UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-32721

WESTERN REFINING, INC.

(Exact name of registrant as specified in its charter)

Delaware		20-3472415
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
123 W. Mills Ave., Suite 200
El Paso, Texas		79901
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (915) 534-1400

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (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 Rule 12b-2 of the Exchange Act). Yes o No þ

As of April 30, 2010, there were 88,886,716 shares outstanding, par value $0.01, of the registrant’s common stock.

 

 

WESTERN REFINING, INC. AND SUBSIDIARIES

INDEX

		Page No.
Part I. Financial Information
Item 1. Financial Statements			1
Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009 (Unaudited)			1
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009 (Unaudited)			2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (Unaudited)			3
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2010 and 2009 (Unaudited)			4
Notes to Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures about Market Risk			46
Item 4. Controls and Procedures			47
Part II. Other Information
Item 1. Legal Proceedings			49
Item 1A. Risk Factors			50
Item 6. Exhibits			51
Signatures			52
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Forward-Looking Statements

     As provided by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, certain statements included throughout this Quarterly Report on Form 10-Q, and in particular under the sections entitled Part I — Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II — Item 1, “Legal Proceedings” relating to matters that are not historical fact are forward-looking statements that represent management’s beliefs and assumptions based on currently available information. These forward-looking statements relate to matters such as our industry, business strategy, goals, and expectations concerning our market position, future operations, margins, profitability, deferred taxes, capital expenditures, liquidity and capital resources, our working capital requirements, our ability to improve our capital structure through asset sales and/or through certain financings, and other financial and operating information. Forward-looking statements also include those regarding the timing of completion of certain operational improvements we are making at our refineries, future operational or refinery efficiencies and cost savings, future refining capacity, timing of future maintenance turnarounds, the amount or sufficiency of future cash flows and earnings growth, future expenditures and future contributions related to pension and postretirement obligations, our ability to manage our inventory price exposure through commodity derivative instruments, the impact on our business of existing and future state and federal regulatory requirements, environmental loss contingency accruals, projected remediation costs or requirements, and the expected outcomes of legal proceedings in which we are involved. We have used the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “will,” “future,” and similar terms and phrases to identify forward-looking statements in this report.

     Forward-looking statements reflect our current expectations regarding future events, results, or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations, and cash flows.

     Actual events, results, and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, the following:

	•		our ability to realize the synergies from our acquisition of Giant Industries, Inc., or Giant;
	•		adverse changes in the credit ratings assigned to our debt instruments;
	•		conditions in the capital markets;
	•		our ability to raise additional funds for our working capital needs in the public or private debt or equity markets;
	•		adverse changes in our crude oil suppliers’ view as to our creditworthiness;
	•		worsening of the economic downturn and instability and volatility in the financial markets;
	•		changes in the underlying demand for our refined products;
	•		availability, costs, and price volatility of crude oil, other refinery feedstocks, and refined products;
	•		changes in crack spreads;
	•		changes in the spread between West Texas Intermediate, or WTI, crude oil and West Texas Sour, or WTS, crude oil, also known as the sweet/sour spread;
	•		changes in the spread between WTI crude oil and Mayan crude oil, also known as the light/heavy spread;
	•		changes in the spread between WTI crude oil and Dated Brent crude oil;

	•		construction of new, or expansion of existing, product pipelines in the areas that we serve;
	•		actions of customers and competitors;
	•		changes in fuel and utility costs incurred by our refineries;
	•		disruptions due to equipment interruption, pipeline disruptions, or failure at our or third-party facilities;
	•		execution of planned capital projects, cost overruns relating to those projects, and failure to realize the expected benefits from those projects;
	•		effects of, and costs relating to, compliance with current and future local, state, and federal environmental, economic, climate change, safety, tax and other laws, policies and regulations, and enforcement initiatives;
	•		rulings, judgments or settlements in litigation, or other legal or regulatory matters, including unexpected environmental remediation costs, in excess of any reserves or insurance coverage;
	•		the price, availability, and acceptance of alternative fuels and alternative-fuel vehicles;
	•		operating hazards, natural disasters, casualty losses, acts of terrorism, and other matters beyond our control; and
	•		other factors discussed in more detail under Part I. — Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, or 2009 10-K, which are incorporated herein by this reference, and in Part II. — Item 1. “Legal Proceedings” of this Quarterly Report on Form 10-Q.

     Any one of these factors or a combination of these factors could materially affect our results of operations and could influence whether any forward-looking statements ultimately prove to be accurate. You are urged to consider these factors carefully in evaluating any forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements.

     Although we believe that our plans, intentions, and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can provide no assurance that such plans, intentions, or expectations will be achieved. These statements are based on assumptions made by us based on our experience and perception of historical trends, current conditions, expected future developments, and other factors that we believe are appropriate in the circumstances. Such statements are subject to a number of risks and uncertainties, many of which are beyond our control. The forward-looking statements included herein are made only as of the date of this report, and we are not required to update any information to reflect events or circumstances that may occur after the date of this report, except as required by applicable law.

Part I
Financial Information

Item 1. Financial Statements

WESTERN REFINING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)

		March 31,				December 31,
		2010				2009
ASSETS
Current assets:
Cash and cash equivalents		$	25,330			$	74,890
Accounts receivable, principally trade, net of a reserve for doubtful accounts of $1,724 and $1,571, respectively			333,586				337,559
Inventories			460,088				422,753
Prepaid expenses			139,332				29,216
Other current assets			36,231				79,740
Total current assets			994,567				944,158
Property, plant, and equipment, net			1,753,471				1,767,900
Intangible assets, net			60,723				61,693
Other assets, net			48,564				50,903
Total assets		$	2,857,325			$	2,824,654
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	399,594			$	405,684
Accrued liabilities			120,940				118,569
Current deferred income tax liability, net			41,672				45,651
Current portion of long-term debt			183,000				63,000
Total current liabilities			745,206				632,904
Long-term liabilities:
Long-term debt, less current portion			1,054,308				1,053,664
Deferred income tax liability, net			354,289				391,348
Environmental, postretirement, and other liabilities			45,137				58,286
Total long-term liabilities			1,453,734				1,503,298
Commitments and contingencies (Note 19)
Stockholders’ equity:
Common stock, par value $0.01, 240,000,000 shares authorized; 88,913,488 and 88,688,717 shares issued, respectively			889				887
Preferred stock, par value $0.01, 10,000,000 shares authorized; no shares issued and outstanding			—				—
Additional paid-in capital			583,775				583,458
Retained earnings			96,231				126,920
Accumulated other comprehensive loss, net of tax			(1,067	)			(1,370	)
Treasury stock, 698,006 shares at cost			(21,443	)			(21,443	)
Total stockholders’ equity			658,385				688,452
Total liabilities and stockholders’ equity		$	2,857,325			$	2,824,654

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

WESTERN REFINING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

		Three Months Ended
		March 31,
		2010				2009
Net sales		$	1,915,395			$	1,368,198
Operating costs and expenses:
Cost of products sold (exclusive of depreciation and amortization)			1,765,461				1,047,831
Direct operating expenses (exclusive of depreciation and amortization)			106,980				133,538
Selling, general and administrative expenses			16,501				35,018
Maintenance turnaround expense			23,286				104
Depreciation and amortization			34,282				34,240
Total operating costs and expenses			1,946,510				1,250,731
Operating income (loss)			(31,115	)			117,467
Other income (expense):
Interest income			30				143
Interest expense and other financing costs			(36,774	)			(27,055	)
Amortization of loan fees			(2,414	)			(1,554	)
Other income (expense)			(294	)			922
Income (loss) before income taxes			(70,567	)			89,923
Provision for income taxes			39,878				(30,995	)
Net income (loss)		$	(30,689	)		$	58,928
Net earnings (loss) per share:
Basic		$	(0.35	)		$	0.86
Diluted		$	(0.35	)		$	0.86
Weighted average common shares outstanding:
Basic			88,006				67,817
Diluted			88,006				67,817

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

WESTERN REFINING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

		Three Months Ended
		March 31,
		2010				2009
Cash flows from operating activities:
Net income (loss)		$	(30,689	)		$	58,928
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			34,282				34,240
Amortization of loan fees			2,414				1,554
Amortization of original issue discount			3,894				—
Stock-based compensation expense			1,177				994
Deferred income taxes			(41,038	)			26,925
Gain (loss) on disposal of assets			(71	)			287
Changes in operating assets and liabilities:
Accounts receivable			3,973				(14,383	)
Inventories			(37,335	)			(37,121	)
Prepaid expenses			(110,116	)			19,799
Other assets			43,497				324
Accounts payable			(6,137	)			30,751
Accrued liabilities			1,513				(21,502	)
Postretirement and other long-term liabilities			(12,936	)			(3,956	)
Net cash provided by (used in) operating activities			(147,572	)			96,840
Cash flows from investing activities:
Capital expenditures			(18,843	)			(38,655	)
Proceeds from the sale of assets			105				—
Net cash provided by (used in) investing activities			(18,738	)			(38,655	)
Cash flows from financing activities:
Payments on long-term debt			(3,250	)			(3,250	)
Revolving credit facility, net			120,000				(60,000	)
Repurchases of common stock			—				(523	)
Net cash provided by (used in) financing activities			116,750				(63,773	)
Net decrease in cash and cash equivalents			(49,560	)			(5,588	)
Cash and cash equivalents at beginning of period			74,890				79,817
Cash and cash equivalents at end of period		$	25,330			$	74,229
Supplemental Disclosures of Cash Flow Information Cash paid (refunded) for:
Income taxes		$	(50,732	)		$	(1,974	)
Interest			20,968				44,094
Non-cash investing and financing activities:
Capital expenditures accrued in accounts payable			379				8,161

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

WESTERN REFINING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)

		Three Months Ended
		March 31,
		2010				2009
Net income (loss)		$	(30,689	)		$	58,928
Other comprehensive income (loss) items:
Defined benefit plans:
Pension plan settlement adjustment, net of tax of $(164)			278				—
Reclassification of losses to operations, net of tax of $(29) and $(155), respectively			25				273
Other comprehensive income, net of tax			303				273
Comprehensive income (loss)		$	(30,386	)		$	59,201

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

WESTERN REFINING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Organization

     The “Company” or “Western” may be used to refer to Western Refining, Inc. and, unless the context otherwise requires, its subsidiaries. Any references to the “Company” as of a date prior to September 16, 2005 (the date of Western Refining, Inc.’s formation) are to Western Refining Company, L.P. (“Western Refining LP”). On May 31, 2007, the Company completed the acquisition of Giant Industries, Inc. (“Giant”). Any references to the “Company” prior to this date exclude the operations of Giant.

     The Company is an independent crude oil refiner and marketer of refined products and also operates service stations and convenience stores. The Company owns and operates three refineries with a total crude oil throughput capacity of approximately 221,000 barrels per day (“bpd”). In addition to the Company’s 128,000 bpd refinery in El Paso, Texas, the Company also owns and operates a 70,000 bpd refinery on the East Coast of the United States near Yorktown, Virginia and a refinery near Gallup in the Four Corners region of Northern New Mexico with a throughput capacity of 23,000 bpd. Until November 2009, the Company also operated a 17,000 bpd refinery near Bloomfield, New Mexico. The Company indefinitely suspended refining operations at the Bloomfield refinery in late November 2009. The Company continues to operate Bloomfield as a refinery terminal. The Company’s primary operating areas encompass West Texas, Arizona, New Mexico, Utah, Colorado, and the Mid-Atlantic region. In addition to the refineries, the Company also owns and operates stand-alone refined product distribution terminals in Flagstaff, Arizona; Bloomfield, New Mexico; and Albuquerque, New Mexico, as well as asphalt terminals in Phoenix and Tucson, Arizona; Albuquerque; and El Paso. As of March 31, 2010, the Company also owned and operated 150 retail service stations and convenience stores in Arizona, Colorado, and New Mexico; a fleet of crude oil and finished product truck transports; and a wholesale petroleum products distributor that operates in Arizona, California, Colorado, Nevada, New Mexico, Texas, and Utah.

     The Company’s operations include three business segments: the refining group, the retail group, and the wholesale group. Prior to the Giant acquisition, the Company operated as one business segment. See Note 3, “Segment Information” for a further discussion of the Company’s business segments.

     Demand for gasoline is generally higher during the summer months than during the winter months. In addition, higher volumes of ethanol are blended to the gasoline produced in the Southwest region during the winter months, thereby increasing the supply of gasoline. This combination of decreased demand and increased supply during the winter months can lower gasoline prices. Consequently, the Company’s operating results for the first and fourth calendar quarters are generally lower than those for the second and third calendar quarters of each year. The effects of seasonal demand for gasoline are partially offset by increased demand during the winter months for diesel fuel in the Southwest and heating oil in the Northeast. Volatile refining margins continued to affect the Company’s results of operations during the first quarter of 2010. The Company’s refining margins improved slightly during the first quarter of 2010 compared to the fourth quarter of 2009; however they were still significantly lower than those realized during the first quarter 2009.

2. Basis of Presentation, Significant Accounting Policies, and Recent Accounting Pronouncements

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010, or for any other period.

     The Condensed Consolidated Balance Sheet at December 31, 2009, has been derived from the audited financial statements of the Company at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (“2009 Form 10-K”).

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

     The condensed consolidated financial statements include the accounts of Western Refining, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Cash Equivalents

     Cash equivalents consist of investments in money market accounts. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be a cash equivalent. Included within our cash balances of $25.3 million and $74.9 million on March 31, 2010 and December 31, 2009, respectively, were $0.05 million and $5.4 million, respectively, in cash equivalents included in the Company’s Condensed Consolidated Balance Sheets.

Use of Estimates

     The preparation of financial statements in conformity with U.S. GAAP 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

     From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that may have an impact on the Company’s accounting and reporting. The Company believes that such recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting or reporting or that such impact will not be material to its financial position, results of operations, and cash flows when implemented.

Reclassifications

     Cost of products sold (exclusive of depreciation and amortization) for the three months ended March 31, 2009 includes $1.2 million in economic hedging losses previously reported as loss from derivative activities under other income (expense) in the first quarter 2009 Condensed Consolidated Statement of Operations. This reclassification in the prior year was made to conform to the current presentation. Inclusion of these amounts in cost of products sold for the period provides a better matching of costs to revenues than the Company’s previous presentation as all related derivative trading activity is for the purpose of reducing the Company’s exposure to crude oil, other feedstock, and refined product price risk. Cost of products sold (exclusive of depreciation and amortization) for the three months ended March 31, 2010 includes $2.8 million in economic hedging losses.

3. Segment Information

     The Company is organized into three operating segments based on manufacturing and marketing criteria and the nature of their products and services, their production processes, and their types of customers. These segments are the refining group, the retail group, and the wholesale group. A description of each segment and its principal products follows:

     Refining Group. The Company’s refining group operates three refineries: one in El Paso, Texas (the El Paso refinery); one near Gallup, New Mexico (the Gallup refinery); and one near Yorktown, Virginia (the Yorktown refinery). The refining group also operates a crude oil transportation and gathering pipeline system in New Mexico, an asphalt plant in El Paso, three stand-alone refined product distribution terminals, and four asphalt terminals. The three refineries make various grades of gasoline, diesel fuel, and other products from crude oil; other feedstocks; and blending components. The Company purchases crude oil, other feedstocks, and blending components from various suppliers. The Company also acquires refined products through exchange agreements and from various third-party suppliers. The Company sells these products through its own service stations, its own wholesale group, independent wholesalers and retailers, commercial accounts, and sales and exchanges with major oil companies.

     Retail Group. The Company’s retail group operates service stations, which include convenience stores or kiosks. The service stations sell various grades of gasoline, diesel fuel, general merchandise, and beverage and food products to the general public. The Company’s refining and/or wholesale groups supply the gasoline and diesel fuel that the retail group sells. The Company purchases general merchandise and beverage and food products from various suppliers. At March 31, 2010, the Company’s retail group operated 150 service stations and convenience stores or kiosks located in Arizona, New Mexico, and Colorado.

     Wholesale Group. The Company’s wholesale group includes several lubricant and bulk petroleum distribution plants, unmanned fleet fueling operations, a bulk lubricant terminal facility, and a fleet of refined product and lubricant delivery trucks. The wholesale group distributes commercial wholesale petroleum products primarily in Arizona, California, Colorado, Nevada, New Mexico, Texas, and Utah. The Company’s wholesale group purchases petroleum fuels and lubricants from suppliers and from the refining group.

     Segment Accounting Principles. Operating income for each segment consists of net revenues less cost of products sold; direct operating expenses; selling, general and administrative expenses; maintenance turnaround expense; and depreciation and amortization. Cost of products sold reflects current costs adjusted, where appropriate, for last-in, first-out (“LIFO”) and lower of cost or market (“LCM”) inventory adjustments. Intersegment revenues are reported at prices that approximate market.

     Operations that are not included in any of the three segments mentioned above are included in the category “Other.” These operations consist primarily of corporate staff operations and other items not considered to be related to the normal business operations of the other segments. Other items of income and expense, including income taxes, are not allocated to operating segments.

     The total assets of each segment consist primarily of cash and cash equivalents; net property, plant, and equipment; inventories; net accounts receivable; goodwill; and other assets directly associated with the individual segment’s operations. Included in the total assets of the corporate operations are cash and cash equivalents; various accounts receivable; net property, plant, and equipment; and other long-term assets.

     Disclosures regarding the Company’s reportable segments with reconciliations to consolidated totals for the three months ended March 31, 2010 and 2009 are presented below:

		For the Three Months Ended March 31, 2010
		Refining				Retail				Wholesale
		Group				Group				Group				Other				Consolidated
										(In thousands)
Net sales to external customers		$	1,332,383			$	153,930			$	429,082			$	—			$	1,915,395
Intersegment revenues (1)			585,575				4,650				84,756				—				—
Depreciation and amortization			29,276				2,406				1,385				1,215				34,282
Operating income (loss)			(26,943	)			1,159				6,663				(11,994	)			(31,115	)
Other income (expense), net																			(39,452	)
Loss before income taxes																		$	(70,567	)
Capital expenditures		$	18,455			$	46			$	272			$	70			$	18,843
Total assets at March 31, 2010			2,475,928				153,843				173,187				54,367				2,857,325

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

		For the Three Months Ended March 31, 2009
		Refining				Retail				Wholesale
		Group				Group				Group				Other				Consolidated
										(In thousands)
Net sales to external customers		$	957,369			$	128,026			$	282,803			$	—			$	1,368,198
Intersegment revenues (1)			335,299				4,650				48,208				—				—
Depreciation and amortization			29,242				2,273				1,414				1,311				34,240
Operating income (loss)			134,000				1,815				1,161				(19,509	)			117,467
Other income (expense), net																			(27,544	)
Income before income taxes																		$	89,923
Capital expenditures		$	37,872			$	106			$	452			$	225			$	38,655
Total assets, excluding goodwill, at March 31, 2009		$	2,423,469			$	161,174			$	148,544			$	66,912			$	2,800,099
Goodwill (2)			230,712				27,610				41,230				—				299,552
Total assets at March 31, 2009 (3)		$	2,654,181			$	188,784			$	189,774			$	66,912			$	3,099,651

4. Fair Value Measurement

     Following the requirements of FASC 820, Fair Value Measurements and Disclosures (“FASC 820”), the Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

     FASC 820 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:

	Level 1		Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
	Level 2		Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data.
	Level 3		Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable and cannot be corroborated by market data or other entity-specific inputs.

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

     The carrying amounts of cash equivalents, accounts receivables, accounts payable, accrued liabilities, and amounts outstanding under the Company’s revolving credit facility, approximated their fair values at March 31, 2010 due to their short-term maturities. The following table represents the Company’s assets measured at fair value on a recurring basis as of March 31, 2010, and the basis for that measurement:

Fair Value Measurement at March 31, 2010 Using

Quoted Prices in

Active Markets for

Identical Assets or

Significant Other

Significant

Carrying Value at

Liabilities

Observable Inputs

Unobservable Inputs

March 31, 2010

(Level 1)

(Level 2)

(Level 3)

(In thousands)

Financial assets:

Money market accounts

$

52

$

52

$

—

$

—

Financial liabilities:

Derivative contracts

486

—

486

—

5. Inventories

     Inventories were as follows:

		March 31,				December 31,
		2010				2009
		(In thousands)
Refined products		$	168,432			$	145,813
Crude oil and other raw materials			269,351				252,860
Lubricants			11,620				12,738
Convenience store merchandise			10,685				11,342
Inventories		$	460,088			$	422,753

     The Company values its crude oil, other raw materials, and asphalt inventories at the lower of cost or market under the LIFO valuation method. Other than refined products inventories held by the Company’s retail and wholesale groups, refined products inventories are valued under the LIFO valuation method. Lubricants and convenience store merchandise are valued under the first-in, first-out (“FIFO”), valuation method.

     As of March 31, 2010 and December 31, 2009, refined products and crude oil and other raw materials totaled 7.4 million barrels and 7.1 million barrels, respectively. The Company’s average LIFO cost per barrel of refined products and crude oil and other raw materials inventories was $58.21 and $56.32 for the three months ended March 31, 2010 and December 31, 2009, respectively. At March 31, 2010, the excess of the current cost of these crude oil, refined product, and other feedstock and blendstock inventories over LIFO cost was $156.6 million. At December 31, 2009, the excess of the current cost of these crude oil, refined product, and other feedstock and blendstock inventories over LIFO cost was $126.4 million. Inventories valued under the LIFO method were $389.3 million and $356.5 million at March 31, 2010 and December 31, 2009, respectively. There were no inventory reductions that resulted in the liquidation of LIFO inventory levels for the three months ended March 31, 2010 or 2009.

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

6. Prepaid Expenses

     Prepaid expenses were as follows:

		March 31,				December 31,
		2010				2009
		(In thousands)
Prepaid crude oil and other raw materials inventories		$	126,063			$	11,407
Prepaid insurance and other			13,269				17,809
Prepaid expenses		$	139,332			$	29,216

7. Other Current Assets

     Other current assets were as follows:

		March 31,				December 31,
		2010				2009
		(In thousands)
Materials and chemicals inventories		$	32,707			$	31,988
Income taxes receivable			—				42,685
Derivative activities receivable			2,257				3,778
Spare parts inventories			781				781
Other			486				508
Total		$	36,231			$	79,740

8. Property, Plant, and Equipment

     Property, plant, and equipment were as follows:

		March 31,				December 31,
		2010				2009
		(In thousands)
Refinery facilities and related equipment		$	1,740,107			$	1,712,295
Pipelines, terminals, and transportation equipment			94,486				94,485
Retail and wholesale facilities and related equipment			183,997				183,681
Other			20,508				20,537
Construction in progress			71,550				81,337
			2,110,648				2,092,335
Accumulated depreciation			(357,177	)			(324,435	)
Property, plant, and equipment, net		$	1,753,471			$	1,767,900

     The Company capitalized interest of $0.8 million and $3.8 million for the three months ended March 31, 2010 and 2009, respectively. Depreciation expense was $33.3 million and $33.1 million for the three months ended March 31, 2010 and 2009, respectively.

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

9. Goodwill and Other Intangible Assets

     The Company’s policy was to test goodwill for impairment annually or more frequently if indications of impairment existed. Various indications of possible goodwill impairment prompted the Company to perform goodwill impairment analyses at December 31, 2008 and March 31, 2009. Management determined that no such impairment existed as of those dates. The Company performed its annual impairment test as of June 30, 2009. Performance of the test is a two-step process. Step 1 of the impairment test compares the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs Step 2 of the goodwill impairment test to determine the amount of impairment loss. Step 2 of the goodwill impairment test compares the implied fair value of the affected reporting unit’s goodwill against the carrying value of that goodwill.

     The Company completed Step 1 of the impairment test during the second quarter of 2009 and concluded that impairment existed. The Company finalized its Step 2 analysis during the third quarter of 2009, maintaining that the Company’s prior quarter’s assumptions and forecasts had not significantly changed. Consistent with the preliminary Step 2 analysis completed during the second quarter of 2009, the Company concluded that all of its goodwill was impaired. The resulting impairment charge of $299.6 million was reported in the Company’s second quarter 2009 results of operations. There were no such impairment charges prior to the second quarter 2009.

     A summary of intangible assets is presented in the table below:

		March 31, 2010												December 31, 2009
																										Weighted
		Gross								Net				Gross								Net				Average
		Carrying				Accumulated				Carrying				carrying				Accumulated				Carrying				Amortization Period
		Value				Amortization				Value				Value				Amortization				Value				(Years)
										(In thousands)
Amortizable assets:
Licenses and permits		$	39,151			$	(8,463	)		$	30,688			$	39,151			$	(7,717	)		$	31,434				10.3
Customer relationships			6,300				(990	)			5,310				6,300				(885	)			5,415				12.7
Rights-of-way			4,203				(961	)			3,242				4,203				(905	)			3,298				14.7
Other			1,149				(715	)			434				1,149				(652	)			497				11.7
			50,803				(11,129	)			39,674				50,803				(10,159	)			40,644
Unamortizable assets:
Trademarks			5,300				—				5,300				5,300				—				5,300
Liquor licenses			15,749				—				15,749				15,749				—				15,749
		$	71,852			$	(11,129	)		$	60,723			$	71,852			$	(10,159	)		$	61,693

     Intangible asset amortization expense for the three months ended March 31, 2010 was $1.0 million based upon estimated useful lives ranging from 10 to 15 years. Intangible asset amortization expense for the three months ended March 31, 2009 was $1.2 million based upon estimated useful lives ranging from 6 to 20 years. Estimated amortization expense for the rest of this fiscal year and the next five fiscal years is as follows (in thousands):

2010 remainder		$	2,850
2011			3,847
2012			3,821
2013			3,737
2014			3,547
2015			3,545

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

10. Accrued Liabilities

     Accrued liabilities were as follows:

		March 31,				December 31,
		2010				2009
		(In thousands)
Excise taxes		$	31,847			$	34,898
Payroll and related costs			23,063				35,293
Accrued interest			16,362				4,323
Environmental reserve			16,260				8,024
Legal fees and other			13,617				22,480
Accrued income taxes			10,201				—
Property taxes			6,575				10,536
Pension obligation			3,015				3,015
Total		$	120,940			$	118,569

     During the latter part of March 2010, the Company reversed $14.7 million related to its accrued bonus estimate for 2009. This revision of the Company’s 2009 bonus estimate reduced direct operating expenses (exclusive of depreciation and amortization) and selling, general and administrative expenses reported in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 by $8.5 million and $6.2 million, respectively.

11. Long-Term Debt

     Long-term debt was as follows:

		March 31,				December 31,
		2010				2009
		(In thousands)
11.25% Senior Secured Notes, due 2017, net of unamortized discount of $26,380 and $26,943 at March 31, 2010 and December 31, 2009, respectively		$	298,620			$	298,057
Floating Rate Senior Secured Notes, due 2014, net of unamortized discount of $19,527 and $20,467 at March 31, 2010 and December 31, 2009, respectively			255,473				254,533
5.75% Senior Convertible Notes, due 2014, net of conversion feature of $53,792 and $56,183 at March 31, 2010 and December 31, 2009, respectively			161,658				159,267
Term Loan, due 2014			351,557				354,807
2007 Revolving Credit Agreement			170,000				50,000
Total long-term debt			1,237,308				1,116,664
Current portion of long-term debt (1)			(183,000	)			(63,000	)
Long-term debt, net of current portion		$	1,054,308			$	1,053,664

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Interest expense and other financing costs were as follows:

		Three Months Ended
		March 31,
		2010				2009
		(In thousands)
Contractual interest:
11.25% Senior Secured Notes		$	9,140			$	—
Floating Senior Secured Notes			7,391				—
5.75% Senior Convertible Notes			3,097				—
Term Loan			9,404				28,305
2007 Revolving Credit Agreement			1,292				188
			30,324				28,493
Amortization of original issuance discount:
11.25% Senior Secured Notes			563				—
Floating Senior Secured Notes			940				—
5.75% Senior Convertible Notes			2,391				—
			3,894				—
Other interest expense			3,308				2,348
Capitalized interest			(752	)			(3,786	)
		$	36,774			$	27,055

     Senior Secured Notes. In June 2009, the Company issued two tranches of Senior Secured Notes under an indenture dated June 12, 2009. The first tranche consisted of $325.0 million in aggregate principal amount of 11.25% Senior Secured Notes (the “Fixed Rate Notes”). The second tranche consisted of $275.0 million Senior Secured Floating Rate Notes (the “Floating Rate Notes,” and together with the Fixed Rate Notes, the “Senior Secured Notes”). The Fixed Rate Notes pay interest semi-annually in cash in arrears on June 15 and December 15 of each year at a rate of 11.25% per annum and will mature on June 15, 2017. The Fixed Rate Notes may be redeemed by the Company at the Company’s option beginning on June 15, 2013 through June 14, 2014 at a premium of 5.625%; from June 15, 2014 through June 14, 2015 at a premium of 2.813%; and at par thereafter. As of March 31, 2010, the fair value of the Fixed Rate Notes was $295.8 million.

     The Floating Rate Notes pay interest quarterly at a per annum rate, reset quarterly, equal to 3-month LIBOR (subject to a LIBOR floor of 3.25%) plus 7.50% and will mature on June 15, 2014. The interest rate on the Floating Rate Notes as of March 31, 2010 was 10.75%. The Floating Rate Notes may be redeemed by the Company at the Company’s option beginning on December 15, 2011 through June 14, 2012 at a premium of 5.0%; from June 15, 2012 through June 14, 2013 at a premium of 3.0%; and at a premium of 1.0% thereafter. The fair value of the Floating Rate Notes was $250.3 million at March 31, 2010. The Company is amortizing the original issue discounts using the effective interest method over the life of the notes. The combined proceeds from the issuance and sale of the Senior Secured Notes were used to repay a portion of the outstanding indebtedness under the Term Loan Credit Agreement (“Term Loan”).

     The Senior Secured Notes are guaranteed by all of the Company’s domestic restricted subsidiaries in existence on the date the Senior Secured Notes were issued. The Senior Secured Notes will also be guaranteed by all future wholly-owned domestic restricted subsidiaries and by any restricted subsidiary that guarantees any of the Company’s indebtedness under credit facilities that are secured by a lien on the collateral securing the Senior Secured Notes. The Senior Secured Notes are also secured on a first-priority basis, equally and ratably with the Company’s Term Loan and any future other pari passu secured obligation, by the collateral securing the Term Loan, which consists of the Company’s fixed assets, and on a second-priority basis, equally and ratably with the Term Loan and any future other pari passu secured obligation, by the collateral securing the 2007 Revolving Credit Agreement, which consists of the Company’s cash and cash equivalents, trade accounts receivable, and inventory.

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

     The indenture governing the Senior Secured Notes contains covenants that limit the Company’s (and most of its subsidiaries’) ability to, among other things: (i) pay dividends or make other distributions in respect of their capital stock or make other restricted payments; (ii) make certain investments; (iii) sell certain assets; (iv) incur additional debt or issue certain preferred shares; (v) create liens on certain assets to secure debt; (vi) consolidate, merge, sell, or otherwise dispose of all or substantially all of their assets; (vii) restrict dividends or other payments from restricted subsidiaries; and (viii) enter into certain transactions with their affiliates. These covenants are subject to a number of important limitations and exceptions. The indenture governing the Senior Secured Notes also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, and interest on all then outstanding Senior Secured Notes to be due and payable immediately.

     The Company may issue additional notes from time to time pursuant to the indenture governing the Senior Secured Notes.

     Convertible Senior Notes. The Company issued and sold $215.5 million in aggregate principal amount of its 5.75% Senior Convertible Notes due 2014 (the “Convertible Senior Notes”) during June and July 2009. The Convertible Senior Notes are unsecured and pay interest semi-annually in arrears at a rate of 5.75% per year. The Convertible Senior Notes will mature on June 15, 2014. The initial conversion rate for the Convertible Senior Notes is 92.5926 shares of common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $10.80 per share of common stock). In lieu of delivery of shares of common stock in satisfaction of the Company’s obligation upon conversion of the Convertible Senior Notes, the Company may elect to settle conversions entirely in cash or by net share settlement. Proceeds from the issuance of the Convertible Senior Notes were used to repay a portion of outstanding indebtedness under the Term Loan. Issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are required to separately account for the liability and equity (conversion feature) components of the instruments in a manner reflective of the issuer’s nonconvertible debt borrowing rate. The borrowing rate used by the Company to determine the liability and equity components of the Convertible Senior Notes was 13.75%. The Company valued the conversion feature at $60.9 million and recorded additional paid-in capital of $36.3 million, net of deferred income taxes of $22.6 million and transaction costs of $2.0 million, related to the equity portion of this convertible debt. The discount on the Convertible Senior Notes is amortized using the effective interest method through maturity on June 15, 2014. As of March 31, 2010, the fair value of the Convertible Senior Notes was $173.4 million and the if-converted value is less than its principal amount.

     Term Loan Credit Agreement. The Term Loan has a maturity date of May 30, 2014 and it is secured by the Company’s fixed assets. The Term Loan provides for principal payments on a quarterly basis of $13.0 million annually until March 31, 2014 with the remaining balance due on the maturity date. The Company made principal payments on the Term Loan of $925.7 million in the second and third quarters of 2009 primarily from the net proceeds of the debt and common stock offerings in June and July 2009. Interest rates under the Term Loan Agreement are equal to LIBOR (subject to a floor of 3.25%) plus 7.50%. The average interest rates under the Term Loan for the first quarter of 2010 and 2009 were 10.75% and 8.88%, respectively. As of March 31, 2010, the interest rate under the Term Loan was 10.75%. The Company amended the Term Loan during the second and fourth quarters of 2009 in connection with the new debt offerings and to modify certain of the financial covenants. To effect these amendments, the Company paid $3.4 million in amendment fees. As a result of the partial paydown of the Term Loan in June 2009, the Company expensed $9.0 million during the second quarter to write-off a portion of the unamortized loan fees related to the Term Loan. As of March 31, 2010, the fair value of the Term Loan was $340.1 million.

     2007 Revolving Credit Agreement. The 2007 Revolving Credit Agreement matures on May 31, 2012 and provides loans of up to $800 million. The 2007 Revolving Credit Agreement, secured by certain cash and cash equivalents, trade accounts receivable, and inventory, can be used to refinance existing indebtedness of the Company and its subsidiaries, to finance working capital and capital expenditures, and for other general corporate purposes. The 2007 Revolving Credit Agreement is a collateral-based facility with total borrowing capacity, subject to borrowing base amounts based upon eligible receivables and inventory, and provides for letters of credit and swing line loans. As of March 31, 2010, the gross availability under the 2007 Revolving Credit Agreement was $625.5 million determined based on an advance rate formula tied to our accounts receivable and inventory levels. As of March 31, 2010, the Company had net availability under the 2007 Revolving Credit Agreement of

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

$184.5 million due to $271.0 million in letters of credit outstanding and $170.0 million in outstanding direct borrowings. The average interest rates under the 2007 Revolving Credit Agreement for the quarters ended March 31, 2010 and 2009 were 6.25% and 5.50%, respectively. At March 31, 2010, the interest rate under the 2007 Revolving Credit Agreement was 6.25%. The Company amended the 2007 Revolving Credit Agreement during the second and fourth quarters of 2009 in connection with the new debt offerings and to modify certain of the financial covenants. The Company incurred $5.6 million in fees related to these amendments.

     As a result of the 2009 fourth quarter amendment, the Company’s 2007 Revolving Credit Agreement requires a structure mandating that all receipts be swept daily to reduce borrowings outstanding under the 2007 Revolving Credit Agreement. This arrangement, combined with the existence of a material adverse change clause in the 2007 Revolving Credit Agreement, requires the classification of outstanding borrowings under the 2007 Revolving Credit Agreement as a current liability. This structure became effective during March 2010.

     Guarantors of the Term Loan and the Revolving Credit Agreement. The Term Loan and the 2007 Revolving Credit Agreement (together, the “Agreements”) are guaranteed, on a joint and several basis, by subsidiaries of Western Refining, Inc. The guarantees related to the Agreements remain in effect until such time that the terms of the Agreements are satisfied and subsequently terminated. Amounts potentially due under these guarantees are equal to the amounts due and payable under the respective Agreements at any given time. No amounts have been recorded for these guarantees. The guarantees are not subject to recourse to third parties.

     Certain Covenants in Agreements. The Agreements contain certain covenants, including limitations on debt, investments, and dividends; and financial covenants relating to minimum interest coverage, maximum leverage, and minimum EBITDA. Pursuant to the Agreements, the Company agreed not to pay cash dividends on its common stock until after December 31, 2009. The Company was in compliance with all applicable covenants set forth in the agreements at March 31, 2010.

12. Income Taxes

     Compared to the federal statutory rate of 35%, the effective tax rates for the three months ended March 31, 2010 and 2009, were 56.5% and 34.5%, respectively. The effective tax rate and resultant benefit for the three months ended March 31, 2010, was higher than the statutory rate primarily due to the federal income tax credit available to small business refiners related to the production of ultra low sulfur diesel fuel and the Company’s current estimate of annual taxable income relative to the current period results of operations. The effective tax rate and resultant expense for the three months ended March 31, 2009, was also affected by the federal income tax credit available to small business refiners related to the production of ultra low sulfur diesel fuel.

     The Company is currently under examination by the Internal Revenue Service (“IRS”) for tax years ended December 31, 2006 and May 31, 2007. The May 31, 2007 tax return is the final tax return for the legacy Giant entities. The Company concluded a 2005 exam and began the 2006 exam during the third quarter of 2009. The Company continues to work with the IRS to expedite the conclusion of the 2006 and 2007 examinations. The Company does not believe the results of these examinations will have a material adverse effect on the Company’s financial position or results of operations. The timing and results of any final determination related to the December 31, 2006 and May 31, 2007 tax returns remain uncertain.

     The Company classifies interest to be paid on an underpayment of income taxes and any related penalties as income tax expense. Based on the results of the examination of the Company’s 2005 federal income tax return, the Company’s uncertain tax positions were settled. Accordingly, $6.3 million in estimated liabilities related to the Company’s uncertain tax positions were reversed during the third quarter of 2009, including $0.5 million that affected the Company’s effective tax rate. As of March 31, 2010, the Company had no unrecognized tax benefits.

13. Retirement Plans

     The Company accounts for its retirement plans in accordance with FASC 715, Compensation – Retirement Benefits (“FASC 715”), which requires companies to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare, and other postretirement plans in their financial statements.

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Pensions

     In connection with the negotiation of a collective bargaining agreement covering employees of the El Paso refinery during the second quarter of 2009, the Company terminated the defined benefit plan covering certain El Paso refinery employees. Regulatory approval of this termination was received during the first quarter 2010. No changes to the Company’s proposed plan of termination were required. Through March 2010, the Company had distributed $21.3 million: $3.8 million in 2010 and $17.5 million in 2009 from plan assets to plan participants as a result of the termination agreement with an approximate $3.0 million obligation remaining to be paid out under the agreement as of March 31, 2010. Distributions made were in accordance with the termination agreement. The termination resulted in reductions to the related pension obligation of $24.3 million and $25.1 million to other comprehensive loss in 2009.

     The components of the net periodic benefit cost associated with the Company’s pension plans for certain employees at the El Paso and Yorktown refineries were as follows:

		Three Months Ended
		March 31,
		2010				2009
		(In thousands)
Net periodic benefit cost includes:
Service cost		$	445			$	1,180
Interest cost			318				938
Amortization of net loss			7				425
Expected return on assets			(307	)			(613	)
Other termination expenses			816				—
Net periodic benefit cost		$	1,279			$	1,930

     The Company contributed $2.8 million for the pension plan covering certain El Paso refinery employees during the three months ended March 31, 2010. In 2010, the Company expects to contribute $1.2 million to its pension plan for the Yorktown refinery and expects to fund approximately $3.0 million to complete the termination of its pension plan for the El Paso refinery.

Postretirement Obligations

     The components of the net periodic benefit cost associated with the Company’s postretirement medical benefit plans covering certain employees at the El Paso and Yorktown refineries were as follows:

		Three Months Ended
		March 31,
		2010				2009
		(In thousands)
Net periodic benefit cost includes:
Service cost		$	133			$	135
Interest cost			125				120
Amortization of net gain			(4	)			3
Net periodic benefit cost		$	254			$	258

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Defined Contribution Plans and Deferred Compensation Plan

     The Company sponsors a 401(k) defined contribution plan that resulted from the merger of legacy Western and Giant 401(k) defined contribution plans, effective January 1, 2009. Under the merged plan, participants may contribute a percentage of their eligible compensation to the plan and invest in various investment options. The Company will match participant contributions to the merged plan subject to certain limitations and a per participant maximum contribution. For each 1% of eligible compensation contributed by the participant throughout the year ended December 31, 2009, the Company matched 2% up to a maximum of 8% of eligible compensation, provided the participant had a minimum of one year of service with the Company. Beginning January 1, 2010, for each 1% of eligible compensation contributed by the participant, the Company will match 1% up to a maximum of 4% of eligible compensation, provided the participant has a minimum of one year of service with the Company. For the three months ended March 31, 2010 and 2009, the Company expensed $1.4 million and $1.8 million, respectively, in connection with this plan.

14. Crude Oil and Refined Product Risk Management

     The Company enters into crude oil forward contracts to facilitate the supply of crude oil to the refineries. During the three months ended March 31, 2010, the Company entered into net forward, fixed-price contracts to physically receive and deliver crude oil that qualify as normal purchases and normal sales and are exempt from the reporting requirements of FASC 815, Derivative and Hedging (“FASC 815”).

     The Company also uses crude oil and refined products futures, swap contracts, or options to mitigate the change in value for a portion of its volumes subject to market prices. Under a refined products swap contract, the Company agrees to buy or sell an amount equal to a fixed price times a set number of barrels, and to buy or sell in return an amount equal to a specified variable price times the same amount of barrels. The physical volumes are not exchanged, and these contracts are net settled with cash. The Company elected not to pursue hedge accounting treatment for these instruments for financial accounting purposes. The contract fair value is reflected on the Condensed Consolidated Balance Sheets and the related net gain or loss is recorded within cost of products sold in the Condensed Consolidated Statements of Operations. Quoted prices for similar assets or liabilities in active markets (Level 2) are considered to determine the fair values for the purpose of marking to market the derivative instruments at each period end. At March 31, 2010, the Company had open commodity derivative instruments consisting of crude oil futures and finished products price swaps on 754,000 barrels primarily to protect the value of certain crude oil, finished product, and blendstock inventories for future quarters in 2010. The fair value of the outstanding contracts at March 31, 2010, was a net unrealized loss of $0.5 million, of which $1.2 million were unrealized gains and $1.7 million were unrealized losses. At December 31, 2009, the Company had open commodity derivative instruments consisting of crude oil futures and finished products price swaps on 268,000 barrels primarily to protect the value of certain crude oil, finished product, and blendstock inventories for the first quarter of 2010. The Company recognized $2.8 million and $1.2 million, within cost of products sold, of net realized and unrealized losses from derivative activities on matured contracts during the quarters ended March 31, 2010 and 2009, respectively.

15. Stock-Based Compensation

     Under the Western Refining Long-Term Incentive Plan, shares of restricted stock are periodically granted to employees and outside directors of the Company. These shares generally vest over a three-year period. Although ownership of the shares does not transfer to the recipients until the shares have vested, recipients have voting and nonforfeitable dividend rights on these shares from the date of grant. The fair value of each share of restricted stock awarded is measured based on the market price as of the measurement date and will be amortized on a straight-line basis over the respective vesting periods.

     In January 2009, the Company adopted the provisions of FASC 718, Compensation — Stock Compensation (“FASC 718”), related to specific accounting requirements for realized income tax benefits from dividends. FASC 718 requires that a realized income tax benefit from dividends or dividend equivalents that are (a) paid to employees holding equity-classified nonvested shares, equity-classified nonvested share units, or equity-classified outstanding share options and (b) charged to retained earnings should be recognized as an increase to additional

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

paid-in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. The adoption of these provisions did not have an impact on the Company’s financial position or results of operations during 2009.

     The Company recorded stock compensation expense of $1.2 million and $1.0 million for the three months ended March 31, 2010 and 2009, respectively, of which $0.3 million and $0.2 million was included in direct operating expenses and $0.9 million and $0.8 million in selling, general and administrative expenses, respectively. The tax deficiency related to the shares that vested during the three months ended March 31, 2010, was $0.9 million. The tax benefit related to the shares that vested during the three months ended March 31, 2009, was $0.4 million. The deficiency and benefit were determined using a statutory blended rate of 37.17%. The aggregate fair value at the grant date of the shares that vested during the three months ended March 31, 2010 and 2009, was $3.5 million respectively for both periods. The related aggregate intrinsic value of these shares at the vesting date for 2010 and 2009 was $1.2 million and $2.5 million, respectively. No expense was capitalized in either period.

     As of March 31, 2010, there were 677,175 shares of restricted stock outstanding with an aggregate fair value at grant date of $7.2 million and an aggregate intrinsic value of $3.7 million. The compensation cost of nonvested awards not recognized as of March 31, 2010, was $6.3 million, which will be recognized over a weighted-average period of approximately 1.8 years. The following table summarizes the Company’s restricted stock activity for the three months ended March 31, 2010:

						Weighted-Average
						Grant-Date
		Number of Shares				Fair Value
Nonvested at December 31, 2009			794,679			$	12.72
Awards granted			108,351				5.15
Awards vested			(224,771	)			15.42
Awards forfeited			(1,084	)			13.43
Nonvested at March 31, 2010			677,175				10.62

     The Company’s Board of Directors authorized the issuance of up to 5,000,000 shares of common stock under the Western Refining Long-Term Incentive Plan. As of March 31, 2010, there were 1,852,337 shares of common stock reserved for future grants under this plan.

16. Stockholders’ Equity

     In connection with the Company’s conversion from a partnership to a corporate holding company and its initial public offering, 66,442,900 shares of its common stock were issued at an aggregate issuance price of $327.4 million. The Company received $297.2 million in net proceeds from this stock issuance. During June 2009, the Company issued an additional 20,000,000 shares of its common stock at an aggregate offering price of $180.0 million. The net proceeds of this issuance were $170.4 million. Additionally, during 2009, the Company issued and sold $215.5 million in Convertible Senior Notes and recorded additional paid-in capital of $36.3 million related to the equity portion of this convertible debt.

     Through December 2009, the Company made repurchases of its common stock to cover payroll withholding taxes for certain employees pursuant to the vesting of restricted shares awarded under the Western Refining Long-Term Incentive Plan. During the three months ended March 31, 2009, the Company repurchased 42,890 shares at an aggregate cost of $0.5 million. These repurchases were recorded as treasury stock. No such repurchases of the Company’s common stock occurred during the three months ended March 31, 2010.

     On June 30, 2008, as part of the amendment to its credit facilities, the Company agreed not to declare or pay cash dividends to its common stockholders until after December 31, 2009. The payment of dividends is limited under the terms of the Company’s 2007 Revolving Credit Agreement, Term Loan Facility, and Senior Secured Notes, and in part depends on the Company’s ability to satisfy certain financial covenants. Accordingly, the Company did not declare or pay dividends during 2009 or the three months ended March 31, 2010.

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

17. Earnings Per Share

     As discussed in Note 16, “Stock-Based Compensation,” the Company has granted shares of restricted stock to certain employees and outside directors of the Company. Although ownership of these shares does not transfer to the recipients until the shares have vested, recipients have voting and nonforfeitable dividend rights on these shares from the date of grant. Following the provisions of FASC 260, Earnings per Share (“FASC 260”), related to participating securities, the Company applied the two-class method to determine its earnings per share.

     The computation of basic and diluted earnings per share under the two-class method is presented below:

		Three Months Ended March 31,
		2010				2009
		(In thousands, except
		per share data)
Allocation of Earnings (Losses):
Net income (loss)		$	(30,689	)		$	58,928
Distributed earnings			—				—
Income allocated to participating securities			—				(471	)
Undistributed income (loss) available to common shareholders		$	(30,689	)		$	58,457
Weighted-Average Number of Common Shares Outstanding:
Basic and dilutive number of common shares outstanding			88,006				67,817
Basic Earnings (Loss) per Common Share:
Distributed earnings per share		$	—			$	—
Undistributed earnings (loss) per share			(0.35	)			0.86
Basic earnings (loss) per common share		$	(0.35	)		$	0.86
Diluted Earnings (Loss) per Common Share:
Distributed earnings per share		$	—			$	—
Undistributed earnings (loss) per share			(0.35	)			0.86
Diluted earnings (loss) per common share (1)		$	(0.35	)		$	0.86

		Three Months Ended March 31,
		2010				2009
		(In thousands)
Common equivalent shares			19,949				—
Restricted stock			6				9

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

18. Related Party Transactions

     Effective May 1, 2009, the non-exclusive aircraft lease with an entity controlled by the Company’s majority stockholder was terminated by the Company and as a result, it no longer operates a private aircraft. The hourly rental payment was $1,775 per flight hour and the Company was responsible for all operating and maintenance costs of the aircraft. Personal use of the aircraft by certain officers of the Company was reimbursed to the Company at the highest rate allowed by the Federal Aviation Administration for a non-charter operator. In addition, the Company had a policy requiring that its officers deposit in advance of any personal use of the aircraft an amount equal to three months of anticipated expenses for the use of the aircraft. The following table summarizes the total costs incurred for the lease of the aircraft for the three months ended March 31, 2009:

		Three Months Ended March 31,
		2009
		(In thousands)
Lease payments		$	134
Operating and maintenance expenses			326
Reimbursed by officers			(216	)
Total costs		$	244

     The Company had entered into a lease agreement with Transmountain Oil Company, L.C. (“Transmountain”), pursuant to which Transmountain leased certain office space from the Company. The lease commenced on December 1, 2005, for a period of ten years and contained two five-year renewal options. The lease was assumed by the third party as of November 18, 2008, and was subsequently terminated in March 2009.

19. Contingencies

Environmental Matters

     Like other petroleum refiners, the Company’s operations are subject to extensive and periodically changing federal and state environmental regulations governing air emissions, wastewater discharges, and solid and hazardous waste management activities. The Company’s policy is to accrue environmental and clean-up related costs of a non-capital nature when it is probable that a liability has been incurred and the amount can be reasonably estimated. Such estimates may be subject to revision in the future as regulations and other conditions change.

     Periodically, the Company receives communications from various federal, state, and local governmental authorities asserting violation(s) of environmental laws and/or regulations. These governmental entities may also propose or assess fines or require corrective action for these asserted violations. The Company intends to respond in a timely manner to all such communications and to take appropriate corrective action. The Company does not anticipate that any such matters currently asserted will have a material adverse impact on its financial condition, results of operations, or cash flows.

     Environmental remediation accruals are recorded in the current and long-term sections of the Company’s Condensed Consolidated Balance Sheets, according to their nature. As of March 31, 2010, the Company had environmental liability accruals of approximately $25.6 million, of which $16.3 million was in accrued liabilities. The majority of these liabilities have been recorded using an inflation factor of 2.7% and a discount rate of 7.1%. Approximately $1.5 million and $1.3 million of environmental liabilities accrued at March 31, 2010 and December 31, 2009, respectively, have not been discounted. As of March 31, 2010, the unescalated, undiscounted environmental reserve related to these liabilities totaled $29.9 million, leaving $5.8 million to be accreted over time.

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

     The table below summarizes the Company’s environmental liability accruals:

		December 31, 2009				Increase (Decrease)				Payments				March 31, 2010
						(In thousands)
Yorktown refinery		$	22,455			$	(2,756	)		$	(363	)		$	19,336
Four Corners and other			6,133				238				(145	)			6,226
Totals		$	28,588			$	(2,518	)		$	(508	)		$	25,562

El Paso Refinery

     The groundwater and certain solid waste management units and other areas at and adjacent to the El Paso refinery have been impacted by prior spills, releases, and discharges of petroleum or hazardous substances and are currently undergoing remediation by the Company and Chevron Products Company (“Chevron”) pursuant to certain agreed administrative orders with the Texas Commission on Environmental Quality (the “TCEQ”). Pursuant to the Company’s purchase of the north side of the El Paso refinery from Chevron, Chevron retained responsibility to remediate their solid waste management units in accordance with its Resource Conservation Recovery Act (“RCRA”) permit, which Chevron has fulfilled. Chevron also retained liability for, and control of, certain groundwater remediation responsibilities that are ongoing.

     In May 2000, the Company entered into an Agreed Order with the Texas Natural Resources Conservation Commission, now known as the TCEQ, for remediation of the south side of the El Paso refinery property. In August 2000, the Company purchased a Pollution and Legal Liability and Clean-Up Cost Cap Insurance policy at a cost of $10.3 million, which the Company expensed in 2000. The policy is non-cancelable and covers environmental clean-up costs related to contamination that occurred prior to December 31, 1999, including the costs of the Agreed Order activities. The insurance provider assumed responsibility for all environmental clean-up costs related to the Agreed Order up to $20 million. In addition, under a settlement agreement with the Company, a subsidiary of Chevron is obligated to pay 60% of any Agreed Order environmental clean-up costs that would otherwise have been covered under the policy but that exceed the $20 million threshold. Under the policy, environmental costs outside the scope of the Agreed Order are covered up to $20 million and require payment by the Company of a deductible of $0.1 million per incident as well as any costs that exceed the covered limits of the insurance policy.

     The U.S. Environmental Protection Agency (the “EPA”) has embarked on a Petroleum Refinery Enforcement Initiative (“EPA Initiative”) whereby it is investigating industry-wide noncompliance with certain Clean Air Act rules. The EPA Initiative has resulted in many refiners entering into consent decrees typically requiring penalties and substantial capital expenditures for additional air pollution control equipment. Since December 2003, the Company has been voluntarily discussing a settlement pursuant to the EPA Initiative related to the El Paso refinery. Negotiations with the EPA regarding this Initiative have focused exclusively on air emission programs. The Company does not expect these negotiations to result in any soil or groundwater remediation or clean-up requirements. In May 2008, the EPA and the Company agreed on the basic EPA Initiative requirements related to the Fluid Catalytic Cracking Unit (“FCCU”) and heaters and boilers that the Company expects will ultimately be incorporated into a final settlement agreement between the Company and the EPA. Based on current negotiations and information, the Company estimates the total capital expenditures necessary to address the EPA Initiative issues would be approximately $60 million of which $38.6 million has already been expended; $15.2 million for the installation of a flare gas recovery system that was completed in 2007 and $23.4 million for nitrogen oxides (“NOx”) emission controls on heaters and boilers was expended in 2008 and 2009. The Company estimates remaining expenditures of approximately $21.4 million for the NOx emission controls on heaters and boilers from 2010 through 2013. The Company’s estimated capital expenditures for regulatory projects includes the $21.4 million for NOx emission controls. This estimate could change depending upon the actual final settlement reached. The Company anticipates meeting the EPA Initiative NOx requirements for the FCCU using catalyst additives and therefore does not expect additional capital expenditures related to the EPA Initiative NOx requirements for the FCCU.

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

     The Company received a proposed draft settlement agreement from the EPA in April 2009. In August 2009, the EPA proposed a penalty of $1.5 million. The Company has accrued $1.5 million as a penalty for this matter. As of March 31, 2010, a final settlement between the Company and the EPA relating to this matter is still pending.

     In March 2008, the TCEQ had notified the Company that it would be presenting the Company with a proposed Agreed Order regarding six excess air emission incidents that occurred at the El Paso refinery during 2007 and early 2008. While at this time it is not known precisely how or when the Agreed Order may affect the Company, the Company may be required to implement corrective action under the Agreed Order and may be assessed penalties. The Company does not expect any penalties or corrective action requested to have a material adverse effect on its business, financial condition, or results of operations or that any penalties assessed or increased costs associated with the corrective action will be material.

Yorktown Refinery

     Yorktown 1991 and 2006 Orders. In August 2006, Giant agreed to the terms of the final administrative consent order pursuant to which Giant will implement a clean-up plan for the refinery. Following the acquisition of Giant, the Company completed the first phase of the plan and is in the process of negotiating revisions with the EPA for the remainder of the clean-up plan.

     The Company currently estimates $37.6 million in total remediation expenditures associated with the EPA order. Through March 2010, $14.1 million has been expended for the EPA order. The Company anticipates approximately $15.5 million in additional expenditures during 2010 and 2011. The EPA issued an approval in January 2010 which will allow the Company to begin implementing the Company’s revised soil clean-up plan beginning in the second quarter of 2010. The January 2010 EPA approval and a prior EPA approval in 2008 allowed adjustments to the cost estimates for the groundwater monitoring plan and reductions to the Company’s estimate of total remediation expenditures.

     Yorktown 2002 Amended Consent Decree. In May 2002, Giant acquired the Yorktown refinery and assumed certain environmental obligations including responsibilities under a consent decree among various parties covering many locations (the “Consent Decree”) entered in August 2001 under the EPA Initiative. Parties to the Consent Decree include the United States, BP Exploration and Oil Co., Amoco Oil Company, and Atlantic Richfield Company. As applicable to the Yorktown refinery, the Consent Decree required, among other things, a reduction of NOx, sulfur dioxide, and particulate matter emissions and upgrades to the refinery’s leak detection and repair program. The Company does not expect implementation of the Consent Decree requirements will result in any soil or groundwater remediation or clean-up requirements. Pursuant to the Consent Decree and prior to May 31, 2007, Giant had installed a new sour water stripper and sulfur recovery unit with a tail gas treating unit and an electrostatic precipitator on the FCCU and had begun using sulfur dioxide emissions reducing catalyst additives in the FCCU. The Company estimates additional capital expenditures of approximately $5 million to complete implementation of the Consent Decree requirements. The schedule for project implementation has not been defined. The Company does not expect completing the requirements of the Consent Decree will result in material increased operating costs, nor does it expect the completion of these requirements to have a material adverse effect on its business, financial condition, or results of operations.

     In March 2010, the EPA demanded stipulated penalties in the amount of $0.5 million, pursuant to the Consent Decree, for a flaring event that occurred at Yorktown refinery in October 2009. In April 2010, the Company met with the EPA and provided in writing additional clarifying information in anticipation that the EPA will consider the information as the basis for reducing the agency’s demand for stipulated penalties. The Company continues to communicate with the EPA regarding the clarifying information. The Company has until mid-May 2010 to pay the stipulated penalty amount demanded by the EPA, successfully conclude the current informal negotiations with the EPA to reduce the demand, invoke dispute resolution under the Consent Decree and escrow the demand amount while the dispute is being resolved, or agree with the EPA to suspend dispute resolution without escrowing the demand amount while a resolution is developed. The Company does not expect any penalties, corrective action, or other associated settlement costs related to this demand for stipulated penalties to have a material adverse effect on its business, financial condition, or results of operations.

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

     Yorktown EPA Emergency Planning and Community Right-to-Know Act (“EPCRA”) Potential Enforcement Notice. In January 2010, the EPA issued the Yorktown refinery a notice to “show cause” why the EPA should not bring an enforcement action pursuant to the notification requirements under the EPCRA related to two separate flaring events that occurred in 2007 prior to the Company’s acquisition of Giant. The EPA has proposed a total penalty of $0.3 million provided the Company reaches a settlement with the EPA by May 13, 2010. The Company is currently negotiating a settlement with the EPA that includes a reduced penalty. The Company does not expect any penalties, corrective action, or other associated settlement costs related to this notice to have a material adverse effect on its business, financial condition, or results of operations.

Four Corners Refineries

     Four Corners 2005 Consent Agreements. In July 2005, as part of the EPA Initiative, Giant reached an administrative settlement with the New Mexico Environment Department (“NMED”) and the EPA in the form of consent agreements that resolved certain alleged violations of air quality regulations at the Gallup and Bloomfield refineries in the Four Corners area of New Mexico (“the 2005 NMED Agreement”). In January 2009, the Company and the NMED agreed to an amendment of the 2005 administrative settlement with the NMED (“the 2009 NMED Amendment”), which altered certain deadlines and allowed for alternative air pollution controls.

     In late November 2009, the Company indefinitely suspended refining operations at the Bloomfield refinery. The Company currently operates the site as a products distribution terminal and crude oil storage facility. Bloomfield continues to use some of the refinery equipment to support the terminal and to store crude oil for the Gallup refinery. The Company has begun negotiations with the NMED to revise the 2009 NMED Amendment to reflect the indefinite suspension.

     Based on current information and the 2009 NMED Amendment, and favorably negotiating a revision to reflect the indefinite suspension of refining operations at the Bloomfield refinery, the Company estimates the total remaining capital expenditures that may be required pursuant to the 2009 NMED Amendment would be approximately $15 million and will occur primarily from 2010 through 2012. These capital expenditures will primarily be for installation of emission controls on the heaters, boilers, and FCCU, and for reducing sulfur in fuel gas to reduce emissions of sulfur dioxide, NOx, and particulate matter from the Gallup refinery. The 2009 NMED Amendment also provided for a $2.3 million penalty of which $0.3 million was paid to fund a Supplemental Environmental Project (“SEP”) prior to the third quarter of 2009. The remaining penalty of $2.0 million was accrued and is to be paid to fund a separate SEP in the State of New Mexico. Two of three scheduled payments of the remaining penalty totaling $1.3 million have been made by the Company. The first payment was made in November 2009, the second payment was made in March 2010, and the final payment is scheduled for September 2010. The Company does not expect implementation of the requirements in the 2005 NMED Agreement and the associated 2009 NMED Amendment will result in any soil or groundwater remediation or clean-up costs.

     Bloomfield 2007 NMED Remediation Order. In July 2007, the Company received a final administrative compliance order from the NMED alleging that releases of contaminants and hazardous substances that have occurred at the Bloomfield refinery over the course of its operation prior to June 1, 2007, have resulted in soil and groundwater contamination. Among other things, the order requires the Company to:

	•		investigate and determine the nature and extent of such releases of contaminants and hazardous substances;
	•		perform interim remediation measures, or continue interim measures already begun, to mitigate any potential threats to human health or the environment from such releases;
	•		identify and evaluate alternatives for corrective measures to clean up any contaminants and hazardous substances released at the refinery and prevent or mitigate their migration at or from the site;
	•		implement any corrective measures that may be approved by the NMED;
	•		develop investigation work plans over a period of approximately four years; and

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

•

implement corrective measures pursuant to the investigation.

     The order recognizes that prior work satisfactorily completed may fulfill some of the foregoing requirements. In that regard, the Company has already put in place some remediation measures with the approval of the NMED and New Mexico Oil Conservation Division.

     Based on current information, the Company estimates a remaining undiscounted cost of $4.2 million for implementing the investigation and interim measures of the order. The Company has recorded a liability of $2.3 million, of which $1.2 million is discounted, relating to the investigation and interim measures of the final order implementation costs. As of March 31, 2010, the Company had expended $0.9 million to implement the order.

     Gallup 2007 RCRA Inspection. In September 2007, the Gallup refinery was inspected jointly by the EPA and the NMED (“the Gallup 2007 RCRA Inspection”) to determine compliance with the EPA’s hazardous waste regulations promulgated pursuant to the RCRA. During the first quarter of 2009, the Company accrued $0.7 million for a proposed penalty related to this matter. The Company reached a final settlement with the agencies in August 2009 and paid a penalty of $0.7 million in October 2009 pursuant to the final settlement. The Company does not expect implementation of the requirements in the final settlement will result in any soil or groundwater remediation or clean-up costs. Based on current information, the Company estimates capital expenditures of approximately $8.9 million to upgrade the wastewater treatment plant at the Gallup refinery pursuant to the requirements of the final settlement. In the second quarter of 2010, the Company will submit to the NMED, for approval, a plan with the design to upgrade the wastewater treatment plant. In April 2010, the Company submitted to the NMED, for approval, a plan with the design and construction schedule to upgrade the wastewater treatment plant.

Legal Matters

     Lawsuits have been filed in numerous states alleging that methyl tertiary butyl ether (“MTBE”), a high octane blendstock used by many refiners in producing specially formulated gasoline, has contaminated water supplies. The suits allege MTBE contamination of water supplies owned and operated by the plaintiffs, who are generally water providers or governmental entities. The plaintiffs assert that numerous refiners, distributors, or sellers of MTBE and/or gasoline containing MTBE are responsible for the contamination. The plaintiffs also claim that the defendants are jointly and severally liable for compensatory and punitive damages, costs, and interest. Joint and several liability means that each defendant may be liable for all of the damages even though that party was responsible for only a small part of the damages.

     As a result of the acquisition of Giant, certain of the subsidiaries of the Company were defendants in approximately 40 of these MTBE lawsuits pending in Virginia, Connecticut, Massachusetts, New Hampshire, New York, New Jersey, Pennsylvania, Florida, and New Mexico. The Company and its subsidiaries have reached settlement agreements regarding most of these lawsuits, including the New Mexico suit. After these settlement agreements, there are currently a total of two lawsuits pending in New Hampshire and New Jersey. The settlements referenced above were not material individually or in the aggregate to the Company’s business, financial condition, or results of operations.

     Owners of a small hotel in Aztec, New Mexico, filed a lawsuit in San Juan County, New Mexico alleging migration of underground gasoline onto their property from underground storage tanks located on a convenience store property across the street, which is owned by a subsidiary of the Company. Plaintiffs allege the damage primarily resulted from a release of petroleum hydrocarbons in 1992 and claim a component of the gasoline, MTBE, has contaminated their property as a result of this release. The Court has granted a summary judgment against Plaintiffs and dismissed all claims related to the alleged 1992 release.

     In April 2003, the Company received a payment of reparations in the amount of $6.8 million from a pipeline company as ordered by the Federal Energy Regulatory Commission (“FERC”). Following judicial review of the FERC order, as well as a series of other orders, the pipeline company made a Compliance Filing in March 2008, in which it asserts it overpaid reparations to the Company in a total amount of $1.1 million and refunds in the amount of $0.7 million, including accrued interest through February 29, 2008, and that interest should continue to accrue on those amounts. In the February 2008 Compliance Filing, the pipeline company also indicated that in a separate FERC proceeding,

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

it owes the Company an additional amount of reparations and refunds of $5.2 million including interest through February 29, 2008. While this amount is subject to adjustment upward or downward based on further orders of the FERC and on appeal, interest on the amount owed to the Company should continue to accrue until the pipeline company makes payment to the Company. On January 29, 2009, the FERC approved a settlement between the Company and the pipeline company regarding a Complaint proceeding the Company had brought related to pipeline tariffs it was being charged. Pursuant to this settlement, the Company received $3.1 million as a refund/settlement payment during the second quarter of 2009.

     A subsidiary of the Company, Western Refining Yorktown, Inc. (“Western Yorktown”), declared force majeure under its crude oil supply agreement with Statoil Marketing & Trading (US) Inc. (“Statoil”) based on the effects of the Grane crude oil on its Yorktown refinery plant and equipment. Statoil filed a lawsuit against the subsidiary on March 28, 2008, in the Superior Court of Delaware in and for New Castle County. The parties have agreed to dismiss all claims and counterclaims with prejudice. Based on the terms of this settlement, the Company recorded a $20 million fourth quarter 2009 charge. We paid $10 million of this settlement in March 2010 and expect to pay another $10 million over a period of three years.

     A lawsuit has been filed in the Federal District Court for the District of New Mexico by certain Plaintiffs who allege the Bureau of Indian Affairs (“BIA”), acted improperly in approving certain rights-of-way on land allotted to the individual Plaintiffs by the Navajo Nation, Arizona, New Mexico, and Utah (“Navajo Nation”). The lawsuit names the Company and numerous other defendants (“Right-of-Way Defendants”), and seeks imposition of a constructive trust and asserts these Right-of-Way Defendants are in trespass on the Allottee’s lands. The Court has dismissed all of Plaintiffs’ claims in this matter.

     In February 2009, subsidiaries of the Company, Western Refining Pipeline, Co. (“Western Pipeline”) and Western Refining Southwest, Inc. (“Western Southwest”) filed a Compliant at the FERC against TEPPCO Crude Pipeline, LLC (“TEPPCO Pipeline”) and TEPPCO Crude Oil, LLC (“TEPPCO Crude”) and collectively (“TEPPCO”), asserting violations of the Interstate Commerce Act and breaches of contracts between the parties including that TEPPCO Pipeline had wrongfully seized crude oil belonging to Western Southwest and wrongfully taken pipeline capacity lease payments from Western Pipeline in a cumulative amount in excess of $5 million. After filing this Complaint, Western Pipeline and Western Southwest gave TEPPCO Pipeline and TEPPCO Crude notification of termination of pipeline capacity lease agreements and a crude oil purchase agreement with TEPPCO Pipeline and TEPPCO Crude. FERC dismissed the Complaint on the basis that it does not have jurisdiction. Western Pipeline and Western Southwest requested the FERC to reconsider its dismissal and the FERC has denied this request for reconsideration. Western Pipeline and Western Southwest have appealed the FERC’s ruling to the United States Fifth Circuit Court of Appeals. After the initial FERC dismissal, TEPPCO Pipeline and TEPPCO Crude filed a lawsuit against Western Pipeline and Western Southwest in the Midland Texas District Court which alleges breach of contract and seeks damages in excess of $10 million. Western Pipeline and Western Southwest believe their termination of the contracts was appropriate and believe that TEPPCO owes Western compensation for the crude oil that TEPPCO wrongfully seized. Western intends to defend itself against TEPPCO’s claims accordingly.

     Regarding the claims asserted against the Company referenced above, potentially applicable factual and legal issues have not been resolved, the Company has yet to determine if a liability is probable and the Company cannot reasonably estimate the amount of any loss associated with these matters. Accordingly, the Company has not recorded a liability for these pending lawsuits.

Other Matters

     In April 2010, a subsidiary of the Company received a demand from the Bankruptcy Litigation Trustee for a former customer of the subsidiary which requested the return of $4.8 million alleged to be preferential payments made by the former customer to the subsidiary of the Company. While the Company is disputing the entirety of this claim, the Company has recorded a non-material liability regarding a portion of the amount claimed. Regarding the remaining amount of this claim, there are potentially applicable factual and legal issues that have not been resolved.

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

As such, the Company has yet to determine whether a liability is probable and therefore cannot reasonably estimate any further amount of the claim, which may be payable.

     The Company is party to various other claims and legal actions arising in the normal course of business. The Company believes that the resolution of these matters will not have a material adverse effect on its financial condition, results of operations, or cash flows.

     Narrow heavy sour crude oil differentials can significantly impact the results of operations for the Yorktown refinery. Such narrow crude oil differentials could make the Yorktown refinery uneconomical to operate. Due to these economic conditions, at December 31, 2009, the Company performed an impairment analysis of its Yorktown long-lived and intangible assets. The Company incorporated current industry analysts’ margin forecasts into its estimated cash flows. Based on the analysis, the Company determined that the carrying amount of its significant Yorktown operating assets continued to be recoverable as of December 31, 2009. No significant changes have occurred during the first quarter 2010 within the Yorktown market that would require revision of the analysis performed by the Company at December 31, 2009.

     Due to the effect of the current unfavorable economic conditions on the refining industry, and the Company’s expectations of a continuation of such conditions for the near term, the Company will continue to monitor both its operating assets and its capital projects for potential asset impairments or project write-offs until conditions improve. The Company’s current evaluations are focused on the Yorktown refinery long-lived assets, which had a carrying value of $715.2 million as of March 31, 2010. Changes in market conditions, as well as changes in assumptions used to test for recoverability and to determine fair value, could result in significant impairment charges or project write-offs in the future, thus affecting the Company’s earnings.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

     You should read the following discussion together with the financial statements and the notes thereto included elsewhere in this report. This discussion contains forward-looking statements that are based on management’s current expectations, estimates, and projections about our business and operations. The cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under Part I, Item 1A. “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2009, or 2009 Form 10-K, and elsewhere in this report. You should read such “Risk Factors” and “Forward-Looking Statements” in this report. In this Item 2, all references to “Western Refining,” “the Company,” “Western,” “we,” “us,” and “our” refer to Western Refining, Inc., or WNR, and the entities that became its subsidiaries upon closing of our initial public offering (including Western Refining Company, L.P., or Western Refining LP), and Giant Industries, Inc., or Giant, and its subsidiaries, which became wholly-owned subsidiaries on May 31, 2007, unless the context otherwise requires or where otherwise indicated.

Company Overview

     We are an independent crude oil refiner and marketer of refined products and also operate service stations and convenience stores. We own and operate three refineries with a total crude oil throughput capacity of approximately 221,000 barrels per day, or bpd. In addition to our 128,000 bpd refinery in El Paso, Texas, we own and operate a 70,000 bpd refinery on the East Coast of the United States near Yorktown, Virginia and a refinery near Gallup, New Mexico with a throughput capacity of approximately 23,000 bpd. Until November 2009, we also operated a 17,000 bpd refinery near Bloomfield, New Mexico. We indefinitely suspended refining operations at the Bloomfield refinery in late November 2009. We continue to operate Bloomfield as a refinery terminal. Our primary operating areas encompass West Texas, Arizona, New Mexico, Utah, Colorado, and the Mid-Atlantic region. In addition to the refineries, we also own and operate stand-alone refined product distribution terminals in Albuquerque, New Mexico; near Flagstaff, Arizona; and Bloomfield, New Mexico; as well as asphalt terminals in Phoenix and Tucson, Arizona; Albuquerque; and El Paso. As of March 31, 2010, we also own and operate 150 retail service stations and convenience stores in Arizona, Colorado, and New Mexico; a fleet of crude oil and finished product truck transports; and a wholesale petroleum products distributor that operates in Arizona, California, Colorado, Nevada, New Mexico, Texas, and Utah.

     Since the acquisition of Giant, we have increased our sour and heavy crude oil processing capacity as a percent of our total crude oil capacity from 12% prior to the acquisition to approximately 44% as of March 31, 2010. Sour and heavy crude oil has historically been less expensive to acquire than light sweet crude oil. However, beginning in the second quarter of 2009, price differentials have narrowed between sour and heavy crude oil and light sweet crude oil, particularly the heavy crude oil price differential at our Yorktown refinery has been significantly reduced. We have deferred certain smaller projects at our south crude unit in El Paso due to the narrow spread between sweet and sour crude oil and the overall economic environment. Deferment of the crude unit projects will limit sour runs to our current combined sour and heavy crude oil processing capability at maximum throughput until the projects in the crude unit are completed.

     We own a pipeline that runs from Southeast New Mexico to Northwest New Mexico. The pipeline can transport crude oil from Southeast New Mexico to the Four Corners region and south from Lynch, New Mexico to Jal, New Mexico. This pipeline provides us with an alternative method of transportation within New Mexico and an alternative supply of crude oil for our Gallup refinery. In addition, along with rail deliveries, this pipeline is capable of providing enough crude oil for the Gallup refinery to run full capacity. Based on lower product demand in the Four Corners area, we have removed the crude from portions of the pipeline, and we do not currently transport crude via pipeline from Southeast New Mexico. However, we presently use sections of the pipeline to deliver crude to our Gallup refinery, and to transport crude for unrelated third parties. We regularly evaluate cost effective and alternative sources of crude oil and operations of this pipeline. See Part I, Item 1A. “Risk Factors — We may not have sufficient crude oil to be able to run our Gallup refinery at the historical rates of our Four Corners refineries” in our 2009 annual report on Form 10-K.

     We report our operating results in three business segments: the refining group, the retail group, and the wholesale group. Our refining group operates the three refineries and related refined product distribution terminals and asphalt terminals. At the refineries, we refine crude oil and

other feedstocks into finished products such as gasoline, diesel fuel, jet fuel, and asphalt. Our refineries market finished products to a diverse customer base including wholesale distributors and retail chains. Our retail group operates service stations and convenience stores and sells gasoline, diesel fuel, and merchandise. Our wholesale group distributes gasoline, diesel fuel, and lubricant products. See Note 3, Segment Information in the Notes to Condensed Consolidated Financial Statements included in this quarterly report for detailed information on our operating results by segment.

Major Influences on Results of Operations

     Refining. Our earnings and cash flows from our refining operations are primarily affected by the difference between refined product prices and the prices for crude oil and other feedstocks, all of which are commodities. The cost to acquire feedstocks and the price of the refined products that we ultimately sell depend on numerous factors beyond our control. These factors include the supply of, and demand for, crude oil, gasoline, and other refined products, which in turn depend on changes in domestic and foreign economies; weather conditions; domestic and foreign political affairs; production levels; the availability of imports; the marketing of competitive fuels; the price differentials on sour and heavy crude oils versus light sweet crude oils; and government regulation. While our net sales fluctuate significantly with movements in crude oil and refined product prices, it is primarily the spread between crude oil and refined product prices that affects our earnings and cash flows from our operations. The benchmark Gulf Coast unleaded gasoline price compared to West Texas Intermediate, or WTI, crude oil in the first quarter of 2010 averaged $7.30 margin per barrel compared to $7.95 margin per barrel for the same period in 2009. The benchmark Gulf Coast diesel fuel price compared to WTI crude oil in the first quarter of 2010 averaged $7.58 margin per barrel compared to $12.32 margin per barrel for the same period in 2009. Additionally, the increase in the price of crude oil beginning in the second quarter of 2009 and continuing through the first quarter of 2010 significantly reduced margins on asphalt and coke as compared to the first quarter of 2009. Another factor that continues to impact margins during the first quarter of 2010 as it has the last three quarters of 2009, was the narrowing of price differentials on sour and heavy crude oils versus light sweet crude oils. Our Yorktown refinery can process up to 100% of heavy crude oil, but margins can be significantly impacted by the pricing differential between heavy and WTI crude oil, as was the case for the first quarter of 2010 and the last three quarters of 2009. In addition, we had changes in our lower of cost or market or LCM reserve of $11.0 million related to our Yorktown inventories in the first quarter of 2009 that decreased our cost of products sold for the three months ended March 31, 2009, resulting in increased refining margins for the prior year quarter. The related LCM reserve was initially recognized during the fourth quarter of 2008.

     Other factors that impact our overall refinery gross margins are the sale of lower value products such as residuum, petroleum coke, and propane, particularly when crude costs are higher. In addition, our refinery gross margin is further reduced because our refinery product yield is less than our total refinery throughput volume. For example, our Yorktown refinery liquid products yield for the first quarter 2010 was 93.2%. Coke production made up the majority of the balance of the product yield. Our results of operations are also significantly affected by our refineries’ direct operating expenses, especially the cost of natural gas used for fuel and the cost of electricity. Natural gas prices have historically been volatile. Typically, electricity prices fluctuate with natural gas prices.

     Demand for gasoline is generally higher during the summer months than during the winter months. In addition, higher volumes of ethanol are blended with gasoline produced in the Southwest region during the winter months, thereby increasing the supply of gasoline. This combination of decreased demand and increased supply during the winter months can lower gasoline prices. 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. The effects of seasonal demand for gasoline are partially offset by increased demand during the winter months for diesel fuel in the Southwest and heating oil in the Northeast. Primarily due to volatile fluctuations in refining margins beyond these seasonal trends, our results of operations did not necessarily reflect these seasonal trends during 2009 and may not reflect them for 2010.

     Safety, reliability, and the environmental performance of our refineries’ operations are critical to our financial performance. Unplanned downtime of our refineries generally results in lost refinery gross margin opportunity, increased maintenance costs, and a temporary increase in working capital investment and inventory. We attempt to mitigate the financial impact of planned downtime, such as a turnaround or a major maintenance project, through a planning process that considers product availability, margin environment, and the availability of resources to perform the required maintenance.

     Periodically we have both major and minor planned maintenance turnarounds at our refineries that are expensed as incurred. We shut down the south crude unit for 19 days at the El Paso refinery during the first quarter of 2010. We also had a planned 10 day outage for a reformer regeneration at the Gallup refinery in March 2010. We have scheduled crude and coker unit turnarounds at the Yorktown refinery during the first quarter of 2011.

     The nature of our business requires us to maintain substantial quantities of crude oil and refined product inventories. Crude oil and refined products are commodities; as such, we have no control over the changing market value of these inventories. Our inventory of crude oil and the majority of our refined products are valued at the lower of cost or market value under the last-in, first-out, or LIFO, inventory valuation methodology. If the market values of our inventories decline below our cost basis, we would record a write-down of our inventories resulting in a non-cash charge to our cost of products sold. Under the LIFO inventory valuation method, this write-down is subject to recovery in future periods to the extent the market values of our inventories equal our cost basis relative to any LIFO inventory valuation write-downs previously recorded. In addition, due to the volatility in the price of crude oil and other blendstocks, we experienced fluctuations in our LIFO reserves between the first quarter of 2009 and the first quarter of 2010. See Note 5, Inventories in the Notes to Condensed Consolidated Financial Statements included in this quarterly report for detailed information on the impact of LIFO inventory accounting.

     Retail. Our earnings and cash flows from our retail business segment are primarily affected by the sales volumes and margins of gasoline and diesel fuel sold, and by the sales and margins of merchandise sold at our service stations and convenience stores. Margins for gasoline and diesel fuel sales are equal to the sales price less the delivered cost of the fuel and motor fuel taxes, and are measured on a cents per gallon, or cpg, basis. Fuel margins are impacted by local supply, demand, and competition. Margins for retail merchandise sold are equal to retail merchandise sales less the delivered cost of the merchandise, net of supplier discounts and inventory shrinkage, and are measured as a percentage of merchandise sales. Merchandise sales are impacted by convenience or location, branding, and competition. Our retail sales are seasonal. Our retail business segment operating results for the first and fourth calendar quarters are generally lower than those for the second and third calendar quarters of each year.

     Wholesale. Our earnings and cash flows from our wholesale business segment are primarily affected by the sales volumes and margins of gasoline, diesel fuel, and lubricants sold. Margins for gasoline, diesel fuel, and lubricant sales are equal to the sales price less cost of sales. Margins are impacted by local supply, demand, and competition.

Critical Accounting Policies and Estimates

     We prepare our financial statements in conformity with U.S. generally accepted accounting principles, or 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 could materially affect the amounts recorded in our financial statements. Our critical accounting policies, estimates, and recent accounting pronouncements that potentially impact us are discussed in detail under Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2009 annual report on Form 10-K.

Results of Operations

     The following tables summarize our consolidated and operating segment financial data and key operating statistics for the three months ended March 31, 2010 and 2009. The following data should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this quarterly report.

Consolidated

		Three Months Ended
		March 31,
		2010				2009
		(In thousands, except per share data)
Statement of Operations Data:
Net sales (1)		$	1,915,395			$	1,368,198
Operating costs and expenses:
Cost of products sold (exclusive of depreciation and amortization) (1)			1,765,461				1,047,831
Direct operating expenses (exclusive of depreciation and amortization) (1)			106,980				133,538
Selling, general and administrative expenses			16,501				35,018
Maintenance turnaround expense			23,286				104
Depreciation and amortization			34,282				34,240
Total operating costs and expenses			1,946,510				1,250,731
Operating income (loss)			(31,115	)			117,467
Other income (expense):
Interest income			30				143
Interest expense			(36,774	)			(27,055	)
Amortization of loan fees			(2,414	)			(1,554	)
Other income (expense), net			(294	)			922
Income (loss) before income taxes			(70,567	)			89,923
Provision for income taxes			39,878				(30,995	)
Net income (loss)		$	(30,689	)		$	58,928
Basic earnings (loss) per share		$	(0.35	)		$	0.86
Dilutive earnings (loss) per share		$	(0.35	)		$	0.86
Weighted average basic shares outstanding			88,006				67,817
Weighted average dilutive shares outstanding			88,006				67,817
Cash Flow Data:
Net cash provided by (used in):
Operating activities		$	(147,572	)		$	96,840
Investing activities			(18,738	)			(38,655	)
Financing activities			116,750				(63,773	)
Other Data:
Adjusted EBITDA (2)		$	26,189			$	141,921
Capital expenditures			18,843				38,655
Balance Sheet Data (at end of period):
Cash and cash equivalents		$	25,330			$	74,229
Working capital			249,361				335,666
Total assets			2,857,325				3,099,651
Total debt			1,237,308				1,277,250
Stockholders’ equity			658,385				870,713

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

	•		Adjusted EBITDA does not reflect our cash expenditures or future requirements for significant turnaround activities, capital expenditures, or contractual commitments;
	•		Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;
	•		Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; and
	•		our calculation of Adjusted EBITDA may differ from the Adjusted EBITDA calculations of other companies in our industry, thereby limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally. The following table reconciles net income (loss) to Adjusted EBITDA for the periods presented:

		Three Months Ended
		March 31,
		2010				2009
		(In thousands)
Net income (loss)		$	(30,689	)		$	58,928
Interest expense			36,774				27,055
Provision for income taxes			(39,878	)			30,995
Amortization of loan fees			2,414				1,554
Depreciation and amortization			34,282				34,240
Maintenance turnaround expense			23,286				104
Net change in LCM reserve			—				(10,955	)
Adjusted EBITDA		$	26,189			$	141,921

Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009

     Net Sales. Net sales primarily consist of gross sales of refined products, lubricants, and merchandise, net of customer rebates or discounts and excise taxes. Net sales for the three months ended March 31, 2010, were $1,915.4 million, compared to $1,368.2 million for the three months ended March 31, 2009, an increase of $547.2 million, or 40.0%. This increase was the result of increased sales from our refining, retail, and wholesale groups of $375.0 million, $25.9 million, and $145.3 million, respectively, net of intercompany transactions that eliminate in consolidation. The average sales price per barrel of refined products for all operating segments increased from $57.34 in 2009 to $88.20 in 2010. This increase was partially offset by a decrease in sales volume. Our sales volume decreased by 0.6 million barrels, or 2.1%, to 28.5 million barrels for 2010 compared to 29.1 million barrels for 2009.

     Cost of Products Sold (exclusive of depreciation and amortization). Cost of products sold primarily includes cost of crude oil, other feedstocks and blendstocks, purchased refined products, lubricants and merchandise for resale, and transportation and distribution

costs. Cost of products sold was $1,765.5 million for the three months ended March 31, 2010, compared to $1,047.8 million for the three months ended March 31, 2009, an increase of $717.7 million, or 68.5%. This increase was primarily the result of increased cost of products sold from our refining, retail, and wholesale groups of $543.2 million, $26.8 million, and $147.7 million, respectively, net of intercompany transactions that eliminate in consolidation. A non-cash LCM inventory recovery of $11.0 million reduced cost of products sold in the three months ended March 31, 2009. No such recovery occurred during the three months ended March 31, 2010. The average cost per barrel of crude oil, feedstocks, and refined products for all operating segments increased from $47.35 to $83.55 for the three months ended March 31, 2009 and 2010, respectively. Cost of products sold for the three months ended March 31, 2009 includes $1.2 million in economic hedging losses previously reported as loss from derivative activities under other income (expense) in the first quarter 2009. This reclassification in the prior year was made to conform to the current presentation. Cost of products sold for the three months ended March 31, 2010 includes $2.8 million in economic hedging losses.

     Direct Operating Expenses (exclusive of depreciation and amortization). Direct operating expenses include direct costs of labor, maintenance materials and services, transportation expenses, chemicals and catalysts, natural gas, utilities, insurance expense, property taxes, and other direct operating expenses. Direct operating expenses were $107.0 million for the three months ended March 31, 2010, compared to $133.5 million for the three months ended March 31, 2009, a decrease of $26.5 million, or 19.9%. Included in this decrease was $8.5 million related to the reversal of our December 2009 incentive bonus accrual. The decrease in direct operating expenses resulted from decreases of $22.9 million and $4.0 million, and an increase of $0.4 million in direct operating expenses of our refining, wholesale, and retail groups, respectively, net of intercompany transactions that eliminate in consolidation.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of corporate overhead, marketing expenses, public company costs, and stock-based compensation. Selling, general and administrative expenses were $16.5 million for the three months ended March 31, 2010, compared to $35.0 million for the three months ended March 31, 2009, a decrease of $18.5 million, or 52.9%. Included in this decrease was $6.2 million related to the reversal of our December 2009 incentive bonus accrual. The decrease in selling, general and administrative expenses resulted from decreased expenses in our refining, retail, and wholesale groups of $7.5 million, $0.8 million, and $2.9 million, respectively, and a $7.4 million decrease in corporate overhead.

     The decrease of $7.4 million in corporate overhead was primarily due to decreased environmental fines and penalties ($2.9 million), incentive compensation ($2.6 million), professional and legal fees ($1.4 million), sponsorships ($0.5 million), repairs and maintenance ($0.4 million), and wages ($0.4 million). These decreases were partially offset by an increase in pension and retiree medical benefits ($0.9 million).

     Maintenance Turnaround Expense. Maintenance turnaround expense includes planned major and minor maintenance and repairs generally performed every two to six years, depending on the processing units involved. During the quarter ended March 31, 2010, we incurred costs of $23.3 million for the turnaround of the Southside FCCU and catalytic gasoline hydrotreater at the El Paso refinery. During the quarter ended March 31, 2009, we incurred costs of $0.1 million in anticipation of a turnaround scheduled for the first quarter of 2011 at the Yorktown refinery.

     Depreciation and Amortization. Depreciation and amortization for the three months ended March 31, 2010, was $34.3 million, compared to $34.2 million for the three months ended March 31, 2009, an increase of $0.1 million, or 0.3%. The lack of significant change between periods is the result of the fourth quarter 2009 impairment of various long-lived and amortizable intangible assets of $52.8 million offset in part by increased depreciation from fixed assets put into service during 2009.

     Operating Income (Loss). Operating loss was $31.1 million for the three months ended March 31, 2010, compared to operating income of $117.5 million for the three months ended March 31, 2009, a decrease of $148.6 million. This decrease was attributable primarily to decreased refinery gross margins and the maintenance turnaround completed in El Paso in the first quarter of 2010 compared to higher refinery gross margins and minimal maintenance turnaround activity in the first quarter of 2009, partially offset by decreases in direct operating expenses and selling, general and administrative expenses.

     Interest Income. Interest income for the three months ended March 31, 2010 and 2009, was $0.03 million and $0.1 million, respectively. This decrease was primarily attributable to decreased balances of cash available for investment.

     Interest Expense. Interest expense for the three months ended March 31, 2010 was $36.8 million (net of capitalized interest of $0.8 million) compared to $27.1 million (net of capitalized interest of $3.8 million) for the three months ended March 31, 2009, an increase of $9.7 million, or 35.8%. This increase was primarily attributable to higher effective interest rates in the first quarter 2010 versus the first quarter 2009 offset by lower levels of outstanding debt.

     Amortization of Loan Fees. Amortization of loan fees for the three months ended March 31, 2010 was $2.4 million, compared to $1.6 million for the three months ended March 31, 2009, an increase of $0.8 million, or 50.0%. This increase is primarily the result of additional deferred loan fees incurred during 2009 of $30.7 million for new debt and amendments to our Term Loan Credit Agreement, or Term Loan, and our revolving credit agreement. This increase was partially offset by the reduction in amortization expense resulting from the second quarter 2009 write-off of $9.0 million in unamortized loan fees related to our term loan.

     Provision for Income Taxes. We recorded a benefit for income taxes of $39.9 million for the three months ended March 31, 2010, using an estimated effective tax rate of 56.5%, as compared to the federal statutory rate of 35%. The effective tax rate was higher primarily due to the federal income tax credit available to small business refiners related to the production of ultra low sulfur diesel fuel and our currently estimated annual taxable income relative to the current period net loss.

     We recorded an expense for income taxes of $31.0 million for the three months ended March 31, 2009, using an estimated effective tax rate of 34.5% as compared to the federal statutory rate of 35%. The effective tax rate was lower primarily due to the federal income tax credit available to small business refiners related to the production of ultra low sulfur diesel fuel and manufacturing activities deductions.

     Net Income (Loss). We reported a net loss of $30.7 million for the three months ended March 31, 2010, representing $0.35 net loss per share on weighted average dilutive shares outstanding of 88.0 million. For the first quarter of 2009, we reported net income of $58.9 million representing $0.86 net earnings per share on weighted average dilutive shares outstanding of 67.8 million.

     See additional analysis under the Refining Segment, Retail Segment, and Wholesale Segment.

Refining Segment

		Three Months Ended
		March 31,
		2010				2009
		(In thousands, except per
		barrel data)
Net sales (including intersegment sales)		$	1,917,958			$	1,292,668
Operating costs and expenses:
Cost of products sold (exclusive of depreciation and amortization) (1)			1,807,155				1,013,325
Direct operating expenses (exclusive of depreciation and amortization)			82,103				105,402
Selling, general and administrative expenses			3,081				10,595
Maintenance turnaround expense			23,286				104
Depreciation and amortization			29,276				29,242
Total operating costs and expenses			1,944,901				1,158,668
Operating income (loss)		$	(26,943	)		$	134,000
Key Operating Statistics:
Total sales volume (bpd) (2)			249,623				260,452
Total refinery production (bpd)			192,502				228,164
Total refinery throughput (bpd) (3)			192,974				229,453
Per barrel of throughput:
Refinery gross margin (1)(4)		$	6.38			$	13.53
Gross profit (4)			4.69				12.11
Direct operating expenses (5)			4.73				5.10

     The following tables set forth our summary refining throughput and production data for the periods and refineries presented:

All Refineries

		Three Months Ended
		March 31,
		2010				2009
Key Operating Statistics:
Refinery product yields (bpd)
Gasoline			101,548				118,797
Diesel and jet fuel			73,061				85,548
Residuum			4,024				6,351
Other			8,167				10,357
Liquid products			186,800				221,053
By-products			5,702				7,111
Total refinery production (bpd)			192,502				228,164
Refinery throughput (bpd)
Sweet crude oil			126,234				128,809
Sour or heavy crude oil			50,325				72,775
Other feedstocks/blendstocks			16,415				27,869
Total refinery throughput (bpd)			192,974				229,453

El Paso Refinery