10-Q 1 alj-2012930x10q.htm 10-Q ALJ-2012.9.30-10Q
 
 
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, 2012
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, 2012, was 61,272,429.

 
 



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,
2012
 
December 31,
2011
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
45,692

 
$
157,066

Accounts and other receivables, net
252,105

 
247,214

Inventories
240,689

 
147,272

Deferred income tax asset
35,986

 
49,410

Prepaid expenses and other current assets
21,581

 
8,376

Total current assets
596,053

 
609,338

Equity method investments
25,454

 
20,342

Property, plant and equipment, net
1,494,369

 
1,504,870

Goodwill
105,943

 
105,943

Other assets, net
99,118

 
89,889

Total assets
$
2,320,937

 
$
2,330,382

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
352,714

 
$
298,596

Accrued liabilities
151,478

 
91,416

Current portion of long-term debt
428,882

 
119,874

Total current liabilities
933,074

 
509,886

Other non-current liabilities
253,628

 
192,065

Long-term debt
369,851

 
930,322

Deferred income tax liability
308,043

 
302,325

Total liabilities
1,864,596

 
1,934,598

Commitments and contingencies (Note 14)

 

Stockholders’ equity:
 
 
 
Preferred stock, par value $0.01, 15,000,000 shares authorized; 4,220,000 and 4,000,000 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively
42,200

 
40,000

Common stock, par value $0.01, 150,000,000 shares authorized; 60,900,422 and 56,107,986 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively
609

 
561

Additional paid-in capital
351,124

 
318,659

Accumulated other comprehensive loss, net of income tax
(47,499
)
 
(26,483
)
Retained earnings
109,471

 
63,273

Total stockholders’ equity
455,905

 
396,010

Non-controlling interest in subsidiaries
436

 
(226
)
Total equity
456,341

 
395,784

Total liabilities and equity
$
2,320,937

 
$
2,330,382


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


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,
 
2012
 
2011
 
2012
 
2011
Net sales (1)
$
2,360,334

 
$
2,056,653

 
$
6,062,956

 
$
5,303,388

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales
2,101,647

 
1,827,098

 
5,407,197

 
4,717,673

Unrealized losses on commodity swaps
5,017

 

 
37,458

 

Direct operating expenses
81,160

 
83,338

 
230,243

 
202,476

Selling, general and administrative expenses
47,670

 
34,680

 
119,018

 
107,595

Depreciation and amortization
31,870

 
29,812

 
93,000

 
80,046

Total operating costs and expenses
2,267,364

 
1,974,928

 
5,886,916

 
5,107,790

Gain (loss) on disposition of assets
(2,624
)
 
229

 
(2,838
)
 
161

Operating income
90,346

 
81,954

 
173,202

 
195,759

Interest expense
(22,773
)
 
(22,582
)
 
(78,113
)
 
(63,780
)
Equity earnings of investees
4,542

 
2,005

 
6,112

 
3,775

Other income (loss), net
202

 
(14,272
)
 
(6,791
)
 
(51,065
)
Income before income tax expense
72,317

 
47,105

 
94,410

 
84,689

Income tax expense
26,776

 
17,004

 
34,705

 
26,952

Net income
45,541

 
30,101

 
59,705

 
57,737

Net income attributable to non-controlling interest
2,318

 
1,480

 
2,758

 
2,317

Net income available to common stockholders
$
43,223

 
$
28,621

 
$
56,947

 
$
55,420

Earnings per share, basic
$
0.76

 
$
0.51

 
$
1.01

 
$
1.00

Weighted average shares outstanding, basic (in thousands)
56,699

 
55,755

 
56,322

 
55,290

Earnings per share, diluted
$
0.69

 
$
0.46

 
$
0.91

 
$
0.91

Weighted average shares outstanding, diluted (in thousands)
63,060

 
61,690

 
62,679

 
61,231

Cash dividends per share
$
0.04

 
$
0.04

 
$
0.12

 
$
0.12

___________
(1)
Includes excise taxes on sales by the retail and branded marketing segment of $17,159 and $15,476 for the three months and $49,481 and $44,887 for the nine months ended September 30, 2012 and 2011, respectively.


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


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,
 
2012
 
2011
 
2012
 
2011
Net income
$
45,541

 
$
30,101

 
$
59,705

 
$
57,737

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Interest rate derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
Unrealized holding gain (loss) arising during period, net of tax
9

 
(92
)
 
(111
)
 
(500
)
Less: reclassification adjustments for gain (loss) realized in net income, net of tax
(659
)
 
(689
)
 
(1,965
)
 
(1,984
)
Net gain (loss), net of tax
668

 
597

 
1,854

 
1,484

Commodity contracts designated as cash flow hedges:
 
 
 
 
 
 
 
Unrealized holding gain (loss) arising during period, net of tax
(31,399
)
 

 
(56,486
)
 

Less: reclassification adjustments for gain (loss) realized in net income, net of tax
(17,939
)
 

 
(32,244
)
 

Net gain (loss), net of tax
(13,460
)
 

 
(24,242
)
 

Total other comprehensive income (loss), net of tax
(12,792
)
 
597

 
(22,388
)
 
1,484

Comprehensive income
32,749

 
30,698

 
37,317

 
59,221

Comprehensive income attributable to non-controlling interest
1,556

 
1,480

 
1,386

 
2,317

Comprehensive income attributable to common stockholders
$
31,193

 
$
29,218

 
$
35,931

 
$
56,904



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


ALON USA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
 
For the Nine Months Ended
 
September 30,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income available to common stockholders
$
56,947

 
$
55,420

Adjustments to reconcile net income available to common stockholders to cash provided by operating activities:
 
 
 
Depreciation and amortization
93,000

 
80,046

Stock compensation
2,617

 
2,135

Deferred income tax expense
32,520

 
21,438

Net income attributable to non-controlling interest
2,758

 
2,317

Equity earnings of investees (net of dividends)
(5,112
)
 
(1,525
)
Amortization of debt issuance costs
4,864

 
4,370

Amortization of original issuance discount
1,909

 
2,146

Write-off of unamortized original issuance discount
9,624

 

(Gain) loss on disposition of assets
2,838

 
(161
)
Unrealized losses on commodity swaps
37,458

 

Changes in operating assets and liabilities:
 
 
 
Accounts and other receivables, net
(39,343
)
 
(95,309
)
Income tax receivable
2,516

 

Inventories
(93,417
)
 
(114,279
)
Prepaid expenses and other current assets
(13,205
)
 
(680
)
Other assets, net
(12,587
)
 
(13,705
)
Accounts payable
54,118

 
37,974

Accrued liabilities
16,430

 
57,153

Other non-current liabilities
61,563

 
21,022

Net cash provided by operating activities
215,498

 
58,362

Cash flows from investing activities:
 
 
 
Capital expenditures
(72,273
)
 
(91,120
)
Capital expenditures for turnarounds and catalysts
(11,437
)
 
(6,995
)
Proceeds from disposition of assets
274

 
547

Earnout payment related to Krotz Springs refinery acquisition

 
(6,562
)
Net cash used in investing activities
(83,436
)
 
(104,130
)
Cash flows from financing activities:
 
 
 
Dividends paid to stockholders
(6,754
)
 
(6,652
)
Dividends paid to non-controlling interest
(269
)
 
(570
)
Proceeds from issuance of common stock

 
11,900

Stock issuance costs
(10
)
 
(537
)
Inventory supply agreement

 
1,165

Deferred debt issuance costs
(3,407
)
 
(2,169
)
Revolving credit facilities, net
(224,341
)
 
125,053

Additions to long-term debt

 
30,136

Payments on long-term debt
(8,655
)
 
(8,644
)
Net cash provided by (used in) financing activities
(243,436
)
 
149,682

Net increase (decrease) in cash and cash equivalents
(111,374
)
 
103,914

Cash and cash equivalents, beginning of period
157,066

 
71,687

Cash and cash equivalents, end of period
$
45,692

 
$
175,601

Supplemental cash flow information:
 
 
 
Cash paid for interest
$
58,599

 
$
49,784

Cash paid for income tax
$
3,478

 
$
3,203

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


ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, dollars in thousands except as noted)
(1)
Basis of Presentation
(a)
Basis of Presentation
The consolidated financial statements include the accounts of Alon USA Energy, Inc. and its subsidiaries (collectively, “Alon”). All significant intercompany balances and transactions have been eliminated. These consolidated financial statements of Alon are unaudited and have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of Alon’s management, the information included in these consolidated financial statements reflects all adjustments, consisting of normal and recurring adjustments, which are necessary for a fair presentation of Alon’s consolidated financial position and results of operations for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the operating results that may be obtained for the year ending December 31, 2012.
The consolidated balance sheet as of December 31, 2011, 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, 2011.
(b)
New Accounting Standards
In June 2011, the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ("ASC") 220, Comprehensive Income, were amended to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. Under either option, the entity is required to present reclassification adjustments on the face of the financial statement where those components are presented. These provisions are effective for the first interim or annual period beginning after December 15, 2011, and are to be applied retrospectively, with early adoption permitted. The adoption of this guidance did not affect Alon's financial position or results of operations because these requirements only affect the presentation of the financial statements and disclosures.
In December 2011, the provisions of FASB ASC 210, Balance Sheet, were amended to require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of these arrangements on its financial position. The update retains the existing offsetting requirements and enhances the disclosure requirements to allow investors to better compare financial statements prepared under U.S. GAAP with those prepared under International Financial Reporting Standards. These new revisions are to be applied retrospectively and will be effective for interim and annual periods beginning January 1, 2013. The adoption of this guidance will not affect Alon's financial position or results of operations because these requirements will only affect the presentation of the financial statements and disclosures.
In July 2012, the provisions of FASB ASC 350, Intangibles - Goodwill and Other, were amended to allow an entity the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. These provisions are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this guidance will not affect Alon's financial position or results of operations.
(2)
Segment Data
Alon’s revenues are derived from three operating segments: (i) refining and unbranded marketing, (ii) asphalt and (iii) retail and branded marketing. The reportable operating segments are strategic business units that offer different products and services. The segments are managed separately as each segment requires unique technology, marketing strategies and distinct operational emphasis. Each operating segment’s performance is evaluated primarily based on operating income.
(a)
Refining and Unbranded Marketing Segment
Alon’s refining and unbranded marketing segment includes sour and heavy crude oil refineries located in Big Spring, Texas; and Paramount, Bakersfield and Long Beach, California (the “California refineries”); and a light sweet crude oil refinery located in Krotz Springs, Louisiana. Alon's refineries have a combined throughput capacity of approximately 240,000 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. In Bakersfield, Alon is converting intermediate products into finished products and is not refining crude oil. Finished products and blendstocks are also marketed through sales and exchanges with other major oil

5

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


companies, state and federal governmental entities, unbranded wholesale distributors and various other third parties. Alon also acquires finished products through exchange agreements and third-party suppliers.
(b)
Asphalt Segment
Alon’s asphalt segment includes the Willbridge, Oregon refinery and 11 refinery/terminal locations in Texas (Big Spring), California (Paramount, Long Beach, Elk Grove, Bakersfield and Mojave), Oregon (Willbridge), Washington (Richmond Beach), Arizona (Phoenix and Flagstaff), and Nevada (Fernley) (50% interest) as well as a 50% interest in Wright Asphalt Products Company, LLC (“Wright”) which specializes in marketing patented tire rubber modified asphalt products. Alon produces both paving and roofing grades of asphalt and, depending on the terminal, can manufacture performance-graded asphalts, emulsions and cutbacks. The operations in which Alon has a 50% interest (Fernley and Wright), are recorded under the equity method of accounting and the investments are included as part of total assets in the asphalt segment data.
(c)
Retail and Branded Marketing Segment
Alon’s retail and branded marketing segment operates approximately 299 convenience stores located primarily in Central and West Texas and New Mexico. These convenience stores typically offer various grades of gasoline, diesel fuel, general merchandise and food and beverage products to the general public, primarily under the 7-Eleven and Alon brand names. Substantially all of the motor fuel sold through Alon’s convenience stores and the majority of the motor fuels marketed in Alon’s branded business is supplied by Alon’s Big Spring refinery. Alon markets gasoline and diesel under the Alon brand name through a network of approximately 625 locations, including Alon's convenience stores.
Alon has operated under an exclusive license to use the FINA trademark in the wholesale distribution of motor fuel within Texas, Oklahoma, New Mexico, Arizona, Arkansas, Louisiana, Colorado and Utah since 2000. Alon's license to use the FINA brand expired in August 2012 in accordance with its terms. Alon developed its own brand and logo in anticipation of this expiration of this license and has substantially completed the conversion of all of its locations and all locations served by its branded marketing business to the new Alon brand. Alon will no longer be subject to the geographic limitations contained in the FINA license agreement.
(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 as of and for the three and nine month periods ended September 30, 2012 and 2011, are presented below:
 
Refining and
Unbranded Marketing
 
Asphalt
 
Retail and Branded
Marketing
 
Corporate
 
Consolidated
Total
Three Months Ended September 30, 2012
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
1,756,212

 
$
203,982

 
$
400,140

 
$

 
$
2,360,334

Intersegment sales/purchases
380,407

 
(83,783
)
 
(296,624
)
 

 

Depreciation and amortization
26,330

 
1,485

 
3,444

 
611

 
31,870

Operating income (loss)
95,203

 
(3,574
)
 
(469
)
 
(814
)
 
90,346

Total assets
1,892,569

 
180,831

 
232,981

 
14,556

 
2,320,937

Turnaround, chemical catalyst and capital expenditures
26,200

 
1,075

 
6,669

 
484

 
34,428

 
Refining and
Unbranded Marketing
 
Asphalt
 
Retail and Branded
Marketing
 
Corporate
 
Consolidated
Total
Three Months Ended September 30, 2011
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
1,471,936

 
$
201,081

 
$
383,636

 
$

 
$
2,056,653

Intersegment sales/purchases
390,245

 
(114,492
)
 
(275,753
)
 

 

Depreciation and amortization
25,179

 
1,522

 
2,707

 
404

 
29,812

Operating income (loss)
77,380

 
(4,114
)
 
9,280

 
(592
)
 
81,954

Total assets
2,047,354

 
145,788

 
212,253

 
14,502

 
2,419,897

Turnaround, chemical catalyst and capital expenditures
17,664

 
125

 
7,777

 
329

 
25,895


6

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


 
Refining and
Unbranded Marketing
 
Asphalt
 
Retail and Branded
Marketing
 
Corporate
 
Consolidated
Total
Nine Months Ended September 30, 2012
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
4,454,145

 
$
449,442

 
$
1,159,369

 
$

 
$
6,062,956

Intersegment sales/purchases
1,073,250

 
(221,028
)
 
(852,222
)
 

 

Depreciation and amortization
77,242

 
4,281

 
9,689

 
1,788

 
93,000

Operating income (loss)
169,184

 
1,409

 
4,981

 
(2,372
)
 
173,202

Total assets
1,892,569

 
180,831

 
232,981

 
14,556

 
2,320,937

Turnaround, chemical catalyst and capital expenditures
57,043

 
8,535

 
16,865

 
1,267

 
83,710

 
Refining and
Unbranded Marketing
 
Asphalt
 
Retail and Branded
Marketing
 
Corporate
 
Consolidated
Total
Nine Months Ended September 30, 2011
 
 
 
 
 
 
 
 
 
Net sales to external customers
$
3,784,798

 
$
435,135

 
$
1,083,455

 
$

 
$
5,303,388

Intersegment sales/purchases
1,012,327

 
(232,971
)
 
(779,356
)
 

 

Depreciation and amortization
64,799

 
4,999

 
9,037

 
1,211

 
80,046

Operating income (loss)
200,523

 
(27,439
)
 
24,450

 
(1,775
)
 
195,759

Total assets
2,047,354

 
145,788

 
212,253

 
14,502

 
2,419,897

Turnaround, chemical catalyst and capital expenditures
83,114

 
1,458

 
12,271

 
1,272

 
98,115

Operating income (loss) for each segment consists of net sales less cost of sales, direct operating expenses, selling, general and administrative expenses, depreciation and amortization, and gain on disposition of assets. Intersegment sales are intended to approximate wholesale market prices. Consolidated totals presented are after intersegment eliminations.
Total assets of each segment consist of net property, plant and equipment, inventories, cash and cash equivalents, accounts and other receivables and other assets directly associated with the segment’s operations. Corporate assets consist primarily of corporate headquarters information technology and administrative equipment.
(3)
Fair Value
The carrying amounts of Alon’s cash and cash equivalents, receivables, payables and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The reported amounts of long-term debt approximate fair value. Derivative financial instruments are carried at fair value, which is based on quoted market prices.
Alon must determine fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As required, Alon utilizes valuation techniques that maximize the use of observable inputs (levels 1 and 2) and minimize the use of unobservable inputs (level 3) within the fair value hierarchy. Alon generally applies the “market approach” to determine fair value. This method uses pricing and other information generated by market transactions for identical or comparable assets and liabilities. Assets and liabilities are classified within the fair value hierarchy based on the lowest level (least observable) input that is significant to the measurement in its entirety.

7

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, 2012 and December 31, 2011, respectively:
 
Quoted Prices in
Active Markets
For Identical
Assets or
Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Consolidated
Total
As of September 30, 2012
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
13,060

 
$

 
$

 
$
13,060

Liabilities:
 
 
 
 
 
 
 
Commodity contracts (swaps)

 
43,401

 

 
43,401

Commodity contracts (forwards)

 
2,351

 

 
2,351

Interest rate swap

 
1,344

 

 
1,344

 
 
 
 
 
 
 
 
As of December 31, 2011
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Commodity contracts (swaps)

 
31,936

 

 
31,936

Liabilities:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
78

 

 

 
78

Commodity contracts (call options)

 
9,268

 

 
9,268

Interest rate swap

 
4,197

 

 
4,197

(4)
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 our fair value hedges is based on the level of our operating inventories. The gain or loss on a derivative instrument designated and qualifying as a fair value hedge, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, is recognized currently in income in the same period.
As of September 30, 2012, 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 2018.
Cash Flow Hedges
To designate a derivative as a cash flow hedge, Alon documents at the inception of the hedge the assessment that the derivative will be highly effective in offsetting expected changes in cash flows from the item hedged. This assessment, which is updated at least quarterly, is generally based on the most recent relevant historical correlation between the derivative and the item hedged. If, during the term of the derivative, the hedge is determined to be no longer highly effective, hedge accounting is prospectively discontinued and any remaining unrealized gains or losses, based on the effective portion of the derivative at that date, are reclassified to earnings when the underlying transaction occurs.
Commodity Derivatives. As of September 30, 2012, Alon has accounted for certain commodity swap contracts as cash flow hedges with contract purchase volumes of 6,750 thousand barrels of crude and contract sales volumes of 6,750 thousand barrels of refined products with the longest remaining contract term of fifteen months. During the three and nine months ended September 30, 2012, Alon recognized unrealized after-tax losses of $13,460 and $24,242, respectively, related to these transactions in Other Comprehensive Income ("OCI"). There were no amounts reclassified from OCI into cost of sales as a result of the discontinuance of cash flow hedge accounting.

8

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


For the three and nine months ended September 30, 2012 and 2011, 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, 2012, Alon had an interest rate swap agreement with a notional amount of $100,000, a remaining period of three months and a fixed interest rate of 4.25%. This swap was accounted for as a cash flow hedge.
For cash flow hedges, gains and losses reported in OCI are reclassified into interest expense when the forecasted transaction affects income. Alon recognized in OCI unrealized after-tax gains of $668 and $597 during the three months ended September 30, 2012 and 2011, respectively, and $1,854 and $1,484 during the nine months ended September 30, 2012 and 2011, respectively, for the fair value measurement of the interest rate swap agreements. There were no amounts reclassified from OCI into interest expense as a result of the discontinuance of cash flow hedge accounting.
For the three and nine months ended September 30, 2012 and 2011, 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.
The following table presents the effect of derivative instruments on the consolidated statements of financial position.
 
As of September 30, 2012
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
 
 
 
Balance Sheet
 
 
 
Location
 
Fair Value
 
Location
 
Fair Value
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
 
$

 
Accrued liabilities
 
$
(5,522
)
Commodity contracts (futures and forwards)
Accounts receivable
 
15,492

 
Accrued liabilities
 
(2,432
)
Total derivatives not designated as hedging instruments
 
 
$
15,492

 
 
 
$
(7,954
)
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
 
$

 
Accrued liabilities
 
$
(37,879
)
Commodity contracts (forwards)
 
 

 
Other non-current liabilities
 
(2,351
)
Interest rate swap
 
 

 
Other non-current liabilities
 
(1,344
)
Total derivatives designated as hedging instruments
 
 

 
 
 
(41,574
)
Total derivatives
 
 
$
15,492

 
 
 
$
(49,528
)

9

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


 
As of December 31, 2011
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
 
 
 
Balance Sheet
 
 
 
Location
 
Fair Value
 
Location
 
Fair Value
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts (swaps)
Accounts receivable
 
$
32,678

 
Accrued liabilities
 
$
(742
)
Commodity contracts (call options)
 
 

 
Accrued liabilities
 
(9,268
)
Commodity contracts (futures and forwards)
Accounts receivable
 
809

 
Accrued liabilities
 
(887
)
Total derivatives not designated as hedging instruments
 
 
$
33,487

 
 
 
$
(10,897
)
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap
 
 
$

 
Other non-current liabilities
 
$
(4,197
)
Total derivatives designated as hedging instruments
 
 

 
 
 
(4,197
)
Total derivatives
 
 
$
33,487

 
 
 
$
(15,094
)
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, 2012
 
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
$
(21,032
)
 
Cost of sales
 
$
(28,029
)
 
 
 
$

Interest rate swaps
 
1,028

 
Interest expense
 
(1,014
)
 
 
 

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

 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended September 30, 2011
 
 
 
 
 
 
 
 
Interest rate swap
 
$
918

 
Interest expense
 
$
(1,058
)
 
 
 
$

Total derivatives
 
$
918

 
 
 
$
(1,058
)
 
 
 
$

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, 2012
 
 
 
 
 
 
 
 
Commodity contracts (swaps)
 
$
(37,879
)
 
Cost of sales
 
$
(50,381
)
 
 
 
$

Interest rate swaps
 
2,853

 
Interest expense
 
(3,023
)
 
 
 

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

 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2011
 
 
 
 
 
 
 
 
Interest rate swap
 
$
2,284

 
Interest expense
 
$
(3,053
)
 
 
 
$

Total derivatives
 
$
2,284

 
 
 
$
(3,053
)
 
 
 
$


10

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
 
2012
 
2011
 
2012
 
2011
Commodity contracts (forwards)
Cost of sales
 
$
(2,351
)
 
$

 
$
(2,351
)
 
$

Total derivatives
 
 
$
(2,351
)
 
$

 
$
(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
 
2012
 
2011
 
2012
 
2011
Commodity contracts (futures & forwards)
Cost of sales
 
$
11,294

 
$
1,122

 
$
26,869

 
$
10,290

Commodity contracts (swaps)
Cost of sales
 
(5,810
)
 
(357
)
 
(18,016
)
 
(3,716
)
Commodity contracts (swaps)
Unrealized losses on commodity swaps
 
(5,017
)
 

 
(37,458
)
 

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

 
(14,269
)
 
(7,297
)
 
(51,093
)
Total derivatives
 
 
$
467

 
$
(13,504
)
 
$
(35,902
)
 
$
(44,519
)
(5)
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,
2012
 
December 31,
2011
Crude oil, refined products, asphalt and blendstocks
$
80,875

 
$
37,159

Crude oil inventory consigned to others
109,738

 
62,489

Materials and supplies
21,642

 
21,491

Store merchandise
21,180

 
19,322

Store fuel
7,254

 
6,811

Total inventories
$
240,689

 
$
147,272

A reduction of inventory volumes occurring in the nine months ended September 30, 2012 and 2011, resulted in a liquidation of LIFO inventory layers associated with refined products and asphalt carried at lower costs which prevailed in previous years. The liquidation decreased cost of sales by approximately $15,499 and $44,570 for the nine months ended September 30, 2012 and 2011, respectively.
Market values of crude oil, refined products, asphalt and blendstock inventories exceeded LIFO costs by $68,677 and $93,401 at September 30, 2012 and December 31, 2011, respectively.
Crude oil inventory consigned to others represents inventory that was sold to third parties with an obligation by Alon to repurchase the inventory at the end of the respective agreements. As a result of this requirement to repurchase inventory, no revenue was recorded on these transactions and the inventory volumes remain valued under the LIFO method.
Alon recorded liabilities associated with this consigned inventory of $128,379 in other non-current liabilities at September 30, 2012 and $26,389 in accounts payable and $58,328 in other non-current liabilities at December 31, 2011.

11

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


(6)
Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following:
 
September 30,
2012
 
December 31,
2011
Refining facilities
$
1,769,684

 
$
1,718,792

Pipelines and terminals
43,446

 
43,414

Retail
156,923

 
147,679

Other
19,955

 
18,685

Property, plant and equipment, gross
1,990,008

 
1,928,570

Less accumulated depreciation
(495,639
)
 
(423,700
)
Property, plant and equipment, net
$
1,494,369

 
$
1,504,870

(7)
Additional Financial Information
The tables that follow provide additional financial information related to the consolidated financial statements.
(a)
Other Assets, Net
 
September 30,
2012
 
December 31,
2011
Deferred turnaround and chemical catalyst cost
$
19,174

 
$
20,998

Environmental receivables
15,990

 
17,369

Deferred debt issuance costs
10,897

 
12,354

Intangible assets, net
8,906

 
7,663

Receivable from supply agreements
26,179

 
12,496

Other, net
17,972

 
19,009

Total other assets
$
99,118

 
$
89,889

(b)
Accrued Liabilities and Other Non-Current Liabilities
 
September 30,
2012
 
December 31,
2011
Accrued Liabilities:
 
 
 
Taxes other than income taxes, primarily excise taxes
$
35,021

 
$
32,892

Employee costs
15,387

 
11,368

Commodity contracts
45,833

 
10,897

Accrued finance charges
18,191

 
10,902

Environmental accrual
6,425

 
6,292

Other
30,621

 
19,065

Total accrued liabilities
$
151,478

 
$
91,416

 
 
 
 
Other Non-Current Liabilities:
 
 
 
Pension and other postemployment benefit liabilities, net
$
44,277

 
$
46,493

Environmental accrual (Note 14)
55,576

 
59,171

Asset retirement obligations
11,759

 
11,442

Interest rate swap valuations
1,344

 
4,197

Consignment inventory
128,379

 
58,328

Other
12,293

 
12,434

Total other non-current liabilities
$
253,628

 
$
192,065

(8)
Postretirement Benefits
Alon has four defined benefit pension plans covering substantially all of its employees, excluding employees of SCS. 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

12

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


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 2012 to its pension plans has not changed significantly from amounts previously disclosed in Alon’s consolidated financial statements for the year ended December 31, 2011. For the nine months ended September 30, 2012 and 2011, Alon contributed $6,930 and $4,410, 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, 2012 and 2011:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
943

 
$
914

 
$
2,829

 
$
2,743

Interest cost
1,032

 
1,035

 
3,095

 
3,105

Expected return on plan assets
(1,076
)
 
(932
)
 
(3,229
)
 
(2,798
)
Amortization of net loss
645

 
447

 
1,936

 
1,343

Net periodic benefit cost
$
1,544

 
$
1,464

 
$
4,631

 
$
4,393

(9)
Indebtedness
Debt consisted of the following:
 
September 30,
2012
 
December 31,
2011
Term loan credit facility
$
421,875

 
$
425,250

Revolving credit facilities
84,000

 
308,341

Senior secured notes
210,973

 
209,324

Retail credit facilities
81,885

 
107,281

Total debt
798,733

 
1,050,196

Less current portion
(428,882
)
 
(119,874
)
Total long-term debt
$
369,851

 
$
930,322

Alon USA Energy, Inc. Term Loan Credit Facility. Alon has a $450,000 term loan (the “Alon Energy Term Loan”) that will mature on August 2, 2013. Principal payments of $4,500 per annum are paid in quarterly installments, subject to reduction from mandatory repayments associated with certain events.
Borrowings under the Alon Energy Term Loan bear interest at a rate based on a margin from between 1.75% to 2.50% per annum over the Eurodollar rate based upon the ratings of the loans by Standard & Poor's Rating Service and Moody's Investors Service, Inc. Currently, the margin is 2.25% over the Eurodollar rate.
The Alon Energy Term Loan is jointly and severally guaranteed by all of Alon's subsidiaries except for its retail subsidiaries and those subsidiaries established in conjunction with the Krotz Springs refinery acquisition and certain subsidiaries established in conjunction with the Bakersfield acquisition. The Alon Energy Term Loan is secured by a second lien on cash, accounts receivable and inventory and a first lien on most of its remaining assets. Both liens exclude the assets of its retail subsidiaries and those subsidiaries established in conjunction with the Krotz Springs refinery acquisition and certain subsidiaries established in conjunction with the Bakersfield acquisition.
The Alon Energy Term Loan contains restrictive covenants, such as restrictions on liens, mergers, consolidations, sales of assets, additional indebtedness, different businesses, certain lease obligations, and certain restricted payments.
The Alon Energy Term Loan does not contain any maintenance financial covenants.
At September 30, 2012 and December 31, 2011, the Alon Energy Term Loan had an outstanding balance of $421,875 and $425,250, respectively.
Alon launched syndication of $450,000 of new term debt and expects funding to occur in November 2012; proceeds will be used to retire existing debt of $421,875 due August 2013.

13

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


Alon USA, LP Credit Facility. Alon has a $240,000 revolving credit facility (the “Alon USA LP Credit Facility”) that will mature in March 2016. The Alon USA LP Credit Facility can be used both for borrowings and the issuance of letters of credit subject to a limit of the lesser of the facility or the amount of the borrowing base under the facility.
Borrowings under the Alon USA LP Credit Facility bear interest at the Eurodollar rate plus 3.50% per annum subject to an overall minimum interest rate of 4.00%.
The Alon USA LP Credit Facility is secured by (i) a first lien on cash, accounts receivables, inventories and related assets of Alon USA LP and (ii) a second lien on fixed assets, including the Big Spring refinery and certain asphalt terminals.
The Alon USA LP Credit Facility contains certain restrictive covenants including maintenance financial covenants.
Borrowings of $84,000 and $200,000 were outstanding under the Alon USA LP Credit Facility at September 30, 2012 and December 31, 2011, respectively. At September 30, 2012 and December 31, 2011, outstanding letters of credit under the Alon USA LP Credit Facility were $83,987 and $35,509, respectively.
Paramount Petroleum Corporation Credit Facility. In February 2012, Alon repaid in full all of its obligations under the Paramount Credit Facility.
Alon Brands Term Loans. In March 2011, Alon Brands issued $30,000 five-year unsecured notes (the "Alon Brands Term Loans") to a group of investors including certain shareholders of Alon Israel and their affiliates. In conjunction with the issuance of the Alon Brands Term Loans, 3,092,783 warrants were issued to purchase shares of Alon's common stock. In March 2012, Alon issued $30,000 of 8.5% Series B Convertible Preferred Stock to the holders of the Alon Brands Term Loans and repaid in full its obligations under the Alon Brands Term Loans. Also as part of the transaction, the warrants issued in conjunction with the Alon Brands Term Loans were surrendered to Alon. As the Alon Brands Term Loans were originally issued at a discount, the remaining $9,624 of unamortized original issuance discount was charged to interest expense for the nine months ended September 30, 2012.
Financial Covenants. Alon has certain credit facilities that contain restrictive covenants, including maintenance financial covenants. At September 30, 2012, Alon was in compliance with these maintenance financial covenants.
(10)
Stock-Based Compensation
Alon’s original incentive compensation plan, the Alon USA Energy, Inc. 2005 Incentive Compensation Plan, was approved by its stockholders in 2006 and amended in May 2010. In May 2012, Alon’s stockholders approved a second amended and restated incentive compensation plan, the Alon USA Energy, Inc. Second Amended and Restated 2005 Incentive Compensation Plan ("the Plan"), which is a component of Alon’s overall executive incentive compensation program. The Plan permits the granting of awards in the form of options to purchase common stock, Stock Appreciation Rights (“SARs”), restricted shares of common stock, restricted common stock units, performance shares, performance units and senior executive plan bonuses to Alon’s directors, officers and key employees.
Restricted Stock. Non-employee directors, 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 2012, Alon granted awards of 11,148 restricted shares at a grant date price of $8.97. The restricted shares granted to the non-employee directors vest over a period of three years, assuming continued service at vesting.
In May 2012, Alon granted awards of 180,000 restricted shares to certain executive officers at a grant date price of $8.77.  These May 2012 restricted shares will vest as follows:  50% on May 10, 2013 and 50% on May 10, 2016, assuming continued service at vesting. In August 2012, Alon granted awards of 37,500 restricted shares to certain executive officers at a weighted average grant date price of $13.95.  These August 2012 shares will vest on May 10, 2013, assuming continued service at vesting.
Compensation expense for the restricted stock grants amounted to $407 and $389 for the three months ended September 30, 2012 and 2011, respectively, and $1,126 and $665 for the nine months ended September 30, 2012 and 2011, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations.

14

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


The following table summarizes the restricted share activity from January 1, 2011:
 
 
 
Weighted
Average
Grant Date
Fair Values
Nonvested Shares
Shares
 
(per share)
Nonvested at January 1, 2011
16,169

 
$
9.28

Granted
186,015

 
13.50

Vested
(7,278
)
 
10.31

Forfeited

 

Nonvested at December 31, 2011
194,906

 
$
13.26

Granted
228,648

 
9.63

Vested
(97,424
)
 
13.27

Forfeited

 

Nonvested at September 30, 2012
326,130

 
$
10.71

As of September 30, 2012, there was $2,595 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 2.3 years. The fair value of shares vested in 2012 was $848.
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. 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, 2012 and 2011, respectively, and $1,122 and $623 for the nine months ended September 30, 2012 and 2011, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations.
Senior Executive Plan Bonuses.  In August 2012, Alon granted 37,500 shares of common stock to certain executive officers at a weighted average grant date price of $13.95.  These shares vested immediately upon issuance.  Compensation expense for the bonuses amounted to $523 for the three and nine months ended September 30, 2012, and is included in selling, general and administrative expenses in the consolidated statements of operations.
Stock Appreciation Rights. Through September 30, 2012, 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 and the remaining SARs have grant prices ranging from $10.00 to $16.00 . At September 30, 2012, 192,332 SARs have expired without being exercised.
When exercised, all SARs are convertible into shares of Alon common stock, the number of which will be determined at the time of exercise by calculating the difference between the closing price of Alon common stock on the exercise date and the grant price of the SARs (the “Spread”), multiplying the Spread by the number of SARs being exercised and then dividing the product by the closing price of Alon common stock on the exercise date.
Compensation expense for the SARs grants amounted to $15 and $31 for the three months ended September 30, 2012 and 2011, respectively, and $44 and $305 for the nine months ended September 30, 2012 and 2011, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations.
2000 Incentive Stock Compensation Plan. On August 1, 2000, Alon Assets and Alon Operating, majority owned, consolidated subsidiaries of Alon, adopted the 2000 Incentive Stock Compensation Plan pursuant to which Alon’s board of directors may grant stock options to certain officers and members of executive management. The 2000 Incentive Stock Compensation Plan authorized grants of options to purchase up to 16,154 shares of common stock of Alon Assets and 6,066 shares of common stock of Alon Operating. This plan was closed to new participants subsequent to August 1, 2000, the initial grant date. All stock options issued were exercised in prior years.
In June 2012, Alon signed agreements with shareholders of two of its subsidiaries, Alon Assets, Inc. ("Alon Assets") and Alon USA Operating, Inc. ("Alon Operating"). According to the agreements, Alon has the right to exchange 581,699 of its shares over a period of 12 quarters and 2,326,946 of its shares over a period of 20 quarters, beginning July 2012, for 15,549.3 shares of Alon Assets and 5,839.1 shares of Alon Operating. In July 2012, 164,822 shares of Alon's common stock were issued in exchange for 881.12 shares of Alon Assets and 330.88 shares of Alon Operating. In October 2012, 290,725 shares of Alon's common stock were issued in exchange for 1554.19 shares of Alon Assets and 583.63 shares of Alon Operating.

15

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


Compensation expense associated with the difference in value between the participants ownership of Alon Assets and Alon Operating stock compared to Alon USA Energy, Inc. stock of $472 and $542 was recognized for the three and nine months ended September 30, 2012 and 2011, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations.
(11)
Stockholders’ Equity (per share in dollars)
(a)
Preferred stock (share value in dollars)
In March 2012, pursuant to the terms of the Series B Convertible Preferred Stock Agreement, Alon issued 3,000,000 shares of 8.5% Series B Convertible Preferred Stock to a group of investors who held, in the aggregate, $30,000 of the Alon Brands Term Loans and 3,092,783 warrants to purchase shares of Alon common stock. Pursuant to this agreement, Alon repaid in full its obligations under the Alon Brands Term Loans and the warrants were surrendered to Alon. The terms of the Series B Convertible Preferred Stock are substantially the same as the terms of the Series A Convertible Preferred Stock except that, based on certain conditions, Alon has the right to convert the preferred stock into Alon common stock from March 2015 for the Series B Convertible Preferred Stock and from October 2013 for the Series A Convertible Preferred Stock. If all of the Series B Convertible Preferred Stock were to be converted into Alon's common stock based on the initial conversion price of $6.74 per share, then 4,451,100 shares of Alon's common stock would be issued.
During the three months ended September 30, 2012, certain holders of the Series A and Series B Convertible Preferred Stock converted preferred shares to shares of Alon's common stock.  500,000 Series A preferred shares and 2,280,000 Series B preferred shares were converted to 741,850 and 3,382,836 shares of common stock, respectively.
(b)
Dividends
Common Stock Dividends. On September 19, 2012, Alon paid a regular quarterly cash dividend of $0.04 per share on Alon’s common stock to stockholders of record at the close of business on September 5, 2012.
(c)
Accumulated Other Comprehensive Loss
The following table displays the change in accumulated other comprehensive loss, net of tax.
 
Unrealized Loss on Cash Flow Hedges
 
Defined Benefit Pension Plans
 
Total
Balance at December 31, 2011
$
(3,194
)
 
$
(23,289
)
 
$
(26,483
)
Current period other comprehensive loss, net of tax
(21,016
)
 

 
(21,016
)
Balance at September 30, 2012
$
(24,210
)
 
$
(23,289
)
 
$
(47,499
)
(12)
Earnings Per Share
Basic earnings per share is calculated as net income available to common stockholders divided by the average number of participating shares of common stock outstanding. Diluted earnings per share include the dilutive effect of SARs using the treasury stock method and the dilutive effect of convertible preferred shares, warrants, restricted stock awards and restricted stock units using the if-converted method.

16

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


The calculation of earnings per share, basic and diluted, for the three and nine months ended September 30, 2012 and 2011, is as follows:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Net income available to common stockholders
$
43,223

 
$
28,621

 
$
56,947

 
$
55,420

Average number of shares of common stock outstanding
56,699

 
55,755

 
56,322

 
55,290

Dilutive RSAs, SARs, RSUs, convertible preferred stock and warrants
6,361

 
5,935

 
6,357

 
5,941

Average number of shares of common stock outstanding assuming dilution
63,060

 
61,690

 
62,679

 
61,231

Earnings per share – basic
$
0.76

 
$
0.51

 
$
1.01

 
$
1.00

Earnings per share – diluted
$
0.69

 
$
0.46

 
$
0.91

 
$
0.91

(13)
Related-Party Transactions
In March 2012, pursuant to the terms of the Series B Convertible Preferred Stock Agreement, Alon issued $12,000 of 8.5% Series B Convertible Preferred Stock to certain shareholders of Alon Israel and their affiliates. In conjunction with the issuance of the Series B Convertible Preferred Stock, Alon repaid all amounts due under the Alon Brands Term Loan and the warrants held by Alon Israel and their affiliates were surrendered to Alon.
During the nine months ended September 30, 2012, Alon purchased, from an affiliate, hydrotreating equipment and other refinery processing equipment for $18,000 and $8,000, respectively.
(14)
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 Agreement with J. Aron & Company
During the first quarter of 2012, Alon entered into a Supply and Offtake Agreement (the “Supply and Offtake Agreement”), with J. Aron & Company (“J. Aron”). Pursuant to the Supply and Offtake Agreement (i) J. Aron agreed to sell to Alon, and Alon agreed to buy from J. Aron, at market prices, crude oil for processing at the California refineries and (ii) Alon agreed to sell, and J. Aron agreed to buy, at market prices, certain refined products produced at the California refineries.
In connection with the execution of the Supply and Offtake Agreement for the California refineries, Alon also entered into agreements that 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 tanks located at the California refineries, and an agreement to identify prospective purchasers of refined products on J. Aron’s behalf. The Supply and Offtake Agreement for the California refineries has an initial term that expires in May 2016. J. Aron may elect to terminate the agreement prior to the initial term beginning in May 2013, provided Alon receives notice of termination at least six months prior to that date. Following expiration or termination of the Supply and Offtake Agreement, Alon is obligated to purchase at market prices the crude oil and refined product inventories then owned by J. Aron and located at the California refineries.
In July 2012, each of the Supply and Offtake Agreements for the Big Spring refinery, Krotz Springs refinery and the California refineries were amended principally in order to extend the terms of the Supply and Offtake Agreements by an additional two years. After the amendments, the Supply and Offtake Agreements have an initial term that expires in May 2018. J. Aron may elect to terminate the agreements prior to the initial term in May 2015 and upon each anniversary thereof provided Alon receives notice of termination at least six months prior to that date. Alon may elect to terminate in May 2017, provided Alon provides notice of termination at least six months prior to that date.
In May 2010, Alon Refining Krotz Springs, Inc. ("ARKS") entered into a secured Credit Agreement (the “Standby LC Facility”) by and between ARKS, as Borrower, and Goldman Sachs Bank USA, as Issuing Bank. The Standby LC Facility provides for up to $200,000 of letters of credit to be issued to J. Aron. Obligations under the Standby LC Facility are secured by a first priority lien on the existing and future accounts receivable and inventory of ARKS. In July 2012, ARKS entered into an amendment to the Standby LC Facility that extends the expiration of the Standby LC Facility until July 31, 2013. At this

17

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


time there is no further availability under the Standby LC Facility.
(b)
Contingencies
Alon is involved in various other claims and legal actions arising in the ordinary course of business. In August 2011, Alon received from the Federal Trade Commission a civil investigative demand to provide documents as part of an industry-wide investigation related to petroleum industry practices and pricing. Alon believes the ultimate disposition of this and all other matters will not have a material effect on Alon’s financial position, results of operations or liquidity.
(c)
Environmental
Alon is subject to federal, state, and local environmental laws and regulations. These rules regulate the discharge of materials into the environment and may require Alon to incur future obligations to investigate the effects of the release or disposal of certain petroleum, chemical, and mineral substances at various sites; to remediate or restore these sites; to compensate others for damage to property and natural resources and for remediation and restoration costs. These possible obligations relate to sites owned by Alon and associated with past or present operations. Alon is currently participating in environmental investigations, assessments and cleanups under these regulations at refineries, service stations, pipelines and terminals. Alon may in the future be involved in additional environmental investigations, assessments and cleanups. The magnitude of future costs will depend on factors such as the unknown nature and contamination at many sites, the timing, extent and method of the remedial actions which may be required, and the determination of Alon’s liability in proportion to other responsible parties.
Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefit are expensed. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Substantially all amounts accrued are expected to be paid out over the next 15 years. The level of future expenditures for environmental remediation obligations cannot be determined with any degree of reliability.
Alon has accrued environmental remediation obligations of $62,001 ($6,425 accrued liability and $55,576 non-current liability) at September 30, 2012, and $65,463 ($6,292 accrued liability and $59,171 non-current liability) at December 31, 2011.
In connection with the acquisition of the Bakersfield refinery on June 1, 2010, a subsidiary of Alon entered into an indemnification agreement with a prior owner for remediation expenses of conditions that existed at the refinery on the acquisition date. Alon is required to make indemnification claims to the prior owner by March 15, 2015. Alon has recorded a current receivable of $706 and a non-current receivable of $15,287, and a current receivable of $706 and a non-current receivable of $15,719 at September 30, 2012 and December 31, 2011, respectively.
Paramount Petroleum Corporation has indemnification agreements with a prior owner for part of the remediation expenses at its refineries and offsite tank farm and, as a result, has recorded a current receivable of $1,893 and a non-current receivable of $703, and a current receivable of $1,893 and a non-current receivable of $1,650 at September 30, 2012 and December 31, 2011, respectively.
(15)
Subsequent Events
Dividend Declared
On November 1, 2012, Alon declared its regular quarterly cash dividend of $0.04 per share on Alon’s common stock, payable on December 17, 2012, to stockholders of record at the close of business on December 3, 2012.
Commitments for New Term Loan
Alon launched syndication of $450,000 of new term debt and expects funding to occur in November 2012; proceeds will be used to retire existing debt of $421,875 due August 2013.

18


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, 2011. In this document, the words “Alon,” “the Company,” “we” and “our” refer to Alon USA Energy, Inc. and its subsidiaries.
Forward-Looking Statements
Certain statements contained in this report and other materials we file with the SEC, or in other written or oral statements made by us, other than statements of historical fact, are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We have used the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “will,” “future” and similar terms and phrases to identify forward-looking statements.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows.
Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, the following:
changes in general economic conditions and capital markets;
changes in the underlying demand for our products;
the availability, costs and price volatility of crude oil, other refinery feedstocks and refined products;
changes in the spread between West Texas Intermediate Cushing ("WTI") crude oil and West Texas Sour ("WTS") crude oil;
changes in the spread between WTI crude oil and Light Louisiana Sweet and Heavy Louisiana Sweet crude oils, 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 under 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 failure at our or third-party facilities;
the execution of planned capital projects;
adverse changes in the credit ratings assigned to our trade credit and debt instruments;
the effects of and cost of compliance with current and future state and federal environmental, economic, safety and other laws, policies and regulations;
operating hazards, natural disasters such as flooding, casualty losses and other matters beyond our control;
the global financial crisis’ impact on our business and financial condition; and
the other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2011 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.

19


Company Overview
We are an independent refiner and marketer of petroleum products operating primarily in the South Central, Southwestern and Western regions of the United States. Our crude oil refineries are located in Texas, California, Oregon and Louisiana and have a combined throughput capacity of approximately 250,000 barrels per day (“bpd”). Our refineries produce petroleum products including various grades of gasoline, diesel fuel, jet fuel, petrochemicals, petrochemical feedstocks, asphalt, and other petroleum-based products.
Refining and Unbranded Marketing Segment. Our refining and unbranded marketing segment includes sour and heavy crude oil refineries located in Big Spring, Texas; and Paramount, Bakersfield and Long Beach, California; and a light sweet crude oil refinery located in Krotz Springs, Louisiana. We refer to the Paramount, Bakersfield and Long Beach refineries together as our “California refineries.” The refineries in our refining and unbranded marketing segment have a combined throughput capacity of approximately 240,000 bpd. At these refineries we refine crude oil into petroleum products, including gasoline, diesel fuel, jet fuel, petrochemicals, petrochemical feedstocks and asphalts, which are marketed primarily in the South Central, Southwestern, and Western United States. At Bakersfield, we convert intermediate products into finished products and do not refine crude oil.
We market transportation fuels produced at our Big Spring refinery in West and Central Texas, Oklahoma, New Mexico and Arizona. We refer to our operations in these regions as our “physically integrated system” because we supply our retail and branded marketing segment's convenience stores and unbranded distributors with motor fuels produced at our Big Spring refinery and distributed through a network of pipelines and terminals which we either own or have access to through leases or long-term throughput agreements.
We market refined products produced by our California refineries to wholesale distributors, other refiners and third parties primarily on the West Coast. At Bakersfield, we operate the hydrocracker unit and process vacuum gas oil produced by our other California locations.
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 and its docking facilities along the Atchafalaya River allow barge access. The refinery also uses its direct access to the Colonial Pipeline to transport products to markets in the Southern and Eastern United States. 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 unbranded marketing segment and at our Willbridge, Oregon refinery. Asphalt produced by the refineries in our refining and unbranded marketing segment is transferred to the asphalt segment at prices substantially determined by reference to the cost of crude oil, which is intended to approximate wholesale market prices. Our asphalt segment markets asphalt through 11 refinery/terminal locations in Texas (Big Spring), California (Paramount, Long Beach, Elk Grove, Bakersfield and Mojave), Oregon (Willbridge), Washington (Richmond Beach), Arizona (Phoenix and Flagstaff) and Nevada (Fernley) (50% interest) as well as through a 50% interest in Wright Asphalt Products Company, LLC (“Wright”). We produce both paving and roofing grades of asphalt, including performance-graded asphalts, emulsions and cutbacks.
Retail and Branded Marketing Segment. Our retail and branded marketing segment operates approximately 299 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. We have operated under an exclusive license to use the FINA trademark in the wholesale distribution of motor fuel within Texas, Oklahoma, New Mexico, Arizona, Arkansas, Louisiana, Colorado and Utah since 2000. Our license to use the FINA brand expired in August 2012 in accordance with its terms. We developed our own brand and logo in anticipation of the expiration of this license and have substantially completed the conversion of all of our locations and all locations served by our branded marketing business to the new Alon brand. Under the Alon brand, we will no longer be subject to the geographic limitations contained in the FINA license agreement.
Substantially all of the motor fuel sold through our retail operations and the majority of the motor fuel marketed in our branded business is supplied by our Big Spring refinery. In 2012, approximately 94% of the motor fuel requirements of our branded marketing operations, including retail operations, were supplied by our Big Spring refinery. Branded distributors that are not part of our integrated supply system, primarily in Central Texas, are supplied with motor fuels we obtain from third-party suppliers.

20


We market gasoline and diesel under the Alon brand name through a network of approximately 625 locations, including our convenience stores. Approximately 56% of the gasoline and 21% of the diesel motor fuel produced at our Big Spring refinery was transferred to our retail and branded marketing segment at prices substantially determined by reference to commodity pricing information published by Platts. Additionally, our retail and branded marketing segment licenses the use of the Alon brand name and provides credit card processing services to approximately 141 licensed locations that are not under fuel supply agreements with us.
Third Quarter Operational and Financial Highlights
Operating income for the third quarter of 2012 was $90.3 million, compared to $82.0 million in the same period last year. Our operational and financial highlights for the third quarter of 2012 include the following:
Combined refinery throughput for the third quarter of 2012 averaged 171,086 bpd, 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, compared to 162,214 bpd for the third quarter of 2011, consisting of 56,828 bpd at the Big Spring refinery, 39,056 bpd at the California refineries and 66,330 bpd at the Krotz Springs refinery.
Operating margin at the Big Spring refinery was $28.19 per barrel for the third quarter of 2012, compared to $23.05 per barrel for the same period in 2011. This increase in operating margin is mainly due to higher Gulf Coast 3/2/1 crack spreads and a widening sweet/sour spread.
Operating margin at the California refineries was $0.12 per barrel for the third quarter of 2012, compared to $3.64 per barrel for the same period in 2011. This decrease in operating margin is mainly due to the costs of crude oil used by the refinery.
Operating margin at the Krotz Springs refinery was $11.28 per barrel for the third quarter of 2012, compared to $7.77 per barrel for the same period in 2011. This increase in operating margin is mainly due to lower crude oil costs with the addition of WTI priced crude oils and higher Gulf Coast 2/1/1 high sulfur diesel crack spreads.
The average Gulf Coast 3/2/1 crack spread was $31.76 per barrel for the third quarter of 2012 compared to $31.28 per barrel for the third quarter of 2011. The average West Coast 3/1/1/1 crack spread for the third quarter of 2012 was $14.40 per barrel compared to $11.22 per barrel for the same period in 2011. The average Gulf Coast 2/1/1 high sulfur diesel crack spread for the third quarter of 2012 was $15.91 per barrel compared to $12.44 per barrel for the third quarter of 2011.
The average WTI to WTS spread for the third quarter of 2012 was $3.34 per barrel compared to $0.82 per barrel for the same period in 2011. The average LLS to WTI spread for the third quarter of 2012 was $15.02 per barrel compared to $18.87 per barrel for the same period in 2011. The average WTI to Buena Vista spread for the third quarter of 2012 was $(14.14) per barrel compared to $(17.52) per barrel for the same period in 2011.
Asphalt margins in the third quarter of 2012 were $25.49 per ton compared to $25.68 per ton in the third quarter of 2011. This decrease was primarily due to non-cash inventory items offset by higher asphalt sales prices. The average blended asphalt sales price increased 21.8% from $540.07 per ton in the third quarter of 2011 to $657.68 per ton in the third quarter of 2012 and the average non-blended asphalt sales price increased 2.3% from $383.87 per ton in the third quarter of 2011 to $392.76 per ton in the third quarter of 2012.
Retail fuel sales volume increased by 7.9% from 40.8 million gallons in the third quarter of 2011 to 44.0 million gallons in the third quarter of 2012. Our branded fuel sales volume increased by 5.9% from 95.2 million gallons in the third quarter of 2011 to 100.8 million gallons in the third quarter of 2012.
Operating income for the third quarter of 2012 was also impacted by unrealized losses on commodity swaps of $5.0 million and realized losses on commodity swaps of $33.8 million. There were no significant unrealized or realized losses on commodity swaps for the third quarter of 2011.

21


Major Influences on Results of Operations
Refining and Unbranded Marketing. Earnings and cash flow from our refining and unbranded marketing segment are primarily affected by the difference between refined product prices and the prices for crude oil and other feedstocks. The cost to acquire crude oil and other feedstocks and the price of the refined products we ultimately sell depend on numerous factors beyond our control, including the supply of, and demand for, crude oil, gasoline and other refined products which, in turn, depend on, among other factors, changes in domestic and foreign economies, weather conditions, domestic and foreign political affairs, production levels, the availability of imports, the marketing of competitive fuels and government regulation. While our sales and operating revenues fluctuate significantly with movements in crude oil and refined product prices, it is the spread between crude oil and refined product prices, and not necessarily fluctuations in those prices, that affect our earnings.
In order to measure our operating performance, we compare our per barrel refinery operating margins to certain industry benchmarks. We calculate the per barrel operating margin for each refinery by dividing the refinery’s gross margin by its throughput volumes. Gross margin is the difference between net sales and cost of sales (exclusive of substantial unrealized hedge positions and certain inventory adjustments).
We compare our Big Spring refinery’s per barrel operating margin to the Gulf Coast 3/2/1 crack spread. A 3/2/1 crack spread is calculated assuming that three barrels of a benchmark crude oil are converted, or cracked, into two barrels of gasoline and one barrel of diesel. We calculate the Gulf Coast 3/2/1 crack spread using the market values of Gulf Coast conventional gasoline and ultra-low sulfur diesel and the market value of West Texas Intermediate Cushing, or WTI, a light, sweet crude oil.
We compare our California refineries’ per barrel operating margin to the West Coast 3/1/1/1 crack spread. A 3/1/1/1 crack spread is calculated assuming that three barrels of a benchmark crude oil are converted into one barrel of gasoline, one barrel of diesel and one barrel of fuel oil. We calculate the West Coast 3/1/1/1 crack spread using the market values of West Coast LA CARBOB pipeline gasoline, LA ultra-low sulfur pipeline diesel, and LA 380 pipeline CST (fuel oil) and the market value of Buena Vista crude oil.
We compare our Krotz Springs refinery’s per barrel operating margin to the Gulf Coast 2/1/1 crack spread. A 2/1/1 crack spread is calculated assuming that two barrels of a benchmark crude oil are converted into one barrel of gasoline and one barrel of diesel. We calculate the Gulf Coast 2/1/1 crack spread using the market values of Gulf Coast conventional gasoline and Gulf Coast high sulfur diesel and the market value of Light Louisiana Sweet, or LLS, crude oil.
Our Big Spring refinery and California refineries are capable of processing substantial volumes of sour crude oil, which has historically cost less than intermediate and sweet crude oils. We measure the cost advantage of refining sour crude oil by calculating the difference between the value of WTI crude oil less the value of West Texas Sour, or WTS, a medium, sour crude oil. We refer to this differential as the sweet/sour spread. A widening of the sweet/sour spread can favorably influence the operating margin for our Big Spring and California refineries. In addition, our California refineries are capable of processing significant volumes of heavy crude oils which historically have cost less than light crude oils. We measure the cost advantage of refining heavy crude oils by calculating the difference between the value of WTI crude oil less the value of Buena Vista crude oil. A widening of this spread can favorably influence the refinery operating margins for our California refineries.
The Krotz Springs refinery has the capability to process substantial volumes of low-sulfur, or sweet, crude oils to produce a high percentage of light, high-value refined products. Sweet crude oil typically comprises 100% of the Krotz Springs refinery's crude oil input. This input was primarily comprised of LLS crude oil and WTI crude oil. We measure the cost of refining the LLS crude oil by calculating the difference between the average value of LLS crude oil to the average value of WTI crude oil. A narrowing of this spread can favorably influence the refinery operating margins of our Krotz Springs refinery.
The results of operations from our refining and unbranded marketing segment are also significantly affected by our refineries’ operating costs, particularly the cost of natural gas used for fuel and the cost of electricity. Natural gas prices have historically been volatile. Typically, electricity prices fluctuate with natural gas prices.
Demand for gasoline products is generally higher during summer months than during winter months due to seasonal increases in highway traffic. As a result, the operating results for our refining and unbranded marketing segment for the first and fourth calendar quarters are generally lower than those for the second and third calendar quarters. The effects of seasonal demand for gasoline are partially offset by seasonality in demand for diesel, which in our region is generally higher in winter months as east-west trucking traffic moves south to avoid winter conditions on northern routes.
Safety, reliability and the environmental performance of our refineries are critical to our financial performance. The financial impact of planned downtime, such as a turnaround or major maintenance project, is mitigated through a diligent planning process that considers expectations for product availability, margin environment and the availability of resources to perform the required maintenance.

22


The nature of our business requires us to maintain substantial quantities of crude oil and refined product inventories. Crude oil and refined products are essentially commodities, and we have no control over the changing market value of these inventories. Because our inventory is valued at the lower of cost or market value under the LIFO inventory valuation methodology, price fluctuations generally have little effect on our financial results.
Asphalt. Earnings from our asphalt segment depend primarily upon the margin between the price at which we sell our asphalt and the transfer prices for asphalt produced at our refineries in the refining and unbranded marketing segment. Asphalt is transferred to our asphalt segment at prices substantially determined by reference to the cost of crude oil, which is intended to approximate wholesale market prices. The asphalt segment also conducts operations and markets asphalt at our refinery located in Willbridge, Oregon. In addition to producing asphalt at our refineries, at times when refining margins are unfavorable we opportunistically purchase asphalt from other producers for resale. A portion of our asphalt sales are made using fixed price contracts for delivery at future dates. Because these contracts are priced at the market prices for asphalt at the time of the contract, a change in the cost of crude oil between the time we enter into the contract and the time we produce the asphalt can positively or negatively influence the earnings of our asphalt segment. Demand for paving asphalt products is higher during warmer months than during colder months due to seasonal increases in road construction work. As a result, revenues from our asphalt segment for the first and fourth calendar quarters are expected to be lower than those for the second and third calendar quarters.
Retail and Branded Marketing. Earnings and cash flows from our retail and branded marketing segment are primarily affected by merchandise and motor fuel sales volumes and margins at our convenience stores and the motor fuel sales volumes and margins from sales to our Alon-branded distributors, together with licensing and credit card related fees generated from our Alon-branded distributors and licensees. Retail merchandise gross margin is equal to retail merchandise sales less the delivered cost of the retail merchandise, net of vendor discounts and rebates, measured as a percentage of total retail merchandise sales. Retail merchandise sales are driven by convenience, branding and competitive pricing. Motor fuel margin is equal to motor fuel sales less the delivered cost of fuel and motor fuel taxes, measured on a cents per gallon (“cpg”) basis. Our motor fuel margins are driven by local supply, demand and competitor pricing. Our convenience store sales are seasonal and peak in the second and third quarters of the year, while the first and fourth quarters usually experience lower overall sales.
Factors Affecting Comparability
Our financial condition and operating results over the nine months ended September 30, 2012 and 2011, have been influenced by the following factors which are fundamental to understanding comparisons of our period-to-period financial performance.
Crude throughput was reduced at the Krotz Springs refinery during the second quarter of 2011 due to the flooding in Louisiana and its impact on crude oil supply to the refinery.
For the three and nine months ended September 30, 2012, we had unrealized losses on commodity swaps of $5.0 million and $37.5 million, respectively, as shown separately in the consolidated statements of operations. Additionally for the three and nine months ended September 30, 2012, we had realized losses on commodity swaps of $33.8 million and $68.3 million, respectively, included in cost of sales in the consolidated statements of operations. We had no significant unrealized or realized gains or losses on commodity swaps for the three and nine months ended September 30, 2011.
Included in other income (loss), net in the consolidated statements of operations, we also had losses on heating oil call option crack spread contracts of $14.3 million for the three months ended September 30, 2011, and $7.3 million and $51.1 million for the nine months ended September 30, 2012 and 2011, respectively.
We launched syndication of $450.0 million of new term debt and expect funding to occur in November 2012; proceeds will be used to retire existing debt of $421.9 million due August 2013.
Results of Operations
Net Sales. Net sales consist primarily of sales of refined petroleum products through our refining and unbranded marketing segment and asphalt segment and sales of merchandise, including food products, and motor fuels, through our retail and branded marketing segment.
For the refining and unbranded marketing segment, net sales consist of gross sales, net of customer rebates, discounts and excise taxes and includes inter-segment sales to our asphalt and retail and branded marketing segments, which are eliminated through consolidation of our financial statements. Asphalt sales consist of gross sales, net of any discounts and applicable taxes. Retail net sales consist of gross merchandise sales, less rebates, commissions and discounts, and gross fuel sales, including motor fuel taxes. For our petroleum and asphalt products, net sales are mainly affected by crude oil and refined product prices and volume changes caused by operations. Our retail merchandise sales are affected primarily by competition and seasonal influences.

23


Cost of Sales. Refining and unbranded marketing cost of sales includes crude oil and other raw materials, inclusive of transportation costs. Asphalt cost of sales includes costs of purchased asphalt, blending materials and transportation costs. Retail cost of sales includes cost of sales for motor fuels and for merchandise. Motor fuel cost of sales represents the net cost of purchased fuel, including transportation costs and associated motor fuel taxes. Merchandise cost of sales includes the delivered cost of merchandise purchases, net of merchandise rebates and commissions. Cost of sales excludes depreciation and amortization expense.
Direct Operating Expenses. Direct operating expenses, which relate to our refining and unbranded marketing and asphalt segments, include costs associated with the actual operations of our refineries and asphalt terminals, such as energy and utility costs, routine maintenance, labor, insurance and environmental compliance costs. Environmental compliance costs, including monitoring and routine maintenance, are expensed as incurred. All operating costs associated with our crude oil and product pipelines are considered to be transportation costs and are reflected as cost of sales.
Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses consist primarily of costs relating to the operations of our convenience stores, including labor, utilities, maintenance and retail corporate overhead costs. Refining and marketing and asphalt segment corporate overhead and marketing expenses are also included in SG&A expenses.

24


ALON USA ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED
Summary Financial Tables. The following tables provide summary financial data and selected key operating statistics for Alon and our three operating segments for the three and nine months ended September 30, 2012 and 2011. The summary financial data for our three operating segments does not include certain SG&A expenses and depreciation and amortization related to our corporate headquarters. The following data should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q. All information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” except for Balance Sheet data as of December 31, 2011 is unaudited.
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(dollars in thousands, except per share data)
STATEMENTS OF OPERATIONS DATA:
 
 
 
 
 
 
 
Net sales (1)
$
2,360,334

 
$
2,056,653

 
$
6,062,956

 
$
5,303,388

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales
2,101,647

 
1,827,098

 
5,407,197

 
4,717,673

Unrealized losses on commodity swaps
5,017

 

 
37,458

 

Direct operating expenses
81,160

 
83,338

 
230,243

 
202,476

Selling, general and administrative expenses (2)
47,670

 
34,680

 
119,018

 
107,595

Depreciation and amortization (3)
31,870

 
29,812

 
93,000

 
80,046

Total operating costs and expenses
2,267,364

 
1,974,928

 
5,886,916

 
5,107,790

Gain (loss) on disposition of assets
(2,624
)
 
229

 
(2,838
)
 
161

Operating income
90,346

 
81,954

 
173,202

 
195,759

Interest expense (4)
(22,773
)
 
(22,582
)
 
(78,113
)
 
(63,780
)
Equity earnings of investees
4,542

 
2,005

 
6,112

 
3,775

Other income (loss), net (5)
202

 
(14,272
)
 
(6,791
)
 
(51,065
)
Income before income tax expense
72,317

 
47,105

 
94,410

 
84,689

Income tax expense
26,776

 
17,004

 
34,705

 
26,952

Net income
45,541

 
30,101

 
59,705

 
57,737

Net income attributable to non-controlling interest
2,318

 
1,480

 
2,758

 
2,317

Net income available to common stockholders
$
43,223

 
$
28,621

 
$
56,947

 
$
55,420

Earnings per share, basic
$
0.76

 
$
0.51

 
$
1.01

 
$
1.00

Weighted average shares outstanding, basic (in thousands)
56,699

 
55,755

 
56,322

 
55,290

Earnings per share, diluted
$
0.69

 
$
0.46

 
$
0.91

 
$
0.91

Weighted average shares outstanding, diluted (in thousands)
63,060

 
61,690

 
62,679

 
61,231

Cash dividends per share
$
0.04

 
$
0.04

 
$
0.12

 
$
0.12

CASH FLOW DATA:
 
 
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
 
 
Operating activities
$
101,276

 
$
109,478

 
$
215,498

 
$
58,362

Investing activities
(34,170
)
 
(28,055
)
 
(83,436
)
 
(104,130
)
Financing activities
(78,930
)
 
(22,964
)
 
(243,436
)
 
149,682

OTHER DATA:
 
 
 
 
 
 
 
Adjusted EBITDA (6)
$
129,584

 
$
99,270

 
$
268,361

 
$
228,354

Capital expenditures (7)
31,748

 
23,162

 
72,273

 
91,120

Capital expenditures for turnaround and chemical catalyst
2,680

 
2,733

 
11,437

 
6,995


25


 
September 30,
2012
 
December 31,
2011
BALANCE SHEET DATA (end of period):
 
 
 
Cash and cash equivalents
$
45,692

 
$
157,066

Working capital (A)
(337,021
)
 
99,452

Total assets
2,320,937

 
2,330,382

Total debt
798,733

 
1,050,196

Total equity
456,341

 
395,784

(A)
We launched syndication of $450,000 of new term debt and expect funding to occur in November 2012; proceeds will be used to retire existing debt of $421,875 due August 2013.
_____________________
(1)
Includes excise taxes on sales by the retail and branded marketing segment of $17,159 and $15,476 for the three months ended September 30, 2012 and 2011, respectively, and $49,481 and $44,887 for the nine months ended September 30, 2012 and 2011, respectively.
(2)
Includes corporate headquarters selling, general and administrative expenses of $203 and $188 for the three months ended September 30, 2012 and 2011, respectively, and $584 and $564 for the nine months ended September 30, 2012 and 2011, respectively, which are not allocated to our three operating segments.
(3)
Includes corporate depreciation and amortization of $611 and $404 for the three months ended September 30, 2012 and 2011, respectively, and $1,788 and $1,211 for the nine months ended September 30, 2012 and 2011, respectively, which are not allocated to our three operating segments.
(4)
Interest expense for the nine months ended September 30, 2012, includes a charge of $9,624 for the write-off of unamortized original issuance discount associated with our repayment of the Alon Brands Term Loan.
(5)
Other income (loss), net for the