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"). 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. As Delek Logistics does not derive an amount of gross margin material to us from third parties, there is limited risk to Delek associated with Delek Logistics' operations. However, 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.
Risks and Uncertainties Related to the COVID-19 Pandemic
During the quarter ended March 31, 2022, the economic environment in which we operate continued to improve as a result of the widespread availability of vaccines and testing in the U.S. over recent months which, in turn, has contributed to return to work, return to schools, and increased travel, with a corresponding increase in the demand for vehicle motor fuel and jet fuel. While we continue to face uncertainties around the COVID-19 Pandemic in terms of new variants, these stabilization trends as well as other factors impacting demand for our products, such as the global supply constraints caused by the military conflict between Russia and the Ukraine have mitigated the risks that remaining Pandemic-related uncertainties could have a material adverse impact on our financial position or results of operations. While these remaining uncertainties did not have a material impact on the preparation of our unaudited financial statements as of and for the three months ended March 31, 2022, to the extent these uncertainties were identified and were believed to have had a material impact on our prior year period results of operations or financial position based on the requirements for assessing such financial statement impact under GAAP, we have considered them in the preparation of our unaudited financial statements as of and for the three months ended March 31, 2022. The application of accounting policies impacted by such considerations include (but are not necessarily limited to) the following:
•The interim evaluation of indefinite-lived intangibles and goodwill for potential impairment, where indicators exist, as defined by GAAP;
•The interim evaluation of long-lived assets for potential impairment, where indicators exist, as defined by GAAP;
•The interim evaluation of joint ventures for potential impairment, where indicators exist, as defined by GAAP;
•The evaluation of derivatives and hedge accounting for counterparty risk and changes in forecasted transactions, as provided for under GAAP;
•The evaluation of inventory valuation allowances that may be warranted under the lower of cost or net realizable value analysis, for first-in, first-out (“FIFO”) costing method, pursuant to GAAP;
•The consideration of debt modifications and/or covenant requirements, as applicable;
•The evaluation of commitments and contingencies, including changes in concentrations, as applicable;
•The interim evaluation of the impact of changing forecasts on our assessment of deferred tax asset valuation allowances and annual effective tax rates; and
•The interim evaluation of our ability to continue as a going concern.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 6 - Inventory for additional information.
Reclassifications
Certain prior period amounts have been reclassified in order to conform to the current period presentation.
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 - 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 9);
•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 March 31, 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").
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
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 March 31, 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 and refined products logistics and marketing assets. The logistics segment generates revenue by charging fees for gathering, transporting and storing crude oil and for marketing, distributing, transporting and storing intermediate and refined products in select regions of the southeastern United States and West Texas for our refining segment and third parties, and sales of wholesale products in the West Texas market.
Retail Segment
Our retail segment consists of 248 owned and leased convenience store sites as of March 31, 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.
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):
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| | | Three Months Ended March 31, 2022 |
| | Refining | | Logistics | | Retail | | Corporate,
Other and Eliminations | | Consolidated |
Net revenues (excluding inter-segment fees and revenues) | | $ | 3,267.9 | | | $ | 82.8 | | | $ | 209.5 | | | $ | 898.9 | | | $ | 4,459.1 | |
| Inter-segment fees and revenues | | 225.8 | | | 123.8 | | | — | | | (349.6) | | | — | |
| Operating costs and expenses: | | | | | | | | | | |
| Cost of materials and other | | 3,276.9 | | | 126.2 | | | 173.0 | | | 576.4 | | | 4,152.5 | |
| Operating expenses (excluding depreciation and amortization presented below) | | 119.9 | | | 18.1 | | | 22.7 | | | 6.2 | | | 166.9 | |
| Segment contribution margin | | $ | 96.9 | | | $ | 62.3 | | | $ | 13.8 | | | $ | (33.3) | | | 139.7 | |
| Income from equity method investments | | 0.2 | | | 7.0 | | | — | | | 3.7 | | | |
| Segment contribution margin and income (loss) from equity method investments | | $ | 97.1 | | | $ | 69.3 | | | $ | 13.8 | | | $ | (29.6) | | | |
| Depreciation and amortization | | $ | 52.8 | | | $ | 10.4 | | | $ | 3.5 | | | $ | 1.6 | | | 68.3 | |
General and administrative expenses | | | | | | | | | | 53.1 | |
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| Other operating income, net | | | | | | | | | | (28.4) | |
| Operating income | | | | | | | | | | $ | 46.7 | |
| Capital spending (excluding business combinations) | | $ | 14.3 | | | $ | 9.1 | | | $ | 3.0 | | | $ | 6.5 | | | $ | 32.9 | |
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| | | Three Months Ended March 31, 2021 |
| | Refining (1) | | Logistics | | Retail | | Corporate,
Other and Eliminations | | Consolidated (1) |
Net revenues (excluding inter-segment fees and revenues) | | $ | 1,584.5 | | | $ | 56.7 | | | $ | 174.8 | | | $ | 576.2 | | | $ | 2,392.2 | |
Inter-segment fees and revenues | | 155.6 | | | 96.2 | | | — | | | (251.8) | | | — | |
| Operating costs and expenses: | | | | | | | | | | |
| Cost of materials and other | | 1,615.0 | | | 81.1 | | | 136.5 | | | 340.2 | | | 2,172.8 | |
| Operating expenses (excluding depreciation and amortization presented below) | | 114.7 | | | 14.9 | | | 21.6 | | | 4.1 | | | 155.3 | |
| Segment contribution margin | | $ | 10.4 | | | $ | 56.9 | | | $ | 16.7 | | | $ | (19.9) | | | 64.1 | |
| Income from equity method investments | | 0.2 | | | 4.0 | | | — | | | 0.6 | | | |
| Segment contribution margin and income (loss) from equity method investments | | $ | 10.6 | | | $ | 60.9 | | | $ | 16.7 | | | $ | (19.3) | | | |
| Depreciation and amortization | | $ | 52.1 | | | $ | 10.7 | | | $ | 3.2 | | | $ | 2.5 | | | 68.5 | |
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General and administrative expenses | | | | | | | | | | 41.1 | |
| Other operating expense, net | | | | | | | | | | 1.9 | |
| Operating loss | | | | | | | | | | $ | (47.4) | |
| Capital spending (excluding business combinations) | | $ | 57.8 | | | $ | 7.8 | | | $ | 0.8 | | | $ | 0.6 | | | $ | 67.0 | |
(1) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. See Note 6 for further discussion.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Other Segment Information
Total assets by segment were as follows as of March 31, 2022 (in millions):
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| | Refining | | Logistics | | Retail | | Corporate,
Other and Eliminations | | Consolidated |
| Total assets | | $ | 7,842.9 | | | $ | 935.3 | | | $ | 255.4 | | | $ | (1,086.9) | | | $ | 7,946.7 | |
| Less: | | | | | | | | | | |
| Inter-segment notes receivable | | (1,026.8) | | | — | | | — | | | 1,026.8 | | | — | |
| Inter-segment right of use lease assets | | (245.2) | | | — | | | — | | | 245.2 | | | — | |
| Total assets, excluding inter-segment notes receivable and right of use assets | | $ | 6,570.9 | | | $ | 935.3 | | | $ | 255.4 | | | $ | 185.1 | | | $ | 7,946.7 | |
Property, plant and equipment and accumulated depreciation as of March 31, 2022 and depreciation expense by reporting segment for the three months ended March 31, 2022 are as follows (in millions):
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| | Refining | | Logistics | | Retail | | Corporate,
Other and Eliminations | | Consolidated |
| Property, plant and equipment | | $ | 2,677.7 | | | $ | 724.9 | | | $ | 170.0 | | | $ | 102.4 | | | $ | 3,675.0 | |
| Less: Accumulated depreciation | | (995.0) | | | (276.6) | | | (62.0) | | | (67.4) | | | (1,401.0) | |
| Property, plant and equipment, net | | $ | 1,682.7 | | | $ | 448.3 | | | $ | 108.0 | | | $ | 35.0 | | | $ | 2,274.0 | |
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| Depreciation expense for the three months ended March 31, 2022 | | $ | 51.1 | | | $ | 10.4 | | | $ | 3.3 | | | $ | 1.6 | | | $ | 66.4 | |
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 March 31, 2022 (see Note 1 for further discussion on the impact of the COVID-19 Pandemic).
Note 3 - 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), 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 15 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
| | | | March 31, |
| | | | | | | 2022 | | 2021 (1) |
| Numerator: | | | | | | | | |
| Numerator for EPS | | | | | | | | |
| Net income (loss) | | | | | | $ | 14.8 | | | $ | (62.7) | |
| Less: Income attributed to non-controlling interest | | | | | | 8.2 | | | 7.3 | |
| Numerator for basic and diluted EPS attributable to Delek | | | | | | $ | 6.6 | | | $ | (70.0) | |
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| Denominator: | | | | | | | | |
| Weighted average common shares outstanding (denominator for basic EPS) | | | | | | 73,236,274 | | | 73,803,772 | |
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| Dilutive effect of stock-based awards | | | | | | 412,992 | | | — | |
| Weighted average common shares outstanding, assuming dilution (denominator for diluted EPS) | | | | | | 73,649,266 | | | 73,803,772 | |
| EPS: | | | | | | | | |
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| Basic income (loss) per share | | | | | | $ | 0.09 | | | $ | (0.95) | |
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| Diluted income (loss) per share | | | | | | $ | 0.09 | | | $ | (0.95) | |
| 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) | | | | | | 3,088,678 | | | 2,733,056 | |
| Antidilutive due to loss | | | | | | — | | | 634,006 | |
| Total antidilutive stock-based compensation | | | | | | 3,088,678 | | | 3,367,062 | |
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(1) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. See Note 6 for further discussion.
Note 4 - Delek Logistics
Delek Logistics is a publicly traded limited partnership that 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 integral to Delek’s refining and marketing operations. As of March 31, 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 April 14, 2022, Delek Logistics filed a shelf registration statement with the SEC registering 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 all of which were sold as of March 18, 2022. For the three months ended March 31, 2022, we sold 385,522 units for gross proceeds of $16.4 million; $13.6 million net of taxes.
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 as of March 31, 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.
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
Notes to Condensed Consolidated Financial Statements (Unaudited)
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).
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| | | | |
| | March 31, 2022 | | December 31, 2021 |
| ASSETS | | | | |
| Cash and cash equivalents | | $ | 2.7 | | | $ | 4.3 | |
| Accounts receivable | | 20.4 | | | 15.4 | |
| Accounts receivable from related parties | | — | | | — | |
| Inventory | | 1.8 | | | 2.4 | |
| Other current assets | | 1.5 | | | 1.0 | |
| Property, plant and equipment, net | | 448.3 | | | 449.4 | |
| Equity method investments | | 249.9 | | | 250.0 | |
| Operating lease right-of-use assets | | 19.1 | | | 20.9 | |
| Goodwill | | 12.2 | | | 12.2 | |
| Intangible assets, net | | 154.5 | | | 153.9 | |
| Other non-current assets | | 24.9 | | | 25.6 | |
| Total assets | | $ | 935.3 | | | $ | 935.1 | |
| LIABILITIES AND DEFICIT | | | | |
| Accounts payable | | $ | 12.6 | | | $ | 8.2 | |
| Accounts payable to related parties | | 50.3 | | | 64.4 | |
| | | | |
| Current portion of operating lease liabilities | | 6.7 | | | 6.8 | |
| Accrued expenses and other current liabilities | | 26.7 | | | 17.4 | |
| Long-term debt | | 905.5 | | | 899.0 | |
| Asset retirement obligations | | 6.6 | | | 6.5 | |
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| Operating lease liabilities, net of current portion | | 12.4 | | | 14.1 | |
| Other non-current liabilities | | 21.0 | | | 22.7 | |
| Deficit | | (106.5) | | | (104.0) | |
| Total liabilities and deficit | | $ | 935.3 | | | $ | 935.1 | |
Note 5 - 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. Accordingly, distributions received from WWP through the WWP Project Financing JV will first be applied in service of the related project financing 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 under the project financing debt. 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.
The Company's maximum exposure to any losses incurred by HoldCo is limited to its investment. As of March 31, 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 March 31, 2022 and December 31, 2021, Delek's investment balance in WWP Project Financing Joint Venture totaled $51.4 million and $49.3 million, respectively, and is included as part of total assets in corporate, other and eliminations in our segment disclosure. In
Notes to Condensed Consolidated Financial Statements (Unaudited)
addition on the investment, we recognized an income (loss) of $2.1 million and $(0.3) million for the three months ended March 31, 2022 and 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 March 31, 2022 and December 31, 2021, Delek's investment balance in Red River totaled $144.6 million and $144.0 million, respectively. During the three months ended March 31, 2022 and 2021, respectively, we made no capital contributions and $1.4 million in capital contributions based on capital calls received. We recognized income on the investment totaling $5.2 million and $2.2 million for the three months ended March 31, 2022 and 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 March 31, 2022 and December 31, 2021, Delek Logistics' investment balances in these joint ventures totaled $105.3 million and $106.0 million, respectively, and were accounted for using the equity method. We recognized income on these investments totaling $1.8 million for both the three months ended March 31, 2022 and 2021.
Other Investments
We have a 50% interest in a joint venture that owns an asphalt terminal located in Brownwood, Texas. As of March 31, 2022 and December 31, 2021, Delek's investment balance in this joint venture was $43.2 million and $41.6 million, respectively. We recognized income on this investment totaling $1.6 million and $0.9 million for the three months ended March 31, 2022 and 2021, respectively. This investment is accounted for using the equity method and is included as part of total assets in corporate, other and eliminations in our segment disclosure.
Delek Renewables, LLC, a wholly-owned subsidiary of Delek, has a joint venture that owns, operates and maintains a terminal consisting of an ethanol unit train facility with an ethanol tank in North Little Rock, Arkansas. As of March 31, 2022 and December 31, 2021, Delek Renewables, LLC's investment balance in this joint venture was $3.3 million and $3.2 million, respectively, and was accounted for using the equity method. We recognized income on this investment totaling $0.2 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively. The investment in this joint venture is reflected in the refining segment.
Note 6 - 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.
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:
(In millions):
| | | | | | | | | | | | | | |
| | | | December 31, 2021 |
| | March 31, 2022 | | As Adjusted (1) |
| Refinery raw materials and supplies | | $ | 774.1 | | | $ | 516.0 | |
| Refinery work in process | | 186.3 | | | 156.2 | |
| Refinery finished goods | | 622.8 | | | 550.6 | |
| Retail fuel | | 11.0 | | | 9.3 | |
| Retail merchandise | | 28.2 | | | 26.2 | |
| Logistics refined products | | 1.8 | | | 2.4 | |
| Total inventories | | $ | 1,624.2 | | | $ | 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 and our Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2021 and our Consolidated Condensed Balance Sheet as of December 31, 2021, were retrospectively adjusted as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2021 |
| (In millions) | | As Reported (using LIFO) | | Adjustment | | As Adjusted (using FIFO) |
| Condensed Consolidated Statements of Income | | | | | | |
| Cost of materials and other | | $ | 2,205.5 | | | $ | (32.7) | | | $ | 2,172.8 | |
| Total cost of sales | | 2,397.7 | | | (32.7) | | | 2,365.0 | |
| Loss before income tax benefit | | (103.7) | | 32.7 | | | (71.0) | |
| Income tax benefit | | (12.4) | | 4.1 | | (8.3) | |
| Net loss | | (91.3) | | 28.6 | | (62.7) | |
| Net loss attributable to Delek | | (98.6) | | 28.6 | | (70.0) | |
| | | | | | |
| Net loss per share attributable to Delek | | | | | | |
| Basic | | $ | (1.34) | | | $ | 0.39 | | | $ | (0.95) | |
| Diluted | | $ | (1.34) | | | $ | 0.39 | | | $ | (0.95) | |
| | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2021 |
| (In millions) | | As Reported (using LIFO) | | Adjustment | | As Adjusted (using FIFO) |
| Condensed Consolidated Statements of Cash Flows | | | | | | |
Net loss | | $ | (91.3) | | | $ | 28.6 | | | $ | (62.7) | |
Non-cash lower of cost or market/net realizable value adjustment | | (20.4) | | 21.2 | | 0.8 | |
| Deferred income taxes | | 5.1 | | 3.8 | | 8.9 | |
Inventories and other current assets | | (304.2) | | (39.4) | | (343.6) | |
| Accounts payable and other current liabilities | | 524.5 | | (14.2) | | 510.3 | |
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following tables reflect the effect of the change in the accounting principle on the current period Condensed Consolidated Financial Statements:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 |
| (In millions) | | As Computed (using LIFO) | | As Reported (using FIFO) | | Effect of Change |
| Condensed Consolidated Statements of Income | | | | | | |
| Cost of materials and other | | $ | 4,273.6 | | | $ | 4,152.5 | | | $ | 121.1 | |
| Total cost of sales | | 4,475.8 | | 4,354.7 | | 121.1 |
| (Loss) income before income tax (benefit) expense | | (103.2) | | 17.9 | | (121.1) |
| Income tax (benefit) expense | | (21.2) | | 3.1 | | (24.3) |
| Net (loss) income attributable to Delek | | (90.2) | | 6.6 | | (96.8) |
| | | | | | |
| Net (loss) income per share attributable to Delek | | | | | | |
| Basic | | $ | (1.23) | | | $ | 0.09 | | | $ | (1.32) | |
| Diluted | | $ | (1.23) | | | $ | 0.09 | | | $ | (1.32) | |
| | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 |
| (In millions) | | As Computed (using LIFO) | | As Reported (using FIFO) | | Effect of Change |
| Condensed Consolidated Balance Sheet | | | | | | |
| Inventories, net inventory valuation reserves | | $ | 1,449.2 | | | $ | 1,624.2 | | | $ | (175.0) | |
| | | | | | |
| Total Assets | | 7,771.7 | | 7,946.7 | | (175.0) |
Accrued expenses and other current | | 1,057.0 | | 1,032.3 | | 24.7 |
Deferred tax liabilities | | 182.3 | | 218.7 | | (36.4) |
| Retained Earnings | | 228.0 | | 391.3 | | (163.3) |
| Total liabilities and stockholders' equity | | 7,771.7 | | 7,946.7 | | (175.0) |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 |
| (In millions) | | As Computed (using LIFO) | | As Reported (using FIFO) | | Effect of Change |
| Condensed Consolidated Statements of Cash Flows | | | | | | |
Net (loss) income | | (82.0) | | $ | 14.8 | | | $ | (96.8) | |
Non-cash lower of cost or market/net realizable value adjustment | | (8.0) | | (8.5) | | 0.5 |
| Deferred income taxes | | (7.9) | | 10.4 | | (18.3) |
Inventories and other current assets | | (375.3) | | (465.2) | | 89.9 |
| Accounts payable and other current liabilities | | 1,013.3 | | 988.6 | | 24.7 |
At March 31, 2022, we recorded a pre-tax inventory valuation reserve of $0.8 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 $8.5 million and $(0.9) million for the three months ended March 31, 2022 and 2021, respectively.
Note 7 - 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 March 31, 2022 (1) | | 3.0 | | | 1.1 | | | 1.0 | |
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.
In April 2020, we amended and restated our three Supply and Offtake Agreements to renew and extend the terms to December 30, 2022, with J. Aron having the sole discretion to further extend to May 30, 2025 by giving at least 6 months prior notice to the current maturity date. As part of this 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 be 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 March 31, 2022, the fixed component of the Baseline Step-Out Liabilities subject to the Periodic Price Adjustments amounted to approximately $39.2 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 $148.8 million and $62.3 million for the three months ended March 31, 2022 and 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 March 31, 2022: | | | | | | | | |
| Baseline Step-Out Liability | | $ | 232.4 | | | $ | 97.8 | | | $ | 149.1 | | | $ | 479.3 | |
| Revolving over/short inventory financing liability | | 101.9 | | | 32.8 | | | (24.7) | | | 110.0 | |
| Total Obligations Under Supply and Offtake Agreements - Current portion | | $ | 334.3 | | | $ | 130.6 | | | $ | 124.4 | | | $ | 589.3 | |
| | | | | | | | |
| | | | | | | | |
| Other payable for monthly activity true-up | | $ | 20.5 | | | $ | 3.7 | | | $ | 3.3 | | | $ | 27.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 March 31, 2022 | | $ | 2.9 | | | $ | 1.0 | | | $ | 1.1 | | | $ | 5.0 | |
Recurring cash fees paid during the three months ended March 31, 2021 | | $ | 2.4 | | | $ | 0.7 | | | $ | 1.1 | | | $ | 4.2 | |
We maintained letters of credit under the Supply and Offtake Agreements as follows (in millions):
| | | | | | | | |
| | El Dorado |
Letters of credit outstanding as of March 31, 2022 | | $ | 145.0 | |
Letters of credit outstanding as of December 31, 2021 | | $ | 195.0 | |
Note 8 - 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):
| | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| Revolving Credit Facility | | $ | — | | | $ | — | |
Term Loan Credit Facility (1) | | 1,238.3 | | | 1,240.0 | |
Hapoalim Term Loan (2) | | 18.9 | | | 29.0 | |
| Delek Logistics Credit Facility | | 264.1 | | | 258.0 | |
Delek Logistics 2025 Notes (3) | | 247.0 | | | 246.7 | |
Delek Logistics 2028 Notes (4) | | 394.5 | | | 394.3 | |
| Reliant Bank Revolver | | 50.0 | | | 50.0 | |
| | | 2,212.8 | | | 2,218.0 | |
| Less: Current portion of long-term debt and notes payable | | 82.1 | | | 92.2 | |
| | | $ | 2,130.7 | | | $ | 2,125.8 | |
(1)Net of deferred financing costs of $2.0 million and $2.2 million and debt discount of $16.5 million and $17.8 million at March 31, 2022 and December 31, 2021, respectively.
(2)Net of deferred financing costs of $0.1 million and $0.1 million and debt discount of $0.1 million and $0.1 million at March 31, 2022 and December 31, 2021, respectively.
(3)Net of deferred financing costs of $2.3 million and $2.5 million and debt discount of $0.7 million and $0.8 million at March 31, 2022 and December 31, 2021, respectively.
(4)Net of deferred financing costs of $5.5 million and $5.7 million at March 31, 2022 and December 31, 2021, respectively.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 "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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 March 31, 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 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 March 31, 2022, the borrowing rate for base rate loans under the Revolving Credit Facility was 3.75% and there were no principal amounts outstanding thereunder. Additionally, there were letters of credit issued of approximately $362.5 million as of March 31, 2022 under the Revolving Credit Facility. Unused credit commitments under the Revolving Credit Facility, as of March 31, 2022, were approximately $637.5 million.
At March 31, 2022, the weighted average borrowing rate under the Term Loan Credit Facility was approximately 3.00% comprised entirely of LIBOR borrowings, and the principal amount outstanding thereunder was $1,256.8 million. As of March 31, 2022, the effective interest rate related to the Term Loan Credit Facility was 3.52%.
Delek Hapoalim Term Loan
On December 31, 2019, Delek entered into an unsecured term loan credit and guaranty agreement (the "Agreement") with Bank Hapoalim B.M. ("BHI") as the administrative agent. Pursuant to the Agreement, on December 31, 2019, Delek borrowed $40.0 million (the "BHI Term Loan"). The interest rate under the Agreement is equal to LIBOR plus a margin of 3.00%. The 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 Term Loan to modify one of the required quarterly financial covenant metrics; there were no other changes as a result of these amendments.
At March 31, 2022, the weighted average borrowing rate under the term loan was approximately 3.46% comprised entirely of a LIBOR borrowing and the principal amount outstanding thereunder was $19.1 million. On July 30, 2021 and January 31, 2022, we elected to voluntarily prepay $10.0 million each period in principal of the term loan. As of March 31, 2022, the effective interest rate related to the BHI Term Loan was 4.33%.
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
Notes to Condensed Consolidated Financial Statements (Unaudited)
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, LIBOR, 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 March 31, 2022, the weighted average borrowing rate was approximately 2.67%. 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 March 31, 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.
As of March 31, 2022, Delek Logistics had $264.1 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 March 31, 2022, were $585.9 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 103.375% of the redeemed principal, plus accrued and unpaid interest, if any. Beginning on May 15, 2022, the Issuers may, subject to certain conditions and limitations, redeem all or part of the Delek Logistics 2025 Notes, 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 March 31, 2022, we had $250.0 million in outstanding principal amount under the Delek Logistics 2025 Notes, and the effective interest rate was 7.20%.
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
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 March 31, 2022, we had $400.0 million in outstanding principal amount under the Delek Logistics 2028 Notes, and the effective interest rate was 7.05%.
Reliant Bank Revolver
Delek has an unsecured revolving credit agreement with Reliant Bank (the "Reliant Bank Revolver"). On December 16, 2019, we amended the Reliant Bank Revolver to extend the maturity date to June 30, 2022, reduce the fixed interest rate to 4.50% per annum and increase the revolver commitment amount to $50.0 million. There were no other significant changes to the agreement in connection with this amendment. On December 9, 2020 and June 17, 2021, we amended the Reliant Bank Revolver to modify a required quarterly financial covenant metric; there were no other changes as a result of these amendments. 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 March 31, 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 March 31, 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 9 - 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,
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 months ended March 31, 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.
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 March 31, 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 March 31, 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 10 for further information regarding the fair value of derivative instruments (in millions).
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| | | March 31, 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 | | $ | 188.9 | | | $ | (237.4) | | | $ | 21.5 | | | $ | — | |
Commodity derivatives(1) | Other current liabilities | | 238.4 | | | (261.9) | | | 101.5 | | | (102.3) | |
| | | | | | | | | |
Commodity derivatives(1) | Other long-term liabilities | | 2.2 | | | (3.6) | | | 6.1 | | | (6.1) | |
RIN commitment contracts(2) | Other current assets | | 2.7 | | | — | | | 1.6 | | | — | |
RIN commitment contracts(2) | Other current liabilities | | — | | | (7.0) | | | — | | | (0.7) | |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total gross fair value of derivatives | | $ | 432.2 | | | $ | (509.9) | | | $ | 130.7 | | | $ | (109.1) | |
Less: Counterparty netting and cash collateral(3) | | 335.2 | | | (478.1) | | | 107.1 | | | (82.4) | |
| Total net fair value of derivatives | | $ | 97.0 | | | $ | (31.8) | | | $ | 23.6 | | | $ | (26.7) | |
(1)As of March 31, 2022 and December 31, 2021, we had open derivative positions representing 200,455,511 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 March 31, 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 March 31, 2022 and December 31, 2021, we had open RINs commitment contracts representing 108,950,000 and 16,325,000 RINs, respectively.
(3)As of March 31, 2022 and December 31, 2021, $142.8 million and $(24.7) million, respectively, of cash collateral (obligation) held by counterparties has been netted with the derivatives with each counterparty.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 March 31, |
| | | | | | 2022 | | 2021 |
(Losses) gains on hedging derivatives not designated as hedging instruments recognized in cost of materials and other (1) | | | | | | $ | (71.4) | | | $ | 57.2 | |
| Losses on non-trading physical forward contract commodity derivatives in cost of materials and other | | | | | | (3.4) | | | (1.1) | |
| 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 | | | | | | $ | (74.8) | | | $ | 56.3 | |
(1) Gains (losses) on commodity derivatives that are economic hedges but not designated as hedging instruments include unrealized gains (losses) of $(70.7) million and $11.2 million for the three months ended March 31, 2022 and 2021.
(2) See separate table below for disclosures about "trading derivatives."
The effect of cash flow hedge accounting on the condensed consolidated statements of income is as follows (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 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 months ended March 31, 2022 or 2021. There were no gains (losses), net of tax, on settled commodity contracts during the three months ended March 31, 2022, and $0.2 million during the three months ended March 31, 2021, respectively, which were reclassified into cost of materials and other in the condensed consolidated statements of income. As of March 31, 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 March 31, |
| | | | | | 2022 | | 2021 |
| Trading Physical Forward Contract Commodity Derivatives | | | | | | | | |
| Realized gains (losses) | | | | | | $ | 18.0 | | | $ | (0.4) | |
| Unrealized losses | | | | | | (0.4) | | | (0.4) | |
| Total | | | | | | $ | 17.6 | | | $ | (0.8) | |
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| Trading Hedging Commodity Derivatives | | | | | | | | |
| Realized gains (losses) | | | | | | $ | 15.0 | | | $ | (0.4) | |
| Unrealized losses | | | | | | (17.2) | | | (0.6) | |
| Total | | | | | | $ | (2.2) | | | $ | (1.0) | |
Note 10 - 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
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 9) 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 (see Note 14). The environmental credits obligation surplus or deficit is categorized as Level 2 if measured at fair value either directly through observable inputs or indirectly through market-corroborated inputs.
As of and for the three months ended March 31, 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):
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| | | March 31, 2022 |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | |
| Commodity derivatives | | $ | — | | | $ | 429.5 | | | $ | — | | | $ | 429.5 | |
| Commodity investments | | 19.7 | | | — | | | — | | | 19.7 | |
| | | | | | | | |
| RINs commitment contracts | | — | | | 2.7 | | | — | | | 2.7 | |
| | | | | | | | |
Total assets | | 19.7 | | | 432.2 | | | — | | | 451.9 | |
| Liabilities | | | | | | | | |
| Commodity derivatives | | — | | | (502.9) | | | — | | | (502.9) | |
| | | | | | | | |
| RINs commitment contracts | | — | | | (7.0) | | | — | | | (7.0) | |
| Environmental credits obligation deficit | | — | | | (177.5) | | | — | | | (177.5) | |
| J. Aron supply and offtake obligations | | — | | | (589.3) | | | — | | | (589.3) | |
| Total liabilities | | — | | | (1,276.7) | | | — | | | (1,276.7) | |
| Net liabilities | | $ | 19.7 | | | $ | (844.5) | | | $ | — | | | $ | (824.8) | |
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 recognized for multiple derivative instruments executed with the same counterparty and where the legal right of offset exists. As of March 31, 2022 and December 31, 2021, $142.8 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 9 for further information regarding derivative instruments.
Note 11 - 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 March 31, 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 March 31, 2022 the remaining unpaid balance is $0.7 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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. 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 March 31, 2022, we have recorded an environmental liability of approximately $111.9 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 March 31, 2022 and December 31, 2021 is a liability totaling $78.5 million related to a property that we have 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 (expiring 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 March 31, 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 March 31, 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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. Six employees were injured in the fire. 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 three months ended March 31, 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 $1.0 million in the three months ended March 31, 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 months ended March 31, 2022. We continue to incur repair costs that may be recoverable under property and casualty insurance policies. In addtion, during the three months ended March 31, 2022, we recognized a gain of $4.3 million 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 $9.8 million in the three months ended March 31, 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 months ended March 31, 2022. An additional $0.1 million was recognized as a gain, in excess of losses during the three months ended March 31, 2022. We continue to incur repair costs that may be recoverable under property and casualty insurance policies. In addtion, during the three months ended March 31, 2022, we recognized a gain of $5.7 million 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 three months ended March 31, 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 March 31, 2022, we had in place letters of credit totaling approximately $362.5 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 March 31, 2022.
Note 12 - Income Taxes
Under ASC 740 we used an estimated annual tax rate to record income taxes for the three months ended March 31, 2022 and March 31, 2021. Our effective tax rate was 17.3% and 11.7% for the three months ended March 31, 2022 and 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 months ended March 31, 2022 as compared to the three months ended March 31, 2021 was primarily due to net increase in valuation allowance on certain state tax attributes in 2021 and increased 2022 projected pre-tax earnings.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 13 - Related Party Transactions
Our related party transactions consist primarily of transactions with our equity method investees (See Note 5). Transactions with our related parties were as follows for the periods presented (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
Revenues (1) | | | | | | $ | 16.7 | | | $ | 10.4 | |
Cost of materials and other (2) | | | | | | $ | 23.4 | | | $ | 15.1 | |
(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.
Note 14 - Other Current Assets and Liabilities
The detail of other current assets is as follows (in millions):
| | | | | | | | | | | |
| Other Current Assets | March 31, 2022 | | December 31, 2021 |
| | | |
| Prepaid expenses | $ | 181.3 | | | $ | 44.9 | |
| Short-term derivative assets (see Note 9) | 97.0 | | | 23.6 | |
| Investment commodities | 19.7 | | | 45.0 | |
| Income and other tax receivables | 1.5 | | | 3.6 | |
| | | |
| | | |
| | | |
| Other | 9.6 | | | 8.9 | |
| Total | $ | 309.1 | | | $ | 126.0 | |
The detail of accrued expenses and other current liabilities is as follows (in millions):
| | | | | | | | | | | |
| Accrued Expenses and Other Current Liabilities | March 31, 2022 | | December 31, 2021 |
| | | |
| Product financing agreements | $ | 319.7 | | | $ | 249.6 | |
| Crude purchase liabilities | 227.6 | | | 107.4 | |
| Consolidated Net RINs Obligation deficit (see Note 10) | 177.5 | | | 172.2 | |
| Income and other taxes payable | 129.1 | | | 124.8 | |
| Deferred revenue | 53.7 | | | 44.6 | |
| Employee costs | 44.8 | | | 44.4 | |
| Short-term derivative liabilities (see Note 9) | 30.5 | | | 26.8 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Other | 49.4 | | | 28.0 | |
| Total | $ | 1,032.3 | | | $ | 797.8 | |
Note 15 - Equity-Based Compensation
Delek US Holdings, Inc. 2006 and 2016 and Alon USA Energy, Inc. 2005 Long-Term Incentive Plans (collectively, the "Incentive Plans")
The Delek US Holdings, Inc. 2016 Long-Term Incentive Plan has 14,235,000 shares of common stock authorized for issuance; 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 $5.1 million and $4.5 million for the three months ended March 31, 2022 and 2021, respectively. These amounts are included in general and administrative expenses and operating expenses in the accompanying condensed consolidated statements of income. As of March 31, 2022, there was $39.2 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 1.3 years.
We issued net shares of common stock of 45,800 and 93,856 as a result of exercised or vested equity-based awards during the three months ended March 31, 2022 and 2021, respectively. These amounts are net of 17,829 and 58,851 shares withheld to satisfy employee tax obligations related to the exercises and vesting during the three months ended March 31, 2022 and 2021, respectively.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
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 85.0% 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 March 31, 2022. Implementation of the plan will be effective during the second quarter of 2022.
Note 16 - Shareholders' Equity
Dividends Suspension
We elected to suspend dividends beginning in the fourth quarter of 2020 in order to conserve capital.
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. The repurchase program does not obligate us to acquire any particular amount of stock and does not expire. 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 months ended March 31, 2022 or 2021. As of March 31, 2022, there was $229.7 million of authorization remaining under Delek's aggregate stock repurchase program.
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 17 - 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 one 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
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 March 31, 2022, $24.1 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 March 31, |
| (in millions) | | | | | | 2022 | | 2021 |
| Lease Cost | | | | | | | | |
Operating lease costs (1) | | | | | | $ | 17.4 | | | $ | 17.7 | |
Short-term lease costs (2) | | | | | | 8.7 | | | 9.5 | |
| Sublease income | | | | | | (0.1) | | | (1.9) | |
| Net lease costs | | | | | | $ | 26.0 | | | $ | 25.3 | |
| Other Information | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
Operating cash flows from operating leases (1) | | | | | | $ | (17.4) | | | $ | (18.3) | |
| Leased assets obtained in exchange for new operating lease liabilities | | | | | | $ | 1.5 | | | $ | 7.4 | |
| Leased assets obtained in exchange for new financing lease liabilities | | | | | | $ | — | | | $ | 12.2 | |
| | | | | | | | |
| | | | | | March 31, 2022 | | March 31, 2021 |
| Weighted-average remaining lease term (years) operating leases | | | | | | 4.5 | | 5.1 |
| Weighted-average remaining lease term (years) financing leases | | | | | | 6.5 | | 7.7 |
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.
Note 18 - Subsequent Events
Planned 3 Bear Energy - New Mexico, LLC Acquisition
On April 8, 2022, DKL Delaware Gathering, LLC (the “Purchaser”), a subsidiary of Delek Logistics, entered into a Membership Interest Purchase Agreement with 3 Bear Energy – New Mexico LLC (the “Seller”) to purchase 100% of the limited liability company interests in 3 Bear Delaware Holding – NM, LLC (the “Purchased Interests”), 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 Agreement”). Delek Logistics also entered into a guaranty agreement with the Seller in order to guaranty the payment obligations of the Purchaser under the Purchase Agreement.
The purchase price for the Purchased Interests is $624.7 million, subject to customary adjustments under the Purchase Agreement for net working capital and indebtedness. The Purchaser paid a deposit under the Purchase Agreement of approximately $31.2 million. The deposit may be retained by the Seller upon certain termination events described in the Purchase Agreement. At closing, the deposit will be applied to the purchase price to be paid under the Purchase Agreement.
The transactions contemplated by the Purchase Agreement are expected to close around mid-year 2022. The closing is subject to customary closing conditions set forth in the Purchase Agreement, including regulatory approvals. The Purchase Agreement also contains representations and warranties of the parties, indemnification obligations, termination rights, and other covenants and agreements.