Crude Oil Supply and Inventory Purchase Agreement

6 Months Ended

Jun. 30, 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 June 30, 2020 (1)	3.5	1.6	1.4
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 subsequent changes in fair value of the Baseline Step-Out Liabilities were recorded in interest expense.

In January 2020, we amended 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 subsequent 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.

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 by giving at least 6 months prior notice to the current maturity date. As part of this amendment, there were changes to the underlying market index, annual fee, the crude purchase fee, crude roll fees and timing of cash settlements related to periodic price adjustments (the "Periodic Price Adjustments"). The Baseline Step-Out Liabilities continue to be recorded at fair value under the fair value election included under ASC 815 and ASC 825. The Baseline Step-Out Liabilities have a floating component whose fair value reflects changes to commodity price risk with changes in fair value recorded in cost of materials and other and a fixed component whose fair value reflects changes to interest rate risk with changes in fair value recorded in interest expense. There was no amendment date 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.

Pursuant to the Periodic Price Adjustments provision in the Supply and Offtake Agreements, the Company may be required to pay down all or a portion of the fixed component of the Baseline Step-Out Liabilities or may receive additional proceeds depending on the change in fair value of the inventory collateral subject to a threshold at certain specified Periodic Pricing Dates, which occur on October 1st and May 1st, annually, not to extend beyond expiration of the Supply and Offtake Agreements. Additionally, at the Periodic Pricing Dates, if a Periodic Price Adjustment is triggered, the prospective pricing underlying the fixed component of the Baseline Step-Out Liabilities will be adjusted to reflect either the pay-down or the incremental proceeds, accordingly. As of June 30, 2020, the fixed component of the Baseline Step-Out Liabilities subject to the Periodic Price Adjustments amounted to approximately $58.8 million. All or some portion of that amount may become due or payable in periods occurring within twelve months, if Periodic Price Adjustments are triggered in October 2020 and May 2021.

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 June 30, 2020:
Baseline Step-Out Liability	$	97.9	$	48.0		$	69.1	$	215.0
Revolving over/short inventory financing liability	63.6		30.7			4.7		99.0
Total Obligations Under Supply and Offtake Agreements	161.5		78.7			73.8		314.0
Less: Current portion	63.6		30.7			4.7		99.0
Obligations Under Supply and Offtake Agreements - Noncurrent portion	$	97.9	$	48.0		$	69.1	$	215.0
Other current payable (receivable) for monthly activity true-up	$	7.0	$	(8.8	)	$	7.4	$	5.6

(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 inventory 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 Supply and Offtake Agreements require payments of fixed annual 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 June 30, 2020	$	2.7	$	1.1	$	1.0	$	4.8
Recurring cash fees paid during the three months ended June 30, 2019	$	3.2	$	1.5	$	2.6	$	7.3
Recurring cash fees paid during the six months ended June 30,2020	$	5.9	$	2.1	$	2.0	$	10.0
Recurring cash fees paid during the six months ended June 30, 2019	$	5.7	$	2.9	$	5.0	$	13.6

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 June 30, 2020	$	2.7	$	1.1	$	1.0	$	4.8
Interest expense for the three months ended June 30, 2019	$	4.1	$	1.7	$	2.9	$	8.7
Interest expense for the six months ended June 30, 2020	$	6.3	$	5.2	$	2.4	$	13.9
Interest expense for the six months ended June 30, 2019	$	7.3	$	1.6	$	6.0	$	14.9

Reflected in interest expense are losses totaling $3.9 million for the six months ended June 30, 2020, and losses totaling $1.4 million and gains totaling $3.7 million for the three and six months ended June 30, 2019, respectively, related to the changes in fair value in the Baseline Step-Out Liabilities component of Obligations Under Supply and Offtake Agreements. There were no such gains or losses for three months ended June 30, 2020.

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	June 30, 2020	$	170.0	$	10.0
Letters of credit outstanding as of	December 31, 2019	$	180.0	$	44.0