ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.
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, results of operations, cash flows or financial condition.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is traded on the New York Stock Exchange under the symbol “ALJ.”
The following table sets forth the quarterly high and low sales prices of our common stock for each quarterly period within the two most recently completed fiscal years:
Holders
As of March 1, 2011, there were approximately 26 common stockholders of record.
Dividends
On April 2, 2009, we paid a regular quarterly cash dividend of $0.04 per share of our common stock. In connection with our cash dividend payment to stockholders, the non-controlling interest stockholders of Alon Assets and Alon Operating received an aggregate cash dividend of $0.144 million.
On June 15, 2009, we paid a regular quarterly cash dividend of $0.04 per share of our common stock. In connection with our cash dividend payment to stockholders, the non-controlling interest stockholders of Alon Assets and Alon Operating received an aggregate cash dividend of $0.144 million.
On September 15, 2009, we paid a regular quarterly cash dividend of $0.04 per share of our common stock. In connection with our cash dividend payment to stockholders, the non-controlling interest stockholders of Alon Assets and Alon Operating received an aggregate cash dividend of $0.144 million.
On December 15, 2009, we paid a regular quarterly cash dividend of $0.04 per share of our common stock. In connection with our cash dividend payment to stockholders, the non-controlling interest stockholders of Alon Assets and Alon Operating received an aggregate cash dividend of $0.144 million.
On March 31, 2010, we paid a regular quarterly cash dividend of $0.04 per share. In connection with our cash dividend payment to stockholders, the non-controlling interest stockholders of Alon Assets and Alon Operating received an aggregate cash dividend of $0.144 million.
On June 15, 2010, we paid a regular quarterly cash dividend of $0.04 per share of our common stock. In connection with our cash dividend payment to stockholders, the non-controlling interest stockholders of Alon Assets and Alon Operating received an aggregate cash dividend of $0.285 million.
On September 15, 2010, we paid a regular quarterly cash dividend of $0.04 per share of our common stock. In connection with our cash dividend payment to stockholders, the non-controlling interest stockholders of Alon Assets and Alon Operating received an aggregate cash dividend of $0.164 million.
On December 15, 2010, we paid a regular quarterly cash dividend of $0.04 per share of our common stock.
We intend to continue to pay quarterly cash dividends on our common stock at an annual rate of $0.16 per share. However, the declaration and payment of future dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, legal requirements, restrictions in our debt agreements, the terms of our preferred stock and other factors our board of directors deems relevant.
Recent Sales of Unregistered Securities
Alon has entered into unregistered sales of equity securities as described in Item 9B of this Form 10-K.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Stockholder Return Performance Graph
The following performance graph compares the cumulative total stockholder return on Alon common stock as traded on the NYSE with the Standard & Poor’s 500 Stock Index (the “S&P 500”) and our peer group for the cumulative five year period from January 3, 2006 to December 31, 2010, assuming an initial investment of $100 dollars and the reinvestment of all dividends, if any. The “Peer Group” includes Frontier Oil Corporation, Tesoro Petroleum Corp. and Valero Energy Corporation.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical consolidated financial and operating data for our company. The selected historical consolidated statement of operations and consolidated statement of cash flows data for the years ended December 31, 2007 and 2006, and the selected consolidated balance sheet data as of December 31, 2008, 2007 and 2006 are derived from our audited consolidated financial statements, which are not included in this Annual Report on Form 10-K. The selected historical consolidated statement of operations and consolidated statement of cash flows data for the years ended December 31, 2010, 2009 and 2008, and the selected consolidated balance sheet data as of December 31, 2010 and 2009, are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Our financial statements include the results of the Krotz Springs refining business from July 1, 2008. As a result of this transaction, the financial and operating data for periods prior to the effective date of this transaction may not be comparable to the data for the years ended December 31, 2010, 2009 and 2008.
The following selected historical consolidated financial and operating data should be read in conjunction with Item 7
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of operations is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K and the other sections of this Annual Report on Form 10-K, including Items 1 and 2 “Business and Properties,” and Item 6 “Selected Financial Data.”
Forward-Looking Statements
Certain statements contained in this report and other materials we file with the SEC, or in other written or oral statements made by us, other than statements of historical fact, are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We have used the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “will,” “future” and similar terms and phrases to identify forward-looking statements.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows. See Item 1A “Risk Factors.”
Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, the following:
•
changes in general economic conditions and capital markets;
•
changes in the underlying demand for our products;
•
the availability, costs and price volatility of crude oil, other refinery feedstocks and refined products;
•
changes in the sweet/sour spread;
•
changes in the light/heavy spread;
•
changes in the spread between West Texas Intermediate crude oil and Light Louisiana and Heavy Louisiana Sweet crude oils;
•
the effects of transactions involving forward contracts and derivative instruments;
•
actions of customers and competitors;
•
changes in fuel and utility costs incurred by our facilities;
•
disruptions due to equipment interruption, pipeline disruptions or failure at our or third-party facilities;
•
the execution of planned capital projects;
•
adverse changes in the credit ratings assigned to our trade credit and debt instruments;
•
the effects of and cost of compliance with current and future state and federal environmental, economic, safety and other laws, policies and regulations;
•
operating hazards, natural disasters, casualty losses and other matters beyond our control;
•
realization of synergies and accretion to reported earnings from our acquisition of the Bakersfield refinery;
•
integration of the operations and employees of the Bakersfield refinery and the timing of such integration;
•
the global financial crisis’ impact on our business and financial condition; and
•
the other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2010 under the caption “Risk Factors.”
Any one of these factors or a combination of these factors could materially affect our future results of operations and could influence whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required by the securities laws to do so.
Overview
We are an independent refiner and marketer of petroleum products operating primarily in the South Central, Southwestern and Western regions of the United States. Our crude oil refineries are located in Texas, California, Oregon and Louisiana and have a combined throughput capacity of approximately 250,000 barrels per day (“bpd”). Our refineries produce petroleum products including various grades of gasoline, diesel fuel, jet fuel, petrochemicals, petrochemical feedstocks, asphalt, and other petroleum-based products.
Refining and Unbranded Marketing Segment. Our refining and unbranded marketing segment includes sour and heavy crude oil refineries that are located in Big Spring, Texas; and Paramount, Bakersfield and Long Beach, California; and a light sweet crude oil refinery located in Krotz Springs, Louisiana. We refer to the Paramount, Bakersfield and Long Beach refineries together as our “California refineries.” The refineries in our refining and unbranded marketing segment have a combined throughput capacity of approximately 240,000 bpd. At our refineries we refine crude oil into petroleum products, including gasoline, diesel fuel, jet fuel, petrochemicals, feedstocks and asphalts, which are marketed primarily in the South Central, Southwestern, and Western United States.
We market transportation fuels produced at our Big Spring refinery in West and Central Texas, Oklahoma, New Mexico and Arizona. We refer to our operations in these regions as our “physically integrated system” because we supply our retail and branded marketing segment convenience stores and unbranded distributors in this region with motor fuels produced at our Big Spring refinery and distributed through a network of pipelines and terminals which we either own or have access to through leases or long-term throughput agreements.
We market refined products produced from our California refineries to wholesale distributors, other refiners and third parties primarily on the West Coast. We plan to integrate the Bakersfield hydrocracker unit by processing vacuum gas oil produced at our other California refineries.
The Krotz Springs refinery processing units are structured to yield approximately 101.5% of total feedstock input, meaning that for each 100 barrels of crude oil and feedstocks input into the refinery, it produces 101.5 barrels of refined products. Of the 101.5%, on average 99.0% is light finished products such as gasoline and distillates, including diesel and jet fuel, petrochemical feedstocks and liquefied petroleum gas, and the remaining 2.5% is primarily heavy oils. We market refined products from Krotz Springs to wholesale distributors, other refiners, and third parties. The refinery’s location provides access to upriver markets on the Mississippi and Ohio Rivers and its docking facilities along the Atchafalaya River allow barge access. The refinery also uses its direct access to the Colonial Pipeline to transport products to markets in the Southern and Eastern United States.
Asphalt Segment. Our asphalt segment markets asphalt produced at our Big Spring and California refineries included in the refining and marketing segment and at our Willbridge, Oregon refinery. Asphalt produced by the refineries in our refining and marketing segment is transferred to the asphalt segment at prices substantially determined by reference to the cost of crude oil, which is intended to approximate wholesale market prices. Our
asphalt segment markets asphalt through 12 refinery/terminal locations in Texas (Big Spring), California (Paramount, Long Beach, Elk Grove, Bakersfield and Mojave), Oregon (Willbridge), Washington (Richmond Beach), Arizona (Phoenix, Flagstaff and Fredonia) and Nevada (Fernley) (50% interest) as well as a 50% interest in Wright Asphalt Products Company, LLC (“Wright”). We produce both paving and roofing grades of asphalt, including performance-graded asphalts, emulsions and cutbacks.
Retail and Branded Marketing Segment. Our retail and branded marketing segment operates 304 convenience stores primarily in Central and West Texas and New Mexico. These convenience stores typically offer various grades of gasoline, diesel fuel, general merchandise and food and beverage products to the general public, primarily under the 7-Eleven and FINA brand names. Substantially all of the motor fuel sold through our retail operations and the majority of the motor fuel marketed in our branded business is supplied by our Big Spring refinery. In 2010, approximately 91% of the motor fuel requirements of our branded marketing operations, including retail operations, were supplied by our Big Spring refinery. Branded distributors that are not part of our integrated supply system, primarily in Central Texas, are supplied with motor fuels we obtain from third-party suppliers.
We market gasoline and diesel under the FINA brand name through a network of approximately 630 locations, including our convenience stores. Approximately 63% of the gasoline and 22% of the diesel motor fuel produced at our Big Spring refinery was transferred to our retail and branded marketing segment at prices substantially determined by reference to commodity pricing information published by Platts. Additionally, our retail and branded marketing segment licenses the use of the FINA brand name and provides credit card processing services to approximately 260 licensed locations that are not under fuel supply agreements with us.
Summary of 2010 Developments
In March 2010, Alon Refining Krotz Springs (“ARKS”) entered into a $65.0 million short-term credit facility with Bank Hapoalim B.M. The short-term credit facility as amended and restated matured on November 15, 2010 and was prepaid in full in October 2010. The proceeds of the short-term credit facility were used in part to prepay the ARKS revolving credit facility.
In March 2010, ARKS terminated its revolving credit facility agreement and repaid all outstanding amounts thereunder. As a result of the prepayment of the ARKS revolving credit facility, a write-off of unamortized debt issuance costs of $6.7 million was recorded as interest expense in the first quarter of 2010.
In April 2010, ARKS entered into a Supply and Offtake Agreement, which was amended on May 26, 2010 (the “Supply and Offtake Agreement”) with J. Aron & Company (“J. Aron”), the proceeds of which allowed ARKS to retire part of its obligations under its short-term credit facility and support the operation of the Krotz Springs refinery at a minimum of 72,000 barrels per day. Pursuant to the Supply and Offtake Agreement, (i) J. Aron agreed to sell to ARKS, and ARKS agreed to buy from J. Aron, at market price, crude oil for processing at the Krotz Springs refinery and (ii) ARKS agreed to sell, and J. Aron agreed to buy, at market price, certain refined products produced at the Krotz Springs refinery.
In June 2010, we purchased a refinery in Bakersfield, California from Big West of California, LLC, a subsidiary of Flying J, Inc. The refinery is non-operational at this time and will require turnaround work and additional capital expenditures before it can be returned to operations and integrated with the other California refineries. In connection with the Bakersfield refinery acquisition, the acquisition date fair value of the identifiable net assets acquired exceeded the fair value of the consideration transferred, resulting in a $17.5 million bargain purchase gain.
In October 2010, we completed a registered direct offering of our 8.5% Series A Convertible Preferred Stock for an aggregate offering price of $40.0 million before deducting offering expenses. We used $30.0 million of the proceeds from the offering to prepay in full the ARKS short-term credit facility in October 2010. Also in October 2010, we obtained $23.0 million of letters of credit outside our existing credit facilities.
In December 2010, Southwest Convenience Stores, LLC (“SCS”) entered into an amended and restated retail credit facility agreement with Wells Fargo Bank. The facility amended and restated the original credit agreement, dated June 29, 2007, between SCS and Wachovia Bank, the predecessor to Wells Fargo Bank. The amendment to the original credit agreement reinstated the original facility size from $73.4 million to $93.4 million. The facility
consists of the $73.4 million existing term loan, a $10.0 million additional term loan and $10.0 million of revolving credit capacity. At December 31, 2010, $93.4 million was outstanding under this facility.
2010 Operations Highlights
Highlights for 2010 include:
Major Influences on Results of Operations
Refining and Unbranded Marketing. Our earnings and cash flow from our refining and unbranded marketing segment are primarily affected by the difference between refined product prices and the prices for crude oil and other feedstocks. The cost to acquire crude oil and other feedstocks and the price of the refined products we ultimately sell depend on numerous factors beyond our control, including the supply of, and demand for, crude oil, gasoline and other refined products which, in turn, depend on, among other factors, changes in domestic and foreign economies, weather conditions, domestic and foreign political affairs, production levels, the availability of imports, the marketing of competitive fuels and government regulation. While our sales and operating revenues fluctuate significantly with movements in crude oil and refined product prices, it is the spread between crude oil and refined product prices, and not necessarily fluctuations in those prices that affect our earnings.
In order to measure our operating performance, we compare our per barrel refinery operating margins to certain industry benchmarks. We compare our Big Spring refinery’s per barrel operating margin to the Gulf Coast and Group III, or mid-continent, 3/2/1 crack spreads. A 3/2/1 crack spread in a given region is calculated assuming that three barrels of a benchmark crude oil are converted, or cracked, into two barrels of gasoline and one barrel of diesel. We calculate the Gulf Coast 3/2/1 crack spread using the market values of Gulf Coast conventional gasoline and ultra-low sulfur diesel and the market value of West Texas Intermediate, or WTI, a light, sweet crude oil. We calculate the Group III 3/2/1 crack spread using the market values of Group III conventional gasoline and ultra-low sulfur diesel and the market value of WTI crude oil. We calculate the per barrel operating margin for our Big Spring refinery by dividing the Big Spring refinery’s gross margin by its throughput volumes. Gross margin is the difference between net sales and cost of sales (exclusive of substantial unrealized hedge positions and inventory adjustments related to acquisitions).
We compare our California refineries’ per barrel operating margin to the West Coast 3/2/1 crack spread. A 3/2/1 crack spread is calculated assuming that three barrels of a benchmark crude oil are converted into two barrels of gasoline and one barrel of diesel. This is calculated using the market values of West Coast LA CARBOB pipeline gasoline, LA ultra-low sulfur pipeline diesel and the market value of WTI crude oil.
We compare our Krotz Springs refinery’s per barrel margin to the Gulf Coast 2/1/1 crack spread. The 2/1/1 crack spread is calculated assuming that two barrels of a benchmark crude oil are converted into one barrel of gasoline and one barrel of diesel. We calculate the Gulf Coast 2/1/1 crack spread using the market values of Gulf Coast conventional gasoline and Gulf Coast high sulfur diesel and the market value of WTI crude oil.
Our Big Spring refinery and California refineries are capable of processing substantial volumes of sour crude oil, which has historically cost less than intermediate and sweet crude oils. We measure the cost advantage of refining sour crude oil at our refineries by calculating the difference between the value of WTI crude oil less the value of West Texas Sour, or WTS, a medium, sour crude oil. We refer to this differential as the sweet/sour spread. A widening of the sweet/sour spread can favorably influence the operating margin for our Big Spring and California refineries. In addition, our California refineries are capable of processing significant volumes of heavy crude oils which historically have cost less than light crude oils. We measure the cost advantage of refining heavy crude oils by calculating the difference between the value of WTI crude oil less the value of MAYA crude, which we refer to as the light/heavy spread. A widening of the light/heavy spread can favorably influence the refinery operating margins for our California refineries.
The Krotz Springs refinery has the capability to process substantial volumes of low-sulfur, or sweet, crude oils to produce a high percentage of light, high-value refined products. Sweet crude oil typically comprises 100% of the Krotz Springs refinery’s crude oil input. This input is comprised of equal amounts of Heavy Louisiana Sweet, or HLS crude oil, and Light Louisiana Sweet, or LLS crude oil. We measure the cost of refining these lighter sweet crude oils by calculating the difference between the average value of LLS crude oil (which also approximates the value of HLS crude oil) to the average value of WTI crude oil. A narrowing of this spread can favorably influence the refinery operating margins of our Krotz Springs refinery.
The results of operations from our refining and unbranded marketing segment are also significantly affected by our refineries’ operating costs, particularly the cost of natural gas used for fuel and the cost of electricity. Natural gas prices have historically been volatile. Typically, electricity prices fluctuate with natural gas prices.
Demand for gasoline products is generally higher during summer months than during winter months due to seasonal increases in highway traffic. As a result, the operating results for our refining and unbranded marketing segment for the first and fourth calendar quarters are generally lower than those for the second and third calendar quarters. The effects of seasonal demand for gasoline are partially offset by seasonality in demand for diesel, which in our region is generally higher in winter months as east-west trucking traffic moves south to avoid winter conditions on northern routes.
Safety, reliability and the environmental performance of our refineries are critical to our financial performance. The financial impact of planned downtime, such as a turnaround or major maintenance project, is mitigated through a diligent planning process that considers product availability, margin environment and the availability of resources to perform the required maintenance.
The nature of our business requires us to maintain substantial quantities of crude oil and refined product inventories. Crude oil and refined products are essentially commodities, and we have no control over the changing market value of these inventories. Because our inventory is valued at the lower of cost or market value under the LIFO inventory valuation methodology, price fluctuations generally have little effect on our financial results.
Asphalt. Our earnings from our asphalt segment depend primarily upon the margin between the price at which we sell our asphalt and the transfer prices for asphalt produced at our refineries in the refining and unbranded marketing segment. Asphalt is transferred to our asphalt segment at prices substantially determined by reference to the cost of crude oil, which is intended to approximate wholesale market prices. The asphalt segment also conducts operations at and markets asphalt produced by our refinery located in Willbridge, Oregon. In addition to producing asphalt at our refineries, at times when refining margins are unfavorable we opportunistically purchase asphalt from other producers for resale. A portion of our asphalt sales are made using fixed price contracts for delivery of asphalt products at future dates. Because these contracts are priced at the market prices for asphalt at the time of the contract, a change in the cost of crude oil between the time we enter into the contract and the time we produce the asphalt can positively or negatively influence the earnings of our asphalt segment. Demand for paving asphalt products is higher during warmer months than during colder months due to seasonal increases in road construction work. As a result, the revenues for our asphalt segment for the first and fourth calendar quarters are expected to be lower than those for the second and third calendar quarters.
Retail and Branded Marketing. Our earnings and cash flows from our retail and branded marketing segment are primarily affected by merchandise and motor fuel sales and margins at our convenience stores and the motor fuel sales volumes and margins from sales to our FINA-branded distributors, together with licensing and credit card related fees generated from our FINA-branded distributors and licensees. Retail merchandise gross margin is equal to retail merchandise sales less the delivered cost of the retail merchandise, net of vendor discounts and rebates, measured as a percentage of total retail merchandise sales. Retail merchandise sales are driven by convenience, branding and competitive pricing. Motor fuel margin is equal to motor fuel sales less the delivered cost of fuel and motor fuel taxes, measured on a cents per gallon (“cpg”) basis. Our motor fuel margins are driven by local supply, demand and competitor pricing. Our convenience store sales are seasonal and peak in the second and third quarters of the year, while the first and fourth quarters usually experience lower overall sales.
Factors Affecting Comparability
Our financial condition and operating results over the three year period ended December 31, 2010 have been influenced by the following factors, which are fundamental to understanding comparisons of our period-to-period financial performance.
Big Spring Refinery Fire
On February 18, 2008, a fire at the Big Spring refinery destroyed the propylene recovery unit and damaged equipment in the alkylation and gas concentration units. On April 5, 2008, the refinery was able to begin partial operation in a 35,000 bpd hydroskimming mode. The major units brought back on line in April included the crude unit, reformer unit, distillate hydrotreater and jet fuel hydrotreater. The Fluid Catalytic Cracking Unit (“FCCU”) returned to normal operating capabilities with the restart on September 26, 2008. Substantially all of the repairs to the units damaged in the fire were completed in 2009 other than the alkylation unit which returned to operations in January 2010.
For the year ended December 31, 2008, we recorded $56.9 million of non-reimbursable costs associated with the fire. The components of net costs associated with fire as of December 31, 2008 included: $51.1 million for expenses incurred from pipeline commitment deficiencies, crude sale losses and other incremental costs; $5.0 million for our third party liability insurance deductible under the insurance policy; and depreciation for the temporarily idled facilities of $0.8 million.
An involuntary pre-tax gain on conversion of assets of $279.7 million was recorded for the insurance proceeds of $330.0 million received in excess of the book value of the assets impaired of $25.3 million and demolition and repair expenses of $25.0 million incurred through December 31, 2008. An additional $55.0 million of insurance proceeds were received in 2008 and January 2009 and this was recorded as business interruption recovery for the year ended December 31, 2008.
Refinery Acquisitions
In June 2010, we purchased the Bakersfield, California refinery from Big West of California, LLC, a subsidiary of Flying J, Inc. The refinery is non-operational at this time and will require turnaround work and additional capital expenditures before it can be returned to operations and integrated with other California refineries. In connection with the Bakersfield refinery acquisition, the acquisition date fair value of the identifiable net assets acquired exceeded the fair value of the consideration transferred, resulting in a $17.5 million bargain purchase gain.
In July 2008, we acquired the refining business located in Krotz Springs, Louisiana from Valero. The purchase price was $333.0 million in cash plus $141.5 million for working capital, including inventories. The Krotz Springs refinery, with a nameplate crude capacity of approximately 83,100 bpd, supplies multiple demand centers in the Southern and Eastern United States markets through a pipeline operated by the Colonial Pipeline. The purchase of the Krotz Springs refinery increased property, plant and equipment by $376.7 million, inventories by $145.0 million and debt by $141.5 million. The results of operations for the Krotz Springs refinery have been included in our consolidated statements of operations for the second half of the year ended December 31, 2008.
Unscheduled Turnaround and Reduced Crude Oil Throughput
In an effort to match our safety, reliability and the environmental performance initiatives with the current operating margin environment, we accelerated a planned turnaround at our Krotz Springs refinery from the first quarter of 2010 to the fourth quarter of 2009. The refinery resumed operations in June 2010. Throughput at the Big Spring refinery was lower during 2010, as we implemented new operating procedures. The California refineries’ throughput was lower during 2010, due to continued efforts to optimize asphalt production with demand and as a result of the shutdown in December 2010 to redeploy resources for the integration of the Bakersfield refinery acquired in June 2010.
Hurricane Activity
The aftermath of Hurricanes Gustav and Ike in the third quarter of 2008 resulted in the shutdown of approximately 25% of the refining capacity in the United States which greatly influenced the production and supply of both crude oil and refined products throughout the United States. Hurricane Gustav directly affected our refinery in Krotz Springs, Louisiana causing power outages and crude oil supply disruption.
HEP Transaction
A gain on disposition of assets of $42.9 million in the second quarter of 2008 represented the recognition of all the remaining deferred gain associated with the contribution of certain pipelines and terminals to Holly Energy Partners, LP (“HEP”), in March 2005 and was due to the termination of an indemnification agreement with HEP.
Results of Operations
Net Sales. Net sales consist primarily of sales of refined petroleum products through our refining and unbranded marketing segment and asphalt segment and sales of merchandise, including food products, and motor fuels, through our retail and branded marketing segment.
For the refining and unbranded marketing segment, net sales consist of gross sales, net of customer rebates, discounts and excise taxes. Net sales for our refining and unbranded marketing segment include intersegment sales to our asphalt and retail and branded marketing segments, which are eliminated through consolidation of our financial statements. Asphalt sales consist of gross sales, net of any discounts and applicable taxes. Retail net sales consist of gross merchandise sales, less rebates, commissions and discounts, and gross fuel sales, including motor fuel taxes. For our petroleum and asphalt products, net sales are mainly affected by crude oil and refined product prices and volume changes caused by operations. Our retail merchandise sales are affected primarily by competition and seasonal influences.
Cost of Sales. Refining and unbranded marketing cost of sales includes crude oil and other raw materials, inclusive of transportation costs. Asphalt cost of sales includes costs of purchased asphalt, blending materials and transportation costs. Retail cost of sales includes cost of sales for motor fuels and for merchandise. Motor fuel cost of sales represents the net cost of purchased fuel, including transportation costs and associated motor fuel taxes. Merchandise cost of sales includes the delivered cost of merchandise purchases, net of merchandise rebates and commissions. Cost of sales excludes depreciation and amortization expense.
Direct Operating Expenses. Direct operating expenses, which relate to our refining and unbranded marketing and asphalt segments, include costs associated with the actual operations of our refineries, such as energy and utility costs, routine maintenance, labor, insurance and environmental compliance costs. Environmental compliance costs, including monitoring and routine maintenance, are expensed as incurred. All operating costs associated with our crude oil and product pipelines are considered to be transportation costs and are reflected as cost of sales.
Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses consist primarily of costs relating to the operations of our convenience stores, including labor, utilities, maintenance and retail corporate overhead costs. Refining and marketing and asphalt segment corporate overhead and marketing expenses are also included in SG&A expenses.
Summary Financial Tables. The following tables provide summary financial data and selected key operating statistics for us and our three operating segments for the years ended December 31, 2010, 2009 and 2008. The summary financial data for our three operating segments does not include certain SG&A expenses and depreciation and amortization related to our corporate headquarters. The following data should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.
ALON USA ENERGY, INC. CONSOLIDATED
REFINING AND UNBRANDED MARKETING SEGMENT
(1)
Net sales include intersegment sales to our asphalt and retail and branded marketing segments at prices which are intended to approximate wholesale market prices. These intersegment sales are eliminated through consolidation of our financial statements.
(2)
Unrealized loss associated with consignment inventory for the year ended December 31, 2010, is a mark-to-market adjustment for the associated consigned inventory liabilities. Crude oil consignment inventory represents inventory located at storage facilities that was sold to third parties with an obligation by us to repurchase the inventory at then prevailing market prices when the respective agreements end. At December 31, 2010, we had 0.7 million barrels of crude oil consigned to others with a market value of 59.5 million.
(3)
Includes $51.1 million of expenses incurred from pipeline commitment deficiencies, crude sale losses and other incremental costs; $5.0 million for our third party liability insurance deductible under the insurance policy; and depreciation for the temporarily idled facilities of $0.8 million for the year ended December 31, 2008.
(4)
Business interruption recovery of $55.0 million was recorded for the year ended December 31, 2008 as a result of the Big Spring refinery fire with all insurance proceeds being received in 2008 and January 2009.
(5)
A gain on involuntary conversion of assets of $279.7 million has been recorded for the insurance proceeds received in excess of the book value of the assets impaired of $25.3 million and demolition and repair expenses of $25.0 million incurred through December 31, 2008 as a result of the Big Spring refinery fire.
(6)
Gain on disposition of assets reported in 2008 primarily includes the recognition of deferred gain recorded in connection with the HEP transaction. A recognized gain of $42.9 million represented all the remaining deferred gain associated with the HEP transaction and was due to the termination of an indemnification agreement with HEP.
(7)
Refinery operating margin is a per barrel measurement calculated by dividing the margin between net sales and cost of sales (exclusive of substantial unrealized hedge positions and inventory adjustments related to acquisitions) attributable to each refinery by the refinery’s throughput volumes. Industry-wide refining results are driven and measured by the margins between refined product prices and the prices for crude oil, which are referred to as crack spreads. We compare our refinery operating margins to these crack spreads to assess our operating performance relative to other participants in our industry.
The refinery operating margin for the year ended December 31, 2010, excludes a benefit of $4.5 million to cost of sales for inventory adjustments related to the Bakersfield refinery acquisition. There were unrealized hedging gains of $4.2 million for the year ended December 31, 2008, for the California refineries. For the Krotz Springs refinery, there were unrealized hedging gains of $25.6 million for the year ended December 31, 2009, and unrealized hedging gains of $117.5 million for the for the six months ended December 31, 2008. The 2008 refinery operating margin for the Krotz Springs refinery also excludes a charge of $127.4 million to cost of sales for inventory adjustments related to the acquisition. Additionally, the Krotz Springs refinery margin for 2009 excludes realized gains related to the unwind of the heating oil crack spread hedge of $139.3 million.
(8)
Refinery direct operating expense is a per barrel measurement calculated by dividing direct operating expenses at our Big Spring, California, and Krotz Springs refineries, exclusive of depreciation and amortization, by the applicable refinery’s total throughput volumes. Direct operating expenses related to the Bakersfield refinery of $3.4 million for the year ended December 31, 2010, has been excluded from the per barrel measurement.
(9)
Total refinery throughput represents the total barrels per day of crude oil and blendstock inputs in the refinery production process.
(10)
Total refinery production represents the barrels per day of various products produced from processing crude and other refinery feedstocks through the crude units and other conversion units at the refineries.
(11)
Refinery utilization represents average daily crude oil throughput divided by crude oil throughput capacity, excluding planned periods of downtime for maintenance and turnarounds.
ASPHALT SEGMENT
(1)
Cost of sales includes intersegment purchases of asphalt blends from our refining and unbranded marketing segment at prices which approximate wholesale market prices. These intersegment purchases are eliminated through consolidation of our financial statements.
(2)
Blended asphalt represents base asphalt that has been blended with other materials necessary to sell the asphalt as a finished product.
(3)
Non-blended asphalt represents base material asphalt and other components that require additional blending before being sold as a finished product.
(4)
Asphalt margin is a per ton measurement calculated by dividing the margin between net sales and cost of sales by the total sales volume. Asphalt margins are used in the asphalt industry to measure operating results related to asphalt sales.
RETAIL AND BRANDED MARKETING SEGMENT
(1)
Includes excise taxes on sales by the retail and branded marketing segment of $54.9 million, $47.1 million and $37.5 million for the years ended December 31, 2010, 2009 and 2008, respectively. Net sales also includes royalty and related net credit card fees of $4.2 million, $1.4 million and $0.3 million for the years ended December 31, 2010, 2009 and 2008, respectively.
(2)
Cost of sales includes intersegment purchases of motor fuels from our refining and unbranded marketing segment at prices which approximate wholesale market prices. These intersegment purchases are eliminated through consolidation of our financial statements.
(3)
Branded fuel sales represent branded fuel sales to our wholesale marketing customers that are primarily supplied by the Big Spring refinery. The branded fuels that are not supplied by the Big Spring refinery are obtained from third-party suppliers. Due to the fire on February 18, 2008 at the Big Spring refinery, more fuel was purchased from third-party suppliers in 2008. The branded fuel sales margin represents the margin between the net sales and cost of sales attributable to our branded fuel sales volume, expressed on a cents-per-gallon basis.
(4)
Retail fuel and merchandise sales per site for 2009 were calculated using 306 stores for eleven months and 308 stores for one month.
(5)
Retail fuel margin represents the difference between motor fuel sales revenue and the net cost of purchased motor fuel, including transportation costs and associated motor fuel taxes, expressed on a cents-per-gallon basis. Motor fuel margins are frequently used in the retail industry to measure operating results related to motor fuel sales.
(6)
Retail fuel sales price per gallon represents the average sales price for motor fuels sold through our retail convenience stores.
(7)
Merchandise margin represents the difference between merchandise sales revenues and the delivered cost of merchandise purchases, net of rebates and commissions, expressed as a percentage of merchandise sales revenues. Merchandise margins, also referred to as in-store margins, are commonly used in the retail industry to measure in-store, or non-fuel, operating results.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Net Sales
Consolidated. Net sales for 2010 were $4,030.7 million compared to $3,915.7 million for 2009, an increase of $115.0 million or 2.9%. This increase was primarily due to higher refined product prices and higher motor fuel volume and merchandise sales, partially offset by lower refinery throughput and lower asphalt sales volumes.
Refining and Unbranded Marketing Segment. Net sales for our refining and unbranded marketing segment were $3,454.1 million for 2010, compared to $3,359.0 million for 2009, an increase of $95.1 million or 2.8%. The increase in net sales was primarily due to higher refined product prices partially offset by lower refinery throughput.
Combined refinery throughput for the year ended December 31, 2010 averaged 105,868 bpd, consisting of 49,028 bpd at the Big Spring refinery, 17,596 bpd at the California refineries, and 39,244 bpd at the Krotz Springs refinery compared to average total refinery throughput for 2009 of 139,365 bpd, consisting of 59,870 bpd at the Big Spring refinery, 31,158 bpd at the California refineries and 48,337 at the Krotz Springs refinery. The Big Spring refinery throughput was lower as a result of efforts to implement new operating procedures and the California refineries’ throughput was lower due to our continued efforts to optimize asphalt production with demand and the redeployment of resources to integrate the Bakersfield refinery. The Krotz Springs refinery throughput was lower due to its shutdown for turnaround activities until its restart in June 2010.
The average price of Gulf Coast gasoline for 2010 increased 41.7 cpg, or 25.5%, to 205.2 cpg, compared to 163.5 cpg for 2009. The average Gulf Coast ultra-low sulfur diesel price for 2010 increased 49.2 cpg, or 29.6%, to 215.6 cpg, compared to 166.4 cpg for 2009. The average price of West Coast LA CARBOB gasoline for 2010 increased 36.2 cpg, or 19.5%, to 221.4 cpg, compared to 185.2 cpg for 2009. The average West Coast LA ultra-low sulfur diesel price for 2010 increased 50.6 cpg, or 29.7%, to 221.2 cpg, compared to 170.6 cpg for 2009.
Asphalt Segment. Net sales for our asphalt segment were $399.3 million for 2010, compared to $440.9 million for 2009, a decrease of $41.6 million or 9.4%. The decrease was due primarily to a decrease in asphalt sales volume and partially offset by higher asphalt sales prices in 2010. For 2010, the asphalt volume decreased 27.5%, from 1.191 million tons in 2009 to 0.863 million tons in 2010. Also, the average blended asphalt sales price increased 16.4% from $409.88 per ton for 2009 to $477.26 per ton for 2010 and the average non-blended asphalt sales price increased 91.8% from $170.05 per ton for 2009 to $326.16 per ton for 2010.
Retail and Branded Marketing Segment. Net sales for our retail and branded marketing segment were $1,044.8 million for 2010, compared to $808.2 million for 2009, an increase of $236.6 million or 29.3%. This increase was primarily attributable to increases in motor fuel prices, motor fuel volume and merchandise sales.
Cost of Sales
Consolidated. Cost of sales were $3,703.4 million for 2010, compared to $3,502.8 million for 2009, an increase of $200.6 million or 5.7%. This increase was primarily due to increased costs in all segments due to higher crude oil prices, higher motor fuel volume and merchandise sales and the realized gain recognized in 2009 for the unwind of the heating oil hedge, partially offset by lower refinery throughput and lower asphalt sales volumes.
Refining and Unbranded Marketing Segment. Cost of sales for our refining and unbranded marketing segment were $3,302.8 million for 2010, compared to $3,117.5 million for 2009, an increase of $185.3 million or 5.9%. This increase was primarily due to higher crude oil costs and the realized gain recognized in 2009 for the unwind of the heating oil hedge, partially offset by lower refinery throughput volumes. The average WTI per barrel for 2010 increased $17.59 per barrel to $79.41 per barrel, compared to $61.82 per barrel for 2009, an increase of 28.5%.
Asphalt Segment. Cost of sales for our asphalt segment were $355.3 million for 2010, compared to $386.0 million for 2009, a decrease of $30.7 million or 8.0%. The decrease was due primarily to lower asphalt sales volumes and partially offset by higher crude oil costs in 2010.
Retail and Branded Marketing Segment. Cost of sales for our retail and branded marketing segment was $912.9 million for 2010, compared to $691.7 million for 2009, an increase of $221.2 million or 32.0%. This increase was primarily attributable to increases in motor fuel prices, motor fuel volumes and merchandise costs.
Direct Operating Expenses
Consolidated. Direct operating expenses were $249.9 million for 2010, compared to $265.5 million for 2009, a decrease of $15.6 million or 5.9%. This decrease was due to lower refinery throughput volumes for 2010 compared to 2009.
Refining and Unbranded Marketing Segment. Direct operating expenses for our refining and unbranded marketing segment for 2010 were $205.8 million, compared to $221.4 million for 2009, a decrease of $15.6 million or 7.0%. This decrease was due to lower refinery throughput volumes for 2010 compared to 2009. This decrease was partially offset by the acquisition of the Bakersfield refinery in 2010.
Asphalt Segment. Direct operating expenses for our asphalt segment for 2010 and 2009 were $44.1 million.
Selling, General and Administrative Expenses
Consolidated. SG&A expenses for 2010 were $128.1 million, compared to $129.4 million for 2009, a decrease of $1.3 million or 1.0%.
Refining and Unbranded Marketing Segment. SG&A expenses for our refining and unbranded marketing segment for 2010 were $22.8 million, compared to $29.4 million for 2009, a decrease of $6.6 million or 22.4%. This decrease was primarily due to net bad debt recoveries of $1.5 million in 2010 compared to bad debt expense of $3.3 million in 2009.
Asphalt Segment. SG&A expenses for our asphalt segment for 2010 were $5.5 million, compared to $4.6 million for 2009, an increase of $0.9 million or 19.6%. This increase is due to employee related costs in 2010.
Retail and Branded Marketing Segment. SG&A expenses for our retail and branded marketing segment for 2010 were $99.0 million, compared to $94.7 million for 2009, an increase of $4.3 million or 4.5%. The increase was primarily attributable to increased payroll and related costs.
Depreciation and Amortization
Depreciation and amortization for 2010 was $102.1 million, compared to $97.2 million for 2009, an increase of $4.9 million or 5.0%. This increase was primarily attributable to depreciation on the capital expenditures placed into service during the fourth quarter of 2009 and in 2010.
Operating Income (Loss)
Consolidated. Operating loss for 2010 was $160.8 million, compared to $80.8 million for 2009, an increase of $80.0 million. This increase was primarily due to lower refinery throughput and margins, lower asphalt sales volumes and the realized gain recognized in 2009 for the unwind of the heating oil hedge, partially offset by higher motor fuel volumes and higher merchandise sales and margins.
Refining and Unbranded Marketing Segment. Operating loss for our refining and unbranded marketing segment was $166.0 million for 2010, compared to $86.5 million for 2009, an increase of $79.5 million. This increase was primarily due to lower refinery throughput at all our refineries, lower refining margins at our Krotz Springs and California refineries for 2010 compared to the same period last year and the realized gain recognized in 2009 for the unwind of the heating oil hedge. This was partially offset by higher margins at our Big Spring refinery, lower direct operating costs and net bad debt recoveries of $1.5 million in 2010 compared to bad debt expense of $3.3 million in 2009.
Refinery operating margin at the Big Spring refinery was $6.03 per barrel for 2010 compared to $4.35 per barrel for 2009. The Big Spring refinery light product yields were approximately 89.4% for 2010 and 82.1% for 2009. Refinery operating margin at the California refineries was $1.08 per barrel for 2010 compared to $1.83 per barrel for 2009. The Krotz Springs refinery operating margin for 2010 was $2.24 per barrel compared to $5.66 per barrel for 2009.
Asphalt Segment. Operating loss for our asphalt segment was $12.5 million for 2010, compared to $0.6 million for 2009, an increase of $11.9 million. The increase was primarily due to lower sales volumes in 2010.
Retail and Branded Marketing Segment. Operating income for our retail and branded marketing segment was $19.8 million for 2010, compared to $7.8 million for 2009, an increase of $11.8 million. This increase was primarily attributable to higher motor fuel volumes and higher merchandise sales and margins.
Interest Expense
Interest expense was $94.9 million for 2010, compared to $111.1 million in 2009, a decrease of $16.2 million or 14.6%.The decrease is primarily due to $20.5 million of unamortized debt issuance costs written off as a result of the prepayment of $163.8 million of term debt in 2009 and $5.7 million of interest expenses related to the liquidation of our heating oil hedge in 2009. This was partially offset by $6.7 million of debt issuance costs written off associated with our prepayment of the Alon Refining Krotz Springs, Inc. revolving credit facility in 2010.
Gain from Bargain Purchase
In connection with the Bakersfield refinery acquisition in June 2010, the acquisition date fair value of the identifiable net assets acquired exceeded the fair value of the consideration transferred, resulting in a $17.5 million bargain purchase gain in 2010.
Income Tax Benefit
Income tax benefit was $90.5 million in 2010, compared to $64.9 million in 2009, an increase of $25.6 million. The increase in income tax benefit was attributable to our lower 2010 taxable income compared to 2009. The pre-tax loss for 2010 includes the $17.5 million non-taxable bargain purchase gain. Our effective tax rate was 37.6% for 2010, excluding the $17.5 million non-taxable bargain purchase gain, compared to an effective tax rate of 38.8% for 2009.
Non-controlling Interest in Loss of Subsidiaries
Non-controlling interest in loss of subsidiaries represents the proportional share of net loss related to non-voting common stock owned by non-controlling interest stockholders in two of our subsidiaries, Alon Assets and Alon Operating. Non-controlling interest in loss of subsidiaries was $9.6 million for 2010, compared to $8.6 million for 2009, an increase of $1.0 million.
Net Loss Available to Common Stockholders
Net loss available to common stockholders was $122.9 million for 2010, compared to $115.2 million for 2009, an increase in loss of $7.7 million. This increase was attributable to the factors discussed above.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net Sales
Consolidated. Net sales for 2009 were $3,915.7 million compared to $5,156.7 million for 2008, a decrease of $1,241.0 million or 24.1%. This decrease was primarily due to lower refined product prices, and was partially offset by higher sales volume from a full year of operations at our Big Spring and Krotz Springs refineries.
Refining and Unbranded Marketing Segment. Net sales for our refining and unbranded marketing segment were $3,359.0 million for 2009, compared to $4,551.8 million for 2008, a decrease of $1,192.8 million or 26.2%. The decrease in net sales was primarily due to significantly lower refined product prices partially offset by the inclusion of an additional six months of sales from the Krotz Springs refinery acquired in July 2008 and lower 2008 throughput volumes as a result of the February 18, 2008 Big Spring refinery fire.
The Big Spring refinery and California refineries combined throughput for 2009 averaged 91,028 bpd consisting of 59,870 bpd at the Big Spring refinery and 31,158 bpd at the California refineries compared to average total refinery throughput for 2008 of 68,892 bpd, consisting of 37,793 bpd at the Big Spring refinery and 31,099 bpd at the California refineries. The Krotz Springs refinery throughput for 2009 averaged 48,337 bpd and for the period from its acquisition effective July 1, 2008 through December 31, 2009 averaged 58,184 bpd.
The decrease in refined product prices that our refineries experienced was similar to the price decreases experienced in each refinery’s respective markets. The average price of Gulf Coast gasoline for 2009 decreased 83.6 cpg, or 33.8%, to 163.5 cpg, compared to 247.1 cpg for 2008. The average Gulf Coast ultra-low sulfur diesel price for 2009 decreased 125.4 cpg, or 43.0%, to 166.4 cpg, compared to 291.8 cpg for 2008. The average price of West Coast LA CARBOB gasoline for 2009 decreased 82.7 cpg, or 30.9%, to 185.2 cpg, compared to 267.9 cpg for 2008. The average West Coast LA ultra-low sulfur diesel price for 2009 decreased 117.7 cpg, or 40.8%, to 170.6 cpg, compared to 288.3 cpg for 2008.
Asphalt Segment. Net sales for our asphalt segment were $440.9 million for 2009, compared to $647.2 million for 2008, a decrease of $206.3 million or 31.9%. The decrease was due primarily to a decrease in the average asphalt sales price and lower asphalt sales volumes for the year 2009. For the year 2009, we sold 1.191 million tons of asphalt compared to 1.298 million tons of asphalt sold in 2008, a decrease of 0.107 million tons of asphalt or 8.2%. Also, the average blended asphalt sales price decreased 19.9% from $511.95 per ton for 2008 to $409.88 per ton for 2009 and the average non-blended asphalt sales price decreased 46.1% from $315.48 per ton for 2008 to $170.05 per ton for 2009. The blended asphalt sales accounted for 92% of total asphalt sales for 2009. The percentage decrease in the blended asphalt sales price of 19.9% was less than the 37.9% decrease in WTI prices for 2009.
Retail and Branded Marketing Segment. Net sales for our retail and branded marketing segment were $808.2 million for 2009, compared to $1,227.3 million for 2008, a decrease of $419.1 million or 34.1%. This decrease was primarily due to a 100.2 million gallon reduction in wholesale non-integrated branded fuel sales related to the net decline of 130 retail outlets that we supplied with motor fuel and lower sales prices. This net decline in retail outlets supplied by us was a result of our efforts to reduce our exposure in markets not integrated with our Big Spring refinery by allowing fuel supply agreements to expire by their terms. This reduction was partially offset by higher integrated branded fuel sales, retail fuel sales and merchandise sales.
Cost of Sales
Consolidated. Cost of sales was $3,502.8 million for 2009, compared to $4,853.2 million for 2008, a decrease of $1,350.4 million or 27.8%. This decrease was primarily due to decreased costs in all segments due to lower crude oil prices, and was partially offset by higher cost of sales volume from a full year of operations at our Big Spring and Krotz Springs refineries.
Refining and Unbranded Marketing Segment. Cost of sales for our refining and unbranded marketing segment were $3,117.5 million for 2009, compared to $4,505.1 million for 2008, a decrease of $1,387.6 million or 30.8%. This decrease was primarily due to lower crude oil costs, partially offset by the inclusion of an additional six months of cost of sales from the Krotz Springs refinery acquired in July 2008 and lower 2008 throughput volumes at the Big Spring refinery from the February 2008 fire. The average price per barrel of WTI for 2009 decreased $37.74 per barrel to an average of $61.82 per barrel, compared to an average of $99.56 per barrel for 2008, a decrease of 37.9%.
Asphalt Segment. Cost of sales for our asphalt segment were $386.0 million for 2009, compared to $500.0 million for 2008, a decrease of $114.0 million or 22.8%. The decrease was due to the decreased cost of crude oil and lower asphalt sales volumes in 2009.
Retail and Branded Marketing Segment. Cost of sales for our retail and branded marketing segment was $691.7 million for 2009, compared to $1,117.7 million for 2008, a decrease of $426.0 million or 38.1%. This decrease was primarily due to a 100.2 million gallon reduction in wholesale non-integrated branded fuel sales related to the net decline of 130 retail outlets that we supplied with motor fuel and lower product costs. This reduction was partially offset by higher integrated branded fuel sales, retail fuel sales and merchandise sales.
Direct Operating Expenses
Consolidated. Direct operating expenses were $265.5 million for 2009, compared to $216.5 million for 2008, an increase of $49.0 million or 22.6%. This increase was primarily due to the direct operating expenses associated with the Krotz Springs refinery acquired in July 2008 and higher throughput volumes at the Big Spring refinery for 2009 compared to 2008.
Refining and Unbranded Marketing Segment. Direct operating expenses for our refining and unbranded marketing segment for 2009 were $221.4 million, compared to $173.1 million for 2008, an increase of $48.3 million or 27.9%. This increase was primarily due to the inclusion of an additional six months of direct operating expenses associated with the Krotz Springs refinery acquired in July 2008 and higher throughput volumes at the Big Spring refinery for 2009 compared to 2008. This was partially offset by lower natural gas prices in 2009.
Asphalt Segment. Direct operating expenses for our asphalt segment for 2009 were $44.1 million, compared to $43.4 million for 2008, an increase of $0.7 million or 1.6%.
Selling, General and Administrative Expenses
Consolidated. SG&A expenses for 2009 were $129.4 million, compared to $119.9 million for 2008, an increase of $9.5 million or 7.9%. This increase was primarily due to the inclusion of an additional six months of SG&A costs associated with the Krotz Springs refinery acquired in July 2008 and an increase of $3.3 million in allowance for doubtful accounts.
Refining and Unbranded Marketing Segment. SG&A expenses for our refining and unbranded marketing segment for 2009 were $29.4 million, compared to $17.8 million for 2008, an increase of $11.6 million or 65.2%. This increase was primarily due to the inclusion of an additional six months of SG&A costs associated with the Krotz Springs refinery acquired in July 2008 and an increase of $3.3 million in allowance for doubtful accounts.
Asphalt Segment. SG&A expenses for our asphalt segment for 2009 were $4.6 million, compared to $4.3 million for 2008, an increase of $0.3 million or 7.0%.
Retail and Branded Marketing Segment. SG&A expenses for our retail and branded marketing segment for 2009 were $94.7 million, compared to $97.2 million for 2008, a decrease of $2.5 million or 2.6%. This decrease was primarily attributable to implementation of improved inventory control procedures to reduce shrinkage.
Depreciation and Amortization
Depreciation and amortization for 2009 was $97.2 million, compared to $66.8 million for 2008, an increase of $30.4 million or 45.5%. This increase was primarily attributable to a full year of depreciation of the assets acquired from the acquisition of the Krotz Springs refinery and depreciation on the capital expenditures related to the rebuild of the Big Spring refinery.
Operating Income (Loss)
Consolidated. Operating income (loss) for 2009 was ($80.8) million, compared to $223.5 million for 2008, a decrease of $304.3 million. This decrease was primarily due to gains recorded in 2008 for the involuntary conversion of assets and business interruption recovery associated with the Big Spring refinery fire, partially offset by fire related costs. Operating income in 2008 also included a gain on disposition of assets related to the HEP transaction. Refining margins at our Big Spring refinery and California refineries were higher for 2009 compared to the same period last year, and the Krotz Springs refinery acquired in July 2008 included six months of operating margin in 2008 and twelve months of operating margin in 2009.
Refining and Unbranded Marketing Segment. Operating income (loss) for our refining and unbranded marketing segment was ($86.5) million for 2009, compared to $128.8 million for 2008, a decrease of $215.3 million. This decrease was primarily due to gains recorded in 2008 for the involuntary conversion of assets of $279.7 million and business interruption recovery of $55.0 million associated with the Big Spring refinery fire, offset by fire related costs of $56.9 million. Additionally, gains on disposition of assets of $45.2 million were recorded in 2008 related to the HEP transaction. Partially offsetting these 2008 gains were higher refining margins at our Big Spring refinery and California refineries for 2009 compared to the same period last year. In addition, the Krotz Springs refinery acquired in July 2008 included six months of operating margin in 2008 and twelve months of operating margin in 2009.
Refinery operating margin at the Big Spring refinery was $4.35 per barrel for 2009 compared to ($3.18) per barrel for 2008. This increase was primarily due to the depressed margins experienced in conjunction with the fire at the Big Spring refinery in 2008. The Big Spring refinery light product yields were approximately 82.1% for 2009 and 69.8% for 2008. Refinery operating margin at the California refineries was $1.83 per barrel for 2009 compared to $1.65 per barrel for 2008. The Krotz Springs refinery operating margin for 2009 was $5.66 per barrel compared to $7.25 per barrel for the period from its acquisition effective July 1, 2008 through December 31, 2008. The lower Krotz Springs refinery operating margin is due primarily to lower Gulf coast 2/1/1 high sulfur diesel margins in 2009.
Asphalt Segment. Operating income (loss) for our asphalt segment was ($0.6) million for 2009, compared to $97.4 million for 2008, a decrease of $98.0 million. The decrease was primarily due to the lower sales prices and sales volumes in 2009.
Retail and Branded Marketing Segment. Operating income (loss) for our retail and branded marketing segment was $7.8 million for 2009, compared to ($1.2) million for 2008, an increase of $9.0 million. This increase was primarily attributable to higher branded fuel margins.
Interest Expense
Interest expense was $111.1 million for 2009, compared to $67.6 million in 2008, an increase of $43.5 million or 64.3%. The increase is primarily due to interest on our borrowings and letter of credit fees related to the Krotz Springs refinery acquisition in July 2008, interest expenses related to the liquidation of our heating oil hedge in 2009 of $5.7 million and the write-off of unamortized debt issuance costs of $20.5 million as a result of the prepayment of the Krotz Term Loan in 2009.
Income Tax Expense (Benefit)
Income tax expense (benefit) was ($64.9) million in 2009, compared to $62.8 million in 2008, a decrease of $127.7 million. The decrease in income tax expense (benefit) was attributable to our lower 2009 taxable income compared to 2008. Our effective tax rate for 2009 was 38.8% compared to 40.3% for 2008.
Non-controlling Interest in Income (Loss) of Subsidiaries
Non-controlling interest in income (loss) of subsidiaries represents the proportional share of net income related to non-voting common stock owned by non-controlling interest stockholders in two of our subsidiaries, Alon Assets
and Alon Operating. Non-controlling interest in income (loss) of subsidiaries was ($8.6) million for 2009, compared to $5.9 million for 2008, a decrease of $14.5 million.
Accumulated Dividends on Preferred Stock of Subsidiary
Accumulated dividends on preferred stock of subsidiary for the year ended December 31, 2009, represent dividends of $12.9 million for the conversion of the preferred stock into Alon common stock. Also included for the year ended December 31, 2009 is $8.6 million of accumulated dividends.
Net Income (Loss) Available to Common Stockholders
Net income (loss) available to common stockholders was ($115.2) million for 2009, compared to $82.9 million for 2008, a decrease of $198.1 million. This decrease was attributable to the factors discussed above.
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash generated from our operating activities, borrowings under our revolving credit facilities and capital contributions or loans from affiliates.
During the first quarter of 2011, we have completed three agreements. In January 2011, we completed a Standby Equity Distribution Agreement for a commitment by an unrelated party to purchase up to $25.0 million of our common stock over a two-year period. In February 2011, we signed a multi-year agreement with J. Aron for the supply of crude oil that will support the operation of the Big Spring refinery at 70,000 barrels per day. This agreement became effective on March 1, 2011. The structure of this new agreement is also expected to result in lower borrowing costs as we used the proceeds from the sale of inventories to repay approximately $125.0 million of loans under our Alon USA LP Credit Facility. Also, the structure will substantially reduce our need to issue letters of credit to support Big Spring refinery crude oil purchases. In addition, the structure will allow us to make crude oil purchases without the constraint of increases in crude oil prices customary with a typical revolving credit facility. Also, in February 2011, Alon Brands issued 5-year unsecured notes for $30.0 million to a group of investors, including Alon Israel.
We believe that the aforementioned sources of funds and other sources of capital available to us will be sufficient to satisfy the anticipated cash requirements associated with our business during the next 12 months. Our ability to generate sufficient cash from our operating activities depends on our future performance, which is subject to general economic, political, financial, competitive and other factors beyond our control.
Depending upon conditions in the capital markets and other factors, we will from time to time consider the issuance of debt or equity securities, or other possible capital markets transactions, the proceeds of which could be used to refinance current indebtedness, extend or replace existing revolving credit facilities or for other corporate purposes.
Cash Flow
The following table sets forth our consolidated cash flows for the years ended December 31, 2010, 2009 and 2008:
Cash Flows Provided By (Used in) Operating Activities
Net cash provided by operating activities in 2010 was $21.3 million, compared to $283.1 million in 2009. The change of $261.9 million in net cash provided by operating activities in 2010 is primarily attributable to the difference of $162.7 million in net income, adjusted for non-cash reconciling items such as deferred income tax
expense, bargain purchase gain, gain on the disposition of assets and depreciation, in 2010 compared to 2009, and the receipt of proceeds from the liquidation of our heating oil crack spread hedge in 2009 for $133.6 million.
Net cash provided by (used in) operating activities in 2009 was $283.1 million, compared to ($0.8) million in 2008. The change of $283.9 million in net cash provided by operating activities in 2009 was attributable to the receipt of proceeds from the liquidation of our heating oil crack spread hedge in 2009 for $133.6 million, receipt of income tax receivables in 2009 of $113.0 million and the change in net income compared to 2008, adjusted for non-cash reconciling items such as deferred income tax expense, gain on involuntary conversion of assets, gain on the disposition of assets and depreciation.
Cash Flows Used In Investing Activities
Net cash used in investing activities was $40.9 million in 2010 compared to $138.7 million in 2009. The change in net cash used in investing activities of $97.8 was primarily due to lower 2010 capital expenditures of $93.3 million compared to 2009, proceeds received from the disposition of assets and sale of securities of $22.0 million and $36.9 million, respectively, and a decrease in the earnout payments made to Valero of $10.9 million from 2009. This was partially offset by the acquisition of the Bakersfield refinery of $32.4 million in 2010 and insurance proceeds of $34.1 million received in 2009 to rebuild the Big Spring refinery.
Net cash used in investing activities was $138.7 million in 2009 compared to $610.3 million in 2008. The change in cash used in investing activities of $471.6 million was primarily due to the July 3, 2008 acquisition of the Krotz Springs refinery of $481.0 million and 2008 capital expenditures to rebuild the Big Spring refinery, net of insurance proceeds. This was partially offset by higher capital expenditures, $106.4 million in 2009 compared to $72.3 million in 2008, and earnout payments made to Valero of $19.7 million as part of the Krotz Springs refinery acquisition in 2009.
Cash Flows Provided By (Used In) Financing Activities
Net cash provided by (used in) financing activities was $50.8 million in 2010 compared to ($122.5) million in 2009. The change in net cash used in financing activities of $173.4 million was primarily attributable to the proceeds received from the sale of preferred stock of $40.0 million, cash received from the inventory supply agreement of $45.8 million in 2010 compared to cash received from an inventory supply agreement of $20.2 million in 2009, as well as an overall decrease in payments made on long-term debt and debt issuance costs during 2010.
Net cash provided by (used in) financing activities was ($122.5) million in 2009 compared to $561.0 million in 2008. The change in net cash used in financing activities of $683.5 million was primarily attributable to proceeds received in 2008 from the Krotz Term Loan of $252.0 million to purchase the Krotz Springs refinery and $276.8 million of borrowings on the revolving credit facilities plus an $80.0 million investment from our parent. These proceeds were partially offset by debt issuance costs of $28.1 million and payments on long-term debt of $11.9 million. In 2009, the prepayment of the Krotz Term Loan and repayments of borrowings under revolving credit facilities of $322.2 million were made from proceeds associated with the receipt of income tax receivables, the liquidation of the heating oil crack spread hedge and net proceeds received from the issuance of the senior notes of $205.4 million. 2009 also included cash used of $17.8 million for debt issuance cost, associated with the senior secured notes, and $20.2 million of cash received from an inventory supply agreement.
Cash and Cash Equivalents
We consider all highly liquid instruments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents are stated at cost, which approximates market value.
As of December 31, 2010, our total cash and cash equivalents were $71.7 million and we had total debt of $916.3 million.
Credit Facilities
Alon USA Energy, Inc. Credit Facilities
Term Loan Credit Facility. We have a term loan (the “Alon Energy Term Loan”) that will mature on August 2, 2013. Principal payments of $4.5 million per annum are paid in quarterly installments, subject to reduction from mandatory repayments associated with certain events.
Borrowings under the Alon Energy Term Loan bear interest at a rate based on a margin over the Eurodollar rate from between 1.75% to 2.50% per annum based upon the ratings of the loans by Standard & Poor’s Rating Service and Moody’s Investors Service, Inc. Currently, the margin is 2.25% over the Eurodollar rate.
The Alon Energy Term Loan is jointly and severally guaranteed by all of our subsidiaries except for our retail subsidiaries and those subsidiaries established in conjunction with the Krotz Springs refinery acquisition and certain subsidiaries established in conjunction with the Bakersfield acquisition. The Alon Energy Term Loan is secured by a second lien on cash, accounts receivable and inventory and a first lien on most of our remaining assets excluding those of our retail subsidiaries and those subsidiaries established in conjunction with the Krotz Springs refinery acquisition and certain subsidiaries established in conjunction with the Bakersfield acquisition.
The Alon Energy Term Loan contains restrictive covenants, such as restrictions on liens, mergers, consolidations, sales of assets, additional indebtedness, different businesses, certain lease obligations, and certain restricted payments. The Alon Energy Term Loan does not contain any maintenance financial covenants.
At December 31, 2010 and 2009, the Alon Energy Term Loan had an outstanding balance of $429.8 million and $434.3 million, respectively.
Letter of Credit Facility. In March 2010, we entered into an unsecured credit facility with Israel Discount Bank of New York (the “Alon Energy Letter of Credit Facility”) for the issuance of letters of credit in an amount not to exceed $60.0 million and with a sub-limit for borrowings not to exceed $30.0 million. This facility will terminate on January 31, 2013. The Alon Energy Letter of Credit Facility contains certain restrictive covenants including maintenance financial covenants. On December 31, 2010, Alon had $60.0 million of outstanding letters of credit under this facility. Borrowings under this facility bear interest at the Eurodollar rate plus 3.50% per annum subject to an overall minimum interest rate of 4.00%.
Alon USA, LP Credit Facility
Revolving Credit Facility. We have a $240.0 million revolving credit facility (the “Alon USA LP Credit Facility”) that will mature on January 1, 2013. The Alon USA LP Credit Facility can be used both for borrowings and the issuance of letters of credit subject to a limit of the lesser of the facility or the amount of the borrowing base under the facility.
Borrowings under the Alon USA LP Credit Facility bear interest at the Eurodollar rate plus 3.00% per annum subject to an overall minimum interest rate of 4.00%.
The Alon USA LP Credit Facility is secured by (i) a first lien on our cash, accounts receivables, inventories and related assets and (ii) a second lien on our fixed assets and other specified property, in each case, excluding those of Alon Paramount Holdings, Inc. (“Alon Holdings”), and its subsidiaries other than Alon Pipeline Logistics, LLC (“Alon Logistics”), the subsidiaries established in conjunction with the Krotz Springs refinery acquisition, the subsidiaries established in conjunction with the Bakersfield refinery acquisition and our retail subsidiaries.
The Alon USA LP Credit Facility contains certain restrictive covenants including maintenance financial covenants.
Borrowings of $122.0 million and $88.0 million were outstanding under the Alon USA LP Credit Facility at December 31, 2010 and 2009, respectively. At December 31, 2010 and 2009, outstanding letters of credit under the Alon USA LP Credit Facility were $117.0 million and $129.0 million, respectively.
Paramount Petroleum Corporation Credit Facility
Revolving Credit Facility. Paramount Petroleum Corporation has a $300.0 million revolving credit facility (the “Paramount Credit Facility”) that will mature on February 28, 2012. The Paramount Credit Facility can be used both for borrowings and the issuance of letters of credit subject to a limit of the lesser of the facility or the amount of the borrowing base under the facility.
Borrowings under the Paramount Credit Facility bear interest at the Eurodollar rate plus a margin based on excess availability. Based on the excess availability at December 31, 2010, the margin was 2.00%.
The Paramount Credit Facility is primarily secured by (i) a first lien on cash, accounts receivables, inventories and related assets and (ii) a second lien on Alon Holdings’ (excluding Alon Logistics) fixed assets and other specified property.
The Paramount Credit Facility contains certain restrictive covenants related to working capital, operations and other matters.
Borrowings of $63.1 million and $45.3 million were outstanding under the Paramount Credit Facility at December 31, 2010 and 2009, respectively. At December 31, 2010 and 2009, outstanding letters of credit under the Paramount Credit Facility were $1.3 million and $18.0 million, respectively.
Alon Refining Krotz Springs, Inc. Credit Facilities
Senior Secured Notes. In October 2009, Alon Refining Krotz Springs, Inc. (“ARKS”) issued 13.50% senior secured notes (the “Senior Secured Notes”) in aggregate principal amount of $216.5 million in a private offering. In February 2010, ARKS exchanged $216.5 million of Senior Secured Notes for an equivalent amount of Senior Secured Notes (“Exchange Notes”) registered under the Securities Act of 1933. The Exchange Notes will mature on October 15, 2014 and the entire principal amount is due at maturity. Interest is payable semi-annually in arrears on April 15 and October 15. The Exchange Notes are substantially identical to the Senior Secured Notes, except that the Exchange Notes have been registered with the Securities and Exchange Commission and are not subject to transfer restrictions. The Senior Secured Notes were issued at an offering price of 94.857% and ARKS received gross proceeds of $205.4 million (before fees and expenses related to the offering). ARKS used the proceeds to repay in full all outstanding obligations under its term loan at that time. The remaining proceeds from the offering were used for general corporate purposes.
The terms of the Senior Secured Notes are governed by an indenture (the “Indenture”) and the obligations under the Indenture are secured by a first priority lien on ARKS’ property, plant and equipment and a second priority lien on ARKS’ cash, accounts receivable and inventory.
The Indenture also contains restrictive covenants such as restrictions on loans, mergers, sales of assets, additional indebtedness and restricted payments. The Indenture does not contain any maintenance financial covenants.
At December 31, 2010 and 2009, the Senior Secured Notes had an outstanding balance (net of unamortized discount) of $207.4 million and $205.7 million, respectively. ARKS is utilizing the effective interest method to amortize the original issue discount over the life of the Senior Secured Notes.
Short-Term Credit Facility. In March 2010, ARKS entered into a $65.0 million short-term credit facility with Bank Hapoalim B.M. (the “ARKS Term Facility”). The ARKS Term Facility was drawn upon closing and all outstanding amounts were repaid during 2010.
Revolving Credit Facility. In March 2010, ARKS terminated its revolving credit facility agreement (the “ARKS Facility”) and repaid all outstanding amounts thereunder. As a result of the prepayment of the ARKS Facility, we recorded a write-off of unamortized debt issuance costs of $6.7 million as interest expense in the first quarter of 2010.
Borrowings of $83.3 million and outstanding letters of credit of $2.8 million were outstanding under the ARKS Facility at December 31, 2009.
Retail Credit Facilities
Term Credit Agreement. Southwest Convenience Stores, LLC (“SCS”) is party to a credit agreement (the “SCS Credit Agreement”) that, as amended, matures on December 30, 2015. On December 30, 2010, SCS entered into an amendment to the SCS Credit Agreement. The amendment increased the amount outstanding from $73.4 million (“SCS Refinancing Term Loan”) by $10.0 million (“SCS Additional Term Loan”) and also included a revolving credit loan (“SCS Revolving Credit Loan”) with a maximum loan amount of the lesser of the borrowing base or $10.0 million.
Borrowings under the SCS Refinancing Term Loan bear interest at a Eurodollar rate plus 2.00% per annum with principal payments made in quarterly installments based on a 15-year amortization schedule.
Borrowings under the SCS Additional Term Loan bear interest at a Eurodollar rate plus 2.75% per annum with principal payments made in quarterly installments based on a 5-year amortization schedule.
Borrowings under the SCS Revolving Credit Loan bear interest at a Eurodollar rate plus 2.75% per annum.
The obligations under the SCS Credit Agreement are secured by a pledge of substantially all of the assets of SCS and Skinny’s, LLC and each of their subsidiaries, including cash, accounts receivable and inventory.
The SCS Credit Agreement contains certain restrictive covenants including maintenance financial covenants.
At December 31, 2010 and 2009, the SCS Credit Agreement had an outstanding balance under the term loans of $83.4 million and $79.7 million, respectively. At December 31, 2010, the SCS Revolving Credit Loan had an outstanding balance of $10.0 million.
Other Retail Related Credit Facilities
In 2003, we obtained $1.5 million in mortgage loans to finance the acquisition of new retail locations. The interest rates on these loans ranged between 5.5% and 9.7%, with 5 to 15 year payment terms. At December 31, 2010 and 2009, the outstanding balances were $0.7 million and $0.8 million, respectively.
Capital Spending
Each year our Board of Directors approves capital projects, including regulatory and planned turnaround projects that our management is authorized to undertake in our annual capital budget. Additionally, at times when conditions warrant or as new opportunities arise, other projects or the expansion of existing projects may be approved. Our capital expenditure budgets, including expenditures for chemical catalyst and turnarounds, for 2011 and 2012 are $108.9 million and $115.0 million, respectively. The following table summarizes our expected capital expenditures for 2011 and 2012 by operating segment and major category:
Turnaround and Chemical Catalyst Costs. Our 2010 turnaround and chemical catalyst costs were $13.1 million.
Between our major turnarounds, we also perform periodic scheduled turnaround projects on various units at our Big Spring, Krotz Springs and California refineries. A summary of our expected turnaround and chemical catalyst costs for the following five years are as follows:
Contractual Obligations and Commercial Commitments
Information regarding our known contractual obligations of the types described below as of December 31, 2010 is set forth in the following table:
(1)
Balances represent the minimum committed volume multiplied by the tariff and terminal rates pursuant to the terms of the Pipelines and Terminals Agreement with HEP, as well as our minimum requirements with Sunoco.
(2)
Other commitments include refinery maintenance services costs.
As of December 31, 2010, we did not have any material capital lease obligations or any agreements to purchase goods or services, other than those included in the table above, that were binding on us.
Our “Other non-current liabilities” are described in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. For most of these liabilities, timing of the payment of such liabilities is not fixed and therefore cannot be determined as of December 31, 2010. However, certain expected payments related to our anticipated pension contributions in 2010 and other post-retirement benefits obligations are discussed in Note 13 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements.
Critical Accounting Policies
Our accounting policies are described in the notes to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We prepare our consolidated financial statements in conformity with GAAP. In order to apply these principles, we must make judgments, assumptions and estimates based on the best available information at the time. Actual results may differ based on the accuracy of the information utilized and subsequent events, some of which we may have little or no control over. Our critical accounting policies, which are discussed below, could materially affect the amounts recorded in our consolidated financial statements.
Inventory. Crude oil, refined products and blendstocks for the refining and unbranded marketing segment and asphalt for the asphalt segment are priced at the lower of cost or market value. Cost is determined using the LIFO valuation method. Under the LIFO valuation method, we charge the most recent acquisition costs to cost of sales, and we value inventories at the earliest acquisition costs. We selected this method because we believe it more accurately reflects the cost of our current sales. If the market value of inventory is less than the inventory cost on a LIFO basis, then the inventory is written down to market value. An inventory write-down to market value results in a non-cash accounting adjustment, decreasing the value of our crude oil and refined products inventory and increasing our cost of sales. A reduction of inventory volumes during 2010, 2009 and 2008 resulted in a liquidation of LIFO inventory layers carried at lower costs which prevailed in previous years. The liquidation decreased cost of sales by approximately $18.6 million, $10.2 million, and $4.1 million in 2010, 2009 and 2008, respectively. Market values of crude oil, refined products, asphalts and blendstocks exceeded LIFO costs by $115.1 million and $100.5 million at December 31, 2010 and 2009, respectively.
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. Our environmental liabilities represent the estimated cost to investigate and remediate contamination at our properties. Our estimates are based upon internal and third-party assessments of contamination, available remediation technology and environmental regulations. Accruals for estimated liabilities from projected environmental remediation obligations are recognized no later than the completion of the remedial feasibility study. These accruals are adjusted as further information develops or circumstances change. We do not discount environmental liabilities to their present value unless payments are fixed and determinable. At December 31, 2010, for those payments we considered fixed and determinable, payments were discounted at a 4% rate. We record them without considering potential recoveries from third parties. Recoveries of environmental remediation costs from third parties are recorded as assets when receipt is deemed probable. We update our estimates to reflect changes in factual information, available technology or applicable laws and regulations.
Turnarounds and Chemical Catalyst Costs. We record the cost of planned major refinery maintenance, referred to as turnarounds, and chemical catalyst used in the refinery process units, which are typically replaced in conjunction with planned turnarounds, in “Other assets” in our consolidated financial statements. Turnaround and catalyst costs are currently deferred and amortized on a straight-line basis beginning the month after the completion of the turnaround and ending immediately prior to the next scheduled turnaround. The amortization of deferred turnaround and chemical catalysts costs are presented in “Depreciation and amortization” in our consolidated financial statements.
Impairment of Long-Lived Assets. We account for impairment of long-lived assets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 360-10, Property, Plant, and Equipment. In evaluating our assets, long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of an asset to future net cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its expected future cash flows, an impairment loss is recognized based on the excess of the carrying value of the impaired asset over its fair value. These future cash flows and fair values are estimates based on our
judgment and assumptions. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs of disposition.
Deferred Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Asset Retirement Obligations. Alon uses ASC Subtopic 410-20, Asset Retirement Obligations, which established accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement costs. The provisions of ASC Subtopic 410-20 apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of a long-lived asset. ASC Subtopic 410-20 also requires companies to recognize a liability for the fair value of a legal obligation to perform asset retirement activities that are conditional on a future event, if the amount can be reasonably estimated.
In order to determine fair value, management must make certain estimates and assumptions including, among other things, projected cash flows, a credit-adjusted risk-free rate and an assessment of market conditions that could significantly impact the estimated fair value of the asset retirement obligation. These estimates and assumptions are subjective.
Goodwill and Intangible Assets. Goodwill represents the excess of the cost of an acquired entity over the fair value of the assets acquired less liabilities assumed. Intangible assets are assets that lack physical substance (excluding financial assets). Goodwill acquired in a business combination and intangible assets with indefinite useful lives are not amortized and intangible assets with finite useful lives are amortized on a straight-line basis over 1 to 40 years. Goodwill and intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired. Alon uses December 31 of each year as the valuation date for annual impairment testing purposes.
At December 31, 2010, Alon had three reporting units with goodwill; California refining, California asphalt, and Retail operations. The fair values of our reporting units in 2010 that contain goodwill were determined using two methods, one based on discounted cash flow models with estimated cash flows based on internal forecasts of revenues and expenses and the other based on market earnings multiples. Each reporting unit was evaluated separately. Cash flows were discounted at rates that approximate a market participants’ weighted average cost of capital; 10% for both California refining and California asphalt and 8.5% for Retail operations. We believe these two approaches are appropriate valuation techniques for the purposes of our impairment testing. Therefore, we concluded from our valuations, based on business conditions and market values that existed at December 31, 2010, that none of our goodwill was impaired. However, the market value of our common stock at December 31, 2010 continued to reflect the effects of the difficult economic environment, the market’s perception of our asset utilization and significant competition in most of our markets. If, among other factors, (1) our equity value declines further, (2) the fair value of our reporting units decline, or (3) the impact of economic or competitive factors adversely affect beyond what was anticipated, we could conclude in future periods that impairment losses are required in order to reduce the carrying value of our goodwill, and, to a lesser extent, long-lived assets. Depending on the severity of the changes in the key factors underlying the valuation of our reporting units, such losses could be significant.
Reconciliation of Amounts Reported Under Generally Accepted Accounting Principles
Reconciliation of Adjusted EBITDA to amounts reported under generally accepted accounting principles in financial statements.
Adjusted EBITDA represents earnings before non-controlling interest in income of subsidiaries, income tax expense, interest expense, depreciation and amortization, gain on bargain purchase and gain on disposition of assets. Adjusted EBITDA is not a recognized measurement under GAAP; however, the amounts included in Adjusted
EBITDA are derived from amounts included in our consolidated financial statements. 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 non-controlling interest in income of subsidiaries, income tax expense, interest expense, gain on disposition of assets, gain on bargain purchase and the accounting effects of capital expenditures and acquisitions, 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 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 the prior claim that non-controlling interest have on the income generated by non-wholly-owned subsidiaries;
•
Adjusted EBITDA does not reflect changes in or cash requirements for our working capital needs; and
•
Our calculation of Adjusted EBITDA may differ from EBITDA calculations of other companies in our industry, 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.
The following table reconciles net income (loss) available to common stockholders to Adjusted EBITDA for the years ended December 31, 2010, 2009 and 2008, respectively:
Adjusted EBITDA for the year ended December 31, 2008 includes a gain on involuntary conversion of assets of $279.7 million representing the insurance proceeds received with respect to property damage resulting from the Big Spring refinery fire in excess of the net book value of the assets impaired; net costs associated with the fire at the Big Spring refinery of $56.9 million; and a charge for inventory adjustments related to the Krotz Springs acquisition of $127.4 million.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Quantitative and Qualitative Disclosure About Market Risk
Changes in commodity prices and purchased fuel prices are our primary sources of market risk. Our risk management committee oversees all activities associated with the identification, assessment and management of our market risk exposure.
Commodity Price Risk
We are exposed to market risks related to the volatility of crude oil and refined product prices, as well as volatility in the price of natural gas used in our refinery operations. Our financial results can be affected significantly by fluctuations in these prices, which depend on many factors, including demand for crude oil, gasoline and other refined products, changes in the economy, worldwide production levels, worldwide inventory levels and governmental regulatory initiatives. Our risk management strategy identifies circumstances in which we may utilize the commodity futures market to manage risk associated with these price fluctuations.
In order to manage the uncertainty relating to inventory price volatility, we have consistently applied a policy of maintaining inventories at or below a targeted operating level. In the past, circumstances have occurred, such as timing of crude oil cargo deliveries, turnaround schedules or shifts in market demand that have resulted in variances between our actual inventory level and our desired target level. Upon the review and approval of our risk management committee, we may utilize the commodity futures market to manage these anticipated inventory variances.
We maintain inventories of crude oil, refined products, blendstocks and asphalt, the values of which are subject to wide fluctuations in market prices driven by world economic conditions, regional and global inventory levels and seasonal conditions. As of December 31, 2010, we held approximately 2.4 million barrels of crude oil and product inventories valued under the LIFO valuation method with an average cost of $38.81 per barrel. Market value exceeded carrying value of LIFO costs by $115.1 million. We refer to this excess as our LIFO reserve. If the market value of these inventories had been $1.00 per barrel lower, our LIFO reserve would have been reduced by $2.4 million.
In accordance with fair value provisions of ASC 825-10, all commodity futures contracts are recorded at fair value and any changes in fair value between periods is recorded in the profit and loss section of our consolidated financial statements. “Forwards” represent physical trades for which pricing and quantities have been set, but the physical product delivery has not occurred by the end of the reporting period. “Futures” represent trades which have been executed on the New York Mercantile Exchange which have not been closed or settled at the end of the reporting period. A “long” represents an obligation to purchase product and a “short” represents an obligation to sell product.
The following table provides information about our derivative commodity instruments as of December 31, 2010:
Interest Rate Risk
As of December 31, 2010, $608.2 million of our outstanding debt was at floating interest rates out of which approximately $122.0 million was at the Eurodollar rate plus 3.00%, subject to a minimum interest rate of 4.00%. As of December 31, 2010, we had an interest rate swap agreement with a notional amount of $100.0 million with a remaining period of 24 months and a fixed interest rate of 4.25%. An increase of 1% in the Eurodollar rate on floating rate indebtedness net of the instrument subject to the minimum interest rate would result in an increase in our interest expense of approximately $5.2 million per year.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements and Schedule are included as an annex of this Annual Report on Form 10-K. See the Index to Consolidated Financial Statements and Schedule on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Our management has evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”)) as of the end of the period covered by this report, and has concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or furnish under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms including, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or furnish under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) for Alon. Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2010. In management’s evaluation, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Management believes that as of December 31, 2010, our internal control over financial reporting was effective based on those criteria.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Certifications
Included in this Annual Report on Form 10-K are certifications of our Chief Executive Officer and Chief Financial Officer which are required in accordance with Rule 13a-14 of the Exchange Act. This section includes the information concerning the controls and controls evaluation referred to in the certifications.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
In February 2011, Alon Brands issued 5-year unsecured notes for $30.0 million to a group of investors, including Alon Israel. In connection with the issuance of the unsecured notes, these investors were given warrants to invest up to $30.0 million in the aggregate in Alon and Alon Brands. Pursuant to the warrant agreements entered into in March 2011, Alon issued to the investors warrants to purchase 3,082,783 shares of Alon’s common stock at an initial exercise price of $9.70, which is equal to the amount that is 18% over the average reported closing price of a share of Alon’s common stock on the New York Stock Exchange during the forty-five calendar days immediately preceding February 21, 2011, the date of entry into the agreements. The investors may pay the exercise price of the warrants in cash or may exercise the warrants on a net-issuance basis. The warrants are assignable to affiliates of the investors and exercisable immediately and at any time through March 2016. Any or all of the warrants may be exchanged only prior to Alon Brands initial public offering for warrants to purchase shares of the common stock of Alon Brands.
The warrants were offered and sold in reliance on the exemption from registration set forth in Section 4(2) of the Securities Act. Alon determined that such exemption was and is available based on representations of the investors and information available to Alon to the effect that each of the investors is sophisticated within the meaning of Section 4(2) of the Securities Act among other factors. In addition, the issuances of the warrants did not involve any public offering; Alon made no solicitation in connection with the sale other than communications with the investors; and Alon has taken necessary steps to ensure that the warrants and the shares issuable upon exercise of the warrants are offered for resale or resold only pursuant to an effective registration statement or in a transaction that is exempt from the registration requirements of the Securities Act.
In connection with the issuance of the warrants, Alon also entered into a registration rights agreement with certain of the investors (the “Registration Rights Agreement”) pursuant to which Alon agreed to register the offer and sale of such investors’ warrant shares in up to two separate demand registrations and, for a period of seven years, pursuant to registration statements on Form S-3, provided the minimum amount that will be registered by means of any such registration is $3.0 million. The Registration Rights Agreement also provides certain rights for the investors to include their warrant shares in other registrations of securities by Alon.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information concerning our directors set forth under “Corporate Governance Matters - The Board of Directors” in the proxy statement for our 2011 annual meeting of stockholders (the “Proxy Statement”) is incorporated herein by reference. Certain information concerning our executive officers is set forth under the heading “Business and Properties - Executive Officers of the Registrant” in Items 1 and 2 of this Annual Report on Form 10-K, which is incorporated herein by reference. The information concerning compliance with Section 16(a) of the Exchange Act set forth under “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement is incorporated herein by reference.
The information concerning our audit committee set forth under “Corporate Governance Matters - Committees of the Board and - Audit Committee” in the Proxy Statement is incorporated herein by reference.
The information regarding our Code of Ethics set forth under “Corporate Governance Matters - Corporate Governance Guidelines, Code of Business Conduct and Ethics and Committee Charters” in the Proxy Statement is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under “Executive Compensation” in the Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information set forth under “Security Ownership of Certain Beneficial Holders and Management” in the Proxy Statement is incorporated herein by reference. The information regarding our equity plans under which shares of our common stock are authorized for issuance as set forth under “Equity Compensation Plan Information” in the Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information set forth under “Certain Relationships and Related Transactions” and under “Corporate Governance Matters - Independent Directors” in the Proxy Statement is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information set forth under “Independent Public Accountants” in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)
The following documents are filed as part of this report:
(1)
Consolidated Financial Statements and Schedule, see “Index to Consolidated Financial Statements and Schedule” on page.
(a)
Schedule II - Valuation and Qualifying accounts is included in the Notes to Consolidated Financial Statements.
(2)
Exhibits: Reference is made to the Index of Exhibits immediately preceding the exhibits hereto, which index is incorporated herein by reference.
*
Identifies management contracts and compensatory plans or arrangements.

Filed under confidential treatment request.
ALON USA ENERGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Alon USA Energy, Inc.:
We have audited the accompanying consolidated balance sheets of Alon USA Energy, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three year-period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public Company Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alon USA Energy, Inc. and its subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Alon USA Energy, Inc.’s internal control over financial reporting as of December 31, 2010 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring organizations of Treadway commission (COSO), and our report dated March 14, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Dallas, Texas
March 14, 2011
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Alon USA Energy, Inc.:
We have audited Alon USA Energy, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Alon USA Energy, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Alon USA Energy, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Alon USA Energy, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2010, and our report dated March 14, 2011 expressed an unqualified opinion on those consolidated financial statements.
Dallas, Texas
March 14, 2011
ALON USA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
The accompanying notes are an integral part of these consolidated financial statements.
ALON USA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
ALON USA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
ALON USA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
(1) Description and Nature of Business
In this document, Alon may refer to Alon USA Energy, Inc. and its consolidated subsidiaries or to Alon USA Energy, Inc. or an individual subsidiary.
Alon USA Energy, Inc. and its subsidiaries engage in the business of refining and marketing of petroleum products, primarily in the South Central, Southwestern and Western regions of the United States. Alon’s business consists of three operating segments: (i) refining and unbranded marketing, (ii) asphalt and (iii) retail and branded marketing.
Refining and Unbranded Marketing Segment. Our refining and unbranded marketing segment includes sour and heavy crude oil refineries that are located in Big Spring, Texas; and Paramount, Bakersfield and Long Beach, California; and a light sweet crude oil refinery located in Krotz Springs, Louisiana. We refer to the Paramount, Bakersfield and Long Beach refineries together as our “California refineries.” Our refineries have a combined throughput capacity of approximately 240,000 barrels per day (“bpd”). At our refineries we refine crude oil into petroleum products, including gasoline, diesel fuel, jet fuel, petrochemicals, feedstocks and asphalts, which are marketed primarily in the South Central, Southwestern, and Western United States.
Alon markets transportation fuels produced at our Big Spring refinery in West and Central Texas, Oklahoma, New Mexico and Arizona. We refer to our operations in these regions as our “physically integrated system” because we supply our retail and branded marketing segment convenience stores and unbranded distributors in this region with motor fuels produced at our Big Spring refinery and distributed through a network of pipelines and terminals which we either own or have access to through leases or long-term throughput agreements.
Alon markets refined products produced from our California refineries to wholesale distributors, other refiners and third parties primarily on the West Coast. Alon plans to integrate the Bakersfield hydrocracker unit by processing vacuum gas oil produced at the other California locations.
The Krotz Springs refinery supplies multiple demand centers in the Southern and Eastern United States markets through the Colonial products pipeline system. The Krotz Springs refinery processing units are structured to yield approximately 101.5% of total feedstock input, meaning that for each 100 barrels of crude oil and feedstocks input into the refinery, it produces 101.5 barrels of refined products. Of the 101.5%, on average 99.0% is light finished products such as gasoline and distillates, including diesel and jet fuel, petrochemical feedstocks and liquefied petroleum gas, and the remaining 2.5% is primarily heavy oils.
Asphalt Segment. Alon’s asphalt segment markets asphalt produced at its Big Spring and California refineries included in the refining and unbranded marketing segment and at our Willbridge, Oregon refinery. Asphalt produced by the refineries in our refining and unbranded marketing segment is transferred to the asphalt segment at prices substantially determined by reference to the cost of crude oil, which is intended to approximate wholesale market prices. The Willbridge refinery is an asphalt topping refinery and has a crude oil throughput capacity of 12,000 bpd. The Willbridge refinery processes primarily heavy crude oils with approximately 70% of its production sold as asphalt products.
Alon’s asphalt segment markets asphalt through 12 refinery/terminal locations in Texas (Big Spring), California (Paramount, Long Beach, Elk Grove, Bakersfield and Mojave), Oregon (Willbridge), Washington (Richmond Beach), Arizona (Phoenix, Flagstaff and Fredonia), and Nevada (Fernley) (50% interest) as well as a 50% interest in Wright Asphalt Products Company, LLC (“Wright”). We produce both paving and roofing grades of asphalt, including performance-graded asphalts, emulsions and cutbacks.
Retail and Branded Marketing Segment. Our retail and branded marketing segment operates 304 convenience stores primarily in Central and West Texas and New Mexico. These convenience stores typically offer various grades of gasoline, diesel fuel, general merchandise and food and beverage products to the general public, primarily under the 7-Eleven and FINA brand names. Substantially all of the motor fuel sold through our retail operations and the majority of the motor fuel marketed in our branded business is supplied by our Big Spring refinery. In 2010, approximately 91% of the motor fuel requirements of our branded marketing operations, including retail operations,
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
were supplied by our Big Spring refinery. Our convenience stores that are not part of our integrated supply system, primarily in Central Texas, are supplied with motor fuels we obtain from third-party suppliers. We market gasoline and diesel under the FINA brand name through a network of approximately 630 locations, including our convenience stores. Additionally, our retail and branded marketing segment licenses the use of the FINA brand name and provides credit card processing services to approximately 260 licensed locations that are not under fuel supply agreements.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements include the accounts of Alon USA Energy, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
(b) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(c) Revenue Recognition
Revenues from sales of refined products are earned and realized upon transfer of title to the customer based on the contractual terms of delivery (including payment terms and prices). Title primarily transfers at the refinery or terminal when the refined product is loaded into the common carrier pipelines, trucks or railcars (free on board origin). In some situations, title transfers at the customer’s destination (free on board destination).
Alon occasionally enters into refined product buy/sell arrangements, which involve linked purchases and sales related to refined product sales contracts entered into to address location, quality or grade requirements. These buy/sell transactions are included on a net basis in sales in the consolidated statements of operations and profits are recognized when the exchanged product is sold.
In the ordinary course of business, logistical and refinery production schedules necessitate the occasional sale of crude oil to third parties. All purchases and sales of crude oil are recorded net, in cost of sales in the consolidated statements of operations.
Sulfur credits purchased to meet federal gasoline sulfur regulations are recorded in inventory at the lower of cost or market. Cost is computed on an average cost basis. Purchased sulfur credits are removed from inventory and charged to cost of sales in the consolidated statements of operations as they are utilized. Sales of excess sulfur credits are recognized in earnings and included in net sales in the consolidated statements of operations.
Alon’s present excise taxes on sales by Alon’s retail and branded marketing segment is presented on a gross basis with supplemental information regarding the amount of such taxes included in revenues provided in a footnote on the face of the consolidated statements of operations. All other excise taxes are presented on a net basis in the consolidated statements of operations.
(d) Cost Classifications
Refining and unbranded marketing cost of sales includes crude oil and other raw materials, inclusive of transportation costs. Asphalt cost of sales includes costs of purchased asphalt, blending materials and transportation costs. Retail and branded marketing cost of sales includes cost of sales for motor fuels and for merchandise. Motor fuel cost of sales represents the net cost of purchased fuel, including transportation costs and associated motor fuel taxes. Merchandise cost of sales includes the delivered cost of merchandise purchases, net of merchandise rebates
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
and commissions. Cost of sales excludes depreciation and amortization, which is presented separately in the consolidated statements of operations.
Direct operating expenses, which relate to Alon’s refining and unbranded marketing and asphalt segments, include costs associated with the actual operations of the refineries and terminals, such as energy and utility costs, routine maintenance, labor, insurance and environmental compliance costs. Operating costs associated with Alon’s crude oil and product pipelines are considered to be transportation costs and are reflected in cost of sales in the consolidated statements of operations.
Selling, general and administrative expenses consist primarily of costs relating to the operations of the convenience stores, including labor, utilities, maintenance and retail corporate overhead costs. Refining and unbranded marketing and asphalt segments corporate overhead and marketing expenses are also included in selling, general and administrative expenses.
Interest expense consists of interest expense, letters of credit, financing costs associated with crude oil purchases, and fees, amortization of deferred debt issuance costs and the write-off of unamortized debt issuance costs but excludes capitalized interest.
(e) Cash and Cash Equivalents
All highly-liquid instruments with a maturity of three months or less at the time of purchase are considered to be cash equivalents. Cash equivalents are stated at cost, which approximates market value.
(f) Accounts Receivable
The majority of accounts receivable is due from companies in the petroleum industry. Credit is extended based on evaluation of the customer’s financial condition and in certain circumstances, collateral, such as letters of credit or guarantees, are required. Credit losses are charged to reserve for bad debts when accounts are deemed uncollectible. Reserve for bad debts is based on a combination of current sales and specific identification methods.
(g) Inventories
Crude oil, refined products and blendstocks for the refining and unbranded marketing segment and asphalt for the asphalt segment (including inventory consigned to others) are stated at the lower of cost or market. Cost is determined under the last-in, first-out (“LIFO”) valuation method. Cost of crude oil, refined products, asphalt and blendstock inventories in excess of market value are charged to cost of sales. Such charges are subject to reversal in subsequent periods, not to exceed LIFO cost, if prices recover. Materials and supplies are stated at average cost. Cost for the retail and branded marketing segment merchandise inventories is determined under the retail inventory method and cost for retail and branded marketing segment fuel inventories is determined under the first-in, first-out (“FIFO”) method.
(h) Hedging Activity
All derivative instruments are recorded in the consolidated balance sheet as either assets or liabilities measured at their fair value. Alon generally considers all commodity forwards, futures, swaps, and option contracts to be part of its risk management strategy. Alon has elected not to designate these commodity contracts as cash flow hedges for financial accounting purposes. Accordingly, net unrealized gains and losses for changes in the fair value on open commodity derivative contracts are recognized in cost of sales or in other income, net on the consolidated statement of operations.
Alon selectively designates certain commodity derivative contracts and interest rate derivatives as cash flow hedges. The effective portion of the gains or losses associated with these derivative contracts designated and qualifying as cash flow hedges are initially recorded in accumulated other comprehensive income in the consolidated balance sheet and reclassified into the statement of operations in the period in which the underlying hedged forecasted transaction affects income. The amounts recorded into the consolidated statement of operations
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
for commodity derivative contracts is recorded as a part of cost of sales and the amounts recorded for interest rate derivatives are recognized as interest expense. The ineffective portion of the gains or losses on the derivative contracts, if any, is recognized in the statement of operations as it is incurred.
(i) Property, Plant, and Equipment
The carrying value of property, plant, and equipment includes the fair value of the asset retirement obligation and has been reflected in the consolidated balance sheets at cost, net of accumulated depreciation.
Property, plant, and equipment, net of salvage value, are depreciated using the straight-line method at rates based on the estimated useful lives for the assets or groups of assets, beginning in the first month of operation following acquisition or completion. Alon capitalizes interest costs associated with major construction projects based on the effective interest rate on aggregate borrowings.
Leasehold improvements are depreciated on the straight-line method over the shorter of the contractual lease terms or the estimated useful lives.
Expenditures for major replacements and additions are capitalized. Refining and unbranded marketing segment and asphalt segment expenditures for routine repairs and maintenance costs are charged to direct operating expense as incurred. Retail and branded marketing segment routine repairs and maintenance costs are charged to selling, general and administrative expense as incurred. The applicable costs and accumulated depreciation of assets that are sold, retired, or otherwise disposed of are removed from the accounts and the resulting gain or loss is recognized.
(j) Impairment of Long-Lived Assets and Assets To Be Disposed Of
Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of an asset to future net cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its expected future cash flows, an impairment loss is recognized based on the excess of the carrying value of the impaired asset over its fair value. These future cash flows and fair values are estimates based on management’s judgment and assumptions. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs of disposition.
(k) Asset Retirement Obligations
Alon uses Accounting Standards Codification (“ASC”) subtopic 410-20, Asset Retirement Obligations, which established accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement costs. The provisions of ASC subtopic 410-20 apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of a long-lived asset. ASC subtopic 410-20 also requires companies to recognize a liability for the fair value of a legal obligation to perform asset retirement activities that are conditional on a future event, if the amount can be reasonably estimated (Note 12).
(l) Turnarounds and Chemical Catalyst Costs
Alon records the cost of planned major refinery maintenance, referred to as turnarounds, and chemical catalyst used in the refinery process units, which are typically replaced in conjunction with planned turnarounds, in “Other assets” in the consolidated balance sheets. Turnaround and catalyst costs are currently deferred and amortized on a straight-line basis beginning the month after the completion of the turnaround and ending immediately prior to the next scheduled turnaround. The amortization of deferred turnaround and chemical catalyst costs are presented in “Depreciation and amortization” in the consolidated statements of operations.
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
(m) Income Taxes
Alon accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(n) Stock-Based Compensation
Alon uses the grant date fair value based method for calculating and accounting for stock-based compensation.
Alon previously accounted for stock-based compensation using the intrinsic value method. Accordingly, compensation cost for stock options was measured as the excess of the estimated fair value of the common stock over the exercise price and was recognized over the scheduled vesting period on an accelerated basis. All pre-initial public offering (“IPO”) stock-based awards continue to be accounted for using the intrinsic value method.
Stock compensation expense is presented as selling, general and administrative expenses in the consolidated statements of operations (Note 19).
(o) Environmental Expenditures
Alon accrues for costs associated with environmental remediation obligations when such costs are probable and can be reasonably estimated. Environmental liabilities represent the estimated costs to investigate and remediate contamination at Alon’s properties. This estimate is based on internal and third-party assessments of the extent of the contaminations, the selected remediation technology and review of applicable environmental regulations.
Accruals for estimated costs from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value unless payments are fixed and determinable. Recoveries of environmental remediation costs from other parties are recorded as assets when the receipt is deemed probable (Note 11). Estimates are updated to reflect changes in factual information, available technology or applicable laws and regulations.
(p) Earnings Per Share
Earnings per share are computed by dividing net income (loss) available to common stockholders by the weighted average number of participating common shares outstanding during the reporting period. Diluted earnings per share are calculated to give effect to all potentially dilutive common shares that were outstanding during the period (Note 18).
(q) Other Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting stockholders’ equity that, under United States generally accepted accounting principles, are excluded from net income (loss), such as defined benefit pension plan adjustments and gains and losses related to certain derivative instruments. The balance in other comprehensive income (loss), net of tax reported in the consolidated statements of stockholders’ equity consists of defined benefit pension plans, fair value of interest rate swap adjustments, and the fair value of commodity derivative contract adjustments.
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
(r) Defined Benefit Pension and Other Postretirement Plans
Alon recognizes the overfunded or underfunded status of its defined benefit pension and postretirement plans as an asset or a liability in the statement of financial position and recognizes changes in that funded status through comprehensive income in the year the changes occur.
(s) Commitments and Contingencies
Liabilities for loss contingencies, arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Recoveries of environmental remediation costs from third parties, which are probable of realization, are separately recorded as assets, and are not offset against the related environmental liability.
(t) Goodwill and Intangible Assets
Goodwill represents the excess of the cost of an acquired entity over the fair value of the assets acquired less liabilities assumed. Intangible assets are assets that lack physical substance (excluding financial assets). Goodwill acquired in a business combination and intangible assets with indefinite useful lives are not amortized and intangible assets with finite useful lives are amortized on a straight-line basis over 1 to 40 years. Goodwill and intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired. Alon uses December 31 of each year as the valuation date for annual impairment testing purposes.
(u) Reclassifications
Certain reclassifications have been made to the prior period balances to conform to the current presentation.
(3) Acquisitions
Bakersfield Refinery Acquisition
On June 1, 2010, Alon completed the acquisition of the Bakersfield, California refinery (“Bakersfield refinery”) from Big West of California, LLC, a subsidiary of Flying J, Inc. The aggregate purchase price was $58,409 in cash, which included the purchase price of hydrocarbon inventories. In connection with the acquisition, an affiliate of Alon purchased certain refinery assets not installed at the Bakersfield refinery location for $26,000. The remaining assets were purchased by Alon. Alon incurred $550 of acquisition-related costs that were recognized in selling, general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2010.
Alon plans to integrate the Bakersfield hydrocracker unit by processing vacuum gas oil produced at the other California locations. Alon is currently completing the necessary projects to integrate the refineries, which are expected to be completed in June 2011. While these projects are ongoing, the Bakersfield refinery is not in operation and depreciation of the fixed assets will begin when the refinery is ready for its intended use.
An acquirer is required to recognize and measure the goodwill acquired in a business combination or a gain from a bargain purchase. FASB ASC 805 defines a bargain purchase as a business combination in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any non-controlling interest in the acquiree, and it requires the acquirer to recognize that excess in earnings as a gain attributable to the acquirer.
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
An independent appraisal of the net assets acquired in the Bakersfield refinery acquisition has been completed. The fair value of the assets acquired and liabilities assumed are as follows:
In connection with the acquisition of the Bakersfield refinery, Alon recorded an accrued environmental remediation obligation of $42,122. This amount was included as a non-current liability in the consolidated balance sheet at the acquisition date.
Also in connection with the acquisition of the Bakersfield refinery, Alon entered into an indemnification agreement with a prior owner for remediation expenses of conditions that existed at the refinery on the acquisition date. Alon is required to make indemnification claims to the prior owner by March 15, 2015. The indemnification amount was $17,122 and was recorded as a non-current receivable in the consolidated balance sheet at the acquisition date.
Krotz Springs Refinery Acquisition
Effective July 1, 2008, Alon completed the acquisition of all the capital stock of the refining business located in Krotz Springs, Louisiana, from Valero Energy Corporation (“Valero”). The purchase price was $333,000 in cash plus $141,494 for working capital, including inventories (the “Purchase Price”). The completion of the Krotz Springs refinery acquisition increased Alon’s crude refining capacity by 50% to approximately 250,000 bpd including our refineries located on the West Coast and in West Texas. The Krotz Springs refinery supplies multiple demand centers in the Southern and Eastern United States markets through a pipeline operated by the Colonial product pipeline system.
The Purchase Price was allocated based on fair values of the assets and liabilities acquired at the date of acquisition. The Purchase Price was determined as set forth below:
The Purchase Price was allocated as follows:
(4) Contribution and Sale of Pipelines and Terminals
HEP Transaction. On February 28, 2005, Alon completed the contribution of the Fin-Tex, Trust and River product pipelines, the Wichita Falls and Abilene product terminals and the Orla tank farm to Holly Energy Partners, LP (“HEP”). In exchange for this contribution, which is referred to as the “HEP transaction”, Alon received $120,000 in cash, prior to closing costs of approximately $2,000, and 937,500 subordinated Class B limited partnership units of HEP (“HEP Units”).
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
The entire cash consideration of $120,000 was financed by high-yield debt issued by HEP with a 10-year maturity (“HEP Debt”). Alon Pipeline Logistics, LLC, a majority-owned subsidiary of Alon (“Alon Logistics”) entered into an agreement with the general partner of HEP providing for Alon Logistics to indemnify the general partner for cash payments such general partner has to make toward satisfaction of the principal or interest under the HEP Debt following a default by HEP. The indemnity terminates at such time as Alon Logistics no longer holds any HEP units and subject to other terms described in the indemnification agreement. The indemnification obligation is specific to Alon Logistics and does not extend to other Alon entities, even if the HEP units are transferred to such other entities. In the second quarter of 2008, Alon recorded a gain of $42,935 that represented the remaining deferred gain associated with the HEP transaction. The gain was recorded due to the termination of the indemnification agreement with HEP.
In the first quarter of 2010, Alon sold 587,658 HEP Units to related parties (Note 16). The remaining 349,842 HEP Units were sold in open market transactions during the second quarter of 2010.
(5) Segment Data
Alon’s revenues are derived from three operating segments: (i) refining and unbranded marketing, (ii) asphalt and (iii) retail and branded marketing. The operating segments adhere to the accounting policies used for Alon’s consolidated financial statements as described in Note 2. The reportable operating segments are strategic business units that offer different products and services. The segments are managed separately as each segment requires unique technology, marketing strategies and distinct operational emphasis. Each operating segment’s performance is evaluated primarily based on operating income.
(a) Refining and Unbranded Marketing Segment
Alon’s refining and unbranded marketing segment includes sour and heavy crude oil refineries located in Big Spring, Texas; and at its California refineries and a light sweet crude oil refinery located in Krotz Springs, Louisiana. At these refineries, Alon refines crude oil into products including gasoline, diesel, jet fuel, petrochemicals, feedstocks, asphalts and other petroleum products, which are marketed primarily in the South Central, Southwestern and Western regions of the United States. Finished products and blendstocks are also marketed through sales and exchanges with other major oil companies, state and federal governmental entities, unbranded wholesale distributors and various other third parties. Alon also acquires finished products through exchange agreements and third-party suppliers.
(b) Asphalt Segment
Alon’s asphalt segment includes the Willbridge, Oregon refinery and 12 refinery/terminal locations in Texas (Big Spring), California (Paramount, Long Beach, Elk Grove, Bakersfield and Mojave), Oregon (Willbridge), Washington (Richmond Beach), Arizona (Phoenix, Flagstaff and Fredonia), and Nevada (Fernley) (50% interest) as well as a 50% interest in Wright which specializes in marketing patented tire rubber modified asphalt products. Alon produces both paving and roofing grades of asphalt and, depending on the terminal, can manufacture performance-graded asphalts, emulsions and cutbacks. The operations in which Alon has a 50% interest (Fernley and Wright), are recorded under the equity method of accounting, and the investments are included as total assets in the asphalt segment data.
(c) Retail and Branded Marketing Segment
Alon’s retail and branded marketing segment operates 304 convenience stores primarily in Central and West Texas and New Mexico. These convenience stores typically offer various grades of gasoline, diesel fuel, general merchandise and food and beverage products to the general public, primarily under the 7-Eleven and FINA brand names. Substantially all of the motor fuel sold through our retail operations and the majority of the motor fuel marketed in our branded business is supplied by our Big Spring refinery. In 2010, approximately 91% of the motor fuel requirements of our branded marketing operations, including retail operations, were supplied by our Big Spring
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
refinery. Branded distributors that are not part of Alon’s integrated supply system, primarily in Central Texas, are supplied with motor fuels Alon obtains from third-party suppliers.
Alon markets gasoline and diesel under the FINA brand name through a network of approximately 630 locations, including our convenience stores. Approximately 63% of the gasoline and 22% of the diesel motor fuel produced at the Big Spring refinery was transferred to the retail and branded marketing segment. These transfers were at prices substantially determined by reference to commodity pricing information published by Platts. Additionally, Alon’s retail and branded marketing segment licenses the use of the FINA brand name and provides credit card processing services to approximately 260 licensed locations that are not under fuel supply agreements.
(d) Corporate
Operations that are not included in any of the three segments are included in the corporate category. These operations consist primarily of corporate headquarter operating and depreciation expenses.
Segment data as of and for the years ended December 31, 2010, 2009, and 2008 is presented below.
Operating income (loss) for each segment consists of net sales less cost of sales; direct operating expenses; selling, general and administrative expenses; depreciation and amortization; and gain (loss) on disposition of assets. Intersegment sales are intended to approximate wholesale market prices. Consolidated totals presented are after intersegment eliminations.
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
Total assets of each segment consist of net property, plant and equipment, inventories, cash and cash equivalents, accounts and other receivables and other assets directly associated with the segment’s operations. Corporate assets consist primarily of corporate headquarters information technology and administrative equipment.
(6) Fair Value
The carrying amounts of Alon’s cash and cash equivalents, receivables, payables and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The reported amount of long-term debt approximates fair value. Derivative financial instruments are carried at fair value, which is based on quoted market prices.
Alon must determine fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As required, Alon utilizes valuation techniques that maximize the use of observable inputs (levels 1 and 2) and minimize the use of unobservable inputs (level 3) within the fair value hierarchy. Alon generally applies the “market approach” to determine fair value. This method uses pricing and other information generated by market transactions for identical or comparable assets and liabilities. Assets and liabilities are classified within the fair value hierarchy based on the lowest level (least observable) input that is significant to the measurement in its entirety.
The following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the consolidated balance sheets at December 31, 2010 and 2009, respectively:
(7) Derivative Instruments
Commodity Derivatives - Mark to Market
Alon selectively utilizes commodity derivatives to manage its exposure to commodity price fluctuations and uses crude oil and refined product commodity derivative contracts to reduce risk associated with potential price changes on committed obligations. Alon does not speculate using derivative instruments. There is not a significant credit risk on Alon’s derivative instruments which are transacted through counterparties meeting established collateral and credit criteria.
Alon has elected not to designate the following commodity derivatives as cash flow hedges for financial accounting purposes. Therefore, changes in the fair value of the commodity derivatives are included in income in the period of the change.
At December 31, 2010, Alon had forward contracts for the net purchase of 354,614 barrels of refined product and the sales of 41,991 barrels of crude oil at an average price of $102.80 per barrel. Accordingly, the contracts are
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
recorded at their fair market values and an unrealized gain of $1,360 has been recorded in cost of sales in the consolidated statements of operations for the year ended December 31, 2010.
At December 31, 2010, Alon held futures contracts for sale of 22,000 barrels of refined product at an average price of $99.44 per barrel. Accordingly, the contracts are recorded at their fair market values and an unrealized loss of $146 has been included in cost of sales in the consolidated statements of operations for the year ended December 31, 2010.
At December 31, 2010, Alon had written call contracts outstanding for the net purchase of 3,008,500 barrels of crude and sale of 3,008,500 barrels of heating oil at an average strike price of $13.43 per barrel for a period of 18 months commencing January 2011. The value of the obligation exceeded the value at the strike price by $3,187 resulting in an unrealized loss included in other income, net in the consolidated statements of operations for the year ended December 31, 2010. The written call contracts are recorded in other income, net as the calls are considered a financing activity due to the receipt of the call premiums at the beginning of the contracts.
At December 31, 2010, Alon held futures contracts for 218,800 barrels of heating oil swaps at an average spread of $11.38 per barrel. Accordingly, the contracts are recorded at their fair market values and an unrealized loss of $681 has been included in cost of sales in the consolidated statements of operations for the year ended December 31, 2010.
At December 31, 2009, Alon held futures contracts for purchases and sales of 240,000 barrels of crude oil at an average price of $73.26 per barrel. Accordingly, the contracts are recorded at their fair market values and an unrealized gain of $322 has been included in cost of sales in the consolidated statements of operations for the year ended December 31, 2009.
At December 31, 2009, Alon held futures contracts for 364,800 barrels of heating oil swaps at an average spread of $11.38 per barrel. Accordingly, the contracts are recorded at their fair market values and an unrealized gain of $89 has been included in cost of sales in the consolidated statements of operations for the year ended December 31, 2009.
At December 31, 2009, Alon held futures contracts for purchases and sales of 278,322 barrels of crude oil at an average price of $77.99 per barrel. Accordingly, the contracts are recorded at their fair market values and an unrealized loss of $9,983 has been included in cost of sales in the consolidated statements of operations for the year ended December 31, 2009.
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 December 31, 2010, Alon had an interest rate swap agreement with a notional amount of $100,000, a remaining period of two years 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 accumulated other comprehensive income in equity are reclassified into interest expense when the forecasted transactions affect income. During the years ended December 31, 2010 and 2009, Alon recognized unrealized after-tax gains of $6,131 and $5,960; respectively, for the fair value measurement of the interest rate swaps. There were no amounts reclassified into interest expense as a result of the discontinuance of cash flow hedge accounting.
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
For the years ended December 31, 2010 and 2009, 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. Gains and losses for the futures contracts designated as cash flow hedges reported in accumulated other comprehensive income in the balance sheet are reclassified into cost of sales when the forecasted transactions affect income. 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. In April 2009, Alon completed an unwind of these futures contracts for $139,290.
An after-tax loss of $4,563 and an after-tax gain of $3,409 have been reclassified from equity to earnings for the years ended December 31, 2010 and 2009, respectively. All adjustments have been recognized in income since the discontinuance of hedge accounting.
The following table presents the effect of derivative instruments on the consolidated statements of financial position.
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
The following tables present the effect of derivative instruments on Alon’s consolidated statements of operations and accumulated other comprehensive income (“OCI”).
Derivatives not designated as hedging instruments:
(8) Accounts and Other Receivables
Financial instruments that potentially subject Alon to concentration of credit risk consist primarily of trade accounts receivables. Credit risk is minimized as a result of the ongoing credit assessment of Alon’s customer base and a lack of concentration in Alon’s customer base. Alon performs ongoing credit evaluations of its customers and requires letters of credit, prepayments or other collateral or guarantees as management deems appropriate. Valero and J. Aron and Company (Note 21) each accounted for more than 10% of Alon’s net sales for the year ended December 31, 2010. Valero (Note 21) and BP North America each accounted for more than 10% of Alon’s net sales for the years ended December 31, 2009 and 2008. Alon’s allowance for doubtful accounts is reflected as a reduction of accounts and other receivables in the consolidated balance sheets.
Accounts and other receivables consisted of the following:
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
The following table sets forth the allowance for doubtful accounts for the years 2010, 2009, and
(9) Inventories
Alon’s inventories are stated at the lower of cost or market. Cost is determined under the LIFO method for crude oil, refined products, asphalt, and blendstock inventories. Materials and supplies are stated at average cost. Cost for convenience store merchandise inventories is determined under the retail inventory method and cost for convenience store fuel inventories is determined under the FIFO method.
Carrying value of inventories consisted of the following:
Crude oil, refined products, asphalt, and blendstock inventories totaled 2,441 barrels and 3,301 barrels as of December 31, 2010 and 2009, respectively. A reduction of inventory volumes during 2010, 2009, and 2008 resulted in a liquidation of LIFO inventory layers carried at lower costs which prevailed in previous years. The liquidation decreased cost of sales by approximately $18,619 in 2010, $10,169 in 2009, and $4,133 in 2008.
Market values of crude oil, refined products, asphalt, and blendstock inventories exceeded LIFO costs by $115,072 and $100,496 at December 31, 2010 and 2009, respectively.
Crude oil inventory consigned to others represents inventory located at storage facilities that were sold to third parties with an obligation by Alon to repurchase the inventory at the end of the respective agreements. As a result of this requirement to repurchase inventory, no revenue was recorded on these transactions and the inventory volumes remain valued under the LIFO method.
Alon had 674 barrels and 286 barrels of crude oil consigned to others at December 31, 2010 and 2009, respectively. Alon recorded liabilities associated with this consigned inventory of $27,034 in accounts payable and $32,433 in other non-current liabilities at December 31, 2010 and $22,558 in accounts payable at December 31, 2009. For the year ended December 31, 2010, Alon recorded an unrealized loss of $8,942 on the mark-to-market adjustment for these consigned inventory liabilities. This amount is reflected as a separate line item on the consolidated statements of operations.
Additionally, Alon recorded accounts receivable of $1,073 at December 31, 2010 for forward commitments related to month-end consignment inventory target levels differing from projected levels and the associated pricing with these inventory level differences.
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
(10) Property, Plant, and Equipment, Net
Property, plant, and equipment consisted of the following:
The useful lives on depreciable assets used to determine depreciation expense were as follows:
Alon capitalized interest of $1,004, $1,692 and $3,417 for the years ended December 31, 2010, 2009 and 2008, respectively.
(11) Other Assets
Other assets consisted of the following:
Alon has indemnification agreements with prior owners for part of the remediation expenses at certain West Coast assets. Alon has recorded current receivables of $1,323 and $1,948 and non-current receivables of $3,039 and $3,448 at December 31, 2010 and 2009, respectively, and corresponding accrued environmental liabilities (Note 21).
In connection with the acquisition of the Bakersfield refinery on June 1, 2010, Alon entered into an indemnification agreement with a prior owner for remediation expenses of conditions that existed at the refinery on the acquisition date. Alon is required to make indemnification claims to the prior owner by March 15, 2015. Alon has recorded a current receivable of $2,675 and non-current receivable of $14,387 at December 31, 2010 and corresponding accrued environmental liabilities (Note 21).
Debt issuance costs are amortized over the term of the related debt using the effective interest method. Amortization of debt issuance costs was $5,825, $7,112, and $4,128 for the years ended December 31, 2010, 2009, and 2008, respectively, and is recorded as interest expense in the consolidated statements of operations. Additionally, $6,659 and $20,482 of unamortized debt issuance costs were written off in 2010 and 2009, respectively (Note 14). Unamortized debt issuance costs written off in 2010 were related to the prepayment of the Alon Refining Krotz Springs, Inc. revolving credit facility in the first quarter of 2010.
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
(12) Accrued Liabilities and Other Non-Current Liabilities
Accrued liabilities and other non-current liabilities consisted of the following:
Alon has asset retirement obligations with respect to its refineries due to various legal obligations to clean and/or dispose of these assets at the time they are retired. However, the majority of these assets can be used for extended and indeterminate periods of time provided that they are properly maintained and/or upgraded. It is Alon’s practice and intent to continue to maintain these assets and make improvements based on technological advances. When a date or range of dates can reasonably be estimated for the retirement of these assets or any component part of these assets, Alon will estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using established present value techniques.
Alon has recorded asset retirement obligations for the removal of underground storage tanks and the removal of brand signage at Alon’s owned and leased retail sites. The asset retirement obligation for storage tank removal on leased retail sites is accreted over the expected life of the underground storage tank which approximates the average retail site lease term.
The following table summarizes the activity relating to the asset retirement obligations for the years ended December 31, 2010 and 2009:
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
(13) Employee and Postretirement Benefits
(a) Retirement Plans
Alon has three defined benefit pension plans covering substantially all of its refining and unbranded marketing segment employees, excluding West Coast employees and employees of SCS. The benefits are based on years of service and the employee’s final average monthly compensation. Alon’s funding policy is to contribute annually not less than the minimum required nor more than the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those benefits expected to be earned in the future.
The measurement dates used to determine pension benefit measures for the pension plan is December 31, 2010 and 2009. Financial information related to Alon’s pension plans is presented below.
The pre-tax amounts related to our defined benefit plans recognized in our consolidated balance sheets as of December 31, 2010 and 2009 were as follows:
The pre-tax amounts in accumulated other comprehensive income (loss) as of December 31, 2010 and 2009 that have not yet been recognized as components of net periodic benefit cost were as follows:
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
The following amounts included in accumulated other comprehensive income (loss) as of December 31, 2010 are expected to be recognized as components of net periodic benefit cost during the year ending December 31, 2011:
As of December 31, 2010 and 2009, the accumulated benefit obligation for each of Alon’s pension plans was in excess of the fair value of plan assets. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans were as follows:
The weighted-average assumptions used to determine benefit obligations at December 31, 2010, 2009, and 2008 were as follows:
The discount rate used reflects the expected future cash flow based on Alon’s funding valuation assumptions and participant data as of the beginning of the plan year. The expected future cash flow is discounted by the Principal Pension Discount Yield Curve for the fiscal year end because it has been specifically designed to help pension funds comply with statutory funding guidelines.
The weighted-average assumptions used to determine net periodic benefit costs for the years ended December 31, 2010, 2009, and 2008 were as follows:
Alon’s overall expected long-term rate of return on assets is 9.0%. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories. The components of net periodic benefit cost for the years and periods are as follows:
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
Plan Assets
The weighted-average asset allocation of Alon’s pension benefits at December 31, 2010 and 2009 was as follows:
The fair value of Alon’s pension assets by category as of December 31, 2010 and 2009 were as follows:
The investment policies and strategies for the assets of Alon’s pension benefits is to, over a five year period, provide returns in excess of the benchmark. The portfolio is expected to earn long-term returns from capital appreciation and a stable stream of current income. This approach recognizes that assets are exposed to price risk and the market value of the plans’ assets may fluctuate from year to year. Risk tolerance is determined based on Alon’s specific risk management policies. In line with the investment return objective and risk parameters, the plans’ mix of assets includes a diversified portfolio of equity, fixed-income and real estate investments. Equity investments include domestic and international stocks of various sizes of capitalization. The asset allocation of the plan is reviewed on at least an annual basis.
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
Cash Flows
Alon contributed $5,880 and $4,165 to the pension plan for the years ended December 31, 2010 and 2009, respectively, and expects to contribute $5,633 to the pension plan in 2011. There were no employee contributions to the plans.
The benefits expected to be paid in each year 2011 - 2015 are $2,325; $2,966; $2,915; $3,248 and $3,679, respectively. The aggregate benefits expected to be paid in the five years from 2016 - 2020 are $25,174. The expected benefits are based on the same assumptions used to measure Alon’s benefit obligation at December 31, 2010 and include estimated future employee service.
Alon sponsors a 401(k) plan in which employees of Alon’s retail marketing segment may participate by contributing up to 50% of their pay after completing three months of service. Alon matches from 1% to 4.5% of employee compensation. This match is limited to 4.5% of employee pay with full vesting of matching and contributions occurring after two years of service. Alon’s contribution for the years ended December 31, 2010 and 2009 was $500 and $343, respectively.
For Alon’s Krotz Springs refining employees, Alon sponsors a 401(k) savings plan available to all employees. Starting in 2010, Alon no longer matched 401(k) contributions for Krotz Springs employees. In 2009, Alon matched 75% of individual participant contributions up to 8% of compensation. This match was limited to 6% of employee pay. Alon’s contribution for the year ended December 31, 2009 was $1,025.
For West Coast employees, Alon sponsors a 401(k) savings plan available to all employees who are at least 21 years of age. Participants may contribute a minimum of 1% up to a maximum of 50% of base pay subject to limits established by the Internal Revenue Service. Alon matches 100% of individual participant contributions based on the first 6% of compensation with full vesting of matching and contributions occurring after two years of service. Alon’s contribution for the years ended December 31, 2010 and 2009 was $1,742 and $1,678, respectively.
(b) Postretirement Medical Plan
In addition to providing pension benefits, Alon adopted an unfunded postretirement medical plan covering certain health care and life insurance benefits (other benefits) for active and certain retired employees who meet eligibility requirements in the plan documents. The health care benefits in excess of certain limits are insured. The accrued benefit liability reflected in the consolidated balance sheets was $3,966 and $3,837 at December 31, 2010 and 2009, respectively, related to this plan.
As of December 31, 2010, the total accumulated postretirement benefit obligation under the postretirement medical plan was $3,869.
(14) Long-Term Debt
Long-term debt consisted of the following:
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
(a) Alon USA Energy, Inc. Credit Facilities
Term Loan Credit Facility. Alon has a term loan (the “Alon Energy Term Loan”) that will mature on August 2, 2013. Principal payments of $4,500 per annum are paid in quarterly installments, subject to reduction from mandatory repayments associated with certain events.
Borrowings under the Alon Energy Term Loan bear interest at a rate based on a margin over the Eurodollar rate from between 1.75% to 2.50% per annum based upon the ratings of the loans by Standard & Poor’s Rating Service and Moody’s Investors Service, Inc. Currently, the margin is 2.25% over the Eurodollar rate.
The Alon Energy Term Loan is jointly and severally guaranteed by all of Alon’s subsidiaries except for Alon’s retail subsidiaries and those subsidiaries established in conjunction with the Krotz Springs refinery acquisition and certain subsidiaries established in conjunction with the Bakersfield acquisition. The Alon Energy Term Loan is secured by a second lien on cash, accounts receivable and inventory and a first lien on most of the remaining assets of Alon excluding those of Alon’s retail subsidiaries and those subsidiaries established in conjunction with the Krotz Springs refinery acquisition and certain subsidiaries established in conjunction with the Bakersfield acquisition.
The Alon Energy Term Loan contains restrictive covenants, such as restrictions on liens, mergers, consolidations, sales of assets, additional indebtedness, different businesses, certain lease obligations, and certain restricted payments. The Alon Energy Term Loan does not contain any maintenance financial covenants.
At December 31, 2010 and 2009, the Alon Energy Term Loan had an outstanding balance of $429,750 and $434,250, respectively.
Letter of Credit Facility. In March 2010, Alon entered into an unsecured credit facility with Israel Discount Bank of New York (the “Alon Energy Letter of Credit Facility”) for the issuance of letters of credit in an amount not to exceed $60,000 and with a sub-limit for borrowings not to exceed $30,000. This facility will terminate on January 31, 2013. The Alon Energy Letter of Credit Facility contains certain restrictive covenants including maintenance financial covenants. On December 31, 2010, Alon had $60,000 of outstanding letters of credit under this facility. Borrowings under this facility bear interest at the Eurodollar rate plus 3.50% per annum subject to an overall minimum interest rate of 4.00%.
(b) Alon USA, LP Credit Facility
Revolving Credit Facility. Alon has a $240,000 revolving credit facility (the “Alon USA LP Credit Facility”) that will mature on January 1, 2013. The Alon USA LP Credit Facility can be used both for borrowings and the issuance of letters of credit subject to a limit of the lesser of the facility or the amount of the borrowing base under the facility.
Borrowings under the Alon USA LP Credit Facility bear interest at the Eurodollar rate plus 3.00% per annum subject to an overall minimum interest rate of 4.00%.
The Alon USA LP Credit Facility is secured by (i) a first lien on Alon’s cash, accounts receivables, inventories and related assets and (ii) a second lien on Alon’s fixed assets and other specified property, in each case, excluding those of Alon Paramount Holdings, Inc. (“Alon Holdings”), and its subsidiaries other than Alon Pipeline Logistics, LLC (“Alon Logistics”), the subsidiaries established in conjunction with the Krotz Springs refinery acquisition, the subsidiaries established in conjunction with the Bakersfield refinery acquisition and Alon’s retail subsidiaries.
The Alon USA LP Credit Facility contains certain restrictive covenants including maintenance financial covenants.
Borrowings of $122,000 and $88,000 were outstanding under the Alon USA LP Credit Facility at December 31, 2010 and 2009, respectively. At December 31, 2010 and 2009, outstanding letters of credit under the Alon USA LP Credit Facility were $116,956 and $128,963, respectively.
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
(c) Paramount Petroleum Corporation Credit Facility
Revolving Credit Facility. Paramount Petroleum Corporation has a $300,000 revolving credit facility (the “Paramount Credit Facility”) that will mature on February 28, 2012. The Paramount Credit Facility can be used both for borrowings and the issuance of letters of credit subject to a limit of the lesser of the facility or the amount of the borrowing base under the facility.
Borrowings under the Paramount Credit Facility bear interest at the Eurodollar rate plus a margin based on excess availability. Based on the excess availability at December 31, 2010, the margin was 2.00%.
The Paramount Credit Facility is primarily secured by (i) a first lien on cash, accounts receivables, inventories and related assets and (ii) a second lien on Alon Holdings’ (excluding Alon Logistics) fixed assets and other specified property.
The Paramount Credit Facility contains certain restrictive covenants related to working capital, operations and other matters.
Borrowings of $63,120 and $45,290 were outstanding under the Paramount Credit Facility at December 31, 2010 and 2009, respectively. At December 31, 2010 and 2009, outstanding letters of credit under the Paramount Credit Facility were $1,250 and $17,999, respectively.
(d) Alon Refining Krotz Springs, Inc. Credit Facilities
Senior Secured Notes. In October 2009, Alon Refining Krotz Springs, Inc. (“ARKS”) issued 13.50% senior secured notes (the “Senior Secured Notes”) in aggregate principal amount of $216,500 in a private offering. In February 2010, ARKS exchanged $216,480 of Senior Secured Notes for an equivalent amount of Senior Secured Notes (“Exchange Notes”) registered under the Securities Act of 1933. The Exchange Notes will mature on October 15, 2014 and the entire principal amount is due at maturity. Interest is payable semi-annually in arrears on April 15 and October 15. The Exchange Notes are substantially identical to the Senior Secured Notes, except that the Exchange Notes have been registered with the Securities and Exchange Commission and are not subject to transfer restrictions. The Senior Secured Notes were issued at an offering price of 94.857% and ARKS received gross proceeds of $205,365 (before fees and expenses related to the offering). ARKS used the proceeds to repay in full all outstanding obligations under its term loan at that time. The remaining proceeds from the offering were used for general corporate purposes.
The terms of the Senior Secured Notes are governed by an indenture (the “Indenture”) and the obligations under the Indenture are secured by a first priority lien on ARKS’ property, plant and equipment and a second priority lien on ARKS’ cash, accounts receivable and inventory.
The Indenture also contains restrictive covenants such as restrictions on loans, mergers, sales of assets, additional indebtedness and restricted payments. The Indenture does not contain any maintenance financial covenants.
At December 31, 2010 and 2009, the Senior Secured Notes had an outstanding balance (net of unamortized discount) of $207,378 and $205,693, respectively. Alon is utilizing the effective interest method to amortize the original issue discount over the life of the Senior Secured Notes.
Short-Term Credit Facility. In March 2010, ARKS entered into a $65,000 short-term credit facility with Bank Hapoalim B.M. (the “ARKS Term Facility”). The ARKS Term Facility was drawn upon closing and all outstanding amounts were repaid during 2010.
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
Revolving Credit Facility. In March 2010, ARKS terminated its revolving credit facility agreement (the “ARKS Facility”) and repaid all outstanding amounts thereunder. As a result of the prepayment of the ARKS Facility, Alon recorded a write-off of unamortized debt issuance costs of $6,659 as interest expense in the first quarter of 2010.
Borrowings of $83,287 and outstanding letters of credit of $2,765 were outstanding under the ARKS Facility at December 31, 2009.
(e) Retail Credit Facilities
Term Credit Agreement. Southwest Convenience Stores, LLC (“SCS”) is party to a credit agreement (the “SCS Credit Agreement”) that, as amended, matures on December 30, 2015. On December 30, 2010, SCS entered into an amendment to the SCS Credit Agreement. The amendment increased the amount outstanding from $73,361 (“SCS Refinancing Term Loan”) by $10,000 (“SCS Additional Term Loan”) and also included a revolving credit loan (“SCS Revolving Credit Loan”) with a maximum loan amount of the lesser of the borrowing base or $10,000.
Borrowings under the SCS Refinancing Term Loan bear interest at a Eurodollar rate plus 2.00% per annum with principal payments made in quarterly installments based on a 15-year amortization schedule.
Borrowings under the SCS Additional Term Loan bear interest at a Eurodollar rate plus 2.75% per annum with principal payments made in quarterly installments based on a 5-year amortization schedule.
Borrowings under the SCS Revolving Credit Loan bear interest at a Eurodollar rate plus 2.75% per annum.
The obligations under the SCS Credit Agreement are secured by a pledge of substantially all of the assets of SCS and Skinny’s LLC and each of their subsidiaries, including cash, accounts receivable and inventory.
The SCS Credit Agreement contains certain restrictive covenants including maintenance financial covenants.
At December 31, 2010 and 2009, the SCS Credit Agreement had an outstanding balance under the term loans of $83,361 and $79,694, respectively. At December 31, 2010, the SCS Revolving Credit Loan had an outstanding balance of $10,000.
(f) Other Retail Related Credit Facilities
In 2003, Alon obtained $1,545 in mortgage loans to finance the acquisition of new retail locations. The interest rates on these loans ranged between 5.5% and 9.7%, with 5 to 15 year payment terms. At December 31, 2010 and 2009, the outstanding balances were $696 and $810, respectively.
(g) Maturity of Long-Term Debt
The aggregate scheduled maturities of long-term debt for each of the five years subsequent to December 31, 2010 are as follows: 2011 - $11,512; 2012 - $74,627; 2013 - $549,728; 2014 - $214,318; 2015 - $65,851 and thereafter - $269.
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
(h) Interest and Financing Expense
Interest and financing expense included the following:
(15) Income Taxes
Income tax expense (benefit) included the following:
A reconciliation between the income tax expense (benefit) computed on pretax income (loss) at the statutory federal rate and the actual provision for income tax expense (benefit) is as follows:
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
The following table sets forth the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of taxable income and projections for future taxable income, over the periods which the deferred tax assets are deductible, management believes it is more likely than not that Alon will realize the benefits of these deductible differences in future periods.
At December 31, 2010, Alon has net operating loss carryforwards for Federal income tax purposes of $196,403 which are available to offset future Federal taxable income through 2030. In addition, Alon has net operating loss carryforwards for state and local income tax purposes of $468,249 which are available to offset future state taxable income in various years through 2030.
Alon has elected to recognize interest expense related to the underpayment of income taxes in interest expense, and penalties relating to underpayment of income taxes as a reduction to other income, net, in the consolidated statements of operations. Alon is subject to U.S. federal income tax, and income tax in multiple state jurisdictions with California, Texas, and Louisiana comprising the majority of the Company’s state income tax. The federal tax years 2000 to 2005 are closed to audit, with 2006 through 2009 remaining open to audit. In general, the state tax years open to audit range from 2002 to 2009. Alon’s liability for unrecognized tax benefits and accrued interest did not increase during the year ended December 31, 2010, as there were no unrecognized tax benefits recorded in 2010.
(16) Related-Party Transactions
(a) Sale of ARL Preferred Shares
In connection with the acquisition of the Krotz Springs refinery, pursuant to a stock purchase agreement Alon Israel Oil Company, Ltd. (“Alon Israel”) provided letters of credit in the amount of $55,000 to support the borrowing base of ARKS and purchased shares of Series A Preferred Stock of Alon Refining Louisiana, Inc. for $80,000. Alon Israel issued an additional $25,000 of letters of credit in the first quarter of 2009 for the benefit of ARKS. In December 2009, Alon Israel’s shares of Series A Preferred Stock were exchanged for 7,351,051 shares of Alon common stock. In connection with the termination of the ARKS Facility, Alon returned to Alon Israel $65,000 of letters of credit, leaving $15,000 of letters of credit. In the event that any letter of credit, provided by Alon Israel, is drawn upon by beneficiaries of a letter of credit, a promissory note will be issued in favor of Alon Israel for the
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
amount of any such drawn letter of credit. This promissory note will provide that Alon Israel may exchange the promissory note for shares of Alon common stock.
(b) Letter of Credit Fee Agreement
In November 2010, Alon entered into a Letter of Credit Fee Agreement with Alon Israel whereby Alon Israel caused a bank to issue and deliver a $23,000 letter of credit in favor of Alon USA, LP, a subsidiary of Alon (“Alon LP”), to a supplier of Alon LP to support Alon LP’s crude oil purchases. Pursuant to the Letter of Credit Fee Agreement, Alon agreed to pay a fee of 8.5% per annum of the outstanding letter of credit amount. If the letter of credit is drawn upon Alon has a repayment obligation to repay the amount withdrawn pursuant to the terms of the Letter of Credit Fee Agreement. The initial term of the Letter of Credit Fee Agreement will end on March 31, 2011 but may be extended in Alon Israel’s sole discretion for additional six month terms thereafter.
(c) Collateral Fee Agreement
In March 2010, Alon entered into a line letter with Israel Discount Bank of New York (“IDB”), pursuant to which IDB agreed to provide a line of credit to Alon in a maximum amount of $60,000. The collateral supporting the line of credit is currently comprised of a security interest in a $30,000 deposit account maintained at IDB by Alon Israel. In 2010, in consideration for maintaining the deposit at IDB as collateral under the line letter, Alon entered into a Collateral Fee Agreement with Alon Israel whereby it agreed to pay a fee to Alon Israel based upon a formula set forth in the agreement which includes, among other items, costs to Alon Israel associated with the deposit. Currently the fee is 6.0% per annum. The initial term of the Collateral Fee Agreement ended on December 31, 2010 and is automatically extended for six month terms thereafter unless terminated by either party after the initial term with 30 days prior written notice.
(d) Sale of HEP Units
In January 2010, Alon sold 150,200 HEP Units to each of Dor-Alon Energy in Israel (1988) Ltd. and Alon Holdings Blue Square-Israel, Ltd., both affiliates of Alon Israel, and Alon also exchanged 287,258 HEP Units for auction rate securities held by Alon Israel (which were sold in March 2010 and no gain or loss was recognized). The HEP Units sold and exchanged were based on a price per unit based on the average closing price of HEP’s publically traded Class A limited partnership units for the 30 trading days preceding the closing of such transaction for a total of $22,760.
(e) Richmond Beach Property Sale
In April 2010, Alon entered into a Purchase and Sale Agreement with BSRE Point Wells, LP (“BSRE”), a subsidiary of Alon Holdings Blue Square-Israel, Ltd. to sell a parcel of land at Richmond Beach, Washington for $19,500. The sale of the land was completed in June 2010 and Alon deferred recognition of the gain on the sale of land of $5,539 as the land was sold to an affiliated entity. The deferred gain will be recognized at such time as the property is sold to a third party.
In conjunction with the sale, Alon entered into a development agreement with BSRE. The agreement provides that Alon and BSRE, in order to enhance the value of the land with a view towards maximizing the proceeds from its sale, intend to cooperate in the development and construction of a mixed-use residential and planned community real estate project on the land. As part of this agreement, Alon agreed to pay a quarterly development fee of $439, commencing in the third quarter of 2010, in exchange for the right to participate in the potential profits realized by BSRE from the development of the land.
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
(17) Stockholders’ Equity
(a) Common and preferred stock (share value in dollars)
The authorized capital stock of Alon consists of 100,000,000 shares of common stock, $0.01 par value, and 10,000,000 shares of convertible preferred stock, $0.01 par value. Issued and outstanding shares of common stock were 54,281,636 and 54,170,913 as of December 31, 2010 and 2009, respectively.
In October 2010, Alon completed a registered direct offering of Alon’s 8.5% Series A Convertible Preferred Stock (the “Preferred Stock”) for an aggregate offering price of $40,000 less offering expenses, of which Alon Israel purchased $35,000. The holders of the Preferred Stock can convert, at the holder’s option, the Preferred Stock into Alon’s common stock based on an initial conversion price of $6.74 per share of Alon’s common stock, in each case subject to adjustments. The Preferred Stock may be redeemed at Alon’s option after October 28, 2017. If all of the Preferred Stock will be converted into Alon’s common stock based on the initial conversion price, then 5,934,800 shares of Alon’s common stock will be issued. Issued and outstanding shares of convertible preferred stock were 4,000,000 shares as of December 31, 2010. There were no issued and outstanding shares of preferred stock as of December 31, 2009.
For the years ended December 31, 2010, 2009, and 2008, activity in the number of common stock was as follows:
(b) Dividends
Alon paid regular quarterly cash dividends of $0.04 per share on Alon’s common stock in 2010 on each of the following dates: March 31, 2010; June 15, 2010; September 15, 2010; and December 15, 2010. Additionally, the non-controlling interest stockholders of Alon Assets and Alon Operating received aggregate cash dividends of $593.
In 2009, Alon paid regular quarterly cash dividends of $0.04 per share on Alon’s common stock on each of the following dates: April 2, 2009; June 15, 2009; September 15, 2009; and December 15, 2009. Additionally, the non-controlling interest stockholders of Alon Assets and Alon Operating received aggregate cash dividends of $576.
In 2008, Alon paid regular quarterly cash dividends of $0.04 per share on Alon’s common stock on each of the following dates: March 14, 2008; June 13, 2008; September 12, 2008; and December 12, 2008. Additionally, the non-controlling interest stockholders of Alon Assets and Alon Operating received aggregate cash dividends of $386.
(18) Earnings per Share
Basic earnings per share are calculated as net income (loss) available to common stockholders divided by the average number of participating shares of common stock outstanding. Diluted earnings per share include the dilutive effect of SARs using the treasury stock method and the dilutive effect of convertible preferred shares using the if-converted method.
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
The calculation of earnings (loss) per share, basic and diluted for the years ended December 31, 2010, 2009, and 2008 is as follows:
(19) Stock-Based Compensation
Alon has two employee incentive compensation plans, (i) the 2005 Incentive Compensation Plan and (ii) the 2000 Incentive Stock Compensation Plan.
(a) 2005 Incentive Compensation Plan (share value in dollars)
The 2005 Incentive Compensation Plan was approved by the stockholders in November 2005, and is a component of Alon’s overall executive incentive compensation program. The 2005 Incentive Compensation Plan permits the granting of awards in the form of options to purchase common stock, SARs, restricted shares of common stock, restricted common stock units, performance shares, performance units and senior executive plan bonuses to Alon’s directors, officers and key employees. Other than the restricted share grants and SARs discussed below, there have been no stock-based awards granted under the 2005 Incentive Compensation Plan.
Restricted Stock. Non-employee directors are awarded an annual grant of shares of restricted stock valued at $25. All restricted shares granted under the 2005 Incentive Compensation Plan vest over a period of three years, assuming continued service at vesting.
Compensation expense for the restricted stock grants amounted to $75, $75, and $138 for the years ended December 31, 2010, 2009, and 2008, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations. There is no material difference between intrinsic value and fair value under FASB ASC Subtopic 718-10 for pro forma disclosure purposes. The following table summarizes the restricted share activity from January 1, 2009:
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
As of December 31, 2010, there was $63 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2005 Incentive Compensation Plan. That cost is expected to be recognized over a weighted-average period of 1.9 years. The fair value of shares vested in 2010 was $31.
Stock Appreciation Rights. In March 2007, Alon granted awards of 361,665 Stock Appreciation Rights (“SARs”) to certain officers and key employees at a grant price equal to $28.46. The March 2007 SARs vest as follows: 50% on March 7, 2009, 25% on March 7, 2010 and 25% on March 7, 2011 and, pursuant to an amendment to the grant agreements on January 25, 2010, are exercisable during the three-year period following the date of vesting.
In July 2008, Alon granted awards of 12,000 SARs to certain employees at the close of the Krotz Springs refinery acquisition at a grant price equal to $14.23. The July 2008 SARs vest as follows: 50% on July 1, 2010, 25% on July 1, 2011 and 25% on July 1, 2012 and are exercisable during the 365-day period following the date of vesting.
In December 2008, Alon granted an award of 10,000 SARs at a grant price equal to $14.23. The December 2008 SARs vest as follows: 25% on December 1, 2010, 25% on December 1, 2011, 25% on December 1, 2012 and 25% on December 1, 2013 and are exercisable during the 365-day period following the date of vesting.
In January 2010, Alon granted awards of 177,250 SARs to certain officers and key employees at a grant price equal to $16.00. The January 2010 SARs vest as follows: 50% on December 10, 2011, 25% on December 10, 2012 and 25% on December 10, 2013 and are exercisable during the 365-day period following the date of vesting.
In March 2010, Alon granted awards of 10,000 SARs at a grant price equal to $16.00 and 10,000 SARs at a grant price equal to $10.00 to an executive officer. The March 2010 SARs vest as follows: 50% on March 1, 2012, 25% on March 1, 2013 and 25% on March 1, 2014 and are exercisable during the 365-day period following the date of vesting.
When exercised, all SARs are convertible into shares of Alon common stock, the number of which will be determined at the time of exercise by calculating the difference between the closing price of Alon common stock on the exercise date and the grant price of the SARs (the “Spread”), multiplying the Spread by the number of SARs being exercised and then dividing the product by the closing price of Alon common stock on the exercise date.
Compensation expense for the SARs grants amounted to $500, $479, and $1,101 for the years ended December 31, 2010, 2009, and 2008, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations.
(b) 2000 Incentive Stock Compensation Plan
On August 1, 2000, Alon Assets, Inc. (“Alon Assets”) and Alon USA Operating, Inc. (“Alon Operating”), majority owned, fully consolidated subsidiaries of Alon, adopted the 2000 Incentive Stock Compensation Plan pursuant to which Alon’s board of directors may grant stock options to certain officers and members of executive
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
management. The 2000 Incentive Stock Compensation Plan authorized grants of options to purchase up to 16,154 shares of common stock of Alon Assets and 6,066 shares of common stock of Alon Operating. All authorized options were granted in 2000 and there have been no additional options granted under this plan. All stock options have ten-year terms. The options are subject to accelerated vesting and become fully exercisable if Alon achieves certain financial performance and debt service criteria. Upon exercise, Alon will reimburse the option holder for the exercise price of the shares and under certain circumstances the related federal and state taxes payable as a result of such exercises (gross-up liability). This plan was closed to new participants subsequent to August 1, 2000, the initial grant date. Total compensation expense (benefit) recognized under this plan was $4, $(52), and $(1,066) for the years ended December 31, 2010, 2009, and 2008, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations.
The following table summarizes the stock option activity for Alon Assets and Alon Operating for the years ended December 31, 2010 and 2009:
The intrinsic value of total options exercised in 2010 was $1,508.
(20) Big Spring Refinery Fire
On February 18, 2008, a fire at the Big Spring refinery destroyed the propylene recovery unit and damaged equipment in the alkylation and gas concentration units. The re-start of the crude unit in a hydroskimming mode began on April 5, 2008 and the Fluid Catalytic Cracking Unit (“FCCU”) resumed operations on September 26, 2008. Substantially all of the repairs to the units damaged in the fire have been completed.
Alon’s insurance policies at the time of the fire provided a combined single limit of $385,000 for property damage, with a $2,000 deductible, and business interruption coverage with a 45-day waiting period. Alon also had third party liability insurance which provided coverage with a limit of $150,000 and a $5,000 deductible.
For purposes of financial reporting, Alon recorded costs associated with the fire on a pre-tax basis net of anticipated insurance recoveries and reflected this as a separate line item on the consolidated statements of operations. For the year ended December 31, 2008, Alon recorded pre-tax costs of $56,854 associated with the fire. The components of net costs associated with fire as of December 31, 2008 include: $51,064 for expenses incurred from pipeline commitment deficiencies, crude sale losses and other incremental costs; $5,000 for Alon’s third party liability insurance deductible under the insurance policy described above; and depreciation for the temporarily idled facilities of $790.
Alon received $330,000 of insurance proceeds on work performed through December 31, 2008 and $55,000 for business interruption recovery as a result of the fire with all proceeds received in 2008 and January 2009.
With the insurance proceeds received of $330,000 an involuntary pre-tax gain on conversion of assets was recorded of $279,680 for the proceeds received in excess of the book value of the assets impaired of $25,330 and
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
demolition and repair expenses of $24,990 incurred through December 31, 2008. Pre-tax income of $55,000 was also recorded in 2008 for business interruption recovery.
(21) Commitments and Contingencies
(a) Leases
Alon has long-term lease commitments for land, office facilities, retail facilities and related equipment and various equipment and facilities used in the storage and transportation of refined products. Alon also has long-term lease commitments for land at its Krotz Springs refinery. In most cases Alon expects that in the normal course of business, Alon’s leases will be renewed or replaced by other leases. Alon has commitments under long-term operating leases for certain buildings, land, equipment, and pipelines expiring at various dates over the next twenty years. Certain long-term operating leases relating to buildings, land and pipelines include options to renew for additional periods. At December 31, 2010, minimum lease payments on operating leases were as follows:
Total rental expense was $42,762, $42,883, and $55,448 for the years ended December 31, 2010, 2009, and 2008, respectively. Contingent rentals and subleases were not significant.
(b) Other Commitments
In the normal course of business, Alon has long-term commitments to purchase services such as natural gas, electricity and water for use by its refineries, terminals, pipelines and retail locations. Alon is also party to various refined product and crude oil supply and exchange agreements. These agreements are typically short-term in nature or provide terms for cancellation.
Alon, simultaneously with the HEP transaction (Note 4), entered into a Pipelines and Terminals Agreement with HEP providing continued access to these assets for an initial term of 15 years and three additional five year renewal terms exercisable at Alon’s sole option. Pursuant to the Pipelines and Terminals Agreement, Alon has committed to transport and store minimum volumes of refined products in these pipelines and terminals. The tariff rates applicable to the transportation of refined products on the pipelines are variable, with a base fee which is reduced for volumes exceeding defined volumetric targets. The agreement provides for the reduction of the minimum volume requirement under certain circumstances. The service fees for the storage of refined products in the terminals are initially set at rates competitive in the marketplace.
In conjunction with the sale of the Amdel and White Oil pipelines in 2006, Alon entered into a 10-year Throughput and Deficiency Agreement with Sunoco, with an option to extend the agreement by four additional thirty-month periods. The Throughput and Deficiency Agreement gives Alon transportation rights to ship a minimum of 15,000 bpd of crude oil on the Amdel and White Oil pipelines from the Gulf Coast and from Midland to the Big Spring refinery.
To further diversify crude oil delivery sources to the Big Spring refinery, Alon entered into a 15-year arrangement with Centurion in 2006. This arrangement gives Alon transportation pipeline capacity to ship a minimum of 21,500 bpd of crude oil from Midland to the Big Spring refinery using Centurion’s approximately forty-mile long pipeline system from Midland to Roberts Junction and Alon’s three-mile pipeline from Roberts Junction to the Big Spring refinery which Alon leases to Centurion.
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
In connection with the Krotz Springs refinery acquisition (Note 3), Alon and Valero entered into an offtake agreement that provides for Valero to purchase, at market prices, light cycle oil and high sulfur distillate blendstock for a period of five years.
Also in connection with the Krotz Springs refinery acquisition, Alon and Valero entered into an earnout agreement, which was amended in August 2009, to fix the remaining amounts to be paid thereunder. Pursuant to the amended earnout agreement, Alon has paid Valero approximately $8,750 and $19,688 in 2010 and 2009, respectively. Additionally, Alon has agreed to pay Valero an additional sum of $6,562 in three installments of approximately $2,188 per quarter through the third quarter of 2011 which will result in aggregate earnout payments of $35,000. The $6,562 that remains to be paid is included in accrued liabilities on the consolidated balance sheet at December 31, 2010.
In April 2010, ARKS entered into a Supply and Offtake Agreement, which was amended in May 2010 and March 2011 (the “Supply and Offtake Agreement”), with J. Aron & Company (“J. Aron”), to support the operation of the refinery at a minimum of 72,000 barrels per day. Pursuant to the Supply and Offtake Agreement, (i) J. Aron agreed to sell to ARKS, and ARKS agreed to buy from J. Aron, at market price, crude oil for processing at the Krotz Springs refinery and (ii) ARKS agreed to sell, and J. Aron agreed to buy, at market price, certain refined products produced at the Krotz Springs refinery.
In connection with the execution of the Supply and Offtake Agreement, ARKS also entered into agreements that provided for the sale, at market price, of ARKS’ crude oil and certain refined product inventories to J. Aron, the lease to J. Aron of crude oil and refined product storage tanks located at the Krotz Springs refinery, and an agreement to identify prospective purchasers of refined products on J. Aron’s behalf. The proceeds from the sale of crude oil and certain refined product inventories to J. Aron allowed ARKS to retire part of its obligations under the ARKS Term Facility. The Supply and Offtake Agreement has an initial term that expires on May 31, 2016. J. Aron may elect to terminate the agreement on May 31, 2013, May 31, 2014 or May 31, 2015 and ARKS may elect to terminate the agreement on May 31, 2015; provided that such election is given at least six months prior to any such election. Following expiration or termination of the Supply and Offtake Agreement, ARKS is obligated to purchase the crude oil and refined product inventories then owned by J. Aron and located at the Krotz Springs refinery at market price at that time.
In May 2010, ARKS entered into a secured Credit Agreement (the “Standby LC Facility”) by and between ARKS, as Borrower, and Goldman Sachs Bank USA, as Issuing Bank. The Standby LC Facility provides for up to $200,000 of letters of credit to be issued to J. Aron. Obligations under the Standby LC Facility are secured by a first priority lien on the existing and future accounts receivable and inventory of ARKS. At this time there is no further availability under the Standby LC Facility.
The Standby LC Facility includes customary events of default and restrictions on the activities of ARKS and its subsidiaries. The Standby LC Facility contains no maintenance financial covenants.
Alon is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on Alon’s financial position, results of operations or liquidity.
(c) Environmental
Alon is subject to loss contingencies pursuant to federal, state, and local environmental laws and regulations. These rules regulate the discharge of materials into the environment and may require Alon to incur future obligations to investigate the effects of the release or disposal of certain petroleum, chemical, and mineral substances at various sites; to remediate or restore these sites; to compensate others for damage to property and natural resources and for remediation and restoration costs. These possible obligations relate to sites owned by Alon and are associated with past or present operations. Alon is currently participating in environmental investigations, assessments and cleanups under these regulations at service stations, pipelines, and terminals. Alon may in the future be involved in additional environmental investigations, assessments and cleanups. The magnitude of future costs will depend on factors such as the unknown nature and contamination at many sites, the unknown timing, extent and method of the remedial actions which may be required, and the determination of Alon’s liability in proportion to other responsible parties.
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefit are expensed. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Substantially all amounts accrued are expected to be paid out over the next 15 years. The level of future expenditures for environmental remediation obligations is impossible to determine with any degree of reliability.
In connection with the HEP transaction, Alon entered into an Environmental Agreement with HEP pursuant to which Alon agreed to indemnify HEP against costs and liabilities incurred by HEP to the extent resulting from the existence of environmental conditions at the pipelines or terminals prior to February 28, 2005 or from violations of environmental laws with respect to the pipelines and terminals occurring prior to February 28, 2005. Alon’s environmental indemnification obligations under the Environmental Agreement expire after February 28, 2015. In addition, Alon’s indemnity obligations are subject to HEP first incurring $100 of damages as a result of pre-existing environmental conditions or violations. Alon’s environmental indemnity obligations are further limited to an aggregate indemnification amount of $20,000, including any amounts paid by Alon to HEP with respect to indemnification for breaches of Alon’s representations and warranties under the Contribution Agreement. With respect to any remediation required for environmental conditions existing prior to February 28, 2005, Alon has the option under the Environmental Agreement to perform such remediation itself in lieu of indemnifying HEP for their costs of performing such remediation. Pursuant to this option, Alon is continuing to perform the ongoing remediation at the Wichita Falls terminal. Any remediation required under the terms of the Environmental Agreement is limited to the standards under the applicable environmental laws as in effect at February 28, 2005.
In connection with the sale of the Amdel and White Oil Pipelines, on March 1, 2006, Alon entered into a Purchase and Sale Agreement with Sunoco pursuant to which Alon agreed to indemnify Sunoco against costs and liabilities incurred by Sunoco to the extent resulting from the existence of environmental conditions at the pipelines prior to March 1, 2006 or from violations of environmental laws with respect to the pipelines occurring prior to March 1, 2006. With respect to any remediation required for environmental conditions existing prior to March 1, 2006, Alon has the option under the Purchase and Sale Agreement to perform such remediation itself in lieu of indemnifying Sunoco for their costs of performing such remediation.
Alon has accrued environmental remediation obligations of $69,006 ($7,349 current payable and $61,657 non-current liability) at December 31, 2010 and $29,454 ($2,104 current payable and $27,350 non-current liability) at December 31, 2009. The net environmental obligations (net of discount of $14,785) for which discounting were applied were $39,749. Those obligations were discounted at a rate of 4%. The aggregate gross disbursements for Alon’s discounted environmental obligations for each of the five years subsequent to December 31, 2010 are as follows: 2011 - $3,556; 2012 - $4,255; 2013 - $4,195; 2014 - $4,174; 2015 - $4,029 and thereafter - $34,326.
(22) Quarterly Information (unaudited)
Selected financial data by quarter is set forth in the table below:
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(dollars in thousands except as noted)
(23) Subsequent Events
In January 2011, Alon completed a Standby Equity Distribution Agreement for a commitment to purchase up to $25,000 of Alon’s common stock over a two-year period. Alon has issued approximately 1,092,000 shares of its common stock and received $10,100.
In February 2011, Alon signed a multi-year agreement with J. Aron for the supply of crude oil that will support the operation of the Big Spring refinery at 70,000 barrels per day. This agreement became effective on March 1, 2011. The structure of this new agreement is also expected to result in lower borrowing costs as Alon used the proceeds from the sale of inventories to repay approximately $125,000 of loans under its Alon USA LP Credit Facility. Also, the structure will substantially reduce the need to issue letters of credit to support Big Spring refinery crude oil purchases. In addition, the structure will allow Alon to make crude oil purchases without the constraint of increases in crude oil prices customary with a typical revolving credit facility.
Also, in February 2011, Alon Brands issued 5-year unsecured notes for $30,000 to a group of investors, including Alon Israel. In connection with the issuance of the unsecured notes, these investors were given warrants to invest up to $30,000 in the aggregate in Alon and Alon Brands.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities and on the dates indicated have signed this report below.
March 14, 2011
By:
/s/ David Wiessman
David Wiessman
Executive Chairman of the Board
March 14, 2011
By:
/s/ Jeff D. Morris
Jeff D. Morris
Chief Executive Officer and Director
March 14, 2011
By:
/s/ Shai Even
Shai Even
Senior Vice President and Chief Financial Officer
March 14, 2011
By:
/s/ Ron W. Haddock
Ron W. Haddock
Director
March 14, 2011
By:
/s/ Itzhak Bader
Itzhak Bader
Director
March 14, 2011
By:
/s/ Avraham Baiga Shochat
Avraham Baiga Shochat
Director
March 14, 2011
By:
/s/ Yeshayahu Pery
Yeshayahu Pery
Director
March 14, 2011
By:
/s/ Zalman Segal
Zalman Segal
Director
March 14, 2011
By:
/s/ Boaz Biran
Boaz Biran
Director
March 14, 2011
By:
/s/ Avinadav Grinshpon
Avinadav Grinshpon
Director
March 14, 2011
By:
/s/ Shlomo Even
Shlomo Even
Director
Exhibit Index
*
Identifies management contracts and compensatory plans or arrangements.

Filed under confidential treatment request.