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, 2014
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, 2014, was 69,370,172.

 
 



TABLE OF CONTENTS

 
Page


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,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
197,151

 
$
224,499

Accounts and other receivables, net
155,636

 
200,398

Income tax receivable
7,543

 
16,053

Inventories
169,530

 
128,770

Deferred income tax asset
12,599

 
13,045

Prepaid expenses and other current assets
29,555

 
18,629

Total current assets
572,014

 
601,394

Equity method investments
26,667

 
26,251

Property, plant and equipment, net
1,398,914

 
1,429,342

Goodwill
101,913

 
105,943

Other assets, net
134,599

 
82,210

Total assets
$
2,234,107

 
$
2,245,140

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
295,050

 
$
336,499

Accrued liabilities
97,631

 
120,858

Current portion of long-term debt
50,506

 
83,174

Total current liabilities
443,187

 
540,531

Other non-current liabilities
183,929

 
189,474

Long-term debt
593,204

 
529,074

Deferred income tax liability
374,980

 
360,657

Total liabilities
1,595,300

 
1,619,736

Commitments and contingencies (Note 16)

 

Stockholders’ equity:
 
 
 
Preferred stock, par value $0.01, 15,000,000 shares authorized; 68,180 shares issued and outstanding at June 30, 2014 and December 31, 2013
682

 
682

Common stock, par value $0.01, 150,000,000 shares authorized; 69,204,542 and 68,641,428 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
692

 
686

Additional paid-in capital
512,917

 
509,170

Accumulated other comprehensive loss, net of tax
(11,831
)
 
(37,515
)
Retained earnings
109,954

 
124,936

Total stockholders’ equity
612,414

 
597,959

Non-controlling interest in subsidiaries
26,393

 
27,445

Total equity
638,807

 
625,404

Total liabilities and equity
$
2,234,107

 
$
2,245,140


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,
 
2014
 
2013
 
2014
 
2013
Net sales (1)
$
1,742,883

 
$
1,676,595

 
$
3,426,128

 
$
3,327,791

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales
1,580,447

 
1,497,712

 
3,086,992

 
2,875,969

Direct operating expenses
67,630

 
71,446

 
138,308

 
145,668

Selling, general and administrative expenses
46,333

 
43,101

 
85,722

 
84,842

Depreciation and amortization
29,453

 
30,798

 
59,331

 
61,961

Total operating costs and expenses
1,723,863

 
1,643,057

 
3,370,353

 
3,168,440

Gain (loss) on disposition of assets
(88
)
 
8,494

 
2,117

 
8,512

Operating income
18,932

 
42,032

 
57,892

 
167,863

Interest expense
(29,256
)
 
(20,261
)
 
(57,271
)
 
(41,553
)
Equity earnings of investees
1,278

 
2,110

 
819

 
1,729

Other income, net
638

 
46

 
621

 
129

Income (loss) before income tax expense
(8,408
)
 
23,927

 
2,061

 
128,168

Income tax expense (benefit)
(1,971
)
 
3,985

 
123

 
34,575

Net income (loss)
(6,437
)
 
19,942

 
1,938

 
93,593

Net income attributable to non-controlling interest
1,080

 
8,446

 
8,670

 
27,913

Net income (loss) available to stockholders
$
(7,517
)
 
$
11,496

 
$
(6,732
)
 
$
65,680

Earnings (loss) per share, basic
$
(0.11
)
 
$
0.17

 
$
(0.10
)
 
$
1.03

Weighted average shares outstanding, basic (in thousands)
68,851

 
62,614

 
68,734

 
62,285

Earnings (loss) per share, diluted
$
(0.11
)
 
$
0.17

 
$
(0.10
)
 
$
0.97

Weighted average shares outstanding, diluted (in thousands)
68,851

 
68,071

 
68,734

 
67,743

Cash dividends per share
$
0.06

 
$
0.22

 
$
0.12

 
$
0.26

___________
(1)
Includes excise taxes on sales by the retail segment of $19,101 and $18,531 for the three months and $36,911 and $35,836 for the six months ended June 30, 2014 and 2013, 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,
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
(6,437
)
 
$
19,942

 
$
1,938

 
$
93,593

Other comprehensive income:
 
 
 
 
 
 
 
Interest rate derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
Unrealized holding loss arising during period
(802
)
 

 
(802
)
 

Loss reclassified to earnings - interest expense
14

 

 
14

 

Net loss, before tax
(788
)
 

 
(788
)
 

Income tax benefit
(290
)
 

 
(290
)
 

Net loss, net of tax
(498
)
 

 
(498
)
 

Commodity contracts designated as cash flow hedges:
 
 
 
 
 
 
 
Unrealized holding gain arising during period
8,925

 
12,369

 
32,507

 
21,750

Gain reclassified to earnings - cost of sales

 
(10,018
)
 

 
(9,994
)
Amortization of unrealized loss on de-designated cash flow hedges - cost of sales
2,153

 

 
10,428

 

Net gain, before tax
11,078

 
2,351

 
42,935

 
11,756

Income tax expense
4,098

 
862

 
15,885

 
4,360

Net gain, net of tax
6,980

 
1,489

 
27,050

 
7,396

Total other comprehensive income, net of tax
6,482

 
1,489

 
26,552

 
7,396

Comprehensive income
45

 
21,431

 
28,490

 
100,989

Comprehensive income attributable to non-controlling interest
1,261

 
8,446

 
9,538

 
28,182

Comprehensive income (loss) attributable to stockholders
$
(1,216
)
 
$
12,985

 
$
18,952

 
$
72,807



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,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
1,938

 
$
93,593

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
59,331

 
61,961

Stock compensation
3,540

 
3,008

Deferred income tax expense (benefit)
(825
)
 
6,527

Equity earnings of investees

 
(1,729
)
Amortization of debt issuance costs
2,124

 
2,272

Amortization of original issuance discount
3,309

 
1,504

Write-off of unamortized original issuance discount
254

 

Write-off of unamortized debt issuance costs
253

 

Gain on disposition of assets
(2,117
)
 
(8,512
)
Unrealized loss on commodity swaps
9,510

 

Changes in operating assets and liabilities:
 
 
 
Accounts and other receivables, net
49,314

 
(22,000
)
Income tax receivable
8,510

 

Inventories
(41,744
)
 
(20,708
)
Prepaid expenses and other current assets
(10,926
)
 
9,732

Other assets, net
147

 
2,662

Accounts payable
(31,459
)
 
(13,066
)
Accrued liabilities
(25,458
)
 
2,485

Other non-current liabilities
5,941

 
12,025

Net cash provided by operating activities
31,642

 
129,754

Cash flows from investing activities:
 
 
 
Capital expenditures
(54,655
)
 
(30,622
)
Capital expenditures for turnarounds and catalysts
(26,269
)
 
(6,624
)
Contribution to equity method investment
(597
)
 
(581
)
Dividends from investees, net of equity earnings
181

 

Proceeds from disposition of assets
40,333

 
25,745

Net cash used in investing activities
(41,007
)
 
(12,082
)
Cash flows from financing activities:
 
 
 
Dividends paid to stockholders
(8,221
)
 
(16,228
)
Dividends paid to non-controlling interest
(389
)
 
(731
)
Distributions paid to non-controlling interest in the Partnership
(10,010
)
 
(23,579
)
Inventory agreement transactions
(25,200
)
 

Deferred debt issuance costs
(2,062
)
 
(205
)
Revolving credit facilities, net

 
(54,000
)
Additions to long-term debt
145,000

 

Payments on long-term debt
(117,101
)
 
(4,757
)
Net cash used in financing activities
(17,983
)
 
(99,500
)
Net increase (decrease) in cash and cash equivalents
(27,348
)
 
18,172

Cash and cash equivalents, beginning of period
224,499

 
116,296

Cash and cash equivalents, end of period
$
197,151

 
$
134,468

Supplemental cash flow information:
 
 
 
Cash paid for interest, net of capitalized interest
$
57,906

 
$
37,829

Cash paid (refunds received) for income tax
$
(6,740
)
 
$
19,100

Supplemental disclosure of non-cash activity:
 
 
 
Capital expenditures included in accounts payable and accrued liabilities
$
32,522

 
$


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
As used in this report, unless otherwise specified, the terms “Alon,” “we,” “us” or “our” refer to Alon USA Energy, Inc. and its consolidated subsidiaries or to Alon USA Energy, Inc. or an individual subsidiary. The “Partnership,” as used in this report, refers to Alon USA Partners, LP and its consolidated subsidiaries.
These consolidated financial statements and notes 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 our 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 our 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. Our results of operations for the three and six month periods ended June 30, 2014 are not necessarily indicative of the operating results that may be realized for the year ending December 31, 2014.
Our consolidated balance sheet as of December 31, 2013, 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 our Annual Report on Form 10-K for the year ended December 31, 2013.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard that provides accounting guidance for all revenue arising from contracts to provide goods or services to customers. This standard is intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The requirements from the new standard are effective for interim and annual periods beginning after December 15, 2016, and early adoption is not permitted. The standard allows for either full retrospective adoption or modified retrospective adoption. We are evaluating the guidance to determine the method of adoption and the impact of this standard on our consolidated financial statements.
(2)
Alon USA Partners, LP     
The Partnership (NYSE: ALDW) is a publicly traded limited partnership that owns the assets and operations of the Big Spring refinery and associated wholesale marketing operations. As of June 30, 2014, the 11,506,550 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 limited partner interests in the Partnership not owned by us are reflected in the results of operations in net income attributable to non-controlling interest and in our balance sheet in non-controlling interest in subsidiaries. The Partnership is consolidated within the refining and marketing segment.
We have agreements with the Partnership which establish fees for certain administrative and operational services provided by us and our subsidiaries to the Partnership, provide certain indemnification obligations and other matters and establish terms for the supply of products by the Partnership to us.
Partnership Distributions
The Partnership has adopted a policy pursuant to which it will distribute all of the available cash it generates each quarter, as defined in the partnership agreement and subject to the approval of the board of directors of the General Partner. The per unit amount of available cash to be distributed each quarter, if any, will be distributed within 60 days following the end of such quarter.

5

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, 2014, the Partnership paid the following cash distributions:
Date Paid
 
Distribution Amount Per Unit
 
Total Distribution Amount
 
Distribution Paid to Non-Affiliated Common Unitholders
March 3, 2014
 
$
0.18

 
$
11,250

 
$
2,070

May 21, 2014
 
0.69

 
43,130

 
7,940

(3)
Segment Data
Our 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.
(a)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 (the “California refineries”); and a light sweet crude oil refinery located in Krotz Springs, Louisiana. Our refineries have a combined throughput capacity of approximately 217,000 barrels per day (“bpd”). At these refineries, we refine crude oil into petroleum products including gasoline, diesel, jet fuel, petrochemicals, petrochemical feedstocks, asphalt and other petroleum-based products, which are marketed primarily in the South Central, Southwestern and Western regions of the United States. During the six months ended June 30, 2014 and 2013, we did not process crude oil at our California refineries.
We supply gasoline and diesel to 636 Alon branded retail sites, including our retail segment convenience stores. During 2014, approximately 66% of the gasoline and 32% of the diesel produced at our Big Spring refinery was transferred to our branded marketing business 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 76 licensed locations that are not under fuel supply agreements.
(b)Asphalt Segment
Our asphalt segment includes 10 refinery/terminal locations in Texas (Big Spring), California (Paramount, Long Beach, Elk Grove, Bakersfield and Mojave), 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, which specializes in marketing patented tire rubber modified asphalt products. The operations in which we have 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. Asphalt produced by our Big Spring refinery 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.
(c)Retail Segment
Our retail segment operates 296 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.
(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, 2014 and 2013 are presented below:
 
Refining and
Marketing
 
Asphalt
 
Retail
 
Corporate
 
Consolidated
Total
Three Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
1,372,547

 
$
117,677

 
$
252,659

 
$

 
$
1,742,883

Intersegment sales (purchases)
148,777

 
(9,233
)
 
(139,544
)
 

 

Depreciation and amortization
24,713

 
1,162

 
2,983

 
595

 
29,453

Operating income (loss)
16,765

 
(3,889
)
 
6,826

 
(770
)
 
18,932

Total assets
1,900,995

 
109,810

 
200,510

 
22,792

 
2,234,107

Turnarounds, catalysts and capital expenditures
43,081

 
1,501

 
2,841

 
494

 
47,917

 
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

Turnarounds, catalysts and capital expenditures
14,054

 
2,599

 
6,537

 
426

 
23,616

 
Refining and
Marketing
 
Asphalt
 
Retail
 
Corporate
 
Consolidated
Total
Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
2,738,373

 
$
213,848

 
$
473,907

 
$

 
$
3,426,128

Intersegment sales (purchases)
287,869

 
(26,216
)
 
(261,653
)
 

 

Depreciation and amortization
50,081

 
2,362

 
5,697

 
1,191

 
59,331

Operating income (loss)
56,769

 
(7,094
)
 
9,759

 
(1,542
)
 
57,892

Total assets
1,900,995

 
109,810

 
200,510

 
22,792

 
2,234,107

Turnarounds, catalysts and capital expenditures
70,124

 
3,219

 
6,222

 
1,359

 
80,924

 
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

Turnarounds, catalysts and capital expenditures
25,239

 
4,391

 
7,177

 
439

 
37,246

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.

7

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


(4)
Fair Value
We 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. We classify financial assets and financial liabilities into the following fair value hierarchy:
Level 1 -     valued based on quoted prices in active markets for identical assets and liabilities;
Level 2 -     valued based on quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability; and
Level 3 -     valued based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
As required, we utilize 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. We generally apply 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 our 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 instruments are carried at fair value, which are based on quoted market prices. Derivative instruments and the Renewable Identification Numbers (“RINs”) obligation are our only assets and liabilities measured at fair value on a recurring basis.
The RINs obligation represents the period-end deficit, if any, after considering any RINs acquired or under contract, necessary to meet our requirements to blend biofuels into the products we have produced. 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, 2014 and December 31, 2013:
 
Level 1
 
Level 2
 
Level 3
 
Total
As of June 30, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Commodity contracts (swaps)
$

 
$
6,528

 
$

 
$
6,528

Liabilities:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
104

 

 

 
104

Interest rate swaps

 
788

 

 
788

Fair value hedges

 
10,390

 

 
10,390

 
 
 
 
 
 
 
 
As of December 31, 2013
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
335

 
$

 
$

 
$
335

Liabilities:
 
 
 
 
 
 
 
Commodity contracts (swaps)

 
15,328

 
11,569

 
26,897

Fair value hedges

 
3,339

 

 
3,339

RINs obligation

 
334

 

 
334

Level 3 Financial Instruments
As of December 31, 2013, we had commodity price swap contracts related to forecasted sales of jet fuel and forecasted purchases of crude oil for which quoted forward market prices were not readily available. The forward rate used to value these commodity price swaps was derived using a projected forward rate using quoted market rates for similar products, adjusted for product grade differentials, a level 3 input. In January 2014, quoted forward market prices for these commodities became available, and the related financial liability was reclassified to level 2.

8

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 presents the changes in fair value of our level 3 assets and liabilities (all related to commodity price swap contracts) for the six months ended June 30, 2014:
 
 
For the Six Months Ended
 
 
June 30, 2014
Balance at beginning of period
 
$
(11,569
)
Change in fair value of level 3 trades open at the beginning of the period
 

Fair value of trades entered into during the period
 

Fair value of reclassification from level 3 to level 2
 
11,569

Settlement value of contractual maturities - Recognized in cost of sales
 

Balance at end of period
 
$

(5)
Derivative Financial Instruments
Mark to Market
Commodity Derivatives. We selectively utilize crude oil and refined product commodity derivative contracts to reduce the risk associated with potential price changes on committed obligations. We do not speculate using derivative instruments. Credit risk on our derivative instruments is mitigated by transacting with counterparties meeting established collateral and credit criteria.
Fair Value Hedges
Fair value hedges are used to hedge price volatility of certain refining inventories and firm commitments to purchase inventories. The gain or loss on a derivative instrument designated and qualifying as a fair value hedge, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, is recognized in earnings in the same period.
As of June 30, 2014, we have accounted for certain commodity contracts as fair value hedges with contract purchase volumes of 766 thousand barrels of crude oil with remaining contract terms through May 2019.
Cash Flow Hedges
To designate a derivative as a cash flow hedge, we document 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 transactions occur.
Commodity Derivatives. As of June 30, 2014, we have accounted for certain commodity swap contracts as cash flow hedges with net contract purchase volumes of 3,600 thousand barrels of crude oil and net contract sales volumes of 3,600 thousand barrels of refined products with the longest remaining contract term of eighteen months. Related to these transactions in other comprehensive income (“OCI”), we recognized unrealized gains of $11,078 and $2,351 for the three months and $42,935 and $11,756 for the six months ended June 30, 2014 and 2013, respectively.
In November 2013 and April 2014, we elected to de-designate certain commodity swap contracts that were previously designated as cash flow hedges. As of June 30, 2014, we have total net unrealized losses of $5,144 classified in OCI that related to the application of hedge accounting prior to de-designation, which will be recorded into earnings as the underlying transactions occur through the remainder of 2014. During the three and six months ended June 30, 2014, we reclassified $2,153 and $10,428 of losses, respectively, related to these de-designated cash flow hedges from OCI into cost of sales.
Interest Rate Derivatives. We selectively utilize interest rate swaps to manage our exposure to interest rate risk. In April 2014, we entered into three interest rate swap agreements, maturing March 2019, that effectively fix the variable LIBOR interest component of the term loan feature of the Alon Retail Credit Agreement, as defined in Note 12. The aggregate notional amount under these agreements covers approximately 75% of the outstanding principal of the term loan throughout the duration of the interest rate swaps. As of June 30, 2014, the outstanding principal of the term loan was $106,333. The interest rate swaps lock in an average fixed interest rate of 0.25% in 2014; 0.60% in 2015; 1.47% in 2016; 2.35% in 2017; 3.09% in 2018 and 3.28% thereafter. The interest rate swaps have been accounted for as cash flow hedges. Related to these transactions in OCI, we recognized unrealized losses of $788 during the three and six months ended June 30, 2014.

9

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


For the three and six months ended June 30, 2014 and 2013, there was no cash flow hedge ineffectiveness recognized in income. No component of our cash flow hedges’ gains or losses was excluded from the assessment of hedge effectiveness.
As of June 30, 2014, we have net unrealized gains of $12,166 classified in OCI related to cash flow hedges. Assuming commodity prices and interest rates remain unchanged, unrealized gains of $3,008 will be reclassified from OCI into earnings as the underlying transactions occur over the next twelve-month period.
The following tables present the effect of derivative instruments on the consolidated statements of financial position:
 
As of June 30, 2014
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
Accounts receivable
 
$
1,353

 
Accrued liabilities
 
$
1,457

Total derivatives not designated as hedging instruments
 
 
$
1,353

 
 
 
$
1,457

 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts (swaps)
Accounts receivable
 
$
4,552

 
 
 
$

Commodity contracts (swaps)
Other assets, net
 
1,976

 
 
 

Interest rate swaps
 
 

 
Other non-current liabilities
 
788

Fair value hedges
 
 

 
Other non-current liabilities
 
10,390

Total derivatives designated as hedging instruments
 
 
6,528

 
 
 
11,178

Total derivatives
 
 
$
7,881

 
 
 
$
12,635

 
As of December 31, 2013
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
Accounts receivable
 
$
1,533

 
Accrued liabilities
 
$
1,198

Total derivatives not designated as hedging instruments
 
 
$
1,533

 
 
 
$
1,198

 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
 
$

 
Accrued liabilities
 
$
15,328

Commodity contracts (swaps)
 
 

 
Other non-current liabilities
 
11,569

Fair value hedges
 
 

 
Other non-current liabilities
 
3,339

Total derivatives designated as hedging instruments
 
 

 
 
 
30,236

Total derivatives
 
 
$
1,533

 
 
 
$
31,434


10

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 the consolidated statements of operations and accumulated other comprehensive income:
Derivatives designated as hedging instruments:
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, 2014
 
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
$
11,078

 
Cost of sales
 
$
(2,153
)
 
 
 
$

Interest rate swaps
 
(788
)
 
Interest expense
 
(14
)
 
 
 

Total derivatives
 
$
10,290

 
 
 
$
(2,167
)
 
 
 
$

 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended June 30, 2013
 
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
$
2,351

 
Cost of sales
 
$
10,018

 
 
 
$

Total derivatives
 
$
2,351

 
 
 
$
10,018

 
 
 
$

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, 2014
 
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
$
42,935

 
Cost of sales
 
$
(10,428
)
 
 
 
$

Interest rate swaps
 
(788
)
 
Interest expense
 
(14
)
 
 
 

Total derivatives
 
$
42,147

 
 
 
$
(10,442
)
 
 
 
$

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

 
Cost of sales
 
$
9,994

 
 
 
$

Total derivatives
 
$
11,756

 
 
 
$
9,994

 
 
 
$

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
 
2014
 
2013
 
2014
 
2013
Fair value hedges
Cost of sales
 
$
(4,444
)
 
$
961

 
$
(7,051
)
 
$
(1,858
)
Total derivatives
 
 
$
(4,444
)
 
$
961

 
$
(7,051
)
 
$
(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
 
2014
 
2013
 
2014
 
2013
Commodity contracts (futures & forwards)
Cost of sales
 
$
(5,133
)
 
$
2,532

 
$
(6,118
)
 
$
10,519

Commodity contracts (swaps)
Cost of sales
 
(236
)
 

 
1,801

 

Total derivatives
 
 
$
(5,369
)
 
$
2,532

 
$
(4,317
)
 
$
10,519


11

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


Offsetting Assets and Liabilities
Our derivative financial instruments are subject to master netting arrangements to manage counterparty credit risk associated with derivatives and we offset the fair value amounts recorded for derivative instruments to the extent possible under these agreements on our consolidated balance sheets.
The following table presents offsetting information regarding our derivatives by type of transaction as of June 30, 2014 and December 31, 2013:
 
Gross Amounts of Recognized Assets/Liabilities
 
Gross Amounts offset in the Statement of Financial Position
 
Net Amounts 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, 2014
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures & forwards)
$
1,483

 
$
(130
)
 
$
1,353

 
$
(1,353
)
 
$

 
$

Commodity contracts (swaps)
6,528

 

 
6,528

 

 

 
6,528

Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures & forwards)
$
1,587

 
$
(130
)
 
$
1,457

 
$
(1,353
)
 
$

 
$
104

Interest rate swaps
788

 

 
788

 

 

 
788

Fair value hedges
10,390

 

 
10,390

 

 

 
10,390

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures & forwards)
$
2,287

 
$
(754
)
 
$
1,533

 
$
(1,198
)
 
$

 
$
335

Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures & forwards)
$
1,952

 
$
(754
)
 
$
1,198

 
$
(1,198
)
 
$

 
$

Commodity contracts (swaps)
26,897

 

 
26,897

 

 

 
26,897

Fair value hedges
3,339

 

 
3,339

 

 

 
3,339

Compliance Program Market Risk
We are obligated by government regulations to blend a certain percentage of biofuels into the products we produce that are consumed in the U.S. We purchase biofuels from third parties and blend those biofuels into our products, and each gallon of biofuel purchased includes a RIN. To the degree we are unable to blend biofuels at the required percentage, a RINs deficit is generated and we must acquire that number of RINs by the annual reporting deadline in order to remain in compliance with applicable regulations.
We are exposed to market risk related to the volatility in the price of RINs needed to comply with these government regulations. We manage this risk by purchasing RINs when prices are deemed favorable utilizing fixed price purchase contracts. Some of these contracts are derivative instruments; however, we elect the normal purchase and sale exception and do not record these contracts at their fair values.
The cost of meeting our obligations under these compliance programs was $4,742 and $8,016 for the three months ended and $12,755 and $8,016 for the six months ended June 30, 2014 and 2013, respectively. These amounts are reflected in cost of sales.
(6)
Inventories
Our 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.

12

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:
 
June 30,
2014
 
December 31,
2013
Crude oil, refined products, asphalt and blendstocks
$
62,496

 
$
34,326

Crude oil inventory consigned to others
55,667

 
44,081

Materials and supplies
21,726

 
21,685

Store merchandise
22,788

 
20,526

Store fuel
6,853

 
8,152

Total inventories
$
169,530

 
$
128,770

Market values of crude oil, refined products, asphalt and blendstock inventories exceeded LIFO costs by $69,607 and $61,199 at June 30, 2014 and December 31, 2013, 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 and most of our asphalt terminals. Pursuant to the Supply and Offtake Agreements, (i) J. Aron agreed to sell to us, and we agreed to buy from J. Aron, at market prices, crude oil for processing at the refineries and (ii) we 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 our 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 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. We may elect to terminate in May 2018 on six months prior notice.
Following expiration or termination of the Supply and Offtake Agreements, we are obligated to purchase the crude oil and refined product inventories then owned by J. Aron and located at the leased storage facilities at then current market prices.
In association with the Supply and Offtake Agreement at the Krotz Springs refinery, we 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”), our wholly-owned subsidiary. 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. As of June 30, 2014, there is no further availability under the Krotz Springs Standby LC Facility. The Krotz Springs Standby LC Facility matures in July 2016.
As of June 30, 2014 and December 31, 2013, we had net current payables to J. Aron for purchases of $15,427 and $16,917, respectively, non-current liabilities related to the original financing of $78,098 and $67,889, respectively, and a consignment inventory receivable representing a deposit paid to J. Aron of $26,179 and $26,179, respectively.
Additionally, we had net current receivables of $853 and net current payables of $539 at June 30, 2014 and December 31, 2013, 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.

13

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,
2014
 
December 31,
2013
Refining facilities
$
1,808,470

 
$
1,804,445

Pipelines and terminals
43,439

 
43,445

Retail
189,647

 
184,858

Other
16,771

 
15,326

Property, plant and equipment, gross
2,058,327

 
2,048,074

Accumulated depreciation
(659,413
)
 
(618,732
)
Property, plant and equipment, net
$
1,398,914

 
$
1,429,342

Disposition of Assets
In January 2014, we sold our Willbridge, Oregon asphalt terminal for $40,000. The terminal was included in our asphalt segment and at the time of disposition was allocated goodwill of $4,030. For the six months ended June 30, 2014, a before-tax gain of $2,014 was recognized and has been included in gain (loss) on disposition of assets in our consolidated statements of operations.
(9)
Goodwill
The following table provides a summary of changes to our goodwill balance by segment for the six months ended June 30, 2014:
Balance at December 31, 2013
$
105,943

Disposition of assets with allocated goodwill
(4,030
)
Balance at June 30, 2014
$
101,913

During the six months ended June 30, 2014, we sold our Willbridge, Oregon asphalt terminal, which was allocated goodwill of $4,030 at the time of disposition.
(10)
Additional Financial Information
The following tables provide additional financial information related to the consolidated financial statements.
(a)
Other Assets, Net
 
June 30,
2014
 
December 31,
2013
Deferred turnaround and catalyst cost
$
62,723

 
$
12,271

Environmental receivables
2,161

 
4,273

Deferred debt issuance costs
12,287

 
12,602

Intangible assets, net
7,917

 
7,497

Receivable from supply agreements
26,179

 
26,179

Other, net
23,332

 
19,388

Total other assets
$
134,599

 
$
82,210


14

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


(b)
Accrued Liabilities and Other Non-Current Liabilities
 
June 30,
2014
 
December 31,
2013
Accrued Liabilities:
 
 
 
Taxes other than income taxes, primarily excise taxes
$
22,889

 
$
37,645

Employee costs
9,085

 
13,793

Commodity contracts
1,457

 
16,526

Accrued finance charges
3,039

 
8,733

Environmental accrual (Note 16)
12,898

 
12,898

Other
48,263

 
31,263

Total accrued liabilities
$
97,631

 
$
120,858

 
 
 
 
Other Non-Current Liabilities:
 
 
 
Pension and other postemployment benefit liabilities, net
$
40,619

 
$
40,351

Environmental accrual (Note 16)
42,475

 
45,484

Asset retirement obligations
12,028

 
12,468

Consignment inventory obligations
78,098

 
67,889

Commodity contracts

 
11,569

Other
10,709

 
11,713

Total other non-current liabilities
$
183,929

 
$
189,474

(11)
Postretirement Benefits
The components of net periodic benefit cost related to our benefit plans were as follows for the three and six months ended June 30, 2014 and 2013:
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
856

 
$
1,116

 
$
1,712

 
$
2,232

Interest cost
1,238

 
1,100

 
2,476

 
2,200

Expected return on plan assets
(1,369
)
 
(1,157
)
 
(2,739
)
 
(2,314
)
Amortization of net loss
595

 
1,005

 
1,191

 
2,010

Net periodic benefit cost
$
1,320

 
$
2,064

 
$
2,640

 
$
4,128

Our estimated contributions during 2014 to our pension plans have not changed significantly from amounts previously disclosed in the consolidated financial statements for the year ended December 31, 2013. For the six months ended June 30, 2014 and 2013, we contributed $2,525 and $2,075, respectively, to our qualified pension plans.
(12)
Indebtedness
Debt consisted of the following:
 
June 30,
2014
 
December 31,
2013
Term loan credit facilities
$
267,913

 
$
244,322

Revolving credit facility
100,000

 
100,000

Senior secured notes
35,423

 
73,706

Convertible senior notes
123,638

 
121,090

Retail credit facilities
116,736

 
73,130

Total debt
643,710

 
612,248

Less: Current portion
50,506

 
83,174

Total long-term debt
$
593,204

 
$
529,074

(a) Alon Energy Term Loan
In March 2014, we entered into a five-year Term Loan Agreement (“Alon Energy Term Loan”) for a principal amount of $25,000, maturing in March 2019. Repayments are monthly, commencing June 2014. Borrowings under this agreement incur interest at an annual rate equal to LIBOR plus a margin of 3.75%. We pledged 2,200,000 of the Partnership’s common units as collateral for the Alon Energy Term Loan. Additionally, Alon Assets, Inc. (“Alon Assets”) guarantees all payments under the Alon Energy Term Loan. The Alon Energy Term Loan contains certain restrictive covenants, including maintenance financial covenants.
Proceeds from the Alon Energy Term Loan were used to purchase equipment for a capital project at our Big Spring refinery.
At June 30, 2014, the Alon Energy Term Loan had an outstanding balance of $24,569.
(b) Retail Credit Facilities
Southwest Convenience Stores, LLC and Skinny’s LLC, (“Alon Retail”) were party to a credit agreement (the “Credit Agreement”) with a maturity in December 2015. At December 31, 2013, the outstanding balance under the Credit Agreement was $72,689. In March 2014, Alon Retail entered into a new credit agreement (“Alon Retail Credit Agreement”) and repaid in full its obligations under the Credit Agreement.
The Alon Retail Credit Agreement will mature in March 2019 and includes a $110,000 term loan and a $10,000 revolving credit loan. The Alon Retail Credit Agreement also includes an accordion feature that provides for incremental term loans up to $30,000 to fund store rebuilds, new builds and acquisitions. Borrowings under the Alon Retail Credit Agreement bear interest at a Eurodollar rate plus an applicable margin between 2.00% and 2.75%, determined quarterly based upon Alon Retail’s leverage ratio. Principal payments are made in quarterly installments based on a 15-year amortization schedule. Obligations under the

15

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


Alon Retail Credit Agreement are secured by a first lien on substantially all of the assets of Alon Retail. The Alon Retail Credit Agreement also contains certain restrictive covenants including maintenance financial covenants.
Proceeds from the Alon Retail Credit Agreement were used to fully repay the remaining obligations under the Credit Agreement and pay a dividend distribution of $40,000 to Alon Brands, Inc., our wholly-owned subsidiary, while the remainder used for general corporate purposes.
At June 30, 2014, the Alon Retail Credit Agreement had an outstanding balance of $116,333, consisting of a term loan balance of $106,333 and a revolving credit loan balance of $10,000.
(c) Revolving Facility and Letters of Credit
We had letters of credit outstanding under the Alon Energy $60,000 letter of credit facility of $58,227 and $56,827 at June 30, 2014 and December 31, 2013, respectively.
We had borrowings of $100,000 and $100,000 and letters of credit of $58,963 and $109,772 outstanding under the Alon USA LP $240,000 revolving credit facility at June 30, 2014 and December 31, 2013, respectively.
(d) Senior Secured Notes
In May 2014, we redeemed $40,000 of the principal balance on the 13.50% senior secured notes (“Senior Secured Notes”) due October 2014. As a result of the prepayment of the Senior Secured Notes, write-offs of unamortized original issuance discount and debt issuance costs of $254 and $253, respectively, were charged to interest expense in the consolidated statements of operations for the three and six months ended June 30, 2014.
At June 30, 2014 and December 31, 2013, the Senior Secured Notes had an outstanding balance of $35,423 and $73,706, respectively.
In July 2014, we redeemed the remaining principal balance on the Senior Secured Notes.
(e) Financial Covenants
We have certain credit agreements that contain maintenance financial covenants. At June 30, 2014, we were in compliance with these covenants.
(13)
Stock-Based Compensation (share values in dollars)
Our overall executive incentive compensation program permits the granting of awards to our directors, officers and key employees in the form of options to purchase common stock, stock appreciation rights, restricted shares of common stock, restricted common stock units, performance shares, performance units and senior executive plan bonuses.
Restricted Stock. Non-employee directors are awarded an annual grant of $25 in shares of restricted stock, which vest over a period of three years, assuming continued service at vesting. In May 2014, we granted awards to our non-employee directors of 4,965 restricted shares at a grant date price of $15.11 per share.
In May 2014, we granted awards of 255,000 restricted shares to certain executive officers at a grant date price of $15.11 per share. These May 2014 restricted shares will vest as follows:  50% in May 2015 and 50% in May 2016, assuming continued service at vesting.
The following table summarizes the restricted share activity from January 1, 2014:
 
 
 
 
Weighted
Average
Grant Date
Fair Values
Nonvested Shares
 
Shares
 
(per share)
Nonvested at January 1, 2014
 
448,694

 
$
14.64

Granted
 
259,965

 
15.11

Vested
 
(134,640
)
 
16.95

Forfeited
 

 

Nonvested at June 30, 2014
 
574,019

 
$
14.31


16

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


Compensation expense for restricted stock awards amounted to $1,000 and $620 for the three months ended June 30, 2014 and 2013, respectively, and $1,488 and $1,137 for the six months ended June 30, 2014 and 2013, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations. The fair value of shares vested in 2014 was $2,044.
Restricted Stock Units. In May 2011, we granted 500,000 restricted stock units to our CEO and President at a grant date fair value of $11.47 per share. Each restricted unit represents the right to receive one share of our 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 restricted stock units amounted to $374 and $374 for the three months ended June 30, 2014 and 2013, respectively, and $748 and $748 for the six months ended June 30, 2014 and 2013, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations.
Unrecognized Compensation Cost. As of June 30, 2014, there was $6,971 of total unrecognized compensation cost related to non-vested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.9 years.
(14)
Equity (share values in dollars)
Changes to equity during the six months ended June 30, 2014 are presented below:
 
 
Total Stockholders’ Equity
 
Non-controlling Interest
 
Total Equity
Balance at December 31, 2013
 
$
597,959

 
$
27,445

 
$
625,404

Other comprehensive income
 
25,684

 
868

 
26,552

Stock compensation
 
3,731

 
(191
)
 
3,540

Dividends of common stock on preferred stock
 
(7
)
 

 
(7
)
Distributions to non-controlling interest in the Partnership
 

 
(10,010
)
 
(10,010
)
Dividends
 
(8,221
)
 
(389
)
 
(8,610
)
Net income (loss)
 
(6,732
)
 
8,670

 
1,938

Balance at June 30, 2014
 
$
612,414

 
$
26,393

 
$
638,807

(a)Common Stock
Amended Shareholder Agreement. In 2012, we signed agreements with the remaining non-controlling interest shareholders of Alon Assets whereby the participants would exchange shares of Alon Assets for shares of our common stock. During the six months ended June 30, 2014, 329,644 shares of our common stock were issued in exchange for 1,762.24 shares of Alon Assets. We have 1,590,067 shares of our common stock available for exchange at June 30, 2014 for the outstanding shares held by non-controlling interest shareholders of Alon Assets.
We recognized compensation expense associated with the difference in value between the participants' ownership of Alon Assets compared to our common stock of $608 and $734 for the three months ended June 30, 2014 and 2013, respectively, and $1,305 and $1,498 for the six months ended June 30, 2014 and 2013, respectively. These amounts are included in selling, general and administrative expenses in the consolidated statements of operations.
(b)
Dividends
Common Stock Dividends. During the six months ended June 30, 2014, we paid the following dividends:
Date Paid
 
Record Date
 
Dividend Amount Per Share
March 14, 2014
 
February 28, 2014
 
$
0.06

June 16, 2014
 
May 30, 2014
 
0.06

Preferred Stock Dividends. During the six months ended June 30, 2014, we issued 738 shares of common stock for payment of the quarterly 8.5% preferred stock dividend to preferred stockholders.

17

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


(c)
Accumulated Other Comprehensive Loss
The following table displays the change in accumulated other comprehensive loss, net of tax:
 
Unrealized Gain (Loss) on Cash Flow Hedges
 
Postretirement Benefit Plans
 
Total
Balance at December 31, 2013
$
(18,248
)
 
$
(19,267
)
 
$
(37,515
)
Other comprehensive income before reclassifications
19,293

 

 
19,293

Amounts reclassified from accumulated other comprehensive loss
6,391

 

 
6,391

Net current-period other comprehensive income
25,684

 

 
25,684

Balance at June 30, 2014
$
7,436

 
$
(19,267
)
 
$
(11,831
)
(15)
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 (loss) per share includes the dilutive effect of granted stock appreciation rights, granted restricted common stock units, granted restricted common stock awards, convertible debt and warrants using the treasury stock method and the dilutive effect of convertible preferred shares using the if-converted method.
The calculation of earnings (loss) per share, basic and diluted, for the three and six months ended June 30, 2014 and 2013, is as follows (shares in thousands, per share value in dollars):
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Net income (loss) available to stockholders
$
(7,517
)
 
$
11,496

 
$
(6,732
)
 
$
65,680

Less: preferred stock dividends
14

 
757

 
29

 
1,515

Net income (loss) available to common stockholders
(7,531
)
 
10,739

 
(6,761
)
 
64,165

 
 
 
 
 
 
 
 
Weighted average shares outstanding, basic
68,851

 
62,614

 
68,734

 
62,285

Dilutive common stock equivalents

 
5,457

 

 
5,458

Weighted average shares outstanding, diluted
68,851

 
68,071

 
68,734

 
67,743

Earnings (loss) per share, basic
$
(0.11
)
 
$
0.17

 
$
(0.10
)
 
$
1.03

Earnings (loss) per share, diluted
$
(0.11
)
 
$
0.17

 
$
(0.10
)
 
$
0.97

For the three and six months ended June 30, 2014, we have excluded 200 and 195 common stock equivalents, respectively, from the weighted average diluted shares outstanding as the effect of including such shares would be anti-dilutive. For the three and six months ended June 30, 2013, the weighted average diluted shares includes all potentially dilutive common stock equivalents.
(16)
Commitments and Contingencies
(a)
Commitments
In the normal course of business, we have long-term commitments to purchase, at market prices, utilities such as natural gas, electricity and water for use by our refineries, terminals, pipelines and retail locations. We are also party to various refined product and crude oil supply and exchange agreements, which are typically short-term in nature or provide terms for cancellation.
(b)
Contingencies
We are involved in various legal actions arising in the ordinary course of business. We believe the ultimate disposition of these matters will not have a material effect on our financial position, results of operations or liquidity.
One of our subsidiaries is a party to a lawsuit alleging breach of contract pertaining to an asphalt supply agreement. We believe that we have valid counterclaims as well as affirmative defenses that will preclude recovery. Attempts to reach a

18

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


commercial arrangement to resolve the dispute have been unsuccessful to this point. A pre-trial ruling by the trial court is currently being appealed and therefore the matter is not scheduled for trial. Due to the uncertainties of litigation, we cannot predict with certainty the ultimate resolution of this lawsuit.
(c)
Environmental
We are 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 us 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 and to compensate others for damage to property and natural resources. These contingent obligations relate to sites that we own and are associated with past or present operations. We are currently participating in environmental investigations, assessments and cleanups pertaining to our refineries, service stations, pipelines and terminals. We may be involved in additional future 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 our 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.
We have accrued environmental remediation obligations of $55,373 ($12,898 current liability and $42,475 non-current liability) at June 30, 2014, and $58,382 ($12,898 current liability and $45,484 non-current liability) at December 31, 2013.
We have an indemnification agreement with a prior owner for remediation expenses at the Bakersfield refinery. We are required to make indemnification claims to the prior owner by March 15, 2015. We have recorded current receivables of $8,927 and $9,100 at June 30, 2014 and December 31, 2013, respectively, and a non-current receivable of $1,774 at December 31, 2013.
In addition to the indemnification agreement related to the Bakersfield refinery, we have an indemnification agreement with a prior owner for part of the remediation expenses at certain other West Coast assets. We have recorded current receivables of $418 and $418 and non-current receivables of $2,161 and $2,499 at June 30, 2014 and December 31, 2013, respectively.
(17)
Subsequent Events
Repayment of Senior Secured Notes
In July 2014, we redeemed the remaining principal balance on the Senior Secured Notes.
Dividend Declared
In August 2014, our board of directors declared the regular quarterly cash dividend of $0.10 per share on our common stock, payable on September 22, 2014, to holders of record at the close of business on September 8, 2014.
Partnership Distribution
In August 2014, the board of directors of the General Partner declared a cash distribution to the Partnership’s common unitholders of approximately $8,130, or $0.13 per common unit. The cash distribution will be paid on August 25, 2014 to unitholders of record at the close of business on August 18, 2014. The total cash distribution payable to non-affiliated common unitholders will be approximately $1,500.

19

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, 2013. 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”) Cushing crude oil and West Texas Sour (“WTS”) crude oil or WTI Midland crude oil;
changes in the spread between WTI Cushing crude oil and Light Louisiana Sweet (“LLS”) crude oil;
changes in the spread between Brent crude oil and WTI Cushing crude oil;
changes in the spread between Brent crude oil and LLS crude oil;
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 upon termination of the Supply and Offtake Agreements, we are obligated to purchase the crude oil and refined product inventories then owned by J. Aron at then current market prices;
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 debt instruments;
the effects of and cost of compliance with the Renewable Fuel Standards 2 (“RFS2”) requirements, including the availability, cost and price volatility of Renewable Identification Numbers (“RINs”);
the effects 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

20

Table of Contents

the other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2013 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.
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 217,000 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 217,000 bpd. At our refineries, we refine crude oil into petroleum products, including gasoline, diesel fuel, jet fuel, petrochemicals, petrochemical feedstocks, asphalt and other petroleum-based products, which are marketed primarily in the South Central, Southwestern and Western United States. In 2014, we did not process crude oil at our California refineries.
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 the 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 it supplies our Alon branded and unbranded distributors in these regions 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 supply gasoline and diesel to 636 Alon branded retail sites, including our retail segment convenience stores. In 2014, approximately 66% of the gasoline and 32% of the diesel produced at the Big Spring refinery was transferred to our branded marketing business 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 76 licensed locations that are not under fuel supply agreements.
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.
Asphalt Segment. Our asphalt segment includes 10 asphalt refinery/terminal locations in Texas (Big Spring), California (Paramount, Long Beach, Elk Grove, Bakersfield and Mojave), 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, which specializes in patented ground tire rubber modified asphalt products.
As part of our efforts to maximize the return generated by the production of asphalt, we have an exclusive license to use advanced asphalt-blending technology in West Texas, Arizona, New Mexico and Colorado, and a non-exclusive license in Idaho, Montana, Nevada, North Dakota, Utah and Wyoming, with respect to asphalt produced at our Big Spring refinery, and a ground tire rubber (“GTR”) asphalt manufacturing process with respect to asphalt sold in California.
Asphalt produced by our Big Spring refinery 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. We sell asphalt produced at our Big Spring refinery or purchased from third parties primarily as paving asphalt to road and materials manufacturers and highway construction/maintenance contractors as GTR, polymer modified or emulsion asphalt.
Retail Segment. Our retail segment operates 296 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.

21

Table of Contents

Second Quarter Operational and Financial Highlights
Operating income for the second quarter of 2014 was $18.9 million, compared to $42.0 million in the same period last year. Our operational and financial highlights for the second quarter of 2014 include the following:
During the second quarter of 2014, we completed the planned turnaround and the vacuum tower project at the Big Spring refinery, which has allowed us to increase the refinery’s crude oil throughput by 3,000 bpd to 73,000 bpd.
Combined refinery average throughput for the second quarter of 2014 was 114,869 bpd, consisting of 38,994 bpd at the Big Spring refinery and 75,875 bpd at the Krotz Springs refinery, compared to a combined refinery average throughput of 130,928 bpd for the second quarter of 2013, consisting of 72,124 bpd at the Big Spring refinery and 58,804 bpd at the Krotz Springs refinery. The lower throughput at the Big Spring refinery was primarily due to the planned turnaround during the second quarter of 2014. During the second quarter of 2013, the Krotz Springs refinery was impacted by the unplanned shut down and repair of the reformer unit for approximately one month.
Refinery operating margin at the Big Spring refinery was $17.04 per barrel for the second quarter of 2014 compared to $14.99 per barrel for the same period in 2013. This increase in operating margin was primarily due to a widening of both the WTI Cushing to WTS spread and the WTI Cushing to WTI Midland spread, partially offset by a lower Gulf Coast 3/2/1 crack spread. Also impacting the Big Spring refinery operating margin during the second quarter of 2014 were RINs credits of $0.8 million, generated as a result of reduced production during the planned turnaround at our refinery, compared to RINs costs of $8.0 million for the second quarter of 2013.
Refinery operating margin at the Krotz Springs refinery was $8.89 per barrel for the second quarter of 2014 compared to $1.97 per barrel for the same period in 2013. This increase was primarily due to a higher Gulf Coast 2/1/1 high sulfur diesel crack spreads and a widening WTI Cushing to WTI Midland spread, partially offset by a narrowing LLS to WTI Cushing spread. The Krotz Springs refinery operating margin was also impacted during the second quarter of 2014 by $5.5 million of costs associated with RINs obligations. The Krotz Springs refinery received an exemption from the RFS2 requirements for 2013 and as a result did not record costs associated with RINs.
The average Gulf Coast 3/2/1 crack spread was $16.42 per barrel for the second quarter of 2014 compared to $21.17 per barrel for the second quarter of 2013, which was primarily influenced by a reduction in the Brent to WTI Cushing spread. The average Brent to WTI Cushing spread for the second quarter of 2014 was $7.56 per barrel compared to $12.51 per barrel for the same period in 2013. The average Gulf Coast 2/1/1 high sulfur diesel crack spread for the second quarter of 2014 was $12.47 per barrel compared to $4.15 per barrel for the second quarter of 2013, which was primarily influenced by an increase in the Brent to LLS spread. The average Brent to LLS spread for the second quarter of 2014 was $4.67 per barrel compared to $(2.56) per barrel for the same period in 2013.
The average WTI Cushing to WTS spread for the second quarter of 2014 was $7.88 per barrel compared to $0.36 per barrel for the same period in 2013. The average WTI Cushing to WTI Midland spread for the second quarter of 2014 was $8.37 per barrel compared to $0.14 per barrel for the same period in 2013. The average LLS to WTI Cushing spread for the second quarter of 2014 was $2.89 per barrel compared to $15.07 per barrel for the same period in 2013.
Asphalt margins in the second quarter of 2014 were $67.64 per ton compared to $83.27 per ton in the second quarter of 2013. This decrease was primarily due to lower asphalt sales prices during the second quarter of 2014 compared to 2013. The average blended asphalt sales price decreased 4.6% to $564.75 per ton in the second quarter of 2014, from $591.81 per ton in the second quarter of 2013, and the average non-blended asphalt sales price decreased 21.6% to $302.75 per ton in the second quarter of 2014, from $386.40 per ton in the second quarter of 2013.
Retail fuel sales volume increased by 2.7% to 48.8 million gallons in the second quarter of 2014 from 47.5 million gallons in the second quarter of 2013.

22

Table of Contents

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 Cushing crude oil are converted, or cracked, into two barrels of Gulf Coast conventional gasoline and one barrel of Gulf Coast ultra-low sulfur diesel.
We compare our Krotz Springs refinery’s operating margin to the Gulf Coast 2/1/1 high sulfur diesel crack spread. A Gulf Coast 2/1/1 high sulfur diesel 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 is 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 price of WTI Cushing crude oil and the price of WTS, a medium, sour crude oil. We refer to this differential as the WTI Cushing/WTS, or sweet/sour, spread. A widening of the sweet/sour spread can favorably influence the operating margin for our Big Spring refinery. The Big Spring refinery’s crude oil input is primarily comprised of WTS and WTI Midland priced crude oil.
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 Midland priced crude oil.
In addition, we have been able to capitalize on the oversupply of West Texas crudes in Midland, the largest origination terminal for West Texas crude oil, resulting from increased production in the Permian Basin coupled with infrastructure constraints. Although West Texas crudes are typically transported to Cushing and to the Gulf Coast for sale, current logistical and infrastructure constraints are limiting the ability of Permian Basin producers to transport their production to Cushing and to the Gulf Coast. The resulting oversupply of West Texas crudes at Midland has depressed Midland crude prices and enabled us to obtain an increased portion of our crude supply at discounted prices to Cushing. Moreover, by sourcing West Texas crude oils at Midland, we are able to eliminate the cost of transporting crude to and from Cushing. The WTI Cushing less WTI Midland spread represents the differential between the average per barrel price of WTI Cushing crude oil and the average per barrel price of WTI Midland crude oil. A widening of the WTI Cushing less WTI Midland spread can favorably influence the operating margin for both our Big Spring and Krotz Springs refineries.
Global product prices are influenced by the price of Brent crude which is a global benchmark crude. Global product prices set product prices in the U.S. As a result, both our Big Spring and Krotz Springs refineries are influenced by the spread between Brent crude and WTI Cushing. For both our Big Spring and Krotz Springs refineries, the Brent less WTI Cushing spread represents the differential between the average per barrel price of Brent crude oil and the average per barrel price of WTI Cushing crude oil. A widening of the spread between Brent and WTI Cushing can favorably influence both refineries’ operating margins. Also, the Krotz Springs refinery is influenced by the spread between Brent crude and LLS. For our Krotz Springs refinery, the Brent less LLS spread represents the differential between the average per barrel price of Brent crude oil and the average per barrel price of LLS crude oil. A widening of the spread between Brent and LLS can favorably influence the Krotz Springs refinery operating margins.
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

23

Table of Contents

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 the Big Spring refinery or the price for 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. A portion of our asphalt sales are made using fixed price contracts for delivery at future dates. Because these contracts are priced using 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 negativ