Crude Oil Supply and Inventory Purchase Agreement

3 Months Ended

Mar. 31, 2020

Other Liabilities Disclosure [Abstract]

Crude Oil Supply and Inventory Purchase Agreement

Delek has Supply and Offtake Agreements with J. Aron & Company ("J. Aron") in connection with its El Dorado, Big Spring and Krotz Springs refineries (collectively, the "Supply and Offtake Agreements"). Pursuant to the Supply and Offtake Agreements, (i) J. Aron agrees to sell to us, and we agree to buy from J. Aron, at market prices, crude oil for processing at these refineries and (ii) we agree to sell, and J. Aron agrees to buy, at market prices, certain refined products produced at these refineries. The Supply and Offtake Agreements also provide for 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. At the inception of the Supply and Offtake Agreements, we transferred title to a certain number of barrels of crude and other inventories to J. Aron (the "Step-In"), and the Supply and Offtake Agreements require the repurchase of remaining inventory (including certain "Baseline Volumes") at the termination of those Agreements (the "Step-Out"). The Supply and Offtake Agreements are accounted for as inventory financing arrangements under the fair value election provided by ASC 815 Derivatives and Hedging ("ASC 815") and ASC 825, Financial Instruments ("ASC 825").

Barrels subject to the Supply and Offtake Agreements are as follows:

(in millions)	El Dorado	Big Spring	Krotz Springs
Baseline Volumes pursuant to the respective Supply and Offtake Agreements	2.0	0.8	1.3
Barrels of inventory consigned under the respective Supply and Offtake Agreements as of March 31, 2020 (1)	3.5	1.8	1.5
Barrels of inventory consigned under the respective Supply and Offtake Agreements as of December 31, 2019 (1)	3.5	2.0	1.7

⁽¹⁾  Includes Baseline Volumes plus/minus over/short quantities.

The Supply and Offtake Agreements have certain termination provisions, which may include requirements 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.

The Supply and Offtake Agreements were amended in December 2018 for Big Spring and in January 2019 for El Dorado and Krotz Springs so that the Baseline Step-Out Liabilities, as defined below, were based upon a fixed price. As a result, we recorded gains on the change in fair value resulting from the modification in cost of materials and other in the periods in which the amendments occurred, including a gain of $7.6 million which was recognized in the first quarter of 2019. As a result of these amendments, the changes in fair value of the Baseline Step-Out Liabilities were recorded in interest expense.

In January 2020, we amended and restated our three Supply and Offtake Agreements so that the repurchase of Baseline Volumes at the end of the Supply and Offtake Agreement term (representing the "Baseline Step-Out Liability" or, collectively, the "Baseline Step-Out Liabilities") would be based on market-indexed prices subject to commodity price risk. As a result of the amendment, such Baseline Step-Out Liabilities will continue to be recorded at fair value under the fair value election provided by ASC 815 and ASC 825, where the fair value will now reflect changes in commodity price risk rather than interest rate risk with such changes in fair value being recorded in cost of materials and other. We recognized a loss in the first quarter of 2020 of $1.5 million on the change in fair value resulting from the modification.

The Baseline Step-Out Liabilities are reflected as non-current liabilities on our consolidated balance sheet to the extent that they are not contractually due within twelve months. Monthly activity resulting in over and short volumes continue to be valued using market-indexed pricing, and are included in current liabilities (or receivables) on our consolidated balance sheet.

Net balances payable (receivable) under the Supply and Offtake Agreements were as follows as of the balance sheet dates:

(in millions)	El Dorado		Big Spring		Krotz Springs			Total
Balances as of March 31, 2020:
Baseline Step-Out Liability	$	78.7	$	41.7	$	59.1		$	179.5
Revolving over/short product financing liability	58.9		30.3		8.7			97.9
Total Obligations Under Supply and Offtake Agreements	137.6		72.0		67.8			277.4
Less: Current portion	58.9		30.3		8.7			97.9
Obligations Under Supply and Offtake Agreements - Noncurrent portion	$	78.7	$	41.7	$	59.1		$	179.5
Other current payable (receivable) for monthly activity true-up	$	11.4	$	10.7	$	(18.2	)	$	3.9

(in millions)	El Dorado			Big Spring			Krotz Springs			Total
Balances as of December 31, 2019:
Baseline Step-Out Liability	$	125.5		$	57.2		$	87.6		$	270.3
Revolving over/short product financing liability	93.0			73.5			40.5			207.0
Total Obligations Under Supply and Offtake Agreements	218.5			130.7			128.1			477.3
Less: Current portion	218.5			73.5			40.5			332.5
Obligations Under Supply and Offtake Agreements - Noncurrent portion	$	—		$	57.2		$	87.6		$	144.8
Other current receivable for monthly activity true-up	$	(16.4	)	$	(3.1	)	$	(3.5	)	$	(23.0	)

The El Dorado Supply and Offtake Agreement has a maturity date of April 30, 2020. The Big Spring and Krotz Springs Supply and Offtake Agreements expire in May 2021, except that J. Aron or Delek may elect to terminate in May 2020 on prior notice, as defined in those Agreements. The Big Spring and Krotz Springs Supply and Offtake Agreements were amended in November 2019 to require such notice prior to February 2020, and again in January, February and March 2020 to ultimately require such notice in April 2020. Subsequent to March 31, 2020, in April 2020, we amended and restated our three Supply and Offtake Agreements to renew and extend the terms to December 30, 2022, with J. Aron having the sole discretion to further extend to May 30, 2025. As part of this amendment, there were changes to the underlying market index, annual fee and the crude purchase fee.

The Supply and Offtake Agreements require payments of fees which are factored into the interest rate yield under the fair value accounting model. Recurring cash fees paid during the periods presented were as follows:

(in millions)	El Dorado		Big Spring		Krotz Springs		Total
Recurring cash fees paid during the three months ended March 31,2020	$	3.2	$	1.0	$	1.0	$	5.2
Recurring cash fees paid during the three months ended March 31, 2019	$	2.4	$	1.4	$	2.3	$	6.1

Interest expense recognized under the Supply and Offtake Agreements includes the yield attributable to recurring cash fees, one-time cash fees (e.g., in connection with amendments), as well as other changes in fair value, which may increase or decrease interest expense. Total interest expense incurred during the periods presented was as follows:

(in millions)	El Dorado		Big Spring			Krotz Springs		Total
Interest expense for the three months ended March 31, 2020	$	3.6	$	4.1		$	1.4	$	9.1
Interest expense for the three months ended March 31, 2019	$	3.1	$	(0.1	)	$	3.0	$	6.0

Reflected in interest expense are losses totaling $3.9 million and gains totaling $5.1 million for the three months March 31, 2020 and 2019, respectively, related to the changes in fair value in the Baseline Step-Out Liabilities component of Obligations Under Supply and Offtake Agreements.

We maintained letters of credit under the Supply and Offtake Agreements as follows:

(in millions)	El Dorado		Big Spring and Krotz Springs
Letters of credit outstanding as of March 31, 2020	$	150.0	$	10.0
Letters of credit outstanding as of December 31. 2019	$	180.0	$	44.0

In connection with the Krotz Springs Supply and Offtake Agreement, prior to September 30, 2019, we granted a security interest to J. Aron in certain assets (including all of its accounts receivable and inventory) to secure our obligations to J. Aron. Pursuant to an amendment to the security agreement effective September 30, 2019, no cash, deposit accounts or accounts receivable constitute collateral.