Delek US(DK) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited financial statements, management's analysis of financial condition and operations, market risk disclosures, and internal controls Item 1. Financial Statements (unaudited) The company reported significant net losses for Q3 and YTD 2020, driven by lower revenues and margins due to adverse market conditions Condensed Consolidated Balance Sheets Total assets decreased to $6.53 billion from $7.02 billion, while stockholders' equity declined significantly due to net loss Condensed Consolidated Balance Sheet Highlights (In millions) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total current assets | $2,514.5 | $2,963.3 | | Total assets | $6,525.0 | $7,016.3 | | Total current liabilities | $1,814.2 | $2,355.9 | | Long-term debt, net | $2,440.6 | $2,030.7 | | Total liabilities | $5,104.7 | $5,181.0 | | Total stockholders' equity | $1,420.3 | $1,835.3 | Condensed Consolidated Statements of Operations The company reported a net loss of $88.1 million in Q3 2020 and $314.8 million YTD, a reversal from prior year net income Statement of Operations Summary (In millions, except per share data) | Metric | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Net revenues | $2,062.9 | $2,334.3 | $5,419.6 | $7,014.5 | | Operating (loss) income | $(75.2) | $87.4 | $(413.9) | $444.1 | | Net (loss) income attributable to Delek | $(88.1) | $51.3 | $(314.8) | $277.9 | | Diluted (loss) income per share | $(1.20) | $0.68 | $(4.28) | $3.60 | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities was $399.8 million for YTD 2020, a significant reversal from prior year cash generation Cash Flow Summary (Nine Months Ended Sep 30, In millions) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(399.8) | $448.4 | | Net cash used in investing activities | $(163.0) | $(509.5) | | Net cash provided by (used in) financing activities | $415.4 | $(11.8) | | Net decrease in cash and cash equivalents | $(147.4) | $(72.9) | Notes to Condensed Consolidated Financial Statements Notes detail COVID-19 impacts on estimates, refining segment decline, new JV, increased debt, and dividend suspension - The COVID-19 Pandemic and OPEC Production Disputes have created significant uncertainties impacting accounting estimates for credit losses, asset impairments (long-lived assets, goodwill), inventory valuation, and deferred tax assets[35] - On August 13, 2020, Delek Logistics eliminated its Incentive Distribution Rights (IDRs) in exchange for $45.0 million in cash and 14.0 million new common limited partner units, simplifying its capital structure[70] - The company suspended its quarterly dividend beginning in Q4 2020 to conserve capital in response to adverse market conditions[159] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes poor 2020 performance to COVID-19 and OPEC disputes, prompting reduced capex, dividend suspension, and cost cuts Executive Summary and Strategic Overview Operations were significantly impacted by COVID-19, prompting reduced capital expenditures, dividend suspension, and strategic asset sales - Management has taken several actions to mitigate the impact of the pandemic, including reducing planned capital expenditures for 2020, suspending the share repurchase program, taking advantage of CARES Act tax relief, and enacting cost reduction measures across the organization[176] - On May 7, 2020, the company sold its non-operating refinery in Bakersfield, California, for $40.0 million in cash, resulting in a gain of $56.8 million, largely due to the buyer assuming associated environmental and retirement liabilities[50][198] - The company entered into the W2W Holdings LLC joint venture with MPLX to obtain project financing for its 15% share of the Wink to Webster Pipeline construction costs[194] Market Trends Challenging market conditions in 2020 saw Gulf Coast crack spreads collapse and RINs costs rise, pressuring refining margins - Gulf Coast crack spreads, a key indicator of refining profitability, were significantly lower in Q3 2020 compared to Q3 2019, with the 3-2-1 crack spread averaged $8.15/bbl in Q3 2020 versus $17.55/bbl in Q3 2019[207][208] - The cost of RINs, an environmental compliance cost, increased substantially in 2020, with Ethanol RINs averaged $0.47 in Q3 2020, up from $0.17 in Q3 2019, negatively impacting refining margins[215][217] Results of Operations Consolidated results shifted to a net loss of $76.9 million in Q3 2020, primarily due to the refining segment's negative contribution margin Segment Contribution Margin (In millions) | Segment | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Refining | $(17.8) | $150.1 | $(248.5) | $650.1 | | Logistics | $67.2 | $46.6 | $175.9 | $130.9 | | Retail | $18.3 | $18.6 | $54.9 | $46.4 | - The refining segment's contribution margin swung to a loss of $17.8 million in Q3 2020 from a positive $150.1 million in Q3 2019, primarily due to a 50-70% decline in benchmark crack spreads and narrower crude oil differentials[280][291] - The logistics segment's contribution margin increased by 44.2% in Q3 2020 year-over-year, driven by revenues from the Big Spring Gathering System and Delek Trucking acquisitions, along with lower operating expenses[306] Liquidity and Capital Resources The company maintained $807.9 million in cash and $752.0 million in available borrowing capacity, while reducing 2020 capital expenditures - The company's 2020 capital spending forecast has been reduced from $325.7 million to $248.7 million in response to the uncertainties from the COVID-19 pandemic[336] Liquidity Position as of Sep 30, 2020 (In millions) | Item | Amount | | :--- | :--- | | Cash and cash equivalents | $807.9 | | Total long-term indebtedness | $2,474.0 | | Unused credit commitments | $752.0 | Quantitative and Qualitative Disclosures about Market Risk The company manages market risks from commodity prices and interest rates, with $2.19 billion in floating-rate debt exposed to rate changes - The company has significant exposure to interest rate changes on its floating-rate debt, which totaled approximately $2.19 billion; a hypothetical 1% change in interest rates would alter annual interest expense by about $21.9 million[341] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[343] PART II. OTHER INFORMATION This section details legal proceedings, key risk factors impacting the company, and other significant corporate information Legal Proceedings The company is involved in various legal proceedings but does not anticipate a material adverse effect on its financial condition - The company states that it does not expect any currently pending legal proceedings to have a material adverse effect on its business, financial condition, or results of operations[346] Risk Factors Key risk factors include the adverse impact of COVID-19, dividend suspension, operational concentration, and the stockholder rights plan - The COVID-19 pandemic and global oil market volatility are identified as having an adverse impact on the company's business, results of operations, and overall financial performance[347] - The company has suspended its quarterly dividend, and there is no assurance when dividends will be declared in the future, which may impact shareholder returns[350] - A stockholder rights plan (or "poison pill") was adopted on March 20, 2020, which could make it more difficult for a third party to acquire control of the company without board approval[351] Other Information The company entered a consulting agreement with a former EVP, and the CEO agreed to waive 33% of his base salary - Effective November 3, 2020, President and CEO Ezra Uzi Yemin agreed to waive 33% of his base compensation[356] Exhibits This section lists exhibits filed with the Form 10-Q, including agreements for IDR simplification and executive certifications