Alon USA Energy, Inc. - FORM 10-Q

Alon USA Energy, Inc. - FORM 10-Q - August 4, 2015

Attached files

Attached files

file	filename
EX-31.1 - CERTIFICATION - Alon USA Energy, Inc.	alj-ex311_2015630xq2.htm
EX-32.1 - CERTIFICATION - Alon USA Energy, Inc.	alj-ex321_2015630xq2.htm
EX-31.2 - CERTIFICATION - Alon USA Energy, Inc.	alj-ex312_2015630xq2.htm

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
		FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015



o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		FOR THE TRANSITION PERIOD FROM __________TO __________

Commission file number: 001-32567

ALON USA ENERGY, INC.

(Exact name of Registrant as specified in its charter)

___________________________________________________



Delaware		74-2966572
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

12700 Park Central Dr., Suite 1600, 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 þ 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 whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the Registrant’s common stock, par value $0.01 per share, outstanding as of July 31, 2015, was 70,783,704.

TABLE OF CONTENTS



	Page
PART I. FINANCIAL INFORMATION	1
ITEM 1. FINANCIAL STATEMENTS	1
CONSOLIDATED BALANCE SHEETS	1
CONSOLIDATED STATEMENTS OF OPERATIONS	2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	3
CONSOLIDATED STATEMENTS OF CASH FLOWS	4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	5
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	22
FORWARD-LOOKING STATEMENTS	22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44
ITEM 4. CONTROLS AND PROCEDURES	46
PART II. OTHER INFORMATION	47
ITEM 6. EXHIBITS	47
SIGNATURES	48

Table of Contents

PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

ALON USA ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands except per share data)



	June 30, 2015			December 31, 2014
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	263,830		$	214,961
Accounts and other receivables, net	162,834			153,859
Income tax receivable	—			9,196
Inventories	117,367			122,803
Deferred income tax asset	11,353			11,228
Prepaid expenses and other current assets	24,625			26,315
Total current assets	580,009			538,362
Equity method investments	26,650			25,376
Property, plant and equipment, net	1,352,199			1,372,344
Goodwill	101,913			101,913
Other assets, net	150,789			162,879
Total assets	$	2,211,560		$	2,200,874
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	309,928		$	292,217
Accrued liabilities	101,035			104,391
Current portion of long-term debt	15,086			15,089
Total current liabilities	426,049			411,697
Other non-current liabilities	174,919			182,659
Long-term debt	524,127			548,598
Deferred income tax liability	372,155			384,142
Total liabilities	1,497,250			1,527,096
Commitments and contingencies (Note 16)
Stockholders’ equity:
Preferred stock, par value $0.01, 15,000,000 shares authorized; 0 and 68,180 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively	—			682
Common stock, par value $0.01, 150,000,000 shares authorized; 70,567,357 and 69,606,944 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively	706			696
Additional paid-in capital	519,234			517,127
Accumulated other comprehensive loss, net of tax	(16,132		)	(8,458		)
Retained earnings	172,801			126,851
Total stockholders’ equity	676,609			636,898
Non-controlling interest in subsidiaries	37,701			36,880
Total equity	714,310			673,778
Total liabilities and equity	$	2,211,560		$	2,200,874

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

Table of Contents

ALON USA ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, dollars in thousands except per share data)



	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
Net sales (1)	$	1,301,341		$	1,742,883		$	2,404,581		$	3,426,128
Operating costs and expenses:
Cost of sales	1,069,931			1,580,447			1,964,419			3,086,992
Direct operating expenses	62,856			67,630			127,061			138,308
Selling, general and administrative expenses	49,193			46,333			94,789			85,722
Depreciation and amortization	31,267			29,453			63,229			59,331
Total operating costs and expenses	1,213,247			1,723,863			2,249,498			3,370,353
Gain (loss) on disposition of assets	—			(88		)	572			2,117
Operating income	88,094			18,932			155,655			57,892
Interest expense	(18,217		)	(29,256		)	(39,254		)	(57,271		)
Equity earnings of investees	1,828			1,278			1,274			819
Other income, net	13			638			59			621
Income (loss) before income tax expense (benefit)	71,718			(8,408		)	117,734			2,061
Income tax expense (benefit)	23,856			(1,971		)	35,817			123
Net income (loss)	47,862			(6,437		)	81,917			1,938
Net income attributable to non-controlling interest	11,452			1,080			18,568			8,670
Net income (loss) available to stockholders	$	36,410		$	(7,517	)	$	63,349		$	(6,732	)
Earnings (loss) per share, basic	$	0.52		$	(0.11	)	$	0.91		$	(0.10	)
Weighted average shares outstanding, basic (in thousands)	69,684			68,851			69,584			68,734
Earnings (loss) per share, diluted	$	0.50		$	(0.11	)	$	0.87		$	(0.10	)
Weighted average shares outstanding, diluted (in thousands)	72,501			68,851			72,395			68,734
Cash dividends per share	$	0.15		$	0.06		$	0.25		$	0.12

___________


(1)	Includes excise taxes on sales by the retail segment of $19,369 and $19,101 for the three months and $37,425 and $36,911 for the six months ended June 30, 2015 and 2014, respectively.

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

Table of Contents

ALON USA ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, dollars in thousands)



	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
Net income (loss)	$	47,862		$	(6,437	)	$	81,917		$	1,938
Other comprehensive income (loss):
Interest rate derivatives designated as cash flow hedges:
Unrealized holding gain (loss) arising during period	89			(802		)	(841		)	(802		)
Loss reclassified to earnings - interest expense	97			14			112			14
Net gain (loss), before tax	186			(788		)	(729		)	(788		)
Income tax expense (benefit)	69			(290		)	(270		)	(290		)
Net gain (loss), net of tax	117			(498		)	(459		)	(498		)
Commodity contracts designated as cash flow hedges:
Unrealized holding gain arising during period	—			8,925			6,070			32,507
Amortization of unrealized (gain) loss on de-designated cash flow hedges - cost of sales	(9,955		)	2,153			(17,937		)	10,428
Net gain (loss), before tax	(9,955		)	11,078			(11,867		)	42,935
Income tax expense (benefit)	(3,683		)	4,098			(4,391		)	15,885
Net gain (loss), net of tax	(6,272		)	6,980			(7,476		)	27,050
Total other comprehensive income (loss), net of tax	(6,155		)	6,482			(7,935		)	26,552
Comprehensive income	41,707			45			73,982			28,490
Comprehensive income attributable to non-controlling interest	11,291			1,261			18,307			9,538
Comprehensive income (loss) attributable to stockholders	$	30,416		$	(1,216	)	$	55,675		$	18,952

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

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ALON USA ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, dollars in thousands)

	For the Six Months Ended
	June 30,
	2015			2014
Cash flows from operating activities:
Net income	$	81,917		$	1,938
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	63,229			59,331
Stock compensation	3,767			3,540
Deferred income taxes	(7,451		)	(825		)
Equity earnings of investees	(1,274		)	—
Amortization of debt issuance costs	1,667			2,124
Amortization of original issuance discount	3,070			3,309
Write-off of unamortized debt issuance costs	—			253
Write-off of unamortized original issuance discount	—			254
Gain on disposition of assets	(572		)	(2,117		)
Unrealized (gain) loss on commodity swaps	(7,925		)	9,510
Changes in operating assets and liabilities:
Accounts and other receivables, net	(9,264		)	49,314
Income tax receivable	9,196			8,510
Inventories	5,436			(41,744		)
Prepaid expenses and other current assets	1,690			(10,926		)
Other assets, net	(293		)	147
Accounts payable	(12,424		)	(31,459		)
Accrued liabilities	(6,409		)	(25,458		)
Other non-current liabilities	(8,469		)	5,941
Net cash provided by operating activities	115,891			31,642
Cash flows from investing activities:
Capital expenditures	(31,051		)	(54,655		)
Capital expenditures for turnarounds and catalysts	(4,363		)	(26,269		)
Contribution to equity method investment	—			(597		)
Dividends from investees, net of equity earnings	—			181
Proceeds from disposition of assets	1,469			40,333
Net cash used in investing activities	(33,945		)	(41,007		)
Cash flows from financing activities:
Dividends paid to stockholders	(17,384		)	(8,221		)
Dividends paid to non-controlling interest	(260		)	(389		)
Distributions paid to non-controlling interest in the Partnership	(16,224		)	(10,010		)
Inventory agreement transactions	30,135			(25,200		)
Deferred debt issuance costs	(1,800		)	(2,062		)
Revolving credit facilities, net	(20,000		)	—
Additions to long-term debt	—			145,000
Payments on long-term debt	(7,544		)	(117,101		)
Net cash used in financing activities	(33,077		)	(17,983		)
Net increase (decrease) in cash and cash equivalents	48,869			(27,348		)
Cash and cash equivalents, beginning of period	214,961			224,499
Cash and cash equivalents, end of period	$	263,830		$	197,151
Supplemental cash flow information:
Cash paid for interest, net of capitalized interest	$	35,660		$	57,906
Cash paid (refunds received) for income tax	$	17,853		$	(6,740	)
Supplemental disclosure of non-cash activity:
Capital expenditures included in accounts payable and accrued liabilities	$	—		$	32,522

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

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ALON USA ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, dollars in thousands except as noted)


(1)	Basis of Presentation

As used in this report, unless otherwise specified, the terms “Alon,” “we,” “us” or “our” refer to Alon USA Energy, Inc. and its consolidated subsidiaries or to Alon USA Energy, Inc. or an individual subsidiary. The “Partnership,” as used in this report, refers to Alon USA Partners, LP and its consolidated subsidiaries.

These consolidated financial statements and notes 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. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements.

In the opinion of our management, the information included in these consolidated financial statements reflects all adjustments, consisting of normal and recurring adjustments, which are necessary for a fair presentation of our consolidated financial position and results of operations for the interim periods presented. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior year balances may have been aggregated or disaggregated in order to conform to the current year presentation. Our results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the operating results that may be realized for the year ending December 31, 2015.

Our consolidated balance sheet as of December 31, 2014 has been derived from the audited financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014.

New Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard that provides accounting guidance for all revenue arising from contracts to provide goods or services to customers. This standard is intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The standard allows for either full retrospective adoption or modified retrospective adoption. In July 2015, the FASB voted to approve a one-year deferral of the effective date for the new revenue standard, making the requirements of the standard effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted for interim and annual periods beginning after December 15, 2016. We are evaluating the guidance to determine the method of adoption and the impact this standard will have on our consolidated financial statements.

In February 2015, the FASB issued an accounting standards update making targeted changes to the current consolidation guidance. The new standard changes the way certain decisions are made related to substantive rights, related parties, and decision making fees when applying the variable interest entity consolidation model and eliminates certain guidance for limited partnerships and similar entities under the voting interest consolidation model. The requirements from the updated standard are effective for interim and annual periods beginning after December 15, 2015, and early adoption is permitted. We are evaluating the effect that adopting the updated guidance will have on our consolidated financial statements and related disclosures.

In April 2015, the FASB issued an accounting standards update simplifying the presentation of debt issuance costs. The new standard requires that certain costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. The requirements from the updated standard are effective for interim and annual periods beginning after December 15, 2015, and early adoption is permitted. We currently have debt issuance costs included as deferred charges in our consolidated balance sheets, which will be reclassified as a reduction of debt when we adopt the updated guidance.

In April 2015, the FASB issued an accounting standards update that provides a practical expedient for the measurement date of entities’ defined benefit pension or other postretirement plans. For an entity with a fiscal year-end that does not coincide with a month-end, the guidance allows the entity to measure the defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end. For an entity that has a significant event in an interim period that calls for a remeasurement, the guidance allows an entity to remeasure the defined benefit plan assets and obligations using the month-end that is closest to the date of the significant event. The requirements from the updated standard are effective for interim and annual periods beginning after December 15, 2015, and early adoption is permitted. The adoption of this guidance will not have a material effect on our financial position or results of operations.

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ALON USA ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)

In July 2015, the FASB issued an accounting standards update simplifying the measurement of certain inventory. This updated standard simplifies the measurement of inventory by requiring certain inventory to be measured at the lower of cost or net realizable value. The amendments in this accounting standards update are effective for interim and annual periods beginning after December 15, 2016. This accounting standards update does not apply to the subsequent measurement of inventory measured using the last-in, first-out (“LIFO”) or retail inventory method, therefore the adoption of this guidance will not have a material effect on our financial position or results of operations.


(2)	Alon USA Partners, LP

The Partnership (NYSE: ALDW) is a publicly-traded limited partnership that owns the assets and conducts the operations of the Big Spring refinery and the associated wholesale marketing operations. As of June 30, 2015, the 11,510,039 common units held by the public represent 18.4% of the Partnership’s common units outstanding. We own the remaining 81.6% of the Partnership’s common units and Alon USA Partners GP, LLC (the “General Partner”), our wholly-owned subsidiary, owns 100% of the non-economic general partner interest in the Partnership.

The limited partner interests in the Partnership not owned by us are reflected in the consolidated statements of operations in net income attributable to non-controlling interest and in our consolidated balance sheets in non-controlling interest in subsidiaries. The Partnership is consolidated within the refining and marketing segment.

We have agreements with the Partnership which establish fees for certain administrative and operational services provided by us and our subsidiaries to the Partnership, provide certain indemnification obligations and other matters and establish terms for the supply of products by the Partnership to us.

Partnership Distributions

The Partnership has adopted a policy pursuant to which it will distribute all of the available cash generated each quarter, as defined in the partnership agreement, subject to the approval of the board of directors of the General Partner. The per unit amount of available cash to be distributed each quarter, if any, will be distributed within 60 days following the end of such quarter.

During the six months ended June 30, 2015, the Partnership paid the following cash distributions:



Date Paid	Distribution Amount Per Unit		Total Distribution Amount		Distribution Paid to Non-Affiliated Common Unitholders
March 2, 2015	$	0.70	$	43,755	$	8,055
May 26, 2015	0.71		44,380		8,169


(3)	Segment Data

Our revenues are derived from three operating segments: (i) refining and marketing, (ii) asphalt and (iii) retail. The reportable operating segments are strategic business units that offer different products and services. The segments are managed separately as each segment requires unique technology, marketing strategies and distinct operational emphasis. Each operating segment’s performance is evaluated primarily based on operating income.

(a)Refining and Marketing Segment

Our refining and marketing segment includes a sour crude oil refinery located in Big Spring, Texas, a light sweet crude oil refinery located in Krotz Springs, Louisiana and heavy crude oil refineries located in Paramount, Bakersfield and Long Beach, California (the “California refineries”). Our refineries have a combined crude oil throughput capacity of approximately 217,000 barrels per day (“bpd”). We refine crude oil into petroleum products including various grades of gasoline, diesel, jet fuel, petrochemicals, petrochemical feedstocks, asphalt and other petroleum-based products, which are marketed primarily in the South Central, Southwestern and Western United States. Our California refineries did not process crude oil during the six months ended June 30, 2015 and 2014 due to the high cost of crude oil relative to product yield and low asphalt demand.

We supply gasoline and diesel to 640 Alon branded retail sites, including our retail segment convenience stores. During 2015, approximately 56% of the gasoline and 23% of the diesel produced at the Big Spring refinery was transferred to our branded marketing business at prices substantially determined by wholesale market prices. Additionally, we license the use of the Alon brand name and provide credit card processing services to 67 licensed locations that are not under fuel supply agreements.

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ALON USA ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)

(b)Asphalt Segment

We own or operate 10 asphalt terminals located in Texas (Big Spring), Washington (Richmond Beach), California (Paramount, Long Beach, Elk Grove, Bakersfield and Mojave), Arizona (Phoenix and Flagstaff), and Nevada (Fernley) (50% interest) as well as through a 50% interest in Wright Asphalt Products Company, LLC, which specializes in patented ground tire rubber modified asphalt products. The operations in which we have a 50% interest are recorded under the equity method of accounting and the investments are included as part of total assets in the asphalt segment data. Asphalt produced by our Big Spring refinery is transferred to the asphalt segment at prices substantially determined by reference to the cost of crude oil, which is intended to approximate wholesale market prices.

(c)Retail Segment

Our retail segment operates 294 convenience stores located in Central and West Texas and New Mexico. These convenience stores typically offer various grades of gasoline, diesel fuel, food products, food service, tobacco products, non-alcoholic and alcoholic beverages, general merchandise as well as money orders to the public, primarily under the 7-Eleven and Alon brand names. Substantially all of the motor fuel sold through our retail segment is supplied by our Big Spring refinery.

(d)Corporate

Operations that are not included in any of the three segments are included in the corporate category. These operations consist primarily of corporate headquarters operating and depreciation expenses.

Segment data as of and for the three and six month periods ended June 30, 2015 and 2014 are presented below:



	Refining and Marketing		Asphalt			Retail			Corporate			Consolidated Total
Three Months Ended June 30, 2015
Net sales to external customers	$	1,024,807	$	69,900		$	206,634		$	—		$	1,301,341
Intersegment sales (purchases)	101,233		(7,925		)	(93,308		)	—			—
Depreciation and amortization	26,692		1,207			2,943			425			31,267
Operating income (loss)	83,581		(1,723		)	6,837			(601		)	88,094
Total assets	1,848,273		115,184			226,387			21,716			2,211,560
Turnarounds, catalysts and capital expenditures	14,500		238			6,202			1,392			22,332



	Refining and Marketing		Asphalt			Retail			Corporate			Consolidated Total
Three Months Ended June 30, 2014
Net sales to external customers	$	1,372,547	$	117,677		$	252,659		$	—		$	1,742,883
Intersegment sales (purchases)	148,777		(9,233		)	(139,544		)	—			—
Depreciation and amortization	24,713		1,162			2,983			595			29,453
Operating income (loss)	16,765		(3,889		)	6,826			(770		)	18,932
Total assets	1,888,299		122,506			200,510			22,792			2,234,107
Turnarounds, catalysts and capital expenditures	43,081		1,501			2,841			494			47,917



	Refining and Marketing		Asphalt			Retail			Corporate			Consolidated Total
Six Months Ended June 30, 2015
Net sales to external customers	$	1,901,410	$	120,552		$	382,619		$	—		$	2,404,581
Intersegment sales (purchases)	184,122		(18,856		)	(165,266		)	—			—
Depreciation and amortization	54,003		2,352			5,980			894			63,229
Operating income (loss)	159,228		(16,154		)	13,827			(1,246		)	155,655
Total assets	1,848,273		115,184			226,387			21,716			2,211,560
Turnarounds, catalysts and capital expenditures	21,239		1,644			9,518			3,013			35,414

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ALON USA ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)



	Refining and Marketing		Asphalt			Retail			Corporate			Consolidated Total
Six Months Ended June 30, 2014
Net sales to external customers	$	2,738,373	$	213,848		$	473,907		$	—		$	3,426,128
Intersegment sales (purchases)	287,869		(26,216		)	(261,653		)	—			—
Depreciation and amortization	50,081		2,362			5,697			1,191			59,331
Operating income (loss)	56,769		(7,094		)	9,759			(1,542		)	57,892
Total assets	1,888,299		122,506			200,510			22,792			2,234,107
Turnarounds, catalysts and capital expenditures	70,124		3,219			6,222			1,359			80,924

Operating income (loss) for each segment consists of net sales less cost of sales, direct operating expenses, selling, general and administrative expenses, depreciation and amortization, and gain (loss) on disposition of assets. Intersegment sales are intended to approximate wholesale market prices. Consolidated totals presented are after intersegment eliminations.

Total assets of each segment consist of net property, plant and equipment, inventories, cash and cash equivalents, accounts and other receivables and other assets directly associated with the segment’s operations. Corporate assets consist primarily of corporate headquarters information technology and administrative equipment.


(4)	Fair Value

We 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. We classify financial assets and financial liabilities into the following fair value hierarchy:


•	Level 1 - valued based on quoted prices in active markets for identical assets and liabilities;


•	Level 2 - valued based on quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability; and


•	Level 3 - valued based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As required, we utilize 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. We generally apply 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 carrying amounts of our 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 long-term debt approximate fair value. Derivative instruments are carried at fair value, which are based on quoted market prices. Derivative instruments are our only assets and liabilities measured at fair value on a recurring basis.

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ALON USA ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)

The following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the consolidated balance sheets at June 30, 2015 and December 31, 2014:



	Level 1		Level 2		Level 3		Total
As of June 30, 2015
Assets:
Commodity contracts (swaps)	$	—	$	38,797	$	—	$	38,797
Fair value hedges	—		20,113		—		20,113
Liabilities:
Commodity contracts (futures and forwards)	18		—		—		18
Interest rate swaps	—		1,967		—		1,967

As of December 31, 2014
Assets:
Commodity contracts (swaps)	$	—	$	42,740	$	—	$	42,740
Fair value hedges	—		24,903		—		24,903
Liabilities:
Commodity contracts (futures and forwards)	333		—		—		333
Interest rate swaps	—		1,238		—		1,238


(5)	Derivative Financial Instruments

We selectively utilize crude oil and refined product commodity derivative contracts to reduce the risk associated with potential price changes on committed obligations as well as to reduce earnings volatility. We also utilize interest rate swaps to manage our exposure to interest rate risk. We do not speculate using derivative instruments. Credit risk on our derivative instruments is mitigated by transacting with counterparties meeting established collateral and credit criteria.

Mark to Market

We have certain contracts that serve as economic hedges, which are derivatives used for risk management but not designated as hedges for financial accounting purposes. All economic hedge transactions are recorded at fair value and any changes in fair value between periods are recognized in earnings.

We have contracts that are used to fix prices on forecasted purchases of inventory, which we refer to as futures and forwards. Futures represent trades executed on the New York Mercantile Exchange which have not been closed or settled at the end of the reporting period. 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.

We also have economic hedges in the form of swap contracts that fix price differentials between different types of crude oil and the crack spreads between certain refined products and the crude oil that we use at our refineries. At June 30, 2015, these swap contracts had aggregate volumes of 17,230 thousand barrels of crude oil and refined products with contract terms through December 2016.

Fair Value Hedges

Fair value hedges are used to hedge price volatility of certain refining inventories and firm commitments to purchase inventories. The gain or loss on a derivative instrument designated and qualifying as a fair value hedge, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, is recognized in earnings in the same period.

We have certain commodity contracts associated with the Supply and Offtake Agreements discussed in Note 7 that have been accounted for as fair value hedges, which had purchase volumes of 678 thousand barrels of crude oil as of June 30, 2015.

Cash Flow Hedges

To designate a derivative as a cash flow hedge, we document at the inception of the hedge the assessment that the derivative will be highly effective in offsetting expected changes in cash flows from the hedged item. This assessment, which is updated at least quarterly, is generally based on the most recent relevant historical correlation between the derivative and the hedged item. If, during the term of the derivative, the hedge is determined to be no longer highly effective, hedge accounting is

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ALON USA ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)

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 transactions occur.

Commodity Derivatives. As of June 30, 2015, we did not have any commodity swap contracts accounted for as cash flow hedges. In January 2015, we elected to de-designate the commodity swap contracts that were previously designated as cash flow hedges. As of June 30, 2015, these commodity swap contracts were accounted for as economic hedges, as mentioned above. As of June 30, 2015, unrealized gains of $24,010 were classified in other comprehensive income (“OCI”) that related to the application of hedge accounting prior to de-designation, which will be reclassified into earnings as the underlying transactions occur through the remainder of 2015. During the three and six months ended June 30, 2015, we reclassified gains of $9,955 and $17,937, respectively, from OCI into cost of sales related to these de-designated cash flow hedges. During the three and six months ended June 30, 2014, we reclassified losses of $2,153 and $10,428, respectively, from OCI into cost of sales related to previously de-designated cash flow hedges that settled in 2014.

Related to commodity swap cash flow hedges in OCI, we recognized unrealized gains (losses) of $(9,955) and $11,078 for the three months ended and $(11,867) and $42,935 for the six months ended June 30, 2015 and 2014, respectively.

Interest Rate Derivatives. In April 2014, we entered into three interest rate swap agreements, maturing March 2019, that effectively fix the variable LIBOR interest component of the term loan feature within the retail credit agreement. These interest rate swaps have been accounted for as cash flow hedges. The aggregate notional amount under these agreements covers approximately 75% of the outstanding principal of the term loan throughout the duration of the interest rate swaps. As of June 30, 2015, the outstanding principal of the term loan was $99,000. The interest rate swaps lock in an average fixed interest rate of 0.60% in 2015; 1.47% in 2016; 2.35% in 2017; 3.09% in 2018 and 3.28% in 2019.

Related to interest rate swap cash flow hedges in OCI, we recognized unrealized gains (losses) of $186 and $(788) for the three months ended and $(729) and $(788) for the six months ended June 30, 2015 and 2014, respectively.

For the three and six months ended June 30, 2015 and 2014, there was no cash flow hedge ineffectiveness recognized in income. No component of our cash flow hedges’ gains or losses was excluded from the assessment of hedge effectiveness.

As of June 30, 2015, we have net unrealized gains of $22,043 classified in OCI related to cash flow hedges, including amounts related to the de-designated cash flow hedges. Assuming interest rates remain unchanged, unrealized gains of $23,602 will be reclassified from OCI into earnings over the next twelve-month period as the underlying transactions occur.

The following tables present the effect of derivative instruments on the consolidated balance sheets:



	As of June 30, 2015
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives not designated as hedging instruments:
Commodity contracts (futures and forwards)	Accounts receivable	$	656	Accrued liabilities	$	674
Commodity contracts (swaps)	Accounts receivable	30,829			—
Commodity contracts (swaps)	Other assets	7,968			—
Total derivatives not designated as hedging instruments		39,453			674

Derivatives designated as hedging instruments:
Interest rate swaps		$	—	Other non-current liabilities	$	1,967
Fair value hedges	Other assets	20,113			—
Total derivatives designated as hedging instruments		20,113			1,967
Total derivatives		$	59,566		$	2,641

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ALON USA ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)



	As of December 31, 2014
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives not designated as hedging instruments:
Commodity contracts (futures and forwards)	Accounts receivable	$	7,168	Accrued liabilities	$	7,501
Commodity contracts (swaps)	Accounts receivable	6,809			—
Commodity contracts (swaps)	Other assets	11,622			—
Total derivatives not designated as hedging instruments		25,599			7,501

Derivatives designated as hedging instruments:
Commodity contracts (swaps)	Accounts receivable	$	24,309		$	—
Interest rate swaps		—		Other non-current liabilities	1,238
Fair value hedges	Other assets	24,903			—
Total derivatives designated as hedging instruments		49,212			1,238
Total derivatives		$	74,811		$	8,739

The following tables present the effect of derivative instruments on the consolidated statements of operations and accumulated other comprehensive income:

Derivatives designated as hedging instruments:



Cash Flow Hedging Relationships	Gain (Loss) Recognized in OCI			Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)				Gain (Loss) Reclassified from Accumulated OCI into Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
				Location	Amount			Location	Amount
For the Three Months Ended June 30, 2015
Commodity contracts (swaps)	$	(9,955	)	Cost of sales	$	9,955			$	—
Interest rate swaps	186			Interest expense	(97		)		—
Total derivatives	$	(9,769	)		$	9,858			$	—

For the Three Months Ended June 30, 2014
Commodity contracts (swaps)	$	11,078		Cost of sales	$	(2,153	)		$	—
Interest rate swaps	(788		)	Interest expense	(14		)		—
Total derivatives	$	10,290			$	(2,167	)		$	—

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ALON USA ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)



Cash Flow Hedging Relationships	Gain (Loss) Recognized in OCI			Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)				Gain (Loss) Reclassified from Accumulated OCI into Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
				Location	Amount			Location	Amount
For the Six Months Ended June 30, 2015
Commodity contracts (swaps)	$	(11,867	)	Cost of sales	$	17,937			$	—
Interest rate swaps	(729		)	Interest expense	(112		)		—
Total derivatives	$	(12,596	)		$	17,825			$	—

For the Six Months Ended June 30, 2014
Commodity contracts (swaps)	$	42,935		Cost of sales	$	(10,428	)		$	—
Interest rate swaps	(788		)	Interest expense	(14		)		—
Total derivatives	$	42,147			$	(10,442	)		$	—

Derivatives in fair value hedging relationships:



		Gain (Loss) Recognized in Income
		For the Three Months Ended						For the Six Months Ended
		June 30,						June 30,
	Location	2015			2014			2015			2014
Fair value hedges (1)	Interest expense	$	(10,578	)	$	(4,444	)	$	(4,790	)	$	(7,051	)
Total derivatives		$	(10,578	)	$	(4,444	)	$	(4,790	)	$	(7,051	)

___________


(1)	Changes in the fair value hedges are substantially offset by changes in the hedged items.

Derivatives not designated as hedging instruments:



		Gain (Loss) Recognized in Income
		For the Three Months Ended						For the Six Months Ended
		June 30,						June 30,
	Location	2015			2014			2015			2014
Commodity contracts (futures and forwards)	Cost of sales	$	1,688		$	(5,133	)	$	(3,670	)	$	(6,118	)
Commodity contracts (swaps)	Cost of sales	(2,443		)	(236		)	19,418			1,801
Total derivatives		$	(755	)	$	(5,369	)	$	15,748		$	(4,317	)

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ALON USA ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)

Offsetting Assets and Liabilities

Our derivative instruments are subject to master netting arrangements to manage counterparty credit risk associated with derivatives, and we offset the fair value amounts recorded for derivative instruments to the extent possible under these agreements on our consolidated balance sheets.

The following table presents offsetting information regarding our derivatives by type of transaction as of June 30, 2015 and December 31, 2014:



	Gross Amounts of Recognized Assets/Liabilities		Gross Amounts offset in the Statement of Financial Position			Net Amounts Presented in the Statement of Financial Position		Gross Amounts Not offset in the Statement of Financial Position					Net Amount
	Gross Amounts of Recognized Assets/Liabilities		Gross Amounts offset in the Statement of Financial Position					Financial Instruments			Cash Collateral Pledged		Net Amount
As of June 30, 2015
Derivative Assets:
Commodity contracts (futures and forwards)	$	1,175	$	(519	)	$	656	$	(656	)	$	—	$	—
Commodity contracts (swaps)	46,213		(7,416		)	38,797		—			—		38,797
Fair value hedges	20,113		—			20,113		—			—		20,113
Derivative Liabilities:
Commodity contracts (futures and forwards)	$	1,193	$	(519	)	$	674	$	(656	)	$	—	$	18
Commodity contracts (swaps)	7,416		(7,416		)	—		—			—		—
Interest rate swaps	1,967		—			1,967		—			—		1,967

As of December 31, 2014
Derivative Assets:
Commodity contracts (futures and forwards)	$	8,508	$	(1,340	)	$	7,168	$	(7,168	)	$	—	$	—
Commodity contracts (swaps)	49,204		(6,464		)	42,740		—			—		42,740
Fair value hedges	24,903		—			24,903		—			—		24,903
Derivative Liabilities:
Commodity contracts (futures and forwards)	$	8,841	$	(1,340	)	$	7,501	$	(7,168	)	$	—	$	333
Commodity contracts (swaps)	6,464		(6,464		)	—		—			—		—
Interest rate swaps	1,238		—			1,238		—			—		1,238

Compliance Program Market Risk

We are obligated by government regulations to blend a certain percentage of biofuels into the products that we produce and are consumed in the U.S. We purchase biofuels from third parties and blend those biofuels into our products, and each gallon of biofuel purchased includes a renewable identification number, or RIN. To the degree we are unable to blend biofuels at the required percentage, a RINs deficit is generated and we must acquire that number of RINs by the annual reporting deadline in order to remain in compliance with applicable regulations. Alternatively, if we have a RINs surplus, some of those RINs could be sold. Any such sales would be subject to our normal credit evaluation process.

We are exposed to market risk related to the volatility in the price of credits needed to comply with these governmental and regulatory programs. We manage this risk by purchasing RINs when prices are deemed favorable utilizing fixed price purchase contracts. Some of these contracts are derivative instruments; however, we elect the normal purchase and sale exception and do not record these contracts at their fair values.

The cost of meeting our obligations under these compliance programs was $10,394 and $4,573 for the three months ended and $23,090 and $12,354 for the six months ended June 30, 2015 and 2014, respectively. These amounts are reflected in cost of sales in the consolidated statements of operations.

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ALON USA ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)


(6)	Inventories

Carrying value of inventories consisted of the following:



	June 30, 2015		December 31, 2014
Crude oil, refined products, asphalt and blendstocks	$	44,291	$	48,027
Crude oil consignment inventory (Note 7)	18,861		18,350
Materials and supplies	25,316		22,269
Store merchandise	22,868		27,418
Store fuel	6,031		6,739
Total inventories	$	117,367	$	122,803

The market value of refined products, asphalt and blendstock inventories exceeded LIFO costs by $9,533 and $7,713 at June 30, 2015 and December 31, 2014, respectively. The market value of crude oil inventories exceeded LIFO costs, net of the fair value hedged items, by $24,994 and $17,754 at June 30, 2015 and December 31, 2014, respectively.


(7)	Inventory Financing Agreements

We have entered into Supply and Offtake Agreements and other associated agreements (together the “Supply and Offtake Agreements”) with J. Aron & Company (“J. Aron”), to support the operations of our Big Spring, Krotz Springs and California refineries and most of our asphalt terminals. Pursuant to the Supply and Offtake Agreements, (i) J. Aron agreed to sell to us, and we agreed to buy from J. Aron, at market prices, crude oil for processing at the refineries and (ii) we agreed to sell, and J. Aron agreed to buy, at market prices, certain refined products produced at the refineries.

The Supply and Offtake Agreements also provided for the sale, at market prices, of our crude oil and certain refined product inventories to J. Aron, the lease to J. Aron of crude oil and refined product storage facilities, and to identify prospective purchasers of refined products on J. Aron’s behalf. The Supply and Offtake Agreements have initial terms that expire in May 2019. J. Aron may elect to terminate the Supply and Offtake Agreements prior to the expiration of the initial term beginning in May 2016 and upon each anniversary thereof, on six months prior notice. We may elect to terminate in May 2018 on six months prior notice.

In February 2015, the Supply and Offtake Agreements for the Big Spring and Krotz Springs refineries were amended and the initial term was extended to May 2021. J. Aron may elect to terminate the Supply and Offtake Agreements for the Big Spring and Krotz Springs refineries prior to the expiration of the initial term beginning in May 2018 and upon each anniversary thereof, on six months prior notice. We may elect to terminate in May 2020 on six months prior notice.

Following expiration or termination of the Supply and Offtake Agreements, we are obligated to purchase the crude oil and refined product inventories then owned by J. Aron and located at the leased storage facilities at then current market prices.

Associated with the Supply and Offtake Agreements, we have fair value hedges of our inventory purchase commitments with J. Aron and crude oil inventory consigned to J. Aron (“crude oil consignment inventory”). Additionally, financing charges related to the Supply and Offtake Agreements are recorded as interest expense in the consolidated statements of operations.

In connection with the Supply and Offtake Agreement for our Krotz Springs refinery, we have granted a security interest to J. Aron in all of its accounts and inventory to secure its obligations to J. Aron. In addition, we have granted a security interest in all of its real property and equipment to J. Aron to secure its obligations under a commodity hedge and sale agreement in lieu of posting cash collateral and being subject to cash margin calls.

At June 30, 2015 and December 31, 2014, we had net current payables to J. Aron for purchases of $36,963 and $46,303, respectively, and a consignment inventory receivable representing a deposit paid to J. Aron of $26,179 and $26,179, respectively. At June 30, 2015 and December 31, 2014, we had non-current liabilities for the original financing of $39,236 and $39,060, respectively, net of the related fair value hedges.

Additionally, we had net current payables of $602 and $4,212 at June 30, 2015 and December 31, 2014, respectively, for forward commitments related to month-end consignment inventory target levels differing from projected levels and the associated pricing with these inventory level differences.

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ALON USA ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)


(8)	Property, Plant and Equipment, Net

Property, plant and equipment, net consisted of the following:



	June 30, 2015			December 31, 2014
Refining facilities	$	1,839,394		$	1,820,565
Pipelines and terminals	43,439			43,439
Retail	208,825			200,354
Other	20,959			17,988
Property, plant and equipment, gross	2,112,617			2,082,346
Accumulated depreciation	(760,418		)	(710,002		)
Property, plant and equipment, net	$	1,352,199		$	1,372,344

Disposition of Assets

In January 2014, we sold our Willbridge, Oregon asphalt terminal for $40,000. The terminal was included in our asphalt segment and allocated goodwill of $4,030. For the six months ended June 30, 2014, a pre-tax gain of $2,014 was recognized and has been included in gain (loss) on disposition of assets in our consolidated statements of operations.


(9)	Additional Financial Information

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


(a)	Other Assets, Net



	June 30, 2015		December 31, 2014
Deferred turnaround and catalyst cost	$	53,280	$	60,753
Environmental receivables (Note 16)	2,655		3,030
Deferred debt issuance costs	10,702		10,569
Intangible assets, net	7,376		7,647
Receivable from supply and offtake agreements (Note 7)	26,179		26,179
Commodity contracts	7,968		11,622
Fair value hedges (Note 7)	20,113		24,903
Other, net	22,516		18,176
Total other assets	$	150,789	$	162,879

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ALON USA ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)


(b)	Accrued Liabilities and Other Non-Current Liabilities



	June 30, 2015		December 31, 2014
Accrued Liabilities:
Taxes other than income taxes, primarily excise taxes	$	34,967	$	47,071
Employee costs	14,883		13,297
Commodity contracts	674		7,501
Accrued finance charges	1,840		1,826
Environmental accrual (Note 16)	8,189		8,189
Other	40,482		26,507
Total accrued liabilities	$	101,035	$	104,391

Other Non-Current Liabilities:
Pension and other postemployment benefit liabilities, net	$	53,129	$	52,135
Environmental accrual (Note 16)	39,931		43,546
Asset retirement obligations	12,599		12,328
Consignment inventory obligations (Note 7)	59,349		63,963
Interest rate swaps	1,967		1,238
Other	7,944		9,449
Total other non-current liabilities	$	174,919	$	182,659


(10)	Postretirement Benefits

The components of net periodic benefit cost related to our benefit plans for the three and six months ended June 30, 2015 and 2014 consisted of the following:



	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
Components of net periodic benefit cost:
Service cost	$	997		$	856		$	1,993		$	1,712
Interest cost	1,255			1,238			2,511			2,476
Expected return on plan assets	(1,583		)	(1,369		)	(3,165		)	(2,739		)
Amortization of net loss	840			595			1,679			1,191
Net periodic benefit cost	$	1,509		$	1,320		$	3,018		$	2,640

Our estimated contributions to our pension plans during 2015 have not changed significantly from amounts previously disclosed in the consolidated financial statements for the year ended December 31, 2014. For the six months ended June 30, 2015 and 2014, we contributed $2,175 and $2,525, respectively, to our qualified pension plans.


(11)	Indebtedness

Debt consisted of the following:



	June 30, 2015		December 31, 2014
Term loan credit facilities	$	260,817	$	264,359
Alon USA, LP Credit Facility	40,000		60,000
Convertible senior notes	129,074		126,298
Retail credit facilities	109,322		113,030
Total debt	539,213		563,687
Less: Current portion	15,086		15,089
Total long-term debt	$	524,127	$	548,598

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ALON USA ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)

(a) Letter of Credit Facility and Alon USA, LP Revolving Credit Facility

We had letters of credit outstanding under our $60,000 letter of credit facility of $44,227 and $54,227 at June 30, 2015 and December 31, 2014, respectively.

We had borrowings of $40,000 and $60,000 and letters of credit of $43,463 and $23,511 outstanding under the Alon USA, LP $240,000 revolving credit facility at June 30, 2015 and December 31, 2014, respectively.

In May 2015, the Alon USA, LP $240,000 revolving credit facility was amended to, among other matters, extend the expiration date to May 2019. Borrowings under the Alon USA, LP $240,000 revolving credit facility now bear interest at the Eurodollar rate plus 3.00% per annum.

(b) Convertible Senior Notes

The conversion rate for our 3.00% unsecured convertible senior notes (“Convertible Notes”) is subject to adjustment upon the occurrence of certain events, including cash dividend adjustments, but will not be adjusted for any accrued and unpaid interest. As of June 30, 2015, the conversion rate was adjusted to 69.482 shares of our common stock per each $1 (in thousands) principal amount of Convertible Notes, equivalent to a conversion price of approximately $14.39 per share, to reflect cash dividend adjustments. The strike price of the options was adjusted to $14.39 per share and the strike price of the warrants was adjusted to $19.55 per share. Upon a potential change of control, we may have to settle the value of the warrants in accordance with the indenture. Any future quarterly cash dividend payments in excess of $0.06 per share will cause further adjustment based on the formula contained in the indenture governing the Convertible Notes. As of June 30, 2015, there have been no conversions of the Convertible Notes.

In May 2015, Delek US Holdings, Inc. (“Delek”) acquired approximately 48% of our common stock from Alon Israel Oil Company, Ltd. Delek agreed to a one year standstill provision limiting Delek’s ability to acquire greater than 49.99% of our outstanding common stock, with additional ownership above this threshold subject to the approval of Alon’s independent directors. If Delek were to acquire greater than 50.00% of our outstanding common stock, it could require us to render a make-whole payment to holders of our Convertible Notes of approximately $15,000 as of June 30, 2015, assuming full conversion of the Convertible Notes. In the event of a conversion, the convertible note options will cover our obligation to render payment under the make-whole provision. Under these circumstances, we could also be required to settle the outstanding warrants, which had a value of approximately $50,000 as of June 30, 2015.

We have certain credit agreements that contain maintenance financial covenants. At June 30, 2015, we were in compliance with these covenants.


(12)	Stock-Based Compensation (share values in dollars)

Our overall executive incentive compensation program permits the granting of awards to our directors, officers and key employees in the form of options to purchase common stock, stock appreciation rights, restricted shares of common stock, restricted common stock units, performance shares, performance units and senior executive plan bonuses.

Restricted Stock. Non-employee directors, and non-employee directors of Alon's subsidiaries who are designated by Alon's directors, are awarded an annual grant of $25 in shares of restricted stock, which vest over a period of three years, assuming continued service at vesting. In May 2015, Alon granted awards of 6,028 restricted shares at a grant date price of $16.59 per share.

In May 2015, Alon granted awards of 255,000 restricted shares to certain executive officers at a grant date price of $16.59 per share. These May 2015 restricted shares will fully vest in May 2016, assuming continued service at vesting.

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ALON USA ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)

The following table summarizes the restricted share activity from January 1, 2015:



			Weighted Average Grant Date Fair Values
Nonvested Shares	Shares		(per share)
Nonvested at January 1, 2015	643,999		$	14.24
Granted	261,028		16.59
Vested	(134,290	)	14.97
Forfeited	—		—
Nonvested at June 30, 2015	770,737		$	14.91

Compensation expense for restricted stock awards amounted to $1,515 and $1,000 for the three months ended June 30, 2015 and 2014, respectively, and $2,314 and $1,488 for the six months ended June 30, 2015 and 2014, respectively. These amounts are included in selling, general and administrative expenses in the consolidated statements of operations. The fair value of shares vested in 2015 was $2,257.

Restricted Stock Units. In 2011, we granted 500,000 restricted stock units to our CEO and President at a grant date fair value of $11.47 per share. Each restricted unit represents the right to receive one share of our common stock upon the vesting of the restricted stock unit. All 500,000 restricted stock units vested on March 1, 2015. Compensation expense for restricted stock units amounted to $0 and $374 for the three months ended June 30, 2015 and 2014, respectively, and $249 and $748 for the six months ended June 30, 2015 and 2014, respectively. These amounts are included in selling, general and administrative expenses in the consolidated statements of operations.

Unrecognized Compensation Cost. As of June 30, 2015, there was $6,282 of total unrecognized compensation cost related to non-vested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.2 years.


(13)	Equity (share values in dollars)

Changes to equity during the six months ended June 30, 2015 are presented below:



	Total Stockholders’ Equity			Non-controlling Interest			Total Equity
Balance at December 31, 2014	$	636,898		$	36,880		$	673,778
Other comprehensive loss	(7,674		)	(261		)	(7,935		)
Stock compensation	1,424			(1,002		)	422
Dividends of common stock on preferred stock	(4		)	—			(4		)
Distributions to non-controlling interest in the Partnership	—			(16,224		)	(16,224		)
Dividends	(17,384		)	(260		)	(17,644		)
Net income	63,349			18,568			81,917
Balance at June 30, 2015	$	676,609		$	37,701		$	714,310

(a)Common Stock

Amended Shareholder Agreement. In 2012, we signed agreements with the remaining non-controlling interest shareholders of Alon Assets whereby the participants would exchange shares of Alon Assets for shares of our common stock. During the six months ended June 30, 2015, 329,644 shares of our common stock were issued in exchange for 1,762.24 shares of Alon Assets. At June 30, 2015, 930,778 shares of our common stock are available to be exchanged for the outstanding shares held by non-controlling interest shareholders of Alon Assets.

We recognized compensation expense associated with the difference in value between the participants' ownership of Alon Assets compared to our common stock of $699 and $608 for the three months ended June 30, 2015 and 2014, respectively, $1,183 and $1,305 for the six months ended June 30, 2015 and 2014, respectively. These amounts are included in selling, general and administrative expenses in the consolidated statements of operations.

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ALON USA ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)


(b)	Preferred Stock

Preferred Stock Conversion. During the six months ended June 30, 2015, the remaining 68,180 shares of our preferred stock were converted to 101,150 shares of our common stock.


(c)	Dividends

Common Stock Dividends. During the six months ended June 30, 2015, we paid the following dividends:

Preferred Stock Dividends. During the six months ended June 30, 2015, we issued 771 shares of common stock for payment of the quarterly 8.5% preferred stock dividend to preferred stockholders, prior to the preferred stock conversion into our common stock.


(d)	Accumulated Other Comprehensive Loss

The following table displays the change in accumulated other comprehensive loss, net of tax:



	Unrealized Gain (Loss) on Cash Flow Hedges			Postretirement Benefit Plans			Total
Balance at December 31, 2014	$	21,330		$	(29,788	)	$	(8,458	)
Other comprehensive income before reclassifications	3,368			—			3,368
Amounts reclassified from accumulated other comprehensive loss	(11,042		)	—			(11,042		)
Net current-period other comprehensive loss	(7,674		)	—			(7,674		)
Balance at June 30, 2015	$	13,656		$	(29,788	)	$	(16,132	)


(14)	Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated as net income (loss) available to common stockholders divided by the average number of participating shares of common stock outstanding. Diluted earnings (loss) per share includes the dilutive effect of granted stock appreciation rights, granted restricted common stock units, granted restricted common stock awards, convertible debt and warrants using the treasury stock method and the dilutive effect of convertible preferred shares using the if-converted method.

The calculation of earnings (loss) per share, basic and diluted, for the three and six months ended June 30, 2015 and 2014, is as follows (shares in thousands, per share value in dollars):



	For the Three Months Ended					For the Six Months Ended
	June 30,					June 30,
	2015		2014			2015		2014
Net income (loss) available to stockholders	$	36,410	$	(7,517	)	$	63,349	$	(6,732	)
Less: preferred stock dividends	—		14			15		29
Net income (loss) available to common stockholders	36,410		(7,531		)	63,334		(6,761		)

Weighted average shares outstanding, basic	69,684		68,851			69,584		68,734
Dilutive common stock equivalents	2,817		—			2,811		—
Weighted average shares outstanding, diluted	72,501		68,851			72,395		68,734
Earnings (loss) per share, basic	$	0.52	$	(0.11	)	$	0.91	$	(0.10	)
Earnings (loss) per share, diluted	$	0.50	$	(0.11	)	$	0.87	$	(0.10	)

For the three and six months ended June 30, 2015, the weighted average diluted shares includes all potentially dilutive common stock equivalents. For the three and six months ended June 30, 2014, we have excluded 200 and 195 common stock equivalents, respectively, from the weighted average diluted shares outstanding as the effect of including such shares would be anti-dilutive.

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ALON USA ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)


(15)	Related Party Transactions

Delek US Holdings, Inc.

In May 2015, Delek completed the purchase of approximately 48% of our common stock from Alon Israel Oil Company, Ltd. From the transaction date through June 30, 2015, we purchased $1,944 of refined products from Delek. Accounts payable includes a balance outstanding to Delek of $997 at June 30, 2015.


(16)	Commitments and Contingencies


(a)	Commitments

In the normal course of business, we have long-term commitments to purchase, at market prices, utilities such as natural gas, electricity and water for use by our refineries, terminals, pipelines and retail locations. We are also party to various refined product and crude oil supply and exchange agreements, which are typically short-term in nature or provide terms for cancellation.


(b)	Contingencies

We are involved in various legal actions arising in the ordinary course of business. We believe the ultimate disposition of these matters will not have a material effect on our financial position, results of operations or liquidity.

One of our subsidiaries is a party to a lawsuit alleging breach of contract pertaining to an asphalt supply agreement. We believe that we have valid counterclaims as well as affirmative defenses that will preclude recovery. Attempts to reach a commercial arrangement to resolve the dispute have been unsuccessful to this point. This matter is currently scheduled for trial in October 2015. Due to the uncertainties of litigation, we cannot predict with certainty the ultimate resolution of this lawsuit.


(c)	Environmental

We are subject to loss contingencies pursuant to federal, state, and local environmental laws and regulations. These laws and regulations govern the discharge of materials into the environment and may require us 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 and to compensate others for damage to property and natural resources. These contingent obligations relate to sites that we own and are associated with past or present operations. We are currently participating in environmental investigations, assessments and cleanups pertaining to our refineries, service stations, pipelines and terminals. We may be involved in additional future environmental investigations, assessments and cleanups. The magnitude of future costs are unknown and will depend on factors such as the nature and contamination at many sites, the timing, extent and method of the remedial actions which may be required, and the determination of our 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 15 years. The level of future expenditures for environmental remediation obligations cannot be determined with any degree of reliability.

We have accrued environmental remediation obligations of $48,120 ($8,189 current liability and $39,931 non-current liability) at June 30, 2015, and $51,735 ($8,189 current liability and $43,546 non-current liability) at December 31, 2014.

We have an indemnification agreement with a prior owner for part of the remediation expenses at certain West Coast assets. We have recorded current receivables of $784 and $784 and non-current receivables of $2,655 and $3,030 at June 30, 2015 and December 31, 2014, respectively.

We have an indemnification agreement with a prior owner for remediation expenses at the Bakersfield refinery. We have recorded current receivables of $3,350 at December 31, 2014.


(17)	Subsequent Events

Dividend Declared

On July 30, 2015, our board of directors declared the regular quarterly cash dividend of $0.15 per share on our common stock, payable on September 24, 2015, to holders of record at the close of business on September 8, 2015.

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ALON USA ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)

Partnership Distribution

On July 31, 2015, the board of directors of the General Partner declared a cash distribution to the Partnership’s common unitholders of approximately $65,010, or $1.04 per common unit. The cash distribution will be paid on August 25, 2015 to unitholders of record at the close of business on August 18, 2015. The total cash distribution payable to non-affiliated common unitholders will be approximately $11,970.

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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 consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014. In this document, the words “Alon,” “the Company,” “we,” “our” and “us” refer to Alon USA Energy, Inc. and its consolidated subsidiaries or to Alon USA Energy, Inc. or an individual subsidiary, and not to any other person. Generally, the words “we,” “our” and “us” include Alon USA Partners, LP and its subsidiaries (the “Partnership”) as consolidated subsidiaries of Alon USA Energy, 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 of 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;

Record Date

Dividend Amount Per Share

March 16, 2015

February 26, 2015

June 5, 2015

May 19, 2015