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Acquisitions

12 Months Ended

Dec. 31, 2018

Alon

Effective July 1, 2017, we acquired the outstanding common stock of Alon (the "Delek/Alon Merger"). Prior to the Merger, Old Delek owned a non-controlling equity interest of approximately 47% of the outstanding shares of Alon, which was accounted for under the equity method of accounting (See Note 7). Alon was a refiner and marketer of petroleum products, operating primarily in the south central, southwestern and western regions of the United States.

Subject to the terms and conditions of the Delek/Alon Merger Agreement (the "Merger Agreement"), at the Effective Time, each issued and outstanding share of Alon Common Stock, other than shares owned by Old Delek and its subsidiaries or held in the treasury of Alon, was converted into the right to receive 0.504 of a share of New Delek Common Stock, or, in the case of fractional shares of New Delek Common Stock, cash (without interest) in an amount equal to the product of (i) such fractional part of a share of New Delek Common Stock multiplied by (ii) $25.96 per share, which was the volume weighted average price of the Old Delek Common Stock, par value $0.01 per share as reported on the NYSE Composite Transactions Reporting System for the twenty consecutive NYSE full trading days ending on June 30, 2017. Each outstanding share of restricted Alon Common Stock was assumed by New Delek and converted into restricted stock denominated in shares of New Delek Common Stock, using the conversion rate applicable to the Merger. Committed but unissued share-based awards were exchanged and converted into rights to receive share-based awards indexed to New Delek Common Stock.

In addition, subject to the terms and conditions of the Merger Agreement, each share of Old Delek Common Stock or fraction thereof issued and outstanding immediately prior to the Effective Time (other than Old Delek Common Stock held in the treasury of Old Delek, which was retired in connection with the Merger) was converted at the Effective Time into the right to receive one validly issued, fully paid and non‑assessable share of New Delek Common Stock or such fraction thereof equal to the fractional share of New Delek Common Stock. All existing Old Delek stock options, restricted stock awards and stock appreciation rights were converted into equivalent rights with respect to New Delek Common Stock.

In connection with the Merger, Alon, New Delek and U.S. Bank National Association, as trustee (the “Trustee”), entered into a First Supplemental Indenture (the “Supplemental Indenture”), effective as of July 1, 2017, supplementing the Indenture, dated as of September 16, 2013 (the “Original Indenture”; the Original Indenture, as amended by the Supplemental Indenture, is referred to as the "Indenture"), pursuant to which Alon issued its 3.00% Convertible Senior Notes due 2018 (the “Convertible Notes”), which were convertible into shares of Alon’s Common Stock, par value $0.01 per share or cash or a combination of cash and Alon Common Stock, all as provided in the Indenture. The Supplemental Indenture provided that, as of the Effective Time, the right to convert each $1,000 principal amount of the Convertible Notes based on a number of shares of Alon Common Stock equal to the Conversion Rate (as defined in the Indenture) in effect immediately prior to the Merger was changed into a right to convert each $1,000 principal amount of Convertible Notes into or based on a number of shares of New Delek Common Stock (at the exchange rate of 0.504), par value $0.01 per share, equal to the Conversion Rate in effect immediately prior to the Merger. In addition, the Supplemental Indenture provided that, as of the Effective Time, New Delek fully and unconditionally guaranteed, on a senior basis, Alon’s obligations under the Convertible Notes. See Note 11 for further discussion.

In connection with the Indenture, Alon also entered into equity instruments, including Purchased Options and Warrants, designed, in combination, to hedge a portion of the risk associated with the potential exercise of the conversion feature of the Convertible Notes and to minimize the dilutive effect of such potential conversion. These equity instruments, in addition to the conversion feature, represent equity instruments originally indexed to Alon Common Stock that were exchanged for instruments with terms designed to preserve the original economic intent of such instruments and indexed to New Delek Common Stock in connection with the Merger. See Note 11 for further discussion.

In connection with the Delek/Alon Merger, Delek acquired 100% of the general partner and 81.6% of the limited partner interests in the Alon Partnership, which owns a crude oil refinery in Big Spring, Texas with a crude oil throughput capacity of 73,000 barrels per day ("bpd") and an integrated wholesale marketing business. Delek acquired the non-controlling interest in the Alon Partnership on February 7, 2018. In addition, as a result of the Delek/Alon Merger, Delek acquired a crude oil refinery in Krotz Springs, Louisiana with a crude oil throughput capacity of 74,000 bpd. In connection with the Delek/Alon Merger, Delek also acquired crude oil refineries in California, which have not processed crude oil since 2012. On March 16, 2018, Delek sold to World Energy, LLC the Paramount, California refinery and the California renewables facility (AltAir). The transaction to dispose of certain assets and liabilities associated with the Long Beach, California refinery, to Bridge Point Long Beach, LLC, closed July 17, 2018. Alon was a marketer of asphalt, which it distributed through asphalt terminals located predominantly in the southwestern and western United States. Alon also owned crude oil refineries in California, which have not processed crude oil since 2012. Alon is a marketer of asphalt, which it distributes through asphalt terminals located predominantly in the southwestern and western United States. On May 21, 2018, Delek sold four asphalt terminals (included in Delek's corporate/other segment) and its 50% interest in an asphalt joint venture to an affiliate of Andeavor. See further discussion in Note 2 and Note 8. Finally, in connection with the Delek/Alon Merger, Delek acquired Alon's retail business where Alon was the largest 7-Eleven licensee in the United States and operating approximately 300 convenience stores which market motor fuels in central and west Texas and New Mexico.

Transaction costs incurred by the Company in connection with the Delek/Alon Merger totaled approximately $6.6 million, $24.7 million and $3.0 million for the years ended December 31, 2018, December 31, 2017 and December 31, 2016, respectively. Such costs were included in general and administrative expenses in the accompanying consolidated statements of income.

The Merger was accounted for using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized on the balance sheet at their fair value as of the acquisition date.

Determination of Purchase Price

The components of the consideration transferred were as follows (dollars in millions, except per share amounts):



Delek common stock issued	19,250,795
Ending price per share of Delek Common Stock immediately before the Effective Time	$	26.44
Total value of common stock consideration			$	509.0
Additional consideration⁽¹⁾			21.7
Fair value of Delek's pre-existing equity method investment in Alon ⁽²⁾			449.0
			$	979.7

⁽¹⁾Additional consideration includes the fair value of certain equity instruments originally indexed to Alon stock that were exchanged for instruments indexed to New Delek's stock, as well as the fair value of certain share-based payments that were required to be exchanged for awards indexed to New Delek's stock in connection with the Delek/Alon Merger.

⁽²⁾The fair value of Delek's pre-existing equity method investment in Alon was based on the quoted market price of shares of Alon.

Final Purchase Price Allocation

The final allocation of the aggregate purchase price as of December 31, 2018 (which was finalized as of June 30, 2018) is summarized as follows (in millions), and is inclusive of the California Discontinued Entities discussed in Note 8:



Cash	$	215.3
Receivables	176.8
Inventories	266.3
Prepaids and other current assets	38.7
Property, plant and equipment ⁽¹⁾	1,130.3
Equity method investments	31.0
Acquired intangible assets ⁽²⁾	86.7
Goodwill ⁽³⁾	870.7
Other non-current assets	37.0
Accounts payable	(263.4		)
Obligation under Supply & Offtake Agreements	(208.9		)
Current portion of environmental liabilities	(7.9		)
Other current liabilities	(308.6		)
Environmental liabilities and asset retirement obligations, net of current portion	(226.7		)
Deferred income taxes	(194.0		)
Debt	(568.0		)
Other non-current liabilities ⁽⁴⁾	(95.6		)
Fair value of net assets acquired	$	979.7

⁽¹⁾This fair value of property, plant and equipment is based on a valuation using a combination of the income, cost and market approaches. The useful lives are based upon guidelines for similar equipment, chronological age since installation and consideration of costs spent on upgrades, repairs, turnarounds and rebuilds.

⁽²⁾The acquired intangible assets amount includes the following identified intangibles:


•	Third-party fuel supply agreement intangible that is subject to amortization with a fair value of $49.0 million, which is being amortized over a 10-year useful life. We recognized amortization expense for the year ended December 31, 2018 of $4.9 million. The estimated annual amortization is $4.9 million for the four succeeding fiscal years.


•	Fuel trade name intangible valued at $4.0 million, which will be amortized over 5 years. We recognized amortization expense for the year ended December 31, 2018 of $0.8 million. The estimated annual amortization is $0.8 million for the three succeeding fiscal years, with $0.4 million in the fourth succeeding year.


•	License agreements intangible valued at $2.6 million, which is being amortized over 8.7 years. We recognized amortization expense for the year ended December 31, 2018 of $0.1 million, as this intangible was sold in the first quarter of 2018.


•	Rights-of-way intangible valued at $9.5 million, which has an indefinite life.


•	Liquor license intangible valued at $8.5 million, which has an indefinite life.


•	Colonial Pipeline shipping rights intangible valued at $1.7 million, which has an indefinite life.


•	Refinery permits valued at $3.1 million, which have an indefinite life.


•	Below-market lease intangibles valued at $8.3 million, which is being amortized over the remaining lease term.

⁽³⁾Goodwill generated as a result of the Delek/Alon Merger consists of the value of expected synergies from combining operations, the acquisition of an existing integrated refining, marketing and retail business located in areas with access to cost–advantaged feedstocks with an assembled workforce that cannot be duplicated at the same costs by a new entrant, and the strategic advantages of having a larger market presence. The total amount of goodwill that is expected to be deductible for tax purposes is $15.5 million. Goodwill has been allocated to reportable segments based on various relevant factors. The updated allocation of goodwill to reportable segments in connection with the purchase price allocation is as follows: Refining - $801.3 million and Retail - $44.3 million. The remainder relates to the asphalt operations, which was included in the corporate, other and eliminations segment, and which was subsequently written off as part of the impairment on assets held for sale during the first quarter of 2018.

⁽⁴⁾The assumed other non-current liabilities include liabilities related to above-market leases fair valued at $15.8 million, which is being amortized over the remaining lease term.

Pro Forma Financial Information

The following unaudited pro forma financial information presents the condensed combined results of operations of Delek and Alon for the years ended December 31, 2017 and 2016, as if the Delek/Alon Merger had occurred on January 1, 2016, and reflects the final purchase price allocation. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations that would have been reported had the Delek/Alon merger been completed as of January 1, 2016, and should not be taken as indicative of New Delek's future consolidated results of operations. In addition, the unaudited pro forma condensed combined results of operations do not reflect any cost savings or associated costs to achieve such savings from operating efficiencies, synergies, debt refinancing or other restructuring that may result from the Delek/Alon Merger. The pro forma financial information also does not reflect certain non-recurring adjustments that have been, or are expected to be, recorded in connection with the Delek/Alon Merger, including any accrual for integration costs or transaction costs or additional transactions costs related to the Merger, nor any retrospective adjustments related to the conforming of Alon's accounting policies to Delek's accounting policies, as such adjustments are impracticable to determine, and such adjustments are not expected to be indicative of on-going operations of the combined company. Finally, the pro forma presentation of net revenues and net income is inclusive of the revenue and net income (loss) attributable to the California Discontinued Entities (which are generally not material as the majority of the California Discontinued Entities were non-operating during the pro forma period). Pro forma adjustments are tax-effected at the Company's estimated statutory tax rates.



	Year Ended
	December 31,
(in millions, except per share data)	2017 ^{(1) (2)}		2016 ^{(1) (2)}
	(unaudited)
Net revenues	$	9,477.8	$	8,100.9
Net income attributable to Delek	223.6		16.3
Earnings per share:
Basic	$	2.75	$	0.20
Diluted	$	2.73	$	0.20

⁽¹⁾The pro forma information for the years ended December 31, 2017 and 2016 has been updated to reflect the final purchase price allocation in the table above.


⁽²⁾	The unaudited pro forma statements of operations reflect the following adjustments:


•	To eliminate transactions between Delek and Alon for purchases and sales of refined products, reducing revenue and the associated cost of materials and other. Such pro forma eliminations resulted in a decrease to combined pro forma revenues by $59.0 million and $10.4 million million for the years ended December 31, 2017 and 2016, respectively.


•	To eliminate the non-recurring transaction costs incurred during the historical periods. Such adjustments to general and administrative expense have been estimated to result in an increase to pro forma pre-tax income attributable to Delek totaling $32.2 million and $13.7 million million for the years ended December 31, 2017 and 2016.

•

To retrospectively reflect depreciation of property, plant and equipment and amortization of intangibles based on the fair value of the assets as of the acquisition date, as if that fair value had been reflected beginning January 1, 2016, and to retrospectively eliminate the amortization of any previously recorded intangibles. Such adjustments to depreciation and amortization have been estimated to result in an increase to pro forma pre-tax income attributable to Delek totaling $34.7 million and $70.8 million million for the years ended December 31, 2017 and 2016, respectively.


•	To retrospectively reflect the accretion of asset retirement obligations and certain environmental liabilities. Such adjustments to general and administrative expense have been estimated to result in a decrease to pro forma pre-tax income attributable to Delek totaling $0.8 million and $1.6 million million for the years ended December 31, 2017 and 2016, respectively.

•

To retrospectively reflect adjustments to interest expense, including the impact of discounts or premiums created by the difference in fair value and outstanding amounts as of the acquisition date (collectively, the “new effective yield”), by applying the new effective yield to historical outstanding amounts in the pro forma period and reversing previously recognized interest expense. Such net adjustments to interest expense have been estimated to result in an increase to pro forma pre-tax income attributable to Delek totaling $9.4 million and $20.7 million million for the years ended December 31, 2017 and 2016, respectively.


•	To eliminate Delek’s equity income previously recorded on its equity method investment in Alon, prior to the Merger. Such pro forma elimination resulted in an (increase) decrease to pro forma pre-tax income totaling $3.2 million and $(42.2) million million for the years ended December 31, 2017 and 2016, respectively.


•	To eliminate the impairment charge on the equity method investment in Alon totaling $245.3 million recognized in the year ended December 31, 2016, and to eliminate the gain on remeasurement of the equity method investment in Alon totaling $190.1 million recognized during the year ended December 31, 2017.


•	To record the tax effect on pro forma adjustments and additional tax benefit associated with dividends received from Alon at a combined U.S. (federal and state) income tax statutory blended rate of approximately 37% for the year ended December 31, 2017, and approximately 35% for the year ended December 31, 2016.

•

To adjust the weighted average number of shares outstanding based on 0.504 of a share of Delek common stock for each share of Alon common stock outstanding as of July 1, 2017, as if they were outstanding for the entire year ended December 31, 2017, reflecting the elimination of Alon historical weighted average shares outstanding and the addition of the estimated New Delek incremental shares issued.

As of June 30, 2017, the carrying value of Delek's equity method investment in Alon was $252.6 million. During the year ended December 31, 2017, we recognized a gain of $196.4 million as a result of remeasuring the 47% equity method investment in Alon at its fair value as of the Effective Time of the Delek/Alon Merger, in accordance with ASC 805, net of a $6.3 million loss to record the reversal of accumulated other comprehensive income. This net gain of $190.1 million was recognized in the line item entitled Gain on remeasurement of equity method investment in Alon in the consolidated statements of income. The acquisition-date fair value of the pre-existing non-controlling interest in Alon was $449.0 million and is included in the measurement of the consideration transferred.

Delek began consolidating Alon's results of operations on July 1, 2017. Alon operations contributed $4,649.8 million to net revenues and $394.9 million to pre-tax income for the year ended December 31, 2018, inclusive of the contribution of the California Discontinued Entities. Alon operations contributed $1,950.0 million to net revenues and and $90.1 million to pre-tax income for the year ended December 31, 2017, inclusive of the contribution of the California Discontinued Entities.

Updates to the Preliminary Purchase Price Allocation

During the year ended December 31, 2018, we continued our procedures to determine the fair value of assets acquired and liabilities assumed in the Delek/Alon Merger, as anticipated and disclosed in our 2017 Annual Report on Form 10-K (all of which were completed by June 30, 2018, within the permitted measurement period). As a result, the following changes were made to the preliminary purchase price allocation disclosed in our 2017 Annual Report on Form 10-K:



Subsequent increases (decreases) to initial allocation of fair value of net assets acquired:
Receivables ⁽¹⁾	$	10.7
Inventories	(0.5		)
Prepaids and other current assets ⁽²⁾	9.7
Property, plant and equipment	(0.2		)
Acquired intangible assets ⁽³⁾	7.7
Accounts payable ⁽⁴⁾	6.0
Obligation under Supply & Offtake Agreements ⁽⁵⁾	10.9
Current portion of environmental liabilities	0.4
Other current liabilities ⁽⁶⁾	22.3
Environmental liabilities and asset retirement obligations, net of current portion ⁽⁷⁾	65.3
Deferred income taxes ⁽⁸⁾	(8.4		)
Other non-current liabilities ⁽⁹⁾	(2.8		)
Resulting increase to goodwill	$	66.3

⁽¹⁾Change primarily relates to the recognition of a receivable associated with a third-party indemnification agreement for asset retirement obligations for one of the acquired refineries that was previously under review, and finalization of an accrued receivable estimate.

⁽²⁾Change primarily relates to a reclassification of RINs assets from other current liabilities to other current assets.

⁽³⁾Change is primarily due to the addition of an intangible asset for certain below-market leases that had previously been identified but for which the evaluation and determination of fair value was not complete at December 31, 2017.

⁽⁴⁾Change is primarily due to the elimination of amounts in accounts payable in the retail segment that were determined not to have value combined with reclassifications of amounts to accounts receivable.

⁽⁵⁾Change relates to true-up of certain accounts related to one of the acquired supply and offtake agreements for contractual terms that were previously under review.

⁽⁶⁾Change is primarily due to an increase related to the reclassification of RINs assets from other current liabilities to other current assets and an increase related to the accrual of certain executive bonuses that were required under existing Alon employment agreements and related to service provided prior to the Delek/Alon Merger, net of adjustments to current income taxes payable to true up income taxes related to the acquired net assets.

⁽⁷⁾Change is to record the long-term portion of additional asset retirement obligations and environmental liabilities identified and/or to update preliminary estimates based on additional information.

⁽⁸⁾Change is related to adjustments to net deferred tax liabilities based on the updated purchase price allocation and revisions of preliminary tax estimates.

⁽⁹⁾Change is related to the reversal of an accrual established in the purchase price allocation related to a pre-acquisition legal contingency that was resolved during the first quarter 2018 in our favor.

During the year ended December 31, 2018, certain immaterial catch-up adjustments were recorded related to accretion of environmental liabilities and amortization of leasehold intangibles identified and valued during the final months of the measurement period.

Pipeline Assets

During the year ended December 31, 2017, Delek made two pipeline asset acquisitions, for a total purchase price of $13.0 million. Such acquisitions were accounted for as asset acquisitions, and therefore the cost of the acquisition has been allocated to the cost of the assets acquired on a relative fair value basis.

The following table summarizes the allocation of the relative fair value assigned to the asset groups for the acquisitions (in millions):



Land	$	0.2
Property, plant and equipment	6.4
Intangible assets ⁽¹⁾	6.4
Total	$	13.0

⁽¹⁾ Intangible assets acquired represent rights-of-way assets with indefinite useful lives. Rights-of-way assets are not subject to amortization.