Crude Oil Supply and Inventory Purchase Agreement

3 Months Ended

Mar. 31, 2022

Other Liabilities Disclosure [Abstract]

Crude Oil Supply and Inventory Purchase Agreement

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, 2022 (1)	3.0	1.1	1.0
Barrels of inventory consigned under the respective Supply and Offtake Agreements as of December 31, 2021 (1)	3.5	1.3	1.2

(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.

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 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") 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 condensed consolidated balance sheet to the extent that they are not contractually due within twelve months. Monthly activity resulting in over and short volumes are be valued using market-indexed pricing, and are included in current liabilities (or receivables) on our condensed consolidated balance sheet.

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 (the "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 March 31, 2022, the fixed component of the Baseline Step-Out Liabilities subject to the Periodic Price Adjustments amounted to approximately $39.2 million. Some portion of that amount may become due or payable if Periodic Price Adjustments are triggered on the Periodic Pricing Dates.

Gains (losses) related to changes in fair value due to commodity-index price are recorded as a component of cost of materials and other in the consolidated statements of income. With respect to the Baseline Step-Out liabilities, we recognized gains (losses) in cost of materials and other attributable to changes in fair value due to commodity-index price totaling $148.8 million and $62.3 million for the three months ended March 31, 2022 and 2021, respectively.

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, 2022:
Baseline Step-Out Liability	$	232.4	$	97.8	$	149.1	$	479.3
Revolving over/short inventory financing liability	101.9		32.8		(24.7)		110.0
Total Obligations Under Supply and Offtake Agreements - Current portion	$	334.3	$	130.6	$	124.4	$	589.3
Other payable for monthly activity true-up	$	20.5	$	3.7	$	3.3	$	27.5

	El Dorado		Big Spring		Krotz Springs		Total
Balances as of December 31, 2021:
Baseline Step-Out Liability	$	159.6	$	68.4	$	102.4	$	330.4
Revolving over/short inventory financing liability (receivable)	120.9		41.1		(4.9)		157.1
Total Obligations Under Supply and Offtake Agreements - Current portion	$	280.5	$	109.5	$	97.5	$	487.5
Other (receivable) payable for monthly activity true-up	$	(2.7)	$	1.0	$	7.0	$	5.3

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 and recorded in interest expense. 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, 2022	$	2.9	$	1.0	$	1.1	$	5.0
Recurring cash fees paid during the three months ended March 31, 2021	$	2.4	$	0.7	$	1.1	$	4.2

We maintained letters of credit under the Supply and Offtake Agreements as follows (in millions):

	El Dorado
Letters of credit outstanding as of March 31, 2022	$	145.0
Letters of credit outstanding as of December 31, 2021	$	195.0