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		Smaller reporting company o
				(Do not check if a smaller reporting company)

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 October 29, 2010, there were 88,303,733 shares outstanding, par value $0.01, of the registrant’s common stock.

 

 

WESTERN REFINING, INC. AND SUBSIDIARIES
INDEX

Part I. Financial Information			1
Item 1. Financial Statements			1
Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009 (Unaudited)			1
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009 (Unaudited)			2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (Unaudited)			3
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 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			31
Item 3. Quantitative and Qualitative Disclosure About Market Risk			55
Item 4. Controls and Procedures			56
Part II. Other Information			57
Item 1. Legal Proceedings			57
Item 1A. Risk Factors			57
Item 6. Exhibits			58
Signatures			59
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 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, demand for refined products, possible increased costs, future operations including the operations of our Yorktown refinery, margins, profitability, deferred taxes, capital expenditures, liquidity and capital resources, satisfaction of our working capital requirements, our ability to improve our capital structure through asset sales and/or through certain financings, potential asset impairments or write-offs, 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:

	•		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 referred to 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;
	•		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;

	•		construction of new, or expansion of existing, product pipelines in the areas that we serve;
	•		actions of customers and competitors, including overseas refineries;
	•		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, 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

(Unaudited)
(In thousands, except share data)

		September 30,				December 31,
		2010				2009
ASSETS
Current assets:
Cash and cash equivalents		$	77,522			$	74,890
Accounts receivable, principally trade, net of a reserve for doubtful accounts of $3,260 and $1,571, respectively			278,209				337,559
Inventories			335,379				422,753
Prepaid expenses			90,671				29,216
Other current assets			59,152				79,740
Total current assets			840,933				944,158
Property, plant, and equipment, net			1,713,918				1,767,900
Intangible assets, net			61,059				61,693
Other assets, net			45,772				50,903
Total assets		$	2,661,682			$	2,824,654
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	266,376			$	405,684
Accrued liabilities			138,038				118,569
Current deferred income tax liability, net			43,792				45,651
Current portion of long-term debt			38,000				63,000
Total current liabilities			486,206				632,904
Long-term liabilities:
Long-term debt, less current portion			1,055,608				1,053,664
Deferred income tax liability, net			399,866				391,348
Other liabilities			39,711				58,286
Total long-term liabilities			1,495,185				1,503,298
Commitments and contingencies (Note 19)
Stockholders’ equity:
Common stock, par value $0.01, 240,000,000 shares authorized; 89,001,739 and 88,688,717 shares issued, respectively			890				887
Preferred stock, par value $0.01, 10,000,000 shares authorized; no shares issued and outstanding			—				—
Additional paid-in capital			586,679				583,458
Retained earnings			117,443				126,920
Accumulated other comprehensive loss, net of tax			(3,278	)			(1,370	)
Treasury stock, 698,006 shares at cost			(21,443	)			(21,443	)
Total stockholders’ equity			680,291				688,452
Total liabilities and stockholders’ equity		$2,661,682				$	2,824,654

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

WESTERN REFINING, INC. AND SUBSIDIARIES

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net sales		$	2,038,296			$	1,896,273			$	6,099,028			$	4,848,016
Operating costs and expenses:
Cost of products sold (exclusive of depreciation and amortization)			1,807,411				1,699,399				5,479,813				4,115,610
Direct operating expenses (exclusive of depreciation and amortization)			116,982				116,717				337,930				374,195
Selling, general, and administrative expenses			24,031				23,725				61,604				85,903
Goodwill impairment loss			—				—				—				299,552
Other impairment losses			3,963				—				3,963				—
Maintenance turnaround expense			—				1,031				23,286				4,353
Depreciation and amortization			35,253				34,725				104,294				109,382
Total operating costs and expenses			1,987,640				1,875,597				6,010,890				4,988,995
Operating income (loss)			50,656				20,676				88,138				(140,979	)
Other income (expense):
Interest income			151				17				317				197
Interest expense and other financing costs			(37,099	)			(33,024	)			(111,168	)			(88,047	)
Amortization of loan fees			(2,453	)			(1,795	)			(7,287	)			(4,832	)
Write-off of unamortized loan fees			—				—				—				(9,047	)
Other income (expense), net			712				(39	)			4,631				4,594
Income (loss) before income taxes			11,967				(14,165	)			(25,369	)			(238,114	)
Provision for income taxes			(5,108	)			9,383				15,892				(15,057	)
Net income (loss)		$	6,859			$	(4,782	)		$	(9,477	)		$	(253,171	)
Net earnings (loss) per share:
Basic		$	0.08			$	(0.05	)		$	(0.11	)		$	(3.29	)
Diluted		$	0.08			$	(0.05	)		$	(0.11	)		$	(3.29	)
Weighted average common shares outstanding:
Basic			88,280				87,973				88,170				76,191
Diluted			88,280				87,973				88,170				76,191

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

WESTERN REFINING, INC. AND SUBSIDIARIES

		Nine Months Ended
		September 30,
		2010				2009
Cash flows from operating activities:
Net loss		$	(9,477	)		$	(253,171	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Goodwill impairment loss			—				299,552
Other impairment losses			3,963				—
Depreciation and amortization			104,294				109,382
Amortization of loan fees			7,287				4,832
Amortization of original issue discount			11,694				4,202
Write-off of unamortized loan fees			—				9,047
Stock-based compensation expense			4,273				3,493
Deferred income taxes			6,659				11,193
(Gain) loss on disposal of assets			(418	)			348
Changes in operating assets and liabilities:
Accounts receivable			59,350				(113,083	)
Inventories			87,374				(25,707	)
Prepaid expenses			(61,455	)			(39,500	)
Other assets			21,333				159
Accounts payable			(139,152	)			138,908
Accrued liabilities			18,420				5,938
Other long-term liabilities			(20,664	)			(7,040	)
Net cash provided by operating activities			93,481				148,553
Cash flows from investing activities:
Capital expenditures			(56,741	)			(93,762	)
Proceeds from the sale of assets			642				395
Net cash used in investing activities			(56,099	)			(93,367	)
Cash flows from financing activities:
Additions to long-term debt			—				747,183
Payments on long-term debt			(9,750	)			(922,443	)
Common stock offering			—				170,442
Revolving credit facility, net			(25,000	)			(60,000	)
Deferred financing costs			—				(4,547	)
Repurchases of common stock			—				(599	)
Net cash used in financing activities			(34,750	)			(69,964	)
Net increase (decrease) in cash and cash equivalents		2,632					(14,778	)
Cash and cash equivalents at beginning of period			74,890				79,817
Cash and cash equivalents at end of period		$	77,522			$	65,039
Supplemental disclosures of cash flow information for:
Income taxes refunded		$	(50,731	)		$	(5,071	)
Interest paid			89,859				88,638
Non-cash investing and financing activities:
Reduction of long-term debt for original issue discounts and deferred financing costs			—				68,267
Equity component of convertible notes, net of deferred taxes of $22.6 million and issuance costs of $2.0 million			—				38,252
Accrued capital expenditures			155				776

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

WESTERN REFINING, INC. AND SUBSIDIARIES

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net income (loss)		$	6,859			$	(4,782	)		$	(9,477	)		$	(253,171	)
Other comprehensive income (loss) items:
Benefit plans:
Actuarial loss			(3,684	)			—				(3,684	)			—
Reclassification of (gain) loss to income			(3	)			2				(11	)			217
Pension plan termination adjustment			—				—				617				25,689
Other comprehensive income (loss) before tax			(3,687	)			2				(3,078	)			25,906
Income tax			(1,369	)			1				(1,170	)			9,626
Other comprehensive income (loss), net of tax			(2,318	)			1				(1,908	)			16,280
Comprehensive income (loss)		$	4,541			$	(4,781	)		$	(11,385	)		$	(236,891	)

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 two refineries with a total crude oil throughput capacity of approximately 151,000 barrels per day (“bpd”). In addition to the 128,000 bpd refinery in El Paso, Texas, the Company also owns and operates a 23,000 bpd refinery near Gallup, in the Four Corners region of Northern New Mexico. Prior to September 2010, the Company operated a 70,000 bpd refinery near Yorktown, Virginia and until November 2009, the Company also operated a 17,000 bpd refinery near Bloomfield, New Mexico. The Company temporarily suspended refining operations at the Yorktown facility in September 2010 and indefinitely suspended refining operations at the Bloomfield refinery in late November 2009. The Company continues to operate both facilities as product distribution terminals. 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 Bloomfield, New Mexico; Albuquerque, New Mexico; and Yorktown, Virginia; as well as asphalt terminals in Phoenix and Tucson, Arizona; Albuquerque; and El Paso. As of September 30, 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 wholesale group, and the retail group. See Note 3, “Segment Information” for 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 can significantly impact the Company’s results of operations and affect comparability of net sales and cost of products sold from period to period.

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 and nine months ended September 30, 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. In its Condensed Consolidated Balance Sheets, the Company had no cash equivalents within the cash balance of $77.5 million on September 30, 2010 and $5.4 million of cash equivalents within the cash balance of $74.9 million on December 31, 2009.

     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.

      The Company performed an impairment analysis related to its Yorktown refinery long-lived assets as of June 30, 2010. The economic slowdown that began in 2008 and has continued through 2010 has reduced demand for refined products, thereby putting significant pressure on refined product margins. Beginning in the second quarter of 2009, price differentials between heavy crude oil and light sweet crude oil (“heavy light crude oil differential”) narrowed. Narrow heavy light crude oil differentials can significantly impact the profitability of the Yorktown refinery. Such narrow crude oil differentials could make the Yorktown refinery uneconomical to operate in the near term. Due to these economic conditions, at December 31, 2009, the Company performed an impairment analysis of its Yorktown long-lived and intangible assets. This analysis indicated that the December 31, 2009 carrying value of the Yorktown long-lived assets was recoverable. Continuing losses due to narrow heavy light crude oil differentials, poor coking economics, changes in Yorktown crude oil purchase contract terms, and potentially significant regulatory capital spending requirements caused the Company to temporarily suspend its Yorktown refining operations during the third quarter of 2010. Accordingly, the Company revised its previous cash flow forecasts used in its analysis for long-lived asset impairment at the Yorktown refinery as of December 31, 2009. This model assumes that refining operations will be temporarily suspended and that the Yorktown facility will be operated as a refined product terminal in the near term. The Company’s revised forecast includes estimates and assumptions that require considerable judgment and are based on historical experience, industry analysts’ margin forecasts, financial forecasts, and industry trends and conditions. The cash flow model assumes an $86.00 average cost per barrel of crude oil and that the heavy light crude oil differentials realized at Yorktown will return to historical levels of between $6.50 and $7.00 per barrel within the next two to three years. Increases in the average cost per barrel of crude oil without a corresponding increase in the heavy light crude oil differential could negatively impact the forecasted cash flows. Additionally, the Company’s forecast assumes that gross refining margins and throughputs will return to near historical levels achieved at the Yorktown refinery in 2008 with an average per barrel margin of $8.70 and an annual average throughput of 69,800 barrels per day. Based on the analysis, the Company determined that the undiscounted cash flows exceeded the carrying amount of its significant Yorktown operating assets as of June 30, 2010. However, due to the uncertainty of various assumptions used, the potential for future impairment remains. Impairments related to Yorktown could have a material impact on the Company’s results of operations. The Company will continue to evaluate all strategic alternatives and if the economic environment in the Yorktown market improves sufficiently, would expect to restart refining operations. If it becomes apparent to management in the future that the Company will not restart the refining operations, or if its future cash flow forecasts change, an indication of potential impairment would exist at that time. The carrying value of the long-lived assets related to refining operations that were idled and could be subject to impairment was approximately $478.7 million at September 30, 2010. The carrying value of total long-lived and intangible assets at Yorktown as of September 30, 2010 was $692.7 million.

     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 for the three and nine months ended September 30, 2009 includes $0.7 million and $13.3 million in economic hedging losses previously reported as loss from derivative activities under other income (expense) in the third quarter 2009 Condensed Consolidated Statements 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 for the three and nine months ended September 30, 2010 includes $1.7 million and $4.8 million in economic hedging losses, respectively.

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 wholesale group, and the retail group. A description of each segment and its principal products follows:

     Refining Group. The Company’s refining group operates two refineries: one in El Paso, Texas (the “El Paso refinery”) and one near Gallup, New Mexico (the “Gallup 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 two 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.

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

     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 third-party suppliers and from the refining group.

     Retail Group. The Company’s retail group operates service stations that 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 wholesale group supplies the gasoline and diesel fuel that the retail group sells. The Company purchases general merchandise and beverage and food products from various third-party suppliers. At September 30, 2010, the Company’s retail group operated 150 service stations and convenience stores or kiosks located in Arizona, New Mexico, and Colorado.

     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 in Note 3, “Segment Information”. 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; 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.

     The Company temporarily suspended its refinery operations at the Yorktown refinery in September 2010. No impairment charges resulted from the suspension of refining operations. Exit costs of $4.0 million were incurred related to this suspension of operations and were primarily related to one-time termination benefits. There were no terminated contract costs incurred and other exit costs were $1.0 million. All costs have either been paid or accrued at September 30, 2010. These exit costs have been included in direct operating expenses and selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010. The Company expects to incur an additional $9.5 million in exit costs during the fourth quarter of 2010. The Company also ceased operating its refined product distribution terminal located in Flagstaff, Arizona. The Company’s impairment analysis resulted in third quarter impairment charges that have been included in other impairment losses in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010.

     During the second quarter of 2009, in performing its annual impairment analysis, the Company determined that the entire balance of goodwill of $299.6 million in four of its six reporting units was impaired. Related impairment charges have been reported under goodwill impairment loss in the accompanying Condensed Consolidated Statement of Operations for the nine months ended September 30, 2009.

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

     Disclosures regarding the Company’s reportable segments with reconciliations to consolidated totals for the three and nine months ended September 30, 2010 and 2009 are presented below:

		For the Three Months Ended September 30, 2010
		Refining				Wholesale				Retail
		Group (2)				Group				Group				Other				Consolidated
		(In thousands)
Net sales to external customers		$	1,372,880			$	476,707			$	188,709			$	—			$	2,038,296
Intersegment revenues (1)			672,126				154,596				6,429				—				—
Operating income (loss)		$	51,947			$	5,151			$	7,606			$	(14,048	)		$	50,656
Other income (expense), net																			(38,689	)
Income before income taxes																		$	11,967
Depreciation and amortization		$	30,434			$	1,210			$	2,496			$	1,113			$	35,253
Capital expenditures			18,041				63				1,385				171				19,660

		For the Nine Months Ended September 30, 2010
		Refining				Wholesale				Retail
		Group (2)				Group				Group				Other				Consolidated
		(In thousands)
Net sales to external customers		$	4,182,086			$	1,396,018			$	520,924			$	—			$	6,099,028
Intersegment revenues (1)			1,913,798				386,171				17,006				—				—
Operating income (loss)		$	96,505			$	16,766			$	13,883			$	(39,016	)		$	88,138
Other income (expense), net																			(113,507	)
Loss before income taxes																		$	(25,369	)
Depreciation and amortization		$	89,211			$	3,914			$	7,631			$	3,538			$	104,294
Capital expenditures			52,527				470				3,503				241				56,741
Total assets at September 30, 2010			2,238,670				158,246				155,731				109,035				2,661,682

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

		For the Three Months Ended September 30, 2009
		Refining				Wholesale				Retail
		Group				Group				Group				Other				Consolidated
		(In thousands)
Net sales to external customers		$	1,316,021			$	408,762			$	171,490			$	—			$	1,896,273
Intersegment revenues (1)			518,109				60,380				5,218				—				—
Operating income (loss)		$	21,450			$	3,680			$	6,752			$	(11,206	)		$	20,676
Other income (expense), net																			(34,841	)
Loss before income taxes																		$	(14,165	)
Depreciation and amortization		$	29,686			$	1,394			$	2,415			$	1,230			$	34,725
Capital expenditures			21,535				1				2,090				408				24,034

		For the Nine Months Ended September 30, 2009
		Refining				Wholesale				Retail
		Group				Group				Group				Other				Consolidated
		(In thousands)
Net sales to external customers		$	3,379,808			$	1,016,821			$	451,387			$	—			$	4,848,016
Intersegment revenues (1)			1,265,901				169,645				15,058				—				—
Operating income (loss) before goodwill impairment loss		$	183,338			$	6,755			$	12,457			$	(43,977	)		$	158,573
Goodwill impairment loss			(230,712	)			(41,230	)			(27,610	)			—				(299,552	)
Operating loss after goodwill impairment loss			(47,374	)			(34,475	)			(15,153	)			(43,977	)			(140,979	)
Other income (expense), net																			(97,135	)
Loss before income taxes																		$	(238,114	)
Depreciation and amortization		$	94,162			$	4,205			$	7,298			$	3,717			$	109,382
Capital expenditures			89,573				583				2,476				1,130				93,762
Total assets at September 30, 2009 (2)			2,530,605				155,617				157,064				75,182				2,918,468

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

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

measure fair value that is 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.

     The carrying amounts of cash equivalents, accounts receivable, accounts payable, accrued liabilities, and amounts outstanding under the Company’s revolving credit facility, approximated their fair values at September 30, 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 September 30, 2010, and the basis for that measurement:

Fair Value Measurement Using

Quoted Prices in

Active Markets

Significant

for Identical

Other

Significant

Assets or

Observable

Unobservable

Carrying

Liabilities

Inputs

Inputs

Value

(Level 1)

(Level 2)

(Level 3)

(In thousands)

Financial liabilities:

Derivative contracts

$

555

$

—

$

555

$

—

     During the third quarter of 2010, the Company impaired various long-lived assets. The impairment was determined as the excess of the carrying values of the respective assets over fair value. Fair value was determined using unobservable inputs (Level 3). The carrying value of these assets prior to impairment was $5.2 million and $1.2 million after impairment.

5. Inventories

     Inventories were as follows:

		September 30,				December 31,
		2010				2009
		(In thousands)
Refined products		$	148,870			$	145,813
Crude oil and other raw materials			162,241				252,860
Lubricants			12,490				12,738
Convenience store merchandise			11,778				11,342
Inventories		$	335,379			$	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 September 30, 2010 and December 31, 2009, refined products and crude oil and other raw materials totaled 5.7 million barrels and 7.1 million barrels, respectively. The Company’s average LIFO cost per barrel of refined products and

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

crude oil and other raw materials inventories was $54.76 and $56.32 for the nine months ended September 30, 2010 and the year ended December 31, 2009, respectively. At September 30, 2010, the excess of the current cost of these crude oil, refined product, and other feedstock and blendstock inventories over LIFO cost was $121.5 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 $300.9 million and $356.5 million at September 30, 2010 and December 31, 2009, respectively. Inventories valued under the FIFO method were $34.5 million and $66.3 million at September 30, 2010 and December 31, 2009, respectively.

     During the three and nine months ended September 30, 2010, the Company recorded LIFO liquidations caused by permanent decreases in inventory levels that were consistent with the Company’s expectations of year-end inventory levels of crude oil, other raw materials, and refined products at the Yorktown facility. The effect of these liquidations increased operating income by $8.9 million, net income by $5.1 million, and earnings per diluted share by $0.06 for the three months ended September 30, 2010. The effect of these liquidations increased operating income by $8.9 million, decreased net loss by $3.3 million, and decreased the loss per diluted share by $0.04 for the nine months ended September 30, 2010. There were no inventory reductions that resulted in the liquidation of LIFO inventory levels for the three and nine months ended September 30, 2009.

6. Prepaid Expenses

     Prepaid expenses were as follows:

		September 30,				December 31,
		2010				2009
		(In thousands)
Prepaid crude oil and other raw materials inventories		$	80,922			$	11,407
Prepaid insurance and other			9,749				17,809
Prepaid expenses		$	90,671			$	29,216

7. Other Current Assets

     Other current assets were as follows:

		September 30,				December 31,
		2010				2009
		(In thousands)
Materials and chemicals inventories		$	35,702			$	31,988
Income taxes receivable and prepaid			19,788				42,685
Derivative activities receivable			2,746				3,778
Spare parts inventories			763				781
Other			153				508
Other current assets		$	59,152			$	79,740

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

8. Property, Plant, and Equipment

     Property, plant, and equipment were as follows:

		September 30,				December 31,
		2010				2009
		(In thousands)
Refinery facilities and related equipment		$	1,750,732			$	1,712,295
Pipelines, terminals, and transportation equipment			90,930				94,485
Retail and wholesale facilities and related equipment			184,266				183,681
Other			20,855				20,537
Construction in progress			82,414				81,337
			2,129,197				2,092,335
Accumulated depreciation			(415,279	)			(324,435	)
Property, plant, and equipment, net		$	1,713,918			$	1,767,900

     Depreciation expense was $34.2 million and $101.1 million for the three and nine months ended September 30, 2010, and $33.5 million and $105.8 million for the three and nine months ended September 30, 2009, respectively.

     Included in property, plant, and equipment, net, at September 30, 2010 were $505.8 million in idled assets related primarily to our temporarily idled Yorktown ($478.7 million) and indefinitely idled Bloomfield ($21.9 million) refineries. The majority of these assets are included under refinery facilities and related equipment and pipelines, terminals, and transportation equipment in the table above. All idled assets continue to be depreciated over their respective estimated useful lives and are subject to the same impairment considerations and periodic review of estimated useful lives as productive assets.

9. Intangible Assets

     Intangible assets were as follows:

		September 30, 2010												December 31, 2009
																										Weighted
																										Average
		Gross								Net				Gross								Net				Amortization
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying				Period
		Value				Amortization				Value				Value				Amortization				Value				(Years)
		(In thousands)
Amortizable assets:
Licenses and permits		$	39,151			$	(9,953	)		$	29,198			$	39,151			$	(7,717	)		$	31,434				9.8
Customer relationships			6,300				(1,200	)			5,100				6,300				(885	)			5,415				12.2
Rights-of-way			6,524				(1,092	)			5,432				4,203				(905	)			3,298				6.7
Other			1,360				(580	)			780				1,149				(652	)			497				8.4
			53,335				(12,825	)			40,510				50,803				(10,159	)			40,644
Unamortizable assets:
Trademarks			4,800				—				4,800				5,300				—				5,300
Liquor licenses			15,749				—				15,749				15,749				—				15,749
Intangible assets, net		$	73,884			$	(12,825	)		$	61,059			$	71,852			$	(10,159	)		$	61,693

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

     Intangible asset amortization expense for the three and nine months ended September 30, 2010 was $1.0 million and $2.9 million, respectively, based upon estimated useful lives ranging from 3 to 20 years. Intangible asset amortization expense for the three and nine months ended September 30, 2009 was $1.3 million and $3.6 million, respectively, 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		$	1,148
2011			4,651
2012			4,626
2013			4,342
2014			4,151
2015			3,673

     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 of 2009 results of operations. There were no such impairment charges prior to the second quarter of 2009.

10. Accrued Liabilities

     Accrued liabilities were as follows:

		September 30,				December 31,
		2010				2009
		(In thousands)
Excise taxes		$	33,331			$	34,898
Payroll and related costs			31,104				35,293
Legal fees and other			23,503				22,480
Accrued interest			15,833				4,323
Environmental reserve			12,630				8,024
Property taxes			10,882				10,536
Pension obligation			7,094				3,015
Accrued income taxes			3,661				—
Accrued liabilities		$	138,038			$	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 Statement of Operations for the nine months ended September 30, 2010 by $8.5 million and $6.2 million, respectively.

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

11. Long-Term Debt

     Long-term debt was as follows:

		September 30,				December 31,
		2010				2009
		(In thousands)
11.25% Senior Secured Notes, due 2017, net of unamortized discount of $25,220 and $26,943, respectively		$	299,780			$	298,057
Floating Rate Senior Secured Notes, due 2014, net of unamortized discount of $17,825 and $20,467, respectively			257,175				254,533
5.75% Senior Convertible Notes, due 2014, net of conversion feature of $48,854 and $56,183, respectively			166,596				159,267
Term Loan, due 2014			345,057				354,807
2007 Revolving Credit Agreement			25,000				50,000
Long-term debt			1,093,608				1,116,664
Current portion of long-term debt (1)			(38,000	)			(63,000	)
Long-term debt, net of current portion		$	1,055,608			$	1,053,664

     Interest expense and other financing costs were as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
						(In thousands)
Contractual interest:
11.25% Senior Secured Notes		$	9,141			$	9,344			$	27,422			$	11,273
Floating Senior Secured Notes			7,555				7,555				22,418				9,115
5.75% Senior Convertible Notes			3,097				3,146				9,291				3,817
Term Loan			9,437				7,549				28,262				58,108
2007 Revolving Credit Agreement			1,393				—				4,628				188
			30,623				27,594				92,021				82,501
Amortization of original issuance discount:
11.25% Senior Secured Notes			512				511				1,723				617
Floating Senior Secured Notes			962				776				2,642				935
5.75% Senior Convertible Notes			2,537				2,193				7,329				2,650
			4,011				3,480				11,694				4,202
Other interest expense			3,641				2,476				10,269				7,021
Capitalized interest			(1,176	)			(526	)			(2,816	)			(5,677	)
Interest expense and other financing costs		$	37,099			$	33,024			$	111,168			$	88,047

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

     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. At September 30, 2010, the fair value of the Fixed Rate Notes was $302.3 million.

     The Floating Rate Notes pay interest quarterly at a per annum rate, reset quarterly, equal to three-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 September 30, 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 $255.8 million at September 30, 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. At September 30, 2010, the fair value of the Convertible Senior Notes was $182.6 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 $922.4 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 nine months ended September 30, 2010 and 2009 were 10.75% and 8.46%, respectively. As of September 30, 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 unscheduled paydown of the Term Loan in June 2009, the Company expensed $9.0 million to write-off a portion of the unamortized loan fees related to the Term Loan. At September 30, 2010, the fair value of the Term Loan was $337.3 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. At September 30, 2010, the gross availability under the 2007 Revolving Credit Agreement was $572.6 million determined based on an advance rate formula tied to the Company’s accounts receivable and inventory levels. At September 30, 2010, the Company had net availability under the 2007 Revolving Credit Agreement of $292.9 million due to $254.7 million in letters of credit outstanding and $25.0 million in outstanding direct borrowings. The average interest rates under the 2007 Revolving Credit Agreement for the nine months ended September 30,

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

2010 and 2009 were 6.14% and 5.13%, respectively. At September 30, 2010, the interest rate under the 2007 Revolving Credit Agreement was 6.75%. 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 2007 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 September 30, 2010.

12. Income Taxes

     Compared to the federal statutory rate of 35%, the effective tax rates for the three and nine months ended September 30, 2010 were 42.7% and 62.6%, respectively. The effective tax rates for the three and nine months ended September 30, 2009, excluding the non-deductible goodwill impairment charge, were 66.2% and 24.5%, respectively. The effective tax rates and resultant expense and benefit, respectively, for the three and nine months ended September 30, 2010 were 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 rates and resultant benefit and expense, respectively, for the three and nine months ended September 30, 2009 were also affected by the federal income tax credit available to small business refiners related to the production of ultra-low sulfur diesel fuel. The effective tax rate applied during any quarter is affected by the earnings or losses in that quarter, the year-to-date earnings or losses at the end of the reporting period, and our forecast of earnings or losses for the future quarters within the reporting year. Our effective tax rate can also be affected by any estimated tax credits that we plan to generate for the full year’s estimated tax provision. Generally, such tax credits will lower our tax expense and effective rate when we have positive earnings and increase our tax benefit and effective rate when we have losses.

     The Company concluded an examination by the Internal Revenue Service (“IRS”) of Giant for premerger tax years ended December 31, 2006 and May 31, 2007, which resulted in a $1.3 million overpayment. IRS examinations of legacy Western remain open for 2005, 2006, 2007, and 2008. 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 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 September 30, 2010, the Company had no unrecognized tax benefits.

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

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.

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 of 2010. No changes to the Company’s proposed plan of termination were required. Through September 2010, the Company had distributed $21.7 million ($4.2 million in 2010 and $17.5 million in 2009) from plan assets to plan participants as a result of the termination agreement. Distributions made were in accordance with the termination agreement. The termination resulted in reductions to the related pension obligation of $5.2 million and $24.3 million, and to other comprehensive loss of $0.6 million and $25.1 million, in the nine months ended September 30, 2010 and the year ended December 31, 2009, respectively.

     In connection with the temporary idling of Yorktown refining operations and resultant termination of participants of the defined benefit plan covering certain Yorktown refinery employees, which occurred in the fourth quarter of 2010, the Company increased both its pension obligation and other comprehensive loss (before income taxes) by $3.7 million, respectively, in the third quarter of 2010. The Company anticipates that substantially all assets held by the benefit plan will be distributed to plan participants by the end of the fourth quarter of 2010.

     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								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
						(In thousands)
Net periodic benefit cost includes:
Service cost		$	462			$	437			$	1,352			$	2,230
Interest cost			327				285				925				1,651
Amortization of net (gain) loss			(9	)			—				4				210
Expected return on assets			(471	)			(257	)			(1,078	)			(1,478	)
Curtailment gain			—				—				—				(1,508	)
Termination expenses			—				—				1,250				—
Net periodic benefit cost		$	309			$	465			$	2,453			$	1,105

     The Company contributed $5.6 million for the pension plan covering certain El Paso refinery employees during the nine months ended September 30, 2010 to complete the termination of its pension plan for the El Paso refinery. In 2010, the Company contributed $5.0 million to its pension plan for the Yorktown refinery.

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

     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								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
						(In thousands)
Net periodic benefit cost includes:
Service cost		$	105			$	135			$	371			$	405
Interest cost			124				120				374				360
Amortization of net (gain) loss			(3	)			3				(11	)			8
Net periodic benefit cost		$	226			$	258			$	734			$	773

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 September 30, 2010 and 2009, the Company expensed $1.7 million and $2.1 million; and for the nine months ended September 30, 2010 and 2009, the Company expensed $4.6 million and $6.6 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. The Company routinely enters into 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, Derivatives 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 September 30, 2010, the Company had open commodity derivative instruments consisting of crude oil futures and finished products price swaps on 345,000 barrels primarily to protect the value of certain crude oil, finished product, and blendstock inventories for the fourth quarter of 2010. The fair value of the outstanding contracts at September 30, 2010, was a net unrealized loss of $0.6 million, of which $1.6 million were unrealized gains and $2.2 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 $1.7 million, within cost of products sold, of net realized and unrealized losses and $4.8 million of net realized and unrealized losses from derivative activities on matured contracts during the three and nine months ended September 30, 2010, respectively. The Company recognized $0.7 million and $13.3 million within cost of products sold, of net realized and unrealized losses from derivative activities on matured contracts during the three and nine months ended September 30, 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.

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

     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 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-based compensation expense of $1.8 million and $1.2 million for the three months ended September 30, 2010 and 2009, of which $0.3 million and $0.3 million was included in direct operating expenses and $1.5 million and $0.9 million in selling, general, and administrative expenses, respectively. The tax deficiency related to the shares that vested during the three months ended September 30, 2010 and 2009 was $0.1 million and $0.2 million, respectively, 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 September 30, 2010 and 2009 was $0.5 million and $0.6 million, respectively. The related aggregate intrinsic value of these shares at the vesting dates for both 2010 and 2009 was $0.1 million. No expense was capitalized in either period.

     The Company recorded stock-based compensation expense of $4.3 million and $3.5 million for the nine months ended September 30, 2010 and 2009, respectively, of which $0.6 million and $0.8 million was included in direct operating expenses and $3.7 million and $2.7 million in selling, general, and administrative expenses, respectively. The tax deficiency related to the shares that vested during the nine months ended September 30, 2010 and 2009 was $1.0 million and $0.7 million, respectively, determined using a statutory blended rate of 37.17%. The aggregate fair value at the grant date of the shares that vested during the nine months ended September 30, 2010 and 2009 was $4.5 million and $4.8 million, respectively. The related aggregate intrinsic value of these shares at the vesting date for 2010 and 2009 was $1.6 million and $3.0 million, respectively. No expense was capitalized in either period.

     As of September 30, 2010, there were 2,295,488 shares of restricted stock outstanding with an aggregate fair value at grant date of $15.3 million and an aggregate intrinsic value of $12.0 million. The compensation cost of nonvested awards not recognized as of September 30, 2010 was $12.4 million, which will be recognized over a weighted-average period of approximately 2.27 years. The following table summarizes the Company’s restricted stock activity for the nine months ended September 30, 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
Awards granted			1,676,939				5.47
Awards vested			(63,394	)			9.21
Awards forfeited			(10,783	)			21.15
Nonvested at June 30, 2010			2,279,937				6.82
Awards granted			40,408				5.01
Awards vested			(24,857	)			16.37
Awards forfeited			—				—
Nonvested at September 30, 2010			2,295,488				6.68

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

     In January 2006, the Company’s Board of Directors and shareholders authorized the issuance of up to 5,000,000 shares of common stock under the Western Refining 2006 Long-Term Incentive Plan (“2006 LTIP”). At September 30, 2010, there were 145,773 shares of common stock reserved for future grants under the 2006 LTIP. On April 7, 2010, the Company’s Board of Directors authorized the issuance of up to 3,850,000 shares of common stock under the 2010 Incentive Plan of Western Refining (“2010 Incentive Plan”). The 2010 Incentive Plan was approved by the Company’s shareholders on May 25, 2010. At September 30, 2010, there were 3,850,000 shares of common stock reserved for future grants under the 2010 Incentive 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. During January 2006, 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 and nine months ended September 30, 2009, the Company repurchased 3,872 and 51,103 shares at an aggregate cost of $0.1 million and $0.6 million, respectively. These repurchases were recorded as treasury stock. There were no repurchases of the Company’s common stock during the three and nine months ended September 30, 2010.

     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. The Company did not declare or pay dividends during 2009 or the three and nine months ended September 30, 2010.

17. Earnings Per Share

     As discussed in Note 15, “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.

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

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(In thousands, other than per share amounts)
Allocation of earnings
Net income (loss)		$	6,859			$	(4,782	)		$	(9,477	)		$	(253,171	)
Distributed earnings			—				—				—				—
Income allocated to participating securities			(173	)			—				—				—
Undistributed income (loss) available to common shareholders		$	6,686			$	(4,782	)		$	(9,477	)		$	(253,171	)
Weighted-average number of common shares
outstanding:
Basic and dilutive number of common shares outstanding			88,280				87,973				88,170				76,191
Basic earnings (loss) per common share:
Distributed earnings per share		$	—			$	—			$	—			$	—
Undistributed earnings (loss) per share			0.08				(0.05	)			(0.11	)			(3.29	)
Basic earnings (loss) per common share		$	0.08			$	(0.05	)		$	(0.11	)		$	(3.29	)
Diluted earnings (loss) per common share:
Distributed earnings per share		$	—			$	—			$	—			$	—
Undistributed earnings (loss) per share			0.08				(0.05	)			(0.11	)			(3.29	)
Diluted earnings (loss) per common share		$	0.08			$	(0.05	)		$	(0.11	)		$	(3.29	)

     The following table reflects potentially dilutive securities that were excluded from the diluted earnings (loss) per common share calculation as the effect of including such shares would have been antidilutive:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
						(In thousands)
Common equivalent shares from Senior Convertible Notes			19,949				19,949				19,949				19,949
Restricted stock			9				—				9				7

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 nine months ended September 30, 2009:

		Nine Months Ended
		September 30, 2009
		(In thousands)
Lease payments		$	181
Operating and maintenance expenses			456
Reimbursed by officers			(321	)
Total		$	316