Attached files
file | filename |
---|---|
EX-31.1 - EX-31.1 - Alon USA Energy, Inc. | d71006exv31w1.htm |
EX-31.2 - EX-31.2 - Alon USA Energy, Inc. | d71006exv31w2.htm |
EX-32.1 - EX-32.1 - Alon USA Energy, Inc. | d71006exv32w1.htm |
EX-23.1 - EX-23.1 - Alon USA Energy, Inc. | d71006exv23w1.htm |
EX-12.1 - EX-12.1 - Alon USA Energy, Inc. | d71006exv12w1.htm |
EX-10.97 - EX-10.97 - Alon USA Energy, Inc. | d71006exv10w97.htm |
EX-10.96 - EX-10.96 - Alon USA Energy, Inc. | d71006exv10w96.htm |
EX-21.1 - EX-21.1 - Alon USA Energy, Inc. | d71006exv21w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
OR
o | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO .
Commission file number: 001-32567
ALON USA ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware (State of incorporation) |
74-2966572 (I.R.S. Employer Identification No.) |
|
7616 LBJ Freeway, Suite 300, Dallas, Texas (Address of principal executive offices) |
75251 (Zip Code) |
Registrants telephone number, including area code: (972) 367-3600
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value | New York Stock Exchange | |
$0.01 per share |
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2). Yes o No þ
The aggregate market value for the registrants common stock held by non-affiliates as of June
30, 2009, the last day of the registrants most recently completed second fiscal quarter was
$84,064,473.99.
As of March 1, 2010, 54,170,913 shares of the registrants common stock, $0.01 par value, were
outstanding.
Documents incorporated by reference: Proxy statement of the registrant relating to the
registrants 2010 annual meeting of stockholders, which is incorporated into Part III of this Form
10-K.
TABLE OF CONTENTS
Page | ||||||||
1 | ||||||||
28 | ||||||||
37 | ||||||||
37 | ||||||||
37 | ||||||||
37 | ||||||||
40 | ||||||||
42 | ||||||||
76 | ||||||||
77 | ||||||||
77 | ||||||||
77 | ||||||||
78 | ||||||||
79 | ||||||||
79 | ||||||||
79 | ||||||||
79 | ||||||||
79 | ||||||||
80 | ||||||||
EX-10.96 | ||||||||
EX-10.97 | ||||||||
EX-12.1 | ||||||||
EX-21.1 | ||||||||
EX-23.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
i
Table of Contents
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES.
Statements in this Annual Report on Form 10-K, including those in Items 1 and 2, Business and
Properties, and Item 3, Legal Proceedings, that are not historical in nature should be deemed
forward-looking statements that are inherently uncertain. See Forward-Looking Statements in
Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 7
for a discussion of forward-looking statements and of factors that could cause actual outcomes and
results to differ materially from those projected.
COMPANY OVERVIEW
In this Annual Report, the words we, our and us refer to Alon USA Energy, Inc. and its
consolidated subsidiaries or to Alon USA Energy, Inc. or an individual subsidiary, and not to any
other person.
We are a Delaware corporation formed in 2000 to acquire the Big Spring, Texas refinery and
related pipeline, terminal and marketing assets from Atofina Petrochemicals, Inc., or FINA. In
2006, we acquired refineries in Paramount and Long Beach, California and Willbridge, Oregon,
together with the related pipeline, terminal and marketing assets, through the acquisitions of
Paramount Petroleum Corporation and Edgington Oil Company. In 2008, we acquired a refinery in Krotz
Springs, Louisiana through the acquisition of Valero Refining Company-Louisiana. As of December 31,
2009, we operated 308 convenience stores in Central and West Texas and New Mexico, primarily under
the 7-Eleven and FINA brand names. Our convenience stores typically offer merchandise, food
products and motor fuels. Our principal executive offices are located at 7616 LBJ Freeway, Suite
300, Dallas, Texas 75251, and our telephone number is (972) 367-3600. Our website can be found at
www.alonusa.com.
On July 28, 2005, our stock began trading on the New York Stock Exchange under the trading
symbol ALJ. We are a controlled company under the rules and regulations of the New York Stock
Exchange because Alon Israel Oil Company, Ltd. (Alon Israel) holds more than 50% of the voting
power for the election of our directors through its ownership of approximately 76.02% of our
outstanding common stock. Alon Israel, an Israeli limited liability company, is the largest
services and trade company in Israel. Alon Israel entered the gasoline marketing and convenience
store business in Israel in 1989 and has grown to become a leading marketer of petroleum products
and one of the largest operators of retail gasoline and convenience stores in Israel. Alon Israel
is a controlling shareholder of Blue Square Israel, Ltd., a leading retailer in Israel, which is
listed on the New York Stock Exchange and the Tel Aviv Stock Exchange and also of Dor-Alon Energy
in Israel (1988) Ltd., a leading Israeli marketer, developer and operator of gas stations and
shopping centers which is listed on the Tel Aviv Stock Exchange.
We file annual, quarterly and current reports and proxy statements, and file or furnish other
information, with the Securities Exchange Commission (SEC). Our SEC filings are available to the
public over the Internet at the SECs website at www.sec.gov. In addition, we make our SEC
filings available free of charge through our internet website at www.alonusa.com as soon as
reasonably practicable after we electronically file, or furnish, such material with the SEC. In
addition, we will provide copies of our filings free of charge to our stockholders upon request to
Alon USA Energy, Inc., Attention: Investor Relations, 7616 LBJ Freeway, Suite 300, Dallas, Texas
75251. We have also made the following documents available free of charge through our internet
website at www.alonusa.com:
| Compensation Committee Charter; | ||
| Audit Committee Charter; | ||
| Corporate Governance Guidelines; and | ||
| Code of Business Conduct and Ethics. |
1
Table of Contents
BUSINESS
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.
In the first quarter of 2008, we modified our presentation of segment data to reflect the
following three operating segments: (i) refining and unbranded marketing, (ii) asphalt and (iii)
retail and branded marketing. The branded marketing segment information historically included as
part of the refining and marketing segment was combined with the retail segment in 2008 and prior
segment results have been changed to conform with the current year presentation. Additional
information regarding our operating segments and properties is presented in Note 6 to our
consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Refining and Unbranded Marketing
Our refining and unbranded marketing segment includes sour and heavy crude oil refineries that
are located in Big Spring, Texas; and Paramount and Long Beach, California; and a light sweet crude
oil refinery located in Krotz Springs, Louisiana. Because we operate the Long Beach refinery as an
extension of the Paramount refinery and due to their physical proximity to one another, we refer to
the Long Beach and Paramount refineries together as our California refineries. Our refineries
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,
petrochemical feedstocks and asphalts, which are marketed primarily in the South Central,
Southwestern and Western United States.
Big Spring Refinery
Our Big Spring refinery has a crude oil throughput capacity of 70,000 bpd and is located on
1,306 acres in the Permian Basin in West Texas. In industry terms, our Big Spring refinery is
characterized as a cracking refinery, which generally refers to a refinery utilizing vacuum
distillation and catalytic cracking processes in addition to basic distillation, naphtha reforming
and hydrotreating processes, to produce higher light product yields through the conversion of
heavier fuel oils into gasoline, light distillates and intermediate products.
Major processing units at our Big Spring refinery include fluid catalytic cracking (FCC),
naphtha reforming, vacuum distillation, hydrotreating and alkylation units.
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. All of the repairs to the units damaged in the fire were
completed by the end of 2009 other than the alkylation unit which returned to operations in January
2010.
Our Big Spring refinery has the capability to process substantial volumes of less expensive
high-sulfur, or sour, crude oils to produce a high percentage of light, high-value refined
products. Typically, sour crude oil has accounted for approximately 90.0% of the Big Spring
refinerys crude oil input.
Our Big Spring refinery produces ultra low-sulfur gasoline, ultra low-sulfur diesel, jet fuel,
petrochemicals, petrochemical feedstocks, asphalt and other petroleum products. This refinery
typically converts approximately 90.0% of its feedstock into finished products such as gasoline,
diesel, jet fuel and petrochemicals, with the remaining 10.0% primarily converted to asphalt and
liquefied petroleum gas.
2
Table of Contents
During each full year of operations since our acquisition from FINA other than 2009 and 2008,
we have averaged over 90% utilization of our Big Spring refinerys crude oil throughout capacity.
The following table summarizes historical throughput and production data for our Big Spring
refinery:
Year Ended December 31, | ||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
bpd | % | bpd | % | bpd | % | |||||||||||||||||||
Refinery throughput: |
||||||||||||||||||||||||
Sour crude |
48,340 | 80.8 | 31,654 | 83.8 | 58,607 | 86.0 | ||||||||||||||||||
Sweet crude |
9,238 | 15.4 | 4,270 | 11.3 | 5,017 | 7.4 | ||||||||||||||||||
Blendstocks |
2,292 | 3.8 | 1,869 | 4.9 | 4,521 | 6.6 | ||||||||||||||||||
Total refinery throughput (1) |
59,870 | 100.0 | 37,793 | 100.0 | 68,145 | 100.0 | ||||||||||||||||||
Refinery production: |
||||||||||||||||||||||||
Gasoline |
26,826 | 45.0 | 14,266 | 38.4 | 32,135 | 47.5 | ||||||||||||||||||
Diesel/jet |
19,136 | 32.2 | 10,439 | 28.2 | 19,676 | 29.1 | ||||||||||||||||||
Asphalt |
5,289 | 8.9 | 4,850 | 13.1 | 7,620 | 11.3 | ||||||||||||||||||
Petrochemicals |
2,928 | 4.9 | 1,221 | 3.3 | 3,980 | 5.9 | ||||||||||||||||||
Other |
5,327 | 9.0 | 6,298 | 17.0 | 4,190 | 6.2 | ||||||||||||||||||
Total refinery production (2) |
59,506 | 100.0 | 37,074 | 100.0 | 67,601 | 100.0 | ||||||||||||||||||
Refinery utilization (3) |
82.3 | % | 52.3 | % | 92.5 | % |
(1) | Total refinery throughput represents the total barrels per day of crude oil and blendstock inputs in the refinery production process. | |
(2) | Total refinery production represents the barrels per day of various products produced from processing oil and other refinery feedstocks through the crude unit and other conversion units at our Big Spring refinery. | |
(3) | Refinery utilization represents average daily crude oil throughput divided by crude oil capacity, excluding planned periods of downtime for maintenance and turnarounds. |
Refinery throughput and production for 2009 reflects the effects of downtime associated with a
scheduled reformer regeneration in May 2009, an unscheduled reformer regeneration in November 2009
and a scheduled shutdown of the ultra low-sulfur gas unit for completion of our ultra low-sulfur
gas project. Refinery throughput and production for 2008 reflects the effects of the downtime
associated with the February 18, 2008 fire. Refinery throughput and production for 2007 reflects
the effects of downtime associated with a scheduled reformer regeneration in January 2007,
scheduled maintenance in the third quarter of 2007 and restrictions on throughput caused by limited
hydrogen production due to operational issues in the catalytic reformer which were resolved by a
reformer regeneration completed in January 2008.
Big Spring Refinery Raw Material Supply
Sour crude oil has typically accounted for more than 90% of our crude oil input at the Big
Spring refinery, of which approximately 93% was West Texas Sour (WTS) crude oil prior to 2007. In
late 2006, we began to use different crudes and feedstocks shipped from the Texas Gulf Coast on the
Amdel pipeline to diversify our crude sources and to improve production yields. As a result, in
2007 WTS decreased to approximately 77% of the Big Spring Refinerys sour crude oil input. WTS was
approximately 63% of the Big Spring Refinerys sour crude oil input in 2008 and approximately 78%
of the Big Spring Refinerys sour crude oil input in 2009. Our Big Spring refinery is the closest
refinery to Midland, Texas, which is the largest origination terminal for West Texas crude oil. We
believe this location provides us with the lowest transportation cost differential for West Texas
crude oil of any refinery.
Approximately 66% of our Big Spring refinerys crude oil input requirements are purchased
through term contracts with several suppliers, including major oil companies. These term contracts
are generally short-term in nature with arrangements that contain market-responsive pricing
provisions and provisions for renegotiation or cancellation by either party. A small
amount of locally gathered crude oil is also delivered directly to our Big Spring refinery.
The remainder of the Big Spring refinerys crude oil input requirements are purchased on the spot
market.
3
Table of Contents
In addition, access to the Amdel and White Oil pipelines gives us the ability to
optimize our refinery crude slate by transporting foreign and domestic crude oils to our Big Spring
refinery from the Gulf Coast when the economics for processing those crude oils are more favorable
than processing locally-sourced crude oils. Other feedstocks, including butane, isobutane and
asphalt blending components, are delivered by truck and railcar, and a majority of our natural gas
is delivered by a pipeline in which we own a 63% interest.
Crude Oil Pipelines
We receive WTS crude oil and West Texas Intermediate (WTI), a light sweet crude oil,
primarily from regional common carrier pipelines. We also have access to offshore domestic and
foreign crude oils available on the Gulf Coast through the Amdel and White Oil pipelines. This
combination of access to Permian Basin crude oil and foreign and offshore domestic crude oil from
the Gulf Coast allows us to optimize our Big Spring refinerys crude oil supply at any given time.
The crude oil pipelines we utilize consist of the following:
Crude Oil Pipelines | Status | Miles | Connections | |||||
Amdel
|
Sunoco Throughput | 504 | Midland and Nederland | |||||
White Oil
|
Sunoco Throughput | 25 | Garden City (Amdel) and Big Spring | |||||
Mesa Interconnect
|
Owned | 4 | Mesa pipeline and Big Spring | |||||
Centurion
|
Owned (leased to Centurion) | 3 | Centurion pipeline and Big Spring |
The 504-mile bi-directional Amdel pipeline and the 25-mile White Oil pipeline connect our
refinery to Nederland, Texas, which is located on the Gulf Coast, and to Midland, Texas. Permian
Basin crude oil is delivered to our Big Spring refinery through the 4-mile long, 16-inch diameter
Mesa Interconnect pipeline which is connected to the Mesa pipeline system, a common carrier, and
through our 3-mile long, 12-inch diameter connection pipeline which is leased to Centurion Pipeline
L.P. (Centurion) and connected to the Centurion 12-inch and 8-inch diameter pipeline system from
Midland, Texas to Roberts Junction in Texas.
On March 1, 2006, we sold our Amdel and White Oil crude pipelines to an affiliate of Sunoco,
Inc. (Sunoco), for a total consideration of approximately $68.0 million. In conjunction with the
sale of the Amdel and White Oil pipelines, we entered into a 10-year pipeline Throughput and
Deficiency Agreement with Sunoco, with an option to extend the agreement by four additional
thirty-month periods. The Throughput and Deficiency Agreement allows us to maintain crude oil
transportation rights on the pipelines from the Gulf Coast and from Midland, Texas to the Big
Spring refinery. Pursuant to the Throughput and Deficiency Agreement, we have agreed to ship a
minimum of 15,000 bpd on the pipelines during the term of the agreement. We commenced shipments of
crude oil through the Amdel and White Oil pipelines under this agreement in October 2006.
To further diversify crude oil delivery sources to our Big Spring refinery, we entered into a
15-year arrangement with Centurion in June 2006. Pursuant to this arrangement, Centurion will
provide us with crude oil transportation pipeline capacity, and we ship a minimum of 21,500 bpd of
crude oil from Midland, Texas to our Big Spring refinery using Centurions approximately 40-mile
long pipeline system from Midland to Roberts Junction and our 3-mile pipeline from Roberts Junction
to the Big Spring refinery which we lease to Centurion. We commenced shipments of crude oil through
these pipelines in November 2006.
Big Spring Refinery Production
Gasoline. In 2009, gasoline accounted for approximately 45.0% of our Big Spring refinerys
production. We produce various grades of gasoline, ranging from 84 sub-octane regular unleaded to
93 octane premium unleaded, and use a computerized component blending system to optimize gasoline
blending. We completed our ultra low-sulfur gasoline project in the second half of 2009, so
gasoline currently produced at the Big Spring refinery complies with the U.S. Environmental
Protection Agencys (EPA) ultra low-sulfur gasoline standard of 30 parts per million (ppm). Our
Big Spring refinery is capable of producing specially formulated fuels, such as those required in
the El Paso, Dallas/Fort Worth and Arizona markets.
Distillates. In 2009, diesel and jet fuel accounted for approximately 32.2% of our Big Spring
refinerys production. All of the on-road specification diesel fuel we produce meets the EPAs
ultra low-sulfur diesel standard of 15 ppm. Our jet fuel production conforms to the JP-8 grade
military specifications required by the Air Force bases to which we market our jet fuel.
Asphalt. Asphalt accounted for approximately 8.9% of our Big Spring refinerys production in
2009. Approximately 49.3% of our Big Spring refinerys asphalt production is blended paving grades
and 50.7% is asphalt
4
Table of Contents
blendstocks. We have an exclusive license to use FINAs asphalt blending
technology in West Texas, Arizona, New Mexico and Colorado and a non-exclusive license in Idaho,
Montana, Nevada, North Dakota, Utah and Wyoming. Exclusivity under this fully-paid license remains
in effect as long as we continue to purchase our rubber modifiers from FINA, although we may
purchase rubber modifiers from other sources and maintain such exclusivity if FINA does not provide
competitive pricing on these products. Because FINA ceased supplying rubber modifiers in the United
States in the first quarter of 2005, we have been purchasing rubber modifiers from other sources
since that time. Our asphalt facilities are capable of producing up to 30 different product
formulations, including both polymer modified asphalt (PMA) and ground tire rubber (GTR)
asphalt. Asphalt produced at the Big Spring refinery is transferred to our asphalt segment at
prices substantially determined by reference to the cost of crude oil, which is intended to
approximate bulk wholesale market prices.
Petrochemical Feedstocks and Other. We produce propane, propylene, certain aromatics,
specialty solvents and benzene for use as petrochemical feedstocks, along with other by-products
such as sulfur and carbon black oil. Our Big Spring refinery has sulfur processing capabilities of
approximately two tons per thousand bpd of crude oil capacity, which is above the average for
cracking refineries and aids in our ability to produce low sulfur motor fuels while continuing to
process significant amounts of sour crude oil.
Big Spring Refinery Transportation Fuel Marketing
Our refining and unbranded marketing segment sales include sales of refined products from our
Big Spring refinery in both the wholesale rack and bulk markets. Our marketing of transportation
fuels produced at our Big Spring refinery is focused on four states in the Southwestern and South
Central regions of the United States through our physically integrated system.
We market transportation fuels produced at our Big Spring refinery in West and Central Texas,
Oklahoma, New Mexico and Arizona. We refer to these areas as our physically integrated system
because our distributors in this region are supplied 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. Other than in 2008 due to the February
18, 2008 fire, approximately 53% of the gasoline and 14% of the diesel motor fuels produced at our
Big Spring Refinery are transferred to our retail and branded marketing segments at prices
substantially determined by reference to commodity pricing information published by Platts.
Unbranded Transportation Fuel Marketing. We presently sell a majority of the diesel fuel and
approximately 25.41% of the gasoline produced at our Big Spring refinery on an unbranded basis.
During 2009 we sold over 16,424 bpd of our Big Spring refinerys diesel fuel and gasoline
production as unbranded fuels, which were largely sold through our physically integrated system.
Jet Fuel Marketing. We market substantially all the jet fuel produced at our Big Spring
refinery as JP-8 grade to the Defense Energy Supply Center (DESC). All DESC contracts are for a
one-year term and are awarded through a competitive bidding process. We have traditionally bid for
contracts to supply Dyess Air Force Base in Abilene, Texas and Sheppard Air Force Base in Wichita
Falls, Texas. Jet fuel production in excess of existing contracts is sold through unbranded rack
sales.
Product Supply Sales. We sell transportation fuel production in excess of our branded and
unbranded marketing needs through bulk sales and exchange channels. These bulk sales and exchange
arrangements are entered into with various oil companies and traders and are transported through
our product pipeline network or truck deliveries. Our petrochemical feedstock and other petroleum
product production is sold to a wide customer base and is transported through truck and railcars.
Big Spring Product Pipelines
The product pipelines we utilize to deliver refined products from our Big Spring refinery are
linked to the major third-party product pipelines in the geographic area around our Big Spring
refinery. These pipelines provide us flexibility to optimize product flows into multiple regional
markets. This product pipeline network can also (1) receive additional transportation fuel products
from the Gulf Coast through the Delek product terminal and Magellan pipelines, (2) deliver and
receive products to and from the Magellan system, our connection to the Group III, or mid-
5
Table of Contents
continent
markets, and (3) deliver products to the New Mexico and Arizona markets through third-party
systems. The following table describes the product pipelines which we utilize:
Expiration | ||||||||||||
Product Pipelines | Access | Miles | Connections | Date | ||||||||
Plains (1)
|
Lease | 38 | Coahoma and Midland | 2012 | ||||||||
Fin-Tex
|
HEP throughput | 137 | Midland and Orla (Holly) | 2020 | ||||||||
Holly
|
Lease | 133 | Orla and El Paso | 2018 | ||||||||
Trust
|
HEP throughput | 332 | Big Spring/Abilene/Wichita Falls | 2020 | ||||||||
Dyess JP-8
|
HEP throughput | 2 | Abilene and Dyess Air Force Base | 2020 | ||||||||
River
|
HEP throughput | 47 | Wichita Falls and Duncan (Magellan) | 2020 | ||||||||
Carswell
|
Owned | 148 | Abilene and Fort Worth | N/A |
(1) | The description of the Plains pipeline does not include a 4-mile pipeline that we own connecting Big Spring and Coahoma, Texas. |
In February 2005, we completed the contribution of our Fin-Tex, Trust, River and Dyess JP-8
product pipelines, and certain of our product terminals connected to these pipelines to Holly
Energy Partners, LP (HEP). Simultaneous with this transaction, we entered into a Pipelines and
Terminal Agreement with HEP with an initial term of 15 years and three subsequent five year renewal
terms exercisable at our sole discretion. Pursuant to the Pipelines and Terminal Agreement, we have
agreed to transport and store minimum volumes of refined products in the pipelines and terminals
and to pay specified tariffs and fees for such transportation and storage during the term of the
agreement. See Note 5 of our consolidated financial statements included elsewhere in this Annual
Report on Form 10-K.
The Plains, Fin-Tex and Holly pipelines make up the Fin-Tex system. Our access to the Plains
and Holly pipelines is secured by pipeline leases, while our access to the Fin-Tex pipeline is
provided through our Pipelines and Terminals Agreement with HEP. The Fin-Tex system transports
product from the Big Spring refinery to El Paso, Texas and allows product to be placed in Tucson
and Phoenix, Arizona through the third-party Kinder Morgan pipeline. The Fin-Tex system also gives
us access to the Albuquerque and Bloomfield, New Mexico markets. We deliver physical barrels to El
Paso and receive, through an exchange agreement with Navajo Refining Company, physical barrels in
Albuquerque and Bloomfield.
The Trust pipeline connects our Big Spring refinery to terminals in Abilene and Wichita Falls,
while the River pipeline connects the terminal in Wichita Falls to our Duncan, Oklahoma terminal.
At Duncan, the River pipeline connects into the Magellan pipeline system for sales into Group III,
or mid-continent, markets. The Trust and River pipeline system is a bi-directional pipeline system
which we access through our Pipelines and Terminals Agreement with HEP.
The Dyess JP-8 pipeline connects the Abilene terminal to Dyess Air Force Base. Our access to
this pipeline is also provided through our Pipelines and Terminals Agreement with HEP.
Our Carswell pipeline system runs from Abilene to Fort Worth, Texas. The Carswell pipeline is
currently inactive.
Product Terminals
We primarily utilize the following six product terminals for delivery of transportation fuels
produced at our Big Spring refinery, of which two are owned and three are accessed through our
Pipelines and Terminal Agreement with HEP:
6
Table of Contents
Working | ||||||||||
Terminals | Access | Capacity (1) | Supply Source | Mode of Delivery | ||||||
Big Spring, Texas (2)
|
Owned | 331 | Pipeline/refinery | Pipeline/truck | ||||||
Abilene, Texas
|
HEP | 111 | Pipeline | Pipeline/truck | ||||||
Wichita Falls, Texas
|
HEP | 189 | Pipeline | Pipeline/truck | ||||||
Duncan, Oklahoma
|
Owned (3) | 154 | Pipeline | Pipeline | ||||||
Orla, Texas
|
HEP | 116 | Pipeline | Pipeline | ||||||
Southlake, Texas
|
Terminalling Agreement | 212 | Pipeline | Truck | ||||||
Total
|
1,113 | |||||||||
(1) | Measured in thousands of barrels. | |
(2) | Includes the tankage located at our Big Spring refinery. | |
(3) | The terminal is owned, but the underlying real property is leased. |
All six terminals we access are physically integrated with our Big Spring refinery through the
product pipelines we utilize. Four of these six terminals, Big Spring, Abilene, Southlake and
Wichita Falls, are equipped with truck loading racks. The other two terminals, Duncan, Oklahoma and
Orla, Texas, are used for delivering shipments into third-party pipeline systems. The Southlake
terminal is supplied pursuant to a throughput agreement with Nustar Logistics, LP (Nustar)
whereby we have agreed to ship 2,000 bpd of product from the HEP-owned Wichita Falls, Texas
terminal to the Southlake terminal through Nustars pipeline. We also directly access three other
terminals located in El Paso, Texas and Tucson and Phoenix, Arizona.
California Refineries and Terminals
On August 4, 2006, we completed the purchase of the stock of Paramount Petroleum Corporation,
a heavy crude oil refining company. Paramount Petroleum Corporations assets included two
refineries located in Paramount, California and Willbridge, Oregon with a combined refining
capacity of 66,000 bpd, seven asphalt terminals located in Washington (Richmond Beach), California
(Elk Grove and Mojave), Arizona (Phoenix, Fredonia and Flagstaff), and Nevada (Fernley) (50%
interest), and a 50% interest in Wright Asphalt Products Company (Wright), which specializes in
patented ground tire rubber modified asphalt products. Our Paramount refinery has a crude oil
throughput capacity of 54,000 bpd and is located on 63 acres in Paramount, California. In industry
terms, the Paramount refinery is characterized as a hydroskimming refinery which is a more
complex refinery configuration than a topping refinery (described below), adding naphtha
reforming, hydrotreating and other chemical treating processes to the distillation process. In
addition to producing vacuum gas oil and asphalt, our Paramount refinery utilizes naphtha reforming
and hydrotreating to produce gasoline and distillate products from the light oil streams resulting
from the distillation process.
On September 28, 2006, we completed the acquisition of Edgington Oil Company, a heavy crude
oil refining company located in Long Beach, California. Edgington Oil Companys assets included a
refinery with a nameplate capacity of approximately 40,000 bpd. Our Long Beach refinery has a crude
oil throughput capacity of 40,000 bpd and is located on 19 acres in Long Beach, California. In
industry terms, the Long Beach refinery is characterized as a topping refinery which generally
refers to a low complexity refinery configuration consisting primarily of a distillation unit.
Distillation is the first step in the refining process separating crude oil into its constituent
petroleum products. The Long Beach refinery utilizes vacuum distillation to produce vacuum gas oil
and asphalt.
Our refineries located in Paramount and Long Beach are included in our refining and unbranded
marketing segment, while our refinery in Willbridge is included in our asphalt segment. Because we
operate the Long Beach refinery as an extension of the Paramount refinery and due to their physical
proximity to one another, we refer to the Paramount and Long Beach refineries together as our
California refineries.
Our California refineries have the capability to process substantial volumes of less expensive
sour crude oils. In 2009 at the California refineries, sour crude oil accounted for approximately
43.5% of crude oil input and heavy crude oil accounted for 56.5%. The California refineries are
connected by pipelines we own. Asphalt is the only finished product produced at the Long Beach
refinery. Approximately 56% of the unfinished motor fuels, jet fuel and other products produced at
the Long Beach refinery in 2009 were transferred to the Paramount refinery via our pipeline
connection and by trucks for final processing and marketing, with the remainder sold to other area
refineries
7
Table of Contents
and third parties. Major processing units at the California refineries include naphtha
reforming, vacuum distillation, hydrotreating and isomerization units.
Our California refineries produce CARBOB gasoline, CARB diesel, jet fuel, asphalt and other
petroleum products. In 2009, these refineries converted approximately 39.7% of crude oil into
higher value products such as gasoline, diesel and jet fuel, with 29.5% converted to asphalt, fuel
oil and sulfur. The remaining 30.8% of production was sold as unfinished feedstocks to other
refineries and third parties.
As reflected in our 2009 production results, the California refineries still produced
unfinished products. Unfinished products typically provide lower margins than finished products. In
order to realize higher margins for the sale of these finished products, we have completed a
refinery upgrade project to bring online a naphtha hydrotreater located at the Paramount refinery.
The naphtha hydrotreater allows us to increase our production of distillates and gasoline and to
produce less unfinished products.
In 2009, we averaged approximately 46% utilization of our California refineries crude oil
throughput capacity. The following table summarizes 2009, 2008 and 2007 throughput and production
data for our California refineries on a combined basis.
Year Ended December 31, | ||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
bpd | % | bpd | % | bpd | % | |||||||||||||||||||
Refinery throughput: |
||||||||||||||||||||||||
Medium sour crude |
13,408 | 43.0 | 8,014 | 25.8 | 20,839 | 33.7 | ||||||||||||||||||
Heavy crude |
17,420 | 55.9 | 22,590 | 72.6 | 40,700 | 65.9 | ||||||||||||||||||
Blendstocks |
330 | 1.1 | 495 | 1.6 | 223 | 0.4 | ||||||||||||||||||
Total refinery throughput (1) |
31,158 | 100.0 | 31,099 | 100.0 | 61,762 | 100.0 | ||||||||||||||||||
Refinery production: |
||||||||||||||||||||||||
Gasoline |
4,920 | 16.2 | 4,141 | 13.7 | 7,318 | 12.1 | ||||||||||||||||||
Diesel/jet |
7,123 | 23.5 | 7,481 | 24.8 | 13,360 | 22.1 | ||||||||||||||||||
Asphalt |
8,976 | 29.5 | 9,214 | 30.5 | 19,006 | 31.5 | ||||||||||||||||||
Light unfinished |
117 | 0.4 | | | 3,071 | 5.1 | ||||||||||||||||||
Heavy unfinished |
8,813 | 29.0 | 9,182 | 30.4 | 16,793 | 27.9 | ||||||||||||||||||
Other |
418 | 1.4 | 192 | 0.6 | 793 | 1.3 | ||||||||||||||||||
Total refinery production (2) |
30,367 | 100.0 | 30,210 | 100.0 | 60,341 | 100.0 | ||||||||||||||||||
Refinery utilization (3) |
46.2 | % | 46.3 | % | 85.9 | % |
(1) | Total refinery throughput represents the total barrels per day of crude oil and blendstock inputs in the refinery production process. | |
(2) | Total refinery production represents the barrels per day of various products produced from processing crude oil and other refinery feedstocks through the crude units and other conversion units at our California refineries. | |
(3) | Refinery utilization represents average daily crude oil throughput divided by crude oil capacity, excluding planned periods of downtime for maintenance and turnarounds. Reflects the effects of downtime associated with a planned turnaround of our No. 2 crude unit at the Paramount refinery in March and April 2007 and the downtime to optimize our refining and asphalt economics in 2009 and 2008. |
Our California refineries operated at low rates for 2009 and 2008 due to historically low West
Coast refining margins. Additionally, 2008 was affected by a planned turnaround of the Paramount
refinery lasting for two months, and a planned revamp and turnaround of the No. 2 crude unit at the
Long Beach refinery lasting five months. The Paramount refinery started back up in February 2009
after the completion of a refinery-wide turnaround and the completion of refinery upgrade projects.
These projects include the upgrade of an idled naphtha hydrotreater, revamping a naphtha
hydrotreater to hydrotreat jet fuel, upgrading crude units metallurgy, upgrading the refinerys
electrical system and the installation of a new flare gas recovery system. These upgrades resulted
in the combined Paramount and Long Beach refineries being operated in a hydroskimming mode. In
September 2007, our Long Beach refinery achieved throughput of 35,000 bpd upon the startup of the
No. 1 crude unit. In November
8
Table of Contents
2007, the No. 2 crude unit at the Long Beach refinery was taken
offline for a planned turnaround. In addition, we continuously evaluate and optimize throughput at
our California refineries based on the topping and hydroskimming margins environment.
California Refineries Raw Material Supply
For 2009, sour crude oil accounted for approximately 43.5% of our crude oil input of which
approximately 20.4% was California sour crude oil. Heavy crude oil accounted for approximately
56.5% of our crude oil input of which approximately 37.4% was local California heavy crude oil. As
a result of the proximity of the California refineries to the Port of Los Angeles and the Port of
Long Beach, we have access to a variety of domestic and foreign crude oils that are available on
the West Coast. Our California refineries receive crude oil primarily from common carrier, private
carrier and our owned pipelines. Approximately 30.0% of our California refineries crude oil input
requirements are purchased through term contracts with several suppliers, including major oil
companies. These term contracts are both short-term and long-term in nature with arrangements that
contain market-responsive pricing provisions and provisions for renegotiation or cancellation by
either party. The remainder of the California refineries crude oil input requirements are
purchased on the spot market. Other feedstocks, including butane and gasoline blendstocks, are
delivered by truck and pipeline.
Crude Oil Pipelines
The crude oil pipelines we utilize provide our California refineries access to California and
foreign crude oils and consist of the following:
Crude Oil Pipelines | Status | Miles | Connections | |||||
Paramount Crude
|
Owned | 2.5 | Paramount and East Hynes Terminal | |||||
Chevron Crude
|
Third Party | 15 | Paramount and local gathering system | |||||
No. 3/No. 4
|
Owned | 13 | Long Beach and Long Beach Harbor | |||||
BP
|
Third Party | 1 | Long Beach and East Hynes Terminal | |||||
Plains Pipeline
|
Third Party | 14 | Long Beach and West Hynes Terminal |
The Paramount refinery is supplied by the Chevron Crude pipeline (heavy sour) and Paramount
Crude pipeline (medium/heavy sour). The Long Beach refinery is supplied by the No. 3/No. 4
pipelines (heavy sour) and the BP pipeline (medium sour). As a supplement to our on-site storage
facilities, the California refineries lease crude oil storage tanks located at the BP-owned East
Hynes, the Plains West Hynes, and the Kinder Morgan Carson crude oil terminals. Additionally, we
acquire California medium sour crude oil from the West Hynes terminal and utilize the Plains
Dominguez and Long Beach terminals pursuant to throughput arrangements. This combination of storage
capacity and throughput arrangements allows the California refineries to receive and optimize the
crude slate of waterborne domestic and foreign crude oil, along with California crude oil.
On June 29, 2007, we purchased a crude oil and unfinished products pipeline system from Kinder
Morgan, Inc. known as the Black Oil System. The Black Oil System includes approximately 6 miles
of active and 13 miles of inactive pipelines in the Long Beach, California area. The Black Oil
System provides our Paramount refinery and other third-party shippers with access to refineries and
waterborne terminals.
California Refineries Production
Gasoline. In 2009, CARBOB gasoline, all of which is produced or finished at our Paramount
refinery, accounted for approximately 16.2% of our California refineries production. The Paramount
refinery utilizes a computerized component blending system to optimize gasoline blending. In
addition, our Paramount refinery is capable of producing specially formulated fuels, such as those
required in the California, Nevada and Arizona markets.
Distillates. In 2009, CARB diesel, Ultra Low-Sulfur EPA diesel, Jet A and military jet fuel,
all of which is produced or finished at our Paramount refinery, accounted for approximately 23.5%
of our California refineries production. All of the diesel fuel we produce is ultra low-sulfur
CARB/EPA diesel. We produce both commercial Jet A and military jet fuel. The military jet fuel
conforms to the JP-8 grade military specifications required by the Air Force bases to which we
market our jet fuel.
9
Table of Contents
Asphalt. In 2009, asphalt accounted for approximately 29.5% of our California refineries
production. Approximately 71.7% of our California refineries asphalt production is paving grades
and 28.3% is roofing asphalt. Asphalt produced at the California refineries 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.
Light and Heavy Unfinished Feedstocks. We produce LPG, naphtha, unfinished distillates, fuel
oil and gas oils used as refinery feedstocks, along with other by-products such as sulfur and fuel
oil, all of which is sold to third parties via pipeline and truck on either a contract or spot
basis.
California Refineries Transportation Fuel Marketing
Our refining and unbranded marketing segment sales includes sales of refined products from our
California refineries in both the wholesale rack and bulk markets. Our marketing of gasoline and
diesel fuels is focused on the Southern California market. We market a portion of the CARBOB gasoline
and CARB diesel produced at our Paramount refinery through the Paramount refinery rack on an
unbranded and delivered basis to wholesale distributors. The remainder of our CARB diesel and our
CARBOB gasoline production is sold through the spot market and term contracts to other refiners and
to third parties and for delivery by pipeline.
We market our jet fuel as Jet A that is sold through the spot market, while our JP-8 military
jet fuel is contracted to the DESC. All JP-8 grade is sold to the DESC under one-year contracts
awarded through a competitive bidding process. Our JP-8 contract was not renewed in 2009 and,
consequently, we have temporarily stopped producing JP-8. However, in 2009, we were awarded the
DESC F76 distillate contract. All of our light products are delivered to our customers via our
Line 145 pipeline or the Paramount rack system.
We sell transportation fuel production in excess of our unbranded marketing needs through bulk
sales and exchange channels. These bulk sales and exchange arrangements are entered into with
various oil companies and traders and are transported through our product pipeline network to the
Kinder Morgan terminal located in Carson, California.
California Product Pipelines/Terminal
The Paramount refinery utilizes our Line 145 eight-mile product pipeline and our two-mile
leased Line 166 pipeline to ship products to the Kinder Morgan product terminal in Carson,
California. The Kinder Morgan product terminal gives us access to the Kinder Morgan product rack,
the Kinder Morgan Pacific pipeline to Phoenix, Arizona, and the Kinder Morgan CalNev pipeline to
Las Vegas, Nevada.
The following table describes the product pipelines which we utilize:
Product Pipelines | Access | Miles | Connections | |||
Line 145 |
Owned and Leased | 8 | Paramount to a connection with Line 145 | |||
Line 166 |
Leased | 2 | Connects to Line 145 to City of Carson, California (Kinder Morgan) |
The Paramount refinery also utilizes its own terminal at the refinery to distribute CARB
diesel, California Reformulated Gasoline (CaRFG), F76 distillate fuel, JP-8 and Jet-A into the
local market. This terminal is equipped with a truck loading rack that has permitted volumes of
approximately 12,000 bpd of distillate and 13,000 bpd of gasoline.
California Feedstock Pipelines
The Paramount refinery operates a feedstock pipeline and terminal system that is used to
supply gas oil and other unfinished product to other Los Angeles (LA) Basin refineries and third
party terminals. The Black Oil System acquired in June 2007 provides our Paramount refinery and
other third-party shippers with access to refineries and waterborne terminals. In the fourth
quarter of 2008 we acquired portions of BPs E-12A pipeline and Plains L-52
10
Table of Contents
pipeline. These lines
are connected to our Line 35, increasing the integration between our Paramount and Long Beach
refineries.
The following table describes the components of our feedstock pipeline and terminal system:
Feedstock Pipelines | Terminal | Access | Tankage (1) | Miles | Connections | |||||||||
Chevron No.1
|
Leased | 4 | Connects our Paramount and Long Beach refineries to our Lakewood Terminal | |||||||||||
Lakewood | Owned | 110 | Connects the Chevron No. 1 pipeline to our Line 160 pipeline | |||||||||||
Line 160
|
Owned | 7.1 | Connects the Lakewood Terminal to our leased tanks at Kinder Morgan, other refiners and third party customers | |||||||||||
Kinder Morgan | Leased | 180 | Connects to our Black Oil Pipeline for deliveries to other refiners and third party customers | |||||||||||
Line 35, L-52, E-12A
|
Owned | 4 | Connects our Long Beach and Paramount Refineries | |||||||||||
Black Oil Pipeline
|
Owned | 19 | Connects the Kinder Morgan Terminal and Plains Pipeline System to LA Basin refiners and waterborne terminals |
(1) | Measured in thousands of barrels. |
Krotz Springs Refinery
On July 3, 2008, we completed the acquisition of the refinery and related assets located in
Krotz Springs, Louisiana through the purchase of all of the capital stock of Valero Refining
Company Louisiana from Valero Energy Corporation (Valero). The completion of the Krotz Springs
refinery acquisition increased Alons crude refining capacity by 50% to approximately 250,000 bpd.
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 the Colonial products pipeline system (Colonial Pipeline).
Krotz Springs liquid product yield is
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.
Our Krotz Springs refinery is strategically located on approximately 381 acres on the
Atchafalaya River in central Louisiana at the intersection of two crude oil pipeline systems and
has direct access to the Colonial Pipeline, providing us with diversified access to both locally
sourced and foreign crude oils, as well as distribution of our products to markets throughout the
Southern and Eastern United States and along the Mississippi and Ohio Rivers. In industry terms,
the Krotz Springs refinery is characterized as a mild residual cracking refinery, which generally
refers to a refinery utilizing vacuum distillation and catalytic cracking processes in addition to
basic distillation and naphtha reforming processes to minimize low quality black oil production and
to produce higher light product yields such as gasoline, light distillates and intermediate
products.
The Krotz Springs refinerys main processing units include a crude unit and an associated
vacuum unit, a fluid catalytic cracking unit, a catalytic reformer unit, a polymerization unit, and
an isomerization unit.
Our 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. Typically,
sweet crude oil has accounted for 100% of the Krotz Springs refinerys crude oil input.
11
Table of Contents
Our Krotz Springs refinery produces gasoline, high sulfur diesel, jet fuel, kerosene,
petrochemicals, petrochemical feedstocks and other petroleum products. This refinery typically
converts approximately 96% of its feedstock into products such as gasoline, diesel, jet fuel and
petrochemicals, with the remaining 4% primarily converted to liquefied petroleum gas.
In 2009, we averaged approximately 65% utilization of our crude oil throughput capacity for
the Krotz Springs refinery. The following table summarizes 2009 and 2008 throughput and production
data for our Krotz Springs refinery.
Year Ended December 31, (1) | ||||||||||||||||
2009 | 2008 | |||||||||||||||
bpd | % | bpd | % | |||||||||||||
Refinery throughput: |
||||||||||||||||
Light sweet crude |
22,942 | 47.5 | 43,361 | 74.5 | ||||||||||||
Heavy sweet crude |
22,258 | 46.0 | 11,979 | 20.6 | ||||||||||||
Blendstocks |
3,137 | 6.5 | 2,844 | 4.9 | ||||||||||||
Total refinery throughput (2) |
48,337 | 100.0 | 58,184 | 100.0 | ||||||||||||
Refinery production: |
||||||||||||||||
Gasoline |
22,264 | 45.4 | 25,195 | 42.8 | ||||||||||||
Diesel/jet |
21,318 | 43.4 | 26,982 | 45.9 | ||||||||||||
Heavy oils |
1,238 | 2.5 | 1,402 | 2.4 | ||||||||||||
Other |
4,258 | 8.7 | 5,258 | 8.9 | ||||||||||||
Total refinery production (3) |
49,078 | 100.0 | 58,837 | 100.0 | ||||||||||||
Refinery utilization (4) |
65.3 | % | 66.6 | % |
(1) | 2008 data includes our Krotz Springs refinery for the period from July 1, 2008 through December 31, 2008. | |
(2) | Total refinery throughput represents the total barrels per day of crude oil and blendstock inputs in the refinery production process. | |
(3) | Total refinery production represents the barrels per day of various products produced from processing oil and other refinery feedstocks through the crude unit and other conversion units at our Krotz Springs refinery. | |
(4) | Refinery utilization represents average daily crude oil throughput divided by crude oil capacity, excluding planned periods of downtime for maintenance and turnarounds. Refinery throughput and production for 2009 reflects the effects of downtime associated with a shutdown that was originally scheduled for the first quarter of 2010 that was accelerated to November 2009. Refinery throughput and production for 2008 reflects the effects of shutdowns during hurricanes Gustav and Ike and limited crude supply due to widespread electrical outages following the hurricanes. |
Krotz Springs Refinery Raw Material Supply
In 2009, sweet crude oil accounted for approximately 100% of our crude oil input at the Krotz
Springs refinery, of which approximately 50.8% was Light Louisiana Sweet (LLS) crude oil and
49.2% was Heavy Louisiana Sweet (HLS) crude oil. The Krotz Springs refinery has access to various
types of domestic and foreign crude oils via a combination of two ExxonMobil pipeline (EMPCo)
systems, barge delivery, or truck rack delivery. Approximately 80% of the crude oil is received by
pipeline with the remainder received by barge or truck.
We receive HLS crude oil, LLS crude oil and foreign crude oils from two EMPCo pipeline
systems. The EMPCo pipeline located to the west of the Krotz Springs refinery is termed the
Southbend/Sunset System, and the EMPCo pipeline located to the east of the Krotz Springs refinery
is termed the Northline System. The Southbend/Sunset System provides HLS crude oil from gathering
systems at South Bend, Avery Island, Empire, Grand Isle and Fourchon, Louisiana. All of
Southbend/Sunsets current crude oil capacity is delivered to the Krotz Springs refinery. The
Northline System delivers LLS and foreign crude oils from the St. James, Louisiana crude oil
terminaling complex.
The Krotz Springs refinery also has access to foreign crude oils which arrive at the St. James
terminal by direct shipment up the Mississippi River and via offload at the Louisiana Offshore Oil
Platform (LOOP) with delivery to
12
Table of Contents
St. James through the LOCAP pipeline. Various Louisiana crude oils can also be delivered by
barge, via the Intracoastal Canal, the Atchafalaya River, or directly by truck.
Approximately 78.4% of our Krotz Springs refinerys crude oil input requirements are purchased
through term contracts with several suppliers. At present, a major
oil company is the largest supplier. These term contracts are both short-term and long-term in
nature with arrangements that contain market-responsive pricing provisions and provisions for
renegotiation or cancellation by either party. The remainder of the Krotz Spring refinerys crude
oil input requirements are purchased on the spot market. Other feedstocks, including butane and
secondary feedstocks, are delivered by truck and marine transportation.
Krotz Springs Refinery Production
Gasoline. In 2009, gasoline accounted for approximately 45.4% of our Krotz Springs refinerys
production. We produce 87 octane regular unleaded gasoline and use a computerized component
blending system to optimize gasoline blending. We also purchase 93 octane premium unleaded gasoline
for truck rack sales. Our Krotz Springs refinery is capable of producing regular unleaded gasoline
grades required in the southern and eastern U.S. markets.
Distillates. In 2009, diesel, light cycle oil and jet fuel accounted for approximately 43.4%
of our Krotz Springs refinerys production. Historically the Krotz Springs refinery shipped high
sulfur distillate blendstock and light cycle oils to certain Valero refineries for processing. In
connection with the acquisition of the Krotz Springs refinery in 2008, we entered into an offtake
agreement with Valero that provides for Valero to purchase, at market prices, certain specified
products and other products as may be mutually agreed upon from time to time. These products
include regular and premium unleaded gasoline, light cycle oil and straight run diesel. The term of
the offtake agreement as it applies to the products produced by the Krotz Springs refinery, is a
follows: (i) five years for light cycle oil and straight run diesel; and (ii) one year for regular
and premium unleaded gasoline.
Heavy Oils and Other. In 2009, we produced slurry oil, LPG, and petrochemical feedstocks,
which accounted for approximately 11% of the Krotz Spring refinerys production.
Krotz Springs Refinery Transportation Fuel Marketing
Our refining and unbranded marketing segment sales include sales of refined products from our
Krotz Springs refinery in both the wholesale rack and bulk markets. Our marketing of gasoline and
diesel fuels is focused on the southeastern United States. We market a portion of the diesel and
gasoline produced at our Krotz Springs refinery through the Krotz Springs refinery rack on an
unbranded basis to wholesale distributors. The remainder of our diesel and gasoline production is
sold through the spot market and term contracts to other refiners and to third parties and for
delivery by barge or pipeline.
We sell transportation fuel production in excess of our unbranded marketing needs through bulk
sales and exchange channels. These bulk sales and exchange arrangements are entered into with
various oil companies and traders and are transported to markets on the Mississippi River and the
Atchafalaya River as well as to the Colonial Pipeline.
Krotz Springs Refinery Product Pipeline
The Krotz Springs refinery connects to and distributes refined products into the Colonial
Pipeline for distribution by our customers to the southern and
eastern United States. The 5,519 mile Colonial pipeline system transports products to 267 marketing
terminals located near the major population centers of the southern and eastern United States. The
Krotz Springs refinerys close proximity to the Colonial pipeline provides us flexibility to
optimize product flows into multiple regional markets. Products not shipped through the Colonial
pipeline are either transported via barge for sale or for further upgrading or are sold at the
Krotz Springs refinerys truck rack. Barges have access to both the Mississippi and Ohio Rivers and
can carry refined products for delivery as far north as Evansville, Indiana.
Propylene/propane mix is sold via railcar and truck, to consumers at Mont Belvieu, Texas or in
adjacent Louisiana markets. Mixed LPGs are shipped on to an LPG fractionator at Napoleonsville,
Louisiana. We pay a fractionation fee and sell the ethane and propane to a regional chemical
company under contract, transport the normal butane back to the Krotz Springs refinery via truck
for blending, and sell the isobutene and natural gasoline on a spot basis.
13
Table of Contents
Asphalt
Our California, Big Spring and Oregon refineries have the capability to process heavy and sour
crude oils, and as a result, we have developed our asphalt business to maximize the value of the
additional amount of vacuum tower bottoms (VTB) produced after making gasoline and distillate
products from these crude oils. We believe our asphalt production capabilities provides the
opportunity to realize higher netbacks than those attainable by producing VTB into No. 6 Fuel Oil,
which is an alternate product that can be produced at these refineries. In addition, our asphalt
production capabilities permit us to realize value from VTB without the significant costs and
expenses required to construct and operate coker units.
The amount of asphalt produced at our refineries, as a percentage of throughput, varies
depending on the configuration of the specific refinery, the crude oils processed at each refinery,
the techniques used in the refining process and the type and quality of the asphalt produced. As
part of our efforts to maximize the return generated by the production of asphalt, we have licensed
advanced asphalt-blending technology from FINA, with respect to asphalt produced at our Big Spring
refinery, and a patented GTR asphalt manufacturing process from Wright with respect to asphalt
produced and sold in California.
Our asphalt segment markets asphalt products produced at our Big Spring and California
refineries 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. During 2008 crude oil prices increased rapidly in the first half of 2008
resulting in increasing transfer prices charged to our asphalt segment. Market prices for asphalt
did not keep pace with these rapid and unprecedented increases in crude oil costs and the resulting
asphalt transfer prices which resulted in decreased margins for our asphalt segment. The asphalt
business in our Texas market was also affected by the effects of contracts that are priced months
in advance of delivery. While our asphalt sales continued to exceed the returns that would have
been realized by producing No. 6 Fuel Oil, the relationship between realized asphalt prices in our
Texas market and our cost of crude in the first half of 2008 was compressed. Asphalt demand overall
decreased in 2008 and continued to be depressed in 2009, due in part to less state highway work and
reduced demand for roofing products.
We continue to believe that the asphalt business is a better alternative to producing No. 6
Fuel Oil or construction and operation of a coker unit. We believe that asphalt production will be
reduced due to coker unit projects that have been announced by several asphalt producing
refineries. We therefore expect the combination of decreased asphalt production in our markets and
a stabilization of crude prices to improve our asphalt margins.
The asphalt segment also conducts operations at and markets asphalt produced by our
Willbridge, Oregon refinery. The Willbridge refinery is an asphalt topping refinery located on 42
acres in the industrial section of Portland and has a crude oil throughput capacity of 12,000 bpd.
Alternatively, the asphalt terminal at Willbridge can be supplied with asphalt produced at the
California refineries or purchased from third parties by marine vessel or by rail cars. When
operating the Willbridge facility as a refinery, it typically operates two to four months per year
at times when cargos of heavy crude oil are available for delivery to the refinery. Heavy crude oil
is delivered to the Willbridge refinery through access to an adjacent dock leased by us from
Chevron. The Willbridge refinery processes primarily heavy crude oil with approximately 70% of its
production being asphalt products. The unfinished products produced by the Willbridge refinery
include yields of approximately 5% naphtha and approximately 25% gas oils. Asphalt produced at the
Willbridge refinery is sold through our terminal at the Willbridge refinery or delivered by truck
and railcar to terminals for further processing and resale. Gas oils and naphtha are sold to local
refiners and other third parties and are primarily delivered by barge or rail cars.
In addition to the Willbridge refinery, our asphalt segment includes 11 refinery/terminal
locations in Texas (Big Spring), California (Paramount, Long Beach, Elk Grove, Bakersfield and
Mojave), Washington (Richmond Beach), Arizona (Phoenix, Flagstaff and Fredonia), Nevada (Fernley)
(50% interest) and a 50% interest in Wright.
In 2009, through our asphalt segment, we sold the asphalt that was produced at our refineries
in Texas and California, primarily as either paving asphalt to road and materials manufacturers and
highway construction/maintenance contractors, as GTR, polymer modified or emulsion asphalt to
highway maintenance contractors, or as roofing asphalt to either roofing shingle manufacturers or
to other industrial users.
14
Table of Contents
Texas Asphalt Marketing
Approximately 8.9% of our Big Spring refinerys production in 2009 was asphalt. We can produce
or manufacture approximately 30 different product formulations, including PMA and GTR asphalts that
meet the stringent and varied state highway road paving specifications for use in Texas, New Mexico
and Arizona. Based on 2008 data, the Texas Department of Transportation has advised us that we are
one of the largest suppliers of asphalt to the State of Texas, which is the second largest asphalt
consuming state in the United States according to the latest available industry data.
Paving grade asphalts are predominantly sold from May through October through competitive bids
to contractors involved in government projects. These asphalt sales are primarily made at our
asphalt terminal at the Big Spring refinery and are delivered to project sites by truck. Our other
asphalt blendstocks are sold to roofing companies and asphalt blenders and delivered by rail
throughout the United States, including to our asphalt terminals in Elk Grove, Bakersfield and
Mojave, California and Phoenix, Arizona.
West Coast Asphalt Marketing
In 2009, approximately 29.5% of our California refineries production was asphalt and asphalt
blendstocks. When operating as a refinery, production at the Willbridge refinery has averaged an
approximate 70% paving and roofing asphalt products yield. Our California refineries/terminals
produce over 100 different grades of paving and roofing asphalt products. Paving asphalt products
include various grades of Performance Graded (PG), Asphalt Cement (AC) and Aged Residue (AR) paving
asphalts, cutbacks, emulsions, PMA and GTR. The products meet the California PG specification
included in the recently enacted conversion to Federal Highway SHRP asphalt performance grading
system (PG). Our GTR products conform to the specifications of the recently enacted California
Assembly Bill 338 which requires usage of GTR asphalt on California road and highways. Roofing
asphalt products include oxidized coatings, asphalt fluxes and saturants which are used in the
roofing industry to manufacture shingles, roofing roll products and built-up roofing asphalts. The
paving and roofing products produced at our refineries can be sold from the on-site asphalt
terminal facilities or they can be distributed through and sold at one of our eight asphalt
terminals in the western United States. Based upon the Asphalt Institutes 2008 data, we are the
largest supplier of liquid asphalt in the State of California, which is currently one of the top
two largest asphalt consuming states in the United States.
Sales of paving asphalt are made primarily to hot mix asphalt (HMA) materials manufacturers
and paving contractors. Sales to HMA manufacturers and paving contractors can be made either
through negotiated contracts or they may result from competitive bidding. Sales of roofing asphalts
are made primarily to shingle manufacturers or other industrial users through contracts. Sales of
asphalt, particularly paving asphalts, are seasonal. Overall, approximately 71% of our West Coast
paving asphalt products were sold between May and October 2009.
Asphalt produced at our California refineries is marketed through the following owned asphalt
terminals:
Asphalt Storage | ||||||||
Terminals | Capacity (1) | Receipt Capabilities | Delivery Capabilities | |||||
California Refineries
|
731 | Refinery, Rail, Truck | Rail, Truck | |||||
Willbridge, OR refinery
|
1,129 | (2) | Refinery, Rail, Truck, Marine | Rail, Truck, Marine | ||||
Elk Grove, CA
|
307 | Rail, Truck | Truck | |||||
Bakersfield, CA
|
183 | Rail, Truck | Truck | |||||
Mojave, CA
|
283 | Rail, Truck | Truck | |||||
Richmond Beach, WA
|
702 | (2) | Rail, Truck, Marine | Truck, Marine | ||||
Fernley, NV (3)
|
254 | Rail, Truck | Truck | |||||
Phoenix, AZ
|
165 | Rail, Truck | Truck | |||||
Flagstaff, AZ
|
25 | Rail, Truck | Truck | |||||
Fredonia, AZ
|
79 | Truck | Truck |
(1) | Measured in thousands of barrels. | |
(2) | Storage figures for Willbridge and Richmond Beach include tanks in service for storage of crude oil, fuel oil or other products. | |
(3) | 50% interest. |
15
Table of Contents
Deliveries of asphalt products to our non-refinery terminals are made primarily through common
carrier trucks and leased railcars that are loaded at the California and Big Spring refineries.
Asphalt produced at our Willbridge refinery is sold primarily through our terminal located at that
refinery but may also be delivered by rail or marine vessel to other terminals.
We also own a 50% interest in Wright, which holds the licensing rights to a patented GTR
manufacturing process for paving asphalts. Wright licenses this proprietary technology from
Neste/Wright Asphalt Company under a perpetual license that covers all of North America, except
California. In California we maintain the exclusive license. Wrights operations consist of
sublicensing the patented technology to parties to manufacture the GTR asphalt for Wright to sell
at various Alon-owned or third party-owned facilities in Texas, Arizona, Oregon and Oklahoma.
Wright also purchases and resells various other paving asphalts in these markets. During 2009,
Wright obtained approximately 24.5% of its asphalt requirements from our refineries and terminals,
and the remainder from other refineries. Wright sells GTR and its other asphalt products on either
a negotiated contract or competitive bidding basis.
Retail and Branded Marketing
We are the largest 7-Eleven licensee in the United States, and we are the sole licensee of the
FINA brand for motor fuels in the South Central and Southwestern United States. Through our
7-Eleven licensing agreement, we have the exclusive right to operate 7-Eleven convenience stores in
substantially all of our existing retail markets and many surrounding areas. We market gasoline and
diesel fuel under the FINA brand name and provide brand support and payment services to
distributors supplying over 650 locations, including all 296 of our owned stores that sell motor
fuel. In markets where we choose not to supply fuel products we also sub-license the FINA brand and
provide the same brand support and payment services to distributors supplying approximately 300
additional locations. In 2009, approximately 93% of Alons branded marketing operations, including
retail operations, were supplied by our Big Spring refinery.
Retail
As of December 31, 2009, we operated 308 owned and leased convenience store sites operating
primarily in Central and West Texas and New Mexico. Our convenience stores typically offer various
grades of gasoline, diesel fuel, food products, tobacco products, non-alcoholic and alcoholic
beverages and general merchandise to the public, primarily under the 7-Eleven and FINA brand names.
We are one of the top three independent convenience store chains, measured by store count, in
each of the cities of Abilene, El Paso, Midland, Odessa, Big Spring and Lubbock, Texas. We also
have a significant presence in Waco and Wichita Falls, Texas and Albuquerque, New Mexico.
The following table shows our owned and leased convenience stores by location:
Location | Owned | Leased | Total | |||||||||
Big Spring, Texas |
6 | 1 | 7 | |||||||||
El Paso, Texas |
13 | 73 | 86 | |||||||||
Lubbock, Texas |
17 | 5 | 22 | |||||||||
Midland, Texas |
9 | 9 | 18 | |||||||||
Odessa, Texas |
11 | 25 | 36 | |||||||||
Wichita Falls, Texas |
8 | 4 | 12 | |||||||||
Abilene, Texas |
34 | 9 | 43 | |||||||||
Waco, Texas |
11 | 3 | 14 | |||||||||
Albuquerque, New Mexico |
12 | 11 | 23 | |||||||||
Other |
29 | 18 | 47 | |||||||||
Total stores |
150 | 158 | 308 | |||||||||
On July 3, 2006, we completed the purchase of 40 retail convenience stores from Good Time
Stores, Inc. (Good Time) in El Paso, Texas. The acquired stores have been branded 7-Eleven and
FINA and our Big Spring refinery supplies these locations with substantially all of their gasoline
and diesel needs. This acquisition provided us a leading market share in El Paso and furthered our
strategy of strengthening our integrated marketing sector.
16
Table of Contents
On June 29, 2007, we completed the acquisition of Skinnys, Inc., a privately held Abilene,
Texas-based company that owned and operated 102 FINA branded convenience stores in Central and West
Texas. Of the 102 stores, approximately two-thirds are owned and one-third are leased. Since the
acquisition, we have re-branded the majority of these stores to the 7-Eleven brand name.
Convenience Store Management and Employees. Each of our stores has a store manager who
supervises a staff of full-time and part-time employees. The number of employees at each
convenience store varies based on the stores size, sales volume and hours of operation. Typically,
a geographic group of six to ten stores is managed by a supervisor who reports to a district
manager. Five district managers are responsible for a varying number of stores depending on the
geographic size of each market and the experience of each district manager. These district managers
report to our retail management headquarters in Odessa, Texas, where we have 56 employees. We also
maintain an office in Abilene, Texas, where we have 33 employees.
Distribution and Supply. The merchandise requirements of our convenience stores are serviced
at least weekly by over 100 direct-store delivery, or (DSD), vendors. In order to minimize costs
and facilitate deliveries, we utilize a single wholesale distributor, McLane Company, Inc., for
non-DSD products. We purchase the products from McLane at cost plus an agreed upon percentage
mark-up. Our current supply contract with McLane expires in December 2011. For the year ended
December 31, 2009, approximately 51% of our retail merchandise sales were purchased from McLane. We
typically do not have contracts with our DSD vendors.
7-Eleven License Agreement. We are party to a license agreement with 7-Eleven, Inc. which
gives us a perpetual license to use the 7-Eleven trademark, service name and trade name in West
Texas and a majority of the counties in New Mexico in connection with our convenience store
operations. 7-Eleven, Inc. has advised us that we are the largest 7-Eleven licensee in the United
States based on the number of stores.
Technology and Store Automation. We have implemented a point-of-sale checkout system at
approximately two-thirds of our convenience stores. This system includes merchandise scanning, pump
control, peripheral device integration and daily operations reporting. This system enhances our
ability to offer a greater variety of promotions with a high degree of flexibility regarding
definition (by store, group of stores, region, or other subset of stores) and duration. We also are
able to receive enhanced management reports that will assist our decision-making processes. We
believe this system will allow our convenience store managers to spend less time preparing reports
and more time analyzing these reports to improve convenience store operations. This system also
includes shortage-control tools. We plan to use this system as a platform to support other
marketing technology projects, including interactive video at the pump and bar-code coupons at the
pump.
Branded Marketing
Approximately 66% of our branded fuel sales are in West Texas and Central Texas. We sell motor
fuel through various terminals to supply approximately 650 locations, including approximately 90%
of our retail locations and other FINA-branded independent locations. The FINA brand is a
recognized trade name in the Southwestern and South Central United States, where motor fuels have
been marketed under the FINA brand since 1956. For the year ended December 31, 2009, we sold 274.1
million gallons of branded motor fuel for distribution to our retail convenience stores and other
retail distribution outlets.
Our branded wholesale motor fuel is sold under the FINA brand, and we have an exclusive
license through 2012 to use the FINA trademark in the wholesale distribution of motor fuel within
Texas, Oklahoma, New Mexico, Arizona, Arkansas, Louisiana, Colorado and Utah. Prior to the
expiration of this license, we intend to review our alternatives for branding our transportation
fuel, including seeking to extend our license with FINA or developing our own brand.
Distribution Network and Distributor Arrangements. We sell motor fuel to our retail locations
and to approximately 31 third-party distributors, who then supply and resell to other retail
outlets. The supply agreements we maintain with our distributors are generally for three-year terms
and usually include 10-day payment terms. All supplied distributors comply with our ratability
program, which involves incentives and penalties based on the consistency of their purchases.
17
Table of Contents
FINA Brand Sub-Licensing. We also sub-license the FINA brand and provide payment card
processing services, advertising programs and loyalty and other marketing programs to 49
distributors supplying approximately 300 additional stores. We offer FINA brand sub-licensing to
distributors supplying geographic areas other than our integrated supply system. This sub-licensing
program allows us to expand the geographic footprint of the FINA brand, thereby increasing its
recognition. Each sub-licensee pays royalties on a per gallon basis and is required to comply with
the FINA minimum standards program and utilize our payment card processing services.
FINA Minimum Standards Program. We have an established image consistency program where each
FINA branded facility in our network is inspected annually by an independent third-party
organization. Each facility is evaluated using specific criteria and image scores based upon these
criteria and are communicated to the controlling distributor. Any non-complying facilities are
enrolled in a specific improvement program to bring the facility up to our FINA standards.
Payment Card Processing. We offer payment card processing services to our distributors and
FINA-brand sublicensees through a third-party provider, which acts as a clearinghouse with
MasterCard, VISA, American Express, Discover and debit card issuers. Our customers payment card
transactions are communicated directly to the third-party provider, which then transmits those
transactions to the appropriate card issuers. Our fees payable to MasterCard, VISA, American
Express, Discover and debit card issuers are contracted through the third-party provider. Although
our fees may vary by card type, we charge our customers, including our retail convenience stores, a
percentage-based fee plus a transaction fee for each card type to simplify the fee structure. Our
rates are designed to provide a margin on the difference between the fees paid by our distributors
and fees charged by the various card associations. The fees are not designed to be a major profit
center, but rather to cover overhead and ancillary expenses of maintaining the payment card network
system. For MasterCard, VISA, American Express, Discover and debit cards, the third-party provider
provides us with daily settlement of transactions. We generally provide our customers with payment
or credit for transactions within five days. We also generally retain the settlement funds for such
payment and transactions that we process as a credit against any payments due to us from our
distributors or sub-licensees. As a result, offering these payment services also reduces our credit
risk.
Technology. We rely on technology to enhance our operations and provide meaningful data and
tools for management to evaluate and manage the profitability of our motor fuel distribution
business. We have a licensing arrangement with a third-party provider for payment card processing
and clearinghouse services for payment card purchases at many of our retail convenience stores, as
well as all of the third-party retail locations supplied by our wholesale distributors or the
sub-licensed FINA stores for which we provided branded services. Under our arrangement with the
third-party provider, we sub-license the proprietary software to each of these retail locations
that provides secure data transfer of payment card transactions directly to the third party
provider for daily processing of each payment card transaction at these retail locations. We also
license JD Edwards enterprise software tailored for our wholesale business that collects and
analyzes the data from each of these payment card transactions that we process, providing our
management with valuable information on consumer purchasing tendencies and trends. Additionally, we
use a proprietary software program to further break-down and analyze the payment card transactions
that we process. We also license pricing optimization software that assists management in modeling
and making timely pricing decisions in order to maximize our gross margin in motor fuel sales. In
addition, we utilize licensed software to manage our customers motor fuel purchases and delivery
arrangements.
Competition
The petroleum refining and marketing industry continues to be highly competitive. Many of our
principal competitors are integrated, multi-national oil companies (e.g., Valero, Chevron,
ExxonMobil, Shell and ConocoPhillips) and other major independent refining and marketing entities
that operate in our market areas. Because of their diversity, integration of operations and larger
capitalization, these major competitors may have greater financial support and diversity with a
potential better ability to bear the economic risks, operating risks and volatile market conditions
associated with the petroleum industry.
Financial returns in the refining and marketing industry depend on the difference between
refined product prices and the prices for crude oil and other feedstock, also referred to as
refining margins. Refining margins are impacted by, among other things, levels of crude oil and
refined product inventories, balance of supply and demand, utilization rates of refineries and
global economic and political events.
All of our crude oil and feedstocks are purchased from third-party sources, while some of our
vertically-integrated competitors have their own sources of crude oil that they may use to supply
their refineries. However, our Big Spring refinery is in close proximity to Midland, Texas, which
is the largest origination terminal for Permian
Basin crude oil, which we believe provides us with transportation cost advantages over many of
our competitors in this region.
18
Table of Contents
The majority of our refined fuel products produced at our Big Spring refinery are shipped to
wholesale distributors within the principal geographic regions of West Texas, Central Texas,
Oklahoma, New Mexico and Arizona or to our retail sites within West Texas and New Mexico.
Production in excess of our wholesale and retail sales is sold in the spot market and either
shipped northeast via the Trust and River pipeline system to distribution points in North Texas and
Oklahoma or West via the Fin-Tex pipeline system to El Paso, Texas and distribution points in New
Mexico and Arizona. The market for refined products in these regions is also supplied by a number
of refiners, including large integrated oil companies or independent refiners that either have
refineries located in the region or have pipeline access to these regions. These larger companies
typically have greater resources and may have greater flexibility in responding to volatile market
conditions or absorbing market changes.
The Longhorn pipeline runs approximately 700 miles from the Houston area of the Gulf Coast to
El Paso and has an estimated maximum capacity of 225,000 bpd of refined products. This pipeline
provides Gulf Coast refiners, which include some of the worlds largest and most complex
refineries, and other shippers with improved access to the refined products markets in West Texas
and New Mexico. In August 2006, Longhorn Pipeline Holdings LLC, the owner of the Longhorn pipeline,
was acquired by Flying J, Inc., (Flying J). Since Flying Js acquisition, we have reduced
shipments to El Paso via the Fin-Tex pipeline system, while increasing sales through our Big Spring
and Abilene terminals. We do not expect our remaining shipments of refined products to be affected,
since they are shipped directly for distribution through contracted FINA-branded locations,
including our retail and branded marketing segment, in addition to being used for exchange paybacks
for sales in the Albuquerque and Bloomfield, New Mexico markets to which the Longhorn pipeline does
not have access. On December 22, 2008, Flying J and certain of it affiliates, including its
subsidiary that operates the Longhorn pipeline, filed for bankruptcy. On July 29, 2009, Magellan
Midstream Partners, L.P. acquired the Longhorn pipeline from Flying J after receiving approval from
the bankruptcy court.
The majority of the refined fuel products produced at our California refineries are sold on
the spot market and shipped through our pipeline to the Kinder Morgan Carson terminal where it can
be distributed to terminals in Arizona, Nevada and Southern California. The balance of our refined
fuel products at our California refineries is sold through our Paramount refinerys truck rack. The
market for refined products in these regions is also supplied by a number of refiners, including
large integrated oil companies or independent refiners that either have refineries located in the
region or have pipeline access to these regions. These larger companies typically have greater
resources and may have greater flexibility in responding to volatile market conditions or absorbing
market changes.
The majority of our refined fuel products produced at our Krotz Springs refinery are sold on
the spot market and shipped through the Colonial pipeline to major demand centers along the
southern and eastern United States. Products not shipped through the Colonial pipeline are either
transported via barge for sale or for further upgrading or are sold at the Krotz Springs refinerys
truck rack. Barges have access to both the Mississippi and Ohio Rivers and can carry refined
products for delivery as far north as Evansville, Indiana. The market for refined products in these
regions is also supplied by a number of refiners, including large integrated oil companies or
independent refiners that either have refineries located in the region or have pipeline access to
these regions. These larger companies typically have greater resources and may have greater
flexibility in responding to volatile market conditions or absorbing market changes.
The principal competitive factors affecting our wholesale marketing business are price and
quality of products, reliability and availability of supply and location of distribution points.
We compete in the asphalt market with various refineries including Valero, Shell, Tesoro, U.S.
Oil, Western, San Joaquin Refining, Ergon and Holly as well as regional and national asphalt
marketing companies that have little or no associated refining operations such as NuStar Energy LP.
The principal factors affecting competitiveness in asphalt markets are cost, supply reliability,
consistency of product quality, transportation cost and capability to produce the range of high
performance products necessary to meet the requirements of customers.
Our major retail competitors include Valero, Chevron, ConocoPhillips, Susser, Allsups and
Western Refining. The principal competitive factors affecting our retail and branded marketing
segment are location of stores, product price and quality, appearance and cleanliness of stores and
brand identification. We expect to continue to face competition from large, integrated oil
companies, as well as from other convenience stores that sell motor fuels. Increasingly, national
grocery and dry goods retailers such as Albertsons and Wal-Mart, as well as regional grocers and
retailers, are entering the motor fuel retailing business. Many of these competitors are
substantially larger than we are, and because of their diversity, integration of operations and
greater resources, may be better able to
withstand volatile market conditions and lower profitability because of competitive pricing
and lower operating costs.
19
Table of Contents
Government Regulation and Legislation
Environmental Controls and Expenditures
Our operations are subject to extensive and frequently changing federal, state, regional and
local laws, regulations and ordinances relating to the protection of the environment, including
those governing emissions or discharges to the air and water, the handling and disposal of solid
and hazardous waste and the remediation of contamination. We believe our operations are generally
in substantial compliance with these requirements. Over the next several years our operations will
have to meet new requirements being promulgated by the EPA and the states and jurisdictions in
which we operate.
Environmental Expenditures. The EPA regulations related to the Clean Air Act require
significant reductions in the sulfur content in gasoline and diesel fuel. These regulations
required most refineries to reduce sulfur content in gasoline to 30 ppm by January 1, 2004. The
regulations allow small refiners to meet the 30 ppm gasoline standard by January 2008, or December
2010 if the small refiner implemented the new diesel sulfur content standard of 15 ppm by June 1,
2006. Prior to the Paramount Petroleum Corporation and Edgington Oil Company acquisitions, we were
certified by the EPA as a small refiner for both gasoline and diesel. In May 2006, we completed
upgrades at our Big Spring refinery to satisfy the required diesel sulfur content standard. Our
expenditures to meet the diesel sulfur standards were approximately $17.9 million.
In November 2006, following consummation of the Paramount Petroleum Corporation and Edgington
Oil Company acquisitions, we provided notice to the EPA that we no longer satisfied the criteria
for a small refiner. As a result, we were then required to comply with the 30 ppm gasoline sulfur
content standards within 30 months. In July 2007, the EPA granted our request to extend this
deadline by six months, with the total 36-month period to commence on September 28, 2006, the date
on which we acquired the assets of Edgington Oil Company. As a result, we were required to meet the
30 ppm gasoline sulfur standard in September 2009. Our gasoline sulfur control schedule at our Big
Spring refinery was impacted by the fire that occurred in February 2008. On September 25, 2009, we
entered into an Administrative Settlement Agreement with EPA, which gave us an additional 90 days
to meet the gasoline sulfur standards at Big Spring in consideration for our agreement to offset
any excess gasoline sulfur during that time. We achieved compliance within the 90 day extension
and have until the end of 2010 to offset any excess sulfur. Compliance with the gasoline sulfur
standards required capital expenditures of approximately $35.5 million through 2009, of which
approximately $5.2 million was spent in 2008 and $1.0 million was spent in 2007. We had previously
budgeted these expenditures through December 2010. Gasoline and diesel produced at our Paramount
refinery currently meet the gasoline and diesel low sulfur fuel standards.
In October 2004, Paramount Petroleum Corporation entered into a Stipulated Order for Abatement
(SOA) with the South Coast Air Quality Management District (SCAQMD), the air pollution agency for
Orange County and the urban portions of Los Angeles, Riverside and San Bernardino counties. The SOA
resolved a number of outstanding issues with the SCAQMD and allowed Paramount Petroleum Corporation
to modify crude unit process heater permit descriptions and operate these heaters at firing rates
sufficient to meet current and anticipated crude oil throughputs. The SOA required that Paramount
Petroleum Corporation install NOx control equipment on specified heaters within a prescribed
schedule, including installation of equipment in 2007 and 2009. We completed expenditures totaling
$4.5 million, of which $2.2 million was spent in 2007, and $2.3 million was spent in 2008, which
completed installation of the NOx control equipment to meet the requirements of the SOA and no
further expenditures are anticipated.
On November 4, 2005, the SCAQMD adopted a stringent regulatory requirement, Rule 1118,
designed to control emissions from refinery flares. Expenditures required to comply with Rule 1118
were approximately $4.0 million, with approximately $0.7 million spent in 2007, $2.2 million spent
in 2008 and $1.1 million spent in 2009. The Paramount refinery has one flare which is subject to
Rule 1118 and required the installation of continuous emissions monitoring equipment and
installation of a vapor recovery system for the flare. The installation of the emissions monitoring
equipment was originally required by Rule 1118 to be completed in 2007; however, the SCAQMDs
Hearing Board granted additional time to comply. The monitoring system was installed and certified
in 2009 and the vapor recovery system was installed and placed in service in 2009. Paramount has
completed the capital projects required to comply with Rule 1118. Rule 1118 does not apply to our
Long Beach refinery.
20
Table of Contents
On August 7, 2008 the SCAQMD issued a notice of violation to the Paramount refinery for
failing to continuously monitor emissions from the Reformer heaters (H-303, H-304, H-305 and
H-306). We subsequently settled the notice of violation for $30,000. The exhaust stacks of these
four heaters are manifolded together and routed to a single piece of NOx control equipment with a
common exhaust stack and continuous emissions monitoring system (CEMS). Each individual heater also
has an emergency by-pass stack that is used on rare occasions for safety reasons. The SCAQMD
believes that use of emergency by-pass stacks without CEMS monitoring is a violation of SCAQMD
rules. Paramount has successfully obtained variance coverage to use the emergency by-pass stacks
during startup activities and expects to be able to use the variance process for future relief from
rule requirements if necessary. Paramount is pursuing a rule change option with the SCAQMD. Absent
a rule change, Paramount could face an approximate cost of $3.5 million.
In 2006, the Governor of California signed into law AB 32, the California Global Warming
Solutions Act of 2006. Regulations implementing the goals stated in the law, i.e., the reduction of
greenhouse gas emission levels to 1990 levels, have yet to be promulgated. Although development of
such regulations is in a preliminary stage, it is expected that AB 32 mandated reductions will
require increased emission controls on both stationary and non-stationary sources and will result
in requirements to significantly reduce greenhouse gases from our California refineries and
possibly our other California terminals.
On June 26, 2009, the U.S. House of Representatives passed the American Clean Energy and
Security Act, which would establish a market-based cap-and-trade system to achieve yearly
reductions in greenhouse gas emissions through which regulated entities will buy and sell a limited
quantity of carbon emission allowances. The Senate likely will consider multiple pieces of its own
legislation, including the Clean Energy Jobs and American Power Act, which also would establish a
cap-and-trade program and sets even more aggressive reduction targets than the House bill and yet
to be introduced bi-partisan legislation sponsored by Sens. John Kerry, Lindsey Graham and Joseph
Lieberman. Both chambers would be required to approve identical legislation before it could become
law. With respect to regulation, on December 7, 2009, the EPA issued an endangerment finding that
greenhouse gases endanger both public health and welfare, and that greenhouse gas (GHG) emissions
from motor vehicles contribute to the threat of climate change. Although the finding itself does
not impose requirements on regulated entities, it allows the EPA and the Department of
Transportation to finalize a jointly proposed rule regulating greenhouse gas emissions from
vehicles and establishing Corporate Average Fuel Economy standards for light-duty vehicles. When
this happens, greenhouse gases will become federally regulated air pollutants subject to the
Prevention of Significant Deterioration (PSD) and Title V permitting programs under the Clean Air
Act. Anticipating this result, the EPA has proposed the tailoring rule to raise the statutory
threshold for regulation under PSD and Title V to prevent virtually every GHG source from instantly
becoming a major stationary source subject to the PSD and Title V permitting requirements. While
it is probable that Congress and/or the EPA will adopt some form of federal mandatory greenhouse
gas emission reductions legislation or regulation in the future, the timing and specific
requirements of any such legislation or regulation are uncertain at this time, especially in light
of recent challenges to the endangerment finding by industry organizations, which have filed
petitions in the United States Court of Appeals for the D.C. Circuit, as well as by Senator Lisa
Murkowski, who has introduced a resolution (S.J. Res. 26) that would overturn the endangerment
finding.
In February 2007, the EPA adopted final rules effective as of April 27, 2007, to reduce the
levels of benzene in gasoline on a nationwide basis. More specifically, the rule would require that
beginning in 2011 refiners meet an annual average gasoline benzene content standard of 0.62% by
volume on all gasoline produced, both reformulated and conventional. Gasoline produced at our
California refineries already meets the standards established by the EPA. We have not yet
determined the capital expenditures that may be necessary to comply with the proposed benzene
limits at our Big Spring or Krotz Springs refineries. Under the regulations, the EPA may grant
extensions of time to comply with the benzene standard if a refinery demonstrates that unusual
circumstances exist that impose extreme hardship and significantly affect the ability of the
refinery to comply. We may ask for an extension of time to comply with the MSAT2 standards at our
Big Spring and Krotz Springs refineries.
In May 2007, the EPA adopted a final rule effective as of September 1, 2007, that subjects
refiners and importers of gasoline to a yearly renewable volume obligation that is based on the
national renewable fuel standard. Due to our size, we are exempted from the requirements of this
rule through December 31, 2010. In February 2010, the EPA finalized new regulations that replace
and update the current rules and extend the renewable fuel standard to other finished products
(e.g., diesel). In the final rulemaking, the EPA did not extend the time for small refiners to
21
Table of Contents
comply with the renewable fuel standard. In light of this, we may ask for an extension of
time to comply based upon a demonstration of disproportionate economic hardship. When we become
subject to the rule, we will be required to blend renewable fuels (e.g., ethanol) into our finished
products or purchase credits in lieu of blending renewable fuels. At this time, we do not know how
much credits will cost or whether we will be able to blend renewable fuels into our finished
products in order to avoid having to purchase credits.
In October 2006, we were contacted by Region 6 of the EPA and invited to enter into
discussions under the EPAs National Petroleum Refinery Initiative. This Initiative addresses what
the EPA deems to be the most significant Clean Air Act compliance concerns affecting the petroleum
refining industry. On February 2, 2007, we committed in writing to enter into discussions with the
EPA under the Petroleum Refinery Initiative. To date, there have been no specific findings entered
against us or any of our refineries by the EPA, and we have not determined whether we will
ultimately enter into a settlement agreement with the EPA. Based on prior settlements that the EPA
has reached with other petroleum refineries under the Petroleum Refinery Initiative, we anticipate
that the EPA will seek relief in the form of the payment of civil penalties, the installation of
air pollution controls and the implementation of environmentally beneficial projects. At this time,
we cannot estimate the amount of any such civil penalties or the cost of any required controls or
environmentally beneficial projects.
The Krotz Springs refinery entered into a consent decree with the EPA under the National
Petroleum Refining Initiative in November 2005. In return for agreeing to the consent decree and
implementing the reductions in emissions that it specifies, the Krotz Springs refinery secured a
release of liability that provides immunity from enforcement actions for alleged past
non-compliance. The major project for consent decree compliance is installing NOx controls and
monitors on heaters and boilers which is scheduled to be completed in 2011. Other projects include
various SO2 and NOx reduction measures. The current best estimate of capital costs is $13.0
million. The Krotz Springs refinery already completed many portions of the consent decree including
compliance with particulate emissions from the FCCU, H2S in the fuel gas, LDAR performance, and
implementation of Benzene Waste Operations NESHAPs requirements. Because the Krotz Springs refinery
remains subject to the Valero consent decree, we entered into an agreement with Valero at the time
of the acquisition allocating responsibilities under the consent decree. The Krotz Spring refinery
is responsible for implementing only those portions of the consent decree that are specifically and
uniquely applicable to the Krotz Springs refinery. In addition, with respect to certain system-wide
emission limitations that apply across all of the Valero refineries, the Krotz Springs refinery was
generally allocated emission limitations that did not necessitate substantial capital expenditures
for add-on controls.
Conditions may develop that cause additional future capital expenditures at our refineries,
product terminals and retail gasoline stations (operating and closed locations) for compliance with
the Federal Clean Air Act and other federal, state and local requirements. We cannot currently
determine the amounts of such future expenditures.
Remediation Efforts. We are currently remediating historical soil and groundwater
contamination at our Big Spring refinery pursuant to a compliance plan issued by the Texas
Commission on Environmental Quality (TCEQ). The compliance plan requires us to investigate and,
if necessary, remediate 59 potentially contaminated areas on our refinery property and also
requires us to monitor and treat contaminated groundwater at our Big Spring refinery and some of
our terminals, which is currently underway. The costs incurred to comply with the compliance plan
are covered, with certain limitations, by an environmental indemnity provided by FINA, which is
discussed below.
We are currently engaged in four separate remediation projects in the Los Angeles area which
are being conducted pursuant to Cleanup and Abatement Orders issued by the Los Angeles Regional
Water Quality Control Board. Two projects focus on clean up efforts in and around the Paramount
refinery and the Lakewood Tank Farm. Our Paramount subsidiary shares the cost of both these
remediation projects with ConocoPhillips, the former owner of the Paramount refinery and Lakewood
Tank Farm. Another project focuses on efforts at the Long Beach refinery, with the costs being
shared with Apex Oil Co., the former owner of the Long Beach refinery. As part of its acquisition
of Pipeline 145, Paramount Petroleum Corporation assumed an active remediation project designed to
clean up a leak that occurred on this pipeline prior to Paramount Petroleum Corporations
ownership. Paramount Petroleum Corporation bears the full costs of this pipeline remediation
effort. Approximately $2.0 million was spent in 2009 for all of these remediation projects of which
Paramounts portion was $1.2 million. We estimate that an additional $2.4 million will be spent in
2010 with our portion being approximately $1.6 million.
We also have a limited ongoing remediation program at our Long Beach refinery. In conjunction
with our acquisition of the Edgington Oil Company refinery in September 2006, we acquired a
seven-year environmental insurance policy, the premiums for which have been prepaid in full. This
policy provides us coverage for both known and unknown conditions existing at our Long Beach
refinery at the time of our acquisition for off-site, third party bodily injury and property damage
claims. The policy limit on a per occurrence and aggregate basis is $15.0
million and has a per occurrence deductible of $0.5 million.
22
Table of Contents
On March 1, 2005, Paramount Petroleum Corporation purchased Chevrons Pacific Northwest
Asphalt business. As part of the purchase and sale agreement, the parties agreed to share the
remediation costs at the Richmond Beach, Washington and Willbridge, Oregon terminals. Approximately
$0.6 million was spent in 2009 for these remediation costs, of which our portion was $0.2 million,
and we estimate that an additional $0.5 million will be spent during 2010, of which our portion
will be $0.2 million.
In addition, we operate 308 owned and leased convenience stores with underground gasoline and
diesel fuel storage tanks primarily in Central and West Texas and New Mexico. Compliance with
federal and state regulations that govern these storage tanks can be costly. The operation of
underground storage tanks also poses various risks, including soil and groundwater contamination.
We are currently investigating and remediating leaks from underground storage tanks at some of our
convenience stores, and it is possible that we may identify more leaks or contamination in the
future that could result in fines or civil liability for us. We have established reserves in our
financial statements in respect of these matters to the extent that the associated costs are both
probable and reasonably estimable. We cannot assure you, however, that these reserves will prove to
be adequate.
Environmental Indemnity from FINA. In connection with the acquisition of our Big Spring
refinery and other operating assets from FINA in August 2000, FINA agreed, within prescribed
limitations, to indemnify us against costs incurred in connection with any remediation that is
required as a result of environmental conditions that existed on the acquired properties prior to
the closing date of our acquisition. FINAs indemnification obligations for these remediation costs
run through August 2010, have a ceiling of $5.0 million per year (with carryover of unused ceiling
amounts and unreimbursed environmental costs into subsequent years) and have an aggregate
indemnification cap of $20.0 million. Thereafter, we are solely responsible for all additional
remediation costs. As of December 31, 2009 the remediation of the properties is on schedule, and we
have expended approximately $16.8 million in connection with that remediation and approximately
$3.0 million in environmental insurance premiums, all of which has been covered by the FINA
indemnity. Subject to a $25 thousand deductible per claim up to an aggregate deductible of $2.0
million, FINA is additionally obligated to indemnify us for third-party claims with respect to
environmental matters received by us within ten years of the closing date to the extent such
matters relate to FINAs operations on the acquired properties prior to the closing date. FINA is
further obligated to indemnify us for environmental fines imposed as a result of FINAs operations
on the acquired properties prior to the closing date, provided that such claims are asserted no
later than the earlier of ten years from the closing date and the date that the applicable statute
of limitations expires. FINAs aggregate indemnification obligations for environmental fines and
third-party claims are not subject to a monetary cap. Excluding liabilities retained by FINA as
described above, we assumed the environmental liabilities associated with the acquired properties
and agreed to indemnify FINA for any environmental claims or costs in connection with our
operations at the acquired properties after the closing date.
Environmental Insurance. We have also purchased two environmental insurance policies to cover
expenditures not covered by the FINA indemnification agreement, the premiums for which have been
prepaid in full. Under an environmental clean-up cost containment, or cost cap policy, we are
insured for remediation costs for known conditions at the time of our acquisition of our assets
from FINA. This policy has an initial retention of $20.0 million during the first ten years after
the acquisition (coinciding with the FINA indemnity), which retention is increased by $1.0 million
annually during the remainder of the term of the policy. Under an environmental response,
compensation and liability insurance policy, or ERCLIP, we are covered for bodily injury, property
damage, clean-up costs, legal defense expenses and civil fines and penalties relating to unknown
conditions and incidents. The ERCLIP policy is subject to a $100 thousand per claim / $1.0 million
aggregate sublimit on liability for civil fines and penalties and a retention of $150 thousand per
claim in the case of civil fines or penalties. Both the cost cap policy and ERCLIP have a term of
twenty years and share a maximum aggregate limit of $40.0 million. The insurer under these policies
is The Kemper Insurance Companies, which has experienced significant downgrades of its credit
ratings in recent years and is currently in run-off. However, we have no reason to believe at this
time that Kemper will be unable to comply with its obligations under these policies. Our insurance
broker has advised us that environmental insurance policies with terms in excess of ten years are
not currently generally available and that policies with shorter terms are available only at
premiums equal to or in excess of the premiums paid for our policies with Kemper.
Environmental Indemnity to HEP. In connection with the HEP transaction, we entered into an
Environmental Agreement with HEP pursuant to which we 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
23
Table of Contents
February 28, 2005. Our environmental indemnification obligations under the Environmental
Agreement expire after February 28, 2015. In addition, our indemnity obligations are subject to HEP
first incurring $100 thousand of damages as a result of pre-existing environmental conditions or
violations. Our environmental indemnity obligations are further limited to an aggregate
indemnification amount of $20.0 million, including any amounts paid by us to HEP with respect to
indemnification for breaches of our representations and warranties under a Contribution Agreement
entered into as a part of the HEP transaction.
With respect to any remediation required for environmental conditions existing prior to
February 28, 2005, we have the option under the Environmental Agreement to perform such remediation
ourselves in lieu of indemnifying HEP for their costs of performing such remediation. Pursuant to
this option, we are continuing to perform the ongoing remediation at the Wichita Falls terminal
which is subject to our environmental indemnity from FINA. 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.
Environmental Indemnity to Sunoco. In connection with the sale of the Amdel and White Oil
crude oil pipelines, we entered into a Purchase and Sale Agreement with Sunoco pursuant to which we
agreed to indemnify Sunoco against costs and liabilities incurred by Sunoco 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, we have the
option under the Purchase and Sale Agreement to perform such remediation ourselves in lieu of
indemnifying Sunoco for their costs of performing such remediation.
Other Government Regulation
The pipelines owned or operated by us and located in Texas are regulated by Department of
Transportation rules and our intrastate pipelines are regulated by the Texas Railroad Commission.
Within the Texas Railroad Commission, the Pipeline Safety Section of the Gas Services Division
administers and enforces the federal and state requirements on our intrastate pipelines. All of our
pipelines within Texas are permitted and certified by the Texas Railroad Commissions Gas Services
Division.
The California State Fire Marshalls Office enforces federal pipeline regulations for
pipelines in the State of California. We are required to have integrity management and other
programs in place, and we anticipate spending approximately $2.0 million over the next five years
to comply with the regulations. We are also required to have a Pipeline Spill Response Plan for all
California pipelines in our system which includes keeping the plan current, training employees to
effect the plan and conducting annual, quarterly and more frequent spill drills. We are also
required to maintain Certificates of Financial Responsibility with the State of California,
Department of Fish and Game, and the Office of Spill Prevention and Response based on a worst case
discharge.
As required by the Oil Pollution Act of 1990 and state requirements, marine oil transfer
operations at the Richmond Beach Terminal are conducted under the facilitys Facility Response Plan
(FRP) approved and on file with the EPA, the U.S. Coast Guard, and the Washington Department of
Ecology. The FRP provides guidance to facility personnel for emergency responses to oil spills. It
provides specific information on internal and external agency and contractor notification
requirements, appropriate oil spill response actions, the proper disposal of contaminated
materials, hazard evaluation and personnel safety, spill response equipment and material lists, and
operator and response personnel training. The Richmond Beach Terminal conducts four training drills
per year for the purpose of assessing the adequacy of the Facility Response Plan and the
effectiveness of personnel training. In addition to the Facility Response Plan, the Richmond Beach
Terminal conducts all transfer operations under a Marine Oil Transfer Operations Manual approved
and on file with the U.S. Coast Guard and the Washington Department of Ecology.
The Petroleum Marketing Practices Act, or PMPA, is a federal law that governs the relationship
between a refiner and a distributor pursuant to which the refiner permits a distributor to use a
trademark in connection with the sale or distribution of motor fuel. We are subject to the
provisions of the PMPA because we sublicense the FINA brand to our branded distributors in
connection with their distribution and sale of motor fuels. Under the PMPA, we may not terminate or
fail to renew these distributor contracts unless certain enumerated preconditions or grounds for
termination or nonrenewal are met and we also comply with the prescribed notice requirements. The
PMPA
24
Table of Contents
provides that our distributors may enforce the provisions of the act through civil actions
against us. If we terminate or fail to renew one or more of our distributor contracts in accordance
with certain requirements of the PMPA, those distributors may file lawsuits against us to compel
continuation of their contracts or to recover damages from us.
Employees
As of December 31, 2009, we had approximately 2,825 employees. Approximately 725 employees
worked in our refining and unbranded marketing segment, of which 630 were employed at our
refineries and approximately 95 were employed at our corporate offices in Dallas, Texas.
Approximately 122 employees worked in our asphalt segment and approximately 1,978 employees worked
in our retail and branded marketing segment.
Approximately 120 of the 170 employees at our Big Spring refinery are covered by collective
bargaining agreements that expire on April 1, 2012. None of the employees in our asphalt, retail
and branded marketing segment or in our corporate offices are represented by a union. We consider
our relations with our employees to be satisfactory.
Properties
Our principal properties are described above under the captions Refining and Unbranded
Marketing, Asphalt and Retail and Branded Marketing in Item 1. We believe that our facilities
are generally adequate for our operations and are maintained in a good state of repair in the
ordinary course of business. As of December 31, 2009, we were the lessee under a number of
cancelable and non-cancelable leases for certain properties. Our leases are discussed more fully in
Note 21 to our consolidated financial statements included elsewhere in this Annual Report on Form
10-K.
Executive Officers of the Registrant
Our current executive officers and key employees (identified by an asterisk), their ages as of
March 1, 2010, and their business experience during at least the past five years are set forth
below.
Name | Age | Position | ||||
David Wiessman
|
55 | Executive Chairman of the Board of Directors | ||||
Jeff D. Morris
|
58 | Director and Chief Executive Officer | ||||
Paul Eisman
|
54 | President | ||||
Shai Even
|
41 | Senior Vice President and Chief Financial Officer | ||||
Joseph Israel
|
38 | Chief Operating Officer | ||||
Claire A. Hart
|
54 | Senior Vice President | ||||
Joseph A. Concienne
|
59 | Senior Vice President of Refining | ||||
Alan Moret
|
55 | Senior Vice President of Supply | ||||
Harlin R. Dean
|
43 | Senior Vice President Legal, General Counsel and Secretary | ||||
Michael Oster
|
38 | Senior Vice President of Mergers and Acquisitions | ||||
Jimmy C. Crosby*
|
50 | Vice President of Refining Big Spring | ||||
Ed Juno*
|
57 | Vice President of Refining Paramount | ||||
William Wuensche*
|
49 | Vice President of Refining Krotz Springs | ||||
William L. Thorpe*
|
63 | Vice President of Asphalt Operations | ||||
Kyle McKeen*
|
46 | President and Chief Executive Officer of Alon Brands | ||||
Joseph Lipman*
|
64 | President and Chief Executive Officer of SCS |
Set forth below is a brief description of the business experience of each of the executive
officers and key employees listed above.
David Wiessman has served as Executive Chairman of the Board of Directors of Alon since July
2000 and served as President and Chief Executive Officer of Alon from its formation in 2000 until
May 2005. Mr. Wiessman has over 25 years of oil industry and marketing experience. Since 1994,
Mr. Wiessman has been Chief Executive Officer, President and a director of Alon Israel Oil Company,
Ltd., or Alon Israel, Alons parent company. In 1992, Bielsol Investments (1987) Ltd. acquired a
50% interest in Alon Israel. In 1987, Mr. Wiessman became Chief Executive Officer of, and a
stockholder in, Bielsol Investments (1987) Ltd. In 1976, after serving in the Israeli Air Force, he
became Chief Executive Officer of Bielsol Ltd., a privately-owned Israeli company that owns and
operates
25
Table of Contents
gasoline stations and owns real estate in Israel. Mr. Wiessman is also Executive Chairman of
the Board of Directors of Blue Square-Israel, Ltd., which is listed on the New York Stock Exchange,
or NYSE, and the Tel Aviv Stock Exchange, or TASE; Executive Chairman of Blue Square Real Estate
Ltd., which is listed on the TASE; and Executive Chairman of the Board and President of Dor-Alon
Energy in Israel (1988) Ltd., which is listed on the TASE, and all of which are subsidiaries of
Alon Israel.
Jeff D. Morris has served as a director and as our Chief Executive Officer since May 2005 and
has served as Chief Executive Officer of our other operating subsidiaries since July 2000. Mr.
Morris also served as our President from May 2005 until March 2010 and President of our other
operating subsidiaries from July 2000 until March 2010. Prior to joining Alon, he held various
positions at Fina, Inc., where he began his career in 1974. Mr. Morris served as Vice President of
Finas SouthEastern Business Unit from 1998 to 2000 and as Vice President of its SouthWestern
Business Unit from 1995 to 1998. In these capacities, he was responsible for both the Big Spring
refinery and Finas Port Arthur refinery and the crude oil gathering assets and marketing
activities for both business units. Mr. Morris has also been a director of our subsidiary Alon
Refining Krotz Springs, Inc. since 2008.
Paul Eisman was appointed to serve as our President in March 2010. Prior to joining Alon, Mr.
Eisman was Executive Vice President, Refining & Marketing Operations at Frontier Oil Corporation
from 2006 to 2009 and held various positions at KBC Advanced Technologies from 2003 to 2006,
including Vice President of North American Operations. During 2002, Mr. Eisman was Senior Vice
President of Planning for Valero Energy Corporation following Valeros acquisition of Ultramar
Diamond Shamrock. Prior to the acquisition, Mr. Eisman had a 24-year career with Ultramar Diamond
Shamrock, serving in many technical and operational roles including Executive Vice President of
Corporate Development and Refinery Manager at the McKee refinery.
Shai Even has served as a Senior Vice President since August 2008 and as our Chief Financial
Officer since December 2004. Mr. Even served as a Vice President from May 2005 to August 2008 and
Treasurer from August 2003 until March 2007. Prior to joining Alon, Mr. Even served as the Chief
Financial Officer of DCL Technologies, Ltd. from 1996 to July 2003 and prior to that worked for
KPMG from 1993 to 1996. Shai Even is the brother of Shlomo Even, one of our directors.
Joseph Israel has served as our Chief Operating Officer since August 2008. Mr. Israel served
as our Vice President of Mergers & Acquisitions from March 2005 to August 2008 and as our General
Manager of Economics and Commerce from September 2000 to March 2005. Prior to joining Alon, Mr.
Israel held positions with several Israeli government entities beginning in 1995, including the
Israeli Land Administration, the Israeli Fuel Administration and most recently as Economics and
Commerce Vice President of Israels Petroleum Energy Infrastructure entity.
Claire A. Hart has served as our Senior Vice President since January 2004 and served as our
Chief Financial Officer and Vice President from August 2000 to January 2004. Prior to joining Alon,
he held various positions in the Finance, Accounting and Operations departments of FINA for 13
years, serving as Treasurer from 1998 to August 2000 and as General Manager of Credit Operations
from 1997 to 1998.
Joseph A. Concienne has served as our Senior Vice President of Refining since August 2008 and
served as our Senior Vice President of Refining and Transportation from May 2007 to August 2008 and
Vice President of Refining and Transportation from March 2001 to May 2007. His primary role is
oversight of our refinery system. Prior to joining Alon, Mr. Concienne served as Director of
Operations/General Manager for Polyone Corporation in Seabrook, Texas from 1998 to 2001. He served
as Vice President/General Manager for Valero Refining and Marketing, Inc. in 1998, and as Manager
of Refinery Operations and Refinery Manager for Phibro Energy Refining (now known as Valero
Refining and Marketing, Inc.) from 1985 to 1998.
Alan Moret has served as our Senior Vice President of Supply since August 2008. Mr. Moret
served as our Senior Vice President of Asphalt Operations from August 2006 to August 2008, with
responsibility for asphalt operations and marketing at our refineries and asphalt terminals. Prior
to joining Alon, Mr. Moret was President of Paramount Petroleum Corporation from November 2001 to
August 2006. Prior to joining Paramount Petroleum Corporation, Mr. Moret held various positions
with Atlantic Richfield Company, most recently as President of ARCO Crude Trading, Inc. from 1998
to 2000 and as President of ARCO Seaway Pipeline Company from 1997 to 1998.
Harlin R. Dean has served as our General Counsel and Secretary since October 2002 and as our
Senior Vice President since August 2008. Mr. Dean served as our Vice President from May 2005 to
August 2008. Prior to joining Alon, Mr. Dean practiced corporate and securities law, with a focus
on public and private merger and
26
Table of Contents
acquisition transactions and public securities offerings, at Brobeck, Phleger & Harrison, LLP,
from April 2000 to September 2002, and at Weil, Gotshal & Manges, LLP, from September 1992 to March
2000.
Michael Oster has served as our Senior Vice President of Mergers and Acquisitions of Alon
Energy since August 2008 and General Manager of Commercial Transactions of Alon Energy from January
2003 to August 2008. Prior to joining Alon Energy, Mr. Oster was a partner in the Israeli law firm,
Yehuda Raveh and Co.
Jimmy C. Crosby has served as our Vice President of Refining Big Spring since January 2010, as Vice President of Refining California Refineries from March 2009 until January 2010, and
as Vice President of Refining and Supply since May 2007, with responsibility for
refinery and supply operations at our California refineries. Mr. Crosby served as our Vice
President of Supply and Planning from May 2005 to May 2007, with responsibility for all terminal
and refinery supply for our Big Spring refinerys marketing and refinery operations. Mr. Crosby
served as our General Manager of Business Development and Planning from August 2000 to May 2005.
Prior to joining Alon, Mr. Crosby worked with FINA from 1996 to August 2000 where he last held the
position of Manager of Planning and Economics for the Big Spring refinery.
Ed Juno
has served as our Vice President of Refining - Paramount since January 2010. Prior to joining Alon, Mr. Juno has been employed in the refining industry for over 35 years, most recently with Sinclair Oil Corporation as Manager of Sinclairs Wyoming refinery from 2008 to 2009 and as Operations Manager of the Wyoming refinery from 2003 to 2008.
William Wuensche has served as our Vice President of Refining Krotz Springs since March
2009, with responsibility for refinery operations at the Krotz Springs refinery. Mr. Wuensche
joined Alon in July 2008 and from August 2008 to March 2009, Mr. Wuensche served as Vice President
of Refining of Alon Refining Krotz Springs, Inc., our subsidiary conducting our refining operations
at Krotz Springs. Prior to joining Alon, Mr. Wuensche was with Valero Refining Company-Louisiana
from June 2006 to July 2008, as Vice President and General Manager of Valeros Krotz Springs
refinery and Valero Refining Company from February 2004 to June 2006, as Vice President and General
Manager of Valeros McKee Refinery. Earlier in his career, Mr. Wuensche held various positions of
increasing responsibilities in the engineering, economics and planning and refinery operations
areas.
William L. Thorpe has served as Vice President of Asphalt Operations since August 2008, with
responsibility over asphalt marketing and operations, quality control and quality assurance at our
refineries and asphalt terminals and safety, security and training at our asphalt terminals. Mr.
Thorpe served as the Vice President of Asphalt Marketing of our subsidiary, Paramount Petroleum
Corporation, from August 2006 to August 2008. Prior to joining Alon, Mr. Thorpe was with Paramount
Petroleum Corporation from 1996 to August 2006 having responsibility for marketing and operations,
serving as Senior Vice President. Prior to joining Paramount Petroleum Corporation, Mr. Thorpe held
management positions with various companies, including Vice President of Pacific Resources, Inc.,
Vice President Sales and Marketing of Marlex Petroleum Corporation, Vice President Marketing
of Charter Oil Company and Manager Transportation Planning and Development of ConocoPhillips.
Mr. Thorpe has served as Vice-Chairman of the Board for the Asphalt Institute and the Asphalt
Pavement Association of California and became Chairman of the Board of the Asphalt Institute
beginning in 2010.
Kyle McKeen has served as President and Chief Executive Officer of Alon Brands, Inc., our
subsidiary that manages our retail and branded marketing operations, since May 2008. From 2005 to
2008, Mr. McKeen served as President and Chief Operating Officer of Carter Energy, an independent
energy marketer supporting over 600 retailers by providing fuel supply, merchandising and marketing
support, and consulting services. Prior to joining Carter Energy in 2005, Mr. McKeen was a member
of the Board of Managers of Alon USA Interests, LLC from September 2002 to 2005 and held numerous
positions of increasing responsibilities with Alon Energy, including Vice President of Marketing.
Joseph Lipman has served as President and Chief Executive Officer of Southwest Convenience
Stores, LLC, or SCS, our subsidiary conducting our retail operations since July 2001. From 1997 to
July 2001, Mr. Lipman served as General Manager of Cosmos, a chain of supermarkets in Israel owned
by Super-Sol Ltd., where he was responsible for marketing and store operations.
27
Table of Contents
ITEM 1A. RISK FACTORS.
You should be aware that the occurrence of any of the events described in this Risk Factors
section and elsewhere in this Annual Report on Form 10-K or in any other of our filings with the
SEC could have a material adverse effect on our business, financial position, results of operations
and cash flows. In evaluating an investment in any of our securities, you should consider
carefully, among other things, the factors and the specific risks set forth below. This annual
report contains forward-looking statements that involve risks and uncertainties. See
Forward-Looking Statements in Managements Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 for a discussion of the factors that could cause actual results to
differ materially from those projected.
The price volatility of crude oil, other feedstocks, refined products and fuel and utility services
may have a material adverse effect on our earnings, profitability and cash flows.
Our refining and marketing earnings, profitability and cash flows from operations depend
primarily on the margin above fixed and variable expenses (including the cost of refinery
feedstocks, such as crude oil) at which we are able to sell refined products. When the margin
between refined product prices and crude oil and other feedstock prices contracts, our earnings,
profitability and cash flows are negatively affected. Refining margins historically have been
volatile, and are likely to continue to be volatile, as a result of a variety of factors, including
fluctuations in the prices of crude oil, other feedstocks, refined products and fuel and utility
services. For example, from January 2005 to December 2009, the price for WTI crude oil fluctuated
between $31.27 and $145.31 per barrel, while the price for Gulf Coast unleaded gasoline fluctuated
between 76.8 cents per gallon, or cpg, and 474.6 cpg. Prices of crude oil, other feedstocks and
refined products depend on numerous factors beyond our control, including the supply of and demand
for crude oil, other feedstocks, gasoline, diesel, asphalt and other refined products. Such supply
and demand are affected by, among other things:
| changes in global and local economic conditions; | ||
| domestic and foreign demand for fuel products; | ||
| worldwide political conditions, particularly in significant oil producing regions such as the Middle East, West Africa and Venezuela; | ||
| the level of foreign and domestic production of crude oil and refined products and the level of crude oil, feedstock and refined products imported into the United States; | ||
| utilization rates of U.S. refineries; | ||
| development and marketing of alternative and competing fuels; | ||
| commodities speculation; | ||
| accidents, interruptions in transportation, inclement weather or other events that can cause unscheduled shutdowns or otherwise adversely affect our refineries; | ||
| federal and state government regulations; and | ||
| local factors, including market conditions, weather conditions and the level of operations of other refineries and pipelines in our markets. |
When the margin between refined product prices and crude oil and other feedstock prices
contracts our earnings, profitability and cash flows are negatively affected.
The nature of our business requires us to maintain substantial quantities of crude oil and
refined product inventories. Because crude oil and refined products are essentially commodities, we
have no control over the changing market value of these inventories. Our inventory is valued at the
lower of cost or market value under the last-in, first-out (LIFO) inventory valuation
methodology. As a result, if the market value of our inventory were to decline to an amount less
than our LIFO cost, we would record a write-down of inventory and a non-cash charge
28
Table of Contents
to cost of sales. Our investment in inventory is affected by the general level of crude oil
prices, and significant increases in crude oil prices could result in substantial working capital
requirements to maintain inventory volumes.
In addition, the volatility in costs of fuel, principally natural gas, and other utility
services, principally electricity, used by our refineries and other operations affect our operating
costs. Fuel and utility prices have been, and will continue to be, affected by factors outside our
control, such as supply and demand for fuel and utility services in both local and regional
markets. Future increases in fuel and utility prices may have a negative effect on our earnings,
profitability and cash flows.
Our profitability depends, in part, on the sweet/sour crude oil price spread. A decrease in this
spread could negatively affect our profitability.
Because our Big Spring and California refineries are configured to process substantial volumes
of sour crude oils, our profitability depends, in part, on the price spread between sweet crude oil
and sour crude oil, which we refer to as the sweet/sour spread. In recent years, the sweet/sour
spread has significantly narrowed and any further tightening of the sweet/sour spreads could
negatively affect our profitability.
The profitability of our California refineries depends, in part, on the light/heavy crude oil price
spread. A decrease in this spread could negatively affect our profitability.
Our California refineries process significant volumes of heavy crude oils and, as a result,
our profitability depends in part on the price spread between light crude oil and heavy crude oil,
which we refer to as the light/heavy spread. Because processing light crude oils produces higher
percentages of light products, light crude oils typically are priced higher than heavy crude oils.
In 2009, the light/heavy spread was less than in 2008 and any further tightening of the
light/heavy spread would negatively affect profitability.
The dangers inherent in our operations could cause disruptions and could expose us to potentially
significant losses, costs or liabilities.
Our operations are subject to significant hazards and risks inherent in refining operations
and in transporting and storing crude oil, intermediate products and refined products. These
hazards and risks include, but are not limited to, natural disasters, fires, explosions, pipeline
ruptures and spills, third party interference and mechanical failure of equipment at our or
third-party facilities, any of which could result in production and distribution difficulties and
disruptions, environmental pollution, personal injury or wrongful death claims and other damage to
our properties and the properties of others. We experienced such an event on February 18, 2008 when
a fire at the Big Spring refinery destroyed the propylene recovery unit and damaged equipment in
the alkylation and gas concentration units. As a result the Big Spring refinerys crude unit did
not operate until April 5, 2008 and the FCCU did not resume operations until September 26, 2008.
The occurrence of such events at our Big Spring refinery, Krotz Springs refinery or our
California refineries could significantly disrupt our production and distribution of refined
products, and any sustained disruption could have a material adverse effect on our business,
financial condition and results of operations.
We are subject to interruptions of supply as a result of our reliance on pipelines for
transportation of crude oil and refined products.
Our refineries receive a substantial percentage of their crude oil and deliver a substantial
percentage of their refined products through pipelines. We could experience an interruption of
supply or delivery, or an increased cost of receiving crude oil and delivering refined products to
market, if the ability of these pipelines to transport crude oil or refined products is disrupted
because of accidents, earthquakes, hurricanes, governmental regulation, terrorism, other
third-party action or any of the types of events described in the preceding risk factor. Our
prolonged inability to use any of the pipelines that we use to transport crude oil or refined
products could have a material adverse effect on our business, results of operations and cash
flows.
29
Table of Contents
If the price of crude oil increases significantly, it could reduce our profit on our fixed-price
asphalt supply contracts.
We enter into fixed-price asphalt supply contracts pursuant to which we agree to deliver
asphalt to customers at future dates. We set the pricing terms in these agreements based, in part,
upon the price of crude oil at the time we enter into each contract. If the price of crude oil
increases from the time we enter into the contract to the time we produce the asphalt, our profits
from these sales could be adversely affected. For example, in the first half of 2008, WTI crude
prices increased from $87.15 per barrel to $140.22 per barrel over a period of six months.
Primarily as a result of these increases in the cost of crude, we experienced reduced margins from
our asphalt sales in the first half of 2008.
Our operating results are seasonal and generally lower in the first and fourth quarters of the
year.
Demand for gasoline and asphalt products is generally higher during the summer months than
during the winter months due to seasonal increases in highway traffic and road construction work.
Seasonal fluctuations in highway traffic also affect motor fuels and merchandise sales in our
retail stores. As a result, our operating results for the first and fourth calendar quarters are
generally lower than those for the second and third calendar quarters of each year. This
seasonality is more pronounced in our asphalt business.
If the price of crude oil increases significantly, it could limit our ability to purchase enough
crude oil to operate our refineries at full capacity.
We rely in part on borrowings and letters of credit under our revolving credit facilities to
purchase crude oil for our refineries. If the price of crude oil increases significantly, we may
not have sufficient capacity under our revolving credit facilities to purchase enough crude oil to
operate our refineries at full capacity. A failure to operate our refineries at full capacity could
adversely affect our profitability and cash flows.
Changes in our credit profile could affect our relationships with our suppliers, which could have a
material adverse effect on our liquidity and our ability to operate our refineries at full
capacity.
Changes in our credit profile could affect the way crude oil suppliers view our ability to
make payments and induce them to shorten the payment terms for our purchases or require us to post
security prior to payment. Due to the large dollar amounts and volume of our crude oil and other
feedstock purchases, any imposition by our suppliers of more burdensome payment terms on us may
have a material adverse effect on our liquidity and our ability to make payments to our suppliers.
This, in turn, could cause us to be unable to operate our refineries at full capacity. A failure to
operate our refineries at full capacity could adversely affect our profitability and cash flows.
Competition in the refining and marketing industry is intense, and an increase in competition in
the markets in which we sell our products could adversely affect our earnings and profitability.
We compete with a broad range of companies in our refining and marketing operations. Many of
these competitors are integrated, multinational oil companies that are substantially larger than we
are. Because of their diversity, integration of operations, larger capitalization, larger and more
complex refineries and greater resources, these companies may be better able to withstand
disruptions in operations, volatile market conditions, to offer more competitive pricing and to
obtain crude oil in times of shortage.
We are not engaged in the petroleum exploration and production business and therefore do not
produce any of our crude oil feedstocks. Certain of our competitors, however, obtain a portion of
their feedstocks from company-owned production. Competitors that have their own crude production
are at times able to offset losses from refining operations with profits from producing operations,
and may be better positioned to withstand periods of depressed refining margins or feedstock
shortages. In addition, we compete with other industries, such as wind, solar and hydropower, that
provide alternative means to satisfy the energy and fuel requirements of our industrial, commercial
and individual customers. If we are unable to compete effectively with these competitors, both
within and outside our industry, there could be a material adverse effect on our business,
financial condition, results of operations and cash flows.
30
Table of Contents
Our indebtedness could adversely affect our financial condition or make us more vulnerable to
adverse economic conditions.
As of December 31, 2009, our consolidated outstanding indebtedness was $937.0 million. Our
level of indebtedness could have important consequences to you, such as:
| we may be limited in our ability to obtain additional financing to fund our working capital needs, capital expenditures and debt service requirements or our other operational needs; | ||
| we may be limited in our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to make principal and interest payments on our debt; | ||
| we may be at a competitive disadvantage compared to competitors with less leverage since we may be less capable of responding to adverse economic and industry conditions; and | ||
| we may not have sufficient flexibility to react to adverse changes in the economy, our business or the industries in which we operate. |
In addition, our ability to make payments on our indebtedness will depend on our ability to
generate cash in the future. Our ability to generate cash is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are beyond our control. Our
historical financial results have been, and we anticipate that our future financial results will
be, subject to fluctuations. We cannot assure you that our business will generate sufficient cash
flow from operations or that future borrowings will be available to us in an amount sufficient to
enable us to pay our indebtedness or to fund our other liquidity needs. Any inability to pay our
debts would require us to pursue one or more alternative strategies, such as selling assets,
refinancing or restructuring our indebtedness or selling equity. However, we cannot assure you that
any such alternatives would be feasible or prove adequate. Failure to pay our debts could cause us
to default on our obligations in respect of our indebtedness and impair our liquidity. Also, some
alternatives would require the prior consent of the lenders under our credit facilities, which we
may not be able to obtain.
Competition in the asphalt industry is intense, and an increase in competition in the markets in
which we sell our asphalt products could adversely affect our earnings and profitability.
Our asphalt business competes with other refiners and with regional and national asphalt
marketing companies. Many of these competitors are larger, more diverse companies with greater
resources, providing them advantages in obtaining crude oil and other blendstocks and in competing
through bidding processes for asphalt supply contracts.
We compete in large part on our ability to deliver specialized asphalt products which we
produce under proprietary technology licenses. Recently, demand for these specialized products has
increased due to new specification requirements by state and federal governments. If we were to
lose our rights under our technology licenses, or if competing technologies for specialized
products are developed by our competitors, our profitability could be adversely affected.
Competition in the retail industry is intense, and an increase in competition in the markets in
which our retail businesses operate could adversely affect our earnings and profitability.
Our retail operations compete with numerous convenience stores, gasoline service stations,
supermarket chains, drug stores, fast food operations and other retail outlets. Increasingly,
national high-volume grocery and dry-goods retailers, such as Albertsons and Wal-Mart are entering
the gasoline retailing business. Many of these competitors are substantially larger than we are.
Because of their diversity, integration of operations and greater resources, these companies may be
better able to withstand volatile market conditions or levels of low or no profitability. In
addition, these retailers may use promotional pricing or discounts, both at the pump and in the
store, to encourage in-store merchandise sales. These activities by our competitors could adversely
affect our profit margins. Additionally, our convenience stores could lose market share, relating
to both gasoline and merchandise, to these and other retailers, which could adversely affect our
business, results of operations and cash flows.
31
Table of Contents
Our convenience stores compete in large part based on their ability to offer convenience to
customers. Consequently, changes in traffic patterns and the type, number and location of competing
stores could result in the loss of customers and reduced sales and profitability at affected
stores.
We may incur significant costs to comply with new or changing environmental laws and regulations.
Our operations are subject to extensive regulatory controls on air emissions, water
discharges, waste management and the clean-up of contamination that can require costly compliance
measures. If we fail to meet environmental requirements, we may be subject to administrative, civil
and criminal proceedings by state and federal authorities, as well as civil proceedings by
environmental groups and other individuals, which could result in substantial fines and penalties
against us as well as governmental or court orders that could alter, limit or stop our operations.
On February 2, 2007, we committed in writing to enter into discussions with the EPA under the
National Petroleum Refinery Initiative. To date, the EPA has not made any specific findings against
us or any of our refineries and we have not determined whether we will ultimately enter into a
settlement agreement with the EPA. Based on prior settlements that the EPA has reached with other
petroleum refiners under the Petroleum Refinery Initiative, we anticipate that the EPA will seek
relief in the form of the payment of civil penalties, the installation of air pollution controls
and the implementation of environmentally beneficial projects. At this time, we cannot estimate the
amount of any such civil penalties or the costs of any required controls or environmentally
beneficial projects.
In addition, new laws and regulations, new interpretations of existing laws and regulations,
increased governmental enforcement or other developments could require us to make additional
unforeseen expenditures. Many of these laws and regulations are becoming increasingly stringent,
and the cost of compliance with these requirements can be expected to increase over time. We are
not able to predict the impact of new or changed laws or regulations or changes in the ways that
such laws or regulations are administered, interpreted or enforced. The requirements to be met, as
well as the technology and length of time available to meet those requirements, continue to develop
and change. To the extent that the costs associated with meeting any of these requirements are
substantial and not adequately provided for, our results of operations and cash flows could suffer.
The adoption of climate change legislation by Congress or the regulation of greenhouse gas
emissions by the United States Environmental Protection Agency (EPA) could result in increased
operating costs, lower profitability and reduced demand for our refined products.
On June 26, 2009, the U.S. House of Representatives passed the American Clean Energy and
Security Act of 2009, also known as the Waxman-Markey cap-and-trade legislation or ACESA. The
purpose of ACESA is to control and reduce emissions of greenhouse gases, or GHGs, in the United
States. GHGs are certain gases, including carbon dioxide and methane, that may be contributing to
warming of the Earths atmosphere and other climatic changes. ACESA would establish an economy-wide
cap on emissions of GHGs in the United States and would require an overall reduction in GHG
emissions of 17% (from 2005 levels) by 2020, and by over 80% by 2050. Under ACESA, most sources of
GHG emissions would be required to obtain GHG emission allowances corresponding to their annual
emissions of GHGs. The number of emission allowances issued each year would decline as necessary to
meet ACESAs overall emission reduction goals. As the number of GHG emission allowances declines
each year, the cost or value of allowances is expected to escalate significantly. The net effect of
ACESA will be to impose increasing costs on the combustion of carbon-based fuels such as oil and
refined petroleum products.
The U.S. Senate has begun work on its own legislation for controlling and reducing emissions
of GHGs in the United States. On September 30, 2009, Senators Barbara Boxer and John Kerry
introduced climate change legislation, S. 1733, entitled the Clean Energy Jobs & American Power
Act. The Senate committee from which the legislation was introduced, the Environment and Public
Works Committee, approved the bill on November 5, 2009. Various Senate committees are expected to
review the bill, and the text of the bill may change as a result. The Clean Energy Jobs & American
Power Act is not identical to ACESA. For example, the 2020 GHG reduction target in the Senate
proposed legislation is 20% below 2005 levels, versus 17% below 2005 levels in the House-passed
bill. The Senate may consider other legislative options, as well; currently, Sens. John Kerry,
Lindsey Graham and Joseph Lieberman are drafting a bi-partisan climate bill.
32
Table of Contents
Any Senate-passed legislation would need to be reconciled with ACESA, and both chambers would
be required to approve identical legislation before it could become law. President Obama has
indicated that he is in support of the adoption of legislation to control and reduce emissions of
GHGs through an emission allowance permitting system that results in fewer allowances being issued
each year but that allows parties to buy, sell and trade allowances as needed to fulfill their GHG
emission obligations. Although it is not possible at this time to predict when the Senate may act
on climate change legislation or how any bill approved by the Senate would be reconciled with
ACESA, any laws or regulations that may be adopted to restrict or reduce emissions of GHGs would
likely require us to incur increased operating costs. If we are unable to sell our refined products
at a price that reflects such increased costs, there could be a material adverse effect on our
business, financial condition and results of operations. In addition, any increase in prices of
refined products resulting from such increased costs could have an adverse effect on our financial
condition, results of operations and cash flows.
In addition to the climate change legislation under consideration by Congress, on December 7,
2009, the EPA issued an endangerment finding that GHGs endanger both public health and welfare, and
that GHG emissions from motor vehicles contribute to the threat of climate change. Although the
finding itself does not impose requirements on regulated entities, it allows the EPA and the
Department of Transportation to finalize a jointly proposed rule regulating greenhouse gas
emissions from vehicles and establishing Corporate Average Fuel Economy standards for light-duty
vehicles. When GHGs become regulated by the EPA for vehicles, they will also become regulated
pollutants under the Clean Air Act triggering other Clean Air Act requirements. The EPAs
endangerment finding is being challenged, however. Industry organizations have filed petitions in
the United States Court of Appeals for the D.C. Circuit, and Senator Lisa Murkowski has introduced
a resolution (S.J. Res. 26) that would overturn the endangerment finding.
On September 30, 2009, the EPA proposed the Prevention of Significant Deterioration and Title
V Greenhouse Gas Tailoring Rule to raise the threshold amount of GHG emissions that a source would
have to emit to trigger certain Clean Air Act permitting requirements and the need to install
controls to reduce emissions of greenhouse gases. The EPA is moving forward with the regulations
despite the Obama administrations stated preference for legislation. Under the current
thresholds in the PSD and Title V rules, the rule would capture even small emitters of greenhouse
gases. Although it is not clear whether a final version of this rule would differ significantly
from the proposed rule, or if finalized, would withstand legal challenges, the new obligations
proposed in the regulation could require us to incur increased operating costs. If we are unable
to sell our refined products at a price that reflects such increased costs, there could be a
material adverse effect on our business, financial condition and results of operations. In
addition, any increase in prices of refined products resulting from such increased costs could have
an adverse effect on our financial condition, results of operations and cash flows.
We may incur significant costs and liabilities with respect to environmental lawsuits and
proceedings and any investigation and remediation of existing and future environmental conditions.
We are currently investigating and remediating, in some cases pursuant to government orders,
soil and groundwater contamination at our Big Spring refinery, terminals and convenience stores.
Since August 2000, we have spent approximately $19.8 million with respect to the investigation and
remediation of our Big Spring refinery and related terminals. We anticipate spending approximately
$8.0 million in investigation and remediation expenses in connection with our Big Spring refinery
and terminals over the next 15 years. Since their acquisition, we have spent approximately $8.6
million with respect to the investigation and remediation of our California refineries and related
terminals. We anticipate spending an additional $16.0 million in investigation and remediation
expenses in connection with our California refineries and terminals over the next 15 years. There
can be no assurances, however, that we will not have to spend more than these anticipated amounts.
Our handling and storage of petroleum and hazardous substances may lead to additional contamination
at our facilities and facilities to which we send or sent wastes or by-products for treatment or
disposal, in which case we may be subject to additional cleanup costs, governmental penalties, and
third-party suits alleging personal injury and property damage. Although we have sold three of our
pipelines and three of our terminals pursuant to the HEP transaction and two of our pipelines
pursuant to the Sunoco transaction, we have agreed, subject to certain limitations, to indemnify
HEP and Sunoco for costs and liabilities that may be incurred by them as a result of environmental
conditions existing at the time of the sale. See Items 1 and 2 Business and Properties
Government Regulation and Legislation Environmental Indemnity to HEP and Environmental
Indemnity to Sunoco. If we are forced to incur costs or pay liabilities in connection with such
proceedings and investigations, such costs and payments could be significant and could adversely
affect our business, results of operations and cash flows.
33
Table of Contents
We could incur substantial costs or disruptions in our business if we cannot obtain or maintain
necessary permits and authorizations or otherwise comply with health, safety, environmental and
other laws and regulations.
From time to time, we have been sued or investigated for alleged violations of health, safety,
environmental and other laws. If a lawsuit or enforcement proceeding were commenced or resolved
against us, we could incur significant costs and liabilities. In addition, our operations require
numerous permits and authorizations under various laws and regulations. These authorizations and
permits are subject to revocation, renewal or modification and can require operational changes to
limit impacts or potential impacts on the environment and/or health and safety. A violation of
authorization or permit conditions or other legal or regulatory requirements could result in
substantial fines, criminal sanctions, permit revocations, injunctions, and/or facility shutdowns.
In addition, major modifications of our operations could require modifications to our existing
permits or upgrades to our existing pollution control equipment. Any or all of these matters could
have a negative effect on our business, results of operations, cash flows or prospects.
We could encounter significant opposition to operations at our California refineries.
Our Paramount refinery is located in a residential area. The refinery is located near schools,
apartment complexes, private homes and shopping establishments. In addition, our Long Beach
refinery is also located in close proximity to other commercial facilities. Any loss of community
support for our California refining operations could result in higher than expected expenses in
connection with opposing any community action to restrict or terminate the operation of the
refinery. Any community action in opposition to our current and planned use of the California
refineries could have a material adverse effect on our business, results of operations and cash
flows.
The occurrence of a release of hazardous materials or a catastrophic event affecting our California
refineries could endanger persons living nearby.
Because our Paramount refinery is located in a residential area, any release of hazardous
material or catastrophic event could cause injuries to persons outside the confines of the
Paramount refinery. Similarly, any such release or event at our Long Beach refinery could cause
injury to persons outside of the Long Beach refinery. In the event that non-employees were injured
as a result of such an event, we would be likely to incur substantial legal costs as well as any
costs resulting from settlements or adjudication of claims from such injured persons. The extent of
these expenses and costs could be in excess of the limits provided by our insurance policies. As a
result, any such event could have a material adverse effect on our business, results of operations
and cash flows.
Certain of our facilities are located in areas that have a history of earthquakes or hurricanes,
the occurrence of which could materially impact our operations.
Our refineries located in California and the related pipeline and asphalt terminals, and to a
lesser extent our refinery and operations in Oregon, are located in areas with a history of
earthquakes, some of which have been quite severe. Our Krotz Springs refinery is located less than
100 miles from the Gulf Coast. In August 2008, the Krotz Springs refinery sustained minor physical
damage from Hurricane Gustav; however, the regional utilities were affected and, as a result, the
Krotz Springs refinery was without electric power for one week. Offshore crude oil production and
gathering facilities were impacted by Gustav and a subsequent storm, which temporarily limited the
availability of crude oil to the Krotz Springs refinery. In the event of an earthquake or hurricane
that causes damage to our refining, pipeline or asphalt terminal assets, or the infrastructure
necessary for the operation of these assets, such as the availability of usable roads, electricity,
water, or natural gas, we may experience a significant interruption in our refining and/or
marketing operations. Such an interruption could have a material adverse effect on our business,
results of operations and cash flows.
Terrorist attacks, threats of war or actual war may negatively affect our operations, financial
condition, results of operations and prospects.
Terrorist attacks, threats of war or actual war, as well as events occurring in response to or
in connection with them, may adversely affect our operations, financial condition, results of
operations and prospects. Energy-related assets (which could include refineries, terminals and
pipelines such as ours) may be at greater risk of future terrorist attacks than other possible
targets in the United States. A direct attack on our assets or assets used by us could have a
material adverse effect on our operations, financial condition, results of operations and
prospects. In addition, any terrorist attack, threats of war or actual war could have an adverse
impact on energy prices, including prices for our crude oil and refined products, and an adverse
impact on the margins from our refining and marketing operations. In addition, disruption or
significant increases in energy prices could result in government-imposed price controls.
34
Table of Contents
Covenants in our credit agreements could limit our ability to undertake certain types of
transactions and adversely affect our liquidity.
Our credit agreements contain negative and financial covenants and events of default that may
limit our financial flexibility and ability to undertake certain types of transactions. For
example, we are subject to negative covenants that restrict our activities, including changes in
control of Alon or certain of our subsidiaries, restrictions on creating liens, engaging in
mergers, consolidations and sales of assets, incurring additional indebtedness, entering into
certain lease obligations, making certain capital expenditures, and making certain dividend, debt
and other restricted payments. Should we desire to undertake a transaction that is limited by the
negative covenants in our credit agreements, we will need to obtain the consent of our lenders or
refinance our credit facilities. Such refinancings may not be possible or may not be available on
commercially acceptable terms, or at all.
Our insurance policies do not cover all losses, costs or liabilities that we may experience.
We maintain significant insurance coverage, but it does not cover all potential losses, costs
or liabilities, and our business interruption insurance coverage does not apply unless a business
interruption exceeds a period of 45 75 days, depending upon the specific policy. We could suffer
losses for uninsurable or uninsured risks or in amounts in excess of our existing insurance
coverage. Our ability to obtain and maintain adequate insurance may be affected by conditions in
the insurance market over which we have no control. The occurrence of an event that is not fully
covered by insurance could have a material adverse effect on our business, financial condition and
results of operations.
We are exposed to risks associated with the credit-worthiness of the insurer of our environmental
policies.
The insurer under three of our environmental policies is The Kemper Insurance Companies, which
has experienced significant downgrades of its credit ratings in recent years and is currently in
run-off. Of these three policies, two are 20-year policies that were purchased to protect us
against expenditures not covered by our indemnification agreement with FINA, and the third policy
is a ten-year policy covering our operations subsequent to our acquisition from FINA. Our insurance
brokers have advised us that environmental insurance policies with terms in excess of ten years are
not currently generally available and that policies with shorter terms are available only at
premiums equal to or in excess of the premiums paid for our policies with Kemper. Accordingly, we
are currently subject to the risk that Kemper will be unable to comply with its obligations under
these policies and that comparable insurance may not be available or, if available, at premiums
equal to or in excess of our current premiums with Kemper, although we have no reason at this time
to believe that Kemper will not be able to comply with its obligations under these policies.
If we lose any of our key personnel, our ability to manage our business and continue our growth
could be negatively affected.
Our future performance depends to a significant degree upon the continued contributions of our
senior management team and key technical personnel. We do not currently maintain key man life
insurance with respect to any member of our senior management team. The loss or unavailability to
us of any member of our senior management team or a key technical employee could significantly harm
us. We face competition for these professionals from our competitors, our customers and other
companies operating in our industry. To the extent that the services of members of our senior
management team and key technical personnel would be unavailable to us for any reason, we would be
required to hire other personnel to manage and operate our company and to develop our products and
technology. We cannot assure you that we would be able to locate or employ such qualified personnel
on acceptable terms or at all.
A substantial portion of our Big Spring refinerys workforce is unionized, and we may face labor
disruptions that would interfere with our operations.
As of December 31, 2009, we employed approximately 170 people at our Big Spring refinery,
approximately 120 of whom were covered by a collective bargaining agreement. The collective
bargaining agreement expires April 1, 2012. Our current labor agreement may not prevent a strike or
work stoppage in the future, and any such work stoppage could have a material adverse effect on our
results of operation and financial condition.
35
Table of Contents
We conduct our convenience store business under a license agreement with 7-Eleven, and the
loss of this license could adversely affect the results of operations of our retail and branded
marketing segment.
Our convenience store operations are primarily conducted under the 7-Eleven name pursuant to a
license agreement between 7-Eleven, Inc. and Alon. 7-Eleven may terminate the agreement if we
default on our obligations under the agreement. This termination would result in our convenience
stores losing the use of the 7-Eleven brand name, the accompanying 7-Eleven advertising and certain
other brand names and products used exclusively by 7-Eleven. Termination of the license agreement
could have a material adverse effect on our retail operations.
We may not be able to successfully execute our strategy of growth through acquisitions.
A component of our growth strategy is to selectively acquire refining and marketing assets and
retail assets in order to increase cash flow and earnings. Our ability to do so will be dependent
upon a number of factors, including our ability to identify acceptable acquisition candidates,
consummate acquisitions on favorable terms, successfully integrate acquired assets and obtain
financing to fund acquisitions and to support our growth and many other factors beyond our control.
Risks associated with acquisitions include those relating to:
| diversion of management time and attention from our existing business; | ||
| challenges in managing the increased scope, geographic diversity and complexity of operations; | ||
| difficulties in integrating the financial, technological and management standards, processes, procedures and controls of an acquired business with those of our existing operations; | ||
| liability for known or unknown environmental conditions or other contingent liabilities not covered by indemnification or insurance; | ||
| greater than anticipated expenditures required for compliance with environmental or other regulatory standards or for investments to improve operating results; | ||
| difficulties in achieving anticipated operational improvements; | ||
| incurrence of additional indebtedness to finance acquisitions or capital expenditures relating to acquired assets; and | ||
| issuance of additional equity, which could result in further dilution of the ownership interest of existing stockholders. |
We may not be successful in acquiring additional assets, and any acquisitions that we do
consummate may not produce the anticipated benefits or may have adverse effects on our business and
operating results.
We depend upon our subsidiaries for cash to meet our obligations and pay any dividends, and we do
not own 100% of the stock of our operating subsidiaries.
We are a holding company. Our subsidiaries conduct all of our operations and own substantially
all of our assets. Consequently, our cash flow and our ability to meet our obligations or pay
dividends to our stockholders depend upon the cash flow of our subsidiaries and the payment of
funds by our subsidiaries to us in the form of dividends, tax sharing payments or otherwise. Our
subsidiaries ability to make any payments will depend on their earnings, cash flows, the terms of
their indebtedness, tax considerations and legal restrictions.
Three of our executive officers, Messrs. Morris, Hart and Concienne, own shares of non-voting
stock of two of our subsidiaries, Alon Assets, Inc., or Alon Assets, and Alon USA Operating, Inc.,
or Alon Operating. As of March 1, 2010, the shares owned by these executive officers represent
6.17% of the aggregate equity interest in these subsidiaries. In addition, these executive officers
hold options vesting through 2010 which, if exercised, could increase their aggregate ownership to
7.25% of Alon Assets and Alon Operating. To the extent these two subsidiaries pay dividends to us,
Messrs. Morris, Hart and Concienne will be entitled to receive pro rata dividends
36
Table of Contents
based on their equity ownership. For additional information, see Item 12 Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters.
Messrs. Morris, Hart and Concienne are parties to stockholders agreements with Alon Assets
and Alon Operating, pursuant to which we may elect or be required to purchase their shares in
connection with put/call rights or rights of first refusal contained in those agreements. The
purchase price for the shares is generally determined pursuant to certain formulas set forth in the
stockholders agreements, but after July 31, 2010, the purchase price, under certain circumstances
involving a termination of, or resignation from, employment would be the fair market value of the
shares. For additional information, see Item 12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.
It may be difficult to serve process on or enforce a United States judgment against certain of our
directors.
All of our directors, other than Messrs. Ron Haddock and Jeff Morris, reside in Israel. In
addition, a substantial portion of the assets of these directors are located outside of the United
States. As a result, you may have difficulty serving legal process within the United States upon
any of these persons. You may also have difficulty enforcing, both in and outside the United
States, judgments you may obtain in United States courts against these persons in any action,
including actions based upon the civil liability provisions of United States federal or state
securities laws. Furthermore, there is substantial doubt that the courts of the State of Israel
would enter judgments in original actions brought in those courts predicated on United States
federal or state securities laws.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations
and claims, including environmental claims and employee related matters. Although we cannot predict
with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us,
we do not believe that any currently pending legal proceeding or proceedings to which we are a
party will have a material adverse effect on our business, results of operations, cash flows or
financial condition.
ITEM 4. RESERVED.
PART II
ITEM 5. MARKET FOR REGISTRANTS 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:
Quarterly Period | High | Low | ||||||
2009 |
||||||||
Fourth Quarter |
$ | 10.18 | $ | 6.60 | ||||
Third Quarter |
11.20 | 8.20 | ||||||
Second Quarter |
15.90 | 9.92 | ||||||
First Quarter |
15.46 | 8.76 | ||||||
2008 |
||||||||
Fourth Quarter |
$ | 14.91 | $ | 6.19 | ||||
Third Quarter |
17.00 | 7.31 | ||||||
Second Quarter |
17.85 | 11.31 | ||||||
First Quarter |
27.88 | 11.62 |
37
Table of Contents
Holders
As of March 1, 2010, there were approximately 29 common stockholders of record.
Dividends
On March 14, 2008, 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 $0.121 million.
On June 13, 2008, 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 $0.121 million.
On September 12, 2008, 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.
On December 12, 2008, 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 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.
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 and other factors our board of directors deems relevant.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
38
Table of Contents
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 & Poors 500 Stock Index (the S&P 500) and
our peer group for the 53-month period from July 28, 2005 (the date on which trading in Alons
common stock on the NYSE commenced) to December 31, 2009, 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.

39
Table of Contents
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 cash flows data
for the years ended December 31, 2006 and 2005, and the selected consolidated balance sheet data as
of December 31, 2007, 2006 and 2005 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 cash flows data for the three years ended December 31, 2009, 2008 and
2007, and the selected consolidated balance sheet data as of December 31, 2009, and 2008, 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. Additionally, our financial statements include the results of Paramount Petroleum
Corporation and its subsidiaries from August 1, 2006 and of the Long Beach refinery from September
28, 2006. As a result of these transactions, the financial and operating data for periods prior to
the effective date of these transactions may not be comparable to the data for the years ended
December 31, 2009, 2008, 2007, and 2006.
The following selected historical consolidated financial and operating data should be read in
conjunction with Item 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K.
Year Ended December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(dollars in thousands, except per share data) | ||||||||||||||||||||
STATEMENT OF OPERATIONS DATA: |
||||||||||||||||||||
Net sales (1) |
$ | 3,915,732 | $ | 5,156,706 | $ | 4,542,151 | $ | 3,093,890 | $ | 2,330,334 | ||||||||||
Operating costs and expenses (1) |
3,994,977 | 5,258,153 | 4,363,238 | 2,877,811 | 2,180,162 | |||||||||||||||
Gain on involuntary conversion of assets (2) |
| 279,680 | | | | |||||||||||||||
Gain (loss) on disposition of assets (3) |
(1,591 | ) | 45,244 | 7,206 | 63,255 | 38,591 | ||||||||||||||
Operating income (loss) |
(80,836 | ) | 223,477 | 186,119 | 279,334 | 188,763 | ||||||||||||||
Net income (loss) available to common
stockholders |
(115,156 | ) | 82,883 | 103,936 | 157,368 | 103,988 | ||||||||||||||
Earnings (loss) per share, basic (4) |
$ | (2.46 | ) | $ | 1.77 | $ | 2.22 | $ | 3.37 | $ | 2.61 | |||||||||
Weighted average shares outstanding, basic (4) |
46,829 | 46,788 | 46,763 | 46,738 | 39,889 | |||||||||||||||
Earnings (loss) per share, diluted |
$ | (2.46 | ) | $ | 1.72 | $ | 2.16 | $ | 3.36 | $ | 2.61 | |||||||||
Weighted average shares outstanding, diluted |
46,829 | 49,583 | 46,804 | 46,779 | 39,908 | |||||||||||||||
Cash dividends per common share |
0.16 | 0.16 | 0.16 | 3.03 | 1.96 | |||||||||||||||
CASH FLOW DATA: |
||||||||||||||||||||
Net cash provided by (used in): |
||||||||||||||||||||
Operating activities |
$ | 283,145 | $ | (812 | ) | $ | 123,950 | $ | 142,977 | $ | 137,895 | |||||||||
Investing activities |
(138,691 | ) | (610,322 | ) | (147,254 | ) | (421,070 | ) | (106,962 | ) | ||||||||||
Financing activities |
(122,471 | ) | 560,973 | 27,753 | 205,439 | 42,530 | ||||||||||||||
BALANCE SHEET DATA (end of period): |
||||||||||||||||||||
Cash and cash equivalents and short-term
investments |
$ | 40,437 | $ | 18,454 | $ | 95,911 | $ | 64,166 | $ | 322,140 | ||||||||||
Working capital |
84,257 | 250,384 | 279,580 | 228,779 | 275,996 | |||||||||||||||
Total assets |
2,132,789 | 2,413,433 | 1,581,386 | 1,408,785 | 758,780 | |||||||||||||||
Total debt |
937,024 | 1,103,569 | 536,615 | 498,669 | 132,390 | |||||||||||||||
Total equity |
431,918 | 536,867 | 403,922 | 299,862 | 286,559 |
(1) | Our buy/sell arrangements involve linked purchases and sales related to refined product contracts entered into to address location, quality or grade requirements. As of January 1, 2006, 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. Prior to January 1, 2006, the results of these buy/sell transactions were recorded separately in sales and cost of sales in the consolidated statements of operations. See Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. | |
(2) | Gain on involuntary conversion of assets reported in 2008 of $279.7 million represents the insurance proceeds received as a result of the Big Spring refinery fire 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. |
40
Table of Contents
(3) | Gain on disposition of assets reported in 2008 primarily reflects the recognition of all the remaining deferred gain associated with the HEP transaction due to the termination of an indemnification agreement with HEP. Gain on disposition of assets reported in 2007 reflects the recognition of $7.2 million deferred gain recorded primarily in connection with the HEP transaction. Gain on disposition of assets reported in 2006 reflects the $52.5 million gain recognized in connection with the Amdel and White Oil transaction and the recognition of $10.8 million deferred gain recorded in connection with the HEP transaction. Gain on disposition of assets reported in 2005 reflect the initial gain recognized in connection with the assets contributed in the HEP transaction. | |
(4) | Basic weighted average shares outstanding and basic earnings per share amounts for the periods presented reflect the effect of a 33,600-for-one split of our common stock which was effected on July 6, 2005. On August 2, 2005, we completed an initial public offering of 11,730,000 shares of our common stock. The shares issued in our initial public offering are included in the number of weighted average shares outstanding at December 31, 2009, 2008, 2007 and 2006, respectively. |
41
Table of Contents
ITEM 7. MANAGEMENTS 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; | ||
| 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; |
42
Table of Contents
| our planned project of the design and construction of a hydrocracker unit at our California refineries may not be completed within the expected time frame or within the budgeted costs for such project due to factors outside of our control; | ||
| the global financial crisis impact on our business and financial condition in ways that we currently cannot predict. We may face significant challenges if conditions in the financial markets do not improve or continue to worsen, such as adversely impacting our ability to refinance existing credit facilities or extend their terms; and | ||
| the other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2009 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.
In the first quarter of 2008, we modified our presentation of segment data to reflect the
following three operating segments: (i) refining and unbranded marketing, (ii) asphalt and (iii)
retail and branded marketing. The branded marketing segment information historically included as
part of the refining and marketing segment was combined with the retail segment in 2008 and prior
segment results have been changed to conform with the current year presentation. Additional
information regarding our operating segments and properties is presented in Note 6 to our
consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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
and Long Beach, California; and a light sweet crude oil refinery located in Krotz Springs,
Louisiana. Because we operate the Long Beach refinery as an extension of the Paramount refinery and
due to their physical proximity to one another, we refer to the Long Beach and Paramount refineries
together as our California refineries. The refineries in our refining and unbranded marketing
segment have a combined throughput capacity of approximately 240,000 bpd. At these refineries we
refine crude oil into petroleum products, including gasoline, diesel fuel, jet fuel,
petrochemicals, 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 at our Paramount refinery to wholesale distributors, other
refiners and third parties primarily on the West Coast. Our Long Beach refinery produces asphalt
products. Unfinished fuel products and intermediates produced at our Long Beach refinery are
transferred to our Paramount refinery via pipeline and truck for further processing or sold to
third parties.
Krotz Springs liquid product yield is 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 refinerys
43
Table of Contents
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 Texas 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 308
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. Historically,
substantially all of the motor fuel sold through our retail operations and the majority of the
motor fuel marketed in our branded business was supplied by our Big Spring refinery. In 2009,
approximately 93% of the motor fuel requirements of our branded marketing operations, including
retail operations, were supplied by our Big Spring refinery. As a result of the February 18, 2008
fire at our Big Spring refinery, branded marketing primarily acquired motor fuel from third-party
suppliers during the period the refinery was down and continued to acquire motor fuels to a lesser
extent when the refinery began partial production on April 5, 2008 through September 30, 2008.
We market gasoline and diesel under the FINA brand name through a network of approximately 650
locations, including our convenience stores. Other than in 2008 due to the February 18, 2008 fire,
approximately 53% of the gasoline and 14% 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 300 licensed locations that are not under fuel supply
agreements with us. 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.
Summary of 2009 Developments
In April 2009, Alon Refining Krotz Springs entered into amendments to its term loan and
revolving credit facilities. In connection with the amendments, it was agreed to unwind and
terminate our heating oil hedge, entered into in July 2008 at the time of the Krotz Springs
refinery acquisition. The proceeds from the unwind of the heating oil hedge of $133.6 million were
used to reduce the principal balance of the Alon Refining Krotz Springs term loan. In addition,
the amendments called for the release of $50 million of cash collateral previously deposited by
Alon Refining Krotz Springs in support of its obligations under the hedging agreement, to the
prepayment of principal under the term loan facility and $50 million to reduce borrowings under the
revolving credit facility. Further, in connection with the loan amendments, our majority
shareholder provided $25 million of equity and $25 million of letter of credit support to Alon
Refining Krotz Springs to further enhance its liquidity.
In July 2009, we entered into an amendment to our unsecured credit facility with Israel
Discount Bank of New York. The amendment extended the maturity date from January 1, 2010 to
January 1, 2013 and increased the borrowing rate of the facility.
In October 2009, we issued, through one of our subsidiaries, $216.5 million in aggregate
principal amount of 13.50% senior secured notes in a private offering. The senior secured notes
will mature on October 15, 2014 and all principal will be paid at maturity. Interest is payable
semi-annually in arrears on April 15 and October 15, commencing on April 15, 2010. We received
gross proceeds of $205.4 million from the sale of the senior secured notes (before fees and
expenses related to the offering). In connection with the closing, we prepaid in full all
outstanding obligations under the Alon Refining Krotz Springs term loan. The remaining proceeds
from the offering were used for general corporate purposes.
44
Table of Contents
We completed our ultra low-sulfur gasoline project in 2009. As a result, all of our
gasoline produced at the Big Spring refinery now complies with the EPAs ultra low-sulfur gasoline
standard of 30 parts per million (ppm).
The repairs to the alkylation unit damaged in the Big Spring refinery fire in 2008 were
completed in November 2009. This unit was restarted in January 2010.
On December 31, 2009, we exchanged 7,351,051 shares of our common stock for all of the
outstanding shares of preferred stock of our subsidiary issued in connection with the acquisition
of the Krotz Springs refinery in 2008. Under the terms of a stockholders agreement between Alon
Israel, the holders of the preferred stock, and Alon, the preferred stock was required to be
exchanged for shares of Alon common stock on July 3, 2011 if not previously exchanged as provided
in the stockholders agreement. Pursuant to an amendment to the stockholders agreement entered into
in December 2009, the mandatory exchange was accelerated to December 31, 2009. The 7,351,051
shares of common stock issued represented the then-outstanding $80 million par value of the
preferred stock plus preferred dividends accrued through July 3, 2011, divided by $14.3925, the
exchange value set forth in the stockholders agreement. As a result of the exchange, the number of
outstanding shares of Alons common stock increased from 46,819,862 to 54,170,913 and Alon Israels
percentage ownership of our outstanding common stock increased from 72.26% to 76.02%.
2009 Operations Highlights
Highlights for 2009 include:
| Operating loss was ($80.8) million, compared to operating income of $223.5 million in 2008. Operating income decreased by $304.3 million for 2009 compared to 2008. The year 2008 included gains of $279.7 million on the involuntary conversion of assets due to the Big Spring refinery fire, and $45.2 million for the gain on disposition of assets. | ||
| The Big Spring refinery and California refineries combined throughput for the year ended December 31, 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 a combined average of 68,892 bpd for the same period last year, consisting of 37,793 bpd at the Big Spring refinery and 31,099 bpd at the California refineries. The Big Spring refinery had higher throughput for the year ended December 31, 2009, compared to the same period last year primarily due to the 2008 fire at the Big Spring refinery. The Krotz Springs refinery throughput for the year ended December 31, 2009, averaged 48,337 bpd and for the period from its acquisition effective July 1, 2008 through December 31, 2008, averaged 58,184 bpd. The lower throughput in 2009 is due to a turnaround that began in November 2009. | ||
| Refinery operating margin at the Big Spring refinery was $4.35 per barrel for the year ended December 31, 2009, compared to ($3.18) per barrel for the same period in 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% for the year ended December 31, 2009, compared to 70% for the same period in 2008. Refinery operating margin at the California refineries was $1.80 per barrel for the year ended December 31, 2009, compared to $1.65 per barrel for the same period in 2008. The Krotz Springs refinery operating margin for the year ended December 31, 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. | ||
| Gulf coast 3/2/1 average crack spreads were $7.24 per barrel for the year ended December 31, 2009, compared to $10.47 per barrel for the same period in 2008. Gulf Coast 2/1/1 high sulfur diesel average crack spreads for the year ended December 31, 2009, was $6.50 per barrel compared to $11.28 per barrel for the same period in 2008. West Coast 3/2/1 average crack spreads for the year ended December 31, 2009, was $13.92 per barrel compared to $15.80 per barrel for the same period in 2008. |
45
Table of Contents
| The average sweet/sour spread for the year ended December 31, 2009 was $1.52 per barrel compared to $3.78 per barrel for 2008. The average light/heavy spread for the year ended December 31, 2009, was $5.46 per barrel compared to $15.63 per barrel for 2008. | ||
| Asphalt margins in 2009 averaged $46.07 per ton compared to an average of $113.43 per ton in 2008. The average blended asphalt sales price decreased 19.9% from $511.95 per ton for the year ended December 31, 2008, to $409.88 per ton for the year ended December 31, 2009, and the average non-blended asphalt sales price decreased 46.1% from $315.48 per ton for the year ended December 31, 2008 to $170.05 per ton for the year ended December 31, 2009. The blended asphalt sales accounted for 92% of total asphalt sales for the year ended December 31, 2009. The decrease in the blended asphalt sales price of 19.9% was less than the 37.9% decrease in WTI prices for the year ended December 31, 2009. | ||
| In our retail and branded marketing segment, retail fuel sales gallons increased by 24.4% from 97.0 million gallons for the year ended December 31, 2008, to 120.7 million gallons for the year ended December 31, 2009. Our integrated branded fuel sales increased by 15.6% from 225.5 million gallons for the year ended December 31, 2008, to 260.6 million gallons for the year ended December 31, 2009. |
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 refinerys 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 refinerys gross
margin by its throughput volumes. Gross margin is the difference between net sales and cost of
sales (exclusive of unrealized hedging gains and losses and inventories adjustments related to
acquisitions).
We compare our California refineries per barrel operating margin to the West Coast 6/1/2/3
crack spread. A 6/1/2/3 crack spread is calculated assuming that six barrels of a benchmark crude
oil are converted into one barrel of gasoline, two barrels of diesel and three barrels of fuel oil.
We calculate the West Coast 6/1/2/3 crack spread using the market values of West Coast LA CARB
pipeline gasoline, LA ultra low-sulfur pipeline diesel, LA 380 pipeline CST (fuel oil) and the
market value of WTI crude oil. The per barrel operating margin of the California refineries is
calculated by dividing the California refinerys gross margin by their throughput volumes. Another
comparison to other West Coast refineries that we use is the West Coast 3/2/1 crack spread. This is
calculated using the market values of West Coast LA CARB pipeline gasoline, LA ultra low-sulfur
pipeline diesel and the market value of WTI crude oil.
Our Krotz Springs refinerys per barrel margin is compared 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.
46
Table of Contents
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 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. For
example, natural gas prices ranged from $13.58 per million British thermal units, or MMBTU, in July
of 2008 to $2.51 MMBTU in September of 2009. 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.
47
Table of Contents
Factors Affecting Comparability
Our financial condition and operating results over the three year period ended December 31,
2009 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.
Retail Store Acquisitions
On June 29, 2007, we completed the acquisition of Skinnys, Inc., a privately held Abilene,
Texas-based company that owned and operated 102 stores in Central and West Texas. The total
consideration was $75.3 million after certain post-closing adjustments, which were finalized in the
fourth quarter of 2007. Of the 102 stores, approximately two-thirds are owned and one-third are
leased. We market motor fuels sold at these stores primarily under the FINA brand and primarily
supply such fuels from our Big Spring refinery. The acquisition of Skinnys increased property,
plant, and equipment by $43.7 million, goodwill by $34.5 million, current assets by $7.0 million,
current liabilities by $10.5 million, and debt by $46.2 million.
Refinery Acquisitions
On July 3, 2008, we completed the acquisition of all the capital stock of 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. Krotz Springs liquid product yield is 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. The purchase of Krotz
Springs 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.
48
Table of Contents
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 is
expected to resume operations in April 2010.
During the downtime in 2008 at the Big Spring refinery due to the February 18, 2008 fire, we
performed all scheduled maintenance originally planned for 2009, including major maintenance at the
crude and FCCU units.
The California refineries operated at reduced throughput rates during 2009 and 2008 to
optimize our refining and asphalt economics.
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 inter-segment sales to our asphalt and retail and branded marketing segments, which
are eliminated through consolidation of our financial statements. Asphalt sales consist of gross
sales, net of any discounts and applicable taxes. Retail net sales consist of gross merchandise
sales, less rebates, commissions and discounts, and gross fuel sales, including motor fuel taxes.
For our petroleum and asphalt products, net sales are mainly affected by crude oil and refined
product prices and volume changes caused by operations. Our retail merchandise sales are affected
primarily by competition and seasonal influences.
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.
49
Table of Contents
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, 2009,
2008 and 2007. 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.
50
Table of Contents
ALON USA ENERGY, INC. CONSOLIDATED
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(dollars in thousands, except per share data) | ||||||||||||
STATEMENT OF OPERATIONS DATA: |
||||||||||||
Net sales (1) |
$ | 3,915,732 | $ | 5,156,706 | $ | 4,542,151 | ||||||
Operating costs and expenses: |
||||||||||||
Cost of sales |
3,502,782 | 4,853,195 | 3,999,287 | |||||||||
Direct operating expenses |
265,502 | 216,498 | 201,196 | |||||||||
Selling, general and administrative expenses (2) |
129,446 | 119,852 | 105,352 | |||||||||
Net costs associated with fire (3) |
| 56,854 | | |||||||||
Business interruption recovery (4) |
| (55,000 | ) | | ||||||||
Depreciation and amortization (5) |
97,247 | 66,754 | 57,403 | |||||||||
Total operating costs and expenses |
3,994,977 | 5,258,153 | 4,363,238 | |||||||||
Gain on involuntary conversion of assets (6) |
| 279,680 | | |||||||||
Gain (loss) on disposition of assets (7) |
(1,591 | ) | 45,244 | 7,206 | ||||||||
Operating income (loss) |
(80,836 | ) | 223,477 | 186,119 | ||||||||
Interest expense (8) |
(111,137 | ) | (67,550 | ) | (47,747 | ) | ||||||
Equity earnings (losses) of investees |
24,558 | (1,522 | ) | 11,177 | ||||||||
Other income, net |
331 | 1,500 | 6,565 | |||||||||
Income (loss) before income tax expense (benefit),
non-controlling interest in income (loss) of subsidiaries
and accumulated dividends on preferred stock of subsidiary |
(167,084 | ) | 155,905 | 156,114 | ||||||||
Income tax expense (benefit) |
(64,877 | ) | 62,781 | 46,199 | ||||||||
Income (loss) before non-controlling interest in income
(loss) of subsidiaries and accumulated dividends on
preferred stock of subsidiary |
(102,207 | ) | 93,124 | 109,915 | ||||||||
Non-controlling interest in income (loss) of subsidiaries |
(8,551 | ) | 5,941 | 5,979 | ||||||||
Accumulated dividends on preferred stock of subsidiary (9) |
21,500 | 4,300 | | |||||||||
Net income (loss) available to common stockholders |
$ | (115,156 | ) | $ | 82,883 | $ | 103,936 | |||||
Earnings (loss) per share, basic |
$ | (2.46 | ) | $ | 1.77 | $ | 2.22 | |||||
Weighted average shares outstanding, basic (in thousands) |
46,829 | 46,788 | 46,763 | |||||||||
Earnings (loss) per share, diluted |
$ | (2.46 | ) | $ | 1.72 | $ | 2.16 | |||||
Weighted average shares outstanding, diluted (in thousands) |
46,829 | 49,583 | 46,804 | |||||||||
Cash dividends per share |
$ | 0.16 | $ | 0.16 | $ | 0.16 | ||||||
CASH FLOW DATA: |
||||||||||||
Net cash provided by (used in): |
||||||||||||
Operating activities |
$ | 283,145 | $ | (812 | ) | $ | 123,950 | |||||
Investing activities |
(138,691 | ) | (610,322 | ) | (147,254 | ) | ||||||
Financing activities |
(122,471 | ) | 560,973 | 27,753 | ||||||||
BALANCE SHEET DATA (end of period): |
||||||||||||
Cash and cash equivalents and short-term investments |
$ | 40,437 | $ | 18,454 | $ | 95,911 | ||||||
Working capital |
84,257 | 250,384 | 279,580 | |||||||||
Total assets |
2,132,789 | 2,413,433 | 1,581,386 | |||||||||
Total debt |
937,024 | 1,103,569 | 536,615 | |||||||||
Total stockholders equity |
422,772 | 434,651 | 388,202 | |||||||||
Non-controlling interest in subsidiaries and preferred
stock of subsidiary including accumulated dividends |
9,146 | 102,216 | 15,720 | |||||||||
Total equity |
431,918 | 536,867 | 403,922 | |||||||||
OTHER DATA: |
||||||||||||
Adjusted EBITDA (10) |
$ | 42,891 | $ | 244,965 | $ | 254,058 | ||||||
Capital expenditures (11) |
81,660 | 62,356 | 42,204 | |||||||||
Capital expenditures to rebuild the Big Spring refinery |
46,769 | 362,178 | | |||||||||
Capital expenditures for turnaround and chemical catalyst |
24,699 | 9,958 | 9,842 |
51
Table of Contents
(1) | Includes excise taxes on sales by the retail and branded marketing segment of $47.1 million, $37.5 million, and $35.8 million for the years ended December 31, 2009, 2008 and 2007, respectively. | |
(2) | Includes corporate headquarters selling, general and administrative expenses of $0.8 million, $0.6 million and $0.5 million for the years ended December 31, 2009, 2008 and 2007, respectively, which are not allocated to our three operating segments. | |
(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 received in 2008 and January 2009. | |
(5) | Includes corporate depreciation and amortization of $0.7 million, $0.9 million and $0.9 million for the years ended December 31, 2009, 2008 and 2007, respectively, which are not allocated to our three operating segments. | |
(6) | 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. | |
(7) | Gain on disposition of assets reported in 2008 primarily includes the recognition of deferred gain recorded in connection with the contribution of certain product pipelines and terminals to Holly Energy Partners, LP, (HEP), in March 2005 (HEP transaction). A recognized gain of $42.9 million in 2008 represented all the remaining deferred gain associated with the HEP transaction and was due to the termination of an indemnification agreement with HEP. Gain on disposition of assets reported in 2007 reflects the recognition of $7.2 million deferred gain recorded primarily in connection with the HEP transaction. | |
(8) | Interest expense for the year ended December 31, 2009 includes $20.5 million of unamortized debt issuance costs written off as a result of prepayments of $163.8 million of term debt in October 2009. Interest expense for 2009 also includes $5.7 million related to the liquidation of the heating oil hedge in the second quarter of 2009. | |
(9) | Accumulated dividends on preferred stock of subsidiary for 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 through December 31, 2009. | |
(10) | See Reconciliation of Amounts Reported Under Generally Accepted Accounting Principles for information regarding our definition of Adjusted EBITDA, its limitations as an analytical tool and a reconciliation of net income to Adjusted EBITDA for the periods presented. | |
(11) | Includes corporate capital expenditures of $3.7 million, $1.2 million and $1.6 million for the years ended December 31, 2009, 2008 and 2007, respectively, which are not allocated to our three operating segments. |
52
Table of Contents
REFINING AND UNBRANDED MARKETING SEGMENT (A)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(dollars in thousands, except per barrel data and | ||||||||||||
pricing statistics) | ||||||||||||
STATEMENT OF OPERATIONS DATA: |
||||||||||||
Net sales (1) |
$ | 3,359,043 | $ | 4,551,769 | $ | 4,090,607 | ||||||
Operating costs and expenses: |
||||||||||||
Cost of sales |
3,117,528 | 4,505,094 | 3,714,227 | |||||||||
Direct operating expenses |
221,378 | 173,142 | 154,267 | |||||||||
Selling, general and administrative expenses |
29,376 | 17,784 | 20,071 | |||||||||
Net costs associated with fire (2) |
| 56,854 | | |||||||||
Business interruption recovery (3) |
| (55,000 | ) | | ||||||||
Depreciation and amortization |
76,252 | 50,047 | 44,107 | |||||||||
Total operating costs and expenses |
3,444,534 | 4,747,921 | 3,932,672 | |||||||||
Gain (loss) on involuntary conversion of assets (4) |
| 279,680 | | |||||||||
Gain (loss) on disposition of assets (5) |
(1,042 | ) | 45,244 | 7,138 | ||||||||
Operating income (loss) |
$ | (86,533 | ) | $ | 128,772 | $ | 165,073 | |||||
KEY OPERATING STATISTICS AND OTHER DATA: |
||||||||||||
Total sales volume (bpd) |
127,400 | 119,195 | 91,027 | |||||||||
Per barrel of throughput: |
||||||||||||
Refinery operating margin Big Spring (6) |
$ | 4.35 | $ | (3.18 | ) | $ | 12.83 | |||||
Refinery operating margin CA Refineries (6) |
1.80 | 1.65 | 2.73 | |||||||||
Refinery operating margin Krotz Springs (6) |
5.66 | 7.25 | N/A | |||||||||
Refinery direct operating expense Big Spring (7) |
4.21 | 4.40 | 3.67 | |||||||||
Refinery direct operating expense CA Refineries (7) |
4.82 | 5.81 | 2.79 | |||||||||
Refinery direct operating expense Krotz Springs (7) |
4.22 | 4.30 | N/A | |||||||||
Capital expenditures |
71,555 | 57,576 | 28,669 | |||||||||
Capital expenditures to rebuild the Big Spring refinery |
46,769 | 362,178 | | |||||||||
Capital expenditures for turnaround and chemical catalyst |
24,699 | 9,958 | 9,842 | |||||||||
PRICING STATISTICS: |
||||||||||||
WTI crude oil (per barrel) |
$ | 61.82 | $ | 99.56 | $ | 72.32 | ||||||
WTS crude oil (per barrel) |
60.30 | 95.78 | 67.32 | |||||||||
MAYA crude oil (per barrel) |
56.36 | 83.93 | 59.86 | |||||||||
Crack spreads (3/2/1) (per barrel): |
||||||||||||
Gulf Coast |
$ | 7.24 | $ | 10.47 | $ | 15.00 | ||||||
Group III |
8.10 | 11.15 | 19.41 | |||||||||
West Coast |
13.92 | 15.80 | 27.37 | |||||||||
Crack spreads (6/1/2/3) (per barrel): |
||||||||||||
West Coast |
$ | 4.15 | $ | 0.48 | $ | 6.33 | ||||||
Crack spreads (2/1/1) (per barrel): |
||||||||||||
Gulf Coast high sulfur diesel |
$ | 6.50 | $ | 11.28 | $ | 12.80 | ||||||
Crude oil differentials (per barrel): |
||||||||||||
WTI less WTS |
$ | 1.52 | $ | 3.78 | $ | 5.00 | ||||||
WTI less MAYA |
5.46 | 15.63 | 12.46 | |||||||||
Product price (per gallon): |
||||||||||||
Gulf Coast unleaded gasoline |
163.5 | ¢ | 247.1 | ¢ | 204.5 | ¢ | ||||||
Gulf Coast ultra low-sulfur diesel |
166.4 | 291.8 | 214.7 | |||||||||
Gulf Coast high sulfur diesel |
161.9 | 280.8 | 200.8 | |||||||||
Group III unleaded gasoline |
166.2 | 248.1 | 216.0 | |||||||||
Group III ultra low-sulfur diesel |
167.0 | 294.5 | 223.3 | |||||||||
West Coast LA CARBOB (unleaded gasoline) |
185.2 | 267.9 | 244.2 | |||||||||
West Coast LA ultra low-sulfur diesel |
170.6 | 288.3 | 223.7 | |||||||||
Natural gas (per MMBTU) |
$ | 4.16 | $ | 8.90 | $ | 7.12 |
(A) | In the first quarter of 2008, our branded marketing business was removed from the refining and marketing segment and combined with the retail segment. Information for 2007 has been recast to provide a comparison to 2009 and 2008 results. |
53
Table of Contents
Year Ended December 31, | ||||||||||||||||||||||||
THROUGHPUT AND PRODUCTION DATA: | 2009 | 2008 | 2007 | |||||||||||||||||||||
Big Spring refinery | bpd | % | bpd | % | bpd | % | ||||||||||||||||||
Refinery throughput: |
||||||||||||||||||||||||
Sour crude |
48,340 | 80.8 | 31,654 | 83.8 | 58,607 | 86.0 | ||||||||||||||||||
Sweet crude |
9,238 | 15.4 | 4,270 | 11.3 | 5,017 | 7.4 | ||||||||||||||||||
Blendstocks |
2,292 | 3.8 | 1,869 | 4.9 | 4,521 | 6.6 | ||||||||||||||||||
Total refinery throughput (8) |
59,870 | 100.0 | 37,793 | 100.0 | 68,145 | 100.0 | ||||||||||||||||||
Refinery production: |
||||||||||||||||||||||||
Gasoline |
26,826 | 45.0 | 14,266 | 38.4 | 32,135 | 47.5 | ||||||||||||||||||
Diesel/jet |
19,136 | 32.2 | 10,439 | 28.2 | 19,676 | 29.1 | ||||||||||||||||||
Asphalt |
5,289 | 8.9 | 4,850 | 13.1 | 7,620 | 11.3 | ||||||||||||||||||
Petrochemicals |
2,928 | 4.9 | 1,221 | 3.3 | 3,980 | 5.9 | ||||||||||||||||||
Other |
5,327 | 9.0 | 6,298 | 17.0 | 4,190 | 6.2 | ||||||||||||||||||
Total refinery production (9) |
59,506 | 100.0 | 37,074 | 100.0 | 67,601 | 100.0 | ||||||||||||||||||
Refinery utilization (10) |
82.3 | % | 52.3 | % | 92.5 | % |
Year Ended December 31, | ||||||||||||||||||||||||
THROUGHPUT AND PRODUCTION DATA: | 2009 | 2008 | 2007 | |||||||||||||||||||||
California refineries | bpd | % | bpd | % | bpd | % | ||||||||||||||||||
Refinery throughput: |
||||||||||||||||||||||||
Medium sour crude |
13,408 | 43.0 | 8,014 | 25.8 | 20,839 | 33.7 | ||||||||||||||||||
Heavy crude |
17,420 | 55.9 | 22,590 | 72.6 | 40,700 | 65.9 | ||||||||||||||||||
Blendstocks |
330 | 1.1 | 495 | 1.6 | 223 | 0.4 | ||||||||||||||||||
Total refinery throughput (8) |
31,158 | 100.0 | 31,099 | 100.0 | 61,762 | 100.0 | ||||||||||||||||||
Refinery production: |
||||||||||||||||||||||||
Gasoline |
4,920 | 16.2 | 4,141 | 13.7 | 7,318 | 12.1 | ||||||||||||||||||
Diesel/jet |
7,123 | 23.5 | 7,481 | 24.8 | 13,360 | 22.1 | ||||||||||||||||||
Asphalt |
8,976 | 29.5 | 9,214 | 30.5 | 19,006 | 31.5 | ||||||||||||||||||
Light unfinished |
117 | 0.4 | | | 3,071 | 5.1 | ||||||||||||||||||
Heavy unfinished |
8,813 | 29.0 | 9,182 | 30.4 | 16,793 | 27.9 | ||||||||||||||||||
Other |
418 | 1.4 | 192 | 0.6 | 793 | 1.3 | ||||||||||||||||||
Total refinery production (9) |
30,367 | 100.0 | 30,210 | 100.0 | 60,341 | 100.0 | ||||||||||||||||||
Refinery utilization (10) |
46.2 | % | 46.3 | % | 85.9 | % | ||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||||||
THROUGHPUT AND PRODUCTION DATA: | 2009 | 2008 | ||||||||||||||||||||||
Krotz Springs refinery (B) | bpd | % | bpd | % | ||||||||||||||||||||
Refinery throughput: |
||||||||||||||||||||||||
Light sweet crude |
22,942 | 47.5 | 43,361 | 74.5 | ||||||||||||||||||||
Heavy sweet crude |
22,258 | 46.0 | 11,979 | 20.6 | ||||||||||||||||||||
Blendstocks |
3,137 | 6.5 | 2,844 | 4.9 | ||||||||||||||||||||
Total refinery throughput (8) |
48,337 | 100.0 | 58,184 | 100.0 | ||||||||||||||||||||
Refinery production: |
||||||||||||||||||||||||
Gasoline |
22,264 | 45.4 | 25,195 | 42.8 | ||||||||||||||||||||
Diesel/jet |
21,318 | 43.4 | 26,982 | 45.9 | ||||||||||||||||||||
Heavy oils |
1,238 | 2.5 | 1,402 | 2.4 | ||||||||||||||||||||
Other |
4,258 | 8.7 | 5,258 | 8.9 | ||||||||||||||||||||
Total refinery production (9) |
49,078 | 100.0 | 58,837 | 100.0 | ||||||||||||||||||||
Refinery utilization (10) |
65.3 | % | 66.6 | % |
(B) | The year ended December 31, 2008, represents throughput and production data for the period from July 1, 2008 through December 31, 2008. |
54
Table of Contents
(1) | Net sales include inter-segment sales to our asphalt and retail and branded marketing segments at prices which are intended to approximate wholesale market prices. These inter-segment sales are eliminated through consolidation of our financial statements. | |
(2) | 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. | |
(3) | 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. | |
(4) | 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. | |
(5) | 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. Gain on disposition of assets reported in 2007 reflects the recognition of $7.1 million deferred gain recorded primarily in connection with the HEP transaction. | |
(6) | Refinery operating margin is a per barrel measurement calculated by dividing the margin between net sales and cost of sales (exclusive of unrealized hedging gains and losses and inventories adjustments related to acquisitions) attributable to each refinery by the refinerys 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. There were unrealized hedging gains of $0.4 million and $4.2 million for the years ended December 31, 2009 and 2008, respectively, and an unrealized hedging loss of $4.3 million for the California refineries for the year ended December 31, 2007. 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 Krotz Springs refinery for the six months ended December 31, 2008. The 2008 refinery operating margin for the Krotz Springs refinery excludes a charge of $127.4 million to cost of sales for inventories 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. | |
(7) | 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 refinerys total throughput volumes. | |
(8) | Total refinery throughput represents the total barrels per day of crude oil and blendstock inputs in the refinery production process. | |
(9) | 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. Light product yields decreased at the Big Spring refinery for the year ended December 31, 2008 due to the fire on February 18, 2008 and the re-start of the crude unit in a hydroskimming mode on April 5, 2008. | |
(10) | Refinery utilization represents average daily crude oil throughput divided by crude oil throughput capacity, excluding planned periods of downtime for maintenance and turnarounds. The decrease in refinery utilization at our Big Spring refinery for 2008 is due to the fire on February 18, 2008. Production ceased at the Big Spring refinery until the re-start of the crude unit in a hydroskimming mode on April 5, 2008. The Big Spring refinery returned to a normal operating mode with the re-start of the Fluid Catalytic Cracking Unit (FCCU) on September 26, 2008. The decrease in refinery utilization at our California refineries is due to reduced throughput to optimize our refining and asphalt economics. The low refinery utilization at our Krotz Springs refinery is due to shutdowns during hurricanes Gustav and Ike and limited crude supply and electrical outages following the hurricanes. |
55
Table of Contents
ASPHALT SEGMENT
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(dollars in thousands, except per ton data) | ||||||||||||
STATEMENT OF OPERATIONS DATA: |
||||||||||||
Net sales |
$ | 440,915 | $ | 647,221 | $ | 642,937 | ||||||
Operating costs and expenses: |
||||||||||||
Cost of sales (1) |
386,050 | 499,992 | 592,709 | |||||||||
Direct operating expenses |
44,124 | 43,356 | 46,929 | |||||||||
Selling, general and administrative expenses |
4,588 | 4,292 | 2,825 | |||||||||
Depreciation and amortization |
6,807 | 2,139 | 2,145 | |||||||||
Total operating costs and expenses |
441,569 | 549,779 | 644,608 | |||||||||
Operating income (loss) |
$ | (654 | ) | $ | 97,442 | $ | (1,671 | ) | ||||
KEY OPERATING STATISTICS AND OTHER DATA: |
||||||||||||
Number of terminals (end of period) |
12 | 12 | 12 | |||||||||
Blended asphalt sales volume (tons in thousands) (2) |
994 | 1,210 | 1,794 | |||||||||
Non-blended asphalt sales volume (tons in thousands) (3) |
197 | 88 | 133 | |||||||||
Blended asphalt sales price per ton (2) |
$ | 409.88 | $ | 511.95 | $ | 344.81 | ||||||
Non-blended asphalt sales price per ton (3) |
170.05 | 315.48 | 183.08 | |||||||||
Asphalt margin per ton (4) |
46.07 | 113.43 | 26.07 | |||||||||
Capital expenditures |
$ | 2,579 | $ | 644 | $ | 2,167 |
(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. |
56
Table of Contents
RETAIL AND BRANDED MARKETING SEGMENT (A)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(dollars in thousands, except per gallon data) | ||||||||||||
STATEMENT OF OPERATIONS DATA: |
||||||||||||
Net sales (1) |
$ | 808,221 | $ | 1,227,319 | $ | 1,274,516 | ||||||
Operating costs and expenses: |
||||||||||||
Cost of sales (2) |
691,651 | 1,117,712 | 1,158,260 | |||||||||
Selling, general and administrative expenses |
94,725 | 97,172 | 81,933 | |||||||||
Depreciation and amortization |
13,464 | 13,674 | 10,245 | |||||||||
Total operating costs and expenses |
799,840 | 1,228,558 | 1,250,438 | |||||||||
Gain (loss) on disposition of assets |
(549 | ) | | 68 | ||||||||
Operating income (loss) |
$ | 7,832 | $ | (1,239 | ) | $ | 24,146 | |||||
KEY OPERATING STATISTICS AND OTHER DATA: |
||||||||||||
Integrated branded fuel sales (thousands of gallons) (3) |
260,629 | 225,474 | 254,044 | |||||||||
Integrated branded fuel margin (cents per gallon) (3) |
5.9 | ¢ | 4.4 | ¢ | 9.2 | ¢ | ||||||
Non-Integrated branded fuel sales (thousands of gallons) (3) |
13,472 | 113,626 | 204,537 | |||||||||
Non-Integrated branded fuel margin (cents per gallon) (3) |
3.3 | ¢ | (0.3) | ¢ | 1.3 | ¢ | ||||||
Number of stores (end of period) |
308 | 306 | 307 | |||||||||
Retail fuel sales (thousands of gallons) |
120,697 | 96,974 | 91,946 | |||||||||
Retail fuel sales (thousands of gallons per site per month) (4) |
33 | 27 | 30 | |||||||||
Retail fuel margin (cents per gallon) (5) |
13.9 | ¢ | 19.7 | ¢ | 21.2 | ¢ | ||||||
Retail fuel sales price (dollar per gallon) (6) |
$ | 2.29 | $ | 3.26 | $ | 2.82 | ||||||
Merchandise sales |
$ | 268,785 | $ | 261,144 | $ | 220,807 | ||||||
Merchandise sales (per site per month) (4) |
73 | 72 | 72 | |||||||||
Merchandise margin (7) |
30.7 | % | 30.9 | % | 32.0 | % | ||||||
Capital expenditures |
$ | 3,822 | $ | 2,928 | $ | 9,797 |
(A) | In the first quarter of 2008, our branded marketing business was removed from the refining and marketing segment and combined with the retail segment. Information for 2007 has been recast to provide a comparison to the 2009 and 2008 results. | |
(1) | Includes excise taxes on sales by the retail and branded marketing segment of $47.1 million, $37.5 million, and $35.8 million for the years ended December 31, 2009, 2008 and 2007, respectively. Net sales also includes royalty and related net credit card fees of $0.9 million and $0.3 million for the years ended December 31, 2009 and 2008, respectively. | |
(2) | Cost of sales includes inter-segment purchases of motor fuels from our refining and unbranded marketing segment at prices which approximate market prices. These inter-segment purchases are eliminated through consolidation of our financial statements. | |
(3) | Marketing sales volume represents branded fuel sales to our wholesale marketing customers located in both our integrated and non-integrated regions. The branded fuels we sell in our integrated region are primarily supplied by the Big Spring refinery, but 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 fuels we sell in the non-integrated region are obtained from third-party suppliers. The marketing 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 and includes net credit card revenue from these sales. | |
(4) | Retail fuel and merchandise sales per site for 2009 were calculated using 306 stores for eleven months and 308 stores for one month. Retail fuel and merchandise sales per site for 2008 were calculated using 306 stores. Retail fuel and merchandise sales per site for 2007 were calculated using 206 stores for six months and 307 stores for six months due to the acquisition of Skinnys, Inc. on June 29, 2007. | |
(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. |
57
Table of Contents
(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, 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 refinerys 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.
58
Table of Contents
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%.
59
Table of Contents
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% for 2009 and 70% for 2008. Refinery operating margin at the
California refineries was $1.80 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.
60
Table of Contents
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.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Net Sales
Consolidated. Net sales for 2008 were $5,156.7 million compared to $4,542.2 million for 2007,
an increase of $614.5 million or 13.5%. This increase was primarily due to the acquisition of the
Krotz Springs refinery and higher refined product prices, offset by lower sales volume in all of
our segments.
Refining and Unbranded Marketing Segment. Net sales for our refining and unbranded marketing
segment were $4,551.8 million for 2008, compared to $4,090.6 million for 2007, an increase of
$461.2 million or 11.3%. The increase in net sales was primarily due to the inclusion six months of
sales from the Krotz Springs refinery acquired in July 2008 and to significantly higher refined
product prices offset by reduced production at the Big Spring refinery due to the February 18, 2008
fire and reduced production at the California refineries to manage refining economics. Refinery
production averaged 37,074 bpd at the Big Spring refinery and 30,210 bpd at the California
refineries during 2008 compared to 67,601 bpd at the Big Spring refinery and 60,341 bpd at the
California refineries in 2007, a decrease in total refinery production of 47.4%. The average
production from the Krotz Springs refinery for the six months since the acquisition averaged 58,837
bpd. The production decrease at the Big Spring refinery is due to the fire on February 18, 2008.
Production ceased at the Big Spring refinery until the re-start of the crude unit in a
hydroskimming mode on April 5, 2008 with a return to normal operation of the FCCU on September 26,
2008. The production at our California refineries was reduced as a result of the economics of these
refineries and record prices for production inputs. The increase in refined product prices that our
Big Spring refinery experienced was similar to the price increases experienced in the Gulf Coast
markets. The increase in refined product prices that our California refineries experienced was
similar to the price increases experienced in the West Coast markets. The average price of Gulf
Coast gasoline in 2008 increased 42.6 cpg, or 20.8%, to 247.1 cpg, compared to 204.5 cpg in 2007.
The average Gulf Coast diesel price in 2008 increased 77.1 cpg, or 35.9%, to 291.8 cpg compared to
214.7 cpg in 2007. The average price of West Coast LA CARBOB gasoline in 2008 increased 23.7 cpg,
or 9.7%, to 267.9 cpg, compared to 244.2 cpg in 2007. The average West Coast LA diesel price in
2008 increased 64.6 cpg, or 28.9%, to 288.3 cpg compared to 223.7 cpg in 2007.
Asphalt Segment. Net sales for our asphalt segment were $647.2 million for 2008, compared to
$642.9 million for 2007, an increase of $4.3 million or 0.7%. This increase was due primarily to an
increase in the average asphalt sales price. The average asphalt sales price was $498.63 per ton in
2008 compared to $333.65 per ton in 2007, an increase of $164.98 per ton or 49.4%. This increase in
asphalt price was partially offset by a decrease in asphalt
sales volume. Asphalt sales volume was 1.298 million tons in 2008 and 1.927 million tons in
2007, a decrease of 0.629 million tons or 32.6%.
61
Table of Contents
Retail and Branded Marketing Segment. Net sales for our retail and branded marketing segment
were $1,227.3 million for 2008, compared to $1,274.5 million for 2007, a decrease of $47.2 million
or 3.7%. This decrease was primarily due to a 119.5 million gallon reduction in wholesale fuel
sales related to the net decline of 60 retail outlets that we supplied with motor fuel. 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 retail motor fuel and merchandise sales
from 102 convenience stores acquired in June 2007 and higher motor fuel prices compared to 2007.
Cost of Sales
Consolidated. Cost of sales was $4,853.2 million for 2008, compared to $3,999.3 million for
2007, an increase of $853.9 million or 21.4%. This increase was primarily due to the acquisition of
the Krotz Springs refinery and higher crude oil prices during 2008 as compared to 2007, offset by
reduced production at our Big Spring and California refineries and lower purchase volumes in our
asphalt segments and retail and branded marketing segment.
Refining and Unbranded Marketing Segment. Cost of sales for our refining and unbranded
marketing segment was $4,505.1 million for 2008, compared to $3,714.2 million for 2007, an increase
of $790,9 million or 21.3%. This increase was primarily due to production costs from the Krotz
Springs refinery acquired in July 2008. The reduction in cost of sales at our Big Spring and
California refineries were offset by substantial increases in the price of crude costs. The average
price per barrel of WTS for 2008 increased $28.46 per barrel to $95.78 per barrel, compared to
$67.32 per barrel for 2007, an increase of 42.3%.
Asphalt Segment. Cost of sales for our asphalt segment was $500.0 million for 2008, compared
to $592.7 million for 2007, a decrease of $92.7 million or 15.6%. This decrease was due primarily
to lower asphalt sales volumes in 2008 as 1.298 million tons were sold compared to 1.927 million
tons sold in 2007, a decrease of 0.629 million tons or 32.6%.
Retail and Branded Marketing Segment. Cost of sales for our retail and branded marketing
segment was $1,117.7 million for 2008, compared to $1,158.3 million for 2007, a decrease of $40.6
million or 3.5%. This decrease was primarily due to a 119.5 million gallon reduction in wholesale
fuel sales related to the net decline of 60 retail outlets that we supplied with motor fuel. This
reduction was partially offset by higher retail motor fuel and merchandise sales from 102
convenience stores acquired in June 2007 and higher motor fuel prices compared to 2007.
Direct Operating Expenses
Consolidated. Direct operating expenses were $216.5 million for 2008, compared to $201.2
million for 2007, an increase of $15.3 million or 7.6%. This increase was primarily attributable to
the addition of the operating expenses associated with the acquisition of the Krotz Springs
refinery.
Refining and Unbranded Marketing Segment. Direct operating expenses for our refining and
unbranded marketing segment were $173.1 million for 2008, compared to $154.3 million for 2007, an
increase of $18.8 million or 12.2%. This increase was primarily attributable to the addition of the
operating expenses associated with the Krotz Springs refinery acquisition.
Asphalt Segment. Direct operating expenses for our asphalt segment were $43.4 million for
2008, compared to $46.9 million for 2007, a decrease of $3.5 million or 7.5%. This decrease was due
primarily to the reallocation of operating expenses as a result of the fire at the Big Spring
refinery on February 18, 2008.
62
Table of Contents
Selling, General and Administrative Expenses
Consolidated. SG&A expenses for 2008 were $119.9 million, compared to $105.4 million for 2007,
an increase of $14.5 million or 13.8%. This increase was primarily due to a full year of costs
associated with the 102 Skinnys stores acquired on June 29, 2007, partially offset by decreases in
certain employee costs.
Refining and Unbranded Marketing Segment. SG&A expenses for our refining and unbranded
marketing segment for 2008 were $17.8 million compared to $20.1 million for 2007, a decrease of
$2.3 million or 11.4%. This decrease was primarily attributable to decreases in certain employee
costs and stock compensation expense to minority share holders, partially offset by increases
attributable to the Krotz Springs refinery acquisition.
Asphalt Segment. SG&A expenses for our asphalt segment were $4.3 million for 2008, compared to
$2.8 million for 2007, an increase of $1.5 million or 53.6%.
Retail and Branded Marketing Segment. SG&A expenses for our retail and branded marketing
segment for 2008 were $97.2 million, compared to $81.9 million for 2007, an increase of $15.3
million or 18.7%. This increase was primarily attributable to the acquisition of 102 Skinnys
stores on June 29, 2007.
Depreciation and Amortization
Depreciation and amortization for 2008 was $66.8 million, compared to $57.4 million for 2007,
an increase of $9.4 million or 16.4%. This increase was primarily attributable to the acquisition
of the Krotz Springs refinery and capital expenditures related to the rebuild of the Big Spring
refinery.
Operating Income
Consolidated. Operating income for 2008 was $223.5 million compared to $186.1 million for
2007, an increase of $37.4 million or 20.1%. Excluding $277.8 million in net gains associated with
the Big Spring refinery fire and $45.2 million of gains from the disposition of assets primarily
relating to the HEP transaction, operating loss for 2008 was $99.5 million compared to operating
income of $178.9 million for 2007 (excluding $7.2 million in gains on the disposition of assets
primarily related to the HEP transaction), a decrease of $278.4 million. Management believes these
exclusions enhance period-to-period comparability. This decrease in operating income was primarily
attributable to lower operating income in our refining and unbranded marketing segment and retail
and branded marketing segment as a result of decreased operating margins as a result of higher
crude prices and the effects of the fire at the Big Spring refinery, partially offset by higher
operating income in our asphalt segment.
Refining and Unbranded Marketing Segment. Operating income for our refining and unbranded
marketing segment was $128.8 million for 2008, compared to $165.1 million for 2007, a decrease of
$36.3 million or 22.0%. The operating income for our refining and unbranded marketing segment in
2008, excluding $277.8 million in net gains associated with the Big Spring refinery fire and $45.2
million of gains from the disposition of assets primarily relating to the HEP transaction, is an
operating loss for 2008 of $194.2 million compared to operating income of $158.0 million for 2007
(excluding $7.1 million in gains on the disposition of assets primarily related to the HEP
transaction), a decrease of $352.2 million. This decrease was primarily attributable to the
decrease in our refinery operating margin at the Big Spring refinery due to the fire. The operating
margin for our Big Spring refinery for 2008 decreased $16.01 per barrel to ($3.18) per barrel in
2008 from $12.83 per barrel in 2007. The Big Spring refinery operated in a hydroskimming mode from
April 5, 2008 to September 26, 2008 due to the fire, which resulted in lower refinery light product
yields and as a result a lower refinery operating margin was realized. Light product yields were
approximately 70% for 2008 and 83% for 2007. Our operating margin for our California refineries
decreased $1.08 per barrel to $1.65 per barrel, or 39.6%. Refining and unbranded marketing segment
operating income was also affected by a decrease in the Gulf Coast 3/2/1 crack spread from an
average of $15.00 per barrel in 2007 to $10.47 per barrel in 2008, a decrease of 30.2%, as well as
a decrease of the sweet/sour spread from $5.00 per barrel in 2007 to $3.78 per barrel for 2008, a
decrease of 24.4%.
Asphalt Segment. Operating income for our asphalt segment was $97.4 million for 2008, compared
to a loss of $1.7 million for 2007, an increase of $99.1 million. This increase was primarily due
to an increase in our asphalt margin of $113.43 per ton in 2008, compared to $26.07 per ton in
2007, an increase of $87.36 per ton.
63
Table of Contents
Retail and Branded Marketing Segment. Operating loss for our retail and branded marketing
segment was $1.2 million for 2008, compared to operating income of $24.1 million for 2007, a
decrease of $25.3 million. This decrease was primarily attributable to lower fuel volumes and lower
wholesale motor fuel margins.
Interest Expense
Interest expense was $67.6 million for 2008, compared to $47.7 million in 2007, an increase of
$19.9 million or 41.7%. The increase is primarily due to interest on our borrowings to fund our
borrowings for the Krotz Springs refinery acquisition in July 2008 as well as borrowings associated
with the repair of the Big Spring refinery.
Income Tax Expense
Income tax expense was $62.8 million for 2008, compared to $46.2 million in 2007, an increase
of $16.6 million or 35.9%. The increase in income tax expense was attributable to our higher 2008
taxable income compared to 2007, as well as a $5.5 million benefit in 2007 resulting from the
true-up of the prior year income tax expense and a 2007 benefit of $4.8 million resulting from a
change in the effective state income tax rate. Our effective tax rate for 2008 was 40.3% compared
to 29.6% for 2007.
Non-controlling Interest in Income of Subsidiaries
Non-controlling interest in income of subsidiaries represents the proportional share of net
income related to non-voting common stock owned by minority shareholders in two of our
subsidiaries, Alon Assets and Alon Operating. Non-controlling interest in income of subsidiaries
was $5.9 million for 2008, compared to $6.0 million for 2007, an increase of $0.1 million or 1.6%.
Net Income Available to Common Stockholders
Net income available to common stockholders was $82.9 million for 2008, compared to $103.9
million for 2007, a decrease of $21.0 million or 20.2%. This decrease was attributable to the
factors discussed above and accumulated dividends on shares of preferred stock issued by a
subsidiary in conjunction with the Krotz Springs refinery acquisition of $4.3 million.
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash generated from our operating
activities and borrowings under our revolving credit facilities. 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.
On March 9, 2010, we entered into a 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.
On March 15, 2010,
Alon Refining Krotz Springs terminated its revolving credit facility and repaid
all outstanding amounts thereunder. On March 15, 2010, Alon Refining Krotz Springs also
entered into a new $65.0 million credit facility with the lenders party thereto and Bank Hapoalim
B.M., as administrative agent. Alon Refining Krotz Springs borrowed $65.0 million and used
approximately $51.0 million to repay the outstanding amounts under its revolving credit facility
that was terminated. Borrowings under the new credit facility bear interest at LIBOR plus 3.00%.
Alon Refining Krotz Springs will use the new credit facility as a bridge facility that will terminate on
June 15, 2010. The Alon Refining Krotz Springs Board of Directors has approved an entrance
into a new multi year facility with another financial institution which is expected to close by March
31, 2010. This multi year facility compared to its revolving credit facility is expected to reduce
borrowing costs and to eliminate the existing limitation on the Krotz Springs refinery throughput.
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. Certain of our credit facilities contain
financial covenants for which we must maintain compliance; the most restrictive of these covenants is contained in the
Alon USA LP Credit Facility agreement which requires a subsidiary of ours, Alon
USA, Inc., to maintain a net debt to EBITDA ratio, as defined, of no
more than 4 to 1. We currently anticipate we will be in compliance with this and all other financial covenants
contained in our credit agreements. In addition, our future capital expenditures and other cash
requirements could be higher than we
currently expect as a result of various factors, including the costs of such future capital
expenditures related to the expansion of our business.
64
Table of Contents
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. Pursuant to our growth strategy, we
will also consider from time to time acquisitions of, and investments in, assets or businesses that
complement our existing assets and businesses. Acquisition transactions, if any, are expected to be
financed through cash on hand and from operations, bank borrowings, the issuance of debt or equity
securities or a combination of two or more of those sources.
Cash Flow
The following table sets forth our consolidated cash flows for the years ended December 31,
2009, 2008 and 2007:
Year Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(dollars in thousands) | ||||||||||||
Cash provided by (used in): |
||||||||||||
Operating activities |
$ | 283,145 | $ | (812 | ) | $ | 123,950 | |||||
Investing activities |
(138,691 | ) | (610,322 | ) | (147,254 | ) | ||||||
Financing activities |
(122,471 | ) | 560,973 | 27,753 | ||||||||
Net increase (decrease) in cash and cash equivalents |
$ | 21,983 | $ | (50,161 | ) | $ | 4,449 | |||||
Cash Flows Provided By (Used in) Operating Activities
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.
Net cash provided by (used in) operating activities for 2008 was ($0.8) million, compared to
$124.0 million for 2007. The change of $124.8 million in net cash used in operating activities was
primarily attributable to the decrease in net income, net of heating oil hedge gain, gain on
involuntary conversion of assets and gain on disposition of assets all net of income tax effect,
partially offset by $133.0 million due to optimization of working capital including inventory
reductions (excluding the $143.4 million of inventories acquired in the Krotz Springs refinery
acquisition) offset by increases in income tax receivables.
Cash Flows Used In Investing Activities
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.
Net cash used in investing activities was $610.3 million in 2008 compared to $147.3 million in
2007. The change in cash used in investing activities of $463.0 million is due to the July 3, 2008
acquisition of the Krotz Springs refinery of $481.0 million and the capital expenditures for the
rebuild of the Big Spring refinery of $362.2 million offset by the proceeds from insurance
recoveries related to the rebuild of $270.9 million, sale of short-term investments of $27.3
million, and the $75.3 million used to acquire the stock of Skinnys, Inc. in 2007.
65
Table of Contents
Cash Flows Provided By (Used In) Financing Activities
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.
Net cash provided by (used in) financing activities was $561.0 million in 2008 compared to
$27.8 million in 2007. The change in net cash provided by financing activities in 2008 of $533.2
million was primarily attributable to $276.8 million of borrowings under the revolving credit
facilities and activities related to the Krotz Springs acquisition which included additions to
long-term debt of $252.0 million and $80.0 million received from the sale of preferred stock of a
subsidiary net of debt issuance costs of $28.1 million, partially offset by repayment of long-term
debt of $11.9 million compared to an increase in long term debt of $46.3 million to partially fund
the acquisition of Skinnys, Inc. and repayment of long-term debt of $8.4 million in 2007 offset by
debt issuance costs of $2.2 million.
Cash and Cash Equivalents and Indebtedness
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 and are invested in conservative, highly-rated instruments issued by financial institutions
or government entities with strong credit standings.
As of December 31, 2009, our total cash and cash equivalents were $40.4 million and we had
total debt of $937.0 million.
Summary of Indebtedness. The following table sets forth the principal amounts outstanding
under our bank credit facilities, retail mortgages and equipment loans at December 31, 2009:
As of December 31, 2009 | ||||||||||||
Amount Outstanding |
Total Facilities |
Total Availability (1) |
||||||||||
(dollars in thousands) | ||||||||||||
Debt, including current portion: |
||||||||||||
Term loan credit facilities |
$ | 434,250 | $ | 434,250 | $ | | ||||||
Revolving credit facilities |
216,577 | 790,000 | 149,445 | |||||||||
Senior secured notes |
205,693 | 205,693 | | |||||||||
Retail credit facilities |
80,504 | 80,504 | | |||||||||
Totals |
$ | 937,024 | $ | 1,510,447 | $ | 149,445 | ||||||
(1) | Total availability was calculated as the lesser of (a) the total size of the facilities less outstanding borrowings and letters of credit as of December 31, 2009 which was $423.7 million, or (b) total borrowing base less outstanding borrowings and letters of credit, if applicable, as of December 31, 2009 which was $149.4 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 events.
66
Table of Contents
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 & Poors Rating Service and Moodys 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. 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 excluding those
of our retail subsidiaries and those subsidiaries established in conjunction with the Krotz Springs
refinery 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, 2009 and 2008, the Alon Energy Term Loan had an outstanding balance of $434.3
million and $437.8 million, respectively.
Letters of Credit Facilities.
On July 30, 2008, we entered into an unsecured credit facility
for the issuance of letters of credit in an amount not to exceed $60.0 million. We used letters of
credit under this facility to support the purchase of crude oil for the Big Spring refinery. We
terminated this facility in May 2009. At December 31, 2008, we had $51.3 million of outstanding
letters of credit under this credit facility.
On March 9, 2010, we entered into a 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.
Alon USA, LP Credit Facilities
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, excluding those of Alon Paramount Holdings, Inc.
(Alon Holdings), our subsidiary, and its subsidiaries other than Alon Pipeline Logistics, LLC
(Alon Logistics), those subsidiaries established in conjunction with the Krotz Springs refinery
acquisition and those of our retail subsidiaries and (ii) a second lien on our fixed assets
excluding assets held by Alon Holdings (excluding Alon Logistics), those subsidiaries established
in conjunction with the Krotz Springs refinery acquisition and our retail subsidiaries.
The Alon USA LP Credit Facility contains certain restrictive covenants including financial
covenants.
Borrowings of $88.0 million and $118.0 million were outstanding under the Alon USA LP Credit
Facility at December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008, outstanding
letters of credit under the Alon USA LP Credit Facility were $129.0 million and $30.6 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, 2009, the
margin was 1.75%.
The Paramount Credit Facility is primarily secured by the assets of Alon Holdings (excluding
Alon Logistics).
67
Table of Contents
The Paramount Credit Facility contains certain restrictive covenants related to working
capital, operations and other matters.
Borrowings of $45.3 million and $11.7 million were outstanding under the Paramount Credit
Facility at December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008, outstanding
letters of credit under the Paramount Credit Facility were $18.0 million and $12.2 million,
respectively.
Alon Refining Krotz Springs, Inc. Credit Facilities
Term Loan Credit Facility. On July 3, 2008, Alon Refining Krotz Springs, Inc. (ARKS)
entered into a $302.0 million Term Loan Agreement (the Krotz Term Loan).
On April 9, 2009, ARKS and Alon Refining Louisiana, Inc. (ARL) entered into a first
amendment agreement to the Krotz Term Loan. As part of the first amendment, the parties agreed to
liquidate the heating oil crack spread hedge and use the proceeds of $133.6 million to reduce the
Krotz Term Loan principal balance.
In October 2009, ARKS made a prepayment of $163.8 million, representing the outstanding
principal balance of the Krotz Term Loan, with the proceeds received from the issuance of the ARKS
senior secured notes (see Senior Secured Notes). As a result of the prepayment of the Krotz Term
Loan, a write-off of unamortized debt issuance costs of $20.5 million is included as interest
expense in the consolidated statements of operations for the year ended December 31, 2009.
At December 31, 2008, the Krotz Term Loan had an outstanding balance of $302.0 million.
Senior Secured Notes. In October 2009, ARKS issued $216.5 million in aggregate principal
amount of 13.50% senior secured notes (the Senior Secured Notes) in a private offering. The
Senior Secured Notes were issued at an offering price of 94.857%. The Senior Secured 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, commencing on April 15, 2010.
ARKS received gross proceeds of $205.4 million from the sale of the Senior Secured Notes
(before fees and expenses related to the offering). In connection with the closing, ARKS prepaid
in full all outstanding obligations under the Krotz Term Loan. The remaining proceeds from the
offering may be 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
financial covenants.
Additionally,
ARKS must under certain circumstances offer to purchase some of the Senior
Secured Notes at par plus accrued interest or at 101% if excess cash flow is generated if assets are sold. If there is a change of control, then the holders of the Senior
Secured Notes may require ARKS to purchase the Senior Secured Notes at a price of 101%. Additionally, we may redeem up to 35% of the aggregate principal amount outstanding with the proceeds of certain equity offerings.
The Senior Secured Notes are also redeemable by ARKS on or after October 15, 2012 at par,
accrued interest and Special Interest.
On February 13, 2010, ARKS announced that it had exchanged $215.9 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 are substantially identical to the Senior Secured
Notes, except that the Exchange Notes have been registered and will not have any of the transfer
restrictions or other related matters as in the Senior Secured Notes.
At December 31, 2009, the Senior Secured Notes had an outstanding balance of $205.7 million,
net of unamortized discount of $10.8 million. Alon is amortizing the original issue discount using
the effective interest method over the life of the Senior Secured Notes.
68
Table of Contents
Revolving Credit Facility. On July 3, 2008, ARKS entered into a revolving credit facility
agreement (the ARKS Facility) that had a maturity of July 3, 2013. The ARKS Facility had an
original commitment of $400.0 million, was reduced in December 2008 to $300.0 million, and in April
2009 to $250.0 million. The ARKS Facility can be used both for borrowings and the issuance of
letters of credit subject to a facility limit of the lesser of the facility or the amount of the
borrowing base under the facility.
On December 18, 2008, ARKS entered into an amendment to the ARKS Facility with its lender.
This amendment increased the applicable margin, amended certain elements of the borrowing base
calculation and the timing of submissions under certain circumstances, and reduced the commitment
from $400.0 million to $300.0 million. Under these circumstances, the facility limit will be the
lesser of $300.0 million or the amount of the borrowing base, although the amendment contains a
feature that will allow for an increase in the facility size to $400.0 million subject to approval
by both parties.
On April 9, 2009, the ARKS Facility was further amended to include among other things, a
reduction to the commitment from $300.0 million to $250.0 million with the ability to increase the
facility size to $275.0 million upon request by ARKS and under certain circumstances up to $400.0
million. This amendment also increased the applicable margin, amended certain elements of the
borrowing base calculation and required a monthly fixed charge coverage ratio.
The ARKS credit facility was also amended on October 22, 2009 to allow for the issuance of the
Senior Secured Notes, certain Indenture provisions and certain hedging transactions. The amendment
also adjusted certain elements of the Borrowing Base definition as well as the delivery of the
Borrowing Base certification.
Borrowings under the ARKS Facility bear interest at a rate based on a margin over the
Eurodollar rate based on a fixed charge coverage ratio. Currently that margin is 4.0%.
This ARKS Facility is guaranteed by ARL and is secured by a first lien on cash, accounts
receivable, and inventory of ARKS and ARL and a second lien on the remaining assets.
The ARKS Facility contains customary restrictive covenants, such as restrictions on liens,
mergers, consolidation, sales of assets, capital expenditures, additional indebtedness,
investments, hedging transactions, and certain restricted payments. Additionally, the ARKS
Facility contains one financial covenant.
Borrowings of $83.3 million and $147.1 million were outstanding under the ARKS Facility at
December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008, outstanding letters of
credit under the ARKS Facility were $2.8 million and $68.3 million, respectively.
On March 15, 2010, ARKS
terminated the ARKS Facility and repaid all outstanding amounts
thereunder. On March 15, 2010, ARKS also entered into a new $65.0 million credit facility with
the lenders party thereto and Bank Hapoalim B.M., as administrative agent. ARKS borrowed
$65.0 million and used approximately $51.0 million to repay the outstanding amounts under the
ARKS Facility that was terminated. Borrowings under the new credit facility bear interest at
LIBOR plus 3.00%. ARKS will use the new credit facility as a bridge facility that will terminate
on June 15, 2010. ARKS Board of Directors has approved an entrance into a new multi year facility
with another financial institution which is expected to close by March 31, 2010. This multi year
facility compared to the ARKS Facility is expected to reduce borrowing costs and to eliminate the
existing limitation on the Krotz Springs refinery throughput.
Retail Credit Facilities
Southwest Convenience Stores, LLC (SCS), a subsidiary of Alon, has a credit agreement (the
SCS Credit Agreement) that will mature on July 1, 2017. Monthly principal payments are based on
a 15-year amortization term.
Borrowings under the SCS Credit Agreement bear interest at a Eurodollar rate plus 1.50% per
annum.
Obligations under the SCS Credit Agreement are jointly and severally guaranteed by Alon, Alon
USA Interests, LLC, Skinnys, LLC and all of the subsidiaries of SCS. The obligations under the
SCS Credit Agreement are secured by a pledge on substantially all of the assets of SCS and
Skinnys, LLC and each of their subsidiaries, including cash, accounts receivable and inventory.
69
Table of Contents
The SCS Credit Agreement also contains customary restrictive covenants on its activities, such
as restrictions on liens, mergers, consolidations, sales of assets, additional indebtedness,
investments, certain lease obligations and certain restricted payments. The SCS Credit Agreement
also includes one annual financial covenant.
At December 31, 2009 and 2008, the SCS Credit Agreement had an outstanding balance of $79.7
million and $86.0 million, respectively, and there were no further amounts available for borrowing.
Other Retail Related Credit Facilities
In 2003, Alon 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, 2009 and 2008, the outstanding balances were $0.8 million and $0.9
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 2010 and 2011 are $71.9 million and $112.2
million respectively. The following table summarizes our expected capital expenditures for 2010 and
2011 by operating segment and major category:
2010 | 2011 | |||||||
(dollars in thousands) | ||||||||
Refining and Unbranded Marketing Segment: |
||||||||
Sustaining maintenance |
$ | 32,791 | $ | 54,595 | ||||
Growth/profit improvement/other |
439 | 10,700 | ||||||
Chemical catalyst and turnaround |
14,635 | 22,776 | ||||||
Total |
47,865 | 88,071 | ||||||
Asphalt Segment: |
||||||||
Sustaining maintenance |
5,546 | 4,000 | ||||||
Growth/profit improvement |
1,425 | 8,680 | ||||||
Total |
6,971 | 12,680 | ||||||
Retail and Branded Marketing Segment: |
||||||||
Sustaining maintenance |
7,316 | 5,045 | ||||||
Growth/profit improvement |
6,818 | 3,000 | ||||||
Total |
14,134 | 8,045 | ||||||
Corporate Segment: |
||||||||
Sustaining |
2,975 | 3,421 | ||||||
Total Capital Expenditures |
$ | 71,945 | $ | 112,217 | ||||
Turnaround and Chemical Catalyst Costs. Our 2009 turnaround and chemical catalyst costs were
$24.7 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:
2010 | 2011 | 2012 | 2013 | 2014 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Scheduled turnaround costs |
$ | 2,400 | $ | 4,050 | $ | 7,800 | $ | 17,400 | $ | 5,100 | ||||||||||
Chemical catalyst costs |
12,235 | 18,726 | 11,343 | 11,667 | 24,368 | |||||||||||||||
Total |
$ | 14,635 | $ | 22,776 | $ | 19,143 | $ | 29,067 | $ | 29,468 | ||||||||||
70
Table of Contents
Contractual Obligations and Commercial Commitments
Information regarding our known contractual obligations of the types described below as of
December 31, 2009 is set forth in the following table:
Payments Due by Period | ||||||||||||||||||||
Less Than | More Than | |||||||||||||||||||
Contractual Obligations | 1 Year | 1-3 Years | 3-5 Years | 5 Years | Total | |||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Long-term debt obligations |
$ | 10,946 | $ | 67,192 | $ | 810,533 | $ | 48,353 | $ | 937,024 | ||||||||||
Operating lease obligations |
35,950 | 56,072 | 25,707 | 65,025 | 182,754 | |||||||||||||||
Pipelines and Terminals Agreement (1) |
27,549 | 55,098 | 55,099 | 151,572 | 289,318 | |||||||||||||||
Other commitments (2) |
2,828 | 5,655 | 5,654 | 20,499 | 34,636 | |||||||||||||||
Total obligations |
$ | 77,273 | $ | 184,017 | $ | 896,993 | $ | 285,449 | $ | 1,443,732 | ||||||||||
(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, 2009, 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,
2009. However, certain expected payments related to our anticipated pension contributions in 2009
and other post-retirement benefits obligations are discussed in Note 14 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. For example, in the second half of 2001,
market prices were significantly lower than our inventory cost determined under our LIFO valuation
method, which resulted in our recording a non-cash charge of $23.2 million to cost of sales and a
corresponding decrease in the value of our crude oil and refined products inventory. In 2002,
market prices rose substantially, allowing us to recover $18.6 million of the 2001 inventory
write-down to market value with a corresponding non-cash credit to cost of sales. Any such recovery
results in a non-cash accounting adjustment, increasing the value of our crude oil and refined
products inventory and decreasing our cost of sales. Our results of operations could continue to
include such non-cash write-downs and recoveries of inventory if market prices for crude oil and
refined products return to levels comparable to those in 2001. A reduction of inventory volumes
during 2009, 2008 and 2007 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
71
Table of Contents
$10.2 million, $4.1 million, and $4.6 million in 2009, 2008 and 2007, respectively. Market
values of crude oil, refined products, asphalts and blendstocks exceeded LIFO costs by $100.5
million and $4.0 million at December 31, 2009 and 2008, 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, 2009, for those payments
the Company 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 SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Superseded by
ASC topic 360-10). 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. Effective January 1, 2003, we adopted Statement No. 143,
Accounting for Asset Retirement Obligations (Superseded by ASC topic 410-20), which established
accounting standards for recognition and measurement of a liability for an asset retirement
obligation and the associated asset retirement costs. An entity is required to recognize the fair
value of a liability for an asset retirement obligation in the period in which it is incurred if a
reasonable estimate of fair value can be made. If a reasonable estimate of fair value cannot be
made in the period the asset retirement obligation is incurred, the liability should be recognized
when a reasonable estimate of fair value can be made.
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.
72
Table of Contents
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, 2009, Alon had three reporting units with goodwill; California refining,
California asphalt, and Retail operations. The fair values of our reporting units in 2009 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; 11%
for both California refining and California asphalt and 10% 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, 2009, that none of our goodwill was impaired. However, the market value of
our common stock continues to reflect the effects of the difficult economic environment and
significant competition in most of our markets. If, among other factors, (1) our equity value
remains depressed or declines further, (2) the fair value of our reporting units decline, or (3)
the adverse impacts of economic or competitive factors are worse than 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.
New Accounting Standards and Disclosures
In June 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162 (SFAS No. 168) (superseded by Accounting Standards
Codification (ASC) topic 105-10-5). SFAS No. 168 stipulates the FASB Accounting Standards
Codification is the source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. SFAS No. 168 is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The adoption did not have any effect on our
consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165) (superseded by
ASC topic 855-10-5). SFAS No. 165 provides guidance on managements assessment of subsequent
events and incorporates this guidance into accounting literature. SFAS No. 165 is effective
prospectively for interim and annual periods ending after June 15, 2009. There was no effect on
Our results of operations or financial position, and the required disclosures are included in Note
23 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
In December 2008, the FASB issued FASB Staff Position FAS 132(R)-1, Employers Disclosures
about Postretirement Benefit Plans (FSP FAS 132(R)-1) (superseded by ASC topic 715-20-50), which
amends FASB Statement 132 (revised 2003), Employers Disclosures about Pensions and Other
Postretirement Benefits, to provide guidance on employers disclosures about plan assets of defined
benefit pension or other postretirement plans. The disclosures are intended to provide users of
financial statements an understanding of the determination of investment allocations, the major
categories of plan assets, inputs and valuation techniques used to measure fair value of plan
assets, and significant concentrations of credit risk with plan assets. FAS 132(R)-1 is effective
for years ending after December 15, 2009. Since FSP FAS 132 (R)-1 only affects disclosure
requirements, there was no effect on our results of operations or financial position.
In November 2008, the FASB ratified its consensus on EITF Issue No. 08-6, Equity Method
Investment Accounting Considerations. The scope of the Issue applies to all investments accounted
for under the equity method. The Issue covers the initial measurement of an equity method
investment, recognition of other-than-temporary impairments, and the effects on ownership of the
investor due to the issuance of shares by the investee. The Issue is
73
Table of Contents
effective for fiscal years beginning on or after December 15, 2008. The adoption did not have
any effect on our consolidated financial statements.
In June 2008, the FASB ratified its consensus on EITF Issue No. 08-3, Accounting by Lessees
for Maintenance Deposits, which applies to the lessees accounting for maintenance deposits paid by
a lessee under an arrangement accounted for as a lease that are refunded only if the lessee
performs specified maintenance activities and deposits within the scope of the Issue shall be
accounted for as deposit assets. The effect of the change shall be recognized as a change in
accounting principle as of the beginning of the fiscal year in which the consensus is initially
applied for all arrangements existing at the effective date. This Issue is effective for fiscal
years beginning after December 15, 2008. The adoption did not have any effect on our consolidated
financial statements.
In April 2008, the FASB issued FASB Staff Position FAS 142-3, Determination of the Useful Life
of Intangible Assets (FSP FAS 142-3) (superseded by ASC topic 350-50-4). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for fiscal years
beginning after December 15, 2008 and early adoption is prohibited. The adoption did not have any
effect on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosure about Derivative Instruments and
Hedging Activities (SFAS No. 161) (superseded by ASC topic 815-10-65), which established
disclosure requirements for hedging activities. SFAS No. 161 requires that entities disclose the
purpose and strategy for using derivative instruments, include discussion regarding the method for
accounting for the derivative and the related hedged items under SFAS No. 133 and the derivative
and related hedged items effect on a companys financial statements. SFAS No. 161 also requires
quantitative disclosures about the fair values of derivative instruments and their gains or losses
in tabular format as well as discussion regarding contingent credit-risk features in derivative
agreements and counterparty risk. SFAS No. 161 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after November 15, 2008. There was no effect on our
results of operations or financial position, and the required disclosures are included in Note 8.
The adoption did not have any effect on Our consolidated financial statements.
Effective January 1, 2008, Alon adopted the provisions of SFAS No. 157, Fair Value
Measurements (superseded by ASC topic 820-10), which pertain to certain balance sheet items
measured at fair value on a recurring basis. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about such measurements that are
permitted or required under other accounting pronouncements. While SFAS No. 157 may change the
method of calculating fair value, it does not require any new fair value measurements.
In February 2008, the FASB issued FASB Staff Position FAS 157-2, Partial Deferral of the
Effective Date of Statement 157 (FSP FAS 157-2) (superseded by ASC topic 820-10-65). FSP FAS
157-2 delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually) to fiscal years beginning after November 15,
2008. The adoption did not have any effect on Our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value that are not currently required to be
measured at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15,
2007. The adoption did not have any effect on Our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements, an Amendment of ARB 51 (SFAS No. 160) (superseded by ASC topic 810-20-65),
which requires non-controlling interests (previously referred to as minority interests) to be
treated as a separate component of equity. SFAS No. 160 is effective for periods beginning on or
after December 15, 2008 and earlier application was prohibited and changes the presentation of
income in the consolidated statements of operations. Information must be recast to classify
non-controlling interests in equity, attribute net income and other comprehensive income to
non-controlling interests, and provide other disclosures required by SFAS No. 160.
74
Table of Contents
The effect of the adoption of SFAS No. 160 on the consolidated balance sheet as of December
31, 2008 is summarized below.
December 31, | December 31, | |||||||||||
2008 | Adjustments | 2008 | ||||||||||
(as | ||||||||||||
previously | ||||||||||||
reported) | (recast) | |||||||||||
Total stockholders equity |
$ | 431,919 | $ | 2,732 | $ | 434,651 | ||||||
Non-controlling interest in subsidiaries (1) |
| 17,916 | 17,916 | |||||||||
Preferred stock of subsidiary including accumulated dividends (1) |
| 84,300 | 84,300 | |||||||||
Total equity |
$ | 431,919 | $ | 104,948 | $ | 536,867 | ||||||
(1) | Previously reported outside of equity. |
The adjustments reflect the attribution of unrealized gains or losses historically recorded to
accumulated other comprehensive loss, net of income tax, to non-controlling interest in
subsidiaries, and the reclassification of non-controlling interest in subsidiaries and preferred
stock of subsidiary including accumulated dividends, into equity.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (superseded by ASC
topic 805-10), which requires that the purchase method of accounting be used for all business
combinations. SFAS No. 141(R) requires most identifiable assets, liabilities, non-controlling
interests, and goodwill acquired in a business combination be recorded at full fair value. SFAS
No. 141(R) applies to all business combinations, including combinations by contract alone. SFAS No.
141(R) is effective for periods beginning on or after December 15, 2008 and earlier application is
prohibited. SFAS No. 141(R) will be applied to business combinations occurring after the effective
date.
Reconciliation of Amounts Reported Under Generally Accepted Accounting Principles
Reconciliation of Adjusted EBITDA to amounts reported under generally accepted accounting
principles in financial statements.
For the years ended December 31, 2009, 2008 and 2007, Adjusted EBITDA represents earnings
before non-controlling interest in income of subsidiaries, income tax expense, interest expense,
depreciation and amortization 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 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 |
75
Table of Contents
| 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) to Adjusted EBITDA for the years ended
December 31, 2009, 2008 and 2007, respectively:
For the Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(in thousands) | ||||||||||||
Net income (loss) |
$ | (115,156 | ) | $ | 82,883 | $ | 103,936 | |||||
Non-controlling interest in income
(loss) of subsidiaries (including
accumulated dividends on preferred
stock of subsidiary) |
12,949 | 10,241 | 5,979 | |||||||||
Income tax expense (benefit) |
(64,877 | ) | 62,781 | 46,199 | ||||||||
Interest expense |
111,137 | 67,550 | 47,747 | |||||||||
Depreciation and amortization |
97,247 | 66,754 | 57,403 | |||||||||
(Gain) loss on disposition of assets |
1,591 | (45,244 | ) | (7,206 | ) | |||||||
Adjusted EBITDA |
$ | 42,891 | $ | 244,965 | $ | 254,058 | ||||||
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. 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, 2009,
we held approximately 3.3 million barrels of crude oil and product inventories valued under the
LIFO valuation method with an average cost of $45.55 per barrel. Market value exceeded carrying
value of LIFO costs by $100.5 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 $3.3 million.
76
Table of Contents
The following table provides information about our derivative commodity instruments as of
December 31, 2009:
Contract | Wtd Avg | |||||||||||||||||||||||
Volume | Purchase | Wtd Avg | Contract | |||||||||||||||||||||
Description of Activity | (in barrels) | Price | Sales Price | Value | Fair Value | Gain (Loss) | ||||||||||||||||||
Futures-long (Crude) |
240,000 | $ | 71.95 | $ | | $ | 17,268 | $ | 19,046 | $ | 1,778 | |||||||||||||
Futures-short (Crude) |
(240,000 | ) | | 80.63 | (17,895 | ) | (19,351 | ) | (1,456 | ) |
Contract | ||||||||||||||||||||||||
Volume | Wtd Avg | Wtd Avg | Contract | |||||||||||||||||||||
Description of Activity | (in barrels) | Contract | Sales Price | Value | Fair Value | Gain (Loss) | ||||||||||||||||||
Futures-crack spread (Heating Oil) |
364,800 | $ | 11.38 | $ | 11.62 | $ | 4,150 | $ | 4,239 | $ | 89 | |||||||||||||
Futures-long (SPR swaps) |
278,322 | 95.92 | 81.59 | 26,696 | 22,708 | (3,988 | ) | |||||||||||||||||
Futures-short (SPR swaps) |
(278,322 | ) | 60.05 | 81.59 | (16,713 | ) | (22,708 | ) | (5,995 | ) |
Interest Rate Risk
As of December 31, 2009, $730.5 million of our outstanding debt was at floating interest rates
out of which approximately $88.0 million was at the Eurodollar rate plus 3.00%, subject to a
minimum interest rate of 4.00%. As of December 31, 2009, we had interest rate swap agreements with
a notional amount of $350.0 million with remaining periods ranging from less than a year to three
years and fixed interest rates ranging from 4.25% to 4.75%. An increase of 1% in the Eurodollar
rate on indebtedness net of the weighted average notional amount of the interest rate swap
agreements outstanding in 2009 and the instrument subject to the minimum interest rate would result
in an increase in our interest expense of approximately $3.4 million per year.
In accordance with SFAS No. 133 (superseded by ASC topic 815-10), 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.
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 F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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 SECs 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.
77
Table of Contents
Managements 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,
2009. In managements 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, 2009, 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, 2009 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. OTHER INFORMATION.
None.
78
Table of Contents
PART III
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 2010 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. EXECUTIVE COMPENSATION.
The information set forth under Executive Compensation in the Proxy Statement is
incorporated herein by reference.
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. 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. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information set forth under Independent Public Accountants in the Proxy Statement is
incorporated herein by reference.
79
Table of Contents
PART IV
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 F-1. | |
(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. |
Exhibit No. | Description of Exhibit | |
3.1
|
Amended and Restated Certificate of Incorporation of Alon USA Energy, Inc. (incorporated by reference to Exhibit 3.1 to Form S-1/A, filed by the Company on July 7, 2005, SEC File No. 333-124797). | |
3.2
|
Amended and Restated Bylaws of Alon USA Energy, Inc. (incorporated by reference to Exhibit 3.2 to Form S-1/A, filed by the Company on July 14, 2005, SEC File No. 333-124797). | |
4.1
|
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). | |
4.2
|
Indenture, dated as of October 22, 2009, by and among Alon Refining Krotz Springs, Inc. and Wilmington Trust FSB, as Trustee (incorporated by reference to Exhibit 4.1 to Form 8-K, filed by the Company on October 23, 2009, SEC File No. 001-32567). | |
10.1
|
Trademark License Agreement, dated as of July 31, 2000, among Finamark, Inc., Atofina Petrochemicals, Inc. and SWBU, L.P. (incorporated by reference to Exhibit 10.3 to Form S-1, filed by the Company on May 11, 2005, SEC File No. 333-124797). | |
10.2
|
First Amendment to Trademark License Agreement, dated as of April 11, 2001, among Finamark, Inc., Atofina Petrochemicals, Inc. and SWBU, L.P. (incorporated by reference to Exhibit 10.4 to Form S-1, filed by the Company on May 11, 2005, SEC File No. 333-124797). | |
10.3
|
Pipeline Lease Agreement, dated as of December 12, 2007, between Plains Pipeline, L.P. and Alon USA, L.P. (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on February 2, 2008, SEC File No. 001-32567). | |
10.4
|
Pipeline Lease Agreement, dated as of February 21, 1997, between Navajo Pipeline Company and American Petrofina Pipe Line Company (incorporated by reference to Exhibit 10.6 to Form S-1, filed by the Company on May 11, 2005, SEC File No. 333-124797). | |
10.5
|
Amendment and Supplement to Pipeline Lease Agreement, dated as of August 31, 2007, by and between HEP Pipeline Assets, Limited Partnership and Alon USA, LP (incorporated by reference to Exhibit 10.1 to Form 10-Q, filed by the Company on November 8, 2007). | |
10.6
|
Contribution Agreement, dated as of January 25, 2005, among Holly Energy Partners, L.P., Holly Energy Partners Operating, L.P., T & R Assets, Inc., Fin-Tex Pipe Line Company, Alon USA Refining, Inc., Alon Pipeline Assets, LLC, Alon Pipeline Logistics, LLC, Alon USA, Inc. and Alon USA, LP (incorporated by reference to Exhibit 10.7 to Form S-1, filed by the Company on May 11, 2005, SEC File No. 333-124797). | |
10.7
|
Pipelines and Terminals Agreement, dated as of February 28, 2005, between Alon USA, LP and Holly Energy Partners, L.P. (incorporated by reference to Exhibit 10.8 to Form S-1, filed by the Company on May 11, 2005, SEC File No. 333-124797). | |
10.8
|
Pipeline Lease Agreement, dated as of December 12, 2007, between Plains Pipeline, L.P. and Alon USA, LP (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on February 5, 2008, SEC File No. 001-32567). |
80
Table of Contents
Exhibit No. | Description of Exhibit | |
10.9
|
Liquor License Purchase Agreement, dated as of May 12, 2003, between Southwest Convenience Stores, LLC and SCS Beverage, Inc. (incorporated by reference to Exhibit 10.34 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). | |
10.10
|
Premises Lease, dated as of May 12, 2003, between Southwest Convenience Stores, LLC and SCS Beverage, Inc. (incorporated by reference to Exhibit 10.35 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). | |
10.11
|
Registration Rights Agreement, dated as of July 6, 2005, between Alon USA Energy, Inc. and Alon Israel Oil Company, Ltd. (incorporated by reference to Exhibit 10.22 to Form S-1/A, filed by the Company on July 7, 2005, SEC File No. 333-124797). | |
10.12
|
Registration Rights Agreement, dated October 22, 2009, between Alon Refining Krotz Springs, Inc. and Jefferies & Company, Inc. (incorporated by reference to Exhibit 10.2 to Form 8-K, filed by the Company on October 23, 2009, SEC File No. 001-32567). | |
10.13
|
Amended Revolving Credit Agreement, dated as of June 22, 2006, among Alon USA, LP, EOC Acquisition, LLC, Israel Discount Bank of New York, Bank Leumi USA and certain other guarantor companies and financial institutions from time to time named therein (incorporated by reference to Exhibit 10.2 to Form 8-K, filed by the Company on June 26, 2006, SEC File No. 001-32567). | |
10.14
|
First Amendment to Amended Revolving Credit Agreement, dated as of August 4, 2006, to the Amended Revolving Credit Agreement, dated as of June 22, 2006, among Alon USA, LP, EOC Acquisition, LLC, Israel Discount Bank of New York, Bank Leumi USA and certain other guarantor companies and financial institutions from time to time named therein (incorporated by reference to Exhibit 10.25 to Form 10-K, filed by the Company on March 15, 2007 SEC File No. 001-32567). | |
10.15
|
Waiver, Consent, Partial Release and Second Amendment, dated as of February 28, 2007, to the Amended Revolving Credit Agreement, dated as of June 22, 2006, Alon USA, LP, Edgington Oil Company, LLC, Israel Discount Bank of New York, Bank Leumi USA and certain other guarantor companies and financial institutions from time to time named therein (incorporated by reference to Exhibit 10.2 to Form 8-K, filed by the Company on March 5, 2007, SEC File No. 001-32567). | |
10.16
|
Third Amendment to Amended Revolving Credit Agreement, dated as of June 29, 2007, to the Amended Revolving Credit Agreement, dated as of June 22, 2006, among Alon USA Energy, Inc., Alon USA, LP, the guarantor companies and financial institutions named therein, Israel Discount Bank of New York and Bank Leumi USA (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on July 20, 2007, SEC File No. 001-32567). | |
10.17
|
Waiver, Consent, Partial Release and Fourth Amendment, dated as of July 2, 2008, by and among Alon USA, LP, Israel Discount Bank of New York, Bank Leumi USA and certain other guarantor companies and financial institutions from time to time named therein (incorporated by reference to Exhibit 10.4 to Form 8-K, filed by the Company on July 10, 2008, SEC File No. 001-32567). | |
10.18
|
Fifth Amendment to Amended Revolving Credit Agreement, dated as of July 31, 2009, by and among Alon USA, LP, Israel Discount Bank of New York, Bank Leumi USA and certain other guarantor companies and financial institutions from time to time named therein (incorporated by reference to Exhibit 10.3 to Form 10-Q, filed by the Company on August 6, 2009, SEC File No. 001-32567). | |
10.19
|
Credit Agreement, dated as of July 30, 2008, among Alon USA Energy, Inc., the financial institutions from time to time party thereto, Israel Discount Bank and Bank Leumi USA (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on August 1, 2008, SEC File No. 001-32567). | |
10.20
|
Amended and Restated Credit Agreement, dated as of June 29, 2007, among Southwest Convenience Stores, LLC, the lenders party thereto and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on July 2, 2007, SEC File No. 001-32567). | |
10.21
|
Credit Agreement, dated as of June 22, 2006, among Alon USA Energy, Inc., the lenders party thereto and Credit Suisse (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on June 26, 2006, SEC File No. 001-32567). |
81
Table of Contents
Exhibit No. | Description of Exhibit | |
10.22
|
Amendment No. 1 to the Credit Agreement, dated as of February 28, 2007, by and among Alon USA Energy, Inc., the lenders party thereto and Credit Suisse (incorporated by reference to Exhibit 10.3 to Form 8-K, filed by the Company on March 5, 2007, SEC File No. 001-32567). | |
10.23
|
Second Amended and Restated Credit Agreement, dated as of February 28, 2007, among Paramount Petroleum Corporation, Bank of America, N.A. and certain other guarantor companies and financial institutions from time to time named therein (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on March 5, 2007, SEC File No. 001-32567). | |
10.24
|
First Amendment to Second Amended and Restated Credit Agreement, dated as of March 30, 2007, among Paramount Petroleum Corporation, Bank of America, N.A. and certain other guarantor companies and financial institutions from time to time named therein (incorporated by reference to Exhibit 10.37 to Form 10-K, filed by the Company on March 11, 2008, SEC File No. 001-32567). | |
10.25
|
Term Loan Agreement, dated as of July 3, 2008, by and among Alon Refining Louisiana, Inc., Alon Refining Krotz Springs, Inc., the lenders party thereto and Credit Suisse, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.2 to Form 8-K, filed by the Company on July 10, 2008, SEC File No. 001-32567). | |
10.26
|
First Amendment Agreement, dated as of April 9, 2009, by and among Alon Refining Louisiana, Inc., Alon Refining Krotz Springs, Inc., the lenders party thereto and Wells Fargo Bank, National Association, as successor to Credit Suisse, Cayman Islands Branch, as agent (incorporated by reference to Exhibit 10.1 to Form 10-Q, filed by the Company on August 6, 2009, SEC File No. 001-32567). | |
10.27
|
Loan and Security Agreement, dated as of July 3, 2008, by and among Alon Refining Louisiana, Inc., Alon Refining Krotz Springs, Inc., the lenders party thereto and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.3 to Form 8-K, filed by the Company on July 10, 2008, SEC File No. 001-32567). | |
10.28
|
First Amendment to Loan and Security Agreement, dated as of December 18, 2008, by and among Alon Refining Louisiana, Inc., Alon Refining Krotz Springs, Inc., the lenders party thereto and Bank of America, N.A. (incorporated by reference to Exhibit 10.28 to Form 10-K, filed by the Company on April 10, 2009, SEC File No. 001-32567). | |
10.29
|
Second Amendment to Loan and Security Agreement, dated as of April 9, 2009, by and among Alon Refining Louisiana, Inc., Alon Refining Krotz Springs, Inc., the lenders party thereto and Bank of America, N.A., as agent (incorporated by reference to Exhibit 10.2 to Form 8-K, filed by the Company on April 27, 2009, SEC File No. 001-32567). | |
10.30
|
Amended and Restated Loan and Security Agreement, dated as of October 22, 2009 (as amended, supplemented or otherwise modified from time to time), among Alon Refining Louisiana, Inc., Alon Refining Krotz Springs, Inc., each other party joined as a borrower thereunder from time to time, the Lenders party thereto, and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on October 23, 2009, SEC File No. 001-32567). | |
10.31
|
Purchase Agreement dated October 13, 2009, between Alon Refining Krotz Springs, Inc. and Jefferies & Co. (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on October 19, 2009, SEC File No. 001-32567). | |
10.32
|
Management and Consulting Agreement, dated as of August 1, 2003, among Alon USA, Inc., Alon Israel Oil Company, Ltd. and Alon USA Energy, Inc. (incorporated by reference to Exhibit 10.21 to Form S-1, filed by the Company on May 11, 2005, SEC File No. 333-124797). | |
10.33
|
Amendment, dated as of June 17, 2005, to the Management and Consulting Agreement, dated as of August 1, 2003, among Alon USA, Inc., Alon Israel Oil Company, Ltd. and Alon USA Energy, Inc. (incorporated by reference to Exhibit 10.21.1 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). | |
10.34*
|
Executive Employment Agreement, dated as of July 31, 2000, between Jeff D. Morris and Alon USA GP, Inc., as amended by the Amendment to Executive/Management Employment Agreement, dated May 1, 2005 (incorporated by reference to Exhibit 10.23 to Form S-1, filed by the Company on May 11, 2005, SEC File No. 333-124797). |
82
Table of Contents
Exhibit No. | Description of Exhibit | |
10.35*
|
Second Amendment to Executive Employment Agreement, dated as of November 4, 2008, between Jeff D. Morris and Alon USA GP, LLC (incorporated by reference to Exhibit 10.9 to Form 10-Q, filed by the Company on November 7, 2008, SEC File No. 001-32567). | |
10.36*
|
Executive Employment Agreement, dated as of July 31, 2000, between Claire A. Hart and Alon USA GP, Inc., as amended by the Amendment to Executive/Management Employment Agreement, dated May 1, 2005 (incorporated by reference to Exhibit 10.24 to Form S-1, filed by the Company on May 11, 2005, SEC File No. 333-124797). | |
10.37*
|
Second Amendment to Executive Employment Agreement, dated as of November 4, 2008, between Claire A. Hart and Alon USA GP, LLC (incorporated by reference to Exhibit 10.10 to Form 10-Q, filed by the Company on November 7, 2008, SEC File No. 001-32567). | |
10.38*
|
Executive Employment Agreement, dated as of February 5, 2001, between Joseph A. Concienne, III and Alon USA GP, Inc., as amended by the Amendment to Executive/Management Employment Agreement, dated May 1, 2005 (incorporated by reference to Exhibit 10.25 to Form S-1, filed by the Company on May 11, 2005, SEC File No. 333-124797). | |
10.39*
|
Second Amendment to Executive Employment Agreement, dated as of November 4, 2008, between Joseph A. Concienne, III and Alon USA GP, LLC. (incorporated by reference to Exhibit 10.11 to Form 10-Q, filed by the Company on November 7, 2008, SEC File No. 001-32567). | |
10.40*
|
Amended and Restated Management Employment Agreement, dated as of August 9, 2006, between Harlin R. Dean and Alon USA GP, LLC (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on August 10, 2006, SEC File No. 001-32567). | |
10.41*
|
Amendment to Amended and Restated Management Employment Agreement, dated as of November 4, 2008, between Harlin R. Dean and Alon USA GP, LLC (incorporated by reference to Exhibit 10.12 to Form 10-Q, filed by the Company on November 7, 2008, SEC File No. 001-32567). | |
10.42*
|
Management Employment Agreement, dated as of September 1, 2000, between Yosef Israel and Alon USA GP, LLC (incorporated by reference to Exhibit 10.33 to Form 10-K, filed by the Company on March 15, 2006, SEC File No. 001-32567). | |
10.43*
|
Amendment to Executive/Management Employment Agreement, dated as of May 1, 2005 between Yosef Israel and Alon USA GP, LLC (incorporated by reference to Exhibit 10.34 to Form 10-K, filed by the Company on March 15, 2006, SEC File No. 001-32567). | |
10.44*
|
Second Amendment to Executive/Management Employment Agreement, dated as of November 4, 2008, between Yosef Israel and Alon USA GP, LLC (incorporated by reference to Exhibit 10.13 to Form 10-Q, filed by the Company on November 7, 2008, SEC File No. 001-32567). | |
10.45*
|
Executive Employment Agreement, dated as of August 1, 2003, between Shai Even and Alon USA GP, LLC (incorporated by reference to Exhibit 10.49 to Form 10-K, filed by the Company on March 15, 2007, SEC File No. 001-32567). | |
10.46*
|
Amendment to Executive Employment Agreement, dated as of November 4, 2008, between Shai Even and Alon USA GP, LLC. (incorporated by reference to Exhibit 10.14 to Form 10-Q, filed by the Company on November 7, 2008, SEC File No. 001-32567). | |
10.47*
|
Agreement of Principles of Employment, dated as of July 6, 2005, between David Wiessman and Alon USA Energy, Inc. (incorporated by reference to Exhibit 10.50 to Form S-1/A, filed by the Company on July 7, 2005, SEC File No. 333-124797). | |
10.48*
|
Management Employment Agreement, dated as of October 30, 2008, between Michael Oster and Alon USA GP, LLC (incorporated by reference to Exhibit 10.71 to Form 10-K, filed by the Company on April 10, 2009, SEC File No. 001-32567). | |
10.49*
|
Annual Cash Bonus Plan (incorporated by reference to Exhibit 10.27 to Form S-1, filed by the Company on May 11, 2005, SEC File No. 333-124797). | |
10.50*
|
Description of 10% Bonus Plan (incorporated by reference to Exhibit 10.28 to Form S-1, filed by the Company on May 11, 2005, SEC File No. 333-124797). | |
10.51*
|
Description of Annual Bonus Plans (incorporated by reference to Exhibit 10.2 to Form 10-Q, filed by the Company on May 6, 2008, SEC File No. 001-32567). |
83
Table of Contents
Exhibit No. | Description of Exhibit | |
10.52*
|
Change of Control Incentive Bonus Program (incorporated by reference to Exhibit 10.29 to Form S-1, filed by the Company on May 11, 2005, SEC File No. 333-124797). | |
10.53*
|
Description of Director Compensation (incorporated by reference to Exhibit 10.30 to Form S-1, filed by the Company on May 11, 2005, SEC File No. 333-124797). | |
10.54*
|
Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.31 to Form S-1, filed by the Company on May 11, 2005, SEC File No. 333-124797). | |
10.55*
|
Form of Officer Indemnification Agreement (incorporated by reference to Exhibit 10.32 to Form S-1, filed by the Company on May 11, 2005, SEC File No. 333-124797). | |
10.56*
|
Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.33 to Form S-1, filed by the Company on May 11, 2005, SEC File No. 333-124797). | |
10.57*
|
Alon Assets, Inc. 2000 Stock Option Plan (incorporated by reference to Exhibit 10.36 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). | |
10.58*
|
Alon USA Operating, Inc. 2000 Stock Option Plan (incorporated by reference to Exhibit 10.37 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). | |
10.59*
|
Incentive Stock Option Agreement, dated as of July 31, 2000, between Alon Assets, Inc. and Jeff D. Morris, as amended by the Amendment to the Incentive Stock Option Agreement, dated June 30, 2002 (incorporated by reference to Exhibit 10.38 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). | |
10.60*
|
Second Amendment to Incentive Stock Option Agreement, dated as of November 4, 2008, between Jeff D. Morris and Alon Assets, Inc. (incorporated by reference to Exhibit 10.15 to Form 10-Q, filed by the Company on November 7, 2008, SEC File No. 001-32567). | |
10.61
|
Shareholder Agreement, dated as of July 31, 2000, between Alon Assets, Inc. and Jeff D. Morris, as amended by the Amendment to the Shareholder Agreement, dated June 30, 2002 (incorporated by reference to Exhibit 10.39 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). | |
10.62*
|
Incentive Stock Option Agreement, dated as of July 31, 2000, between Alon USA Operating, Inc. and Jeff D. Morris, as amended by the Amendment to the Incentive Stock Option Agreement, dated June 30, 2002 (incorporated by reference to Exhibit 10.40 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). | |
10.63*
|
Second Amendment to Incentive Stock Option Agreement, dated as of November 4, 2008, between Jeff D. Morris and Alon USA Operating, Inc. (incorporated by reference to Exhibit 10.16 to Form 10-Q, filed by the Company on November 7, 2008, SEC File No. 001-32567). | |
10.64
|
Shareholder Agreement, dated as of July 31, 2000, between Alon USA Operating, Inc. and Jeff D. Morris, as amended by the Amendment to the Shareholder Agreement, dated June 30, 2002 (incorporated by reference to Exhibit 10.41 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). | |
10.65*
|
Incentive Stock Option Agreement, dated as of July 31, 2000, between Alon Assets, Inc. and Claire A. Hart, as amended by the Amendment to the Incentive Stock Option Agreement, dated June 30, 2002 and July 25, 2002 (incorporated by reference to Exhibit 10.42 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). | |
10.66
|
Shareholder Agreement, dated as of July 31, 2000, between Alon Assets, Inc. and Claire A. Hart, as amended by the Amendment to the Shareholder Agreement, dated June 30, 2002 (incorporated by reference to Exhibit 10.43 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). | |
10.67*
|
Incentive Stock Option Agreement, dated as of July 31, 2000, between Alon USA Operating, Inc. and Claire A. Hart, as amended by the Amendment to the Incentive Stock Option Agreement, dated June 30, 2002 and July 25, 2002 (incorporated by reference to Exhibit 10.44 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). |
84
Table of Contents
Exhibit No. | Description of Exhibit | |
10.68
|
Shareholder Agreement, dated as of July 31, 2000, between Alon USA Operating, Inc. and Claire A. Hart, as amended by the Amendment to the Shareholder Agreement, dated June 30, 2002 (incorporated by reference to Exhibit 10.45 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). | |
10.69*
|
Incentive Stock Option Agreement, dated as of February 5, 2001, between Alon Assets, Inc. and Joseph A. Concienne, III, as amended by the Amendment to the Incentive Stock Option Agreement, dated July 25, 2002 (incorporated by reference to Exhibit 10.46 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). | |
10.70
|
Shareholder Agreement, dated as of February 5, 2001, between Alon Assets, Inc. and Joseph A. Concienne, III (incorporated by reference to Exhibit 10.47 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). | |
10.71*
|
Incentive Stock Option Agreement, dated as of February 5, 2001, between Alon USA Operating, Inc. and Joseph A. Concienne, III, as amended by the Amendment to the Incentive Stock Option Agreement, dated July 25, 2002 (incorporated by reference to Exhibit 10.48 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). | |
10.72
|
Shareholder Agreement, dated as of February 5, 2001, between Alon USA Operating, Inc. and Joseph A. Concienne, III (incorporated by reference to Exhibit 10.49 to Form S-1/A, filed by the Company on June 17, 2005, SEC File No. 333-124797). | |
10.73
|
Agreement, dated as of July 6, 2005, among Alon USA Energy, Inc., Alon USA, Inc., Alon USA Capital, Inc., Alon USA Operating, Inc., Alon Assets, Inc., Jeff D. Morris, Claire A. Hart and Joseph A. Concienne, III (incorporated by reference to Exhibit 10.52 to Form S-1/A, filed by the Company on July 7, 2005, SEC File No. 333-124797). | |
10.74*
|
Alon USA Energy, Inc. 2005 Incentive Compensation Plan, as amended on November 7, 2005 (incorporated by reference to Exhibit 10.2 to Form 8-K, filed by the Company on November 8, 2005, SEC File No. 001-32567). | |
10.75*
|
Form of Restricted Stock Award Agreement relating to Director Grants pursuant to Section 12 of the Alon USA Energy, Inc. 2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on August 5, 2005, SEC File No. 001-32567). | |
10.76*
|
Form of Restricted Stock Award Agreement relating to Participant Grants pursuant to Section 8 of the Alon USA Energy, Inc. 2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on August 23, 2005, SEC File No. 001-32567). | |
10.77*
|
Form II of Restricted Stock Award Agreement relating to Participant Grants pursuant to Section 8 of the Alon USA Energy, Inc. 2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10.3 to Form 8-K, filed by the Company on November 8, 2005, SEC File No. 001-32567). | |
10.78*
|
Form of Appreciation Rights Award Agreement relating to Participant Grants pursuant to Section 7 of the Alon USA Energy, Inc. 2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on March 12, 2007, SEC File No. 001-32567). | |
10.79*
|
Form of Amendment to Appreciation Rights Award Agreement relating to Participant Grants pursuant to Section 7 of the Alon USA Energy, Inc. 2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10.2 to Form 8-K, filed by the Company on January 27, 2010, SEC File No. 001-32567). | |
10.80*
|
Form II of Appreciation Rights Award Agreement relating to Participant Grants pursuant to Section 7 of the Alon USA Energy, inc. 2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on January 27, 2010, SEC File No. 001-32567). | |
10.81
|
Purchase and Sale Agreements, dated as of February 13, 2006, between Alon Petroleum Pipe Line, LP and Sunoco Pipelines, LP, (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on February 13, 2006, SEC File No. 001-32567). | |
10.82
|
Stock Purchase Agreement, dated as of April 28, 2006, among Alon USA Energy, Inc., The Craig C. Barto and Gisele M. Barto Living Trust, Dated April 5, 1991, The Jerrel C. Barto and Janice D. Barto Living Trust, Dated March 18, 1991, W. Scott Lovejoy, III and Mark R. Milano (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on May 2, 2006, SEC File No. 001-32567). |
85
Table of Contents
Exhibit No. | Description of Exhibit | |
10.83
|
First Amendment to Stock Purchase Agreement, dated as of June 30, 2006, among Alon USA Energy, Inc., The Craig C. Barto and Gisele M. Barto Living Trust, Dated April 5, 1991, The Jerrel C. Barto and Janice D. Barto Living Trust, Dated March 18, 1991, W. Scott Lovejoy III and Mark R. Milano (incorporated by reference to Exhibit 10.1 to Form 10-Q, filed by the Company on November 14, 2006, SEC File No. 001-32567). | |
10.84
|
Second Amendment to Stock Purchase Agreement, dated as of July 31, 2006, among Alon USA Energy, Inc., The Craig C. Barto and Gisele M. Barto Living Trust, Dated April 5, 1991, The Jerrel C. Barto and Janice D. Barto Living Trust, Dated March 18, 1991, W. Scott Lovejoy III and Mark R. Milano (incorporated by reference to Exhibit 10.2 to Form 10-Q, filed by the Company on November 14, 2006, SEC File No. 001-32567). | |
10.85
|
Agreement and Plan of Merger, dated as of April 28, 2006, among Alon USA Energy, Inc., Apex Oil Company, Inc., Edgington Oil Company, and EOC Acquisition, LLC (incorporated by reference to Exhibit 10.2 to Form 8-K, filed by the Company on May 2, 2006, SEC File No. 001-32567). | |
10.86
|
Agreement and Plan of Merger, dated March 2, 2007, by and among Alon USA Energy, Inc., Alon USA Interests, LLC, ALOSKI, LLC, Skinnys, Inc. and the Davis Shareholders (as defined therein) (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on March 6, 2007, SEC File No. 001-32567). | |
10.87
|
Stock Purchase Agreement, dated May 7, 2008, between Valero Refining and Marketing Company and Alon Refining Krotz Springs, Inc. (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on May 13, 2008, SEC File No. 001-32567). | |
10.88
|
First Amendment to Stock Purchase Agreement, dated as of July 3, 2008, by and among Valero Refining and Marketing Company, Alon Refining Krotz Springs, Inc. and Valero Refining Company-Louisiana (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on July 10, 2008, SEC File No. 001-32567). | |
10.89
|
Series A Preferred Stock Purchase Agreement, dated as of July 3, 2008, by and between Alon Refining Louisiana, Inc. and Alon Israel Oil Company, Ltd. (incorporated by reference to Exhibit 10.5 to Form 8-K, filed by the Company on July 10, 2008, SEC File No. 001-32567). | |
10.90
|
Stockholders Agreement, dated as of July 3, 2008, by and among Alon USA Energy, Inc., Alon Refining Louisiana, Inc., Alon Louisiana Holdings, Inc. and Alon Israel Oil Company, Ltd. (incorporated by reference to Exhibit 10.6 to Form 8-K, filed by the Company on July 10, 2008, SEC File No. 001-32567). | |
10.91
|
Amended and Restated Stockholders Agreement dated as of March 31, 2009, by and among Alon USA Energy, Inc., Alon Refining Louisiana, Inc., Alon Louisiana Holdings, Inc. and Alon Israel Oil Company, Ltd. (incorporated by reference to Exhibit 10.88 to Form 10-K, filed by the Company on April 10, 2009, SEC File No. 001-32567). | |
10.92
|
First Amendment to Amended and Restated Stockholders Agreement dated as of December 31, 2009, by and among Alon USA Energy, Inc., Alon Refining Louisiana, Inc., Alon Louisiana Holdings, Inc. and Alon Israel Oil Company, Ltd. (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on January 5, 2010, SEC File No. 001-32567). | |
10.93
|
Offtake Agreement, dated as of July 3, 2008, by and between Valero Marketing and Supply Company and Alon Refining Krotz Springs, Inc. (incorporated by reference to Exhibit 10.9 to Form 10-Q, filed by the Company on August 8, 2008, SEC File No. 001-32567). | |
10.94
|
Earnout Agreement, dated as of July 3, 2008, by and between Valero Refining and Marketing Company and Alon Refining Krotz Springs, Inc. (incorporated by reference to Exhibit 10.10 to Form 10-Q, filed by the Company on August 8, 2008, SEC File No. 001-32567). | |
10.95
|
First Amendment to Earnout Agreement, dated as of August 27, 2009, by and between Valero Refining and Marketing Company and Alon Refining Krotz Springs, Inc. (incorporated by reference to Exhibit 10.1 to Form 10-Q, filed by the Company on November 6, 2009, SEC File No. 001-32567). | |
10.96
|
Revolving Credit Line Agreement dated March 9, 2010 by and between the Company and Israel Discount Bank of New York. | |
10.97
|
Credit Agreement dated as of March 15, 2010 (as amended, supplemented or otherwise modified from time to time), among the Company, each other party joined as a borrower thereunder from time to time, the Lenders party thereto, and Bank Hapoalim B.M., as Administrative Agent. |
86
Table of Contents
Exhibit No. | Description of Exhibit | |
12.1
|
Statement Regarding Computation of Ratio of Earnings to Fixed Charges. | |
21.1
|
Subsidiaries of Alon USA Energy, Inc. | |
23.1
|
Consent of KPMG LLP. | |
31.1
|
Certifications of Chief Executive Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certifications of Chief Financial Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002. |
* | Identifies management contracts and compensatory plans or arrangements. | |
| Filed under confidential treatment request. |
87
Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page | ||||
Audited Consolidated Financial Statements: |
||||
F-2 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
F-9 |
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Alon USA Energy, Inc.:
Alon USA Energy, Inc.:
We have audited the accompanying consolidated balance sheets of Alon USA Energy, Inc. and
subsidiaries as of December 31, 2009 and 2008, 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, 2009. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits 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 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, 2009 and 2008, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
Effective January 1, 2008, the Company adopted the authoritative guidance for fair value measurements as it relates to financial instruments.
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, 2009 based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 16, 2010 expressed an unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
/s/ KPMG LLP
Dallas, Texas
March 16, 2010
March 16, 2010
F-2
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Alon USA Energy, Inc.:
Alon USA Energy, Inc.:
We have audited Alon USA Energy, Inc.s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal ControlIntegrated 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 Managements Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Companys 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 companys 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 companys 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 companys 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, 2009, based on criteria established in
Internal ControlIntegrated 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, 2009 and 2008, 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, 2009, and our report dated March 16, 2010 expressed an unqualified opinion on
those consolidated financial statements.
/s/ KPMG LLP
Dallas, Texas
March 16, 2010
March 16, 2010
F-3
Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
As of December 31, | ||||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 40,437 | $ | 18,454 | ||||
Accounts and other receivables, net |
103,094 | 204,576 | ||||||
Income tax receivable |
65,418 | 116,564 | ||||||
Inventories |
214,999 | 232,320 | ||||||
Deferred income tax asset |
7,700 | | ||||||
Prepaid expenses and other current assets |
4,188 | 81,758 | ||||||
Total current assets |
435,836 | 653,672 | ||||||
Equity method investments |
43,052 | 37,661 | ||||||
Property, plant, and equipment, net |
1,477,426 | 1,448,959 | ||||||
Goodwill |
105,943 | 105,943 | ||||||
Other assets |
70,532 | 167,198 | ||||||
Total assets |
$ | 2,132,789 | $ | 2,413,433 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 248,253 | $ | 233,004 | ||||
Accrued liabilities |
92,380 | 111,317 | ||||||
Current portion of long-term debt |
10,946 | 28,397 | ||||||
Deferred income tax liability |
| 30,570 | ||||||
Total current liabilities |
351,579 | 403,288 | ||||||
Other non-current liabilities |
95,076 | 104,190 | ||||||
Long-term debt |
926,078 | 1,075,172 | ||||||
Deferred income tax liability |
328,138 | 293,916 | ||||||
Total liabilities |
1,700,871 | 1,876,566 | ||||||
Commitments and contingencies (Note 21) |
||||||||
Stockholders equity: |
||||||||
Preferred stock, par value $0.01, 10,000,000 shares
authorized; no shares issued and outstanding |
| | ||||||
Common stock, par value $0.01, 100,000,000 shares
authorized; 54,170,913 and 46,814,021 shares issued and
outstanding at December 31, 2009 and 2008, respectively |
542 | 468 | ||||||
Additional paid-in capital |
289,853 | 183,642 | ||||||
Accumulated other comprehensive loss, net of income tax |
(32,871 | ) | (37,354 | ) | ||||
Retained earnings |
165,248 | 287,895 | ||||||
Total stockholders equity |
422,772 | 434,651 | ||||||
Non-controlling interest in subsidiaries |
9,146 | 17,916 | ||||||
Preferred stock of subsidiary including accumulated dividends |
| 84,300 | ||||||
Total equity |
431,918 | 536,867 | ||||||
Total liabilities and equity |
$ | 2,132,789 | $ | 2,413,433 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net sales (1) |
$ | 3,915,732 | $ | 5,156,706 | $ | 4,542,151 | ||||||
Operating costs and expenses: |
||||||||||||
Cost of sales |
3,502,782 | 4,853,195 | 3,999,287 | |||||||||
Direct operating expenses |
265,502 | 216,498 | 201,196 | |||||||||
Selling, general and administrative expenses |
129,446 | 119,852 | 105,352 | |||||||||
Net costs associated with fire |
| 56,854 | | |||||||||
Business interruption recovery |
| (55,000 | ) | | ||||||||
Depreciation and amortization |
97,247 | 66,754 | 57,403 | |||||||||
Total operating costs and expenses |
3,994,977 | 5,258,153 | 4,363,238 | |||||||||
Gain on involuntary conversion of assets |
| 279,680 | | |||||||||
Gain (loss) on disposition of assets |
(1,591 | ) | 45,244 | 7,206 | ||||||||
Operating income (loss) |
(80,836 | ) | 223,477 | 186,119 | ||||||||
Interest expense |
(111,137 | ) | (67,550 | ) | (47,747 | ) | ||||||
Equity earnings (losses) of investees |
24,558 | (1,522 | ) | 11,177 | ||||||||
Other income, net |
331 | 1,500 | 6,565 | |||||||||
Income (loss) before income tax expense (benefit),
non-controlling interest in income (loss) of subsidiaries,
and accumulated dividends on preferred stock of subsidiary |
(167,084 | ) | 155,905 | 156,114 | ||||||||
Income tax expense (benefit) |
(64,877 | ) | 62,781 | 46,199 | ||||||||
Income (loss) before non-controlling interest in income
(loss) of subsidiaries and accumulated dividends on
preferred stock of subsidiary |
(102,207 | ) | 93,124 | 109,915 | ||||||||
Non-controlling interest in income (loss) of subsidiaries |
(8,551 | ) | 5,941 | 5,979 | ||||||||
Accumulated dividends on preferred stock of subsidiary |
21,500 | 4,300 | | |||||||||
Net income (loss) available to common stockholders |
$ | (115,156 | ) | $ | 82,883 | $ | 103,936 | |||||
Earnings (loss) per share, basic |
$ | (2.46 | ) | $ | 1.77 | $ | 2.22 | |||||
Weighted average shares outstanding, basic (in thousands) |
46,829 | 46,788 | 46,763 | |||||||||
Earnings (loss) per share, diluted |
$ | (2.46 | ) | $ | 1.72 | $ | 2.16 | |||||
Weighted average shares outstanding, diluted (in thousands) |
46,829 | 49,583 | 46,804 | |||||||||
Cash dividends per share |
$ | 0.16 | $ | 0.16 | $ | 0.16 | ||||||
(1) | Includes excise taxes on sales by the retail and branded marketing segment of $47,137, $37,483 and $35,808 for the years ended December 31, 2009, 2008, and 2007, respectively. |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(dollars in thousands)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(dollars in thousands)
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Common | Paid-In | Comprehensive | Retained | Stockholders | Non-controlling | Total | ||||||||||||||||||||||
Stock | Capital | Income (Loss) | Earnings | Equity | Interest (1) | Equity | ||||||||||||||||||||||
Balance at December 31, 2006 |
$ | 468 | $ | 181,622 | $ | (7,400 | ) | $ | 116,056 | $ | 290,746 | $ | 9,116 | $ | 299,862 | |||||||||||||
Stock compensation expense |
| 1,310 | | | 1,310 | 1,112 | 2,422 | |||||||||||||||||||||
Dividends |
| | | (7,490 | ) | (7,490 | ) | (468 | ) | (7,958 | ) | |||||||||||||||||
Income before non-controlling interest
in income of subsidiaries |
| | | 103,936 | 103,936 | 5,979 | 109,915 | |||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||
Defined benefit pension plans, net of
tax of $958 |
| | 1,532 | | 1,532 | 99 | 1,631 | |||||||||||||||||||||
Fair value of interest rate swaps,
net of tax of $1,050 |
| | (1,832 | ) | | (1,832 | ) | (118 | ) | (1,950 | ) | |||||||||||||||||
Total comprehensive income |
103,636 | 5,960 | 109,596 | |||||||||||||||||||||||||
Balance at December 31, 2007 |
468 | 182,932 | (7,700 | ) | 212,502 | 388,202 | 15,720 | 403,922 | ||||||||||||||||||||
Stock compensation expense |
| 710 | | | 710 | (1,062 | ) | (352 | ) | |||||||||||||||||||
Dividends |
| | | (7,490 | ) | (7,490 | ) | (386 | ) | (7,876 | ) | |||||||||||||||||
Sale of preferred stock by subsidiary (1) |
| | | | | 80,000 | 80,000 | |||||||||||||||||||||
Income before non-controlling interest
in income of subsidiaries and
accumulated dividends on preferred stock
of subsidiary (1) |
| | | 82,883 | 82,883 | 10,241 | 93,124 | |||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||
Defined benefit pension plans, net of
tax of $8,780 |
| | (13,481 | ) | | (13,481 | ) | (1,044 | ) | (14,525 | ) | |||||||||||||||||
Fair value of commodity derivative
contracts, net of tax of $677 |
| | (1,071 | ) | | (1,071 | ) | (83 | ) | (1,154 | ) | |||||||||||||||||
Fair value of interest rate swaps,
net of tax of $6,828 |
| | (15,102 | ) | | (15,102 | ) | (1,170 | ) | (16,272 | ) | |||||||||||||||||
Total comprehensive income |
53,229 | 7,944 | 61,173 | |||||||||||||||||||||||||
Balance at December 31, 2008 |
468 | 183,642 | (37,354 | ) | 287,895 | 434,651 | 102,216 | 536,867 | ||||||||||||||||||||
Stock compensation expense |
| 485 | | | 485 | 17 | 502 | |||||||||||||||||||||
Dividends |
| | | (7,491 | ) | (7,491 | ) | (576 | ) | (8,067 | ) | |||||||||||||||||
Conversion of preferred stock of
subsidiary for common stock |
74 | 105,726 | | | 105,800 | (105,800 | ) | | ||||||||||||||||||||
Income (loss) before non-controlling
interest in income (loss) of
subsidiaries and accumulated dividends
on preferred stock of subsidiary (1) |
| | | (115,156 | ) | (115,156 | ) | 12,949 | (102,207 | ) | ||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||
Defined benefit pension plans, plus
tax of $887 |
| | 2,110 | | 2,110 | 162 | 2,272 | |||||||||||||||||||||
Fair value of commodity derivative
contracts, net of tax of $2,000 |
| | (3,166 | ) | | (3,166 | ) | (243 | ) | (3,409 | ) | |||||||||||||||||
Fair value of interest rate swaps,
net of tax of $3,207 |
| | 5,539 | | 5,539 | 421 | 5,960 | |||||||||||||||||||||
Total comprehensive income (loss) |
(110,673 | ) | 13,289 | (97,384 | ) | |||||||||||||||||||||||
Balance at December 31, 2009 |
$ | 542 | $ | 289,853 | $ | (32,871 | ) | $ | 165,248 | $ | 422,772 | $ | 9,146 | $ | 431,918 | |||||||||||||
(1) | Includes $80,000 in sale of preferred stock by subsidiary in connection with the Krotz Springs refinery acquisition in July 2008 and accumulated dividends of $21,500 and $4,300 through December 31, 2009 and 2008, respectively. |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) available to common stockholders |
$ | (115,156 | ) | $ | 82,883 | $ | 103,936 | |||||
Adjustments to reconcile net income (loss) available to common
stockholders to cash provided by (used in) operating activities: |
||||||||||||
Depreciation and amortization |
97,247 | 66,754 | 57,403 | |||||||||
Stock compensation |
502 | 173 | 2,264 | |||||||||
Deferred income tax expense (benefit) |
(5,451 | ) | 177,797 | (2,984 | ) | |||||||
Non-controlling interest in income (loss) of subsidiaries |
(8,551 | ) | 5,941 | 5,979 | ||||||||
Accumulated dividends on preferred stock of subsidiary |
21,500 | 4,300 | | |||||||||
Equity (earnings) losses of investees (net of dividends) |
(5,391 | ) | 4,296 | (1,876 | ) | |||||||
Amortization of debt issuance costs |
7,112 | 4,128 | 2,093 | |||||||||
Amortization of original issuance discount |
328 | | | |||||||||
Write-off of unamortized debt issuance costs |
20,482 | | | |||||||||
Mark-to-market of heating oil hedge |
| (117,452 | ) | | ||||||||
Gain on involuntary conversion of assets |
| (279,680 | ) | | ||||||||
(Gain) loss on disposition of assets |
1,591 | (45,244 | ) | (7,206 | ) | |||||||
Changes in operating assets and liabilities, net of acquisition effects: |
||||||||||||
Accounts and other receivables, net |
67,357 | 59,336 | (144,068 | ) | ||||||||
Income tax receivable |
51,146 | (81,320 | ) | | ||||||||
Inventories |
17,321 | 213,373 | 16,715 | |||||||||
Heating oil crack spread hedge |
117,485 | | | |||||||||
Prepaid expenses and other current assets |
2,164 | 5,933 | 794 | |||||||||
Other assets |
5,992 | (5,264 | ) | 7,561 | ||||||||
Accounts payable |
40,892 | (108,458 | ) | 82,141 | ||||||||
Accrued liabilities |
(25,197 | ) | 17,419 | 8,312 | ||||||||
Other non-current liabilities |
(8,228 | ) | (5,727 | ) | (7,114 | ) | ||||||
Net cash provided by (used in) operating activities |
283,145 | (812 | ) | 123,950 | ||||||||
Cash flows from investing activities: |
||||||||||||
Capital expenditures |
(81,660 | ) | (62,356 | ) | (42,204 | ) | ||||||
Capital expenditures to rebuild the Big Spring refinery |
(46,769 | ) | (362,178 | ) | | |||||||
Capital expenditures for turnarounds and catalysts |
(24,699 | ) | (9,958 | ) | (9,842 | ) | ||||||
Proceeds from insurance to rebuild the Big Spring refinery |
34,125 | 270,885 | | |||||||||
Proceeds from disposition of assets |
| 7,000 | | |||||||||
Earnout payments related to Krotz Springs refinery acquisition |
(19,688 | ) | | | ||||||||
Sale (purchase) of short-term investments, net |
| 27,296 | (27,296 | ) | ||||||||
Acquisition of Krotz Springs refinery |
| (481,011 | ) | | ||||||||
Acquisition of Skinnys, Inc. stock |
| | (75,329 | ) | ||||||||
Acquisition of Paramount Petroleum Corporation stock |
| | 7,417 | |||||||||
Net cash used in investing activities |
(138,691 | ) | (610,322 | ) | (147,254 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Dividends paid to non-controlling interest shareholders |
(576 | ) | (386 | ) | (468 | ) | ||||||
Dividends paid to shareholders |
(7,491 | ) | (7,490 | ) | (7,490 | ) | ||||||
Proceeds from sale of preferred stock by subsidiary |
| 80,000 | | |||||||||
Cash received from inventory supply agreement |
20,237 | | | |||||||||
Deferred debt issuance costs |
(17,768 | ) | (28,105 | ) | (2,235 | ) | ||||||
Revolving credit facilities, net |
(60,241 | ) | 276,818 | | ||||||||
Additions to long-term debt |
205,365 | 252,000 | 46,334 | |||||||||
Payments on long-term debt |
(261,997 | ) | (11,864 | ) | (8,388 | ) | ||||||
Net cash provided by (used in) financing activities |
(122,471 | ) | 560,973 | 27,753 | ||||||||
Net increase (decrease) in cash and cash equivalents |
21,983 | (50,161 | ) | 4,449 | ||||||||
Cash and cash equivalents, beginning of period |
18,454 | 68,615 | 64,166 | |||||||||
Cash and cash equivalents, end of period |
$ | 40,437 | $ | 18,454 | $ | 68,615 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Supplemental cash flow information: |
||||||||||||
Cash paid for interest, net of capitalized interest |
$ | 87,164 | $ | 58,504 | $ | 48,686 | ||||||
Cash (received) paid for income tax, net of refunds |
$ | (111,791 | ) | $ | (30,334 | ) | $ | 91,781 | ||||
Non-cash activities: |
||||||||||||
Financing activity payments on long-term debt from
deposit held to secure heating oil crack spread hedge |
$ | 50,000 | $ | | $ | | ||||||
Financing activity proceeds from borrowings
retained by bank as deposit for hedge related
activities for Krotz Springs refinery acquisition |
$ | | $ | 50,000 | $ | | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
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. Alons 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
and Long Beach, California; and a light sweet crude oil refinery located in Krotz Springs,
Louisiana. Because we operate the Long Beach refinery as an extension of the Paramount refinery
and due to their physical proximity to one another, we refer to the Long Beach and Paramount
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.
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 at our Paramount refinery to wholesale distributors, other
refiners and third parties primarily on the West Coast. Our Long Beach refinery produces asphalt
products. Unfinished fuel products and intermediates produced at our Long Beach refinery are
transferred to our Paramount refinery via pipeline and truck for further processing or sold to
third parties.
The Krotz Springs refinery supplies multiple demand centers in the Southern and Eastern United States markets through the Colonial products pipeline system. Krotz Springs liquid product yield is
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. Alons 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.
Alons 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.
F-9
Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
Retail and Branded Marketing Segment. Our retail and branded marketing segment operates 308
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. Historically,
substantially all of the motor fuel sold through our retail operations and the majority of the
motor fuel marketed in our branded business was supplied by our Big Spring refinery. As a result
of the February 18, 2008 fire at our Big Spring refinery, branded marketing primarily acquired
motor fuel from third-party suppliers during the period the refinery was down and continued to
acquire motor fuels to a lesser extent when the refinery began partial production on April 5, 2008
through September 30, 2008. We market gasoline and diesel under the FINA brand name through a
network of approximately 650 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 300 licensed locations that are not under fuel supply
agreements with us. 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.
(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) Adoption of New Accounting Standards
As previously disclosed in Alons Quarterly Report on Form 10-Q for the quarter ended March
31, 2009, Alon adopted the provisions of Statement of Financial Accounting Standards (SFAS) No.
160, Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB 51 (SFAS
No. 160), effective January 1, 2009. SFAS No. 160 requires retrospective reclassification for
all periods presented for non-controlling interests (previously referred to as minority interests)
to the equity section of the consolidated balance sheets and changes in the presentation of income
in the consolidated statements of operations.
These consolidated financial statements present changes required under SFAS No. 160 for
periods prior to the adoption as of January 1, 2009. For further information on the impacts of the
adoption of SFAS No. 160 on our consolidated financial statements, refer to (w) New Accounting
Standards and Disclosures.
(c) 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.
(d) 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 customers 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.
F-10
Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
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.
Alons present excise taxes on sales by Alons 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.
(e) 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 and commissions. Cost of goods excludes depreciation and amortization, which is presented
separately in the consolidated statements of operations.
Direct operating expenses, which relate to Alons 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 Alons 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 and financing fees, amortization of deferred debt issuance costs and the write-off of unamortized debt issuance costs but excludes capitalized interest.
(f) 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.
(g) Accounts Receivable
The majority of accounts receivable is due from companies in the petroleum industry. Credit
is extended based on evaluation of the customers 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.
(h) Inventories
Crude oil, refined products and blendstocks for the refining and unbranded marketing segment
and asphalt for the asphalt segment are stated at the lower of cost or market. Cost is determined
under the last-in, first-out (LIFO)
F-11
Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
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.
(i) 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.
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 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.
(j) HEP Investment
The investment in Holly Energy Partners, LP (HEP) consists of 937,500 of subordinated class
B limited partnership units in HEP and is accounted for under the equity method. These units may
be converted into common units after March 2010, or before as described in the limited partnership
agreement. The fair market value of 937,500 HEP common units as of December 31, 2009 was $36,482.
(k) 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 month 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.
(l) 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
F-12
Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
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 managements judgment and
assumptions. Assets to be disposed of are reported at the lower of the carrying amount or fair
value less costs of disposition.
(m) Asset Retirement Obligations
Alon uses SFAS No. 143, Accounting for Asset Retirement Obligations (superseded by Accounting
Standards Codification (ASC) topic 410-20), 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 SFAS No. 143 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. Alon also uses Financial Accounting Standards Board
(FASB) Interpretation No. 47, Accounting for Conditional Retirement Obligations (FIN 47)
(superseded by ASC topic 410-20), which 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 13).
(n) 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.
(o) 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.
(p) 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 20).
F-13
Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
(q) 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 Alons 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 12). Estimates are updated to reflect
changes in factual information, available technology or applicable laws and regulations.
(r) Earnings Per Share
Earnings per share are computed by dividing net income (loss) available to common stockholders
by the weighted average of the 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 19).
(s) 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.
(t) 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.
(u) 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.
(v) 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.
F-14
Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
(w) New Accounting Standards and Disclosures
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162
(SFAS No. 168) (superseded by ASC topic 105-10-5). SFAS
No. 168 stipulates the FASB Accounting Standards Codification is the source of authoritative U.S.
GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS No. 168 is effective
for financial statements issued for interim and annual periods ending after September 15, 2009.
The adoption did not have any effect on Alons consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165) (superseded by
ASC topic 855-10-5). SFAS No. 165 provides guidance on managements assessment of subsequent
events and incorporates this guidance into accounting literature. SFAS No. 165 is effective
prospectively for interim and annual periods ending after June 15, 2009. There was no effect on
Alons results of operations or financial position, and the required disclosures are included in
Note 23.
In December 2008, FASB issued FASB Staff Position FAS 132(R)-1, Employers Disclosures about
Postretirement Benefit Plans (FSP FAS 132(R)-1), which amends FASB Statement 132 (revised 2003),
Employers Disclosures about Pensions and Other Postretirement Benefits, to provide guidance on
employers disclosures about plan assets of defined benefit pension or other postretirement plan.
The disclosures are intended to provide users of financial statements an understanding of the
determination of investment allocations, the major categories of plan assets, inputs and valuation
techniques used to measure fair value of plan assets, and significant concentrations of credit risk
with plan assets. FSP FAS 132(R)-1 is effective for years ending after December 15, 2009. Since
FSP FAS 132(R)-1 only affects disclosure requirements, there was no effect on Alons results of
operations or financial position.
In November 2008, the FASB ratified its consensus on Emerging Issues Task Force (EITF) Issue
No. 08-6, Equity Method Investment Accounting Considerations. The scope of the Issue applies to
all investments accounted for under the equity method. The Issue covers the initial measurement of
an equity method investment, recognition of other-than-temporary impairments, and the effects on
ownership of the investor due to the issuance of shares by the investee. The Issue is effective
for fiscal years beginning after December 15, 2008. The adoption did not have any effect on Alons
consolidated financial statements.
In June 2008, the FASB ratified its consensus on EITF Issue No. 08-3, Accounting by Lessees
for Maintenance Deposits, which applies to the lessees accounting for maintenance deposits paid by
a lessee under an arrangement accounted for as a lease that are refunded only if the lessee
performs specified maintenance activities and deposits within the scope of the Issue shall be
accounted for as deposit assets. The effect of the change shall be recognized as a change in
accounting principle as of the beginning of the fiscal year in which the consensus is initially
applied for all arrangements existing at the effective date. This Issue is effective for fiscal
years beginning after December 15, 2008. The adoption did not have any effect on Alons
consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position FAS 142-3, Determination of the Useful Life
of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008 and early adoption is prohibited. The
adoption did not have any effect on Alons consolidated financial statements.
In March 2008, the
FASB issued SFAS No. 161, Disclosure about Derivative Instruments and
Hedging Activities (SFAS No. 161) (superseded by ASC topic 815-10-65), which established disclosure requirements for hedging
activities. SFAS No. 161 requires that entities disclose the purpose and strategy for using
derivative instruments, include discussion regarding the method for accounting for the derivative
and the related hedged items under SFAS No. 133 and the derivative and related hedged items effect
on a companys financial statements. SFAS No. 161 also requires quantitative disclosures about the
fair values of derivative instruments and their gains or losses in tabular format as well as
discussion regarding contingent credit-risk features in derivative agreements and counterparty
risk. The statement is
F-15
Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after November 15, 2008. There was no effect on Alons results of operations or financial position, and the required
disclosures are included in Note 8.
Effective January 1, 2008, Alon adopted the provisions of SFAS No. 157, Fair Value
Measurements (superseded by ASC topic 741-10), which pertain to certain balance sheet items measured at fair value on a recurring
basis. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and
expands disclosures about such measurements that are permitted or required under other accounting
pronouncements. While SFAS No. 157 may change the method of calculating fair value, it does not
require any new fair value measurements.
In February 2008, the FASB issued FASB Staff Position FAS 157-2, Partial Deferral of the
Effective Date of Statement 157 (FSP FAS 157-2) (superseded by ASC topic 820-10-65). FSP FAS 157-2 delays the effective date of SFAS
No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized
or disclosed at fair value in the financial statements on a recurring basis (at least annually) to
fiscal years beginning after November 15, 2008. The adoption did not have any effect on Alons
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, which requires non-controlling interests
(previously referred to as minority interests) to be treated as a separate component of equity and
changes the presentation of income in the consolidated statements of operations. For consolidated
subsidiaries that are less than wholly-owned, the third-party holdings of equity interests are
referred to as non-controlling interests. The portion of income attributable to non-controlling
interests is presented as non-controlling interest in income (loss) of subsidiaries in the
consolidated statements of operations and the portion of total equity of such subsidiaries is
presented as non-controlling interest in subsidiaries in the consolidated balance sheets.
Additionally, SFAS No. 160 requires that comprehensive income (loss) be attributed to
non-controlling interests. SFAS No. 160 was effective for periods beginning on or after December
15, 2008 and earlier application was prohibited.
As previously mentioned in Note 2(b), Alon adopted the provisions of SFAS No. 160 effective
January 1, 2009. SFAS No. 160 requires comparative period information to be recast to classify
non-controlling interests in equity, attribute net income and other comprehensive income to
non-controlling interests, and provide other disclosures.
The effect of the adoption of SFAS No. 160 on the consolidated balance sheet as of December
31, 2008 is summarized below:
December 31, | December 31, | |||||||||||
2008 | Adjustments | 2008 | ||||||||||
(as previously | ||||||||||||
reported) | (recast) | |||||||||||
Total stockholders equity |
$ | 431,919 | $ | 2,732 | $ | 434,651 | ||||||
Non-controlling interest in subsidiaries (1) |
| 17,916 | 17,916 | |||||||||
Preferred stock of subsidiary including accumulated dividends (1) |
| 84,300 | 84,300 | |||||||||
Total equity |
$ | 431,919 | $ | 104,948 | $ | 536,867 | ||||||
(1) | Previously reported outside of equity. |
The adjustments reflect the attribution of unrealized gains or losses historically recorded to
accumulated other comprehensive loss, net of income tax, to non-controlling interest in
subsidiaries, and the reclassification of non-controlling interest in subsidiaries and preferred
stock of subsidiary including accumulated dividends, into equity.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (superseded by ASC topic 805-10), which requires that
the purchase method of accounting be used for all business combinations. SFAS No. 141(R) requires
most identifiable assets, liabilities, non-controlling interests, and goodwill acquired in a
business combination be recorded at full fair value. SFAS No. 141(R) applies to all business
combinations, including combinations by contract alone. SFAS No. 141(R) is effective for periods
beginning on or after December 15, 2008 and earlier application is prohibited. SFAS No. 141(R)
will be applied to business combinations occurring after the effective date.
F-16
Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
(x) Reclassifications
Certain reclassifications have been made to the prior period balances to conform to the
current presentation.
(3) 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.
Alons 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 Alons 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 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.
(4) Acquisitions
Krotz Springs Refinery Acquisition
On July 3, 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
effective date of the acquisition was July 1, 2008. 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 Alons 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, 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 product pipeline system. Krotz Springs liquid product yield is
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.
The cash portion of the Purchase Price and working capital payment were funded in part by
borrowings under a $302,000 term loan credit facility and borrowings under a $400,000 revolving
credit facility (Note 15).
F-17
Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
Additionally, funds for a portion of the Purchase Price were provided through an $80,000
equity investment by Alon Israel Oil Company, Ltd., the Companys majority stockholder, in
preferred stock of a new Alon holding company subsidiary, which may be exchanged for shares of Alon
common stock (Note 17). The shares of the new subsidiary have a par value of $1,000.00 per share
and accrue dividends at a rate of 10.75% per annum. The dividends are cumulative and paid upon
approval of Alons board of directors. In addition, Alon Israel Oil Company, Ltd. provided for the
issuance of $55,000 in letters of credit to support increased borrowing capacity
under the $400,000 revolving credit facility. A committee of independent and disinterested
members of Alons board of directors negotiated and approved these transactions.
The Purchase Price has been allocated based on fair values of the assets and liabilities
acquired at the date of acquisition. The Purchase Price has been determined as set forth below:
Cash paid |
$ | 474,494 | ||
Transaction costs |
6,517 | |||
Total Purchase Price |
$ | 481,011 | ||
The Purchase Price was allocated as follows:
Current assets |
$ | 145,859 | ||
Property, plant and equipment |
376,702 | |||
Current liabilities |
(29,309 | ) | ||
Other non-current liabilities |
(12,241 | ) | ||
Total Purchase Price |
$ | 481,011 | ||
In connection with the acquisition, Alon entered into an earnout agreement with Valero, dated
as of July 3, 2008, that provided for up to three annual payments to Valero based on the average
market prices for crude oil, regular unleaded gasoline, and ultra low-sulfur diesel in each of the
three twelve month periods following the acquisition. In August 2009, Alon amended the earnout
agreement with Valero to replace future earnout payments with fixed future payments. As a result,
Alon has paid Valero approximately $19,688 in 2009 and has agreed to pay Valero an additional sum
of $15,312 in seven installments of approximately $2,188 per quarter through the third quarter of
2011 for earnout payments in an aggregate amount of $35,000. As a result, $35,000 is reflected as
an addition to property, plant and equipment with increases of $8,750 to accrued liabilities and
$6,562 to other non-current liabilities on the consolidated balance sheet at December 31, 2009
after giving effect to the 2009 payments.
Alon and Valero also entered into an offtake agreement that provides for Valero to purchase at
market prices, certain specified products and other products as may be mutually agreed upon from
time to time. These products include regular and premium unleaded gasoline, ultra low-sulfur
diesel, jet fuel, light cycle oil, high sulfur diesel, No. 2 blendstock, butane/butylene, poly C4,
normal butane, LPG mix, propane/propylene, high sulfur slurry, low-sulfur atmospheric tower bottoms
and ammonium thiosulfate. The term of the offtake agreement as it applies to the products produced
by the refinery is as follows: (i) five years for light cycle oil and straight run diesel; (ii) one
year for regular and premium unleaded gasoline; and (iii) three months for the remaining refined
products (each such term beginning October 2008).
Unaudited Pro Forma Financial Information
The consolidated statements of operations include the results of the Krotz Springs refinery
acquisition from July 1, 2008. The following unaudited pro forma financial information for Alon
assumes:
| The acquisition of the Krotz Springs refining business occurred on January 1, 2008; | ||
| $302,000 of term debt and $141,494 of borrowings under the revolving credit facility was incurred on January 1, 2008 to fund the acquisition and buy initial inventories; and | ||
| Depreciation expense was higher beginning January 1, 2008 based upon the revaluation of estimated asset values as of that date. |
F-18
Table of Contents
ALON USA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except as noted)
Year Ended | ||||||||
December 31, | ||||||||