UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||||||||
| For the quarterly period ended | June 30, 2022 | |||||||||||||
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
| For the transition period from to | ||||||||
Commission file number 001-38142
DELEK US HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| Delaware |  | 35-2581557 | |||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
7102 Commerce Way | Brentwood | Tennessee | 37027 | ||||||||
(Address of principal executive offices) | (Zip Code) | ||||||||||
(615) 771-6701
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||||||||
| Common Stock, par value $0.01 | DK | New York Stock Exchange | ||||||||||||
At July 29, 2022, there were 71,035,056 shares of common stock, $0.01 par value, outstanding (excluding securities held by, or for the account of, the Company or its subsidiaries).
Table of Contents
Delek US Holdings, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended June 30, 2022
2 | |  | ||||
Financial Statements
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Delek US Holdings, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(In millions, except share and per share data)
| June 30, 2022 | December 31, 2021 As Adjusted (1) | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | 1,244.6 | $ | 856.5 | ||||||||||
| Accounts receivable, net | 1,319.4 | 776.6 | ||||||||||||
| Inventories, net of inventory valuation reserves | 1,805.9 | 1,260.7 | ||||||||||||
| Other current assets | 187.5 | 126.0 | ||||||||||||
| Total current assets | 4,557.4 | 3,019.8 | ||||||||||||
| Property, plant and equipment: | ||||||||||||||
| Property, plant and equipment | 4,107.1 | 3,645.4 | ||||||||||||
| Less: accumulated depreciation | (1,447.1) | (1,338.1) | ||||||||||||
| Property, plant and equipment, net | 2,660.0 | 2,307.3 | ||||||||||||
| Operating lease right-of-use assets | 190.7 | 208.5 | ||||||||||||
| Goodwill | 740.0 | 729.7 | ||||||||||||
| Other intangibles, net | 325.8 | 102.7 | ||||||||||||
| Equity method investments | 354.6 | 344.1 | ||||||||||||
| Other non-current assets | 96.1 | 100.5 | ||||||||||||
| Total assets | $ | 8,924.6 | $ | 6,812.6 | ||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | 2,449.6 | $ | 1,695.3 | ||||||||||
| Current portion of long-term debt | 72.0 | 92.2 | ||||||||||||
| Obligation under Supply and Offtake Agreements | 770.5 | 487.5 | ||||||||||||
| Current portion of operating lease liabilities | 51.4 | 53.9 | ||||||||||||
| Accrued expenses and other current liabilities | 885.6 | 797.8 | ||||||||||||
| Total current liabilities | 4,229.1 | 3,126.7 | ||||||||||||
| Non-current liabilities: | ||||||||||||||
| Long-term debt, net of current portion | 2,745.7 | 2,125.8 | ||||||||||||
| Environmental liabilities, net of current portion | 112.7 | 109.5 | ||||||||||||
| Asset retirement obligations | 41.1 | 38.3 | ||||||||||||
| Deferred tax liabilities | 300.3 | 214.5 | ||||||||||||
| Operating lease liabilities, net of current portion | 131.9 | 152.0 | ||||||||||||
| Other non-current liabilities | 26.4 | 31.8 | ||||||||||||
| Total non-current liabilities | 3,358.1 | 2,671.9 | ||||||||||||
| Stockholders’ equity: | ||||||||||||||
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding | — | — | ||||||||||||
Common stock, $0.01 par value, 110,000,000 shares authorized, 88,610,583 shares and 91,772,080 shares issued at June 30, 2022 and December 31, 2021, respectively | 0.9 | 0.9 | ||||||||||||
| Additional paid-in capital | 1,159.1 | 1,206.5 | ||||||||||||
| Accumulated other comprehensive loss | (3.9) | (3.8) | ||||||||||||
Treasury stock, 17,575,527 shares, at cost, as of June 30, 2022 and December 31, 2021 | (694.1) | (694.1) | ||||||||||||
| Retained earnings | 753.0 | 384.7 | ||||||||||||
| Non-controlling interests in subsidiaries | 122.4 | 119.8 | ||||||||||||
| Total stockholders’ equity | 1,337.4 | 1,014.0 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 8,924.6 | $ | 6,812.6 | ||||||||||
(1) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. See Note 7 for further discussion.
See accompanying notes to condensed consolidated financial statements
3 | | | ||||
Financial Statements
Delek US Holdings, Inc.
Condensed Consolidated Statements of Income (Unaudited)
(In millions, except share and per share data)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| 2021 | 2021 | |||||||||||||||||||||||||
| 2022 | As Adjusted (1) | 2022 | As Adjusted (1) | |||||||||||||||||||||||
| Net revenues | $ | 5,982.6 | $ | 2,191.5 | $ | 10,441.7 | $ | 4,583.7 | ||||||||||||||||||
| Cost of sales: | ||||||||||||||||||||||||||
| Cost of materials and other | 5,082.6 | 1,960.6 | 9,235.1 | 4,133.4 | ||||||||||||||||||||||
| Operating expenses (excluding depreciation and amortization presented below) | 188.5 | 130.8 | 328.0 | 260.7 | ||||||||||||||||||||||
| Depreciation and amortization | 62.8 | 60.5 | 125.5 | 122.8 | ||||||||||||||||||||||
| Total cost of sales | 5,333.9 | 2,151.9 | 9,688.6 | 4,516.9 | ||||||||||||||||||||||
| Operating expenses related to retail and wholesale business (excluding depreciation and amortization presented below) | 34.0 | 35.4 | 61.4 | 60.8 | ||||||||||||||||||||||
| General and administrative expenses | 126.5 | 53.5 | 179.6 | 94.6 | ||||||||||||||||||||||
| Depreciation and amortization | 5.2 | 5.8 | 10.8 | 12.0 | ||||||||||||||||||||||
| Other operating income, net | (10.3) | (4.9) | (38.7) | (3.0) | ||||||||||||||||||||||
| Total operating costs and expenses | 5,489.3 | 2,241.7 | 9,901.7 | 4,681.3 | ||||||||||||||||||||||
| Operating income (loss) | 493.3 | (50.2) | 540.0 | (97.6) | ||||||||||||||||||||||
| Interest expense, net | 43.6 | 33.1 | 82.0 | 62.5 | ||||||||||||||||||||||
| Income from equity method investments | (15.7) | (6.8) | (26.6) | (11.6) | ||||||||||||||||||||||
| Other (income) expense, net | (3.6) | 6.8 | (2.3) | 5.8 | ||||||||||||||||||||||
| Total non-operating expense, net | 24.3 | 33.1 | 53.1 | 56.7 | ||||||||||||||||||||||
| Income (loss) before income tax expense (benefit) | 469.0 | (83.3) | 486.9 | (154.3) | ||||||||||||||||||||||
| Income tax expense (benefit) | 100.4 | (35.2) | 103.5 | (43.5) | ||||||||||||||||||||||
| Net income (loss) | 368.6 | (48.1) | 383.4 | (110.8) | ||||||||||||||||||||||
| Net income attributed to non-controlling interests | 6.8 | 8.6 | 15.0 | 15.9 | ||||||||||||||||||||||
| Net income (loss) attributable to Delek | $ | 361.8 | $ | (56.7) | $ | 368.4 | $ | (126.7) | ||||||||||||||||||
| Basic income (loss) per share | $ | 5.11 | $ | (0.77) | $ | 5.12 | $ | (1.72) | ||||||||||||||||||
| Diluted income (loss) per share | $ | 5.05 | $ | (0.77) | $ | 5.07 | $ | (1.72) | ||||||||||||||||||
(1) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. See Note 7 for further discussion.
See accompanying notes to condensed consolidated financial statements
4 | | | ||||
Financial Statements
Delek US Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In millions)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| 2021 | 2021 | |||||||||||||||||||||||||
| 2022 | As Adjusted (1) | 2022 | As Adjusted (1) | |||||||||||||||||||||||
| Net income (loss) | $ | 368.6 | $ | (48.1) | $ | 383.4 | $ | (110.8) | ||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||
| Commodity contracts designated as cash flow hedges: | ||||||||||||||||||||||||||
| Comprehensive loss on commodity contracts designated as cash flow hedges, net of taxes | — | — | — | (0.2) | ||||||||||||||||||||||
| Other loss, net of taxes | (0.1) | — | (0.2) | — | ||||||||||||||||||||||
| Total other comprehensive loss | (0.1) | — | (0.2) | (0.2) | ||||||||||||||||||||||
| Comprehensive income (loss) | 368.5 | (48.1) | 383.2 | (111.0) | ||||||||||||||||||||||
| Comprehensive income attributable to non-controlling interest | 6.8 | 8.6 | 15.0 | 15.9 | ||||||||||||||||||||||
| Comprehensive income (loss) attributable to Delek | $ | 361.7 | $ | (56.7) | $ | 368.2 | $ | (126.9) | ||||||||||||||||||
(1) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. See Note 7 for further discussion.
See accompanying notes to condensed consolidated financial statements
5 | | | ||||
Financial Statements
Delek US Holdings, Inc.
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(In millions, except share data)
| Three Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Retained Earnings | Treasury Stock | Non-Controlling Interest in Subsidiaries | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2022 | 88,320,612 | $ | 0.9 | $ | 1,156.0 | $ | (3.9) | $ | 391.3 | (17,575,527) | $ | (694.1) | $ | 124.5 | $ | 974.7 | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 361.8 | — | — | 6.8 | 368.6 | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interests | — | — | — | — | — | — | — | (9.0) | (9.0) | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation expense | — | — | 7.1 | — | — | — | — | 0.1 | 7.2 | |||||||||||||||||||||||||||||||||||||||||||||||
| Taxes paid due to the net settlement of equity-based compensation | — | — | (4.0) | — | — | — | — | — | (4.0) | |||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of equity-based awards | 289,971 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | (0.1) | — | — | (0.1) | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2022 | 88,610,583 | $ | 0.9 | $ | 1,159.1 | $ | (3.9) | $ | 753.0 | (17,575,527) | $ | (694.1) | $ | 122.4 | $ | 1,337.4 | ||||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Retained Earnings As Adjusted (1) | Treasury Stock | Non-Controlling Interest in Subsidiaries | Total Stockholders' Equity As Adjusted (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | 91,450,724 | $ | 0.9 | $ | 1,188.6 | $ | (7.4) | $ | 443.1 | (17,575,527) | $ | (694.1) | $ | 117.7 | $ | 1,048.8 | ||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | (56.7) | — | — | 8.6 | (48.1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to non-controlling interest | — | — | — | — | — | — | — | (7.9) | (7.9) | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation expense | — | — | 5.9 | — | — | — | — | — | 5.9 | |||||||||||||||||||||||||||||||||||||||||||||||
| Taxes paid due to the net settlement of equity-based compensation | — | — | (1.9) | — | — | — | — | — | (1.9) | |||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of equity-based awards | 186,937 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | (0.1) | — | — | — | (0.1) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021, As Adjusted (1) | 91,637,661 | $ | 0.9 | $ | 1,192.6 | $ | (7.4) | $ | 386.3 | (17,575,527) | $ | (694.1) | $ | 118.4 | $ | 996.7 | ||||||||||||||||||||||||||||||||||||||||
6 | | | ||||
Financial Statements
Delek US Holdings, Inc.
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(In millions, except share data)
| Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Retained Earnings | Treasury Stock | Non-Controlling Interest in Subsidiaries | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2021, As Adjusted (1) | 91,772,080 | $ | 0.9 | $ | 1,206.5 | $ | (3.8) | $ | 384.7 | (17,575,527) | $ | (694.1) | $ | 119.8 | $ | 1,014.0 | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 368.4 | — | — | 15.0 | 383.4 | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interests | — | — | — | — | — | — | — | (17.7) | (17.7) | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation expense | — | — | 12.4 | — | — | — | — | 0.2 | 12.6 | |||||||||||||||||||||||||||||||||||||||||||||||
| Sale of Delek Logistic common limited partner units, net | — | — | 8.5 | — | — | — | — | 5.1 | 13.6 | |||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of Delek common stock from IEP Energy Holding LLC | (3,497,268) | — | (64.0) | — | — | — | — | — | (64.0) | |||||||||||||||||||||||||||||||||||||||||||||||
| Taxes paid due to the net settlement of equity-based compensation | — | — | (4.3) | — | — | — | — | — | (4.3) | |||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of equity-based awards | 335,771 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | (0.1) | (0.1) | — | — | — | (0.2) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2022 | 88,610,583 | $ | 0.9 | $ | 1,159.1 | $ | (3.9) | $ | 753.0 | (17,575,527) | $ | (694.1) | $ | 122.4 | $ | 1,337.4 | ||||||||||||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Retained Earnings As Adjusted (1) | Treasury Stock | Non-Controlling Interest in Subsidiaries | Total Stockholders' Equity As Adjusted (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | 91,356,868 | $ | 0.9 | $ | 1,185.1 | $ | (7.2) | $ | 522.0 | (17,575,527) | $ | (694.1) | $ | 118.4 | $ | 1,125.1 | ||||||||||||||||||||||||||||||||||||||||
| — | — | — | — | (8.7) | — | — | — | (8.7) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | (126.7) | — | — | 15.9 | (110.8) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss related to commodity contracts, net | — | — | — | (0.2) | — | — | — | — | (0.2) | |||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to non-controlling interest | — | — | — | — | — | — | — | (15.9) | (15.9) | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation expense | — | — | 10.5 | — | — | — | — | — | 10.5 | |||||||||||||||||||||||||||||||||||||||||||||||
| Taxes paid due to the net settlement of equity-based compensation | — | — | (3.0) | — | — | — | — | — | (3.0) | |||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of equity-based awards | 280,793 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | (0.3) | — | — | — | (0.3) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021, As Adjusted (1) | 91,637,661 | $ | 0.9 | $ | 1,192.6 | $ | (7.4) | $ | 386.3 | (17,575,527) | $ | (694.1) | $ | 118.4 | $ | 996.7 | ||||||||||||||||||||||||||||||||||||||||
(1) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. See Note 7 for further discussion.
See accompanying notes to condensed consolidated financial statements
7 | | | ||||
Financial Statements
Delek US Holdings, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
| Six Months Ended June 30, | ||||||||||||||
| 2021 | ||||||||||||||
| 2022 | As Adjusted (1) | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net income (loss) | $ | 383.4 | $ | (110.8) | ||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization | 136.3 | 134.8 | ||||||||||||
| Non-cash lease expense | 35.4 | 28.1 | ||||||||||||
| Deferred income taxes | 93.9 | (40.8) | ||||||||||||
| Income from equity method investments | (26.6) | (11.6) | ||||||||||||
| Dividends from equity method investments | 14.5 | 10.6 | ||||||||||||
| Non-cash lower of cost or market/net realizable value adjustment | (1.2) | 0.2 | ||||||||||||
| Equity-based compensation expense | 12.6 | 10.5 | ||||||||||||
| Other | 7.8 | 3.4 | ||||||||||||
| Changes in assets and liabilities: | ||||||||||||||
| Accounts receivable | (513.9) | (298.4) | ||||||||||||
| Inventories and other current assets | (533.9) | (387.7) | ||||||||||||
| Fair value of derivatives | (74.9) | (7.1) | ||||||||||||
| Accounts payable and other current liabilities | 777.4 | 671.4 | ||||||||||||
| Obligation under Supply and Offtake Agreements | 283.0 | 148.6 | ||||||||||||
| Non-current assets and liabilities, net | (7.9) | (16.3) | ||||||||||||
| Net cash provided by operating activities | 585.9 | 134.9 | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Acquisition of 3 Bear | (621.7) | — | ||||||||||||
| Equity method investment contributions | (0.1) | (1.6) | ||||||||||||
| Distributions from equity method investments | 1.7 | 5.4 | ||||||||||||
| Purchases of property, plant and equipment | (98.1) | (132.7) | ||||||||||||
| Purchase of intangible assets | (3.8) | (0.7) | ||||||||||||
| Proceeds from sale of property, plant and equipment | 1.1 | 10.9 | ||||||||||||
| Net cash used in investing activities | (720.9) | (118.7) | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Proceeds from long-term revolvers | 1,470.9 | 1,026.5 | ||||||||||||
| Payments on long-term revolvers | (848.0) | (1,501.3) | ||||||||||||
| Proceeds from term debt | — | 400.0 | ||||||||||||
| Payments on term debt | (26.7) | (26.7) | ||||||||||||
| Proceeds from product financing agreements | 508.2 | 458.2 | ||||||||||||
| Repayments of product financing agreements | (511.0) | (302.2) | ||||||||||||
| Taxes paid due to the net settlement of equity-based compensation | (4.3) | (3.0) | ||||||||||||
| Distribution to non-controlling interest | (17.7) | (15.9) | ||||||||||||
| Proceeds from sale of Delek Logistics LP common limited partner units | 16.4 | — | ||||||||||||
| Purchase of Delek common stock from IEP Energy Holding LLC | (64.0) | — | ||||||||||||
| Deferred financing costs paid | (0.7) | (6.3) | ||||||||||||
| Net cash provided by financing activities | 523.1 | 29.3 | ||||||||||||
| Net increase in cash and cash equivalents | 388.1 | 45.5 | ||||||||||||
| Cash and cash equivalents at the beginning of the period | 856.5 | 787.5 | ||||||||||||
| Cash and cash equivalents at the end of the period | $ | 1,244.6 | $ | 833.0 | ||||||||||
Delek US Holdings, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
(In millions)
| Six Months Ended June 30, | ||||||||||||||
| 2021 | ||||||||||||||
| 2022 | As Adjusted (1) | |||||||||||||
| Supplemental disclosures of cash flow information: | ||||||||||||||
| Cash paid during the period for: | ||||||||||||||
Interest, net of capitalized interest of $0.7 million and $0.5 million in the 2022 and 2021 periods, respectively | $ | 75.4 | $ | 55.7 | ||||||||||
| Income taxes | $ | 9.2 | $ | 4.0 | ||||||||||
| Non-cash investing activities: | ||||||||||||||
| (Decrease) increase in accrued capital expenditures | $ | (4.8) | $ | 0.1 | ||||||||||
| Non-cash financing activities: | ||||||||||||||
| Non-cash lease liability arising from obtaining right-of-use assets during the period | $ | 11.3 | $ | 26.4 | ||||||||||
(1) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. See Note 7 for further discussion.
See accompanying notes to condensed consolidated financial statements
8 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - Organization and Basis of Presentation
Delek US Holdings, Inc. operates through its consolidated subsidiaries, which include Delek US Energy, Inc. ("Delek Energy") (and its subsidiaries) and Alon USA Energy, Inc. ("Alon") (and its subsidiaries). The terms "we," "our," "us," "Delek" and the "Company" are used in this report to refer to Delek and its consolidated subsidiaries. Delek's common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "DK."
Our condensed consolidated financial statements include the accounts of Delek and its subsidiaries. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with United States ("U.S.") Generally Accepted Accounting Principles ("GAAP") have been condensed or omitted, although management believes that the disclosures herein are adequate to make the financial information presented not misleading. Our unaudited condensed consolidated financial statements have been prepared in conformity with GAAP applied on a consistent basis with those of the annual audited consolidated financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on February 25, 2022 (the "Annual Report on Form 10-K") and in accordance with the rules and regulations of the SEC. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2021 included in our Annual Report on Form 10-K.
Our condensed consolidated financial statements include Delek Logistics Partners, LP ("Delek Logistics", NYSE:DKL), which is a variable interest entity ("VIE"). On June 1, 2022, DKL Delaware Gathering, LLC, a subsidiary of the Delek Logistics, acquired 100% of the limited liability company interests in 3 Bear Delaware Holding – NM, LLC ("3 Bear") from 3 Bear Energy – New Mexico LLC, related to their crude oil and natural gas gathering, processing and transportation businesses, as well as water disposal and recycling operations, located in the Delaware Basin of New Mexico (the "3 Bear Acquisition"). See Note 2 - Acquisitions for additional information. As the indirect owner of the general partner of Delek Logistics, we have the ability to direct the activities of this entity that most significantly impact its economic performance. We are also considered to be the primary beneficiary for accounting purposes for this entity and are Delek Logistics' primary customer. In the event that Delek Logistics incurs a loss, our operating results will reflect such loss, net of intercompany eliminations, to the extent of our ownership interest in this entity.
In the opinion of management, all adjustments necessary for a fair presentation of the financial condition and the results of operations for the interim periods have been included. All significant intercompany transactions and account balances have been eliminated in consolidation. All adjustments are of a normal, recurring nature. Operating results for the interim period should not be viewed as representative of results that may be expected for any future interim period or for the full year.
Accounting Policies
With the exception of the policy updates below, there have been no new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Change in Accounting Principle
As of January 1, 2022, we changed our method for accounting for inventory held at the Tyler Refinery to the FIFO costing method from the last-in, first-out ("LIFO") costing method, which will conform the Company’s refining inventory to a single method of accounting. Total inventories accounted for using LIFO, prior to the accounting method change, comprised 28.0% of the Company’s total inventories as of December 31, 2021. This change in accounting method is preferable because it provides better consistency across our refineries and improves transparency, and results in recognition that better reflects the physical flow of inventory and more accurately reflects the current value of inventory. The effects of this change have been retrospectively applied to all periods presented with a cumulative effect adjustment reflected in the January 1, 2021 beginning retained earnings. See Note 7 - Inventory for additional information.
Reclassifications
Certain prior period amounts have been reclassified in order to conform to the current period presentation.
9 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
New Accounting Pronouncements Adopted During 2022
ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-06, which is intended to simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity's own equity. The pronouncement is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2021. We adopted this guidance on January 1, 2022 and the adoption did not have a material impact on our business, financial condition or results of operations.
Accounting Pronouncements Not Yet Adopted
ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848)
In March 2020, the FASB issued an amendment which is intended to provide temporary optional expedients and exceptions to GAAP guidance on contracts, hedge accounting and other transactions affected by the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank rates. This guidance is effective for all entities at any time beginning on March 12, 2020 through December 31, 2022 and may be applied from the beginning of an interim period that includes the issuance date of the ASU. The Company is currently evaluating the impact this guidance may have on its condensed consolidated financial statements and related disclosures.
Note 2 - Acquisitions
3 Bear Delaware Holding - NM, LLC Acquisition
Delek Logistics completed the 3 Bear Acquisition on June 1, 2022 (the "Acquisition Date"), in which it acquired crude oil and natural gas gathering, processing and transportation and storage operations, as well as water disposal and recycling operations, located in the Delaware Basin of New Mexico.
The base purchase price for 3 Bear was $624.7 million, subject to adjustments for net working capital and closing indebtedness, as defined in the 3 Bear Purchase Agreement. The 3 Bear Acquisition was financed through a combination of cash on hand and borrowings under the Delek Logistics' Credit Facility (as defined in Note 9 of the condensed consolidated financial statements in Item 1. Financial Statements).
For the three and six months ended June 30, 2022, we incurred $6.2 million and $6.4 million, respectively, in incremental direct acquisition and integration costs that principally consist of legal, advisory and other professional fees. Such costs are included in general and administrative expenses in the accompanying condensed consolidated statements of income for these periods.
Our consolidated financial and operating results reflect the 3 Bear Acquisition operations beginning June1, 2022. Our results of operations included revenue and net income of $20.6 million and $1.5 million, respectively, for the period from June 1, 2022 through June 30, 2022 related to these operations.
The 3 Bear Acquisition was accounted for using the acquisition method of accounting, whereby the preliminary purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their fair values. The excess of the consideration paid over the fair value of the net assets acquired was recorded as goodwill.
Determination of Purchase Price
The table below represents the estimated purchase price (in millions):
| Base purchase price: | $ | 624.7 | |||
Less: closing net working capital (as defined in the 3 Bear Purchase Agreement) (1) | (0.3) | ||||
Less: closing indebtedness (as defined in the 3 Bear Purchase Agreement) (1) | (80.4) | ||||
| Cash paid for the adjusted purchase price | 544.0 | ||||
| Cash paid to payoff 3 Bear credit agreement (as defined in the 3 Bear Purchase Agreement) | 80.4 | ||||
| Preliminary purchase price | $ | 624.4 | |||
(1) These amounts are based upon estimates at closing, but are subject to a subsequent review and revision period pursuant to the 3 Bear Purchase Agreement at which time final settlements for these components will be determined. Such subsequent adjustments may result in changes to the preliminary purchase price.
10 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
Purchase Price Allocation
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed in the 3 Bear Acquisition as of June 1, 2022 (in millions):
| Assets acquired: | ||||||||
| Cash and cash equivalents | $ | 2.7 | ||||||
| Accounts receivables, net | 28.9 | |||||||
| Inventories | 1.8 | |||||||
| Other current assets | 1.0 | |||||||
| Property, plant and equipment | 382.8 | |||||||
| Operating lease right-of-use assets | 7.4 | |||||||
| Goodwill | 10.6 | |||||||
Other intangibles, net (1) | 223.6 | |||||||
| Other non-current assets | 0.5 | |||||||
| Total assets acquired | 659.3 | |||||||
| Liabilities assumed: | ||||||||
| Accounts payable | 8.0 | |||||||
| Accrued expenses and other current liabilities | 22.1 | |||||||
| Current portion of operating lease liabilities | 1.1 | |||||||
| Asset retirement obligations | 2.3 | |||||||
| Operating lease liabilities, net of current portion | 1.4 | |||||||
| Total liabilities assumed | 34.9 | |||||||
| Fair value of net assets acquired | $ | 624.4 | ||||||
(1)The acquired intangible assets amount includes the following identified intangibles:
•Customer relationship intangible that is subject to amortization with a preliminary fair value of $210.0 million, which will be amortized over an 11.6-year useful life. We recognized amortization expense for the three and six months ended June 30, 2022 of $1.5 million. The estimated amortization is $18.0 million for each of the five succeeding fiscal years.
•Rights-of-way intangible valued at $13.6 million, which has an indefinite life.
These fair value estimates are preliminary and therefore, the final fair value of assets acquired and liabilities assumed and the resulting effect on our financial position may change once all necessary information has become available, the final working capital adjustment is complete, and we finalize our valuations. To the extent possible, estimates have been considered and recorded, as appropriate, for the items above based on the information available as of June 30, 2022. We will continue to evaluate these items until they are satisfactorily resolved and adjust our purchase price allocation accordingly, within the allowable measurement period (not to exceed one year from the date of acquisition), as defined by Accounting Standards Codification ("ASC") 805, Business Combinations ("ASC 805").
The fair value of property, plant and equipment was based on the combination of the cost and market approaches. Key assumptions in the cost approach include determining the replacement cost by evaluating recently published data and adjusting replacement cost for physical deterioration, functional and economic obsolescence. We used the market approach to measure the value of certain assets through an analysis of recent sales or offerings of comparable properties.
The fair value of customer relationships was based on the income approach. Key assumptions in the income approach include projected revenue attributable to customer relationships, attrition rate, operating margins and discount rates.
The fair values discussed above were based on significant inputs that are not observable in the market and, therefore, represent Level 3 measurements.
The fair values of all other current assets and payables were equivalent to their carrying values due to their short-term nature.
The goodwill recognized in the 3 Bear Acquisition is primarily attributable to enhancing our third party revenues, further diversification of our customer and product mix, expanding our footprint into the Delaware basin and bolstering our Environmental, Social and Governance ("ESG") optionality through furthering carbon capture opportunities and greenhouse gas reduction projects currently underway. This goodwill is deductible for income tax purposes. Goodwill related to the 3 Bear Acquisition is included in the logistics segment.
11 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
Unaudited Pro Forma Financial Information
The following table summarizes the unaudited pro forma financial information of the Company assuming the 3 Bear Acquisition had occurred on January 1, 2021. The unaudited pro forma financial information has been adjusted to give effect to certain pro forma adjustments that are directly related to the 3 Bear Acquisition based on available information and certain assumptions that management believes are factually supportable. The most significant pro forma adjustments relate to (i) incremental interest expense and amortization of deferred financing costs associated with revolving credit facility borrowings incurred in connection with the 3 Bear Acquisition, (ii) incremental depreciation resulting from the estimated fair values of acquired property, plant and equipment, (iii) incremental amortization resulting from the estimated fair values of acquired customer relationship intangibles (iv) accounting policy alignment, and (v) transaction costs. The unaudited pro forma financial information excludes any expected cost savings or other synergies as a result of the 3 Bear Acquisition. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have been achieved had the 3 Bear Acquisition been effective as of the dates presented, nor is it indicative of future operating results of the combined company. Actual results may differ significantly from the unaudited pro forma financial information.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| (in millions, except per share data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Net sales | $ | 6,030.8 | $ | 2,222.2 | $ | 10,540.3 | $ | 4,645.3 | ||||||||||||||||||
| Net income (loss) attributable to Delek | $ | 365.4 | $ | (83.9) | $ | 368.6 | $ | (196.3) | ||||||||||||||||||
| Net income (loss) per share: | ||||||||||||||||||||||||||
| Basic income (loss) per share | $ | 5.16 | $ | (1.14) | $ | 5.12 | $ | (2.66) | ||||||||||||||||||
| Diluted income (loss) per share | $ | 5.10 | $ | (1.14) | $ | 5.07 | $ | (2.66) | ||||||||||||||||||
Note 3 - Segment Data
We aggregate our operating units into three reportable segments: Refining, Logistics, and Retail. Operations that are not specifically included in the reportable segments are included in Corporate, Other and Eliminations, which consist of the following:
•our corporate activities;
•results of certain immaterial operating segments, including our Canadian crude trading operations (as discussed in Note 10);
•wholesale crude operations;
•Alon's asphalt terminal operations; and
•intercompany eliminations.
Decisions concerning the allocation of resources and assessment of operating performance are made based on this segmentation. Management measures the operating performance of each of the reportable segments based on the segment contribution margin. Segment contribution margin is defined as net revenues less cost of materials and other and operating expenses, excluding depreciation and amortization.
Refining Segment
The refining segment processes crude oil and other feedstocks for the manufacture of transportation motor fuels, including various grades of gasoline, diesel fuel and aviation fuel, asphalt and other petroleum-based products that are distributed through owned and third-party product terminals. The refining segment has a combined nameplate capacity of 302,000 barrels per day ("bpd") as of June 30, 2022, including the following:
•75,000 bpd Tyler, Texas refinery (the "Tyler refinery");
•80,000 bpd El Dorado, Arkansas refinery (the "El Dorado refinery");
•73,000 bpd Big Spring, Texas refinery (the "Big Spring refinery"); and
•74,000 bpd Krotz Springs, Louisiana refinery (the "Krotz Springs refinery").
The refining segment also owns and operates three biodiesel facilities involved in the production of biodiesel fuels and related activities, located in Crossett, Arkansas, Cleburne, Texas and New Albany, Mississippi. The biodiesel industry has historically been substantially aided by federal and state tax incentives. One tax incentive program that has been significant to our renewable fuels facilities is the federal blender's tax credit (also known as the biodiesel tax credit or "BTC"). The BTC provides a $1.00 refundable tax credit per gallon of pure biodiesel to the first blender of biodiesel with petroleum-based diesel fuel. The blender's tax credit was re-enacted in December 2019 for the years 2020 through 2022.
12 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
On May 7, 2020, we sold our equity interests in Alon Bakersfield Property, Inc., an indirect wholly-owned subsidiary that owned our non-operating refinery located in Bakersfield, California, to a subsidiary of Global Clean Energy Holdings, Inc. (“GCE”). As part of the transaction, GCE granted a call option to Delek to acquire up to a 33 1/3% limited member interest in the acquiring subsidiary of GCE for up to $13.3 million, subject to certain adjustments. Such option is exercisable by Delek through the 90th day after GCE demonstrates commercial operations, as contractually defined, which has not yet occurred as of June 30, 2022.
The refining segment's petroleum-based products are marketed primarily in the south central, southwestern and western regions of the United States. This segment also ships and sells gasoline into wholesale markets in the southern and eastern United States. Motor fuels are sold under the Alon or Delek brand through various terminals to supply Alon or Delek branded retail sites. In addition, Alon sells motor fuels through its wholesale distribution network on an unbranded basis.
Logistics Segment
Our logistics segment owns and operates crude oil, refined products and natural gas logistics and marketing assets as well as water disposal and recycling assets. The logistics segment generates revenue by charging fees for gathering, transporting and storing crude oil and natural gas, marketing, distributing, transporting and storing intermediate and refined products and disposing and recycling water in select regions of the southeastern United States, the Delaware Basin in New Mexico and West Texas for our refining segment and third parties, and sales of wholesale products in the West Texas market. The operating results and assets acquired in the 3 Bear Acquisition have been included in the Logistics segment beginning on June 1, 2022.
Retail Segment
Our retail segment consists of 248 owned and leased convenience store sites as of June 30, 2022, located primarily in West Texas and New Mexico. These convenience stores typically offer various grades of gasoline and diesel primarily under the Alon or Delek brand name and food products, food service, tobacco products, non-alcoholic and alcoholic beverages, general merchandise as well as money grams to the public, primarily under the 7-Eleven and DK or Alon brand names. Substantially all of the motor fuel sold through our retail segment is supplied by our Big Spring refinery, which is transferred to the retail segment at prices substantially determined by reference to published commodity pricing information. In November 2018, we terminated the license agreement with 7-Eleven, Inc. The terms of such agreement and subsequent amendments require the removal of all 7-Eleven branding on a store-by-store basis by December 31, 2023.
Significant Inter-segment Transactions
All inter-segment transactions have been eliminated in consolidation and consist primarily of the following:
•refining segment refined product sales to the retail segment to be sold through the store locations;
•refining segment sales of asphalt and refined product to entities included in corporate, other and eliminations;
•logistics segment service fee revenue under service agreements with the refining segment based on the number of gallons sold and to share a portion of the margin achieved in return for providing marketing, sales and customer services;
•logistics segment sales of wholesale finished product to our refining segment; and
•logistics segment crude transportation, terminalling and storage fee revenue from our refining segment for the utilization of pipeline, terminal and storage assets.
13 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
Business Segment Operating Performance
The following is a summary of business segment operating performance as measured by contribution margin for the period indicated (in millions):
| Three Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||
| Refining | Logistics | Retail | Corporate, Other and Eliminations | Consolidated | ||||||||||||||||||||||||||||
Net revenues (excluding inter-segment fees and revenues) | $ | 4,498.0 | $ | 142.4 | $ | 277.1 | $ | 1,065.1 | $ | 5,982.6 | ||||||||||||||||||||||
| Inter-segment fees and revenues | 312.5 | 124.3 | — | (436.8) | — | |||||||||||||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||||||||||||||||||
| Cost of materials and other | 4,027.2 | 176.4 | 233.8 | 645.2 | 5,082.6 | |||||||||||||||||||||||||||
| Operating expenses (excluding depreciation and amortization presented below) | 165.0 | 21.0 | 25.1 | 11.4 | 222.5 | |||||||||||||||||||||||||||
| Segment contribution margin | $ | 618.3 | $ | 69.3 | $ | 18.2 | $ | (28.3) | 677.5 | |||||||||||||||||||||||
| Income from equity method investments | 0.2 | 7.1 | — | 8.4 | ||||||||||||||||||||||||||||
| Segment contribution margin and income (loss) from equity method investments | $ | 618.5 | $ | 76.4 | $ | 18.2 | $ | (19.9) | ||||||||||||||||||||||||
| Depreciation and amortization | $ | 49.9 | $ | 13.3 | $ | 3.2 | $ | 1.6 | 68.0 | |||||||||||||||||||||||
General and administrative expenses | 126.5 | |||||||||||||||||||||||||||||||
| Other operating income, net | (10.3) | |||||||||||||||||||||||||||||||
| Operating income | $ | 493.3 | ||||||||||||||||||||||||||||||
| Capital spending (excluding business combinations) | $ | 19.0 | $ | 26.7 | $ | 6.0 | $ | 8.7 | $ | 60.4 | ||||||||||||||||||||||
| Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||
Refining (1) | Logistics | Retail | Corporate, Other and Eliminations (1)(2) | Consolidated (1)(2) | ||||||||||||||||||||||||||||
Net revenues (excluding inter-segment fees and revenues) | $ | 2,226.9 | $ | 66.1 | $ | 209.0 | $ | (310.5) | $ | 2,191.5 | ||||||||||||||||||||||
Inter-segment fees and revenues | 188.8 | 102.4 | — | (291.2) | — | |||||||||||||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||||||||||||||||||
| Cost of materials and other | 2,286.6 | 88.8 | 164.7 | (579.5) | 1,960.6 | |||||||||||||||||||||||||||
| Operating expenses (excluding depreciation and amortization presented below) | 115.0 | 15.5 | 22.4 | 13.3 | 166.2 | |||||||||||||||||||||||||||
| Segment contribution margin | $ | 14.1 | $ | 64.2 | $ | 21.9 | $ | (35.5) | 64.7 | |||||||||||||||||||||||
| Income from equity method investments | 0.1 | 6.7 | — | — | ||||||||||||||||||||||||||||
| Segment contribution margin and income (loss) from equity method investments | $ | 14.2 | $ | 70.9 | $ | 21.9 | $ | (35.5) | ||||||||||||||||||||||||
| Depreciation and amortization | $ | 51.0 | $ | 10.0 | $ | 3.4 | $ | 1.9 | 66.3 | |||||||||||||||||||||||
General and administrative expenses | 53.5 | |||||||||||||||||||||||||||||||
| Other operating income, net | (4.9) | |||||||||||||||||||||||||||||||
| Operating loss | $ | (50.2) | ||||||||||||||||||||||||||||||
Capital spending (excluding business combinations) | $ | 60.7 | $ | 2.6 | $ | 0.5 | $ | 1.9 | $ | 65.7 | ||||||||||||||||||||||
14 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
| Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||
| Refining | Logistics | Retail | Corporate, Other and Eliminations | Consolidated | ||||||||||||||||||||||||||||
Net revenues (excluding inter-segment fees and revenues) | $ | 7,766.1 | $ | 225.2 | $ | 486.6 | $ | 1,963.8 | $ | 10,441.7 | ||||||||||||||||||||||
| Inter-segment fees and revenues | 538.1 | 248.1 | — | (786.2) | — | |||||||||||||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||||||||||||||||||
| Cost of materials and other | 7,304.1 | 302.6 | 406.8 | 1,221.6 | 9,235.1 | |||||||||||||||||||||||||||
| Operating expenses (excluding depreciation and amortization presented below) | 284.9 | 39.1 | 47.8 | 17.6 | 389.4 | |||||||||||||||||||||||||||
| Segment contribution margin | $ | 715.2 | $ | 131.6 | $ | 32.0 | $ | (61.6) | 817.2 | |||||||||||||||||||||||
| Income from equity method investments | 0.4 | 14.1 | — | 12.1 | ||||||||||||||||||||||||||||
| Segment contribution margin and income (loss) from equity method investments | $ | 715.6 | $ | 145.7 | $ | 32.0 | $ | (49.5) | ||||||||||||||||||||||||
| Depreciation and amortization | $ | 102.7 | $ | 23.7 | $ | 6.7 | $ | 3.2 | 136.3 | |||||||||||||||||||||||
General and administrative expenses | 179.6 | |||||||||||||||||||||||||||||||
| Other operating income, net | (38.7) | |||||||||||||||||||||||||||||||
| Operating income | $ | 540.0 | ||||||||||||||||||||||||||||||
| Capital spending (excluding business combinations) | $ | 33.3 | $ | 35.8 | $ | 9.0 | $ | 15.2 | $ | 93.3 | ||||||||||||||||||||||
| Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||
Refining (1) | Logistics | Retail | Corporate, Other and Eliminations | Consolidated (1) | ||||||||||||||||||||||||||||
Net revenues (excluding inter-segment fees and revenues) | $ | 3,811.4 | $ | 122.8 | $ | 383.8 | $ | 265.7 | $ | 4,583.7 | ||||||||||||||||||||||
Inter-segment fees and revenues | 344.4 | 198.6 | — | (543.0) | — | |||||||||||||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||||||||||||||||||
| Cost of materials and other | 3,901.6 | 169.9 | 301.2 | (239.3) | 4,133.4 | |||||||||||||||||||||||||||
| Operating expenses (excluding depreciation and amortization presented below) | 229.7 | 30.4 | 44.0 | 17.4 | 321.5 | |||||||||||||||||||||||||||
| Segment contribution margin | $ | 24.5 | $ | 121.1 | $ | 38.6 | $ | (55.4) | 128.8 | |||||||||||||||||||||||
| Income from equity method investments | 0.3 | 10.7 | — | 0.6 | ||||||||||||||||||||||||||||
| Segment contribution margin and income (loss) from equity method investments | $ | 24.8 | $ | 131.8 | $ | 38.6 | $ | (54.8) | ||||||||||||||||||||||||
| Depreciation and amortization | $ | 103.1 | $ | 20.7 | $ | 6.6 | $ | 4.4 | 134.8 | |||||||||||||||||||||||
General and administrative expenses | 94.6 | |||||||||||||||||||||||||||||||
| Other operating income, net | (3.0) | |||||||||||||||||||||||||||||||
| Operating loss | $ | (97.6) | ||||||||||||||||||||||||||||||
| Capital spending (excluding business combinations) | $ | 118.5 | $ | 10.4 | $ | 1.3 | $ | 2.5 | $ | 132.7 | ||||||||||||||||||||||
(1) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. See Note 7 for further discussion.
(2) Reflects an adjustment to net down year-to-date net revenues and cost of materials and other of approximately $362 million related to certain crude wholesale net settled transactions included in corporate, other and eliminations that occurred during the three months ended March 31, 2021, which was not reflected in the unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2021, as filed on our March 31, 2021 Quarterly Report on Form 10-Q on May 6, 2021. Such uncorrected adjustment, as well as the subsequent out-of-period correction reflected above, did not relate to any of our reportable segments, had no impact on segment contribution margin, consolidated contribution margin or consolidated operating loss, and are not considered material to the condensed consolidated financial statements in either period.
15 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
Other Segment Information
Total assets by segment were as follows as of June 30, 2022 (in millions):
| Refining | Logistics | Retail | Corporate, Other and Eliminations | Consolidated | ||||||||||||||||||||||||||||
| Total assets | $ | 8,235.6 | $ | 1,609.3 | $ | 258.5 | $ | (1,178.8) | $ | 8,924.6 | ||||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||
| Inter-segment notes receivable | (1,026.8) | — | — | 1,026.8 | — | |||||||||||||||||||||||||||
| Inter-segment right of use lease assets | (220.4) | — | — | 220.4 | — | |||||||||||||||||||||||||||
| Total assets, excluding inter-segment notes receivable and right of use assets | $ | 6,988.4 | $ | 1,609.3 | $ | 258.5 | $ | 68.4 | $ | 8,924.6 | ||||||||||||||||||||||
Property, plant and equipment and accumulated depreciation as of June 30, 2022 and depreciation expense by reporting segment for the three and six months ended June 30, 2022 are as follows (in millions):
| Refining | Logistics | Retail | Corporate, Other and Eliminations | Consolidated | ||||||||||||||||||||||||||||
| Property, plant and equipment | $ | 2,696.8 | $ | 1,141.8 | $ | 175.8 | $ | 92.7 | $ | 4,107.1 | ||||||||||||||||||||||
| Less: Accumulated depreciation | (1,043.4) | (288.0) | (64.6) | (51.1) | (1,447.1) | |||||||||||||||||||||||||||
| Property, plant and equipment, net | $ | 1,653.4 | $ | 853.8 | $ | 111.2 | $ | 41.6 | $ | 2,660.0 | ||||||||||||||||||||||
| Depreciation expense for the three months ended June 30, 2022 | $ | 48.5 | $ | 11.8 | $ | 3.0 | $ | 1.6 | $ | 64.9 | ||||||||||||||||||||||
| Depreciation expense for the six months ended June 30, 2022 | $ | 99.6 | $ | 22.2 | $ | 6.3 | $ | 3.2 | $ | 131.3 | ||||||||||||||||||||||
In accordance with Accounting Standards Codification ("ASC") 360, Property, Plant and Equipment ("ASC 360"), Delek evaluates the realizability of property, plant and equipment as events occur that might indicate potential impairment. There were no indicators of impairment related to our property, plant and equipment as of June 30, 2022.
Note 4 - Earnings (Loss) Per Share
Basic earnings per share (or "EPS") is computed by dividing net income (loss) by the weighted average common shares outstanding. Diluted earnings per share is computed by dividing net income (loss) attributable to Delek, as adjusted for changes to income that would result from the assumed settlement of the dilutive equity instruments included in diluted weighted average common shares outstanding, by the diluted weighted average common shares outstanding. For all periods presented, we have outstanding various equity-based compensation awards that are considered in our diluted EPS calculation (when to do so would be dilutive), and is inclusive of awards disclosed in Note 16 to these condensed consolidated financial statements. For those instruments that are indexed to our common stock, they are generally dilutive when the market price of the underlying indexed share of common stock is in excess of the exercise price.
The following table sets forth the computation of basic and diluted earnings per share.
16 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| 2022 | 2021 (1) | 2022 | 2021 (1) | |||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Numerator for EPS | ||||||||||||||||||||||||||
| Net income (loss) | $ | 368.6 | $ | (48.1) | $ | 383.4 | $ | (110.8) | ||||||||||||||||||
| Less: Income attributed to non-controlling interest | 6.8 | 8.6 | 15.0 | 15.9 | ||||||||||||||||||||||
| Numerator for basic and diluted EPS attributable to Delek | $ | 361.8 | $ | (56.7) | $ | 368.4 | $ | (126.7) | ||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||||
| Weighted average common shares outstanding (denominator for basic EPS) | 70,805,458 | 73,911,582 | 72,014,151 | 73,857,975 | ||||||||||||||||||||||
| Dilutive effect of stock-based awards | 874,496 | — | 661,162 | — | ||||||||||||||||||||||
| Weighted average common shares outstanding, assuming dilution (denominator for diluted EPS) | 71,679,954 | 73,911,582 | 72,675,313 | 73,857,975 | ||||||||||||||||||||||
| EPS: | ||||||||||||||||||||||||||
| Basic income (loss) per share | $ | 5.11 | $ | (0.77) | $ | 5.12 | $ | (1.72) | ||||||||||||||||||
| Diluted income (loss) per share | $ | 5.05 | $ | (0.77) | $ | 5.07 | $ | (1.72) | ||||||||||||||||||
| The following equity instruments were excluded from the diluted weighted average common shares outstanding because their effect would be antidilutive: | ||||||||||||||||||||||||||
| Antidilutive stock-based compensation (because average share price is less than exercise price) | 1,450,184 | 2,983,783 | 2,853,904 | 2,802,950 | ||||||||||||||||||||||
| Antidilutive due to loss | — | 659,005 | — | 678,426 | ||||||||||||||||||||||
| Total antidilutive stock-based compensation | 1,450,184 | 3,642,788 | 2,853,904 | 3,481,376 | ||||||||||||||||||||||
(1) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. See Note 7 for further discussion.
Note 5 - Delek Logistics
Delek Logistics is a publicly traded limited partnership formed by Delek in 2012 that owns and operates crude oil, refined products, and natural gas logistics and marketing assets as well as water disposal and recycling assets. A substantial majority of Delek Logistics' assets are integral to Delek’s refining and marketing operations. As of June 30, 2022, we owned a 78.9% interest in Delek Logistics, consisting of 34,311,278 common limited partner units and the non-economic general partner interest. The limited partner interests in Delek Logistics not owned by us are reflected in net income attributable to non-controlling interest in the accompanying condensed consolidated statements of income and in non-controlling interest in subsidiaries in the accompanying condensed consolidated balance sheets.
On June1, 2022, DKL Delaware Gathering, LLC, a subsidiary of Delek Logistics, completed the 3 Bear Acquisition related to crude oil and natural gas gathering, processing and transportation businesses, as well as water disposal and recycling operations, in the Delaware Basin in New Mexico. The purchase price was $624.7 million, subject to customary closing adjustments. See Note 2 - Acquisitions for additional information.
On April 14, 2022, Delek Logistics filed a shelf registration statement with the SEC registering, which was declared effective on April 29th, for the potential sale, from time to time by Delek Logistics, of up to $200.0 million of common limited partner units of Delek Logistics.
On December 20, 2021, Delek commenced a program to sell up to 434,590 common limited partner units representing limited partner interests in Delek Logistics over the next three months in open market transactions conducted pursuant to Rule 144 under the Securities Act of 1933, as amended, and a Rule 10b5-1 trading plan. For the six months ended June 30, 2022, we sold 385,522 units for gross proceeds of $16.4 million or $13.6 million net of taxes, all of which was received in the first quarter.
In August 2020, Delek Logistics filed a shelf registration statement, which subsequently became effective, with the SEC for the proposed re-sale or other disposition from time to time by Delek of up to 14.0 million common limited partner units representing our limited partner interests in Delek Logistics. No units were sold under this registration as of June 30, 2022.
We have agreements with Delek Logistics that, among other things, establish fees for certain administrative and operational services provided by us and our subsidiaries to Delek Logistics, provide certain indemnification obligations and establish terms for fee-based commercial logistics and marketing services provided by Delek Logistics and its subsidiaries to us. The revenues and expenses associated with these agreements are eliminated in consolidation.
17 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
Delek Logistics is a VIE, as defined under GAAP, and is consolidated into our condensed consolidated financial statements, representing our logistics segment. The assets of Delek Logistics can only be used to settle its own obligations and its creditors have no recourse to our assets. Exclusive of intercompany balances and the marketing agreement intangible asset between Delek Logistics and Delek which are eliminated in consolidation, the Delek Logistics condensed consolidated balance sheets as presented below are included in the condensed consolidated balance sheets of Delek (unaudited, in millions).
| June 30, 2022 | December 31, 2021 | |||||||||||||
| ASSETS | ||||||||||||||
| Cash and cash equivalents | $ | 13.8 | $ | 4.3 | ||||||||||
| Accounts receivable | 43.9 | 15.4 | ||||||||||||
| Accounts receivable from related parties | — | — | ||||||||||||
| Inventory | 3.7 | 2.4 | ||||||||||||
| Other current assets | 2.3 | 1.0 | ||||||||||||
| Property, plant and equipment, net | 853.8 | 449.4 | ||||||||||||
| Equity method investments | 248.7 | 250.0 | ||||||||||||
| Operating lease right-of-use assets | 25.3 | 20.9 | ||||||||||||
| Goodwill | 22.8 | 12.2 | ||||||||||||
| Intangible assets, net | 376.2 | 153.9 | ||||||||||||
| Other non-current assets | 18.8 | 25.6 | ||||||||||||
| Total assets | $ | 1,609.3 | $ | 935.1 | ||||||||||
| LIABILITIES AND DEFICIT | ||||||||||||||
| Accounts payable | $ | 44.4 | $ | 8.2 | ||||||||||
| Accounts payable to related parties | 91.5 | 64.4 | ||||||||||||
| Current portion of operating lease liabilities | 7.7 | 6.8 | ||||||||||||
| Accrued expenses and other current liabilities | 19.4 | 17.4 | ||||||||||||
| Long-term debt | 1,522.2 | 899.0 | ||||||||||||
| Asset retirement obligations | 9.0 | 6.5 | ||||||||||||
| Operating lease liabilities, net of current portion | 12.8 | 14.1 | ||||||||||||
| Other non-current liabilities | 18.8 | 22.7 | ||||||||||||
| Deficit | (116.5) | (104.0) | ||||||||||||
| Total liabilities and deficit | $ | 1,609.3 | $ | 935.1 | ||||||||||
Note 6 - Equity Method Investments
Wink to Webster Pipeline
On February 21, 2020, we, through our wholly-owned direct subsidiary Delek Energy, entered into the W2W Holdings LLC Agreement with MPLX Operations LLC ("MPLX") (collectively, with its wholly-owned subsidiaries, the "WWP Project Financing Joint Venture" or the "WWP Project Financing JV"). The WWP Project Financing JV was created for the specific purpose of obtaining financing to fund our combined capital calls resulting from and occurring during the construction period of the pipeline system under the Wink to Webster Pipeline LLC ("WWP") Joint Venture, and to service that debt. In connection with the arrangement, both Delek Energy and MPLX contributed their respective 15% ownership interests in WWP to the WWP Project Financing JV as collateral for and in service of the related project financing. On June 2, 2022, the WWP Project Financing JV refinanced its project finance debt using the proceeds from a $535.0 million senior secured notes issuance due January 31, 2032. In connection with this notes issuance, on June 2, 2022 the WWP Project Financing JV also entered into a senior secured credit agreement that provides for revolving loan commitments in an amount of up to $75.0 million and the issuance of letters of credit in an amount of up to $44.0 million. The maturity date of the revolver and letter credit commitments is June 2, 2027. Distributions received from WWP through the WWP Project Financing JV will first be applied in service of its debt, with excess distributions being made to the members of the WWP Project Financing JV as provided for in the W2W Holdings LLC Agreement and as allowed for under its debt agreements. The obligations of the members under the W2W Holdings LLC Agreement are guaranteed by the parents of the members of the WWP Project Financing JV.
The Company evaluated Delek Energy's investment in W2W Holdings LLC ("HoldCo") and determined that HoldCo is a VIE. The Company determined it is not the primary beneficiary since it does not have the power to direct activities that most significantly impact HoldCo. The Company does not hold a controlling financial interest in HoldCo because no single party has the power to direct the activities that most significantly impact HoldCo’s economic performance since power to make the decisions about the significant activities is shared equally with MPLX and all significant decisions require unanimous consent of the board of directors of HoldCo. The Company accounts for its investment in HoldCo using the equity method of accounting due to its significant influence with its 50% membership interest.
18 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company's maximum exposure to any losses incurred by HoldCo is limited to its investment. As of June 30, 2022, except for the guarantee of member obligations under the W2W Holdings LLC Agreement, the Company does not have other existing guarantees with or to HoldCo, or any third-party for work contracted with it.
As of June 30, 2022 and December 31, 2021, Delek's investment balance in WWP Project Financing Joint Venture totaled $53.5 million and $49.3 million, respectively, and is included as part of total assets in corporate, other and eliminations in our segment disclosure. In addition on the investment, we recognized income of $2.1 million and $4.2 million for the three and six months ended June 30, 2022, respectively, and a loss of $3.9 million and $4.1 million for the three and six months ended June 30, 2021, respectively.
Delek Logistics Investments
Delek Logistics has a 33% membership interest in Red River Pipeline Company LLC (“Red River”), which owns a 16-inch crude oil pipeline running from Cushing, Oklahoma to Longview, Texas. As of June 30, 2022 and December 31, 2021, Delek's investment balance in Red River totaled $144.8 million and $144.0 million, respectively. We made no capital contributions during the six months ended June 30, 2022 and made $1.4 million in capital contributions during the six months ended June 30, 2021 based on capital calls. We recognized income on the investment totaling $4.6 million and $9.9 million for the three and six months ended June 30, 2022, respectively, and $3.7 million and $6.0 million for the three and six months ended June 30, 2021, respectively. This investment is accounted for using the equity method and is included as part of total assets in our logistics segment.
In addition to Red River, Delek Logistics has two joint ventures that own and operate logistics assets, and which serve third parties and subsidiaries of Delek. We own a 50% membership interest in the entity formed with an affiliate of Plains All American Pipeline, L.P. to operate one of these pipeline systems (the "Caddo Pipeline") and a 33% membership interest in Andeavor Logistics Rio Pipeline LLC which operates the other pipeline system (the "Rio Pipeline"). As of June 30, 2022 and December 31, 2021, Delek Logistics' investment balances in these joint ventures totaled $103.9 million and $106.0 million, respectively, and were accounted for using the equity method. We recognized income on these investments totaling $2.4 million and $4.2 million for the three and six months ended June 30, 2022, respectively, and $2.9 million and $4.6 million for the three and six months ended June 30, 2021, respectively.
Other Investments
In addition to our pipeline joint ventures, we also have a 50% interest in a joint venture that owns asphalt terminals located in the southwestern region of the U.S., as well as a 50% interest in a joint venture that owns, operates and maintains a terminal consisting of an ethanol unit train facility with an ethanol tank in Arkansas. As of June 30, 2022 and December 31, 2021, Delek's investment balance in these joint ventures was $52.4 million and $44.8 million, respectively. We recognized income on these investments totaling $6.6 million and $8.3 million for the three and six months ended June 30, 2022, respectively, and $4.1 million and $5.1 million for the three and six months ended June 30, 2021, respectively. These investments are accounted for using the equity method and is included as part of total assets in corporate, other and eliminations in our segment disclosure.
Note 7 - Inventory
Crude oil, work in process, refined products, blendstocks and asphalt inventory for all of our operations, excluding merchandise inventory in our retail segment, are stated at the lower of cost determined using FIFO basis or net realizable value. Retail merchandise inventory consists of cigarettes, beer, convenience merchandise and food service merchandise and is stated at estimated cost as determined by the retail inventory method.
Effective January 1, 2022, we changed our method for valuing the inventory held at the Tyler Refinery to the FIFO inventory valuation method from the LIFO inventory valuation method. Total inventories accounted for using LIFO, prior to the accounting method change, comprised 28.0% of the Company’s total inventories as of December 31, 2021. This change in accounting method is preferable because it provides better consistency across our refineries and improved transparency, and results in recognition that better reflects the physical flow of inventory and more accurately reflects the current value of inventory. After this change, we no longer utilize the LIFO valuation method and the majority of our inventories are now valued using the FIFO cost method, with the remainder valued using the Retail method for the retail segment inventory. The effects of this change have been retrospectively applied to all periods presented. This change resulted in a decrease to retained earnings of $8.7 million as of January 1, 2021 in accordance with ASC 250, Accounting Changes and Error Corrections.
19 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents the components of inventory for each period presented reflecting the accounting method change discussed above:
| December 31, 2021 | ||||||||||||||
| (in millions) | June 30, 2022 | As Adjusted (1) | ||||||||||||
| Refinery raw materials and supplies | $ | 768.1 | $ | 516.0 | ||||||||||
| Refinery work in process | 205.5 | 156.2 | ||||||||||||
| Refinery finished goods | 785.9 | 550.6 | ||||||||||||
| Retail fuel | 12.4 | 9.3 | ||||||||||||
| Retail merchandise | 30.3 | 26.2 | ||||||||||||
| Logistics refined products | 3.7 | 2.4 | ||||||||||||
| Total inventories | $ | 1,805.9 | $ | 1,260.7 | ||||||||||
(1) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories, as described above.
In addition, certain financial statement line items in our Condensed Consolidated Statement of Income for the three and six months ended June 30, 2021, our Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2021 and our Consolidated Condensed Balance Sheet as of December 31, 2021, were retrospectively adjusted as follows:
| Three Months Ended June 30, 2021 | ||||||||||||||||||||
| (In millions) | As Reported (using LIFO) | Adjustment | As Adjusted (using FIFO) | |||||||||||||||||
| Condensed Consolidated Statements of Income | ||||||||||||||||||||
| Cost of materials and other | $ | 1,995.8 | $ | (35.2) | $ | 1,960.6 | ||||||||||||||
| Total cost of sales | $ | 2,187.1 | $ | (35.2) | $ | 2,151.9 | ||||||||||||||
| Loss before income tax benefit | $ | (118.5) | $ | 35.2 | $ | (83.3) | ||||||||||||||
| Income tax benefit | $ | (46.0) | $ | 10.8 | $ | (35.2) | ||||||||||||||
| Net loss | $ | (72.5) | $ | 24.4 | $ | (48.1) | ||||||||||||||
| Net loss attributable to Delek | $ | (81.1) | $ | 24.4 | $ | (56.7) | ||||||||||||||
| Net loss per share attributable to Delek | ||||||||||||||||||||
| Basic | $ | (1.10) | $ | 0.33 | $ | (0.77) | ||||||||||||||
| Diluted | $ | (1.10) | $ | 0.33 | $ | (0.77) | ||||||||||||||
| Six Months Ended June 30, 2021 | ||||||||||||||||||||
| (In millions) | As Reported (using LIFO) | Adjustment | As Adjusted (using FIFO) | |||||||||||||||||
| Condensed Consolidated Statements of Income | ||||||||||||||||||||
| Cost of materials and other | $ | 4,201.3 | $ | (67.9) | $ | 4,133.4 | ||||||||||||||
| Total cost of sales | $ | 4,584.8 | $ | (67.9) | $ | 4,516.9 | ||||||||||||||
| Loss before income tax benefit | $ | (222.2) | $ | 67.9 | $ | (154.3) | ||||||||||||||
| Income tax benefit | $ | (58.4) | $ | 14.9 | $ | (43.5) | ||||||||||||||
| Net loss | $ | (163.8) | $ | 53.0 | $ | (110.8) | ||||||||||||||
| Net loss attributable to Delek | $ | (179.7) | $ | 53.0 | $ | (126.7) | ||||||||||||||
| Net loss per share attributable to Delek | ||||||||||||||||||||
| Basic | $ | (2.43) | $ | 0.71 | $ | (1.72) | ||||||||||||||
| Diluted | $ | (2.43) | $ | 0.71 | $ | (1.72) | ||||||||||||||
20 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
| December 31, 2021 | ||||||||||||||||||||
| (In millions) | As Reported (using LIFO) | Adjustment | As Adjusted (using FIFO) | |||||||||||||||||
| Condensed Consolidated Balance Sheet | ||||||||||||||||||||
| Inventories, net of inventory valuation reserves | $ | 1,176.1 | $ | 84.6 | $ | 1,260.7 | ||||||||||||||
| Total Assets | $ | 6,728.0 | $ | 84.6 | $ | 6,812.6 | ||||||||||||||
Deferred tax liabilities | $ | 196.4 | $ | 18.1 | $ | 214.5 | ||||||||||||||
| Retained Earnings | $ | 318.2 | $ | 66.5 | $ | 384.7 | ||||||||||||||
| Total liabilities and stockholders' equity | $ | 6,728.0 | $ | 84.6 | $ | 6,812.6 | ||||||||||||||
| Six Months Ended June 30, 2021 | ||||||||||||||||||||
| (In millions) | As Reported (using LIFO) | Adjustment | As Adjusted (using FIFO) | |||||||||||||||||
| Condensed Consolidated Statements of Cash Flows | ||||||||||||||||||||
Net loss | $ | (163.8) | $ | 53.0 | $ | (110.8) | ||||||||||||||
Non-cash lower of cost or market/net realizable value adjustment | $ | (30.1) | $ | 30.3 | $ | 0.2 | ||||||||||||||
| Deferred income taxes | $ | (52.9) | $ | 12.1 | $ | (40.8) | ||||||||||||||
Inventories and other current assets | $ | (302.5) | $ | (85.2) | $ | (387.7) | ||||||||||||||
| Non-current assets and liabilities, net | $ | (6.1) | $ | (10.2) | $ | (16.3) | ||||||||||||||
The following tables reflect the effect of the change in the accounting principle on the current period Condensed Consolidated Financial Statements:
| Three Months Ended June 30, 2022 | ||||||||||||||||||||
| (In millions) | As Computed (using LIFO) | As Reported (using FIFO) | Effect of Change | |||||||||||||||||
| Condensed Consolidated Statements of Income | ||||||||||||||||||||
| Cost of materials and other | $ | 5,128.0 | $ | 5,082.6 | $ | 45.4 | ||||||||||||||
| Total cost of sales | $ | 5,379.3 | $ | 5,333.9 | $ | 45.4 | ||||||||||||||
| (Loss) income before income tax (benefit) expense | $ | 423.6 | $ | 469.0 | $ | (45.4) | ||||||||||||||
| Income tax (benefit) expense | $ | 89.3 | $ | 100.4 | $ | (11.1) | ||||||||||||||
| Net (loss) income attributable to Delek | $ | 327.5 | $ | 361.8 | $ | (34.3) | ||||||||||||||
| Net (loss) income per share attributable to Delek | ||||||||||||||||||||
| Basic | $ | 4.63 | $ | 5.11 | $ | (0.48) | ||||||||||||||
| Diluted | $ | 4.57 | $ | 5.05 | $ | (0.48) | ||||||||||||||
| Six Months Ended June 30, 2022 | ||||||||||||||||||||
| (In millions) | As Computed (using LIFO) | As Reported (using FIFO) | Effect of Change | |||||||||||||||||
| Condensed Consolidated Statements of Income | ||||||||||||||||||||
| Cost of materials and other | $ | 9,401.6 | $ | 9,235.1 | $ | 166.5 | ||||||||||||||
| Total cost of sales | $ | 9,855.1 | $ | 9,688.6 | $ | 166.5 | ||||||||||||||
| (Loss) income before income tax (benefit) expense | $ | 320.4 | $ | 486.9 | $ | (166.5) | ||||||||||||||
| Income tax (benefit) expense | $ | 68.1 | $ | 103.5 | $ | (35.4) | ||||||||||||||
| Net (loss) income attributable to Delek | $ | 237.3 | $ | 368.4 | $ | (131.1) | ||||||||||||||
| Net (loss) income per share attributable to Delek | ||||||||||||||||||||
| Basic | $ | 3.30 | $ | 5.12 | $ | (1.82) | ||||||||||||||
| Diluted | $ | 3.27 | $ | 5.07 | $ | (1.80) | ||||||||||||||
21 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
| June 30, 2022 | ||||||||||||||||||||
| (In millions) | As Computed (using LIFO) | As Reported (using FIFO) | Effect of Change | |||||||||||||||||
| Condensed Consolidated Balance Sheet | ||||||||||||||||||||
| Inventories, net inventory valuation reserves | $ | 1,575.2 | $ | 1,805.9 | $ | (230.7) | ||||||||||||||
| Total Assets | $ | 8,693.9 | $ | 8,924.6 | $ | (230.7) | ||||||||||||||
Accrued expenses and other current | $ | 902.2 | $ | 885.6 | $ | 16.6 | ||||||||||||||
Deferred tax liabilities | $ | 250.6 | $ | 300.3 | $ | (49.7) | ||||||||||||||
| Retained Earnings | $ | 555.4 | $ | 753.0 | $ | (197.6) | ||||||||||||||
| Total liabilities and stockholders' equity | $ | 8,693.9 | $ | 8,924.6 | $ | (230.7) | ||||||||||||||
| Six Months Ended June 30, 2022 | ||||||||||||||||||||
| (In millions) | As Computed (using LIFO) | As Reported (using FIFO) | Effect of Change | |||||||||||||||||
| Condensed Consolidated Statements of Cash Flows | ||||||||||||||||||||
Net (loss) income | $ | 252.3 | $ | 383.4 | $ | (131.1) | ||||||||||||||
Non-cash lower of cost or market/net realizable value adjustment | $ | (1.4) | $ | (1.2) | $ | (0.2) | ||||||||||||||
| Deferred income taxes | $ | 62.3 | $ | 93.9 | $ | (31.6) | ||||||||||||||
Inventories and other current assets | $ | (387.6) | $ | (533.9) | $ | 146.3 | ||||||||||||||
| Accounts payable and other current liabilities | $ | 794.0 | $ | 777.4 | $ | 16.6 | ||||||||||||||
At June 30, 2022, we recorded a pre-tax inventory valuation reserve of $8.1 million due to a market price decline below our cost of certain inventory products. At December 31, 2021, we recorded a pre-tax inventory valuation reserve of $9.3 million. We recognized a net reduction (increase) in cost of materials and other in the accompanying condensed consolidated statements of income related to the change in pre-tax inventory valuation of $(7.3) million and $1.2 million for the three and six months ended June 30, 2022, respectively, and $0.8 million and $(0.1) million for the three and six months ended June 30, 2021, respectively.
Note 8 - Crude Oil Supply and Inventory Purchase Agreement
Delek has Supply and Offtake Agreements with J. Aron & Company ("J. Aron") in connection with its El Dorado, Big Spring and Krotz Springs refineries (collectively, the "Supply and Offtake Agreements"). Pursuant to the Supply and Offtake Agreements, (i) J. Aron agrees to sell to us, and we agree to buy from J. Aron, at market prices, crude oil for processing at these refineries and (ii) we agree to sell, and J. Aron agrees to buy, at market prices, certain refined products produced at these refineries. The Supply and Offtake Agreements also provide for the lease to J. Aron of crude oil and refined product storage facilities, and the identification of prospective purchasers of refined products on J. Aron’s behalf. At the inception of the Supply and Offtake Agreements, we transferred title to a certain number of barrels of crude and other inventories to J. Aron (the "Step-In"), and the Supply and Offtake Agreements require the repurchase of remaining inventory (including certain "Baseline Volumes") at the termination of those Agreements (the "Step-Out"). The Supply and Offtake Agreements are accounted for as inventory financing arrangements under the fair value election provided by ASC 815 Derivatives and Hedging ("ASC 815") and ASC 825, Financial Instruments ("ASC 825").
Barrels subject to the Supply and Offtake Agreements are as follows (in millions):
| El Dorado | Big Spring | Krotz Springs | ||||||||||||||||||
| Baseline Volumes pursuant to the respective Supply and Offtake Agreements | 2.0 | 0.8 | 1.3 | |||||||||||||||||
Barrels of inventory consigned under the respective Supply and Offtake Agreements as of June 30, 2022 (1) | 3.2 | 1.2 | 1.3 | |||||||||||||||||
Barrels of inventory consigned under the respective Supply and Offtake Agreements as of December 31, 2021 (1) | 3.5 | 1.3 | 1.2 | |||||||||||||||||
(1) Includes Baseline Volumes plus/minus over/short quantities.
The Supply and Offtake Agreements have certain termination provisions, which may include requirements to negotiate with third parties for the assignment to us of certain contracts, commitments and arrangements, including procurement contracts, commitments for the sale of product, and pipeline, terminalling, storage and shipping arrangements.
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In April 2020, we amended and restated our three Supply and Offtake Agreements to renew and extend the terms to December 30, 2022. J. Aron has the sole discretion to further extend the three Supply and Offtake Agreements to May 30, 2025 by giving notice at least 6 months prior to the current maturity date. As of June 30, 2022, J. Aron did not provide notice to further extend to May 30, 2025. As part of the April 2020 amendment, there were changes to the underlying market index, annual fee, the crude purchase fee, crude roll fees and timing of cash settlements related to periodic price adjustments (the "Periodic Price Adjustments"). The repurchase of Baseline Volumes at the end of the Supply and Offtake Agreement term (representing the "Baseline Step-Out Liability" or, collectively, the "Baseline Step-Out Liabilities") continue to be recorded at fair value under the fair value election included under ASC 815 and ASC 825. The Baseline Step-Out Liabilities have a floating component whose fair value reflects changes to commodity price risk with changes in fair value recorded in cost of materials and other and a fixed component whose fair value reflects changes to interest rate risk with changes in fair value recorded in interest expense. There was no amendment date change in fair value resulting from the modification. The Baseline Step-Out Liabilities are reflected as non-current liabilities on our condensed consolidated balance sheet to the extent that they are not contractually due within twelve months. Monthly activity resulting in over and short volumes are valued using market-indexed pricing, and are included in current liabilities (or receivables) on our condensed consolidated balance sheet.
Pursuant to the Periodic Price Adjustments provision in the Supply and Offtake Agreements, the Company may be required to pay down all or a portion of the fixed component of the Baseline Step-Out Liabilities or may receive additional proceeds depending on the change in fair value of the inventory collateral subject to a threshold at certain specified periodic pricing dates (the "Periodic Pricing Dates"), which occur on October 1st and May 1st, annually, not to extend beyond expiration of the Supply and Offtake Agreements. Additionally, at the Periodic Pricing Dates, if a Periodic Price Adjustment is triggered, the prospective pricing underlying the fixed component of the Baseline Step-Out Liabilities will be adjusted to reflect either the pay-down or the incremental proceeds, accordingly. As of June 30, 2022, the fixed component of the Baseline Step-Out Liabilities subject to the Periodic Price Adjustments amounted to approximately $72.8 million. Some portion of that amount may become due or payable if Periodic Price Adjustments are triggered on the Periodic Pricing Dates.
Gains (losses) related to changes in fair value due to commodity-index price are recorded as a component of cost of materials and other in the consolidated statements of income. With respect to the Baseline Step-Out liabilities, we recognized gains (losses) in cost of materials and other attributable to changes in fair value due to commodity-index price totaling $58.1 million and $206.9 million during the three and six months ended June 30, 2022, respectively, and $41.8 million and $104.1 million during the three and six months ended June 30, 2021, respectively.
Net balances payable (receivable) under the Supply and Offtake Agreements were as follows as of the balance sheet dates (in millions):
| El Dorado | Big Spring | Krotz Springs | Total | |||||||||||||||||||||||
Balances as of June 30, 2022: | ||||||||||||||||||||||||||
| Baseline Step-Out Liability | $ | 261.0 | $ | 110.6 | $ | 165.8 | $ | 537.4 | ||||||||||||||||||
| Revolving over/short inventory financing liability | 161.1 | 59.3 | 12.7 | 233.1 | ||||||||||||||||||||||
| Total Obligations Under Supply and Offtake Agreements - Current portion | $ | 422.1 | $ | 169.9 | $ | 178.5 | $ | 770.5 | ||||||||||||||||||
| Other (receivable) payable for monthly activity true-up | $ | (9.5) | $ | 1.0 | $ | 14.8 | $ | 6.3 | ||||||||||||||||||
| El Dorado | Big Spring | Krotz Springs | Total | |||||||||||||||||||||||
Balances as of December 31, 2021: | ||||||||||||||||||||||||||
| Baseline Step-Out Liability | $ | 159.6 | $ | 68.4 | $ | 102.4 | $ | 330.4 | ||||||||||||||||||
| Revolving over/short inventory financing liability (receivable) | 120.9 | 41.1 | (4.9) | 157.1 | ||||||||||||||||||||||
| Total Obligations Under Supply and Offtake Agreements - Current portion | $ | 280.5 | $ | 109.5 | $ | 97.5 | $ | 487.5 | ||||||||||||||||||
| Other (receivable) payable for monthly activity true-up | $ | (2.7) | $ | 1.0 | $ | 7.0 | $ | 5.3 | ||||||||||||||||||
The Supply and Offtake Agreements require payments of fixed annual fees which are factored into the interest rate yield under the fair value accounting model and recorded in interest expense. Recurring cash fees paid during the periods presented were as follows (in millions):
| El Dorado | Big Spring | Krotz Springs | Total | |||||||||||||||||||||||
Recurring cash fees paid during the three months ended June 30, 2022 | $ | 3.0 | $ | 1.0 | $ | 1.2 | $ | 5.2 | ||||||||||||||||||
Recurring cash fees paid during the three months ended June 30, 2021 | $ | 2.8 | $ | 0.8 | $ | 1.1 | $ | 4.7 | ||||||||||||||||||
Recurring cash fees paid during the six months ended June 30, 2022 | $ | 5.9 | $ | 2.0 | $ | 2.3 | $ | 10.2 | ||||||||||||||||||
Recurring cash fees paid during the six months ended June 30, 2021 | $ | 5.2 | $ | 1.5 | $ | 2.2 | $ | 8.9 | ||||||||||||||||||
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We maintained letters of credit under the Supply and Offtake Agreements as follows (in millions):
| El Dorado | ||||||||
Letters of credit outstanding as of June 30, 2022 | $ | 120.0 | ||||||
Letters of credit outstanding as of December 31, 2021 | $ | 195.0 | ||||||
Note 9 - Long-Term Obligations and Notes Payable
Outstanding borrowings, net of unamortized debt discounts and certain deferred financing costs, under Delek’s existing debt instruments are as follows (in millions):
| June 30, 2022 | December 31, 2021 | |||||||||||||
| Revolving Credit Facility | $ | — | $ | — | ||||||||||
Term Loan Credit Facility (1) | 1,236.6 | 1,240.0 | ||||||||||||
Hapoalim Term Loan (2) | 8.9 | 29.0 | ||||||||||||
Delek Logistics Credit Facility (3) | 880.3 | 258.0 | ||||||||||||
Delek Logistics 2025 Notes (4) | 247.2 | 246.7 | ||||||||||||
Delek Logistics 2028 Notes (5) | 394.7 | 394.3 | ||||||||||||
| Reliant Bank Revolver | 50.0 | 50.0 | ||||||||||||
| 2,817.7 | 2,218.0 | |||||||||||||
| Less: Current portion of long-term debt and notes payable | 72.0 | 92.2 | ||||||||||||
| $ | 2,745.7 | $ | 2,125.8 | |||||||||||
(1)Net of deferred financing costs of $1.9 million and $2.2 million at June 30, 2022 and December 31, 2021, respectively and debt discount of $15.0 million and $17.8 million at June 30, 2022 and December 31, 2021, respectively.
(2)Net of deferred financing costs of $0.1 million and $0.1 million at June 30, 2022 and December 31, 2021, respectively and a nominal debt discount and $0.1 million debt discount at June 30, 2022 and December 31, 2021, respectively.
(3)Net of deferred financing costs of $0.6 million at June 30, 2022.
(4)Net of deferred financing costs of $2.1 million and $2.5 million at June 30, 2022 and December 31, 2021, respectively and debt discount of $0.7 million and $0.8 million at June 30, 2022 and December 31, 2021, respectively.
(5)Net of deferred financing costs of $5.3 million and $5.7 million at June 30, 2022 and December 31, 2021, respectively.
Delek Revolver and Term Loan
On March 30, 2018 (the "Closing Date"), Delek entered into (i) a new term loan credit agreement with Wells Fargo Bank, National Association, as administrative agent (the "Term Administrative Agent"), Delek, as borrower, certain subsidiaries of Delek, as guarantors, and the lenders from time to time party thereto, providing for a senior secured term loan facility in an amount of $700.0 million (the "Term Loan Credit Facility") and (ii) a second amended and restated credit agreement with Wells Fargo Bank, National Association, as administrative agent (the "Revolver Administrative Agent"), Delek, as borrower, certain subsidiaries of Delek, as guarantors, and the other lenders party thereto, providing for a senior secured asset-based revolving credit facility with commitments of $1.0 billion (the "Revolving Credit Facility" and, together with the Term Loan Credit Facility, the "New Credit Facilities").
The Revolving Credit Facility permits borrowings in Canadian dollars of up to $50.0 million. Effective March 21, 2022, the limits for the issuance of letters of credit for the Revolving Credit Facility increased from of up to $400.0 million to up to $500.0 million, including letters of credit denominated in Canadian dollars of up to $10.0 million. Delek may designate restricted subsidiaries as additional borrowers under the Revolving Credit Facility.
The Term Loan Credit Facility was drawn in full for $700.0 million on the Closing Date at an original issue discount of 0.50%. Proceeds under the Term Loan Credit Facility, as well as proceeds of approximately $300.0 million in borrowings under the Revolving Credit Facility on the Closing Date, were used to repay certain indebtedness of Delek and its subsidiaries (the “Refinancing”), as well as certain fees, costs and expenses in connection with the closing of the New Credit Facilities, with any remaining proceeds held in cash. Proceeds of future borrowings under the Revolving Credit Facility may be used for working capital and general corporate purposes of Delek and its subsidiaries.
On May 22, 2019 (the "First Incremental Effective Date"), we amended the Term Loan Credit Facility agreement pursuant to the terms of the First Incremental Amendment to Term Loan Credit Agreement (the "Incremental Amendment"). Pursuant to the Incremental Amendment, the Company borrowed $250.0 million in aggregate principal amount of incremental term loans (the “Incremental Term Loans”) at an original issue discount of 0.75%. On November 12, 2019 (the "Second Incremental Effective Date"), we amended the Term Loan Credit facility agreement pursuant to the terms of the Second Incremental Amendment to the Term Loan Credit Agreement (the
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Notes to Condensed Consolidated Financial Statements (Unaudited)
"Second Incremental Amendment") and borrowed $150.0 million in aggregate principal amount of incremental term loans (the "Incremental Loans") at an original issue discount of 1.21%. The terms of the Incremental Term Loans and Incremental Loans are substantially identical to the terms applicable to the initial term loans under the Term Loan Credit Facility borrowed in March 2018. There are no restrictions on the Company's use of the proceeds of the Incremental Term Loans and Incremental Loans. The proceeds may be used for (i) reducing utilizations under the Revolving Credit Facility, (ii) general corporate purposes and (iii) paying transaction fees and expenses associated with the incremental amendments.
On May 19, 2020, we amended the Term Loan Credit Facility agreement and borrowed $200.0 million in aggregate principal amount of incremental term loans (the “Third Incremental Term Loan”) at an original issue discount of 7.00%. The Third Incremental Term Loan constitutes a separate class of term loans (the "Class B Loans") under the Term Loan Credit Facility from those initially borrowed in March 2018 and the incremental term loans borrowed in May 2019 and November 2019 (collectively, the "Class A Loans"). Delek may voluntarily prepay the outstanding Third Incremental Term Loan at any time subject to customary breakage costs with respect to LIBOR loans and subject to a prepayment premium of 1.00% in connection with certain customary repricing events that may occur during the period from the day after the first anniversary of the Third Incremental Term Loan through the second anniversary of the Third Incremental Term Loan. The other terms of the Third Incremental Term Loan are substantially identical to the terms applicable to the Class A Loans. The proceeds of the Third Incremental Term Loan may be used (i) for general corporate purposes and (ii) to pay transaction fees and expenses associated with the Third Incremental Term Loan.
Interest and Unused Line Fees
The interest rates applicable to borrowings under the Term Loan Credit Facility and the Revolving Credit Facility are based on a fluctuating rate of interest measured by reference to either, at Delek’s option, (i) a base rate, plus an applicable margin, or (ii) a reserve-adjusted LIBOR, plus an applicable margin (or, in the case of Revolving Credit Facility borrowings denominated in Canadian dollars, the Canadian dollar bankers' acceptances rate ("CDOR"). On October 26, 2018, Delek entered into an amendment to the Term Loan Credit Facility (the “First Amendment”) to reduce the margin on certain borrowings under the Term Loan Credit Facility and incorporate certain other changes. The First Amendment decreased the applicable margins for Class A Loans under (i) Base Rate Loans by 0.25% to 1.25% and (ii) LIBOR Rate Loans by 0.25% to 2.25%, as such terms are defined in the Term Loan Credit Facility. Class B Loans incurred under the Third Incremental Term Loan bear interest at a rate that is determined, at the Company’s election, at LIBOR or at base rate, in each case, plus an applicable margin of 5.50% with respect to LIBOR borrowings and 4.50% with respect to base rate borrowings. Additionally, Class B loans that are LIBOR borrowings are subject to a minimum LIBOR rate floor of 1.00%.
The applicable margin for Revolving Credit Facility borrowings is based on Delek’s excess availability as determined by reference to a borrowing base, ranging from 0.25% to 0.75% per annum with respect to base rate borrowings and from 1.25% to 1.75% per annum with respect to LIBOR and CDOR borrowings.
In addition, the Revolving Credit Facility requires Delek to pay an unused line fee on the average amount of unused commitments thereunder in each quarter, which fee is at a rate of 0.25% or 0.375% per annum, depending on average commitment usage for such quarter. As of June 30, 2022, the unused line fee was 0.375% per annum.
Maturity and Repayments
The Revolving Credit Facility will mature and the commitments thereunder will terminate on March 30, 2023. The Term Loan Credit Facility matures on March 30, 2025 and requires scheduled quarterly principal payments on the last business day of the applicable quarter. Pursuant to the Second Incremental Amendment, the quarterly payments increased to $2.75 million commencing with December 31, 2019 on the Class A Loans. Additionally, the Term Loan Credit Facility requires prepayments by Delek with the net cash proceeds from certain debt incurrences, asset dispositions and insurance or condemnation events with respect to Delek’s assets, subject to certain exceptions, thresholds and reinvestment rights. The Term Loan Credit Facility also requires annual prepayments with a variable percentage of Delek’s excess cash flow, ranging from 50.0% to 0% depending on Delek’s consolidated fiscal year end secured net leverage ratio. The Third Incremental Term Loan requires quarterly payments on the Class B Loans of $0.5 million commencing June 30, 2020.
Guarantee and Security
The obligations of the borrowers under the New Credit Facilities are guaranteed by Delek and each of its direct and indirect, existing and future, wholly-owned domestic subsidiaries, subject to customary exceptions and limitations, and excluding Delek Logistics Partners, LP, Delek Logistics GP, LLC, and each subsidiary of the foregoing (collectively, the "MLP Subsidiaries"). Borrowings under the New Credit Facilities are also guaranteed by DK Canada Energy ULC, a British Columbia unlimited liability company and a wholly-owned restricted subsidiary of Delek.
The Revolving Credit Facility is secured by a first priority lien over substantially all of Delek’s and each guarantor's receivables, inventory, renewable identification numbers ("RINs"), instruments, intercompany loan receivables, deposit and securities accounts and related books and records and certain other personal property, subject to certain customary exceptions (the "Revolving Priority Collateral"), and a second priority lien over substantially all of Delek's and each guarantor's other assets, including all of the equity interests of any subsidiary held by
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Notes to Condensed Consolidated Financial Statements (Unaudited)
Delek or any guarantor (other than equity interests in certain MLP Subsidiaries) subject to certain customary exceptions, but excluding real property (such real property and equity interests, the "Term Priority Collateral").
The Term Loan Credit Facility is secured by a first priority lien on the Term Priority Collateral and a second priority lien on the Revolving Priority Collateral, all in accordance with an intercreditor agreement between the Term Administrative Agent and the Revolver Administrative Agent and acknowledged by Delek and the subsidiary guarantors. Certain excluded assets are not included in the Term Priority Collateral and the Revolving Priority Collateral.
Additional Information
At June 30, 2022, the borrowing rate for base rate loans under the Revolving Credit Facility was 5.00% and there was a nominal principal amount outstanding thereunder. Additionally, there were letters of credit issued of approximately $363.9 million as of June 30, 2022 under the Revolving Credit Facility. Unused credit commitments under the Revolving Credit Facility, as of June 30, 2022, were approximately $636.1 million.
At June 30, 2022, the weighted average borrowing rate under the Term Loan Credit Facility was approximately 4.42% comprised entirely of LIBOR borrowings, and the principal amount outstanding thereunder was $1,253.5 million. As of June 30, 2022, the effective interest rate related to the Term Loan Credit Facility was 4.96%.
Delek Hapoalim Term Loan
On December 31, 2019, Delek entered into an unsecured term loan credit and guaranty agreement (the "BHI Agreement") with Bank Hapoalim B.M. ("BHI") as the administrative agent. Pursuant to the BHI Agreement, on December 31, 2019, Delek borrowed $40.0 million (the "BHI Term Loan"). The interest rate under the BHI Agreement is equal to LIBOR plus a margin of 3.00%. The BHI Agreement has a current maturity of December 31, 2022 and requires quarterly loan amortization payments of $0.1 million, commencing March 31, 2020. Proceeds may be used for general corporate purposes. On December 30, 2020 and June 28, 2021, we amended the BHI Agreement to modify one of the required quarterly financial covenant metrics; there were no other changes as a result of these amendments.
At June 30, 2022, the weighted average borrowing rate under the term loan was approximately 4.67% comprised entirely of a LIBOR borrowing and the principal amount outstanding thereunder was $9.0 million. On July 30, 2021, January 31, 2022, and June 30, 2022, we elected to voluntarily prepay $10.0 million each period in principal of the term loan. As of June 30, 2022, the effective interest rate related to the BHI Term Loan was 6.52%.
Delek Logistics Credit Facility
On September 28, 2018, Delek Logistics and all of its subsidiaries entered into a third amended and restated senior secured revolving credit agreement with Fifth Third Bank ("Fifth Third") as administrative agent and a syndicate of lenders (hereafter, the "Delek Logistics Credit Facility") with lender commitments of $850.0 million. The Delek Logistics Credit Facility also contains an accordion feature whereby Delek Logistics can increase the size of the credit facility to an aggregate of $1.0 billion, subject to receiving increased or new commitments from lenders and the satisfaction of certain other conditions precedent.
The obligations under the Delek Logistics Credit Facility remain secured by first priority liens on substantially all of Delek Logistics' tangible and intangible assets.
The Delek Logistics Credit Facility has a maturity date of September 28, 2023. Borrowings under the Delek Logistics Credit Facility bear interest at either a U.S. dollar prime rate, Canadian dollar prime rate, or recently amended term Secured Overnight Financing Rate (“Term SOFR”), or a CDOR rate, in each case plus applicable margins, at the election of the borrowers and as a function of draw down currency. The applicable margin in each case and the fee payable for the unused revolving commitments vary based upon Delek Logistics' most recent total leverage ratio calculation delivered to the lenders, as called for and defined under the terms of the Delek Logistics Credit Facility. At June 30, 2022, the weighted average borrowing rate was approximately 3.35%. Additionally, the Delek Logistics Credit Facility requires Delek Logistics to pay a leverage ratio dependent quarterly fee on the average unused revolving commitment. As of June 30, 2022, this fee was 0.30% on an annualized basis.
In August 2020, Delek Logistics entered into a First Amendment to the Delek Logistics Credit Facility which, among other things, permitted the transfer of cash and equity consideration for the elimination of incentive distribution rights held by Delek Logistics GP, LLC, the general partner. It also modified the total leverage ratio and the senior leverage ratio (each as defined in the Delek Logistics Credit Facility) calculations to reduce the total funded debt (as defined in the Delek Logistics Credit Facility) component thereof by the total amount of unrestricted consolidated cash and cash equivalents on the balance sheet of the Delek Logistics and its subsidiaries up to $20.0 million.
On May 13, 2022, Delek Logistics entered into a Second Amendment to the Delek Logistics Credit Facility which, among other things, provided for the transition from a LIBOR benchmark to Term SOFR with credit spread adjustments for 1-month and 3-month Term SOFR loans and provided consent and flexibility related to the previously announced 3 Bear Acquisition with respect to certain covenants in the Delek Logistics Credit Facility.
On May 26, 2022, Delek Logistics entered into a Third Amendment to the Delek Logistics Credit Facility which, among other things,
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Notes to Condensed Consolidated Financial Statements (Unaudited)
provides for certain changes to the Delek Logistics Credit Facility in connection with the previously announced acquisition of 3 Bear in respect of pro forma calculations and certain other requirements under the Delek Logistics Credit Facility.
Further, on May 26, 2022, Delek Logistics entered into a Fourth Amendment (the “Fourth Amendment”) to the Delek Logistics Credit Facility. Among other things, the Fourth Amendment: (i) increased the U.S. Revolving Credit Commitments (as defined in the Delek Logistics Credit Facility) by an amount equal to $150.0 million, resulting in aggregate lender commitments under the Delek Logistics Credit Facility in an amount of $1.0 billion, (ii) increased the U.S. L/C Sublimit (as defined in the Delek Logistics Credit Facility) to an aggregate amount equal to $90.0 million and (iii) increased the U.S. Swing Line Sublimit (as defined in the Delek Logistics Credit) to an aggregate amount equal to $18.0 million.
As of June 30, 2022, Delek Logistics had $880.9 million of outstanding borrowings under the Delek Logistics Credit Facility, with no letters of credit in place. Unused credit commitments under the Delek Logistics Credit Facility, as of June 30, 2022, were $119.1 million.
Delek Logistics 2025 Notes
On May 23, 2017, Delek Logistics and its wholly owned subsidiary Delek Logistics Finance Corp. (“Finance Corp.” and together with Delek Logistics, the “Issuers”) issued $250.0 million in aggregate principal amount of 6.75% senior notes due 2025 (the “Delek Logistics 2025 Notes”) at a discount. The Delek Logistics 2025 Notes are general unsecured senior obligations of the Issuers. The Delek Logistics 2025 Notes are unconditionally guaranteed jointly and severally on a senior unsecured basis by Delek Logistics' existing subsidiaries (other than Finance Corp.) and will be unconditionally guaranteed on the same basis by certain of Delek Logistics' future subsidiaries. The Delek Logistics 2025 Notes rank equal in right of payment with all existing and future senior indebtedness of the Issuers, and senior in right of payment to any future subordinated indebtedness of the Issuers. Interest on the Delek Logistics 2025 Notes is payable semi-annually in arrears on each May 15 and November 15.
In May 2018, the Delek Logistics 2025 Notes were exchanged for new notes with terms substantially identical in all material respects with the Delek Logistic 2025 Notes except the new notes do not contain terms with respect to transfer restrictions.
All or part of the Delek Logistics 2025 Notes are currently redeemable, subject to certain conditions and limitations, at a redemption price of 101.688% of the redeemed principal for the twelve-month period beginning on May 15, 2022, and 100.00% beginning on May 15, 2023 and thereafter, plus accrued and unpaid interest, if any.
In the event of a change of control, accompanied or followed by a ratings downgrade within a certain period of time, subject to certain conditions and limitations, the Issuers will be obligated to make an offer for the purchase of the Delek Logistics 2025 Notes from holders at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest.
As of June 30, 2022, we had $250.0 million in outstanding principal amount under the Delek Logistics 2025 Notes, and the effective interest rate was 7.19%.
Delek Logistics 2028 Notes
On May 24, 2021, Delek Logistics and Finance Corp. (collectively, the “Co-issuers”), issued $400.0 million in aggregate principal amount of the Co-issuers 7.125% Senior Notes due 2028 (the “Delek Logistics 2028 Notes”), at par, pursuant to an indenture with U.S. Bank, National Association as trustee. The Delek Logistics 2028 Notes are general unsecured senior obligations of the Co-issuers and are unconditionally guaranteed jointly and severally on a senior unsecured basis by Delek Logistics’ subsidiaries other than Finance Corp. and will be unconditionally guaranteed on the same basis by certain of Delek Logistics’ future subsidiaries. The Delek Logistics 2028 Notes rank equal in right of payment with all existing and future senior indebtedness of the Co-issuers, and senior in right of payment to any future subordinated indebtedness of the Co-issuers. The Delek Logistics 2028 Notes will mature on June 1, 2028, and interest is payable semi-annually in arrears on each June 1 and December 1, commencing December 1, 2021.
At any time prior to June 1, 2024, the Co-issuers may redeem up to 35% of the aggregate principal amount of the Delek Logistics 2028 Notes with the net cash proceeds of one or more equity offerings by Delek Logistics at a redemption price of 107.125% of the redeemed principal amount, plus accrued and unpaid interest, if any, subject to certain conditions and limitations. Prior to June 1, 2024, the Co-issuers may also redeem all or part of the Delek Logistics 2028 Notes at a redemption price of the principal amount plus accrued and unpaid interest, if any, plus a "make whole" premium, subject to certain conditions and limitations. In addition, beginning on June 1, 2024, the Co-issuers may, subject to certain conditions and limitations, redeem all or part of the Delek Logistics 2028 Notes, at a redemption price of 103.563% of the redeemed principal for the twelve-month period beginning on June 1, 2024, 101.781% for the twelve-month period beginning on June 1, 2025, and 100.00% beginning on June 1, 2026 and thereafter, plus accrued and unpaid interest, if any.
In the event of a change of control, accompanied or followed by a ratings downgrade within a certain period of time, subject to certain conditions and limitations, the Co-issuers will be obligated to make an offer for the purchase of the Delek Logistics 2028 Notes from holders at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest.
As of June 30, 2022, we had $400.0 million in outstanding principal amount under the Delek Logistics 2028 Notes, and the effective interest rate was 7.40%.
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Notes to Condensed Consolidated Financial Statements (Unaudited)
Reliant Bank Revolver
Delek has an unsecured revolving credit agreement with Reliant Bank (the "Reliant Bank Revolver") with a maximum borrowing commitment of $50.0 million. On June 30, 2022, among other things, we amended the Reliant Bank Revolver to extend the maturity date to June 30, 2023 and change the fixed interest rate of 4.50% per annum to a variable rate loan equal to the Wall Street Journal Prime Rate plus 0.75% effective July 1, 2022. The revolving credit agreement requires us to pay a quarterly fee of 0.50% on an annualized basis on the average unused revolving commitment. As of June 30, 2022, we had $50.0 million outstanding and had no unused credit commitments under the Reliant Bank Revolver.
Restrictive Covenants
Under the terms of our Revolving Credit Facility, Term Loan Credit Facility, Delek Logistics Credit Facility, Delek Logistics 2025 Notes, Delek Logistics 2028 Notes, Reliant Bank Revolver and BHI Agreement, we are required to comply with certain usual and customary financial and non-financial covenants. The terms and conditions of the Revolving Credit Facility include periodic compliance with a springing minimum fixed charge coverage ratio financial covenant if excess availability under the revolver borrowing base is below certain thresholds, as defined in the credit agreement. The Term Loan Credit Facility does not have any financial maintenance covenants. We believe we were in compliance with all covenant requirements under each of our credit facilities as of June 30, 2022.
Certain of our debt facilities contain limitations on the incurrence of additional indebtedness, making of investments, creation of liens, dispositions and acquisitions of assets, and making of restricted payments and transactions with affiliates. These covenants may also limit the payment, in the form of cash or other assets, of dividends or other distributions, or the repurchase of shares with respect to our equity. Additionally, some of our debt facilities limit our ability to make investments, including extensions of loans or advances to, or acquisitions of equity interests in, or guarantees of obligations of, certain other entities.
Note 10 - Derivative Instruments
We use the majority of our derivatives to reduce normal operating and market risks with the primary objective of reducing the impact of market price volatility on our results of operations. As such, our use of derivative contracts is aimed at:
•limiting our exposure to commodity price fluctuations on inventory above or below target levels (where appropriate) within each of our segments;
•managing our exposure to commodity price risk associated with the purchase or sale of crude oil, feedstocks/intermediates and finished grade fuel within each of our segments;
•managing our exposure to market crack spread fluctuations;
•managing the cost of our credits required by the U.S. Environmental Protection Agency ("EPA") to blend biofuels into fuel products ("RINs Obligation") using future commitments to purchase or sell RINs at fixed prices and quantities; and
•limiting the exposure to interest rate fluctuations on our floating rate borrowings.
We primarily utilize commodity swaps, futures, forward contracts and options contracts, generally with maturity dates of three years or less, and from time to time interest rate swaps or caps to achieve these objectives. Futures contracts are standardized agreements, traded on a futures exchange, to buy or sell a commodity at a predetermined price and location at a specified future date. Options provide the right, but not the obligation to buy or sell the commodity at a specified price in the future. Commodity swaps and futures contracts require cash settlement for the commodity based on the difference between a fixed or floating price and the market price on the settlement date, and options require payment/receipt of an upfront premium. Because these derivatives are entered into to achieve objectives specifically related to our inventory and production risks, such gains and losses (to the extent not designated as accounting hedges and recognized on an unrealized basis in other comprehensive income) are recognized in cost of materials and other.
Forward contracts are agreements to buy or sell a commodity at a predetermined price at a specified future date, and for our transactions, generally require physical delivery. Forward contracts where the underlying commodity will be used or sold in the normal course of business qualify as normal purchases and normal sales ("NPNS") pursuant to ASC 815. If we elect the NPNS exception, such forward contracts are not accounted for as derivative instruments but rather are accounted for under other applicable GAAP. Commodity forward contracts accounted for as derivative instruments are recorded at fair value with changes in fair value recognized in earnings in the period of change. Our Canadian crude trading operations are accounted for as derivative instruments, and the related unrealized and realized gains and losses are recognized in other operating income, net on the condensed consolidated statements of income. Additionally, as of and for the three and six months ended June 30, 2022, other forward contracts accounted for as derivatives that are specific to managing crude costs rather than for trading purposes are recognized in cost of materials and other on the accompanying condensed consolidated statements of income in our refining segment, and are included in our disclosures of commodity derivatives in the tables below.
Futures, swaps or other commodity related derivative instruments that are utilized to specifically provide economic hedges on our Canadian forward contract or investment positions are recognized in other operating income, net because that is where the related underlying transactions are reflected.
28 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
From time to time, we also enter into future commitments to purchase or sell RINs at fixed prices and quantities, which are used to manage the costs associated with our RINs Obligation. These future RINs commitment contracts meet the definition of derivative instruments under ASC 815, and are recorded at estimated fair value in accordance with the provisions of ASC 815. Changes in the fair value of these future RINs commitment contracts are recorded in cost of materials and other on the condensed consolidated statements of income.
As of June 30, 2022, we do not believe there is any material credit risk with respect to the counterparties to any of our derivative contracts.
In accordance with ASC 815, certain of our commodity swap contracts have been designated as cash flow hedges and the change in fair value between the execution date and the end of period has been recorded in other comprehensive income. The fair value of these contracts is recognized in income in the same financial statement line item as hedged transaction at the time the positions are closed and the hedged transactions are recognized in income.
The following table presents the fair value of our derivative instruments as of June 30, 2022 and December 31, 2021. The fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under our master netting arrangements, including cash collateral on deposit with our counterparties. We have elected to offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements. As a result, the asset and liability amounts below differ from the amounts presented in our condensed consolidated balance sheets. See Note 11 for further information regarding the fair value of derivative instruments (in millions).
| June 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||
| Derivative Type | Balance Sheet Location | Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||||||||
Commodity derivatives(1) | Other current assets | $ | 113.0 | $ | (103.2) | $ | 21.5 | $ | — | ||||||||||||||||||||
Commodity derivatives(1) | Other current liabilities | — | (8.6) | 101.5 | (102.3) | ||||||||||||||||||||||||
Commodity derivatives(1) | Other long-term assets | 0.4 | — | — | — | ||||||||||||||||||||||||
Commodity derivatives(1) | Other long-term liabilities | — | — | 6.1 | (6.1) | ||||||||||||||||||||||||
RIN commitment contracts(2) | Other current assets | 16.8 | — | 1.6 | — | ||||||||||||||||||||||||
RIN commitment contracts(2) | Other current liabilities | — | (13.0) | — | (0.7) | ||||||||||||||||||||||||
| Total gross fair value of derivatives | $ | 130.2 | $ | (124.8) | $ | 130.7 | $ | (109.1) | |||||||||||||||||||||
Less: Counterparty netting and cash collateral(3) | (36.9) | 103.2 | 107.1 | (82.4) | |||||||||||||||||||||||||
| Total net fair value of derivatives | $ | 167.1 | $ | (228.0) | $ | 23.6 | $ | (26.7) | |||||||||||||||||||||
(1)As of June 30, 2022 and December 31, 2021, we had open derivative positions representing 112,028,194 and 182,525,893 barrels, respectively, of crude oil and refined petroleum products. There were no open positions designated as cash flow hedging instruments as of June 30, 2022 and December 31, 2021. Additionally, as of December 31, 2021, we had open derivative positions representing and 1,320,000 MMBTU of natural gas products.
(2)As of June 30, 2022 and December 31, 2021, we had open RINs commitment contracts representing 117,750,000 and 16,325,000 RINs, respectively.
(3)As of June 30, 2022 and December 31, 2021, $66.3 million and $(24.7) million, respectively, of cash collateral (obligation) held by counterparties has been netted with the derivatives with each counterparty.
Total gains (losses) on our non-trading commodity derivatives and RINs commitment contracts recorded in the condensed consolidated statements of income are as follows (in millions):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
(Losses) gains on hedging derivatives not designated as hedging instruments recognized in cost of materials and other (1) | $ | (34.4) | $ | 22.2 | $ | (105.8) | $ | 79.6 | ||||||||||||||||||
| (Losses) gains on non-trading physical forward contract commodity derivatives in cost of materials and other | 8.2 | (4.4) | 4.8 | (5.5) | ||||||||||||||||||||||
| (Losses) gains on hedging derivatives not designated as hedging instruments recognized in operating expenses | (1.7) | — | (1.7) | — | ||||||||||||||||||||||
| Realized gains reclassified out of accumulated other comprehensive income and into cost of materials and other on commodity derivatives designated as cash flow hedging instruments | — | — | — | 0.2 | ||||||||||||||||||||||
| Total (losses) gains | $ | (27.9) | $ | 17.8 | $ | (102.7) | $ | 74.3 | ||||||||||||||||||
(1) Gains (losses) on commodity derivatives that are economic hedges but not designated as hedging instruments include unrealized gains (losses) of $66.1 million and $(4.6) million for the three and six months ended June 30, 2022, respectively, and $(21.2) million and $(9.4) million for the three and six months ended June 30, 2021, respectively.
29 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
The effect of cash flow hedge accounting on the condensed consolidated statements of income is as follows (in millions):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Gain (loss) on cash flow hedging relationships recognized in cost of materials and other: | ||||||||||||||||||||||||||
| Commodity contracts: | ||||||||||||||||||||||||||
| Hedged items | $ | — | $ | — | $ | — | $ | (0.2) | ||||||||||||||||||
| Derivative designated as hedging instruments | — | — | — | 0.2 | ||||||||||||||||||||||
| Total | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
For cash flow hedges, no component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness for the three and six months ended June 30, 2022 or 2021. There were no gains (losses), net of tax, on settled commodity contracts during the three and six months ended June 30, 2022 and $0.2 million during the six months ended June 30, 2021, respectively, which were reclassified into cost of materials and other in the condensed consolidated statements of income. As of June 30, 2022, we estimate that no amount of deferred gains related to commodity cash flow hedges will be reclassified into cost of materials and other over the next 12 months as a result of hedged transactions that are forecasted to occur.
Total (losses) gains on our trading derivatives (none of which were designated as hedging instruments) recorded in other operating income, net on the condensed consolidated statements of income are as follows (in millions):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Trading Physical Forward Contract Commodity Derivatives | ||||||||||||||||||||||||||
| Realized gains (losses) | $ | 2.9 | $ | 2.5 | $ | 20.9 | $ | 2.1 | ||||||||||||||||||
| Unrealized losses | 0.1 | 0.8 | (0.3) | 0.4 | ||||||||||||||||||||||
| Total | $ | 3.0 | $ | 3.3 | $ | 20.6 | $ | 2.5 | ||||||||||||||||||
| Trading Hedging Commodity Derivatives | ||||||||||||||||||||||||||
| Realized gains (losses) | $ | (3.0) | $ | (4.6) | $ | 11.9 | $ | (5.0) | ||||||||||||||||||
| Unrealized gains (losses) | 0.6 | 0.1 | (16.5) | (0.5) | ||||||||||||||||||||||
| Total | $ | (2.4) | $ | (4.5) | $ | (4.6) | $ | (5.5) | ||||||||||||||||||
Note 11 - Fair Value Measurements
Our assets and liabilities that are measured at fair value include commodity derivatives, investment commodities, environmental credits obligations and Supply and Offtake Agreements. Delek applies the provisions of ASC 820, Fair Value Measurements ("ASC 820"), which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. ASC 820 requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting our assumptions about pricing by market participants.
Our commodity derivative contracts, which consist of commodity swaps, exchange-traded futures, options and physical commodity forward purchase and sale contracts (that do not qualify for the NPNS exception under ASC 815), are valued based on exchange pricing and/or price index developers such as Platts or Argus and are, therefore, classified as Level 2.
Our RINs commitment contracts are future commitments to purchase or sell RINs at fixed prices and quantities, which are used to manage the costs associated with our Consolidated Net RINs Obligation (as defined in our accounting policies in Note 2 to the audited consolidated financial statements included in Item. 8 Financial Statements and Supplementary Data, of our December 31, 2021 Annual Report on Form 10-K). These RINs commitment contracts (which are forward contracts accounted for as derivatives – see Note 10) are categorized as Level 2, and are measured at fair value based on quoted prices from an independent pricing service.
Our environmental credits obligation surplus or deficit includes the Consolidated Net RINs Obligation surplus or deficit, as well as other environmental credit obligation surplus or deficit positions subject to fair value accounting pursuant to our accounting policy). The environmental credits obligation surplus or deficit is categorized as Level 2, if measured at fair value either directly through observable
30 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
inputs or indirectly through market-corroborated inputs, and gains (losses) related to changes in fair value are recorded as a component of cost of materials and other in the consolidated statements of income. With respect to our Consolidated Net RINs Obligation surplus or deficit, we recognized gains (losses) on changes in fair value totaling $(39.8) million and $(41.0) million for three and six months ended June 30, 2022, respectively, and $(49.8) million and $(104.9) million for three and six months ended June 30, 2021, respectively, primarily attributable to changes in the market prices of the underlying credits that occurred at the end of each quarter including changes in volume requirements related to the 2020, 2021 and 2022 RINs Obligation to reflect the June 2022 EPA finalized volume requirements.
As of and for the six months ended June 30, 2022 and 2021, we elected to account for our J. Aron step-out liability at fair value in accordance with ASC 825, as it pertains to the fair value option. This standard permits the election to carry financial instruments and certain other items similar to financial instruments at fair value on the balance sheet, with all changes in fair value reported in earnings. With respect to the amended and restated Supply and Offtake Agreements, such amendments being effective April 2020 for all the agreements, we apply fair value measurement as follows: (1) we determine fair value for our amended variable step-out liability based on changes in fair value related to market volatility based on a floating commodity-index price, and for our amended fixed step-out liability based on changes to interest rates and the timing and amount of expected future cash settlements where such obligation is categorized as Level 2 Gains (losses) related to changes in fair value due to commodity-index price are recorded as a component of cost of materials and other, and changes in fair value due to interest rate risk are recorded as a component of interest expense in the condensed consolidated statements of income; and (2) we determine fair value of the commodity-indexed revolving over/short inventory financing liability based on the market prices for the consigned crude oil and refined products collateralizing the financing/funding where such obligation is categorized as Level 2 and is presented in the current portion of the Obligation under Supply and Offtake Agreements on our condensed consolidated balance sheets. Gains (losses) related to the change in fair value are recorded as a component of cost of materials and other in the condensed consolidated statements of income.
For all other financial instruments, the fair value approximates the historical or amortized cost basis comprising our carrying value and therefore are not included in the table below. The fair value hierarchy for our financial assets and liabilities accounted for at fair value on a recurring basis was as follows (in millions):
| June 30, 2022 | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Commodity derivatives | $ | — | $ | 113.4 | $ | — | $ | 113.4 | ||||||||||||||||||
| Commodity investments | 16.1 | — | — | 16.1 | ||||||||||||||||||||||
| RINs commitment contracts | — | 16.8 | — | 16.8 | ||||||||||||||||||||||
Total assets | 16.1 | 130.2 | — | 146.3 | ||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Commodity derivatives | — | (111.8) | — | (111.8) | ||||||||||||||||||||||
| RINs commitment contracts | — | (13.0) | — | (13.0) | ||||||||||||||||||||||
| Environmental credits obligation deficit | — | (203.9) | — | (203.9) | ||||||||||||||||||||||
| J. Aron supply and offtake obligations | — | (770.5) | — | (770.5) | ||||||||||||||||||||||
| Total liabilities | — | (1,099.2) | — | (1,099.2) | ||||||||||||||||||||||
| Net liabilities | $ | 16.1 | $ | (969.0) | $ | — | $ | (952.9) | ||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Commodity derivatives | $ | — | $ | 129.1 | $ | — | $ | 129.1 | ||||||||||||||||||
| RINs commitment contracts | — | 1.6 | — | 1.6 | ||||||||||||||||||||||
| Total assets | — | 130.7 | — | 130.7 | ||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Commodity derivatives | — | (108.4) | — | (108.4) | ||||||||||||||||||||||
| RINs commitment contracts | — | (0.7) | — | (0.7) | ||||||||||||||||||||||
| Environmental credits obligation deficit | — | (172.2) | — | (172.2) | ||||||||||||||||||||||
| J. Aron supply and offtake obligations | — | (487.5) | — | (487.5) | ||||||||||||||||||||||
| Total liabilities | — | (768.8) | — | (768.8) | ||||||||||||||||||||||
| Net liabilities | $ | — | $ | (638.1) | $ | — | $ | (638.1) | ||||||||||||||||||
The derivative values above are based on analysis of each contract as the fundamental unit of account as required by ASC 820. In the table above, derivative assets and liabilities with the same counterparty are not netted where the legal right of offset exists. This differs from the presentation in the financial statements which reflects our policy, wherein we have elected to offset the fair value amounts
31 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
recognized for multiple derivative instruments executed with the same counterparty and where the legal right of offset exists. As of June 30, 2022 and December 31, 2021, $66.3 million and $(24.7) million, respectively, of cash collateral (obligation) was held by counterparty brokerage firms and has been netted with the net derivative positions with each counterparty. See Note 10 for further information regarding derivative instruments.
Non-Recurring Fair Value Measurements
The 3 Bear Acquisition was accounted for as a business combination using the acquisition method of accounting, with the assets acquired and liabilities assumed at their respective acquisition date fair values at the closing date. The fair value measurements were based on a combination of valuation methods including discounted cash flows, the market approach and obsolescence adjusted replacement costs, all of which are Level 3 inputs.
Note 12 - Commitments and Contingencies
Litigation
In the ordinary conduct of our business, we are from time to time subject to lawsuits, investigations and claims, including environmental claims and employee-related matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, including civil penalties or other enforcement actions, we do not believe that any currently pending legal proceeding or proceedings to which we are a party will have a material adverse effect on our financial statements. Certain environmental matters that have or may result in penalties or assessments are discussed below in the "Environmental, Health and Safety" section of this note.
One of our Alon subsidiaries was the defendant in a legal action related to an easement dispute arising from a purchase of property that occurred in October 2013. In June 2019, the court found in favor of the plaintiffs and assessed damages against such subsidiary, which were reduced in the fourth quarter of 2019 to $6.4 million. Such amount is included as of June 30, 2022 and December 31, 2021 in accrued expenses and other current liabilities on the accompanying condensed consolidated balance sheet. The matter was appealed and has been remanded to the district court regarding jurisdictional issues.
On June 19, 2017, the Arkansas Teacher Retirement System filed a lawsuit in the Delaware Court of Chancery (Arkansas Teacher Retirement System v. Alon USA Energy, Inc., et al., Case No. 2017-0453), asserting claims for breach of fiduciary duty in connection with the business combination of Delek US Holdings, Inc. and Alon USA Energy, Inc. Following a mediation, the parties to the litigation agreed to a settlement and release of all claims of the plaintiff class in exchange for the defendants' agreement to pay $44.8 million into a settlement fund, of which our insurance carriers agreed to fund approximately $42.5 million under the applicable insurance policies and pursuant to varying limits and limitations. The settlement, in which the Company and other defendants expressly deny all assertions of wrongdoing or fault, was approved by the Court on October 29, 2021. In addition to the $2.3 million of the settlement that was not covered by insurance, we accrued $4.2 million of estimated unpaid and remaining legal fees. As of June 30, 2022 the remaining unpaid balance is $0.2 million, and is included in accrued expenses and other current liabilities on the accompanying condensed consolidated balance sheet.
Self-insurance
With respect to workers’ compensation claims, we are subject to claims losses up to a $4.0 million deductible on a per accident basis, general liability claims up to $4.0 million on a per occurrence basis and medical claims for eligible full-time employees up to $0.3 million per covered individual per calendar year. We are also subject to auto liability claims losses up to a $4.0 million deductible on a per accident basis.
We have umbrella liability insurance available to each of our segments in an amount determined reasonable by management.
Environmental, Health and Safety
We are subject to extensive federal, state and local environmental and safety laws and regulations enforced by various agencies, including the EPA, the United States Department of Transportation, the Occupational Safety and Health Administration, as well as numerous state, regional and local environmental, safety and pipeline agencies. These laws and regulations govern the discharge of materials into the environment, waste management practices, pollution prevention measures and the composition of the fuels we produce, as well as the safe operation of our plants and pipelines and the safety of our workers and the public. Numerous permits or other authorizations are required under these laws and regulations for the operation of our refineries, renewable fuels facilities, terminals, pipelines, underground storage tanks, trucks, rail cars and related operations, and may be subject to revocation, modification and renewal.
These laws and permits raise potential exposure to future claims and lawsuits involving environmental and safety matters which could include soil and water contamination, air pollution, personal injury and property damage allegedly caused by substances which we manufactured, handled, used, released or disposed of, transported, or that relate to pre-existing conditions for which we have assumed responsibility. We believe that our current operations are in substantial compliance with existing environmental and safety requirements.
32 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
However, there have been and will continue to be ongoing discussions about environmental and safety matters between us and federal and state authorities, including notices of violations, citations and other enforcement actions, some of which have resulted or may result in changes to operating procedures and in capital expenditures. While it is often difficult to quantify future environmental or safety related expenditures, we anticipate that continuing capital investments and changes in operating procedures will be required for the foreseeable future to comply with existing and new requirements, as well as evolving interpretations and more strict enforcement of existing laws and regulations.
As of June 30, 2022, we have recorded an environmental liability of approximately $115.4 million, primarily related to the estimated probable costs of remediating or otherwise addressing certain environmental issues of a non-capital nature at our refineries, as well as terminals, some of which we no longer own. This liability includes estimated costs for ongoing investigation and remediation efforts for known contamination of soil and groundwater. Approximately $2.7 million of the total liability is expected to be expended over the next 12 months, with most of the balance expended by 2032, although some costs may extend up to 30 years. In the future, we could be required to extend the expected remediation period or undertake additional investigations of our refineries, pipelines and terminal facilities, which could result in the recognition of additional remediation liabilities.
Included in our environmental liabilities as of both June 30, 2022 and December 31, 2021 is a liability totaling $78.5 million related to a property that we historically operated as an asphalt and marine fuel terminal both as an owner and, subsequently, as a lessee under an in-substance lease agreement (the “License Agreement”). The License Agreement, which provided us the license to continue operating our asphalt and marine fuel terminal operations on the property for a term of ten years and expired in June 2020, also ascribed a contractual noncontingent indemnification guarantee to certain of our wholly-owned subsidiaries related to certain incremental environmental remediation activities, predicated on the completion of certain property development activities ascribed to the lessor. Our combined liability, comprised of our environmental liability plus the estimated fair value of the noncontingent guarantee liability, was recorded when Delek acquired the outstanding common stock of Alon, effective July 1, 2017 ("Delek/Alon Merger"). While the License Agreement expired in June 2020, it is currently being disputed in litigation where we have determined that no loss accrual is necessary and that the amount of incremental loss that is reasonably possible is immaterial as of June 30, 2022. Such ongoing dispute causes sufficient uncertainty around the release of risk and the appropriate joint and several liability allocations thereunder that we cannot currently determine a more reasonable estimate of the potential total contingent liability that is probable, nor do we have sufficient information to better estimate the fair value of any remaining noncontingent guarantee liability. As such, as of June 30, 2022 and December 31, 2021, except for accretion and expenditures, our combined environmental liability related to the terminal and property remained unchanged.
We are also subject to various regulatory requirements related to carbon emissions and the compliance requirements to remit environmental credit obligations due to the EPA or other regulatory agencies, the most significant of which relates to the RINs Obligation subject to the EPA’s RFS-2 regulations (as defined in our accounting policies in Note 2 to the audited consolidated financial statements included in Item. 8 Financial Statements and Supplementary Data, of our December 31, 2021 Annual Report on Form 10-K). The RFS-2 regulations are highly complex and evolving, requiring us to periodically update our compliance systems. As part of our on-going monitoring and compliance efforts, on an annual basis we engage a third party to perform procedures to review our RINs inventory, processes and compliance. The results of such procedures may include procedural findings but may also include findings regarding the usage of RINs to meet past obligations, the treatment of exported RINs, and the propriety of RINs on-hand and related adjustments to our RINs inventory, which (to the extent they are valued) offset our RINs Obligation. Such adjustments may also require communication with the EPA if they involve reportable non-compliance which could lead to the assessment of penalties. Based on management’s review which was completed during the second quarter 2021, we recorded a RINs inventory true-up adjustment totaling $(12.3) million which increased our recorded RINs Obligation. We have also self-reported our related instances of non-compliance to the EPA, and while we cannot yet estimate the extent of penalties that may be assessed, it is not expected to be material in relation to our total RINs Obligation.
In June 2022, the EPA finalized volumes for compliance years 2020, 2021 and 2022 under the RFS program (as defined in our accounting policies in Note 2 to the audited consolidated financial statements included in Item. 8 Financial Statements and Supplementary Data, of our December 31, 2021 Annual Report on Form 10-K), announced supplemental volume obligations for compliance years 2022 and 2023 and established new provisions of the RFS which addressed bio-intermediates. Additionally, the EPA denied the petitions for small refinery exemptions for prior period compliance years.
Other Losses and Contingencies
Delek maintains property damage insurance policies which have varying deductibles. Delek also maintains business interruption insurance policies, with varying coverage limits and waiting periods. Covered losses in excess of the deductible and outside of the waiting period will be recoverable under the property and business interruption insurance policies.
El Dorado Refinery Fire
On February 27, 2021, our El Dorado refinery experienced a fire in its Penex unit. Contrary to initial assessments, and despite occurring during the early stages of turnaround activity, the facility did suffer operational disruptions as a result of the fire. During the six months ended June 30, 2021, we incurred workers' compensation losses of $3.8 million associated with the fire, which is included in operating expenses in the accompanying condensed consolidated statements of income. Additionally, we recognized accelerated depreciation of
33 | | | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
$1.0 million in the six months ended June 30, 2021 due to property damaged in the fire, which was recovered during 2021. No expense was recorded related to the El Dorado refinery fire during the three and six months ended June 30, 2022. We continue to incur repair costs that may be recoverable under property and casualty insurance policies. In addition, during the three and six months ended June 30, 2022, we recognized a gain of $3.3 million and $7.6 million, respectively, related to business interruption claims. Such gain is included in other operating income in the consolidated statements of income. If applicable, we accrue receivables for probable insurance or other third-party recoveries. Work to determine the full extent of covered business interruption and property and casualty losses and potential insurance claims is ongoing and may result in the future recognition of insurance recoveries.
Winter Storm Uri
During February 2021, the Company experienced a severe weather event ("Winter Storm Uri") which temporarily impacted operations at all of our refineries. Due to the extreme freezing conditions, we experienced reduced throughputs at our refineries as there was a disruption in the crude supply, as well as damages to various units at our refineries requiring additional operating and capital expenditures. We recognized additional operating expenses in the amount of $6.1 million and $15.9 million in the three and six months ended June 30, 2021 due to property damaged in the freeze, which was recovered during 2021. No expense was recorded related to the Winter Storm Uri during the three and six months ended June 30, 2022. An additional $0.1 million was recognized as a gain in excess of losses during the six months ended June 30, 2022. We continue to incur repair costs that may be recoverable under property and casualty insurance policies. In addition, during the three and six months ended June 30, 2022, we recognized a gain of $5.3 million and $11.0 million, respectively, related to business interruption claims. If applicable, we accrue receivables for probable insurance or other third-party recoveries. Work to determine the full extent of covered business interruption and property and casualty losses and potential insurance claims is ongoing and is expected to result in additional future recognition of insurance recoveries.
Crude Oil and Other Releases
We have experienced several crude oil and other releases involving our assets. There were no material releases that occurred during the six months ended June 30, 2022. For other releases that occurred in prior years, we have received regulatory closure or a majority of the cleanup and remediation efforts are substantially complete. We expect regulatory closure in 2022 for the release sites that have not yet received it and do not anticipate material costs associated with any fines or penalties or to complete activities that may be needed to achieve regulatory closure. Expenses incurred for the remediation of these crude oil and other releases are included in operating expenses in our condensed consolidated statements of income.
Letters of Credit
As of June 30, 2022, we had in place letters of credit totaling approximately $363.9 million with various financial institutions securing obligations primarily with respect to our commodity transactions for the refining segment and certain of our insurance programs. There were no amounts drawn by beneficiaries of these letters of credit at June 30, 2022.
Note 13 - Income Taxes
Under ASC 740 we used an estimated annual tax rate to record income taxes for the three and six months ended June 30, 2022 and June 30, 2021. Our effective tax rate was 21.4% and 21.3% for the three and six months ended June 30, 2022, respectively, and 42.3% and 28.2% for the three and six months ended June 30, 2021, respectively. The difference between the effective tax rate and the statutory rate is generally attributable to permanent differences and discrete items. The change in our effective tax rate for the three and six months ended June 30, 2022 as compared to the three and six months ended June 30, 2021 was primarily due to the impact of credits and permanent differences on the tax rate due to changes in pre-tax income and changes in the second quarter estimated annual effective tax rate applied to year-to-date loss for the six months ended June 30, 2021.
Note 14 - Related Party Transactions
Our related party transactions consist primarily of transactions with our equity method investees (See Note 6). Transactions with our related parties were as follows for the periods presented (in millions):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
Revenues (1) | $ | 27.2 | $ | 19.2 | $ | 43.9 | $ | 29.6 | ||||||||||||||||||
Cost of materials and other (2) | $ | 23.7 | $ | 9.9 | $ | 47.1 | $ | 25.0 | ||||||||||||||||||
(1)Consists primarily of asphalt sales which are recorded in corporate, other and eliminations segment.
(2)Consists primarily of pipeline throughput fees paid by the refining segment and asphalt purchases.
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Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 15 - Other Current Assets and Liabilities
The detail of other current assets is as follows (in millions):
| Other Current Assets | June 30, 2022 | December 31, 2021 | |||||||||
| Short-term derivative assets (see Note 10) | $ | 92.9 | $ | 23.6 | |||||||
| Prepaid expenses | 62.0 | 44.9 | |||||||||
| Investment commodities | 16.1 | 45.0 | |||||||||
| Income and other tax receivables | 1.6 | 3.6 | |||||||||
| Other | 14.9 | 8.9 | |||||||||
| Total | $ | 187.5 | $ | 126.0 | |||||||
The detail of accrued expenses and other current liabilities is as follows (in millions):
| Accrued Expenses and Other Current Liabilities | June 30, 2022 | December 31, 2021 | |||||||||
| Product financing agreements | $ | 258.5 | $ | 249.6 | |||||||
| Consolidated Net RINs Obligation deficit (see Note 11) | 203.9 | 172.2 | |||||||||
| Income and other taxes payable | 151.8 | 124.8 | |||||||||
| Crude purchase liabilities | 101.7 | 107.4 | |||||||||
| Employee costs | 96.9 | 44.4 | |||||||||
| Short-term derivative liabilities (see Note 10) | 21.6 | 26.8 | |||||||||
| Deferred revenue | 8.0 | 44.6 | |||||||||
| Other | 43.2 | 28.0 | |||||||||
| Total | $ | 885.6 | $ | 797.8 | |||||||
Note 16 - Equity-Based Compensation
Delek US Holdings, Inc. 2006 and 2016 and Alon USA Energy, Inc. 2005 Long-Term Incentive Plans (collectively, the "Incentive Plans")
On May 3, 2022, the Company's stockholders approved an amendment to the Delek US Holdings, Inc. 2016 Long-Term Incentive Plan that increased the number of shares of common stock available for issuance under this plan by 760,000 shares to 14,995,000 shares; no awards will be made under this plan after May 5, 2026. Compensation expense related to equity-based awards granted under the Incentive Plans amounted to $6.7 million and $11.8 million for the three and six months ended June 30, 2022, respectively, and $5.7 million and $10.1 million for the three and six months ended June 30, 2021, respectively. These amounts are included in general and administrative expenses and operating expenses in the accompanying condensed consolidated statements of income. As of June 30, 2022, there was $55.0 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.6 years.
We issued net shares of common stock of 289,971 and 335,771 as a result of exercised or vested equity-based awards during the three and six months ended June 30, 2022, respectively, and 186,937 and 280,793 for the three and six months ended June 30, 2021, respectively. These amounts are net of 250,334 and 268,163 shares withheld to satisfy employee tax obligations related to the exercises and vesting during the three and six months ended June 30, 2022, respectively, and 88,478 and 147,329 shares during the three and six months ended June 30, 2021, respectively.
Delek Logistics GP, LLC 2012 Long-Term Incentive Plan
The Delek Logistics GP, LLC 2012 Long-Term Incentive Plan (the "LTIP") was adopted by the Delek Logistics GP, LLC board of directors in connection with the completion of Delek Logistics' initial public offering in November 2012. The LTIP is administered by the Conflicts Committee of the board of directors of Delek Logistics' general partner. The LTIP has 912,207 common units representing limited partner interests in Delek Logistics authorized for issuance and expires June 9, 2031.
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Notes to Condensed Consolidated Financial Statements (Unaudited)
Delek US Holdings, Inc. Employee Stock Purchase Plan
On June 2, 2021, the Company's board of directors adopted the Delek US Holdings, Inc. Employee Stock Purchase Plan (the "ESPP"). The ESPP is structured as a qualified employee stock purchase plan under Section 423 of the U.S. Internal Revenue Code of 1986. The Company authorized the issuance of 2,000,000 shares of common stock under the ESPP. On each purchase date, eligible employees (as defined in the ESPP) can purchase the Company's stock at a price per share equal to 90.0% of the closing price of the Company's common stock on the exercise date, but no less than par value. There are four offering periods of three months during each fiscal year, beginning each January 1st, April 1st, July 1st, and October 1st. No shares of common stock were issued under the ESPP as of June 30, 2022. Implementation of the plan became effective June 1, 2022.
Note 17 - Shareholders' Equity
Dividends
On June 21, 2022, Delek announced that its Board of Directors declared a special cash dividend on its common stock of $0.20 per share payable to all shareholders of record of the Company’s common stock as of the close of business on July 12, 2022. The payment date for the special dividend was July 20, 2022.
On August 1, 2022, our Board of Directors voted to declare a quarterly cash dividend of $0.20 per share of our common stock, payable on September 6, 2022 to shareholders of record on August 22, 2022.
Stock Repurchase Program
On November 6, 2018, our Board of Directors authorized a share repurchase program for up to $500.0 million of Delek common stock. Any share repurchases under the repurchase program may be implemented through open market transactions or in privately negotiated transactions, in accordance with applicable securities laws. The timing, price and size of repurchases are made at the discretion of management and will depend on prevailing market prices, general economic and market conditions and other considerations. In the second quarter of 2020, we elected to suspend the share repurchase program. No repurchases of our common stock were made in the three and six months ended June 30, 2022 or 2021. As of June 30, 2022, there was $229.7 million of authorization remaining under Delek's aggregate stock repurchase program.
On August 1, 2022, the Board of Directors approved an approximately $170.0 million increase in its share repurchase authorization, bringing the total amount available for repurchases under current authorizations to $400.0 million.
Stock Purchase and Cooperation Agreement
On March 7, 2022, Delek entered into a stock purchase and cooperation agreement (the “Icahn Group Agreement”) with IEP Energy Holding LLC, a Delaware limited liability company, American Entertainment Properties Corp., a Delaware corporation, Icahn Enterprises Holdings L.P., a Delaware limited partnership, Icahn Enterprises G.P. Inc., a Delaware corporation, Beckton Corp., a Delaware corporation, and Carl C. Icahn (collectively, the “Icahn Group”), pursuant to which the Company purchased an aggregate of 3,497,268 shares of common stock of the Company, at a price per share of $18.30, the closing price of a share of Company common stock on the New York Stock Exchange on March 4, 2022, the last trading day prior to the execution of the Icahn Group Agreement, which equals an aggregate purchase price of $64.0 million. The Company funded the transaction from cash on hand. The 3,497,268 shares were cancelled at the time of the transaction.
In addition to the foregoing, under the terms of the Icahn Group Agreement, the Icahn Group withdrew its nomination notice for the nomination of nominees for election to the Company’s board of directors for the Company’s 2022 annual meeting of stockholders. Under the terms of the Icahn Group Agreement, the Icahn Group agreed to standstill restrictions, which requires, among other things, that until the completion of the Company’s 2023 annual meeting of stockholders, the Icahn Group will refrain from acquiring additional shares of the Company Common Stock.
Note 18 - Leases
We lease certain retail stores, land, building and various equipment from others. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew, with renewal terms that can extend the lease term from to 15 years or more. The exercise of existing lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Some of our lease agreements include a rate based on equipment usage and others include a rate with fixed increases or inflationary indices based increase. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We
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Notes to Condensed Consolidated Financial Statements (Unaudited)
rent or sublease certain real estate and equipment to third parties. Our sublease portfolio consists primarily of operating leases within our retail stores and crude storage equipment.
As of June 30, 2022, $23.6 million of our net property, plant, and equipment balance is subject to an operating lease. This agreement does not include options for the lessee to purchase our leasing equipment, nor does it include any material residual value guarantees or material restrictive covenants. The agreement includes a one-year renewal option and certain variable payment based on usage.
The following table presents additional information related to our operating leases in accordance ASC 842, Leases ("ASC 842"):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| (in millions) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Lease Cost | ||||||||||||||||||||||||||
Operating lease costs (1) | $ | 18.5 | $ | 17.8 | $ | 35.9 | $ | 35.5 | ||||||||||||||||||
Short-term lease costs (2) | 8.6 | 11.0 | 17.3 | 20.5 | ||||||||||||||||||||||
| Sublease income | — | (1.9) | (0.1) | (3.8) | ||||||||||||||||||||||
| Net lease costs | $ | 27.1 | $ | 26.9 | $ | 53.1 | $ | 52.2 | ||||||||||||||||||
| Other Information | ||||||||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||||||||||
Operating cash flows from operating leases (1) | $ | (18.5) | $ | (17.9) | $ | (35.9) | $ | (36.2) | ||||||||||||||||||
| Leased assets obtained in exchange for new operating lease liabilities | $ | 9.8 | $ | 6.8 | $ | 11.3 | $ | 14.2 | ||||||||||||||||||
| Leased assets obtained in exchange for new financing lease liabilities | $ | — | $ | 0.2 | $ | — | $ | 12.4 | ||||||||||||||||||
| June 30, 2022 | June 30, 2021 | |||||||||||||||||||||||||
| Weighted-average remaining lease term (years) operating leases | 4.4 | 4.9 | ||||||||||||||||||||||||
| Weighted-average remaining lease term (years) financing leases | 6.4 | 7.5 | ||||||||||||||||||||||||
Weighted-average discount rate operating leases (3) | 6.0 | % | 6.4 | % | ||||||||||||||||||||||
Weighted-average discount rate financing leases (3) | 3.3 | % | 3.3 | % | ||||||||||||||||||||||
(1) Includes an immaterial amount of financing lease cost.
(2) Includes an immaterial amount of variable lease cost.
(3) Our discount rate is primarily based on our incremental borrowing rate in accordance with ASC 842.
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Management's Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is management’s analysis of our financial performance and of significant trends that may affect our future performance. The MD&A should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on February 25, 2022 (the "Annual Report on Form 10-K"). Those statements in the MD&A that are not historical in nature should be deemed forward-looking statements that are inherently uncertain.
Delek US Holdings, Inc. is a registrant pursuant to the Securities Act of 1933, as amended ("Securities Act") and is listed on the New York Stock Exchange ("NYSE") under the ticker symbol "DK". Unless otherwise noted or the context requires otherwise, the terms "we," "our," "us," "Delek" and the "Company" are used in this report to refer to Delek US Holdings, Inc. and its consolidated subsidiaries for all periods presented. You should read the following discussion of our financial condition and results of operations in conjunction with our historical condensed consolidated financial statements and notes thereto.
The Company announces material information to the public about the Company, its products and services and other matters through a variety of means, including filings with the SEC, press releases, public conference calls, the Company’s website (www.delekus.com), the investor relations section of its website (ir.delekus.com), the news section of its website (www.delekus.com/news), and/or social media, including its Twitter account (@DelekUSHoldings). The Company encourages investors and others to review the information it makes public in these locations, as such information could be deemed to be material information. Please note that this list may be updated from time to time.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). These forward-looking statements reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, statements that refer to the acquisition of 3 Bear Delaware Holding – NM, LLC (the “3 Bear Acquisition”), including any statements regarding the expected benefits, synergies, growth opportunities, impact on liquidity and prospects, and other financial and operating benefits thereof, statements regarding the effect, impact, potential duration or other implications of, or expectations expressed with respect to, the outbreak of COVID-19 and its development into a pandemic in early 2020 (the "COVID-19 Pandemic" or the "Pandemic") and its impact on oil production and pricing, and statements regarding our efforts and plans in response to such events, the information concerning possible future results of operations, business and growth strategies, including as the same may be impacted by the attack on Ukraine by Russia in February 2022 (the "Russia-Ukraine War"), financing plans, expectations that regulatory developments or other matters will or will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and the benefits and synergies to be obtained from our completed and any future acquisitions, statements of management’s goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as "may," "will," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "appears," "projects" and similar expressions, as well as statements in future tense, identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Important factors that, individually or in the aggregate, could cause such differences include, but are not limited to:
•volatility in our refining margins or fuel gross profit as a result of changes in the prices of crude oil, other feedstocks and refined petroleum products and the impact of the COVID-19 Pandemic on such demand;
•reliability of our operating assets;
•actions of our competitors and customers;
•changes in, or the failure to comply with, the extensive government regulations applicable to our industry segments, including current and future restrictions on commercial and economic activities in response to the COVID-19 Pandemic or future pandemics;
•our ability to execute our strategy of growth through acquisitions, such as the 3 Bear Acquisition, and capital projects and changes in the expected value of and benefits derived therefrom, including any ability to successfully integrate acquisitions, realize expected synergies or achieve operational efficiency and effectiveness;
•diminishment in value of long-lived assets may result in an impairment in the carrying value of the assets on our balance sheet and a resultant loss recognized in the statement of operations;
•the unprecedented market environment and economic effects of the COVID-19 Pandemic, including uncertainty regarding the timing, pace and extent of economic recovery in the United States ("U.S.") due to the COVID-19 Pandemic;
•general economic and business conditions affecting the southern, southwestern and western U.S., particularly levels of spending related to travel and tourism and the ongoing and future impacts of the COVID-19 Pandemic;
•volatility under our derivative instruments;
•deterioration of creditworthiness or overall financial condition of a material counterparty (or counterparties);
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Management's Discussion and Analysis
•unanticipated increases in cost or scope of, or significant delays in the completion of, our capital improvement and periodic turnaround projects;
•risks and uncertainties with respect to the quantities and costs of refined petroleum products supplied to our pipelines and/or held in our terminals;
•operating hazards, natural disasters, weather related disruptions, casualty losses and other matters beyond our control;
•increases in our debt levels or costs;
•possibility of accelerated repayment on a portion of the J. Aron supply and offtake liability if the purchase price adjustment feature triggers a change on the re-pricing dates;
•changes in our ability to continue to access the credit markets;
•compliance, or failure to comply, with restrictive and financial covenants in our various debt agreements;
•changes in our ability to pay dividends;
•seasonality;
•increased costs of compliance with, or liability for violation of, existing or future laws, regulations and other requirements;
•legislative and regulatory measures to address climate change and greenhouse gases emissions;
•acts of terrorism (including cyber-terrorism) aimed at either our facilities or other facilities;
•impacts of global conflicts;
•future decisions by the Organization of Petroleum Exporting Countries ("OPEC") and the members of other leading oil producing countries (together with OPEC, “OPEC+”) regarding production and pricing and disputes between OPEC+ members regarding the same;
•disruption, failure, or cybersecurity breaches affecting or targeting our IT systems and controls, our infrastructure, or the infrastructure of our cloud-based IT service providers;
•changes in the cost or availability of transportation for feedstocks and refined products; and
•other factors discussed under the headings "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" and in our other filings with the SEC.
In light of these risks, uncertainties and assumptions, our actual results of operations and execution of our business strategy could differ materially from those expressed in, or implied by, the forward-looking statements, and you should not place undue reliance upon them. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance, and you should not use our historical performance to anticipate future results or period trends. We can give no assurances that any of the events anticipated by any forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events or otherwise.
Executive Summary
| Business Overview | ||
We are an integrated downstream energy business focused on petroleum refining, the transportation, storage and wholesale distribution of crude oil, intermediate and refined products and convenience store retailing. Our operating segments consist of refining, logistics, and retail, and are discussed in the sections that follow.
Business and Economic Environment Overview
During the second quarter 2022, the domestic oil and gas industry benefited from unprecedented conditions, including continued post-Pandemic demand exacerbated by global supply constraints, which led to an extraordinary crack spread environment. Crude oil supply constraints have persisted for a variety of reasons, including the continued effects from Pandemic-related refinery closures as well as the continuing impact of sanctions on Russian oil exports and transportation as a result of the ongoing Russia-Ukraine War. These conditions have coalesced into an environment producing second quarter 2022 increases in our average benchmark crack spreads ranging from 152.3% to 274.1% compared to the second quarter of 2021, and increases ranging from 560.1% to 1,684.1% compared to the Pandemic low in the second quarter of 2020. At the same time, supply chain constraints continue across industries, attributable to labor and driver shortages as well as lingering international trade tensions. These and other factors have triggered an inflationary environment, resulting in a 9.1% year-over-year increase in the Consumer Price Index for All Urban Consumers as of June 30, 2022, as well as significant increases across virtually every category (including food, utilities and motor fuel), with fuel oil and other fuels showing the largest twelve-month increase as of June 30, 2022 of 70.4% and motor fuel showing the second largest increase of 60.2%. To combat the inflationary environment, the Federal Reserve has raised interest rates 225 bps since January 2022, representing a 900% increase over the 0.25% fed funds rate which held steady for all of 2021. The stock market volatility is reflective of the stressed economic environment as well, with the S&P 500 and the Dow Industrial Average falling by 11.9% and 10.3%. respectively, compared to June 30, 2022. For the broader market, debt and equity are generally expensive, while stock buy-backs may be at a bargain, while for the energy sector, there have been pockets of opportunity thanks to the strong energy-specific economics.
This environment provides unique opportunities for those midstream and downstream companies that have successfully weathered the Pandemic. If downstream companies can avoid outages and maximize utilization, they are well positioned to capitalize on the record-setting or near-record crack spreads. Additionally, midstream companies, many of which have built-in recessionary protections as a result of minimum volume commitments on throughput and dedicated acreage agreements, are positioned to run barrels through logistics assets at higher utilization than the minimums during this period. Because of this favorability, well-positioned midstream and downstream players can potentially take advantage of capital markets when the timing is right. Likewise, strategic acquisitions in midstream can be particularly favorable, because of that built-in recessionary protection.
Thanks to our diligent efforts to manage capital and liquidity and preserve our assets during the Pandemic, we were well-positioned coming into the second quarter 2022 to take advantage of the favorable economic environment. From a refining perspective, as a result of
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Management's Discussion and Analysis
expansive and targeted surgical strike turnaround activities we conducted over the last couple of years, we made the strategic decision to run our refineries at or near capacity to take advantage of the tremendous crack spread environment. As a result, we saw our utilization increase from 88.5% in the second quarter of 2021 to a record high of 97.6% in the second quarter of 2022, Additionally, in our midstream business, we successfully closed on an acquisition that expands our gathering footprint into the Delaware sub-basin of the Permian, and expanded our product offering to include natural gas gathering and processing as well as wastewater processing and disposal. This acquisition not only diversifies our logistics customer base to include significantly more third-party customers, it allows us to provide comprehensive logistics services in the Delaware Basin, while also serving as a funnel into our existing midstream Permian activities. While the impact on the second quarter is not significant (as a result of the Acquisition closing in June), we expect that the acquisition itself will be immediately accretive, delivering incremental contribution margin and cash flows attributable to existing long-term dedicated acreage agreements as well as some contracts with minimum volume commitments. Additionally, the Delaware sub-basin is one of the most prolific drilling locations in the U.S., providing us significant opportunity for expanded gathering and processing as the producers ramp up production.
As a result of all these efforts, our revenues increased 173.0% to $6.0 billion during the second quarter 2022 compared to the second quarter 2021, while net income attributable to Delek increased $418.5 million. On a year-to-date basis, much of the same macroeconomic favorability was applicable when comparing our results to the prior year period, and we were able to capitalize on those conditions in much the same way – namely, through higher utilization rates at our refineries. Further impacting our year-over-year improvement in year-to-date results was the impact on the prior year period of outages related to turnaround activities, a fire at our El Dorado refinery and the effects of the February 2021 severe weather event ("Winter Storm Uri"). All of these factors led to an increase in our refining utilization rates from an average of 73.0% for the six months ended June 30, 2021 to 93.9% for the six months ended June 30, 2022, and increases to revenue and net income of $5.9 billion and $495.1 million, respectively. Additionally, cash flows from operations increased 334.3% to $585.9 million for the six months ended June 30, 2022, compared to $134.9 million for the six months ended June 30, 2021, despite higher interest costs which were attributable to a combination of higher variable interest rates on certain of our credit facilities as well as incremental interest on borrowings used to fund the 3 Bear Acquisition. As a result of these strong cash flows, we were able to declare both a special dividend and reinstate the quarterly dividend, as well as obtain board approval to increase our share repurchase authorization, both of which are indicative of our continued commitment to return value to shareholders.
See further discussion on macroeconomic factors and market trends, including the impact on 2021 and the outlook for 2022, in the ‘Market Trends’ section below. See also the ‘Results of Operations’ section below for further discussion.
| Refining Overview | ||
The refining segment (or "Refining") processes crude oil and other feedstocks for the manufacture of transportation motor fuels, including various grades of gasoline, diesel fuel and aviation fuel, asphalt and other petroleum-based products that are distributed through owned and third-party product terminals. The refining segment has a combined nameplate capacity of 302,000 barrels per day as of June 30, 2022. A high-level summary of the refinery activities is presented below:
| Tyler, Texas refinery (the "Tyler refinery") | El Dorado, Arkansas refinery (the "El Dorado refinery") | Big Spring, Texas refinery (the "Big Spring refinery") | Krotz Springs, Louisiana refinery (the "Krotz Springs refinery") | |||||||||||
| Total Nameplate Capacity (barrels per day ("bpd")) | 75,000 | 80,000 (1) | 73,000 | 74,000 | ||||||||||
| Primary Products | Gasoline, jet fuel, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, petroleum coke and sulfur | Gasoline, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, asphalt and sulfur | Gasoline, jet fuel, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, aromatics and sulfur | Gasoline, jet fuel, high-sulfur diesel, light cycle oil, liquefied petroleum gases, propylene and ammonium thiosulfate | ||||||||||
| Crack Spread Benchmark | Gulf Coast 5-3-2 | Gulf Coast 5-3-2 (2) | Gulf Coast 3-2-1 (3) | Gulf Coast 2-1-1 (4) | ||||||||||
| Marketing and Distribution | The refining segment's petroleum-based products are marketed primarily in the south central and southwestern regions of the United States, and the refining segment also ships and sells gasoline into wholesale markets in the southern and eastern United States. Motor fuels are sold under the Alon or Delek brand through various terminals to supply Alon or Delek branded retail sites. In addition, we sell motor fuels through our wholesale distribution network on an unbranded basis. | |||||||||||||
(1) While the El Dorado refinery has a total nameplate capacity of 80,000 bpd, El Dorado refinery’s output generally does not exceed 75,000, which is the maximum output for the small refinery exemption under the Environmental Protection Agency's ("EPA") Renewable Fuel Standards..
(2) While there is variability in the crude slate and the product output at the El Dorado refinery, we compare our per barrel refined product margin to the U.S. Gulf Coast ("Gulf Coast") 5-3-2 crack spread because we believe it to be the most closely aligned benchmark.
(3) Our Big Spring refinery is capable of processing substantial volumes of sour crude oil and/or substantial volumes of sweet crude oil, and therefore the West Texas Intermediate ("WTI") Cushing/ West Texas Sour ("WTS") price differential, taking into account differences in production yield, is an important measure for helping us make strategic, market-respondent production decisions.
(4) The Krotz Springs refinery has the capability to process substantial volumes of light sweet crude oil to produce a high percentage of refined light products.
Our refining segment also owns and operates three biodiesel facilities involved in the production of biodiesel fuels and related activities, located in Crossett, Arkansas, Cleburne, Texas, and New Albany, Mississippi.
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Management's Discussion and Analysis
| Logistics Overview | ||
Our logistics segment (or "Logistics") gathers, transports and stores crude oil and natural gas, markets, distributes, transports and stores refined products and disposes and recycles water in select regions of the southeastern United States, the Delaware Basin in New Mexico and West Texas for our refining segment and third parties. It is comprised of the consolidated balance sheet and results of operations of Delek Logistics Partners, LP ("Delek Logistics", NYSE:DKL), where we owned an 78.9% interest in Delek Logistics at June 30, 2022. Delek Logistics was formed by Delek in 2012 to own, operate, acquire and construct crude oil and refined products logistics and marketing assets. A substantial majority of Delek Logistics' assets are currently integral to our refining and marketing operations. The logistics segment's pipelines and transportation business owns or leases capacity on approximately 400 miles of crude oil transportation pipelines, approximately 450 miles of refined product pipelines, and an approximately 900-mile crude oil gathering system and associated crude oil storage tanks with an aggregate of approximately 10.2 million barrels of active shell capacity. It also owns and operates ten light product terminals and markets light products using third-party terminals. Logistics has strategic investments in pipeline joint ventures that provide access to pipeline capacity as well as the potential for earnings from joint venture operations. The logistics segment owns or leases approximately 264 tractors and 353 trailers used to haul primarily crude oil and other products for related and third parties.
In addition, effective with the 3 Bear Acquisition, June 1, 2022, Delek's logistics segment now includes 3 Bear's operations of crude oil and natural gas gathering, processing and transportation businesses, as well as water disposal and recycling operations, in the Delaware Basin in New Mexico. The asset base includes approximately 485 miles of pipelines, 88 million cubic feet ("MMCf") per day ("MMCf/d") of cryogenic natural gas processing capacity, 140 thousand barrels ("MBbl") per day ("MBbl/d") of crude gathering capacity, 120 MBbl of crude storage capacity and 200 MBbl/d of water disposal capacity. (See further discussion in Note 2 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q).
| Retail Overview | ||
Our retail segment (or "Retail") at June 30, 2022 includes the operations of 248 owned and leased convenience store sites located primarily in West Texas and New Mexico. Our convenience stores typically offer various grades of gasoline and diesel under the DK or Alon brand name and food products, food service, tobacco products, non-alcoholic and alcoholic beverages, general merchandise as well as money grams to the public, primarily under the 7-Eleven and DK or Alon brand names pursuant to a license agreement with 7-Eleven, Inc. In November 2018, we terminated the license agreement with 7-Eleven, Inc. and the terms of such termination and subsequent amendments require the removal of all 7-Eleven branding on a store-by-store basis by December 31, 2023. Merchandise sales at our convenience store sites will continue to be sold under the 7-Eleven brand name until 7-Eleven branding is removed pursuant to the termination. As of June 30, 2022, we have removed the 7-Eleven brand name at 55 of our store locations. Substantially all of the motor fuel sold through our retail segment is supplied by our Big Spring refinery, which is transferred to the retail segment at prices substantially determined by reference to published commodity pricing information.
The cost to acquire the refined fuel products we sell to our wholesale customers in our logistics segment and at our convenience stores in our retail segment depends on numerous factors beyond our control, including the supply of, and demand for, crude oil, gasoline and other refined petroleum products which, in turn, depend on, among other factors, changes in domestic and foreign economies, weather conditions, domestic and foreign political affairs, production levels, the availability of imports, the marketing of competitive fuels and government regulation. Our retail merchandise sales are driven by convenience, customer service, competitive pricing and branding. Motor fuel margin is sales less the delivered cost of fuel and motor fuel taxes, measured on a cents per gallon basis. Our motor fuel margins are impacted by local supply, demand, weather, competitor pricing and product brand.
| Corporate and Other Overview | ||
Our corporate activities, results of certain immaterial operating segments, our asphalt terminal operations, our wholesale crude operations, and intercompany eliminations are reported in corporate, other and eliminations in our segment disclosures. Additionally, our corporate activities include certain of our commodity and other hedging activities.
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Management's Discussion and Analysis
| Strategic Update | ||
Our Framework: Long-Term Sustainability
The emphasis on environmental responsibility and long-term economic and environmental sustainability is accelerating, with increased demand for transparency evolving out of the Environmental, Social and Governance ("ESG") movement. As we evaluate our current ESG positioning in the market, we also must integrate a broader sustainability view to all of our activities, both operational and strategic. For these reasons, we have developed a Long-Term Sustainability Framework, which will help us to formulate our strategic objectives and initiatives.
Long-Term Sustainability Framework: Overarching Objectives
Certain fundamental principles are foundational to our Long-Term Sustainability Framework, and direct us as we develop our guiding objectives. With that in mind, we have initially identified the following overarching objectives:
I. Redirect Corporate Culture towards Innovation, Excellence, and Operating Discipline.
II. Focus on Operational Optimization and Improved Margin Capture.
III. Implement Digital Transformation Strategy.
IV. Identify ESG-Conscious Investments with Clear Value Propositions and Sustainable Returns.
V. Evaluate Strategic Priorities and Redefine Long-term Sustainable Business Model.
Long-Term Sustainability Framework: Key Initiatives
Additionally, integral to our Long-Term Sustainability Framework and the achievement of the initial overarching objectives are the following key initiatives:
•Transform our corporate and operating culture into "One Delek" through unification of purpose, vision and strategy with an emphasis on cultural sustainability.
•Transform our refining operations into the "Refinery of the Future" founded on digitization and automation, innovation and synergistic discipline.
•Develop a "New Energy" mentality focused on understanding the future of energy on a global scale and how Delek can be a leader and facilitator of positive, sustainable change in the energy industry.
Long-Term Sustainability Strategy: A Snapshot
The Overarching Objectives and Key Initiatives are integrated and interdependent, representative of the synergistic approach we are employing, and together comprise our Long-term Sustainability Strategy, as illustrated below (see further discussion in our 2021 Annual Report on Form 10-K):
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Management's Discussion and Analysis
| 2022 Strategic Developments | ||
In our 2021 Annual Report on Form 10-K, we further defined our 2022 strategy by identifying certain key Focused Objectives and Priorities, as they relate to our Key Initiatives. The following table presents some of our most significant 2022 developments to date towards the achievement of our Focused Objectives:
| Key Initiative: Implementing One Delek Culture Transformation | Key Initiative: Planning for Refinery of the Future Operational Transformation | ||||
Focused Objective: Improving Efficiency in Systems and Processes | |||||
| We are committed to becoming even more efficient by focusing on our systems and processes. We know there is always room for improvement, and those improvements can make every employee more effective and valued. | |||||
Improving Consistency and Transparency by Conforming Refining Inventory Accounting Methodology: As of January 1, 2022, we changed our method for accounting for inventory held at the Tyler Refinery to the first-in, first-out ("FIFO") cost method from the last-in, first-out ("LIFO") cost method. This change in accounting method will conform the Company’s refining inventory to a single method of accounting, and will eliminate the inherent volatility in the LIFO valuation of inventory attributable to increments and decrements in historical LIFO layers, which can impact comparability between periods as well as to market conditions and crack spreads. For these reasons, we expect that the newly adopted accounting principle will improve financial reporting by providing better consistency, better transparency, and recognition that better reflects the physical flow of inventory and more accurately reflects the current value of inventory. The effects of this change have been retrospectively applied to all periods presented with a cumulative effect adjustment reflected in the January 1, 2021 beginning retained earnings. (See further discussion in Note 7 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q). | |||||
Focused Objective: Balancing Risk and Reward | |||||
| As we continue to grow, we want to cultivate a healthy appetite for risk. That means, when we make decisions, we plan to identify those risks that come with the greatest potential for success, and pursue them with care. | |||||
Increasing Shareholder Value through Payment of Dividends: On June 21, 2022, our Board of Directors voted to declare a special cash dividend of $0.20 per share of our common stock, which was paid on July 20, 2022 to shareholders of record on July 12, 2022. On August 1, 2022, our Board of Directors voted to declare a quarterly cash dividend of $0.20 per share of our common stock, payable on September 6, 2022 to shareholders of record on August 22, 2022. | |||||
Increasing Shareholder Value through Increase of Share Repurchase Program: On August 1, 2022, our Board of Directors approved an approximately $170.0 million increase in its share repurchase authorization, bringing the total amount available for repurchases under current authorizations to $400.0 million. We expect to repurchase approximately $25 to $35 million of stock in the third quarter 2022. | |||||
Increasing Flexibility through Debt Amendments: On May 26, 2022, Delek Logistics entered into a Third Amendment to the Delek Logistics Credit Facility which, among other things, provides for certain changes to the Delek Logistics Credit Facility in connection with the 3 Bear Acquisition in respect of pro forma calculations and certain other requirements. Further, on May 26, 2022, Delek Logistics entered into a Fourth Amendment (the “Fourth Amendment”) to the Delek Logistics Credit Facility. Among other things, the Fourth Amendment: (i) increased the U.S. Revolving Credit Commitments (as defined in the Delek Logistics Credit Facility) by an amount equal to $150.0 million, for an aggregate amount of $1.0 billion, (ii) increased the U.S. L/C Sublimit (as defined in the Delek Logistics Credit Facility) to an aggregate amount equal to $90.0 million and (iii) increased the U.S. Swing Line Sublimit (as defined in the Delek Logistics Credit) to an aggregate amount equal to $18.0 million. The exercise of the accordion feature gave Delek Logistics the flexibility to utilize borrowings under the Delek Logistics Credit Facility to help fund the acquisition of 3 Bear while continuing to maintain sufficient availability to continue to effectively manage working capital needs and liquidity risk, and to evaluate longer term capitalization strategies. | |||||
Increasing Shareholder Value and Reducing Outsider Risk through Stock Purchase and Cooperation Agreement: On March 7, 2022, Delek entered into a stock purchase and cooperation agreement (the “Icahn Group Agreement”) with IEP Energy Holding LLC, a Delaware limited liability company, American Entertainment Properties Corp., a Delaware corporation, Icahn Enterprises Holdings L.P., a Delaware limited partnership, Icahn Enterprises G.P. Inc., a Delaware corporation, Beckton Corp., a Delaware corporation, and Carl C. Icahn (collectively, the “Icahn Group”), pursuant to which the Company agreed to purchase an aggregate of 3,497,268 shares of common stock of the Company, at a price per share of $18.30, the closing price of a share of Company common stock on the New York Stock Exchange on March 4, 2022, the last trading day prior to the execution of the Ichan Group Agreement, which equals an aggregate purchase price of $64.0 million. | |||||
Focus on Leadership Succession Planning: On June 9, 2022, Avigal Soreq was appointed the President and Chief Executive Officer ("CEO") and as a member of the Board of Directors (the "Board") under a previously announced CEO succession plan. Ezra Uzi Yemin, the Company’s previous President and CEO, was appointed as the Executive Chairman of the Board. Mr. Soreq was previously the Chief Executive Officer of El Al Israel Airlines, the national airline of Israel, since January 2021. Prior to that, he served as a member of the Company’s executive management team, including as the Chief Operating Officer from March 2020 until January 2021, its Chief Commercial Officer from November 2016 until March 2020, an Executive Vice President from August 2015 until January 2021, and a Vice President from 2012 until 2015. In addition, Mr. Soreq served as an Executive Vice President of Delek Logistics GP, LLC from 2015 until 2021, and as its Vice President from 2012 until 2015. Delek also announced on March 27, 2022, that Leonardo Moreno, a highly experienced executive in the global renewable energy and technology sector, has been appointed director to the Board. With these appointments of Messrs. Soreq and Moreno, the Board has been expanded to comprise nine directors, seven of whom are independent and three of whom are diverse, fulfilling the Company’s objective of at least 30% of the Board comprising diverse members by 2022. | |||||
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Management's Discussion and Analysis
| Key Initiative: Implementing One Delek Culture Transformation | Key Initiative: Planning for Refinery of the Future Operational Transformation | ||||
Focused Objective: Balancing Risk and Reward / Driving EBITDA Improvements | |||||
| As we continue to grow, we want to cultivate a healthy appetite for risk. That means, when we make decisions, we plan to identify those risks that come with the greatest potential for success, and pursue them with care. | |||||
Completed Strategic Midstream Acquisition: On June 1, 2022, DKL Delaware Gathering, LLC, a subsidiary of Delek Logistics, completed the acquisition of 100% of the limited liability company interests in 3 Bear Delaware Holding – NM, LLC (“3 Bear”) from 3 Bear Energy – New Mexico LLC (the “Seller”), related to Seller’s crude oil and gas gathering, processing and transportation businesses, as well as water disposal and recycling operations, in the Delaware Basin in New Mexico. The purchase price for 3Bear was $624.7 million, subject to customary adjustments, and was financed through a combination of cash on hand and borrowings under Delek Logistics' existing credit agreement. (See further discussion in Note 2 and Note 8 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q). This acquisition provides us the opportunity to significantly expand our third-party midstream contribution margin within our logistics segment. | |||||
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Management's Discussion and Analysis
| Market Trends | ||
Our results of operations are significantly affected by fluctuations in the prices of certain commodities, including, but not limited to, crude oil, gasoline, distillate fuel, biofuels, natural gas and electricity, among others. Historically, the impact of commodity price volatility on our refining margins (as defined under the heading "Non-GAAP Measures" in MD&A Item 2.), specifically as it relates to the price of crude oil as compared to the price of refined products and timing differences in the movements of those prices (subject to our inventory costing methodology), as well as location differentials, may be favorable or unfavorable compared to peers. Additionally, our refining margin profitability is impacted by regulatory factors, including the cost of RINs.
During the second quarter of 2022, the domestic oil and gas industry benefited from unprecedented conditions, including continued post-Pandemic demand exacerbated by global supply constraints, which led to record crack spreads. Average gasoline (CBOB) prices increased by 71.2% to $3.40 in the second quarter 2022 compared to the second quarter 2021, while the average 5-3-2 ULSD crack spread has increased 163.3% to $44.03 from $16.72 in the second quarter 2022 compared to the second quarter 2021.
Market Outlook for the Remainder of 2022
As we look to the remainder of the year, commodity markets are predicting a decline in demand as consumer purchasing continues to be eroded by inflation combined with the expectation that the federal reserve may continue to raise interest rates in response. Such conditions could spell the declaration of an official recession, which may upend markets in unexpected ways and make capital more difficult to come by. However, due to years of global underinvestment in oil production and the possibility of continued sanctions on Russia, demand for oil and related commodity prices may continue to be strong, sitting at or near the higher end of the life-cycle. That said, domestic regulatory intervention could put pressure on profits of oil companies and may have unanticipated effects on the commodities markets as well as the capital markets. For these reasons, we continue to position the Company to run at or near our nameplate capacity to take advantage of favorable pricing environments while working to integrate our new acquisition and leverage the new logistics lines of business to our advantage, always with an eye towards the One Delek vision and long-term operational sustainability. Additionally, we will continue to balance the cost of debt and cost of equity while continuing to exercise a longer term sustainable view of capital allocation.
From a geographic positioning perspective, absent government intervention, industry analysts expect the Brent, a global benchmark crude, to WTI differential to continue to be favorable for domestic exports throughout 2022, including the U.S. Gulf Coast region. Furthermore, while the likelihood of a favorable Midland-Cushing differential is constrained by overbuilt pipeline capacity, significant export developments and other factors could quickly shift differentials to be more favorable to our Permian-heavy positioning. We currently employ commercial strategies to minimize differential risk associated with our concentrated gathering activities in the Permian Basin, but we are well-positioned to capitalize on a favorable shift in Midland WTI pricing compared to other benchmark crudes, including Cushing WTI.
Despite the tremendous market environment during the second quarter of 2022, the costs of RINs regulatory compliance continues to negatively impact our ability to capture crack spreads compared to other, larger refiners. In June 2022, the EPA finalized volumes for compliance years 2020, 2021 and 2022 under the RFS program (as defined in our accounting policies in Note 2 to the audited consolidated financial statements included in Item. 8 Financial Statements and Supplementary Data, of our December 31, 2021 Annual Report on Form 10-K), announced supplemental volume obligations for compliance years 2022 and 2023 and established new provisions of the RFS which addressed bio-intermediates. Additionally, the EPA denied the petitions for small refinery exemptions ("SREs") for prior period compliance years based on the arguably inaccurate presumption that small refineries are not unduly burdened by the cost of RINs, which resulted in the denial of our pending 2019 and 2020 SRE applications. In April 2022, the EPA also overturned the previously granted 2018 SREs, of which we received three such exemptions (for all our refineries except Big Spring), though it further announced that compliance will not be required. These actions by the EPA could result in significant increases in RINs prices over the coming months. Accordingly, our net RINs Obligation in future periods may be negatively impacted by volatility in prices, likewise disproportionately impacting our ability to capture crack spread, particularly compared to our larger refinery competitors. For these reasons, we are challenging the denial of our 2018, 2019 and 2020 SREs in federal district court in the District of Columbia.
Finally, while the global economic environment continues to support growth, both growth and stability continue to be impacted by building inflationary pressures, including with respect to essentials like housing, food, transportation and heat. The U.S. Federal Reserve and fellow central banks have made and are considering further rate changes to combat the rising inflation. Successful efforts along these lines could cause the cost of capital to rise and could negatively impact construction and other growth efforts that drive demand for our products, but could also reduce the burden on consumers which could lead to increases in discretionary travel and other activities requiring refined fuel products. Because of this uncertainty, there continues to be risk around inflation as well as the potential impact of regulatory efforts to curb inflation which cannot currently be determined.
See the following pages for further discussion on how certain key market trends impact our refining margins.
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Management's Discussion and Analysis
| Crude Prices | ||
WTI crude oil represents the largest component of our crude slate at all of our refineries, and can be sourced through our gathering channels or optimization efforts from Midland, Texas or Cushing, Oklahoma or other locations. We manage our supply chain risk to ensure that we have the barrels to meet our crude slate consumption plan for each month through gathering supply contracts and throughput agreements on various strategic pipelines, some of which include those where we hold equity method investments. We manage market price risk on crude oil through financial derivative hedges, in accordance with our risk management strategies. The table below reflects the quarterly average prices of WTI Midland and WTI Cushing crude oil for each of the quarterly periods in 2021 and for the two quarterly periods in 2022.
| Crude Pricing Differentials | ||
As U.S. crude oil production has increased over recent years, domestic refiners have benefited from the discount for WTI Cushing compared to Brent. This generally leads to higher margins in our refineries, as refined product prices are influenced by Brent crude prices and the majority of our crude supply is WTI-linked. Because of our positioning in the Permian basin, including our access to significant sources of WTI Midland crude through our gathering system, we are even further benefited by discounts for WTI Midland/WTI Cushing differentials. When these discounts shrink or become premiums, our reliance on WTI-linked crude pricing, and specifically WTI Midland crude, can negatively impact our refining margins. Conversely, as these price discounts widen, so does our competitive advantage, created specifically by our access to WTI Midland crude sourced through our gathering systems.
The chart below illustrates the key differentials impacting our refining operations, including WTI Cushing to Brent, WTI Midland to WTI Cushing, and Louisiana Light Sweet crude oil ("LLS") to WTI Cushing for each of the quarterly periods in 2021 and for the two quarterly periods in 2022.
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Management's Discussion and Analysis
| Refined Product Prices | ||
Our refineries produce the following products:
| Tyler Refinery | El Dorado Refinery | Big Spring Refinery | Krotz Springs Refinery | |||||||||||
| Primary Products | Gasoline, jet fuel, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, petroleum coke and sulfur | Gasoline, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, asphalt and sulfur | Gasoline, jet fuel, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, aromatics and sulfur | Gasoline, jet fuel, high-sulfur diesel, light cycle oil, liquefied petroleum gases, propylene and ammonium thiosulfate | ||||||||||
The charts below illustrate the quarterly average prices of Gulf Coast Gasoline ("CBOB"), U.S. High Sulfur Diesel ("HSD") and U.S. Ultra Low Sulfur Diesel ("ULSD") for each of the quarterly periods in 2021 and for the two quarterly periods in 2022.
| Crack Spreads | ||
Crack spreads are used as benchmarks for predicting and evaluating a refinery's product margins by measuring the difference between the market price of feedstocks/crude oil and the resultant refined products. Generally, a crack spread represents the approximate refining margin resulting from processing one barrel of crude oil into its outputs, generally gasoline and diesel fuel.
The table below reflects the quarterly average Gulf Coast 5-3-2 ULSD, 3-2-1 ULSD and 2-1-1 HSD/LLS crack spreads for each of the quarterly periods in 2021 and for the two quarterly periods in 2022. As the chart illustrates, the 3-2-1 crack spread has consistently outperformed the 5-3-2 and the 2-1-1 crack spreads. When market conditions consist of near-capacity throughputs and no significant outages, our Big Spring refinery, whose benchmark is the 3-2-1 crack spread, should outperform our other refineries in terms of refining margin, which are benchmarked against either the 5-3-2 or the 2-1-1 crack spreads.
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Management's Discussion and Analysis
| RIN Volatility | ||
Environmental regulations and the political environment continue to affect our refining margins in the form of volatility in the price of RINs. We enter into future commitments to purchase or sell RINs at fixed prices and quantities, which are used to manage the costs of our credits for commitments required by the EPA to blend biofuels into fuel products ("RINs Obligation"). On a consolidated basis, we work to balance our RINs Obligation in order to minimize the effect of RINs on our results. While we obtain RINs in our refining and logistics segments through our ethanol and biodiesel production and blending, and generate RINs through biodiesel production, our refining segment still must purchase additional RINs to satisfy its obligations. Additionally, our ability to obtain RINs through blending is limited by our refined product slate, blending capabilities and market constraints. The cost to purchase these additional RINs is a significant cash outflow for our business. Increases in the market prices of RINs generally adversely affect our results of operations through changes in fair value to our existing RINs Obligation, to the extent we do not have offsetting RINs inventory on hand or effective economic hedges through net forward purchase commitments. RINs prices are highly sensitive to regulatory and political influence and conditions, and therefore often do not correlate to movements in crude oil prices, refined product prices or crack spreads. Furthermore, RIN prices are impacted by market expectations regarding whether the EPA may grant certain SREs. Because of the volatility in RINs prices, it is not possible to predict future RINs cost with certainty, and movements in RIN prices can have significant and unanticipated adverse effects on our refining margins that are outside of our control.
The chart below illustrates the volatility in RINs beginning with the first quarter of 2021 through the second quarter of 2022.
| Energy Costs | ||
The chart below illustrates the quarterly average prices of Waha (Permian Basin) and Henry Hub (Gulf Coast) beginning with the first quarter of 2021 through the second quarter of 2022.
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Management's Discussion and Analysis
Critical Accounting Estimates
The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The SEC has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results of operations, and require our most difficult, subjective or complex judgments or estimates. Based on this definition and as further described in our 2021 Annual Report on Form 10-K, we believe our critical accounting policies include the following: (i) evaluating impairment for property, plant and equipment and definite life intangibles, (ii) evaluating potential impairment of goodwill, (iii) estimating environmental expenditures, and (iv) estimating asset retirement obligations. Additionally, we have identified the following critical accounting policy that impacts the six months ended June 30, 2022:
Taxes
Under Accounting Standards Codification ("ASC") 740, Income Taxes (“ASC 740”), we use an estimated annual effective tax rate ("AETR") to record income taxes. The development of the estimated AETR involves significant judgment, particularly early in the year and in times of economic uncertainty. As of and during the six months ended June 30, 2022, our estimates of the expected AETR reflected inputs which are subject to judgment including (but not necessarily limited to) the following:
•Forecasted pre-tax U.S. generally accepted accounting principles ("GAAP") income or loss for the year
•Estimates of expected permanent differences in GAAP income or loss and taxable income or loss for the year
•Forecasted capital expenditures for the year and future years (where such activities can be impacted by unanticipated events)
•Expected applicable jurisdictional tax rates
•Estimated impact of possible deduction and tax credit limitations
•Estimates regarding net operating losses, carryback and carryforward provisions (and limitations) and valuation allowances
All of these inputs are subject to significant judgment and assumptions about future events impacting 2022, some of which are based on historical trends and results, operational plans, and projections regarding future pricing and profitability (where we utilize third party forward curves and pricing sources, where possible, but where expectations regarding capture rates and other factors involve judgment). We also note that, while economic conditions affecting our industry and industry outlooks related to COVID-19 are stabilizing and improving, there remains a level of uncertainty related to COVID-19 and the expectations for recovery that increases the level of judgment involved with some of these assumptions. Accordingly, where appropriate, we may consider the probability of certain components in determining what we believe to be a reasonable estimate based on conditions and events that were in existence as of our reporting date, which may also involve the use of significant management judgment. Furthermore, many of our assumptions are inter-relational, where changing one assumption can impact other assumptions (e.g., in terms of the applicability of or limitations under various tax code provisions).
The nature of the AETR estimation approach for recording income taxes requires continuous review and adjustment during the year based on actual results, and as better information regarding forecasted results and assumptions becomes available. Significant changes in any of these assumptions or in actual results compared to our forecasts and assumptions could cause material changes in our AETR, which could result in cumulative adjustments to reflect the new estimates in future periods.
We have developed and utilized methodologies and rationales for the development of our assumptions, subject to internal controls and sensitivity or probability assessments, as appropriate, and we believe our process provides a reasonable basis for our estimated AETR as well as the income taxes as of and for the six months ended June 30, 2022.
Business Combinations
We recognize and measure the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date. Any excess or surplus of the purchase consideration when compared to the fair value of the net tangible assets acquired, if any, is recorded as goodwill or gain from a bargain purchase. The fair value of assets and liabilities as of the acquisition date are often estimated using a combination of approaches, including the income approach, which requires us to project future cash flows and apply an appropriate discount rate; the cost approach, which requires estimates of replacement costs and depreciation and obsolescence estimates; and the market approach which uses market data and adjusts for entity-specific differences. We use all available information to make these fair value determinations and engage third-party consultants for valuation assistance. The estimates used in determining fair values are based on assumptions believed to be reasonable but which are inherently uncertain. Accordingly, actual results may differ materially from the projected results used to determine fair value.
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Management's Discussion and Analysis
Non-GAAP Measures
Our management uses certain “non-GAAP” operational measures to evaluate our operating segment performance and non-GAAP financial measures to evaluate past performance and prospects for the future to supplement our GAAP financial information presented in accordance with U.S. GAAP. These financial and operational non-GAAP measures are important factors in assessing our operating results and profitability and include:
•Refining margin - calculated as the difference between net refining revenues and total cost of materials and other;
•Refined product margin - calculated as the difference between net revenues attributable to refined products (produced and purchased) and related cost of materials and other (which is applicable to both the refining segment and the West Texas wholesale marketing activities within our logistics segment); and
•Refining margin per barrels sold - calculated as refining margin divided by our average refining sales in barrels per day (excluding purchased barrels) multiplied by 1,000 and multiplied by the number of days in the period.
We believe these non-GAAP operational and financial measures are useful to investors, lenders, ratings agencies and analysts to assess our ongoing performance because, when reconciled to their most comparable GAAP financial measure, they provide improved comparability between periods through the exclusion of certain items that we believe are not indicative of our core operating performance and that may obscure our underlying results and trends.
Non-GAAP measures have important limitations as analytical tools, because they exclude some, but not all, items that affect net earnings and operating income. These measures should not be considered substitutes for their most directly comparable U.S. GAAP financial measures.
Non-GAAP Reconciliations
The following table provides a reconciliation of refining margin to the most directly comparable U.S. GAAP measure, gross margin:
Reconciliation of refining margin to gross margin (in millions)
| Refining Segment | ||||||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 As Adjusted (1) | |||||||||||||||||||||||
Net revenues | $ | 4,810.5 | $ | 2,415.7 | $ | 8,304.2 | $ | 4,155.8 | ||||||||||||||||||
Cost of sales | 4,242.1 | 2,452.6 | 7,691.7 | 4,234.4 | ||||||||||||||||||||||
Gross margin | 568.4 | (36.9) | 612.5 | (78.6) | ||||||||||||||||||||||
Add back (items included in cost of sales): | ||||||||||||||||||||||||||
Operating expenses (excluding depreciation and amortization)(1)(2) | 165.0 | 115.0 | 284.9 | 229.7 | ||||||||||||||||||||||
Depreciation and amortization | 49.9 | 51.0 | 102.7 | 103.1 | ||||||||||||||||||||||
Refining margin | $ | 783.3 | $ | 129.1 | $ | 1,000.1 | $ | 254.2 | ||||||||||||||||||
(1) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. For further discussion, see Note 7 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
(2) Reflects the prior period conforming reclassification adjustment between operating expenses and general and administrative expenses.
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Management's Discussion and Analysis
Summary Financial and Other Information
The following table provides summary financial data for Delek:
| Consolidated Summary Statement of Operations Data | ||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
(in millions) (1) | June 30, | June 30, | ||||||||||||||||||||||||
| 2022 | 2021 As Adjusted (2) | 2022 | 2021 As Adjusted (2) | |||||||||||||||||||||||
| Net revenues | $ | 5,982.6 | $ | 2,191.5 | $ | 10,441.7 | $ | 4,583.7 | ||||||||||||||||||
Total operating costs and expenses | 5,489.3 | 2,241.7 | 9,901.7 | 4,681.3 | ||||||||||||||||||||||
Operating income (loss) | 493.3 | (50.2) | 540.0 | (97.6) | ||||||||||||||||||||||
| Total non-operating expense, net | 24.3 | 33.1 | 53.1 | 56.7 | ||||||||||||||||||||||
| Income (loss) before income tax expense (benefit) | 469.0 | (83.3) | 486.9 | (154.3) | ||||||||||||||||||||||
| Income tax expense (benefit) | 100.4 | (35.2) | 103.5 | (43.5) | ||||||||||||||||||||||
| Net income (loss) | 368.6 | (48.1) | 383.4 | (110.8) | ||||||||||||||||||||||
| Net income attributed to non-controlling interests | 6.8 | 8.6 | 15.0 | 15.9 | ||||||||||||||||||||||
| Net income (loss) attributable to Delek | $ | 361.8 | $ | (56.7) | $ | 368.4 | $ | (126.7) | ||||||||||||||||||
(1) This information is presented at a summary level for your reference. See the Consolidated Condensed Statements of Income included in Item 1. to this Quarterly Report on Form 10-Q for more detail regarding our results of operations and net loss per share.
(2) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. For further discussion, see Note 7 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
We report operating results in three reportable segments:
•Refining
•Logistics
•Retail
Decisions concerning the allocation of resources and assessment of operating performance are made based on this segmentation. Management measures the operating performance of each of its reportable segments based on the segment contribution margin which is defined as net revenues less costs of materials and other and operating expenses, excluding depreciation and amortization.
51 | | | ||||
Management's Discussion and Analysis
Results of Operations
Consolidated Results of Operations — Comparison of the Three and Six Months Ended June 30, 2022 versus the Three and Six Months Ended June 30, 2021
Net Income (Loss)
Q2 2022 vs. Q2 2021
Consolidated net income for the second quarter of 2022 was $368.6 million compared to a net loss of $48.1 million for the second quarter of 2021. Consolidated net income attributable to Delek for the second quarter of June 30, 2022 was $361.8 million, or $5.11 per basic share, compared to a net loss of $56.7 million, or $(0.77) per basic share, for the second quarter 2021. Explanations for significant drivers impacting net income (loss) as compared to the comparable period of the prior year are discussed in the sections below.
YTD 2022 vs. YTD 2021
Consolidated net income for the six months ended June 30, 2022 was $383.4 million compared to a net loss of $110.8 million for the six months ended June 30, 2021. Consolidated net income attributable to Delek for the six months ended June 30, 2022 was $368.4 million, or $5.12 per basic share, compared to a net loss of $126.7 million, or $(1.72) per basic share, for the six months ended June 30, 2021. Explanations for significant drivers impacting net income (loss) as compared to the comparable period of the prior year are discussed in the sections below.
Net Revenues
Q2 2022 vs. Q2 2021
In the second quarter of 2022 and 2021, we generated net revenues of $5,982.6 million and $2,191.5 million, respectively, an increase of $3,791.1 million, or 173.0%. The increase in net revenues was primarily driven by the following factors:
•in our refining segment, increases in the average price of U.S. Gulf Coast gasoline of 71.2%, ULSD of 104.0%, and HSD of 103.7%;
•in our logistics segment, increases in the average volumes of diesel sold and in the average sales price per gallon of diesel and gasoline sold in our West Texas marketing operations as well as incremental revenues from the 3 Bear Acquisition; and
•in our retail segment, increases in fuel sales primarily attributable to a 48.9% increase in average price charged per gallon sold.
YTD 2022 vs. YTD 2021
For the six months ended June 30, 2022 and 2021, we generated net revenues of $10,441.7 million and $4,583.7 million, respectively, an increase of $5,858.0 million, or 127.8%. The increase in net revenues was primarily driven by the following factors:
•in our refining segment, increases in the average price of U.S. Gulf Coast gasoline of 65.1%, ULSD of 91.0%, and HSD of 92.5%;
•in our logistics segment, increases in the average volumes of diesel sold and in the average sales price per gallon of diesel and gasoline sold in our West Texas marketing operations; and
•in our retail segment, increases in fuel sales primarily attributable to a 45.5% increase in average price charged per gallon sold.
Cost of Materials and Other
Q2 2022 vs. Q2 2021
Cost of materials and other was $5,082.6 million for the second quarter of 2022 compared to $1,960.6 million for the second quarter of 2021, an increase of $3,122.0 million, or 159.2%. The net increase in cost of materials and other was primarily driven by the following:
•increases in cost of crude oil feedstocks at the refineries, including a 64.3% increase in the average cost of WTI Cushing crude oil and a 63.4% increase in the average cost of WTI Midland crude oil;
•increases in the average volumes sold and average cost per gallon of gasoline and diesel sold in our logistics segment; and
•an increase in retail cost of materials and other due to 58.8% increase in average cost per gallon sold applied to higher fuel sales volumes.
YTD 2022 vs. YTD 2021
Cost of materials and other was $9,235.1 million for the six months ended June 30, 2022 compared to $4,133.4 million for the six months ended June 30, 2021, an increase of $5,101.7 million, or 123.4%. The net increase in cost of materials and other was primarily driven by the following:
•increases in cost of crude oil feedstocks at the refineries, including a 64.0% increase in the average cost of WTI Cushing crude oil and a 62.3% increase in the average cost of WTI Midland crude oil;
52 | | | ||||
Management's Discussion and Analysis
•increases in average RINs expense due to increased production during the six months ended June 30, 2022 compared to the six months ended June 30, 2021;
•increases in the average volumes sold and average cost per gallon of gasoline and diesel sold in our logistics segment; and
•an increase in retail cost of materials and other due to 54.7% increase in average cost per gallon sold applied to higher fuel sales volumes.
Operating Expenses
Q2 2022 vs. Q2 2021
Operating expenses were $222.5 million for the second quarter of 2022 compared to $166.2 million for the second quarter of 2021, an increase of $56.3 million, or 33.9%. The increase in operating expenses was primarily driven by the following:
•an increase in variable costs and utilities associated with higher throughput during current period;
•higher natural gas prices in the second quarter of 2022; and
•increases in employee cost primarily related to increased salaries, wages and other benefits.
Such increases were partially offset by a decrease in outside services, maintenance and lease costs.
YTD 2022 vs. YTD 2021
Operating expenses were $389.4 million for the six months ended June 30, 2022 compared to $321.5 million for the six months ended June 30, 2021, an increase of $67.9 million, or 21.1%. The increase in operating expenses was primarily driven by the following:
•an increase in variable costs and utilities associated with higher throughput during current period;
•higher natural gas prices in the first half of 2022; and
•increases in employee cost primarily related to increased salaries, wages and other benefits.
Such increases were partially offset by a decrease in outside services, maintenance and lease costs.
General and Administrative Expenses
Q2 2022 vs. Q2 2021
General and administrative expenses were $126.5 million for the second quarter of 2022 compared to $53.5 million for the second quarter of 2021, an increase of $73.0 million, or 136.4%. The increase was primarily driven by an increase in headcount, increases in salaries, wages and other benefits and incremental transaction costs related to the 3 Bear Acquisition.
YTD 2022 vs. YTD 2021
General and administrative expenses were $179.6 million and $94.6 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $85.0 million, or 89.9%. The increase was primarily driven by an increase in headcount, increases in salaries, wages and other benefits and incremental transaction costs related to the 3 Bear Acquisition.
Depreciation and Amortization
Q2 2022 vs. Q2 2021
Depreciation and amortization (included in both cost of sales and other operating expenses) was $68.0 million for the second quarter of 2022 compared to $66.3 million for the second quarter of 2021, an increase of $1.7 million, or 2.6%.
YTD 2022 vs. YTD 2021
Depreciation and amortization (included in both cost of sales and other operating expenses) was $136.3 million compared to $134.8 million for the six months ended June 30, 2022 and 2021, respectively, an increase of $1.5 million, or 1.1%.
Other Operating Income, Net
Q2 2022 vs. Q2 2021
Other operating income, net increased by $5.4 million in the second quarter of 2022 to $10.3 million compared to $4.9 million in the second quarter of 2021. The increases were due to insurance proceeds received in the second quarter of 2022.
YTD 2022 vs. YTD 2021
Other operating income, net increased by $35.7 million during the six months ended June 30, 2022 to $38.7 million compared to $3.0 million during the six months ended June 30, 2021. The increases were primarily driven by an increase due to realized hedge gains during the 2022 period.
53 | | | ||||
Management's Discussion and Analysis
Non-operating Expenses, Net
Interest Expense, Net
Q2 2022 vs. Q2 2021
Interest expense, net increased by $10.5 million, or 31.7%, to $43.6 million in the second quarter of 2022 compared to $33.1 million in the second quarter of 2021, primarily driven by the following:
•an increase in the average effective interest rate of 0.67% in the second quarter of 2022 compared to the second quarter of 2021 (where effective interest rate is calculated as interest expense divided by the net average borrowings/obligations outstanding); and
•an increase in net average borrowings outstanding (including the obligations under the supply and offtake agreements which have an associated interest charge) of approximately $434.9 million in the second quarter of 2022 (calculated as a simple average of beginning borrowings/obligations and ending borrowings/obligations for the period) compared to the second quarter of 2021.
YTD 2022 vs. YTD 2021
Interest expense, net increased by $19.5 million, or 31.2%, to $82.0 million during the six months ended June 30, 2022 compared to $62.5 million during the six months ended June 30, 2021, primarily driven by the following:
•an increase in the average effective interest rate of 0.62% during the six months ended June 30, 2022 compared to the six months ended June 30, 2021 (where effective interest rate is calculated as interest expense divided by the net average borrowings/obligations outstanding); and
•an increase in net average borrowings outstanding (including the obligations under the supply and offtake agreements which have an associated interest charge) of approximately $425.3 million during the six months ended June 30, 2022 (calculated as a simple average of beginning borrowings/obligations and ending borrowings/obligations for the period) compared to the six months ended June 30, 2021.
Results from Equity Method Investments
Q2 2022 vs. Q2 2021
We recognized income of $15.7 million from equity method investments during the second quarter of 2022, compared to $6.8 million for the second quarter of 2021, an increase of $8.9 million. This increase was primarily driven by the following:
•increase in income from our Red River and Caddo equity method investment due to higher throughput volumes and resulting revenue increases; and
•an increase in income from our investment in W2W Holdings LLC to income of $2.1 million in the second quarter of 2022 from a loss of $3.9 million in the second quarter of 2021.
YTD 2022 vs. YTD 2021
We recognized income of $26.6 million from equity method investments during the six months ended June 30, 2022, compared to $11.6 million for the six months ended June 30, 2021, an increase of $15.0 million. This increase was primarily driven by the following:
•increase in income from our Red River and Caddo equity method investment due to higher throughput volumes and resulting revenue increases; and
•an increase in income from our investment in W2W Holdings LLC to income of $4.2 million during the six months of 2022 from a loss of $4.1 million during the six months of 2021.
Q2 2022 vs. Q2 2021
Income tax expense increased by $135.6 million in the second quarter of 2022 compared to the second quarter of 2021, primarily driven by the following:
•pre-tax income of $469.0 million in the second quarter of 2022, as compared to a pre-tax loss of $83.3 million for the second quarter of 2021; and
•a decrease in our effective tax rate which was 21.4% for the second quarter of 2022, compared to 42.3% for the second quarter of 2021 primarily due to the following:
◦the impact of credits and permanent differences on the tax rate due to changes in pre-tax book income;
◦changes in the valuation allowance for state tax attributes; and
◦changes in the second quarter estimated annual tax rate applied to year-to-date loss for the second quarter of 2021.
54 | | | ||||
Management's Discussion and Analysis
YTD 2022 vs. YTD 2021
Income tax expense increased by $147.0 million during the six months ended June 30, 2022 compared to the same period for 2021, primarily driven by the following:
•pre-tax income of $486.9 million in the six months ended June 30, 2022, as compared to a pre-tax loss of $154.3 million for the six months ended June 30, 2021; and
•a decrease in our effective tax rate which was 21.3% for the six months ended June 30, 2022, compared to 28.2% for the six months ended June 30, 2021 primarily due to the following:
◦the impact of credits and permanent differences on the tax rate due to changes in pre-tax book income; and
◦changes in the valuation allowance for state tax attributes.
55 | | | ||||
Management's Discussion and Analysis
| Refining Segment | ||
The tables and charts below set forth certain information concerning our refining segment operations ($ in millions, except per barrel amounts):
| Refining Segment Margins | ||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| 2022 | Adjusted 2021 (1) | 2022 | Adjusted 2021 (1) | |||||||||||||||||||||||
Net revenues | $ | 4,810.5 | $ | 2,415.7 | $ | 8,304.2 | $ | 4,155.8 | ||||||||||||||||||
| Cost of materials and other | 4,027.2 | 2,286.6 | 7,304.1 | 3,901.6 | ||||||||||||||||||||||
Refining margin | 783.3 | 129.1 | 1,000.1 | 254.2 | ||||||||||||||||||||||
Operating expenses (excluding depreciation and amortization)(1) (2) | 165.0 | 115.0 | 284.9 | 229.7 | ||||||||||||||||||||||
Contribution margin(1) | $ | 618.3 | $ | 14.1 | $ | 715.2 | $ | 24.5 | ||||||||||||||||||
(1) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. For further discussion, see Note 7 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
(2) Reflects the prior period conforming reclassification adjustment between operating expenses and general and administrative expenses.
Factors Impacting Refining Profitability
Our profitability in the refining segment is substantially determined by the difference between the cost of the crude oil feedstocks we purchase and the price of the refined products we sell, referred to as the "crack spread", "refining margin" or "refined product margin". Refining margin is used as a metric to assess a refinery's product margins against market crack spread trends, where "crack spread" is a measure of the difference between market prices for crude oil and refined products and is a commonly used proxy within the industry to estimate or identify trends in refining margins.
The cost to acquire feedstocks and the price of the refined petroleum products we ultimately sell from our refineries depend on numerous factors beyond our control, including the supply of, and demand for, crude oil, gasoline and other refined petroleum products which, in turn, depend on, among other factors, changes in domestic and foreign economies, weather conditions such as hurricanes or tornadoes, local, domestic and foreign political affairs, global conflict, production levels, the availability of imports, the marketing of competitive fuels and government regulation. Other significant factors that influence our results in the refining segment include operating costs (particularly the cost of natural gas used for fuel and the cost of electricity), seasonal factors, refinery utilization rates and planned or unplanned maintenance activities or turnarounds. Moreover, while the fluctuations in the cost of crude oil are typically reflected in the prices of light refined products, such as gasoline and diesel fuel, the price of other residual products, such as asphalt, coke, carbon black oil and liquefied petroleum gas ("LPG") are less likely to move in parallel with crude cost. This could cause additional pressure on our realized margin during periods of rising or falling crude oil prices.
Additionally, our margins are impacted by the pricing differentials of the various types and sources of crude oil we use at our refineries and their relation to product pricing. Our crude slate is predominantly comprised of WTI crude oil. Therefore, favorable differentials of WTI compared to other crude will favorably impact our operating results, and vice versa. Additionally, because of our gathering system presence in the Midland area and the significant source of crude specifically from that region into our network, a widening of the WTI Cushing less WTI Midland spread will favorably influence the operating margin for our refineries. Alternatively, a narrowing of this differential will have an adverse effect on our operating margins. Global product prices are influenced by the price of Brent crude which is a global benchmark crude. Global product prices influence product prices in the U.S. As a result, our refineries are influenced by the spread between Brent crude and WTI Midland. The Brent less WTI Midland spread represents the differential between the average per barrel price of Brent crude oil and the average per barrel price of WTI Midland crude oil. A widening of the spread between Brent and WTI Midland will favorably influence our refineries' operating margins. Also, the Krotz Springs refinery is influenced by the spread between Brent crude and LLS. The Brent less LLS spread represents the differential between the average per barrel price of Brent crude oil and the average per barrel price of LLS crude oil. A discount in LLS relative to Brent will favorably influence the Krotz Springs refinery operating margin.
Refining contribution margin is impacted by regulatory costs associated with the cost of RINs as well as energy costs, including the cost of natural gas. In periods of unfavorable regulatory sentiment or uncertainty regarding the possibility of SREs, RINs prices can increase at higher rates than crack spreads, or even when crack spreads are declining. This can be particularly impactful on smaller refineries, where the operating cost structure does not have as much scalability as larger refineries. Additionally, volatility in energy costs, which are captured in our operating expenses and impact our Refining contribution margin, can significantly impact our ability to capture crack spreads, with natural gas representing the most significant component. Within Delek’s geographic footprint, we source the majority of our natural gas from the Gulf Coast, and secondarily from the Permian, and we do not currently have the capability at our refineries to switch our energy consumption to utilize alternative sources of fuel. For this reason, unfavorable Gulf Coast (Henry Hub) differentials can impact
56 | | | ||||
Management's Discussion and Analysis
our crack spread capture. The cost to acquire the refined fuel products we sell to our wholesale customers in our logistics segment and at our convenience stores in our retail segment largely depends on numerous factors beyond our control, including the supply of, and demand for, crude oil, gasoline and other refined petroleum products which, in turn, depend on, among other factors, changes in domestic and foreign economies, weather conditions, domestic and foreign political affairs, production levels, the availability of imports, the marketing of competitive fuels and government regulation.
In addition to the above, it continues to be a strategic and operational objective to manage price and supply risk related to crude oil that is used in refinery production, and to develop strategic sourcing relationships. For that purpose, from a pricing perspective, we enter into commodity derivative contracts to manage our price exposure to our inventory positions, future purchases of crude oil and ethanol, future sales of refined products or to fix margins on future production. We also enter into future commitments to purchase or sell RINs at fixed prices and quantities, which are used to manage our RINs Obligation. Additionally, from a sourcing perspective, we often enter into purchase and sale contracts with vendors and customers or take physical or financial commodity positions for crude oil that may not be used immediately in production, but that may be used to manage the overall supply and availability of crude expected to ultimately be needed for production and/or to meet minimum requirements under strategic pipeline arrangements, and also to optimize and hedge availability risks associated with crude that we ultimately expect to use in production. Such transactions are inherently based on certain assumptions and judgments made about the current and possible future availability of crude. Therefore, when we take physical or financial positions for optimization purposes, our intent is generally to take offsetting positions in quantities and at prices that will advance these objectives while minimizing our positional and financial statement risk. However, because of the volatility of the market in terms of pricing and availability, it is possible that we may have material positions with timing differences or, more rarely, that we are unable to cover a position with an offsetting position as intended. Such differences could have a material impact on the classification of resulting gains/losses, assets or liabilities, and could also significantly impact refining contribution margin.
Finally, as part of our overall business strategy, we regularly evaluate opportunities to expand our portfolio of businesses and may at any time be discussing or negotiating a transaction that, if consummated, could have a material effect on our business, financial condition, liquidity or results of operations.
57 | | | ||||
Management's Discussion and Analysis
| Refinery Statistics | ||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||||||||
| Tyler, TX Refinery | ||||||||||||||||||||||||||
| Days in period | 91 | 91 | 181 | 181 | ||||||||||||||||||||||
Total sales volume - refined product (average barrels per day)(1) | 72,283 | 77,529 | 72,922 | 75,389 | ||||||||||||||||||||||
| Products manufactured (average barrels per day): | ||||||||||||||||||||||||||
| Gasoline | 32,645 | 37,495 | 34,924 | 38,522 | ||||||||||||||||||||||
| Diesel/Jet | 30,271 | 30,449 | 29,644 | 29,102 | ||||||||||||||||||||||
| Petrochemicals, LPG, natural gas liquids ("NGLs") | 1,983 | 2,079 | 2,116 | 1,903 | ||||||||||||||||||||||
| Other | 1,824 | 1,633 | 1,748 | 1,552 | ||||||||||||||||||||||
| Total production | 66,723 | 71,656 | 68,432 | 71,079 | ||||||||||||||||||||||
| Throughput (average barrels per day): | ||||||||||||||||||||||||||
| Crude Oil | 66,681 | 72,639 | 66,559 | 68,718 | ||||||||||||||||||||||
| Other feedstocks | 552 | (384) | 2,128 | 2,779 | ||||||||||||||||||||||
| Total throughput | 67,233 | 72,255 | 68,687 | 71,497 | ||||||||||||||||||||||
| Total refining revenue ($ in millions) | $ | 1,039.9 | $ | 625.0 | $ | 1,809.8 | $ | 1,115.0 | ||||||||||||||||||
Cost of materials and other ($ in millions) (2) | 834.2 | 553.1 | 1,523.8 | 961.6 | ||||||||||||||||||||||
Total refining margin ($ in millions) (2) | $ | 205.7 | $ | 71.9 | $ | 286.0 | $ | 153.4 | ||||||||||||||||||
| Per barrel of refined product sales: | ||||||||||||||||||||||||||
Tyler refining margin (2) | $ | 31.27 | $ | 10.18 | 21.67 | $ | 11.24 | |||||||||||||||||||
Direct operating expenses (3) | $ | 5.61 | $ | 3.51 | 4.95 | $ | 3.54 | |||||||||||||||||||
| Crude Slate: (% based on amount received in period): | ||||||||||||||||||||||||||
| WTI crude oil | 83.8 | % | 86.7 | % | 85.4 | % | 90.6 | % | ||||||||||||||||||
| East Texas crude oil | 16.2 | % | 13.3 | % | 14.6 | % | 9.0 | % | ||||||||||||||||||
| Other | — | % | — | % | — | % | 0.4 | % | ||||||||||||||||||
| El Dorado, AR Refinery | ||||||||||||||||||||||||||
Days in period | 91 | 91 | 181 | 181 | ||||||||||||||||||||||
Total sales volume - refined product (average barrels per day)(1) | 84,299 | 55,381 | 82,825 | 52,561 | ||||||||||||||||||||||
| Products manufactured (average barrels per day): | ||||||||||||||||||||||||||
| Gasoline | 39,347 | 26,143 | 38,118 | 21,872 | ||||||||||||||||||||||
| Diesel | 32,855 | 20,534 | 31,027 | 17,271 | ||||||||||||||||||||||
| Petrochemicals, LPG, NGLs | 1,549 | 808 | 1,285 | 780 | ||||||||||||||||||||||
| Asphalt | 8,181 | 5,997 | 7,655 | 4,840 | ||||||||||||||||||||||
| Other | 805 | 603 | 795 | 521 | ||||||||||||||||||||||
| Total production | 82,737 | 54,085 | 78,880 | 45,284 | ||||||||||||||||||||||
| Throughput (average barrels per day): | ||||||||||||||||||||||||||
| Crude Oil | 81,510 | 54,086 | 76,827 | 44,479 | ||||||||||||||||||||||
| Other feedstocks | 2,221 | 1,451 | 3,079 | 1,558 | ||||||||||||||||||||||
| Total throughput | 83,731 | 55,537 | 79,906 | 46,037 | ||||||||||||||||||||||
| Total refining revenue ($ in millions) | $ | 1,130.1 | $ | 489.5 | $ | 1,942.2 | $ | 926.2 | ||||||||||||||||||
| Cost of materials and other ($ in millions) | 939.2 | 479.1 | 1,711.8 | 930.0 | ||||||||||||||||||||||
| Total refining margin ($ in millions) | $ | 190.9 | $ | 10.4 | $ | 230.4 | $ | (3.8) | ||||||||||||||||||
| Per barrel of refined product sales: | ||||||||||||||||||||||||||
| El Dorado refining margin | $ | 24.88 | $ | 2.06 | $ | 15.37 | $ | (0.39) | ||||||||||||||||||
Direct operating expenses (3) | $ | 4.88 | $ | 5.14 | $ | 4.34 | $ | 5.71 | ||||||||||||||||||
| Crude Slate: (% based on amount received in period): | ||||||||||||||||||||||||||
| WTI crude oil | 53.1 | % | 48.9 | % | 43.2 | % | 46.9 | % | ||||||||||||||||||
| Local Arkansas crude oil | 15.6 | % | 20.4 | % | 16.4 | % | 25.1 | % | ||||||||||||||||||
| Other | 31.3 | % | 30.7 | % | 40.4 | % | 28.0 | % | ||||||||||||||||||
58 | | | ||||
Management's Discussion and Analysis
| Refinery Statistics (continued) | ||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||||||||
| Big Spring, TX Refinery | ||||||||||||||||||||||||||
| Days in period | 91 | 91 | 181 | 181 | ||||||||||||||||||||||
Total sales volume - refined product (average barrels per day) (1) | 72,928 | 69,191 | 71,039 | 68,947 | ||||||||||||||||||||||
| Products manufactured (average barrels per day): | ||||||||||||||||||||||||||
| Gasoline | 34,918 | 33,501 | 33,912 | 33,159 | ||||||||||||||||||||||
| Diesel/Jet | 27,043 | 25,492 | 24,877 | 23,226 | ||||||||||||||||||||||
| Petrochemicals, LPG, NGLs | 3,537 | 4,335 | 3,436 | 3,745 | ||||||||||||||||||||||
| Asphalt | 1,406 | 1,012 | 1,642 | 1,400 | ||||||||||||||||||||||
| Other | 1,410 | 1,491 | 1,345 | 1,448 | ||||||||||||||||||||||
| Total production | 68,314 | 65,831 | 65,212 | 62,978 | ||||||||||||||||||||||
| Throughput (average barrels per day): | ||||||||||||||||||||||||||
| Crude oil | 70,662 | 69,731 | 65,675 | 64,772 | ||||||||||||||||||||||
| Other feedstocks | (1,093) | (1,704) | 315 | (395) | ||||||||||||||||||||||
| Total throughput | 69,569 | 68,027 | 65,990 | 64,377 | ||||||||||||||||||||||
| Total refining revenue ($ in millions) | $ | 1,116.4 | $ | 615.1 | $ | 1,941.9 | $ | 1,117.1 | ||||||||||||||||||
| Cost of materials and other ($ in millions) | 922.9 | 572.0 | 1,650.5 | 1,033.2 | ||||||||||||||||||||||
| Total refining margin ($ in millions) | $ | 193.5 | $ | 43.1 | $ | 291.4 | $ | 83.9 | ||||||||||||||||||
| Per barrel of refined product sales: | ||||||||||||||||||||||||||
| Big Spring refining margin | $ | 29.16 | $ | 6.84 | $ | 22.66 | $ | 6.72 | ||||||||||||||||||
Direct operating expenses (3) | $ | 7.06 | $ | 5.34 | $ | 6.24 | $ | 5.88 | ||||||||||||||||||
| Crude Slate: (% based on amount received in period): | ||||||||||||||||||||||||||
| WTI crude oil | 68.2 | % | 66.4 | % | 67.5 | % | 64.7 | % | ||||||||||||||||||
| WTS crude oil | 31.8 | % | 33.6 | % | 32.5 | % | 35.3 | % | ||||||||||||||||||
| Krotz Springs, LA Refinery | ||||||||||||||||||||||||||
Days in period | 91 | 91 | 181 | 181 | ||||||||||||||||||||||
Total sales volume - refined product (average barrels per day) (1) | 75,791 | 77,318 | 77,800 | 51,286 | ||||||||||||||||||||||
| Products manufactured (average barrels per day): | ||||||||||||||||||||||||||
| Gasoline | 31,298 | 33,056 | 31,979 | 19,661 | ||||||||||||||||||||||
| Diesel/Jet | 32,419 | 26,611 | 31,711 | 15,370 | ||||||||||||||||||||||
| Heavy Oils | 845 | 868 | 1,690 | 527 | ||||||||||||||||||||||
| Petrochemicals, LPG, NGLs | 7,152 | 6,601 | 7,040 | 3,948 | ||||||||||||||||||||||
| Other | 5,970 | 6,705 | 5,840 | 8,948 | ||||||||||||||||||||||
| Total production | 77,684 | 73,841 | 78,260 | 48,454 | ||||||||||||||||||||||
| Throughput (average barrels per day): | ||||||||||||||||||||||||||
| Crude Oil | 75,849 | 70,883 | 74,430 | 42,377 | ||||||||||||||||||||||
| Other feedstocks | 922 | 2,240 | 3,181 | 6,786 | ||||||||||||||||||||||
| Total throughput | 76,771 | 73,123 | 77,611 | 49,163 | ||||||||||||||||||||||
| Total refining revenue ($ in millions) | $ | 1,514.0 | $ | 687.4 | $ | 2,604.1 | $ | 1,007.1 | ||||||||||||||||||
| Cost of materials and other ($ in millions) | 1,271.3 | 668.4 | 2,319.1 | 974.0 | ||||||||||||||||||||||
| Total refining margin ($ in millions) | $ | 242.7 | $ | 19.0 | $ | 285.0 | $ | 33.1 | ||||||||||||||||||
| Per barrel of refined product sales: | ||||||||||||||||||||||||||
| Krotz Springs refining margin | $ | 35.20 | $ | 2.71 | $ | 20.24 | $ | 3.56 | ||||||||||||||||||
Direct operating expenses (3) | $ | 6.05 | $ | 3.96 | $ | 5.05 | $ | 5.19 | ||||||||||||||||||
| Crude Slate: (% based on amount received in period): | ||||||||||||||||||||||||||
| WTI Crude | 49.4 | % | 65.0 | % | 56.6 | % | 67.9 | % | ||||||||||||||||||
| Gulf Coast Sweet Crude | 40.6 | % | 33.5 | % | 38.2 | % | 30.9 | % | ||||||||||||||||||
| Other | 10.0 | % | 1.5 | % | 5.2 | % | 1.2 | % | ||||||||||||||||||
(1) Includes inter-refinery sales and sales to other segments which are eliminated in consolidation. See tables below.
(2) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. For further discussion, see Note 7 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
(3) Reflects the prior period conforming reclassification adjustment between operating expenses and general and administrative expenses.
59 | | | ||||
Management's Discussion and Analysis
Included in the refinery statistics above are the following inter-refinery and sales to other segments:
| Inter-refinery Sales | ||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| (in barrels per day) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||||||||
| Tyler refined product sales to other Delek refineries | 2,378 | 1,797 | 1,746 | 1,945 | ||||||||||||||||||||||
| El Dorado refined product sales to other Delek refineries | 1,531 | 961 | 1,201 | 704 | ||||||||||||||||||||||
| Big Spring refined product sales to other Delek refineries | 470 | 874 | 554 | 801 | ||||||||||||||||||||||
| Krotz Springs refined product sales to other Delek refineries | 1,061 | 590 | 783 | 297 | ||||||||||||||||||||||
| Refinery Sales to Other Segments | ||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| (in barrels per day) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||||||||
| Tyler refined product sales to other Delek segments | — | 897 | — | 909 | ||||||||||||||||||||||
| El Dorado refined product sales to other Delek segments | 9 | 11 | 8 | 9 | ||||||||||||||||||||||
| Big Spring refined product sales to other Delek segments | 22,647 | 22,179 | 22,209 | 22,145 | ||||||||||||||||||||||
| Krotz Springs refined product sales to other Delek segments | — | 2,069 | — | 2,038 | ||||||||||||||||||||||
| Pricing Statistics (average for the period presented) | ||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||||||||
| WTI — Cushing crude oil (per barrel) | $ | 108.74 | $ | 66.19 | $ | 102.02 | $ | 62.21 | ||||||||||||||||||
| WTI — Midland crude oil (per barrel) | $ | 108.50 | $ | 66.41 | $ | 101.81 | $ | 62.74 | ||||||||||||||||||
| WTS -- Midland crude oil (per barrel) | $ | 109.06 | $ | 66.57 | $ | 101.92 | $ | 62.73 | ||||||||||||||||||
| LLS (per barrel) | $ | 110.25 | $ | 68.04 | $ | 103.92 | $ | 64.21 | ||||||||||||||||||
| Brent crude oil (per barrel) | $ | 111.84 | $ | 69.08 | $ | 104.93 | $ | 65.22 | ||||||||||||||||||
| U.S. Gulf Coast 5-3-2 crack spread (per barrel) - utilizing HSD | $ | 34.05 | $ | 11.89 | $ | 26.12 | $ | 11.04 | ||||||||||||||||||
U.S. Gulf Coast 5-3-2 crack spread (per barrel) (1) | $ | 44.03 | $ | 16.72 | $ | 33.77 | $ | 15.20 | ||||||||||||||||||
U.S. Gulf Coast 3-2-1 crack spread (per barrel) (1) | $ | 42.44 | $ | 16.82 | $ | 32.56 | $ | 15.26 | ||||||||||||||||||
U.S. Gulf Coast 2-1-1 crack spread (per barrel) (1) | $ | 32.47 | $ | 8.68 | $ | 24.12 | $ | 7.91 | ||||||||||||||||||
| U.S. Gulf Coast Unleaded Gasoline (per gallon) | $ | 3.40 | $ | 1.99 | $ | 3.05 | $ | 1.85 | ||||||||||||||||||
| Gulf Coast Ultra low sulfur diesel (per gallon) | $ | 3.98 | $ | 1.95 | $ | 3.50 | $ | 1.83 | ||||||||||||||||||
| U.S. Gulf Coast high sulfur diesel (per gallon) | $ | 3.39 | $ | 1.67 | $ | 3.04 | $ | 1.58 | ||||||||||||||||||
Natural gas (per MMBtu) (2) | $ | 7.50 | $ | 2.98 | $ | 6.05 | $ | 2.85 | ||||||||||||||||||
(1) For our Tyler and El Dorado refineries, we compare our per barrel refining product margin to the Gulf Coast 5-3-2 crack spread consisting of WTI Cushing crude, U.S. Gulf Coast CBOB gasoline and U.S. Gulf Coast Pipeline No. 2 heating oil (ultra low sulfur diesel). For our Big Spring refinery, we compare our refined product margin to the Gulf Coast 3-2-1 crack spread consisting of WTI Cushing crude, Gulf Coast CBOB gasoline and Gulf Coast ultra low sulfur diesel, and for our Krotz Springs refinery, we compare our per barrel refined product margin to the Gulf Coast 2-1-1 crack spread consisting of LLS crude oil, Gulf Coast CBOB gasoline and U.S. Gulf Coast Pipeline No. 2 heating oil (high sulfur diesel). The Tyler refinery's crude oil input is primarily WTI Midland and East Texas, while the El Dorado refinery's crude input is primarily a combination of WTI Midland, local Arkansas and other domestic inland crude oil. The Big Spring refinery’s crude oil input is primarily comprised of WTS and WTI Midland. The Krotz Springs refinery’s crude oil input is primarily comprised of LLS and WTI Midland.
(2) One Million British Thermal Units ("MMBtu").
60 | | | ||||
Management's Discussion and Analysis
Refining Segment Operational Comparison of the Three and Six Months Ended June 30, 2022 versus the Three and Six Months Ended June 30, 2021
Net Revenues
Q2 2022 vs. Q2 2021
Net revenues for the refining segment increased by $2,394.8 million, or 99.1%, in the second quarter of 2022 compared to the second quarter of 2021, primarily driven by the following:
•increases in the average price of U.S. Gulf Coast gasoline of 71.2% ULSD of 104.0%, and HSD of 103.7% and
•an increase in total sales volumes of 2.2 million barrels.
Net revenues included sales to our retail segment of $160.1 million and $91.8 million, sales to our logistics segment of $143.9 million and $74.1 million, and sales to our other segment of $8.5 million and $22.9 million for the three months ended June 30, 2022 and June 30, 2021, respectively. We eliminate this intercompany revenue in consolidation.
YTD 2022 vs. YTD 2021
Net revenues for the refining segment increased by $4,148.4 million, or 99.8%, in the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily driven by the following:
•increases in the average price of U.S. Gulf Coast gasoline of 65.1%, ULSD of 91.0%, and HSD of 92.5%; and
•an increase in total sales volumes of 8.5 million barrels, where sales volumes were lower in the six months of 2021 due to severe weather impacting our refineries and turnaround activities at our El Dorado refinery.
Net revenues included sales to our retail segment of $271.9 million and $161.5 million, sales to our logistics segment of $249.6 million and $139.9 million and sales to our other segment of $16.6 million and $43.0 million for the six months ended June 30, 2022 and 2021, respectively. We eliminate this intercompany revenue in consolidation.
Cost of Materials and Other
Q2 2022 vs. Q2 2021
Cost of materials and other increased by $1,740.6 million, or 76.1%, in the second quarter of 2022 compared to the second quarter of 2021, primarily driven by the following:
•increases in the cost of WTI Cushing crude oil, from an average of $66.19 per barrel to an average of $108.74, or 64.3%, and increases in the cost of WTI Midland crude oil, from an average of $66.41 per barrel to an average of $108.50, or 63.4%; and
•an increase in sales volumes.
YTD 2022 vs. YTD 2021
Cost of materials and other increased by $3,402.5 million, or 87.2%, during the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily driven by the following:
•increases in the cost of WTI Cushing crude oil, from an average of $62.21 per barrel to an average of $102.02, or 64.0%;
•increases in the cost of WTI Midland crude oil, from an average of $62.74 per barrel to an average of $101.81, or 62.3%;
•an increase in sales volumes; and
•an increase in RINs expense primarily due to increased production.
61 | | | ||||
Management's Discussion and Analysis
Our refining segment has multiple service agreements with our logistics segment which, among other things, require the refining segment to pay terminalling and storage fees based on the throughput volume of crude and finished product in the logistics segment pipelines and the volume of crude and finished product stored in the logistics segment storage tanks, subject to minimum volume commitments. These costs and fees were $123.8 million and $101.9 million during the second quarters of 2022 and 2021, respectively, and $247.2 million and $197.7 million during the six months ended June 30, 2022 and 2021, respectively. We eliminate these intercompany fees in consolidation.
Refining Margin
Q2 2022 vs. Q2 2021
Refining margin increased by $654.2 million, or 506.7%, in the second quarter of 2022 compared to the second quarter of 2021, primarily driven by the following:
•a 186.4% improvement in the 5-3-2 crack spread (the primary measure for the Tyler refinery and El Dorado refinery), a 152.3% improvement in the average Gulf Coast 3-2-1 crack spread (the primary measure for the Big Spring refinery), and a 274.1% improvement in the average Gulf Coast 2-1-1 crack spread (the primary measure for the Krotz Springs refinery) and;
•an increase in utilization and sales volumes.
(1) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. For further discussion, see Note 7 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
62 | | | ||||
Management's Discussion and Analysis
YTD 2022 vs. YTD 2021
Refining margin increased by $745.9 million, or 293.4%, in the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily driven by the following:
•a 136.6% improvement in the 5-3-2 crack spread (the primary measure for the Tyler refinery and El Dorado refinery), a 113.4% improvement in the average Gulf Coast 3-2-1 crack spread (the primary measure for the Big Spring refinery), and a 204.9% improvement in the average Gulf Coast 2-1-1 crack spread (the primary measure for the Krotz Springs refinery) and;
•an increase in sales volumes.
Such increase was partially offset by an increase in RINs expense primarily due to increased production.
(1) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. For further discussion, see Note 7 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
63 | | | ||||
Management's Discussion and Analysis
Operating Expenses
Q2 2022 vs. Q2 2021
Operating expenses increased by $50.0 million, or 43.5%, in the second quarter of 2022 compared to the second quarter of 2021, primarily driven by the following:
•increase in variable costs and utilities associated with higher throughput during the current period; and
•higher natural gas prices in the second quarter of 2022.
YTD 2022 vs. YTD 2021
Operating expenses increased by $55.2 million, or 24.0%, during the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily driven by the following:
•increase in variable costs and utilities associated with higher throughput during the current period; and
•higher natural gas prices in the six months ended June 30, 2022 compared to the prior year for the same period.
Contribution Margin
Q2 2022 vs. Q2 2021
Contribution margin increased by $604.2 million, or a 12.3% improvement in contribution margin percentage, in the second quarter of 2022 compared to the second quarter of 2021, primarily driven by an increase in refining margin primarily driven by improved crack spreads, increased sales volumes, offset by increase in variable costs and utilities and natural gas prices.
YTD 2022 vs. YTD 2021
Contribution margin increased by $690.7 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily driven by an increase in refining margin primarily driven by improved crack spreads, increased sales volumes, offset by increase in variable costs and utilities, natural gas prices, and higher RINs expense primarily due to increased production.
64 | | | ||||
Management's Discussion and Analysis
| Logistics Segment | ||
The table below sets forth certain information concerning our logistics segment operations ($ in millions, except per barrel amounts):
| Logistics Contribution Margin and Operating Information | ||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Net revenues | $ | 266.7 | $ | 168.5 | $ | 473.3 | $ | 321.4 | ||||||||||||||||||
| Cost of materials and other | 176.4 | 88.8 | 302.6 | 169.9 | ||||||||||||||||||||||
| Operating expenses (excluding depreciation and amortization) | 21.0 | 15.5 | 39.1 | 30.4 | ||||||||||||||||||||||
Contribution margin | $ | 69.3 | $ | 64.2 | $ | 131.6 | $ | 121.1 | ||||||||||||||||||
| Operating Information: | ||||||||||||||||||||||||||
East Texas - Tyler Refinery sales volumes (average bpd) (1) | 63,502 | 74,565 | 67,021 | 73,271 | ||||||||||||||||||||||
Big Spring wholesale marketing throughputs (average bpd) | 78,634 | 75,136 | 77,100 | 74,038 | ||||||||||||||||||||||
West Texas wholesale marketing throughputs (average bpd) | 10,073 | 9,395 | 9,994 | 9,765 | ||||||||||||||||||||||
West Texas wholesale marketing margin per barrel | $ | 2.67 | $ | 4.24 | $ | 2.85 | $ | 3.81 | ||||||||||||||||||
Terminalling throughputs (average bpd) (2) | 130,002 | 139,987 | 136,808 | 142,250 | ||||||||||||||||||||||
| Throughputs (average bpd): | ||||||||||||||||||||||||||
Lion Pipeline System: | ||||||||||||||||||||||||||
Crude pipelines (non-gathered) | 84,699 | 53,316 | 78,818 | 48,743 | ||||||||||||||||||||||
Refined products pipelines to Enterprise Systems | 64,821 | 39,193 | 62,186 | 32,806 | ||||||||||||||||||||||
SALA Gathering System | 17,961 | 17,430 | 17,064 | 14,670 | ||||||||||||||||||||||
East Texas Crude Logistics System | 19,942 | 27,497 | 18,010 | 26,790 | ||||||||||||||||||||||
Big Spring Gathering Assets (3) | 101,236 | 79,589 | 100,783 | 76,672 | ||||||||||||||||||||||
| Plains Connection System | 154,086 | 122,529 | 158,025 | 115,484 | ||||||||||||||||||||||
(1)Excludes jet fuel and petroleum coke.
(2)Consists of terminalling throughputs at our Tyler, Big Spring, Big Sandy and Mount Pleasant, Texas terminals, El Dorado and North Little Rock, Arkansas terminals and Memphis and Nashville, Tennessee terminals.
(3)Excludes volumes that are being temporarily transported via trucks while connectors are under construction.
Logistics Segment Operational Comparison of the Three and Six Months Ended June 30, 2022 versus the Three and Six Months Ended June 30, 2021
Net Revenues
Q2 2022 vs. Q2 2021
Net revenues increased by $98.2 million, or 58.3%, in the second quarter of 2022 compared to the second quarter of 2021, primarily driven by:
•increases in the average sales prices per gallon of gasoline and diesel sold and volumes of gasoline sold, partially offset by a decrease in the volumes of diesel sold in our West Texas marketing operations;
•incremental revenues from the 3 Bear Acquisition; and
•increases in pipeline throughputs.
Net revenues included sales to our refining segment of $123.8 million and $101.9 million for the three months ended June 30, 2022 and June 30, 2021, respectively. We eliminate this intercompany revenue in consolidation.
YTD 2022 vs. YTD 2021
Net revenues increased by $151.9 million, or 47.3%, in the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily driven by the following:
•increases in the average sales prices per gallon of gasoline and diesel sold and volume of diesel sold, partially offset by a decrease in the volume of gasoline sold in our West Texas marketing operations;
•incremental revenues from the 3 Bear Acquisition; and
•increases in pipeline throughputs, where the six months ended June 30, 2021 were negatively impacted by the Pandemic as well as severe weather events.
65 | | | ||||
Management's Discussion and Analysis
Net revenues included sales to our refining segment of $247.2 million and $197.7 million for the six months ended June 30, 2022 and 2021, respectively, and sales to our other segment of $0.9 million and $0.9 million for the six months ended June 30, 2022 and 2021, respectively. We eliminate this intercompany revenue in consolidation.
Cost of Materials and Other
Q2 2022 vs. Q2 2021
Cost of materials and other for the logistics segment increased by $87.6 million, or 98.6%, in the second quarter of 2022 compared to the second quarter of 2021 primarily driven by the following:
•increases in the average cost per gallon of gasoline and diesel sold, and increases in the volume of gasoline sold in our West Texas marketing operations:
◦the average cost per gallon of gasoline and diesel sold increased $1.35 per gallon and $2.04 per gallon, respectively;
◦the average volumes of gasoline and diesel sold increased by 2.2 million gallons and 0.4 million gallons, respectively, and;
•incremental cost of materials and other from the 3 Bear Acquisition.
Our logistics segment purchased product from our refining segment of $143.9 million and $74.1 million for the three months ended June 30, 2022 and June 30, 2021, respectively. We eliminate these intercompany costs in consolidation.
YTD 2022 vs. YTD 2021
Cost of materials and other for the logistics segment increased by $132.7 million, or 78.1%, in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 primarily driven by the following:
•increases in the average cost per gallon of gasoline and diesel sold, partially offset by decreases in the average volumes of gasoline sold in our West Texas marketing operations:
◦the average cost per gallon of gasoline and diesel sold increased $1.18 per gallon and $1.64 per gallon, respectively;
◦the average volumes of diesel sold increased by 2.9 million gallons, while gasoline volumes sold decreased by 1.2 million gallons; and
•incremental cost of materials and other from the 3 Bear Acquisition.
66 | | | ||||
Management's Discussion and Analysis
Our logistics segment purchased product from our refining segment of $249.6 million and $139.9 million for the six months ended June 30, 2022 and June 30, 2021, respectively. We eliminate these intercompany costs in consolidation.
Operating Expenses
Q2 2022 vs. Q2 2021
Operating expenses increased by $5.5 million, or 35.5%, in the second quarter of 2022 compared to the second quarter of 2021, driven by the following:
•increase due to additional expenses associated with 3 Bear Acquisition;
•increases in employee and outside service costs after cost cutting measures previously implemented to respond to the COVID-19 Pandemic, including delaying non-essential projects, ended;
•increase in energy costs, due to higher natural gas prices; and
•increases in utilities, maintenance and other variable expenses due to higher throughput.
YTD 2022 vs. YTD 2021
Operating expenses increased by $8.7 million, or 28.6%, in the six months ended June 30, 2022 compared to the six months ended June 30, 2021, driven by the following:
•increase due to additional expenses associated with 3 Bear Acquisition;
•increases in employee and outside service costs; and
•increases in variable expenses such as maintenance and materials costs due to higher throughput.
Contribution Margin
Q2 2022 vs. Q2 2021
Contribution margin increased by $5.1 million in the second quarter of 2022 compared to the second quarter of 2021 primarily driven by the following:
•increases in revenue due to higher throughput volumes; and
•partially offset by increases in operating expense.
YTD 2022 vs. YTD 2021
Contribution margin increased by $10.5 million, or 8.7%, in the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily driven by the following:
•increases in revenue due to higher throughput volumes; and
•partially offset by increases in operating expense.
67 | | | ||||
Management's Discussion and Analysis
| Retail Segment | ||
The table below sets forth certain information concerning our retail segment operations (gross sales $ in millions):
| Retail Contribution Margins | ||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Net revenues | $ | 277.1 | $ | 209.0 | $ | 486.6 | $ | 383.8 | ||||||||||||||||||
Cost of materials and other | 233.8 | 164.7 | 406.8 | 301.2 | ||||||||||||||||||||||
Operating expenses (excluding depreciation and amortization) | 25.1 | 22.4 | 47.8 | 44.0 | ||||||||||||||||||||||
Contribution margin | $ | 18.2 | $ | 21.9 | $ | 32.0 | $ | 38.6 | ||||||||||||||||||
| Operating Information | ||||||||||||||||||||||||||
Number of stores (end of period) | 248 | 252 | 248 | 252 | ||||||||||||||||||||||
Average number of stores | 248 | 252 | 248 | 252 | ||||||||||||||||||||||
Average number of fuel stores | 243 | 247 | 243 | 247 | ||||||||||||||||||||||
Retail fuel sales | $ | 193.6 | $ | 124.5 | $ | 333.5 | $ | 224.6 | ||||||||||||||||||
Retail fuel sales (thousands of gallons) | 44,911 | 42,978 | 84,416 | 82,744 | ||||||||||||||||||||||
Average retail gallons sold per average number of fuel stores (in thousands) | 185 | 174 | 348 | 336 | ||||||||||||||||||||||
Average retail sales price per gallon sold | $ | 4.31 | $ | 2.90 | $ | 3.95 | $ | 2.71 | ||||||||||||||||||
Retail fuel margin ($ per gallon) (1) | $ | 0.329 | $ | 0.389 | $ | 0.322 | $ | 0.370 | ||||||||||||||||||
Merchandise sales (in millions) | $ | 83.4 | $ | 84.5 | $ | 153.1 | $ | 159.2 | ||||||||||||||||||
Merchandise sales per average number of stores (in millions) | $ | 0.3 | $ | 0.3 | $ | 0.6 | $ | 0.6 | ||||||||||||||||||
Merchandise margin % | 34.0 | % | 32.7 | % | 34.3 | % | 32.7 | % | ||||||||||||||||||
Same-Store Comparison (2) | ||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
Change in same-store fuel gallons sold | 5.8 | % | 1.3 | % | 3.4 | % | (10.7) | % | ||||||||||||||||||
Change in same-store merchandise sales | 0.1 | % | (5.4) | % | (2.4) | % | (1.9) | % | ||||||||||||||||||
(1)Retail fuel margin represents gross margin on fuel sales in the retail segment, and is calculated as retail fuel sales revenue less retail fuel cost of sales. The retail fuel margin per gallon calculation is derived by dividing retail fuel margin by the total retail fuel gallons sold for the period.
(2)Same-store comparisons include period-over-period changes in specified metrics for stores that were in service at both the beginning of the earliest period and the end of the most recent period used in the comparison.
Retail Segment Operational Comparison of the Three and Six Months Ended June 30, 2022 versus the Three and Six Months Ended June 30, 2021
Net Revenues
Q2 2022 vs. Q2 2021
Net revenues for the retail segment increased by $68.1 million, or 32.6%, in the second quarter of 2022 compared to the second quarter of 2021, primarily driven by the following:
•an increase in total fuel sales which were $193.6 million in the second quarter of 2022 compared to $124.5 million in the second quarter of 2021, primarily attributable to an increase of $1.41 in average price charged per gallon sold; and
•slightly offset by a decrease in merchandise sales to $83.4 million in the second quarter of 2022 compared to $84.5 million in the second quarter of 2021
68 | | | ||||
Management's Discussion and Analysis
2022 vs. YTD 2021
Net revenues for the retail segment increased by $102.8 million, or 26.8%, in the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily driven by the following:
•an increase in total fuel sales which were $333.5 million in the six months of 2022 compared to $224.6 million in the six months of 2021, primarily attributable to a $1.24 increase in average price charged per gallon sold; and
•offset by a decrease in merchandise sales to $153.1 million in the six months of 2022 compared to $159.2 million in the six months of 2021, primarily driven by the same-store sales decrease of 2.4%.
Cost of Materials and Other
Q2 2022 vs. Q2 2021
Cost of materials and other for the retail segment increased by $69.1 million, or 42.0%, in the second quarter of 2022 compared to the second quarter of 2021, primarily driven by an increase in average cost per gallon of $1.47 or 58.8% applied to fuel sales volumes that increased period over period. Our retail segment purchased finished product from our refining segment of $160.1 million and $91.8 million for the three months ended June 30, 2022 and June 30, 2021, respectively, which is eliminated in consolidation.
YTD 2022 vs. YTD 2021
Cost of materials and other for the retail segment increased by $105.6 million, or 35.1%, in the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily driven by an increase in average cost per gallon of $1.28 or 54.7% applied to fuel sales volumes that increased period over period. Our retail segment purchased finished product from our refining segment of $271.9 million and $161.5 million for the six months ended June 30, 2022 and June 30, 2021, respectively, which is eliminated in consolidation.
Operating Expenses
Q2 2022 vs. Q2 2021
Retail segment operating expenses increased by $2.7 million, or 12.1%, in the second quarter of 2022 compared to the second quarter of 2021, primarily due to increased salary cost.
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Management's Discussion and Analysis
YTD 2022 vs. YTD 2021
Operating expenses for the retail segment increased by $3.8 million, or 8.6% in the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to increased salary cost.
Contribution Margin
Q2 2022 vs. Q2 2021
Contribution margin for the retail segment decreased by $3.7 million, or 16.9%, in the second quarter of 2022 compared to the second quarter of 2021, primarily driven by the following:
•a 1.3% decrease in merchandise sales, offset by an improvement in merchandise margin percentage of 1.3%; and
•a decrease in the average fuel margin of $0.060 per gallon, partially offset by an increase in fuel sales volume.
YTD 2022 vs. YTD 2021
Contribution margin for the retail segment decreased by $6.6 million, or 17.1%, in the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily driven by the following:
•a 3.8% decrease in merchandise sales, partially offset by an improvement in merchandise margin percentage of 1.6%; and
•a decrease in average fuel margin of $0.048 per gallon, partially offset by an increase in fuel sales volume.
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources are
•cash generated from our operating activities;
•borrowings under our debt facilities; and
•potential issuances of additional equity and debt securities.
At June 30, 2022 our total liquidity amounted to $2.0 billion comprised primarily of $636.1 million in unused credit commitments under the Delek Revolving Credit Facility (as defined in Note 9 of the condensed consolidated financial statements in Item 1. Financial Statements), $119.1 million in unused credit commitments under the Delek Logistics Credit Facility (as defined in Note 9 of the condensed consolidated financial statements in Item 1. Financial Statements) and $1,244.6 million in cash and cash equivalents. Historically, we have generated adequate cash from operations to fund ongoing working capital requirements and pay quarterly cash dividends and operational capital expenditures. In response to the COVID-19 Pandemic and the decline in oil prices, on November 5, 2020, we announced that we elected to suspend dividends in order to conserve capital. On June 21, 2022, our Board of Directors voted to declare a special cash dividend of $0.20 per share of our common stock, payable on July 20, 2022 to shareholders of record on July 12, 2022. Return of cash to shareholders remains a priority for the Company along with maintaining a strong and flexible balance sheet. On August 1, 2022, our Board voted to reinstate the quarterly cash dividend and declared a quarterly cash dividend of $0.20 per share of our common stock, payable on September 6, 2022 to shareholders of record on August 22, 2022. In addition, on August 1, 2022, the Board approved an approximately $170.0 million increase in its share repurchase authorization, bringing the total amount available for repurchases under current authorizations to $400.0 million. Other funding sources including borrowings under existing credit agreements and issuance of equity and debt securities have been utilized to meet our funding requirements and support our growth capital projects and acquisitions. In addition,
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Management's Discussion and Analysis
we have historically been able to source funding that terms that reflect market conditions, our financial position and our credit ratings. We continue to monitor market conditions, our financial position and our credit ratings and expect future funding sources to be at terms that are sustainable and profitable for the Company. However, there can be no assurances regarding the availability of any future debt or equity financings or whether such financings can be made available on terms that are acceptable to us; any execution of such financing activities will be dependent on the contemporaneous availability of functioning debt or equity markets. Additionally, new debt financing activities will be subject to the satisfaction of any debt incurrence limitation covenants in our existing financing agreements. Our debt limitation covenants in our existing financing documents are usual and customary for credit agreements of our type and reflective of market conditions at the time of their execution. Additionally, our ability to satisfy working capital requirements, to service our debt obligations, to fund planned capital expenditures, or to pay dividends will depend upon future operating performance, which will be affected by prevailing economic conditions in the oil industry and other financial and business factors, including the current COVID-19 Pandemic and oil prices, some of which are beyond our control.
If market conditions were to change, for instance due to the uncertainty created by the COVID-19 Pandemic or the Russia-Ukraine War, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be unfavorably impacted.
As of June 30, 2022, we believe we were in compliance with all of our debt maintenance covenants, where the most significant long-term obligation subject to such covenants was the Delek Logistics Credit Facility (see Note 9 of the condensed consolidated financial statements in Item 1. Financial Statements). We currently expect to remain in compliance with our existing debt maintenance covenants, though we can provide no assurances, particularly if conditions significantly worsen beyond our ability to predict. Additionally, we were in compliance with incurrence covenants during the quarter ended June 30, 2022 to the extent that any of our activities triggered these covenants. However, given the uncertainty around economic conditions, it is at least reasonably possible that conditions could change significantly, and that such changes could adversely impact our ability to meet some of these incurrence covenants. Inability to meet the incurrence covenants could impose certain incremental restrictions on our ability to incur new debt and also may limit whether and the extent to which we may pay dividends, as well as impose additional restrictions on our ability to repurchase our stock, make new investments and incur new liens (among others). Such restrictions would generally remain in place until such quarter that we are able to satisfy the applicable incurrence based covenants. In the event that we are subject to these incremental restrictions, we believe that we have sufficient current and alternative sources of liquidity, including (but not limited to) the following: available borrowings under our existing Wells Fargo Revolving Credit Facility, and for Delek Logistics, under its Delek Logistics Credit Facility (each as defined in Note 9 of the condensed consolidated financial statements in Item 1. Financial Statements); the allowance to incur additional secured debt under the Term Loan Credit Facility (as defined in Note 9 of the condensed consolidated financial statements in Item 1. Financial Statements); as well as the possibility of obtaining other secured and unsecured debt, raising capital through equity issuance, or taking advantage of transactional financing opportunities such as sale-leasebacks, each as otherwise contemplated and allowed under our incurrence covenants.
Cash Flows
The following table sets forth a summary of our consolidated cash flows (in millions):
| Consolidated | ||||||||||||||
| Six Months Ended June 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Cash Flow Data: | ||||||||||||||
| Operating activities | $ | 585.9 | $ | 134.9 | ||||||||||
| Investing activities | (720.9) | (118.7) | ||||||||||||
| Financing activities | 523.1 | 29.3 | ||||||||||||
| Net increase | $ | 388.1 | $ | 45.5 | ||||||||||
Cash Flows from Operating Activities
Net cash provided by operating activities was $585.9 million for the six months ended June 30, 2022, compared to net cash used of $134.9 million for the comparable period of 2021. The increase in cash provided by operating activities was primarily due to an increase in cash receipts from customers and cash payments to suppliers and for salaries resulting in a net $472.0 million increase in cash provided by operating activities. Additionally, income taxes paid increased $5.2 million and dividends received decreased $3.9 million.
Cash Flows from Investing Activities
Net cash used in investing activities was $720.9 million for the first six months of 2022, compared to $118.7 million in the comparable period of 2021. The increase in cash flows used in investing activities was primarily due to the $621.7 million acquisition of 3 Bear, partially offset by a $34.6 million decrease in purchases of property, plant and equipment, partially attributable to delaying non-essential projects in light of the COVID-19 Pandemic and a $9.8 million decrease in proceeds from sale of property, plant and equipment.
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Cash Flows from Financing Activities
Net cash provided by financing activities was $523.1 million for the six months ended June 30, 2022, compared to cash provided of $29.3 million in the comparable 2021 period. This increase in cash provided was primarily due to net proceeds on our revolvers and term debt of $596.2 million during the six months ended June 30, 2022, compared to net proceeds of $101.5 million in the comparable 2021 period and $16.4 million in proceeds from the sale of Delek Logistics limited partner units in the current period, partially offset by a $158.8 million decrease in net proceeds from inventory financing arrangements and the purchase of Delek common stock from IEP Energy Holding, LLC for $64.0 million in the current period.
Cash Position, Indebtedness and Other Financing Arrangements
As of June 30, 2022, our total cash and cash equivalents were $1,244.6 million and we had total long-term indebtedness of approximately $2,817.7 million. The total long-term indebtedness is net of deferred financing costs and debt discount of $10.0 million and $15.7 million, respectively. Additionally, we had letters of credit issued of approximately $363.9 million. Total unused credit commitments or borrowing base availability, as applicable, under our revolving credit facilities was approximately $755.2 million. Our total long-term indebtedness consisted of the following:
•an aggregate principal amount of $1,253.5 million under the Term Loan Credit Facility, due on March 30, 2025, with effective interest rate of 4.96%;
•an aggregate principal amount of $9.0 million in outstanding borrowings under the Delek Hapoalim Term Loan, due on December 31, 2022, with effective interest rate of 6.52%;
•an aggregate principal amount of $880.9 million under the Delek Logistics Credit Facility, due on September 28, 2023, with average borrowing rate of 3.35%;
•an aggregate principal amount of $250.0 million under the Delek Logistics 2025 Notes, due in 2025, with effective interest rate of 7.19%;
•an aggregate principal amount of $400.0 million under the Delek Logistics 2028 Notes, due in 2028, with effective interest rate of 7.40%;
•an aggregate principal amount of $50.0 million under the Reliant Bank Revolver, due on June 30, 2023, with fixed interest rate of 4.50%; and
•the Revolving Credit Facility, due on March 30, 2023, with borrowing rate of 5.00% for base rate loans, with a nominal principal amount outstanding.
See Note 9 of the condensed consolidated financial statements in Item 1. Financial Statements, for additional information about our separate credit facilities included in long-term indebtedness.
Additionally, we also utilize other financing arrangements to finance operating assets and/or, from time to time, to monetize other assets that may not be needed in the near term, when internal cost of capital and other criteria are met. Such arrangements include our supply and offtake arrangements, which finance a significant portion of our first-in, first-out inventory at the refineries and, from time to time, RINs or other non-inventory product financing liabilities. Our supply and offtake obligation with J. Aron amounted to $770.5 million at June 30, 2022, $537.4 million of which is due on December 30, 2022. (See Note 8 of the condensed consolidated financial statements in Item 1. Financial Statements, for additional information about our supply and offtake facilities). Our product financing liabilities consisted primarily of RIN financings as of June 30, 2022, and totaled $258.5 million, all of which is due by December 31, 2022. See further description of these types of arrangements in the Environmental Credits and Related Regulatory Obligations accounting policy disclosed in Note 2 to our audited consolidated financial statements included Item 8. Financial Statements and Supplementary Data, of our December 31, 2021 Annual Report on Form 10-K. For both arrangements and the related commitments, see also our "Contractual Obligations" section included in Item 2. Management's Discussion and Analysis.
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Management's Discussion and Analysis
Capital Spending
A key component of our long-term strategy is our capital expenditure program. Our capital expenditures for the six months ended June 30, 2022 were $93.3 million, of which approximately $33.3 million was spent in our refining segment, $35.8 million in our logistics segment, $9.0 million in our retail segment and $15.2 million primarily at the holding company level. The following table summarizes our actual capital expenditures for the six months ended June 30, 2022 and planned capital expenditures for the full year 2022 by operating segment and major category (in millions):
| Full Year 2022 Forecast | Six Months Ended June 30, 2022 | |||||||||||||
| Refining | ||||||||||||||
| Sustaining maintenance, including turnaround activities | $ | 79.0 | $ | 30.0 | ||||||||||
| Regulatory | 12.5 | 2.3 | ||||||||||||
| Discretionary projects | 2.8 | 1.0 | ||||||||||||
| Refining segment total | 94.3 | 33.3 | ||||||||||||
| Logistics | ||||||||||||||
| Regulatory | 5.4 | 2.4 | ||||||||||||
| Sustaining maintenance | 2.7 | 0.1 | ||||||||||||
| Discretionary projects | 108.0 | 33.3 | ||||||||||||
| Logistics segment total | 116.1 | 35.8 | ||||||||||||
| Retail | ||||||||||||||
| Regulatory | — | — | ||||||||||||
| Sustaining maintenance | 3.9 | 1.8 | ||||||||||||
| Discretionary projects | 35.1 | 7.2 | ||||||||||||
| Retail segment total | 39.0 | 9.0 | ||||||||||||
| Other | ||||||||||||||
| Regulatory | 2.3 | 1.1 | ||||||||||||
| Sustaining maintenance | 26.2 | 11.5 | ||||||||||||
| Discretionary projects | 14.4 | 2.6 | ||||||||||||
| Other total | 42.9 | 15.2 | ||||||||||||
| Total capital spending | $ | 292.3 | $ | 93.3 | ||||||||||
The amount of our capital expenditure budget is subject to change due to unanticipated increases in the cost, scope and completion time for our capital projects and subject to the changes and uncertainties discussed under the 'Forward-Looking Statements' section of Item 2, of this Quarterly Report on Form 10-Q.
We have no material off-balance sheet arrangements through the date of the filing of this Quarterly Report on Form 10-Q.
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Management's Discussion and Analysis
| Cash Requirements | ||
Long-Term Cash Requirements Under Contractual Obligations
Information regarding our known cash requirements under contractual obligations of the types described below as of June 30, 2022, is set forth in the following table (in millions):
| Payments Due by Period | ||||||||||||||||||||||||||||||||
| <1 Year | 1-3 Years | 3-5 Years | >5 Years | Total | ||||||||||||||||||||||||||||
Long term debt and notes payable obligations | $ | 72.0 | $ | 2,371.4 | $ | — | $ | 400.0 | $ | 2,843.4 | ||||||||||||||||||||||
Interest(1) | 117.0 | 165.9 | 65.4 | 47.8 | 396.1 | |||||||||||||||||||||||||||
Operating lease commitments(2)(7) | 156.0 | 176.7 | 99.3 | 33.1 | 465.1 | |||||||||||||||||||||||||||
Finance lease commitments(3) | 4.4 | 4.6 | 2.8 | 5.2 | 17.0 | |||||||||||||||||||||||||||
Purchase commitments(4) | 1,014.1 | 0.2 | — | — | 1,014.3 | |||||||||||||||||||||||||||
Product financing commitments(5) | 258.5 | — | — | — | 258.5 | |||||||||||||||||||||||||||
Transportation agreements(6) | 164.7 | 257.1 | 244.1 | 261.2 | 927.1 | |||||||||||||||||||||||||||
J. Aron supply and offtake obligations (7) | 552.8 | — | — | — | 552.8 | |||||||||||||||||||||||||||
| Total | $ | 2,339.5 | $ | 2,975.9 | $ | 411.6 | $ | 747.3 | $ | 6,474.3 | ||||||||||||||||||||||
(1) Expected interest payments on debt outstanding at June 30, 2022. Floating interest rate debt is calculated using June 30, 2022 rates. For additional information, see Note 9 of our condensed consolidated financial statements included in Item 1. Financial Statements, of this Quarterly Report on Form 10-Q.
(2) Amounts reflect future estimated lease payments under operating leases having remaining non-cancelable terms in excess of one year as of June 30, 2022.
(3) Amounts reflect future estimated lease payments under financing leases having remaining non-cancelable terms in excess of one year as of June 30, 2022.
(4) We have purchase commitments to secure certain quantities of crude oil, finished product and other resources used in production at both fixed and market prices. We have estimated future payments under the market-based agreements using current market rates. Excludes purchase commitments in buy-sell transactions which have matching notional amounts with the same counterparty and are generally net settled in exchanges.
(5) Balances consist of obligations under RINs product financing arrangements. For additional information, see Note 11 of our condensed consolidated financial statements included in Item 1. Financial Statements, of this Quarterly Report on Form 10-Q.
(6) Balances consist of contractual obligations under agreements with third parties (not including Delek Logistics) for the transportation of crude oil to our refineries.
(7) Balances consists of contractual obligations under the J. Aron Supply and Offtake Agreements, including annual fees and principal obligation for the Baseline Volume Step-Out Liability. For additional information, see Note 8 of our condensed consolidated financial statements included in Item 1. Financial Statements, of this Quarterly Report on Form 10-Q.
Other Cash Requirements
Our material short-term cash requirements under contractual obligations are presented above, and we expect to fund the majority of those requirements with cash flows from operations, with the exception of the supply and offtake obligations, which are expected to be refinanced. Our other cash requirements consisted of operating activities and capital expenditures. Operating activities include cash outflows related to payments to suppliers for crude and other inventories (which are largely reflected in our contractual purchase commitments in the table above) and payments for salaries and other employee related costs. In line with our Long-term Sustainable strategy, future cash requirements will include initiatives to build on our long term sustainable business model, ESG initiatives and digital transformation.
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Management's Discussion and Analysis
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
These disclosures should be read in conjunction with the condensed consolidated financial statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and other information presented herein, as well as in the "Quantitative and Qualitative Disclosures About Market Risk" section contained in our Annual Report on Form 10-K, filed on February 25, 2022.
Price Risk Management Activities
At times, we enter into the following instruments/transactions in order to manage our market-indexed pricing risk: commodity derivative contracts which we use to manage our price exposure to our inventory positions, future purchases of crude oil and ethanol, future sales of refined products or to fix margins on future production; and future commitments to purchase or sell RINs at fixed prices and quantities, which are used to manage the costs associated with our RINs obligations and meet the definition of derivative instruments under ASC 815, Derivatives and Hedging ("ASC 815"). In accordance with ASC 815, all of these commodity contracts and future purchase commitments are recorded at fair value, and any change in fair value between periods has historically been recorded in the profit and loss section of our condensed consolidated financial statements. Occasionally, at inception, the Company will elect to designate the commodity derivative contracts as cash flow hedges under ASC 815. Gains or losses on commodity derivative contracts accounted for as cash flow hedges are recognized in other comprehensive income on the condensed consolidated balance sheets and, ultimately, when the forecasted transactions are completed, in net revenues or cost of materials and other in the condensed consolidated statements of income.
The following table sets forth information relating to our open commodity derivative contracts, excluding our trading derivative contracts (which are presented separately below), as of June 30, 2022 ($ in millions):
| Total Outstanding | Notional Contract Volume by Year of Maturity | |||||||||||||||||||||||||||||||
| Contract Description | Fair Value | Notional Contract Volume | 2022 | 2023 | 2024 | |||||||||||||||||||||||||||
| Contracts not designated as hedging instruments: | ||||||||||||||||||||||||||||||||
Crude oil price swaps - long(1) | $ | (2.0) | 51,163,000 | 45,463,000 | 5,700,000 | — | ||||||||||||||||||||||||||
Crude oil price swaps - short(1) | 13.3 | 49,879,000 | 45,179,000 | 4,700,000 | — | |||||||||||||||||||||||||||
Inventory, refined product and crack spread swaps - long(1) | (29.6) | 3,395,000 | 3,395,000 | — | — | |||||||||||||||||||||||||||
Inventory, refined product and crack spread swaps - short(1) | 12.2 | 5,669,000 | 5,669,000 | — | — | |||||||||||||||||||||||||||
RIN commitment contracts - long(2) | 3.8 | 117,750,000 | 117,750,000 | — | — | |||||||||||||||||||||||||||
| Total | $ | (2.3) | 227,856,000 | 217,456,000 | 10,400,000 | — | ||||||||||||||||||||||||||
(1) Volume in barrels
(2) Volume in RINs
Interest Risk Management Activities
We have market exposure to changes in interest rates relating to our outstanding floating rate borrowings, which totaled approximately $2,143.4 million as of June 30, 2022. The annualized impact of a hypothetical one percent change in interest rates on our floating rate debt as of June 30, 2022 would be to change interest expense by approximately $21.4 million.
Inflation
Inflationary factors, such as increases in the costs of our inputs, operating expenses, and interest rates may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales if the prices at which we are able to sell our products and services does not increase in line with increases in costs.
LIBOR Transition
LIBOR is a commonly used indicative measure of the average interest rate at which major global banks could borrow from one another. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR discontinued the reporting of certain LIBOR rates on December 31, 2021, and has publicly announced that it intends to discontinue all USD LIBOR rates after June 2023. Certain of our agreements use LIBOR as a “benchmark” or “reference rate” for various terms. Some agreements contain an existing LIBOR alternative. Where there is not an alternative, we expect to replace the LIBOR benchmark with an alternative reference rate. While we do not expect the transition to an alternative rate to have a significant impact on our business or operations, it is possible that the move away from LIBOR could materially impact our borrowing costs on our variable rate indebtedness.
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Management's Discussion and Analysis
Commodity Derivatives Trading Activities
We enter into active trading positions in a variety of commodity derivatives, which include forward physical contracts, swap contracts, and futures contracts. These trading activities are undertaken by using a range of contract types in combination to create incremental gains by capitalizing on crude oil supply and pricing seasonality. These contracts are classified as held for trading and are recognized at fair value with changes in fair value recognized in the income statement.
The following table sets forth information relating to trading commodity derivative contracts as of June 30, 2022:
| Total Outstanding | Notional Contract Volume by Year of Maturity | |||||||||||||||||||||||||||||||||||||||||||
| Contract Description | Fair Value | Notional Contract Volume | 2022 | 2023 | 2024 | 2025 | 2026 | |||||||||||||||||||||||||||||||||||||
Crude forward contracts- long(1) | 64.0 | 723,921 | 723,921 | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Crude forward contracts- short(1) | 56.2 | 628,273 | 628,273 | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Total | $ | 120.2 | 1,352,194 | 1,352,194 | — | — | — | — | ||||||||||||||||||||||||||||||||||||
(1) Volume in barrels
ITEM 4. CONTROLS AND PROCEDURES
Our disclosure controls and procedures are designed to provide reasonable assurance that the information that we are required to disclose in reports we file under the Exchange Act is accumulated and appropriately communicated to management. We carried out an evaluation required by Rule 13a-15(b) of the Exchange Act, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures at the end of the reporting period. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the reporting period.
We acquired 3 Bear effective June 1 2022, and have included the operating results and assets and liabilities of 3 Bear in our consolidated financial statements as of June 30, 2022 and for the 30 days then ended. As permitted by SEC guidance for newly acquired businesses, management’s assessment of the Company’s disclosure controls and procedures did not include an assessment of those disclosure controls and procedures of 3 Bear that are subsumed by internal control over financial reporting. 3 Bear accounted for approximately 7.0% of total assets as of June 30, 2022 and approximately 0.2% of total revenues of the Company for the six months ended on June 30, 2022. Other than our internal controls for 3 Bear, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the second quarter of 2022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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Legal Proceedings, Risk Factors, Unregistered Sales of Equity Securities and Other Information
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary conduct of our business, we are from time to time subject to lawsuits, investigations and claims, including, environmental claims and employee-related matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, including civil penalties or other enforcement actions, we do not believe that any currently pending legal proceeding or proceedings to which we are a party will have a material adverse effect on our business, financial condition or results of operations. See Note 12 to our accompanying condensed consolidated financial statements, which is incorporated by reference in this Item 1, for additional information. Aside from the disclosure updated in Note 12, there have been no material developments to the proceedings previously reported in our Annual Report on Form 10-K filed on February 25, 2022.
ITEM 1A. RISK FACTORS
There were no material changes during the six months ended June 30, 2022 to the risk factors identified in the Company’s fiscal 2021 Annual Report on Form 10-K, except as described below.
We may be unsuccessful in integrating the operations of the assets we have acquired or may acquire with our operations, and in realizing all or any part of the anticipated benefits of any such acquisitions.
From time to time, we evaluate and acquire assets and businesses that we believe complement our existing assets and businesses. Acquisitions may require substantial capital or the incurrence of substantial indebtedness. Our capitalization and results of operations may change significantly as a result of completed or future acquisitions. Acquisitions and business expansions involve numerous risks, including difficulties in the assimilation of the assets and operations of the acquired businesses, inefficiencies and difficulties that arise because of unfamiliarity with new assets and the businesses associated with them, and new geographic areas and the diversion of management's attention from other business concerns. Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined, and we may experience unanticipated delays in realizing the benefits of an acquisition. Also, following an acquisition, we may discover previously unknown liabilities associated with the acquired business or assets for which we have no recourse under applicable indemnification provisions.
On June 1 2022, a subsidiary of Delek Logistics acquired 100% of the equity interests of 3 Bear Delaware Holding – NM, LLC (the “3 Bear Acquisition”), an indirect subsidiary of 3 Bear Energy, LLC (“3 Bear”).
The 3 Bear Acquisition will require the management of Delek Logistics, which includes certain members of our management who provide management services to Delek Logistics, to devote significant attention and resources to integrating the 3 Bear business with its business. Potential difficulties that may be encountered in the integration process include, among others:
• the inability to successfully integrate the 3 Bear business into its business in a manner that permits Delek Logistics to achieve the revenue and cost savings that it announced as anticipated from the acquisition;
• complexities associated with managing the larger, integrated business;
• potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the acquisition;
• integrating personnel from the two companies while maintaining focus on providing consistent, high-quality products and services;
• loss of key employees;
• integrating relationships with customers, vendors and business partners;
• performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the acquisition and the integration of operations; and
• the disruption or loss in momentum in, each company’s ongoing business or inconsistencies in standards, controls, procedures and policies.
Delays or difficulties in the integration process could adversely affect our business, financial condition, and results of operations. There can be no assurance that the acquisition will result in the realization of the full benefits of the synergies, cost savings, innovation and operational efficiencies that are currently expected from this integration or the have been communicated with respect to this acquisition or that these benefits will be achieved within the anticipated timeframe.
The Russia-Ukraine War, and events occurring in response thereto, including sanctions brought by the United States and other countries against Russia and any expansion of hostilities, may have an adverse impact on our business, our future results of operations, and our overall financial performance.
The effects of the military conflict that began with the Russian invasion of Ukraine in February 2022 on our business, financial condition, and results of operations are impossible to predict. Sanctions brought by the United States and other countries against Russia, any escalation of the conflict, including the regional or global expansion of hostilities, and other future developments could significantly affect the global economy, lead to market volatility and supply chain disruptions, have an adverse impact on energy prices, including prices for crude oil, other feedstocks, and refined petroleum products, have an adverse impact on the margins from our petroleum product marketing operations, and have a material adverse effect on our business, financial condition, and results of operations.
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The physical effects of climate change and severe weather present risks to our operations.
The potential physical effects of climate change and severe weather on our operations are highly uncertain and depend upon the unique geographic and environmental factors present. We have systems in place to manage potential acute physical risks, including those that may be caused by climate change, but if any such events were to occur, they could have an adverse effect on our assets and operations. Examples of potential physical risks include floods, hurricane-force winds, wildfires, freezing temperatures and snowstorms. We have incurred, and will continue to incur, costs to protect our assets from physical risks, and to employ processes, to the extent available, to mitigate such risks.
Any extreme weather events may disrupt the ability to operate our facilities or to transport crude oil, refined petroleum or petrochemical and plastics products in these areas. Extended periods of such disruption could have an adverse effect on our results of operations. We could also incur substantial costs to prevent or repair damage to these facilities. Finally, depending on the severity and duration of any extreme weather events or climate conditions, our operations may need to be modified and material costs incurred, which could materially and adversely affect our business, financial condition and results of operations.
There are certain environmental hazards and risks inherent in our operations that could adversely affect those operations and our financial results.
The operation of refineries, pipelines, terminals and vessels is inherently subject to the risks of spills, discharges or other inadvertent releases of petroleum or hazardous substances. If any of these events had previously occurred or occurs in the future in connection with any of our refineries, pipelines or refined petroleum products terminals, or in connection with any facilities that receive our wastes or byproducts for treatment or disposal, other than events for which we are indemnified, we could be liable for all costs and penalties associated with their remediation under federal, state, local and international environmental laws or common law, and could be liable for property damage to third parties caused by contamination from releases and spills.
ITEM 5. OTHER INFORMATION
None.
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Exhibits
ITEM 6. EXHIBITS
| Exhibit No. | Description | ||||||||||
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| 101 | The following materials from Delek US Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2022, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 (Unaudited), (ii) Condensed Consolidated Statements of Income for the three and six months ended June 30, 2022 and 2021 (Unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021 (Unaudited), (iv) Condensed Consolidated Statements of Changes in Stockholders' Equity for the three and six months ended June 30, 2022 and 2021 (Unaudited), (v) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (Unaudited), and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited). | ||||||||||
| 104 | The cover page from Delek US Holdings, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, has been formatted in Inline XBRL. | ||||||||||
| * | Management contract or compensatory plan or arrangement. | |||||||
| # | Filed herewith | |||||||
| ## | Furnished herewith | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Delek US Holdings, Inc. | |||||
| By: | /s/ Avigal Soreq | ||||
| Avigal Soreq | |||||
| President and Chief Executive Officer (Principal Executive Officer) | |||||
| By: | /s/ Reuven Spiegel | ||||
| Reuven Spiegel | |||||
| Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||||
| By: | /s/ Robert Wright | ||||
| Robert Wright | |||||
| Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) | |||||
Dated: August 5, 2022
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