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: 333-163942

 

ALON REFINING KROTZ SPRINGS, INC.

(Exact name of Registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		74-2849682 (I.R.S. Employer Identification No.)

7616 LBJ Freeway, Suite 300, Dallas, Texas 75251
(Address of principal executive offices) (Zip Code)

(972) 367-3600
(Registrant’s telephone number, including area code)

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. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     The registrant is a subsidiary of Alon USA Energy, Inc., a Delaware corporation, and there is no market for the registrant’s common stock. As of November 1, 2010, 50,110 shares of the registrant’s Class A Common stock, par value $0.01, and 315 shares of the registrant’s Class B Common stock, par value $0.01, were outstanding.

     The aggregate market value for the registrant’s common stock held by non-affiliates as of September 30, 2010, the last day of the registrant’s most recently completed third fiscal quarter was $0.

 

 

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS			1
BALANCE SHEETS			1
STATEMENTS OF OPERATIONS			2
STATEMENTS OF CASH FLOWS			3
NOTES TO FINANCIAL STATEMENTS			4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			15
FORWARD-LOOKING STATEMENTS			15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			25
ITEM 4. CONTROLS AND PROCEDURES			26
PART II. OTHER INFORMATION
ITEM 5. EXHIBITS			27
SIGNATURES			28
EXHIBITS
EX-31.1 CERTIFICATION OF CEO PURSUANT TO SECTION 302
EX-31.2 CERTIFICATION OF CFO PURSUANT TO SECTION 302
EX-32.1 CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALON REFINING KROTZ SPRINGS, INC.

BALANCE SHEETS

(in thousands except per share data)

		September 30,				December 31,
		2010				2009
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	—			$	26,161
Accounts receivable			3,378				8,344
Inventories			42,066				54,623
Prepaid expenses			721				615
Total current assets			46,165				89,743
Property, plant, and equipment, net			353,064				362,265
Other assets			32,276				30,829
Total assets		$	431,505			$	482,837
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	180,037			$	92,682
Accrued liabilities			32,653				31,299
Short-term debt			30,000				—
Total current liabilities			242,690				123,981
Other non-current liabilities			4,496				7,873
Long-term debt			206,928				288,980
Total liabilities			454,114				420,834
Commitments and contingencies (Note 10)
Stockholders’ equity:
Class A Common stock, par value $0.01, 75,000 shares authorized; 50,110 and 36,219 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively			—				—
Class B Common stock, par value $0.01, 1,000 shares authorized; 315 and 405 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively			—				—
Additional paid-in capital			137,656				126,656
Accumulated other comprehensive loss, net of income tax			(886	)			(7,240	)
Retained deficit			(159,379	)			(57,413	)
Total stockholders’ equity			(22,609	)			62,003
Total liabilities and equity		$	431,505			$	482,837

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

ALON REFINING KROTZ SPRINGS, INC.

STATEMENTS OF OPERATIONS

(unaudited, dollars in thousands)

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net sales		$	470,954			$	390,748			$	648,912			$	990,511
Operating costs and expenses:
Cost of sales			465,875				377,315				646,144				866,197
Direct operating expenses			20,001				15,090				45,909				58,959
Selling, general and administrative expenses			1,646				1,154				5,183				4,810
Depreciation and amortization			5,578				5,577				16,187				14,735
Total operating costs and expenses			493,100				399,136				713,423				944,701
Operating income (loss)			(22,146	)			(8,388	)			(64,511	)			45,810
Interest expense			(10,511	)			(10,461	)			(37,467	)			(38,776	)
Other income, net			(2	)			2				12				6
Income (loss) before income tax expense (benefit)			(32,659	)			(18,847	)			(101,966	)			7,040
Income tax expense (benefit)			—				(6,530	)			—				—
Net income (loss)		$	(32,659	)		$	(12,317	)		$	(101,966	)		$	7,040

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

ALON REFINING KROTZ SPRINGS, INC.

STATEMENTS OF CASH FLOWS

(unaudited, dollars in thousands)

		For the Nine Months Ended
		September 30,
		2010				2009
Cash flows from operating activities:
Net income (loss)		$	(101,966	)		$	7,040
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization			16,187				14,735
Amortization of debt issuance costs			1,967				3,993
Amortization of original issuance discount			1,235				—
Write-off of unamortized debt issuance costs			6,659				—
Changes in operating assets and liabilities:
Accounts and other receivables, net			4,966				23,693
Inventories			20,883				(21,488	)
Heating oil crack spread hedge			—				116,701
Prepaid expenses and other current assets			(106	)			20,796
Other assets			(2,656	)			(563	)
Accounts payable			66,891				90,074
Accrued liabilities			7,708				(19,185	)
Other non-current liabilities			3,184				27
Net cash provided by operating activities			24,952				235,823
Cash flows from investing activities:
Capital expenditures			(5,381	)			(5,192	)
Capital expenditures for turnarounds and catalysts			(2,369	)			(2,250	)
Earnout payment related to refinery acquisition			(6,562	)			(17,521	)
Net cash used in investing activities			(14,312	)			(24,963	)
Cash flows from financing activities:
Deferred debt issuance costs			(847	)			(5,977	)
Cash received from inventory supply agreement			6,333				—
Revolving credit facilities, net			(83,287	)			(141,703	)
Additions to short-term debt			65,000				—
Payments on short-term debt			(35,000	)			—
Payments on long-term debt			—				(88,180	)
Proceeds from parent equity investment			11,000				25,000
Net cash used in financing activities			(36,801	)			(210,860	)
Net increase (decrease) in cash and cash equivalents			(26,161	)			—
Cash and cash equivalents, beginning of period			26,161				—
Cash and cash equivalents, end of period		$	—			$	—
Supplemental cash flow information:
Cash paid for interest		$	19,541			$	36,469
Financing activity — payments on long-term debt from deposit held to secure heating oil crack spread hedge		$	—			$	(50,000	)

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

ALON REFINING KROTZ SPRINGS, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited, dollars in thousands except as noted)

(1) Basis of Presentation and Certain Significant Accounting Policies

     (a) Basis of Presentation

     The financial statements include the accounts of Alon Refining Krotz Springs, Inc. (the “Company”). These financial statements of the Company are unaudited and have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of the Company’s management, the information included in these financial statements reflects all adjustments, consisting of normal and recurring adjustments, which are necessary for a fair presentation of the Company’s financial position and results of operations for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the operating results that may be obtained for the year ending December 31, 2010.

     The balance sheet as of December 31, 2009 has been derived from the audited financial statements as of that date. These unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

     (b) Revenue Recognition

     Revenues from sales of refined products are earned and realized upon transfer of title to the customer based on the contractual terms of delivery (including payment terms and prices). Title primarily transfers at the refinery when the refined product is loaded into common carrier pipelines, trucks or railcars (free on board origin). In some situations, title transfers at the customer’s destination (free on board destination).

     In the ordinary course of business, logistical and refinery production schedules necessitate the occasional sale of crude oil to third parties. All purchases and sales of crude oil are recorded net, in cost of sales in the statements of operations.

     (c) New Accounting Standards

     In February 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-09, Subsequent Event (Topic 855) which amends FASB Accounting Standards Codification (“ASC”) Topic 855, Subsequent Events so that SEC filers, as defined in the ASU, no longer are required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. ASU 2010-09 is effective immediately. ASU 2010-09 only affects disclosure requirements and will not have any effect on the Company’s financial statements.

     In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value which amends FASB ASC Topic 820, Fair Value Measurements and Disclosure, to require entities to make new disclosure about recurring and non-recurring fair-value measurements. The update requires new disclosures regarding significant transfers in and out of Level 1 and Level 2 fair-value measurements and information about purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value adjustments. The update provides additional guidance on other fair value disclosures. This update is effective for interim and annual reporting periods beginning after December 15, 2009. ASU 2010-06 only affects disclosure requirements and will not have any effect on the Company’s financial statements.

(2) Operating Results and Liquidity

     Due to the refinery operating margin environment, the Company accelerated the turnaround that was originally scheduled for the first quarter of 2010 to November 2009. Also, the Company extended the refinery downtime

ALON REFINING KROTZ SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)

beyond the turnaround due to further distressed refinery operating margins. As a result, the refinery had no throughput for 2010 until its restart in June 2010.

     On March 15, 2010, the Company terminated its revolving credit facility and repaid all outstanding amounts thereunder. As a result of the prepayment of the revolving credit facility, a write-off of unamortized debt issuance costs of $6,659 was recorded as interest expense in the first quarter of 2010.

     On March 15, 2010, the Company entered into a $65,000 short-term credit facility with Bank Hapoalim B.M. that, as currently amended and restated matures on November 15, 2010. The Company originally borrowed $65,000 and has repaid $35,000 as of September 30, 2010. The Company prepaid the remaining $30,000 on October 28, 2010, through a capital contribution from its parent.

     Future operating results will depend on market factors, primarily the difference between the prices the Company receives from customers for produced products compared to the prices the Company pays to suppliers for crude oil. The Company plans to continue to operate the refinery at current or higher utilization rates as long as the refinery is able to generate cash operating margin. Management believes its current liquidity is adequate to operate the refinery.

(3) Supply and Offtake Agreement

     Supply and Offtake Agreement with J. Aron & Company

     On April 21, 2010, the Company entered into a Supply and Offtake Agreement, which was amended on May 26, 2010, (the “Supply and Offtake Agreement”) with J. Aron & Company (“J. Aron”), the proceeds of which allowed the Company to retire part of its obligations under the Term Facility, as defined below, and support the operation of the refinery at a minimum of 72,000 barrels per day. Pursuant to the Supply and Offtake Agreement, (i) J. Aron agreed to sell to the Company, and the Company agreed to buy from J. Aron, at market price, crude oil for processing at the refinery and (ii) the Company agreed to sell, and J. Aron agreed to buy, at market price, certain refined products produced at the refinery.

     In connection with the execution of the Supply and Offtake Agreement, the Company also entered into agreements that provided for the sale, at market price, of the Company’s crude oil and certain refined product inventories to J. Aron, the lease to J. Aron of crude oil and refined product storage tanks located at the refinery, and an agreement to identify prospective purchasers of refined products on J. Aron’s behalf. The Supply and Offtake Agreement has an initial term that expires on May 31, 2012, and automatically renews for up to two additional 12-month terms unless either party provides notice of termination at least six months prior to the end of the then-current term. Following expiration or termination of the Supply and Offtake Agreement, the Company is obligated to purchase the crude oil and refined product inventories then owned by J. Aron and located at the refinery.

     The Supply and Offtake Agreement includes customary events of default and restrictions on the activities of the Company.

     Standby LC Facility

     On May 28, 2010, the Company entered into a secured Credit Agreement (the “Standby LC Facility”) by and between the Company, as Borrower, and Goldman Sachs Bank USA, as Issuing Bank. The Standby LC Facility provides for up to $200,000 of letters of credit to be issued to J. Aron. Obligations under the Standby LC Facility are secured by a first priority lien on the existing and future accounts receivable and inventory of the Company. At this time there is no further availability under the Standby LC Facility.

     The Standby LC Facility includes customary events of default and restrictions on the activities of the Company. The Standby LC Facility contains no maintenance financial covenants.

ALON REFINING KROTZ SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)

(4) Fair Value and Derivative Instruments

     (a) Fair Value of Financial Instruments

     The carrying amounts of the Company’s cash and cash equivalents, receivables, payables and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The reported amounts of short-term and long-term debt approximate fair value. Derivative financial instruments are carried at fair value, which is based on quoted market prices.

     The Company must determine fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As required, the Company utilizes valuation techniques that maximize the use of observable inputs (levels 1 and 2) and minimize the use of unobservable inputs (level 3) within the fair value hierarchy. The Company generally applies the “market approach” to determine fair value. This method uses pricing and other information generated by market transactions for identical or comparable assets and liabilities. Assets and liabilities are classified within the fair value hierarchy based on the lowest level (least observable) input that is significant to the measurement in its entirety.

     The following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the balance sheets at September 30, 2010 and December 31, 2009, respectively:

		Quoted Prices
		in
		Active Markets				Significant
		for Identical				Other				Significant
		Assets or				Observable				Unobservable
		Liabilities				Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)				Total
As of September 30, 2010
Assets:
Commodity contracts (futures and forwards)		$	531			$	—			$	—			$	531
Liabilities:
Commodity contracts (swaps)			—				633				—				633
Commodity contracts (call options)			—				6,646				—				6,646
As of December 31, 2009
Assets:
Commodity contracts (swaps)		$	—			$	89			$	—			$	89
Liabilities:
Commodity contracts (swaps)			—				9,983				—				9,983

     (b) Derivative Financial Instruments

     Commodity Derivatives — Mark to Market

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

     The Company has elected not to designate the following commodity derivatives as cash flow hedges for financial accounting purposes. Therefore, changes in the fair value of the commodity derivatives are included in income in the period of the change.

     At September 30, 2010, the Company held forward contracts for net purchases of 92,966 barrels of refined

ALON REFINING KROTZ SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)

products at an average price of $86.11 per barrel. At September 30, 2009, Alon held net forward contracts for sales of 200,015 barrels of refined product at an average price of $70.31 per barrel. The contracts are recorded at their fair market values and an unrealized gain of $531 and an unrealized loss of $688 have been included in cost of sales in the statements of operations for the nine months ended September 30, 2010 and September 30, 2009, respectively.

     At September 30, 2009, the Company held futures contracts for 434,000 barrels of crude swaps at an average price of $74.80 per barrel. The contracts are recorded at their fair market values.

     At September 30, 2010, the Company held futures contracts for sales of 255,600 barrels of heating oil crack spread swaps at an average of $11.38 per barrel. The contracts are recorded at their fair market values and an unrealized loss of $633 has been included in cost of sales in the statement of operations for the nine months ended September 30, 2010.

     At September 30, 2010, the Company had written call contracts outstanding for the net purchase of 3,514,500 barrels of crude and sale of 3,514,500 barrels of heating oil at an average strike price of $11.35 per barrel for a period of 21 months commencing October 2010. The value of the obligation equals the premium received resulting in no unrealized gain or loss being recorded in cost of sales in the statement of operations for the nine months ended September 30, 2010.

     Commodity Derivatives — Cash Flow Hedges

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

     Contemporaneously with the acquisition of the refinery, the Company entered into futures contracts for the forward purchase of crude oil and the forward sale of distillates of 14,849,750 barrels. These futures contracts were designated as cash flow hedges for accounting purposes. Gains and losses for the futures contracts designated as cash flow hedges reported in accumulated other comprehensive income in the balance sheet are reclassified into cost of sales when the forecasted transactions affect income. In the fourth quarter of 2008, the Company determined during its retrospective assessment of hedge effectiveness that the hedge was no longer highly effective. Cash flow hedge accounting was discontinued in the fourth quarter of 2008 and all changes in value subsequent to the discontinuance were recognized into earnings. In April 2009, the Company completed an unwind of these futures contracts for $139,296.

     Losses of $2,825 and $6,354 for the three and nine months ended September 30, 2010, and gains of $433 and $4,447 for the three and nine months ended September 30, 2009, have been reclassified from accumulated other comprehensive income to earnings since the discontinuance of cash flow hedge accounting, respectively. All remaining adjustments from accumulated comprehensive income to cost of sales will be recorded in October 2010. No component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness.

ALON REFINING KROTZ SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)

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

		As of September 30, 2010
		Asset Derivatives								Liability Derivatives
		Balance Sheet								Balance Sheet
		Location				Fair Value				Location				Fair Value
Derivatives not designated as hedging instruments:
Commodity contracts (swaps)						$	—			Accounts payable				$	(633	)
Commodity contracts (futures, forwards, swaps and call options)							—			Accrued liabilities					(2,953	)
Commodity contracts (call options)							—			Other non-current liabilities					(3,162	)
Total derivatives not designated as hedging instruments						$	—							$	(6,748	)

		As of December 31, 2009
		Asset Derivatives								Liability Derivatives
		Balance Sheet								Balance Sheet
		Location				Fair Value				Location				Fair Value
Derivatives not designated as hedging instruments:
Commodity contracts (futures, forwards and swaps)		Accounts receivable				$	89			Accrued liabilities				$	(9,983	)
Total derivatives not designated as hedging instruments						$	89							$	(9,983	)

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

														Gain (Loss) Reclassified
														from Accumulated OCI into
														Income (Ineffective
														Portion and Amount
						Gain (Loss) Reclassified from Accumulated								Excluded from
Cash Flow Hedging		Gain (Loss)				OCI into Income (Effective Portion)								Effectiveness Testing)
Relationships		Recognized in OCI				Location				Amount				Location				Amount
For the Three Months Ended September 30, 2010
Commodity contracts (heating oil swaps)		$	—			Cost of sales				$	(2,825	)						$	—
Total derivatives		$	—							$	(2,825	)						$	—
For the Nine months Ended September 30, 2010
Commodity contracts (heating oil swaps)		$	—			Cost of sales				$	(6,354	)						$	—
Total derivatives		$	—							$	(6,354	)						$	—

ALON REFINING KROTZ SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)

														Gain (Loss) Reclassified
														from Accumulated OCI into
														Income (Ineffective
						Gain (Loss) Reclassified from								Portion and Amount
						Accumulated OCI into Income								Excluded from
Cash Flow Hedging		Gain (Loss)				(Effective Portion)								Effectiveness Testing)
Relationships		Recognized in OCI				Location				Amount				Location				Amount
For the Three Months Ended September 30, 2009
Commodity contracts (heating oil swaps)		$	—			Cost of sales				$	433							$	—
Total derivatives		$	—							$	433							$	—
For the Nine months Ended September 30, 2009
Commodity contracts (heating oil swaps)		$	—			Cost of sales				$	4,447							$	—
Total derivatives		$	—							$	4,447							$	—

		Gain (Loss) Recognized in Income
Derivatives not designated as hedging instruments:		Location		Amount
For the Three Months Ended September 30, 2010
Commodity contracts (futures and forwards)		Cost of sales		$	1,290
Commodity contracts (swaps)		Cost of sales			(186	)
Commodity contracts (call options)		Cost of sales			60
Total derivatives				$	1,164
For the Nine months Ended September 30, 2010
Commodity contracts (futures and forwards)		Cost of sales		$	1,848
Commodity contracts (swaps)		Cost of sales			(501	)
Total derivatives				$	1,347

		Gain (Loss) Recognized in Income
Derivatives not designated as hedging instruments:		Location		Amount
For the Three Months Ended September 30, 2009
Commodity contracts (futures and forwards)		Cost of sales		$	1,725
Total derivatives				$	1,725
For the Nine months Ended September 30, 2009
Commodity contracts (futures and forwards)		Cost of sales		$	(3,000	)
Commodity contracts (heating oil swaps)		Cost of sales			41,182
Commodity contracts (crude swaps)		Cost of sales			174
Total derivatives				$	38,356

(5) Inventories

     The Company’s inventories are stated at the lower of cost or market and are comprised primarily of crude oil, refined products and blendstocks. Cost is determined under the LIFO method for crude oil, refined products and blendstocks. Materials and supplies are stated at average cost.

ALON REFINING KROTZ SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)

     Market values of crude oil, refined products and blendstock inventories exceeded LIFO costs by $21,087 and $20,499 at September 30, 2010 and December 31, 2009, respectively.

     The Company’s inventories include $38,629 and $22,558 of inventory consigned to others at September 30, 2010 and December 31, 2009, respectively.

(6) Property, Plant and Equipment, net

     Property, plant and equipment consisted of the following:

		September 30,				December 31,
		2010				2009
Refining facilities		$	394,822			$	389,441
Less accumulated depreciation			(41,758	)			(27,176	)
Property, plant and equipment, net		$	353,064			$	362,265

     The useful lives of refining facilities used to determine depreciation expense were 3 — 20 years with an average life of 18 years.

(7) Additional Financial Information

     The following tables provide additional financial information related to the financial statements.

     (a) Other assets

		September 30,				December 31,
		2010				2009
Deferred turnaround and chemical catalyst cost		$	12,358			$	11,540
Deferred debt issuance costs			9,287				17,118
Intangible assets			2,168				2,171
Security deposit			8,463				—
Total other assets		$	32,276			$	30,829

     Unamortized debt issuance costs of $6,659 related to the prepayment of the Company’s revolving credit facility were written off the first quarter of 2010.

     (b) Accrued Liabilities and Other Non-Current Liabilities

		September 30,				December 31,
		2010				2009
Accrued Liabilities:
Commodity contracts		$	2,953			$	9,983
Valero earnout liability			8,750				8,750
Accrued interest			16,631				8,137
Other			4,319				4,429
Total accrued liabilities		$	32,653			$	31,299
Other Non-Current Liabilities:
Environmental accrual		$	389			$	412
Asset retirement obligations			945				899
Valero earnout liability			—				6,562
Commodity contracts			3,162				—
Total other non-current liabilities		$	4,496			$	7,873

ALON REFINING KROTZ SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)

     (c) Comprehensive Income (Loss)

     The following table displays the computation of total comprehensive income:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net income (loss)		$	(32,659	)		$	(12,317	)		$	(101,966	)		$	7,040
Other comprehensive gain, net of tax:
Unrealized gain on cash flow hedges, net of tax			2,825				433				6,354				4,447
Total other comprehensive income, net of tax			2,825				433				6,354				4,447
Comprehensive income (loss)		$	(29,834	)		$	(11,884	)		$	(95,612	)		$	11,487

     The following table displays the components of accumulated other comprehensive loss, net of tax.

		September 30,				December 31,
		2010				2009
Unrealized losses on cash flow hedges		$	(886	)		$	(7,240	)
Accumulated other comprehensive loss		$	(886	)		$	(7,240	)

(8) Indebtedness

     Debt consisted of the following:

		September 30,				December 31,
		2010				2009
Short-term debt		$	30,000			$	—
Revolving credit facility		$	—			$	83,287
Senior secured notes, net of discount			206,928				205,693
Total long-term debt		$	206,928			$	288,980

     Senior Secured Notes. In October 2009, the Company issued 13.50% senior secured notes (the “Senior Secured Notes”) in aggregate principal amount of $216,500 in a private offering. The Senior Secured Notes were issued at an offering price of 94.857%.

     The Company received gross proceeds of $205,365 from the sale of the Senior Secured Notes (before fees and expenses related to the offering). In connection with the closing, the Company prepaid in full all outstanding obligations under the Company’s term loan. The remaining proceeds from the offering were used for general corporate purposes.

     The terms of the Senior Secured Notes are governed by an indenture (the “Indenture”) and the obligations under the Indenture are secured by a first priority lien on the Company’s property, plant and equipment and a second priority lien on the Company’s cash, accounts receivable and inventory.

     The Indenture also contains restrictive covenants such as restrictions on loans, mergers, sales of assets, additional indebtedness and restricted payments. The Indenture does not contain any maintenance financial covenants.

     On February 17, 2010, the Company exchanged $216,480 of Senior Secured Notes for an equivalent amount of Senior Secured Notes (“Exchange Notes”) registered under the Securities Act of 1933. The Exchange Notes will mature on October 15, 2014 and the entire principal amount is due at maturity. Interest is payable semi-annually in arrears on April 15 and October 15. The Exchange Notes are substantially identical to the Senior Secured Notes, except that the Exchange Notes have been registered with the Securities and Exchange Commission and are not subject to transfer restrictions.

ALON REFINING KROTZ SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)

     At September 30, 2010, and December 31, 2009, the Senior Secured Notes had an outstanding balance (net of unamortized discount) of $206,928 and $205,693, respectively. The Company is utilizing the effective interest method to amortize the original issue discount over the life of the Senior Secured Notes.

     Short-Term Credit Facility. On March 15, 2010, the Company entered into a $65,000 short-term credit facility with Bank Hapoalim B.M. (the “Term Facility”). The Term Facility as currently amended and restated matures on November 15, 2010. The Company originally borrowed $65,000 and has repaid $35,000 as of September 30, 2010.

     Borrowings under the Term Facility bear interest at LIBOR plus 3.00% and $30,000 was outstanding under the Term Facility at September 30, 2010. The Term Facility is secured by a second lien on all assets other than cash, accounts receivable, and inventory owned by the Company. The Term Facility contains customary restrictive covenants, such as restrictions on liens, mergers, consolidation, sales of assets, capital expenditures, additional indebtedness, investments, hedging transactions, and certain restricted payments.

     The Term Facility was prepaid in full on October 28, 2010, through a contribution from the Company’s parent.

     Revolving Credit Facility. On March 15, 2010, the Company terminated its revolving credit facility and repaid all outstanding amounts thereunder. As a result of the prepayment of the revolving credit facility, the Company recorded a write-off of unamortized debt issuance costs of $6,659 as interest expense in the first quarter of 2010.

     Borrowings of $83,287 and outstanding letters of credit of $2,765 were outstanding under the revolving credit facility at December 31, 2009.

(9) Related-Party Transactions

     A portion of the purchase price for the acquisition of the Company’s refinery from Valero was provided through an $80,000 equity investment contributed to the Company by Alon Israel Oil Company, Ltd. (“Alon Israel”), the majority stockholder of Alon USA, together with a $21,656 equity investment by Alon USA and its affiliates. Also in connection with the acquisition, Alon Israel, together with Alon USA and its affiliates, arranged for the issuance of $66,000 of standby letters of credit, without recourse to the Company, to support increased borrowing capacity under the Company’s revolving credit facility.

     In connection with amendments to the Company’s credit facilities in April 2009, Alon Israel, together with Alon USA and its affiliates, invested an additional $25,000 of equity in the Company, and arranged for the issuance of an additional $25,000 of standby letters of credit without recourse to the Company. In connection with the termination of the revolving credit facility, the Company returned to Alon Israel $65,000 of letters of credit. In the second quarter of 2010, $11,000 of the standby letters of credit support was converted into equity of the Company. These contributions, together with the equity and letters of credit support resulted in $137,656 of equity and $15,000 of letters of credit support provided to the Company from Alon Israel and Alon USA and its affiliates at September 30, 2010.

     The Company is a subsidiary of Alon USA and is operated as a component of the integrated operations of Alon USA and its other subsidiaries. As such, the executive officers of Alon USA, who are employed by another subsidiary of Alon USA, also serve as executive officers of the Company and Alon USA’s other subsidiaries and Alon USA performs general corporate and administrative services and functions for the Company and Alon USA’s other subsidiaries, which include accounting, treasury, cash management, tax, information technology, insurance administration and claims processing, legal, environmental, risk management, audit, payroll and employee benefit processing, and internal audit services. Alon USA allocates the expenses actually incurred by it in performing these services to the Company and to its other subsidiaries based primarily on the amount of time the individuals performing such services devote to the Company’s business and affairs relative to the amount of time they devote to the business and affairs of Alon USA’s other subsidiaries. The Company records the amount of such allocations to its financial statements as selling, general and administrative expenses. For the three and nine months ended

ALON REFINING KROTZ SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)

September 30, 2010 the Company recorded selling, general and administrative expenses of $1,646 and $5,183, respectively, with respect to allocations from Alon USA for such services.

     Alon USA currently owns all of the Company’s outstanding voting capital stock. As a result, Alon USA can control the election of the Company’s directors, exercise control or significant influence over the Company’s corporate and management policies and generally determine the outcome of any corporate transaction or other matter submitted to the Company’s stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. So long as Alon USA continues to own a majority of the outstanding shares of the Company’s voting capital stock, Alon USA will continue to be able to effectively control or influence the outcome of such matters.

(10) Commitments and Contingencies

     (a) Commitments

     In the normal course of business, the Company has long-term commitments to purchase utilities such as natural gas, electricity and water for use by the refinery. The Company is also party to various refined product and crude oil supply and exchange agreements. These agreements are short-term in nature or provide terms for cancellation.

     Offtake Agreement with Valero

     In connection with the acquisition of the Company’s refinery, the Company and Valero Energy Corporation (“Valero”) entered into an offtake agreement for five years that provides for Valero to purchase, at market prices, light cycle oil and straight run diesel.

     Earnout Agreement with Valero

     In connection with the acquisition of the Company’s refinery, in July 2008 the Company and Valero entered into an earnout agreement which was amended in August 2009, to fix the remaining amounts to be paid thereunder. Pursuant to the earnout agreement, the Company has paid Valero approximately $19,688 in 2009 and $6,562 in the first nine months of 2010. Additionally, the Company has agreed to pay Valero an additional sum of $8,750 in four installments of approximately $2,188 per quarter through the third quarter of 2011 which will result in aggregate earnout payments of $35,000. The $8,750 that remains to be paid is included in accrued liabilities on the consolidated balance sheet at September 30, 2010.

     (b) Environmental

     The Company is subject to federal, state, and local environmental laws and regulations. These rules regulate the discharge of materials into the environment and may require the Company to incur future obligations to investigate the effects of the release or disposal of certain petroleum, chemical, and mineral substances at various sites; to remediate or restore these sites; to compensate others for damage to property and natural resources and for remediation and restoration costs. These possible obligations relate to sites owned by the Company and associated with past or present operations. The Company is currently participating in environmental investigations, assessments and cleanups under these regulations at its refinery. The Company may in the future be involved in additional environmental investigations, assessments and cleanups. The magnitude of future costs will depend on factors such as the unknown nature and contamination at many sites, the timing, extent and method of the remedial actions which may be required, and the determination of the Company’s liability in proportion to other responsible parties.

     Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefit are expensed. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Substantially all amounts accrued are expected to be paid out over the next five years. The level of future expenditures for environmental remediation obligations beyond the next five years cannot be determined with any degree of reliability.

ALON REFINING KROTZ SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)

     The Company has accrued a non-current liability for environmental remediation obligations of $389 and $412 at September 30, 2010 and at December 31, 2009, respectively.

(11) Subsequent Event

     The Company prepaid the remaining $30,000 on the Term Facility on October 28, 2010, through a capital contribution from its parent.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion of our financial condition and results of operations should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009. In this document, the words “the Company,” “we” and “our” refer to Alon Refining Krotz Springs, Inc.

Forward-Looking Statements

     Certain statements contained in this report and other materials we file with the SEC, or in other written or oral statements made by us, other than statements of historical fact, are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We have used the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “will,” “future” and similar terms and phrases to identify forward-looking statements.

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

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

	•		changes in general economic conditions and capital markets;
	•		changes in the underlying demand for our products;
	•		the availability, costs and price volatility of crude oil, other refinery feedstocks and refined products;
	•		changes in the spread between West Texas Intermediate crude oil and Light Louisiana and Heavy Louisiana Sweet crude oil;
	•		the effects of transactions involving forward contracts and derivative instruments;
	•		actions of customers and competitors;
	•		changes in fuel and utility costs incurred by our refinery;
	•		disruptions due to equipment interruption, pipeline disruptions or failure at third-party facilities;
	•		the execution of planned capital projects;
	•		adverse changes in the credit ratings assigned to our trade credit and debt instrument;
	•		the effects of and cost of compliance with current and future state and federal environmental, economic, safety and other laws, policies and regulations;
	•		operating hazards, natural disasters, casualty losses and other matters beyond our control;
	•		the global financial crisis’ impact on our business and financial condition and our ability to refinance existing credit facilities or extend their terms; and

•

the other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2009 under the caption “Risk Factors.”

     Any one of these factors or a combination of these factors could materially affect our future results of operations and could influence whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward looking statements. We do not intend to update these statements unless we are required by the securities laws to do so.

Refinery Overview

     We own and operate a high conversion crude oil refinery with a crude oil throughput capacity of approximately 83,100 barrels per day (“bpd”). Placed into service in 1980, our refinery is the second newest complex, grassroots refinery built in the United States. Our refinery is strategically located on the Atchafalaya River in central Louisiana at the intersection of two crude oil pipeline systems and has direct access to the Colonial Pipeline, providing us with diversified access to both locally sourced and foreign crude oils, as well as distribution of our products to markets throughout the Southern and Eastern United States and along the Mississippi and Ohio Rivers.

     Our refinery has the capability to process substantial volumes of low-sulfur, or sweet, crude oils to produce a high percentage of light, high-value refined products. Sweet crude oil typically comprises 100% of our refinery’s crude oil input.

     Our refinery’s Residual Fluid Catalytic Cracking Unit (“FCC”) allows us to produce a high percentage of light products with fewer processing units and lower maintenance costs compared to refineries utilizing conventional FCC technologies. Our refinery’s liquid product yield is approximately 101.5%, meaning that for each 100 barrels of crude oil and feedstocks input into our refinery, we typically produce 101.5 barrels of refined products. Of the 101.5%, on average 99.0% is light finished products such as gasoline and distillates, including diesel and jet fuel, petrochemical feedstocks and LPG, and the remaining 2.5% is primarily heavy oils.

Refinery History

     In 1980, Hill Petroleum completed the initial construction of our refinery and commenced operations with a crude unit, vacuum unit and reformer. Our refinery subsequently went through several upgrades, including the addition of an FCC in 1982, a 3,300 bpd polymerization unit in 1986, and a 4,500 bpd isomerization unit in 1992. Valero acquired our refinery in 1997, upgraded the FCC to a 34,100 bpd Residual FCC in 2002 and installed an 18,000 bpd gasoline desulfurization unit (“GDU”) in 2006.

     Effective July 1, 2008, Alon USA completed the acquisition of our refinery and related assets through the acquisition of all of the capital stock of Valero Refining Company — Louisiana from Valero. The purchase price was $333.0 million in cash plus $141.5 million for working capital, including inventories, as well as future consideration in the form of earnout payments due from us based on the average market prices for crude oil, regular unleaded gasoline, and ultra low-sulfur diesel in each of the three twelve month periods following the acquisition. In August 2009, we amended the earnout agreement with Valero to replace future earnout payments with fixed future payments. As a result, we paid Valero approximately $26.2 million through September 30, 2010 and have agreed to pay Valero an additional sum of $8.8 million in four installments of approximately $2.2 million per quarter through the third quarter of 2011 for earnout payments in an aggregate amount of $35.0 million.

Major Influences on Results of Operations

     Our earnings and cash flows are primarily affected by the difference between refined product prices and the prices for crude oil and other feedstocks. The cost to acquire crude oil and other feedstocks and the price of the refined products we ultimately sell depends on numerous factors beyond our control, including the supply of, and demand for, crude oil, gasoline and other refined products which, in turn, depends on, among other factors, changes in domestic and foreign economies, weather conditions, domestic and foreign political affairs, production levels, the availability of imports, the marketing of competitive fuels and government regulation. While our sales and operating revenues fluctuate significantly with movements in crude oil and refined product prices, it is the spread between crude oil and refined product prices, and not necessarily fluctuations in those prices, which affects our earnings.

     In order to measure our operating performance, we compare our per barrel refinery operating margins to certain industry benchmarks. We compare our refinery’s per barrel operating margin to the Gulf Coast 2/1/1 crack spread. The Gulf Coast 2/1/1 crack spread is calculated assuming that two barrels of a benchmark crude oil are converted, or cracked, into one barrel of gasoline and one barrel of diesel. We calculate the Gulf Coast 2/1/1 crack spread using the market values of Gulf Coast unleaded gasoline and Gulf Coast high sulfur diesel and the market value of WTI crude oil.

     Our refinery has the capability to process substantial volumes of low-sulfur, or sweet, crude oils to produce a high percentage of light, high-value refined products. Sweet crude oil typically comprises 100% of the refinery’s crude oil input, comprised of equal amounts of Heavy Louisiana Sweet, or HLS crude oil, and Light Louisiana Sweet, or LLS crude oil. We measure the cost of refining these lighter sweet crude oils by calculating the difference between the average value of HLS and LLS crude oils to the value of WTI crude oil. A narrowing of this spread can favorably influence the refinery operating margins of our refinery.

     Our results of operations are also significantly affected by our refinery’s operating costs, particularly the cost of natural gas used for fuel and the cost of electricity. Natural gas prices have historically been volatile. For example, between January 1, 2008 and December 31, 2009, natural gas prices ranged between $2.51 and $13.58 per million British thermal units. Typically, electricity prices fluctuate with natural gas prices.

Factors Affecting Comparability

     Factors which are fundamental to understanding comparisons of our period-to-period financial performance for both historical and future periods include those discussed below.

 Throughput

     Safety, reliability and the environmental performance of our refinery is critical to our financial performance. The financial impact of planned downtime, such as a turnaround or major maintenance project, is mitigated through a diligent planning process that considers product availability, margin environment and the availability of resources to perform the required maintenance. Our refinery was shutdown during November of 2009 for a scheduled turnaround and remained down as the work was completed and restarted in June of 2010.

 Revolving Credit Facility and Term Credit Facility

     On March 15, 2010, we terminated our revolving credit facility and repaid all outstanding amounts thereunder. As a result of the prepayment of the revolving credit facility, a write-off of unamortized debt issuance costs of $6.7 million was recorded as interest expense in the first quarter of 2010.

     On March 15, 2010, we entered into a new $65.0 million term credit facility with Bank Hapoalim B.M. with a maturity date of November 15, 2010. We borrowed $65.0 million and used approximately $51.0 million to repay the outstanding amounts under the revolving credit facility that was terminated. We originally borrowed $65.0 million and have repaid $35.0 million as of September 30, 2010. We prepaid the remaining $30.0 million on October 28, 2010, through a capital contribution from our parent.

 Senior Secured Notes

     In October 2009, we issued $216.5 million in aggregate principal amount of 13.50% senior secured notes in a private offering. We received gross proceeds of $205.4 million from the sale of the senior secured notes (before fees and expenses related to the offering). In connection with the closing, we prepaid in full the outstanding principal balance of our term loan of $163.8 million.

 2008 Hedging Agreement

     Contemporaneously with the acquisition of our refinery, we entered into a heating oil crack spread hedging agreement (the “2008 Hedging Agreement”) consisting of futures contracts for the forward purchase of crude oil and the forward sale of heating oil covering 14,849,750 barrels over a 27 month period. As of December 31, 2008, the mark-to-market value of the heating oil crack spread hedge was $116.7 million and was recorded as a reduction to cost of sales. In April 2009, the 2008 Hedging Agreement was terminated at a value of $139.3 million for which we received proceeds of $133.6 million and recorded a charge to interest expense of $5.7 million. In connection with the termination of the 2008 Hedging Agreement, we also received $50.0 million from the release of cash collateral previously pledged by us to support obligations under the 2008 Hedging Agreement.

Results of Operations

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Statement of Operations Data:
Net sales		$	470,954			$	390,748			$	648,912			$	990,511
Cost of sales			465,875				377,315				646,144				866,197
Direct operating expenses			20,001				15,090				45,909				58,959
Selling, general and administrative expenses			1,646				1,154				5,183				4,810
Depreciation and amortization expenses			5,578				5,577				16,187				14,735
Total operating costs and expenses			493,100				399,136				713,423				944,701
Operating income (loss)			(22,146	)			(8,388	)			(64,511	)			45,810
Interest expense			(10,511	)			(10,461	)			(37,467	)			(38,776	)
Other income (loss), net			(2	)			2				12				6
Income (loss) before income tax expense (benefit)			(32,659	)			(18,847	)			(101,966	)			7,040
Income tax expense (benefit)			—				(6,530	)			—				—
Net income (loss)		$	(32,659	)		$	(12,317	)		$	(101,966	)		$	7,040
Operating Data:
Refinery Throughput (bpd):
Light sweet crude			38,597				30,741				16,460				28,755
Heavy sweet crude			23,854				27,547				11,603				24,691
Blendstocks			1,707				1,402				878				3,862
Total refinery throughput (1)			64,158				59,690				28,941				57,308
Refinery Production (bpd):
Gasoline			26,442				27,441				11,720				26,628
Diesel/Jet			31,383				26,855				13,609				25,288
Heavy oils			1,487				1,205				1,437				1,151
Others			5,368				4,865				2,304				5,090
Total refinery production (2)			64,680				60,366				29,070				58,157
Key Operating Statistics:
Refinery utilization (3)			75.2	%			70.1	%			33.8	%			64.3	%
Per barrel of throughput:
Refinery operating margin (4)		$	1.00			$	2.45			$	0.44			$	6.64
Refinery direct operating expense (5)			3.39				2.75				5.82				3.77
Capital expenditures			2,052				2,105				5,381				5,192
Capital expenditures for turnaround and catalyst			175				568				2,369				2,250
Pricing Statistics:
WTI crude oil (per barrel)		$	76.05			$	68.17			$	77.50			$	57.03
HLS crude oil (per barrel)			78.18				69.76				79.41				58.71
LLS crude oil (per barrel)			79.63				70.43				80.58				59.87
HLS/LLS less WTI (per barrel)			2.86				1.93				2.50				2.26
2/1/1 Gulf Coast high sulfur diesel crack spread (per barrel)			7.02				5.36				7.40				7.14
Product price (dollars per gallon):
Gulf Coast unleaded gasoline		$	1.950			$	1.773			$	2.014			$	1.545
Gulf Coast high sulfur diesel			2.006				1.728				2.029				1.510
Natural gas (per mmbtu)		$	4.23			$	3.44			$	4.52			$	3.90

Three months ended September 30, 2010 compared to three months ended September 30, 2009

     Net Sales. Net sales for the three months ended September 30, 2010 increased by $80.3 million, or 20.6%, to $471.0 million from $390.7 million for the three months ended September 30, 2009. The increase in net sales was due to increased refinery throughput and an overall increase in average product prices.

     Cost of Sales. Cost of sales for the three months ended September 30, 2010 increased by $88.6 million, or 23.5%, to $465.9 million from $377.3 million for the three months ended September 30, 2009. The increase in cost of sales was due to increased refinery throughput and an overall increase in crude oil prices.

     Direct Operating Expenses. Direct operating expenses for the three months ended September 30, 2010 increased $4.9 million, or 32.5%, to $20.0 million from $15.1 million for the three months ended September 30, 2009. This increase was partially attributable to an increase in refinery throughput and an increase in natural gas prices.

     Selling, General and Administrative Expenses. SG&A expenses for the three months ended September 30, 2010 increased by $0.4 million, or 33.3%, to $1.6 million from $1.2 million for the three months ended September 30, 2009. These costs are allocated to us from Alon USA’s consolidated operations.

     Depreciation and Amortization Expenses. Depreciation and amortization expenses for the three months ended September 30, 2010 and 2009 was $5.6 million.

     Operating loss. Operating loss for the three months ended September 30, 2010 increased to $22.1 million from $8.4 million for the three months ended September 30, 2009, an increase in loss of $13.7 million. This increase was attributable to higher HLS/LLS crude oil costs relative to WTI for the three months ended September 30, 2010 compared to the same period in 2009.

     Interest expense. Interest expense for the three months ended September 30, 2010 and 2009 was $10.5 million.

     Income tax expense (benefit). Income tax expense for the three months ended September 30, 2010 was $0.0 million compared to income tax benefit of $6.5 million for the three months ended September 30, 2009. The decrease resulted from no income tax benefit recognized on our pre-tax loss in 2010 compared to an income tax

benefit recognized on our pre-tax loss in 2009. Our effective tax rate was 0.0% in the third quarter of 2010, compared to an effective tax rate of 34.6% in the third quarter of 2009.

     Net loss. Net loss increased to $32.7 million in 2010 from $12.3 million in 2009. This increase was attributable to the factors discussed above.

Nine months ended September 30, 2010 compared to nine months ended September 30, 2009

     Net Sales. Net sales for the nine months ended September 30, 2010 decreased by $341.6 million, or 34.5%, to $648.9 million from $990.5 million for the nine months ended September 30, 2009. The nine months ended September 30, 2010 reflects four months of production beginning in June 2010 after the completion of turnaround work at the refinery.

     Cost of Sales. Cost of sales for the nine months ended September 30, 2010 decreased by $220.1 million, or 25.4%, to $646.1 million from $866.2 million for the nine months ended September 30, 2009. The nine months ended September 30, 2010 reflects four months of production beginning in June 2010 after the completion of turnaround work at the refinery.

     Direct Operating Expenses. Direct operating expenses for the nine months ended September 30, 2010 decreased to $45.9 million from $59.0 million for the nine months ended September 30, 2009, a decrease of $13.1 million, or 22.2%. The nine months ended September 30, 2010 reflects four months of production beginning in June 2010 after the completion of turnaround work at the refinery.

     Selling, General and Administrative Expenses. SG&A expenses for the nine months ended September 30, 2010 increased to $5.2 million from $4.8 million for the nine months ended September 30, 2009, an increase of $0.4 million, or 8.3%. These costs are allocated to us from Alon USA’s consolidated operations.

     Depreciation and Amortization Expenses. Depreciation and amortization expenses for the nine months ended September 30, 2010 increased $1.5 million, or 10.2%, to $16.2 million from $14.7 million for the nine months ended September 30, 2009. This increase was primarily attributable to amortization of turnaround and chemical catalyst costs and the increase to property, plant and equipment in the second half of 2009 related to the amended earnout agreement with Valero.

     Operating income (loss). Operating income (loss) for the nine months ended September 30, 2010 decreased to ($64.5) million from $45.8 million for the nine months ended September 30, 2009, a decrease of $110.3 million. This decrease was attributable to the refinery shutdown until its restart in June 2010.

     Interest expense. Interest expense for the nine months ended September 30, 2010 was $37.5 million compared to $38.8 million for the nine months ended September 30, 2009. Included in interest expense for the nine months ended September 30, 2010, is a charge of $6.7 million for the write-off of debt issuance costs associated with our prepayment of the revolving credit facility, and for the nine months ended September 30, 2009, is a charge of $5.7 million related to liquidation of our heating oil hedge.

     Income tax expense. Income tax expense for the nine months ended September 30, 2010 and 2009 was $0.0 million.

     Net income (loss). Net income (loss) decreased to ($102.0) million in 2010 from $7.0 million in 2009. This decrease was attributable to the factors discussed above.

Liquidity and Capital Resources

     Our primary sources of liquidity are cash on hand and cash generated from operating activities. Although our parent company and its parent have previously made certain contributions to our capital, neither has any obligation to make any such contributions in the future.

     On March 15, 2010, we entered into a $65.0 million short-term credit facility with Bank Hapoalim B.M. (the “Term Facility”). The Term Facility as currently amended and restated matures on November 15, 2010. We originally borrowed $65.0 million and have repaid $35.0 million as of September 30, 2010. We prepaid the remaining $30.0 million on October 28, 2010, through a capital contribution from our parent.

     On April 21, 2010, we entered into a Supply and Offtake Agreement, which was amended on May 26, 2010 (the “Supply and Offtake Agreement”), with J. Aron & Company (“J. Aron”), the proceeds of which allowed us to retire part of our obligations under the Term Facility and support the operation of the refinery at a minimum of 72,000 bpd. Pursuant to the Supply and Offtake Agreement, (i) J. Aron agreed to sell to us, and we agreed to buy from J. Aron, at market price, crude oil for processing at the refinery and (ii) we agreed to sell, and J. Aron agreed to buy, at market price, certain refined products produced at the refinery.

     Our ability to generate sufficient cash from our operating activities depends on our future performance, which is subject to general economic, political, financial, competitive and other factors beyond our control. In addition, our future capital expenditures and other cash requirements could be higher than we currently expect as a result of various factors, including the costs of such future capital expenditures related to the expansion of our business.

     Depending upon conditions in the capital markets and other factors, we will from time to time consider the issuance of debt or equity securities, or other possible capital markets transactions, the proceeds of which could be used to refinance current indebtedness, extend or replace existing revolving credit facilities or for other corporate purposes. Pursuant to our growth strategy, we will also consider from time to time acquisitions of, and investments in, assets or businesses that complement our existing assets and businesses. Acquisition transactions, if any, are expected to be financed through cash on hand and from operations, bank borrowings, the issuance of debt or equity securities or a combination of two or more of those sources.

Cash Flows

     The following table sets forth our cash flows for the nine months ended September 30, 2010 and 2009:

		For the Nine Months Ended
		September 30,
		2010				2009
Net cash provided by (used in):
Operating activities		$	24,952			$	235,823
Investing activities			(14,312	)			(24,963	)
Financing activities			(36,801	)			(210,860	)
Net increase (decrease) in cash and cash equivalents		$	(26,161	)		$	—

  Cash Flows Provided By Operating Activities

     Net cash provided by operating activities was $25.0 million for the nine months ended September 30, 2010 compared to $235.8 million for the nine months ended September 30, 2009. The decrease in cash provided by operating activities is primarily due to the decrease in net income primarily due to the extended shutdown of the refinery through June 2010 and the proceeds received in 2009 from the liquidation of the 2008 Hedging Agreement.

  Cash Flows Used In Investing Activities

     Net cash used in investing activities has been used primarily for capital expenditures, including expenditures for turnarounds and catalysts. Capital expenditures were $7.8 million and $7.4 million for the nine months ended September 30, 2010 and 2009, respectively. Additionally, payments of $6.6 million and $17.5 million were made during the nine months ended September 30, 2010 and 2009, respectively, associated with the amended earnout agreement with Valero.

  Cash Flows Used In Financing Activities

     Net cash used in financing activities was $36.8 million for the nine months ended September 30, 2010 compared to $210.9 million for the nine months ended September 30, 2009. Cash used during the nine months ended September 30, 2010 reflects the repayment of the revolving credit facility of $83.3 million which was partially offset by net short-term debt borrowings of $30.0 million and proceeds from parent equity investment of $11.0 million. Cash used during the nine months ended September 30, 2009 reflects repayment of our term loan of $88.2 million and payments on our revolving credit facility of $141.7 million, partially offset by proceeds from parent equity investment of $25.0 million.

Summary of Indebtedness

     Senior Secured Notes. In October 2009, we issued 13.50% senior secured notes (the “Senior Secured Notes”) in aggregate principal amount of $216.5 million in a private offering. The Senior Secured Notes were issued at an offering price of 94.857%.

     We received gross proceeds of $205.4 million from the sale of the Senior Secured Notes (before fees and expenses related to the offering). In connection with the closing, we prepaid in full all outstanding obligations under our term loan. The remaining proceeds from the offering were used for general corporate purposes.

     The terms of the Senior Secured Notes are governed by an indenture (the “Indenture”) and the obligations under the Indenture are secured by a first priority lien on our property, plant and equipment and a second priority lien on our cash, accounts receivable and inventory.

     The Indenture also contains restrictive covenants such as restrictions on loans, mergers, sales of assets, additional indebtedness and restricted payments. The Indenture does not contain any maintenance financial covenants.

     On February 17, 2010, we exchanged $216.5 million of Senior Secured Notes for an equivalent amount of Senior Secured Notes (“Exchange Notes”) registered under the Securities Act of 1933. The Exchange Notes will mature on October 15, 2014 and the entire principal amount is due at maturity. Interest is payable semi-annually in arrears on April 15 and October 15. The Exchange Notes are substantially identical to the Senior Secured Notes, except that the Exchange Notes have been registered with the Securities and Exchange Commission and are not subject to transfer restrictions.

     At September 30, 2010 and December 31, 2009, the Senior Secured Notes had an outstanding balance (net of unamortized discount) of $206.9 million and $205.7 million, respectively. We are utilizing the effective interest method to amortize the original issue discount over the life of the Senior Secured Notes.

     Short-Term Credit Facility. On March 15, 2010, we entered into a $65.0 million term credit facility with Bank Hapoalim B.M. (the “Term Facility”). The Term Facility as currently amended and restated matures on November 15, 2010. We borrowed $65.0 million and have repaid $35.0 million as of September 30, 2010.

     Borrowings under the Term Facility bear interest at LIBOR plus 3.00% and $30.0 million was outstanding under the Term Facility at September 30, 2010. The Term Facility is secured by a second lien on all assets other than cash, accounts receivable, and inventory owned by us. The Term Facility contains customary restrictive covenants, such as restrictions on liens, mergers, consolidation, sales of assets, capital expenditures, additional indebtedness, investments, hedging transactions, and certain restricted payments.

     We prepaid the remaining $30.0 million on October 28, 2010, through a capital contribution from our parent.

     Revolving Credit Facility. On March 15, 2010, we terminated our revolving credit facility and repaid all outstanding amounts thereunder. As a result of the prepayment of the revolving credit facility, we recorded a write-off of unamortized debt issuance costs of $6.7 million as interest expense in the first quarter of 2010.

     Borrowings of $83.3 million and outstanding letters of credit of $2.8 million were outstanding under the revolving credit facility at December 31, 2009.

Capital Spending

     Each year our Board of Directors approves capital projects, including regulatory and planned turnaround projects that our management is authorized to undertake in our annual capital budget. Additionally, at times when conditions warrant or as new opportunities arise, other projects or the expansion of existing projects may be approved. Our capital expenditure projections, including expenditures for fixed-bed catalyst and turnarounds, for 2010 is approximately $8.2 million, of which approximately $2.4 million is related to fixed-bed catalyst and turnarounds and approximately $5.8 million is related to various improvement and sustaining projects. Approximately $5.4 million has been spent on various improvements and sustaining projects and $2.4 million has been spent on turnaround and chemical catalyst costs as of September 30, 2010 compared to $5.2 million for various improvements and sustaining projects and $2.3 million for turnaround and chemical catalyst costs for the same period in 2009.

Contractual Obligations

     There have been no material changes outside the ordinary course of business from our contractual obligations and commercial commitments detailed in our Annual Report of Form 10-K for the year ended December 31, 2009.

Off-Balance Sheet Arrangements

     We are not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material current or future impact on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Earnout Agreement with Valero

     In connection with our refinery acquisition, in July 2008 we entered into an earnout agreement with Valero which was amended in August 2009, to fix the remaining amounts to be paid thereunder. We have paid Valero approximately $19.7 million in 2009 and $6.5 million in the nine months ending September 30, 2010. Additionally, we agreed to pay Valero an additional sum of $8.8 million in four installments of approximately $2.2 million per quarter through the third quarter of 2011 which will result in aggregate earnout payments of $35.0 million.

Critical Accounting Policies

     We prepare our financial statements in conformity with GAAP. In order to apply these principles, we must make judgments, assumptions and estimates based on the best available information at the time. Actual results may differ based on the accuracy of the information utilized and subsequent events, some of which we may have little or no control over. Our critical accounting policies are described under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2009. Certain critical accounting policies that materially affect the amounts recorded in our financial statements are the use of the LIFO method for valuing certain inventories and the deferral and subsequent amortization of costs associated with major turnarounds and chemical catalysts replacements. No significant changes to the accounting policies have occurred subsequent to December 31, 2009.

New Accounting Standards

     New accounting standards are disclosed in Note 1(c) Basis of Presentation and Certain Significant Accounting Policies—New Accounting Standards included in the financial statements included in Item 1 of this report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Changes in commodity prices and purchased fuel prices are our primary sources of market risk. Alon USA’s risk management committee oversees all activities associated with the identification, assessment and management of our market risk exposure.

Commodity Price Risk

     We are exposed to market risks related to the volatility of crude oil and refined product prices, as well as volatility in the price of natural gas used in our refinery operations. Our financial results can be affected significantly by fluctuations in these prices, which depend on many factors, including demand for crude oil, gasoline and other refined products, changes in the economy, worldwide production levels, worldwide inventory levels and governmental regulatory initiatives. Alon USA’s risk management strategy identifies circumstances in which we may utilize the commodity futures market to manage risk associated with these price fluctuations.

     In order to manage the uncertainty relating to inventory price volatility, we have consistently applied a policy of maintaining inventories at or below a targeted operating level. In the past, circumstances have occurred, such as timing of crude oil cargo deliveries, turnaround schedules or shifts in market demand that have resulted in variances between our actual inventory level and our desired target level. Upon the review and approval of Alon USA’s risk management committee, we may utilize the commodity futures market to manage these anticipated inventory variances. In addition, we have entered into and regularly evaluate opportunities to provide us with a minimum fixed cash flow stream on the volume of products hedged during the hedge term and to protect against volatility on commodity prices.

     We maintain inventories of crude oil, refined products, blendstocks and asphalt, the values of which are subject to wide fluctuations in market prices driven by world economic conditions, regional and global inventory levels and seasonal conditions. As of September 30, 2010, we held approximately 0.8 million barrels of crude oil and product inventories valued under the LIFO valuation method with an average cost of $51.24 per barrel. Market value exceeded carrying value of LIFO costs by $21.1 million. We refer to this excess as our LIFO reserve. If the market value of these inventories had been $1.00 per barrel lower, our LIFO reserve would have been reduced by $0.8 million.

     In accordance with the fair value provisions of ASC 825-10, all commodity futures contracts are recorded at fair value and any changes in fair value between periods is recorded in the profit and loss section of our financial statements. “Forwards” represent physical trades for which pricing and quantities have been set, but the physical product delivery has not occurred by the end of the reporting period. “Futures” represent trades which have been executed on the New York Mercantile Exchange which have not been closed or settled at the end of the reporting period. A “long” represents an obligation to purchase product and a “short” represents an obligation to sell product.

     The following table provides information about our derivative commodity instruments as of September 30, 2010:

Description						Wtd Avg Purchase				Wtd Avg Sales								Market				Gain
of Activity		Contract Volume				Price/BBL				Price/BBL				Contract Value				Value				(Loss)
														(in thousands)
Forwards-long (Diesel)			92,966			$	86.11			$	—			$	8,005			$	8,536			$	531
Description						Wtd Avg Contract				Wtd Avg Market								Market				Gain
of Activity		Contract Volume				Spread				Spread				Contract Value				Value				(Loss)
														(in thousands)
Futures-crack spread (Heating Oil)			255,600			$	11.38			$	8.90			$	2,908			$	2,275			$	(633	)
Futures-call options (Heating Oil)			(3,514,500	)			13.24				13.24				(46,535	)			(46,535	)			—

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

(1) Evaluation of Disclosure Controls and Procedures

     Our management has evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”)) as of the end of the period covered by this report, and has concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or furnish under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms including, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or furnish under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.

(2) Changes in Internal Control Over Financial Reporting

     There has been no change in our internal control over financial reporting during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 5. EXHIBITS

Exhibit
Number		Description of Exhibit
3.1		Amended and Restated Certificate of Incorporation of Alon Refining Krotz Springs, Inc. (incorporated by reference to Exhibit 3.1 to Form S-4, filed by Alon Refining Krotz Springs, Inc. on December 22, 2009, SEC File No. 333-163942).
3.2		Amended and Restated Bylaws of Alon Refining Krotz Springs, Inc. (incorporated by reference to Exhibit 3.2 to Form S-4, filed by the Alon Refining Krotz Springs, Inc. on December 22, 2009, SEC File No. 333-163942).
4.1		Indenture, dated as of October 22, 2009, by and among Alon Refining Krotz Springs, Inc. and Wilmington Trust FSB, as Trustee (incorporated by reference to Exhibit 4.1 to Form 8-K, filed by Alon USA Energy, Inc. on October 23, 2009, SEC File No. 001-32567).
10.1		Amendment No. 3 to Credit Agreement, dated August 11, 2010 (as amended, supplemented or otherwise modified from time to time), among Alon Refining Krotz Springs, Inc., each other party joined as a borrower thereunder from time to time, the Lenders party thereto, and Bank Hapoalim B.M., as Administrative Agent (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by Alon USA Energy, Inc. on August 13, 2010, 2010, SEC File No. 001-32567).
31.1		Certifications of Chief Executive Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2		Certifications of Chief Financial Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBITS

Exhibit
Number		Description of Exhibit
3.1		Amended and Restated Certificate of Incorporation of Alon Refining Krotz Springs, Inc. (incorporated by reference to Exhibit 3.1 to Form S-4, filed by Alon Refining Krotz Springs, Inc. on December 22, 2009, SEC File No. 333-163942).
3.2		Amended and Restated Bylaws of Alon Refining Krotz Springs, Inc. (incorporated by reference to Exhibit 3.2 to Form S-4, filed by the Alon Refining Krotz Springs, Inc. on December 22, 2009, SEC File No. 333-163942).
4.1		Indenture, dated as of October 22, 2009, by and among Alon Refining Krotz Springs, Inc. and Wilmington Trust FSB, as Trustee (incorporated by reference to Exhibit 4.1 to Form 8-K, filed by Alon USA Energy, Inc. on October 23, 2009, SEC File No. 001-32567).
10.1		Amendment No. 3 to Credit Agreement, dated August 11, 2010 (as amended, supplemented or otherwise modified from time to time), among Alon Refining Krotz Springs, Inc., each other party joined as a borrower thereunder from time to time, the Lenders party thereto, and Bank Hapoalim B.M., as Administrative Agent (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by Alon USA Energy, Inc. on August 13, 2010, 2010, SEC File No. 001-32567).
31.1		Certifications of Chief Executive Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2		Certifications of Chief Financial Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.