Crude Oil Supply and Inventory Purchase Agreement

3 Months Ended

Mar. 31, 2019

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 Supply and Offtake Agreement

The El Dorado refinery's Supply and Offtake Agreement as amended and restated on February 27, 2017 and in effect through December 2018 (the "El Dorado Supply and Offtake Agreement") provided for Lion Oil Company ("Lion Oil") (as the primary legal entity associated with the El Dorado refinery for purposes of this Agreement) and J. Aron to identify mutually acceptable contracts for the purchase of crude oil from third parties and J. Aron to 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 is 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 $15.8 million and $7.8 million as of March 31, 2019 and December 31, 2018, respectively. Also pursuant to the El Dorado Supply and Offtake Agreement and other related agreements, Lion Oil arranges 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. The El Dorado Supply and Offtake Agreement has a maturity date of April 30, 2020. Based upon terms in effect as of December 31, 2018, upon the expiration 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.

Effective January 3, 2019, we amended the El Dorado Supply and Offtake Agreement with J. Aron that supports the operations of our El Dorado refinery so that the repurchase of baseline volumes at the end of the El Dorado Supply and Offtake Agreement term (representing the El Dorado "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 $4.1 million in the first quarter of 2019, and we incurred $3.2 million in fees paid to J. Aron which were charged to interest expense. 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 fair value election provided by ASC 815 Derivatives and Hedging ("ASC 815") and ASC 825, Financial Instruments ("ASC 825"). The change in fair value recorded during the three months ended March 31, 2019 related to the new instrument totaled $(2.5) million and is reflected as a reduction in interest expense.

At March 31, 2019 and December 31, 2018, Delek had 3.5 million barrels and 2.8 million barrels, respectively, of inventory consigned from J. Aron under the El Dorado Supply and Offtake Agreement, and we have recorded total liabilities associated with this consigned inventory of $190.9 million and $152.6 million, respectively, on the condensed consolidated balance sheets. As a result of the amendment to the El Dorado Supply and Offtake Agreement, as of March 31, 2019, the fair value of the Baseline Step-Out Liability totaling $103.6 million is reflected as a non-current obligation on our condensed consolidated balance sheet, and represents 2.0 million barrels of baseline consigned inventory.

We maintained letters of credit with respect to the El Dorado Supply and Offtake Agreement totaling $150.0 million and $120.0 million at March 31, 2019 and December 31, 2018, respectively.

This arrangement is accounted for as a product financing. Delek incurred recurring fees payable to J. Aron under the El Dorado Supply and Offtake Agreement of $2.4 million and $2.7 million during the three months ended March 31, 2019 and March 31, 2018, 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.

Alon Supply and Offtake Agreements

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 and Krotz Springs refineries 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 Alon Supply and Offtake Agreements have initial terms that expire in May 2021. J. Aron or Delek may elect to terminate the agreements at the Big Spring and Krotz Springs refineries in May 2020 on six months prior notice. The daily purchases and sales are trued-up on a monthly basis in order to reflect actual average monthly prices. We have recorded a net receivable (payable) related to this monthly settlement of $17.2 million and $(1.0) million as of March 31, 2019 and December 31, 2018, respectively. Based upon terms in effect prior to the December 2018 and January 2019 amendments discussed below, upon the expiration 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.

Effective December 21, 2018, we amended our Supply and Offtake Agreement related to the Big Spring refinery (the "Big Spring Supply and Offtake Agreement") so that the repurchase of baseline volumes at the end of the Supply and Offtake Agreement term (representing the Big Spring "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 for the Big Spring Supply and Offtake Agreement, 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 in the fourth quarter of 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 fair value election provided by ASC 815 and ASC 825. Fees paid to J Aron as a result of this transaction were recorded as interest expense. As of March 31, 2019 and December 31, 2018 , the fair value of the Baseline Step-Out Liability for the Big Spring refinery was $48.1 million and $49.6 million, respectively, each based on 0.8 million barrels of baseline consigned inventory. As a result of the amendment, as of both March 31, 2019 and December 31, 2018, this baseline consigned inventory for the Big Spring refinery is reflected as a non-current obligation on our condensed consolidated balance sheet. The change in fair value recorded during the three months ended March 31, 2019 related to the new instrument totaled $(1.5) million and is reflected as a reduction in interest expense. There were no changes in our credit spread during the period that would require recognition in accumulated other comprehensive income pursuant to ASC 825.

At March 31, 2019 and December 31, 2018, Delek had 1.5 million barrels and 1.7 million barrels, respectively, of inventory consigned from J. Aron under the Big Spring Supply and Offtake Agreement, and we have recorded total liabilities associated with this consigned inventory of $91.5 million and $96.5 million, respectively, on the condensed consolidated balance sheets.

Effective January 2, 2019, we amended our Supply and Offtake Agreement related to the Krotz Springs refinery (the "Krotz Springs Supply and Offtake Agreement") so that the repurchase of baseline volumes at the end of the Supply and Offtake Agreement term (representing the Krotz Springs "Baseline Step-Out Liability") will also be based upon a fixed price instead of a market-indexed price. Like the Big Spring amendment, this 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 for the Krotz Springs Supply and Offtake Agreement, 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 of $3.5 million in the first quarter of 2019, and we incurred $1.8 million in fees paid to J Aron which were charged to interest expense. 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 fair value election provided by ASC 815 and ASC 825.

At March 31, 2019, Delek had 1.4 million barrels of inventory consigned from J. Aron under the Krotz Springs Supply and Offtake Agreement, inclusive of both the baseline volumes and over, short and excess target quantities, and we have total recorded liabilities associated with this consigned inventory of $102.4 million in the condensed consolidated balance sheets. As a result of the amendment, as of March 31, 2019, the fair value of the Baseline Step-Out Liability totaling $74.2 million for the Krotz Springs refinery is reflected as a non-current obligation on our condensed consolidated balance sheet, and represents 1.3 million barrels of baseline consigned inventory. The change in fair value

recorded during the three months ended March 31, 2019 related to the new instrument totaled $(1.1) million and is reflected as a reduction in interest expense. There were no changes in our credit spread during the period that would require recognition in accumulated other comprehensive income pursuant to ASC 825.

Based upon terms in effect as of December 31, 2018 for the Krotz Springs Supply and Offtake Agreement, as of December 31, 2018, we had 1.8 million barrels of inventory consigned from J. Aron under the Krotz Springs Supply and Offtake Agreement, inclusive of both the baseline volumes and over, short and excess target quantities, and 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 (based on prevailing market-indexed pricing).

Both the Big Spring Supply and Offtake Agreement and the Krotz Springs Supply and Offtake Agreement are accounted for as product financing arrangements. Delek incurred recurring fees payable to J. Aron of $3.7 million and $3.4 million during the three months ended March 31, 2019 and 2018, respectively. These amounts are included as a component of interest expense in the condensed 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.

We maintain letters of credit totaling $44.0 million and $24.0 million, as of March 31, 2019 and December 31, 2018, respectively with respect to the Alon Supply and Offtake Agreements. In connection with the Krotz Springs Supply and Offtake Agreement, 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.