Delek US(DK) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition, results of operations, and market risks Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements of Delek US Holdings, Inc. for the periods ended June 30, 2021, including balance sheets, income statements, comprehensive income statements, statements of changes in stockholders' equity, and cash flow statements, along with detailed notes explaining the company's organization, accounting policies, segment data, and other financial disclosures Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (In millions) | Item | June 30, 2021 | December 31, 2020 | | :----------------------------------- | :------------ | :---------------- | | ASSETS | | | | Total current assets | $2,961.5 | $2,299.5 | | Property, plant and equipment, net | $2,362.6 | $2,367.2 | | Goodwill | $729.7 | $729.7 | | Total assets | $6,788.4 | $6,134.1 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total current liabilities | $2,791.3 | $1,903.2 | | Total non-current liabilities | $3,044.7 | $3,105.8 | | Total stockholders' equity | $952.4 | $1,125.1 | | Total liabilities and stockholders' equity | $6,788.4 | $6,134.1 | - Total assets increased by $654.3 million (10.7%) from December 31, 2020, to June 30, 2021, primarily driven by an increase in current assets, including cash and cash equivalents, accounts receivable, and inventories[9] - Total current liabilities significantly increased by $888.1 million (46.7%) from December 31, 2020, to June 30, 2021, mainly due to higher accounts payable and accrued expenses[9] Condensed Consolidated Statements of Income Condensed Consolidated Statements of Income (In millions, except per share data) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net revenues | $2,191.5 | $1,535.5 | $4,583.7 | $3,356.7 | | Total operating costs and expenses | $2,276.9 | $1,512.7 | $4,749.2 | $3,695.4 | | Operating (loss) income | $(85.4) | $22.8 | $(165.5) | $(338.7) | | Net (loss) income | $(72.5) | $98.5 | $(163.8) | $(208.5) | | Net (loss) income attributable to Delek | $(81.1) | $87.7 | $(179.7) | $(226.7) | | Basic (loss) income per share | $(1.10) | $1.19 | $(2.43) | $(3.08) | | Diluted (loss) income per share | $(1.10) | $1.18 | $(2.43) | $(3.08) | - For the three months ended June 30, 2021, the company reported a net loss of $72.5 million, a significant decline from a net income of $98.5 million in the prior-year period, primarily due to an operating loss of $85.4 million[12] - For the six months ended June 30, 2021, the net loss improved to $163.8 million from $208.5 million in the prior-year period, despite an operating loss of $165.5 million[12] Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income (In millions) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net (loss) income | $(72.5) | $98.5 | $(163.8) | $(208.5) | | Total other comprehensive (loss) gain | $— | $(0.7) | $(0.2) | $0.4 | | Comprehensive (loss) income | $(72.5) | $97.8 | $(164.0) | $(208.1) | | Comprehensive (loss) income attributable to Delek | $(81.1) | $87.0 | $(179.9) | $(226.3) | - Total comprehensive loss attributable to Delek for the three months ended June 30, 2021, was $81.1 million, compared to comprehensive income of $87.0 million in the same period of 2020[15] - For the six months ended June 30, 2021, total comprehensive loss attributable to Delek was $179.9 million, an improvement from a loss of $226.3 million in the prior-year period[15] Condensed Consolidated Statements of Changes in Stockholders' Equity Condensed Consolidated Statements of Changes in Stockholders' Equity (In millions, except share data) | Item | Balance at Dec 31, 2020 | Net (loss) income (6 months) | Other comprehensive loss (6 months) | Distributions to non-controlling interests (6 months) | Equity-based compensation expense (6 months) | Taxes paid due to net settlement of equity-based compensation (6 months) | Exercise of equity-based awards (6 months) | Other (6 months) | Balance at June 30, 2021 | | :----------------------------------- | :---------------------- | :--------------------------- | :---------------------------------- | :------------------------------------ | :----------------------------------- | :------------------------------------------------------- | :--------------------------------------- | :--------------- | :----------------------- | | Common Stock Shares | 91,356,868 | — | — | — | — | — | 280,793 | — | 91,637,661 | | Common Stock Amount | $0.9 | — | — | — | — | — | — | — | $0.9 | | Additional Paid-in Capital | $1,185.1 | — | — | — | $10.5 | $(3.0) | — | — | $1,192.6 | | Accumulated Other Comprehensive Income | $(7.2) | — | $(0.2) | — | — | — | — | — | $(7.4) | | Retained Earnings | $522.0 | $(179.7) | — | — | — | — | — | $(0.3) | $342.0 | | Treasury Stock Shares | (17,575,527) | — | — | — | — | — | — | — | (17,575,527) | | Treasury Stock Amount | $(694.1) | — | — | — | — | — | — | — | $(694.1) | | NonControlling Interest in Subsidiaries | $118.4 | $15.9 | — | $(15.9) | — | — | — | — | $118.4 | | Total Stockholders' Equity | $1,125.1 | $(163.8) | $(0.2) | $(15.9) | $10.5 | $(3.0) | — | $(0.3) | $952.4 | - Total stockholders' equity decreased by $172.7 million from $1,125.1 million at December 31, 2020, to $952.4 million at June 30, 2021, primarily due to a net loss of $163.8 million[21] - Equity-based compensation expense contributed $10.5 million to additional paid-in capital for the six months ended June 30, 2021[21] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (In millions) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $134.9 | $(323.1) | | Net cash used in investing activities | $(118.7) | $(155.9) | | Net cash provided by financing activities | $29.3 | $372.7 | | Net increase (decrease) in cash and cash equivalents | $45.5 | $(106.3) | | Cash and cash equivalents at the end of the period | $833.0 | $849.0 | - Net cash provided by operating activities significantly improved to $134.9 million for the six months ended June 30, 2021, compared to net cash used of $323.1 million in the prior-year period[25] - Net cash used in investing activities decreased to $118.7 million in 2021 from $155.9 million in 2020, while net cash provided by financing activities decreased substantially to $29.3 million from $372.7 million[25] Notes to Condensed Consolidated Financial Statements Note 1 - Organization and Basis of Presentation Delek US Holdings, Inc. operates through consolidated subsidiaries, including Delek US Energy and Alon USA Energy, with its common stock listed on the NYSE under 'DK', and prepares financial statements in accordance with GAAP, consolidating Delek and its subsidiaries, including Delek Logistics Partners, LP as a variable interest entity - Delek US Holdings, Inc. operates through consolidated subsidiaries, including Delek US Energy and Alon USA Energy, with its common stock listed on the NYSE under 'DK'[29] - The company's unaudited condensed consolidated financial statements are prepared in conformity with U.S. GAAP and include Delek Logistics Partners, LP as a consolidated variable interest entity (VIE)[29] - The COVID-19 Pandemic continues to pose uncertainties that could impact future results, affecting accounting policies such as impairment evaluations for intangibles, long-lived assets, and joint ventures, as well as inventory valuation allowances and deferred tax asset valuations[30][33] - ASU 2020-01, ASU 2019-12, and ASU 2018-14 were adopted on January 1, 2021, with no material impact on the company's financial condition or results of operations[34][35] Note 2 - Segment Data Delek aggregates its operations into three reportable segments: Refining, Logistics, and Retail, with other activities grouped under Corporate, Other and Eliminations, measuring segment performance by contribution margin - Delek operates through three reportable segments: Refining, Logistics, and Retail, with performance measured by segment contribution margin[37][39] - The Refining segment has a combined nameplate capacity of 302,000 barrels per day (bpd) across four refineries (Tyler, El Dorado, Big Spring, Krotz Springs) and operates three biodiesel facilities[40] - The Retail segment comprises 252 owned and leased convenience stores, primarily in Central and West Texas and New Mexico, selling gasoline, diesel, and various merchandise, with 7-Eleven branding to be removed by December 31, 2023[42] Segment Contribution Margin (In millions) | Segment | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Refining | $(19.9) | $59.7 | $(41.1) | $(230.7) | | Logistics | $64.2 | $61.4 | $121.9 | $108.7 | | Retail | $21.9 | $24.3 | $38.8 | $36.6 | | Corporate, Other and Eliminations | $(31.6) | $(15.5) | $(47.6) | $(28.6) | | Consolidated | $34.6 | $129.9 | $72.0 | $(114.0) | Note 3 - Earnings (Loss) Per Share Basic and diluted earnings per share (EPS) are calculated based on net income (loss) attributable to Delek and weighted average common shares outstanding, with certain stock-based compensation awards excluded from diluted EPS as antidilutive Earnings (Loss) Per Share (In millions, except share and per share data) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net (loss) income attributable to Delek | $(81.1) | $87.7 | $(179.7) | $(226.7) | | Weighted average common shares outstanding (basic) | 73,911,582 | 73,547,582 | 73,857,975 | 73,492,656 | | Diluted weighted average common shares outstanding | 73,911,582 | 74,028,043 | 73,857,975 | 73,492,656 | | Basic (loss) income per share | $(1.10) | $1.19 | $(2.43) | $(3.08) | | Diluted (loss) income per share | $(1.10) | $1.18 | $(2.43) | $(3.08) | - Antidilutive stock-based compensation, totaling 3,642,788 shares for the three months ended June 30, 2021, and 3,481,376 shares for the six months ended June 30, 2021, was excluded from diluted EPS calculations[53] Note 4 - Delek Logistics Delek Logistics, 80.0% owned by Delek and consolidated as the logistics segment, eliminated incentive distribution rights in August 2020 and made significant acquisitions in March and May 2020 - Delek owns an 80.0% interest in Delek Logistics, which is consolidated as a variable interest entity (VIE) and represents the company's logistics segment[56] - In August 2020, Delek Logistics eliminated incentive distribution rights (IDRs) and converted the economic general partner interest to non-economic, receiving $45.0 million cash and 14.0 million newly issued common limited partner units[56] - Delek Logistics acquired the Big Spring Gathering System for $100.0 million cash and 5.0 million common units in March 2020, and Delek Trucking for approximately $48.0 million cash in May 2020[60] Delek Logistics Condensed Consolidated Balance Sheets (In millions) | Item | June 30, 2021 | December 31, 2020 | | :----------------------------------- | :------------ | :---------------- | | Total assets | $935.5 | $956.4 | | Total liabilities and deficit | $935.5 | $956.4 | | Long-term debt | $928.7 | $992.3 | | Deficit | $(107.8) | $(108.3) | Note 5 - Equity Method Investments Delek holds several equity method investments, including a 15% ownership in Wink to Webster Pipeline LLC (WWP) and a 50% interest in the WWP Project Financing Joint Venture, along with interests in other pipeline and terminal assets - Delek Energy holds a 15% ownership interest in Wink to Webster Pipeline LLC (WWP) and a 50% interest in the WWP Project Financing Joint Venture, which is accounted for using the equity method[61] - Delek Logistics has a 33% membership interest in the Red River Pipeline Joint Venture, which completed an expansion project in August 2020, and recognized income of $6.0 million for the six months ended June 30, 2021[66] - Other equity method investments include a 50% interest in the Caddo Pipeline, a 33% interest in the Rio Pipeline, a 50% interest in a Brownwood, Texas asphalt terminal, and an investment in an ethanol unit train facility[66][67] Income from Equity Method Investments (In millions) | Investment | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 | | :----------------------------------- | :------------------------------- | :----------------------------- | | WWP Project Financing Joint Venture | $(3.9) | $(4.1) | | Red River Pipeline Joint Venture | $3.7 | $6.0 | | Caddo Pipeline & Rio Pipeline | $2.9 | $4.6 | | Brownwood Asphalt Terminal | $3.9 | $4.8 | | North Little Rock Ethanol Facility | $0.2 | $0.3 | Note 6 - Inventory The company's inventories are valued at the lower of cost or net realizable value, primarily using FIFO and LIFO for the Tyler refinery, with total inventories increasing to $1,031.2 million at June 30, 2021 - Inventories are valued at the lower of cost or net realizable value, with FIFO used for most operations and LIFO for the Tyler refinery[68] Carrying Value of Inventories (In millions) | Inventory Type | June 30, 2021 | December 31, 2020 | | :----------------------------------- | :------------ | :---------------- | | Refinery raw materials and supplies | $415.0 | $270.7 | | Refinery work in process | $140.2 | $92.1 | | Refinery finished goods | $437.1 | $327.1 | | Retail fuel | $9.3 | $6.2 | | Retail merchandise | $27.6 | $28.5 | | Logistics refined products | $2.0 | $3.1 | | Total inventories | $1,031.2 | $727.7 | - A pre-tax inventory valuation reserve of $0.9 million was recorded at June 30, 2021, a significant reduction from $31.1 million at December 31, 2020, which reversed in Q1 2021[71] Note 7 - Crude Oil Supply and Inventory Purchase Agreement Delek maintains Supply and Offtake Agreements with J. Aron & Company for its El Dorado, Big Spring, and Krotz Springs refineries, accounted for as inventory financing arrangements at fair value, with total obligations of $496.3 million at June 30, 2021 - Delek has Supply and Offtake Agreements with J. Aron & Company for its El Dorado, Big Spring, and Krotz Springs refineries, treated as inventory financing arrangements at fair value[72] - The agreements were amended in April 2020, extending terms to December 30, 2022, and modifying the fair value accounting for Baseline Step-Out Liabilities to reflect commodity price risk (floating component) and interest rate risk (fixed component)[72] - Periodic Price Adjustments can trigger payments or proceeds; $15.2 million of incremental proceeds were received from J. Aron on May 28, 2021[74] Obligations Under Supply and Offtake Agreements (In millions) | Item | June 30, 2021 | December 31, 2020 | | :----------------------------------- | :------------ | :---------------- | | Baseline Step-Out Liability | $329.0 | $224.9 | | Revolving over/short inventory financing liability | $167.3 | $122.8 | | Total Obligations Under Supply and Offtake Agreements | $496.3 | $347.7 | | Less: Current portion | $167.3 | $122.8 | | Noncurrent portion | $329.0 | $224.9 | Note 8 - Long-Term Obligations and Notes Payable Delek's long-term obligations include various credit facilities and notes totaling $2,197.9 million net of current portion at June 30, 2021, with the company believing it was in compliance with all debt covenants Outstanding Borrowings (In millions) | Debt Instrument | June 30, 2021 | December 31, 2020 | | :----------------------------------- | :------------ | :---------------- | | Revolving Credit Facility | $— | $— | | Term Loan Credit Facility | $1,243.4 | $1,246.8 | | Hapoalim Term Loan | $39.2 | $39.3 | | Delek Logistics Credit Facility | $288.8 | $746.6 | | Delek Logistics 2025 Notes | $246.2 | $245.7 | | Delek Logistics 2028 Notes | $393.7 | $— | | Reliant Bank Revolver | $33.0 | $50.0 | | Promissory Notes | $— | $20.0 | | Total long-term debt, net of current portion | $2,197.9 | $2,315.0 | - The Term Loan Credit Facility had $1,266.5 million outstanding at June 30, 2021, with a weighted average borrowing rate of approximately 3.00% and an effective interest rate of 3.53%[89] - Delek Logistics issued $400.0 million in 7.125% Senior Notes due 2028 on May 24, 2021, with an effective interest rate of 7.41%[96] - The company believes it was in compliance with all financial and non-financial covenants under its various debt agreements as of June 30, 2021[101] Note 9 - Derivative Instruments Delek utilizes derivative instruments to manage exposure to commodity price fluctuations, crack spreads, RINs obligations, and interest rate risk, with total gross fair value of derivatives at $178.2 million in assets and $(142.7) million in liabilities as of June 30, 2021 - Delek uses commodity swaps, futures, forward contracts, and options to manage commodity price, crack spread, RINs, and interest rate risks, primarily to reduce market volatility[102] - Gains and losses on commodity derivatives not designated as hedging instruments are recognized in cost of materials and other, except for Canadian crude trading operations, where they are recognized in other operating income, net[102][105] Fair Value of Derivative Instruments (In millions) | Derivative Type | June 30, 2021 Assets | June 30, 2021 Liabilities | December 31, 2020 Assets | December 31, 2020 Liabilities | | :----------------------------------- | :------------------- | :------------------------ | :----------------------- | :-------------------------- | | Commodity derivatives (not hedging) | $135.6 | $(140.7) | $1,397.7 | $(1,387.0) | | RIN commitment contracts | $42.6 | $(2.0) | $33.6 | $(22.5) | | Total gross fair value of derivatives | $178.2 | $(142.7) | $1,431.3 | $(1,409.5) | | Total net fair value of derivatives | $64.8 | $(21.3) | $73.0 | $(36.4) | Total Gains (Losses) on Hedging Derivatives and RINs Commitment Contracts (In millions) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Gains (losses) on derivatives not designated as hedging instruments recognized in cost of materials and other | $22.2 | $(156.6) | $79.6 | $(91.0) | | (Losses) gains on commodity derivatives not designated as hedging instruments recognized in other operating income, net | $(4.4) | $(3.7) | $(5.5) | $7.9 | | 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 | $— | $2.2 | $0.2 | $2.9 | | Total gains (losses) | $17.8 | $(158.1) | $74.3 | $(80.2) | Note 10 - Fair Value Measurements Delek applies ASC 820 for fair value measurements, categorizing assets and liabilities into Level 1, 2, or 3 based on input observability, with total net fair value of assets and liabilities at $(600.6) million as of June 30, 2021 - Delek categorizes fair value measurements into Level 1, 2, or 3 based on input observability, with commodity derivatives, RINs commitment contracts, and environmental credits obligations primarily classified as Level 2[110][113] - The J. Aron supply and offtake liability is measured at fair value, with changes related to commodity-index price recorded in cost of materials and other, and changes due to interest rate risk recorded in interest expense[113] Fair Value Hierarchy for Financial Assets and Liabilities (In millions) | Item | June 30, 2021 Level 2 | December 31, 2020 Level 2 | | :----------------------------------- | :-------------------- | :------------------------ | | Assets | | | | Commodity derivatives | $135.6 | $1,397.7 | | RINs commitment contracts | $42.6 | $33.6 | | Total assets | $178.2 | $1,431.3 | | Liabilities | | | | Commodity derivatives | $(140.7) | $(1,387.0) | | RINs commitment contracts | $(2.0) | $(22.5) | | Environmental credits obligation deficit | $(139.8) | $(59.6) | | J. Aron supply and offtake obligations | $(496.3) | $(354.1) | | Total liabilities | $(778.8) | $(1,823.2) | | Net assets (liabilities) | $(600.6) | $(391.9) | Note 11 - Commitments and Contingencies Delek is subject to various lawsuits, investigations, and claims, including environmental matters, but does not anticipate a material adverse effect on its financial statements, with environmental liabilities totaling $112.0 million at June 30, 2021 - Delek is involved in various legal proceedings, including an easement dispute with $6.4 million in assessed damages and a class action settlement for $44.8 million, of which $42.5 million is covered by insurance[117] - As of June 30, 2021, the company has recorded an environmental liability of approximately $112.0 million, primarily for remediation costs at refineries and terminals[121] - The El Dorado refinery experienced a fire in February 2021, causing operational disruptions and $3.8 million in workers' compensation losses and $1.0 million in accelerated depreciation, with ongoing efforts to determine insurance recoveries[125] - Winter Storm Uri in February 2021 temporarily impacted all refineries, causing reduced throughputs, increased natural gas costs, and damages, with potential business interruption and property and casualty losses subject to insurance recoveries[126] Note 12 - Income Taxes Delek's effective tax rate was 38.8% for Q2 2021 and 26.3% for YTD 2021, influenced by valuation allowance reversals and prior-year net operating loss carryback benefits, with $156.2 million in federal income tax refunds received in July and August 2021 Effective Tax Rate | Period | 2021 | 2020 | | :----------------------------------- | :--- | :--- | | Three Months Ended June 30, | 38.8% | (57.3)% | | Six Months Ended June 30, | 26.3% | 36.3% | - The change in effective tax rate was primarily driven by the reversal of a valuation allowance for deferred tax assets in partnership investments and a federal net operating loss carryback to a prior 35% tax rate year in 2020[129] - Delek received $156.2 million in federal income tax refunds in July and August 2021, related to the net operating loss carryback provisions of the CARES Act[129][147] Note 13 - Related Party Transactions Related party transactions primarily involve equity method investees, with revenues of $19.2 million and cost of materials and other of $9.9 million for Q2 2021 Related Party Transactions (In millions) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues | $19.2 | $22.2 | $29.6 | $29.9 | | Cost of materials and other | $9.9 | $11.4 | $25.0 | $20.5 | - Revenues primarily consist of asphalt sales, while cost of materials and other primarily includes pipeline throughput fees paid by the refining segment and asphalt purchases[132] Note 14 - Other Current Assets and Liabilities Other current assets totaled $271.0 million at June 30, 2021, mainly comprising income and other tax receivables and short-term derivative assets, while accrued expenses and other current liabilities amounted to $878.8 million, with product financing agreements and Consolidated Net RINs Obligation deficit as largest components Other Current Assets (In millions) | Item | June 30, 2021 | December 31, 2020 | | :----------------------------------- | :------------ | :---------------- | | Income and other tax receivables | $146.7 | $142.0 | | Short-term derivative assets | $64.8 | $72.9 | | Prepaid expenses | $24.8 | $21.8 | | Other | $34.7 | $19.7 | | Total | $271.0 | $256.4 | Accrued Expenses and Other Current Liabilities (In millions) | Item | June 30, 2021 | December 31, 2020 | | :----------------------------------- | :------------ | :---------------- | | Product financing agreements | $358.8 | $198.0 | | Consolidated Net RINs Obligation deficit | $139.8 | $59.6 | | Crude purchase liabilities | $116.4 | $62.1 | | Income and other taxes payable | $113.4 | $109.5 | | Deferred revenue | $48.1 | $16.5 | | Employee costs | $36.1 | $30.2 | | Short-term derivative liabilities | $21.1 | $35.8 | | Other | $45.1 | $34.7 | | Total | $878.8 | $546.4 | Note 15 - Equity-Based Compensation Delek's 2016 Long-Term Incentive Plan was amended to increase available shares, with compensation expense of $5.7 million for Q2 2021, and an Employee Stock Purchase Plan (ESPP) was adopted in June 2021 - The 2016 Long-Term Incentive Plan was amended to increase the number of shares available for issuance by 3,215,000 to 14,235,000[134] Equity-Based Compensation Expense (In millions) | Period | 2021 | 2020 | | :----------------------------------- | :--- | :--- | | Three Months Ended June 30, | $5.7 | $5.0 | | Six Months Ended June 30, | $10.1 | $10.9 | - As of June 30, 2021, $45.5 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements is expected to be recognized over a weighted-average period of 1.7 years[134] - The Delek US Holdings, Inc. Employee Stock Purchase Plan (ESPP) was adopted in June 2021, authorizing 2,000,000 shares for employees to purchase at 85.0% of the closing price[139] Note 16 - Shareholders' Equity Delek suspended dividends and its share repurchase program to conserve capital, with $229.7 million remaining authorization, and a stockholder rights plan expired on March 19, 2021 - Delek suspended dividends beginning in the fourth quarter of 2020 to conserve capital[140] - The share repurchase program, authorized for up to $500.0 million, was suspended in the second quarter of 2020, with $229.7 million of authorization remaining as of June 30, 2021[140] - A stockholder rights plan, adopted on March 20, 2020, expired on March 19, 2021[141] Note 17 - Leases Delek leases various assets, including retail stores, land, buildings, and equipment, with net lease costs of $26.9 million for Q2 2021 and a weighted-average remaining lease term of 4.9 years for operating leases - Delek leases retail stores, land, buildings, and equipment, with short-term leases (12 months or less) not recorded on the balance sheet[142] - As of June 30, 2021, $25.5 million of net property, plant, and equipment is subject to an operating lease[145] Lease Costs and Other Information (In millions) | Item | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 | | :----------------------------------- | :------------------------------- | :----------------------------- | | Operating lease costs | $17.8 | $35.5 | | Short-term lease costs | $11.0 | $20.5 | | Sublease income | $(1.9) | $(3.8) | | Net lease costs | $26.9 | $52.2 | | Weighted-average remaining lease term (operating leases) | 4.9 years | 4.9 years | | Weighted-average discount rate (operating leases) | 6.4% | 6.4% | Note 18 - Subsequent Events In July and August 2021, Delek received a total of $156.2 million in federal income tax refunds related to net operating loss carryback provisions under the CARES Act - In July and August 2021, Delek received $156.2 million in federal income tax refunds related to net operating loss carryback provisions under the CARES Act[147] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of Delek's financial performance, significant trends, and future prospects, including an executive summary of business operations, the impact of the COVID-19 Pandemic, strategic initiatives, and market trends Executive Summary Delek is an integrated downstream energy business with refining, logistics, and retail segments, facing challenges from the COVID-19 Pandemic, Winter Storm Uri, and the El Dorado refinery fire, while strategically focusing on cost savings, capital control, and growth opportunities - Delek is an integrated downstream energy business operating in refining, logistics, and retail segments[156] - The COVID-19 Pandemic has significantly reduced global economic activity, leading to a decline in demand and market prices for crude oil and refined products, particularly gasoline and jet fuel[157] - Management responded to the pandemic by reducing discretionary capital expenditures, suspending the share repurchase program and dividend distributions, taking advantage of CARES Act tax relief, and implementing cost reduction measures[163] - Key developments in 2021 include managing the impacts of Winter Storm Uri and the El Dorado refinery fire, addressing rapidly escalating RINs prices due to regulatory uncertainty, adopting an Employee Stock Purchase Plan (ESPP), issuing Delek Logistics 2028 Notes, and executing an exclusive supply agreement with Baker Petrolite LLC[166][177][180][181][184] Market Trends Delek's results are significantly affected by commodity price fluctuations, with H1 2021 seeing slow refining margin improvements due to increased international supply and U.S. supply disruptions, and sharply increasing RIN prices dampening refiners' ability to capture crack spread improvements - Refining margins in H1 2021 were slow to improve due to increased international supply and U.S. supply disruptions from Winter Storm Uri and the Colonial Pipeline cyber incident[185] - Sharply increasing RIN prices, influenced by judicial rulings on Small Refinery Exemptions (SREs) and regulatory sentiment, significantly dampened refining margins, despite improving crack spreads[185][197] - The U.S. Supreme Court's reversal of a lower court's ruling on RINs in June 2021 led to market optimism regarding the potential granting of SRE applications[180][185] Gulf Coast Crack Spread (Average per barrel) | Crack Spread | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | Q1 2021 | Q2 2021 | | :----------------------------------- | :------ | :------ | :------ | :------ | :------ | :------ | | 5-3-2 Crack Spread - ULSD | $11.41 | $7.08 | $8.15 | $7.83 | $14.33 | $18.29 | | 3-2-1 Crack Spread | $10.74 | $6.67 | $7.49 | $8.08 | $13.57 | $16.72 | | 2-1-1 Crack Spread | $8.12 | $2.35 | $3.51 | $4.46 | $7.65 | $9.79 | RIN Prices (Average per RIN) | RIN Type | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | Q1 2021 | Q2 2021 | | :----------------------------------- | :------ | :------ | :------ | :------ | :------ | :------ | | Ethanol RINs | $0.26 | $0.40 | $0.47 | $0.63 | $1.07 | $1.62 | | Biodiesel RINs | $0.47 | $0.54 | $0.67 | $0.88 | $1.17 | $1.71 | Contractual Obligations As of June 30, 2021, Delek's total contractual obligations amounted to $4,883.2 million, with long-term debt and notes payable, operating lease commitments, and transportation agreements being the largest components Contractual Obligations (In millions) as of June 30, 2021 | Obligation Type | <1 Year | 1-3 Years | 3-5 Years | >5 Years | Total | | :----------------------------------- | :------ | :-------- | :-------- | :------- | :------ | | Long term debt and notes payable obligations | $46.4 | $353.8 | $1,477.5 | $400.0 | $2,277.7 | | Interest | $94.4 | $176.0 | $101.8 | $57.0 | $429.2 | | Operating lease commitments | $127.4 | $385.5 | $172.3 | $149.4 | $834.6 | | Product financing commitments | $358.8 | $— | $— | $— | $358.8 | | Transportation agreements | $138.4 | $222.4 | $189.0 | $80.8 | $630.6 | | J. Aron supply and offtake obligations | $15.5 | $336.8 | $— | $— | $352.3 | | Total | $780.9 | $1,474.5 | $1,940.6 | $687.2 | $4,883.2 | Critical Accounting Policies Delek's critical accounting policies involve significant estimates and judgments, including inventory adjustments, impairment evaluations, environmental expenditures, asset retirement obligations, and the estimation of the annual effective tax rate (AETR) - Critical accounting policies include estimating quarterly inventory adjustments (LIFO), evaluating impairment for property, plant and equipment, definite-life intangibles, and goodwill, and estimating environmental expenditures and asset retirement obligations[202] - The estimation of the annual effective tax rate (AETR) is a critical accounting policy requiring significant judgment, especially during economic uncertainty, based on forecasted pre-tax income/loss, permanent differences, capital expenditures, tax rates, and net operating losses[202] - The AETR estimation approach necessitates continuous review and adjustment, as significant changes in assumptions or actual results could cause material changes in the AETR and cumulative adjustments[205] Non-GAAP Measures Delek uses non-GAAP operational and financial measures such as Refining margin, Refined product margin, and Refining margin per barrels sold to evaluate segment performance and future prospects, supplementing GAAP information for improved comparability - Delek uses non-GAAP measures like Refining margin, Refined product margin, and Refining margin per barrels sold to evaluate operating segment performance and future prospects[206] - These non-GAAP measures are considered useful for investors, lenders, ratings agencies, and analysts to assess ongoing performance by providing improved comparability through the exclusion of certain non-core operating items[206] Non-GAAP Reconciliations The reconciliation of refining margin to gross margin shows a refining margin of $93.9 million for Q2 2021, compared to $148.4 million in the prior-year period, and $186.3 million for YTD 2021, a significant improvement from $(30.3) million in the prior-year period Reconciliation of Refining Margin to Gross Margin (In millions) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net revenues | $2,415.7 | $1,077.0 | $4,155.8 | $2,804.9 | | Cost of sales | $2,486.6 | $1,062.1 | $4,300.0 | $3,117.6 | | Gross margin | $(70.9) | $14.9 | $(144.2) | $(312.7) | | Add back: Operating expenses (excluding D&A) | $113.8 | $88.7 | $227.4 | $200.4 | | Add back: Depreciation and amortization | $51.0 | $44.8 | $103.1 | $82.0 | | Refining margin | $93.9 | $148.4 | $186.3 | $(30.3) | Summary Financial and Other Information Delek's summary statement of operations data shows a net loss of $72.5 million for Q2 2021, compared to net income of $98.5 million for Q2 2020, with operating results reported across three segments: Refining, Logistics, and Retail Summary Statement of Operations Data (In millions) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net revenues | $2,191.5 | $1,535.5 | $4,583.7 | $3,356.7 | | Operating (loss) income | $(85.4) | $22.8 | $(165.5) | $(338.7) | | Net (loss) income | $(72.5) | $98.5 | $(163.8) | $(208.5) | | Net (loss) income attributable to Delek | $(81.1) | $87.7 | $(179.7) | $(226.7) | - The company reports operating results in three reportable segments: Refining, Logistics, and Retail, with performance measured by segment contribution margin[211] Results of Operations Delek experienced a consolidated net loss of $72.5 million in Q2 2021, down from $98.5 million net income in Q2 2020, but an improved net loss of $163.8 million for YTD 2021 compared to $208.5 million for YTD 2020, driven by increased net revenues and cost of materials, partially offset by changes in operating and G&A expenses Consolidated Results of Operations - Consolidated net loss for Q2 2021 was $72.5 million, compared to net income of $98.5 million for Q2 2020; net loss attributable to Delek was $(81.1) million, or $(1.10) per basic share, for Q2 2021[212] - Consolidated net loss for YTD 2021 was $163.8 million, an improvement from $208.5 million for YTD 2020; net loss attributable to Delek was $(179.7) million, or $(2.43) per basic share, for YTD 2021[213] - Net revenues increased by $656.0 million (42.7%) in Q2 2021 and $1,227.0 million (36.6%) in YTD 2021, primarily driven by higher average prices of U.S. Gulf Coast gasoline, ULSD, and HSD, and increased sales volumes across segments[214][216][217] - Cost of materials and other increased by $718.0 million (56.2%) in Q2 2021 and $1,012.9 million (31.8%) in YTD 2021, mainly due to higher crude oil feedstock costs (WTI Cushing and Midland), increased RINs costs, and higher retail/marketing costs, partially offset by changes in inventory valuation and hedging losses[218][220] - Operating expenses increased by $33.3 million (26.1%) in Q2 2021 and $28.1 million (10.0%) in YTD 2021, driven by higher variable costs (natural gas, electric, chemicals, catalyst) and increased maintenance/lease costs related to Winter Storm Uri and unit outages[221] - General and administrative expenses decreased by $3.1 million (5.0%) in Q2 2021 and $21.7 million (17.0%) in YTD 2021, primarily due to lower contract services, employee expenses, and travel-related costs[222] - Interest expense increased by $3.4 million (11.4%) in Q2 2021 due to higher effective interest rates and average borrowings, but decreased by $3.3 million (5.0%) in YTD 2021 due to a lower average effective interest rate[228][229] - Income from equity method investments decreased by $3.9 million in Q2 2021 and $4.2 million in YTD 2021, mainly due to lower income from W2W Holdings LLC and logistics' equity method investments impacted by Winter Storm Uri[230] - Income tax benefit increased by $10.1 million in Q2 2021 due to a pre-tax loss and higher effective tax rate, but decreased by $60.6 million in YTD 2021 due to a lower pre-tax loss and a decrease in the effective tax rate, influenced by prior-year NOL carryback benefits and valuation allowance reversals[234][235] Refining Segment Operational Comparison - Refining net revenues increased by $1,338.7 million (124.3%) in Q2 2021 and $1,350.9 million (48.2%) in YTD 2021, driven by higher average prices of U.S. Gulf Coast gasoline, ULSD, and HSD, and increased sales volumes[255][256] - Refining cost of materials and other increased by $1,393.2 million (150.0%) in Q2 2021 and $1,134.3 million (40.0%) in YTD 2021, primarily due to higher crude oil costs (WTI Cushing and Midland), increased RINs costs, and higher purchased product volumes[257][261] - Refining margin decreased by $54.5 million (36.7%) in Q2 2021, mainly due to higher RINs costs and lower inventory valuation benefits, partially offset by improved crack spreads and decreased hedging losses; for YTD 2021, refining margin increased by $216.6 million (714.9%) due to improved crack spreads and inventory valuation reversal[263][268] - Refining operating expenses increased by $25.1 million (28.3%) in Q2 2021 and $27.0 million (13.5%) in YTD 2021, driven by increased outside services, maintenance, lease costs related to Winter Storm Uri and unit outages, and higher variable costs[273][274] - Refining contribution margin decreased by $79.6 million (6.4% decline in percentage) in Q2 2021 due to lower refining margin and higher operating expenses; for YTD 2021, it increased by $189.6 million due to higher refining margin, partially offset by increased operating expenses[277][278] Refining Segment Margins (In millions) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net revenues | $2,415.7 | $1,077.0 | $4,155.8 | $2,804.9 | | Cost of materials and other | $2,321.8 | $928.6 | $3,969.5 | $2,835.2 | | Refining margin | $93.9 | $148.4 | $186.3 | $(30.3) | | Operating expenses (excluding D&A) | $113.8 | $88.7 | $227.4 | $200.4 | | Contribution margin | $(19.9) | $59.7 | $(41.1) | $(230.7) | Logistics Segment Operational Comparison - Logistics net revenues increased by $50.8 million (43.2%) in Q2 2021 and $40.3 million (14.3%) in YTD 2021, primarily due to revenues from Big Spring Gathering System and Delek Trucking acquisitions, and higher West Texas marketing sales prices[283][284][286][287][288] - Logistics cost of materials and other increased by $44.9 million (102.3%) in Q2 2021 and $24.7 million (17.0%) in YTD 2021, driven by higher average cost per gallon and increased volumes in West Texas marketing operations[293] - Logistics operating expenses increased by $3.1 million (25.0%) in Q2 2021 and $2.4 million (8.8%) in YTD 2021, due to higher employee and outside service costs, utilities, and maintenance, partly from reduced cost-cutting measures and higher throughput[294][297] - Logistics contribution margin increased by $2.8 million (4.6%) in Q2 2021 and $13.2 million (12.1%) in YTD 2021, driven by increased West Texas marketing volumes and margin, and acquisition revenues, partially offset by higher operating expenses[298] Logistics Contribution Margin (In millions) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net revenues | $168.5 | $117.7 | $321.4 | $281.1 | | Cost of materials and other | $88.8 | $43.9 | $169.9 | $145.2 | | Operating expenses (excluding D&A) | $15.5 | $12.4 | $29.6 | $27.2 | | Contribution margin | $64.2 | $61.4 | $121.9 | $108.7 | Retail Segment Operational Comparison - Retail net revenues increased by $43.6 million (26.4%) in Q2 2021 and $39.8 million (11.6%) in YTD 2021, primarily due to higher fuel sales prices, partially offset by decreased merchandise sales[305][308] - Retail cost of materials and other increased by $45.1 million (37.7%) in Q2 2021 and $37.5 million (14.2%) in YTD 2021, mainly due to an increase in the average cost per gallon of fuel sold[309][310] - Retail operating expenses increased slightly by $0.9 million (4.2%) in Q2 2021 and $0.1 million (0.2%) in YTD 2021[313] - Retail contribution margin decreased by $2.4 million (9.9%) in Q2 2021 due to lower average fuel margin and increased operating expenses, partially offset by improved merchandise margin; for YTD 2021, it increased by $2.2 million (6.0%) due to increased merchandise margin[314] Retail Contribution Margins (In millions) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net revenues | $209.0 | $165.4 | $383.8 | $344.0 | | Cost of materials and other | $164.7 | $119.6 | $301.2 | $263.7 | | Operating expenses (excluding D&A) | $22.4 | $21.5 | $43.8 | $43.7 | | Contribution margin | $21.9 | $24.3 | $38.8 | $36.6 | Liquidity and Capital Resources Delek's total liquidity at June 30, 2021, was $2.1 billion, comprising operating cash flows, debt facilities, and unused credit commitments, with the company believing it is in compliance with all debt covenants and forecasting $180.6 million in capital expenditures for 2021 - Delek's total liquidity at June 30, 2021, was $2.1 billion, comprising $694.1 million in unused credit commitments under the Revolving Credit Facility, $561.2 million under the Delek Logistics Credit Facility, and $833.0 million in cash and cash equivalents[316] - The company suspended dividends in Q4 2020 and its share repurchase program in Q2 2020 to conserve capital[316] - Delek believes it was in compliance with all debt maintenance covenants as of June 30, 2021, and expects to remain compliant, but acknowledges potential adverse impacts from significantly worsening economic conditions[319] Cash Flow Data (In millions) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Operating activities | $134.9 | $(323.1) | | Investing activities | $(118.7) | $(155.9) | | Financing activities | $29.3 | $372.7 | | Net increase (decrease) | $45.5 | $(106.3) | - Capital expenditures for the six months ended June 30, 2021, were $132.7 million, with a full-year 2021 forecast of $180.6 million, primarily for sustaining maintenance in the refining segment[328] Item 3. Quantitative and Qualitative Disclosures about Market Risk Delek manages market risks through various activities, including commodity derivative contracts to mitigate price exposure on inventory, purchases, sales, margins, and RINs obligations, and interest rate risk management for floating rate borrowings Price Risk Management Activities - Delek uses commodity derivative contracts (swaps, futures, forward contracts, options) to manage price exposure related to inventory, crude oil and ethanol purchases, refined product sales, and RINs obligations[330][332] - All commodity contracts and future purchase commitments are recorded at fair value, with changes recognized in profit and loss, unless designated as cash flow hedges, in which case gains or losses are recognized in other comprehensive income[332] Open Commodity Derivative Contracts (as of June 30, 2021, in millions) | Contract Description | Fair Value | Total Outstanding Notional Contract Volume | | :----------------------------------- | :--------- | :--------------------------------------- | | Crude oil price swaps - long | $35.4 | 15,924,000 barrels | | Crude oil price swaps - short | $(35.5) | 13,989,000 barrels | | Inventory, refined product and crack spread swaps - long | $42.2 | 89,425,000 barrels | | Inventory, refined product and crack spread swaps - short | $(61.0) | 90,394,000 barrels | | RIN commitment contracts - long | $40.7 | 81,960,000 RINs | | RIN commitment contracts - short | $0.1 | 1,500,000 RINs | | Total | $21.9 | 293,192,000 (various units) | Interest Risk Management Activities - Delek has market exposure to changes in interest rates on its outstanding floating rate borrowings, which totaled approximately $1,594.7 million as of June 30, 2021[333] - A hypothetical one percent change in interest rates on floating rate debt would impact interest expense by approximately $15.9 million annually[333] Commodity Derivatives Trading Activities - Delek engages in active trading of commodity derivatives, including forward physical contracts, swap contracts, and futures contracts, to generate incremental gains by capitalizing on crude oil supply and pricing seasonality[334] - All trading contracts had remaining durations of less than one year as of June 30, 2021, and are classified as held for trading, with changes in fair value recognized in the income statement[334] Commodity Derivative Contracts Held for Trading (as of June 30, 2021) | Contract Description | Notional Contract Volume (barrels) | Weighted-average Market Price (per barrel) | Contractual Volume at Fair Value (in millions) | | :----------------------------------- | :--------------------------------- | :----------------------------------------- | :--------------------------------------------- | | Over the counter forward sales contracts (crude) | 1,701,878 | $58.69 | $99.9 | | Over the counter forward purchase contracts (crude) | 1,100,112 | $59.46 | $65.4 | Item 4. Controls and Procedures Delek's management concluded that the company's disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting identified during Q2 2021, and ongoing monitoring of the COVID-19 Pandemic's impact - The Chief Executive Officer and Chief Financial Officer concluded that Delek's disclosure controls and procedures were effective as of June 30, 2021[337] - No material changes in internal control over financial reporting were identified during the second quarter of 2021[337] - The company is continually monitoring and assessing the COVID-19 Pandemic to minimize its impact on the design and operating effectiveness of internal controls[337] PART II. OTHER INFORMATION This part covers legal proceedings, risk factors, other disclosures, and exhibits related to the company's quarterly report Item 1. Legal Proceedings Delek is routinely involved in lawsuits, investigations, and claims, including environmental matters, but does not anticipate a material adverse effect on its financial statements, with no material developments since the Annual Report on Form 10-K beyond what is disclosed in Note 11 - Delek is subject to lawsuits, investigations, and claims in the ordinary course of business, including environmental and employee-related matters[340] - Management does not believe that any currently pending legal proceedings will have a material adverse effect on the company's financial statements[340] - No material developments to previously reported proceedings have occurred since the Annual Report on Form 10-K, other than those detailed in Note 11[340] Item 1A. Risk Factors There were no material changes to the risk factors identified in the Company's 2020 Annual Report on Form 10-K, except for the addition of a risk related to stockholder activism, which can be costly, disrupt operations, and divert management's attention - No material changes to risk factors were identified from the 2020 Annual Report on Form 10-K, except for a new risk related to stockholder activism[341] - Stockholder activism can be costly, disrupt operations, and divert management's attention, potentially affecting the company's ability to implement strategic plans and create value[342] - The contested director election in May 2021, involving CVR Energy, Inc., resulted in significant costs and highlights the potential for activism to cause fluctuations in stock price and impact business stability[342] Item 5. Other Information This section states that there is no other information to report - No other information is reported in this section[343] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including indentures for Delek Logistics' 2028 Senior Notes, an amendment to the 2016 Long-Term Incentive Plan, certifications from the CEO and CFO, and Inline XBRL formatted financial statements and cover page - Exhibits include the Indenture for Delek Logistics' 7.125% Senior Notes due 2028 and the form of the notes[346] - An amendment to the Delek US Holdings, Inc. 2016 Long-Term Incentive Plan is filed as Exhibit 10.1[346] - Certifications from the CEO and CFO are included, covering compliance with Securities Exchange Act rules and Sarbanes-Oxley Act requirements[346] - The Condensed Consolidated Financial Statements and the cover page are provided in Inline XBRL format[346] Signatures The report is duly signed on behalf of Delek US Holdings, Inc. by Ezra Uzi Yemin, Director (Chairman), President and Chief Executive Officer, and Reuven Spiegel, Executive Vice President and Chief Financial Officer, on August 5, 2021 - The report is signed by Ezra Uzi Yemin, Director (Chairman), President and Chief Executive Officer, and Reuven Spiegel, Executive Vice President and Chief Financial Officer[350] - The signing date for the report is August 5, 2021[350]