Delek US Holdings, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Although the request specifies 2018 Q4, this filing is an annual report; it also provides unaudited quarterly results. Unless noted, financial amounts are in millions of dollars.
Business context
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. Delek consolidated Alon beginning July 1, 2017, so 2018 includes a full year of Alon operations versus six months in 2017; annual comparisons are therefore not directly like-for-like. Delek also acquired the remaining public interest in the Alon Partnership in February 2018.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net revenue | $10,233.1 | $7,267.1 |
| Operating income | $611.9 | $180.3 |
| Net income | $374.9 | $322.6 |
| Net income attributable to Delek | $340.1 | $288.8 |
| Diluted earnings per share | $3.95 | $4.00 |
| Cash from operating activities | $560.3 | $319.7 |
| Cash and cash equivalents at year-end | $1,079.3 | $931.8 |
| Total debt, including current maturities | $1,783.3 | $1,465.6 |
- Revenue rose 40.8%, primarily reflecting the additional six months of Alon results and higher refined-product prices. Operating income more than tripled. Delek-attributable net income increased, while diluted EPS declined slightly, with higher weighted-average shares contributing to the difference.
- Refining segment contribution margin was $865.1, up from $450.7; margin as a percentage of segment revenue increased to 9.0% from 6.8%. Logistics contribution margin was $169.8, versus $121.9; retail contribution margin was $58.9, versus $26.8. Comparisons also reflect the merger and, for retail, only six months of results in 2017.
- Average Gulf Coast 5-3-2 crack spread rose to $13.21 per barrel from $13.01. Management cited wider crude-oil discounts, including WTI Midland versus WTI Cushing, and RIN exemptions as additional refining-margin supports. Results remain exposed to commodity spreads and RIN prices.
- Capital expenditures were $317.2 in 2018. Management forecast 2019 capital spending of $350.1, including $223.7 for refining and $90.7 for corporate/other.
- Year-end unused borrowing availability was approximately $913.9, with $179.4 of letters of credit outstanding. Management said available liquidity sources were expected to meet operating and capital needs for at least 12 months. Delek reported compliance with debt covenants at year-end.
Fourth-quarter results and material changes
- Q4 2018 revenue was $2,474.1 and operating income was $182.8. Net income from continuing operations was $127.6; net income attributable to Delek was $121.6. Diluted EPS from continuing operations was $1.48.
- Q4 2017 reported $2,483.7 revenue, $112.5 operating income, $226.9 continuing-operations income and $211.1 attributable income. The comparison is affected by merger-related accounting and a $166.9 tax benefit from the 2017 Tax Reform Act; Q4 2017 also included a $190.1 pre-tax gain on remeasurement of Delek’s former Alon investment.
- 2018 cash from operations increased by $240.6. Investing activities used $125.3, including $322.0 of property, plant and equipment purchases, partly offset by asset-sale proceeds. Financing activities used $297.6, including $365.3 of share repurchases and $80.1 of dividends paid.
- Debt increased year over year, while cash also increased. In March 2018, Delek refinanced multiple facilities with a $700.0 term loan and a $1.0 billion asset-based revolver; it recorded a $9.1 loss on debt extinguishment. Floating-rate borrowings were approximately $1,451.5; a hypothetical one-percentage-point rate change would change annual interest expense by about $14.5.
Outlook, management commentary, risks and unusual items
- Management’s priorities include safer, more reliable operations; improving asset returns and efficiency; managing risks; growing logistics and the Permian Basin platform; and increasing earnings. No quantified earnings or margin guidance is provided.
- About 50 miles of a planned 200-mile Permian gathering system were operational at year-end. A proposed 600-mile Permian-to-Gulf Coast pipeline remained under evaluation with prospective joint-venture partners. An El Dorado refinery turnaround was planned for March 2019; a 6,000-bpd Krotz Springs alkylation unit was expected to enter service in Q2 2019.
- Management forecast environmental, health and safety capital spending of approximately $93.2 in 2019 and $41.9 in 2020. Tier 3 gasoline sulfur compliance spending was expected to include a further $19.8 in 2019. The Big Spring Clean Air Act consent decree was expected to require a $0.5 penalty and potentially significant pollution-control investment over ten years.
- Environmental liabilities were $143.3 at year-end, with approximately $3.8 expected to be spent over the following 12 months. The company cautioned that further remediation needs, stricter regulation, pipeline releases and refinery incidents could increase costs. Several pipeline releases occurred during 2018; the Magnolia Release enforcement matter was settled for an accrued $2.2.
- Refining results depend heavily on volatile crack spreads, crude differentials, utilization and reliable operation of four concentrated facilities. Other key exposures include RIN availability and cost, supply and distribution interruptions, interest rates, debt and borrowing-base constraints, counterparty risk, and environmental and safety regulation.
- Unusual 2018 items included a $52.5 net inventory valuation loss; RIN exemptions that reduced refining costs; a $27.5 impairment on asphalt assets held for sale followed by a $13.3 gain on sale; and a $41.4 loss on sale of California discontinued operations. A $20.0 Bakersfield environmental indemnification settlement benefited Q4 operating costs and other income. The annual report also discloses a $5.5 tax-expense adjustment and a $60.7 revenue-and-cost correction versus the February earnings release; the latter had no effect on operating income or net income.
- Delek terminated its 7-Eleven license in November 2018 and planned to remove the branding by December 31, 2021 at the latest. The company sold 15 underperforming stores in Q4 and planned to sell 28 more in Q1 2019. The board declared a quarterly dividend of $0.27 per share in February 2019, up from $0.26.
- California refinery and renewable-fuel assets were divested during 2018; the company also sold asphalt terminals and related interests. Delek repurchased 9.0 million shares for $365.3 during the year and had approximately $409.7 of aggregate repurchase authorization remaining at year-end.
Most important facts for investors to verify
- Separate underlying operating improvement from the effects of a full year of Alon consolidation, added shares and prior-year merger and tax-accounting items.
- Reconcile the 2018 inventory valuation loss and RIN-waiver benefits with recurring refining margins; assess sensitivity to crude differentials and crack spreads.
- Review debt maturities, floating-rate exposure, borrowing availability and the terms and renewal/termination provisions of J. Aron supply-and-offtake agreements.
- Track the actual cost and timing of refinery maintenance, Permian projects and environmental compliance, including the Big Spring consent decree and recorded remediation liability.
- Assess execution and economics of the retail rebranding and store dispositions, and whether planned logistics projects progress beyond evaluation and construction.