UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
Form 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
FOR THE TRANSITION PERIOD FROM __________TO __________ 
 
Commission file number: 001-32567
Alon USA Energy, Inc.
(Exact name of Registrant as specified in its charter)
___________________________________________________
 
Delaware
 
74-2966572
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
7616 LBJ Freeway, Suite 300, Dallas, Texas 75251
(Address of principal executive offices) (Zip Code)
 
(972) 367-3600
(Registrant’s telephone number, including area code)
___________________________________________________
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o
Smaller reporting company o
 
(Do not check if a smaller reporting company)
Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares of the Registrant’s common stock, par value $0.01 per share, outstanding as of May 1, 2011, was 55,576,822.
 
 
 
 

 
 
EX-10.1 AMENDED AND RESTATED SUPPLY AND OFFTAKE AGREEMENT BY AND BETWEEN ALON USA, LP AND J. ARON & COMPANY
EX-10.2 AMENDED AND RESTATED SECOND AMENDMENT TO THE SUPPLY AND OFFTAKE AGREEMENT BY AND BETWEEN ALON REFINING KROTZ SPRINGS, INC. AND J. ARON & COMPANY
EX-10.3 AMENDED AND RESTATED SECOND AMENDMENT TO THE SUPPLY AND OFFTAKE AGREEMENT BY AND BETWEEN ALON REFINING KROTZ SPRINGS, INC. AND J. ARON & COMPANY
EX-31.1 CERTIFICATION OF CEO PURSUANT TO SECTION 302
EX-31.2 CERTIFICATION OF CFO PURSUANT TO SECTION 302
EX-32.1 CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906

Table of Contents

PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
 
ALON USA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share data)
 
 
March 31,
2011
 
December 31,
2010
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
119,445
 
 
$
71,687
 
Accounts and other receivables, net
155,328
 
 
115,541
 
Income tax receivable
8,642
 
 
8,642
 
Inventories
143,584
 
 
141,050
 
Deferred income tax asset
51,941
 
 
49,052
 
Prepaid expenses and other current assets
8,661
 
 
7,875
 
Total current assets
487,601
 
 
393,847
 
Equity method investments
16,169
 
 
18,664
 
Property, plant, and equipment, net
1,491,342
 
 
1,488,532
 
Goodwill
105,943
 
 
105,943
 
Other assets, net
98,741
 
 
81,535
 
Total assets
$
2,199,796
 
 
$
2,088,521
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
263,093
 
 
$
292,991
 
Accrued liabilities
113,646
 
 
88,354
 
Current portion of long-term debt
46,983
 
 
11,512
 
Total current liabilities
423,722
 
 
392,857
 
Other non-current liabilities
204,923
 
 
160,976
 
Long-term debt
900,263
 
 
904,793
 
Deferred income tax liability
296,920
 
 
288,128
 
Total liabilities
1,825,828
 
 
1,746,754
 
Commitments and contingencies (Note 14)
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, par value $0.01, 10,000,000 shares authorized; 4,000,000 issued and outstanding at March 31, 2011 and December 31, 2010, respectively
40,000
 
 
40,000
 
Common stock, par value $0.01, 100,000,000 shares authorized; 55,440,585 and 54,281,636 shares issued and outstanding at March 31, 2011, and December 31, 2010, respectively
554
 
 
543
 
Additional paid-in capital
312,518
 
 
290,809
 
Accumulated other comprehensive loss, net of income tax
(21,319
)
 
(21,917
)
Retained earnings
43,064
 
 
33,052
 
Total stockholders’ equity
374,817
 
 
342,487
 
Non-controlling interest in subsidiaries
(849
)
 
(720
)
Total equity
373,968
 
 
341,767
 
Total liabilities and equity
$
2,199,796
 
 
$
2,088,521
 
The accompanying notes are an integral part of these consolidated financial statements.

1

Table of Contents

ALON USA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, dollars in thousands except per share data)
 
 
For the Three Months Ended
 
March 31,
 
2011
 
2010
Net sales (1)
$
1,651,104
 
 
$
579,313
 
Operating costs and expenses:
 
 
 
Cost of sales
1,461,123
 
 
538,715
 
Direct operating expenses
56,923
 
 
61,444
 
Selling, general and administrative expenses
34,330
 
 
31,807
 
Depreciation and amortization
25,447
 
 
26,322
 
Total operating costs and expenses
1,577,823
 
 
658,288
 
Gain on disposition of assets
12
 
 
 
Operating income (loss)
73,293
 
 
(78,975
)
Interest expense
(20,440
)
 
(26,585
)
Equity losses of investees
(245
)
 
(103
)
Other income (loss), net
(31,913
)
 
14,204
 
Income (loss) before income tax expense (benefit), non-controlling interest in income (loss) of subsidiaries
20,695
 
 
(91,459
)
Income tax expense (benefit)
7,470
 
 
(34,713
)
Income (loss) before non-controlling interest in income (loss) of subsidiaries
13,225
 
 
(56,746
)
Non-controlling interest in income (loss) of subsidiaries
160
 
 
(3,804
)
Net income (loss) available to common stockholders
$
13,065
 
 
$
(52,942
)
Income (loss) per share, basic
$
0.24
 
 
$
(0.98
)
Weighted average shares outstanding, basic (in thousands)
54,549
 
 
54,161
 
Income (loss) per share, diluted
$
0.22
 
 
$
(0.98
)
Weighted average shares outstanding, diluted (in thousands)
60,484
 
 
54,161
 
Cash dividends per share
$
0.04
 
 
$
0.04
 
___________________________________
(1)
Includes excise taxes on sales by the retail segment of $14,218 and $12,786 for the three months ended March 31, 2011, and 2010, respectively.
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.

2

Table of Contents

ALON USA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
 
For the Three Months Ended
 
March 31,
 
2011
 
2010
Cash flows from operating activities:
 
 
 
Net income (loss) available to common stockholders
$
13,065
 
 
$
(52,942
)
Adjustments to reconcile net income (loss) available to common stockholders to cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
25,447
 
 
26,322
 
Stock compensation
254
 
 
234
 
Deferred income tax expense
5,580
 
 
(34,713
)
Non-controlling interest in income (loss) of subsidiaries
160
 
 
(3,804
)
Amortization of debt issuance costs
1,404
 
 
1,379
 
Amortization of original issuance discount
455
 
 
393
 
Write-off of unamortized debt issuance costs
 
 
6,659
 
Gain on disposition of assets
(12
)
 
 
Changes in operating assets and liabilities, net of acquisition effects:
 
 
 
Accounts and other receivables, net
(39,787
)
 
8,180
 
Income tax receivable
 
 
34,655
 
Inventories
(3,699
)
 
(7,988
)
Prepaid expenses and other current assets
(786
)
 
(7,634
)
Other assets, net
(19,958
)
 
(9,257
)
Accounts payable
(30,004
)
 
(8,927
)
Accrued liabilities
27,394
 
 
6,803
 
Other non-current liabilities
44,868
 
 
(339
)
Net cash provided by (used in) operating activities
24,381
 
 
(40,979
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(25,163
)
 
(7,303
)
Capital expenditures for turnarounds and catalysts
(185
)
 
(10,009
)
Dividends from investees, net of equity earnings
2,495
 
 
409
 
Proceeds from disposition of assets
18
 
 
 
Proceeds from sale of securities
 
 
22,760
 
Escrow deposit for purchase of Bakersfield Refinery
 
 
(10,000
)
Earnout payment related to Krotz Springs refinery acquisition
(2,187
)
 
(2,188
)
Net cash used in investing activities
(25,022
)
 
(6,331
)
Cash flows from financing activities:
 
 
 
Dividends paid to stockholders
(2,204
)
 
(2,167
)
Dividends paid to non-controlling interest
(287
)
 
(144
)
Proceeds from issuance of common stock
10,100
 
 
 
Stock issuance costs
(282
)
 
 
Inventory supply agreement
1,165
 
 
 
Deferred debt issuance costs
(1,567
)
 
(455
)
Revolving credit facilities, net
13,852
 
 
(45,065
)
Additions to long-term debt
30,000
 
 
 
Payments on long-term debt
(2,378
)
 
(2,736
)
Additions to short-term debt
 
 
65,000
 
Net cash provided by financing activities
48,399
 
 
14,433
 
Net increase (decrease) in cash and cash equivalents
47,758
 
 
(32,877
)
Cash and cash equivalents, beginning of period
71,687
 
 
40,437
 
Cash and cash equivalents, end of period
$
119,445
 
 
$
7,560
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
12,737
 
 
$
11,979
 
Refunds received for income tax
$
(186
)
 
$
(34,668
)
 
 
The accompanying notes are an integral part of these consolidated financial statements.

3

Table of Contents

ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, dollars in thousands except as noted)
 
(1)
Basis of Presentation
The consolidated financial statements include the accounts of Alon USA Energy, Inc. and its subsidiaries (collectively, “Alon”). All significant intercompany balances and transactions have been eliminated. These consolidated financial statements of Alon are unaudited and have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of Alon’s management, the information included in these consolidated financial statements reflects all adjustments, consisting of normal and recurring adjustments, which are necessary for a fair presentation of Alon’s consolidated financial position and results of operations for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the operating results that may be obtained for the year ending December 31, 2011.
The consolidated balance sheet as of December 31, 2010, has been derived from the audited financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Alon’s Annual Report on Form 10-K for the year ended December 31, 2010.
 
(2)
Segment Data
Alon’s revenues are derived from three operating segments: (i) refining and unbranded marketing, (ii) asphalt and (iii) retail and branded marketing. The reportable operating segments are strategic business units that offer different products and services. The segments are managed separately as each segment requires unique technology, marketing strategies and distinct operational emphasis. Each operating segment’s performance is evaluated primarily based on operating income.
(a)
Refining and Unbranded Marketing Segment
Alon’s refining and unbranded marketing segment includes sour and heavy crude oil refineries located in Big Spring, Texas, and Paramount, Bakersfield and Long Beach, California (the “California refineries”) and a light sweet crude oil refinery located in Krotz Springs, Louisiana. At these refineries, Alon refines crude oil into products including gasoline, diesel, jet fuel, petrochemicals, feedstocks, asphalts and other petroleum products, which are marketed primarily in the South Central, Southwestern and Western regions of the United States. Finished products and blendstocks are also marketed through sales and exchanges with other major oil companies, state and federal governmental entities, unbranded wholesale distributors and various other third parties. Alon also acquires finished products through exchange agreements and third-party suppliers.
(b)
Asphalt Segment
Alon’s asphalt segment includes the Willbridge, Oregon refinery and 12 refinery/terminal locations in Texas (Big Spring), California (Paramount, Long Beach, Elk Grove, Bakersfield and Mojave), Oregon (Willbridge), Washington (Richmond Beach), Arizona (Phoenix, Flagstaff and Fredonia), and Nevada (Fernley) (50% interest) as well as a 50% interest in Wright Asphalt Products Company, LLC (“Wright”) which specializes in marketing patented tire rubber modified asphalt products. Alon produces both paving and roofing grades of asphalt and, depending on the terminal, can manufacture performance-graded asphalts, emulsions and cutbacks. The operations in which Alon has a 50% interest (Fernley and Wright), are recorded under the equity method of accounting, and the investments are included as part of total assets in the asphalt segment data.
(c)
Retail and Branded Marketing Segment
Alon’s retail and branded marketing segment operates 304 convenience stores located primarily in Central and West Texas and New Mexico. These convenience stores typically offer various grades of gasoline, diesel fuel, general merchandise and food and beverage products to the general public, primarily under the 7-Eleven and FINA brand names. Alon’s branded marketing business markets gasoline and diesel under the FINA brand name, primarily in the Southwestern and South Central United States, through a network of approximately 640 locations, including Alon’s convenience stores. Historically, substantially all of the motor fuel sold through Alon’s convenience stores and the majority of the motor fuels marketed in Alon’s branded business have been supplied by Alon’s Big Spring refinery.
(d)
Corporate
Operations that are not included in any of the three segments are included in the corporate category. These operations consist primarily of corporate headquarters operating and depreciation expenses.

4

Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)
 

Segment data as of and for the three month periods ended March 31, 2011 and 2010, are presented below:
 
Refining and
Unbranded Marketing
 
Asphalt
 
Retail and Branded
Marketing
 
Corporate
 
Consolidated
Total
Three Months ended March 31, 2011
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
1,248,677
 
 
$
86,243
 
 
$
316,184
 
 
$
 
 
$
1,651,104
 
Intersegment sales/purchases
250,347
 
 
(23,487
)
 
(226,860
)
 
 
 
 
Depreciation and amortization
20,037
 
 
1,730
 
 
3,277
 
 
403
 
 
25,447
 
Operating income (loss)
79,289
 
 
(9,628
)
 
4,223
 
 
(591
)
 
73,293
 
Total assets
1,863,971
 
 
118,012
 
 
200,931
 
 
16,882
 
 
2,199,796
 
Turnaround, chemical catalyst and capital expenditures
23,278
 
 
660
 
 
1,345
 
 
65
 
 
25,348
 
 
 
Refining and
Unbranded Marketing
 
Asphalt
 
Retail and Branded
Marketing
 
Corporate
 
Consolidated
Total
Three Months ended March 31, 2010
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
286,144
 
 
$
67,141
 
 
$
226,028
 
 
$
 
 
$
579,313
 
Intersegment sales/purchases
196,896
 
 
(51,059
)
 
(145,837
)
 
 
 
 
Depreciation and amortization
20,954
 
 
1,717
 
 
3,420
 
 
231
 
 
26,322
 
Operating loss
(58,518
)
 
(18,179
)
 
(1,859
)
 
(419
)
 
(78,975
)
Total assets
1,686,285
 
 
191,198
 
 
189,952
 
 
16,211
 
 
2,083,646
 
Turnaround, chemical catalyst and capital expenditures
16,321
 
 
179
 
 
397
 
 
415
 
 
17,312
 
Operating income (loss) for each segment consists of net sales less cost of sales, direct operating expenses, selling, general and administrative expenses, depreciation and amortization, and gain (loss) on disposition of assets. Intersegment sales are intended to approximate wholesale market prices. Consolidated totals presented are after intersegment eliminations.
Total assets of each segment consist of net property, plant and equipment, inventories, cash and cash equivalents, accounts and other receivables and other assets directly associated with the segment’s operations. Corporate assets consist primarily of corporate headquarters information technology and administrative equipment.
 
(3)
Fair Value
The carrying amounts of Alon’s cash and cash equivalents, receivables, payables and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The reported amounts of short-term and long-term debt approximate fair value. Derivative financial instruments are carried at fair value, which is based on quoted market prices.
Alon must determine fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As required, Alon utilizes valuation techniques that maximize the use of observable inputs (levels 1 and 2) and minimize the use of unobservable inputs (level 3) within the fair value hierarchy. Alon generally applies the “market approach” to determine fair value. This method uses pricing and other information generated by market transactions for identical or comparable assets and liabilities. Assets and liabilities are classified within the fair value hierarchy based on the lowest level (least observable) input that is significant to the measurement in its entirety.

5

Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)
 

The following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the consolidated balance sheets at March 31, 2011, and December 31, 2010, respectively:
 
Quoted Prices in
Active Markets
For Identical
Assets or
Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Consolidated
Total
Three Months ended March 31, 2011
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
560
 
 
$
 
 
$
 
 
$
560
 
Liabilities:
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
 
2,553
 
 
 
 
2,553
 
Commodity contracts (call options)
 
 
34,486
 
 
 
 
34,486
 
Interest rate swaps
 
 
6,579
 
 
 
 
6,579
 
Year ended December 31, 2010
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
1,214
 
 
$
 
 
$
 
 
$
1,214
 
Liabilities:
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
 
681
 
 
 
 
681
 
Commodity contracts (call options)
 
 
8,876
 
 
 
 
8,876
 
Interest rate swaps
 
 
7,501
 
 
 
 
7,501
 
 
(4)
Derivative Financial Instruments
Commodity Derivatives — Mark to Market
Alon selectively utilizes commodity derivatives to manage its exposure to commodity price fluctuations and uses crude oil, refined product and precious metal (catalyst) commodity derivative contracts to reduce risk associated with potential price changes on committed obligations. Alon does not speculate using derivative instruments. There is not a significant credit risk on Alon’s derivative instruments which are transacted through counterparties meeting established collateral and credit criteria.
Cash Flow Hedges
To designate a derivative as a cash flow hedge, Alon documents at the inception of the hedge the assessment that the derivative will be highly effective in offsetting expected changes in cash flows from the item hedged. This assessment, which is updated at least quarterly, is generally based on the most recent relevant historical correlation between the derivative and the item hedged. If, during the term of the derivative, the hedge is determined to be no longer highly effective, hedge accounting is prospectively discontinued and any remaining unrealized gains or losses, based on the effective portion of the derivative at that date, are reclassified to earnings when the underlying transaction occurs.
Interest Rate Derivatives. Alon selectively utilizes interest rate related derivative instruments to manage its exposure to floating-rate debt instruments. Alon periodically uses interest rate swap agreements to manage its floating to fixed rate position by converting certain floating-rate debt to fixed-rate debt. As of March 31, 2011, Alon had an interest rate swap agreement with a notional amount of $100,000, a remaining period of two years and a fixed interest rate of 4.25%. This swap was accounted for as a cash flow hedge.
For cash flow hedges, gains and losses reported in equity are reclassified into interest expense when the forecasted transaction affects income. During the three months ended March 31, 2011 and 2010, Alon recognized in equity unrealized after-tax gains of $598 and $1,020, respectively, for the fair value measurement of the interest rate swap agreements. There were no amounts reclassified from equity into interest expense as a result of the discontinuance of cash flow hedge accounting.
For the three months ended March 31, 2011 and 2010, there was no hedge ineffectiveness recognized in income. No component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness.
Commodity Derivatives. In May 2008, as part of financing the acquisition of the Krotz Springs refinery, Alon entered into futures contracts for the forward purchase of crude oil and the forward sale of heating oil of 14,849,750 barrels. These futures contracts were designated as cash flow hedges for accounting purposes. In the fourth quarter of 2008, Alon determined

6

Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)
 

during its retrospective assessment of hedge effectiveness that the hedge was no longer highly effective. Cash flow hedge accounting was discontinued in the fourth quarter of 2008 and all changes in value subsequent to the discontinuance were recognized into earnings. An after-tax loss of $377 for the three months ended March 31, 2010 was reclassified from equity to earnings due to the discontinuance of cash flow hedge accounting. No component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness.
The following table presents the effect of derivative instruments on the consolidated statements of financial position.
 
 
As of March 31, 2011
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
 
 
 
Balance Sheet
 
 
 
Location
 
Fair Value
 
Location
 
Fair Value
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
 
$
 
 
Accrued liabilities
 
$
(2,553
)
Commodity contracts (call options)
 
 
 
 
Accrued liabilities
 
(25,360
)
Commodity contracts (futures and forwards)
Accounts receivable
 
1,557
 
 
Accrued liabilities
 
(997
)
Commodity contracts (call options)
 
 
 
 
Other non-current liabilities
 
(9,126
)
Total derivatives not designated as hedging instruments
 
 
$
1,557
 
 
 
 
$
(38,036
)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap
 
 
$
 
 
Other non-current liabilities
 
$
(6,579
)
Total derivatives designated as hedging instruments
 
 
 
 
 
 
(6,579
)
Total derivatives
 
 
$
1,557
 
 
 
 
$
(44,615
)
 
As of December 31, 2010
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
 
 
 
Balance Sheet
 
 
 
Location
 
Fair Value
 
Location
 
Fair Value
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
 
$
 
 
Accounts Payable
 
$
(681
)
Commodity contracts (call options)
 
 
 
 
Accrued liabilities
 
(5,748
)
Commodity contracts (futures and forwards)
Accounts receivable
1,364
 
 
Accrued liabilities
 
(150
)
Commodity contracts (call options)
 
 
 
 
Other non-current
liabilities
 
(3,128
)
Total derivatives not designated as hedging instruments
 
 
$
1,364
 
 
 
 
$
(9,707
)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap
 
 
$
 
 
Other non-current
liabilities
 
$
(7,501
)
Total derivatives designated as hedging instruments
 
 
 
 
 
 
(7,501
)
Total derivatives
 
 
$
1,364
 
 
 
 
$
(17,208
)

7

Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)
 

The following tables present the effect of derivative instruments on Alon’s consolidated statements of operations and accumulated other comprehensive income (“OCI”).
Cash Flow Hedging Relationships
 
Gain (Loss) Recognized
in OCI
 
Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Gain (Loss) Reclassified
from Accumulated OCI into
Income (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)
 
 
 
 
Location
 
Amount
 
Location
 
Amount
For the Three Months Ended March 31, 2011
 
 
 
 
 
 
 
 
Interest rate swap
 
$
922
 
 
Interest expense
 
$
(975
)
 
 
 
$
 
Total derivatives
 
$
922
 
 
 
 
$
(975
)
 
 
 
$
 
Cash Flow Hedging Relationships
 
Gain (Loss) Recognized
in OCI
 
Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Gain (Loss) Reclassified
from Accumulated OCI into
Income (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)
 
 
 
 
Location
 
Amount
 
Location
 
Amount
For the Three Months Ended March 31, 2010
 
 
 
 
 
 
 
 
Commodity contracts (heating oil swaps)
 
$
 
 
Cost of sales
 
$
(598
)
 
 
 
$
 
Interest rate swaps
 
1,569
 
 
Interest expense
 
(3,558
)
 
 
 
 
Total derivatives
 
$
1,569
 
 
 
 
$
(4,156
)
 
 
 
$
 
Derivatives not designated as hedging instruments:
 
Gain (Loss) Recognized in Income
 
Location
 
Amount
For the Three Months Ended March 31, 2011
 
 
 
Commodity contracts (futures & forwards)
Cost of sales
 
$
(2,070
)
Commodity contracts (heating oil swaps)
Cost of sales
 
5,259
 
Commodity contracts (call options)
Other income (loss), net
 
(31,919
)
Total derivatives
 
 
$
(28,730
)
 
Gain (Loss) Recognized in Income
 
Location
 
Amount
For the Three Months Ended March 31, 2010
 
 
 
Commodity contracts (futures & forwards)
Cost of sales
 
$
1,473
 
Commodity contracts (heating oil swaps)
Cost of sales
 
(106
)
Total derivatives
 
 
$
1,367
 
 
(5)
Inventories
Alon’s inventories are stated at the lower of cost or market. Cost is determined under the last-in, first-out (LIFO) method for crude oil, refined products, asphalt, and blendstock inventories. Materials and supplies are stated at average cost. Cost for convenience store merchandise inventories is determined under the retail inventory method and cost for convenience store fuel inventories is determined under the first-in, first-out (FIFO) method.

8

Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)
 

Carrying value of inventories consisted of the following:
 
 
March 31,
2011
 
December 31,
2010
Crude oil, refined products, asphalt and blendstocks
$
36,599
 
 
$
60,588
 
Crude oil inventory consigned to others
63,028
 
 
38,445
 
Materials and supplies
19,229
 
 
19,059
 
Store merchandise
17,824
 
 
17,237
 
Store fuel
6,904
 
 
5,721
 
Total inventories
$
143,584
 
 
$
141,050
 
Crude oil, refined products, asphalt and blendstock inventories totaled 2,038 barrels and 2,441 barrels as of March 31, 2011 and December 31, 2010, respectively. A reduction of inventory volumes in 2011 resulted in a liquidation of LIFO inventory layers associated with refined products and asphalt carried at lower costs which prevailed in previous years. The liquidation decreased cost of sales by approximately $42,642 for the three months ended March 31, 2011. An increase in LIFO inventory associated with crude oil resulted in an increase to cost of sales of $20,182 for the three months ended March 31, 2011.
Market values of crude oil, refined products, asphalt and blendstock inventories exceeded LIFO costs by $110,366 and $115,072 at March 31, 2011 and December 31, 2010, respectively.
Crude oil inventory consigned to others represents inventory located at storage facilities that were sold to third parties with an obligation by Alon to repurchase the inventory at the end of the respective agreements. As a result of this requirement to repurchase inventory, no revenue was recorded on these transactions and the inventory volumes remain valued under the LIFO method.
Alon had 976 barrels and 674 barrels of crude oil consigned to others at March 31, 2011 and December 31, 2010, respectively. Alon recorded liabilities associated with this consigned inventory of $27,034 and $27,034 in accounts payable and $61,467 and $32,433 in other non-current liabilities at March 31, 2011 and December 31, 2010, respectively.
Additionally, Alon recorded accounts receivable of $1,416 and $1,073 at March 31, 2011 and December 31, 2010, respectively, for forward commitments related to month-end consignment inventory target levels differing from projected levels and the associated pricing with these inventory level differences.
Normal Purchase Normal Sale
Effective January 1, 2011, Alon elected to account for all inventory financing agreements it has under the "Normal Purchase Normal Sales" exemption of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 815, Derivatives and Hedging. This exemption applies to situations where commodities are physically delivered. In previous periods Alon recorded changes in the fair value of the estimated settlement liability of these contracts through the statement of operations. Beginning January 1, 2011 and forward, changes in fair value of the estimated settlement liability will no longer be recorded due to the Normal Purchase Normal Sale exemption. If the contracts were settled March 31, 2011, the payment would be in excess of the liability recorded by $17,754.
 

9

Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)
 

(6)
Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following:
 
 
March 31,
2011
 
December 31,
2010
Refining facilities
$
1,651,381
 
 
$
1,628,039
 
Pipelines and terminals
40,686
 
 
40,686
 
Retail
138,954
 
 
137,771
 
Other
17,247
 
 
16,773
 
Property, plant and equipment, gross
1,848,268
 
 
1,823,269
 
Less accumulated depreciation
(356,926
)
 
(334,737
)
Property, plant and equipment, net
$
1,491,342
 
 
$
1,488,532
 
 
(7)
Additional Financial Information
The tables that follow provide additional financial information related to the consolidated financial statements.
(a)
Other Assets, Net
 
 
March 31,
2011
 
December 31,
2010
Deferred turnaround and chemical catalyst cost
$
20,566
 
 
$
23,047
 
Environmental receivables
17,170
 
 
17,426
 
Deferred debt issuance costs
16,453
 
 
16,284
 
Intangible assets, net
7,780
 
 
7,901
 
Receivable from supply agreements
22,095
 
 
5,805
 
Other, net
14,677
 
 
11,072
 
Total other assets
$
98,741
 
 
$
81,535
 
(b)
Accrued Liabilities and Other Non-Current Liabilities
 
 
March 31,
2011
 
December 31,
2010
Accrued Liabilities:
 
 
 
Taxes other than income taxes, primarily excise taxes
$
19,645
 
 
$
23,584
 
Employee costs
10,236
 
 
11,571
 
Commodity contracts
28,910
 
 
5,898
 
Accrued finance charges
16,320
 
 
12,246
 
Environmental accrual
7,349
 
 
7,349
 
Valero earnout liability
4,375
 
 
6,562
 
Other
26,811
 
 
21,144
 
Total accrued liabilities
$
113,646
 
 
$
88,354
 
 
 
 
 
Other Non-Current Liabilities:
 
 
 
Pension and other postemployment benefit liabilities, net
$
33,592
 
 
$
33,157
 
Environmental accrual (Note 14)
61,092
 
 
61,657
 
Asset retirement obligations
11,104
 
 
10,932
 
Interest rate swap valuations
6,579
 
 
7,501
 
Consignment inventory
61,467
 
 
32,433
 
Commodity contracts
9,126
 
 
3,128
 
Other
21,963
 
 
12,168
 
Total other non-current liabilities
$
204,923
 
 
$
160,976
 

10

Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)
 

(c)
Comprehensive Income (Loss)
The following table displays the computation of total comprehensive income (loss):
 
 
For the Three Months Ended
 
March 31,
 
2011
 
2010
Income (loss) before non-controlling interest in income (loss) of subsidiaries
$
13,225
 
 
$
(56,746
)
Other comprehensive gain, net of tax:
 
 
 
Unrealized gain on cash flow hedges, net of tax
598
 
 
1,397
 
Total other comprehensive income, net of tax
598
 
 
1,397
 
Comprehensive gain (loss)
13,823
 
 
(55,349
)
Comprehensive income (loss) attributable to non-controlling interest
160
 
 
(3,761
)
Comprehensive income (loss) attributable to common stockholders
$
13,663
 
 
$
(51,588
)
The following table displays the components of accumulated other comprehensive loss, net of tax.
 
March 31,
2011
 
December 31,
2010
Unrealized losses on cash flow hedges, net of tax
$
(4,743
)
 
$
(5,341
)
Pension and post-employment benefits, net of tax
(16,576
)
 
(16,576
)
Accumulated other comprehensive loss, net of tax
$
(21,319
)
 
$
(21,917
)
 
(8)
Postretirement Benefits
Alon has three defined benefit pension plans covering substantially all of its refining and unbranded marketing segment employees, excluding West Coast employees. The benefits are based on years of service and the employee’s final average monthly compensation. Alon’s funding policy is to contribute annually not less than the minimum required nor more than the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those benefits expected to be earned in the future. Alon’s estimated contributions during 2011 to its pension plans has not changed significantly from amounts previously disclosed in Alon’s consolidated financial statements for the year ended December 31, 2010. For the three months ended March 31, 2011 and 2010, Alon contributed $1,100 and $735, respectively, to its qualified pension plans.
The components of net periodic benefit cost related to Alon’s benefit plans were as follows for the three months ended March 31, 2011 and 2010:
 
 
For the Three Months Ended
 
March 31,
 
2011
 
2010
Components of net periodic benefit cost:
 
 
 
Service cost
$
914
 
 
$
1,018
 
Interest cost
1,035
 
 
946
 
Expected return on plan assets
(933
)
 
(905
)
Amortization of net loss
448
 
 
386
 
Net periodic benefit cost
$
1,464
 
 
$
1,445
 
 

11

Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)
 

(9)
Indebtedness
Debt consisted of the following:
 
 
March 31,
2011
 
December 31,
2010
Term loan credit facility
$
428,625
 
 
$
429,750
 
Revolving credit facilities
198,972
 
 
185,120
 
Senior secured notes
207,832
 
 
207,378
 
Retail credit facilities
111,817
 
 
94,057
 
Total debt
947,246
 
 
916,305
 
Less current portion
(46,983
)
 
(11,512
)
Total long-term debt
$
900,263
 
 
$
904,793
 
Alon Brands Term Loans. In March 2011, Alon Brands issued $30,000 five-year unsecured notes (the "Alon Brands Term Loans") to a group of investors including certain shareholders of Alon Israel and their affiliates. The notes will mature in March 2016. The group of investors have the right to request that principal payments of the loan will be paid in four equal, consecutive annual payments, starting in March 2013. Otherwise, the principal amount will be paid at the maturity date in March 2016.
Borrowings under the Alon Brands Term Loans bear interest at a rate of 7% per annum, payable on a semi-annual basis, provided that the interest rate will increase to 9% per annum solely with respect to the portion of the loan equal to the unexercised portion of the warrants described below.
The Alon Brands Term Loans contain certain restrictive covenants, including maintenance financial covenants.
In conjunction with the issuance of the notes, Alon issued 3,092,783 warrants to purchase shares of Alon USA Energy common stock at an initial exercise price per share of $9.70. The warrants are exercisable in whole or in part until March 2016, five years from the date of issuance.
At March 31, 2011, the Alon Brands Term Loan had an outstanding balance of $19,012 (net of unamortized discount). Alon is utilizing the effective interest method to amortize the discount over the life of facility.
 
(10)
Stock-Based Compensation
Alon has two employee incentive compensation plans, (i) the Amended and Restated 2005 Incentive Compensation Plan and (ii) the 2000 Incentive Stock Compensation Plan.
(a)
Amended and Restated 2005 Incentive Compensation Plan (share value in dollars)
Alon’s original incentive compensation plan, the Alon USA Energy, Inc. 2005 Incentive Compensation Plan, was approved by its stockholders in 2006. In May 2010, Alon’s stockholders approved an amended and restated incentive compensation plan, the Alon USA Energy, Inc. Amended and Restated 2005 Incentive Compensation Plan, which is a component of Alon’s overall executive incentive compensation program. The Amended and Restated 2005 Incentive Compensation Plan permits the granting of awards in the form of options to purchase common stock, Stock Appreciation Rights (“SARs”), restricted shares of common stock, restricted common stock units, performance shares, performance units and senior executive plan bonuses to Alon’s directors, officers and key employees.
Restricted Stock. Non-employee directors are awarded an annual grant of shares of restricted stock valued at $25. The restricted shares granted to the non-employee directors vest over a period of three years, assuming continued service at vesting.
Compensation expense for the restricted stock grants amounted to $12 and $12 for the three months ended March 31, 2011 and 2010, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations. There is no material difference between intrinsic value and fair value under FASB ASC Topic 718-10 for pro forma disclosure purposes.

12

Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)
 

The following table summarizes the restricted share activity from January 1, 2010:
 
 
 
 
Weighted
Average
Grant Date
Fair Values
Nonvested Shares
 
Shares
 
(per share)
Nonvested at January 1, 2010
 
10,226
 
 
$
14.67
 
Granted
 
10,416
 
 
7.20
 
Vested
 
(4,473
)
 
16.77
 
Forfeited
 
 
 
 
Nonvested at December 31, 2010
 
16,169
 
 
$
9.28
 
Granted
 
 
 
 
Vested
 
 
 
 
Forfeited
 
 
 
 
Nonvested at March 31, 2011
 
16,169
 
 
$
9.28
 
As of March 31, 2011, there was $51 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Amended and Restated 2005 Incentive Compensation Plan. That cost is expected to be recognized over a weighted-average period of 1.6 years. The fair value of shares vested in 2011 was $0.
Stock Appreciation Rights. Through December 31, 2010, Alon has granted awards of 580,915 SARs to certain officers and key employees of Alon of which 62% of these SARs have a grant price of $28.46 and the remaining SARs have grant prices ranging from $10.00 to $16.00.
In January 2011, Alon granted awards of 18,250 SARs to certain officers and key employees at a grant price equal to $16.00. The January 2011 SARs vest as follows: 50% on January 5, 2013, 25% on January 5, 2014, and 25% on January 5, 2015, and are exercisable during the 365-day period following the date of vesting.
When exercised, all SARs are convertible into shares of Alon common stock, the number of which will be determined at the time of exercise by calculating the difference between the closing price of Alon common stock on the exercise date and the grant price of the SARs (the “Spread”), multiplying the Spread by the number of SARs being exercised and then dividing the product by the closing price of Alon common stock on the exercise date.
Compensation expense for the SARs grants amounted to $242 and $208 for the three months ended March 31, 2011 and 2010, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations.
(b)
2000 Incentive Stock Compensation Plan
On August 1, 2000, Alon Assets, Inc. (“Alon Assets”) and Alon USA Operating, Inc. (“Alon Operating”), majority owned, fully consolidated subsidiaries of Alon, adopted the 2000 Incentive Stock Compensation Plan pursuant to which Alon’s board of directors may grant stock options to certain officers and members of executive management. The 2000 Incentive Stock Compensation Plan authorized grants of options to purchase up to 16,154 shares of common stock of Alon Assets and 6,066 shares of common stock of Alon Operating. All authorized options were granted in 2000 and there have been no additional options granted under this plan. All stock options have ten-year terms. The options are subject to accelerated vesting and become fully exercisable if Alon achieves certain financial performance and debt service criteria. Upon exercise, Alon will reimburse the option holder for the exercise price of the shares and under certain circumstances the related federal and state taxes payable as a result of such exercises (gross-up liability). This plan was closed to new participants subsequent to August 1, 2000, the initial grant date. All stock options have been exercised at March 31, 2011. Total compensation expense recognized under this plan was $0 and $13 for the three months ended March 31, 2011 and 2010, and is included in selling, general and administrative expenses in the consolidated statements of operations.

13

Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)
 

The following table summarizes the stock option activity for Alon Assets and Alon Operating for the three months ended March 31, 2011, and for the year ended December 31, 2010:
 
 
Alon Assets
 
Alon Operating
 
Number of
Options
Outstanding
 
Weighted
Average
Exercise
Price
 
Number of
Options
Outstanding
 
Weighted
Average
Exercise
Price
Outstanding at January 1, 2010
2,793
 
 
$
100
 
 
1,049
 
 
$
100
 
Granted
 
 
 
 
 
 
 
Exercised
(2,187
)
 
100
 
 
(822
)
 
100
 
Forfeited and expired
 
 
 
 
 
 
 
Outstanding at December 31, 2010
606
 
 
$
100
 
 
227
 
 
$
100
 
Granted
 
 
 
 
 
 
 
Exercised
(606
)
 
100
 
 
(227
)
 
100
 
Forfeited and expired
 
 
 
 
 
 
 
Outstanding at March 31, 2011
 
 
$
 
 
 
 
$
 
The intrinsic value of total options exercised in 2011 was $471.
 
(11)
Stockholders’ Equity (per share in dollars)
Common Stock Dividends
On March 15, 2011, Alon paid a regular quarterly cash dividend of $0.04 per share on Alon’s common stock to stockholders of record at the close of business on March 1, 2011.
Warrants
In conjunction with the issuance of the Alon Brands Term Loans, Alon issued 3,092,783 warrants to purchase shares of Alon USA Energy, Inc. common stock at an initial exercise price per share of $9.70. The warrants are exercisable in whole or in part until March 2016, five years from the date of issuance.
Standby Equity Distribution Agreement
In January 2011, Alon entered into a Standby Equity Distribution Agreement (the "SEDA”) with YA Global Master SPV Ltd. ("YA Global”) to purchase up to $25,000 of Alon USA Energy, Inc. common stock ("Common Stock"). At any time during the effective period of the agreement, Alon may require YA Global to purchase shares of Common Stock by delivering an advance notice (as provided for in the SEDA) to YA Global. The purchase price of the Common Stock is 98.5% of the market price during the five consecutive trading days after the receipt of the advance notice is provided to YA Global. Par value of the Common Stock is $0.01 per share. In no event shall the number of shares of Common Stock owned by YA Global and its affiliates exceed 4.99% of the outstanding Common Stock at that time. The SEDA automatically terminates in January 2013. During the first quarter of 2011, Alon sold $10,100 of Common Stock.
 
(12)
Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated as net income (loss) available to common stockholders divided by the average number of participating shares of common stock outstanding. Diluted earnings per share include the dilutive effect of SARs using the treasury stock method and the dilutive effect of convertible preferred shares and warrants using the if-converted method.

14

Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)
 

The calculation of earnings (loss) per share, basic and diluted, for the three months ended March 31, 2011 and 2010, is as follows:
 
Three Months Ended
 
March 31,
 
2011
 
2010
Net income (loss) available to common stockholders
$
13,065
 
 
$
(52,942
)
Average number of shares of common stock outstanding
54,549
 
 
54,161
 
Dilutive SARs, convertible preferred stock and warrants
5,935
 
 
 
Average number of shares of common stock outstanding assuming dilution
60,484
 
 
54,161
 
Income (loss) per share – basic
$
0.24
 
 
$
(0.98
)
Income (loss) per share – diluted
$
0.22
 
 
$
(0.98
)
 
(13)
Related-Party Transactions
Alon Brands Term Loans    
In March 2011, Alon Brands issued $12,000 five-year unsecured notes to certain shareholders of Alon Israel and their affiliates from the Alon Brands Term Loans. The notes will mature in March 2016. The shareholders have the right to request that principal payments of the loan will be paid in four equal, consecutive annual payments, starting in March 2013. Otherwise, the principal amount will be paid at the maturity date in March 2016.
Borrowings under the Alon Brands Term Loans bear interest at a rate of 7% per annum, payable on a semi-annual basis, provided that the interest rate will increase to 9% per annum solely with respect to the portion of the loan equal to the unexercised portion of the warrants described below.
The Alon Brands Term Loans contains certain restrictive covenants, including maintenance financial covenants.
In conjunction with the issuance of the notes, Alon issued to certain shareholders of Alon Israel 1,237,113 warrants to purchase shares of Alon USA Energy, Inc. common stock at an initial exercise price per share of $9.70. The warrants are exercisable in whole or in part until March 2016, five years from the date of issuance.
 
(14)
Commitments and Contingencies
(a)
Commitments
In the normal course of business, Alon has long-term commitments to purchase utilities such as natural gas, electricity and water for use by its refineries, terminals, pipelines and retail locations. Alon is also party to various refined product and crude oil supply and exchange agreements. These agreements are typically short-term in nature or provide terms for cancellation.
Supply and Offtake Agreement with J. Aron & Company
In February 2011, Alon entered into a Supply and Offtake Agreement, (the “Supply and Offtake Agreement”), with J. Aron & Company (“J. Aron”). Pursuant to the Supply and Offtake Agreement, (i) J. Aron agreed to sell to Alon, and Alon agreed to buy from J. Aron, at market price, crude oil for processing at the Big Spring refinery and (ii) Alon agreed to sell, and J. Aron agreed to buy, at market price, certain refined products produced at the Big Spring refinery.
In connection with the execution of the Supply and Offtake Agreement, Alon also entered into agreements that provided for the sale, at market price, of Alon's crude oil and certain refined product inventories to J. Aron, the lease to J. Aron of crude oil and refined product storage tanks located at the Big Spring refinery, and an agreement to identify prospective purchasers of refined products on J. Aron’s behalf. The Supply and Offtake Agreement has an initial term that expires in May 2016. J. Aron may elect to terminate the agreement prior to the initial term beginning in May 2013, provided Alon receives notice of termination at least six months prior to that date. Following expiration or termination of the Supply and Offtake Agreement, Alon is obligated to purchase the crude oil and refined product inventories then owned by J. Aron and located at the Big Spring refinery.

15

Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)
 

(b)
Contingencies
Alon is involved in various other claims and legal actions arising in the ordinary course of business. Alon believes the ultimate disposition of these matters will not have a material effect on Alon’s financial position, results of operations or liquidity.
(c)
Environmental
Alon is subject to federal, state, and local environmental laws and regulations. These rules regulate the discharge of materials into the environment and may require Alon to incur future obligations to investigate the effects of the release or disposal of certain petroleum, chemical, and mineral substances at various sites; to remediate or restore these sites; to compensate others for damage to property and natural resources and for remediation and restoration costs. These possible obligations relate to sites owned by Alon and associated with past or present operations. Alon is currently participating in environmental investigations, assessments and cleanups under these regulations at refineries, service stations, pipelines and terminals. Alon may in the future be involved in additional environmental investigations, assessments and cleanups. The magnitude of future costs will depend on factors such as the unknown nature and contamination at many sites, the timing, extent and method of the remedial actions which may be required, and the determination of Alon’s liability in proportion to other responsible parties.
Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefit are expensed. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Substantially all amounts accrued are expected to be paid out over the next 15 years. The level of future expenditures for environmental remediation obligations cannot be determined with any degree of reliability.
Alon has accrued environmental remediation obligations of $68,441 ($7,349 current payable and $61,092 non-current liability) at March 31, 2011, and $69,006 ($7,349 current payable and $61,657 non-current liability) at December 31, 2010.
In connection with the acquisition of the Bakersfield refinery on June 1, 2010, a subsidiary of Alon entered into an indemnification agreement with a prior owner for remediation expenses of conditions that existed at the refinery on the acquisition date. Alon is required to make indemnification claims to the prior owner by March 15, 2015. Alon has recorded a current receivable of $2,675 and $2,675 and a non-current receivable of $14,243 and $14,386 at March 31, 2011 and December 31, 2010, respectively.
Paramount Petroleum Corporation has indemnification agreements with a prior owner for part of the remediation expenses at its refineries and offsite tank farm and, as a result, has recorded a current receivable of $1,323 and $1,323 and non-current receivable of $2,927 and $3,039 at March 31, 2011 and December 31, 2010, respectively.
 
(15)
Subsequent Event
Dividend Declared
On May 5, 2011, Alon declared its regular quarterly cash dividend of $0.04 per share on Alon’s common stock, payable on June 1, 2011, to stockholders of record at the close of business on June 15, 2011.
.
 

16

Table of Contents

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010. In this document, the words “Alon,” “the Company,” “we” and “our” refer to Alon USA Energy, Inc. and its subsidiaries.
Table of Contents

Forward-Looking Statements
Certain statements contained in this report and other materials we file with the SEC, or in other written or oral statements made by us, other than statements of historical fact, are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We have used the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “will,” “future” and similar terms and phrases to identify forward-looking statements.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows.
Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, the following:
changes in general economic conditions and capital markets;
changes in the underlying demand for our products;
the availability, costs and price volatility of crude oil, other refinery feedstocks and refined products;
changes in the sweet/sour spread;
changes in the light/heavy spread;
changes in the spread between West Texas Intermediate crude oil and Light Louisiana Sweet and Heavy Louisiana Sweet crude oils, as well as California crudes such as Buena Vista;
the effects of transactions involving forward contracts and derivative instruments;
actions of customers and competitors;
changes in fuel and utility costs incurred by our facilities;
disruptions due to equipment interruption, pipeline disruptions or failure at our or third-party facilities;
the execution of planned capital projects;
adverse changes in the credit ratings assigned to our trade credit and debt instruments;
the effects of and cost of compliance with current and future state and federal environmental, economic, safety and other laws, policies and regulations;
operating hazards, natural disasters such as flooding, casualty losses and other matters beyond our control;
realization of synergies and accretion to reported earnings from our acquisition of the Bakersfield refinery;
integration of the operations and employees of the Bakersfield refinery and the timing of such integration;
the global financial crisis’ impact on our business and financial condition; and
the other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2010 under the caption “Risk Factors”.
Any one of these factors or a combination of these factors could materially affect our future results of operations and could influence whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required by the securities laws to do so.

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Company Overview
We are an independent refiner and marketer of petroleum products operating primarily in the South Central, Southwestern and Western regions of the United States. Our crude oil refineries are located in Texas, California, Oregon and Louisiana and have a combined throughput capacity of approximately 250,000 barrels per day (“bpd”). Our refineries produce petroleum products including various grades of gasoline, diesel fuel, jet fuel, petrochemicals, petrochemical feedstocks, asphalt, and other petroleum-based products.
Refining and Unbranded Marketing Segment. Our refining and unbranded marketing segment includes sour and heavy crude oil refineries located in Big Spring, Texas; and Paramount, Bakersfield and Long Beach, California; and a light sweet crude oil refinery located in Krotz Springs, Louisiana. We refer to the Long Beach, Bakersfield and Paramount refineries together as our “California refineries.” The refineries in our refining and unbranded marketing segment have a combined throughput capacity of approximately 240,000 bpd. At these refineries we refine crude oil into petroleum products, including gasoline, diesel fuel, jet fuel, petrochemicals, feedstocks and asphalts, which are marketed primarily in the South Central, Southwestern, and Western United States.
We market transportation fuels produced at our Big Spring refinery in West and Central Texas, Oklahoma, New Mexico and Arizona. We refer to our operations in these regions as our “physically integrated system” because we supply our retail and branded marketing segment convenience stores and unbranded distributors in this region with motor fuels produced at our Big Spring refinery and distributed through a network of pipelines and terminals which we either own or have access to through leases or long-term throughput agreements.
We market refined products produced from our California refineries to wholesale distributors, other refiners and third parties primarily on the West Coast. We plan to integrate the Bakersfield hydrocracker unit by processing vacuum gas oil produced at our other California refineries.
The Krotz Springs refining processing units are structured to yield approximately 101.5% of total feedstock input, meaning that for each 100 barrels of crude oil and feedstocks input into the refinery, it produces 101.5 barrels of refined products. Of the 101.5%, on average 99.0% is light finished products such as gasoline and distillates, including diesel and jet fuel, petrochemical feedstocks and liquefied petroleum gas, and the remaining 2.5% is primarily heavy oils. We market refined products from Krotz Springs to wholesale distributors, other refiners, and third parties. The refinery’s location provides access to upriver markets on the Mississippi and Ohio Rivers and its docking facilities along the Atchafalaya River allow barge access. The refinery also uses its direct access to the Colonial Pipeline to transport products to markets in the Southern and Eastern United States.
Asphalt Segment. Our asphalt segment markets asphalt produced at our Big Spring and California refineries included in the refining and marketing segment and at our Willbridge, Oregon refinery. Asphalt produced by the refineries in our refining and marketing segment is transferred to the asphalt segment at prices substantially determined by reference to the cost of crude oil, which is intended to approximate wholesale market prices. Our asphalt segment markets asphalt through 12 refinery/terminal locations in Texas (Big Spring), California (Paramount, Long Beach, Elk Grove, Bakersfield and Mojave), Oregon (Willbridge), Washington (Richmond Beach), Arizona (Phoenix, Flagstaff and Fredonia) and Nevada (Fernley) (50% interest) as well as a 50% interest in Wright Asphalt Products Company, LLC (“Wright”). We produce both paving and roofing grades of asphalt, including performance-graded asphalts, emulsions and cutbacks.
Retail and Branded Marketing Segment. Our retail and branded marketing segment operates 304 convenience stores located primarily in Central and West Texas and New Mexico. These convenience stores typically offer various grades of gasoline, diesel fuel, general merchandise and food and beverage products to the general public, primarily under the 7-Eleven and FINA brand names. Substantially all of the motor fuel sold through our retail operations and the majority of the motor fuel marketed in our branded business is supplied by our Big Spring refinery. In 2011, approximately 89% of the motor fuel requirements of our branded marketing operations, including retail operations, were supplied by our Big Spring refinery. Branded distributors that are not part of our integrated supply system, primarily in Central Texas, are supplied with motor fuels we obtain from third-party suppliers.
We market gasoline and diesel under the FINA brand name through a network of approximately 640 locations, including our convenience stores. Approximately 53% of the gasoline and 19% of the diesel motor fuel produced at our Big Spring refinery was transferred to our retail and branded marketing segment at prices substantially determined by reference to commodity pricing information published by Platts. Additionally, our retail and branded marketing segment licenses the use of the FINA brand name and provides credit card processing services to approximately 260 licensed locations that are not under fuel supply agreements with us.
 

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First Quarter Operational and Financial Highlights
Operating income for the first quarter of 2011 was $73.3 million, compared to an operating loss of $(79.0) million in the same period last year. Operating income increased principally due to higher refinery throughput and margins, higher retail fuel margins and motor fuel sales volumes. Other operational and financial highlights for the first quarter of 2011 include the following:
Combined refinery throughput for the three months ended March 31, 2011, averaged 135,638 bpd, consisting of 62,181 bpd at the Big Spring refinery and 73,457 bpd at the Krotz Springs refinery, compared to a combined average throughput of 61,047 bpd for the three months ended March 31, 2010, consisting of 42,784 bpd at the Big Spring refinery and 18,263 bpd at the California refineries. The California refineries were shutdown most of the first quarter of 2011 to redeploy resources for the integration of the Bakersfield refinery acquired in June 2010. The Krotz Springs refinery was shut down during the first quarter of 2010 for scheduled turnaround work.
Operating margin at the Big Spring refinery was $19.50 per barrel for the first quarter of 2011, compared to $4.91 per barrel for the same period in 2010. The operating margin in 2011 was positively impacted by higher Gulf Coast 3/2/1 crack spreads and WTI to WTS crude oil spreads.
Operating margin at the Krotz Springs refinery was $5.06 per barrel for the first quarter of 2011.
Asphalt margins in the first quarter of 2011 were $18.18 per ton compared to $(28.50) per ton in the first quarter of 2010. The average blended asphalt sales price increased 9.3% from $463.53 per ton in the first quarter of 2010 to $506.55 per ton in the first quarter of 2011 and the average non-blended asphalt sales price decreased 9.4% from $333.82 per ton in the first quarter of 2010 to $302.57 per ton in the first quarter of 2011. Asphalt sales volumes in the first quarter of 2011 were 192 thousand tons compared to 151 thousand tons in the first quarter of 2010.
Retail and branded marketing segment retail fuel sales gallons increased by 12.0% from 32.7 million gallons in the first quarter of 2010 to 36.7 million gallons in the first quarter of 2011. Our branded fuel sales increased by 21.4% from 70.5 million gallons in the first quarter of 2010 to 85.6 million gallons in the first quarter of 2011. Operating income for our retail and branded marketing segment was $4.2 million for the first quarter of 2011 compared to an operating loss of $(1.9) million  for the same period in 2010.
On March 15, 2011, Alon paid a regular quarterly cash dividend of $0.04 per share on Alon’s common stock to stockholders of record at the close of business on March 1, 2011.
 
Major Influences on Results of Operations
Refining and Unbranded Marketing. Earnings and cash flow from our refining and unbranded marketing segment are primarily affected by the difference between refined product prices and the prices for crude oil and other feedstocks. The cost to acquire crude oil and other feedstocks and the price of the refined products we ultimately sell depend on numerous factors beyond our control, including the supply of, and demand for, crude oil, gasoline and other refined 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. While our sales and operating revenues fluctuate significantly with movements in crude oil and refined product prices, it is the spread between crude oil and refined product prices, and not necessarily fluctuations in those prices that affect our earnings.
In order to measure our operating performance, we compare our per barrel refinery operating margins to certain industry benchmarks. We compare our Big Spring refinery’s per barrel operating margin to the Gulf Coast 3/2/1 crack spreads. A 3/2/1 crack spread is calculated assuming that three barrels of a benchmark crude oil are converted, or cracked, into two barrels of gasoline and one barrel of diesel. We calculate the Gulf Coast 3/2/1 crack spread using the market values of Gulf Coast conventional gasoline and ultra-low sulfur diesel and the market value of West Texas Intermediate, or WTI, a light, sweet crude oil. We calculate the per barrel operating margin for our Big Spring refinery by dividing the Big Spring refinery’s gross margin by its throughput volumes. Gross margin is the difference between net sales and cost of sales (exclusive of substantial unrealized hedge positions and inventories adjustments related to acquisitions).
We compare our California refineries’ per barrel operating margin to the West Coast 3/2/1 crack spread. A 3/2/1 crack spread is calculated assuming that three barrels of a benchmark crude oil are converted into two barrels of gasoline and one barrel of diesel. This is calculated using the market values of West Coast LA CARBOB pipeline gasoline, LA ultra-low sulfur pipeline diesel and the market value of WTI crude oil.
We compare our Krotz Springs refinery’s per barrel margin to the Gulf Coast 2/1/1 crack spread. The 2/1/1 crack spread is calculated assuming that two barrels of a benchmark crude oil are converted into one barrel of gasoline and one barrel of

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diesel. We calculate the Gulf Coast 2/1/1 crack spread using the market values of Gulf Coast conventional gasoline and Gulf Coast high sulfur diesel and the market value of WTI crude oil.
Our Big Spring refinery and California refineries are capable of processing substantial volumes of sour crude oil, which has historically cost less than intermediate and sweet crude oils. We measure the cost advantage of refining sour crude oil by calculating the difference between the value of WTI crude oil less the value of West Texas Sour, or WTS, a medium, sour crude oil. We refer to this differential as the sweet/sour spread. A widening of the sweet/sour spread can favorably influence the operating margin for our Big Spring and California refineries. In addition, our California refineries are capable of processing significant volumes of heavy crude oils which historically have cost less than light crude oils. We measure the cost advantage of refining heavy crude oils by calculating the difference between the value of WTI crude oil less the value of Buena Vista crude oil. A widening of this spread can favorably influence the refinery operating margins for our California refineries.
The Krotz Springs refinery has the capability to process substantial volumes of low-sulfur, or sweet, crude oils to produce a high percentage of light, high-value refined products. Sweet crude oil typically comprises 100% of the Krotz Springs refinery's crude oil input. This input is comprised of equal amounts of Heavy Louisiana Sweet, or HLS crude oil, and Light Louisiana Sweet, or LLS crude oil. We measure the cost of refining these lighter sweet crude oils by calculating the difference between the average value of LLS crude oil (which also approximates the value of HLS crude oil) to the average value of WTI crude oil. A narrowing of this spread can favorably influence the refinery operating margins of our Krotz Springs refinery.
The results of operations from our refining and unbranded marketing segment are also significantly affected by our refineries’ operating costs, particularly the cost of natural gas used for fuel and the cost of electricity. Natural gas prices have historically been volatile. Typically, electricity prices fluctuate with natural gas prices.
Demand for gasoline products is generally higher during summer months than during winter months due to seasonal increases in highway traffic. As a result, the operating results for our refining and unbranded marketing segment for the first and fourth calendar quarters are generally lower than those for the second and third calendar quarters. The effects of seasonal demand for gasoline are partially offset by seasonality in demand for diesel, which in our region is generally higher in winter months as east-west trucking traffic moves south to avoid winter conditions on northern routes.
Safety, reliability and the environmental performance of our refineries are critical to our financial performance. The financial impact of planned downtime, such as a turnaround or major maintenance project, is mitigated through a diligent planning process that considers expectations for product availability, margin environment and the availability of resources to perform the required maintenance.
The nature of our business requires us to maintain substantial quantities of crude oil and refined product inventories. Crude oil and refined products are essentially commodities, and we have no control over the changing market value of these inventories. Because our inventory is valued at the lower of cost or market value under the LIFO inventory valuation methodology, price fluctuations generally have little effect on our financial results.
Asphalt. Earnings from our asphalt segment depend primarily upon the margin between the price at which we sell our asphalt and the transfer prices for asphalt produced at our refineries in the refining and unbranded marketing segment. Asphalt is transferred to our asphalt segment at prices substantially determined by reference to the cost of crude oil, which is intended to approximate wholesale market prices. The asphalt segment also conducts operations at and markets asphalt produced by our refinery located in Willbridge, Oregon. In addition to producing asphalt at our refineries, at times when refining margins are unfavorable we opportunistically purchase asphalt from other producers for resale. A portion of our asphalt sales are made using fixed price contracts for delivery at future dates. Because these contracts are priced at the market prices for asphalt at the time of the contract, a change in the cost of crude oil between the time we enter into the contract and the time we produce the asphalt can positively or negatively influence the earnings of our asphalt segment. Demand for paving asphalt products is higher during warmer months than during colder months due to seasonal increases in road construction work. As a result, revenues from our asphalt segment for the first and fourth calendar quarters are expected to be lower than those for the second and third calendar quarters.
Retail and Branded Marketing. Earnings and cash flows from our retail and branded marketing segment are primarily affected by merchandise and motor fuel sales volumes and margins at our convenience stores and the motor fuel sales volumes and margins from sales to our FINA-branded distributors, together with licensing and credit card related fees generated from our FINA-branded distributors and licensees. Retail merchandise gross margin is equal to retail merchandise sales less the delivered cost of the retail merchandise, net of vendor discounts and rebates, measured as a percentage of total retail merchandise sales. Retail merchandise sales are driven by convenience, branding and competitive pricing. Motor fuel margin is equal to motor fuel sales less the delivered cost of fuel and motor fuel taxes, measured on a cents per gallon (“cpg”) basis. Our motor fuel margins are driven by local supply, demand and competitor pricing. Our convenience store sales are seasonal and peak in the second and third quarters of the year, while the first and fourth quarters usually experience lower overall sales.
 

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Factors Affecting Comparability
Our financial condition and operating results over the three months ended March 31, 2011 and 2010, have been influenced by the following factors which are fundamental to understanding comparisons of our period-to-period financial performance.
The Krotz Springs refinery was shut down during November 2009 for a scheduled turnaround and remained down until its restart in June 2010. Throughput at the Big Spring refinery was higher over the three months ended March 31, 2011, after we implemented new operating procedures. The California refineries were shut down for most of the first quarter of 2011 to redeploy resources for the integration of the Bakersfield refinery acquired in June 2010.
 
Table of Contents

Results of Operations
Net Sales. Net sales consist primarily of sales of refined petroleum products through our refining and unbranded marketing segment and asphalt segment and sales of merchandise, including food products, and motor fuels, through our retail and branded marketing segment.
For the refining and unbranded marketing segment, net sales consist of gross sales, net of customer rebates, discounts and excise taxes and includes inter-segment sales to our asphalt and retail and branded marketing segments, which are eliminated through consolidation of our financial statements. Asphalt sales consist of gross sales, net of any discounts and applicable taxes. Retail net sales consist of gross merchandise sales, less rebates, commissions and discounts, and gross fuel sales, including motor fuel taxes. For our petroleum and asphalt products, net sales are mainly affected by crude oil and refined product prices and volume changes caused by operations. Our retail merchandise sales are affected primarily by competition and seasonal influences.
Cost of Sales. Refining and unbranded marketing cost of sales includes crude oil and other raw materials, inclusive of transportation costs. Asphalt cost of sales includes costs of purchased asphalt, blending materials and transportation costs. Retail cost of sales includes cost of sales for motor fuels and for merchandise. Motor fuel cost of sales represents the net cost of purchased fuel, including transportation costs and associated motor fuel taxes. Merchandise cost of sales includes the delivered cost of merchandise purchases, net of merchandise rebates and commissions. Cost of sales excludes depreciation and amortization expense.
Direct Operating Expenses. Direct operating expenses, which relate to our refining and unbranded marketing and asphalt segments, include costs associated with the actual operations of our refineries and asphalt terminals, such as energy and utility costs, routine maintenance, labor, insurance and environmental compliance costs. Environmental compliance costs, including monitoring and routine maintenance, are expensed as incurred. All operating costs associated with our crude oil and product pipelines are considered to be transportation costs and are reflected as cost of sales.
Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses consist primarily of costs relating to the operations of our convenience stores, including labor, utilities, maintenance and retail corporate overhead costs. Refining and marketing and asphalt segment corporate overhead and marketing expenses are also included in SG&A expenses.

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ALON USA ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED
Summary Financial Tables. The following tables provide summary financial data and selected key operating statistics for Alon and our three operating segments for the three months ended March 31, 2011 and 2010. The summary financial data for our three operating segments does not include certain SG&A expenses and depreciation and amortization related to our corporate headquarters. The following data should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q. All information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” except for Balance Sheet data as of December 31, 2010 is unaudited.
 
For the Three Months Ended
 
March 31,
 
2011
 
2010
 
(dollars in thousands, except per
share data)
STATEMENT OF OPERATIONS DATA:
 
 
 
Net sales (1)
$
1,651,104
 
 
$
579,313
 
Operating costs and expenses:
 
 
 
Cost of sales
1,461,123
 
 
538,715
 
Direct operating expenses
56,923
 
 
61,444
 
Selling, general and administrative expenses (2)
34,330
 
 
31,807
 
Depreciation and amortization (3)
25,447
 
 
26,322
 
Total operating costs and expenses
1,577,823
 
 
658,288
 
Gain on disposition of assets
12
 
 
 
Operating income (loss)
73,293
 
 
(78,975
)
Interest expense (4)
(20,440
)
 
(26,585
)
Equity loss of investees
(245
)
 
(103
)
Other income (loss), net (5)
(31,913
)
 
14,204
 
Income (loss) before income tax expense (benefit) and non-controlling interest in income (loss) of subsidiaries
20,695
 
 
(91,459
)
Income tax expense (benefit)
7,470
 
 
(34,713
)
Income (loss) before non-controlling interest in income (loss) of subsidiaries
13,225
 
 
(56,746
)
Non-controlling interest in income (loss) of subsidiaries
160
 
 
(3,804
)
Net income (loss) available to common stockholders
$
13,065
 
 
$
(52,942
)
Income (loss) per share, basic
$
0.24
 
 
$
(0.98
)
Weighted average shares outstanding, basic (in thousands)
54,549
 
 
54,161
 
Income (loss) per share, diluted
$
0.22
 
 
$
(0.98
)
Weighted average shares outstanding, diluted (in thousands)
60,484
 
 
54,161
 
Cash dividends per share
$
0.04
 
 
$
0.04
 
CASH FLOW DATA:
 
 
 
Net cash provided by (used in):
 
 
 
Operating activities
$
24,381
 
 
$
(40,979
)
Investing activities
(25,022
)
 
(6,331
)
Financing activities
48,399
 
 
14,433
 
OTHER DATA:
 
 
 
Adjusted EBITDA (6)
66,570
 
 
(38,552
)
Capital expenditures (7)
25,163
 
 
7,303
 
Capital expenditures for turnaround and chemical catalyst
185
 
 
10,009
 
 
March 31
2011
 
December 31
2010
BALANCE SHEET DATA (end of period):
 
 
 
Cash and cash equivalents
119,445
 
 
71,687
 
Working capital
63,879
 
 
990
 
Total assets
2,199,796
 
 
2,088,521
 
Total debt
947,246
 
 
916,305
 
Total equity
373,968
 
 
341,767
 

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(1)
Includes excise taxes on sales by the retail and branded marketing segment of $14,218 and $12,786 for the three months ended March 31, 2011 and 2010, respectively.
(2)
Includes corporate headquarters selling, general and administrative expenses of $188 and $188 for the three months ended March 31, 2011 and 2010, respectively, which are not allocated to our three operating segments.
(3)
Includes corporate depreciation and amortization of $403 and $231 for the three months ended March 31, 2011 and 2010, respectively, which are not allocated to our three operating segments.
(4)
Interest expense of $26,585 for the three months ended March 31, 2010, includes a charge of $6,659 for the write-off of debt issuance costs associated with our prepayment of the Alon Refining Krotz Springs, Inc. revolving credit facility.
(5)
Other income (loss) for the three months ended March 31, 2011 is substantially the loss on heating oil crack spread contracts. In the first quarter of 2010, Alon sold approximately two-thirds of its investment in Holly Energy Partners for $22,760, resulting in a gain of $8,047. Subsequently, Alon marked-to-market its remaining investment, resulting in an unrealized gain of $6,291.
(6)
Adjusted EBITDA represents earnings before non-controlling interest in income of subsidiaries, income tax expense, interest expense, depreciation and amortization, and gain on disposition of assets. Adjusted EBITDA is not a recognized measurement under GAAP; however, the amounts included in Adjusted EBITDA are derived from amounts included in our consolidated financial statements. Our management believes that the presentation of Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. In addition, our management believes that Adjusted EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry because the calculation of Adjusted EBITDA generally eliminates the effects of non-controlling interest in income of subsidiaries, income tax expense, interest expense, gain on disposition of assets and the accounting effects of capital expenditures and acquisitions, items that may vary for different companies for reasons unrelated to overall operating performance.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;
Adjusted EBITDA does not reflect the prior claim that non-controlling interest have on the income generated by non-wholly-owned subsidiaries;
Adjusted EBITDA does not reflect changes in or cash requirements for our working capital needs; and
Our calculation of Adjusted EBITDA may differ from EBITDA calculations of other companies in our industry, limiting its usefulness as a comparative measure.
Because of these limitations, Adjusted EBITDA should not be considered a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally.
The following table reconciles net income (loss) available to common stockholders to Adjusted EBITDA for the three months ended March 31, 2011 and 2010, respectively:
 
For the Three Months Ended
 
March 31,
 
2011
 
2010
 
(dollars in thousands)
Net income (loss) available to common stockholders
$
13,065
 
 
$
(52,942
)
Non-controlling interest in income (loss) of subsidiaries
160
 
 
(3,804
)
Income tax expense (benefit)
7,470
 
 
(34,713
)
Interest expense
20,440
 
 
26,585
 
Depreciation and amortization
25,447
 
 
26,322
 
Gain on disposition of assets
(12
)
 
 
Adjusted EBITDA
$
66,570
 
 
$
(38,552
)

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Adjusted EBITDA for the three months ended March 31, 2011 does not exclude loss on heating oil crack spread contracts of $31,919.
(7)
Includes corporate capital expenditures of $65 and $415 for the three months ended March 31, 2011 and 2010, respectively, which are not allocated to our three operating segments.

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REFINING AND UNBRANDED MARKETING SEGMENT
 
 
 
 
For the Three Months Ended
 
March 31,
 
2011
 
2010
 
(dollars in thousands, except per barrel data and pricing statistics)
STATEMENTS OF OPERATIONS DATA:
 
 
 
Net sales (1)
$
1,499,024
 
 
$
483,040
 
Operating costs and expenses:
 
 
 
Cost of sales
1,345,021
 
 
463,864
 
Direct operating expenses
46,949
 
 
50,352
 
Selling, general and administrative expenses
7,728
 
 
6,388
 
Depreciation and amortization
20,037
 
 
20,954
 
Total operating costs and expenses
1,419,735
 
 
541,558
 
Operating income (loss)
$
79,289
 
 
$
(58,518
)
KEY OPERATING STATISTICS:
 
 
 
Per barrel of throughput:
 
 
 
Refinery operating margin – Big Spring (2)
$
19.50
 
 
$
4.91
 
Refinery operating margin – CA Refineries (2)
N/A
 
 
(0.42
)
Refinery operating margin – Krotz Springs (2)
5.06
 
 
N/A
 
Refinery direct operating expense – Big Spring (3)
4.13
 
 
6.57
 
Refinery direct operating expense – CA Refineries (3)
N/A
 
 
8.82
 
Refinery direct operating expense – Krotz Springs (3)
2.85
 
 
N/A
 
Capital expenditures
23,093
 
 
6,312
 
Capital expenditures for turnaround and chemical catalyst
185
 
 
10,009
 
PRICING STATISTICS:
 
 
 
WTI crude oil (per barrel)
$
94.13
 
 
$
78.75
 
WTS crude oil (per barrel)
90.03
 
 
76.87
 
Buena Vista crude oil (per barrel)
99.31
 
 
77.11
 
HLS crude oil (per barrel)
106.51
 
 
78.82
 
LLS crude oil (per barrel)
107.18
 
 
79.96
 
Crack spreads (3/2/1) (per barrel):
 
 
 
Gulf Coast
$
18.09
 
 
$
7.09
 
West Coast
24.59
 
 
10.12
 
Crack spreads (2/1/1) (per barrel):
 
 
 
Gulf Coast high sulfur diesel
$
18.38
 
 
$
6.25
 
Crude oil differentials (per barrel):
 
 
 
WTI less WTS
$
4.10
 
 
$
1.88
 
LLS less WTI
13.05
 
 
1.21
 
WTI less Buena Vista
(5.18
)
 
1.64
 
Product price (dollars per gallon):
 
 
 
Gulf Coast unleaded gasoline
$
2.595
 
 
$
2.040
 
Gulf Coast ultra-low sulfur diesel
2.825
 
 
2.052
 
Gulf Coast high sulfur diesel
2.762
 
 
2.008
 
West Coast LA CARBOB (unleaded gasoline)
2.786
 
 
2.136
 
West Coast LA ultra-low sulfur diesel
2.907
 
 
2.076
 
Natural gas (per MMBTU)
4.20
 
 
4.99
 

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THROUGHPUT AND PRODUCTION DATA:
BIG SPRING REFINERY
For the Three Months Ended
March 31,
 
2011
 
2010
 
bpd
 
%
 
bpd
 
%
Refinery throughput:
 
 
 
 
 
 
 
Sour crude
52,124
 
 
83.8
 
 
35,978
 
 
84.1
 
Sweet crude
8,499
 
 
13.7
 
 
5,258
 
 
12.3
 
Blendstocks
1,558
 
 
2.5
 
 
1,548
 
 
3.6
 
Total refinery throughput (4)
62,181
 
 
100.0
 
 
42,784
 
 
100.0
 
Refinery production:
 
 
 
 
 
 
 
Gasoline
30,373
 
 
49.3
 
 
20,618
 
 
48.9
 
Diesel/jet
19,988
 
 
32.4
 
 
13,743
 
 
32.6
 
Asphalt
4,340
 
 
7.0
 
 
2,359
 
 
5.6
 
Petrochemicals
3,824
 
 
6.2
 
 
2,021
 
 
4.8
 
Other
3,165
 
 
5.1
 
 
3,396
 
 
8.1
 
Total refinery production (5)
61,690
 
 
100.0
 
 
42,137
 
 
100.0
 
Refinery utilization (6)
 
 
86.6
%
 
 
 
64.8
%
THROUGHPUT AND PRODUCTION DATA:
CALIFORNIA REFINERIES
For the Three Months Ended
March 31,
 
2011
 
2010
 
bpd
 
%
 
bpd
 
%
Refinery throughput:
 
 
 
 
 
 
 
Medium sour crude
 
 
 
 
4,106
 
 
22.5
 
Heavy crude
 
 
 
 
13,740
 
 
75.2
 
Blendstocks
 
 
 
 
417
 
 
2.3
 
Total refinery throughput (4)
 
 
 
 
18,263
 
 
100.0
 
Refinery production:
 
 
 
 
 
 
 
Gasoline
 
 
 
 
2,469
 
 
14.0
 
Diesel/jet
 
 
 
 
3,370
 
 
19.1
 
Asphalt
 
 
 
 
6,163
 
 
34.9
 
Light unfinished
 
 
 
 
 
 
 
Heavy unfinished
 
 
 
 
5,259
 
 
29.8
 
Other
 
 
 
 
393
 
 
2.2
 
Total refinery production (5)
 
 
 
 
17,654
 
 
100.0
 
Refinery utilization (6)
 
 
%
 
 
 
24.6
%
THROUGHPUT AND PRODUCTION DATA:
KROTZ SPRINGS REFINERY
For the Three Months Ended
March 31,
 
2011
 
2010
 
bpd
 
%
 
bpd
 
%
Refinery throughput:
 
 
 
 
 
 
 
Light sweet crude
52,930
 
 
72.0
 
 
 
 
 
Heavy sweet crude
19,224
 
 
26.2
 
 
 
 
 
Blendstocks
1,303
 
 
1.8
 
 
 
 
 
Total refinery throughput (4)
73,457
 
 
100.0
 
 
 
 
 
Refinery production:
 
 
 
 
 
 
 
Gasoline
31,175
 
 
42.4
 
 
 
 
 
Diesel/jet
34,542
 
 
46.9
 
 
 
 
 
Heavy Oils
1,659
 
 
2.3
 
 
 
 
 
Other
6,146
 
 
8.4
 
 
 
 
 
Total refinery production (5)
73,522
 
 
100.0
 
 
 
 
 
Refinery utilization (6)
 
 
86.8
%
 
 
 
%

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Table of Contents

(1)
Net sales include intersegment sales to our asphalt and retail and branded marketing segments at prices which approximate wholesale market prices. These intersegment sales are eliminated through consolidation of our financial statements.
(2)
Refinery operating margin is a per barrel measurement calculated by dividing the margin between net sales and cost of sales (exclusive of substantial unrealized hedge positions and inventory adjustments related to acquisitions) attributable to each refinery by the refinery’s throughput volumes. Industry-wide refining results are driven and measured by the margins between refined product prices and the prices for crude oil, which are referred to as crack spreads. We compare our refinery operating margins to these crack spreads to assess our operating performance relative to other participants in our industry.
(3)
Refinery direct operating expense is a per barrel measurement calculated by dividing direct operating expenses at our Big Spring, California, and Krotz Springs refineries, exclusive of depreciation and amortization, by the applicable refinery’s total throughput volumes. Direct operating expenses related to the Bakersfield refinery of $1,512 have been excluded from the per barrel measurement calculation for the three months ended March 31, 2011.
(4)
Total refinery throughput represents the total barrels per day of crude oil and blendstock inputs in the refinery production process.
(5)
Total refinery production represents the barrels per day of various products produced from processing crude and other refinery feedstocks through the crude units and other conversion units at the refineries.
(6)
Refinery utilization represents average daily crude oil throughput divided by crude oil capacity, excluding planned periods of downtime for maintenance and turnarounds.
 

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Table of Contents

ASPHALT SEGMENT
 
 
 
 
For the Three Months Ended
 
March 31,
 
2011
 
2010
 
(dollars in thousands, except per ton data)
STATEMENTS OF OPERATIONS DATA:
 
 
 
Net sales
$
86,243
 
 
$
67,141
 
Operating costs and expenses:
 
 
 
Cost of sales (1)
82,752
 
 
71,445
 
Direct operating expenses
9,974
 
 
11,092
 
Selling, general and administrative expenses
1,415
 
 
1,066
 
Depreciation and amortization
1,730
 
 
1,717
 
Total operating costs and expenses
95,871
 
 
85,320
 
Operating loss
$
(9,628
)
 
$
(18,179
)
KEY OPERATING STATISTICS:
 
 
 
Blended asphalt sales volume (tons in thousands) (2)
138
 
 
129
 
Non-blended asphalt sales volume (tons in thousands) (3)
54
 
 
22
 
Blended asphalt sales price per ton (2)
$
506.55
 
 
$
463.53
 
Non-blended asphalt sales price per ton (3)
302.57
 
 
333.82
 
Asphalt margin per ton (4)
18.18
 
 
(28.50
)
Capital expenditures
$
660
 
 
$
179
 
(1)
Cost of sales includes intersegment purchases of asphalt blends from our refining and unbranded marketing segment at prices which approximate wholesale market prices. These intersegment purchases are eliminated through consolidation of our financial statements.
(2)
Blended asphalt represents base asphalt that has been blended with other materials necessary to sell the asphalt as a finished product.
(3)
Non-blended asphalt represents base material asphalt and other components that require additional blending before being sold as a finished product.
(4)
Asphalt margin is a per ton measurement calculated by dividing the margin between net sales and cost of sales by the total sales volume. Asphalt margins are used in the asphalt industry to measure operating results related to asphalt sales.
 
 

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Table of Contents

RETAIL AND BRANDED MARKETING SEGMENT
 
 
 
 
For the Three Months Ended
 
March 31,
 
2011
 
2010
 
(dollars in thousands, except per gallon data)
STATEMENTS OF OPERATIONS DATA:
 
 
 
Net sales (1)
$
316,184
 
 
$
226,028
 
Operating costs and expenses:
 
 
 
Cost of sales (2)
283,697
 
 
200,302
 
Selling, general and administrative expenses
24,999
 
 
24,165
 
Depreciation and amortization
3,277
 
 
3,420
 
Total operating costs and expenses
311,973
 
 
227,887
 
Gain on disposition of assets
12
 
 
 
Operating income
$
4,223
 
 
$
(1,859
)
KEY OPERATING STATISTICS:
 
 
 
Branded fuel sales (thousands of gallons) (3)
85,570
 
 
70,469
 
Branded fuel margin (cents per gallon) (3)
3.7
 
 
4.2
 
Number of stores (end of period)
304
 
 
308
 
Retail fuel sales (thousands of gallons)
36,655
 
 
32,714
 
Retail fuel sales (thousands of gallons per site per month)
40
 
 
35
 
Retail fuel margin (cents per gallon) (4)
14.6
 
 
9.0
 
Retail fuel sales price (dollars per gallon) (5)
$
3.19
 
 
$
2.63
 
Merchandise sales
$
68,001
 
 
$
63,482
 
Merchandise sales (per site per month)
$