Derivative Financial Instruments

6 Months Ended

Jun. 30, 2011

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure

Derivative Financial Instruments

Commodity Derivatives — Mark to Market

Alon selectively utilizes commodity derivatives to manage its exposure to commodity price fluctuations and uses crude oil, refined product and precious metal (catalyst) commodity derivative contracts to reduce risk associated with potential price changes on committed obligations. Alon does not speculate using derivative instruments. There is not a significant credit risk on Alon’s derivative instruments which are transacted through counterparties meeting established collateral and credit criteria.

Cash Flow Hedges

To designate a derivative as a cash flow hedge, Alon documents at the inception of the hedge the assessment that the derivative will be highly effective in offsetting expected changes in cash flows from the item hedged. This assessment, which is updated at least quarterly, is generally based on the most recent relevant historical correlation between the derivative and the item hedged. If, during the term of the derivative, the hedge is determined to be no longer highly effective, hedge accounting is prospectively discontinued and any remaining unrealized gains or losses, based on the effective portion of the derivative at that date, are reclassified to earnings when the underlying transaction occurs.

Interest Rate Derivatives. Alon selectively utilizes interest rate related derivative instruments to manage its exposure to floating-rate debt instruments. Alon periodically uses interest rate swap agreements to manage its floating to fixed rate position by converting certain floating-rate debt to fixed-rate debt. As of June 30, 2011, Alon had an interest rate swap agreement with a notional amount of $100,000, a remaining period of 18 months and a fixed interest rate of 4.25%. This swap was accounted for as a cash flow hedge.

For cash flow hedges, gains and losses reported in equity are reclassified into interest expense when the forecasted transaction affects income. During the six months ended June 30, 2011 and 2010, Alon recognized in equity unrealized after-tax gains of $887 and $2,352, respectively, for the fair value measurement of the interest rate swap agreements. There were no amounts reclassified from equity into interest expense as a result of the discontinuance of cash flow hedge accounting.

For the six months ended June 30, 2011 and 2010, there was no hedge ineffectiveness recognized in income. No component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness.

Commodity Derivatives. In May 2008, as part of financing the acquisition of the Krotz Springs refinery, Alon entered into futures contracts for the forward purchase of crude oil and the forward sale of heating oil of 14,849,750 barrels. These futures contracts were designated as cash flow hedges for accounting purposes. In the fourth quarter of 2008, Alon determined during its retrospective assessment of hedge effectiveness that the hedge was no longer highly effective. Cash flow hedge accounting was discontinued in the fourth quarter of 2008 and all changes in value subsequent to the discontinuance were recognized into earnings. An after-tax loss of $2,223 for the six months ended June 30, 2010 was reclassified from equity to earnings due to the discontinuance of cash flow hedge accounting. No component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness.

The following table presents the effect of derivative instruments on the consolidated statements of financial position.

	As of June 30, 2011
	Asset Derivatives			Liability Derivatives
	Balance Sheet			Balance Sheet
	Location	Fair Value		Location	Fair Value
Derivatives not designated as hedging instruments:
Commodity contracts (swaps)		$	—	Accrued liabilities	$	(2,397	)
Commodity contracts (call options)		—		Accrued liabilities	(29,513		)
Commodity contracts (futures and forwards)	Accounts receivable	305		Accrued liabilities	(841		)
Commodity contracts (call options)		—		Other non-current liabilities	(2,175		)
Total derivatives not designated as hedging instruments		$	305		$	(34,926	)
Derivatives designated as hedging instruments:
Interest rate swap		$	—	Other non-current liabilities	$	(6,135	)
Total derivatives designated as hedging instruments		—			(6,135		)
Total derivatives		$	305		$	(41,061	)

	As of December 31, 2010
	Asset Derivatives			Liability Derivatives
	Balance Sheet			Balance Sheet
	Location	Fair Value		Location	Fair Value
Derivatives not designated as hedging instruments:
Commodity contracts (swaps)		$	—	Accounts Payable	$	(681	)
Commodity contracts (call options)		—		Accrued liabilities	(5,748		)
Commodity contracts (futures and forwards)	Accounts receivable	1,364		Accrued liabilities	(150		)
Commodity contracts (call options)		—		Other non-current liabilities	(3,128		)
Total derivatives not designated as hedging instruments		$	1,364		$	(9,707	)
Derivatives designated as hedging instruments:
Interest rate swap		$	—	Other non-current liabilities	$	(7,501	)
Total derivatives designated as hedging instruments		—			(7,501		)
Total derivatives		$	1,364		$	(17,208	)

The following tables present the effect of derivative instruments on Alon’s consolidated statements of operations and accumulated other comprehensive income (“OCI”).

Cash Flow Hedging Relationships	Gain (Loss) Recognized in OCI		Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)				Gain (Loss) Reclassified from Accumulated OCI into Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
			Location	Amount			Location	Amount
For the Three Months Ended June 30, 2011
Interest rate swap	$	444	Interest expense	$	(1,020	)		$	—
Total derivatives	$	444		$	(1,020	)		$	—
For the Three Months Ended June 30, 2010
Commodity contracts (swaps)	$	—	Cost of sales	$	(2,931	)		$	—
Interest rate swaps	2,049		Interest expense	(3,666		)		—
Total derivatives	$	2,049		$	(6,597	)		$	—

Cash Flow Hedging Relationships	Gain (Loss) Recognized in OCI		Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)				Gain (Loss) Reclassified from Accumulated OCI into Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
			Location	Amount			Location	Amount
For the Six Months Ended June 30, 2011
Interest rate swap	$	1,366	Interest expense	$	(1,995	)		$	—
Total derivatives	$	1,366		$	(1,995	)		$	—
For the Six Months Ended June 30, 2010
Commodity contracts (swaps)	$	—	Cost of sales	$	(3,529	)		$	—
Interest rate swaps	3,618		Interest expense	(7,224		)		—
Total derivatives	$	3,618		$	(10,753	)		$	—

Derivatives not designated as hedging instruments:

	Gain (Loss) Recognized in Income
	Location	Amount
For the Three Months Ended June 30, 2011
Commodity contracts (futures & forwards)	Cost of sales	$	1,122
Commodity contracts (swaps)	Cost of sales	(357		)
Commodity contracts (call options)	Other income (loss), net	(4,905		)
Total derivatives		$	(4,140	)
For the Three Months Ended June 30, 2010
Commodity contracts (futures & forwards)	Cost of sales	$	267
Commodity contracts (swaps)	Cost of sales	$	(269	)
Commodity contracts (swaps)	Other income (loss), net	(202		)
Total derivatives		$	(204	)

	Gain (Loss) Recognized in Income
	Location	Amount
For the Six Months Ended June 30, 2011
Commodity contracts (futures & forwards)	Cost of sales	$	10,759
Commodity contracts (swaps)	Cost of sales	(2,678		)
Commodity contracts (call options)	Other income (loss), net	(36,824		)
Total derivatives		$	(28,743	)
For the Six Months Ended June 30, 2010
Commodity contracts (futures & forwards)	Cost of sales	$	1,740
Commodity contracts (swaps)	Cost of sales	$	(375	)
Commodity contracts (swaps)	Other income (loss), net	(202		)
Total derivatives		$	1,163