OIL - Delek US Holdings Reports Third Quarter 2021 Results

-- Reported third quarter net income of $18.1 million or $0.24 per share and adjusted EBITDA of $109.8 million

-- Improved operational performance and reliability drove significantly stronger EBITDA

-- Recognizing insurance proceeds from fire/freeze events in the first half of 2021

-- Competitive cost structure positions DK to capture improving margins

-- Continue working with EPA on small refinery exemptions (SRE's)

-- Recent all-time high in DKL units reduces DKL cost of capital and reinforces intrinsic value within DK

-- Wink to Webster pipeline JV poised to contribute to performance throughout 2022

-- Maintained strong balance sheet with $831 million of cash as of September 30, 2021

PR Newswire

BRENTWOOD, Tenn. , Nov. 4, 2021 /PRNewswire/ -- Delek US Holdings, Inc. (NYSE: DK) ("Delek US") today announced financial results for its third quarter ended September 30, 2021 . Delek US reported a third quarter 2021 net income of $18.1 million , or $0.24 per share, versus net loss of $(88.1) million , or $(1.20) per share, for the quarter ended September 30, 2020 . On an adjusted basis, Delek US reported Adjusted net income of $9.9 million , or $0.13 per share, for the third quarter 2021. This compares to Adjusted net loss of $(99.5) million , or $(1.35) per share, in the prior year. Adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") was $109.8 million for the third quarter compared to Adjusted EBITDA of $(11.2) million in the prior year.

Net income and Adjusted net income include approximately $11.2 million (after-tax), or $0.15 per share, of net tailwinds which is comprised of the following: $(3.0) million (pre-tax) representing the combined net effect of a favorable estimated "other inventory impact" and an unfavorable other net inventory hedging impact, as outlined on pages 14 and 10, respectively; a $21.5 million (pre-tax) one-time catch-up adjustment to capitalize manufacturing overhead in refining finished goods; and a $(4.1) million (pre-tax) incremental equity method investment loss related specifically to an agreement termination with a related joint venture that we also recognized. See further discussion in the Consolidated Results section below.

Uzi Yemin , Chairman, President and Chief Executive Officer of Delek US, stated, "After a challenging first half of 2021, improved operations and reliability are allowing us to capture the stronger market environment resulting in significantly stronger EBITDA. We have begun receiving insurance proceeds and continue working with our insurance carriers to offset financial impacts relating to the freeze and fire that occurred in the first half of the year. We also continue to engage with the EPA in pursuit of small refinery exemptions."

Mr. Yemin continued, "Midstream remains resilient with DKL on-track to deliver a 5% distribution increase on a full-year basis. DKL units recently traded at an all-time high, reflecting the significant value of DK's 80% ownership stake. Finally, the Wink to Webster project is expected to progressively ramp-up and contribute to performance throughout 2022."

Liquidity

As of September 30, 2021 , Delek US had a cash balance of $830.6 million and total consolidated long-term debt of $2,222.2 million , resulting in Net debt of $1,391.6 million .  As of September 30, 2021 , Delek Logistics Partners, LP (NYSE: DKL) ("Delek Logistics") had $901.4 million of total long-term debt and $4.9 million of cash, which are included in the consolidated amounts on Delek US' balance sheet. Excluding Delek Logistics, Delek US had approximately $825.7 million in cash and $1,320.8 million of long-term debt, or a $495.1 million Net debt position.

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Consolidated Results

Net income attributable to Delek increased in the third quarter 2021 to $18.1 million compared to $(88.1) million net loss in the third quarter 2020. On an adjusted basis, Adjusted net income was $9.9 million in Q3 2021 compared to Adjusted net loss of $(99.5) million in Q3 2020.

The increase in the current quarter Adjusted net income compared to the prior year quarter of $109.4 million is primarily attributable to the following (all after-tax): $96.1 million favorable change attributable to improvements in refining operating results and contribution margins compared to the prior year quarter; a $(22.7) million unfavorable net other inventory impact compared to the prior year quarter; a net unfavorable impact of $(1.6) million related to other inventory hedging gains/losses compared to the prior year quarter; and property and casualty insurance recoveries and WTW Contract Termination recoveries that related to expenses and expenditures we actually incurred, net of the related incremental equity method investment loss in W2W Holdings LLC ("WWP Project Financing JV"), totaling approximately $20.9 million ¹ . Additionally, we also recorded a one-time cumulative correcting adjustment to capitalize manufacturing overhead (including operating expenses and depreciation) in refining inventory related to prior years of $16.7 million ² (after-tax). See below for further discussion of operating results and contribution margin across our segments.

Refining Segment Results

Refining contribution margin increased to $91.4 million in the third quarter 2021 from $(17.8) million in the third quarter 2020, while Adjusted segment contribution margin was $91.8 million in the third quarter 2021 compared to $(21.2) million in the third quarter 2020. The current period Adjusted refining contribution margin reflects $8.9 million of favorable other inventory impact and $(11.9) million additional inventory hedging losses compared to $38.1 million and $0.9 million , respectively, in the third quarter 2020. Other inventory impacts, excluding lower of cost or market/net realizable value ("LCM"), are outlined by refinery in the tables on page 14. Additionally, Adjusted refining contribution margins were positively impacted by property and casualty insurance recoveries that related to expenses we actually incurred in previous quarters totaling $17.0 million , as well as a one-time cumulative adjustment to capitalize manufacturing overhead (excluding the depreciation component) in refining inventory related to prior years of $14.0 million ³ .

On a year-over-year basis, results increased primarily due to higher crack spreads as higher vaccination rates and a global economic recovery led to an increase in demand. During the third quarter 2021, Delek US's benchmark crack spreads were up an average of approximately 161.6% from prior-year levels. The refineries ability to capture the full crack spread increase was negatively impacted by higher RIN costs year over year.

Logistics Segment Results

The logistics segment contribution margin in the third quarter 2021 was $67.2 million compared to $67.2 million in the third quarter 2020, where Adjusted segment contribution margin was $67.3 million compared to $66.9 million in the prior year quarter. Higher refinery utilization and increased demand were partially offset by operating expenses associated with pipeline integrity work resulting in a year-over-year improvement in performance from our assets.

Retail Segment Results

For the third quarter 2021, contribution margin, on both a GAAP and Adjusted basis, was $17.9 million compared to $18.3 million in the prior-year period for the retail segment. Merchandise sales were approximately $81.7 million with an average retail margin of 33.7% in the third quarter 2021, compared to merchandise sales of approximately $86.8 million with an average retail margin of 31.6% in the prior-year period. Approximately 41.9 million retail fuel gallons were sold at an average margin of $0.33 per gallon in the third quarter 2021 compared to 45.1 million retail fuel gallons sold at an average margin of $0.31 per gallon in the third quarter 2020. In the third quarter 2021, the average merchandise store count was 250 compared to 253 in the prior-year period. On a same-store-sales basis in the third quarter 2021, merchandise sales decreased (7.1)% and fuel gallons sold decreased (5.9)% compared to the prior-year period.

Corporate and Other Activity

Contribution margin from Corporate, Other and Eliminations was a loss of $12.9 million in the third quarter 2021 compared to a loss of $20.4 million in the prior-year period, where Adjusted contribution margin was a $12.9 million loss compared to an $31.7 million loss in the same quarter of 2020, where these amounts include inter-segment eliminations.

The Wink to Webster crude oil pipeline, currently flowing through the consolidated equity method investment line, is in its final construction phase. The 36-inch diameter pipeline, which is fully contracted with minimum volume commitments (MVCs), will originate in the Permian Basin and have destination points in the Houston market.

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Third Quarter 2021 Results | Conference Call Information

Delek US will hold a conference call to discuss its third quarter 2021 results on Friday, November 5, 2021 at 8:00 a.m. Central Time . Investors will have the opportunity to listen to the conference call live by going to www.DelekUS.com and clicking on the Investor Relations tab. Participants are encouraged to register at least 15 minutes early to download and install any necessary software. Presentation materials accompanying the call will be available on the investor relations tab of the Delek US website approximately ten minutes prior to the start of the call. For those who cannot listen to the live broadcast, the online replay will be available on the website for 90 days.

Investors may also wish to listen to Delek Logistics' (NYSE: DKL) third quarter 2021 earnings conference call that will be held on Friday, November 5, 2021 at 7:00 a.m. Central Time and review Delek Logistics' earnings press release. Market trends and information disclosed by Delek Logistics may be relevant to the logistics segment reported by Delek US. Both a replay of the conference call and press release for Delek Logistics will be available online at www.deleklogistics.com .

About Delek US Holdings, Inc.

Delek US Holdings, Inc. is a diversified downstream energy company with assets in petroleum refining, logistics, renewable fuels and convenience store retailing.The refining assets consist primarily of refineries operated in Tyler and Big Spring, Texas , El Dorado, Arkansas and Krotz Springs, Louisiana with a combined nameplate crude throughput capacity of 302,000 barrels per day.

The logistics operations primarily consist of Delek Logistics Partners, LP (NYSE: DKL). Delek US Holdings, Inc. and its affiliates own approximately 80% (including the general partner interest) of Delek Logistics Partners, LP. Delek Logistics Partners, LP is a growth-oriented master limited partnership focused on owning and operating midstream energy infrastructure assets.

The convenience store retail operates approximately 250 convenience stores in central and West Texas and New Mexico .

Safe Harbor Provisions Regarding Forward-Looking Statements

This press release contains forward-looking statements that are based upon current expectations and involve a number of risks and uncertainties. Statements concerning current estimates, expectations and projections about future results, performance, prospects, opportunities, plans, actions and events and other statements, concerns, or matters that are not historical facts are "forward-looking statements," as that term is defined under the federal securities laws. These statements contain words such as "possible," "believe," "should," "could," "would," "predict," "plan," "estimate," "intend," "may," "anticipate," "will," "if", "potential," "expect" or similar expressions, as well as statements in the future tense. These forward-looking statements include, but are not limited to, statements regarding throughput at the Company's refineries; crude oil prices, discounts and quality and our ability to benefit therefrom; share repurchases; cost reductions; payments of dividends; growth; investments into our business; the performance and execution of our midstream growth initiatives, including the Big Spring Gathering System, the Red River joint venture and the Wink to Webster long-haul crude oil pipeline, and the flexibility, benefits and the expected returns therefrom; RINs waivers and tax credits and the value and benefit therefrom; cash and liquidity; opportunities and anticipated performance and financial position.

Investors are cautioned that the following important factors, among others, may affect these forward-looking statements. These factors include, but are not limited to: uncertainty related to timing and amount of future share repurchases and dividend payments; risks and uncertainties with respect to the quantities and costs of crude oil we are able to obtain and the price of the refined petroleum products we ultimately sell, uncertainties regarding future decisions by OPEC regarding production and pricing disputes between OPEC members and Russia ; uncertainty relating to the impact of the COVID-19 outbreak on the demand for crude oil, refined products and transportation and storage services; Delek US' ability to realize cost reductions; risks related to Delek US' exposure to Permian Basin crude oil, such as supply, pricing, gathering, production and transportation capacity; gains and losses from derivative instruments; risks associated with acquisitions and dispositions; acquired assets may suffer a diminishment in fair value as a result of which we may need to record a write-down or impairment in carrying value of the asset; the possibility of litigation challenging renewable fuel standard waivers; changes in the scope, costs, and/or timing of capital and maintenance projects; the ability to grow the Big Spring Gathering System; the ability of the Red River joint venture to complete the expansion project to increase the Red River pipeline capacity; the ability of the joint venture to construct the Wink to Webster long haul crude oil pipeline; operating hazards inherent in transporting, storing and processing crude oil and intermediate and finished petroleum products; our competitive position and the effects of competition; the projected growth of the industries in which we operate; general economic and business conditions affecting the geographic areas in which we operate; and other risks described in Delek US' filings with the United States Securities and Exchange Commission (the "SEC"), including risks disclosed in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other filings and reports with the SEC.

Forward-looking statements should not be read as a guarantee of future performance or results and will not be accurate indications of the times at, or by, which such performance or results will be achieved.  Forward-looking information is based on information available at the time and/or management's good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements.  Delek US undertakes no obligation to update or revise any such forward-looking statements to reflect events or circumstances that occur, or which Delek US becomes aware of, after the date hereof, except as required by applicable law or regulation.

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Non-GAAP Disclosures:

Our management uses certain "non-GAAP" operational measures to evaluate our operating segment performance and non-GAAP financial measures to evaluate past performance and prospects for the future to supplement our GAAP financial information presented in accordance with U.S. GAAP. These financial and operational non-GAAP measures are important factors in assessing our operating results and profitability and include:

• Adjusting items - certain identified infrequently occurring items, non-cash items, and items that are not attributable to or indicative of our on-going operations or that may obscure our underlying results and trends;
• Adjusted net income (loss) - calculated as net income attributable to Delek US adjusted for relevant Adjusting items recorded during the period;
• Adjusted net income (loss) per share - calculated as Adjusted net income (loss) divided by weighted average shares outstanding, assuming dilution, as adjusted for any anti-dilutive instruments that may not be permitted for consideration in GAAP earnings per share calculations but that nonetheless favorably impact dilution;
• Earnings before interest, taxes, depreciation and amortization ("EBITDA") - calculated as net income attributable to Delek adjusted to add back interest expense, income tax expense, depreciation and amortization;
• Adjusted EBITDA - calculated as EBITDA adjusted for the relevant identified Adjusting items in Adjusted net income (loss) that do not relate to interest expense, income tax expense, depreciation or amortization, and adjusted to include income (loss) attributable to non-controlling interests;
• Adjusted segment contribution margin - calculated as Segment contribution margin adjusted for the identified Adjusting Items in Adjusted net income (loss) that impact Segment contribution margin;
• Refining margin - calculated as the difference between total refining revenues and total cost of materials and other;
• Adjusted refining margin - calculated as refining margin adjusted for the relevant identified Adjusting items in Adjusted net income (loss) that impact refining margin and that, where applicable, can be identified and/or are measured and recognized at the refinery level;
• Refining margin per sales barrel - calculated as refining margin divided by our average refining sales in barrels per day (excluding purchased barrels) multiplied by 1,000 and multiplied by the number of days in the period;
• Adjusted refining margin per sales barrel - calculated as adjusted refining margin divided by our average refining sales in barrels per day (excluding purchased barrels) multiplied by 1,000 and multiplied by the number of days in the period; and
• Net debt - calculated as long-term debt including both current and non-current portions (the most comparable GAAP measure) less cash and cash equivalents as of a specific balance sheet date.

We believe these non-GAAP operational and financial measures are useful to investors, lenders, ratings agencies and analysts to assess our ongoing performance because, when reconciled to their most comparable GAAP financial measure, they provide improved relevant comparability between periods, to peers or to market metrics through the inclusion of retroactive regulatory or other adjustments as if they had occurred in the prior periods they relate to, or through the  exclusion of certain items that we believe are not indicative of our core operating performance and that may obscure our underlying results and trends. "Net debt," also a non-GAAP financial measure,  is an important measure to monitor leverage and evaluate the balance sheet.

Non-GAAP measures have important limitations as analytical tools, because they exclude some, but not all, items that affect net earnings and operating income. These measures should not be considered substitutes for their most directly comparable U.S. GAAP financial measures.  Additionally, because Adjusted net income or loss, Adjusted net income or loss per share, EBITDA and adjusted EBITDA, and Adjusted Segment Contribution Margin or any of our other identified non-GAAP measures may be defined differently by other companies in its industry, Delek US' definition may not be comparable to similarly titled measures of other companies. See the accompanying tables in this earnings release for a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures.

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Significant Transactions During the Quarter Impacting Results:

Property and Casualty Insurance Recoveries

During the quarter, we received insurance recoveries related to the fire and freeze events that occurred during the first quarter 2021, and which unfavorably impacted our results during the first two quarters of 2021. To date, we have recognized approximately $21.4 million ( $16.6 million after-tax) of insurance recoveries all related to property and casualty claims, $4.4 million of which related to replacement cost coverage on property losses and which helps offset corresponding capital expenditures, and the remaining $17.0 million of which relates to repairs and other operating expenses incurred in connection with our property and casualty damages. Neither property and damage repairs and expenses impacting operating expenses, nor related insurance recoveries, meet our requirements for Adjusting items in Adjusted net income or Adjusted EBITDA. We have additional property and casualty claims, as well as business interruption claims, that are outstanding and still pending, and which are expected to be recognized in future quarters. The proceeds related to recovery of property and casualty related operating expenses have no economic impact on Adjusted net income or Adjusted EBITDA for the nine months ended September 30, 2021 because they are 100% offset by related expenses we incurred during that period.

Contract Termination Recoveries

During the quarter, the Wink to Webster Pipeline LLC (the "WTW Pipeline JV") partners made the decision to buy Delek out of the Midland Connector Financing Commitment Agreement, which provided an interest-free commitment to fund Delek up to $65 million upon completion of a connector to connect the Wink -to- Webster long-haul pipeline to our Big Spring Gathering System, with repayment over 14 years ("WTW Contract Termination"). The buy-out totaled $27.5 million and enabled us to recover approximately $17.3 million of capital expenditures that we may not have incurred had it not been for the financing commitment, including approximately $6.6 million that was written off during the third quarter, as in-substance indemnification. As a result of the transaction, we recognized $20.9 million of other non-operating income in the third quarter, representing the excess over our current period recognized write-offs. Of that total excess, $10.2 million has been included as an adjusting item in Adjusted net income because it represents the portion that exceeds our total related expenditures that have or will impact results of operations, and all $20.9 million has been included as an adjusting item in Adjusted EBITDA representing the portion that exceeds the related component of our expenditures that has or will impact EBITDA. We also recognized our portion of the WTW Pipeline JV's expense associated with this buy-out resulting in an incremental equity method loss of $(4.1) million on our WWP Project Financing JV investment (which owns a 15% interest in the WWP Pipeline JV) during the third quarter that does not meet the criteria for adjustment but represents part of the economics of the transaction. The net economic impact of this transaction on Adjusted net income was $6.6 million (pre-tax) (or the recoveries not adjusted net of the related incremental equity method loss) for the three and nine months ended September 30, 2021 . There is no economic impact on Adjusted EBITDA other than the recognition of the incremental equity method loss of $(4.1) million for the three and nine months ended September 30, 2021 .

Immaterial Cumulative Correction to Refining Inventory

The third quarter results were adjusted to correct an immaterial prior period error relating to $21.5 million ( $16.7 million after-tax) of manufacturing overhead costs that should have been included in refining finished goods inventory as of prior periods. Of that amount, $14.0 million was recognized as a reduction of operating expenses and $7.5 million was recognized as a reduction of depreciation in the refining segment. The impact of this cumulative balance sheet error correction on specific refining segment contribution margins is shown in the Other Items Impacting Contribution section on page 9. As a result of the error correction, the inventory balance has been corrected as of September 30, 2021 .

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Other Items Impacting Contribution Margin:

In addition to the items that were reflected as adjustments for deriving our Adjusted segment contribution margin (as presented on page 20), there were other items that were recognized during the periods that impacted our Segment contribution margins. The primary items are as follows:

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Other Items Impacting Refining Margin:

In addition to the items that were reflected as adjustments for deriving our Adjusted refining margin, which then was used to calculate Adjusted refining margin per barrel presented on page 13, there were other items that were recognized during the periods that impacted our Refining margins at the refineries. The primary items are as follows:

Other Inventory Impact : "Other inventory impact" is primarily calculated by multiplying the number of barrels sold during the period by the difference between current period weighted average purchase cost per barrel and per barrel cost of materials and other for the period recognized on a FIFO basis. It assumes no beginning or ending inventory, so that the current period average purchase cost per barrel is a reasonable estimate of our market purchase cost for the current period, without giving effect to any build or draw on beginning inventory. These amounts are based on management estimates using a methodology including these assumptions, and are not intended to be a representation of results under LIFO. However, this analysis provides management with a means to compare hypothetical refining margins to current period average crack spreads, as well as provides a means to better compare our results to peers.

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Included in the refinery statistics above are the following inter-refinery and sales to other segments:

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Information about Delek US Holdings, Inc. can be found on its website ( www.delekus.com ), investor relations webpage (ir.delekus.com), news webpage ( www.delekus.com/news ) and its Twitter account (@DelekUSHoldings).

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SOURCE Delek US Holdings, Inc.