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 JUNE 30, 2013
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.)
12700 Park Central Dr., Suite 1600, 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  þ 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:
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 August 1, 2013, was 63,104,550.

 
 



TABLE OF CONTENTS

 
 
 
 
EX-10.2 SECOND AMENDMENT TO CREDIT AGREEMENT, DATED AS OF JULY 31, 2013, TO THE CREDIT AGREEMENT, DATED MAY 28, 2010, BY AND BETWEEN ALON REFINING KROTZ SPRINGS, INC., AND GOLDMAN SACHS BANK USA
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)
 
June 30,
2013
 
December 31,
2012
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
134,468

 
$
116,296

Accounts and other receivables, net
218,197

 
184,138

Inventories
204,627

 
183,919

Deferred income tax asset
9,474

 
5,223

Prepaid expenses and other current assets
17,307

 
19,322

Total current assets
584,073

 
508,898

Equity method investments
23,892

 
21,582

Property, plant and equipment, net
1,443,082

 
1,492,493

Goodwill
105,943

 
105,943

Other assets, net
89,675

 
94,658

Total assets
$
2,246,665

 
$
2,223,574

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
296,507

 
$
309,573

Accrued liabilities
104,484

 
102,579

Current portion of long-term debt
9,478

 
9,504

Total current liabilities
410,469

 
421,656

Other non-current liabilities
268,047

 
254,946

Long-term debt
520,286

 
577,513

Deferred income tax liability
363,411

 
348,273

Total liabilities
1,562,213

 
1,602,388

Commitments and contingencies (Note 16)

 

Stockholders’ equity:
 
 
 
Preferred stock, par value $0.01, 15,000,000 shares authorized; 3,568,180 and 4,220,000 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively
35,682

 
42,200

Common stock, par value $0.01, 150,000,000 shares authorized; 62,897,637 and 61,272,429 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively
629

 
613

Additional paid-in capital
455,358

 
444,022

Accumulated other comprehensive loss, net of income tax
(23,320
)
 
(30,447
)
Retained earnings
176,256

 
128,319

Total stockholders’ equity
644,605

 
584,707

Non-controlling interest in subsidiaries
39,847

 
36,479

Total equity
684,452

 
621,186

Total liabilities and equity
$
2,246,665

 
$
2,223,574


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
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net sales (1)
$
1,676,595

 
$
1,910,489

 
$
3,327,791

 
$
3,702,622

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales
1,497,712

 
1,686,876

 
2,875,969

 
3,305,550

Unrealized (gains) losses on commodity swaps

 
(12,871
)
 

 
32,441

Direct operating expenses
71,446

 
76,874

 
145,668

 
149,083

Selling, general and administrative expenses
43,101

 
36,208

 
84,842

 
71,348

Depreciation and amortization
30,798

 
30,419

 
61,961

 
61,130

Total operating costs and expenses
1,643,057

 
1,817,506

 
3,168,440

 
3,619,552

Gain (loss) on disposition of assets
8,494

 
(345
)
 
8,512

 
(214
)
Operating income
42,032

 
92,638

 
167,863

 
82,856

Interest expense
(20,261
)
 
(24,300
)
 
(41,553
)
 
(55,340
)
Equity earnings of investees
2,110

 
1,509

 
1,729

 
1,570

Other income (loss), net
46

 
1,107

 
129

 
(6,993
)
Income before income tax expense
23,927

 
70,954

 
128,168

 
22,093

Income tax expense
3,985

 
25,680

 
34,575

 
7,929

Net income
19,942

 
45,274

 
93,593

 
14,164

Net income attributable to non-controlling interest
8,446

 
2,183

 
27,913

 
440

Net income available to stockholders
$
11,496

 
$
43,091

 
$
65,680

 
$
13,724

Earnings per share, basic
$
0.17

 
$
0.77

 
$
1.03

 
$
0.24

Weighted average shares outstanding, basic (in thousands)
62,614

 
56,238

 
62,285

 
56,133

Earnings per share, diluted
$
0.17

 
$
0.65

 
$
0.97

 
$
0.21

Weighted average shares outstanding, diluted (in thousands)
68,071

 
66,635

 
67,743

 
66,562

Cash dividends per share
$
0.22

 
$
0.04

 
$
0.26

 
$
0.08

___________
(1)
Includes excise taxes on sales by the retail segment of $18,531 and $16,198 for the three months and $35,836 and $32,322 for the six months ended June 30, 2013 and 2012, 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 COMPREHENSIVE INCOME
(unaudited, dollars in thousands)

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
19,942

 
$
45,274

 
$
93,593

 
$
14,164

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
Interest rate derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
Unrealized holding loss arising during period

 
(13
)
 

 
(184
)
Less: reclassification to earnings - interest expense

 
(1,014
)
 

 
(2,009
)
Net gain

 
1,001

 

 
1,825

Commodity contracts designated as cash flow hedges:
 
 
 
 
 
 
 
Unrealized holding gain (loss) arising during period
12,369

 
9,589

 
21,750

 
(39,199
)
Less: reclassification to earnings - cost of sales
10,018

 
(14,399
)
 
9,994

 
(22,352
)
Net gain (loss)
2,351

 
23,988

 
11,756

 
(16,847
)
Total other comprehensive income (loss), before tax
2,351

 
24,989

 
11,756

 
(15,022
)
Income tax expense (benefit) related to items of other comprehensive income
862

 
8,987

 
4,360

 
(5,426
)
Total other comprehensive income (loss), net of tax
1,489

 
16,002

 
7,396

 
(9,596
)
Comprehensive income
21,431

 
61,276

 
100,989

 
4,568

Comprehensive income (loss) attributable to non-controlling interest
8,446

 
3,052

 
28,182

 
(170
)
Comprehensive income attributable to stockholders
$
12,985

 
$
58,224

 
$
72,807

 
$
4,738



The accompanying notes are an integral part of these consolidated financial statements.
3

Table of Contents

ALON USA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
 
For the Six Months Ended
 
June 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
93,593

 
$
14,164

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
61,961

 
61,130

Stock compensation
3,008

 
1,496

Deferred income tax expense
6,527

 
4,665

Equity earnings of investees (net of dividends)
(1,729
)
 
(1,570
)
Amortization of debt issuance costs
2,272

 
3,297

Amortization of original issuance discount
1,504

 
1,344

Write-off of unamortized original issuance discount

 
9,624

(Gain) loss on disposition of assets
(8,512
)
 
214

Unrealized losses on commodity swaps

 
32,441

Changes in operating assets and liabilities:
 
 
 
Accounts and other receivables, net
(22,000
)
 
28,207

Inventories
(20,708
)
 
(71,881
)
Prepaid expenses and other current assets
9,732

 
(15,615
)
Other assets, net
2,662

 
(17,258
)
Accounts payable
(13,066
)
 
6,099

Accrued liabilities
2,485

 
(9,506
)
Other non-current liabilities
12,025

 
67,371

Net cash provided by operating activities
129,754

 
114,222

Cash flows from investing activities:
 
 
 
Capital expenditures
(30,622
)
 
(40,525
)
Capital expenditures for turnarounds and catalysts
(6,624
)
 
(8,757
)
Contribution to equity method investment
(581
)
 

Proceeds from disposition of assets
25,745

 
16

Net cash used in investing activities
(12,082
)
 
(49,266
)
Cash flows from financing activities:
 
 
 
Dividends paid to stockholders
(16,228
)
 
(4,481
)
Dividends paid to non-controlling interest
(731
)
 
(269
)
Distributions paid to non-controlling interest in the Partnership
(23,579
)
 

Deferred debt issuance costs
(205
)
 
(2,643
)
Revolving credit facilities, net
(54,000
)
 
(151,341
)
Payments on long-term debt
(4,757
)
 
(5,772
)
Net cash used in financing activities
(99,500
)
 
(164,506
)
Net increase (decrease) in cash and cash equivalents
18,172

 
(99,550
)
Cash and cash equivalents, beginning of period
116,296

 
157,066

Cash and cash equivalents, end of period
$
134,468

 
$
57,516

Supplemental cash flow information:
 
 
 
Cash paid for interest, net of capitalized interest
$
37,829

 
$
43,832

Taxes paid (refunds received) for income tax
$
19,100

 
$
(1,378
)
Non-cash activity:
 
 
 
Financing activity — payment on long-term debt from issuance of preferred stock
$

 
$
(30,000
)

The accompanying notes are an integral part of these consolidated financial statements.
4

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”). The term “Alon” generally includes Alon USA Partners, LP (“ALDW”) and its subsidiaries as consolidated subsidiaries of Alon USA Energy with certain exceptions where there are transactions or obligations between ALDW and Alon USA Energy or its other subsidiaries. When used in descriptions of agreements and transactions, “ALDW” or the “Partnership” refers to ALDW and its consolidated subsidiaries.
These consolidated financial statements and notes 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. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior year balances may have been aggregated or disaggregated in order to conform to the current year presentation. 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, 2013.
The consolidated balance sheet as of December 31, 2012, 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, 2012.
New Accounting Standards
Effective January 1, 2013, Alon adopted Accounting Standards Update (“ASU”) No. 2011- 11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities and ASU No. 2013- 01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities issued by the Financial Accounting Standards Board (“FASB”). These updates require an entity to disclose both gross information and net information of recognized derivative instruments, repurchase agreements and securities borrowing and lending transactions offset in the consolidated balance sheet. The updated guidance was applied retrospectively, effective January 1, 2013. The adoption concerns disclosure only and did not have any financial impact on the consolidated financial statements.
ASU No. 2013- 02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013- 02”), was issued in February 2013. This ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, ASU 2013- 02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross- reference to other disclosures required under GAAP that provide additional detail about those amounts. The updated guidance was applied retrospectively, effective January 1, 2013. The adoption concerns disclosure only and did not have any financial impact on the consolidated financial statements.
(2)
Alon USA Partners, LP
ALDW is a publicly traded limited partnership that was formed to own the assets and operations of the Big Spring refinery and associated wholesale marketing operations. On November 26, 2012, the Partnership completed its initial public offering (NYSE: ALDW) of 11,500,000 common units representing limited partner interests. As of June 30, 2013, the 11,502,476 common units held by the public represent 18.4% of the Partnership's common units outstanding. Alon owns the remaining 81.6% of the Partnership's common units and Alon USA Partners GP, LLC (the "General Partner"), Alon's wholly-owned subsidiary, owns 100% of the non-economic General Partner interest in the Partnership.
The limited partner interests in the Partnership not owned by Alon are reflected in the results of operations as net income attributable to non-controlling interests and in Alon's balance sheet in non-controlling interests in subsidiaries. The Partnership is consolidated within the refining and marketing segment.

5

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


The Partnership has adopted a policy pursuant to which it will distribute all of the available cash, as defined in the partnership agreement, it generates each quarter. The available cash for distribution each quarter will be determined by the board of directors of the General Partner within 60 days following the end of such quarter.
Alon has agreements with the Partnership which establish fees for certain administrative and operational services provided by Alon and its subsidiaries to the Partnership, provide certain indemnification obligations and other matters and establish terms for the supply of products by the Partnership to Alon.
(3)
Segment Data
Alon’s revenues are derived from three operating segments: (i) refining and marketing, (ii) asphalt and (iii) retail. 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.
In the fourth quarter of 2012, based on a change in our internal reporting structure as a result of the Partnership's initial public offering, the branded marketing operations have been combined with the refining and marketing segment and are no longer included with the retail segment. Information for the three and six months ended June 30, 2012 has been recast to provide a comparison to the current year results.
(a)
Refining and Marketing Segment
Alon’s refining and 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. Alon's refineries have a combined throughput capacity of approximately 214,000 barrels per day (“bpd”). 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.
Alon supplies gasoline and diesel to approximately 640 Alon branded retail sites, including its retail segment convenience stores. Approximately 65% of the gasoline and 29% of the diesel motor fuel produced at Alon's Big Spring refinery was transferred to Alon's retail segment convenience stores at prices substantially determined by wholesale market prices. Additionally, Alon licenses the use of the Alon brand name and provides credit card processing services to 99 licensed locations that are not under fuel supply agreements.
(b)
Asphalt Segment
Alon’s asphalt segment includes the Willbridge, Oregon refinery and 11 refinery/terminal locations in Texas (Big Spring), California (Paramount, Long Beach, Elk Grove, Bakersfield and Mojave), Oregon (Willbridge), Washington (Richmond Beach), Arizona (Phoenix and Flagstaff), 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 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 Segment
Alon’s retail segment operates 298 convenience stores located 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 Alon brand names. Substantially all of the motor fuel sold through Alon’s retail segment is 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.

6

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 and six month periods ended June 30, 2013 and 2012, are presented below:
 
Refining and
 Marketing
 
Asphalt
 
Retail
 
Corporate
 
Consolidated
Total
Three Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
1,287,571

 
$
144,191

 
$
244,833

 
$

 
$
1,676,595

Intersegment sales/purchases
156,043

 
(24,732
)
 
(131,311
)
 

 

Depreciation and amortization
26,107

 
1,563

 
2,554

 
574

 
30,798

Operating income (loss)
33,014

 
2,021

 
7,764

 
(767
)
 
42,032

Total assets
1,880,858

 
141,515

 
204,252

 
20,040

 
2,246,665

Turnaround, chemical catalyst and capital expenditures
14,054

 
2,599

 
6,537

 
426

 
23,616

 
Refining and
 Marketing
 
Asphalt
 
Retail
 
Corporate
 
Consolidated
Total
Three Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
1,525,339

 
$
152,911

 
$
232,239

 
$

 
$
1,910,489

Intersegment sales/purchases
228,504

 
(106,056
)
 
(122,448
)
 

 

Depreciation and amortization
25,758

 
1,414

 
2,623

 
624

 
30,419

Operating income (loss)
79,360

 
6,404

 
7,689

 
(815
)
 
92,638

Total assets
1,888,729

 
171,517

 
193,838

 
15,280

 
2,269,364

Turnaround, chemical catalyst and capital expenditures
24,128

 
5,969

 
1,866

 
657

 
32,620

 
Refining and
Marketing
 
Asphalt
 
Retail
 
Corporate
 
Consolidated
Total
Six Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
2,559,797

 
$
299,056

 
$
468,938

 
$

 
$
3,327,791

Intersegment sales/purchases
297,942

 
(41,291
)
 
(256,651
)
 

 

Depreciation and amortization
52,612

 
3,112

 
4,822

 
1,415

 
61,961

Operating income (loss)
159,722

 
(2,380
)
 
12,304

 
(1,783
)
 
167,863

Total assets
1,880,858

 
141,515

 
204,252

 
20,040

 
2,246,665

Turnaround, chemical catalyst and capital expenditures
25,239

 
4,391

 
7,177

 
439

 
37,246

 
Refining and
Marketing
 
Asphalt
 
Retail
 
Corporate
 
Consolidated
Total
Six Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
3,008,281

 
$
245,460

 
$
448,881

 
$

 
$
3,702,622

Intersegment sales/purchases
381,370

 
(137,245
)
 
(244,125
)
 

 

Depreciation and amortization
52,035

 
2,796

 
5,122

 
1,177

 
61,130

Operating income (loss)
68,431

 
4,983

 
11,000

 
(1,558
)
 
82,856

Total assets
1,888,729

 
171,517

 
193,838

 
15,280

 
2,269,364

Turnaround, chemical catalyst and capital expenditures
34,934

 
7,460

 
6,105

 
783

 
49,282

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 on disposition of assets. Intersegment sales are intended to approximate wholesale market prices. Consolidated totals presented are after intersegment eliminations.

7

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


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.
(4)
Fair Value
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.
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 long-term debt approximate fair value. Derivative financial instruments are carried at fair value, which is based on quoted market prices. Derivative instruments and the Renewable Identification Numbers ("RINs") obligation are the only financial assets and liabilities measured at fair value on a recurring basis.
The RINs obligation represents the period-end deficit for the purchase of RINs to satisfy the requirement to blend biofuels into the products Alon has produced. Alon's RINs obligation is based on the RINs deficit and the price of those RINs as of the balance sheet date. The RINs obligation is categorized as Level 2 of the fair value hierarchy and is measured at fair value using the market approach based on quoted prices from an independent pricing service.
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 June 30, 2013 and December 31, 2012, 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
As of June 30, 2013
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
616

 
$

 
$

 
$
616

Commodity contracts (swaps)

 
13,270

 

 
13,270

Liabilities:
 
 
 
 
 
 
 
Fair value hedges

 
3,578

 

 
3,578

RINs obligation

 
8,016

 

 
8,016

 
 
 
 
 
 
 
 
As of December 31, 2012
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
2,072

 
$

 
$

 
$
2,072

Commodity contracts (swaps)

 
1,514

 

 
1,514

Liabilities:
 
 
 
 
 
 
 
Fair value hedges

 
1,720

 

 
1,720

(5)
Derivative Financial Instruments
Mark to Market
Commodity Derivatives. Alon selectively utilizes commodity derivatives to manage its exposure to commodity price fluctuations and uses crude oil and refined product commodity derivative contracts to reduce risk associated with potential price changes on committed obligations. Alon does not speculate using derivative instruments. Credit risk on Alon’s derivative instruments is substantially mitigated by transacting with counterparties meeting established collateral and credit criteria.

8

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


Fair Value Hedges
Fair value hedges are used to hedge price volatility in certain refining inventories and firm commitments to purchase inventories. The level of activity for fair value hedges is based on the level of operating inventories. The gain or loss on a derivative instrument designated and qualifying as a fair value hedge, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, is recognized currently in income in the same period.
As of June 30, 2013, Alon has accounted for certain commodity contracts as fair value hedges with contract purchase volumes of 1,323 thousand barrels of crude oil with remaining contract terms through May 2019.
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.
Commodity Derivatives. As of June 30, 2013, Alon has accounted for certain commodity swap contracts as cash flow hedges with contract purchase volumes of 7,560 thousand barrels of crude oil and contract sales volumes of 7,560 thousand barrels of refined products with the longest remaining contract term of eighteen months. Related to these transactions in Other Comprehensive Income ("OCI"), Alon recognized unrealized gains (losses) of $2,351 and $23,988 for the three months ended and $11,756 and $(16,847) for the six months ended June 30, 2013 and 2012, respectively. There were no amounts reclassified from OCI into cost of sales as a result of the discontinuance of cash flow hedge accounting.
For the three and six months ended June 30, 2013 and 2012, 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.
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 June 30, 2013, Alon did not have any outstanding interest rate swap agreements.
Alon recognized in OCI unrealized gains of $1,001 and $1,825 during the three and six months ended June 30, 2012, respectively, for the fair value measurement of the interest rate swap agreements.
The following table presents the effect of derivative instruments on the consolidated statements of financial position:
 
As of June 30, 2013
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
 
 
 
Balance Sheet
 
 
 
Location
 
Fair Value
 
Location
 
Fair Value
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
Accounts receivable
 
$
2,111

 
Accrued liabilities
 
$
(1,495
)
Total derivatives not designated as hedging instruments
 
 
$
2,111

 
 
 
$
(1,495
)
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts (swaps)
Accounts receivable
 
$
14,346

 
Other non-current liabilities
 
$
(1,076
)
Fair value hedges
 
 

 
Other non-current liabilities
 
(3,578
)
Total derivatives designated as hedging instruments
 
 
14,346

 
 
 
(4,654
)
Total derivatives
 
 
$
16,457

 
 
 
$
(6,149
)

9

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


 
As of December 31, 2012
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
 
 
 
Balance Sheet
 
 
 
Location
 
Fair Value
 
Location
 
Fair Value
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
Accounts receivable
 
$
2,743

 
Accrued liabilities
 
$
(671
)
Total derivatives not designated as hedging instruments
 
 
$
2,743

 
 
 
$
(671
)
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts (swaps)
Accounts receivable
 
$
2,287

 
Accrued liabilities
 
$
(773
)
Fair value hedges
 
 

 
Other non-current liabilities
 
(1,720
)
Total derivatives designated as hedging instruments
 
 
2,287

 
 
 
(2,493
)
Total derivatives
 
 
$
5,030

 
 
 
$
(3,164
)
The following tables present the effect of derivative instruments on Alon’s consolidated statements of operations and accumulated other comprehensive income:
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 June 30, 2013
 
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
$
2,351

 
Cost of sales
 
$
10,018

 
 
 
$

Total derivatives
 
$
2,351

 
 
 
$
10,018

 
 
 
$

 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended June 30, 2012
 
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
$
23,988

 
Cost of sales
 
$
(14,399
)
 
 
 
$

Interest rate swap
 
1,001

 
Interest expense
 
(1,014
)
 
 
 

Total derivatives
 
$
24,989

 
 
 
$
(15,413
)
 
 
 
$


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 Six Months Ended June 30, 2013
 
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
$
11,756

 
Cost of sales
 
$
9,994

 
 
 
$

Total derivatives
 
$
11,756

 
 
 
$
9,994

 
 
 
$

 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended June 30, 2012
 
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
$
(16,847
)
 
Cost of sales
 
$
(22,352
)
 
 
 
$

Interest rate swap
 
1,825

 
Interest expense
 
(2,009
)
 
 
 

Total derivatives
 
$
(15,022
)
 
 
 
$
(24,361
)
 
 
 
$



10

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


Derivatives in fair value hedging relationships:
 
 
 
Gain (Loss) Recognized in Income
 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
 
June 30,
 
June 30,
 
Location
 
2013
 
2012
 
2013
 
2012
Fair value hedges
Cost of sales
 
$
961

 
$

 
$
(1,858
)
 
$

Total derivatives
 
 
$
961

 
$

 
$
(1,858
)
 
$

Derivatives not designated as hedging instruments:
 
 
 
Gain (Loss) Recognized in Income
 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
 
June 30,
 
June 30,
 
Location
 
2013
 
2012
 
2013
 
2012
Commodity contracts (futures & forwards)
Cost of sales
 
$
2,532

 
$
13,861

 
$
10,519

 
$
15,575

Commodity contracts (swaps)
Cost of sales
 

 
(5,825
)
 

 
(12,206
)
Commodity contracts (swaps)
Unrealized gains (losses) on commodity swaps
 

 
12,871

 

 
(32,441
)
Commodity contracts (call options)
Other income (loss), net
 

 
856

 

 
(7,297
)
Total derivatives
 
 
$
2,532

 
$
21,763

 
$
10,519

 
$
(36,369
)
Offsetting Assets and Liabilities
Alon's derivative financial instruments are subject to master netting arrangements to manage counterparty credit risk associated with derivatives, however, Alon does not offset on its consolidated balance sheets the fair value amounts recorded for derivative instruments under these agreements.
The following table presents offsetting information regarding Alon's derivatives by type of transaction as of June 30, 2013 and December 31, 2012:
 
Gross Amounts of Recognized Assets (Liabilities)
 
Gross Amounts offset in the Statement of Financial Position
 
Net Amounts of Assets (Liabilities) Presented in the Statement of Financial Position
 
Gross Amounts Not offset in the Statement of Financial Position
 
Net Amount
 
 
 
Financial Instruments
 
Cash Collateral Pledged
 
As of June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Assets:
 
 
 
 
 
 
 
 
 
 
Futures & forwards
$
2,111

 
$

 
$
2,111

 
$
(1,495
)
 
$

 
$
616

Swaps
14,346

 

 
14,346

 

 

 
14,346

Commodity Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
Futures & forwards
$
(1,495
)
 
$

 
$
(1,495
)
 
$
1,495

 
$

 
$

Swaps
(1,076
)
 

 
(1,076
)
 

 

 
(1,076
)
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Assets:
 
 
 
 
 
 
 
 
 
 
Futures & forwards
$
2,743

 
$

 
$
2,743

 
$
(671
)
 
$

 
$
2,072

Swaps
2,287

 

 
2,287

 

 

 
2,287

Commodity Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
Futures & forwards
$
(671
)
 
$

 
$
(671
)
 
$
671

 
$

 
$

Swaps
(773
)
 

 
(773
)
 

 

 
(773
)

11

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


(6)
Inventories
Alon’s inventories (including inventory consigned to others) 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.
Carrying value of inventories consisted of the following:
 
June 30,
2013
 
December 31,
2012
Crude oil, refined products, asphalt and blendstocks
$
42,989

 
$
40,068

Crude oil inventory consigned to others
107,256

 
91,876

Materials and supplies
22,981

 
21,919

Store merchandise
22,758

 
22,139

Store fuel
8,643

 
7,917

Total inventories
$
204,627

 
$
183,919

Market values of crude oil, refined products, asphalt and blendstock inventories exceeded LIFO costs by $66,421 and $58,213 at June 30, 2013 and December 31, 2012, respectively.
(7)
Inventory Financing Agreements
Alon has entered into Supply and Offtake Agreements and other associated agreements (together the "Supply and Offtake Agreements") with J. Aron & Company ("J. Aron"), to support the operations of the Big Spring, Krotz Springs and California refineries. Pursuant to the Supply and Offtake Agreements, (i) J. Aron agreed to sell to Alon, and Alon agreed to buy from J. Aron, at market prices, crude oil for processing at the refineries and (ii) Alon agreed to sell, and J. Aron agreed to buy, at market prices, certain refined products produced at the refineries.
The Supply and Offtake Agreements also provided for the sale, at market prices, 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 facilities, and to identify prospective purchasers of refined products on J. Aron's behalf. The Supply and Offtake Agreements were amended in February 2013 and have initial terms that expire in May 2019. J. Aron may elect to terminate the Supply and Offtake Agreements prior to the expiration of the initial term in May 2016 and upon each anniversary thereof, on six months prior notice. Alon may elect to terminate in May 2018 on six months prior notice.
Following expiration or termination of the Supply and Offtake Agreements, Alon is obligated to purchase the crude oil and refined product inventories then owned by J. Aron and located at the leased storage facilities at market prices at that time.
In association with the supply and offtake agreement at the Krotz Springs refinery, Alon entered into a secured Credit Agreement (the “Krotz Springs Standby LC Facility”) by and between Alon, as Borrower, and Goldman Sachs Bank USA, as Issuing Bank. The Krotz Springs Standby LC Facility provides for up to $200,000 of letters of credit to be issued to J. Aron. Obligations under the Krotz Springs Standby LC Facility are secured by a first priority lien on the existing and future accounts receivable and inventory of Alon Refining Krotz Springs, Inc. and its subsidiaries ("ARKS"), a wholly owned subsidiary of Alon. The Krotz Springs Standby LC Facility includes customary events of default and restrictions on the activities of ARKS. The Krotz Springs Standby LC Facility contains no maintenance financial covenants. At this time there is no further availability under the Krotz Springs Standby LC Facility. In August 2013, Alon amended the Krotz Springs Standby LC Facility to extend the maturity date to July 2016.
As of June 30, 2013 and December 31, 2012, Alon had net current payables to J. Aron for purchases of $34,754 and $37,940, respectively, non-current liabilities related to the original financing of $129,606 and $115,955, respectively, and a consignment inventory receivable representing a deposit paid to J. Aron of $26,179 and $26,179, respectively.
Additionally, Alon had net current payables of $1,125 and net current receivables of $5,878 at June 30, 2013 and December 31, 2012, 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.

12

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


(8)
Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following:
 
June 30,
2013
 
December 31,
2012
Refining facilities
$
1,776,492

 
$
1,781,701

Pipelines and terminals
43,445

 
43,445

Retail
172,269

 
164,998

Other
14,760

 
14,296

Property, plant and equipment, gross
2,006,966

 
2,004,440

Less accumulated depreciation
(563,884
)
 
(511,947
)
Property, plant and equipment, net
$
1,443,082

 
$
1,492,493

(9)
Additional Financial Information
The tables that follow provide additional financial information related to the consolidated financial statements.
(a)
Other Assets, Net
 
June 30,
2013
 
December 31,
2012
Deferred turnaround and chemical catalyst cost
$
14,574

 
$
15,978

Environmental receivables
10,696

 
13,563

Deferred debt issuance costs
12,638

 
14,705

Intangible assets, net
7,898

 
9,384

Receivable from supply agreements
26,179

 
26,179

Other, net
17,690

 
14,849

Total other assets
$
89,675

 
$
94,658

(b)
Accrued Liabilities and Other Non-Current Liabilities
 
June 30,
2013
 
December 31,
2012
Accrued Liabilities:
 
 
 
Taxes other than income taxes, primarily excise taxes
$
29,797

 
$
37,888

Employee costs
13,058

 
18,995

Commodity contracts
1,495

 
1,444

Accrued finance charges
11,581

 
11,633

Environmental accrual
7,631

 
6,730

RINs obligation
8,016

 

Other
32,906

 
25,889

Total accrued liabilities
$
104,484

 
$
102,579

 
 
 
 
Other Non-Current Liabilities:
 
 
 
Pension and other postemployment benefit liabilities, net
$
60,456

 
$
58,270

Environmental accrual (Note 16)
51,008

 
54,672

Asset retirement obligations
12,183

 
11,867

Consignment inventory
129,606

 
115,955

Commodity contracts
1,076

 

Other
13,718

 
14,182

Total other non-current liabilities
$
268,047

 
$
254,946


13

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


(10)
Postretirement Benefits
Alon has four defined benefit pension plans covering substantially all of its employees, excluding employees of Alon's retail segment. 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 2013 to its pension plans have not changed significantly from amounts previously disclosed in Alon’s consolidated financial statements for the year ended December 31, 2012. For the six months ended June 30, 2013 and 2012, Alon contributed $2,075 and $2,920, 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 and six months ended June 30, 2013 and 2012:
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
1,116

 
$
943

 
$
2,232

 
$
1,886

Interest cost
1,100

 
1,031

 
2,200

 
2,063

Expected return on plan assets
(1,157
)
 
(1,076
)
 
(2,314
)
 
(2,153
)
Amortization of net loss
1,005

 
645

 
2,010

 
1,291

Net periodic benefit cost
$
2,064

 
$
1,543

 
$
4,128

 
$
3,087

(11) Indebtedness
Debt consisted of the following:
 
June 30,
2013
 
December 31,
2012
Term loan credit facility
$
245,312

 
$
246,311

Revolving credit facility

 
49,000

Senior secured notes
212,826

 
211,573

Retail credit facilities
71,626

 
80,133

Total debt
529,764

 
587,017

Less current portion
(9,478
)
 
(9,504
)
Total long-term debt
$
520,286

 
$
577,513

Alon had outstanding letters of credit under the Alon Energy Letter of Credit Facility of $59,450 and $59,485 at June 30, 2013 and December 31, 2012, respectively.
Alon had borrowings of $0 and $49,000 and letters of credit of $100,528 and $58,759 outstanding under the Alon USA LP revolving credit facility at June 30, 2013 and December 31, 2012, respectively.
Alon has certain credit agreements that contain restrictive covenants, including maintenance financial covenants. At June 30, 2013, Alon was in compliance with these maintenance financial covenants.
(12)
Stock-Based Compensation (share values in dollars)
Alon’s overall executive incentive compensation program includes 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.

14

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


Restricted Stock. Non-employee directors, and non-employee directors of Alon's subsidiaries who are designated by Alon's directors, are awarded an annual grant of $25 in shares of restricted stock. In May 2013, Alon granted awards of 4,257 restricted shares at a grant date price of $17.62 per share. The restricted shares granted to the non-employee directors vest over a period of three years, assuming continued service at vesting.
In May 2013, Alon granted awards of 255,000 restricted shares to certain executive officers at a grant date price of $17.25 per share. These May 2013 restricted shares will vest as follows:  50% in May 2014 and 50% in May 2016, assuming continued service at vesting.
The following table summarizes the restricted share activity from January 1, 2012:
 
 
 
Weighted
Average
Grant Date
Fair Values
Nonvested Shares
Shares
 
(per share)
Nonvested at January 1, 2012
194,906

 
$
13.26

Granted
228,648

 
9.63

Vested
(97,424
)
 
13.27

Forfeited

 

Nonvested at December 31, 2012
326,130

 
$
10.71

Granted
259,247

 
17.28

Vested
(136,693
)
 
10.24

Forfeited

 

Nonvested at June 30, 2013
448,684

 
$
14.65

Compensation expense for restricted stock awards amounted to $620 and $545 for the three months ended June 30, 2013 and 2012, respectively, and $1,137 and $719 for the six months ended June 30, 2013 and 2012, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations.
As of June 30, 2013, there was $5,401 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 2.4 years. The fair value of shares vested in 2013 was $2,379.
Restricted Stock Units. In May 2011, Alon granted 500,000 restricted stock units to the CEO and President of Alon at a grant date fair value of $11.47 per share. Each restricted unit represents the right to receive one share of Alon common stock upon the vesting of the restricted stock unit. All 500,000 restricted stock units vest on March 1, 2015, assuming continued service at vesting. Compensation expense for the restricted stock units amounted to $374 and $374 for the three months ended June 30, 2013 and 2012, respectively, and $748 and $748 for the six months ended June 30, 2013 and 2012, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations.
Stock Appreciation Rights. Through June 30, 2013, Alon has granted awards of 599,165 SARs to certain officers and key employees of Alon of which 60% of these SARs have a grant price of $28.46 per share and the remaining SARs have grant prices ranging from $10.00 to $16.00 per share. As of June 30, 2013, 437,165 SARs have expired without being exercised with 134,752 SARs remaining outstanding at June 30, 2013.
Compensation expense for the SARs grants amounted to $6 and $14 for the three months ended June 30, 2013 and 2012, respectively, and $12 and $29 for the six months ended June 30, 2013 and 2012, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations.
(13)
Equity (share values in dollars)
(a)
Common Stock
Amended Shareholder Agreement. In 2011, an agreement was reached with one of the non-controlling interest shareholders of Alon Assets, Inc. ("Alon Assets"), whereby the participant would exchange 2,019 shares of Alon Assets ratably over a three year period for up to 377,710 shares of Alon's common stock. One-third of the Alon Assets shares were exchanged in each of October 2012 and October 2011, and the remaining one-third will be exchanged in October 2013.
In 2012, Alon signed agreements with the two remaining non-controlling interest shareholders of Alon Assets. Alon has the right to exchange 581,699 shares of its common stock over a period of 12 quarters and 2,326,946 shares of its common stock over a period of 20 quarters, beginning July 2012, for 15,549.3 shares of Alon Assets.

15

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


During the six months ended June 30, 2013, 329,644 shares of Alon's common stock were issued in exchange for 1,762.24 shares of Alon Assets with 2,249,356 shares of Alon's common stock available for exchange at June 30, 2013.
Compensation expense associated with the difference in value between the participants' ownership of Alon Assets compared to Alon's common stock of $734 and $1,498 was recognized for the three and six months ended June 30, 2013 and is included in selling, general and administrative expenses in the consolidated statements of operations.
(b)
Preferred stock
Preferred Stock Conversion. During the six months ended June 30, 2013, certain shareholders of Alon Israel and their affiliates converted 651,820 shares of Series B Preferred Stock to 967,107 shares of Alon's common stock.
(c)
Dividends
Common Stock Dividends. On March 15, 2013, 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, 2013.
On June 14, 2013, Alon paid a regular quarterly cash dividend of $0.06 per share and a special non-recurring dividend of $0.16 per share on Alon's common stock to stockholders of record at the close of business on May 31, 2013.
Preferred Stock Dividends. Alon issued 91,789 shares of common stock for payment of the quarterly 8.5% preferred stock dividend to preferred stockholders for the six months ended June 30, 2013.
Partnership Distributions. On March 1, 2013, the Partnership paid a cash distribution of $35,626, or $0.57 per unit, for the period of November 27, 2012 through and including December 31, 2012. The total cash distribution paid to non-affiliated common unitholders was $6,556.
On May 15, 2013, the Partnership paid a cash distribution of $92,503, or $1.48 per unit, for the period of January 1, 2013 through and including March 31, 2013. The total cash distribution paid to non-affiliated common unitholders was $17,023.
(d)
Accumulated Other Comprehensive Loss
The following table displays the change in accumulated other comprehensive loss, net of tax.
 
Unrealized Gain on Cash Flow Hedges
 
Defined Benefit Pension Plans
 
Total
Balance at December 31, 2012
$
455

 
$
(30,902
)
 
$
(30,447
)
Current period other comprehensive income, net of tax
7,127

 

 
7,127

Balance at June 30, 2013
$
7,582

 
$
(30,902
)
 
$
(23,320
)
(14) Earnings Per Share
Basic earnings per share is calculated as net income 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 and granted restricted stock units using the treasury stock method and the dilutive effect of convertible preferred shares using the if-converted method.

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


The calculation of earnings per share, basic and diluted, for the three and six months ended June 30, 2013 and 2012, is as follows:
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net income available to stockholders
$
11,496

 
$
43,091

 
$
65,680

 
$
13,724

less: preferred stock dividends
757

 

 
1,515

 

Net income available to common stockholders
10,739

 
43,091

 
64,165

 
13,724

 
 
 
 
 
 
 
 
Weighted average number of shares of common stock outstanding
62,614

 
56,238

 
62,285

 
56,133

Dilutive SARs, RSUs and convertible preferred stock
5,457

 
10,397

 
5,458

 
10,429

Weighted average number of shares of common stock outstanding assuming dilution
68,071

 
66,635

 
67,743

 
66,562

Earnings per share – basic
$
0.17

 
$
0.77

 
$
1.03

 
$
0.24

Earnings per share – diluted
$
0.17

 
$
0.65

 
$
0.97

 
$
0.21

For the three and six months ended June 30, 2013 and 2012, the weighted average number of diluted shares includes all potentially dilutive securities.
(15)
Related-Party Transactions
In March 2012, pursuant to the terms of the Series B Convertible Preferred Stock Agreement, Alon issued 1,200,000 shares of 8.5% Series B Convertible Preferred Stock for $12,000 to certain shareholders of Alon Israel and their affiliates. In 2012 and January 2013, 480,000 and 651,820 shares, respectively, of Series B Convertible Preferred Stock were converted into shares of Alon's common stock. At June 30, 2013, 68,180 shares of Series B Convertible Preferred Stock remain outstanding.
(16)
Commitments and Contingencies
(a)
Commitments
In the normal course of business, Alon has long-term commitments to purchase, at market prices, 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.
(b)
Contingencies
Alon is involved in various 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 loss contingencies pursuant to federal, state, and local environmental laws and regulations. These laws and regulations govern 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 contingent obligations relate to sites owned by Alon and its past or present operations. Alon is currently participating in environmental investigations, assessments and cleanups pertaining to its 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 are unknown and will depend on factors such as the 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

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


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 $58,639 ($7,631 accrued liability and $51,008 non-current liability) at June 30, 2013, and $61,402 ($6,730 accrued liability and $54,672 non-current liability) at December 31, 2012.
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 current receivables of $3,239 and $3,239 and non-current receivables of $9,240 and $11,599 at June 30, 2013 and December 31, 2012, respectively.
Alon has indemnification agreements with prior owners for part of the remediation expenses at certain West Coast assets. Alon has recorded current receivables of $604 and $604 and non-current receivables of $1,456 and $1,964 at June 30, 2013 and December 31, 2012, respectively.
(17)    Subsequent Events
Dividend Declared
On August 6, 2013, Alon declared a regular quarterly cash dividend of $0.06 per share payable on September 19, 2013, to stockholders of record at the close of business on September 5, 2013.
Partnership Distribution Declared
On August 5, 2013 the Board of the General Partner declared a cash distribution to the Partnership's common unitholders for the period from April 1, 2013 through and including June 30, 2013 of approximately $44,375, or $0.71 per common unit. The cash distribution will be paid on August 23, 2013 to unitholders of record at the close of business on August 16, 2013. The total cash distribution to be paid to non-affiliated common unitholders is approximately $8,165.
New Supply and Offtake Agreements
In July 2013, Alon entered into offtake agreements with two investment grade oil companies that provides for the sale, at market prices, of light cycle oil and high sulfur distillate blendstock through June 2015. Both agreements will automatically extend for successive one year terms unless either Alon or the other party cancels the agreement by delivering written notice of termination to the other at least 180 days prior to the end of the then current term.

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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, 2012. In this document, the words “Alon,” “the Company,” “we” and “our” refer to Alon USA Energy, Inc. and its subsidiaries or to Alon USA Energy, Inc. or an individual subsidiary, and not to any other person. Generally, the words "we", "our" and "us" include Alon USA Partners, LP and its subsidiaries (the "Partnership") as consolidated subsidiaries of Alon USA Energy, Inc.
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 of 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 spread between West Texas Intermediate ("WTI") crude oil and West Texas Sour ("WTS") crude oil;
changes in the spread between WTI crude oil and Light Louisiana Sweet ("LLS") crude oil, as well as the spread between California crudes such as Buena Vista and WTI;
the effects of transactions involving forward contracts and derivative instruments;
actions of customers and competitors;
termination of our Supply and Offtake Agreements with J. Aron & Company (“J. Aron”), which include all our refineries and most of our asphalt terminals, of which J. Aron is our largest supplier of crude oil and our largest customer of refined products. Additionally, we are obligated to repurchase all consigned inventories and certain other inventories upon termination of these Supply and Offtake Agreements;
changes in fuel and utility costs incurred by our facilities;
disruptions due to equipment interruption, pipeline disruptions or failures 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 the Renewable Fuel Standard, including the availability, cost and price volatility of Renewable Identification Numbers ("RINs");
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, casualty losses and other matters beyond our control;
the effect of any national or international financial crisis 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, 2012 under the caption “Risk Factors”.

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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.
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 214,000 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 Marketing Segment. Our refining and 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 Paramount, Bakersfield and Long Beach refineries together as our “California refineries.” The refineries in our refining and marketing segment have a combined throughput capacity of approximately 214,000 bpd. At these refineries we refine crude oil into petroleum products, including gasoline, diesel fuel, jet fuel, petrochemicals, petrochemical feedstocks and asphalts, which are marketed primarily in the South Central, Southwestern, and Western United States.
Alon owns the Big Spring refinery and wholesale marketing operations through Alon USA Partners, LP (the "Partnership") (NYSE: ALDW). Alon markets transportation fuels produced at its Big Spring refinery in West and Central Texas, Oklahoma, New Mexico and Arizona. Alon refers to its operations in these regions as its “physically integrated system” because it supplies its Alon branded and unbranded distributors in these regions with motor fuels produced at its Big Spring refinery and distributed through a network of pipelines and terminals which it either owns or has access to through leases or long-term throughput agreements.
We supply gasoline and diesel to approximately 640 Alon branded retail sites, including our retail segment convenience stores. Approximately 65% of the gasoline and 29% of the diesel motor fuel produced at the Big Spring refinery was transferred to our retail segment convenience stores at prices substantially determined by wholesale market prices. Additionally, we license the use of the Alon brand name and provide credit card processing services to approximately 99 licensed locations that are not under fuel supply agreements.
We market refined products purchased by third parties or produced by our California refineries to wholesale distributors, other refiners and third parties primarily on the West Coast. In December 2012, the California refineries suspended operations.
We market refined products produced by our Krotz Springs refinery to other refiners and third parties. The refinery’s location provides access to upriver markets on the Mississippi and Ohio Rivers. The refinery also uses its direct access to the Colonial Pipeline to transport products to markets in the Southern and Eastern United States. The Krotz Springs refinery 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.
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 11 refinery/terminal locations in Texas (Big Spring), California (Paramount, Long Beach, Elk Grove, Bakersfield and Mojave), Oregon (Willbridge), Washington (Richmond Beach), Arizona (Phoenix and Flagstaff) and Nevada (Fernley) (50% interest) as well as through 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 Segment. Our retail segment operates 298 convenience stores located 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 Alon brand names. Substantially all of the motor fuel sold through our retail segment is supplied by our Big Spring refinery.

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Second Quarter Operational and Financial Highlights
Operating income for the second quarter of 2013 was $42.0 million, compared to operating income of $92.6 million in the same period last year. Our operational and financial highlights for the second quarter of 2013 include the following:
Combined refinery throughput for the second quarter of 2013 averaged 130,928 bpd, consisting of 72,124 bpd at the Big Spring refinery and 58,804 bpd at the Krotz Springs refinery, compared to 160,071 bpd for the second quarter of 2012, consisting of 64,558 bpd at the Big Spring refinery, 31,206 bpd at the California refineries and 64,307 bpd at the Krotz Springs refinery. The lower throughput rates were due to the California refineries being shut down during the first half of 2013 as well as the impact of the Krotz Springs refinery unplanned shut down and repair of the reformer unit for approximately one month during the second quarter of 2013.
Operating margin at the Big Spring refinery was $16.21 per barrel for the second quarter of 2013 compared to $25.79 per barrel for the same period in 2012. This decrease in operating margin is mainly due to lower Gulf Coast 3/2/1 crack spreads and a narrowing of the WTI to WTS spread.
Operating margin at the Krotz Springs refinery was $2.30 per barrel for the second quarter of 2013 compared to $5.28 per barrel for the same period in 2012. This decrease is mainly due to costs incurred from the unplanned shut down and repair of the reformer unit and lower Gulf Coast 2/1/1 crack spreads, partially offset by the higher utilization of lower cost WTI priced crude oils.
The average Gulf Coast 3/2/1 crack spread was $21.17 per barrel for the second quarter of 2013 compared to $26.04 per barrel for the second quarter of 2012. The average Gulf Coast 2/1/1 high sulfur diesel crack spread for the second quarter of 2013 was $4.15 per barrel compared to $7.72 per barrel for the second quarter of 2012.
The average WTI to WTS spread for the second quarter of 2013 was $0.36 per barrel compared to $5.36 per barrel for the same period in 2012. The average LLS to WTI spread for the second quarter of 2013 was $15.07 per barrel compared to $18.11 per barrel for the same period in 2012.
Asphalt margins in the second quarter of 2013 were $83.27 per ton compared to $67.31 per ton in the second quarter of 2012. This increase is primarily due to lower costs winter fill asphalt sold during the second quarter of 2013. The average blended asphalt sales price decreased 2.8% from $608.81 per ton in the second quarter of 2012 to $591.81 per ton in the second quarter of 2013 and the average non-blended asphalt sales price decreased 18.0% from $471.41 per ton in the second quarter of 2012 to $386.40 per ton in the second quarter of 2013.
Retail fuel sales volume increased by 14.5% from 41.5 million gallons in the second quarter of 2012 to 47.5 million gallons in the second quarter of 2013.
RINs costs for the three and six months ended June 30, 2013 were $8.0 million. We were not subject to the Renewable Fuel Standard requirements in 2012, which resulted in RINs carryforward credits. These 2012 RINs carryforward credits were used to offset our entire RINs obligations, net of RINs generated, during the three months ended March 31, 2013.
Major Influences on Results of Operations
Refining and Marketing. Earnings and cash flows from our refining and marketing segment are primarily affected by the difference between refined product prices and the prices for crude oil and other feedstocks. These prices 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 calculate this margin for each refinery by dividing the refinery’s gross margin by its throughput volumes. Gross margin is the difference between net sales and cost of sales (exclusive of substantial hedge positions and certain inventory adjustments). Each refinery is compared to an industry benchmark that is intended to approximate that refinery's crude slate and product yield.
We compare our Big Spring refinery’s operating margin to the Gulf Coast 3/2/1 crack spread. A Gulf Coast 3/2/1 crack spread is calculated assuming that three barrels of WTI crude oil are converted, or cracked, into two barrels of Gulf Coast conventional gasoline and one barrel of Gulf Coast ultra-low sulfur diesel.

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We compare our California refineries’ operating margin to the West Coast 3/1/1/1 crack spread. A West Coast 3/1/1/1 crack spread is calculated assuming that three barrels of Buena Vista crude oil are converted into one barrel of West Coast LA CARBOB pipeline gasoline, one barrel of LA ultra-low sulfur pipeline diesel and one barrel of LA 380 pipeline CST fuel oil.
We compare our Krotz Springs refinery’s operating margin to the Gulf Coast 2/1/1 crack spread. A Gulf Coast 2/1/1 crack spread is calculated assuming that two barrels of LLS crude oil are converted into one barrel of Gulf Coast conventional gasoline and one barrel of Gulf Coast high sulfur diesel.
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 and the value of West Texas Sour, or WTS, a medium, sour crude oil. We refer to this differential as the WTI/WTS, or 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 and 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 primarily comprised of LLS crude oil and WTI crude oil. We measure the cost of refining the LLS crude oil by calculating the difference between the average value of LLS crude oil and 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 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 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 or asphalt purchased from third parties. Asphalt is transferred to our asphalt segment from our refining and marketing segment at prices substantially determined by reference to the cost of crude oil, which is intended to approximate wholesale market prices. 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. Earnings and cash flows from our retail segment are primarily affected by merchandise and retail fuel sales volumes and margins at our convenience stores. 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. Retail fuel margin is equal to retail fuel sales less the delivered cost of fuel and excise taxes, measured on a cents per gallon (“cpg”) basis. Our retail fuel margins are driven by local supply, demand and competitor pricing. Our retail 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 six months ended June 30, 2013 and 2012, have been influenced by the following factors which are fundamental to understanding comparisons of our period-to-period financial performance.
Maintenance and Reduced Crude Oil Throughput
During the three and six months ended June 30, 2013, the Krotz Springs refinery was impacted by the unplanned shut down and repair of the reformer unit for approximately one month.
The California refineries were not in operation for the three and six months ended June 30, 2013 and the first quarter of 2012. The California refineries were in operation for the three months ended June 30, 2012.
Certain Derivative Impacts
Included in unrealized (gains) losses on commodity swaps and cost of sales in the consolidated statements of operations for the three and six months ended June 30, 2013 are total gains of $10.0 million and $10.0 million, respectively, compared to total losses of $7.4 million and $67.0 million for the three and six months ended June 30, 2012, respectively.
Included in other income (loss), net in the consolidated statements of operations are losses on heating oil call option crack spread contracts of $7.3 million for the six months ended June 30, 2012.
Initial Public Offering of Alon USA Partners, LP
On November 26, 2012, the Partnership completed its initial public offering of 11,500,000 common units representing limited partner interests. As of June 30, 2013, the 11,502,476 common units held by the public represent 18.4% of the Partnership's common units outstanding. We own the remaining 81.6% of the Partnership's common units and Alon USA Partners GP, LLC (the "General Partner"), our wholly-owned subsidiary, owns 100% of the non-economic general partner interest in the Partnership. The Partnership is consolidated within the refining and marketing segment.
The non-controlling interest in subsidiaries on the consolidated balance sheets includes the investment by partners other than us, including those partners’ share of net income and distributions of the Partnership since the close of its initial public offering on November 26, 2012. Net income attributable to non-controlling interest on the consolidated statements of operations includes those partners’ share of net income of the Partnership.
Renewable Fuel Standard
RINs costs for the three and six months ended June 30, 2013 were $8.0 million. We were not subject to the Renewable Fuel Standard requirements in 2012, which resulted in RINs carryforward credits. These 2012 RINs carryforward credits were used to offset our entire RINs obligations, net of RINs generated, during the three months ended March 31, 2013.
Costs Associated with Early Repayment of Debt
Interest expense for the six months ended June 30, 2012 includes a charge of $9.6 million for the write-off of unamortized original issuance discount associated with a term loan repayment.

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Results of Operations
The period-to-period comparison of our results of operations has been prepared using the historical periods included in our consolidated financial statements. We refer to our financial statement line items in the explanation of our period-to-period changes in results of operations. Below are general definitions of what those line items include and represent.
Net Sales. Net sales consist primarily of sales of refined petroleum products through our refining and marketing segment and asphalt segment and sales of merchandise, food products, and retail fuels, through our retail segment.
For the refining and 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 segments, which are eliminated through consolidation of our financial statements. Asphalt sales consist of gross sales, net of any discounts and applicable 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. Retail net sales consist of gross merchandise sales, less rebates, commissions and discounts, and gross fuel sales, including excise taxes. Our retail merchandise sales are affected primarily by competition and seasonal influences.
Cost of Sales. Refining and 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 retail fuels and for merchandise. Retail fuel cost of sales represents the cost of purchased fuel, including transportation costs and associated excises 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 marketing segment and asphalt segment, 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. Corporate overhead and marketing expenses are also included in SG&A expenses for the refining and marketing segment and asphalt segment.

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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 and six months ended June 30, 2013 and 2012. 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, 2012 is unaudited.
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(dollars in thousands, except per share data)
STATEMENTS OF OPERATIONS DATA:
 
 
 
 
 
 
 
Net sales (1)
$
1,676,595

 
$
1,910,489

 
$
3,327,791

 
$
3,702,622

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales
1,497,712

 
1,686,876

 
2,875,969

 
3,305,550

Unrealized (gains) losses on commodity swaps

 
(12,871
)
 

 
32,441

Direct operating expenses
71,446

 
76,874

 
145,668

 
149,083

Selling, general and administrative expenses (2)
43,101

 
36,208

 
84,842

 
71,348

Depreciation and amortization (3)
30,798

 
30,419

 
61,961

 
61,130

Total operating costs and expenses
1,643,057

 
1,817,506

 
3,168,440

 
3,619,552

Gain (loss) on disposition of assets
8,494

 
(345
)
 
8,512

 
(214
)
Operating income
42,032

 
92,638

 
167,863

 
82,856

Interest expense (4)
(20,261
)
 
(24,300
)
 
(41,553
)
 
(55,340
)
Equity earnings of investees
2,110

 
1,509

 
1,729

 
1,570

Other income (loss), net (5)
46

 
1,107

 
129

 
(6,993
)
Income before income tax expense
23,927

 
70,954

 
128,168

 
22,093

Income tax expense
3,985

 
25,680

 
34,575

 
7,929

Net income
19,942

 
45,274

 
93,593

 
14,164

Net income attributable to non-controlling interest
8,446

 
2,183

 
27,913

 
440

Net income available to stockholders
$
11,496

 
$
43,091

 
$
65,680

 
$
13,724

Earnings per share, basic
$
0.17

 
$
0.77

 
$
1.03

 
$
0.24

Weighted average shares outstanding, basic (in thousands)
62,614

 
56,238

 
62,285

 
56,133

Earnings per share, diluted
$
0.17

 
$