Management's Discussion of Results of Operations
(Excerpts) |
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Management Discussion. That information is contained elsewhere in our articles.
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with 0 to 2 gets a "-1", and 3 to 5 gets a "+1."
On a scale of 0 to 5, 5
being best, Zenith rates this company's Management's Discussion as a 2.
Important factors that, individually or in
the aggregate, could cause differences include, but are not limited to:
volatility in our refining margins or fuel gross profit as a result of changes
in the prices of crude oil, other feedstocks and refined petroleum products;
reliability of our operating assets;
actions of our competitors and customers;
changes in, or the failure to comply with, the extensive government regulations
applicable to our industry segments;
our ability to execute our strategy of growth through acquisitions and capital
projects and changes in the expected value of and benefits derived therefrom,
including any ability to successfully integrate acquisitions, realize expected
synergies or achieve operational efficiency and effectiveness;
diminishment in value of long-lived assets may result in an impairment in the
carrying value of the assets on our balance sheet and a resultant loss
recognized in the statement of operations;
general economic and business conditions affecting the southern, southwestern
and western United States, particularly levels of spending related to travel
and tourism;
volatility under our derivative instruments;
deterioration of creditworthiness or overall financial condition of a material
counterparty (or counterparties);
unanticipated increases in cost or scope of, or significant delays in the
completion of, our capital improvement and periodic turnaround projects;
risks and uncertainties with respect to the quantities and costs of refined
petroleum products supplied to our pipelines and/or held in our terminals;
operating hazards, natural disasters, casualty losses and other matters beyond
our control;
increases in our debt levels or costs;
changes in our ability to continue to access the credit markets;
compliance, or failure to comply, with restrictive and financial covenants in
our various debt agreements;
the inability of our subsidiaries to freely make dividends, loans or other cash
distributions to us;
seasonality;
acts of terrorism (including cyber-terrorism) aimed at either our facilities or
other facilities that could impair our ability to produce or transport refined
products or receive feedstocks;
disruption, failure, or cybersecurity breaches affecting or targeting our IT
systems and controls, our infrastructure, or the infrastructure of our
cloud-based IT service providers;
changes in the cost or availability of transportation for feedstocks and
refined products; and
Executive Summary and Strategic Overview
Business Overview
We are an integrated downstream energy business focused on petroleum refining,
the transportation, storage and wholesale distribution of crude oil,
intermediate and refined products and convenience store retailing. Effective
July 1, 2017, we acquired through the Delek/Alon Merger the operations and net
assets of Alon. The Delek/Alon Merger continues to have a significant impact on
our revenue and profitability as well as earnings per share, our net asset
position, our purchasing position in the marketplace, our footprint in the
refining industry, especially in the Gulf Coast Region/Permian Basin, and our
ability to go to market and secure financing. The refining segment processes
crude oil and other feedstocks for the manufacture of transportation motor
fuels, including various grades of gasoline, diesel fuel and aviation fuel,
asphalt and other petroleum-based products that are distributed through owned
and third-party product terminals. The refining segment has a combined
nameplate capacity of 302,000 bpd, including the 75,000 bpd Tyler, Texas
refinery (the "Tyler refinery"), the 80,000 bpd El Dorado, Arkansas refinery
(the "El Dorado refinery"), the 73,000 bpd Big Spring, Texas refinery (the "Big
Spring refinery"), and the 74,000 bpd Krotz Springs, Louisiana refinery (the
"Krotz Springs refinery"), as well as a non-operating refinery located in
Bakersfield, California. The refining segment also owns and operates two
biodiesel facilities involved in the production of biodiesel fuels and related
activities, located in Crossett, Arkansas and Cleburn, Texas. The refining
segment's petroleum-based products are marketed primarily in the south central,
southwestern and western regions of the United States, and the refining segment
also ships and sells gasoline into wholesale markets in the southern and
eastern United States. Motor fuels are sold under the Alon or Delek brand
through various terminals to supply Alon or Delek branded retail sites. In
addition, we sell motor fuels through our wholesale distribution network on an
unbranded basis. Our profitability in the refining segment is substantially
determined by the difference between the cost of the crude oil feedstocks we
purchase and the price of the refined products we sell, referred to as the
"crack spread", "refining margin" or "refined product margin". Refining margin
is used as a metric to assess a refinery's product margins against market crack
spread trends, where "crack spread" is a measure of the difference between
market prices for crude oil and refined products and is a commonly used proxy
within the industry to estimate or identify trends in refining margins. The
cost to acquire feedstocks and the price of the refined petroleum products we
ultimately sell from our refineries depend on numerous factors beyond our
control, including the supply of, and demand for, crude oil, gasoline and other
refined petroleum products which, in turn, depend on, among other factors,
changes in domestic and foreign economies, weather conditions such as
hurricanes or tornadoes, local, domestic and foreign political affairs, global
conflict, production levels, the availability of imports, the marketing of
competitive fuels and government regulation. Other significant factors that
influence our results in the refining segment include operating costs
(particularly the cost of natural gas used for fuel and the cost of
electricity), seasonal factors, refinery utilization rates and planned or
unplanned maintenance activities or turnarounds. Demand for gasoline and
asphalt products is generally higher during the summer months than during the
winter months due to seasonal increases in motor vehicle traffic and road and
home construction. Varying vapor pressure requirements between the summer and
winter months also tighten summer gasoline supply. As a result, our operating
results are generally lower for the first and fourth quarters of the calendar
year. Moreover, while the fluctuations in the cost of crude oil are typically
reflected in the prices of light refined products, such as gasoline and diesel
fuel, the price of other residual products, such as asphalt, coke, carbon black
oil and liquefied petroleum gas ("LPG"), are less likely to move in parallel
with crude cost. This could cause additional pressure on our realized margin
during periods of rising or falling crude oil prices. Additionally, our margins
are impacted by the pricing differentials of the various types and sources of
crude oil we use at our refineries and their relation to product pricing, such
as the differentials between West Texas Intermediate ("WTI") Midland and WTI
Cushing or WTI Midland and Brent crude oil. With respect to measuring our
refining margins at our refineries, we consider the following:
For our Tyler refinery, we compare our per barrel refined product margin to the
U.S.Gulf Coast ("Gulf Coast") 5-3-2 crack spread. The Gulf Coast 5-3-2 crack
spread is used as a benchmark for measuring a refinery's product margins by
measuring the difference between the market price of light products and crude
oil, and represents the approximate refining margin resulting from processing
one barrel of crude oil into three-fifths barrel of gasoline and two-fifths
barrel of high-sulfur diesel.
For our Big Spring refinery, we compare our per barrel refined product margin
to the Gulf Coast 3-2-1 crack spread. The Gulf Coast 3-2-1 crack spread is
calculated assuming that one barrel of WTI Cushing crude oil are converted into
two-thirds barrel of Gulf Coast conventional gasoline and one-third barrel of
Gulf Coast ultra-low sulfur diesel. Our Big Spring refinery is capable of
processing substantial volumes of sour crude oil, which has historically cost
less than intermediate, and/or substantial volumes of sweet crude oils, and
therefore the WTI Cushing/WTS price differential, taking into account
differences in production yield, is an important measure for helping us make
strategic, market-respondent production decisions.
For our Krotz Springs refinery, we compare our per barrel refined product
margin to the Gulf Coast 2-1-1 high sulfur diesel crack spread which is
calculated assuming that one barrel of Light Louisiana Sweet (LLS) crude oil
is converted into one-half barrel of Gulf Coast conventional gasoline and
one-half barrel of Gulf Coast high sulfur diesel. The Krotz Springs refinery
has the capability to process substantial volumes of light sweet, crude oils to
produce a high percentage of refined light products.
The crude oil and product slate flexibility of the El Dorado refinery allows us
to take advantage of changes in the crude oil and product markets; therefore,
we anticipate that the quantities and varieties of crude oil processed and
products manufactured at the El Dorado refinery by processing a variety of
feedstocks into a number of refined product types will continue to vary. While
there is variability in the crude slate and the product output at the El Dorado
refinery, we compare our per barrel refined product margin to the Gulf Coast
5-3-2 crack spread because we believe it to be the most closely aligned
benchmark. A widening of the WTI Cushing less WTI Midland spread will favorably
influence the operating margin for our refineries. Alternatively, a narrowing
of this differential will have an adverse effect on our operating margins.
Global product prices are influenced by the price of Brent crude which is a
global benchmark crude. Global product prices influence product prices in the
U.S. As a result, our refineries are influenced by the spread between Brent
crude and WTI Midland. The Brent less WTI Midland spread represents the
differential between the average per barrel price of Brent crude oil and the
average per barrel price of WTI Midland crude oil. A widening of the spread
between Brent and WTI Midland will favorably influence our refineries'
operating margins. Also, the Krotz Springs refinery is influenced by the spread
between Brent crude and LLS. The Brent less LLS spread represents the
differential between the average per barrel price of Brent crude oil and the
average per barrel price of LLS crude oil. A discount in LLS relative to Brent
will favorably influence the Krotz Springs refinery operating margin. Our
logistics segment gathers, transports and stores crude oil and markets,
distributes, transports and stores refined products in select regions of the
southeastern United States and west Texas for our refining segment and third
parties. It is comprised of the consolidated balance sheet and results of
operations of Delek Logistics Partners, LP ("Delek Logistics", NYSE:DKL), where
we owned a 61.4% limited partner interest (at June 30, 2019) in Delek Logistics
and a 94.6% interest in the entity that owns the entire 2.0% general partner
interest in Delek Logistics and all of the incentive distribution rights. Delek
Logistics was formed by Delek in 2012 to own, operate, acquire and construct
crude oil and refined products logistics and marketing assets. A substantial
majority of Delek Logistics' assets are currently integral to our refining and
marketing operations. The logistics segment's pipelines and transportation
business owns or leases capacity on approximately 400 miles of crude oil
transportation pipelines, approximately 450 miles of refined product pipelines,
an approximately 600-mile crude oil gathering system and associated crude oil
storage tanks with an aggregate of approximately 9.6 million barrels of active
shell capacity. Our logistics segment owns and operates nine light product
terminals and markets light products using third-party terminals. Our retail
segment at June 30, 2019 includes the operations of 263 owned and leased
convenience store sites located primarily in central and west Texas and New
Mexico which were acquired in connection with the Delek/Alon Merger. Our
convenience stores typically offer various grades of gasoline and diesel under
the Delek or Alon brand name and food products, food service, tobacco products,
non-alcoholic and alcoholic beverages, general merchandise as well as money
orders to the public, primarily under the 7-Eleven and Delek or Alon brand
names pursuant to a license agreement with 7-Eleven, Inc. which gives us a
perpetual license to use the 7-Eleven trademark, service name and trade name in
west Texas and a majority of the counties in New Mexico in connection with our
retail store operations. In November 2018, we terminated the license agreement
with 7-Eleven, Inc. and the terms of such termination require the removal of
all 7-Eleven branding on a store-by-store basis by the earlier of December 31,
2021 or the date upon which our last 7-Eleven store is de-identified or closed.
Merchandise sales at our convenience store sites will continue to be sold under
the 7-Eleven brand name until 7-Eleven branding is removed pursuant to the
termination. Substantially all of the motor fuel sold through our retail
segment is supplied by our Big Spring refinery, which is transferred to the
retail segment at prices substantially determined by reference to published
commodity pricing information. In connection with our retail strategic
initiatives, we closed or sold 20 under-performing or non-strategic store
locations during the six months ended June 30, 2019 and have plans to close 10
additional stores during the remainder of 2019.
The cost to acquire the refined fuel products we sell to our wholesale
customers in our logistics segment and at our convenience stores in our retail
segment depends on numerous factors beyond our control, including the supply
of, and demand for, crude oil, gasoline and other refined petroleum products
which, in turn, depend on, among other factors, changes in domestic and foreign
economies, weather conditions, domestic and foreign political affairs,
production levels, the availability of imports, the marketing of competitive
fuels and government regulation. Our retail merchandise sales are driven by
convenience, customer service, competitive pricing and branding. Motor fuel
margin is sales less the delivered cost of fuel and motor fuel taxes, measured
on a cents per gallon basis. Our motor fuel margins are impacted by local
supply, demand, weather, competitor pricing and product brand. Our corporate
activities, results of certain immaterial operating segments (including Alon's
asphalt terminal operations effective with the Delek/Alon Merger), results and
assets of discontinued operations and intercompany eliminations are reported in
corporate, other and eliminations in our segment disclosure. As part of our
overall business strategy, we regularly evaluate opportunities to expand our
portfolio of businesses and may at any time be discussing or negotiating a
transaction that, if consummated, could have a material effect on our business,
financial condition, liquidity or results of operations.
2019 Developments Transactions designed to maximize shareholder return Dividend
Declaration On July 29, 2019, Delek's Board of Directors voted to declare a
quarterly cash dividend of $0.29 per share, payable on September 3, 2019, to
stockholders of record on August 19, 2019. Our previous quarterly cash dividend
amounts ranged between $0.20 to $0.26 per share throughout 2018, was $0.27 for
the first quarter 2019 and was $0.28 for the second quarter of 2019.
Share Repurchases During the three and six months ended June 30, 2019, Delek
repurchased 1,647,078 and 2,938,722 shares for an aggregate purchase price of
$58.6 million and $104.8 million, respectively, under the most recent share
repurchase plan which provided for repurchases up to $500.0 million and was
approved by the board on November 6, 2018. As of June 30, 2019, there remained
$304.9 million available for repurchases under the most recent repurchase plan.
Transactions designed to maximize return on assets Alkylation Project Completed
The alkylation unit at the Krotz Springs refinery was completed in early April
providing additional flexibility to the refinery. The total cost was
approximately $138.0 million. This unit should improve the ability to convert
low value products into gasoline, enable the refinery to produce multiple
summer gasoline grades and increase octane, allowing the refinery to produce
premium gasoline. Because of the conversion improvement at the refinery from
this project, its returns are expected to be less dependent on the crack spread
environment over time.
Investment in Pipeline Joint Venture In September 2018, Delek announced plans
for a joint venture with Energy Transfer, Magellan, and MPLX to construct a
600-mile common carrier pipeline to transport crude oil from the Permian Basin
to the Texas Gulf Coast region (the "Proposed PGC Partnership"). During the
first quarter 2019, we elected not to move forward with the Proposed PGC
Partnership which allowed us to explore other options to participate in a
long-haul crude oil pipeline. On July 30, 2019, we, through our wholly-owned
direct subsidiary Delek US Energy, Inc. (Delek Energy), entered into a
limited liability company agreement (the LLCA) and related agreements with
multiple joint venture members of Wink to Webster Pipeline LLC (WWP).
Pursuant to the LLCA, Delek Energy will have a 15% ownership interest in WWP.
WWP intends to construct and operate a crude oil pipeline system from Wink,
Texas to Webster, Texas along with certain pipelines from Webster, Texas to
other destinations in the Gulf Coast area. Pursuant to the LLCA, Delek Energy
will be required to contribute its percentage interest of the applicable
construction costs (including certain costs previously incurred by WWP) and it
is anticipated that Delek Energys capital contributions will total
approximately $340 million to $380 million over the course of construction
(expected to be two to three years), with an initial capital contribution of
$40.0 million due within 30 days of the execution of the LLCA.This investment
was made to advance our long-term strategic objectives to expand our midstream
investments and network/pipeline access.
Red River Joint Venture In May 2019, Delek Logistics, through its wholly owned
indirect subsidiary Delek Logistics Pipeline, LLC (Delek Logistics Pipeline),
entered into a Contribution and Subscription Agreement (the Contribution
Agreement) with Plains Pipeline, L.P. (Plains) and Red River Pipeline
Company LLC (Red River). Pursuant to the Contribution Agreement, Delek
Logistics Pipeline contributed approximately $124.7 million, substantially all
of which was financed under the Delek Logistics Credit Facility, to Red River
in exchange for a 33% membership interest in Red River and Delek Logistics
Pipelines admission as a member of Red River ("Red River Pipeline Joint
Venture"). Red River intends to proceed with an expansion project to increase
the capacity of the pipeline from 150,000 barrels per day to 235,000 barrels
per day and, pursuant to the Contribution Agreement, in May 2019 we contributed
an additional $3.5 million for such expansion project. This investment was also
made to advance our long-term strategic objectives to expand our midstream
investments and network/pipeline access. Transactions designed to minimize the
cost of capital/manage financial risk exposures 2019 Amendments to Supply and
Offtake Agreements During January 2019, we amended the El Dorado refinery and
the Krotz Springs refinery Supply and Offtake Agreements with J. Aron & Company
("J. Aron") so that the repurchase of baseline volumes at the end of the
applicable Supply and Offtake Agreement term (representing the "Baseline
Step-Out Liabilities") will be based upon a fixed price instead of a
market-indexed price and therefore subject to changes in fair value that
reflect changes in interest rate risk rather than commodity price risk. The
modified arrangement results in a Baseline Step-Out Liability that is no longer
subject to commodity volatility, but for which its fair value is subject to
interest rate risk. As a result, we recorded a gain on the change in fair value
resulting from the modification of the instruments from commodities-based risk
to interest rate risk in cost of materials and other in the first quarter of
2019. Such Baseline Step-Out Liabilities will continue to be recorded at fair
value, where the fair value will reflect changes in interest rate risk rather
than commodity price risk.
2019 Amendment to the Term Loan Credit Facility Agreement On May 22, 2019 (the
"First Incremental Effective Date"), we amended the Term Loan Credit Facility
agreement pursuant to the terms of the First Incremental Amendment to Term Loan
Credit Agreement (the "Incremental Amendment"). Pursuant to the Incremental
Amendment, the Company borrowed $250.0 million in aggregate principal amount of
incremental term loans (the Incremental Term Loans) at an original issue
discount of 0.75%, increasing the aggregate principal amount of loans
outstanding under the Term Loan Credit Facility on the First Incremental
Effective Date to $943.0 million. Per the Incremental Amendment, the required
scheduled quarterly principal payments under the Term Loan Credit Facility
increased from $1.750 million to $2.375 million commencing with the quarterly
principal payment due on June 28, 2019. The terms of the Incremental Term Loans
are substantially identical to the terms applicable to the initial term loans
under the Term Loan Credit Facility borrowed in March 2018. There are no
restrictions on the Company's use of the proceeds of the Incremental Term
Loans, and the proceeds may be used to (i) to reduce utilizations under the
Revolving Credit Facility, (ii) for general corporate purposes and (iii) to pay
transaction fees and expenses associated with the Incremental Amendment.
Market Trends Our results of operations are significantly affected by
fluctuations in the prices of certain commodities, including, but not limited
to, crude oil, gasoline, distillate fuel, biofuels, natural gas and
electricity. Historically, our profitability has been affected by commodity
price volatility, specifically as it relates to the price of crude oil and
refined products.
Management's Discussion and Analysis
The market price of refined products contributed to the increase in the average
Gulf Coast 5-3-2 crack spread to $14.28 during the first six months of 2019
from $12.99 during the first six months of 2018, with the Gulf Coast price of
gasoline (CBOB) decreasing 11.2%, from an average of $1.87 per gallon in the
first six months of 2018 to $1.66 per gallon in the first six months of 2019
and the Gulf Coast price of High Sulfur Diesel decreased 4.8%, from an average
of $1.87 per gallon in the first six months of 2018 to $1.78 per gallon in the
first six months of 2019. The charts below illustrate the quarterly high, low
and average prices of Gulf Coast Gasoline, U.S. Gulf Coast High Sulfur Diesel
and Ultra Low Sulfur Diesel ("ULSD") for each of the quarterly periods in 2018
and for the two quarterly periods in 2019.
As U.S. crude oil production has increased, we have seen the discount for WTI
Cushing compared to Brent widen. This generally leads to higher margins in our
refineries, as refined product prices are influenced by Brent crude prices and
the majority of our crude supply is WTI-linked. The average discount for WTI
Cushing compared to Brent increased to $8.78 during the first six months of
2019 from $5.66 during the first six months of 2018. We note similar historical
trends when reviewing the discount for WTI Cushing compared to LLS, where the
average discount increased to $7.37 during the first six months of 2019 from
$3.99 during the first six months of 2018. Additionally, our refineries
continue to have relatively greater access to WTI Midland and WTI
Midland-linked crude feedstocks compared to certain of our competitors. The
average discount for WTI Midland compared to WTI Cushing decreased to $1.71
during the first six months of 2019 from a discount of $4.33 during the first
six months of 2018. As these price discounts increase, so does our competitive
advantage, created by our access to WTI Midland-linked crude oil pricing. The
chart below illustrates the differentials of both Brent crude oil and WTI
Midland crude oil as compared to WTI Cushing crude oil for each of the
quarterly periods in 2018 and for the two quarterly periods in 2019.
Environmental regulations continue to affect our margins in the form of
volatility in the cost of renewable identification number ("RINs"). On a
consolidated basis, we work to balance the cost of our credits for commitments
required by the EPA to blend biofuels into fuel products ("RINs Obligation") in
order to minimize the effect of RINs on our results. While we generate RINs in
both our refining and logistics segments through our ethanol blending and
biodiesel production, our refining segment needs to purchase additional RINs to
satisfy its obligations. As a result, increases in the price of RINs generally
adversely affect our results of operations. It is not possible at this time to
predict with certainty what future volumes or costs may be, but given the
volatile price of RINs, the cost of purchasing sufficient RINs could have an
adverse impact on our results of operations if we are unable to recover those
costs in the price of our refined products. The chart below illustrates the
volatile nature of the price for RINs for each of the quarterly periods in 2018
and for the two quarterly periods in 2019. chart-6e715f0fe63c594abba.jpg
Contractual Obligations There have been no material changes to our contractual
obligations and commercial commitments during the six months ended June 30,
2019, from those disclosed in our Annual Report on Form 10-K.
Non-GAAP Measures Our management uses certain non-GAAP operational measures
to evaluate our operating segment performance and non-GAAP financial measures
to evaluate past performance and prospects for the future to supplement our
GAAP financial information presented in accordance with U.S. GAAP. These
financial and operational non-GAAP measures are important factors in assessing
our operating results and profitability and include:
Refining margin - calculated as the difference between net refining revenues
and total cost of materials and other;
Refined product margin - calculated as the difference between net revenues
attributable to refined products (produced and purchased) and related cost of
materials and other (which is applicable to both the refining segment and the
west Texas wholesale marketing activities within our logistics segment); and
Refining margin per barrels sold - calculated as refining margin divided by our
average refining sales in barrels per day (excluding purchased barrels)
multiplied by 1,000 and multiplied by the number of days in the period. We
believe these non-GAAP operational and financial measures are useful to
investors, lenders, ratings agencies and analysts to assess our ongoing
performance because, when reconciled to their most comparable GAAP financial
measure, they provide improved comparability between periods through the
exclusion of certain items that we believe are not indicative of our core
operating performance and they may obscure our underlying results and trends.
Non-GAAP measures have important limitations as analytical tools, because they
exclude some, but not all, items that affect net earnings and operating income.
These measures should not be considered substitutes for their most directly
comparable U.S. GAAP financial measures. Non-GAAP Reconciliations
Refining Segment
Refining segment net revenues and cost of sales for the three and six months
ended June 30, 2018 reflect a correction of an intercompany elimination which
resulted in an increase in those accounts of $73.4 million not previously
reflected on the unaudited consolidated financial statements in our June 30,
2018 Quarterly Report on Form 10-Q filed on August 9, 2018. Such amounts are
not considered material to the financial statements and had no impact to gross
margin or refining margin for those periods. See Note 23 to our annual audited
consolidated financial statements included in Part II, Item 8 of our 2018
Annual Report on Form 10-K, as amended and filed on June 27, 2019, for further
discussion.
Net revenues and cost of materials and other for the three and six months ended
June 30, 2018 reflect a correction of an intercompany elimination which
resulted in an increase in those accounts of $73.4 million not previously
reflected on the unaudited consolidated financial statements in our June 30,
2018 Quarterly Report on Form 10-Q filed on August 9, 2018. Such amounts are
not considered material to the financial statements and had no impact to
operating income or segment contribution margin for those periods. See Note 23
to our annual audited consolidated financial statements included in Part II,
Item 8 of our 2018 Annual Report on Form 10-K, as amended and filed on June 27,
2019, for further discussion.
Income tax expense for the six months ended June 30, 2018 reflects a correction
made in our 2018 Annual Report on Form 10-K (as originally filed on March 1,
2019 ) to record additional deferred tax expense totaling $5.5 million related
to the recognition of a valuation allowance on deferred tax assets recognized
in connection with the Big Spring Logistic Assets Acquisition (see Note 5) not
previously reported in our June 30, 2018 Quarterly Report on Form 10-Q filed on
August 9, 2018. Such amount is not considered material to the financial
statements or the trend of earnings for that period. See Note 23 to our annual
audited consolidated financial statements included in Part II, Item 8 of our
2018 Annual Report on Form 10-K, as amended and filed on June 27, 2019, for
further discussion.
Results of Operations
Consolidated Results of Operations Comparison of the Three and Six Months
Ended June 30, 2019 versus the Three and Six Months Ended June 30, 2018
Net Income Q2 2019 vs. Q2 2018
Consolidated net income for the second quarter of 2019 was $83.8 million
compared to a net income of $86.7 million for the second quarter of 2018.
Consolidated net income attributable to Delek for the second quarter of June
30, 2019 was $77.3 million, or $1.01 per basic share, compared to a net income
of $79.1 million, or $0.94 per basic share, for the second quarter 2018.
Explanations for significant drivers impacting net income as compared to the
comparable period of the prior year are discussed in the sections below. YTD
2019 vs. YTD 2018 Consolidated net income for the six months ended June 30,
2019 was $238.2 million compared to net income of $61.2 million for the six
months ended June 30, 2018. Consolidated net income attributable to Delek for
the six months ended June 30, 2019 was $226.6 million, or $2.94 per basic
share, compared to net income of $38.7 million, or $0.47 per basic share, for
the six months ended June 30, 2018.
Net Revenues Q2 2019 vs. Q2 2018 In the second quarters of 2019 and 2018, we
generated net revenues of $2,480.3 million and $2,636.9 million, respectively,
a decrease of $156.6 million, or 5.9%. The decrease in net revenues was
primarily driven by the following factors:
in our refining segment, decreases in the average price of U.S. Gulf Coast
gasoline of 8.8%, ULSD of 7.9%, and High-Sulfur diesel ("HSD") of 8.2%;
in our logistics segment, decreases in the average volume sold and sales prices
per gallon of gasoline and diesel sold in our west Texas marketing operations,
where the average sales prices per gallon of gasoline and diesel sold decreased
$0.26 per gallon and $0.24 per gallon, respectively;
in our retail segment, decreases in fuel sales volumes and merchandise sales
partially attributable to reduction in the average number of stores, and
decrease in fuel sales due to a $0.19 decrease in average price charged per
gallon; and
a reduction in revenue from our asphalt business due to the sale of asphalt
assets in the second quarter of 2018. Such decreases were partially offset by:
increased revenues in our logistics segment associated with our Paline Pipeline
as a result of increased rates and a change in the fee structure. YTD 2019 vs.
YTD 2018 For the six months ended June 30, 2019 and 2018, we generated net
revenues of $4,680.2 million and $4,990.1 million, respectively, a decrease of
$309.9 million, or 6.2%. The decrease in net revenues was primarily driven by
the following factors:
in our refining segment, decreases in the average price of U.S. Gulf Coast
gasoline of 11.2%, ULSD of 5.4%, and HSD of 4.8%; and
in our logistics segment, decreases in the average volume sold and sales prices
per gallon of gasoline and diesel sold in our west Texas marketing operations,
where the average sales prices per gallon of gasoline and diesel sold decreased
$0.21 per gallon and $0.17 per gallon, respectively. Such decreases were
partially offset by:
increased revenues in our logistics segment associated with our Paline Pipeline
as a result of increased rates and a change in the fee structure.
Cost of Materials and Other Q2 2019 vs. Q2 2018 Cost of materials and other was
$2,067.7 million for the second quarter of 2019 compared to $2,250.2 million
for the second quarter of 2018, a decrease of $182.5 million, or 8.1%. The net
decrease in cost of materials and other was primarily driven by the following:
decreases in the cost of crude oil feedstocks at the refineries including a
decrease in the cost of WTI Cushing crude oil from an average of $68.03 per
barrel to an average of $59.80, and a decrease in the cost of WTI Midland crude
oil from an average of $59.93 per barrel to an average of $57.56 during the
comparable periods;
a decrease in RIN expense from approximately $35.8 million to income of $1.0
million, where ethanol RIN prices averaged $0.17 per RIN in second quarter 2019
compared to $0.31 per RIN in the prior year period;
decreases in the cost of refined products in the logistics segment where the
average cost per gallon of gasoline and diesel purchased decreased $0.23 per
gallon and $0.17 per gallon, respectively;
a decrease in retail fuel cost of materials and other attributable to a
decrease in average cost per gallon of $0.25; and
an increase in hedging gains to $30.7 million recognized during the second
quarter of 2019 from a loss of $13.9 million recognized during the second
quarter of 2018. YTD 2019 vs. YTD 2018 Cost of materials and other was $3,767.1
million for the six months ended June 30, 2019 compared to $4,293.0 million for
the six months ended June 30, 2018, a decrease of $525.9 million, or 12.3%. The
net decrease in cost of materials and other was primarily driven by the
following:
decreases in the cost of crude oil feedstocks at the refineries including a
decrease in the cost of WTI Cushing crude oil from an average of $65.52 per
barrel to an average of $57.36, and a decrease in the cost of WTI Midland crude
oil from an average of $61.19 per barrel to an average of $55.65 during the
comparable periods;
a decrease in RIN expense where ethanol RIN prices averaged $0.18 per RIN in
six months ended June 30, 2019 compared to $0.45 per RIN in the prior year
period;
decreases in the cost of refined products in the logistics segment where the
average cost per gallon of gasoline and diesel purchased decreased $0.21 per
gallon and $0.13 per gallon, respectively;
a decrease in retail fuel cost of materials and other attributable to a
decrease in average cost per gallon of $0.20; and
an increase in hedging gains to $50.5 million recognized during the six months
ended June 30, 2019 from a loss of $23.2 million recognized during the six
months ended June 30, 2018. Such decreases were partially offset by:
a prior period benefit of approximately $115.5 million related to a combination
of the 2017 RINs waivers and a biodiesel tax credit recognized during the six
months ended June 30, 2018 that was not recurring in the six months ended June
30, 2019. Operating Expenses Q2 2019 vs. Q2 2018 Operating expenses were $162.3
million for the second quarter of 2019 compared to $157.5 million for the
second quarter of 2018, an increase of $4.8 million, or 3.0%. The increase in
operating expenses was primarily driven by the following:
higher employee related costs primarily across our refining and logistics
segment; and
higher outside service costs in our refining segment. YTD 2019 vs. YTD 2018
Operating expenses were $329.0 million for the six months ended June 30, 2019
compared to $315.6 million for the six months ended June 30, 2018, an increase
of $13.4 million, or 4.2%. The increase in operating expenses was primarily
driven by the following:
higher employee related costs primarily in our refining and logistics segments;
higher contract services in our refining and logistics segments; and
partially offset by reductions in maintenance expense and chemical expenses in
our refining segment.
General and Administrative Expenses Q2 2019 vs. Q2 2018 General and
administrative expenses were $69.5 million for the second quarter of 2019
compared to $52.9 million for the second quarter of 2018, an increase of $16.6
million, or 31.4%. The increase in general and administrative expense was
primarily driven by the following:
an increase in employee costs driven by higher annual incentive plan costs and
increased headcount in corporate and other; and
increases in legal costs associated with various acquisition, investment,
litigation and dispute matters; and
increases for various outside service costs. YTD 2019 vs. YTD 2018 General and
administrative expenses were $131.7 million and $118.1 million for the six
months ended June 30, 2019 and 2018, respectively, a increase of $13.6 million,
or 11.5%. The increase in general and administrative expense was primarily
driven by the following:
an increase in employee costs driven by higher annual incentive plan costs and
increased headcount;
increases in legal costs associated with various acquisition, investment,
litigation and dispute matters;
increases in supplies expenses for subscriptions and office related costs; and
increases for various outside service costs.
Depreciation and Amortization Q2 2019 vs. Q2 2018
Depreciation and amortization (included in both cost of sales and other
operating expenses) was $50.1 million for the second quarter of 2019 compared
to $49.2 million for the second quarter of 2018, a increase of $0.9 million, or
1.8%. YTD 2019 vs. YTD 2018
Depreciation and amortization (included in both cost of sales and other
operating expenses) was $96.9 million compared to $97.2 million for the six
months ended June 30, 2019 and 2018, respectively, a decrease of $0.3 million,
or 0.3%.
Other Operating Income, Net Q2 2019 vs. Q2 2018
Other operating income decreased by $4.4 million in the second quarter of 2019
to $3.6 million compared to expense of $8.0 million in the second quarter of
2018, partially due to higher net gains associated with our Canadian crude
trading operations in the second quarter of 2018. YTD 2019 vs. YTD 2018 Other
operating income decreased by $6.5 million during the six months ended June 30,
2019 to $1.2 million compared to income of $7.7 million during the six months
ended June 30, 2018, partially due to higher net gains associated with our
Canadian crude trading operations in the second quarter of 2018.
Non-operating Expenses, Net
Interest Expense Q2 2019 vs. Q2 2018 Interest expense increased by $1.3
million, or 4.1%, to $32.8 million in the second quarter of 2019 compared to
$31.5 million in the second quarter of 2018, primarily driven by the following:
an increase in the average effective interest rate of 0.86% in the second
quarter of 2019 compared to the second quarter of 2018 (where effective
interest rate is calculated as interest expense divided by the net average
borrowings/obligations outstanding), partially offset by a decrease in net
average borrowings outstanding (including the obligations under the supply and
offtake agreements which have an associated interest charge) of approximately
$274.6 million in the second quarter of 2019 (calculated as a simple average of
beginning borrowings/obligations and ending borrowings/obligations for the
period) compared to the second quarter of 2018.
YTD 2019 vs. YTD 2018 Interest expense decreased by $2.5 million, or 3.9%, to
$61.5 million during the six months ended June 30, 2019 compared to $64.0
million during the six months ended June 30, 2018, primarily driven by the
following:
a decrease in the average effective interest rate of 0.26% during the six
months ended June 30, 2019 compared to the six months ended June 30, 2018
(where effective interest rate is calculated as interest expense divided by the
net average borrowings/obligations outstanding), partially offset by an
increase in net average borrowings outstanding (including the obligations under
the supply and offtake agreements which have an associated interest charge) of
approximately $13.9 million during the six months ended June 30, 2019
(calculated as a simple average of beginning borrowings/obligations and ending
borrowings/obligations for the period) compared to the six months ended June
30, 2018.
Results from Equity Method Investments Q2 2019 vs. Q2 2018 We recognized income
of $9.3 million from equity method investments during the second quarter of
2019, compared to $2.9 million for the second quarter of 2018, an increase of
$6.4 million. This increase was primarily driven by the following:
an increase in income from our logistics joint ventures from $1.9 million in
the second quarter of 2018 to $4.5 million in the second quarter of 2019,
primarily due to the addition of the Red River Joint Venture in May 2019; and
an increase in income from our asphalt joint venture from $0.9 million in the
second quarter of 2018 to $4.7 million in the second quarter of 2019. YTD 2019
vs. YTD 2018 During the six months ended June 30, 2019, we recognized income of
$11.9 million from equity method investments, compared to $2.9 million for the
six months ended June 30, 2018, an increase of $9.0 million. This increase was
primarily driven by the following:
an increase in income from our logistics joint ventures from $2.8 million in
the first six months of 2018 to $6.5 in the first six months of 2019, primarily
due to the addition of the Red River Joint Venture in May 2019; and
an increase in income from our asphalt joint venture from $0.2 million in the
first six months of 2018 to $5.2 million in the first six months of 2019.
Other
Q2 2019 vs. Q2 2018
During the second quarter of 2018, we recognized a gain on the sale of certain
asphalt assets totaling $13.2 million which was not present during the three
months ended June 30, 2019.
YTD 2019 vs. YTD 2018
During the six months ended June 30, 2018, we incurred certain infrequently
occurring expenses/charges that were not incurred during the six months ended
June 30, 2019. These included a $9.0 million loss on extinguishment of debt
related to the Refinancing and an impairment loss on assets held for sale
totaling approximately $27.5 million related to the asphalt assets held for
sale. These charges were partially offset by a realized gain on the sale of
certain asphalt assets totaling $13.2 million, including a gain on the sale of
an asphalt equity method investment. See Notes 7 and 10 of the condensed
consolidated financial statements in Item 1, Financial Statements, for
additional information.
Income Taxes Q2 2019 vs. Q2 2018 Income tax expense decreased by $8.2 million
in the second quarter of 2019 compared to the second quarter of 2018, primarily
driven by the following:
pre-tax income of $109.2 million in the second quarter of 2019, as compared to
pre-tax income $120.3 million for the second quarter of 2018; and
a decrease in our effective tax rate which was 22.5% for the second quarter of
2019, compared to 27.3% for the second quarter of 2018 primarily due to the
discrete adjustments that were reported in the second quarter of 2018 to
properly consider the impact of the Tax Reform Act (which reduced the US
federal corporate tax rate from 35% to 21%) on previously recorded deferred
taxes.
YTD 2019 vs. YTD 2018 Income tax expense increased by $49.1 million during the
six months ended June 30, 2019 compared to the same period for 2018, primarily
driven by the following:
pre-tax income of $309.4 million for the six months ended June 30, 2019, as
compared to pre-tax income of $91.5 million for the six months ended June 30,
2018; and
a decrease in our effective tax rate which was 22.8% and 23.3% for the six
months ended June 30, 2019 and 2018, respectively, primarily due to the
discrete adjustments that were reported in the first six months of 2018 for the
following:
?
further adjustments to properly consider the impact of the Tax Reform Act
(which reduced the US federal corporate tax rate from 35% to 21%) on previously
recorded deferred taxes;
?
tax benefit for federal tax credits attributable to the Companys biodiesel
blending operations for 2017 that have not been extended by Congress;
?
tax expense associated with the impairment of assets held for sale; and
?
changes in valuation allowance attributable to the book-tax basis differences
from the Big Spring Logistic Asset Acquisition (See Note 5).
Operating Segments We review operating results in the following reportable
segments:
Refining
Logistics
Retail
Decisions concerning the allocation of resources and assessment of operating
performance are made based on this segmentation. Management measures the
operating performance of each of its reportable segments based on the segment
contribution margin. Refining Segment
Refining Segment Margins
Refining segment net revenues and cost of materials and other for the three and
six months ended June 30, 2018 reflect a correction of an intercompany
elimination which resulted in an increase in those accounts of $73.4 million
not previously reflected on the unaudited consolidated financial statements in
our June 30, 2018 Quarterly Report on Form 10-Q filed on August 9, 2018. Such
amounts are not considered material to the financial statements and had no
impact to operating income or segment contribution margin for those periods.
See Note 23 to our annual audited consolidated financial statements included in
Part II, Item 8 of our 2018 Annual Report on Form 10-K, as amended and filed on
June 27, 2019, for further discussion.
The net revenues, cost of materials and other and refining margin for the six
months ended June 30, 2019 excludes Canada trading activity which was
previously included and reported in the refining segment for the three months
ended March 31, 2018.
Total sales volume includes 628 bpd and 366 bpd sold to the El Dorado refinery,
104 bpd and 100 bpd sold to the Big Spring refinery, 182 bpd and 91 bpd sold to
the Krotz Springs refinery and 24 bpd and 281 bpd sold to the logistics segment
during the three and six months ended June 30, 2019, respectively. Total sales
volume includes 109 bpd and 120 bpd sold to the El Dorado refinery, 428 bpd and
459 bpd sold to the Big Spring refinery, no bpd and 118 bpd sold to the Krotz
Springs refinery and 267 bpd and 917 bpd sold to the logistics segment during
the three and six months ended June 30, 2018, respectively. Total sales volume
excludes wholesale activity of 4,939 bpd and 4,760 bpd of during the three and
six months ended June 30, 2019, respectively, and 4,729 bpd and 4,603 bpd
during the three and six months ended June 30, 2018, respectively.
(2)
Total sales volume includes 333 bpd and 239 bpd sold to the Tyler refinery,
33,659 bpd and 37,428 bpd sold to the Krotz Springs refinery, 377 bpd and 300
bpd sold to the Big Spring refinery, 15 bpd and 33 bpd sold to logistics
segment and 43 bpd and 122 bpd sold to Alon Asphalt Company during the three
and six months ended June 30, 2019, respectively. Total sales volume includes
985 bpd and 515 bpd sold to the Tyler refinery, 21,648 bpd and 11,407 bpd sold
to the Krotz Springs refinery, 302 bpd and 566 bpd sold to the Big Spring
refinery, no bpd and no bpd sold to logistics segment and 220 bpd and 123 bpd
sold to Alon Asphalt Company during the three and six months ended June 30,
2018, respectively. Total sales volume excludes wholesale activity of 67,741
bpd and 66,237 bpd during the three and six months ended June 30, 2019,
respectively, and 48,287 bpd and 50,709 bpd during the three and six months
ended June 30, 2018, respectively.
(3)
Total sales volume includes 653 bpd and 732 bpd sold to the Tyler refinery, no
bpd and 171 bpd sold to the El Dorado refinery, 13,914 bpd and 14,135 bpd sold
to the retail segment, 9,401 bpd and 10,192 bpd sold to the logistics segment
and 1,900 bpd and 1,707 bpd sold to Alon Asphalt Company during the three and
six months ended June 30, 2019, respectively. Total sales volume includes 600
bpd and 410 bpd sold to the Tyler refinery, no bpd and no bpd sold to the El
Dorado refinery, 13,838 bpd and 14,026 bpd sold to the retail segment, 3,158
bpd and 4,237 bpd sold to the logistics segment and 1,895 bpd and 1,522 bpd
sold to Alon Asphalt Company during the three and six months ended June 30,
2018, respectively. Total sales volume excludes wholesale activity of 8,183 bpd
and 7,833 bpd during the three and six months ended June 30, 2019,
respectively, and 5,927 bpd and 8,103 bpd during the three and six months ended
June 30, 2018, respectively.
(4)
Total sales volume includes 10,185 bpd and 5,421 bpd sold to the El Dorado
refinery and 26 bpd and 108 bpd sold to the Tyler refinery during the three and
six months ended June 30, 2019, respectively. Total sales volume includes
39,398 bpd and 29,130 bpd sold to the El Dorado refinery and no bpd and 110 bpd
sold to the Tyler refinery during the three and six months ended June 30, 2018,
respectively. Total sales volume excludes wholesale activity of 13,977 bpd and
15,196 bpd during the three and six months ended June 30, 2019, respectively,
and 10,222 bpd and 7,247 bpd during the three and six months ended June 30,
2018, respectively.
(5)
For our Tyler and El Dorado refineries, we compare our per barrel refining
product margin to the Gulf Coast 5-3-2 crack spread consisting of WTI Cushing
crude, U.S. Gulf Coast CBOB and U.S, Gulf Coast Pipeline No. 2 heating oil
(high sulfur diesel). For our Big Spring refinery, we compare our per barrel
refined product margin to the Gulf Coast 3-2-1 crack spread consisting of WTI
Cushing crude, Gulf Coast 87 Conventional gasoline and Gulf Coast ultra low
sulfur diesel, and for our Krotz Springs refinery, we compare our per barrel
refined product margin to the Gulf Coast 2-1-1 crack spread consisting of LLS
crude oil, Gulf Coast 87 Conventional gasoline and U.S, Gulf Coast Pipeline No.
2 heating oil (high sulfur diesel). The Tyler refinery's crude oil input is
primarily WTI Midland and east Texas, while the El Dorado refinery's crude
input is primarily a combination of WTI Midland, local Arkansas and other
domestic inland crude oil. The Big Spring refinerys crude oil input is
primarily comprised of WTS and WTI Midland. The Krotz Springs refinerys crude
oil input is primarily comprised of LLS and WTI Midland.
Refining Segment Operational Comparison of the Three and Six Months Ended June
30, 2019 versus the Three and Six Months Ended June 30, 2018 Net Revenues Q2
2019 vs. Q2 2018 Net revenues for the refining segment decreased by $175.4
million, or 6.9%, in the second quarter of 2019 compared to the second quarter
of 2018, primarily driven by the following:
decreases in the average price of U.S. Gulf Coast gasoline of 8.8%, ULSD of
7.9%, and High-Sulfur diesel ("HSD") of 8.2%; and
decreases in sales volume of refined product totaling 3.2 million barrels
consisting of decreases in sales volumes at our El Dorado refinery primarily
resulting from the scheduled turnaround activities and decreases in sales
volumes at the other refineries related to unit outages or maintenance
stoppages, offset by a 3.2 million barrel increase in purchased product sales
across all four refineries primarily to compensate for production shortfalls.
Net revenues included sales to our retail segment of $101.7 million and $118.9
million, sales to our logistics segment of $73.2 million and $99.5 million and
sales to our other segment of $40.4 million and $7.7 million for the three
months ended June 30, 2019 and June 30, 2018, respectively. We eliminate this
intercompany revenue in consolidation. YTD 2019 vs. YTD 2018 Net revenues for
the refining segment decreased by $209.3 million, or 4.5%, in the six months
ended June 30, 2019 compared to the six months ended June 30, 2018, primarily
driven by the following:
decreases in the average price of U.S. Gulf Coast gasoline of 11.2%, ULSD of
5.4%, and HSD of 4.8%; and
decreases in sales volume of refined product totaling 3.7 million barrels
consisting of decreases in sales volumes at our El Dorado refinery primarily
resulting from the scheduled turnaround activities and decreases in sales
volumes at the Tyler and Krotz Springs refineries related to unit outages or
maintenance stoppages, offset by a 1.8 million barrel increase in sales volumes
of refined product at our Big Spring refinery and a 5.7 million barrel increase
in purchased product sales across all four refineries primarily to compensate
for production shortfalls. Net revenues included sales to our retail segment of
$191.9 million and $218.4 million, sales to our logistics segment of $152.6
million and $181.8 million and sales to our other segment of $55.4 million and
$11.1 million for the six months ended June 30, 2019 and 2018, respectively. We
eliminate this intercompany revenue in consolidation.
Cost of Materials and Other Q2 2019 vs. Q2 2018 Cost of materials and other
decreased by $178.5 million, or 7.9%, in the second quarter of 2019 compared to
the second quarter of 2018, primarily driven by the following:
a decrease in the cost of WTI Cushing crude oil, from an average of $68.03 per
barrel to an average of $59.80, or 12.1%;
a decrease in the cost of WTI Midland crude oil, from an average of $59.93 per
barrel to an average of $57.56, or 4.0%; and
a decrease in RIN expense from approximately $32.8 million to income of $1.0
million, where ethanol RIN prices averaged $0.17 per RIN in second quarter 2019
compared to $0.31 per RIN in the prior year period. YTD 2019 vs. YTD 2018 Cost
of materials and other decreased by $379.7 million, or 9.2%, during the six
months ended June 30, 2019 compared to the six months ended June 30, 2018,
primarily driven by the following:
a decrease in the cost of WTI Cushing crude oil, from an average of $65.52 per
barrel to an average of $57.36, or 12.5%;
a decrease in the cost of WTI Midland crude oil, from an average of $61.19 per
barrel to an average of $55.65, or 9.1%; and
the net reversal benefit of $51.5 million related to inventory valuation
reserves recognized during the six months ended June 30, 2019 compared to the
net reversal benefit of $1.9 million recognized during the six months ended
June 30, 2018. These decreases were partially offset by the following:
a prior period benefit of approximately $115.5 million related to a combination
of the 2017 RINs waivers and a biodiesel tax credit recognized during the six
months ended June 30, 2018 that was not recurring in the same period of 2019.
chart-5cf029c38ef35f6a9da.jpgchart-907a8ff19ca466d4485.jpg Our refining segment
purchases finished product from our logistics segment and has multiple service
agreements with our logistics segment which, among other things, require the
refining segment to pay terminalling and storage fees based on the throughput
volume of crude and finished product in the logistics segment pipelines and the
volume of crude and finished product stored in the logistics segment storage
tanks, subject to minimum volume commitments. These costs and fees were $52.2
million and $43.6 million during the second quarters of 2019 and 2018,
respectively, and $104.4 million and $97.9 million during the six months ended
June 30, 2019 and 2018, respectively. We eliminate these intercompany fees in
consolidation.
Refining Margin Q2 2019 vs. Q2 2018 Refining margin increased by $3.1 million,
or 1.1%, in the second quarter of 2019 compared to the second quarter of 2018,
primarily driven by the following:
wider discounts between WTI Cushing crude oil compared to Brent which impact
refining margin at all four refineries where, during the second quarter of
2019, the average WTI Cushing crude oil differential to Brent crude oil was
$8.64 per barrel compared to $6.93 during the second quarter of 2018;
a 7.9% improvement in the 5-3-2 crack spread (the primary measure for the Tyler
refinery and El Dorado refinery);
a 5.4% improvement in the average Gulf Coast 3-2-1 crack spread (the primary
measure for the Big Spring refinery); and
the benefit attributable to the decrease in RIN prices. These increases were
partially offset by the following:
a narrowing of the average WTI Cushing crude oil differential to WTS crude oil
to $1.87 per barrel during the second quarter of 2019 compared to $8.50 during
the second quarter of 2018 and narrowing of the average WTI Midland crude oil
differential to WTI Cushing crude oil to $2.24 per barrel during the second
quarter of 2019 compared to $8.10 during the second quarter of 2018;
a narrowing of the discount between WTI Midland crude oil and Brent crude oil
where, during the second quarter of 2019, the WTI Midland crude oil
differential to Brent crude oil was an average discount of $10.88 per barrel
compared to $15.03 per barrel during the second quarter of 2018; and
a 10.0% decline in the average Gulf Coast 2-1-1 crack spread (the primary
measure for the Krotz Springs refinery).
chart-f034b08c429d52b18b7.jpgchart-d845b1d949f051588b0.jpg
YTD 2019 vs. YTD 2018
Refining margin increased by $170.4 million, or 31.7%, in the six months ended
June 30, 2019 compared to the six months ended June 30, 2018, primarily driven
by the following:
a wider discount between WTI Cushing crude oil compared to Brent where, during
the six months of 2019, the average WTI Cushing crude oil differential to Brent
crude oil was $8.78 per barrel compared to $5.66 during the six months of 2018,
a 9.9% improvement in the 5-3-2 crack spread (the primary measure for the Tyler
refinery and El Dorado refinery);
a 2.4% improvement in the average Gulf Coast 3-2-1 crack spread (the primary
measure for the Big Spring refinery);
the net reversal benefit of $51.5 million related to inventory valuation
reserves recognized during the six months of 2019 compared to the net reversal
benefit of $1.9 million recognized during the six months of 2018; and
the benefit attributable to the decrease in RIN prices. These increases were
partially offset by the following
a narrowing of the discount between WTI Midland crude oil compared to WTI
Cushing where, during the six months of 2019, the average WTI Midland crude oil
differential to WTI Cushing crude oil was $1.71 per barrel compared to $4.33
during the six months of 2018;
a narrowing of the discount between WTI Midland crude oil and Brent crude oil
where, during the six months of 2019, the WTI Midland crude oil differential to
Brent crude oil was an average discount of $10.49 per barrel compared to $9.99
per barrel during the same period of 2018;
a narrowing of the average WTI Cushing crude oil differential to WTS crude oil
to $1.41 per barrel during the six months of 2019 compared to $5.05 during the
six months of 2018;
a 16.9% decline in the average Gulf Coast 2-1-1 crack spread (the primary
measure for the Krotz Springs refinery); and
a prior period benefit of approximately $115.5 million related to a combination
of the 2017 RINs waivers and a biodiesel tax credit recognized during the six
months of 2018 that was not recurring in the same period of 2019.
Operating Expenses
Q2 2019 vs. Q2 2018
Operating expenses increased by $1.8 million, or 1.6%, in the second quarter of
2019 compared to the second quarter of 2018, primarily driven by the following:
increases in employee related costs across the Tyler, Krotz Springs and Big
Spring refineries; and
increases in insurance expense across all refineries. YTD 2019 vs. YTD 2018
Operating expenses increased by $8.1 million, or 3.6%, during the six months
ended June 30, 2019 compared to the six months ended June 30, 2018, primarily
driven by the following:
an overall net increase of $7.6 million in outside services costs across all
four refineries primarily related to various unit outages and project studies;
an increase in employee related costs of $5.7 million at the El Dorado, Krotz
Springs and Big Spring refineries;
an offsetting decrease of $2.3 million across the El Dorado, Tyler and Big
Spring refineries attributable to reduced chemical and catalyst costs; and
offsetting reductions in repairs and maintenance expense at the El Dorado,
Krotz Springs and Big Spring refineries. Contribution Margin Q2 2019 vs. Q2
2018 Contribution margin increased by $1.3 million, or a 0.6% improvement in
contribution margin percentage, in the second quarter of 2019 compared to the
second quarter of 2018, primarily driven by the following:
the addition of the alkylation unit at our Krotz Springs refinery contributed
approximately $14.5 million to contribution margin during the second quarter of
2019;
a 7.9% improvement in the 5-3-2 crack spread (the primary measure for the Tyler
refinery) and a 5.4% improvement in the average Gulf Coast 3-2-1 crack spread
(the primary measure for the Big Spring refinery); and
the benefit attributable to the decrease in RIN prices. These increases were
partially offset by the following:
the decline of the Midland WTI crude oil differential to Brent crude oil to an
average discount of $10.88 per barrel compared to $15.03 per barrel in the
prior-year period;
a 10.0% decline in the average Gulf Coast 2-1-1 crack spread (the primary
measure for the Krotz Springs refinery); and
a narrowing of the discount between WTI Cushing and WTS crude oil where the
discount was $1.87 during the second quarter of 2019 compared to $8.50 in the
prior-year period. YTD 2019 vs. YTD 2018 Contribution margin increased by
$162.3 million, or a 4.4% improvement in contribution margin percentage, for
the six months ended June 30, 2019 compared to the six months ended June 30,
2018, primarily driven by the following:
wider discounts in the WTI Midland/Brent, WTI Cushing/LLS and WTI Cushing/Brent
differentials period over period;
a 9.9% improvement in the 5-3-2 crack spread (the primary measure for the Tyler
refinery) and a 2.4% improvement in the average Gulf Coast 3-2-1 crack spread
(the primary measure for the Big Spring refinery);
the net reversal benefit of $51.5 million related to inventory valuation
reserves recognized during the six months of 2019 compared to the net reversal
benefit of $1.9 million recognized during the six months of 2018; and
the benefit attributable to the decrease in RIN prices. These increases were
partially offset by the following:
a 16.9% decline in the average Gulf Coast 2-1-1 crack spread (the primary
measure for the Krotz Springs refinery); and
a narrowing of the discount between WTI Cushing and WTS crude oil where the
discount was $1.41 during the first six months of 2019 compared to $5.05 in the
prior-year period;
a narrowing of the discount between WTI Midland and WTI Cushing where the
discount was $1.71 during the first six months of 2019 compared to $4.33 in the
prior-year period; and
a prior period benefit of approximately $115.5 million related to a combination
of the 2017 RINs waivers and a biodiesel tax credit recognized during the six
months of 2018 that was not recurring in the same period of 2019.
Logistics Segment
Logistics Segment Contribution
Excludes jet fuel and petroleum coke.
Throughputs for the six months ended June 30, 2018 are for the 122 days we
marketed certain finished products produced at or sold from the Big Spring
Refinery following the execution of the Big Spring Marketing Agreement,
effective March 1, 2018, as defined in Note 3 to our accompanying condensed
consolidated financial statements.
Consists of terminalling throughputs at our Tyler, Big Spring, Big Sandy and
Mount Pleasant, Texas, our El Dorado and North Little Rock, Arkansas and our
Memphis and Nashville, Tennessee terminals. Throughputs for the six months
ended June 30, 2018 for the Big Spring terminal are for the 122 days we
operated the terminal following its acquisition effective March 1, 2018.
Barrels per day are calculated for only the days we operated each terminal.
Total throughput barrels for the six months ended June 30, 2018 was 26.0
million barrels, which averaged 143,593 bpd for the 181 day period.
Logistics Segment Operational Comparison of the Three and Six Months Ended June
30, 2019 versus the Three and Six Months Ended June 30, 2018
Net Revenues Q2 2019 vs. Q2 2018 Net revenues decreased by $11.0 million, or
6.6%, in the second quarter of 2019 compared to the second quarter of 2018,
primarily driven by the following:
decreases in the average volumes sold and in the average sales prices per
gallon of gasoline and diesel sold in our west Texas marketing operations.
?
the average volumes of gasoline and diesel sold decreased 2.3 million gallons
and 0.4 million gallons, respectively.
?
the average sales prices per gallon of gasoline and diesel sold decreased $0.26
per gallon and $0.24 per gallon, respectively. Such decreases were partially
offset by the following:
net revenues for marketing and terminalling services under the agreements
associated with our assets in Big Spring, Texas; and
increased revenues associated with our Paline Pipeline as a result of increased
rates and a change in the fee structure from the second quarter of 2018, during
which the capacity of the Paline Pipeline was contracted to separate parties
for a monthly fee, compared to the second quarter of 2019, during which the
pipeline was subject to a FERC tariff;
increased revenues from fees received by the Partnership related to the
management of the Delek Permian Gathering Project during the second quarter of
2019 for which there were no fees earned during the second quarter of 2018. Net
revenues included $8.5 million and $8.7 million of net service fees paid by our
refining segment to our logistics segment during the second quarter of 2019 and
2018, respectively. These service fees are based on the number of gallons sold
and a fee for providing sales and customer support services. Net revenues also
included sales of finished product, crude and refined product transportation,
terminalling and storage fees paid by our refining segment to our logistics
segment, including revenues earned under the commercial agreements entered into
in connection with the Big Spring Logistic Assets Acquisition. These revenues
were $52.2 million and $43.6 million in the second quarter of 2019 and 2018,
respectively. The logistics segment also sold $0.4 million and $0.7 million of
RINs to the refining segment during the second quarter of 2019 and 2018,
respectively. Net revenues also includes fees of $1.1 million received by Delek
Logistics during the second quarter of 2019 from corporate for managing a
long-term capital project on our behalf for the construction of a gathering
system in the Permian Basin.These intercompany sales and fees are eliminated in
consolidation. YTD 2019 vs. YTD 2018 Net revenues decreased by $26.4 million,
or 7.9%, in the six months ended June 30, 2019 compared to the six months ended
June 30, 2018, primarily driven by the following:
decreases in the average volumes and in the average sales prices per gallon of
gasoline and diesel sold in our west Texas marketing operations.
?
the average volumes of gasoline and diesel sold decreased 6.3 million gallons
and 7.2 million gallons, respectively.
?
the average sales prices per gallon of gasoline and diesel sold decreased $0.21
per gallon and $0.17 per gallon, respectively. Such decreases were partially
offset by the following:
net revenues generated under the agreements executed in connection with the Big
Spring Logistic Assets Acquisition, which were effective March 1, 2018. Refer
to Note 3 to our accompanying condensed consolidated financial statements for
additional information about the agreements executed in connection with the Big
Spring Logistic Assets Acquisition;
increased revenues associated with our Paline Pipeline as a result of increased
rates and a change in the fee structure from the six months ended June 30,
2018, during which the capacity of the Paline Pipeline was contracted to
separate parties for a monthly fee, compared to the six months ended June 30,
2019, during which the pipeline was subject to a FERC tariff; and
increased revenues from fees received by Delek Logistics related to the
management of the Delek Permian Gathering Project during the six months ended
June 30, 2019 for which there were no fees earned during the six months ended
June 30, 2018. Net revenues included $16.9 million and $14.8 million of net
service fees paid by our refining segment to our logistics segment during the
six months of 2019 and 2018, respectively. These service fees are based on the
number of gallons sold and a fee for providing sales and customer support
services. Net revenues also included sales of finished product, crude and
refined product transportation, terminalling and storage fees paid by our
refining segment to our logistics segment, including revenues earned under the
commercial agreements entered into in connection with the Big Spring Logistic
Assets Acquisition. These revenues were $104.4 million and $97.9 million in the
six months of 2019 and 2018, respectively. The logistics segment also sold $0.8
million and $2.0 million of RINs to the refining segment during the six months
of 2019 and 2018, respectively. Net revenues also includes fees of $2.8 million
received by Delek Logistics during the six months of 2019 from corporate for
managing a long-term capital project on our behalf for the construction of a
gathering system in the Permian Basin.These intercompany sales and fees are
eliminated in consolidation.
chart-9ebefbad4791c584637.jpgchart-2f2c68bc547a52fc941.jpg Cost of Materials
and Other Q2 2019 vs. Q2 2018 Cost of materials and other for the logistics
segment decreased $12.2 million, or 11.5%, in the second quarter of 2019
compared to the second quarter of 2018. This decrease was primarily driven by
the following:
decreases in the average volumes sold and in the average cost per gallon of
gasoline and diesel sold in our west Texas marketing operations.
?
the average volumes of gasoline and diesel sold decreased 2.3 million gallons
and 0.4 million gallons, respectively.
?
the average cost per gallon of gasoline and diesel sold decreased $0.23 per
gallon and $0.17 per gallon, respectively. Our logistics segment purchased
product from our refining segment of $73.2 million and $99.5 million for the
three months ended June 30, 2019 and June 30, 2018, respectively. We eliminate
these intercompany costs in consolidation. YTD 2019 vs. YTD 2018 Cost of
materials and other for the logistics segment decreased $34.9 million, or
15.5%, in the six months ended June 30, 2019 compared to the six months ended
June 30, 2018. This decrease was primarily driven by the following:
decreases in the average volumes sold and in the average cost per gallon of
gasoline and diesel sold in our west Texas marketing operations.
?
the average volumes of gasoline and diesel sold decreased 6.3 million gallons
and 7.2 million gallons, respectively.
?
the average cost per gallon of gasoline and diesel sold decreased $0.21 per
gallon and $0.13 per gallon, respectively. Our logistics segment purchased
product from our refining segment of $152.6 million and $181.8 million for the
six months ended June 30, 2019 and June 30, 2018, respectively. We eliminate
these intercompany costs in consolidation.
Operating Expenses Q2 2019 vs. Q2 2018 Operating expenses increased by $2.4
million, or 16.1%, in the second quarter of 2019 compared to the second quarter
of 2018, driven by the following:
higher operating costs associated with logistics assets at the Big Spring,
Tyler and El Dorado refineries, including variable expenses such as utilities,
contractor and materials costs; and
higher employee costs allocated to the logistics segment as a result of an
increase in allocated employee headcount in various operational groups. YTD
2019 vs. YTD 2018 Operating expenses increased by $5.9 million, or 21.5%, in
the six months ended June 30, 2019 compared to the six months ended June 30,
2018, driven by the following:
higher operating costs associated with the logistics assets acquired in the Big
Spring Logistic Assets Acquisition, including allocated employee costs and
variable expenses such as utilities, due to operating the acquired assets for
the entirety of the six months ended June 30, 2019 compared to four months
during the six month ended June 30, 2018;
higher operating costs associated with logistics assets at the Tyler and El
Dorado refineries, including variable expenses such as utilities, contractor
and materials costs; and
higher employee costs allocated to the logistics segment as a result of an
increase in allocated employee headcount in various operational groups.
Contribution Margin Q2 2019 vs. Q2 2018 Contribution margin decreased by $1.2
million, or 2.6%, in the second quarter of 2019 compared to the second quarter
of 2018, primarily driven by the following:
lower sales volumes combined with a $1.81 decrease in gross margin per gallon
of our gasoline and diesel sold in our west Texas marketing operations; and
a slight increase in operating expenses. YTD 2019 vs. YTD 2018 Contribution
margin increased by $2.6 million, or 3.2%, in the six months ended June 30,
2019 compared to the six months ended June 30, 2018, primarily driven by the
following:
increases in revenue generated under the agreements executed in connection with
the Big Spring Logistic Assets Acquisition. Such increases were partially
offset by the following:
higher operating expenses; and
decreases in the volumes of gasoline and diesel sold in our west Texas
marketing operations.
Retail Segment
Retail fuel margin represents gross margin on fuel sales in the retail segment,
and is calculated as retail fuel sales revenue less retail fuel cost of sales.
The retail fuel margin per gallon calculation is derived by dividing retail
fuel margin by the total retail fuel gallons sold for the period.
Same-store comparisons include period-over-period increases or decreases in
specified metrics for stores that were in service at both the beginning of the
earliest period and the end of the most recent period used in the comparison.
Retail Segment Operational Comparison of the Three and Six Months Ended June
30, 2019 versus the Three and Six Months Ended June 30, 2018 Net Revenues Q2
2019 vs. Q2 2018 Net revenues for the retail segment decreased by $20.3
million, or 8.3%, in the second quarter of 2019 compared to the second quarter
of 2018, primarily driven by the following:
total fuel sales were $140.8 million in the second quarter of 2019 compared to
$152.0 million in the second quarter of 2018, attributable to the following:
?
a $0.19 decrease in average price charged per gallon; and
?
a slight decrease in total retail fuel gallons sold for the retail segment to
53,743 thousand gallons in the second quarter of 2019 compared to 54,114
thousand gallons in the second quarter of 2018 associated with the reduction in
average number of stores period over period, where there was a same-store sales
growth in fuel volumes of 1.7 %;
merchandise sales were $83.3 million in the second quarter of 2019 compared to
$90.2 million in the second quarter of 2018 which was impacted by the reduction
in average number of stores period over period and included a same-store sales
decrease of 2.5%. YTD 2019 vs. YTD 2018 Net revenues for the retail segment
decreased by $32.7 million, or 7.2%, in the six months ended June 30, 2019
compared to the six months ended June 30, 2018, primarily driven by the
following:
total fuel sales were $262.7 million in the six months of 2019 compared to
$280.9 million in the six months of 2018, attributable to the following:
?
a $0.17 decrease in average price charged per gallon; and
?
relative consistency in total retail fuel gallons sold of 107,633 thousand
gallons in the six months of 2019 compared to 107,813 thousand gallons in the
six months of 2018, where the consistent volumes are attributable to a decrease
in volumes associated with the reduction in average number of stores period
over period offset by same-store sales growth in fuel volumes of 3.1 %.
merchandise sales were $158.6 million in the six months of 2019 compared to
$168.3 million in the six months of 2018 which was impacted by the reduction in
average number of stores period over period and included a same-store sales
decrease of 0.5%.
Q2 2019 vs. Q2 2018 Cost of materials and other for the retail segment
decreased by $18.8 million, or 9.4%, in the second quarter of 2019 compared to
the second quarter of 2018, primarily driven by the following:
a decrease in average cost per gallon of $0.25 or 9.7% applied to fuel sales
volumes that decreased slightly period over period. Our retail segment
purchased finished product from our refining segment of $101.7 million and
$118.9 million for the three months ended June 30, 2019 and June 30, 2018,
respectively, attributable to the reduction in the number of stores. We
eliminate this intercompany cost in consolidation. YTD 2019 vs. YTD 2018 Cost
of materials and other for the retail segment decreased by $28.6 million, or
7.6%, in the six months ended June 30, 2019 compared to the six months ended
June 30, 2018, primarily driven by the following:
a decrease in average cost per gallon of $0.20 or 8.2% applied to fuel sales
volumes that remained relatively consistent period over period. Our retail
segment purchased finished product from our refining segment of $191.9 million
and $218.4 million for the six months ended June 30, 2019 and June 30, 2018,
respectively, attributable to the reduction in the number of stores. We
eliminate this intercompany cost in consolidation.
Operating Expenses Q2 2019 vs. Q2 2018 Operating expenses for the retail
segment decreased by $0.5 million, or 2.0% in the second quarter of 2019
compared to the second quarter of 2018. This decrease is primarily attributable
to a decrease in operating costs associated with the reduction in the number of
stores. YTD 2019 vs. YTD 2018 Operating expenses for the retail segment
decreased by $1.4 million, or 2.8% in the six months ended June 30, 2019
compared to the six months ended June 30, 2018. This decrease is primarily
attributable to a decrease in operating costs associated with the reduction in
the number of stores.
Contribution Margin
Q2 2019 vs. Q2 2018 Contribution margin for the retail segment decreased by
$1.0 million, a 5.4% decline in contribution margin percentage, in the second
quarter of 2019 compared to the second quarter of 2018, primarily driven by the
following:
a decline in fuel revenues primarily attributable to the $0.19 decline in
average price charged per gallon of retail fuel sold;
a decline in merchandise revenues largely attributable to the reduction in the
number of average stores; and
partially offset by $0.057 per gallon improvement in the retail fuel margin.
YTD 2019 vs. YTD 2018 Contribution margin for the retail segment decreased by
$2.7 million, a 8.9% decline in contribution margin percentage, in the six
months ended June 30, 2019 compared to the six months ended June 30, 2018,
primarily driven by the following:
a decline in fuel revenues primarily attributable to the $0.17 decline in
average price charged per gallon of retail fuel sold;
a decline in merchandise revenues largely attributable to the reduction in the
number of average stores;
a decline in same-store contribution margin of 13.2%; and
partially offset by $0.034 per gallon improvement in the retail fuel margin.
Liquidity and Capital Resources Our primary sources of liquidity are
cash generated from our operating activities;
borrowings under our debt facilities; and
potential issuances of additional equity and debt securities. We believe that
cash generated from these sources will be sufficient to satisfy the anticipated
cash requirements associated with our existing operations and capital
expenditures for at least the next 12 months.
Cash Flows
Cash Flows from Operating Activities Net cash provided by operating activities
was $235.4 million for the six months ended June 30, 2019, compared to net cash
used of $136.4 million for the comparable period of 2018. The increase in cash
flows from operations was partially due to an increase in net income, which for
the six months ended June 30, 2019 was $238.2 million, compared to $61.2
million in the same period of 2018. Additionally, net income for the six months
ended June 30, 2019 included a non-cash expense for deferred income taxes of
$16.0 million compared to a benefit of $65.3 million in the prior year. Also,
contributing $134.9 million to the increase was the change in fair value of
derivatives. Cash Flows from Investing Activities Net cash used in investing
activities was $329.4 million for the first six months of 2019, compared to net
cash received of $13.8 million in the comparable period of 2018. The increase
in cash flows used in investing activities was primarily due to an increase in
cash purchases of property, plant and equipment and capital expenditures
related to turnaround activities, which increased from $142.5 million in 2018,
to $199.9 million in 2019, and a $136.2 million increase in equity method
investment contributions in the current year, $124.7 million of which related
to our obtaining a 33% membership interest in Red River Red River Pipeline
Joint Venture in May 2019. Also contributing to this increase was the sale of
asphalt assets and discontinued operations in 2018, for which we received
proceeds of $110.8 million and $39.7 million, respectively. Cash Flows from
Financing Activities Net cash used in financing activities was $33.9 million
for the six months ended June 30, 2019, compared to net cash provided of $313.5
million in the comparable 2018 period. The decrease in net cash provided by
financing activities was partially due to the decrease in net proceeds received
from long-term revolvers due to completion of the Refinancing transaction as
well as the additional borrowings used to fund the Big Spring Logistic Assets
Acquisition during the six months ended June 30, 2018. We made net payments on
long-term revolvers of $85 million during the six months ended June 30, 2019
compared to net proceeds received of $552 million in the comparable 2018
period. Partially offsetting this decrease was a decrease in repurchase of
common stock to $104.8 million for the six months ended June 30, 2019 compared
to $115.3 million in the comparable 2018 period, as well as a decrease in
repayments of product financing arrangements to $15.6 million for the six
months ended June 30, 2019 compared to $72.4 million in the comparable 2018
period. Cash Position and Indebtedness As of June 30, 2019, our total cash and
cash equivalents were $951.4 million and we had total indebtedness of
approximately $1,916.7 million. Total unused credit commitments or borrowing
base availability, as applicable, under our revolving credit facilities was
approximately $911.1 million and we had letters of credit issued of
approximately $267.2 million. We believe we were in compliance with our
covenants in all debt facilities as of June 30, 2019. See Note 10 of the
condensed consolidated financial statements in Item 1, Financial Statements,
for additional information about our separate credit facilities. Capital
Spending A key component of our long-term strategy is our capital expenditure
program. Our capital expenditures for the six months ended June 30, 2019 were
$214.3 million, of which approximately $130.5 million was spent in our refining
segment, $2.2 million in our logistics segment, $10.5 million in our retail
segment and $71.1 million at the holding company level.
The amount of our capital expenditure budget is subject to change due to
unanticipated increases in the cost, scope and completion time for our capital
projects. For example, we may experience increases in the cost of and/or timing
to obtain necessary equipment required for our continued compliance with
government regulations or to complete improvement projects or scheduled
maintenance activities. Additionally, the scope and cost of employee or
contractor labor expense related to installation of that equipment could exceed
our projections. Our capital expenditure budget may also be revised as
management continues to evaluate projects for reliability or profitability. We
have no off-balance sheet arrangements through the date of the filing of this
Quarterly Report on Form 10-Q.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Price Risk Management Activities
At times, we enter into the following
instruments/transactions in order to manage our market-indexed pricing risk:
commodity derivative contracts which we use to manage our price exposure to our
inventory positions, future purchases of crude oil and ethanol, future sales of
refined products or to fix margins on future production; and future commitments
to purchase or sell RINs at fixed prices and quantities, which are used to
manage the costs associated with our RINs obligations and meet the definition
of derivative instruments under ASC 815, Derivatives and Hedging ("ASC 815").
In accordance with ASC 815, all of these commodity contracts and future
purchase commitments are recorded at fair value, and any change in fair value
between periods has historically been recorded in the profit and loss section
of our condensed consolidated financial statements. Occasionally, at inception,
the Company will elect to designate the commodity derivative contracts as cash
flow hedges under ASC 815. Gains or losses on commodity derivative contracts
accounted for as cash flow hedges are recognized in other comprehensive income
on the condensed consolidated balance sheets and, ultimately, when the
forecasted transactions are completed, in net revenues or cost of materials and
other in the condensed consolidated statements of income.
Interest Risk Management Activities
We have market exposure to changes in
interest rates relating to our outstanding floating rate borrowings, which
totaled approximately $1,612.3 million as of June 30, 2019. The annualized
impact of a hypothetical one percent change in interest rates on our floating
rate debt as of June 30, 2019 would be to change interest expense by
approximately $16.1 million. Commodity Derivatives Trading Activities In the
first half of 2018, we began entering into active trading positions in a
variety of commodity derivatives, which include forward physical contracts,
swap contracts, and futures contracts. These contracts are classified as held
for trading and are recognized at fair value with changes in fair value
recognized in the income statement. Trading activities are undertaken by using
a range of contract types in combination to create incremental gains by
capitalizing on crude oil supply and pricing seasonality. These contracts had
remaining durations of less than one year as of June 30, 2019.