Delek US Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is management’s analysis of our financial performance and of significant trends that may affect our future performance. The MD&A should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 1, 2021 (the "Annual Report on Form 10-K"). Those statements in the MD&A that are not historical in nature should be deemed forward-looking statements that are inherently uncertain. Delek US Holdings, Inc. is a registrant pursuant to the Securities Act of 1933, as amended ("Securities Act") and is listed on the New York Stock Exchange ("NYSE") under the ticker symbol "DK". Unless otherwise noted or the context requires otherwise, the terms "we," "our," "us," "Delek" and the "Company" are used in this report to refer to Delek US Holdings, Inc. and its consolidated subsidiaries for all periods presented. You should read the following discussion of our financial condition and results of operations in conjunction with our historical condensed consolidated financial statements and notes thereto. The Company announces material information to the public about the Company, its products and services and other matters through a variety of means, including filings with the SEC, press releases, public conference calls, the Company’s website ( www.delekus.com ), the investor relations section of its website ( ir.delekus.com ), the news section of its website ( www.delekus.com/news ), and/or social media, including its Twitter account ( @DelekUSHoldings ). The Company encourages investors and others to review the information it makes public in these locations, as such information could be deemed to be material information. Please note that this list may be updated from time to time. Forward-Looking Statements This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). These forward-looking statements reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, statements regarding the effect, impact, potential duration or other implications of, or expectations expressed with respect to, the outbreak of COVID-19, its development into a pandemic in March 2020, and any subsequent mutation of COVID-19 into one or more variants (the "COVID-19 Pandemic" or the "Pandemic") and the actions of members of the Organization of Petroleum Exporting Countries ("OPEC") and other leading oil producing countries (together with OPEC, “OPEC+”), 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 or future pandemics; • 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 ability to successfully integrate acquisitions, realize expected synergies or achieve operational efficiency and effectiveness; • diminishment in value of long-lived assets may result in an impairment in the carrying value of the assets on our balance sheet and a resultant loss recognized in the statement of operations; • the unprecedented market environment and economic effects of the COVID-19 Pandemic, including uncertainty 34 | Management's Discussion and Analysis regarding the timing, pace and extent of economic recovery in the United States ("U.S.") due to the COVID-19 Pandemic; • general economic and business conditions affecting the southern, southwestern and western U.S., particularly levels of spending related to travel and tourism and the ongoing and future impacts of the COVID-19 Pandemic; • volatility under our derivative instruments; • deterioration of creditworthiness or overall financial condition of a material counterparty (or counterparties); • unanticipated increases in cost or scope of, or significant delays in the completion of, our capital improvement and periodic turnaround projects; • risks and uncertainties with respect to the quantities and costs of refined petroleum products supplied to our pipelines and/or held in our terminals; • operating hazards, natural disasters, weather related disruptions, casualty losses and other matters beyond our control; • increases in our debt levels or costs; • possibility of accelerated repayment on a portion of the J. Aron supply and offtake liability if the purchase price adjustment feature triggers a change on the re-pricing dates; • changes in our ability to continue to access the credit markets; • compliance, or failure to comply, with restrictive and financial covenants in our various debt agreements; • 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 the same; • disruption, failure, or cybersecurity breaches affecting or targeting our IT systems and controls, our infrastructure, or the infrastructure of our cloud-based IT service providers; • changes in the cost or availability of transportation for feedstocks and refined products; and • other factors discussed under the headings "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" and in our other filings with the SEC. In light of these risks, uncertainties and assumptions, our actual results of operations and execution of our business strategy could differ materially from those expressed in, or implied by, the forward-looking statements, and you should not place undue reliance upon them. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance, and you should not use our historical performance to anticipate future results or period trends. We can give no assurances that any of the events anticipated by any forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events or otherwise. Executive Summary Business Overview We are an integrated downstream energy business focused on petroleum refining, the transportation, storage and wholesale distribution of crude oil, intermediate and refined products and convenience store retailing. Our operating segments consist of refining, logistics, and retail, and are discussed in the sections that follow. The Impact of the COVID-19 Pandemic 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 activity. As a result, and particularly during 2020, we experienced 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. Uncertainty about the duration of the COVID-19 Pandemic has caused periodic storage constraints in the U.S. resulting from over-supply 35 | Management's Discussion and Analysis of produced oil. Additionally, significant environmental events, such as extreme weather conditions or natural disasters can impact pipeline accessibility and utilization, other supply sources, as well as demand. While in the last several months, we have seen successful domestic efforts to distribute the COVID-19 vaccine across the U.S., which has led to some improved stability in the capital markets as well as improved pricing in crude oil, refined products, and related forward curves, there continues to be general economic uncertainty, and, accordingly, demand for refined product and for our logistics assets has not yet returned to normal levels. Such uncertainty has been further aggravated by the mutation of the COVID-19 virus into one or more variants and plateauing demand for currently available vaccines. Based on these conditions and events, downward pressure on commodity prices, crack spreads and demand remains a significant risk and could continue for the near term. We have previously identified the following known uncertainties resulting from the COVID-19 Pandemic. And while the risk surrounding these uncertainties appears to be lessening, they still represent risks that could impact our operations, financial condition and results of operations. They are as follows: • 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, as well to the carrying value of our long-lived or indefinite-lived assets; • 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 (see also Note 1 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional discussion of specific financial statement risks); • The decline in demand for refined products 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 also Note 1 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional discussion of specific financial statement risks); • 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 and may consider additional relief legislation. Beyond the direct impact of existing legislation on Delek in the current or prior periods (as applicable), 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. 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. Generally Accepted Accounting 36 | Management's Discussion and Analysis Principles ("GAAP"), we have considered them in the preparation of our unaudited financial statements as of and for the nine months ended September 30, 2021, which are included in Item 1, of this Quarterly Report on Form 10-Q. In addition, management has actively responded to the continuing impact of the COVID-19 Pandemic on our business. Additionally, to the extent warranted, we continue to monitor the impact and implement measures to mitigate the risk. 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 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 discretionary capital expenditures; • 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 Coronavirus Aid Relief, and Economic Security Act (the "CARES Act") or other Pandemic relief legislation; • Implementing regular site cleaning and disinfecting procedures; • Adopting remote working where possible and when immediate exposure risk warrants, and where on-site operations are required, taking appropriate safety precautions; • Identifying alternative financing solutions as needed 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, 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, include the following: • 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 a current income tax receivable of $135.6 million and a non-current tax receivable of $20.6 million as of December 31, 2020, related to the net operating loss carryback, all of which was received in the third quarter of 2021. • We made significant efforts to reduce our capital spending, particularly on growth and non-critical sustaining maintenance projects. See the "Liquidity and Capital Resources" section of Item 2. MD&A 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 our Krotz Springs refinery that was 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. We completed this turnaround work late in the first quarter 2021 and have since returned to normalized production. • Additionally, we developed a cost savings plan for 2021 designed to continue to 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 Springs refinery, while also implementing other efforts such as targeted budgeting around outside contractor expenses and deferral of certain non-critical, non-capitalizable maintenance activities. Furthermore, both operating and general and administrative expenses were favorably impacted by a cumulative reduction in workforce, some of which were temporary. Reductions in workforce were made possible in large part by significant efforts to improve process efficiency and leverage technology where cost-effective. • Finally, we elected to suspend share repurchases and dividends beginning in the second and fourth quarters of 2020, respectively, in order to conserve capital. This has helped us maintain our liquidity and manage our cost of capital impacted by the Pandemic, as well as provided additional 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 had a mitigating impact on cash flows as well as our operations, which we believe has improved 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 2. MD&A 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 37 | Management's Discussion and Analysis Pandemic, the speed and effectiveness of responses to combat the virus and any new variants and the challenges with the vaccination rollout. The COVID-19 Pandemic, and the volatile regional and global economic conditions stemming from the Pandemic, could also exacerbate the risk factors identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and in this Form 10-Q, as applicable. 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. Other Significant Events During February 2021, the Company experienced a severe weather event ("Winter Storm Uri") which temporarily impacted operations at all of our refineries. Due to the extreme freezing conditions, and despite the acceleration of planned and ongoing turnaround work at the El Dorado and Krotz Spring refineries (which provided some mitigation), we experienced reduced throughputs at our refineries as there was a disruption in the crude supply, increases in natural gas costs, as well as damages to various units at our refineries requiring additional operating and capital expenditures. 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. The incident was investigated by the Occupational Safety and Health Administration and Chemical Safety Board and resulted in operational disruptions as well as property and casualty damages.. To date, we have recognized approximately $21.4 million ($16.6 million after-tax) of insurance recoveries all related to property and casualty claims, $4.4 million of which related to replacement cost coverage on property losses and which helps offset corresponding capital expenditures, and the remaining $17.0 million of which relates to repairs and other operating expenses incurred in connection with our property and casualty damages. We have additional property and casualty claims, as well as business interruption claims, that are outstanding and still pending, and which are expected to be recognized in future quarters. Refining Overview The refining segment (or "Refining") processes crude oil and other feedstocks for the manufacture of transportation motor fuels, including various grades of gasoline, diesel fuel and aviation fuel, asphalt and other petroleum-based products that are distributed through owned and third-party product terminals. The refining segment has a combined nameplate capacity of 302,000 barrels per day as of September 30, 2021. A high-level summary of the refinery activities is presented below: Tyler, Texas refinery (the "Tyler refinery") El Dorado, Arkansas refinery (the "El Dorado refinery") Big Spring, Texas refinery (the "Big Spring refinery") Krotz Springs, Louisiana refinery (the "Krotz Springs refinery") Total Nameplate Capacity (barrels per day ("bpd")) 75,000 80,000 (1) 73,000 74,000 Primary Products Gasoline, jet fuel, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, petroleum coke and sulfur Gasoline, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, asphalt and sulfur Gasoline, jet fuel, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, aromatics and sulfur Gasoline, jet fuel, high-sulfur diesel, light cycle oil, liquefied petroleum gases, propylene and ammonium thiosulfate Relevant Crack Spread Benchmark Gulf Coast 5-3-2 Gulf Coast 5-3-2 (2) Gulf Coast 3-2-1 (3) Gulf Coast 2-1-1 (4) Marketing and Distribution The refining segment's petroleum-based products are marketed primarily in the south central, 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 the El Dorado refinery has a total nameplate capacity of 80,000 bpd, in order to qualify for the small refinery exemption under the EPA’s Renewable Fuel Standards regulations total output cannot exceed 75,000 bpd. We currently expect that the El Dorado refinery’s output will remain under the 75,000 bpd threshold in the current economic environment. (2) 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 ("Gulf Coast") 5-3-2 crack spread because we believe it to be the most closely aligned benchmark. (3) Our Big Spring refinery is capable of processing substantial volumes of sour crude oil, which has historically cost less than intermediate, and/or substantial volumes of sweet crude oil, and therefore the West Texas Intermediate ("WTI") Cushing/ West Texas Sour ("WTS") price differential, taking into account differences in production yield, is an important measure for helping us make strategic, market-respondent production decisions. (4) The Krotz Springs refinery has the capability to process substantial volumes of light sweet crude oil to produce a high percentage of refined light products. Our refining segment also owns and operates three biodiesel facilities involved in the production of biodiesel fuels and related activities, located in Crossett, Arkansas, Cleburne, Texas, and New Albany, Mississippi. 38 | Management's Discussion and Analysis 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 Partners, LP ("Delek Logistics", NYSE:DKL), where we owned an 80.0% interest in Delek Logistics at September 30, 2021. Delek Logistics was formed by Delek in 2012 to own, operate, acquire and construct crude oil and refined products logistics and marketing assets. A substantial majority of Delek Logistics' assets are currently integral to our refining and marketing operations. The logistics segment's pipelines and transportation business owns or leases capacity on approximately 400 miles of crude oil transportation pipelines, approximately 450 miles of refined product pipelines, and an approximately 900-mile crude oil gathering system and associated crude oil storage tanks with an aggregate of approximately 10.2 million barrels of active shell capacity. It also owns and operates ten light product terminals and markets light products using third-party terminals. Logistics has strategic investments in pipeline joint ventures that provide access to pipeline capacity as well as the potential for earnings from joint venture operations. The logistics segment owns or leases approximately 264 tractors and 353 trailers used to haul primarily crude oil and other products for related and third parties. Retail Overview Our retail segment (or "Retail") at September 30, 2021 includes the operations of 250 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 grams to the public, primarily under the 7-Eleven and DK or Alon brand names pursuant to a license agreement with 7-Eleven, Inc. In November 2018, we terminated the license agreement with 7-Eleven, Inc. and the terms of such termination and subsequent amendments require the removal of all 7-Eleven branding on a store-by-store basis by December 31, 2023. Merchandise sales at our convenience store sites will continue to be sold under the 7-Eleven brand name until 7-Eleven branding is removed pursuant to the termination. As of September 30, 2021, 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 49 under-performing or non-strategic store locations since the fourth quarter of 2018. The cost to acquire the refined fuel products we sell to our wholesale customers in our logistics segment and at our convenience stores in our retail segment depends on numerous factors beyond our control, including the supply of, and demand for, crude oil, gasoline and other refined petroleum products which, in turn, depend on, among other factors, changes in domestic and foreign economies, weather conditions, domestic and foreign political affairs, production levels, the availability of imports, the marketing of competitive fuels and government regulation. Our retail merchandise sales are driven by convenience, customer service, competitive pricing and branding. Motor fuel margin is sales less the delivered cost of fuel and motor fuel taxes, measured on a cents per gallon basis. Our motor fuel margins are impacted by local supply, demand, weather, competitor pricing and product brand. Corporate and Other Overview Our corporate activities, results of certain immaterial operating segments, our asphalt terminal operations, our wholesale crude operations, and intercompany eliminations are reported in corporate, other and eliminations in our segment disclosures. Additionally, our corporate activities include certain of our commodity and other hedging activities. 39 | Management's Discussion and Analysis Strategic Overview The Road So Far: A Recent Look Back In recent history, the Company's overall strategy has been 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 goals for the Company, while factoring in market conditions and expected cash flows. In our 2020 Annual Report on Form 10-K, we outlined the specifics around the Company's strategy, including the Five-Year Strategic Framework (which we initially developed in 2019), as well as our corresponding Core Strategic Focus Areas and our Strategic Initiatives. During much of the first half of 2021, our principal focus was on managing the operational and financial risks related to the COVID-19 Pandemic while also maintaining our attention on these Core Strategic Areas of Focus, which in turn continued to guide our objectives and initiatives : I. Safety and wellness. II. Reliability and integrity. III. Systems and processes. IV. Risk-based decision making. V. Positioning for growth. That said, as we have previously communicated to you, not only have we consistently reevaluated our initiatives and immediate strategic priorities in light of the significant economic and operational impact of the COVID-19 Pandemic, we also have been continuing to actively review our strategies and related operational objectives and consider the need for changes in order to address the evolving industry and market, while ensuring that we continue to appropriately consider and capitalize on our operational strengths and strategic positioning. The combination of our commitment to strategic thinking combined with the rapidly changing environment has led us to embrace a seismic shift in perspective around our long-term strategic direction and outlook, which now is guiding changes to our strategic framework and objectives. The critical principle underlying this evolving perspective is sustainability , and is discussed in more detail below. Evolving Focus: A Sustainability Strategy It is vitally important that our strategic process, especially in view of the evolutionary direction of our macroeconomic and geopolitical environment, involves a continuous evaluation of our business model in terms of long-term economic and operational sustainability. We are operating in a mature industry (the production, logistics and marketing of hydrocarbon-based refined products), with increasingly difficult operational and regulatory challenges and, likewise, pressure on operating costs/gross margins as well as the availability and cost of capital. More consolidation in our industry is expected as the regulatory environment continues to move towards reducing carbon emissions and transitions to renewable energy in the long-term, and evolving consumer and capital markets sentiment, regulations, talent availability, supply chain constraints and customer demand as we move in that direction are expected to cause disruption and increasing pressure in the intermediate term. In order to compete and survive under historic environmental and regulatory changes, companies in our industry will need to be adaptive, forward-thinking and strategic in their approach to long-term sustainability. What this picture looks like, as we come to understand it, is what we refer to as our "Sustainability View." A New Framework: Long-Term Sustainability For these reasons, we have launched a process to develop a Long-Term Sustainability Framework , out of which will come our refined strategic objectives and initiatives. Within this Long-Term Sustainability Framework, we have identified the following initial overarching objectives: I. Focus on Improving Operational Efficiency at Capturing Margins. II. Redirect Corporate Culture towards Innovation, Excellence, and Operating Discipline. III. Understand Value Proposition of Costs and Investments and Maximize Return on Investment. IV. Implement Digital Transformation Strategy. V. Evaluate Strategic Priorities and Redefine Long-term Sustainable Business Model. Developing a strategy focused on long-term economic and operational sustainability in a challenging and rapidly changing environment is a larger and more ambitious objective than a strategy that is simply centered on growth and return on shareholder investment in the near-term. For these reasons, it is important to understand the scalability of our strategy and what are the appropriate stages and priorities, recognizing that the inherent complexity of achieving long-term sustainability is a long game requiring both a measured, disciplined approach as well agility and flexibility to changing conditions. 40 | Management's Discussion and Analysis A Great Start: Stage 1 Initiatives While this Framework is in its early changes, we have already been hard at work identifying and developing our Stage 1 Initiatives in the context of these overarching objectives, and many of them are well underway in terms of implementation. This progress is in part due to some overlap with our previous strategic objectives (thus also validating that our previous objectives were, in many ways, the right areas of focus), but also the result of the energy and commitment that our sustainability framework is generating in our organization. Some of the initiatives that are underway and are expected to continue throughout the remainder of 2021 and into 2022 include the following: • Enterprise-wide cost and waste reduction initiatives as well as initiatives focused on eliminating lost revenue and value leakage; • Recent and on-going new system implementations that will improve our ability to understand all aspects of our business as well as our ability to make real-time and forward-looking operational decisions. • Identifying the qualities of a "Delek Leader" and the "Employee of the Future" to help incorporate those qualities into our human capital programs, incentives and rewards. • Identifying and evaluating the types of investment opportunities that fit our Sustainability View, including consideration of strategic investments or joint ventures in renewables, incubator investments in innovative new technologies, and other core-business investments that could improve our scalability and agility. • Redefining our framework for evaluating, tracking and understanding the value creation propositions for proposed capital and strategic investments under the context of our evolving Long-Term Sustainability Objectives and our Sustainability View. We have selected these Stage 1 initiatives because they are all foundational to continued progression toward achieving our overarching strategic objectives under the Long-Term Sustainability Framework, and thus were very intentional. We look forward to reporting to you on our progress on these and other key initiatives, and to providing additional color around this exciting new way of thinking about and planning for the future of our business. 2021 Developments Managing Through the COVID-19 Pandemic Our principle focus during 2021 has been to execute on the following initiatives, consistent with those discussed above, in the context of the COVID-19 Pandemic: • effectively implementing and executing on our operating cost savings initiatives; • continuing to be focused on controlling capital expenditures; • focusing on operating efficiently; • continuing to position ourselves to manage our supply chain risk, our customer risk and our liquidity sources; • continuing to maintain a strong retail business; and • with our sights also set on recovery from the Pandemic and the future, continuing to explore and investigate potential growth opportunities for midstream or other lines of business. While, as previously noted above, COVID-19 conditions seem to be improving, we were faced with some unprecedented challenges which required our focus during the first nine months of 2021, including the effects of Winter Storm Uri as well as the El Dorado fire (described above). These events continue to be a significant area of focus as we continue to aggressively pursue insurance recoveries under our existing policies. We believe that managing the efforts listed above, plus managing through the disruption caused by these two unexpected events, were critical to managing our results in this continued challenging environment. Regulatory Volatility Our RINs cost and RINs Obligation (as defined in Note 9 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q) have been negatively impacted by increasing RINs prices during much of 2021 which resulted from an unfavorable ruling against companies previously granted the EPA's Small Refinery Exemptions (or "SREs") under the Renewable Fuel Standard (the "RFS") which governs RINs volume obligations for U.S. hydrocarbon refining companies, importers and blenders. Additionally, a worsening environmental regulatory sentiment in Washington, D.C. following the change in the presidential administration in January 2021 continued to put upward pressure on RIN prices. The 10th Circuit Court of Appeals ruling, which was subsequently appealed and (for the majority of the period) was waiting to be heard by the U.S. Supreme Court, stalled the approval of 2019 SRE applications already submitted (inclusive of 2019 SRE applications for each of our four refineries) and led to the postponement of 2020 SRE applications. Because of these delays and uncertainties, the EPA issued, by Final Rule, extensions on the compliance deadline under the RFS as well as the deadline for submission of the obligated party attestation reports, as follows: the 2019 compliance deadline was extended to November 30, 2021, and the submission deadline for the related report was extended to June 1, 2022, for small refineries; the 41 | Management's Discussion and Analysis 2020 compliance deadline was extended to January 31, 2022, and the submission deadline for the related report was extended to June 1, 2022, for small refineries; and the 2021 compliance deadline remains at March 31, 2022. In late June 2021, the U.S. Supreme Court overturned the previous appeals court's ruling regarding RINs, resulting in market optimism that the stalled SRE applications from 2019, as well as new applications for 2020, may be granted, based on the published criteria. Immediately following this ruling, we undertook efforts to prepare 2020 SRE applications for our refineries and we submitted them in August 2021. Market expectations that at least some SRE applications may be approved and/or that the EPA may reduce certain outstanding compliance requirements, resulted in an improvement in RINs prices during the third quarter of 2021. Uncertainty remains regarding the likelihood of SREs being granted as well as the potential for EPA relief from certain compliance requirements. While we cannot know the outcome of our SRE applications, Delek has a long history of being granted the waivers with most grants to the Krotz Springs and El Dorado refineries. As an example, in 2018, we were granted SREs for our Tyler, Krotz Springs and El Dorado refineries. Additionally, while our current Net RINs Obligation reflects current RINs market prices as of September 30, 2021, the financial statement impact, including both the income statement and net cash impact, of any future receipt of SRE(s) is not determinable because of the complexity of the Net RINs Obligation and related transactions, where such financial statement impact is dependent upon the following: (1) which refineries receive exemptions; (2) the composition of those specific Net RINs Obligation (in terms of the vintages of RINs we currently own versus the waived RINs Obligation) and the related market prices at the date each exemption is granted; (3) the composition of our RINs forward commitment contracts that may be settled or positions closed as a result of any exemption and the related gains or losses; (4) the settlement requirements of related RINs product financing arrangements; and (5) the quantity of and dates at which excess RINs can be sold and the sales price (see also Note 9, Note 10 and Note 14 to the condensed consolidated financial statements included as well as our related accounting policies related to RINs included in Note 2 to the audited consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, of our December 31, 2020 Annual Report on Form 10-K). We note that our total gross RINs Obligation for 2020, for all four refineries, was approximately 340 million RINs, across all RIN categories, and that receipt of any SREs could result in significant benefit, both in terms of income statement effect and cash flows. Regardless of whether we expect to be granted SREs, we continue to actively manage our RINs inventory portfolio as well as monitor prices and positions on existing and expected RINs Obligations to mitigate our income statement and cash flow exposure. See additional discussion of the effect of RINs prices and volatility on our refining margins in the "Market Trends" section below. Other Strategic Activity In addition to these management efforts, we successfully executed on several strategic opportunities as described below. Wink to Webster Contract Termination On September 30, 2021 Wink to Webster Pipeline LLC (“WWP”) made the decision to buy Delek out of the Midland Connector Financing Commitment Agreement which provided an interest-free commitment to fund us up to $65.0 million upon completion of a connector to connect the WWP long-haul pipeline to our Big Spring Gathering System, with repayment over 14 years. The buy-out totaled $27.5 million and represented the estimated incremental cost of capital to fund the $65.0 million in expenditures over a 14-year term, and enabled us to recover approximately $18.0 million of capital expenditures that we may not have incurred had it not been for the financing commitment, including approximately $6.6 million that was written off during the third quarter. As a result of the transaction, we recognized $20.9 million of other non-operating income in the third quarter, representing the excess over our current period recognized write-offs. (See further discussion in Note 5 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q). Delek US Holdings, Inc. Employee Stock Purchase Plan In June 2021, the Company's board of directors adopted the Delek US Holdings, Inc. Employee Stock Purchase Plan (the "ESPP"). The ESPP is structured as a qualified employee stock purchase plan. The Company authorized the issuance of 2,000,000 shares of common stock under the ESPP. On each purchase date, eligible employees (as defined in the ESPP) can purchase the Company's stock at a price per share equal to 85.0% of the closing price of the Company's common stock on the exercise date, but no less than par value. There are four offering periods of three months during each fiscal year, beginning each January 1st, April 1st, July 1st, and October 1st. (See further discussion in Note 15 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q). Delek Logistics 2028 Notes On May 24, 2021, Delek Logistics and its wholly owned subsidiary Delek Logistics Finance Corp. (“Finance Corp.” and together with Delek Logistics, the “Co-issuers”), issued $400.0 million in aggregate principal amount of the Co-issuers 7.125% Senior Notes due 2028 (the “Delek Logistic 2028 Notes”) at par, pursuant to an indenture with U.S. Bank, National Association as trustee . The Delek Logistics 2028 Notes are general unsecured senior obligations of the Co-issuers and are unconditionally guaranteed jointly and severally on a senior unsecured basis by Delek Logistics’ subsidiaries other than Finance Corp. The Delek Logistic 2028 Notes rank equal in right of payment with all existing and future senior indebtedness of the Co-issuers, and senior in right of payment to any future subordinated indebtedness 42 | Management's Discussion and Analysis of the Co-issuers. The Delek Logistic 2028 Notes will mature on June 1, 2028, and interest is payable semi-annually in arrears on each June 1 and December 1, commencing December 1, 2021. (See further discussion in Note 8 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q) Exclusive Supply Agreement In May 2021, we executed an exclusive supply and strategic relationship agreement with Baker Petrolite LLC (an affiliate of Baker Hughes Company) ("Baker"). The agreement provides that, under certain circumstances, Baker will supply certain chemicals exclusively to us within a defined territory. Those chemicals allow us, through blending competencies utilizing proprietary intellectual property, to clarify slurry which can then be used in International Maritime Organization-compliant products. The agreement has a 5-year initial term and a 5-year extension option. Market Trends Our results of operations are significantly affected by fluctuations in the prices of certain commodities, including, but not limited to, crude oil, gasoline, distillate fuel, biofuels, natural gas and electricity, among others. Historically, the impact of commodity price volatility on our refining margins (as defined in our "Non-GAAP Measures" in MD&A Item 2.), specifically as it relates to the price of crude oil as compared to the price of refined products and timing differences in the movements of those prices (subject to our inventory costing methodology), as well as location differentials, may be favorable or unfavorable compared to peers. Additionally, our refining margin profitability is impacted by regulatory factors, including the cost of RINs. During 2021, despite improved consumer demand resulting from stabilization in cases of COVID-19 and decreasing mortality rates during much of the period and across much of the country, and corresponding to the availability of vaccines, improvements in domestic refining margins have been slow to materialize. This is largely attributable to the increasing supply from international markets where consumer demand improvement has lagged behind the U.S and, similarly, the closing of much of the U.S. export arbitrage. The U.S. market for transportation fuels has attracted higher infusion of international supply due in part to supply disruptions in the U.S. that occurred during the first nine months of 2021. In February 2021, the operations of many U.S. refineries, including ours, were temporarily disrupted due to the negative effects arising out of Winter Storm Uri. This contributed to a significant depletion of transportation fuel inventories throughout much of the country. Additionally, in May 2021, there was a cybersecurity incident with the Colonial Pipeline which resulted in pipeline shutdowns that interrupted supply to much of the eastern U.S. for six days, and which caused disruption for Delek primarily at our Krotz Springs refinery. As a result of both of these events, the U.S. market attracted higher levels of supply from international markets, which diluted price increases and associated refining margins. Furthermore, while there have been improving crack spreads during 2021, driven largely by the improvement in domestic consumer demand and the modest economic improvement and outlook associated with stabilizing Pandemic uncertainties, the ability of U.S. refiners to capture those improvements were significantly dampened by sharply increasing RIN prices. As previously discussed, the RINs market was impacted by last year's judicial rulings imposing limitations on smaller refinery's abilities to qualify for the EPA's SREs under the RFS, combined with worsening environmental regulatory sentiment coming out of Washington, D.C.. These conditions were pervasive for the majority of the first half of 2021. Following the June 2021 U.S. Supreme Court reversal of the lower court's ruling, however, there was a notable improvement in market optimism that existing SRE applications from 2019, as well as new applications for 2020, may be granted. As a result, we saw some improvement in RIN prices during the third quarter 2021, in anticipation of possible EPA relief. See the following pages for further discussion on how certain key market trends impact our refining margins. 43 | Management's Discussion and Analysis Crude Prices WTI crude oil represents the largest component of our crude slate at all of our refineries, and can be sourced through our gathering channels or optimization efforts from Midland, Texas or Cushing, Oklahoma or other locations. The table below reflects the quarterly average prices of WTI Midland and WTI Cushing crude oil for each of the quarterly periods in 2020 and for the three quarterly periods in 2021. As shown in the historical graph, WTI Midland crude prices can be favorable or unfavorable as compared to WTI Cushing. Crude Pricing Differentials As U.S. crude oil production has increased over recent years, domestic refiners have benefited from the discount for WTI Cushing compared to Brent ("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. Because of our positioning in the Permian basin, including our access to significant sources of WTI Midland crude through our gathering system, we are even further benefited by discounts for WTI Midland/WTI Cushing differentials. When these discounts shrink or become premiums, our reliance on WTI-linked crude pricing, and specifically WTI Midland crude, can negatively impact our refining margins. Conversely, as these price discounts widen, so does our competitive advantage, created specifically by our access to WTI Midland crude sourced through our gathering systems. The chart below illustrates the key differentials impacting our refining operations, including WTI Cushing to Brent, WTI Midland to WTI Cushing, and Louisiana Light Sweet crude oil ("LLS") to WTI Cushing for each of the quarterly periods in 2020 and for the three quarterly periods in 2021. 44 | Management's Discussion and Analysis Refined Product Prices Our refineries produce the following products: Tyler Refinery El Dorado Refinery Big Spring Refinery Krotz Springs Refinery Primary Products Gasoline, jet fuel, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, petroleum coke and sulfur Gasoline, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, asphalt and sulfur Gasoline, jet fuel, ultra-low-sulfur diesel, liquefied petroleum gases, propylene, aromatics and sulfur Gasoline, jet fuel, high-sulfur diesel, light cycle oil, liquefied petroleum gases, propylene and ammonium thiosulfate The charts below illustrate the quarterly average prices of Gulf Coast Gasoline (CBOB), U.S. High Sulfur Diesel ("HSD") and U.S. Ultra Low Sulfur Diesel ("ULSD") for each of the quarterly periods in 2020 and for the three quarterly periods in 2021. Crack Spreads Crack spreads are used as benchmarks for predicting and evaluating a refinery's product margins by measuring the difference between the market price of feedstocks/crude oil and the resultant refined products. Generally, a crack spread represents the approximate refining margin resulting from processing one barrel of crude oil into its outputs, generally gasoline and diesel fuel. The table below reflects the quarterly average Gulf Coast 5-3-2 ULSD, 3-2-1 ULSD and 2-1-1 HSD/LLS crack spreads for each of the quarterly periods in 2020 and for the three quarterly periods in 2021. As the chart illustrates, the 3-2-1 crack spread has consistently outperformed the 5-3-2 and the 2-1-1 crack spreads. When market conditions consist of near-capacity throughputs and no significant outages, our Big Spring refinery, whose benchmark is the 3-2-1 crack spread, should outperform our other refineries in terms of refining margin, which are benchmarked against either the 5-3-2 or the 2-1-1 crack spreads. 45 | Management's Discussion and Analysis RIN Volatility Environmental regulations and the political environment continue to affect our refining margins in the form of volatility in the price of RINs. On a consolidated basis, we work to balance our RINs Obligation in order to minimize the effect of RINs on our results. While we generate RINs in both our refining and logistics segments through our ethanol blending and biodiesel production and blending, our refining segment still needs to purchase additional RINs to satisfy its obligations. The cost to purchase these additional RINs is a significant cash outflow for our business. Additionally, increases in the market prices of RINs generally adversely affect our results of operations through changes in fair value to our existing RINs Obligation, to the extent we do not have offsetting RINs inventory on hand or effective economic hedges through net forward purchase commitments. The volatility of RINs prices is highly sensitive to regulatory and political influence and conditions, and therefore often does not correlate to movements in crude oil prices, refined product prices or crack spreads. Additionally, the pricing of RINs and the resulting impact on a refiner's margins is dependent on the type of refined product produced. Furthermore, RIN prices are impacted by market expectations regarding whether the EPA may grant certain SREs. The 2020 unfavorable SRE judicial rulings, as well as the changes in regulatory sentiment following the presidential administration change, have caused significant increases in RINs prices to all-time highs. Subsequently, in late June 2021, the U.S. Supreme Court overturned the previous appeals court's ruling regarding RINs, resulting in market optimism regarding the granting of SRE applications. Because of the volatility in RINs prices, it is not possible to predict future RINs cost with certainty, and movements in RIN prices can have significant and unanticipated adverse effects on our refining margins that are outside of our control. The chart below illustrates the volatility in RINs beginning with the first quarter of 2020 through the third quarter of 2021. 46 | Management's Discussion and Analysis Other Required Information Contractual Obligations Information regarding our known contractual obligations and commercial commitments of the types described below as of September 30, 2021, 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 $ 63.4 $ 315.8 $ 1,474.3 $ 400.0 $ 2,253.5 Interest (1) 93.6 172.7 92.2 57.0 415.5 Operating lease commitments (2)(6) 73.2 390.5 175.1 150.0 788.8 Product financing commitments (3) 342.5 — — — 342.5 Transportation agreements (4) 126.2 194.4 187.2 77.1 584.9 J. Aron supply and offtake obligations (5) 15.5 333.7 — — 349.2 Total $ 714.4 $ 1,407.1 $ 1,928.8 $ 684.1 $ 4,734.4 (1) Expected interest payments on debt outstanding at September 30, 2021. Floating interest rate debt is calculated using September 30, 2021 rates. For additional information, see Note 8 of our condensed consolidated financial statements included in Item 1. Financial Statements, of this Quarterly Report on Form 10-Q. (2) Amounts reflect future estimated lease payments under operating leases having remaining non-cancelable terms in excess of one year as of September 30, 2021. (3) Balances consist of contractual obligations under RINs product financing arrangements. (4) Balances consist of obligations under agreements with third parties (not including Delek Logistics) for the transportation of crude oil to our refineries. (5) 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 7 of our condensed consolidated financial statements included in Item 1. Financial Statements, of this Quarterly Report on Form 10-Q. (6) Includes an immaterial amount of financing lease cost. Critical Accounting Policies The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The SEC has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results of operations, and require our most difficult, subjective or complex judgments or estimates. Based on this definition and as further described in our 2020 Annual Report on Form 10-K, we believe our critical accounting policies include the following: (i) estimating our quarterly inventory adjustments using the last-in, first-out valuation method for the Tyler refinery, (ii) evaluating impairment for property, plant and equipment and definite life intangibles, (iii) evaluating potential impairment of goodwill, (iv) estimating environmental expenditures, and (v) estimating asset retirement obligations. Additionally, we have identified the following critical accounting policy that impacts the nine months ended September 30, 2021: Under Accounting Standards Codification ("ASC") 740, Income Taxes (“ASC 740”), we use an estimated annual effective tax rate ("AETR") to record income taxes. The development of the estimated AETR involves significant judgment, particularly early in the year and in times of economic uncertainty. As of and during the nine months ended September 30, 2021, our estimates of the expected AETR reflected inputs which are subject to judgment including (but not necessarily limited to) the following: • Forecasted pre-tax GAAP income or loss for the year • Estimates of expected permanent differences in GAAP income or loss and taxable income or loss for the year • Forecasted capital expenditures for the year and future years (where such activities were significantly impacted by the recent weather event and can likewise be impacted by unanticipated events) • Expected applicable jurisdictional tax rates • Estimated impact of possible deduction and tax credit limitations • Estimates regarding net operating losses, carryback and carryforward provisions (and limitations) and valuation allowances All of these inputs are subject to significant judgment and assumptions about future events impacting 2021, some of which are based on historical trends and results, operational plans, and projections regarding future pricing and profitability (where we utilize third party forward curves and pricing sources, where possible, but where expectations regarding capture rates and other factors involve judgment). We also note that, while economic conditions affecting our industry and industry outlooks related to COVID-19 are stabilizing and improving, there 47 | Management's Discussion and Analysis remains a level of uncertainty related to COVID-19 and the expectations for recovery that increases the level of judgment involved with some of these assumptions. Accordingly, where appropriate, we may consider the probability of certain components in determining what we believe to be a reasonable estimate based on conditions and events that were in existence as of our reporting date, which may also involve the use of significant management judgment. Furthermore, many of our assumptions are inter-relational, where changing one assumption can impact other assumptions (e.g., in terms of the applicability of or limitations under various tax code provisions). The nature of the AETR estimation approach for recording income taxes requires continuous review and adjustment during the year based on actual results, and as better information regarding forecasted results and assumptions becomes available. Significant changes in any of these assumptions or in actual results compared to our forecasts and assumptions could cause material changes in our AETR, which could result in cumulative adjustments to reflect the new estimates in future periods. We have developed and utilized methodologies and rationales for the development of our assumptions, subject to internal controls and sensitivity or probability assessments, as appropriate, and we believe our process provides a reasonable basis for our estimated AETR as well as the income taxes as of and for the nine months ended September 30, 2021. Goodwill and Potential Impairment Our annual goodwill impairment analysis is performed during the fourth quarter of each year. Under Accounting Standards Codification ("ASC") ASC 350, Intangibles - Goodwill and Other, goodwill of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. In our assessment of the potential indicators of impairment, we considered the continued impact of the COVID-19 pandemic, including the the significant rise in number and severity of COVID-19 cases related to the spread of the Delta variant since the second quarter of 2021, as well as the impact of our stock price, which continues to be depressed, on our market capitalization. To determine whether these negative developments arising due to the Pandemic that occurred through September 30, 2021, would more likely than not reduce the fair value of a reporting unit below its carrying amount, we performed certain analyses on the most significant inputs in our valuation model to evaluate the impact of these events on the fair value of our reporting units. Based on our initial qualitative analysis, we determined that there was sufficient risk present associated with our Krotz Springs refinery (“KSR”) reporting unit to indicate that the fair value of that reporting unit were more likely than not to have declined below the carrying value as of August 31, 2021. Accordingly, we performed a quantitative assessment of goodwill on the KSR reporting unit as of August 31, 2021. The estimated fair value of the reporting unit was determined using a combination of a discounted cash flow ("DCF") analysis and a market approach. The DCF analysis was based on our current projection of cash flows which reflected our updated estimates for long-term growth rates, gross margin, capital expenditures and the Weighted Average Cost of Capital or "WACC", which we adjusted to reflect the uncertainties that exist in the market as a result of the Pandemic. For the market approach, we applied an average historical multiple for guideline companies to estimated income before taxes, interest, depreciation, and amortization. Our analysis included a reconciliation of the estimated fair value of all reporting units to the company’s market capitalization. Based on the quantitative analysis, we concluded that the goodwill attributed to the KSR reporting unit was not impaired as of August 31, 2021, and the fair value was substantially in excess of its carrying value. We performed a sensitivity analysis on our impairment test, noting that 1% change in our WACC or long-term growth rate, assuming no other changes in any if the other key assumptions, would not result in an impairment of this reporting unit. The fair value measurements for individual reporting units’ estimated fair values represent Level 3 measurements. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the interim goodwill impairment test will prove to be an accurate prediction of the future. We updated our assessment from a sensitivity perspective to consider events that had occurred and conditions that existed as of September 30, 2020, noting no changes to our August 31, 2021 conclusion. Because conditions and events are rapidly changing, we continue to monitor developments with these events and their impact on our valuation. Continued or worsening adverse changes to these factors, as well as their impact on our cash flows, market capitalization and other assumptions and inputs, may result in the need to recognize an impairment in future periods. Specifically with respect to the KSR reporting units, it is at least reasonably possible that continued or worsening adverse change to these factors, or the presence of new factors having a negative impact on our projection of future cash flows not known as of September 30, 2020, may result in a future impairment which could be material. We will perform our annual goodwill assessment during the fourth quarter. Other than as described above, for all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies or estimates since our most recently filed Annual Report on Form 10-K. See Note 1 of the condensed consolidated financial statements in Item 1. Financial Statements, for discussion of updates to our accounting policies. 48 | Management's Discussion and Analysis 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 that may obscure our underlying results and trends. Non-GAAP measures have important limitations as analytical tools, because they exclude some, but not all, items that affect net earnings and operating income. These measures should not be considered substitutes for their most directly comparable U.S. GAAP financial measures. Non-GAAP Reconciliations The following table provides a reconciliation of refining margin to the most directly comparable U.S. GAAP measure, gross margin: Reconciliation of refining margin to gross margin (in millions) Refining Segment Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net revenues $ 2,814.6 $ 1,563.5 $ 6,970.4 $ 4,368.4 Cost of sales 2,769.1 1,631.6 7,069.1 4,749.2 Gross margin 45.5 (68.1) (98.7) (380.8) Add back (items included in cost of sales): Operating expenses (excluding depreciation and amortization) 82.8 102.1 310.2 302.5 Depreciation and amortization 45.9 50.3 149.0 132.3 Refining margin $ 174.2 $ 84.3 $ 360.5 $ 54.0 49 | Management's Discussion and Analysis Summary Financial and Other Information The following table provides summary financial data for Delek: Summary Statement of Operations Data (in millions) (1) Consolidated Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net revenues $ 2,956.5 $ 2,062.9 $ 7,540.2 $ 5,419.6 Total operating costs and expenses (2) 2,910.7 2,138.1 7,659.9 5,833.5 Operating income (loss) (2) 45.8 (75.2) (119.7) (413.9) Total non-operating expense, net 12.8 17.3 69.5 6.1 Income (loss) before income tax expense (benefit) 33.0 (92.5) (189.2) (420.0) Income tax expense (benefit) 6.1 (15.6) (52.3) (134.6) Net income (loss) 26.9 (76.9) (136.9) (285.4) Net income attributed to non-controlling interests 8.8 11.2 24.7 29.4 Net loss attributable to Delek $ 18.1 $ (88.1) $ (161.6) $ (314.8) (1) This information is presented at a summary level for your reference. See the Consolidated Condensed Statements of Income included in Item 1. to this Quarterly Report on Form 10-Q for more detail regarding our results of operations and net loss per share. (2 ) As of September 30, 2021, we recorded an immaterial cumulative correction relating to prior periods to capitalize manufacturing overhead costs that should have been included in refining finished goods totaling $21.5 million. The impact of the balance sheet error correction would not have been material to the prior periods presented and is not material to total inventory or to beginning retained earnings. Of that amount, $14.0 million was recognized as a reduction of operating expenses and $7.5 million was recognized as a reduction of depreciation in the refining segment. We report operating results in three reportable segments: • Refining • Logistics • Retail Decisions concerning the allocation of resources and assessment of operating performance are made based on this segmentation. Management measures the operating performance of each of its reportable segments based on the segment contribution margin which is defined as net revenues less costs of materials and other and operating expenses, excluding depreciation and amortization. Results of Operations Consolidated Results of Operations — Comparison of the Three and Nine Months Ended September 30, 2021 versus the Three and Nine Months Ended September 30, 2020 Net Loss Q3 2021 vs. Q3 2020 Consolidated net income for the third quarter of 2021 was $26.9 million compared to net loss of $76.9 million for the third quarter of 2020. Consolidated net income attributable to Delek for the third quarter of September 30, 2021 was $18.1 million, or $0.24 per basic share, compared to net loss of $88.1 million, or $(1.20) per basic share, for the third quarter 2020. Explanations for significant drivers impacting net income as compared to the comparable period of the prior year are discussed in the sections below. YTD 2021 vs. YTD 2020 Consolidated net loss for the nine months ended September 30, 2021 was $136.9 million compared to net loss of $285.4 million for the nine months ended September 30, 2020. Consolidated net loss attributable to Delek for the nine months ended September 30, 2021 was $161.6 million, or $(2.19) per basic share, compared to a net loss of $314.8 million, or $(4.28) per basic share, for the nine months ended September 30, 2020. Explanations for significant drivers impacting net loss as compared to the comparable period of the prior year are discussed in the sections below. 50 | Management's Discussion and Analysis Net Revenues Q3 2021 vs. Q3 2020 In the third quarters of 2021 and 2020, we generated net revenues of $2,956.5 million and $2,062.9 million, respectively, an increase of $893.6 million, or 43.3%. The increase in net revenues was primarily driven by the following factors: • in our refining segment, increases in the average price of U.S. Gulf Coast gasoline of 86.56%, ULSD of 79.25%, and HSD of 75.13%; • in our logistics segment, increases in the average volumes of gasoline sold and in the average sales prices per gallon of gasoline and diesel sold in our West Texas marketing operations; and • in our retail segment, increases in fuel sales primarily attributable to a 47.9% increase in average price charged per gallon sold. YTD 2021 vs. YTD 2020 For the nine months ended September 30, 2021 and 2020, we generated net revenues of $7,540.2 million and $5,419.6 million, respectively, an increase of $2,120.6 million, or 39.1%. The increase in net revenues was primarily driven by the following factors: • in our refining segment, increases in the average price of U.S. Gulf Coast gasoline of 83.2%, ULSD of 62.6%, and HSD of 60.1%; • in our logistics segment, increases in the average sales prices per gallon of gasoline and diesel sold in our West Texas marketing operations, as well increased revenues associated with agreements executed in the nine months ended September 30, 2020, partially offset by decreased throughputs due to the impact of Winter Storm Uri; and • in our retail segment, increases in fuel sales primarily attributable to a 38.7% increase in average price charged per gallon sold. Total Operating Costs and Expenses Cost of Materials and Other Q3 2021 vs. Q3 2020 Cost of materials and other was $2,670.1 million for the third quarter of 2021 compared to $1,875.9 million for the third quarter of 2020, an increase of $794.2 million, or 42.3%. The net increase in cost of materials and other was primarily driven by the following: • increases in cost of crude oil feedstocks at the refineries, including a 72.6% increase in the average cost of WTI Cushing crude oil and a 72.4% increase in the average cost of WTI Midland crude oil; • increases in average RINs costs during the third quarter of 2021 compared to the third quarter of 2020; • increases in the average volumes of gasoline sold and average cost per gallon of gasoline and diesel sold in our West Texas marketing operations; and • an increase in retail cost of materials and other due to 56.0% increase in average cost per gallon sold applied to higher fuel sales volumes. YTD 2021 vs. YTD 2020 Cost of materials and other was $6,871.4 million for the nine months ended September 30, 2021 compared to $5,064.3 million for the nine months ended September 30, 2020, an increase of $1,807.1 million, or 35.7%. The net increase in cost of materials and other was primarily driven by the following: • increases in cost of crude oil feedstocks at the refineries, including a 67.0% increase in the average cost of WTI Cushing crude oil and a 68.0% increase in the average cost of WTI Midland crude oil; • increases in average RINs costs during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020; • increases in the average cost per gallon of gasoline and diesel sold, partially offset by decreases in the average volumes of gasoline and diesel sold in our West Texas marketing operations; and • an increase in retail fuel cost of materials and other primarily attributable to a 46.6% increase in average cost per gallon sold. Such increases were partially offset by the following: • an increase in commodity hedging gains to a loss of $46.2 million recognized during the nine months ended September 30, 2021 from a loss of $85.2 million recognized during the nine months ended September 30, 2020; • the benefit (expense) of $29.9 million related to the change in pre-tax inventory valuation recognized during the nine months ended September 30, 2021 compared to $(65.6) million recognized during the nine months ended September 30, 2020. 51 | Management's Discussion and Analysis Operating Expenses Q3 2021 vs. Q3 2020 Operating expenses were $122.8 million for the third quarter of 2021 compared to $139.7 million for the third quarter of 2020, a decrease of $16.9 million, or 12.1%. The decrease in operating expenses was primarily driven by the following: • a one-time favorable adjustment of $14.0 million in the current period to reflect the cumulative error correction to capitalize manufacturing overhead in refining finished goods inventory; and • insurance recoveries of $17.0 million related to losses associated with Winter Storm Uri. Such decreases were partially offset by the following: • an increase in variable expenses due to natural gas pricing increases in the third quarter of 2021; • increases in our logistics segment due to terminating certain cost cutting measures previously implemented in response to the Pandemic, as well as increased variable costs due to higher throughput; and • increases in our refining segment at our Krotz Springs refinery associated with new slurry operations and costs associated with Hurricane Ida. YTD 2021 vs. YTD 2020 Operating expenses were $433.2 million for the nine months ended September 30, 2021 compared to $422.0 million for the nine months ended September 30, 2020, an increase of $11.2 million, or 2.7%. The increase in operating expenses was primarily driven by the following: • an increase in variable expenses primarily associated with higher natural gas costs during the February 2021 severe freezing conditions that affected most of the regions where we operate and higher natural gas pricing during the third quarter of 2021; • an increase in Big Spring variable costs due to the refinery being shut down for turnaround activities during the first and second quarters of 2020; • increases in our logistics segment due to terminating certain cost cutting measures previously implemented in response to the Pandemic, as well as increased variable costs due to higher throughput; and • increases in maintenance, outside services and lease costs due to continued costs associated with Winter Storm Uri as well as unit outages at certain of our refineries. Such increases were partially offset by the following: • a one-time favorable adjustment of $14.0 million in the third quarter of 2021 to reflect the cumulative error correction to capitalize manufacturing overhead in refining finished goods inventory; • insurance recoveries of $17.0 million related to losses associated with Winter Storm Uri. General and Administrative Expenses Q3 2021 vs. Q3 2020 General and administrative expenses were $58.7 million for the third quarter of 2021 compared to $57.0 million for the third quarter of 2020, an increase of $1.7 million, or 3.0%. YTD 2021 vs. YTD 2020 General and administrative expenses were $164.4 million and $184.4 million for the nine months ended September 30, 2021 and 2020, respectively, a decrease of $20.0 million, or 10.8%. The decrease in general and administrative expense was primarily driven by the following: • a decrease in employee expenses partially due to additional severance costs incurred in prior year and suspension of matching contributions to our 401(k) plan for the first half of 2021 while the plan was still in place during the nine months ended September 30, 2020; and • a decrease in contract services due to additional legal and consulting services associated with the drop downs in prior year and cost reduction measures. 52 | Management's Discussion and Analysis Depreciation and Amortization Q3 2021 vs. Q3 2020 Depreciation and amortization (included in both cost of sales and other operating expenses) was $60.8 million for the third quarter of 2021 compared to $65.2 million for the third quarter of 2020, a decrease of $4.4 million, or 6.7% primarily due to the following: • a one-time favorable adjustment of $7.5 million in the current period to reflect the cumulative error correction to capitalize manufacturing overhead in refining finished goods inventory; • an offsetting increase due to depreciation associated with assets added during the El Dorado refinery turnaround in the first quarter of 2021, as well as other refining assets placed in service. YTD 2021 vs. YTD 2020 Depreciation and amortization (included in both cost of sales and other operating expenses) was $195.6 million compared to $177.4 million for the nine months ended September 30, 2021 and 2020, respectively, an increase of $18.2 million, or 10.3%, primarily due to depreciation associated with assets added during the Big Spring refinery turnaround in the first quarter of 2020 and the El Dorado refinery turnaround in 2021, as well as other refining assets placed in service. Other Operating Income, Net Q3 2021 vs. Q3 2020 Other operating income, net decreased by $2.0 million in the third quarter of 2021 to $1.7 million compared to a loss of $0.3 million in the third quarter of 2020. YTD 2021 vs. YTD 2020 Other operating income, net decreased by $9.9 million during the nine months ended September 30, 2021 to $4.7 million compared to $14.6 million during the nine months ended September 30, 2020 primarily due to unrealized gain of $10.6 million on the underlying commodity related tie the Strategic Petroleum Reserve financial asset during the prior year period. Non-operating Expenses, Net Interest Expense Q3 2021 vs. Q3 2020 Interest expense increased by $5.8 million, or 18.2%, to $37.7 million in the third quarter of 2021 compared to $31.9 million in the third quarter of 2020, primarily driven by the following: • an increase in the average effective interest rate of 0.96% in the third quarter of 2021 compared to the third quarter of 2020 (where effective interest rate is calculated as interest expense divided by the net average borrowings/obligations outstanding); and partially offset by, • a decrease in net average borrowings outstanding (including the obligations under the supply and offtake agreements which have an associated interest charge) of approximately $62.4 million in the third quarter of 2021 (calculated as a simple average of beginning borrowings/obligations and ending borrowings/obligations for the period) compared to the third quarter of 2020. YTD 2021 vs. YTD 2020 Interest expense increased by $2.5 million, or 2.6%, to $100.5 million during the nine months ended September 30, 2021 compared to $98.0 million during the nine months ended September 30, 2020, primarily driven by the following: • an increase in the average effective interest rate of 0.07% during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 (where effective interest rate is calculated as interest expense divided by the net average borrowings/obligations outstanding); and • an increase in net average borrowings outstanding (including the obligations under the supply and offtake agreements which have an associated interest charge) of approximately $30.8 million during the nine months ended September 30, 2021 (calculated as a simple average of beginning borrowings/obligations and ending borrowings/obligations for the period) compared to the nine months ended September 30, 2020. Results from Equity Method Investments Q3 2021 vs. Q3 2020 We recognized income of $2.9 million from equity method investments during the third quarter of 2021, compared to $12.8 million for the third quarter of 2020, a decrease of $9.9 million. This decrease was primarily driven by the following: 53 | Management's Discussion and Analysis • a decrease in income from our investment in W2W Holdings LLC to a loss of $8.8 million in the third quarter of 2021 from income of $0.2 million in the third quarter of 2020. YTD 2021 vs. YTD 2020 During the nine months ended September 30, 2021, we recognized income of $14.5 million from equity method investments, compared to $28.6 million for the nine months ended September 30, 2020, an decrease of $14.1 million. This decrease was primarily driven by the following: • decrease in income from our logistics' equity method investments due to lower volumes as the impact of the February 2021 Winter Storm Uri was pervasive across all of our equity method investments' pipeline systems; and • a decrease in income from our investment in W2W Holdings LLC to a loss of $12.9 million in the third quarter of 2021 from a loss of $1.8 million in the third quarter of 2020. Other During the three and nine months ended September 30, 2021, we recognized a receivable of $27.5 million, $20.9 million of which is included as a gain in other income, related to payment to be received from a loan buy-out agreement between Wink to Webster Pipeline LLC and the Company. Refer to Note 5 of the condensed consolidated financial statements in Item 1. Financial Statements, for additional information. During the nine months ended September 30, 2020, we recognized a gain of $56.8 million on the sale of our non-operating refinery located in Bakersfield, California. See Note 2 of the condensed consolidated financial statements in Item 1. Financial Statements, for additional information. Income Taxes Q3 2021 vs. Q3 2020 Income tax expense increased by $21.7 million in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • pre-tax income of $33.0 million in the third quarter of 2021, as compared to loss of $92.5 million for the third quarter of 2020; and • an increase in our effective tax rate which was 18.5% for the third quarter of 2021, compared to 16.9% for the third quarter of 2020 primarily due to the following: ◦ the impact of credits and permanent differences on the tax rate due to changes in pre-tax book income; and ◦ changes in the third quarter estimated AETR applied to year-to-date loss for the third quarter of 2020 exceeded changes in AETR applied to year-to-date loss for the third quarter of 2021; offset by ◦ 2020 federal net operating loss carryback to a prior 35% tax rate year creating a 14% rate benefit reported in the third quarter of 2020. YTD 2021 vs. YTD 2020 Income tax benefit decreased by $82.3 million during the nine months ended September 30, 2021 compared to the same period for 2020, primarily driven by the following: • pre-tax loss of $189.2 million in the nine months ended September 30, 2021, as compared to pre-tax loss of $420.0 million for the nine months ended September 30, 2020; and • a decrease in our effective tax rate which was 27.6% for the nine months ended September 30, 2021, compared to 32.0% for the nine months ended September 30, 2020 primarily due to the following: ◦ the reversal of a valuation allowance attributable to book-tax basis differences in partnership investments reported as a discrete benefit in the first quarter of 2020; and ◦ 2020 federal net operating loss carryback to a prior 35% tax rate year creating a 14% rate benefit reported in the third quarter of 2020; offset by ◦ the impact of credits and permanent differences on the tax rate due to changes in pre-tax book income. 54 | Management's Discussion and Analysis Refining Segment The tables and charts below set forth certain information concerning our refining segment operations ($ in millions, except per barrel amounts): Refining Segment Margins Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net revenues $ 2,814.6 $ 1,563.5 $ 6,970.4 $ 4,368.4 Cost of materials and other 2,640.4 1,479.2 6,609.9 4,314.4 Refining margin 174.2 84.3 360.5 54.0 Operating expenses (excluding depreciation and amortization) (1) 82.8 102.1 310.2 302.5 Contribution margin (1) $ 91.4 $ (17.8) $ 50.3 $ (248.5) (1) As of September 30, 2021, we recorded an immaterial cumulative correction relating to prior periods to capitalize manufacturing overhead costs that should have been included in refining finished goods totaling $21.5 million. The impact of the balance sheet error correction resulted in a reduction in operating expenses $14.0 million in the three and nine months ended September 30, 2021, and would not have been material to the prior periods presented. 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 liquefied petroleum gas ("LPG") are less likely to move in parallel with crude cost. This could cause additional pressure on our realized margin during periods of rising or falling crude oil prices. Additionally, our margins are impacted by the pricing differentials of the various types and sources of crude oil we use at our refineries and their relation to product pricing. Our crude slate is predominantly comprised of WTI crude oil. Therefore, favorable differentials of WTI compared to other crude will favorably impact our operating results, and vice versa. Additionally, because of our gathering system presence in the Midland area and the significant source of crude specifically from that region into our network, a widening of the WTI Cushing less WTI Midland spread will favorably influence the operating margin for our refineries. Alternatively, a narrowing of this differential will have an adverse effect on our operating margins. Global product prices are influenced by the price of Brent crude which is a global benchmark crude. Global product prices influence product prices in the U.S. As a result, our refineries are influenced by the spread between Brent crude and WTI Midland. The Brent less WTI Midland spread represents the differential between the average per barrel price of Brent crude oil and the average per barrel price of WTI Midland crude oil. A widening of the spread between Brent and WTI Midland will favorably influence our refineries' operating margins. Also, the Krotz Springs refinery is influenced by the spread between Brent crude and LLS. The Brent less LLS spread represents the differential between the average per barrel price of Brent crude oil and the average per barrel price of LLS crude oil. A discount in LLS relative to Brent will favorably influence the Krotz Springs refinery operating margin. The cost to acquire the refined fuel products we sell to our wholesale customers in our logistics segment and at our convenience stores in our retail segment largely depend on the factors discussed above. 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 55 | Management's Discussion and Analysis sales of refined products or to fix margins on future production. We also enter into future commitments to purchase or sell RINs at fixed prices and quantities, which are used to manage our RINs Obligation. Additionally, from a sourcing perspective, we often enter into purchase and sale contracts with vendors and customers or take physical or financial commodity positions for crude oil that may not be used immediately in production, but that may be used to manage the overall supply and availability of crude expected to ultimately be needed for production and/or to meet minimum requirements under strategic pipeline arrangements, and also to optimize and hedge availability risks associated with crude that we ultimately expect to use in production. Such transactions are inherently based on certain assumptions and judgments made about the current and possible future availability of crude. Therefore, when we take physical or financial positions for optimization purposes, our intent is generally to take offsetting positions in quantities and at prices that will advance these objectives while minimizing our positional and financial statement risk. However, because of the volatility of the market in terms of pricing and availability, it is possible that we may have material positions with timing differences or, more rarely, that we are unable to cover a position with an offsetting position as intended. Such differences could have a material impact on the classification of resulting gains/losses, assets or liabilities, and could also significantly impact refining contribution margin. Finally, as part of our overall business strategy, we regularly evaluate opportunities to expand our portfolio of businesses and may at any time be discussing or negotiating a transaction that, if consummated, could have a material effect on our business, financial condition, liquidity or results of operations. 56 | Management's Discussion and Analysis Refinery Statistics Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (Unaudited) (Unaudited) Tyler, TX Refinery Days in period 92 92 273 274 Total sales volume - refined product (average barrels per day) (1) 74,904 77,386 75,225 74,050 Products manufactured (average barrels per day): Gasoline 35,221 40,383 37,410 39,221 Diesel/Jet 28,452 31,612 28,883 28,980 Petrochemicals, LPG, natural gas liquids ("NGLs") 2,196 3,848 2,001 3,022 Other 1,620 1,763 1,575 1,442 Total production 67,489 77,606 69,869 72,665 Throughput (average barrels per day): Crude Oil 67,199 72,651 68,206 67,693 Other feedstocks 528 4,975 2,021 5,422 Total throughput 67,727 77,626 70,227 73,115 Total refining revenue ($ in millions) $ 643.9 $ 383.8 $ 1,759.0 $ 1,055.3 Cost of materials and other ($ in millions) 595.5 392.4 1,625.0 1,003.0 Total refining margin ($ in millions) $ 48.4 $ (8.6) $ 134.0 $ 52.3 Per barrel of refined product sales: Tyler refining margin $ 7.03 $ (1.21) 6.52 $ 2.58 Direct operating expenses $ 3.20 $ 3.28 3.42 $ 3.35 Crude Slate: (% based on amount received in period) WTI crude oil 87.8 % 89.0 % 89.6 % 92.1 % East Texas crude oil 12.2 % 11.0 % 10.1 % 7.9 % Other — % — % 0.3 % — % El Dorado, AR Refinery Days in period 92 92 273 274 Total sales volume - refined product (average barrels per day) (1) 89,909 79,594 65,147 77,742 Products manufactured (average barrels per day): Gasoline 40,108 36,801 28,017 35,855 Diesel 31,922 30,709 22,208 29,473 Petrochemicals, LPG, NGLs 1,235 1,678 933 1,933 Asphalt 7,595 7,268 5,768 6,655 Other 720 825 588 801 Total production 81,580 77,281 57,514 74,717 Throughput (average barrels per day): Crude Oil 78,744 74,235 56,026 72,427 Other feedstocks 4,115 2,814 2,419 2,610 Total throughput 82,859 77,049 58,445 75,037 Total refining revenue ($ in millions) $ 728.4 $ 452.6 $ 1,654.6 $ 1,407.8 Cost of materials and other ($ in millions) 709.2 405.6 1,639.2 1,399.1 Total refining margin ($ in millions) $ 19.2 $ 47.0 $ 15.4 $ 8.7 Per barrel of refined product sales: El Dorado refining margin $ 2.32 $ 6.42 $ 0.87 $ 0.41 Direct operating expenses $ 1.75 $ 3.25 $ 3.87 $ 3.73 Crude Slate: (% based on amount received in period) WTI crude oil 56.9 % 69.9 % 51.6 % 52.2 % Local Arkansas crude oil 14.7 % 17.7 % 20.2 % 17.2 % Other 28.4 % 12.4 % 28.2 % 30.5 % 57 | Management's Discussion and Analysis Refinery Statistics (continued) Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (Unaudited) (Unaudited) Big Spring, TX Refinery Days in period 92 92 273 274 Total sales volume - refined product (average barrels per day) (1) 72,142 75,884 70,023 61,602 Products manufactured (average barrels per day): Gasoline 36,051 38,106 34,133 29,532 Diesel/Jet 27,036 28,777 24,510 22,190 Petrochemicals, LPG, NGLs 3,528 3,923 3,672 2,959 Asphalt 1,589 2,235 1,464 1,715 Other 1,354 1,397 1,416 1,030 Total production 69,558 74,438 65,195 57,426 Throughput (average barrels per day): Crude oil 70,473 72,779 66,693 57,725 Other feedstocks 576 2,067 (68) 746 Total throughput 71,049 74,846 66,625 58,471 Total refining revenue ($ in millions) $ 677.1 $ 401.9 $ 1,794.1 $ 1,104.4 Cost of materials and other ($ in millions) 630.1 374.0 1,663.4 1,069.3 Total refining margin ($ in millions) $ 47.0 $ 27.9 $ 130.7 $ 35.1 Per barrel of refined product sales: Big Spring refining margin $ 7.07 $ 4.00 $ 6.84 $ 2.07 Direct operating expenses $ 2.93 $ 3.88 $ 4.86 $ 4.47 Crude Slate: (% based on amount received in period) WTI crude oil 75.9 % 63.7 % 68.7 % 70.3 % WTS crude oil 24.1 % 36.3 % 31.3 % 29.7 % Krotz Springs, LA Refinery Days in period 92 92 273 274 Total sales volume - refined product (average barrels per day) (1) 74,493 67,465 59,107 69,965 Products manufactured (average barrels per day): Gasoline 31,465 32,287 23,639 26,872 Diesel/Jet 26,364 23,686 19,075 25,447 Heavy Oils 1,216 729 759 559 Petrochemicals, LPG, NGLs 6,151 3,394 4,690 2,417 Other 3,960 4,020 7,267 11,117 Total production 69,156 64,116 55,430 66,412 Throughput (average barrels per day): Crude Oil 65,583 60,150 50,197 64,019 Other feedstocks 2,713 3,028 5,413 2,415 Total throughput 68,296 63,178 55,610 66,434 Total refining revenue ($ in millions) $ 745.2 $ 335.9 $ 1,752.3 $ 999.1 Cost of materials and other ($ in millions) 705.9 339.1 1,679.9 1,016.8 Total refining margin ($ in millions) $ 39.3 $ (3.2) $ 72.4 $ (17.7) Per barrel of refined product sales: Krotz Springs refining margin $ 5.73 $ (0.50) $ 4.48 $ (0.92) Direct operating expenses $ 3.69 $ 4.25 $ 4.55 $ 3.72 Crude Slate: (% based on amount received in period) WTI Crude 62.5 % 72.6 % 65.5 % 69.3 % Gulf Coast Sweet Crude 37.5 % 24.6 % 33.8 % 29.8 % Other — % 2.8 % 0.7 % 0.9 % (1) Includes inter-refinery sales and sales to other segments which are eliminated in consolidation. See tables below. 58 | Management's Discussion and Analysis Included in the refinery statistics above are the following inter-refinery and sales to other segments: Inter-refinery Sales Three Months Ended Nine Months Ended September 30, September 30, (in barrels per day) 2021 2020 2021 2020 (Unaudited) (Unaudited) Tyler refined product sales to other Delek refineries 1,712 2,479 1,866 1,813 El Dorado refined product sales to other Delek refineries 736 854 715 1,075 Big Spring refined product sales to other Delek refineries 580 2,294 727 1,532 Krotz Springs refined product sales to other Delek refineries 1 14 197 167 Refinery Sales to Other Segments Three Months Ended Nine Months Ended September 30, September 30, (in barrels per day) 2021 2020 2021 2020 (Unaudited) (Unaudited) Tyler refined product sales to other Delek segments 50 1,069 619 1,953 El Dorado refined product sales to other Delek segments 9 27 9 122 Big Spring refined product sales to other Delek segments 22,298 22,835 22,196 22,839 Krotz Springs refined product sales to other Delek segments 3,180 1,002 2,423 336 Pricing Statistics (average for the period presented) Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (Unaudited) (Unaudited) WTI — Cushing crude oil (per barrel) $ 70.54 $ 40.88 $ 65.06 $ 38.95 WTI — Midland crude oil (per barrel) $ 70.74 $ 41.03 $ 65.48 $ 38.98 WTS -- Midland crude oil (per barrel) $ 70.58 $ 40.99 $ 65.43 $ 38.84 LLS (per barrel) $ 71.46 $ 42.46 $ 66.69 $ 40.67 Brent crude oil (per barrel) $ 73.15 $ 43.34 $ 67.96 $ 42.56 U.S. Gulf Coast 5-3-2 crack spread (per barrel) - utilizing HSD $ 13.53 $ 5.13 $ 11.90 $ 5.88 U.S. Gulf Coast 5-3-2 crack spread (per barrel) (1) $ 18.46 $ 7.49 $ 16.32 $ 8.30 U.S. Gulf Coast 3-2-1 crack spread (per barrel) (1) $ 19.72 $ 8.15 $ 17.53 $ 8.92 U.S. Gulf Coast 2-1-1 crack spread (per barrel) (1) $ 11.91 $ 3.51 $ 9.84 $ 4.72 U.S. Gulf Coast Unleaded Gasoline (per gallon) $ 2.15 $ 1.15 $ 1.95 $ 1.07 Gulf Coast Ultra low sulfur diesel (per gallon) $ 2.08 $ 1.16 $ 1.92 $ 1.18 U.S. Gulf Coast high sulfur diesel (per gallon) $ 1.79 $ 1.02 $ 1.65 $ 1.03 Natural gas (per MMBTU) (2) $ 4.32 $ 2.12 $ 3.35 $ 1.92 (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 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 a combination of WTI Midland, local Arkansas and other domestic inland crude oil. The Big Spring refinery’s crude oil input is primarily comprised of WTS and WTI Midland. The Krotz Springs refinery’s crude oil input is primarily comprised of LLS and WTI Midland. (2) One Million British Thermal Units ("MMBTU"). 59 | Management's Discussion and Analysis Refining Segment Operational Comparison of the Three and Nine Months Ended September 30, 2021 versus the Three and Nine Months Ended September 30, 2020 Net Revenues Q3 2021 vs. Q3 2020 Net revenues for the refining segment increased by $1,251.1 million, or 80.0%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • increases in the average price of U.S. Gulf Coast gasoline of 86.56%, ULSD of 79.25%, and HSD of 75.13%; and • an increase in sales volumes of refined and purchased product of 1.3 million barrels and 0.1 million barrels, respectively. Net revenues included sales to our retail segment of $92.3 million and $57.6 million, sales to our logistics segment of $89.9 million and $45.1 million, and sales to our other segment of $28.7 million and $9.9 million for the three months ended September 30, 2021 and September 30, 2020, respectively. We eliminate this intercompany revenue in consolidation. YTD 2021 vs. YTD 2020 Net revenues for the refining segment increased by $2,602.0 million, or 59.6%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • increases in the average price of U.S. Gulf Coast gasoline of 83.2%, ULSD of 62.6%, and HSD of 60.1%; and • decreases in sales volume of refined product totaling 3.7 million barrels, partially due to the temporary suspension of crude refining unit production at our Krotz Springs refinery from November 2020 through February 2021 and related turnaround activities, severe weather impacting our refineries in February 2021, and turnaround at our El Dorado refinery, partially offset by a 2.1 million barrel increase in purchased product sales and increased sales volumes at our Big Spring refinery which was in a turnaround in the prior year period. Net revenues included sales to our retail segment of $253.8 million and $166.6 million, sales to our logistics segment of $229.8 million and $155.7 million and sales to our other segment of $71.7 million and $24.2 million for the nine months ended September 30, 2021 and 2020, respectively. We eliminate this intercompany revenue in consolidation. Cost of Materials and Other Q3 2021 vs. Q3 2020 Cost of materials and other increased by $1,161.2 million, or 78.5%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • increases in the cost of WTI Cushing crude oil, from an average of $40.88 per barrel to an average of $70.54, or 72.6%; • increases in the cost of WTI Midland crude oil, from an average of $41.03 per barrel to an average of $70.74, or 72.4%; • increase in RINs costs from an average cost per RIN of $0.47 and $0.67 for ethanol and biodiesel RINs, respectively during the third quarter of 2020 to and average of $1.41 and $2.40 during the third quarter of 2021; and 60 | Management's Discussion and Analysis • an increase in sales volumes. YTD 2021 vs. YTD 2020 Cost of materials and other increased by $2,295.5 million, or 53.2%, during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • increases in the cost of WTI Cushing crude oil, from an average of $38.95 per barrel to an average of $65.06, or 67.0%; • increases in the cost of WTI Midland crude oil, from an average of $38.98 per barrel to an average of $65.48, or 68.0%; and • increases in RINs costs from an average cost per RIN of $0.37 and $0.56 for ethanol and biodiesel RINs, respectively during the nine months ended September 30, 2020 to an average of $1.37 and $2.24 during the nine months ended September 30, 2021. These increases were partially offset by the following: • the benefit (expense) of $29.9 million related to the change in pre-tax inventory valuation recognized during the nine months ended September 30, 2021 compared to $(65.8) million recognized during the nine months ended September 30, 2020; • a decrease in sales volumes; and • a decrease in hedging losses to $38.1 million recognized during the nine months ended September 30, 2021 as compared to $63.5 million recognized during the nine months ended September 30, 2020. 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 $109.3 million and $92.4 million during the third quarters of 2021 and 2020, respectively, and $307.0 million and $288.3 million during the nine months ended September 30, 2021 and 2020, respectively. We eliminate these intercompany fees in consolidation. Refining Margin Q3 2021 vs. Q3 2020 Refining margin increased by $89.9 million, or 106.6%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • a 163.7% improvement in the 5-3-2 crack spread (the primary measure for the Tyler refinery and El Dorado refinery), a 142.0% improvement in the average Gulf Coast 3-2-1 crack spread (the primary measure for the Big Spring refinery), and a 239.3% improvement in the average Gulf Coast 2-1-1 crack spread (the primary measure for the Krotz Springs refinery). Such increase was partially offset by the following: • increases in average RINs costs in the third quarter of 2021 compared to the third quarter of 2020; and • a $13.5 million decrease in hedging gains. 61 | Management's Discussion and Analysis YTD 2021 vs. YTD 2020 Refining margin increased by $306.5 million, or 567.6%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • a 102.4% improvement in the 5-3-2 crack spread (the primary measure for the Tyler refinery and El Dorado refinery), a 96.5% improvement in the average Gulf Coast 3-2-1 crack spread (the primary measure for the Big Spring refinery), and a 108.5% improvement in the average Gulf Coast 2-1-1 crack spread (the primary measure for the Krotz Springs refinery); • a $25.4 million decrease in hedging losses; and • an increase in reversal benefit of inventory valuation reserve of during the during the nine months of 2021 compared to the prior year period. These increases were partially offset by the following: • increases in average RINs costs during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020; and • a 20.4% increase purchased product volumes sold, while overall sales volumes decreased. 62 | Management's Discussion and Analysis Operating Expenses Q3 2021 vs. Q3 2020 Operating expenses decreased by $19.3 million, or 18.9%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • a one-time favorable adjustment of $14.0 million in the current period to reflect the cumulative error correction to capitalize manufacturing overhead in refining finished goods inventory; and • insurance recoveries of $17.0 million related to losses associated with Winter Storm Uri. Such decreases were offset by the following: • an increase in variable expenses due to natural gas pricing increases in the third quarter of 2021; and • increases at our Krotz Spring refinery due to additional costs incurred as a result of Hurricane Ida, and higher operating expenses due to slurry operations which did not exist in the third quarter of 2020. YTD 2021 vs. YTD 2020 Operating expenses increased by $7.7 million, or 2.5%, during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • an increase in outside services, maintenance and lease costs primarily due to continued repairs and equipment rentals related to Winter Storm Uri; • an increase in Big Spring variable costs due to the refinery being shut down for turnaround activities during the first and second quarters of 2020; 63 | Management's Discussion and Analysis • an increase in utilities costs primarily associated with higher natural gas costs during the February 2021 related to Winter Storm Uri and pricing increases in the third quarter of 2021. Such increases were offset by the following: • a one-time favorable adjustment of $14.0 million in the third quarter of 2021 to reflect the cumulative error correction to capitalize manufacturing overhead in refining finished goods inventory; and • insurance recoveries of $17.0 million related to losses associated with Winter Storm Uri. Contribution Margin Q3 2021 vs. Q3 2020 Contribution margin increased by $109.2 million, or a 4.4% improvement in contribution margin percentage, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • an increase in refining margin primarily driven by improved crack spreads, partially offset by higher average RINs costs and a decrease in hedging gains; and • a decrease in operating expenses of $19.3 million, or 18.9%. YTD 2021 vs. YTD 2020 Contribution margin increased by $298.8 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • an increase in refining margin primarily driven by an overall increase in the average crack spreads, an increase in reversal benefit related to inventory valuation reserves and decrease in hedging losses, partially offset by higher percentage of purchased product sold and increase in average RINs cost. Such increase was offset by the following: • an increase in operating expenses of $7.7 million, or 2.5% 64 | Management's Discussion and Analysis Logistics Segment The table below sets forth certain information concerning our logistics segment operations ($ in millions, except per barrel amounts): Logistics Contribution Margin and Operating Information Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net revenues $ 189.6 $ 142.2 $ 511.0 $ 423.3 Cost of materials and other 105.1 60.7 275.0 205.9 Operating expenses (excluding depreciation and amortization) 17.3 14.3 46.9 41.5 Contribution margin $ 67.2 $ 67.2 $ 189.1 $ 175.9 Operating Information: East Texas - Tyler Refinery sales volumes (average bpd) (1) 71,847 73,417 72,791 70,376 Big Spring wholesale marketing throughputs (average bpd) 81,880 78,659 76,680 73,701 West Texas wholesale marketing throughputs (average bpd) 10,560 9,948 10,033 11,718 West Texas wholesale marketing margin per barrel $ 3.33 $ 3.42 $ 3.64 $ 2.37 Terminalling throughputs (average bpd) (2) 144,355 160,843 142,959 145,240 Throughputs (average bpd): Lion Pipeline System: Crude pipelines (non-gathered) 81,929 78,244 60,344 76,750 Refined products pipelines to Enterprise Systems 62,263 55,740 42,733 55,315 SALA Gathering System 14,086 13,659 14,056 13,520 East Texas Crude Logistics System 18,644 22,591 24,045 15,705 Big Spring Gathering Assets (3) 84,325 90,719 79,251 85,845 Plains Connection System 131,571 104,314 120,905 96,961 (1) Excludes jet fuel and petroleum coke. (2) Consists of terminalling throughputs at our Tyler, Big Spring, Big Sandy and Mount Pleasant, Texas terminals, El Dorado and North Little Rock, Arkansas terminals and Memphis and Nashville, Tennessee terminals. (3) Prior-year period throughputs for the Big Spring Gathering Assets are for the 180 days we owned the assets following the Big Spring Gathering Assets Acquisition effective March 31, 2020. Logistics Segment Operational Comparison of the Three and Nine Months Ended September 30, 2021 versus the Three and Nine Months Ended September 30, 2020 Net Revenues Q3 2021 vs. Q3 2020 Net revenues increased by $47.4 million, or 33.3%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • increased revenues at our Big Spring Refinery Crude Pipeline (the "BSR Crude Pipeline"), as a result of new contracts executed in the second quarter of 2020, which had higher throughput volumes during the third quarter of 2021 compared to the third quarter of 2020; • increased revenues for the Trucking assets, due to higher volumes transported from El Dorado; • increase in revenues for the Paline pipeline and Plains connection system, due to higher throughput volumes; • increases in the average volumes of gasoline sold and in the average sales prices per gallon of gasoline and diesel sold in our West Texas marketing operations as follows: ◦ the average sales prices of gasoline and diesel sold increased by $0.93 per gallon and $0.95 per gallon, respectively; and ◦ the average volumes of gasoline sold increased by 2.9 million gallons, while diesel volumes sold decreased 0.5 million gallons. Net revenues included sales to our refining segment of $109.3 million and $92.4 million for the three months ended September 30, 2021 and September 30, 2020, respectively, and sales to our other segment of $0.5 million and $0.4 million for the three months ended September 30, 2021 and 2020, respectively. We eliminate this intercompany revenue in consolidation. 65 | Management's Discussion and Analysis YTD 2021 vs. YTD 2020 Net revenues increased by $87.7 million, or 20.7%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven 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 4 of the condensed consolidated financial statements in Item 1. Financial Statements, for additional information; • increased revenues at our BSR Crude Pipeline, as a result of new contracts executed in the second quarter of 2020; and • increases in the average sales prices per gallon of gasoline and diesel sold, partially offset by decreases in the average volumes of gasoline and diesel sold in our West Texas marketing operations: ◦ the average sales prices per gallon of gasoline and diesel sold increased $0.69 per gallon and $0.69 per gallon, respectively; and ◦ the average volumes of gasoline sold decreased 10.7 million gallons, partially offset by a 9.0 million decrease of diesel gallons sold. Such increases were partially offset by the following: • decreases in throughputs due to the impact of the severe freezing conditions that affected most of the regions where we operate resulting in lower volumes outside of contractual minimum volume commitments during the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020. • decreases in throughputs at the Paline pipeline due to scheduled pipeline maintenance. Net revenues included sales to our refining segment of $307.0 million and $288.3 million for the nine months ended September 30, 2021 and 2020, respectively, and sales to our other segment of $1.4 million and $1.6 million for the nine months ended September 30, 2021 and 2020, respectively. We eliminate this intercompany revenue in consolidation. 66 | Management's Discussion and Analysis Cost of Materials and Other Q3 2021 vs. Q3 2020 Cost of materials and other for the logistics segment increased $44.4 million, or 73.1%, in the third quarter of 2021 compared to the third quarter of 2020 primarily driven by the following: • increases in the average cost per gallon of gasoline and diesel sold, and increases in the volume of gasoline sold in our West Texas marketing operations: ◦ the average cost per gallon of gasoline and diesel sold increased $1.01 per gallon and $0.96 per gallon, respectively; and ◦ the average volumes of gasoline increased by 2.9 million gallons, while diesel volumes sold decreased by 0.5 million gallons. Our logistics segment purchased product from our refining segment of $89.9 million and $45.1 million for the three months ended September 30, 2021 and September 30, 2020, respectively. We eliminate these intercompany costs in consolidation. YTD 2021 vs. YTD 2020 Cost of materials and other for the logistics segment increased $69.1 million, or 33.6%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily driven by the following: • increases in the average cost per gallon of gasoline and diesel sold, partially offset by decreases in the average volumes of gasoline and diesel sold in our West Texas marketing operations: ◦ the average cost per gallon of gasoline and diesel sold increased $0.75 per gallon and $0.68 per gallon, respectively; and ◦ the average volumes of gasoline and diesel sold increased by 10.7 million gallons and 9.0 million gallons, respectively. Our logistics segment purchased product from our refining segment of $229.8 million and $155.7 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. We eliminate these intercompany costs in consolidation. Operating Expenses Q3 2021 vs. Q3 2020 Operating expenses increased by $3.0 million, or 21.0%, in the third quarter of 2021 compared to the third quarter of 2020, driven by the following: • increases in employee and outside service costs after cost cutting measures previously implemented to respond to the COVID-19 Pandemic, including delaying non-essential projects, ended; • increase in energy costs, due to higher natural gas prices; and • increases in utilities, maintenance and other variable expenses due to higher throughput. YTD 2021 vs. YTD 2020 Operating expenses increased by $5.4 million, or 13.0%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, driven by the following: • increases in employee and outside service costs after cost cutting measures implemented to respond to the COVID-19 Pandemic, including delaying non-essential projects, ended; 67 | Management's Discussion and Analysis • increase in energy costs due to higher natural gas prices; • increases in variable expenses such as maintenance and materials costs due to higher throughput; and • increases in utility costs as a result of significantly higher energy costs during the February 2021 severe freezing conditions that affected most of the regions where we operate. Contribution Margin Q3 2021 vs. Q3 2020 Contribution margin remained stable at $67.2 million in the third quarter of 2021 compared to the third quarter of 2020 as increases in gross margin were offset by higher operating costs. YTD 2021 vs. YTD 2020 Contribution margin increased by $13.2 million, or 7.5%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • an increase in gross margin of $1.27 per barrel in our West Texas marketing operations; and • increases in revenues associated with agreements executed in connection with Big Spring Gathering System and Delek Trucking acquisitions. Such increases were partially offset by the following: • a decrease in gasoline and diesel volumes sold in our West Texas marketing operations; and • an increase in operating expenses 68 | Management's Discussion and Analysis Retail Segment The table below sets forth certain information concerning our retail segment operations (gross sales $ in millions): Retail Contribution Margins Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net revenues $ 206.5 $ 177.7 $ 590.3 $ 521.7 Cost of materials and other 165.2 136.3 466.4 400.0 Operating expenses (excluding depreciation and amortization) 23.4 23.1 67.2 66.8 Contribution margin $ 17.9 $ 18.3 $ 56.7 $ 54.9 Operating Information Number of stores (end of period) 250 253 250 253 Average number of stores 250 253 250 253 Average number of fuel stores 245 248 245 248 Retail fuel sales $ 124.9 $ 90.9 $ 349.5 $ 273.8 Retail fuel sales (thousands of gallons) 41,912 45,096 124,655 135,471 Average retail gallons sold per average number of fuel stores (in thousands) 171 182 510 547 Average retail sales price per gallon sold $ 2.98 $ 2.01 $ 2.80 $ 2.02 Retail fuel margin ($ per gallon) (1) $ 0.327 $ 0.311 $ 0.356 $ 0.352 Merchandise sales (in millions) $ 81.7 $ 86.8 $ 240.9 $ 247.9 Merchandise sales per average number of stores (in millions) $ 0.3 $ 0.3 $ 1.0 $ 1.0 Merchandise margin % 33.7 % 31.6 % 33.1 % 31.3 % Same-Store Comparison (2) Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Change in same-store fuel gallons sold (5.9) % (18.8) % (9.6) % (15.6) % Change in same-store merchandise sales (7.1) % 8.7 % (3.1) % 8.8 % (1) Retail fuel margin represents gross margin on fuel sales in the retail segment, and is calculated as retail fuel sales revenue less retail fuel cost of sales. The retail fuel margin per gallon calculation is derived by dividing retail fuel margin by the total retail fuel gallons sold for the period. (2) Same-store comparisons include period-over-period changes in specified metrics for stores that were in service at both the beginning of the earliest period and the end of the most recent period used in the comparison. Retail Segment Operational Comparison of the Three and Nine Months Ended September 30, 2021 versus the Three and Nine Months Ended September 30, 2020 Net Revenue Q3 2021 vs. Q3 2020 Net revenues for the retail segment increased by $28.8 million, or 16.2%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • an increase in total fuel sales which were $124.9 million in the third quarter of 2021 compared to $90.9 million in the third quarter of 2020, primarily attributable to an increase of $0.96 in average price charged per gallon sold; and • slightly offset by a decrease in merchandise sales to $81.7 million in the third quarter of 2021 compared to $86.8 million in the third quarter of 2020 attributable to a same-store sales decrease of 7.1%. 69 | Management's Discussion and Analysis 2021 vs. YTD 2020 Net revenues for the retail segment increased by $68.6 million, or 13.1%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • an increase in total fuel sales which were $349.5 million in the nine months of 2021 compared to $273.8 million in the nine months of 2020, primarily attributable to a $0.78 increase in average price charged per gallon sold, slightly offset by a decrease in total retail fuel gallons sold; and • slightly offset by a decrease in merchandise sales to $240.9 million in the nine months of 2021 compared to $247.9 million in the nine months of 2020, primarily driven by the same-store sales decrease of 3.1%. Cost of Materials and Other Q3 2021 vs. Q3 2020 Cost of materials and other for the retail segment increased by $28.9 million, or 21.2%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • an increase in average cost per gallon of $0.95 or 56.0% applied to fuel sales volumes that decreased period over period. Our retail segment purchased finished product from our refining segment of $92.3 million and $57.6 million for the three months ended September 30, 2021 and September 30, 2020, respectively. We eliminate this intercompany cost in consolidation. YTD 2021 vs. YTD 2020 Cost of materials and other for the retail segment increased by $66.4 million, or 16.6%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily driven by the following: • an increase in average cost per gallon of $0.78 or 46.6% applied to fuel sales volumes that decreased period over period. Our retail segment purchased finished product from our refining segment of $253.8 million and $166.6 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. We eliminate this intercompany cost in consolidation. 70 | Management's Discussion and Analysis Operating Expenses Q3 2021 vs. Q3 2020 Operating expenses for the retail segment increased by $0.3 million, or 1.3% in the third quarter of 2021 compared to the third quarter of 2020. YTD 2021 vs. YTD 2020 Operating expenses for the retail segment increased by $0.4 million, or 0.6% in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Contribution Margin Q3 2021 vs. Q3 2020 Contribution margin for the retail segment decreased by $0.4 million, or 2.2%, in the third quarter of 2021 compared to the third quarter of 2020, primarily driven by the following: • a 5.9% decrease in merchandise sales, offset by an improvement in merchandise margin percentage of 2.1%; and • a decrease in fuel sales volume, partially offset by increase in average fuel margin of $0.016 per gallon. YTD 2021 vs. YTD 2020 Contribution margin for the retail segment increased by $1.8 million, or 3.3%, in the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily driven by the following: • 2.8% decrease in merchandise sales, partially offset by an improvement in merchandise margin percentage of 1.8%; and • a decrease in fuel sales volume, partially offset by increase in average fuel margin of $0.004 per gallon. 71 | 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 September 30, 2021 our total liquidity amounted to $2.1 billion comprised primarily of $721.7 million in unused credit commitments under the Delek Revolving Credit Facility (as defined in Note 8 of the condensed consolidated financial statements in Item 1. Financial Statements), $589.1 million in unused credit commitments under the Delek Logistics Credit Facility (as defined in Note 8 of the condensed consolidated financial statements in Item 1. Financial Statements) and $830.6 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. In response to the COVID-19 Pandemic and the decline in oil prices, on November 5, 2020, we announced that we have elected to suspend dividends in order to conserve capital. 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 industry and other financial and business factors, including the current COVID-19 Pandemic and oil prices, some of which are beyond our control. If market conditions were to change, for instance due to the significant decline in oil prices or 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 September 30, 2021, we believe we were in compliance with all of our debt maintenance covenants, where the most significant long-term obligation subject to such covenants was the Delek Logistics Credit Facility (see Note 8 of the condensed consolidated financial statements in Item 1. Financial Statements). After considering the current effect of the 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 September 30, 2021 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 covenants. Inability to meet the incurrence covenants could impose certain incremental restrictions on our ability to incur new debt and also may limit whether and the extent to which we may 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 are able to satisfy the applicable incurrence based covenants. In the event that we are subject to these incremental restrictions, we believe that we have sufficient current and alternative sources of liquidity, including (but not limited to) the following: available borrowings under our existing Wells Fargo Revolving Credit Facility, and for Delek Logistics, under its Delek Logistics Credit Facility (each as defined in Note 8 of the condensed consolidated financial statements in Item 1. Financial Statements); the allowance to incur additional secured debt under the Term Loan Credit Facility (as defined in Note 8 of the condensed consolidated financial statements in Item 1. Financial Statements); as well as the possibility of obtaining other secured and unsecured debt, raising capital through equity issuance, or taking advantage of transactional financing opportunities such as sale-leasebacks, each as otherwise contemplated and allowed under our incurrence covenants. 72 | Cash Flows The following table sets forth a summary of our consolidated cash flows (in millions): Consolidated Nine Months Ended September 30, 2021 2020 Cash Flow Data: Operating activities $ 210.2 $ (399.8) Investing activities (143.2) (163.0) Financing activities (23.9) 415.4 Net increase (decrease) $ 43.1 $ (147.4) Cash Flows from Operating Activities Net cash provided by operating activities was $210.2 million for the nine months ended September 30, 2021, compared to net cash used of $399.8 million for the comparable period of 2020. Cash receipts from customers and cash payments to suppliers and for salaries increased resulting in a net $601.4 million increase in cash provided by operating activities. Additionally, cash paid for debt interest decreased by $12.0 million. Partially offsetting these increases in cash provided were an increase in income taxes paid of $0.8 million and a decrease in dividends received of $2.6 million. Cash Flows from Investing Activities Net cash used in investing activities was $143.2 million for the first nine months of 2021, compared to $163.0 million in the comparable period of 2020. The decrease in cash flows used in investing activities was primarily due to a decrease in cash purchases of property, plant and equipment which decreased from $241.7 million in 2020, to $163.1 million in 2021, partially attributable to delaying non-essential projects in light of the COVID-19 Pandemic. Additionally, equity method investment contributions decreased $29.2 million primarily due to contributions made related to our Red River Pipeline Joint Venture and WWP Project Financing JV (each as defined in Note 5 of the condensed consolidated financial statements in Item 1. Financial Statements) for $11.8 million and $18.9 million, respectively, during the nine months ended September 30, 2020. During the nine months ended September 30, 2021, we contributed $1.4 million related to our Red River Pipeline Joint Venture and $0.2 million related to our WWP Project Financing JV. These decreases in cash used in investing activities were partially offset by distributions received in the prior year from our WWP Project Financing JV to return excess capital contributions made in the amount of $69.3 million and proceeds of $39.9 million from the sale of the Bakersfield refinery in the prior year for which there was no comparable activity in the current year period. Cash Flows from Financing Activities Net cash used in financing activities was $23.9 million for the nine months ended September 30, 2021, compared to cash provided of $415.4 million in the comparable 2020 period. This decrease in cash provided was predominantly due to net payments on long-term revolvers and term debt of $125.8 million during the nine months ended September 30, 2021, compared to net proceeds of $402.7 million in the comparable 2020 period. Such decreases were partially offset by an increase in net proceeds from inventory financing arrangements to $135.6 million for the nine months ended September 30, 2021 compared to $142.6 million in the comparable 2020 period. Additionally, cash provided increased $69.0 million due to suspension of dividends in the fourth quarter of 2020. Cash Position, Indebtedness and Other Financing Arrangements As of September 30, 2021, our total cash and cash equivalents were $830.6 million and we had total long-term indebtedness of approximately $2,222.2 million. The total long-term indebtedness is net of deferred financing costs and debt discount of $11.1 million and $20.2 million, respectively. Additionally, we had letters of credit issued of approximately $278.3 million. Total unused credit commitments or borrowing base availability, as applicable, under our revolving credit facilities was approximately $1,310.8 million. Our total long-term indebtedness consisted of the following: • an aggregate principal amount of $1,263.3 million under the Term Loan Credit Facility, due on March 30, 2025, with effective interest rate of 3.51%; • an aggregate principal amount of $29.3 million in outstanding borrowings under the Delek Hapoalim Term Loan, due on December 31, 2022, with effective interest rate of 3.65%; • an aggregate principal amount of $260.9 million under the Delek Logistics Credit Facility, due on September 28, 2023, with average borrowing rate of 2.62%; • an aggregate principal amount of $250.0 million under the Delek Logistics 2025 Notes, due in 2025, with effective interest rate of 7.21%; 73 | • an aggregate principal amount of $400.0 million under the Delek Logistics 2028 Notes, due in 2028, with effective interest rate of 7.41%; • 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 • the Revolving Credit Facility, due on March 30, 2023, with borrowing rate of 3.50% for base rate loans, and no principal amount outstanding. See Note 8 of the condensed consolidated financial statements in Item 1. Financial Statements, for additional information about our separate credit facilities included in long-term indebtedness. Additionally, we also utilize other financing arrangements to finance operating assets and/or, from time to time, to monetize other assets that may not be needed in the near term, when internal cost of capital and other criteria are met. Such arrangements include our supply and offtake arrangements, which finance a significant portion of our first-in, first-out inventory at the refineries and, from time to time, RINs or other non-inventory product financing liabilities. Our supply and offtake obligation with J. Aron amounted to $478.5 million at September 30, 2021, $329.8 million of which is due on December 30, 2022, except that a portion (not to exceed $28.6 million, net of the $10.0 million settlement threshold) of this otherwise long-term component is subject to potential earlier payment under the Periodic Price Adjustment provision. See Note 7 of the condensed consolidated financial statements in Item 1. Financial Statements, for additional information about our supply and offtake facilities. Our product financing liabilities consisted primarily of RIN financings as of September 30, 2021, and totaled $342.5 million, all of which is due by December 31, 2021. See further description of these types of arrangements in the Environmental Credits and Related Regulatory Obligations accounting policy disclosed in Note 2 to our audited consolidated financial statements included Item 8. Financial Statements and Supplementary Data, of our December 31, 2020 Annual Report on Form 10-K. For both arrangements and the related commitments, see also our "Contractual Obligations" section included in Item 2. Management's Discussion and Analysis. Capital Spending A key component of our long-term strategy is our capital expenditure program. Our capital expenditures for the nine months ended September 30, 2021 were $161.6 million, of which approximately $133.0 million was spent in our refining segment, $14.6 million in our logistics segment, $3.2 million in our retail segment and $10.8 million primarily at the holding company level. The following table summarizes our actual capital expenditures for the nine months ended September 30, 2021 and planned capital expenditures for the full year 2021 by operating segment and major category (in millions): Full Year 2021 Forecast Nine Months Ended September 30, 2021 Refining Sustaining maintenance, including turnaround activities (1) $ 153.6 $ 131.5 Regulatory 1.7 1.3 Discretionary projects 0.2 0.2 Refining segment total 155.5 133.0 Logistics Regulatory 3.4 1.4 Sustaining maintenance 1.6 1.2 Discretionary projects 19.6 12.0 Logistics segment total 24.6 14.6 Retail Regulatory — — Sustaining maintenance 2.8 2.0 Discretionary projects 2.1 1.2 Retail segment total 4.9 3.2 Other Regulatory 4.3 3.5 Sustaining maintenance 12.5 5.8 Discretionary projects 5.2 1.5 Other total 22.0 10.8 Total capital spending $ 207.0 $ 161.6 74 | Management's Discussion and Analysis 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. For example, we may experience increases in the cost of and/or timing to obtain necessary equipment required for our continued compliance with government regulations or to complete improvement projects or scheduled maintenance activities. Additionally, the scope and cost of employee or contractor labor expense related to installation of that equipment could exceed our projections. Our capital expenditure budget may also be revised as management continues to evaluate projects for reliability or profitability. We have no material off-balance sheet arrangements through the date of the filing of this Quarterly Report on Form 10-Q.