Delek US Holdings, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the 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 regarding the effect, impact, potential duration or other implications of, or expectations expressed with respect to, the outbreak of COVID-19 and the actions of members of the OPEC and Russia with respect to oil production and pricing, and statements regarding our efforts and plans in response to such events, the information concerning our planned capital expenditures by segment for 2021, possible future results of operations, business and growth strategies, 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; • our ability to execute our strategy of growth through acquisitions and capital projects and changes in the expected value of and benefits derived therefrom, including any inability 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 due to the COVID-19 Pandemic; • general economic and business conditions affecting the southern, southwestern and western United States, 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); • 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, 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; • the suspension of our quarterly dividend; • seasonality; • acts of terrorism (including cyber-terrorism) aimed at either our facilities or other facilities that could impair our ability to produce or transport refined products or receive feedstocks; • future decisions by OPEC+ members regarding production and pricing and disputes between OPEC+ members regarding such; • 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 Item 1A. Risk Factors and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 57 | Management's Discussion and Analysis 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 and Strategic Overview 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. Business and Economic Environment The outbreak of the COVID-19 Pandemic has resulted in significant economic disruption globally, including in the U.S. and specific geographic areas where we operate. Actions taken by various governmental authorities, individuals and companies around the world to prevent the spread of COVID-19 through both voluntary and mandated social distancing, curfews, shutdowns and expanded safety measures have restricted travel, many business operations, public gatherings and the overall level of individual movement and in-person interaction across the globe. This has in turn significantly reduced global economic activity which has had a significant impact on the nature and extent of travel. The COVID-19 Pandemic has had a devastating impact on the airline industry, dramatically reducing the number of domestic flights and, due to foreign travel bans and immigration restrictions abroad as well as traveler concerns over exposure, virtually eliminating international travel originating from the U.S. to many parts of the world. Additionally, the COVID-19 Pandemic has had a significant negative impact on motor vehicle use. As a result, there has also been a decline in the demand for, and thus also the market prices of, crude oil and certain of our products, particularly our refined petroleum products and most notably gasoline and jet fuel. In April and June 2020, agreements were reached to cut oil production between the members of OPEC+ as part of the efforts to resolve the oil production disputes that significantly affected crude oil prices beginning in the first quarter of 2020 (the "OPEC Production Disputes"), and to provide stability in the oil markets. While OPEC+ have reached an agreement to cut oil production, the uncertainty about the duration of the COVID-19 Pandemic has caused storage constraints in the U.S. resulting from over-supply of produced oil. Based on these conditions and events, downward pressure on commodity prices, crack spreads and demand remains a significant risk and could continue for the foreseeable future. During the latter part of 2020, governmental authorities in various states across the U.S., particularly those in our Permian Basin and U.S. Gulf Coast regions, began to lift many of the restrictions created by actions taken to slow down the spread of COVID-19. Additionally, during the fourth quarter 2020, the availability of multiple viable vaccines was announced and since have begun distribution. These actions have resulted in an increase in the level of individual movement and travel and, in turn, an increase in the demand for some of our products relative to earlier in the year, as well as an improvement in the forward curve and pricing outlooks for crude oil prices and crack spreads. These improvements have likewise led to improvement in the equity market capitalization of public companies in the midstream and downstream oil and gas sectors. However, many of the states where such restrictions were lifted also experienced a marked increase in the spread of COVID-19 and many governmental authorities in such areas have responded by reimposing certain restrictions they had previously lifted. This response, as well as the increased infection rates, impacts regions that we serve and could significantly impact demand in ways that we cannot predict. Additionally, increased infection rates could impact our refining, logistics and retail operations, particularly in high-infection states, if our employees are personally affected by the illness, both through direct infection and quarantine procedures. Identified Uncertainties Impacting Delek During the year ended December 31, 2020, Delek experienced the impact on demand and pricing of these unprecedented conditions, most notably in our refining segment. Our business and our 2020 results reflect the impact of decreased demand combined with decreased crack spreads. We also experienced operational constraints, including COVID-19 infections at certain of our company locations that resulted in re-imposed or expanded remote work policies and quarantine protocols. And we continue to face risk from our suppliers and customers who are being affected by similar challenges. We have identified the following known uncertainties resulting from the ongoing COVID-19 Pandemic: • Significant declines and/or volatility in prices of refined products we sell and the feedstocks we purchase as well as in crack spreads resulting from the COVID-19 Pandemic could have a significant impact on our revenues, cost of sales, operating income and liquidity; • A decline in the market prices of refined products and feedstocks below the carrying value in our inventory may result in the adjustment of the value of our inventories to the lower market price and a corresponding loss on the value of our inventories; • The decline in demand for refined product could significantly impact the demand for throughput at our refineries, unfavorably impacting operating results at our refineries, and could impact the demand for storage, which could impact our logistics segment; • The decline in demand and margins impacting current results and forecasts could result in impairments in certain of our long-lived or indefinite-lived assets, including goodwill, or have other financial statement impacts that cannot currently be anticipated (See further discussion in Note 2 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K); 58 | Management's Discussion and Analysis • A significant reduction or suspension in U.S. crude oil production could adversely affect our suppliers and sources of crude oil; • An outbreak in one of our refineries, exacerbated by a limited pool of qualified replacements as well as quarantine protocols, could cause significant disruption in our production or, worst case, temporary idling of the facility; • The restrictions on travel and requirements for social distancing could significantly impact the traffic at our convenience stores, particularly the demand for fuel; • Customers of the refining segment as well as third-party customers of the logistics segment may experience financial difficulties which could interrupt the volumes ordered by those customers and/or could impact the credit worthiness of such customers and the collectability of their outstanding receivables; • The impact of COVID-19 or protocols implemented in response to COVID-19 by key or specialty suppliers may negatively affect our ability to obtain specialty equipment or services when needed; • Equity method investees may be significantly impacted by the COVID-19 Pandemic which may increase the risk of impairment of those investments; • Access to capital markets may be significantly impacted by the volatility and uncertainty in the oil and gas market specifically which could restrict our ability to raise funds; while our current liquidity needs are managed by existing facilities, sources of future liquidity needs may be impacted by the volatility in the debt market and the availability and pricing of such funds as a result of the COVID-19 Pandemic; and • The U.S. Federal Government has enacted certain stimulus and relief measures, including the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") passed on March 27, 2020, and is continuing to consider additional relief legislation. Beyond the direct impact of existing legislation on Delek in the current period, the extent to which the provisions of the existing or any future legislation will achieve its intention to stimulate or provide relief to the greater U.S. economy and/or consumer, as well as the impact and success of such efforts, remains unknown. Other uncertainties related to the impact of the COVID-19 Pandemic as well as global geopolitical factors may exist that have not been identified or that are not specifically listed above, and could impact our future results of operations and financial position, the nature of which and the extent to which are currently unknown. Actions taken by OPEC+ in April and June 2020, including the agreement for management of crude oil supply in the hopes of contributing to market stabilization (the "Oil Production Cuts"), as well as the U.S. Federal Government's passage and/or enactment of additional stimulus and relief measures, as well as their future actions may impact the extent to which the risk underlying these uncertainties are realized. To the extent these uncertainties have been identified and are believed to have an impact on our current period results of operations or financial position based on the requirements for assessing such financial statement impact under U.S. GAAP, we have considered them in the preparation of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Delek's Response to the Continuing Impact of the Pandemic and the Identified Uncertainties In addition, management continues to actively respond to the continuing impact of the COVID-19 Pandemic on our business. Such efforts include (but are not limited to) the following: • Reviewing planned production throughputs at our refineries and planning for optimization of operations; • Coordinating planned maintenance or turnaround activities with possible downtime as a result of possible reductions in throughputs; • Searching for additional storage capacity if needed to store potential builds in crude oil or refined product inventories; • Finding additional suppliers for key or specialty items or securing inventory or priority status with existing vendors; • Reducing planned capital expenditures as compared to pre-Pandemic levels; • Suspending the share repurchase program and dividend distributions until our internal parameters are met for resuming such activities; • Taking advantage of the income and payroll tax relief afforded to us by the CARES Act or other Pandemic relief legislation; • Implementing regular site cleaning and disinfecting procedures; • Adopting remote working where possible, and mandating masks and social distancing protocols where on-site operations are required; • Identifying alternative financing solutions to enhance our access to sources of liquidity; and • Enacting cost reduction measures across the organization, including reducing contract services, reducing overtime and other employee related costs, workforce reduction and reducing or eliminating non-critical travel. The most significant of these efforts to date as well as specifically identified measures that are anticipated in the near term, in terms of realized or anticipated impact on our financial results, include the following: 59 | Management's Discussion and Analysis • For the year ended December 31, 2020 pursuant to the provisions of the CARES Act, we recognized $16.8 million of current federal income tax benefit attributable to anticipated tax refunds from net operating loss carryback to prior 35% tax rate years, and deferred $10.9 million of payroll tax payments which will be payable in equal installments in December 2021 and December 2022. Additionally, we recorded an income tax receivable totaling $156.2 million as of December 31, 2020 related to the net operating loss carryback, which we expect to collect $135.6 million in the first half of 2021 and the remaining balance within eighteen months. • Beginning in the second quarter 2020, we made significant efforts to reduce our capital spending, particularly on growth and non-critical sustaining maintenance projects. As a result, we spent $239.6 million in capital expenditures (as discussed further in the "Capital Spending" section of the "Liquidity and Capital Resources" section of Item 7. Management's Discussion and Analysis) during the year ended December 31, 2020 compared to our initial full-year forecast included in our December 31, 2019 Annual Report on Form 10-K of $325.7 million. See the "Liquidity and Capital Resources" section of Item 7. Management's Discussion and Analysis for further information. • In light of the weak macro-economic environment, we elected to pull forward turnaround work into the fourth quarter of 2020 on certain units at the Krotz Springs refinery that is being conducted on a straight-time basis. This allowed us to continue running the more profitable units of the refinery and should help improve economics toward a break-even level. After this work is complete in the first quarter of 2021 and depending on market conditions, we have the flexibility to optimize operations at Krotz Springs by operating only the units that are producing favorable margins, thereby reducing unnecessary operating expenses, or moving back to full utilization at the facility, should the macro-economic environment and margins improve. • Additionally, we have developed a cost savings plan for 2021 designed to significantly reduce operating expenses and general and administrative expenses. The majority of the expected operating expenses reduction is attributable to the temporary unit optimization at the Krotz Spring refinery, while other efforts such as targeted budgeting around outside contractor expenses and deferral of certain non-critical, non-capitalizable maintenance activities are also expected to have a favorable impact. Furthermore, both operating and general and administrative expenses have been and will continue to be favorably impacted by a cumulative reduction in workforce, the first of which began in the second quarter 2020 and was completed in the fourth quarter. Reductions in workforce are made possible in large part by significant efforts to improve process efficiency and leverage technology where cost-effective. For the year ended December 31, 2020, we have incurred incremental severance costs of $8.5 million related to these workforce reductions. • Finally, we elected to suspend dividends beginning in the fourth quarter 2020 in order to conserve capital. We expect this will help us maintain our liquidity and manage our cost of capital during periods impacted by the Pandemic, and we also believe it will provide us with flexibility to pursue opportunities to provide value to investors with respect to our stock price, which we believe is undervalued. The combination of these efforts are expected to have a favorable impact on cash flows in 2021 as well as our operations process effectiveness, which will improve our liquidity positioning and operational flexibility and response in anticipation of the continued economic impacts of the COVID-19 Pandemic. See the "Liquidity and Capital Resources" section of Item 7. Management's Discussion and Analysis of this Annual Report on Form 10-K for further information. The extent to which our future results are affected by the COVID-19 Pandemic will depend on various factors and consequences beyond our control, such as the duration and scope of the Pandemic; additional actions by businesses and governments in response to the Pandemic, and the speed and effectiveness of responses to combat the virus and any new variants. The COVID-19 Pandemic, and the volatile regional and global economic conditions stemming from the Pandemic, could also exacerbate the risk factors identified in the "Risk Factors"' section located in Item 1A. of this Annual Report on Form 10-K. The COVID-19 Pandemic may also materially adversely affect our results in a manner that is either not currently known or that we do not currently consider to be a significant risk to our business. Significant Subsequent Events During February 2021, the Company experienced a severe weather event at the Tyler, El Dorado and Krotz Springs refineries, resulting in units being temporarily shut down and damages to parts of the facilities due to extreme freezing conditions. The Company is currently determining the financial impact of the event and expects to incur certain recovery costs and repair costs. Additionally, the severe weather conditions and the resultant industry downtime have caused energy prices to rise in certain regions where we operate, which are expected to result in additional operating expenses for the refineries impacted until such time that supply is restored and energy prices stabilize. As a result of this event and the related outages at our El Dorado refinery, we expect to accelerate certain of our planned turnaround activities to coincide with repairs of any damaged units, therefore optimizing and limiting our downtime. On February 27, 2021, our El Dorado refinery experienced a fire in its Penex unit, in which six Delek employees were injured. Our on-site emergency response team, with the assistance of the El Dorado Fire Department, extinguished the fire, and we immediately began to monitor the air quality within the refinery and the community and have detected no adverse impacts as of the date of this Annual Report on Form 10-K. Our most critical focus, however, is on the safety of our employees, contractors and neighbors. While all of our facilities have rigorous, well-documented safety controls, a full investigation will be launched as soon as possible, consistent with our dedication to Safety as a Core Value. The facility was in the process of undergoing turnaround activity, so there are no operational disruptions as a result of the fire. Although we are in the preliminary stages of assessing the extent of damages, we do not believe that this incident will have a material adverse effect on our results of operations. 60 | Management's Discussion and Analysis 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, 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 bpd as of December 31, 2020. A high-level summary of the refinery activities is presented below: Tyler Refinery El Dorado Refinery Big Spring Refinery Krotz Springs Refinery Total Nameplate Capacity (barrels per day ("bpd")) 75,000 80,000 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 Relevant Crack Spread Benchmark Gulf Coast 5-3-2 Gulf Coast 5-3-2 (1) Gulf Coast 3-2-1 (2) Gulf Coast 2-1-1 (3) Marketing and Distribution The refining segment's petroleum-based products are marketed primarily in the south central, southwestern and western 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 there is variability in the crude slate and the product output at the El Dorado refinery, we compare our per barrel refined product margin to the U.S. Gulf Coast 5-3-2 crack spread because we believe it to be the most closely aligned benchmark. (2) Our Big Spring refinery is capable of processing substantial volumes of sour crude oil, which has historically cost less than intermediate, and/or substantial volumes of sweet crude oil, and therefore the WTI Cushing/WTS price differential, taking into account differences in production yield, is an important measure for helping us make strategic, market-respondent production decisions. (3) 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. Logistics Overview Our logistics segment (or "Logistics") gathers, transports and stores crude oil and markets, distributes, transports and stores refined products in select regions of the southeastern United States 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 (NYSE: DKL), where we owned an 80.0% interest at December 31, 2020. Delek Logistics was formed by Delek in 2012 to own, operate, acquire and construct crude oil and refined products logistics and marketing assets, and a substantial majority of its assets are currently integral to our refining and marketing operations. Logistics' 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 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 nine 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. On March 31, 2020, Logistics acquired from another of our segments approximately 200 miles of gathering and ancillary assets located in Howard, Borden and Martin Counties, Texas. In May 2020, Logistics acquired from another of our segments certain leased and owned tractors and trailers and related assets, and subsequently owns or leases approximately 264 tractors and 353 trailers used to haul primarily crude oil and other products for related and third parties. Retail Overview Our retail segment (or "Retail") at December 31, 2020 includes the operations of 253 owned and leased convenience store sites located primarily in Central and 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 orders 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 amendment 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 December 31, 2020, we have removed the 7-Eleven brand name at 57 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. In connection with our Retail strategic initiatives, we closed or sold 46 under-performing or non-strategic store locations since the fourth quarter of 2018. Corporate and Other Overview Our corporate activities, results of certain immaterial operating segments, discontinued operations, our recently commenced wholesale crude operations, and intercompany eliminations are reported in 'corporate, other and eliminations' in our segment disclosures. 61 | Management's Discussion and Analysis Strategic Overview The Company's overall strategy is to take a disciplined approach that looks to balance returning cash to our shareholders and prudently investing in the business to support safe and reliable operations, while exploring opportunities for growth. Our goal has been to balance the different aspects of this program based on evaluations of each opportunity and how it matches our strategic priorities for the company, while factoring in market conditions and expected cash flows. In 2019, Delek’s leadership team built a Five-Year Strategic Framework to facilitate development of the Company’s strategies and initiatives. This framework lays out the Company’s overarching objectives for a five-year period and provides the foundation for our Core Strategic Focus Areas, our Strategic Initiatives, and ultimately our Annual Strategic Priorities, as follows: Five-Year Strategic Framework Our Five-Year Strategic Framework consisted of the following overarching objectives: I. Become nationally recognized for safety and wellness leadership. II. Maximize return on assets through best-in-industry reliability and integrity. III. Improve efficiency and execution through development of systems and processes. IV. Identify and manage risks to improve decision-making and increase profitability. V. Significantly increase overall earnings. These overarching objectives are supported by strategic focus areas, which inform the priorities of each segment’s initiatives, while our overall strategy has been and continues to be to take a disciplined approach that looks to balance returning cash to our shareholders and prudently investing in the business to support safe and reliable operations, while exploring opportunities for growth. Core Strategic Focus Areas Our strategic focus areas and plans must balance the different aspects of our Five-Year Strategic Framework based on evaluations of each opportunity and how it matches our strategic goals for the company, while factoring in market conditions and expected cash generation. Recognizing the significance of the economic impact of the COVID-19 Pandemic (and, earlier in the year, the OPEC Production Disputes), we re-calibrated our 2020 strategy to ensure we were identifying the significant uncertainties arising from and related to the Pandemic in order to be responsive and proactive regarding the risks that those uncertainties created (as discussed above). That said, our modified 2020 strategy as well as our 2021 strategy are still centered around the following strategic focus areas: I. Safety and wellness. II. Reliability and integrity. III. Systems and processes. IV. Risk-based decision making. V. Positioning for growth. 62 | Management's Discussion and Analysis We believe that these Core Strategic Focus Areas are just as relevant in the Pandemic environment as they are in more stable economic conditions, and are representative of our desire to maximize the opportunities both within and external to the organization in a way that is innovative and forward-thinking while simultaneously managing risk and incorporating some of the strategies that have been essential to our story so far and are part of who we are as a company. Strategic Initiatives Building on the Five-Year Strategic Framework and the Core Strategic Focus Areas, we developed the following Strategic Initiatives: 2020 Strategic Priorities - A Look Back All of the elements above are a critical evolution to how we determine our strategic priorities for a particular year, under normal conditions. There were many unforeseen external factors impacting our operations and the economic environment during 2020, but we took that as a challenge rather than a derailment, and we used it as an opportunity to evaluate the fundamentals of our strategy. What we found is that the unforeseen events and conditions arising as a result of the Pandemic reinforced the importance of our Framework and our Focus Areas, and validated the relevancy of not only our Initiatives, but also of our previously identified 2020 Strategic Priorities. These Strategic Priorities are outlined below. 2020 Strategic Priorities • Maintain and continue to enhance our safe operations and commitment to responsible corporate citizenship. A central focus is to enhance the safety across our organization. It is a core value at Delek and we work day-to-day to ingrain this into our culture. The organization is focused on Environment/Health/Safety, Employee Engagement, Community Commitment and Ethics/Governance in an effort to have safe and compliant operations for the benefit of our employees, communities, customers and shareholders. ◦ Our successes in this area included continued focus on safety across our organization, as well as the completion of our first ever Sustainability Report, and improving our performance and executing on our plans for environmental, social and governance responsibility (or "ESG") continues to be a priority for us. • Broaden our winning culture. As a growing organization, we want to develop a culture that can support its success. Our core values: Safety, Integrity, Maximize Value, Passion for Winning & Excellence, Growth Oriented and Commitment are guiding factors in the way we do business. We are committed to investing in our people to expand our knowledge base through training, systems and processes with a goal to retain the ability to act quickly as we grow. ◦ We had significant constraints on costs and investment during 2020 as a result of the Pandemic, and even a workforce reduction. But that is when we really saw the returns from our investments in getting the right people, who in turn have been creating and improving our processes and helping us lay the groundwork for system upgrades that will be key to our continued growth and success. The success of these efforts to date was particularly evident this year in terms of how we have managed our business and our risk in the COVID-19 Pandemic economic environment. • Enhance our integrated platform. Our integrated platform allows us to purchase a barrel of crude oil at the wellhead, transport crude oil to our refineries to produce finished products then transport it to our retail network or third parties. Enhancing this platform we believe will maximize our return on investments and opportunities for growth. 63 | Management's Discussion and Analysis ◦ In 2020, projects such as the dropdown of gathering and trucking assets to Logistics, our involvement and investment in the expansion of Logistics and other pipeline joint venture systems, and the development of wholesale crude sales channels for excess gathered barrels, are all examples of the continuous effort to enhance our existing platform. • Diversify our business model through growth in our midstream operations. We executed initiatives in 2019 to develop our midstream operations through construction of the Big Spring Gathering System, entering into joint ventures for the Red River and Wink to Webster pipelines, with the intention to use our cash flow and strong balance sheet to diversify our earnings mix by increasing the size of our more stable midstream business. ◦ We saw continued growth in our midstream operations with strategic dropdowns of the Big Spring Gathering System and trucking assets to Delek Logistics and expansions of the pipeline capacity under Logistics' Red River joint venture investment, both of which provided immediate accretive value when we executed the IDR Simplification, as well as long term accretive value through our investment in Delek Logistics. • Maximize operational efficiencies. This extends to all aspects of the organization. From back office processes and systems to the operating assets in refining, logistics and retail. By safely maximizing our efficiencies, reliability and asset integrity, we should enhance our competitiveness and free cash flow generation potential. In a commodity based environment that changes quickly, we are consistently focused on executing on factors that are within our control. ◦ In light of the Pandemic and the resulting decline in commodity prices and crack spreads, we quickly shifted our focus away from capital growth projects in the early part of 2020. This provided us with the opportunity to focus our team's considerable efforts and talent on process improvement initiatives, cost control measures, and opportunities for innovation. As a result, we have implemented new technologies, processes and other changes that are already having a positive effect on safety (e.g., we now have more structured safety protocols), our costs (e.g., operating expenses significantly declined in 2020 compared to the prior year), and our operational effectiveness (e.g., our cost and contractor management process and system improvements are positively impacting our ability to monitor and manage our capital spend). • Create organizational scalability to support growth. A challenge of a growing company is that sometimes it comes in large steps, which can stretch an organization. We are focused on developing our systems and processes, improving efficiencies and retaining knowledge within the organization to create a structure that is scalable as we grow in the future. ◦ As referenced above, we have implemented new technologies, processes and other changes that we believe are already having a positive effect on safety, our costs, and our operational effectiveness. These represent fundamental cultural changes that we expect will position us well to implement other planned process and system improvements in the near term, and better position us for scalable growth. • Use our financial flexibility and cash flow to create shareholder value. Delek is focused on managing the cash flow of our business to support a capital allocation program that includes: 1) returning cash to shareholders through dividends and share repurchases, 2) applying a disciplined approach to investing in our business and 3) growing through acquisitions all of which combine to serve our overarching goal of increasing long-term value for our shareholders, while also actively managing cash flow and financial risk during periods of negative economic pressure. ◦ Even during this unprecedented year, we have achieved successes in this area, both in terms of strategic transactions that enhance shareholder value and in terms of managing our cash flow and financial risk so that we are protecting our shareholders' investments in Delek as best we can. See the section below, as well as the "Liquidity and Capital Resources" section of Item 7. Management's Discussion and Analysis of this Annual Report on Form 10-K for further information. The following section highlights some of the specific significant developments and successes realized during 2020. 2020 Significant Developments With these objectives and priorities serving as our guiding principles, and applying the short-term measures to mitigate the impact of the COVID-19 Pandemic and the OPEC Production Disputes described in the 'Business Overview' above, we are pleased to report that we have achieved the following successes during 2020: Transactions designed to maximize return on assets and shareholder value Investment in Midstream Ventures In July 2019, we acquired a 15% ownership interest in Wink to Webster Pipeline LLC (the "WWP Joint Venture"), which we subsequently contributed to a non-recourse financing joint venture with MPLX (who likewise contributed their 15% interest in the WWP Joint Venture) as collateral for and in service of the related project financing (the "WWP Project Financing JV") effective February 21, 2020, in exchange for a 50% interest in the WWP Project Financing JV. The WWP Joint Venture is constructing and will operate a crude oil pipeline system from Wink, Texas to Webster, Texas along with certain pipelines from Webster, Texas to other destinations in the Texas Gulf Coast area that are expected to span approximately 650 miles at completion. Construction of the crude oil pipeline system remains on schedule, and the main segment of the pipeline system commenced operations in the fourth quarter of 2020, with additional segments expected to be placed in service throughout 2021. It is anticipated that capital contributions required of the 15% ownership interest we contributed to the WWP Project 64 | Management's Discussion and Analysis Financing JV will total approximately $340 million to $380 million over the course of construction, the majority of which will be financed under the nonrecourse financing facility of the WWP Project Financing JV. Distributions received from the WWP Joint Venture through the WWP Project Financing JV will first be applied in service of the related project financing debt, with excess distributions being made to the members of the WWP Project Financing JV. The obligations of the members under the WWP Project Financing JV HoldCo LLC Agreement are guaranteed by the parents of the members of the WWP Project Financing JV. See further discussion in Note 7 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Transactions with Delek Logistics Effective August 13, 2020, Delek Logistics completed a restructuring transaction to eliminate the incentive distribution rights held by us and convert the 2.0% economic general partner interest into a non-economic general partner interest, in exchange for total consideration consisting of $45.0 million in cash and 14.0 million newly issued common limited partner units (as previously defined, the "IDR Simplification"). Contemporaneously, we repurchased a 5.2% ownership interest in Delek Logistics GP, LLC, the general partner of Delek Logistics from certain of our affiliates, who are also members of the general partner's management and board of directors, for $23.1 million in cash. Subsequent to these transactions, we owned 34,745,868 common limited partner units, increasing our ownership to 80.0% of the outstanding common units, and 100% of the outstanding interest in the general partner. Effective May 1, 2020, Delek through its wholly owned subsidiaries Lion Oil Company (“Lion Oil”) and Delek Refining, Ltd. (“Delek Refining”) contributed certain leased and owned tractors and trailers and related assets used in the provision of trucking and transportation services for crude oil, petroleum and certain other products throughout Arkansas, Oklahoma and Texas to Delek Trucking, LLC (“Delek Trucking”), a direct wholly owned subsidiary of Lion Oil. Following this contribution, Lion Oil sold all of the issued and outstanding membership interests in Delek Trucking (the “Acquisition”) to DKL Transportation, LLC (“DKL Transportation”), a wholly owned subsidiary of Delek Logistics. Promptly following the consummation of the Acquisition, Delek Trucking merged with and into DKL Transportation, with DKL Transportation continuing as the surviving entity. Total consideration for the Acquisition was approximately $48.0 million in cash, subject to certain post-closing adjustments, primarily financed with borrowings under Delek Logistics’ revolving credit facility. Effective March 31, 2020, Delek Logistics, through its wholly-owned subsidiary DKL Permian Gathering, LLC, acquired the Big Spring Gathering System, located in Howard, Borden and Martin Counties, Texas, from Delek. Delek Logistics will operate and maintain the Big Spring Gathering System connecting our interests in and to certain crude oil production with the Delek Logistics' Big Spring, Texas terminal and provide gathering, transportation and other related services. The total consideration was comprised of $100.0 million in cash and 5.0 million common limited partner units in Delek Logistics. The cash component of this dropdown was financed with borrowings on the Delek Logistics Credit Facility (as defined in Note 8 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Finally, in March 2020, we purchased 451,822 common limited partner units in Delek Logistics from a public investor for approximately $5.0 million. See further discussion in Note 6 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Sale of Bakersfield Non-Operating Refinery On May 7, 2020, we sold our equity interests in Alon Bakersfield Property, Inc., an indirect wholly-owned subsidiary that owns our non-operating refinery located in Bakersfield, California, to a subsidiary of Global Clean Energy Holdings, Inc. (“GCE”) for total cash consideration of $40.0 million. GCE intends to repurpose the refinery into a renewable diesel plant. As part of the transaction, GCE granted a call option to Delek to acquire up to a 33 1/3% limited member interest in the acquiring subsidiary of GCE for $400 per unit (up to $13.3 million), subject to certain adjustments. Such option is exercisable by Delek through the 90th day after GCE demonstrates commercial operations, as contractually defined. See further discussion in Note 4 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Transactions designed to minimize the cost of capital/manage financial risk exposures Amendment and Restated Supply and Offtake Agreements In April 2020, we amended and restated our three Supply and Offtake Agreements to amend and extend the terms to December 30, 2022, with J. Aron having the sole discretion to further extend to May 30, 2025 by providing at least six months notice prior to the current maturity date. As part of this amendment, there were changes to the underlying market index, annual fee, the crude purchase fee, crude roll fees and timing of cash settlements related to periodic price adjustments on the fixed differential component of the Baseline Volume Step-Out Liabilities. The amendments provide us dedicated financing for the inventory covered through at least December 2022, and certain specific market-indexed provisions improve our ability to manage our exposure to commodity price volatility during the term of the agreements. See further discussion in Note 10 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. 2020 Amendment to the Term Loan Credit Facility On May 19, 2020, we amended the Term Loan Credit Facility agreement (as defined in Note 11 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K) and borrowed $200.0 million in aggregate principal amount of incremental term loans (the “Third Incremental Term Loan”) at an original issue discount of 7.00%, requiring 65 | Management's Discussion and Analysis quarterly principal amortization payments of $0.5 million commencing on June 30, 2020. There are no restrictions on the Company's use of the proceeds of the Third Incremental Term Loan, and the proceeds may be used (i) for general corporate purposes and (ii) to pay transaction fees and expenses associated with the Third Incremental Term Loan. See further discussion in Note 11 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Dividend Suspension On November 5, 2020, we announced that we have elected to suspend dividends beginning in the fourth quarter of 2020 in order to conserve capital. Our previous quarterly cash dividend amounts ranged between $0.27 to $0.30 per share for dividends paid throughout 2019 and was $0.31 per share for the dividends paid during each of the previous three quarterly periods of 2020. The declaration, amount and payment of any future dividends on our common stock will be at the sole discretion of our Board of Directors. Share Repurchases During the year ended December 31, 2020, Delek repurchased 58,713 shares for an aggregate purchase price of $1.9 million under the most recent share repurchase plan which provided for repurchases up to $500.0 million and was approved by the Board of Directors on November 6, 2018. As of December 31, 2020, there remained $229.7 million available for repurchases under the most recent repurchase plan. In our efforts to conserve capital, for the time being, we have temporarily suspended the repurchase of shares. See further discussion in Note 22 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. A Look to the Future: Our 2021 Strategic Priorities As we move forward, we are increasingly optimistic about our outlook, and we have identified five strategic priorities for 2021 that continue to be rooted in our Five-Year Strategic Framework, linked to our Core Strategic Focus Areas, and driven by our Strategic Initiatives discussed above. Our 2021 Strategic Priorities are presented below. 2021 Strategic Priorities Building on the continuation of our Five-Year Strategic Framework and the Core Strategic Focus Areas, we have developed and are optimistic about the following 2021 Strategic Initiatives: • Maintain and Continue to Enhance Our Safe Operations. We are proud of our commitment to safety as a core value of the company, and this commitment is reflected in our continuous improvement in DART (days away, restricted or transferred) and TRIR (total recordable incident rate) metrics since 2016. According to the American Fuel & Petrochemical Manufacturers trade association, Delek ranks second overall in these safety metrics among companies operating multiple refineries. The retail business unit’s TRIR is half the industry average. • Drive EBITDA and Cash Flow Improvement. In 2020, the company acted decisively by adapting to the challenging macro environment and delivering significant cost savings. We plan to maintain and enhance our cost containment efforts in 2021. Simultaneously, initiatives for margin improvements through optimization are underway. The combination of these improvements along with a diverse asset base should lead to a lower cash flow break-even profile in the future. • Develop and Utilize Systems, Processes and Technology to Improve Operations. Recognizing that the energy industry remains behind the curve in terms of technological advancements, and that Delek has a long history of being nimble, we have added innovation to our core values. Our vision is to use select technologies and implement advanced systems and processes to achieve further, more structural cost reductions, operational improvements and asset optimization over the medium to longer term. Through our focus on innovation, we expect to enhance the competitiveness of the portfolio within the industry. • Ongoing Commitment to ESG. At Delek, we understand the importance of ESG and the growing role it plays with all stakeholders, as well as within an investment management framework. Therefore, we were pleased that the sustainability report we published in 2020 was well-received, yielding improved scoring from multiple rating agencies. However, we are still relatively early in our ESG journey, and we are striving for progressive improvements over time in terms of underlying performance metrics and disclosure in all ESG categories. We are taking a holistic approach to addressing the evolving and challenging requirements of ESG by gleaning fresh ideas and feedback from business leaders and employees throughout the organization. One example is our de-carbonization steering committee that involves members of each business unit and attempts to generate leading-edge solutions to improve our carbon footprint while maximizing long-term returns on our capital investments. • Laying the Foundation for Future Growth . Delek was built through a history of strategic acquisitions, with a strong track record of seamless integration. We understand that difficult macro environments often create acquisition opportunities or prospects to pivot strategically. After focusing mainly on improving our cash flow break-even profile through reduced capital expenditures and operating costs in 2020, we are emerging from this downturn with an improved cost structure, a healthy balance sheet and opportunities to pursue future growth. We are constantly evaluating the optimal investment options available in our various business units and comparing the potential returns of both organic and inorganic opportunities. In the constantly evolving energy landscape, Delek remains strong, nimble and well-positioned to capture opportunities. 66 | Management's Discussion and Analysis Market Trends Commodity Prices 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 and natural gas and electricity, among others. Historically, our profitability has been affected by commodity price volatility, specifically as it relates to the price of crude oil and refined products. We have significant sources of WTI Midland crude because of our gathering system, and so accordingly favorable pricing of WTI Midland crude compared to other WTI crude can favorably impact our cost of materials and other and therefore our margins compared to other refiners. The table below reflects the quarterly average prices of WTI Midland and WTI Cushing crude oil for each of the quarterly periods over the past three years. As shown in the historical graph, over the past three years WTI Midland crude prices have generally been favorable as compared to WTI Cushing, though that trend reversed slightly in the fourth quarter 2019 and third quarter of 2020. 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 and crude oil and refined products. Generally, crack spreads represent 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 and 2-1-1 crack spreads for each of the quarterly periods over the past three years. As the chart illustrates, the 3-2-1 crack spread has outperformed the 5-3-2 and the 2-1-1 crack spreads in certain periods. In such conditions, things being equal (i.e., 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. 67 | Management's Discussion and Analysis Crack spreads are impacted by the price of refined products as compared to the price of crude oil and therefore may narrow or widen based on different trends in those market prices, or lags in one commodity pricing change versus the other. For example, the average Gulf Coast 5-3-2 ULSD crack spread per barrel remained relatively steady at $8.18 in 2020 compared to $15.77 in 2019, despite Gulf Coast price of gasoline (CBOB) decreasing 33.1%, from an average of $1.63 per gallon in 2019 to $1.09 per gallon in 2020, which indicates that decreases in feedstocks trended similarly. As a result, while, in such circumstances, total revenues for gasoline and corresponding cost of materials and other will be lower (assuming consistent volumes), refining margins would remain relatively flat year-over-year. Thus, while fluctuations in refined product prices will significantly impact our top line revenue (assuming consistent volumes), crack spread has greater direct impact on our margins. 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 In addition to decreases in the price of CBOB gasoline, the Gulf Coast price of High Sulfur Diesel decreased 40.2%, from an average of $1.76 per gallon in 2019 to $1.06 per gallon in 2020. The Gulf Coast price of Ultra Low Sulfur Diesel decreased 36.6% from an average of $1.88 per gallon in 2019 to $1.19 per gallon in 2020. The charts below illustrate the quarterly average prices of Gulf Coast Gasoline, U.S. High Sulfur Diesel and U.S. Ultra Low Sulfur Diesel over the past three years. Crude Pricing Differentials As U.S. crude oil production has increased over recent years, domestic producers have benefited from the discount for WTI Cushing compared to Brent, a global benchmark crude. 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. The average discount for WTI Cushing compared to Brent increased to $3.54 during 2020 from $7.13 during 2019. We note similar historical trends when reviewing the discount for LLS compared to WTI Cushing, where the average discount decreased to $1.67 during 2020 from $5.66 during 2019. Additionally, our refineries continue to have relatively greater access to WTI Midland and WTI Midland-linked crude feedstocks compared to certain of our competitors. The average discount for WTI Midland compared to WTI Cushing decreased to $(0.13) during 2020 from $0.68 during 2019. As these discounts shrink or become premiums, our reliance on WTI-linked crude pricing, and specifically WTI Midland crude can negatively impact our results. Conversely, as these price discounts increase, so does our competitive advantage, created by our access to WTI-linked crude oil pricing, and specifically WTI Midland crude sources through our gathering systems. 68 | Management's Discussion and Analysis The chart below illustrates the differentials of both Brent crude oil and WTI Midland crude oil as compared to WTI Cushing crude oil as well as WTI Cushing as compared to LLS over the past three years. RIN Volatility Environmental regulations continue to affect our margins in the form of volatility in the costs of RINs . On a consolidated basis, we work to balance our RINs obligations in order to minimize the effect of RINs on our results. While we generate RINs in both of our refining and logistics segments through our ethanol blending and biodiesel production, our refining segment needs to purchase additional RINs to satisfy its obligations. As a result, increases in the price of RINs generally adversely affect our results of operations. It is not possible at this time to predict with certainty what future volumes or costs may be, but given the volatile price of RINs, the cost of purchasing sufficient RINs could have an adverse impact on our results of operations if we are unable to recover those costs in the price of our refined products. The chart below illustrates the volatile nature of the price for RINs over the past three years. 69 | Management's Discussion and Analysis Summary Financial and Other Information The following table provides summary financial data for Delek (in millions): Summary Statement of Operations Data Year Ended December 31, 2020 2019 Net revenues $ 7,301.8 $ 9,298.2 Total operating costs and expenses 8,029.8 8,805.9 Operating (loss) income (728.0) 492.3 Total non-operating expenses, net 35.1 89.6 (Loss) income before income tax (benefit) expense (763.1) 402.7 Income tax (benefit) expense (192.7) 71.7 (Loss) income from continuing operations, net of tax (570.4) 331.0 Income from discontinued operations, net of tax — 5.2 Net (loss) income (570.4) 336.2 Net income attributed to non-controlling interests 37.6 25.6 Net (loss) income attributable to Delek $ (608.0) $ 310.6 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. 70 | Management's Discussion and Analysis Results of Operations Consolidated Results of Operations — Comparison of the Year Ended December 31, 2020 versus the Year Ended December 31, 2019 Net Income Consolidated net loss for the year ended December 31, 2020 was $570.4 million compared to net income of $336.2 million for the year ended December 31, 2019. Consolidated net loss attributable to Delek for the year ended December 31, 2020 was $608.0 million, or $(8.26) per basic share, compared to net income of $310.6 million, or $4.10 per basic share, for the year ended December 31, 2019. Explanations for significant drivers impacting net income as compared to the comparable period of the prior year are discussed in the sections below. Net Revenues We generated net revenues of $7,301.8 million and $9,298.2 million during the years ended December 31, 2020 and 2019, respectively, a decrease of $1,996.4 million, or 21.5%. The decrease in net revenues was primarily due to the following: • in our refining segment, decreases in the average price of U.S. Gulf Coast gasoline of 33.1%, ULSD of 36.6%, and High-Sulfur diesel ("HSD") of 40.2%; • in our retail segment, decreases in fuel sales volumes due to demand slowdown as a result of the COVID-19 Pandemic and reduction in average number of stores, as well as a 17.5% decrease in average price charged per gallon; partially offset by an increase in merchandise revenue; and • in our logistics segment, decreases in the average volume sold and sales prices per gallon of gasoline and diesel sold in our West Texas marketing operations, where the average sales prices per gallon of gasoline and diesel sold decreased $0.49 per gallon and $0.71 per gallon, respectively. Such decrease was partially offset by increased revenue associated with agreements executed in connection with Big Spring Gathering System and Delek Trucking acquisitions. Operating Costs and Expenses Cost of Materials and Other Cost of materials and other was $6,841.2 million for the year ended December 31, 2020, compared to $7,657.2 million for 2019, a decrease of $816.0 million, or 10.7%. The net decrease in cost of materials and other primarily related to the following: • a decrease in the cost of crude oil feedstocks at the refineries including a decrease in the cost of WTI Cushing crude oil from an average of $56.99 per barrel to an average of $39.89, and a decrease in the cost of WTI Midland crude oil from an average of $56.31 per barrel to an average of $40.02 per barrel; • a decrease in average volumes sold and the cost of refined products in the logistics segment where the average cost per gallon of gasoline and diesel purchased decreased $0.43 per gallon and $0.66 per gallon, respectively; and • a decrease in retail fuel cost of materials and other attributable to demand slowdown, a decrease in average cost per gallon of $0.50 and a reduction in average number of stores during the year. Such decreases were partially offset by: • a decrease in hedging gains to a loss of $83.4 million recognized during the year ended December 31, 2020 from a gain of $22.8 million recognized during the year ended December 31, 2019 • the (expense) benefit of $(29.2) million related to the change in pre-tax inventory valuation recognized during the year ended December 31, 2020 compared to $52.3 million recognized during the year ended December 31, 2019; and • a prior period benefit of approximately $77.6 million and $20.7 million related to the BTC and 2018 RINs waivers, respectively, recognized during 2019. Operating Expenses Operating expenses (included in both cost of sales and other operating expenses) were $559.8 million for the year ended December 31, 2020 compared to $682.2 million in 2019, a decrease of $122.4 million, or (17.9)%. The decrease in operating expenses was primarily driven by the following: • decrease in outside service costs across all segments due to cost reduction measures; • decreases in the refining segment related to lower employee, utilities, catalysts and maintenance costs; and • decrease in retail operating expenses due to reduction in number of stores. 71 | Management's Discussion and Analysis General and Administrative Expenses General and administrative expenses were $248.3 million for the year ended December 31, 2020 compared to $274.7 million in 2019, a decrease of $26.4 million, or 9.6%. The decrease was primarily driven by the following: • decrease in contract services due to cost reduction measures; • decrease in travel related expense due to travel restrictions in place as a result of the COVID-19 Pandemic; • decrease in loss allowance on a note receivable; and • decrease in stock-based compensation due to workforce reductions in 2020. These decreases were partially offset by increases in salaried labor, including severance, partially offset by a decrease in incentive accrual. Depreciation and Amortization Depreciation and amortization (included in both cost of sales and other operating expenses) was $267.6 million and $194.3 million for the years ended December 31, 2020 and 2019, respectively, an increase of $73.3 million, or 37.7%, primarily due to the following: • depreciation associated with assets added during the Big Spring refinery turnaround in the first quarter of 2020, the El Dorado turnaround assets added in the second quarter of 2019 and the addition of the alkylation unit at our Krotz Springs refinery late in the second quarter of 2019; and • accelerated depreciation of approximately $19.0 million taken in the fourth quarter of 2020 primarily due to the decision to abandon certain property and equipment. Other Operating Income, Net Other operating income, net was $13.1 million and $2.5 million for the years ended December 31, 2020 and 2019, respectively, an increase of $10.6 million, primarily due to a gain of $10.8 million on the underlying commodity related to our contract to store crude oil barrels at one of the Strategic Petroleum Reserve locations. Refer to Note 13 of the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for additional information. Non-Operating Expenses Interest Expense Interest expense was $129.0 million in the year ended December 31, 2020, compared to $131.1 million for 2019, a decrease of $2.1 million, or 1.6%. Results from Equity Method Investments We recognized income from equity method investments of $30.3 million for the year ended December 31, 2020, compared to $34.3 million for the year ended December 31, 2019, a decrease of $4.0 million. This decrease was primarily driven by the following: • an $8.5 million loss from WWP Project Financing Joint Venture primarily due to impairment taken by the underlying WWP Joint Venture. This decrease was partially offset by an increase in income primarily related to our logistics joint ventures. Other Non-Operating Expenses, Net During the year ended December 31, 2020, we recognized a gain of $56.8 million on the sale of our non-operating refinery located in Bakersfield, California. See Note 4 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Other income increased $7.6 million, to $3.5 million during the year ended December 31, 2020, compared to expense of $4.1 million year ended December 31, 2019. Income Taxes Income tax expense decreased $264.4 million during the years ended December 31, 2020 compared to the same period for 2019, primarily driven by the following: • pre-tax loss of $763.1 million compared to pre-tax income of $402.7 million for the years ended December 31, 2020 and 2019, respectively; 72 | Management's Discussion and Analysis • an increase in our effective tax rate which was 25.3% compared to 17.8% for the years ended December 31, 2020 and 2019, respectively, primarily due to the following: ◦ projected 2020 federal net operating loss carryback to a prior 35% tax rate year creating a 14% tax rate arbitrage; ◦ reversal of a valuation allowance attributable to book-tax basis differences in partnership investments reported as a discrete benefit in the first quarter, offset by an increase in valuation allowance on certain state attributes; and ◦ exclusion of goodwill impairment expense from taxable income. • Refer to Note 15 of the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for additional information. A detailed discussion of the fiscal year 2019 compared to year-over-year changes from fiscal year 2018 can be found in Part II, Item 7. Management's Discussion and Analysis, "Results of Operations", of our 2019 Annual Report on Form 10-K, filed on February 28, 2020. 73 | Management's Discussion and Analysis Refining Segment The tables and charts below set forth certain information concerning our refining segment operations ($ in millions, except per barrel amounts): Refining Segment Margins Year Ended December 31, 2020 2019 Net revenues $ 5,817.7 $ 8,798.5 Cost of materials and other 5,745.5 7,528.2 Refining Margin 72.2 1,270.3 Operating expenses (excluding depreciation and amortization) 402.7 492.4 Contribution margin $ (330.5) $ 777.9 Contribution margin percentage (5.7) % 8.8 % 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", "refining margin" or "refined product 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 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. 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. 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 renewable identification numbers ("RINs") at fixed prices and quantities, which are used to manage the costs of our credits for commitments required by the U.S. Environmental Protection Agency ("EPA") to blend biofuels into fuel products ("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 74 | Management's Discussion and Analysis 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. 75 | Management's Discussion and Analysis Refinery Statistics Year Ended December 31, 2020 2019 Tyler, TX Refinery Days in period 366 365 Total sales volume - refined product (average barrels per day) (1) 74,075 76,178 Products manufactured (average barrels per day): Gasoline 40,031 40,801 Diesel/Jet 29,220 30,673 Petrochemicals, LPG, NGLs 2,794 2,798 Other 1,461 1,554 Total production 73,506 75,826 Throughput (average barrels per day): Crude Oil 51,854 70,516 Other feedstocks 22,126 5,873 Total throughput 73,980 76,389 Total refining revenue ($ in millions) $ 1,432.2 $ 2,209.2 Cost of materials and other ($ in millions) 1,331.7 1,817.5 Total refining margin ($ in millions) $ 100.5 $ 391.7 Per barrel of refined product sales: Tyler refining margin $ 3.71 $ 14.09 Direct operating expenses $ 3.45 $ 3.91 Crude Slate: (% based on amount received in period) WTI crude oil 92.0 % 89.0 % East Texas crude oil 8.0 % 11.0 % El Dorado, AR Refinery Days in period 366 365 Total sales volume - refined product (average barrels per day) (1) 75,992 62,420 Products manufactured (average barrels per day): Gasoline 35,480 27,712 Diesel 28,429 20,753 Petrochemicals, LPG, NGLs 1,772 872 Asphalt 6,687 5,533 Other 789 735 Total production 73,157 55,605 Throughput (average barrels per day): Crude Oil 70,385 54,420 Other feedstocks 2,979 1,576 Total throughput 73,364 55,996 Total refining revenue ($ in millions) $ 1,788.8 $ 3,291.1 Cost of materials and other ($ in millions) 1,809.3 3,123.0 Total refining margin ($ in millions) $ (20.5) $ 168.1 Per barrel of refined product sales: El Dorado refining margin $ (0.74) $ 7.38 Operating expenses $ 3.81 $ 5.73 Crude Slate: (% based on amount received in period) WTI crude oil 52.3 % 39.3 % Local Arkansas crude oil 17.8 % 23.1 % Other 29.9 % 37.6 % 76 | Management's Discussion and Analysis Refinery Statistics (continued) Year Ended December 31, 2020 2019 Big Spring, TX Refinery Days in period 366 365 Total sales volume - refined product (average barrels per day) (1) 65,508 76,413 Products manufactured (average barrels per day): Gasoline 32,340 36,352 Diesel/Jet 23,283 27,602 Petrochemicals, LPG, NGLs 3,183 3,746 Asphalt 1,685 1,870 Other 1,119 1,327 Total production 61,610 70,897 Throughput (average barrels per day): Crude oil 61,428 72,039 Other feedstocks 1,078 (453) Total throughput 62,506 71,586 Total refining revenue ($ in millions) $ 1,531.7 $ 2,366.5 Cost of materials and other ($ in millions) 1,497.2 1,984.6 Total refining margin ($ in millions) $ 34.5 $ 381.9 Per barrel of refined product sales: Big Spring refining margin $ 1.44 $ 13.69 Operating expenses $ 4.33 $ 4.35 Crude Slate: (% based on amount received in period) WTI crude oil 67.0 % 75.5 % WTS crude oil 33.0 % 24.5 % Krotz Springs, LA Refinery Days in period 366 365 Total sales volume - refined product (average barrels per day) (1) 61,302 70,511 Products manufactured (average barrels per day): Gasoline 20,615 35,026 Diesel/Jet 20,422 28,049 Heavy Oils 418 1,131 Petrochemicals, LPG, NGLs 2,223 4,647 Other 13,512 26 Total production 57,190 68,879 Throughput (average barrels per day): Crude Oil 53,875 67,943 Other feedstocks 4,126 (366) Total throughput 58,001 67,577 Total refining revenue ($ in millions) $ 1,266.6 $ 2,175.7 Cost of materials and other ($ in millions) 1,296.3 1,914.2 Total refining margin ($ in millions) $ (29.7) $ 261.5 Per barrel of sales: Krotz Springs refining margin $ (1.32) $ 10.16 Operating expenses $ 3.97 $ 4.46 Crude Slate: (% based on amount received in period) WTI Crude 70.1 % 72.0 % Gulf Coast Sweet Crude 29.1 % 28.0 % (1) Includes inter-refinery sales and sales to other segments which are eliminated in consolidation. See tables below. 77 | Management's Discussion and Analysis Included in the refinery statistics above are the following inter-refinery and sales to other segments: Inter-refinery Sales Year Ended December 31, (in barrels per day) 2020 2019 Tyler refined product sales to other Delek refineries 2,010 894 El Dorado refined product sales to other Delek refineries 924 5,039 Big Spring refined product sales to other Delek refineries 1,356 990 Krotz Springs refined product sales to other Delek refineries 190 9,734 Refinery Sales to Other Segments Year Ended December 31, (in barrels per day) 2020 2019 Tyler refined product sales to other Delek segments 1,623 252 El Dorado refined product sales to other Delek segments 94 83 Big Spring refined product sales to other Delek segments 22,601 25,223 Krotz Springs refined product sales to other Delek segments 362 462 Pricing Statistics (average for the period presented) Year Ended December 31, 2020 2019 WTI — Cushing crude oil (per barrel) $ 39.89 $ 56.99 WTI — Midland crude oil (per barrel) $ 40.02 $ 56.31 WTS — Midland crude oil (per barrel) $ 39.96 $ 56.27 LLS (per barrel) $ 41.56 $ 62.65 Brent crude oil (per barrel) $ 43.24 $ 64.14 U.S. Gulf Coast 5-3-2 crack spread (per barrel) - utilizing HSD $ 5.87 $ 13.78 U.S. Gulf Coast 5-3-2 crack spread (per barrel) (1) $ 8.18 $ 15.77 U.S. Gulf Coast 3-2-1 crack spread (per barrel) (1) $ 8.70 $ 16.71 U.S. Gulf Coast 2-1-1 crack spread (per barrel) (1) $ 4.65 $ 9.90 U.S. Gulf Coast Unleaded Gasoline (per gallon) $ 1.09 $ 1.63 Gulf Coast Ultra low sulfur diesel (per gallon) $ 1.19 $ 1.88 U.S. Gulf Coast high sulfur diesel (per gallon) $ 1.06 $ 1.76 Natural gas (per MMBTU) (2) $ 2.13 $ 2.53 (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 and U.S. Gulf Coast Pipeline No. 2 heating oil (ultra low sulfur diesel). For our Big Spring refinery, we compare our $1.06 per barrel refined product margin to the Gulf Coast 3-2-1 crack spread consisting of WTI Cushing crude, Gulf Coast 87 Conventional gasoline and Gulf Coast ultra low sulfur diesel, and for our Krotz Springs refinery, we compare our per barrel refined product margin to the Gulf Coast 2-1-1 crack spread consisting of LLS crude oil, Gulf Coast 87 Conventional 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 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"). 78 | Management's Discussion and Analysis Refining Segment Operational Comparison of the Year Ended December 31, 2020 versus the Year Ended December 31, 2019 Net Revenues Net revenues for the refining segment decreased $2,980.8 million, or 33.9%, in the year ended December 31, 2020 compared to the year ended December 31, 2019. The decrease was primarily driven by the following: • decreases in the average price of U.S. Gulf Coast gasoline of 33.1%, ULSD of 36.6%, and HSD of 40.2%; and • decreases in sales volume of refined product totaling 0.8 million barrels partially due to scheduled turnaround activities at our Big Spring refinery, partially offset by increased sales volumes at our El Dorado refinery due to prior year scheduled turnaround activities and production issues, and a 3.9 million barrel decrease in purchased product sales due to decreased demand. Net revenues included sales to our retail segment of $220.0 million and $379.6 million, sales to our logistics segment of $203.8 million and $278.3 million and sales to our other segment of $30.8 million and $44.7 million for the years ended December 31, 2020 and 2019, respectively. We eliminate this intercompany revenue in consolidation. Cost of Materials and Other Cost of materials and other decreased $1,782.7 million, or 23.7%, in the year ended December 31, 2020 compared to the year ended December 31, 2019. This decrease was primarily driven by the following: • a decrease in the cost of WTI Cushing crude oil from an average of $56.99 per barrel for 2019 to an average of $39.89 during 2020; • a decrease in the cost of WTI Midland crude oil, from an average of $56.31 per barrel for 2019 to an average of $40.02 during 2020. These decreases were partially offset by the following: • a prior period benefit of $77.6 million due to the reenactment of the BTC in December 2019 for the 2018 and 2019 periods, of which $31.1 million related to the first three quarters of 2019 blending activities and $36.0 million related to 2018 blending activities; • a prior period benefit of approximately $20.7 million related to the 2018 RIN Waivers recognized during the year ended December 31, 2019, whereas there was no benefit for the same period of 2020; • the (expense) benefit of $(29.4) million related to the change in pre-tax inventory valuation recognized during the year ended December 31, 2020 compared to $52.2 million recognized during the twelve year ended December 31, 2019; and • a decrease in hedging gains to a loss of $68.2 million recognized during the year ended December 31, 2020 from a gain of $32.6 million recognized during the year ended December 31, 2019. 79 | Management's Discussion and Analysis Our refining segment purchases finished product from our logistics segment and 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 $339.1 million and $218.0 million during the years ended December 31, 2020 and 2019, respectively. We eliminate these intercompany fees in consolidation. Refining Margin Refining margin decreased by $1,198.1 million, or 94.3%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, with a refining margin percentage of 1.2% as compared to 14.4% for the years ended December 31, 2020 and 2019, respectively, primarily driven by the following: • a narrowing of the discount between WTI Midland crude oil and Brent crude oil where, during the year ended December 31, 2020, the WTI Midland crude oil differential to Brent crude oil was an average discount of $3.22 per barrel compared to $7.83 per barrel during the same period of 2019; • a narrowing of the average WTI Cushing crude oil and WTS crude oil to $(0.07) during the year ended December 31, 2020, compared to $0.72 during the same period of 2019; • a narrowing of the discount between WTI Midland crude oil compared to WTI Cushing where, during the year ended December 31, 2020, the average WTI Midland crude oil differential to WTI Cushing crude oil was $(0.13) per barrel compared to $0.68 during the year ended December 31, 2019; • a narrowing of the discount between WTI Cushing crude oil compared to Brent where, during the year ended December 31, 2020, the average WTI Cushing crude oil differential to Brent crude oil was $3.54 per barrel compared to $7.13 during the year ended December 31, 2019; • a 48.1% decline in the 5-3-2 crack spread (the primary measure for the Tyler refinery and El Dorado refinery), a 47.9% decline in the average Gulf Coast 3-2-1 crack spread (the primary measure for the Big Spring refinery), and a 53.0% decline in the average Gulf Coast 2-1-1 crack spread (the primary measure for the Krotz Springs refinery); • a decrease in hedging gains to a loss of $68.2 million recognized during the year ended December 31, 2020 from a gain of $32.6 million recognized during the year ended December 31, 2019; and • a decrease in reversal benefit of inventory valuation reserve during year ended December 31, 2020 compared to the prior year period. 80 | Management's Discussion and Analysis Operating Expenses Operating expenses decreased $89.7 million, or 18.2%, in the year ended December 31, 2020, compared to year ended December 31, 2019. The decrease in operating expenses was primarily driven by the following: • decrease in contract services and inspection costs associated with cost reduction measures taken in 2020; • decrease in maintenance costs due to deferral of projects amidst the COVID-19 Pandemic, and the incurrence of extraordinary maintenance costs at our Big Spring refinery in the comparable prior year period; and • decreases in utilities and catalyst costs, primarily at our Big Spring and Krotz Springs refineries related to reduced throughput due to turnaround and unit downtime, respectively; • decrease in employee related expenses due to deferrals of projects and elimination of incentive bonus; and • reduced costs as a result of the sale of the Bakersfield refinery in May 2020. 81 | Management's Discussion and Analysis Contribution Margin Contribution margin decreased by $1,108.4 million, or a 14.5% decline in contribution margin percentage, for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily driven by the following: • the decline of the Midland WTI crude oil differential to Brent crude oil compared to the prior-year period; • an overall decline in the average crack spreads; • a decrease in reversal benefit related to inventory valuation reserves recognized during the year ended December 31, 2020 compared to the prior year period; and • a narrowing of the discount between WTI Cushing and WTI crude oil compared to the prior-year period. These decreases were partially offset by decreases in operating expenses across all refineries. 82 | Management's Discussion and Analysis Logistics Segment The table below sets forth certain information concerning our logistics segment operations ($ in millions, except per barrel amounts): Logistics Contribution Margin and Operating Information Year Ended December 31, 2020 2019 Net revenues $ 563.4 584.0 Cost of materials and other 269.1 336.5 Operating expenses (excluding depreciation and amortization) 56.2 74.1 Contribution margin $ 238.1 $ 173.4 Operating Information: East Texas - Tyler Refinery sales volumes (average bpd) (1) 71,182 74,206 Big Spring wholesale marketing throughputs (average bpd) 76,345 82,695 West Texas wholesale marketing throughputs (average bpd) 11,264 11,075 West Texas wholesale marketing margin per barrel $ 2.37 $ 4.44 Terminalling throughputs (average bpd) (2) 147,251 160,075 Throughputs (average bpd): Lion Pipeline System: Crude pipelines (non-gathered) 74,179 49,485 Refined products pipelines to Enterprise Systems 53,702 37,716 SALA Gathering System 13,466 15,325 East Texas Crude Logistics System 15,960 19,927 Big Spring Gathering System (3) 82,817 — Plains Connection System (3) 104,770 — (1) Excludes jet fuel and petroleum coke. (2) Consists of terminalling throughputs at our Tyler, Big Spring, Big Sandy and Mount Pleasant, Texas, El Dorado and North Little Rock, Arkansas and Memphis and Nashville, Tennessee terminals. (3) Throughputs for the Big Spring Gathering System and the Plains Connection System are for the approximately 275 days we owned the assets following the Big Spring Gathering Assets Acquisition effective March 31, 2020. 83 | Management's Discussion and Analysis Logistics Segment Operational Comparison of the Year Ended December 31, 2020 versus the Year Ended December 31, 2019 Net Revenues Net revenues decreased by $20.6 million, or 3.5%, in the year ended December 31, 2020 compared to the year ended December 31, 2019 primarily driven by the following: • decreases in the average sales prices per gallon of gasoline and diesel sold, partially offset by increase in the average sales volume of gasoline in our West Texas marketing operations: ◦ the average volumes of gasoline sold increased by 12.6 million gallons, offset by 8.1 million decrease of diesel gallons sold. ◦ the average sales prices per gallon of gasoline and diesel sold decreased by $0.49 per gallon and $0.71 per gallon, respectively. Such decreases were partially offset by the following: • increased revenues associated with agreements executed in connection with Big Spring Gathering System and Delek Trucking acquisitions, which were effective March 31, 2020 and May 1, 2020, respectively. Refer to Note 6 of the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for additional information. Net revenues included sales to our refining segment of $377.7 million and $254.9 million for the years ended December 31, 2020 and 2019, respectively, and sales to our other segment of $2.1 million and $6.1 million for the years ended December 31, 2020 and 2019, respectively. We eliminate this intercompany revenue in consolidation. Cost of Materials and Other Cost of materials and other for the logistics segment decreased by $67.4 million, or 20.0%, in the year ended December 31, 2020 compared to the year ended December 31, 2019. This decrease was primarily driven by the following: • decreases in the average volumes of diesel sold and average cost per gallon of gasoline and diesel sold partially offset by increases in averages volumes of gasoline sold in our West Texas marketing operations: ◦ the average volumes of gasoline sold increased by 12.6 million gallons, partially offset by a 8.1 million decrease of diesel gallons sold. ◦ the average cost per gallon of gasoline and diesel sold decreased by $0.43 per gallon and $0.66 per gallon, respectively. Our logistics segment purchased product from our refining segment of $203.8 million and $278.3 million for the years ended December 31, 2020 and 2019, respectively. We eliminate these intercompany costs in consolidation. 84 | Management's Discussion and Analysis Operating Expenses Operating expenses decreased by $17.9 million, or 24.2%, in the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily driven by the following: • decrease in employee and outside services costs due to measures implemented to respond to the COVID-19 Pandemic including delaying non-essential projects; • lower operating costs associated with allocated contract services pertaining to certain of our assets; and • decreases in variable expenses such as utilities, maintenance and materials costs due to lower production. Contribution Margin Contribution margin increased by $64.7 million, or 37.3%, in the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily driven by the following: • increases in revenue associated with agreements executed in connection with Big Spring Gathering System and Delek Trucking acquisitions; and • decreases in operating expenses. Such increases were partially offset by the following: • decreases in gross margin per barrel sold of $2.07 in our West Texas marketing operations. 85 | Management's Discussion and Analysis Retail Segment The tables below sets forth certain information concerning our retail segment operations (gross sales $ in millions): Retail Contribution Margin and Operating Information Year Ended December 31, 2020 2019 Net revenues $ 681.7 838.0 Cost of materials and other 523.6 684.7 Operating expenses (excluding depreciation and amortization) 90.5 94.8 Contribution margin $ 67.6 $ 58.5 Operating Information Year Ended December 31, 2020 2019 Number of stores (end of period) 253 252 Average number of stores 253 266 Average number of fuel stores 248 247 Retail fuel sales $ 357.9 $ 524.9 Retail fuel sales (thousands of gallons) 176,924 214,094 Average retail gallons per average number of stores (in thousands) 715 827 Average retail sales price per gallon sold $ 2.02 $ 2.45 Retail fuel margin ($ per gallon) (1) $ 0.347 $ 0.276 Merchandise sales (in millions) $ 323.8 $ 313.1 Merchandise sales per average number of stores (in millions) $ 1.3 $ 1.2 Merchandise margin % 31.0 % 30.8 % Same-Store Comparison (2) Year Ended December 31, 2020 2019 Change in same-store retail fuel gallons sold (17.3) % 2.9 % Change in same-store merchandise sales 6.2 % (1.0) % (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 year-over-year changes in specified metrics for stores that were in service at both the beginning of the year and the end of the most recent year used in the comparison. 86 | Management's Discussion and Analysis Retail Segment Operational Comparison of the Year Ended December 31, 2020 versus the Year Ended December 31, 2019 Net Revenues Net revenues for the retail segment decreased by $156.3 million, or 18.7%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily driven by the following: • total fuel sales were $357.9 million for the year ended December 31, 2020 compared to $524.9 million for 2019, attributable to the following: ◦ a decrease in total retail fuel gallons sold of 176,924 thousand gallons during 2020 compared to 214,094 thousand gallons in 2019, primarily attributable to a same-store decline in fuel volumes of (17.3)%, primarily due to demand slowdown as a result of the COVID-19 Pandemic; ◦ a $0.43 decrease in average price charged per gallon; and ◦ $9.8 million decrease related to reduction in number of stores period over period; • merchandise sales were $323.8 million for the year ended December 31, 2020 compared to $313.1 million for 2019 primarily driven by the following: ◦ a same-store sales increase of 6.2% due to strong sales growth for key categories such as beer, cigarettes and packaged beverages, partially offset by a $10.8 million decrease related to reduction in number of stores period over period. 87 | Management's Discussion and Analysis Cost of Materials and Other Cost of materials and other for the retail segment decreased by $161.1 million, or 23.5%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily driven by the following: • a decrease in average cost per gallon of $0.50 or 23.0% applied to fuel sales volumes that decreased period over period; and • a $16.3 million decrease due to reduction in number of stores period over period. Our retail segment purchased finished product from our refining segment of $220.0 million and $379.6 million for the years ended December 31, 2020 and 2019, respectively. We eliminate this intercompany cost in consolidation. Operating Expenses Operating expenses for the retail segment decreased by $4.3 million, or 4.5%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. This decrease is primarily attributable to a decrease in operating costs associated with the reduction in the number of stores, in addition to the execution of various cost reduction initiatives implemented beginning in the second quarter of 2020. Contribution Margin Contribution margin for the retail segment increased by $9.1 million, a 15.6% increase in contribution margin percentage, for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily driven by a $0.071 per gallon improvement in the retail fuel margin and a 0.2% increase in merchandise margin. 88 | Management's Discussion and Analysis 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 December 31, 2020 our total liquidity amounted to $1.6 billion comprised of $746.8 million in unused credit commitments under the Delek Revolving Credit Facility, $103.4 million in unused credit commitments under the DKL Credit Facility and $787.5 million in cash and cash equivalents. Historically, we have generated adequate cash from operations to fund ongoing working capital requirements, pay quarterly cash dividends and operational capital expenditures. 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 historically been able to source funding at 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 and gas industry and other financial and business factors, including the current COVID-19 Pandemic and the impact on demand and commodity prices as well as crack spreads, some of which are beyond our control. During 2020 and through the date of this Annual Report, the COVID-19 Pandemic has had a significant negative impact on economic conditions in the U.S., and a particularly severe impact on the oil and gas industry because of the significant impact the Pandemic has had on motor and air travel. As previously discussed at length in the 'Executive Summary and Strategic Overview' Section of Management's Discussion and Analysis, we have identified several uncertainties and related risks associated with the current and potential future effects of the Pandemic, including increased uncertainty and risk associated with our ability to manage liquidity and capital resources. As a result, and while it's always a critical area of focus, we have dedicated significant efforts throughout 2020 to monitoring and evaluating the evolving uncertainties around liquidity and capital resources and implementing measures and plans to mitigate and manage the associated risk. Here are some of our most significant areas of focus: • In early 2020, as the economic impact of the Pandemic became evident, we reviewed our capital expenditure planning and forecast and suspended the majority of our non-critical growth capital projects during 2020 as well as made strategic decisions to abandon certain capital assets/projects that may no longer fit our objectives. Instead, we focused on required maintenance and regulatory projects as well as strategically-timed turnaround activities. As a result, we were able to reduce our capital expenditures to $239.6 million during the year ended December 31, 2020, compared to our initial full-year forecast included in our December 31, 2019 Annual Report on Form 10-K of $325.7 million; • The temporary suspension of growth and non-essential projects (particularly in Refining) provided us with the opportunity to shift our focus to process improvement initiatives, cost control measures, and opportunities for innovation, which has improved our ability to control costs in terms of operating expenses and the aforementioned critical capital projects, particularly during the fourth quarter of 2020 (and as evident in our results of operations and cash flows from investing activities as presented in our unaudited consolidated financial statements for the three months ended, December 31, 2020, which is presented in our earnings release included in Ex. 99.1 to our Form 8-K filed with the SEC on February 24, 2021), all of which also favorably impact our cash position and provide a longer term foundation for increased operational effectiveness; • Throughout 2020, we continued to monitor credit and liquidity of our key customers, which already go through a stringent and ongoing credit evaluation as part of our internal controls, and we have been able to successfully maintain our collection efforts without significant losses or write-offs. As part of this effort, we also continue to monitor our customers, as well as vendors, for any areas of concentration that could put us at undue risk, and have experienced no significant deterioration in credit or concentration risks that warrant disclosure; • We continued executing on our strategy of divesting of non-strategic or underperforming assets. Where we made significant divestitures of underperforming stores in Retail during 2019, in 2020 we focused on executing a transaction to divest of our remaining non-operating refinery located in Bakersfield, California. As a result, on May 7, 2020, we sold our equity interests in our non-operating refinery located in Bakersfield to a subsidiary of Global Clean Energy Holdings, Inc. (“GCE”) for total cash consideration of $40.0 million (and resulting in a realized gain on the sale of $56.8 million) and which was incurring non-operating losses to maintain basic regulatory requirements. As a result, not only did the sale produce significant cash proceeds, its elimination was immediately cash accretive. See further discussion in Note 4 of our consolidated financial statements included in Item 8. 89 | Management's Discussion and Analysis Financial Statements and Supplementary Data, of this Annual Report on Form 10-K; • To mitigate some of the risk inherent in prices, we utilized (and continue to utilize) various derivative financial instruments to protect a portion of our commodity exposure against pricing risk. In many cases, we hedge our production in a manner that systematically places hedges for several quarters in advance, allowing us to maintain a disciplined risk management program as it relates to commodity price volatility. We supplement the systematic hedging program with discretionary hedges that take advantage of favorable market conditions. These activities included certain fixed price purchase contracts and crack spread hedges executed throughout the year to ensure that we were not overly exposed to the unusually high market volatility which could impact cash requirements at settlement. However, many of these activities also require margin deposits that can fluctuate significantly in a volatile market, much of which cannot be anticipated; • We continue to actively monitor our maintenance and incurrence covenants under our credit facilities and debt instruments, and have implemented enhancements in our cash forecasting and modeling that allow us to better anticipate potential issues, in many cases, before they occur. We believe that our enhanced forecasting efforts and processes will better position us to preemptively work toward amendments with lenders as needed, though it is possible that amendments may not be granted for reasons that may or may not be known to us; • We have examined our discretionary uses of cash, including our stock repurchase activities and dividend distribution payments, both of which are designed to provide a return on shareholder value in times of favorable economic conditions and operating results, but which can actually weaken shareholder value in times of economic distress and downward pressure on our operating results if such activities diminish our ability to appropriately manage and mitigate the heightened risk. As a result of this examination, beginning in the second quarter 2020, we have temporarily suspended the repurchase of shares. Additionally, on November 5, 2020, we announced that we have elected to suspend dividends indefinitely beginning in the fourth quarter of 2020. Both of these decisions have the immediate benefit of conserving capital. Depending on market conditions, we may make the decision to resume share repurchases could which may take priority over future dividends or growth capital; and • Finally, we are always evaluating our existing sources of capital and considering the feasibility and potential advantages of strategic transactions and capital markets opportunities that could expand our sources of liquidity and strengthen our flexibility, while balancing the comparative cost of capital, the incremental leverage risk, as well as the potential transactional risk on our core business and infrastructure. We are pleased that, despite the challenging environment, we have continued to successfully manage our liquidity and available sources of capital during 2020 through strategic transactions such as the following: ◦ The Delek Logistics IDR Simplification, which resulted in the receipt of newly issued registered common limited partner units that we may sell in the market, when we determine that such sale meets all of our criteria for pursuing such a divestiture, including (but not limited to): ▪ that we have evaluated the impact of a dilution of our ownership interest in Delek Logistics' common limited partner units in terms of the impact on distributions to Delek and on Delek's earnings per share and believe the liquidity, potential shareholder value and/or strategic benefits/considerations to be sufficient to warrant the transaction; ▪ that there is a market for the number of units we are considering divesting; and ▪ that the cost of capital associated with the sale transaction (i.e., in terms of the fees and discounts) is reasonable and not unduly cost-prohibitive, given the other factors. ◦ By monetizing assets (including financial assets such as RINs inventories), where the cost of capital is not cost-prohibitive compared to the liquidity considerations, through product financing arrangements; and ◦ By renegotiating and extending financing arrangements and taking advantage of expansion opportunities under our existing credit facilities, where appropriate. The two most significant of these transactions executed during 2020 were as follows: ▪ In April 2020, we amended and restated our three Supply and Offtake Agreements with J. Aron which extended our dedicated financing for the inventory covered through at least December 2022, and updated certain specific market-indexed provisions to improve our ability to manage our exposure to commodity price volatility during the term of the Agreements. See further discussion in Note 10 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K; and ▪ On May 19, 2020, we amended the Term Loan Credit Facility agreement (as defined in Note 11 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K) and borrowed $200.0 million in aggregate principal amount of incremental term loans (the “Third Incremental Term Loan”) at an original issue discount of 7.00%, requiring quarterly principal amortization payments of $0.5 million commencing on June 30, 2020. 90 | Management's Discussion and Analysis As a result of these efforts, and despite the devastating economic effects of the Pandemic on our industry, we have maintained a strong cash position with capital resources flexibility that positions us well as we look forward to the expected economic recovery from the Pandemic, where crack spread forecasts and forward curves indicate the market's expectation for significant recovery in 2022 and stabilization by 2023. We believe we have sufficient financial resources from the above sources to meet our funding requirements in the next 12 months, including working capital requirements, quarterly cash distributions for Delek Logistics public unitholders, and planned capital expenditures. However, if market conditions were to change, for instance due to another significant decline in oil prices or crack spreads and/or significant worsening of conditions/uncertainty created by the COVID-19 Pandemic, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be unfavorably impacted. As of December 31, 2020, 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 further discussion in Note 11 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K). After considering the current effect of the significant decline in oil prices and uncertainty created by the COVID-19 Pandemic on our operations, 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 December 31, 2020 to the extent that any of our activities triggered these covenants. However, given the uncertainty around economic conditions arising from the COVID-19 Pandemic, 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 based covenants, in the event that our activities would warrant testing these covenants. Failure 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 resume paying 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 return to compliance under 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): available borrowings under our existing Wells Fargo Revolving Credit Facility, and for Delek Logistics, under its Delek Logistics Credit Facility (see further discussion in Note 11 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K); the allowance to incur an additional $200 million of secured debt under the Wells Fargo Term Loan Credit Facility(see further discussion in Note 11 of our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K); 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 or joint ventures, 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 Year Ended December 31, 2020 2019 Cash Flow Data: Operating activities $ (282.9) $ 575.2 Investing activities (191.3) (691.3) Financing activities 306.4 (7.9) Net decrease $ (167.8) $ (124.0) Cash Flows from Operating Activities Net cash used in operating activities was $282.9 million for the year ended December 31, 2020, compared to cash provided of $575.2 million for the comparable period of 2019. Cash receipts from customers and cash payments to suppliers and for salaries decreased resulting in a net $960.5 million decrease in cash from operating activities mainly due to a decline in the prices and volume of refined product sold. This decrease was partially offset by a $9.3 million increase in cash received for dividends, a $90.6 million decrease in cash paid for taxes and a $2.5 million decrease in cash paid for debt interest. Cash Flows from Investing Activities Net cash used in investing activities was $191.3 million for the year ended December 31, 2020, compared to $691.3 million in the comparable period of 2019. Equity method investment contributions decreased $236.2 million primarily due to our initial investments in and contributions to the Red River Pipeline Joint Venture and WWP Joint Venture in 2019 for $128.6 million and $126.7 million, respectively. During the year ended December 31, 2020, we contributed $12.2 million related to our Red River Pipeline Joint Venture and $18.9 million related to our interest in WWP and WWP Project Financing JV. Additionally, we received distributions from our WWP Project Financing JV in the amount of $69.3 million for which there was no comparable activity in the prior year period. We also received proceeds of $39.9 million from the sale of our Bakersfield refinery in the year ended December 31, 2020. Also contributing to the decrease was cash purchases of property, plant and equipment which 91 | Management's Discussion and Analysis decreased from $413.0 million in 2019, to $269.4 million in 2020, partially attributable to delaying non-essential projects in light of the COVID-19 Pandemic. Cash Flows from Financing Activities Net cash provided by financing activities was $306.4 million for the year ended December 31, 2020, compared to cash used of $7.9 million in the comparable 2019 period. This increase in cash provided was predominantly due to net proceeds received from long-term revolvers of $128.2 million during the year ended December 31, 2020, compared to net payments of $118.3 million in the comparable 2019 period. Additionally contributing to this increase were a decrease in repurchases of common stock to $1.9 million for the year ended December 31, 2020 compared to $178.1 million in the comparable 2019 period due to management suspending our share repurchase program, and an increase in net proceeds from inventory financing arrangements to $169.1 million for the year ended December 31, 2020 compared to $18.6 million in the comparable 2019 period. Partially offsetting this increase was a decrease in net proceeds received from term debt to $147.1 million during the year ended December 31, 2020, compared to $399.7 million in the comparable 2019 period, and a $28.9 million increase in repurchase of non-controlling interests primarily associated with IDR simplification transactions. Cash Position and Indebtedness As of December 31, 2020, our total cash and cash equivalents were $787.5 million and we had total long-term indebtedness of approximately $2,348.4 million. The total long-term indebtedness is net of deferred financing costs and debt discount of $6.4 million and $24.4 million, respectively. Additionally, we had letters of credit issued of approximately $253.2 million. Total unused credit commitments or borrowing base availability, as applicable, under our revolving credit facilities was approximately $850.2 million. The increase of $281.3 million compared to the balance at December 31, 2019 resulted primarily from the additional borrowings under the Term Loan Credit Facility and the Delek Logistics Credit Facility in 2020. As of December 31, 2020, our total long-term indebtedness consisted of the following: • no aggregate principal amount under the Revolving Credit Facility, due on March 30, 2023, with average borrowing rate of 3.50%; • an aggregate principal amount of $1,273.0 million under the Term Loan Credit Facility, due on March 30, 2025, with effective interest of 3.57%; • an aggregate principal amount of $39.6 million in outstanding borrowings under the BHI Term Loan, due on December 31, 2022, with effective interest of 3.58%; • an aggregate principal amount of $746.6 million under the Delek Logistics Credit Facility, due on September 28, 2023, with average borrowing rate of 2.44%; • an aggregate principal amount of $250.0 million under the Delek Logistics Notes, due in 2025, with effective interest rate of 7.45%; • an aggregate principal amount of $50.0 million under the Reliant Bank Revolver, due on June 30, 2022, with fixed interest rate of 4.50%; and • an aggregate principal amount of $20.0 million under the Promissory Notes, due on January 04, 2021, with fixed interest rate of 5.50%. See Note 11 to our accompanying consolidated financial statements in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information about our separate debt and credit facilities. Additionally, our obligation under the supply and offtake inventory financing agreements with J. Aron amounted to $347.7 million at December 31, 2020, $224.9 million of which is due on December 30, 2022, except that a portion (not to exceed $33.1 million) of this otherwise long-term component is subject to potential earlier payment under the Periodic Price Adjustment provision. See Note 10 to our accompanying consolidated financial statements in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for additional information about our supply and offtake facilities. Debt Ratings We receive debt ratings from the major ratings agencies in the U.S. In determining our debt ratings, the agencies consider a number of qualitative and quantitative items including, but not limited to, commodity pricing levels, our liquidity, asset quality, reserve mix, debt levels and seniorities, cost structure, planned asset sales and production growth opportunities. There are no “rating triggers” in any of our contractual debt obligations that would accelerate scheduled maturities should our debt rating fall below a specified level. However, a downgrade could adversely impact our interest rate on any credit facility implementations and the ability to economically access debt markets in the future. Additionally, any rating downgrades may result in additional letters of credit or cash collateral being posted under certain contractual arrangements. 92 | Management's Discussion and Analysis Our credit ratings as of December 31, 2020 and 2019 are presented below: Year Ended December 31, 2020 2019 Delek S&P BB/Negative BB/Stable Moody's Ba3/Stable Ba3/Stable Delek Logistics S&P BB-/Negative BB-/Stable Moody's B1/Stable B1/Stable Capital Spending A key component of our long-term strategy is our capital expenditure program. Our capital expenditures for the year ended December 31, 2020 were $239.6 million, of which approximately $201.0 million was spent in our refining segment, $15.8 million in our logistics segment, $9.1 million in our retail segment and $13.7 million in corporate and other. The following table summarizes our actual capital expenditures for 2020 and planned capital expenditures for 2021 by operating segment and major category (in millions): Year Ended December 31, 2021 Forecast 2020 Actual Refining Sustaining maintenance, including turnaround activities $ 92.2 $ 158.9 Regulatory 4.4 41.3 Discretionary projects 0.7 0.8 Refining segment total 97.3 201.0 Logistics Regulatory 9.0 1.9 Sustaining maintenance 4.9 1.5 Discretionary projects 6.9 12.4 Logistics segment total 20.8 15.8 Retail Regulatory 3.3 0.2 Sustaining maintenance — 2.4 Discretionary projects 2.4 6.5 Retail segment total 5.7 9.1 Corporate and Other Regulatory 1.8 0.4 Sustaining maintenance 15.0 1.2 Discretionary projects (1)(2) 9.9 12.1 Other total 26.7 13.7 Total capital spending $ 150.5 $ 239.6 (1) Excludes purchases of rights-of-way in the amount of $2.7 million in 2020. 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 7. Management Discussion and Analysis, of this Annual Report on Form 10-K. For further information, please refer to our discussion in Item 1A. Risk Factors, of this Annual Report on Form 10-K. 93 | Management's Discussion and Analysis Contractual Obligations and Commitments Information regarding our known contractual obligations of the types described below as of December 31, 2020, 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 $ 33.4 $ 861.8 $ 1,484.0 $ — $ 2,379.2 Interest (1) 77.9 145.1 72.4 — 295.4 Operating lease commitments (2) 216.6 407.5 277.0 214.4 1,115.5 Purchase commitments (3) 876.6 — — — 876.6 Product financing agreements (4) 198.0 — — — 198.0 Transportation agreements (5) 124.8 230.1 127.5 60.0 542.4 J. Aron supply and offtake obligations (6) 15.5 243.5 — — 259.0 Total $ 1,542.8 $ 1,888.0 $ 1,960.9 $ 274.4 $ 5,666.1 (1) Expected interest payments on debt outstanding at December 31, 2020. Floating interest rate debt is calculated using December 31, 2020 rates. For additional information, see Note 11 to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. (2) Amounts reflect future estimated lease payments under operating leases having remaining non-cancelable terms in excess of one year as of December 31, 2020. (3) We have supply agreements 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. (4) Balances consist of obligations under RINs product financing arrangements, as described in the 'Environmental Credits and Related Regulatory Obligations' accounting policy included in Note 2 to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. (5) Balances consist of contractual obligations under agreements with third parties (not including Delek Logistics) for the transportation of crude oil to our refineries. (6) 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 10 to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Off-Balance Sheet Arrangements We have no material off-balance sheet arrangements through the date of this Annual Report on Form 10-K. 94 | Management's Discussion and Analysis Accounting Standards Critical Accounting Policies and Estimates The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend our business activities. We prepare our consolidated financial statements in conformity with GAAP, and in the process of applying these principles, we must make judgments, assumptions and estimates based on the best available information at the time. To aid a reader's understanding, management has identified our critical accounting policies. These policies are considered critical because they are both most important to the portrayal of our financial condition and results, and require our most difficult, subjective or complex judgments. Often they require judgments and estimation about matters which are inherently uncertain and involve measuring at a specific point in time, events which are continuous in nature. Actual results may differ based on the accuracy of the information utilized and subsequent events, some over which we may have little or no control. Evaluation of Variable Interest Entities ("VIEs") Our consolidated financial statements include the financial statements of our subsidiaries and VIEs, of which we are the primary beneficiary. We evaluate all legal entities in which we hold an ownership or other pecuniary interest to determine if the entity is a VIE. Variable interests can be contractual, ownership or other pecuniary interests in an entity that change with changes in the fair value of the VIE’s assets. If we are not the primary beneficiary, the general partner or another limited partner may consolidate the VIE, and we record the investment as an equity method investment. Significant judgment is exercised in determining that a legal entity is a VIE and in evaluating whether we are the primary beneficiary in a VIE. Generally, the primary beneficiary is the party that has both the power to direct the activities that most significantly impact the VIE’s economic performance and the right to receive benefits or obligation to absorb losses that could be potentially significant to the VIE. We evaluate the entity’s need for continuing financial support; the equity holder’s lack of a controlling financial interest; and/or if an equity holder’s voting interests are disproportionate to its obligation to absorb expected losses or receive residual returns. We evaluate our interests in a VIE to determine whether we are the primary beneficiary. We use a primarily qualitative analysis to determine if we are deemed to have a controlling financial interest in the VIE, either on a standalone basis or as part of a related party group. We continually monitor our interests in legal entities for changes in the design or activities of an entity and changes in our interests, including our status as the primary beneficiary to determine if the changes require us to revise our previous conclusions. LIFO Inventory The Tyler refinery's inventory consists of crude oil, refined petroleum products and blendstocks which are stated at the lower of cost or market. Cost is determined under the last-in, first-out ("LIFO") valuation method. The LIFO method requires management to make estimates on an interim basis of the anticipated year-end inventory quantities, which could differ from actual quantities. We believe the accounting estimate related to the establishment of anticipated year-end LIFO inventory is a critical accounting estimate, because it requires management to make assumptions about future production rates in the Tyler refinery, the future buying patterns of our customers, as well as numerous other factors beyond our control, including the economic viability of the general economy, weather conditions, the availability of imports, the marketing of competitive fuels and government regulation. The impact of changes in actual performance versus these estimates could be material to the inventories reported on our quarterly balance sheets, and the impact on the results reported in our quarterly statements of income could be material. In selecting assumed inventory levels, we use historical trending of production and sales, recognition of current market indicators of future pricing and value and new regulatory requirements which might impact inventory levels. Management's assumptions require significant judgment because actual year-end inventory levels have fluctuated in the past and may continue to do so. At each year-end, actual physical inventory levels are used to calculate both ending inventory balances and final cost of materials and other for the year. Property, Plant and Equipment and Other Intangibles Impairment Property, plant and equipment and other intangibles are evaluated for impairment whenever indicators of impairment exist. Accounting standards require that if an impairment indicator is present, we must assess whether the carrying amount of the asset is unrecoverable by estimating the sum of the future cash flows expected to result from the asset, undiscounted and without interest charges. We derive the required undiscounted cash flow estimates from our historical experience and our internal business plans. We use quoted market prices when available and our internal cash flow estimates discounted at an appropriate interest rate to determine fair value, as appropriate. If the carrying amount is more than the recoverable amount, an impairment charge must be recognized based on the fair value of the asset. Our assessment did not result in impairment during the years ended December 31, 2020, 2019 or 2018. 95 | Management's Discussion and Analysis Goodwill Goodwill in an acquisition represents the excess of the aggregate purchase price over the fair value of the identifiable net assets. Goodwill is reviewed at least annually for impairment, or more frequently if indicators of impairment exist, such as disruptions in our business, unexpected significant declines in operating results or a sustained market capitalization decline. Goodwill is evaluated for impairment by comparing the carrying amount of the reporting unit to its estimated fair value. Prior to the adoption of Accounting Standard Update ("ASU") 2017-04, Simplifying the Test for Goodwill Impairment , if a reporting unit's carrying amount exceeds its fair value (Step 1), the impairment assessment leads to the testing of the implied fair value of the reporting unit's goodwill to its carrying amount (Step 2). If the implied fair value is less than the carrying amount, a goodwill impairment charge is recorded. Subsequent to adoption of ASU 2017-04 (which we adopted during the fourth quarter of 2018, as permitted by the ASU), Step 2 is no longer required, but rather any impairment is determined based on the results of Step 1. In assessing the recoverability of goodwill, assumptions are made with respect to future business conditions and estimated expected future cash flows to determine the fair value of a reporting unit. We may consider inputs such as a market participant weighted average cost of capital ("WACC"), forecasted crack spreads, gross margin, capital expenditures, and long-term growth rate based on historical information and our best estimate of future forecasts, all of which are subject to significant judgment and estimates. We may also consider a market approach in determining or corroborating the fair values of the reporting units using a multiple of expected future cash flows, such as those used by third-party analysts. The market approach involves significant judgment, including selection of an appropriate peer group, selection of valuation multiples, and determination of the appropriate weighting in our valuation model. If these estimates and assumptions change in the future, due to factors such as a decline in general economic conditions, sustained decrease in the crack spreads, competitive pressures on sales and margins and other economic and industry factors beyond management's control, an impairment charge may be required. The most significant risks to our valuation and the potential future impairment of goodwill are the WACC and the volatility of the crack spread, which is based on the crude oil and the refined product markets. The crack spread is often unpredictable and may negatively impact our results of operations in ways that cannot be anticipated and that are beyond management's control. We may also elect to perform a qualitative impairment assessment of goodwill balances. The qualitative assessment permits companies to assess whether it is more likely than not (i.e., a likelihood of greater than 50%) that the fair value of a reporting unit is less than its carrying amount. If a company concludes that, based on the qualitative assessment, it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the company is required to perform the quantitative impairment test. Alternatively, if a company concludes based on the qualitative assessment that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it has completed its goodwill impairment test and does not need to perform the quantitative impairment test. We performed a qualitative assessment on the reporting units in our logistics segment for the years ended December 31, 2020, 2019 and 2018, which did not result in an impairment charge nor did our analysis reflect any reporting units at risk. Our quantitative assessment of goodwill performed on the reporting units in our refining and retail segments during the fourth quarter of 2020, resulted in an impairment of $126.0 million during the year ended December 31, 2020, related to our Big Spring refinery and Krotz Springs refinery reporting units. The impairment was predominantly the result of the continued uncertainty regarding the impact of the COVID-19 Pandemic, which impacted various components of our assessment, including the WACC. The Pandemic has resulted in government-imposed temporary business closures and shelter-at-home directives. This has had the secondary effect of impacting prices of crude oil and refined products as well as supply and demand for crude oil and refined products, and triggered several identified uncertainties, as discussed in the 'Business Overview' section of Management's Discussion and Analysis. As part of our assessment, the aggregate fair value of all reporting units have been reconciled to our market capitalization for reasonableness. Each of the remaining reporting units have a fair value that is substantially in excess of its carrying value. There was no impairment during the years ended December 31, 2019 and 2018. Details of remaining goodwill balances by segment are included in Note 18 to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Environmental Liabilities It is our policy to accrue environmental and clean-up related costs of a non-capital nature when it is both probable that a liability has been incurred and the amount can be reasonably estimated. Environmental liabilities represent the current estimated costs to investigate and remediate contamination at sites where we have environmental exposure. This estimate is based on assessments of the extent of the contamination, the selected remediation methodology and review of applicable environmental regulations, typically considering estimated activities and costs for 15 years, and up to 30 years if a longer period is believed reasonably necessary. Such estimates may require judgment with respect to costs, time frame and extent of required remedial and clean-up activities. Accruals for estimated costs from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study and include, but are not limited to, costs to perform remedial actions and costs of machinery and equipment that are dedicated to the remedial actions and that do not have an alternative use. Such accruals are adjusted as further information develops or circumstances change. We discount environmental liabilities to their present value if payments are fixed or reliably determinable. Expenditures for equipment necessary for environmental issues relating to ongoing operations are capitalized. Changes in laws and regulations and actual remediation expenses compared to historical experience could significantly impact our results of operations and financial position. We believe the estimates selected, in each instance, represent our best estimate of future outcomes, but the actual outcomes could differ from the estimates selected. 96 | Management's Discussion and Analysis Asset Retirement Obligations Delek recognizes liabilities which represent the fair value of a legal obligation to perform asset retirement activities, including those that are conditional on a future event, when the amount can be reasonably estimated. If a reasonable estimate cannot be made at the time the liability is incurred, we record the liability when sufficient information is available to estimate the liability’s fair value. In the refining segment, we have asset retirement obligations with respect to our refineries due to various legal obligations to clean and/or dispose of these assets at the time they are retired. However, the majority of these assets can be used for extended and indeterminate periods of time provided that they are properly maintained and/or upgraded. It is our practice and intent to continue to maintain these assets and make improvements based on technological advances. In the logistics segment, these obligations relate to the required cleanout of the pipeline and terminal tanks and removal of certain above-grade portions of the pipeline situated on right-of-way property. In the retail segment, we have asset retirement obligations related to the removal of underground storage tanks and the removal of brand signage at owned and leased retail sites which are legally required under the applicable leases. The asset retirement obligation for storage tank removal on leased retail sites is accreted over the expected life of the owned retail site or the average retail site lease term. In order to determine fair value, management must make certain estimates and assumptions including, among other things, projected cash flows, a credit-adjusted risk-free rate and an assessment of market conditions that could significantly impact the estimated fair value of the asset retirement obligations. We believe the estimates selected, in each instance, represent our best estimate of future outcomes, but the actual outcomes could differ from the estimates selected. New Accounting Pronouncements See Note 2 to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for a discussion of new accounting pronouncements applicable to us. 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 as the difference between net refining revenues and total cost of materials and other; • Refined product margin - calculated as the difference between net revenues attributable to refined products (produced and purchased) and related cost of materials and other (which is applicable to both the refining segment and the West Texas wholesale marketing activities within our logistics segment); 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 they 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 Refining Segment Year Ended December 31, 2020 2019 2018 Net revenues $ 5,817.7 $ 8,798.5 $ 9,610.4 Cost of sales 6,346.5 8,154.9 8,904.6 Gross margin (528.8) 643.6 705.8 Add back (items included in cost of sales): Operating expenses (excluding depreciation and amortization) 402.7 492.4 465.4 Depreciation and amortization 198.3 134.3 133.7 Refining margin $ 72.2 $ 1,270.3 $ 1,304.9 97 | Management's Discussion and Analysis