Edgar Filing: Delek US Holdings, Inc.

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

DK-9.30.2011-10Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)



þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2011



o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission file number 001-32868

DELEK US HOLDINGS, INC.

(Exact name of registrant as specified in its charter)



Delaware		52-2319066
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

7102 Commerce Way
Brentwood, Tennessee		37027
(Address of principal executive offices)		(Zip Code)

(615) 771-6701

(Registrant’s 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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):

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 October 28, 2011, there were 58,016,342 shares of common stock, $0.01 par value, outstanding.

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TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	3

Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010 (Unaudited)	3

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010 (Unaudited)	4

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 (Unaudited)	5

Notes to Condensed Consolidated Financial Statements (Unaudited)	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3. Quantitative and Qualitative Disclosures about Market Risk	38

Item 4. Controls and Procedures	40

PART II. OTHER INFORMATION

Item 5. Other Information	40

Item 6. Exhibits	41

Signatures	42

Exhibit Index	43

Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

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Part I.

FINANCIAL INFORMATION


Item 1.	Financial Statements

Delek US Holdings, Inc.

Condensed Consolidated Balance Sheets (Unaudited)



	September 30, 2011			December 31, 2010
	(In millions, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	218.7		$	49.1
Accounts receivable	305.4			104.7
Inventory	365.9			136.7
Other current assets	37.2			8.9
Total current assets	927.2			299.4
Property, plant and equipment:
Property, plant and equipment	1,224.0			886.7
Less: accumulated depreciation	(246.2		)	(206.6		)
Property, plant and equipment, net	977.8			680.1
Goodwill	71.9			71.9
Other intangibles, net	16.7			7.9
Minority investment	—			71.6
Other non-current assets	20.6			13.7
Total assets	$	2,014.2		$	1,144.6
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	393.9		$	222.9
Current portion of long-term debt and capital lease obligations	27.1			14.1
Current note payable to related party	6.0			—
Obligation under Supply and Offtake Agreement	190.4			—
Accrued expenses and other current liabilities	121.7			55.5
Total current liabilities	739.1			292.5
Non-current liabilities:
Long-term debt and capital lease obligations, net of current portion	313.0			237.7
Note payable to related party	78.0			44.0
Environmental liabilities, net of current portion	10.2			2.8
Asset retirement obligations	7.8			7.3
Deferred tax liabilities	149.9			105.9
Other non-current liabilities	33.5			11.1
Total non-current liabilities	592.4			408.8
Shareholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding	—			—
Common stock, $0.01 par value, 110,000,000 shares authorized, 58,011,960 shares and 54,403,208 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively	0.6			0.5
Additional paid-in capital	338.4			287.5
Accumulated other comprehensive income	0.1			—
Retained earnings	313.1			155.3
Non-controlling interest in subsidiaries	30.5			—
Total shareholders’ equity	682.7			443.3
Total liabilities and shareholders’ equity	$	2,014.2		$	1,144.6

See accompanying notes to the condensed consolidated financial statements

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Delek US Holdings, Inc.

Condensed Consolidated Statements of Operations (Unaudited)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
	(In millions, except share and per share data)
Net sales	$	2,205.0		$	875.5		$	5,197.2		$	2,766.1
Operating costs and expenses:
Cost of goods sold	1,911.5			793.7			4,558.6			2,509.5
Operating expenses	94.8			58.2			238.2			170.1
Insurance proceeds — business interruption	—			—			—			(12.8		)
Property damage proceeds, net	—			—			—			(4.0		)
General and administrative expenses	18.8			14.9			61.9			45.0
Depreciation and amortization	20.0			14.4			53.3			44.9
Loss on sale of assets	0.6			0.2			2.6			0.3
Total operating costs and expenses	2,045.7			881.4			4,914.6			2,753.0
Operating income (loss)	159.3			(5.9		)	282.6			13.1
Interest expense	16.4			8.1			38.7			25.6
Gain on investment in Lion Oil	(3.7		)	—			(12.9		)	—
Total non-operating expenses	12.7			8.1			25.8			25.6
Income before income taxes	146.6			(14.0		)	256.8			(12.5		)
Income tax expense (benefit)	50.1			(4.1		)	87.4			(3.5		)
Net income (loss)	96.5			(9.9		)	169.4			(9.0		)
Net income attributed to non-controlling interest	4.0			—			5.1			—
Net income (loss) attributable to Delek	$	92.5		$	(9.9	)	$	164.3		$	(9.0	)
Basic earnings (loss) per share	$	1.60		$	(0.18	)	$	2.93		$	(0.17	)
Diluted earnings (loss) per share	$	1.58		$	(0.18	)	$	2.91		$	(0.17	)
Weighted average common shares outstanding:
Basic	57,973,790			54,385,007			56,122,544			54,220,553
Diluted	58,579,804			54,385,007			56,474,636			54,220,553
Dividends declared per common share outstanding	$	0.0375		$	0.0375		$	0.1125		$	0.1125

See accompanying notes to the condensed consolidated financial statements

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Delek US Holdings, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)



	Nine Months Ended September 30,
	2011			2010
Cash flows from operating activities:	(In millions, except per share data)
Net income (loss)	$	169.4		$	(9.0	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	53.3			44.9
Amortization of deferred financing costs	4.4			4.9
Accretion of asset retirement obligations	0.4			0.3
Deferred income taxes	42.9			(2.9		)
Gain on investment in Lion Oil	(12.9		)	—
Loss on sale of assets	2.6			0.3
Gain on involuntary conversion of assets	—			(4.0		)
Stock-based compensation expense	1.7			2.6
Income tax benefit of stock-based compensation	(2.4		)	—
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net	(180.7		)	(18.5		)
Inventories and other current assets	(30.8		)	24.5
Accounts payable and other current liabilities	(30.3		)	0.4
Obligation under Supply and Offtake Agreement, net	(11.3		)	—
Non-current assets and liabilities, net	18.2			(3.5		)
Net cash provided by operating activities	24.5			40.0
Cash flows from investing activities:
Business combination — Lion Acquisition	(80.2		)	—
Purchases of property, plant and equipment	(50.1		)	(40.3		)
Expenditures to rebuild refinery	—			(0.2		)
Proceeds from sales of convenience store assets	3.4			4.2
Property damage insurance proceeds	—			6.2
Net cash used in investing activities	(126.9		)	(30.1		)
Cash flows from financing activities:
Proceeds from long-term revolvers	477.8			503.6
Payments on long-term revolvers	(527.1		)	(498.8		)
Proceeds from term debt	140.7			—
Payments on term debt and capital lease obligations	(13.1		)	(47.7		)
Proceeds from inventory financing agreement	201.7			—
Proceeds from exercise of stock options	2.6			—
Taxes paid in connection with settlement of share purchase rights	—			(2.5		)
Income tax benefit of stock-based compensation	2.4			—
Dividends paid	(6.5		)	(6.3		)
Deferred financing costs paid	(6.5		)	(9.1		)
Net cash provided by (used in) financing activities	272.0			(60.8		)
Net increase (decrease) in cash and cash equivalents	169.6			(50.9		)
Cash and cash equivalents at the beginning of the period	49.1			68.4
Cash and cash equivalents at the end of the period	$	218.7		$	17.5
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of capitalized interest of a nominal amount in both the 2011 and 2010 periods	$	31.2		$	18.6
Income taxes	$	38.7		$	1.6
Non-cash financing activities:
Stock issued in connection with the Lion Acquisition	$	44.3		$	—

See accompanying notes to the condensed consolidated financial statements

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Delek US Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Organization and Basis of Presentation

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”), Delek Marketing & Supply, Inc. (“Marketing”) and Lion Oil Company (“Lion Oil”) (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. 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.

In 2007, Delek acquired approximately 34.6% of the issued and outstanding shares of common stock of Lion Oil, a privately held Arkansas corporation. In April 2011, Delek acquired an additional 53.7% of the issued and outstanding shares of common stock, par value $0.10 per share (the “Lion Shares”), of Lion Oil from Ergon, Inc. (“Ergon”), the former majority shareholder, bringing Delek’s interest in Lion Oil to 88.3%. Delek reports Lion Oil as part of its consolidated group. See Note 3 for discussion of this transaction.

Delek is listed on the New York Stock Exchange under the symbol DK. As of September 30, 2011, approximately 68.5% of our outstanding shares were beneficially owned by Delek Group Ltd. (“Delek Group”) located in Natanya, Israel.

The condensed consolidated financial statements include the accounts of Delek and its wholly-owned subsidiaries. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted, although management believes that the disclosures herein are adequate to make the financial information presented not misleading. Our unaudited condensed consolidated financial statements have been prepared in conformity with GAAP applied on a consistent basis with those of the annual audited 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, 2010 included in our Annual Report on Form 10-K filed with the SEC on March 11, 2011.

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.

The preparation of financial statements in conformity with GAAP 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.

2. Explosion and Fire at the Tyler, Texas Refinery

On November 20, 2008, an explosion and fire occurred at our 60,000 barrels per day (“bpd”) refinery in Tyler, Texas. Two of our employees died as a result of the event and other individuals have claimed injuries. The event caused damage to both our saturates gas plant and naphtha hydrotreater and resulted in an immediate suspension of our refining operations. The Tyler refinery was subject to a gradual, monitored restart in May 2009, culminating in a full resumption of operations on May 18, 2009. We settled all outstanding property damage and business interruption insurance claims in the second quarter 2010.

3. Lion Oil Acquisition

In 2007, Delek acquired approximately 34.6% of the issued and outstanding shares of common stock of Lion Oil. In April 2011, Delek acquired an additional 53.7% of the Lion Shares from Ergon (the “Lion Acquisition”), bringing Delek’s interest in Lion Oil to 88.3%.

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Lion Oil owns the following assets: an 80,000 bpd refinery located in El Dorado, Arkansas; the 80-mile Magnolia crude oil transportation system that runs between Shreveport, Louisiana and the Magnolia crude terminal; the 28-mile El Dorado crude oil transportation system that runs from the Magnolia terminal to the El Dorado refinery, as well as two associated product pipelines; a crude oil gathering system with approximately 600 miles of operating pipeline; and light product distribution terminals located in Memphis and Nashville, Tennessee. The distribution terminals located in Tennessee supply products to some of Delek’s convenience stores in the Memphis and Nashville markets.

Upon acquiring a majority equity ownership position in Lion Oil, Delek assumed operational management of the El Dorado refinery and its related assets. Delek now reports Lion Oil as part of its consolidated group. Transaction costs associated with the Lion Acquisition were $0.5 million and $5.2 million, respectively, during the three and nine months ended September 30, 2011 and were recognized in general and administrative expenses in the accompanying condensed consolidated statements of operations.

As of December 31, 2010, Delek carried its investment in Lion Oil at $71.6 million, using the cost method of accounting. During the three and nine months ended September 30, 2011, we recognized gains of $3.7 million and $12.9 million, respectively, as a result of remeasuring the 34.6% cost basis interest in Lion Oil at its fair value as of the Lion Acquisition date in accordance with ASC 805, Business Combinations. This remeasurement was derived from the consideration transferred in the Lion Acquisition. This gain was recognized in the condensed consolidated statements of operations. The acquisition-date fair value of the previous cost basis interest was $84.5 million and is included in the measurement of the consideration transferred.

The components of the consideration transferred were as follows:



Cash paid to Ergon			$	80.2
Delek restricted common stock issued to Ergon	3,292,844
Average price per share of Delek stock on April 29, 2011	$	13.45
Total value of common stock consideration			44.3
Contingent consideration			6.7
Fair value of Delek investment prior to the Lion Acquisition			$	84.5
			$	215.7

The allocation of the purchase price was based upon a preliminary valuation. Our estimates and assumptions are subject to change during the purchase price allocation period. The primary areas of the purchase price allocation that are not yet finalized relate to property, plant and equipment values, the valuation of intangible assets acquired, certain legal matters, and income taxes. During the third quarter of 2011, we adjusted certain of the acquisition-date fair values previously disclosed, based primarily on additional information regarding contingent consideration and the finalization of working capital amounts, obtained subsequent to the acquisition. The fair value of the contingent consideration is based on certain payments due to Ergon related to future sales of the asphalt produced at the El Dorado refinery. The liability for these payments is recorded in accrued expenses and other current liabilities and other non-current liabilities in the condensed consolidated balance sheets.

The preliminary allocation of the aggregate purchase price of Lion Oil as of September 30, 2011 is summarized as follows (in millions):



Inventory	$	222.6
Accounts receivable and other current assets	20.7
Property, plant and equipment	304.4
Intangible assets	11.3
Other non-current assets	19.1
Accounts payable and other current liabilities	(264.2		)
Long-term note to Ergon	(50.0		)
Asset retirement obligations and environmental liabilities	(9.9		)
Other liabilities	(12.9		)
	241.1
Fair value of non-controlling interest in Lion Oil	(25.4		)
Net fair value of equity acquired	$	215.7

Certain liabilities recorded in the Lion Acquisition relate to accruals for possible loss contingencies associated with two lawsuits pending at the time of the acquisition. We reached an agreement to settle one of these in the third quarter of 2011; the

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other is discussed more fully in Note 14.

Delek began consolidating Lion Oil’s results of operations on April 29, 2011. Lion Oil contributed $900.7 million and $1,413.1 million to net sales, respectively, for the three months ended September 30, 2011 and for the period from April 29, 2011 through September 30, 2011. Lion Oil contributed net income of $30.6 million and $38.4 million, respectively, (net of income attributed to non-controlling interest of $4.0 million and $5.1 million, respectively) for the three months ended September 30, 2011 and the for period from April 29, 2011 through September 30, 2011. Below are the unaudited pro forma consolidated results of operations of Delek for the three and nine months ended September 30, 2011 and for the three and nine months ended September 30, 2010, as if the Lion Acquisition had occurred on January 1, 2010 (amounts in millions, except per share information):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2011		2010			2011		2010
Net sales	$	2,205.0	$	1,468.8		$	6,278.7	$	4,626.9
Net income	96.5		(16.3		)	184.1		2.7
Net income (loss) attributed to non-controlling interest	4.0		(0.7		)	6.9		1.8
Net income attributable to Delek	$	92.5	$	(15.6	)	$	177.2	$	0.9
Basic earnings per share	$	1.60	$	(0.27	)	$	3.16	$	0.02
Diluted earnings per share	$	1.58	$	(0.27	)	$	3.14	$	0.02

Product purchased from Lion Oil by the retail segment prior to the Lion Acquisition totaled $4.3 million during the nine months ended September 30, 2011 and $2.6 million and $8.4 million during the three and nine months ended September 30, 2010, respectively. Also prior to the Lion Acquisition, the refining segment sold $3.6 million and $1.5 million, respectively, of intermediate products to the El Dorado refinery during the nine months ended September 30, 2011 and 2010. These product purchases and sales were made at market values. All product purchases and sales subsequent to the Lion Acquisition have been eliminated in consolidation.

In October 2011, we acquired the remaining non-controlling interest in Lion Oil, bringing our ownership interest to 100%. See Note 16 for additional information.

4. Inventory

Refinery inventory consists of crude oil, refined products and blendstocks which are stated at the lower of cost or market. Cost of inventory for the Tyler refinery is determined under the last-in, first-out (“LIFO”) valuation method. Cost of crude oil, refined product and feedstock inventories in excess of market value are charged to cost of goods sold. Cost of inventory for the El Dorado refinery is determined on a first-in, first-out (“FIFO”) basis.

Marketing inventory consists of refined products which are stated at the lower of cost or market on a 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.

Carrying value of inventories consisted of the following (in millions):



	September 30, 2011		December 31, 2010
Refinery raw materials and supplies	$	111.1	$	29.5
Refinery work in process	69.7		31.5
Refinery finished goods	131.0		18.9
Retail fuel	17.9		20.2
Retail merchandise	26.2		28.3
Marketing refined products	10.0		8.3
Total inventories	$	365.9	$	136.7

At September 30, 2011 and December 31, 2010, the excess of replacement cost (FIFO) over the carrying value (LIFO) of the Tyler refinery inventories was $34.5 million and $36.6 million, respectively.

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Permanent Liquidations

During the three and nine months ended September 30, 2011, respectively, we incurred a permanent reduction in a LIFO layer resulting in a liquidation (loss) gain in our refinery inventory in the amount of $(1.5) million and $0.2 million. This liquidation was recognized as a component of cost of goods sold in the three and nine months ended September 30, 2011.

During the three and nine months ended September 30, 2010, respectively, we incurred a permanent reduction in a LIFO layer resulting in a liquidation gain in our refinery finished goods inventory in the amount of $1.1 million and $0.3 million. This liquidation was recognized as a component of cost of goods sold in the three and nine months ended September 30, 2010.

5. Crude Oil Supply and Inventory Purchase Agreement

Delek entered into a Master Supply and Offtake Agreement (“Supply and Offtake Agreement”) with J. Aron & Company (“J. Aron”) at the closing of the Lion Acquisition. Pursuant to the Supply and Offtake Agreement, J. Aron purchased a majority of the crude oil and refined products in Lion Oil’s inventory at market prices. Throughout the term of the Supply and Offtake Agreement, which expires on April 29, 2014, Lion Oil and J. Aron will identify mutually acceptable contracts for the purchase of crude oil from third parties and J. Aron will supply up to 100,000 bpd of crude to the El Dorado refinery. Crude oil supplied to the El Dorado refinery by J. Aron will be purchased daily at an estimated average monthly market price by Lion Oil. J. Aron will also purchase all refined product from the El Dorado refinery at an estimated market price daily, as they are produced. These daily purchases and sales are trued-up on a monthly basis in order to reflect actual average monthly prices. We have recorded a receivable of $10.3 million as of September 30, 2011 related to this settlement. Also pursuant to the Supply and Offtake Agreement and other related agreements, Lion Oil will endeavor to arrange potential sales by either Lion Oil or J. Aron to third parties of the products produced at the El Dorado refinery. In instances where Lion Oil is the seller to such third parties, J. Aron will first transfer the applicable products to Lion Oil.

Upon any termination of the Supply and Offtake Agreement, including in connection with a force majeure, the parties are required to negotiate with third parties for the assignment to us of certain contracts, commitments and arrangements including procurement contracts, commitments for the sale of product, and pipeline, terminalling, storage and shipping arrangements. While title of the inventories will reside with J. Aron, this arrangement will be accounted for as a financing. Delek incurred fees of $2.1 million and $3.5 million, respectively, during the three and nine months ended September 30, 2011, which are included as a component of interest expense in the statement of operations.

Upon the expiration of the Supply and Offtake Agreement on April 29, 2014 or upon any earlier termination, Delek will be required to repurchase the consigned crude oil and refined products from J. Aron at then market prices. At September 30, 2011, Delek had 2.0 million barrels of inventory consigned to J. Aron and we have recorded a liability associated with this consigned inventory of $190.1 million.

Each month, J. Aron sets target inventory levels for each product subject to pre-agreed minimum and maximum inventory levels for each product group. At September 30, 2011, we recorded a current liability of $0.3 million for forward commitments related to the month end actual consignment inventory levels differing from the month end consignment inventory target levels and the associated pricing with these inventory level differences.

6. Long-Term Obligations and Short-Term Note Payable

Outstanding borrowings under Delek’s existing debt instruments and capital lease obligations are as follows (in millions):



	September 30, 2011		December 31, 2010
MAPCO Revolver	$	74.5	$	122.1
Fifth Third Revolver	27.2		29.0
Promissory notes	224.7		144.0
Term loan facility	97.0		—
Capital lease obligations	0.7		0.7
	424.1		295.8
Less: Current portion of long-term debt, notes payable and capital lease obligations	33.1		14.1
	$	391.0	$	281.7

MAPCO Revolver

On December 23, 2010, we executed a $200.0 million revolving credit facility (“MAPCO Revolver”) that includes (i) a

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$200.0 million revolving credit limit; (ii) a $10.0 million swing line loan sub-limit; (iii) a $50.0 million letter of credit sub-limit; and (iv) an accordion feature which permits an increase in borrowings of up to $275.0 million, subject to additional lender commitments. The MAPCO Revolver extended and increased the $108.0 million revolver and terminated the $165.0 million term loan outstanding under our Second Amended and Restated Credit Agreement among MAPCO, Fifth Third Bank as Administrative Agent and the lenders party thereto (“Senior Secured Credit Facility”). As of September 30, 2011, we had $74.5 million outstanding under the MAPCO Revolver, as well as letters of credit issued of $28.0 million. Borrowings under the MAPCO Revolver are secured by substantially all the assets of Express and its subsidiaries. The MAPCO Revolver will mature on December 23, 2015. The MAPCO Revolver bears interest based on predetermined pricing grids which allow us to choose between Base Rate Loans or LIBOR Rate Loans. At September 30, 2011, the weighted average borrowing rate was approximately 4.4%. Additionally, the MAPCO Revolver requires us to pay a leverage ratio dependent quarterly fee on the average unused revolving commitment. As of September 30, 2011, this fee was 0.75% per year. Amounts available under the MAPCO Revolver as of September 30, 2011 were approximately $97.5 million.

Wells ABL

Delek has an asset-based loan (“ABL”) revolving credit facility (“Wells ABL”) that includes an accordion feature which permits an increase in facility size of up to $600.0 million subject to additional lender commitments. In connection with the closing of the Lion Acquisition, Delek executed an amendment to the Wells ABL (the “Wells ABL Amendment”) on April 29, 2011. Under the terms of the Wells ABL Amendment, among other things, (i) the size of the Wells ABL was increased from $300.0 million to $400.0 million, (ii) the swing line loan sub-limit was increased from $30.0 million to $40.0 million, (iii) the letter of credit sub-limit was increased from $300.0 million to $375.0 million, (iv) the maturity date of the facility was extended from February 23, 2014 to April 29, 2015, and (v) the Wells ABL Amendment permits the issuance of letters of credit under the Wells ABL to secure obligations of Lion Oil and authorizes a factoring agreement between Refining and Lion Oil. As of September 30, 2011, we had letters of credit issued under the facility totaling approximately $177.9 million and nominal amounts in outstanding loans under the Wells ABL. Borrowings under the Wells ABL are secured by substantially all the assets of Refining and its subsidiaries, with certain limitations. Under the facility, revolving loans and letters of credit are provided subject to availability requirements which are determined pursuant to a borrowing base calculation as defined in the Wells ABL. The borrowing base as calculated is primarily supported by cash, certain accounts receivable and certain inventory. Borrowings under the facility bear interest based on predetermined pricing grids which allow us to choose between Base Rate Loans or LIBOR Rate Loans. Additionally, the Wells ABL requires us to pay a credit utilization dependent quarterly fee on the average unused revolving commitment. As of September 30, 2011, this fee was 0.75% per year. Borrowing capacity, as calculated and reported under the terms of the Wells ABL credit facility, net of a $20.0 million availability reserve requirement, as of September 30, 2011 was $136.3 million.

Fifth Third Revolver

We have a revolving credit facility with Fifth Third Bank (“Fifth Third Revolver”) that carries a credit limit of $75.0 million, including a $35.0 million sub-limit for letters of credit. As of September 30, 2011, we had $27.2 million outstanding borrowings under the facility, as well as letters of credit issued of $11.0 million. Borrowings under the Fifth Third Revolver are secured by substantially all of the assets of Marketing. The Fifth Third Revolver matures on December 19, 2012. The Fifth Third Revolver bears interest based on predetermined pricing grids that allow us to choose between Base Rate Loans or LIBOR Rate Loans. At September 30, 2011, the weighted average borrowing rate was approximately 4.2%. Additionally, the Fifth Third Revolver requires us to pay a quarterly fee of 0.50% per year on the average available revolving commitment. Amounts available under the Fifth Third Revolver as of September 30, 2011 were approximately $36.8 million.

Reliant Bank Revolver

We have a revolving credit agreement with Reliant Bank (“Reliant Bank Revolver”) that provides for unsecured loans of up to $7.5 million. As of September 30, 2011, we had no amounts outstanding under this facility. The Reliant Bank Revolver was amended on March 28, 2011 to (i) extend the maturity date by three months to June 28, 2011 and (ii) increase the interest rate for borrowings under the facility to a fixed rate of 5.75%. On June 28, 2011, we further amended the Reliant Bank Revolver to (i) extend the maturity date by one year to June 28, 2012, (ii) decrease the bank borrowing commitments under the facility from $12.0 million to $7.5 million, and (iii) modify the financial covenant definitions to align with those contained in the Term Loan Facility discussed below. Additionally, the Reliant Bank Revolver requires us to pay a quarterly fee of 0.50% per year on the average available revolving commitment. As of September 30, 2011, we had $7.5 million available under the Reliant Bank Revolver.

Promissory Notes

On November 2, 2010, Delek executed a promissory note in the principal amount of $50.0 million with Bank Leumi USA (“Leumi Note”). In connection with the closing of the Lion Acquisition, the Leumi Note was amended on April 29, 2011 to address the effect of the purchase on the security and financial covenants under the note. As of September 30, 2011, we had $46.0 million

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in outstanding borrowings under the Leumi Note. The Leumi Note replaced and terminated promissory notes with Bank Leumi USA in the original principal amounts of $30.0 million and $20.0 million and is secured by all of our shares in Lion Oil. The Leumi Note requires quarterly amortization payments of $2.0 million beginning on April 1, 2011 and matures on October 1, 2013. The Leumi Note bears interest at the greater of a fixed spread over three-month LIBOR or an interest rate floor of 5.0%. As of September 30, 2011, the weighted average borrowing rate was 5.0%.

On October 5, 2010, Delek entered into two promissory notes with Israel Discount Bank of New York (“IDB”) in the principal amounts of $30.0 million and $20.0 million (collectively the “IDB Notes”). In connection with the closing of the Lion Acquisition, the IDB Notes were amended and restated on April 29, 2011 to address the effect of the purchase on the security and financial covenants under the notes. As of September 30, 2011, we had $44.0 million in total outstanding borrowings under the IDB Notes. The IDB Notes replaced and terminated promissory notes with IDB in the original principal amounts of $30.0 million and $15.0 million and are secured by all of our shares in Lion Oil. The IDB Notes require quarterly amortization payments totaling $2.0 million, beginning at the end of the first quarter of 2011. The maturity date of both IDB Notes is December 31, 2013. Both IDB Notes bear interest at the greater of a fixed spread over various LIBOR tenors, as elected by the borrower, or an interest rate floor of 5.0%. As of September 30, 2011, the weighted average borrowing rate was 5.0% under both IDB Notes.

On September 28, 2010, Delek executed an amended and restated note in favor of Delek Petroleum Ltd, an Israeli corporation and an affiliate of the company ("Delek Petroleum") (“Petroleum Note”) in the principal amount of $44.0 million, replacing a note with Delek Petroleum in the original principal amount of $65.0 million. As of September 30, 2011, $44.0 million was outstanding under the Petroleum Note. The Petroleum Note contains the following provisions: (i) the payment of the principal and interest may be accelerated upon the occurrence and continuance of customary events of default under the note, (ii) Delek is responsible for the payment of any withholding taxes due on interest payments, (iii) the note is unsecured and contains no covenants, and (iv) the note may be repaid at the borrower’s election in whole or in part at any time without penalty or premium. The Petroleum Note was amended on April 28, 2011 to extend the maturity date from January 1, 2012 to January 1, 2013. The Petroleum Note bears interest, payable on a quarterly basis, at 8.25% (excluding any applicable withholding taxes) and Delek is responsible for the payment of any withholding taxes due on interest payments.

On April 25, 2011, Delek entered into a joint venture with Gatlin Partners, LLC (“Developer”), to form GDK Bear Paw, LLC (“Bear Paw”). Delek and Developer each own 50% of Bear Paw. On May 12, 2011, Bear Paw entered into a Note with Standard Insurance Company (the “Note”) for $1.9 million in order to build a MAPCO Mart convenience store. Bear Paw has entered into a lease with Express whereby Express will lease the property for a minimum of 20 years. The Note bears interest at 6.4% and is secured by the land, building and equipment of the completed MAPCO Mart. Under the terms of the Note, beginning on the first day of the tenth month following the initial fund advancement, Bear Paw shall make payments of principal on the Note over a ten year term at a 25 year amortization schedule. If the Note is not paid in full after the ten year period, Bear Paw may continue to make monthly payments under the Note, however the interest rate will reset pursuant to the terms of the Note. There is also an interest rate reset after the first twenty year period. The final maturity date of the Note is June 1, 2036. As of September 30, 2011, Bear Paw has drawn approximately $0.7 million under the Note.

On April 28, 2011, Delek executed a Subordinated Note with Delek Petroleum in the principal amount of $40.0 million (“Subordinated Note”). As of September 30, 2011, $40.0 million was outstanding under the Subordinated Note. The Subordinated Note matures on December 31, 2017 and is subordinated to the Term Loan Facility discussed below. Interest on the unpaid balance of the Subordinated Note will be computed at a rate per annum equal to 7.25% (net of withholding taxes) and Delek is responsible for the payment of any withholding taxes due on interest payments. The payment of the principal and interest on the Subordinated Note may be accelerated upon the occurrence and continuance of customary events of default. The Subordinated Note requires Delek to make quarterly interest payments commencing June 30, 2011 and annual principal amortization payments of $6.0 million commencing June 30, 2012, with payment of the latter subject to meeting certain payment conditions set forth in the subordination agreement in effect between Delek Petroleum and the Term Loan Facility creditors.

On April 29, 2011, Delek entered into a $50.0 million promissory note with Ergon, Inc. (“Ergon Note”) in connection with the closing of the Lion Acquisition. As of September 30, 2011, $50.0 million was outstanding under the Ergon Note. The Ergon Note requires Delek to make annual amortization payments of $10.0 million each commencing April 29, 2013. The Ergon Note matures on April 29, 2017. Interest under the Ergon Note is computed at a fixed rate equal to 4.0% per annum.

Term Loan Facility

On April 29, 2011, Delek entered into a $100.0 million term loan credit facility (“Term Loan Facility”) with Israeli Discount Bank of New York, Bank Hapoalim B.M. and Bank Leumi USA as the lenders. As of September 30, 2011, $97.0 million was outstanding under the Term Loan Facility. The Term Loan Facility requires Delek to make four quarterly amortization payments of $1.5 million each commencing June 30, 2011, followed by sixteen quarterly principal amortization payments of $4.0 million each. The Term Loan Facility matures on April 29, 2016, and is secured by all assets of Lion Oil (excluding inventory and accounts

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receivable) as well as all of our shares in Lion Oil. Interest on the unpaid balance of the Term Loan Facility will be computed at a rate per annum equal to the LIBOR Rate or the Reference Rate, at our election, plus the applicable margins, subject in each case to an interest rate floor of 5.5% per annum. As of September 30, 2011, the weighted average borrowing rate was 5.5%.

Interest-Rate Derivative Instruments

In 2011, Delek entered into interest rate swap agreements for a total notional amount of $160.0 million. These agreements are intended to economically hedge floating rate debt related to our current borrowings. However, as we have elected to not apply the permitted hedge accounting treatment, including formal hedge designation and documentation, in accordance with the provisions of ASC 815, Derivatives and Hedging (ASC 815), the fair value of the derivatives is recorded in other non-current liabilities in the accompanying consolidated balance sheets with the offset recognized in earnings. The derivative instruments mature in 2015. The estimated mark-to-market liability associated with our interest rate derivatives as of September 30, 2011 was $4.2 million.

In accordance with ASC 815, we recorded non-cash expense representing the change in estimated fair value of the interest rate swap agreements of $3.0 million and $4.2 million for the three and nine months ended September 30, 2011.

While Delek has not elected to apply permitted hedge accounting treatment for these interest rate derivatives in accordance with the provisions of ASC 815 in the past, we may choose to elect that treatment in future transactions.

7. Income Taxes

At September 30, 2011, Delek had unrecognized tax benefits of $0.7 million which, if recognized, would affect our effective tax rate. Delek recognizes accrued interest and penalties related to unrecognized tax benefits as an adjustment to the current provision for income taxes. Interest of a nominal amount was recognized related to unrecognized tax benefits during both the three and nine months ended September 30, 2011 and a nominal amount and $0.1 million, respectively, during the three and nine months ended September 30, 2010.

8. Shareholders’ Equity

Dividends Paid

On August 2, 2011, Delek announced that its Board of Directors voted to declare a quarterly cash dividend of $0.0375 per share, payable on September 21, 2011, to shareholders of record on August 24, 2011.

On May 3, 2011, Delek announced that its Board of Directors voted to declare a quarterly cash dividend of $0.0375 per share, payable on June 21, 2011, to shareholders of record on May 24, 2011.

On February 8, 2011, Delek announced that its Board of Directors voted to declare a quarterly cash dividend of $0.0375 per share, payable on March 22, 2011, to shareholders of record on March 1, 2011.

Comprehensive Income

For the three and nine months ended September 30, 2011, comprehensive income includes net income and changes in the fair value of derivative instruments designated as cash flow hedges. Comprehensive income for the three and nine months ended September 30, 2010 was equivalent to net income (in millions).



	Three Months Ended September 30,					Nine Months Ended September 30,
	2011		2010			2011		2010
Net income (loss) attributable to Delek	$	92.5	$	(9.9	)	$	164.3	$	(9.0	)
Other comprehensive income:
Net unrealized gain on derivative instruments, net of tax expense of $1.2 and $0.1 million for the three and nine months ended September 30, 2011, respectively	2.1		—			0.1		—
Comprehensive income (loss)	$	94.6	$	(9.9	)	$	164.4	$	(9.0	)

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9. Stock Based Compensation

Compensation Expense Related to Equity-based Awards

Compensation expense for the equity-based awards amounted to $0.7 million ($0.5 million, net of taxes) and $1.7 million ($1.1 million, net of taxes) for the three and nine months ended September 30, 2011, respectively, and $0.7 million ($0.5 million, net of taxes) and $2.6 million ($1.7 million, net of taxes) for the three and nine months ended September 30, 2010, respectively. These amounts are included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

As of September 30, 2011, there was $9.0 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 1.4 years.

During the nine months ended September 30, 2011 and 2010, respectively, we issued 315,908 and 695,534 shares of common stock as a result of exercised stock options, stock appreciation rights, share purchase rights and vested restricted stock units. These amounts are net of 11,024 and 680,584 shares, respectively, withheld to satisfy employee tax obligations related to the exercises and vestings.

10. Earnings Per Share

Basic and diluted earnings per share (“EPS”) are computed by dividing net income by the weighted average common shares outstanding. The common shares used to compute Delek’s basic and diluted earnings per share are as follows:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2011	2010	2011	2010
Weighted average common shares outstanding	57,973,790	54,385,007	56,122,544	54,220,553
Dilutive effect of equity instruments	606,014	—	352,092	—
Weighted average common shares outstanding, assuming dilution	58,579,804	54,385,007	56,474,636	54,220,553

Outstanding equity awards totaling 1,448,873 and 2,615,535 common share equivalents were excluded from the diluted earnings per share calculation for the three and nine months ended September 30, 2011, respectively. Outstanding equity awards totaling 3,743,935 and 3,800,185 common share equivalents were excluded from the diluted earnings per share calculation for the three and nine months ended September 30, 2010, respectively. These share equivalents did not have a dilutive effect under the treasury stock method.

11. Segment Data

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 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 and other purchased feedstocks for the manufacture of transportation motor fuels including various grades of gasoline, diesel fuel, 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 140,000 bpd, including the 60,000 bpd refinery located in Tyler, Texas and the 80,000 bpd refinery located in El Dorado, Arkansas.

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 September 30, 2011, we had 384 stores in total, consisting of 208 located in Tennessee, 87 in Alabama, 65 in Georgia, 11 in Arkansas and 8 in Virginia. The remaining 5 stores are located in Kentucky and Mississippi. The retail fuel and convenience stores operate under

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Delek’s MAPCO Express^®, MAPCO Mart^®, East Coast^®, Fast Food and Fuel^TM, Favorite Markets^®, Delta Express^® and Discount Food Mart^TM brands. The retail segment also supplied fuel to approximately 69 dealer locations as of September 30, 2011. In the retail segment, management reviews operating results on a divisional basis, where a division represents a specific geographic market. 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 based on the number of gallons sold at the Tyler refinery and a sharing of a portion of the margin achieved in return for providing marketing, sales and customer services. This intercompany transaction fee was $3.7 million and $9.1 million during the three and nine months ended September 30, 2011, respectively, and $2.6 million and $8.1 million during the three and nine months ended September 30, 2010, respectively. Additionally, the refining segment pays crude transportation and storage fees to the marketing segment for the utilization of certain crude pipeline assets. These fees were $2.6 million and $7.6 million during the three and nine months ended September 30, 2011, respectively, and $2.2 million and $7.1 million during the three and nine months ended September 30, 2010, respectively. During the three and nine months ended September 30, 2011, the refining segment sold finished product to the retail and marketing segments in the amount of $21.7 million and $37.5 million. During the three and nine months ended September 30, 2010, the refining segment sold $0.5 million and $11.7 million, respectively, in finished product to the marketing segment. All inter-segment transactions have been eliminated in consolidation.

The following is a summary of business segment operating performance as measured by contribution margin for the period indicated (in millions):



	Three Months Ended September 30, 2011
(In millions)	Refining		Retail		Marketing		Corporate, Other and Eliminations			Consolidated
Net sales (excluding intercompany fees and sales)	$	1,516.4	$	499.4	$	188.7	$	0.5		$	2,205.0
Intercompany fees and sales	18.0		—		6.3		(24.3		)	—
Operating costs and expenses:
Cost of goods sold	1,296.6		449.2		187.2		(21.5		)	1,911.5
Operating expenses	61.7		34.6		1.0		(2.5		)	94.8
Segment contribution margin	$	176.1	$	15.6	$	6.8	$	0.2		198.7
General and administrative expenses										18.8
Depreciation and amortization										20.0
Loss on sale of assets										0.6
Operating income										$	159.3
Total assets	$	1,476.7	$	405.1	$	72.9	$	59.5		$	2,014.2
Capital spending (excluding business combinations)	$	12.1	$	10.1	$	0.1	$	2.2		$	24.5

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	Three Months Ended September 30, 2010
(In millions)	Refining			Retail		Marketing		Corporate, Other and Eliminations			Consolidated
Net sales (excluding intercompany fees and sales)	$	357.2		$	402.7	$	115.1	$	0.5		$	875.5
Intercompany fees and sales	(2.1		)	—		4.8		(2.7		)	—
Operating costs and expenses:
Cost of goods sold	330.7			349.9		113.3		(0.2		)	793.7
Operating expenses	25.5			34.1		0.9		(2.3		)	58.2
Segment contribution margin	$	(1.1	)	$	18.7	$	5.7	$	0.3		23.6
General and administrative expenses											14.9
Depreciation and amortization											14.4
Loss on sale of assets											0.2
Operating loss											$	(5.9	)
Total assets	$	519.5		$	416.3	$	75.3	$	148.2		$	1,159.3
Capital spending (excluding business combinations)	$	12.8		$	2.9	$	—	$	—		$	15.7



	Nine Months Ended September 30, 2011
(In millions)	Refining		Retail		Marketing		Corporate, Other and Eliminations			Consolidated
Net sales (excluding intercompany fees and sales)	$	3,253.0	$	1,410.5	$	533.2	$	0.5		$	5,197.2
Intercompany fees and sales	28.4		—		16.7		(45.1		)	—
Operating costs and expenses:
Cost of goods sold	2,799.9		1,272.3		526.2		(39.8		)	4,558.6
Operating expenses	140.7		101.5		3.5		(7.5		)	238.2
Segment contribution margin	$	340.8	$	36.7	$	20.2	$	2.7		400.4
General and administrative expenses										61.9
Depreciation and amortization										53.3
Loss on sale of assets										2.6
Operating income										$	282.6
Capital spending (excluding business combinations)	$	21.1	$	26.3	$	0.1	$	2.6		$	50.1

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	Nine Months Ended September 30, 2010
(In millions)	Refining			Retail		Marketing		Corporate, Other and Eliminations			Consolidated
Net sales (excluding intercompany fees and sales)	$	1,216.9		$	1,194.1	$	354.5	$	0.6		$	2,766.1
Intercompany fees and sales	3.6			—		15.2		(18.8		)	—
Operating costs and expenses:
Cost of goods sold	1,123.4			1,048.4		349.5		(11.8		)	2,509.5
Operating expenses	73.8			101.5		2.0		(7.2		)	170.1
Insurance proceeds — business interruption	(12.8		)	—		—		—			(12.8		)
Property damage expenses	(4.0		)	—		—		—			(4.0		)
Segment contribution margin	$	40.1		$	44.2	$	18.2	$	0.8		103.3
General and administrative expenses											45.0
Depreciation and amortization											44.9
Loss on sale of assets											0.3
Operating income											$	13.1
Capital spending (excluding business combinations)	$	32.2		$	8.0	$	—	$	0.1		$	40.3

Property, plant and equipment, accumulated depreciation and depreciation expense by reporting segment as of and for the three and nine months ended September 30, 2011 are as follows (in millions):



	Refining			Marketing			Retail			Corporate, Other and Eliminations			Consolidated
Property, plant and equipment	$	786.2		$	35.6		$	395.7		$	6.5		$	1,224.0
Less: Accumulated depreciation	(104.3		)	(8.8		)	(132.7		)	(0.4		)	(246.2		)
Property, plant and equipment, net	$	681.9		$	26.8		$	263.0		$	6.1		$	977.8
Depreciation expense for the three months ended September 30, 2011	$	11.8		$	0.4		$	6.0		$	—		$	18.2
Depreciation expense for the nine months ended September 30, 2011	$	30.5		$	1.2		$	19.1		$	—		$	50.8

In accordance with ASC 360, Property, Plant & Equipment, Delek evaluates the realizability of property, plant and equipment as events occur that might indicate potential impairment.

12. Fair Value Measurements

The fair values of financial instruments are estimated based upon current market conditions and quoted market prices for the same or similar instruments. Management estimates that the carrying value approximates fair value for all of Delek’s assets and liabilities that fall under the scope of ASC 825, Financial Instruments (ASC 825).

Delek applies the provisions of ASC 820, Fair Value Measurements (ASC 820), which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. ASC 820 applies to our interest rate and commodity derivatives that are measured at fair value on a recurring basis. The standard also requires that we assess the impact of nonperformance risk on our derivatives. Nonperformance risk is not considered material at this time.

ASC 820 requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or 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.

OTC commodity swaps, physical commodity purchase and sale contracts and interest rate swaps are generally valued using

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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. Our contracts are valued using quotations provided by brokers based on exchange pricing and/or price index developers such as PLATTS or ARGUS. These are classified as Level 2.

The fair value hierarchy for our financial assets and liabilities accounted for at fair value on a recurring basis at September 30, 2011, was (in millions):



	As of September 30, 2011
	Level 1		Level 2			Level 3		Total
Assets
Commodity derivatives	$	—	$	3.0		$	—	$	3.0
Liabilities
Interest rate derivatives	—		(4.2		)	—		(4.2		)
Commodity derivatives	—		(2.7		)	—		(2.7		)
Total liabilities	—		(6.9		)	—		(6.9		)
Net liabilities	$	—	$	(3.9	)	$	—	$	(3.9	)

The derivative values above are based on analysis of each contract as the fundamental unit of account as required by ASC 820. Derivative assets and liabilities with the same counterparty are not netted where the legal right of offset exists. This differs from the presentation in the financial statements which reflects our policy under the guidance of ASC 815-10-45, wherein we have elected to offset the fair value amounts recognized for multiple derivative instruments executed with the same counterparty. As of September 30, 2011 and December 31, 2010, $1.4 million and $0.7 million, respectively, of net derivative positions are included in other current liabilities on the accompanying consolidated balance sheets. As of September 30, 2011, $2.5 million of cash collateral is held by counterparty brokerage firms and has been netted with the net derivative positions with each counterparty.

13. Derivative Instruments

From time to time, Delek enters into swaps, forwards, futures and option contracts for the following purposes:


•	To limit the exposure to price fluctuations for physical purchases and sales of crude oil and finished products in the normal course of business; and


•	To limit the exposure to floating-rate fluctuations on our borrowings.

We use derivatives to reduce normal operating and market risks with a primary objective in derivative instrument use being the reduction of the impact of market price volatility on our results of operations. The following discussion provides additional details regarding the types of derivative contracts held during the three and nine months ended September 30, 2011 and 2010.

Swaps

In April 2011, 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 2011 through October 2011. We also entered into a series of OTC swaps based on the future price of unleaded gasoline as quoted on the Gulf Coast PLATTS which fixed the sales price of unleaded gasoline for a predetermined number of gallons at future dates from July 2011 through October 2011.

In accordance with ASC 815, the WTI and unleaded gasoline 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 nine months ended September 30, 2011, Delek recorded unrealized gains as a component of other comprehensive income of $3.3 million ($2.1 million, net of deferred taxes) and $0.2 million ($0.1 million, net of deferred taxes), respectively, related to the change in the fair value of these swaps. The fair value of these contracts is recognized in income at the time the positions are closed and the hedged transactions are recognized in income. For both the three and nine months ended September 30, 2011, we recognized losses of $5.4 million related to positions closed during the period. As of September 30, 2011, Delek had total unrealized gains, net of deferred income taxes, in accumulated other comprehensive income of $0.1 million associated with its cash flow hedges.

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Also, in the second quarter 2011, 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 in July 2011. We recognized gains of $0.1 million and $2.3 million on these swaps during the three and nine months ended September 30, 2011, respectively, which are included as an adjustment to cost of goods sold in the accompanying condensed consolidated statements of operations. There were no gains or losses recognized related to these swap contracts during the three and nine months ended September 30, 2010. There were no unrealized gains or losses held on the condensed consolidated balance sheets as of September 30, 2011 or December 31, 2010.

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 (losses) gains of $(0.1) million and $0.4 million on forward fuel contracts during the three and nine months ended September 30, 2011, respectively, and $0.1 million and $(0.1) million during the three and nine months ended September 30, 2010, respectively, which are included as an adjustment to cost of goods sold in the accompanying condensed consolidated statements of operations. There were unrealized losses related to these forward fuel contracts of $0.1 million held on the condensed consolidated balance sheet as of September 30, 2011. There were no unrealized gains or losses held on the condensed consolidated balance sheet as of December 31, 2010.

Futures Contracts

From time to time, Delek enters 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 180 days. Delek recognized (losses) gains of $(1.0) million and $(5.3) million on futures contracts during the three and nine months ended September 30, 2011, respectively, and $0.8 million and $5.5 million during the three and nine months ended September 30, 2010, respectively, which are included as an adjustment to cost of goods sold in the accompanying condensed consolidated statements of operations. There were unrealized gains (losses) of $0.2 million and $(1.4) million held on the condensed consolidated balance sheets as of September 30, 2011 and December 31, 2010, respectively.

From time to time, Delek also enters into futures contracts with fuel supply vendors that secure supply of product to be purchased for use in the normal course of business at our refining and retail segments. These contracts are priced based on an index that is clearly and closely related to the product being purchased, contain no net settlement provisions and typically qualify under the normal purchase exemption from derivative accounting treatment under ASC 815.

Interest Rate Instruments

From time to time, Delek enters into interest rate swap and cap agreements that are intended to economically hedge a portion of our interest rate exposure under our floating rate debt. These interest rate derivative instruments are discussed in conjunction with our long term debt in Note 6.

14. Commitments and Contingencies

Litigation

In the ordinary conduct of our business, we are from time to time subject to lawsuits, investigations and claims, including environmental claims and employee-related matters. In addition, certain private parties who claim they were adversely affected by the November 2008 explosion and fire at our Tyler refinery have commenced litigation against us for which an estimate of the possible loss or range of loss cannot be made.

Lion Oil is party to a lawsuit involving a claim brought by a crude oil vendor. This lawsuit was filed prior to the Lion Acquisition and alleges that Lion Oil breached certain of its obligations under buy/sell agreements to exchange crude oil. The aggregate potential loss in this lawsuit ranges from zero to approximately $14.0 million, plus interest and legal fees. An amount was accrued related to this lawsuit as part of the Lion Acquisition, as discussed in Note 3.

Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, including civil penalties or other enforcement actions, we do not believe that any currently pending legal proceeding or proceedings to which we are a party will have a material adverse effect on our business, financial condition or results of operations.

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Self-insurance

Delek is self-insured for employee medical claims up to $0.2 million per employee 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 and safety laws enforced by agencies including the EPA, the U.S. Department of Transportation / Pipeline and Hazardous Materials Safety Administration, OSHA, the Texas Commission on Environmental Quality (“TCEQ”), the Texas Railroad Commission, the Arkansas Department of Environmental Quality and the Tennessee Department of Environment and Conservation as well as other state and federal agencies. Numerous permits or other authorizations are required under these laws for the operation of our refineries, terminals, pipelines, underground storage tanks and related operations, and may be subject to revocation, modification and renewal.

These laws and permits raise potential exposure to future claims and lawsuits involving environmental and safety matters which could include soil and water contamination, air pollution, personal injury and property damage allegedly caused by substances which we manufactured, handled, used, released or disposed, or that relate to pre-existing conditions for which we have assumed responsibility. We believe that our current operations are in substantial compliance with existing environmental and safety requirements. However, there have been and will continue to be ongoing discussions about environmental and safety matters between us and federal and state authorities, including notices of violations, citations and other enforcement actions, some of which have resulted or may result in changes to operating procedures and in capital expenditures. While it is often difficult to quantify future environmental or safety related expenditures, Delek anticipates that continuing capital investments and changes in operating procedures will be required for the foreseeable future to comply with existing and new requirements as well as evolving interpretations and more strict enforcement of existing laws and regulations.

The Comprehensive Environmental Response, Compensation and Liability Act, 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. Analogous state laws impose similar responsibilities and liabilities on responsible parties. In the course of our ordinary operations, our various businesses generate waste, 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 future cleanup under Superfund. At this time, our El Dorado refinery has been named as a minor Potentially Responsible Party at one site for which we believe future costs will not be material.

We have recorded a liability of approximately $13.3 million as of September 30, 2011 primarily related to the probable estimated costs of remediating or otherwise addressing certain environmental issues of a non-capital nature at the Tyler and El Dorado refineries. This liability includes estimated costs for on-going investigation and remediation efforts for known contamination of soil and groundwater which were already being performed by the former owner of the Tyler refinery and the former operators of the El Dorado refinery, as well as estimated costs for additional issues which have been identified subsequent to the purchase. We expect approximately $1.5 million of this amount to be reimbursable by a prior owner of the El Dorado refinery and have recorded $0.2 million in other current assets and $1.3 million in other non-current assets and in our condensed consolidated balance sheet as of September 30, 2011. Approximately $3.1 million of the liability is expected to be expended over the next 12 months with most of the balance expended by 2022. In the future we could be required to undertake additional investigations of our refineries, pipelines and terminal facilities or convenience stores, which could result in additional remediation liabilities.

Both of our refineries have negotiated consent decrees with the United States Environmental Protection Agency (“EPA”) and the United States Department of Justice regarding certain Clean Air Act requirements. The State of Arkansas is also a party to the El Dorado refinery consent decree. The El Dorado refinery consent decree was effective on June 12, 2003 and the Tyler refinery consent decree became effective on September 23, 2009. Neither consent decree alleges any violations by Delek subsequent to our purchase of the refineries and the prior owners/operators were responsible for payment of the assessed penalties. All capital projects required by the consent decrees have been completed, however, the consent decrees require certain on-going operational changes. Although the consent decrees will remain in force for several years, we believe any costs resulting from these changes and compliance with the consent decrees will not have a material adverse effect upon our business, financial condition or operations.

In October 2007, the TCEQ approved an Agreed Order that resolved alleged violations of certain air rules that had continued after the Tyler refinery was acquired. The Agreed Order required the Tyler refinery to pay a penalty and fund a Supplemental

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Environmental Project for which we had previously reserved adequate amounts. In addition, the Tyler refinery was required to implement certain corrective measures, which the company completed as specified in Agreed Order Docket No. 2006-1433-AIR-E, with one exception that was completed in 2010.

In 2008, the El Dorado refinery signed a Consent Administrative Order (“CAO”) with the State of Arkansas with regard to wastewater discharges. In conjunction with three other area dischargers, including the city of El Dorado Water Utilities, the El Dorado refinery applied for and was granted a NPDES permit for a combined discharge to the Ouachita River. The permit was contested by several environmental groups and other parties but ultimately upheld by the State of Arkansas Supreme Court in late 2010. The El Dorado refinery is party to an agreement with the other three dischargers to design, construct and jointly operate a 23 mile wastewater pipeline to convey the treated, commingled waste water to the Ouachita River. The U.S. Army Corps of Engineers has issued the required wetlands permits for construction of the pipeline and outfall structure although environmental groups have threatened to file suit in an attempt to block the permits. Acquisition of the rights-of-way is underway to be followed by detail design and construction. We expect the pipeline to be completed in late 2012. The U.S. EPA was not a party to the CAO and may issue the El Dorado refinery an Administrative Complaint with regard to wastewater discharge violations that are addressed by the new NPDES permit and pipeline. Any penalty potentially assessed is not expected to be material.

The EPA issued final rules for gasoline formulation that required the reduction of average benzene content by January 1, 2011 and will require the reduction of maximum annual average benzene content by July 1, 2012. We completed a project at the Tyler refinery in the fourth quarter 2010 to reduce gasoline benzene levels. A similar project was completed at the El Dorado refinery in June 2011. However, it will be necessary for us to purchase credits to fully comply with these content requirements for the Tyler refinery and there can be no assurance that such credits will be available or that we will be able to purchase available credits at reasonable prices. Additional benzene reduction projects may be implemented to reduce or eliminate our need to purchase benzene credits depending on the availability and cost of credits.

Various legislative and regulatory measures to address climate change and greenhouse gas (“GHG”) emissions (including carbon dioxide, methane and nitrous oxides) are in various phases of discussion or implementation. They include proposed and newly enacted federal regulation and state actions to develop statewide, regional or nationwide programs designed to control and reduce GHG emissions from fixed sources, such as our refineries, as well as mobile transportation sources. There are currently no state or regional initiatives for controlling GHG emissions that would affect our Tyler or El Dorado refineries. Although it is not possible to predict the requirements of any GHG legislation that may be enacted, any laws or regulations that have been or may be adopted to restrict or reduce GHG emissions will likely require us to incur increased operating and capital costs. If we are unable to maintain sales of our refined products at a price that reflects such increased costs, there could be a material adverse effect on our business, financial condition and results of operations. Further, any increase in prices of refined products resulting from such increased costs could have an adverse effect on our financial condition, results of operations and cash flows.

Beginning with the 2010 calendar year, EPA rules require us to report GHG emissions from our refinery operations and consumer use of fuel products produced at our refineries on an annual basis. While the cost of compliance with the reporting rule is not material, data gathered under the rule may be used in the future to support additional regulation of GHG. Effective January 2, 2011, the EPA began regulating GHG emissions from refineries and other major sources through the Prevention of Significant Deterioration and Federal Operating Permit (Title V) programs. While these rules do not impose any limits or controls on GHG emissions from current operations, emission increases from future projects or operational changes, such as capacity increases, may be impacted and required to meet emission limits or technological requirements such as Best Available Control Technologies.

EPA has announced its intent to further regulate of refinery air emissions, including GHG emissions, through New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants to be proposed in late 2011.

In 2010, the EPA and the Department of Transportation’s National Highway Traffic Safety Administration finalized new standards raising the required Corporate Average Fuel Economy (“CAFE”) of the nation’s passenger fleet by 40% to approximately 35 mpg by 2016 and imposing the first-ever federal GHG emissions standards on cars and light trucks. Later in the year, EPA and the Department of Transportation also announced their intention to propose first-time standards for fuel economy of medium and heavy duty trucks in 2011, as well as further increases in the CAFE standard for passenger vehicles after 2016. Such increases in fuel economy standards and potential electrification of the vehicle fleet, along with mandated increases in use of renewable fuels discussed below, could result in decreasing demand for petroleum fuels. Decreasing demand for petroleum fuels could materially affect profitability at our refineries, as well as at our convenience stores.

The Tyler and El Dorado refineries were classified as small refineries exempt from renewable fuel standards through 2010. The Energy Independence and Security Act of 2007 (“EISA”) increased the amounts of renewable fuel required by the Energy Policy Act of 2005 to 32 billion gallons by 2022. A rule finalized by EPA in 2010 to implement EISA (“RFS 2”) requires that refiners blend increasing amounts of biofuels with refined products, equal to approximately 7.75% of combined gasoline and diesel volume in 2011 and escalating to approximately 18% in 2022. Alternatively, credits, called Renewable Identification Numbers

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(“RINs”) can be used instead of physically blending biofuels. If adequate supplies of the required types of biofuels are unavailable in volumes sufficient to meet our requirement or if RINs are not available in sufficient volumes or at economical prices, refinery production or profitability could be negatively affected. The rule could also cause decreased crude runs in future years and materially affect profitability unless fuel demand rises at a comparable rate or other outlets are found for the displaced products. Although temporarily exempt from these rules, the Tyler refinery began supplying a 90% gasoline-10% ethanol blend (“E-10”) in January 2008 and we are implementing additional projects that will allow us to blend increasing amounts of ethanol and biodiesel into our fuels beginning in 2011. The Tyler refinery began producing a 2% biodiesel blend in June. The El Dorado refinery completed a project at the truck loading rack in June 2011 to make E-10 available.

In June 2007, OSHA announced that, under a National Emphasis Program (“NEP I”) addressing workplace hazards at petroleum refineries, it would conduct inspections of process safety management programs at approximately 80 refineries nationwide. OSHA conducted an NEP I inspection at our Tyler, Texas refinery between February and August of 2008 and issued citations assessing an aggregate penalty of less than $0.1 million. We are contesting the NEP I citations. In April 2009, OSHA conducted a NEP I inspection at the El Dorado refinery and assessed a penalty of less than $0.1 million, paid by the previous operator.

Between November 2008 and May 2009, OSHA conducted another inspection at our Tyler refinery as a result of the explosion and fire that occurred there and issued citations assessing an aggregate penalty of approximately $0.2 million. We are also contesting these citations and do not believe that the outcome of any pending OSHA citations (whether alone or in the aggregate) will have a material adverse effect on our business, financial condition or results of operations.

In addition to OSHA, the Chemical Safety Board and the EPA requested information pertaining to the November 2008 incident at the Tyler refinery. The EPA is currently conducting an investigation under Section 114 of the Clean Air Act pertaining to our compliance with the chemical accident prevention standards of the Clean Air Act.

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 that 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 September 30, 2011, Delek had in place letters of credit totaling approximately $218.8 million with various financial institutions securing obligations with respect to its workers’ compensation and general liability self-insurance programs, crude oil purchases for the refining segment, gasoline and diesel purchases for the marketing segment and fuel for our retail fuel and convenience stores. No amounts were outstanding under these letters of credit at September 30, 2011.

15. Related Party Transactions

At September 30, 2011, Delek Group beneficially owned approximately 68.5% of our outstanding common stock. As a result, Delek Group and its controlling shareholder, Mr. Itshak 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 September 28, 2010, Delek executed the Petroleum Note in the principal amount of $44.0 million, replacing a note with Delek Petroleum in the original principal amount of $65.0 million. Delek Petroleum is a wholly owned subsidiary of Delek Group. As of September 30, 2011, $44.0 million was outstanding under the Petroleum Note. The Petroleum Note was amended in April 2011 to extend the maturity date from January 1, 2012 to January 1, 2013. We are responsible for the payment of any withholding taxes due on interest payments under the Petroleum Note and the payment of principal and interest may be accelerated upon the occurrence and continuance of customary events of default.

On April 28, 2011, Delek executed a Subordinated Note with Delek Petroleum in the principal amount of $40.0 million. As of September 30, 2011, $40.0 million was outstanding under the Subordinated Note. The Subordinated Note matures on December 31, 2017 and is subordinated to the Term Loan Facility. We are responsible for the payment of any withholding taxes due on interest payments under the Subordinated Note and the payment of principal and interest may be accelerated upon the occurrence and continuance of customary events of default.

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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 continues 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. An amended and restated management and consulting agreement dated May 1, 2011 was executed with Delek Group in the second quarter 2011. Under the amended agreement, the fee payable to Delek Group increased to $150 thousand per calendar quarter effective April 1, 2011.

16. Subsequent Events

Dividend Declaration

On November 1, 2011, our Board of Directors voted to declare a quarterly cash dividend of $0.0375 per share as well as a special dividend of $0.18 per share, both payable on December 20, 2011 to shareholders of record on November 22, 2011.

Acquisition of Remaining Interests in Lion Oil

On October 7, 2011, we acquired the remaining 11.7% minority equity interests in Lion Oil held by a consortium of private investors for approximately $13.0 million, funded through existing cash on hand. Upon closing of the transaction, we increased our total equity ownership in Lion Oil from 88.3% to 100%.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is management’s 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 with the SEC on March 11, 2011. 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” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements 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 management’s 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 management’s 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, individually or in the aggregate, could cause such differences include, but are not limited to:


•	reliability of our operating assets;


•	competition;


•	changes in, or the failure to comply with, the extensive government regulations applicable to our industry segments;


•	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;


•	our ability to execute our strategy of growth through acquisitions and transactional risks in acquisitions;


•	diminishment of value in long-lived assets may result in an impairment in the carrying value of the asset on our balance sheet and a resultant loss recognized in the statement of operations;


•	general economic and business conditions, particularly levels of spending relating to travel and tourism or conditions affecting the southeastern United States;


•	dependence on one wholesaler for a significant portion of our convenience store merchandise;


•	unanticipated increases in cost or scope of, or significant delays in the completion of, our capital improvement 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;


•	compliance, or failure to comply, with restrictive and financial covenants in our various debt agreements;


•	the inability of our subsidiaries to freely make dividends to us;


•	seasonality;

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•	acts of terrorism aimed at either our facilities or other facilities that could impair our ability to produce or transport refined products or receive feedstocks;


•	changes in the cost or availability of transportation for feedstocks and refined products;


•	volatility of derivative instruments;


•	potential conflicts of interest between our major stockholder and other stockholders; and


•	other factors discussed under the heading “Management’s Discussion and Analysis” and “Risk Factors” 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 an integrated downstream energy business focused on petroleum refining, the wholesale distribution of refined products and convenience store retailing. Our business consists of three operating segments: refining, marketing and retail. Our refining segment operates independent refineries in Tyler, Texas and El Dorado, Arkansas with a combined design crude distillation capacity of 140,000 barrels per day (“bpd”), along with product distribution terminals and associated logistics assets. Our marketing segment sells refined products on a wholesale basis in west Texas through company-owned and third-party operated terminals and owns and/or operates crude oil pipelines and associated tank farms in east Texas. Our retail segment markets gasoline, diesel, other refined petroleum products and convenience merchandise through a network of approximately 380 company-operated retail fuel and convenience stores located in Alabama, Arkansas, Georgia, Kentucky, Mississippi, Tennessee and Virginia.

Our profitability in the refinery segment is substantially determined by the spread between the price of refined products and the price of crude oil, referred to as the “refined product margin.” 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 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 the cost of crude, our primary feedstock, operating costs, particularly the cost of natural gas used for fuel and the cost of electricity, seasonal factors, utilization rates and planned or unplanned maintenance activities or turnarounds. Moreover, while the increases in the cost of crude oil are typically reflected in the prices of light refined products, the value of heavier products, such as asphalt, coke, carbon black oil, and liquefied petroleum gas (“LPG”) are less likely to move in parallel with crude cost. This causes additional pressure on our realized margin.

For our Tyler, Texas refinery, we compare our per barrel refined product margin to a well established industry metric, the U.S. Gulf Coast 5-3-2 crack spread (“Gulf Coast crack spread”). The Gulf Coast crack spread is used as a benchmark for measuring a refinery’s product margins by measuring the difference between the price of light products and crude oil. It represents the approximate gross margin resulting from processing one barrel of crude oil into three fifths of a barrel of gasoline and two fifths of a barrel of high sulfur diesel. We calculate the Gulf Coast crack spread using the market value of U.S. Gulf Coast Pipeline 87 Octane Conventional Gasoline and U.S. Gulf Coast Pipeline No. 2 Heating Oil (high sulfur diesel) and the first month futures price of light sweet crude oil on the NYMEX. U.S. Gulf Coast Pipeline 87 Octane Conventional Gasoline is a grade of gasoline commonly marketed as Regular Unleaded at retail locations. U.S. Gulf Coast Pipeline No. 2 Heating Oil is a petroleum distillate that can be used as either a diesel fuel or a fuel oil. This is the standard by which other distillate products (such as ultra low sulfur diesel) are priced. The NYMEX is the commodities trading exchange located in New York City where contracts for the future delivery of petroleum products are bought and sold.

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As of the date of this Form 10-Q, we have not yet had sufficient historical operating data to identify a reasonable refined product margin benchmark that would accurately portray the historical refined product margins at the El Dorado, Arkansas refinery. We anticipate that the quantities and varieties of crude oil processed and products manufactured at the El Dorado refinery may vary, when compared to those crudes processed and products produced under the prior owner. As a result, past results may not be reflective of future performance.

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.

Recent Developments

Crude Supply Update. During the third quarter 2011, we secured approximately 10,000 bpd of West Texas Sour ("WTS") at our El Dorado refinery which, in combination with the approximately 15,000 bpd of local Arkansas crudes we collect through our crude gathering system, represented our total West Texas Intermediate ("WTI")-linked crude slate at El Dorado. A favorable margin environment is an incentive for us to optimize production at our refineries. However, running at higher rates requires that we secure additional volumes of crude oil for processing. While we were able to secure additional volumes of WTI during the third quarter 2011 beyond what we typically nominate, the delivered cost of these barrels was significantly higher, as crude suppliers were able to charge more for highly sought after WTI barrels. This higher cost of crude at the Tyler refinery is reflected in our lower realized margin at Tyler during the third quarter 2011. Overall, approximately half of the barrels we run in our 140,000 bpd refining system lay in at a price that is in parity with WTI.

Acquisition of Remaining Interests in Lion Oil. In October 2011, we acquired the remaining equity interests in Lion Oil. By assuming sole ownership of Lion Oil, we have increased flexibility with which to pursue a wider range of strategic initiatives capable of unlocking value for our shareholders, specifically as it relates to the growth and development of our marketing and logistics business.

Capital Projects Update. Our integration of Lion's operations is proceeding as planned. We have identified a series of potential capital projects at the El Dorado and Tyler refineries that require modest capital investment, can be completed in a year or less and have the potential to generate significant incremental contribution margin over a relatively short period of time.

At the El Dorado refinery, our Light Straight Run/Sat Gas Expansion project will enable us to increase our liquid recovery by 1.0%-1.5% (as a percentage of crude charge). By recovering propane and butane that would otherwise be burned in the fuel system at El Dorado, we anticipate that El Dorado will be able to generate additional contribution margin. The estimated cost of this capital project is $16.0 million and consists primarily of upgrading certain equipment and installing a sulfur treatment system. Some capital cost will be allocated to our 2011 forecast, though the bulk of spending will occur in 2012.

A second project we are currently evaluating is the Vacuum Towers Bottoms ("VTB") project, which primarily consists of installing a new feed tank at the Tyler refinery. By transporting asphalt from our El Dorado refinery for processing in our 6,500 bpd coker at the Tyler refinery just 200 miles away, we are able to transform a lower value heavy product into a higher value light product at Tyler. This is an especially attractive option during the winter season, a time of year when asphalt prices typically experience a seasonal low, when compared to summer and fall months. We are currently running approximately 1,000 barrels per day of El Dorado asphalt through the coker at Tyler; the VTB project would allow us to increase the amount of asphalt processed at Tyler's coker from the current 1,000 bpd to approximately 2,000 bpd. The estimated capital investment is $5.0 million, most of which will fall into our 2012 capital forecast. We anticipate incremental contribution margin by converting asphalt to light product.

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Executive Overview

Consolidated operating income (loss) for the third quarter 2011 was $159.3 million, compared to $(5.9) million in the same period last year. The increase in operating income was primarily attributable to a combination of elevated Gulf Coast refining margins, access to discounted crude oil, including WTI and WTI-linked crude oils, and strong regional demand for light products in markets served by our Tyler refinery. The benchmark 5-3-2 Gulf Coast crack spread increased from $7.45 per barrel in the third quarter 2010 to $30.80 per barrel in the third quarter 2011.

The third quarter 2011 results benefited from a strong performance in our refining segment, led by the Tyler refinery, which more than offset a decline in the contribution margin from the retail segment, when compared to the third quarter 2010.

Refining segment contribution margin increased to $176.1 million in the third quarter 2011, versus $(1.1) million in the third quarter 2010. The Tyler refinery produced approximately 95.7% light products in the third quarter 2011 and 95.9% in the third quarter 2010. The Tyler refinery operating margin, excluding intercompany fees paid to the marketing segment, was $24.14 per barrel sold in the third quarter 2011, compared to $6.30 per barrel sold in the third quarter 2010. This margin represented 78.4% and 84.6% of the average Gulf Coast crack spread in the third quarter 2011 and 2010, respectively.

In the third quarter 2011, the El Dorado refinery operated at an average utilization rate of 99.7% and El Dorado’s product slate was comprised of 74.4% light products, 21.2% asphalt and 4.4% other residual products. The El Dorado refinery margin was $14.33 per barrel sold during the third quarter 2011.

Retail segment contribution margin declined to $15.6 million in the third quarter 2011, versus $18.7 million in the third quarter 2010. Retail fuel margin was $0.188 per gallon in the third quarter 2011, versus $0.196 in the prior-year period. Merchandise margin declined to 29.0% in the third quarter 2011, versus 30.1% in the prior-year period, due in part to lower margins in the cigarette category and ongoing promotional activities. Same-store retail fuel gallons sold increased 3.2% in the third quarter 2011. Same-store merchandise sales increased 2.4% in the third quarter 2011. At the conclusion of the third quarter 2011, the retail segment operated 384 locations, versus 420 locations in the prior-year period.

Marketing segment contribution margin increased to $6.8 million in the third quarter 2011, versus $5.7 million in the third quarter 2010. Total sales volumes increased 14.3% to 16,139 bpd in the third quarter 2011, versus the prior-year period. Total sales volumes increased on a year-over-year basis for the seventh consecutive quarter during the third quarter 2011, as regional demand trends for distillate products remained strong in the period.

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. Historically, our profitability has been affected by the volatility of commodity prices, including crude oil and refined products.

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 volatility in the price of crude oil which outpaced product prices in the third quarters of 2011 and 2010. The average price of WTI in the first nine months of 2011 and 2010 was $95.45 and $77.60 per barrel, respectively. The U.S. Gulf Coast crack spread ranged from a high of $36.64 per barrel to a low of $10.40 per barrel during the first nine months of 2011 and averaged $23.87 per barrel during the first nine months of 2011 compared to an average of $7.87 in the same period of 2010.

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 $2.31 per gallon to a high of $3.40 per gallon in the first nine months of 2011 and averaged $2.80 per gallon during the first nine months of 2011, which compares to an average of $2.04 per gallon in the comparable period of 2010. 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 sales and margins. Finally, the higher cost of fuel has resulted in higher credit card fees as a percentage of sales and gross profit. As fuel prices increase, we typically 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 differential between the price of WTI crude oil and competing benchmark crudes such as Brent crude, continued to widen during the first nine months of 2011, when compared to recent historical levels. The price of WTI held an average discount of almost $23 per barrel when compared to Brent crude during the third quarter 2011, versus a discount of $1 per barrel in the comparable period of 2010. Access to cost advantaged WTI or WTI-linked crude is a significant cost advantage for our Tyler

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refinery and, to a lesser extent our El Dorado refinery, given the steep discounts evident in current WTI-Brent pricing.

As part of our overall business strategy, management determines the cost to store crude, the pricing of products and whether we should maintain, increase or decrease inventory levels of crude or other intermediate feedstocks based on various factors, including the crude pricing market in the Gulf Coast region, the refined products market in the same region, the relationship between these two markets, our ability to obtain credit with crude vendors, and any other factors which may impact the costs of crude. During the first nine months of 2011, crude inventory that had increased at the end of 2010 due to unplanned maintenance at the Tyler refinery was reduced to normal operational levels.

Summary Financial and Other Information

The following table provides summary financial data for Delek.



	Three Months Ended						Nine Months Ended
Statement of Operations Data	September 30,						September 30,
	2011			2010			2011			2010
	(In millions, except share and per share data)
Net sales:
Refining	$	1,534.4		$	355.1		$	3,281.4		$	1,220.5
Marketing	195.0			119.9			549.9			369.7
Retail	499.4			402.7			1,410.5			1,194.1
Other	(23.8		)	(2.2		)	(44.6		)	(18.2		)
Total	2,205.0			875.5			5,197.2			2,766.1
Operating costs and expenses:
Cost of goods sold	1,911.5			793.7			4,558.6			2,509.5
Operating expenses	94.8			58.2			238.2			170.1
Insurance proceeds — business interruption	—			—			—			(12.8		)
Property damage proceeds, net	—			—			—			(4.0		)
General and administrative expenses	18.8			14.9			61.9			45.0
Depreciation and amortization	20.0			14.4			53.3			44.9
Loss on sale of assets	0.6			0.2			2.6			0.3
Total operating costs and expenses	2,045.7			881.4			4,914.6			2,753.0
Operating income (loss)	159.3			(5.9		)	282.6			13.1
Interest expense	16.4			8.1			38.7			25.6
Gain on investment in Lion Oil	(3.7		)	—			(12.9		)	—
Total non-operating expenses	12.7			8.1			25.8			25.6
Income before taxes	146.6			(14.0		)	256.8			(12.5		)
Income tax expense (benefit)	50.1			(4.1		)	87.4			(3.5		)
Net income (loss)	96.5			(9.9		)	169.4			(9.0		)
Net income attributed to non-controlling interest	4.0			—			5.1			—
Net income (loss) attributable to Delek	$	92.5		$	(9.9	)	$	164.3		$	(9.0	)
Basic earnings (loss) per share:	$	1.60		$	(0.18	)	$	2.93		$	(0.17	)
Diluted earnings (loss) per share:	$	1.58		$	(0.18	)	$	2.91		$	(0.17	)
Weighted average common shares outstanding:
Basic	57,973,790			54,385,007			56,122,544			54,220,553
Diluted	58,579,804			54,385,007			56,474,636			54,220,553

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	Nine Months Ended September 30,
	2011			2010
Cash Flow Data:
Cash flows provided by operating activities	$	24.5		$	40.0
Cash flows used in investing activities	(126.9		)	(30.1		)
Cash flows provided by (used in) financing activities	272.0			(60.8		)
Net increase (decrease) in cash and cash equivalents	$	169.6		$	(50.9	)



	Three Months Ended September 30, 2011
(In millions)	Refining		Retail		Marketing		Corporate, Other and Eliminations			Consolidated
Net sales (excluding intercompany fees and sales)	$	1,516.4	$	499.4	$	188.7	$	0.5		$	2,205.0
Intercompany fees and sales	18.0		—		6.3		(24.3		)	—
Operating costs and expenses:
Cost of goods sold	1,296.6		449.2		187.2		(21.5		)	1,911.5
Operating expenses	61.7		34.6		1.0		(2.5		)	94.8
Segment contribution margin	$	176.1	$	15.6	$	6.8	$	0.2		198.7
General and administrative expenses										18.8
Depreciation and amortization										20.0
Loss on sale of assets										0.6
Operating income										$	159.3
Total assets	$	1,476.7	$	405.1	$	72.9	$	59.5		$	2,014.2
Capital spending (excluding business combinations)	$	12.1	$	10.1	$	0.1	$	2.2		$	24.5



	Three Months Ended September 30, 2010
(In millions)	Refining			Retail		Marketing		Corporate, Other and Eliminations			Consolidated
Net sales (excluding intercompany fees and sales)	$	357.2		$	402.7	$	115.1	$	0.5		$	875.5
Intercompany fees and sales	(2.1		)	—		4.8		(2.7		)	—
Operating costs and expenses:
Cost of goods sold	330.7			349.9		113.3		(0.2		)	793.7
Operating expenses	25.5			34.1		0.9		(2.3		)	58.2
Segment contribution margin	$	(1.1	)	$	18.7	$	5.7	$	0.3		23.6
General and administrative expenses											14.9
Depreciation and amortization											14.4
Loss on sale of assets											0.2
Operating loss											$	(5.9	)
Total assets	$	519.5		$	416.3	$	75.3	$	148.2		$	1,159.3
Capital spending (excluding business combinations)	$	12.8		$	2.9	$	—	$	—		$	15.7

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	Nine Months Ended September 30, 2011
(In millions)	Refining		Retail		Marketing		Corporate, Other and Eliminations			Consolidated
Net sales (excluding intercompany fees and sales)	$	3,253.0	$	1,410.5	$	533.2	$	0.5		$	5,197.2
Intercompany fees and sales	28.4		—		16.7		(45.1		)	—
Operating costs and expenses:
Cost of goods sold	2,799.9		1,272.3