10-K
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SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C.
20549
FORM 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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OR
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o
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-6841
DELEK US HOLDINGS,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other
jurisdiction of
Incorporation or organization)
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52-2319066
(I.R.S. Employer
Identification No.)
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830 Crescent Centre Drive,
Suite 300, Franklin, Tennessee
(Address of principal
executive offices)
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37067
(Zip Code)
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Registrants telephone number, including area code
(615) 771-6701
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $.01 par value
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New York Stock Exchange
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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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants 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, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check One):
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
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 at June 30, 2006 was approximately
$173,067,200, based upon the closing sale price of the
registrants 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 February 23, 2007, there were 51,139,869 shares of
Common Stock, $.01 par value, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement to
be delivered to stockholders in connection with the 2007 Annual
Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission within 120 days after
December 31, 2006, are incorporated by reference into
Part III of this
Form 10-K.
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. 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,
Managements Discussion and Analysis of Financial Condition
and Results of Operations, of this Annual Report on
Form 10-K.
PART I
Company
Overview
We are a diversified energy business focused on petroleum
refining, wholesale sales of refined products and retail
marketing. Our business consists of three operating segments:
refining, marketing and retail. Our refining segment operates a
high conversion, moderate complexity independent refinery in
Tyler, Texas, with a design crude distillation capacity of
60,000 barrels per day (bpd), along with an associated crude oil
pipeline and light products loading facilities. Our marketing
segment sells refined products on a wholesale basis in west
Texas through company-owned and third-party operated terminals.
Our retail segment markets gasoline, diesel, other refined
petroleum products and convenience merchandise through a network
of 394 company-operated retail fuel and convenience stores
located in Alabama, Arkansas, Georgia, Kentucky, Louisiana,
Mississippi, Tennessee and Virginia. We focus on creating value
in our existing and acquired assets through disciplined
financial management and operating expense and loss prevention
controls, effective utilization of information technology and
implementation of new marketing strategies and by fostering a
culture of dedication and teamwork among our employees.
We are a Delaware corporation formed in connection with our
acquisition in May 2001 of 198 retail fuel and convenience
stores from a subsidiary of The Williams Companies. Since then,
we have completed several other acquisitions of retail fuel and
convenience stores. In 2005, we expanded our scope of operations
to include complementary petroleum refining and wholesale and
distribution businesses by acquiring the Tyler refinery. We
initiated operations of our marketing segment during the third
quarter of 2006 with the purchase of assets from Pride Companies
LP and affiliates. We are also a controlled company under the
rules and regulations of the New York Stock Exchange because an
indirect, wholly-owned subsidiary of Delek Group Ltd., owns
approximately 77.0% of our outstanding common stock. Delek Group
Ltd. is a conglomerate that is domiciled and publicly traded in
Israel, has significant interests in fuel supply businesses and
is controlled indirectly by Mr. Itshak Sharon (Tshuva).
1
Acquisitions
We have been successful in rapidly integrating our refinery
acquisition, five large retail fuel and convenience store
acquisitions, a pipeline and terminal acquisition and several
smaller acquisitions since our formation in 2001. Our principal
acquisitions since inception are summarized below:
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Approximate
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purchase
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Date
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Acquired Company/Assets
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Acquired from
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price(1)
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May 2001
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MAPCO Express, Inc., with 198
retail fuel and convenience stores
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Williams Express, Inc.
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$162.5 million
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June 2001
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36 retail fuel and convenience
stores in Virginia
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East Coast Oil Corporation
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$40.1 million
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February 2003
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Seven retail fuel and convenience
stores
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Pilot Travel Centers
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$11.9 million
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April 2004
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Williamson Oil Co., Inc., with 89
retail fuel and convenience stores in Alabama, a wholesale fuel
and merchandise operation
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Wiliamson Oil Co., Inc.
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$19.8 million, plus assumed
debt of $28.6
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April 2005
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Refinery, pipeline and other
refining, product terminal and crude oil pipeline assets located
in and around Tyler, Texas, including physical inventories of
crude oil, intermediaries and light products
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La Gloria Oil and Gas Company
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$68.1 million, including
$25.9 million of prepaid crude inventory and
$38.4 million of assumed crude vendor liabilities
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December 2005
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21 retail fuel and convenience
stores, a network of four dealer-operated stores, four
undeveloped lots and inventory in the Nashville, Tennessee area
(BP Stores)
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BP Products North America, Inc.
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$35.5 million
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July 2006
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43 retail fuel and convenience
stores located in Georgia and Tennessee (Fast stores)
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Fast Petroleum, Inc.
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$50.0 million
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July 2006
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Refined petroleum product
terminals, seven pipelines, storage tanks and idle oil refinery
equipment (Pride assets)
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Pride Companies, L.P.
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$55.1 million
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(1) |
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Excludes transaction costs
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In the first quarter of 2007 we signed a purchase and sale
agreement to acquire 107 stores from Calfee Company of Dalton,
Inc. and affiliates for $65.0 million plus inventory. We
anticipate that, subject to government approval, this
acquisition will close in the second quarter of 2007. We expect
to continue to review acquisition and organic growth
opportunities in the refining, marketing, retail fuel and
convenience store markets as well as opportunities to acquire
other petroleum sale and distribution logistical assets such as
pipelines, terminals and fuel storage facilities.
Information
About Our Segments
As a result of our acquisition of refined petroleum product
terminals, seven pipelines, storage tanks and idle refinery
equipment, beginning in the third quarter of 2006 we added a
third operating segment, marketing, to complement our refining
and retail segments. Segment information is prepared on the same
basis that management reviews financial information for
operational decision making purposes. Additional segment and
financial information is contained in our segment results
included in Item 6, Selected Financial Data, Item 7,
Managements Discussion and Analysis of Financial Condition
and Results of Operations, and in Note 10, Segment Data, of
our consolidated financial statements included in Item 8 of
this Annual Report on
Form 10-K.
Refining
Segment
We operate a high conversion, moderate complexity independent
refinery with a design crude distillation capacity of
60,000 bpd, along with an associated crude oil pipeline and
light products loading facilities. The refinery is located in
the city of Tyler in East Texas, and is the only supplier of a
full range of refined petroleum products within a radius of
approximately 115 miles.
2
The Tyler refinery is situated on approximately 100 out of a
total of approximately 600 contiguous acres of land (excluding
pipelines) that we own in Tyler and adjacent areas. The Tyler
refinery includes a fluidized catalytic cracking unit and a
delayed coker, enabling us to produce over 92% light products
and has a Nelson complexity of 8.9. It has the ability to
produce and sell a full range of gasoline, diesel, jet fuels,
liquefied petroleum gas (LPG) and natural gas liquids (NGLs).
For 2006, gasoline accounted for approximately 53% and diesel
and jet fuels accounted for approximately 39% of the Tyler
refinerys production.
The inland location of the Tyler refinery provides a degree of
protection from the effects of tropical weather. While Hurricane
Rita caused significant property damage and resulted in a
substantial period of down time for numerous refiners in
Southern Texas, the Tyler refinery maintained stable operations
throughout, and was the sole supplier of refined petroleum
products in East Texas during late September 2005, as competing
terminals in our region ran out of supply.
Fuel Customers. We have the advantage of being
able to deliver nearly all of our gasoline and diesel fuel
production into the local market via our terminal at the
refinery. Our customers have strong credit profiles and include
major oil companies, independent refiners and marketers,
jobbers, distributors, utility and transportation companies, and
independent retail fuel operators. Our refinerys ten
largest customers, excluding U.S. government contracts,
accounted for $904.7 million, or 57.5%, of net sales for
the refining segment for 2006. Our customers include ExxonMobil,
Valero Marketing and Supply, Murphy Oil USA, Truman Arnold and
Chevron, among others. Although none of our customers account
for 10% or more of our consolidated net sales in 2006,
ExxonMobil accounted for approximately 13% of net sales for the
refining segment for 2006. Our product pipeline sales are
specific to Chevron and represent 6.4% of the refining
segments sales. Additionally, during the second quarter of
2006, we were awarded a contract with the U.S. government
to supply jet fuel (JP8) to various military facilities for a
one year period. The government solicits competitive bids for
this contract annually. Sales under this contract totaled
$51.5 million, or 3.3%, of the refining segments
2006 net sales.
The Tyler refinery does not generally supply fuel to our retail
fuel and convenience stores, since it is not located in the same
geographic region as our stores.
Refinery Design and Production. The Tyler
refinery has a crude oil processing unit with a 60,000 bpd
atmospheric column and a 18,000 bpd vacuum tower. The other
major process units at the Tyler refinery include a 20,200 bpd
fluid catalytic cracking unit, a 6,500 bpd delayed coking
unit, a 21,000 bpd naphtha hydrotreating unit, a
22,000 bpd distillate hydrotreating unit, a 17,500 bpd
continuous regeneration reforming unit, a 5,000 bpd
isomerization unit, and an alkylation unit with a capacity of
4,700 bpd.
The Tyler refinery was designed to mainly process light, sweet
crude oil, which is a higher quality, more expensive crude oil
than heavy, sour crude oil. Our owned and leased pipelines are
connected to five crude oil pipeline systems that allow us
access to East Texas, West Texas and foreign sweet crude oils. A
small amount of local East Texas crude oil is also delivered to
the refinery by truck. The table below sets forth information
concerning crude oil received at the Tyler refinery in 2006:
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Percentage of Crude
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Source
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Oil Received
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East Texas Crude Oil
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65
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%
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West Texas Intermediate Crude Oil
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26
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%
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Foreign Sweet Crude Oil
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5
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%
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Other Domestic Crude
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4
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%
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Upon delivery to the Tyler refinery, crude oil is sent to a
distillation unit, where complex hydrocarbon molecules are
separated into distinct boiling ranges. The processed crude oil
is then treated in specific units of the refinery, and the
resulting distilled and treated fuels are pumped to blending
units to create the desired finished fuel product. A more
detailed summary of our production output for the year ended
2006 follows:
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Gasoline: Gasoline accounted for approximately
53% of our refinerys production. The refinery produces
three different grades of conventional gasoline
(premium 93 octane, regular and mid-grade), as well
as aviation gasoline.
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Diesel/jet fuels. Diesel and jet fuel products
accounted for approximately 39% of our refinerys
production. Diesel and jet fuel products include military
specification JP-8, commercial jet fuel, low sulfur diesel, and
ultra low sulfur diesel, which replaced the low sulfur diesel
beginning in September, 2006.
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Petrochemicals. We produced small quantities
of propane, refinery grade propylene and butanes.
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Other Products. We produced small quantities
of other products, including anode grade coke, slurry oil,
sulfur and other blendstocks.
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The table below sets forth information concerning the historical
throughput and production at the Tyler refinery for the last
three years. The data for periods prior to April 29, 2005
have been derived from the internal financial records of the
previous owner.
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Period from
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Year Ended
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April 29 through
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Year Ended
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Year Ended
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December 31,
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December 31,
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December 31,
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December 31,
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2006
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2005(1)
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2005(2)
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2004
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Bpd
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%
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Bpd
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%
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Bpd
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%
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Bpd
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%
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Refinery throughput:
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Crude
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55,998
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96.3
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%
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51,906
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97.7
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%
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48,251
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96.8
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%
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46,885
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93.9
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%
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Other Blendstocks
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2,130
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3.7
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1,244
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2.3
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1,584
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3.2
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3,051
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6.1
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Total refinery throughput
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58,128
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100.0
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%
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53,150
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100.0
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%
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49,835
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100.0
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%
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49,936
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100.0
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%
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Products produced:
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Gasoline
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30,163
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53.3
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%
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26,927
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52.2
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%
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25,744
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53.0
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%
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28,349
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57.6
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%
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Diesel/jet
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21,816
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38.6
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20,779
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40.2
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18,688
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38.5
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17,613
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35.8
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Petrochemicals, LPG, NGLs
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2,280
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4.0
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2,218
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4.3
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1,983
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4.0
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2,153
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4.4
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Other
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2,324
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4.1
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1,684
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3.3
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2,185
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4.5
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1,108
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2.2
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Total products produced
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56,583
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100.0
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%
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51,608
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100.0
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%
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48,600
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100.0
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%
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49,223
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100.0
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%
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(1) |
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Effective April 29, 2005, we
completed the acquisition of the Tyler refinery and related
assets. Information presented is for the 247 days we
operated the refinery in the fiscal period ended
December 31, 2005.
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(2) |
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Represents actual throughput during
the year ended December 31, 2005 (including pre and
post-acquisition), and reflects reductions resulting from the
turnaround conducted by the previous owner during the first
quarter of 2005 and a three-week turnaround that we conducted in
the fourth quarter of the year.
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During the third quarter of 2006, two significant capital
projects were completed that allowed us to produce 100% of our
diesel pool as ultra low sulfur diesel and provided improved and
more reliable sulfur handling capability at the refinery. These
projects were comprised of the expansion and modification of the
distillate de-sulfurization unit and the installation of a new
35 long ton per day sulfur recovery unit and tail gas treating
unit. The completion of these two projects concluded the first
phase of our Clean Fuels capital program.
Profitability Improvements. Delek conducted a
feasibility study to identify opportunities to improve the
profitability of the refinery. This study identified three low
complexity projects with estimated potential returns on
investment of approximately 50%. The projects are designed to
provide incremental refining segment contribution margin by
allowing the processing of a lower cost crude slate, as well as
reducing current operational bottlenecks in certain processing
units. As with any capital project, we may experience increases
in the cost
and/or
timing to obtain necessary equipment required to complete the
project. Additionally, the scope
and/or cost
of employee
and/or
contractor labor expense related to the installation of
equipment could increase. We are moving forward with these
projects and they are expected to be fully implemented in the
second half of 2008.
Storage Capacity. Storage capacity at the
Tyler refinery, including tanks along our pipeline, totals
approximately 2.7 million barrels, consisting of
approximately 1.2 million barrels of crude oil storage and
1.5 million barrels of refined and intermediate product
storage.
Supply and Distribution. The majority of the
crude oil purchased for the Tyler refinery is East Texas crude
oil. Most of this East Texas crude oil processed in our refinery
is delivered by truck or through our pipeline and
4
leased pipeline from Nettleton Station in Longview, Texas. This
represents an inherent cost advantage due to our ability to
purchase crude oil on its way to market, as opposed to
purchasing from a market or trade location. The crude oil is
purchased during the trading month and priced during the
calendar month to achieve the refinery crack spread of the day.
The proximity of the refinery to receive both domestic and
foreign barrels affords us the opportunity to replace barrels
with financially advantaged alternatives on short notice.
Our ability to access West Texas intermediate (WTI) or foreign
sweet crude oil, when they are available at competitive prices,
has helped significantly to maintain the refinerys
competitive supply cost advantage. These alternate supply
sources allow us to optimize the refinery operation and
utilization while also allowing us to more favorably negotiate
the cost and quality of the local East Texas crude oil we
purchase.
The McMurrey Pipeline System, which we own, consists of
approximately 65 miles of
6-inch crude
oil lines that transports crude oil to the Tyler refinery. We
currently operate the main trunk line, and the following pump
stations and terminals that are also owned by us:
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Delek Tank Farm: One 150,000 barrel and
one 300,000 barrel tank.
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Nettleton Station: Five
50,000 barrel tanks.
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Bradford Station: One 50,000 barrel
and one 100,000 barrel tank.
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ARP Station: Two
50,000 barrel tanks.
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The vast majority of our transportation fuels and other products
are sold via truck directly from the refinery. 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. LPG, NGLs, and clarified
slurry oil are also sold via truck from dedicated loading
facilities at the refinery. We also have a pipeline connection
for the sale of propane into a facility owned by Texas Eastman.
Petroleum coke is sold primarily via rail from the refinery,
with occasional truck loading for specialty or excess product.
The remainder of our transportation fuels are sold via pipeline
to a single, pipeline-connected terminal owned by Chevron. We
transport these products on TEPPCO pipeline to a point of
interconnection to a Chevron-owned pipeline terminating in Big
Sandy, Texas.
Competition. The refining industry is highly
competitive and includes fully integrated national or
multinational oil companies engaged in many segments of the
petroleum business, including exploration, production,
transportation, refining, marketing and convenience stores. Our
principal competitors are Texas Gulf Coast refiners, product
terminal operators in our region and Calumet Lubricants in
Shreveport, Louisiana. The principal competitive factors
affecting our refinery operations are crude oil and other
feedstock costs, refinery product margins, refinery efficiency,
refinery product mix and distribution and transportation costs.
Certain of our larger competitors operate refineries that are
larger and more complex and in different geographies, and, as a
result, could have lower per barrel costs or higher margins per
barrel of throughput than us. We have no crude oil reserves and
are not engaged in exploration. We believe, however, that we are
a strong competitor in our defined market because our
manufactured products are not readily made available by our
competitors and our location allows for a realized margin that
is favorable in comparison to the reported Gulf Coast 5-3-2
crack spread because our production process yields a high
percentage of high margin light distillate products.
Marketing
Segment
Formed initially in connection with the acquisition of the
assets of the Pride Companies LP and its affiliates in 2006, the
marketing segment represents the next step in our strategy of
becoming a fully integrated provider of fuels and related
products. Through this segment, we sell refined products on a
wholesale basis in west Texas through company-owned and third
party operated terminals. In order to grow our presence in this
segment, we intend to implement the following initiatives:
further develop and leverage our existing marketing and
distribution capabilities and experience using the assets
acquired from the Pride Companies, more fully utilize our
favorable supply contract with Magellan Asset Services LP
(Magellan), develop exchange opportunities between our segments
and expand our base of operations through acquisitions.
5
Our marketing segment generates net sales through five
integrated activities:
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Transportation of petroleum products through pipelines and
company-owned truck loading terminals in Abilene, Texas and
San Angelo, Texas
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Direct sales of petroleum products to third parties through
truck racks in San Angelo, Abilene, Aledo, Odessa, DFW
Chevron and Big Springs, Texas and other terminals throughout
the Magellan Orion pipeline system
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Product supply to exchange partners at the Abilene,
San Angelo and Aledo terminals
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Marketing services for both wholesale marketing and contract
sales on behalf of our Tyler refinery since October 2006
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A margin-sharing arrangement with our Tyler refinery of 50% of
wholesale margins above a contractually defined threshold
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A description of the assets we use to generate these net sales
include:
Petroleum Product Marketing Terminals. The
marketing segment markets its products through three owned
terminals in San Angelo, Abilene and Tyler, Texas and
third-party terminaling operations in Aledo, Odessa and Big
Springs, Texas. The San Angelo terminal began operations in
1991 and has operated continuously. The Abilene terminal began
operations in the 1950s and has undergone routine
upgrading. At each terminal, products are loaded on two loading
lanes each having four bottom-loading arms. The loading racks
are fully automated and unmanned during the night. The Tyler
terminal was built in the 1970s and was most recently
expanded in 1994. It is currently operated by our refining
segment and includes nine loading lanes and is fully automated
and unmanned at night. We have in excess of
1,000,000 barrels of combined refined product storage tank
capacity at Tye station and our terminals in Abilene and
San Angelo.
Pipelines. We own seven product pipelines of
approximately 114 miles between our refined product
terminals in Abilene and San Angelo, Texas, which includes
a line connecting our facility to Dyess Air Force Base. These
refined product pipelines are:
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Eight-inch pipeline between Magellan Pipeline Company, L.P.
custody transfer point at Tye Station (Magellan tie-in) to the
Abilene terminal
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13.5 mile, four-inch pipeline from the Abilene products
terminal to the Magellan tie-in
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76.5 mile, six-inch products pipeline system from the
Magellan tie-in to San Angelo
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Three other local product pipelines
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Supply Agreements. Substantially all of our
petroleum products are purchased from Magellan under two
separate supply contracts. Under the terms of the first supply
contract, we can purchase up to 20,350 bpd of petroleum
products to the Abilene terminal for sales and exchange at
Abilene and San Angelo. The primary term is through
December 31, 2007, however, the agreement may be renewed
for five additional terms of two years. Additionally, we can
purchase up to an additional 7,000 bpd of refined products
into the Magellan pipeline system in East Houston under a
separate contract that expires in 2015. While the primary
purpose of this second contact is to supply products at
Magellans Aledo, Texas terminal, the agreement allows us
to redirect products to other terminals along the Magellan
pipeline. In the five months subsequent to our purchase of the
Pride Companies assets, we purchased approximately 96% of
our marketing segments petroleum products from Magellan
under these two agreements.
Customers. We have various types of customers
including major oil companies such as ExxonMobil, independent
refiners and marketers such as Murphy Oil, jobbers,
distributors, utility and transportation companies and
independent retail fuel operators. In general, marketing
customers typically come from within a
100-mile
radius of our terminal operations. Our customers include Flying
J, Murphy Oil, ExxonMobil, and Town & Country Food.
None of our customers in the marketing segment accounted for 10%
or more of our consolidated or segment net sales in 2006. The
top ten customers accounted for just over half of the marketing
segment sales in 2006. In October 2006, our marketing segment
also began providing marketing and sales services for customers
of the Tyler refinery.
6
In return for these services to customers of the Tyler refinery,
the marketing segment receives a monthly fee from the refining
segment plus a sharing of marketing margin above predetermined
thresholds. Net fees received under this arrangement were
$3.4 million in 2006, and eliminate in consolidation.
Competition. Our company-owned refined product
terminals 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
served economically by any terminal. The two key markets in west
Texas that we serve from our company-owned facilities are
Abilene and San Angelo, TX. While we have direct
competition from an independent refiner 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.
Retail
Segment
We operate 394 retail fuel and convenience stores, which are
located in Alabama, Arkansas, Georgia, Kentucky, Louisiana,
Mississippi, Tennessee and Virginia, primarily under the MAPCO
Express®,
MAPCO
Marttm,
East Coast
®,
Fast Food and
Fueltm
and Discount Food
Marttm
brands. In 2006 we purchased 43 stores from Fast Petroleum, Inc.
and affiliates that strengthened our presence in key core
markets located in southeastern Tennessee and northern Georgia
and re-imaged all stores purchased in the BP acquisition. We
also completed four store raze and rebuilds, opened
two new stores, which we constructed, and retrofitted four
existing stores using our next generation, MAPCO Mart concept.
The MAPCO Mart store with
GrilleMarxtm
is designed to offer premium amenities and products, such as a
proprietary
made-to-order
food program with touch-screen order machines, indoor and
outdoor seating, expanded coffee and hot drink bars, an expanded
cold and frozen drink area where customers can customize their
drink flavors, a walk-in beer cave and an expanded import and
micro brew beer section. Due to the initial success of these
stores in our Nashville market, we plan to continue our
raze and rebuild program into other of our core
markets in 2007.
Our retail segment also includes a wholesale fuel distribution
operation that supplies more than 50 dealer-operated retail
locations. We believe that we have established strong brand
recognition and market presence in the major retail markets in
which we operate. Approximately 87% of our stores are
concentrated in Tennessee, Alabama and Virginia. In terms of
number of retail fuel and convenience stores, we rank in the
top-three in major markets such as Nashville, Memphis, northern
Alabama and Richmond.
We operate a business model that we believe enables us to
generate higher per gallon gas margins than the industry average
as well as drive merchandise sales that are higher than the
industry average. Our stores are positioned in high traffic
areas (approximately 79% of our stores are located at street
corner locations) and we employ a localized marketing strategy
that focuses on the demographics surrounding each store and
customizing the product mix and promotional strategies to meet
the needs of customers in those demographics. Our management
approach also incorporates a strong focus on controlling
operating expenses and loss prevention, which has been an
important element in the successful development of our retail
segment.
Company-Operated Stores. Of our sites,
approximately 66% are open 24 hours per day and the
remaining sites are open at least 16 hours per day. Our
average store size is approximately 2,360 square feet with
approximately 69% of our stores being more than
2,000 square feet.
Our retail fuel and convenience stores typically offer tobacco
products and immediately consumable items such as beer,
non-alcoholic beverages 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.
While several of our locations include well recognized national
quick service food chains such as Subway
®,
we have begun to change our focus in food service to providing
proprietary, made to order food offerings under our
GrilleMarxtm
brand. We have chosen this strategy because we believe it best
fits our neighborhood store strategy of offering products that
meet the customs and tastes of each community we serve. Our
GrilleMarxtm
program gives us significant flexibility in site selection, the
ability to control product consistency and tailor our food
offerings to local tastes. In addition, our proprietary fresh
food program allows us a unique product offering without paying
royalties typically charged by the branded programs. In 2006 we
added the
GrilleMarxtm
food program to 10 locations and rolled out a premium coffee and
frozen beverage programs to most locations. We also introduced
private label products to our soft drink,
7
sandwich, water and automotive categories which provide points
of differentiation and enhanced margins. Our plans are to add at
least one new private label offering per quarter during 2007.
All of our locations are retail fuel and convenience stores. The
majority of our retail fuel and convenience stores have 4 to 5
multi-pump fuel dispensers with credit card readers. Virtually
all of our company-operated locations have a canopy to protect
self-service customers from rain and to provide street appeal by
creating a modern, well-lit and safe environment.
Fuel Operations. For the years ended
December 31, 2006, 2005 and 2004, our net fuel sales were
76.3%, 73.4% and 69.5%, respectively, of net sales for our
retail segment. The following table highlights certain
information regarding our fuel operations for the years ended
December 31, 2006, 2005 and 2004:
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Year Ended December 31
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2006
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2005
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2004
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Number of stores (end of period)
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394
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349
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331
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Average number of stores
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369
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330
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310
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Retail fuel sales (thousands of
gallons)
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396,867
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341,335
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315,294
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Average retail gallons per average
number of stores (thousands of gallons)
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1,075
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1,034
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1,017
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Retail fuel margin (cents per
gallon)
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$
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0.145
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$
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0.165
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$
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0.155
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We currently operate a fleet of delivery trucks to deliver
approximately 57% of the fuel sold at our retail fuel and
convenience stores. We purchased approximately 33% of the fuel
sold at our retail fuel and convenience stores in 2006 from
Valero Marketing and Supply under a contract that extends
through the second quarter of 2008. We also purchase fuel under
contracts with BP, ExxonMobil, Shell, Conoco Phillips and
Chevron, and purchase the balance of our fuel from a variety of
independent fuel distributors. The price of fuel purchased is
generally based on contracted 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. To
date, we have met substantially all our purchase commitments
under these contracts.
Merchandise Operations. For 2006, 2005 and
2004, our merchandise sales were 23.7%, 26.6%, and 30.5%
respectively, of net sales for our retail segment. The following
table highlights certain information with respect to our
merchandise sales for the years ended December 31, 2006,
2005 and 2004:
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Year Ended December 31
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2006
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2005
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2004
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Comparable store merchandise sales
change
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2.9
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%
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1.4
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%
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4.1
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%
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Merchandise margin
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30.6
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%
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29.8
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%
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29.5
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%
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Merchandise profit as a percentage
of total margins
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63.0
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%
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60.1
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%
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60.6
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%
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We purchased approximately 69% of our general merchandise,
including most tobacco products and grocery items for 2006 from
a single wholesale grocer, McLane Company, Inc., a wholly-owned
subsidiary of Berkshire Hathaway. Our contract with McLane
expires at the end of 2007, but may be renewed at our option for
an additional two year period. Other major suppliers and
manufacturers include
Coca-Cola,
Pepsi-Cola, Frito Lay, Gatorade, Hersheys, Kraft/Nabisco
and Oscar Mayer.
Technology and Store Automation. We continue
to invest in our technological infrastructure to enable us to
better address the expectations of our customers and improve our
operating efficiencies and inventory management. In 2006 we
completed the implementation of a scan out management system
that integrates with our
point-of-sale
(POS) systems in all company-operated stores.
Most of our stores are connected to a high speed data network
and provide nearly real-time information to our supply chain
management, inventory management and security systems. We
believe that our systems provide many of the most desirable
features commercially available today in the information
software market, while providing more rapid access to data,
customized reports and greater ease of use. Our information
technology systems help us manage our inventory, optimize our
marketing strategy and reduce cash and merchandise shortages.
Our
8
information technology systems allow us to improve our
profitability and strengthen operating and financial performance
in multiple ways, including by:
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tracking sales of complementary products; for example,
determining the impact of fuel price movements on in-store sales
or tracking the impact of a beer promotion on snack sales;
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providing real-time fuel inventory data to optimize fuel
purchase and distribution costs; pricing fuel at individual
stores on a daily basis, taking into account competitors
prices, competitors historical behavior, daily changes in
cost and the impact of pricing on in-store merchandise sales;
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allowing us to determine on a daily basis negative sales trends;
for example, merchandise categories that are below budget or
below the prior periods results and
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integrating our security video with our point of sales
transaction log in a searchable database that allows us to
search for footage related to specific transactions enabling the
identification of potentially fraudulent transactions and
providing examples through which to train our employees.
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Dealer Operations. Our retail segment also
includes a wholesale fuel distribution network that supplies
more than 50 dealer-operated retail locations. For 2006 and
2005, our dealer net sales were approximately 5% of net sales
for our retail segment. Our business arrangements with dealers
include contractual arrangements in which we pay a commission to
the dealer based on profits from the fuel sales, contractual
arrangements in which we supply fuel and invoice the dealer for
its cost of fuel plus an agreed upon margin and non-contractual
arrangements in which dealers order fuel from us at their
discretion.
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
factors of competition include location, ease of access,
pricing, product and service selections, customer service, fuel
brands, store appearance, cleanliness and safety. We believe we
are able to effectively compete in the markets in which we
operate because our market concentration in most of our markets
allows us to gain better vendor support. In addition,
approximately 79% of our stores are located at street corner
locations that generally experience greater customer traffic and
generate higher sales per store than non-corner locations. We
utilize customized merchandising strategies in each of our
stores rather than implementing one merchandising strategy for
all of our stores as some of our competitors do. Finally, we use
proprietary information technology that allows us to manage our
fuel sales and margin more effectively than competitors without
access to comparable technology.
Governmental
Regulation and Environmental Matters
We are subject to various federal, state and local environmental
laws. These laws raise potential exposure to future claims and
lawsuits involving environmental matters which could include
soil and water contamination, air pollution, personal injury and
property damage allegedly caused by substances which we
manufactured, handled, used, released or disposed. While it is
often extremely difficult to reasonably quantify future
environmental-related expenditures, we anticipate that
continuing capital investments will be required over the next
several years to comply with existing regulations.
Based upon environmental evaluations performed by third parties
subsequent to our purchase of the Tyler refinery, we recorded a
liability of approximately $7.9 million as of
December 31, 2006 relative to the probable estimated costs
of remediating or otherwise addressing certain environmental
issues of a non-capital nature which were assumed in connection
with the acquisition as discussed in Notes 4 and 12 to the
Consolidated Financial Statements included elsewhere herein.
This liability includes estimated costs for on-going
investigation and remediation efforts for known contaminations
of soil and groundwater which were already being performed by
the former owner, as well as estimated costs for additional
issues which have been identified subsequent to the purchase.
Approximately $0.4 million of the undiscounted liability is
expected to be expended by the end of 2007 with the remaining
balance of $7.5 million expendable by 2016.
9
Other than certain enforcement actions under discussion with the
Texas Commission on Environmental Quality (TCEQ), the
U.S. Environmental Protection Agency (EPA) and the
U.S. Department of Justice (DOJ), and for which appropriate
reserves have been accrued or for which we believe the outcome
will be immaterial, we have not been named as defendant in any
environmental, health or safety litigation.
The Federal Clean Air Act (CAA) authorizes the EPA to require
modifications in the formulation of the refined transportation
fuel products manufactured in order to limit the emissions
associated with their final use. In December 1999, the EPA
promulgated national regulations limiting the amount of sulfur
to be allowed in gasoline at future dates. The EPA believes such
limits are necessary to protect new automobile emission control
systems that may be inhibited by sulfur in the fuel. The new
regulations required the phase-in of gasoline sulfur standards
beginning in 2004, with the final reduction to the sulfur
content of gasoline to an annual average level of 30
parts-per-million
(ppm), and a per-gallon maximum of 80 ppm to be completed
by January 1, 2006. The regulation also included special
provisions for small refiners or those receiving a waiver. We
applied for a waiver from the EPA postponing requirements for
the lowest gasoline sulfur standards, which was granted in the
second quarter of 2005.
Contemporaneous with our refinery purchase, we became a party to
a waiver and Compliance Plan with the EPA that extended the
implementation deadline until December 2007 or May 2008,
depending on which capital investment option we chose. In return
for the extension, we agreed to produce 95% of the diesel fuel
at the refinery with a sulfur content of 15 ppm or less by
June 1, 2006. In order to achieve this goal, we needed to
complete the modification and expansion of an existing diesel
hydrotreater. Due to construction delays which were the result
of the impact of Hurricanes Katrina and Rita on the availability
of construction resources, we requested, and received, a
modification to our Compliance Plan which, among other things,
granted us an additional three months in which to complete the
project. This project was completed in the third quarter of 2006.
Regulations promulgated by TCEQ require the use of only Low
Emission Diesel, (LED), in counties east of Interstate 35
beginning in October 2005. We have received approval to meet
these requirements by selling diesel that meets the criteria in
an Alternate Emissions Reduction Plan on file with the TCEQ
through the end of 2007 or through the use of approved additives.
The EPA has proposed changes in gasoline formulation that would
require further reductions in benzene content by 2011. The
Energy Policy Act of 2005 requires increasing amounts of
renewable fuel be incorporated into the gasoline pool through
2010. Although final rules implementing the Act have not been
promulgated, we believe that as a small refinery we could be
exempt from renewable fuel standards until 2010.
The Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), also known as Superfund, imposes
liability, without regard to fault or the legality of the
original conduct, on certain classes of persons who are
considered to be responsible for the release of a
hazardous substance into the environment. These
persons include the owner or operator of the disposal site or
sites where the release occurred and companies that disposed or
arranged for the disposal of the hazardous substances. Under
CERCLA, such persons may be subject to joint and several
liabilities for the costs of cleaning up the hazardous
substances that have been released into the environment, for
damages to natural resources and for the costs of certain health
studies. It is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property
damage allegedly caused by hazardous substances or other
pollutants released into the environment. Analogous state laws
impose similar responsibilities and liabilities on responsible
parties. Waste is generated in the course of the refinerys
ordinary operations, some of which falls within the statutory
definition of a hazardous substance, and some of
which may have been disposed of at sites that may require
cleanup under Superfund. At this time, we have not been named a
party at any Superfund sites and under the terms of the purchase
agreement, we did not assume any liability for wastes disposed
of prior to our ownership of the refinery.
Our business is also subject to other laws and regulations
including, but not limited to, employment laws and regulations,
regulations governing the sale of alcohol and tobacco, minimum
wage requirements, working condition requirements, public
accessibility requirements, citizenship requirements, gaming
laws and other laws and regulations. A violation or change
of these laws could have a material adverse effect on our
business, financial condition and results of operations.
10
Employees
As of December 31, 2006, we had 3,064 employees, of which
247 were employed in our refining segment, 14 were employed in
our marketing segment and 2,803 were employed either full or
part-time by our retail segment. As of December 31, 2006,
147 of the operations and maintenance hourly employees at the
refinery and 21 truck drivers at the refinery were represented
by United Steel, Paper and Forestry, Rubber, Manufacturing,
Energy, Allied Industrial and Service Workers International
Union and its Local 202 and were covered by collective
bargaining agreements. None of our employees in our marketing or
retail segments or in our corporate offices 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 registrations issued by the
United States Patent and Trademark Office: MAPCO
EXPRESS &
Design®,
EAST
COAST®,
CAFÉ EXPRESS FINEST COFFEE IN TOWN MAPCO &
Design®,
GUARANTEED RIGHT! MAPCO EXPRESS &
Design®,
FAST FOOD AND
FUELtm,
FLEET
ADVANTAGE®
and DELTA
EXPRESS®.
Our pending registrations include GRILLE
MARXtm
and MAPCO
MARTtm
and
MAPCOtm.
While we do not have and have not applied for a federally
registered mark for DISCOUNT FOOD
MARTtm,
we do claim common law trademark rights in the name. 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 http://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
and current reports on
Form 8-K
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. We also post our corporate governance guidelines, code
of business conduct and ethics and the charters of our
boards committees in the same website location. Our
governance documents are available in print to any stockholder
that makes a written request to Kent Thomas, General Counsel and
Secretary, Delek US Holdings, Inc., 830 Crescent Centre Drive,
Suite 300, Franklin, Tennessee 37067. Contained in
Exhibits 31.1 and 31.2 of this Annual Report on
Form 10-K,
are our chief executive officers and chief financial
officers certifications regarding the quality of our
public disclosures under Section 302 of the Sarbanes-Oxley
Act of 2002.
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.
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 Industry
We
operate an independent refinery and may not be able to withstand
volatile market conditions, compete on the basis of price or
obtain sufficient 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.
11
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 industry in which we operate our retail fuel and convenience
stores is highly competitive and marked 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.
These non-traditional gasoline retailers have obtained a
significant share of the motor fuels market and we expect their
market share 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 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.
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, employment, labor, immigration, minimum wages
and overtime pay, health benefits, working conditions, public
accessibility, the sale of alcohol and tobacco and other
requirements. A violation of any of these requirements could
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 our 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.
12
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 currently a particular target of investigative activity. For
example, in the aftermath of Hurricanes Katrina and Rita in
2005, the Federal Trade Commission launched an investigation of
gasoline pricing among producers and suppliers of petroleum
products, including us, and state officials commenced price
gouging investigations of retail operators, including us. The
assessment of fines and penalties against us or damaging
publicity as a result of these or similar investigations, or our
need to incur costs associated with complying with any resulting
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.
Our
refining margins may decline as a result of increases in the
prices of crude oil and other feedstocks.
Our earnings, cash flow and profitability from our refining
operations depend on the margin above fixed and variable
expenses (including the cost of refinery feedstocks, such as
crude oil) at which we are able to sell refined petroleum
products. Refining margins historically have been and are likely
to continue to be volatile, as a result of numerous factors
beyond our control, including the supply of and demand for crude
oil, other feedstocks, gasoline and other refined petroleum
products. Such supply and demand are affected by, among other
things:
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changes in global and local economic conditions;
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United States and foreign demand for fuel products;
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refined product inventory levels:
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worldwide political conditions, particularly in significant oil
producing regions such as the Middle East, Western Coastal
Africa, the former Soviet Union, and South America;
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the level of foreign and domestic production of crude oil and
refined petroleum products and the level of crude oil, other
feedstocks and refined petroleum products imported into the
United States;
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utilization rates of refineries in the United States;
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development and marketing of alternative and competing fuels;
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events that cause disruptions in our distribution channels;
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local factors, including market conditions, adverse weather
conditions and the level of operations of other refineries and
pipelines in our markets; and
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United States government regulations.
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Our
fuel gross profit may decline as a result of increases in the
prices of crude oil, other feedstocks and refined petroleum
products.
Significant increases and volatility in costs of crude oil,
other feedstocks and refined petroleum products could result in
significant increases in the retail price of refined petroleum
products and in lower retail fuel gross margin per gallon.
Increases in the retail price of refined petroleum products
could impact consumer demand for fuel. In addition, the
volatility in costs of fuel, principally natural gas, and other
utility services, principally electricity, used by our refinery
and other operations affect our operating costs. Fuel and
utility prices have been, and will continue to be, affected by
factors that are beyond our control, such as supply and demand
for fuel and utility services in both local and regional
markets. This volatility makes it extremely difficult to predict
the impact future wholesale cost fluctuations will have on our
business, financial condition and results of operations. These
factors could impact materially our fuel gallon volume, fuel
gross profit and overall customer traffic, which in turn would
adversely impact our merchandise sales.
13
If the
market value of our inventory declines to an amount less than
our LIFO basis, we would record a write-down of inventory and a
non-cash charge to cost of sales, which would adversely affect
our earnings.
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. Because our refinery
inventory is valued at the lower of cost or market value under
the last-in,
first-out, or LIFO, inventory valuation methodology, if the
market value of our inventory were to decline to an amount less
than our LIFO basis, we would record a write-down of inventory
and a non-cash charge to cost of sales.
Anti-smoking
measures, increases in tobacco taxes and wholesale cost
increases of tobacco products could reduce our tobacco product
sales.
Sales of tobacco products accounted for approximately 9%, 10%
and 12% of net sales of our retail segment for the years ended
December 31, 2006, 2005 and 2004, respectively. Significant
increases in wholesale cigarette costs, increased taxes on
tobacco products, declines in the percentage of smokers in the
general population, additional legal restrictions on smoking in
public or private establishments, future legislation and
national and local campaigns to discourage smoking in the United
States have had an adverse effect on the demand for tobacco
products and could have a material adverse effect on our
business, financial condition and results of operations.
Competitive pressures in our markets can make it difficult to
pass price increases on to our customers. This could materially
and adversely affect our retail price of cigarettes, cigarette
unit volume and net sales, merchandise gross profit and overall
customer traffic. Because we derive a significant percentage of
our net sales from tobacco products, a decline in net sales from
the sale of tobacco products or decrease in margins on our
tobacco product sales could have a material adverse effect on
our business, financial condition and results of operations.
A
terrorist attack on our refinery assets, or threats of war or
actual war, may hinder or prevent us from conducting our
business.
Terrorist attacks in the United States and the war with Iraq, as
well as events occurring in response or similar to or in
connection with them, 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
Ltd., is based, has suffered armed conflicts and political
instability in recent years. We may be more susceptible to
terrorist attack as a result of our connection to an Israeli
owner. On the date of this report, half of our directors reside
in Israel. Our business may be harmed if armed conflicts or
political instability in Israel cause one or more of our
directors to become unavailable to serve on our board of
directors.
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 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. In addition,
disruption or significant increases in energy prices could
result in government-imposed price controls.
Risks
Relating to Our Business
Due to
the concentration of our stores in the southeastern United
States, an economic downturn in that region could cause our
sales and the value of our assets to decline.
Substantially all of our stores are located in the southeastern
United States. As a result, our results of operations are
subject to general economic conditions in that region. An
economic downturn in the Southeast 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.
14
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 our refinery, pipeline and terminals, and our retail
fuel and convenience stores that complement our existing sites
or broaden our geographic presence, and if attractive
opportunities arise, assets in complementary new lines of
business. From our inception in 2001 through December 31,
2006, we acquired our refinery and our refined products
terminals in Tyler, we acquired 394 retail fuel and convenience
stores and we developed our wholesale fuel business, in seven
major transactions and several smaller transactions. We expect
to continue to acquire retail fuel and convenience stores,
refinery assets and product terminals and pipelines as a major
element of our growth strategy, however:
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we may not be able to identify suitable acquisition candidates
or acquire additional assets on favorable terms;
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we compete with others to acquire any of these assets, which
competition may increase and could result in decreased
availability or increased prices for suitable acquisition
candidates;
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we may experience difficulty in anticipating the timing and
availability of acquisition candidates;
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since the convenience store industry is dominated by small,
independent operators that own fewer than ten
stores, we will likely need to complete numerous small
acquisitions, rather than a few major acquisitions, to
substantially increase our number of retail fuel and convenience
stores;
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the need to complete numerous acquisitions will require
significant amounts of our managements time;
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we may not be able to obtain the necessary financing, on
favorable terms or at all, to finance any of our potential
acquisitions; and
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as a public company, we are subject to internal controls and
other accounting requirements with respect to any business we
acquire, which may prevent some acquisitions we might otherwise
deem favorable or increase our acquisition costs.
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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:
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during the acquisition process, we may fail or be unable to
discover some of the liabilities of companies or businesses that
we acquire;
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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;
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we may fail to successfully integrate or manage acquired
refinery, pipeline and terminal assets, our retail fuel and
convenience stores, or other assets;
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acquired retail fuel and convenience stores or other assets may
not perform as we expect or we may not be able to obtain the
cost savings and financial improvements we anticipate;
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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; and
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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.
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15
We are
relatively new to the refining business and may enter new lines
of business in which we are inexperienced.
In April 2005, we acquired the Tyler refinery, and our pipeline
and other refining, product terminal and crude oil pipeline
assets located in Tyler, Texas. Prior to this acquisition, we
were not involved in refining operations. As a result of our
recent entry into the refining business, we may not be able to
successfully enter into advantageous business relationships with
other refinery, pipeline or terminal operators, or wholesale
marketers comparable to those which more established refiners
may be able to enter. Therefore, we may be unable to take full
advantage of business opportunities for the refining business
and we may encounter difficulties in meeting our expectations or
the expectations of investors for the operating results of the
refining business.
We continually evaluate strategic opportunities for growth,
which may include opportunities in new lines of business, in
which we currently have no operations and lack experience. Our
ability to succeed in any new line of business will depend upon
our ability to address and overcome limitations in our
experience.
We may
incur significant costs and liabilities with respect to
investigation and remediation of existing environmental
conditions at our refinery.
Prior to our purchase of the refinery and pipeline, the previous
owner had been engaged for many years in the investigation and
remediation of liquid hydrocarbons 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 and unknown impacted areas at the refinery. In the future,
it may be necessary to conduct further assessments and
remediation efforts at the refinery and pipeline locations. In
addition, we have identified and self-reported certain other
environmental matters subsequent to our purchase of the
refinery. Based upon environmental evaluations performed by
third parties subsequent to our purchase of the Tyler refinery,
we recorded an environmental liability of approximately
$7.9 million at the acquisition date for the estimated
costs of environmental remediation for our refinery and crude
oil pipeline. We expect remediation of soil and groundwater at
the refinery to continue for the foreseeable future. The need to
make future expenditures for these purposes that exceed the
amounts we estimate and accrue for could have a material adverse
effect on our business, financial condition and results of
operations.
We may
incur significant costs and liabilities in connection with new
environmental regulations and prior non-compliance with air
emission regulations.
We anticipate that compliance with new regulations, lowering the
permitted level of sulfur in gasoline, will require us to spend
approximately $64.8 million in capital costs between 2007
and the end of 2008. In addition, as part of a national
initiative, the EPA inspected the Tyler refinery in 2003 and
alleged that the prior owner did not comply with certain air
emission regulations. A settlement with the EPA could result in
required capital expenditures and potential penalties. We
currently estimate that these settlement costs and additional
capital expenditures to comply with the requirements of the EPA
will be approximately $10.0 million from 2007 to the end of
2010. The need to make future expenditures for these purposes
that exceed the amounts we estimated for them could have a
material adverse effect on our business, financial condition and
results of operations.
A
disruption in the supply or an increase in the price of light
sweet crude oil would significantly affect the productivity and
profitability of our refinery.
Our refinery mainly processes light sweet crude oils
efficiently. Due to increasing demand for lower sulfur fuels,
light sweet crude oils are more costly and less readily
available to us than heavy sour crude oils. An inability to
obtain an adequate supply of light sweet crude oils to operate
our refinery at full capacity or 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.
16
The
dangers inherent in our refining operations could cause
disruptions and expose us to potentially significant costs and
liabilities.
Our refining operations are subject to significant hazards and
risks inherent in refining operations and in transporting and
storing crude oil, intermediate and refined petroleum products.
These hazards and risks include, but are not limited to, natural
disasters, fires, explosions, pipeline ruptures and spills,
third party interference and mechanical failure of equipment at
our or third-party facilities, and other events beyond our
control, any of which could result in production and
distribution difficulties and disruptions, environmental
pollution, personal injury or wrongful death claims and other
damage to our properties and the properties of others.
We are
particularly vulnerable to disruptions in our refining
operations, because all of our refining operations are currently
conducted at a single facility.
Because all of our refining operations are currently conducted
at a single refinery, any of such events at our refinery could
significantly disrupt our storage, production and distribution
of crude and refined petroleum products and could have a
material adverse effect on our business, financial condition and
results of operations.
We are
subject to interruptions in supply and delivery as a result of
our reliance on pipelines for transportation of crude
oil.
Our refinery receives substantially all of its crude oil through
pipelines. We could experience an interruption of supply and
delivery, or an increased cost of receiving crude oil, if the
ability of these pipelines to transport crude oil is disrupted
because of accidents, governmental regulation, terrorism, other
third-party action or other events beyond our control. The
unavailability for our use for a prolonged period of time of any
of the pipelines that are used to transport crude oil to our
refinery could have a material adverse effect on our business,
financial condition and results of operations.
Our
existing inbound pipeline capacity will be insufficient to
support materially increased production from our
refinery.
We rely on our pipeline and a leased pipeline to transport crude
oil to our refinery. Due to the capacity limitations, we may be
unable to draw sufficient crude oil from the inbound pipelines
to support increases in our refining output. If we wish to
materially increase our refining output, we will need to upgrade
or supplement the inbound pipelines, which would require us to
make substantial additional capital expenditures.
Our
refinery has only limited access to an outbound pipeline, which
we do not own, for distribution of our refined petroleum
products.
During the year ended December 31, 2006, approximately 89%
of our refinery sales were completed through a rack system
located at our refinery. Unlike other refiners, we do not own,
and have limited access to, an outbound pipeline for
distribution of our refinery products to our customers. Our lack
of an outbound pipeline may undermine our ability to attract new
customers for our refined petroleum products or increase sales
of our refinery products.
If the
price of crude oil increases significantly, we may not be able
to finance the purchase of enough crude oil to operate our
refinery at full capacity.
We rely in part on our ability to borrow to collateralize or
purchase crude oil for our refinery. If the price of crude oil
increases significantly, we may not have sufficient borrowing
capacity, and may not be able to sufficiently increase borrowing
capacity, under our existing credit facilities to purchase
enough crude oil to operate our refinery at full capacity. Our
failure to operate our refinery at full capacity could have a
material adverse effect on our business, financial condition and
results of operations.
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An
interruption or termination of supply and delivery of refined
products to our wholesale business could result in a decline in
our sales and earnings.
Our marketing segment sells refined products produced by
refineries owned by third parties. Further, in 2006, Magellan
supplied 96% of the products sold by our marketing segment. We
could experience an interruption or termination of supply or
delivery of refined products if these refineries or Magellan
partially or completely shut down their operations, temporarily
or permanently. The ability of these refineries and Magellan 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 Magellans 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 marketing business. A reduction
in the volume of refined products supplied to our marketing
segment could adversely affect our sales and earnings.
An
increase in competition in the market in which we sell our
refined products could lower prices and adversely affect our
sales and profitability.
Our Tyler refinery is the only supplier of a full range of
refined petroleum products within a radius of approximately
115 miles of its location and there are no competitive fuel
loading terminals within approximately 90 miles of our
San Angelo terminal. If a refined petroleum products
delivery pipeline is built in or around the Tyler, Texas area,
or a competing terminal is built closer to the San Angelo
area we could lose our niche market advantage, which could have
a material adverse effect on our business, financial condition
and results of operations.
We may
be unable to negotiate market price risk protection in contracts
with unaffiliated suppliers of refined products.
In 2006, we obtained 96% of our supply of refined products for
our marketing segment under contracts that contain provisions
that mitigate the market price risk inherent in the purchase and
sale of refined products. We cannot assure you that we will be
able to negotiate similar market price protections in other
contracts that we enter into for the supply of refined products.
To the extent that we purchase refined product 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.
Our
debt levels may limit our flexibility in obtaining additional
financing and in pursuing other business
opportunities.
We have a significant amount of debt. As of December 31,
2006, we had total consolidated debt, including current
maturities, of $286.6 million. In addition to our
outstanding debt, as of December 31, 2006, our borrowing
availability under our various credit facilities was
$142.4 million.
Our significant level of debt could have important consequences
for us. For example, it could:
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increase our vulnerability to general adverse economic and
industry conditions;
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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;
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limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;
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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, renovate our
stores or pursue acquisitions or other business opportunities;
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limit our ability to borrow additional funds in the
future; and
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increase the interest cost of our borrowed funds.
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In addition, a substantial portion of our debt has a variable
rate of interest, which increases our vulnerability to interest
rate fluctuations.
If we are unable to meet our debt (principal and interest) and
lease obligations, 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 obligations 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 would intensify.
Our
subsidiaries debt agreements contain operating and
financial restrictions that might constrain our business and
financing activities.
The operating and financial restrictions and covenants in our
subsidiaries 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 subsidiaries ability to:
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declare dividends and redeem or repurchase capital stock;
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prepay, redeem or repurchase debt;
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make loans and investments;
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incur additional indebtedness or amend our debt and other
material agreements;
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make capital expenditures;
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engage in mergers, acquisitions and asset sales; and
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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 the other segment.
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Other restrictive covenants require that we meet fixed charge
coverage, interest charge coverage and leverage tests as
described in the credit facility agreements. 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 repay our
indebtedness under our credit facilities when due, the lenders
could seek to foreclose on the assets or Delek may be required
to contribute additional capital to its subsidiaries. Any of
these outcomes could have a material adverse effect on our
business, financial condition and results of operations.
We may
seek to grow by opening new retail fuel and convenience stores
in new geographic areas.
Since our inception, we have grown primarily by acquiring retail
fuel and convenience stores in the southeastern United States.
We may seek to grow by selectively pursuing acquisitions or by
opening new retail fuel and convenience stores in states
adjacent to 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 retail fuel and convenience
store operations would be as receptive to our retail fuel and
convenience stores as consumers in our existing markets. The
achievement of our expansion plans will depend in part upon our
ability to:
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select, and compete successfully in, new markets;
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obtain suitable sites at acceptable costs;
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realize an acceptable return on the cost of capital invested in
new facilities;
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hire, train, and retain qualified personnel;
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integrate new retail fuel and convenience stores into our
existing distribution, inventory control, and information
systems;
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expand relationships with our suppliers or develop relationships
with new suppliers; and
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secure adequate financing, to the extent required.
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We cannot assure you that we will achieve our expansion 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.
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, extended periods of rain,
ice storms and snow, all of which we have experienced in the
past few years. Inclement weather conditions, as well as severe
storms such as Hurricanes Katrina and Rita, could damage our
facilities, have a significant adverse impact on consumer
behavior, travel and retail fuel and convenience store traffic
patterns or impede our ability to operate our locations. If such
conditions prevail in Texas, they could undermine our ability to
produce and transport products from our refinery 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.
Our
operating results are seasonal and generally lower in the first
and fourth quarters of the year for our refining segment 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 and other merchandise is generally higher
during the summer months than during the winter months due to
seasonal increases in highway traffic. As a result, the
operating results of our refining segment and wholesale fuel
segment are generally lower for the first and fourth quarters of
each year. Seasonal fluctuations in highway 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 highway traffic and sales could have a
material adverse effect on our business, financial condition and
results of operations.
We
depend on one supplier for a significant portion of our retail
fuel supply.
We purchased approximately 33% of our fuel for our retail fuel
and convenience stores for the year ended December 31, 2006
from a single supplier, Valero Marketing and Supply. Our
contract with Valero expires in 2008 and provides us with
discounts that may not be available to us from other suppliers.
We cannot assure you that we will be able to renew our contract
with Valero on terms that are satisfactory to us, if at all, or
that we would be able to secure equally favorable terms from
another supplier. A change of fuel supplier, a disruption in
supply or a significant change in our relationship with this
fuel supplier could lead to an increase in our fuel costs and
could have a material adverse effect on our business, financial
condition and results of operations.
20
We
depend on one wholesaler for a significant portion of our
convenience store merchandise.
We purchased approximately 69% of our merchandise, including
most tobacco products and grocery items, for the year ended
December 31, 2006 from a single wholesale grocer, McLane
Company, Inc., a wholly-owned subsidiary of Berkshire Hathaway
Inc. A change of merchandise suppliers, a disruption in supply
or a significant change in our relationship or pricing with our
principal merchandise supplier could lead to an increase in our
cost of goods or a reduction in the reliability of timely
deliveries and could have a material adverse effect on our
business, financial condition and results of operations.
In addition, we believe that our arrangements with vendors,
including McLane, with respect to allowances, payment terms and
operational support commitments, have enabled us to decrease the
operating expenses of convenience stores that we acquire. If we
are unable to maintain favorable arrangements with these
vendors, we may be unable to continue to effect operating
expense reductions at convenience stores we have acquired or
will acquire.
If our
proprietary technology systems are ineffective in enabling our
managers to efficiently manage our operations, our operating
performance will decline.
We invest in and rely heavily upon our proprietary information
technology systems to enable our managers to access real-time
data from our supply chain and inventory management systems, our
security systems and to monitor customer and sales information.
For example, our proprietary technology systems enable our
managers to view data for our stores, merchandise or fuel on an
aggregate basis or by specific store, type of merchandise or
fuel product, which in turn enables our managers to quickly
determine whether budgets and projected margins are being met
and to make adjustments in response to any shortfalls. In the
absence of this proprietary information technology, our managers
would be unable to respond as promptly in order to reduce
inefficiencies in our cost structure and maximize our sales and
margins.
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 maintain significant insurance coverage, including property
insurance capped at $500.0 million for our refinery,
pipelines, and marketing terminals, and $35.0 million for
our retail fuel and convenience stores. However, our insurance
coverage does not cover all potential losses, costs or
liabilities, and our business interruption insurance coverage
does not apply unless a business interruption exceeds
45 days. We could suffer losses for uninsurable or
uninsured risks or in amounts in excess of our existing
insurance coverage.
The energy industry is highly capital intensive, and the entire
or partial loss of individual facilities can result in
significant costs to both industry participants, 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, during 2005, Hurricanes
Katrina and Rita 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, 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.
21
A
substantial portion of our refinery workforce is unionized, and
we may face labor disruptions that would interfere with our
operations.
As of December 31, 2006, we employed 247 people at our
Tyler refinery and pipeline and had collective bargaining
agreements covering 147 of our operations and maintenance hourly
employees and 21 of our refinerys truck drivers, which
agreements expire on January 1, 2009 and January 31,
2009, respectively. 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 are
dependent on gasoline sales at our retail fuel and convenience
stores which makes us susceptible to increases in the cost of
gasoline and interruptions in fuel supply.
Fuel sales represented approximately 76%, 73% and 70% of our net
sales of our retail segment for the years ended
December 31, 2006, 2005 and 2004, respectively. Our
dependence on fuel sales makes us susceptible to increases in
the cost of gasoline. As a result, 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 gasoline sales makes us susceptible to
interruptions in fuel supply. We typically have no more than a
five-day
supply of fuel at each of our retail fuel and convenience
stores. Our fuel contracts do not guarantee an uninterrupted,
unlimited supply in the event of a shortage. In addition,
gasoline sales generate customer traffic to our retail fuel and
convenience stores. As a result, decreases in gasoline sales, in
the event of a shortage or otherwise, could adversely affect our
merchandise sales. A serious interruption in the supply of
gasoline could have a material adverse effect on our business,
financial condition and results of operations.
We may
incur losses as a result of our forward contract activities and
derivative transactions.
We occasionally use derivative financial instruments, such as
interest rate swaps and interest rate cap agreements, and fuel
related derivative transactions, and we expect to continue to
enter into these types of transactions. We cannot assure you
that the strategies underlying these transactions will be
successful. If any of the instruments we utilize to hedge our
exposure to various types of risk are not effective, we may
incur losses.
If we
violate state laws regulating our sale of tobacco and alcohol
products, or if these laws are changed, our results of
operations will suffer.
We sell tobacco products in all of our stores and alcohol
products in approximately 95% of our stores. Our net sales from
the sale of tobacco and alcohol products were
$178.9 million, $161.9 million and $144.6 million
for the years ended December 31, 2006, 2005 and 2004,
respectively. State laws regulate our sale of tobacco and
alcohol products. For example, state and local regulatory
agencies have the power to approve, revoke, suspend or deny
applications for, and renewals of, permits and licenses relating
to the sale of these products or to seek other remedies. Certain
states regulate relationships, including overlapping ownership,
among alcohol manufacturers, wholesalers and retailers and may
deny or revoke licensure if relationships in violation of the
state laws exist. In addition, certain states have adopted or
are considering adopting warm beer laws that seek to
discourage driving under the influence of alcohol by prohibiting
the sale of refrigerated beer. Our violation of state laws
regulating our sale of tobacco and alcohol products or a change
in these laws, such as the adoption of a warm beer
laws in one or more of the states we operate, could have a
material adverse effect on our business, financial condition and
results of operations.
22
If we
fail to meet our obligations under our long-term branded
gasoline supply agreement with BP, we may incur penalties
and/or the
agreement may be terminated.
In December 2005, we entered into a branded gasoline jobber
supply agreement with BP, to purchase a portion of our gasoline
products for a minimum of 15 years. The agreement requires
us to purchase specified minimum quantities of branded gasoline
products annually, which quantities escalate on a yearly basis.
Under this agreement, in the year ended December 31, 2006,
BP locations accounted for approximately 11% of our total
gasoline sales volume. If we fail to purchase the applicable
annual minimum quantities, BP may terminate the agreement and we
could be required to pay BP damages equal to the difference
between the specified contractual minimum annual gallons of
gasoline products and the amount actually purchased by us,
multiplied by a specified per gallon amount. The termination of
the agreement by BP and the imposition of damages could have a
material adverse effect on our business, financial condition and
results of operations.
If we
are unable to continue using the BP, Exxon, Shell, Conoco or
Chevron brand names or if there is negative publicity concerning
any of these major oil companies, sales at certain of our stores
may suffer.
Branded stores, i.e., BP, Exxon, Shell, Conoco and Chevron,
represent 26% of the total fuel sales volume from our retail
locations. If these stores lose the right to use these brand
names (and accompanying brand advertising), or if there is
negative publicity concerning any of these major oil companies,
we could suffer a decline in sales at these stores.
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, half of our directors reside in the
State of Israel. As a result, you may have difficulty serving
legal process within the United States upon any of these
persons. You may also have difficulty enforcing, both in and
outside the United States, judgments you may obtain 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
U.S. federal or state securities laws.
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
will be subject to U.S. federal income tax with respect to
gain recognized on the sale, exchange or other disposition of
common stock if we are, or were, a U.S. real property
holding corporation, or a 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.
Based on our estimates of the fair market value of our
U.S. real property interests, we believe that, as of
December 31, 2006, less than 27% of our assets constituted
U.S. real property interests. However, because 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); it is possible that we
will become a USRPHC in the future. In addition, it is possible
that the Internal Revenue Service will not agree with our
conclusions regarding the valuation of our assets or our current
USRPHC status. If we are or become a USRPHC, so long as our
common stock is regularly traded on an established securities
market (such as the New York Stock Exchange (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.
23
The
costs, scope and timelines of our capital improvement projects
may deviate significantly from our original plans and
estimates.
We may experience unanticipated increases in the cost, scope and
completion time for our capital improvement projects, including
capital improvement projects at the refinery undertaken to
comply with government regulations. Equipment that we require to
complete capital improvement projects may be unavailable to us
at expected costs or within expected time periods, increasing
project costs or causing delays. Additionally, employee or
contractor labor expense may exceed our expectations. The
inability to complete our capital improvement projects within
the cost parameters and timelines we anticipate due to these or
other factors beyond our control could have a material adverse
effect on our business, financial condition and results of
operations.
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:
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our quarterly or annual earnings or those of other companies in
our industry;
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announcements by us or our competitors of significant contracts
or acquisitions;
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changes in accounting standards, policies, guidance,
interpretations or principles;
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general economic and stock market conditions;
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the failure of securities analysts to cover our common stock or
changes in financial estimates by analysts;
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future sales of our common stock; and
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the other factors described in these Risk Factors.
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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
frequently appear to occur without 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 the past, some companies that have had 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 managements attention and resources.
You
may suffer substantial dilution.
You will suffer dilution if stock, restricted stock units,
restricted stock, stock options, warrants or other equity
awards, whether currently outstanding or subsequently granted,
are exercised.
We are
a controlled company within the meaning of the NYSE
rules and, as a result, will qualify for, and intend to rely on,
exemptions from certain corporate governance
requirements.
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:
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the requirement that a majority of our board of directors
consist of independent directors;
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the requirement that we have a nominating/corporate governance
committee consisting entirely of independent directors with a
written charter addressing the committees purpose and
responsibilities; and
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24
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the requirement that we have a compensation committee consisting
entirely of independent directors with a written charter
addressing the committees purpose and responsibilities.
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We utilize all of these exemptions. Accordingly, you 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, Delek Group Ltd., may have conflicts of
interest with other stockholders in the future.
At December 31, 2006, Delek Group Ltd. owned approximately
77% of our outstanding common stock. As a result, Delek Group
Ltd. and its controlling shareholder, Mr. Sharon (Tshuva),
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 Ltd. continues to own a
significant amount of the outstanding shares of our common
stock, Delek Group Ltd. 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 assure
you that the interests of Delek Group Ltd. will coincide with
the interests of other holders of our common stock.
Future
sales of our common stock by our controlling stockholder, Delek
Group Ltd., could depress the price of our common
stock.
The market price of our common stock could decline as a result
of sales of a large number of shares of our common stock in the
market after this offering 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, 2006, 39,389,869 of our
shares of common stock were controlled by Delek Group, Ltd. In
addition, Delek Group Ltd. will be able to register under the
Securities Act, subject to specified limitations, common stock
it owns, pursuant to a registration rights agreement with us.
The registration rights we granted to Delek Group Ltd. apply to
all shares of our common stock owned by Delek Group Ltd. and
entities it controls.
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, 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 from our subsidiaries is restricted under the
terms of their senior secured credit facilities. 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 $0.15 per share, we cannot assure you 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 Ltd. 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
25
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. 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.
We are
exposed to risks relating to evaluations of internal controls
required by Section 404 of the Sarbanes-Oxley Act of
2002.
We are in the process of evaluating our internal controls
systems to allow management to report on, and our independent
auditors to audit, our internal controls over financial
reporting. We will be performing the system and process
evaluation and testing (and any necessary remediation) required
to comply with the management certification and auditor
attestation requirements of Section 404 of the
Sarbanes-Oxley Act of 2002. We will be required to comply with
Section 404 by no later than December 31, 2007.
However, we cannot be certain as to the timing of completion of
our evaluation, testing and remediation actions or the impact of
the same on our operations.
Furthermore, upon completion of 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 significant deficiency, or
combination of significant deficiencies that results in more
than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or
detected. We are aware that we need, and we intend, to hire
additional accounting personnel in order to comply with the
rules and regulations that will apply to us as a public company.
If we fail to implement the requirements of Section 404 in
a timely manner, we might 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.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
We own our refinery in Tyler, Texas, which is used by our
refining segment and is situated on approximately 100 out of a
total of approximately 712 acres of land owned by us, along
with an associated crude oil pipeline and light products loading
facilities. We also own terminals in San Angelo and
Abilene, Texas, which are used by our marketing segment, along
with 114 miles of refined product pipelines and light
product loading facilities.
26
As of December 31, 2006, we owned the real estate at 237
retail fuel and convenience store locations, and leased the real
property at 179 stores. Of the stores owned or leased by us, 21
were either leased or subleased to third party dealers; 40 other
dealer sites are owned or leased independently by dealers.
The following table summarizes the real estate position of our
retail segment.
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Number of
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Company
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Remaining
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Remaining
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Operated
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Number of
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Number of
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Number of
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Lease Term
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Lease Term
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State
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Sites
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Dealer
Sites(1)
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Owned Sites
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Leased Sites
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<
3 Years(2)
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>
3 Years(2)
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Tennessee
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214
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8
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112
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104
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3
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101
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Alabama
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92
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45
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69
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39
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3
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36
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Virginia
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36
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26
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10
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10
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Arkansas
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15
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7
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8
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8
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Kentucky
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3
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1
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2
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2
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Louisiana
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2
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2
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2
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Mississippi
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2
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2
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Georgia
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30
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7
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20
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14
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14
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Florida
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2
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Total
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394
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62
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237
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179
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6
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173
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(1) |
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Includes 40 sites neither owned by
nor subleased from us.
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(2) |
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Includes renewal options; measured
as of December 31, 2006.
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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 believe that none of these leases is
individually material.
We lease our corporate headquarters at 830 Crescent Centre
Drive, Suite 300, Franklin, Tennessee. The lease is on a
month-to-month
basis and will expire on April 1, 2007. We have entered
into a new lease for our future corporate headquarters at 7102
Commerce Way, Brentwood, Tennessee. The new lease is for
54,000 square feet of office space of which we will occupy
34,000 square feet and anticipate
sub-leasing
the remaining space. The lease has a 15 year term and
expires in March 2022. We anticipate completing our move to the
new corporate headquarters by April 1, 2007.
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ITEM 3.
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LEGAL
PROCEEDINGS
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We are subject to various claims and legal actions that arise in
the ordinary course of business. In the opinion of management,
the ultimate resolution of any such matters currently known will
not have a material adverse effect on our business, financial
condition and results of operations in future periods.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our common stock is traded on the NYSE under the symbol
DK.
27
The following table sets forth the quarterly high and low sales
prices of our common stock for each quarterly period since our
common stock began trading on the New York Stock Exchange on
May 4, 2006:
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2006
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High
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Low
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Second Quarter
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$
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17.99
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$
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12.08
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Third Quarter
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$
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22.85
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$
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14.83
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Fourth Quarter
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$
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19.00
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$
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15.72
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Holders
As of March 1, 2007, there were approximately 12 common
stockholders of record.
Dividends
In connection with our initial public offering, 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. On each of
December 7, 2006 and March 7, 2007, we paid a cash
dividend of $0.0375 per share of our common stock to the
record holders of our common stock. The dividends paid in 2006
totaled $1.9 million. We intend to continue to pay
quarterly cash dividends on our common stock at an annual rate
of $0.15 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. We have paid no
other cash dividends on our common stock during the two most
recent fiscal years.
Recent
Sales of Unregistered Securities
None.
Use of
Proceeds from Registered Securities
On May 3, 2006, the Securities and Exchange Commission
declared effective our registration statement on
Form S-1
(Registration
No. 333-131675)
related to our initial public offering of common stock.
Approximately $4.9 million was used to pay offering
expenses related to the initial public offering, and
approximately $12.0 million was used to pay underwriting
discounts and commissions. Net proceeds of the offering after
payment of offering expenses and underwriting discounts and
commissions were approximately $166.9 million.
As of December 31, 2006, we used the net proceeds from the
offering as follows:
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to fully repay the $25.0 million outstanding principal,
plus accrued interest to the date of repayment, under the
promissory note payable to Delek The Israel Fuel
Corporation Ltd. (Delek Fuel), one of our affiliates, which bore
interest at a rate of 6.3% per year and had a maturity date
of April 27, 2008;
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to fully repay the $17.5 million outstanding principal,
plus accrued interest to the date of repayment, under the
promissory note payable to Delek Group Ltd., which bore interest
at a rate of 7.0% per year and had a maturity date of
April 27, 2010;
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to pay expenses of $4.9 million associated with the
offering;
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to pay $23.0 million toward the purchase of the 43 retail
locations from Fast Petroleum;
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to pay $50.0 million toward the purchase of the Pride
assets.
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The remaining net proceeds from the offering continue to be
invested in investment grade, short-term investments.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
None.
28
Performance
Graph
The following Performance Graph and related information shall
not be deemed soliciting material or to be
filed with the Securities and Exchange Commission,
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 compares cumulative total returns
for our stockholders since May 4, 2006 (the date on which
trading in Deleks common stock on the NYSE commenced) to
the Standard and Poors 500 Stock Index and a peer group
selected by management, assuming a $100 investment made on
May 4, 2006. Each of the three measures of cumulative
total return assumes reinvestment of dividends. The peer group
is comprised of Alon USA Energy, Inc., Frontier Oil Corp., Holly
Corp., Pantry, Inc., Sunoco, Inc., Tesoro Corp., Valero Energy
Corp. and Western Refining, Inc. The stock performance shown on
the graph below is not necessarily indicative of future price
performance.
COMPARISON
OF CUMULATIVE TOTAL RETURN
29
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ITEM 6.
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SELECTED
FINANCIAL DATA
|
The following selected financial data should be read in
conjunction with Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations, and
Item 8, Financial Statements and Supplementary Data, of
this Annual Report on
Form 10-K.
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Year Ended December 31,
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2006(1)
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2005(2)
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2004(3)
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2003
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2002
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(In millions, except share and per share data)
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Statement of Operations
Data:
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Net sales:
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Retail
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$
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1,395.6
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$
|
1,101.0
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$
|
857.8
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$
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600.2
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$
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549.6
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Refining
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1,590.2
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|
930.5
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Marketing
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221.6
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Other
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0.3
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0.4
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0.1
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Total
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3,207.7
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2,031.9
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857.9
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600.2
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549.6
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Expenses:
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Cost of goods sold
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2,818.3
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1,731.6
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|
730.8
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|
500.2
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|
460.3
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Operating expenses
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|
|
173.2
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|
133.1
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|
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|
80.1
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|
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|
62.7
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|
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62.1
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|
General and administrative expenses
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38.2
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|
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|
23.5
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|
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15.1
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12.8
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12.2
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Depreciation and amortization
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22.8
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|
16.1
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|
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|
12.4
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8.8
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7.4
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Gain on disposal of assets
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(1.6
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)
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(0.9
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)
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(0.4
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)
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Losses on forward contract hedging
activities(4)
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9.1
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|
|
|
|
|
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|
|
|
|
|
|
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3,052.5
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|
1,911.8
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|
|
|
837.5
|
|
|
|
584.1
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|
|
|
542.0
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|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
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Operating income
|
|
|
155.2
|
|
|
|
120.1
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|
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|
20.4
|
|
|
|
16.1
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|
|
|
7.6
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Interest expense
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|
24.2
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|
|
|
17.4
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|
|
|
7.1
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|
|
5.9
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|
5.7
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|
Interest income
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|
(7.2
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)
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|
(2.1
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)
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Interest expense
related party
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1.0
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3.0
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1.2
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0.1
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Other expenses, net
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|
0.2
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|
|
|
2.5
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|
0.7
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|
|
(0.2
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)
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2.6
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18.2
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|
20.8
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9.0
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5.8
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8.3
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Income (loss) before income taxes
and cumulative effect of change in accounting policy
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137.0
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99.3
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11.4
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|
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|
10.3
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|
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|
(0.7
|
)
|
Income tax expense (benefit)
|
|
|
44.0
|
|
|
|
34.9
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|
4.1
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|
|
3.8
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|
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|
(0.2
|
)
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|
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|
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Income (loss) before cumulative
effect of change in accounting policy
|
|
|
93.0
|
|
|
|
64.4
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|
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|
7.3
|
|
|
|
6.5
|
|
|
|
(0.5
|
)
|
Cumulative effect of change in
accounting policy
|
|
|
|
|
|
|
(0.3
|
)
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Net income (loss)
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$
|
93.0
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|
$
|
64.1
|
|
|
$
|
7.3
|
|
|
$
|
6.5
|
|
|
$
|
(0.5
|
)
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Basic earnings (loss) per share:
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|
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|
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Income (loss) before cumulative
effect of change in accounting policy
|
|
$
|
1.98
|
|
|
$
|
1.64
|
|
|
$
|
0.19
|
|
|
$
|
0.16
|
|
|
$
|
(0.01
|
)
|
Cumulative effect of change in
accounting policy
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.98
|
|
|
$
|
1.63
|
|
|
$
|
0.19
|
|
|
$
|
0.16
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Diluted earnings (loss) per share:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income (loss) before cumulative
effect of change in accounting policy
|
|
$
|
1.94
|
|
|
$
|
1.64
|
|
|
$
|
0.19
|
|
|
$
|
0.16
|
|
|
$
|
(0.01
|
)
|
Cumulative effect of change in
accounting policy
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.94
|
|
|
$
|
1.63
|
|
|
$
|
0.19
|
|
|
$
|
0.16
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Weighted average shares, basic
|
|
|
47,077,369
|
|
|
|
39,389,869
|
|
|
|
39,389,869
|
|
|
|
39,389,869
|
|
|
|
39,389,869
|
|
Weighted average shares, diluted
|
|
|
47,915,962
|
|
|
|
39,389,869
|
|
|
|
39,389,869
|
|
|
|
39,389,869
|
|
|
|
39,389,869
|
|
30
|
|
|
|
|
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|
|
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|
|
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|
Year Ended December 31,
|
|
|
|
2006(1)
|
|
|
2005(2)
|
|
|
2004(3)
|
|
|
2003
|
|
|
2002
|
|
|
|
(In millions, except share and per share data)
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by operating
activities
|
|
$
|
110.2
|
|
|
$
|
148.7
|
|
|
$
|
24.9
|
|
|
$
|
26.3
|
|
|
$
|
17.5
|
|
Cash flows used in investing
activities
|
|
|
(251.4
|
)
|
|
|
(162.3
|
)
|
|
|
(27.3
|
)
|
|
|
(16.1
|
)
|
|
|
(12.1
|
)
|
Cash flows provided by (used in)
financing activities
|
|
|
180.2
|
|
|
|
54.1
|
|
|
|
5.6
|
|
|
|
(2.3
|
)
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
39.0
|
|
|
$
|
40.5
|
|
|
$
|
3.2
|
|
|
$
|
7.9
|
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Balance Sheet Data:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents
|
|
$
|
101.6
|
|
|
$
|
62.6
|
|
|
$
|
22.1
|
|
|
$
|
18.9
|
|
|
$
|
11.0
|
|
Total current assets
|
|
$
|
410.6
|
|
|
$
|
251.8
|
|
|
$
|
64.0
|
|
|
$
|
46.7
|
|
|
$
|
40.0
|
|
Property, plant and equipment, net
|
|
$
|
424.7
|
|
|
$
|
270.6
|
|
|
$
|
189.3
|
|
|
$
|
136.5
|
|
|
$
|
130.9
|
|
Total assets
|
|
$
|
949.4
|
|
|
$
|
606.2
|
|
|
$
|
330.1
|
|
|
$
|
256.8
|
|
|
$
|
234.1
|
|
Total current liabilities
|
|
$
|
230.9
|
|
|
$
|
175.8
|
|
|
$
|
72.2
|
|
|
$
|
48.5
|
|
|
$
|
39.3
|
|
Total debt, including current
maturities
|
|
$
|
286.6
|
|
|
$
|
268.8
|
|
|
$
|
203.3
|
|
|
$
|
168.8
|
|
|
$
|
161.7
|
|
Total non-current liabilities
|
|
$
|
336.3
|
|
|
$
|
310.6
|
|
|
$
|
202.1
|
|
|
$
|
159.8
|
|
|
$
|
152.8
|
|
Total stockholders equity
|
|
$
|
382.2
|
|
|
$
|
119.8
|
|
|
$
|
55.8
|
|
|
$
|
48.4
|
|
|
$
|
41.9
|
|
Total liabilities and
stockholders equity
|
|
$
|
949.4
|
|
|
$
|
606.2
|
|
|
$
|
330.1
|
|
|
$
|
256.8
|
|
|
$
|
234.1
|
|
|
|
|
(1) |
|
Marketing operations were initiated
on August 1, 2006 in conjunction with the acquisition of
the Pride assets.
|
|
(2) |
|
Effective April 29, 2005, we
completed the acquisition of the Tyler refinery and related
assets. We operated the refinery for 247 days in 2005. The
results of operations of the Tyler refinery and related assets
are included in our financial results from the date of
acquisition.
|
|
(3) |
|
Effective April 30, 2004, we
completed the acquisition of 100% of the outstanding stock of
Williamson Oil. The results of operations of Williamson Oil are
included in our financial results from the date of acquisition.
|
|
(4) |
|
In order to mitigate the risks of
changes in the market price of crude oil and refined petroleum
products, we entered into forward contracts to fix the purchase
price of crude and sales price of specific refined petroleum
products for a predetermined number of units at a future date.
|
Segment
Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining(2)
|
|
|
Retail
|
|
|
Marketing(3)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions, except share and per share data)
|
|
|
Net sales (excluding intercompany
marketing fees and sales)
|
|
$
|
1,593.4
|
|
|
$
|
1,395.6
|
|
|
$
|
218.2
|
|
|
$
|
0.5
|
|
|
$
|
3,207.7
|
|
Intercompany marketing fees and
sales
|
|
|
(3.2
|
)
|
|
|
(0.2
|
)
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,367.4
|
|
|
|
1,234.9
|
|
|
|
216.0
|
|
|
|
|
|
|
|
2,818.3
|
|
Operating expenses
|
|
|
69.6
|
|
|
|
102.8
|
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
173.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
153.2
|
|
|
$
|
57.7
|
|
|
$
|
5.3
|
|
|
$
|
|
|
|
|
216.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.2
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
155.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
332.4
|
|
|
$
|
428.4
|
|
|
$
|
92.4
|
|
|
$
|
96.2
|
|
|
$
|
949.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending (excluding
business combinations)
|
|
$
|
74.9
|
|
|
$
|
22.4
|
|
|
$
|
0.2
|
|
|
$
|
|
|
|
$
|
97.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining(2)
|
|
|
Retail
|
|
|
Marketing(1)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions, except share and per share data)
|
|
|
Net sales (excluding intercompany
marketing fees and sales)
|
|
$
|
930.5
|
|
|
$
|
1,101.0
|
|
|
$
|
|
|
|
$
|
0.4
|
|
|
$
|
2,031.9
|
|
Intercompany sales
|
|
|
0.9
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
776.4
|
|
|
|
955.2
|
|
|
|
|
|
|
|
|
|
|
|
1,731.6
|
|
Operating expenses
|
|
|
45.8
|
|
|
|
86.9
|
|
|
|
|
|
|
|
0.4
|
|
|
|
133.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
109.2
|
|
|
$
|
58.0
|
|
|
$
|
|
|
|
$
|
|
|
|
|
167.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.5
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.1
|
|
Gain on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.6
|
)
|
Losses on forward contract
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
120.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
235.6
|
|
|
$
|
367.4
|
|
|
$
|
|
|
|
$
|
3.2
|
|
|
$
|
606.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending (excluding
business combinations)
|
|
$
|
18.8
|
|
|
$
|
10.4
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
29.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Statement of Accounting Standards
No. 131, Disclosures About Segments of an Enterprise and
Related Information, requires disclosure of a measure of
segment profit or loss. In connection with the purchase of the
Tyler refinery and related assets on April 29, 2005,
management began viewing our companys operating results in
two reportable segments: retail and refining. The initiation of
operations in the marketing segment added a third reportable
segment in the third quarter of 2006. We measure the operating
performance of each segment based on segment contribution
margin. We define segment contribution margin as net sales less
cost of goods sold and operating expenses, excluding
depreciation and amortization.
|
|
|
|
For the retail segment, cost of
goods sold comprises the costs of specific products sold.
Operating expenses include costs such as wages of employees at
the stores, lease expense for the stores, utility expense for
the stores and other costs of operating the stores, excluding
depreciation and amortization.
|
|
|
|
For the refining segment, cost of
goods sold includes all the costs of crude oil, feedstocks and
related transportation. Operating expenses include the costs
associated with the actual operations of the refinery, excluding
depreciation and amortization.
|
|
|
|
For the marketing segment, cost of
goods sold includes all costs of refined products, additives and
related transportation. Operating expenses include the costs
associated with the actual operation of owned terminals,
excluding depreciation and amortization, terminaling expense at
third-party locations and pipeline maintenance costs.
|
|
(2) |
|
Effective April 29, 2005, we
completed the acquisition of the Tyler refinery and related
assets. We operated the refinery for 247 days in 2005.
|
|
(3) |
|
Marketing operations were initiated
on August 1, 2006 in conjunction with the acquisition of
the Pride assets.
|
32
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Managements Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) is managements
analysis of our financial performance and of significant trends
that may affect our future performance. The MD&A should be
read in conjunction with Deleks consolidated financial
statements and related notes included elsewhere in this Annual
Report on
Form 10-K.
Those statements in the MD&A that are not historical in
nature should be deemed forward-looking statements that are
inherently uncertain.
Forward-Looking
Statements
This Annual Report contains forward-looking
statements that reflect our current estimates,
expectations and projections about our future results,
performance, prospects and opportunities. Forward-looking
statements include, among other things, the information
concerning our possible future results of operations, business
and growth strategies, financing plans, expectations that
regulatory developments or other matters will not have a
material adverse effect on our business or financial condition,
our competitive position and the effects of competition, the
projected growth of the industry in which we operate, and the
benefits and synergies to be obtained from our completed and any
future acquisitions, and statements of managements goals
and objectives, and other similar expressions concerning matters
that are not historical facts. Words such as may,
will, should, could,
would, predicts, potential,
continue, expects,
anticipates, future,
intends, plans, believes,
estimates, appears, projects
and similar expressions, as well as statements in future tense,
identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of
future performance or results, and will not necessarily be
accurate indications of the times at, or by which, such
performance or results will be achieved. Forward-looking
information is based on information available at the time
and/or
managements good faith belief with respect to future
events, and is subject to risks and uncertainties that could
cause actual performance or results to differ materially from
those expressed in the statements. Important factors that could
cause such differences include, but are not limited to:
|
|
|
|
|
competition;
|
|
|
|
changes in, or the failure to comply with, the extensive
government regulations applicable to our industry segments;
|
|
|
|
decreases in our refining margins or fuel gross profit as a
result of increases in the prices of crude oil, other feedstocks
and refined petroleum products;
|
|
|
|
our ability to execute our strategy of growth through
acquisitions and transactional risks in acquisitions;
|
|
|
|
general economic and business conditions, particularly levels of
spending relating to travel and tourism or conditions affecting
the southeastern United States;
|
|
|
|
dependence on one principal fuel supplier and one wholesaler for
a significant portion of our convenience store merchandise;
|
|
|
|
unanticipated increases in cost or scope of, or significant
delays in the completion of our capital improvement projects;
|
|
|
|
risks and uncertainties with respect to the quantities and costs
of refined petroleum products supplied to our pipelines
and/or held
in our terminals;
|
|
|
|
operating hazards, natural disasters, casualty losses and other
matters beyond our control;
|
|
|
|
increases in our debt levels;
|
|
|
|
restrictive covenants in our debt agreements;
|
|
|
|
seasonality;
|
|
|
|
terrorist attacks;
|
33
|
|
|
|
|
potential conflicts of interest between our major stockholder
and other stockholders;
|
|
|
|
other factors discussed under Item 1, Business, and
Item 1A, Risk Factors, of this Annual Report on
Form 10-K
|
In light of these risks, uncertainties and assumptions, our
actual results of operations and execution of our business
strategy could differ materially from those expressed in, or
implied by, the forward-looking statements, and you should not
place undue reliance upon them. In addition, past financial
and/or
operating performance is not necessarily a reliable indicator of
future performance and you should not use our historical
performance to anticipate results or future period trends. We
can give no assurances that any of the events anticipated by the
forward-looking statements will occur or, if any of them do,
what impact they will have on our results of operations and
financial condition.
Forward-looking statements speak only as of the date the
statements are made. We assume no obligation to update
forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting
forward-looking information except to the extent required by
applicable securities laws. If we do update one or more
forward-looking statements, no inference should be drawn that we
will make additional updates with respect thereto or with
respect to other forward-looking statements.
Overview
We are a diversified energy business focused on petroleum
refining, wholesale sales of refined products and retail
marketing. Our business consists of three operating segments:
refining, marketing and retail. Our refining segment operates a
high conversion, moderate complexity independent refinery in
Tyler, Texas, with a design crude distillation capacity of
60,000 bpd, along with an associated crude oil pipeline and
light products loading facilities. Our marketing segment sells
refined products on a wholesale basis in west Texas through
company-owned and third-party operated terminals. Our retail
segment markets gasoline, diesel, other refined petroleum
products and convenience merchandise through a network of
394 company-operated retail fuel and convenience stores
located in Alabama, Arkansas, Georgia, Kentucky, Louisiana,
Mississippi, Tennessee and Virginia. The following presents
certain significant acquisitions and pivotal events in our
history:
|
|
|
|
|
Delek began doing business in April 2001 with the acquisition of
198 retail gasoline and convenience stores. Between April 2001
and December 2005, we have completed several other acquisitions
of retail gasoline and convenience stores;
|
|
|
|
In April 2005, we acquired a petroleum refinery, a product
loading facility and crude oil pipeline assets in and around
Tyler, Texas, from subsidiaries of Crown Central Petroleum;
|
|
|
|
In May 2006 Delek became a publicly traded company listed on the
NYSE under the symbol DK;
|
|
|
|
In July 2006, we completed the acquisition of 43 retail fuel and
convenience stores in northwest Georgia and southeast
Tennessee; and
|
|
|
|
In July 2006, we completed the acquisition of refining
equipment, pipelines, storage tanks and terminals that expanded
our marketing and supply operations and enhanced our refining
operations.
|
Strategic
Initiatives
We are committed to improving stockholder value while
maintaining financial stability and flexibility by continuing to:
|
|
|
|
|
pursue opportunistic acquisitions that strengthen our core
markets and leverage our core competencies;
|
|
|
|
conservatively manage operating expenses;
|
|
|
|
modernize, grow and improve the profitability of our operations
through carefully evaluated capital investments;
|
|
|
|
return cash to investors through payment of cash dividends;
|
34
|
|
|
|
|
develop and refine innovative information technology
applications for all business segments;
|
|
|
|
provide prudent and scalable capital structure;
|
|
|
|
focus on health, safety and environmental compliance.
|
To accomplish the foregoing goals, we have taken the following
actions in 2006:
|
|
|
|
|
In May 2006, we sold 11.5 million shares of common stock to
the public while our parent company retained 77.4% share
ownership. Other than the repayment of $42.5 million in
related party debt, the net proceeds have been used to support
our growth initiatives. We plan to continue these growth
initiatives throughout 2007.
|
|
|
|
We spent approximately $12.3 million on our re-image and
new store program in 2006, completed four raze and rebuilds and
two new store builds using the MAPCO Mart
GrilleMarxtm
brand. We are planning to spend approximately an additional
$19.0 million on this initiative in 2007.
|
|
|
|
We acquired and successfully integrated the Fast assets and
established a new core market in Southeastern Tennessee and
Northern Georgia. Our retail segment strategy is centered on
operating a high concentration of sites in a similar geographic
region to promote operational efficiencies and increased segment
contribution margin.
|
|
|
|
We acquired terminal and pipeline assets from the Pride
Companies in West Texas. We believe there are realizable
synergies across the various aspects of our segments. The
addition of our marketing segment through the acquisition of
assets from the Pride Companies allows us to begin capitalizing
on these natural market positions.
|
|
|
|
We expanded ultra low sulfur diesel capacity at our Tyler
refinery by 83%. Our throughput increased over 9% from 53,150 to
58,128 bpd over the period we operated the refinery in
2005. In addition, our customer base has expanded approximately
25% over the prior year due to our focused initiatives on
organic growth and regulatory compliance. We plan to spend
approximately $64 million through 2008 to comply with the
CAA regulations requiring a reduction in sulfur content in
gasoline.
|
|
|
|
We implemented a scanning out system in all
394 company-owned stores. We believe our proprietary
technology platform affords us the opportunity to manage our
operations more efficiently and control expenses.
|
|
|
|
We re-imaged 21 stores acquired in the BP transaction in
December 2005 to MAPCO Mart. Our focus on delivering a
consistent brand offering is a strong complement to our strategy
of successfully assimilating acquisitions. We believe this
provides us stronger brand recognition within our core market
areas.
|
|
|
|
We declared our first cash dividend on November 7, 2006 of
$0.0375 per share of common stock.
|
Market
Trends
The results of operations from our refining segment are
significantly affected by the cost of commodities.
The volatility in the energy markets that we experienced in 2005
has continued in 2006 with the US Gulf Coast 5-3-2 crack spread
for 2006 averaging $10.16 per barrel, but ranging from a
high of $21.50 per barrel to a low of $1.07 per
barrel, compared to an average of $10.58 per barrel
in 2005. High demand for refined products, a strengthening
economy, production interruptions and the phase out of methyl
tert-butyl ether (MTBE), resulted in increases in product prices
that outpaced increases in crude oil and oil products prices in
2006 compared to 2005.
Volatility in the wholesale cost of fuel has also increased
significantly over the past year due to the factors noted above.
Our average fuel cost to our retail fuel and convenience stores
increased from $2.05 per gallon in 2005 to $2.34 per
gallon in 2006. If this volatility continues and we are unable
to fully pass our cost increases on to our customers, our retail
fuel margins will decline. Additionally, increases in the retail
price of fuel could result in lower demand for fuel and reduced
customer traffic inside our convenience stores in our retail
segment. This may place pressure on in-store merchandise margins.
35
The cost of natural gas used for fuel in our refinery has also
shown historic volatility. Our average cost of natural gas, per
million British Thermal Units (MMBTU) decreased from
$10.13 per MMBTU in the second half of 2005 to
$7.10 per MMBTU in the second half of 2006.
Factors
Affecting Comparability
The comparability of our results of operations for the year
ended December 31, 2006 compared to the years ended
December 31, 2005 and 2004 is affected by the following
factors:
|
|
|
|
|
the completion of several acquisitions in 2004, 2005 and 2006
including: the purchase of the Williamson Oil, Co. in 2004; the
purchase of the Tyler refinery assets in April 2005; the
purchase of 21 retail fuel and convenience stores, a network of
four wholesale operators, four undeveloped properties and
inventory from BP in December 2005; the purchase of 43 retail
fuel and convenience stores in Georgia and Tennessee in
July 2006 and the commencement of marketing operations in
August 2006 in conjunction with the purchase of refined
petroleum product terminals, seven pipelines and storage tanks;
|
|
|
|
a scheduled turnaround at our Tyler refinery that was started
and completed in December 2005;
|
|
|
|
the receipt of approximately $166.9 million in proceeds of
an initial public offering of our stock in May 2006, after
payment of offering expenses and underwriting discounts and
commissions;
|
|
|
|
repayment of $42.5 million of related party debt in May
2006;
|
|
|
|
the adoption of SFAS No. 123(R), Share-Based
Payment in January 2006; and
|
|
|
|
an increase in general and administrative expenses in 2006 due
to the costs of operating as a public company
|
Results
of Operations
Consolidated
Results of Operation Comparison of the Year Ended
December 31, 2006 versus the Year Ended December 31,
2005
For the years ended December 31, 2006 and 2005, we
generated net sales of $3,207.7 million and
$2,031.9 million, respectively, and net income of
$93.0 million and $64.1 million, respectively. The
increase in both net sales and net income was primarily due to
the inclusion of a full year of sales from the Tyler refinery
and BP stores which were acquired in 2005, and the contribution
from the acquisitions of the Fast stores and the Pride assets in
the third quarter of 2006.
Of the $1,175.8 million increase in net sales,
$611.6 million resulted from the inclusion of a full year
of sales from acquisitions completed in 2005,
$284.6 million of the increase was due to acquisitions
completed during 2006, and the remaining increase resulted from
an 8.7% increase in barrels sold per day at our refinery and
higher average retail fuel prices and merchandise sales at our
convenience stores.
Cost of goods sold was $2,818.3 million for 2006, compared
to $1,731.6 million for 2005, an increase of
$1,086.7 million or 63%. Of this increase,
$527.7 million resulted from the inclusion of a full year
of sales from acquisitions made in 2005, $275.2 million of
the increase was due to acquisitions completed during 2006, and
the remaining increase was due to higher costs of crude in our
refining segment and higher costs of fuel in our retail segment.
Operating expenses were $173.2 million for 2006 compared to
$133.1 million for 2005, an increase of $40.1 million
or 30%. Of this increase, $30.6 million resulted from the
inclusion of a full year of sales from acquisitions made in 2005
and $5.3 million was due to acquisitions completed during
2006. Also contributing to the higher operating expenses were
credit card expenses at our retail segment, which increased
nearly $1.8 million over 2005 as a result of higher credit
card transaction amounts due primarily to higher fuel prices, as
well as increases in interchange fees charged by several credit
card providers.
General and administrative expenses were $38.2 million for
2006 compared to $23.5 million for 2005, an increase of
$14.7 million or 63%. We do not allocate general and
administrative expenses to the segments. The increase associated
with this overhead expense was primarily due to recognition of
share-based compensation
36
associated with the implementation of Statement of Financial
Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment (SFAS 123R), additional bonuses
associated with our initial public offering activity, increases
in personnel, professional support and contractors as a result
of being a public company and our efforts with Sarbanes Oxley
compliance, consulting costs associated with several projects at
the refinery and an increase in accrued liability related to
general liability insurance. Delek has efforts underway toward
meeting its requirement to certify compliance with the internal
control requirements of Sarbanes-Oxley in 2007.
Depreciation and amortization was $22.8 million for 2006
compared to $16.1 million for 2005. This increase was
primarily due to the inclusion of a full year of depreciation
expense associated with the refinery compared to eight months of
expense in 2005, the BP stores acquired during 2005 and the Fast
stores acquired in the third quarter of 2006 which have no
comparative depreciation in 2005.
During 2005, the sale of one convenience store, partially offset
by the write-off of associated goodwill, netted a pre-tax gain
of $1.6 million. There were no such sales or asset
disposals in 2006.
During August and September 2005, we entered into forward fuel
contracts to fix the purchase price of crude oil and sales price
of finished grade fuel for a predetermined number of units at a
future date, which had fulfillment terms of less than
60 days. We realized losses of $9.1 million during
2005, which were included as losses on forward contract
activities. There were no forward contracts for fuel in 2006.
Interest expense was $24.2 million in 2006 compared to
$17.4 million for 2005, an increase of $6.8 million.
This increase was due to increased indebtedness associated with
the acquisitions completed in 2006, a full year of interest
associated with acquisitions completed in 2005 and higher
short-term interest rates. Interest income was $7.2 million
for 2006 compared to $2.1 million for 2005, an increase of
$5.1 million. This increase was due primarily to higher
cash and short-term investment balances as a result of the
refinerys favorable operations, as well as the proceeds
received from our initial public offering in May 2006. Interest
expense from related party notes payable for 2006 decreased to
$1.0 million from $3.0 million in 2005. This decrease
was due largely to the payment of all related party debt from
proceeds received in our initial public offering in May 2006.
During the second quarter of 2005, we wrote off
$3.5 million of deferred financing costs associated with
the refinancing of a portion of our long-term debt. In 2006, we
recognized only a nominal loss in the fair market value of our
interest rate derivatives as compared to a $1.5 million
gain for 2005.
In 2006, we recorded a $0.2 million expense in connection
with guarantee fees payable to Delek Group Ltd. relating
primarily to the guaranty of a portion of our debt incurred in
connection with the acquisition of the Tyler refinery, compared
to $0.6 million expense in 2005. These guarantees were
eliminated during the second quarter of 2006.
Income tax expense was $44.0 million for 2006, compared to
$34.9 million for 2005, an increase of $9.1 million.
This increase primarily resulted from our higher taxable income
in 2006 compared to 2005. Our effective tax rate was 32.1% for
2006, compared to 35.1% for 2005. Therefore, the increase in
pre-tax income was partially offset by a decrease in our
effective rate.
In 2006 we benefited from other tax incentives relating to our
refinery operations. Substantially all of our refinery
operations are conducted through a Texas limited partnership,
which is not subject to Texas franchise tax. The limited
partnerships 0.1% general partner was subject to Texas
franchise tax on its 0.1% share of refining operations.
Additionally, all other Texas activity, including the marketing
segment, has occurred in a limited partnership entity, also not
subject to Texas franchise tax. Accordingly, the effective tax
rate applicable to the refining and marketing segments is the
federal tax rate plus a nominal amount of state franchise tax.
Consequently, our consolidated effective tax rate was reduced by
their proportionate contribution to our consolidated pretax
earnings. Delek benefited from other tax incentives related to
its refinery operations. Specifically, Delek was entitled to the
benefit of the domestic manufacturers production deduction
for federal tax purposes. Additionally, Delek was entitled to
federal tax credits related to the production of ultra low
sulfur diesel fuel. The combination of these two items further
reduced Deleks effective federal tax rate. The taxation of
earnings in Texas is subject to change due to new legislation
which will be effective January 1, 2007. This legislation
will require taxation of all or a portion of a limited
partnerships earnings.
37
Consolidated
Results of Operation Comparison of the Year Ended
December 31, 2005 versus the Year Ended December 31,
2004
For the years ended December 31, 2005 and 2004, we
generated net sales of $2,031.9 million and
$857.9 million, respectively, and net income of
$64.1 million and $7.3 million, respectively. The
increase in both net sales and net income was due primarily to
the acquisition of the Tyler refinery on April 29, 2005.
Of the $1,174.0 million increase in net sales,
$930.5 million was generated from the 2005 acquisition of
the Tyler refinery, with the rest of the increase resulting from
higher average retail fuel prices at our convenience stores and
the inclusion of a full year of sales from the acquisition of
Williamson Oil stores compared to only eight months in 2004.
Cost of goods sold was $1,731.6 million for 2005, compared
to $730.8 million for 2004, an increase of
$1,000.8 million or 137%. Of this increase,
$776.4 million was due to the cost of goods sold from the
Tyler refinery acquisition in 2005, $70.1 million was due
to the inclusion of a full year of results of operations from
the acquisition of Williamson Oil stores compared to only eight
months in 2004, and the remaining increase was primarily due to
an increase in the average fuel price at our retail fuel and
convenience stores.
Operating expenses were $133.1 million for 2005, compared
to $80.1 million for 2004, an increase of
$53.0 million or 66%. Of this increase, $45.8 million
was due to operating costs from the 2005 Tyler refinery
acquisition, which approximated $3.63 per barrel sold. In
addition, we had an increase of $7.1 million in store
operating costs from the inclusion of a full year of results of
operations from the acquisition of Williamson Oil stores
compared to only eight months in 2004. The ratio of operating
expenses to merchandise sales plus total gallons sold in our
retail operations declined slightly to 13.2% in 2005 from 13.3%
in 2004 due to a focus on operating expense control.
General and administrative expenses were $23.5 million for
2005, compared to $15.1 million for 2004, an increase of
$8.4 million or 55.6%. This increase was primarily due to
additional salary and related expenses in our retail segment due
in part to the inclusion of a full year of results of operations
from the acquisition of Williamson Oil stores compared to only
eight months in 2004, and general and administrative expenses
from the acquisition of the Tyler refinery in 2005.
Depreciation and amortization was $16.1 million for 2005,
compared to $12.4 million for 2004. This increase was
primarily due to $1.4 million in depreciation associated
with the Tyler refinery along with approximately
$1.2 million in additional depreciation resulting from the
inclusion of a year of depreciation from the acquisition of
Williamson Oil stores compared to only eight months in 2004.
During 2005, we recognized a net pre-tax gain of
$1.6 million associated with the sale of one convenience
store partially offset by the write-off of associated goodwill,
compared to $0.9 million pre-tax gain for 2004 primarily
associated with the sale of one convenience store and one
undeveloped property.
During August and September 2005, we entered into forward fuel
contracts to fix the purchase price of crude oil and sales price
of finished grade fuel for a predetermined number of units at a
future date, which had fulfillment terms of less than
60 days. We realized losses of $9.1 million during
2005, which are included as losses on forward contract
activities.
Interest expense was $17.4 million for 2005, compared to
$7.1 million for 2004, an increase of $10.3 million.
This increase was due to increased indebtedness, letter of
credit fees associated with the 2005 purchase of the Tyler
refinery and higher short-term interest rates. Interest income
was $2.1 million for 2005 and immaterial for 2004. This
increase was due to higher cash balances and new short-term
investments resulting from cash flow provided by the Tyler
refinery operations. Interest expense from related party notes
payable for 2005 increased to $3.0 million from
$1.2 million in 2004 due to borrowings incurred in
conjunction with the Tyler refinery acquisition. In addition, a
$1.5 million increase in unrealized gains on interest rate
derivative instruments was recorded in 2005, compared to an
unrealized loss of $0.7 million for 2004.
We also wrote-off deferred financing charges of
$3.5 million in 2005 associated with the refinancing of a
portion of our long-term debt.
38
In 2005, we recorded a $0.6 million expense in connection
with guarantee fees payable to Delek Group Ltd. relating
primarily to the guaranty of a portion of our debt incurred in
connection with the acquisition of the Tyler refinery.
Income tax expense was $34.9 million for 2005, compared to
$4.1 million for 2004, an increase of $30.8 million.
This increase primarily resulted from our higher taxable income
in 2005 compared to 2004. Our effective tax rate was 35.1% for
2005, compared to 36.0% for 2004. Substantially all of our
refinery operations are conducted through a Texas limited
partnership, which is not subject to Texas franchise tax. The
limited partnerships 0.1% general partner was subject to
Texas franchise tax on its 0.1% share of refining operations.
Accordingly, the effective tax rate applicable to our refining
operations is the federal tax rate plus a nominal amount of
state franchise tax. Consequently, our consolidated effective
tax rate was reduced by our refinerys proportionate
contribution to our consolidated pretax earnings.
Operating
Segments
We review operating results in three reportable segments:
refining, marketing and retail. The refining segment was created
in April 2005 with the acquisition of the Tyler refinery. In the
third quarter of 2006, we added a third segment, marketing, to
track the activity associated with the sales of refined products
on a wholesale basis. Marketing operations were initiated on
August 1, 2006 in conjunction with the acquisition of the
Pride assets.
Refining
Segment
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Days operated in period
|
|
|
365
|
|
|
|
247
|
|
Total sales volume (average
barrels per day)
|
|
|
55,523
|
|
|
|
51,096
|
|
Products manufactured (average
barrels per day):
|
|
|
|
|
|
|
|
|
Gasoline
|
|
|
30,163
|
|
|
|
26,927
|
|
Diesel/Jet
|
|
|
21,816
|
|
|
|
20,779
|
|
Petrochemicals, LPG, NGLs
|
|
|
2,280
|
|
|
|
2,218
|
|
Other
|
|
|
2,324
|
|
|
|
1,684
|
|
|
|
|
|
|
|
|
|
|
Total production
|
|
|
56,583
|
|
|
|
51,608
|
|
|
|
|
|
|
|
|
|
|
Throughput (average barrels per
day):
|
|
|
|
|
|
|
|
|
Crude oil
|
|
|
55,998
|
|
|
|
51,906
|
|
Other feedstocks
|
|
|
2,130
|
|
|
|
1,244
|
|
|
|
|
|
|
|
|
|
|
Total throughput
|
|
|
58,128
|
|
|
|
53,150
|
|
|
|
|
|
|
|
|
|
|
Per barrel of sales:
|
|
|
|
|
|
|
|
|
Refining operating margin
|
|
$
|
11.00
|
|
|
$
|
12.29
|
|
Refining operating margin
excluding intercompany marketing service fees
|
|
$
|
11.16
|
|
|
$
|
12.29
|
|
Direct operating expenses
|
|
$
|
3.44
|
|
|
$
|
3.63
|
|
Pricing statistics (average for
the period presented):
|
|
|
|
|
|
|
|
|
WTI Cushing crude oil
(per barrel)
|
|
$
|
66.27
|
|
|
$
|
59.39
|
|
US Gulf Coast 5-3-2 crack spread
(per barrel)
|
|
$
|
10.16
|
|
|
$
|
12.19
|
|
US Gulf Coast Unleaded Gasoline
(per gallon)
|
|
$
|
1.83
|
|
|
$
|
1.69
|
|
Low sulfur diesel (per gallon)
|
|
$
|
2.00
|
|
|
$
|
1.72
|
|
Natural gas (per MMBTU)
|
|
$
|
6.89
|
|
|
$
|
10.13
|
|
Operations in our refining segment began with the acquisition of
the refinery on April 29, 2005. Net sales were
$1,593.6 million for 2006 compared to $931.4 million
for 2005, an increase of $662.2 million or 71.1%. Of this
39
increase, $507.4 million resulted from the inclusion of a
full year of sales from the acquired refinery compared to only
eight months in 2005. Additionally, total sales volume for 2006
averaged 55,523 bpd compared to 51,096 bpd for the
eight months we operated the refinery in 2005, an increase of
4,427 bpd or 8.7%. Average sales price per barrel rose to
$78.64 per barrel for 2006 compared to $73.80 per
barrel in 2005, an increase of 6.6%.
Cost of goods sold for our refining segment in 2006 was
$1,367.4 million compared to $776.4 million for the
period from April 29, 2005 through December 31, 2005.
Of this increase, $436.0 million resulted from the
inclusion of a year of cost of goods sold from the refinery
compared to only eight months in 2005. The remaining cost
increase was due to a 8.7% increase in average barrels sold per
day and a 9.8% increase in crude and feedstock cost per barrel
in 2006 compared to the average barrels sold and cost per barrel
for the eight months we operated the refinery in the same period
in 2005.
In conjunction with the Pride acquisition and the formation of
our marketing segment in the third quarter of 2006, our refining
business entered into a services agreement with our marketing
segment on October 1st, which among other things, required
it to pay service fees based on the number of gallons sold at
the Tyler refinery and a sharing of a portion of the marketing
margin achieved in return for providing marketing, sales and
customer services. This services agreement lowered the refining
margin achieved by our refining segment $0.16 per barrel in
2006 to $11.00 per barrel. Without this fee, the refining
segment would have achieved a refining operating margin of
$11.16 per barrel in 2006 which was 109.8% of the
U.S. Gulf Coast crack spread compared to $12.29 per barrel
for the period operated last year which was 100.8% of the
U.S. Gulf Coast crack spread.
Operating expenses were $69.6 million for 2006 or
$3.44 per barrel sold compared to $45.8 million for
the period of April 29, 2005 through December 31, 2005
or $3.63 per barrel sold. The reduction in operating
expense per barrel was due primarily to lower natural gas costs
which averaged $6.89 per MMBTU in 2006 compared to
$10.13 per MMBTU during the time we operated the refinery
in 2005. Segment contribution margin for the refining segment
for 2006 represented 71% of our total segment contribution
margin, or $153.2 million.
Marketing
Segment
We initiated operations in our marketing segment during the
third quarter of 2006 with the acquisition of the Pride assets.
In this segment we sell refined products on a wholesale basis in
west Texas through company-owned and third-party operated
terminals.
|
|
|
|
|
|
|
For the period
|
|
|
|
August 1, 2006
|
|
|
|
through
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Days operated in period
|
|
|
153
|
|
Total sales volume (average
barrels per day)
|
|
|
17,758
|
|
Products sold (average barrels per
day):
|
|
|
|
|
Gasoline
|
|
|
8,129
|
|
Diesel/Jet
|
|
|
9,568
|
|
Other
|
|
|
61
|
|
|
|
|
|
|
Total sales
|
|
|
17,758
|
|
|
|
|
|
|
Direct operating expenses (per
barrel of sales)
|
|
$
|
0.12
|
|
Net sales for the marketing segment were $221.6 million for
the period from August 1, 2006, the date operations
commenced, through December 31, 2006. Total sales volume
averaged 17,758 barrels per day during this period. Net sales
also included $3.4 million of net service fees paid by our
refining segment to our marketing segment for marketing, sales
and customer support services.
Cost of goods sold was $216.0 million for the period from
August 1, 2006 through December 31, 2006,
approximating a cost per barrel sold of $79.49. This cost per
barrel resulted in an average gross margin per barrel of $2.06.
Included in costs during this period are losses generated of
$2.7 million associated with the purchase of initial
inventory which required payment at a spot price rather than
more favorable terms under our long-term purchase
40
contracts, and which then had an immediate drop in market value
prior to the ultimate sale of such inventory. Additionally, we
recognized losses during 2006 of $1.3 million associated
with settlement of nomination differences under long-term
purchase contracts.
Operating expenses in the marketing segment were approximately
$0.3 million for the period from August 1, 2006
through December 31, 2006, primarily due to marketing
salaries and insurance costs. Segment contribution margin for
the marketing segment for 2006 represented 2% of our total
segment contribution margin or $5.3 million.
Retail
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Number of stores (end of period)
|
|
|
394
|
|
|
|
349
|
|
|
|
331
|
|
Average number of stores
|
|
|
369
|
|
|
|
330
|
|
|
|
310
|
|
Retail fuel sales (thousands of
gallons)
|
|
|
396,867
|
|
|
|
341,335
|
|
|
|
315,294
|
|
Average retail gallons per average
number of stores (in thousands)
|
|
|
1,075
|
|
|
|
1,034
|
|
|
|
1,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail fuel margin ($ per gallon)
|
|
$
|
0.145
|
|
|
$
|
0.165
|
|
|
$
|
0.155
|
|
Merchandise sales (in millions)
|
|
$
|
330.5
|
|
|
$
|
292.4
|
|
|
$
|
261.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise margin %
|
|
|
30.6
|
%
|
|
|
29.8
|
%
|
|
|
29.5
|
%
|
Credit expense (% of gross margin)
|
|
|
7.8
|
%
|
|
|
5.9
|
%
|
|
|
4.8
|
%
|
Merchandise and cash over/short (%
of net sales)
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
0.4
|
%
|
Operating expense/merchandise
sales plus total gallons
|
|
|
13.5
|
%
|
|
|
13.2
|
%
|
|
|
13.3
|
%
|
Retail
Segment Operational Comparison of the Year Ended
December 31, 2006 versus the Year Ended December 31,
2005
Net sales for our retail segment in 2006 increased 26.7% to
$1,395.6 million. This increase was primarily due to a
12.8% increase in average retail fuel prices, inclusion of a
full year of operations of BP stores acquired in 2005, net sales
from the acquisition of the Fast stores in the third quarter of
2006 and a 2.9% increase in comparable store merchandise sales.
Retail fuel sales were 396.9 million gallons for 2006,
compared to 341.3 million gallons for 2005. This increase
was primarily due to the inclusion of a full year of sales from
the acquisition of the BP stores purchased in December 2005 and
the purchase of the Fast stores in the third quarter of 2006.
The combination of these two factors increased fuel gallons sold
by 55.8 million gallons. Comparable store gallons decreased
0.2% between 2005 and 2006. Total fuel sales, including
wholesale gallons, increased 31.7% to $1,065.1 million in
2006. The increase was primarily due to the increase in gallons
sold noted above and an increase of $0.28 per gallon in the
average retail price per gallon ($2.49 per gallon in 2006
compared to $2.21 per gallon in 2005).
Merchandise sales increased 13.0% to $330.5 million in
2006. The increase in merchandise sales was primarily due to
$30.5 million in merchandise sales resulting from the
inclusion of a full year of merchandise sales from the 2005
acquisition of the BP stores, as well as the 2006 acquisition of
the Fast stores. Our comparable store merchandise sales
increased by 2.9% due primarily to same store increases of 15.8%
in our food service category and 5.2% in our dairy category. The
growth within each of these categories is driven primarily by
our proprietary product offerings.
Cost of goods sold for our retail segment increased 29.2% to
$1,234.9 million in 2006. This increase was primarily due
to a 14.9% increase in average retail fuel costs and
$150.9 million in cost of goods sold resulting from the
inclusion of a full year of results from operations of the
acquisition of the BP stores purchased in December 2005 and the
purchase of the Fast stores in the third quarter of 2006. Fuel
cost of goods sold represented 81.4% of total cost of goods sold
for the segment and increased primarily due to a 14.1% increase
in retail fuel costs and
41
55.5 million increase in gallons sold. Merchandise cost of
goods sold was $229.3 million for 2006, compared to
$205.4 million for 2005.
Operating expenses increased 18.3% in 2006 to
$102.8 million. This increase was due primarily to
$12.5 million in store operating costs from the inclusion
of a full year of operating expenses from the acquisition of the
BP stores purchased in December 2005 and the purchase of the
Fast stores in the third quarter of 2006 and higher credit card
expenses. The ratio of operating expenses to merchandise sales
plus total gallons sold in our retail operations increased to
13.5% from 13.2% in 2005 due largely to increased credit card
expenses which grew to 7.8% of our gross margin in 2006 from
5.9% in 2005. Credit card fees are largely derived as a
percentage of the retail fuel costs and were driven higher in
2006 by the $0.28 cents per gallon increase in our retail fuel
prices. Segment contribution margin for the retail segment for
2006 represented 27% of our total contribution margin or
$57.7 million.
Retail
Segment Operational Comparison of the Year Ended
December 31, 2005 versus the Year Ended December 31,
2004
Net sales for our retail segment were $1,101.0 million for
2005, compared to $857.8 million for 2004, an increase of
$243.2 million or 28.4%. This increase was primarily due to
a 24.0% increase in average retail fuel prices and
$79.2 million in net sales resulting from the inclusion of
a full year of sales from the acquisition of Williamson Oil
stores compared to only eight months in 2004.
Retail fuel sales were 341.3 million gallons for 2005,
compared to 315.3 million gallons for 2004. This increase
was primarily due to the inclusion of a full year of sales from
the acquisition of Williamson Oil stores compared to only eight
months in 2004. This was partially offset by the estimated
2.6 million gallon impact of Hurricane Katrina. Comparable
store gallons increased 0.9%. Total fuel sales, including
wholesale gallons, were $808.6 million for 2005, compared
to $596.6 million in 2004, an increase of
$212.0 million or 35.5%. The increase was primarily due to
an increase of $0.36 per gallon in the average retail price
per gallon ($2.14 per gallon compared to $1.78 per
gallon) and $58.3 million in fuel sales resulting from the
inclusion of a full year of fuel sales from the acquisition of
Williamson Oil stores in 2004.
Merchandise sales were $292.4 million for 2005, compared to
$261.2 million over the same period in 2004, an increase of
$31.2 million or 11.9%. The increase in merchandise sales
was primarily due to $20.8 million in merchandise sales
resulting from the inclusion of a full year of merchandise sales
from the acquisition of Williamson Oil stores compared to only
eight months in 2004. Comparable store (company stores operated
for the entire 12 months in both 2004 and
2005) merchandise sales increased by 1.4% primarily due to
increases in the cigarette and dairy categories which were
driven by competitive pricing and merchandising strategies.
Cost of goods sold for our retail segment was
$955.2 million for 2005, compared to $730.8 million
for 2004, an increase of $225.3 million or 30.8%. This
increase was primarily due to a 25.7% increase in average retail
fuel costs and $70.1 million in cost of goods sold
resulting from the inclusion of a full year of results of
operations from the acquisition of Williamson Oil stores
compared to only eight months in 2004.
Fuel cost of goods sold was $750.8 million for 2005,
compared to $546.4 million for 2004, due to a 25.5%
increase in retail fuel costs and a 26.0 million increase
in gallons sold. Merchandise cost of goods sold was
$205.3 million for 2005, compared to $184.3 million
for 2004. The increase in merchandise cost of goods sold was
primarily due to $14.6 million in costs of goods sold
resulting from the inclusion of a full year of results of
operations from the acquisition of Williamson Oil stores
compared to only eight months in 2004.
Operating expenses were $86.9 million for 2005, compared to
$80.1 million for 2004, an increase of $6.8 million or
8.5%. This increase was due primarily to $7.1 million in
store operating costs from the inclusion of a full year of
results of operations from the acquisition of Williamson Oil
stores compared to only eight months in 2004. The ratio of
operating expenses to merchandise sales plus total gallons sold
in our retail operations declined slightly to 13.2% from 13.3%
due to a focus on operating expense control. Segment
contribution margin for the retail segment for 2005 represented
35% of our total contribution margin, or $58.0 million.
42
Liquidity
and Capital Resources
Our primary sources of liquidity are cash generated from our
operating activities and borrowings under our revolving credit
facilities. In addition, our liquidity was enhanced during the
second quarter of 2006 by the receipt of $166.9 million of
net proceeds from our initial public offering of common stock,
after the payment of underwriting discounts and commissions, and
offering expenses. We believe that our cash flows from
operations, borrowings under our current credit facilities, and
the remaining proceeds from our initial public offering will be
sufficient to satisfy the anticipated cash requirements
associated with our existing operations for at least the next
12 months. However, our future capital expenditures and
other cash requirements could be higher than we currently expect
as a result of various factors, including any expansion of our
business that we may complete.
Cash
Flows
The following table sets forth a summary of our consolidated
cash flows for the years ended December 31, 2006, 2005 and
2004 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by operating
activities
|
|
$
|
110.2
|
|
|
$
|
148.7
|
|
|
$
|
24.9
|
|
Cash flows used in investing
activities
|
|
|
(251.4
|
)
|
|
|
(162.3
|
)
|
|
|
(27.3
|
)
|
Cash flows provided by financing
activities
|
|
|
180.2
|
|
|
|
54.1
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
$
|
39.0
|
|
|
$
|
40.5
|
|
|
$
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
Net cash provided by operating activities was
$110.2 million for 2006, compared to $148.7 million
for 2005 and $24.9 million in 2004. The decrease in cash
flows from operations in 2006 from 2005 was primarily due to a
$24.8 million increase in inventory and other current
assets and decreases in interest payable, interest payable to
related parties, accrued employee costs and accrued expenses and
other current liabilities. These changes were partially offset
by higher net income, an increase in deferred taxes resulting
from book-tax depreciation differences, and depreciation and
amortization primarily as a result of the operation of the
refinery for a full year. The increase in income resulted in a
corresponding increase in our income taxes payable during the
current period.
The increase in cash flows from operations from 2004 to 2005 was
primarily due to an $88.1 million increase in accounts
payable resulting from crude oil purchases for our refinery and
higher net income. These changes were partially offset by a
$41.7 million increase in accounts receivable as a result
of refinery operations.
Cash
Flows from Investing Activities
Net cash used in investing activities was $251.4 million
for 2006, compared to cash used of $162.3 million in 2005
and $27.3 million in 2004. The increase from 2005 to 2006
was partially a result of current period purchases and sales of
short-term investments with a net increase in use of
$20.0 million. Our short-term investments consist of market
auction rate debt securities, which we purchase from time to
time using excess cash on deposit.
Cash used in investing activities includes our capital
expenditures during the current period of approximately
$97.5 million, of which $74.9 million was spent on
projects at our refinery, $0.2 million in our marketing
segment and $22.4 million in our retail segment. During
2006, we spent $65.6 million on regulatory and compliance
projects at the refinery. In our retail segment, we spent
$12.3 million opening four next generation
stores, completing one
retro-fit of
a store and
re-imaging
the BP stores acquired in December 2005.
In 2006, we also utilized $107.3 million of cash in
connection with the $56.4 million (including transaction
costs) acquisition of the Pride assets and $51.0 million
(including transaction costs), less $0.1 million of cash
received, in connection with the acquisition of the Fast assets.
43
The increase in cash used in investing activities from 2004 to
2005 was primarily due to the purchase of the refinery in April
2005, and the acquisition of the BP stores in December 2005
totaling approximately $109.6 million (including
transaction costs). Additionally, an increase in capital
expenditures of $29.2 million including $18.8 million
for projects at the refinery and the remaining capital spent in
the retail segment accounted for the remaining increase in cash
used in investing.
Cash
Flows from Financing Activities
Net cash provided from financing activities was
$180.2 million for 2006, compared to $54.1 million
during 2005 and $5.6 million in 2004. The increase in cash
provided from financing activities was primarily due to our
initial public offering completed on May 9, 2006. We
received approximately $166.9 million in net proceeds from
the initial public offering after payment of underwriting
discounts and commissions and offering expenses. Cash used in
financing activities primarily included the repayment of two
related party notes totaling $42.5 million. We fully repaid
the $25.0 million outstanding principal, plus accrued
interest to the date of repayment, under the promissory note
payable to Delek Fuel, which bore interest at a rate of
6.3% per year and had a maturity date of April 27,
2008; and we fully repaid the $17.5 million outstanding
principal, plus accrued interest to the date of repayment, under
the promissory note payable to Delek Group, which bore interest
at a rate of 7.0% per year and had a maturity date of
April 27, 2010.
On May 23, 2006, we also refinanced $30.0 million of
existing promissory notes with a new $30.0 million
promissory note in favor of Israel Discount Bank of New York.
The proceeds of this note were used to repay the outstanding
$10.0 million of indebtedness under the Bank Leumi note due
April 27, 2007 and to refinance the $20.0 million
outstanding principal indebtedness under the previous note with
Israel Discount Bank of New York due April 30, 2007. The
IDB Note matures on May 30, 2009, and bears interest,
payable semi-annually, at a spread of 2.00% over the LIBOR, for
interest periods of 30, 60, 90 or 180 days as selected
by Delek with the first interest payment due on
November 26, 2006. In connection with this refinancing, the
Delek Group guaranty made to Israel Discount Bank of New York
and Bank Leumi US on Deleks behalf and the associated
obligation of Delek to pay a guaranty fee to Delek Group for
such guaranty terminated.
On July 14, 2006, in connection with the purchase of the
assets of Fast Petroleum, Inc. discussed in Note 4 of the
Consolidated Financial Statements, Delek amended its Senior
Secured Credit Facility Revolver increase commitment amounts by
an additional $50.0 million for a total commitment under
the Senior Secured Credit Facility Revolver of
$120.0 million.
On July 27, 2006, Delek executed a $30.0 million
promissory note in favor of Bank Leumi US. The proceeds of this
note were used to fund a portion of the Pride acquisition and
its working capital needs discussed in Note 4 of the
Consolidated Financial Statements. This note matures on
July 27, 2009, and bears interest, payable for the
applicable interest period, at a spread of 2.0% per year over
the LIBOR rate (Reserve Adjusted) for interest periods
of 30, 90 or 180 days as selected by Delek.
In conjunction with the Pride acquisition discussed in
Note 4, on July 31, 2006, Delek executed a short-term
revolver with Fifth Third Bank as administrative agent in the
amount of $50.0 million. The proceeds of this note were
used to fund the working capital needs of a new Delek
subsidiary, Delek Marketing and Supply, L.P. The Fifth Third
note matures on July 30, 2007, and bears interest, payable
for the applicable interest period, at a spread of 1.5% to 2.5%,
as determined by leverage based pricing grid, over the LIBOR
The increase in cash flows from financing activities from 2004
to 2005 primarily consisted of a total refinancing of all debt.
Cash provided from financing activities included net proceeds
received as a result of refinancing term and revolver borrowings
of $40.0 million through a revolving credit facility and a
$165.0 million term loan and proceeds received through the
subsequent upsizing of the revolver by $30.0 million to
$70.0 million in conjunction with the BP transaction,
as well as $50.0 million in proceeds received from notes
issued in connection with the refinery purchase. Cash
provided by financing activities in 2005 also reflected a
subordinated loan of $35.0 million received from Delek
Group Ltd. Cash used in financing activities included
$14.9 million of financing costs paid in connection with
new debt issuance, debt repayments of $216.0 million and
payments under capital lease obligations.
44
Cash
Position and Indebtedness
As of December 31, 2006, our total cash and cash
equivalents were $101.6 million, investment grade
short-term investments totaled $73.2 million and we had
total indebtedness of approximately $286.6 million.
Borrowing availability under our three separate revolving credit
facilities was approximately $142.4 million and we had a
total face value of letters of credit outstanding of
$184.7 million. We were in compliance with our covenants in
all debt facilities as of December 31, 2006. Our liquidity
was further enhanced during the second quarter of 2006 by the
receipt of approximately $166.9 million in net proceeds
from our initial public offering of common stock.
A summary of our indebtedness as of December 31, 2006 is
shown below (in millions):
|
|
|
|
|
|
|
December 31, 2006
|
|
|
Senior secured credit
facility term loan
|
|
$
|
147.1
|
|
Senior secured credit
facility revolver
|
|
|
59.5
|
|
SunTrust ABL revolver
|
|
|
|
|
Fifth Third note
|
|
|
19.2
|
|
Promissory notes
|
|
|
60.0
|
|
Capital lease obligations
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
286.6
|
|
Less: current portion of long-term
debt & short term note payable
|
|
|
21.0
|
|
|
|
|
|
|
Total long-term indebtedness
|
|
$
|
265.6
|
|
|
|
|
|
|
Senior
Secured Credit Facility
The senior secured credit facility consists of a
$120.0 million revolving credit facility and
$165.0 million term loan facility which has
$147.1 million outstanding. Borrowings under the senior
secured credit facility are secured by substantially all the
assets of MAPCO Express, Inc. and its subsidiaries. Letters of
credit outstanding under the facility totaled $16.5 million
as of December 31, 2006. The senior secured credit facility
term loan requires quarterly principal payments of approximately
0.25% of the principal balance through March 31, 2011 and a
balloon payment of approximately 94.25% of the principal balance
due upon maturity on April 28, 2011. We are also required
to make certain prepayments of this facility depending on excess
cash flow as defined in the credit agreement. In accordance with
this excess cash flow calculation, we prepaid $15.6 million
in April 2006. The senior secured credit facility revolver is
payable in full upon maturity on April 28, 2010 with
periodic interest repayment requirements. The senior secured
credit facility term and senior secured credit facility revolver
loans bear interest based on predetermined pricing grids which
allow us to choose between a Base Rate or
Eurodollar loan. Interest is payable quarterly for
Base Rate loans and for the applicable interest period on
Eurodollar loans. As of December 31, 2006, the weighted
average borrowing rate was approximately 8.1% for the senior
secured credit facility term loan and 7.9% for the senior
secured credit facility revolver. Additionally, the senior
secured credit facility requires us to pay a quarterly fee of
0.5% per year on the average available revolving commitment
available under the senior secured credit facility revolver,
which as of December 31, 2006 totaled approximately
$44.0 million.
We are required to comply with certain financial and
non-financial covenants under the senior secured credit
facility. We were in compliance with all covenant requirements
as of December 31, 2006.
SunTrust
ABL Revolver
On October 16, 2006, we amended and restated our existing
asset based revolving credit facility. The amended and restated
agreement, among other things, increased the size of the
facility from $250 to $300 million, including a
$300 million
sub-limit
for letters of credit, and extended the maturity of the facility
by one year to April 28, 2010. The revolving credit
agreement bears interest based on predetermined pricing grids
that allow us to choose between a Base Rate or
Eurodollar rate. Interest is payable quarterly for
Base Rate loans and for the applicable interest period on
Eurodollar loans. Availability under the SunTrust ABL revolver
is determined by a borrowing base defined in the SunTrust ABL
revolver, supported primarily by cash, certain accounts
receivable and inventory.
45
In addition, the SunTrust ABL revolver supports our issuances of
letters of credit used primarily in connection with the
purchases of crude oil for use in our refinery that at no time
may exceed the aggregate borrowing capacity available under the
SunTrust ABL revolver. As of December 31, 2006, we had no
outstanding borrowings under the agreement but had letters of
credit outstanding totaling approximately $167.3 million.
Excess collateral capacity under the SunTrust ABL revolver as of
December 31, 2006 was $67.6 million.
The SunTrust ABL revolver contains a negative covenant that
prohibits us from creating, incurring or assuming any liens,
mortgages, pledges, security interests or other similar
arrangements against the property, plant and equipment of the
refinery, subject to customary exceptions for certain permitted
liens.
Under the SunTrust ABL revolver, we are also subject to certain
non-financial covenants and, in the event that our availability
under its borrowing base is less than $30.0 million on the
measurement date, certain financial covenants. We were in
compliance with all covenant requirements as of
December 31, 2006.
Fifth
Third Note
In conjunction with the Pride acquisition, on July 27,
2006, Delek executed a short-term revolver with Fifth Third Bank
as administrative agent in the amount of $50.0 million. The
proceeds of this note were used to fund the working capital
needs of a new subsidiary, Delek Marketing and Supply, LP. The
Fifth Third Note matures on July 30, 2007, and bears
interest, payable for the applicable interest period, at a
spread of 1.5% to 2.5%, as determined by a leverage-based
pricing matrix, per year over the LIBOR. Borrowings under the
Fifth Third Note are secured by substantially all of the assets
of Delek Marketing & Supply LP. As of December 31,
2006 the weighted average borrowing rate for amounts borrowed
was 7.80%. Amounts available under the Fifth Third Note as of
December 31, 2006, were approximately $30.8 million.
We are required to comply with certain financial and
non-financial covenants under this note. We were in compliance
with all covenant requirements as of December 31, 2006.
Promissory
Notes
On May 23, 2006, Delek executed a $30.0 million
promissory note in favor of Israel Discount Bank of New York
(the IDB Note). The proceeds of this note were used to repay the
existing promissory notes in favor of Israel Discount Bank and
Bank Leumi US. The IDB Note matures on May 30, 2009, and
bears interest, payable semi-annually, at a spread of 2.0% over
the LIBOR, for interest periods of 30, 60, 90 or
180 days as selected by us. As of December 31, 2006
the weighted average borrowing rate for amounts borrowed under
the IDB Note was 7.31%.
On July 27, 2006, we executed a $30.0 million
promissory note in favor of Bank Leumi US. The proceeds of this
note were used to fund a portion of the acquisition of the Pride
assets and its working capital needs. This note matures on
July 27, 2009, and bears interest, payable for the
applicable interest period, at a spread of 2.0% per year
over the LIBOR rate (Reserve Adjusted) for interest periods
of 30, 90 or 180 days. As of December 31, 2006,
the weighted average borrowing rate for amounts borrowed under
the Bank Leumi Note was 7.56%.
Capital
Spending
A key component of our long-term strategy is our capital
expenditure program. Our capital expenditures for 2006 were
$97.5 million, of which approximately $74.9 million
was spent in our refining segment, $0.2 million in our
marketing segment and $22.4 million was spent in our retail
segment. Our capital expenditure budget is
46
approximately $115.1 million for 2007. The following table
summarizes our actual capital expenditures for 2006 and planned
capital expenditures for 2007 by operating segment and major
category (in millions).
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007 Budget
|
|
|
2006 Actual
|
|
|
Refining:
|
|
|
|
|
|
|
|
|
Sustaining maintenance
|
|
$
|
7.1
|
|
|
$
|
3.7
|
|
Regulatory
|
|
|
48.5
|
|
|
|
65.6
|
|
Discretionary projects
|
|
|
34.4
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
Total refinery
|
|
|
90.0
|
|
|
|
74.9
|
|
Marketing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sustaining maintenance
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
Retail:
|
|
|
|
|
|
|
|
|
Sustaining maintenance
|
|
|
3.0
|
|
|
|
3.7
|
|
Store enhancements
|
|
|
3.0
|
|
|
|
6.4
|
|
Re-image/builds
|
|
|
19.0
|
|
|
|
12.3
|
|
|
|
|
|
|
|
|
|
|
Total retail
|
|
|
25.0
|
|
|
|
22.4
|
|
|
|
|
|
|
|
|
|
|
Total capital spending
|
|
$
|
115.1
|
|
|
$
|
97.5
|
|
|
|
|
|
|
|
|
|
|
In 2007, we plan to spend approximately $25.0 million in
the retail segment, $19.0 million of which is expected to
consist of 6 to 8 new store builds and the re-imaging of 60 to
80 stores in our current portfolio. We spent $12.3 million
on similar projects in 2006. With respect to the refining
segment, we plan to spend approximately $64.8 million from
2006 to the end of 2008 to comply with the CAA regulations
requiring a reduction in sulfur content in gasoline. We spent
$65.6 million on regulatory projects for the refining
segment in 2006, including $44.6 million to comply with
on-road low sulfur diesel requirements. We also plan to spend
approximately $53.3 million on crude optimization projects
in 2007 and 2008, of which $16.0 million is planned to be
spent in 2007. In addition, we plan to spend approximately
$3.4 million for other environmental and regulatory
projects in 2007.
The amount of our capital expenditure budget is subject to
change due to unanticipated increases in the cost, scope and
completion time for our capital projects. For example, we may
experience increases in the cost of
and/or
timing to obtain necessary equipment required for our continued
compliance with government regulations or to complete
improvement projects to the refinery. Additionally, the scope
and/or cost of employee
and/or
contractor labor expense related with installation of that
equipment could increase from our projections.
Contractual
Obligations and Commitments
Information regarding our known contractual obligations of the
types described below as of December 31, 2006, is set forth
in the following table (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
<1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
>5 Years
|
|
|
Total
|
|
|
Long-term debt and capital lease
obligations
|
|
$
|
21.0
|
|
|
$
|
63.5
|
|
|
$
|
202.1
|
|
|
$
|
|
|
|
$
|
286.6
|
|
Interest(1)
|
|
|
21.9
|
|
|
|
39.5
|
|
|
|
17.0
|
|
|
|
|
|
|
|
78.4
|
|
Operating lease
obligations(2)
|
|
|
11.2
|
|
|
|
21.9
|
|
|
|
21.0
|
|
|
|
119.7
|
|
|
|
173.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54.1
|
|
|
$
|
124.9
|
|
|
$
|
240.1
|
|
|
$
|
119.7
|
|
|
$
|
538.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes expected payments on debt
outstanding under credit facilities in place at
December 31, 2006. Variable interest is calculated using
December 31, 2006 rates.
|
|
(2) |
|
Amounts reflect future estimated
lease payments, including renewal options for leases we have
determined are reasonably assured, under operating leases having
remaining non-cancelable terms in excess of one year as of
December 31, 2006.
|
47
Off-Balance
Sheet Arrangements
We have no off-balance sheet arrangements.
Critical
Accounting Policies
The fundamental objective of financial reporting is to provide
useful information that allows a reader to comprehend the
business activities of Delek. We prepare our consolidated
financial statements in conformity with U.S. GAAP and in
the process of applying these principles, we must make
judgments, assumptions and estimates based on the best available
information at the time. To aid a readers understanding,
management has identified Deleks critical accounting
policies. These policies are considered critical because they
have the potential to have a material impact on our financial
statements, and because they require judgments and estimation
due to the uncertainty involved in measuring at a specific point
in time, events which are continuous in nature. Actual results
may differ based on the accuracy of the information utilized and
subsequent events, some over which we may have little or no
control.
LIFO
Inventory
Refining segment inventory consists of crude oil, refined
petroleum products and blendstocks which are stated at the lower
of cost or market. Cost is determined under the LIFO valuation
method. The LIFO method requires management to make estimates on
an interim basis of the anticipated on-hand year-end inventory
quantities, which could differ from actual quantities. Cost of
crude oil, refined petroleum product and blendstock inventories
in excess of market value are charged to cost of goods sold.
Such changes are subject to reversal in subsequent periods, not
to exceed LIFO cost, if prices recover.
Delek believes the accounting estimate related to the
establishment of anticipated year-end LIFO inventory is a
critical accounting estimate because it requires management to
make assumptions about future production rates in the refinery,
the future buying patterns of our customers, as well as the
economic viability of the general economy and the impact of
changes in actual performance versus these estimates would have
on the inventories reported on our quarterly balance sheets and
the results reported in our quarterly statements of operations
could be material. In selecting assumed inventory levels, Delek
uses historical trending of production and sales, recognition of
current market indicators of future pricing and value, and new
regulatory requirements which might impact inventory levels.
Managements assumptions require significant judgment
because actual year-end inventory levels have fluctuated in the
past and may continue to do so.
At each year-end, actual physical inventory levels are used to
calculate both ending inventory balances and final cost of goods
sold for the year.
Long-lived
Asset Recovery
A significant portion of our total assets are long-lived assets,
consisting primarily of property, plant and equipment
(PP&E), definite-lived intangibles and goodwill. Changes in
technology, changes in the regulatory climate, Deleks
intended use for the assets, as well as changes in broad
economic or industry factors, may cause the estimated period of
use or the value of these assets to change.
Depreciable
Lives of Assets
Delek believes the accounting estimate related to the
establishment of asset depreciable lives is a critical
accounting estimate because it requires management to make
assumptions about competitive uses for assets,
wear-and-tear
on assets in use, as well as technology evolution, and the
impact of changes in actual experience could be material to our
financial position and results of operations.
If Deleks estimates of depreciable lives altered the
depreciable rate by 5% higher or lower than those used in the
preparation of our consolidated financial statements, recorded
depreciation expense would have been impacted by approximately
$1.1 million in 2006 and $0.8 million in 2005.
48
Management believes the estimates of lives selected, in each
instance, represent its best estimate of future outcomes, but
the actual outcomes could differ from the estimates selected.
Property,
Plant and Equipment and Definite Life Intangibles
Impairment
PP&E and definite life intangibles are evaluated for
impairment whenever indicators of impairment exist. Accounting
standards require that if an impairment indicator is present,
Delek must assess whether the carrying amount of the asset is
unrecoverable by estimating the sum of the future cash flows
expected to result from the asset, undiscounted and without
interest charges. If the carrying amount is more than the
recoverable amount, an impairment charge must be recognized
based on the fair value of the asset. Delek has had no
impairments of PP&E or definite life intangibles.
Goodwill
and Potential Impairment
Goodwill is reviewed at least annually for impairment, or more
frequently if indicators of impairment exist. Goodwill is tested
by comparing net book value of the operating segments to the
estimated fair value of the reporting unit.
Delek believes that the accounting estimate related to goodwill
is a critical accounting estimate because it requires management
to make assumptions about fair values, involves judgment in
determining the occurrence of a triggering event and
the impact of recognizing an impairment could be material to our
financial position and results of operations. Managements
assumptions about fair values require significant judgment
because broad economic factors, industry factors and estimates
concerning the competitive uses of assets can result in variable
and volatile fair values.
Management completed impairment analyses on goodwill in the
fourth quarter of each year. These tests were performed
internally and no impairments were found to exist.
Vendor
Discounts and Deferred Revenue
In our retail segment, we receive cash discounts or cash
payments from certain vendors related to product promotions
based upon factors such as quantities purchased, quantities
sold, merchandise exclusivity, store space and various other
factors. In accordance with the provisions of the FASB EITF
Issue 02-16,
Accounting by a Reseller for Consideration Received from a
Vendor, we recognize these amounts as a reduction of
inventory until the products are sold, at which time the amounts
are reflected as a reduction in cost of goods sold. Certain of
these amounts are received from vendors related to agreements
covering several periods. These amounts are initially recorded
as deferred revenue, are reclassified as a reduction in
inventory upon receipt of the products and are subsequently
recognized as a reduction of cost of goods sold as the products
are sold.
We also receive advance payments from certain vendors related to
contractual agreements. These amounts are recorded as deferred
revenue and are subsequently recognized as a reduction of cost
of goods sold as earned in accordance with the terms of the
agreements.
Delek believes that the accounting estimates related to the
establishment of deferred revenue amounts and the associated
recognition of the reduction of cost of goods sold upon their
being earned is a critical accounting estimate because it
requires management to make assumptions about future sales,
customer choice, as well as the future economic viability of the
communities in which we market; and the impact of changes in
actual performance versus these estimates would have on the
reporting in our balance sheet and the results reported in our
statements of operations could be material. In selecting
assumptions for the estimate, we use historical trending of
sales, market industry information and recognition of current
market indicators about general economic conditions which might
impact future sales.
At December 31, 2006 and 2005, vendor deferred revenue
totaled $1.2 million and $0.9 million, respectively,
of which $0.4 million was considered long-term in nature in
each year.
49
Environmental
Expenditures
It is our policy to accrue environmental and
clean-up
related costs of a non-capital nature when it is both probable
that a liability has been incurred and the amount can be
reasonably estimated. Environmental liabilities represent the
current estimated costs to investigate and remediate
contamination at our properties. This estimate is based on
internal and third-party assessments of the extent of the
contaminations, the selected remediation technology and review
of applicable environmental regulations. Accruals for estimated
costs from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility
study and include, but are not limited to, costs to perform
remedial actions and costs of machinery and equipment that is
dedicated to the remedial actions and that does not have an
alternative use. Such accruals are adjusted as further
information develops or circumstances change. We do not discount
environmental liabilities to their present value unless payments
are fixed and determinable. Expenditures for equipment necessary
for environmental issues relating to ongoing operations are
capitalized.
Delek believes that the accounting estimate related to
environmental expenditure liabilities is a critical accounting
estimate because it requires management to make assumptions
about future remediation costs, and the future timing required
to remediate the asset; and the impact that changes in actual
performance versus these estimates would have on the projected
environmental liability reported on our balance sheet could be
material.
Management believes the estimates selected, in each instance,
represents its best estimate of future outcomes, but the actual
outcomes could differ from the estimate selected.
New
Accounting Pronouncements
In September 2006, the FASB published SFAS No. 157,
Fair Value Measurements (SFAS 157), to eliminate the
diversity in practice that exists due to the different
definitions of fair value and the limited guidance for applying
those definitions in GAAP that are dispersed among the many
accounting pronouncements that require fair value measurements.
SFAS 157 retains the exchange price notion in earlier
definitions of fair value, but clarifies that the exchange price
is the price in an orderly transaction between market
participants to sell an asset or liability in the principal or
most advantageous market for the asset or liability. Fair value
is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction
between market participants at the measurement date (an exit
price), as opposed to the price that would be paid to acquire
the asset or received to assume the liability at the measurement
date (an entry price). SFAS 157 expands disclosures about
the use of fair value to measure assets and liabilities in
interim and annual periods subsequent to initial recognition.
The guidance in this Statement applies for derivatives and other
financial instruments to be measured at fair value under
SFAS 133 at initial recognition and in all subsequent
periods. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years although earlier
application is encouraged. We do not expect the application of
SFAS 157 to have a material effect on our financial
position or results of operations.
In July 2006, The FASB issued FIN 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109, Accounting for Income Taxes (FIN 48).
FIN 48, which is the most significant change to accounting
for income taxes since the adoption of the liability approach,
prescribes a comprehensive model for how companies should
recognize, measure, present, and disclose in their financial
statements uncertain tax positions taken or expected to be taken
on a tax return. The interpretation clarifies the accounting for
income taxes by prescribing the minimum recognition threshold a
tax position is required to meet before being recognized in the
financial statements. In addition, FIN 48 clearly scopes
out income taxes from SFAS No. 5, Accounting for
Contingencies. The Interpretation also revises
disclosure requirements to include an annual tabular rollforward
of unrecognized tax benefits. The provisions of FIN 48 are
required to be adopted for fiscal periods beginning after
December 15, 2006. Delek will be required to apply this
Interpretation to all tax positions upon initial adoption with
any cumulative effect adjustment to be recognized as an
adjustment to retained earnings. Management is currently
analyzing the effect of this guidance on Deleks tax
positions.
In March 2006, the EITF reached a consensus on EITF Issue
No. 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (that is, Gross versus Net Presentation) (EITF
06-3), which
allows companies to adopt a policy of presenting taxes in the
income statement on
50
either a gross or net basis. Taxes within the scope of this EITF
would include taxes that are imposed on a revenue transaction
between a seller and a customer, for example, sales taxes, use
taxes, value-added taxes, and some types of excise taxes. EITF
06-3 is
effective for interim and annual reporting periods beginning
after December 15, 2006. EITF
06-3 will
not impact the method for recording and reporting sales taxes in
the consolidated financial statements as our policy is to
exclude all such taxes from revenue where we are the agent.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
Changes in commodity prices (mainly crude oil and gasoline) and
interest rates are our main sources of market risk. We manage
these risks based on the assessment of our management.
Commodity
Price Risk
Sudden change in petroleum prices is our main source of market
risk. Our business model is affected more by the volatility of
petroleum prices than by the cost of the petroleum that we sell.
We manage these risks based on the assessment of our management
and we use hedging strategies from time to time.
In order to manage the uncertainty relating to inventory price
volatility, we have consistently applied a policy of maintaining
inventories at or below a targeted operating level. In the past,
circumstances have occurred, such as timing of crude oil cargo
deliveries, turnaround schedules or shifts in market demand that
have resulted in variances between our actual inventory level
and our desired target level. We may utilize the commodity
futures market to manage these anticipated inventory variances.
In accordance with SFAS No. 133, all commodity futures
contracts are recorded at fair value, and any change in fair
value between periods has historically been recorded in the
profit and loss section of our consolidated financial statements.
We are exposed to market risks related to the volatility of
crude oil and refined petroleum product prices, as well as
volatility in the price of natural gas used in our refinery
operations. Our financial results can be affected significantly
by fluctuations in these prices, which depend on many factors,
including demand for crude oil, gasoline and other refined
petroleum products, changes in the economy, worldwide production
levels, worldwide inventory levels and governmental regulatory
initiatives. Our risk management strategy identifies
circumstances in which we may utilize the commodity futures
market to manage risk associated with these price fluctuations.
We did not enter into or carry any commodity futures contracts
for the years ended December 31, 2006 or 2005.
We maintain at our refinery and in third-party facilities
inventories of crude oil, feedstocks and refined petroleum
products, the values of which are subject to wide fluctuations
in market prices driven by world economic conditions, regional
and global inventory levels and seasonal conditions. At
December 31, 2006, we held approximately 1.4 million
barrels of crude and product inventories valued under the LIFO
valuation method with an average cost of $60.48 per barrel.
Replacement cost (FIFO) exceeded carrying value of LIFO costs by
$10.2 million. We refer to this excess as our LIFO reserve.
Interest
Rate Risk
We have market exposure to changes in interest rates relating to
our outstanding variable rate borrowings, which totaled
$286.6 million as of December 31, 2006. We help manage
this risk through interest rate swap and cap agreements that
modify the interest characteristics of our outstanding long-term
debt. In accordance with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities
(SFAS 133), all interest rate hedging instruments are
recorded at fair value and any changes in the fair value between
periods are recognized in earnings. The fair value of our
interest rate hedging instruments changed by an immaterial
amount for the year ended December 31, 2006 and increased
by $1.5 million for the year ended December 31, 2005.
The fair values of our interest rate swaps and cap agreements
are obtained from dealer quotes. These values represent the
estimated amount that we would receive or pay to terminate the
agreement taking into account the difference between the
contract rate of interest and rates currently quoted for
agreements, of similar terms and maturities. We expect the
interest rate derivatives will reduce our exposure to short-term
interest rate movements. The annualized impact of a hypothetical
1% change in interest rates on floating rate debt outstanding as
of December 31, 2006 would be to
51
change interest expense by $2.9 million. Increases in rates
would be partially mitigated by interest rate derivatives
mentioned above. As of December 31, 2006, we had interest
rate cap agreements in place representing $128.8 million in
notional value with various settlement dates, the latest of
which expires in July 2010. These interest rate caps range from
3.50% to 4.00% as measured by the
3-month
LIBOR rate and include a knock-out feature at rates ranging from
6.50% to 7.15% using the same measurement rate. The fair value
of our interest rate derivatives was $3.4 million as of
both December 31, 2006 and December 31, 2005.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The information required by Item 8 is incorporated by
reference to the section beginning on
page F-1.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Conclusions
Regarding Effectiveness of Disclosure Controls and
Procedures
Our management has evaluated, with the participation of our
principal executive and principal financial officer, the
effectiveness of our disclosure controls and procedures (as
defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934) as of the end of
the period covered by this report, and has concluded that our
disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed
by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Securities
and Exchange Commissions rules and forms.
Changes
in Internal Control over Financial Reporting
There has been no change in our internal control over financial
reporting (as described in
Rule 13a-15(f)
under the Securities Exchange Act of 1934) that occurred
during our last fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control
over financial reporting.
This annual report does not include a report of
managements assessment regarding internal control over
financial reporting or an attestation report of our registered
public accounting firm due to a transition period established by
rules of the Securities and Exchange Commission for newly public
companies.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by Item 401 of
Regulation S-K
regarding directors is included under Election of
Directors in the definitive Proxy Statement for our Annual
Meeting of Stockholders to be held May 8, 2007 (the
Definitive Proxy Statement), and is incorporated
herein by reference. Information regarding executive officers is
included under Management in the Definitive Proxy
Statement and is incorporated herein by reference. The
information required by Item 405 of
Regulation S-K
is included under Section 16(a) Beneficial Ownership
Reporting Compliance in the Definitive Proxy Statement and
is incorporated herein by reference. The information required by
Items 407(c)(3), (d)(4), and (d)(5) of
Regulation S-K
is included under Corporate Governance in the
Definitive Proxy Statement and is incorporated herein by
reference.
Our Board Governance Guidelines, our charters for our Audit and
Compensation Committees and our Code of Business
Conduct & Ethics covering all employees, including our
principal executive officer, principal
52
financial officer, principal accounting officer and controllers,
are available on our website, www.delekus.com, and a copy
will be mailed upon request to Investor Relations, Delek US
Holdings, Inc. or ir@delekus.com. We intend to disclose any
amendments to or waivers of the Code of Business
Conduct & Ethics on behalf of our Chief Executive
Officer, Chief Financial Officer, Controller, and persons
performing similar functions on our website, at
www.delekus.com, under the Investor Relations
caption, promptly following the date of any such amendment or
waiver.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item is included under
Executive Compensation in the Definitive Proxy
Statement and is incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table provides information as of December 31,
2006, regarding compensation plans (including individual
compensation arrangements) under which our equity securities are
authorized for issuance.
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
Number of Securities
|
|
|
|
|
|
Future Issuance Under
|
|
|
|
to be Issued Upon Exercise
|
|
|
Weighted-Average Exercise
|
|
|
Equity Compensation Plans
|
|
|
|
of Outstanding Options,
|
|
|
Price of Outstanding Options
|
|
|
(Excluding Securities
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved
by security holders
|
|
|
1,652,952
|
|
|
$
|
17.52
|
|
|
|
1,400,440
|
(2)
|
Equity compensation plans not
approved by security
holders(1)
|
|
|
1,719,493
|
|
|
$
|
2.03
|
|
|
|
none
|
|
TOTAL
|
|
|
3,372,445
|
|
|
|
|
|
|
|
1,400,440
|
|
|
|
|
(1) |
|
Pursuant to his employment
agreement, our President and Chief Executive Officer, Ezra Uzi
Yemin, was granted share purchase rights in May 2004. Upon
completion of the IPO, the share purchase rights permitted him
to purchase, subject to certain vesting requirements, up to
1,969,493 shares of our common stock which was 5% of our
outstanding shares immediately prior to the completion of the
IPO. Under the applicable vesting provisions, Mr. Yemin is
entitled to purchase up to one-fifth of these shares for each
year of his employment (prorated monthly) from May 2004 until
expiration of the employment agreement in April 2009.
Mr. Yemin exercised 250,000 of his share purchase rights in
December 2006. At December 31, 2006, Mr. Yemin had
vested 1,050,396 share purchase rights of which 800,396
were outstanding.
|
|
(2) |
|
Consists of the number of
securities available for future issuance under our 2006
Long-Term Incentive Plan as of December 31, 2006.
|
The information required by this Item is included under
Security Ownership of Certain Beneficial Owners and
Management in the Definitive Proxy Statement and is
incorporated herein by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this Item is included under
Certain Relationships and Related Transactions, and
Corporate Governance in the Definitive Proxy
Statement and is incorporated herein by reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this Item is included under
Relationship with Independent Auditors in the
Definitive Proxy Statement and is incorporated herein by
reference.
53
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Certain Documents Filed as Part of this Annual Report
on
Form 10-K
1. Financial Statements
2. Exhibits See below
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate
of Incorporation (incorporated by reference to Exhibit 3.1
to the Companys Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
3
|
.2
|
|
Amended and Restated Bylaws
(incorporated by reference to Exhibit 3.2 to the
Companys Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
4
|
.1
|
|
Specimen common stock certificate
(incorporated by reference to Exhibit 4.1 to the
Companys Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.1*
|
|
Employment Agreement, dated as of
May 1, 2004, by and between MAPCO Express, Inc., Uzi Yemin
and Delek US Holdings, Inc. (incorporated by reference to
Exhibit 10.1 to the Companys Registration Statement
on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.1(a)*
|
|
Amendment No. 1 to Employment
Agreement, dated as of October 31, 2005 and effective as of
September 15, 2005, by and among MAPCO Express, Inc., Delek
US Holdings, Inc. and Uzi Yemin (incorporated by reference to
Exhibit 10.1(a) to the Companys Registration
Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.1(b)*
|
|
Amendment No. 2 to Employment
Agreement, dated as of February 1, 2006, by and among MAPCO
Express, Inc., Delek US Holdings, Inc. and Uzi Yemin
(incorporated by reference to Exhibit 10.1(b) to the
Companys Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.1(c)*
|
|
Amendment No. 3 to Employment
Agreement, dated as of April 17, 2006, by and among MAPCO
Express, Inc., Delek US Holdings, Inc. and Uzi Yemin
(incorporated by reference to Exhibit 10.1(c) to the
Companys Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.1(d)*
|
|
Amendment No. 4 to Employment
Agreement, dated as of November 13, 2006, by and among
MAPCO Express, Inc., Delek US Holdings, Inc. and Uzi Yemin
|
|
10
|
.2*
|
|
Amended and Restated Consulting
Agreement, dated as of April 11, 2006, by and between
Greenfeld-Energy Consulting, Ltd. and Delek Refining, Ltd.
(incorporated by reference to Exhibit 10.2 to the
Companys Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.3*
|
|
Form of Indemnification Agreement
for Directors and Officers (incorporated by reference to
Exhibit 10.3 to the Companys Registration Statement
on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.4
|
|
Registration Rights Agreement,
dated as of April 17, 2006, by and between Delek US
Holdings, Inc. and Delek Group Ltd. (incorporated by reference
to Exhibit 10.4 to the Companys Registration
Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.5+
|
|
Distribution Service Agreement,
dated as of January 1, 2005, by and between MAPCO Express,
Inc. and McLane Company, Inc. DBA McLane Grocery Distribution
(incorporated by reference to Exhibit 10.5 to the
Companys Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.6+
|
|
RPC Agreement, dated as of
May 30, 2001, by and between Williams Refining &
Marketing, LLC and MAPCO Express, Inc. (incorporated by
reference to Exhibit 10.6 to the Companys
Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.6(a)
|
|
Assignment and Assumption
Agreement effective as of March 3, 2003, by and between
Williams Refining & Marketing, LLC, Williams Generating
Memphis, LLC, Williams Memphis Terminal, Inc., and Williams
Petroleum Pipeline Systems, Inc. and The Premcor Refining Group,
Inc. (incorporated by reference to Exhibit 10.6(a) to the
Companys Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
54
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.6(b)
|
|
Assignment of the RPC Agreement
between Williams Refining & Marketing, LLC and MAPCO
Express, Inc., dated May 30, 2001, from The Premcor
Refining Group, Inc. to Valero Marketing and Supply Company,
effective December 1, 2005 (incorporated by reference to
Exhibit 10.6(b) to the Companys Registration
Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.7
|
|
Amended and Restated Credit
Agreement, dated as of April 28, 2005, among MAPCO Express,
Inc., MAPCO Family Centers, Inc., the several lenders from time
to time party to the Agreement, Lehman Brothers Inc., SunTrust
Bank, Bank Leumi USA and Lehman Commercial Paper Inc.
(incorporated by reference to Exhibit 10.7 to the
Companys Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.7(a)
|
|
First Amendment to Amended and
Restated Credit Agreement, dated as of August 18, 2005,
among MAPCO Express, Inc., MAPCO Family Centers, Inc., the
several banks and other financial institutions or entities from
time to time parties thereto, Lehman Brothers Inc., SunTrust
Bank, Bank Leumi USA and Lehman Commercial Paper Inc.
(incorporated by reference to Exhibit 10.7(a) to the
Companys Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.7(b)
|
|
Second Amendment to Amended and
Restated Credit Agreement, dated as of October 11, 2005,
among MAPCO Express, Inc., the several banks and other financial
institutions or entities from time to time parties to the
Agreement, Lehman Brothers Inc., SunTrust Bank, Bank Leumi USA
and Lehman Commercial Paper Inc. (incorporated by reference to
Exhibit 10.7(b) to the Companys Registration
Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.7(c)
|
|
Third Amendment to Amended and
Restated Credit Agreement, dated as of December 15, 2005,
among MAPCO Express, Inc., the several banks and other financial
institutions or entities from time to time parties to the Credit
Agreement, Lehman Brothers Inc., SunTrust Bank, Bank Leumi USA
and Lehman Commercial Paper Inc. (incorporated by reference to
Exhibit 10.7(c) to the Companys Registration
Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.7(d)
|
|
Fourth Amendment to Amended and
Restated Credit Agreement, dated as of April 18, 2006,
among MAPCO Express, Inc., the several banks and other financial
institutions or entities from time to time parties to the Credit
Agreement, Lehman Brothers, Inc., SunTrust Bank, Bank Leumi USA
and Lehman Commercial Paper Inc. (incorporated by reference to
Exhibit 10.7(d) to the Companys Registration
Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.7(e)
|
|
Fifth Amendment to Amended and
Restated Credit Agreement, dated as of June 14, 2006, among
MAPCO Express, Inc., the several banks and other financial
institutions or entities from time to time parties to the Credit
Agreement, Lehman Brothers, Inc., SunTrust Bank, Bank Leumi USA
and Lehman Commercial Paper Inc. (incorporated by reference to
Exhibit 10.3 to the Companys
Form 10-Q
filed on August 11, 2006)
|
|
10
|
.7(f)
|
|
Sixth Amendment to Amended and
Restated Credit Agreement entered into effective July 13,
2006, among MAPCO Express, Inc., the several banks and other
financial institutions or entities from time to time parties to
the Credit Agreement, Lehman Brothers, Inc., SunTrust Bank, Bank
Leumi USA and Lehman Commercial Paper, Inc. (incorporated by
reference to Exhibit 10.1 to the Companys
Form 10-Q
filed on November 14, 2006)
|
|
10
|
.8
|
|
Amended and Restated Revolving
Credit Agreement, dated as of May 2, 2005, among Delek
Refining, Ltd., Delek Pipeline Texas, Inc., the several banks
and other financial institutions and lenders from time to time
party thereto, SunTrust Bank, The CIT Group/Business Credit,
Inc., National City Business Credit, Inc., Bank of America, N.A.
and PNC Business Credit, Inc. (incorporated by reference to
Exhibit 10.8 to the Companys Registration Statement
on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.8(a)
|
|
First Amendment to Amended and
Restated Credit Agreement, dated as of October 1, 2005,
among Delek Refining, Ltd., Delek Pipeline Texas, Inc., various
financial institutions, SunTrust Bank and The CIT Group/Business
Credit, Inc. (incorporated by reference to Exhibit 10.8(a)
to the Companys Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.8(b)
|
|
Second Amendment to Amended and
Restated Credit Agreement, dated as of October 13, 2006,
among Delek Refining, Ltd., Delek Pipeline Texas, Inc., various
financial institutions, SunTrust Bank and The CIT Group/Business
Credit, Inc.
|
55
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.9
|
|
Refinery Purchase and Sale
Agreement, dated as of March 14, 2005, by and between
La Gloria Oil and Gas Company, Delek Refining, Ltd., Delek
Pipeline Texas, Inc. and Delek Texas Land, Inc. (incorporated by
reference to Exhibit 10.10 to the Companys
Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.9(a)
|
|
Amendment to Refinery Purchase and
Sale Agreement, dated as of April 29, 2005, by and between
La Gloria Oil and Gas Company, Delek Refining, Ltd., Delek
Pipeline Texas, Inc. and Delek Texas Land, Inc. (incorporated by
reference to Exhibit 10.10(a) to the Companys
Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.9(b)
|
|
Second Amendment to Refinery
Purchase and Sale Agreement and Indemnity Agreement, dated
October 10, 2005, by and between La Gloria Oil and Gas
Company (renamed Tyler Holding Company, Inc.), Delek Refining,
Ltd., Delek Pipeline Texas, Inc. and Delek Texas Land, Inc.
(incorporated by reference to Exhibit 10.10(b) to the
Companys Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.10+
|
|
Pipeline Capacity Lease Agreement,
dated April 12, 1999, between La Gloria Oil and Gas
Company and Scurlock Permian, LLC (incorporated by reference to
Exhibit 10.11 to the Companys Registration Statement
on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.10(a)+
|
|
One-Year Renewal of Pipeline
Capacity Lease Agreement, dated December 21, 2004, between
Plains Marketing, L.P., as successor to Scurlock Permian LLC,
and La Gloria Oil and Gas Company (incorporated by
reference to Exhibit 10.11(a) to the Companys
Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.10(b)+
|
|
Assignment of the Pipeline
Capacity Lease Agreement, as amended and renewed on
December 21, 2004, by La Gloria Oil and Gas Company to
Delek Refining, Ltd. (incorporated by reference to
Exhibit 10.11(b) to the Companys Registration
Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.10(c)+
|
|
Amendment to One-Year Renewal of
Pipeline Capacity Lease Agreement, dated January 15, 2006,
between Delek Refining, Ltd. and Plains Marketing, L.P.
(incorporated by reference to Exhibit 10.11(c) to the
Companys Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.10(d)
|
|
Extension of Pipeline Capacity
Lease Agreement, dated January 15, 2006, between Delek
Refining, Ltd. and Plains Marketing, L.P. (incorporated by
reference to Exhibit 10.11(d) to the Companys
Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.10(e)+
|
|
Modification and Extension of
Pipeline Capacity Lease Agreement, effective May 1, 2006,
between Delek Refining, Ltd. and Plains Marketing, L.P.
(incorporated by reference to Exhibit 10.11(e) to the
Companys Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.11+
|
|
Branded Jobber Contract, dated
December 15, 2005, between BP Products North America, Inc.
and MAPCO Express, Inc. (incorporated by reference to
Exhibit 10.12 to the Companys Registration Statement
on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.12*
|
|
Delek US Holdings, Inc. 2006
Long-Term Incentive Plan (incorporated by reference to Exhibit
10.13 to the Companys Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.12(a)*
|
|
Form of Delek US Holdings, Inc.
2006 Long-Term Incentive Plan Restricted Stock Unit Agreement
(incorporated by reference to Exhibit 10.13(a) to the
Companys Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.12(b)*
|
|
Director Form of Delek US
Holdings, Inc. 2006 Long-Term Incentive Plan Stock Option
Agreement (incorporated by reference to Exhibit 10.13(b) to
the Companys Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.12(c)*
|
|
Officer Form of Delek US Holdings,
Inc. 2006 Long-Term Incentive Plan Stock Option Agreement
(incorporated by reference to Exhibit 10.13(c) to the
Companys Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.13*
|
|
Description of Director
Compensation (incorporated by reference to Exhibit 10.14 to
the Companys Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
56
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.14
|
|
Management and Consulting
Agreement, dated as of January 1, 2006, by and between
Delek Group Ltd. and Delek US Holdings, Inc. (incorporated by
reference to Exhibit 10.15 to the Companys
Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675).
|
|
10
|
.15
|
|
Promissory Note, dated
May 23, 2006, in the principal amount of $30,000,000.00, of
Delek Finance, Inc., in favor of Israel Discount Bank of New
York (incorporated by reference to Exhibit 10.10 to the
Companys
Form 10-Q
filed on May 24, 2006)
|
|
10
|
.16
|
|
Purchase and Sale Agreement, dated
June 14, 2006, by and between MAPCO Express, Inc., Fast
Petroleum, Inc., Worth L. Thompson, Jr., John E. Thompson,
Thompson Management, Inc., Thompson Acquisitions, Inc., Thompson
Investment Properties, Inc., WJET, Inc., Fast Financial
Services, Inc. and Top Tier Assets LLC (incorporated by
reference to Exhibit 10.1(a) to the Companys
Form 10-Q
filed on August 11, 2006)
|
|
10
|
.16(a)
|
|
First Amendment to Purchase and
Sale Agreement, made and entered into as of July 13, 2006,
by and between MAPCO Express, Inc., Fast Petroleum, Inc., Worth
L. Thompson, Jr., John E. Thompson, Thompson Management,
Inc., Thompson Acquisitions, Inc., Thompson Investment
Properties, Inc., WJET, Inc., Fast Financial Services, Inc. and
Top Tier Assets LLC (incorporated by reference to
Exhibit 10.1(b) to the Companys
Form 10-Q
filed on August 11, 2006)
|
|
10
|
.17
|
|
Purchase and Sale Agreement,
entered into effective June 21, 2006, by and among Pride
Companies, L.P., Pride Refining, Inc., Pride Marketing LLC, and
Delek US Holdings, Inc. (incorporated by reference to
Exhibit 10.2(a) to the Companys
Form 10-Q
filed on August 11, 2006)
|
|
10
|
.17(a)
|
|
First Amendment to Purchase and
Sale Agreement, made and entered into as of July 31, 2006,
by and among Pride Companies, L.P., Pride Refining, Inc., Pride
Marketing LLC, Pride Products and Delek US Holdings, Inc. and
Delek Marketing & Supply, LP. (incorporated by
reference to Exhibit 10.2(b) to the Companys
Form 10-Q
filed on August 11, 2006)
|
|
10
|
.18
|
|
Credit Agreement dated
July 31, 2006, by and between Delek Marketing & Supply,
LP, and various financial institutions, from time to time, party
to the Agreement, as Lenders, and Fifth Third Bank,
Administrative Agent (incorporated by reference to
Exhibit 10.2 to the Companys
Form 10-Q
filed on November 14, 2006)
|
|
10
|
.19
|
|
Promissory Note dated
July 27, 2006, by and between Delek US Holdings, Inc., and
Bank Leumi USA as lender (incorporated by reference to
Exhibit 10.3 to the Companys
Form 10-Q
filed on November 14, 2006)
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of Ernst & Young
LLP
|
|
23
|
.2
|
|
Consent of Mayer Hoffman McCann
P.C.
|
|
24
|
.1
|
|
Power of Attorney
|
|
31
|
.1
|
|
Certification of the
Companys Chief Executive Officer pursuant to
Rule 13a-14(a)/15(d)-14(a)
under the Securities Exchange Act
|
|
31
|
.2
|
|
Certification of the
Companys Chief Financial Officer pursuant to
Rule 13a-14(a)/15(d)-14(a)
under the Securities Exchange Act
|
|
32
|
.1
|
|
Certification of the
Companys Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
Certification of the
Companys Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
*
|
|
Management contract or compensatory
plan or arrangement.
|
|
+
|
|
Confidential treatment has been
requested with respect to certain portions of this exhibit
pursuant to Rule 406 of the Securities Act. Omitted
portions have been filed separately with the Securities and
Exchange Commission.
|
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Edward Morgan
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: March 20, 2007
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by or on behalf of
the following persons on behalf of the registrant and in the
capacities indicated on March 20, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Ezra
Uzi Yemin
Ezra
Uzi Yemin
Director, President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
/s/ Gabriel
Last* Gabriel
Last
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Asaf
Bartfeld*
Asaf
Bartfeld
Director
|
|
|
|
/s/ Alan
Gelman* Alan
Gelman
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Zvi
Greenfeld*
Zvi
Greenfeld
Director
|
|
|
|
/s/ Carlos
E.
Jorda* Carlos
E. Jorda
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Charles
H. Leonard*
Charles
H. Leonard
Director
|
|
|
|
/s/ Philip
L.
Maslowe* Philip
L. Maslowe
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Edward
Morgan
Edward
Morgan
Vice President and Chief Financial Officer (Principal Financial
and Accounting Officer)
|
|
|
|
|
|
|
*By:
|
|
/s/ Edward
Morgan
Individually and as
Attorney-in-Fact
|
58
Delek US
Holdings, Inc.
Consolidated Financial Statements
As of December 31, 2006 and 2005 and
for the Years Ended December 31, 2006, 2005 and
2004
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-1
|
|
Audited Financial Statements
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Delek US Holdings, Inc.
We have audited the accompanying consolidated balance sheets of
Delek US Holdings, Inc. as of December 31, 2006 and 2005,
and the related consolidated statements of operations, changes
in shareholders equity, and cash flows for the years ended
December 31, 2006 and 2005. These financial statements are
the responsibility of Deleks management. Our
responsibility is to express an opinion on these financial
statements based on our audits. The financial statements of
Delek US Holdings, Inc. for the year ended December 31,
2004, were audited by other auditors whose report dated
January 19, 2006, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of Deleks internal control over financial reporting.
Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of
Deleks internal control over financial reporting.
Accordingly we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the 2006 and 2005 financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Delek US Holdings, Inc. at
December 31, 2006 and 2005 and the consolidated results of
its operations and cash flows for the years ended
December 31, 2006 and 2005, in conformity with
U.S. generally accepted accounting principles.
As discussed in Notes 2 and 9 to the consolidated financial
statements, Delek changed its method of accounting for
stock-based compensation in connection with the adoption of
Statement of Financial Accounting Standards No. 123
(revised 2004) on January 1, 2006.
Nashville, Tennessee
March 15, 2007
F-1
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of
Delek US Holdings, Inc.
We have audited the accompanying consolidated statements of
operations, changes in shareholders equity, and cash flows
of Delek US Holdings, Inc. for the year ended December 31,
2004. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
results of operations and cash flows of Delek US Holdings, Inc.
for the year ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles.
/s/
Mayer
Hoffman McCann P.C.
Mayer Hoffman McCann P.C.
Plymouth Meeting, Pennsylvania
January 19, 2006
F-2
Delek US
Holdings, Inc.
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions, except share and per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
101.6
|
|
|
$
|
62.6
|
|
Short-term investments
|
|
|
73.2
|
|
|
|
26.6
|
|
Accounts receivable
|
|
|
83.7
|
|
|
|
52.9
|
|
Inventory
|
|
|
120.8
|
|
|
|
101.3
|
|
Other current assets
|
|
|
31.3
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
410.6
|
|
|
|
251.8
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
493.1
|
|
|
|
317.1
|
|
Less: accumulated depreciation
|
|
|
(68.4
|
)
|
|
|
(46.5
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
424.7
|
|
|
|
270.6
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
80.7
|
|
|
|
63.7
|
|
Other intangibles, net
|
|
|
12.2
|
|
|
|
0.6
|
|
Note receivable from a related
party
|
|
|
|
|
|
|
0.2
|
|
Other non-current assets
|
|
|
21.2
|
|
|
|
19.3
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
949.4
|
|
|
$
|
606.2
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
175.5
|
|
|
$
|
144.6
|
|
Current portion of long-term debt
and capital lease obligations
|
|
|
1.8
|
|
|
|
1.7
|
|
Note payable
|
|
|
19.2
|
|
|
|
|
|
Accrued expenses and other current
liabilities
|
|
|
34.4
|
|
|
|
29.5
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
230.9
|
|
|
|
175.8
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease
obligations, net of current portion
|
|
|
265.6
|
|
|
|
224.6
|
|
Notes payable to related parties
|
|
|
|
|
|
|
42.5
|
|
Environmental liabilities, net of
current portion
|
|
|
9.3
|
|
|
|
7.3
|
|
Asset retirement obligations
|
|
|
3.3
|
|
|
|
3.4
|
|
Deferred tax liabilities
|
|
|
50.5
|
|
|
|
27.5
|
|
Other non-current liabilities
|
|
|
7.6
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
336.3
|
|
|
|
310.6
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par
value, 10,000,000 shares authorized, 0 shares issued
and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par
value, 110,000,000 shares authorized, 51,139,869 and
39,389,869 shares issued and outstanding, respectively
|
|
|
0.5
|
|
|
|
0.4
|
|
Additional paid-in capital
|
|
|
211.9
|
|
|
|
40.7
|
|
Retained earnings
|
|
|
169.8
|
|
|
|
78.7
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
382.2
|
|
|
|
119.8
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
949.4
|
|
|
$
|
606.2
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-3
Delek US
Holdings, Inc.
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions, except share and per share data)
|
|
|
Net sales
|
|
$
|
3,207.7
|
|
|
$
|
2,031.9
|
|
|
$
|
857.9
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
2,818.3
|
|
|
|
1,731.6
|
|
|
|
730.8
|
|
Operating expenses
|
|
|
173.2
|
|
|
|
133.1
|
|
|
|
80.1
|
|
General and administrative expenses
|
|
|
38.2
|
|
|
|
23.5
|
|
|
|
15.1
|
|
Depreciation and amortization
|
|
|
22.8
|
|
|
|
16.1
|
|
|
|
12.4
|
|
Gain on disposal of assets
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
(0.9
|
)
|
Losses on forward contract
activities
|
|
|
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,052.5
|
|
|
|
1,911.8
|
|
|
|
837.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
155.2
|
|
|
|
120.1
|
|
|
|
20.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
24.2
|
|
|
|
17.4
|
|
|
|
7.1
|
|
Interest income
|
|
|
(7.2
|
)
|
|
|
(2.1
|
)
|
|
|
|
|
Interest expense to related parties
|
|
|
1.0
|
|
|
|
3.0
|
|
|
|
1.2
|
|
Other expenses, net
|
|
|
0.2
|
|
|
|
2.5
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.2
|
|
|
|
20.8
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
and cumulative effect of change in accounting policy
|
|
|
137.0
|
|
|
|
99.3
|
|
|
|
11.4
|
|
Income tax expense
|
|
|
44.0
|
|
|
|
34.9
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting policy
|
|
|
93.0
|
|
|
|
64.4
|
|
|
|
7.3
|
|
Cumulative effect of change in
accounting policy
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
93.0
|
|
|
$
|
64.1
|
|
|
$
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting policy
|
|
$
|
1.98
|
|
|
$
|
1.64
|
|
|
$
|
0.19
|
|
Cumulative effect of change in
accounting policy
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.98
|
|
|
$
|
1.63
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting policy
|
|
$
|
1.94
|
|
|
$
|
1.64
|
|
|
$
|
0.19
|
|
Cumulative effect of change in
accounting policy
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.94
|
|
|
$
|
1.63
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
47,077,369
|
|
|
|
39,389,869
|
|
|
|
39,389,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
47,915,962
|
|
|
|
39,389,869
|
|
|
|
39,389,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-4
Delek US
Holdings, Inc.
Consolidated
Statements of Changes in Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
(In millions, except share data)
|
|
|
Balance at December 31, 2003
|
|
|
39,389,869
|
|
|
$
|
0.4
|
|
|
$
|
40.7
|
|
|
$
|
7.3
|
|
|
$
|
48.4
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.3
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
39,389,869
|
|
|
|
0.4
|
|
|
|
40.7
|
|
|
|
14.6
|
|
|
|
55.7
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64.1
|
|
|
|
64.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
39,389,869
|
|
|
|
0.4
|
|
|
|
40.7
|
|
|
|
78.7
|
|
|
|
119.8
|
|
Proceeds from public offering
|
|
|
11,500,000
|
|
|
|
0.1
|
|
|
|
166.8
|
|
|
|
|
|
|
|
166.9
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
|
|
|
|
|
|
2.4
|
|
Income tax benefit of stock- based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
1.5
|
|
Common stock dividends ($0.375 per
share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.9
|
)
|
|
|
(1.9
|
)
|
Exercise of stock options
|
|
|
250,000
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
0.5
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93.0
|
|
|
|
93.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
51,139,869
|
|
|
$
|
0.5
|
|
|
$
|
211.9
|
|
|
$
|
169.8
|
|
|
$
|
382.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-5
Delek US
Holdings, Inc.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
93.0
|
|
|
$
|
64.1
|
|
|
$
|
7.3
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
22.8
|
|
|
|
16.1
|
|
|
|
12.4
|
|
Amortization of deferred financing
costs
|
|
|
4.2
|
|
|
|
2.3
|
|
|
|
0.8
|
|
Accretion of asset retirement
obligations
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
|
|
Deferred income taxes
|
|
|
22.8
|
|
|
|
8.9
|
|
|
|
3.9
|
|
Net gain on disposal of assets
|
|
|
|
|
|
|
(3.1
|
)
|
|
|
(0.2
|
)
|
Net losses on write-down of assets
|
|
|
|
|
|
|
3.5
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
Income tax benefit of stock-based
compensation
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities,
net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(30.7
|
)
|
|
|
(41.7
|
)
|
|
|
(1.4
|
)
|
Inventories and other current assets
|
|
|
(24.8
|
)
|
|
|
11.1
|
|
|
|
(2.8
|
)
|
Accounts payable and other current
liabilities
|
|
|
23.1
|
|
|
|
88.1
|
|
|
|
5.2
|
|
Non-current assets and liabilities,
net
|
|
|
(1.4
|
)
|
|
|
(0.7
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
110.2
|
|
|
|
148.7
|
|
|
|
24.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(520.2
|
)
|
|
|
(26.6
|
)
|
|
|
|
|
Sales of short-term investments
|
|
|
473.6
|
|
|
|
|
|
|
|
|
|
Business combinations, net of cash
acquired
|
|
|
(107.3
|
)
|
|
|
(109.6
|
)
|
|
|
(22.1
|
)
|
Purchase of property, plant and
equipment
|
|
|
(97.5
|
)
|
|
|
(29.2
|
)
|
|
|
(7.0
|
)
|
Proceeds from sale of convenience
store assets
|
|
|
|
|
|
|
3.1
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(251.4
|
)
|
|
|
(162.3
|
)
|
|
|
(27.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from long-term revolver
|
|
|
46.7
|
|
|
|
23.5
|
|
|
|
2.5
|
|
Proceeds from other debt instruments
|
|
|
60.0
|
|
|
|
215.0
|
|
|
|
33.7
|
|
Payments on debt and capital lease
obligations
|
|
|
(47.4
|
)
|
|
|
(187.1
|
)
|
|
|
(49.5
|
)
|
Proceeds from note payable to
related parties
|
|
|
|
|
|
|
34.9
|
|
|
|
24.9
|
|
Payments of note payable to related
parties
|
|
|
(42.5
|
)
|
|
|
(21.0
|
)
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
|
166.9
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock
options
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
Income tax benefit of stock-based
compensation
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted
cash
|
|
|
|
|
|
|
3.7
|
|
|
|
(1.7
|
)
|
Purchase of interest rate
derivative instruments
|
|
|
|
|
|
|
|
|
|
|
(2.3
|
)
|
Deferred financing costs paid
|
|
|
(3.6
|
)
|
|
|
(14.9
|
)
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
180.2
|
|
|
|
54.1
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents:
|
|
|
39.0
|
|
|
|
40.5
|
|
|
|
3.2
|
|
Cash and cash equivalents at the
beginning of the period
|
|
|
62.6
|
|
|
|
22.1
|
|
|
|
18.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the
end of the period
|
|
$
|
101.6
|
|
|
$
|
62.6
|
|
|
$
|
22.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of capitalized
interest of $1.8 million in 2006
|
|
$
|
19.1
|
|
|
$
|
17.0
|
|
|
$
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
32.5
|
|
|
$
|
25.8
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
$
|
1.1
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired via the issuance of
notes payable
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination of equity investment in
Related Party LLC and related debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-6
Delek US
Holdings, Inc.
Notes to
Consolidated Financial Statements
Delek US
Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Delek US Holdings, Inc. (Delek, we, our or us) is the sole
shareholder of MAPCO Express, Inc. (Express), MAPCO Fleet, Inc.
(Fleet), Delek Refining, Inc. (Refining), Delek Finance, Inc.
(Finance) and Delek Marketing and Supply, Inc. (Marketing),
(collectively the Subsidiaries). Delek and Express were
incorporated during April 2001 in the State of Delaware. Fleet,
Refining, Finance, and Marketing were incorporated in the State
of Delaware during January 2004, February 2005, April 2005 and
June 2006, respectively.
On May 9, 2006, we completed an initial public offering of
11,500,000 shares of our common stock at a price of
$16.00 per share for an aggregate offering price of
approximately $184.0 million. The shares, which are listed
on the New York Stock Exchange, began trading on May 4,
2006, under the symbol DK. All of the shares offered
were primary shares sold by Delek. We received approximately
$166.9 million in net proceeds from the initial public
offering after payment of underwriting discounts and commissions
and deduction of offering expenses. The initial public offering
represented the sale by us of a 22.6% interest in Delek. Our
remaining outstanding shares, at the close of our initial public
offering, were beneficially owned by Delek Group Ltd. (Delek
Group) located in Natanya, Israel.
Basis
of Presentation
Our consolidated financial statements have been prepared in
conformity with U.S. generally accepted accounting
principles applied on a consistent basis, except for the
adoption of SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS 123R), and in accordance
with the rules and regulations of the Securities and Exchange
Commission (SEC). The consolidated financial statements include
the accounts of Delek and its wholly-owned subsidiaries. All
significant intercompany transactions and account balances have
been eliminated in consolidation.
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Certain amounts presented in prior period financial statements
have been reclassified to conform to the current period
presentation. These reclassifications had no effect on the
results of operations or shareholders equity as previously
reported.
Classification
of Operations
Delek is a diversified energy business focused on petroleum
refining, wholesale sales of refined products and retail
marketing. Management views operating results in primarily three
segments: refining, marketing and retail. The refining segment
operates a high conversion, independent refinery in Tyler,
Texas. The marketing segment sells refined products on a
wholesale basis in west Texas through company-owned and
third-party operating terminals. The retail segment markets
gasoline, diesel and other refined petroleum products and
convenience merchandise through a network of
394 company-operated retail fuel and convenience stores.
Segment reporting is more fully discussed in Note 10.
Cash
and Cash Equivalents
Delek maintains cash and cash equivalents in accounts with
financial institutions and retains nominal amounts of cash at
the convenience store locations as petty cash. All highly liquid
investments purchased with an original maturity of three months
or less are considered to be cash equivalents.
F-7
Delek US
Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Short-Term
Investments
Short-term investments, which consist of market auction rate
debt securities and municipal rate bonds, are classified as
available for sale under the provisions of Financial
Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. At
December 31, 2006, these securities had contractual
maturities ranging from July 1, 2026 to December 1,
2040. Our stated investment policy is to sell these securities
and repurchase similar securities at each auction date, which
must not exceed 90 days and typically ranges from 7 to
35 days. Based on the historical practice of adhering to
this investment policy and our intent to continue to adhere to
this investment policy, we have classified these securities as
short-term investments in the accompanying consolidated balance
sheets. These short-term investments are carried at fair value,
which is based on quoted market prices.
Accounts
Receivable
Accounts receivable primarily represent receivables related to
credit card sales, receivables from vendor promotions and trade
receivables generated in the ordinary course of business. Delek
recorded an allowance for doubtful accounts related to trade
receivables of $0.1 million and $0.2 million as of
December 31, 2006 and 2005, respectively. All other
accounts receivable amounts are considered to be fully
collectible. Accordingly, no additional allowance was
established as of December 31, 2006, and 2005.
Delek sells a variety of products to a diverse customer base. On
a consolidated basis, there were no customers that accounted for
more than 10% of net sales during the years ended
December 31, 2006, 2005 and 2004.
One of Deleks refinery customers accounted for
approximately 11.2% and 10.1% of the refining segments
outstanding accounts receivable balance as of December 31,
2006 and 2005, respectively. A second customer accounted for
approximately 25.3% of the segments outstanding accounts
receivable balance as of December 31, 2005 but had no
receivable balance as of December 31, 2006.
One credit card provider accounted for approximately 12% of the
retail segments total outstanding accounts receivable
balance as of December 31, 2006, and this service provider,
along with a second credit card provider, accounted for
approximately 23% of the segments total outstanding
accounts receivable balance as of December 31, 2005.
Two of the marketing segments customers accounted for
approximately 23% of its total accounts receivable balance as of
December 31, 2006.
Inventory
Refinery inventory consists of crude oil, refined products and
blend stocks which are stated at the lower of cost or market.
Cost is determined under the
last-in,
first-out (LIFO) valuation method. Cost of crude oil, refined
product and blend stock inventories in excess of market value
are charged to cost of goods sold. Such changes are subject to
reversal in subsequent periods, not to exceed LIFO cost, if
prices recover.
Marketing inventory consists of refined products which are
stated at the lower of cost or market on a
first-in,
first-out (FIFO) basis.
Retail merchandise inventory consists of gasoline, diesel fuel,
other petroleum products, cigarettes, beer, convenience
merchandise and food service merchandise. Fuel inventories are
stated at the lower of cost or market on a FIFO basis. Non-fuel
inventories are stated at estimated cost as determined by the
retail inventory method.
Property,
Plant and Equipment
Assets acquired by Delek in conjunction with acquisitions are
recorded at estimated fair market value in accordance with the
purchase method of accounting as prescribed in
SFAS No. 141, Business Combinations.
F-8
Delek US
Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Other acquisitions of property and equipment are carried at
cost. Betterments, renewals and extraordinary repairs that
extend the life of the asset are capitalized. Maintenance and
repairs are charged to expense as incurred. Delek owns certain
fixed assets on leased locations and depreciates these assets
and asset improvements over the lesser of managements
estimated useful lives of the assets or the remaining lease term.
Depreciation is computed using the straight-line method over
managements estimated useful lives of the related assets,
which are as follows:
|
|
|
Automobiles
|
|
3-5 years
|
Computer equipment and software
|
|
3-10
years
|
Refinery turnaround costs
|
|
4 years
|
Furniture and fixtures
|
|
5-15 years
|
Retail store equipment
|
|
7-15 years
|
Asset retirement obligation assets
|
|
15-36 years
|
Refinery machinery and equipment
|
|
15-40 years
|
Petroleum and other site (POS)
improvements
|
|
8-40 years
|
Building and building improvements
|
|
40 years
|
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, Delek evaluates
the realizability of property, plant and equipment as events
occur that might indicate potential impairment.
Capitalized
Interest
Delek had a significant construction period associated with
several capital projects in the refining segment and with the
construction related to the new prototype stores
being built in the retail segment. For the year ended
December 31, 2006 interest of $1.6 million was
capitalized by the refining segment, while the retail segment
capitalized $0.2 million of interest. There was no interest
capitalized in either 2005 or 2004.
Refinery
Turnaround Costs
Refinery turnaround costs are incurred in connection with
planned shutdown and inspections of the refinerys major
units to perform necessary repairs and replacements. Refinery
turnaround costs are deferred when incurred, classified as
property, plant and equipment and amortized on a straight-line
basis over that period of time estimated to lapse until the next
planned turnaround occurs. Refinery turnaround costs include,
among other things, the cost to repair, restore, refurbish or
replace refinery equipment such as vessels, tanks, reactors,
piping, rotating equipment, instrumentation, electrical
equipment, heat exchangers and fired heaters. During December
2005, we successfully completed a major turnaround covering the
fluid catalytic cracking unit, sulfuric acid alkylation unit,
sulfur recovery unit, amine unit and kerosene and gasoline
treating units. The next planned turnaround activities are not
scheduled until 2008.
Goodwill
Goodwill is accounted for under the provisions of
SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS 142). This statement addresses how intangible
assets and goodwill should be accounted for upon and after their
acquisition. Specifically, goodwill and intangible assets with
indefinite useful lives are not amortized, but are subject to
annual impairment tests based on their estimated fair value. In
accordance with the provisions of SFAS 142, we perform an
annual review of impairment of goodwill in the fourth quarter by
comparing the carrying value of the applicable reporting unit to
its estimated fair value.
F-9
Delek US
Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Derivatives
Delek records all derivative financial instruments, including
interest rate swap agreements, interest rate cap agreements,
fuel-related derivatives and forward contracts at estimated fair
value regardless of their intended use in accordance with the
provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities
(SFAS 133), as amended and interpreted. Changes in the
fair value of the derivative instruments are recognized
periodically in operations as we have not elected to apply the
hedging treatment permitted under the provisions of
SFAS 133 allowing such changes to be classified as other
comprehensive income. In the future, based on the facts and
circumstances, we may elect to apply hedging treatment. We
validate the fair value of all derivative financial instruments
on a monthly basis, utilizing valuations from third party
financial and brokerage institutions.
In 2006, Delek had no fuel-related derivatives or forward
contracts with financial institutions.
During August and September of 2005, Delek entered into six
forward fuel contracts with a major financial institution. The
contracts fixed the purchase price of crude and sales price of
finished grade fuel for a predetermined number of units at a
future date and had fulfillment terms of less than 60 days.
Delek recorded realized losses of $9.1 million during the
year ended December 31, 2005 which are included as losses
on forward contract activities in the accompanying consolidated
statements of operations.
Interest-rate derivatives are discussed in Note 8.
Fair
Value of Financial Instruments
The fair values of financial instruments are estimated based
upon current market conditions and quoted market prices for the
same or similar instruments as of December 31, 2006 and
2005. Management estimates that book value approximates fair
value for all of Deleks assets and liabilities that fall
under the scope of SFAS No. 107, Disclosures about
Fair Value of Financial Instruments.
A majority of our debt and derivative financial instruments
outstanding at December 31, 2006 and 2005 were executed
with a limited number of financial institutions. The risk of
counterparty default is limited to the unpaid portion of amounts
due to us pursuant to the terms of the derivative agreements.
The net amount due from these financial institutions at
December 31, 2006 and 2005 totaled $3.4 million on
both dates, as discussed in Note 8.
Self-Insurance
Reserves
Delek is primarily self-insured for employee medical,
workers compensation and general liability costs, with
varying limits of per claim and aggregate stop loss insurance
coverage that management considers adequate. We maintain an
accrual for these costs based on claims filed and an estimate of
claims incurred but not reported. Differences between actual
settlements and recorded accruals are recorded in the period
identified.
Vendor
Discounts and Deferred Revenue
Delek receives cash discounts or cash payments from certain
vendors related to product promotions based upon factors such
as, quantities purchased, quantities sold, merchandise
exclusivity, store space and various other factors. In
accordance with Emerging Issues Task Force (EITF)
02-16,
Accounting by a Reseller for Consideration Received from a
Vendor, we recognize these amounts as a reduction of
inventory until the products are sold, at which time the amounts
are reflected as a reduction in cost of goods sold. Certain of
these amounts are received from vendors related to agreements
covering several periods. These amounts are initially recorded
as deferred revenue, are reclassified as a reduction in
inventory upon receipts of the products, and are subsequently
recognized as a reduction of cost of goods sold as the products
are sold.
Delek also receives advance payments from certain vendors
relating to non-inventory agreements. These amounts are recorded
as deferred revenue and are subsequently recognized as a
reduction of cost of goods sold as earned.
F-10
Delek US
Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Environmental
Expenditures
It is Deleks policy to accrue environmental and
clean-up
related costs of a non-capital nature when it is both probable
that a liability has been incurred and the amount can be
reasonably estimated. Environmental liabilities represent the
current estimated costs to investigate and remediate
contamination at our properties. This estimate is based on
internal and third-party assessments of the extent of the
contamination, the selected remediation technology and review of
applicable environmental regulations, typically considering
estimated activities and costs for the next ten years, unless a
specific longer range plan is in place. Accruals for estimated
costs from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility
study and include, but are not limited to, costs to perform
remedial actions and costs of machinery and equipment that is
dedicated to the remedial actions and that does not have an
alternative use. Such accruals are adjusted as further
information develops or circumstances change. Expenditures for
equipment necessary for environmental issues relating to ongoing
operations are capitalized.
Asset
Retirement Obligations
Effective January 1, 2005, Delek adopted FASB
Interpretation No. (FIN) 47, Accounting for Conditional Asset
Retirement Obligations (FIN 47), requiring the
recognition of a liability for the fair value of a legal
obligation to perform asset retirement activities that are
conditional on a future event when the amount can be reasonably
estimated. The interpretation also clarifies when an entity
would have sufficient information to reasonably estimate the
fair value of an asset retirement obligation under
SFAS No. 143, Accounting for Asset Retirement
Obligations. A cumulative effect of change in
accounting policy of $0.3 million (net of $0.2 million
of income taxes) and a long-term asset retirement obligation of
$1.2 million were recorded upon adoption.
Deleks initial asset retirement obligation recognized in
connection with the adoption of FIN 47 as of
January 1, 2005 relates to the present value of estimated
costs to remove underground storage tanks at Deleks leased
retail sites which are legally required under the applicable
leases. The asset retirement obligation for storage tank removal
on leased retail sites is being accreted over the expected life
of the underground storage tanks which approximate the average
retail site lease term.
The effect on the results of operations for the year ended
December 31, 2005, and the pro forma effects (unaudited) on
the results of operations for the year ended December 31,
2004 were $0.2 million and $0.1 million, respectively.
Subsequent to adoption of FIN 47, Delek recorded long-term
asset retirement obligations in connection with its purchase of
the refinery of $1.8 million related to the required
disposal of waste in certain storage tanks, asbestos abatement
at an identified location and other estimated costs that would
be legally required upon final closure of the refinery.
With the purchase of assets from the Pride Companies, L.P. and
affiliates, and the establishment of the marketing segment,
Delek recorded long-term asset retirement obligations of
$0.2 million related to the required cleanout of the
pipeline and terminal tanks, and removal of certain above-grade
portions of the pipeline situated on
right-of-way
property. In the purchase of assets from FAST Petroleum, our
review found no requirements which required the recognition of
asset retirement obligations associated with leased retail
sites. These liabilities upon acquisition are discussed further
in Note 4.
F-11
Delek US
Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The reconciliation of the beginning and ending carrying amounts
of asset retirement obligations as of December 31, 2006 and
2005 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
Beginning balance
|
|
$
|
3.4
|
|
|
$
|
|
|
Cumulative effect of adoption of
FIN 47
|
|
|
|
|
|
|
1.5
|
|
Additional liabilities
|
|
|
0.6
|
|
|
|
1.8
|
|
Liabilities settled
|
|
|
(1.0
|
)
|
|
|
|
|
Accretion expense
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.3
|
|
|
$
|
3.4
|
|
|
|
|
|
|
|
|
|
|
In order to determine fair value, management must make certain
estimates and assumptions including, among other things,
projected cash flows, a credit-adjusted risk-free rate and an
assessment of market conditions that could significantly impact
the estimated fair value of the asset retirement obligation.
Revenue
Recognition
Revenues for products sold are recorded at the point of sale
upon delivery of product, which is the point at which title to
the product is transferred, and when payment has either been
received or collection is reasonably assured.
Delek derives service revenue from the sale of lottery tickets,
money orders, car washes and other ancillary product and service
offerings. Service revenue and related costs are recorded at
gross amounts and net amounts, as appropriate, in accordance
with the provisions of
EITF 99-19,
Reporting Revenue Gross as a Principal Versus Net as an
Agent. We record service revenue and related costs at gross
amounts when Delek is the primary obligor, is subject to
inventory risk, has latitude in establishing prices and
selecting suppliers, influences product or service
specifications, or has several but not all of these indicators.
When Delek is not the primary obligor and does not possess other
indicators of gross reporting as discussed previously, we record
net service revenue.
Excise
Taxes
Federal excise and state motor fuel taxes imposed on certain
sales of refined petroleum products are reported net within cost
of goods sold.
Deferred
Financing Costs
Deferred financing costs represent expenses related to issuing
our long-term debt, obtaining our lines of credit and obtaining
lease financing. These amounts are amortized over the remaining
term of the respective financing and are included in interest
expense. See Note 8 for further information.
Advertising
Costs
Delek expenses advertising costs as the advertising space is
utilized. Advertising expense for the year ended
December 31, 2006 was $2.0 million and was
$1.2 million for each of the years ended December 31,
2005 and 2004.
Operating
Leases
Delek leases land and buildings under various operating lease
arrangements, most of which provide the option, after the
initial lease term, to renew the leases. Some of these lease
arrangements include fixed rental rate increases, while others
include rental rate increases based upon such factors as
changes, if any, in defined inflationary indices.
F-12
Delek US
Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
In accordance with SFAS No. 13, Accounting for
Leases, for all leases that include fixed rental rate
increases, Delek calculates the total rent expense for the
entire lease period, considering renewals for all periods for
which failure to renew the lease imposes economic penalty, and
records rental expense on a straight-line basis in the
accompanying consolidated statements of operations.
Income
Taxes
Income taxes are accounted for under the provisions of
SFAS No. 109, Accounting for Income Taxes. This
statement generally requires Delek to record deferred income
taxes for the differences between the book and tax bases of its
assets and liabilities, which are measured using enacted tax
rates and laws that will be in effect when the differences are
expected to reverse. Deferred income tax expense or benefit
represents the net change during the year in our deferred income
tax assets and liabilities.
In connection with the acquisition of the refinery effective
April 29, 2005 discussed in Note 4, Deleks
consolidated effective tax rate changed. Substantially all of
the refinery operations are organized as a limited partnership
in the state of Texas, which is not subject to Texas franchise
tax. Additionally, all other Texas activity, including the new
marketing segment, has occurred in a limited partnership entity,
also not subject to Texas franchise tax. As a result, both our
refining and marketing segments are expected to incur an
effective tax rate for the year that is equal to the federal
rate plus a nominal amount of state franchise taxes.
Consequently, Deleks consolidated effective tax rate is
reduced by their proportionate contribution to the consolidated
pretax earnings. The taxation of earnings in Texas is subject to
change due to new legislation which will be effective
January 1, 2007. This legislation will require taxation of
all or a portion of a limited partnerships earnings.
Delek benefits from other tax incentives related to its refinery
operations. Specifically, Delek is entitled to the benefit of
the domestic manufacturers production deduction for
federal tax purposes. Additionally, Delek is entitled to federal
tax credits related to the production of ultra low sulfur diesel
fuel. The combination of these two items reduces Deleks
federal effective tax rate to an amount that is less than the
statutory rate of 35%.
Earnings
Per Share
Basic and diluted earnings per share (EPS) are computed by
dividing net income by the weighted average common shares
outstanding. The common shares used to compute Deleks
basic and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Weighted average common shares
outstanding
|
|
|
47,077,369
|
|
|
|
39,389,869
|
|
|
|
39,389,869
|
|
Dilutive effect of equity
instruments
|
|
|
838,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding, assuming dilution
|
|
|
47,915,962
|
|
|
|
39,389,869
|
|
|
|
39,389,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding stock options totaling 1,651,452 common shares were
excluded from the diluted earnings per share calculation for the
year ended December 31, 2006. These stock options did not
have a dilutive effect under the treasury stock method. All
potential stock-based compensation was contingently issuable in
both 2005 and 2004, and was excluded from the diluted earnings
per share calculation.
Stock
Compensation
In December 2004, the FASB issued SFAS 123R. This statement
is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes Accounting
Principals Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and its related
implementation guidance. The revised standard requires the cost
of all share-based payments to employees, including grants of
employee stock options, be recognized in the
F-13
Delek US
Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
income statement and establishes fair value as the measurement
objective in accounting for share-based payment arrangements.
Pro forma disclosure is no longer an alternative. Delek adopted
SFAS 123R on January 1, 2006. With respect to the pro
forma disclosure requirements of SFAS 123R in 2005 and
2004, there was no fair value recognition related to share-based
compensation, as all stock options were considered contingently
issuable prior to our initial public offering in May 2006.
We have elected to use the Black-Scholes-Merton option-pricing
model to determine the fair value of stock-based awards on the
dates of grant. We have elected the modified prospective
transition method as permitted by SFAS 123R. See
Note 9 for additional information.
Comprehensive
Income
Comprehensive income for the years ended December 31, 2006,
2005, and 2004 was equivalent to net income for Delek.
New
Accounting Pronouncements
In September 2006, the FASB published SFAS No. 157,
Fair Value Measurements (SFAS 157), to eliminate the
diversity in practice that exists due to the different
definitions of fair value and the limited guidance for applying
those definitions in GAAP that are dispersed among the many
accounting pronouncements that require fair value measurements.
SFAS 157 retains the exchange price notion in earlier
definitions of fair value, but clarifies that the exchange price
is the price in an orderly transaction between market
participants to sell an asset or liability in the principal or
most advantageous market for the asset or liability. Fair value
is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction
between market participants at the measurement date (an exit
price), as opposed to the price that would be paid to acquire
the asset or received to assume the liability at the measurement
date (an entry price). SFAS 157 expands disclosures about
the use of fair value to measure assets and liabilities in
interim and annual periods subsequent to initial recognition.
The guidance in this Statement applies for derivatives and other
financial instruments to be measured at fair value under
SFAS 133 at initial recognition and in all subsequent
periods. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years although earlier
application is encouraged. We do not expect the application of
SFAS 157 to have a material effect on our financial
position or results of operations.
In July 2006, The FASB issued FIN 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109, Accounting for Income Taxes (FIN 48).
FIN 48, which is the most significant change to accounting
for income taxes since the adoption of the liability approach,
prescribes a comprehensive model for how companies should
recognize, measure, present, and disclose in their financial
statements uncertain tax positions taken or expected to be taken
on a tax return. The interpretation clarifies the accounting for
income taxes by prescribing the minimum recognition threshold a
tax position is required to meet before being recognized in the
financial statements. In addition, FIN 48 clearly scopes
out income taxes from SFAS No. 5, Accounting for
Contingencies. The Interpretation also revises disclosure
requirements to include an annual tabular rollforward of
unrecognized tax benefits. The provisions of FIN 48 are
required to be adopted for fiscal periods beginning after
December 15, 2006. Delek will be required to apply this
Interpretation to all tax positions upon initial adoption with
any cumulative effect adjustment to be recognized as an
adjustment to retained earnings. Management is currently
analyzing the effect of this guidance on Deleks tax
positions.
In March 2006, the EITF reached a consensus on EITF Issue
No. 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (that is, Gross versus Net Presentation) (EITF
06-3), which
allows companies to adopt a policy of presenting taxes in the
income statement on either a gross or net basis. Taxes within
the scope of this EITF would include taxes that are imposed on a
revenue transaction between a seller and a customer, for
example, sales taxes, use taxes, value-added taxes, and some
types of excise taxes. EITF
06-3 is
effective for interim and annual reporting periods beginning
after December 15, 2006.
F-14
Delek US
Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
EITF 06-3
will not impact the method for recording and reporting sales
taxes in the consolidated financial statements as our policy is
to exclude all such taxes from revenue where we are the agent.
Carrying value of inventories consisted of the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
Refinery raw materials and supplies
|
|
$
|
31.5
|
|
|
$
|
28.3
|
|
Refinery work in process
|
|
|
18.7
|
|
|
|
22.5
|
|
Refinery finished goods
|
|
|
22.9
|
|
|
|
16.3
|
|
Retail fuel
|
|
|
14.4
|
|
|
|
12.4
|
|
Retail merchandise
|
|
|
26.7
|
|
|
|
21.8
|
|
Marketing refined products
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Inventories
|
|
$
|
120.8
|
|
|
$
|
101.3
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 and 2005, the excess of replacement
cost (FIFO) over the carrying value (LIFO) of refinery
inventories was $10.2 million and $9.1 million,
respectively. There were reductions of $0.9 million and
$1.0 million to costs of goods sold during 2006 and 2005,
respectively, as a result of the liquidation of LIFO inventories.
One retail merchandise vendor accounted for approximately 69%,
63%, and 45%, of total retail merchandise purchases during the
years ended December 31, 2006, 2005, and 2004,
respectively. Additionally, one retail fuel vendor accounted for
approximately 33%, 51% and 50% of total retail fuel purchases
during the years ended December 31, 2006, 2005, and 2004,
respectively. Seven crude vendors accounted for approximately
97% of total crude purchased during the year ended
December 31, 2006. In 2005, six vendors were used and
accounted for 97% of total crude purchased. In our marketing
segment, one vendor accounted for 96% of petroleum products
during the period from acquisition through December 31,
2006. Delek believes that sources of inventory are available
from suppliers other than from its current vendors; however, the
cost structure of such purchases may be different.
2006
Acquisitions
During the third quarter of 2006, Delek, through its Express
subsidiary, purchased 43 retail fuel and convenience stores
located in northwest Georgia and southeast Tennessee, and
related assets, from FAST Petroleum, Inc. and its related
subsidiaries and investors (Fast acquisition) for approximately
$50.0 million, net of $0.1 million in cash acquired.
Of the 43 stores, Delek owns 32 of the properties and assumed
leases for the remaining 11 properties.
F-15
Delek US
Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
In addition to the consideration paid as acquisition cost for
the Fast Acquisition, Delek incurred and capitalized
$1.0 million in acquisition transaction costs. The
allocation of the aggregate purchase price of the Fast
Acquisition is summarized as follows (in millions):
|
|
|
|
|
Inventory
|
|
$
|
3.9
|
|
Other current assets
|
|
|
0.1
|
|
Fixed assets
|
|
|
39.9
|
|
Goodwill
|
|
|
9.4
|
|
Taxes payable and other liabilities
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
$
|
50.9
|
|
|
|
|
|
|
On July 31, 2006, marketing through its Delek
Marketing & Supply, LP. subsidiary, purchased a variety
of assets related to the oil refining and marketing businesses
of Pride Companies, L.P., Pride Refining, Inc., Pride Marketing
LLC, and Pride Products (Pride acquisition) for the purchase
price of approximately $55.1 million. The purchased assets
included, among other things, two refined petroleum product
terminals located in Abilene and San Angelo, Texas; seven
pipelines; storage tanks; idle oil refinery equipment, including
a Nash unit and other refinery equipment; and the Pride
Companies rights under existing supply contracts.
In addition to the consideration paid as acquisition cost for
the Pride acquisition, marketing incurred and capitalized
$1.3 million in acquisition transaction costs. The
allocation of the aggregate purchase price of the Pride
acquisition is summarized as follows (in millions):
|
|
|
|
|
Other current assets
|
|
$
|
0.7
|
|
Fixed assets
|
|
|
37.9
|
|
Goodwill
|
|
|
7.6
|
|
Intangibles
|
|
|
12.2
|
|
Assumed environmental and asset
retirement liabilities
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
$
|
56.4
|
|
|
|
|
|
|
Delek consolidated the results of the Fast and Pride
acquisitions as of their respective dates of acquisition.
Unaudited pro forma information as if these acquisitions had
occurred as of January 1, 2006 has not been included as it
was deemed not to be material to the results of operations.
2005
Acquisitions
Effective April 29, 2005, Delek acquired certain refinery
and crude oil pipeline assets in Tyler, Texas (collectively the
Refinery). Total consideration paid for Refinery assets totaled
$68.1 million.
In addition to the consideration paid as the acquisition cost
mentioned above for the Refinery, Delek incurred and capitalized
$5.1 million in acquisition transaction costs. The
allocation of the aggregate purchase price of the Refinery
acquisition is summarized as follows (in millions):
|
|
|
|
|
Fixed assets
|
|
$
|
33.9
|
|
Inventory
|
|
|
59.9
|
|
Prepaid inventory and other assets
|
|
|
26.4
|
|
Assumed accounts payable and other
current liabilities
|
|
|
(37.3
|
)
|
Assumed asset retirement
obligations
|
|
|
(1.8
|
)
|
Assumed environmental liabilities
|
|
|
(7.9
|
)
|
|
|
|
|
|
|
|
$
|
73.2
|
|
|
|
|
|
|
F-16
Delek US
Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Delek consolidated the Refinerys results of operations
beginning April 29, 2005. The unaudited pro forma
consolidated results of operations for the years ended
December 31, 2005 and 2004 as if the Refinery acquisition
had occurred on January 1, of each year, respectively, are
as follows (2004 amounts also include the pro forma adjustments
for the WOC acquisition discussed below) (amounts in millions,
except per share information):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
$
|
2,312.2
|
|
|
$
|
1,775.6
|
|
Income before cumulative effect of
change in accounting policy
|
|
$
|
68.7
|
|
|
$
|
16.7
|
|
Net income
|
|
$
|
68.4
|
|
|
$
|
16.7
|
|
Basic and diluted earnings per
share before cumulative effect of change in accounting policy
|
|
$
|
1.74
|
|
|
$
|
0.42
|
|
Basic and diluted earnings per
share
|
|
$
|
1.73
|
|
|
$
|
0.42
|
|
In connection with the purchase of the Refinery, Delek deposited
funds in an escrow account as a condition to closing for
purposes of indemnifying the seller against potential
noncompliance with our obligations under the purchase and sales
agreement. At December 31, 2005, $5.0 million was
being held in escrow. The purchase and sales agreement was
subsequently amended to provide that all remaining escrowed
funds be returned to Delek by the escrow agent. As of
December 31, 2006, no amounts remained escrowed.
Effective December 15, 2005, Delek acquired 21 convenience
stores and 4 undeveloped properties in the Nashville market from
BP Products North America, Inc. (BP Acquisition). Total
consideration paid for the BP Acquisition totaled
$35.5 million.
In addition to the consideration paid as the acquisition cost
mentioned above for the BP Acquisition, Delek incurred and
capitalized $0.9 million in acquisition transaction costs.
The allocation of the aggregate purchase price of the BP
Acquisition is summarized as follows (in millions):
|
|
|
|
|
Fixed assets
|
|
$
|
34.9
|
|
Inventory
|
|
|
1.5
|
|
|
|
|
|
|
|
|
$
|
36.4
|
|
|
|
|
|
|
2004
Acquisitions
On April 30, 2004, Delek completed a stock purchase
agreement with an unrelated party whereby Delek acquired 100% of
the issued and outstanding stock of Williamson Oil Co., Inc.
(WOC), an Alabama corporation, which included operating assets,
working capital and related debt for 100 convenience stores
located primarily in the state of Alabama. Of the 100 stores
acquired, eleven were owned by WOC but leased to and operated by
unrelated third parties. Thus, 89 stores were directly operated
by WOC. The acquisition included two wholly owned subsidiaries
of WOC that provide wholesale distribution of fuel and
merchandise to unrelated third parties and WOC operating stores.
Total consideration paid to the seller in exchange for 100% of
the stock of WOC was $20.7 million.
F-17
Delek US
Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
In addition to the consideration paid as the acquisition cost
mentioned above for WOC, Delek incurred and capitalized
$2.5 million in acquisition transaction costs, of which
$0.1 and $2.4 million was recorded during 2005 and 2004,
respectively. The allocation of the aggregate purchase price of
the WOC acquisition is summarized as follows (in millions):
|
|
|
|
|
Fixed assets
|
|
$
|
58.8
|
|
Inventory
|
|
|
6.9
|
|
Cash
|
|
|
1.0
|
|
Other assets
|
|
|
3.1
|
|
Goodwill
|
|
|
3.7
|
|
Deferred tax liabilities
|
|
|
(8.8
|
)
|
Assumed liabilities
|
|
|
(41.5
|
)
|
|
|
|
|
|
|
|
$
|
23.2
|
|
|
|
|
|
|
Delek has completed its allocation of the purchase price for the
WOC acquisition. During the year ended December 31, 2005,
the final allocation of the purchase price for the WOC
acquisition resulted in net decreases to goodwill of
$0.8 million.
The above acquisitions were accounted for using the purchase
method of accounting, as prescribed in SFAS 141 and the
results of their operations have been included in the
consolidated statements of operations from the dates of
acquisition. The purchase price was allocated to the underlying
assets and liabilities based on their estimated relative fair
values.
The final allocations of the Fast Acquisition and Pride
Acquisition purchase prices are subject to adjustments for a
period not to exceed one year from the consummation date. The
allocation periods are intended to differentiate between amounts
that are determined as a result of the identification and
valuation process required by SFAS 141 for all assets
acquired and liabilities assumed and amounts that are determined
because information that was not previously obtainable becomes
obtainable.
5. Property,
Plant and Equipment
Property, plant and equipment, at cost, consist of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
Land
|
|
$
|
69.7
|
|
|
$
|
58.7
|
|
Building and building improvements
|
|
|
129.7
|
|
|
|
99.7
|
|
Refinery machinery, marketing
equipment and pipelines
|
|
|
135.6
|
|
|
|
31.7
|
|
Retail, including petroleum, store
equipment and other site improvements
|
|
|
117.2
|
|
|
|
96.0
|
|
Refinery turnaround costs
|
|
|
10.0
|
|
|
|
9.0
|
|
Other equi |