0001694426-18-000220.txt : 20181109 0001694426-18-000220.hdr.sgml : 20181109 20181109160225 ACCESSION NUMBER: 0001694426-18-000220 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 144 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181109 DATE AS OF CHANGE: 20181109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Delek US Holdings, Inc. CENTRAL INDEX KEY: 0001694426 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 352581557 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38142 FILM NUMBER: 181173054 BUSINESS ADDRESS: STREET 1: 7102 COMMERCE WAY CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 615-721-3715 MAIL ADDRESS: STREET 1: 7102 COMMERCE WAY CITY: BRENTWOOD STATE: TN ZIP: 37027 FORMER COMPANY: FORMER CONFORMED NAME: Delek Holdco, Inc. DATE OF NAME CHANGE: 20170111 10-Q 1 dk-10qx093018.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
For the quarterly period ended September 30, 2018
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from                      to                     
Commission file number 001-38142
DELEK US HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
dklogoa15.jpg
35-2581557
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
7102 Commerce Way, Brentwood, Tennessee 37027
(Address of principal executive offices) (Zip Code)
(615) 771-6701
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 every Interactive Data File required to be submitted 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 such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
At November 2, 2018, there were 81,948,413 shares of common stock, $0.01 par value, outstanding (excluding securities held by, or for the account of, the Company or its subsidiaries).


Table of Contents

Delek US Holdings, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 2018


2


Financial Statements

Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Delek US Holdings, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(In millions, except share and per share data)
 
 
September 30, 2018
 
December 31, 2017
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
1,109.1

 
$
931.8

Accounts receivable, net
 
736.9

 
579.6

Accounts receivable from related parties
 
3.1

 
2.1

Inventories, net of inventory valuation reserves
 
923.9

 
808.4

Assets held for sale
 

 
160.0

Other current assets
 
88.4

 
129.9

Total current assets
 
2,861.4

 
2,611.8

Property, plant and equipment:
 
 
 
 
Property, plant and equipment
 
2,897.2

 
2,772.5

Less: accumulated depreciation
 
(754.8
)
 
(631.7
)
Property, plant and equipment, net
 
2,142.4

 
2,140.8

Goodwill
 
857.8

 
816.6

Other intangibles, net
 
105.8

 
101.1

Equity method investments
 
131.3

 
138.1

Other non-current assets
 
60.0

 
126.8

Total assets
 
$
6,158.7

 
$
5,935.2

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
1,108.1

 
$
973.4

Accounts payable to related parties
 
2.2

 
1.7

Current portion of long-term debt
 
32.0

 
590.2

Obligation under Supply and Offtake Agreements
 
478.7

 
435.6

Liabilities associated with assets held for sale
 

 
105.9

Accrued expenses and other current liabilities
 
384.6

 
564.9

Total current liabilities
 
2,005.6

 
2,671.7

Non-current liabilities:
 
 
 
 
Long-term debt, net of current portion
 
1,830.0

 
875.4

Environmental liabilities, net of current portion
 
136.1

 
68.9

Asset retirement obligations
 
76.9

 
72.1

Deferred tax liabilities
 
175.2

 
199.9

Other non-current liabilities
 
37.8

 
83.0

Total non-current liabilities
 
2,256.0

 
1,299.3

Stockholders’ 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, 90,432,492 shares and 81,533,548 shares issued at September 30, 2018 and December 31, 2017, respectively
 
0.9

 
0.8

Additional paid-in capital
 
1,168.8

 
900.1

Accumulated other comprehensive income
 
6.4

 
6.9

Treasury stock, 8,302,905 shares and 762,623 shares, at cost, as of September 30, 2018 and December 31, 2017, respectively
 
(356.3
)
 
(25.0
)
Retained earnings
 
901.5

 
767.8

Non-controlling interests in subsidiaries
 
175.8

 
313.6

Total stockholders’ equity
 
1,897.1

 
1,964.2

Total liabilities and stockholders’ equity
 
$
6,158.7

 
$
5,935.2

See accompanying notes to condensed consolidated financial statements

3


Financial Statements

Delek US Holdings, Inc.
Condensed Consolidated Statements of Income (Unaudited)
(In millions, except share and per share)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net revenues
 
$
2,495.2

 
$
2,370.6

 
$
7,411.9

 
$
4,783.4

Cost of sales:
 
 
 
 
 
 
 
 
Cost of materials and other
 
1,970.5

 
2,017.2

 
6,190.1

 
4,210.7

Operating expenses (excluding depreciation and amortization presented below)
 
136.4

 
126.7

 
400.7

 
248.5

Depreciation and amortization
 
41.2

 
40.1

 
119.3

 
93.2

Total cost of sales
 
2,148.1

 
2,184.0

 
6,710.1

 
4,552.4

Operating expenses related to retail and wholesale business (excluding depreciation and amortization presented below)
 
27.6

 
26.5

 
78.9

 
28.0

General and administrative expenses
 
58.0

 
68.0

 
176.1

 
122.0

Depreciation and amortization
 
8.0

 
6.8

 
27.1

 
12.2

Other operating (income) expense, net
 
(1.7
)
 
0.7

 
(9.4
)
 
1.0

Total operating costs and expenses
 
2,240.0

 
2,286.0

 
6,982.8

 
4,715.6

Operating income
 
255.2

 
84.6

 
429.1

 
67.8

Interest expense
 
31.2

 
34.1

 
95.2

 
62.5

Interest income
 
(1.4
)
 
(0.9
)
 
(3.0
)
 
(2.7
)
Income from equity method investments
 
(4.0
)
 
(5.1
)
 
(6.9
)
 
(9.7
)
Gain on remeasurement of equity method investment
 

 
(190.1
)
 

 
(190.1
)
Gain on sale of business
 

 

 
(13.2
)
 

Impairment loss on assets held for sale
 

 

 
27.5

 

Loss on extinguishment of debt
 
0.1

 

 
9.1

 

Other (income) expense, net
 
(7.5
)
 
(5.4
)
 
(7.9
)
 
(5.3
)
Total non-operating expenses (income), net
 
18.4

 
(167.4
)
 
100.8

 
(145.3
)
Income from continuing operations before income tax expense
 
236.8

 
252.0

 
328.3

 
213.1

Income tax expense
 
51.0

 
133.5

 
66.8

 
111.5

Income from continuing operations, net of tax
 
185.8

 
118.5

 
261.5

 
101.6

Discontinued operations:
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, including gain (loss) on sale of discontinued operations
 
0.8

 
(6.4
)
 
(10.7
)
 
(6.4
)
Income tax expense (benefit)
 
0.3

 
(2.3
)
 
(2.2
)
 
(2.3
)
Income (loss) from discontinued operations, net of tax
 
0.5

 
(4.1
)
 
(8.5
)
 
(4.1
)
Net income
 
186.3

 
114.4

 
253.0

 
97.5

Net income attributed to non-controlling interests
 
6.5

 
10.0

 
29.0

 
19.8

Net income attributable to Delek
 
$
179.8

 
$
104.4

 
$
224.0

 
$
77.7

Basic income per share:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
2.15

 
$
1.35

 
$
2.89

 
$
1.20

Income (loss) from discontinued operations
 
$
0.01

 
$
(0.05
)
 
$
(0.20
)
 
$
(0.06
)
Total basic income per share
 
$
2.16

 
$
1.30

 
$
2.69

 
$
1.14

Diluted income per share:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
2.02

 
$
1.34

 
$
2.75

 
$
1.19

Income (loss) from discontinued operations
 
$
0.01

 
$
(0.05
)
 
$
(0.19
)
 
$
(0.06
)
Total diluted income per share
 
$
2.03

 
$
1.29

 
$
2.56

 
$
1.13

Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
83,575,122

 
80,581,762

 
83,294,473

 
68,272,918

Diluted
 
89,021,260

 
81,245,405

 
88,369,113

 
68,975,974

Dividends declared per common share outstanding
 
$
0.25

 
$
0.15

 
$
0.70

 
$
0.45

See accompanying notes to condensed consolidated financial statements

4


Financial Statements

Delek US Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In millions)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income attributable to Delek
 
$
179.8

 
$
104.4

 
$
224.0

 
$
77.7

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Commodity contracts designated as cash flow hedges:
 
 
 
 
 
 
 
 
Unrealized gains (losses), net of ineffectiveness gains of a nominal amount and $0.7 million for the three months and nine months ended September 30, 2018, respectively, and $0.1 million and $0.5 million for the three and nine months ended September 30, 2017, respectively
 
43.1

 
3.4

 
(28.9
)
 
(6.4
)
Realized losses (gains) reclassified to cost of materials and other
 
9.6

 
(1.0
)
 
18.4

 
38.5

Increase (decrease) related to commodity cash flow hedges, net
 
52.7

 
2.4

 
(10.5
)
 
32.1

Income tax (expense) benefit
 
(11.0
)
 
(0.8
)
 
2.3

 
(11.2
)
Net comprehensive income (loss) on commodity contracts designated as cash flow hedges
 
41.7

 
1.6

 
(8.2
)
 
20.9

 
 
 
 
 
 
 
 
 
Interest rate contracts designated as cash flow hedges:
 
 
 
 
 
 
 
 
Unrealized gains (losses)
 

 
0.1

 
(1.3
)
 
0.1

Realized losses reclassified to interest expense
 

 
0.1

 
0.7

 
0.1

Increase (decrease) related to interest rate cash flow hedges, net
 

 
0.2

 
(0.6
)
 
0.2

Income tax (expense) benefit
 

 
(0.1
)
 
0.1

 
(0.1
)
Net comprehensive income (loss) on interest rate contracts designated as cash flow hedges
 

 
0.1

 
(0.5
)
 
0.1

 
 
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
 
0.2

 

 
(0.4
)
 

 
 
 
 
 
 
 
 
 
Other comprehensive income from equity method investments, net of tax expense of $2.2 million for both the three and nine months ended September 30, 2017
 

 
4.1

 

 
4.1

 
 
 
 
 
 
 
 
 
Postretirement benefit plans:
 
 
 
 
 
 
 
 
Unrealized gain arising during the year related to:
 
 
 
 
 
 
 
 
  Net actuarial gain
 
8.9

 
1.0

 
9.0

 
1.0

  Curtailment and settlement gains
 
2.4

 
6.3

 
2.5

 
6.3

Gain reclassified to earnings:
 
 
 
 
 
 
 
 
   Recognized due to curtailment and settlement
 
(2.4
)
 
(6.1
)
 
(2.5
)
 
(6.1
)
Increase related to postretirement benefit plans, net
 
8.9

 
1.2

 
9.0

 
1.2

Income tax expense
 
(2.0
)
 
(0.4
)
 
(2.0
)
 
(0.4
)
Net comprehensive income on postretirement benefit plans
 
6.9

 
0.8

 
7.0

 
0.8

Total other comprehensive income (loss)
 
48.8

 
6.6

 
(2.1
)
 
25.9

Comprehensive income attributable to Delek
 
$
228.6

 
$
111.0

 
$
221.9

 
$
103.6

See accompanying notes to condensed consolidated financial statements

5


Financial Statements

Delek US Holdings, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income
 
$
253.0

 
$
97.5

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 
Depreciation and amortization
 
146.4

 
105.4

Amortization of above and below market leases, net
 
(1.1
)
 

Amortization of deferred financing costs and debt discount
 
7.4

 
5.3

Accretion of environmental liabilities and asset retirement obligations
 
2.6

 
0.4

Amortization of unfavorable contract liability
 
(2.2
)
 
(4.4
)
Deferred income taxes
 
(34.7
)
 
97.8

Income from equity method investments
 
(6.9
)
 
(9.7
)
Dividends from equity method investments
 
5.2

 
1.1

Loss on disposal of assets
 
1.3

 
1.0

Gain on remeasurement of equity method investment
 

 
(190.1
)
Loss on extinguishment of debt
 
9.1

 

Gain on sale of business
 
(13.2
)
 

Impairment of assets held for sale
 
27.5

 

Equity-based compensation expense
 
15.6

 
12.6

Loss from discontinued operations
 
8.5

 
4.1

Changes in assets and liabilities, net of acquisitions:
 
 

 
 

Accounts receivable
 
(112.7
)
 
(57.5
)
Inventories and other current assets
 
(78.7
)
 
(38.1
)
Fair value of derivatives
 
(64.1
)
 
18.9

Accounts payable and other current liabilities
 
50.5

 
6.6

Obligation under Supply and Offtake Agreement
 
32.2

 
64.1

Non-current assets and liabilities, net
 
(14.4
)
 
(35.4
)
Cash provided by operating activities - continuing operations
 
231.3

 
79.6

Cash used in operating activities - discontinued operations
 
(30.1
)
 
(7.2
)
Net cash provided by operating activities
 
201.2

 
72.4

Cash flows from investing activities:
 
 

 
 
Business combinations, net of cash acquired
 

 
200.5

Equity method investment contributions
 
(0.2
)
 
(4.8
)
Distributions from equity method investments
 
1.0

 
10.9

Purchases of property, plant and equipment
 
(228.0
)
 
(108.4
)
Purchase of intangible assets
 
(1.7
)
 
(5.5
)
Proceeds from sale of property, plant and equipment
 
5.4

 

Proceeds from sale of business
 
110.8

 

Proceeds from sales of discontinued operations
 
55.5

 

Cash (used in) provided by investing activities - continuing operations
 
(57.2
)
 
92.7

Cash provided by investing activities - discontinued operations
 
20.0

 
13.5

Net cash (used in) provided by investing activities
 
(37.2
)
 
106.2

Delek US Holdings, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
(In millions)
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Cash flows from financing activities:
 
 

 
 
Proceeds from long-term revolvers
 
1,749.1

 
781.7

Payments on long-term revolvers
 
(1,227.8
)
 
(920.5
)
Proceeds from term debt
 
690.6

 
248.1

Payments on term debt
 
(824.6
)
 
(79.9
)
Proceeds from product financing agreements
 

 
21.0

Repayments of product financing agreements
 
(72.4
)
 
(9.0
)
Taxes paid due to the net settlement of equity-based compensation
 
(10.8
)
 
(2.7
)
Repurchase of common stock
 
(207.4
)
 

Repurchase of non-controlling interest
 

 
(7.3
)
Distribution to non-controlling interest
 
(21.5
)
 
(23.8
)
Dividends paid
 
(58.8
)
 
(31.3
)
Deferred financing costs paid
 
(13.2
)
 
(6.1
)
Cash provided by (used in) financing activities - continuing operations
 
3.2

 
(29.8
)
Cash used in financing activities - discontinued operations
 

 

Net cash provided by (used in) financing activities
 
3.2

 
(29.8
)
Net increase in cash and cash equivalents
 
167.2

 
148.8

Cash and cash equivalents at the beginning of the period
 
941.9

 
689.2

Cash and cash equivalents at the end of the period
 
1,109.1

 
838.0

Less cash and cash equivalents of discontinued operations at the end of the period
 

 
6.3

Cash and cash equivalents of continuing operations at the end of the period
 
$
1,109.1

 
$
831.7

Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest, net of capitalized interest of $0.6 million and $0.2 million in the 2018 and 2017 periods, respectively
 
$
87.2

 
$
52.7

Income taxes
 
$
53.3

 
$
70.6

Non-cash investing activities:
 
 
 
 
Common stock issued in connection with the buyout of Alon Partnership non-controlling interest
 
$
127.0

 
$

(Decrease) increase in accrued capital expenditures
 
$
(17.1
)
 
$
2.4

Non-cash financing activities:
 
 
 
 
Common stock issued in connection with settlement of Convertible Notes
 
$
123.9

 
$

Treasury shares received in connection with exercise of Call Options
 
$
(123.9
)
 
$

Common stock issued in connection with the Delek/Alon Merger
 
$


$
509.0

Equity instruments issued in connection with the Delek/Alon Merger
 
$

 
$
21.7


See accompanying notes to condensed consolidated financial statements

6


Notes to Condensed Consolidated Financial Statements (Unaudited)


Note 1 - Organization and Basis of Presentation
Delek US Holdings, Inc. operates through its consolidated subsidiaries, which include Delek US Energy, Inc. (and its subsidiaries) and Alon USA Energy, Inc. ("Alon") (and its subsidiaries).
Effective July 1, 2017 (the "Effective Time"), we acquired the outstanding common stock of Alon (previously listed under NYSE: ALJ) (the "Delek/Alon Merger", as further discussed in Note 2), resulting in a new post-combination consolidated registrant renamed as Delek US Holdings, Inc. (“New Delek”), with Alon and the previous Delek US Holdings, Inc. (“Old Delek”) surviving as wholly-owned subsidiaries. New Delek is the successor issuer to Old Delek and Alon pursuant to Rule 12g-3(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition, as a result of the Delek/Alon Merger, the shares of common stock of Old Delek and Alon were delisted from the New York Stock Exchange ("NYSE") in July 2017, and their respective reporting obligations under the Exchange Act were terminated.
Unless otherwise indicated or the context requires otherwise, the disclosures and financial information included in this report for the periods prior to July 1, 2017 reflect that of Old Delek, and the disclosures and financial information included in this report for the periods beginning July 1, 2017 reflect that of New Delek. The terms "we," "our," "us," "Delek" and the "Company" are used in this report to refer to Old Delek and its consolidated subsidiaries for the periods prior to July 1, 2017, and New Delek and its consolidated subsidiaries for the periods on or after July 1, 2017, unless otherwise noted. New Delek's Common Stock is listed on the NYSE under the symbol "DK."
During the third quarter 2017, we committed to a plan to sell certain assets associated with our Paramount and Long Beach, California refineries and Alon's California renewable fuels facility (collectively, the "California Discontinued Entities"), which were acquired as part of the Delek/Alon Merger. As a result of this decision and commitment to a plan, and because it was made within three months of the Delek/Alon Merger, we met the requirements under Accounting Standards Codification ("ASC") 205-20, Presentation of Financial Statements - Discontinued Operations ("ASC 205-20") and ASC 360, Property, Plant and Equipment ("ASC 360") to report the results of the California Discontinued Entities as discontinued operations and to classify the California Discontinued Entities as a group of assets held for sale. On March 16, 2018, Delek sold to World Energy, LLC (i) all of Delek’s membership interests in AltAir Paramount, LLC (Alon's California renewable fuels facility), (ii) certain refining assets and other related assets located in Paramount, California and (iii) certain associated tank farm and pipeline assets and other related assets located in California. The transaction to dispose of certain assets and liabilities associated with our Long Beach, California refinery, to Bridge Point Long Beach, LLC, closed July 17, 2018. See Note 5 for further information regarding the California Discontinued Entities.
On February 12, 2018, Delek announced it had reached a definitive agreement to sell certain assets and operations of four asphalt terminals (included in Delek's corporate/other segment), as well as an equity method investment in an additional asphalt terminal, to an affiliate of Andeavor. This transaction includes asphalt terminal assets in Bakersfield, Mojave and Elk Grove, California and Phoenix, Arizona, as well as Delek’s 50 percent equity interest in the Paramount-Nevada Asphalt Company, LLC joint venture that operates an asphalt terminal located in Fernley, Nevada. On May 21, 2018, Delek completed the transaction and received net proceeds of approximately $110.8 million, inclusive of the $75.0 million base proceeds as well as certain preliminary working capital adjustments. These associated assets did not meet the definition of held for sale pursuant to ASC 360 as of December 31, 2017, and therefore were not reflected as held for sale nor as discontinued operations in the consolidated financial statements as of and for the year ended December 31, 2017. See Note 5 for further information regarding the disposal of these assets held for sale.
Our condensed consolidated financial statements include the accounts of Delek and its subsidiaries. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") have been condensed or omitted, although management believes that the disclosures herein are adequate to make the financial information presented not misleading. Our unaudited condensed consolidated financial statements have been prepared in conformity with GAAP applied on a consistent basis with those of the annual audited financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 1, 2018 (the "Annual Report on Form 10-K") and in accordance with the rules and regulations of the SEC. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2017 included in our Annual Report on Form 10-K.
Our condensed consolidated financial statements include Delek Logistics Partners, LP ("Delek Logistics"), Alon USA Partners, LP (the "Alon Partnership") and AltAir Paramount LLC ("AltAir"), all variable interest entities as of December 31, 2017. However, Delek acquired the non-controlling interest in the Alon Partnership on February 7, 2018 and sold AltAir on March 16, 2018. Thus, Delek Logistics is Delek's only remaining variable interest entity as of September 30, 2018. As the indirect owner of the general partner of Delek Logistics, we have the ability to direct the activities of this entity that most significantly impact its economic performance. We are also considered to be the primary beneficiary for accounting purposes for this entity and are Delek Logistics' primary customer. As Delek Logistics does not derive an amount of gross margin material to us from third parties, there is limited risk to Delek associated with Delek Logistics' operations. However, in the event that Delek Logistics incurs a loss, our operating results will reflect such loss, net of intercompany eliminations, to the extent of our ownership interest in this entity.

7


Notes to Condensed Consolidated Financial Statements (Unaudited)

In the opinion of management, all adjustments necessary for a fair presentation of the financial condition and the results of operations for the interim periods have been included. All significant intercompany transactions and account balances have been eliminated in consolidation. All adjustments are of a normal, recurring nature. Operating results for the interim period should not be viewed as representative of results that may be expected for any future interim period or for the full year.
Certain prior period amounts have been reclassified in order to conform to the current period presentation. Additionally, certain changes to presentation of the prior period statements of income have been made in order to conform to the current period presentation, primarily relating to the addition of a subtotal entitled 'cost of sales' which includes all costs directly attributable to the generation of the related revenue, as defined by GAAP, and the retitling of what was previously referred to as 'cost of goods sold' to 'cost of materials and other'. In connection with this change in presentation, we have revised our related accounting policy as follows:
Cost of Materials and Other and Operating Expenses
For the refining segment, cost of materials and other includes (i) the direct cost of materials (such as crude oil and other refinery feedstocks, refined petroleum products and blendstocks, and ethanol feedstocks and products) that are a component of our products sold; (ii) costs related to the delivery (such as shipping and handling costs) of products sold; (iii) costs related to our environmental credit obligations to comply with various governmental and regulatory programs (such as the cost of renewable identification numbers as required by the EPA’s Renewable Fuel Standard and emission credits under various cap-and-trade systems); and (iv) gains and losses on our commodity derivative instruments.
Operating expenses for the refining segment include the costs to operate our refineries and biodiesel facilities, excluding depreciation and amortization. These costs primarily include employee-related expenses, energy and utility costs, catalysts and chemical costs, and repairs and maintenance expenses.
For the logistics segment, cost of materials and other includes (i) all costs of purchased refined products, additives and related transportation of such products, (ii) costs associated with the operation of our trucking assets, which primarily include allocated employee costs and other costs related to fuel, truck leases and repairs and maintenance, (iii) the cost of pipeline capacity leased from a third-party, and (iv) gains and losses related to our commodity hedging activities.
Operating expenses for the logistics segment include the costs associated with the operation of owned terminals and pipelines and terminalling expense at third-party locations, excluding depreciation and amortization. These costs primarily include outside services, allocated employee costs, repairs and maintenance costs and energy and utility costs. Operating expenses related to the wholesale business are excluded from cost of sales because they primarily relate to costs associated with selling the products through our wholesale business.
For the retail segment, cost of materials and other comprises the costs related to specific products sold at retail sites, primarily consisting of motor fuels and merchandise. Retail fuel cost of sales represents the cost of purchased fuel, including transportation costs. Merchandise cost of sales includes the delivered cost of merchandise purchases, net of merchandise rebates and commissions. Operating expenses related to the retail business include costs such as wages of employees, lease expense, utility expense and other costs of operating the stores, excluding depreciation and amortization, and are excluded from cost of sales because they primarily relate to costs associated with selling the products through our retail sites.
Depreciation and amortization is separately presented in our statement of income and disclosed by reportable segment in Note 14.
New Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (the "FASB") issued guidance related to customers’ accounting for implementation costs incurred in a cloud computing arrangement that is considered a service contract. This pronouncement aligns the requirements for capitalizing implementation costs in such arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. Entities can choose to adopt the new guidance prospectively or retrospectively. We expect to adopt this guidance on or before the effective date and are currently evaluating the impact that adopting this new guidance will have on our business, financial condition and results of operations.
In August 2018, the FASB issued guidance related to disclosure requirements for defined benefit plans. The pronouncement eliminates, modifies and adds disclosure requirements for defined benefit plans. The pronouncement is effective for fiscal years ending after December 15, 2020, and early adoption is permitted. We expect to adopt this guidance on or before the effective date and do not expect adopting this new guidance will have a material impact on our business, financial condition or results of operations.
In August 2018, the FASB issued guidance related to disclosure requirements for fair value measurements. The pronouncement eliminates, modifies and adds disclosure requirements for fair value measurements. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We expect to adopt this guidance on or before the effective date and do not expect adopting this new guidance will have a material impact on our business, financial condition or results of operations.

8


Notes to Condensed Consolidated Financial Statements (Unaudited)

In February 2018, the FASB issued guidance that allows a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Reform Act"), which was signed into law on December 22, 2017. Consequently, the amendments eliminate the stranded tax effects related to items in accumulated other comprehensive income resulting from the Tax Reform Act. The new guidance may be applied retrospectively to each period in which the effect of the Tax Reform Act is recognized, or in the period of adoption. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We elected to early adopt this guidance effective January 1, 2018.   As a result of adopting this guidance, we reclassified $1.6 million from AOCI to retained earnings. The effect of the Tax Reform Act on temporary differences related to amounts initially recorded in AOCI are provisional. As we finalize the accounting for tax effects of the Tax Reform Act on the related temporary differences, additional reclassification adjustments may be recorded in future periods. See Note 11 for further discussion.
In August 2017, the FASB issued guidance to better align financial reporting for hedging activities with the economic objectives of those activities for both financial (e.g., interest rate) and commodity risks. The guidance was intended to create more transparency in the presentation of financial results, both on the face of the financial statements and in the footnotes, and simplify the application of hedge accounting guidance. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Companies are required to apply the guidance on a modified retrospective transition method in which the cumulative effect of the change will be recognized within equity in the consolidated balance sheet as of the date of adoption. Early adoption is permitted, including in an interim period. If a company early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. We expect to adopt this guidance on or before the effective date and are currently evaluating the impact that adopting this new guidance will have on our business, financial condition and results of operations.
In May 2017, the FASB issued guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The modification accounting guidance applies if the value, vesting conditions or classification of the award changes. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. This guidance should be applied prospectively to an award modified on or after the adoption date. We adopted this guidance on January 1, 2018 and the adoption did not have a material impact on our business, financial condition or results of operations.
In March 2017, the FASB issued guidance that will require that an employer disaggregate the service cost component from the other components of net benefit cost with respect to defined benefit postretirement employee benefit plans. Service cost is required to be reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit cost are required to be reported outside the subtotal for operating income. Additionally, only the service cost component of net benefit costs are eligible for capitalization. The guidance became effective January 1, 2018. We adopted this guidance on January 1, 2018, which will retrospectively impact the presentation of our third and fourth quarter 2017 statements of income as a result of the pension and postretirement obligations assumed in the Delek/Alon Merger. As further discussed in Note 18, only the service cost component of net periodic benefit costs are included as part of general and administrative expenses in the accompanying condensed consolidated statements of income. The other components of net periodic benefit costs are included as part of other non-operating expenses (income), net. As a practical expedient, we used the amounts disclosed regarding our pension and other postretirement benefit plans for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements in our current Quarterly Report on Form 10-Q and will also do so in our 2018 Annual Report on Form 10-K. This will require recasting of prior periods subsequent to the Delek/Alon Merger. The following table details the impact of the retrospective adoption of this standard for the three and nine months ended September 30, 2017.
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30, 2017
 
September 30, 2017
 
(in millions)
 
As Reported
Adjustment
As Adjusted
 
As Reported
Adjustment
As Adjusted
 
General and administrative expenses
$
61.8

$
6.2

$
68.0

 
$
115.8

$
6.2

$
122.0

 
Other expense (income), net
 
$
0.8

$
(6.2
)
$
(5.4
)
 
$
0.9

$
(6.2
)
$
(5.3
)
 


In February 2017, the FASB issued guidance clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. The amendments in this guidance should be applied using either i) a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption or ii) a retrospective basis to each period presented in the financial statements. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We adopted this guidance on January 1, 2018, and the adoption did not have a material impact on our business, financial condition or results of operations.

9


Notes to Condensed Consolidated Financial Statements (Unaudited)

In January 2017, the FASB issued guidance concerning the goodwill impairment test that eliminates Step 2, which required a comparison of the implied fair value of goodwill of the reporting unit with the carrying amount of that goodwill for that reporting unit. It also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative assessment, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. As permitted under Accounting Standards Update 2017-04, we expect to early adopt this guidance in the fourth quarter of 2018 in connection with our 2018 goodwill impairment tests to be performed as of October 31, 2018. We do not anticipate that the adoption will have a material impact on our business, financial condition or results of operations.
In October 2016, the FASB issued guidance that requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted this guidance on January 1, 2018. As a result of adopting this guidance, we decreased retained earnings by $29.9 million for the cumulative effect as of January 1, 2018.
In August 2016, the FASB issued guidance that clarifies eight cash flow classification issues pertaining to cash receipts and cash payments. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted this guidance on January 1, 2018 and the adoption did not have a material impact on our business, financial condition or results of operations, except for reclassifications of certain distributions received from equity method investees, due to Delek making an accounting policy election to classify distributions received from equity method investees using the cumulative earnings approach. Under this approach, distributions received are considered returns on investment and classified as cash inflows from operating activities, unless the investor’s cumulative distributions received less distributions received in prior periods that were determined to be returns of investment exceed cumulative equity in earnings (as adjusted for amortization of basis differences) recognized by the investor. When such an excess occurs, the current-period distribution up to this excess should be considered a return of investment and classified as cash inflows from investing activities. This resulted in a reclassification of $10.9 million of distributions received in the nine months ended September 30, 2017 from the line item entitled dividends from equity method investments in net cash provided by (used in) operating activities to the line item entitled distributions from equity method investments in net cash provided by (used in) investing activities in the condensed consolidated statements of cash flows.
In June 2016, the FASB issued guidance requiring the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. This guidance is effective for interim and annual periods beginning after December 15, 2019. We expect to adopt this guidance on or before the effective date and are currently evaluating the impact that adopting this new guidance will have on our business, financial condition and results of operations.
In February 2016, the FASB issued guidance that requires the recognition of a lease liability and a right-of-use asset, initially measured at the present value of the lease payments, in the statement of financial condition for all leases with terms longer than one year. Subsequent guidance was issued to consider the impact of practical expedients. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We plan to adopt the new lease standard on January 1, 2019. We plan to elect the package of practical expedients which, among other things, allows us to carry forward the historical lease classification. We plan to also elect the practical expedient not to separate lease and non-lease components, which allows us to combine the components if certain criteria are met. Further, we plan to elect the optional transition method, which allows us to recognize a cumulative-effect adjustment to the opening balance sheet of retained earnings at the date of adoption and to not recast our comparative periods. We do not plan to elect the hindsight practical expedients, which would have allowed us to use hindsight in determining the reasonably certain lease term.
As part of our efforts to prepare for adoption, beginning in 2018, we formed a project implementation team, as well as a project timeline, to evaluate the guidance. We have substantially completed our analysis of existing leases and the impact on our business processes and accounting systems. We continue to evaluate the impact of the guidance on our controls and financial statement disclosures, and expect to implement any changes to accommodate the new accounting and disclosure requirements prior to adoption on January 1, 2019. We anticipate adoption of the guidance will have a material impact on our consolidated balance sheet, but will not have a material impact on our consolidated income statement. We anticipate that the most significant impact will be the recognition of the lease liability and a right-of-use asset on our consolidated balance sheet.

10


Notes to Condensed Consolidated Financial Statements (Unaudited)

In January 2016, the FASB issued guidance that affects the accounting for equity investments, financial liabilities accounted for under the fair value option and the presentation and disclosure requirements for financial instruments. Under the new guidance, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification for equity securities with readily determinable fair values. For financial liabilities when the fair value option has been elected, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. It will require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and will eliminate the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We adopted this guidance on January 1, 2018 and the adoption did not have a material impact on our business, financial condition or results of operations.
In May 2014, the FASB issued guidance as codified in Accounting Standards Codification ("ASC") 606, “Revenue from Contracts with Customers ("ASC 606),” to clarify the principles for recognizing revenue. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires improved interim and annual disclosures that enable the users of financial statements to better understand the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, and can be adopted retrospectively. We adopted this guidance on January 1, 2018, using the modified retrospective transition method applied to contracts which were not completed as of January 1, 2018, and the adoption did not have a material impact on our business, financial condition or results of operations.
The Company has updated its policies as it relates to revenue recognition. Revenue is measured based on consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or by providing services to a customer. The adoption of ASC 606 did not materially change our revenue recognition patterns, which are described below by reportable segment:
Refining
Revenues for products sold are recorded at the point of sale upon delivery of product, which is the point at which title to the product is transferred, the customer has accepted the product and the customer has significant risks and rewards of owning the product. We typically have a right to payment once control of the product is transferred to the customer. Transaction prices for these products are typically at market rates for the product at the time of delivery. Payment terms require customers to pay shortly after delivery and do not contain significant financing components.
Logistics
Revenues for products sold are generally recognized upon delivery of the product, which is when title and control of the product is transferred. Transaction prices for these products are typically at market rates for the product at the time of delivery. Service revenues are recognized as crude oil, intermediate and refined product are shipped through, delivered by or stored in our pipelines, trucks, terminals and storage facility assets, as applicable. We do not recognize product revenues for these services as the product does not represent a promised good in the context of ASC 606. All service revenues are based on regulated tariff rates or contractual rates. Payment terms require customers to pay shortly after delivery and do not contain significant financing components.
Retail
Fuel and merchandise revenue is recognized at the point of sale, which is when control of the product is transferred to the customer. Payments from customers are received at the time sales occur in cash or by credit or debit card. We derive service revenues from the sale of lottery tickets, money orders, car washes and other ancillary product and service offerings. Service revenue and related costs are recorded at gross amounts or net amounts, as appropriate, in accordance with the principal versus agent provisions in ASC 606.
Refer to Note 14 for disclosure of our revenue disaggregated by segment, as well as a description of our reportable segment operations.
Sales, Use and Excise Taxes
Upon the adoption of ASC 606, we made the accounting policy election to exclude from revenue all taxes assessed by a governmental authority, including sales, use and excise taxes, that are both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer. Sales, use and excise taxes were also excluded from revenue historically in accordance with the applicable guidance in ASC 605, Revenue Recognitio