10-Q
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30, 2008
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-32868
DELEK US HOLDINGS,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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52-2319066
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(State or other jurisdiction
of
Incorporation or organization)
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(I.R.S. Employer
Identification No.)
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7102 Commerce Way
Brentwood, Tennessee
(Address of principal
executive offices)
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37027
(Zip
Code)
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(615) 771-6701
(Registrants telephone
number, including area code)
Not Applicable
(Former name, former address and
former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
At August 1, 2008, there were 53,680,570 shares of
common stock, $0.01 par value, outstanding.
TABLE OF
CONTENTS
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PART I. FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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2
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Condensed Consolidated Balance Sheets as of June 30, 2008 and
December 31, 2007 (Unaudited)
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2
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Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 2008 and 2007 (Unaudited)
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3
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Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2008 and 2007 (Unaudited)
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4
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Notes to Condensed Consolidated Financial Statements (Unaudited)
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5
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Item 2.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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31
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Item 3.
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Quantitative and Qualitative Disclosure about Market Risk
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46
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Item 4.
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Controls and Procedures
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48
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PART II. OTHER INFORMATION
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Item 1A.
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Risk Factors
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48
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Item 4.
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Submission of Matters to a Vote of Security Holders
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49
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Item 5.
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Other Information
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Item 6.
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Exhibits
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49
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Signatures
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50
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Exhibit Index
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51
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Part I.
FINANCIAL
INFORMATION
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Item 1.
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Financial
Statements
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Delek US
Holdings, Inc.
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June 30,
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December 31,
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2008
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2007
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(In millions, except share and per share data)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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86.4
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$
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105.0
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Short-term investments
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44.4
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Accounts receivable
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170.1
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118.8
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Inventory
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165.1
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130.6
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Other current assets
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23.6
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47.7
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Total current assets
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445.2
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446.5
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Property, plant and equipment:
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Property, plant and equipment
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714.8
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644.3
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Less: accumulated depreciation
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(115.5
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)
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(98.2
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)
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Property, plant and equipment, net
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599.3
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546.1
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Goodwill
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91.6
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89.0
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Other intangibles, net
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11.0
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11.6
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Equity method investment
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132.4
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139.5
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Other non-current assets
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17.6
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11.6
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Total assets
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$
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1,297.1
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$
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1,244.3
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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326.8
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$
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248.6
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Current portion of long-term debt and capital lease obligations
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31.7
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10.8
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Note payable
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45.0
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Accrued expenses and other current liabilities
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81.9
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45.6
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Total current liabilities
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485.4
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305.0
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Non-current liabilities:
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Long-term debt and capital lease obligations, net of current
portion
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243.3
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344.4
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Environmental liabilities, net of current portion
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5.2
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6.7
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Asset retirement obligations
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6.4
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5.3
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Deferred tax liabilities
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48.3
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60.3
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Other non-current liabilities
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13.4
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10.1
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Total non-current liabilities
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316.6
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426.8
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Shareholders Equity:
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Preferred stock, $0.01 par value, 10,000,000 shares
authorized, 0 shares issued and outstanding
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Common stock, $0.01 par value, 110,000,000 shares
authorized, 53,680,570 and 53,666,570 shares issued and
outstanding, respectively
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0.5
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0.5
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Additional paid-in capital
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275.9
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274.1
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Accumulated other comprehensive income
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(13.9
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)
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0.3
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Retained earnings
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232.6
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237.6
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Total shareholders equity
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495.1
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512.5
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Total liabilities and shareholders equity
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$
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1,297.1
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$
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1,244.3
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See accompanying notes to the condensed consolidated financial
statements
2
Delek US
Holdings, Inc.
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Three Months Ended June 30,
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Six Months Ended June 30,
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2008
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2007
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2008
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2007
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(In millions, except share and per share data)
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Net sales
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$
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1,449.6
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$
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1,103.1
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$
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2,667.8
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$
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1,908.7
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Operating costs and expenses:
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Cost of goods sold
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1,354.7
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923.8
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2,487.3
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1,628.9
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Operating expenses
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64.6
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56.5
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122.5
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103.3
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General and administrative expenses
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12.6
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13.8
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25.9
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26.0
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Depreciation and amortization
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9.2
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8.0
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18.6
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15.0
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Gain on sale of assets
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(2.9
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)
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(2.9
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)
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1,438.2
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1,002.1
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2,651.4
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1,773.2
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Operating income
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11.4
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101.0
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16.4
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135.5
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Interest expense
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5.7
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8.3
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11.7
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15.5
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Interest income
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(0.5
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)
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(3.2
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)
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(1.6
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)
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(5.2
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)
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Loss from equity method investment
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0.6
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7.1
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Other expenses (income), net
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(0.1
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)
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(0.4
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)
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0.7
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0.2
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5.7
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4.7
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17.9
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10.5
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Income before income tax expense
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5.7
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96.3
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(1.5
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)
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125.0
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Income tax expense
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1.7
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29.1
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(0.5
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)
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36.9
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Net income (loss)
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$
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4.0
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$
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67.2
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$
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(1.0
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)
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$
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88.1
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Basic earnings (loss) per share
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$
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0.07
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$
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1.31
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$
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(0.02
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)
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$
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1.72
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Diluted earnings (loss) per share
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$
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0.07
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$
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1.29
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$
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(0.02
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)
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$
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1.69
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Weighted average common shares outstanding:
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Basic
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53,671,164
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51,176,711
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53,669,611
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51,158,392
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Diluted
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54,418,019
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52,255,690
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53,669,611
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52,206,022
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Dividends declared per common share outstanding
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$
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0.0375
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$
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$
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0.0750
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$
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0.2725
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See accompanying notes to the consolidated financial statements
3
Delek US
Holdings, Inc.
Condensed
Consolidated Statements of Cash Flows (Unaudited)
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Six Months Ended
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June 30,
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2008
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2007
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(In millions)
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Cash flows from operating activities:
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Net (loss) income
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$
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(1.0
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)
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$
|
88.1
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Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
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Depreciation and amortization
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18.6
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15.0
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Amortization of deferred financing costs
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2.2
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|
|
2.6
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Accretion of asset retirement obligations
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|
0.4
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|
|
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0.2
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Deferred income taxes
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|
|
(4.1
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)
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5.3
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Loss from equity method investment
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7.1
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|
|
|
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Loss on interest rate derivative instruments
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0.7
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|
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0.2
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Gain on sale of assets
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|
|
(2.9
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)
|
|
|
|
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Stock-based compensation expense
|
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|
1.8
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|
|
|
1.5
|
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Income tax benefit of stock-based compensation
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|
|
|
|
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|
(0.2
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)
|
Changes in assets and liabilities, net of acquisitions:
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|
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Accounts receivable, net
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|
|
(51.3
|
)
|
|
|
(24.6
|
)
|
Inventories and other current assets
|
|
|
(10.2
|
)
|
|
|
1.1
|
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Accounts payable and other current liabilities
|
|
|
92.2
|
|
|
|
43.6
|
|
Non-current assets and liabilities, net
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|
|
(9.2
|
)
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
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Net cash provided by operating activities
|
|
|
44.3
|
|
|
|
135.2
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(472.8
|
)
|
|
|
(600.9
|
)
|
Sales of short-term investments
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|
|
517.2
|
|
|
|
459.7
|
|
Business combinations, net of cash acquired
|
|
|
|
|
|
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(72.2
|
)
|
Purchases of property, plant and equipment
|
|
|
(71.5
|
)
|
|
|
(27.0
|
)
|
Proceeds from sale of property, plant and equipment
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net cash used in investing activities
|
|
|
(23.2
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)
|
|
|
(240.4
|
)
|
|
|
|
|
|
|
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|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net (repayments) proceeds from long-term revolver
|
|
|
(21.3
|
)
|
|
|
13.8
|
|
Proceeds from other debt instruments
|
|
|
20.0
|
|
|
|
65.0
|
|
Payments on debt and capital lease obligations
|
|
|
(33.9
|
)
|
|
|
(1.0
|
)
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
1.8
|
|
Income tax benefit of stock-based compensation
|
|
|
|
|
|
|
0.2
|
|
Dividends paid
|
|
|
(4.0
|
)
|
|
|
(13.9
|
)
|
Deferred financing costs paid
|
|
|
(0.5
|
)
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(39.7
|
)
|
|
|
64.6
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(18.6
|
)
|
|
|
(40.6
|
)
|
Cash and cash equivalents at the beginning of the period
|
|
|
105.0
|
|
|
|
101.6
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
86.4
|
|
|
$
|
61.0
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest, net of capitalized interest of $2.4 million and
$0.5 million for the six months ended June 30, 2008
and 2007, respectively
|
|
$
|
7.2
|
|
|
$
|
10.8
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
|
|
|
$
|
1.4
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
4
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
Delek US Holdings, Inc. (Delek, we, our or us) is the sole
shareholder of MAPCO Express, Inc. (Express), MAPCO Fleet, Inc.
(Fleet), Delek Refining, Inc. (Refining), Delek Finance, Inc.
(Finance) and Delek Marketing & Supply, Inc.
(Marketing), (collectively, the Subsidiaries).
We are a Delaware corporation formed in connection with our
acquisition in May 2001 of 198 retail fuel and convenience
stores from a subsidiary of the Williams Companies. Since then,
we have completed several other acquisitions of retail fuel and
convenience stores. In April 2005, we expanded our scope of
operations to include complementary petroleum refining and
wholesale and distribution businesses by acquiring a refinery in
Tyler, Texas. We initiated operations of our marketing segment
in August 2006 with the purchase of assets from Pride Companies
LP and affiliates (Pride Acquisition). Delek and Express were
incorporated during April 2001 in the State of Delaware. Fleet,
Refining, Finance, and Marketing were incorporated in the State
of Delaware during January 2004, February 2005, April 2005 and
June 2006, respectively.
We are a controlled company under the rules and regulations of
the New York Stock Exchange where our shares are traded under
the symbol DK. As of June 30, 2008,
approximately 73.4% of our outstanding shares are beneficially
owned by Delek Group Ltd. (Delek Group), a conglomerate that is
domiciled and publicly traded in Israel, has significant
interests in fuel supply businesses and is controlled indirectly
by Mr. Itshak Sharon (Tshuva).
Delek is a diversified energy business focused on petroleum
refining, wholesale sales of refined products and retail
marketing. Management views operating results primarily in three
segments: refining, marketing and retail. The refining segment
operates a high conversion, independent refinery in Tyler,
Texas. The marketing segment sells refined products on a
wholesale basis in west Texas through company-owned and
third-party operating terminals. The retail segment markets
gasoline, diesel and other refined petroleum products and
convenience merchandise through a network of
497 company-operated retail fuel and convenience stores.
Segment reporting is more fully discussed in Note 8. In
addition, we own a minority equity interest in Lion Oil Company,
a privately-held Arkansas corporation, which operates a
75,000 barrel per day high-conversion crude oil refinery
and other pipeline and product terminals, which is more fully
discussed in Note 5.
Basis
of Presentation
The condensed consolidated financial statements include the
accounts of Delek and its wholly-owned subsidiaries. We hold a
34.6% minority interest in Lion Oil Company, which we account
for as an equity method investment. Certain information and
footnote disclosures normally included in annual financial
statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted,
although management believes that the disclosures are adequate
to make the financial information presented not misleading. Our
unaudited condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles in the United States applied on a consistent basis
with those of the annual audited financial statements included
in our Annual Report on
Form 10-K
and in accordance with the rules and regulations of the
Securities and Exchange Commission (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, 2007
included in our Annual Report on
Form 10-K
filed with the SEC on March 3, 2008.
In the opinion of management, all adjustments necessary for a
fair presentation of the financial position 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.
5
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Reclassifications
Certain balance sheet amounts, primarily associated with various
receivables and payables, have been reclassified using a gross
presentation method to conform to current year reporting.
Certain pipeline expenses previously presented in cost of goods
sold have been reclassified to operating expense, general and
administrative expenses, and depreciation and amortization. This
change in presentation, which was made as of December 31,
2007, resulted in a decrease in cost of goods sold totaling
$0.5 million and $1.7 million for the three and six
months ended June 30, 2007. These other expenses were
increased, in total, by the same amounts. These
reclassifications had no effect on net income or
shareholders equity, as previously reported.
Cash
and Cash Equivalents
Delek maintains cash and cash equivalents in accounts with
large, national financial institutions and retains nominal
amounts of cash at the convenience store locations as petty
cash. All highly liquid investments purchased with an original
maturity of three months or less are considered to be cash
equivalents. These cash equivalents consist primarily of time
deposits, money market investments and high-quality commercial
paper.
Short-Term
Investments
Short-term investments as of December 31, 2007 primarily
consisted of investment grade market auction rate debt
securities and municipal rate bonds, which were classified as
available for sale under the provisions of Financial
Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Our
stated investment policy is to sell these securities and
repurchase similar securities at each auction date, which must
not exceed 90 days and typically ranges from 7 to
35 days. These short-term investments were carried at cost,
which approximated fair market value.
Due to the uncertainty in the credit markets in the last several
months, one of our auction rate investments held an auction
which was not fully subscribed in February 2008. At
June 30, 2008, this A2/A rated investment totaled
$5.6 million. The auction failure resulted in an interest
rate reset that increased the rate by 99 basis points. Due
to the failure of the auction, we have reclassified this
investment to other non-current assets on the accompanying
condensed consolidated balance sheet as of June 30, 2008.
If this security continues to experience failed auctions or its
credit ratings deteriorate, we may adjust the carrying value of
this investment. Based on our ability to access cash and cash
equivalents and our expected operating cash flows, we currently
do not anticipate the lack of liquidity on this auction rate
security to materially impact our overall liquidity.
Accounts
Receivable
Accounts receivable primarily represent receivables related to
credit card sales, receivables from vendor promotions and trade
receivables generated in the ordinary course of business. Delek
has an allowance for doubtful accounts related to trade
receivables of less than $0.1 million as of both
June 30, 2008 and December 31, 2007. All other
accounts receivable amounts are considered to be fully
collectible.
6
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Inventory
Refinery inventory consists of crude oil, refined products and
blendstocks which are stated at the lower of cost or market.
Cost is determined under the
last-in,
first-out (LIFO) valuation method. Cost of crude oil, refined
product and blendstock inventories in excess of market value are
charged to cost of goods sold. Such changes are subject to
reversal in subsequent periods, not to exceed LIFO cost, if
prices recover.
Marketing inventory consists of refined products which are
stated at the lower of cost or market on a
first-in,
first-out (FIFO) basis.
Retail merchandise inventory consists of gasoline, diesel fuel,
other petroleum products, cigarettes, beer, convenience
merchandise and food service merchandise. Fuel inventories are
stated at the lower of cost or market on a FIFO basis. Non-fuel
inventories are stated at estimated cost as determined by the
retail inventory method.
Property,
Plant and Equipment
Assets acquired by Delek in conjunction with acquisitions are
recorded at estimated fair market value in accordance with the
purchase method of accounting as prescribed in
SFAS No. 141, Business Combinations. Other
acquisitions of property and equipment are carried at cost.
Betterments, renewals and extraordinary repairs that extend the
life of the asset are capitalized. Maintenance and repairs are
charged to expense as incurred. Delek owns certain fixed assets
on leased locations and depreciates these assets and asset
improvements over the lesser of managements estimated
useful lives of the assets or the remaining lease term.
Depreciation is computed using the straight-line method over
managements estimated useful lives of the related assets,
which are as follows:
|
|
|
|
|
Automobiles
|
|
|
3-5 years
|
|
Computer equipment and software
|
|
|
3-10 years
|
|
Refinery turnaround costs
|
|
|
4 years
|
|
Furniture and fixtures
|
|
|
5-15 years
|
|
Retail store equipment
|
|
|
7-15 years
|
|
Asset retirement obligation assets
|
|
|
15-40 years
|
|
Refinery machinery and equipment
|
|
|
15-40 years
|
|
Petroleum and other site (POS) improvements
|
|
|
8-40 years
|
|
Building and building improvements
|
|
|
40 years
|
|
Property, plant and equipment and accumulated depreciation by
reporting segment as of and for the three and six months ended
June 30, 2008 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
Refining
|
|
|
Marketing
|
|
|
Retail
|
|
|
and Other
|
|
|
Consolidated
|
|
|
Property, plant and equipment
|
|
$
|
254.5
|
|
|
$
|
33.3
|
|
|
$
|
425.0
|
|
|
$
|
2.0
|
|
|
$
|
714.8
|
|
Less: Accumulated depreciation
|
|
|
(20.5
|
)
|
|
|
(3.2
|
)
|
|
|
(91.7
|
)
|
|
|
(0.1
|
)
|
|
|
(115.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
234.0
|
|
|
$
|
30.1
|
|
|
$
|
333.3
|
|
|
$
|
1.9
|
|
|
$
|
599.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense (three months ended June 30, 2008)
|
|
$
|
2.8
|
|
|
$
|
0.5
|
|
|
$
|
5.6
|
|
|
$
|
|
|
|
$
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense (six months ended June 30, 2008)
|
|
$
|
5.5
|
|
|
$
|
0.9
|
|
|
$
|
11.6
|
|
|
$
|
|
|
|
$
|
18.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, Delek evaluates
the realizability of property, plant and equipment as events
occur that might indicate potential impairment. We do not
believe any property, plant and equipment impairment exists as
of June 30, 2008.
Capitalized
Interest
Delek had several capital construction projects in the refining
segment and construction related to the new
prototype stores being built in the retail segment.
The refining segment capitalized interest of $1.1 million
and $2.3 million, respectively for the three and six months
ended June 30, 2008 and $0.3 million and
$0.5 million, respectively, for the three and six months
ended June 30, 2007. The retail segment capitalized
$0.1 million of interest for the six months ended
June 30, 2008 and a nominal amount of interest for the
three and six months ended June 30, 2007. There was no
interest capitalized by the marketing segment for the three or
six months ended June 30, 2008 or 2007.
Refinery
Turnaround Costs
Refinery turnaround costs are incurred in connection with
planned shutdowns and inspections of the refinerys major
units to perform necessary repairs and replacements. Refinery
turnaround costs are deferred when incurred, classified as
property, plant and equipment and amortized on a straight-line
basis over that period of time estimated to lapse until the next
planned turnaround occurs. Refinery turnaround costs include,
among other things, the cost to repair, restore, refurbish or
replace refinery equipment such as vessels, tanks, reactors,
piping, rotating equipment, instrumentation, electrical
equipment, heat exchangers and fired heaters. During December
2005, we successfully completed a major turnaround covering the
fluid catalytic cracking unit, sulfuric acid alkylation unit,
sulfur recovery unit, amine unit and kerosene and gasoline
treating units. Turnaround activities for other units are
expected to occur during 2009.
Goodwill
Goodwill is accounted for under the provisions of
SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS 142). This statement addresses how intangible
assets and goodwill should be accounted for upon and after their
acquisition. Specifically, goodwill and intangible assets with
indefinite useful lives are not amortized, but are subject to
annual impairment tests based on their estimated fair value. In
accordance with the provisions of SFAS 142, we perform an
annual review of impairment of goodwill in the fourth quarter by
comparing the carrying value of the applicable reporting unit to
its estimated fair value. Additionally, goodwill is tested for
impairment between annual reviews if an event occurs such that
it would be more likely than not that a reduction in carrying
amount has occurred. If the reporting units carrying
amount exceeds its fair value, the impairment test must be
completed by comparing the implied fair value of the reporting
units goodwill to its carrying amount. If the implied fair
value is less than the carrying amount, a goodwill impairment
charge is recorded. We do not believe any goodwill impairment
exists as of June 30, 2008.
Derivatives
Delek records all derivative financial instruments, including
interest rate swap agreements, interest rate cap agreements,
fuel-related derivatives, OTC future swaps and forward contracts
at estimated fair value regardless of their intended use in
accordance with the provisions of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
(SFAS 133), as amended and interpreted. Changes in the
fair value of the derivative instruments are recognized
periodically in operations unless we elect to apply the hedging
treatment permitted under the provisions of SFAS 133
allowing such changes to be classified as other comprehensive
income. We validate the fair value of all derivative financial
instruments on a monthly basis, utilizing valuations from third
party financial and brokerage institutions. See Note 9 for
further discussion.
8
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Fair
Value of Financial Instruments
Effective January 1, 2008, Delek adopted the provisions of
SFAS No. 157, Fair Value Measurements
(SFAS 157), which pertain to certain balance sheet
items measured at fair value on a recurring basis. SFAS 157
defines fair value, establishes a framework for measuring fair
value and expands disclosures about such measurements that are
permitted or required under other accounting pronouncements.
While SFAS 157 may change the method of calculating fair
value, it does not require any new fair value measurements. See
Note 9 for further discussion.
Effective January 1, 2008, Delek adopted the provisions of
SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities an amendment of
FASB Statement No. 115 (SFAS 159). This statement
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. By electing the fair value option in conjunction with
a derivative, an entity can achieve an accounting result similar
to a fair value hedge without having to comply with complex
hedge accounting rules. At January 1, 2008, we did not make
the fair value election for any financial instruments not
already carried at fair value in accordance with other
accounting standards, so the adoption of SFAS 159 did not
impact our condensed consolidated financial statements.
Self-Insurance
Reserves
Delek is primarily self-insured for employee medical,
workers compensation and general liability costs, with
varying limits of per claim and aggregate stop loss insurance
coverage in amounts determined reasonable by management. We
maintain an accrual for these costs based on claims filed and an
estimate of claims incurred but not reported. Differences
between actual settlements and recorded accruals are recorded in
the period identified.
Vendor
Discounts and Deferred Revenue
Delek receives cash discounts or cash payments from certain
vendors related to product promotions based upon factors such as
quantities purchased, quantities sold, merchandise exclusivity,
store space and various other factors. In accordance with
Emerging Issues Task Force (EITF)
02-16,
Accounting by a Reseller for Consideration Received from a
Vendor, we recognize these amounts as a reduction of
inventory until the products are sold, at which time the amounts
are reflected as a reduction in cost of goods sold. Certain of
these amounts are received from vendors related to agreements
covering several periods. These amounts are initially recorded
as deferred revenue, are reclassified as a reduction in
inventory upon receipt of the products, and are subsequently
recognized as a reduction of cost of goods sold as the products
are sold.
Delek also receives advance payments from certain vendors
relating to non-inventory agreements. These amounts are recorded
as deferred revenue and are subsequently recognized as a
reduction of cost of goods sold as earned.
Environmental
Expenditures
It is Deleks policy to accrue environmental and
clean-up
related costs of a non-capital nature when it is both probable
that a liability has been incurred and the amount can be
reasonably estimated. Environmental liabilities represent the
current estimated costs to investigate and remediate
contamination at our properties. This estimate is based on
internal and third-party assessments of the extent of the
contamination, the selected remediation technology and review of
applicable environmental regulations, typically considering
estimated activities and costs for the next 15 years,
unless a specific longer range estimate is practicable. Accruals
for estimated costs from environmental remediation obligations
generally are recognized no later than completion of the
remedial feasibility study and include, but are not limited to,
costs to perform remedial actions and
9
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
costs of machinery and equipment that is dedicated to the
remedial actions and that does not have an alternative use. Such
accruals are adjusted as further information develops or
circumstances change. Expenditures for equipment necessary for
environmental issues relating to ongoing operations are
capitalized.
Asset
Retirement Obligations
Delek recognizes liabilities which represent the fair value of a
legal obligation to perform asset retirement activities,
including those that are conditioned on a future event when the
amount can be reasonably estimated. In the retail segment these
obligations relate to the net present value of estimated costs
to remove underground storage tanks at owned and leased retail
sites which are legally required under the applicable leases.
The asset retirement obligation for storage tank removal on
retail sites is being accreted over the expected life of the
owned retail site or the average retail site lease term. In the
refining segment, these obligations relate to the required
disposal of waste in certain storage tanks, asbestos abatement
at an identified location and other estimated costs that would
be legally required upon final closure of the refinery. In the
marketing segment, these obligations relate to the required
cleanout of the pipeline and terminal tanks, and removal of
certain above-grade portions of the pipeline situated on
right-of-way
property.
The reconciliation of the beginning and ending carrying amounts
of asset retirement obligations as of June 30, 2008 and
December 31, 2007 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Year Ended
|
|
|
|
Ended June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Beginning balance
|
|
$
|
5.3
|
|
|
$
|
3.3
|
|
Additional
liabilities(1)
|
|
|
0.7
|
|
|
|
1.5
|
|
Acquired liabilities
|
|
|
|
|
|
|
0.7
|
|
Liabilities settled
|
|
|
|
|
|
|
(0.3
|
)
|
Accretion expense
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6.4
|
|
|
$
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This amount represents managements recognition of an asset
retirement obligation associated with additional underground
storage tanks at various retail stores which previously was not
assessed as required. |
In order to determine fair value, management must make certain
estimates and assumptions including, among other things,
projected cash flows, a credit-adjusted risk-free rate and an
assessment of market conditions that could significantly impact
the estimated fair value of the asset retirement obligation.
Revenue
Recognition
Revenues for products sold are recorded at the point of sale
upon delivery of product, which is the point at which title to
the product is transferred, and when payment has either been
received or collection is reasonably assured.
Delek derives service revenue from the sale of lottery tickets,
money orders, car washes and other ancillary product and service
offerings. Service revenue and related costs are recorded at
gross amounts and net amounts, as appropriate, in accordance
with the provisions of
EITF 99-19,
Reporting Revenue Gross as a Principal Versus Net as an
Agent. We record service revenue and related costs at gross
amounts when Delek is the primary obligor, is subject to
inventory risk, has latitude in establishing prices and
selecting suppliers, influences product or service
specifications, or has several but not all of these indicators.
When Delek is not the primary obligor and does not possess other
indicators of gross reporting as discussed previously, we record
net service revenue.
10
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Cost
of Goods Sold and Operating Expenses
For the retail segment, cost of goods sold comprises the costs
of specific products sold. Operating expenses include costs such
as wages of employees at the stores, lease and utilities expense
for the stores, credit card interchange transaction charges and
other costs of operating the stores. For the refining segment,
cost of goods sold includes all the costs of crude oil,
feedstocks and external costs. Operating expenses include the
costs associated with the actual operations of the refinery. For
the marketing segment, cost of goods sold includes all costs of
refined products, additives and related transportation.
Operating expenses include the costs associated with the actual
operation of owned terminals, terminaling expense at third-party
locations and pipeline maintenance costs.
Sales,
Use and Excise Taxes
Deleks policy is to exclude sales, use and excise taxes
from revenue when we are an agent of the taxing authority, in
accordance with
EITF 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (that is, Gross versus Net Presentation).
Deferred
Financing Costs
Deferred financing costs represent expenses related to issuing
our long-term debt and obtaining our lines of credit. These
amounts are amortized over the remaining term of the respective
financing and are included in interest expense. See Note 6
for further information.
Advertising
Costs
Delek expenses advertising costs as the advertising space is
utilized. Advertising expense for the three and six months ended
June 30, 2008 was $0.7 million and $1.3 million,
respectively, and $0.4 million and $1.0 million,
respectively, for the three and six months ended June 30,
2007.
Operating
Leases
Delek leases land and buildings under various operating lease
arrangements, most of which provide the option, after the
initial lease term, to renew the leases. Some of these lease
arrangements include fixed rental rate increases, while others
include rental rate increases based upon such factors as
changes, if any, in defined inflationary indices.
In accordance with SFAS No. 13, Accounting for
Leases, for all leases that include fixed rental rate
increases, Delek calculates the total rent expense for the
entire lease period, considering renewals for all periods for
which failure to renew the lease imposes economic penalty, and
records rental expense on a straight-line basis in the
accompanying condensed consolidated statements of operations.
Income
Taxes
Income taxes are accounted for under the provisions of
SFAS No. 109, Accounting for Income Taxes. This
statement generally requires Delek to record deferred income
taxes for the differences between the book and tax bases of its
assets and liabilities, which are measured using enacted tax
rates and laws that will be in effect when the differences are
expected to reverse. Deferred income tax expense or benefit
represents the net change during the year in our deferred income
tax assets and liabilities.
In July 2006, the FASB issued FIN 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109, Accounting for Income Taxes (FIN 48).
FIN 48, which is the most significant change to accounting
for income taxes since the adoption of the liability approach,
prescribes a comprehensive model for how companies should
recognize, measure, present and disclose in their financial
statements uncertain tax
11
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
positions taken or expected to be taken on a tax return. The
interpretation clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is
required to meet before being recognized in the financial
statements. In addition, FIN 48 clearly scopes out income
taxes from SFAS No. 5, Accounting for
Contingencies. The interpretation also revises disclosure
requirements to include an annual tabular rollforward of
unrecognized tax benefits.
Delek adopted the provisions of FIN 48 effective
January 1, 2007. The adoption of the interpretation to all
of Deleks tax positions resulted in an increase in the
liability for unrecognized tax benefits and a cumulative effect
adjustment of $0.1 million recognized as an adjustment to
retained earnings. At January 1, 2007, Delek had
unrecognized tax benefits of $0.2 million which, if
recognized, would affect our effective tax rate. There were no
significant changes to the liability for unrecognized tax
benefits during the three or six months ended June 30, 2008
or 2007.
Delek files a consolidated U.S. federal income tax return,
as well as income tax returns in various state jurisdictions.
Delek is no longer subject to U.S. federal income tax
examinations by tax authorities for years before 2004 or state
and local income tax examinations by tax authorities for the
years before 2003. The Internal Revenue Service has examined
Deleks income tax returns through 2004 and during the
second quarter of 2008, began the process of examining the
returns for 2005 and 2006. Delek does not anticipate any
significant changes to its financial position or cash payouts as
a result of FIN 48 adjustments within the next twelve
months.
Delek recognizes accrued interest and penalties related to
unrecognized tax benefits as an adjustment to the current
provision for income taxes. A nominal amount of interest was
recognized related to unrecognized tax benefits during the three
and six months ended June 30, 2008 and 2007.
Delek benefits from federal tax incentives related to its
refinery operations. Specifically, Delek is entitled to the
benefit of the domestic manufacturers production deduction
for federal tax purposes. Additionally, in 2007 Delek was
entitled to federal tax credits related to the production of
ultra low sulfur diesel fuel. The combination of these two items
reduces Deleks federal effective tax rate to an amount
that, for the three and six months ended June 30, 2007, is
less than the statutory rate of 35%.
Earnings
(Loss) Per Share
Basic and diluted earnings (loss) per share (EPS) are computed
by dividing net income by the weighted average common shares
outstanding. The common shares used to compute Deleks
basic and diluted earnings (loss) per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Weighted average common shares outstanding
|
|
|
53,671,164
|
|
|
|
51,176,711
|
|
|
|
53,669,611
|
|
|
|
51,158,392
|
|
Dilutive effect of equity instruments
|
|
|
746,855
|
|
|
|
1,078,979
|
|
|
|
|
|
|
|
1,047,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, assuming dilution
|
|
|
54,418,019
|
|
|
|
52,255,690
|
|
|
|
53,669,611
|
|
|
|
52,206,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding stock options totaling 1,912,327 common shares were
excluded from the diluted earnings per share calculation
for both the three and six months ended June 30, 2008.
Outstanding stock options totaling 864,195 and 1,755,496 common
shares were excluded from the diluted earnings per share
calculation for the three and six months ended June 30,
2007, respectively. These share equivalents did not have a
dilutive effect under the treasury stock method. Outstanding
stock options totaling 764,688 were also excluded from the
diluted earnings per share calculation for the six months ended
June 30, 2008 because of their anti-dilutive effect due to
the net loss for the period.
12
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Shareholders
Equity
On May 1, 2008, Delek announced that its Board of Directors
voted to declare a quarterly cash dividend of $0.0375 per common
share, payable to shareholders of record on May 19, 2008.
This dividend was paid on June 9, 2008.
Stock-Based
Compensation
SFAS No. 123R, Share Based Payment
(SFAS 123R) requires the use of a valuation model to
calculate the fair value of stock-based awards. Delek uses the
Black-Scholes-Merton option-pricing model to determine the fair
value of stock-based awards as of the date of grant.
Restricted stock units (RSUs) are measured based on the fair
market value of the underlying stock on the date of grant.
Vested RSUs are not issued until the minimum statutory
withholding requirements have been remitted to us for payment to
the taxing authority. As a result, the actual number of shares
accounted for as issued may be less than the number of RSUs
vested, due to any withholding amounts which have not been
remitted.
We generally recognize compensation expense related to
stock-based awards with graded or cliff vesting on a
straight-line basis over the vesting period.
Comprehensive
Income (Loss)
For the three and six months ended June 30, 2008,
comprehensive income (loss) includes net income (loss) and
changes in the fair value of derivative instruments designated
as cash flow hedges. Comprehensive income for the three and six
months ended June 30, 2007 was equivalent to net income (in
millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net income (loss)
|
|
$
|
4.0
|
|
|
$
|
67.2
|
|
|
$
|
(1.0
|
)
|
|
$
|
88.1
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on derivative instruments, Net of tax
benefit of $6.1 and $8.1 for the three and six months ended
June 30, 2008
|
|
|
(10.3
|
)
|
|
|
|
|
|
|
(14.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(6.3
|
)
|
|
$
|
67.2
|
|
|
$
|
(15.2
|
)
|
|
$
|
88.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141
(Revised), Business Combinations (SFAS 141(R)). This
statement will apply to all transactions in which an entity
obtains control of one or more other businesses. In general,
SFAS 141(R) requires the acquiring entity in a business
combination to recognize the fair value of all the assets
acquired and liabilities assumed in the transaction; establishes
the acquisition-date as the fair value measurement point; and
modifies the disclosure requirements. This statement applies
prospectively to business combinations for which the acquisition
date is on or after January 1, 2009. However, accounting
for changes in valuation allowances for acquired deferred tax
assets and the resolution of uncertain tax positions for prior
business combinations will impact tax expense instead of
impacting the prior business combination accounting starting
January 1, 2009. We are currently evaluating the changes
provided in this statement.
Also in December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB
No. 51(SFAS 160), which changes the classification
of non-
13
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
controlling interests, sometimes called a minority interest, in
the consolidated financial statements. Additionally, this
statement establishes a single method of accounting for changes
in a parent companys ownership interest that do not result
in deconsolidation and requires a parent company to recognize a
gain or loss when a subsidiary is deconsolidated. This statement
is effective January 1, 2009, and will be applied
prospectively with the exception of the presentation and
disclosure requirements which must be applied retrospectively.
Delek has no minority interest reporting in its consolidated
reporting, therefore adoption of SFAS 160 is not expected
to have an impact on its financial position or results of
operations.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
(SFAS 161). SFAS 161 applies to all derivative
instruments and nonderivative instruments that are designated
and qualify as hedging instruments pursuant to
paragraphs 37 and 42 of SFAS 133 and related hedged
items accounted for under SFAS 133. The standard requires
entities to provide greater transparency through additional
disclosures about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items
are accounted for under SFAS 133 and its related
interpretations, and how derivative instruments and related
hedged items affect an entitys financial position, results
of operations, and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years beginning after
November 15, 2008. Delek will adopt SFAS 161 effective
January 1, 2009. We are currently evaluating the potential
effect, if any, of this statement on our financial position or
results of operations.
Carrying value of inventories consisted of the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Refinery raw materials and supplies
|
|
$
|
51.6
|
|
|
$
|
20.7
|
|
Refinery work in process
|
|
|
27.6
|
|
|
|
19.1
|
|
Refinery finished goods
|
|
|
16.7
|
|
|
|
28.3
|
|
Retail fuel
|
|
|
20.3
|
|
|
|
22.9
|
|
Retail merchandise
|
|
|
33.7
|
|
|
|
36.0
|
|
Marketing refined products
|
|
|
15.2
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
Total Inventories
|
|
$
|
165.1
|
|
|
$
|
130.6
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2008 and December 31, 2007, the excess of
replacement cost (FIFO) over the carrying value (LIFO) of
refinery inventories was $85.5 million and
$47.6 million, respectively.
Temporary
Liquidations
During the three months ended June 30, 2008, we incurred a
temporary LIFO liquidation gain in our refinery inventory of
$0.1 million, which we expect to be restored by the end of
the year. The temporary LIFO liquidation gain has been deferred
as a component of accrued expenses and other current liabilities
in the accompanying June 30, 2008 condensed consolidated
balance sheet.
During the three months ended June 30, 2007, we carried a
temporary LIFO liquidation gain in our refinery inventory of
$0.5 million, which was restored by the end of the year.
The temporary LIFO liquidation gain was deferred as a component
of accrued expenses and other current liabilities.
14
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Permanent
Liquidations
During the three months ended June 30, 2008, we incurred a
permanent reduction in the LIFO layer resulting in a liquidation
in our refinery work in process and finished goods inventories
in the amount of $12.5 million, in addition to the
permanent reduction incurred during the first quarter of 2008 in
the amount of $2.4 million. Of the $12.5 million gain
recognized in the three months ended June 30, 2008,
$10.0 million related to a reduction in managements
estimated year-end LIFO inventory levels. The total liquidation
gain incurred in the six months ended June 30, 2008 was
$14.9 million. This liquidation, which represents a
reduction of approximately 214,000 barrels, was recognized
as a reduction of cost of goods sold in the six months ended
June 30, 2008.
During the three months ended June 30, 2007, we incurred a
permanent reduction in the LIFO layer resulting in a liquidation
gain in our refinery finished goods inventory in the amount of
$1.5 million, in addition to the permanent reduction
incurred during the first quarter of 2007 in the amount of
$0.5 million. The total liquidation gain incurred in the
six months ended June 30, 2007 was $2.0 million. This
liquidation gain represents a reduction of approximately
227,000 barrels and was recognized as a reduction of cost
of goods sold in the six months ended June 30, 2007.
Calfee
Acquisition
In the first quarter of 2007, Delek, through its Express
subsidiary, agreed to purchase 107 retail fuel and convenience
stores located in northern Georgia and eastern Tennessee, and
related assets, from the Calfee Company of Dalton, Inc. and its
affiliates (the Calfee acquisition). We completed the purchase
of 103 stores and assumed the management of all 107 stores in
the second quarter of 2007. The purchase of the remaining four
locations closed on July 27, 2007. Of the 107 stores, Delek
owns 70 of the properties and assumed leases for the remaining
37 properties. Delek purchased the assets for approximately
$71.8 million, including $0.1 million of cash.
In addition to the consideration paid as acquisition cost for
the Calfee acquisition, Delek incurred and capitalized
$2.9 million in acquisition transaction costs. We
recognized goodwill in connection with this acquisition and
believe it is related to the synergy that is created in
combining these retail stores with others in our chain to
establish MAPCO as a market leader in the Chattanooga and
northern Georgia corridor. The allocation of the aggregate
purchase price of the Calfee acquisition is summarized as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
|
|
|
$
|
6.7
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
64.3
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
2.0
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
11.2
|
|
|
|
|
|
Other intangible assets
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
Current and non-current liabilities
|
|
|
|
|
|
|
(10.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
74.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Calfee acquisition was accounted for using the purchase
method of accounting, as prescribed in SFAS 141, and the
results of operations associated with the Calfee stores have
been included in the accompanying condensed consolidated
statements of operations from the date of acquisition. The
purchase price was allocated to the underlying assets and
liabilities based on their estimated fair values. Delek has
finalized the valuation work associated with certain
intangibles. During the six months ended June 30, 2008, the
final allocation of the Calfee acquisition purchase price
resulted in a net increase to goodwill of $2.6 million.
15
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
|
|
5.
|
Equity
Method Investment
|
Investment
in Lion Oil Company
On August 22, 2007, Delek completed the acquisition of
approximately 28.4% of the issued and outstanding shares of
common stock of Lion Oil Company (Lion Oil). On
September 25, 2007, Delek completed the acquisition of an
additional approximately 6.2% of the issued and outstanding
shares of Lion Oil, bringing its total ownership interest to
approximately 34.6%. Total cash consideration paid to the
sellers by Delek in both transactions totaled approximately
$88.2 million. Delek also incurred and capitalized
$0.9 million in acquisition transaction costs. In addition
to cash consideration, Delek issued to one of the sellers
1,916,667 unregistered shares of Delek common stock, par value
$0.01 per share, valued at $51.2 million using the closing
price of our stock on the date of the acquisition. As of
June 30, 2008, our total investment in Lion Oil was
$132.4 million.
Lion Oil, a privately held Arkansas corporation, owns and
operates a 75,000 barrel per day, crude oil refinery in El
Dorado, Arkansas, three crude oil pipelines, a crude oil
gathering system and two refined petroleum product terminals in
Memphis and Nashville, Tennessee. The two terminals supply
products to some of Deleks 180 convenience stores in the
Memphis and Nashville markets. These product purchases are made
at market value and totaled $6.0 million and
$8.4 million during the three and six months ended
June 30, 2008, respectively.
Delek includes its proportionate share of the operating results
of Lion Oil in its consolidated statements of operations two
months in arrears. We do not believe this lag has a material
adverse effect on our reporting. These results are reported in
earnings or loss from equity method investment. Summarized
financial information of Deleks proportionate share of
Lion Oil is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Gross profit (including refinery operating costs)
|
|
$
|
2.9
|
|
|
$
|
|
|
|
$
|
(5.8
|
)
|
|
$
|
|
|
Terminal operating expenses
|
|
|
0.8
|
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
Net loss
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
(6.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Current assets
|
|
$
|
141.3
|
|
|
$
|
89.3
|
|
Total assets
|
|
|
261.6
|
|
|
|
190.0
|
|
Current liabilities
|
|
|
87.1
|
|
|
|
66.8
|
|
Non-current liabilities
|
|
|
167.5
|
|
|
|
22.7
|
|
Equity in net assets
|
|
|
94.1
|
|
|
|
100.5
|
|
In addition to the net loss above, Delek recognized $0.1 and
$0.4 million in amortization of the equity investment for
the three and six months ended June 30, 2008, respectively.
The difference between the cost of Deleks investment in
Lion Oil and its share of underlying equity in the net assets of
Lion Oil is attributable to the difference between the fair
value at the date of acquisition and Lion Oils historical
cost. The portion of the difference attributable to the refinery
is being amortized over the estimated remaining useful life at
the date of acquisition, which is 25 years. The remaining
difference is attributable to base levels of inventory which
will be recognized when the base level of inventory is
liquidated.
16
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
|
|
6.
|
Long-Term
Obligations and Short-Term Note Payable
|
Outstanding borrowings under Deleks existing debt
instruments and capital lease obligations are as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Senior secured credit facility term loan
|
|
$
|
131.9
|
|
|
$
|
145.6
|
|
Senior secured credit facility revolver
|
|
|
40.0
|
|
|
|
49.0
|
|
Fifth Third revolver
|
|
|
21.0
|
|
|
|
34.3
|
|
Reliant Bank revolver
|
|
|
1.0
|
|
|
|
|
|
Lehman note
|
|
|
45.0
|
|
|
|
65.0
|
|
Promissory notes
|
|
|
80.0
|
|
|
|
60.0
|
|
Capital lease obligations
|
|
|
1.1
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
320.0
|
|
|
|
355.2
|
|
Less:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
76.7
|
|
|
|
10.8
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
243.3
|
|
|
$
|
344.4
|
|
|
|
|
|
|
|
|
|
|
Senior
Secured Credit Facility
The senior secured credit facility consists of a
$120.0 million revolving credit facility and
$165.0 million term loan facility which as of June 30,
2008, had $40.0 million outstanding under the revolver and
$131.9 million outstanding under the term loan. Borrowings
under the senior secured credit facility are secured by
substantially all the assets of MAPCO Express, Inc. and its
subsidiaries. Letters of credit outstanding under the facility
totaled $21.3 million as of June 30, 2008. The senior
secured credit facility term loan requires quarterly principal
payments of approximately 0.25% of the principal balance through
March 31, 2011 and a balloon payment of approximately
94.25% of the principal balance due upon maturity on
April 28, 2011. We are also required to make certain
prepayments of this facility depending on excess cash flow as
defined in the credit agreement. In accordance with this excess
cash flow calculation, we prepaid $15.6 million in April
2006 and $9.5 million in March 2008. In June 2008, Express
sold real property operated by a third party for
$3.9 million. The proceeds of this sale, net of expenses,
were used to pay down the term loan. The senior secured credit
facility revolver is payable in full upon maturity on
April 28, 2010 with periodic interest repayment
requirements. The senior secured credit facility term and senior
secured credit facility revolver loans bear interest based on
predetermined pricing grids which allow us to choose between a
Base Rate or Eurodollar loan. Interest
is payable quarterly for Base Rate loans and for the applicable
interest period on Eurodollar loans. At June 30, 2008, the
weighted average borrowing rate was approximately 5.1% for the
senior secured credit facility term loan and 4.8% for the senior
secured credit facility revolver. Additionally, the senior
secured credit facility requires us to pay a quarterly fee of
0.5% per year on the average available revolving commitment
under the senior secured credit facility revolver. Amounts
available under the senior secured revolver as of June 30,
2008 were approximately $58.7 million.
We are required to comply with certain financial and
non-financial covenants under the senior secured credit
facility. We were in compliance with all covenant requirements
as of June 30, 2008.
SunTrust
ABL Revolver
On October 16, 2006, we amended and restated our existing
asset based revolving credit facility. The amended and restated
agreement, among other things, increased the size of the
facility from $250 to $300 million, including a
$300 million
sub-limit
for letters of credit, and extended the maturity of the facility
17
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
by one year to April 28, 2010. The revolving credit
agreement bears interest based on predetermined pricing grids
that allow us to choose between a Base Rate or
Eurodollar rate. Interest is payable quarterly for
Base Rate loans and for the applicable interest period on
Eurodollar loans. Availability under the SunTrust ABL revolver
is determined by a borrowing base defined in the SunTrust ABL
revolver, supported primarily by cash, certain accounts
receivable and inventory.
In addition, the SunTrust ABL revolver supports our issuances of
letters of credit used primarily in connection with the
purchases of crude oil for use in our refinery that at no time
may exceed the aggregate borrowing capacity available under the
SunTrust ABL revolver. As of June 30, 2008, we had no
outstanding borrowings under the agreement but had letters of
credit outstanding totaling approximately $219.2 million.
Excess collateral capacity under the SunTrust ABL revolver as of
June 30, 2008 was $73.6 million.
The SunTrust ABL revolver contains a negative covenant that
prohibits us from creating, incurring or assuming any liens,
mortgages, pledges, security interests or other similar
arrangements against the property, plant and equipment of the
refinery, subject to customary exceptions for certain permitted
liens.
Under the SunTrust ABL revolver, we are also subject to certain
non-financial covenants and, in the event that our availability
under the borrowing base is less than $30.0 million on the
measurement date, to certain financial covenants. We were in
compliance with all covenant requirements as of June 30,
2008.
Fifth
Third Revolver
In conjunction with the Pride Acquisition discussed in
Note 1, on July 27, 2006, Delek executed a short-term
revolver with Fifth Third Bank, as administrative agent, in the
amount of $50.0 million. The proceeds of this revolver were
used to fund the working capital needs of our new subsidiary,
Delek Marketing & Supply, LP. The Fifth Third revolver
initially matured on July 30, 2007, but on July 27,
2007 the maturity was extended until January 31, 2008. On
December 19, 2007, we amended and restated our existing
revolving credit facility. The amended and restated agreement,
among other things, increased the size of the facility from
$50.0 to $75.0 million, including a $25.0 million
sub-limit
for letters of credit, and extended the maturity of the facility
to December 19, 2012. The revolver bears interest at our
election at either (x) a spread of 1.5% to 2.5%, as
determined by a leverage-based pricing matrix, over the LIBOR
for the applicable interest period or (y) a spread of 0.0%
to 1.0%, as determined by the same matrix, over Fifth
Thirds base rate. Borrowings under the Fifth Third
revolver are secured by substantially all of the assets of Delek
Marketing & Supply, LP. As of June 30, 2008, the
weighted average borrowing rate for amounts borrowed was 4.6%.
We have letters of credit outstanding of $23.0 million as
of June 30, 2008. Amounts available under the Fifth Third
revolver as of June 30, 2008 were approximately
$31.0 million. We are required to comply with certain
financial and non-financial covenants under this revolver. We
were in compliance with all covenant requirements as of
June 30, 2008.
Lehman
Credit Agreement
On March 30, 2007, Delek entered into a credit agreement
with Lehman Commercial Paper Inc., as administrative agent,
Lehman Brothers Inc., as arranger and joint book runner, and
JPMorgan Chase Bank, N.A., as documentation agent, arranger and
joint book runner. The credit agreement provides for unsecured
loans of $65.0 million, the proceeds of which were used to
pay a portion of the acquisition costs for the assets of Calfee
Company of Dalton, Inc. and affiliates, and to pay related costs
and expenses in April 2007. The loans become due on
March 30, 2009 and bear interest, at Deleks election
in accordance with the terms of the credit agreement, at either
a Base Rate or Eurodollar rate, plus in each case, an applicable
margin of initially 1.0% in respect of Base Rate loans, and 2.0%
in respect of Eurodollar loans, which applicable margin is
subject to increase depending on the number of days the loan
remains outstanding. Interest is payable quarterly for Base Rate
loans and for the applicable interest period for Eurodollar
loans. As of June 30, 2008, the weighted average borrowing
rate was 6.0%. This agreement was amended in June 2008 to
redefine certain
18
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
financial covenants required under the agreement. We are
required to comply with certain financial and non-financial
covenants under this credit agreement. We were in compliance
with all covenant requirements as of June 30, 2008.
Promissory
Notes
On May 23, 2006, Delek executed a $30.0 million
promissory note in favor of Israel Discount Bank of New York
(IDB Note). The proceeds of this note were used to repay the
existing promissory notes in favor of Israel Discount Bank and
Bank Leumi US. The IDB Note matures on May 30, 2009, and
bears interest, payable semi-annually, at a spread of 2.0% over
the LIBOR, for interest periods of 30, 60, 90 or 180 days
as selected by us. As of June 30, 2008 the weighted average
borrowing rate for amounts borrowed under the IDB Note was 4.6%.
On July 27, 2006, we executed a $30.0 million
promissory note in favor of Bank Leumi US. The proceeds of this
note were used to fund a portion of the Pride Acquisition and
its working capital needs. This note matures on July 27,
2009, and bears interest, payable for the applicable interest
period, at a spread of 2.0% per year over the LIBOR rate
(Reserve Adjusted) for interest periods of 30, 90 or
180 days. As of June 30, 2008, the weighted average
borrowing rate for amounts borrowed under the Bank Leumi Note
was 6.0%. We are not required to comply with any financial or
non-financial covenants under these notes.
On May 12, 2008, we executed a second promissory note in
favor of Bank Leumi US for $20.0 million. The proceeds of
this note were used to reduce short term debt and for working
capital needs. This note matures on May 11, 2011, and bears
interest, payable for the applicable interest period, at a
spread of 2.825% per year over the LIBOR rate (Reserve Adjusted)
for interest periods of 30, 90 or 180 days. As of
June 30, 2008, the weighted average borrowing rate for
amounts borrowed under the Bank Leumi Note was 5.6%. In
connection with the execution of this note, Delek incurred and
capitalized $0.3 million in deferred financing costs in the
three and six months ended June 30, 2008 that will be
amortized over the term of the facility. We are required to
comply with certain financial and non-financial covenants under
this credit agreement. We were in compliance with all covenant
requirements as of June 30, 2008.
Reliant
Bank Revolver
On March 28, 2008, we entered into a revolving credit
agreement with Reliant Bank, a Tennessee bank, headquartered in
Brentwood, Tennessee. The credit agreement provides for
unsecured loans of up to $12.0 million and we had
$1.0 million in borrowings under this facility as of
June 30, 2008. This loan becomes due on March 31, 2011
and bears interest, payable for the applicable interest period,
at a spread of 2.5% per year over the 30 day LIBOR rate. As
of June 30, 2008, the weighted average borrowing rate for
amounts borrowed under this agreement was 5.0%. We are required
to comply with certain financial and non-financial covenants
under this revolver. We were in compliance with all covenant
requirements as of June 30, 2008.
Letters
of Credit
As of June 30, 2008, Delek had in place letters of credit
totaling approximately $266.3 million with various
financial institutions securing obligations with respect to its
workers compensation and general liability self-insurance
programs, as well as purchases of crude oil for the refinery,
purchases of refined product for our marketing segment and fuel
for our retail fuel and convenience stores. No amounts were
outstanding under these facilities at June 30, 2008.
19
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Interest-Rate
Derivative Instruments
Delek had interest rate cap agreements in place totaling
$97.5 million and $98.8 million of notional principal
amounts at June 30, 2008 and December 31, 2007,
respectively. These agreements are intended to economically
hedge floating rate debt related to our current borrowings under
the senior secured credit facility. However, as we have elected
to not apply the permitted hedge treatment, including formal
hedge designation and documentation, in accordance with the
provisions of SFAS 133, as amended, the fair value of the
derivatives is recorded in other non-current assets in the
accompanying consolidated balance sheets with the offset
recognized in earnings. The derivative instruments mature on
various dates ranging from July 2008 through July 2010. The
estimated fair value of interest rate swap and interest rate cap
agreements at June 30, 2008 and December 31, 2007
totaled $0.3 million and $1.0 million, respectively.
In accordance with SFAS 133, as amended, we recorded
non-cash expense (income) representing the change in estimated
fair value of the interest rate cap agreements of
$(0.1) million and $0.7 million, respectively, for the
three and six months ended June 30, 2008 and
$(0.4) million and $0.2 million, respectively, for the
three and six months ended June 30, 2007.
While Delek has not elected to apply permitted hedging treatment
in accordance with the provisions of SFAS No. 133 in
the past, we may choose to elect that treatment in future
transactions.
|
|
7.
|
Stock
Based Compensation
|
In April 2006, Deleks Board of Directors adopted the Delek
US Holdings, Inc. 2006 Long-Term Incentive Plan (the Plan)
pursuant to which Delek may grant stock options, stock
appreciation rights, restricted stock, restricted stock units
and other stock-based awards of up to 3,053,392 shares of
Deleks common stock to certain directors, officers,
employees, consultants and other individuals who perform
services for Delek or its affiliates. The options granted under
the Plan are granted at market price or higher. In approximately
75% of the grants, vesting occurs ratably over a period from
three to five years. In approximately 25% of the grants, vesting
occurs at the end of the fourth year. All of the options granted
require continued service in order to vest in the option.
Compensation
Expense Related to Equity-based Awards
Compensation expense for the equity-based awards amounted to
$0.9 million ($0.5 million, net of taxes) and
$1.8 million ($1.2 million, net of taxes) for the
three and six months ended June 30, 2008, respectively and
$0.8 million ($0.5 million, net of taxes) and
$1.5 million ($1.1 million, net of taxes) for the
three and six months ended June 30, 2007, respectively.
These amounts are included in general and administrative
expenses in the accompanying consolidated statements of
operations.
As of June 30, 2008, there was $6.3 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 1.5 years.
We report our operating results in three reportable segments:
refining, marketing and retail. Decisions concerning the
allocation of resources and assessment of operating performance
are made based on this segmentation. Management measures the
operating performance of each of its reportable segments based
on the segment contribution margin.
Segment contribution margin is defined as net sales less cost of
sales and operating expenses, excluding depreciation and
amortization. Operations which are not specifically included in
the reportable segments are
20
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
included in the corporate and other category, which primarily
consists of operating expenses, depreciation and amortization
expense and interest income and expense associated with
corporate headquarters.
The refining segment processes crude oil that is transported
through our crude oil pipeline and an unrelated third-party
pipeline. The refinery processes the crude and other purchased
feedstocks for the manufacture of transportation motor fuels
including various grades of gasoline, diesel fuel, aviation fuel
and other petroleum-based products that are distributed through
its product terminal located at the refinery.
Our marketing segment sells refined products on a wholesale
basis in west Texas through company-owned and third-party
operated terminals. This segment also provides marketing
services to the Tyler refinery.
Our retail segment markets gasoline, diesel, other refined
petroleum products and convenience merchandise through a network
of company-operated retail fuel and convenience stores
throughout the southeastern United States. As of June 30,
2008, we had 497 stores in total consisting of 264 located in
Tennessee, 94 in Alabama, 81 in Georgia, 36 in Virginia and 15
in Arkansas. The remaining 7 stores are in Kentucky, Louisiana
and Mississippi. The retail fuel and convenience stores operate
under Deleks brand names MAPCO
Express®,
MAPCO
Mart®,
East
Coast®,
Discount Food
Marttm,
Fast Food and
Fueltm
and Favorite
Markets®
brands. In the retail segment, management reviews operating
results on a divisional basis, where a division represents a
specific geographic market. Management reporting also provides
tracking of product sales across the system, activity associated
with specific acquisitions and activity by brand. These
divisional operating segments exhibit similar economic
characteristics, provide the same products and services, and
operate in such a manner such that aggregation of these
operations is appropriate for segment presentation.
Our refining business has a services agreement with our
marketing segment, which among other things, requires the
refining segment to pay service fees to the marketing segment
based on the number of gallons sold at the Tyler refinery and a
sharing of a portion of the marketing margin achieved in return
for providing marketing, sales and customer services. This
intercompany transaction fee was $3.6 million and
$7.0 million, respectively, in the three and six months
ended June 30, 2008 and $3.8 million and
$6.6 million, respectively, in the three and six months
ended June 30, 2007. All inter-segment transactions have
been eliminated in consolidation.
21
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
The following is a summary of business segment operating
performance as measured by contribution margin for the period
indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining(1)
|
|
|
Retail
|
|
|
Marketing
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net sales (excluding intercompany marketing fees and sales)
|
|
$
|
636.9
|
|
|
$
|
579.6
|
|
|
$
|
232.9
|
|
|
$
|
0.2
|
|
|
$
|
1,449.6
|
|
Intercompany marketing fees and sales
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
587.5
|
|
|
|
523.3
|
|
|
|
230.2
|
|
|
|
13.7
|
|
|
|
1,354.7
|
|
Operating expenses
|
|
|
25.3
|
|
|
|
39.0
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
64.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
20.5
|
|
|
$
|
17.3
|
|
|
$
|
6.1
|
|
|
$
|
(13.6
|
)
|
|
|
30.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.6
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.2
|
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
458.6
|
|
|
$
|
538.4
|
|
|
$
|
100.7
|
|
|
$
|
199.4
|
|
|
$
|
1,297.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending (excluding business combinations)
|
|
$
|
26.7
|
|
|
$
|
8.4
|
|
|
$
|
0.5
|
|
|
$
|
|
|
|
$
|
35.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining(1)
|
|
|
Retail
|
|
|
Marketing
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net sales (excluding intercompany marketing fees and sales)
|
|
$
|
439.2
|
|
|
$
|
486.4
|
|
|
$
|
177.4
|
|
|
$
|
0.1
|
|
|
$
|
1,103.1
|
|
Intercompany marketing fees and sales
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
321.4
|
|
|
|
430.8
|
|
|
|
171.6
|
|
|
|
|
|
|
|
923.8
|
|
Operating expenses
|
|
|
18.9
|
|
|
|
37.2
|
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
56.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
95.1
|
|
|
$
|
18.4
|
|
|
$
|
9.3
|
|
|
$
|
|
|
|
|
122.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.8
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
418.1
|
|
|
$
|
522.3
|
|
|
$
|
97.2
|
|
|
$
|
114.9
|
|
|
$
|
1,152.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending (excluding business combinations)
|
|
$
|
13.7
|
|
|
$
|
5.1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining(1)
|
|
|
Retail
|
|
|
Marketing
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net sales (excluding intercompany marketing fees and sales)
|
|
$
|
1,193.1
|
|
|
$
|
1,060.6
|
|
|
$
|
413.8
|
|
|
$
|
0.3
|
|
|
$
|
2,667.8
|
|
Intercompany marketing fees and sales
|
|
|
(7.0
|
)
|
|
|
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,110.6
|
|
|
|
957.9
|
|
|
|
407.9
|
|
|
|
10.9
|
|
|
|
2,487.3
|
|
Operating expenses
|
|
|
47.4
|
|
|
|
74.5
|
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
122.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
28.1
|
|
|
$
|
28.2
|
|
|
$
|
12.5
|
|
|
$
|
(10.8
|
)
|
|
|
58.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.9
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.6
|
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending (excluding business combinations)
|
|
$
|
58.0
|
|
|
$
|
12.8
|
|
|
$
|
0.7
|
|
|
$
|
|
|
|
$
|
71.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining(1)
|
|
|
Retail
|
|
|
Marketing
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net sales (excluding intercompany marketing fees and sales)
|
|
$
|
795.9
|
|
|
$
|
817.3
|
|
|
$
|
295.3
|
|
|
$
|
0.2
|
|
|
$
|
1,908.7
|
|
Intercompany marketing fees and sales
|
|
|
(6.6
|
)
|
|
|
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
620.4
|
|
|
|
722.3
|
|
|
|
286.2
|
|
|
|
|
|
|
|
1,628.9
|
|
Operating expenses
|
|
|
37.8
|
|
|
|
64.8
|
|
|
|
0.5
|
|
|
|
0.2
|
|
|
|
103.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
131.1
|
|
|
$
|
30.2
|
|
|
$
|
15.2
|
|
|
$
|
|
|
|
|
176.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.0
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
135.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending (excluding business combinations)
|
|
$
|
19.5
|
|
|
$
|
7.5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
27.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Refinery segment operating results reflect certain
reclassifications made to conform first quarter previously
reported balances to current year financial statement
presentation. Certain pipeline expenses previously presented in
cost of goods sold have been reclassified to operating expenses,
general and administrative expenses and depreciation. These
reclassifications had no effect on either net income or
shareholders equity, as previously reported. |
|
|
9.
|
Derivative
Instruments
|
Fair
Value Measurements
Effective January 1, 2008, Delek adopted
SFAS No. 157, Fair Value Measurements
(SFAS 157), which defines fair value, establishes a
framework for its measurement and expands disclosures about fair
value
23
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
measurements. We elected to implement this Statement with the
one-year deferral permitted by FASB Staff Position (FSP)
157-2 for
nonfinancial assets and nonfinancial liabilities measured at
fair value, except those that are recognized or disclosed on a
recurring basis (at least annually.) The deferral applies to
nonfinancial assets and liabilities measured at fair value in a
business combination; impaired properties, plant and equipment;
intangible assets and goodwill; and initial recognition of asset
retirement obligations and restructuring costs for which we use
fair value. We are still evaluating the potential impact to our
consolidated financial statements from implementation of the
standard for these assets and liabilities.
Due to our election under
FSP 157-2,
for 2008, SFAS 157 applies to interest rate and commodity
derivatives that are measured at fair value on a recurring basis
in periods subsequent to initial recognition. The implementation
of SFAS 157 did not cause a change in the method of
calculating fair value of our assets and liabilities with the
exception of assessing the impact of nonperformance risk on
derivatives, which is not considered material. The primary
impact from adoption was additional disclosure.
SFAS 157 requires disclosures that categorize assets and
liabilities measured at fair value into one of three different
levels depending on the observability of the inputs employed in
the measurement. Level 1 inputs are quoted prices in active
markets for identical assets or liabilities. Level 2 inputs
are observable inputs other than quoted prices included within
Level 1 for the asset or liability, either directly or
indirectly through market-corroborated inputs. Level 3
inputs are unobservable inputs for the asset or liability
reflecting our assumptions about pricing by market participants.
We value our exchange-cleared derivatives using unadjusted
closing prices provided by the exchange as of the balance sheet
date, and these are classified as Level 1 in the fair value
hierarchy. Over the counter (OTC) commodity swaps and physical
commodity purchase and sale contracts are generally valued using
quotations provided by brokers based on exchange pricing
and/or price
index developers such as PLATTS and ARGUS. These are classified
as Level 2. We currently do not carry any longer-term
contracts or less liquid contracts, as all of our derivatives
are supported by actively traded futures markets.
Exchange-cleared financial and commodity options are valued
using exchange closing prices and are classified as
Level 1. Financial OTC swaps are valued using
industry-standard models that consider various assumptions,
including quoted forward prices for interest rates, time value,
volatility factors and contractual prices for the underlying
instruments, as well as other relevant economic measures. The
degree to which these inputs are observable in the forward
markets determines the classification as Level 2 or 3.
The fair value hierarchy for our financial assets and
liabilities accounted for at fair value on a recurring basis at
June 30, 2008, was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
$
|
0.1
|
|
|
$
|
132.5
|
|
|
$
|
|
|
|
$
|
132.6
|
|
Interest rate derivatives
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
0.3
|
|
Auction rate investment
|
|
|
|
|
|
|
5.6
|
|
|
|
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
0.1
|
|
|
|
138.4
|
|
|
|
|
|
|
|
138.5
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
|
|
|
|
|
(165.0
|
)
|
|
|
|
|
|
|
(165.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets (liabilities)
|
|
$
|
0.1
|
|
|
$
|
(26.6
|
)
|
|
$
|
|
|
|
$
|
(26.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The derivative values above are based on analysis of each
contract as the fundamental unit of account as required by
SFAS 157. 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 the
24
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
companys policy under the guidance of FASB Staff Position
No. FIN 39-1, Amendment of FASB Interpretation
No. 39, wherein we have elected to offset the fair
value amounts recognized for multiple derivative instruments
executed with the same counterparty. As of June 30, 2008,
$32.4 million of net derivative positions are included in
other current liabilities and as of December 31, 2007,
$0.6 million is included in other current assets and
$0.2 million is included in other current liabilities on
the accompanying condensed consolidated balance sheets. As of
June 30, 2008, $11.4 million of cash collateral is
held by counterparty brokerage firms.
Gain/Loss
Recognition
Delek uses swaps, options, futures, forwards and other
derivative instruments for risk management purposes. A
discussion of the accounting for each type of derivative follows.
Swaps
In December 2007, in conjunction with providing renewable
E-10
products in our retail markets, we entered into a series of OTC
swaps based on the futures price of ethanol as quoted on the
Chicago Board of Trade which fixed the purchase price of ethanol
for a predetermined number of gallons at future dates from April
2008 through December 2009. We also entered into a series of OTC
swaps based on the future price of unleaded gasoline as quoted
on the NYMEX which fixed the sales price of unleaded gasoline
for a predetermined number of gallons at future dates from April
2008 through December 2009. Delek recorded unrealized losses of
$13.2 million and $10.4 million, respectively, during
the three and six months ended June 30, 2008, and a
realized loss of $0.1 million during both the three and six
months ended June 30, 2008, which were included as an
adjustment to cost of goods sold in the accompanying condensed
consolidated statements of operations.
In March 2008, we entered into a series of OTC swaps based on
the future price of West Texas Intermediate Crude (WTI) as
quoted on the NYMEX which fixed the purchase price of WTI for a
predetermined number of barrels at future dates from July 2008
through December 2009. We also entered into a series of OTC
swaps based on the future price of Ultra Low Sulfur Diesel
(ULSD) as quoted on the Gulf Coast ULSD PLATTS which fixed the
sales price of ULSD for a predetermined number of gallons at
future dates from July 2008 through December 2009.
In accordance with SFAS No. 133, the WTI and ULSD
swaps 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. For the three and
six months ended June 30, 2008, Delek recorded unrealized
losses as a component of other comprehensive income of
$16.4 million ($10.3 million, net of deferred taxes)
and $22.3 million ($14.2 million, net of deferred
taxes), respectively, related to the change in the fair value of
these swaps. The fair value of these contracts will be
recognized in income beginning in July 2008, at the time the
positions are closed and the hedged transactions are recognized
in income. As of June 30, 2008, Delek had total unrealized
losses, net of deferred income taxes, in accumulated other
comprehensive income of $13.9 million associated with its
cash flow hedges.
There were no outstanding swaps during the three or six months
ended June 30, 2007.
Forward
Fuel Contracts
From time to time, Delek enters into forward fuel contracts with
major financial institutions that fix the purchase price of
finished grade fuel for a predetermined number of units at a
future date and have fulfillment terms of less than
90 days. Delek recognized gains (losses) of
$(0.9) million and $(0.4) million, respectively,
during the three and six months ended June 30, 2008 and
$0.1 million and $0.5 million, respectively, during
the three and six months ended June 30, 2007, which are
included as an adjustment to cost of goods sold in the
accompanying condensed consolidated statements of operations.
25
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Options
In the first quarter of 2008, Delek entered into a put option
with a major financial institution that fixes the sales price of
crude oil for a predetermined number of units, which expires in
December 2008. Delek recorded unrealized losses of
$0.3 million and $0.4 million, respectively, during
the three and six months ended June 30, 2008, which are
included as an adjustment to cost of goods sold in the
accompanying condensed consolidated statements of operations.
There were no option contracts outstanding during the three or
six months ended June 30, 2007.
Futures
Contracts
In the first quarter of 2008, Delek entered into futures
contracts with major financial institutions that fix the
purchase price of crude oil and the sales price of finished
grade fuel for a predetermined number of units at a future date
and have fulfillment terms of less than 90 days. Delek
recognized losses of $6.1 million and $7.6 million,
respectively, during the three and six months ended
June 30, 2008, which are included as an adjustment to cost
of goods sold in the accompanying condensed consolidated
statements of operations. There were no futures contracts
outstanding during the three or six months ended June 30,
2007.
Interest
Rate Instruments
From time to time, Delek enters into interest rate swap and cap
agreements that are intended to economically hedge floating rate
debt related to our current borrowings. These interest rate
derivative instruments are discussed in conjunction with our
long term debt in Note 6.
|
|
10.
|
Commitments
and Contingencies
|
Litigation
Delek is subject to various claims and legal actions that arise
in the ordinary course of business. In the opinion of
management, the ultimate resolution of any such matters known by
management will not have a material adverse effect on
Deleks financial position or results of operations in
future periods.
Self-insurance
Delek is self-insured for employee medical claims up to
$0.1 million per employee per year or an aggregate cost
exposure of approximately $5.5 million per year.
Delek is self-insured for workers compensation claims up
to $1.0 million on a per accident basis. We self-insure for
general liability claims up to $4.0 million on a per
occurrence basis. We self-insure for auto liability up to
$4.0 million on a per accident basis.
We have umbrella liability insurance available to each of our
segments in an amount determined reasonable by management.
Environmental,
Health and Safety
Delek is subject to various federal, state and local
environmental laws. These laws raise potential exposure to
future claims and lawsuits involving environmental 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. While it is often difficult to quantify future
environmental-related expenditures, Delek anticipates that
continuing capital investments will be required over the next
several years to comply with existing regulations. We have not
been named as defendant in any environmental, health or safety
litigation.
26
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Based upon environmental evaluations performed internally and by
third parties subsequent to our purchase of the Tyler refinery,
we have recorded a liability of approximately $7.9 million
as of June 30, 2008 relative to the probable estimated
costs of remediating or otherwise addressing certain
environmental issues of a non-capital nature which were assumed
in connection with the refinery acquisition. This liability
includes estimated costs for on-going investigation and
remediation efforts for known contaminations of soil and
groundwater which were already being performed by the former
owner, as well as estimated costs for additional issues which
have been identified subsequent to the purchase. Approximately
$2.7 million of the liability is expected to be expended by
the end of 2008 with the remaining balance of $5.2 million
expendable by 2022.
In late 2004, the prior refinery owner began discussions with
the Environmental Protection Agency (EPA) Region 6 and the
Department of Justice (DOJ) regarding certain air quality
requirements at the refinery. The prior refinery owner expected
to settle the matter with EPA and the DOJ by the end of 2005,
however, EPA did not present a consent decree and no discussions
occurred in 2006. Nonetheless, Delek completed certain capital
projects at the refinery that EPA indicated would likely be
addressed in a consent decree. These projects include a new
electrical substation to increase operational reliability and
additional sulfur removal capacity to address upsets at the
refinery.
In June 2007, EPA Region 6 and DOJ resumed negotiations and
presented the former owner and Delek with the initial draft of
the consent decree in August 2007. The companies provided
comments at that time and received a revised draft consent
decree in April 2008. The revised draft consent decree addresses
capital projects that have either been completed or will not
have a material adverse effect upon our future financial
results. In addition, the proposed consent decree requires
certain on-going operational changes that will increase future
operating expenses at the refinery. EPA Region 6 and the DOJ
have advised Delek that a final consent decree should be lodged
with the United States District Court for the Eastern District
of Texas around September 1, 2008. At this point in time,
we believe any such costs will not have a material adverse
effect upon our business, financial condition or operations.
In October, 2007, the Texas Commission on Environmental Quality
(TCEQ) approved an Agreed Order in which the Tyler refinery
resolved alleged violations of air rules dating back to the
acquisition of the refinery. The Agreed Order required the
refinery to pay a penalty and fund a Supplemental Environmental
Project for which we had previously reserved adequate amounts.
In addition, the refinery was required to implement certain
corrective measures, which the company has completed, with one
exception. Delek has advised the TCEQ of the exception, which we
believe will not result in a material adverse effect on our
business, financial condition or results of operations.
The Federal Clean Air Act (CAA) authorizes the EPA to require
modifications in the formulation of the refined transportation
fuel products manufactured in order to limit the emissions
associated with their final use. In December 1999, the EPA
promulgated national regulations limiting the amount of sulfur
to be allowed in gasoline at future dates. The EPA believes such
limits are necessary to protect new automobile emission control
systems that may be inhibited by sulfur in the fuel. The new
regulations required the phase-in of gasoline sulfur standards
beginning in 2004, with the final reduction to the sulfur
content of gasoline to an annual average level of 30
parts-per-million
(ppm), and a per-gallon maximum of 80 ppm to be completed
by January 1, 2006. The regulation also included special
provisions for small refiners or those receiving a waiver.
Contemporaneous with the refinery purchase, Delek became a party
to a Waiver and Compliance Plan with the EPA that extended the
implementation deadline for low sulfur gasoline to May 2008,
based on the capital investment option we chose. In return for
the extension, we agreed to produce 95% of the diesel fuel at
the refinery with a sulfur content of 15 ppm or less by
June 1, 2006 through the remainder of the term of the
Waiver. In order to achieve this goal, we needed to complete the
modification and expansion of an existing diesel hydrotreater by
June 1, 2006. Due to construction delays, which resulted
from the impacts of Hurricanes Katrina and Rita on the
availability of construction resources, Delek requested, and
received, a modification to
27
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
our Compliance Plan which, among other things, granted an
additional three months to complete the project. This project
was completed in the third quarter of 2006. As required by the
modification to the compliance plan, Delek purchased and retired
diesel sulfur credits to offset the volume of high sulfur diesel
produced during the three month extension. During the first
quarter of 2008, it became apparent to us that the construction
of our Gasoline Hydrotreater would not be completed by the
original deadline of May 31, 2008 due to the continuing
shortage of skilled labor and ongoing delays in the receipt of
equipment. We began discussions with EPA regarding this
potential delay in completing the gasoline hydrotreater and
agreed to an extension to certain provisions of the Waiver that
allowed us to exceed the 80 ppm per gallon sulfur maximum
for up to two months past the original May 31, 2008,
compliance date. Construction and commissioning of the Gasoline
Hydrotreater was completed in June 2008 with all gasoline
meeting low sulfur specifications by the end of June. As a
condition of the Waiver, Delek may have to purchase gasoline
sulfur credits, but we do not believe that any such purchase of
credits will result in a material adverse effect on our
business, financial condition or results of operations.
Regulations promulgated by the TCEQ required the use of only Low
Emission Diesel (LED) in counties east of Interstate 35
beginning in October 2005. Delek received approval to meet these
requirements through the end of 2007 by selling diesel that
meets the criteria in an Alternate Emissions Reduction Plan on
file with the TCEQ and through the use of approved additives
either before or after December 2007.
The EPA has issued final rules for gasoline formulation that
will require further reductions in benzene content by 2011. We
are in the process of identifying and evaluating options for
complying with this requirement.
The Energy Policy Act of 2005 requires increasing amounts of
renewable fuel be incorporated into the gasoline pool through
2012. Under final rules implementing this Act (the Renewable
Fuel Standard), the Tyler refinery is classified as a small
refinery exempt from renewable fuel standards through 2010.
Although temporarily exempt from this rule, the Tyler refinery
began supplying an
E-10
gasoline-ethanol blend in January 2008. The Energy Independence
and Security Act of 2007 increased the amounts of renewable fuel
required by the Energy Policy Act of 2005. The EPA has not yet
promulgated implementing rules for the 2007 Act so it is not yet
possible to determine what the Tyler refinery compliance
requirement will be.
The Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), also known as Superfund,
imposes liability, without regard to fault or the legality of
the original conduct, on certain classes of persons who are
considered to be responsible for the release of a
hazardous substance into the environment. These
persons include the owner or operator of the disposal site or
sites where the release occurred and companies that disposed or
arranged for the disposal of the hazardous substances. Under
CERCLA, such persons may be subject to joint and several
liabilities for the costs of cleaning up the hazardous
substances that have been released into the environment, for
damages to natural resources and for the costs of certain health
studies. It is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property
damage allegedly caused by hazardous substances or other
pollutants released into the environment. Analogous state laws
impose similar responsibilities and liabilities on responsible
parties. In the course of the refinerys ordinary
operations, waste is generated, some of which falls within the
statutory definition of a hazardous substance and
some of which may have been disposed of at sites that may
require cleanup under Superfund. At this time, we have not been
named a party at any Superfund sites and under the terms of the
refinery purchase agreement, we did not assume any liability for
wastes disposed of prior to our ownership.
During 2007, the Department of Homeland Security (DHS)
promulgated Chemical Facility Anti-Terrorism Standards (CFATS)
to regulate the security of high risk chemical
facilities. In compliance with this rule, we submitted certain
required information concerning our Tyler refinery and Abilene
and San Angelo terminals to the DHS. If the DHS determines
that any of these facilities represents a high risk facility, we
will be required
28
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
to prepare a Security Vulnerability Analysis and possibly
develop and implement Site Security Plans required by the
standard. We do not believe the outcome will have a material
effect on our business.
In June 2007, the U.S. Department of Labors
Occupational Safety & Health Administration (OSHA)
announced it was implementing a National Emphasis Program
addressing workplace hazards at petroleum refineries. Under this
program, OSHA expects to conduct inspections of process safety
management programs over the next two years at approximately 80
refineries nationwide. On February 19, 2008, OSHA commenced
an inspection at our Tyler, Texas refinery. We expect that OSHA
will communicate its initial findings to us within the next
thirty days. We believe our refinery operations are in
substantial compliance with workplace process safety management
regulations and rules, however, it is possible that OSHA may
cite us for violations, impose fines or require remedial
actions. We currently do not expect that the outcome of the OSHA
inspection will have a material adverse effect on our financial
position or results of operations.
Vendor
Commitments
Delek maintains an agreement with a significant vendor that
requires the purchase of certain general merchandise exclusively
from this vendor over a specified period of time. Additionally,
we maintain agreements with certain fuel suppliers which contain
terms which generally require the purchase of predetermined
quantities of third-party branded fuel for a specified period of
time. In certain fuel vendor contracts, penalty provisions exist
if minimum quantities are not met.
Letters
of Credit
As of June 30, 2008, Delek had in place letters of credit
totaling approximately $266.3 million with various
financial institutions securing obligations with respect to its
workers compensation and general liability self-insurance
programs, as well as purchases of crude oil for the refinery,
purchases of refined product for our marketing segment and fuel
for our retail fuel and convenience stores. No amounts were
outstanding under these facilities at June 30, 2008.
|
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11.
|
Related
Party Transactions
|
At June 30, 2008, Delek Group Ltd. controlled approximately
73.4% of our outstanding common stock. As a result, Delek Group
Ltd. and its controlling shareholder, Mr. Sharon (Tshuva),
will continue to control the election of our directors,
influence our corporate and management policies and determine,
without the consent of our other stockholders, the outcome of
any corporate transaction or other matter submitted to our
stockholders for approval, including potential mergers or
acquisitions, asset sales and other significant corporate
transactions.
On January 22, 2007, we granted 28,000 stock options to
Gabriel Last, one of our directors, under our 2006 Long-Term
Incentive Plan. These options vest ratably over four years, have
an exercise price of $16.00 per share and will expire on
January 22, 2017. The grant to Mr. Last was a special,
one-time grant in consideration of his supervision and direction
of management and consulting services provided by Delek Group to
us. The grant was not compensation for his service as a
director. This grant does not mark the adoption of a policy to
compensate our non-employee related directors and we do not
intend to issue further grants to Mr. Last in the future.
On December 10, 2006, we granted 28,000 stock options to
Asaf Bartfeld, one of our directors, under our 2006 Long-Term
Incentive Plan. These options vest ratably over four years and
have an exercise price of $17.64 per share and will expire on
December 10, 2016. The grant to Mr. Bartfeld was a
special, one-time grant in consideration of his supervision and
direction of management and consulting services provided by
Delek Group, Ltd. to us. The grant was not compensation for his
service as a director. This grant does not
29
Delek US
Holdings, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
mark the adoption of a policy to compensate our non-employee
related directors and we do not intend to issue further grants
to Mr. Bartfeld in the future.
Effective January 1, 2006, Delek entered into a management
and consulting agreement with Delek Group, pursuant to which key
management personnel of Delek Group provide management and
consulting services to Delek, including matters relating to
long-term planning, operational issues and financing strategies.
The agreement has an initial term of one year and will continue
thereafter until either party terminates the agreement upon
30 days advance notice. As compensation, the
agreement provides for payment to Delek Group of $125 thousand
per calendar quarter payable within 90 days of the end of
each quarter and reimbursement for reasonable out-of-pocket
costs and expenses incurred.
As of May 1, 2005, Delek entered into a consulting
agreement with Greenfeld-Energy Consulting, Ltd., (Greenfeld) a
company owned and controlled by one of Deleks directors.
Under the terms of the agreement, the director personally
provides consulting services relating to the refining industry
and Greenfeld receives monthly consideration and reimbursement
of reasonable expenses. From May 2005 through August 2005, Delek
paid Greenfeld approximately $7 thousand per month. Since
September 2005, Delek has paid Greenfeld a monthly payment of
approximately $8 thousand. In April 2006, Delek paid Greenfeld a
bonus of $70 thousand for services rendered in 2005. Pursuant to
the agreement, on May 3, 2006, we granted
Mr. Greenfeld options to purchase 130,000 shares of
our common stock at $16.00 per share, our initial public
offering price, pursuant to our 2006 Long-Term Incentive Plan.
These options vest ratably over five years. The agreement
continues in effect until terminated by either party upon six
months advance notice to the other party.
On January 12, 2006, we entered into a consulting agreement
with Charles H. Green, the father of one of our named executive
officers, Frederec Green. Under the terms of the agreement,
Charles Green provides assistance and guidance, primarily in the
area of electrical reliability, at our Tyler refinery, and is
paid $100 per hour for services rendered. We paid
$0.1 million for these services during both the six months
ended June 30, 2008 and June 30, 2007.
Dividend
Declaration
On August 5, 2008, Deleks Board of Directors declared
a quarterly cash dividend of $0.0375 per share, payable on
September 17, 2008 to stockholders of record on
August 27, 2008.
SemCrude
Bankruptcy
On July 22, 2008, SemCrude, L.P. (SemCrude), filed a
voluntary petition for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. SemCrude is a contractual
counterparty to Refining in certain July 2008 crude oil
exchanges totaling approximately 21,000 barrels. Refining
has taken what it believes to be appropriate steps in the
bankruptcy proceedings to mitigate its monetary exposure, if
any, under the Contract.
Tax
Reimbursements to Chief Executive Officer
On August 5, 2008, the Boards of Directors of Delek and
Express approved a new element of compensation for our President
and Chief Executive Officer, Ezra Uzi Yemin. Mr. Yemin is
currently provided a rent-free residence for his use. The new
element of compensation, which is retroactive to January 1,
2008, is the reimbursement of the value of income taxes incurred
as a result of the benefit.
30
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ITEM 2.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS
|
Managements Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) is managements
analysis of our financial performance and of significant trends
that may affect our future performance. The MD&A should be
read in conjunction with our condensed consolidated financial
statements and related notes included elsewhere in this
Form 10-Q
and in the
Form 10-K
filed on March 3, 2008. Those statements in the MD&A
that are not historical in nature should be deemed
forward-looking statements that are inherently uncertain.
Forward-Looking
Statements
This
Form 10-Q
contains forward looking statements that reflect our
current estimates, expectations and projections about our future
results, performance, prospects and opportunities.
Forward-looking statements include, among other things, the
information concerning our possible future results of
operations, business and growth strategies, financing plans,
expectations that regulatory developments or other matters will
not have a material adverse effect on our business or financial
condition, our competitive position and the effects of
competition, the projected growth of the industry in which we
operate, and the benefits and synergies to be obtained from our
completed and any future acquisitions, and statements of
managements goals and objectives, and other similar
expressions concerning matters that are not historical facts.
Words such as may, will,
should, could, would,
predicts, potential,
continue, expects,
anticipates, future,
intends, plans, believes,
estimates, appears, projects
and similar expressions, as well as statements in future tense,
identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of
future performance or results, and will not necessarily be
accurate indications of the times at, or by which, such
performance or results will be achieved. Forward-looking
information is based on information available at the time
and/or
managements good faith belief with respect to future
events, and is subject to risks and uncertainties that could
cause actual performance or results to differ materially from
those expressed in the statements. Important factors that could
cause such differences include, but are not limited to:
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competition;
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|
changes in, or the failure to comply with, the extensive
government regulations applicable to our industry segments;
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decreases in our refining margins or fuel gross profit as a
result of increases in the prices of crude oil, other feedstocks
and refined petroleum products;
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our ability to execute our strategy of growth through
acquisitions and transactional risks in acquisitions;
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general economic and business conditions, particularly levels of
spending relating to travel and tourism or conditions affecting
the southeastern United States;
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dependence on one principal fuel supplier and one wholesaler for
a significant portion of our convenience store merchandise;
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unanticipated increases in cost or scope of, or significant
delays in the completion of our capital improvement projects;
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risks and uncertainties with respect to the quantities and costs
of refined petroleum products supplied to our pipelines
and/or held
in our terminals;
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operating hazards, natural disasters, casualty losses and other
matters beyond our control;
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increases in our debt levels;
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restrictive covenants in our debt agreements;
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seasonality;
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terrorist attacks;
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31
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losses from derivative instruments;
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potential conflicts of interest between our major stockholder
and other stockholders and
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other factors discussed under the heading Managements
Discussion and Analysis of Financial Condition and Results of
Operations and in our other filings with the SEC.
|
In light of these risks, uncertainties and assumptions, our
actual results of operations and execution of our business
strategy could differ materially from those expressed in, or
implied by, the forward-looking statements, and you should not
place undue reliance upon them. In addition, past financial
and/or
operating performance is not necessarily a reliable indicator of
future performance and you should not use our historical
performance to anticipate results or future period trends. We
can give no assurances that any of the events anticipated by the
forward-looking statements will occur or, if any of them do,
what impact they will have on our results of operations and
financial condition.
Forward-looking statements speak only as of the date the
statements are made. We assume no obligation to update
forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting
forward-looking information except to the extent required by
applicable securities laws. If we do update one or more
forward-looking statements, no inference should be drawn that we
will make additional updates with respect thereto or with
respect to other forward-looking statements.
Overview
We are a diversified energy business focused on petroleum
refining, wholesale sales of refined products and retail
marketing. Our business consists of three operating segments:
refining, marketing and retail. Our refining segment operates a
high conversion, moderate complexity independent refinery in
Tyler, Texas, with a design crude distillation capacity of
60,000 barrels per day (bpd), along with an associated
crude oil pipeline and light products loading facilities. Our
marketing segment sells refined products on a wholesale basis in
west Texas through company-owned and third-party operated
terminals. Our retail segment markets gasoline, diesel, other
refined petroleum products and convenience merchandise through a
network of 497 company-operated retail fuel and convenience
stores located in Alabama, Arkansas, Georgia, Kentucky,
Louisiana, Mississippi, Tennessee and Virginia. Additionally, we
own a minority equity interest in Lion Oil Company, a
privately-held Arkansas corporation, which operates a
75,000 bpd moderate complexity crude oil refinery and other
pipeline and product terminals. The refinery is located in El
Dorado, Arkansas.
The cost to acquire feedstocks and the price of the refined
petroleum products we ultimately sell from our refinery depend
on numerous factors beyond our control, including the supply of,
and demand for, crude oil, gasoline and other refined petroleum
products which, in turn, depend on, among other factors, changes
in domestic and foreign economies, weather conditions, domestic
and foreign political affairs, global conflict, production
levels, the availability of imports, the marketing of
competitive fuels and government regulation. Other significant
factors that influence our results in our refining segment
include the cost of crude, our primary raw material, the
refinerys operating costs, particularly the cost of
natural gas used for fuel and the cost of electricity, seasonal
factors, refinery utilization rates and planned or unplanned
maintenance activities or turnarounds.
Our sales and operating refined petroleum product prices
fluctuate significantly with movements in crude oil and refined
petroleum product prices. Both the spread between crude oil and
refined petroleum product prices, and more recently the time lag
between these fluctuations in those prices, affect our earnings.
We compare our per barrel refining operating margin to certain
industry benchmarks, specifically the U.S. Gulf Coast 5-3-2
crack spread. The U.S. Gulf Coast 5-3-2 crack spread
represents the differential between Platts quotations for
3/5 of a barrel of U.S. Gulf Coast Pipeline 87 Octane
Conventional Gasoline and 2/5 of a barrel of U.S. Gulf
Coast Pipeline No. 2 Heating Oil (high sulfur diesel) on
the one hand, and the first month futures price of 5/5 of a
barrel of light sweet crude oil on the New York Mercantile
Exchange, on the other hand.
Finally, while the increases in the cost of crude oil are
reflected in the changes of light refined products, the value of
heavier products, such as fuel oil, asphalt and coke, have not
moved in parallel with crude cost. This causes additional
pressure on our refining margins.
32
The cost to acquire the refined fuel products we sell to our
wholesale customers in our marketing segment and at our
convenience stores in our retail segment depends on numerous
factors beyond our control, including the supply of, and demand
for, crude oil, gasoline and other refined petroleum products
which, in turn, depends on, among other factors, changes in
domestic and foreign economies, weather conditions, domestic and
foreign political affairs, production levels, the availability
of imports, the marketing of competitive fuels and government
regulation. Our retail merchandise sales are driven by
convenience, customer service, competitive pricing and branding.
Motor fuel margin is sales less the delivered cost of fuel and
motor fuel taxes, measured on a cents per gallon basis. Our
motor fuel margins are impacted by local supply, demand,
weather, competitor pricing and product brand.
As part of our overall business strategy, we regularly evaluate
opportunities to expand and complement our business and may at
any time be discussing or negotiating a transaction that, if
consummated, could have a material effect on our business,
financial condition, liquidity or results of operations.
Executive
Summary of Recent Developments
Refining
segment activity
At the refinery, we continue to work to comply with the Federal
Clean Air Act regulations requiring a reduction in sulfur
content in gasoline. Our gasoline hydrotreater (GHT) became
operational in June 2008.
Our average throughput for the second quarter of 2008 was
53,500 barrels per day compared to 56,700 for the second
quarter of 2007. Our utilization rate equaled 82.3% for the
second quarter of 2008 compared to 92.4% during the second
quarter of 2007. The reduction in total throughputs was the
result of maintenance performed on the Platformer and Diesel
Hydrotreater units, which resulted in lower utilization in April
2008.
Sales volume for the second quarter of 2008 was 51,700 versus
53,800 barrels for the comparable period in the prior year.
The decrease in sales volume is primarily due to the maintenance
outages discussed above.
Our margin realization, adding back intercompany service fees,
was $10.49 per barrel sold in the second quarter of 2008 versus
$24.06 in the comparable period in 2007. This decrease was due
to a 42.7% decrease in the U.S. Gulf Coast 5-3-2 crack
spread, which was affected by the lag in the increase of prices
of refined products as compared to the sharp increase in crude
oil prices.
Continued optimization of the refinery operation, including the
introduction of a linear programming model in the second quarter
of 2008, allowed us to run 5,300 barrels per day of sour
crude through the refinery and continue to maintain our light,
high-value products at a 90.3% realization rate in the second
quarter of 2008.
Marketing
segment activity
Our marketing segment generated net sales for the 2008 second
quarter of $236.5 million on sales of more than
17,700 barrels per day of refined products compared to
$181.2 million on sales of approximately
20,300 barrels per day in the second quarter of 2007. The
increase in sales was primarily driven by an increase in the
average sales prices of products sold during the quarter.
Retail
segment activity
Retail fuel margins improved in the second quarter of 2008,
increasing 11.4% to $0.176 per gallon, compared to $0.158 per
gallon in the second quarter of 2007. This improvement was
primarily due to favorable blending economics associated with
our ongoing
E-10
(ethanol) blended fuel program. As of June 30, 2008,
blended fuel was sold at 83.0% of the convenience store
locations at the retail segment.
In the second quarter of 2008, we continued to move forward with
plans to expand our new MAPCO Mart concept store and our
proprietary food service offering,
GrilleMarx®
with 3 locations completed during the quarter. We also completed
the rollout of our MAPCO Mart re-image campaign in 48 stores
located mostly in the Chattanooga and Georgia retail divisions.
Capital spent on these projects in the second quarter of 2008
totaled $6.9 million.
33
In the second quarter of 2008, private label merchandise sales
represented 1.5% of total retail segment merchandise sales,
excluding sales from the stores purchased from the Calfee
Company of Dalton, Inc. in July 2007, compared to 1.6% of total
retail segment merchandise sales in the second quarter of 2007.
Body
TonicsTM,
a sugar free, vitamin enhanced private label isotonic athletic
drink in four flavors was introduced in the second quarter of
2008. There are several new private label products in
development and we intend to continue to introduce new items
regularly. We are currently studying the brand appeal of our
private label products and expect to update our packaging in the
next few months.
Market
Trends
Our results of operations are significantly affected by the cost
of commodities. Sudden change in petroleum prices is our primary
source of market risk. Our business model is affected more by
the volatility of petroleum prices than by the cost of the
petroleum that we sell.
We continually experience volatility in the energy markets.
Concerns about the U.S. economy and continued uncertainty
in several oil-producing regions of the world resulted in
increases in the price of crude oil which outpaced product
prices in the 2008 and 2007 second quarters. The average price
of crude oil in the second quarters of 2008 and 2007 was $124.28
and $65.06 per barrel, respectively. The U.S. Gulf Coast
5-3-2 crack spread ranged from a high of $18.86 per barrel to a
low of $9.65 per barrel during the second quarter of 2008. The
5-3-2 crack spread averaged $13.24 per barrel during the second
quarter of 2008 compared to an average of $23.10 per barrel in
the 2007 second quarter.
We also continue to experience high volatility in the wholesale
cost of fuel. The U.S. Gulf Coast price for unleaded
gasoline ranged from a low of $2.62 per gallon to a high of
$3.43 per gallon in the second quarter of 2008 and averaged
$3.12 per gallon in the second quarter of 2008, which compares
to an average of $2.23 per gallon in the 2007 second quarter. If
this volatility continues and we are unable to fully pass our
cost increases on to our customers, our retail fuel margins will
decline. Additionally, increases in the retail price of fuel
could result in lower demand for fuel and reduced customer
traffic inside our convenience stores in our retail segment.
This may place downward pressure on in-store merchandise
margins. Finally, the higher cost of fuel has also resulted in
higher credit card fees as a percentage of sales and gross
profit. As fuel prices increase, we see increased usage of
credit cards by our customers and pay higher interchange costs
since credit card fees are paid as a percentage of sales.
The cost of natural gas used for fuel in our Tyler refinery has
also shown historic volatility. Our average cost of natural gas
increased to $11.35 per million British Thermal Units (MMBTU) in
the 2008 second quarter from $7.53 per MMBTU in the 2007 second
quarter.
As part of our overall business strategy, management determines,
based on the market and other factors, whether to maintain,
increase or decrease inventory levels of crude or other
intermediate feedstocks.
Factors
Affecting Comparability
The comparability of our results of operations for the three and
six months ended June 30, 2008 compared to the three and
six months ended June 30, 2007 is affected by the following
factors:
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the completion of acquisitions, including the April 5, 2007
purchase of 107 Calfee Company of Dalton, Inc. retail and
convenience stores located primarily in south eastern Tennessee
and northern Georgia (Calfee stores) and the purchase from
existing shareholders of a 34.6% minority interest equity
investment in Lion Oil Company (Lion Oil) in the third quarter
of 2007;
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the addition of ethanol blending at both our refining and retail
segments; and
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higher commodity prices, which have dramatically impacted sales
and costs of sales.
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34
Summary
Financial and Other Information
The following table provides summary financial data for Delek.
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Three Months Ended June 30,
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Six Months Ended June 30,
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2008
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|
2007
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|
|
2008
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|
|
2007
|
|
|
Statement of Operations Data:
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|
|
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|
|
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|
|
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Net sales:
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|
|
|
|
|
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|
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|
|
|
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|
Refining
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$
|
633.3
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|
|
$
|
435.4
|
|
|
$
|
1,186.1
|
|
|
$
|
789.3
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|
Marketing
|
|
|
236.5
|
|
|
|
181.2
|
|
|
|
420.8
|
|
|
|
301.9
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|
Retail
|
|
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579.6
|
|
|
|
486.4
|
|
|
|
1,060.6
|
|
|
|
817.3
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|
Other
|
|
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0.2
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
1,449.6
|
|
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|
1,103.1
|
|
|
|
2,667.8
|
|
|
|
1,908.7
|
|
Operating costs and expenses:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
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|
|
1,354.7
|
|
|
|
923.8
|
|
|
|
2,487.3
|
|
|
|
1,628.9
|
|
Operating expenses
|
|
|
64.6
|
|
|
|
56.5
|
|
|
|
122.5
|
|
|
|
103.3
|
|
General and administrative expenses
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|
|
12.6
|
|
|
|
13.8
|
|
|
|
25.9
|
|
|
|
26.0
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|
Depreciation and amortization
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|
|
9.2
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|
|
|
8.0
|
|
|
|
18.6
|
|
|
|
15.0
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|
Gain on sale of assets
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|
|
(2.9
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)
|
|
|
|
|
|
|
(2.9
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
1,438.2
|
|
|
|
1,002.1
|
|
|
|
2,651.4
|
|
|
|
1,773.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
11.4
|
|
|
|
101.0
|
|
|
|
16.4
|
|
|
|
135.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
5.7
|
|
|
|
8.3
|
|
|
|
11.7
|
|
|
|
15.5
|
|
Interest income
|
|
|
(0.5
|
)
|
|
|
(3.2
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)
|
|
|
(1.6
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)
|
|
|
(5.2
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)
|
Loss from equity method investment
|
|
|
0.6
|
|
|
|
|
|
|
|
7.1
|
|
|
|
|
|
Other expenses (income), net
|
|
|
(0.1
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)
|
|
|
(0.4
|
)
|
|
|
0.7
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.7
|
|
|
|
4.7
|
|
|
|
17.9
|
|
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income before income tax expense
|
|
|
5.7
|
|
|
|
96.3
|
|
|
|
(1.5
|
)
|
|
|
125.0
|
|
Income tax expense
|
|
|
1.7
|
|
|
|
29.1
|
|
|
|
(0.5
|
)
|
|
|
36.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net income (loss)
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|
$
|
4.0
|
|
|
$
|
67.2
|
|
|
$
|
(1.0
|
)
|
|
$
|
88.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.07
|
|
|
$
|
1.31
|
|
|
$
|
(0.02
|
)
|
|
$
|
1.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.07
|
|
|
$
|
1.29
|
|
|
$
|
(0.02
|
)
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
53,671,164
|
|
|
|
51,176,711
|
|
|
|
53,669,611
|
|
|
|
51,158,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
54,418,019
|
|
|
|
52,255,690
|
|
|
|
53,669,611
|
|
|
|
52,206,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by operating activities
|
|
|
|
|
|
|
|
|
|
$
|
44.3
|
|
|
$
|
135.2
|
|
Cash flows used in investing activities
|
|
|
|
|
|
|
|
|
|
|
(23.2
|
)
|
|
|
(240.4
|
)
|
Cash flows (used in) provided by financing activities
|
|
|
|
|
|
|
|
|
|
|
(39.7
|
)
|
|
|
64.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
$
|
(18.6
|
)
|
|
$
|
(40.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining(1)
|
|
|
Retail
|
|
|
Marketing
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net sales (excluding intercompany marketing fees and sales)
|
|
$
|
636.9
|
|
|
$
|
579.6
|
|
|
$
|
232.9
|
|
|
$
|
0.2
|
|
|
$
|
1,449.6
|
|
Intercompany marketing fees and sales
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
587.5
|
|
|
|
523.3
|
|
|
|
230.2
|
|
|
|
13.7
|
|
|
|
1,354.7
|
|
Operating expenses
|
|
|
25.3
|
|
|
|
39.0
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
64.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
20.5
|
|
|
$
|
17.3
|
|
|
$
|
6.1
|
|
|
$
|
(13.6
|
)
|
|
|
30.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.6
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.2
|
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
458.6
|
|
|
$
|
538.4
|
|
|
$
|
100.7
|
|
|
$
|
199.4
|
|
|
$
|
1,297.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending (excluding business combinations)
|
|
$
|
26.7
|
|
|
$
|
8.4
|
|
|
$
|
0.5
|
|
|
$
|
|
|
|
$
|
35.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining(1)
|
|
|
Retail
|
|
|
Marketing
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net sales (excluding intercompany marketing fees and sales)
|
|
$
|
439.2
|
|
|
$
|
486.4
|
|
|
$
|
177.4
|
|
|
$
|
0.1
|
|
|
$
|
1,103.1
|
|
Intercompany marketing fees and sales
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
321.4
|
|
|
|
430.8
|
|
|
|
171.6
|
|
|
|
|
|
|
|
923.8
|
|
Operating expenses
|
|
|
18.9
|
|
|
|
37.2
|
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
56.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
95.1
|
|
|
$
|
18.4
|
|
|
$
|
9.3
|
|
|
$
|
|
|
|
|
122.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.8
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
418.1
|
|
|
$
|
522.3
|
|
|
$
|
97.2
|
|
|
$
|
114.9
|
|
|
$
|
1,152.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending (excluding business combinations)
|
|
$
|
13.7
|
|
|
$
|
5.1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining(1)
|
|
|
Retail
|
|
|
Marketing
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net sales (excluding intercompany marketing fees and sales)
|
|
$
|
1,193.1
|
|
|
$
|
1,060.6
|
|
|
$
|
413.8
|
|
|
$
|
0.3
|
|
|
$
|
2,667.8
|
|
Intercompany marketing fees and sales
|
|
|
(7.0
|
)
|
|
|
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,110.6
|
|
|
|
957.9
|
|
|
|
407.9
|
|
|
|
10.9
|
|
|
|
2,487.3
|
|
Operating expenses
|
|
|
47.4
|
|
|
|
74.5
|
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
122.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
28.1
|
|
|
$
|
28.2
|
|
|
$
|
12.5
|
|
|
$
|
(10.8
|
)
|
|
|
58.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.9
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.6
|
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending (excluding business combinations)
|
|
$
|
58.0
|
|
|
$
|
12.8
|
|
|
$
|
0.7
|
|
|
$
|
|
|
|
$
|
71.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining(1)
|
|
|
Retail
|
|
|
Marketing
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net sales (excluding intercompany marketing fees and sales)
|
|
$
|
795.9
|
|
|
$
|
817.3
|
|
|
$
|
295.3
|
|
|
$
|
0.2
|
|
|
$
|
1,908.7
|
|
Intercompany marketing fees and sales
|
|
|
(6.6
|
)
|
|
|
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
620.4
|
|
|
|
722.3
|
|
|
|
286.2
|
|
|
|
|
|
|
|
1,628.9
|
|
Operating expenses
|
|
|
37.8
|
|
|
|
64.8
|
|
|
|
0.5
|
|
|
|
0.2
|
|
|
|
103.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
131.1
|
|
|
$
|
30.2
|
|
|
$
|
15.2
|
|
|
$
|
|
|
|
|
176.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.0
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
135.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending (excluding business combinations)
|
|
$
|
19.5
|
|
|
$
|
7.5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
27.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Refinery segment operating results reflect certain
reclassifications made to conform first quarter previously
reported balances to current year financial statement
presentation. Certain pipeline expenses previously presented in
cost of goods sold have been reclassified to operating expenses,
general and administrative expenses and depreciation. These
reclassifications had no effect on either net income or
shareholders equity, as previously reported. |
Results
of Operations
Consolidated
Results of Operations Comparison of the Three Months
Ended June 30, 2008 versus the Three Months Ended June 30,
2007
For the second quarters of 2008 and 2007, we generated net sales
of $1,449.6 million and $1,103.1 million,
respectively, an increase of $346.5 million or 31.4%. The
increase in net sales is primarily due to an
37
increase in average sales prices at all three of our operating
segments, partially offset by slightly lower sales volume due to
lower production volume at the refinery and lower merchandise
sales at the retail segment.
Cost of goods sold was $1,354.7 million for the 2008 second
quarter compared to $923.8 million for the 2007 second
quarter, an increase of $430.9 million or 46.6%. The
increase in cost of goods sold resulted from higher cost of
crude at the refinery, higher fuel costs at the retail segment
and losses on fuel derivatives of $19.6 million in the
three months ended June 30, 2008. This increase was
partially offset by lower production volume at the refinery due
to maintenance on both the Platformer and Diesel Hydrotreater
units in April 2008 and a permanent LIFO liquidation gain
recognized in the second quarter of 2008.
Operating expenses were $64.6 million for the second
quarter of 2008 compared to $56.5 million for the 2007
second quarter, an increase of $8.1 million or 14.3%. This
increase was primarily due to higher credit card costs in the
retail segment and higher natural gas expenses at the refinery.
General and administrative expenses were $12.6 million for
the second quarter of 2008 compared to $13.8 million for
the 2007 second quarter, a decrease of $1.2 million. We do
not allocate general and administrative expenses to the segments.
Depreciation and amortization was $9.2 million for the 2008
second quarter compared to $8.0 million for the 2007 second
quarter. This increase was primarily due to completion of
several raze and rebuild projects in the retail segment and
several capital projects that were placed in service at the
refinery in the second quarter of 2008.
In the second quarter of 2008, we recognized a gain on sale of
assets of $2.9 million related to the sale of real property
owned by the retail segment but operated by a third-party dealer.
Interest expense was $5.7 million in the 2008 second
quarter compared to $8.3 million for the 2007 second
quarter, a decrease of $2.6 million. This decrease was due
to an overall reduction in variable rates on indebtedness in the
second quarter of 2008, as well as increased interest
capitalized at the refinery. Interest income was
$0.5 million for the second quarter of 2008 compared to
$3.2 million for the second quarter of 2007, a decrease of
$2.7 million. This decrease was due our reduction in
short-term investments in the second quarter of 2008.
Loss from equity method investment was $0.6 million in the
second quarter of 2008 and includes our proportionate share of
the income from our Lion Oil equity investment for this period
of $0.5 million and $0.1 million of amortization
expense related to the fair value differential determined at the
acquisition date of our equity investment in the third quarter
of 2007. We include our proportionate share of the operating
results of Lion Oil in its consolidated statements of operations
two months in arrears.
Other expenses (income), net were $(0.1) million in the
second quarter of 2008 compared to $(0.4) million in the
2007 second quarter and primarily relate to the change in fair
market value of our interest rate derivatives.
Income tax (benefit) expense was $1.7 million for the
second quarter of 2008, compared to $29.1 million for the
2007 second quarter, a decrease of $27.4 million. This
decrease primarily resulted from the decrease in net income in
the second quarter of 2008 compared to the second quarter of
2007. Our effective tax rate was 29.8% for the second quarter of
2008, compared to 30.2% for the second quarter of 2007.
Consolidated
Results of Operations Comparison of the Six Months
Ended June 30, 2008 versus the Six Months Ended June 30,
2007
For the six months ended June 30, 2008 and 2007, we
generated net sales of $2,667.8 million and
$1,908.7 million, respectively, an increase of
$759.1 million or 39.8%. This increase is primarily
attributed to higher sales prices at all three of our operating
segments and the inclusion of a full six months of results from
the Calfee stores.
Cost of goods sold was $2,487.3 million for the six months
ended June 30, 2008 compared to $1,628.9 million for
the six months ended June 30, 2007, an increase of
$858.4 million or 52.7%. This
38
increase is primarily attributable to higher costs of crude at
the refinery, higher fuel costs at the retail segment, the
inclusion of a full six months of results from the Calfee stores
and losses on fuel derivatives of $18.4 million in the six
months ended June 30, 2008. This increase was partially
offset by a permanent LIFO liquidation gain recognized in the
six months ended June 30, 2008.
Operating expenses were $122.5 million for the six months
ended June 30, 2008 compared to $103.3 million for the
six months ended June 30, 2007, an increase of
$19.2 million or 18.6%. This increase was primarily driven
by changes in the retail segment, including a $8.0 million
increase related to the operation of the Calfee stores for a
full six months in 2008 and higher credit card expenses. The
refining segment also experienced higher operating expenses
primarily due to the increase in the price of natural gas.
General and administrative expenses were $25.9 million for
the six months ended June 30, 2008 compared to
$26.0 million for the six months ended June 30, 2007,
a decrease of $0.1 million. We do not allocate general and
administrative expenses to the segments.
Depreciation and amortization was $18.6 million for the six
months ended June 30, 2008 compared to $15.0 million
for the comparable period in 2007. This increase was primarily
due to the inclusion of a full six months of depreciation
expense associated with the Calfee stores acquired in the second
quarter of 2007, the completion of several raze and rebuild
projects in the retail segment and several capital projects that
were placed in service at the refinery in the second quarter of
2008.
In the six months ended June 30, 2008, we recognized a gain
on sale of assets of $2.9 million related to the sale of
real property owned by the retail segment but operated by a
third-party dealer.
Interest expense was $11.7 million in the six months ended
June 30, 2008 compared to $15.5 million for the six
months ended June 30, 2007, a decrease of
$3.8 million. This decrease was due to a decrease in our
average borrowing rates on our variable rate facilities, as well
as an increase in interest capitalized by the refining segment.
Interest income was $1.6 million for the six months ended
June 30, 2008 compared to $5.2 million for the six
months ended June 30, 2007, a decrease of
$3.6 million. This decrease was due our reduction in
short-term investments in the first six months of 2008.
Loss from equity method investment was $7.1 million in the
six months ended June 30, 2008 and includes our
proportionate share of the income from our Lion Oil equity
investment for this period of $6.7 million and
$0.4 million of amortization expense related to the fair
value differential determined at the acquisition date of our
equity investment in the third quarter of 2007. We include our
proportionate share of the operating results of Lion Oil in its
consolidated statements of operations two months in arrears.
In the six months ended June 30, 2008, we recognized a
$0.7 million loss in the fair market value of our interest
rate derivatives as compared to $0.2 million in the
comparable period in 2007.
Income tax (benefit) expense was $(0.5) million for the six
months ended June 30, 2008, compared to $36.9 million
for the six months ended June 30, 2007, a decrease of
$37.4 million. This decrease primarily resulted from our
net loss in the six months ended June 30, 2008 compared to
net income in the comparable period in 2007. Our effective tax
rate was 33.9% for the six months ended June 30, 2008,
compared to 29.5% for the comparable period in 2007. The
increase in the effective tax rate was primarily due to federal
tax credits in 2007 related to production of ultra low sulfur
diesel fuel.
We benefit from federal tax incentives related to our refinery
operations. Specifically, we were entitled to the benefit of the
domestic manufacturers production deduction for federal
tax purposes. Additionally, in 2007 we were entitled to federal
tax credits related to the production of ultra low sulfur diesel
fuel. The combination of these two items further reduced our
effective federal tax rate to an amount that is significantly
less than the statutory rate of 35% for the six months ended
June 30, 2007.
Operating
Segments
We review operating results in three reportable segments:
refining, marketing and retail.
39
Refining
Segment
The table below sets forth certain information concerning our
refining segment operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Days operated in period
|
|
|
91
|
|
|
|
91
|
|
|
|
182
|
|
|
|
181
|
|
Total sales volume (average barrels per day)
|
|
|
51,731
|
|
|
|
53,792
|
|
|
|
54,620
|
|
|
|
54,818
|
|
Products manufactured (average barrels per day):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline
|
|
|
27,669
|
|
|
|
29,061
|
|
|
|
29,496
|
|
|
|
30,203
|
|
Diesel/Jet
|
|
|
19,742
|
|
|
|
20,006
|
|
|
|
20,523
|
|
|
|
20,334
|
|
Petrochemicals, LPG, NGLs
|
|
|
2,588
|
|
|
|
2,311
|
|
|
|
2,137
|
|
|
|
2,027
|
|
Other
|
|
|
2,518
|
|
|
|
4,442
|
|
|
|
2,523
|
|
|
|
3,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total production
|
|
|
52,517
|
|
|
|
55,820
|
|
|
|
54,679
|
|
|
|
55,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput (average barrels per day):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil
|
|
|
49,542
|
|
|
|
55,440
|
|
|
|
51,263
|
|
|
|
54,252
|
|
Other feedstocks
|
|
|
3,938
|
|
|
|
1,221
|
|
|
|
4,519
|
|
|
|
2,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total throughput
|
|
|
53,480
|
|
|
|
56,661
|
|
|
|
55,782
|
|
|
|
56,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per barrel of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining operating margin
|
|
$
|
9.73
|
|
|
$
|
23.29
|
|
|
$
|
7.59
|
|
|
$
|
17.02
|
|
Refining operating margin excluding intercompany marketing
service fees
|
|
$
|
10.49
|
|
|
$
|
24.06
|
|
|
$
|
8.29
|
|
|
$
|
17.69
|
|
Direct operating expenses
|
|
$
|
5.38
|
|
|
$
|
3.86
|
|
|
$
|
4.77
|
|
|
$
|
3.81
|
|
Pricing statistics (average for the period presented):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WTI Cushing crude oil (per barrel)
|
|
$
|
124.28
|
|
|
$
|
65.06
|
|
|
$
|
111.01
|
|
|
$
|
61.70
|
|
US Gulf Coast 5-3-2 crack spread (per barrel)
|
|
$
|
13.24
|
|
|
$
|
23.10
|
|
|
$
|
11.04
|
|
|
$
|
16.51
|
|
US Gulf Coast Unleaded Gasoline (per gallon)
|
|
$
|
3.12
|
|
|
$
|
2.23
|
|
|
$
|
2.78
|
|
|
$
|
1.93
|
|
Ultra low sulfur diesel (per gallon)
|
|
$
|
3.65
|
|
|
$
|
2.07
|
|
|
$
|
3.23
|
|
|
$
|
1.94
|
|
Natural gas (per MMBTU)
|
|
$
|
11.35
|
|
|
$
|
7.53
|
|
|
$
|
9.96
|
|
|
$
|
7.36
|
|
Comparison
of the Three Months Ended June 30, 2008 versus the Three
Months Ended June 30, 2007
Net sales for the refining segment were $633.3 million for
the second quarter of 2008 compared to $435.4 million for
the 2007 second quarter, an increase of $197.9 million or
45.5%. Net sales increased primarily due to an increase in the
average sales price per barrel of $134.32 as compared to $88.73
in the second quarter of 2007. The increase was partially offset
by lower sales volumes due to lower production volumes in the
second quarter of 2008. The lower production volumes in the 2008
second quarter were primarily due to maintenance performed on
the Platformer and Diesel Hydrotreater units in April 2008.
Cost of goods sold for the second quarter of 2008 was
$587.5 million compared to $321.4 million for the 2007
second quarter, an increase of $266.1 million or 82.8%.
This cost increase was primarily due to an increase in crude
costs. The average cost per barrel sold was $124.79 for the 2008
second quarter compared to $65.65 per barrel sold for the
comparable period in 2007. We also recognized a
$6.1 million loss on fuel futures contracts in the three
months ended June 30, 2008. These increases were partially
offset by a liquidation gain related to our LIFO inventory. In
response to rapidly escalating crude costs, we determined
operations could function at a lower volume of crude,
intermediate and feedstock inventory levels. We adjusted our
target LIFO levels to reflect these lower operating volumes.
Consequently, we recorded a permanent liquidation gain of
$12.5 million in the three months ended June 30, 2008,
compared to a $1.5 million gain in the three months ended
June 30, 2007.
40
Our refining segment has a services agreement with our marketing
segment, which among other things, requires the refining segment
to pay service fees to the marketing segment based on the number
of gallons sold at the Tyler refinery and a sharing of a portion
of the marketing margin achieved in return for providing
marketing, sales and customer services. This service agreement
lowered the refining margin achieved by our refining segment in
the second quarter of 2008 by $0.76 per barrel sold to $9.73 per
barrel sold. Without this fee, the refining segment would have
achieved a refining operating margin of $10.49 per barrel sold
in the 2008 second quarter, which was 79.2% of the
U.S. Gulf Coast crack spread, compared to $24.06 per barrel
sold in the comparable 2007 period, which was 104.2% of the
U.S. Gulf Coast crack spread. We eliminate this
intercompany fee in consolidation.
Operating expenses were $25.3 million for the 2008 second
quarter or $5.38 per barrel sold compared to $18.9 million
for the 2007 second quarter or $3.86 per barrel sold. The
increase in operating expense per barrel sold was primarily
due to higher natural gas costs which averaged $11.35 per MMBTU
in 2008 second quarter compared to $7.53 per MMBTU during the
2007 second quarter, an increase of $4.3 million in the
2008 second quarter when compared to the 2007 second quarter.
Contribution margin for the refining segment in the 2008 second
quarter was $20.5 million, or 67.7% of our consolidated
contribution margin.
Comparison
of the Six Months Ended June 30, 2008 versus the Six Months
Ended June 30, 2007
Net sales for the refining segment were $1,186.1 million
for the six months ended June 30, 2008 compared to
$789.3 million for the same period in 2007, an increase of
$396.8 million or 50.3%. Net sales increased primarily due
to an increase in the average sales price per barrel of $119.16
as compared to $79.27 in the six months ended June 30, 2007.
Cost of goods sold for our refining segment for the six months
ended June 30, 2008 was $1,110.6 million compared to
$620.4 million for the comparable period of 2007, an
increase of $490.2 million or 79.0%. This cost increase was
primarily due to an increase in crude costs. The average cost
per barrel was $111.72 for the six months ended June 30,
2008 compared to $62.53 per barrel for the comparable period in
2007. We also recognized a $7.6 million loss on fuel
futures contracts in the six months ended June 30, 2008.
These increases were partially offset by a liquidation gain
related to our LIFO inventory. In response to rapidly escalating
crude costs, we determined operations could function at a lower
volume of crude, intermediate and feedstock inventory levels. We
adjusted our target LIFO levels to reflect these lower operating
volumes. Consequently, we recorded a permanent liquidation gain
of $14.9 million in the six months ended June 30,
2008, compared to a $2.0 million gain in the three months
ended June 30, 2007.
Our refining segment has a services agreement with our marketing
segment, which among other things, requires the refining segment
to pay service fees to the marketing segment based on the number
of gallons sold at the Tyler refinery and a sharing of a portion
of the marketing margin achieved in return for providing
marketing, sales and customer services. This service agreement
lowered the refining margin achieved by our refining segment in
the six months ended June 30, 2008 by $0.70 per barrel sold
to $7.59 per barrel sold. Without this fee, the refining segment
would have achieved a refining operating margin of $8.29 per
barrel sold in the six months ended June 30, 2008, which
was 75.1% of the U.S. Gulf Coast crack spread, compared to
$17.69 per barrel sold in the comparable 2007 period, which was
107.1% of the U.S. Gulf Coast crack spread. We eliminate
this intercompany fee in consolidation.
Operating expenses were $47.4 million for the six months
ended June 30, 2008 or $4.77 per barrel sold compared to
$37.8 million for the six months ended June 30, 2007
or $3.81 per barrel sold. The increase in operating expense per
barrel sold was due primarily to a $5.8 million increase in
natural gas costs which averaged $9.96 per MMBTU in the six
months ended June 30, 2008 compared to $7.36 per MMBTU
during the six months ended June 30, 2007.
Segment contribution margin for the refining segment for the six
months ended June 30, 2008 represented 48.4% of our
consolidated segment contribution margin, or $28.1 million.
41
Marketing
Segment
The table below sets forth certain information concerning our
marketing segment operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Days operated in period
|
|
|
91
|
|
|
|
91
|
|
|
|
182
|
|
|
|
181
|
|
Total sales volume (average barrels per day)
|
|
|
17,746
|
|
|
|
20,324
|
|
|
|
17,502
|
|
|
|
18,660
|
|
Products sold (average barrels per
day)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline
|
|
|
8,932
|
|
|
|
9,570
|
|
|
|
8,487
|
|
|
|
8,668
|
|
Diesel/Jet
|
|
|
8,751
|
|
|
|
10,754
|
|
|
|
8,950
|
|
|
|
9,952
|
|
Other
|
|
|
63
|
|
|
|
|
|
|
|
65
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
17,746
|
|
|
|
20,324
|
|
|
|
17,502
|
|
|
|
18,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses (per barrel of sales)
|
|
$
|
0.15
|
|
|
$
|
0.16
|
|
|
$
|
0.14
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of the Three Months Ended June 30, 2008 versus the Three
Months Ended June 30, 2007
Net sales for the marketing segment were $236.5 million in
the second quarter of 2008 compared to $181.2 million for
the 2007 second quarter, an increase of $55.3 million or
30.5%. The average sales price of gasoline and diesel rose 50.4%
from $2.28 per gallon in the second quarter of 2007 to $3.13 per
gallon in the second quarter of 2008. Total sales volume
averaged 17,746 barrels per day in the 2008 second quarter
compared to 20,324 in the 2007 second quarter. Net sales
included $3.6 million and $3.8 million of net service
fees paid by our refining segment to our marketing segment for
the 2008 and 2007 second quarters, respectively. These service
fees are based on the number of gallons sold and a shared
portion of the margin achieved in return for providing sales and
customer support services.
Cost of goods sold was $230.2 million in the second quarter
of 2008 approximating a cost per barrel sold of $142.53. This
compares to cost of goods sold of $171.6 million for the
second quarter of 2007, approximating a cost per barrel sold of
$92.78. This cost per barrel resulted in an average gross margin
of $3.92 per barrel in the 2008 second quarter compared to $5.19
per barrel in the 2007 second quarter. Additionally, we
recognized a loss of $0.9 million during the 2008 second
quarter compared to a gain of $0.1 million in the 2007
second quarter associated with settlement of nomination
differences under long-term purchase contracts.
Operating expenses in the marketing segment were approximately
$0.2 million for the second quarter of 2008 and
$0.3 million for the 2007 second quarter and primarily
relate to utilities and insurance costs.
Contribution margin for the marketing segment in the 2008 second
quarter was $6.1 million, or 20.1% of our consolidated
segment contribution margin.
Comparison
of the Six Months Ended June 30, 2008 versus the Six Months
Ended June 30, 2007
Net sales for the marketing segment were $420.8 million for
the six months ended June 30, 2008 compared to
$301.9 million for the comparable period in 2007. The
average price of gasoline and diesel rose 48.6% to $3.09 per
gallon in the six months ended June 30, 2008 from $2.08 in
the comparable period in 2007. Total sales volume averaged
17,502 barrels per day for the six months ended
June 30, 2008 as compared to 18,660 barrels per day
for the same period in 2007. Net sales for the six months ended
June 30, 2008 and 2007 included $7.0 million and
$6.6 million, respectively, of net service fees paid by our
refining segment to our marketing segment. These service fees
are based on the number of gallons sold and a shared portion of
the margin achieved in return for providing marketing, sales and
customer support services.
Cost of goods sold was $407.9 million for the six months
ended June 30, 2008, approximating a cost per barrel
sold of $128.05, as compared to $286.2 million, or $84.73
per barrel sold, for the comparable period in 2007. This cost
per barrel resulted in an average gross margin of $4.07 per
barrel for the six months ended
42
June 30, 2008 compared to $4.66 per barrel for the same
period in 2007. Additionally, we recognized gains (losses)
during the six months ended June 30, 2008 and 2007 of
$(0.4) million and $0.5 million, respectively,
associated with settlement of nomination differences under
long-term purchase contracts.
Operating expenses in the marketing segment were approximately
$0.4 million and $0.5 million for the six months ended
June 30, 2008 and 2007, respectively, and primarily relate
to marketing utilities and insurance costs.
Segment contribution margin for the marketing segment for the
six months ended June 30, 2008 represented 21.6% of our
total segment contribution margin, or $12.5 million.
Retail
Segment
The table below sets forth certain information concerning our
retail segment operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Number of stores (end of period)
|
|
|
497
|
|
|
|
502
|
|
|
|
497
|
|
|
|
502
|
|
Average number of stores
|
|
|
496
|
|
|
|
501
|
|
|
|
496
|
|
|
|
447
|
|
Retail fuel sales (thousands of gallons)
|
|
|
118,625
|
|
|
|
123,845
|
|
|
|
235,227
|
|
|
|
226,341
|
|
Average retail gallons per average number of stores (in
thousands)
|
|
|
239
|
|
|
|
247
|
|
|
|
474
|
|
|
|
506
|
|
Retail fuel margin ($ per gallon)
|
|
$
|
0.176
|
|
|
$
|
0.158
|
|
|
$
|
0.151
|
|
|
$
|
0.142
|
|
Merchandise sales (in thousands)
|
|
$
|
108,074
|
|
|
$
|
111,812
|
|
|
$
|
205,198
|
|
|
$
|
193,605
|
|
Merchandise margin %
|
|
|
31.9
|
%
|
|
|
31.6
|
%
|
|
|
32.1
|
%
|
|
|
32.0
|
%
|
Credit expense (% of gross margin)
|
|
|
10.3
|
%
|
|
|
8.6
|
%
|
|
|
10.4
|
%
|
|
|
8.3
|
%
|
Merchandise and cash over/short (% of net sales)
|
|
|
0.2
|
%
|
|
|
0.3
|
%
|
|
|
0.2
|
%
|
|
|
0.3
|
%
|
Operating expense/merchandise sales plus total gallons
|
|
|
16.6
|
%
|
|
|
15.3
|
%
|
|
|
16.3
|
%
|
|
|
14.9
|
%
|
Comparison
of the Three Months Ended June 30, 2008 versus the Three
Months Ended June 30, 2007
Net sales for our retail segment in the 2008 second quarter
increased 19.2% to $579.6 million from $486.4 million
in the comparable 2007 period. This increase was primarily due
to a 25.3% increase in retail fuel sales, which was driven by
the increase in average fuel prices. The retail fuel price
increased 30.8% to an average price of $3.72 per gallon in the
second quarter of 2008 when compared to an average price of
$2.85 per gallon in the second quarter of 2007. This increase
was partially offset by a $3.7 million decrease in
merchandise sales.
Total fuel sales, including wholesale dollars, increased 25.8%
to $471.5 million in the second quarter of 2008. The
increase was primarily due to an increase of $0.87 per gallon in
the average retail price per gallon ($3.72 per gallon in the
second quarter of 2008 compared to $2.85 per gallon in the
second quarter of 2007). This increase was partially offset by a
decline in gallons sold. Retail fuel sales were
118.6 million gallons for the 2008 second quarter compared
to 123.8 million gallons for the 2007 second quarter.
Comparable store gallons decreased 4.0% between the second
quarter of 2008 and the second quarter of 2007.
Merchandise sales decreased 3.3% to $108.1 million in the
second quarter of 2008. Comparable store merchandise sales
decreased by 3.1% due primarily to decreases in our soft drink,
snack, and general merchandise categories.
Cost of goods sold for our retail segment increased 21.5% to
$523.3 million in the second quarter of 2008. This increase
was primarily due to the increase in the cost of fuel. The
average cost of fuel was $3.54 per gallon sold in the second
quarter of 2008 compared to $2.69 per gallon sold in the second
quarter of 2007.
43
Operating expenses were $39.0 million in the 2008 second
quarter, an increase of $1.8 million, or 4.8%. This
increase was due primarily to higher credit card, environmental
and insurance expenses. The ratio of operating expenses to
merchandise sales plus total gallons sold in our retail
operations increased to 16.6% in the second quarter of 2008 from
15.3% in the second quarter of 2007.
Segment contribution margin for the retail segment for the 2008
second quarter represented 57.1% of our total contribution
margin or $17.3 million.
Comparison
of the Six Months Ended June 30, 2008 versus the Six Months
Ended June 30, 2007
Net sales for our retail segment in the six months ended
June 30, 2008 increased 29.8% to $1,060.6 million from
$817.3 million in the comparable 2007 period. This increase
was primarily due to the inclusion of sales from the acquisition
of the Calfee stores in the second quarter of 2007 and an
increase in average fuel prices. The retail fuel price increased
32.2% to an average price of $3.41 per gallon in the six months
ended June 30, 2008 when compared to an average price of
$2.58 per gallon in the six months ended June 30, 2007.
Retail fuel sales were 235.2 million gallons for the six
months ended June 30, 2008, compared to 226.3 million
gallons for the six months ended June 30, 2007. This
increase was primarily due to the full six months results from
the purchased Calfee stores, which increased fuel gallons sold
by 15.8 million gallons. Comparable store gallons decreased
3.0% between the six months ended June 30, 2008 and the six
months ended June 30, 2007. Total fuel sales, including
wholesale dollars, increased 37.1% to $855.4 million in the
six months ended June 30, 2008. The increase was primarily
due to the increase in gallons sold noted above and an increase
of $0.82 per gallon in the average retail price per gallon
($3.40 per gallon in the six months ended June 30, 2008
compared to $2.58 per gallon in the six months ended
June 30, 2007).
Merchandise sales increased 6.0% to $205.2 million in the
six months ended June 30, 2008. The increase in merchandise
sales was primarily due to $17.8 million in merchandise
sales resulting from a full six months results from the 2007
Calfee stores acquisition. Our comparable store merchandise
sales decreased by 3.2% due primarily to decreases in our soft
drink and general merchandise categories.
Cost of goods sold for our retail segment increased 32.6% to
$957.9 million in the six months ended June 30, 2008.
This increase was primarily due to the inclusion of a full six
months results from the Calfee stores acquired which increased
cost of goods sold by 9.9% and an increase in the average cost
of fuel of $0.81 per gallon, to $3.25 per gallon in the six
months ended June 30, 2008 as compared to $2.44 per gallon
in the 2007 comparable period.
Operating expenses were $74.5 million in the six months
ended June 30, 2008, an increase of $9.7 million, or
15.0%. This increase was due primarily to $8.0 million in
store operating costs from the inclusion of a full six months
results from the Calfee stores, and in our existing stores,
higher credit card expenses; which was partially offset by a
decrease in lease payments and other expenses. The ratio of
operating expenses to merchandise sales plus total gallons sold
in our retail operations increased to 16.3% in the six months
ended June 30, 2008 from 14.9% in the six months ended
June 30, 2007.
Segment contribution margin for the retail segment for the six
months ended June 30, 2008 represented 48.6% of our total
contribution margin or $28.2 million.
Liquidity
and Capital Resources
Our primary sources of liquidity are cash generated from our
operating activities and borrowings under our revolving credit
facilities. We believe that our existing cash balances, cash
flows from operations and borrowings under our current credit
facilities will be sufficient to satisfy the anticipated cash
requirements associated with our existing operations for at
least the next 12 months.
Additional capital may be required in order to consummate
significant acquisitions and any significant changes in our
capital spending needs. We would likely seek these additional
funds from a variety of sources,
44
including public or private debt and stock offerings, and
borrowings under credit lines or other sources. There can be no
assurance that we will be able to raise additional funds on
favorable terms or at all.
Cash
Flows
The following table sets forth a summary of our consolidated
cash flows for the six months ended June 30, 2008 and 2007
(in millions):
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
Cash flows provided by operating activities
|
|
$
|
44.3
|
|
|
$
|
135.2
|
|
Cash flows used in investing activities
|
|
|
(23.2
|
)
|
|
|
(240.4
|
)
|
Cash flows (used in) provided by financing activities
|
|
|
(39.7
|
)
|
|
|
64.6
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(18.6
|
)
|
|
$
|
(40.6
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
Net cash provided by operating activities was $44.3 million
for the six months ended June 30, 2008 compared to
$135.2 million for the six months ended June 30, 2007.
The decrease in cash flows from operations in the six months
ended June 30, 2008 from the six months ended June 30,
2007 was primarily due to a $89.1 million decrease in net
income and a $26.7 million increase in accounts receivable,
net. These increases were partially offset by an increase in
accounts payable and other current liabilities.
Cash
Flows from Investing Activities
Net cash used in investing activities was $23.2 million for
the six months ended June 30, 2008 compared to
$240.4 million in the six months ended June 30, 2007.
This decrease was partially a result of current period purchases
and sales of short-term investments with a net increase in cash
of $44.4 million in the six months ended June 30, 2008
compared to cash used of $141.2 million in 2007.
Cash used in investing activities includes our capital
expenditures during the current period of approximately
$71.5 million, of which $58.0 million was spent on
projects at our refinery and $12.8 million in our retail
segment. During the six months ended June 30, 2008, we
spent $39.0 million on regulatory and maintenance projects
at the refinery. In our retail segment, we spent
$5.5 million completing several raze and
rebuild projects.
Cash used in investing activities for the six months ended
June 30, 2007 included the acquisition of the Calfee stores.
Cash
Flows from Financing Activities
Net cash used in financing activities was $39.7 million in
the six months ended June 30, 2008, compared to cash
provided of $64.6 million in the six months ended
June 30, 2007. The decrease in cash provided from financing
activities was primarily due to net payments on long-term
revolvers of $21.3 million during the six months ended
June 30, 2008, compared to proceeds of $13.8 million
in the comparable period of 2007 and the $65 million
proceeds from debt instruments in the six months ended
June 30, 2007 compared to $20.0 million in the same
period of 2008.
Cash
Position and Indebtedness
As of June 30, 2008, our total cash and cash equivalents
were $86.4 million and we had total indebtedness of
approximately $320.0 million. Borrowing availability under
our four separate revolving credit facilities was approximately
$174.3 million and we had letters of credit outstanding of
$266.3 million. We were in compliance with our covenants in
all debt facilities as of June 30, 2008.
45
Capital
Spending
A key component of our long-term strategy is our capital
expenditure program. Our capital expenditures for the 2008
second quarter were $35.6 million, of which approximately
$26.7 million was spent in our refining segment,
$8.4 million in our retail segment and $0.5 million in
the marketing segment.
Our total capital expenditure budget for the year ending
December 31, 2008 is $125.0 million, which consists of
$105.0 million related to refining segment and another
$20.0 million related to the retail and marketing segments.
During the six months ended June 30, 2008, refining spent
$35.2 million on regulatory projects, $3.8 million on
maintenance at the refinery, as well as an additional
$19.0 million related to discretionary projects. During the
same period the retail segment spent a total of
$12.8 million, of which $9.6 million was for three new
store builds and the re-imaging of 50 of our existing stores. We
plan to spend approximately $53 million during the
remainder of 2008, primarily on discretionary projects at the
refinery.
The amount of our capital expenditure budget is subject to
either increases or decreases due to unanticipated increases in
the cost, scope and completion time for our capital projects,
including capital projects at the refinery undertaken to comply
with government regulations. Equipment that we require to
complete capital projects may be unavailable to us at expected
costs or within expected time periods, increasing project costs
or causing delays. Additionally, employee or contract labor
expense may exceed our expectations. The inability to complete
our capital projects within the cost parameters and timelines we
anticipate due to these or other factors beyond our control
could have a material impact on our estimates.
Off-Balance
Sheet Arrangements
We have no off-balance sheet arrangements as of June 30,
2008.
|
|
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
Changes in commodity prices (mainly petroleum crude oil and
unleaded gasoline) and interest rates are our main sources of
market risk. When we make the decision to manage our market
exposure, our objective is generally to avoid losses from
negative price changes, realizing we will not obtain the benefit
of positive price changes.
Commodity
Price Risk
Impact of Changing Prices. Our revenues and
cash flows, as well as estimates of future cash flows, are
sensitive to changes in energy prices. Major shifts in the cost
of crude oil, the prices of refined products and the cost of
ethanol can generate large changes in the operating margin in
each of our segments. Gains and losses on transactions accounted
for using mark-to-market accounting are reflected in cost of
goods sold in the consolidated statements of operations at each
period end. Gains or losses on commodity derivative contracts
accounted for as cash flow hedges are recognized in other
comprehensive income on the consolidated balance sheets and
ultimately, when the forecasted transactions are completed in
net sales or cost of goods sold in the consolidated statements
of operations.
Price Risk Management Activities. At times, we
enter into commodity derivative contracts to manage our price
exposure to our inventory positions, future purchases of crude
oil and ethanol, future sales of refined products or to fix
margins on future production. In connection with our marketing
segments supply contracts, we entered into certain futures
contracts. In accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), all of these commodity futures
contracts are recorded at fair value, and any change in fair
value between periods has historically been recorded in the
consolidated statements of operations. At June 30, 2008 and
December 31, 2007, we had open derivative contracts
representing 19,000 barrels and 40,000 barrels,
respectively, of refined petroleum products. We had an
unrealized net (loss) gain of $(0.1) million and
$0.1 million as of June 30, 2008 and December 31,
2007, respectively.
In December 2007, in connection with our offering of renewable
fuels in our retail segment markets, we entered into a series of
over the counter (OTC) swaps based on the futures price of
ethanol as quoted on the
46
Chicago Board of Trade and a series of OTC swaps based on the
futures price of unleaded gasoline as quoted on the New York
Mercantile Exchange. In accordance with SFAS No. 133,
all of these swaps are recorded at fair value, and any change in
fair value between periods has historically been recorded in the
consolidated statements of operations. As of June 30, 2008
and December 31, 2007, we had open derivative contracts
representing 711,190 barrels and 276,536 barrels of
ethanol, respectively. We had unrealized net gains of
$19.4 million and $2.5 million as of June 30,
2008 and December 31, 2007, respectively. As of
June 30, 2008 and December 31, 2007, we also had open
derivative contracts representing 710,000 barrels and
270,000 barrels, respectively, of unleaded gasoline and had
unrealized net losses of $29.7 million and
$1.9 million, respectively.
In March 2008, we entered into a series of OTC swaps based on
the future price of West Texas Intermediate Crude (WTI) as
quoted on the NYMEX which fixed the purchase price of WTI for a
predetermined number of barrels at future dates from July 2008
through December 2009. We also entered into a series of OTC
swaps based on the future price of Ultra Low Sulfur Diesel
(ULSD) as quoted on the Gulf Coast ULSD PLATTS which fixed the
sales price of ULSD for a predetermined number of gallons at
future dates from July 2008 through December 2009.
In accordance with SFAS No. 133, the WTI and ULSD
swaps 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. For the three and
six months ended June 30, 2008, Delek recorded unrealized
losses as a component of other comprehensive income of
$16.4 million ($10.3 million, net of deferred taxes),
and $22.3 million ($14.2 million, net of deferred
taxes), respectively, related to the change in the fair value of
these swaps. The fair value of these contracts will be
recognized in income beginning in July 2008, at the time the
positions are closed and the hedged transactions are recognized
in income. As of June 30, 2008, Delek had total unrealized
gains (losses), net of deferred income taxes, in accumulated
other comprehensive income of $(13.9) million associated
with its cash flow hedges. We did not have any commodity futures
contracts designated in cash flow hedges during the six months
ended June 30, 2007.
We maintain at our refinery and in third-party facilities
inventories of crude oil, feedstocks and refined petroleum
products, the values of which are subject to wide fluctuations
in market prices driven by world economic conditions, regional
and global inventory levels and seasonal conditions. At
June 30, 2008, we held approximately 1.3 million
barrels of crude and product inventories valued under the LIFO
valuation method with an average cost of $71.44 per barrel.
Replacement cost (FIFO) exceeded carrying value of LIFO costs by
$85.5 million. We refer to this excess as our LIFO reserve.
Interest
Rate Risk
We have market exposure to changes in interest rates relating to
our outstanding variable rate borrowings, which totaled
$320.0 million as of June 30, 2008. We help manage
this risk through interest rate cap agreements that modify the
interest characteristics of our outstanding long-term debt. In
accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities
(SFAS 133), all interest rate hedging instruments are
recorded at fair value and any changes in the fair value between
periods are recognized in earnings. The fair value of our
interest rate hedging instruments increased by $0.1 million
and $0.4 million for the quarters ended June 30, 2008
and June 30, 2007, respectively. The fair values of our
interest rate cap agreements are obtained from dealer quotes.
These values represent the estimated amount that we would
receive or pay to terminate the agreements taking into account
the difference between the contract rate of interest and rates
currently quoted for agreements, of similar terms and
maturities. We expect that interest rate derivatives will reduce
our exposure to short-term interest rate movements. The
annualized impact of a hypothetical 1% change in interest rates
on floating rate debt outstanding as of June 30, 2008 would
be to change interest expense by $3.2 million. Increases in
rates would be partially mitigated by interest rate derivatives
mentioned above. As of June 30, 2008, we had interest rate
cap agreements in place representing $97.5 million in
notional value with various settlement dates, the latest of
which expires in July 2010. These interest rate caps range from
3.50% to 4.00% as measured by the
3-month
LIBOR rate and include a knock-out feature at rates ranging from
6.65% to 7.15% using the same measurement rate. The fair value
of our interest rate derivatives was $0.3 million and
$1.0 million as of June 30, 2008 and December 31,
2007.
47
The types of instruments used in our hedging and trading
activities described above include swaps, and futures. Our
positions in derivative commodity instruments are monitored and
managed on a daily basis by a risk management committee to
ensure compliance with our risk management strategies which have
been approved by our board of directors.
|
|
ITEM 4.
|
CONTROLS
AND PROCEDURES.
|
|
|
(a)
|
Evaluation
of Disclosure Controls and Procedures
|
Our management has evaluated, with the participation of our
principal executive and principal financial officer, the
effectiveness of our disclosure controls and procedures (as
defined in
Rule 13a-15(e)
or
Rule 15d-15(e)
under the Securities Exchange Act of 1934) as of the end of
the period covered by this report, and has concluded that our
disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed
by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Securities
and Exchange Commissions rules and forms.
|
|
(b)
|
Changes
in Internal Control over Financial Reporting
|
There has been no change in our internal control over financial
reporting (as described in
Rule 13a-15(f)
under the Securities Exchange Act of 1934) that occurred
during our last fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control
over financial reporting.
PART II.
OTHER
INFORMATION
There are no material changes to the risk factors previously
disclosed in Deleks Annual Report on
Form 10-K,
filed with the Securities and Exchange Commission on
March 3, 2008.
48
|
|
Item 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
The following information relates to matters submitted to the
stockholders of Delek US Holdings, Inc. at the Annual Meeting of
Stockholders held on May 1, 2008.
At the meeting, the following directors were elected by the vote
indicated:
|
|
|
|
|
Ezra Uzi Yemin
|
|
|
|
|
Votes cast in favor:
|
|
|
44,534,615
|
|
Votes withheld:
|
|
|
5,704,445
|
|
Gabriel Last
|
|
|
|
|
Votes cast in favor:
|
|
|
43,951,889
|
|
Votes withheld:
|
|
|
6,287,171
|
|
Asaf Bartfeld
|
|
|
|
|
Votes cast in favor:
|
|
|
44,403,768
|
|
Votes withheld:
|
|
|
5,835,292
|
|
Zvi Greenfeld
|
|
|
|
|
Votes cast in favor:
|
|
|
44,736,777
|
|
Votes withheld:
|
|
|
5,502,283
|
|
Carlos E. Jordá
|
|
|
|
|
Votes cast in favor:
|
|
|
49,125,340
|
|
Votes withheld:
|
|
|
1,113,720
|
|
Charles H. Leonard
|
|
|
|
|
Votes cast in favor:
|
|
|
49,127,001
|
|
Votes withheld:
|
|
|
1,112,059
|
|
Philip L. Maslowe
|
|
|
|
|
Votes cast in favor:
|
|
|
49,126,476
|
|
Votes withheld:
|
|
|
1,112,584
|
|
The proposal to ratify Ernst & Young LLP as our
independent registered public accounting firm for fiscal year
2008 was approved by the vote indicated:
|
|
|
|
|
Votes cast in favor:
|
|
|
50,185,646
|
|
Votes against:
|
|
|
36,369
|
|
Abstentions:
|
|
|
17,045
|
|
|
|
Item 5.
|
OTHER
INFORMATION
|
Tax
Reimbursements to Chief Executive Officer
On August 5, 2008, the Boards of Directors of Delek and
Express approved a new element of compensation for our President
and Chief Executive Officer, Ezra Uzi Yemin. Mr. Yemin is
currently provided a rent-free residence for his use. The new
element of compensation, which is retroactive to January 1,
2008, is the reimbursement of the value of income taxes incurred
as a result of the benefit.
49
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.1
|
|
Fourth Amendment dated June 26, 2008 to the Credit Agreement
dated March 30, 2007 by and between Delek US Holdings Inc. and
Lehman Commercial Paper, Inc., as administrative agent, Lehman
Brothers, Inc., as arranger and joint bookrunner, and JPMorgan
Chase Bank, N.A. as documentation agent, arranger and joint
bookrunner.
|
|
31
|
.1
|
|
Certification of the Companys Chief Executive Officer
pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities
Exchange Act.
|
|
31
|
.2
|
|
Certification of the Companys Chief Financial Officer
pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities
Exchange Act.
|
|
32
|
.1
|
|
Certification of the Companys Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of the Companys Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Delek US Holdings, Inc.
Ezra Uzi Yemin
President and Chief Executive Officer
(Principal Executive Officer) and Director
Edward Morgan
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: August 11, 2008
51
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.1
|
|
Fourth Amendment dated June 26, 2008 to the Credit Agreement
dated March 30, 2007 by and between Delek US Holdings Inc. and
Lehman Commercial Paper, Inc., as administrative agent, Lehman
Brothers, Inc., as arranger and joint bookrunner, and JPMorgan
Chase Bank, N.A. as documentation agent, arranger and joint
bookrunner.
|
|
31
|
.1
|
|
Certification of the Companys Chief Executive Officer
pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities
Exchange Act.
|
|
31
|
.2
|
|
Certification of the Companys Chief Financial Officer
pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities
Exchange Act.
|
|
32
|
.1
|
|
Certification of the Companys Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of the Companys Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|