# Delek US Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2022 - Company: [Delek US Holdings, Inc.](/companies/dk.md) (CIK 1694426) - Form: 10-Q - Filed: 2022-11-08 - Accepted by EDGAR: Nov 8, 2022, 14:48 ET - Period: 2022-09-30 - Accession: 0001694426-22-000159 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1694426/000169442622000159/dk-20220930.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1694426/000169442622000159/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2022-09-30. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2022-07-01 to 2022-09-30 | $5.32bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Revenue | 9 months, 2022-01-01 to 2022-09-30 | $15.77bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Cost of revenue | 3 months, 2022-07-01 to 2022-09-30 | $5.18bn | us-gaap:CostOfRevenue | | Cost of revenue | 9 months, 2022-01-01 to 2022-09-30 | $14.87bn | us-gaap:CostOfRevenue | | Selling, general and administrative | 3 months, 2022-07-01 to 2022-09-30 | $62.4m | us-gaap:SellingGeneralAndAdministrativeExpense | | Selling, general and administrative | 9 months, 2022-01-01 to 2022-09-30 | $242.0m | us-gaap:SellingGeneralAndAdministrativeExpense | | Operating income | 3 months, 2022-07-01 to 2022-09-30 | $53.0m | us-gaap:OperatingIncomeLoss | | Operating income | 9 months, 2022-01-01 to 2022-09-30 | $593.0m | us-gaap:OperatingIncomeLoss | | Income tax | 3 months, 2022-07-01 to 2022-09-30 | $4.0m | us-gaap:IncomeTaxExpenseBenefit | | Income tax | 9 months, 2022-01-01 to 2022-09-30 | $107.5m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2022-07-01 to 2022-09-30 | $7.4m | us-gaap:NetIncomeLoss | | Net income | 9 months, 2022-01-01 to 2022-09-30 | $375.8m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.10 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | $5.21 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.11 | us-gaap:EarningsPerShareBasic | | Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | $5.26 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 71,109,364 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 72,148,638 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | $716.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 9 months, 2022-01-01 to 2022-09-30 | $192.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Dividends paid | 9 months, 2022-01-01 to 2022-09-30 | $28.3m | us-gaap:PaymentsOfDividends | | Share repurchases | 9 months, 2022-01-01 to 2022-09-30 | $64.0m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Cash and equivalents | at 2022-09-30 | $1.15bn | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2022-09-30 | $4.03bn | us-gaap:AssetsCurrent | | Total assets | at 2022-09-30 | $8.40bn | us-gaap:Assets | | Current liabilities | at 2022-09-30 | $3.83bn | us-gaap:LiabilitiesCurrent | | Long-term debt | at 2022-09-30 | $2.67bn | us-gaap:LongTermDebtNoncurrent | | Current portion of debt | at 2022-09-30 | $63.0m | us-gaap:LongTermDebtCurrent | | Shareholders' equity | at 2022-09-30 | $1.28bn | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest | ## Management's discussion and analysis As filed, 126,353 characters. Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is management’s analysis of our financial performance and of significant trends that may affect our future performance. The MD&A should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on February 25, 2022 (the "Annual Report on Form 10-K"). Those statements in the MD&A that are not historical in nature should be deemed forward-looking statements that are inherently uncertain. Delek US Holdings, Inc. is a registrant pursuant to the Securities Act of 1933, as amended ("Securities Act") and is listed on the New York Stock Exchange ("NYSE") under the ticker symbol "DK". Unless otherwise noted or the context requires otherwise, the terms "we," "our," "us," "Delek" and the "Company" are used in this report to refer to Delek US Holdings, Inc. and its consolidated subsidiaries for all periods presented. You should read the following discussion of our financial condition and results of operations in conjunction with our historical condensed consolidated financial statements and notes thereto. The Company announces material information to the public about the Company, its products and services and other matters through a variety of means, including filings with the SEC, press releases, public conference calls, the Company’s website (www.delekus.com), the investor relations section of its website (ir.delekus.com), the news section of its website (www.delekus.com/news), and/or social media, including its Twitter account (@DelekUSHoldings). The Company encourages investors and others to review the information it makes public in these locations, as such information could be deemed to be material information. Please note that this list may be updated from time to time. ### Forward-Looking Statements This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). These forward-looking statements reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, statements that refer to the acquisition of 3 Bear Delaware Holding – NM, LLC (the “3 Bear Acquisition”), including any statements regarding the expected benefits, synergies, growth opportunities, impact on liquidity and prospects, and other financial and operating benefits thereof, statements regarding the effect, impact, potential duration or other implications of, or expectations expressed with respect to, the outbreak of COVID-19 and its development into a pandemic in early 2020 (the "COVID-19 Pandemic" or the "Pandemic") and its impact on oil production and pricing, and statements regarding our efforts and plans in response to such events, the information concerning possible future results of operations, business and growth strategies, including as the same may be impacted by the attack on Ukraine by Russia in February 2022 (the "Russia-Ukraine War"), financing plans, expectations that regulatory developments or other matters will or will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and the benefits and synergies to be obtained from our completed and any future acquisitions, statements of management’s goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as "may," "will," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "appears," "projects" and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily 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. Important factors that, individually or in the aggregate, could cause such differences include, but are not limited to: - volatility in our refining margins or fuel gross profit as a result of changes in the prices of crude oil, other feedstocks and refined petroleum products and the impact of the COVID-19 Pandemic on such demand; - reliability of our operating assets; - actions of our competitors and customers; - changes in, or the failure to comply with, the extensive government regulations applicable to our industry segments, including current and future restrictions on commercial and economic activities in response to the COVID-19 Pandemic or future pandemics; - our ability to execute our strategy of growth through acquisitions, such as the 3 Bear Acquisition, and capital projects and changes in the expected value of and benefits derived therefrom, including any ability to successfully integrate acquisitions, realize expected synergies or achieve operational efficiency and effectiveness; - diminishment in value of long-lived assets may result in an impairment in the carrying value of the assets on our balance sheet and a resultant loss recognized in the statement of operations; - the unprecedented market environment and economic effects of the COVID-19 Pandemic, including uncertainty regarding the timing, pace and extent of economic recovery in the United States ("U.S.") due to the COVID-19 Pandemic; - general economic and business conditions affecting the southern, southwestern and western U.S., particularly levels of spending related to travel and tourism and the ongoing and future impacts of the COVID-19 Pandemic; - volatility under our derivative instruments; - deterioration of creditworthiness or overall financial condition of a material counterparty (or counterparties); ### 38 \| - unanticipated increases in cost or scope of, or significant delays in the completion of, our capital improvement and periodic turnaround 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, weather related disruptions, casualty losses and other matters beyond our control; - increases in our debt levels or costs; - possibility of accelerated repayment on a portion of the J. Aron supply and offtake liability if the purchase price adjustment feature triggers a change on the re-pricing dates; - changes in our ability to continue to access the credit markets; - compliance, or failure to comply, with restrictive and financial covenants in our various debt agreements; - changes in our ability to pay dividends; - seasonality; - earthquakes, hurricanes, tornadoes, and other weather events, which can unforeseeably affect the price or availability of electricity, natural gas, crude oil, and other feedstocks, critical supplies, refined petroleum products and ethanol; - increased costs of compliance with, or liability for violation of, existing or future laws, regulations and other requirements; - legislative and regulatory measures to address climate change and greenhouse gases emissions; - acts of terrorism (including cyber-terrorism) aimed at either our facilities or other facilities; - impacts of global conflicts; - future decisions by the Organization of Petroleum Exporting Countries ("OPEC") and the members of other leading oil producing countries (together with OPEC, “OPEC+”) regarding production and pricing and disputes between OPEC+ members regarding the same; - disruption, failure, or cybersecurity breaches affecting or targeting our IT systems and controls, our infrastructure, or the infrastructure of our cloud-based IT service providers; - changes in the cost or availability of transportation for feedstocks and refined products; and - other factors discussed under the headings "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" 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 future results or period trends. We can give no assurances that any of the events anticipated by any forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events or otherwise. ### Executive Summary ### Business Overview We are an integrated downstream energy business focused on petroleum refining, the transportation, storage and wholesale distribution of crude oil, intermediate and refined products and convenience store retailing. Our operating segments consist of refining, logistics, and retail, and are discussed in the sections that follow. ### Business and Economic Environment Overview Through the first nine months of 2022, the recovery of demand to pre-pandemic levels for petroleum-based transportation fuels and constrained supply of those products, resulted in an increase in feedstock costs as well as a widening of market crack spreads. Geopolitical events including the Russia-Ukraine War and new governmental policies have contributed to the ongoing volatility and unpredictability of global energy markets. We believe that safety, reliability and environmental responsibility are critical for our success. Through the first nine months of 2022, we have successfully taken advantage of the favorable economic environment by operating our refineries at record utilization rates. Our continued investment in Delek Logistics has resulted in realized synergies and increased flexibility through our entire supply chain. The integration of 3 Bear has expanded our existing crude oil gathering throughput capacity in the Permian while also extending our product offering to include natural gas gathering and processing as well as wastewater processing and disposal. The 3 Bear assets have complimented our existing Permian gathering assets which has seen a significant increase in throughput during 2022. Our retail operations have benefited from continued strong demand from U.S. drivers and present several high-growth opportunities for future investment which will complement our existing operations and build brand equity. While refining margins have reached historical levels during the year, rising natural gas prices, supply constraints, and increased labor costs have been a headwind. A sharp increase in inflation and increases in interest rates intended to combat inflation have resulted in an expectation of a global economic downturn and an increasingly competitive capital market environment. In addition, a global reduction of investment in carbon intensive activities driven by climate change initiatives, has resulted in higher costs of capital for most companies in our industry. We are continuously evaluating forward markets and have actively engaged cost and risk mitigation strategies to proactively take advantage of opportunities through disciplined capital allocation. We are committed to lowering costs and improving the efficiency of our cost structure in all aspects of our business and are challenging ourselves to continue to focus on operational excellence. We are continuously looking to improve our operating and general and administrative cost structure and are exploring a zero-based budgeting process for 2023. Our focus on reduction of greenhouse gas emissions is a key objective as we strive to be a leader in the transition to a carbon neutral future. Delek formed the New Energy Task Force in 2021, and the group has been studying and internally reporting our current emissions status, pinpointing potential means of achieving emissions reductions, providing updates on carbon capture opportunities and regulatory ### 39 \| issues facing the industry and Delek specifically, and identifying transformational opportunities consistent with the Intergovernmental Panel on Climate Change’s 2°scenarios. Delek prioritizes stewardship of the environment, and we focus on how to positively impact our shareholders, employees, customers, and the communities where we operate. We believe shareholder value is strengthened through, among other things, a stable dividend complemented by share repurchases. We also want to reward our shareholders with a competitive long-term capital allocation framework. In the second quarter 2022, we reinstated a regular cash dividend of $0.20 per share which lays a foundation that we believe can be supported throughout the business cycle. Through September 30, 2022, we have paid a special dividend and reinstated the quarterly dividend for a total return of $28.3 million. On October 31, 2022, we increased the quarterly cash dividend by $0.1 per share to $0.21. In August 2022, we announced an expansion of the share repurchase authorization to $400 million, which reflects our desire to deliver increased cash returns during periods of strong free cash flow generation. During the three months ended September 30, 2022, we made repurchases of $40.0 million. In addition, we are evaluating opportunities to reduce our long term debt which will reward our shareholders with a competitive long-term capital allocation framework and demonstrates our commitment to our balance sheet strength. Our near-term focus is centered around unlocking the "sum of the parts" value of our existing business while identifying growth opportunities to enhance the Company's scale and diversify revenue streams, including in the alternative energy markets. As part of our plan, we have hired Mark Hobbs who is an experienced investment banker with over 28 years of energy experience to fill the role of EVP, Corporate Development and who will work closely with the rest of our management team to unlock the “sum of parts” value. In addition, we have also hired third party advisors to work alongside our management team to identify strategic options. We believe this process will maximize the value of our shareholders while optimizing our asset portfolio and balance sheet. See further discussion on macroeconomic factors and market trends, including the impact on 2021 and the outlook for 2022, in the ‘Market Trends’ section below. See also the ‘Results of Operations’ section below for further discussion. ### Refining Overview The refining segment (or "Refining") processes crude oil and other feedstocks for the manufacture of transportation motor fuels, including various grades of gasoline, diesel fuel and aviation fuel, asphalt and other petroleum-based products that are distributed through owned and third-party product terminals. The refining segment has a combined nameplate capacity of 302,000 barrels per day as of September 30, 2022. A high-level summary of the refinery activities is presented below: | | Tyler, Texas refinery (the "Tyler refinery") El Dorado, Arkansas refinery (the "El Dorado refinery") Big Spring, Texas refinery (the "Big Spring refinery") Krotz Springs, Louisiana refinery (the "Krotz Springs refinery") | | --- | --- | | **Total Nameplate Capacity (barrels per day ("bpd"))** | 75,000 80,000 (1) 73,000 74,000 | | **Primary Products** | Gasoline, jet fuel, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, petroleum coke and sulfur Gasoline, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, asphalt and sulfur Gasoline, jet fuel, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, aromatics and sulfur Gasoline, jet fuel, high-sulfur diesel, light cycle oil, liquefied petroleum gases, propylene and ammonium thiosulfate | | **Crack Spread Benchmark** | Gulf Coast 5-3-2 Gulf Coast 5-3-2 (2) Gulf Coast 3-2-1 (3) Gulf Coast 2-1-1 (4) | | **Marketing and Distribution** | The refining segment's petroleum-based products are marketed primarily in the south central and southwestern regions of the United States, and the refining segment also ships and sells gasoline into wholesale markets in the southern and eastern United States. Motor fuels are sold under the Alon or Delek brand through various terminals to supply Alon or Delek branded retail sites. In addition, we sell motor fuels through our wholesale distribution network on an unbranded basis. | (1) While the El Dorado refinery has a total nameplate capacity of 80,000 barrels per day ("bpd"), El Dorado refinery’s output generally does not exceed 75,000, which is the maximum output for the small refinery exemption under the Environmental Protection Agency's ("EPA") Renewable Fuel Standards.. (2) While there is variability in the crude slate and the product output at the El Dorado refinery, we compare our per barrel refining margin to the U.S. Gulf Coast ("Gulf Coast") 5-3-2 crack spread because we believe it to be the most closely aligned benchmark. (3) Our Big Spring refinery is capable of processing substantial volumes of sour crude oil and/or substantial volumes of sweet crude oil, and therefore the West Texas Intermediate ("WTI") Cushing/ West Texas Sour ("WTS") price differential, taking into account differences in production yield, is an important measure for helping us make strategic, market-respondent production decisions. (4) The Krotz Springs refinery has the capability to process substantial volumes of light sweet crude oil to produce a high percentage of refined light products. Our refining segment also owns and operates three biodiesel facilities involved in the production of biodiesel fuels and related activities, located in Crossett, Arkansas, Cleburne, Texas, and New Albany, Mississippi. ### 40 \| ### Logistics Overview Our logistics segment (or "Logistics") gathers, transports and stores crude oil and natural gas, markets, distributes, transports and stores refined products and disposes and recycles water in select regions of the southeastern United States, the Delaware Basin in New Mexico and West Texas for our refining segment and third parties. It is comprised of the consolidated balance sheet and results of operations of Delek Logistics Partners, LP ("Delek Logistics", NYSE:DKL), where we owned an 78.9% interest in Delek Logistics at September 30, 2022. Delek Logistics was formed by Delek in 2012 to own, operate, acquire and construct crude oil and refined products logistics and marketing assets. A substantial majority of Delek Logistics' assets are currently integral to our refining and marketing operations. The logistics segment's pipelines and transportation business owns or leases capacity on approximately 400 miles of crude oil transportation pipelines, approximately 450 miles of refined product pipelines, and an approximately 900-mile crude oil gathering system and associated crude oil storage tanks with an aggregate of approximately 10.2 million barrels of active shell capacity. It also owns and operates ten light product terminals and markets light products using third-party terminals. Logistics has strategic investments in pipeline joint ventures that provide access to pipeline capacity as well as the potential for earnings from joint venture operations. The logistics segment owns or leases approximately 264 tractors and 353 trailers used to haul primarily crude oil and other products for related and third parties. In addition, effective with the 3 Bear Acquisition, June 1, 2022, Delek's logistics segment now includes 3 Bear's operations of crude oil and natural gas gathering, processing and transportation businesses, as well as water disposal and recycling operations, in the Delaware Basin in New Mexico. The asset base includes approximately 485 miles of pipelines, 88 million cubic feet ("MMCf") per day ("MMCf/d") of cryogenic natural gas processing capacity, 140 thousand barrels ("MBbl") per day ("MBbl/d") of crude gathering capacity, 120 MBbl of crude storage capacity and 200 MBbl/d of water disposal capacity. (See further discussion in Note 2 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q). ### Retail Overview Our retail segment (or "Retail") at September 30, 2022 includes the operations of 248 owned and leased convenience store sites located primarily in West Texas and New Mexico. Our convenience stores typically offer various grades of gasoline and diesel under the DK or Alon brand name and food products, food service, tobacco products, non-alcoholic and alcoholic beverages, general merchandise as well as money grams to the public, primarily under the 7-Eleven and DK or Alon brand names pursuant to a license agreement with 7-Eleven, Inc. In November 2018, we terminated the license agreement with 7-Eleven, Inc. and the terms of such termination and subsequent amendments require the removal of all 7-Eleven branding on a store-by-store basis by December 31, 2023. Merchandise sales at our convenience store sites will continue to be sold under the 7-Eleven brand name until 7-Eleven branding is removed pursuant to the termination. As of September 30, 2022, we have removed the 7-Eleven brand name at 55 of our store locations. Substantially all of the motor fuel sold through our retail segment is supplied by our Big Spring refinery, which is transferred to the retail segment at prices substantially determined by reference to published commodity pricing information. The cost to acquire the refined fuel products we sell to our wholesale customers in our logistics 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, depend 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. ### Corporate and Other Overview Our corporate activities, results of certain immaterial operating segments, our asphalt terminal operations, our wholesale crude operations, and intercompany eliminations are reported in corporate, other and eliminations in our segment disclosures. Additionally, our corporate activities include certain of our commodity and other hedging activities. ### 41 \| ### Strategic Update ### Our Framework: Long-Term Sustainability The emphasis on environmental responsibility and long-term economic and environmental sustainability is accelerating, with increased demand for transparency evolving out of the Environmental, Social and Governance ("ESG") movement. As we evaluate our current ESG positioning in the market, we also must integrate a broader sustainability view to all of our activities, both operational and strategic. For these reasons, we have developed a **Long-Term Sustainability Framework**, which will help us to formulate our strategic objectives and initiatives. ### Long-Term Sustainability Framework: Overarching Objectives Certain fundamental principles are foundational to our Long-Term Sustainability Framework, and direct us as we develop our guiding objectives. With that in mind, we have initially identified the following **overarching objectives:** **I. Redirect Corporate Culture towards Innovation, Excellence, and Operating Discipline.** II. **Focus on Operational Optimization and Improved Margin Capture.** III. **Implement Digital Transformation Strategy.** IV. **Identify ESG-Conscious Investments with Clear Value Propositions and Sustainable Returns.** V. **Evaluate Strategic Priorities and Redefine Long-term Sustainable Business Model.** ### Long-Term Sustainability Framework: Key Initiatives **Additionally, integral to our Long-Term Sustainability Framework and the achievement of the initial overarching objectives are the following key initiatives:** - **Transform our corporate and operating culture into "One Delek"** through unification of purpose, vision and strategy with an emphasis on cultural sustainability. - **Transform our refining operations into the "Refinery of the Future"** founded on digitization and automation, innovation and synergistic discipline. - **Develop a "New Energy" mentality focused on understanding the future of energy** on a global scale and how Delek can be a leader and facilitator of positive, sustainable change in the energy industry. ### Long-Term Sustainability Strategy: A Snapshot The **Overarching Objectives** and **Key Initiatives** are integrated and interdependent, representative of the synergistic approach we are employing, and together comprise our Long-term Sustainability Strategy, as illustrated below (see further discussion in our 2021 Annual Report on Form 10-K): ### 42 \| ### 2022 Strategic Developments In our 2021 Annual Report on Form 10-K, we further defined our 2022 strategy by identifying certain key Focused Objectives and Priorities, as they relate to our Key Initiatives. The following table presents some of our most significant 2022 developments to date towards the achievement of our Focused Objectives: ### Key Initiative: Implementing One Delek Culture Transformation Key Initiative: Planning for Refinery of the Future Operational Transformation ### Focused Objective: Improving Efficiency in Systems and Processes **We are committed to becoming even more efficient by focusing on our systems and processes. We know there is always room for improvement, and those improvements can make every employee more effective and valued.** ***Improving Efficiency and Processes to Drive Enhanced Analytics by implementing a New Enterprise Resource Planning System:*** In October 2022, we implemented a new enterprise resource planning system, designed to improve the efficiency of our internal operational and administrative activities. This system implementation is part of our ongoing business transformation initiatives and we expect these system infrastructure investments will result in more efficient and scalable operational processes and provide enhanced analytics to drive business performance. ***Improving Consistency and Transparency by Conforming Refining Inventory Accounting Methodology:*** As of January 1, 2022, we changed our method for accounting for inventory held at the Tyler Refinery to the first-in, first-out ("FIFO") cost method from the last-in, first-out ("LIFO") cost method. This change in accounting method will conform the Company’s refining inventory to a single method of accounting, and will eliminate the inherent volatility in the LIFO valuation of inventory attributable to increments and decrements in historical LIFO layers, which can impact comparability between periods as well as to market conditions and crack spreads. For these reasons, we expect that the newly adopted accounting principle will improve financial reporting by providing better consistency, better transparency, and recognition that better reflects the physical flow of inventory and more accurately reflects the current value of inventory. The effects of this change have been retrospectively applied to all periods presented with a cumulative effect adjustment reflected in the January 1, 2021 beginning retained earnings. (See further discussion in Note 7 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q). ### Focused Objective: Balancing Risk and Reward **As we continue to grow, we want to cultivate a healthy appetite for risk. That means, when we make decisions, we plan to identify those risks that come with the greatest potential for success, and pursue them with care.** ***Increasing Shareholder Value through Payment of Dividends:*** On October 31, 2022, our Board of Directors voted to declare a quarterly cash dividend of $0.21 per share of our common stock, which is payable on December 2, 2022 to shareholders of record on November 18, 2022. In addition, a special cash dividend of $0.20 per share of our common stock was paid on July 20, 2022 to shareholders of record on July 12, 2022 and a quarterly cash dividend of $0.20 per share of our common stock was paid on September 6, 2022 to shareholders of record on August 22, 2022. ***Increasing Shareholder Value through Increase of Share Repurchase Program:*** On August 1, 2022, our Board of Directors approved an approximately $170.3 million increase in its share repurchase authorization, bringing the total amount available for repurchases under current authorizations to $400.0 million. During both the three and nine months ended September 30, 2022, Delek repurchased 1,435,602 shares for an aggregate purchase price of $40.0 million. As of September 30, 2022, there was $360.0 million of authorization remaining for repurchases. ***Increasing Flexibility through Debt Amendments:*** On May 26, 2022, Delek Logistics entered into a Third Amendment to the Delek Logistics Credit Facility which, among other things, provides for certain changes to the Delek Logistics Credit Facility in connection with the 3 Bear Acquisition in respect of pro forma calculations and certain other requirements. Further, on May 26, 2022, Delek Logistics entered into a Fourth Amendment (the “Fourth Amendment”) to the Delek Logistics Credit Facility. Among other things, the Fourth Amendment: (i) increased the U.S. Revolving Credit Commitments (as defined in the Delek Logistics Credit Facility) by an amount equal to $150.0 million, for an aggregate amount of $1.0 billion, (ii) increased the U.S. L/C Sublimit (as defined in the Delek Logistics Credit Facility) to an aggregate amount equal to $90.0 million and (iii) increased the U.S. Swing Line Sublimit (as defined in the Delek Logistics Credit) to an aggregate amount equal to $18.0 million. The exercise of the accordion feature gave Delek Logistics the flexibility to utilize borrowings under the Delek Logistics Credit Facility to help fund the acquisition of 3 Bear while continuing to maintain sufficient availability to continue to effectively manage working capital needs and liquidity risk, and to evaluate longer term capitalization strategies. On October 13, 2022, Delek Logistics entered into a fourth amended and restated senior secured revolving credit agreement with Fifth Third, as administrative agent and a syndicate of lenders (the "Amended and Restated Delek Logistics Credit Facility"). The Amended and Restated Delek Logistics Credit Facility, among other things, (i) increased total aggregate commitments to $1.2 billion, comprised of (A) senior secured revolving commitments of $900.0 million in aggregate (eliminating the Canadian dollar tranche), with sublimit of up to $115.0 million for letters of credit and $25.0 million for swing line loans (the “Delek Logistics Revolving Facility”) with an extend maturity date of October 13, 2027, and (B) a new senior secured term loan facility for a term loan in the original principal amount of $300.0 million (the “Delek Logistics Term Facility”), (ii) reset the accordion feature under the Delek Logistics Revolving Facility, such that aggregate revolving commitments can be increased to up to $1.15 billion upon the agreement of Delek Logistics and one or more existing or new lenders and (ii) provided for the Delek Logistics Term Facility be drawn in full on October 13, 2022, with a maturity date of October 13, 2024 and with a prepayment requirement for the proceeds obtained from certain senior unsecured notes issuances. ### 43 \| ### Management's Discussion and Analysis On October 26, 2022, Delek entered into a third amended and restated credit agreement with Wells Fargo Bank, as administrative agent, Delek, as borrower, certain subsidiaries of Delek, as guarantors, and the other lenders party thereto, providing for a senior secured asset-based revolving credit facility with total credit commitment of $1.1 billion with an extended maturity date of October 26, 2027 (the “Amended and Restated Revolving Credit Facility”). ***Increasing Shareholder Value and Reducing Outsider Risk through Stock Purchase and Cooperation Agreement:*** On March 7, 2022, Delek entered into a stock purchase and cooperation agreement (the “Icahn Group Agreement”) with IEP Energy Holding LLC, a Delaware limited liability company, American Entertainment Properties Corp., a Delaware corporation, Icahn Enterprises Holdings L.P., a Delaware limited partnership, Icahn Enterprises G.P. Inc., a Delaware corporation, Beckton Corp., a Delaware corporation, and Carl C. Icahn (collectively, the “Icahn Group”), pursuant to which the Company agreed to purchase an aggregate of 3,497,268 shares of common stock of the Company, at a price per share of $18.30, the closing price of a share of Company common stock on the New York Stock Exchange on March 4, 2022, the last trading day prior to the execution of the Ichan Group Agreement, which equals an aggregate purchase price of $64.0 million. ***Focus on Leadership Succession Planning:*** On June 9, 2022, Avigal Soreq was appointed the President and Chief Executive Officer ("CEO") and as a member of the Board of Directors (the "Board") under a previously announced CEO succession plan. Ezra Uzi Yemin, the Company’s previous President and CEO, was appointed as the Executive Chairman of the Board. Mr. Soreq was previously the Chief Executive Officer of El Al Israel Airlines, the national airline of Israel, since January 2021. Prior to that, he served as a member of the Company’s executive management team, including as the Chief Operating Officer from March 2020 until January 2021, its Chief Commercial Officer from November 2016 until March 2020, an Executive Vice President from August 2015 until January 2021, and a Vice President from 2012 until 2015. In addition, Mr. Soreq served as an Executive Vice President of Delek Logistics GP, LLC from 2015 until 2021, and as its Vice President from 2012 until 2015. Delek also announced on March 27, 2022, that Leonardo Moreno, a highly experienced executive in the global renewable energy and technology sector, has been appointed director to the Board. With these appointments of Messrs. Soreq and Moreno, the Board has been expanded to comprise nine directors, seven of whom are independent and three of whom are diverse, fulfilling the Company’s objective of at least 30% of the Board comprising diverse members by 2022. ### Key Initiative: Implementing One Delek Culture Transformation Key Initiative: Planning for Refinery of the Future Operational Transformation ### Focused Objective: Balancing Risk and Reward / Driving EBITDA Improvements **As we continue to grow, we want to cultivate a healthy appetite for risk. That means, when we make decisions, we plan to identify those risks that come with the greatest potential for success, and pursue them with care.** ***Completed Strategic Midstream Acquisition:*** On June 1, 2022, DKL Delaware Gathering, LLC, a subsidiary of Delek Logistics, completed the acquisition of 100% of the limited liability company interests in 3 Bear Delaware Holding – NM, LLC (“3 Bear”) from 3 Bear Energy – New Mexico LLC (the “Seller”), related to Seller’s crude oil and gas gathering, processing and transportation businesses, as well as water disposal and recycling operations, in the Delaware Basin in New Mexico. The purchase price for 3 Bear was $628.1 million and was financed through a combination of cash on hand and borrowings under Delek Logistics' existing credit agreement. (See further discussion in Note 2 and Note 8 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q). This acquisition provides us the opportunity to significantly expand our third-party midstream contribution margin within our logistics segment. ### 44 \| ### Market Trends Our results of operations are significantly affected by fluctuations in the prices of certain commodities, including, but not limited to, crude oil, gasoline, distillate fuel, biofuels, natural gas and electricity, among others. Historically, the impact of commodity price volatility on our refining margins (as defined under the heading "Non-GAAP Measures" in MD&A Item 2.), specifically as it relates to the price of crude oil as compared to the price of refined products and timing differences in the movements of those prices (subject to our inventory costing methodology), as well as location differentials, may be favorable or unfavorable compared to peers. Additionally, our refining margin profitability is impacted by regulatory factors, including the cost of renewable identification numbers ("RINs"). ### Market Outlook for the Remainder of 2022 During the third quarter of 2022, the domestic oil and gas industry witnessed a contraction of domestic market crack spreads compared to the unprecedented favorable market conditions that existed during the second quarter of 2022. We expect the volatility in the global energy markets will continue until supply can meet the current demand and fears of an economic downturn subside. Although the possibility of an economic downturn exists, Delek is witnessing a strong demand environment for refined products which is being driven by a rebound in domestic on road fuel demand. To capture the macro environment, we have positioned the Company to continue to run safely, reliably and environmentally responsibly at near nameplate capacity while leveraging our new 3 Bear logistics lines of business with an eye towards the One Delek vision. We will continue to balance the cost of debt and cost of equity while continuing to exercise a longer-term sustainable view of capital allocation. See the following pages for further discussion on how certain key market trends impact our refining margins. ### Crude Prices WTI crude oil represents the largest component of our crude slate at all of our refineries, and can be sourced through our gathering channels or optimization efforts from Midland, Texas or Cushing, Oklahoma or other locations. We manage our supply chain risk to ensure that we have the barrels to meet our crude slate consumption plan for each month through gathering supply contracts and throughput agreements on various strategic pipelines, some of which include those where we hold equity method investments. We manage market price risk on crude oil through financial derivative hedges, in accordance with our risk management strategies. The table below reflects the quarterly average prices of WTI Midland and WTI Cushing crude oil for each of the quarterly periods in 2021 and for the three quarterly periods in 2022. ### Crude Pricing Differentials Historically, domestic refiners have benefited from the discount for WTI Cushing compared to Brent. This generally leads to higher margins in our refineries, as refined product prices are influenced by Brent crude prices and the majority of our crude supply is WTI-linked. Because of our positioning in the Permian basin, including our access to significant sources of WTI Midland crude through our gathering system, we are even further benefited by discounts for WTI Midland/WTI Cushing differentials. When these discounts shrink or become premiums, our reliance on WTI-linked crude pricing, and specifically WTI Midland crude, can negatively impact our refining margins. Conversely, as these price discounts widen, so does our competitive advantage, created specifically by our access to WTI Midland crude sourced through our gathering systems. The chart below illustrates the key differentials impacting our refining operations, including WTI Cushing to Brent, WTI Midland to WTI Cushing, and Louisiana Light Sweet crude oil ("LLS") to WTI Cushing for each of the quarterly periods in 2021 and for the three quarterly periods in 2022. ### 45 \| ### Management's Discussion and Analysis ### Refined Product Prices Our refineries produce the following products: | | Tyler Refinery | El Dorado Refinery | Big Spring Refinery | Krotz Springs Refinery | | --- | --- | --- | --- | --- | | Primary Products | Gasoline, jet fuel, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, petroleum coke and sulfur | Gasoline, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, asphalt and sulfur | Gasoline, jet fuel, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, aromatics and sulfur | Gasoline, jet fuel, high-sulfur diesel, light cycle oil, liquefied petroleum gases, propylene and ammonium thiosulfate | The charts below illustrate the quarterly average prices of CBOB, U.S. High Sulfur Diesel ("HSD") and U.S. Ultra Low Sulfur Diesel ("ULSD") for each of the quarterly periods in 2021 and for the three quarterly periods in 2022. ### Crack Spreads Crack spreads are used as benchmarks for predicting and evaluating a refinery's product margins by measuring the difference between the market price of feedstocks/crude oil and the resultant refined products. Generally, a crack spread represents the approximate refining margin resulting from processing one barrel of crude oil into its outputs, generally gasoline and diesel fuel. The table below reflects the quarterly average Gulf Coast 5-3-2 ULSD, 3-2-1 ULSD and 2-1-1 HSD/LLS crack spreads for each of the quarterly periods in 2021 and for the three quarterly periods in 2022. As the chart illustrates, the 3-2-1 crack spread has consistently outperformed the 5-3-2 and the 2-1-1 crack spreads. When market conditions consist of near-capacity throughputs and no significant outages, our Big Spring refinery, whose benchmark is the 3-2-1 crack spread, should outperform our other refineries in terms of refining margin, which are benchmarked against either the 5-3-2 or the 2-1-1 crack spreads. ### 46 \| ### Management's Discussion and Analysis ### RIN Volatility Environmental regulations and the political environment continue to affect our refining margins in the form of volatility in the price of RINs. We enter into future commitments to purchase or sell RINs at fixed prices and quantities, which are used to manage our RINs Obligation. On a consolidated basis, we work to balance our RINs Obligation in order to minimize the effect of RINs on our results. While we obtain RINs in our refining and logistics segments through our ethanol and biodiesel production and blending, and generate RINs through biodiesel production, our refining segment still must purchase additional RINs to satisfy its obligations. Additionally, our ability to obtain RINs through blending is limited by our refined product slate, blending capabilities and market constraints. The cost to purchase these additional RINs is a significant cash outflow for our business. Increases in the market prices of RINs generally adversely affect our results of operations through changes in fair value to our existing RINs Obligation, to the extent we do not have offsetting RINs inventory on hand or effective economic hedges through net forward purchase commitments. RINs prices are highly sensitive to regulatory and political influence and conditions, and therefore often do not correlate to movements in crude oil prices, refined product prices or crack spreads. Furthermore, RIN prices are impacted by market expectations regarding whether the EPA may grant certain SREs. Because of the volatility in RINs prices, it is not possible to predict future RINs cost with certainty, and movements in RIN prices can have significant and unanticipated adverse effects on our refining margins that are outside of our control. The chart below illustrates the volatility in RINs beginning with the first quarter of 2021 through the third quarter of 2022. ### Energy Costs Energy costs are a significant element of our Refining contribution margin and can significantly impact our ability to capture crack spreads, with natural gas representing the largest component. Natural gas prices are driven by supply-side factors such as amount of natural gas production, level of natural gas in storage and import and export activity, while demand-side factors include variability of weather, economic growth and the availability and price of other fuels. Refiners and other large-volume fuel consumers may be more or less susceptible to volatility in natural gas prices depending on their consumption levels as well as their capabilities to switch to more economical sources of fuel/energy. Additionally, geographic location of facilities make consumers vulnerable to price differentials of natural gas available at different supply hubs. Within Delek’s geographic footprint, we source the majority of our natural gas from the Gulf Coast, and secondarily ### 47 \| from the Permian, coinciding with the physical locations of our refineries. We manage our risk around natural gas prices by entering into variable and fixed-price supply contracts in both the Gulf and Permian Basin or by entering into derivative hedges based on forecasted consumption and forward curve prices, as appropriate, in accordance with our risk policy. The chart below illustrates the quarterly average prices of Waha (Permian Basin) and Henry Hub (Gulf Coast) beginning with the first quarter of 2021 through the third quarter of 2022. ### Critical Accounting Estimates The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The SEC has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results of operations, and require our most difficult, subjective or complex judgments or estimates. Based on this definition and as further described in our 2021 Annual Report on Form 10-K, we believe our critical accounting policies include the following: (i) evaluating impairment for property, plant and equipment and definite life intangibles, (ii) evaluating potential impairment of goodwill, (iii) estimating environmental expenditures, and (iv) estimating asset retirement obligations. Additionally, we have identified the following critical accounting policy that impacts the nine months ended September 30, 2022: ### Taxes Under Accounting Standards Codification ("ASC") 740, *Income Taxes (“*ASC 740”), we use an estimated annual effective tax rate ("AETR") to record income taxes. The development of the estimated AETR involves significant judgment, particularly early in the year and in times of economic uncertainty. As of and during the nine months ended September 30, 2022, our estimates of the expected AETR reflected inputs which are subject to judgment including (but not necessarily limited to) the following: - Forecasted pre-tax U.S. generally accepted accounting principles ("GAAP") income or loss for the year - Estimates of expected permanent differences in GAAP income or loss and taxable income or loss for the year - Forecasted capital expenditures for the year and future years (where such activities can be impacted by unanticipated events) - Expected applicable jurisdictional tax rates - Estimated impact of possible deduction and tax credit limitations - Estimates regarding net operating losses, carryback and carryforward provisions (and limitations) and valuation allowances All of these inputs are subject to significant judgment and assumptions about future events impacting 2022, some of which are based on historical trends and results, operational plans, and projections regarding future pricing and profitability (where we utilize third party forward curves and pricing sources, where possible, but where expectations regarding capture rates and other factors involve judgment). We also note that, while economic conditions affecting our industry and industry outlooks related to COVID-19 are stabilizing and improving, there remains a level of uncertainty related to COVID-19 and the expectations for recovery that increases the level of judgment involved with some of these assumptions. Accordingly, where appropriate, we may consider the probability of certain components in determining what we believe to be a reasonable estimate based on conditions and events that were in existence as of our reporting date, which may also involve the use of significant management judgment. Furthermore, many of our assumptions are inter-relational, where changing one assumption can impact other assumptions (e.g., in terms of the applicability of or limitations under various tax code provisions). The nature of the AETR estimation approach for recording income taxes requires continuous review and adjustment during the year based on actual results, and as better information regarding forecasted results and assumptions becomes available. Significant changes in any of these assumptions or in actual results compared to our forecasts and assumptions could cause material changes in our AETR, which could result in cumulative adjustments to reflect the new estimates in future periods. ### 48 \| We have developed and utilized methodologies and rationales for the development of our assumptions, subject to internal controls and sensitivity or probability assessments, as appropriate, and we believe our process provides a reasonable basis for our estimated AETR as well as the income taxes as of and for the nine months ended September 30, 2022. ### Business Combinations We recognize and measure the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date. Any excess or surplus of the purchase consideration when compared to the fair value of the net tangible assets acquired, if any, is recorded as goodwill or gain from a bargain purchase. The fair value of assets and liabilities as of the acquisition date are often estimated using a combination of approaches, including the income approach, which requires us to project future cash flows and apply an appropriate discount rate; the cost approach, which requires estimates of replacement costs and depreciation and obsolescence estimates; and the market approach which uses market data and adjusts for entity-specific differences. We use all available information to make these fair value determinations and engage third-party consultants for valuation assistance. The estimates used in determining fair values are based on assumptions believed to be reasonable but which are inherently uncertain. Accordingly, actual results may differ materially from the projected results used to determine fair value. ### 49 \| ### Non-GAAP Measures 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: - Refining margin - calculated based on the regional market sales price of refined products produced, less allocated transportation, RFS renewable volume obligation and associated feedstock costs. This measure reflects the economics of each refinery exclusive of the financial impact of inventory price risk mitigation programs and marketing uplift strategies; - Refining segment margin- calculated as the difference between net refining revenues and total cost of materials and other; and - Refining margin per barrels sold - 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. 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 comparability between periods 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. 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. ### Non-GAAP Reconciliations The following table provides a reconciliation of refining margin to the most directly comparable U.S. GAAP measure, gross margin: ### Reconciliation of refining margin to gross margin (in millions) *Refining Segment* | | Three Months Ended September 30, 2022 | 2021 As Adjusted (1) | Nine Months Ended September 30, 2022 | 2021 As Adjusted (1) | | --- | ---: | ---: | ---: | ---: | | Net revenues | $4,246.1 | $2,814.6 | $12,550.3 | $6,970.4 | | Cost of sales | 4,189.0 | 2,778.4 | 11,880.7 | 7,012.8 | | **Gross margin** | 57.1 | 36.2 | 669.6 | (42.4) | | Add back (items included in cost of sales): | | | | | | Operating expenses (excluding depreciation and amortization)(2) | 172.0 | 84.2 | 456.9 | 313.9 | | Depreciation and amortization | 48.9 | 45.9 | 151.6 | 149.0 | | **Refining segment margin** | $278.0 | $166.3 | $1,278.1 | $420.5 | (1) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. For further discussion, see Note 7 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. (2) Reflects the prior period conforming reclassification adjustment between operating expenses and general and administrative expenses. ### 50 \| ### Summary Financial and Other Information The following table provides summary financial data for Delek: *Consolidated Summary Statement of Operations Data* | (in millions) (1) | Three Months Ended September 30, 2022 | 2021 As Adjusted (2) | Nine Months Ended September 30, 2022 | 2021 As Adjusted (2) | | --- | ---: | ---: | ---: | ---: | | Net revenues | $5,324.9 | $2,956.5 | $15,766.6 | $7,540.2 | | Total operating costs and expenses | 5,271.9 | 2,918.6 | 15,173.6 | 7,599.9 | | Operating income (loss) | 53.0 | 37.9 | 593.0 | (59.7) | | Total non-operating expense, net | 32.2 | 12.8 | 85.3 | 69.5 | | Income (loss) before income tax expense (benefit) | 20.8 | 25.1 | 507.7 | (129.2) | | Income tax expense (benefit) | 4.0 | 4.5 | 107.5 | (39.0) | | Net income (loss) | 16.8 | 20.6 | 400.2 | (90.2) | | Net income attributed to non-controlling interests | 9.4 | 8.8 | 24.4 | 24.7 | | Net income (loss) attributable to Delek | $7.4 | $11.8 | $375.8 | $(114.9) | (1) This information is presented at a summary level for your reference. See the Condensed Consolidated Statements of Income included in Item 1. to this Quarterly Report on Form 10-Q for more detail regarding our results of operations and net loss per share. (2) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. For further discussion, see Note 7 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We report operating results in three reportable segments: - Refining - Logistics - Retail Decisions concerning the allocation of resources and assessment of operating performance are made based on this segmentation. Management measures the operating performance of each of its reportable segments based on the segment contribution margin which is defined as net revenues less costs of materials and other and operating expenses, excluding depreciation and amortization. ### 51 \| ### Results of Operations ***Consolidated Results of Operations — Comparison of the Three and Nine Months Ended September 30, 2022 versus the Three and Nine Months Ended September 30, 2021*** ### Net Income (Loss) ### Q3 2022 vs. Q3 2021 Consolidated net income for the third quarter of 2022 was $16.8 million compared to net income of $20.6 million for the third quarter of 2021. Consolidated net income attributable to Delek for the third quarter of September 30, 2022 was $7.4 million, or $0.11 per basic share, compared to a net income of $11.8 million, or $0.16 per basic share, for the third quarter 2021. Explanations for significant drivers impacting net income as compared to the comparable period of the prior year are discussed in the sections below. ### YTD 2022 vs. YTD 2021 Consolidated net income for the nine months ended September 30, 2022 was $400.2 million compared to a net loss of $90.2 million for the nine months ended September 30, 2021. Consolidated net income attributable to Delek for the nine months ended September 30, 2022 was $375.8 million, or $5.26 per basic share, compared to a net loss of $114.9 million, or $(1.55) per basic share, for the nine months ended September 30, 2021. Explanations for significant drivers impacting net income (loss) as compared to the comparable period of the prior year are discussed in the sections below. ### Net Revenues ### Q3 2022 vs. Q3 2021 In the third quarter of 2022 and 2021, we generated net revenues of $5,324.9 million and $2,956.5 million, respectively, an increase of $2,368.4 million, or 80.1%. The increase in net revenues was primarily driven by the following factors: - in our refining segment, increases in the average price of U.S. Gulf Coast gasoline of 23.3%, ULSD of 67.9%, and HSD of 60.1%; - in our logistics segment, increases in the average volumes of diesel sold and in the average sales price per gallon of diesel and gasoline sold in our West Texas marketing operations as well as incremental revenues from the 3 Bear Acquisition; and - in our retail segment, increases in fuel sales primarily attributable to a 26.8% increase in average price charged per gallon sold. ### YTD 2022 vs. YTD 2021 For the nine months ended September 30, 2022 and 2021, we generated net revenues of $15,766.6 million and $7,540.2 million, respectively, an increase of $8,226.4 million, or 109.1%. The increase in net revenues was primarily driven by the following factors: - in our refining segment, increases in the average price of U.S. Gulf Coast gasoline of 49.3%, ULSD of 82.4%, and HSD of 80.3%; - in our logistics segment, increases in the average volumes of diesel sold and in the average sales price per gallon of diesel and gasoline sold in our West Texas marketing operations; and - in our retail segment, increases in fuel sales primarily attributable to a 38.8% increase in average price charged per gallon sold. ### Total Operating Costs and Expenses ### Cost of Materials and Other ### Q3 2022 vs. Q3 2021 Cost of materials and other was $4,916.0 million for the third quarter of 2022 compared to $2,678.0 million for the third quarter of 2021, an increase of $2,238.0 million, or 83.6%. The net increase in cost of materials and other was primarily driven by the following: - increases in cost of crude oil feedstocks at the refineries, including a 29.9% increase in the average cost of WTI Cushing crude oil and a 29.2% increase in the average cost of WTI Midland crude oil; - increases in the average volumes sold and average cost per gallon of gasoline and diesel sold in our logistics segment; and - an increase in retail cost of materials and other due to 29.4% increase in average cost per gallon sold applied to higher fuel sales volumes. ### YTD 2022 vs. YTD 2021 Cost of materials and other was $14,151.1 million for the nine months ended September 30, 2022 compared to $6,811.4 million for the nine months ended September 30, 2021, an increase of $7,339.7 million, or 107.8%. The net increase in cost of materials and other was primarily driven by the following: ### 52 \| - increases in cost of crude oil feedstocks at the refineries, including a 51.4% increase in the average cost of WTI Cushing crude oil and a 50.1% increase in the average cost of WTI Midland crude oil; - increases in average RINs expense due to increased production during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021; - increases in the average volumes sold and average cost per gallon of gasoline and diesel sold in our logistics segment; and - an increase in retail cost of materials and other due to 45.5% increase in average cost per gallon sold applied to higher fuel sales volumes. ### Operating Expenses ### Q3 2022 vs. Q3 2021 Operating expenses were $226.4 million for the third quarter of 2022 compared to $128.5 million for the third quarter of 2021, an increase of $97.9 million, or 76.2%. The increase in operating expenses was primarily driven by the following: - an increase in variable costs and utilities associated with higher throughput during current period; - higher natural gas prices in the third quarter of 2022; and - increases in employee costs including incentive compensation costs. ### YTD 2022 vs. YTD 2021 Operating expenses were $615.8 million for the nine months ended September 30, 2022 compared to $450.0 million for the nine months ended September 30, 2021, an increase of $165.8 million, or 36.8%. The increase in operating expenses was primarily driven by the following: - an increase in variable costs and utilities associated with higher throughput during current period; - higher natural gas prices in the first half of 2022; and - increases in employee costs including incentive compensation costs. ### General and Administrative Expenses ### Q3 2022 vs. Q3 2021 General and administrative expenses were $62.4 million for the third quarter of 2022 compared to $53.0 million for the third quarter of 2021, an increase of $9.4 million, or 17.7%. The increase was primarily driven by an increase in employee costs including incentive compensation costs and incremental transaction costs related to the 3 Bear Acquisition. ### YTD 2022 vs. YTD 2021 General and administrative expenses were $242.0 million and $147.6 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of $94.4 million, or 64.0%. The increase was primarily driven by an increase in employee costs including incentive compensation costs and incremental transaction costs related to the 3 Bear Acquisition. ### Depreciation and Amortization ### Q3 2022 vs. Q3 2021 Depreciation and amortization (included in both cost of sales and other operating expenses) was $72.9 million for the third quarter of 2022 compared to $60.8 million for the third quarter of 2021, an increase of $12.1 million, or 19.9%. ### YTD 2022 vs. YTD 2021 Depreciation and amortization (included in both cost of sales and other operating expenses) was $209.2 million compared to $195.6 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of $13.6 million, or 7.0%. ### Other Operating Income, Net ### Q3 2022 vs. Q3 2021 Other operating income, net increased by $4.1 million in the third quarter of 2022 to $5.8 million compared to $1.7 million in the third quarter of 2021. The increases were due to insurance proceeds received in the third quarter of 2022. ### YTD 2022 vs. YTD 2021 Other operating income, net increased by $39.8 million during the nine months ended September 30, 2022 to $44.5 million compared to $4.7 million during the nine months ended September 30, 2021. The increases were primarily driven by an increase due to realized hedge gains during the 2022 period and insurance proceeds received in 2022. ### 53 \| ### Non-operating Expenses, Net ### Interest Expense, Net ### Q3 2022 vs. Q3 2021 Interest expense, net increased by $13.2 million, or 35.2%, to $50.7 million in the third quarter of 2022 compared to $37.5 million in the third quarter of 2021, primarily driven by the following: - an increase in the average effective interest rate of 56 basis points in the third quarter of 2022 compared to the third quarter of 2021 (where effective interest rate is calculated as interest expense divided by the net average borrowings/obligations outstanding); and - an increase in net average borrowings outstanding (including the obligations under the supply and offtake agreements which have an associated interest charge) of approximately $738.4 million in the third quarter of 2022 (calculated as a simple average of beginning borrowings/obligations and ending borrowings/obligations for the period) compared to the third quarter of 2021. ### YTD 2022 vs. YTD 2021 Interest expense, net increased by $32.7 million, or 32.7%, to $132.7 million during the nine months ended September 30, 2022 compared to $100.0 million during the nine months ended September 30, 2021, primarily driven by the following: - an increase in the average effective interest rate of 101 basis points during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 (where effective interest rate is calculated as interest expense divided by the net average borrowings/obligations outstanding); and - an increase in net average borrowings outstanding (including the obligations under the supply and offtake agreements which have an associated interest charge) of approximately $316.1 million during the nine months ended September 30, 2022 (calculated as a simple average of beginning borrowings/obligations and ending borrowings/obligations for the period) compared to the nine months ended September 30, 2021. ### Results from Equity Method Investments ### Q3 2022 vs. Q3 2021 We recognized income of $17.8 million from equity method investments during the third quarter of 2022, compared to $2.9 million for the third quarter of 2021, an increase of $14.9 million. This increase was primarily driven by the following: - increase in income from our Red River and Caddo equity method investment due to higher throughput volumes and resulting revenue increases; and - an increase in income from our investment in W2W Holdings LLC to income of $1.2 million in the third quarter of 2022 from a loss of $8.8 million in the third quarter of 2021. ### YTD 2022 vs. YTD 2021 We recognized income of $44.4 million from equity method investments during the nine months ended September 30, 2022, compared to $14.5 million for the nine months ended September 30, 2021, an increase of $29.9 million. This increase was primarily driven by the following: - increase in income from our Red River and Caddo equity method investment due to higher throughput volumes and resulting revenue increases; and - an increase in income from our investment in W2W Holdings LLC to income of $5.4 million during the nine months of 2022 from a loss of $12.9 million during the nine months of 2021. ### Other During the three and nine months ended September 30, 2021, we recognized a receivable of $27.5 million, $20.9 million of which is included as a gain in other income, related to payment to be received from a loan buy-out agreement between Wink to Webster Pipeline LLC and the Company. Refer to Note 6 of the condensed consolidated financial statements in Item 1. Financial Statements, for additional information. ### Income Taxes ### Q3 2022 vs. Q3 2021 Income tax expense decreased by $0.5 million in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following: - pre-tax income of $20.8 million in the third quarter of 2022, as compared to a pre-tax loss of $25.1 million for the third quarter of 2021; and ### 54 \| - an increase in our effective tax rate which was 19.2% for the third quarter of 2022, compared to 17.9% for the third quarter of 2021 primarily due to the following: - the impact of credits and permanent differences on the tax rate due to changes in pre-tax book income; - changes in the valuation allowance for state tax attributes; and - changes in the third quarter estimated annual tax rate applied to year-to-date loss for the third quarter of 2021. ### YTD 2022 vs. YTD 2021 Income tax expense increased by $146.5 million during the nine months ended September 30, 2022 compared to the same period for 2021, primarily driven by the following: - pre-tax income of $507.7 million in the nine months ended September 30, 2022, as compared to a pre-tax loss of $129.2 million for the nine months ended September 30, 2021; and - a decrease in our effective tax rate which was 21.2% for the nine months ended September 30, 2022, compared to 30.2% for the nine months ended September 30, 2021 primarily due to the following: - the impact of credits and permanent differences on the tax rate due to changes in pre-tax book income; and - changes in the valuation allowance for state tax attributes. ### 55 \| ### Refining Segment The tables and charts below set forth certain information concerning our refining segment operations ($ in millions, except per barrel amounts): *Refining Segment Margins* | | Three Months Ended September 30, 2022 | Adjusted 2021 (1) | Nine Months Ended September 30, 2022 | Adjusted 2021 (1) | | --- | ---: | ---: | ---: | ---: | | Net revenues | $4,246.1 | $2,814.6 | $12,550.3 | $6,970.4 | | Cost of materials and other | 3,968.1 | 2,648.3 | 11,272.2 | 6,549.9 | | **Refining segment margin** | 278.0 | 166.3 | 1,278.1 | 420.5 | | Operating expenses (excluding depreciation and amortization)(1) (2) | 172.0 | 84.2 | 456.9 | 313.9 | | **Contribution margin(1)** | $106.0 | $82.1 | $821.2 | $106.6 | (1) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. For further discussion, see Note 7 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. (2) Reflects the prior period conforming reclassification adjustment between operating expenses and general and administrative expenses. ### Factors Impacting Refining Profitability Our profitability in the refining segment is substantially determined by the difference between the cost of the crude oil feedstocks we purchase and the price of the refined products we sell, referred to as the "crack spread" or "refining margin". Refining margin is used as a metric to assess a refinery's product margins against market crack spread trends, where "crack spread" is a measure of the difference between market prices for crude oil and refined products and is a commonly used proxy within the industry to estimate or identify trends in refining margins. The cost to acquire feedstocks and the price of the refined petroleum products we ultimately sell from our refineries 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 such as hurricanes or tornadoes, local, 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 the refining segment include 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. Moreover, while the fluctuations in the cost of crude oil are typically reflected in the prices of light refined products, such as gasoline and diesel fuel, the price of other residual products, such as asphalt, coke, carbon black oil and liquefied petroleum gas ("LPG") are less likely to move in parallel with crude cost. This could cause additional pressure on our realized margin during periods of rising or falling crude oil prices. Additionally, our margins are impacted by the pricing differentials of the various types and sources of crude oil we use at our refineries and their relation to product pricing. Our crude slate is predominantly comprised of WTI crude oil. Therefore, favorable differentials of WTI compared to other crude will favorably impact our operating results, and vice versa. Additionally, because of our gathering system presence in the Midland area and the significant source of crude specifically from that region into our network, a widening of the WTI Cushing less WTI Midland spread will favorably influence the operating margin for our refineries. Alternatively, a narrowing of this differential will have an adverse effect on our operating margins. Global product prices are influenced by the price of Brent crude which is a global benchmark crude. Global product prices influence product prices in the U.S. As a result, our refineries are influenced by the spread between Brent crude and WTI Midland. The Brent less WTI Midland spread represents the differential between the average per barrel price of Brent crude oil and the average per barrel price of WTI Midland crude oil. A widening of the spread between Brent and WTI Midland will favorably influence our refineries' operating margins. Also, the Krotz Springs refinery is influenced by the spread between Brent crude and LLS. The Brent less LLS spread represents the differential between the average per barrel price of Brent crude oil and the average per barrel price of LLS crude oil. A discount in LLS relative to Brent will favorably influence the Krotz Springs refinery operating margin. Refining contribution margin is impacted by regulatory costs associated with the cost of RINs as well as energy costs, including the cost of natural gas. In periods of unfavorable regulatory sentiment or uncertainty regarding the possibility of SREs, RINs prices can increase at higher rates than crack spreads, or even when crack spreads are declining. This can be particularly impactful on smaller refineries, where the operating cost structure does not have as much scalability as larger refineries. Additionally, volatility in energy costs, which are captured in our operating expenses and impact our Refining contribution margin, can significantly impact our ability to capture crack spreads, with natural gas representing the most significant component. Within Delek’s geographic footprint, we source the majority of our natural gas from the Gulf Coast, and secondarily from the Permian, and we do not currently have the capability at our refineries to switch our energy consumption to utilize alternative sources of fuel. For this reason, unfavorable Gulf Coast (Henry Hub) differentials can impact ### 56 \| our crack spread capture. The cost to acquire the refined fuel products we sell to our wholesale customers in our logistics segment and at our convenience stores in our retail segment largely 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, depend 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. In addition to the above, it continues to be a strategic and operational objective to manage price and supply risk related to crude oil that is used in refinery production, and to develop strategic sourcing relationships. For that purpose, from a pricing perspective, we enter into commodity derivative contracts to manage our price exposure to our inventory positions, future purchases of crude oil and ethanol, future sales of refined products or to fix margins on future production. We also enter into future commitments to purchase or sell RINs at fixed prices and quantities, which are used to manage our RINs Obligation. Additionally, from a sourcing perspective, we often enter into purchase and sale contracts with vendors and customers or take physical or financial commodity positions for crude oil that may not be used immediately in production, but that may be used to manage the overall supply and availability of crude expected to ultimately be needed for production and/or to meet minimum requirements under strategic pipeline arrangements, and also to optimize and hedge availability risks associated with crude that we ultimately expect to use in production. Such transactions are inherently based on certain assumptions and judgments made about the current and possible future availability of crude. Therefore, when we take physical or financial positions for optimization purposes, our intent is generally to take offsetting positions in quantities and at prices that will advance these objectives while minimizing our positional and financial statement risk. However, because of the volatility of the market in terms of pricing and availability, it is possible that we may have material positions with timing differences or, more rarely, that we are unable to cover a position with an offsetting position as intended. Such differences could have a material impact on the classification of resulting gains/losses, assets or liabilities, and could also significantly impact refining contribution margin. Finally, as part of our overall business strategy, we regularly evaluate opportunities to expand our portfolio of businesses 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. *Refinery Statistics* *(Unaudited)* *(Unaudited)* | Total Refining Segment | Three Months Ended September 30, 2022 | 2021 As Adjusted(2) | Nine Months Ended September 30, 2022 | 2021 As Adjusted(2) | | --- | ---: | ---: | ---: | ---: | | Days in period | 92 | 92 | 273 | 273 | | Total sales volume - refined product (average bpd) (1) | 300,129 | 343,007 | 303,084 | 311,532 | | Total production (average bpd) | 300,235 | 287,784 | 293,969 | 245,849 | | Crude oil | 299,973 | 282,000 | 289,046 | 241,120 | | Other feedstocks | 2,276 | 7,931 | 6,536 | 7,342 | | Total throughput (average bpd): | 302,249 | 289,931 | 295,582 | 248,462 | | Total refining segment margin ($ in millions) (2) | $278.0 | $166.3 | $1,278.1 | $420.5 | | Total refining segment operating expenses ($ in millions) (3) | 172.0 | 84.2 | 456.9 | 313.9 | | Total refining segment contribution margin ($ in millions) (2) | $106.0 | $82.1 | $821.2 | $106.6 | | Crude Slate: (% based on amount received in period) | | | | | | WTI crude oil | 75.2% | 70.8% | 67.1% | 70.1% | | Gulf Coast Sweet Crude | 5.3% | 8.5% | 8.4% | 7.0% | | Local Arkansas crude oil | 3.5% | 4.0% | 4.1% | 4.7% | | Other | 16.0% | 16.7% | 20.4% | 18.2% | ### 57 \| ### Management's Discussion and Analysis *Refinery Statistics (continued)* *(Unaudited)* *(Unaudited)* | Tyler, AR Refinery Products manufactured (average bpd): | Three Months Ended September 30, 2022 | 2021 As Adjusted(2) | Nine Months Ended September 30, 2022 | 2021 As Adjusted(2) | | --- | ---: | ---: | ---: | ---: | | Gasoline | 35,210 | 35,221 | 35,021 | 37,410 | | Diesel/Jet | 33,844 | 28,452 | 31,060 | 28,883 | | Petrochemicals, LPG, natural gas liquids ("NGLs") | 2,246 | 2,196 | 2,160 | 2,001 | | Other | 2,032 | 1,620 | 1,844 | 1,575 | | Total production | 73,332 | 67,489 | 70,085 | 69,869 | | Throughput (average bpd): | | | | | | Crude Oil | 74,796 | 67,199 | 69,335 | 68,206 | | Other feedstocks | (1,123) | 528 | 1,032 | 2,021 | | Total throughput | 73,673 | 67,727 | 70,367 | 70,227 | | Per barrel of throughput: | | | | | | Operating expenses (3) | $6.93 | $3.54 | 5.87 | $3.73 | | Crude Slate: (% based on amount received in period): | | | | | | WTI crude oil | 86.4% | 87.8% | 85.9% | 89.6% | | East Texas crude oil | 13.6% | 12.2% | 14.1% | 10.1% | | Other | —% | —% | —% | 0.3% | | **El Dorado, AR Refinery** | | | | | | Products manufactured (average bpd): | | | | | | Gasoline | 40,577 | 40,108 | 38,946 | 28,017 | | Diesel | 31,372 | 31,922 | 31,143 | 22,208 | | Petrochemicals, LPG, NGLs | 1,347 | 1,235 | 1,306 | 933 | | Asphalt | 8,503 | 7,595 | 7,941 | 5,768 | | Other | 848 | 720 | 813 | 588 | | Total production | 82,647 | 81,580 | 80,149 | 57,514 | | Throughput (average bpd): | | | | | | Crude Oil | 80,711 | 78,744 | 78,136 | 56,026 | | Other feedstocks | 3,301 | 4,115 | 3,154 | 2,419 | | Total throughput | 84,012 | 82,859 | 81,290 | 58,445 | | Per barrel of throughput: | | | | | | Operating expenses (3) | $4.73 | $1.90 | $4.65 | $4.31 | | Crude Slate: (% based on amount received in period): | | | | | | WTI crude oil | 68.4% | 56.9% | 52.1% | 51.6% | | Local Arkansas crude oil | 14.0% | 14.7% | 15.5% | 20.2% | | Other | 17.6% | 28.4% | 32.4% | 28.2% | | **Big Spring, TX Refinery** | | | | | | Products manufactured (average bpd): | | | | | | Gasoline | 34,431 | 36,051 | 34,087 | 34,133 | | Diesel/Jet | 26,020 | 27,036 | 25,262 | 24,510 | | Petrochemicals, LPG, NGLs | 3,524 | 3,528 | 3,466 | 3,672 | | Asphalt | 1,701 | 1,589 | 1,662 | 1,464 | | Other | 1,342 | 1,354 | 1,344 | 1,416 | | Total production | 67,018 | 69,558 | 65,821 | 65,195 | ### 58 \| ### Management's Discussion and Analysis *Refinery Statistics (continued)* *(Unaudited)* *(Unaudited)* | Throughput (average bpd): | Three Months Ended September 30, 2022 | 2021 As Adjusted(2) | Nine Months Ended September 30, 2022 | 2021 As Adjusted(3) | | --- | ---: | ---: | ---: | ---: | | Crude oil | 70,955 | 70,473 | 67,455 | 66,693 | | Other feedstocks | (3,189) | 576 | (866) | (68) | | Total throughput | 67,766 | 71,049 | 66,589 | 66,625 | | Per barrel of throughput: | | | | | | Direct operating expenses (3) | $7.19 | $2.97 | $6.96 | $5.13 | | Crude Slate: (% based on amount received in period): | | | | | | WTI crude oil | 72.7% | 75.9% | 69.3% | 68.7% | | WTS crude oil | 27.3% | 24.1% | 30.7% | 31.3% | | **Krotz Springs, LA Refinery** | | | | | | Products manufactured (average bpd): | | | | | | Gasoline | 32,371 | 31,465 | 32,111 | 23,639 | | Diesel/Jet | 31,195 | 26,364 | 31,537 | 19,075 | | Heavy Oils | 944 | 1,216 | 1,439 | 759 | | Petrochemicals, LPG, NGLs | 6,768 | 6,151 | 6,948 | 4,690 | | Other | 5,960 | 3,960 | 5,881 | 7,267 | | Total production | 77,238 | 69,156 | 77,916 | 55,430 | | Throughput (average bpd): | | | | | | Crude Oil | 73,510 | 65,583 | 74,120 | 50,197 | | Other feedstocks | 3,287 | 2,713 | 3,216 | 5,413 | | Total throughput | 76,797 | 68,296 | 77,336 | 55,610 | | Per barrel of throughput: | | | | | | Direct operating expenses (3) | $5.85 | $4.02 | $5.24 | $4.91 | | Crude Slate: (% based on amount received in period): | | | | | | WTI Crude | 70.1% | 62.5% | 61.0% | 65.5% | | Gulf Coast Sweet Crude | 23.2% | 37.5% | 33.3% | 33.8% | | Other | 6.7% | —% | 5.7% | 0.7% | (1) Includes sales to other segments which are eliminated in consolidation. See tables below. (2) Adjusted to reflect the retrospective change in accounting policy from LIFO to FIFO for certain inventories. For further discussion, see Note 7 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. (3) Reflects the prior period conforming reclassification adjustment between operating expenses and general and administrative expenses. Included in the refinery statistics above are the following sales to other segments: *Refinery Sales to Other Segments* *(Unaudited)* *(Unaudited)* | (in barrels per day) | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 | | --- | ---: | ---: | ---: | ---: | | Tyler refined product sales to other Delek segments | — | 50 | — | 619 | | El Dorado refined product sales to other Delek segments | — | 9 | 5 | 9 | | Big Spring refined product sales to other Delek segments | 21,565 | 22,298 | 20,863 | 22,196 | | Krotz Springs refined product sales to other Delek segments | — | 3,180 | — | 2,423 | ### 59 \| ### Management's Discussion and Analysis *Pricing Statistics (average for the period presented)* *(Unaudited)* *(Unaudited)* | | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 | | --- | ---: | ---: | ---: | ---: | | WTI — Cushing crude oil (per barrel) | $91.63 | $70.54 | $98.50 | $65.06 | | WTI — Midland crude oil (per barrel) | $91.43 | $70.74 | $98.29 | $65.48 | | WTS -- Midland crude oil (per barrel) | $92.17 | $70.58 | $98.58 | $65.43 | | LLS (per barrel) | $94.07 | $71.46 | $100.58 | $66.69 | | Brent crude oil (per barrel) | $97.69 | $73.15 | $102.48 | $67.96 | | U.S. Gulf Coast 5-3-2 crack spread (per barrel) - utilizing HSD | $23.07 | $13.53 | $25.08 | $11.90 | | U.S. Gulf Coast 5-3-2 crack spread (per barrel) (1) | $33.65 | $18.46 | $33.73 | $16.32 | | U.S. Gulf Coast 3-2-1 crack spread (per barrel) (1) | $31.28 | $18.64 | $32.12 | $16.42 | | U.S. Gulf Coast 2-1-1 crack spread (per barrel) (1) | $21.53 | $11.11 | $23.24 | $9.01 | | U.S. Gulf Coast Unleaded Gasoline (per gallon) | $2.64 | $2.15 | $2.92 | $1.95 | | Gulf Coast Ultra low sulfur diesel (per gallon) | $3.49 | $2.08 | $3.49 | $1.92 | | U.S. Gulf Coast high sulfur diesel (per gallon) | $2.86 | $1.79 | $2.98 | $1.65 | | Natural gas (per MMBtu) (2) | $7.97 | $4.32 | $6.69 | $3.35 | (1) For our Tyler and El Dorado refineries, we compare our per barrel refining product margin to the Gulf Coast 5-3-2 crack spread consisting of WTI Cushing crude, U.S. Gulf Coast CBOB gasoline and U.S. Gulf Coast Pipeline No. 2 heating oil (ultra low sulfur diesel). For our Big Spring refinery, we compare our refining margin to the Gulf Coast 3-2-1 crack spread consisting of WTI Cushing crude, Gulf Coast CBOB gasoline and Gulf Coast ultra low sulfur diesel, and for our Krotz Springs refinery, we compare our per barrel refining margin to the Gulf Coast 2-1-1 crack spread consisting of LLS crude oil, Gulf Coast CBOB gasoline and U.S. Gulf Coast Pipeline No. 2 heating oil (high sulfur diesel). The Tyler refinery's crude oil input is primarily WTI Midland and East Texas, while the El Dorado refinery's crude input is primarily a combination of WTI Midland, local Arkansas and other domestic inland crude oil. The Big Spring refinery’s crude oil input is primarily comprised of WTS and WTI Midland. The Krotz Springs refinery’s crude oil input is primarily comprised of LLS and WTI Midland. (2) One Million British Thermal Units ("MMBtu"). ### 60 \| ***Refining Segment Operational Comparison of the Three and Nine Months Ended September 30, 2022 versus the Three and Nine Months Ended September 30, 2021*** ### Net Revenues ### Q3 2022 vs. Q3 2021 Net revenues for the refining segment increased by $1,431.5 million, or 50.9%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by increases in the average price of U.S. Gulf Coast gasoline of 23.3% ULSD of 67.9%, and HSD of 60.1% and Net revenues included sales to our retail segment of $132.1 million and $92.3 million, sales to our logistics segment of $124.7 million and $89.9 million, and sales to our other segment of $0.0 million and $28.7 million for the three months ended September 30, 2022 and September 30, 2021, respectively. We eliminate this intercompany revenue in consolidation. ### YTD 2022 vs. YTD 2021 Net revenues for the refining segment increased by $5,579.9 million, or 80.1%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following: - increases in the average price of U.S. Gulf Coast gasoline of 49.3%, ULSD of 82.4%, and HSD of 80.3%; and - an increase in total sales volumes of 13.1 million barrels, where sales volumes were lower in the nine months of 2021 due to severe weather impacting our refineries and turnaround activities at our El Dorado refinery. Net revenues included sales to our retail segment of $404.0 million and $253.8 million, sales to our logistics segment of $374.3 million and $229.8 million and sales to our other segment of $16.7 million and $71.7 million for the nine months ended September 30, 2022 and 2021, respectively. We eliminate this intercompany revenue in consolidation. ### Cost of Materials and Other ### Q3 2022 vs. Q3 2021 Cost of materials and other increased by $1,319.8 million, or 49.8%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following: - increases in the cost of WTI Cushing crude oil, from an average of $70.54 per barrel to an average of $91.63, or 29.9%, and increases in the cost of WTI Midland crude oil, from an average of $70.74 per barrel to an average of $91.43, or 29.2%; and - an increase in sales volumes. ### YTD 2022 vs. YTD 2021 Cost of materials and other increased by $4,722.3 million, or 72.1%, during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following: - increases in the cost of WTI Cushing crude oil, from an average of $65.06 per barrel to an average of $98.50, or 51.4%; - increases in the cost of WTI Midland crude oil, from an average of $65.48 per barrel to an average of $98.29, or 50.1%; - an increase in sales volumes; and - an increase in RINs expense primarily due to increased production. ### 61 \| Our refining segment has multiple service agreements with our logistics segment which, among other things, require the refining segment to pay terminalling and storage fees based on the throughput volume of crude and finished product in the logistics segment pipelines and the volume of crude and finished product stored in the logistics segment storage tanks, subject to minimum volume commitments. These costs and fees were $126.1 million and $109.3 million during the third quarters of 2022 and 2021, respectively, and $375.1 million and $307.0 million during the nine months ended September 30, 2022 and 2021, respectively. We eliminate these intercompany fees in consolidation. ### Refining Segment Margin ### Q3 2022 vs. Q3 2021 Refining segment margin increased by $111.7 million, or 67.2%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following: - a 70.5% improvement in the 5-3-2 crack spread (the primary measure for the Tyler refinery and El Dorado refinery), a 67.8% improvement in the average Gulf Coast 3-2-1 crack spread (the primary measure for the Big Spring refinery), and a 93.8% improvement in the average Gulf Coast 2-1-1 crack spread (the primary measure for the Krotz Springs refinery) and; - an increase in utilization and sales volumes. ### YTD 2022 vs. YTD 2021 Refining margin increased by $857.6 million, or 203.9%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following: - a 110.8% improvement in the 5-3-2 crack spread (the primary measure for the Tyler refinery and El Dorado refinery), a 95.6% improvement in the average Gulf Coast 3-2-1 crack spread (the primary measure for the Big Spring refinery), and a 157.9% improvement in the average Gulf Coast 2-1-1 crack spread (the primary measure for the Krotz Springs refinery) and; - an increase in sales volumes. Such increase was partially offset by an increase in RINs expense primarily due to increased production. ### Operating Expenses ### Q3 2022 vs. Q3 2021 Operating expenses increased by $87.8 million, or 104.3%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following: - increase in variable costs and utilities associated with higher throughput during the current period; and - higher natural gas prices in the third quarter of 2022. ### YTD 2022 vs. YTD 2021 Operating expenses increased by $143.0 million, or 45.6%, during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following: - increase in variable costs and utilities associated with higher throughput during the current period; and - higher natural gas prices in the nine months ended September 30, 2022 compared to the prior year for the same period. ### 62 \| ### Contribution Margin ### Q3 2022 vs. Q3 2021 Contribution margin increased by $23.9 million, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by an increase in refining margin primarily driven by improved crack spreads offset by increase in variable costs and utilities and natural gas prices. ### YTD 2022 vs. YTD 2021 Contribution margin increased by $714.6 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by an increase in refining margin primarily driven by improved crack spreads, increased sales volumes, offset by increase in variable costs and utilities, natural gas prices, and higher RINs expense primarily due to increased production. ### 63 \| ### Logistics Segment The table below sets forth certain information concerning our logistics segment operations ($ in millions, except per barrel amounts): *Logistics Contribution Margin and Operating Information* | | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 | | --- | ---: | ---: | ---: | ---: | | Net revenues | $294.1 | $189.6 | $767.4 | $511.0 | | Cost of materials and other | 177.7 | 105.1 | 480.3 | 275.0 | | Operating expenses (excluding depreciation and amortization) | 25.9 | 17.6 | 65.0 | 48.0 | | Contribution margin | $90.5 | $66.9 | $222.1 | $188.0 | | **Operating Information:** | | | | | | East Texas - Tyler Refinery sales volumes (average bpd) (1) | 65,396 | 71,847 | 66,473 | 72,791 | | Big Spring wholesale marketing throughputs (average bpd) | 74,238 | 81,880 | 76,135 | 76,680 | | West Texas wholesale marketing throughputs (average bpd) | 10,082 | 10,560 | 10,023 | 10,033 | | West Texas wholesale marketing margin per barrel | $4.23 | $3.33 | $3.84 | $3.64 | | Terminalling throughputs (average bpd) (2) | 142,003 | 144,355 | 138,558 | 142,959 | | **Throughputs (average bpd):** | | | | | | Lion Pipeline System: | | | | | | Crude pipelines (non-gathered) | 87,653 | 81,929 | 81,795 | 60,344 | | Refined products pipelines to Enterprise Systems | 65,761 | 62,263 | 63,391 | 42,733 | | SALA Gathering System | 14,354 | 14,086 | 16,150 | 14,056 | | East Texas Crude Logistics System | 23,960 | 18,644 | 20,015 | 24,045 | | Big Spring Gathering Assets (3) | 121,304 | 84,325 | 107,699 | 79,251 | | Plains Connection System | 184,254 | 131,571 | 166,864 | 120,905 | | Trucking Assets | 15,763 | 11,450 | 13,606 | 10,655 | (1) Excludes jet fuel and petroleum coke. (2) Consists of terminalling throughputs at our Tyler, Big Spring, Big Sandy and Mount Pleasant, Texas terminals, El Dorado and North Little Rock, Arkansas terminals and Memphis and Nashville, Tennessee terminals. (3) Excludes volumes that are being temporarily transported via trucks while connectors are under construction. ***Logistics Segment Operational Comparison of the Three and Nine Months Ended September 30, 2022 versus the Three and Nine Months Ended September 30, 2021*** ### Net Revenues ### Q3 2022 vs. Q3 2021 Net revenues increased by $104.5 million, or 55.1%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by: - increases in the average sales prices per gallon of diesel and gasoline sold, partially offset by a decrease in the volumes of gasoline and diesel sold in our West Texas marketing operations; - incremental revenues from the 3 Bear Acquisition; and - increases in pipeline throughputs. Net revenues included sales to our refining segment of $126.1 million and $109.3 million for the three months ended September 30, 2022 and September 30, 2021, respectively. We eliminate this intercompany revenue in consolidation. ### YTD 2022 vs. YTD 2021 Net revenues increased by $256.4 million, or 50.2%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following: - increases in the average sales prices per gallon of gasoline and diesel sold and volume of diesel sold, partially offset by a decrease in the volume of gasoline sold in our West Texas marketing operations; - incremental revenues from the 3 Bear Acquisition; and - increases in pipeline throughputs, where the nine months ended September 30, 2021 were negatively impacted by the Pandemic as well as severe weather events. ### 64 \| Net revenues included sales to our refining segment of $375.1 million and $307.0 million for the nine months ended September 30, 2022 and 2021, respectively, and sales to our other segment of $2.0 million and $1.4 million for the nine months ended September 30, 2022 and 2021, respectively. We eliminate this intercompany revenue in consolidation. ### Cost of Materials and Other ### Q3 2022 vs. Q3 2021 Cost of materials and other for the logistics segment increased by $72.6 million, or 69.1%, in the third quarter of 2022 compared to the third quarter of 2021 primarily driven by the following: - increases in the average cost per gallon of gasoline and diesel sold, and increases in the volume of gasoline sold in our West Texas marketing operations: - the average cost per gallon of gasoline and diesel sold increased $0.56 per gallon and $1.42 per gallon, respectively; - the average volumes of gasoline and diesel sold decreased by 0.8 million gallons and 1.1 million gallons, respectively, and; - incremental cost of materials and other from the 3 Bear Acquisition. Our logistics segment purchased product from our refining segment of $124.7 million and $89.9 million for the three months ended September 30, 2022 and September 30, 2021, respectively. We eliminate these intercompany costs in consolidation. ### YTD 2022 vs. YTD 2021 Cost of materials and other for the logistics segment increased by $205.3 million, or 74.7%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 primarily driven by the following: - increases in the average cost per gallon of gasoline and diesel sold, partially offset by decreases in the average volumes of gasoline sold in our West Texas marketing operations: - the average cost per gallon of gasoline and diesel sold increased $0.97 per gallon and $1.55 per gallon, respectively; - the average volumes of diesel sold increased by 1.9 million gallons, while gasoline volumes sold decreased by 2.0 million gallons; and - incremental cost of materials and other from the 3 Bear Acquisition. ### 65 \| Our logistics segment purchased product from our refining segment of $374.3 million and $229.8 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. We eliminate these intercompany costs in consolidation. ### Operating Expenses ### Q3 2022 vs. Q3 2021 Operating expenses increased by $8.3 million, or 47.2%, in the third quarter of 2022 compared to the third quarter of 2021, driven by the following: - increase due to additional expenses associated with 3 Bear Acquisition; - increases in employee and outside service costs after cost cutting measures previously implemented to respond to the COVID-19 Pandemic, including delaying non-essential projects, ended; - increase in energy costs, due to higher natural gas prices; and - increases in utilities, maintenance and other variable expenses due to higher throughput. ### YTD 2022 vs. YTD 2021 Operating expenses increased by $17.0 million, or 35.4%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, driven by the following: - increase due to additional expenses associated with 3 Bear Acquisition; - increases in employee and outside service costs; and - increases in variable expenses such as maintenance and materials costs due to higher throughput. ### Contribution Margin ### Q3 2022 vs. Q3 2021 Contribution margin increased by $23.6 million in the third quarter of 2022 compared to the third quarter of 2021 primarily driven by the following: - increases in revenue due to higher throughput volumes; and - partially offset by increases in operating expense. ### YTD 2022 vs. YTD 2021 Contribution margin increased by $34.1 million, or 18.1%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following: - increases in revenue due to higher throughput volumes; and - partially offset by increases in operating expense. ### 66 \| ### Retail Segment The table below sets forth certain information concerning our retail segment operations (gross sales $ in millions): *Retail Contribution Margins* | | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 | | --- | ---: | ---: | ---: | ---: | | **Net revenues** | $253.1 | $206.5 | $739.7 | $590.3 | | Cost of materials and other | 210.3 | 165.2 | 617.1 | 466.4 | | Operating expenses (excluding depreciation and amortization) | 25.4 | 23.4 | 73.2 | 67.4 | | **Contribution margin** | $17.4 | $17.9 | $49.4 | $56.5 | | **Operating Information** | | | | | | Number of stores (end of period) | 248 | 250 | 248 | 250 | | Average number of stores | 248 | 250 | 248 | 250 | | Average number of fuel stores | 243 | 245 | 243 | 245 | | Retail fuel sales | $169.0 | $124.9 | $502.4 | $349.5 | | Retail fuel sales (thousands of gallons) | 44,729 | 41,912 | 129,145 | 124,655 | | Average retail gallons sold per average number of fuel stores (in thousands) | 184 | 171 | 533 | 510 | | Average retail sales price per gallon sold | $3.78 | $2.98 | $3.89 | $2.80 | | Retail fuel margin ($ per gallon) (1) | $0.345 | $0.327 | $0.330 | $0.356 | | Merchandise sales (in millions) | $84.2 | $81.7 | $237.3 | $240.9 | | Merchandise sales per average number of stores (in millions) | $0.3 | $0.3 | $1.0 | $1.0 | | Merchandise margin % | 32.6% | 33.7% | 33.7% | 33.1% | *Same-Store Comparison (2)* | | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 | | --- | ---: | ---: | ---: | ---: | | Change in same-store fuel gallons sold | 7.4% | (5.9)% | 4.7% | (9.6)% | | Change in same-store merchandise sales | 3.9% | (7.1)% | (0.3)% | (3.1)% | (1) Retail fuel margin represents gross margin on fuel sales in the retail segment, and is calculated as retail fuel sales revenue less retail fuel cost of sales. The retail fuel margin per gallon calculation is derived by dividing retail fuel margin by the total retail fuel gallons sold for the period. (2) Same-store comparisons include period-over-period changes in specified metrics for stores that were in service at both the beginning of the earliest period and the end of the most recent period used in the comparison. ### Retail Segment Operational Comparison of the Three and Nine Months Ended September 30, 2022 versus the Three and Nine Months Ended September 30, 2021 ### Net Revenues ### Q3 2022 vs. Q3 2021 Net revenues for the retail segment increased by $46.6 million, or 22.6%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following: - an increase in total fuel sales which were $169.0 million in the third quarter of 2022 compared to $124.9 million in the third quarter of 2021, primarily attributable to an increase of $0.80 in average price charged per gallon sold; and - an increase in merchandise sales to $84.2 million in the third quarter of 2022 compared to $81.7 million in the third quarter of 2021. ### 2022 vs. YTD 2021 Net revenues for the retail segment increased by $149.4 million, or 25.3%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the following: ### 67 \| - an increase in total fuel sales which were $502.4 million in the nine months of 2022 compared to $349.5 million in the nine months of 2021, primarily attributable to a $1.09 increase in average price charged per gallon sold; and - partially offset by a decrease in merchandise sales to $237.3 million in the nine months of 2022 compared to $240.9 million in the nine months of 2021, primarily driven by the same-store sales decrease of 0.3%. ### Cost of Materials and Other ### Q3 2022 vs. Q3 2021 Cost of materials and other for the retail segment increased by $45.1 million, or 27.3%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by an increase in average cost per gallon of $0.78 or 29.4% applied to fuel sales volumes that increased period over period. Our retail segment purchased finished product from our refining segment of $132.1 million and $92.3 million for the three months ended September 30, 2022 and September 30, 2021, respectively, which is eliminated in consolidation. ### YTD 2022 vs. YTD 2021 Cost of materials and other for the retail segment increased by $150.7 million, or 32.3%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by an increase in average cost per gallon of $1.11 or 45.5% applied to fuel sales volumes that increased period over period. Our retail segment purchased finished product from our refining segment of $404.0 million and $253.8 million for the nine months ended September 30, 2022 and September 30, 2021, respectively, which is eliminated in consolidation. ### Operating Expenses ### Q3 2022 vs. Q3 2021 Retail segment operating expenses increased by $2.0 million, or 8.5%, in the third quarter of 2022 compared to the third quarter of 2021, primarily due to increased salary cost and credit card expenses due to a higher price per gallon. ### YTD 2022 vs. YTD 2021 Operating expenses for the retail segment increased by $5.8 million, or 8.6% in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to increased employee costs. ### 68 \| ### Management's Discussion and Analysis ### Contribution Margin ### Q3 2022 vs. Q3 2021 Contribution margin for the retail segment decreased by $0.5 million, or 2.8%, in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by the following: - a decline in merchandise margin percentage of 1.1%; and - an increase in operating expense. ### YTD 2022 vs. YTD 2021 Contribution margin for the retail segment decreased by $7.1 million, or 12.6%, in the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily driven by the following: - a decrease in average fuel margin of $0.025 per gallon and an increase in fuel sales volume; and - a 1.5% decrease in merchandise sales, partially offset by an increase in merchandise margin percentage of 0.6%. ### Liquidity and Capital Resources Our primary sources of liquidity and capital resources are - cash generated from our operating activities; - borrowings under our debt facilities; and - potential issuances of additional equity and debt securities. At September 30, 2022 our total liquidity amounted to $2.1 billion comprised primarily of $787.4 million in unused credit commitments under the Delek Revolving Credit Facility (as defined in Note 9 of the condensed consolidated financial statements in Item 1. Financial Statements), $193.1 million in unused credit commitments under the Delek Logistics Credit Facility (as defined in Note 9 of the condensed consolidated financial statements in Item 1. Financial Statements) and $1,153.8 million in cash and cash equivalents. Refer to Note 19 of the condensed consolidated financial statements in Item 1. Financial Statements for information on our recent amendments to our debt facilities. Historically, we have generated adequate cash from operations to fund ongoing working capital requirements and pay quarterly cash dividends and operational capital expenditures. In response to the COVID-19 Pandemic and the decline in oil prices, on November 5, 2020, we announced that we elected to suspend dividends in order to conserve capital. On June 21, 2022, our Board of Directors voted to declare a special cash dividend of $0.20 per share of our common stock, payable on July 20, 2022 to shareholders of record on July 12, 2022. Return of cash to shareholders remains a priority for the Company along with maintaining a strong and flexible balance sheet. On August 1, 2022, our Board voted to reinstate the quarterly cash dividend and declared a quarterly cash dividend of $0.20 per share of our common stock, payable on September 6, 2022 to shareholders of record on August 22, 2022. On October 31, 2022, our Board declared a quarterly cash dividend of $0.21 per share of our common stock, payable on December 2, 2022 to shareholders of record on November 18, 2022. In addition, on August 1, 2022, the Board approved an approximately $170.3 million increase in its share repurchase authorization, bringing the total amount available for repurchases under current authorizations to $400.0 million. During the third quarter 2022, we repurchased approximately 1.4 million shares of Delek US common stock for approximately $40 million, with an average price of $27.86 per share. Other funding sources including borrowings under existing credit agreements and issuance of equity and debt securities have been utilized to meet our funding requirements and support our growth capital projects and acquisitions. In addition, we have ### 69 \| historically been able to source funding that terms that reflect market conditions, our financial position and our credit ratings. We continue to monitor market conditions, our financial position and our credit ratings and expect future funding sources to be at terms that are sustainable and profitable for the Company. However, there can be no assurances regarding the availability of any future debt or equity financings or whether such financings can be made available on terms that are acceptable to us; any execution of such financing activities will be dependent on the contemporaneous availability of functioning debt or equity markets. Additionally, new debt financing activities will be subject to the satisfaction of any debt incurrence limitation covenants in our existing financing agreements. Our debt limitation covenants in our existing financing documents are usual and customary for credit agreements of our type and reflective of market conditions at the time of their execution. Additionally, our ability to satisfy working capital requirements, to service our debt obligations, to fund planned capital expenditures, or to pay dividends will depend upon future operating performance, which will be affected by prevailing economic conditions in the oil industry and other financial and business factors, including the current COVID-19 Pandemic and oil prices, some of which are beyond our control. If market conditions were to change, for instance due to the uncertainty created by the COVID-19 Pandemic or the Russia-Ukraine War, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be unfavorably impacted. As of September 30, 2022, we believe we were in compliance with all of our debt maintenance covenants, where the most significant long-term obligation subject to such covenants was the Delek Logistics Credit Facility (see Note 9 of the condensed consolidated financial statements in Item 1. Financial Statements). We currently expect to remain in compliance with our existing debt maintenance covenants, though we can provide no assurances, particularly if conditions significantly worsen beyond our ability to predict. Additionally, we were in compliance with incurrence covenants during the quarter ended September 30, 2022 to the extent that any of our activities triggered these covenants. However, given the uncertainty around economic conditions, it is at least reasonably possible that conditions could change significantly, and that such changes could adversely impact our ability to meet some of these incurrence covenants. Inability to meet the incurrence covenants could impose certain incremental restrictions on our ability to incur new debt and also may limit whether and the extent to which we may pay dividends, as well as impose additional restrictions on our ability to repurchase our stock, make new investments and incur new liens (among others). Such restrictions would generally remain in place until such quarter that we are able to satisfy the applicable incurrence based covenants. In the event that we are subject to these incremental restrictions, we believe that we have sufficient current and alternative sources of liquidity, including (but not limited to) the following: available borrowings under our existing Wells Fargo Revolving Credit Facility, and for Delek Logistics, under its Delek Logistics Credit Facility (each as defined in Note 9 of the condensed consolidated financial statements in Item 1. Financial Statements); the allowance to incur additional secured debt under the Term Loan Credit Facility (as defined in Note 9 of the condensed consolidated financial statements in Item 1. Financial Statements); as well as the possibility of obtaining other secured and unsecured debt, raising capital through equity issuance, or taking advantage of transactional financing opportunities such as sale-leasebacks, each as otherwise contemplated and allowed under our incurrence covenants. ### Cash Flows The following table sets forth a summary of our consolidated cash flows (in millions): *Consolidated* | Cash Flow Data: | Nine Months Ended September 30, 2022 | 2021 | | --- | ---: | ---: | | Operating activities | $716.1 | $210.2 | | Investing activities | (819.9) | (143.2) | | Financing activities | 401.1 | (23.9) | | Net increase | $297.3 | $43.1 | ### Cash Flows from Operating Activities Net cash provided by operating activities was $716.1 million for the nine months ended September 30, 2022, compared to cash provided of $210.2 million for the comparable period of 2021. The increase in cash provided by operating activities was primarily due to an increase in cash receipts from customers and cash payments to suppliers and for salaries resulting in a net $555.4 million increase in cash provided by operating activities. Additionally, interest paid increased $34.4 million, income taxes paid increased $22.4 million and dividends received increased $7.3 million. ### 70 \| ### Cash Flows from Investing Activities Net cash used in investing activities was $819.9 million for the first nine months of 2022, compared to $143.2 million in the comparable period of 2021. The increase in cash flows used in investing activities was primarily due to the $625.4 million acquisition of 3 Bear, an $29.7 million increase in purchases of property, plant and equipment, partially attributable to delaying non-essential projects in light of the COVID-19 Pandemic and a $10.4 million decrease in proceeds from sale of property, plant and equipment. ### Cash Flows from Financing Activities Net cash provided by financing activities was $401.1 million for the nine months ended September 30, 2022, compared to net cash used of $23.9 million in the comparable 2021 period. This increase in cash provided was primarily due to net proceeds on our revolvers and term debt of $510.0 million during the nine months ended September 30, 2022, compared to net repayments of $125.8 million in the comparable 2021 period and $16.4 million in proceeds from the sale of Delek Logistics limited partner units in the current period, partially offset by a $95.6 million decrease in net proceeds from inventory financing arrangements, the purchase of Delek common stock from IEP Energy Holding, LLC for $64.0 million in the current period, $40.0 million of share repurchases and $28.3 million dividends paid in the period. ### Cash Position, Indebtedness and Other Financing Arrangements As of September 30, 2022, our total cash and cash equivalents were $1,153.8 million and we had total long-term indebtedness of approximately $2,733.6 million. The total long-term indebtedness is net of deferred financing costs and debt discount of $9.2 million and $14.3 million, respectively. Additionally, we had letters of credit issued of approximately $212.6 million. Total unused credit commitments or borrowing base availability, as applicable, under our revolving credit facilities was approximately $980.5 million. Our total long-term indebtedness consisted of the following: - an aggregate principal amount of $1,250.2 million under the Term Loan Credit Facility, due on March 30, 2025, with effective interest rate of 6.41%; - an aggregate principal amount of $806.9 million under the Delek Logistics Credit Facility, due on September 28, 2023, with average borrowing rate of 5.64%; - an aggregate principal amount of $250.0 million under the Delek Logistics 2025 Notes, due in 2025, with effective interest rate of 7.19%; - an aggregate principal amount of $400.0 million under the Delek Logistics 2028 Notes, due in 2028, with effective interest rate of 7.40%; - an aggregate principal amount of $50.0 million under the United Community Bank Revolver (formally Reliant Bank), due on June 30, 2023, with fixed interest rate of 7.00%; and - the Revolving Credit Facility, due on March 30, 2023, with borrowing rate of 6.50% for base rate loans, with no principal amount outstanding. See Note 9 and Note 19 of the condensed consolidated financial statements in Item 1. Financial Statements, for additional information about our separate credit facilities included in long-term indebtedness. Additionally, we also utilize other financing arrangements to finance operating assets and/or, from time to time, to monetize other assets that may not be needed in the near term, when internal cost of capital and other criteria are met. Such arrangements include our supply and offtake arrangements, which finance a significant portion of our first-in, first-out inventory at the refineries and, from time to time, RINs or other non-inventory product financing liabilities. Our supply and offtake obligation with J. Aron amounted to $596.2 million at September 30, 2022, $413.0 million of which is due on December 30, 2022. (See Note 8 of the condensed consolidated financial statements in Item 1. Financial Statements, for additional information about our supply and offtake facilities). Our product financing liabilities consisted primarily of RIN financings as of September 30, 2022, and totaled $305.7 million, all of which is due by December 31, 2022. See further description of these types of arrangements in the Environmental Credits and Related Regulatory Obligations accounting policy disclosed in Note 2 to our audited consolidated financial statements included Item 8. Financial Statements and Supplementary Data, of our December 31, 2021 Annual Report on Form 10-K. For both arrangements and the related commitments, see also our "Contractual Obligations" section included in Item 2. Management's Discussion and Analysis. ### 71 \| ### Capital Spending A key component of our long-term strategy is our capital expenditure program. Our capital expenditures for the nine months ended September 30, 2022 were $174.1 million, of which approximately $56.0 million was spent in our refining segment, $68.0 million in our logistics segment, $22.6 million in our retail segment and $27.5 million primarily at the holding company level. The following table summarizes our actual capital expenditures for the nine months ended September 30, 2022 and planned capital expenditures for the full year 2022 by operating segment and major category (in millions): *Refining* | | Full Year 2022 Forecast | Nine Months Ended September 30, 2022 | | --- | ---: | ---: | | Sustaining maintenance, including turnaround activities | $100.9 | $50.6 | | Regulatory | 9.7 | 4.0 | | Discretionary projects | 2.9 | 1.4 | | **Refining segment total** | 113.5 | 56.0 | | **Logistics** | | | | Regulatory | 4.6 | 2.9 | | Sustaining maintenance | 1.7 | 1.1 | | Discretionary projects | 110.5 | 64.0 | | **Logistics segment total** | 116.8 | 68.0 | | **Retail** | | | | Regulatory | — | — | | Sustaining maintenance | 4.5 | 3.3 | | Discretionary projects | 29.0 | 19.3 | | **Retail segment total** | 33.5 | 22.6 | | **Other** | | | | Regulatory | 3.8 | 1.9 | | Sustaining maintenance | 24.4 | 20.6 | | Discretionary projects | 8.0 | 5.0 | | **Other total** | 36.2 | 27.5 | | **Total capital spending (1)** | $300.0 | $174.1 | (1) The current year spend excludes approximately $8.1 million for equipment purchased during the nine months ended September 30, 2021 to be used in future expansion projects. The amount of our capital expenditure budget is subject to change due to unanticipated increases in the cost, scope and completion time for our capital projects and subject to the changes and uncertainties discussed under the 'Forward-Looking Statements' section of Item 2, of this Quarterly Report on Form 10-Q. We have no material off-balance sheet arrangements through the date of the filing of this Quarterly Report on Form 10-Q. ### 72 \| ### Cash Requirements ### Long-Term Cash Requirements Under Contractual Obligations Information regarding our known cash requirements under contractual obligations of the types described below as of September 30, 2022, is set forth in the following table (in millions): | | Payments Due by Period \<1 Year | 1-3 Years | 3-5 Years | \>5 Years | Total | | --- | ---: | ---: | ---: | ---: | ---: | | Long term debt and notes payable obligations | $869.9 | $1,487.2 | $— | $400.0 | $2,757.1 | | Interest(1) | 167.9 | 200.2 | 65.4 | 42.8 | 476.3 | | Operating lease commitments(2)(7) | 57.6 | 82.2 | 36.1 | 28.5 | 204.4 | | Finance lease commitments(3) | 4.4 | 3.8 | 2.8 | 4.8 | 15.8 | | Purchase commitments(4) | 697.9 | — | — | — | 697.9 | | Product financing commitments(5) | 305.7 | — | — | — | 305.7 | | Transportation agreements(6) | 158.9 | 257.1 | 226.8 | 249.7 | 892.5 | | J. Aron supply and offtake obligations (7) | 428.5 | — | — | — | 428.5 | | Total | $2,690.8 | $2,030.5 | $331.1 | $725.8 | $5,778.2 | (1) Expected interest payments on debt outstanding at September 30, 2022. Floating interest rate debt is calculated using September 30, 2022 rates. For additional information, see Note 9 of our condensed consolidated financial statements included in Item 1. Financial Statements, of this Quarterly Report on Form 10-Q. (2) Amounts reflect future estimated lease payments under operating leases having remaining non-cancelable terms in excess of one year as of September 30, 2022. (3) Amounts reflect future estimated lease payments under financing leases having remaining non-cancelable terms in excess of one year as of September 30, 2022. (4) We have purchase commitments to secure certain quantities of crude oil, finished product and other resources used in production at both fixed and market prices. We have estimated future payments under the market-based agreements using current market rates. Excludes purchase commitments in buy-sell transactions which have matching notional amounts with the same counterparty and are generally net settled in exchanges. (5) Balances consist of obligations under RINs product financing arrangements. For additional information, see Note 11 of our condensed consolidated financial statements included in Item 1. Financial Statements, of this Quarterly Report on Form 10-Q. (6) Balances consist of contractual obligations under agreements with third parties (not including Delek Logistics) for the transportation of crude oil to our refineries. (7) Balances consists of contractual obligations under the J. Aron Supply and Offtake Agreements, including annual fees and principal obligation for the Baseline Volume Step-Out Liability. For additional information, see Note 8 of our condensed consolidated financial statements included in Item 1. Financial Statements, of this Quarterly Report on Form 10-Q. ### Other Cash Requirements Our material short-term cash requirements under contractual obligations are presented above, and we expect to fund the majority of those requirements with cash flows from operations, with the exception of the supply and offtake obligations, which are expected to be refinanced. Our other cash requirements consisted of operating activities and capital expenditures. Operating activities include cash outflows related to payments to suppliers for crude and other inventories (which are largely reflected in our contractual purchase commitments in the table above) and payments for salaries and other employee related costs. In line with our Long-term Sustainable strategy, future cash requirements will include initiatives to build on our long term sustainable business model, ESG initiatives and digital transformation. ### 73 \| ## Market risk As filed, 6,462 characters. These disclosures should be read in conjunction with the condensed consolidated financial statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and other information presented herein, as well as in the "Quantitative and Qualitative Disclosures About Market Risk" section contained in our Annual Report on Form 10-K, filed on February 25, 2022. ### Price Risk Management Activities At times, we enter into the following instruments/transactions in order to manage our market-indexed pricing risk: commodity derivative contracts which we use to manage our price exposure to our inventory positions, future purchases of crude oil and ethanol, future sales of refined products or to fix margins on future production; and future commitments to purchase or sell RINs at fixed prices and quantities, which are used to manage the costs associated with our RINs obligations and meet the definition of derivative instruments under ASC 815, *Derivatives and Hedging* ("ASC 815"). In accordance with ASC 815, all of these commodity contracts and future purchase commitments are recorded at fair value, and any change in fair value between periods has historically been recorded in the profit and loss section of our condensed consolidated financial statements. Occasionally, at inception, the Company will elect to designate the commodity derivative contracts as cash flow hedges under ASC 815. Gains or losses on commodity derivative contracts accounted for as cash flow hedges are recognized in other comprehensive income on the condensed consolidated balance sheets and, ultimately, when the forecasted transactions are completed, in net revenues or cost of materials and other in the condensed consolidated statements of income. The following table sets forth information relating to our open commodity derivative contracts, excluding our trading derivative contracts (which are presented separately below), as of September 30, 2022 ($ in millions): | Contract Description Contracts not designated as hedging instruments: | Total Outstanding Fair Value | Notional Contract Volume | Notional Contract Volume by Year of Maturity 2022 | 2023 | 2024 | | --- | ---: | ---: | ---: | ---: | ---: | | Crude oil price swaps - long(1) | $20.3 | 51,961,000 | 24,910,000 | 27,051,000 | — | | Crude oil price swaps - short(1) | (11.9) | 49,753,000 | 28,382,000 | 21,371,000 | — | | Inventory, refined product and crack spread swaps - long(1) | (8.9) | 3,516,000 | 2,226,000 | 1,290,000 | — | | Inventory, refined product and crack spread swaps - short(1) | 22.0 | 7,343,000 | 4,953,000 | 2,390,000 | — | | Natural gas swaps - long(3) | (2.7) | 2,030,000 | — | 2,030,000 | — | | Natural gas swaps - short(3) | 0.5 | 5,755,000 | 5,475,000 | 280,000 | — | | RIN commitment contracts - long(2) | 0.3 | 128,800,000 | 128,800,000 | — | — | | RIN commitment contracts - short(2) | 1.6 | 22,000,000 | 22,000,000 | — | — | | Total | $21.2 | 271,158,000 | 216,746,000 | 54,412,000 | — | (1) Volume in barrels (2) Volume in RINs (3) Volume in MMBTU . ### Interest Risk Management Activities We have market exposure to changes in interest rates relating to our outstanding floating rate borrowings, which totaled approximately $2,107.1 million as of September 30, 2022. The annualized impact of a hypothetical one percent change in interest rates on our floating rate debt as of September 30, 2022 would be to change interest expense by approximately $21.1 million. ### Inflation Inflationary factors, such as increases in the costs of our inputs, operating expenses, and interest rates may adversely affect our operating results. During 2022, our results of operations were negatively affected by higher natural gas costs, higher labor costs and supply chain disruptions, in part, by the COVID-19 Pandemic, the uncertain economic environment, and macroeconomic and geopolitical events and trends. We expect these cost pressures and supply chain challenges to continue into fiscal year 2023. In addition, current or future governmental policies may increase the risk of inflation, which could further increase costs and may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales if the prices at which we are able to sell our products and services do not increase in line with increases in costs. ### 74 \| ### LIBOR Transition LIBOR is a commonly used indicative measure of the average interest rate at which major global banks could borrow from one another. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR discontinued the reporting of certain LIBOR rates on December 31, 2021, and has publicly announced that it intends to discontinue all USD LIBOR rates after June 2023. Certain of our agreements use LIBOR as a “benchmark” or “reference rate” for various terms. Some agreements contain an existing LIBOR alternative such as the Secured Overnight Financing Rate. Where there is not an alternative, we expect to replace the LIBOR benchmark with an alternative reference rate. While we do not expect the transition to an alternative rate to have a significant impact on our business or operations, it is possible that the move away from LIBOR could materially impact our borrowing costs on our variable rate indebtedness. ### Commodity Derivatives Trading Activities We enter into active trading positions in a variety of commodity derivatives, which include forward physical contracts, swap contracts, and futures contracts. These trading activities are undertaken by using a range of contract types in combination to create incremental gains by capitalizing on crude oil supply and pricing seasonality. These contracts are classified as held for trading and are recognized at fair value with changes in fair value recognized in the income statement. The following table sets forth information relating to trading commodity derivative contracts as of September 30, 2022: | Contract Description | Total Outstanding Fair Value | Notional Contract Volume | Notional Contract Volume by Year of Maturity 2022 | 2023 | 2024 | 2025 | 2026 | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Crude forward contracts- long(1) | 105.9 | 1,551,582 | 1,551,582 | — | — | — | — | | Crude forward contracts- short(1) | (96.3) | 1,425,681 | 1,425,681 | — | — | — | — | | Total | $9.6 | 2,977,263 | 2,977,263 | — | — | — | — | (1) Volume in barrels. ## Controls and procedures As filed, 1,910 characters. Our disclosure controls and procedures are designed to provide reasonable assurance that the information that we are required to disclose in reports we file under the Exchange Act is accumulated and appropriately communicated to management. We carried out an evaluation required by Rule 13a-15(b) of the Exchange Act, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures at the end of the reporting period. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the reporting period. We acquired 3 Bear effective June 1 2022, and have included the operating results and assets and liabilities of 3 Bear in our consolidated financial statements as of September 30, 2022 and for the 122 days then ended. As permitted by SEC guidance for newly acquired businesses, management’s assessment of the Company’s disclosure controls and procedures did not include an assessment of those disclosure controls and procedures of 3 Bear that are subsumed by internal control over financial reporting. 3 Bear accounted for approximately 8.0% of total assets as of September 30, 2022 and approximately 0.5% of total revenues of the Company for the nine months ended on September 30, 2022. Other than our internal controls for 3 Bear, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the third quarter of 2022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. ### 75 \| ### Legal Proceedings, Risk Factors, Unregistered Sales of Equity Securities and Other Information ## Risk factors As filed, 7,031 characters. There were no material changes during the nine months ended September 30, 2022 to the risk factors identified in the Company’s fiscal 2021 Annual Report on Form 10-K, except as described below. ***We may be unsuccessful in integrating the operations of the assets we have acquired or may acquire with our operations, and in realizing all or any part of the anticipated benefits of any such acquisitions.*** From time to time, we evaluate and acquire assets and businesses that we believe complement our existing assets and businesses. Acquisitions may require substantial capital or the incurrence of substantial indebtedness. Our capitalization and results of operations may change significantly as a result of completed or future acquisitions. Acquisitions and business expansions involve numerous risks, including difficulties in the assimilation of the assets and operations of the acquired businesses, inefficiencies and difficulties that arise because of unfamiliarity with new assets and the businesses associated with them, and new geographic areas and the diversion of management's attention from other business concerns. Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined, and we may experience unanticipated delays in realizing the benefits of an acquisition. Also, following an acquisition, we may discover previously unknown liabilities associated with the acquired business or assets for which we have no recourse under applicable indemnification provisions. On June 1 2022, a subsidiary of Delek Logistics acquired 100% of the equity interests of 3 Bear Delaware Holding – NM, LLC, an indirect subsidiary of 3 Bear Energy, LLC. The 3 Bear Acquisition will require the management of Delek Logistics, which includes certain members of our management who provide management services to Delek Logistics, to devote significant attention and resources to integrating the 3 Bear business with its business. Potential difficulties that may be encountered in the integration process include, among others: - the inability to successfully integrate the 3 Bear business into its business in a manner that permits Delek Logistics to achieve the revenue and cost savings that it announced as anticipated from the acquisition; - complexities associated with managing the larger, integrated business; - potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the acquisition; - integrating personnel from the two companies while maintaining focus on providing consistent, high-quality products and services; - loss of key employees; - integrating relationships with customers, vendors and business partners; - performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the acquisition and the integration of operations; and - the disruption or loss in momentum in, each company’s ongoing business or inconsistencies in standards, controls, procedures and policies. Delays or difficulties in the integration process could adversely affect our business, financial condition, and results of operations. There can be no assurance that the acquisition will result in the realization of the full benefits of the synergies, cost savings, innovation and operational efficiencies that are currently expected from this integration or the have been communicated with respect to this acquisition or that these benefits will be achieved within the anticipated timeframe. ***The Russia-Ukraine War, and events occurring in response thereto, including sanctions brought by the United States and other countries against Russia and any expansion of hostilities, may have an adverse impact on our business, our future results of operations, and our overall financial performance.*** The effects of the military conflict that began with the Russian invasion of Ukraine in February 2022 on our business, financial condition, and results of operations are impossible to predict. Sanctions brought by the United States and other countries against Russia, any escalation of the conflict, including the regional or global expansion of hostilities, and other future developments could significantly affect the global economy, lead to market volatility and supply chain disruptions, have an adverse impact on energy prices, including prices for crude oil, other feedstocks, and refined petroleum products, have an adverse impact on the margins from our petroleum product marketing operations, and have a material adverse effect on our business, financial condition, and results of operations. ### 76 \| ***The physical effects of climate change and severe weather present risks to our operations.*** The potential physical effects of climate change and severe weather on our operations are highly uncertain and depend upon the unique geographic and environmental factors present. We have systems in place to manage potential acute physical risks, including those that may be caused by climate change, but if any such events were to occur, they could have an adverse effect on our assets and operations. Examples of potential physical risks include floods, hurricane-force winds, wildfires, freezing temperatures and snowstorms. We have incurred, and will continue to incur, costs to protect our assets from physical risks, and to employ processes, to the extent available, to mitigate such risks. Any extreme weather events may disrupt the ability to operate our facilities or to transport crude oil, refined petroleum or petrochemical and plastics products in these areas. Extended periods of such disruption could have an adverse effect on our results of operations. We could also incur substantial costs to prevent or repair damage to these facilities. Finally, depending on the severity and duration of any extreme weather events or climate conditions, our operations may need to be modified and material costs incurred, which could materially and adversely affect our business, financial condition and results of operations. ***There are certain environmental hazards and risks inherent in our operations that could adversely affect those operations and our financial results.*** The operation of refineries, pipelines, terminals and vessels is inherently subject to the risks of spills, discharges or other inadvertent releases of petroleum or hazardous substances. If any of these events had previously occurred or occurs in the future in connection with any of our refineries, pipelines or refined petroleum products terminals, or in connection with any facilities that receive our wastes or byproducts for treatment or disposal, other than events for which we are indemnified, we could be liable for all costs and penalties associated with their remediation under federal, state, local and international environmental laws or common law, and could be liable for property damage to third parties caused by contamination from releases and spills. Filed Nov 8, 2022. Source: SEC EDGAR, the filing index for accession 0001694426-22-000159. Last ingested by Listed: Nov 6, 2026, 13:59 ET. No prices; not investment advice.