Alon USA Partners, LP - FORM 10-Q

Attached files

file	filename
EX-32.2 - CERTIFICATION - Alon USA Partners, LP	aldw-ex321_2017331xq1.htm
EX-31.2 - CERTIFICATION - Alon USA Partners, LP	aldw-ex312_2017331xq1.htm
EX-31.1 - CERTIFICATION - Alon USA Partners, LP	aldw-ex311_2017331xq1.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 MARCH 31, 2017



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: 001-35742

ALON USA PARTNERS, LP

(Exact name of Registrant as specified in its charter)

___________________________________________________



Delaware		46-0810241
(State of organization)		(I.R.S. Employer
		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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 number of the Registrant’s common limited partner units outstanding as of May 1, 2017, was 62,520,220.

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 CASH FLOWS	3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13
FORWARD-LOOKING STATEMENTS	13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	23
ITEM 4. CONTROLS AND PROCEDURES	25
PART II. OTHER INFORMATION	26
ITEM 6. EXHIBITS	26
SIGNATURES	27

Table of Contents

PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

ALON USA PARTNERS, LP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)



	March 31, 2017		December 31, 2016
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	109,034	$	73,524
Accounts and other receivables, net	75,518		82,292
Accounts and other receivables, net - related parties	12,085		11,425
Inventories	50,518		49,682
Prepaid expenses and other current assets	4,883		4,949
Total current assets	252,038		221,872
Property, plant and equipment, net	416,838		420,554
Other assets, net	50,611		53,211
Total assets	$	719,487	$	695,637
LIABILITIES AND PARTNERS’ EQUITY
Current liabilities:
Accounts payable	$	301,183	$	249,835
Accrued liabilities	40,626		43,100
Current portion of long-term debt	2,500		2,500
Total current liabilities	344,309		295,435
Other non-current liabilities	24,765		62,880
Long-term debt	233,652		233,819
Total liabilities	602,726		592,134
Commitments and contingencies (Note 11)
Partners’ equity:
General Partner	—		—
Common unitholders - 62,520,220 units issued and outstanding at March 31, 2017 and December 31, 2016	116,761		103,503
Total partners’ equity	116,761		103,503
Total liabilities and partners’ equity	$	719,487	$	695,637

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

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ALON USA PARTNERS, LP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, dollars in thousands except per unit data)



	For the Three Months Ended
	March 31,
	2017			2016
Net sales (1)	$	544,532		$	368,009
Operating costs and expenses:
Cost of sales	470,471			319,333
Direct operating expenses	24,760			25,044
Selling, general and administrative expenses	6,764			7,309
Depreciation and amortization	14,229			14,206
Total operating costs and expenses	516,224			365,892
Operating income	28,308			2,117
Interest expense	(7,845		)	(10,587		)
Other income (loss), net	(95		)	84
Income (loss) before state income tax expense	20,368			(8,386		)
State income tax expense	256			176
Net income (loss)	$	20,112		$	(8,562	)
Earnings (loss) per unit	$	0.32		$	(0.14	)
Weighted average common units outstanding (in thousands)	62,520			62,510
Cash distribution per unit	$	0.11		$	0.08

___________


(1)	Includes sales to related parties of $91,000 and $63,110 for the three months ended March 31, 2017 and 2016, respectively.

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

Table of Contents

ALON USA PARTNERS, LP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, dollars in thousands)

	For the Three Months Ended
	March 31,
	2017			2016
Cash flows from operating activities:
Net income (loss)	$	20,112		$	(8,562	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization	14,229			14,206
Unit-based compensation	23			10
Amortization of debt issuance costs	402			563
Amortization of original issuance discount	171			154
Changes in operating assets and liabilities:
Accounts and other receivables, net	6,774			(9,335		)
Accounts and other receivables, net - related parties	(660		)	(1,527		)
Inventories	(836		)	4,114
Prepaid expenses and other current assets	66			2,136
Other assets, net	(1,246		)	(6,661		)
Accounts payable	4,755			5,586
Accrued liabilities	(3,381		)	3,385
Other non-current liabilities	1,363			2,593
Net cash provided by operating activities	41,772			6,662
Cash flows from investing activities:
Capital expenditures	(5,026		)	(8,112		)
Capital expenditures for turnarounds and catalysts	(849		)	(2,681		)
Net cash used in investing activities	(5,875		)	(10,793		)
Cash flows from financing activities:
Distributions paid to unitholders	(1,267		)	(921		)
Distributions paid to unitholders - Alon Energy	(5,610		)	(4,080		)
RINs financing transactions	7,115			—
Payments on long-term debt	(625		)	(625		)
Net cash used in financing activities	(387		)	(5,626		)
Net increase (decrease) in cash and cash equivalents	35,510			(9,757		)
Cash and cash equivalents, beginning of period	73,524			132,953
Cash and cash equivalents, end of period	$	109,034		$	123,196
Supplemental cash flow information:
Cash paid for interest, net of capitalized interest	$	8,971		$	10,144
Cash paid for income tax	$	256		$	176
Supplemental disclosure of non-cash activity:
Capital expenditures included in accounts payable and accrued liabilities	$	907		$	—

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

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ALON USA PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, dollars in thousands except as noted)


(1)	Basis of Presentation

As used in this report, the terms “Alon,” the “Partnership,” “we,” “our” and “us” or like terms refer to Alon USA Partners, LP, and its consolidated subsidiaries or to Alon USA Partners, LP or an individual subsidiary. References in this report to “Alon Energy” refer collectively to Alon USA Energy, Inc. and any of its consolidated subsidiaries, other than Alon USA Partners, LP, its subsidiaries and its general partner.

We are a Delaware limited partnership formed in August 2012 by Alon Energy and Alon USA Partners GP, LLC (the “General Partner”). The General Partner, a wholly-owned subsidiary of Alon Energy, owns 100% of our general partner interest, which is a non-economic interest.

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 the General Partner’s 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 months ended March 31, 2017 are not necessarily indicative of the operating results that may be realized for the year ending December 31, 2017.

Our consolidated balance sheet as of December 31, 2016 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, 2016.

New Accounting Pronouncements

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 August 2015, the FASB updated the guidance to include 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 and related disclosures. Based on our initial evaluation, though not currently quantified, the adoption of the standard is not expected to have a material impact on the timing of revenue recognized, results of operations or cash flows.

In February 2016, the FASB issued new guidance on the accounting for leases, which requires lessees to recognize assets and liabilities on the balance sheet for the present value of the rights and obligations created by all leases with terms of more than 12 months. The standard will also require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The requirements from this guidance are effective for interim and annual periods beginning after December 31, 2018. We are evaluating the guidance to determine the impact this standard will have on our consolidated financial statements.

In June 2016, the FASB issued an accounting standards update requiring the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The requirements from the updated standard are effective for interim and annual periods beginning after December 15, 2019. We are evaluating the guidance to determine the impact this standard will have on our consolidated financial statements.

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ALON USA PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)

In August 2016, the FASB issued an accounting standards update addressing eight specific cash flow issues with the objective of eliminating the existing diversity in practice. The amendments from this update are effective for interim and annual periods beginning after December 15, 2017. We do not expect application of this standard to have a material effect on our consolidated financial statements.


(2)	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.

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 March 31, 2017 and December 31, 2016:



	Level 1		Level 2		Level 3		Total
As of March 31, 2017
Assets:
Fair value hedge of consigned inventory	$	—	$	5,455	$	—	$	5,455
Liabilities:
Commodity contracts (futures and forwards)	267		—		—		267

As of December 31, 2016
Assets:
Fair value hedge of consigned inventory	$	—	$	4,389	$	—	$	4,389
Liabilities:
Commodity contracts (futures and forwards)	689		—		—		689


(3)	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 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.

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ALON USA PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)

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.

Fair Value Hedge

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 Agreement discussed in Note 5 that have been accounted for as a fair value hedge, which had purchase volumes of 140 thousand barrels of crude oil as of March 31, 2017.

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



	As of March 31, 2017
	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	$	186	Accrued liabilities	$	453
Total derivatives not designated as hedging instruments		186			453

Derivatives designated as hedging instruments:
Fair value hedge of consigned inventory	Other assets	$	5,455		$	—
Total derivatives designated as hedging instruments		5,455			—
Total derivatives		$	5,641		$	453



	As of December 31, 2016
	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	$	30	Accrued liabilities	$	719
Total derivatives not designated as hedging instruments		30			719

Derivatives designated as hedging instruments:
Fair value hedge of consigned inventory	Other assets	$	4,389		$	—
Total derivatives designated as hedging instruments		4,389			—
Total derivatives		$	4,419		$	719

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ALON USA PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)

The following tables present the effect of derivative instruments on the consolidated statements of operations:

Derivatives in fair value hedging relationships:



		Gain Recognized in Income
		For the Three Months Ended
		March 31,
	Location	2017		2016
Fair value hedge of consigned inventory (1)	Interest expense	$	1,066	$	1,026
Total derivatives		$	1,066	$	1,026

_______________________


(1)	Changes in the fair value hedge are substantially offset in earnings by changes in the hedged item.

Derivatives not designated as hedging instruments:



		Gain Recognized in Income
		For the Three Months Ended
		March 31,
	Location	2017		2016
Commodity contracts (futures and forwards)	Cost of sales	$	2,156	$	5,374
Total derivatives		$	2,156	$	5,374

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 March 31, 2017 and December 31, 2016:



	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 March 31, 2017
Derivative Assets:
Commodity contracts (futures and forwards)	$	731	$	(545	)	$	186	$	(186	)	$	—	$	—
Fair value hedge of consigned inventory	5,455		—			5,455		—			—		5,455
Derivative Liabilities:
Commodity contracts (futures and forwards)	$	998	$	(545	)	$	453	$	(186	)	$	—	$	267

As of December 31, 2016
Derivative Assets:
Commodity contracts (futures and forwards)	$	980	$	(950	)	$	30	$	(30	)	$	—	$	—
Fair value hedge of consigned inventory	4,389		—			4,389		—			—		4,389
Derivative Liabilities:
Commodity contracts (futures and forwards)	$	1,669	$	(950	)	$	719	$	(30	)	$	—	$	689

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ALON USA PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)

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. We may also sell the RINs with an agreement to repurchase in the future at a fixed price. 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 $4,158 and $819 for the three months ended March 31, 2017 and 2016, respectively. These amounts are reflected in cost of sales in the consolidated statements of operations.


(4)	Inventories

Carrying value of inventories consisted of the following:



	March 31, 2017		December 31, 2016
Crude oil, refined products and blendstocks	$	37,471	$	36,259
Crude oil consignment inventory (Note 5)	1,438		1,850
Materials and supplies	11,609		11,573
Total inventories	$	50,518	$	49,682

At March 31, 2017 and December 31, 2016, the market value of our refined products and blendstock inventories was less than inventories valued on a LIFO cost basis which resulted in a lower of cost or market reserve of $4,371 and $6,213, respectively. At March 31, 2017 and December 31, 2016, the market value of our crude oil inventories exceeded LIFO costs, net of the fair value hedged item, by $5,161 and $5,236, respectively.


(5)	Inventory Financing Agreement

We have entered into a Supply and Offtake Agreement and other associated agreements (together the “Supply and Offtake Agreement”) with J. Aron & Company (“J. Aron”). 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 prices, crude oil for processing at our refinery and (ii) we agreed to sell, and J. Aron agreed to buy, at market prices, certain refined products produced at our refinery.

The Supply and Offtake Agreement 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 the identification of prospective purchasers of refined products on J. Aron’s behalf.

The Supply and Offtake Agreement has an initial term that expires in May 2021. J. Aron may elect to terminate the Supply and Offtake Agreement 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 Agreement, we are obligated to purchase the crude oil and refined product inventories then owned by J. Aron and located at the Big Spring refinery at then current market prices.

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

At March 31, 2017 and December 31, 2016, we had net current payables of $7,195 and net current receivables of $10,569, respectively, with J. Aron for purchases and sales, and a consignment inventory receivable representing a deposit paid to J. Aron of $6,290 and $6,290, respectively. At March 31, 2017 and December 31, 2016, we had non-current liabilities for the original financing of $7,802 and $7,550, respectively, net of the related fair value hedge.

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ALON USA PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)

Additionally, we had net current payables of $453 and $719 at March 31, 2017 and December 31, 2016, 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.


(6)	Property, Plant and Equipment, Net

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



	March 31, 2017			December 31, 2016
Refining facilities	$	738,630		$	732,697
Accumulated depreciation	(321,792		)	(312,143		)
Property, plant and equipment, net	$	416,838		$	420,554


(7)	Additional Financial Information

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


(a)	Other Assets, Net



	March 31, 2017		December 31, 2016
Deferred turnaround and catalyst cost	$	31,082	$	34,252
Receivable from supply and offtake agreement (Note 5)	6,290		6,290
Fair value hedge of consigned inventory (Note 3)	5,455		4,389
Other	7,784		8,280
Total other assets	$	50,611	$	53,211


(b)	Accounts Payable

Included in accounts payable was $125,778 and $78,565 related to RINs financing transactions as of March 31, 2017 and December 31, 2016, respectively.


(c)	Accrued Liabilities and Other Non-Current Liabilities



	March 31, 2017		December 31, 2016
Accrued Liabilities:
Taxes other than income taxes, primarily excise taxes	$	30,294	$	31,882
Accrued finance charges	306		372
Environmental accrual (Note 11)	796		796
Commodity contracts	453		719
Other	8,777		9,331
Total accrued liabilities	$	40,626	$	43,100

Other Non-Current Liabilities:
Consignment inventory obligation (Note 5)	$	13,257	$	11,939
Environmental accrual (Note 11)	5,796		5,796
Asset retirement obligations	3,176		3,131
RINs financing transactions	—		39,478
Other	2,536		2,536
Total other non-current liabilities	$	24,765	$	62,880

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ALON USA PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)


(8)	Indebtedness

Debt consisted of the following:



	March 31, 2017		December 31, 2016
Term loan credit facility	$	236,152	$	236,319
Revolving credit facility	—		—
Total debt	236,152		236,319
Less: Current portion	2,500		2,500
Total long-term debt	$	233,652	$	233,819

Outstanding letters of credit under the revolving credit facility were $68,159 and $100,613 at March 31, 2017 and December 31, 2016, respectively.

The revolving credit facility contains maintenance financial covenants. At March 31, 2017, we were in compliance with these covenants.


(9)	Partners' Equity (unit values in dollars)

Cash Distributions

We have adopted a policy pursuant to which we 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.

The following table summarizes the Partnership’s cash distribution activity during the period:



	Cash Available for Distribution per Unit (1)	Distribution Paid Per Unit	Total Distribution Paid
First Quarter 2017	0.38	0.11	6,877

_______________________


(1)	Represents the aggregate cash available for distribution per unit attributable to the period indicated. This represents the difference between cash available for distribution and distributions paid in the table above.


(10)	Related Party Transactions

Sales and Receivables

Sales to related parties include motor fuels and asphalt sold to other Alon Energy subsidiaries at prices substantially determined by reference to market commodity pricing information. These sales are included in net sales in the consolidated statements of operations. Accounts receivable from related parties includes sales of motor fuels and is shown separately on the consolidated balance sheets.

Costs Allocated from Alon Energy

The Partnership is a subsidiary of Alon Energy and is operated as a component of the integrated operations of Alon Energy. As such, the executive officers of Alon Energy, who are employed by another subsidiary of Alon Energy, also serve as executive officers of the General Partner and Alon Energy’s other subsidiaries.

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ALON USA PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)


(a)	Corporate Overhead Allocations

Alon Energy performs general corporate and administrative services and functions for us and their 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 Energy allocates the expenses actually incurred in performing these services to the Partnership based primarily on the estimated amount of time the individuals performing such services devote to our business and affairs relative to the amount of time they devote to the business and affairs of Alon Energy’s other subsidiaries. The management of Alon Energy and the General Partner consider these allocations to be reasonable. We record the amount of such allocations as selling, general and administrative expenses. Our allocation for selling, general and administrative expenses were $2,650 and $3,420 for the three months ended March 31, 2017 and 2016, respectively.


(b)	Labor Costs

As we are operated as a component of Alon Energy’s integrated operations, we have no employees. As a result, employee expense costs for Alon Energy employees working in our operations have been allocated to us and recorded as payroll expense in direct operating expenses and selling, general and administrative expenses. The allocated portion of Alon Energy’s employee expense costs included in direct operating expenses were $7,023 and $7,262 for the three months ended March 31, 2017 and 2016, respectively. The allocated portion of Alon Energy’s employee expense costs included in selling, general and administrative expenses were $1,020 and $955 for the three months ended March 31, 2017 and 2016, respectively.


(c)	Insurance Costs

Insurance costs related to the Big Spring refinery and wholesale marketing operations are allocated to us by Alon Energy based on estimated insurance premiums on a stand-alone basis relative to Alon Energy’s total insurance premium. Our allocation for insurance costs included in direct operating expenses were $1,128 and $860 for the three months ended March 31, 2017 and 2016, respectively.

Leasing Agreements

In June 2014, we entered into six-year lease agreements with a subsidiary of Alon Energy to lease equipment at the Big Spring refinery. The lease agreements were effective July 1, 2014 and require fixed monthly payments amounting to $4,920 annually. Related to these agreements, we recorded selling, general and administrative expense of $1,230 for the three months ended March 31, 2017 and 2016.

Transactions with Delek US Holdings, Inc.

At March 31, 2017, Delek US Holdings, Inc. (“Delek”) owns approximately 47% of Alon Energy’s outstanding common stock and has entered into a merger agreement with Alon Energy to acquire all of the remaining outstanding shares of Alon Energy’s common stock, which is expected to close during the next few months. We have transactions with Delek that occur in the ordinary course of business. During the three months ended March 31, 2017 and 2016, we had purchases, net of sales, of crude oil and products from Delek of $2,833 and $414, respectively.

Distributions

During the three months ended March 31, 2017, we paid cash distributions of $6,877, or $0.11 per unit, of which $5,610 was paid to Alon Energy. During the three months ended March 31, 2016, we paid cash distributions of $5,001, or $0.08 per unit, of which $4,080 was paid to Alon Energy.


(11)	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 refinery, terminals and pipelines. 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.


(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 owned by the Partnership and are associated with past or present operations. We are currently participating in environmental investigations, assessments and cleanups pertaining to the refinery, 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

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ALON USA PARTNERS, LP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(unaudited, dollars in thousands except as noted)

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 $6,592 ($796 current liability and $5,796 non-current liability) at March 31, 2017, and $6,592 ($796 accrued liability and $5,796 non-current liability) at December 31, 2016.


(12)	Subsequent Event

Distribution Declared

On May 4, 2017, the board of directors of the General Partner declared a cash distribution to our common unitholders of approximately $23,758, or $0.38 per common unit. The cash distribution will be paid on May 30, 2017 to unitholders of record at the close of business on May 22, 2017.

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

References in this report to the “Partnership,” “Alon,” “we,” “our” and “us” or like terms refer to Alon USA Partners, LP and its consolidated subsidiaries. Unless the context otherwise requires, references in this report to “Alon Energy” refer collectively to Alon USA Energy, Inc. and any of its consolidated subsidiaries other than Alon USA Partners, LP, its subsidiaries and its general partner. 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, 2016.

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;


•	changes in the spread between West Texas Intermediate (“WTI”) Cushing crude oil and West Texas Sour (“WTS”) crude oil or WTI Midland crude oil;


•	changes in the spread between Brent crude oil and WTI Cushing crude oil;


•	the effects of transactions involving forward contracts and derivative instruments;


•	actions of customers and competitors;

•

termination of our Supply and Offtake Agreement with J. Aron & Company (“J. Aron”), under which J. Aron is one of our largest suppliers of crude oil and one of our largest customers of refined products. Additionally, upon termination of the Supply and Offtake Agreement, we are obligated to purchase the crude oil and refined product inventories then owned by J. Aron at then current market prices;


•	changes in fuel and utility costs incurred by our refinery;


•	disruptions due to equipment interruption, pipeline disruptions or failures at our or third-party facilities;


•	the execution of planned capital projects;


•	adverse changes in the credit ratings assigned to our trade credit and debt instruments;


•	the effects and cost of compliance with the renewable fuel standards program, including the availability, cost and price volatility of renewable identification numbers;


•	the effects and cost of compliance with current and future state and federal environmental, economic, safety and other laws, policies and regulations;


•	the effects of seasonality on demand for our products;


•	the level of competition from other petroleum refiners;


•	operating hazards, accidents, fires, severe weather, floods and other natural disasters, casualty losses and other matters beyond our control, which could result in unscheduled downtime;


•	the effect of any national or international financial crisis on our business and financial condition; and

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•	the other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2016 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 securities laws to do so.

Company Overview

We are a limited partnership formed in August 2012 and engaged principally in the business of operating a crude oil refinery in Big Spring, Texas, with a crude oil throughput capacity of 73,000 barrels per day (“bpd”). We refine crude oil into finished products, which we market primarily in Central and West Texas, Oklahoma, New Mexico and Arizona through our integrated wholesale distribution network to both Alon Energy’s retail convenience stores and other third-party distributors. We distribute fuel products through a network of pipelines and terminals that we own or access through leases or long-term throughput agreements.

For additional information on our business, see Items 1. and 2. “Business and Properties” included in our Annual Report on Form 10-K for the year ended December 31, 2016.

First Quarter Operational and Financial Highlights

Our operational and financial highlights for the first quarter of 2017 include the following:


•	Operating income for the first quarter of 2017 was $28.3 million, compared to $2.1 million for the first quarter of 2016.

•

Big Spring refinery average throughput for the first quarter of 2017 was 77,754 bpd compared to 67,536 bpd for the first quarter of 2016. During the first quarter of 2017, the Big Spring refinery reported the highest total quarterly average throughput ever. The reduced throughput during the first quarter of 2016 was the result of planned downtime to complete a reformer regeneration and catalyst replacement for our diesel hydrotreater unit.

•

Refinery operating margin was $10.32 per barrel for the first quarter of 2017 compared to $7.77 per barrel for the same period in 2016. This increase in operating margin was primarily due to a higher Gulf Coast 3/2/1 crack spread and a widening of the WTI Cushing to WTS spread, partially offset by the increased premium in WTI Midland compared to WTI Cushing, increased RINs costs and a reduced benefit from the contango market environment which increased the cost of crude.


•	The average Gulf Coast 3/2/1 crack spread was $13.75 per barrel for the first quarter of 2017 compared to $11.24 per barrel for the first quarter of 2016.

•

The average WTI Cushing to WTI Midland spread for the first quarter of 2017 was $(0.64) per barrel compared to $(0.13) per barrel for the same period in 2016. The average WTI Cushing to WTS spread for the first quarter of 2017 was $1.27 per barrel compared to $(0.10) per barrel for the same period in 2016. The average Brent to WTI Cushing spread for the first quarter of 2017 was $1.66 per barrel compared to $0.49 per barrel for the same period in 2016.


•	The average RINs cost effect on refinery operating margin was $0.59 per barrel for the first quarter of 2017, compared to $0.13 per barrel for the same period in 2016.


•	The contango environment in the first quarter of 2017 created an average cost of crude benefit of $1.00 per barrel compared to an average cost of crude benefit of $1.83 per barrel for the same period in 2016.


•	During the first quarter of 2017, we generated cash available for distribution of $0.38 per unit, compared to no distribution being generated during the first quarter of 2016.

Major Influences on Results of Operations

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

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In order to measure our operating performance, we compare our per barrel refinery operating margin to certain industry benchmarks. We calculate this margin for the Big Spring refinery by dividing the refinery’s gross margin by its throughput volumes. Gross margin is the difference between net sales and cost of sales (exclusive of certain inventory adjustments and inclusive of RINs costs).

We compare our Big Spring refinery operating margin to the Gulf Coast 3/2/1 crack spread, which is intended to approximate the refinery’s crude slate and product yield. A Gulf Coast 3/2/1 crack spread is calculated assuming that three barrels of WTI Cushing crude oil are converted, or cracked, into two barrels of Gulf Coast conventional gasoline and one barrel of Gulf Coast ultra-low sulfur diesel.

Our Big Spring refinery is capable of processing substantial volumes of sour crude oil, which has historically cost less than intermediate and sweet crude oils. We measure the cost advantage of refining sour crude oil by calculating the difference between the price of WTI Cushing crude oil and the price of WTS, a medium, sour crude oil. We refer to this differential as the WTI Cushing/WTS, or sweet/sour, spread. A widening of the sweet/sour spread can favorably influence the operating margin for our Big Spring refinery. The Big Spring refinery’s crude oil input is primarily comprised of WTS and WTI Midland.

In addition, the location of the Big Spring refinery near Midland, the largest origination terminal for West Texas crude oil, provides reliable crude sourcing with a relatively low transportation cost. Additionally, we have the ability to source locally produced crude at Big Spring by truck, which enables us to better control quality and eliminate the cost of transporting our crude supply from Midland. The WTI Cushing less WTI Midland spread represents the differential between the average per barrel price of WTI Cushing crude oil and the average per barrel price of WTI Midland crude oil. A widening of the WTI Cushing less WTI Midland spread will favorably influence the operating margin for our Big Spring refinery. Alternatively, a narrowing of this differential will have an adverse effect on our operating margin.

Global product prices are influenced by the price of Brent crude which is a global benchmark crude. Global product prices influence product prices in the U.S. As a result, the Big Spring refinery is influenced by the spread between Brent crude and WTI Cushing. The Brent less WTI Cushing spread represents the differential between the average per barrel price of Brent crude oil and the average per barrel price of WTI Cushing crude oil. A widening of the spread between Brent and WTI Cushing will favorably influence the operating margin for our Big Spring 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. Typically, electricity prices fluctuate with natural gas prices.

Demand for gasoline products is generally higher during summer months than during winter months due to seasonal increases in highway traffic. As a result, our operating results for the first and fourth calendar quarters are generally lower than those for the second and third calendar quarters. The effects of seasonal demand for gasoline are partially offset by seasonality in demand for diesel, which in our region is generally higher in winter months as east-west trucking traffic moves south to avoid winter conditions on northern routes.

Safety, reliability and the environmental performance of our 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 expectations for product availability, margin environment and the availability of resources to perform the required maintenance.

The nature of our business requires us to maintain crude oil and refined product inventories. Crude oil and refined products are commodities, and we have no control over the changing market value of these inventories. Because our inventory is valued at the lower of cost or market value under the last-in, first-out (“LIFO”) inventory valuation methodology, price fluctuations generally have little effect on our financial results.

Factors Affecting Comparability

Our financial condition and operating results over the three months ended March 31, 2017 and 2016 have been influenced by the following factor which is fundamental to understanding comparisons of our period-to-period financial performance.

Maintenance and Turnaround Impact on Crude Oil Throughput

During the three months ended March 31, 2016, throughput at the refinery was reduced as a result of planned downtime to complete a reformer regeneration and catalyst replacement for our diesel hydrotreater unit.

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Results of Operations

The period-to-period comparisons of our results of operations have been prepared using the historical periods included in our consolidated financial statements. We refer to our financial statement line items in the explanation of our period-to-period changes in results of operations. Below are general definitions of what those line items include and represent.

Net sales. Net sales consist principally of sales of refined petroleum products, and are mainly affected by refined product prices, changes to the product mix and volume changes caused by operations. Product mix refers to the percentage of production represented by higher value motor fuels, such as gasoline, rather than lower value finished products.

Cost of sales. Cost of sales includes principally crude oil, blending materials and RINs, other raw materials and transportation costs, which include costs associated with our crude oil and product pipelines. Cost of sales excludes depreciation and amortization, which is presented separately in the consolidated statements of operations.

Direct operating expenses. Direct operating expenses include costs associated with the actual operations of the refinery, such as energy and utility costs, routine maintenance, labor, insurance and environmental compliance costs.

Selling, general and administrative expenses. Selling, general and administrative expenses, or SG&A, primarily include corporate overhead costs and marketing expenses. These costs also include actual costs incurred by Alon Energy and allocated to us.

Depreciation and amortization. Depreciation and amortization represents an allocation of the cost of capital assets to expense within the consolidated statements of operations. The cost is expensed based on the straight-line method over the estimated useful life of the related asset. Depreciation and amortization also includes deferred turnaround and catalyst replacement costs. Turnaround and catalyst replacement costs are currently deferred and amortized on a straight-line basis beginning the month after the completion of the turnaround and ending immediately prior to the next scheduled turnaround.

Operating income. Operating income represents our net sales less our total operating costs and expenses.

Interest expense. Interest expense includes interest expense, letters of credit, financing costs associated with crude oil purchases, financing fees, and amortization of both original issuance discount and deferred debt issuance costs but excludes capitalized interest.

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ALON USA PARTNERS, LP AND SUBSIDIARIES CONSOLIDATED

Summary Financial Tables. The following tables provide summary financial data and selected key operating statistics for the three months ended March 31, 2017 and 2016. The following data should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q. All information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” except for Balance Sheet data as of December 31, 2016 is unaudited.



	For the Three Months Ended
	March 31,
	2017			2016
	(dollars in thousands, except per unit data, per barrel data and pricing statistics)
STATEMENTS OF OPERATIONS DATA:
Net sales (1)	$	544,532		$	368,009
Operating costs and expenses:
Cost of sales	470,471			319,333
Direct operating expenses	24,760			25,044
Selling, general and administrative expenses	6,764			7,309
Depreciation and amortization	14,229			14,206
Total operating costs and expenses	516,224			365,892
Operating income	28,308			2,117
Interest expense	(7,845		)	(10,587		)
Other income (loss), net	(95		)	84
Income (loss) before state income tax expense	20,368			(8,386		)
State income tax expense	256			176
Net income (loss)	$	20,112		$	(8,562	)
Earnings (loss) per unit	$	0.32		$	(0.14	)
Weighted average common units outstanding (in thousands)	62,520			62,510
Cash distribution per unit	$	0.11		$	0.08
CASH FLOW DATA:
Net cash provided by (used in):
Operating activities	$	41,772		$	6,662
Investing activities	(5,875		)	(10,793		)
Financing activities	(387		)	(5,626		)
OTHER DATA:
Adjusted EBITDA (2)	$	42,442		$	16,407
Capital expenditures	5,026			8,112
Capital expenditures for turnarounds and catalysts	849			2,681
KEY OPERATING STATISTICS:
Per barrel of throughput:
Refinery operating margin (3)	$	10.32		$	7.77
Refinery direct operating expense (4)	3.54			4.07
PRICING STATISTICS:
Crack spreads (per barrel):
Gulf Coast 3/2/1	$	13.75		$	11.24
WTI Cushing crude oil (per barrel)	$	51.78		$	33.30
Crude oil differentials (per barrel):
WTI Cushing less WTI Midland	$	(0.64	)	$	(0.13	)
WTI Cushing less WTS	1.27			(0.10		)
Brent less WTI Cushing	1.66			0.49
Product price (dollars per gallon):
Gulf Coast unleaded gasoline	$	1.56		$	1.07
Gulf Coast ultra-low sulfur diesel	1.57			1.03
Natural gas (per MMBtu)	3.07			1.98

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	March 31, 2017			December 31, 2016
	(dollars in thousands)
BALANCE SHEET DATA (end of period):
Cash and cash equivalents	$	109,034		$	73,524
Working capital	(92,271		)	(73,563		)
Total assets	719,487			695,637
Total debt	236,152			236,319
Total debt less cash and cash equivalents	127,118			162,795
Total partners’ equity	116,761			103,503



THROUGHPUT AND PRODUCTION DATA:	For the Three Months Ended
THROUGHPUT AND PRODUCTION DATA:	March 31,
	2017			2016
	bpd	%		bpd	%
Refinery throughput:
WTS crude	30,301	39.0		36,554	54.1
WTI crude	42,877	55.1		27,760	41.1
Blendstocks	4,576	5.9		3,222	4.8
Total refinery throughput (5)	77,754	100.0		67,536	100.0
Refinery production:
Gasoline	38,690	49.9		34,100	50.5
Diesel/jet	28,871	37.2		22,682	33.6
Asphalt	2,893	3.7		3,148	4.6
Petrochemicals	4,530	5.8		3,617	5.3
Other	2,633	3.4		4,027	6.0
Total refinery production (6)	77,617	100.0		67,574	100.0
Refinery utilization (7)		100.2	%		93.2	%


(1)	Includes sales to related parties of $91,000 and $63,110 for the three months ended March 31, 2017 and 2016, respectively.

(2)

Adjusted EBITDA represents earnings before state income tax expense, interest expense and depreciation and amortization. Adjusted EBITDA is not a recognized measurement under GAAP; however, the amounts included in Adjusted EBITDA are derived from amounts included in our consolidated financial statements. Our management believes that the presentation of Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. In addition, our management believes that Adjusted EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry because the calculation of Adjusted EBITDA generally eliminates the effects of state income tax expense, interest expense and the accounting effects of capital expenditures and acquisitions, items that may vary for different companies for reasons unrelated to overall operating performance.

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


•	Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;


•	Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;


•	Adjusted EBITDA does not reflect changes in or cash requirements for our working capital needs; and


•	Our calculation of Adjusted EBITDA may differ from EBITDA calculations of other companies in our industry, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally.

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The following table reconciles net income (loss) to Adjusted EBITDA for the three months ended March 31, 2017 and 2016:



	For the Three Months Ended
	March 31,
	2017		2016
	(dollars in thousands)
Net income (loss)	$	20,112	$	(8,562	)
State income tax expense	256		176
Interest expense	7,845		10,587
Depreciation and amortization	14,229		14,206
Adjusted EBITDA	$	42,442	$	16,407

(3)

Refinery operating margin is a per barrel measurement calculated by dividing the margin between net sales and cost of sales (exclusive of certain inventory adjustments) by the refinery’s throughput volumes. Industry-wide refining results are driven and measured by the margins between refined product prices and the prices for crude oil, which are referred to as crack spreads. We compare our refinery operating margin to these crack spreads to assess our operating performance relative to other participants in our industry.

Refinery operating margin for the three months ended March 31, 2017 and 2016 excludes gains related to inventory adjustments of $1,842 and $946, respectively.


(4)	Refinery direct operating expense is a per barrel measurement calculated by dividing direct operating expenses by total throughput volumes.


(5)	Total refinery throughput represents the total barrels per day of crude and blendstock inputs in the refinery production process.


(6)	Total refinery production represents the barrels per day of various refined products produced from processing crude and other refinery blendstocks through the crude units and other conversion units.


(7)	Refinery utilization represents average daily crude throughput divided by crude oil capacity, excluding planned periods of downtime for maintenance and turnarounds.

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Three Months Ended March 31, 2017 Compared to the Three Months Ended March 31, 2016

Net Sales. Net sales for the three months ended March 31, 2017 were $544.5 million, compared to $368.0 million for the three months ended March 31, 2016, an increase of $176.5 million, or 48.0%. This increase was primarily due to higher refined product prices and higher refinery throughput. The average per gallon price of Gulf Coast gasoline for the three months ended March 31, 2017 increased $0.49, or 45.8%, to $1.56, compared to $1.07 for the three months ended March 31, 2016. The average per gallon price of Gulf Coast ultra-low sulfur diesel for the three months ended March 31, 2017 increased $0.54, or 52.4%, to $1.57, compared to $1.03 for the three months ended March 31, 2016.

Refinery average throughput for the three months ended March 31, 2017 was 77,754 bpd compared to 67,536 bpd for the three months ended March 31, 2016, an increase of 15.1%. The reduced throughput during the first quarter of 2016 was the result of planned downtime to complete a reformer regeneration and catalyst replacement for our diesel hydrotreater unit.

Cost of Sales. Cost of sales for the three months ended March 31, 2017 were $470.5 million, compared to $319.3 million for the three months ended March 31, 2016, an increase of $151.2 million, or 47.4%. This increase was primarily due to increased crude oil prices and higher refinery throughput. The average price of WTI Cushing increased 55.5% to $51.78 per barrel for the three months ended March 31, 2017 from $33.30 per barrel for the three months ended March 31, 2016.

Direct Operating Expenses. Direct operating expenses for the three months ended March 31, 2017 were $24.8 million, compared to $25.0 million for the three months ended March 31, 2016, a decrease of $0.2 million, or 0.8%.

Selling, General and Administrative Expenses. SG&A expenses for the three months ended March 31, 2017 were $6.8 million, compared to $7.3 million for the three months ended March 31, 2016, a decrease of $0.5 million, or 6.8%.

Depreciation and Amortization. Depreciation and amortization for the three months ended March 31, 2017 was $14.2 million, compared to $14.2 million for the three months ended March 31, 2016.

Operating Income. Operating income for the three months ended March 31, 2017 was $28.3 million, compared to $2.1 million for the three months ended March 31, 2016, an increase of $26.2 million. This increase was primarily due to higher refinery throughput and higher refinery operating margin. Refinery operating margin for the three months ended March 31, 2017 was $10.32 per barrel, compared to $7.77 per barrel for the three months ended March 31, 2016. This increase in operating margin was primarily due to a higher Gulf Coast 3/2/1 crack spread and a widening of the WTI Cushing to WTS spread, partially offset by the increased premium in WTI Midland compared to WTI Cushing, increased RINs costs and a reduced benefit from the contango market environment which increased the cost of crude.

The average Gulf Coast 3/2/1 crack spread was $13.75 per barrel for the three months ended March 31, 2017, compared to $11.24 per barrel for the three months ended March 31, 2016. The average WTI Cushing to WTI Midland spread was $(0.64) per barrel for the three months ended March 31, 2017, compared to $(0.13) per barrel for the three months ended March 31, 2016. The average WTI Cushing to WTS spread was $1.27 per barrel for the three months ended March 31, 2017, compared to $(0.10) per barrel for the three months ended March 31, 2016. The average Brent to WTI Cushing spread was $1.66 per barrel for the three months ended March 31, 2017 compared to $0.49 per barrel for the three months ended March 31, 2016. The contango environment for the three months ended March 31, 2017 created an average cost of crude benefit of $1.00 per barrel, compared to an average cost of crude benefit of $1.83 per barrel for the three months ended March 31, 2016. The average RINs cost effect on refinery operating margin was $0.59 per barrel for the first quarter of 2017, compared to $0.13 per barrel for the three months ended March 31, 2016.

Interest Expense. Interest expense was $7.8 million for the three months ended March 31, 2017, compared to $10.6 million for the three months ended March 31, 2016, a decrease of $2.8 million, or 26.4%. This decrease was primarily due to the effect of the contango in crude oil prices on our supply and offtake agreements.

State Income Tax Expense. State income tax expense was $0.3 million for the three months ended March 31, 2017, compared to $0.2 million for the three months ended March 31, 2016.

Net Income (Loss). Net income for the three months ended March 31, 2017 was $20.1 million, compared to net loss of $(8.6) million for the three months ended March 31, 2016, an increase of $28.7 million. This increase was attributable to the factors discussed above.

Liquidity and Capital Resources

Our primary sources of liquidity are cash on hand, cash generated from our operating activities, borrowings under our revolving credit facility, inventory supply and offtake arrangement and other credit lines. Additionally, we have the ability to utilize a $60.0 million letter of credit facility through Alon Energy for our crude and product purchases.

We have an agreement with J. Aron for the supply of crude oil that supports the operations of the Big Spring refinery. This arrangement substantially reduces our physical inventories and the associated need to issue letters of credit to support crude oil

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purchases. In addition, the structure allows us to acquire crude oil without the constraints of a maximum facility size during periods of high crude oil prices.

We believe that the aforementioned sources of funds and other sources of capital available to us will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for at least the next twelve months. However, future capital expenditures and other cash requirements could be higher than we currently expect as a result of various factors. Additionally, 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.

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 our existing revolving credit facility or for other Partnership purposes.

Cash Flows

The following table sets forth our consolidated cash flows for the three months ended March 31, 2017 and 2016:



	For the Three Months Ended
	March 31,
	2017			2016
	(dollars in thousands)
Cash provided by (used in):
Operating activities	$	41,772		$	6,662
Investing activities	(5,875		)	(10,793		)
Financing activities	(387		)	(5,626		)
Net increase (decrease) in cash and cash equivalents	$	35,510		$	(9,757	)

Cash Flows Provided by Operating Activities

Net cash provided by operating activities was $41.8 million during the three months ended March 31, 2017 compared to $6.7 million during the three months ended March 31, 2016. The increase in net cash provided by operating activities of $35.1 million was primarily due to increased net income (loss) after adjusting for non-cash items of $28.6 million, increased cash collected on accounts receivable of $17.0 million and reduced cash used for other assets of $5.4 million, partially offset by increased cash used for inventories of $5.0 million, increased cash used for accounts payable and accrued liabilities of $7.6 million, reduced cash provided by other non-current liabilities of $1.2 million and increased cash used for prepaid expenses and other current assets of $2.1 million.

Cash Flows Used in Investing Activities

Net cash used in investing activities was $5.9 million during the three months ended March 31, 2017 compared to $10.8 million during the three months ended March 31, 2016. The decrease in net cash used in investing activities of $4.9 million was primarily due to completing a reformer regeneration and catalyst replacement for our diesel hydrotreater unit during 2016.

Cash Flows Used in Financing Activities

Net cash used in financing activities was $0.4 million during the three months ended March 31, 2017 compared to $5.6 million during the three months ended March 31, 2016. The change in net cash used in financing activities of $5.2 million was primarily due to increased cash received from RINs financing transactions of $7.1 million, partially offset by increased distributions to unitholders of $1.9 million.

Indebtedness

Revolving Credit Facility. We have a $240.0 million revolving credit facility that can be used both for borrowings and the issuance of letters of credit. At March 31, 2017 and December 31, 2016, there were no outstanding borrowings under this facility. At March 31, 2017 and December 31, 2016, we had letters of credit outstanding of $68.2 million and $100.6 million, respectively.

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Capital Spending

Each year the board of directors of our General Partner approves capital projects, including sustaining maintenance, regulatory and planned turnaround and catalyst projects that our management is authorized to undertake in our annual capital budget. Additionally, our management assesses opportunities for growth and profit improvement projects on an ongoing basis and any related projects require further approval from the board of directors of our General Partner. Our total capital expenditure plan for 2017 is $42.0 million, which includes expenditures for catalysts and turnarounds of $9.0 million, growth and profit improvement projects of $14.0 million and sustaining and regulatory projects of $19.0 million. Approximately $5.9 million has been spent during the three months ended March 31, 2017.

Contractual Obligations and Commercial Commitments

There have been no material changes outside the ordinary course of business from our contractual obligations and commercial commitments detailed in our Annual Report on Form 10-K for the year ended December 31, 2016.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements.

Critical Accounting Policies

We prepare our consolidated financial statements in conformity with GAAP. In order to apply these principles, we must make judgments, assumptions and estimates based on the best available information at the time. Actual results may differ based on the accuracy of the information utilized and subsequent events, some of which we may have little or no control over.

Our critical accounting policies 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, 2016. Certain critical accounting policies that materially affect the amounts recorded in our consolidated 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 catalysts replacements. No significant changes to these accounting policies have occurred subsequent to December 31, 2016.

New Accounting Standards and Disclosures

New accounting standards, if any, are disclosed in Note (1) Basis of Presentation included in the consolidated financial statements included in Item 1 of this report.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Changes in commodity prices, purchased fuel prices and interest rates are our primary sources of market risk. Alon Energy’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 Energy’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 Energy’s risk management committee, we may utilize the commodity futures market to manage these anticipated inventory variances.

We maintain inventories of crude oil, refined products and blendstocks, 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. At March 31, 2017, the market value of refined products and blendstock inventories was less than inventories on a LIFO cost basis which resulted in recording a lower of cost or market reserve of $4.4 million. At March 31, 2017, the market value of crude oil inventories exceeded LIFO costs, net of the fair value hedged item, by $5.2 million.

As of March 31, 2017, we held 0.4 million barrels of refined products and blendstock and 0.4 million barrels of crude oil inventories valued under the LIFO valuation method. If the market value of refined products and blendstock inventories would have been $1.00 per barrel lower, the lower of cost or market recovery recorded for the three months ended March 31, 2017 would have been $0.4 million lower. If the market value of crude oil would have been $1.00 per barrel lower, the market value of crude oil inventories would have exceeded LIFO costs, net of the fair value hedged item, by $4.8 million.

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

The following table provides information about our commodity derivative contracts as of March 31, 2017:



Description	Contract Volume		Wtd Avg Purchase		Wtd Avg Sales		Contract			Market			Gain
of Activity	(barrels)		Price/BBL		Price/BBL		Value			Value			(Loss)
							(in thousands)
Forwards-short (Crude)	(163,089	)	$	—	$	49.67	$	(8,101	)	$	(8,308	)	$	(207	)
Forwards-long (Gasoline)	6,286		67.16		—		422			442			20
Forwards-short (Distillate)	(172,427	)	—		65.97		(11,375		)	(11,910		)	(535		)
Forwards-short (Jet)	(12,088	)	—		63.30		(765		)	(782		)	(17		)
Forwards-long (Slurry)	1,494		40.89		—		61			64			3
Forwards-long (Catfeed)	85,393		61.80		—		5,277			5,543			266
Forwards-long (Slop)	16,630		39.67		—		660			683			23
Forwards-short (Propane)	(5,000	)	—		24.68		(123		)	(122		)	1
Forwards-long (Butane)	8,376		32.37		—		271			264			(7		)
Futures-long (Crude)	4,000		23.14		—		93			203			110
Futures-short (Gasoline)	(91,000	)	—		68.98		(6,277		)	(6,509		)	(232		)
Futures-long (Distillate)	123,000		63.63		—		7,826			8,134			308

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Interest Rate Risk

As of March 31, 2017, our outstanding debt balance of $239.4 million, excluding discounts and debt issuance costs, was subject to floating interest rates, all of which was charged interest at the Eurodollar rate (with a floor of 1.25%) plus a margin of 8.00%.

An increase of 1% in the Eurodollar rate on our indebtedness would result in an increase in our interest expense of approximately $1.6 million per year.

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ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management has evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-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 were effective as of March 31, 2017 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 Securities and Exchange Commission’s rules and forms including, without limitation, controls and procedures designed 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 accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as described in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 6. EXHIBITS



Exhibit
Number		Description of Exhibit
31.1		Certification of Chief Executive Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification 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.
101		The following financial information from Alon USA Partners, LP’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows and (iv) Notes to the Consolidated Financial Statements.

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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.



		Alon USA Partners, LP
		By:	Alon USA Partners GP, LLC
			its general partner

Date:	May 8, 2017	By:	/s/ David Wiessman
			David Wiessman
			Executive Chairman of the Board


Date:	May 8, 2017	By:	/s/ Alan Moret
			Alan Moret
			Chief Executive Officer
			(Principal Executive Officer)


Date:	May 8, 2017	By:	/s/ Shai Even
			Shai Even
			President and Chief Financial Officer
			(Principal Accounting Officer)

Alon USA Partners, LP - FORM 10-Q - May 8, 2017

Attached files

Alon USA Partners, LP Reports