FORM 10-K
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, 2007
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OR
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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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7102 Commerce Way
Brentwood, Tennessee
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37027
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(Address of principal executive
offices)
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(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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the common stock held by
non-affiliates as of June 29, 2007 was approximately
$313,884,020, 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 28, 2008, there were 53,668,195 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 2008 Annual
Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission within 120 days after
December 31, 2007, 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
60,000 barrels per day (bpd) high conversion,
moderate complexity, independent refinery in Tyler, Texas. Our
marketing segment sells refined products on a wholesale basis in
west Texas through company-owned and third-party operated
terminals. Our retail segment markets gasoline, diesel, other
refined petroleum products and convenience merchandise through a
network of 497 company-operated retail fuel and convenience
stores located in Alabama, Arkansas, Georgia, Kentucky,
Louisiana, Mississippi, Tennessee and Virginia. We also own a
34.6% minority equity interest in Lion Oil Company, a privately
held Arkansas corporation, which owns and operates a moderate
conversion, independent refinery with a design crude
distillation capacity of 75,000 barrels per day, and other
pipeline and product terminals. The refinery is located in El
Dorado, Arkansas.
Delek US Holdings, Inc. is the sole shareholder of MAPCO
Express, Inc. (Express), MAPCO Fleet, Inc.
(Fleet), Delek Refining, Inc.
(Refining), Delek Finance, Inc.
(Finance) and Delek Marketing & Supply,
Inc. (Marketing). We are a Delaware corporation
formed in connection with our acquisition in May 2001 of 198
retail fuel and convenience stores from a subsidiary of The
Williams Companies. Since then, we have completed several other
acquisitions of retail fuel and convenience stores. In April
2005, we expanded our scope of operations to include
complementary petroleum refining and wholesale and distribution
businesses by acquiring the Tyler refinery. We initiated
operations of our marketing segment in August 2006 with the
purchase of assets from Pride Companies LP and affiliates.
Delek and Express were incorporated during April 2001 in the
State of Delaware. Fleet, Refining, Finance, and Marketing were
incorporated in the State of Delaware during January 2004,
February 2005, April 2005 and June 2006, respectively.
We are a controlled company under the rules and regulations of
the New York Stock Exchange where our shares are traded under
the symbol DK. As of December 31, 2007,
approximately 73.4% of our outstanding shares were beneficially
owned by Delek Group Ltd. (Delek Group), a
conglomerate that is domiciled and publicly traded in Israel.
Delek Group has significant interests in fuel supply businesses
and is controlled indirectly by Mr. Itshak Sharon
(Tshuva).
1
Acquisitions
We have rapidly integrated our refinery acquisition, six
convenience store chain acquisitions, a pipeline and terminal
acquisition and several smaller acquisitions since our formation
in May 2001. Our principal acquisitions since inception are
summarized below:
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Date
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Acquired Company/Assets
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Acquired From
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Approximate Purchase 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, and a wholesale fuel and merchandise operation
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Williamson Oil Co., Inc.
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$19.8 million, plus assumed debt of $28.6 million
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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 (Tyler refinery)
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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
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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
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Fast Petroleum, Inc. and affiliates
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$50.0 million, including $0.1 million of cash acquired
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August 2006
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Refined petroleum product terminals, seven pipelines, storage
tanks, idle oil refinery equipment and rights under supply
contracts
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Pride Companies, L.P. and affiliates
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$55.1 million
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April 2007
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107 retail fuel and convenience stores located in northern
Georgia and southeastern Tennessee
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Calfee Company of Dalton, Inc. and affiliates
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$71.8 million, including $0.1 million of cash acquired
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August and September 2007
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34.6% equity ownership in Lion Oil Company, an owner and
operator of a refinery in El Dorado, Arkansas and other pipeline
and product terminals
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TransMontaigne, Inc. and other shareholders of Lion Oil
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$88.2 million and 1,916,667 unregistered shares of our common
stock, which are subject to registration rights
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(1) |
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Excludes transaction costs |
2
We expect to continue to review acquisition and internal growth
opportunities in the refining, marketing, retail fuel and
convenience store markets, as well as opportunities to acquire
assets related to distribution logistics, such as pipelines,
terminals and fuel storage facilities. Please see Item 1A,
Risk Factors, of this Annual Report on
Form 10-K
as well as our other filings with the SEC for a description of
the risks and uncertainties that are inherent in our acquisition
strategy.
Information
About Our Segments
We prepare segment information 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 11, Segment Data, of our
consolidated financial statements included in Item 8,
Financial Statements and Supplementary Data, of this Annual
Report on
Form 10-K.
Refining
Segment
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
Tyler, Texas, and is the only supplier of a full range of
refined petroleum products within a radius of approximately
115 miles.
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 fluid catalytic cracking (FCC)
unit and a delayed coker, enabling us to produce approximately
91% light products, including primarily a full range of
gasoline, diesel, jet fuels, liquefied petroleum gas
(LPG) and natural gas liquids (NGLs) and
has a Nelson complexity of 8.9. For 2007, gasoline accounted for
approximately 54.3% and diesel and jet fuels accounted for
approximately 36.6% of the Tyler refinerys fiscal
production.
As the only full range product supplier in east Texas, our
location is a natural advantage over other suppliers. The
transportation cost of moving product into Tyler stands as a
barrier for competitors. We see this differential as a margin
enhancement.
Fuel Customers. We have the advantage of being
able to deliver nearly all of our gasoline and diesel fuel
production into the local market using our terminal at the
refinery. Our customers generally 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 accounted for
$998.6 million, or 58.9%, of net sales for the refining
segment in 2007. Our customers include ExxonMobil, Valero
Marketing and Supply, Murphy Oil USA, Truman Arnold and Chevron,
among others. Although none of our customers accounted for 10%
or more of our consolidated net sales in 2007, ExxonMobil
accounted for approximately 13.2% of net sales for the refining
segment in 2007. Our product pipeline sales are specific to
Chevron and represent 6.2% of the refining segments net
sales. Additionally, we have a contract with the
U.S. government to supply jet fuel (JP8) to
various military facilities that expires in March 31, 2008.
The U.S. government solicits competitive bids for this
contract annually. Sales under this contract totaled
$35.8 million, or 2.1%, of the refining segments
2007 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 an 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 is designed to mainly process light, sweet
crude oil, which is a higher quality, more expensive crude oil
than heavier and more 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
3
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 2007:
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Percentage of
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Source
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Crude Oil Received
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East Texas crude oil
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52.1
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%
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West Texas intermediate crude oil
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38.4
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%
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West Texas sour crude oil
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7.7
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%
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Foreign sweet and other domestic crude oil
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1.8
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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 summary of
our production output for 2007 follows:
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Gasoline. Gasoline accounted for approximately
54.3% of our refinerys production. The refinery produces
two grades of conventional gasoline (premium 93
octane and regular), as well as aviation gasoline. Effective
January 1, 2008, we began offering renewable
E-10
products which contain 90% conventional fuel and 10% ethanol.
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Diesel/jet fuels. Diesel and jet fuel products
accounted for approximately 36.6% of our refinerys
production. Diesel and jet fuel products include military
specification JP8, commercial jet fuel, low sulfur diesel, and
ultra low sulfur diesel. Low sulfur diesel was replaced by ultra
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 fiscal years. The data for periods prior to April 29,
2005, or the acquisition date for the Tyler refinery and related
assets, has been derived from the internal financial records of
the previous owner.
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Period from
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April 29
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Year Ended
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Year Ended
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Through
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Year Ended
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December 31, 2007
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December 31, 2006
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December 31,
2005(1)
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December 31,
2005(2)
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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 (average barrels per day):
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Crude:
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Light
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49,711
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88.5
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%
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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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Sour
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4,149
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7.4
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Total crude
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53,860
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95.9
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55,998
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96.3
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51,906
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97.7
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48,251
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96.8
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Other blendstocks
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2,303
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4.1
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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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Total refinery throughput
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56,163
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100.0
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%
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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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Products produced (average barrels per day):
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Gasoline
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29,660
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54.3
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%
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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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Diesel/jet
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20,010
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36.6
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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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Petrochemicals, LPG, NGLs
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2,142
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3.9
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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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Other
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2,848
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5.2
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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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Total production
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54,660
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100.0
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%
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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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(1) |
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Effective April 29, 2005, we completed the acquisition of
the Tyler refinery and related assets. Information includes
throughput and production data for the 247 day period in
fiscal 2005 that we operated the refinery. |
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(2) |
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Information includes throughput and production data for the full
year 2005, including pre-acquisition and post-acquisition
periods, and reflects reductions resulting from a turnaround
conducted by the previous owner during the first quarter of 2005
and a three-week turnaround conducted by us in the fourth
quarter of 2005. |
4
Profitability Improvements. In 2007, Delek
commenced work on three low complexity projects at the Tyler
refinery which were identified in a 2006 feasibility study. This
study identified these projects as providing estimated potential
returns on investment of 50%. The projects have been designed to
provide incremental refining segment contribution margin by
allowing the processing of a lower cost (heavier, more sour)
crude slate, as well as to reduce current operational
bottlenecks in certain processing units. We expect these
projects to be substantially completed in the fourth quarter of
2008 with the associated upgrade of our FCC reactor to be
completed by the end of the first quarter in 2009. We may
experience increases in the cost or delay in the completion date
necessary to obtain equipment required to complete these
projects, as is a possibility with any capital project.
Additionally, the scope of the work, cost of qualified employees
and contractor labor expense related to the installation of
equipment are all at risk of increases. We currently estimate
the cost of these projects to total $65.0 million which is
an increase of $10.0 million over our previous estimate of
$55.0 million.
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
Diesel Hydrotreater 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. The second phase of the Clean
Fuels program is the installation of a Gasoline Hydrotreater,
which we anticipate will be completed in the second quarter of
2008.
Storage Capacity. Storage capacity at the
Tyler refinery, including tanks along our pipeline, totals
approximately 2.5 million barrels, consisting of
approximately 1.1 million barrels of crude oil storage and
1.4 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 the east Texas crude oil processed in our refinery
is delivered to us by truck or through our company-owned
pipeline and a 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 the market,
as opposed to purchasing from a market or trade location. 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 our 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 available, at competitive
prices has been a significant competitive supply cost advantage
at the refinery. 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 six-inch crude oil lines that
transport 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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Atlas Tank Farm:
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One 145,000 barrel tank and one 300,000 barrel tank
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Nettleton Station:
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Five 54,000 barrel tank
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Bradford Station:
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One 54,000 barrel tank and one 9,000 barrel tank
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ARP Station:
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Two 54,000 barrel tanks
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The vast majority of our transportation fuels and other products
are sold by 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. Capabilities at our rack
include the ability to simultaneously blend finished components
prior to loading trucks. LPG, NGLs and clarified slurry oil are
sold by truck from dedicated loading facilities at the refinery.
Effective January 1, 2008, we also began selling renewable
E-10 products at our truck rack. We also have a pipeline
connection for the sale of propane into a facility owned by
Texas Eastman. We sell petroleum coke primarily by rail from the
refinery, with occasional truck loading for specialty or excess
product. All of our ethanol is currently transported to the
refinery by truck. Ethanol tank capacity is currently limited to
7,700 barrels.
5
The remainder of our transportation fuels are sold by 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 and
multinational oil companies engaged in many segments of the
petroleum business, including exploration, production,
transportation, refining, marketing and retail fuel and
convenience stores. Our principal competitors are Texas Gulf
Coast refiners, product terminal operators in the east Texas
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
competitors operate refineries that are larger and more complex
and in different geographical regions than ours, and, as a
result, could have lower per barrel costs, higher margins per
barrel and throughput or utilization rates which are better than
us. We have no crude oil reserves and are not engaged in
exploration or production. We believe; however, our geographic
location provides an inherent advantage because our competitors
have an inherent transportation cost. Our location allows for a
realized margin that is favorable in comparison to the reported
U.S. Gulf Coast 5-3-2 crack spread.
Marketing
Segment
Formed initially in connection with the acquisition of the
assets of the Pride Companies, L.P. and its affiliates effective
August 1, 2006, the marketing segment furthered 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. To grow our presence in this segment,
we intend to implement the following initiatives:
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further develop and leverage our existing marketing and
distribution capabilities and experience using the assets
acquired from Pride Companies, L.P.;
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more fully utilize our favorable supply contract with Magellan
Asset Services LP (Magellan);
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develop exchange opportunities between our segments; and
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expand our base of operations through acquisitions.
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Our marketing segment generates net sales through five
integrated activities:
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i.
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transportation of petroleum products through pipelines and
company-owned truck loading terminals in Abilene and
San Angelo, Texas;
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ii.
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direct sales of petroleum products to third parties through
truck racks in San Angelo, Abilene, Aledo, Odessa and Big
Springs, Texas and other terminals throughout the Magellan Orion
pipeline system;
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iii.
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supplying product to exchange partners at the Abilene,
San Angelo and Aledo, Texas terminals;
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iv.
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marketing services provided to our Tyler refinery for both
wholesale marketing and contract sales; and
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v.
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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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Petroleum Product Marketing Terminals. The
marketing segment markets its products through three
company-owned terminals in San Angelo, Abilene and Tyler,
Texas and third-party terminal 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, 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, Texas Station (a Magellan tie-in location) and
our terminals in Abilene and San Angelo.
6
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 from Magellan Pipeline Company, L.P. custody
transfer point at Tye Station to the Abilene terminal;
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13.5 mile, four-inch pipeline from the Abilene terminal to
the Magellan tie-in;
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76.5 mile, six-inch pipeline system from the Magellan
tie-in to San Angelo; and
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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 for the Abilene terminal for sales and exchange at
Abilene and San Angelo (the Abilene Agreement).
This agreement, which currently runs through December 31,
2009, may be renewed for four additional two-year terms by us.
Additionally, we can purchase up to an additional 7,000 bpd
of refined products for the Magellan pipeline system in East
Houston under a separate contract that expires in 2015. While
the primary purpose of this second contract is to supply
products at terminals in Aledo and Odessa, Texas, the agreement
allows us to redirect products to other terminals along the
Magellan pipeline. In 2007, Magellan was the sole supplier of
our marketing segments petroleum products under these two
supply agreements. Under the terms of the Abilene Agreement with
Magellan, they are not permitted to move additional barrels into
the third-party terminals we operate. They do not compete in
these locations. We were notified on February 22, 2008,
that Magellans rights and obligations under the Abilene
Agreement will be assigned to Northville Product Services, L.P.
(Northville) effective March 1, 2008. Our
consent is required for Magellan to assign one of the agreements
integral to the Abilene contract. As of February 29, 2008,
we had an agreement in principle with Magellan and Northville to
consent to the assignment under certain terms and conditions.
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, among
others, Flying J, Murphy Oil, ExxonMobil, and Susser Petroleum.
None of our customers in the marketing segment accounted for 10%
or more of our consolidated or marketing segment net sales in
2007. Two customers accounted for more than 10% of our marketing
segment net sales and the top ten customers accounted for just
over half of the marketing segment net sales in 2007. Pursuant
to an arms length services agreement, our marketing
segment also provides marketing and sales services for customers
of the Tyler refinery. In return for these services to customers
of the Tyler refinery, the marketing segment receives a service
fee based on the number of gallons sold from the refining
segment plus a sharing of marketing margin above predetermined
thresholds. Net fees received from the refining segment under
this arrangement were $14.7 million and $3.4 million
in 2007 and 2006, respectively, and were eliminated 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, Texas. While we have direct
competition from an independent refinery that markets through
another terminal in the Abilene market, there are no competitive
fuel loading terminals within approximately 90 miles of our
San Angelo terminal.
Retail
Segment
As of December 31, 2007, we operated 497 retail fuel and
convenience stores, which are located in Alabama, Arkansas,
Georgia, Kentucky, Louisiana, Mississippi, Tennessee and
Virginia, primarily under the MAPCO
Express®,
MAPCO
Mart®,
East
Coast®,
Discount Food
Marttm,
Fast Food and
Fueltm
and Favorite
Markets®
brands. In July 2006, we purchased 43 stores from Fast
Petroleum, Inc. and affiliates that strengthened our presence
7
in key markets located in southeastern Tennessee and northern
Georgia and we also re-imaged all stores purchased from BP
Products North America, Inc. (BP) in December 2005.
In April 2007, we purchased 107 stores from Calfee Company of
Dalton, Inc. and affiliates. This purchase further solidified
our presence in the southeastern Tennessee and northern Georgia
markets. In 2007, we completed three store raze and
rebuilds and retrofitted one existing store using our next
generation, MAPCO Mart concept. The MAPCO Mart store with
GrilleMarx®
is designed to
offer premium amenities and products, such as a proprietary
made-to-order food program with bi-lingual touch-screen order
machines, 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. Following these
raze and rebuilds and retrofits which are located in
our Nashville market, two new stores were opened in 2007 in
Alabama using our MAPCO Mart brand. We plan to continue our
raze and rebuild program in these and other of our
markets and will utilize the upscale imagery of these next
generation stores to continue re-imaging existing locations in
2008.
We believe that we have established strong brand recognition and
market presence in the major retail markets in which we operate.
Approximately 72% of our stores are concentrated in Tennessee
and Alabama. In terms of number of retail fuel and convenience
stores, we rank in the top-five in the major markets of
Nashville, Chattanooga, Memphis and northern Alabama.
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, we operate a high concentration of sites in similar
geographic regions to promote operational efficiencies and we
employ a localized marketing strategy that focuses on the
demographics surrounding each store and customizing product mix
and promotional strategies to meet the needs of customers in
those demographics. Our business model also incorporates a
strong focus on controlling operating expenses and loss
prevention, which continues to be an important element in the
successful development of our retail segment.
Company-Operated Stores. Of our sites,
approximately 60% 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 2,000 or more 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 stores include well recognized national
branded quick service food chains such as
Subway®,
we have recently shifted our focus in food service to providing
proprietary, made-to-order food offerings under our
GrilleMarx®
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
GrilleMarx®
program gives us significant flexibility in site
selection, the ability to control product consistency and to
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 introduced our own
MAPCO®
private label products in the majority of our locations for soft
drink, sandwich, water and automotive categories which provide
points of differentiation and enhanced margins. In 2007, we
introduced candy and energy drinks under our
MAPCO®
private label program. We intend to continue to introduce new
private label product offerings using our
MAPCO®
brand.
All but three of our locations offer both retail fuel and
convenience stores. The majority of our locations have four to
five 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.
Effective January 1, 2008, we initiated blending of ethanol
in our finished gasoline products, allowing customers access to
renewable
E-10
products.
8
Fuel Operations. For 2007, 2006 and 2005, our
net fuel sales were 76.8%, 76.3%, and 73.4%, respectively, of
total net sales for our retail segment. The following table
highlights certain information regarding our fuel operations for
these years:
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Year Ended December 31,
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2007
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2006
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2005
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Number of stores (end of period)
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497
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394
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349
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Average number of stores (during period)
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470
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369
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330
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Retail fuel sales (thousands of gallons)
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474,154
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396,867
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341,335
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Average retail gallons per average number of stores (thousands
of gallons)
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1,009
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1,075
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1,034
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Retail fuel margin (cents per gallon)
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$
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0.144
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$
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0.145
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$
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0.165
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We currently operate a fleet of delivery trucks that deliver
approximately half of the fuel sold at our retail fuel and
convenience stores. We purchased approximately 29% of the fuel
sold at our retail fuel and convenience stores in 2007 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, Marathon and
Chevron, and purchase the remainder 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 2007, 2006 and
2005, our merchandise sales were 23.2%, 23.7%, and 26.6%,
respectively, of total net sales for our retail segment. The
following table highlights certain information regarding our
merchandise operations for 2007, 2006 and 2005:
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Year Ended December 31,
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2007
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2006
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2005
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Comparable store merchandise sales change (year over year)
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1.1
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%
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2.9
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%
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1.4
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%
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Merchandise margin
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31.6
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%
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30.6
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%
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29.8
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%
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Merchandise profit as a percentage of total margin
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64.9
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%
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63.0
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%
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60.1
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%
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We purchased approximately 54% of our general merchandise,
including most tobacco products and grocery items, for 2007 from
a single wholesale grocer, McLane Company, Inc.
(McLane), a wholly-owned subsidiary of Berkshire
Hathaway. Our contract with McLane expired on December 31,
2007. Beginning December 31, 2007, we changed our grocery
supplier to Core-Mark International, Inc.
(Core-Mark). We entered into a contract with
Core-Mark that expires at the end of 2010, but may be renewed at
our option through the end of 2013. Our other major suppliers
include
Coca-Cola®,
Pepsi-Cola®
and Frito
Lay®.
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 2007, we
completed the integration of BPs interface system for
customer transactions. We also began implementation on a project
for scanning in merchandise as it is received at our
company-operated stores. We expect to complete this scanning in
project in 2008. 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.
In 2007, we selected Fuel Quests Fuel Management System to
enhance our management of fuel inventory and fuel purchasing. We
anticipate that the implementation of this software will provide
efficiencies across the multiple processes we currently use. We
expect this implementation to be completed in 2008.
Most of our stores are connected to a high speed data network
and provide near 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 us 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
9
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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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-Operated Stores. Our retail segment
also includes a wholesale fuel distribution network that
supplies more than 60 dealer-operated retail locations. In 2007,
our dealer net sales were approximately 4.7% of net sales for
our retail segment. Our business 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
the 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
competitive factors affecting us include location, ease of
access, pricing, timely deliveries, product and service
selections, customer service, fuel brands, store appearance,
cleanliness and safety. We believe we are able to 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. Our retail segment strategy continues to center
on operating a high concentration of sites in a similar
geographic region to promote operational efficiencies. In
addition, we use proprietary information technology that allows
us to competitively manage our fuel sales and margin.
Equity
Investment
We also own a 34.6% minority equity interest in Lion Oil Company
(Lion Oil), a privately held Arkansas corporation,
which owns and operates a moderate conversion, independent
refinery with a design crude distillation capacity of
75,000 barrels per day, three crude oil pipelines and
refined product terminals in Memphis and Nashville, Tennessee.
The refinery is located in El Dorado, Arkansas. The El Dorado
refinery has the ability to produce and sell all consumer grades
of gasoline, distillates, propanes, solvents, high sulfur
diesel, low sulfur diesel, dyed low sulfur diesel, asphalt and
protective coatings, specialty asphalt products and liquefied
petroleum gas.
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 internally and by
third parties subsequent to our purchase of the Tyler refinery,
we recorded a liability of approximately $8.2 million as of
December 31, 2007 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 3 and 13 to the
consolidated financial statements included in Item 8,
Financial Statements and Supplementary Data, in this Annual
Report on
10
Form 10-K.
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 $1.6 million of the liability is expected to
be expended by the end of 2008 with the remaining balance of
$6.6 million expendable by 2022.
In October 2007, the Texas Commission on Environmental Quality
(TCEQ) approved an Agreed Order in which the Tyler
refinery resolved alleged violations of air rules dating back to
the acquisition of the refinery. The Agreed Order required the
refinery to pay a penalty and fund a Supplemental Environmental
Project for which we had previously reserved adequate amounts.
We are in discussions with the U.S. Environmental
Protection Agency (EPA) and the U.S. Department
of Justice (DOJ), concerning some other enforcement
actions; the outcome of which we believe will not result in a
material adverse effect on our business, financial condition or
results of operations. 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 received approval to
meet these requirements through the end of 2007 by selling
diesel that meets the criteria in an Alternate Emissions
Reduction Plan on file with the TCEQ and through the use of
approved additives thereafter.
The EPA has issued final rules for gasoline formulation that
will require further reductions in benzene content by 2011. We
are in the process of identifying and evaluating options for
complying with this requirement. The Energy Policy Act of 2005
requires increasing amounts of renewable fuel be incorporated
into the gasoline pool through 2012. Under final rules
implementing this Act (the Renewable Fuel Standard), the Tyler
refinery is classified as a small refinery exempt from renewable
fuel standards through 2010. Although temporarily exempt from
this rule, the Tyler refinery began supplying an
E-10
gasoline-ethanol blend effective January 1, 2008. The Energy
Independence and Security Act of 2007 requires increasing
amounts of renewable fuel compared with the Energy Policy Act of
2005. The EPA has not yet promulgated implementing rules for the
2007 Act so it is not yet possible to determine what the Tyler
compliance requirement will be.
The Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), also known as Superfund,
imposes liability, without regard to fault or the legality of
the original conduct, on certain classes of persons who are
considered to be responsible for the release of a
hazardous substance into the environment. These
persons include the owner or operator of the disposal site or
sites where the release occurred and companies that disposed or
arranged for the disposal of the hazardous substances. Under
CERCLA, such persons may be subject to joint and several
liability 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
11
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.
During 2007, the Department of Homeland Security
(DHS) promulgated Chemical Facility Anti-Terrorism
Standards to regulate the security of high risk
chemical facilities. In compliance with this rule, we submitted
certain required information concerning our Tyler refinery and
Abilene and San Angelo terminals to the DHS. If the DHS
determines that any of these facilities represents a high risk
facility, we will be required to prepare a Security
Vulnerability Analysis and possibly develop and implement Site
Security Plans required by the standard. We do not believe the
outcome will have a material effect on our business.
In June 2007, the U.S. Department of Labors
Occupational Safety & Health Administration
(OSHA) announced it was implementing a National
Emphasis Program addressing workplace hazards at petroleum
refineries. Under this program, OSHA expects to conduct
inspections of process safety management programs over the next
two years at approximately 80 refineries nationwide that are
located in the states that do not have their own OSHA program.
Texas does not have a state OSHA program. On February 19,
2008, OSHA initiated an inspection at our Tyler, Texas 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.
Employees
As of December 31, 2007, we had 3,708 employees, of
which 271 were employed in our refining segment, 12 were
employed in our marketing segment and 3,425 were employed either
full or part-time in our retail segment. As of December 31,
2007, 149 operations and maintenance hourly employees and 27
truck drivers at the refinery were represented by the 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 which
run through January 2009. None of our employees in our marketing
or retail segments or in our corporate office are represented by
a union. We consider our relations with our employees to be
satisfactory.
Trade
Names, Service Marks and Trademarks
We regard our intellectual property as being an important factor
in the marketing of goods and services in our retail segment. We
own, have registered or applied for registration of a variety of
trade names, service marks and trademarks for use in our
business. We own the following trademark registrations issued by
the United States Patent and Trademark Office:
MAPCO®,
MAPCO
MART®,
MAPCO EXPRESS &
Design®,
EAST
COAST®,
GRILLE
MARX®
CAFÉ EXPRESS FINEST COFFEE IN TOWN MAPCO &
Design®,
GUARANTEED RIGHT! MAPCO EXPRESS &
Design®,
FAST FOOD AND
FUELtm,
FLEET
ADVANTAGE®
and DELTA
EXPRESS®.
While we do not already have and have not applied for a
federally registered trademark for DISCOUNT FOOD
MARTtm,
we do claim common law trademark rights in this 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
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file or furnish such material to the SEC. We also post our
corporate governance guidelines, code of business conduct and
ethics and the charters of our board of directors
committees in the same website location. Our governance
documents are available in print to any stockholder that makes a
written request to Kent Thomas, Secretary, Delek US Holdings,
Inc., 7102 Commerce Way, Brentwood, TN 37027. In accordance with
Section 303A.12(a) of the New York Stock Exchange Listed
Company Manual, we submitted our chief executive officers
certification to the New York Stock Exchange in 2007.
Exhibits 31.1 and 31.2 of this Annual Report on
Form 10-K
contain certifications of our chief executive officer and chief
financial officer 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 in Tyler, Texas and own
a non-controlling interest in an unaffiliated corporation that
owns another independent refinery in El Dorado, Arkansas which
may not be able to withstand volatile market conditions, compete
on the basis of price or obtain sufficient quantities of crude
oil in times of shortage to the same extent as integrated,
multinational oil companies.
We compete with a broad range of companies in our refining and
petroleum product marketing operations. Many of these
competitors are integrated, multinational oil companies that are
substantially larger than we are. Because of their diversity,
integration of operations, larger capitalization, larger and
more complex refineries and greater resources, these companies
may be better able to withstand volatile market conditions
relating to crude oil and refined product pricing, to compete on
the basis of price and to obtain crude oil in times of shortage.
We 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
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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.
In the future, we may incur substantial expenditures for
investigation or remediation of contamination that has not been
discovered at our current or former locations or locations that
we may acquire. In addition, new legal requirements, new
interpretations of existing legal requirements, increased
legislative activity and governmental enforcement and other
developments could require us to make additional unforeseen
expenditures. Companies in the petroleum industry, such as us,
are often the target of activist and regulatory activity
regarding pricing, safety, environmental compliance and other
business practices which could result in price controls, fines,
increased taxes or other actions affecting the conduct of our
business. For example, consumer activists are lobbying various
authorities to enact laws and regulations mandating the use of
temperature compensation devices for fuel dispensed at our
retail stores. In addition, the United States Supreme Court
decision in Massachusetts v. Environmental Protection
Agency, 549
U.S. No. 05-1120,
slip op. at 1 (U.S. April 2, 2007) may prompt
further legislative and regulatory activity in the realm of
greenhouse gas emissions and climate change. Environmental
regulation is becoming more stringent and new environmental laws
and regulations are continuously being enacted or proposed.
While it is impractical to predict the impact that potential
regulatory and activist activity may have, such future activity
may result in increased costs to operate and maintain our
facilities as well as increased capital outlays to improve our
facilities. Such future activity could also adversely affect our
ability to expand production, result in damaging publicity about
us, or reduce demand for our products. Our need to incur costs
associated with complying with any resulting 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.
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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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domestic 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;
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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
such as ethanol;
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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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U.S. government regulations.
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Our
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 cause our
profits to decline. If the prices for which we can sell our
refined products fail to keep pace with rising prices of crude
oil and other feedstocks, our results of operations will be
negatively impacted. This is especially true for
non-transportation fuel products such as asphalt, butane, coke,
propane and slurry whose prices do not typically correlate to
fluctuations in the price of crude oil.
Increases in the price of crude oil and other feedstocks could
also result in significant increases in the retail price of
transportation fuel products, higher credit card expenses on
retail fuel sales and in lower retail fuel gross margin per
gallon. Increases in the retail price of transportation fuel
products could also diminish consumer demand for fuel and lead
to lower retail fuel sales. In addition, the volatility in costs
of fuel, principally natural gas, and other utility services,
principally electricity, used by our Tyler refinery and other
operations affect our operating costs.
Feedstock, fuel and utility prices have been, and will continue
to be, affected by factors that are beyond our control, such as
supply and demand and regulation 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 materially impact our refining gross profits, fuel
gallon volume, fuel gross profit and overall customer traffic,
which in turn would adversely impact our merchandise sales.
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 refining
inventory is valued at the lower of cost or market value under
the last-in,
first-out (LIFO) inventory valuation methodology, we
would record a write-down
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of inventory and a non-cash charge to cost of sales if the
market value of our inventory were to decline to an amount less
than our LIFO basis.
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 8%, 9% and
10% of total net sales of our retail segment for the years ended
December 31, 2007, 2006 and 2005, respectively. Significant
increases in wholesale cigarette costs, increased taxes on
tobacco products (such as the July 2007, $0.10 per pack tax
increase in the state of Tennessee), 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 any additional cost increases associated with these
products 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 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, three 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.
Increased
consumption of renewable fuels could lead to a decrease in fuel
prices and/or a reduction in demand for refined
fuels.
Regulatory initiatives have caused an increase in the
consumption of renewable fuels such as ethanol. In the future,
renewable fuels may continue to be blended with, or may replace,
refined fuels. Such increased use of renewable fuels may result
in an increase in fuel supply and corresponding decrease in fuel
prices. Increased use of renewable fuels may also result in a
decrease in demand for refined fuels. A significant decrease in
fuel prices or refined fuel demand could have an adverse impact
on our financial results.
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
16
sales and the value of our assets to decline and have a material
adverse effect on our business, financial condition and results
of operations.
We may
not be able to successfully execute our strategy of growth
through acquisitions.
A significant part of our growth strategy is to acquire assets
such as refineries, pipelines, terminals, and retail fuel and
convenience stores that complement our existing sites or broaden
our geographic presence. If attractive opportunities arise, we
may also acquire assets in new lines of business that are
complementary to our existing businesses. Through nine major
transactions and several smaller transactions spanning from our
inception in 2001 through December 31, 2007, we acquired
our refinery and refined products terminals in Tyler and a
minority equity interest in the unaffiliated corporation that
owns the El Dorado refinery, we acquired approximately 500
retail fuel and convenience stores and we developed our
wholesale fuel business. 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 usually compete with others to acquire assets, which
competition may increase, and, any level of competition could
result in decreased availability or increased prices for
acquisition candidates;
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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 reporting obligations,
internal controls and other accounting requirements with respect
to any business we acquire, which may prevent or negatively
affect the valuation of some acquisitions we might otherwise
deem favorable or increase our acquisition costs.
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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
refining, pipeline and terminal assets, retail fuel and
convenience stores, or other assets;
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acquired retail fuel and convenience stores, refineries,
pipelines, terminals 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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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, and in August 2007, we acquired
a non-controlling interest in an unaffiliated corporation that
owns a refinery located in El Dorado, Arkansas. Prior to the
acquisition of the Tyler refinery in 2005, we were not involved
in refining operations. As a result of our 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 Tyler refinery.
Prior to our purchase of the Tyler 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 internally and by third parties subsequent
to our purchase of the Tyler refinery, we recorded an
environmental liability of approximately $8.2 million as of
December 31, 2007 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 site
contamination, new environmental regulations and prior
non-compliance with air emission regulations.
In the future, we may incur substantial expenditures for
investigation or remediation of contamination that has not been
discovered at our current or former locations or locations that
we may acquire. In addition, new legal requirements, new
interpretations of existing legal requirements, increased
legislative activity and governmental enforcement and other
developments could require us to make additional unforeseen
expenditures. We anticipate that compliance with new
regulations, including lowering the permitted level of sulfur in
gasoline, will require us to spend approximately
$42.0 million in capital costs in 2008. In October 2007,
the TCEQ approved an Agreed Order in which the Tyler refinery
resolved alleged violations of air rules dating back to the
acquisition of the refinery. The Agreed Order required the
refinery to pay a penalty and fund a Supplemental Environmental
Project for which we had previously reserved adequate amounts.
We are also in discussions with the EPA and the DOJ, concerning
some other enforcement actions; the outcome of which we believe
will not result in a material adverse effect on our business,
financial condition or results of operations. However, a
settlement with the EPA could result in additional capital
expenditures and potential penalties that could have a material
adverse effect on our business, financial condition and results
of operations.
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We
could incur substantial costs or disruptions in our business if
we cannot obtain or maintain necessary permits and
authorizations or otherwise comply with health, safety,
environmental and other laws and regulations.
Our operations require numerous permits and authorizations under
various laws and regulations. These authorizations and permits
are subject to revocation, renewal or modification and can
require operational changes to limit impacts or potential
impacts on the environment
and/or
health and safety. A violation of authorization or permit
conditions or other legal or regulatory requirements could
result in substantial fines, criminal sanctions, permit
revocations, injunctions,
and/or
facility shutdowns. In addition, major modifications of our
operations could require modifications to our existing permits
or upgrades to our existing pollution control equipment. Any or
all of these matters could have a negative effect on our
business, results of operations and cash flows.
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 Tyler refinery.
Our Tyler refinery processes primarily light sweet crude oils as
opposed to light to medium sour crude oils. 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 Tyler 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.
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
or weather-related 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. The occurrence of any of these events
could result in production and distribution difficulties and
disruptions, environmental pollution, personal injury or death
and other damage to our properties and the properties of others.
In addition, the Tyler refinery is located in a populated area.
Any release of hazardous material or catastrophic event could
affect our employees and contractors at the refinery as well as
persons outside the refinery grounds. In the event that personal
injuries or deaths result from such events, we would likely
incur substantial legal costs and liabilities. The extent of
these costs and liabilities could exceed the limits of our
available insurance. As a result, any such event could have a
material adverse effect on our business, results of operations
and cash flows.
We are
particularly vulnerable to disruptions to our refining
interests, because our refining interests are concentrated in
two facilities.
Our refining interests consist of the Tyler refinery and our
minority equity interest in the unaffiliated corporation that
owns the El Dorado refinery (collectively our refining
interests.) Because our refining interests are
concentrated in only two facilities, significant disruptions at
either facility, could have a material adverse effect on our
business, financial condition or results of operations.
Interruptions
in the supply and delivery of crude oil may affect our refining
interests and limitations in systems for the delivery of crude
oil may inhibit the growth of our refining
interests.
Our refining interests receive substantially all of their crude
oil from third parties. We could experience an interruption of
supply and delivery, or an increased cost of receiving crude
oil, if the ability of these third parties 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 system of delivery of crude oil could have a
material adverse effect on our business, financial condition or
results of operations.
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Moreover, limitations in deliver capacity may not allow our
refining interests to draw sufficient crude oil to support
increases in refining output. In order to materially increase
refining output, existing crude delivery systems may require
upgrades or supplementation, which may require substantial
additional capital expenditures.
Our
Tyler refinery has only limited access to an outbound pipeline,
which we do not own, for distribution of our refined petroleum
products.
For 2007, approximately 93.8% of our refinery sales volume in
Tyler was completed through a rack system located at the
refinery. Unlike other refiners, we do not own, and have limited
access to, an outbound pipeline for distribution of our refinery
products to our Tyler customers. Our lack of access to an
outbound pipeline may undermine our ability to attract new
customers for our refined petroleum products or increase sales
of our refinery products.
From
time to time, our cash needs may exceed our internally generated
cash flow, and our business could be materially and adversely
affected if we are not able to obtain the necessary funds from
financing activities.
We have significant short-term cash needs to satisfy working
capital requirements such as crude oil purchases which fluctuate
with the pricing and sourcing of crude oil. We rely in part on
our ability to borrow to collateralize or purchase crude oil for
our Tyler 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 the Tyler refinery at full capacity. Our failure
to operate the Tyler refinery at full capacity could have a
material adverse effect on our business, financial condition and
results of operations. We also have significant long-term needs
for cash, including those to support our expansion and upgrade
plans, as well as for regulatory compliance.
If credit markets tighten, it may become more difficult to
obtain cash from third party sources. If we cannot generate cash
flow or otherwise secure sufficient liquidity to support our
short-term and long-term capital requirements, we may not be
able to comply with regulatory deadlines or pursue our business
strategies, in which case our operations may not perform as well
as we currently expect.
Changes
in our credit profile could affect our relationships with our
suppliers, which could have a material adverse effect on our
liquidity and our ability to operate the Tyler refinery at full
capacity.
Changes in our credit profile could affect the way crude oil
suppliers view our ability to make payments. As a result,
suppliers could shorten the payment terms of their invoices with
us or require us to provide significant collateral to them that
we do not currently provide. Due to the large dollar amounts and
volume of our crude oil and other feedstock purchases, any
imposition by our suppliers of more burdensome payment terms on
us may have a material adverse effect on our liquidity and our
ability to make payments to our suppliers. This in turn could
cause us to be unable to operate the Tyler refinery at full
capacity. A failure to operate the Tyler refinery at full
capacity could adversely affect our profitability and cash flows.
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. In 2007, Magellan was the
sole supplier to 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
ceased 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
20
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 2007, we obtained 63.5% 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
or ethanol. To the extent that we purchase inventory at prices
that do not compare favorably to the prices at which we are able
to sell refined products, our sales and margins may be adversely
affected.
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,
2007, we had total debt, including current maturities, of
$355.2 million. In addition to our outstanding debt, as of
December 31, 2007, our borrowing availability under our
various credit facilities was $189.6 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.
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Our
debt agreements contain operating and financial restrictions
that might constrain our business and financing
activities.
The operating and financial restrictions and covenants in our
credit facilities and any future financing agreements could
adversely affect our ability to finance future operations or
capital needs or to engage, expand or pursue our business
activities. For example, to varying degrees our credit
facilities restrict our ability to:
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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 we may be required to
contribute additional capital to our subsidiaries. Any of these
outcomes could have a material adverse effect on our business,
financial condition and results of operations.
Compliance
with and changes in tax laws could adversely affect our
performance.
We are subject to extensive tax liabilities, including federal,
state, and foreign income taxes and transactional taxes such as
excise, sales/use, payroll, franchise, withholding, and ad
valorem taxes. New tax laws and regulations and changes in
existing tax laws and regulations are continuously being enacted
or proposed that could result in increased expenditures for tax
liabilities in the future. Certain of these liabilities are
subject to periodic audits by the respective taxing authority
which could increase our tax liabilities. Subsequent changes to
our tax liabilities as a result of these audits may also subject
us to interest and penalties.
We may
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, tornadoes, extended periods
of rain, ice storms and snow, all of which we have experienced
in the past few years. Inclement weather conditions could damage
our facilities, interrupt production, adversely impact consumer
behavior, travel and retail fuel and convenience store traffic
patterns or interrupt or impede our ability to operate our
locations. If such conditions prevail in Texas, they could
interrupt or undermine our ability to produce and transport
products from our Tyler 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 and marketing
segments and in the first quarter of the year for our retail
segment. We depend on favorable weather conditions in the spring
and summer months.
Demand for gasoline and other merchandise is generally higher
during the summer months than during the winter months due to
seasonal increases in motor vehicle traffic. As a result, the
operating results of our refining segment and wholesale fuel
segment are generally lower for the first and fourth quarters of
each year. Seasonal fluctuations in traffic also affect sales of
motor fuels and merchandise in our retail fuel and convenience
stores. As a result, the operating results of our retail segment
are generally lower for the first quarter of the year. In
addition, demand for asphalt products is generally higher in the
summer months than during the winter months due to increased
road construction. This seasonality in asphalt sales may
negatively impact the portion of Lion Oil Company profits or
losses reported by us during the winter months.
Weather conditions in our operating area also have a significant
effect on our operating results. Customers are more likely to
purchase higher profit margin items at our retail fuel and
convenience stores, such as fast foods, fountain drinks and
other beverages and more gasoline during the spring and summer
months, thereby typically generating higher revenues and gross
margins for us in these periods. Unfavorable weather conditions
during these months and a resulting lack of the expected
seasonal upswings in traffic and sales could have a material
adverse effect on our business, financial condition and results
of operations.
We
depend on one supplier for a significant portion of our retail
fuel supply.
We purchased approximately 29% of our fuel for our retail fuel
and convenience stores in 2007 from a single supplier, Valero
Marketing and Supply Company. Our contract with Valero expires
in May 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 equal or more favorable to us, if at all, or that we would
be able to secure equal or more 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.
23
We
depend on one wholesaler for a significant portion of our
convenience store merchandise.
We purchased approximately 54% of our general merchandise,
including most tobacco products and grocery items, in 2007 from
a single wholesale grocer, McLane Company, Inc., under a
contract that expired on December 31, 2007. Beginning
December 31, 2007, we began purchasing our general
merchandise from
Core-Mark
International, Inc. under a long-term contract. 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 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.
Insufficient
ethanol supplies or disruption in ethanol supply may disrupt our
ability to market ethanol blended fuels.
The ethanol that we blend into our fuel at our Tyler terminal
and in many of our retail fuel and convenience stores cannot be
delivered through pipelines. Therefore, ethanol must be blended
with gasoline at the distribution terminal. In addition to the
quantities of ethanol that we must obtain and maintain for
blending at our Tyler terminal, we must obtain and maintain
sufficient quantities of ethanol to blend with fuel supplied to
our retail stores because the majority of our retail fuel
suppliers do not offer ethanol blended gasoline at their
terminals. In the event that we are unable to obtain or maintain
sufficient quantities of ethanol to support our blending needs,
our sale of ethanol blended gasoline could be interrupted or
suspended which could result in lower profits in our refining
and retail segments.
We
have entered into fixed formula contracts to purchase ethanol
for the majority of our 2008 supply requirements.
As part of our ethanol blending program, we have entered into
contracts to purchase the majority of our 2008 ethanol supply
requirements using a fixed formula to calculate the purchase
price. In the event our competitors are able to purchase ethanol
at prices that are equal to or more favorable than the prices we
pay under these contracts, we may receive no competitive
advantage under our blending program, or we may suffer a
competitive disadvantage under our blending program, either of
which could have a material adverse effect on our business,
financial condition or results of operations. Moreover, if any
of the suppliers with whom we have entered into such contracts
become unable to fulfill the terms of our contract with them, we
may not be able to enforce the terms of our contract or purchase
ethanol at the previously negotiated price. This could also have
the effect of placing us at a competitive disadvantage as to our
competitors.
Due to
our minority equity ownership position in Lion Oil Company, we
cannot control the operations of the El Dorado refinery or the
corporate and management policies of Lion Oil.
As of December 31, 2007, we owned approximately 34.6% of
the issued and outstanding common stock of Lion Oil Company, a
privately held Arkansas corporation that owns and operates a
refinery in El Dorado, Arkansas. Approximately 53.7% of the
issued and outstanding common stock of Lion Oil is owned by one
shareholder. This controlling shareholder is party to a
management agreement with Lion Oil and, due to its majority
equity ownership position, is able to elect a majority of the
Lion Oil board of directors. As a result of our minority equity
ownership position and the controlling shareholders
majority equity ownership position and contractual management
rights, we are unable to control the operations of the refinery
in El Dorado, Arkansas.
So long as there is a controlling shareholder of Lion Oil that
maintains a majority equity ownership position in, and the
contractual management rights with, Lion Oil, the controlling
shareholder will continue to control the election of a majority
of Lion Oils directors, influence Lion Oils
corporate and management policies (including the declaration of
dividends and the timing and preparation of its financial
statements) and determine, without our
24
consent, the outcome of any corporate transaction or other
matter submitted to Lion Oil shareholders for approval,
including potential mergers or acquisitions, asset sales and
other significant corporate transactions.
Our
equity investment in Lion Oil is somewhat illiquid because there
is no active trading market for shares of Lion Oil common
stock.
Because Lion Oil is a privately held corporation, there is no
active trading market for shares of Lion Oil common stock. As a
result, we cannot assure you that we will be able to increase or
decrease our equity interest in Lion Oil, or that if we do, we
will be able to do so upon favorable terms or at favorable
prices.
Because
we recognize our investment in Lion Oil under the equity method
of accounting, the earnings or losses reported by Lion Oil will
have a direct effect upon our earnings.
Due to our ownership percentage in Lion Oil, we recognize our
investment using the equity method of accounting. As a result,
the earnings or losses reported by Lion Oil will have a direct
impact on our earnings or losses per share. The refinery in El
Dorado, Arkansas is an independent refinery subject to many of
the same risk factors as our Tyler refinery, as well as other
risk factors some of which are detailed in this annual report.
To the extent that these factors adversely impact Lion
Oils earnings, our earnings per share may be adversely
affected as well.
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.
While we carry property, business interruption, pollution and
casualty insurance, we do not maintain insurance coverage
against all potential losses. We could suffer losses for
uninsurable or uninsured risks or in amounts in excess of
existing insurance coverage. The occurrence of an event that is
not fully covered by insurance could have a material adverse
effect on our business, financial condition and results of
operations.
The energy industry is highly capital intensive, and the entire
or partial loss of individual facilities can result in
significant costs to both industry companies, such as us, and
their insurance carriers. In recent years, several large energy
industry claims have resulted in significant increases in the
level of premium costs and deductible periods for participants
in the energy industry. For example, 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
25
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.
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, 2007, we employed 271 people at our
Tyler refinery and pipeline. From among these employees, 149 of
our operations and maintenance hourly employees and 27 truck
drivers at the refinery were covered by separate collective
bargaining agreements which 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 and diesel fuel sales at our retail fuel
and convenience stores which makes us susceptible to increases
in the cost of gasoline and interruptions in fuel
supply.
Net fuel sales represented approximately 77%, 76% and 73% of
total net sales of our retail segment for 2007, 2006 and 2005,
respectively. Our dependence on fuel sales makes us susceptible
to increases in the cost of gasoline and diesel fuel. 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 is 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 93% of our stores. Our net sales from
the sale of tobacco and alcohol products were approximately
$215.4 million, $178.9 million and $161.9 million
for 2007, 2006 and 2005, respectively. State laws regulate the
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 law in one or more of the states we
operate, could have a material adverse effect on our business,
financial condition and results of operations.
26
If we
fail to meet our obligations under our long-term branded
gasoline supply agreement with BP, the agreement may be
terminated and we may incur penalties.
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.
Sales of BP branded gasoline under this agreement accounted for
approximately 12% of our total fuel sales volume in 2007. 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. We
recorded liabilities for failure to purchase required
contractual volume minimums of $0.2 million in both 2007
and 2006.
If
there is negative publicity concerning the BP, Exxon, Shell,
Conoco, Marathon or Chevron brand names, sales at certain of our
stores may suffer.
Fuel sold under the BP, Exxon, Shell, Conoco, Marathon and
Chevron brand names represented approximately 37% of total fuel
sales volume for the retail segment in 2007. If there is
negative publicity concerning any of these major oil companies,
we could suffer a decline in sales volume at these stores and it
could have a material adverse effect on our business, financial
condition and results of operations.
It may
be difficult to serve process on or enforce a United States
judgment against those of our directors who reside in
Israel.
On the date of this report, three of our 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, 2007, less than 27.1% 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.
27
The
costs, scope and timelines of our capital 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 projects at the refinery undertaken to comply with
government regulations. Equipment that we require to complete
capital projects may be unavailable to us at expected costs or
within expected time periods, increasing project costs or
causing delays. Additionally, employee or contractor labor
expense may exceed our expectations. The inability to complete
our capital projects within the cost parameters and timelines we
anticipate due to these or other factors beyond our control
could have a material adverse effect on our business, financial
condition and results of operations.
If we
lose any of our key personnel, our ability to manage our
business and continue our growth could be negatively
impacted.
Our future performance depends to a significant degree upon the
continued contributions of our senior management team and key
technical personnel. We do not currently maintain key person
life insurance policies, non-compete agreements or employment
agreements with the majority of our senior management team. The
loss or unavailability to us of any member of our senior
management team or a key technical employee could significantly
harm us. We face competition for these professionals from our
competitors, our customers and other companies operating in our
industry. To the extent that the services of members of our
senior management team and key technical personnel would be
unavailable to us for any reason, we would be required to hire
other personnel to manage and operate our company and to develop
our products and technology. We cannot assure you that we would
be able to locate or employ such qualified personnel on
acceptable terms or at all.
Litigation
and/or negative publicity concerning food quality, health and
other related issues could result in significant liabilities or
litigation costs and cause consumers to avoid our convenience
stores.
Negative publicity, regardless of whether the concerns are
valid, concerning food quality, food safety or other health
concerns, facilities, employee relations or other matters
related to our operations may materially adversely affect demand
for food offered in our convenience stores and could result in a
decrease in customer traffic to our stores. Additionally, we may
be the subject of complaints or litigation arising from
food-related illness or injury in general which could have a
negative impact on our business.
It is critical to our reputation that we maintain a consistent
level of high quality food in our stores. Health concerns, poor
food quality or operating issues stemming from one store or a
limited number of stores can materially adversely affect the
operating results of some or all of our stores and harm our
proprietary brands.
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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28
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. You will also suffer dilution if we issue
currently unissued shares of our stock to future sellers in
furtherance of our growth strategy.
We are
a controlled company within the meaning of the NYSE
rules and, as a result, we qualify for, and intend to rely on,
exemptions from certain corporate governance
requirements.
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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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, 2007, Delek Group Ltd. owned approximately
73.4% of our outstanding common stock. As a result, Delek Group
Ltd. and its controlling shareholder, Mr. Sharon, will
continue to be able to control the election of our directors,
influence our corporate and management policies (including the
declaration of dividends) and determine, without the consent of
our other stockholders, the outcome of any corporate transaction
or other matter submitted to our stockholders for approval,
including potential mergers or acquisitions, asset sales and
other significant corporate transactions. So long as Delek Group
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 currently unregistered shares of our common stock could
depress the price of our common stock.
The market price of our common stock could decline as a result
of the introduction of a large number of currently unregistered
shares of our common stock into the market or the perception
that these sales could occur. These sales, or the possibility
that these sales may occur, also might make it more difficult
for us to sell equity securities in the future at a time and at
a price that we deem appropriate. At December 31, 2007,
39,389,869 unregistered shares of our shares of common stock
were controlled by Delek Group, Ltd. Delek Group Ltd. will be
29
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. In addition, on
the date of this report, Morgan Stanley Capital Group, Inc.
owned 1,916,667 unregistered shares of our common stock.
Pursuant to a registration rights agreement with us, Morgan
Stanley will be able to register these shares under the
Securities Act, subject to specified limitations.
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 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.
To comply with the management certification and auditor
attestation requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 (Section 404), we
are required to evaluate our internal controls systems to allow
30
management to report on, and our independent auditors to audit,
our internal controls over financial reporting. During this
process, we may identify control deficiencies of varying degrees
of severity under applicable SEC and Public Company Accounting
Oversight Board rules and regulations that remain unremediated.
As a public company, we are required to report, among other
things, control deficiencies that constitute a material
weakness or changes in internal controls that, or are
reasonably likely to, materially affect internal controls over
financial reporting. A material weakness is a
deficiency, or combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable
possibility that a material misstatement of the companys
annual or interim financial statements will not be prevented or
detected on a timely basis.
If we fail to comply with the requirements of Section 404,
we may be subject to sanctions or investigation by regulatory
authorities such as the SEC or the NYSE. Additionally, failure
to comply with Section 404 or the report by us of a
material weakness may cause investors to lose confidence in our
financial statements and our stock price may be adversely
affected. If we fail to remedy any material weakness, our
financial statements may be inaccurate, we may face restricted
access to the capital markets, and our stock price may decline.
ITEM 1B. UNRESOLVED
STAFF COMMENTS
None.
We own a refinery in Tyler, Texas, which is used by our refining
segment and is situated on approximately 100 out of a total of
approximately 600 acres of land owned by us, along with an
associated crude oil pipeline and light products loading
facilities. In January 2008, we purchased four additional vacant
or undeveloped properties totaling less than ten acres and a
railroad spur of less than two acres adjacent to our property
for additional flexibility and buffer. This additional acreage
is included in the total of approximately 600 acres owned
by us. 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.
As of December 31, 2007, we owned the real estate at 293
retail fuel and convenience store locations, and leased the real
property at 204 stores. Of the stores owned or leased by us, 20
were either leased or subleased to third party dealers; 38 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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|
|
|
|
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|
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Company
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|
|
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|
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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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264
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|
|
|
11
|
|
|
|
157
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|
|
|
114
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|
|
|
10
|
|
|
|
104
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Alabama
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|
94
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|
|
|
41
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|
63
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|
|
41
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|
|
|
6
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|
|
|
35
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|
Georgia
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81
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|
|
4
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46
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38
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5
|
|
|
|
33
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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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|
|
|
|
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9
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|
6
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|
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2
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|
|
|
4
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Kentucky
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|
|
3
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|
|
|
|
|
|
|
1
|
|
|
|
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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|
|
|
1
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|
|
|
1
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|
Mississippi
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|
|
2
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|
|
|
|
|
|
|
2
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|
|
|
|
|
|
|
|
|
|
|
|
Florida
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|
|
|
|
|
|
2
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
497
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|
|
|
58
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|
|
|
304
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|
|
|
213
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|
|
|
24
|
|
|
|
189
|
|
|
|
|
|
|
|
|
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|
|
|
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(1) |
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Includes 38 sites neither owned by nor subleased by us. |
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(2) |
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Includes renewal options; measured as of December 31, 2007. |
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
31
acceptable extensions of the leases for those locations that we
intend to continue operating. We believe that none of these
leases are individually material.
We lease our corporate headquarters at 7102 Commerce Way,
Brentwood, Tennessee. The lease is for 54,000 square feet
of office space of which we occupy 34,000 square feet and
sub-lease the remaining space. The lease term expires in March
2022.
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ITEM 3.
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LEGAL
PROCEEDINGS
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In the ordinary conduct of our business, from time to time we
are subject to lawsuits, investigations and claims, including,
environmental claims and employee related matters. Although we
cannot predict with certainty the ultimate resolution of
lawsuits, investigations and claims asserted against us, we do
not believe that any currently pending legal proceeding or
proceedings to which we are a party will have a material adverse
effect on our business, financial condition or results of
operations.
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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 PURCHASE OF EQUITY SECURITIES
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Market
Information and Dividends
Our common stock is traded on the New York Stock Exchange under
the symbol DK. The following table sets forth the
quarterly high and low sales prices of our common stock for each
quarterly period in 2006 and 2007 and dividends issued in these
periods since our common stock began trading on the New York
Stock Exchange on May 4, 2006:
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Regular
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Special
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Dividends
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Dividends
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High
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Low
|
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Per Common
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Per Common
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Period
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Sales Price
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Sales Price
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Share
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Share
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2006:
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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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None
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None
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Third quarter
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|
$
|
22.85
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$
|
14.83
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|
|
None
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|
|
|
|
None
|
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Fourth quarter
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|
$
|
19.00
|
|
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|
$
|
15.72
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$
|
0.0375
|
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None
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2007:
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|
|
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|
|
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|
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First quarter
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$
|
19.28
|
|
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$
|
14.82
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|
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|
$
|
0.0375
|
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|
|
|
None
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Second quarter
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|
$
|
28.49
|
|
|
|
$
|
18.67
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|
|
|
$
|
0.0375
|
|
|
|
$
|
0.1975
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Third quarter
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|
$
|
30.77
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|
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|
$
|
21.35
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|
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|
$
|
0.0375
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|
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|
None
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Fourth quarter
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|
$
|
26.17
|
|
|
|
$
|
17.50
|
|
|
|
$
|
0.0375
|
|
|
|
$
|
0.1975
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In connection with our initial public offering in May 2006, our
Board of Directors announced its intention to pay a regular
quarterly cash dividend of $0.0375 per share of our common stock
beginning in the fourth quarter of 2006. The dividends paid in
2007 totaled approximately $28.5 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. Except as
represented in the schedule above, we have paid no other cash
dividends on our common stock during the two most recent fiscal
years.
Holders
As of February 1, 2008, we had approximately 9 common
stockholders of record. This number does not include beneficial
owners of our common stock whose stock is held in nominee or
street name accounts through brokers.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
None.
32
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 compare cumulative total returns
for our stockholders since May 4, 2006 (the date of our
initial public offering) to the Standard and Poors 500
Stock Index and a peer group selected by management. The graph
assumes 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., Caseys General Stores, Inc., Frontier Oil
Corporation, Holly Corporation, Pantry, Inc., Sunoco, Inc.,
Susser Holdings Corporation, Tesoro Corporation, TravelCenters
of America, LLC, Valero Energy Corporation and Western Refining,
Inc. The stock performance shown on the graph below is not
necessarily indicative of future price performance.
33
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ITEM 6.
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SELECTED
FINANCIAL DATA
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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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|
2007
|
|
|
2006(1)(2)
|
|
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2005(2)(3)
|
|
|
2004(4)
|
|
|
2003
|
|
|
|
(In millions, except share and per share data)
|
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Statement of Operations Data:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net sales:
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|
|
|
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|
|
|
|
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|
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Retail
|
|
$
|
1,775.8
|
|
|
$
|
1,395.6
|
|
|
$
|
1,101.0
|
|
|
$
|
857.8
|
|
|
$
|
600.2
|
|
Refining
|
|
|
1,694.3
|
|
|
|
1,598.6
|
|
|
|
930.5
|
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
626.6
|
|
|
|
221.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
4,097.1
|
|
|
|
3,216.1
|
|
|
|
2,031.9
|
|
|
|
857.9
|
|
|
|
600.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
3,632.5
|
|
|
|
2,824.4
|
|
|
|
1,730.1
|
|
|
|
730.8
|
|
|
|
500.2
|
|
Operating expenses
|
|
|
220.5
|
|
|
|
175.5
|
|
|
|
134.6
|
|
|
|
80.1
|
|
|
|
62.7
|
|
General and administrative expenses
|
|
|
54.6
|
|
|
|
38.2
|
|
|
|
23.5
|
|
|
|
15.1
|
|
|
|
12.8
|
|
Depreciation and amortization
|
|
|
33.1
|
|
|
|
22.8
|
|
|
|
16.1
|
|
|
|
12.4
|
|
|
|
8.8
|
|
Loss (gain) on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
(0.9
|
)
|
|
|
(0.4
|
)
|
Unrealized (gain) loss on forward contract hedging activities(5)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
3,940.6
|
|
|
|
3,060.9
|
|
|
|
1,911.8
|
|
|
|
837.5
|
|
|
|
584.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
156.5
|
|
|
|
155.2
|
|
|
|
120.1
|
|
|
|
20.4
|
|
|
|
16.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
30.6
|
|
|
|
24.2
|
|
|
|
17.4
|
|
|
|
7.1
|
|
|
|
5.9
|
|
Interest income
|
|
|
(9.3
|
)
|
|
|
(7.2
|
)
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
Interest expense to related parties
|
|
|
|
|
|
|
1.0
|
|
|
|
3.0
|
|
|
|
1.2
|
|
|
|
0.1
|
|
Loss from equity method investment
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
|
2.4
|
|
|
|
0.2
|
|
|
|
2.5
|
|
|
|
0.7
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses, net
|
|
|
24.5
|
|
|
|
18.2
|
|
|
|
20.8
|
|
|
|
9.0
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and cumulative effect of a change in
accounting policy
|
|
|
132.0
|
|
|
|
137.0
|
|
|
|
99.3
|
|
|
|
11.4
|
|
|
|
10.3
|
|
Income tax expense
|
|
|
35.6
|
|
|
|
44.0
|
|
|
|
34.9
|
|
|
|
4.1
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in accounting policy
|
|
|
96.4
|
|
|
|
93.0
|
|
|
|
64.4
|
|
|
|
7.3
|
|
|
|
6.5
|
|
Cumulative effect of a change in accounting policy
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
96.4
|
|
|
$
|
93.0
|
|
|
$
|
64.1
|
|
|
$
|
7.3
|
|
|
$
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in accounting policy
|
|
$
|
1.85
|
|
|
$
|
1.98
|
|
|
$
|
1.64
|
|
|
$
|
0.19
|
|
|
$
|
0.16
|
|
Cumulative effect of a change in accounting policy
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.85
|
|
|
$
|
1.98
|
|
|
$
|
1.63
|
|
|
$
|
0.19
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in accounting policy
|
|
$
|
1.82
|
|
|
$
|
1.94
|
|
|
$
|
1.64
|
|
|
$
|
0.19
|
|
|
$
|
0.16
|
|
Cumulative effect of a change in accounting policy
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.82
|
|
|
$
|
1.94
|
|
|
$
|
1.63
|
|
|
$
|
0.19
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares, basic
|
|
|
52,077,893
|
|
|
|
47,077,369
|
|
|
|
39,389,869
|
|
|
|
39,389,869
|
|
|
|
39,389,869
|
|
Weighted average shares, diluted
|
|
|
52,850,231
|
|
|
|
47,915,962
|
|
|
|
39,389,869
|
|
|
|
39,389,869
|
|
|
|
39,389,869
|
|
Dividends declared per common share outstanding
|
|
$
|
0.54
|
|
|
$
|
0.04
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by operating activities
|
|
$
|
179.9
|
|
|
$
|
110.2
|
|
|
$
|
148.7
|
|
|
$
|
24.9
|
|
|
$
|
26.3
|
|
Cash flows used in investing activities
|
|
|
(222.7
|
)
|
|
|
(251.4
|
)
|
|
|
(162.3
|
)
|
|
|
(27.3
|
)
|
|
|
(16.1
|
)
|
Cash flows provided by (used in) financing activities
|
|
|
45.5
|
|
|
|
180.2
|
|
|
|
54.1
|
|
|
|
5.6
|
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
2.7
|
|
|
$
|
39.0
|
|
|
$
|
40.5
|
|
|
$
|
3.2
|
|
|
$
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
104.3
|
|
|
$
|
101.6
|
|
|
$
|
62.6
|
|
|
$
|
22.1
|
|
|
$
|
18.9
|
|
Short-term investments
|
|
|
45.5
|
|
|
|
73.2
|
|
|
|
26.6
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
440.0
|
|
|
|
410.6
|
|
|
|
251.8
|
|
|
|
64.0
|
|
|
|
46.7
|
|
Property, plant and equipment, net
|
|
|
546.1
|
|
|
|
424.7
|
|
|
|
270.6
|
|
|
|
189.3
|
|
|
|
136.5
|
|
Total assets
|
|
|
1,237.8
|
|
|
|
949.4
|
|
|
|
606.2
|
|
|
|
330.1
|
|
|
|
256.8
|
|
Total current liabilities
|
|
|
298.5
|
|
|
|
230.9
|
|
|
|
175.8
|
|
|
|
72.2
|
|
|
|
48.5
|
|
Total debt, including current maturities
|
|
|
355.2
|
|
|
|
286.6
|
|
|
|
268.8
|
|
|
|
203.3
|
|
|
|
168.8
|
|
Total non-current liabilities
|
|
|
426.8
|
|
|
|
336.3
|
|
|
|
310.6
|
|
|
|
202.1
|
|
|
|
159.8
|
|
Total shareholders equity
|
|
|
512.5
|
|
|
|
382.2
|
|
|
|
119.8
|
|
|
|
55.8
|
|
|
|
48.4
|
|
Total liabilities and shareholders equity
|
|
|
1,237.8
|
|
|
|
949.4
|
|
|
|
606.2
|
|
|
|
330.1
|
|
|
|
256.8
|
|
|
|
|
(1) |
|
Effective August 1, 2006, marketing operations were
initiated in conjunction with the acquisition of the Pride
assets. |
|
(2) |
|
Refinery segment operating results reflect certain
reclassifications made to conform prior year balances to current
year financial statement presentation. Sales of intermediate
feedstock sales have been reclassified to net sales which had
previously been presented on a net basis in cost of goods sold.
Certain pipeline expenses previously presented in cost of goods
sold have been reclassified to operating expenses, general and
administrative expenses and depreciation. These
reclassifications had no effect on either net income or
shareholders equity, as previously reported. |
|
(3) |
|
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. |
|
(4) |
|
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. |
|
(5) |
|
To mitigate the risks of changes in the market price of crude
oil and refined petroleum products, we may enter 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. |
35
Segment
Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Of and for the Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining(2)
|
|
|
Retail
|
|
|
Marketing
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Net sales (excluding intercompany marketing fees and sales)
|
|
$
|
1,709.0
|
|
|
$
|
1,775.8
|
|
|
$
|
611.9
|
|
|
$
|
0.4
|
|
|
$
|
4,097.1
|
|
Intercompany marketing fees and sales
|
|
|
(14.7
|
)
|
|
|
|
|
|
|
14.7
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,460.2
|
|
|
|
1,575.4
|
|
|
|
596.9
|
|
|
|
|
|
|
|
3,632.5
|
|
Operating expenses
|
|
|
82.2
|
|
|
|
136.8
|
|
|
|
1.0
|
|
|
|
0.5
|
|
|
|
220.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
151.9
|
|
|
$
|
63.6
|
|
|
$
|
28.7
|
|
|
$
|
(0.1
|
)
|
|
|
244.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54.6
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33.1
|
|
Gain on forward contract activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
156.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
377.4
|
|
|
$
|
516.6
|
|
|
$
|
91.5
|
|
|
$
|
252.3
|
|
|
$
|
1,237.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending (excluding business combinations)
|
|
$
|
61.6
|
|
|
$
|
23.8
|
|
|
$
|
0.3
|
|
|
$
|
2.0
|
|
|
$
|
87.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Of and for the Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining(2)
|
|
|
Retail
|
|
|
Marketing(3)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
Net sales (excluding intercompany marketing fees and sales)
|
|
$
|
1,601.8
|
|
|
$
|
1,395.6
|
|
|
$
|
218.2
|
|
|
$
|
0.5
|
|
|
$
|
3,216.1
|
|
Intercompany marketing fees and sales
|
|
|
(3.2
|
)
|
|
|
(0.2
|
)
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,373.5
|
|
|
|
1,234.9
|
|
|
|
216.0
|
|
|
|
|
|
|
|
2,824.4
|
|
Operating expenses
|
|
|
71.9
|
|
|
|
102.8
|
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
175.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
153.2
|
|
|
$
|
57.7
|
|
|
$
|
5.3
|
|
|
$
|
|
|
|
|
216.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Of and for the Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining(2)(4)
|
|
|
Retail
|
|
|
Marketing
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
Net sales (excluding intercompany and sales)
|
|
$
|
930.5
|
|
|
$
|
1,101.0
|
|
|
$
|
|
|
|
$
|
0.4
|
|
|
$
|
2,031.9
|
|
Intercompany sales
|
|
|
0.9
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
774.9
|
|
|
|
955.2
|
|
|
|
|
|
|
|
|
|
|
|
1,730.1
|
|
Operating expenses
|
|
|
47.3
|
|
|
|
86.9
|
|
|
|
|
|
|
|
0.4
|
|
|
|
134.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
109.2
|
|
|
$
|
58.0
|
|
|
$
|
|
|
|
$
|
|
|
|
|
167.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.5
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.1
|
|
Gain on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.6
|
)
|
Loss 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 Financial 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 external costs. 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) |
|
Refinery segment operating results reflect certain
reclassifications made to conform prior year balances to current
year financial statement presentation. Sales of intermediate
feedstock sales have been reclassified to net sales which had
previously been presented on a net basis in cost of goods sold.
Certain pipeline expenses previously presented in cost of goods
sold have been reclassified to operating expenses, general and
administrative expenses and depreciation. These
reclassifications had no effect on either net income or
shareholders equity, as previously reported. |
|
(3) |
|
Effective August 1, 2006, marketing operations were
initiated in conjunction with the acquisition of the Pride
assets. |
|
(4) |
|
Effective April 29, 2005, we completed the acquisition of
the Tyler refinery and related assets. We operated the refinery
for 247 days in 2005. |
37
|
|
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. It
should be read in conjunction with the consolidated financial
statements and related notes included in Item 8, Financial
Statements and Supplementary Data, in this Annual Report on
Form 10-K.
Those statements in 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;
|
38
|
|
|
|
|
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
and in our other filings with the SEC.
|
In light of these risks, uncertainties and assumptions, our
actual results of operations and execution of our business
strategy could differ materially from those expressed in, or
implied by, the forward-looking statements, and you should not
place undue reliance upon them. In addition, past financial
and/or
operating performance is not necessarily a reliable indicator of
future performance and you should not use our historical
performance to anticipate results or future period trends. We
can give no assurances that any of the events anticipated by the
forward-looking statements will occur or, if any of them do,
what impact they will have on our results of operations and
financial condition.
Forward-looking statements speak only as of the date the
statements are made. We assume no obligation to update
forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting
forward-looking information except to the extent required by
applicable securities laws. If we do update one or more
forward-looking statements, no inference should be drawn that we
will make additional updates with respect thereto or with
respect to other forward-looking statements.
Overview
We are a diversified energy business focused on petroleum
refining, wholesale sales of refined products and retail
marketing. Our business consists of three operating segments:
refining, marketing and retail. Our refining segment operates a
high conversion, moderate complexity independent refinery in
Tyler, Texas, with a design crude distillation capacity of
60,000 barrels per day (bpd), along with an
associated crude oil pipeline and light products loading
facilities. Our marketing segment sells refined products on a
wholesale basis in west Texas through company-owned and
third-party operated terminals. Our retail segment markets
gasoline, diesel, other refined petroleum products and
convenience merchandise through a network of
497 company-operated retail fuel and convenience stores
located in Alabama, Arkansas, Georgia, Kentucky, Louisiana,
Mississippi, Tennessee and Virginia. Additionally, we own a
minority equity interest in Lion Oil Company, a privately-held
Arkansas corporation, which operates a 75,000 bpd moderate
complexity crude oil refinery and other pipeline and product
terminals. The refinery is located in El Dorado, Arkansas.
The cost to acquire feedstocks and the price of the refined
petroleum products we ultimately sell from our refinery depend
on numerous factors beyond our control, including the supply of,
and demand for, crude oil, gasoline and other refined petroleum
products which, in turn, depend on, among other factors, changes
in domestic and foreign economies, weather conditions, domestic
and foreign political affairs, global conflict, production
levels, the availability of imports, the marketing of
competitive fuels and government regulation. Other significant
factors that influence our results in our refining segment
include the cost of crude, our primary raw material, the
refinerys operating costs, particularly the cost of
natural gas used for fuel and the cost of electricity, seasonal
factors, refinery utilization rates and planned or unplanned
maintenance activities or turnarounds.
Our sales and operating refined petroleum product prices
fluctuate significantly with movements in crude oil and refined
petroleum product prices. Both the spread between crude oil and
refined petroleum product prices, and more recently the
timeframe between these fluctuations in those prices, affect our
earnings. We compare our per barrel refining operating margin to
certain industry benchmarks, specifically the U.S. Gulf
Coast 5-3-2 crack spread. The U.S. Gulf Coast 5-3-2 crack
spread represents the differential between Platts
quotations for 3/5 of a barrel of U.S. Gulf Coast Pipeline
87 Octane Conventional Gasoline and 2/5 of a barrel of
U.S. Gulf Coast Pipeline No. 2 Heating Oil (high
sulfur diesel) on the one hand, and the first month futures
price of 5/5 of a barrel of light sweet crude oil on the New
York Mercantile Exchange, on the other hand.
Over the past few years, we, as well as other oil refiners have
operated in an upward-sloping oil pricing environment, where the
current price of crude is lower than the future price as
represented in the futures contract market. An upward-sloping
market is referred to as a contango market. However,
in September 2007, the global oil market started to reflect the
expectation that oil prices in the near to intermediate term
would be lower than spot market prices. In effect,
the forward curve which represents the oil futures
market is inverted, therefore the
39
market is now in backwardation. Due to this current
market structure, and because our crude purchases and our
refined product sales are executed using the futures market, our
cost of crude is higher than the daily spot price; having a
negative impact on our gross margin per barrel when compared to
the industry crack spread, which is computed using spot prices
for oil, gasoline, and diesel fuel. The direction of future
prices is difficult to forecast; however, at present, a
continuation of this backwardated market is reflected in the
futures contract market structure.
Finally, while the increases in the cost of crude oil, are
reflected in the changes of light refined products, the value of
heavier products, such as fuel oil, asphalt and coke, have not
moved in parallel with crude cost. This causes additional
pressure on our refining margins.
The cost to acquire the refined fuel products we sell to our
wholesale customers in our marketing segment and at our
convenience stores in our retail segment depends on numerous
factors beyond our control, including the supply of, and demand
for, crude oil, gasoline and other refined petroleum products
which, in turn, depends on, among other factors, changes in
domestic and foreign economies, weather conditions, domestic and
foreign political affairs, production levels, the availability
of imports, the marketing of competitive fuels and government
regulation. Our retail merchandise sales are driven by
convenience, customer service, competitive pricing and branding.
Motor fuel margin is sales less the delivered cost of fuel and
motor fuel taxes, measured on a cents per gallon basis. Our
motor fuel margins are impacted by local supply, demand,
weather, competitor pricing and product brand.
As part of our overall business strategy, we regularly evaluate
opportunities to expand and complement our business and may at
any time be discussing or negotiating a transaction that, if
consummated, could have a material effect on our business,
financial condition, liquidity or results of operations.
Strategic
Initiatives
We are committed to enhancing shareholder value while
maintaining financial stability and flexibility by continuing to:
|
|
|
|
|
pursue acquisition opportunities that strengthen our core
markets and leverage our core competencies;
|
|
|
|
modernize, grow and improve the profitability of our operations
through carefully evaluated capital investments;
|
|
|
|
develop and refine innovative information technology
applications for all business segments;
|
|
|
|
provide value to our customers and employees by delivering a
high level of customer service standards;
|
|
|
|
demonstrate a prudent and scalable capital structure; and
|
|
|
|
focus on health, safety and environmental compliance.
|
To accomplish the foregoing goals, the following represent
certain significant accomplishments in 2007:
|
|
|
|
|
In April 2007, we acquired 107 retail fuel and convenience
stores in northern Georgia and southeastern Tennessee. Over the
course of the remainder of 2007, we integrated these additional
stores into our structure, creating two divisions in
southeastern Tennessee and northern Georgia from what had
formerly been a single division. Our retail segment strategy
continues to center on operating a high concentration of sites
in similar geographic regions to promote operational
efficiencies and increase segment contribution margin.
|
|
|
|
In June 2007, Delek completed the implementation of a new
disaster recovery infrastructure which encompasses replication
of all critical systems from data centers located in Brentwood,
Tennessee and Tyler, Texas. The disaster recovery system allows
Delek to conduct business with high reliability and continuous
data protection. Annual testing of the disaster recovery systems
will be completed to help to ensure the integrity of our systems.
|
|
|
|
In July 2007, we commenced operation of a new 138kV power
substation at the Tyler refinery that provided us with a more
reliable, independent power supply.
|
40
|
|
|
|
|
In August 2007, we acquired a 28.4% equity ownership in Lion
Oil, a privately held Arkansas corporation that owns and
operates a refinery and other pipeline and product terminals. We
increased our ownership percentage to 34.6% in September 2007.
|
|
|
|
In 2007, we introduced the MAPCO Mart brand to our Alabama
division by opening two stores. This was the first time our
concept brand has moved outside of Tennessee.
|
|
|
|
In 2007, we have become a leader in blending ethanol in our
finished gasoline products, in our retail markets, allowing
customers access to renewable
E-10
products. In December 2007, we completed the necessary
requirements to provide
E-10
products at our Tyler terminal. We began offering these products
January 1, 2008.
|
|
|
|
During 2007, we were able to increase the consumption of sour
crude oil in the refinery. West Texas sour crude comprised
approximately 7.7% of our crude slate for the year.
|
|
|
|
In April 2007, utilizing our proprietary information technology
platform, we successfully completed verification testing and
were granted approval to begin beta-testing an interface to the
BP electronic payment system through a mid-stream device
supplied by Verifone. In September 2007, MAPCOs
point-of-sale was added to BPs list of certified
EPS-integrated POS systems and we were given approval to deploy
our point-of-sale to production. The production implementation
was completed in November 2007. Completion of this development
project allows full integration of all payment types through our
proprietary point-of-sale system. We currently operate 37
convenience stores selling BP branded fuels.
|
|
|
|
During 2007, we paid dividends totaling approximately
$28.5 million to our shareholders.
|
|
|
|
Our capital spending in 2007 totaled approximately
$87.7 million including $35.2 for discretionary high return
projects and $38.7 for health, safety and reliability projects.
|
Market
Trends
Our results of operations are significantly affected by the cost
of commodities. Sudden change in petroleum prices is our primary
source of market risk. Our business model is affected more by
the volatility of petroleum prices than by the cost of the
petroleum that we sell.
We continually experience volatility in the energy markets. In
2007 compared to 2006, concerns about the U.S. economy and
continued uncertainty in several oil-producing regions of the
world resulted in increases in the price of crude oil which
outpaced product prices in 2007 and 2006. The average price of
crude oil in 2007, 2006 and 2005 was $72.44, $66.27 and $59.39
per barrel, respectively. In 2006 compared to 2005, high demand
for refined products, a strengthening economy, production
interruptions and the phase out of methyl tertiary-butyl ether
(MTBE), resulted in increases in product prices that
outpaced increases in crude oil and other feedstock prices in
those years. The U.S. Gulf Coast 5-3-2 crack spread ranged
from a high of $33.32 per barrel to a low of $3.88 per barrel
during 2007 and averaged $13.04 per barrel during 2007 compared
to an average of $10.16 in 2006 and $10.58 per barrel in 2005.
We also continue to experience high volatility in the wholesale
cost of fuel. The U.S. Gulf Coast price for unleaded
gasoline ranged from a low of $1.30 per gallon to a high of
$2.60 per gallon in 2007 and averaged $2.05 per gallon in 2007,
which compares to averages of $1.83 per gallon in 2006 and $1.69
per gallon in 2005. If this volatility continues and we are
unable to fully pass our cost increases on to our customers, our
retail fuel margins will decline. Additionally, increases in the
retail price of fuel could result in lower demand for fuel and
reduced customer traffic inside our convenience stores in our
retail segment. This may place downward pressure on in-store
merchandise margins. Finally, the higher cost of fuel has also
resulted in higher credit card fees as a percentage of sales and
gross profit. As fuel prices increase, we see increased usage of
credit cards by our customers and pay higher interchange costs
since credit card fees are paid as a percentage of sales.
The cost of natural gas used for fuel in our Tyler refinery has
also shown historic volatility. Our average cost of natural gas
increased to $7.12 per million British Thermal Units
(MMBTU) in 2007 from $6.89 per million MMBTU in 2006
and decreased from $10.13 per MMBTU in 2005.
41
As part of our overall business strategy, management determines,
based on the market and other factors, whether to maintain,
increase or decrease inventory levels of crude or other
intermediate feedstocks. At the end of 2007, we reduced certain
of our crude and feedstock inventories.
Factors
Affecting Comparability
The comparability of our results of operations for the year
ended December 31, 2007 compared to the years ended
December 31, 2006 and 2005 was affected by the following
factors:
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the completion of several acquisitions in 2005 through 2007
including: the purchase of the Tyler refinery 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 BP stores);
the purchase of 43 retail fuel and convenience stores in Georgia
and Tennessee from Fast Petroleum, Inc., in July 2006 (the
Fast stores), the commencement of marketing
operations in August 2006 in conjunction with the purchase of
refined petroleum product terminals, seven pipelines and storage
tanks from Pride Companies, L.P. (the Pride assets);
the purchase of 107 retail fuel and convenience stores from
Calfee Company of Dalton, Inc. in April 2007 (the Calfee
stores); and the purchase from existing shareholders of a
34.6% minority interest equity investment in Lion Oil Company in
August and September 2007 .
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a scheduled turnaround at our Tyler refinery that was started
and completed in December 2005;
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the receipt of approximately $166.9 million in proceeds
from an initial public offering of our stock in May 2006, after
payment of offering expenses and underwriting discounts and
commissions;
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repayment of $42.5 million of related party debt in May
2006;
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the adoption of SFAS No. 123(R), Share-Based
Payment in January 2006;
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an increase in general and administrative expenses in 2006 and
2007 compared to 2005 due to the costs of operating as a public
company and the associated regulatory environment;
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the completion of the distillate desulfurization unit at our
Tyler refinery in 2006 which allowed for accelerated tax
depreciation and generated specific federal tax credits that
significantly reduced our effective income tax rate in
2007; and
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continued optimization of the refinery operation in 2007 allowed
us to run over 4,149 barrels per day of west Texas sour
(WTS) crude oil resulting in additional margin in
2007 on that lower-priced feedstock, whereas we were not running
any WTS crude oil in 2006 and 2005.
|
Results
of Operations
Consolidated
Results of Operation Comparison of the Year Ended
December 31, 2007 versus the Year Ended December 31,
2006
In the fiscal years ended December 31, 2007 and 2006, we
generated net sales of $4,097.1 million and
$3,216.1 million, respectively. The increase in net sales
was primarily due to an increase of $405.0 million in sales
from the new marketing segment which initiated operations in the
third quarter of 2006. Further contributing to the
$881.0 million increase in net sales, $196.2 million
was due to the Calfee stores acquired in April 2007 and
$87.2 million was due to the Fast stores acquired in July
2006. The remaining increase resulted from higher average sales
prices in both our refining and retail segments which was
partially offset by lower sales volume at the refinery due to
weather-related power outages, mid-cycle maintenance and
optimization of production during 2007.
Cost of goods sold was $3,632.5 million in 2007 compared to
$2,824.4 million in 2006, an increase of
$808.1 million or 28.6%. Of this total increase,
$380.9 million resulted from the inclusion of the marketing
segment costs, $169.5 million was due to the inclusion of
the Calfee stores acquired and $78.6 million was due to the
inclusion of the Fast stores acquired. The cost of crude oil
increased 9.3% from an average of $72.44 per barrel in 2007
compared to $66.27 per barrel in 2006.
42
Operating expenses were $220.5 million in 2007 compared to
$175.5 million in 2006, an increase of $45.1 million
or 25.7%. This increase was primarily driven by the retail
segment, including an increase of $21.2 million related to
acquiring the Calfee stores in April 2007 and $6.1 million
related to acquiring the Fast stores in July 2006. The remaining
increase was primarily due to a continuing increase in credit
card expense, resulting from both increased customer usage and
interchange fees. In the refining segment, we incurred
additional costs of $10.4 million primarily for
maintenance-related expenditures, additional environmental
expenses and increased chemical costs. The new marketing segment
also contributed $0.7 million to the increased expenses.
General and administrative expenses were $54.6 million in
2007 compared to $38.2 million in 2006, an increase of
$16.4 million, or 42.9%. We do not allocate general and
administrative expenses to our operating segments. The overall
increase was primarily due to the addition of personnel,
professional support and contractors as a result of the
acquisition of the Calfee and Fast stores, the new marketing
segment, a $0.9 million increase in stock compensation
expense, a $1.3 million increase in property taxes and the
costs associated with being a public company, including our
efforts related to meeting the requirement to certify compliance
with the internal control provisions of Sarbanes-Oxley for the
fiscal year ended December 31, 2007. We also incurred
additional costs associated with potential acquisitions which we
determined we will no longer pursue.
Depreciation and amortization was $33.1 million in 2007
compared to $22.8 million in 2006. This increase was
primarily due to the inclusion of depreciation expense
associated with the Calfee stores acquired in April 2007 and the
inclusion of a full year of depreciation expense associated with
the new marketing segment initiated in August 2006 and the Fast
stores acquired in July 2006 as well as depreciation expense
associated with several large capital projects in the refining
segment, including the distillate desulfurization unit and the
sulfur recovery unit placed in service at the refinery in
September 2006.
Interest expense was $30.6 million in 2007 compared to
$24.2 million in 2006, an increase of $6.4 million.
This increase was primarily due to increased indebtedness in
connection with the acquisitions of the Calfee and Fast stores
and the
start-up of
the marketing segment. Interest income was $9.3 million in
2007 compared to $7.2 million in 2006, an increase of
$2.1 million. This increase was due primarily to higher
cash and short-term investment balances as a result of the
refinery segments favorable cash flow as well as the
proceeds received from our initial public offering in May 2006.
In addition, we had interest expense of $1.0 million in
2006 with no comparable expense in 2007 which was associated
with related party notes payable that were repaid in connection
with our initial public offering in May 2006.
Loss from equity method investment were $0.8 million in
2007 and relate to our proportionate share of loss from Lion Oil
since the acquisition date of $0.6 million and
$0.2 million of depreciation expense related to the fair
value differential for property, plant and equipment determined
at the acquisition date. We acquired a 28.4% ownership interest
in August 2007 and purchased an additional 6.2% ownership
interest in September 2007 for a combined total ownership
interest of 34.6%.
Other operating expenses, net, were $2.4 million in 2007
compared to $0.2 million in 2006. In 2007, we recognized a
$2.4 million loss associated with the change in the fair
market value of our interest rate derivatives as compared to a
nominal loss of less than $0.1 million in 2006.
Income tax expense was $35.6 million in 2007 compared to
$44.0 million in 2006, a decrease of $8.4 million.
This decrease primarily resulted from approximately
$12.7 million in federal tax credit earned as a result of
our production of ultra low sulfur diesel fuel, which we began
producing in the third quarter of 2006. In 2006, this federal
tax credit was approximately $4.3 million. We also benefit
from federal tax incentives related to our refinery operations
that reduce our effective tax rate from the statutory rate of
35%, including a deduction earned for being a domestic
manufacturer. Deductions related to our qualifying domestic
production activity approximate $6.3 million in 2007
compared to $2.0 million in 2006. These items contributed
to our effective tax rate reducing to 27.0% in 2007 compared to
32.1% in 2006.
43
Consolidated
Results of Operation Comparison of the Year Ended
December 31, 2006 versus the Year Ended December 31,
2005
In the fiscal years ended December 31, 2006 and 2005, we
generated net sales of $3,216.1 million and
$2,031.9 million, respectively. The increase in net sales
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 $1,184.2 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 8.9% 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 $2,824.4 million in 2006, compared
to $1,730.1 million in 2005, an increase of
$1,094.3 million or 63.3%. Of this total 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 $175.5 million in 2006 compared to
$134.6 million in 2005, an increase of $40.8 million
or 30.3%. 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 in
2006 compared to $23.5 million in 2005, an increase of
$14.7 million or 62.6%. We do not allocate general and
administrative expenses to our operating segments. The overall
increase was primarily due to recognition of share-based
compensation 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.
Depreciation and amortization was $22.8 million in 2006
compared to $16.1 million in 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 July 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 in 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.
44
Other operating expenses, net, were $0.2 million in 2006
and $2.5 million in 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. 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.
Income tax expense was $44.0 million in 2006, compared to
$34.9 million in 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. We benefited from other tax incentives related to its
refinery operations. Specifically, we were entitled to the
benefit of the domestic manufacturers production deduction
for federal tax purposes. Additionally, we were entitled to
federal tax credits related to the production of ultra low
sulfur diesel fuel. The combination of these two items further
reduced our effective federal tax rate.
Operating
Segments
We review operating results in three reportable segments:
refining, marketing and retail. Our company was initially formed
in May 2001 with the acquisition of 198 retail fuel and
convenience stores from Williams Express, Inc., a subsidiary of
The Williams Companies Inc. The refining segment was created in
April 2005 with the acquisition of the Tyler refinery. Effective
August 1, 2006, we added a third segment, marketing, to
track the activity associated with the sales of refined products
on a wholesale basis.
45
Refining
Segment
The table below sets forth information concerning our refinery
segment operations for 2007, 2006 and 2005:
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Year Ended December 31,
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2007
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2006
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|
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2005
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Days operated in period
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365
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365
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247
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Total sales volume (average barrels per day)(1)
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54,282
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56,074
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|
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51,096
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Products manufactured (average barrels per day):
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|
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|
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|
|
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Gasoline
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29,660
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30,163
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26,927
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Diesel/jet
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20,010
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21,816
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|
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20,779
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Petrochemicals, LPG, NGLs
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2,142
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2,280
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2,218
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Other
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|
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2,848
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2,324
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|
1,684
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Total production
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54,660
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56,583
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51,608
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Refinery throughput (average barrels per day):
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Crude oil
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53,860
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55,998
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51,906
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Other feedstocks
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2,303
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|
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|
2,130
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1,244
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Total refinery throughput
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56,163
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58,128
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53,150
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Per barrel of sales:
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Refining operating margin(1)
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$
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11.82
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$
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11.00
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$
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12.42
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Refining operating margin excluding intercompany marketing
fees(1)
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12.56
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11.16
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12.42
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Direct cash operating expenses(1)
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4.15
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3.51
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3.76
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Pricing statistics (average for the period presented):
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WTI Cushing crude oil (per barrel)
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$
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72.44
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$
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66.27
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$
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59.39
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U.S. Gulf Coast 5-3-2 crack spread (per barrel)
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13.04
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10.16
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12.19
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U.S. Gulf Coast unleaded gasoline (per gallon)
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2.05
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|
|
|
1.83
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|
|
|
1.69
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Low sulfur diesel (per gallon)
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2.11
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|
|
|
2.00
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|
|
|
1.72
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Ultra low sulfur diesel (per gallon)
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2.14
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|
|
|
|
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Natural gas (per MMBTU)
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|
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7.12
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|
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6.89
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|
|
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10.13
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|
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(1) |
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Refinery segment operating results reflect certain
reclassifications made to conform prior year balances to current
year financial statement presentation. Sales of intermediate
feedstock sales have been reclassified to net sales which had
previously been presented on a net basis in cost of goods sold.
Certain pipeline expenses previously presented in cost of goods
sold have been reclassified to operating expenses, general and
administrative expenses and depreciation. These
reclassifications had no effect on either net income or
shareholders equity, as previously reported. |
Refining
Segment Operational Comparison Of The Year Ended
December 31, 2007 versus the Year Ended December 31,
2006
In the fiscal years ended December 31, 2007 and 2006, net
sales for the refining segment were $1,694.3 million and
$1,598.6 million, respectively, an increase of
$95.7 million, or 6.0%. Total sales volume for 2007
averaged 54,282 barrels per day compared to
56,074 barrels per day in 2006. Our sales volume was
negatively impacted by weather related power outages in the
summer of 2007 as well as unplanned maintenance interruptions at
the Tyler refinery which caused temporary product outages at the
Tyler terminal. The average sales price was $85.52 per barrel in
2007 compared to $78.11 per barrel in 2006.
46
Cost of goods sold for our refining segment in 2007 was
$1,460.2 million compared to $1,373.5 million in 2006,
an increase of $86.7 million. This cost increase resulted
from higher crude oil costs, partially offset by the reduction
in sales volume. The average cost per barrel was $73.70 in 2007
compared to $67.11 in 2006.
In conjunction with the acquisition of the Pride assets and the
formation of our marketing segment effective August 1,
2006, our refining segment entered into a service agreement with
our marketing segment on October 1, 2006, which among other
things, requires the refining segment to pay service fees based
on the number of gallons sold at the Tyler refinery and to share
with the marketing segment a portion of the marketing margin
achieved in return for providing marketing, sales and customer
services. This service agreement lowered the margin achieved by
our refining segment in 2007 by $0.74 per barrel to $11.82 per
barrel. Without this fee, the refining segment would have
achieved a refining operating margin of $12.56 per barrel in
2007 compared to $11.16 per barrel in 2006. We eliminate this
intercompany fee in consolidation.
Operating expenses were $82.2 million in 2007, or $4.15 per
barrel sold, compared to $71.8 million in 2006, or $3.51
per barrel sold. The increase in operating expense primarily
resulted from a $4.0 million increase in maintenance costs,
a $3.3 million increase in environmental expenses and a
$1.9 million increase in chemical usage related to
operations, partially offset by the decrease in sales volume of
1,792 average barrels per day and a decrease in utility expense
resulting from more favorable rates in 2007 compared to 2006.
The increase in maintenance costs resulted from unplanned
maintenance events in 2007 including power outages experienced
prior to the commencement of operation of the 138kV power
substation and costs related to the repair of a
300,000 barrel crude oil tank.
Contribution margin for the refining segment in 2007 was
$151.9 million, or 62.2% of our consolidated contribution
margin.
Refining
Segment Operational Comparison Of The Year Ended
December 31, 2006 versus the Year Ended December 31,
2005
In the fiscal years ended December 31, 2006 and 2005, net
sales were $1,598.6 million and $930.5 million,
respectively, an increase of $668.1 million or 71.8%. Of
this total increase, $507.4 million resulted from the
inclusion of a full year of sales from the Tyler refinery
compared to only eight months in 2005. Additionally, total sales
volume for 2006 averaged 56,074 barrels per day compared to
51,096 barrels per day for the eight months we operated the
refinery in 2005, an increase of 4,978 average barrels per day
or 8.9%. Average sales price per barrel rose to $78.11 per
barrel for 2006 compared to $73.80 per barrel in 2005, an
increase of 5.8%.
Cost of goods sold for our refining segment in 2006 was
$1,373.5 million compared to $774.9 million for the
period from April 29, 2005 through December 31, 2005.
Of this increase, $436.0 million resulted from the
inclusion of a full year of cost of goods sold from the refinery
compared to only eight months in 2005. The remaining cost
increase was due to an 8.9% 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.
The service agreement between the refining and marketing
segments lowered the refining margin achieved by our refining
segment by $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 compared
to $12.42 per barrel for the period operated in 2005. We
eliminate this intercompany fee in consolidation.
Operating expenses were $71.8 million for 2006, or $3.51
per barrel sold, compared to $47.3 million for the period
of April 29, 2005 through December 31, 2005, or $3.76
per barrel sold. The reduction in operating expense per barrel
was primarily due 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.
Contribution margin for the refining segment in 2006 was
$153.2 million, or 70.9% of our consolidated segment
contribution margin.
47
Marketing
Segment
We initiated operations in our marketing segment effective
August 1, 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.
The table below sets forth certain information concerning our
marketing segment for the full year ended December 31, 2007
and for the period since its formation on August 1, 2006
through December 31, 2006:
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|
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|
|
|
|
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|
|
For the Period
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|
|
|
|
|
August 1, 2006
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|
|
Year Ended
|
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|
Through
|
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|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Days operated in period
|
|
|
365
|
|
|
|
153
|
|
Total sales volume (average barrels per day)
|
|
|
17,923
|
|
|
|
17,758
|
|
Products sold (average barrels per day):
|
|
|
|
|
|
|
|
|
Gasoline
|
|
|
8,166
|
|
|
|
8,129
|
|
Diesel/jet
|
|
|
9,651
|
|
|
|
9,568
|
|
Other
|
|
|
106
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
17,923
|
|
|
|
17,758
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses (per barrel of sales)
|
|
$
|
0.15
|
|
|
$
|
0.12
|
|
Marketing
Segment Operational Comparison Of The Year Ended
December 31, 2007 versus the Year Ended December 31,
2006
Net sales for the marketing segment were $626.6 million in
2007. Net sales for the marketing segment were
$221.6 million for the period from August 1, 2006
through December 31, 2006. Total sales volume averaged
17,923 barrels per day in 2007 and 17,758 barrels per
day in the 2006 period. Net sales included $14.7 million of
service fees paid by our refining segment to our marketing
segment in 2007 and $3.4 million paid during the 2006
period. These service fees are based on the number of gallons
sold and a shared portion of the margin achieved in return for
providing marketing, sales and customer support services.
Cost of goods sold was $596.9 million in 2007, or $91.24
per barrel sold of $91.24. Cost of goods sold was
$216.0 million in the 2006 period, or $79.49 per barrel
sold. Average gross margin was $4.54 and $2.06 per barrel in
2007 and the 2006 period, respectively. We recognized a gain in
2007 of $0.6 million and a loss of $1.3 million in the
2006 period associated with the settlement of nomination
differences under long-term purchase contracts. In the 2006
period, we also incurred a loss 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 contracts, and which then had an immediate
drop in market value prior to the ultimate sale of such
inventory.
Operating expenses in the marketing segment were
$1.0 million in 2007 and $0.3 million in the 2006
period. These costs primarily relate to salaries, utilities and
insurance costs.
Contribution margin for the marketing segment in 2007 was
$28.7 million, or 11.8% of our consolidated segment
contribution margin.
48
Retail
Segment
The table below sets forth information concerning our retail
segment operations for the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Number of stores (end of period)
|
|
|
497
|
|
|
|
394
|
|
|
|
349
|
|
Average number of stores
|
|
|
470
|
|
|
|
369
|
|
|
|
330
|
|
Retail fuel sales (thousands of gallons)
|
|
|
474,154
|
|
|
|
396,867
|
|
|
|
341,335
|
|
Average retail gallons per average number of stores (in
thousands)
|
|
|
1,009
|
|
|
|
1,075
|
|
|
|
1,034
|
|
Retail fuel margin ($ per gallon)
|
|
$
|
0.144
|
|
|
$
|
0.145
|
|
|
$
|
0.165
|
|
Merchandise sales (in millions)
|
|
$
|
411.4
|
|
|
$
|
330.5
|
|
|
$
|
292.4
|
|
Merchandise margin %
|
|
|
31.6
|
%
|
|
|
30.6
|
%
|
|
|
29.8
|
%
|
Credit expense (% of gross margin)
|
|
|
8.8
|
%
|
|
|
7.8
|
%
|
|
|
5.9
|
%
|
Merchandise and cash over/short (% of net sales)
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
Operating expenses/merchandise sales plus total gallons
|
|
|
14.9
|
%
|
|
|
13.5
|
%
|
|
|
13.2
|
%
|
Retail
Segment Operational Comparison of the Year Ended
December 31, 2007 versus the Year Ended December 31,
2006
In the fiscal years ended December 31, 2007 and 2006, net
sales for our retail segment were $1,775.8 million and
$1,395.6 million, respectively, an increase of
$380.2 million or 27.2%. Retail fuel sales, including
wholesale dollars, increased 28.1% to $1,364.4 million in
2007. Merchandise sales increased 24.5% to $411.4 million
in 2007.
Retail fuel sales were 474.2 million gallons in 2007
compared to 396.9 million gallons in 2006. The increase in
retail fuel sales was primarily due to the acquisition of the
Calfee stores in May 2007 and the Fast stores in July 2006. The
inclusion of the Calfee and Fast stores increased fuel gallons
sold by 72.8 million. Same store fuel gallons sold were
flat in 2007 when compared to 2006. Retail fuel sales price
increased 8.4%, or $0.21 per gallon, to an average price of
$2.70 per gallon in 2007 from an average price of $2.49 per
gallon in 2006.
The increase in merchandise sales was primarily due to a
$74.6 million increase in merchandise sales resulting from
the inclusion of the Calfee stores and a full year of
merchandise sales from the Fast stores. Our comparable store
merchandise sales increased by 1.1%.
We continue to develop our private label product offerings which
currently include water, soft drinks, sandwiches, motor oil,
automatic transmission fluid and bag candy. In 2007, private
label merchandise sales represented 1.4% of total retail segment
merchandise sales compared to 1.1% of total retail segment
merchandise sales in 2006. Private label water represented 39.9%
of the water subcategory, private label soda represented 3.1% of
the soft drink category, automotive products represented 29.9%
of the automotive subcategory and candy represented 4.1% of the
candy category in 2007. The percentages for water and automotive
subcategories can be presented as a percentage of subcategories
due to our scanning-out initiatives completed in 2006.
Cost of goods sold for our retail segment increased 27.6% to
$1,575.4 million in 2007 from $1,234.9 million in
2006. This increase was primarily due to the inclusion of the
Calfee and Fast stores acquired which increased cost of goods
sold $248.1 million and resulted in an 8.9% increase in
average retail fuel costs.
Operating expenses were $136.8 million in 2007, an increase
of $34.0 million, or 33.1%. This increase was primarily due
to $27.3 million operating costs from the inclusion of the
Calfee and Fast stores, higher utility and maintenance expenses
in our existing stores, as well as a continuing increase in
credit card expense. The ratio of operating expenses to
merchandise sales plus total gallons sold in our retail
operations increased to 14.9% in 2007 from 13.5% in 2006.
Contribution margin for the retail segment in 2007 was
$63.6 million, or 26.1% of our consolidated contribution
margin.
49
Retail
Segment Operational Comparison of the Year Ended
December 31, 2006 versus the Year Ended December 31,
2005
In the fiscal years ended December 31, 2006 and 2005,
respectively, net sales for our retail segment were
$1,395.6 million and $1,101.0 million, respectively,
an increase of $294.6 million or 26.8%. 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 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.
Contribution margin for the retail segment in 2006 was
$57.7 million, or 26.7% of our consolidated contribution
margin.
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 and borrowings under our current credit facilities
will be sufficient to satisfy the anticipated cash requirements
associated with our existing operations for at least the next
12 months.
Additional capital may be required in order to consummate
significant acquisitions. We will likely seek these additional
funds from a variety of sources, including public or private
debt and stock offerings, and borrowings under credit lines or
other sources. There can be no assurance that we will be able to
raise additional funds on favorable terms or at all.
50
Cash
Flows
The following table sets forth a summary of our consolidated
cash flows for 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by operating activities
|
|
$
|
179.9
|
|
|
$
|
110.2
|
|
|
$
|
148.7
|
|
Cash flows used in investing activities
|
|
|
(222.7
|
)
|
|
|
(251.4
|
)
|
|
|
(162.3
|
)
|
Cash flows provided by financing activities
|
|
|
45.5
|
|
|
|
180.2
|
|
|
|
54.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
2.7
|
|
|
$
|
39.0
|
|
|
$
|
40.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
Net cash provided by operating activities was $179.9 for 2007
compared to $110.2 million for 2006 and $148.7 million
for 2005. The increase in cash flows from operations in 2007
from 2006 was primarily due to a $67.9 million increase in
accounts payable and other current liabilities as well as
increased depreciation and amortization costs resulting from
recent capital spending programs at our Tyler refinery and the
depreciation associated with the purchase of the Calfee stores
completed in the second quarter of 2007. 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 in 2006
resulted in a corresponding increase in our income taxes payable
during 2006.
Cash
Flows from Investing Activities
Net cash used in investing activities was $222.7 million
for 2007, compared to $251.4 million for 2006 and
$162.3 million in 2005. The decrease from 2006 to 2007 was
primarily due to the $75.0 million net change in purchase
and sales activity associated with our short-term investments
and to our acquisition costs in 2007 compared to 2006. 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 in 2007 includes our capital
expenditures of approximately $87.7 million, of which
$61.6 million was spent on projects at our refinery,
$0.3 million in our marketing segment and
$23.8 million in our retail segment. During 2007, we spent
$38.7 million on regulatory and compliance projects at the
refinery. In our retail segment, we spent $8.6 million
opening three store raze and rebuilds, including
two in our Alabama market, and retrofitting one existing store
using our next generation MAPCO Mart concept.
In 2007, we also used $163.7 million of cash in connection
with the $74.6 million (including transaction costs)
acquisition of the Calfee stores and the $89.1 million
(including transaction costs) cash paid for the acquisition of a
34.6% equity ownership of Lion Oil.
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. Capital expenditures in
2006 were 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 raze and rebuild stores, and
retrofitting one existing store using the MAPCO Mart concept. In
2006, we also reimaged the BP stores acquired in December 2005.
In 2006, we also used $107.3 million of cash (including
transaction costs) in connection with the acquisition of the
Pride assets and the acquisition of the Fast stores.
51
Cash
Flows from Financing Activities
Net cash provided from financing activities was
$45.5 million for 2007, compared to $180.2 million for
2006 and $54.1 million during 2005. Net cash provided by
financing activities in 2007 was primarily due to the
$65.0 million in proceeds received from the issuance of
debt that funded a portion of the Calfee acquisition. We also
had net proceeds from our revolving credit facilities of
$4.6 million and $7.7 million of proceeds and tax
benefit associated with our stock compensation. All of these
proceeds in 2007 were partially offset by dividend payments of
$28.5 million.
The $65.0 million credit agreement was executed on
March 30, 2007, with Lehman Commercial Paper Inc., as
administrative agent, Lehman Brothers Inc., as arranger and
joint book runner, and JPMorgan Chase Bank, N.A., as
documentation agent, arranger and joint book runner. The credit
agreement provides for unsecured loans of $65.0 million,
the proceeds of which were used to pay a portion of the
acquisition costs for the assets of Calfee Company of Dalton,
Inc. and affiliates, and to pay related acquisition transaction
costs and expenses in April 2007. The loans become due on
March 30, 2009 and bear interest, at Deleks election
in accordance with the terms of the credit agreement, at either
a Base Rate or Eurodollar rate, plus in each case, an applicable
margin of initially 1% in respect of Base Rate loans, and 2% in
respect of Eurodollar loans, which applicable margin is subject
to increase depending on the number of days the loan remains
outstanding.
The increase in cash provided from financing activities from
2005 to 2006 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 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
U.S. 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 Fast stores
acquisition discussed in Note 3 of our consolidated
financial statements included in Item 8, Financial
Statements and Supplementary Data, of the Annual Report on
Form 10-K,
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 U.S. The proceeds of
this note were used to fund a portion of the acquisition of the
Pride assets and its working capital needs discussed in
Note 3 of the consolidated financial statements included in
Item 8, Financial Statements and Supplementary Data, in the
Annual Report on
Form 10-K.
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 acquisition of the Pride assets
discussed in Note 3 of our consolidated financial
statements included in Item 8 of the Annual Report on
Form 10-K,
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 revolver were used to
fund the working capital needs of a new Delek subsidiary, Delek
Marketing and Supply, L.P.
52
The Fifth Third revolver initially matured on July 30,
2007, but on July 27, 2007 the maturity was extended until
January 31, 2008. On December 19, 2007, we amended and
restated our existing revolving credit facility. The amended and
restated agreement among other things, increased the size of the
facility from $50.0 to $75.0 million, including a
$25.0 million
sub-limit
for letters of credit and extended the maturity of the facility
to December 19, 2012. The revolver bears interest at our
election, at either (x) a spread of 1.5% to 2.5%, as
determined by a
leverage-based
pricing matrix over the LIBOR for the applicable interest period
or (y) a spread of 0.0% to 1.0%, as determined by the same
matrix, over Fifth Thirds base rate.
Cash
Position and Indebtedness
As of December 31, 2007, our total cash and cash
equivalents were approximately $104.3 million, investment
grade short-term investments totaled $45.5 million and we
had total indebtedness of approximately $355.2 million.
Borrowing availability under our three revolving credit
facilities was approximately $189.6 million and we had a
total face value of letters of credit outstanding of
$171.6 million.
A summary of our total indebtedness as of December 31, 2007
is shown below:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Senior secured credit facility term loan
|
|
$
|
145.6
|
|
Senior secured credit facility revolver
|
|
|
49.0
|
|
SunTrust ABL revolver
|
|
|
|
|
Fifth Third revolver
|
|
|
34.3
|
|
Lehman note
|
|
|
65.0
|
|
Promissory notes
|
|
|
60.0
|
|
Capital lease obligations
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
355.2
|
|
Less: Current portion of long-term debt and capital lease
obligations
|
|
|
10.8
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
344.4
|
|
|
|
|
|
|
Senior
Secured Credit Facility
The senior secured credit facility consists of a
$120.0 million revolving credit facility and
$165.0 million term loan facility which has
$145.6 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 $15.1 million
as of December 31, 2007. The senior secured credit facility
term loan requires quarterly principal payments of approximately
0.25% of the principal balance through March 31, 2011 and a
balloon payment of approximately 94.25% of the principal balance
due upon maturity on April 28, 2011. We are also required
to make certain prepayments of this facility depending on excess
cash flow as defined in the credit agreement. In accordance with
this excess cash flow calculation, we prepaid $15.6 million
in April 2006 and expect to make another payment of
$9.1 million in March 2008. The senior secured credit
facility revolver is payable in full upon maturity on
April 28, 2010 with periodic interest repayment
requirements. The senior secured credit facility term and senior
secured credit facility revolver loans bear interest based on
predetermined pricing grids which allow us to choose between a
Base Rate or Eurodollar loan. Interest
is payable quarterly for Base Rate loans and for the applicable
interest period on Eurodollar loans. At December 31, 2007,
the weighted average borrowing rate was approximately 7.7% for
the senior secured credit facility term loan and 7.5% 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, 2007 totaled
approximately $56.0 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, 2007.
53
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.
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, 2007, we had no
outstanding borrowings under the agreement but had letters of
credit outstanding totaling approximately $154.5 million.
Excess collateral capacity under the SunTrust ABL revolver as of
December 31, 2007 was $93.0 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 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, 2007.
Fifth
Third Revolver
In conjunction with the acquisition of the Pride assets
discussed herein and in Note 3 of our consolidated
financial statements included in Item 8, Financial
Statements and Supplementary Data, of this Annual Report on
Form 10-K,
on July 27, 2006, Delek executed a short-term revolver with
Fifth Third Bank, as administrative agent, in the amount of
$50.0 million. The proceeds of this revolver were used to
fund the working capital needs of a new subsidiary, Delek
Marketing & Supply, LP. The Fifth Third revolver
initially matured on July 30, 2007, but on July 27,
2007 the maturity was extended until January 31, 2008. On
December 19, 2007, we amended and restated our existing
revolving credit facility. The amended and restated agreement,
among other things, increased the size of the facility from
$50.0 to $75.0 million, including a $25.0 million
sub-limit for letters of credit, and extended the maturity of
the facility to December 19, 2012. The revolver bears
interest at our election, at either, (x) a spread of 1.5%
to 2.5%, as determined by a leverage-based pricing matrix over
the LIBOR for the applicable interest period or (y) a
spread of 0.0% to 1.0%, as determined by the same matrix, over
Fifth Thirds base rate. Borrowings under the Fifth Third
revolver are secured by substantially all of the assets of Delek
Marketing & Supply LP. As of December 31, 2007,
the weighted average borrowing rate for amounts borrowed was
6.8%. Amounts available under the Fifth Third revolver as of
December 31, 2007 were approximately $40.7 million. We
are required to comply with certain financial and non-financial
covenants under this revolver. We were in compliance with all
covenant requirements as of December 31, 2007.
Lehman
Credit Agreement
On March 30, 2007, Delek entered into a credit agreement
with Lehman Commercial Paper Inc., as administrative agent,
Lehman Brothers Inc., as arranger and joint book runner, and
JPMorgan Chase Bank, N.A., as documentation agent, arranger and
joint book runner. The credit agreement provides for unsecured
loans of $65.0 million, the proceeds of which were used to
pay a portion of the acquisition costs for the assets of Calfee
Company of Dalton, Inc. and affiliates, and to pay related costs
and expenses in April 2007. The loans become due on
March 30, 2009 and bear interest, at Deleks election
in accordance with the terms of the credit agreement, at either
a Base Rate or Eurodollar rate, plus in each case, an applicable
margin of initially 1% in respect of Base Rate loans, and 2% in
respect of Eurodollar loans, which applicable margin is subject
to increase depending on the number of days the loan remains
outstanding. Interest is payable quarterly for Base Rate loans
and for the applicable interest period for Eurodollar loans. As
of December 31, 2007, the weighted average borrowing rate
was 7.7%. In connection with the execution of this agreement,
Delek incurred and capitalized $0.8 million in deferred
financing costs that will be amortized over the term of the
facility.
54
We are required to comply with certain financial and
non-financial covenants under this credit agreement. We were in
compliance with all covenant requirements as of
December 31, 2007.
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, 2007, the weighted average borrowing rate for
amounts borrowed under the IDB Note was 6.9%.
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, 2007, the weighted
average borrowing rate for amounts borrowed under the Bank Leumi
Note was 6.9%.
Capital
Spending
A key component of our long-term strategy is our capital
expenditure program. Our capital expenditures for 2007 were
$87.7 million, of which $61.6 million was spent in our
refining segment, $0.3 million in our marketing segment,
$23.8 million was spent in our retail segment and
$2.0 million was spent at the Delek US level. Our capital
expenditure budget is approximately $150.5 million for
2008. The following table summarizes our actual capital
expenditures for 2007 and planned capital expenditures for 2008
by operating segment and major category (in millions):
|
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|
|
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Year Ended December 31,
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|
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2008 Budget
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2007 Actual
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Refining:
|
|
|
|
|
|
|
|
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Sustaining maintenance
|
|
$
|
17.5
|
|
|
$
|
5.2
|
|
Regulatory
|
|
|
48.3
|
|
|
|
38.7
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|
Discretionary projects
|
|
|
59.2
|
|
|
|
17.7
|
|
|
|
|
|
|
|
|
|
|
Refining segment total
|
|
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125.0
|
|
|
|
61.6
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|
|
|
|
|
|
|
|
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|
Marketing:
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|
|
|
|
|
|
|
|
Sustaining maintenance
|
|
|
0.3
|
|
|
|
0.3
|
|
Discretionary projects
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|
|
0.7
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|
|
|
|
|
|
|
|
|
|
|
|
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Marketing segment total
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|
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1.0
|
|
|
|
0.3
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|
|
|
|
|
|
|
|
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Retail:
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|
|
|
|
|
|
|
Sustaining maintenance
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|
|
4.0
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|
|
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6.6
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Store enhancements
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3.5
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|
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8.6
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Re-image/builds
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17.0
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8.6
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|
|
|
|
|
|
|
|
|
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Retail segment total
|
|
|
24.5
|
|
|
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23.8
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|
|
|
|
|
|
|
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Corporate(1)
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2.0
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|
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|
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|
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Total capital spending
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$
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150.5
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|
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$
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87.7
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|
|
|
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(1) |
|
On July 23, 2007, Delek executed an amendment to the
employment agreement with Mr. Yemin, President and Chief
Executive Officer of Delek. Under this amendment, a new
residence was purchased by Delek at a cost of approximately
$2.0 million to be provided to Mr. Yemin by Delek
rent-free. In addition, Mr. Yemin has the option to
purchase the residence from Delek following the termination of
his employment for any reason other than for cause. |
In 2008, we plan to spend approximately $24.5 million in
the retail segment, $17.0 million of which is expected to
consist of 6 to 8 new store builds and the re-imaging of 60 to
80 of our existing stores. We spent
55
$8.6 million on similar projects in 2007. With respect to
the refining segment, we plan to spend approximately
$42.0 million in 2008 to comply with the CAA regulations
requiring a reduction in sulfur content in gasoline. We spent
$38.7 million on regulatory projects for the refining
segment in 2007. We expect that in 2008 and 2009, the crude
optimization projects will require $65.0 to complete. In
addition, we plan to spend approximately $6.3 million for
other environmental and regulatory projects in 2008.
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 cost of employee 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, 2007, is set forth
in the following table (in millions).
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<1 Year
|
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1-3 Years
|
|
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3-5 Years
|
|
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>5 Years
|
|
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Total
|
|
|
Long term debt and capital lease obligations
|
|
$
|
10.8
|
|
|
$
|
177.1
|
|
|
$
|
166.8
|
|
|
$
|
0.5
|
|
|
$
|
355.2
|
|
Interest(1)
|
|
|
23.7
|
|
|
|
29.1
|
|
|
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7.4
|
|
|
|
|
|
|
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60.2
|
|
Operating lease commitments(2)
|
|
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15.5
|
|
|
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23.6
|
|
|
|
13.8
|
|
|
|
16.7
|
|
|
|
69.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Capital project commitments(3)
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|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
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2.2
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Total
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$
|
50.0
|
|
|
$
|
232.0
|
|
|
$
|
188.0
|
|
|
$
|
17.2
|
|
|
$
|
487.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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(1) |
|
Includes expected payments on debt outstanding under credit
facilities in place at December 31, 2007. Variable interest
is calculated using December 31, 2007 rates. |
|
(2) |
|
Amounts reflect future estimated lease payments under operating
leases having remaining non-cancelable terms in excess of one
year as of December 31, 2007. |
|
(3) |
|
Amounts constitute a minimum obligation that would be required
as a penalty payment if a certain capital project is not
completed. We have no expectation that this capital project will
not be completed. |
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 accounting principles
generally accepted in the United States, 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 are both most
important to the portrayal of our financial condition and
results, and require our most difficult, subjective or complex
judgments. Often they require judgments and estimation about
matters which are inherently uncertain and involve 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
last-in,
first-out
(LIFO) valuation method. The LIFO
56
method requires management to make estimates on an interim basis
of the anticipated year-end inventory quantities, which could
differ from actual quantities.
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 numerous
other factors beyond our control including the economic
viability of the general economy, weather conditions, the
availability of imports, the marketing of competitive fuels and
government regulation. The impact of changes in actual
performance versus these estimates could be material to 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-life 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.
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.
Property and equipment of retail stores we are closing are
written down to their estimated net realizable value at the time
we close such stores. Changes in market demographics,
competition, economic conditions and other factors can impact
the operations of certain locations. Cash flows vary from year
to year, and we analyze regional market, division and store
operations. As a result, we identified and recorded impairment
charges of $0.3 million for closed stores in 2007. In both
2007 and 2006, we turned certain locations into unbranded dealer
operations. Similar changes may occur in the future that will
require us to record impairment charges.
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. In assessing the
recoverability of goodwill, assumptions are made with respect to
future business conditions and estimated expected future cash
flows to determine the fair value of a reporting unit. If these
estimates and assumptions change in the future due to such
factors as a decline in general economic conditions, competitive
pressures on sales and margins, and other economic and industry
factors beyond managements control, an impairment charge
may be required. Details of remaining goodwill balances by
segment are included in Note 7 to the consolidated
financial statements in Item 8, Financial Statements and
Supplementary Data, of this Annual Report on
Form 10-K
and are incorporated herein by reference.
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
57
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 make assumptions and judgments regarding, for example, the
likelihood of attaining specified levels of purchases or selling
specified volumes of products, and the duration of carrying a
specified product. In selecting estimates, we use historical
trending of sales, market industry information and recognition
of current market indicators about general economic conditions
which might impact future sales. The impact of changes in actual
performance versus these estimates could be material.
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
contamination, 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 discount
environmental liabilities to their present value if payments are
fixed and determinable. Expenditures for equipment necessary for
environmental issues relating to ongoing operations are
capitalized.
Changes in laws and regulations, the financial condition of
state trust funds associated with environmental remediation and
actual remediation expenses compared to historical experience
could significantly impact our results of operations and
financial position. We believe the estimates selected, in each
instance, represent our best estimate of future outcomes, but
the actual outcomes could differ from the estimates 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 plan to adopt SFAS 157 beginning
January 1, 2008 and do not expect it to have a material
effect on our financial position or results of operations. The
FASB provided a one year deferral of the adoption of
SFAS 157 for certain
non-financial
assets and liabilities. We have elected to defer the adoption
for certain
non-financial
assets and liabilities as specified in FASB Staff Position
No. 157-2.
In February 2007, the FASB published SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115 (SFAS 159), which permits
entities to choose to measure many financial instruments and
certain other items at fair value. While most of the provisions
of this statement only apply to entities that elect the fair
value option, the amendment to FASB Statement No. 115,
58
Accounting for Certain Investments in Debt and Equity
Securities (SFAS 115), applies to all
entities with available-for-sale and trading securities. The
fair value option established by SFAS 159 permits all
entities to choose to measure eligible items at fair value at
specified election dates and requires all entities to report
unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting
date. The fair value option may be applied instrument by
instrument, is irrevocable once elected, and must be applied to
entire instruments rather than to portions of instruments.
SFAS 159 is effective as of the beginning of an
entitys first fiscal year that begins after
November 15, 2007. We plan to adopt this standard beginning
January 1, 2008 but are not currently contemplating
electing to apply it to our financial instruments. We do not
expect SFAS 159 to have a material impact on our financial
position or results of operations.
In December 2007, the FASB issued SFAS No. 141
(Revised), Business Combinations
(SFAS No. 141(R)). This Statement will
apply to all transactions in which an entity obtains control of
one or more other businesses. In general,
SFAS No. 141(R) requires the acquiring entity in a
business combination to recognize the fair value of all the
assets acquired and liabilities assumed in the transaction;
establishes the acquisition-date as the fair value measurement
point; and modifies the disclosure requirements. This Statement
applies prospectively to business combinations for which the
acquisition date is on or after January 1, 2009. However,
accounting for changes in valuation allowances for acquired
deferred tax assets and the resolution of uncertain tax
positions for prior business combinations will impact tax
expense instead of impacting the prior business combination
accounting starting January 1, 2009. We are currently
evaluating the changes provided in this Statement.
Also in December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51,
which changes the classification of non-controlling interests,
sometimes called a minority interest, in the consolidated
financial statements. Additionally, this Statement establishes a
single method of accounting for changes in a parent
companys ownership interest that do not result in
deconsolidation and requires a parent company to recognize a
gain or loss when a subsidiary is deconsolidated. This Statement
is effective January 1, 2009, and will be applied
prospectively with the exception of the presentation and
disclosure requirements which must be applied retrospectively.
Delek has no minority interest reporting in its consolidated
reporting, therefore adoption of SFAS No. 160 will not
have an impact on our financial position or results of
operations.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
Changes in commodity prices (mainly petroleum crude oil and
unleaded gasoline) and interest rates are our primary sources of
market risk. When we make the decision to manage our market
exposure, our objective is generally to avoid losses from
negative price changes, realizing we will not obtain the benefit
of positive price changes.
Commodity
Price Risk
Impact of Changing Prices. Our revenues and
cash flows, as well as estimates of future cash flows, are
sensitive to changes in energy prices. Major shifts in the cost
of crude oil, the prices of refined products and the cost of
ethanol can generate large changes in the operating margin in
each of our segments. Gains and losses on transactions accounted
for using mark-to-market accounting are reflected in the Cost of
goods sold in the Consolidated Statements of Income at each
period end. Gains or losses on commodity derivative contracts
accounted for as cash flow hedges are recognized in Other
comprehensive income on the Consolidated Balance Sheets and
ultimately, when the forecasted transactions are completed to
Net sales or Cost of goods sold in the Consolidated Statements
of Income.
Price Risk Management Activities. At times, we
enter into commodity derivative contracts to manage our price
exposure to our inventory positions, future purchases of crude
oil and ethanol, future sales of refined products or to fix
margins on future production. During 2007, in connection with
our marketing segments supply contracts, we entered into
certain futures contracts. In accordance with
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133), all of
these commodity futures contracts are recorded at fair value,
and any change in fair value between periods has historically
been recorded in the profit and loss section of our consolidated
financial statements. At December 31, 2007, we had open
derivative contracts representing 40,000 barrels of refined
59
petroleum products with an unrealized net gain of
$0.1 million. We did not have any commodity futures
contracts during the year ended December 31, 2006.
In December 2007, in connection with our offering of renewable
fuels in our retail segment markets, we entered into a series of
over the counter swaps based on the futures price of ethanol as
quoted on the Chicago Board of Trade and a series of over the
counter swaps based on the futures price of unleaded gasoline as
quoted on the New York Mercantile Exchange. In accordance with
SFAS No. 133, these swaps were designated as cash flow
hedges and the change in fair value between periods has been
recorded in Other comprehensive income. Any ineffectiveness in
these swaps has been recorded to Other expense, net. As of
December 31, 2007, we had open derivative contracts
representing 11,614,500 gallons of ethanol with an unrealized
net gain of $2.5 million. We also had open derivative
contracts representing 11,340,000 gallons of unleaded gasoline
with an unrealized net loss of $1.9 million. We did not
have any commodity futures contracts designated in cash flow
hedges during the year ended December 31, 2006.
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, 2007, we held approximately 1.2 million
barrels of crude and product inventories valued under the LIFO
valuation method with an average cost of $57.31 per barrel.
Replacement cost (FIFO) exceeded carrying value of LIFO costs by
$47.6 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
$353.9 million as of December 31, 2007. 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 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
decreased by $2.4 million for the year ending
December 31, 2007 and changed by an immaterial amount for
the year ended December 31, 2006. 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 agreements taking into
account the difference between the contract rate of interest and
rates currently quoted for agreements, of similar terms and
maturities. We expect that interest rate derivatives will reduce
our exposure to short-term interest rate movements. The
annualized impact of a hypothetical one percent change in
interest rates on floating rate debt outstanding as of
December 31, 2007 would be to change interest expense by
$3.5 million. Increases in rates would be partially
mitigated by interest rate derivatives mentioned above. As of
December 31, 2007, we had interest rate cap agreements in
place representing $98.8 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 $1.0 million as of
December 31, 2007.
The types of instruments used in our hedging and trading
activities described above include swaps, and futures. Our
positions in derivative commodity instruments are monitored and
managed on a daily basis by a risk management committee to
ensure compliance with our risk management strategies which have
been approved by our board of directors.
|
|
ITEM 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.
60
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
We maintain disclosure controls and procedures (as defined in
Rule 13a-15(e)
and
15d-15(e))
under the Exchange Act that are designed to provide reasonable
assurance that the information that we are required to disclose
in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and such
information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure. It should be noted that, because of
inherent limitations, our disclosure controls and procedures,
however well designed and operated, can provide only reasonable,
and not absolute, assurance that the objectives of the
disclosure controls and procedures are met.
As required by paragraph (b) of
Rules 13a-15
and 15d-15
under the Exchange Act, our Chief Executive Officer and our
Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of the end of the period covered by
this report. Based on such evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded, as of
the end of the period covered by this report, that our
disclosure controls and procedures were effective to ensure that
the information that we are required to disclose in the reports
we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC
rules and forms and such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
Managements
Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Our internal
control over financial reporting is a process that is designed
under the supervision of our Chief Executive Officer and Chief
Financial Officer, and effected by our Board of Directors,
management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States. Our internal control over financial reporting
includes those policies and procedures that:
i. Pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets;
ii. Provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally
accepted in the United States, and that receipts and
expenditures recorded by us are being made only in accordance
with authorizations of our management and Board of
Directors; and
iii. Provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies and procedures may deteriorate.
Management has conducted its evaluation of the effectiveness of
internal control over financial reporting as of
December 31, 2007, based on the framework in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
Managements assessment included an evaluation of the
design of our internal control over financial reporting and
testing the operational effectiveness of our internal control
over financial reporting. Management reviewed the results of the
assessment with the Audit Committee of the Board of Directors.
Based on its assessment, management determined that, at
December 31, 2007, we maintained effective internal control
over financial reporting.
61
Report of
Independent Registered Public Accounting Firm
Our independent registered public accounting firm,
Ernst & Young LLP, has audited the effectiveness of
our internal control over financial reporting as of
December 31, 2007, as stated in their report, which is
included in the section beginning on
page F-1.
The information required by Item 8 is incorporated by
reference to the section beginning on
page F-1.
Changes
in Internal Control over Financial Reporting
There have been no changes in our internal control over
financial reporting during the fourth quarter of fiscal 2007
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
From time to time, we make changes to our internal control over
financial reporting that are intended to enhance its
effectiveness and which do not have a material effect on our
overall internal control over financial reporting. We will
continue to evaluate the effectiveness of our disclosure
controls and procedures and internal control over financial
reporting on an ongoing basis and will take action as
appropriate.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE
GOVERNANCE
|
The information required by Item 401 of
Regulation S-K
regarding directors will be included under Election of
Directors in the definitive Proxy Statement for our Annual
Meeting of Stockholders to be held May 2, 2008 (the
Definitive Proxy Statement), and is incorporated
herein by reference. Information regarding executive officers
will be included under Management in the Definitive
Proxy Statement and is incorporated herein by reference. The
information required by Item 405 of
Regulation S-K
will be 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
will be 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 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 will be included under
Executive Compensation and Corporate
Governance 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
|
The information required by this Item will be included under the
headings Security Ownership of Certain Beneficial Owners
and Management and Equity Compensation Plan
Information in the Definitive Proxy Statement and is
incorporated herein by reference.
62
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
The information required by this Item will be included under
Certain Relationships and Related Transactions,
Election of Directors 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 will be included under
Relationship with Independent Auditors in the
Definitive Proxy Statement and is incorporated herein by
reference.
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 (incorporated by reference
to Exhibit 10.1(d) to the Companys
Form 10-K
filed on March 20, 2007)
|
|
10
|
.1(e)*
|
|
Amendment No. 5 dated July 23, 2007 to Employment
Agreement by and among MAPCO Express, Inc., Delek US Holdings,
Inc. and Uzi Yemin (incorporated by reference to
Exhibit 10.2 to the Companys
Form 10-Q
filed on November 9, 2007)
|
|
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)
|
63
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
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+
|
|
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
|
.5(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)
|
|
10
|
.5(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
|
.6
|
|
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
|
.6(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
|
.6(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
|
.6(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
|
.6(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
|
.6(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)
|
64
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.6(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
|
.6(g)
|
|
Seventh Amendment to Amended and Restated Credit Agreement
entered into effective March 30, 2007, 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 May 15, 2007)
|
|
10
|
.7
|
|
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
|
.7(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
|
.7(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. (incorporated by
reference to Exhibit 10.8(b) to the Companys
Form 10-K
filed on March 20, 2007)
|
|
10
|
.8+
|
|
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
|
.8(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
|
.8(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
|
.8(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
|
.8(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
|
.8(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
|
.9+
|
|
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
|
.10*
|
|
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)
|
65
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.10(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
|
.10(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
|
.10(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
|
.11
|
|
Description of Director Compensation (incorporated by reference
to Exhibit 10.8 to the Companys
Form 10-Q
filed on May 15, 2007)
|
|
10
|
.12
|
|
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
|
.13
|
|
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
|
.14
|
|
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
|
.14(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
|
.15
|
|
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
|
.15(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
|
.16
|
|
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, as Administrative Agent
(incorporated by reference to Exhibit 10.2 to the
Companys
Form 10-Q
filed on November 14, 2006)
|
|
10
|
.16(a)
|
|
First Amendment dated January 9, 2007 to the 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, as Administrative Agent
(incorporated by reference to Exhibit 10.1 to the
Companys
Form 10-Q
filed on May 15, 2007)
|
|
10
|
.16(b)
|
|
Second Amendment dated July 27, 2007 to 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, as Administrative Agent, and L/C
Issuer (incorporated by reference to Exhibit 10.3 to the
Companys
Form 10-Q
filed on November 9, 2007)
|
|
10
|
.16(c)
|
|
Amended and Restated Credit Agreement dated December 19,
2007 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, as Administrative Agent and
L/C issuer
|
|
10
|
.17
|
|
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)
|
66
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.18
|
|
Purchase and Sale Agreement dated February 8, 2007, by and
between MAPCO Express, Inc., Calfee Company of Dalton, Inc., FM
Leasing, LP, FM Leasing I, LP, MF Leasing, LP, AC Stores,
LP, Com-Pac Properties, LLC, Com-Pac Properties Group, LP and
Favorite One Properties, LP. (incorporated by reference to
Exhibit 10.2 to the Companys
Form 10-Q
filed on May 15, 2007)
|
|
10
|
.18(a)
|
|
First Amendment dated April 2, 2007, to the Purchase and
Sale Agreement dated February 8, 2007, by and between MAPCO
Express, Inc., Calfee Company of Dalton, Inc., FM Leasing, LP,
FM Leasing I, LP, MF Leasing, LP, AC Stores, LP, Com-Pac
Properties, LLC, Com-Pac Properties Group, LP and Favorite One
Properties, LP. (incorporated by reference to
Exhibit 10.2(a) to the Companys
Form 10-Q
filed on May 15, 2007)
|
|
10
|
.19
|
|
Credit Agreement dated March 30, 2007, by and between Delek
US Holdings, Inc. and Lehman Commercial Paper Inc., as
administrative agent, Lehman Brothers Inc., as arranger and
joint bookrunner, and JPMorgan Chase Bank, N.A., as
documentation agent, arranger and joint bookrunner (incorporated
by reference to Exhibit 10.4 to the Companys
Form 10-Q
filed on May 15, 2007)
|
|
10
|
.19(a)
|
|
First Amendment dated August 20, 2007 to the Credit
Agreement dated March 30, 2007 by and between Delek US
Holdings, Inc. and Lehman Commercial Paper, Inc., as
administrative agent, Lehman Brothers, Inc., as arranger and
joint bookrunner, and JPMorgan Chase Bank, N.A. as documentation
agent, arranger and joint bookrunner (incorporated by reference
to Exhibit 10.4 to the Companys
Form 10-Q
filed on November 9, 2007)
|
|
10
|
.19(b)
|
|
Second Amendment dated October 17, 2007 to the Credit
Agreement dated March 30, 2007 by and between Delek US
Holdings, Inc. and Lehman Commercial Paper, Inc., as
administrative agent, Lehman Brothers, Inc. as arranger and
joint bookrunner, and JPMorgan Chase Bank, N.A. as documentation
agent, arranger and joint bookrunner
|
|
10
|
.19(c)
|
|
Third Amendment dated December 4, 2007 to the Credit
Agreement dated March 30, 2007 by and between Delek US
Holdings, Inc. and Lehman Commercial Paper, Inc., as
administrative agent, Lehman Brothers, Inc. as arranger and
joint bookrunner, and JPMorgan Chase Bank, N.A. as documentation
agent, arranger and joint bookrunner
|
|
10
|
.20*
|
|
Letter Agreement dated September 1, 2004, by and between
MAPCO Express, Inc. and Assaf Ginzburg (incorporated by
reference to Exhibit 10.5 to the Companys
Form 10-Q
filed on May 15, 2007)
|
|
10
|
.21*
|
|
Letter Agreement dated May 25, 2005, by and between MAPCO
Express, Inc. and Edward A. Morgan (incorporated by reference to
Exhibit 10.6 to the Companys
Form 10-Q
filed on May 15, 2007)
|
|
10
|
.22*
|
|
Letter Agreement dated May 25, 2005, by and between Delek
Refining, Inc. and Frederec Green (incorporated by reference to
Exhibit 10.7 to the Companys
Form 10-Q
filed on May 15, 2007)
|
|
10
|
.23
|
|
Stock Purchase Agreement dated July 12, 2007 by and between
TransMontaigne, Inc. and Delek US Holdings, Inc.
(incorporated by reference to Exhibit 10.1 to the
Companys
Form 10-Q
filed on November 9, 2007)
|
|
10
|
.24
|
|
Registration Rights Agreement dated August 22, 2007 by and
between Delek US Holdings, Inc. and TransMontaigne, Inc.
(incorporated by reference to Exhibit 10.5 to the
Companys
Form 10-Q
filed on November 9, 2007)
|
|
10
|
.24(a)
|
|
Assignment and Assumption Agreement dated October 9, 2007
by and between TransMontaigne, Inc., as assignor, Morgan Stanley
Capital Group, Inc., as assignee, and Delek US Holdings, Inc.
|
|
10
|
.25++
|
|
Distribution Service Agreement dated December 28, 2007 by
and between MAPCO Express, Inc. and Core-Mark International, Inc.
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP
|
|
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
|
67
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
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. |
|
++ |
|
Confidential treatment has been requested with respect to
certain portions of this exhibit pursuant to
Rule 24b-2
of the Securities Exchange Act. Omitted portions have been filed
separately with the Securities and Exchange Commission. |
68
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.
Delek US Holdings, Inc.
Edward Morgan
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: March 3, 2008
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 3, 2008:
|
|
|
/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/ Carlos
E. Jorda*
Carlos
E. Jorda
Director
|
|
|
|
/s/ Zvi
Greenfeld*
Zvi
Greenfeld
Director
|
|
/s/ Philip
L. Maslowe*
Philip
L. Maslowe
Director
|
|
|
|
/s/ Charles
H. Leonard*
Charles
H. Leonard
Director
|
|
|
|
|
|
/s/ Edward
Morgan
Edward
Morgan
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
Edward Morgan
Individually and as
Attorney-in-Fact
69
Delek US
Holdings, Inc.
Consolidated Financial Statements
As of December 31, 2007 and 2006 and
For Each of the Three Years Ended December 31,
2007
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-1
|
|
Audited Financial Statements:
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
|
|
All other financial schedules are not required under related
instructions, or are inapplicable and therefore have been
omitted.
|
|
|
|
|
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Delek US Holdings, Inc.
We have audited Delek US Holdings, Inc.s internal control
over financial reporting as of December 31, 2007, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Delek
US Holdings, Inc.s management is responsible for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting included in Managements Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the companys internal control
over financial reporting 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 effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Delek US Holdings, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2007, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Delek US Holdings, Inc. as of
December 31, 2007 and 2006, and the related consolidated
statements of operations, changes in shareholders equity
and comprehensive income, and cash flows for each of the three
years in the period ended December 31, 2007 of Delek US
Holdings, Inc. and our report dated February 26, 2008
expressed an unqualified opinion thereon.
Nashville, Tennessee
February 26, 2008
F-1
Report of
Independent Registered Public Accounting Firm
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, 2007 and 2006,
and the related consolidated statements of operations, changes
in shareholders equity and comprehensive income, and cash
flows for each of the three years in the period ended
December 31, 2007. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
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. 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Delek US Holdings, Inc. at
December 31, 2007 and 2006, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2007, in conformity with
U.S. generally accepted accounting principles.
As discussed in Notes 2 and 10 to the consolidated
financial statements, the Company changed its method of
accounting for stock-based compensation in connection with the
adoption of Statement of Financial Accounting Standards
No. 123 (revised 2004) Share-Based Payment
effective January 1, 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Delek
US Holdings, Inc.s internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control Integrated Framework
issued by the Committee on Sponsoring Organizations of the
Treadway Commission and our report dated February 26, 2008
expressed an unqualified opinion thereon.
Nashville, Tennessee
February 26, 2008
F-2
Delek US
Holdings, Inc.
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions, except par value and shares)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
104.3
|
|
|
$
|
101.6
|
|
Short-term investments
|
|
|
45.5
|
|
|
|
73.2
|
|
Accounts receivable
|
|
|
112.6
|
|
|
|
83.7
|
|
Inventory
|
|
|
130.6
|
|
|
|
120.8
|
|
Other current assets
|
|
|
47.0
|
|
|
|
31.3
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
440.0
|
|
|
|
410.6
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
644.3
|
|
|
|
493.1
|
|
Less: accumulated depreciation
|
|
|
(98.2
|
)
|
|
|
(68.4
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
546.1
|
|
|
|
424.7
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
89.0
|
|
|
|
80.7
|
|
Other intangibles, net
|
|
|
11.6
|
|
|
|
12.2
|
|
Equity method investment
|
|
|
139.5
|
|
|
|
|
|
Other non-current assets
|
|
|
11.6
|
|
|
|
21.2
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,237.8
|
|
|
$
|
949.4
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
248.6
|
|
|
$
|
175.5
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
10.8
|
|
|
|
1.8
|
|
Note payable
|
|
|
|
|
|
|
19.2
|
|
Accrued expenses and other current liabilities
|
|
|
39.1
|
|
|
|
34.4
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
298.5
|
|
|
|
230.9
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations, net of current
portion
|
|
|
344.4
|
|
|
|
265.6
|
|
Environmental liabilities, net of current portion
|
|
|
6.7
|
|
|
|
9.3
|
|
Asset retirement obligations
|
|
|
5.3
|
|
|
|
3.3
|
|
Deferred tax liabilities
|
|
|
60.3
|
|
|
|
50.5
|
|
Other non-current liabilities
|
|
|
10.1
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
426.8
|
|
|
|
336.3
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 110,000,000 shares
authorized, 53,666,570 and 51,139,869 shares issued and
outstanding at December 31, 2007 and 2006, respectively
|
|
|
0.5
|
|
|
|
0.5
|
|
Additional paid-in capital
|
|
|
274.1
|
|
|
|
211.9
|
|
Accumulated other comprehensive income
|
|
|
0.3
|
|
|
|
|
|
Retained earnings
|
|
|
237.6
|
|
|
|
169.8
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
512.5
|
|
|
|
382.2
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,237.8
|
|
|
$
|
949.4
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-3
Delek US
Holdings, Inc.
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions, except shares and per share data)
|
|
|
Net sales
|
|
$
|
4,097.1
|
|
|
$
|
3,216.1
|
|
|
$
|
2,031.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
3,632.5
|
|
|
|
2,824.4
|
|
|
|
1,730.1
|
|
Operating expenses
|
|
|
220.5
|
|
|
|
175.5
|
|
|
|
134.6
|
|
General and administrative expenses
|
|
|
54.6
|
|
|
|
38.2
|
|
|
|
23.5
|
|
Depreciation and amortization
|
|
|
33.1
|
|
|
|
22.8
|
|
|
|
16.1
|
|
Gain on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
(1.6
|
)
|
Unrealized (gain) loss on forward contract activities
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
3,940.6
|
|
|
|
3,060.9
|
|
|
|
1,911.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
156.5
|
|
|
|
155.2
|
|
|
|
120.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
30.6
|
|
|
|
24.2
|
|
|
|
17.4
|
|
Interest income
|
|
|
(9.3
|
)
|
|
|
(7.2
|
)
|
|
|
(2.1
|
)
|
Interest expense to related parties
|
|
|
|
|
|
|
1.0
|
|
|
|
3.0
|
|
Loss from equity method investment
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
|
2.4
|
|
|
|
0.2
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses
|
|
|
24.5
|
|
|
|
18.2
|
|
|
|
20.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense and cumulative effect of a
change in accounting policy
|
|
|
132.0
|
|
|
|
137.0
|
|
|
|
99.3
|
|
Income tax expense
|
|
|
35.6
|
|
|
|
44.0
|
|
|
|
34.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in accounting policy
|
|
|
96.4
|
|
|
|
93.0
|
|
|
|
64.4
|
|
Cumulative effect of a change in accounting policy
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
96.4
|
|
|
$
|
93.0
|
|
|
$
|
64.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in accounting policy
|
|
$
|
1.85
|
|
|
$
|
1.98
|
|
|
$
|
1.64
|
|
Cumulative effect of change in accounting policy
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.85
|
|
|
$
|
1.98
|
|
|
$
|
1.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in accounting policy
|
|
$
|
1.82
|
|
|
$
|
1.94
|
|
|
$
|
1.64
|
|
Cumulative effect of change in accounting policy
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.82
|
|
|
$
|
1.94
|
|
|
$
|
1.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
52,077,893
|
|
|
|
47,077,369
|
|
|
|
39,389,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
52,850,231
|
|
|
|
47,915,962
|
|
|
|
39,389,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share outstanding
|
|
$
|
0.54
|
|
|
$
|
0.04
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-4
Delek US
Holdings, Inc.
Consolidated
Statements of Changes in Shareholders Equity and
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
(In millions, except shares and per share data)
|
|
|
Balance at December 31, 2004
|
|
|
39,389,869
|
|
|
$
|
0.4
|
|
|
$
|
40.7
|
|
|
$
|
|
|
|
$
|
14.6
|
|
|
$
|
55.7
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64.1
|
|
|
|
64.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64.1
|
|
|
|
64.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
39,389,869
|
|
|
|
0.4
|
|
|
|
40.7
|
|
|
|
|
|
|
|
78.7
|
|
|
|
119.8
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93.0
|
|
|
|
93.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93.0
|
|
|
|
93.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from public offering
|
|
|
11,500,000
|
|
|
|
0.1
|
|
|
|
166.8
|
|
|
|
|
|
|
|
|
|
|
|
166.9
|
|
Common stock dividends ($0.15 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.9
|
)
|
|
|
(1.9
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
Income tax benefit of stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
Exercise of stock-based awards
|
|
|
250,000
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
51,139,869
|
|
|
|
0.5
|
|
|
|
211.9
|
|
|
|
|
|
|
|
169.8
|
|
|
|
382.2
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96.4
|
|
|
|
96.4
|
|
Unrealized gain on cash flow hedges, net of deferred income tax
expense of $0.2 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
96.4
|
|
|
|
96.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock dividends ($0.15 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28.5
|
)
|
|
|
(28.5
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Income tax benefit of stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
3.8
|
|
Exercise of stock-based awards
|
|
|
610,034
|
|
|
|
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
3.9
|
|
Stock issued in connection with equity method investment
|
|
|
1,916,667
|
|
|
|
|
|
|
|
51.2
|
|
|
|
|
|
|
|
|
|
|
|
51.2
|
|
Cumulative effect of adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
53,666,570
|
|
|
$
|
0.5
|
|
|
$
|
274.1
|
|
|
$
|
0.3
|
|
|
$
|
237.6
|
|
|
$
|
512.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-5
Delek US
Holdings, Inc.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
96.4
|
|
|
$
|
93.0
|
|
|
$
|
64.1
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
33.1
|
|
|
|
22.8
|
|
|
|
16.1
|
|
Amortization of deferred financing costs
|
|
|
4.9
|
|
|
|
4.2
|
|
|
|
2.3
|
|
Accretion of asset retirement obligations
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.1
|
|
Deferred income taxes
|
|
|
10.3
|
|
|
|
22.8
|
|
|
|
8.9
|
|
Loss from equity method investment
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
Net loss (gain) on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
Loss on interest rate derivative instruments
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
3.3
|
|
|
|
2.4
|
|
|
|
|
|
Income tax benefit of stock-based compensation
|
|
|
(3.8
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
Changes in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(28.9
|
)
|
|
|
(30.7
|
)
|
|
|
(41.7
|
)
|
Inventories and other current assets
|
|
|
(32.0
|
)
|
|
|
(24.8
|
)
|
|
|
11.1
|
|
Accounts payable and other current liabilities
|
|
|
91.0
|
|
|
|
23.1
|
|
|
|
88.1
|
|
Non-current assets and liabilities, net
|
|
|
2.3
|
|
|
|
(1.4
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
179.9
|
|
|
|
110.2
|
|
|
|
148.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(3,214.1
|
)
|
|
|
(520.2
|
)
|
|
|
(26.6
|
)
|
Sales of short-term investments
|
|
|
3,242.5
|
|
|
|
473.6
|
|
|
|
|
|
Purchase of equity method investment
|
|
|
(89.1
|
)
|
|
|
|
|
|
|
|
|
Business combinations, net of cash acquired
|
|
|
(74.6
|
)
|
|
|
(107.3
|
)
|
|
|
(109.6
|
)
|
Purchase of property, plant and equipment
|
|
|
(87.7
|
)
|
|
|
(97.5
|
)
|
|
|
(29.2
|
)
|
Proceeds from sale of convenience store assets
|
|
|
0.3
|
|
|
|
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(222.7
|
)
|
|
|
(251.4
|
)
|
|
|
(162.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from revolvers
|
|
|
4.6
|
|
|
|
46.7
|
|
|
|
23.5
|
|
Proceeds from issuance of debt
|
|
|
65.0
|
|
|
|
60.0
|
|
|
|
215.0
|
|
Payments on debt and capital lease obligations
|
|
|
(2.0
|
)
|
|
|
(47.4
|
)
|
|
|
(187.1
|
)
|
Proceeds from note payable to related parties
|
|
|
|
|
|
|
|
|
|
|
34.9
|
|
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
|
|
|
3.9
|
|
|
|
0.5
|
|
|
|
|
|
Income tax benefit of stock-based compensation
|
|
|
3.8
|
|
|
|
1.5
|
|
|
|
|
|
Dividends paid
|
|
|
(28.5
|
)
|
|
|
(1.9
|
)
|
|
|
|
|
Decrease in restricted cash
|
|
|
|
|
|
|
|
|
|
|
3.7
|
|
Deferred financing costs paid
|
|
|
(1.3
|
)
|
|
|
(3.6
|
)
|
|
|
(14.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
45.5
|
|
|
|
180.2
|
|
|
|
54.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
2.7
|
|
|
|
39.0
|
|
|
|
40.5
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
101.6
|
|
|
|
62.6
|
|
|
|
22.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
104.3
|
|
|
$
|
101.6
|
|
|
$
|
62.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of capitalized interest of $2.1 million and
$1.8 million in 2007 and 2006, respectively
|
|
$
|
22.1
|
|
|
$
|
19.1
|
|
|
$
|
17.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
34.1
|
|
|
$
|
32.5
|
|
|
$
|
25.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued in connection with acquisition of equity method
investment
|
|
$
|
51.2
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-6
Delek US
Holdings, Inc.
Notes to
Consolidated Financial Statements
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