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 SEPTEMBER 30, 2016
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 October 24, 2016, was 71,597,757.

 
 



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)
 
September 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
264,802

 
$
234,127

Accounts and other receivables, net
132,173

 
119,171

Income tax receivable
13,609

 
3,741

Inventories
138,230

 
105,515

Deferred income tax asset
35,049

 
13,786

Prepaid expenses and other current assets
38,870

 
28,275

Total current assets
622,733

 
504,615

Equity method investments
35,538

 
42,811

Property, plant and equipment, net
1,383,346

 
1,380,202

Goodwill
62,885

 
62,885

Other assets, net
172,770

 
185,625

Total assets
$
2,277,272

 
$
2,176,138

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
421,442

 
$
315,721

Accrued liabilities
95,485

 
93,780

Current portion of long-term debt
16,408

 
16,420

Total current liabilities
533,335

 
425,921

Other non-current liabilities
222,165

 
165,935

Long-term debt
534,053

 
539,542

Deferred income tax liability
379,316

 
380,580

Total liabilities
1,668,869

 
1,511,978

Commitments and contingencies (Note 17)

 

Stockholders’ equity:
 
 
 
Common stock, par value $0.01, 150,000,000 shares authorized; 71,481,410 and 70,960,461 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
715

 
710

Additional paid-in capital
530,625

 
526,035

Accumulated other comprehensive loss, net of tax
(29,238
)
 
(28,808
)
Retained earnings
44,666

 
141,201

Total stockholders’ equity
546,768

 
639,138

Non-controlling interest in subsidiaries
61,635

 
25,022

Total equity
608,403

 
664,160

Total liabilities and equity
$
2,277,272

 
$
2,176,138


The accompanying notes are an integral part of these consolidated financial statements.
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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 Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net sales (1)
$
1,043,717

 
$
1,151,204

 
$
2,902,078

 
$
3,555,785

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales
895,900

 
914,193

 
2,502,438

 
2,878,612

Direct operating expenses
68,095

 
65,047

 
199,894

 
192,108

Selling, general and administrative expenses
46,780

 
54,100

 
147,125

 
148,889

Depreciation and amortization
36,878

 
31,033

 
108,725

 
94,262

Total operating costs and expenses
1,047,653

 
1,064,373

 
2,958,182

 
3,313,871

Gain (loss) on disposition of assets
522

 
23

 
(1,560
)
 
595

Operating income (loss)
(3,414
)
 
86,854

 
(57,664
)
 
242,509

Interest expense
(16,027
)
 
(20,696
)
 
(53,133
)
 
(59,950
)
Equity earnings of investees
6,060

 
3,451

 
10,743

 
4,725

Other income, net
402

 
92

 
620

 
151

Income (loss) before income tax expense (benefit)
(12,979
)
 
69,701

 
(99,434
)
 
187,435

Income tax expense (benefit)
(5,641
)
 
17,325

 
(35,406
)
 
53,142

Net income (loss)
(7,338
)
 
52,376

 
(64,028
)
 
134,293

Net income attributable to non-controlling interest
1,462

 
10,440

 
679

 
29,008

Net income (loss) available to stockholders
$
(8,800
)
 
$
41,936

 
$
(64,707
)
 
$
105,285

Earnings (loss) per share, basic
$
(0.12
)
 
$
0.60

 
$
(0.92
)
 
$
1.51

Weighted average shares outstanding, basic (in thousands)
71,089

 
69,893

 
70,575

 
69,687

Earnings (loss) per share, diluted
$
(0.12
)
 
$
0.58

 
$
(0.92
)
 
$
1.46

Weighted average shares outstanding, diluted (in thousands)
71,089

 
72,526

 
70,575

 
72,281

Cash dividends per share
$
0.15

 
$
0.15

 
$
0.45

 
$
0.40

___________
(1)
Includes excise taxes on sales by the retail segment of $21,126 and $20,068 for the three months and $60,515 and $57,493 for the nine months ended September 30, 2016 and 2015, respectively.

The accompanying notes are an integral part of these consolidated financial statements.
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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 Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
(7,338
)
 
$
52,376

 
$
(64,028
)
 
$
134,293

Other comprehensive income (loss):
 
 
 
 
 
 
 
Interest rate derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
Unrealized holding gain (loss) arising during period
317

 
(997
)
 
(1,204
)
 
(1,838
)
Loss reclassified to earnings - interest expense
237

 
107

 
535

 
219

Net gain (loss), before tax
554

 
(890
)
 
(669
)
 
(1,619
)
Income tax expense (benefit)
202

 
(330
)
 
(245
)
 
(600
)
Net gain (loss), net of tax
352

 
(560
)
 
(424
)
 
(1,019
)
Commodity contracts designated as cash flow hedges:
 
 
 
 
 
 
 
Unrealized holding gain arising during period

 

 

 
6,070

Amortization of unrealized gain on de-designated cash flow hedges - cost of sales

 
(11,323
)
 

 
(29,260
)
Net loss, before tax

 
(11,323
)
 

 
(23,190
)
Income tax benefit

 
(4,189
)
 

 
(8,580
)
Net loss, net of tax

 
(7,134
)
 

 
(14,610
)
Total other comprehensive income (loss), net of tax
352

 
(7,694
)
 
(424
)
 
(15,629
)
Comprehensive income (loss)
(6,986
)
 
44,682

 
(64,452
)
 
118,664

Comprehensive income attributable to non-controlling interest
1,469

 
10,298

 
685

 
28,605

Comprehensive income (loss) attributable to stockholders
$
(8,455
)
 
$
34,384

 
$
(65,137
)
 
$
90,059



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 Nine Months Ended
 
September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(64,028
)
 
$
134,293

Adjustments to reconcile net income (loss) to cash provided by operating activities:
 
 
 
Depreciation and amortization
108,725

 
94,262

Stock compensation
5,976

 
7,280

Deferred income taxes
(35,651
)
 
(17,815
)
Equity earnings of investees, net of dividends
(7,875
)
 
(2,750
)
Amortization of debt issuance costs
2,302

 
2,620

Amortization of original issuance discount
5,048

 
4,639

(Gain) loss on disposition of assets
1,560

 
(595
)
Unrealized (gain) loss on commodity swaps
11,032

 
(9,014
)
Changes in operating assets and liabilities:
 
 
 
Accounts and other receivables, net
(17,023
)
 
(2,595
)
Income tax receivable
3,500

 
6,350

Inventories
(29,699
)
 
11,432

Prepaid expenses and other current assets
(10,595
)
 
(1,927
)
Other assets, net
11,672

 
(15,614
)
Accounts payable
44,156

 
(44,234
)
Accrued liabilities
892

 
11,779

Other non-current liabilities
(12,231
)
 
(1,801
)
Net cash provided by operating activities
17,761

 
176,310

Cash flows from investing activities:
 
 
 
Capital expenditures
(49,824
)
 
(57,262
)
Capital expenditures for turnarounds and catalysts
(29,464
)
 
(11,410
)
Proceeds from disposition of assets
1,917

 
1,570

Acquisition of California renewable fuels project
(7,936
)
 

Acquisition of retail stores

 
(11,196
)
Net cash used in investing activities
(85,307
)
 
(78,298
)
Cash flows from financing activities:
 
 
 
Dividends paid to stockholders
(31,828
)
 
(27,877
)
Dividends paid to non-controlling interest
(401
)
 
(260
)
Distributions paid to non-controlling interest in the Partnership
(2,534
)
 
(28,195
)
RINs financing transactions
145,301

 
(8,137
)
Deferred debt issuance costs

 
(2,139
)
Revolving credit facilities, net

 
(10,000
)
Additions to long-term debt

 
14,049

Payments on long-term debt
(12,317
)
 
(11,550
)
Net cash provided by (used in) financing activities
98,221

 
(74,109
)
Net increase in cash and cash equivalents
30,675

 
23,903

Cash and cash equivalents, beginning of period
234,127

 
214,961

Cash and cash equivalents, end of period
$
264,802

 
$
238,864

Supplemental cash flow information:
 
 
 
Cash paid for interest, net of capitalized interest
$
48,781

 
$
54,031

Cash paid (refunds received) for income tax
$
(1,891
)
 
$
37,046

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

 
$
4,087


The accompanying notes are an integral part of these consolidated financial statements.
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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,” “our” and “us” or like terms refer to Alon USA Energy, Inc. and its consolidated subsidiaries or to Alon USA Energy, Inc. or an individual subsidiary. Generally, the words
“we,” “our” and “us” include Alon USA Partners, LP and its consolidated subsidiaries (the “Partnership”) as consolidated
subsidiaries of Alon USA Energy, Inc. unless when used in disclosures of transactions or obligations between the Partnership
and Alon USA Energy, Inc., or its other 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 nine months ended September 30, 2016 are not necessarily indicative of the operating results that may be realized for the year ending December 31, 2016.
Our consolidated balance sheet as of December 31, 2015 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, 2015.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) 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 standard allows for either full retrospective adoption or modified retrospective adoption. In August 2015, the FASB updated the guidance to include a one-year deferral of the effective date for the new revenue standard, making the requirements of the standard effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted for interim and annual periods beginning after December 15, 2016. We are evaluating the guidance to determine the method of adoption and the impact this standard will have on our consolidated financial statements.
In February 2015, the FASB issued an accounting standards update making targeted changes to the current consolidation guidance. The new standard changes the way certain decisions are made related to substantive rights, related parties, and decision making fees when applying the variable interest entity consolidation model and eliminates certain guidance for limited partnerships and similar entities under the voting interest consolidation model. We have adopted the updated guidance, effective January 1, 2016, with no material impact to our consolidated financial statements.
In July 2015, the FASB issued an accounting standards update simplifying the measurement of certain inventory. This updated standard simplifies the measurement of inventory by requiring certain inventory to be measured at the lower of cost or net realizable value. The amendments in this accounting standards update are effective for interim and annual periods beginning after December 15, 2016. This accounting standards update does not apply to the subsequent measurement of inventory measured using the last-in, first-out (“LIFO”) or retail inventory method, therefore the adoption of this guidance will not have a material effect on our financial position or results of operations.
In November 2015, the FASB issued an accounting standards update simplifying the presentation of income taxes. This updated standard eliminates the current requirement to present deferred tax liabilities and assets as current and non-current in a classified balance sheet. Instead, all deferred tax assets and liabilities will be required to be classified as non-current. The requirements from the updated standard are effective for interim and annual periods beginning after December 31, 2016, and early adoption is permitted. We are evaluating the guidance to determine the impact this standard will have on our consolidated financial statements.

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


In February 2016, the FASB issued new guidance on the accounting for leases, which requires lessees to recognize assets and liabilities on the balance sheet for the present value of the rights and obligations created by all leases with terms of more than 12 months. The ASU also will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The requirements from this guidance are effective for interim and annual periods beginning after December 31, 2018. We are evaluating the guidance to determine the impact this standard will have on our consolidated financial statements.
In March 2016, the FASB issued an accounting standards update which clarifies that for the purposes of applying hedge accounting for derivative transactions, a change in the counterparty to a derivative contract (through novation) that has been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, require de-designation of that hedging relationship. The adoption of this guidance will not have a material effect on our financial position or results of operations.
In March 2016, the FASB issued an accounting standards update to simplify some provisions in stock compensation accounting. The areas for simplification of this update involve the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification of the statement of cash flows. This update will be effective for interim and annual periods beginning after December 15, 2016, and early adoption is permitted. We do not expect application of this standard to have a material effect on our consolidated financial statements.
In June 2016, the FASB issued an accounting standards update requiring the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The requirements from the updated standard are effective for interim and annual periods beginning after December 15, 2019. We are evaluating the guidance to determine the impact this standard will have on our consolidated financial statements.
In August 2016, the FASB issued an accounting standards update addressing eight specific cash flow issues with the objective of eliminating the existing diversity in practice. The amendments from this update are effective for interim and annual periods beginning after December 15, 2017. We do not expect application of this standard to have a material effect on our consolidated financial statements.
(2)
California Renewable Fuels Project
On March 1, 2016, we acquired control of the California renewable fuels project which initially provides for us to receive approximately 77% of earnings and distributions of the project. We increased our original 32% ownership and obtained control of the California renewable fuels project after certain operational milestones were achieved. We contributed to the project total cash in the amount of $27,058.
Our California renewable fuels project began operations in February 2016. The project converts approximately 2,500 barrels per day of tallow and other feedstocks into renewable fuels, which are replacements for petroleum-based fuel. Our California renewable fuels project generates environmental credits in the form of renewable identification numbers, low-carbon fuels standards credits and blender’s tax credits, which are all recorded in net sales.
Acquisitions achieved in stages require that in the period the acquiring company achieves control, that it recognize 100% of the fair value of the net assets at that time. Additionally, the existing equity interests of the company and of non-controlling interest are required to be recorded at fair value. The fair value of the project was estimated by applying the market approach. Based on our analysis at March 1, 2016, there was no gain recorded for the revaluation of our previous equity interests. The fair value of the assets and liabilities recorded into our consolidated financial statements are as follows:
Current assets
 
$
11,897

Other assets
 
7,704

Property, plant and equipment
 
49,612

Current liabilities
 
(5,408
)
Fair value of net assets assumed
 
63,805

Non-controlling interest
 
(38,851
)
 
 
$
24,954


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


Beginning March 1, 2016, we have consolidated the California renewable fuels project as part of our refining and marketing segment in our consolidated financial statements. Our consolidated statements of operations include the project’s revenues of $48,503 and $99,176 and operating income of $6,083 and $13,003 for the three and nine months ended September 30, 2016, respectively.
(3)
Alon USA Partners, LP
The Partnership (NYSE: ALDW) is a publicly-traded limited partnership that owns the assets and conducts the operations of the Big Spring refinery and the associated integrated wholesale marketing operations. The limited partner interests of the Partnership are represented as common units outstanding. As of September 30, 2016, the 11,520,220 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 general partner interest in the Partnership, which is a non-economic interest.
The limited partner interests in the Partnership not owned by us are reflected in the consolidated statements of operations in net income attributable to non-controlling interest and in our consolidated balance sheets in non-controlling interest in subsidiaries. The Partnership is consolidated within the refining and marketing segment.
We have agreements with the Partnership, under which the Partnership has agreed to reimburse us 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 generated each quarter, as defined in the partnership agreement, 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.
The following table summarizes the Partnership’s cash distribution activity during the period:
 
Cash Available for Distribution per Unit (1)
 
Distribution Amount Per Unit
 
Total Distribution Amount
 
Distributions Paid to Non-Controlling Interest
First Quarter 2016
$

 
$
0.08

 
$
5,001

 
$
921

Second Quarter 2016
0.14

 

 

 

Third Quarter 2016
0.15

 
0.14

 
8,753

 
1,613

_______________________
(1)
Represents the aggregate cash available for distribution per unit attributable to the period indicated. This represents the difference between cash available for distribution and distributions paid in the table above.
(4)
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 a sour crude oil refinery located in Big Spring, Texas, a light sweet crude oil refinery located in Krotz Springs, Louisiana, and heavy crude oil refineries located in Paramount, Bakersfield and Long Beach, California (the “California refineries”). We refine crude oil into petroleum products including various grades of 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. We are also shipping and selling gasoline into wholesale markets in the Southern and Eastern United States. Our California refineries have not processed crude oil since 2012 due to the high cost of crude oil relative to product yield and low asphalt demand.
We sell motor fuels under the Alon brand through various terminals to supply 639 Alon branded retail sites, including our retail segment convenience stores. In addition, we sell motor fuels through our wholesale distribution network on an unbranded basis.

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


We are the majority owner of a renewable fuels project in California that began commercial production in February 2016 and converts tallow and vegetable oils into renewable fuels. The produced renewable fuels are drop-in replacements for petroleum-based fuels. The renewable fuels project generates both state and federal environmental credits as well as the federal blender’s tax credit.
(b)Asphalt Segment
We own or operate 11 asphalt terminals located in Texas (Big Spring), California (Paramount, Long Beach, Elk Grove, Bakersfield and Mojave), Washington (Richmond Beach), Arizona (Phoenix and Flagstaff), as well as asphalt terminals in which we own a 50% interest located in Fernley, Nevada, and Brownwood, Texas. 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 307 convenience stores located in Central and West Texas and New Mexico. These convenience stores typically offer various grades of gasoline and diesel under the Alon brand name and food products, food service, tobacco products, non-alcoholic and alcoholic beverages, general merchandise as well as money orders to the public, primarily under the 7-Eleven brand name. 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.
Segment data for the three and nine month periods ended September 30, 2016 and 2015 is presented below:
 
Refining and
Marketing
 
Asphalt
 
Retail
 
Corporate
 
Consolidated
Total
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
776,406

 
$
73,800

 
$
193,511

 
$

 
$
1,043,717

Intersegment sales (purchases)
82,717

 
(3,993
)
 
(78,724
)
 

 

Depreciation and amortization
31,504

 
1,264

 
3,392

 
718

 
36,878

Operating income (loss)
(17,410
)
 
9,682

 
5,215

 
(901
)
 
(3,414
)
Turnarounds, catalysts and capital expenditures
15,410

 
919

 
869

 
588

 
17,786

 
Refining and
Marketing
 
Asphalt
 
Retail
 
Corporate
 
Consolidated
Total
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
853,912

 
$
88,436

 
$
208,856

 
$

 
$
1,151,204

Intersegment sales (purchases)
97,014

 
(7,247
)
 
(89,767
)
 

 

Depreciation and amortization
26,363

 
1,313

 
3,024

 
333

 
31,033

Operating income (loss)
61,481

 
18,501

 
7,385

 
(513
)
 
86,854

Turnarounds, catalysts and capital expenditures
25,674

 
840

 
5,365

 
1,379

 
33,258

 
Refining and
Marketing
 
Asphalt
 
Retail
 
Corporate
 
Consolidated
Total
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
2,162,938

 
$
195,396

 
$
543,744

 
$

 
$
2,902,078

Intersegment sales (purchases)
222,711

 
(12,678
)
 
(210,033
)
 

 

Depreciation and amortization
92,802

 
3,785

 
10,141

 
1,997

 
108,725

Operating income (loss)
(83,532
)
 
14,228

 
14,194

 
(2,554
)
 
(57,664
)
Turnarounds, catalysts and capital expenditures
69,801

 
1,994

 
4,780

 
2,713

 
79,288


8

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


 
Refining and
Marketing
 
Asphalt
 
Retail
 
Corporate
 
Consolidated
Total
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
2,755,322

 
$
208,988

 
$
591,475

 
$

 
$
3,555,785

Intersegment sales (purchases)
281,136

 
(26,103
)
 
(255,033
)
 

 

Depreciation and amortization
80,366

 
3,665

 
9,004

 
1,227

 
94,262

Operating income (loss)
220,709

 
2,347

 
21,212

 
(1,759
)
 
242,509

Turnarounds, catalysts and capital expenditures
46,913

 
2,484

 
14,883

 
4,392

 
68,672

Total assets by reportable segment consisted of the following:
 
September 30,
2016
 
December 31,
2015
Refining and marketing
$
1,893,506

 
$
1,822,924

Asphalt
118,045

 
106,015

Retail
248,558

 
231,078

Corporate
17,163

 
16,121

Total assets
$
2,277,272

 
$
2,176,138

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.
(5)
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 are our only assets and liabilities measured at fair value on a recurring basis.

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


The following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the consolidated balance sheets at September 30, 2016 and December 31, 2015:
 
Level 1
 
Level 2
 
Level 3
 
Total
As of September 30, 2016
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Commodity contracts (swaps)
$

 
$
3,767

 
$

 
$
3,767

Fair value hedges of consigned inventory

 
19,071

 

 
19,071

Liabilities:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
124

 

 

 
124

Interest rate swaps

 
2,845

 

 
2,845

 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Commodity contracts (swaps)
$

 
$
14,799

 
$

 
$
14,799

Fair value hedges of consigned inventory

 
33,797

 

 
33,797

Liabilities:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
592

 

 

 
592

Interest rate swaps

 
2,176

 

 
2,176

(6)
Derivative Financial Instruments
We selectively utilize crude oil and refined product commodity derivative contracts to reduce the risk associated with potential price changes on committed obligations as well as to reduce earnings volatility. We also utilize interest rate swaps to manage our exposure to interest rate risk. 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.
Mark to Market
We have certain contracts that serve as economic hedges, which are derivatives used for risk management but not designated as hedges for financial accounting purposes. All economic hedge transactions are recorded at fair value and any changes in fair value between periods are recognized in earnings.
We have contracts that are used to fix prices on forecasted purchases of inventory, which we refer to as futures and forwards. Futures represent trades executed on the New York Mercantile Exchange which have not been closed or settled at the end of the reporting period. Forwards represent physical trades for which pricing and quantities have been set, but the physical product delivery has not occurred by the end of the reporting period.
We also have economic hedges in the form of swap contracts that fix price differentials between different types of crude oil and refined products that we use or produce at our refineries. At September 30, 2016, these swap contracts had aggregate volumes of 2,250 thousand barrels of crude oil with contract terms through December 2016.
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.
We have certain commodity contracts associated with the Supply and Offtake Agreements discussed in Note 8 that have been accounted for as fair value hedges, which had purchase volumes of 466 thousand barrels of crude oil as of September 30, 2016.
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 hedged item. This assessment, which is updated at least quarterly, is generally based on the most recent relevant historical correlation between the derivative and the hedged item. If, during the term of the derivative, the hedge is determined to be no longer highly effective, hedge accounting is

10

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


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 September 30, 2016, we did not have any commodity swap contracts accounted for as cash flow hedges. During the first quarter of 2015, we elected to de-designate certain commodity swap contracts that were previously designated as cash flow hedges. Consequently, hedge accounting was discontinued for these commodity swap contracts and the related unrealized gains in other comprehensive income (“OCI”) were recorded into earnings as the underlying transactions occurred. During the three and nine months ended September 30, 2015, we reclassified gains of $11,323 and $29,260, respectively, from OCI into cost of sales related to these de-designated cash flow hedges.
Related to commodity swap cash flow hedges in OCI, we recognized unrealized losses of $0 and $11,323 for the three months ended and $0 and $23,190 for the nine months ended September 30, 2016 and 2015, respectively.
Interest Rate Derivatives. We have interest rate swap agreements, maturing March 2019, that effectively fix the variable LIBOR interest component of the term loans within the retail credit agreement. These interest rate swaps have been accounted for as cash flow hedges. The aggregate notional amount under these agreements covers approximately 75% of the outstanding principal of these term loans throughout the duration of the interest rate swaps. As of September 30, 2016, the outstanding principal of these term loans was $99,917. The interest rate swaps lock in an average fixed interest rate of 1.69% through the remainder of 2016; 2.22% in 2017; 2.89% in 2018 and 3.06% in 2019.
Related to interest rate swap cash flow hedges in OCI, we recognized unrealized gains (losses) of $554 and $(890) for the three months ended and $(669) and $(1,619) for the nine months ended September 30, 2016 and 2015, respectively.
For the three and nine months ended September 30, 2016 and 2015, 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 September 30, 2016, we have unrealized losses of $2,845 classified in OCI related to cash flow hedges. Assuming interest rates remain unchanged, unrealized losses of $1,001 will be reclassified from OCI into earnings over the next twelve-month period as the underlying transactions occur.
The following tables present the effect of derivative instruments on the consolidated balance sheets:
 
As of September 30, 2016
 
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
 
$
6,246

 
Accrued liabilities
 
$
6,370

Commodity contracts (swaps)
Accounts receivable
 
3,767

 
 
 

Total derivatives not designated as hedging instruments
 
 
10,013

 
 
 
6,370

 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swaps
 
 
$

 
Other non-current liabilities
 
$
2,845

Fair value hedges of consigned inventory
Other assets
 
19,071

 
 
 

Total derivatives designated as hedging instruments
 
 
19,071

 
 
 
2,845

Total derivatives
 
 
$
29,084

 
 
 
$
9,215


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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, 2015
 
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
 
$
292

 
Accrued liabilities
 
$
884

Commodity contracts (swaps)
Accounts receivable
 
14,799

 
 
 

Total derivatives not designated as hedging instruments
 
 
15,091

 
 
 
884

 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swaps
 
 
$

 
Other non-current liabilities
 
$
2,176

Fair value hedges of consigned inventory
Other assets
 
33,797

 
 
 

Total derivatives designated as hedging instruments
 
 
33,797

 
 
 
2,176

Total derivatives
 
 
$
48,888

 
 
 
$
3,060

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 September 30, 2016
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
554

 
Interest expense
 
$
(237
)
 
 
 
$

Total derivatives
 
$
554

 
 
 
$
(237
)
 
 
 
$

 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
$
(11,323
)
 
Cost of sales
 
$
11,323

 
 
 
$

Interest rate swaps
 
(890
)
 
Interest expense
 
(107
)
 
 
 

Total derivatives
 
$
(12,213
)
 
 
 
$
11,216

 
 
 
$

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 Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(669
)
 
Interest expense
 
$
(535
)
 
 
 
$

Total derivatives
 
$
(669
)
 
 
 
$
(535
)
 
 
 
$

 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
$
(23,190
)
 
Cost of sales
 
$
29,260

 
 
 
$

Interest rate swaps
 
(1,619
)
 
Interest expense
 
(219
)
 
 
 

Total derivatives
 
$
(24,809
)
 
 
 
$
29,041

 
 
 
$


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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 Nine Months Ended
 
 
 
September 30,
 
September 30,
 
Location
 
2016
 
2015
 
2016
 
2015
Fair value hedges of consigned inventory (1)
Interest expense
 
$
(2,385
)
 
$
13,735

 
$
(14,726
)
 
$
8,945

Total derivatives
 
 
$
(2,385
)
 
$
13,735

 
$
(14,726
)
 
$
8,945

________________
(1)
Changes in the fair value hedges are substantially offset in earnings by changes in the hedged items.
Derivatives not designated as hedging instruments:
 
 
 
Gain (Loss) Recognized in Income
 
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
 
September 30,
 
September 30,
 
Location
 
2016
 
2015
 
2016
 
2015
Commodity contracts (futures and forwards)
Cost of sales
 
$
(1,286
)
 
$
(1,958
)
 
$
5,134

 
$
(5,628
)
Commodity contracts (swaps)
Cost of sales
 
(66
)
 
778

 
395

 
20,196

Total derivatives
 
 
$
(1,352
)
 
$
(1,180
)
 
$
5,529

 
$
14,568


13

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 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 September 30, 2016 and December 31, 2015:
 
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 September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
7,929

 
$
(1,683
)
 
$
6,246

 
$
(6,246
)
 
$

 
$

Commodity contracts (swaps)
8,687

 
(4,920
)
 
3,767

 

 

 
3,767

Fair value hedges of consigned inventory
19,071

 

 
19,071

 

 

 
19,071

Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
8,053

 
$
(1,683
)
 
$
6,370

 
$
(6,246
)
 
$

 
$
124

Commodity contracts (swaps)
4,920

 
(4,920
)
 

 

 

 

Interest rate swaps
2,845

 

 
2,845

 

 

 
2,845

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
1,112

 
$
(820
)
 
$
292

 
$
(292
)
 
$

 
$

Commodity contracts (swaps)
39,739

 
(24,940
)
 
14,799

 

 

 
14,799

Interest rate swaps
30

 
(30
)
 

 

 

 

Fair value hedges of consigned inventory
33,797

 

 
33,797

 

 

 
33,797

Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
1,704

 
$
(820
)
 
$
884

 
$
(292
)
 
$

 
$
592

Commodity contracts (swaps)
24,940

 
(24,940
)
 

 

 

 

Interest rate swaps
2,206

 
(30
)
 
2,176

 

 

 
2,176

Compliance Program Market Risk
We are obligated by government regulations to blend a certain percentage of biofuels into the products that we produce and 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 renewable identification number, or 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. Alternatively, if we have a RINs surplus, some of those RINs could be sold. Any such sales would be subject to our normal credit evaluation process.
We are exposed to market risk related to the volatility in the price of credits needed to comply with these governmental and regulatory programs. We manage this risk by purchasing RINs when prices are deemed favorable utilizing fixed price purchase contracts. We may also sell the RINs with an agreement to repurchase in the future. 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 (exclusive of benefit generated from our California renewable fuels project operations) was $12,863 and $6,558 for the three months ended and $33,210 and $29,648 for the nine

14

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


months ended September 30, 2016 and 2015, respectively. These amounts are reflected in cost of sales in the consolidated statements of operations.
(7)
Inventories
Carrying value of inventories consisted of the following:
 
September 30,
2016
 
December 31,
2015
Crude oil, refined products, asphalt and blendstocks
$
67,886

 
$
42,123

Crude oil consignment inventory (Note 8)
9,024

 
2,928

Materials and supplies
28,371

 
26,940

Store merchandise
27,483

 
28,475

Store fuel
5,466

 
5,049

Total inventories
$
138,230

 
$
105,515

The market value of refined products, asphalt and blendstock inventories exceeded LIFO costs by $2,104 at September 30, 2016 and was lower than LIFO costs by $836 at December 31, 2015. The market value of crude oil inventories exceeded LIFO costs, net of the fair value hedged items, by $12,100 and $18,521 at September 30, 2016 and December 31, 2015, respectively.
(8)
Inventory Financing Agreements
We have 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 our Big Spring, Krotz Springs and California refineries and certain 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 for the Big Spring and Krotz Springs refineries have initial terms that expire in May 2021, and the Supply and Offtake Agreement for the California refineries has initial terms that expire in May 2019. J. Aron may elect to terminate the Supply and Offtake Agreements for the Big Spring and Krotz Springs refineries prior to the expiration of the initial term beginning in May 2018 and upon each anniversary thereof, on six months prior notice. We may elect to terminate at the Big Spring and Krotz refineries in May 2020 on six months prior notice. J. Aron may elect to terminate the Supply and Offtake Agreement for the California refineries prior to the expiration of the initial term in May 2017 and upon each anniversary thereof, on six months prior notice. We may elect to terminate at the California refineries 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.
Associated with the Supply and Offtake Agreements, we have designated fair value hedges of our inventory purchase commitments with J. Aron and crude oil inventory consigned to J. Aron (“crude oil consignment inventory”). Additionally, financing charges related to the Supply and Offtake Agreements are recorded as interest expense in the consolidated statements of operations.
In connection with the Supply and Offtake Agreement for our Krotz Springs refinery, we have granted a security interest to J. Aron in all of its accounts and inventory to secure its obligations to J. Aron. In addition, we have granted a security interest in all of its real property and equipment to J. Aron to secure its obligations under a commodity hedge and sale agreement in lieu of posting cash collateral and being subject to cash margin calls.
At September 30, 2016 and December 31, 2015, we had net current payables of $34,703 and net current receivables of $8,385, respectively, with J. Aron for purchases and sales, and a consignment inventory receivable representing a deposit paid to J. Aron of $26,179 and $26,179, respectively. At September 30, 2016 and December 31, 2015, we had non-current liabilities for the original financing of $21,142 and $23,771, respectively, net of the related fair value hedges.

15

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


Additionally, we had net current payables of $3,977 and $328 at September 30, 2016 and December 31, 2015, 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.
(9)
Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following:
 
September 30,
2016
 
December 31,
2015
Refining facilities (1)
$
1,994,344

 
$
1,915,924

Pipelines and terminals
43,538

 
43,443

Retail
213,849

 
209,921

Other
26,022

 
23,377

Property, plant and equipment, gross
2,277,753

 
2,192,665

Accumulated depreciation
(894,407
)
 
(812,463
)
Property, plant and equipment, net
$
1,383,346

 
$
1,380,202

________________
(1)
Includes the property, plant and equipment of our California renewable fuels project (Note 2).
(10)
Additional Financial Information
The following tables provide additional financial information related to the consolidated financial statements.
(a)
Other Assets, Net
 
September 30,
2016
 
December 31,
2015
Deferred turnaround and catalyst cost
$
82,587

 
$
87,469

Environmental receivables (Note 17)
2,258

 
2,648

Intangible assets, net
19,098

 
14,505

Receivable from supply and offtake agreements (Note 8)
26,179

 
26,179

Fair value hedges of consigned inventory (Note 6)
19,071

 
33,797

Other, net
23,577

 
21,027

Total other assets
$
172,770

 
$
185,625

(b)
Accounts Payable
Included in accounts payable was $172,627 and $91,179 related to RINs financing transactions as of September 30, 2016 and December 31, 2015, respectively.

16

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


(c)
Accrued Liabilities and Other Non-Current Liabilities
 
September 30,
2016
 
December 31,
2015
Accrued Liabilities:
 
 
 
Taxes other than income taxes, primarily excise taxes
$
37,540

 
$
35,375

Employee costs
22,690

 
25,202

Commodity contracts
6,370

 
884

Accrued finance charges
551

 
1,789

Environmental accrual (Note 17)
7,880

 
7,880

Other
20,454

 
22,650

Total accrued liabilities
$
95,485

 
$
93,780

 
 
 
 
Other Non-Current Liabilities:
 
 
 
Pension and other postemployment benefit liabilities, net
$
52,357

 
$
49,054

Environmental accrual (Note 17)
38,785

 
38,482

Asset retirement obligations
11,369

 
10,906

Consignment inventory obligations (Note 8)
40,213

 
57,568

Interest rate swaps
2,845

 
2,176

RINs financing transactions
68,978

 

Other
7,618

 
7,749

Total other non-current liabilities
$
222,165

 
$
165,935

(11)
Postretirement Benefits
The components of net periodic benefit cost related to our benefit plans for the three and nine months ended September 30, 2016 and 2015 consisted of the following:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
952

 
$
996

 
$
2,855

 
$
2,989

Interest cost
1,409

 
1,255

 
4,227

 
3,766

Expected return on plan assets
(1,749
)
 
(1,582
)
 
(5,247
)
 
(4,747
)
Amortization of net loss
807

 
839

 
2,420

 
2,518

Net periodic benefit cost
$
1,419

 
$
1,508

 
$
4,255

 
$
4,526

Our estimated contributions to our pension plans during 2016 have not changed significantly from amounts previously disclosed in the notes to the consolidated financial statements for the year ended December 31, 2015. For the nine months ended September 30, 2016 and 2015, we contributed $1,181 and $4,530, respectively, to our qualified pension plans.

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


(12)
Indebtedness
Debt consisted of the following:
 
September 30,
2016
 
December 31,
2015
Term loan credit facilities
$
251,628

 
$
256,519

Alon USA, LP Credit Facility
55,000

 
55,000

Convertible senior notes
134,782

 
129,623

Retail credit facilities
109,051

 
114,820

Total debt
550,461

 
555,962

Less: Current portion
16,408

 
16,420

Total long-term debt
$
534,053

 
$
539,542

(a) Letter of Credit Facility and Alon USA, LP Revolving Credit Facility
We had letters of credit outstanding under our $60,000 letter of credit facility of $51,927 and $60,627 at September 30, 2016 and December 31, 2015, respectively.
We had borrowings of $55,000 and $55,000 and letters of credit of $91,225 and $48,590 outstanding under the Alon USA, LP $240,000 revolving credit facility at September 30, 2016 and December 31, 2015, respectively.
(b) Convertible Senior Notes
The conversion rate for our 3.00% unsecured convertible senior notes (“Convertible Notes”) is subject to adjustment upon the occurrence of certain events, including cash dividend adjustments, but will not be adjusted for any accrued and unpaid interest. As of September 30, 2016, the conversion rate was adjusted to 72.504 shares of our common stock per each $1 (in thousands) principal amount of Convertible Notes, equivalent to a conversion price of approximately $13.79 per share, to reflect cash dividend adjustments. The strike price of the options was adjusted to $13.79 per share and the strike price of the warrants was adjusted to $18.74 per share. Upon a potential change of control, we may have to settle the value of the warrants. Any future quarterly cash dividend payments in excess of $0.06 per share will cause further adjustment based on the formula contained in the indenture governing the Convertible Notes. As of September 30, 2016, there have been no conversions of the Convertible Notes.
In May 2015, Delek US Holdings, Inc. (“Delek”) acquired approximately 48% of our outstanding common stock from Alon Israel Oil Company, Ltd. If Delek were to acquire greater than 50.00% of our outstanding common stock, it could require us to settle the full principal amount of the Convertible Notes of $150,000 and to render a make-whole payment to holders of our Convertible Notes, assuming full conversion. In the event of a conversion, the convertible note options will cover our obligation to render payment under the make-whole provision. Under these circumstances, we could also be required to settle the outstanding warrants, which had a value of approximately $7,000 as of September 30, 2016. Based on our share price as of September 30, 2016, we would not have to render a make-whole payment as our share price was below the minimum share price per the make-whole provision in the indenture.
(c) Financial Covenants
We have certain credit agreements that contain maintenance financial covenants. At September 30, 2016, 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 2016, Alon granted awards of 14,000 restricted shares at a grant date price of $8.93 per share.
In May 2015, we granted an award of 100,000 restricted shares to our CEO and President at a grant date price of $18.82. In May 2016, we granted awards of 158,333 restricted shares to our CEO and President at a grant date price of $7.55 per share. The 2015 award and 100,000 shares of the 2016 award vested in May 2016 while the remaining 58,333 are scheduled to vest in December 2016. In July 2016, it was determined that awards made in 2015 and 2016 exceeded plan limits, and as a result it is

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


expected that an aggregate of 150,000 previously vested shares will be surrendered back to us by our CEO and President and the outstanding award of 58,333 restricted shares will be reduced to 50,000.
In July 2016, we granted awards of 131,985 restricted shares to certain executive officers at a grant date price of $6.66 per share. These July 2016 restricted shares will fully vest in December 2016, assuming continued service at vesting.
In August 2016, we granted awards of 69,980 restricted shares to certain executive officers at a grant date price of $7.55 per share. These August 2016 restricted shares will vest as follows: 50% in August 2017 and 50% in August 2019, assuming continued service at vesting.
The following table summarizes the restricted share activity from January 1, 2016:
 
 
 
 
Weighted
Average
Grant Date
Fair Values
Non-vested Shares
 
Shares (1)
 
(per share)
Non-vested at December 31, 2015
 
905,727

 
$
15.86

Granted
 
374,298

 
7.29

Vested
 
(930,073
)
 
14.86

Forfeited
 

 

Non-vested at September 30, 2016
 
349,952

 
$
9.36

________________
(1)
These amounts do not reflect the surrendering of shares described above.
Compensation expense for restricted stock awards amounted to $761 and $2,920 for the three months ended September 30, 2016 and 2015, respectively, and $5,027 and $5,234 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in selling, general and administrative expenses in the consolidated statements of operations. The fair value of shares vested in 2016 was $7,913.
Restricted Stock Units. Compensation expense for restricted stock units granted to our CEO and President amounted to $0 for the three months ended September 30, 2016 and 2015 and $0 and $249 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in selling, general and administrative expenses in the consolidated statements of operations.
Partnership Restricted Units. Non-employee directors of the Partnership, who are designated by Alon’s directors, are awarded an annual grant of $25 in restricted common units, which vest over a period of three years, assuming continued service at vesting. In May 2016, we granted awards of 7,653 restricted common units at a grant date price of $9.80 per unit. In June 2016, we granted awards of 2,528 restricted common units at a grant date price of $9.89 per unit. Compensation expense for the Partnership’s restricted common unit grants amounted to $25 and $20 for the three months ended September 30, 2016 and 2015, respectively, and $53 and $40 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in selling, general and administrative expenses in the consolidated statements of operations.
Unrecognized Compensation Cost. As of September 30, 2016, there was $2,015 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 1.1 years.

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


(14)
Equity (share values in dollars)
Changes to equity during the nine months ended September 30, 2016 are presented below:
 
 
Total Stockholders’ Equity
 
Non-controlling Interest
 
Total Equity
Balance at December 31, 2015
 
$
639,138

 
$
25,022

 
$
664,160

Other comprehensive income (loss)
 
(430
)
 
6

 
(424
)
Stock compensation
 
4,595

 
(238
)
 
4,357

Acquisition of California renewable fuels project
 

 
39,101

 
39,101

Distributions to non-controlling interest in the Partnership
 

 
(2,534
)
 
(2,534
)
Dividends
 
(31,828
)
 
(401
)
 
(32,229
)
Net income (loss)
 
(64,707
)
 
679

 
(64,028
)
Balance at September 30, 2016
 
$
546,768

 
$
61,635

 
$
608,403

(a)Common Stock
Amended Shareholder Agreement. In 2012, we signed agreements with the remaining non-controlling interest shareholders of Alon Assets, Inc. (“Alon Assets”) whereby the participants would exchange shares of Alon Assets for shares of our common stock. During the nine months ended September 30, 2016, 349,042 shares of our common stock were issued in exchange for 1,865.94 shares of Alon Assets. At September 30, 2016, 349,042 shares of our common stock are available to be exchanged for all of the outstanding shares held by the non-controlling interest shareholder 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 $189 and $573 for the three months ended September 30, 2016 and 2015, respectively, and $896 and $1,756 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in selling, general and administrative expenses in the consolidated statements of operations.
(b)
Dividends
Common Stock Dividends. During the nine months ended September 30, 2016, we paid the following dividends:
Date Paid
 
Record Date
 
Dividend Amount Per Share
March 18, 2016
 
February 26, 2016
 
$
0.15

June 6, 2016
 
May 19, 2016
 
0.15

September 6, 2016
 
August 19, 2016
 
0.15

(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, 2015
$
(1,357
)
 
$
(27,451
)
 
$
(28,808
)
Other comprehensive loss before reclassifications
(768
)
 

 
(768
)
Amounts reclassified from accumulated other comprehensive loss
338

 

 
338

Net current-period other comprehensive loss
(430
)
 

 
(430
)
Balance at September 30, 2016
$
(1,787
)
 
$
(27,451
)
 
$
(29,238
)
(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.

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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 (loss) per share, basic and diluted, for the three and nine months ended September 30, 2016 and 2015, is as follows (shares in thousands, per share value in dollars):
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss) available to stockholders
$
(8,800
)
 
$
41,936

 
$
(64,707
)
 
$
105,285

Less: preferred stock dividends

 

 

 
15

Net income (loss) available to common stockholders
(8,800
)
 
41,936

 
(64,707
)
 
105,270

 
 
 
 
 
 
 
 
Weighted average shares outstanding, basic
71,089

 
69,893

 
70,575

 
69,687

Dilutive common stock equivalents

 
2,633

 

 
2,594

Weighted average shares outstanding, diluted
71,089

 
72,526

 
70,575

 
72,281

Earnings (loss) per share, basic
$
(0.12
)
 
$
0.60

 
$
(0.92
)
 
$
1.51

Earnings (loss) per share, diluted
$
(0.12
)
 
$
0.58

 
$
(0.92
)
 
$
1.46

For the three and nine months ended September 30, 2016, we excluded 112 and 132 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 nine months ended September 30, 2015, the weighted average diluted shares includes all potentially dilutive common stock equivalents.
(16)
Related Party Transactions
Delek US Holdings, Inc.
In May 2015, Delek completed the purchase of approximately 48% of our outstanding common stock from Alon Israel Oil Company, Ltd. We have transactions with Delek that occur in the ordinary course of business. Including amounts prior to the transaction, we purchased refined products from Delek of $705 and $7,328 for the three months ended September 30, 2016 and 2015, respectively, and $2,242 and $9,728 for the nine months ended September 30, 2016 and 2015, respectively.
(17)
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 commercial arrangement to resolve the dispute have been unsuccessful to this point. This matter is currently 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

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


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 $46,665 ($7,880 current liability and $38,785 non-current liability) at September 30, 2016, and $46,362 ($7,880 current liability and $38,482 non-current liability) at December 31, 2015.
We have an indemnification agreement with a prior owner for part of the remediation expenses at certain West Coast assets. We have recorded current receivables of $623 and $623 and non-current receivables of $2,258 and $2,648 at September 30, 2016 and December 31, 2015, respectively.
(18)
Subsequent Events
Dividend Declared
On October 27, 2016, our board of directors declared the regular quarterly cash dividend of $0.15 per share on our common stock, payable on December 23, 2016, to holders of record at the close of business on December 7, 2016.
Partnership Distribution
On October 26, 2016, the board of directors of the General Partner declared a cash distribution to the Partnership’s common unitholders of approximately $9,378, or $0.15 per common unit. The cash distribution will be paid on November 22, 2016 to unitholders of record at the close of business on November 11, 2016. The total cash distribution payable to non-affiliated common unitholders will be approximately $1,728.

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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In this document, the words “Alon,” “we,” “our” and “us” or like terms refer to Alon USA Energy, Inc. and its consolidated subsidiaries or to Alon USA Energy, Inc. or an individual subsidiary. Generally, the words “we,” “our” and “us” include Alon USA Partners, LP and its consolidated subsidiaries (the “Partnership”) as consolidated subsidiaries of Alon USA Energy, Inc. unless when used in disclosures of transactions or obligations between the Partnership and Alon USA Energy, Inc., or its other subsidiaries. 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, 2015.
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;
changes in the ownership of our common stock by Delek US Holdings, Inc. (“Delek”), which may trigger change of control provisions contained in the agreements and instruments governing our convertible senior notes and the related purchased options and warrant transactions;
termination of our Supply and Offtake Agreements with J. Aron & Company (“J. Aron”), which include all of our refineries and certain of our asphalt terminals, under which J. Aron is one of our largest suppliers of crude oil and one of our largest customers 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 and cost of compliance with the renewable fuel standards program, including the availability, cost and price volatility of renewable identification numbers;

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the effects and cost of compliance with current and future state and federal environmental, economic, safety and other laws, policies and regulations;
the effects of seasonality on demand for our products;
operating hazards, accidents, fires, severe weather, floods and other natural disasters, casualty losses and other matters beyond our control, which could result in unscheduled downtime;
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, 2015 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. We own 100% of the general partner and 81.6% of the limited partner interests in the Partnership (NYSE: ALDW), which owns a crude oil refinery in Big Spring, Texas, with a crude oil throughput capacity of 73,000 barrels per day (“bpd”) and an integrated wholesale marketing business. In addition, we directly own a crude oil refinery in Krotz Springs, Louisiana, with a crude oil throughput capacity of 74,000 bpd. We also own crude oil refineries in California, which have not processed crude oil since 2012. We own a majority interest in a renewable fuels project in California, with a throughput capacity of 2,500 bpd. We are a leading marketer of asphalt, which we distribute primarily through asphalt terminals located predominately in the Southwestern and Western United States. We are the largest 7-Eleven licensee in the United States and operate approximately 300 convenience stores which also market motor fuels in Central and West Texas and New Mexico.
Refining and Marketing
Our refining and marketing segment includes a sour crude oil refinery located in Big Spring, Texas, a light sweet crude oil refinery located in Krotz Springs, Louisiana, and heavy crude oil refineries located in Paramount, Bakersfield and Long Beach, California (“California refineries”). Our California refineries have not processed crude oil since 2012 due to the high costs of crude oil relative to product yield and low asphalt demand. We refine crude oil into petroleum products, including various grades of 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.
We own the Big Spring refinery and its integrated wholesale marketing operations through the Partnership. Our marketing of transportation fuels produced at the Big Spring refinery is focused on Central and West Texas, Oklahoma, New Mexico and Arizona. We refer to our operations in these regions as our “physically integrated system” because our distributors in this region are supplied primarily with motor fuels produced at our Big Spring refinery and distributed through a network of pipelines and terminals that we own or access through leases or long-term throughput agreements.
We sell motor fuels under the Alon brand through various terminals to supply 639 locations, including our retail segment convenience stores. We provide substantially all of our branded customers motor fuels, brand support and payment processing services in addition to the license of the Alon brand name and associated trade dress.
We market transportation fuel production from our Krotz Springs refinery substantially through bulk sales and exchange channels. These bulk sales and exchange arrangements are entered into with various oil companies and trading companies and are transported to markets on the Mississippi River and the Atchafalaya River as well as to the Colonial Pipeline. Beginning in the fourth quarter of 2015, we began shipping and selling gasoline into wholesale markets in the Southern and Eastern United States using our status as a regular shipper on the Colonial Pipeline.
We are the majority owner of a renewable fuels project in California that began commercial production in February 2016 and converts tallow and vegetable oils into renewable fuels. The produced renewable fuels are drop-in replacements for petroleum-based fuels. The renewable fuels project generates both state and federal environmental credits as well as the federal blender’s tax credit. The throughput and production data for our California renewable fuels project are generally not included in our combined refinery data, unless otherwise specified.

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Asphalt
We own or operate 11 asphalt terminals located in Texas (Big Spring), Washington (Richmond Beach), California (Paramount, Long Beach, Elk Grove, Bakersfield and Mojave), Arizona (Phoenix and Flagstaff) as well as asphalt terminals in which we own a 50% interest located in Fernley, Nevada, and Brownwood, Texas. 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.
We purchase non-blended asphalt from third parties in addition to non-blended asphalt produced at the Big Spring refinery. We market asphalt through our terminals as blended and non-blended 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.
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 market asphalt primarily as paving asphalt to road and materials manufacturers and as ground tire rubber polymer modified or emulsion asphalt to highway construction/maintenance contractors. Sales of asphalt are seasonal with the majority of sales occurring between May and October.
Retail
Our convenience stores typically offer various grades of gasoline, diesel, food products, food service, tobacco products, non-alcoholic and alcoholic beverages, general merchandise as well as money orders to the 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.
For additional information on each of our operating segments, see Items 1. and 2. “Business and Properties” included in our Annual Report on Form 10-K for the year ended December 31, 2015.
Third Quarter Operational and Financial Highlights
Operating loss for the third quarter of 2016 was $3.4 million, compared to operating income of $86.9 million for the same period last year. Our operational and financial highlights for the third quarter of 2016 include the following:
Combined refinery average throughput for the third quarter of 2016 was 137,767 bpd, compared to a combined refinery average throughput of 146,070 bpd for the third quarter of 2015. The Big Spring refinery average throughput for the third quarter of 2016 was 70,063 bpd, compared to 75,797 bpd for the third quarter of 2015. The Krotz Springs refinery average throughput for the third quarter of 2016 was 67,704 bpd, compared to 70,273 bpd for the third quarter of 2015. The reduced throughput at our Big Spring refinery was the result of a reformer regeneration during the third quarter of 2016. The reduced throughput at the Krotz Springs refinery during the third quarter of 2016 was the result of our election to reduce the crude rate in order to optimize the refinery yield.
Refinery operating margin at the Big Spring refinery was $9.22 per barrel for the third quarter of 2016 compared to $16.71 per barrel for the same period in 2015. This decrease in operating margin was primarily due to a lower Gulf Coast 3/2/1 crack spread and increased RINs costs, partially offset by a widening of both the WTI Cushing to WTI Midland and WTI Cushing to WTS spreads and an increased benefit from the contango market environment which reduced the cost of crude.
Refinery operating margin at the Krotz Springs refinery was $3.42 per barrel for the third quarter of 2016 compared to $6.66 per barrel for the same period in 2015. This decrease in operating margin was primarily due to a lower Gulf Coast 2/1/1 high sulfur diesel crack spread, a narrowing of the LLS to WTI Cushing spread and increased RINs costs, partially offset by a widening of the WTI Cushing to WTI Midland spread and an increased benefit from the contango market environment which reduced the cost of crude.
The average Gulf Coast 3/2/1 crack spread was $13.31 per barrel for the third quarter of 2016 compared to $19.77