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| DK > SEC Filings for DK > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
• changes in, or the failure to comply with, the extensive government regulations applicable to our industry segments;
• decreases in our refining margins or fuel gross profit as a result of increases in the prices of crude oil, other feedstocks and refined petroleum products;
• our ability to execute our strategy of growth through acquisitions and transactional risks in acquisitions;
• general economic and business conditions, particularly levels of spending relating to travel and tourism or conditions affecting the southeastern United States;
• dependence on one wholesaler for a significant portion of our convenience store merchandise;
• unanticipated increases in cost or scope of, or significant delays in the completion of our capital improvement projects;
• risks and uncertainties with respect to the quantities and costs of refined petroleum products supplied to our pipelines and/or held in our terminals;
• operating hazards, natural disasters, casualty losses and other matters beyond our control;
• increases in our debt levels;
• compliance, or failure to comply, with restrictive and financial covenants in our various debt agreements;
• seasonality;
• terrorist attacks;
• volatility of derivative instruments;
• potential conflicts of interest between our major stockholder and other stockholders; and
• other factors discussed under the heading "Managements Discussion and Analysis" and in our other filings with the SEC.
In light of these risks, uncertainties and assumptions, our actual results of
operations and execution of our business strategy could differ materially from
those expressed in, or implied by, the forward-looking statements, and you
should not place undue reliance upon them. In addition, past financial and/or
operating performance is not necessarily a reliable indicator of future
performance and you should not use our historical performance to anticipate
results or future period trends. We can give no assurances that any of the
events anticipated by the forward-looking statements will occur or, if any of
them do, what impact they will have on our results of operations and financial
condition.
Forward-looking statements speak only as of the date the statements are made.
We assume no obligation to update forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting
forward-looking information except to the extent required by applicable
securities laws. If we do update one or more forward-looking statements, no
inference should be drawn that we will make additional updates with respect
thereto or with respect to other forward-looking statements.
Overview
We are a diversified energy business focused on petroleum refining, wholesale
sales of refined products and retail marketing. Our business consists of three
operating segments: refining, marketing and retail. Our refining segment owns a
high conversion, moderate complexity independent refinery in Tyler, Texas, with
a design crude distillation capacity of 60,000 barrels per day (bpd) and light
products loading facilities. Our marketing segment sells refined products on a
wholesale basis in east and west Texas through company-owned and third-party
operated terminals and crude oil pipelines and owns and leases certain refined
product and crude oil storage facilities. Our retail segment markets gasoline,
diesel, other refined petroleum products and convenience merchandise through a
network of 452 company-operated retail fuel and convenience stores located in
Alabama, Arkansas, Georgia, Kentucky, Louisiana, Mississippi, Tennessee and
Virginia. Of these 452 locations, the 9 stores located in Virginia are currently
classified as held for sale for accounting purposes. Additionally, we own a
minority interest in Lion Oil Company (Lion Oil), a privately-held Arkansas
corporation, which operates a 75,000 bpd moderate complexity crude oil refinery
located in El Dorado, Arkansas and other pipeline and product terminals.
The cost to acquire feedstocks and the price of the refined petroleum
products we ultimately sell from our refinery depend on numerous factors beyond
our control, including the supply of, and demand for, crude oil, gasoline and
other refined petroleum products which, in turn, depend on, among other factors,
changes in domestic and foreign economies, weather conditions, domestic and
foreign political affairs, global conflict, production levels, the availability
of imports, the marketing of competitive fuels and government regulation. Other
significant factors that influence our results in our refining segment include
the cost of crude, our primary raw material, the refinery's operating costs,
particularly the cost of natural gas used for fuel and the cost of electricity,
seasonal factors, refinery utilization rates and planned or unplanned
maintenance activities or turnarounds.
The pricing of our refined petroleum products fluctuate significantly with
movements in both crude oil and refined petroleum product markets. Both the
spread between crude oil and refined petroleum product prices, and more recently
the time lag between the fluctuations in those prices, affect our earnings. We
compare our per barrel refining operating margin to certain industry benchmarks,
specifically the U.S. Gulf Coast 5-3-2 crack spread. The U.S. Gulf Coast 5-3-2
crack spread represents the differential between Platt's quotations for 3/5 of a
barrel of U.S. Gulf Coast Pipeline 87 Octane Conventional Gasoline and 2/5 of a
barrel of U.S. Gulf Coast Pipeline No. 2 Heating Oil (high sulfur diesel) and
the first month futures price of 5/5 of a barrel of light sweet crude oil on the
New York Mercantile Exchange.
While the increases in the cost of crude oil are reflected in the changes of
light refined products over time, the value of heavier products, such as fuel
oil, asphalt and coke, do not always move in parallel with crude cost. These
disparities in markets may cause additional pressure on our refining margins.
As we have previously reported, on November 20, 2008, an explosion and fire
occurred at our refinery in Tyler, Texas which halted our production. The
explosion and fire caused damage to both our saturates gas plant and naphtha
hydrotreater and resulted in an immediate suspension of our refining operations.
The refinery was subject to a gradual, monitored restart in early May 2009,
culminating in a full resumption of operations on May 18, 2009. For the nine
months ended September 30, 2009, the refinery was fully operational for a total
of 136 days.
We carry insurance coverage with $1.0 billion in combined limits to insure
property damage and business interruption, which is likely to cover the bulk of
the reconstruction and business interruption expenses that we incur during the
transitional recovery period. Thus far, through September 30, 2009, we have
recorded insurance proceeds of $100.2 million, of which $64.1 million is
included as business interruption proceeds and $36.1 million is included as
property damage proceeds. We also recorded expenses of $11.4 million, resulting
in a net gain of $24.7 million related to property damage proceeds. The final
total insurance claim has not yet been resolved for a number of reasons,
including, without limitation, the interpretation of insurance policy
provisions, the length of the insurance claim, insurance deductible amounts and
periods, market conditions that affect projected revenues and firm profits,
actual operating and rebuild costs and expenses, additional or revised
information, audit adjustments and other verifications of the insurance claim
and subsequent events.
The cost to acquire the refined fuel products we sell to our wholesale
customers in our marketing segment and at our convenience stores in our retail
segment depends on numerous factors beyond our control, including the supply of,
and demand for, crude oil, gasoline and other refined petroleum products which,
in turn, depends on, among other factors, changes in domestic and foreign
economies, weather conditions, domestic and foreign political affairs,
production levels, the availability of imports, the marketing of competitive
fuels and government regulation. Our retail merchandise sales are driven by
convenience, customer service, competitive pricing and branding. Motor fuel
margin is sales less the delivered cost of fuel and motor fuel taxes, measured
on a cents per gallon basis. Our motor fuel margins are impacted by local
supply, demand, weather, competitor pricing and product brand.
As part of our overall business strategy, we regularly evaluate opportunities
to expand and complement our business and may at any time be discussing or
negotiating a transaction that, if consummated, could have a material effect on
our business, financial condition, liquidity or results of operations.
Executive Summary of Recent Developments
Refining segment activity
The third quarter of 2009 was the first full quarter of operations for the
Tyler refinery since the suspension of operations due to the explosion and fire
that occurred in the fourth quarter of 2008.
For the third quarter of 2009, capacity utilization at the refinery was
82.6%, as compared to 86.0% in the same quarter 2008. We produced 54,092 barrels
per day in the 2009 third quarter, versus 55,339 barrels per day in the 2008
third quarter.
During the third quarter of 2009, we sought to optimize our production slate
to take advantage of a gasoline crack which, while weak, was still stronger than
the distillate crack. As a result, 55.0% of our total production was gasoline,
while 36.2% was distillate and 8.8% was residual products.
Marketing segment activity
Our marketing segment generated net sales for the 2009 third quarter of
$90.1 million on sales of approximately 11,897 barrels per day of refined
products compared to $224.9 million on sales of approximately 16,900 barrels per
day in the third quarter of 2008. Inventories of refined products in central
Texas rose to unusually high levels during the period. Refined product volumes
that are typically shipped by competitors into upper Midwestern markets remained
in central Texas during the period, as summer demand in the outside markets
declined below historical levels. Given these competitive dynamics, sales and
profit margins within the marketing segment were under pressure during the third
quarter of 2009.
Retail segment activity
In the third quarter of 2009, the retail segment reported positive same-store
gallons sold and positive same-store merchandise sales when compared to the same
quarter of 2008. We believe that a combination of lower fuel prices and
stabilization in unemployment rates in certain of our core markets in Tennessee
and Georgia have helped contribute to this improvement.
Market Trends
Our results of operations are significantly affected by the cost of
commodities. Sudden change in petroleum prices is our primary source of market
risk. Our business model is affected more by the volatility of petroleum prices
than by the cost of the petroleum that we sell.
We continually experience volatility in the energy markets. Concerns about
the U.S. economy and continued uncertainty in several
oil-producing regions of the world resulted in volatility in the price of crude
oil and product prices in 2009 and 2008. The average price of crude oil in the
third quarters of 2009 and 2008 was $68.24 and $118.70 per barrel, respectively.
The U.S. Gulf Coast 5-3-2 crack spread ranged from a high of $11.82 per barrel
to a low of $1.89 per barrel and averaged $6.38 per barrel during the third
quarter of 2009, compared to an average of $15.08 in the third quarter of 2008.
We also continue to experience high volatility in the wholesale cost of fuel.
The U.S. Gulf Coast price for unleaded gasoline ranged from a low of $1.59 per
gallon to a high of $2.03 per gallon during the third quarter of 2009 and
averaged $1.81 per gallon in the 2009 third quarter, which compares to an
average of $3.12 per gallon in the third quarter of 2008. If this volatility
continues and we are unable to fully pass our cost increases on to our
customers, our retail fuel margins will decline.
The cost of natural gas used for fuel in our Tyler refinery has also shown
historic volatility. Our average cost of natural gas decreased to $3.15 per
million British Thermal Units (MMBtu) in the third quarter of 2009 from $9.12
per million MMBtu in the third quarter of 2008.
As part of our overall business strategy, management determines, based on the
market and other factors, whether to maintain, increase or decrease inventory
levels of crude or other intermediate feedstocks. At the end of 2008, we reduced
certain of our crude and feedstock inventories primarily as a result of the
refinery shutdown resulting from the fire in November 2008. In April 2009, in
preparation for the reinitiating of operations at the refinery, we resumed
purchasing activities and began building crude and intermediate inventories to
appropriate, on-going operating levels.
Factors Affecting Comparability
The comparability of our results of operations for the three and nine months
ended September 30, 2009 compared to the three and nine months ended
September 30, 2008 is affected by the following factors:
• The explosion and fire at the Tyler, Texas refinery on November 20, 2008
which shut down operations at the refinery for a portion of the nine months
ended September 30, 2009. Operations fully resumed on May 18, 2009.
• Volatile commodity prices in both 2009 and 2008, which have dramatically impacted sales and costs of sales, and
• Change in the accounting for the investment in Lion Oil from the equity method to the cost method.
Summary Financial and Other Information
The following table provides summary financial data for Delek.
Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 2009 2008
(In millions, except share and per share data)
Net sales:
Refining $ 368.2 $ 670.5 $ 522.9 $ 1,856.6
Marketing 90.1 224.9 259.9 645.7
Retail 365.2 506.9 990.5 1,454.3
Other (5.6 ) 0.2 (7.2 ) 0.5
Total 817.9 1,402.5 1,766.1 3,957.1
Operating costs and expenses:
Cost of goods sold 745.1 1,271.2 1,562.9 3,654.7
Operating expenses 55.6 64.0 154.8 179.8
Insurance proceeds - business
interruption (6.0 ) - (64.1 ) -
Property damage proceeds, net (5.8 ) - (24.7 ) -
General and administrative expenses 15.4 16.3 45.6 41.9
Depreciation and amortization 13.9 10.3 36.6 28.1
Loss (gain) on sale of assets 1.9 (4.0 ) 1.9 (6.9 )
Total operating costs and expenses 820.1 1,357.8 1,713.0 3,897.6
Operating income (2.2 ) 44.7 53.1 59.5
Interest expense 6.8 6.5 17.2 18.2
Interest income - (0.4 ) (0.1 ) (2.0 )
Loss from equity method investment - 0.8 - 7.9
Other expenses (income), net (1.4 ) 0.1 0.6 0.8
Total non-operating expenses 5.4 7.0 17.7 24.9
Income (loss) from continuing operations
before income tax expense (benefit) (7.6 ) 37.7 35.4 34.6
Income tax expense (benefit) (2.5 ) 13.3 12.6 12.1
Income (loss) from continuing operations (5.1 ) 24.4 22.8 22.5
Income (loss) from discontinued
operations, net of tax 0.3 1.0 (1.0 ) 1.9
Net income (loss) $ (4.8 ) $ 25.4 $ 21.8 $ 24.4
Basic earnings per share:
Income (loss) from continuing operations $ (0.10 ) $ 0.45 $ 0.43 $ 0.41
Income (loss) from discontinued
operations 0.01 0.02 (0.02 ) 0.04
Total basic earnings per share $ (0.09 ) $ 0.47 $ 0.41 $ 0.45
Diluted earnings per share:
Income (loss) from continuing operations $ (0.10 ) $ 0.45 $ 0.42 $ 0.41
Income (loss) from discontinued
operations 0.01 0.02 (0.02 ) 0.04
Total diluted earnings per share $ (0.09 ) $ 0.47 $ 0.40 $ 0.45
Weighted average common shares
outstanding:
Basic 53,700,497 53,680,570 53,690,793 53,673,290
Diluted 53,700,497 54,380,835 54,449,404 54,414,106
Dividends declared per common share
outstanding $ 0.0375 $ 0.0375 $ 0.1125 $ 0.1125
Cash Flow Data:
Cash flows provided by operating
activities $ 151.3 $ 98.4
Cash flows used in investing activities (105.1 ) (38.2 )
Cash flows provided by (used in)
financing activities 46.2 (85.8 )
Net increase (decrease) in cash and cash
equivalents $ 92.4 $ (25.6 )
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As of and For the Three Months Ended September 30, 2009
Corporate,
Other and
Refining Retail Marketing Eliminations Consolidated
Net sales (excluding intercompany marketing fees and sales) $ 366.1 $ 365.2 $ 86.5 $ 0.1 $ 817.9
Intercompany marketing fees and sales 2.1 - 3.6 (5.7 ) -
Operating costs and expenses:
Cost of goods sold 347.5 315.1 85.7 (3.2 ) 745.1
Operating expenses 24.1 33.4 0.5 (2.4 ) 55.6
Insurance proceeds - business interruption (6.0 ) - - - (6.0 )
Property damage proceeds, net (5.8 ) - - - (5.8 )
Segment contribution margin $ 8.4 $ 16.7 $ 3.9 $ - 29.0
General and administrative expenses 15.4
Depreciation and amortization 13.9
Loss on sale of assets 1.9
Operating income $ (2.2 )
Total assets $ 554.0 $ 434.6 $ 67.4 $ 210.6 $ 1,266.6
Capital spending (excluding business combinations) $ 7.9 $ 4.2 $ - $ - $ 12.1
As of and For the Three Months Ended September 30, 2008
Corporate,
Other and
Refining Retail(1) Marketing Eliminations Consolidated
Net sales (excluding
intercompany marketing fees and
sales) $ 675.3 $ 506.9 $ 220.1 $ 0.2 $ 1,402.5
Intercompany marketing fees and
sales (4.8 ) - 4.8 - -
Operating costs and expenses:
Cost of goods sold 612.8 450.0 217.4 (9.0 ) 1,271.2
Operating expenses 28.1 35.4 0.4 0.1 64.0
Segment contribution margin $ 29.6 $ 21.5 $ 7.1 $ 9.1 67.3
General and administrative
expenses 16.3
Depreciation and amortization 10.3
Gain on sale of assets (4.0 )
Operating income $ 44.7
Total assets $ 457.1 $ 505.2 $ 85.3 $ 195.1 $ 1,242.7
Capital spending (excluding
business combinations) $ 15.8 $ 3.5 $ 0.2 $ - $ 19.5
For the Nine Months Ended September 30, 2009
Corporate,
Other and
Refining Retail Marketing Eliminations Consolidated
Net sales (excluding
intercompany marketing fees and
sales) $ 528.2 $ 990.5 $ 246.9 $ 0.5 $ 1,766.1
Intercompany marketing fees and
sales (5.3 ) - 13.0 (7.7 ) -
Operating costs and expenses:
Cost of goods sold 465.6 858.6 242.4 (3.7 ) 1,562.9
Operating expenses 60.0 98.3 0.9 (4.4 ) 154.8
Insurance proceeds - business
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