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, 2013
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
FOR THE TRANSITION PERIOD FROM __________TO __________ 

Commission file number: 001-32567
ALON USA ENERGY, INC.
(Exact name of Registrant as specified in its charter)
___________________________________________________

Delaware
 
74-2966572
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
12700 Park Central Dr., Suite 1600, Dallas, Texas 75251
(Address of principal executive offices) (Zip Code)

(972) 367-3600
(Registrant’s telephone number, including area code)
___________________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o
Smaller reporting company o
 
(Do not check if a smaller reporting company)
Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares of the Registrant’s common stock, par value $0.01 per share, outstanding as of November 1, 2013, was 68,640,671.

 
 



TABLE OF CONTENTS

 
 
 
 
EX-31.1 CERTIFICATION OF CEO PURSUANT TO SECTION 302
EX-31.2 CERTIFICATION OF CFO PURSUANT TO SECTION 302
EX-32.1 CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

ALON USA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share data)
 
September 30,
2013
 
December 31,
2012
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
291,174

 
$
116,296

Accounts and other receivables, net
201,017

 
184,138

Inventories
232,586

 
183,919

Deferred income tax asset
9,259

 
5,223

Prepaid expenses and other current assets
23,413

 
19,322

Total current assets
757,449

 
508,898

Equity method investments
26,649

 
21,582

Property, plant and equipment, net
1,432,674

 
1,492,493

Goodwill
105,943

 
105,943

Other assets, net
87,627

 
94,658

Total assets
$
2,410,342

 
$
2,223,574

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
285,223

 
$
309,573

Accrued liabilities
116,449

 
102,579

Current portion of long-term debt
9,464

 
9,504

Total current liabilities
411,136

 
421,656

Other non-current liabilities
272,608

 
254,946

Long-term debt
718,014

 
577,513

Deferred income tax liability
356,457

 
348,273

Total liabilities
1,758,215

 
1,602,388

Commitments and contingencies (Note 16)

 

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

 
42,200

Common stock, par value $0.01, 150,000,000 shares authorized; 63,166,561 and 61,272,429 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively
632

 
613

Additional paid-in capital
471,798

 
444,022

Accumulated other comprehensive loss, net of income tax
(25,843
)
 
(30,447
)
Retained earnings
143,027

 
128,319

Total stockholders’ equity
625,296

 
584,707

Non-controlling interest in subsidiaries
26,831

 
36,479

Total equity
652,127

 
621,186

Total liabilities and equity
$
2,410,342

 
$
2,223,574


The accompanying notes are an integral part of these consolidated financial statements.
1

Table of Contents

ALON USA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, dollars in thousands except per share data)

 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Net sales (1)
$
1,892,836

 
$
2,360,334

 
$
5,220,627

 
$
6,062,956

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales
1,789,320

 
2,101,647

 
4,665,289

 
5,407,197

Unrealized losses on commodity swaps

 
5,017

 

 
37,458

Direct operating expenses
72,035

 
81,160

 
217,703

 
230,243

Selling, general and administrative expenses
40,224

 
47,670

 
125,066

 
119,018

Depreciation and amortization
30,988

 
31,870

 
92,949

 
93,000

Total operating costs and expenses
1,932,567

 
2,267,364

 
5,101,007

 
5,886,916

Gain (loss) on disposition of assets
334

 
(2,624
)
 
8,846

 
(2,838
)
Operating income (loss)
(39,397
)
 
90,346

 
128,466

 
173,202

Interest expense
(22,263
)
 
(22,773
)
 
(63,816
)
 
(78,113
)
Equity earnings of investees
3,426

 
4,542

 
5,155

 
6,112

Other income (loss), net
91

 
202

 
220

 
(6,791
)
Income (loss) before income tax expense (benefit)
(58,143
)
 
72,317

 
70,025

 
94,410

Income tax expense (benefit)
(24,958
)
 
26,776

 
9,617

 
34,705

Net income (loss)
(33,185
)
 
45,541

 
60,408

 
59,705

Net income (loss) attributable to non-controlling interest
(4,476
)
 
2,318

 
23,437

 
2,758

Net income (loss) available to stockholders
$
(28,709
)
 
$
43,223

 
$
36,971

 
$
56,947

Earnings (loss) per share, basic
$
(0.47
)
 
$
0.76

 
$
0.56

 
$
1.01

Weighted average shares outstanding, basic (in thousands)
62,901

 
56,699

 
62,490

 
56,322

Earnings (loss) per share, diluted
$
(0.47
)
 
$
0.69

 
$
0.54

 
$
0.91

Weighted average shares outstanding, diluted (in thousands)
62,901

 
63,060

 
67,989

 
62,679

Cash dividends per share
$
0.06

 
$
0.04

 
$
0.32

 
$
0.12

___________
(1)
Includes excise taxes on sales by the retail segment of $19,307 and $17,159 for the three months and $55,143 and $49,481 for the nine months ended September 30, 2013 and 2012, respectively.


The accompanying notes are an integral part of these consolidated financial statements.
2

Table of Contents

ALON USA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, dollars in thousands)

 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss)
$
(33,185
)
 
$
45,541

 
$
60,408

 
$
59,705

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

 
14

 

 
(170
)
Less: reclassification to earnings - interest expense

 
(1,014
)
 

 
(3,023
)
Net gain

 
1,028

 

 
2,853

Commodity contracts designated as cash flow hedges:
 
 
 
 
 
 
 
Unrealized holding gain (loss) arising during period
7,208

 
(49,061
)
 
28,958

 
(88,260
)
Less: reclassification to earnings - cost of sales
11,339

 
(28,029
)
 
21,333

 
(50,381
)
Net gain (loss)
(4,131
)
 
(21,032
)
 
7,625

 
(37,879
)
Total other comprehensive income (loss), before tax
(4,131
)
 
(20,004
)
 
7,625

 
(35,026
)
Income tax expense (benefit) related to items of other comprehensive income
(1,529
)
 
(7,212
)
 
2,831

 
(12,638
)
Total other comprehensive income (loss), net of tax
(2,602
)
 
(12,792
)
 
4,794

 
(22,388
)
Comprehensive income (loss)
(35,787
)
 
32,749

 
65,202

 
37,317

Comprehensive income (loss) attributable to non-controlling interest
(4,555
)
 
1,556

 
23,627

 
1,386

Comprehensive income (loss) attributable to stockholders
$
(31,232
)
 
$
31,193

 
$
41,575

 
$
35,931



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,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
60,408

 
$
59,705

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
92,949

 
93,000

Stock compensation
5,070

 
2,617

Deferred income tax expense
613

 
32,520

Equity earnings of investees (net of dividends)
(4,286
)
 
(5,112
)
Amortization of debt issuance costs
3,474

 
4,864

Amortization of original issuance discount
2,591

 
1,909

Write-off of unamortized original issuance discount

 
9,624

(Gain) loss on disposition of assets
(8,846
)
 
2,838

Unrealized losses on commodity swaps

 
37,458

Changes in operating assets and liabilities:
 
 
 
Accounts and other receivables, net
(8,572
)
 
(36,827
)
Inventories
(48,667
)
 
(93,417
)
Prepaid expenses and other current assets
3,626

 
(13,205
)
Other assets, net
5,091

 
(12,587
)
Accounts payable
(24,350
)
 
54,118

Accrued liabilities
14,352

 
16,430

Other non-current liabilities
16,208

 
61,563

Net cash provided by operating activities
109,661

 
215,498

Cash flows from investing activities:
 
 
 
Capital expenditures
(48,311
)
 
(72,273
)
Capital expenditures for turnarounds and catalysts
(6,843
)
 
(11,437
)
Contribution to equity method investment
(781
)
 

Proceeds from disposition of assets
25,745

 
274

Net cash used in investing activities
(30,190
)
 
(83,436
)
Cash flows from financing activities:
 
 
 
Dividends paid to stockholders
(19,988
)
 
(6,754
)
Dividends paid to non-controlling interest
(731
)
 
(269
)
Distributions paid to non-controlling interest in the Partnership
(31,746
)
 

Equity issuance costs
(1,012
)
 
(10
)
Deferred debt issuance costs
(4,126
)
 
(3,407
)
Revolving credit facilities, net
31,000

 
(224,341
)
Proceeds from issuance of convertible debt
150,000

 

Payments on long-term debt
(12,765
)
 
(8,655
)
Proceeds from issuance of warrants
13,230

 

Payments for purchases of hedges on convertible debt
(28,455
)
 

Net cash provided by (used in) financing activities
95,407

 
(243,436
)
Net increase (decrease) in cash and cash equivalents
174,878

 
(111,374
)
Cash and cash equivalents, beginning of period
116,296

 
157,066

Cash and cash equivalents, end of period
$
291,174

 
$
45,692

Supplemental cash flow information:
 
 
 
Cash paid for interest, net of capitalized interest
$
50,534

 
$
56,744

Taxes paid for income tax
$
19,101

 
$
3,478

Non-cash activity:
 
 
 
Financing activity — payment on long-term debt from issuance of preferred stock
$

 
$
(30,000
)

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

Table of Contents

ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, dollars in thousands except as noted)
(1)
Basis of Presentation
The consolidated financial statements include the accounts of Alon USA Energy, Inc. and its subsidiaries (collectively, “Alon”). The term “Alon” generally includes Alon USA Partners, LP and its subsidiaries (“ALDW”) as consolidated subsidiaries of Alon USA Energy, Inc. with certain exceptions where there are transactions or obligations between ALDW and Alon USA Energy or its other subsidiaries. When used in descriptions of agreements and transactions, “ALDW” or the “Partnership” refers to Alon USA Partners, LP and its consolidated subsidiaries.
These consolidated financial statements and notes of Alon are unaudited and have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements.
In the opinion of Alon's management, the information included in these consolidated financial statements reflects all adjustments, consisting of normal and recurring adjustments, which are necessary for a fair presentation of Alon's consolidated financial position and results of operations for the interim periods presented. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior year balances may have been aggregated or disaggregated in order to conform to the current year presentation. The results of operations for the interim periods are not necessarily indicative of the operating results that may be obtained for the year ending December 31, 2013.
The consolidated balance sheet as of December 31, 2012, has been derived from the audited financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Alon's Annual Report on Form 10-K for the year ended December 31, 2012.
New Accounting Standards
Effective January 1, 2013, Alon adopted Accounting Standards Update (“ASU”) No. 2011- 11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities and ASU No. 2013- 01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities issued by the Financial Accounting Standards Board (“FASB”). These updates require an entity to disclose both gross information and net information of recognized derivative instruments, repurchase agreements and securities borrowing and lending transactions offset in the consolidated balance sheet. The updated guidance was applied retrospectively, effective January 1, 2013. The adoption concerns disclosure only and did not have any financial impact on the consolidated financial statements.
ASU No. 2013- 02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013- 02”), was issued in February 2013. This ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, ASU 2013- 02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross- reference to other disclosures required under GAAP that provide additional detail about those amounts. The updated guidance was applied retrospectively, effective January 1, 2013. The adoption concerns disclosure only and did not have any financial impact on the consolidated financial statements.
(2)
Alon USA Partners, LP     
ALDW is a publicly traded limited partnership that was formed to own the assets and operations of the Big Spring refinery and associated wholesale marketing operations. On November 26, 2012, the Partnership completed its initial public offering (NYSE: ALDW) of 11,500,000 common units representing limited partner interests. As of September 30, 2013, the 11,502,476 common units held by the public represent 18.4% of the Partnership's common units outstanding. Alon owns the remaining 81.6% of the Partnership's common units and Alon USA Partners GP, LLC (the "General Partner"), Alon's wholly-owned subsidiary, owns 100% of the non-economic General Partner interest in the Partnership.
The limited partner interests in the Partnership not owned by Alon are reflected in the results of operations in net income (loss) attributable to non-controlling interest and in Alon's balance sheet in non-controlling interest in subsidiaries. The Partnership is consolidated within the refining and marketing segment.

5

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


The Partnership has adopted a policy pursuant to which it will distribute all of the available cash 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.
Alon has agreements with the Partnership which establish fees for certain administrative and operational services provided by Alon and its subsidiaries to the Partnership, provide certain indemnification obligations and other matters and establish terms for the supply of products by the Partnership to Alon.
(3)
Segment Data
Alon’s revenues are derived from three operating segments: (i) refining and marketing, (ii) asphalt and (iii) retail. The reportable operating segments are strategic business units that offer different products and services. The segments are managed separately as each segment requires unique technology, marketing strategies and distinct operational emphasis. Each operating segment’s performance is evaluated primarily based on operating income.
In the fourth quarter of 2012, based on a change in our internal reporting structure as a result of the Partnership's initial public offering, the branded marketing operations were combined with the refining and marketing segment and no longer included with the retail segment. Information for the three and nine months ended September 30, 2012 has been recast to provide a comparison to the current year results.
(a)
Refining and Marketing Segment
Alon’s refining and marketing segment includes sour and heavy crude oil refineries located in Big Spring, Texas; and Paramount, Bakersfield and Long Beach, California (the “California refineries”); and a light sweet crude oil refinery located in Krotz Springs, Louisiana. Alon's refineries have a combined throughput capacity of approximately 214,000 barrels per day (“bpd”). At these refineries, Alon refines crude oil into products including gasoline, diesel, jet fuel, petrochemicals, feedstocks, asphalts and other petroleum products, which are marketed primarily in the South Central, Southwestern and Western regions of the United States. Finished products and blendstocks are also marketed through sales and exchanges with other major oil companies, state and federal governmental entities, unbranded wholesale distributors and various other third parties. Alon also acquires finished products through exchange agreements and third-party suppliers.
Alon supplies gasoline and diesel to 633 Alon branded retail sites, including its retail segment convenience stores. Approximately 62% of the gasoline and 29% of the diesel motor fuel produced at Alon's Big Spring refinery was transferred to Alon's branded marketing business at prices substantially determined by wholesale market prices. Additionally, Alon licenses the use of the Alon brand name and provides credit card processing services to 95 licensed locations that are not under fuel supply agreements.
(b)
Asphalt Segment
Alon’s asphalt segment includes 11 refinery/terminal locations in Texas (Big Spring), California (Paramount, Long Beach, Elk Grove, Bakersfield and Mojave), Oregon (Willbridge), Washington (Richmond Beach), Arizona (Phoenix and Flagstaff), and Nevada (Fernley) (50% interest) as well as a 50% interest in Wright Asphalt Products Company, LLC (“Wright”) which specializes in marketing patented tire rubber modified asphalt products. Alon produces paving grades of asphalt and, depending on the terminal, can manufacture performance-graded asphalts, emulsions and cutbacks. The operations in which Alon has a 50% interest are recorded under the equity method of accounting and the investments are included as part of total assets in the asphalt segment data.
(c)
Retail Segment
Alon’s retail segment operates 297 convenience stores located in Central and West Texas and New Mexico. These convenience stores typically offer various grades of gasoline, diesel fuel, general merchandise and food and beverage products to the general public, primarily under the 7-Eleven and Alon brand names. Substantially all of the motor fuel sold through Alon’s retail segment is supplied by Alon’s Big Spring refinery.
(d)
Corporate
Operations that are not included in any of the three segments are included in the corporate category. These operations consist primarily of corporate headquarters operating and depreciation expenses.

6

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


Segment data as of and for the three and nine month periods ended September 30, 2013 and 2012 are presented below:
 
Refining and
 Marketing
 
Asphalt
 
Retail
 
Corporate
 
Consolidated
Total
Three Months Ended September 30, 2013
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
1,446,918

 
$
194,230

 
$
251,688

 
$

 
$
1,892,836

Intersegment sales/purchases
164,339

 
(27,131
)
 
(137,208
)
 

 

Depreciation and amortization
26,255

 
1,588

 
2,538

 
607

 
30,988

Operating income (loss)
(47,587
)
 
1,723

 
7,250

 
(783
)
 
(39,397
)
Total assets
2,032,798

 
145,313

 
209,122

 
23,109

 
2,410,342

Turnaround, chemical catalyst and capital expenditures
11,754

 
1,556

 
4,369

 
229

 
17,908

 
Refining and
 Marketing
 
Asphalt
 
Retail
 
Corporate
 
Consolidated
Total
Three Months Ended September 30, 2012
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
1,921,919

 
$
203,982

 
$
234,433

 
$

 
$
2,360,334

Intersegment sales/purchases
211,183

 
(83,783
)
 
(127,400
)
 

 

Depreciation and amortization
26,849

 
1,485

 
2,925

 
611

 
31,870

Operating income (loss)
89,190

 
(3,574
)
 
5,544

 
(814
)
 
90,346

Total assets
1,929,904

 
180,831

 
195,646

 
14,556

 
2,320,937

Turnaround, chemical catalyst and capital expenditures
31,064

 
1,075

 
1,805

 
484

 
34,428

 
Refining and
Marketing
 
Asphalt
 
Retail
 
Corporate
 
Consolidated
Total
Nine Months Ended September 30, 2013
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
4,006,715

 
$
493,286

 
$
720,626

 
$

 
$
5,220,627

Intersegment sales/purchases
462,281

 
(68,422
)
 
(393,859
)
 

 

Depreciation and amortization
78,867

 
4,700

 
7,360

 
2,022

 
92,949

Operating income (loss)
112,135

 
(657
)
 
19,554

 
(2,566
)
 
128,466

Total assets
2,032,798

 
145,313

 
209,122

 
23,109

 
2,410,342

Turnaround, chemical catalyst and capital expenditures
36,993

 
5,947

 
11,546

 
668

 
55,154

 
Refining and
Marketing
 
Asphalt
 
Retail
 
Corporate
 
Consolidated
Total
Nine Months Ended September 30, 2012
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
4,930,200

 
$
449,442

 
$
683,314

 
$

 
$
6,062,956

Intersegment sales/purchases
592,553

 
(221,028
)
 
(371,525
)
 

 

Depreciation and amortization
78,884

 
4,281

 
8,047

 
1,788

 
93,000

Operating income (loss)
157,621

 
1,409

 
16,544

 
(2,372
)
 
173,202

Total assets
1,929,904

 
180,831

 
195,646

 
14,556

 
2,320,937

Turnaround, chemical catalyst and capital expenditures
65,998

 
8,535

 
7,910

 
1,267

 
83,710

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.

7

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


Total assets of each segment consist of net property, plant and equipment, inventories, cash and cash equivalents, accounts and other receivables and other assets directly associated with the segment’s operations. Corporate assets consist primarily of corporate headquarters information technology and administrative equipment.
(4)
Fair Value
Alon must determine fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As required, Alon utilizes valuation techniques that maximize the use of observable inputs (levels 1 and 2) and minimize the use of unobservable inputs (level 3) within the fair value hierarchy. Alon generally applies the “market approach” to determine fair value. This method uses pricing and other information generated by market transactions for identical or comparable assets and liabilities. Assets and liabilities are classified within the fair value hierarchy based on the lowest level (least observable) input that is significant to the measurement in its entirety.
The carrying amounts of Alon’s cash and cash equivalents, receivables, payables and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The reported amounts of long-term debt approximate fair value. Derivative financial instruments are carried at fair value, which is based on quoted market prices. Derivative instruments are the only financial assets and liabilities measured at fair value on a recurring basis.
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, 2013 and December 31, 2012:
 
Quoted Prices in
Active Markets
For Identical
Assets or
Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Consolidated
Total
As of September 30, 2013
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
81

 
$

 
$

 
$
81

Commodity contracts (swaps)

 
9,139

 

 
9,139

Liabilities:
 
 
 
 
 
 
 
Fair value hedges

 
11,466

 

 
11,466

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

 
$

 
$

 
$
2,072

Commodity contracts (swaps)

 
1,514

 

 
1,514

Liabilities:
 
 
 
 
 
 
 
Fair value hedges

 
1,720

 

 
1,720

(5)
Derivative Financial Instruments
Mark to Market
Commodity Derivatives. Alon selectively utilizes commodity derivatives to manage its exposure to commodity price fluctuations and uses crude oil and refined product commodity derivative contracts to reduce risk associated with potential price changes on committed obligations. Alon does not speculate using derivative instruments. Credit risk on Alon’s derivative instruments is substantially mitigated by transacting with counterparties meeting established collateral and credit criteria.
Fair Value Hedges
Fair value hedges are used to hedge price volatility in certain refining inventories and firm commitments to purchase inventories. The level of activity for fair value hedges is based on the level of operating inventories. The gain or loss on derivative instruments designated and qualifying as fair value hedges, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, is recognized currently in earnings in the same period.
As of September 30, 2013, Alon has accounted for certain commodity contracts as fair value hedges with contract purchase volumes of 1,323 thousand barrels of crude oil with remaining contract terms through May 2019.

8

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


Cash Flow Hedges
To designate a derivative as a cash flow hedge, Alon documents at the inception of the hedge the assessment that the derivative will be highly effective in offsetting expected changes in cash flows from the item hedged. This assessment, which is updated at least quarterly, is generally based on the most recent relevant historical correlation between the derivative and the item hedged. If, during the term of the derivative, the hedge is determined to be no longer highly effective, hedge accounting is prospectively discontinued and any remaining unrealized gains or losses, based on the effective portion of the derivative at that date, are reclassified to earnings when the underlying transactions occur.
Commodity Derivatives. As of September 30, 2013, Alon has accounted for certain commodity swap contracts as cash flow hedges with contract purchase volumes of 7,200 thousand barrels of crude oil and net contract sales volumes of 7,200 thousand barrels of refined products with the longest remaining contract term of fifteen months. Related to these transactions in Other Comprehensive Income ("OCI"), Alon recognized unrealized gains (losses) of $(4,131) and $(21,032) for the three months ended and $7,625 and $(37,879) for the nine months ended September 30, 2013 and 2012, respectively. There were no amounts reclassified from OCI into cost of sales as a result of the discontinuance of cash flow hedge accounting.
For the three and nine months ended September 30, 2013 and 2012, there was no hedge ineffectiveness recognized in income. No component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness.
Interest Rate Derivatives. Alon selectively utilizes interest rate related derivative instruments to manage its exposure to floating-rate debt instruments. Alon periodically uses interest rate swap agreements to manage its floating to fixed rate position by converting certain floating-rate debt to fixed-rate debt. As of September 30, 2013, Alon did not have any outstanding interest rate swap agreements.
Alon recognized in OCI unrealized gains of $1,028 and $2,853 during the three and nine months ended September 30, 2012, respectively, for the fair value measurement of the interest rate swap agreements.
The following table presents the effect of derivative instruments on the consolidated statements of financial position:
 
As of September 30, 2013
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
 
 
 
Balance Sheet
 
 
 
Location
 
Fair Value
 
Location
 
Fair Value
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
Accounts receivable
 
$
4,830

 
Accrued liabilities
 
$
(4,749
)
Total derivatives not designated as hedging instruments
 
 
$
4,830

 
 
 
$
(4,749
)
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts (swaps)
Accounts receivable
 
$
10,593

 
Other non-current liabilities
 
$
(1,454
)
Fair value hedges
 
 

 
Other non-current liabilities
 
(11,466
)
Total derivatives designated as hedging instruments
 
 
10,593

 
 
 
(12,920
)
Total derivatives
 
 
$
15,423

 
 
 
$
(17,669
)

9

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


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

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

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

 
Accrued liabilities
 
$
(773
)
Fair value hedges
 
 

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

 
 
 
(2,493
)
Total derivatives
 
 
$
5,030

 
 
 
$
(3,164
)
The following tables present the effect of derivative instruments on Alon’s consolidated statements of operations and accumulated other comprehensive income:
Cash Flow Hedging Relationships
 
Gain (Loss) Recognized
in OCI
 
Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Gain (Loss) Reclassified
from Accumulated OCI into
Income (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)
 
 
 
 
Location
 
Amount
 
Location
 
Amount
For the Three Months Ended September 30, 2013
 
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
$
(4,131
)
 
Cost of sales
 
$
11,339

 
 
 
$

Total derivatives
 
$
(4,131
)
 
 
 
$
11,339

 
 
 
$

 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended September 30, 2012
 
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
$
(21,032
)
 
Cost of sales
 
$
(28,029
)
 
 
 
$

Interest rate swap
 
1,028

 
Interest expense
 
(1,014
)
 
 
 

Total derivatives
 
$
(20,004
)
 
 
 
$
(29,043
)
 
 
 
$

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, 2013
 
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
$
7,625

 
Cost of sales
 
$
21,333

 
 
 
$

Total derivatives
 
$
7,625

 
 
 
$
21,333

 
 
 
$

 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2012
 
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
$
(37,879
)
 
Cost of sales
 
$
(50,381
)
 
 
 
$

Interest rate swap
 
2,853

 
Interest expense
 
(3,023
)
 
 
 

Total derivatives
 
$
(35,026
)
 
 
 
$
(53,404
)
 
 
 
$



10

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


Derivatives in fair value hedging relationships:
 
 
 
Gain (Loss) Recognized in Income
 
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
 
September 30,
 
September 30,
 
Location
 
2013
 
2012
 
2013
 
2012
Fair value hedges
Cost of sales
 
$
(7,888
)
 
$
(2,351
)
 
$
(9,746
)
 
$
(2,351
)
Total derivatives
 
 
$
(7,888
)
 
$
(2,351
)
 
$
(9,746
)
 
$
(2,351
)
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
 
2013
 
2012
 
2013
 
2012
Commodity contracts (futures & forwards)
Cost of sales
 
$
(1,757
)
 
$
11,294

 
$
8,762

 
$
26,869

Commodity contracts (swaps)
Cost of sales
 

 
(5,810
)
 

 
(18,016
)
Commodity contracts (swaps)
Unrealized losses on commodity swaps
 

 
(5,017
)
 

 
(37,458
)
Commodity contracts (call options)
Other income (loss), net
 

 

 

 
(7,297
)
Total derivatives
 
 
$
(1,757
)
 
$
467

 
$
8,762

 
$
(35,902
)
Offsetting Assets and Liabilities
Alon's derivative financial instruments are subject to master netting arrangements to manage counterparty credit risk associated with derivatives, however, Alon does not offset on its consolidated balance sheets the fair value amounts recorded for derivative instruments under these agreements.
The following table presents offsetting information regarding Alon's derivatives by type of transaction as of September 30, 2013 and December 31, 2012:
 
Gross Amounts of Recognized Assets (Liabilities)
 
Gross Amounts offset in the Statement of Financial Position
 
Net Amounts of Assets (Liabilities) Presented in the Statement of Financial Position
 
Gross Amounts Not offset in the Statement of Financial Position
 
Net Amount
 
 
 
Financial Instruments
 
Cash Collateral Pledged
 
As of September 30, 2013
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Assets:
 
 
 
 
 
 
 
 
 
 
Futures & forwards
$
4,830

 
$

 
$
4,830

 
$
(4,749
)
 
$

 
$
81

Swaps
10,593

 

 
10,593

 

 

 
10,593

Commodity Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
Futures & forwards
$
(4,749
)
 
$

 
$
(4,749
)
 
$
4,749

 
$

 
$

Swaps
(1,454
)
 

 
(1,454
)
 

 

 
(1,454
)
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Assets:
 
 
 
 
 
 
 
 
 
 
Futures & forwards
$
2,743

 
$

 
$
2,743

 
$
(671
)
 
$

 
$
2,072

Swaps
2,287

 

 
2,287

 

 

 
2,287

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

 
$
(671
)
 
$
671

 
$

 
$

Swaps
(773
)
 

 
(773
)
 

 

 
(773
)

11

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


Compliance Program Price Risk
Alon is exposed to market risk related to the volatility in the price of credits needed to comply with various governmental and regulatory programs. The most significant programs impacting operations are those that require Alon to blend biofuels into the products produced. Alon is obligated to blend biofuels into the products produced at a rate that is at least equal to the required annual quotas. To the degree Alon is unable to blend at the applicable rate, biofuel credits (primarily RINs) must be purchased to cover this deficit. Alon is exposed to the volatility in the market price of these credits, and Alon manages that risk by purchasing biofuel credits when prices are deemed favorable utilizing fixed price purchase contracts. Some of these contracts are derivative instruments; however, Alon elects the normal purchase and sale exception and does not record these contracts at their fair values.
The cost of meeting Alon's obligations under these compliance programs was $1,178 and $9,194 for the three and nine months ended September 30, 2013, respectively. These amounts are reflected in cost of sales.
(6)
Inventories    
Alon’s inventories (including inventory consigned to others) are stated at the lower of cost or market. Cost is determined under the last-in, first-out (LIFO) method for crude oil, refined products, asphalt, and blendstock inventories. Materials and supplies are stated at average cost. Cost for convenience store merchandise inventories is determined under the retail inventory method and cost for convenience store fuel inventories is determined under the first-in, first-out (FIFO) method.
Carrying value of inventories consisted of the following:
 
September 30,
2013
 
December 31,
2012
Crude oil, refined products, asphalt and blendstocks
$
62,487

 
$
40,068

Crude oil inventory consigned to others
115,691

 
91,876

Materials and supplies
22,818

 
21,919

Store merchandise
24,010

 
22,139

Store fuel
7,580

 
7,917

Total inventories
$
232,586

 
$
183,919

Market values of crude oil, refined products, asphalt and blendstock inventories exceeded LIFO costs by $78,110 and $58,213 at September 30, 2013 and December 31, 2012, respectively.
(7)
Inventory Financing Agreements
Alon has entered into Supply and Offtake Agreements and other associated agreements (together the "Supply and Offtake Agreements") with J. Aron & Company ("J. Aron"), to support the operations of the Big Spring, Krotz Springs and California refineries and most of our asphalt terminals. Pursuant to the Supply and Offtake Agreements, (i) J. Aron agreed to sell to Alon, and Alon agreed to buy from J. Aron, at market prices, crude oil for processing at the refineries and (ii) Alon agreed to sell, and J. Aron agreed to buy, at market prices, certain refined products produced at the refineries.
The Supply and Offtake Agreements also provided for the sale, at market prices, of Alon's crude oil and certain refined product inventories to J. Aron, the lease to J. Aron of crude oil and refined product storage facilities, and to identify prospective purchasers of refined products on J. Aron's behalf. The Supply and Offtake Agreements were amended in February 2013 and have initial terms that expire in May 2019. J. Aron may elect to terminate the Supply and Offtake Agreements prior to the expiration of the initial term in May 2016 and upon each anniversary thereof, on six months prior notice. Alon may elect to terminate in May 2018 on six months prior notice.
Following expiration or termination of the Supply and Offtake Agreements, Alon is obligated to purchase the crude oil and refined product inventories then owned by J. Aron and located at the leased storage facilities at market prices at that time.
In association with the Supply and Offtake Agreement at the Krotz Springs refinery, Alon entered into a secured Credit Agreement (the “Krotz Springs Standby LC Facility”) by and between Alon, as Borrower, and Goldman Sachs Bank USA, as Issuing Bank. The Krotz Springs Standby LC Facility provides for up to $200,000 of letters of credit to be issued to J. Aron. Obligations under the Krotz Springs Standby LC Facility are secured by a first priority lien on the existing and future accounts receivable and inventory of Alon Refining Krotz Springs, Inc. and its subsidiaries ("ARKS"), a wholly owned subsidiary of Alon. The Krotz Springs Standby LC Facility includes customary events of default and restrictions on the activities of ARKS. The Krotz Springs Standby LC Facility contains no maintenance financial covenants. At this time there is no further availability

12

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


under the Krotz Springs Standby LC Facility. In August 2013, Alon amended the Krotz Springs Standby LC Facility to extend the maturity date to July 2016.
As of September 30, 2013 and December 31, 2012, Alon had net current payables to J. Aron for purchases of $49,272 and $37,940, respectively, non-current liabilities related to the original financing of $137,494 and $115,955, respectively, and a consignment inventory receivable representing a deposit paid to J. Aron of $26,179 and $26,179, respectively.
Additionally, Alon had net current payables of $2,736 and net current receivables of $5,878 at September 30, 2013 and December 31, 2012, respectively, for forward commitments related to month-end consignment inventory target levels differing from projected levels and the associated pricing with these inventory level differences.
(8)
Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following:
 
September 30,
2013
 
December 31,
2012
Refining facilities
$
1,788,196

 
$
1,781,701

Pipelines and terminals
43,445

 
43,445

Retail
176,659

 
164,998

Other
14,979

 
14,296

Property, plant and equipment, gross
2,023,279

 
2,004,440

Less: Accumulated depreciation
(590,605
)
 
(511,947
)
Property, plant and equipment, net
$
1,432,674

 
$
1,492,493

(9)
Additional Financial Information
The tables that follow provide additional financial information related to the consolidated financial statements.
(a)
Other Assets, Net
 
September 30,
2013
 
December 31,
2012
Deferred turnaround and chemical catalyst cost
$
11,164

 
$
15,978

Environmental receivables
9,407

 
13,563

Deferred debt issuance costs
15,357

 
14,705

Intangible assets, net
7,685

 
9,384

Receivable from supply agreements
26,179

 
26,179

Other, net
17,835

 
14,849

Total other assets
$
87,627

 
$
94,658


13

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
 
September 30,
2013
 
December 31,
2012
Accrued Liabilities:
 
 
 
Taxes other than income taxes, primarily excise taxes
$
28,995

 
$
37,888

Employee costs
14,346

 
18,995

Commodity contracts
4,749

 
1,444

Accrued finance charges
18,850

 
11,633

Environmental accrual (Note 16)
8,081

 
6,730

Environmental compliance obligation
17,604

 

Other
23,824

 
25,889

Total accrued liabilities
$
116,449

 
$
102,579

 
 
 
 
Other Non-Current Liabilities:
 
 
 
Pension and other postemployment benefit liabilities, net
$
59,671

 
$
58,270

Environmental accrual (Note 16)
49,566

 
54,672

Asset retirement obligations
12,321

 
11,867

Consignment inventory
137,494

 
115,955

Commodity contracts
1,454

 

Other
12,102

 
14,182

Total other non-current liabilities
$
272,608

 
$
254,946

(10)
Postretirement Benefits
Alon has four defined benefit pension plans covering substantially all of its employees, excluding employees of Alon's retail segment. The benefits are based on years of service and the employee's final average monthly compensation. Alon's funding policy is to contribute annually not less than the minimum required nor more than the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those benefits expected to be earned in the future. Alon’s estimated contributions during 2013 to its pension plans have not changed significantly from amounts previously disclosed in Alon’s consolidated financial statements for the year ended December 31, 2012. For the nine months ended September 30, 2013 and 2012, Alon contributed $5,005 and $6,793, respectively, to its qualified pension plans.
The components of net periodic benefit cost related to Alon’s benefit plans were as follows for the three and nine months ended September 30, 2013 and 2012:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
1,116

 
$
943

 
$
3,348

 
$
2,829

Interest cost
1,100

 
1,032

 
3,300

 
3,095

Expected return on plan assets
(1,158
)
 
(1,076
)
 
(3,472
)
 
(3,229
)
Amortization of net loss
1,006

 
645

 
3,016

 
1,936

Net periodic benefit cost
$
2,064

 
$
1,544

 
$
6,192

 
$
4,631


14

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


(11)
Indebtedness
Debt consisted of the following:
 
September 30,
2013
 
December 31,
2012
Term loan credit facility
$
244,816

 
$
246,311

Revolving credit facility
80,000

 
49,000

Senior secured notes
207,902

 
211,573

Convertible senior notes
119,888

 

Retail credit facilities
74,872

 
80,133

Total debt
727,478

 
587,017

Less: Current portion
(9,464
)
 
(9,504
)
Total long-term debt
$
718,014

 
$
577,513

Alon had outstanding letters of credit under the Alon Energy Letter of Credit Facility of $56,827 and $59,485 at September 30, 2013 and December 31, 2012, respectively.
Alon had borrowings of $80,000 and $49,000 and letters of credit of $88,672 and $58,759 outstanding under the Alon USA LP revolving credit facility at September 30, 2013 and December 31, 2012, respectively.
Alon has certain credit agreements that contain restrictive covenants, including maintenance financial covenants. At September 30, 2013, Alon was in compliance with these maintenance financial covenants.
(a)Alon USA Convertible Senior Notes (share values in dollars)
In September 2013, Alon completed an offering of 3.00% convertible senior unsecured notes (the “Convertible Notes”) in aggregate principal amount of $150,000, which mature on September 15, 2018. Interest on the Convertible Notes is payable semiannually in arrears on March 15 and September 15 of each year, beginning on March 15, 2014. The Convertible Notes are not redeemable at Alon's option prior to maturity. Under the terms of the Convertible Notes, the holders of the Convertible Notes cannot require Alon to repurchase all or part of the notes except for instances of a fundamental change, as defined in the indenture.
The holders of the Convertible Notes may convert at anytime after June 15, 2018 if Alon's common stock is above approximately $14.79 per share. Prior to June 15, 2018 and after December 31, 2013, holders may convert if Alon's common stock is above approximately $19.22 per share, as defined in the indenture. The Convertible Notes may be converted into shares of Alon’s common stock, into cash, or into a combination of cash and shares of common stock, at Alon’s election. Alon's current intent is to settle conversions of each $1 (in thousands) principal amount of the Convertible Notes through cash payments, with any excess of this amount to be settled by a combination of cash and shares of Alon's common stock.
The Convertible Notes were issued at an offering price of 100% and Alon received gross proceeds of $150,000 (before fees and expenses related to the offering). The Convertible Notes had an initial conversion rate of 67.627 shares of Alon's common stock per each $1 (in thousands) principal amount of the Convertible Notes and is equivalent to an initial conversion price of approximately $14.79 per share, which represents a conversion premium of 32.5% on Alon's last reported common stock price of $11.16 per share on the date of the offering. The conversion rate is subject to adjustment upon the occurrence of certain events, but will not be adjusted for any accrued and unpaid interest. The Convertible Notes do not contain any maintenance financial covenants.
Alon used $15,225 of the proceeds to fund the cost of entering into convertible note hedge transactions (after such cost was partially offset by the proceeds Alon received from entering into warrant transactions) described below. In October 2013, Alon used the remaining net proceeds from the Convertible Notes offering, along with cash on hand, to redeem $140,000 of the outstanding principal balance on the 13.50% senior secured notes.
In accordance with Accounting Standards Codification ("ASC") 470-20, Debt - Debt with Conversion and Other Options ("ASC 470-20"), Alon separated the $150,000 principal amount of the Convertible Notes between the liability component and the equity component (i.e. the embedded conversion feature). The fair value of the liability component was calculated using a discount rate of an identical unsecured instrument without a conversion feature. Based on this borrowing rate, the fair value of the liability component of the Convertible Notes on the issuance date was $119,635, with a corresponding debt discount of $30,365, to be amortized at an effective interest rate of 8.15% over the term of the Convertible Notes. The carrying amount of

15

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


the embedded conversion feature was determined to be $30,365, by deducting the fair value of the liability component from the $150,000 principal amount of the Convertible Notes. The embedded conversion feature was recorded to additional paid-in capital because this financial instrument could be settled in Alon's own common stock and does not meet the definition of a derivative instrument. Additionally, $4,933 of transaction costs were allocated on a proportionate basis between other assets and additional paid-in capital in the consolidated balance sheets.
Interest expense on the Convertible Notes' contractual coupon rates for the three and nine months ended September 30, 2013 was $188. The amount charged to interest expense for amortization of the original issuance discount on the Convertible Notes for the three and nine months ended September 30, 2013 was $253.
As of September 30, 2013, the if-converted value of the Convertible Notes would not exceed the outstanding principal.
The principal balance, unamortized discount and net carrying amount of the liability and equity components of the Convertible Notes as of September 30, 2013 are as follows:
 
September 30,
2013
Equity component, pretax (1)
$
30,365

Convertible Notes:
 
Principal balance
150,000

Less: Unamortized discount
(30,112
)
Convertible notes, net
$
119,888

(1) Alon recognized a deferred tax liability of $11,171 related to the issuance of the Convertible Notes.
Convertible Note Hedge Transactions
In connection with the offering of the Convertible Notes, Alon also entered into convertible note hedge transactions with respect to Alon's common stock (the “Purchased Options”) with the initial purchasers of the Convertible Notes (the “Hedge Counterparties”). Alon paid an aggregate amount of $28,455 to the Hedge Counterparties for the Purchased Options. The Purchased Options, with a strike price of $14.79 per share of Alon's common stock, cover 10,144,050 shares of Alon's common stock, subject to customary anti-dilution adjustments, that initially underlie the Convertible Notes sold in the offering. The Purchased Options will expire in September 2018.
The Purchased Options are intended to reduce the potential dilution with respect to Alon’s common stock upon conversion of the Convertible Notes as well as offset any potential cash payments Alon is required to make in excess of the principal amount upon any conversion of the notes. The Purchased Options have been included in additional paid-in capital on the consolidated balance sheets, net of deferred tax assets of $10,468.
The Purchased Options are separate transactions and are not part of the terms of the Convertible Notes. Holders of the Convertible Notes do not have any rights with respect to the Purchased Options.
Warrant Transactions
In connection with the offering of the Convertible Notes, Alon also entered into warrant transactions (the “Warrants”), whereby Alon sold to the Hedge Counterparties warrants in an aggregate amount of $13,230 to acquire, subject to customary anti-dilution adjustments, up to 10,144,050 shares of Alon's common stock at a strike price of approximately $20.09 per share of common stock. The Warrants will be settled on a net-share basis and will expire in April 2019. The Warrants have been included in additional paid-in capital on the consolidated balance sheets.
The Warrants are separate transactions and are not part of the terms of the Convertible Notes. Holders of the Convertible Notes do not have any rights with respect to the Warrants.
(b)    Senior Secured Notes
In October 2013, Alon used proceeds from the Convertible Notes offering to repay approximately $140,000 of the principal balance on the 13.50% senior secured notes, leaving a remaining principal balance of approximately $74,640.

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


(12)
Stock-Based Compensation (share values in dollars)
Alon’s overall executive incentive compensation program includes the granting of awards in the form of options to purchase common stock, Stock Appreciation Rights (“SARs”), restricted shares of common stock, restricted common stock units, performance shares, performance units and senior executive plan bonuses to Alon’s directors, officers and key employees.
Restricted Stock. Non-employee directors, and non-employee directors of Alon's subsidiaries who are designated by Alon's directors, are awarded an annual grant of $25 in shares of restricted stock. In May 2013, Alon granted awards of 4,257 restricted shares at a grant date price of $17.62 per share. The restricted shares granted to the non-employee directors vest over a period of three years, assuming continued service at vesting.
In May 2013, Alon granted awards of 255,000 restricted shares to certain executive officers at a grant date price of $17.25 per share. These May 2013 restricted shares will vest as follows:  50% in May 2014 and 50% in May 2016, assuming continued service at vesting.
The following table summarizes the restricted share activity from January 1, 2012:
 
 
 
 
Weighted
Average
Grant Date
Fair Values
Nonvested Shares
 
Shares
 
(per share)
Nonvested at January 1, 2012
 
194,906

 
$
13.26

Granted
 
228,648

 
9.63

Vested
 
(97,424
)
 
13.27

Forfeited
 

 

Nonvested at December 31, 2012
 
326,130

 
$
10.71

Granted
 
259,257

 
17.26

Vested
 
(136,693
)
 
10.21

Forfeited
 

 

Nonvested at September 30, 2013
 
448,694

 
$
14.64

Compensation expense for restricted stock awards amounted to $1,117 and $407 for the three months ended September 30, 2013 and 2012, respectively, and $2,254 and $1,126 for the nine months ended September 30, 2013 and 2012, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations.
As of September 30, 2013, there was $4,284 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 1.8 years. The fair value of shares vested in 2013 was $2,379.
Restricted Stock Units. In May 2011, Alon granted 500,000 restricted stock units to the CEO and President of Alon at a grant date fair value of $11.47 per share. Each restricted unit represents the right to receive one share of Alon common stock upon the vesting of the restricted stock unit. All 500,000 restricted stock units vest on March 1, 2015, assuming continued service at vesting. Compensation expense for the restricted stock units amounted to $374 and $374 for the three months ended September 30, 2013 and 2012, respectively, and $1,122 and $1,122 for the nine months ended September 30, 2013 and 2012, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations.
Stock Appreciation Rights. Through September 30, 2013, Alon has granted awards of 599,165 SARs to certain officers and key employees of Alon of which 60% of these SARs have a grant price of $28.46 per share and the remaining SARs have grant prices ranging from $10.00 to $16.00 per share. As of September 30, 2013, 437,165 SARs have expired without being exercised with 134,752 SARs remaining outstanding at September 30, 2013.
Compensation expense for the SARs grants amounted to $6 and $15 for the three months ended September 30, 2013 and 2012, respectively, and $18 and $44 for the nine months ended September 30, 2013 and 2012, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations.

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


(13)
Equity (share values in dollars)
Changes to equity during the nine months ended September 30, 2013 are presented below:
 
 
Total Stockholders' Equity
 
Non-controlling Interest
 
Total Equity
Balance at December 31, 2012
 
$
584,707

 
$
36,479

 
$
621,186

Other comprehensive income
 
4,604

 
190

 
4,794

Stock compensation
 
5,868

 
(798
)
 
5,070

Equity issuance costs
 
(1,012
)
 

 
(1,012
)
Dividends of common stock on preferred stock
 
(291
)
 

 
(291
)
Equity component related to issuance of convertible notes
 
19,194

 

 
19,194

Convertible note hedge transactions
 
(17,987
)
 

 
(17,987
)
Warrant transactions
 
13,230

 

 
13,230

Distributions to non-controlling interest in the Partnership
 

 
(31,746
)
 
(31,746
)
Dividends
 
(19,988
)
 
(731
)
 
(20,719
)
Net income
 
36,971

 
23,437

 
60,408

Balance at September 30, 2013
 
$
625,296

 
$
26,831

 
$
652,127

(a)Common Stock
Amended Shareholder Agreement. In 2011, an agreement was reached with one of the non-controlling interest shareholders of Alon Assets, Inc. ("Alon Assets"), whereby the participant would exchange 2,019 shares of Alon Assets ratably over a three year period for up to 377,710 shares of Alon's common stock. One-third of the Alon Assets shares were exchanged in each of October 2012 and October 2011, and the remaining one-third will be exchanged in October 2013.
In 2012, Alon signed agreements with the two remaining non-controlling interest shareholders of Alon Assets. Alon has the right to exchange 581,699 shares of its common stock over a period of 12 quarters and 2,326,946 shares of its common stock over a period of 20 quarters, beginning July 2012, for 15,549.30 shares of Alon Assets.
During the nine months ended September 30, 2013, 494,467 shares of Alon's common stock were issued in exchange for 2,643.36 shares of Alon Assets with 2,084,534 shares of Alon's common stock available for exchange at September 30, 2013.
Compensation expense associated with the difference in value between the participants' ownership of Alon Assets compared to Alon's common stock of $561 and $2,059 was recognized for the three and nine months ended September 30, 2013 and is included in selling, general and administrative expenses in the consolidated statements of operations.
(b)
Preferred stock
Preferred Stock Conversion. During the nine months ended September 30, 2013, certain shareholders of Alon Israel and their affiliates converted 651,820 shares of Series B Preferred Stock to 967,107 shares of Alon's common stock.
(c)
Dividends
Common Stock Dividends. During the nine months ended September 30, 2013, Alon paid the following dividends:
Date Paid
 
Record Date
 
Dividend Amount Per Share
 
Special Non-Recurring Dividend
March 15, 2013
 
March 1, 2013
 
$
0.04

 
$

June 14, 2013
 
May 31, 2013
 
$
0.06

 
$
0.16

September 19, 2013
 
September 5, 2013
 
$
0.06

 
$

Preferred Stock Dividends. Alon issued 195,891 shares of common stock for payment of the quarterly 8.5% preferred stock dividend to preferred stockholders for the nine months ended September 30, 2013.

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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)


Partnership Distributions. During the nine months ended September 30, 2013, the Partnership paid the following cash distributions:
Date Paid
 
Distribution Amount Per Unit
 
Total Distribution Amount
 
Distribution Paid to Non-Affiliated Common Unitholders
March 1, 2013
 
$
0.57

 
$
35,626

 
$
6,556

May 15, 2013
 
$
1.48

 
$
92,503

 
$
17,023

August 23, 2013
 
$
0.71

 
$
44,377

 
$
8,167

(d)
Accumulated Other Comprehensive Loss
The following table displays the change in accumulated other comprehensive loss, net of tax:
 
Unrealized Gain on Cash Flow Hedges
 
Defined Benefit Pension Plans
 
Total
Balance at December 31, 2012
$
455

 
$
(30,902
)
 
$
(30,447
)
Current period other comprehensive income, net of tax
4,604

 

 
4,604

Balance at September 30, 2013
$
5,059

 
$
(30,902
)
 
$
(25,843
)
(14)
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 include the dilutive effect of SARs, granted restricted stock units, 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 nine months ended September 30, 2013 and 2012, is as follows:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss) available to stockholders
$
(28,709
)
 
$
43,223

 
$
36,971

 
$
56,947

Less: Preferred stock dividends
760

 

 
2,275

 

Net income (loss) available to common stockholders
(29,469
)
 
43,223

 
34,696

 
56,947

 
 
 
 
 
 
 
 
Weighted average number of shares of common stock outstanding
62,901

 
56,699

 
62,490

 
56,322

Dilutive SARs, RSUs, convertible debt, warrants and convertible preferred stock

 
6,361

 
5,499

 
6,357

Weighted average number of shares of common stock outstanding assuming dilution
62,901

 
63,060

 
67,989

 
62,679

Earnings (loss) per share – basic
$
(0.47
)
 
$
0.76

 
$
0.56

 
$
1.01

Earnings (loss) per share – diluted
$
(0.47
)
 
$
0.69

 
$
0.54

 
$
0.91

For the three months ended September 30, 2013, Alon has excluded 5,419 common stock equivalents from the weighted average number of diluted shares outstanding as the effect of including such shares would be anti-dilutive. For the nine months ended September 30, 2013 and the three and nine months ended September 30, 2012, the weighted average number of diluted shares includes all potentially dilutive securities.

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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)


(15)
Related-Party Transactions
In March 2012, pursuant to the terms of the Series B Convertible Preferred Stock Agreement, Alon issued 1,200,000 shares of 8.5% Series B Convertible Preferred Stock for $12,000 to certain shareholders of Alon Israel and their affiliates. In 2012 and January 2013, 480,000 and 651,820 shares, respectively, of Series B Convertible Preferred Stock were converted into shares of Alon's common stock. At September 30, 2013, 68,180 shares of Series B Convertible Preferred Stock remain outstanding.
(16)
Commitments and Contingencies
(a)
Commitments
In the normal course of business, Alon has long-term commitments to purchase, at market prices, utilities such as natural gas, electricity and water for use by its refineries, terminals, pipelines and retail locations. Alon is also party to various refined product and crude oil supply and exchange agreements. These agreements are typically short-term in nature or provide terms for cancellation.
Supply and Offtake Agreements
In July 2013, Alon entered into offtake agreements with two investment grade oil companies that provides for the sale, at market prices, of light cycle oil and high sulfur distillate blendstock through June 2015. Both agreements will automatically extend for successive one year terms unless either Alon or the other party cancels the agreement by delivering written notice of termination to the other at least 180 days prior to the end of the then current term.
(b)
Contingencies
Alon is involved in various legal actions arising in the ordinary course of business. Alon believes the ultimate disposition of these matters will not have a material effect on Alon’s financial position, results of operations or liquidity.
One of Alon's subsidiaries is a party to a lawsuit alleging breach of contract pertaining to an asphalt supply agreement. Alon believes that it has valid counterclaims as well as affirmative defenses that will prevent recovery. Attempts to reach a commercial arrangement to resolve the dispute have been unsuccessful to this point. The matter is currently scheduled to go to trial in January 2014. Due to the uncertainties of litigation, Alon cannot predict with certainty the ultimate resolution of this lawsuit.
(c)
Environmental
Alon is subject to loss contingencies pursuant to federal, state, and local environmental laws and regulations. These laws and regulations govern the discharge of materials into the environment and may require Alon to incur future obligations to investigate the effects of the release or disposal of certain petroleum, chemical, and mineral substances at various sites; to remediate or restore these sites; to compensate others for damage to property and natural resources and for remediation and restoration costs. These contingent obligations relate to sites owned by Alon and its past or present operations. Alon is currently participating in environmental investigations, assessments and cleanups pertaining to its refineries, service stations, pipelines and terminals. Alon may in the future be involved in additional environmental investigations, assessments and cleanups. The magnitude of future costs are unknown and will depend on factors such as the nature and contamination at many sites, the timing, extent and method of the remedial actions which may be required, and the determination of Alon’s liability in proportion to other responsible parties.
Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefit are expensed. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Substantially all amounts accrued are expected to be paid out over the next 15 years. The level of future expenditures for environmental remediation obligations cannot be determined with any degree of reliability.
Alon has accrued environmental remediation obligations of $57,647 ($8,081 accrued liability and $49,566 non-current liability) at September 30, 2013, and $61,402 ($6,730 accrued liability and $54,672 non-current liability) at December 31, 2012.
In connection with the acquisition of the Bakersfield refinery on June 1, 2010, a subsidiary of Alon entered into an indemnification agreement with a prior owner for remediation expenses of conditions that existed at the refinery on the acquisition date. Alon is required to make indemnification claims to the prior owner by March 15, 2015. Alon has recorded current receivables of $3,239 and $3,239 and non-current receivables of $8,361 and $11,599 at September 30, 2013 and December 31, 2012, respectively.

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


Alon has indemnification agreements with prior owners for part of the remediation expenses at certain West Coast assets. Alon has recorded current receivables of $604 and $604 and non-current receivables of $1,046 and $1,964 at September 30, 2013 and December 31, 2012, respectively.
(17)
Subsequent Events
Repayment of Senior Secured Notes
In October 2013, Alon used proceeds from the Convertible Notes offering to repay approximately $140,000 of the principal balance on the 13.50% senior secured notes, leaving a remaining principal balance of approximately $74,640.
Conversion of Preferred Shares
In October 2013, Alon Israel converted 3,500,000 shares of Series A Preferred Stock to 5,192,950 shares of Alon's common stock.
Dividend Declared
On November 4, 2013, Alon declared a regular quarterly cash dividend of $0.06 per share payable on December 18, 2013, to stockholders of record at the close of business on December 3, 2013.




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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012. In this document, the words “Alon,” “the Company,” “we” and “our” refer to Alon USA Energy, Inc. and its subsidiaries or to Alon USA Energy, Inc. or an individual subsidiary, and not to any other person. Generally, the words "we", "our" and "us" include Alon USA Partners, LP and its subsidiaries (the "Partnership") as consolidated subsidiaries of Alon USA Energy, Inc.
Forward-Looking Statements
Certain statements contained in this report and other materials we file with the SEC, or in other written or oral statements made by us, other than statements of historical fact, are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We have used the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “will,” “future” and similar terms and phrases to identify forward-looking statements.
Forward-looking statements reflect our current expectations of future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows.
Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, the following:
changes in general economic conditions and capital markets;
changes in the underlying demand for our products;
the availability, costs and price volatility of crude oil, other refinery feedstocks and refined products;
changes in the spread between West Texas Intermediate ("WTI") crude oil and West Texas Sour ("WTS") crude oil;
changes in the spread between WTI crude oil and Light Louisiana Sweet ("LLS") crude oil, as well as the spread between California crudes such as Buena Vista and WTI;
the effects of transactions involving forward contracts and derivative instruments;
actions of customers and competitors;
termination of our Supply and Offtake Agreements with J. Aron & Company (“J. Aron”), which include all our refineries and most of our asphalt terminals, of which J. Aron is our largest supplier of crude oil and our largest customer of refined products. Additionally, we are obligated to repurchase all consigned inventories and certain other inventories upon termination of these Supply and Offtake Agreements;
changes in fuel and utility costs incurred by our facilities;
disruptions due to equipment interruption, pipeline disruptions or failures at our or third-party facilities;
the execution of planned capital projects;
adverse changes in the credit ratings assigned to our trade credit and debt instruments;
the effects of and cost of compliance with the Renewable Fuel Standard, including the availability, cost and price volatility of Renewable Identification Numbers ("RINs");
the effects of and cost of compliance with current and future state and federal environmental, economic, safety and other laws, policies and regulations;
operating hazards, natural disasters, casualty losses and other matters beyond our control;
the effect of any national or international financial crisis on our business and financial condition; and
the other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2012 under the caption “Risk Factors”.

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Any one of these factors or a combination of these factors could materially affect our future results of operations and could influence whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required by the securities laws to do so.
Company Overview
We are an independent refiner and marketer of petroleum products operating primarily in the South Central, Southwestern and Western regions of the United States. Our crude oil refineries are located in Texas, California, Oregon and Louisiana and have a combined throughput capacity of approximately 214,000 barrels per day (“bpd”). Our refineries produce petroleum products including various grades of gasoline, diesel fuel, jet fuel, petrochemicals, petrochemical feedstocks, asphalt and other petroleum-based products.
Refining and Marketing Segment. Our refining and marketing segment includes sour and heavy crude oil refineries located in Big Spring, Texas; and Paramount, Bakersfield and Long Beach, California; and a light sweet crude oil refinery located in Krotz Springs, Louisiana. We refer to the Paramount, Bakersfield and Long Beach refineries together as our “California refineries.” The refineries in our refining and marketing segment have a combined throughput capacity of approximately 214,000 bpd. At these refineries we refine crude oil into petroleum products, including gasoline, diesel fuel, jet fuel, petrochemicals, petrochemical feedstocks and asphalts, which are marketed primarily in the South Central, Southwestern, and Western United States.
Alon owns the Big Spring refinery and wholesale marketing operations through Alon USA Partners, LP (the "Partnership") (NYSE: ALDW). Alon markets transportation fuels produced at its Big Spring refinery in West and Central Texas, Oklahoma, New Mexico and Arizona. Alon refers to its operations in these regions as its “physically integrated system” because it supplies its Alon branded and unbranded distributors in these regions with motor fuels produced at its Big Spring refinery and distributed through a network of pipelines and terminals which it either owns or has access to through leases or long-term throughput agreements.
We supply gasoline and diesel to 633 Alon branded retail sites, including our retail segment convenience stores. Approximately 62% of the gasoline and 29% of the diesel motor fuel 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 approximately 95 licensed locations that are not under fuel supply agreements.
We market refined products purchased by third parties or produced by our California refineries to wholesale distributors, other refiners and third parties primarily on the West Coast. In December 2012, the California refineries suspended operations.
We market refined products produced by our Krotz Springs refinery to other refiners and third parties. The refinery’s location provides access to upriver markets on the Mississippi and Ohio Rivers. The refinery also uses its direct access to the Colonial Pipeline to transport products to markets in the Southern and Eastern United States. The Krotz Springs refinery processing units are structured to yield approximately 101.5% of total feedstock input, meaning that for each 100 barrels of crude oil and feedstocks input into the refinery, it produces 101.5 barrels of refined products. Of the 101.5%, on average 99.0% is light finished products such as gasoline and distillates, including diesel and jet fuel, petrochemical feedstocks and liquefied petroleum gas, and the remaining 2.5% is primarily heavy oils.
Asphalt Segment. Our asphalt segment markets asphalt produced at our Big Spring and California refineries included in the refining and marketing segment and also asphalt purchased from third parties. Asphalt produced by the refineries in our refining and marketing segment is transferred to the asphalt segment at prices substantially determined by reference to the cost of crude oil, which is intended to approximate wholesale market prices. Our asphalt segment markets asphalt through 11 refinery/terminal locations in Texas (Big Spring), California (Paramount, Long Beach, Elk Grove, Bakersfield and Mojave), Oregon (Willbridge), Washington (Richmond Beach), Arizona (Phoenix and Flagstaff) and Nevada (Fernley) (50% interest) as well as through a 50% interest in Wright Asphalt Products Company, LLC (“Wright”). We produce paving grades of asphalt, including performance-graded asphalts, emulsions and cutbacks.
Retail Segment. Our retail segment operates 297 convenience stores located in Central and West Texas and New Mexico. These convenience stores typically offer various grades of gasoline, diesel fuel, general merchandise and food and beverage products to the general public, primarily under the 7-Eleven and Alon brand names. Substantially all of the motor fuel sold through our retail segment is supplied by our Big Spring refinery.

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Table of Contents

Third Quarter Operational and Financial Highlights
Operating loss for the third quarter of 2013 was $39.4 million, compared to operating income of $90.3 million in the same period last year. Our operational and financial highlights for the third quarter of 2013 include the following:
Combined refinery throughput for the third quarter of 2013 averaged 132,159 bpd, consisting of 63,090 bpd at the Big Spring refinery and 69,069 bpd at the Krotz Springs refinery, compared to 171,086 bpd for the third quarter of 2012, consisting of 69,563 bpd at the Big Spring refinery, 32,298 bpd at the California refineries and 69,225 bpd at the Krotz Springs refinery. The lower throughput rates were due to the California refineries being shut down during the third quarter of 2013 as well as unplanned downtime at the Big Spring refinery during the third quarter of 2013.
Operating margin at the Big Spring refinery was $6.46 per barrel for the third quarter of 2013 compared to $27.75 per barrel for the same period in 2012. This decrease in operating margin is mainly due to lower Gulf Coast 3/2/1 crack spreads and a narrowing of the WTI to WTS spread.
Operating margin at the Krotz Springs refinery was $1.23 per barrel for the third quarter of 2013 compared to $11.28 per barrel for the same period in 2012. This decrease is mainly due to lower Gulf Coast 2/1/1 crack spreads and higher crude oil prices, partially offset by the higher utilization of lower cost WTI priced crude oils.
The average Gulf Coast 3/2/1 crack spread was $14.23 per barrel for the third quarter of 2013 compared to $31.76 per barrel for the third quarter of 2012. The average Gulf Coast 2/1/1 high sulfur diesel crack spread for the third quarter of 2013 was $6.58 per barrel compared to $15.91 per barrel for the third quarter of 2012.
The average WTI to WTS spread for the third quarter of 2013 was $0.08 per barrel compared to $3.70 per barrel for the same period in 2012. The average LLS to WTI spread for the third quarter of 2013 was $6.60 per barrel compared to $15.02 per barrel for the same period in 2012.
Asphalt margins in the third quarter of 2013 were $63.93 per ton compared to $25.49 per ton in the third quarter of 2012. This increase is primarily due to lower costs of purchased asphalt sold during the third quarter of 2013. The average blended asphalt sales price decreased 10.9% from $657.68 per ton in the third quarter of 2012 to $585.68 per ton in the third quarter of 2013 and the average non-blended asphalt sales price decreased 8.7% from $392.76 per ton in the third quarter of 2012 to $358.61 per ton in the third quarter of 2013.
Retail fuel sales volume increased by 12.3% from 44.0 million gallons in the third quarter of 2012 to 49.4 million gallons in the third quarter of 2013.
Beginning in 2013, the Big Spring refinery became subject to the Renewable Fuel Standards requirement to begin blending biofuels in the products we produce and