e10vk
UNITED STATES 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,
2010
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OR
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o
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-32868
DELEK US HOLDINGS,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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52-2319066
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(State or other jurisdiction
of
incorporation or organization)
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(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 whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o 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
(Do not check if a smaller
reporting company)
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Smaller reporting
company o
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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 30, 2010 was approximately
$101,009,618, 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 March 4, 2011, there were 54,425,796 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 2011 Annual
Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission within 120 days after
December 31, 2010, 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. Delek US Holdings, Inc., a Delaware corporation
formed in 2001, 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). 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 (Tyler refinery). Our marketing segment
sells refined products on a wholesale basis in west Texas
through company-owned and third-party operated terminals and
owns and/or
operates crude oil pipelines and associated tank farms in east
Texas. Our retail segment markets gasoline, diesel, other
refined petroleum products and convenience merchandise through a
network of approximately 412 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 located in El Dorado,
Arkansas with a design crude distillation capacity of
80,000 barrels per day, and other pipeline and product
terminals.
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, 2010,
approximately 73.0% 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).
The Tyler
Refinery Fire
On November 20, 2008, an explosion and fire occurred at our
60,000 bpd refinery in Tyler, Texas. Some individuals have
claimed injury and two of our employees died as a result of the
event. The event caused damage to both our saturates gas plant
and naphtha hydrotreater and resulted in a suspension of our
refining operations until May 2009.
Several parallel investigations were commenced following the
event, including our own investigation and investigations and
inspections by the U.S. Department of Labors
Occupational Safety & Health Administration
(OSHA), the U.S. Chemical Safety and Hazard
Investigation Board (CSB) and the
U.S. Environmental Protection Agency (EPA).
OSHA concluded its inspection in May 2009 and issued citations
assessing an aggregate penalty of approximately
$0.2 million. We are contesting these citations and do not
believe that the outcome will have a material effect on our
business, financial condition or results of operations. We
cannot assure you as to the outcome of the other investigations,
including possible civil penalties or other enforcement actions.
Currently we carry, and at the time of the incident we carried,
insurance coverage of $1.0 billion in combined limits to
insure against property damage and business interruption. Under
these policies, we were subject to a
3
$5.0 million deductible for property damage insurance and a
45 calendar day waiting period for business interruption
insurance. Delek received $141.4 million in proceeds from
insurance claims arising from the explosion and fire. The
insurance proceeds received in 2010 represent final payments on
all outstanding property damage and business interruption
insurance claims arising from the November 20, 2008
incident.
During the year ended December 31, 2010, we recognized
income from insurance proceeds of $17.0 million, of which
$12.8 million is included as business interruption proceeds
and $4.2 million is included as property damage. We also
recorded expenses during the year ended December 31, 2010
of $0.2 million, resulting in a net gain of
$4.0 million related to property damage proceeds. During
the year ended December 31, 2009, we recognized income from
insurance proceeds of $116.0 million, of which
$64.1 million is included as business interruption proceeds
and $51.9 million is included as property damage. We also
recorded expenses of $11.6 million resulting in a net gain
of $40.3 million related to property damage proceeds. At
December 31, 2008, a receivable of $8.4 million was
recorded relating to the expected insurance proceeds covering
certain losses incurred to limited commodity inventory exposure
with the suspension of operations at the Tyler refinery. This
receivable was reversed in January 2009 upon receipt of
insurance proceeds.
Acquisitions
We have integrated the Tyler refinery acquisition, six
convenience store chain acquisitions and a pipeline and terminal
acquisition 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, intermediates and
light products
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La Gloria Oil and Gas Company
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$68.1 million, including $25.9 million of prepaid crude
inventory and $38.4 million of assumed crude vendor liabilities
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December 2005
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21 retail fuel and convenience stores, a network of four
dealer-operated stores, four undeveloped lots and inventory in
the Nashville, Tennessee area
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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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(1) |
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Excludes transaction costs |
Historically, we have grown through acquisitions, rather than by
organic growth. We continually review acquisition and other
growth opportunities in the refining, marketing, retail fuel and
convenience store markets, as
4
well as opportunities to acquire assets related to distribution
logistics, such as pipelines, terminals and fuel storage
facilities and may make acquisitions as we deem appropriate. We
regularly assess the continued viability of our asset mix,
reviewing for asset profitability, market saturation and,
specifically in our retail segment, quality brand image. 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.
Dispositions
of Assets Held for Sale
In late 2008, we initiated a plan to market the retail
segments 36 Virginia stores for sale. As a result, our
Virginia operations were reclassified to discontinued operations
for accounting purposes. As of December 31, 2008, we had
closed on the sale of 12 of the properties, which resulted in
proceeds, net of expenses of $9.8 million. During 2009, we
sold an additional 15 of the Virginia properties, which resulted
in proceeds, net of expenses of $9.3 million. As of
December 31, 2009, we ceased marketing the remaining nine
Virginia locations for sale and, accordingly, we have restored
these properties to normal operations. The results from the nine
Virginia stores have been reclassified to normal operations and
the assets and liabilities associated with remaining stores are
reflected in the appropriate balance sheet classifications for
all periods presented herein. We continued to operate these
stores in 2010.
Information
About Our Segments
We prepare segment information on the same basis that we review
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 12, 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, and an associated light products loading
facility. The Tyler refinery is located in Tyler, Texas, and is
the only supplier of a full range of refined petroleum products
within a radius of approximately 100 miles. The Tyler
refinery is located in the Gulf Coast region (Gulf Coast
region), which is a defined area by the
U.S. Department of Energy in which prices for products have
historically differed from prices in the other four regional
Petroleum Administration for Defense Districts, or areas of the
country where refined products are produced and sold.
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
95% light products, including primarily a full range of
gasoline, diesel, jet fuels, liquefied petroleum gas
(LPG) and natural gas liquids (NGLs) and
has a complexity of 9.5. For 2010, gasoline accounted for
approximately 56.3% and diesel and jet fuels accounted for
approximately 36.9% of the Tyler refinerys fiscal
production.
As the only full range product supplier within 100 miles,
we believe our location gives us a natural advantage over other
suppliers. We believe 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 believe we have an
advantage of being able to deliver nearly all of our gasoline
and diesel fuel production into the local market using our
terminal at the Tyler 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. The Tyler refinerys ten largest customers
accounted for $1,080.4 million, or 64.4%, of net sales for
the refining segment in 2010. One customer, ExxonMobil,
accounted for $201.0 million, or 12.0% of our net sales in
2010. We have a contract with the U.S. government to supply
jet fuel (JP8) to various military facilities that
expires in March 2011. The U.S. government solicits
competitive bids for this contract annually. Although we have
submitted a proposal in the formal process for a new contract,
there can be no assurance that we will be awarded a new contract
or, if
5
awarded, the contract will be on acceptable terms. Sales under
this contract totaled $71.9 million, or 4.3%, of the
refining segments 2010 net sales.
The Tyler refinery does not generally supply fuel to our retail
fuel and convenience stores, since it is not located in the same
geographic region as our stores.
Refinery Design and Production. The Tyler
refinery has a crude oil processing unit with a 60,000 bpd
atmospheric column and a 21,000 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 22,000 bpd naphtha hydrotreating
unit, a 13,000 bpd gasoline hytrotreating unit, a
22,000 bpd distillate hydrotreating unit, a 17,500 bpd
continuous regeneration reforming unit, a 5,000 bpd
isomerization unit, and a sulfuric alkylation unit with a
alkylate production capacity of 4,720 bpd.
The Tyler refinery is designed to mainly process light, sweet
crude oil, which is typically a higher quality, more expensive
crude oil than heavier and more sour crude oil. The Tyler
refinery has access to five crude oil pipeline systems that
allow us access to East Texas, West Texas, Gulf of Mexico and
foreign crude oils. A small amount of local East Texas crude oil
is also delivered to the Tyler refinery by truck. The table
below sets forth information concerning crude oil received at
the Tyler refinery in 2010:
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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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25.8
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%
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West Texas intermediate crude oil(1)
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68.3
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%
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West Texas sour crude oil
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3.4
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%
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Foreign sweet and other domestic crude oil
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2.5
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%
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(1) |
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West Texas intermediate crude oil (WTI) is a light,
sweet crude oil characterized by an API gravity between 38 and
40 and a sulfur content of less than 0.4 weight percent that is
used as a benchmark for other crude oils. |
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 Tyler refinery, and the
resulting distilled and treated fuels are blended to create the
desired finished fuel products. In the refining industry, a well
established metric called the crack spread, is used as a
benchmark for measuring a refinerys product margins by
measuring the difference between the price of light products and
crude oil. It represents the approximate gross margin resulting
from processing one barrel of crude oil into three fifths of a
barrel of gasoline and two fifths of a barrel of high sulfur
diesel. Because we are located in the Gulf Coast region, we
apply the Gulf Coast 5-3-2 crack spread (Gulf Coast crack
spread), which we calculate using the market values of
U.S. Gulf Coast Pipeline 87 Octane Conventional Gasoline
and U.S. Gulf Coast Pipeline No. 2 Heating Oil (high
sulfur diesel) and the market value of WTI crude oil.
U.S. Gulf Coast Pipeline 87 Octane Conventional Gasoline is
a grade of gasoline commonly marketed as Regular Unleaded at
retail locations. U.S. Gulf Coast Pipeline No. 2
Heating Oil is a petroleum distillate that can be used as either
a diesel fuel or a fuel oil. This is the standard by which other
distillate products (such as ultra low sulfur diesel) are
priced. U.S. Gulf Coast Pipeline 87 Octane Conventional
Gasoline and U.S. Gulf Coast Pipeline No. 2 Heating
Oil are prices for which the products trade in the Gulf Coast
region.
A summary of our production output for 2010 follows:
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Gasoline. Gasoline accounted for approximately
56.3% of the Tyler refinerys production. The Tyler
refinery produces two grades of conventional gasoline
(premium 93 octane and regular 87
octane), as well as aviation gasoline. Effective January 1,
2008, we began offering
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 36.9% of the Tyler refinerys
production. Diesel and jet fuel products include military
specification JP8, commercial jet fuel, low sulfur diesel, and
ultra low sulfur diesel. Since September 2006, the Tyler
refinery has produced primarily ultra low sulfur diesel.
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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 petroleum 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.
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Year Ended
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Year Ended
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Year Ended
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December 31,
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December 31,
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December 31,
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2010
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2009(1)
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2008(1)
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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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Sweet
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48,300
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89.0
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%
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46,053
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85.6
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%
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46,468
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81.6
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%
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Sour
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1,700
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3.1
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3,251
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6.0
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5,215
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9.2
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Total crude
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50,000
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92.1
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49,304
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91.6
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51,683
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90.8
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Other blendstocks(2)
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4,286
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7.9
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4,498
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8.4
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5,239
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9.2
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Total refinery throughput
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54,286
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100.0
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%
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53,802
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100.0
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%
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56,922
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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(3)
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30,019
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56.3
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%
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28,707
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54.9
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%
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30,346
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54.4
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%
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Diesel/jet
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19,669
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36.9
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19,206
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36.7
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20,857
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37.4
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Petrochemicals, LPG, NGLs
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1,623
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3.0
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2,064
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3.9
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1,963
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3.5
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Other
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2,012
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3.8
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2,350
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4.5
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2,607
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4.7
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Total production
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53,323
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100.0
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%
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52,327
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100.0
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%
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55,773
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100.0
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%
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(1) |
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The Tyler refinery did not operate during the period from the
November 20, 2008 explosion and fire through May 18,
2009. This information has been calculated based on the 228 and
324 days that the Tyler refinery was operational in 2009
and 2008, respectively. |
|
(2) |
|
Includes denatured ethanol. |
|
(3) |
|
Includes
E-10 product. |
Capital Improvements. In 2010, the main focus
of our refining capital improvements program was on regulatory
spending, including the completion of the fractionation section
of our MSAT II compliance project and the maintenance shop and
warehouse relocation project.
The fourth quarter 2008 explosion and fire at the Tyler refinery
resulted in a suspension in production from November 20,
2008 through May 18, 2009. In 2009, during this period of
refinery shutdown, we moved forward with major unit turnarounds
and the portions of the Crude Optimization capital projects
which were previously slated to be completed in late 2009.
Portions of the Crude Optimization projects were completed in
the first half of 2009.
MSAT II
Compliance Project
The purpose of the MSAT II project is to comply with the MSAT II
regulations, which limit the annual average benzene content in
gasoline beginning in January 2011. The project will consist of
new fractionation equipment, Isomerization Unit modifications
and a new catalyst for saturating benzene. The fractionation
section was completed and placed in service in October 2010 and
the Isomerization Unit modifications are planned for completion
by the end of 2012.
Maintenance
Shop and Warehouse Relocation Project
This project involved the construction of a single, new building
outside of potential overpressure zones for personnel working in
the existing maintenance shops and warehouse. The purpose of the
project is to provide a safer working
7
environment for maintenance and warehouse workers at the Tyler
refinery by minimizing the risk of injury due to vapor cloud
explosions, fires and releases of hazardous substances. The
purchasing department employees were also relocated to this
building due to synergies with the warehouse operation. This
project began in 2009 and was completed in 2010.
Crude
Optimization Projects
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|
Deep Cut Project. The Deep Cut project
includes modifications to the Crude, Vacuum and Amine
Regeneration Units (ARU) and the installation of a new Vacuum
Heater, Coker Heater, a second ARU and a NaSH Unit. A
significant portion of this project was completed in the first
half of 2009. The installation of the second ARU and the NaSH
Unit is expected to be completed by 2013. The completed portions
of this project have given us the ability to run a deeper
cut in the Vacuum Unit and allow the running of a heavier
crude slate, although this capability will not be fully realized
until we complete the remainder of the FCC Reactor revamp,
discussed below. The installation of the second ARU and NaSH
unit will further increase our sulfur capacity. Further, the new
Coker Heater should allow much longer runs between decoking,
which will reduce maintenance cost and increase the on-stream
efficiency of the Coker.
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|
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|
Coker Valve Project. The Coker Valve project
involved installing Delta Valves on the bottom heads of both
coke drums, modifying feed piping to coke drums and installing a
new Coke crusher and conveyor system. We believe the
installation of the Delta Valves has significantly improved the
safety of the operation to remove coke from the coke drums and
they will enable the Coker to run shorter cycles, thereby
increasing effective capacity. The entire project should allow
for the safe handling of shot coke that may be produced during
deep cut operations on a heavy crude slate. This project was
completed in the first half of 2009.
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|
|
|
FCC Reactor Revamp. We plan to modify the
fractionation section of the FCC and install new catalyst
section equipment, including a new reactor and catalyst stripper
and make modifications to the riser. In the first half of 2009,
we completed the fractionation section modifications, which will
accommodate higher conversions expected from the FCC Reactor,
once the catalyst section installations are complete. The
remainder of this project is expected to be completed in 2014.
|
Gasoline
Hydrotreater
In 2008, we completed the installation of a Gasoline
Hydrotreater Unit at the Tyler refinery. The Gasoline
Hydrotreater allowed the Tyler refinery to meet the Tier II
gasoline specifications for sulfur in gasoline and eliminated
the previous constraints on the sulfur content in crude
selection because of the crude slates impact on the sulfur
content of the gasoline pool.
Storage Capacity. Storage capacity at or near
the Tyler refinery, including tanks along the pipelines owned
and/or
operated by the marketing segment, 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. Approximately 25.8%
of the crude oil purchased for the Tyler refinery is East Texas
crude oil. Most of the East Texas crude oil processed in the
Tyler refinery is delivered to us by truck or through the
pipelines owned
and/or
operated by the marketing segment 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. The
ability of the Tyler 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, Gulf of Mexico or foreign
crude oils, when available, at competitive prices has been a
significant competitive supply cost advantage at the Tyler
refinery. These alternate supply sources allow us to optimize
the Tyler 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 vast majority of our transportation fuels and other products
are sold by truck directly from the Tyler 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 Tyler
refinery. Effective January 1, 2008, we also began selling
8
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 truck from the Tyler
refinery. All of our ethanol is currently transported to the
Tyler refinery by truck. Ethanol tank capacity is currently
limited to 9,000 barrels.
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 the Tyler 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
ours. 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 to deliver products into
the markets we serve. Our location allows for product pricing
that is favorable in comparison to the U.S. Gulf Coast
crack spread.
Marketing
Segment
Our marketing segment sells refined products on a wholesale
basis in west Texas through company-owned and third party
operated terminals. The segment also manages, through
company-owned and leased pipelines, the transportation of crude
to, and provides storage of crude for, the Tyler refinery. The
marketing segment also provides marketing services to the Tyler
refinery in the sales of its products through wholesale and
contract sales. Finally, the marketing segment provides storage
of ethanol to Express for blending with conventional gasoline
using dedicated ethanol tankage located at a third-party owned
terminal in Nashville, Tennessee.
Petroleum Product Marketing Terminals. Our
marketing segment markets products through three company-owned
terminals in San Angelo, Abilene and Tyler, Texas and
third-party terminal operations in Aledo, Odessa, Big Springs
and Frost, 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 owned and 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 Pipeline Company,
L.P. (Magellan Pipeline) tie-in location) and our
terminals in Abilene and San Angelo.
Pipelines. We own seven product pipelines of
approximately 114 miles between our refined product
terminals in Abilene and San Angelo, Texas, which includes
a line connecting our facility to Dyess Air Force Base. These
refined product pipelines include:
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an eight-inch pipeline from a Magellan Pipeline custody transfer
point at Tye Station to the Abilene terminal;
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|
a 13.5 mile, four-inch pipeline from the Abilene terminal
to the Magellan Pipeline tie-in;
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|
a 76.5 mile, six-inch pipeline system from the Magellan
Pipeline tie-in to San Angelo; and
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|
three other local product pipelines.
|
We also own
and/or
operate pipelines, which consists of approximately 65 miles
of crude oil lines that transport crude oil to the Tyler
refinery. The following pump stations and terminals are also
owned and/or
leased by us:
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|
|
Atlas Tank Farm: One 150,000 barrel tank
and one 300,000 barrel tank
|
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|
Nettleton Station: Five 55,000 barrel
tanks
|
|
|
|
Bradford Station: One 54,000 barrel tank
and one 9,000 barrel tank
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ARP Station: Two 55,000 barrel tanks
|
9
Substantially all of our pipeline systems run across leased land
or
rights-of-way.
Supply Agreements. Substantially all of our
petroleum products for sale in west Texas are purchased from two
suppliers. Under a contract with Noble Petro, Inc.
(Noble), we can purchase up to 20,350 bpd of
petroleum products for the Abilene terminal for sales and
exchange at Abilene and San Angelo. This agreement runs
through December 31, 2017.
Additionally, we can purchase up to an additional 7,000 bpd
of refined products under the terms of a contract with Magellan
Asset Services, L.P. (Magellan). This agreement
expires on December 14, 2015. The primary purpose of this
second contract is to supply products at terminals in Aledo,
Dallas, Frost and Odessa, Texas.
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, ExxonMobil, Murphy Oil, and Susser Petroleum. One
customer, Susser Petroleum, accounted for more than 13.9% of our
marketing segment net sales and the top ten customers accounted
for 55.0% of the marketing segment net sales in 2010. Pursuant
to an arms length services agreement, our marketing
segment also provides marketing and sales services to the
refining segment. In return for these services, 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
$10.6 million and $11.0 million in 2010 and 2009,
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. 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, 2010, we operated 412 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®,
Discount Food
Marttm,
Fast Food and
Fueltm,
East
Coast®,
Delta
Express®
and Favorite
Markets®
brands. During the past three years we have reimaged 75 stores,
in each instance conforming to the MAPCO
Mart®
brand. A reimaged location would typically include the
re-configuring of the interior of the store including remodeling
surfaces, as well as replacement of certain inside equipment,
remodeling the exterior of the store, and new outdoor signage.
During 2010, we spent $3.2 million reimaging 13 stores.
We believe that we have established strong brand recognition and
market presence in the major retail markets in which we operate.
Approximately 75% of our stores are concentrated in Tennessee
and Alabama. The local markets where we have strong presence
include Nashville, Chattanooga/Northern Georgia Corridor, and we
are building a presence in Northern Alabama.
Our stores are positioned in high traffic areas and we operate a
high concentration of sites in similar geographic regions to
promote operational efficiencies. 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. The majority of our
stores are open 24 hours per day and the remaining sites
are open at least 14 hours per day. Our average store size
is approximately 2,465 square feet with approximately 73%
of our stores being 2,000 or more square feet.
10
Our retail fuel and convenience stores typically offer tobacco
products and immediately consumable items such as non-alcoholic
beverages, beer and a large variety of snacks and prepackaged
items. A significant number of the sites also offer state
sanctioned lottery games, ATM services and money orders. As of
December 31, 2010, we operated 58 quick service restaurants
in our store locations. In 36 of these locations, we offer
national branded quick service food chains such as
Quiznos®,
Subway®,
Krispy Krunchy
Chicken®
and
Blimpie®.
We also have a variety of proprietary in-house, quick service
food offerings featuring fried chicken, breakfast biscuits, deli
sandwiches and other hot foods.
Our convenience stores also offer MAPCO private label products
in a number of categories. We successfully launched our first
private label items in 2006. Recognizing early that these
products bring a higher gross margin to the bottom line, as well
as increasing value to our customers, we have embraced this
market strategy. Our private label program provides a quality
offering with a price point previously unavailable to our
customers in a number of categories. Some of the most recent
launches include salty snacks, teas and juices and energy drinks
and shots. In the majority of our locations we offer the
blending of ethanol in our finished gasoline products, allowing
customers access to
E-10
products.
Fuel Operations. For 2010, 2009 and 2008, our
net fuel sales from continuing operations were 75.9%, 72.9%, and
79.5%, respectively, of total net sales from the continuing
operations for our retail segment. The following table
highlights certain information regarding our continuing fuel
operations for these years:
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|
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|
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|
|
Year Ended December 31,
|
|
|
2010
|
|
2009(1)
|
|
2008(1)
|
|
Number of stores (end of period)
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|
412
|
|
|
|
442
|
|
|
|
467
|
|
Average number of stores (during period)
|
|
|
428
|
|
|
|
459
|
|
|
|
467
|
|
Retail fuel sales (thousands of gallons)
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|
423,509
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|
|
|
434,159
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|
435,665
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Average retail gallons per average number of stores (thousands
of gallons)
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|
990
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|
946
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|
|
|
933
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Retail fuel margin (cents per gallon)
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$
|
0.161
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|
|
$
|
0.136
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|
|
$
|
0.198
|
|
|
|
|
(1) |
|
All numbers in this table reflect only continuing operations. |
We currently operate a fleet of delivery trucks that deliver
approximately one-half of the fuel sold at our retail fuel and
convenience stores. We believe that the operation of a
proprietary truck fleet enables us to reduce fuel delivery
expenses while enhancing service to our locations.
We purchased approximately 38% of the fuel sold at our retail
fuel and convenience stores in 2010 from two suppliers under
short-term contracts that extend through the second quarter of
2011. The remainder of our unbranded fuel is purchased from a
variety of independent fuel distributors and other suppliers. We
purchase fuel for our branded locations under contracts with BP,
ExxonMobil, Shell, Conoco and Marathon. 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 most of our purchase
commitments under these contracts. We carried liabilities for
failure to purchase required contractual volume minimums of
$0.2 million and $0.3 million as of December 31,
2010 and 2009, respectively.
Merchandise Operations. For 2010, 2009 and
2008, our merchandise sales were 24.1%, 27.1%, and 20.5%,
respectively, of total net sales for our retail segment. The
following table highlights certain information regarding our
continuing merchandise operations for these years:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009(1)
|
|
2008(1)
|
|
Comparable store merchandise sales change (year over year)
|
|
|
4.3
|
%
|
|
|
0.4
|
%
|
|
|
(6.6
|
)%
|
Merchandise margin
|
|
|
30.5
|
%
|
|
|
30.9
|
%
|
|
|
31.7
|
%
|
Total merchandise sales (in thousands)
|
|
$
|
384,106
|
|
|
$
|
385,559
|
|
|
$
|
387,377
|
|
Average number of stores (during period)
|
|
|
428
|
|
|
|
459
|
|
|
|
467
|
|
Average merchandise sales per average number of stores (in
thousands)
|
|
$
|
898
|
|
|
$
|
840
|
|
|
$
|
829
|
|
|
|
|
(1) |
|
All numbers in this table reflect only continuing operations. |
11
We purchased approximately 59% of our general merchandise,
including most tobacco products and grocery items, for 2010 from
a single wholesale grocer, Core-Mark International, Inc.
(Core-Mark). We entered into a contract with
Core-Mark that expires at 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.
Most of our stores are connected to a high speed data network
and provide near real-time information to our merchandise
pricing management and security systems. We believe that our
systems provide us more rapid access to data, customized reports
and greater ease of use. Our information technology systems help
us reduce cash and merchandise shortages. Our information
technology systems allow us to improve our profitability and
strengthen operating and financial performance in multiple ways,
including by:
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|
pricing fuel at individual stores on a daily basis, taking into
account market 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.
|
Dealer-Operated Stores. Our retail segment
also includes a wholesale fuel distribution network that
supplies 57 dealer-operated retail locations. In 2010, our
dealer net sales represented approximately 4.7% of net sales for
our retail segment. Our business with dealers includes a variety
of 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 effectively manage our fuel sales and margin.
Minority
Investment
We own a 34.6% minority 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 80,000 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. Effective
October 1, 2008, we are accounting for this interest using
the cost method. See Note 6 of the Consolidated Financial
Statements contained in Item 8, Financial Statements and
Supplementary Data of this Annual Report on
Form 10-K
for further discussion.
We are required to review our cost-method investment for any
diminishment of fair value in the instance where there are
indicators that possible impairment has occurred. In the fourth
quarter of 2010, these indicators included
12
an evaluation of publicly-disclosed transactions in the refining
sector, in conjunction with our internal reviews of potential
transactions. We evaluated our investment using two methods, the
comparable sales approach and the income approach. We utilized
the most recent transactions of 2010 in determining value under
the comparable sales approach. We updated assumptions in work
done previously under the income approach, to refresh that
method of looking at value. This evaluation resulted in the
recognition of a $60.0 million non-cash impairment of our
minority investment in the fourth quarter of 2010. Delek carried
its investment in Lion Oil at $71.6 million and
$131.6 million as of December 31, 2010 and 2009,
respectively.
Governmental
Regulation and Environmental Matters
Delek is subject to various federal, state and local
environmental and safety laws enforced by agencies including the
EPA, the U.S. Department of Transportation
(DOT) / Pipeline and Hazardous Materials
Safety Administration (PHMSA), OSHA, the Texas
Commission on Environmental Quality (TCEQ), the
Texas Railroad Commission (TRRC) and the Tennessee
Department of Environment and Conservation (TDEC) as
well as numerous other state and federal agencies . These laws
raise potential exposure to future claims and lawsuits involving
environmental and safety matters which could include soil and
water contamination, air pollution, personal injury and property
damage allegedly caused by substances which we manufactured,
handled, used, released or disposed, or that relate to
pre-existing conditions for which we have assumed
responsibility. While it is often difficult to quantify future
environmental or safety related expenditures, Delek anticipates
that continuing capital investments will be required for the
foreseeable future to comply with existing and new regulations.
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. Analogous state laws impose similar
responsibilities and liabilities on responsible parties. In the
course of the Tyler refinerys ordinary operations, waste
is generated, 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 as
a potentially responsible party at any Superfund sites and under
the terms of the Tyler refinery purchase agreement, we did not
assume any liability for wastes disposed of at third party owned
treatment, storage or disposal sites prior to our ownership.
We have recorded a liability of approximately $4.3 million
as of December 31, 2010 primarily related to the probable
estimated costs of remediating or otherwise addressing certain
environmental issues of a non-capital nature at the Tyler
refinery. This liability includes estimated costs for on-going
investigation and remediation efforts for known contamination of
soil and groundwater which were already being performed by the
former owner, as well as estimated costs for additional issues
which have been identified subsequent to the purchase.
Approximately $1.5 million of the liability is expected to
be expended over the next 12 months with the remaining
balance of $2.8 million expendable by 2022.
In late 2004, the prior refinery owner began discussions with
the United States EPA Region 6 and the United States Department
of Justice (DOJ) regarding certain Clean Air Act
(CAA) requirements at the Tyler refinery. Under the
agreement by which we purchased the Tyler refinery, we agreed to
be responsible for all cost of compliance under the settlement.
A consent decree was entered by the Court and became effective
on September 23, 2009. The consent decree does not allege
any violations by Delek subsequent to the purchase of the Tyler
refinery and the prior owner was responsible for payment of the
assessed penalty. The capital projects required by the consent
decree have been completed including a new electrical substation
to increase operational reliability and additional sulfur
removal capacity to address upsets. In addition, the consent
decree requires certain on-going operational changes. We believe
any costs resulting from these changes will not have a material
adverse effect upon our business, financial condition or
operations.
In October 2007, the TCEQ approved an Agreed Order that resolved
alleged violations of certain air rules that had continued after
the Tyler refinery was acquired. The Agreed Order required the
Tyler refinery to pay a penalty and fund a Supplemental
Environmental Project for which we had previously reserved
adequate amounts. In addition, the Tyler refinery was required
to implement certain corrective measures, which the company
completed as specified in Agreed Order Docket
No. 2006-1433-AIR-E,
with one exception that was completed in 2010.
13
The EPA has issued final rules for gasoline formulation that
required the reduction of average benzene content by
January 1, 2011 and will require the reduction of maximum
annual average benzene content by July 1, 2012. We
completed a project to reduce gasoline benzene levels in the
fourth quarter 2010. However, it may be necessary for us to
purchase credits to comply with these content requirements and
there can be no assurance that such credits will be available or
that we will be able to purchase available credits at reasonable
prices.
Various legislative and regulatory measures to address climate
change and greenhouse gas (GHG) emissions (including
carbon dioxide, methane and nitrous oxides) are in various
phases of discussion or implementation. They include proposed
and newly enacted federal regulation and state actions to
develop statewide, regional or nationwide programs designed to
control and reduce GHG emissions from fixed sources, such as the
Tyler refinery, as well as mobile transportation sources.
Although it is not possible to predict the requirements of any
GHG legislation that may be enacted, any laws or regulations
that have been or may be adopted to restrict or reduce GHG
emissions will likely require us to incur increased operating
costs. If we are unable to maintain sales of our refined
products at a price that reflects such increased costs, there
could be a material adverse effect on our business, financial
condition and results of operations. Further, any increase in
prices of refined products resulting from such increased costs
could have an adverse effect on our financial condition, results
of operations and cash flows.
Beginning with the 2010 calendar year, EPA rules require us to
report GHG emissions from the Tyler refinery operations and
consumer use of products produced at the Tyler refinery on an
annual basis. While the cost of compliance with the rule is not
material, data gathered under the rule may be used in the future
to support additional regulation of GHGs. Beginning in January
2011, the EPA will begin regulating GHG emissions from
refineries and other major sources through the Prevention of
Significant Deterioration (PSD) and Federal
Operating Permit (Title V) programs. While these rules
do not impose any limits or controls on GHG emissions from
current operations, emission increases from future projects or
operational changes, such as capacity increases, may be impacted
and required to meet emission limits or technological
requirements such as Best Available Control Technologies. EPA
has announced their intent for further regulation of refinery
GHG emissions through New Source Performance Standards
(NSPS) to be finalized in late 2011 or 2012. GHG
regulation could also impact the consumption of refined
products, thereby affecting the Tyler refinery operations.
In 2010, the EPA and the Department of Transportations
National Highway Traffic Safety Administration
(NHTSA) finalized new standards, raising the
required Corporate Average Fuel Economy (CAFE) of
the nations passenger fleet by 40% to approximately 35 mpg
by 2016 and imposing the first-ever federal GHG emissions
standards on cars and light trucks. Later in the year, EPA and
the Department of Transportation also announced their intention
to propose first-time standards for fuel economy of medium and
heavy duty trucks in 2011, as well as further increases in the
CAFE standard for passenger vehicles after 2016. Such increases
in fuel economy standards and potential electrification of the
vehicle fleet, along with mandated increases in use of renewable
fuels discussed above, could result in decreasing demand for
petroleum fuels. Decreasing demand for petroleum fuels could
materially affect profitability at the Tyler refinery, as well
as at our convenience stores.
The Energy Policy Act of 2005 requires increasing amounts of
renewable fuel to 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. The
Energy Independence and Security Act of 2007 (EISA)
increased the amounts of renewable fuel required by the Energy
Policy Act of 2005. A rule finalized by EPA to implement EISA
(referred to as the Renewable Fuel Standard
2, or RFS 2) requires that we blend increasing
amounts of biofuels with our refined products beginning with
approximately 7.42% of our combined gasoline and diesel volume
in 2011 and escalating to approximately 18% in 2022. The rule
could cause decreased crude runs in future years and materially
affect profitability unless fuel demand rises at a comparable
rate or other outlets are found for the displaced products.
Although temporarily exempt from these rules, the Tyler refinery
began supplying an
E-10
gasoline-ethanol blend in January 2008. Because our exemption
from RFS 2 terminated at the end of 2010, we are implementing
projects that will allow us to blend increasing amounts of
ethanol and biodiesel into our fuels beginning in 2011.
In June 2007, OSHA announced that, under a National Emphasis
Program (NEP I) addressing workplace hazards at
petroleum refineries, it would conduct inspections of process
safety management programs at approximately 80 refineries
nationwide. OSHA conducted an NEP I inspection at our Tyler,
Texas refinery between
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February and August of 2008 and issued citations assessing an
aggregate penalty of less than $0.1 million. We are
contesting the NEP I citations. Between November 2008 and May
2009, OSHA conducted another inspection at our Tyler refinery as
a result of the explosion and fire that occurred there and
issued citations assessing an aggregate penalty of approximately
$0.2 million. We are also contesting these citations and do
not believe that the outcome of any pending OSHA citations
(whether alone or in the aggregate) will have a material adverse
effect on our business, financial condition or results of
operations.
In addition to OSHA, the CSB and the EPA requested information
pertaining to the November 2008 incident. The EPA is currently
conducting an investigation under Section 114 of the Clean
Air Act pertaining to our compliance with the chemical accident
prevention standards of the Clean Air Act.
Employees
As of December 31, 2010, we had 3,395 employees, of
which 254 were employed in our refining segment, 22 were
employed in our marketing segment, 3,058 were employed either
full or part-time in our retail segment and 61 were employed by
the parent company. As of December 31, 2010, 150 operations
and maintenance hourly employees and 40 truck drivers at the
Tyler refinery were represented by the United Steel, Paper and
Forestry, Rubber, Manufacturing, Energy, Allied Industrial and
Service Workers International Union and its Local 202 and were
covered by collective bargaining agreements which run through
January 31, 2012. 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,
FAVORITE
MARKET®,
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 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
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 2010. 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 under Section 302 of the Sarbanes-Oxley
Act of 2002.
15
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 Industries
Our
refining margins have been volatile and are likely to remain
volatile, which may have a material adverse effect on our
earnings and cash flows.
Our earnings, cash flow and profitability from our refining
operations are substantially determined by the difference
between the price of refined products and the price of crude
oil, which is referred to as the refining margin.
Refining margins historically have been volatile and are likely
to continue to be volatile, as a result of numerous factors
beyond our control, including volatility in the prices of crude
oil and other feedstocks purchased by our Tyler refinery,
volatility in the costs of natural gas and electricity used by
our Tyler refinery, and volatility in the prices of gasoline and
other refined petroleum products sold by our Tyler refinery. For
example, during the year ended December 31, 2010, the price
for West Texas Intermediate (WTI) crude oil
fluctuated between $68.01 and $91.51 per barrel, while the price
for U.S. Gulf Coast unleaded gasoline fluctuated between
$1.83 and $2.41 per gallon. Such volatility is affected by,
among other things:
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changes in global and local economic conditions;
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domestic and foreign supply and demand for crude oil and refined
products;
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investor speculation in commodities;
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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 ability of the members of the Organization of Petroleum
Exporting Countries to maintain oil price and production
controls;
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pricing and other actions taken by competitors that impact the
market;
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the level of crude oil, other feedstocks and refined petroleum
products imported into the United States;
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excess capacity and utilization rates of refineries worldwide;
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development and marketing of alternative and competing fuels,
such as ethanol and biodiesel;
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changes in fuel specifications required by environmental and
other laws, particularly with respect to oxygenates and sulfur
content;
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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;
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accidents, interruptions in transportation, inclement weather or
other events that can cause unscheduled shutdowns or otherwise
adversely affect the Tyler refinery, or the supply and delivery
of crude oil from third parties; and
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U.S. government regulations.
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The crude oil we purchase and the refined products we sell are
commodities whose prices are determined by market forces beyond
our control. While an increase or decrease in the price of crude
oil will often result in a corresponding increase or decrease in
the wholesale price of refined products, a change in the price
of one commodity does not always result in a corresponding
change in the other. A substantial or prolonged increase in
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crude oil prices without a corresponding increase in refined
product prices or a substantial or prolonged decrease in refined
product prices without a corresponding decrease in crude oil
prices could have a significant negative effect on our results
of operations and cash flows. This is especially true for
non-transportation refined products such as asphalt, butane,
coke, sulfur, propane and slurry whose prices are less likely to
correlate to fluctuations in the price of crude oil.
In addition, our Tyler refinery has historically processed
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 have historically been more costly
than heavy sour crude oils, and an increase in the cost of light
sweet crude oils could have a material adverse effect on our
business, financial condition and results of operations. The
capital improvements completed at the Tyler refinery in 2009
allow it to process more sour crude oils. As the Tyler refinery
begins to process more sour crude oils, a substantial or
prolonged decrease in the differential between the price of
sweet and sour crude oils could negatively impact our earnings
and cash flows.
Finally, higher refined product prices often result in negative
consequences for our retail operations such as higher credit
card expenses (because credit card fees are typically calculated
as a percentage of the transaction amount rather than a
percentage of gallons sold), lower retail fuel gross margin per
gallon, reduced demand for refined products, fewer retail
gallons sold and fewer retail merchandise transactions.
We are
subject to loss of market share or pressure to reduce prices in
order to compete effectively with a changing group of
competitors in a fragmented retail industry.
The markets in which we operate our retail fuel and convenience
stores are highly competitive and characterized by ease of entry
and constant change in the number and type of retailers offering
the products and services found in our stores. We compete with
other convenience store chains, gas stations, supermarkets, drug
stores, discount stores, club stores, mass merchants, fast food
operations and other retail outlets. In some of our markets, our
competitors have been in existence longer and have greater
financial, marketing and other resources than we do. As a
result, our competitors may be able to respond better to changes
in the economy and new opportunities within the industry.
In recent years, several non-traditional retailers, such as
supermarkets, club stores and mass merchants, have affected the
convenience store industry by entering the retail fuel business
and/or
selling merchandise traditionally found in convenience stores.
These non-traditional gasoline
and/or
convenience merchandise retailers have obtained a significant
share of the motor fuels market, may obtain a significant share
of the convenience merchandise market and their market share in
each market is expected to grow. Because of their diversity,
integration of operations, experienced management and greater
resources, these companies may be better able to withstand
volatile market conditions or levels of low or no profitability
in the retail segment. In addition, these retailers may use
promotional pricing or discounts, both at the pump and in the
store, to encourage in-store merchandise sales. These activities
by our competitors could pressure us to offer similar discounts,
adversely affecting our profit margins. Additionally, the loss
of market share by our retail fuel and convenience stores to
these and other retailers relating to either gasoline or
merchandise could have a material adverse effect on our
business, financial condition and results of operations.
Independent owner-operators can generally operate stores with
lower overhead costs than ours. Should significant numbers of
independent owner-operators enter our market areas, retail
prices in some of our categories may be negatively affected, as
a result of which our profit margins may decline at affected
stores.
Our stores compete, in large part, based on their ability to
offer convenience to customers. Consequently, changes in traffic
patterns and the type, number and location of competing stores
could result in the loss of customers and reduced sales and
profitability at affected stores. Other major competitive
factors include ease of access, pricing, timely deliveries,
product and service selections, customer service, fuel brands,
store appearance, cleanliness and safety.
17
We
operate in a highly regulated industry and increased costs of
compliance with, or liability for violation of, existing or
future laws, regulations and other requirements could
significantly increase our costs of doing business, thereby
adversely affecting our profitability.
Our industry is subject to extensive laws, regulations and other
requirements including, but not limited to, those relating to
the environment, safety, employment, labor, immigration, minimum
wages and overtime pay, health care and benefits, working
conditions, public accessibility, the sale of alcohol and
tobacco and other requirements. These laws and regulations are
enforced by agencies including the EPA, the
DOT / PHMSA, the OSHA, the TCEQ, the TRRC and the TDEC
as well as numerous other state and federal agencies. A
violation of any of these requirements could have a material
adverse effect on our business, financial condition and results
of operations. For example, OSHA and the EPA commenced
investigations of the Tyler refinery following the accident that
occurred there in November 2008. OSHA concluded its inspection
in May 2009 and issued citations assessing an aggregate penalty
of approximately $0.2 million. We are contesting the
citations and fines and do not believe the outcome will have a
material effect on our business. The EPAs investigation is
ongoing and we cannot assure you as to the outcome of the
EPAs investigation including any possible penalties that
may arise.
Ongoing compliance with laws, regulations and other requirements
could also have a material adverse effect on our business,
financial condition and results of operations. Under various
federal, state and local environmental requirements, as the
owner or operator of the Tyler refinery and retail locations, we
may be liable for the costs of removal or remediation of
contamination at our existing or former locations, whether we
knew of, or were responsible for, the presence of such
contamination. We have incurred such liability in the past and
several of our current and former locations are the subject of
ongoing remediation projects. The failure to timely report and
properly remediate contamination may subject us to liability to
third parties and may adversely affect our ability to sell or
rent our property or to borrow money using our property as
collateral. Additionally, persons who arrange for the disposal
or treatment of hazardous substances also may be liable for the
costs of removal or remediation of these substances at sites
where they are located, regardless of whether the site is owned
or operated by that person. We typically arrange for the
treatment or disposal of hazardous substances in our refining
operations. We do not typically do so in our retail operations,
but we may nonetheless be deemed to have arranged for the
disposal or treatment of hazardous substances. Therefore, we may
be liable for removal or remediation costs, as well as other
related costs, including fines, penalties and damages resulting
from injuries to persons, property and natural resources. 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, we
are required to pay an Oil Spill Liability Trust Fund fee
of $0.08 per barrel of crude oil that we purchase and federal
legislation has recently been proposed that would increase the
fee to as much as $0.78 per barrel.
Various legislative and regulatory measures to address climate
change and GHG emissions (including carbon dioxide, methane and
nitrous oxides) are in various phases of discussion or
implementation. They include proposed and newly enacted federal
regulation and state actions to develop statewide, regional or
nationwide programs designed to control and reduce GHG emissions
from fixed sources, such as the Tyler refinery, as well as
mobile transportation sources. Although it is not possible to
predict the requirements of any GHG legislation that may be
enacted, any laws or regulations that have been or may be
adopted to restrict or reduce GHG emissions will likely require
us to incur increased operating costs. If we are unable to
maintain sales of our refined products at a price that reflects
such increased costs, there could be a material adverse effect
on our business, financial condition and results of operations.
Further, any increase in the prices of refined products
resulting from such increased costs could have an adverse effect
on our financial condition, results of operations and cash flows.
18
Beginning with the 2010 calendar year, EPA rules require us to
report GHG emissions from the Tyler refinery operations and
consumer use of products produced at the Tyler refinery on an
annual basis. While the cost of compliance with the rule is not
material, data gathered under the rule may be used in the future
to support additional regulation of GHGs. Beginning in January
2011, the EPA will begin regulating GHG emissions from
refineries and other major sources through the PSD and Federal
Operating Permit (Title V) programs. While these rules
do not impose any limits or controls on GHG emissions from
current operations, emission increases from future projects or
operational changes, such as capacity increases, may be impacted
and required to meet emission limits or technological
requirements such as Best Available Control Technologies. EPA
has announced their intent for further regulation of refinery
GHG emissions through NSPS to be finalized in late 2011 or 2012.
GHG regulation could also impact the consumption of refined
products, thereby affecting the Tyler refinery operations.
Finally, the EPA has issued final rules for gasoline formulation
that require the reduction of average benzene content by
January 1, 2011. It may be necessary for us to purchase
credits to comply with these content requirements and there can
be no assurance that such credits will be available or that we
will be able to purchase available credits at reasonable prices.
Compliance with any future legislation or regulation of
temperature compensation, greenhouse gas emissions or benzene
content may result in increased capital and operating costs and
may have a material adverse effect on our results of operations
and financial condition.
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.
We
operate an independent refinery in Tyler, Texas which may not be
able to withstand volatile market conditions, compete on the
basis of price or obtain sufficient quantities of crude oil in
times of shortage to the same extent as integrated,
multinational oil companies.
We compete with a broad range of companies in our refining and
petroleum product marketing operations. Many of these
competitors are integrated, multinational oil companies that are
substantially larger than we are. Because of their diversity,
integration of operations, larger capitalization, larger and
more complex refineries and greater resources, these companies
may be better able to withstand volatile market conditions
relating to crude oil and refined product pricing, to compete on
the basis of price and to obtain crude oil in times of shortage.
We do not engage in the petroleum exploration and production
business and therefore do not produce any of our own crude oil
feedstocks. Certain of our competitors, however, obtain a
portion of their feedstocks from company-owned production.
Competitors that have their own crude production are at times
able to offset losses from refining operations with profits from
producing operations and may be better positioned to withstand
periods of depressed refining margins or feedstock shortages. In
addition, we compete with other industries, such as wind, solar
and hydropower that provide alternative means to satisfy the
energy and fuel requirements of our industrial, commercial and
individual customers. If we are unable to compete effectively
with these competitors, both within and outside our industry,
there could be a material adverse effect on our business,
financial condition, results of operations and cash flows.
If the
market value of our inventory declines to an amount less than
our cost basis, we would record a write-down of inventory and a
non-cash charge to cost of sales, which may 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 inventory is valued
at the lower of cost or market value, we would record a
write-down of inventory and a non-cash charge to cost of sales
if the market value of our inventory were to decline to an
amount below our cost.
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A
terrorist attack on our assets, or threats of war or actual war,
may hinder or prevent us from conducting our
business.
Terrorist attacks in the United States and the wars with Iraq
and Afghanistan, as well as events occurring in response or
similar to or in connection with them, including political
instability in various Middle Eastern countries, may harm our
business. Energy-related assets (which could include refineries,
pipelines and terminals such as ours) may be at greater risk of
future terrorist attacks than other possible targets in the
United States. In addition, the State of Israel, where our
majority stockholder, Delek Group Ltd. (Delek
Group), 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. As of December 31, 2010, four of our
directors reside in Israel.
A direct attack on our assets or the assets of others used by us
could have a material adverse effect on our business, financial
condition and results of operations. In addition, any terrorist
attack or continued political instability in the Middle East
could have an adverse impact on energy prices, including prices
for our crude oil, other feedstocks and refined petroleum
products, and an adverse impact on the margins from our refining
and petroleum product marketing operations. Disruption or
significant increases in energy prices could also result in
government-imposed price controls.
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 required an increase in the
consumption of renewable fuels such as ethanol and biodiesel. 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. For example,
the Energy Policy Act of 2005 required increasing amounts of
renewable fuel be incorporated into the gasoline pool through
2012. The Energy Independence and Security Act of 2007
(EISA) increases the amounts of renewable fuel
required by the Energy Policy Act of 2005. A rule finalized by
the EPA in 2010 (RFS-2) to implement the EISA
requires us to displace increasing amounts of refined products
produced by the Tyler refinery with biofuels, beginning with
approximately 7.8% in 2011 and escalating to 18% or more in
2022, depending on demand for motor fuels. The proposed rule
could cause decreased crude runs and materially affect our
profitability unless fuel demand rises at a comparable rate or
other outlets are found for the displaced products. Although the
Tyler refinery has been exempt from renewable fuel standards
through 2010, it began supplying an
E-10
gasoline-ethanol blend in January 2008.
Increases
in required fuel economy and regulation of CO2 emissions from
motor vehicles may reduce demand for transportation
fuels.
In 2010, the EPA and the NHTSA finalized new standards, raising
the required CAFE of the nations passenger fleet by 40% to
approximately 35 mpg by 2016 and imposing the first-ever federal
GHG emissions standards on cars and light trucks. Later in the
year, EPA and the Department of Transportation also announced
their intention to propose first-time standards for fuel economy
of medium and heavy duty trucks in 2011, as well as further
increases in the CAFE standard for passenger vehicles after
2016. Such increases in fuel economy standards and potential
electrification of the vehicle fleet, along with mandated
increases in use of renewable fuels discussed above, could
result in decreasing demand for petroleum fuels. Decreasing
demand for petroleum fuels could materially affect profitability
at the Tyler refinery, as well as at our convenience stores.
Risks
Relating to Our Business
We are
particularly vulnerable to disruptions to our refining
operations, because our refining operations are concentrated in
one facility.
Because all of our refining operations are concentrated in the
Tyler refinery, significant disruptions at the Tyler facility
could have a material adverse effect on our business, financial
condition or results of operations. Refining segment
contribution margin comprised approximately 39.8%, 57.6% and
42.9% of our consolidated contribution
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margin for the 2010, 2009 and 2008 fiscal years, respectively.
We expect to perform a maintenance turnaround of each processing
unit at the Tyler refinery every three to five years. Depending
on which units are affected, all or a portion of the Tyler
refinerys production will be disrupted during a turnaround.
In addition, the Tyler refinery consists of many processing
units, a number of which have been in operation for many years.
Even if properly maintained, equipment may require significant
capital expenditures to maintain desired efficiencies. One or
more of the units may require additional unscheduled down time
for unanticipated maintenance or repairs that are more frequent
than our scheduled turnaround. For example, refinery operations
were suspended for approximately one week of unscheduled down
time in the third quarter of 2010 and an explosion and fire at
our Tyler refinery in November 2008 suspended operations at the
Tyler refinery for more than five months.
Refinery operations may also be disrupted by external factors
such as an interruption of electricity, natural gas, water
treatment or other utilities. Other potentially disruptive
factors discussed elsewhere in these risk factors include
natural disasters, severe weather conditions, workplace or
environmental accidents, interruptions of supply, work
stoppages, losses of permits or authorizations or acts of
terrorism. Disruptions to our refining operations could reduce
our revenues during the period of time that our units are not
operating.
General
economic conditions may adversely affect our business, operating
results and financial condition.
The domestic economy and economic slowdowns may have serious
negative consequences for our business and operating results
because our performance is subject to domestic economic
conditions and their impact on levels of consumer spending. Some
of the factors affecting consumer spending include general
economic conditions, unemployment, consumer debt, reductions in
net worth based on recent declines in equity markets and
residential real estate values, adverse developments in mortgage
markets, taxation, energy prices, interest rates, consumer
confidence and other macroeconomic factors. During a period of
economic weakness or uncertainty, current or potential customers
may travel less, reduce or defer purchases, go out of business
or have insufficient funds to buy or pay for our products and
services.
Substantially all of our retail fuel and convenience stores are
located in the southeastern United States, primarily in the
states of Alabama, Georgia and Tennessee. As a result, our
results of operations are particularly vulnerable to general
economic conditions in that region. An economic downturn in the
Southeast could cause our sales and the value of our assets to
decline and have a material adverse effect on our business,
financial condition and results of operations.
Moreover, a financial market crisis may have a material adverse
impact on financial institutions and limit access to capital and
credit. This could, among other things, make it more difficult
for us to obtain (or increase our cost of obtaining) capital and
financing for our operations. Our access to additional capital
may not be available on terms acceptable to us or at all.
The
costs, scope, timelines and benefits of our refining projects
may deviate significantly from our original plans and
estimates.
We may experience unanticipated increases in the cost, scope and
completion time for our improvement, maintenance and repair
projects at our Tyler refinery. The Tyler refinery projects are
generally initiated to increase the yields of higher-value
products, increase our ability to process lower cost crude oils,
increase production capacity, meet new regulatory requirements
or maintain the safe operations of our existing assets.
Equipment that we require to complete these projects may be
unavailable to us at expected costs or within expected time
periods. Additionally, employee or contractor labor expense may
exceed our expectations. Due to these or other factors beyond
our control, we may be unable to complete these projects within
anticipated cost parameters and timelines. In addition, the
benefits we realize from completed projects may take longer to
achieve
and/or be
less than we anticipated. Our inability to complete
and/or
realize the benefits of the Tyler refinery projects in a
cost-efficient and timely manner could have a material adverse
effect on our business, financial condition and results of
operations.
21
The
dangers inherent in our 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.
Because of these inherent dangers, our refining operations are
subject to various laws and regulations relating to occupational
health and safety and environmental protection. Continued
efforts to comply with applicable laws and regulations related
to health, safety and the environment, or a finding of
non-compliance with current regulations, could result in
additional capital expenditures or operating expenses, as well
as fines and penalties.
In addition, 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 Tyler refinery as
well as persons outside the Tyler 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.
For example, the incident at our Tyler refinery in November 2008
resulted in two employee deaths and a suspension of production
that continued until May 2009. We are a party to lawsuits,
claims and government investigations as a result of this
incident. Amounts we may pay in connection with these claims and
investigations may not be covered by insurance.
We also operate approximately forty fuel delivery trucks. These
trucks regularly transport highly combustible motor fuels on
public roads. A motor vehicle accident involving one of our
trucks could result in significant personal injuries
and/or
property damage.
From
time to time, our cash and credit needs may exceed our
internally generated cash flow and available credit, and our
business could be materially and adversely affected if we are
not able to obtain the necessary cash or credit from financing
sources.
We have significant short-term cash needs to satisfy working
capital requirements such as crude oil purchases which fluctuate
with the pricing and sourcing of crude oil. We rely in part on
our access to credit to purchase crude oil for our Tyler
refinery. If the price of crude oil increases significantly, we
may not have sufficient available credit, and may not be able to
sufficiently increase such availability, under our existing
credit facilities or other arrangements to purchase enough crude
oil to operate 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 any expansion and upgrade plans, as well as
for regulatory compliance.
Depending on the conditions in credit markets, it may become
more difficult to obtain cash or credit from third party
sources. If we cannot generate cash flow or otherwise secure
sufficient liquidity to support our short-term and long-term
capital requirements, we may not be able to comply with
regulatory deadlines or pursue our business strategies, in which
case our operations may not perform as well as we currently
expect.
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,
2010, we had total debt of $295.8 million, including
current maturities of $14.1 million. In addition to our
outstanding debt, as of December 31, 2010, our letters of
credit issued under our various credit facilities were
$157.0 million. Our borrowing availability under our
various credit facilities as of December 31, 2010 was
$168.0 million.
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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 and letters of
credit.
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In addition, a substantial portion of our debt has a variable
rate of interest, which increases our exposure to interest rate
fluctuations, to the extent we elect not to hedge such exposures.
If we are unable to service 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 could intensify.
Our
debt agreements contain operating and financial restrictions
that might constrain our business and financing
activities.
The operating and financial restrictions and covenants in our
credit facilities and any future financing agreements could
adversely affect our ability to finance future operations or
capital needs or to engage, expand or pursue our business
activities. For example, to varying degrees our credit
facilities restrict our ability to:
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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, issue guaranties and pledge assets;
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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 leverage
coverage, fixed charge coverage, interest charge coverage, and
net worth tests as described in the credit facility agreements.
In addition, the covenant requirements of our various credit
agreements require us to make many subjective determinations
pertaining to our compliance thereto and exercise good faith
judgment in determining our compliance. Our ability to comply
with the covenants and restrictions contained in our debt
instruments may be affected by events beyond our control,
including prevailing economic, financial and industry
conditions. If market or other economic conditions deteriorate,
our ability to comply with these covenants and restrictions may
be impaired. If we breach any of the restrictions or covenants
in our debt agreements, a significant portion of our
indebtedness may become immediately due and payable, and our
lenders commitments to make further loans to us may
terminate. We might not have, or be able to obtain, sufficient
funds to make these immediate payments. In addition, our
obligations under our credit facilities
23
are secured by substantially all of our assets. If we are unable
to timely repay our indebtedness under our credit facilities,
the lenders could seek to foreclose on the assets or we may be
required to contribute additional capital to our subsidiaries.
Any of these outcomes could have a material adverse effect on
our business, financial condition and results of operations.
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, as well
as the historical volatility of crude oil pricing, any
imposition by our suppliers of more burdensome payment terms may
have a material adverse effect on our liquidity and our ability
to make payments to our suppliers. This in turn could cause us
to be unable to operate the Tyler refinery at full capacity. A
failure to operate the Tyler refinery at full capacity could
adversely affect our profitability and cash flows.
Interruptions
or limitations in the supply and delivery of crude oil may
negatively affect our refining interests and inhibit the growth
of our refining interests.
Our Tyler refinery processes primarily light sweet crude oils,
which are less readily available to us than heavier, more sour
crude oils. The Tyler refinery receives substantially all of its
crude oil from third parties and received more than 50% of its
crude oil during the year ended December 31, 2010 through a
crude delivery pipeline owned by a third party. We could
experience an interruption or reduction 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, maintenance or
failure of pipelines or other delivery systems, other
third-party action or other events beyond our control. The
unavailability for our use for a prolonged period of time of any
system of delivery of crude oil could have a material adverse
effect on our business, financial condition or results of
operations.
Moreover, interruptions in delivery or limitations in delivery
capacity may not allow our refining interests to draw sufficient
crude oil to support current refinery production or increases in
refining output. In order to maintain or materially increase
refining output, existing crude delivery systems may require
upgrades or supplementation, which may require substantial
additional capital expenditures.
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. In addition, because our business
interruption policy does not cover losses during the first
45 days of the interruption, a significant part or all of a
business interruption loss could be uninsured. The occurrence of
an event that is not fully covered by insurance could have a
material adverse effect on our business, financial condition and
results of operations.
The energy industry is highly capital intensive, and the entire
or partial loss of individual facilities or multiple facilities
can result in significant costs to both industry companies, such
as us, and their insurance carriers. In recent years, several
large energy industry claims have resulted in significant
increases in the level of premium costs and deductible periods
for participants in the energy industry. For example, hurricanes
in recent years have caused significant damage to several
petroleum refineries along the Gulf Coast, in addition to
numerous oil and gas production facilities and pipelines in that
region. As a result of large energy industry claims, insurance
companies that have historically participated in underwriting
energy-related facilities may discontinue that practice, may
reduce the insurance capacity they are willing to offer or
demand significantly higher premiums or deductible periods to
cover these facilities. If significant changes in the number or
financial solvency of insurance underwriters
24
for the energy industry occur, or if other adverse conditions
over which we have no control prevail in the insurance market,
we may be unable to obtain and maintain adequate insurance at
reasonable cost.
In addition, we cannot assure you that our insurers will renew
our insurance coverage on acceptable terms, if at all, or that
we will be able to arrange for adequate alternative coverage in
the event of non-renewal. The unavailability of full insurance
coverage to cover events in which we suffer significant losses
could have a material adverse effect on our business, financial
condition and results of operations.
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 eight major
transactions spanning from our inception in 2001 through April
2007, we acquired the Tyler refinery and refined products
terminals in Tyler, acquired approximately 500 retail fuel and
convenience stores and 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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The occurrence of any of these factors could adversely affect
our growth strategy. We have not completed any major
acquisitions since April 2007.
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 assets;
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acquired 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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acquisitions may require us to incur additional debt or issue
additional equity;
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acquired assets may suffer a diminishment in fair value as a
result of which we may need to record a write-down or
impairment, as in the case of the $60.0 million impairment
of our minority investment in Lion Oil in the fourth quarter of
2010.
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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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The occurrence of any of these factors could adversely affect
our business, financial condition and results of operations.
We may
incur significant costs and liabilities with respect to
investigation and remediation of 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 Tyler refinery. In the future, it may be necessary
to conduct further assessments and remediation efforts at the
Tyler refinery and pipeline locations. In addition, we have
identified and self-reported certain other environmental matters
subsequent to our purchase of the Tyler 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
$4.1 million as of December 31, 2010 for the estimated
costs of environmental remediation for the Tyler refinery. We
expect remediation of groundwater at the Tyler 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 and environmental, health and safety
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 environmental,
health and safety regulations will require us to spend
approximately $4.0 million in capital costs in 2011 and
approximately $81.0 million during the next five years.
We
could incur substantial costs or disruptions in our business if
we cannot obtain or maintain necessary permits and
authorizations or otherwise comply with health, safety,
environmental and other laws and regulations.
Our operations require numerous permits and authorizations under
various laws and regulations. These authorizations and permits
are subject to revocation, renewal or modification and can
require operational changes to limit impacts or potential
impacts on the environment
and/or
health and safety. A violation of authorization or permit
conditions or other legal or regulatory requirements could
result in substantial fines, criminal sanctions, permit
revocations, injunctions,
and/or
facility shutdowns. In addition, major modifications of our
operations could require modifications to our existing permits
or upgrades to our existing pollution control equipment. Any or
all of these matters could have a negative effect on our
business, results of operations and cash flows.
Our
Tyler refinery has only limited access to an outbound pipeline,
which we do not own, for distribution of our refined petroleum
products.
For the year ended December 31, 2010, nearly all of the
Tyler refinery sales volume in Tyler was completed through a
rack system located at the Tyler refinery. Unlike other
refiners, we do not own, and currently have limited access to,
an outbound pipeline for distribution of the Tyler refinery
products to our Tyler customers. Our lack of access to an
outbound pipeline may limit our ability to attract new customers
for our refined petroleum products or increase sales of the
Tyler refinery products.
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An
interruption or termination of supply and delivery of refined
products to our wholesale business could result in a decline in
our sales and earnings.
Our marketing segment sells refined products produced by
refineries owned by third parties. In 2010, our marketing
segment received nearly all of its supply of refined products
from two suppliers. We could experience an interruption or
termination of supply or delivery of refined products if our
suppliers partially or completely ceased operations, temporarily
or permanently. The ability of these refineries and our
suppliers to supply refined products to us could be disrupted by
anticipated events such as scheduled upgrades or maintenance, as
well as events beyond their control, such as unscheduled
maintenance, fires, floods, storms, explosions, power outages,
accidents, acts of terrorism or other catastrophic events, labor
difficulties and work stoppages, governmental or private party
litigation, or legislation or regulation that adversely impacts
refinery operations. In addition, any reduction in capacity of
other pipelines that connect with our suppliers pipelines
or our pipelines due to testing, line repair, reduced operating
pressures, or other causes could result in reduced volumes of
refined product supplied to our 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 and/or reduction in demand in the market
in which we sell our refined products could lower prices and
adversely affect our sales and profitability.
Our Tyler refinery is currently the only supplier of a full
range of refined petroleum products within a radius of
approximately 100 miles of its location and there are no
competitive fuel loading terminals within approximately
90 miles of our San Angelo terminal. If competitors
commence operations within these niche markets, we could lose
our niche market advantage, which could have a material adverse
effect on our business, financial condition and results of
operations. For example, a third party operator has announced
its intention to reopen the refined products terminal in Big
Sandy, Texas formerly operated by Chevron. If the Big Sandy
terminal resumes marketing products that compete with our Tyler
products, sales at our Tyler terminal may be negatively impacted.
In addition, the maintenance or replacement of our existing
customers depends on a number of factors outside of our control,
including increased competition from other suppliers and demand
for refined products in the markets we serve. Loss of, or
reduction in, amounts purchased by our major customers could
have an adverse effect on us to the extent that we are not able
to correspondingly increase sales to other purchasers.
We may
be unable to negotiate market price risk protection in contracts
with unaffiliated suppliers of refined products.
During the year ended December 31, 2010, we obtained most
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 in the future we will be
able to negotiate similar market price protections in other
contracts that we enter into for the supply of refined products
or ethanol. To the extent that we purchase inventory at prices
that do not compare favorably to the prices at which we are able
to sell refined products, our sales and margins may be adversely
affected.
Compliance
with and changes in tax laws could adversely affect our
performance.
We are subject to extensive tax liabilities, including federal
and state and transactional taxes such as excise, sales/use,
payroll, franchise, withholding, and ad valorem taxes. New tax
laws and regulations and changes in existing tax laws and
regulations are continuously being enacted or proposed that
could result in increased expenditures for tax liabilities in
the future. Certain of these liabilities are subject to periodic
audits by the respective taxing authority which could increase
our tax liabilities. Subsequent changes to our tax liabilities
as a result of these audits may also subject us to interest and
penalties.
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We may
seek to diversify our retail fuel and convenience store
operations by entering new geographic areas, which may present
operational and competitive challenges.
Since our inception, we have grown our retail fuel and
convenience store operations primarily by acquiring stores in
the southeastern United States. In the future, we may seek to
grow by selectively operating stores in geographic areas other
than those in which we currently operate, or in which we
currently have a relatively small number of stores. This growth
strategy would present numerous operational and competitive
challenges to our senior management and employees and would
place significant pressure on our operating systems. In
addition, we cannot assure you that consumers located in the
regions in which we may expand our operations would be as
receptive to our stores as consumers in our existing markets.
The success of our development plans will depend in part upon
our ability to:
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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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identify and contract with financially stable developers;
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realize an acceptable return on the 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 development goals,
manage our growth effectively, or operate our existing and new
retail fuel and convenience stores profitability. The failure to
achieve any of the foregoing could have a material adverse
effect on our business, financial condition and results of
operations.
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.
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,
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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 wholesaler for a significant portion of our
convenience store merchandise; we may not be able to maintain
favorable arrangements with vendors.
We purchase a majority of our general merchandise, including
most tobacco products and grocery items, from a single wholesale
grocer, Core-Mark International, Inc., including approximately
59% of such merchandise during the year ended December 31,
2010. 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.
A
substantial portion of the Tyler refinery workforce is
unionized, and we may face labor disruptions that would
interfere with our operations.
As of December 31, 2010, we employed 283 people at our
Tyler refinery and pipeline. From among these employees, 150 of
our operations and maintenance hourly employees and 40 truck
drivers at the Tyler refinery were covered by separate
collective bargaining agreements which each expire on
January 31, 2012. 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 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 at stores representing the continuing operations
of our retail segment represented approximately 76%, 73% and 80%
of total net sales of our retail segment for 2010, 2009 and 2008
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 fuel sales also makes us susceptible to
interruptions in fuel supply. Fuel from the U.S. Gulf Coast
transported to us through the Colonial and Plantation pipelines
is the primary source of fuel supply for the majority of our
retail fuel and convenience stores. For example, at
December 31, 2010, fuel transported to us through these
pipelines was the primary source of fuel supply for
approximately 86% of our stores. To mitigate the risks of cost
volatility, we typically have no more than a five day supply of
fuel at each of our stores. Our fuel contracts do not guarantee
an uninterrupted, unlimited supply in the event of a shortage.
Gasoline sales generate customer traffic to our retail fuel and
convenience stores. 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.
29
If
there is negative publicity concerning the Shell, Exxon, BP,
Marathon and Conoco brand names, fuel and merchandise sales at
certain of our stores may suffer.
We are an independent retailer of fuel that markets some of our
products under the major oil company brands Shell, Exxon, BP,
Marathon and Conoco. Fuel sold under these major brands
represented approximately 37.4% of total fuel sales volume for
our retail segment during the year ended December 31, 2010.
Negative publicity concerning any of these major oil companies
could adversely affect fuel and merchandise sales volumes in our
retail segment. For example, the Deepwater Horizon accident in
the Gulf of Mexico in April 2010 has resulted in consumer
boycotts of independent retailers of BP branded fuels. Fuel sold
under the BP brand represented approximately 13.7% of total fuel
sales volume for our retail segment during the year ended
December 31, 2010. If negative publicity pertaining to BP
or any of the other major brands adversely affects our sales
volumes, it 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 to partially mitigate the
risk of various financial exposures inherent in our business. We
expect to continue to enter into these types of transactions. In
connection with such derivative transactions, we may be required
to make payments to maintain margin accounts and to settle the
contracts at their value upon termination. The maintenance of
required margin accounts and the settlement of derivative
contracts at termination could cause us to suffer losses or
limited gains. In particular, derivative transactions could
expose us to the risk of financial loss upon unexpected or
unusual variations in the sales price of crude oil and that of
wholesale gasoline. We cannot assure you that the strategies
underlying these transactions will be successful. If any of the
instruments we utilize to manage our exposure to various types
of risk is not effective, we may incur losses.
In addition, we evaluate the creditworthiness of each of our
counterparties but we may not always be able to fully anticipate
or detect deterioration in their creditworthiness and overall
financial condition. The deterioration of creditworthiness or
overall financial condition of a material counterparty (or
counterparties) could expose us to an increased risk of
nonpayment or other default under our contracts with them. If a
material counterparty (or counterparties) default on their
obligations to us, this could materially adversely affect our
financial condition, results of operations or cash flows.
Due to
our minority 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, 2010, 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
ownership position and the controlling shareholders
majority equity ownership position and contractual management
rights, we are unable to control or influence 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 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.
30
Our
minority ownership position in Lion Oil is 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 interest in Lion Oil, or that if we do, we will be
able to do so upon favorable terms or at favorable prices.
We
rely on information technology in our operations, and any
material failure, inadequacy, interruption or security failure
of that technology could harm our business.
We rely on information technology systems across our operations,
including for management of our supply chain, point of sale
processing at our sites, and various other processes and
transactions. We rely on commercially available systems,
software, tools and monitoring to provide security for
processing, transmission and storage of confidential customer
information, such as payment card and personal credit
information. In addition, the systems currently used for certain
transmission and approval of payment card transactions, and the
technology utilized in payment cards themselves, may put certain
payment card data at risk, and these systems are determined and
controlled by the payment card industry, and not by us. In
recent years, several retailers have experienced data breaches
resulting in the exposure of sensitive customer data, including
payment card information. Any compromise or breach of our
information and payment technology systems could cause
interruptions in our operations, damage our reputation, reduce
our customers willingness to visit our sites and conduct
business with us or expose us to litigation from customer or
sanctions from the payment card industry. Further, the failure
of these systems to operate effectively, or problems we may
experience with transitioning to upgraded or replacement
systems, could significantly harm our business and operations
and cause us to incur significant costs to remediate such
problems.
If we
lose any of our key personnel, our ability to manage our
business and continue our growth could be negatively
impacted.
Our future performance depends to a significant degree upon the
continued contributions of our senior management team and key
technical personnel. We do not currently maintain key person
life insurance policies for any of our senior management team.
The loss or unavailability to us of any member of our senior
management team or a key technical employee could significantly
harm us. We face competition for these professionals from our
competitors, our customers and other companies operating in our
industry. To the extent that the services of members of our
senior management team and key technical personnel would be
unavailable to us for any reason, we would be required to hire
other personnel to manage and operate our company and to develop
our products and technology.
We cannot assure you that we would be able to locate or employ
such qualified personnel on acceptable terms or at all.
It may
be difficult to serve process on or enforce a United States
judgment against those of our directors who reside in
Israel.
On the date of this report, four of our seven 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
may 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 USRPHC, at any time
during the shorter of the five-year period ending on the date of
the sale or other disposition and
31
the period such
non-U.S. holder
held our common stock (the shorter period referred to as the
lookback period). In general, we would be a USRPHC
if the fair market value of our U.S. real property
interests, as such term is defined for U.S. federal
income tax purposes, equals or exceeds 50% of the sum of the
fair market value of our worldwide real property interests and
our other assets used or held for use in a trade or business.
The test for determining USRPHC status is applied on certain
specific determination dates and is dependent upon a number of
factors, some of which are beyond our control (including, for
example, fluctuations in the value of our assets). If we are or
become a USRPHC, so long as our common stock is regularly traded
on an established securities market such as the 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.
Litigation
and/or negative publicity concerning food or beverage 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 or beverage quality, food or beverage
safety or other health concerns, facilities, employee relations
or other matters related to our operations may materially
adversely affect demand for food and beverages offered in our
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 or beverage-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 and beverages in our stores. Health
concerns, poor food or beverage quality or operating issues
stemming from one store or a limited number of stores can
materially adversely affect the operating results of some or all
of our stores and harm our proprietary brands.
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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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;
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announcements by us or our competitors of significant contracts
or acquisitions;
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sales of common stock by us, our senior officers or our
affiliates; and
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the other factors described in these Risk Factors.
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In recent years, the stock market has experienced extreme price
and volume fluctuations. This volatility has had a significant
impact on the market price of securities issued by many
companies, including companies in our industry. The changes
often occur without any apparent regard to the operating
performance of these companies. The price of our common stock
could fluctuate based upon factors that have little or nothing
to do with our company, and these fluctuations could materially
reduce our stock price. In addition, the recent distress in the
credit and financial markets has resulted in extreme volatility
in trading prices of securities and diminished liquidity, and we
cannot assure you that our liquidity will not be affected by
changes in the financial markets and the global economy.
In the past, some companies that have 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.
32
You
may suffer substantial dilution.
We may sell securities in the public or private equity markets
if and when conditions are favorable, even if we do not have an
immediate need for capital. In addition, if we have an immediate
need for capital, we may sell securities in the public or
private equity markets even when conditions are not otherwise
favorable. You will suffer dilution if we issue currently
unissued shares of our stock in the future in furtherance of our
growth strategy. You will also suffer dilution if stock,
restricted stock units, restricted stock, stock options, stock
appreciation rights, warrants or other equity awards, whether
currently outstanding or subsequently granted, are exercised.
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
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.
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 its board of directors
consist of independent directors;
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the requirement to 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 to 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 except that our compensation
committee does have a written charter addressing its purpose and
responsibilities. 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 may have conflicts of interest with
other stockholders in the future.
At December 31, 2010, Delek Group beneficially owned
approximately 73% of our outstanding common stock. As a result,
Delek Group 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 continues to own a
significant amount of the outstanding shares of our common
stock, Delek Group will continue to be able to influence or
effectively control our decisions,
33
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 will coincide with the interests of other holders of our
common stock.
Future
sales of shares of our common stock could depress the price of
our common stock.
The market price of our common stock could decline as a result
of the introduction of a large number of shares of our common
stock into the market or the perception that these sales could
occur. These sales, or the possibility that these sales may
occur, also might make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem
appropriate. At December 31, 2010, 39,736,432 shares
of our common stock were controlled by Delek Group. In
accordance with Delek Groups registration rights agreement
with us, these 39,736,432 shares have been registered for
resale by the selling stockholders, in one or more transactions,
at their discretion in the future.
We
depend upon our subsidiaries for cash to meet our obligations
and pay any dividends.
We are a holding company. Our subsidiaries conduct substantially
all of our operations and own substantially all of our assets.
Consequently, our cash flow and our ability to meet our
obligations or pay dividends to our stockholders depend upon the
cash flow of our subsidiaries and the payment of funds by our
subsidiaries to us in the form of dividends, tax sharing
payments or otherwise. Our subsidiaries ability to make
any payments will depend on many factors, including their
earnings, cash flows, the terms of their indebtedness, tax
considerations and legal restrictions.
We may
be unable to pay future dividends in the anticipated amounts and
frequency set forth herein.
We will only be able to pay dividends from our available cash on
hand and funds received from our subsidiaries. Our ability to
receive dividends and other cash payments from our subsidiaries
is restricted under the terms of their respective credit
facilities. For example, under the terms of their credit
facilities, our subsidiaries are subject to certain customary
covenants that limit their ability to, subject to certain
exceptions as defined in their respective credit agreements,
remit cash to, distribute assets to, or make investments in, us
as the parent company. Specifically, these covenants limit the
payment, in the form of cash or other assets, of dividends or
other cash payments, to us. The declaration of future dividends
on our common stock will be at the discretion of our board of
directors and will depend upon many factors, including our
results of operations, financial condition, earnings, capital
requirements, restrictions in our debt agreements and legal
requirements. Although we currently intend to pay quarterly cash
dividends on our common stock at an annual rate of $0.15 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 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.
34
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.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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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 and a light
products loading facility. We also own crude oil pipelines and
related tank farms, which are owned by our marketing segment and
operated by it on behalf of our refining segment. Much of our
pipeline system runs across leased land and
rights-of-way.
In 2008, we purchased five 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, certain of
which are leased to third parties and used by our marketing
segment, along with 114 miles of refined product pipelines
and light product loading facilities.
As of December 31, 2010, we owned the real estate at
235 company operated retail fuel and convenience store
locations, and leased the real property at 177 company
operated stores. In addition to these stores, we own or lease 14
locations that were either leased or subleased to third party
dealers; 43 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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Dealer Sites
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Company
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Not Owned
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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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Nor Leased
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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
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By Us
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Owned Sites
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Leased Sites
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< 3 Years(1)
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> 3 Years(1)
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Tennessee
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221
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16
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11
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126
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100
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61
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39
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Alabama
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88
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37
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31
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59
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35
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16
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19
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Georgia
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77
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4
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1
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44
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36
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27
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9
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Arkansas
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11
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8
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3
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2
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1
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|
Virginia
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9
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1
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8
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3
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5
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Kentucky
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3
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1
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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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Louisiana
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1
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1
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|
1
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Total
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412
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|
57
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43
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241
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|
|
185
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|
|
110
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|
|
75
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(1) |
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Includes options renewable at our discretion; measured as of
December 31, 2010. |
Most of our retail fuel and convenience store leases are net
leases requiring us to pay taxes, insurance and maintenance
costs. Of the leases that expire in less than three years, we
anticipate that we will be able to negotiate acceptable
extensions of the leases for those locations that we intend to
continue operating. We believe that none of these leases 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 April 2022.
35
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ITEM 3.
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LEGAL
PROCEEDINGS
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In the ordinary conduct of our business, we are from time to
time subject to lawsuits, investigations and claims, including,
environmental claims and employee related matters. Between
February and August of 2008, OSHA conducted an inspection at our
Tyler, Texas refinery and issued citations assessing an
aggregate penalty of less than $0.1 million. Between
November 2008 and May 2009, OSHA conducted another inspection at
our Tyler, Texas refinery as a result of the explosion and fire
that occurred on November 20, 2008, and issued citations
assessing an aggregate penalty of approximately
$0.2 million. We are contesting these citations and do not
believe that the outcome of any pending OSHA citations (whether
alone or in the aggregate) will have a material adverse effect
on our business, financial condition or results of operations.
Although we cannot predict with certainty the ultimate
resolution of lawsuits, investigations and claims asserted
against us, including civil penalties or other enforcement
actions, we do not believe that any currently pending legal
proceeding or proceedings to which we are a party will have a
material adverse effect on our business, financial condition or
results of operations.
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ITEM 4.
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REMOVED
AND RESERVED
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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 and dividends issued since January 1, 2009:
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Regular Dividends
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Special Dividends
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Period
|
|
High Sales Price
|
|
|
Low Sales Price
|
|
|
Per Common Share
|
|
|
Per Common Share
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
11.61
|
|
|
$
|
5.27
|
|
|
$
|
0.0375
|
|
|
|
None
|
|
Second Quarter
|
|
$
|
12.41
|
|
|
$
|
7.92
|
|
|
$
|
0.0375
|
|
|
|
None
|
|
Third Quarter
|
|
$
|
9.20
|
|
|
$
|
6.84
|
|
|
$
|
0.0375
|
|
|
|
None
|
|
Fourth Quarter
|
|
$
|
8.70
|
|
|
$
|
5.65
|
|
|
$
|
0.0375
|
|
|
|
None
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
8.44
|
|
|
$
|
6.56
|
|
|
$
|
0.0375
|
|
|
|
None
|
|
Second Quarter
|
|
$
|
8.25
|
|
|
$
|
6.06
|
|
|
$
|
0.0375
|
|
|
|
None
|
|
Third Quarter
|
|
$
|
7.78
|
|
|
$
|
6.22
|
|
|
$
|
0.0375
|
|
|
|
None
|
|
Fourth Quarter
|
|
$
|
7.64
|
|
|
$
|
6.65
|
|
|
$
|
0.0375
|
|
|
|
None
|
|
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
2010 and 2009 totaled approximately $8.4 million and
$8.1 million, respectively. As of the date of this filing,
we intend to continue to pay quarterly cash dividends on our
common stock at the same 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 table above, we have paid
no other cash dividends on our common stock during the two most
recent fiscal years.
Holders
As of March 4, 2011, there were approximately
12 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.
36
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.
COMPARISON
OF CUMULATIVE TOTAL RETURN
37
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following selected financial data should be read in
conjunction with Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations, and
Item 8, Financial Statements and Supplementary Data, of
this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008(1)
|
|
|
2007(1)
|
|
|
2006(1)(2)(3)
|
|
|
|
(In millions, except share and per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
$
|
1,683.2
|
|
|
$
|
882.1
|
|
|
$
|
2,091.8
|
|
|
$
|
1,694.3
|
|
|
$
|
1,598.6
|
|
Marketing
|
|
|
504.4
|
|
|
|
374.4
|
|
|
|
745.5
|
|
|
|
626.6
|
|
|
|
221.6
|
|
Retail
|
|
|
1,592.3
|
|
|
|
1,421.5
|
|
|
|
1,885.7
|
|
|
|
1,672.9
|
|
|
|
1,294.9
|
|
Other
|
|
|
(24.3
|
)
|
|
|
(11.3
|
)
|
|
|
0.7
|
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
3,755.6
|
|
|
|
2,666.7
|
|
|
|
4,723.7
|
|
|
|
3,994.2
|
|
|
|
3,115.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
3,412.9
|
|
|
|
2,394.1
|
|
|
|
4,308.1
|
|
|
|
3,539.3
|
|
|
|
2,734.2
|
|
Operating expenses
|
|
|
229.5
|
|
|
|
219.0
|
|
|
|
240.8
|
|
|
|
213.8
|
|
|
|
169.0
|
|
Insurance proceeds business interruption
|
|
|
(12.8
|
)
|
|
|
(64.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Property damage proceeds, net
|
|
|
(4.0
|
)
|
|
|
(40.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill
|
|
|
|
|
|
|
7.0
|
|
|
|
11.2
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
59.0
|
|
|
|
64.3
|
|
|
|
57.0
|
|
|
|
54.1
|
|
|
|
37.6
|
|
Depreciation and amortization
|
|
|
61.1
|
|
|
|
52.4
|
|
|
|
41.3
|
|
|
|
32.1
|
|
|
|
21.8
|
|
Loss (gain) on sales of assets
|
|
|
0.7
|
|
|
|
2.9
|
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
Unrealized gain on forward contract hedging activities(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
3,746.4
|
|
|
|
2,635.3
|
|
|
|
4,651.6
|
|
|
|
3,839.2
|
|
|
|
2,962.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
9.2
|
|
|
|
31.4
|
|
|
|
72.1
|
|
|
|
155.0
|
|
|
|
152.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
34.1
|
|
|
|
25.5
|
|
|
|
23.7
|
|
|
|
30.6
|
|
|
|
24.2
|
|
Interest income
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(2.1
|
)
|
|
|
(9.3
|
)
|
|
|
(7.2
|
)
|
Interest expense to related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
Loss from minority investment(5)
|
|
|
|
|
|
|
|
|
|
|
7.9
|
|
|
|
0.8
|
|
|
|
|
|
Impairment of minority investment
|
|
|
60.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
|
|
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
2.4
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses, net
|
|
|
94.1
|
|
|
|
26.0
|
|
|
|
28.9
|
|
|
|
24.5
|
|
|
|
18.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(84.9
|
)
|
|
|
5.4
|
|
|
|
43.2
|
|
|
|
130.5
|
|
|
|
134.6
|
|
Income tax (benefit) expense
|
|
|
(5.0
|
)
|
|
|
3.1
|
|
|
|
18.6
|
|
|
|
35.0
|
|
|
|
43.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(79.9
|
)
|
|
|
2.3
|
|
|
|
24.6
|
|
|
|
95.5
|
|
|
|
91.5
|
|
(Loss) income from discontinued operations, net of tax
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
1.9
|
|
|
|
0.9
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(79.9
|
)
|
|
$
|
0.7
|
|
|
$
|
26.5
|
|
|
$
|
96.4
|
|
|
$
|
93.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(1.47
|
)
|
|
$
|
0.04
|
|
|
$
|
0.47
|
|
|
$
|
1.83
|
|
|
$
|
1.94
|
|
(Loss) income from discontinued operations
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
0.03
|
|
|
|
0.02
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(1.47
|
)
|
|
$
|
0.01
|
|
|
$
|
0.50
|
|
|
$
|
1.85
|
|
|
$
|
1.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(1.47
|
)
|
|
$
|
0.04
|
|
|
$
|
0.46
|
|
|
$
|
1.81
|
|
|
$
|
1.91
|
|
(Loss) income from discontinued operations
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
0.03
|
|
|
|
0.01
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(1.47
|
)
|
|
$
|
0.01
|
|
|
$
|
0.49
|
|
|
$
|
1.82
|
|
|
$
|
1.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares, basic
|
|
|
54,264,763
|
|
|
|
53,693,258
|
|
|
|
53,675,145
|
|
|
|
52,077,893
|
|
|
|
47,077,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares, diluted
|
|
|
54,264,763
|
|
|
|
54,484,969
|
|
|
|
54,401,747
|
|
|
|
52,850,231
|
|
|
|
47,915,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share outstanding
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
$
|
0.54
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008(1)
|
|
|
2007(1)
|
|
|
2006(1)
|
|
|
|
(In millions)
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by operating activities
|
|
$
|
71.0
|
|
|
$
|
137.8
|
|
|
$
|
28.6
|
|
|
$
|
179.6
|
|
|
$
|
109.5
|
|
Cash flows used in investing activities
|
|
|
(44.5
|
)
|
|
|
(102.9
|
)
|
|
|
(39.4
|
)
|
|
|
(221.8
|
)
|
|
|
(250.7
|
)
|
Cash flows (used in) provided by financing activities
|
|
|
(45.8
|
)
|
|
|
18.2
|
|
|
|
(78.9
|
)
|
|
|
45.6
|
|
|
|
180.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(19.3
|
)
|
|
$
|
53.1
|
|
|
$
|
(89.7
|
)
|
|
$
|
3.4
|
|
|
$
|
39.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008(1)
|
|
|
2007(1)
|
|
|
2006(1)
|
|
|
|
(In millions)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
49.1
|
|
|
$
|
68.4
|
|
|
$
|
15.3
|
|
|
$
|
105.0
|
|
|
$
|
101.6
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44.4
|
|
|
|
73.2
|
|
Total current assets
|
|
|
299.4
|
|
|
|
311.6
|
|
|
|
194.0
|
|
|
|
468.6
|
|
|
|
433.3
|
|
Property, plant and equipment, net
|
|
|
680.1
|
|
|
|
692.0
|
|
|
|
586.6
|
|
|
|
525.5
|
|
|
|
403.6
|
|
Total assets
|
|
|
1,144.6
|
|
|
|
1,223.0
|
|
|
|
1,017.2
|
|
|
|
1,244.3
|
|
|
|
949.4
|
|
Total current liabilities
|
|
|
292.5
|
|
|
|
322.2
|
|
|
|
186.2
|
|
|
|
305.0
|
|
|
|
230.9
|
|
Total debt, including current maturities
|
|
|
295.8
|
|
|
|
317.1
|
|
|
|
286.0
|
|
|
|
355.2
|
|
|
|
286.6
|
|
Total non-current liabilities
|
|
|
408.8
|
|
|
|
369.8
|
|
|
|
297.2
|
|
|
|
426.8
|
|
|
|
336.3
|
|
Total shareholders equity
|
|
|
443.3
|
|
|
|
531.0
|
|
|
|
533.8
|
|
|
|
512.5
|
|
|
|
382.2
|
|
Total liabilities and shareholders equity
|
|
|
1,144.6
|
|
|
|
1,223.0
|
|
|
|
1,017.2
|
|
|
|
1,244.3
|
|
|
|
949.4
|
|
|
|
|
(1) |
|
Operating results for 2008, 2007 and 2006 have been restated to
reflect the reclassification of the retail segments
remaining nine Virginia stores back to normal operations. |
|
(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) |
|
To mitigate the risks of changes in the market price of crude
oil and refined petroleum products, from time to time we 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. |
|
(5) |
|
Beginning October 1, 2008, Delek began reporting its
investment in Lion Oil using the cost method of accounting. See
Note 6 of the Consolidated Financial Statements in
Item 8, Financial Statements and Supplementary Data of this
Annual Report on
10-K for
further information. |
39
Segment
Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining
|
|
|
Retail
|
|
|
Marketing
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
Net sales (excluding intercompany marketing fees and sales)
|
|
$
|
1,678.2
|
|
|
$
|
1,592.3
|
|
|
$
|
484.3
|
|
|
$
|
0.8
|
|
|
$
|
3,755.6
|
|
Intercompany marketing fees and sales
|
|
|
5.0
|
|
|
|
|
|
|
|
20.1
|
|
|
|
(25.1
|
)
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,546.8
|
|
|
|
1,405.2
|
|
|
|
476.7
|
|
|
|
(15.8
|
)
|
|
|
3,412.9
|
|
Operating expenses
|
|
|
101.4
|
|
|
|
134.7
|
|
|
|
2.9
|
|
|
|
(9.5
|
)
|
|
|
229.5
|
|
Insurance proceeds business interruption
|
|
|
(12.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12.8
|
)
|
Property damage proceeds, net
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
51.8
|
|
|
$
|
52.4
|
|
|
$
|
24.8
|
|
|
$
|
1.0
|
|
|
|
130.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59.0
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61.1
|
|
Loss on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
545.1
|
|
|
$
|
420.6
|
|
|
$
|
65.2
|
|
|
$
|
113.7
|
|
|
$
|
1,144.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending (excluding business combinations)
|
|
$
|
42.3
|
|
|
$
|
14.4
|
|
|
$
|
|
|
|
$
|
0.1
|
|
|
$
|
56.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining
|
|
|
Retail
|
|
|
Marketing
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
Net sales (excluding intercompany marketing fees and sales)
|
|
$
|
887.7
|
|
|
$
|
1,421.5
|
|
|
$
|
356.8
|
|
|
$
|
0.7
|
|
|
$
|
2,666.7
|
|
Intercompany marketing fees and sales
|
|
|
(5.6
|
)
|
|
|
|
|
|
|
17.6
|
|
|
|
(12.0
|
)
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
809.6
|
|
|
|
1,240.8
|
|
|
|
349.5
|
|
|
|
(5.8
|
)
|
|
|
2,394.1
|
|
Operating expenses
|
|
|
85.9
|
|
|
|
138.5
|
|
|
|
1.2
|
|
|
|
(6.6
|
)
|
|
|
219.0
|
|
Impairment of goodwill
|
|
|
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
7.0
|
|
Insurance proceeds business interruption
|
|
|
(64.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64.1
|
)
|
Property damage proceeds, net
|
|
|
(40.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
91.0
|
|
|
$
|
35.2
|
|
|
$
|
23.7
|
|
|
$
|
1.1
|
|
|
|
151.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64.3
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52.4
|
|
Loss on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
573.8
|
|
|
$
|
430.0
|
|
|
$
|
62.3
|
|
|
$
|
156.9
|
|
|
$
|
1,223.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending (excluding business combinations)
|
|
$
|
155.1
|
|
|
$
|
14.3
|
|
|
$
|
0.5
|
|
|
$
|
0.1
|
|
|
$
|
170.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining
|
|
|
Retail(2)
|
|
|
Marketing
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
Net sales (excluding intercompany marketing fees and sales)
|
|
$
|
2,105.6
|
|
|
$
|
1,885.7
|
|
|
$
|
731.7
|
|
|
$
|
0.7
|
|
|
$
|
4,723.7
|
|
Intercompany marketing fees and sales
|
|
|
(13.8
|
)
|
|
|
|
|
|
|
13.8
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,921.3
|
|
|
|
1,673.4
|
|
|
|
721.2
|
|
|
|
(7.8
|
)
|
|
|
4,308.1
|
|
Operating expenses
|
|
|
96.9
|
|
|
|
142.9
|
|
|
|
1.0
|
|
|
|
|
|
|
|
240.8
|
|
Impairment of goodwill
|
|
|
|
|
|
|
11.2
|
|
|
|
|
|
|
|
|
|
|
|
11.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
73.6
|
|
|
$
|
58.2
|
|
|
$
|
23.3
|
|
|
$
|
8.5
|
|
|
|
163.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57.0
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41.3
|
|
Gain on sales of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
348.4
|
|
|
$
|
464.8
|
|
|
$
|
55.3
|
|
|
$
|
148.7
|
|
|
$
|
1,017.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending (excluding business combinations)
|
|
$
|
82.9
|
|
|
$
|
18.6
|
|
|
$
|
0.9
|
|
|
$
|
|
|
|
$
|
102.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Accounting Standards Codification (ASC) 280,
Segment Reporting, requires disclosure of a measure of
segment profit or loss. 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 Tyler 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) |
|
Retail operating results for 2008 have been restated to reflect
the reclassification of the remaining nine Virginia stores back
to normal operations. |
|
|
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.
41
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:
|
|
|
|
|
reliability of our operating assets;
|
|
|
|
competition;
|
|
|
|
changes in, or the failure to comply with, the extensive
government regulations applicable to our industry segments;
|
|
|
|
decreases in our refining margins or fuel gross profit as a
result of increases in the prices of crude oil, other feedstocks
and refined petroleum products;
|
|
|
|
our ability to execute our strategy of growth through
acquisitions and transactional risks in acquisitions;
|
|
|
|
diminishment of value in long-lived assets may result in an
impairment in the carrying value of the asset on our balance
sheet and a resultant loss recognized in the statement of
operations;
|
|
|
|
general economic and business conditions, particularly levels of
spending relating to travel and tourism or conditions affecting
the southeastern United States;
|
|
|
|
dependence on one wholesaler for a significant portion of our
convenience store merchandise;
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unanticipated increases in cost or scope of, or significant
delays in the completion of our capital improvement projects;
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risks and uncertainties with respect to the quantities and costs
of refined petroleum products supplied to our pipelines
and/or held
in our terminals;
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operating hazards, natural disasters, casualty losses and other
matters beyond our control;
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increases in our debt levels;
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compliance, or failure to comply, with restrictive and financial
covenants in our various debt agreements;
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the inability of our subsidiaries to freely make dividends to us;
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seasonality;
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acts of terrorism aimed at either our facilities or other
facilities that could impair our ability to produce or transport
refined products or receive feedstocks;
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changes in the cost or availability of transportation for
feedstocks and refined products;
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volatility of derivative instruments;
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potential conflicts of interest between our major stockholder
and other stockholders; and
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42
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other factors discussed under the heading
Managements Discussion and Analysis and in our
other filings with the SEC.
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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 light products loading facility. Our marketing
segment sells refined products on a wholesale basis in west
Texas through company-owned and third-party operated terminals
and owns
and/or
operates crude oil pipelines and associated tank farms in east
Texas. Our retail segment markets gasoline, diesel, other
refined petroleum products and convenience merchandise through a
network of approximately 412 company-operated retail fuel
and convenience stores located in Alabama, Arkansas, Georgia,
Kentucky, Louisiana, Mississippi, Tennessee and Virginia.
Additionally, we own a minority interest in Lion Oil Company, a
privately-held Arkansas corporation, which operates a
80,000 bpd moderate complexity crude oil refinery located
in El Dorado, Arkansas and other pipeline and product terminals.
Our profitability in the refining segment is substantially
determined by the spread between the price of refined products
and the price of crude oil, referred to as the refined
product margin. The cost to acquire feedstocks and the
price of the refined petroleum products we ultimately sell from
the Tyler refinery depend on numerous factors beyond our
control, including the supply of, and demand for, crude oil,
gasoline and other refined petroleum products which, in turn,
depend on, among other factors, changes in domestic and foreign
economies, weather conditions such as hurricanes or tornadoes,
local, domestic and foreign political affairs, global conflict,
production levels, the availability of imports, the marketing of
competitive fuels and government regulation. Other significant
factors that influence our results in the refining segment
include the cost of crude, our primary feedstock, the Tyler
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. Moreover, while any
changes in the cost of crude oil, are reflected in the price of
light refined products, the value of heavier products, such as
coke, carbon black oil (CBO), and liquefied
petroleum gas (LPG) have not moved in parallel with
crude cost. This causes additional pressure on our realized
margins.
We compare our per barrel refined product margin to a well
established industry metric, the U.S. Gulf Coast
5-3-2 crack
spread (Gulf Coast crack spread), which is used as a
benchmark for measuring a refinerys product margins by
measuring the difference between the price of light products and
crude oil. It represents the approximate gross margin resulting
from processing one barrel of crude oil into three fifths of a
barrel of gasoline and two fifths of a barrel of high sulfur
diesel. We calculate the Gulf Coast crack spread using the
market value of U.S. Gulf Coast Pipeline 87 Octane
Conventional Gasoline and U.S. Gulf Coast Pipeline
No. 2 Heating Oil (high sulfur diesel) and the first month
futures price of light sweet crude oil on the New York
Mercantile Exchange (NYMEX). U.S. Gulf Coast
Pipeline 87 Octane Conventional Gasoline is a grade of gasoline
commonly marketed as Regular Unleaded at retail locations.
U.S. Gulf Coast Pipeline No. 2 Heating Oil is a
petroleum distillate that can be used as either a diesel fuel or
a fuel oil. This is the standard by which other distillate
products (such as ultra low sulfur diesel) are priced.
43
The NYMEX is the commodities trading exchange located in New
York City where contracts for the future delivery of petroleum
products are bought and sold.
An event in our refining segment which has spanned the three
year period discussed was an explosion and fire, which occurred
at the Tyler refinery on November 20, 2008. The explosion
and fire caused damage to both our saturates gas plant and
naphtha hydrotreater and resulted in an immediate suspension of
our refining operations. The Tyler refinery was subject to a
gradual, monitored restart in May 2009, culminating in a full
resumption of operations on May 18, 2009. We settled all
outstanding property damage and business interruption insurance
claims in 2010.
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:
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focus on health, safety and environmental compliance;
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provide value to our customers and employees by delivering a
high level of customer service standards;
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demonstrate a prudent and scalable capital structure;
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repair, modernize, grow and improve the profitability of our
operations through carefully evaluated capital
investments; and
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pursue acquisition opportunities that strengthen our core
markets and leverage our core competencies.
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In pursuit of the foregoing goals, the following represent
certain significant accomplishments in 2010:
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Throughout 2010, we completed several capital projects at the
Tyler refinery, including the fractionation section of the
Mobile Source Air Toxics (MSAT) II compliance
project, which allows for reduced benzene content in gasoline;
construction of a new warehouse and maintenance shops, which
improves the safety of the Tyler refinery employees; and
improvements to tankage, lines and loading systems to increase
the amounts and types of renewable fuels we can blend at the
Tyler refinery.
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In March 2010, the Tyler refinery began wide-scale training on
Duponts Safety Observations Program as part of a new
initiative to promote an improved safety culture.
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Revitalized our promotional marketing to defined bi-monthly
period which both capture consumer interest and frequently
attach to a charitable event or cause. We have labeled this
initiative the WOW promotion.
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Obtained long-term financing in the form of revolving credit
facilities for both our refining and retail segments, which
ensure continued access to needed liquidity in our operations.
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Extended the maturity dates on $144.0 million in promissory
notes.
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During 2010, we paid dividends totaling $8.4 million to our
shareholders.
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44
Market
Trends
Our results of operations are significantly affected by the cost
of commodities. Sudden change in petroleum price 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.
Concerns about the U.S. economy and continued uncertainty
in several oil-producing regions of the world resulted in
volatility in the price of crude oil which outpaced product
prices in 2010, 2009 and 2008. The average price of crude oil in
2010, 2009 and 2008 was $79.50, $61.93 and $99.73 per barrel,
respectively. The U.S. Gulf Coast crack spread ranged from
a high of $14.26 per barrel to a low of $4.58 per barrel during
2010 and averaged $7.93 per barrel during 2010 compared to an
average of $6.92 in 2009 and $10.27 per barrel in 2008.
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 $1.83 per gallon to a high of
$2.41 per gallon in 2010 and averaged $2.07 per gallon in 2010,
which compares to averages of $1.65 per gallon in 2009 and $2.49
per gallon in 2008. If this volatility continues and we are
unable to fully pass our cost increases on to our customers, our
retail fuel margins will decline. Additionally, increases in the
retail price of fuel could result in lower demand for fuel and
reduced customer traffic inside our convenience stores in our
retail segment. This may place downward pressure on in-store
merchandise sales and margins. Finally, the higher cost of fuel
has resulted in higher credit card fees as a percentage of sales
and gross profit. As fuel prices increase, we 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 $4.34 per million British Thermal Units
(MMBTU) in 2010 from $3.72 per million MMBTU in 2009
and $9.22 per MMBTU in 2008.
As part of our overall business strategy, management determines
the cost to store crude, the pricing of products and whether we
should maintain, increase or decrease inventory levels of crude
or other intermediate feedstocks based on various factors,
including the crude pricing market in the Gulf Coast region, the
refined products market in the same region, the relationship
between these two markets, our ability to obtain credit with
crude vendors, and any other factors which may impact the costs
of crude. At the end of 2010, our crude inventory increased by
approximately 120,000 barrels due to unplanned maintenance
at the refinery. At the end of 2009, we reduced our crude
inventory, primarily because of the limited refined product
margin at that time.
Factors
Affecting Comparability
The comparability of our results of operations for the year
ended December 31, 2010 as compared to the years ended
December 31, 2009 and 2008 was affected by the following
factors:
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The receipt of $4.0 million and $40.3 million,
respectively, of property damage insurance proceeds, net of
expenses, for the years ended December 31, 2010 and 2009,
due to the November 20, 2008 explosion and fire at the
Tyler refinery;
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the explosion and fire at the Tyler refinery on
November 20, 2008, which shut down operations at the Tyler
refinery for a portion of each of the years ended
December 31, 2009 and 2008. Operations fully resumed on
May 18, 2009;
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the change in the accounting for the investment in Lion Oil from
the equity method to the cost method beginning October 2008;
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the addition of ethanol blending at our refining segment in 2008.
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45
Results
of Operations
Consolidated
Results of Operations Comparison of the Year Ended
December 31, 2010 versus the Year Ended December 31,
2009
In the fiscal years ended December 31, 2010 and 2009, we
generated net sales of $3,755.6 million and
$2,666.7 million, respectively. The $1,088.9 million,
or 40.8%, increase in net sales is primarily attributed to
higher sales volume at the Tyler refinery due to the resumption
of operations after the November 20, 2008 explosion and
fire that led to the suspension of operations at the Tyler
refinery for the period from November 20, 2008 to
May 18, 2009 and higher sales prices due to an increase in
commodity prices at all three of our operating segments.
Cost of goods sold was $3,412.9 million in 2010 compared to
$2,394.1 million in 2009, an increase of
$1,018.8 million or 42.6%. This increase is primarily
attributable to higher costs of crude and sales volumes at the
Tyler refinery, higher fuel costs at the retail segment and
higher product cost per barrel at the marketing segment.
Operating expenses were $229.5 million in 2010 compared to
$219.0 million in 2009, an increase of $10.5 million
or 4.8%. This increase was primarily driven by the resumption of
operations at the Tyler refinery, as well as increased expenses
at the refining segment associated with maintenance performed at
the Tyler refinery in the third quarter of 2010. These increases
were partially offset by a decrease in operating expenses at our
retail segment due to a reduction in our retail and convenience
store count in 2010 from 2009.
During the year ended December 31, 2010, we recognized
income from insurance proceeds of $17.0 million related to
the November 20, 2008 explosion and fire at the Tyler
refinery, of which $12.8 million is included as business
interruption proceeds and $4.2 million is included as
property damage. We also recorded expenses during the year ended
December 31, 2010 of $0.2 million, resulting in a net
gain of $4.0 million related to property damage proceeds.
During the year ended December 31, 2009, we recorded
insurance proceeds of $116.0 million, of which
$64.1 million was included as business interruption
proceeds and $51.9 million was included as property damage
proceeds. We also recorded expenses of $11.6 million,
resulting in a net gain of $40.3 million related to
property damage proceeds.
Goodwill impairment was $7.0 million in 2009 and relates to
the write-off of goodwill associated with our purchase of stores
from Fast Petroleum, Inc. and affiliates (Fast stores). The
impairment taken in 2009 was based on our annual impairment
testing performed in the fourth quarter. Our annual impairment
testing performed in the fourth quarter of 2010 did not result
in goodwill impairment.
General and administrative expenses were $59.0 million in
2010 compared to $64.3 million in 2009, a decrease of
$5.3 million, or 8.2%. The overall decrease was primarily
due to costs related to potential acquisitions that were
incurred during 2009 and a decrease in legal expenses.
Depreciation and amortization was $61.1 million in 2010
compared to $52.4 million in 2009, an increase of
$8.7 million or 16.6%. This increase was primarily due to
several projects that were placed in service at the Tyler
refinery in the second half of 2009, including the saturates gas
plant rebuild, the 2009 turnaround activities and certain crude
optimization projects.
Loss on sale of assets was $0.7 million in 2010 compared to
$2.9 million in 2009. In 2010, the retail segment sold
twelve retail fuel and convenience stores and one dealer
location for a net loss of $0.7 million. In 2009, the
retail segment sold 24 non-core real estate assets during the
third and fourth quarters for a net loss of $2.9 million.
Interest expense was $34.1 million in 2010 compared to
$25.5 million in 2009, an increase of $8.6 million.
This increase was due to higher amortization of deferred
financing charges and higher interest rates under several of our
credit facilities which have been refinanced or amended during
2010 and the greater use of our refining segments ABL
credit facility to issue letters of credit for crude oil
purchases compared to 2009 when the Tyler refinery was not
operating for a significant portion of the period. We also did
not have any significant refinery projects in process during
2010, so little capitalization of interest expense occurred,
whereas we had a significant capitalization of interest expense
in 2009. Interest income was nominal in 2010, as compared to
$0.1 million for 2009.
46
Impairment of minority investment was $60.0 million in
2010. In the fourth quarter of 2010, an evaluation of publicly
disclosed transactions in the refining sector, in conjunction
with our internal reviews of potential transactions, indicated a
need to evaluate our cost-method investment for possible
diminishment of fair value. Therefore, we performed an
evaluation of the fair value of our minority investment which
resulted in the need to recognize a $60.0 million
impairment of our minority investment in the fourth quarter of
2010. No impairment of our minority investment was necessary in
2009.
Other operating expenses, net, were $0.6 million in 2009.
In the second quarter of 2009, we exchanged our auction rate
securities investment for shares of common stock in Bank of
America to be held as available for sale securities. This
conversion resulted in a loss of $2.0 million. In the third
quarter of 2009, we sold the common stock of Bank of America.
This sale resulted in a gain of $1.4 million, which
partially offset the loss recognized on conversion. There were
no other operating expenses in 2010.
Income tax (benefit) expense was $(5.0) million in 2010
compared to $3.1 million in 2009, a decrease of
$8.1 million. This decrease was primarily due to the net
loss in 2010 as compared to income in 2009. Our effective tax
rate was 5.9% in 2010, compared to 57.4% in 2009. The decrease
in the effective tax rate was primarily due to a valuation
allowance related to the impairment of our minority investment
in 2010, adjustments to our valuation allowances on deferred tax
assets in 2009, which increased our 2009 expense, and the
goodwill impairment recognized in the fourth quarter of 2009, a
portion of which was non-deductible for tax purposes.
Loss from discontinued operations was $1.6 million in 2009
and relates to the operations of the 27 Virginia stores
classified as discontinued operations. As of December 31,
2009 there were no remaining assets held for sale and,
therefore, there was no income or loss from discontinued
operations in 2010.
Consolidated
Results of Operations Comparison of the Year Ended
December 31, 2009 versus the Year Ended December 31,
2008
In the fiscal years ended December 31, 2009 and 2008, we
generated net sales of $2,666.7 million and
$4,723.7 million, respectively. The $2,057.0 million,
or 43.5%, decrease in net sales is primarily attributed to lower
sales volume at the Tyler refinery due to the November 20,
2008 explosion and fire that led to the suspension of operations
at the Tyler refinery for the period from November 20, 2008
to May 18, 2009 and lower sales prices due to a reduction
in commodity prices at all three of our operating segments.
Cost of goods sold was $2,394.1 million in 2009 compared to
$4,308.1 million in 2008, a decrease of
$1,914.0 million or 44.4%. This decrease is primarily
attributable to lower costs of crude and sales volumes at the
Tyler refinery, lower fuel costs at the retail segment and lower
product cost per barrel at the marketing segment.
Operating expenses were $219.0 million in 2009 compared to
$240.8 million in 2008, a decrease of $21.8 million or
9.1%. This decrease was primarily driven by lower natural gas
and electricity rates in the refining segment and lower credit
card expenses at the retail segment.
During the year ended December 31, 2009, we recorded
insurance proceeds of $116.0 million related to the
November 20, 2008 explosion and fire at the Tyler refinery,
of which $64.1 million was included as business
interruption proceeds and $51.9 million was included as
property damage proceeds. We also recorded expenses of
$11.6 million, resulting in a net gain of
$40.3 million related to property damage proceeds.
Goodwill impairment was $7.0 million in 2009 and relates to
the write-off of goodwill associated with our purchase of the
Fast stores. Goodwill impairment was $11.2 million in 2008
and relates to the write-off of goodwill associated with our
purchase of stores from Calfee Company of Dalton, Inc. and
affiliates (Calfee stores). The impairments taken in
both 2009 and 2008 were based on our annual impairment testing
performed in the fourth quarter of each year.
General and administrative expenses were $64.3 million in
2009 compared to $57.0 million in 2008, an increase of
$7.3 million, or 12.8%. The overall increase was primarily
due to an increase in legal fees associated with the
November 20, 2008 explosion and fire at the Tyler refinery
and increases in salaried labor and outside services. We do not
allocate general and administrative expenses to our operating
segments.
47
Depreciation and amortization was $52.4 million in 2009
compared to $41.3 million in 2008, an increase of
$11.1 million or 26.9%. This increase was primarily due to
the completion of a full turnaround at the Tyler refinery in the
first half of 2009.
Gain (loss) on sale of assets was $(2.9) million in 2009
compared to $6.8 million in 2008. In 2009, the retail
segment sold 24 non-core real estate assets during the third and
fourth quarters for a net loss of $2.9 million. In 2008,
the retail segment sold two retail fuel and convenience stores,
one in the second quarter and the other in the third quarter,
for a net gain of $6.8 million.
Interest expense was $25.5 million in 2009 compared to
$23.7 million in 2008, an increase of $1.8 million.
This increase was due to an increase in our deferred financing
charges and a decrease in capitalized interest, partially offset
by lower average borrowing rates on our variable rate facilities
and decreases in average loan balances and letters of credit
issued. Interest income was $0.1 million for 2009 compared
to $2.1 million for 2008, a decrease of $2.0 million.
This decrease was primarily due to our reduction in short-term
investments and lower rates of return in 2009.
Beginning October 1, 2008, we began reporting our
investment in Lion Oil using the cost method of accounting.
Accordingly, there was no income or loss from equity method
investment in the year ended December 31, 2009. Loss from
equity method investment was $7.9 million in 2008. Our
proportionate share of the loss from the Lion Oil minority
investment was $7.1 million for 2008. In addition, we had
amortization expense of $0.8 million for 2008 related to
the fair value differential determined at the acquisition date
of our minority investment. We included our proportionate share
of the operating results of Lion Oil in our consolidated
statements of operations two months in arrears.
Gain on extinguishment of debt was $1.6 million in 2008 and
relates to a purchase in a participating stake in debt of Delek
US held by Finance, as permitted under the terms of the credit
agreement. At a consolidated level, this purchase resulted in a
gain on debt extinguishment. There was no gain or loss on
extinguishment of debt in 2009.
Other operating expenses, net, were $0.6 million in 2009
compared to $1.0 million in 2008. In the second quarter of
2009, we exchanged our auction rate securities investment for
shares of common stock in Bank of America to be held as
available for sale securities. This conversion resulted in a
loss of $2.0 million. In the third quarter of 2009, we sold
the common stock of Bank of America. This sale resulted in a
gain of $1.4 million, which partially offset the loss
recognized on conversion. In 2008, we recognized a
$1.0 million loss associated with the change in the fair
market value of our interest rate derivatives.
Income tax expense was $3.1 million in 2009 compared to
$18.6 million in 2008, a decrease of $15.5 million.
This decrease was primarily due to the decrease in net income in
2009 as compared to 2008. Our effective tax rate was 57.4% in
2009, compared to 43.1% in 2008. The increase in the effective
tax rate was primarily due to adjustments to our valuation
allowances on deferred tax assets in 2009, which increased our
2009 expense, and the goodwill impairment recognized in the
fourth quarter of 2009, a portion of which was non-deductible
for tax purposes.
Income (loss) from discontinued operations was
$(1.6) million and $1.9 million in 2009 and 2008,
respectively, and relates to the operations of the 27 Virginia
stores classified as discontinued operations. As of
December 31, 2009 there were no remaining assets held for
sale.
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.
48
Refining
Segment
The table below sets forth information concerning the Tyler
refinery segment operations for 2010, 2009 and 2008:
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Year Ended December 31,
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2010
|
|
|
2009
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|
|
2008
|
|
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Days operated in period(1)
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365
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|
|
|
228
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|
|
|
324
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Total sales volume (average barrels per day)(1)
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53,360
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51,823
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|
|
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56,609
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Products manufactured (average barrels per day)(1):
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Gasoline
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30,019
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28,707
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30,346
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Diesel/jet
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19,669
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19,206
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20,857
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Petrochemicals, LPG, NGLs
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1,623
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2,064
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1,963
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Other
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2,012
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2,350
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2,607
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Total production
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53,323
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52,327
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55,773
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Refinery throughput (average barrels per day)(1):
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Crude oil
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50,000
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49,304
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51,683
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Other feedstocks
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4,286
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4,498
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5,239
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Total refinery throughput
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54,286
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53,802
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56,922
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Per barrel of sales(2):
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Refining operating margin(3)
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$
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7.00
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$
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6.14
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$
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9.29
|
|
Refining operating margin excluding intercompany marketing
fees(4)
|
|
|
7.55
|
|
|
|
7.07
|
|
|
|
10.05
|
|
Direct operating expenses(5)
|
|
|
5.21
|
|
|
|
7.28
|
|
|
|
5.28
|
|
Pricing statistics (average for the period presented)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
WTI Cushing crude oil (per barrel)
|
|
$
|
79.50
|
|
|
$
|
71.22
|
|
|
$
|
106.95
|
|
U.S. Gulf Coast 5-3-2 crack spread (per barrel)
|
|
|
7.93
|
|
|
|
5.97
|
|
|
|
11.13
|
|
U.S. Gulf Coast unleaded gasoline (per gallon)
|
|
|
2.07
|
|
|
|
1.87
|
|
|
|
2.69
|
|
Ultra low sulfur diesel (per gallon)
|
|
|
2.16
|
|
|
|
1.85
|
|
|
|
3.11
|
|
Natural gas (per MMBTU)
|
|
|
4.34
|
|
|
|
3.71
|
|
|
|
9.22
|
|
|
|
|
(1) |
|
The Tyler refinery did not operate during the period from
November 21, 2008 through May 17, 2009 due to the
November 20, 2008 explosion and fire. The Tyler refinery
resumed full operations on May 18, 2009. Sales volumes for
2009 include minimal sales of intermediate products made prior
to the restart of the Tyler refinery. Information is calculated
based on the number of days the Tyler refinery was fully
operational. |
|
(2) |
|
Per barrel of sales information is calculated by
dividing the applicable income statement line item (operating
margin or operating expenses) divided by the total barrels sold
during the period. |
|
(3) |
|
Operating margin is defined as refining segment net
sales less cost of goods sold. |
|
(4) |
|
Operating margin excluding intercompany marketing
fees is defined as refining segment net sales less cost of goods
sold, adjusted to exclude the fees paid to the marketing segment
of $10.6 million, $11.0 million and $13.8 million
in the years ended December 31, 2010, 2009 and 2008,
respectively. |
|
(5) |
|
Direct operating expenses are defined as operating
expenses attributed to the refining segment. |
Refining
Segment Operational Comparison of the Year Ended
December 31, 2010 versus the Year Ended December 31,
2009
In the fiscal years ended December 31, 2010 and 2009, net
sales for the refining segment were $1,683.2 million and
$882.1 million, respectively, an increase of
$801.1 million, or 90.8%. Total sales volume for 2010
averaged 53,360 barrels per day compared to
51,823 barrels per day in 2009. The increase in total sales
was primarily due to
49
the resumption of operations at the Tyler refinery on
May 18, 2009 after the November 20, 2008 explosion and
fire and an increase in the average sales price of $12.79 per
barrel, to $86.42 per barrel sold in 2010 compared to $73.63 per
barrel sold in 2009.
Cost of goods sold for our refining segment in 2010 was
$1,546.8 million compared to $809.6 million in 2009,
an increase of $737.2 million or 91.1%. This cost increase
resulted from an increase in the average cost per barrel of
$12.58, from $66.84 per barrel in 2009 to $79.42 per barrel in
2010. Further contributing to the increase in cost of goods sold
was the increase in sales volume due to the resumption of
operations at the Tyler refinery discussed above. Cost of goods
sold for 2010 includes a $3.2 million gain on derivative
contracts, compared to a gain of $6.6 million in 2009.
Our refining segment has a service agreement with our marketing
segment, which among other things, requires the refining segment
to pay service fees based on the number of gallons sold at the
Tyler refinery and to share with the marketing segment a portion
of the marketing margin achieved in return for providing
marketing, sales and customer services. This fee was
$10.6 million in 2010 as compared to $11.0 million in
2009. This service agreement lowered the margin achieved by our
refining segment in 2010 by $0.55 per barrel to $7.00 per
barrel. Without this fee, the refining segment would have
achieved a refining operating margin of $7.55 per barrel in 2010
compared to $7.07 per barrel in 2009. We eliminate this
intercompany fee in consolidation.
Operating expenses were $101.4 million in 2010, or $5.21
per barrel sold, compared to $85.9 million in 2009, or
$7.28 per barrel sold. The decrease in operating expense per
barrel sold was due primarily to the continuation of fixed
costs, such as salaries, benefits and utilities despite the
suspension of operations for the first 137 days of 2009, as
compared to a full year of production in 2010. The overall
increase in operating expenses of $15.5 million, or 18.0%,
is attributed to the resumption of operations at the Tyler
refinery, an increase in equipment rental, maintenance and
contractor expenses associated with the maintenance performed on
several process units at the Tyler refinery in the third quarter
of 2010 and a $2.4 million increase in transportation and
pipeline expenses, which are paid to the marketing segment. We
eliminate these fees in consolidation.
During the year ended December 31, 2010, we recognized
income from insurance proceeds of $17.0 million related to
the November 20, 2008 explosion and fire at the Tyler
refinery, of which $12.8 million is included as business
interruption proceeds and $4.2 million is included as
property damage. We also recorded expenses during the year ended
December 31, 2010 of $0.2 million, resulting in a net
gain of $4.0 million related to property damage proceeds.
During the year ended December 31, 2009, we recorded
insurance proceeds of $116.0 million, of which
$64.1 million was included as business interruption
proceeds and $51.9 million was included as property damage
proceeds. We also recorded expenses of $11.6 million,
resulting in a net gain of $40.3 million related to
property damage proceeds.
Contribution margin for the refining segment in 2010 was
$51.8 million, or 39.8% of our consolidated contribution
margin.
Refining
Segment Operational Comparison of the Year Ended
December 31, 2009 versus the Year Ended December 31,
2008
In the fiscal years ended December 31, 2009 and
2008 net sales for the refining segment were
$882.1 million and $2,091.8 million, respectively, a
decrease of $1,209.7 million, or 57.8%. Total sales volume
for 2009 averaged 51,823 barrels per day compared to
56,609 barrels per day in 2008. The decrease in total sales
volume was primarily due to the November 20, 2008 explosion
and fire that led to the suspension of operations at the Tyler
refinery for the period from November 20, 2008 to
May 17, 2009. The average sales price also decreased by
$40.42 per barrel, to $73.63 per barrel sold in 2009 compared to
$114.05 per barrel sold in 2008. Although the Tyler
refinerys operations were suspended subsequent to the
November 20, 2008 explosion and fire, nominal amounts of
intermediates and finished products were sold during the period
from November 21, 2008 through May 18, 2009.
Cost of goods sold for our refining segment in 2009 was
$809.6 million compared to $1,921.3 million in 2008, a
decrease of $1,111.7 million or 57.9%. This cost decrease
resulted from decrease in the average cost per barrel of $37.91,
from $104.75 per barrel in 2008 to $66.84 per barrel in 2009.
Further contributing to the decrease in cost of goods sold was
the decrease in sales volume due to the November 20, 2008
explosion and fire discussed above. Cost
50
of goods sold for 2009 includes a $6.6 million gain on
derivative contracts, compared to a gain of $38.8 million
in 2008.
Our refining segment has a service agreement with our marketing
segment, which among other things, requires the refining segment
to pay service fees based on the number of gallons sold at the
Tyler refinery and 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 2009 by
$0.93 per barrel to $6.14 per barrel. Without this fee, the
refining segment would have achieved a refining operating margin
of $7.07 per barrel in 2009 compared to $10.05 per barrel in
2008. We eliminate this intercompany fee in consolidation.
Operating expenses were $85.9 million in 2009, or $7.28 per
barrel sold, compared to $96.9 million in 2008, or $5.28
per barrel sold. The increase in operating expense per barrel
sold was due primarily to the continuation of fixed costs, such
as salaries, benefits and utilities despite the suspension of
operations for the first 137 days of 2009. The overall
decrease in operating expenses of $11.0 million, or 11.4%,
is attributed to a decrease in natural gas and electricity rates
in 2009, partially offset by a $4.0 million increase in
transportation and pipeline expenses, which are paid to the
marketing segment. We eliminate these fees in consolidation.
During the year ended December 31, 2009, we recorded
insurance proceeds of $116.0 million related to the
November 20, 2008 explosion and fire at the Tyler refinery,
of which $64.1 million is included as business interruption
proceeds and $51.9 million is included as property damage
proceeds. We also recorded expenses of $11.6 million,
resulting in a net gain of $40.3 million related to
property damage proceeds.
Contribution margin for the refining segment in 2009 was
$91.0 million, or 60.3% of our consolidated contribution
margin.
Marketing
Segment
The table below sets forth certain information concerning our
marketing segment for the years ended December 31, 2010,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Days operated in period
|
|
|
365
|
|
|
|
365
|
|
|
|
366
|
|
Products sold (average barrels per day):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline
|
|
|
6,419
|
|
|
|
6,777
|
|
|
|
7,980
|
|
Diesel/jet
|
|
|
7,888
|
|
|
|
6,552
|
|
|
|
8,517
|
|
Other
|
|
|
47
|
|
|
|
49
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
|
14,354
|
|
|
|
13,378
|
|
|
|
16,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
Segment Operational Comparison of the Year Ended
December 31, 2010 versus the Year Ended December 31,
2009
Net sales for the marketing segment were $504.4 million and
$374.4 million in the years ended December 31, 2010
and 2009, respectively, an increase of $130.0 million or
34.7%. Total sales volume averaged 14,354 barrels per day
in 2010 and 13,378 barrels per day in 2009. The average
sales price per gallon of gasoline increased to $2.15 per gallon
in 2010, from $1.73 per gallon in 2009. The average sales price
per gallon of diesel also increased to $2.25 per gallon in 2010,
from $1.75 per gallon in 2009. The increase in sales volumes
during 2010 can be attributed primarily to an increase in diesel
sales volumes attributed to higher demand for distillate
products in west Texas. Net sales included $10.6 million
and $11.0 million, respectively, of service fees in 2010
and 2009 and $9.5 million and $6.6 million,
respectively, in transportation and storage fees in 2010 and
2009. These fees were paid by our refining segment to our
marketing segment and are eliminated in consolidation. The
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. The
transportation and storage fees are based on the number of
barrels of crude transferred to the Tyler refinery from certain
pipelines owned and leased by the marketing segment, plus a set
monthly storage fee.
51
Cost of goods sold was $476.7 million in 2010, or $90.99
per barrel sold compared to $349.5 million in 2009, or
$71.58 per barrel sold, an increase of $127.2 million or
36.4%. Average gross margin was $3.49 and $3.75 per barrel in
2010 and 2009, respectively. We recognized a gain (loss) of
$0.6 million and $(2.1) million in 2010 and 2009,
respectively, associated with the settlement of nomination
differences under a long-term purchase contract and finished
grade fuel derivatives.
Operating expenses in the marketing segment were
$2.9 million and $1.2 million, respectively in 2010
and 2009. Operating expenses increased due to the intercompany
sale of certain pipeline assets from our refining segment to our
marketing segment on March 31, 2009. Operating expenses
associated with these assets amounted to $2.0 million in
2010.
Contribution margin for the marketing segment in 2010 was
$24.8 million, or 19.1% of our consolidated segment
contribution margin.
Marketing
Segment Operational Comparison of the Year Ended
December 31, 2009 versus the Year Ended December 31,
2008
Net sales for the marketing segment were $374.4 million and
$745.5 million in the years ended December 31, 2009
and 2008, respectively, a decrease of $371.1 million or
49.8%. Total sales volume averaged 13,378 barrels per day
in 2009 and 16,557 barrels per day in 2008. The average
sales price per gallon of gasoline decreased to $1.73 per gallon
in 2009, from $2.73 per gallon in 2008. The average sales price
per gallon of diesel also decreased to $1.75 per gallon in 2009,
from $3.08 per gallon in 2008. The decrease in sales volumes
during 2009 can be attributed primarily to a rise in refined
product inventory in central Texas. Refined product volumes that
are typically shipped by competitors into upper Midwestern
markets remained in central Texas during the period, as summer
demand in the outside markets declined below historical levels.
Net sales included $11.0 million and $13.8 million,
respectively, of service fees in 2009 and 2008 and
$6.6 million in transportation and storage fees for the
year ended December 31, 2009. These fees were paid by our
refining segment to our marketing segment and are eliminated in
consolidation. The 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. The transportation and storage fees are based on the
number of barrels of crude transferred to the Tyler refinery
from certain pipelines owned and leased by the marketing
segment, plus a set monthly storage fee.
Cost of goods sold was $349.5 million in 2009, or $71.58
per barrel sold compared to $721.2 million in 2008, or
$119.01 per barrel sold, a decrease of $371.7 million or
51.5%. Average gross margin was $3.75 and $4.02 per barrel in
2009 and 2008, respectively. We recognized a (loss) gain of
$(2.1) million and $5.7 million in 2009 and 2008,
respectively, associated with the settlement of nomination
differences under a long-term purchase contract and finished
grade fuel derivatives.
Operating expenses in the marketing segment were
$1.2 million and $1.0 million, respectively in 2009
and 2008. These costs primarily relate to salaries, utilities
and insurance costs.
Contribution margin for the marketing segment in 2009 was
$23.7 million, or 15.7% of our consolidated segment
contribution margin.
52
Retail
Segment
The table below sets forth information concerning our retail
segment continuing operations for the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Number of stores (end of period)
|
|
|
412
|
|
|
|
442
|
|
|
|
467
|
|
Average number of stores
|
|
|
428
|
|
|
|
459
|
|
|
|
467
|
|
Retail fuel sales (thousands of gallons)
|
|
|
423,509
|
|
|
|
434,159
|
|
|
|
435,665
|
|
Average retail gallons per average number of stores (in
thousands)
|
|
|
990
|
|
|
|
946
|
|
|
|
933
|
|
Retail fuel margin ($ per gallon)
|
|
$
|
0.161
|
|
|
$
|
0.136
|
|
|
$
|
0.198
|
|
Merchandise sales (in millions)
|
|
$
|
384.1
|
|
|
$
|
385.6
|
|
|
$
|
387.4
|
|
Merchandise margin %
|
|
|
30.5
|
%
|
|
|
30.9
|
%
|
|
|
31.7
|
%
|
Credit expense (% of gross margin)
|
|
|
9.6
|
%
|
|
|
8.6
|
%
|
|
|
9.0
|
%
|
Merchandise and cash over/short (% of net sales)
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
Operating expenses/merchandise sales plus total gallons
|
|
|
16.1
|
%
|
|
|
16.3
|
%
|
|
|
16.7
|
%
|
Retail
Segment Operational Comparison of the Year Ended
December 31, 2010 versus the Year Ended December 31,
2009
In the fiscal years ended December 31, 2010 and 2009, net
sales for our retail segment were $1,592.3 million and
$1,421.5 million, respectively, an increase of
$170.8 million or 12.0%. Retail fuel sales, excluding
wholesale dollars, increased 16.8% to $1,133.9 million in
2010. This increase was due primarily to an increase in retail
fuel prices of $0.44 per gallon, to an average price of $2.68
per gallon in 2010 compared to an average price of $2.24 per
gallon in 2009. Retail fuel sales were 423.5 million
gallons in 2010 compared to 434.2 million gallons in 2009.
Our comparable store merchandise sales increased by 4.3%,
primarily in the dairy, snack, beer, cigarette and food service
categories. However, overall merchandise sales decreased 0.4% to
$384.1 million in 2010 due to the decrease in the number of
stores operated during 2010, as compared to 2009.
Cost of goods sold for our retail segment increased 13.2% to
$1,405.2 million in 2010 from $1,240.8 million in
2009. This increase was primarily due to the increase in the
average cost per gallon of 19.8%, to an average cost of $2.52
per gallon in 2010 compared to an average cost of $2.10 per
gallon in 2009.
Operating expenses were $134.7 million in 2010, a decrease
of $3.8 million, or 2.7%. This decrease was primarily due
to the decrease in the average store count, from 459 in 2009 to
428 in 2010. However, on a same-store basis, operating expenses
increased by $3.8 million, or 3.0%, primarily due to
increases in salaries and credit expense. The salary increase is
primarily due to the introduction of new quick service
restaurants into our stores. The ratio of operating expenses to
merchandise sales plus total gallons sold in our retail
operations decreased to 16.1% in 2010 from 16.3% in 2009.
Goodwill impairment was $7.0 million in 2009 and relates to
the write-off of goodwill associated with our purchase of the
Fast stores. The impairment taken in 2009 was based on our
annual impairment testing performed in the fourth quarter. Our
annual impairment testing performed in the fourth quarter of
2010 did not result in goodwill impairment.
Contribution margin for the retail segment in 2010 was
$52.4 million, or 40.3% of our consolidated contribution
margin.
Retail
Segment Operational Comparison of the Year Ended
December 31, 2009 versus the Year Ended December 31,
2008
In the fiscal years ended December 31, 2009 and 2008, net
sales for our retail segment were $1,421.5 million and
$1,885.7 million, respectively, a decrease of
$464.2 million or 24.6%. Retail fuel sales, excluding
wholesale
53
dollars, decreased 30.2% to $983.0 million in 2009. This
decrease was due primarily to a decrease in retail fuel prices
of $0.95 per gallon, to an average price of $2.24 per gallon in
2009 compared to an average price of $3.19 per gallon in 2008.
Retail fuel sales were 434.2 million gallons in 2009
compared to 435.7 million gallons in 2008.
Merchandise sales decreased 0.5% to $385.6 million in 2009.
The decrease in merchandise sales was primarily due to decreases
in our dairy, beer, fountain and food service categories. This
decrease was partially offset by higher cigarette sales, which
can be attributed to the April 1, 2009 federal tax increase
on cigarettes. Our comparable store merchandise sales increased
by 0.4%.
Cost of goods sold for our retail segment decreased 25.9% to
$1,240.8 million in 2009 from $1,673.4 million in
2008. This decrease was primarily due to the decrease in the
average cost per gallon of 30.5%, to an average cost of $2.10
per gallon in 2009 compared to an average cost of $3.02 per
gallon in 2008.
Operating expenses were $138.5 million in 2009, a decrease
of $4.4 million, or 3.1%. This decrease was primarily due
to the decrease in the number of stores operated and a decrease
in credit expenses. The ratio of operating expenses to
merchandise sales plus total gallons sold in our retail
operations decreased to 16.3% in 2009 from 16.7% in 2008.
Goodwill impairment was $7.0 million in 2009 and relates to
the write-off of goodwill associated with our purchase of the
Fast stores. Goodwill impairment was $11.2 million in 2008
and relates to the write-off of goodwill associated with our
purchase of the Calfee stores. The impairments taken in both
2009 and 2008 were based on our annual impairment testing
performed in the fourth quarter of each year.
Contribution margin for the retail segment in 2009 was
$35.2 million, or 23.3% 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, and due to the Tyler refinery incident in the fourth
quarter of 2008, business interruption and property damage
insurance proceeds covering the period of downtime experienced
by the Tyler refinery and the necessary capital expenditures to
repair and replace assets damaged in the incident. We believe
that our cash flows from operations and borrowings under or
refinancing of 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
acquisitions, for capital expenditures, or to fund expanded
general operations. 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. We continue to monitor the capital markets but there
can be no assurance that we will be able to raise additional
funds on favorable terms or at all.
Cash
Flows
The following table sets forth a summary of our consolidated
cash flows for 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by operating activities
|
|
$
|
71.0
|
|
|
$
|
137.8
|
|
|
$
|
28.6
|
|
Cash flows used in investing activities
|
|
|
(44.5
|
)
|
|
|
(102.9
|
)
|
|
|
(39.4
|
)
|
Cash flows (used in) provided by financing activities
|
|
|
(45.8
|
)
|
|
|
18.2
|
|
|
|
(78.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(19.3
|
)
|
|
$
|
53.1
|
|
|
$
|
(89.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
Cash
Flows from Operating Activities
Net cash provided by operating activities was $71.0 million
for 2010 compared to $137.8 million for 2009 and
$28.6 million for 2008. The decrease in cash flows from
operations in 2010 from 2009 was primarily due to a large
increase in accounts payable and other current liabilities in
2009 attributable to the restart of the Tyler refinery, a
decrease in deferred income taxes and a net loss of
$79.9 million in 2010, as compared to net income of
$0.7 million in 2009. Partially offsetting these decreases
in operating cash flow was a $20.9 million decrease in
inventory and other current assets in 2010, which was driven by
the receipt of a $39.6 million federal income tax refund in
April 2010 that was receivable as of December 31, 2009.
The increase in cash flows from operations in 2009 from 2008 was
primarily due to increases in accounts payable and other current
liabilities, partially offset by increases in accounts
receivable and inventory, resulting from the resumption of
operations of the Tyler refinery in 2009. Further contributing
to the increase was an increase in deferred tax liabilities and
non-cash losses relating to asset sales and the impairment of
our minority investment in 2009.
Cash
Flows from Investing Activities
Net cash used in investing activities was $44.5 million for
2010 compared to $102.9 million for 2009 and
$39.4 million for 2008. The decrease in cash used in
investing activities from 2009 to 2010 was primarily due to
decrease in capital spending in 2010. The 2009 capital spending
primarily relating to the rebuild of the saturates gas plant
that was damaged in the November 20, 2008 explosion and
fire at the Tyler refinery. Partially offsetting the decrease in
cash used was a decrease in property damage insurance proceeds
received in 2010, as compared to 2009. The insurance proceeds
received in the second quarter of 2010 represent final payments
on all outstanding property damage and business interruption
insurance claims arising from the November 20, 2008
incident.
Cash used in investing activities in 2010 includes our capital
expenditures of approximately $56.8 million, of which
$42.3 million was spent on projects at the Tyler refinery,
$14.4 million was spent in our retail segment and
$0.1 million was spent at the holding company level. During
2010, we spent $38.0 million on regulatory and maintenance
projects at the Tyler refinery. In our retail segment, we spent
$5.5 million completing several reimaging and raze
and rebuild projects.
The increase from 2008 to 2009 was primarily due to the increase
in capital spending in 2009, primarily relating to the rebuild
of the saturates gas plant that was damaged in the
November 20, 2008 explosion and fire at the Tyler refinery.
Further contributing to the increase was cash of
$44.4 million provided by net sales proceeds on short-term
investments in 2008, for which there was no comparable activity
in 2009.
Cash
Flows from Financing Activities
Net cash used in financing activities was $45.8 million,
compared to cash provided by financing activities of
$18.2 million for 2009 and cash used in financing
activities of $78.9 million for 2008. Net cash used in
financing activities in 2010 was primarily due to the net
repayment of $97.4 million of our debt and capital lease
obligations, compared to net repayments of $2.7 million in
2009. These payments were partially offset by net proceeds on
our revolving credit facilities of $76.1 million in 2010,
compared to $33.8 million in 2009.
Net cash provided by financing activities in 2009 was primarily
due to the $33.8 million net increase in our revolving
debt, as well as $65.0 million proceeds from a note payable
to Delek Petroleum Ltd., a subsidiary of Delek Group (Delek
Petroleum). These increases were partially offset by
$67.7 million in repayments on our other debt obligations.
Cash
Position and Indebtedness
As of December 31, 2010, our total cash and cash
equivalents were approximately $49.1 million and we had
total indebtedness of approximately $295.8 million.
Borrowing availability under our four revolving credit
facilities was approximately $168.0 million and we had a
total face value of letters of credit issued of
$157.0 million.
55
A summary of our total third party indebtedness as of
December 31, 2010 is shown below:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
|
(In millions)
|
|
|
MAPCO Revolver
|
|
|
122.1
|
|
Fifth Third Revolver
|
|
|
29.0
|
|
Promissory notes
|
|
|
144.0
|
|
Capital lease obligations
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
295.8
|
|
Less: Current portion of long-term debt, notes payable and
capital lease obligations
|
|
|
14.1
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
281.7
|
|
|
|
|
|
|
MAPCO
Revolver
On December 23, 2010, we executed a $200.0 million
revolving credit facility (MAPCO Revolver) that
includes (i) a $200.0 million revolving credit limit;
(ii) a $10.0 million swing line loan
sub-limit;
(iii) a $50.0 million letter of credit sublimit; and
(iv) an accordion feature which permits an increase in
borrowings of up to $275.0 million, subject to additional
lender commitments. The MAPCO Revolver extended and increased
the $108.0 million revolver and terminated the
$165.0 million term loan outstanding under our Second
Amended and Restated Credit Agreement among MACPO, Fifth Third
Bank as Administrative Agent and the lenders party thereto
(Senior Secured Credit Facility). As of December 31, 2010,
we had $122.1 million outstanding under the MAPCO Revolver,
as well as letters of credit issued of $22.7 million.
Borrowings under the MAPCO Revolver are secured by substantially
all the assets of Express and its subsidiaries. The MAPCO
Revolver will mature on December 23, 2015. The MAPCO
Revolver bears interest based on predetermined pricing grids
which allow us to choose between Base Rate Loans or LIBOR Rate
Loans. At December 31, 2010, the weighted average borrowing
rate was 6.25%. Additionally, the MAPCO Revolver requires us to
pay a leverage ratio dependent quarterly fee on the average
unused revolving commitment. As of December 31, 2010, this
fee was 0.75% per year. Amounts available under the MAPCO
Revolver as of December 31, 2010 were approximately
$55.2 million.
Wells
ABL
On February 23, 2010, we executed a $300 million
asset-based loan (ABL) revolving credit facility
(Wells ABL) that includes (i) a
$300 million revolving credit line, (ii) a
$30 million swing line loan
sub-limit,
(iii) a $300 million letter of credit sublimit, and
(iv) an accordion feature which permits an increase in
facility size of up to $600 million subject to additional
lender commitments. The Wells ABL replaced and terminated a
$300.0 million ABL revolver with SunTrust. As of
December 31, 2010, we had letters of credit issued under
the facility totaling approximately $119.8 million and a
nominal amount in outstanding loans under the Wells ABL.
Borrowings under the Wells ABL are secured by substantially all
the assets of Refining and its subsidiaries, with certain
limitations. Under the facility, revolving loans and letters of
credit are provided subject to availability requirements which
are determined pursuant to a borrowing base calculation as
defined in the Wells ABL. The borrowing base as calculated is
primarily supported by cash, certain accounts receivable and
certain inventory. The Wells ABL matures on February 23,
2014. Borrowings under the facility bear interest based on
predetermined pricing grids which allow us to choose between
Base Rate Loans or LIBOR Rate Loans. At December 31, 2010,
the weighted average borrowing rate for the Wells ABL was 5.25%.
Additionally, the Wells ABL requires us to pay a credit
utilization dependent quarterly fee on the average unused
revolving commitment. As of December 31, 2010, this fee was
1.00% per year. Borrowing capacity, as calculated and reported
under the terms of the Wells ABL credit facility, net of a
$15.0 million availability reserve requirement, as of
December 31, 2010 was $67.3 million.
Fifth
Third Revolver
We have a revolving credit facility with Fifth Third Bank
(Fifth Third Revolver) that carries a credit limit
of $75.0 million, including a $35.0 million
sub-limit
for letters of credit. As of December 31, 2010, we had
$29.0 million outstanding borrowings under the facility, as
well as letters of credit issued of $12.5 million.
56
Borrowings under the Fifth Third Revolver are secured by
substantially all of the assets of Marketing. The Fifth Third
Revolver matures on December 19, 2012. The Fifth Third
Revolver bears interest based on predetermined pricing grids
that allow us to choose between Base Rate Loans or LIBOR Rate
Loans. At December 31, 2010, the weighted average borrowing
rate was approximately 3.51%. Additionally, the Fifth Third
Revolver requires us to pay a quarterly fee of 0.5% per year on
the average available revolving commitment. Amounts available
under the Fifth Third Revolver as of December 31, 2010 were
approximately $33.5 million.
Reliant
Bank Revolver
We have a revolving credit agreement with Reliant Bank
(Reliant Bank Revolver) that provides for unsecured
loans of up to $12.0 million. As of December 31, 2010,
we had no amounts outstanding under this facility. The Reliant
Bank Revolver matures on March 28, 2011 and bears interest
at a fixed spread over the 30 day LIBOR rate. As of
December 31, 2010, we had $12.0 million available
under the Reliant Bank Revolver.
Promissory
Notes
On November 2, 2010, Delek executed a promissory note in
the principal amount of $50.0 million with Bank Leumi USA
(Leumi Note). As of December 31, 2010, we had
$50.0 million in outstanding borrowings under the Leumi
Note. The Leumi Note replaced and terminated promissory notes
with Bank Leumi USA in the original principal amounts of
$30 million and $20 million and is secured by our
shares in Lion Oil Company. The Leumi Note requires quarterly
amortization payments of $2.0 million beginning on
April 1, 2011 and matures on October 1, 2013. The
Leumi Note bears interest at the greater of a fixed spread over
three-month LIBOR or an interest rate floor of 5.0%. As of
December 31, 2010, the weighted average borrowing rate was
5.00%.
On October 5, 2010, Delek entered into two promissory notes
with Israel Discount Bank of New York (IDB) in the
principal amounts of $30 million and $20 million
(collectively the IDB Notes). As of
December 31, 2010, we had $50.0 million in total
outstanding borrowings under the IDB Notes. The IDB Notes
replaced and terminated promissory notes with IDB in the
original principal amounts of $30 million and
$15 million and are secured by our shares in Lion Oil
Company. The IDB Notes require quarterly amortization payments
totaling $2 million, beginning at the end of the first
quarter of 2011. The maturity date of both IDB Notes is
December 31, 2013. Both IDB Notes bear interest at the
greater of a fixed spread over various LIBOR tenors, as elected
by the borrower, or an interest rate floor of 5.0%. As of
December 31, 2010, the weighted average borrowing rate was
5.0% under both IDB Notes.
On September 28, 2010, Delek executed an amended and
restated note in favor of Delek Petroleum (Petroleum
Note) in the principal amount of $44.0 million,
replacing a Delek Petroleum note in the original amount of
$65.0 million. As of December 31, 2010,
$44.0 million was outstanding under the Petroleum Note. The
Petroleum Note contains the following provisions: (i) the
payment of the principal and interest may be accelerated upon
the occurrence and continuance of customary events of default
under the note, (ii) Delek is responsible for the payment
of any withholding taxes due on interest payments,
(iii) the note is unsecured and contains no covenants, and
(iv) the note may be repaid at our election in whole or in
part at any time without penalty or premium. The Petroleum Note
matures on January 1, 2012 and bears interest, payable on a
quarterly basis, at 8.25% (net of any applicable withholding
taxes).
Restrictive
Covenants
Under the terms of our MAPCO Revolver, Wells ABL, Fifth Third
Revolver, Reliant Bank Revolver, Leumi Note and IDB Notes, we
are required to comply with certain usual and customary
financial and non-financial covenants. Further, although we are
not required to comply with a fixed charge coverage ratio
financial covenant under the Wells ABL during the year ended
December 31, 2010, we may be required to comply with the
covenant at times when the borrowing base excess availability is
less than certain thresholds, as defined in the Wells ABL. We
believe we were in compliance with all covenant requirements
under each of our facilities as of December 31, 2010.
Certain of our credit facilities also contain limitations at
subsidiary levels on the incurrence of additional indebtedness,
making of investments, creation of liens, disposition of
property, making of restricted payments and transactions with
affiliates. Specifically, these covenants may limit the payment,
in the form of cash or other assets, of dividends or other
distributions, or the repurchase of shares with respect to the
equity of our subsidiaries.
57
Additionally, our subsidiaries are limited in their ability to
make investments, including extensions of loans or advances to,
or acquisition of equity interests in, or guarantees of
obligations of, any other entities.
Capital
Spending
A key component of our long-term strategy is our capital
expenditure program. Our capital expenditures for 2010 were
$56.8 million, of which $42.3 million was spent in our
refining segment, $14.4 million was spent in our retail
segment and $0.1 million was spent at the holding company
level. Our capital expenditure budget is approximately
$74.3 million for 2011. The following table summarizes our
actual capital expenditures for 2010 and planned capital
expenditures for 2011 by operating segment and major category
(in millions):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011 Forecast
|
|
|
2010 Actual
|
|
|
Refining:
|
|
|
|
|
|
|
|
|
Sustaining maintenance, including turnaround activities
|
|
$
|
6.4
|
|
|
$
|
6.0
|
|
Regulatory
|
|
|
4.6
|
|
|
|
32.0
|
|
Discretionary projects
|
|
|
14.1
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
Refining segment total
|
|
|
25.1
|
|
|
|
42.3
|
|
|
|
|
|
|
|
|
|
|
Marketing:
|
|
|
|
|
|
|
|
|
Discretionary projects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing segment total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail:
|
|
|
|
|
|
|
|
|
Sustaining maintenance
|
|
|
5.9
|
|
|
|
5.0
|
|
Growth/profit improvement
|
|
|
11.8
|
|
|
|
3.9
|
|
Retrofit/rebrand/re-image
|
|
|
15.1
|
|
|
|
5.0
|
|
Raze and rebuild/land
|
|
|
16.4
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
Retail segment total
|
|
|
49.2
|
|
|
|
14.4
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Total capital spending
|
|
$
|
74.3
|
|
|
$
|
56.8
|
|
|
|
|
|
|
|
|
|
|
In 2011, we plan to spend approximately $49.2 million in
the retail segment, $15.1 million of which is expected to
consist of the re-imaging of at least 25 existing stores. During
2010, we spent $3.2 million on the reimage of 13 stores and
another $1.8 million on other rebranding initiatives. In
addition, we plan to spend $16.4 million to build 10 to 20
new prototype locations at existing and new leased sites and
$11.8 million on other profit and growth improvements in
existing stores in 2011. We expect to spend approximately
$4.6 million on regulatory projects in the refining segment
in 2011, $0.2 million of which relates to the MSAT II
compliance project and another $0.3 million of which
relates to the maintenance shop and warehouse relocation
project, both of which are discussed further below. We spent
$32.0 million on such projects in 2010, primarily on the
substantial completion of the MSAT II and maintenance shop and
warehouse relocation projects. In addition, we plan to spend
approximately $6.4 million on maintenance projects and
approximately $14.1 million for other discretionary
projects in the refining segment in 2011.
Refining
Capital Improvements
In 2010, the main focus of our refining capital improvements
program was in regulatory spending; including the completion of
the fractionation section of our MSAT II compliance project and
the maintenance shop and warehouse relocation project.
The fourth quarter 2008 explosion and fire at the Tyler refinery
resulted in a suspension in production from November 20,
2008 through May 18, 2009. In 2009, during this period of
refinery shutdown, we moved forward with major unit turnarounds
and the portions of the Crude Optimization capital projects
which were previously
58
slated to be completed in late 2009. Portions of the Crude
Optimization projects were completed in the first half of 2009.
We expect the remaining portions of these projects to be
completed by the first quarter of 2014.
The details of these projects are discussed below.
MSAT II
Compliance Project
The purpose of the MSAT II project is to comply with the MSAT II
regulations, which limit the annual average benzene content in
gasoline beginning in January 2011. The project will consist of
new fractionation equipment, Isomerization Unit modifications
and a new catalyst for saturating benzene. The fractionation
section was completed and placed in service in October 2010 and
the Isomerization Unit modifications are planned for completion
by the end of 2012.
Maintenance
Shop and Warehouse Relocation Project
This project involves the construction of a single, new building
outside of potential overpressure zones for personnel working in
the existing maintenance shops and warehouse. The purpose of the
project is to provide a safer working environment for
maintenance and warehouse workers at the Tyler refinery by
minimizing the risk of injury due to vapor cloud explosions,
fires and releases of hazardous substances. The purchasing
department employees will also be relocated to this building due
to synergies with the warehouse operation. This project began in
2009 and was completed in 2010.
Crude
Optimization Projects
Deep Cut Project. The Deep Cut project
includes modifications to the Crude, Vacuum and Amine
Regeneration Units (ARU) and the installation of a new Vacuum
Heater, Coker Heater, a second ARU and a NaSH Unit. A
significant portion of this project was completed in the first
half of 2009. The installation of the second ARU and the NaSH
Unit is expected to be completed in 2013. The completed portions
of this project have given us the ability to run a deeper
cut in the Vacuum Unit and allow the running of a heavier
crude slate, although this capability will not be fully realized
until we complete the remainder of the FCC Reactor revamp,
discussed below. The installation of the second ARU and NaSH
unit will further increase our sulfur capacity. Further, the new
Coker Heater should allow much longer runs between decoking,
which will reduce maintenance cost and increase the on-stream
efficiency of the Coker.
Coker Valve Project. The Coker Valve project
involved installing Delta Valves on the bottom heads of both
coke drums, modifying feed piping to coke drums and installing a
new coke crusher and conveyor system. The installation of the
Delta Valves has significantly improved the safety of the
operation to remove coke from the coke drums and they will
enable the coker to run shorter cycles, thereby increasing
effective capacity. The entire project will allow for the safe
handling of shot coke that may be produced during deep cut
operations on a heavy crude slate. This project was completed in
the first half of 2009.
FCC Reactor Revamp. We plan to modify the
fractionation section of the FCC and install a new reactor and
catalyst stripper, and make modifications to the riser. In the
first half of 2009, we completed the fractionation section
modifications, which will accommodate higher conversions
expected from the FCC Reactor, once the catalyst section
installations are complete. The remainder of this project is
expected to be completed by 2014.
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 Tyler refinery. Additionally, the
scope and cost of employee or contractor labor expense related
with installation of that equipment could increase from our
projections.
59
Contractual
Obligations and Commitments
Information regarding our known contractual obligations of the
types described below as of December 31, 2010, is set forth
in the following table (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
<1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
>5 Years
|
|
|
Total
|
|
|
Long term debt, notes payable and capital lease obligations
|
|
$
|
14.1
|
|
|
$
|
159.2
|
|
|
$
|
122.2
|
|
|
$
|
0.3
|
|
|
$
|
295.8
|
|
Interest(1)
|
|
|
17.8
|
|
|
|
23.5
|
|
|
|
15.2
|
|
|
|
0.2
|
|
|
|
56.7
|
|
Operating lease commitments(2)
|
|
|
15.2
|
|
|
|
25.9
|
|
|
|
20.9
|
|
|
|
66.7
|
|
|
|
128.7
|
|
Capital project commitments(3)
|
|
|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47.1
|
|
|
$
|
210.8
|
|
|
$
|
158.3
|
|
|
$
|
67.2
|
|
|
$
|
483.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes expected interest payments on debt outstanding under
credit facilities in place at December 31, 2010. Variable
interest is calculated using December 31, 2010 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, 2010. |
|
(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 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 Tyler
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.
60
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 the assets on our balance sheet are of
a nature that multiple reporting periods are required to insure
the recovery of their value. Assets such as property, plant and
equipment (PP&E), definite life intangibles,
goodwill and investments all require a regular assessment of
continued value because of 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.
The minority investment in the equity shares of a privately held
company, Lion Oil, is carried as a cost-method investment which
requires that we review for any diminishment of fair value in
the instance when there are indicators that a possible
impairment has occurred. This evaluation resulted in the
recognition of a $60.0 million non-cash impairment of our
minority investment in the fourth quarter of 2010. Details
regarding this investment are provided in Note 6 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.
Property,
Plant and Equipment and Definite Life Intangibles
Impairment
Property, plant and equipment 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. We derive the
required undiscounted cash flow estimates from our historical
experience and our internal business plans. We use quoted market
prices when available and our internal cash flow estimates
discounted at an appropriate interest rate to determine fair
value, as appropriate. 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 $1.8 million for closed stores in 2010 and
$0.4 million in both 2009 and 2008. 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. We use a
market participant weighted average cost of capital, estimated
minimal growth rates for revenue, gross profit, and capital
expenditures based on history and our best estimate of future
forecasts. We also estimated the fair values of the reporting
units using a multiple of expected future cash flows such as
those used by third party analysts. 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 8 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.
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
61
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 January 2010, the FASB issued guidance regarding fair value
measurements and disclosures, which is effective for interim or
annual periods beginning after December 31, 2009 and should
be applied prospectively. This guidance provides more robust
disclosures about the different classes of assets and
liabilities measured at fair value, the valuation techniques and
inputs used, the activity in Level 3 fair value
measurements, and the transfers between Levels 1, 2 and 3.
Delek adopted this guidance in January 2010. The additional
disclosures required did not have an impact on our financial
position or results of operations. See Note 13 of the
Consolidated Financial Statements in Item 8, Financial
Statements and Supplementary Data of this Annual Report on
10-K for the
additional disclosures required.
|
|
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 cost of goods sold in the
consolidated statements of operations 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, in net sales or cost of
goods sold in the consolidated statements of operations.
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. In accordance with ASC 815,
Derivatives and Hedging (ASC 815), 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. We had open futures contracts representing
350,000 barrels and 113,000 barrels, respectively, of
crude and refined petroleum products with an unrealized net
(loss) gain of $(1.4) million and $0.1 million,
respectively, at December 31, 2010 and December 31,
2009.
In December 2007, in connection with our offering of renewable
fuels in our retail segment markets, we entered into a series of
OTC swaps based on the futures price of ethanol as quoted on the
Chicago Board of Trade and a series of OTC swaps based on the
futures price of unleaded gasoline as quoted on the New York
Mercantile Exchange. In accordance with ASC 815, all of
these swaps are recorded at fair value, and any change in fair
value
62
between periods has historically been recorded in the
consolidated statements of operations. We had no open swap
contracts as of December 31, 2010. As of December 31,
2009, we had open derivative contracts representing
95,967 barrels of ethanol with unrealized net losses of
$0.5 million. As of December 31, 2009, we also had
open derivative contracts representing 96,000 barrels of
unleaded gasoline with unrealized net gains of $0.8 million.
In March 2008, we entered into a series of OTC swaps based on
the future price of West Texas Intermediate Crude (WTI) as
quoted on the NYMEX which fixed the purchase price of WTI for a
predetermined number of barrels at future dates from July 2008
through December 2009. We also entered into a series of OTC
swaps based on the future price of Ultra Low Sulfur Diesel
(ULSD) as quoted on the Gulf Coast ULSD PLATTS which fixed the
sales price of ULSD for a predetermined number of gallons at
future dates from July 2008 through December 2009.
In accordance with ASC 815, the WTI and ULSD swaps were
designated as cash flow hedges with the change in fair value
recorded in other comprehensive income. However, as of
November 20, 2008, due to the suspension of operations at
the Tyler refinery, the cash flow designation was removed
because the probability of occurrence of the hedged forecasted
transactions for the period of the shutdown became remote. All
changes in the fair value of these swaps subsequent to
November 20, 2008 have been recognized in the statement of
operations. For the year ended December 31, 2009, we
recognized gains of $9.6 million, which are included as an
adjustment to cost of goods sold in the consolidated statement
of operations as a result of the discontinuation of these cash
flow hedges. There were no gains or losses recognized for the
year ended December 31, 2010.
We maintain at the Tyler 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, 2010, we held approximately 1.2 million
barrels of crude and product inventories valued under the LIFO
valuation method with an average cost of $65.11 per barrel. At
December 31, 2010 and December 31, 2009, the excess of
replacement cost (FIFO) over the carrying value (LIFO) of
refinery inventories was $36.6 million and
$20.8 million, respectively. 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
$251.1 million as of December 31, 2010. The annualized
impact of a hypothetical one percent change in interest rates on
floating rate debt outstanding as of December 31, 2010
would be to change interest expense by $2.5 million.
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 ASC 815, 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 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
any interest rate derivatives held would reduce our exposure to
short-term interest rate movements. As of December 31,
2010, we did not have any interest rate derivative agreements in
place. As of December 31, 2009, we had interest rate cap
agreements in place representing $60.0 million in notional
value. All agreements matured in July 2010. The fair value of
our interest rate derivatives was nominal as of
December 31, 2009.
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 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.
63
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
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 Securities Exchange Act of 1934, as amended
(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 at a
reasonable assurance level 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, 2010, 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
64
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, 2010, we maintained effective internal control
over financial reporting.
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, 2010, 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 2010
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 AND CORPORATE GOVERNANCE
|
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. A copy will be mailed upon request
made 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
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.
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 4, 2010 (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.
|
|
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.
65
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The information required by this Item will be included under
Security Ownership of Certain Beneficial Owners and
Management and Equity Compensation Plan
Information in the Definitive Proxy Statement and is
incorporated herein by reference.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
The information required by this Item will be included under
Certain Relationships and Related Transactions in
the Definitive Proxy Statement and is incorporated herein by
reference.
The information required by Item 407(a) of
Regulation S-K
will be included under Election of Directors and
Corporate Governance in the Definitive Proxy
Statement and is incorporated herein by reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Set forth below are the fees paid for the services of
Ernst & Young LLP during fiscal years 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Audit fees(1)
|
|
$
|
1,485,046
|
|
|
$
|
1,568,558
|
|
Audit-related fees(2)
|
|
|
12,635
|
|
|
|
303,426
|
|
Tax fees(3)
|
|
|
12,633
|
|
|
|
|
|
All other fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,510,314
|
|
|
$
|
1,871,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit fees consisted of services rendered to us or certain of
our subsidiaries. Such audit services include audits of
financial statements, reviews of our quarterly financial
statements, audit services provided in connection with our
regulatory filings, and preliminary review of our documentation
and test plans in connection with our evaluation of internal
controls. Fees and expenses are for services in connection with
the audit of our fiscal years ended December 31, 2010 and
December 31, 2009 regardless of when the fees and expenses
were paid. |
|
(2) |
|
Fees for audit-related matters billed in 2010 and 2009 consisted
of agreed upon procedures for us and our subsidiaries,
procedures related to regulatory filings of our parent
companies, and consultations on various accounting and reporting
areas. |
|
(3) |
|
Fees for tax services billed in 2010 consisted primarily of
preparation of federal and state income tax returns for us and
certain of our subsidiaries and consultation on various tax
matters related to us and our subsidiaries. |
The Audit Committee has considered and determined that the
provision of non-audit services by our independent registered
public accounting firm is compatible with maintaining auditor
independence.
Pre-Approval Policies and Procedures. In
general, all engagements performed by our independent registered
public accounting firm, whether for auditing or non-auditing
services, must be pre-approved by the Audit Committee. During
2010, all of the services performed for us by Ernst &
Young LLP were pre-approved by the Audit Committee.
66
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 and Schedule
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, 2009 by and between
Delek US Holdings, Inc. and Ezra Uzi Yemin (incorporated by
reference to Exhibit 10.2 to the Companys
Form 10-Q
filed on November 6, 2009)
|
|
10
|
.2*
|
|
Termination dated May 12, 2010 of Amended and Restated
Consulting Agreement with Greenfeld-Energy Consulting, Ltd.
dated April 11, 2006 (incorporated by reference to
Exhibit 10.3 to the Companys
Form 10-Q
filed on August 6, 2010)
|
|
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+
|
|
Resignation, Waiver, Consent and Appointment Agreement dated
September 1, 2009 by and between Fifth Third Bank, N.A.,
Lehman Commercial Paper, Inc. and MAPCO Express, Inc.
(incorporated by reference to Exhibit 10.3 to the
Companys
Form 10-Q
filed on November 6, 2009)
|
|
10
|
.5(a)+
|
|
Second Amended and Restated Credit Agreement dated as of
December 10, 2009 between MAPCO Express, Inc. as borrower,
Fifth Third Bank as arranger and administrative agent, Bank
Leumi USA as co-administrative agent, SunTrust Bank as
syndication agent and the lenders from time to time parties
thereto (incorporated by reference to Exhibit 10.5(k) to
the Companys
Form 10-K
filed on March 12, 2010)
|
|
10
|
.5(b)+
|
|
First Amendment dated December 23, 2010 to Second Amended
and Restated Credit Agreement dated as of December 10, 2009
between MAPCO Express, Inc. as borrower, Fifth Third Bank as
arranger and administrative agent, Bank Leumi USA as
co-administrative agent, SunTrust Bank as syndication agent and
the lenders from time to time parties thereto (incorporated by
reference to Exhibit 99.2 to the Companys
Form 8-K
filed on December 29, 2010)
|
|
10
|
.6
|
|
Credit Agreement dated February 23, 2010 by and between
Delek Refining, Ltd. As borrower and a consortium of lenders
including Wells Fargo Capital Finance, LLC as administrative
agent (incorporated by reference to Exhibit 99.2 to the
Companys
Form 8-K
filed on February 25, 2010)
|
|
10
|
.7++
|
|
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
|
.7(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)
|
67
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.7(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
|
.7(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
|
.7(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
|
.7(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
|
.7(f)+
|
|
Modification and Extension of Pipeline Capacity Lease Agreement
dated March 31, 2009 between Delek Crude Logistics, LLC and
Plains Marketing L.P. (incorporated by reference to
Exhibit 10.1 to the Companys
Form 10-Q
filed on May 11, 2009)
|
|
10
|
.8*
|
|
Delek US Holdings, Inc. 2006 Long-Term Incentive Plan (as
amended through May 4, 2010) (incorporated by reference to
Exhibit 10.1 to the Companys
Form 10-Q
filed on May 7, 2010)
|
|
10
|
.8(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
|
.8(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
|
.8(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
|
.8(d)*
|
|
Director Form of Delek US Holdings, Inc. 2006 Long-Term
Incentive Plan Stock Appreciation Rights Agreement (incorporated
by reference to Exhibit 10.5 to the Companys
Form 10-Q
filed on August 6, 2010)
|
|
10
|
.8(e)*
|
|
Employee Form of Delek US Holdings, Inc. 2006 Long-Term
Incentive Plan Stock Appreciation Rights Agreement (incorporated
by reference to Exhibit 10.4 to the Companys
Form 10-Q
filed on August 6, 2010)
|
|
10
|
.9
|
|
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
|
.10
|
|
Replacement Promissory Note I in the principal amount of
$20,000,000 dated October 5, 2010 by and between Delek
Finance, Inc. and Israel Discount Bank of New York (incorporated
by reference to Exhibit 10.4 to the Companys
Form 10-Q
filed on November 5, 2010)
|
|
10
|
.10(a)
|
|
Replacement Promissory Note II in the principal amount of
$30,000,000 dated October 5, 2010 by and between Delek
Finance, Inc. and Israel Discount Bank of New York (incorporated
by reference to Exhibit 10.5 to the Companys
Form 10-Q
filed on November 5, 2010)
|
|
10
|
.11
|
|
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 (incorporated by reference to
Exhibit 10.16(c) to the Companys
Form 10-K
filed on March 3, 2008)
|
|
10
|
.11(a)
|
|
First Amendment dated October 17, 2008 to 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 (incorporated by reference to Exhibit 10.13(d)
to the Companys
Form 10-K
filed on March 9, 2009)
|
68
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.11(b)
|
|
Second Amendment dated March 31, 2009 to 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 (incorporated by reference to Exhibit 10.2 to
the Companys
Form 10-Q
filed on May 11, 2009)
|
|
10
|
.12
|
|
Promissory Note in the principal amount of $50,000,000 dated
November 2, 2010 by and between Delek US Holdings, Inc.,
and Bank Leumi USA as lender (incorporated by reference to
Exhibit 10.6 to the Companys
Form 10-Q
filed on November 5, 2010)
|
|
10
|
.12(a)
|
|
Letter agreement dated June 23, 2009 between Delek US
Holdings, Inc. and Bank Leumi USA (incorporated by reference to
Exhibit 10.4 to the Companys
Form 10-Q
filed on August 7, 2009)
|
|
10
|
.13
|
|
Term Promissory Note dated September 29, 2009 in the
principal amount of $65,000,000 between Delek US Holdings, Inc.
and Delek Petroleum, Ltd. (incorporated by reference to
Exhibit 10.4 to the Companys
Form 10-Q
filed on November 6, 2009)
|
|
10
|
.13(a)
|
|
Amended and Restated Term Promissory Note dated
September 28, 2010 in the principal amount of $44,000,000
between Delek US Holdings, Inc. and Delek Petroleum, Ltd.
(incorporated by reference to Exhibit 10.3 to the
Companys
Form 10-Q
filed on November 5, 2010)
|
|
10
|
.14*
|
|
Employment Agreement dated May 1, 2009 by and between Delek
US Holdings, Inc. and Assaf Ginzburg (incorporated by reference
to Exhibit 10.1 to the Companys
Form 10-Q
filed on August 7, 2009)
|
|
10
|
.15*
|
|
Employment Agreement dated May 1, 2009 by and between Delek
US Holdings, Inc. and Frederec Green (incorporated by reference
to Exhibit 10.2 to the Companys
Form 10-Q
filed on August 7, 2009)
|
|
10
|
.16*
|
|
Employment Agreement dated June 10, 2009 by and between
MAPCO Express, Inc. and Igal Zamir (incorporated by reference to
Exhibit 10.3 to the Companys
Form 10-Q
filed on August 7, 2009)
|
|
10
|
.16(a)*
|
|
Special Bonus Acknowledgement dated August 9, 2010 between
Igal Zamir and MAPCO Express, Inc. (incorporated by reference to
Exhibit 10.1 to the Companys
Form 10-Q
filed on November 5, 2010)
|
|
10
|
.17*
|
|
Employment Agreement dated August 25, 2009 by and between
Delek US Holdings, Inc. and Mark B. Cox (incorporated by
reference to Exhibit 10.1 to the Companys
Form 10-Q
filed on November 6, 2009)
|
|
10
|
.17(a)*
|
|
Special Bonus Acknowledgement dated May 4, 2010 between
Mark B. Cox and Delek US Holdings, Inc. (incorporated by
reference to Exhibit 10.2 to the Companys
Form 10-Q
filed on August 6, 2010)
|
|
10
|
.18*
|
|
Letter agreement between Edward Morgan and Delek US Holdings,
Inc. dated April 17, 2009 (incorporated by reference to
Exhibit 10.3 to the Companys
Form 10-Q
filed on May 11, 2009)
|
|
10
|
.19*
|
|
Letter agreement between Lynwood E. Gregory, III and Delek
US Holdings, Inc. dated February 24, 2011 (incorporated by
reference to Exhibit 99.3 to the Companys
Form 8-K
filed on February 25, 2010)
|
|
10
|
.20+
|
|
Distribution Service Agreement dated December 28, 2007 by
and between MAPCO Express, Inc. and Core-Mark International,
Inc. (incorporated by reference to Exhibit 10.25 to the
Companys
Form 10-K
filed on March 3, 2008)
|
|
10
|
.20(a)+
|
|
First Amendment dated August 18, 2010 to the Distribution
Service Agreement dated December 28, 2007 by and between
MAPCO Express, Inc. and Core-Mark International, Inc.
(incorporated by reference to Exhibit 10.2 to the
Companys
Form 10-Q
filed on November 5, 2010)
|
|
10
|
.21*
|
|
Form of 409A Addendum (incorporated by reference to
Exhibit 10.1 to the Companys
Form 10-Q
filed on August 6, 2010)
|
|
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
|
69
|
|
|
|
|
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 was requested and granted pursuant to
Rule 24b-2
of the Securities Exchange Act, with respect to certain portions
of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission. |
|
++ |
|
Confidential treatment was requested and granted pursuant to
Rule 406 of the Securities Act, and an extension of such
confidential treatment was requested and granted pursuant to
Rule 24b-2
of the Securities Exchange Act, with respect to certain portions
of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission. |
70
Delek US
Holdings, Inc.
Consolidated
Financial Statements
As of December 31, 2010 and 2009 and
For Each of the Three Years Ended December 31,
2010
INDEX TO
FINANCIAL STATEMENTS AND SCHEDULE
|
|
|
|
|
|
|
|
F-2
|
|
Audited Financial Statements:
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-44
|
|
All other financial schedules are not required under related
instructions, or are inapplicable and therefore have been
omitted.
F-1
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, 2010, 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, 2010, 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, 2010 and 2009, 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, 2010 of Delek US
Holdings, Inc. and our report dated March 11, 2011
expressed an unqualified opinion thereon.
Nashville, Tennessee
March 11, 2011
F-2
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, 2010 and 2009,
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, 2010. Our audits also included the financial
statement schedule listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule 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, 2010 and 2009, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2010, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
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, 2010, based on criteria
established in Internal Control Integrated Framework
issued by the Committee on Sponsoring Organizations of the
Treadway Commission and our report dated March 11, 2011
expressed an unqualified opinion thereon.
Nashville, Tennessee
March 11, 2011
F-3
Delek US
Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In millions, except share and per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
49.1
|
|
|
$
|
68.4
|
|
Accounts receivable
|
|
|
104.7
|
|
|
|
76.7
|
|
Inventory
|
|
|
136.7
|
|
|
|
116.4
|
|
Other current assets
|
|
|
8.9
|
|
|
|
50.1
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
299.4
|
|
|
|
311.6
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
886.7
|
|
|
|
865.5
|
|
Less: accumulated depreciation
|
|
|
(206.6
|
)
|
|
|
(173.5
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
680.1
|
|
|
|
692.0
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
71.9
|
|
|
|
71.9
|
|
Other intangibles, net
|
|
|
7.9
|
|
|
|
9.0
|
|
Minority investment
|
|
|
71.6
|
|
|
|
131.6
|
|
Other non-current assets
|
|
|
13.7
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,144.6
|
|
|
$
|
1,223.0
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
222.9
|
|
|
$
|
192.5
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
14.1
|
|
|
|
17.7
|
|
Note payable to related party
|
|
|
|
|
|
|
65.0
|
|
Accrued expenses and other current liabilities
|
|
|
55.5
|
|
|
|
47.0
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
292.5
|
|
|
|
322.2
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations, net of current
portion
|
|
|
237.7
|
|
|
|
234.4
|
|
Note payable to related party
|
|
|
44.0
|
|
|
|
|
|
Environmental liabilities, net of current portion
|
|
|
2.8
|
|
|
|
5.3
|
|
Asset retirement obligations
|
|
|
7.3
|
|
|
|
7.0
|
|
Deferred tax liabilities
|
|
|
105.9
|
|
|
|
110.5
|
|
Other non-current liabilities
|
|
|
11.1
|
|
|
|
12.6
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
408.8
|
|
|
|
369.8
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 110,000,000 shares
authorized, 54,403,208 and 53,700,570 shares issued and
outstanding at December 31, 2010 and 2009, respectively
|
|
|
0.5
|
|
|
|
0.5
|
|
Additional paid-in capital
|
|
|
287.5
|
|
|
|
281.8
|
|
Retained earnings
|
|
|
155.3
|
|
|
|
248.7
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
443.3
|
|
|
|
531.0
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,144.6
|
|
|
$
|
1,223.0
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-4
Delek US
Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions, except shares and per share data)
|
|
|
Net sales
|
|
$
|
3,755.6
|
|
|
$
|
2,666.7
|
|
|
$
|
4,723.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
3,412.9
|
|
|
|
2,394.1
|
|
|
|
4,308.1
|
|
Operating expenses
|
|
|
229.5
|
|
|
|
219.0
|
|
|
|
240.8
|
|
Insurance proceeds business interruption
|
|
|
(12.8
|
)
|
|
|
(64.1
|
)
|
|
|
|
|
Property damage insurance, net
|
|
|
(4.0
|
)
|
|
|
(40.3
|
)
|
|
|
|
|
Impairment of goodwill
|
|
|
|
|
|
|
7.0
|
|
|
|
11.2
|
|
General and administrative expenses
|
|
|
59.0
|
|
|
|
64.3
|
|
|
|
57.0
|
|
Depreciation and amortization
|
|
|
61.1
|
|
|
|
52.4
|
|
|
|
41.3
|
|
Loss (gain) on sales of assets
|
|
|
0.7
|
|
|
|
2.9
|
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
3,746.4
|
|
|
|
2,635.3
|
|
|
|
4,651.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
9.2
|
|
|
|
31.4
|
|
|
|
72.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
34.1
|
|
|
|
25.5
|
|
|
|
23.7
|
|
Interest income
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(2.1
|
)
|
Loss from minority investment
|
|
|
|
|
|
|
|
|
|
|
7.9
|
|
Impairment of minority investment
|
|
|
60.0
|
|
|
|
|
|
|
|
|
|
Gain on debt extinguishment
|
|
|
|
|
|
|
|
|
|
|
(1.6
|
)
|
Other expenses, net
|
|
|
|
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses
|
|
|
94.1
|
|
|
|
26.0
|
|
|
|
28.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income tax
(benefit) expense
|
|
|
(84.9
|
)
|
|
|
5.4
|
|
|
|
43.2
|
|
Income tax (benefit) expense
|
|
|
(5.0
|
)
|
|
|
3.1
|
|
|
|
18.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(79.9
|
)
|
|
|
2.3
|
|
|
|
24.6
|
|
(Loss) income from discontinued operations, net of tax
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(79.9
|
)
|
|
$
|
0.7
|
|
|
$
|
26.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(1.47
|
)
|
|
$
|
0.04
|
|
|
$
|
0.47
|
|
(Loss) income from discontinued operations
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic (loss) earnings per share
|
|
$
|
(1.47
|
)
|
|
$
|
0.01
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(1.47
|
)
|
|
$
|
0.04
|
|
|
$
|
0.46
|
|
(Loss) income from discontinued operations
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted (loss) earnings per share
|
|
$
|
(1.47
|
)
|
|
$
|
0.01
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
54,264,763
|
|
|
|
53,693,258
|
|
|
|
53,675,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
54,264,763
|
|
|
|
54,484,969
|
|
|
|
54,401,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share outstanding
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-5
Delek US
Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007
|
|
|
53,666,570
|
|
|
$
|
0.5
|
|
|
$
|
274.1
|
|
|
$
|
0.3
|
|
|
$
|
237.6
|
|
|
$
|
512.5
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.5
|
|
|
|
26.5
|
|
Unrealized loss on cash flow hedges, net of deferred income tax
benefit of $0.6 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
26.5
|
|
|
|
25.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock dividends ($0.15 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.0
|
)
|
|
|
(8.0
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
3.7
|
|
Exercise of stock-based awards
|
|
|
15,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
53,682,070
|
|
|
$
|
0.5
|
|
|
$
|
277.8
|
|
|
$
|
(0.6
|
)
|
|
$
|
256.1
|
|
|
$
|
533.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
0.7
|
|
Unrealized gain on cash flow hedges, net of deferred income tax
expense of $0.3 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock dividends ($0.15 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.1
|
)
|
|
|
(8.1
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
4.0
|
|
Exercise of stock-based awards
|
|
|
18,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
53,700,570
|
|
|
$
|
0.5
|
|
|
$
|
281.8
|
|
|
$
|
|
|
|
$
|
248.7
|
|
|
$
|
531.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79.9
|
)
|
|
|
(79.9
|
)
|
Common stock dividends ($0.15 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.4
|
)
|
|
|
(8.4
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Net settlement of share appreciation rights
|
|
|
638,909
|
|
|
|
|
|
|
|
2.6
|
|
|
|
|
|
|
|
(5.1
|
)
|
|
|
(2.5
|
)
|
Exercise of stock-based awards
|
|
|
63,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
54,403,208
|
|
|
$
|
0.5
|
|
|
$
|
287.5
|
|
|
$
|
|
|
|
$
|
155.3
|
|
|
$
|
443.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-6
Delek US
Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(79.9
|
)
|
|
$
|
0.7
|
|
|
$
|
26.5
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
61.1
|
|
|
|
52.4
|
|
|
|
41.3
|
|
Amortization of deferred financing costs
|
|
|
7.1
|
|
|
|
6.4
|
|
|
|
4.7
|
|
Accretion of asset retirement obligations
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
0.7
|
|
Gain on involuntary conversion of assets
|
|
|
(4.0
|
)
|
|
|
(40.3
|
)
|
|
|
|
|
Deferred income taxes
|
|
|
(4.6
|
)
|
|
|
39.8
|
|
|
|
10.0
|
|
Loss from minority investment
|
|
|
|
|
|
|
|
|
|
|
7.9
|
|
Loss on interest rate derivative instruments
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
Loss on sale of investments
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
Loss (gain) on sale of assets
|
|
|
0.7
|
|
|
|
2.9
|
|
|
|
(6.8
|
)
|
Gain on sale of assets held for sale
|
|
|
|
|
|
|
1.1
|
|
|
|
(0.4
|
)
|
Impairment of goodwill
|
|
|
|
|
|
|
7.0
|
|
|
|
11.2
|
|
Impairment of minority investment
|
|
|
60.0
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
3.1
|
|
|
|
4.0
|
|
|
|
3.7
|
|
Changes in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(28.0
|
)
|
|
|
(31.3
|
)
|
|
|
73.4
|
|
Inventory and other current assets
|
|
|
20.9
|
|
|
|
(46.9
|
)
|
|
|
58.9
|
|
Accounts payable and other current liabilities
|
|
|
38.9
|
|
|
|
137.2
|
|
|
|
(193.2
|
)
|
Non-current assets and liabilities, net
|
|
|
(4.8
|
)
|
|
|
3.8
|
|
|
|
(10.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
71.0
|
|
|
|
137.8
|
|
|
|
28.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
|
|
|
|
|
|
|
|
(472.8
|
)
|
Sales of short-term investments
|
|
|
|
|
|
|
5.0
|
|
|
|
517.2
|
|
Expenditures to rebuild refinery
|
|
|
(0.2
|
)
|
|
|
(11.6
|
)
|
|
|
|
|
Property damage insurance proceeds
|
|
|
4.2
|
|
|
|
51.9
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(56.8
|
)
|
|
|
(170.0
|
)
|
|
|
(102.4
|
)
|
Proceeds from sale of convenience store assets
|
|
|
8.3
|
|
|
|
12.5
|
|
|
|
8.8
|
|
Proceeds from sale of assets held for sale
|
|
|
|
|
|
|
9.3
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(44.5
|
)
|
|
|
(102.9
|
)
|
|
|
(39.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolvers
|
|
|
815.1
|
|
|
|
554.9
|
|
|
|
871.4
|
|
Payments on revolvers
|
|
|
(739.0
|
)
|
|
|
(521.1
|
)
|
|
|
(913.6
|
)
|
Proceeds from other debt instruments
|
|
|
100.0
|
|
|
|
|
|
|
|
35.0
|
|
Payments on debt and capital lease obligations
|
|
|
(176.4
|
)
|
|
|
(67.7
|
)
|
|
|
(62.0
|
)
|
Proceeds from note payable to related party
|
|
|
|
|
|
|
65.0
|
|
|