Crude Oil Supply and Inventory Purchase Agreement

12 Months Ended

Dec. 31, 2018

Other Liabilities Disclosure [Abstract]

Crude Oil Supply and Inventory Purchase Agreement

Crude Oil Supply and Inventory Purchase Agreements

Delek has Master Supply and Offtake Agreements (the "Supply and Offtake Agreements") with J. Aron & Company ("J. Aron").

El Dorado refinery operations

Throughout the term of the Supply and Offtake Agreement that supports the operations of our refinery located in El Dorado, Arkansas (the "El Dorado Supply and Offtake Agreement"), which was amended on February 27, 2017 to change, among other things, certain terms related to pricing and an extension of the maturity date to April 30, 2020, Lion Oil Company ("Lion Oil") (as the primary legal entity associated with the El Dorado refinery for purposes of this Agreement) and J. Aron will identify mutually acceptable contracts for the purchase of crude oil from third parties and J. Aron will supply up to 100,000 bpd of crude oil to the El Dorado refinery. Crude oil supplied to the El Dorado refinery by J. Aron will be purchased daily at an estimated average monthly market price by Lion Oil. J. Aron will also purchase all refined products from the El Dorado refinery at an estimated daily market price, as they are produced. These daily purchases and sales are trued-up on a monthly basis in order to reflect actual average monthly prices. We have recorded a receivable related to this monthly settlement of $7.8 million and $0.3 million as of December 31, 2018 and 2017, respectively. Also pursuant to the El Dorado Supply and Offtake Agreement and other related agreements, Lion Oil will endeavor to arrange potential sales by either Lion Oil or J. Aron to third parties of the products produced at the El Dorado refinery or purchased from third parties. In instances where Lion Oil is the seller to such third parties, J. Aron will first transfer title to the applicable products to Lion Oil.

This arrangement is accounted for as a product financing arrangement under the fair value election provided by ASC 815 and ASC 825. Delek incurred fees payable to J. Aron under the El Dorado Supply and Offtake Agreement of $10.7 million, $9.7 million and $9.7 million during the years ended December 31, 2018, 2017 and 2016, respectively. These amounts are included as a component of interest expense in the condensed consolidated statements of income. Upon any termination of the El Dorado Supply and Offtake Agreement, including in connection with a force majeure event, the parties are required to negotiate with third parties for the assignment to us of certain contracts, commitments and arrangements, including procurement contracts, commitments for the sale of product, and pipeline, terminalling, storage and shipping arrangements.

Based upon terms in effect as of December 31, 2018, upon the expiration of the El Dorado Supply and Offtake Agreement on April 30, 2020, or upon any earlier termination, Delek would be required to repurchase the consigned crude oil and refined products from J. Aron at then prevailing market prices. At December 31, 2018 and 2017, Delek had 2.8 million barrels and 3.0 million barrels, respectively, of inventory consigned from J. Aron under the El Dorado Supply and Offtake Agreement, and we have recorded liabilities associated with this consigned inventory of $152.6 million and $181.9 million, respectively, in the consolidated balance sheets, measured using the fair value election pursuant to ASC 825. We also maintained letters of credit with respect to the El Dorado Supply and Offtake Agreement totaling $120.0 and $95.0, as of December 31, 2018 and 2017, respectively. See Note 24 for discussion of the January 2019 amendment to the El Dorado Supply and Offtake Agreement and its expected impact on the consolidated financial statements.

Alon refinery operations

Effective with the Delek/Alon Merger, we assumed Alon's existing Supply and Offtake Agreements and other associated agreements with J. Aron, to support the operations of our Big Spring, Krotz Springs and California refineries (as further defined in Note 4) and certain of our asphalt terminals (together, the “Alon Supply and Offtake Agreements”). Pursuant to the Alon Supply and Offtake Agreements, (i) J. Aron agreed to sell to us, and we agreed to buy from J. Aron, at market prices, crude oil for processing at these refineries and (ii) we agreed to sell, and J. Aron agreed to buy, at market prices, certain refined products produced at these refineries. The Alon Supply and Offtake Agreements also provide for the sale, at market prices, of our crude oil and certain refined product inventories to J. Aron, the lease to J. Aron of crude oil and refined product storage facilities and the identification of prospective purchasers of refined products on J. Aron’s behalf. The Supply and Offtake Agreements for the Big Spring and Krotz Springs refineries have initial terms that expire in May 2021. The Supply and Offtake Agreement for the California refineries which had an initial expiration date in May 2019, contained early termination provisions, and we elected to terminate the Supply and Offtake Agreement at the California refineries effective on May 31, 2018. J. Aron may elect to terminate the Supply and Offtake Agreements for the Big Spring and Krotz Springs refineries prior to the expiration of the initial term beginning in May 2019 and upon each anniversary thereafter, on six months' prior notice. We may elect to terminate the agreements at the Big Spring and Krotz Springs refineries in May 2020 on six months prior notice.

These daily purchases and sales are trued-up on a monthly basis in order to reflect actual average monthly prices. We have recorded a net payable related to this monthly settlement of $1.0 million and $4.4 million as of December 31, 2018 and 2017, respectively.

These arrangements are accounted for as product financing arrangements. Delek incurred fees payable to J. Aron of $13.8 million and $7.1 million during the year ended December 31, 2018 and 2017, respectively. These amounts are included as a component of interest expense in the consolidated statements of income. Upon any termination of the Alon Supply and Offtake Agreements, including in connection with a force majeure event, the parties are required to negotiate with third parties for the assignment to us of certain contracts, commitments and arrangements, including procurement contracts, commitments for the sale of product, and pipeline, terminalling, storage and shipping arrangements.

Effective December 21, 2018, we amended our Big Spring refinery's Supply and Offtake Agreement with J. Aron so that the repurchase of baseline volumes at the end of the Supply and Offtake Agreement term (representing the "Baseline Step-Out Liability") will be based upon a fixed price instead of a market-indexed price. The modified arrangement results in a Baseline Step-Out Liability that is no longer subject to commodity volatility, but for which its fair value is now subject to interest rate risk. As a result, we recorded a gain on the change in fair value resulting from

the modification of the instruments from commodities-based risk to interest rate risk in cost of materials and other totaling approximately $4.0 million in the fourth quarter of 2018. As of December 31, 2018, the Baseline Step-Out Liability under the Big Spring refinery's Supply and Offtake Agreement represents the fixed notional amount outstanding under the Supply and Offtake Agreement of $52.0 million less the unamortized discount of $2.4 million for a fair value of $49.6 million related to 0.8 million barrels of baseline consigned inventory, and is reflected as a non-current obligation due May 2020 on our consolidated balance sheet as of December 31, 2018. Such Baseline Step-Out Liability will continue to be recorded at fair value, where the fair value will reflect changes in interest rate risk rather than commodity price risk.

Under the terms of the amendment to the Big Spring refinery Supply and Offtake Agreement, over, short and excess target quantities will continue to be refunded/financed on a monthly basis based on that month's activity, based on market-indexed pricing. This arrangement is treated like short-term financing (where J. Aron may finance our overages or we may finance the shortages based on activity each month), and therefore may be a receivable or payable at period end. As of December 31, 2018, this short-term arrangement resulted in a payable totaling $46.9 million related to 0.9 million barrels of consigned inventory representing quantities over or short baseline volumes and excess target quantities, and is reflected at fair value as a current obligation on our consolidated balance sheet.

Based upon terms in effect as of December 31, 2018, upon the expiration of the Krotz Springs Supply and Offtake Agreement, or upon any earlier termination, Delek would be required to repurchase the consigned crude oil and refined products from J. Aron at then prevailing market prices. At December 31, 2018, Delek had 1.8 million barrels of inventory consigned from J. Aron under the Krotz Springs refinery's Supply and Offtake Agreement, inclusive of both the baseline volumes and over, short and excess target quantities, and we have recorded a current liability associated with this consigned inventory of $113.1 million in the consolidated balance sheets, measured using the fair value election pursuant to ASC 825. See Note 24 for discussion of the January 2019 amendment to the Krotz Springs Supply and Offtake Agreement and its expected impact on the consolidated financial statements.

At December 31, 2017, Delek had 3.5 million barrels of inventory consigned from J. Aron under the Alon Supply and Offtake Agreements, and we recorded a current liability associated with this consigned inventory of $253.7 million in the consolidated balance sheets, measured using the fair value election pursuant to ASC 825. We maintained letters of credit totaling $24.0 and $10.0, as of December 31, 2018 and 2017, respectively with respect to the Alon Supply and Offtake Agreements.

In connection with the Alon Supply and Offtake Agreement for our Krotz Springs refinery, we have granted a security interest to J. Aron in certain assets (including all of its accounts receivable and inventory) to secure its obligations to J. Aron.