UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the Fiscal Year Ended December 31, 2012 | ||||
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to | ||
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Common Stock, $.01 par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 (Section 232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 232.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments of this Form 10-K. 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):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the common stock held by non-affiliates as of June 30, 2012 was approximately $312,226,915, based upon the closing sale price of the registrant's common stock on the New York Stock Exchange on that date. For purposes of this calculation only, all directors, officers subject to Section 16(b) of the Securities Exchange Act of 1934, and 10% stockholders are deemed to be affiliates.
At March 1, 2013, there were 59,713,836 shares of the registrant's common stock, $.01 par value, outstanding.
Documents incorporated by reference
Portions of the registrant's definitive Proxy Statement to be delivered to stockholders in connection with the 2013 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2012, are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
PART I | ||
PART II | ||
PART III | ||
PART IV | ||
Signatures | ||
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Unless otherwise indicated or the context requires otherwise, the terms "Delek," "we," "our," "Company" and "us" are used in this report to refer to Delek US Holdings, Inc. and its consolidated subsidiaries. See also "Glossary of Terms" included in Item 1, Business, of this Annual Report on Form 10-K for definitions of certain business and industry terms used herein.
Statements in this Annual Report on Form 10-K, other than purely historical information, including statements regarding our plans, strategies, objectives, beliefs, expectations and intentions are forward looking statements. These forward-looking statements generally are identified by the words "may," "will," "should," "could," "would," "predicts," "intends," "believes," "expects," "plans," "scheduled," "goal," "anticipates," "estimates" and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, including those discussed below and in Item 1A, Risk Factors, which may cause actual results to differ materially from the forward-looking statements. See also "Forward-Looking Statements" included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
Company Overview
We are an integrated energy business focused on petroleum refining, the transportation and wholesale distribution of crude oil and refined products and convenience store retailing. Delek US Holdings, Inc. ("Holdings"), a Delaware corporation formed in 2001, is the sole shareholder or owner of membership or partnership interests of Delek Refining, Inc. ("Refining"), Delek Finance, Inc. ("Finance"), Delek Marketing & Supply, LLC ("Marketing"), Lion Oil Company ("Lion Oil"), Delek Renewables, LLC, Delek Rail Logistics, LLC, Delek Logistics, GP, LLC, Delek Logistics Services Company, MAPCO Express, Inc. ("Express"), MAPCO Fleet, Inc., NTI Investments, LLC and GDK Bearpaw, LLC. In addition, As of December 31, 2012, own a 60.4% limited partner interest and a 2.0% general partner interest in Delek Logistics Partners, LP ("Delek Logistics"), a master limited partnership that we formed in April 2012. This interest includes 2,799,258 common units, 11,999,258 subordinated units and 489,766 general partner units. Our business consists of three operating segments: refining, logistics and retail.
Our refining segment operates independent refineries in Tyler, Texas (the "Tyler refinery") and El Dorado, Arkansas (the "El Dorado refinery") with a combined design crude distillation capacity of 140,000 bpd. The Tyler refinery sells the majority of its production over the refinery truck rack to supply the local market in the East Texas area. The El Dorado refinery sells a portion of its production at the refinery truck rack though the majority of the refinery's production is shipped into Enterprise Pipeline System to supply a combination of pipeline bulk sales and wholesale rack sales at terminal locations along the pipeline, including Shreveport, LA, North Little Rock, AR, Memphis, TN, and Cape Girardeau, MO. The majority of the crude oil we purchased in 2012 was sourced from inland domestic sources originating primarily from areas of Texas and Arkansas. In 2012, we also began receiving crude oil delivered by rail car to the El Dorado refinery that originates primarily from other parts of the United States. Moving forward, we currently anticipate receiving increasing amounts of Midland, Texas sourced crude oil at both refineries. We believe our ability to access these cost-advantaged feedstocks provides a competitive advantage compared to refineries that purchase more expensive U.S. Gulf Coast and foreign crude oils.
Our logistics segment gathers, transports and stores crude oil and markets, distributes, transports and stores refined products in select regions of the southeastern United States and west Texas for both our refining segment and third parties. The logistics segment owns approximately 400 miles of crude oil transportation pipelines, 123 miles of refined product pipelines, an approximately 600-mile crude oil gathering system and associated crude oil storage tanks with an aggregate of approximately 2.6 million barrels of active shell capacity. Our logistics segment owns and operates five terminals and markets light products using third-party terminals.
Our retail segment markets gasoline, diesel, other refined petroleum products and convenience merchandise through a network of approximately 373 company-operated retail fuel and convenience stores located in Alabama, Arkansas, Georgia, Kentucky, Mississippi, Tennessee and Virginia.
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We are a controlled company under the rules and regulations of the New York Stock Exchange (the "NYSE"), where our shares are traded under the symbol "DK." As of December 31, 2012, approximately 52.9% of our outstanding shares were beneficially owned by an indirect wholly owned subsidiary of Delek Group Ltd. ("Delek Group"), a conglomerate that is domiciled and publicly traded in Israel. Delek Group owns significant interests in energy related businesses and is controlled indirectly by Mr. Itshak Sharon (Tshuva).
In April 2011, we acquired 53.7% of the issued and outstanding shares of common stock of Lion Oil (the "Lion Acquisition") from the then majority shareholder, Ergon, Inc. ("Ergon"). Combined with the 34.6% of Lion Oil common stock that we purchased in 2007, the Lion Acquisition brought our ownership of Lion Oil to 88.3%. In October 2011, we acquired the remaining equity interests in Lion Oil, thereby assuming full equity ownership. Through Lion Oil, we currently own and operate the 80,000 bpd El Dorado refinery, as well as a light product and an asphalt distribution terminal in El Dorado, Arkansas.
On December 19, 2011, we acquired all of the outstanding membership interests of Paline Pipeline Company, LLC ("Paline") from Ergon Terminaling, Inc ("Ergon Terminaling") (the "Paline Acquisition"). Paline owns and operates a 10-inch, 185-mile pipeline system ("Paline Pipeline System"). We acquired Paline and all related assets for a purchase price of $50.0 million, consisting of $25.0 million cash and a three-year, $25.0 million note payable to Ergon Terminaling, which was subsequently assigned to Ergon. On January 31, 2012, we completed the acquisition of an approximately 36 miles long, eight and ten inch pipeline system (the "Nettleton Pipeline") from Plains Marketing, L.P. ("Plains") (the "Nettleton Acquisition"). The purchase price, including the reimbursement by Delek of certain costs incurred by Plains, was approximately $12.3 million. The Nettleton Pipeline is used exclusively to transport crude oil from our tank farms in and around Nettleton, Texas to our refinery in Tyler, Texas. On February 7, 2012, we purchased (i) a light petroleum products terminal located in Big Sandy, Texas, the underlying real property, and other related assets from Sunoco Partners Marketing & Terminals L.P. and (ii) the eight inch diameter Hopewell - Big Sandy Pipeline originating at Hopewell Junction, Texas and terminating at the Big Sandy Station in Big Sandy, Texas from Sunoco Pipeline L.P (the "Big Sandy Pipeline") (collectively, the "Big Sandy Acquisition"). The purchase price was approximately $11.0 million. This terminal was contributed to Delek Logistics as part of its initial public offering and Holdings will pay terminalling fees to Delek Logistics as part of the Terminalling Services Agreement.
Delek Logistics Initial Public Offering
On November 7, 2012, Delek Logistics, closed its initial public offering (the "DKL Offering") of 9,200,000 common units at a price of $21.00 per unit, which included a 1,200,000 common unit over-allotment option that was exercised in full by the underwriters. Headquartered in Brentwood, Tennessee, Delek Logistics was formed by Delek to own, operate, acquire and construct crude oil and refined products logistics and marketing assets. Delek Logistics' initial assets were contributed by us in connection with the DKL Offering and included certain assets formerly owned, or used by, our subsidiaries, including Marketing, Paline and Lion Oil. A substantial majority of Delek Logistics' assets are currently integral to Delek’s refining and marketing operations. We received net proceeds of approximately $171.8 million from the DKL Offering, after deducting offering expenses and debt issuance costs.
We have agreements with Delek Logistics that establish fees for certain administrative and operational services provided by Holdings and its subsidiaries to Delek Logistics, provide certain indemnification obligations and other matters and establish terms for fee-based commercial logistics and marketing services provided by Delek Logistics and its subsidiaries to us. Delek Logistics is a variable interest entity as defined under United States generally accepted accounting principles ("GAAP") and is consolidated into our consolidated financial statements. Intercompany transactions with Delek Logistics and its subsidiaries are eliminated in our consolidated financial statements.
Our Business Strategies
Historically we have grown through acquisitions, as demonstrated by the acquisitions of the Tyler refinery and El Dorado refinery in 2005 and 2011, respectively. Additionally we purchased logistics assets with the Paline Acquisition in 2011 and the Nettleton Acquisition and the Big Sandy Acquisition in 2012. We expect to continue to acquire assets that complement our existing assets and/or broaden our geographic presence as a major element of our business strategy. In addition to acquisitions, we are also focused on improving our operations through internal projects to increase flexibility, enhance efficiencies and provide organic growth.
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Improve Crude Slate Flexibility
Our earnings from our refining operations are substantially determined by the difference between the market price of refined products and the market price of crude oil, which is referred to as the crack spread, refining margin or refined product margin. Inland domestic crudes such as WTI are currently priced at a discount to Light Louisiana Sweet, Brent and other crudes traditionally available in the U.S. Gulf Coast. An increasing portion of the crude oil purchased at both the Tyler and El Dorado refineries is priced at a differential to the price per barrel of WTI. We continue to diversify our crude slate sources to strengthen our ability to improve our refining margins per barrel. We believe we have proven our resourcefulness in improving our crude source flexibility through methods such as overcoming supply limitations and disruptions by implementing large-scale rail delivery of supplemental cost-advantaged crude oil to El Dorado in 2012. We also are working to improve our connections to new and existing pipelines so that we can enhance our access to cost advantaged crudes.
Growth Through Internal Projects
We believe we have demonstrated our ability to achieve improved profitability by targeting and completing "quick hit" capital projects that yield immediate improvements to our financial results. We define "quick hit" capital projects as ones that can be accomplished over a short time frame and directly enhance profitability. In 2012, the Light Straight Run/Saturated Gas ("LSR/Sat Gas") project in El Dorado and the vacuum tower bottoms ("VTB") project in Tyler were completed. The LSR/Sat Gas project enabled us to increase our liquid recovery by 1.0% - 1.5% (as a percentage of crude charge), which provided additional contribution margin by burning less propane and butane in our fuel system. The VTB project consisted of the installation of an additional feed tank so that we could process asphalt from our El Dorado refinery in Tyler, producing a higher value light product. We will continue to pursue internal capital projects that will maximize our profitability, enhance the synergies between our facilities, and improve the refining yields in our existing assets.
Expand and Upgrade our Existing Asset Base
We successfully launched the DKL Offering in November 2012. We believe Delek Logistics positions us with opportunities for future growth as our logistics segment provides additional services to third parties and supports our existing assets. We also completed the construction of 6 new MAPCO convenience stores in 2012 and reimaged 16 stores to our MAPCO Mart image. We plan to continue growing our retail presence in new and existing markets by proceeding with our new construction initiatives.
Information About Our Segments
We prepare segment information on the same basis that we review financial information for operational decision making purposes. In conjunction with the DKL Offering, we reclassified certain operating segments. The majority of the assets previously reported as our marketing segment and certain assets previously operated by our refining segment were contributed to Delek Logistics. The results of the operation of these assets are now reported in our logistics segment. Further, certain operations previously included as part of our marketing segment were retained by Holdings and are now reported as part of our refining segment. The historical results of the operation of these assets have been reclassified to conform to the current presentation.
Additional segment and financial information is contained in our segment results included in Item 6, Selected Financial Data, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and in Note 13, Segment Data, of our consolidated financial statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Refining Segment
Overview
We own and operate two independent refineries located in Tyler, Texas and El Dorado, Arkansas, currently representing a combined 140,000 bpd of crude throughput capacity. Our refining system produces a variety of petroleum-based products used in transportation and industrial markets which are sold to a wide range of customers located principally in inland, domestic markets.
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Both of our refineries are located in the U.S. Gulf Coast Region, which is one of five PADD regional zones established by the U.S. Department of Energy where refined products are produced and sold. Refined product prices generally differ within each of the five PADDs.
Refining System Feedstock Purchases
Our refining system purchases crude oil and other feedstocks through term agreements, some of which may include renewal provisions, and through spot market transactions. The majority of the crude oil we purchase is sourced from inland domestic sources. The majority of our domestic inland crude purchases originate in areas of Texas and Arkansas. In 2012, we also began purchasing crude delivered by rail car that originates primarily in other parts of the United States. A large portion of the crude oil currently purchased at both the Tyler and El Dorado refineries is priced at a differential to the price per barrel of WTI. In most cases, this differential is established during the month prior to the month in which the crude oil is processed at our refineries.
Refining System Production Slate
Our refining system processes a combination of light sweet and medium sour crude oils which, when refined, results in a product mix consisting principally of higher-value transportation fuels such as gasoline, distillate and jet fuel. A lesser portion of our overall production consists of residual products, including paving asphalt, roofing flux and other products with industrial applications.
Refined Product Sales and Distribution
Our refining segment sells products on a wholesale basis to inter-company and third-party customers located around east Texas, Arkansas, Tennessee and the Ohio River Valley, including gulf coast markets and areas along the Enterprise Pipeline System.
Refining Segment Seasonality
Demand for gasoline and asphalt products is generally higher during the summer months than during the winter months due to seasonal increases in motor vehicle traffic and road and home construction. Varying vapor pressure requirements between the summer and winter months also tighten summer gasoline supply. As a result, the operating results of our refining segment are generally lower for the first and fourth quarters of the calendar year.
Refining Segment Competition
The refining industry is highly competitive and includes fully integrated national and multinational oil companies engaged in many segments of the petroleum business, including exploration, production, transportation, refining, marketing and retail fuel and convenience stores. Our principal competitors are petroleum refiners in the Mid-Continent and Gulf Coast regions, in addition to wholesale distributors operating in these markets.
The principal competitive factors affecting our refinery operations are crude oil and other feedstock costs, the differential in price between various grades of crude oil, refinery product margins, refinery reliability and efficiency, refinery product mix, and distribution and transportation costs.
Refining Segment - Tyler Refinery
Our Tyler refinery has a crude throughput capacity of 60,000 bpd. The Tyler refinery is currently the only major distributor of a full range of refined petroleum products within a radius of approximately 100 miles of its location. The refinery is situated on approximately 100 out of a total of approximately 600 contiguous acres of land (excluding pipelines) that we own in Tyler, Texas and adjacent areas.
The Tyler refinery is designed to process mainly light, sweet crude oil, which is typically a higher quality than heavier, sour crudes. The Tyler refinery has access to crude oil pipeline systems that allow us access to East Texas, West Texas, Gulf
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of Mexico and foreign crude oils. Most of the crude supplied to the Tyler refinery is delivered by third-party pipelines and through pipelines owned by our logistics segment. The majority of crude oil currently received at the Tyler refinery via pipeline passes through a regional crude distribution center in Longview, Texas.
The table below sets forth information concerning crude oil received at the Tyler refinery:
Percentage of Crude Oil Received | ||||||
Year Ended December 31, | ||||||
Source | 2012 | 2011 | ||||
East Texas crude oil | 18.8 | % | 17.4 | % | ||
WTI crude oil | 81.2 | % | 79.5 | % | ||
West Texas sour ("WTS") crude oil | — | % | 3.1 | % | ||
The Tyler refinery has a crude oil processing unit with a 60,000 bpd atmospheric column and a 21,000 bpd vacuum tower. The other major processing units at the Tyler refinery include a 20,200 bpd fluid catalytic cracking unit, a 6,500 bpd delayed coking unit, a 22,000 bpd naphtha hydrotreating unit, a 13,000 bpd gasoline hytrotreating unit, a 22,000 bpd distillate hydrotreating unit, a 17,500 bpd continuous regeneration reforming unit, a 5,000 bpd isomerization unit, and a sulfuric alkylation unit with a alkylate production capacity of 4,720 bpd. The Tyler refinery has a Nelson Complexity Factor of 9.5.
The fluid catalytic cracking unit and delayed coker enabled us to produce approximately 96.6% light products in 2012, including primarily a full range of gasoline, diesel, jet fuels, liquefied petroleum gas and natural gas liquids.
The table below sets forth information concerning the throughput at the Tyler refinery:
Year Ended | Year Ended | Year Ended | ||||||||||||||||
December 31, 2012 | December 31, 2011 | December 31, 2010 | ||||||||||||||||
Bpd | % | Bpd | % | Bpd | % | |||||||||||||
Refinery throughput (average barrels per day): | ||||||||||||||||||
Crude: | ||||||||||||||||||
Sweet | 56,426 | 94.2 | % | 54,291 | 89.7 | % | 48,300 | 89.0 | % | |||||||||
Sour | — | — | % | 1,737 | 2.9 | % | 1,700 | 3.1 | % | |||||||||
Total crude | 56,426 | 94.2 | % | 56,028 | 92.6 | % | 50,000 | 92.1 | % | |||||||||
Other blendstocks | 3,450 | 5.8 | % | 4,492 | 7.4 | % | 4,286 | 7.9 | % | |||||||||
Total refinery throughput | 59,876 | 100.0 | % | 60,520 | 100.0 | % | 54,286 | 100.0 | % | |||||||||
The Tyler refinery primarily produces two grades of gasoline (premium - 93 octane and regular - 87 octane), as well as aviation gasoline. Diesel and jet fuel products produced at the Tyler refinery include military specification jet fuel (“JP8"), commercial jet fuel, low sulfur diesel and ultra-low sulfur diesel. The Tyler refinery offers both E-10 and biodiesel blended products. In addition to higher-value gasoline and distillate fuels, the Tyler refinery produces small quantities of propane, refinery grade propylene and butanes, petroleum coke, slurry oil, sulfur and other blendstocks.
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The table below sets forth information concerning the Tyler refinery's production slate:
Year Ended | Year Ended | Year Ended | ||||||||||||||||
December 31, 2012 | December 31, 2011 | December 31, 2010 | ||||||||||||||||
Bpd | % | Bpd | % | Bpd | % | |||||||||||||
Products produced (average barrels per day): | ||||||||||||||||||
Gasoline | 33,045 | 55.8 | % | 32,407 | 54.3 | % | 30,019 | 56.3 | % | |||||||||
Diesel/jet | 21,883 | 37.0 | % | 22,521 | 37.7 | % | 19,669 | 36.9 | % | |||||||||
Petrochemicals, LPG, NGLs | 2,268 | 3.8 | % | 2,205 | 3.7 | % | 1,623 | 3.0 | % | |||||||||
Other | 1,989 | 3.4 | % | 2,564 | 4.3 | % | 2,012 | 3.8 | % | |||||||||
Total production | 59,185 | 100.0 | % | 59,697 | 100.0 | % | 53,323 | 100.0 | % | |||||||||
We believe that by being able to deliver most of our gasoline and diesel fuel production into the local market through our terminal located at the Tyler refinery, our customers benefit from lower transportation costs compared to alternative sources. Our customers include major oil companies, independent refiners and marketers, jobbers, distributors, utility and transportation companies, the U.S. government and independent retail fuel operators.
The Tyler refinery's ten largest customers accounted for $1,662.3 million, or 62.5%, of net sales for the Tyler refinery in 2012. One customer accounted for $277.0 million, or 10.4% of the Tyler refinery's net sales in 2012. We have a contract with the U.S. government to supply JP8 to various military facilities that expires on August 31, 2013. The U.S. government solicits competitive bids for this contract annually. Sales under this contract totaled $90.3 million in 2012, or 3.4%, of the Tyler refinery's 2012 net sales.
The vast majority of our transportation fuels and other products are sold directly from the Tyler refinery's terminal. We operate a nine-lane transportation fuels truck rack with a wide range of additive options, including proprietary packages dedicated for use by our major oil company customers. Capabilities at our rack include the ability to simultaneously blend finished components prior to loading trucks. LPG, NGLs and clarified slurry oil are sold by truck from dedicated loading facilities at the Tyler refinery.
Taking into account the Tyler refinery's crude and product slate, as well as the refinery's location near the Gulf Coast region, we apply a Gulf Coast 5-3-2 crack spread to calculate 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 values of U.S. Gulf Coast Pipeline Conventional 87 CBOB and U.S. Gulf Coast Pipeline No. 2 Heating Oil (high-sulfur diesel) and the market value of WTI crude oil. U.S. Gulf Coast Pipeline Conventional 87 CBOB and U.S. Gulf Coast Pipeline No. 2 Heating Oil are prices for which the products trade in the Gulf Coast region.
Refining Segment - El Dorado Refinery
Our El Dorado refinery has a crude throughput capacity of 80,000 bpd. The El Dorado refinery is the largest refinery in Arkansas and represents more than 90% of state-wide refining capacity.
The El Dorado refinery is designed to mainly process a combination of sweet, medium-sour and heavy crude oils that blend into a medium gravity sour crude oil. The refinery receives crude by several delivery points, including local crude and other third party pipelines that connect directly into the El Dorado Pipeline System, which runs from Magnolia, Arkansas to the El Dorado refinery (the "El Dorado Pipeline System") and rail at third party terminals.
In 2012, we purchased crude oil for the El Dorado refinery from inland sourced crude from east and west Texas, local sources, including crude gathered through the SALA Gathering System, which is a local domestic crude oil gathering system in the adjacent Arkansas area production fields operated by the logistics segment (the "SALA Gathering System"), rail and reduced amounts of Gulf Coast crude. Logistical constraints limit local producers' ability to ship crude oil economically
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to regional refineries. Therefore, we are able to purchase local crude at a discount to other crudes, such as WTI or WTS. At present, J. Aron and Company ("J. Aron"), through arrangements with various oil companies, supplies the majority of the El Dorado refinery's crude oil input requirements pursuant to a Master Supply and Offtake Agreement (“Supply and Offtake Agreement").
The table below sets forth information concerning crude oil received at the El Dorado refinery:
Percentage of Crude Oil Received | ||||||
Year Ended December 31, | ||||||
Source | 2012 | 2011 | ||||
Gulf Coast crude oil | 23.2 | % | 56.1 | % | ||
Inland/local crude oil | 62.4 | % | 33.2 | % | ||
Foreign crude oil | 2.8 | % | 10.7 | % | ||
Rail crude oil | 11.6 | % | — | % | ||
The El Dorado refinery is equipped with a crude oil processing unit with a 100,000 bpd capacity. The actual average annual crude unit throughput will vary based on economics and market requirements, as well as other physical limitations that affect the daily throughput or the utilization rate of the refinery. Because expansion projects for the downstream conversion of units have not been completed, the operable capacity of the El Dorado refinery is estimated at approximately 80,000 bpd. The El Dorado refinery is also equipped with a 55,000 bpd vacuum unit, a 20,000 bpd FCC unit, a 15,300 bpd continuous regenerative catalytic reforming unit, a 7,000 bpd isomerization unit and a 5,000 bpd alkylation unit. The El Dorado refinery has a Nelson Complexity Factor of 9.0.
The table below sets forth information concerning the throughput at the El Dorado refinery:
Year Ended | Year Ended | |||||||||||
December 31, 2012 | December 31, 2011(2) | |||||||||||
Bpd | % | Bpd | % | |||||||||
Refinery throughput (average barrels per day): | ||||||||||||
Crude: | ||||||||||||
Sweet | 29,982 | 41.0 | % | 11,063 | 13.8 | % | ||||||
Sour | 35,393 | 48.3 | % | 62,733 | 78.4 | % | ||||||
Total crude | 65,375 | 89.3 | % | 73,796 | 92.2 | % | ||||||
Other blendstocks(1) | 7,797 | 10.7 | % | 6,258 | 7.8 | % | ||||||
Total refinery throughput | 73,172 | 100.0 | % | 80,054 | 100.0 | % | ||||||
(1) | Includes denatured ethanol and biodiesel. |
(2) | This information has been calculated based on the 247 days we operated the El Dorado refinery following its acquisition in April 2011. |
The El Dorado refinery produces a wide range of refined products, from multiple grades of gasoline and ultra-low sulfur diesel fuels, LPGs, refinery grade propylene and a variety of asphalt products, including paving grade asphalt and roofing flux. The El Dorado refinery produces both low-sulfur gasoline and ultra-low sulfur diesel fuel, in compliance with current clean fuels standards. The El Dorado refinery offers both E-10 and biodiesel blended products.
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In 2012, gasoline, diesel, liquefied petroleum gas and natural gas liquids accounted for approximately 86.7% of the El Dorado refinery's production, while 13.3% of the product slate included various grades of asphalt, black oils and other residual products.
The table below sets forth information concerning the El Dorado refinery's production slate:
Year Ended | Year Ended | |||||||||||
December 31, 2012 | December 31, 2011(1) | |||||||||||
Bpd | % | Bpd | % | |||||||||
Products produced (average barrels per day): | ||||||||||||
Gasoline | 33,411 | 46.8 | % | 33,231 | 41.8 | % | ||||||
Diesel | 27,163 | 38.1 | % | 26,726 | 33.6 | % | ||||||
Petrochemicals, LPG, NGLs | 1,318 | 1.8 | % | 1,399 | 1.8 | % | ||||||
Asphalt | 6,897 | 9.7 | % | 14,820 | 18.7 | % | ||||||
Other | 2,583 | 3.6 | % | 3,267 | 4.1 | % | ||||||
Total production | 71,372 | 100.0 | % | 79,443 | 100.0 | % | ||||||
(1) | This information has been calculated based on the 247 days we operated the El Dorado refinery following its acquisition in 2011. |
Products manufactured at the El Dorado refinery are sold to retailers through spot sales, commercial contracts and through exchange agreements in markets in Arkansas, Memphis, Tennessee and north into the Ohio River Valley region. The refinery connection to the Enterprise Pipeline System is a key means of product distribution for the refinery given access to third-party terminals in multiple Mid-Continent markets that run adjacent to the system. The refinery also supplies products to exchange partners on the Colonial pipeline systems.
The El Dorado refinery's ten largest customers accounted for $1,225.9 million, or 34.0%, of the El Dorado refinery's net sales in 2012. One customer accounted for $229.3 million, or 6.2% of the El Dorado refinery's net sales in 2012.
Logistics Segment
Overview
Our logistics segment consists of Delek Logistics, a publicly traded master limited partnership, and its subsidiaries. Our consolidated financial statements include its consolidated financial results. As of December 31, 2012, we owned a 60.4% limited partner interest and a 2.0% general partner interest in Delek Logistics.
Our logistics segment owns and operates crude oil and refined products logistics and marketing assets. It generates revenue and subsequently contribution margin, which we define as net sales less cost of goods sold and operating expenses, by charging fees for gathering, transporting and storing crude oil and for marketing, distributing, transporting and storing refined products. A substantial majority of the logistics segment's existing assets are both integral to and dependent upon the successful operation of our refining segment's assets as the logistics segment gathers, transports and stores crude oil and markets, distributes, transports and stores refined products in select regions of the southeastern United States and east Texas in support of the Tyler and El Dorado refineries. In addition to intercompany services, the logistics segment also provides some crude oil transportation services for, and terminalling and marketing services to third parties in Texas, Tennessee and Arkansas.
Logistics Segment - Wholesale Marketing and Terminalling
The logistics segment owns and operates five light product terminals. One of these terminals, located in Memphis, Tennessee, supports the El Dorado refinery. Another of these terminals, located in Big Sandy, Texas, is expected to support the Tyler refinery by the end of 2013. In addition, the logistics segment provides products terminalling services to independent third parties at its light products terminal in Nashville, Tennessee and it markets light products using terminals in Abilene and San
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Angelo, Texas. The logistics segment also markets light products using third-party terminals in Aledo, Odessa, Big Spring and Frost, Texas.
Logistics Segment - Pipelines and Transportation
The logistics segment owns approximately 400 miles of crude oil transportation pipelines, 16 miles of refined product pipelines, an approximately 600-mile crude oil gathering system and associated crude oil storage tanks with an aggregate of approximately 1.7 million barrels of active shell capacity. These assets are primarily divided into four operating systems:
• | the Lion Pipeline System, which transports crude oil to, and refined products from the El Dorado refinery (the "Lion Pipeline System"); |
• | the SALA Gathering System, which gathers and transports crude oil production in southern Arkansas and northern Louisiana, primarily for the El Dorado refinery; |
• | the Paline Pipeline System, which will transport crude oil from Longview, Texas to a third party terminal in Nederland, Texas; and |
• | the East Texas Crude Logistics System, which currently transports substantially all of the crude oil delivered to the Tyler refinery (the "East Texas Crude Logistics System"). |
Logistics Segment Supply Agreements
A majority of the petroleum products the logistics segment sells in west Texas are purchased from two suppliers. Under a contract with Noble Petro, Inc. ("Noble"), we can purchase up to 20,350 bpd of petroleum products for the Abilene terminal for sales and exchange at Abilene and San Angelo. This agreement runs through December 2017.
Additionally, we can purchase up to an additional 7,000 bpd of refined products under the terms of a contract with Magellan Asset Services, L.P. This agreement expires on December 14, 2015. The primary purpose of this second contract is to supply products at third-party terminals in Aledo, Frost, Big Spring and Odessa, Texas.
Purchases made under these supply agreements accounted for 78.0% of the total purchases made by the logistics segment during the year ended December 31, 2012.
Related Party Operating Agreements
Lion Oil entered into a pipelines and storage facilities agreement with Delek Logistics under which Delek Logistics provides transportation and storage services to the El Dorado refinery. Under the pipelines and storage facilities agreement, Lion Oil is obligated to meet certain minimum aggregate throughput volumes on the pipelines of Delek Logistics' Lion Pipeline System and SALA Gathering System.
Refining entered into a five-year pipelines and tankage agreement with Delek Logistics pursuant to which Delek Logistics will provide crude oil transportation and storage services for our Tyler refinery. Under the current pipelines and tankage agreement, Refining is obligated to meet minimum aggregate throughput volumes of crude oil. Refining also pays a storage fee for the use of crude oil storage tanks along the East Texas Crude Logistics System.
Logistics Segment Customers
Our logistics segment has various types of customers including major oil companies, independent refiners and marketers, jobbers, distributors, utility and transportation companies, and independent retail fuel operators. In general, these customers typically come from within a 100-mile radius of our terminal operations. The largest customer accounted for 17.8% of our logistics segment net sales and the top ten customers accounted for 45.7% of the logistics segment net sales in 2012.
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Logistics Segment Seasonality
The volume and throughput of crude oil and refined products transported through our pipelines and sold through our terminals and to third parties is directly affected by the level of supply and demand for all of such products in the markets served directly or indirectly by our assets. Supply and demand for such products fluctuates during the calendar year. Demand for gasoline, for example, is generally higher during the summer months than during the winter months due to seasonal increases in motor vehicle traffic. Varying vapor pressure requirements between the summer and winter months also tighten summer gasoline supply. In addition, our refining segment often performs planned maintenance during the winter, when demand for their products is lower. Accordingly, these factors can affect the need for crude oil or finished products by our customers and therefore limit our volumes or throughput during these periods and we expect that our operating results will generally be lower during the first and fourth quarters of the calendar year.
Logistics Segment Competition
Our logistics segment faces competition for the transportation of crude oil from other pipeline owners whose pipelines (i) may have a location advantage over our pipelines, or (ii) may be able to transport more desirable crude oil to third parties or (iii) may be able to transport crude oil or finished product at a lower tariff. In addition, the wholesale marketing and terminalling business in general is also very competitive. Our owned refined product terminals, as well as the other third party terminals we use to sell refined products, compete with other independent terminal operators as well as integrated oil companies on the basis of terminal location, price, versatility and services provided. The costs associated with transporting products from a loading terminal to end users limit the geographic size of the market that can be competitively served by any terminal. Two key markets in west Texas that we serve from our company-owned facilities are Abilene and San Angelo, Texas. We have direct competition from an independent refinery that markets through another terminal in the Abilene market. There are no competitive fuel loading terminals within approximately 90 miles of our San Angelo terminal.
Logistics Segment Activity
The following table summarizes our activity in the wholesale marketing and terminalling portion of our logistics segment:
Year Ended December 31, | |||||||||
2012 | 2011 | 2010 | |||||||
Operating Information: | |||||||||
West Texas marketing throughputs (average bpd) (1) | 16,523 | 15,493 | 14,353 | ||||||
Terminalling throughputs (average bpd) (2) | 15,420 | 17,907 | — | ||||||
East Texas marketing throughputs (average bpd) | 57,574 | 57,047 | 50,173 | ||||||
(1) | Excludes bulk ethanol and biodiesel |
(2) | Consists of terminalling throughputs at our Memphis and Nashville, Tennessee terminals. Throughputs for the year ended December 31, 2011 are for the 247 days Delek operated these terminals following their acquisition in April 2011. |
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The following table summarizes our activity in the pipelines and transportation portion of our logistics segment:
Year Ended December 31, | |||||||||
2012 | 2011 | 2010 | |||||||
Throughputs (average bpd) | |||||||||
Lion Pipeline System (1): | |||||||||
Crude pipelines (non-gathered) | 46,027 | 57,442 | — | ||||||
Refined products pipelines to Enterprise Systems | 45,220 | 45,337 | — | ||||||
SALA Gathering System (1) | 20,747 | 17,676 | — | ||||||
East Texas Crude Logistics System | 55,068 | 55,341 | 49,388 | ||||||
(1) | Throughputs for the year ended December 31, 2011 are for the 247 days Delek operated these pipeline systems following their acquisitions in April 2011. |
Retail Segment
Overview
As of December 31, 2012, we operated 373 retail fuel and convenience stores located throughout the Southeastern United States. More than 93% of our stores were located in Tennessee, Alabama and Georgia, with additional stores located in Arkansas, Virginia, Kentucky and Mississippi. Our retail locations operate primarily under the MAPCO Express®, MAPCO Mart®, Discount Food MartTM, Fast Food and FuelTM, East Coast®, Delta Express® and Favorite Markets® brands.
During the past seven years we have reimaged or newly constructed approximately 50% of our store network, in each instance adopting the MAPCO Mart® brand. A reimaged location will typically include the re-configuring of the interior of the store, including remodeling surfaces, as well as replacement of certain inside equipment, remodeling the exterior of the store, and new outdoor signage. During 2012, we spent $19.7 million on reimaging 16 stores and constructing six new stores.
We believe that we have established strong brand recognition and market presence in the major retail markets in which we operate. The local markets where we have strong presence include Nashville, Memphis and the Chattanooga/northern Georgia corridor, and our presence is growing in northern Alabama and parts of Arkansas.
We seek to operate store locations in centralized, high-traffic urban and suburban markets. Our retail strategy employs localized marketing tactics that account for the unique demographic characteristics of each region that we serve. In recent years, we have introduced customized product offerings and promotional strategies to address the unique tastes and preferences of our customers on a market-by-market basis.
Retail Network
The majority of our stores are open 24 hours per day, while all sites are open at least 14 hours per day. Our average store size is approximately 2,576 square feet, with approximately 75.6% of our stores being 2,000 or more square feet. We are gravitating towards a larger format store, with our new stores constructed averaging 4,780 square feet.
Our retail fuel and convenience stores typically offer tobacco products and immediately consumable items such as non-alcoholic beverages, beer and a large variety of snacks and prepackaged items. A significant number of the sites also offer state sanctioned lottery games, ATM services and money orders. As of December 31, 2012, we operated 81 quick service restaurants in our store locations. In 48 of these locations, we offer national branded quick service food chains such as Quiznos®, Subway®, and Krispy Krunchy Chicken®. We also have a variety of proprietary in-house, quick service food offerings featuring fried chicken, breakfast biscuits, deli sandwiches and other freshly prepared foods.
Our convenience stores also offer unbranded, "private label" products in select categories. Since launching our first private label products in 2006, private label sales as a percentage of total merchandise sales excluding cigarettes has grown to 5.6% in 2012. Our private label products are generally priced at a substantial discount to their branded, nationally recognized counterparts, yet carry a higher gross profit margin for us, when compared to their counterparts. Our private label program provides quality offerings with price points previously unavailable to our customers in a number of categories. Some of the most recent launches include salty snacks, teas and juices and energy drinks and shots.
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Fuel Operations
For 2012, 2011 and 2010, our fuel sales were 79.9%, 79.9%, and 75.9%, respectively, of total net sales for our retail segment.
The following table highlights certain information regarding our continuing fuel operations:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Number of stores (end of period) | 373 | 377 | 412 | |||||||||
Average number of stores (during period) | 374 | 394 | 428 | |||||||||
Retail fuel sales (thousands of gallons) | 404,558 | 409,446 | 423,509 | |||||||||
Average retail gallons per store (based on average number of stores) (thousands of gallons) | 1,082 | 1,039 | 990 | |||||||||
Retail fuel margin (cents per gallon) | $ | 0.146 | $ | 0.162 | $ | 0.161 | ||||||
We currently operate a fleet of 21 delivery trucks that deliver more than 60% the fuel sold at our retail fuel and convenience stores. We believe that the operation of a proprietary truck fleet enables us to reduce fuel delivery expenses while enhancing service to our locations.
We purchased approximately 60.2% of the fuel sold at our retail fuel and convenience stores in 2012 from four suppliers. The price of fuel purchased is generally based on contractual differentials to local and regional price benchmarks. The initial terms of our supply agreements range from one year to 15 years and generally contain minimum monthly or annual purchase requirements. As of December 31, 2012, we had met our purchase commitments under these contracts and did not carry a liability for the failure to purchase required minimums.
Merchandise Operations
For 2012, 2011 and 2010, our merchandise sales were 20.1%, 20.1%, and 24.1%, respectively, of total net sales for our retail segment.
The following table highlights certain information regarding our continuing merchandise operations:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Comparable store merchandise sales change (year over year) | 3.4 | % | 2.3 | % | 4.3 | % | ||||||
Merchandise margin | 29.3 | % | 29.8 | % | 30.5 | % | ||||||
Total merchandise sales (in thousands) | $ | 378,166 | $ | 374,580 | $ | 384,106 | ||||||
Average number of stores (during period) | 374 | 394 | 428 | |||||||||
Average merchandise sales per average number of stores (in thousands) | $ | 1,011 | $ | 951 | $ | 897 | ||||||
We purchased approximately 59.5% of our general merchandise, including most tobacco products and grocery items, for 2012 from a single wholesale grocer, Core-Mark International, Inc. ("Core-Mark") pursuant to a contract that expires at the end of 2013. Our other major suppliers include Coca-Cola®, Pepsi-Cola® and Frito Lay®.
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Dealer-Operated Stores
Our retail segment also includes a wholesale fuel distribution network that supplies 67 dealer-operated retail locations as of December 31, 2012. In 2012, our dealer net sales represented approximately 5.6% of net sales for our retail segment. Our business with dealers includes a variety of contractual arrangements in some of which we pay a commission to the dealer based on profits from the fuel sales and, in others we supply fuel and invoice the dealer for the cost of fuel plus an agreed upon margin. We also have non-contractual arrangements with dealers in which dealers order fuel from us at their discretion.
Retail Segment Seasonality
Demand for gasoline and convenience merchandise is generally higher during the summer months than during the winter months due to seasonal increases in motor vehicle traffic. As a result, the operating results of our retail segment are generally lower for the first quarter of the calendar year.
Weather conditions in our operating area also have a significant effect on our operating results. Customers are more likely to purchase higher profit margin items at our retail fuel and convenience stores, such as fast foods, fountain drinks and other beverages and more gasoline during the spring and summer months. Unfavorable weather conditions during these months and a resulting lack of the expected seasonal upswings in traffic and sales could have a negative impact on our results of operations.
Retail Segment Competition
The retail fuel and convenience store business is highly competitive. We compete on a store-by-store basis with other independent convenience store chains, independent owner-operators, major petroleum companies, supermarkets, drug stores, discount stores, club stores, mass merchants, fast food operations and other retail outlets. Major competitive factors affecting us include location, ease of access, pricing, timely deliveries, product and service selections, customer service, fuel brands, store appearance, cleanliness and safety. We believe we are able to compete effectively in the markets in which we operate because our market concentration in most of our markets allows us to improve buying power with our vendors. Our retail segment strategy continues to center on operating a high concentration of sites in a similar geographic region to promote operational efficiencies.
Information Technology
We believe that our significant investments in Information Technology ("IT") offers us a strategic advantage in support of our various business units. In 2012, we focused on making improvements in all areas of IT including communications, hardware, and systems. Capital investments focused on the modernization of core elements of the infrastructure including communication devices, servers and storage. We believe this not only enhanced system performance, but also reduces risk due to less downtime and increased communication speeds. In addition, telecommunications systems were improved by implementation of new phone technology and redundant data communication services. We also began the standardization of our financial and accounting processes by upgrading and expanding our Enterprise Resource Planning solution. We believe business process redesign resulted in a higher level of consistency in our operations by taking advantage of new system tools including the application of responsive analytics and reporting. We also believe these improvements have enhanced our ability to respond to customer and market requirements and set the foundation for future growth.
Most of the retail segment's stores are connected through a high speed network that provides near real time information in support of merchandise pricing management, store security, fraud prevention, in-store training, and customer point of sale processing. The architecture and design of the store systems provide the flexibility to continue the expansion to new services that require access through a secure Internet connection adhering to Payment Card Industry ("PCI") data security standards. We believe our use of custom and off-the-shelf applications and programs gives us the ability to take advantage of standardization, while offering the flexibility and responsiveness to change. For example, in 2012 numerous new services were added to the retail segment including, postal services, bill pay kiosks, and implementation of a customer loyalty based program. Technology focused opportunities are continually evaluated and leveraged in our ongoing efforts to improve the customer experience and enhance revenue generation.
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Governmental Regulation and Environmental Matters
Environmental Matters
We are subject to various federal, state and local environmental and safety laws enforced by agencies including the United States Environmental Protection Agency ("EPA"), the U.S. Department of Transportation / Pipeline and Hazardous Materials Safety Administration, the Occupational Safety and Health Administration ("OSHA"), the Texas Commission on Environmental Quality, the Railroad Commission of Texas, 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 ("USTs") 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, we anticipate that continuing capital investments and changes in operating procedures will be required for the foreseeable future to comply with existing and new requirements as well as evolving interpretations and more strict enforcement of existing laws and regulations.
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 to us will not be material.
We carried a liability of approximately $12.4 million as of December 31, 2012 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, which were already being performed by the former operators of the Tyler and El Dorado refineries, prior to our acquisitions of these facilities, for known contamination of soil and groundwater as well as estimated costs for additional issues which have been identified subsequent to the purchase. We expect approximately $0.9 million of this amount to be reimbursable by a prior owner of the El Dorado refinery and have recorded $0.1 million in other current assets and $0.8 million in other non-current assets and in our condensed consolidated balance sheet as of December 31, 2012. Approximately $2.0 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.
On March 9, 2013, a release of crude oil was detected within a pumping facility owned by our logistics segment located west of our El Dorado refinery. We are currently in the process of working with the EPA to respond to the released crude oil and believe we will ultimately recover the substantial majority of the released crude oil. For a full description of this incident, please see "Crude Oil Release" under Item 9B, Other Information, of this Annual Report on Form 10-K.
Most of the cost of remediating releases from USTs in our retail segment is reimbursed by state reimbursement funds which are funded by a tax on petroleum products and subject to certain deductible amounts.
Both of our refineries have negotiated consent decrees, referred to as Global Refining Settlements, with the EPA and the United States Department of Justice (the "DOJ") 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 in June 2003
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and the Tyler refinery consent decree became effective in September 2009. Neither consent decree alleges any violations pertaining to our operation of the refineries, and the prior 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 and work practices. 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 2008, the El Dorado refinery signed a Consent Administrative Order ("CAO") that was in effect through 2009 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 National Pollutant Discharge Elimination System ("NPDES") permit for a combined discharge to the Ouachita River. In connection with the CAO, the El Dorado refinery and the three other dischargers have designed, are constructing and will jointly operate an approximately 20 mile wastewater pipeline to convey treated, commingled waste water to the Ouachita River. Construction of the pipeline is underway and expected to be completed by the third quarter of 2013. The EPA was not a party to the Arkansas CAO and in late 2011 referred an enforcement action to the DOJ with regard to historical and on-going waste water discharges that we believe will be remedied by the Ouachita River pipeline. We are in discussions with the EPA and the DOJ regarding penalties and interim actions and have accrued an amount expected to cover the penalty. We anticipate finalizing a Consent Decree with the DOJ in the first half of 2013 and do not believe the settlement will have a material adverse effect upon our business, financial condition or operations.
In 2007, the EPA issued final Mobil Source Air Toxic II rules for gasoline formulation that required the reduction of average benzene content by January 1, 2011 and 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 partially reduce gasoline benzene levels. However, it is necessary for us to purchase credits to fully comply with these content requirements for the Tyler refinery. We accrue as a liability or asset any credit deficit or excess. Although credits have been acquired that cover Tyler's current obligation, we cannot assure you that such credits will be available in the future 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. A project to reduce gasoline benzene levels below the required compliance level was completed at the El Dorado refinery in June 2011 and credits generated by that refinery have been and in the future can be used to partially meet the Tyler refinery's credit requirement.
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 recently 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. We are not aware of any state or regional initiatives for controlling GHG emissions that would affect our 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.
Since 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. The EPA also has indicated that it intends to regulate refinery GHG emissions from new and existing sources through a New Source Performance Standard ("NSPS"), although there is no firm proposal for such regulation.
In mid-2012 the EPA announced an industry-wide enforcement initiative directed at flaring operations and performance at refineries and petrochemical plants, although our refineries have not received any associated inquiries or requests for information and are not a party to any associated enforcement action at this time. In September 2012, the EPA finalized revisions to the NSPS for Petroleum Refineries (NSPS Subpart Ja) that primarily affects flares and process heaters. We believe our existing process heaters meet the applicable requirements. Affected flares have three years to comply with the
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new standard and it is likely the standard will impact the way some flares at our Tyler and El Dorado refineries are designed and/or operated. We are planning capital projects at our refineries related to flare compliance with NSPS Subpart Ja that will be implemented in 2014-2015. The EPA has also announced its intent to further regulate refinery air emissions, through additional NSPS and National Emission Standards for Hazardous Air Pollutants to be proposed in late 2013 but the EPA has not released enough information regarding these rules to estimate the potential cost for compliance.
In 2010, the EPA and the Department of Transportation's National Highway Traffic Safety Administration ("NHTSA") finalized new standards raising the required Corporate Average Fuel Economy ("CAFE") of the nation's passenger fleet by 40% to approximately 35 miles per gallon ("mpg") by 2016 and imposing the first-ever federal GHG emissions standards on cars and light trucks. In September 2011, the EPA and the DOT finalized first-time standards for fuel economy of medium and heavy duty trucks. In September 2012, the EPA and NHTSA finalized rules raising the CAFE and GHG standards for passenger vehicles beginning with 2017 model year vehicles and increasing to the equivalent of 54.5 mpg by 2025. 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 Energy Independence and Security Act of 2007 ("EISA") increased the amounts of renewable fuel required to be blended into domestic transportation fuel supplies by the Energy Policy Act of 2005 to 32 billion gallons by 2022. The Renewable Fuel Standard - 2 rule ("RFS-2"), finalized by the EPA in 2010 to implement EISA, requires that most refiners blend increasing amounts of biofuels with refined products, equal to approximately 9.2% of combined gasoline and diesel volume in 2012, increasing to 10.0% in 2013 and escalating annually to approximately 18% by 2022. Because the mandate requires specified volumes of biofuels, if the demand for motor fuels decreases in future years even higher percentages of biofuels may be required. Alternatively, credits, called Renewable Identification Numbers ("RINs") can be used instead of physically blending biofuels. The Tyler refinery began supplying a 10% ethanol gasoline blend (E-10) in January 2008 and biodiesel blends in June 2011. The El Dorado refinery completed projects at the truck loading rack in June 2011 to make E-10 available and in July 2012 to make biodiesel blends available. We are implementing additional projects at our refineries and terminals that will allow blending increasing amounts of ethanol and biodiesel into our fuels in future years.
The EPA is expected to propose and finalize Tier 3 gasoline rules in 2013 requiring a reduction in annual average gasoline sulfur content from 30 parts per million ("ppm") to 10 ppm by late 2016. The rule will also likely require a reduction in the maximum per-gallon sulfur content from the current limit of 80 ppm although the EPA has not indicated what that new limit will be. We anticipate that the Tyler refinery will meet these new limits with only minor operational changes, but capital projects may be required for additional sulfur removal capacity at the El Dorado refinery.
The EPA requested information pertaining to the November 2008 explosion and fire at the Tyler refinery and conducted an investigation under Section 114 of the Clean Air Act pertaining to our compliance with the chemical accident prevention standards. In late 2011, the EPA referred an enforcement action to the DOJ and we are in discussions with the EPA and the DOJ regarding what, if any, penalties and/or interim actions may be necessary.
Rate Regulation of Petroleum Pipelines
The rates and terms and conditions of service on certain of our pipelines may be subject to regulation by the Federal Energy Regulatory Commission ("FERC") under the Interstate Commerce Act ("ICA") or by the state regulatory commissions in the states in which we transport crude oil and refined products, including the Railroad Commission of Texas, the Louisiana Public Service Commission, and the Arkansas Public Service Commission. We have evaluated and are continuing to evaluate the extent to which our pipelines are subject to such regulation. To the extent we determine that the rates and terms and conditions of service of our pipelines are subject to regulation, we have filed or intend to file tariffs with FERC or the appropriate state regulatory commissions, or, in certain cases, to seek waiver of the requirement to file tariffs, and to comply with all regulatory requirements imposed by those agencies.
FERC regulates interstate transportation under the ICA, the Energy Policy Act of 1992 and the rules and regulations promulgated under those laws. The ICA and its implementing regulations require that tariff rates for interstate service on oil pipelines, including pipelines that transport crude oil and refined products in interstate commerce, be just and reasonable and non-discriminatory and that such rates and terms and conditions of service be filed with FERC. Under the ICA, shippers may challenge new or existing rates or services. FERC is authorized to suspend the effectiveness of a challenged rate for up to seven months, though rates are typically not suspended for the maximum allowable period.
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While FERC regulates rates for shipments of crude oil or refined products in interstate commerce, state agencies may regulate rates and service for shipments in intrastate commerce. We own pipeline assets in Texas, Arkansas, and Louisiana. In Texas, a pipeline, with some exceptions, is required to operate as a common carrier by publishing tariffs and providing transportation without discrimination. Arkansas provides that all intrastate oil pipelines are common carriers. In Louisiana, all pipelines conveying petroleum from a point of origin within the state to a destination within the state are declared common carriers. The Louisiana Public Service Commission is empowered with the authority to establish reasonable rates and regulations for the transport of petroleum by a common carrier, mandating public tariffs and providing of transportation without discrimination.
Employees
As of December 31, 2012, we had 4,033 employees, of whom 768 were employed in our refining segment, 111 were employed by Delek for the benefit of our logistics segment, 3,049 were employed either full or part-time in our retail segment and 105 were employed by Holdings. As of December 31, 2012, 165 operations and maintenance hourly employees and 35 truck drivers at the Tyler refinery were represented by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union and its Local 202. The Tyler operations and maintenance hourly employees are currently covered by a collective bargaining agreement that expires January 31, 2015. The Tyler truck drivers are currently covered by a collective bargaining agreement that expires March 1, 2015. As of December 31, 2012, 174 operations and maintenance hourly employees at the El Dorado refinery were represented by the International Union of Operating Engineers and its Local 381. These employees are covered by a collective bargaining agreement which expires on August 1, 2014. None of our employees in our logistics or retail segments or in our corporate office are represented by a union. We consider our relations with our employees to be satisfactory.
Trade Names, Service Marks and Trademarks
We regard our intellectual property as being an important factor in the marketing of goods and services in our retail segment. We own, have registered or applied for registration of a variety of trade names, service marks and trademarks for use in our business. We own the following trademark registrations issued by the United States Patent and Trademark Office: MAPCO®, MAPCO MART®, MAPCO EXPRESS & Design®, EAST COAST®, GRILLE MARX®, CAFÉ EXPRESS FINEST COFFEE IN TOWN MAPCO & Design®, GUARANTEED RIGHT! MAPCO EXPRESS & Design®, FAVORITE MARKET®, FLEET ADVANTAGE®, DELTA EXPRESS® and LION & Design®. While we do not have and have not applied for a federally registered trademark for DISCOUNT FOOD MARTTM or FAST FOOD AND FUELTM, we do claim state and/or common law trademark rights in these names. Our right to use the "MAPCO" name is limited to the retail fuel and convenience store industry. We are not otherwise aware of any facts which would negatively impact our continuing use of any of our trade names, service marks or trademarks.
Available Information
Our Internet website address is www.DelekUS.com. Information contained on our website is not part of this Annual Report on Form 10-K. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports filed with or furnished to the Securities and Exchange Commission ("SEC") are available on our Internet website in the "Investor Relations" section, free of charge, as soon as reasonably practicable after we file or furnish such material to the SEC. We also post our Corporate Governance Guidelines, Code of Business Conduct & Ethics and the charters of our board of directors' committees in the "Corporate Governance" section of our website accessible by navigating to the "About Us" section on our Internet website. Our governance documents are available in print to any stockholder that makes a written request to the Secretary, Delek US Holdings, Inc., 7102 Commerce Way, Brentwood, Tennessee 37027.
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Glossary of Terms
The following are definitions of certain industry terms used in this Form 10-K:
Alkylation Unit - A refinery unit utilizing an acid catalyst to combine smaller hydrocarbon molecules to form larger molecules in the gasoline boiling range to produce a high octane gasoline blendstock which is referred to as alkylate.
Amine Regeneration Unit (ARU) - A unit that is used to strip out absorbed sulfur-containing gases from the rich amine to restore the amine so it can be re-used again in the process as lean amine to absorb additional sulfur-containing gases (sour gas).
Barrel - A unit of volumetric measurement equivalent to 42 U.S. gallons.
Biodiesel - A renewable fuel produced from vegetable oils or animal fats that can be blended with petroleum derived diesel to produce biodiesel blends for use in diesel engines. Pure biodiesel is referred to as B100, whereas blends of biodiesel are referenced by how much biodiesel is in the blend (e.g., a B5 blend contains five volume percent biodiesel and 95 volume percent ULSD).
Blendstocks - Various products or intermediate streams that are combined with other components of similar type and distillation range to produce finished gasoline, diesel fuel or other refined products. Blendstocks may include natural gasoline, hydrotreated Fluid Catalytic Cracking Unit gasoline, alkylate, ethanol, reformate, butane, diesel, biodiesel, kerosene, light cycle oil or slurry, among others.
Bpd/bpd - Barrels per calendar day.
Brent Crude (Brent) - a light, sweet crude oil, though not as light as WTI. Brent is the leading global price benchmark for Atlantic basin crude oils.
CBOB - Motor gasoline blending components intended for blending with oxygenates, such as ethanol, to produce finished conventional motor gasoline.
Crude Distillation Capacity, Nameplate Capacity or Production Capacity - The maximum sustainable capacity for a refinery or process unit for a given feedstock quality and severity level, measured in barrels per day.
Delayed Coking Unit (Coker) - A refinery unit that processes ("cracks") heavy oils, such as the bottom cuts of crude oil from the crude or vacuum units, to produce blendstocks for light transportation fuels or feedstocks for other units and petroleum coke.
Distillates - Products or intermediates that are normally initially produced via distillation and then further processed to produce finished fuels or blendstocks including gasoline, kerosene, jet fuel and diesel.
Enterprise Products Pipeline System (Enterprise Pipeline System) - a major product pipeline transport system that reaches from the Gulf Coast into the Northeastern United States.
Ethanol - An oxygenated blendstock that is blended with sub-grade (CBOB) or conventional gasoline to produce a finished gasoline.
E-10 - A 90% gasoline-10% ethanol blend.
E-15 - An 85% gasoline-15% ethanol blend.
Fluid Catalytic Cracking Unit or FCC Unit - A refinery unit that uses fluidized catalyst at high temperatures to crack large hydrocarbon molecules into smaller, higher-valued molecules (LPG, gasoline, LCO, etc.).
Feedstocks - Crude oil and petroleum products used as inputs in refining processes.
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Gulf Coast 5−3−2 crack spread or Gulf Coast crack spread - A crack spread reflecting 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, utilizing the market prices of WTI crude oil, U.S. Gulf Coast Pipeline Conventional 87 CBOB and U.S. Gulf Coast Pipeline No. 2 Heating Oil.
Gulf Coast Region - commonly referred to as PADD III, includes the states of Texas, Arkansas, Louisianna, Mississippi, Alabama and New Mexico.
Hydrotreating Unit - A refinery unit that removes sulfur and other contaminants from hydrocarbons at high temperatures and moderate to high pressure in the presence of catalysts and hydrogen. When used to process fuels, this unit reduces the sulfur dioxide emissions from these fuels.
Isomerization Unit - A refinery unit altering the arrangement of a molecule in the presence of a catalyst and hydrogen to produce a more valuable molecule, typically used to increase the octane of gasoline blendstocks.
Jobbers - Retail stations owned by third-parties that sell products purchased from or through us.
LPG - Liquefied petroleum gas.
Light/Medium/Heavy Crude Oil - Terms used to describe the relative densities of crude oil, normally represented by their API gravities. Light crude oils (those having relatively high API gravities) may be refined into a greater amount of valuable products and is typically more expensive than a heavier crude oil.
Mid-Continent Region - commonly referred to as PADD II, includes the states of North Dakota, South Dakota, Nebraska, Kansas, Oklahoma, Minnesota, Iowa, Missouri, Wisconsin, Illinois, Michigan, Indiana, Ohio, Kentucky and Tennessee.
NaSH Unit - A refinery process that uses caustic to capture hydrogen sulfide from sour gas streams to produce sodium hydrosulfide.
Naphtha - A hydrocarbon fraction that is used as a gasoline blending component, a feedstock for reforming and as a petrochemical feedstock.
Nelson Complexity Index - A measure of secondary conversion capacity of a refinery relative to its primary distillation capacity. Generally, more complex refineries have a higher index number.
NGL- Natural gas liquids.
New York Mercantile Exchange (NYMEX) - A commodities futures exchange.
Petroleum Administration for Defense District (PADD)- Any of five regions in the United States as set forth by the Department of Energy and used throughout the oil industry for geographic reference. Our refineries operate in PADD III, commonly referred to as the Gulf Coast region.
Petroleum Coke - A coal-like substance produced as a byproduct during the Delayed Coking refining process.
Pounds per Square Inch, Gauge (psig) - a unit of pressure.
Refining margin, refined product margin or crack spread - A metric used in the refining industry to assess a refinery's product margins by comparing the difference between the price of refined products produced at the refinery and the price of crude oil required to produce those products.
Reforming Unit - A refinery unit that uses high temperature, moderate pressure and catalyst to create petrochemical feedstocks, high octane gasoline blendstocks and hydrogen.
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Renewable Fuels Standard 2 (RFS-2) - An EPA regulation promulgated pursuant to the Energy Independence and Security Act of 2007 which requires most refineries to blend increasing amounts of renewable fuels (including biodiesel and ethanol) with refined products.
Roofing flux - An asphalt-like product used to make roofing shingles for the housing industry.
Sweet/Sour crude oil - Terms used to describe the relative sulfur content of crude oil. Sweet crude oil is relatively low in sulfur content; sour crude oil is relatively high in sulfur content. Sweet crude oil requires less processing to remove sulfur and is typically more expensive than sour crude oil.
Throughput - The quantity of crude oil and feedstocks processed through a refinery or a refinery unit.
Turnaround - A periodic shutdown of refinery process units to perform routine maintenance to restore the operation of the equipment to its former level of performance. Turnaround activities normally include cleaning, inspection, refurbishment and equipment and piping repair and replacements. It is also common to use turnaround periods to change catalysts or to implement capital project improvements.
Ultra-Low Sulfur Diesel (ULSD) - Diesel fuel produced with a lower sulfur content (15 ppm) to reduce sulfur dioxide emissions. ULSD is the only diesel fuel that may be used for on-road and most other applications in the U.S.
U.S. Gulf Coast Pipeline Conventional 87 CBOB or U.S. Gulf Coast Unleaded Gasoline - a grade of gasoline commonly marketed as Regular Unleaded at retail locations. This is the standard by which Gulf Coast gasoline products are priced.
U.S. Gulf Coast Pipeline No. 2 Heating Oil - a petroleum distillate that can be used as either a diesel fuel or a fuel oil. This is the standard by which other Gulf Coast distillate products (such as ultra-low sulfur diesel) are priced.
UST - Underground storage tank.
Vacuum Distillation Unit - A refinery unit that distills heavy crude oils under deep vacuum to allow their separation without coking.
West Texas Intermediate Crude Oil (WTI) - a light, sweet crude oil characterized by an API gravity between 38 and 40 and a sulfur content of less than 0.4 weight percent that is used as a benchmark for other crude oils.
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ITEM 1A. RISK FACTORS
We are subject to numerous known and unknown risks, many of which are presented below and elsewhere in this Annual Report on Form 10-K. You should carefully consider each of the following risks and all of the other information contained in this Annual Report on Form 10-K in evaluating us and our common stock. Any of the risk factors described below or additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could have a material adverse effect on our business, financial condition and results of operations.
Risks Relating to Our Industries
Our refining margins have been volatile and are likely to remain volatile, which may have a material adverse effect on our earnings and cash flows.
Our earnings, cash flow and profitability from our refining operations are substantially determined by the difference between the market price of refined products and the market price of crude oil, which is referred to as the crack spread or refining margin. Refining margins historically have been volatile and are likely to continue to be volatile, as a result of numerous factors beyond our control, including volatility in the prices of the various types of crude oil and other feedstocks purchased by our refineries, volatility in the costs of natural gas and electricity used by our refineries, and volatility in the prices of gasoline and other refined petroleum products sold by our refineries. Although we monitor our refinery operating margins and seek to optimize results by adjusting throughput volumes, throughput types and product slates, there are inherent limitations on our ability to offset the effects of adverse market conditions. Our acquisition of the El Dorado refinery in April 2011 more than doubled our refining capacity and increased our exposure to this volatility.
For example, although there are differences between published prices and margins and those experienced in our operations, certain published data illustrate the volatility we encounter. The New York Mercantile Exchange ("NYMEX") price for domestic light sweet crude oil (NYMEX: CL), the U.S. Gulf Coast price for unleaded gasoline (Platts U.S. Gulf Coast Pipeline Conventional 87 CBOB) and the Gulf Coast 5-3-2 crack spread have fluctuated between the following highs and lows during the preceding three calendar years:
Year Ended | Year Ended | Year Ended | ||||
December 31, 2012 | December 31, 2011 | December 31, 2010 | ||||
Low | High | Low | High | Low | High | |
NYMEX crude oil (per barrel) | $77.69 | $109.77 | $75.67 | $113.93 | $68.01 | $91.51 |
U.S. Gulf Coast Unleaded Gasoline (per gallon) | $2.27 | $3.29 | $2.31 | $3.40 | $1.83 | $2.41 |
U.S. Gulf Coast crack spread (per barrel) | $15.59 | $39.05 | $10.40 | $36.64 | $4.58 | $14.26 |
Such volatility is affected by, among other things:
• | changes in global and local economic conditions; |
• | domestic and foreign supply and demand for crude oil and refined products; |
• | the level of foreign and domestic production of crude oil and refined petroleum products; |
• | increased regulation of feedstock production activities such as hydraulic fracturing; |
• | infrastructure limitations that restrict, or events that disrupt, the distribution of crude oil, other feedstocks and refined petroleum products; |
• | investor speculation in commodities; |
• | worldwide political conditions, particularly in significant oil producing regions such as the Middle East, Africa, the former Soviet Union, and South America; |
• | the ability of the members of the Organization of Petroleum Exporting Countries to maintain oil price and production controls; |
• | pricing and other actions taken by competitors that impact the market; |
• | the level of crude oil, other feedstocks and refined petroleum products imported into and exported out of the United States; |
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• | excess capacity and utilization rates of refineries worldwide; |
• | development and marketing of alternative and competing fuels, such as ethanol and biodiesel; |
• | changes in fuel specifications required by environmental and other laws, particularly with respect to oxygenates and sulfur content; |
• | local factors, including market conditions, adverse weather conditions and the level of operations of other refineries and pipelines in our markets; |
• | accidents, interruptions in transportation, inclement weather or other events that can cause unscheduled shutdowns or otherwise adversely affect our refineries or the supply and delivery of crude oil from third parties; and |
• | U.S. government regulations. |
The crude oil we purchase and the refined products we sell are commodities whose prices are mainly determined by market forces beyond our control. While an increase or decrease in the price of crude oil will often result in a corresponding increase or decrease in the wholesale price of refined products, a change in the price of one commodity does not always result in a corresponding change in the other. A substantial or prolonged increase in crude oil prices without a corresponding increase in refined product prices or a substantial or prolonged decrease in refined product prices without a corresponding decrease in crude oil prices could also have a significant negative effect on our results of operations and cash flows. This is especially true for non-transportation refined products such as asphalt, butane, coke, sulfur, propane and slurry whose prices are less likely to correlate to fluctuations in the price of crude oil, all of which we produce at our refineries.
In addition, our Tyler refinery has historically processed primarily light sweet crude oils, while our El Dorado refinery has historically processed primarily sour crude oils. Due to increasing demand for lower sulfur fuels, light sweet crude oils have historically been more costly than heavy sour crude oils, and an increase in the cost of light sweet crude oils could have a material adverse effect on our business, financial condition and results of operations.
Also, the price for a significant portion of the crude oil processed at our refineries is based upon the WTI benchmark for such oil rather than the Brent benchmark. While the prices for WTI and Brent have historically corresponded to one another, elevated inventories of WTI-priced crude oil in the Mid-Continent region have caused WTI prices to fall significantly below Brent prices in recent years. During the years ended December 31, 2011 and December 31, 2012, this differential ranged from highs of $27.88 and $25.53, respectively, to lows of $3.29 and $9.17, respectively. Our ability to purchase and process favorably priced crude oils has allowed us to achieve higher net income and cash flow during the 2011 and 2012 fiscal years. We cannot assure you that these favorable conditions will continue. A substantial or prolonged narrowing in (or inversion to) the price differential between the WTI and Brent benchmarks for any reason, including, without limitation, actual or perceived reductions in Mid-Continent inventories, could negatively impact our earnings and cash flows. In addition, because the premium or discount we pay for a portion of the crude oil processed at our refineries is established based upon this differential during the month prior to the month in which the crude oil is processed, rapid decreases in the differential may negatively affect our results of operations and cash flows.
Finally, higher refined product prices often result in negative consequences for our retail operations such as higher credit card expenses (because credit card interchange fees are typically calculated as a percentage of the transaction amount rather than a percentage of gallons sold), lower retail fuel gross margin per gallon, reduced demand for refined products, fewer retail gallons sold and fewer retail merchandise transactions.
We operate in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future laws, regulations and other requirements could significantly increase our costs of doing business, thereby adversely affecting our profitability.
Our industry is subject to extensive laws, regulations and other requirements including, but not limited to, those relating to the environment, safety, pipeline tariffs, employment, labor, immigration, minimum wages and overtime pay, health care and benefits, working conditions, public accessibility, the sale of alcohol and tobacco and other requirements. These laws and regulations are enforced by federal agencies including the EPA, the U.S. Department of Transportation, the Pipeline and Hazardous Materials Safety Administration, the Federal Motor Carrier Safety Administration, OSHA and FERC, and state agencies such as the Texas Commission on Environmental Quality and the Arkansas Department of Environmental Quality, the Railroad Commission of Texas and the Tennessee Department of Environment and Conservation as well as numerous other state and federal agencies. A violation of any of these requirements could have a material adverse effect on our business, financial condition and results of operations.
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Ongoing compliance with laws, regulations and other requirements could also have a material adverse effect on our business, financial condition and results of operations. Under various federal, state and local environmental requirements, as the owner or operator of refineries and retail locations, we may be liable for the costs of removal or remediation of contamination at our existing or former locations, whether we knew of, or were responsible for, the presence of such contamination. We have incurred such liability in the past and several of our current and former locations are the subject of ongoing remediation projects. The failure to timely report and properly remediate contamination may subject us to liability to third parties and may adversely affect our ability to sell or rent our property or to borrow money using our property as collateral. Additionally, persons who arrange for the disposal or treatment of hazardous substances also may be liable for the costs of removal or remediation of these substances at sites where they are located, regardless of whether the site is owned or operated by that person. We typically arrange for the treatment or disposal of hazardous substances in our refining operations. We do not typically do so in our retail operations, but we may nonetheless be deemed to have arranged for the disposal or treatment of hazardous substances. Therefore, we may be liable for removal or remediation costs, as well as other related costs, including fines, penalties and damages resulting from injuries to persons, property and natural resources. One of our refineries is a minor potentially responsible party at a superfund site for which we expect our costs to be non-material. In the future, we may incur substantial expenditures for investigation or remediation of contamination that has not been discovered at our current or former locations or locations that we may acquire.
In addition, new legal requirements, new interpretations of existing legal requirements, increased legislative activity and governmental enforcement and other developments could require us to make additional unforeseen expenditures. Companies in the petroleum industry, such as us, are often the target of activist and regulatory activity regarding pricing, safety, environmental compliance, derivatives trading and other business practices which could result in price controls, fines, increased taxes or other actions affecting the conduct of our business. For example, consumer activists are lobbying various authorities to enact laws and regulations mandating the removal of tetra-ethyl lead from aviation gasoline. Others activists seek to require the use of temperature compensation devices for fuel dispensed at our retail stores.
In 2012, the EPA announced an industry-wide enforcement initiative directed at flaring operations and performance at refineries and petrochemical plants and finalized revisions to NSPS Subpart Ja that primarily affects flares and process heaters. Affected flares have three years to comply with the new standard and it is likely the standard will impact the way some flares at our refineries are designed and/or operated. We are planning capital projects at our refineries related to flare compliance with NSPS Ja that are expected to implemented by 2015. We believe our existing process heaters meet the applicable NSPS Ja requirements, and our refineries have not received any inquiries or requests for information from EPA regarding flaring operations and are not a party to any associated enforcement action at this time. The EPA has also announced its intent to further regulate refinery air emissions from a variety of sources (such as cokers, flares, tanks, and other process units) through additional NSPS and National Emission Standards for Hazardous Air Pollutants to be proposed in 2013. However, the EPA has not released sufficient information regarding these rules to estimate the potential cost for compliance
In 2007, the EPA issued final Mobile Source Air Toxic II rules for gasoline formulation that required the reduction of average benzene content beginning January 1, 2011 and the reduction of maximum annual average benzene content by July 1, 2012. We currently purchase credits to comply with these content requirements for one of our refineries but there can be no assurance that such credits will be available or that they will continue to be available for purchase at reasonable prices. The EPA is expected to propose and finalize Tier 3 gasoline rules in 2013 requiring a reduction in annual average gasoline sulfur content from 30 ppm to 10 ppm by late 2016. The rule will also likely require a reduction in the maximum per-gallon sulfur content from the current limit of 80 ppm although EPA has not indicated what that new limit will be. We anticipate that the Tyler refinery will meet these new limits with only minor operational changes, but capital projects may be required for additional sulfur removal capacity at the El Dorado refinery.
Environmental regulation is becoming more stringent and new environmental laws and regulations are continuously being enacted or proposed. Compliance with any future legislation or regulation of our produced fuels, including renewable fuel or carbon content; GHG emissions; sulfur, benzene or other toxic content; vapor pressure; or other fuel characteristics, may result in increased capital and operating costs and may have a material adverse effect on our results of operations and financial condition. While it is impractical to predict the impact that potential regulatory and activist activity may have, such future activity may result in increased costs to operate and maintain our facilities, as well as increased capital outlays to improve our facilities. Such future activity could also adversely affect our ability to expand production, result in damaging publicity about us, or reduce demand for our products. Our need to incur costs associated with complying with any resulting
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new legal or regulatory requirements that are substantial and not adequately provided for, could have a material adverse effect on our business, financial condition and results of operations.
For examples of two of our current regulatory actions with the EPA, please see "Government Regulation and Environmental Matters" under Item 1, Business, and Item 3, Legal Proceedings, of this Annual Report on Form 10-K.
Increased supply of and demand for alternative transportation fuels, increased fuel economy standards and increased use of alternative means of transportation could lead to a decrease in transportation fuel prices and/or a reduction in demand for petroleum-based transportation fuels.
Pursuant to the EISA, the EPA promulgated RFS-2 requiring refiners to blend "renewable fuels" such as ethanol and biodiesel, with their petroleum fuels or purchase renewable energy credits (RINs) in lieu of blending. The volume of renewable fuels required by the EISA increases from 9 billion gallons in 2008 to 36 billion gallons in 2022. Annually, the EPA establishes the volume of renewable fuels that refineries must blend into their finished petroleum fuels as a percentage of their gasoline and diesel sales. RFS-2 requires displacing increasing amounts of petroleum-based transportation fuels with biofuels, beginning with approximately 7.8% and 9.2% in 2011 and 2012, respectively, increasing to 9.6% in 2013 and escalating to 18% or more in 2022, depending on demand for gasoline and diesel. If we are unable to pass the costs of compliance with RFS-2 on to our customers, our profits will be adversely impacted. Moreover, if sufficient RINs are unavailable for purchase, if we have to pay a significantly higher price for RINs or if we are otherwise unable to meet the RFS-2 mandates, our business, financial condition and results of operations could be materially adversely affected.
Beginning in 2013-2014, meeting the RFS-2 volume mandates will require that gasoline contain more than the 10% ethanol (E-10) present in almost all gasoline sold today. In 2011, EPA approved the use of gasoline blends containing 85% gasoline and 15% ethanol (E-15) for use in model year 2001 and later vehicles. However, studies show that E-15 may cause engine and fuel system damage, vehicle manufacturers do not recommend using E-15 except in their "Flex Fuel" vehicles and most existing USTs and retail dispenser systems are not certified by Underwriters Laboratory, local fire codes or the EPA for use with gasoline blends containing more than 10% ethanol. Flex Fuel vehicles can utilize gasoline blends containing up to 85% ethanol (E-85) but there are relatively few such vehicles on the road, there are few E-85 retail locations and the use of E-85 results in significant reductions in fuel economy. These and other impediments may present challenges to blending the required volumes of ethanol. If adequate supplies of the required types of biofuels are unavailable in volumes sufficient to meet our requirement, if we are unable to physically blend the required biofuel volumes without exceeding 10% ethanol, or if RINs are not available in sufficient volumes or at economical prices, refinery production or profitability could be negatively affected.
In addition, as regulatory initiatives have required an increase in the consumption of renewable transportation fuels such as ethanol and biodiesel, consumer acceptance of alternative vehicles such as electric and hybrid vehicles is increasing. Increased use of renewable fuels and alternative vehicles may result in a decrease in demand for petroleum-based transportation fuels. Increased use of renewable fuels may also result in an increase in transportation fuel supply relative to decreased demand and a corresponding decrease in margins. A significant decrease in transportation fuel margins or demand for petroleum-based transportation fuels could have an adverse impact on our financial results. As described above, RFS-2 requires displacement of increasing amounts of petroleum-based transportation fuels with biofuels through 2022. RFS-2 and widespread use of E15 could cause decreased crude runs and materially affect our profitability unless fuel demand rises at a comparable rate or other outlets are found for the displaced products.
Finally, the EPA and the NHTSA finalized new standards in 2010 that raised the required CAFE of the nation's passenger fleet by 40% to approximately 35 mpg by 2016 and imposed the first-ever federal GHG emissions standards on cars and light trucks. In September 2011, the EPA and the Department of Transportation finalized first-time standards for fuel economy of medium and heavy duty trucks. In September 2012, the EPA and NHTSA finalized rules raising the CAFE and GHG standards for passenger vehicles beginning with 2017 model year vehicles and increasing to the equivalent of 54.5 mpg by 2025. Such increases in fuel economy standards and potential electrification of the vehicle fleet, along with mandated increases in use of renewable fuels discussed above, could result in decreasing demand for petroleum fuels. Decreasing demand for petroleum fuels could materially affect profitability at our refineries and convenience stores.
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Legislative and regulatory measures to address climate change and GHG emissions could increase our operating costs or decrease demand for our refined products.
Various legislative and regulatory measures to address climate change and GHG emissions (including carbon dioxide, methane and nitrous oxides) are in various phases of discussion or implementation. They include proposed and recently 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 and fuels. 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 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 the prices of refined products resulting from such increased costs could have a material adverse effect on our business, financial condition or results of operations.
Since the 2010 calendar year, EPA rules require that we report GHG emissions from our refinery operations and consumer use of products produced at our refineries on an annual basis. While the cost of compliance with the rule is not material, data gathered under the rule may be used in the future to support additional regulation of GHGs. In January 2011, the EPA began regulating GHG emissions from refineries and other major sources through the PSD 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. The EPA has announced its intent to further regulate refinery GHG emissions through a NSPS although the timing of the EPA's proposal is currently unclear. GHG regulation could also impact the consumption of refined products, thereby affecting our refinery operations.
We operate independent refineries which may not be able to withstand volatile market conditions, compete on the basis of price or obtain sufficient quantities of crude oil in times of shortage to the same extent as integrated, multinational oil companies.
We compete with a broad range of companies in our refining and petroleum product marketing operations. Many of these competitors are integrated, multinational oil companies that are substantially larger than we are. Because of their diversity, integration of operations, larger capitalization, larger and more complex refineries and greater resources, these companies may be better able to withstand volatile market conditions relating to crude oil and refined product pricing, to compete on the basis of price and to obtain crude oil in times of shortage.
We do not engage in petroleum exploration or production and therefore do not produce any of our crude oil feedstocks. Certain of our competitors, however, obtain a portion of their feedstocks from company-owned production. Competitors that have their own crude oil production are at times able to offset losses from refining operations with profits from producing operations and may be better positioned to withstand periods of depressed refining margins or feedstock shortages. If we are unable to compete effectively with these competitors, there could be a material adverse effect on our business, financial condition, and results of operations.
Decreases in commodity prices may lessen our borrowing capacities, increase collateral requirements for derivative instruments or cause a write-down of inventory.
The nature of our business requires us to maintain substantial quantities of crude oil, refined petroleum product and blendstock inventories. Because crude oil and refined petroleum products are commodities, we have no control over the changing market value of these inventories. For example, reductions in the value of our inventories or accounts receivable as a result of lower commodity prices could result in a reduction in our borrowing base under the revolving credit facility for the Tyler refinery and a reduction in the amount of financial resources available to meet the Tyler refinery's capital requirements. Further, if at any time our availability under the revolving credit facility falls below certain thresholds, we may be required to take steps to reduce our utilization under the credit facility. In addition, decreases in commodity prices may require us to post substantial amounts of cash collateral to some or all of our hedging counterparties in order to maintain any hedging positions. Finally, because our inventory is valued at the lower of cost or market value, we would record a write-down of inventory and a non-cash charge to cost of sales if the market value of our inventory were to decline to an amount below our cost.
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A terrorist attack on our assets, or threats of war or actual war, may hinder or prevent us from conducting our business.
Terrorist attacks in the United States, as well as events occurring in response to or in connection with them, including political instability in various Middle Eastern countries, may harm our business. Energy-related assets (which could include refineries, pipelines and terminals such as ours) may be at greater risk of future terrorist attacks than other possible targets in the United States. In addition, the State of Israel, where our majority stockholder, Delek Group, is based, has suffered armed conflicts and political instability for many years. We may be more susceptible to terrorist attack as a result of our connection to an Israeli owner.
A direct attack on our assets or the assets of others used by us could have a material adverse effect on our business, financial condition and results of operations. In addition, any terrorist attack or continued political instability in the Middle East could have an adverse impact on energy prices, including prices for our crude oil, other feedstocks and refined petroleum products, and an adverse impact on the margins from our refining and petroleum product marketing operations. Disruption or significant increases in energy prices could also result in government-imposed price controls.
We are subject to loss of market share or pressure to reduce prices in order to compete effectively with a changing group of competitors in a fragmented retail industry.
The markets in which we operate our retail fuel and convenience stores are highly competitive and characterized by ease of entry and constant change in the number and type of retailers offering the products and services found in our stores. We compete with other convenience store chains, gas stations, supermarkets, drug stores, discount stores, club stores, mass merchants, fast food operations and other retail outlets. In some of our markets, our competitors have been in existence longer and have greater financial, marketing and other resources than we do. As a result, our competitors may be able to respond better to changes in the economy and new opportunities within the industry.
In recent years, several non-traditional retailers, such as supermarkets, club stores and mass merchants, have affected the convenience store industry by entering the retail fuel business and/or selling merchandise traditionally found in convenience stores. These non-traditional gasoline and/or convenience merchandise retailers have obtained a significant share of the motor fuels market, may obtain a significant share of the convenience merchandise market and their market share in each market is expected to grow. Because of their diversity, integration of operations, experienced management and greater resources, these companies may be better able to withstand volatile market conditions or levels of low or no profitability in the retail segment. In addition, these retailers may use promotional pricing or discounts, both at the pump and in the store, to encourage in-store merchandise sales. These activities by our competitors could pressure us to offer similar discounts, adversely affecting our profit margins. Additionally, the loss of market share by our retail fuel and convenience stores to these and other retailers relating to either gasoline or merchandise could have a material adverse effect on our business, financial condition and results of operations.
Independent owner-operators can generally operate stores with lower overhead costs than ours. Should significant numbers of independent owner-operators enter our market areas, retail prices in some of our categories may be negatively affected, as a result of which our profit margins may decline at affected stores.
Our stores compete, in large part, based on their ability to offer convenience to customers. Consequently, changes in traffic patterns and the type, number and location of competing stores could result in the loss of customers and reduced sales and profitability at affected stores. Other major competitive factors include ease of access, pricing, timely deliveries, product and service selections, customer service, fuel brands, store appearance, cleanliness and safety.
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Risks Relating to Our Business
We are particularly vulnerable to disruptions to our refining operations because our refining operations are concentrated in two facilities.
Because all of our refining operations are concentrated in the Tyler and El Dorado refineries, significant disruptions at either facility could have a material adverse effect on our business, financial condition or results of operations. Refining segment contribution margin comprised approximately 88.9%, 85.3% and 48.0% of our consolidated contribution margin for the 2012, 2011 and 2010 fiscal years, respectively. We expect to perform a maintenance turnaround of each processing unit at each of our refineries, some in 2013 and the remainder in 2014. Depending on which units are affected, all or a portion of each refinery's production may be disrupted during a turnaround.
In addition, our refineries consist of many processing units, a number of which have been in operation for many years. Even if properly maintained, equipment may require significant capital expenditures to maintain desired efficiencies. One or more of the units may require additional unscheduled down time for unanticipated maintenance or repairs that are more frequent than our scheduled turnaround. For example, operations at the Tyler refinery were suspended for approximately one week of unscheduled down time in the third quarter of 2010 and an explosion and fire at the refinery in November 2008 suspended operations for more than five months.
Refinery operations may also be disrupted by external factors such as an interruption of electricity, natural gas, water treatment or other utilities. Other potentially disruptive factors discussed elsewhere in these risk factors include natural disasters, severe weather conditions, workplace or environmental accidents, interruptions of supply, work stoppages, losses of permits or authorizations or acts of terrorism. Disruptions to our refining operations could reduce our revenues during the period of time that our units are not operating.
The costs, scope, timelines and benefits of our refining projects may deviate significantly from our original plans and estimates.
We may experience unanticipated increases in the cost, scope and completion time for our improvement, maintenance and repair projects at our refineries. Refinery projects are generally initiated to increase the yields of higher-value products, increase our ability to process lower cost crude oils, increase production capacity, meet new regulatory requirements or maintain the safe and reliable operations of our existing assets. Equipment that we require to complete these projects may be unavailable to us at expected costs or within expected time periods. Additionally, employee or contractor labor expense may exceed our expectations. Due to these or other factors beyond our control, we may be unable to complete these projects within anticipated cost parameters and timelines. In addition, the benefits we realize from completed projects may take longer to achieve and/or be less than we anticipated. Our inability to complete and/or realize the benefits of refinery projects in a cost-efficient and timely manner could have a material adverse effect on our business, financial condition and results of operations.
The dangers inherent in our operations could cause disruptions and expose us to potentially significant costs and liabilities.
Our refining and logistics operations are subject to significant hazards and risks inherent in transporting, storing and processing crude oil, intermediate products and refined petroleum products. These hazards and risks include, but are not limited to, natural or weather-related disasters, fires, explosions, pipeline ruptures and spills, trucking accidents, train derailments, third party interference, mechanical failure of equipment and other events beyond our control. The occurrence of any of these events could result in production and distribution difficulties and disruptions, personal injury or death, environmental pollution and other damage to our properties and the properties of others. For example, a fire at our Tyler refinery in November 2008 resulted in two employee deaths, third party claims and a suspension of production that continued until May 2009.
Because of these inherent dangers, our refining and logistics operations are subject to various laws and regulations relating to occupational health and safety, process and operating safety and environmental protection. Continued efforts to comply with applicable laws and regulations related to health, safety and the environment, or a finding of non-compliance with current regulations, could result in additional capital expenditures or operating expenses, as well as fines and penalties.
In addition, our refineries, pipelines and terminals are located in populated areas and any release of hazardous material or catastrophic event could affect our employees and contractors as well as persons outside our property. Our crude and product pipelines cross populated and/or environmentally sensitive areas and waterways that could be severely impacted in the event of a release.
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We also operate a fleet of rail cars and trucks that regularly transport crude oil, highly combustible refined fuels and other hazardous substances on public railways and roads. An accident involving one of our rail cars or trucks could result in significant personal injuries and/or property damage.
In the event that personal injuries or deaths result from such events, or there are natural resource damages, we would likely incur substantial legal costs and liabilities. The extent of these costs and liabilities could exceed the limits of our available insurance. As a result, any such event could have a material adverse effect on our business, results of operations and cash flows.
We depend upon our logistics segment for a substantial portion of the crude supply and distribution networks that serve our refineries.
Our logistics segment consists of Delek Logistics, a publicly traded master limited partnership, and our consolidated financial statements include its consolidated financial results. As of December 31, 2012, we owned a 62.4% interest in Delek Logistics, including the 2% general partner interest. Delek Logistics operates a system of crude oil and refined product pipelines, distribution terminals and tankage in Arkansas, Louisiana, Tennessee and Texas. Delek Logistics generates revenues by charging tariffs for transporting crude oil and refined products through its pipelines, by leasing pipeline capacity to third parties, by charging fees for terminalling refined products and other hydrocarbons and storing and providing other services at its terminals.
Our refineries are substantially dependent upon Delek Logistics' assets and services under several long-term pipeline and terminal, tankage and throughput agreements expiring in 2017 through 2022. Delek Logistics is subject to its own operating and regulatory risks, including, but not limited to:
•its reliance on significant customers, including us;
•macroeconomic factors such as commodity price volatility that could affect its customers' utilization of its assets;
•its reliance on us for near-term growth;
•sufficiency of cash flow for required distributions;
•counterparty risks such as creditworthiness and force majeure;
•competition from third party pipelines and terminals and other competitors in the transportation and marketing industries;
•environmental regulations;
•operational hazards and risks;
•pipeline tariff regulations;
•limitations on additional borrowings and other restrictions in its debt agreements; and
•other financial, operational and legal risks.
The occurrence of any of these risks could directly or indirectly affect Delek Logistics' financial condition, results of operations and cash flows. Because Delek Logistics is our consolidated subsidiary, the occurrence of any of these risks could also affect our financial condition, results of operations and cash flows. Additionally, if any of these risks affect Delek Logistics' viability, its ability to serve our supply and distribution network needs will be jeopardized.
For additional information about Delek Logistics, see "Logistics Segment" under Item 1, Business, and "Terminals and Pipelines" under Item 2, Properties, of this Annual Report on Form 10-K.
Interruptions or limitations in the supply and delivery of crude oil or the supply and distribution of refined products may negatively affect our refining operations and inhibit the growth of our refining operations.
We rely on Delek Logistics and third party transportation systems for the delivery of crude oil to our refineries. We could experience an interruption or reduction of supply and delivery, or an increased cost of receiving crude oil, if the ability of these systems to transport crude oil is disrupted because of accidents, adverse weather conditions, governmental regulation, terrorism, maintenance or failure of pipelines or other delivery systems, other third-party action or other events beyond our control. The unavailability for our use for a prolonged period of time of any system of delivery of crude oil could have a material adverse effect on our business, financial condition or results of operations. For example, on two separate occasions since we assumed control of the El Dorado refinery in April 2011, a third party pipeline operator has temporarily suspended crude oil shipments on a pipeline system that supplies significant amounts of crude oil to the refinery. In May 2011, the suspension resulted from flooding along the Mississippi River and lasted approximately five weeks. In April 2012, the suspension resulted from a pipeline rupture and lasted approximately ten months. In each instance, the El Dorado refinery operated at reduced throughput rates until the pipeline system resumed normal operations.
Moreover, interruptions in delivery or limitations in delivery capacity may not allow our refining operations to draw sufficient crude oil to support current refinery production or increases in refining output. In order to maintain or materially increase refining
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output, existing crude delivery systems may require upgrades or supplementation, which may require substantial additional capital expenditures.
In addition, the El Dorado refinery distributes most of its light product production through a third-party pipeline system. An interruption to or change in the operation of the third-party pipeline system may result in a material restriction to our distribution channels. Because demand in the El Dorado market is limited, a material restriction to the El Dorado refinery's distribution channels may cause us to reduce production and may have a material adverse affect on our business, financial condition and results of operations.
Finally, our West Texas terminals sell refined products produced by refineries owned mostly by third parties. In 2012, these terminals received nearly all of their supply of refined products from two suppliers. We could experience an interruption or termination of supply or delivery of refined products if our suppliers partially or completely ceased operations, temporarily or permanently. The ability of these refineries and our suppliers to supply refined products to us could be disrupted by anticipated events such as scheduled upgrades or maintenance, as well as events beyond their control, such as unscheduled maintenance, fires, floods, storms, explosions, power outages, accidents, acts of terrorism or other catastrophic events, labor difficulties and work stoppages, governmental or private party litigation, or legislation or regulation that adversely impacts refinery operations. In addition, any reduction in capacity of other pipelines that connect with our suppliers' pipelines or our pipelines due to testing, line repair, reduced operating pressures, or other causes could result in reduced volumes of refined product supplied to our West Texas terminals. A reduction in the volume of refined products supplied to our West Texas terminals could adversely affect our sales and earnings.
General economic conditions may adversely affect our business, operating results and financial condition.
Economic slowdowns may have serious negative consequences for our business and operating results because our performance is subject to domestic economic conditions and their impact on levels of consumer spending. Some of the factors affecting consumer spending include general economic conditions, unemployment, consumer debt, reductions in net worth based on declines in equity markets and residential real estate values, adverse developments in mortgage markets, taxation, energy prices, interest rates, consumer confidence and other macroeconomic factors. During a period of economic weakness or uncertainty, current or potential customers may travel less, reduce or defer purchases, go out of business or have insufficient funds to buy or pay for our products and services.
Moreover, a financial market crisis may have a material adverse impact on financial institutions and limit access to capital and credit. This could, among other things, make it more difficult for us to obtain (or increase our cost of obtaining) capital and financing for our operations. Our access to additional capital may not be available on terms acceptable to us or at all.
Finally, substantially all of our retail fuel and convenience stores are located in the southeastern United States, primarily in the states of Alabama, Georgia and Tennessee. As a result, our results of operations are particularly vulnerable to general economic conditions in that region. An economic downturn in the southeastern United States could cause our sales and the value of our assets to decline and have a material adverse effect on our business, financial condition and results of operations.
From time to time, our cash and credit needs may exceed our internally generated cash flow and available credit, and our business could be materially and adversely affected if we are not able to obtain the necessary cash or credit from financing sources.
We have significant short-term cash needs to satisfy working capital requirements such as crude oil purchases which fluctuate with the pricing and sourcing of crude oil. We rely in part on our access to credit to purchase crude oil for our refineries. If the price of crude oil increases significantly, we may not have sufficient available credit, and may not be able to sufficiently increase such availability, under our existing credit facilities or other arrangements to purchase enough crude oil to operate our refineries at full capacity. Our failure to operate our refineries at full capacity could have a material adverse effect on our business, financial condition and results of operations. We also have significant long-term needs for cash, including any expansion and upgrade plans, as well as for regulatory compliance.
Depending on the conditions in credit markets, it may become more difficult to obtain cash or credit from third party sources. If we cannot generate cash flow or otherwise secure sufficient liquidity to support our short-term and long-term capital requirements, we may not be able to comply with regulatory deadlines or pursue our business strategies, in which case our operations may not perform as well as we currently expect.
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Our debt levels may limit our flexibility in obtaining additional financing and in pursuing other business opportunities.
As of December 31, 2012, we had total debt of $362.2 million, including current maturities of $52.2 million. In addition to our outstanding debt, as of December 31, 2012, our letters of credit issued under our various credit facilities were $181.9 million. Our borrowing availability under our various credit facilities as of December 31, 2012 was $373.7 million.
Our level of debt could have important consequences for us. For example, it could:
• | increase our vulnerability to general adverse economic and industry conditions; |
• | require us to dedicate a substantial portion of our cash flow from operations to service our debt and lease obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes; |
• | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
• | place us at a disadvantage relative to our competitors that have less indebtedness or better access to capital by, for example, limiting our ability to enter into new markets, upgrade our refining assets, renovate our stores or pursue acquisitions or other business opportunities; |
• | limit our ability to borrow additional funds in the future; and |
• | increase the interest cost of our borrowed funds and letters of credit. |
In addition, a substantial portion of our debt has a variable rate of interest, which increases our exposure to interest rate fluctuations, to the extent we elect not to hedge such exposures.
If we are unable to meet our principal and interest obligations under our debt and lease agreements, we could be forced to restructure or refinance our obligations, seek additional equity financing or sell assets, which we may not be able to do on satisfactory terms or at all. Our default on any of those agreements could have a material adverse effect on our business, financial condition and results of operations. In addition, if new debt is added to our current debt levels, the related risks that we now face could intensify.
Our debt agreements contain operating and financial restrictions that might constrain our business and financing activities.
The operating and financial restrictions and covenants in our credit facilities and any future financing agreements could adversely affect our ability to finance future operations or capital needs or to engage, expand or pursue our business activities. For example, to varying degrees our credit facilities restrict our ability to:
• | declare dividends and redeem or repurchase capital stock; |
• | prepay, redeem or repurchase debt; |
• | make loans and investments, issue guaranties and pledge assets; |
• | incur additional indebtedness or amend our debt and other material agreements; |
• | make capital expenditures; |
• | engage in mergers, acquisitions and asset sales; and |
• | enter into some intercompany arrangements and make some intercompany payments, which in some instances could restrict our ability to use the assets, cash flow or earnings of one segment to support another segment. |
Other restrictive covenants require that we meet certain financial covenants, including leverage coverage, fixed charge coverage and net worth tests as described in the credit facility agreements. In addition, the covenant requirements of our various credit agreements require us to make many subjective determinations pertaining to our compliance thereto and exercise good faith judgment in determining our compliance.
Our ability to comply with the covenants and restrictions contained in our debt instruments may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants and restrictions may be impaired. If we breach any of the restrictions or covenants in our debt agreements, a significant portion of our indebtedness may become immediately due and payable, and our lenders' commitments to make further loans to us may terminate. We might not have, or be able to obtain, sufficient funds to make these immediate payments. In addition, our obligations under our credit facilities are secured by substantially all of our assets. If we are unable to timely repay our indebtedness under our credit facilities, the lenders could seek to foreclose on the assets or we may be required to contribute additional capital to our subsidiaries. Any of these outcomes could have a material adverse effect on our business, financial condition and results of operations. For example, under the agreements governing Lion Oil's term loan credit facility, Holdings' term note with Bank Leumi USA and Finance's term notes with Israel Discount Bank of New York, a mandatory prepayment would be required if Delek Group beneficially owns less than 30% of our outstanding capital stock, or if another
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person or group becomes the owner of a greater percentage of our outstanding capital stock than is beneficially owned at that time by Delek Group. As of December 31, 2012, Delek Group beneficially owned approximately 52.9% of our outstanding capital stock, however we do not have the ability to ensure that such ownership remains at or above 30%. If Delek Group's beneficial ownership of our outstanding capital stock were to diminish to less than 30%, whether through divestiture, dilution or otherwise, or if another person or group becomes the owner of a greater percentage of our outstanding capital stock than is beneficially owned at that time by Delek Group, this would result in the mandatory prepayment of the borrowings under the loan documents referenced above.
Changes in our credit profile could affect our relationships with our suppliers, which could have a material adverse effect on our liquidity and our ability to operate our refineries at full capacity.
Changes in our credit profile could affect the way crude oil suppliers view our ability to make payments. As a result, suppliers could shorten the payment terms of their invoices with us or require us to provide significant collateral to them that we do not currently provide. Due to the large dollar amounts and volume of our crude oil and other feedstock purchases, as well as the historical volatility of crude oil pricing, any imposition by our suppliers of more burdensome payment terms may have a material adverse effect on our liquidity and our ability to make payments to our suppliers. This in turn could cause us to be unable to operate our refineries at full capacity. A failure to operate our refineries at full capacity could adversely affect our profitability and cash flows.
Termination or Expiration of our Supply and Offtake Agreement could have a material adverse effect on our liquidity.
We entered into the Supply and Offtake Agreement with 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. The Supply and Offtake Agreement expires on April 29, 2014. Upon any termination of the Supply and Offtake Agreement, including at expiration or in connection with a force majeure or default, 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. Additionally, upon any termination, we will be required to repurchase or refinance the consigned crude oil and refined products from J. Aron at then market prices, which may have a material impact on our working capital needs. At December 31, 2012, we had approximately 2.9 million barrels of inventory consigned to J. Aron and we have recorded a liability associated with this consigned inventory of $269.8 million.
Our insurance policies do not cover all losses, costs or liabilities that we may experience, and insurance companies that currently insure companies in the energy industry may cease to do so or substantially increase premiums.
We carry property, business interruption, pollution and casualty insurance, but we do not maintain insurance coverage against all potential losses, costs or liabilities. We could suffer losses for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. In addition, because our business interruption policy does not cover losses during the first 21 to 60 days of the interruption, a significant part or all of a business interruption loss could be uninsured. The occurrence of an event that is not fully covered by insurance could have a material adverse effect on our business, financial condition and results of operations.
The energy industry is highly capital intensive, and the entire or partial loss of individual facilities or multiple facilities can result in significant costs to both industry companies, such as us, and their insurance carriers. In recent years, several large energy industry claims have resulted in significant increases in the level of premium costs and deductible periods for participants in the energy industry. For example, hurricanes have caused significant damage to several petroleum refineries along the Gulf Coast, in addition to numerous oil and gas production facilities and pipelines in that region. As a result of large energy industry claims, insurance companies that have historically participated in underwriting energy-related facilities may discontinue that practice, may reduce the insurance capacity they are willing to offer or demand significantly higher premiums or deductible periods to cover these facilities. If significant changes in the number or financial solvency of insurance underwriters for the energy industry occur, or if other adverse conditions over which we have no control prevail in the insurance market, we may be unable to obtain and maintain adequate insurance at reasonable cost.
In addition, we cannot assure you that our insurers will renew our insurance coverage on acceptable terms, if at all, or that we will be able to arrange for adequate alternative coverage in the event of non-renewal. The unavailability of full insurance coverage to cover events in which we suffer significant losses could have a material adverse effect on our business, financial condition and results of operations.
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We may not be able to successfully execute our strategy of growth through acquisitions.
A significant part of our growth strategy is to acquire assets such as refineries, pipelines, terminals, and retail fuel and convenience stores that complement our existing assets and/or broaden our geographic presence. If attractive opportunities arise, we may also acquire assets in new lines of business that are complementary to our existing businesses. From our inception in 2001 through December 2012, we acquired the Tyler and El Dorado refineries, acquired approximately 500 retail fuel and convenience stores and developed our logistics segment through the acquisition of transportation and marketing assets. We expect to continue to acquire assets that complement our existing assets and/or broaden our geographic presence as a major element of our growth strategy, however:
• | we may not be able to identify suitable acquisition candidates or acquire additional assets on favorable terms; |
• | we usually compete with others to acquire assets, which competition may increase, and, any level of competition could result in decreased availability or increased prices for acquisition candidates; |
• | we may experience difficulty in anticipating the timing and availability of acquisition candidates; |
• | we may not be able to obtain the necessary financing, on favorable terms or at all, to finance any of our potential acquisitions; |
• | as a public company, we are subject to reporting obligations, internal controls and other accounting requirements with respect to any business we acquire, which may prevent or negatively affect the valuation of some acquisitions we might otherwise deem favorable or increase our acquisition costs. For example, prior to April 2011, the El Dorado refinery was controlled by a privately held entity that was not required to comply with public financial reporting obligations such as the Securities Exchange Act of 1934 and the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Now that we control the El Dorado refinery, we must ensure that it maintains appropriate disclosure controls and procedures and internal control over financial reporting. |
The occurrence of any of these factors could adversely affect our growth strategy.
Acquisitions involve risks that could cause our actual growth or operating results to differ adversely compared with our expectations.
Due to our emphasis on growth through acquisitions, we are particularly susceptible to transactional risks. For example:
• | during the acquisition process, we may fail or be unable to discover some of the liabilities of companies or businesses that we acquire; |
• | we may assume contracts or other obligations in connection with particular acquisitions on terms that are less favorable or desirable than the terms that we would expect to obtain if we negotiated the contracts or other obligations directly; |
• | we may fail to successfully integrate or manage acquired assets; |
• | acquired assets may not perform as we expect or we may not be able to obtain the cost savings and financial improvements we anticipate; |
• | acquisitions may require us to incur additional debt or issue additional equity; |
• | acquired assets may suffer a diminishment in fair value as a result of which we may need to record a write-down or impairment (such as the $60.0 million impairment of our minority investment in Lion Oil in the fourth quarter of 2010); |
• | we may fail to grow our existing systems, financial controls, information systems, management resources and human resources in a manner that effectively supports our growth; |
• | to the extent that we acquire assets in complementary new lines of business, we may become subject to additional regulatory requirements and additional risks that are characteristic or typical of these new lines of business; and |
• | to the extent that we acquire equity interests in entities that control assets (rather than acquiring the assets directly), we may assume liabilities that predate our ownership and control of the assets. For example, in April 2011, we acquired a majority of the outstanding shares of common stock of Lion Oil, the Arkansas corporation that owns and operates the El Dorado refinery. Because we acquired the stock of Lion Oil (rather than acquiring the refinery assets directly), we may be subject to Lion Oil's historic liabilities. |
The occurrence of any of these factors could adversely affect our business, financial condition and results of operations.
We may incur significant costs and liabilities with respect to investigation and remediation of environmental conditions at our refineries.
Prior to our purchase of our refineries, the previous owners had been engaged for many years in the investigation and remediation of hydrocarbons and other materials which contaminated soil and groundwater at the purchased facilities. Upon purchase of the facilities, we became responsible and liable for certain costs associated with the continued investigation and remediation of known
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and unknown impacted areas at the refineries. In the future, it may be necessary to conduct further assessments and remediation efforts at our refinery, pipeline, tank, terminal and store locations. In addition, we have identified and self-reported certain other environmental matters subsequent to our purchase of the refineries.
Based upon environmental evaluations performed internally and by third parties subsequent to the purchase of our refineries and other properties, we recorded environmental liabilities and accrued amounts we believe are sufficient to complete remediation. We expect remediation of soil, sediment and groundwater at some properties to continue for the foreseeable future. The need to make future expenditures for these purposes that exceed the amounts we estimated and accrued for could have a material adverse effect on our business, financial condition and results of operations.
In the future, we may incur substantial expenditures for investigation or remediation of contamination that has not been discovered at our current or former locations or locations that we may acquire. In addition, new legal requirements, new interpretations of existing legal requirements, increased legislative activity and governmental enforcement and other developments could require us to make additional unforeseen expenditures. We anticipate that compliance with environmental, health and safety regulations will require us to spend approximately $26.7 million in capital costs in 2013 and approximately $88.4 million during the next five years.
We could incur substantial costs or disruptions in our business if we cannot obtain or maintain necessary permits and authorizations or otherwise comply with health, safety, environmental and other laws and regulations.
Our operations require numerous permits and authorizations under various laws and regulations. These authorizations and permits are subject to revocation, renewal or modification and can require operational changes to limit impacts or potential impacts on the environment and/or health and safety. A violation of authorization or permit conditions or other legal or regulatory requirements could result in substantial fines, criminal sanctions, permit revocations, injunctions, and/or facility shutdowns. In addition, major modifications of our operations could require modifications to our existing permits or upgrades to our existing pollution control equipment. Any or all of these matters could have a negative effect on our business, results of operations and cash flows.
Our Tyler refinery currently has no ability to distribute refined petroleum products outside the northeast Texas market.
For the year ended December 31, 2012, nearly all of the refinery sales volume in Tyler was completed through a rack system located at the Tyler refinery. Unlike most other refineries, the Tyler refinery currently has no ability to distribute refined products outside the northeast Texas market. Although we expect that sales will commence at our Big Sandy, Texas terminal in 2013, the Tyler refinery's limited distribution capabilities may continue to limit its ability to attract new customers for its refined petroleum products or increase sales of the Tyler refinery products. If demand for the Tyler refinery's products diminishes within the northeast Texas market, its production may be reduced and our financial results would be adversely affected.
An increase in competition and/or reduction in demand in the markets in which we purchase feedstocks and sell our refined products could increase our costs and/or lower prices and adversely affect our sales and profitability.
Our Tyler refinery is currently the only supplier of a full range of refined petroleum products within a radius of approximately 100 miles of its location and there are no competitive fuel loading terminals within approximately 90 miles of our San Angelo terminal. If competitors commence operations within these niche markets, we could lose our niche market advantage, which could have a material adverse effect on our business, financial condition and results of operations.
Our El Dorado refinery's profitability may be impacted by increased competition from refineries that operate in different regions that have access to Canadian and domestic crudes, which, from time to time may be discounted from crudes available to our El Dorado refinery.
In addition, the maintenance or replacement of our existing customers depends on a number of factors outside of our control, including increased competition from other suppliers and demand for refined products in the markets we serve. Loss of, or reduction in, amounts purchased by our major customers could have an adverse effect on us to the extent that we are not able to correspondingly increase sales to other purchasers.
Finally, our ability to purchase and process favorably priced crude oils has allowed us to achieve higher net income and cash flow during the 2011 and 2012 fiscal years. For example, we currently enjoy access to mid-continent and southern Arkansas crude oils that are favorably priced due, in part, to the limited markets for them. If the price of these crude oils increases as a result of increased competition for them, it could have a material adverse effect on our business, financial condition and results of operations.
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We may be unable to negotiate market price risk protection in contracts with unaffiliated suppliers of refined products.
During the year ended December 31, 2012, our West Texas terminals obtained most of their supply of refined products under contracts that contain provisions that mitigate our market price risk inherent in the purchase and sale of refined products. These contracts allow us to purchase up to 20,350 and 7,000 barrels per day of refined products and expire in December 2017 and December 2015, respectively. We cannot assure you that in the future we will be able to negotiate similar market price protections in other contracts that we enter into for the supply of refined products or ethanol. To the extent that we purchase inventory at prices that do not compare favorably to the prices at which we are able to sell refined products, our sales and margins may be adversely affected.
Compliance with and changes in tax laws could adversely affect our performance.
We are subject to extensive tax liabilities, including federal and state and transactional taxes such as excise, sales/use, payroll, franchise, withholding, and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted or proposed that could result in increased expenditures for tax liabilities in the future. Certain of these liabilities are subject to periodic audits by the respective taxing authority which could increase our tax liabilities. Subsequent changes to our tax liabilities as a result of these audits may also subject us to interest and penalties.
We may incur losses as a result of our forward contract activities and derivative transactions.
We selectively use derivative financial instruments, such as fuel-related derivative transactions and interest rate swaps and interest rate cap agreements, to partially mitigate the risk of various financial exposures inherent in our business. We expect to continue to enter into these types of transactions. In connection with such derivative transactions, we may be required to make payments to maintain margin accounts and to settle the contracts at their value upon termination. The maintenance of required margin accounts and the settlement of derivative contracts at termination could cause us to suffer losses or limit gains. In particular, derivative transactions could expose us to the risk of financial loss upon unexpected or unusual variations in the sales price of crude oil and that of wholesale gasoline. We cannot assure you that the strategies underlying these transactions will be successful. If any of the instruments we utilize to manage our exposure to various types of risk is not effective, we may incur losses.
We are exposed to certain counter party risks which may adversely impact our results of operations.
We evaluate the creditworthiness of each of our various counterparties but we may not always be able to fully anticipate or detect deterioration in their creditworthiness and overall financial condition. The deterioration of creditworthiness or overall financial condition of a material counterparty (or counterparties) could expose us to an increased risk of nonpayment or other default under our contracts with them. If a material counterparty (or counterparties) default on their obligations to us, this could materially adversely affect our financial condition, results of operations or cash flows. For example, under the terms of the Supply and Offtake Agreement with J. Aron, we granted J. Aron the exclusive right to store and withdraw crude and certain products in the tanks associated with the El Dorado refinery. The Supply and Offtake Agreement also provides that the ownership of substantially all crude oil and certain other refined products in the tanks associated with the refinery will be retained by J. Aron, and that J. Aron will purchase substantially all of the specified refined products processed at the El Dorado refinery. If J. Aron does not timely perform its obligations under the Supply and Offtake Agreement, our results of operations may be adversely impacted.
Adverse weather conditions or other unforeseen developments could damage our facilities, reduce customer traffic and impair our ability to produce and deliver refined petroleum products or receive supplies for our retail fuel and convenience stores.
The regions in which we operate are susceptible to severe storms including hurricanes, thunderstorms, tornadoes, extended periods of rain, ice storms and snow, all of which we have experienced in the past few years. Inclement weather conditions could damage our facilities, interrupt production, adversely impact consumer behavior, travel and retail fuel and convenience store traffic patterns or interrupt or impede our ability to operate our locations. If such conditions prevail near our refineries, they could interrupt or undermine our ability to produce and transport products from our refineries and receive and distribute products at our terminals. Regional occurrences, such as energy shortages or increases in energy prices, fires and other natural disasters, could also hurt our business. The occurrence of any of these developments could have a material adverse effect on our business, financial condition and results of operations.
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Our operating results are seasonal and generally lower in the first and fourth quarters of the year for our refining and logistics segments and in the first quarter of the year for our retail segment. We depend on favorable weather conditions in the spring and summer months.
Demand for gasoline, convenience merchandise and asphalt products is generally higher during the summer months than during the winter months due to seasonal increases in motor vehicle traffic and road and home construction. Varying vapor pressure requirements between the summer and winter months also tighten summer gasoline supply. As a result, the operating results of our refining segment and logistics segment are generally lower for the first and fourth quarters of each year. Seasonal fluctuations in traffic also affect sales of motor fuels and merchandise in our retail fuel and convenience stores. As a result, the operating results of our retail segment are generally lower for the first quarter of the year.
Weather conditions in our operating area also have a significant effect on our operating results. Customers are more likely to purchase higher profit margin items at our retail fuel and convenience stores, such as fast foods, fountain drinks and other beverages and more gasoline during the spring and summer months, thereby typically generating higher revenues and gross margins for us in these periods. Unfavorable weather conditions during these months and a resulting lack of the expected seasonal upswings in traffic and sales could have a material adverse effect on our business, financial condition and results of operations.
A substantial portion of the workforce at our refineries is unionized, and we may face labor disruptions that would interfere with our operations.
As of December 31, 2012, we employed 280 and 488 people in our Tyler and El Dorado operations, respectively. From among these employees, 165 operations and maintenance hourly employees and 35 truck drivers at the Tyler refinery were represented by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union and its Local 202 at year end. The Tyler operations and maintenance hourly employees are currently covered by a collective bargaining agreement that expires January 31, 2015. The Tyler truck drivers are currently covered by a collective bargaining agreement that expires March 1, 2015. As of December 31, 2012, 174 operations and maintenance hourly employees at the El Dorado refinery were represented by the International Union of Operating Engineers and its Local 381. These employees are covered by a collective bargaining agreement which expires on August 1, 2014. Although these collective bargaining agreements contain provisions to discourage strikes or work stoppages, we cannot assure you that strikes or work stoppages will not occur. A strike or work stoppage could have a material adverse effect on our business, financial condition and results of operations.
We may seek to diversify our retail fuel and convenience store operations by entering new geographic areas, which may present operational and competitive challenges.
Since our inception, we have grown our retail fuel and convenience store operations primarily by acquiring stores in the southeastern United States. In the future, we may seek to grow by selectively operating stores in geographic areas other than those in which we currently operate, or in which we currently have a relatively small number of stores. This growth strategy would present numerous operational and competitive challenges to our senior management and employees and would place significant pressure on our operating systems. In addition, we cannot assure you that consumers located in the regions in which we may expand our operations would be as receptive to our stores as consumers in our existing markets. The success of our development plans will depend in part upon our ability to:
• | select, and compete successfully in, new markets; |
• | obtain suitable sites at acceptable costs; |
• | identify and contract with financially stable developers; |
• | realize an acceptable return on the capital invested in new facilities; |
• | hire, train, and retain qualified personnel; |
• | integrate new retail fuel and convenience stores into our existing distribution, inventory control, and information systems; |
• | expand relationships with our suppliers or develop relationships with new suppliers; and |
• | secure adequate financing, to the extent required. |
We cannot assure you that we will achieve our development goals, manage our growth effectively, or operate our existing and new retail fuel and convenience stores profitability. The failure to achieve any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
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Wholesale cost increases, vendor pricing programs and tax increases applicable to tobacco products, as well as campaigns to discourage their use, could adversely impact our results of operations in our retail segment.
Sales of tobacco products accounted for approximately 7.8%, 7.9% and 9.6% of net sales in our retail segment during the 2012, 2011 and 2010 fiscal years, respectively. Our tobacco gross profit accounted for approximately 14.8%, 15.9% and 17.2% of total gross profit in our retail segment during the same periods. Increases in the retail price of tobacco products as a result of increased taxes or wholesale costs could materially impact our cigarette sales volume and/or revenues, merchandise gross profit and overall customer traffic. In addition, national and local campaigns to discourage the use of tobacco products may have an adverse effect on demand for these products. A reduction in cigarette sales volume and/or revenues, merchandise gross profit from tobacco products or overall customer demand for tobacco products could have a material adverse effect on the business, financial condition and results of operations of our retail segment.
Major cigarette manufacturers currently offer substantial rebates to us; however, there can be no assurance that such rebate programs will continue. We include these rebates as a component of our gross margin from sales of cigarettes. In the event these rebates are decreased or eliminated, our wholesale cigarette costs will increase. For example, certain major cigarette manufacturers have offered rebate programs that provide rebates only if we follow the manufacturer's retail pricing guidelines. If we do not receive the rebates because we do not participate in the program or if the rebates we receive by participating in the program do not offset or surpass the revenue lost as a result of complying with the manufacturer's pricing guidelines, our cigarette gross margin will be adversely impacted. In general, we attempt to pass wholesale price increases on to our customers. However, due to competitive pressures in our markets, we may not be able to do so. In addition, reduced retail display allowances on cigarettes offered by cigarette manufacturers negatively impact gross margins. These factors could materially impact our retail price of cigarettes, cigarette sales volume and/or revenues, merchandise gross profit and overall customer traffic, which could in turn have a material adverse effect on our business, financial condition and results of operations.
We are dependent on fuel sales at our retail fuel and convenience stores which makes us susceptible to increases in the cost of gasoline and interruptions in fuel supply.
Net fuel sales of our retail segment represented approximately 79.9%, 79.9% and 75.9% of total net sales of our retail segment for 2012, 2011 and 2010 respectively. Our dependence on fuel sales makes us susceptible to increases in the cost of gasoline and diesel fuel and fuel profit margins have a significant impact on our earnings. The volume of fuel sold by us and our fuel profit margins are affected by numerous factors beyond our control, including the supply and demand for fuel, volatility in the wholesale fuel market and the pricing policies of competitors in local markets. Although we can rapidly adjust our pump prices to reflect higher fuel costs, a material increase in the price of fuel could adversely affect demand. A material, sudden increase in the cost of fuel that causes our fuel sales to decline could have a material adverse effect on our business, financial condition and results of operations.
Our dependence on fuel sales also makes us susceptible to interruptions in fuel supply. At December 31, 2012, fuel from the Gulf Coast transported to us through the Colonial and Plantation pipelines was the primary source of fuel supply for approximately 87.2% of our retail fuel and convenience stores. To mitigate the risks of cost volatility, we typically have no more than a five day supply of fuel at each of our stores and our fuel contracts do not guarantee an uninterrupted, unlimited supply in the event of a shortage. Gasoline sales generate customer traffic to our retail fuel and convenience stores and any decrease in gasoline sales, whether due to shortage or otherwise, could adversely affect our merchandise sales. A serious interruption in the supply of gasoline to our retail fuel and convenience stores could have a material adverse effect on our business, financial condition and results of operations.
If there is negative publicity concerning our brand names or the brand names of our suppliers, fuel and merchandise sales at certain of our stores may suffer.
We offer food products in our stores that are marketed under our brand names and certain nationally recognized brands such as Subway and Quizno's. Negative publicity, regardless of whether the concerns are valid, concerning food or beverage quality, food or beverage safety or other health concerns, facilities, employee relations or other matters related to our operations may materially adversely affect demand for food and beverages offered in our stores and could result in a decrease in customer traffic to our stores. Additionally, we may be the subject of complaints or litigation arising from food or beverage-related illness or injury in general which could have a negative impact on our business. Health concerns, poor food or beverage quality or operating issues stemming from one store or a limited number of stores can materially adversely affect the operating results of some or all of our stores and harm our proprietary brands.
In addition, we are an independent retailer of fuel that markets some of our products under the major oil company brands BP, Shell and Marathon. Fuel sold under these major brands represented approximately 19.5% of total fuel sales volume for our retail
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segment during the year ended December 31, 2012. Negative publicity concerning any of these major oil companies could adversely affect fuel and merchandise sales volumes in our retail segment. For example, the Deepwater Horizon accident in the Gulf of Mexico in April 2010 resulted in consumer boycotts of independent retailers of BP branded fuels. If negative publicity pertaining to the major brands adversely affects our sales volumes, it could have a material adverse effect on our business, financial condition and results of operations.
We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.
We rely on information technology systems across our operations, including management of our supply chain, point of sale processing at our retail sites, and various other processes and transactions. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential customer information, such as payment card and personal credit information. In addition, the systems currently used for certain transmission and approval of payment card transactions, and the technology utilized in payment cards themselves, may put certain payment card data at risk, and these systems are determined and controlled by the payment card industry, and not by us. We have taken the necessary steps to assure the PCI compliance and Data Security Standards are being employed at all our locations. In recent years, several retailers have experienced data breaches resulting in the exposure of sensitive customer data, including payment card information. Any compromise or breach of our information and payment technology systems could cause interruptions in our operations, damage our reputation, reduce our customers' willingness to visit our sites and conduct business with us or expose us to litigation from customer or sanctions from the PCI. Also, we inherited information technology systems and controls in El Dorado that monitor the movement of petroleum products through newly acquired pipeline systems. An undetected failure of these systems could result in environmental damage, operational disruptions, regulatory enforcement or private litigation. Further, the failure of any of our systems to operate effectively, or problems we may experience with transitioning to upgraded or replacement systems, could significantly harm our business and operations and cause us to incur significant costs to remediate such problems.
If we lose any of our key personnel, our ability to manage our business and continue our growth could be negatively impacted.
Our future performance depends to a significant degree upon the continued contributions of our senior management team and key technical personnel. We do not currently maintain key person life insurance policies for any of our senior management team. The loss or unavailability to us of any member of our senior management team or a key technical employee could significantly harm us. We face competition for these professionals from our competitors, our customers and other companies operating in our industry. To the extent that the services of members of our senior management team and key technical personnel would be unavailable to us for any reason, we would be required to hire other personnel to manage and operate our company and to develop our products and technology. We cannot assure you that we would be able to locate or employ such qualified personnel on acceptable terms or at all.
It may be difficult to serve process on or enforce a United States judgment against those of our directors who reside in Israel.
On the date of this report, three of our seven directors reside in the State of Israel. As a result, it may be difficult to serve legal process within the United States upon any of these persons. It may also be difficult to enforce, both in and outside the United States, judgments obtained in United States courts against these persons in any action, including actions based upon the civil liability provisions of United States federal or state securities laws, because a substantial portion of the assets of these directors is located outside of the United States. Furthermore, there is substantial doubt that the courts of the State of Israel would enter judgments in original actions brought in those courts predicated on United States federal or state securities laws.
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If we are, or become, a U.S. real property holding corporation, special tax rules may apply to a sale, exchange or other disposition of common stock and non-U.S. holders may be less inclined to invest in our stock as they may be subject to U.S. federal income tax in certain situations.
A non-U.S. holder of our common stock may be subject to U.S. federal income tax with respect to gain recognized on the sale, exchange or other disposition of our common stock if we are, or were, a "U.S. real property holding corporation" or "USRPHC," at any time during the shorter of the five-year period ending on the date of the sale or other disposition and the period such non-U.S. holder held our common stock (the shorter period referred to as the "lookback period"). In general, we would be a USRPHC if the fair market value of our "U.S. real property interests," as such term is defined for U.S. federal income tax purposes, equals or exceeds 50% of the sum of the fair market value of our worldwide real property interests and our other assets used or held for use in a trade or business. The test for determining USRPHC status is applied on certain specific determination dates and is dependent upon a number of factors, some of which are beyond our control (including, for example, fluctuations in the value of our assets). If we are or become a USRPHC, so long as our common stock is regularly traded on an established securities market such as the NYSE, only a non-U.S. holder who, actually or constructively, holds or held during the lookback period more than 5% of our common stock will be subject to U.S. federal income tax on the disposition of our common stock.
Risks Related to Our Common Stock
The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.
The market price of our common stock may be influenced by many factors, some of which are beyond our control, including:
• | our quarterly or annual earnings or those of other companies in our industry; |
• | changes in accounting standards, policies, guidance, interpretations or principles; |
• | general economic and stock market conditions; |
• | the failure of securities analysts to cover our common stock or changes in financial estimates by analysts; |
• | future sales of our common stock; |
• | announcements by us or our competitors of significant contracts or acquisitions; |
• | sales of common stock by us, our senior officers or our affiliates; and |
• | the other factors described in these "Risk Factors." |
In recent years, the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes often occur without any apparent regard to the operating performance of these companies. The price of our common stock could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce our stock price. In addition, recent distress in the credit and financial markets resulted in extreme volatility in trading prices of securities and diminished liquidity, and we cannot assure you that our liquidity will not be affected by changes in the financial markets and the global economy.
In the past, some companies that have experienced volatile market prices for their securities have been subject to securities class action suits filed against them. The filing of a lawsuit against us, regardless of the outcome, could have a material adverse effect on our business, financial condition and results of operations, as it could result in substantial legal costs and a diversion of our management's attention and resources.
Our stockholders may suffer substantial dilution.
We may sell securities in the public or private equity markets if and when conditions are favorable, even if we do not have an immediate need for capital. In addition, if we have an immediate need for capital, we may sell securities in the public or private equity markets even when conditions are not otherwise favorable. Our stockholders will suffer dilution if we issue currently unissued shares of our stock in the future in furtherance of our growth strategy. Our stockholders will also suffer dilution if stock, restricted stock units, restricted stock, stock options, stock appreciation rights, warrants or other equity awards, whether currently outstanding or subsequently granted, are exercised.
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We are exposed to risks relating to evaluations of internal controls required by Section 404.
To comply with the management certification and auditor attestation requirements of Section 404, we are required to evaluate our internal controls systems to allow management to report on, and our independent auditors to audit, our internal controls over financial reporting. During this process, we may identify control deficiencies of varying degrees of severity under applicable SEC and Public Company Accounting Oversight Board rules and regulations that remain unremediated. As a public company, we are required to report, among other things, control deficiencies that constitute a "material weakness" or changes in internal controls that, or are reasonably likely to, materially affect internal controls over financial reporting. A "material weakness" is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.
If we fail to comply with the requirements of Section 404, we may be subject to sanctions or investigation by regulatory authorities such as the SEC or the NYSE. Additionally, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our financial statements and our stock price may be adversely affected. If we fail to remedy any material weakness, our financial statements may be inaccurate, we may face restricted access to the capital markets, and our stock price may decline.
We are a "controlled company" within the meaning of the NYSE rules and, as a result, we qualify for, and intend to rely on, exemptions from certain corporate governance requirements.
Under applicable NYSE rules, a company of which more than 50% of the voting power is held by an individual, a group or another company is a "controlled company" and may elect not to comply with certain corporate governance requirements of the NYSE, including:
• | the requirement that a majority of its board of directors consist of independent directors; |
• | the requirement to have a nominating/corporate governance committee consisting entirely of independent directors with a written charter addressing the committee's purpose and responsibilities; and |
• | the requirement to have a compensation committee consisting entirely of independent directors with a written charter addressing the committee's purpose and responsibilities. |
We utilize all of these exemptions except that our board of directors consists of a majority of independent directors and our compensation committee has a written charter addressing its purpose and responsibilities. Accordingly, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.
Our controlling stockholder may have conflicts of interest with other stockholders in the future.
At December 31, 2012, Delek Group beneficially owned approximately 52.9% of our outstanding common stock. As a result, Delek Group and its controlling stockholder, Mr. Sharon, will continue to be able to control the election of our directors, influence our corporate and management policies (including the declaration of dividends) 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. So long as Delek Group continues to own a significant amount of the outstanding shares of our common stock, Delek Group will continue to be able to influence or effectively control our decisions, including whether to pursue or consummate potential mergers or acquisitions, asset sales, and other significant corporate transactions. We cannot provide any assurances that the interests of Delek Group will coincide with the interests of other holders of our common stock.
Future sales of shares of our common stock could depress the price of our common stock and expose us to increased stockholder activism.
The market price of our common stock could decline as a result of the introduction of a large number of shares of our common stock into the market or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. At December 31, 2012, 31,536,432 shares of our common stock were controlled by Delek Group. In
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accordance with Delek Group's registration rights agreement with us, these shares have been registered for resale by the selling stockholders, in one or more transactions, at their discretion in the future. Affiliates of Delek Group sold an aggregate of 8.2 million shares of our Common Stock during the year ended December 31, 2012.
Our stockholders may from time to time engage in proxy solicitations, advance stockholder proposals or otherwise attempt to effect changes or acquire control over us. This risk will increase if Delek Group ceases to control a majority of our common stock. Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors seeking to increase short-term stockholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases or sales of assets or the entire company. Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of our board of directors and senior management from the pursuit of business strategies. As a result, stockholder campaigns could adversely affect our results of operations, financial condition and cash flows.
We depend upon our subsidiaries for cash to meet our obligations and pay any dividends.
We are a holding company. Our subsidiaries conduct substantially all of our operations and own substantially all of our assets. Consequently, our cash flow and our ability to meet our obligations or pay dividends to our stockholders depend upon the cash flow of our subsidiaries and the payment of funds by our subsidiaries to us in the form of dividends, tax sharing payments or otherwise. Our subsidiaries' ability to make any payments will depend on many factors, including their earnings, cash flows, the terms of their indebtedness, tax considerations and legal restrictions.
We may be unable to pay future dividends in the anticipated amounts and frequency set forth herein.
We will only be able to pay dividends from our available cash on hand and funds received from our subsidiaries. Our ability to receive dividends and other cash payments from our subsidiaries is restricted under the terms of their respective credit facilities. For example, under the terms of their credit facilities, our subsidiaries are subject to certain customary covenants that limit their ability to, subject to certain exceptions as defined in their respective credit agreements, remit cash to, distribute assets to, or make investments in, us as the parent company. Specifically, these covenants limit the payment, in the form of cash or other assets, of dividends or other cash payments, to us. The declaration of future dividends on our common stock will be at the discretion of our board of directors and will depend upon many factors, including our results of operations, financial condition, earnings, capital requirements, restrictions in our debt agreements and legal requirements. Although we currently intend to pay quarterly cash dividends on our common stock at an annual rate of $0.40 per share, we cannot provide any assurances that any dividends will be paid in the anticipated amounts and frequency set forth herein, if at all.
Provisions of Delaware law and our organizational documents may discourage takeovers and business combinations that our stockholders may consider in their best interests, which could negatively affect our stock price.
In addition to the fact that Delek Group currently owns the majority of our common stock, provisions of Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change in control of our company or deterring tender offers for our common stock that other stockholders may consider in their best interests.
Our certificate of incorporation authorizes us to issue up to 10,000,000 shares of preferred stock in one or more different series with terms to be fixed by our board of directors. Stockholder approval is not necessary to issue preferred stock in this manner. Issuance of these shares of preferred stock could have the effect of making it more difficult and more expensive for a person or group to acquire control of us and could effectively be used as an anti-takeover device. On the date of this report, no shares of our preferred stock are outstanding.
Our bylaws provide for an advance notice procedure for stockholders to nominate director candidates for election or to bring business before an annual meeting of stockholders and require that special meetings of stockholders be called only by our chairman of the board, president or secretary after written request of a majority of our board of directors. The anti-takeover provisions of Delaware law and provisions in our organizational documents may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context.
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Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Refineries
The refining segment owns refineries in Tyler, Texas and El Dorado, Arkansas and the land on which these two refineries are located. The Tyler refinery is situated on approximately 100 out of a total of approximately 600 acres of land owned by us. The El Dorado refinery site consists of approximately 460 acres of which the main plant sits on approximately 335 acres. We own the light product truck rack distribution facilities at our Tyler and El Dorado refineries and an asphalt distribution terminal at the El Dorado refinery. The results of operation of these assets are included in our refining segment. See also "Refining Segment" included in Item 1, Business, of this Annual Report on Form 10-K.
Terminals and Pipelines
The logistics segment owns five light product distribution terminals, one in each of Nashville and Memphis, Tennessee and Big Sandy, San Angelo and Abilene, Texas. All of the above properties are located on real property owned by us. The logistics segment also owns the El Dorado Pipeline System, the Magnolia Pipeline System and 600 miles of crude oil gathering lines, which are located in Louisiana and Arkansas. The logistics segment owns the McMurrey Pipeline System, the Nettleton Pipeline, the Big Sandy Pipeline and the Paline Pipeline System, which are located in Texas. All of the pipeline systems set forth above run across leased land and rights-of-way. See also "Logistics Segment" included in Item 1, Business, of this Annual Report on Form 10-K.
Retail Fuel and Convenience Stores
As of December 31, 2012, the retail segment owned the real estate at 217 company operated retail fuel and convenience store locations, and leased the real property at 156 company operated stores. In addition to these stores, we own or lease 13 locations that were either leased or subleased to third party dealers; 54 other dealer sites are owned or leased independently by dealers.
The following table summarizes the real estate position of our retail segment as of December 31, 2012.
State | Company Operated Sites | Dealer Sites | Dealer Sites Not Owned Nor Leased By Us | Owned Sites | Leased Sites | Remaining Lease Term <3 Years (1) | Remaining Lease Term >3 Years (1) | ||||||||||||||
Tennessee | 201 | 22 | 17 | 117 | 89 | 24 | 65 | ||||||||||||||
Alabama | 88 | 36 | 31 | 57 | 36 | 8 | 28 | ||||||||||||||
Georgia | 58 | 9 | 6 | 37 | 24 | 14 | 10 | ||||||||||||||
Arkansas | 12 | — | — | 8 | 4 | 3 | 1 | ||||||||||||||
Virginia | 8 | — | — | — | 8 | 1 | 7 | ||||||||||||||
Kentucky | 4 | — | — | 1 | 3 | 1 | 2 | ||||||||||||||
Mississippi | 2 | — | — | 2 | — | — | — | ||||||||||||||
Total | 373 | 67 | 54 | 222 | 164 | 51 | 113 | ||||||||||||||
(1) | Includes options renewable at our discretion; measured as of December 31, 2012. |
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Most of our retail fuel and convenience store leases are net leases requiring us to pay taxes, insurance and maintenance costs. Of the leases that expire in less than three years, we anticipate that we will be able to negotiate acceptable extensions of the leases for those locations that we intend to continue operating. We do not believe that any of these leases are individually material. See also "Retail Segment" included in Item 1, Business, of this Annual Report on Form 10-K.
Liens and Encumbrances
The majority of the assets described above are pledged under and encumbered by certain of our debt facilities. See Note 11 of the consolidated financial statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information.
Corporate Headquarters
We lease our corporate headquarters at 7102 Commerce Way, Brentwood, Tennessee. The lease is for 54,000 square feet of office space. The lease term expires in April 2022.
ITEM 3. LEGAL PROCEEDINGS
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.
Following the November 2008 incident at the Tyler refinery, the EPA conducted 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. As a result, the EPA referred an enforcement action to the DOJ in late 2011 and we are currently in discussions with EPA and the DOJ regarding what, if any, penalties and/or interim actions may be necessary.
Also in late 2011, the EPA referred an enforcement action to the DOJ pertaining to alleged violations of our NPDES wastewater discharge permit at the El Dorado refinery, which the planned construction of a pipeline to the Ouachita River is designed to alleviate. We are in discussion with the EPA and the DOJ regarding what, if any, penalties and/or interim actions may be necessary.
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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information and Dividends
Our common stock is traded on the New York Stock Exchange under the symbol "DK." The following table sets forth the quarterly high and low sales prices of our common stock for each quarterly period and dividends issued since January 1, 2011:
Period | High Sales Price | Low Sales Price | Regular Dividends Per Common Share | Special Dividends Per Common Share | ||||||||||||
2011 | ||||||||||||||||
First Quarter | $13.89 | $6.83 | $0.0375 | None | ||||||||||||
Second Quarter | $15.83 | $12.58 | $0.0375 | None | ||||||||||||
Third Quarter | $17.50 | $11.19 | $0.0375 | None | ||||||||||||
Fourth Quarter | $16.85 | $9.41 | $0.0375 | $0.1800 | ||||||||||||
2012 | ||||||||||||||||
First Quarter | $15.72 | $10.99 | $0.0375 | $0.0900 | ||||||||||||
Second Quarter | $17.76 | $14.78 | $0.0375 | $0.1000 | ||||||||||||
Third Quarter | $27.41 | $17.57 | $0.0375 | $0.1000 | ||||||||||||
Fourth Quarter | $27.58 | $22.51 | $0.1000 | $0.1000 | ||||||||||||
In connection with our initial public offering in May 2006, our Board of Directors announced its intention to pay a regular quarterly cash dividend of $0.0375 per share of our common stock beginning in the fourth quarter of 2006. In November 2012, our Board of Directors announced its intention to pay a regular quarterly cash dividend to $0.10 per share of our common stock beginning in the fourth quarter of 2012. The dividends paid in 2012 and 2011 totaled approximately $35.5 million and $19.5 million, respectively. As of the date of this filing, we intend to continue to pay quarterly cash dividends on our common stock at the annual rate of $0.40 per share. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend upon many factors, including our financial condition, earnings, legal requirements, restrictions in our debt agreements and other factors our Board of Directors deems relevant. Except as represented in the table above, we have paid no other cash dividends on our common stock during the two most recent fiscal years.
Holders
As of March 1, 2013, there were approximately 7 common stockholders of record. This number does not include beneficial owners of our common stock whose stock is held in nominee or "street" name accounts through brokers.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
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Performance Graph
The following Performance Graph and related information shall not be deemed "soliciting material" or to be "filed" with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
The following graph and table compare cumulative total returns for our stockholders to the Standard and Poor's 500 Stock Index and a market capitalization weighted peer group selected by management for the five-year period commencing December 31, 2007 and ending December 31, 2012. The graph assumes a $100 investment made on December 31, 2007. Each of the three measures of cumulative total return assumes reinvestment of dividends. The new peer group is comprised of Alon USA Energy, Inc. (NYSE: ALJ), CVR Energy, Inc. (NYSE:CVI), HollyFrontier Corporation (NYSE: HFC), Marathon Petroleum Corporation (NYSE: MPC), Phillips 66 (NYSE: PSX), Tesoro Corporation (NYSE: TSO), Valero Energy Corporation (NYSE: VLO) and Western Refining, Inc (NYSE: WNR). We changed our peer group this year to be more reflective of companies that we benchmark against. We removed Casey's General Stores, Inc. (NSDQ: CASY) Susser Holdings Corporation (NYSE: SUSS) and The Pantry, Inc. (NSDQ: PTRY) and we added Phillips 66, Marathon Petroleum and CVR Energy, Inc. The stock performance shown on the graph below is not necessarily indicative of future price performance.
COMPARISON OF CUMULATIVE TOTAL RETURN
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
In conjunction with the DKL Offering, we have reclassified certain operating segments. The majority of the assets previously reported as our marketing segment and certain assets previously operated by our refining segment were contributed to Delek Logistics. The results of the operation of these assets are now reported in our logistics segment. Further, certain operations previously included as part of our marketing segment were retained by Holdings and are now reported as part of our refining segment. The historical results of the operation of these assets have been reclassified to conform to the current presentation.
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Year Ended December 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008(1) | ||||||||||||||||
Statement of Operations Data: | (In millions, except share and per share data) | |||||||||||||||||||
Net sales: | ||||||||||||||||||||
Refining | $ | 6,240.9 | $ | 4,715.9 | $ | 1,693.8 | $ | 893.1 | $ | 2,105.6 | ||||||||||
Logistics | 818.5 | 738.1 | 504.4 | 374.4 | 745.5 | |||||||||||||||
Retail | 1,877.8 | 1,859.4 | 1,592.3 | 1,421.5 | 1,885.7 | |||||||||||||||
Other | (210.5 | ) | (115.2 | ) | (34.9 | ) | (22.3 | ) | (13.1 | ) | ||||||||||
Total net sales | 8,726.7 | 7,198.2 | 3,755.6 | 2,666.7 | 4,723.7 | |||||||||||||||
Operating costs and expenses: | ||||||||||||||||||||
Cost of goods sold | 7,704.4 | 6,429.9 | 3,412.9 | 2,394.1 | 4,308.1 | |||||||||||||||
Operating expenses | 363.3 | 320.9 | 229.5 | 219.0 | 240.8 | |||||||||||||||
Impairment of goodwill | — | 2.2 | — | 7.0 | 11.2 | |||||||||||||||
Insurance proceeds — business interruption | — | — | (12.8 | ) | (64.1 | ) | — | |||||||||||||
Property damage proceeds, net | — | — | (4.0 | ) | (40.3 | ) | — | |||||||||||||
General and administrative expenses | 103.5 | 81.4 | 59.0 | 64.3 | 57.0 | |||||||||||||||
Depreciation and amortization | 82.5 | 74.1 | 61.1 | 52.4 | 41.3 | |||||||||||||||
(Gain) loss on sale of assets | (0.1 | ) | 3.6 | 0.7 | 2.9 | (6.8 | ) | |||||||||||||
Total operating costs and expenses | 8,253.6 | 6,912.1 | 3,746.4 | 2,635.3 | 4,651.6 | |||||||||||||||
Operating income | 473.1 | 286.1 | 9.2 | 31.4 | 72.1 | |||||||||||||||
Interest expense | 45.7 | 51.2 | 34.1 | 25.5 | 23.7 | |||||||||||||||
Interest income | (0.2 | ) | — | — | (0.1 | ) | (2.1 | ) | ||||||||||||
Loss from minority investment(2) | — | — | — | — | 7.9 | |||||||||||||||
(Gain) loss on investment in Lion Oil | — | (12.9 | ) | 60.0 | — | — | ||||||||||||||
Gain on extinguishment of debt | — | — | — | — | (1.6 | ) | ||||||||||||||
Other expenses, net | — | — | — | 0.6 | 1.0 | |||||||||||||||
Total non-operating expenses, net | 45.5 | 38.3 | 94.1 | 26.0 | 28.9 | |||||||||||||||
Income (loss) from continuing operations before income taxes | 427.6 | 247.8 | (84.9 | ) | 5.4 | 43.2 | ||||||||||||||
Income tax expense (benefit) | 151.6 | 84.7 | (5.0 | ) | 3.1 | 18.6 | ||||||||||||||
Income (loss) from continuing operations | 276.0 | 163.1 | (79.9 | ) | 2.3 | 24.6 | ||||||||||||||
Income (loss) from discontinued operations, net of tax | — | — | — | (1.6 | ) | 1.9 | ||||||||||||||
Net income (loss) | 276.0 | 163.1 | (79.9) | 0.7 | 26.5 | |||||||||||||||
Net income attributed to non-controlling interest | 3.2 | 4.8 | — | — | — | |||||||||||||||
Net income (loss) attributable to Delek | $ | 272.8 | $ | 158.3 | $ | (79.9 | ) | $ | 0.7 | $ | 26.5 | |||||||||
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Year Ended December 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008(1) | ||||||||||||||||
Statement of Operations Data (Continued): | (In millions, except share and per share data) | |||||||||||||||||||
Basic earnings (loss) per share: | ||||||||||||||||||||
Income (loss) from continuing operations | $ | 4.65 | $ | 2.80 | $ | (1.47 | ) | $ | 0.04 | $ | 0.47 | |||||||||
(Loss) income from discontinued operations | — | — | — | (0.03 | ) | 0.03 | ||||||||||||||
Basic earnings (loss) per share | $ | 4.65 | $ | 2.80 | $ | (1.47 | ) | $ | 0.01 | $ | 0.50 | |||||||||
Diluted earnings (loss) per share: | ||||||||||||||||||||
Income (loss) from continuing operations | $ | 4.57 | $ | 2.78 | $ | (1.47 | ) | $ | 0.04 | $ | 0.46 | |||||||||
(Loss) income from discontinued operations | — | — | — | (0.03 | ) | 0.03 | ||||||||||||||
Diluted earnings (loss) per share | $ | 4.57 | $ | 2.78 | $ | (1.47 | ) | $ | 0.01 | $ | 0.49 | |||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||
Basic | 58,719,968 | 56,543,977 | 54,264,763 | 53,693,258 | 53,675,145 | |||||||||||||||
Diluted | 59,644,798 | 57,026,864 | 54,264,763 | 54,484,969 | 54,401,747 | |||||||||||||||
Dividends declared per common share outstanding | $ | 0.60 | $ | 0.33 | $ | 0.15 | $ | 0.15 | $ | 0.15 | ||||||||||
Year Ended December 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008(1) | ||||||||||||||||
Cash Flow Data: | (In millions) | |||||||||||||||||||
Cash flows provided by operating activities | $ | 462.9 | $ | 130.1 | $ | 71.0 | $ | 137.8 | $ | 28.6 | ||||||||||
Cash flows used in investing activities | (159.2 | ) | (195.7 | ) | (44.5 | ) | (102.9 | ) | (39.4 | ) | ||||||||||
Cash flows provided by (used in) financing activities | 72.1 | 242.4 | (45.8 | ) | 18.2 | (78.9 | ) | |||||||||||||
Net increase (decrease) in cash and cash equivalents | $ | 375.8 | $ | 176.8 | $ | (19.3 | ) | $ | 53.1 | $ | (89.7 | ) | ||||||||
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Year Ended December 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008(1) | ||||||||||||||||
Balance Sheet Data: | (In millions) | |||||||||||||||||||
Cash and cash equivalents | $ | 601.7 | $ | 225.9 | $ | 49.1 | $ | 68.4 | $ | 15.3 | ||||||||||
Total current assets | 1,359.7 | 1,050.6 | 299.4 | 311.6 | 194.0 | |||||||||||||||
Property, plant and equipment, net | 1,124.2 | 1,053.8 | 680.1 | 692.0 | 586.6 | |||||||||||||||
Total assets | 2,623.7 | 2,230.6 | 1,144.6 | 1,223.0 | 1,017.2 | |||||||||||||||
Total current liabilities | 999.1 | 994.7 | 292.5 | 322.2 | 186.2 | |||||||||||||||
Total debt, including current maturities | 362.2 | 432.6 | 295.8 | 317.1 | 286.0 | |||||||||||||||
Total non-current liabilities | 546.6 | 582.3 | 408.8 | 369.8 | 297.2 | |||||||||||||||
Total shareholders' equity | 1,078.0 | 653.6 | 443.3 | 531.0 | 533.8 | |||||||||||||||
Total liabilities and shareholders' equity | 2,623.7 | 2,230.6 | 1,144.6 | 1,223.0 | 1,017.2 | |||||||||||||||
(1) | Operating results for 2008 have been restated to reflect the reclassification of the retail segment's remaining nine Virginia stores back to normal operations. |
(2) | Beginning October 1, 2008, Delek began reporting its investment in Lion Oil using the cost method of accounting. |
Segment Data(1):
As of and For the Year Ended December 31, 2012 | ||||||||||||||||||||
(In millions) | Refining | Retail | Logistics | Corporate, Other and Eliminations | Consolidated | |||||||||||||||
Net sales (excluding intercompany fees and sales) | $ | 6,070.8 | $ | 1,877.8 | $ | 775.9 | $ | 2.2 | $ | 8,726.7 | ||||||||||
Intercompany fees and sales | 170.1 | — | 42.6 | (212.7 | ) | — | ||||||||||||||
Operating costs and expenses: | ||||||||||||||||||||
Cost of goods sold | 5,441.1 | 1,704.6 | 757.9 | (199.2 | ) | 7,704.4 | ||||||||||||||
Operating expenses | 213.7 | 128.0 | 23.4 | (1.8 | ) | 363.3 | ||||||||||||||
Segment contribution margin | $ | 586.1 | $ | 45.2 | $ | 37.2 | $ | (9.5 | ) | 659.0 | ||||||||||
General and administrative expenses | 103.5 | |||||||||||||||||||
Depreciation and amortization | 82.5 | |||||||||||||||||||
Gain on sale of assets | (0.1 | ) | ||||||||||||||||||
Operating income | $ | 473.1 | ||||||||||||||||||
Total assets | $ | 1,873.3 | $ | 425.6 | $ | 245.8 | $ | 79.0 | $ | 2,623.7 | ||||||||||
Capital spending (excluding business combinations) | $ | 65.9 | $ | 29.1 | $ | 10.5 | $ | 26.5 | $ | 132.0 | ||||||||||
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As of and For the Year Ended December 31, 2011 | ||||||||||||||||||||
(In millions) | Refining | Retail | Logistics | Corporate, Other and Eliminations | Consolidated | |||||||||||||||
Net sales (excluding intercompany fees and sales) | $ | 4,632.5 | $ | 1,859.4 | $ | 715.8 | $ | (9.5 | ) | $ | 7,198.2 | |||||||||
Intercompany fees and sales | 83.4 | — | 22.3 | (105.7 | ) | — | ||||||||||||||
Operating costs and expenses: | ||||||||||||||||||||
Cost of goods sold | 4,160.9 | 1,679.4 | 694.8 | |||||||||||||||||