10-K 1 wnr12311410k.htm 10-K WNR 12.31.14 10K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Fiscal Year Ended December 31, 2014
OR
¨
 
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: 001-32721
WESTERN REFINING, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-3472415
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
123 W. Mills Ave., Suite 200
El Paso, Texas
(Address of principal executive offices)
 
79901
(Zip Code)
Registrant’s telephone number, including area code:
(915) 534-1400
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
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 if disclosure of delinquent filers pursuant to rule 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark if 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. (Check one):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed based on the New York Stock Exchange closing price on June 30, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter) was $2,860,337,605.
As of February 27, 2015, there were 95,459,798 shares outstanding, par value $0.01, of the registrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to the registrant’s 2015 annual meeting of stockholders are incorporated by reference into Part III of this report.



WESTERN REFINING, INC. AND SUBSIDIARIES
INDEX

Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
Item 15.
 EX-10.19.3
 EX-12.1
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101


i


Forward-Looking Statements
As provided by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, certain statements included throughout this Annual Report on Form 10-K and in particular under the sections entitled Item 1. Business, Item 3. Legal Proceedings and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations relating to matters that are not historical fact are forward-looking statements that represent management’s beliefs and assumptions based on currently available information. These forward-looking statements relate to matters such as our industry including the regulation of our industry, business strategy, future operations, our expectations for margins and crack spreads, the discount between West Texas Intermediate ("WTI") crude oil and Dated Brent crude oil as well as the discount between WTI Cushing and WTI Midland crude oils, volatility of crude oil prices, additions to pipeline capacity in the Permian Basin and at Cushing, Oklahoma, expected share repurchases and dividends, volatility in pricing of Renewable Identification Numbers ("RINs"), taxes, capital expenditures, liquidity and capital resources and other financial and operating information. Forward-looking statements also include those regarding the timing of completion of certain operational improvements we are making at our refineries, future operational and refinery efficiencies and cost savings, timing of future maintenance turnarounds, the amount or sufficiency of future cash flows and earnings growth, future expenditures, future contributions related to pension and postretirement obligations, our ability to manage our inventory price exposure through commodity hedging instruments, the impact on our business of existing and future state and federal regulatory requirements, environmental loss contingency accruals, projected remediation costs or requirements and the expected outcomes of legal proceedings in which we are involved. We have used the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “position,” “potential,” “predict,” “project,” “strategy,” “will,” “future” and similar terms and phrases to identify forward-looking statements in this report.
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 or that are affected by unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. In addition, our business and operations involve numerous risks and uncertainties, many that are beyond our control that could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows.
When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-K. Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to predict or identify all of these factors, they include, among others, the following:
changes in crack spreads;
changes in the spread between WTI crude oil and West Texas Sour crude oil, also known as the sweet/sour spread;
changes in the spread between WTI crude oil and Dated Brent crude oil and between WTI Cushing crude oil and WTI Midland crude oil;
availability, costs and price volatility of crude oil, other refinery feedstocks and refined products;
effects of and exposure to risks related to our commodity hedging strategies and transactions;
availability and costs of renewable fuels for blending and RINs to meet Renewable Fuel Standards ("RFS") obligations;
construction of new, or expansion of existing, product or crude pipelines, including in the Permian Basin, in the San Juan Basin and at Cushing, Oklahoma;
changes in the underlying demand for our refined products;
instability and volatility in the financial markets, including as a result of potential disruptions caused by economic uncertainties in Europe;
a potential economic recession in the United States and/or abroad;
adverse changes in the credit ratings assigned to our and our subsidiaries' debt instruments;
changes in the availability and cost of capital;
actions of customers and competitors;
successful integration and future performance of acquired assets, businesses or third-party product supply and processing relationships;
actions of third-party operators, processors and transporters;

1


changes in fuel and utility costs incurred by our refineries;
the effect of weather-related problems on our operations;
disruptions due to equipment interruption, pipeline disruptions or failure at our or third-party facilities;
execution of planned capital projects, cost overruns relating to those projects and failure to realize the expected benefits from those projects;
effects of and costs relating to compliance with current and future local, state and federal environmental, economic, climate change, safety, tax and other laws, policies and regulations and enforcement initiatives;
rulings, judgments or settlements in litigation, tax or other legal or regulatory matters, including unexpected environmental remediation costs in excess of any reserves or insurance coverage;
the price, availability and acceptance of alternative fuels and alternative fuel vehicles;
labor relations;
operating hazards, natural disasters, casualty losses, acts of terrorism including cyber-attacks and other matters beyond our control; and
other factors discussed in more detail under Part I. — Item 1A. Risk Factors of this report that are incorporated herein by this reference.
Any one of these factors or a combination of these factors could materially affect our financial condition, results of operations or cash flows and could influence whether any forward-looking statements ultimately prove to be accurate. You are urged to consider these factors carefully in evaluating any forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements.
Although we believe the forward-looking statements we make in this report related to our plans, intentions and expectations are reasonable, we can provide no assurance that such plans, intentions or expectations will be achieved. These statements are based on assumptions made by us based on our experience and perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate in the circumstances. Such statements are subject to a number of risks and uncertainties, many of which are beyond our control. The forward-looking statements included herein are made only as of the date of this report and we are not required to (and will not) update any information to reflect events or circumstances that may occur after the date of this report, except as required by applicable law.


2


PART I
In this Annual Report on Form 10-K, all references to “Western Refining,” “the Company,” “Western,” “we,” “us” and “our” refer to Western Refining, Inc. ("WNR") and its subsidiaries, unless the context otherwise requires or where otherwise indicated.

Item 1.
Business
Overview
We are an independent crude oil refiner and marketer of refined products incorporated in September 2005 under Delaware law with principal offices located in El Paso, Texas. Our common stock trades on the New York Stock Exchange ("NYSE") under the symbol “WNR.” We own certain operating assets directly; the controlling general partner interest and a 38.4% limited partner interest in Northern Tier Energy LP (“NTI”) and the controlling general partner interest, Incentive Distribution Rights ("IDRs") and a 66.2% limited partner interest in Western Refining Logistics, LP (“WNRL”). NTI and WNRL common partnership units trade on the NYSE under the symbols "NTI" and "WNRL," respectively.
We produce refined products at three refineries: one in El Paso, Texas (131,000 barrels per day, or bpd), one near Gallup, New Mexico (25,000 bpd) and NTI's refinery in St. Paul Park, Minnesota (97,800 bpd). We sell refined products in Arizona, Colorado, the Mid-Atlantic region, New Mexico, the Upper Great Plains region ,West Texas and Mexico through bulk distribution terminals and wholesale marketing networks and we sell refined products through two retail networks with a total of 484 company-owned and franchised retail sites in the U.S.
On November 12, 2013, we acquired a 38.7% limited partner interest and 100% ownership of the general partner of NTI. NTI owns and operates a 97,800 bpd refinery in St. Paul Park, Minnesota. NTI has a retail-marketing network of 254 convenience stores. NTI directly operates 165 of these stores, including 2 owned and the remainder leased, and supports 89 stores through franchise agreements. NTI's primary areas of operation include Minnesota, South Dakota and Wisconsin.
During 2013, we formed WNRL as a Delaware master limited partnership to own, operate, develop and acquire terminals, storage tanks, pipelines and other logistics assets and related businesses. WNRL completed its initial public offering (the "Offering") on October 16, 2013. At December 31, 2014, we own a 66.2% limited partner interest in WNRL and the public held a 33.8% limited partner interest. We control WNRL through our 100% ownership of the general partner of WNRL and through control of the majority of outstanding common partnership units. WNRL provides logistical services to our refineries in the Southwest and operates several lubricant and bulk petroleum distribution plants and a fleet of crude oil and refined product delivery trucks. WNRL distributes commercial wholesale petroleum products primarily in Arizona, California, Colorado, Nevada, New Mexico and Texas.
On October 15, 2014, in connection with a Contribution, Conveyance and Assumption Agreement (the "Contribution Agreement") dated September 25, 2014, we sold all of the outstanding limited liability company interests of Western Refining Wholesale, LLC ("WRW") to WNRL. The sale of WRW to WNRL was a reorganization of entities under common control. The information contained herein for our WNRL accounting predecessor (the "WNRL Predecessor") and WNRL has been retrospectively adjusted, to include the historical results of the WRW assets acquired, for periods prior to the effective date of the transaction. Our financial information includes the historical results of the WNRL Predecessor, retrospectively adjusted due to the transaction, collectively defined as our "Predecessor," for periods prior to October 16, 2013, and the results of WNRL, beginning October 16, 2013, the date WNRL commenced operations, which have also been retrospectively adjusted. We refer to this transaction as the "Wholesale Acquisition."

3


The following simplified diagram depicts the three publicly traded reporting entities in our organizational structure as of December 31, 2014:
During the fourth quarter of 2014, we changed our reportable segments due to fourth quarter changes in our organization. Our operations are currently organized into four operating segments based on manufacturing and marketing criteria and the nature of our products and services, our production processes and our types of customers. The historical segment financial data was retrospectively adjusted for the periods presented. The four business segments are: refining, NTI, WNRL and retail.
Refining. Our refining segment owns and operates two refineries in the Southwest that process crude oil and other feedstocks primarily into gasoline, diesel fuel, jet fuel and asphalt. We market refined products to a diverse customer base including wholesale distributors and retail chains. The refining segment also sells refined products in the Mid-Atlantic region and Mexico.
NTI. NTI owns and operates refining and transportation assets and operates and supports retail convenience stores primarily in the Upper Great Plains region of the U.S.
WNRL. WNRL owns and operates terminal, storage, transportation and provides related services primarily to our refining segment in the Southwest. The WNRL segment also includes wholesale assets consisting of a fleet of crude oil and refined product truck transports and wholesale petroleum product operations in the Southwest region. WNRL receives its product supply from the refining segment and third-party suppliers.
Retail. Our retail segment operates retail convenience stores and unmanned commercial fleet fueling locations located in the Southwest. The retail convenience stores sell gasoline, diesel fuel and convenience store merchandise.
See Note 3, Segment Information in the Notes to Consolidated Financial Statements included in this annual report for detailed information on our operating results by business segment. We sell a variety of refined products to a diverse customer base. When aggregated for all of our operating segments, consolidated net sales to Kroger Company accounted for 11.4% for the year ended December 31, 2013 that are primarily attributable to WNRL. No single customer accounted for more than 10% of consolidated net sales for the years ended December 31, 2014 and 2012.
Refining Segment
Our refining group operates a refinery in El Paso, Texas (the "El Paso refinery") and a refinery near Gallup, New Mexico (the "Gallup refinery"). We supply refined products to the El Paso area via WNRL and other logistics assets adjacent to the El Paso refinery and to other areas including Tucson, Phoenix, Albuquerque and Juarez, Mexico through third-party pipeline systems linked to our El Paso refinery. We supply refined products to the Four Corners region and throughout Northern New Mexico from WNRL operations in Albuquerque, Bloomfield and Gallup, New Mexico. As of October 15, 2014, our refining segment also includes the operations of our refined products marketing and distribution in the Mid-Atlantic region, and we have recast historical financial and operational data of the refining segment, for all periods presented, to reflect the inclusion of the Mid-Atlantic product distribution business that we historically reported within wholesale operations.

4


Prior to August 2012, our refined products sold in the Mid-Atlantic region were purchased from various third parties. On August 31, 2012, we entered into an exclusive supply and marketing agreement with a third party covering activities related to our refined product supply, hedging and sales in the Mid-Atlantic region. On the east coast, we compete with wholesale petroleum products distributors such as Shell Oil Company, BP Oil, CITGO Petroleum Corporation, Valero Energy Corporation and Exxon Mobil Corporation.
Principal Products. Our refineries make various grades of gasoline, diesel fuel, jet fuel and other products from crude oil, other feedstocks and blending components. We also acquire refined products through exchange agreements and from various third-party suppliers. We sell these products through WNRL and our retail group directly to third-party wholesalers and retailers, commercial accounts and sales and exchanges with major oil companies. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for detail on production by refinery.
The following table summarizes sales percentages by product for the years indicated:
 
Year Ended December 31,
 
2014
 
2013
 
2012
Gasoline
36.5
%
 
42.3
%
 
44.3
%
Diesel fuel
25.1

 
35.0

 
34.3

Jet fuel
8.6

 
13.7

 
13.9

Asphalt
2.9

 
3.2

 
3.5

Crude oil and other (1)
26.9

 
5.8

 
4.0

Total sales percentage by type
100.0
%
 
100.0
%
 
100.0
%
(1)
Crude oil sales for the years ended December 31, 2014 and 2013 were $1,489.6 million and $51.3 million, respectively. There were no comparable sales in 2012.
Customers. We sell a variety of refined products to our diverse customer base through the WNRL wholesale business. No single third-party customer of our refining group accounted for more than 10% of our consolidated net sales during the years ended December 31, 2014, 2013 and 2012.
Other than sales of gasoline and diesel fuel for export to Juarez and other cities in Northern Mexico, our refining sales were domestic sales in the United States. The sales for export were to PMI Trading Limited, an affiliate of Petroleos Mexicanos, the Mexican state-owned oil company and accounted for approximately 5.5%, 8.5% and 7.5% of our consolidated net sales during the years ended December 31, 2014, 2013 and 2012, respectively.
We also purchase additional refined products from third parties to supplement supply to our customers. These products are similar to the products that we currently manufacture and represented approximately 10%, 14% and 14% of our total sales volumes during the years ended December 31, 2014, 2013 and 2012, respectively. The decrease when comparing 2014 purchases to 2013 and 2012 levels was primarily the result of lower refined product sales activities in the Mid-Atlantic region where we satisfy our refined product customer sales requirements through third-party purchases.
Competition. The refining segment operates primarily in the U.S. Southwest region including Arizona, Colorado, New Mexico, Utah and West Texas. This region is supplied by substantial refining capacity from our refineries, from other regional refineries and from non-regional refineries via interstate pipelines.
Petroleum refining and marketing is highly competitive. Our southwest refineries primarily compete with Valero Energy Corporation, Phillips 66 Company, Alon USA Energy, Inc., HollyFrontier Corporation, Tesoro Corporation, Chevron Products Company ("Chevron") and Suncor Energy, Inc. as well as refineries in other regions of the country that serve the regions we serve through pipelines. Principal competitive factors include costs of crude oil and other feedstocks, our competitors' refined product pricing, refinery efficiency, operating costs, refinery product mix and costs of product distribution and transportation. Due to their geographic diversity, larger and more complex refineries, integrated operations and greater resources, some of our competitors may be better able to withstand volatile market conditions, compete on the basis of price, obtain crude oil in times of shortage and bear the economic risk inherent in all phases of the refining industry.
In the Mid-Atlantic region, we compete with wholesale petroleum products distributors such as Shell Oil Company, BP Oil, CITGO Petroleum Corporation, Valero Energy Corporation and Exxon Mobil Corporation.
Various refined product pipelines supply our refined product distribution areas. Any expansions or additional product supplied by these third-party pipelines could put downward pressure on refined product prices in these areas.
To the extent that climate change legislation passes to impose domestic greenhouse gas restrictions, domestic refiners will be at competitive disadvantage to offshore refineries not subject to the legislation.

5


El Paso Refinery
Our El Paso refinery has a crude oil throughput capacity of 131,000 bpd with access to logistics assets including approximately 4.3 million barrels of storage capacity, a refined product terminal and an asphalt plant and terminal. The refinery is well situated to serve two separate geographic areas allowing a diversified market pricing exposure. Tucson and Phoenix typically reflect a West Coast market pricing structure while El Paso, Albuquerque and Juarez, Mexico typically reflect a Gulf Coast market pricing structure.
Process Summary. Our El Paso refinery is a cracking facility that has historically run a high percentage of WTI crude oil to optimize the yields of higher value refined products that currently account for over 90% of our production output. We have the flexibility to process up to 22% West Texas Sour ("WTS") crude oil. Under a sulfuric acid regeneration and sulfur gas processing agreement with E.I. du Pont de Nemours ("DuPont"), DuPont constructed and operates two sulfuric acid regeneration units on property we lease to DuPont within our El Paso refinery.
Power and Natural Gas Supply. A regional electric company supplies electricity to our El Paso refinery via two separate feeders to the refinery's north and south sides. There are several uninterruptible power supply units throughout the plant to maintain computers and controls in the event of a power outage. The refinery receives its natural gas supply via pipeline under two transportation agreements. One transportation agreement is on an interruptible basis while the other is on a firm basis. We purchase our natural gas at market rates or under fixed-price agreements.
Raw Material Supply. The primary inputs for our El Paso refinery are crude oil and isobutane. Our El Paso refinery receives crude oil from a 450 mile crude oil pipeline owned and operated by Kinder Morgan Energy Partners, LP ("Kinder Morgan") under a 30-year crude oil transportation agreement that expires in 2034. The system handles both WTI and WTS crude oil with its main trunkline into El Paso used solely for the supply of crude oil to us on a published tariff. Through the crude oil pipeline, we have access to the majority of the producing fields in the Permian Basin that gives us access to a plentiful supply of WTI and WTS crude oil from fields with long reserve lives. In 2013, we completed construction of a crude oil gathering and storage system in the Delaware Basin portion of the Permian Basin area of West Texas (the "Delaware Basin"). This system connects to the Kinder Morgan pipeline to facilitate delivery of crude oil to El Paso. This system was among the logistics assets that we contributed to WNRL upon completion of its initial public offering. We generally buy our crude oil under contracts with various crude oil providers at market-based pricing. Many of these arrangements are subject to cancellation by either party or have terms of one year or less. In addition, these arrangements are subject to periodic renegotiation that could result in our paying higher or lower relative prices for crude oil.
The following table summarizes the historical feedstocks used by our El Paso refinery for the years indicated:
 
Year Ended December 31,
 
Percentage For Year Ended December 31,
Refinery Feedstocks (bpd)
2014
 
2013
 
2012
 
2014
Crude Oil:
 

 
 

 
 

 
 

Sweet crude oil
96,384

 
93,654

 
94,404

 
75.8
%
Sour crude oil
25,113

 
25,195

 
24,792

 
19.7
%
Total Crude Oil
121,497

 
118,849

 
119,196

 
95.5
%
Other Feedstocks and Blendstocks:
 

 
 

 
 

 
 

Intermediates and other
3,735

 
4,130

 
4,852

 
2.9
%
Blendstocks
2,004

 
2,358

 
2,882

 
1.6
%
Total Other Feedstocks and Blendstocks
5,739

 
6,488

 
7,734

 
4.5
%
Total Crude Oil and Other Feedstocks and Blendstocks
127,236

 
125,337

 
126,930

 
100.0
%
Refined Products Transportation. We supply refined products to the El Paso area via WNRL and logistics assets including the light product distribution terminal and other truck and rail racks located at the El Paso refinery and to other areas including Tucson, Phoenix, Albuquerque and Juarez, Mexico, through third-party pipeline systems linked to our El Paso refinery. We deliver gasoline and distillate products to Tucson and Phoenix through Kinder Morgan's East Line and to Albuquerque and Juarez, Mexico, through pipelines owned by Magellan Midstream Partners, LP ("Magellan").
Both Kinder Morgan’s East Line and Magellan's pipeline to Albuquerque are interstate pipelines regulated by the Federal Energy Regulatory Commission (the "FERC"). The tariff provisions for these pipelines include prorating policies that grant historical shippers line space that is consistent with their prior activities as well as a prorated portion of any expansions.

6


Gallup Refinery
Our Gallup refinery, located near Gallup, New Mexico, has a crude oil throughput capacity of 25,000 bpd and access to WNRL segment logistics assets including approximately 595,000 barrels of storage capacity. We market refined products from the Gallup refinery primarily in Arizona, Colorado, New Mexico and Utah. Our primary supply of crude oil and natural gas liquids for our Gallup refinery comes from Colorado, New Mexico and Utah.
Process Summary. The Gallup refinery sources all of its crude oil supply from regionally produced Four Corners Sweet crude oil. Each barrel of raw materials processed by our Gallup refinery yielded in excess of 90% of high value refined products, including gasoline and diesel fuel, during the three years ended December 31, 2014.
Power and Natural Gas Supply. A regional electric cooperative supplies electrical power to our Gallup refinery. There are several uninterruptible power supply units throughout the plant to maintain computers and controls in the event of a power outage. We purchase our natural gas at market rates and have two available pipeline sources for natural gas supply to our refinery.
Raw Material Supply. The feedstock for our Gallup refinery is Four Corners Sweet that we source primarily from Northern New Mexico, Colorado and Utah. We receive crude oil through a pipeline gathering system owned and operated by our WNRL segment and through a third-party pipeline connected to our Gallup refinery. WNRL segment's crude oil pipeline system reaches approximately 200 miles into the San Juan Basin of the Four Corners area and connects with a local common carrier pipeline. We also own a 299 mile section of the TexNew Mex 16" Pipeline that extends from our crude oil station in Star Lake, New Mexico in the Four Corners area to near Maljamar, New Mexico in the Delaware Basin. During 2014, we completed a project to reactivate and reverse the crude oil line flow.
We supplement the crude oil used at our Gallup refinery with other feedstocks that currently include locally produced natural gas liquids and condensate as well as other feedstocks produced outside of the Four Corners area. WNRL owns and operates a 14-mile pipeline that connects the Gallup refinery to Western's recently purchased Wingate facility that provides additional receiving capacity for natural gas liquids consumed at the Gallup refinery.
The following table summarizes the historical feedstocks used by our Gallup refinery for the years indicated:
 
Year Ended December 31,
 
Percentage For Year Ended December 31,
Refinery Feedstocks (bpd)
2014
 
2013
 
2012
 
2014
Crude Oil:
 

 
 

 
 

 
 

Sweet crude oil
25,130

 
23,635

 
20,941

 
90.5
%
Total Crude Oil
25,130

 
23,635

 
20,941

 
90.5
%
Other Feedstocks and Blendstocks:
 

 
 

 
 

 
 

Intermediates and other
867

 

 
684

 
3.1
%
Blendstocks
1,786

 
1,457

 
1,254

 
6.4
%
Total Other Feedstocks and Blendstocks
2,653

 
1,457

 
1,938

 
9.5
%
Total Crude Oil and Other Feedstocks and Blendstocks
27,783

 
25,092

 
22,879

 
100.0
%
We purchase crude oil from a number of sources, including major oil companies and independent producers, under arrangements that contain market responsive pricing provisions. Many of these arrangements are subject to cancellation by either party or have terms of one year or less. In addition, these arrangements are subject to periodic renegotiation that could result in our paying higher or lower relative prices for crude oil.
Refined Products Transportation. We distribute all gasoline and diesel fuel produced at our Gallup refinery through the truck loading rack owned and operated by our WNRL segment. We supply these refined products to Arizona, Colorado, New Mexico and Utah, primarily via a fleet of refined product trucks operated by WNRL and common carriers.
NTI
St. Paul Park Refinery
NTI's St. Paul Park refinery located in Southeast St. Paul Park, Minnesota, has a crude oil throughput capacity of 97,800 bpd and has the ability to process a variety of light, heavy, sweet and sour crudes into higher value refined products. The St. Paul Park refinery competes directly with Koch Industries’ Flint Hills Resources Refinery in Pine Bend, Minnesota, as well as the other refiners in the region and, to a lesser extent, major U.S. and foreign refiners.

7


NTI's refinery is an integrated refining operation that includes storage and transportation assets. NTI's transportation assets include a 17% interest in the Minnesota Pipe Line Company ("MPL"), an eight-bay light product terminal adjacent to the refinery, a seven-bay heavy product loading rack located on the refinery property, rail facilities for shipping liquefied petroleum gas (“LPG”) and asphalt and receiving butane, isobutane and ethanol and a barge dock on the Mississippi River used primarily for shipping vacuum residue and slurry. As of December 31, 2014, NTI's storage assets had an operating capacity of approximately 3.8 million barrels; comprised of 0.8 million barrels of crude oil storage and 3.0 million barrels of feedstock and product storage.
Process Summary. The St. Paul Park refinery is a cracking facility that during the year ended December 31, 2014 processed 91,840 bpd of crude oil and 1,685 bpd of other feedstocks and blendstocks. The facility processes a mix of light sweet, synthetic and heavy sour crude oils, predominately from Canada and North Dakota, into products such as gasoline, diesel, jet fuel, asphalt, kerosene, propane, LPG, propylene and sulfur.
Power and Natural Gas Supply. A regional electric company supplies electricity on a firm basis to the St. Paul Park refinery via five separate feeders to the main refinery areas. Three other utility feeders supply power to the tank farms and barge facilities and the northern turnaround and construction infrastructure. There are several uninterruptible power supply units throughout the plant and one generator to maintain computers and controls in the event of a power outage.
The refinery receives its natural gas supply via pipeline. The supply agreements are on a firm and interruptible basis. NTI purchases natural gas at market rates or under fixed-price agreements.
Raw Material Supply. The following table summarizes the historical feedstocks used by the St. Paul Park refinery. The information presented includes the results of operations of the St. Paul Park refinery beginning November 12, 2013, the date we acquired control of NTI.
 
Period Ended December 31,
 
Percentage For Year Ended December 31,
Refinery Feedstocks (bpd)
2014
 
2013
 
2014
Refinery Throughput Crude Oil Feedstocks by Location:
 
 
 
 
 
Canadian
34,184

 
37,045

 
36.6
%
Domestic
57,656

 
37,192

 
61.6
%
Total Crude Oil by Location
91,840

 
74,237

 
98.20
%
Crude Oil Feedstocks by Type:
 

 
 

 


Light and intermediate
73,999

 
56,310

 
79.1
%
Heavy
17,841

 
17,927

 
19.1
%
Total Crude Oil by Type
91,840

 
74,237

 
98.2
%
Other Feedstocks and Blendstocks (1):
 

 
 

 


Natural gasoline
38

 

 
%
Butanes
798

 
597

 
0.9
%
Gasoil
351

 
114

 
0.4
%
Other
498

 
516

 
0.5
%
Total Other Feedstocks and Blendstocks
1,685

 
1,227

 
1.8
%
Total Crude Oil and Other Feedstocks and Blendstocks
93,525

 
75,464

 
100.0
%
(1)
Other Feedstocks and Blendstocks includes only feedstocks and blendstocks that are used at the refinery and does not include ethanol and biodiesel. Although NTI purchases ethanol and biodiesel to supplement the fuels produced at the St. Paul Park refinery, these are not included in the table as those items are blended at the terminal adjacent to the refinery or at terminals on the Magellan pipeline system.
Of the crude oils processed at the St. Paul Park refinery for the period ended December 31, 2014, approximately 37% was Canadian crude oil and the remainder was comprised of mostly light sweet crude oil from North Dakota.
In March 2012, NTI entered into an amended and restated crude oil supply and logistics agreement (the "Crude Intermediation Agreement") with J.P. Morgan Commodities Canada Corporation (“JPM CCC”), under which JPM CCC assisted NTI in the purchase of most of the crude oil requirements of NTI's refinery. Once NTI identified types of crude oil and pricing terms that met its requirements, NTI notified JPM CCC that then for a fee provided credit, transportation and other logistical services for delivery of the crude oil to storage tanks leased by JPM CCC from NTI for the duration of the crude oil supply and logistics agreement. Title to the crude oil passed from JPM CCC to NTI when the crude oil entered NTI's refinery

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from the storage tanks leased by JPM CCC. JPM CCC announced its intention to sell the physical portions of its commodities business (that included JPM CCC) to Mercuria Energy Group Ltd. during the fourth quarter of 2014. In advance of this sale, JPM CCC and NTI mutually agreed to terminate the Crude Intermediation Agreement. Going forward, NTI expects to use existing trade credit agreements with vendors, or letters of credit under a revolving credit facility, to fund the purchase of crude oil.
The Minnesota Pipeline system has a maximum capacity of approximately 455,000 bpd and is the primary supply route for crude oil to the St. Paul Park refinery. The Minnesota Pipeline extends from Clearbrook, Minnesota to the refinery and receives crude oil from Western Canada and North Dakota through connections with various Enbridge pipelines. NTI also purchases ethanol and biodiesel, as well as conventional petroleum based blendstocks, such as natural gasoline, to supplement the fuels produced at the refinery.
Refined Products Transportation. NTI owns various storage and transportation assets, including an eight-bay light products terminal located adjacent to the St. Paul Park refinery, a seven-bay heavy products terminal located on the St. Paul Park refinery's property, storage tanks, rail loading/unloading facilities and a Mississippi river dock. The primary fuel distribution for NTI is through its light products terminal. Approximately 59% of the gasoline and diesel volumes for the year ended December 31, 2014, were sold via NTI's light products terminal to NTI operated and franchised SuperAmerica branded convenience stores, Marathon Petroleum Company LP ("Marathon") branded convenience stores and other resellers. NTI has a contract with Marathon to supply substantially all of the gasoline and diesel requirements for the independently owned and operated Marathon branded convenience stores within the region that NTI supplies. NTI also has a crude oil transportation operation in North Dakota to allow them to purchase crude oil at the wellhead in the Bakken Shale while limiting the impact of rising trucking costs for crude oil in North Dakota.
Light refined products that include gasoline and distillates, are distributed from the St. Paul Park refinery through a pipeline and terminal system owned by Magellan that has facilities throughout the Upper Great Plains. Asphalt and heavy fuel oil are transported from the refinery via truck from NTI's seven-bay heavy products terminal and via rail and barge through its rail facilities and Mississippi River barge dock and are sold to a broad customer base.
NTI's location allows them to distribute refined products throughout the Upper Great Plains of the United States. The St. Paul Park refinery produces refined products including gasoline, diesel, jet fuel and asphalt that are marketed to resellers and consumers primarily in the Petroleum Administration for Defense District ("PADD") II region. NTI sold the majority of its refinery's 2014 gasoline and diesel sales volumes in Minnesota and Wisconsin with the remainder sold primarily in Iowa, Nebraska, Oklahoma and South and North Dakota. The NTI refinery supplied a majority of the gasoline and diesel sold in the NTI operated or franchised convenience stores for the year ended December 31, 2014, as well as supplied the independently owned and operated Marathon branded stores in its marketing area.
NTI owns 17% of the outstanding common interests of MPL and a 17% interest in MPL Investments, Inc. that owns 100% of the preferred interests of MPL. MPL owns the Minnesota Pipeline, a crude oil pipeline system in Minnesota that transports crude oil to the St. Paul area and supplies NTI's crude oil input.
SuperAmerica Retail
NTI has a retail-marketing network of 258 convenience stores, as of February 27, 2015, located throughout Minnesota, Wisconsin and South Dakota. NTI operates 165 stores of which 2 are owned and the remainder leased, and supports 93 franchised stores. NTI brands all of its company-operated and franchised convenience stores as SuperAmerica. NTI also owns and operates SuperMom’s Bakery that prepares and distributes baked goods and other prepared items for sale in NTI's retail outlets and for other third parties. Substantially all of the fuel gallons sold at NTI's company owned convenience stores for the period ended December 31, 2014, was supplied by its refinery.
NTI's major retail competitors include Holiday, Kwik Trip, Marathon, Freedom Valu Centers, BP, Costco and Sam's Club. The main competitive factors affecting NTI's retail-marketing network are the location of the stores, brand identification and product price and quality.
WNRL
WNRL owns and operates terminal, storage, transportation and wholesale assets and provides related services primarily to our refineries in the Southwest. WNRL is a fee-based, Delaware master limited partnership that Western formed during 2013 to own, operate, develop and acquire logistics and related assets and businesses to include terminals, storage tanks, pipelines and other logistics assets related to the terminalling, transportation, storage and distribution of crude oil and refined products. As of December 31, 2014, Western's ownership of WNRL consisted of a 100% interest in WNRL's general partner and a 66.2% interest in a limited partnership that Western controls through the general partner.

9


Concurrent with the closing of its initial public offering on October 16, 2013, WNRL entered into commercial and service agreements with Western under which it operates assets contributed by Western (the "Contributed Assets") for the purpose of generating fee-based revenues.
On October 15, 2014, Western sold all of the outstanding limited liability company interests of WRW to WNRL, in exchange for $320 million and 1,160,092 WNRL common partnership units in connection with the Contribution Agreement. WNRL entered into commercial and service agreements with Western under which it operates the assets acquired in the Wholesale Acquisition for the purpose of transporting and reselling refined products purchased from Western and transporting crude oil for Western.
Pipeline and Gathering Assets. WNRL's pipeline and gathering assets consist of approximately 300 miles of crude oil pipelines and gathering systems that serve as the primary source of crude oil for our Gallup refinery and provide access to shale crude oil production in the Delaware Basin and southern New Mexico for shipment to our El Paso refinery through the Kinder Morgan crude oil pipeline. These pipeline systems connect at various points to an aggregate of approximately 620,000 barrels of active crude oil storage located primarily in the Delaware Basin and in the Four Corners area.
Terminalling, Transportation, Asphalt and Storage Assets. WNRL's terminalling, transportation and storage infrastructure consist of on-site refined product distribution terminals at the El Paso and Gallup refineries and stand-alone refined products terminals located in Bloomfield and Albuquerque, New Mexico. The Bloomfield product distribution terminal is permitted to operate at 19,000 bpd with a total storage capacity of approximately 734,550 barrels and a truck loading rack with four loading spots. Western maintains a long-term third-party exchange agreement to supply product through a pipeline connection to the Bloomfield product distribution terminal. WNRL provides additional product deliveries to Bloomfield from its truck fleet. The Albuquerque product distribution terminal is permitted to operate at 27,500 bpd with a refined product storage capacity of approximately 170,000 barrels and a truck loading rack with two loading spots. This terminal receives product deliveries via truck or pipeline, including deliveries from our El Paso and Gallup refineries. These assets include approximately 6.9 million barrels of active shell storage capacity. These assets primarily receive, store and distribute crude oil, feedstock and refined products for Western’s Southwest refineries. WNRL also provides fee-based asphalt terminalling and processing services at an asphalt plant and terminal in El Paso and asphalt terminalling services at three stand-alone asphalt terminals in Albuquerque, Phoenix and Tucson that have a combined storage capacity of 473,000 barrels.
Wholesale Assets. WNRL's wholesale assets include several lubricant and bulk petroleum distribution plants and a fleet of crude oil and refined product trucks and lubricant delivery trucks. WNRL distributes wholesale petroleum products primarily in Arizona, California, Colorado, Nevada, New Mexico and Texas. WNRL purchases petroleum fuels and lubricants primarily from the refining segment and from third-party suppliers.
WNRL's principal wholesale customers are retail fuel distributors, our retail segment and the mining, construction, utility, manufacturing, transportation, aviation and agricultural industries. Of the wholesale segment's net sales revenues, 26.0% and 23.9%, were to our retail segment and to Kroger Company, respectively, for the year ended December 31, 2014. WNRL competes with other wholesale petroleum products distributors in the Southwest such as Pro Petroleum, Inc.; Southern Counties Fuels; Synergy Petroleum, LLC; SoCo Group, Inc.; C&R Distributing, Inc.; and Brewer Petroleum Services, Inc.
Retail Segment
Our retail group operates retail stores that sell various grades of gasoline, diesel fuel and convenience store merchandise to the general public. Retail also operates unmanned commercial fueling locations ("cardlocks") that sell various grades of gasoline and diesel fuel to contract customers' vehicle fleets. At February 27, 2015, our retail group operated 261 retail stores located in Arizona, Colorado, New Mexico and Texas and 50 cardlocks located in Arizona, California, Colorado, New Mexico and Texas. We supply the majority of our retail gasoline and diesel fuel inventories through WNRL and purchase general merchandise as well as beverage and food products from various suppliers.
The main competitive factors affecting our retail segment are the location of the stores, brand identification and product price and quality. Our retail stores compete with Alon USA Energy, ampm, Brewer Oil Company, Circle K, Maverik, Murphy Oil, Quik-Trip, Shay Oil, Valero Energy Corporation and 7-2-11 food stores. Large chains of retailers like Costco Wholesale Corp., Wal-Mart Stores, Inc., Kroger Company and other large grocery retailers compete in the motor fuel retail business. Our retail operations are substantially smaller than many of these competitors and they are potentially better able to withstand volatile conditions in the fuel market and lower profitability in merchandise sales due to their integrated operations.

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Our retail stores operate under various brands, including Giant, Western, Western Express, Howdy's, Mustang and Sundial. Gasoline brands sold through these stores include Western, Giant, Mustang, Phillips 66 Company, Conoco, 76, Shell Oil Company, Chevron, Mobil and Texaco.
The following table summarizes the ownership and location of Western's retail stores as of February 27, 2015:
Retail Store locations
Owned
 
Leased
 
Total
Arizona
27

 
77

 
104

Colorado
10

 
2

 
12

New Mexico
74

 
43

 
117

Texas

 
28

 
28

 
111

 
150

 
261

The following table summarizes the ownership and location of Western's cardlocks as of February 27, 2015:
Cardlock locations
Owned
 
Leased
 
Private Sites (1)
 
Total
Arizona
11

 
10

 
12

 
33

California
1

 

 

 
1

Colorado
1

 

 

 
1

New Mexico

 
2

 
3

 
5

Texas

 
10

 

 
10

 
13

 
22

 
15

 
50

(1)
The private site designation for cardlocks represents tanks and equipment that we own and operate on customer sites for the exclusive use of the customer.
Governmental Regulation
All of our operations and properties are subject to extensive federal, state and local environmental, health and safety regulations governing, among other things, the generation, storage, handling, use and transportation of petroleum and hazardous substances; the emission and discharge of materials into the environment; waste management; characteristics and composition of gasoline, diesel and other fuels; and the monitoring, reporting and control of greenhouse gas emissions. Our operations also require numerous permits and authorizations under various environmental, health and safety laws and regulations. Failure to comply with these permits or environmental, health or safety laws generally could result in fines, penalties, or other sanctions, or a revocation of our permits. We have made significant capital and other expenditures to comply with these environmental, health and safety laws. We anticipate significant capital and other expenditures with respect to continuing compliance with these environmental, health and safety laws. For additional details on our capital expenditures related to regulatory requirements and our refinery capacity expansion and upgrade, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital Spending.
Periodically, we receive communications from various federal, state and local governmental authorities asserting violations of environmental laws and/or regulations. These governmental entities may also propose or assess fines or require corrective action for these asserted violations. We intend to respond in a timely manner to all such communications and to take appropriate corrective actions. We do not anticipate that any such matters currently asserted will have a material adverse impact on our financial condition, results of operations or cash flows.
See Note 23, Contingencies, in the Notes to Consolidated Financial Statements included in this annual report for detailed information on certain environmental matters.
Regulation of Fuel Quality
The U.S. Environmental Protection Agency ("EPA") finalized Tier III regulations for gasoline sulfur content in 2014. The regulations have lowered gasoline sulfur content to 10 parts per million ("ppm") with an effective date of 2017 for our El Paso refinery and 2020 for our Gallup refinery. Meeting these regulations will require capital spending and adjustments to the operations of our refineries.
The EPA has issued Renewable Fuels Standards ("RFS") under the Energy Acts of 2005 and 2007, implementing mandates to blend increasing volumes of renewable fuels into the petroleum fuels produced at obligated refineries through the year 2022. Annually, the EPA establishes the volume of renewable fuels that our El Paso and Gallup refineries must blend into their refined petroleum fuels. Obligated refineries demonstrate compliance with the RFS through the accumulation of Renewable Identification Numbers ("RINs"), which are unique serial numbers acquired through blending renewable fuels or

11


direct purchase. Our compliance strategy includes blending at our refineries, transferring RINs from blending across our refinery and terminal system and purchasing third-party RINs.
Minnesota law currently requires the use of biofuels in gasoline and diesel sold in the state for combustion in internal combustion engines. Fuels produced at the St. Paul Park refinery are currently blended with the appropriate amounts of ethanol or biodiesel to ensure that they comply with applicable federal and state renewable fuel standards. Blending renewable fuels into the finished petroleum fuels to comply with these requirements will displace an increasing volume of a refinery’s product pool.
NTI is also subject to other fuel quality requirements under federal and state law, including federal standards governing the maximum sulfur content of gasoline and diesel fuel manufactured at the St. Paul Park refinery. If NTI fails to comply with any of these fuel quality requirements, it could be subject to fines, penalties and corrective action orders. Moreover, fuel quality standards could change in the future requiring them to incur significant costs to ensure that the fuels they produce continue to comply with all applicable requirements. NTI may at some point in the future be required to make significant capital expenditures and/or incur materially increased operating costs to comply with the new standards.
Environmental Remediation
Certain environmental laws hold current or previous owners or operators of real property liable for the costs of cleaning up spills, releases and discharges of petroleum or hazardous substances, even if those owners or operators did not know of and were not responsible for such spills, releases and discharges. These environmental laws also assess liability on any person who arranges for the disposal or treatment of hazardous substances, regardless of whether the affected site is owned or operated by such person. We may face currently unknown liabilities for clean-up costs pursuant to these laws.
In addition to clean-up costs, we may face liability for personal injury or property damage due to exposure to chemicals or other hazardous substances that we may have manufactured, used, handled, disposed of or that are located at or released from our refineries and fueling stations or otherwise related to our current or former operations. We may also face liability for personal injury, property damage, natural resource damage or for clean-up costs for any alleged migration of petroleum or hazardous substances from our facilities or transport operations.

Employees
As of December 31, 2014, our companies employed approximately 5,700 people including 2,950 NTI employees and approximately 550 WNRL employees in its wholesale segment. The collective bargaining agreements covering the El Paso and Gallup refinery employees expire in April 2015 and May 2020, respectively. While all of our collective bargaining agreements contain “no strike” provisions, those provisions are not effective in the event that an agreement expires. Accordingly, we may not be able to prevent a strike or work stoppage in the future and any such work stoppage could have a material effect on our business, financial condition and results of operations. The collective bargaining agreements covering the NTI employees associated with its refining and retail operations expire in December 2016 and August 2017, respectively. Through our control of WNRL's general partner and its affiliate entities, we have seconded approximately 300 employees to WNRL as well as other employees who may provide services to WNRL from time to time.
Available Information
We file reports with the Securities and Exchange Commission (the "SEC"), including annual reports on Form 10-K, quarterly reports on Form 10-Q and other reports from time to time. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer and the SEC’s Internet site at http://www.sec.gov contains the reports, proxy and information statements and other information filed electronically. We do not, however, incorporate any information on that website into this Form 10-K.
As required by Section 406 of the Sarbanes-Oxley Act of 2002, we have adopted a code of ethics that applies specifically to our Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer. We have also adopted a Code of Business Conduct and Ethics applicable to all our directors, officers and employees. The codes of ethics are posted on our website. Within the time period required by the SEC and the NYSE, we will post on our website any amendment to our code of ethics and any waiver applicable to any of our Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer. Our website address is: http://www.wnr.com. We make our website content available for informational purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference in this Form 10-K. We make available on this website under “Investor Relations,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports simultaneously to the electronic filings of those materials with, or furnishing of those materials to, the SEC. We also make available to shareholders hard copies of our complete audited financial statements free of charge upon request.

12


On July 5, 2014, our Chief Executive Officer certified to the NYSE that he was not aware of any violation of the NYSE’s corporate governance listing standards. In addition, attached as Exhibits 31.1 and 31.2 to this Form 10-K are the certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

Item 1A.
Risk Factors
An investment in our common shares involves risk. In addition to the other information in this report and our other filings with the SEC, you should carefully consider the following risk factors in evaluating us and our business.
The price volatility of crude oil, other feedstocks, refined products and fuel and utility services has had and may continue to have a material adverse effect on our earnings and cash flows.
Our earnings and cash flows from operations depend on the margin above fixed and variable expenses (including the cost of refinery feedstocks such as crude oil) at which we are able to sell refined products. Refining margins historically have been volatile and are likely to continue to be volatile, as a result of a variety of factors, including fluctuations in the prices of crude oil, other feedstocks, refined products and fuel and utility services.
In recent years, the prices of crude oil, other feedstocks and refined products have fluctuated substantially. The NYMEX WTI postings of crude oil for 2014 ranged between a $59.29 to $105.15 per barrel. In addition, the WTI/Brent discount has been volatile and we expect continued volatility in crude oil pricing and crack spreads. It is possible that this volatility in crude oil pricing and crack spreads may continue for prolonged periods of time due to numerous factors beyond our control. Prolonged periods of low crude oil prices could impact production growth of inland crude oil, which could reduce the amount of cost advantaged crude oil available and/or the discount of such crude oil and thereby impacting the profitability of our refineries. Prices of crude oil, other feedstocks and refined products depend on numerous factors beyond our control, including the supply of and demand for crude oil, other feedstocks, gasoline and other refined products. Such supply and demand are affected by, among other things:
changes in global and local economic and political conditions;
domestic and foreign demand for crude oil and refined products, especially in the U.S., China and India;
worldwide political conditions, particularly in significant oil producing regions such as the Middle East, West Africa Russia and Latin America;
the level of foreign and domestic production of crude oil and refined products and the level of crude oil, feedstocks and refined products imported into the U.S. that can be impacted by accidents, interruptions in transportation, inclement weather or other events affecting producers and suppliers;
U.S. government regulations, including legislation affecting the exportation of domestic crude oil;
utilization rates of U.S. refineries;
changes in fuel specifications required by environmental and other laws;
the ability of the members of the Organization of Petroleum Exporting Countries ("OPEC") to maintain oil price and production controls;
commodities speculation;
development and marketing of alternative and competing fuels;
pricing and other actions taken by competitors that impact the market;
product pipeline capacity, including the Magellan Southwest System pipeline, Kinder Morgan’s East Line, the Aranco pipeline and the Magellan pipeline system, all of which could increase supply in certain of our service areas and therefore reduce our margins;
accidents, interruptions in transportation, inclement weather or other events that can cause unscheduled shutdowns or otherwise adversely affect our plants, machinery or equipment or those of our suppliers or customers; 
federal and state government regulations and taxes; and
local factors, including market conditions, weather conditions and the level of operations of other refineries and pipelines in our service areas.
Volatility has had, and may continue to further have, a negative effect on our results of operations to the extent that the margin between refined product prices and feedstock prices narrows.
The nature of our business requires us to maintain substantial quantities of crude oil and refined product inventories. Crude oil and refined products are commodities. As a result, we have no control over the changing market value of these inventories. Because our inventory of crude oil and refined product is valued at the lower of cost or market value under the “last-in, first-out” ("LIFO") inventory valuation methodology, if the market value of our inventory were to decline to an amount less than our LIFO cost, we would record a write-down of inventory and a non-cash charge to cost of products sold. Due to the volatility in the price of crude oil and other blendstocks, we experienced fluctuations in our LIFO reserves during the past three years. We also experienced LIFO liquidations based on decreased levels in our inventories. These LIFO liquidations resulted in

13


an increase in cost of products sold of $1.1 million and $3.2 million for the years ended December 31, 2014 and 2013, respectively, and a decrease in cost of products sold of $4.0 million for the year ended December 31, 2012.
In addition, the volatility in costs of fuel, principally natural gas and other utility services, principally electricity, used by our refineries affects operating costs. Fuel and utility prices have been, and will continue to be, affected by factors outside our control, such as supply and demand for fuel and utility services in both local and regional markets. Natural gas prices have historically been volatile. Typically, electricity prices fluctuate with natural gas prices. Future increases in fuel and utility prices may have a material adverse effect on our business, financial condition, results of operations and cash flows.
If the price of crude oil increases significantly or our credit profile changes, or if we or our subsidiaries are unable to access our respective credit agreements for borrowings or for letters of credit, our liquidity and our ability to purchase enough crude oil to operate our refineries at full capacity could be materially and adversely affected.
We and certain of our subsidiaries rely on borrowings and letters of credit under each of our respective credit agreements to purchase crude oil for our refineries. Changes in our credit profile could affect the way crude oil suppliers view our ability to make payments and induce them to shorten the payment terms of their invoices with us or require additional support such as letters of credit. Due to the large dollar amounts and volume of our crude oil and other feedstock purchases, any imposition by our creditors of more burdensome payment terms on us, or our subsidiaries’ inability to access their credit agreements or other similar arrangements may have a material effect on our liquidity and our ability to make payments to our suppliers that could hinder our ability to purchase sufficient quantities of crude oil to operate our refineries at planned rates. In addition, if the price of crude oil increases significantly, we may not have sufficient capacity under the credit agreements or sufficient cash on hand, to purchase enough crude oil to operate our refineries at planned rates. A failure to operate our refineries at planned rates could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our hedging transactions may limit our gains and expose us to other risks.
We enter into hedging transactions from time to time to manage our exposure to commodity price risks or to fix sales margins on future gasoline and distillate production. These transactions limit our potential gains if commodity prices rise above the levels established by our hedging instruments. These transactions may also expose us to risks of financial losses, for example, if our production is less than we anticipated at the time we entered into a hedge agreement or if a counterparty to our hedge contracts fails to perform its obligations under the contracts. Some of our hedging agreements also require us to furnish cash collateral, letters of credit or other forms of performance assurance. Mark-to-market calculations that result in settlement obligations by us to the counterparties could impact our liquidity and capital resources.
Compliance with and changes in tax laws could adversely affect our performance.
We are subject to tax liabilities, including federal, state and transactional taxes such as excise, sales/use, payroll, franchise, withholding and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted or proposed that could result in increased expenditures for tax liabilities in the future. Certain of these liabilities are subject to periodic audits by the respective taxing authority that could increase our tax liabilities. Subsequent changes to our tax liabilities as a result of these audits may also subject us to interest and penalties.
Our indebtedness may limit our ability to obtain additional financing and we also may face difficulties complying with the terms of our indebtedness agreements.
Our level of debt may have important consequences to you. Among other things, it may:
limit our ability to use our cash flows, or obtain additional financing, for future working capital, capital expenditures, acquisitions or other general corporate purposes;
restrict our ability to pay dividends;
require a substantial portion of our cash flows from operations to make debt service payments;
limit our flexibility to plan for, or react to, changes in our business and industry conditions;
place us at a competitive disadvantage compared to our less leveraged competitors; and
increase our vulnerability to the impact of adverse economic and industry conditions.
We cannot assure you that we will continue to generate sufficient cash flows or that we and our subsidiaries will be able to borrow funds under certain credit agreements in amounts sufficient to enable us and our subsidiaries to service our debt or meet our working capital and capital expenditure requirements. Our ability to generate sufficient cash flows from our operating activities will continue to be primarily dependent on producing or purchasing and selling sufficient quantities of refined products at margins sufficient to cover fixed and variable expenses. If our margins were to deteriorate significantly, or if our earnings and cash flows were to suffer for any other reason, we and our subsidiaries may be unable to comply with the financial covenants set forth in our and their respective credit facilities. If we or our subsidiaries fail to satisfy these covenants, we and our subsidiaries could be prohibited from borrowing for our working capital needs and issuing letters of credit that would hinder our ability to purchase sufficient quantities of crude oil to operate our refineries at planned rates. To the extent that we

14


and our subsidiaries are unable to generate sufficient cash flows from operations, or if we and our subsidiaries are unable to borrow or issue letters of credit under certain credit agreements, we and our subsidiaries may be required to sell assets, reduce capital expenditures, refinance all or a portion of our existing debt, or obtain additional financing through equity or debt financings. If additional funds are obtained by issuing equity securities, our existing stockholders could be diluted. We cannot assure you that we would be able to refinance our debt, sell assets or obtain additional financing on terms acceptable to us, if at all. In addition, our ability to incur additional debt will be restricted under the covenants contained in credit agreements and our indentures. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Liquidity and Capital Resources; Working Capital and Indebtedness.
Covenants and events of default in our and our subsidiaries’ debt instruments could limit our ability to undertake certain types of transactions and adversely affect our liquidity.
Our and our subsidiaries’ credit agreements and indentures contain covenants and events of default that may limit our financial flexibility and ability to undertake certain types of transactions. For instance, we and our subsidiaries are subject to covenants that restrict our activities, including restrictions on:
creating liens;
engaging in mergers, consolidations and sales of assets;
incurring additional indebtedness;
providing guarantees;
engaging in different businesses;
making investments;
making certain dividend, debt and other restricted payments;
engaging in certain transactions with affiliates; and
entering into certain contractual obligations.
Debt instruments of our and our subsidiaries are subject to financial covenants. Our ability and that of our subsidiaries to comply with these covenants will depend on factors outside our control, including refined product margins. We cannot assure you that we and our subsidiaries will satisfy these covenants. If we fail to satisfy the covenants set forth in these facilities or an event of default occurs under the applicable facility, the maturity of the debt instruments could be accelerated or we could be prohibited from borrowing for our working capital needs and issuing letters of credit. A similar result could occur if our subsidiaries fail to satisfy the covenants applicable to them in their respective debt instruments. If our and our subsidiaries' obligations under the debt instruments are accelerated and we do not have sufficient cash on hand to pay all amounts due, we could be required to sell assets, to refinance all or a portion of our indebtedness or to obtain additional financing through equity or debt financings. Refinancing may not be possible and additional financing may not be available on commercially acceptable terms, or at all. If we or our subsidiaries cannot borrow or issue letters of credit under our respective credit agreements, we would need to seek additional financing, if available, or curtail our operations.
We have capital needs for which our internally generated cash flows and other sources of liquidity may not be adequate.
The refining business is characterized by high fixed costs resulting from the significant capital outlays associated with refineries, terminals, pipelines and related facilities. We are dependent on the production and sale of quantities of refined products at refined product margins sufficient to cover operating costs, including any increases in costs resulting from future inflationary pressures or market conditions and increases in costs of fuel and power necessary in operating our facilities. Our short-term working capital needs are primarily crude oil purchase requirements that fluctuate with the pricing and sourcing of crude oil. We also have significant long-term needs for cash, including those to support ongoing capital expenditures and other regulatory compliance. Furthermore, future regulatory requirements or competitive pressures could result in additional capital expenditures that may not produce a return on investment. Such capital expenditures may require significant financial resources that may be contingent on our access to capital markets and commercial bank loans. Additionally, other matters, such as regulatory requirements or legal actions, may restrict our access to funds for capital expenditures.
Our refineries consist of many processing units, a number of which have been in operation for many years. Equipment, even if properly maintained, may require significant capital expenditures and expenses to keep it operating at optimum efficiency. One or more of the units may require unscheduled downtime for unanticipated maintenance or repairs that are more frequent than our scheduled turnaround for such units. Scheduled and unscheduled maintenance could reduce our revenues during the period of time that the units are not operating. We have taken significant measures to expand and upgrade units in our refineries by installing new equipment and redesigning older equipment to improve refinery capacity. The installation and redesign of key equipment at our refineries involves significant uncertainties, including the following: our upgraded equipment may not perform at expected throughput levels; the yield and product quality of new equipment may differ from design and/or specifications and redesign or modification of the equipment may be required to correct equipment that does not perform as expected that could require facility shutdowns until the equipment has been redesigned or modified. Any of these risks

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associated with new equipment, redesigned older equipment or repaired equipment could lead to lower revenues or higher costs or otherwise have a material adverse effect on our business, financial condition, results of operations and cash flows.
The dangers inherent in our operations could cause disruptions and could expose us to potentially significant losses, costs or liabilities. Any significant interruptions in the operations of any of our refineries could materially and adversely affect our business, financial condition, results of operations and cash flows.
Our operations are subject to significant hazards and risks inherent in refining operations and in transporting and storing crude oil, intermediate products and refined products. Failure to identify and manage these risks could result in explosions, fires, refinery or pipeline releases of crude oil or refined products or other incidents resulting in personal injury, loss of life, environmental damage, property damage, legal liability, loss of revenue and substantial fines by government authorities. These hazards and risks include, but are not limited to, the following:
natural disasters;
weather-related disruptions;
fires;
explosions;
pipeline ruptures and spills;
third-party interference;
disruption of natural gas deliveries;
disruptions of electricity deliveries;
disruption of sulfur gas processing by Du Pont at our El Paso refinery; and
mechanical failure of equipment at our refineries or third-party facilities.
Any of the foregoing could result in production and distribution difficulties and disruptions, environmental pollution, personal injury or wrongful death claims and other damage to our properties and the properties of others. There is also risk of mechanical failure and equipment shutdowns both in general and following unforeseen events. For example, we may experience unplanned downtime at our El Paso or Gallup refineries due to weather, interruptions to our electrical supply or other causes. In any of these situations, undamaged refinery processing units may be dependent on or interact with damaged process units and, accordingly, may also be subject to being shut down.
Our refineries consist of many processing units, several of which have been in operation for a long time. One or more of the units may require unscheduled downtime for unanticipated maintenance or repairs, or our planned turnarounds may last longer than anticipated. Scheduled and unscheduled maintenance could reduce our revenues and increase our costs during the period of time that our units are not operating.
Our refining activities are conducted at our El Paso refinery in Texas, our Gallup refinery in New Mexico and the St. Paul Park refinery in Minnesota. The refineries constitute a significant portion of our operating assets, and our refineries supply a significant portion of our fuel to our wholesale and retail operations. Because of the significance to us of our refining operations, the occurrence of any of the events described above could significantly disrupt our production and distribution of refined products and any sustained disruption could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Severe weather could interrupt the supply of some of our feedstocks.
Crude oil supplies for the El Paso refinery come from the Permian Basin in Texas and New Mexico and therefore are generally not subject to interruption from severe weather, such as hurricanes. However, we obtain certain of our feedstocks for the El Paso refinery and some refined products we purchase for resale by pipeline from Gulf Coast refineries that are subject to such severe weather risks. Crude oil supplies for the St. Paul Park refinery are from the Bakken Shale of North Dakota and from Western Canada. As a result, the St. Paul Park refinery may be disproportionately exposed to the impact of delays or interruptions of supply from that region caused by natural disasters or adverse weather conditions. An interruption to our supply of feedstocks for the El Paso or the St. Paul Park refineries could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our operations involve environmental risks that could give rise to material liabilities.
Our operations, and those of prior owners or operators of our properties, have previously resulted in spills, discharges, or other releases of petroleum or hazardous substances into the environment, and such spills, discharges or releases could also happen in the future. Past or future spills related to any of our operations, including our refineries, product terminals, convenience stores or transportation of refined products or hazardous substances from those facilities, may give rise to liability (including strict liability, or liability without fault, and clean-up responsibility) to governmental entities or private parties under federal, state, or local environmental laws, as well as under common law. For example, we could be held strictly liable under the Comprehensive Environmental Responsibility, Compensation and Liability Act ("CERCLA") for contamination of properties that we currently own or operate and facilities to which we transported or arranged for the transportation of wastes or

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by-products for use, treatment, storage or disposal, without regard to fault or whether our actions were in compliance with law at the time. Our liability could also increase if other responsible parties, including prior owners or operators of our facilities, fail to complete their clean-up obligations. Based on current information, we do not believe these liabilities are likely to have a material adverse effect on our business, financial condition, results of operations or cash flows. In the event that new spills, discharges, or other releases of petroleum or hazardous substances occur or are discovered or there are other changes in facts or in the level of contributions being made by other responsible parties, there could be a material adverse effect on our business, financial condition, results of operations and cash flows.
In addition, we may face liability for alleged personal injury or property damage due to exposure to chemicals or other hazardous substances located at or released from our facilities or otherwise related to our current or former operations. We may also face liability for personal injury, property damage, natural resource damage, or for clean-up costs for the alleged migration of contamination or other hazardous substances from our facilities to adjacent and other nearby properties.
We may incur significant costs to comply with environmental, health and safety laws and regulations.
Our operations and properties are subject to extensive federal, state and local environmental, health and safety regulations governing, among other things, the generation, storage, handling, use and transportation of petroleum and hazardous substances, the emission and discharge of materials into the environment, waste management, characteristics and composition of gasoline, diesel and other fuels and the monitoring, reporting and control of greenhouse gas emissions. If we fail to comply with these regulations, we may be subject to administrative, civil and criminal proceedings by governmental authorities, as well as civil proceedings by environmental groups and other entities and individuals. A failure to comply, and any related proceedings, including lawsuits, could result in significant costs and liabilities, penalties, judgments against us or governmental or court orders that could alter, limit or stop our operations.
In addition, new environmental laws and regulations, including new regulations relating to alternative energy sources and increased vehicle fuel economy, new state regulations relating to fuel quality, and the risk of global climate change regulation, as well as new interpretations of existing laws and regulations, increased governmental enforcement, or other developments could require us to make additional unforeseen expenditures. Many of these laws and regulations are becoming increasingly stringent, and the cost of compliance with these requirements can be expected to increase over time. We are not able to predict the impact of new or changed laws or regulations or changes in the ways that such laws or regulations are administered, interpreted, or enforced. The requirements to be met, as well as the technology and length of time available to meet those requirements, continue to develop and change. To the extent that the costs associated with meeting any or all of these requirements are substantial and not adequately provided for, there could be a material adverse effect on our business, financial condition, results of operations and cash flows.
The EPA has issued rules pursuant to the Clean Air Act that require refiners to reduce the sulfur content of gasoline and diesel fuel and reduce the benzene content of gasoline by various specified dates. We incurred, and may incur in the future, substantial costs to comply with the EPA’s low sulfur and low benzene rules. Our strategy for complying with low sulfur gasoline and low benzene gasoline regulations at our refineries relies partially on purchasing credits. If credits are not available or are too costly, we may not be able to meet the EPA’s deadlines using a credit strategy. Failure to meet the EPA’s clean fuels mandates could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Pursuant to the Energy Acts of 2005 and 2007, the EPA has issued RFS implementing mandates to blend renewable fuels into the petroleum fuels produced at our refineries. The regulations, in part, require refiners to add annually increasing amounts of renewable fuels to their petroleum products or purchase credits, known as RINs. Annually, the EPA establishes a volume of renewable fuels that obligated refineries must blend into their refined petroleum fuels. In the RFS, the obligated volume increases over time until 2022. Blending renewable fuels into refined petroleum fuels may displace an increasing volume of a refinery’s product pool. Our El Paso and Gallup refineries and the St. Paul Park refinery are subject to the RFS. We currently purchase RINS for some fuel categories on the open market, as well as waiver credits for cellulosic biofuels from the EPA, in order to comply with the RFS. Recently, due in part to the nation’s gasoline supply approaching the “blend wall” (the 10% ethanol limit prescribed by most automobile warranties), the price of RINs has been extremely volatile with the price dramatically increasing in recognition of the decrease in RINs availability. While we cannot predict the future prices of RINs, the costs to obtain the necessary number of RINs could be material. If we are unable to pass the costs of compliance with the RFS onto our customers, if sufficient RINs are unavailable for purchase or we have to pay a significantly higher price for RINs, or if we are otherwise unable to meet the RFS mandates, our business, financial condition, results of operations and cash flows could be materially adversely affected.
Certain states have renewable fuel mandates that further displace volume of a refinery's product pool. Minnesota law currently requires that all diesel sold in the state for combustion in internal combustion engines, with limited exceptions, must contain at least 5% biodiesel. Under the statute, the minimum biodiesel percentage will increase to 10% between April 1 and September 30 of every year beginning as of July 1, 2014. Pending certification by state agencies that certain statutory preconditions are satisfied, the minimum will increase to 20% between April 1 and September 30 of every year beginning as of

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May 1, 2018. Minnesota law also currently requires, with limited exceptions, that all gasoline sold or offered for sale in the state must contain the maximum amount of ethanol allowed under federal law for use in all gasoline powered motor vehicles. Federal law currently allows a maximum of 15% ethanol for cars and light trucks manufactured since 2001, and 10% ethanol for all other vehicles.
The EPA required that fuel and fuel additive manufacturers take certain steps before introducing gasoline containing 15% ethanol (“E15”) into the market, including developing and obtaining EPA approval of a plan to minimize the potential for E15 to be used in vehicles and engines not covered by the partial waiver. The EPA has taken several recent actions to authorize the introduction of E15 into the market, including approving, on June 15, 2012, the first plans to minimize the potential for E15 to be used in vehicles and engines not covered by the partial waiver. Existing laws and regulations could change, and the minimum volumes of renewable fuels that must be blended with refined petroleum fuels may increase. Increasing the volume of renewable fuels that must be blended into its products displaces an increasing volume of its refinery’s product pool, potentially resulting in lower earnings.
Various states have proposed and/or enacted low carbon fuel standards (“LCFS”) intended to reduce carbon intensity in transportation fuels.  In addition, in 2010 the EPA issued social cost of carbon (“SCC”) estimates used by the EPA and other federal agencies in regulatory cost-benefit analyses to take into account alleged broad economic consequences associated with emissions of GHGs. These estimates were increased in 2013.  While the impacts of LCFS and higher SCC in future regulations is not known at this time, either of these may result in increased costs to our operations.
We could incur significant costs to comply with greenhouse gas emissions regulation or legislation.

The EPA has adopted and implemented regulations to restrict emissions of greenhouse gases under certain provisions of the Clean Air Act. One of the rules adopted by the EPA requires, in certain circumstances, permitting of certain emissions of greenhouse gases from large stationary sources, such as refineries, effective January 2, 2011. A number of legal challenges have been presented regarding these proposed greenhouse gas regulations but no legal limitation on the EPA implementing these rules has occurred to date. The EPA has also adopted rules requiring refiners to report greenhouse gas emissions on an annual basis beginning in 2011 for emissions occurring after January 1, 2010. Further, the United States Congress has considered legislation related to the reduction of greenhouse gases through “cap and trade” programs. In addition, Minnesota is a participant in the Midwest Greenhouse Gas Reduction Accord, a non-binding resolution that could lead to the creation of a regional GHG cap-and-trade program if the Minnesota legislature and the legislatures of other participating states enact implementing legislation. To the extent these EPA and other rules and regulations are enacted, our operating costs, including capital expenditures, may increase and additional operating restrictions could be imposed on our business, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Finally, some scientists have concluded that increasing concentrations of greenhouse gases in the earth’s atmosphere may produce climate changes that may have significant physical effects, such as increased frequency and severity of storms, droughts, floods and other climatic events, which if any such event were to occur, it may have a material adverse effect on our business.
Our business, financial condition, results of operations and cash flows may be materially adversely affected by an economic downturn.
The domestic economy, economic slowdowns and the scarcity of credit can lead to lack of consumer confidence, increased market volatility and widespread reduction of business activity generally in the United States and abroad. An economic downturn may adversely affect the liquidity, businesses and/or financial conditions of our customers that has resulted, and may result, not only in decreased demand for our products, but also increased delinquencies in our accounts receivable. Disruptions in the financial markets could also lead to a reduction in available trade credit due to counterparties’ liquidity concerns. If we or our subsidiaries are unable to obtain borrowings or letters of credit under our debt instruments, our business, financial condition, results of operations and cash flows could be materially adversely affected.
We could experience business interruptions caused by pipeline shutdown.
Our El Paso refinery is our largest refinery and is dependent on a pipeline owned by Kinder Morgan for the delivery of all of our crude oil. Because our crude oil refining capacity at the El Paso refinery is approaching the delivery capacity of the pipeline, our ability to offset lost production due to disruptions in supply with increased future production is limited due to this crude oil supply constraint. In addition, we will be unable to take advantage of further expansion of the El Paso refinery’s production without securing additional crude oil supplies or pipeline expansion. We also deliver a substantial percentage of the refined products produced at our El Paso refinery through three principal product pipelines.
We also have a pipeline system that delivers crude oil and natural gas liquids to our Gallup refinery. The Gallup refinery is dependent on the crude oil pipeline system for the delivery of the crude oil necessary to run the refinery. If the operation of the pipeline system is disrupted, we may not receive the crude oil necessary to run the refinery. Certain rights-of-way necessary for our crude oil pipeline system to deliver crude oil to our Gallup refinery must be renewed periodically.

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NTI’s St. Paul Park refinery receives all of its crude oil and delivers a portion of its refined products through pipelines. NTI distributes a portion of its transportation fuels through pipelines owned and operated by Magellan, including the Aranco Pipeline that Magellan leases from NTI. In addition, NTI is dependent on the Minnesota Pipeline system that is the supply route for crude oil and has transported all of the crude oil used at the refinery. Because NTI only has a minority equity interest in the pipeline, it does not have significant influence over or control of the performance of the pipeline.
Certain of the pipelines we utilize are subject to common carrier regulatory obligations applicable to interstate oil pipelines that require that capacity must be prorated among shippers in an equitable manner in accordance with the tariff then in effect in the event there are nominations in excess of capacity. Nominations by new shippers or increased nominations by existing shippers may reduce the capacity available to us. Any extended, non-excused downtime at our refineries could, under certain circumstances, cause us to lose line space on the refined products pipelines used by such refinery, if we cannot otherwise utilize our pipeline allocations.
As a result, we could experience an interruption of supply or delivery, or an increased cost of receiving crude oil and delivering refined products to market, if the ability of these pipelines to transport crude oil, blended stocks or refined products is disrupted because of accidents, weather interruption, governmental regulation, terrorism, other third-party action, or any other events beyond our control. A prolonged inability to receive crude oil or transport refined products on pipelines that we currently utilize could have a material adverse effect on our business, financial condition, results of operations and cash flows.
A material decrease in the supply of crude oil available to our refineries could significantly reduce our production levels.
We continually contract with third-party crude oil suppliers to maintain a sufficient supply of crude oil for production at our refineries. A material decrease in crude oil production from the fields, that supply our refineries as a result of economic, regulatory, or natural influences, availability of equipment, facilities, personnel or services, plant closures for scheduled maintenance, or transportation problems, or an increase in crude oil transport capacities out of the regions that supply our refineries, could result in a decline in the volume of crude oil available to our refineries. In addition, the future growth of our operations may depend in part on whether we can contract for additional supplies of crude oil at a greater rate than the rate of decline in our current supplies. If we are unable to secure sufficient crude oil supplies to our refineries, we may not be able to take full advantage of current and future expansion of our refineries' production capacities. A decline in available crude oil to our refineries or an inability to secure additional crude oil supplies to meet the needs of current or future refinery expansions could result in an overall decline in volumes of refined products produced by our refineries and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We could incur substantial costs or disruptions in our business if we cannot obtain or maintain necessary permits and authorizations.
Our operations require numerous permits and authorizations under various laws and regulations, including environmental and health and safety laws. These authorizations and permits are subject to revocation, renewal or modification and can require operational changes that may involve significant costs, to limit impacts or potential impacts on the environment, health and safety and/or our and our subsidiaries’ permits and licenses relating to the sale of alcohol and tobacco products. A violation of these authorization or permit conditions or other legal or regulatory requirements could result in substantial fines, criminal sanctions, permit revocations, injunctions and/or refinery shutdowns. In addition, major modifications of our operations could require modifications to our existing permits or expensive upgrades to our existing pollution control equipment that could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Competition in the refining, marketing and retail industries is intense and an increase in competition in the areas in which we sell our refined products could adversely affect our sales and profitability.
We compete with a broad range of refining and marketing companies, including certain multinational oil companies. Because of their geographic diversity, larger and more complex refineries, integrated operations and greater resources, some of our competitors may be better able to withstand volatile market conditions, to compete on the basis of price, to obtain crude oil in times of shortage and to bear the economic risks inherent in all phases of the refining industry.
We are not engaged in the petroleum exploration and production business and therefore do not produce any of our crude oil feedstocks. Certain of our competitors, however, obtain a portion of their feedstocks from their own production. Competitors that have their own production are at times able to offset losses from refining operations with profits from production, and may be better positioned to withstand periods of depressed refining margins or feedstock shortages. In addition, we compete with other industries that provide alternative means to satisfy the energy and fuel requirements of our industrial, commercial and individual consumers. If we are unable to compete effectively with these competitors, both within and outside of our industry, there could be a material adverse effect on our business, financial condition, results of operations and cash flows.
The areas where we sell refined products are also supplied by various refined product pipelines. Any expansions or additional product supplied by these third-party pipelines could put downward pressure on refined product prices in these areas.

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Portions of our operations in the areas we operate may be impacted by competitors’ plans, as well as plans of our own, for expansion projects and refinery improvements that could increase the production of refined products. In addition, we anticipate that lower quality crude oils that are typically less expensive to acquire, can and will be processed by our competitors as a result of refinery improvements. These developments could result in increased competition in the areas in which we operate.
Newer or upgraded refineries will often be more efficient than some of our refineries that may put us at a competitive disadvantage. While we have taken measures to maintain and upgrade units in our refineries by installing new equipment and repairing equipment to improve our operations, these actions involve significant uncertainties, since upgraded equipment may not perform at expected throughput levels, the yield and product quality of new equipment may differ from design specifications and modifications may be needed to correct equipment that does not perform as expected. Any of these risks associated with new equipment, redesigned older equipment or repaired equipment could lead to lower revenues or higher costs or otherwise have an adverse effect on our business, financial condition, results of operations and cash flows. Over time, our refineries may become obsolete or be unable to compete because of the construction of new, more efficient facilities by our competitors.
Our retail operations compete with numerous convenience stores, gasoline service stations, supermarket chains, drug stores, fast food operations and other retail outlets. Increasingly, national high-volume grocery and dry-goods retailers are entering the gasoline retailing business. Because of their diversity, integration of operations and greater resources, these companies may be better able to withstand volatile market conditions or levels of low or no profitability. Additionally, our convenience stores could lose market share, relating to both gasoline and merchandise, to these and other retailers that could adversely affect our business, results of operations and cash flows. Our convenience stores compete in large part based on their ability to offer convenience to customers. Consequently, changes in traffic patterns, the type and number and location of competing stores and promotional pricing or discounts by our competitors could result in the loss of customers and reduced sales and profitability at affected stores.
If we and our subsidiaries are unable to make and integrate acquisitions or complete or manage divestitures on economically acceptable terms, our future growth would be limited, and any acquisitions we and our subsidiaries may make may cause our actual growth or results of operations to differ adversely compared with our expectations.
A portion of our strategy to grow our business is dependent on our ability to make selective acquisitions. We actively seek to acquire assets such as refineries, pipelines, terminals and retail fuel and convenience stores that complement our existing assets and/or broaden our geographic presence. For example, in November 2013, we completed the NTI acquisition that now consists of the 97,800 bpd St. Paul Park refinery, 165 convenience stores and 89 franchised convenience stores. In addition, during 2013 we formed WNRL to develop and acquire terminals, storage tanks, pipelines and other logistics assets. WNRL’s acquisition strategy is based, in large part, on its expectation of ongoing divestitures of gathering, transportation and storage assets by industry participants, including Western. Any acquisition involves potential risks, including, among other things:
we may not be able to identify attractive acquisition candidates or negotiate acceptable purchase contracts or we are outbid by competitors;
during the acquisition process, we may fail to or be unable to discover some of the liabilities of companies or businesses that we acquire;
we may not be able to obtain financing for these acquisitions on economically acceptable terms;
we may have mistaken assumptions about the overall costs of equity or debt;
as a public company, we are subject to reporting obligations, internal controls and other accounting requirements with respect to any business we acquire, which may prevent or negatively affect the valuation of some acquisitions we might otherwise deem favorable or increase our acquisition costs;
we may have mistaken assumptions about revenues and costs, including synergies;
we may fail to successfully integrate or manage acquired businesses or assets;
any acquisition may cause the diversion of management’s attention from other business concerns;
any acquisition may involve unforeseen difficulties operating in new product areas or new geographic areas; and
we may have customer or key employee losses at the acquired businesses.
We and our subsidiaries may also not be able to complete any divestitures on acceptable terms to us or at all. Further, as divestitures may reduce our and our subsidiaries’ direct control over certain aspects of our business, any failure to maintain good relations with divested businesses may adversely impact our results of operations or performance.
There can be no assurance that any acquisition, including our NTI acquisition in 2013 or any future or pending acquisition, will be successfully integrated into our operations. Furthermore, our capitalization and results of operations may change significantly as a result of any such acquisitions. The occurrence of any of these factors could adversely affect our growth strategy and cause our actual growth or results of operations to differ adversely compared with our expectations.

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Our insurance policies do not cover all losses, costs or liabilities that we may experience.
Our insurance coverage does not cover all potential losses, costs or liabilities. We could suffer losses for uninsurable or uninsured risks or in amounts in excess of our existing insurance coverage. Our ability to obtain and maintain adequate insurance may be adversely affected by conditions in the insurance market over which we have no control. In addition, if we experience any more insurable events, our annual premiums could increase further or insurance may not be available at all. The occurrence of an event that is not fully covered by insurance or the loss of insurance coverage could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We could be subject to damages based on claims brought against us by our customers or lose customers as a result of a failure of our products to meet certain quality specifications.
The products we sell are required to meet certain quality specifications. If certain of our quality control measures were to fail, we could supply products to our customers that do not meet these specifications. This type of incident could result in various liability claims regarding damages caused by our products. Any liability claims could impact our ability to retain existing customers or acquire new customers, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
A substantial portion of our refining workforce is unionized and we may face labor disruptions that would interfere with our operations.
As of February 27, 2015, we employed approximately 5,700 people, with collective bargaining agreements covering about 430 of those employees. As of December 31, 2014, NTI employed 2,950 people, including 486 employees associated with its refining operations and 2,326 employees associated with its retail operations. NTI is party to collective bargaining agreements covering approximately 190 of the 486 employees associated with its refining operations and 22 of 2,399 associated with its retail operations. WNRL employs approximately 550 employees in its wholesale segment. During 2011, we successfully renegotiated a collective bargaining agreement covering employees at our Gallup refinery that expires in 2020. We also successfully negotiated a new collective bargaining agreement covering employees at our El Paso refinery, renewing the collective bargaining agreement to expire in April of 2015. We also have collective bargaining agreement that expires in December 2016 associated with the operations of the St. Paul Park refining operations and another collective bargaining agreement associated with NTI’s retail operations that expires in August 2017. While our El Paso and Gallup collective bargaining agreements and the NTI collective bargaining agreements contain “no strike” provisions, those provisions are not effective in the event that an agreement expires. Accordingly, we may not be able to prevent a strike or work stoppage in the future, and any such work stoppage could cause disruptions in our business and have a material adverse effect on our business, financial condition, results of operations and cash flows.
Long-lived and intangible assets comprise a significant portion of our total assets.
Long-lived assets and both amortizable intangible assets and intangible assets with indefinite lives must be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. We evaluate the remaining useful lives of our intangible assets with indefinite lives at least annually. If events or circumstances no longer support an indefinite life, the intangible asset is tested for impairment and prospectively amortized over its estimated remaining useful life. Long-lived and amortizable intangible assets are not recoverable if their carrying amount exceeds the sum of the undiscounted cash flows expected to result from their use and eventual disposition. If a long-lived or amortizable intangible asset is not recoverable, an impairment loss is recognized in an amount by which its carrying amount exceeds its fair value, with fair value determined generally based on discounted estimated net cash flows.
In order to test long-lived and both amortizable intangible assets and intangible assets with indefinite lives for recoverability, management must make estimates of projected cash flows related to the asset being evaluated that include, but are not limited to, assumptions about the use or disposition of the asset, its estimated remaining life and future expenditures necessary to maintain its existing service potential. In order to determine fair value, management must make certain estimates and assumptions including, among other things, an assessment of market conditions, projected volumes, margins, cash flows, investment rates, interest/equity rates and growth rates that could significantly impact the fair value of the asset being tested for impairment.
Our operating results are seasonal and generally lower in the first and fourth quarters of the year.
Demand for gasoline is generally higher during the summer months than during the winter months. As a result, our operating results for the first and fourth calendar quarters are generally lower than those for the second and third calendar quarters of each year. In addition, unseasonably cool weather in summer months and/or unseasonably warm weather in winter months in the regions where we sell our refined products can impact the demand for gasoline and diesel.
Seasonal fluctuations in traffic also affect sales of motor fuels and merchandise in our retail fuel and convenience stores. As a result, the operating results of our retail business are generally lower for the first quarter of the year. Weather conditions in

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our operating area also have a significant effect on our retail operating results. Customers are more likely to purchase higher profit margin items at our retail fuel and convenience stores, such as fast foods, fountain drinks and other beverages and more gasoline during the spring and summer months, thereby typically generating higher revenues and gross margins for us in these periods. Unfavorable weather conditions during these months and a resulting lack of the expected seasonal upswings in traffic and sales could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our ability to pay dividends in the future is limited by contractual restrictions and cash generated by operations.
We are a holding company and all of our operations are conducted through our subsidiaries. Consequently, we will rely on dividends or advances from our subsidiaries to fund any dividends. The ability of our operating subsidiaries to pay dividends and our ability to receive distributions from those entities are subject to applicable local law.
WNRL and NTI are dependent upon the earnings and cash flow generated by their respective operations in order to meet their debt service obligations and to allow each of them to make cash distributions to us. The operating and financial restrictions and covenants in their respective debt instruments and any future financing agreements could restrict each of their, and our, ability to finance future operations or capital needs or to expand or pursue business activities, which may in turn limit their ability to make cash distributions to us and our ability to make cash distributions to stockholders. For example, WNRL’s revolving credit facility and the indenture governing its senior notes contain restrictions on its ability to, among other things, make certain cash distributions, incur certain indebtedness, create certain liens, make certain investments, and merge or sell all or substantially all of its assets. NTI’s asset-based revolving credit facility and the indenture governing its 7.125% senior secured notes due 2020 also contain restrictive covenants.
To the extent the ability of our subsidiaries to distribute dividends or other payments to us could be limited in any way, our ability to grow, pursue business opportunities or make acquisitions that could be beneficial to our business, or otherwise fund and conduct our business could be materially limited.
In addition, our ability to pay dividends to our stockholders is subject to certain restrictions in our debt instruments and such restrictions could restrict our ability to pay dividends in the future. In addition, our payment of dividends will depend upon our ability to generate sufficient cash flows. Our board of directors will review our dividend policy periodically in light of the factors referred to above, and we cannot assure you of the amount of dividends, if any, that may be paid in the future.
Our controlling stockholders may have conflicts of interest with other stockholders in the future.
Mr. Paul Foster, our Executive Chairman, and Messrs. Jeff Stevens, our Chief Executive Officer and President and a current director, and Scott Weaver, our Vice President and Assistant Secretary and a current director, own approximately 25.1% of our common stock as of February 27, 2015. As a result, Mr. Foster and the other members of this group may strongly influence or effectively control the election of our directors, our corporate and management policies, and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales, and other significant corporate transactions. The interests of Mr. Foster and the other members of this group may not coincide with the interests of other holders of our common stock.
Loss of any of our key personnel could negatively impact our ability to manage our business and continue our growth.
Our future performance depends to a significant degree upon the continued contributions of our senior management team, including our executive officers and key technical employees. We do not currently maintain key man life insurance with respect to any member of our senior management team. The loss or unavailability to us of any member of our senior management team or a key technical employee could significantly harm us. We face competition for these professionals from our competitors, our customers and other companies operating in our industry. To the extent that the services of members of our senior management team would be unavailable to us for any reason, we would be required to hire other personnel to manage and operate our companies. We may not be able to locate or employ such qualified personnel on acceptable terms, or at all.

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Terrorist attacks, cyber-attacks, threats of war or actual war may negatively affect our operations, financial condition, results of operations, cash flows and prospects.
Terrorist attacks in the U.S. as well as events occurring in response to or in connection with them, may adversely affect our operations, financial condition, results of operations, cash flows and prospects. Energy-related assets (that could include refineries and terminals such as ours or pipelines such as the ones on which we depend for our crude oil supply and refined product distribution) may be at greater risk of future terrorist attacks than other possible targets. A direct attack on our assets or assets used by us could have a material adverse effect on our operations, financial condition, results of operations, cash flows and prospects. In addition, any terrorist attack could have an adverse impact on energy prices, including prices for our crude oil and refined products and an adverse impact on the margins from our refining and marketing operations. In addition, disruption or significant increases in energy prices could result in government imposed price controls. While we currently maintain some insurance that provides coverage against terrorist attacks, such insurance has become increasingly expensive and difficult to obtain. As a result, insurance providers may not continue to offer this coverage to us on terms that we consider affordable, or at all.
We are dependent on technology infrastructure and maintain and rely upon certain critical information systems for the effective operation of our businesses. These information systems include data network and telecommunications, internet access and our websites and various computer hardware equipment and software applications. These information systems are subject to damage or interruption from a number of potential sources including natural disasters, software viruses or other malware, power failures, cyber-attacks and other events. To the extent that these information systems are under our control, we have implemented measures such as virus protection software and emergency recovery processes to address the outlined risks. However, security measures for information systems cannot be guaranteed. Breaches to our networks could lead to such information being accessed, publicly disclosed, lost or stolen, and could result in legal claims or proceedings, liability under laws that protect the privacy of customer information, disrupt the services we provide and damage our reputation, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Any compromise of our data security or our inability to use or access these information systems at critical points in time could unfavorably impact the timely and efficient operation of our business and subject us to additional costs and liabilities.
We have exposure to concentrations of credit risk related to the ability of our counterparties to meet their contractual payment obligations and the potential non-performance of counterparties to deliver contracted commodities or services at the contracted price.
We and our subsidiaries are exposed to credit risk of counterparties with whom we do business. Adverse economic conditions or financial difficulties experienced by these counterparties could impair the ability of these counterparties to pay for our and our subsidiaries’ services or fulfill their contractual obligations, including performance and payment of damages. We and our subsidiaries depend on these counterparties to remit payments and perform services timely. Counterparties could fail or delay the performance of their contractual obligations for a number of reasons, including the effect of regulations on their operations. Any delay or default in payment or performance of contractual obligations and an adverse change in our counterparties’ business, results of operations or financial condition could adversely affect their respective ability to perform each of these obligations that could consequently have a material adverse effect on our business, results of operations or liquidity.
Our operations could be disrupted if our information systems fail, causing increased expenses and loss of sales.
Our business is highly dependent on financial, accounting and other data processing systems and other communications and information systems, including our enterprise resource planning tools and credit and debit card sales at our retail stores and within our wholesale group. We process a large number of transactions and transmit confidential credit and debit card information securely over public networks on a daily basis and rely upon the proper functioning of computer systems. If a key system was to fail or experience unscheduled downtime for any reason, even if only for a short period, our operations and financial results could be affected adversely. These information systems are subject to damage or interruption from a number of potential sources including natural disasters, software viruses or other malware, power failures, cyber-attacks and other events. To the extent that these information systems are under our control, we have implemented measures such as virus protection software, intrusion detection systems and emergency recovery processes to address the outlined risks. However, security measures for information systems cannot be guaranteed to be failsafe. Any security breach could expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and any resulting negative publicity could significantly harm our reputation. Our formal disaster recovery plan may not prevent delays or other complications that could arise from an information systems failure. Further, our business interruption insurance may not compensate us adequately for losses that may occur.
Our pipeline interests are subject to federal and/or state rate regulation that could reduce its profitability.
Certain of our pipelines, are subject to regulation by multiple governmental agencies, and compliance with such regulation increases our cost of doing business and affects our profitability.

23


Kinder Morgan's East Line, the Plains pipeline to Albuquerque and the Minnesota Pipeline, used by NTI, are common carrier pipelines providing interstate transportation service that is subject to regulation by FERC under the Interstate Commerce Act (the “ICA”). The ICA requires that tariff rates for interstate petroleum pipelines transportation service be just and reasonable and that the rates and terms of service of such pipelines not be unduly discriminatory or unduly preferential. Because NTI currently does not operate the Minnesota Pipeline or control the board of managers of the Minnesota Pipe Line Company, NTI does not control how the Minnesota Pipeline’s tariff is applied.
FERC can also impose conditions it considers appropriate, impose penalties limit or set rates retroactively, declare pipeline-related facilities to be common carrier facilities and require that common carrier access be provided or otherwise alter the terms of service and/or rates of such facilities. Rate regulation or a successful challenge to the rates we charge, including on our regulated pipelines could adversely affect the pipeline revenue we generate. Conversely, reduced rates on our regulated pipelines would reduce the rates for transportation of crude oil into our refineries.
Two of our subsidiaries act as the general partner of two publicly traded master limited partnerships that may involve a greater exposure to legal liability than our historic business operations.
Northern Tier Energy GP, LLC and Western Refining Logistics GP, LLC act as the general partners of NTI and WNRL, two publicly traded master limited partnerships, respectively. Our control of the general partner of NTI and WNRL may increase the possibility of claims of breach of fiduciary duties, including claims of conflicts of interest related to WNRL. Any liability resulting from such claims could have a material adverse effect on our future business, financial condition, results of operations and cash flows.
The adoption of financial reform legislation in the United States among other jurisdictions, and the implementing regulations issued thereunder, could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity price and other risks associated with our business.
We use derivative instruments to manage our commodity price risk. The United States Congress adopted comprehensive financial reform legislation in 2010 that establishes federal oversight and regulation of the market for certain derivatives, termed “swaps” and “security-based swaps,” and entities, such as ours, that participate in that market. The Dodd-Frank Act was signed into law by the President on July 21, 2010. Many of the provisions of the Dodd-Frank Act require implementing regulations by agencies including the Commodity Futures Trading Commission (the “CFTC”) and the SEC. While the SEC’s implementing regulations governing security-based swaps have largely not yet been adopted, the CFTC has implemented the majority of its rules governing swaps, including many commodity swaps.
Of particular importance to us, the CFTC has the authority, under certain findings, to establish position limits for certain futures, options on futures and swap contracts. Certain bona fide hedging transactions or positions would be exempt from these position limits. In 2011, the CFTC adopted position limit rules that were subsequently vacated by the U.S. District Court for the District of Columbia. In November 2013, the CFTC re-proposed position limit rules. The timing of adoption and implementation of these proposed rules and their applicability to and impact on our ability to cost-effectively hedge our commodity risks remain unclear.
The financial reform legislation may also require us to comply with margin requirements and with certain clearing and trade-execution requirements in connection with our derivatives activities. While there are exceptions from the clearing and trade execution requirements that have been implemented to date for commercial end users of swaps like us, whether we choose to use these exceptions for all transactions remains uncertain at this time. The Dodd-Frank Act and its implementing regulations have also required some of the counterparties to our swaps to register with the CFTC and become subject to substantial regulation. These requirements and others, such as those related to trade execution and margin, could significantly increase the cost of derivatives contracts (including through requirements to clear swaps and to post collateral for both cleared and uncleared swaps, each of which could adversely affect our available liquidity), materially alter the terms of derivatives contracts, reduce the availability of derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our existing derivative contracts, and increase our exposure to less creditworthy counterparties. If we reduce our use of derivatives as a result of the legislation and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Our revenues could also be adversely affected if a consequence of the legislation and regulations is to lower commodity prices.

24


Our retail business is vulnerable to risks including changes in consumer preferences and economic conditions, competitive environment, supplier concentration, franchising operations and other trends and factors that could harm our business, financial condition, results of operations or cash flows.
Our retail business is subject to changes in consumer preferences, national, regional and local economic conditions, demographic trends and consumer confidence in the economy. Factors such as traffic patterns, weather conditions, local demographics and the number and locations of competing retail service stations and convenience stores also affect the performance of our retail stores. NTI's retail operations in the Upper Great Plains region depend on one principal supplier for a substantial portion of its merchandise inventory. NTI franchises some of its retail stores and as a result, NTI's retail operations partly depend on the retail store franchisees who are independent business operators that could take actions that harm NTI's brand, reputation or goodwill. Adverse changes in any of these trends or factors could reduce our retail customer traffic or sales, or impose limits on our pricing that could adversely affect our business, financial condition, results of operations and cash flows.
Our business depends on the protection of our intellectual property and may suffer if we are unable to adequately protect such intellectual property.
We rely on patent laws, trademark and trade secret protection to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate. There are events that are outside of our control that pose a threat to our intellectual property rights as well as to our products and services. For example, some or all of our and our subsidiaries’ current and future trademarks, service marks and trade dress may not be enforceable, even if registered, against any prior users of similar intellectual property or our competitors who seek to use similar intellectual property in areas where we and our subsidiaries operate or intend to conduct operations. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any impairment of our intellectual property rights could harm our business and our ability to compete. Also, protecting our intellectual property rights is costly and time consuming. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results. In addition, we could encounter claims from prior users of similar intellectual property in areas where we or our subsidiaries operate or intend to conduct operations that could result in additional expenditures and divert our management’s time and attention from our operations. Conversely, competing businesses could infringe on our intellectual property that would necessarily require us to defend our intellectual property possibly at a significant cost to us. Any of these consequences could cause a material adverse effect on our business, financial condition, results of operations and cash flows.

Item 1B.
Unresolved Staff Comments
None.

Item 2.
Properties
Our principal properties are described under Item 1. Business and the information is incorporated herein by reference. As of December 31, 2014, we were a party to a number of cancelable and non-cancelable leases for certain properties, including our corporate headquarters in El Paso and administrative offices in Tempe, Arizona. See Note 25, Leases and Other Commitments, in the Notes to Consolidated Financial Statements included elsewhere in this annual report.

Item 3.
Legal Proceedings
In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations and claims, including environmental claims and employee related matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding or proceedings to which we are a party will have a material adverse effect on our business, financial condition, results of operations or cash flows.

Item 4.
Mine Safety Disclosures
Not Applicable.

25


PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the NYSE under the symbol “WNR.” As of February 27, 2015, we had 49 holders of record of our common stock. The following table summarizes the high and low sales prices of our common stock as reported on the NYSE Composite Tape for the quarterly periods in the past two fiscal years and dividends declared on our common stock for the same periods:
 
High
 
Low
 
Dividends per
Common Share
2014:
 

 
 

 
 

First quarter
$
43.00

 
$
35.58

 
$
0.26

Second quarter
45.00

 
36.49

 
0.26

Third quarter
48.36

 
37.61

 
0.26

Fourth quarter (1)
46.89

 
35.29

 
2.30

2013:
 

 
 

 
 

First quarter
$
38.82

 
$
26.94

 
$
0.12

Second quarter
34.99

 
26.89

 
0.12

Third quarter
31.45

 
26.51

 
0.18

Fourth quarter
42.41

 
29.73

 
0.22

(1)
Dividends for the fourth quarter of 2014 included a special dividend of $2.00 per common share.
Our payment of dividends is limited under the terms of our Western Revolving Credit Agreement, our Senior Unsecured Notes and our Term Loan Credit Agreement, and in part, depends on our ability to satisfy certain financial covenants. Also, as a holding company, we rely on dividends or advances from our subsidiaries to fund any dividends. The ability of our subsidiaries including NTI and WNRL to pay us dividends is restricted by covenants in their respective debt instruments and any future financing agreements. Throughout 2014, our board of directors approved and we declared quarterly cash dividends totaling $293.7 million paid on various dates throughout the year. On February 6, 2015, our board of directors approved a cash dividend for the first quarter of 2015 of $0.30 per share of common stock in an aggregate payment of approximately $28.6 million that will be paid on March 6, 2015 to holders of record on February 20, 2015.
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Performance Graph
The following performance graph and related information shall not be deemed “soliciting material” or “filed” with the SEC, nor shall such information be incorporated by reference into any further filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent we specifically incorporate it by reference into such filing.
The following graph compares the cumulative 60-month total stockholder return on our common stock relative to the cumulative total stockholder returns of the Standard & Poor’s ("S&P, 500") index and a customized peer group of six companies that includes: Alon USA Energy, Inc., CVR Energy, Inc., Delek US Holdings Inc., HollyFrontier Corp., Tesoro Corp. and Valero Energy Corp. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and peer group on December 31, 2009. The index on December 31, 2014, and its relative performance are tracked through this date. The stock price performance included in this graph is not necessarily indicative of future stock price performance.

26


COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
(Tabular representation of data in graph above)
 
Dec
 
Dec
 
Dec
 
Dec
 
Dec
 
Dec
2009
 
2010
 
2011
 
2012
 
2013
 
2014
Western Refining, Inc. 
$100.00
 
$224.63
 
$282.17
 
$662.98
 
$1,017.93
 
$976.31
S&P 500
100.00
 
115.06
 
117.49
 
136.30
 
180.44
 
205.14
Peer Group
100.00
 
142.83
 
148.73
 
282.21
 
394.94
 
393.67
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
As of December 31, 2014, our board of directors authorized four separate share repurchase programs of up to $200 million, per program, of our outstanding common stock. Our board of directors approved share repurchase programs in January of 2014 (the "January 2014 Program") and November of 2014 (the "November 2014 Program"). We used the full authorized amount of $200 million of the January 2014 Program during 2014. As of December 31, 2014, we had $140.8 million remaining in authorized expenditures under the November 2014 Program. Through December 31, 2014, we have purchased approximately 17.9 million shares of our common stock under the share repurchase programs.
Between March 26, 2014, and June 16, 2014, in connection with the settlement of conversions of the Western Convertible Notes, we utilized 12.1 million shares of treasury stock, consisting of treasury shares acquired prior to the share repurchase programs and shares purchased under the programs through June 10, 2014, to satisfy a portion of these conversions. See Note 15, Long-Term Debt in the Notes to Consolidated Financial Statements included in this annual report for detailed information on the settlement of conversions of the Western Convertible Notes.
Subject to market conditions as well as corporate, regulatory and other considerations, we will repurchase shares from time-to-time through open market transactions, block trades, privately negotiated transactions or otherwise. Our board of directors may discontinue the share repurchase program at any time.




27


The following table presents shares repurchased, by month, during 2014.
 
Total number of shares purchased as part of publicly announced plans or programs (1)
 
Average price paid per share (2)
 
Maximum dollar value of shares that may yet be purchased under the programs (In thousands) (3)
January 1 - January 31

 
$

 
$
264,889

February 1 - February 28

 

 
264,889

March 1 - March 31

 

 
264,889

April 1 - April 30

 

 
200,000

May 1 - May 31
12,519

 
38.96

 
199,512

June 1 - June 30
467,843

 
38.11

 
181,675

July 1 - July 31
1,081,620

 
39.51

 
138,923

August 1 - August 31
11,562

 
39.98

 
138,460

September 1 - September 30

 

 
138,460

October 1 - October 31
2,478,288

 
40.33

 
38,460

November 1 - November 30
722,756

 
41.87

 
208,187

December 1 - December 31
1,694,325

 
39.77

 
140,778

Total
6,468,913

 
$
40.05

 
 
(1)
We do not actively repurchase shares of our common stock outside of our publicly announced repurchase programs.
(2)
Average price per share excludes commissions of $0.02 per share.
(3)
From January 1 through April 30, 2014, both the April 2013 Program and the January 2014 Program were active under their respective board authorization terms. We made no purchases under the April 2013 Program between January 1, 2014, and its expiration on April 30, 2014. In November 2014, the board authorized the November 2014 Program for $200 million and, during November, both the January 2014 Program and the November 2014 Program were active. We exhausted the remaining balance available under the January 2014 Program in December of 2014.


28


Item 6.
Selected Financial Data
The following tables set forth a summary of our historical financial and operating data for the periods indicated. The summary results of operations and financial position data as of and for the five years ended December 31, 2014, have been derived from the consolidated financial statements of Western Refining, Inc. and its subsidiaries. The information presented includes the results of operations of NTI beginning November 12, 2013, the date of acquisition. The information presented also includes the financial results for WNRL from October 16, 2013 forward. In addition to the impact of the non-controlling interest in net income of NTI and WNRL, refinery margins have decreased due to additional fees paid by Western to WNRL for logistics services and refining direct operating expenses have decreased for the costs associated with WNRL that are no longer included in refining direct operating costs. Consequently, our results of operations for 2013 are not fully comparable with prior or future periods.
The information presented below should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and the notes thereto included in Item 8. Financial Statements and Supplementary Data.
 
Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
 
(In thousands, except per share data)
Statement of Operations Data
 

 
 

 
 

 
 

 
 

Net sales
$
15,153,573

 
$
10,086,070

 
$
9,503,134

 
$
9,071,037

 
$
7,965,053

Total operating costs and expenses (1)
14,057,060

 
9,514,197

 
8,791,239

 
8,687,258

 
7,859,618

Operating income
1,096,513

 
571,873

 
711,895

 
383,779

 
105,435

 
 
 
 
 
 
 
 
 
 
Net income (loss)
710,072

 
299,554

 
398,885

 
132,667

 
(17,049
)
Less net income attributed to non-controlling interest (3)
150,146

 
23,560

 

 

 

Net income (loss) attributable to Western Refining, Inc.
$
559,926

 
$
275,994

 
$
398,885

 
$
132,667

 
$
(17,049
)
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
6.17

 
$
3.35

 
$
4.42

 
$
1.46

 
$
(0.19
)
Diluted earnings (loss) per share
5.61

 
2.79

 
3.71

 
1.34

 
(0.19
)
Dividends declared per common share
$
3.08

 
$
0.64

 
$
2.74

 
$

 
$

Weighted average basic shares outstanding
90,708

 
82,248

 
89,270

 
88,981

 
88,204

Weighted average dilutive shares outstanding
101,190

 
104,904

 
111,822

 
109,792

 
88,204


 
Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
 
(In thousands)
Other Data
 

 
 

 
 

 
 

 
 

Adjusted EBITDA (2)
$
1,231,443

 
$
754,839

 
$
1,083,669

 
$
786,239

 
$
287,770

Balance Sheet Data (at end of period)
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
431,159

 
$
468,070

 
$
453,967

 
$
170,829

 
$
59,912

Restricted cash
167,009

 

 

 
220,355

 

Working capital
754,762

 
448,667

 
559,213

 
544,981

 
272,750

Total assets
5,682,558

 
5,512,965

 
2,480,407

 
2,570,344

 
2,628,146

Total debt and lease financing obligations
1,548,026

 
1,411,517

 
499,863

 
803,990

 
1,069,531

Total equity
2,787,644

 
2,570,587

 
909,070

 
819,828

 
675,593


29


(1)
The net effect of commodity hedging gains and losses included in cost of products sold for the periods presented was as follows:
 
Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
 
(In thousands)
Realized commodity hedging gain (loss), net
$
95,331

 
$
15,868

 
$
(144,448
)
 
$
(76,033
)
 
$
(9,770
)
Unrealized commodity hedging gain (loss), net
194,423

 
(16,898
)
 
(229,672
)
 
183,286

 
337

Total realized and unrealized commodity hedging gain (loss), net
$
289,754

 
$
(1,030
)
 
$
(374,120
)
 
$
107,253

 
$
(9,433
)
(2)
Adjusted EBITDA represents earnings before interest expense and other financing costs, amortization of loan fees, provision for income taxes, depreciation, amortization, maintenance turnaround expense and certain other non-cash income and expense items. However, Adjusted EBITDA is not a recognized measurement under United States generally accepted accounting principles ("GAAP"). Our management believes that the presentation of Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. In addition, our management believes that Adjusted EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry because the calculation of Adjusted EBITDA generally eliminates the effects of financings, income taxes, the accounting effects of significant turnaround activities (that many of our competitors capitalize and thereby exclude from their measures of EBITDA) and certain non-cash charges that are items that may vary for different companies for reasons unrelated to overall operating performance.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
Adjusted EBITDA does not reflect our cash expenditures or future requirements for significant turnaround activities, capital expenditures or contractual commitments;
Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; and
Adjusted EBITDA, as we calculate it, may differ from the Adjusted EBITDA calculations of other companies in our industry, thereby limiting its usefulness as a comparative measure.
Because of these limitations, Adjusted EBITDA should not be considered a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally.

30


The following table reconciles net income (loss) to Adjusted EBITDA for the periods presented:
 
Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
 
(In thousands)
Net income (loss) attributable to Western Refining, Inc.
$
559,926

 
$
275,994

 
$
398,885

 
$
132,667

 
$
(17,049
)
Net income attributed to non-controlling interest
150,146

 
23,560

 

 

 

Interest expense and other financing costs
89,276

 
68,040

 
81,349

 
134,601

 
146,549

Amortization of loan fees
7,786

 
6,541

 
6,860

 
8,926

 
9,739

Provision for income taxes
292,604

 
153,925

 
218,202

 
69,861

 
(26,077
)
Depreciation and amortization
190,566

 
117,848

 
93,907

 
135,895

 
138,621

Maintenance turnaround expense
48,469

 
50,249

 
47,140

 
2,443

 
23,286

Loss (gain) and impairments on disposal of assets, net (a)
8,530

 
(4,989
)
 

 
450,796

 
13,038

Loss on extinguishment of debt
9

 
46,773

 
7,654

 
34,336

 

Net change in lower of cost or market inventory reserve
78,554

 

 

 

 

Unrealized loss (gain) on commodity hedging transactions, net (b)
(194,423
)
 
16,898

 
229,672

 
(183,286
)
 
(337
)
Adjusted EBITDA
$
1,231,443

 
$
754,839

 
$
1,083,669

 
$
786,239

 
$
287,770

(a) The calculation of Adjusted EBITDA for the year ended December 31, 2011, includes the add-back of net gains and losses of $450.8 million incurred from the sale of the Yorktown refining and certain pipeline assets.
(b) Adjusted EBITDA has been adjusted for the impact of net non-cash unrealized gains and losses related to our commodity hedging transactions. We believe the inclusion of this component of net income provides a better representation of Adjusted EBITDA given the non-cash and potentially volatile nature of commodity hedging.
(3)
Net income attributed to non-controlling interest for the years ended December 31, 2014 and 2013, consisted of income from NTI of $131.9 million and $20.6 million, respectively. Net income attributed to non-controlling interest for the years ended December 31, 2014 and 2013, consisted of income from WNRL of $18.2 million and $3.0 million, respectively.



31


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with the financial statements and the notes thereto included elsewhere in this annual report. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. The cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under Part I — Item 1A. Risk Factors and elsewhere in this report. You should read such Risk Factors and Forward-Looking Statements in this report. In this Item 7, all references to “Western Refining,” “the Company,” “Western,” “we,” “us” and “our” refer to Western Refining, Inc. and its subsidiaries, unless the context otherwise requires or where otherwise indicated.
Company Overview
See Part I — Item 1. Business included in this annual report for detailed information on our business.

Major Influences on Results of Operations
Summary of 2014 Developments
We averaged total throughput of 127,236 bpd at the El Paso refinery for the year ended December 31, 2014, a 1.5% increase from 2013.
We averaged total throughput of 27,783 bpd at the Gallup refinery for the year ended December 31, 2014, a 10.7% increase from 2013.
We completed a turnaround of the south side units of the El Paso refinery during the first quarter of 2014.
We retired the Western Convertible Notes through the issuance of 22,759,243 shares of our common stock in exchange thereof.
We sold all of the outstanding limited liability company interests of WRW to WNRL on October 15, 2014, in exchange for consideration of $320 million in cash and the issuance of approximately 1.16 million common units representing limited partner interests in WNRL.
We purchased 6,468,913 shares under our share repurchase programs at an average price of $40.05 per share.
We declared and paid dividends per share of $3.08 per common share in an aggregate payment of $293.7 million, including a special dividend during the fourth quarter of $2.00 per common share.
NTI averaged total throughput of 93,525 bpd at the St. Paul Park refinery for the year ended December 31, 2014, a 13.7% increase from 2013.
NTI terminated its Crude Intermediation Agreement with JPM CCC, funding the purchase of related crude oil inventories through issuance in a private placement of an additional $75.0 million in principal value of its 2020 Secured Notes.
NTI recorded a lower of cost or market adjustment on its crude oil, finished product and retail LIFO inventory values of $73.7 million as of December 31, 2014.
WNRL completed the Wholesale Acquisition, using $269.0 million borrowed under the WNRL Revolving Credit Facility, on October 15, 2014, to partially fund the purchase.
2014 Operating and Financial Highlights
Net income attributable to Western was $559.9 million, or $5.61 per diluted share for the year ended December 31, 2014 compared to $276.0 million, or $2.79 per diluted share for the year ended December 31, 2013. The increase was primarily due to the inclusion of a full year of financial results from NTI, which generated net income of $88.8 million for the year ended December 31, 2014 compared to $13.6 million representing the period from November 12, 2013 through December 31, 2013. Also contributing to the increase in 2014 net income were our consolidated realized and unrealized net gains on commodity hedging activities compared to a small net loss in the prior year.

32


Our operating income increased $524.6 million from December 31, 2013 to December 31, 2014 as shown by segment in the following table:
 
Year Ended December 31,
 
2014
 
2013
 
Change
 
(In thousands)
Refining
$
836,952

 
$
636,333

 
$
200,619

NTI
241,229

 
37,358

 
203,871

WNRL
74,502

 
(41,527
)
 
116,029

Retail
20,763

 
14,854

 
5,909

Corporate
(76,933
)
 
(75,145
)
 
(1,788
)
Total operating income
$
1,096,513

 
$
571,873

 
$
524,640


The information presented includes the results of operations of NTI beginning November 12, 2013, the consummation date of the purchase transactions. Additionally, the information presented includes the financial results for WNRL from the period beginning October 16, 2013.
The WNRL financial and operational data presented include the historical results of all assets acquired from Western in the Wholesale Acquisition. This acquisition from Western was a transfer of assets between entities under common control. The information contained herein for the WNRL Predecessor and WNRL has been retrospectively adjusted, to include the historical results of the WRW assets acquired, for periods prior to the effective date of the Wholesale Acquisition. Our financial information includes the historical results of the Predecessor for periods prior to October 16, 2013, and the results of WNRL, beginning October 16, 2013, the date WNRL commenced operations, which have also been retrospectively adjusted.
Overview of Segments
Refining. The following items have a significant impact on our overall refinery gross margin, results of operations and
cash flows:
fluctuations in petroleum based commodity values such as refined product prices and the cost of crude oil and other feedstocks resulting from changes in supply and demand;
product yield volumes are less than total refinery throughput volume, resulting in yield loss and lower refinery gross margin;
the impact of our economic hedging activity;
fluctuations in our direct operating expenses, especially the cost of natural gas and the cost of electricity;
planned maintenance turnarounds, generally significant in both downtime and cost, are expensed as incurred;
seasonal fluctuations in demand for refined products; and
unplanned downtime of our refineries generally leads to increased maintenance costs and a temporary increase in working capital investment.
Key factors affecting petroleum based commodities' values include: supply and demand for crude oil, gasoline and other refined products; changes in domestic and foreign economies; weather conditions; domestic and foreign political affairs; crude oil and refined petroleum product production levels; logistics constraints; availability of imports; marketing of competitive fuels; price differentials between heavy and sour crude oils and light sweet crude oils; and government regulation. Our economic hedging activity can also have a significant impact on our refining margins. We engage in hedging activity primarily to fix the margin on a portion of our future gasoline and distillate production and to protect the value of certain crude oil, refined product and blendstock inventories.
Excise and other taxes collected from customers and remitted to governmental authorities are not included in revenues. In addition to the crude oil that we purchase to supply our refinery production, we also purchase crude oil quantities that are transported to different locations and sold to third parties. We record these sales on a gross basis with the sales price recorded as revenues and our corresponding purchase price within cost of products sold. Consolidated cost of products sold for the year ended December 31, 2014 includes $289.8 million of realized and non-cash unrealized net gains from our economic hedging activities, of which $280.2 million related to refining. The non-cash unrealized net gains included in the consolidated total were $194.4 million, including $197.2 million related to Western's refining segment, offset by an unrealized loss of $2.8 million related to NTI for the year ended December 31, 2014.

33


Demand for gasoline is generally higher during the summer months than during the winter months. As a result, our operating results for the first and fourth calendar quarters are generally lower than those for the second and third calendar quarters of each year.
Safety, reliability and the environmental performance of our refineries’ operations are critical to our financial performance. Unplanned downtime of our refineries generally results in lost refinery gross margin opportunity, increased maintenance costs and a temporary increase in working capital investment and inventory. We attempt to mitigate the financial impact of planned downtime, such as a turnaround or a major maintenance project, through a planning process that considers product availability, the margin environment and the availability of resources to perform the required maintenance. We occasionally experience unplanned downtime due to circumstances outside of our control. Certain of these outages qualify for reimbursement as business interruption losses, and we record these reimbursements as revenues. Net sales for the years ended December 31, 2014 and 2013, include $5.8 million and $22.2 million, respectively, in business interruption recoveries related to processing outages that occurred during the first and fourth quarters of 2011 at the El Paso refinery. Net sales for the year ended December 31, 2012, also include $4.0 million in business interruption recoveries related to the 2011 first quarter processing outage at our El Paso refinery.
Under an exclusive supply agreement with a third party, we receive monthly distribution amounts from the supplier equal to one-half of the amount by which our refined product sales in the Mid-Atlantic exceeds the supplier's costs of acquiring, transporting and hedging the refined product related to such sales. To the extent our refined product sales do not exceed the refined product costs during any month, we pay one-half of that amount to the supplier. Our payments to the supplier are limited to an aggregate annual amount of $2.0 million.
NTI. NTI's gross margins, results of operations and cash flows are primarily affected by the following:
Fluctuations in petroleum based commodity values such as refined product prices and the cost of crude oil and other feedstocks resulting from changes in supply and demand;
product yield volumes are less than total refinery throughput volume, resulting in yield loss and lower refinery gross margin;
adjustments to reflect the lower of cost or market value of crude oil, finished product and retail LIFO inventory values;
fluctuations in its direct operating expenses, especially related to the cost of natural gas and the cost of electricity;
planned maintenance turnarounds, generally significant in both downtime and cost, are expensed as incurred;
seasonal fluctuations in demand for refined products; and
unplanned downtime of its refineries generally leads to increased maintenance costs and a temporary increase in working capital investment.
Seasonal demand for gasoline is generally higher during the summer months than during the winter months due to seasonal increases in highway traffic. Decreased demand during the winter months can lower gasoline prices and margins. As a result, NTI's operating results for the first and fourth calendar quarters are generally lower than those for the second and third calendar quarters of each year.
WNRL. As WNRL's logistics operations primarily support the operations of Western, its results of operations and cash flows are indirectly affected by operational items that affect Western. WNRL's terminal throughput volumes depend primarily on the volume of refined and other products produced at Western’s refineries that, in turn, is ultimately dependent on supply and demand for refined product, crude oil and other feedstocks and Western’s response to changes in demand and supply.
Earnings and cash flows from WNRL's wholesale business are primarily affected by the sales volumes and margins of gasoline, diesel fuel and lubricants sold and transportation revenues from crude oil trucking and delivery. These margins are equal to the sales price, net of discounts, less total cost of sales and are measured on a cents per gallon ("cpg") basis. Factors that influence margins include local supply, demand and competition.
Retail. Earnings and cash flows from our retail business are primarily affected by the sales volumes and margins of gasoline and diesel fuel and by the sales and margins of merchandise sold at our retail stores. Margins for gasoline and diesel fuel sales are equal to the sales price less the delivered cost of the fuel and motor fuel taxes and are measured on a cpg basis. Fuel margins are impacted by competition, local and regional supply and demand. Margins for retail merchandise sold are equal to retail merchandise sales less the delivered cost of the merchandise, net of supplier discounts and inventory shrinkage and are measured as a percentage of merchandise sales. Merchandise sales are impacted by convenience or location, branding and competition. Our retail sales reflect seasonal trends such that operating results for the first and fourth calendar quarters are generally lower than those for the second and third calendar quarters of each year. Earnings and cash flows from our cardlock business are primarily affected by the sales volumes and margins of gasoline and diesel fuel sold. These margins are equal to

34


the sales price, net of discounts less the delivered cost of the fuel and motor fuel taxes and are measured on a cpg basis. Factors that influence margins include local supply, demand and competition.

Factors Impacting Comparability of Our Financial Results
Our historical results of operations for the periods presented may not be comparable with prior periods or to our results of operations in the future for the reasons discussed below.
WNRL
During 2013, we formed WNRL, a fee-based growth-oriented master limited partnership, to own, operate, develop and acquire terminals, storage tanks, pipelines and other logistics assets. On October 16, 2013, WNRL completed the offering of 15,812,500 common units representing limited partner interests to the public at a price of $22.00 per unit that included a 2,062,500 common partnership unit over-allotment option exercised by the underwriters. Western retained certain assets that are related to the operations of Western Refining Logistics, LP Predecessor, which is WNRL's predecessor as defined for accounting purposes. The retained assets include Western’s NGL storage facility in Jal, New Mexico and portions of the TexNew Mex 16” Pipeline extending from the crude oil station in Star Lake, New Mexico in the Four Corners area to near Maljamar, New Mexico in the Delaware Basin.
On October 15, 2014, in connection with a Contribution, Conveyance and Assumption Agreement dated September 25, 2014, we sold substantially all of our wholesale business to WNRL.
We are WNRL's primary customer for its terminalling and storage activities and we record the fees we pay to WNRL for its services within cost of products sold. Prior to WNRL's operations, we did not operate our logistics assets for the purpose of generating revenue, therefore, there is no comparable activity prior to WNRL's commencement of operations on October 16, 2013.
As of December 31, 2014, we own a 66.2% limited partner interest in WNRL and the public owns a 33.8% limited partner interest.
See Note 29, Western Refining Logistics, LP, in the Notes to Consolidated Financial Statements included in this annual report for more detailed information.
NTI Acquisition
On November 12, 2013 Western purchased all of NTH’s interests in NT InterHoldCo LLC, a wholly-owned subsidiary of Northern Tier Holdings LLC that holds all of the membership interests in Northern Tier Energy GP LLC, the general partner of Northern Tier Energy LP, and 35,622,500 common units representing a 38.7% limited partner interest in Northern Tier Energy LP for a purchase price of $775 million. Our 2013 results of operations include the period from November 12, 2013 through December 31, 2013. See Note 30, Acquisitions, in the Notes to Consolidated Financial Statements included in this annual report for more detailed information.
Debt Transactions
The following debt transactions occurred during the years ended December 31, 2014, 2013 and 2012:
We made non-mandatory prepayments under our term loan maturing in 2017 during the first and second quarter of 2012 reducing the principal value to zero.
We redeemed or otherwise purchased and canceled all outstanding 11.25% Senior Secured Notes during the first and second quarters of 2013.
We entered into an indenture for the issuance of $350.0 million in aggregate principal amount of 6.25% Senior Unsecured Notes due 2021 on March 25, 2013.
We amended and restated our Western revolving credit facility on April 11, 2013, receiving $900.0 million in commitments maturing in 2018.
WNRL entered into a senior secured revolving credit facility on October 16, 2013, receiving $300.0 million in commitments maturing in 2018.
We entered into a term loan credit agreement on November 12, 2013, that provides for loans of $550.0 million, matures on November 12, 2020 and provides for quarterly principal payments equal to 0.25% of the aggregate principal amount of term loans (as adjusted by any application of debt prepayment, to the extent applicable) with the remaining balance then outstanding due on the maturity date.

35


We delivered an aggregate of 22,759,243 shares of common stock on various dates between March 26, 2014, and June 16, 2014, to noteholders to satisfy the conversion of aggregate principal amount of 5.75% Convertible Senior Unsecured Notes based on conversion rates.
NTI amended and restated its senior secured Revolving Credit Facility on September 29, 2014, increasing the aggregate principal amount available prior to the amendment from $300.0 million to $500.0 million.
NTI increased the principal amount of the 2020 Secured Notes in September 2014 through issuance of a private placement of an additional $75.0 million in principal value at a premium of $4.2 million.
We amended and restated our Western revolving credit facility on October 2, 2014 receiving $900.0 million in commitments maturing in 2019.
WNRL borrowed $269.0 million under the WNRL 2019 Revolving Credit Facility on October 15, 2014, to partially fund the purchase of substantially all of Western's wholesale business.
As a result of the long-term debt redemptions described above, we recognized insignificant losses on extinguishment of debt in 2014 and $46.8 million and $7.7 million for the years ended December 31, 2013 and 2012, respectively. These losses are included in Loss on extinguishment of debt in the Consolidated Statements of Operations.
See Note 15, Long-Term Debt, in the Notes to Consolidated Financial Statements included in this annual report for more detailed information regarding our debt transactions.
Equity Transactions
See Part I — Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities included in this annual report and Note 20, Equity, in the Notes to Consolidated Financial Statements included in this annual report for detailed information regarding our share repurchase programs and the issuance of common stock to satisfy conversions of our Convertible Senior Unsecured Notes.
Employee Benefit Plans
See Note 17, Retirement Plans, in the Notes to Consolidated Financial Statements included in this annual report for detailed information regarding our employee benefit plans.
Commodity Hedging Activities, Property Taxes and Other
Our operating results for the years ended December 31, 2014 included realized and unrealized net gains from our commodity hedging activities of $289.8 million and realized and unrealized net losses from our commodity hedging activities of $1.0 million and $374.1 million for the years ended December 31, 2013 and 2012, respectively. For the period following our acquisition of NTI through December 31, 2013 and the year ended December 31, 2014, NTI operations included $12.4 million in realized commodity hedging gains and $1.8 million in realized commodity hedging losses, respectively, that are included in the consolidated net activity noted above. See Note 18, Crude Oil and Refined Product Risk Management, in the Notes to Consolidated Financial Statements included in this annual report for further discussion on our commodity hedging activities.
During the fourth quarter of 2014, market prices of feedstocks and refined products decreased significantly. We reduced the carrying value of our inventory by $78.6 million in order to state the value at market prices which were lower than our cost at December 31, 2014. Refined products inventory includes a lower of cost or market non-cash adjustment of $41.7 million and crude oil and other raw materials inventory includes a lower of cost or market non-cash adjustment of $36.9 million at December 31, 2014.
During the latter half of 2012, we increased our annual property tax accrual estimate by $11.6 million resulting from increased 2012 appraisal values. In 2013 we reduced our accrual for property tax expense as appraisal values for certain of our properties were re-evaluated and reduced. There were no significant changes in appraisal values of our properties during 2014.
Our income tax provisions include the effects of a decrease in our valuation allowance of $2.9 million and $2.8 million for the years ended December 31, 2014 and 2013, respectively, and an increase of $23.7 million for the year ended December 31, 2012 against the deferred tax assets for Virginia and Maryland generated through the operations of the Yorktown facility prior to the sale of the facility in December 2011.

36


Planned Maintenance Turnaround
During the years ended December 31, 2014, 2013 and 2012, we incurred costs of $48.5 million, $50.2 million and $47.1 million, respectively, for maintenance turnarounds. In the first quarter of 2014, we completed a scheduled maintenance turnaround for the south side units of the El Paso refinery. In the first quarter of 2013, we completed a scheduled maintenance turnaround for the north side units of the El Paso refinery. We also incurred turnaround expense during 2013 in preparation for a planned 2014 turnaround for the south side units at the El Paso refinery. Costs incurred during 2012 and 2011 related primarily to the planned 2012 turnaround for the Gallup refinery. We began a refinery maintenance turnaround at our Gallup refinery during September 2012 that was completed during October 2012. We expense the cost of maintenance turnarounds when the expense is incurred, while most of our competitors capitalize and amortize maintenance turnarounds.

Critical Accounting Policies and Estimates
We prepare our financial statements in conformity with U.S. GAAP. See Note 2, Summary of Accounting Policies to our Consolidated Financial Statements for a summary of our significant accounting policies, many of which require the use of estimates and assumptions. We believe that of our significant accounting policies, the following are noteworthy because they are based on estimates and assumptions that require complex, subjective assumptions by management that can materially impact reported results. Changes in these estimates or assumptions, or actual results that are different, could materially impact our financial condition, results of operations and cash flows.
Inventories. Crude oil, refined product and other feedstock and blendstock inventories are carried at the lower of cost or market. Cost is determined principally under the LIFO valuation method to reflect a better matching of costs and revenues for refining inventories. Costs include both direct and indirect expenditures incurred in bringing an item or product to its existing condition and location, but not unusual/non-recurring costs or research and development costs. Ending inventory costs in excess of market value are written down to net realizable market values and charged to cost of products sold in the period recorded. In subsequent periods, a new LCM determination is made based upon current circumstances. We determine market value inventory adjustments by evaluating crude oil, refined products and other inventories on an aggregate basis by geographic region.
Retail refined product, lubricants and related inventories are determined using the first-in, first-out ("FIFO") inventory valuation method. Refined product inventories originate from either our refineries or from third-party purchases. Retail merchandise inventory value is determined under the retail inventory method.
Maintenance Turnaround Expense. The units at our refineries require periodic maintenance and repairs commonly referred to as “turnarounds.” The required frequency of the maintenance varies by unit but generally is every two to six years depending on the processing unit involved. We expense the cost of maintenance turnarounds when the expense is incurred. These costs are identified as a separate line item in our Consolidated Statements of Operations.
Long-lived Assets. We calculate depreciation and amortization on a straight-line basis over the estimated useful lives of the various classes of depreciable assets. When assets are placed in service, we make estimates of what we believe are their reasonable useful lives. For assets to be disposed of, we report long-lived assets at the lower of carrying amount or fair value less cost of disposal.
We review the carrying values of our long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets to be held and used may not be recoverable. A long-lived asset is not recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If a long-lived asset is not recoverable, an impairment loss is recognized in an amount that its carrying amount exceeds its fair value.
In order to test our long-lived assets for recoverability, we must make estimates of projected cash flows related to the asset being evaluated that include, but are not limited to, assumptions about the use or disposition of the asset, its estimated remaining life and future expenditures necessary to maintain its existing service potential. In order to determine fair value, we must make certain estimates and assumptions including, among other things, an assessment of market conditions, projected cash flows, investment rates, interest/equity rates and growth rates that could significantly impact the estimated fair value of the asset being tested for impairment.
Goodwill. At December 31, 2014 and 2013, we had goodwill of $1,289.4 million and $1,297.0 million, respectively, relating to the NTI acquisition that was completed on November 12, 2013. Goodwill represents the excess of the purchase price (cost) over the fair value of the net assets acquired and is carried at cost. We do not amortize goodwill for financial reporting purposes. We test goodwill for impairment at the reporting unit level. The reporting unit or units used to evaluate and measure goodwill for impairment are determined primarily from the manner in which the business is managed.

37


Our policy is to test goodwill for impairment annually at June 30, or more frequently if indications of impairment exist. The testing of our goodwill for impairment is based on the estimated fair value of our reporting units that is determined based on consideration given to discounted expected future cash flows using a weighted-average cost of capital rate. An assumed terminal value is used to project future cash flows beyond base years. In addition, various market-based methods including market capitalization and earnings before interest, taxes, depreciation and amortization ("EBITDA") multiples are considered. The estimates and assumptions used in determining fair value of a reporting unit require considerable judgment and are based on historical experience, financial forecasts and industry trends and conditions. The discounted cash flow model is sensitive to changes in future cash flow forecasts and the discount rate used. The market capitalization model is sensitive to changes in traded partnership unit price. The EBITDA model is sensitive to changes in recent historical results of operations within the refining industry. We compare and contrast the results of the various valuation models to determine if impairment exists at the end of a reporting period. Any declines in the market capitalization of NTI after December 31, 2014, could be an early indication that goodwill may become impaired in the future.
Intangible Assets. We amortize intangible assets, such as rights-of-way, licenses and permits over their economic useful lives, unless the economic useful lives of the assets are indefinite. If an intangible asset’s economic useful life is determined to be indefinite, then that asset is not amortized. We consider factors such as the asset’s history, our plans for that asset and the market for products associated with the asset when the intangible asset is acquired. We consider these same factors when reviewing the economic useful lives of our existing intangible assets as well. We review the economic useful lives of our intangible assets at least annually.
Environmental and Other Loss Contingencies. We record liabilities for loss contingencies, including environmental remediation costs, when such losses are probable and can be reasonably estimated. Environmental costs are expensed if they relate to an existing condition caused by past operations with no future economic benefit. Estimates of projected environmental costs are made based upon internal and third-party assessments of contamination, available remediation technology and environmental regulations. Loss contingency accruals, including those for environmental remediation, are subject to revision as further information develops or circumstances change and such accruals can take into account the legal liability of other parties.
Certain of our environmental obligations are recorded on a discounted basis. Where the available information is sufficient to estimate the amount of liability, that estimate is used. Where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than other, the lower end of the range is used. Possible recoveries of some of these costs from other parties are not recognized in the financial statements until they become probable. Legal costs associated with environmental remediation are included as part of the estimated liability.
Financial Instruments and Fair Value. We are exposed to various market risks, including changes in commodity prices. We use commodity future contracts, price swaps and options to reduce price volatility, to fix margins for refined products and to protect against price declines associated with our crude oil and blendstock inventories. We recognize all commodity hedge transactions that we enter as either assets or liabilities in the Consolidated Balance Sheets and those instruments are measured at fair value. For instruments used to mitigate the change in value of volumes subject to market prices, we elected not to pursue hedge accounting treatment for financial accounting purposes, generally because of the difficulty of establishing and maintaining the required documentation that would allow for hedge accounting. Moreover, the swap contracts used to fix the margin on a portion of our future gasoline and distillate production do not qualify for hedge accounting treatment. Therefore, changes in the fair value of these commodity hedging instruments are included in income in the period of change. Net gains or losses associated with these transactions are recognized within cost of products sold using mark-to-market accounting.
Other Postretirement Obligations. Other postretirement plan expenses and liabilities are determined based on actuarial valuations. Inherent in these valuations are key assumptions including discount rates, future compensation increases, expected return on plan assets, health care cost trends and demographic data. Changes in our actuarial assumptions are primarily influenced by factors outside of our control and can have a significant effect on our other postretirement liability and cost. A defined benefit postretirement plan sponsor must (a) recognize in its statement of financial position an asset for a plan’s overfunded status or liability for the plan’s underfunded status, (b) measure the plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year and (c) recognize, as a component of other comprehensive income, the changes in the funded status of the plan that arise during the year, but are not recognized as components of net periodic benefit cost.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that may have an impact on our accounting and reporting. We believe that recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have a significant impact on our accounting or reporting or that such impact will not be material to our financial position, results of operations and cash flows when implemented. For further discussion on the impact of recent accounting pronouncements, see Note 2, Summary of Accounting Policies, in the Notes to Consolidated Financial Statements included in this annual report.

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Results of Operations
A discussion and analysis of our consolidated and operating segment financial data and key operating statistics for the three years ended December 31, 2014, is presented below:
Consolidated
 
Year Ended December 31,
 
2014 (2)
 
2013 (2)
 
2012
 
(In thousands, except per share data)
Statement of Operations Data:
 

 
 

 
 

Net sales (1)
$
15,153,573

 
$
10,086,070

 
$
9,503,134

Operating costs and expenses:
 

 
 

 
 

Cost of products sold (exclusive of depreciation and amortization) (1)
12,719,963

 
8,690,222

 
8,054,385

Direct operating expenses (exclusive of depreciation and amortization) (1)
850,634

 
523,836

 
483,070

Selling, general and administrative expenses
226,020

 
137,031

 
114,628

Affiliate severance costs
12,878

 

 

Loss (gain) and impairments on disposal of assets, net
8,530

 
(4,989
)
 
(1,891
)
Maintenance turnaround expense
48,469

 
50,249

 
47,140

Depreciation and amortization
190,566

 
117,848

 
93,907

Total operating costs and expenses
14,057,060

 
9,514,197

 
8,791,239

Operating income
1,096,513

 
571,873

 
711,895

Other income (expense):
 

 
 

 
 

Interest income
1,188

 
746

 
696

Interest expense and other financing costs
(89,276
)
 
(68,040
)
 
(81,349
)
Amortization of loan fees
(7,786
)
 
(6,541
)
 
(6,860
)
Loss on extinguishment of debt
(9
)
 
(46,773
)
 
(7,654
)
Other, net
2,046

 
2,214

 
359

Income before income taxes
1,002,676

 
453,479

 
617,087

Provision for income taxes
(292,604
)
 
(153,925
)
 
(218,202
)
Net income
710,072

 
299,554

 
398,885

Less net income attributed to non-controlling interest (3)
150,146

 
23,560

 

Net income attributable to Western Refining, Inc.
$
559,926

 
$
275,994

 
$
398,885

 
 
 
 
 
 
Basic earnings per share
$
6.17

 
$
3.35

 
$
4.42

Diluted earnings per share
5.61

 
2.79

 
3.71

Dividends declared per common share
$
3.08

 
$
0.64

 
$
2.74

Weighted average basic shares outstanding
90,708

 
82,248

 
89,270

Weighted average dilutive shares outstanding
101,190

 
104,904

 
111,822

(1)
The information presented excludes $4,390.7 million, $4,277.8 million and $4,909.4 million of intercompany sales, $4,374.1 million, $4,265.0 million and $4,901.5 million of intercompany cost of products sold; and $16.6 million, $12.8 million and $7.9 million of intercompany direct operating expenses for the years ended December 31, 2014, 2013 and 2012.
(2)
The information presented includes the results of operations of NTI beginning November 12, 2013, the consummation date of the purchase transactions. Additionally, the WNRL financial and operational data presented include the historical results of all assets acquired from Western in the Wholesale Acquisition. This acquisition from Western was a transfer of assets between entities under common control. Accordingly, the financial information for the WNRL Predecessor and WNRL has been retrospectively adjusted, to include the historical results of the WRW assets acquired, for periods prior to the effective date of the transaction. Our financial information includes the historical results of the Predecessor for periods prior to October 16, 2013, and the results of WNRL, beginning October 16, 2013, the date WNRL commenced operations, which have also been retrospectively adjusted.

39


(3)
Net income attributable to non-controlling interest for the years ended December 31, 2014 and 2013, consisted of net income from NTI of $131.9 million and $20.6 million, respectively, and net income from WNRL of $18.2 million and $3.0 million, respectively.
Gross Margin
Gross margin is a function of net sales less cost of products sold (exclusive of depreciation and amortization). Our consolidated margins increased from 2013 through 2014 by 74.3%. Our margin increase was a reflection of the overall industry wide improvement in refining margins year over year. Our increase in margins was also impacted, in part, by the results of our commodity hedging activities in our refining segment. Total Gross Margin in our other segments increased from 2013 through 2014, in part due to the acquisition of NTI and regional margin environments in the locale of our non-refining operations.
Our consolidated margins decreased from 2012 through 2013 by 3.7%. Our margin decrease was a reflection of the overall industry wide decline in refining margins. Our decrease in margins was offset in part by the results of our commodity hedging activities. Our other segments’ total margins increased from 2012 through 2013, in part due to the acquisition of NTI.
Direct Operating Expenses
The increase in direct operating expenses was primarily due to direct operating expenses associated with NTI ($298.1 million) which was acquired during November 2013 and higher direct operating expenses in our refining segment ($52.5 million).
The increase in direct operating expenses from 2012 to 2013 was primarily due to NTI that had direct operating expenses of $35.1 million with no comparable data in prior periods.
Selling, General and Administrative Expenses
The increase in selling, general and administrative expenses from 2013 to 2014 was primarily due to selling, general and administrative expenses associated with NTI ($91.5 million) which was acquired during November 2013.
The increase in selling, general and administrative expenses from 2012 to 2013 was primarily due to NTI that had selling, general and administrative expenses ($11.7 million) with no comparable data in prior periods.
Affiliate Severance Costs
The severance costs are related to severance payments related to Western's acquisition of NTI's general partner.
Maintenance Turnaround Expenses
During the years ended December 31, 2014 and 2013, we incurred turnaround expenses for a turnaround of the south and north side units of the El Paso refinery, respectively. During the year ended December 31, 2012, we incurred turnaround expenses in connection with the turnaround of our Gallup Refinery.
Depreciation and Amortization
The increase in depreciation and amortization from 2013 to 2014 was primarily due to depreciation associated with the NTI assets acquired during November 2013 ($91.5 million). There was also additional depreciation resulting from assets capitalized during the first quarter of 2013 and 2014, respectively, for the north and south side units of the El Paso refinery and additional depreciation associated with our logistics assets related to the ongoing expansion of our Delaware Basin logistics system. 
The increase from 2012 to 2013 was primarily due to additional depreciation at our Gallup refinery ($4.8 million), resulting from additional assets capitalized during the third and fourth quarters of 2012, and at our El Paso refinery ($2.9 million), related to first quarter of 2013 capital additions. Also, there was additional depreciation associated with WNRL logistics assets due to the ongoing expansion of our Delaware Basin logistics system. We also incurred depreciation associated with the NTI assets acquired during November 2013 ($10.7 million).
Other Income (Expense)
The increase in interest expense from prior periods was attributable to higher debt levels resulting from the issuance of senior unsecured notes on March 25, 2013, a term loan agreement entered into on November 12, 2013, additional interest related to the NTI Senior Secured Notes and WNRL's Revolving Credit Facility, partially offset by the retirement of our Convertible Senior Unsecured Notes.
The loss on extinguishment of debt recorded for the year ended December 31, 2013, was attributable to the tender offer for our Senior Secured Notes. The loss on extinguishment of debt for the year ended December 31, 2012, was the result of the prepayment of our Term Loan.

40


Segment Results
The following tables set forth our consolidating historical financial data for the periods presented below. During the fourth quarter of 2014, we changed our reportable segments due to recent changes in our organization and the corresponding changes in the business assessment needs of our chief operating decision maker. Our operations are now organized into four operating segments based on manufacturing and marketing criteria and the nature of our products and services, our production processes and our types of customers. These segments are refining, NTI, WNRL and retail. See Note 3, Segment Information, in the Notes to Consolidated Financial Statements included in this annual report for more detailed information. The historical financial data was retrospectively adjusted for the periods presented.
 
Year Ended December 31,
 
2014
 
2013
 
2012
 
(In thousands)
Consolidated Gross Margin by Segment
 
 
 
 
 
Refining
$
1,293,802

 
$
1,024,656

 
$
1,203,105

NTI
720,145

 
94,882

 

WNRL
256,969

 
127,411

 
95,833

Retail
162,271

 
148,352

 
149,262

Other
423

 
547

 
549

Consolidated gross margin
$
2,433,610

 
$
1,395,848

 
$
1,448,749

Consolidated Direct Operating Expenses by Segment
 
 
 
 
 
Refining
$
289,983

 
$
241,276

 
$
260,793

NTI
298,104

 
35,123

 

WNRL
142,398

 
135,307

 
115,374

Retail
118,468

 
111,320

 
105,980

Other
1,681

 
810

 
923

Consolidated direct operating expenses
$
850,634

 
$
523,836

 
$
483,070

Consolidated Depreciation and Amortization
 
 
 
 
 
Refining
$
81,726

 
$
75,346

 
$
65,955

NTI
76,544

 
10,740

 

WNRL
17,372

 
15,970

 
14,315

Retail
11,733

 
12,382

 
11,233

Other
3,191

 
3,410

 
2,404

Consolidated depreciation and amortization
$
190,566

 
$
117,848

 
$
93,907

See additional analysis under the refining, NTI, WNRL and retail segments.

41


Refining
 
Year Ended
 
December 31,
 
2014
 
2013
 
2012
 
(In thousands, except per barrel data)
Statement of Operations Data:
 
 
 
 
 
Net sales (including intersegment sales) (1)
$
9,485,734

 
$
8,866,162

 
$
9,500,558

Operating costs and expenses:
 
 
 
 
 
Cost of products sold (exclusive of depreciation and amortization) (2)
8,175,332

 
7,828,695

 
8,289,580

Direct operating expenses (exclusive of depreciation and amortization)
306,583

 
254,087

 
268,666

Selling, general and administrative expenses
28,470

 
26,451

 
24,330

Loss (gain) and impairments on disposal of assets, net
8,202

 
(4,999
)
 
(1,382
)
Maintenance turnaround expense
48,469

 
50,249

 
47,140

Depreciation and amortization
81,726

 
75,346

 
65,955

Total operating costs and expenses
8,648,782

 
8,229,829

 
8,694,289

Operating income
$
836,952

 
$
636,333

 
$
806,269

Key Operating Statistics:
 
 
 
 
 
Total sales volume (bpd) (1) (3)
217,640

 
176,653

 
184,086

Total refinery production (bpd)
152,942

 
147,793

 
147,461

Total refinery throughput (bpd) (4)
155,019

 
150,429

 
149,809

Per barrel of throughput:
 
 
 
 
 
Refinery gross margin (2) (5)
$
23.11

 
$
18.89

 
$
22.01

Direct operating expenses (6)
5.42

 
5.69

 
5.85

Mid-Atlantic sales volume (bbls)
8,588

 
9,734

 
9,301

Mid-Atlantic margin per barrel
$
0.32

 
$
0.47

 
$
0.86

El Paso and Gallup Refineries
 
Year Ended
 
December 31,
 
2014
 
2013
 
2012
Key Operating Statistics
 
 
 
 
 
Refinery product yields (bpd):
 
 
 
 
 
Gasoline
79,279

 
78,568

 
76,536

Diesel and jet fuel
63,359

 
59,580

 
61,224

Residuum
5,121

 
5,445

 
5,655

Other
5,183

 
4,200

 
4,046

Total refinery production (bpd)
152,942

 
147,793

 
147,461

Refinery throughput (bpd):
 
 
 
 
 
Sweet crude oil
121,514

 
117,289

 
115,345

Sour or heavy crude oil
25,113

 
25,195

 
24,792

Other feedstocks and blendstocks
8,392

 
7,945

 
9,672

Total refinery throughput (bpd) (4)
155,019

 
150,429

 
149,809


42


El Paso Refinery
 
Year Ended
 
December 31,
 
2014
 
2013
 
2012
Key Operating Statistics
 
 
 
 
 
Refinery product yields (bpd):
 
 
 
 
 
Gasoline
62,252

 
61,893

 
61,669

Diesel and jet fuel
54,501

 
52,600

 
54,600

Residuum
5,121

 
5,445

 
5,655

Other
3,740

 
3,442

 
3,280

Total refinery production (bpd)
125,614

 
123,380

 
125,204

Refinery throughput (bpd):
 
 
 
 
 
Sweet crude oil
96,384

 
93,654

 
94,404

Sour crude oil
25,113

 
25,195

 
24,792

Other feedstocks and blendstocks
5,739

 
6,488

 
7,734

Total refinery throughput (bpd) (4)
127,236

 
125,337

 
126,930

Total sales volume (bpd) (3)
139,216

 
141,894

 
151,352

Per barrel of throughput:
 
 
 
 
 
Refinery gross margin (2) (5)
$
18.34

 
$
18.74

 
$
28.25

Direct operating expenses (6)
4.37

 
4.30

 
4.50

Gallup Refinery
 
Year Ended
 
December 31,
 
2014
 
2013
 
2012
Key Operating Statistics
 
 
 
 
 
Refinery product yields (bpd):
 
 
 
 
 
Gasoline
17,027

 
16,675

 
14,867

Diesel and jet fuel
8,858

 
6,980

 
6,624

Other
1,443

 
758

 
766

Total refinery production (bpd)
27,328

 
24,413

 
22,257

Refinery throughput (bpd):
 
 
 
 
 
Sweet crude oil
25,130

 
23,635

 
20,941

Other feedstocks and blendstocks
2,653

 
1,457

 
1,938

Total refinery throughput (bpd) (4)
27,783

 
25,092

 
22,879

Total sales volume (bpd) (3)
34,300

 
34,759

 
32,718

Per barrel of throughput:
 
 
 
 
 
Refinery gross margin (2) (5)
$
16.55

 
$
18.94

 
$
28.25

Direct operating expenses (6)
8.40

 
10.13

 
9.60

(1)
Refining net sales for the year ended December 31, 2014, include $1,489.6 million representing a period average of 44,124 bpd in crude oil sales to third parties without comparable activity in 2013 or 2012. The majority of the crude oil sales resulted from the purchase of barrels in excess of what was required for production purposes in the El Paso and Gallup refineries.

43


(2)
Cost of products sold for the combined refining segment includes the net realized and net non-cash unrealized hedging activity shown in the table below. The hedging gains and losses are also included in the combined gross profit and refinery gross margin but are not included in those measures for the individual refineries.
 
Year Ended
 
December 31,
 
2014
 
2013
 
2012
 
(In thousands)
Realized hedging gain (loss), net
$
82,937

 
$
17,714

 
$
(120,805
)
Unrealized hedging gain (loss), net
197,223

 
(16,898
)
 
(229,672
)
Total hedging gain (loss), net
$
280,160

 
$
816

 
$
(350,477
)
(3)
Sales volume includes sales of refined products sourced primarily from our refinery production as well as refined products purchased from third parties. We purchase additional refined products from third parties to supplement supply to our customers. These products are similar to the products that we currently manufacture and represented 9.84%, 14.44% and 13.83% of our total consolidated sales volumes for the years ended December 31, 2014, 2013 and 2012, respectively. The majority of the purchased refined products are distributed through our refined product sales activities in the Mid-Atlantic region where we satisfy our refined product customer sales requirements through a third-party supply agreement.
(4)
Total refinery throughput includes crude oil, other feedstocks and blendstocks.
(5)
Refinery gross margin is a per barrel measurement calculated by dividing the difference between net sales and cost of products sold by our refineries’ total throughput volumes for the respective periods presented. Net realized and net non-cash unrealized economic hedging gains and losses included in the combined refining segment gross margin are not allocated to the individual refineries. Cost of products sold does not include any depreciation or amortization. Refinery gross margin is a non-GAAP performance measure that we believe is important to investors in evaluating our refinery performance as a general indication of the amount above our cost of products that we are able to sell refined products. Each of the components used in this calculation (net sales and cost of products sold) can be reconciled directly to our statement of operations. Our calculation of refinery gross margin may differ from similar calculations of other companies in our industry, thereby limiting its usefulness as a comparative measure. Refinery gross margin in the current year is not entirely comparable to the prior year as a result of a full year of fees paid by our refining segment to WNRL compared to 2013 fees paid only for the period after the Offering through December 31, 2013.
The following table reconciles combined gross profit for our