Delek US Holdings, Inc. (NYSE: DK) — FY 2019 Form 10-K
Reporting period: Year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. Unless noted, financial amounts are in millions of dollars.
Business context and reporting period
Delek is an integrated downstream energy company with refining, logistics and retail segments. Its four operating refineries had combined nameplate capacity of 302,000 barrels per day; it also operated pipeline, storage and wholesale marketing assets and 252 convenience stores. Results are exposed to refining margins, crude differentials, RIN costs, operating reliability and seasonal demand.
Key financial metrics
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net revenue | $9,298.2 | $10,233.1 |
| Operating income | $492.3 | $611.9 |
| Net income attributable to Delek | $310.6 | $340.1 |
| Diluted EPS | $4.06 | $3.95 |
| Cash from operating activities | $575.2 | $560.3 |
| Capital expenditures | $428.1 | $317.2 |
- Margins: Refining margin was $1,254.0 million, down from $1,330.5 million; refining contribution margin declined to $761.6 million from $865.1 million. Logistics contribution margin rose to $173.4 million from $169.8 million; retail contribution margin was nearly flat at $58.5 million versus $58.9 million.
- Cash and liquidity: Cash and cash equivalents were $955.3 million, compared with $1,079.3 million. Management reported total liquidity of about $1.9 billion, including $921.8 million of unused credit commitments.
- Debt: Total debt, including current maturities, was $2,067.1 million, up from $1,783.3 million. The company also reported $309.8 million of letters of credit outstanding. Debt agreements are secured and include restrictive covenants; the company said it was in compliance at year-end.
- Dividends and repurchases: Dividends declared were $1.14 per share, up from $0.96. Delek repurchased 5.0 million shares for $178.1 million in 2019; $231.7 million remained under its repurchase authorization. A $0.31-per-share quarterly dividend was declared in February 2020.
- Fourth quarter: Net revenue was $2,283.7 million, operating income $48.2 million, net income $38.0 million and net income attributable to Delek $32.7 million. Fourth-quarter 2019 continuing-operations income included retroactive biodiesel tax credits.
Material changes versus FY 2018
- Revenue fell 9.1%, primarily reflecting lower refined-product prices and lower West Texas wholesale marketing prices and volumes.
- Operating income declined $119.6 million. Refining contribution margin was pressured by narrower crude-price differentials, refinery outages and lower prior-year RIN waiver and biodiesel-credit benefits, partly offset by improved benchmark crack spreads, lower RIN prices and inventory-reserve reversals.
- Net income attributable to Delek decreased, while diluted EPS increased, reflecting a lower weighted-average share count following repurchases and other share activity.
- Operating cash flow increased modestly, but investing cash outflow grew substantially due to higher capital spending and $267.4 million of equity-method investment contributions, including investments in Red River and Wink to Webster.
- Debt rose by $283.8 million, including incremental term-loan borrowings and additional Delek Logistics borrowing. Cash declined by $124.0 million during the year.
- Retail store count fell from 279 to 252. Fuel margin improved to $0.276 per gallon from $0.239, while merchandise same-store sales declined 1.0%.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management’s 2020 capital expenditure forecast was $325.7 million, excluding a $65 million WWP connector project for which committed financing had been secured. Strategy emphasizes safety, refinery reliability and efficiency, growing midstream operations, and shareholder returns.
- Projects and commitments: The Krotz Springs alkylation unit was completed in April 2019 at a cost of about $138 million. Delek’s 15% Wink to Webster pipeline investment was expected to require total contributions of $340–$380 million over construction; $126.7 million was contributed in 2019. The approximately 250-mile Big Spring gathering system was 177 miles complete and operational at year-end.
- Unusual items: Retroactive biodiesel tax-credit recognition benefited 2019 results by $78.0 million in cost of materials and other; the quarter disclosure identifies $77.6 million of credits in fourth-quarter continuing-operations income. The company also reported inventory valuation reserve benefits in 2019 versus expense in 2018. These items make reported year-over-year earnings less directly comparable.
- Environmental and legal exposure: Accrued environmental liabilities were $146.1 million, with most expected spending by 2032, though some remediation could extend up to 30 years. The Sulphur Springs pipeline diesel release cost $7.1 million through year-end, with monitoring to follow. A consent decree for historical Big Spring Clean Air Act matters requires pollution-control capital spending that may be significant over the next decade.
- Other key risks: Refining margin and crude differentials can change rapidly; operations are concentrated in four refineries and depend on third-party and Delek Logistics transportation networks. RIN availability and cost, project execution, environmental regulation, commodity and interest-rate exposure, counterparty risk, and access to financing are material considerations. Management also cited the novel coronavirus outbreak as a potential source of economic and market disruption.
- Accounting sensitivity: Goodwill was $855.7 million, including $528.0 million at the Big Spring reporting unit. No impairment was recorded, but management said a WACC increase of more than 1% could result in impairment there. Environmental liabilities and goodwill impairment were identified as critical audit matters; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How refinery utilization, outages and margins developed after year-end, particularly at Big Spring and following the planned turnaround.
- Whether crude differentials, RIN costs and biodiesel tax-credit proceeds support or weaken recurring earnings and cash flow.
- Updated funding needs, returns and construction progress for Wink to Webster, Red River and the Big Spring gathering system.
- Debt, borrowing availability, letters of credit and supply-and-offtake agreement terms, including the 2020 amendments and expirations.
- Environmental remediation estimates, the Sulphur Springs monitoring outcome and required Big Spring compliance investments.
- Whether store rebranding and portfolio optimization improve retail performance as the 7-Eleven branding removal deadline approaches.