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, 2016
OR
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, 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
 
 
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 April 30, 2016, was 62,510,039.

 
 



TABLE OF CONTENTS

 
Page
 
 


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,
2016
 
December 31,
2015
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
123,196

 
$
132,953

Accounts and other receivables, net
68,916

 
59,581

Accounts and other receivables, net - related parties
9,532

 
8,005

Inventories
31,330

 
35,444

Prepaid expenses and other current assets
4,609

 
6,745

Total current assets
237,583

 
242,728

Property, plant and equipment, net
432,986

 
434,619

Other assets, net
74,859

 
71,237

Total assets
$
745,428

 
$
748,584

LIABILITIES AND PARTNERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
258,911

 
$
253,325

Accrued liabilities
43,108

 
40,707

Current portion of long-term debt
2,500

 
2,500

Total current liabilities
304,519

 
296,532

Other non-current liabilities
34,137

 
31,513

Long-term debt
289,368

 
289,582

Total liabilities
628,024

 
617,627

Commitments and contingencies (Note 11)

 

Partners’ equity:
 
 
 
General Partner

 

Common unitholders - 62,510,039 units issued and outstanding at March 31, 2016 and December 31, 2015
117,404

 
130,957

Total partners’ equity
117,404

 
130,957

Total liabilities and partners’ equity
$
745,428

 
$
748,584


The accompanying notes are an integral part of these consolidated financial statements.
1

Table of Contents

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,
 
2016
 
2015
Net sales (1)
$
368,009

 
$
542,442

Operating costs and expenses:
 
 
 
Cost of sales
319,333

 
450,595

Direct operating expenses
25,044

 
23,416

Selling, general and administrative expenses
7,309

 
5,903

Depreciation and amortization
14,206

 
13,993

Total operating costs and expenses
365,892

 
493,907

Operating income
2,117

 
48,535

Interest expense
(10,587
)
 
(11,693
)
Other income (loss), net
84

 
(41
)
Income (loss) before state income tax expense
(8,386
)
 
36,801

State income tax expense
176

 
350

Net income (loss)
$
(8,562
)
 
$
36,451

Earnings (loss) per unit
$
(0.14
)
 
$
0.58

Weighted average common units outstanding (in thousands)
62,510

 
62,507

Cash distribution per unit
$
0.08

 
$
0.70

___________
(1)
Includes sales to related parties of $63,110 and $82,889 for the three months ended March 31, 2016 and 2015, respectively.

The accompanying notes are an integral part of these consolidated financial statements.
2

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,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(8,562
)
 
$
36,451

Adjustments to reconcile net income (loss) to cash provided by operating activities:
 
 
 
Depreciation and amortization
14,206

 
13,993

Unit-based compensation
10

 
5

Amortization of debt issuance costs
563

 
527

Amortization of original issuance discount
154

 
145

Changes in operating assets and liabilities:
 
 
 
Accounts and other receivables, net
(9,335
)
 
(20,159
)
Accounts and other receivables, net - related parties
(1,527
)
 
(1,004
)
Inventories
4,114

 
9,863

Prepaid expenses and other current assets
2,136

 
1,812

Other assets, net
(6,661
)
 
(2,910
)
Accounts payable
5,586

 
(524
)
Accrued liabilities
3,385

 
(14,925
)
Other non-current liabilities
2,593

 
3,813

Net cash provided by operating activities
6,662

 
27,087

Cash flows from investing activities:
 
 
 
Capital expenditures
(8,112
)
 
(2,321
)
Capital expenditures for turnarounds and catalysts
(2,681
)
 
(1,484
)
Net cash used in investing activities
(10,793
)
 
(3,805
)
Cash flows from financing activities:
 
 
 
Distributions paid to unitholders
(921
)
 
(8,055
)
Distributions paid to unitholders - Alon Energy
(4,080
)
 
(35,700
)
Inventory agreement transactions

 
35,160

Revolving credit facility, net

 
(10,000
)
Payments on long-term debt
(625
)
 
(625
)
Net cash used in financing activities
(5,626
)
 
(19,220
)
Net increase (decrease) in cash and cash equivalents
(9,757
)
 
4,062

Cash and cash equivalents, beginning of period
132,953

 
106,325

Cash and cash equivalents, end of period
$
123,196

 
$
110,387

Supplemental cash flow information:
 
 
 
Cash paid for interest, net of capitalized interest
$
10,144

 
$
11,539

Cash paid for income tax
$
176

 
$
350

Supplemental disclosure of non-cash activity:
 
 
 
Capital expenditures included in accounts payable and accrued liabilities
$

 
$
661


The accompanying notes are an integral part of these consolidated financial statements.
3

Table of Contents

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 its wholly-owned subsidiary Alon USA Partners GP, LLC (the “General Partner”), which owns 100% of our non-economic general parter 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, 2016 are not necessarily indicative of the operating results that may be realized for the year ending December 31, 2016.
Our consolidated balance sheet as of December 31, 2015 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, 2015.
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 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.
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.
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 ASU also will 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.
(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;

4

Table of Contents
ALON USA PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)


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, 2016 and December 31, 2015:
 
Level 1
 
Level 2
 
Level 3
 
Total
As of March 31, 2016
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
75

 
$

 
$

 
$
75

Fair value hedge of consigned inventory

 
12,590

 

 
12,590

 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Fair value hedge of consigned inventory
$

 
$
11,564

 
$

 
$
11,564

Liabilities:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
40

 

 

 
40

(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.
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 252 thousand barrels of crude oil as of March 31, 2016.

5

Table of Contents
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 balance sheets:
 
As of March 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
 
$
304

 
Accrued liabilities
 
$
229

Total derivatives not designated as hedging instruments
 
 
304

 
 
 
229

 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Fair value hedge of consigned inventory
Other assets
 
$
12,590

 
 
 
$

Total derivatives designated as hedging instruments
 
 
12,590

 
 
 

Total derivatives
 
 
$
12,894

 
 
 
$
229

 
As of December 31, 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
 
$
59

 
Accrued liabilities
 
$
99

Total derivatives not designated as hedging instruments
 
 
59

 
 
 
99

 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Fair value hedge of consigned inventory
Other assets
 
$
11,564

 
 
 
$

Total derivatives designated as hedging instruments
 
 
11,564

 
 
 

Total derivatives
 
 
$
11,623

 
 
 
$
99

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
 
2016
 
2015
Fair value hedge of consigned inventory (1)
Interest expense
 
$
1,026

 
$
2,923

Total derivatives
 
 
$
1,026

 
$
2,923

_______________________
(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
 
2016
 
2015
Commodity contracts (futures and forwards)
Cost of sales
 
$
5,374

 
$
474

Total derivatives
 
 
$
5,374

 
$
474


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Table of Contents
ALON USA PARTNERS, LP 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 March 31, 2016 and December 31, 2015:
 
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
 
 
 
Financial Instruments
 
Cash Collateral Pledged
 
As of March 31, 2016
 
 
 
 
 
 
 
 
 
 
Derivative Assets:
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
455

 
$
(151
)
 
$
304

 
$
(229
)
 
$

 
$
75

Fair value hedge of consigned inventory
12,590

 

 
12,590

 

 

 
12,590

Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
380

 
$
(151
)
 
$
229

 
$
(229
)
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
Derivative Assets:
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
192

 
$
(133
)
 
$
59

 
$
(59
)
 
$

 
$

Fair value hedge of consigned inventory
11,564

 

 
11,564

 

 

 
11,564

Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
232

 
$
(133
)
 
$
99

 
$
(59
)
 
$

 
$
40

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 $819 and $4,538 for the three months ended March 31, 2016 and 2015, respectively. These amounts are reflected in cost of sales in the consolidated statements of operations.

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Table of Contents
ALON USA PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)


(4)
Inventories
Carrying value of inventories consisted of the following:
 
March 31,
2016
 
December 31,
2015
Crude oil, refined products and blendstocks
$
20,688

 
$
24,548

Crude oil consignment inventory (Note 5) (1)
(300
)
 
(95
)
Materials and supplies
10,942

 
10,991

Total inventories
$
31,330

 
$
35,444

_______________________
(1)
The fair value of the hedged item designated in our fair value hedge reduced the carrying value of our consigned inventory valued at LIFO below zero at March 31, 2016 and December 31, 2015.
At March 31, 2016 and December 31, 2015, 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 $8,450 and $9,396, respectively. At March 31, 2016 and December 31, 2015, the market value of crude oil inventories exceeded LIFO costs, net of the fair value hedged item, by $8,168 and $6,387, 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 the Big Spring refinery and (ii) we agreed to sell, and J. Aron agreed to buy, at market prices, certain refined products produced at the Big Spring 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 to identify 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, 2016 and December 31, 2015, we had net current receivables with J. Aron for sales of $5,728 and $4,975, respectively, and a consignment inventory receivable representing a deposit paid to J. Aron of $6,290 and $6,290, respectively. At March 31, 2016 and December 31, 2015, we had non-current liabilities for the original financing of $11,285 and $9,761, respectively, net of the related fair value hedge.
Additionally, we had net current receivables of $304 and net current payables of $99 at March 31, 2016 and December 31, 2015, 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,
2016
 
December 31,
2015
Refining facilities
$
717,226

 
$
709,779

Accumulated depreciation
(284,240
)
 
(275,160
)
Property, plant and equipment, net
$
432,986

 
$
434,619


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Table of Contents
ALON USA PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)


(7)
Additional Financial Information
The following tables provide additional financial information related to the consolidated financial statements.
(a)
Other Assets, Net
 
March 31,
2016
 
December 31,
2015
Deferred turnaround and catalyst cost
$
45,982

 
$
43,021

Receivable from supply and offtake agreement (Note 5)
6,290

 
6,290

Fair value hedge of consigned inventory (Note 5)
12,590

 
11,564

Other
9,997

 
10,362

Total other assets
$
74,859

 
$
71,237

(b)
Accounts Payable
Included in accounts payable was $144,242 and $91,179 related to RINs activity as of March 31, 2016 and December 31, 2015, respectively.
(c)
Accrued Liabilities and Other Non-Current Liabilities
 
March 31,
2016
 
December 31,
2015
Accrued Liabilities:
 
 
 
Taxes other than income taxes, primarily excise taxes
$
29,582

 
$
25,018

Accrued finance charges
412

 
394

Environmental accrual (Note 11)
1,716

 
1,716

Commodity contracts
229

 
99

Other
11,169

 
13,480

Total accrued liabilities
$
43,108

 
$
40,707

 
 
 
 
Other Non-Current Liabilities:
 
 
 
Consignment inventory obligation (Note 5)
$
23,875

 
$
21,325

Environmental accrual (Note 11)
4,727

 
4,725

Asset retirement obligations
2,999

 
2,927

Other
2,536

 
2,536

Total other non-current liabilities
$
34,137

 
$
31,513

(8)
Indebtedness
Debt consisted of the following:
 
March 31,
2016
 
December 31,
2015
Term loan credit facility
$
236,868

 
$
237,082

Revolving credit facility
55,000

 
55,000

Total debt
291,868

 
292,082

Less: Current portion
2,500

 
2,500

Total long-term debt
$
289,368

 
$
289,582

Outstanding letters of credit under the revolving credit facility were $53,200 and $48,590 at March 31, 2016 and December 31, 2015, respectively.
The revolving credit facility contains maintenance financial covenants. At March 31, 2016, 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 Amount Per Unit
 
Total Distribution Amount
First Quarter 2016
 
$

 
$
0.08

 
$
5,001

_______________________
(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.
(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 $3,420 and $2,625 for the three months ended March 31, 2016 and 2015, 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. The allocated portion of Alon Energy’s employee expense costs included in direct operating expenses were $7,262 and $6,332 for the three months ended March 31, 2016 and 2015, 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 $860 and $1,544 for the three months ended March 31, 2016 and 2015, respectively.

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ALON USA PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited, dollars in thousands except as noted)


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, 2016 and 2015.
Transactions with Delek US Holdings, Inc.
In May 2015, Delek US Holdings, Inc. (“Delek”) completed the purchase of approximately 48% of Alon Energy’s outstanding common stock from Alon Israel Oil Company, Ltd. We have transactions with Delek that occur in the ordinary course of business. Including amounts prior to the transaction, we purchased $1,339 and $173 of refined products from Delek for the three months ended March 31, 2016 and 2015, respectively.
Distributions
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. During the three months ended March 31, 2015, we paid cash distributions of $43,755, or $0.70 per unit, of which $35,700 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 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 $6,443 ($1,716 current liability and $4,727 non-current liability) at March 31, 2016, and $6,441 ($1,716 accrued liability and $4,725 non-current liability) at December 31, 2015.

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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” refers to Alon USA Energy, Inc. and any of its consolidated subsidiaries other than the Partnership, 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, 2015.
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, 2015 under the caption “Risk Factors.”
Any one of these factors or a combination of these factors could materially affect our future results of operations and could influence whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required by the securities laws to do so.
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”), which we refer to as our Big Spring refinery. 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 each of our operating segments, see Items 1. and 2. “Business and Properties” included in our Annual Report on Form 10-K for the year ended December 31, 2015.
First Quarter Operational and Financial Highlights
Operating income for the first quarter of 2016 was $2.1 million, compared to $48.5 million for the same period last year. Our operational and financial highlights for the first quarter of 2016 include the following:
Big Spring refinery average throughput for the first quarter of 2016 was 67,536 bpd compared to 72,360 bpd for the first quarter of 2015. The reduced throughput at our Big Spring refinery was the result of planned downtime to complete a reformer regeneration and catalyst replacement for our diesel hydrotreater unit in the beginning of the first quarter of 2016.
Operating margin at the Big Spring refinery was $7.77 per barrel for the first quarter of 2016 compared to $13.80 per barrel for the same period in 2015. This decrease in operating margin was primarily due to a lower Gulf Coast 3/2/1 crack spread and a narrowing of both the WTI Cushing to WTI Midland and the WTI Cushing to WTS spreads, partially offset by the cost of crude benefit from the market moving further into contango in 2016.
The average Gulf Coast 3/2/1 crack spread was $11.24 per barrel for the first quarter of 2016 compared to $17.74 per barrel for the first quarter of 2015.
The average WTI Cushing to WTI Midland spread for the first quarter of 2016 was $(0.13) per barrel compared to $1.95 per barrel for the same period in 2015. The average WTI Cushing to WTS spread for the first quarter of 2016 was $(0.10) per barrel compared to $1.76 per barrel for the same period in 2015. The average Brent to WTI Cushing spread for the first quarter of 2016 was $0.49 per barrel compared to $5.44 per barrel for the same period in 2015.
The contango environment in the first quarter of 2016 created an average cost of crude benefit of $1.83 per barrel compared to an average cost of crude benefit of $0.65 per barrel for the same period in 2015.
During the first quarter of 2016, the cash available for distribution was $0.00 per unit, compared to $0.71 per unit during the first quarter of 2015.
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.
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).

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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. We are also able to source locally produced crude at Big Spring by truck, which tends to have cost and quality advantages. 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.
Recently, the additional takeaway capacity moving crude from Midland to the Gulf Coast has caused a contraction of the WTI Cushing less WTI Midland spread. In addition, the relative small growth in WTS production compared to WTI production and the relative high demand for WTS has caused a contraction of the WTI Cushing less WTS spread.
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, 2016 and 2015 have been influenced by the following factor which is fundamental to understanding comparisons of our period-to-period financial performance.
Planned Maintenance and Reduced Crude Oil Throughput
During the three months ended March 31, 2016, throughput at the Big Spring 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 to expense within the consolidated statements of operations of the carrying value of capital assets. The value is allocated 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, 2016 and 2015. 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, 2015 is unaudited.
 
For the Three Months Ended
 
March 31,
 
2016
 
2015
 
(dollars in thousands, except per unit data, per barrel data and pricing statistics)
STATEMENTS OF OPERATIONS DATA:
 
 
 
Net sales (1)
$
368,009

 
$
542,442

Operating costs and expenses:
 
 
 
Cost of sales
319,333

 
450,595

Direct operating expenses
25,044

 
23,416

Selling, general and administrative expenses
7,309

 
5,903

Depreciation and amortization
14,206

 
13,993

Total operating costs and expenses
365,892

 
493,907

Operating income
2,117

 
48,535

Interest expense
(10,587
)
 
(11,693
)
Other income (loss), net
84

 
(41
)
Income (loss) before state income tax expense
(8,386
)
 
36,801

State income tax expense
176

 
350

Net income (loss)
$
(8,562
)
 
$
36,451

Earnings (loss) per unit
$
(0.14
)
 
$
0.58

Weighted average common units outstanding (in thousands)
62,510

 
62,507

Cash distribution per unit
$
0.08

 
$
0.70

CASH FLOW DATA:
 
 
 
Net cash provided by (used in):
 
 
 
Operating activities
$
6,662

 
$
27,087

Investing activities
(10,793
)
 
(3,805
)
Financing activities
(5,626
)
 
(19,220
)
OTHER DATA:
 
 
 
Adjusted EBITDA (2)
$
16,407

 
$
62,487

Capital expenditures
8,112

 
2,321

Capital expenditures for turnarounds and catalysts
2,681

 
1,484

KEY OPERATING STATISTICS:
 
 
 
Per barrel of throughput:
 
 
 
Refinery operating margin (3)
$
7.77

 
$
13.80

Refinery direct operating expense (4)
4.07

 
3.60

PRICING STATISTICS:
 
 
 
Crack spreads (per barrel):
 
 
 
Gulf Coast 3/2/1
$
11.24

 
$
17.74

WTI Cushing crude oil (per barrel)
$
33.30

 
$
48.48

Crude oil differentials (per barrel):
 
 
 
WTI Cushing less WTI Midland
$
(0.13
)
 
$
1.95

WTI Cushing less WTS
(0.10
)
 
1.76

Brent less WTI Cushing
0.49

 
5.44

Product price (dollars per gallon):
 
 
 
Gulf Coast unleaded gasoline
$
1.07

 
$
1.52

Gulf Coast ultra-low sulfur diesel
1.03

 
1.69

Natural gas (per MMBtu)
1.98

 
2.81


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March 31,
2016
 
December 31,
2015
BALANCE SHEET DATA (end of period):
(dollars in thousands)
Cash and cash equivalents
$
123,196

 
$
132,953

Working capital
(66,936
)
 
(53,804
)
Total assets
745,428

 
748,584

Total debt
291,868

 
292,082

Total debt less cash and cash equivalents
168,672

 
159,129

Total partners’ equity
117,404

 
130,957

THROUGHPUT AND PRODUCTION DATA:
For the Three Months Ended
March 31,
 
2016
 
2015
 
bpd
 
%
 
bpd
 
%
Refinery throughput:
 
 
 
 
 
 
 
WTS crude
36,554

 
54.1

 
44,865

 
62.0

WTI crude
27,760

 
41.1

 
24,137

 
33.4

Blendstocks
3,222

 
4.8

 
3,358

 
4.6

Total refinery throughput (5)
67,536

 
100.0

 
72,360

 
100.0

Refinery production:
 
 
 
 
 
 
 
Gasoline
34,100

 
50.5

 
36,192

 
49.7

Diesel/jet
22,682

 
33.6

 
26,086

 
35.9

Asphalt
3,148

 
4.6

 
3,278

 
4.5

Petrochemicals
3,617

 
5.3

 
4,810

 
6.6

Other
4,027

 
6.0

 
2,394

 
3.3

Total refinery production (6)
67,574

 
100.0

 
72,760

 
100.0

Refinery utilization (7)
 
 
93.2
%
 
 
 
94.5
%
(1)
Includes sales to related parties of $63,110 and $82,889 for the three months ended March 31, 2016 and 2015, 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, 2016 and 2015:
 
For the Three Months Ended
 
March 31,
 
2016
 
2015
 
(dollars in thousands)
Net income (loss)
$
(8,562
)
 
$
36,451

State income tax expense
176

 
350

Interest expense
10,587

 
11,693

Depreciation and amortization
14,206

 
13,993

Adjusted EBITDA
$
16,407

 
$
62,487

(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, 2016 and 2015 excludes gains related to inventory adjustments of $946 and $1,990, 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 oil 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 feedstocks through the crude units and other conversion units.
(7)
Refinery utilization represents average daily crude oil throughput divided by crude oil capacity, excluding planned periods of downtime for maintenance and turnarounds.

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Three Months Ended March 31, 2016 Compared to the Three Months Ended March 31, 2015
Net Sales. Net sales for the three months ended March 31, 2016 were $368.0 million, compared to $542.4 million for the three months ended March 31, 2015, a decrease of $174.4 million, or 32.2%. This decrease was primarily due to lower refined product prices and lower refinery throughput for the three months ended March 31, 2016. The average per gallon price of Gulf Coast gasoline for the three months ended March 31, 2016 decreased $0.45, or 29.6%, to $1.07, compared to $1.52 for the three months ended March 31, 2015. The average per gallon price of Gulf Coast ultra-low sulfur diesel for the three months ended March 31, 2016 decreased $0.66, or 39.1%, to $1.03, compared to $1.69 for the three months ended March 31, 2015. Refinery average throughput for the three months ended March 31, 2016 was 67,536 bpd compared to 72,360 bpd for the three months ended March 31, 2015, a decrease of 6.7%. The reduced throughput at our Big Spring refinery was the result of planned downtime to complete a reformer regeneration and catalyst replacement for our diesel hydrotreater unit in the beginning of the first quarter of 2016.
Cost of Sales. Cost of sales for the three months ended March 31, 2016 were $319.3 million, compared to $450.6 million for the three months ended March 31, 2015, a decrease of $131.3 million, or 29.1%. This decrease was primarily due to reduced crude oil prices and lower refinery throughput. The average price of WTI Cushing decreased 31.3% to $33.30 per barrel for the three months ended March 31, 2016 from $48.48 per barrel for the three months ended March 31, 2015.
Direct Operating Expenses. Direct operating expenses for the three months ended March 31, 2016 were $25.0 million, compared to $23.4 million for the three months ended March 31, 2015, an increase of $1.6 million, or 6.8%. This increase was primarily due to higher maintenance costs, partially offset by lower utility costs for the three months ended March 31, 2016.
Selling, General and Administrative Expenses. SG&A expenses for the three months ended March 31, 2016 were $7.3 million, compared to $5.9 million for the three months ended March 31, 2015, an increase of $1.4 million, 23.7%. This increase was primarily due to higher costs associated with operating leases at our refinery for the three months ended March 31, 2016.
Depreciation and Amortization. Depreciation and amortization for the three months ended March 31, 2016 was $14.2 million, compared to $14.0 million for the three months ended March 31, 2015, an increase of $0.2 million, or 1.4%.
Operating Income. Operating income for the three months ended March 31, 2016 was $2.1 million, compared to $48.5 million for the three months ended March 31, 2015, a decrease of $46.4 million, or 95.7%. This decrease was primarily due to lower refinery throughput and lower refinery operating margin. Refinery operating margin for the three months ended March 31, 2016 was $7.77 per barrel, compared to $13.80 per barrel for the three months ended March 31, 2015. This decrease in operating margin was primarily due to a lower Gulf Coast 3/2/1 crack spread and a narrowing of both the WTI Cushing to WTI Midland and the WTI Cushing to WTS spreads, partially offset by the cost of crude benefit from the market moving further into contango in 2016.
The average Gulf Coast 3/2/1 crack spread decreased to $11.24 per barrel for the three months ended March 31, 2016, compared to $17.74 per barrel for the three months ended March 31, 2015. The average WTI Cushing to WTI Midland spread narrowed to $(0.13) per barrel for the three months ended March 31, 2016, compared to $1.95 per barrel for the three months ended March 31, 2015. The average WTI Cushing to WTS spread narrowed to $(0.10) per barrel for the three months ended March 31, 2016, compared to $1.76 per barrel for the three months ended March 31, 2015. The average Brent to WTI Cushing spread narrowed to $0.49 per barrel for the three months ended March 31, 2016 compared to $5.44 per barrel for the three months ended March 31, 2015. The contango environment for the three months ended March 31, 2016 created an average cost of crude benefit of $1.83 per barrel compared to an average cost of crude benefit of $0.65 per barrel for the three months ended March 31, 2015.
Interest Expense. Interest expense was $10.6 million for the three months ended March 31, 2016, compared to $11.7 million for the three months ended March 31, 2015, a decrease of $1.1 million, or 9.4%.
State Income Tax Expense. State income tax expense was $0.2 million for the three months ended March 31, 2016, compared to $0.4 million for the three months ended March 31, 2015, a decrease of $0.2 million. This decrease was primarily due to the State of Texas permanently reducing the Texas Margin Tax from 1.0% to 0.75% during 2015.
Net Income (Loss). Net loss for the three months ended March 31, 2016 was $8.6 million, compared to net income of $36.5 million for the three months ended March 31, 2015, a decrease of $45.1 million. This decrease was attributable to the factors discussed above.

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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 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, 2016 and 2015:
 
For the Three Months Ended
 
March 31,
 
2016
 
2015
 
(dollars in thousands)
Cash provided by (used in):
 
 
 
Operating activities
$
6,662

 
$
27,087

Investing activities
(10,793
)
 
(3,805
)
Financing activities
(5,626
)
 
(19,220
)
Net increase (decrease) in cash and cash equivalents
$
(9,757
)
 
$
4,062

Cash Flows Provided by Operating Activities
Net cash provided by operating activities was $6.7 million during the three months ended March 31, 2016 compared to $27.1 million during the three months ended March 31, 2015. The decrease in net cash provided by operating activities of $20.4 million was primarily due to decreased net income (loss) after adjusting for non-cash items of $44.8 million, increased cash used for inventories of $5.7 million, increased cash used for other assets of $3.8 million and reduced cash provided by other non-current liabilities of $1.2 million, partially offset by reduced cash used for accounts payable and accrued liabilities of $24.4 million, higher cash collected on accounts receivable of $10.3 million and reduced cash used for prepaid expenses and other current assets of $0.3 million.
Cash Flows Used In Investing Activities
Net cash used in investing activities was $10.8 million during the three months ended March 31, 2016 compared to $3.8 million during the three months ended March 31, 2015. The increase in net cash used in investing activities of $7.0 million was primarily due to completing a reformer regeneration and catalyst replacement for our diesel hydrotreater unit in the beginning of the first quarter of 2016.
Cash Flows Used In Financing Activities
Net cash used in financing activities was $5.6 million during the three months ended March 31, 2016 compared to $19.2 million during the three months ended March 31, 2015. The change in net cash used in financing activities of $13.6 million was primarily due to reduced distributions to unitholders of $38.8 million and lower repayments of $10.0 million on our revolving credit facility, partially offset by reduced cash received under inventory financing arrangements of $35.2 million during the three months ended March 31, 2016.

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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. We had borrowings of $55.0 million and $55.0 million and letters of credit outstanding of $53.2 million and $48.6 million under this facility at March 31, 2016 and December 31, 2015, respectively.
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 2016 is $29.0 million, which includes expenditures for catalysts and turnarounds and approximately $7.2 million of special regulatory projects. Approximately $10.8 million has been spent during the three months ended March 31, 2016.
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, 2015.
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, 2015. 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, 2015.
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, 2016, 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 $8.5 million. At March 31, 2016, the market value of crude oil inventories exceeded LIFO costs, net of the fair value hedged item, by $8.2 million.
As of March 31, 2016, we held 0.3 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 would have been $0.3 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 still exceeded LIFO costs, net of the fair value hedged item, by $7.8 million, requiring no inventory adjustment to be made.
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, 2016:
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)
 
(51,030
)
 
$

 
$
37.96

 
$
(1,937
)
 
$
(1,953
)
 
$
(16
)
Forwards-long (Gasoline)
 
221,101

 
58.22

 

 
12,872

 
13,156

 
284

Forwards-short (Distillate)
 
(1,666
)
 

 
50.36

 
(84
)
 
(88
)
 
(4
)
Forwards-short (Jet)
 
(13,449
)
 

 
47.43

 
(638
)
 
(648
)
 
(10
)
Forwards-short (Slurry)
 
(2,608
)
 

 
22.64

 
(59
)
 
(61
)
 
(2
)
Forwards-long (Catfeed)
 
77,526

 
50.86

 

 
3,943

 
4,068

 
125

Forwards-short (Slop)
 
(10,856
)
 

 
27.96

 
(304
)
 
(323
)
 
(19
)
Forwards-short (Propane)
 
(5,000
)
 

 
18.02

 
(90
)
 
(93
)
 
(3
)
Forwards-long (Butane)
 
73,375

 
22.92

 

 
1,682

 
1,631

 
(51
)
Futures-long (Crude)
 
36,000

 
37.05

 

 
1,334

 
1,380

 
46

Futures-short (Gasoline)
 
(265,000
)
 

 
60.06

 
(15,915
)
 
(16,102
)
 
(187
)
Futures-long (Distillate)
 
24,000

 
51.51

 

 
1,236

 
1,195

 
(41
)
Futures-short (Distillate)
 
(24,000
)
 

 
47.82

 
(1,148
)
 
(1,195
)
 
(47
)

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Interest Rate Risk
As of March 31, 2016, our outstanding debt balance of $296.9 million, excluding discounts and debt issuance costs, was subject to floating interest rates, of which $55.0 million was charged interest at the Eurodollar rate plus 3.00% and $241.9 million 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 $1.0 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 our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”)) as of the end of the period covered by this report, and has concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit 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 ensure that information required to be disclosed by us in the reports that we file or submit 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.
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) that occurred during our last fiscal quarter 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
 
Certifications of Chief Executive Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certifications of Chief Financial Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1
 
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
101
 
The following financial information from Alon USA Partners, LP’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, 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 6, 2016
By:  
/s/ David Wiessman
 
 
 
David Wiessman 
 
 
 
Executive Chairman of the Board
 
 
 
 
 
 
 
 
Date:
May 6, 2016
By:  
/s/ Paul Eisman
 
 
 
Paul Eisman
 
 
 
President, Chief Executive Officer and Director
 
 
 
 
 
 
 
 
Date:
May 6, 2016
By:  
/s/ Shai Even
 
 
 
Shai Even 
 
 
 
Senior Vice President and Chief Financial Officer 
 
 
 
(Principal Accounting Officer)

25