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, 2015
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 May 1, 2015, was 62,506,550.

 
 



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,
2015
 
December 31,
2014
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
110,387

 
$
106,325

Accounts and other receivables, net
88,704

 
68,545

Accounts and other receivables, net - related parties
10,470

 
9,466

Inventories
35,299

 
45,162

Prepaid expenses and other current assets
7,351

 
9,163

Total current assets
252,211

 
238,661

Property, plant and equipment, net
440,764

 
445,706

Other assets, net
83,677

 
85,879

Total assets
$
776,652

 
$
770,246

LIABILITIES AND PARTNERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
220,792

 
$
186,156

Accrued liabilities
40,302

 
54,566

Current portion of long-term debt
2,500

 
2,500

Total current liabilities
263,594

 
243,222

Other non-current liabilities
42,559

 
38,746

Long-term debt
289,396

 
299,876

Total liabilities
595,549

 
581,844

Commitments and contingencies (Note 11)

 

Partners’ equity:
 
 
 
General Partner

 

Common unitholders - 62,506,550 units issued and outstanding at March 31, 2015 and December 31, 2014
181,103

 
188,402

Total partners’ equity
181,103

 
188,402

Total liabilities and partners’ equity
$
776,652

 
$
770,246


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,
 
2015
 
2014
Net sales (1)
$
542,442

 
$
856,460

Operating costs and expenses:
 
 
 
Cost of sales
450,595

 
759,046

Direct operating expenses
23,416

 
28,941

Selling, general and administrative expenses
5,903

 
4,368

Depreciation and amortization
13,993

 
10,067

Total operating costs and expenses
493,907

 
802,422

Operating income
48,535

 
54,038

Interest expense
(11,693
)
 
(11,324
)
Other income (loss), net
(41
)
 
12

Income before state income tax expense
36,801

 
42,726

State income tax expense
350

 
485

Net income
$
36,451

 
$
42,241

Earnings per unit
$
0.58

 
$
0.68

Weighted average common units outstanding (in thousands)
62,507

 
62,502

Cash distribution per unit
$
0.70

 
$
0.18

___________
(1)
Includes sales to related parties of $82,889 and $139,013 for the three months ended March 31, 2015 and 2014, 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,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
36,451

 
$
42,241

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
13,993

 
10,067

Unit-based compensation
5

 

Amortization of debt issuance costs
527

 
506

Amortization of original issuance discount
145

 
135

Changes in operating assets and liabilities:
 
 
 
Accounts and other receivables, net
(20,159
)
 
(12,598
)
Accounts and other receivables, net - related parties
(1,004
)
 
(1,155
)
Inventories
9,863

 
(1,490
)
Prepaid expenses and other current assets
1,812

 
(2,117
)
Other assets, net
(2,910
)
 
(239
)
Accounts payable
(524
)
 
11,364

Accrued liabilities
(14,925
)
 
(9,684
)
Other non-current liabilities
3,813

 
8,237

Net cash provided by operating activities
27,087

 
45,267

Cash flows from investing activities:
 
 
 
Capital expenditures
(2,321
)
 
(4,162
)
Capital expenditures for turnarounds and catalysts
(1,484
)
 
(14,465
)
Net cash used in investing activities
(3,805
)
 
(18,627
)
Cash flows from financing activities:
 
 
 
Distributions paid to unitholders
(8,055
)
 
(2,070
)
Distributions paid to unitholders - Alon Energy
(35,700
)
 
(9,180
)
Inventory agreement transactions
35,160

 

Revolving credit facility, net
(10,000
)
 

Payments on long-term debt
(625
)
 
(625
)
Net cash used in financing activities
(19,220
)
 
(11,875
)
Net increase in cash and cash equivalents
4,062

 
14,765

Cash and cash equivalents, beginning of period
106,325

 
153,583

Cash and cash equivalents, end of period
$
110,387

 
$
168,348

Supplemental cash flow information:
 
 
 
Cash paid for interest, net of capitalized interest
$
11,539

 
$
12,097

Cash paid for income tax
$
350

 
$
485

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,” “us” or “our” refer to Alon USA Partners, LP, one or more of its consolidated subsidiaries or all of them taken as a whole. References in this report to “Alon Energy” refer collectively to Alon USA Energy, Inc. and 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”). In November 2012, we completed our initial public offering of 11,500,000 common units representing limited partner interests. Our General Partner is owned 100% by Alon Energy and holds all of the non-economic general partner interests in the Partnership.
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, 2015 are not necessarily indicative of the operating results that may be realized for the year ending December 31, 2015.
Our consolidated balance sheet as of December 31, 2014 has been derived from the audited financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard that provides accounting guidance for all revenue arising from contracts to provide goods or services to customers. This standard is intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The requirements of the new standard (unless amended) are effective for interim and annual periods beginning after December 15, 2016, and early adoption is not permitted. The standard allows for either full retrospective adoption or modified retrospective adoption. We are evaluating the guidance to determine the method of adoption and the impact of this standard on our consolidated financial statements.
In February 2015, the FASB issued an accounting standards update making targeted changes to the current consolidation guidance. The new standard changes the way certain decisions are made related to substantive rights, related parties, and decision making fees when applying the variable interest entity consolidation model and eliminates certain guidance for limited partnerships and similar entities under the voting interest consolidation model. The requirements from the updated standard are effective for interim and annual periods beginning after December 15, 2015, and early adoption is permitted. We are evaluating the effect that adopting the updated guidance will have on our consolidated financial statements and related disclosures.
In April 2015, the FASB issued an accounting standards update simplifying the presentation of debt issuance costs. The updated standard requires that all cost incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. The requirements from the updated standard are effective for interim and annual periods beginning after December 15, 2015, and early adoption is permitted. We are evaluating the effect that adopting the updated guidance will have on our consolidated financial statements and related disclosures.
(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, 2015 and December 31, 2014:
 
Level 1
 
Level 2
 
Level 3
 
Total
As of March 31, 2015
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
226

 
$

 
$

 
$
226

Fair value hedge

 
13,146

 

 
13,146

 
 
 
 
 
 
 
 
As of December 31, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
1,406

 
$

 
$

 
$
1,406

Fair value hedge

 
10,223

 

 
10,223

(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. 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 executed on the New York Mercantile Exchange which have not been closed or settled at 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 333 thousand barrels of crude oil as of March 31, 2015.

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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)


The following tables present the effect of derivative instruments on the consolidated balance sheets:
 
As of March 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
 
$
497

 
Accrued liabilities
 
$
271

Total derivatives not designated as hedging instruments
 
 
497

 
 
 
271

 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Fair value hedge
Other assets
 
$
13,146

 
 
 
$

Total derivatives designated as hedging instruments
 
 
13,146

 
 
 

Total derivatives
 
 
$
13,643

 
 
 
$
271

 
As of December 31, 2014
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
Accounts receivable
 
$
2,629

 
Accrued liabilities
 
$
1,223

Total derivatives not designated as hedging instruments
 
 
2,629

 
 
 
1,223

 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Fair value hedge
Other assets
 
$
10,223

 
 
 
$

Total derivatives designated as hedging instruments
 
 
10,223

 
 
 

Total derivatives
 
 
$
12,852

 
 
 
$
1,223

The following tables present the effect of derivative instruments on the consolidated statements of operations:
Derivatives in fair value hedging relationships:
 
 
 
Gain (Loss) Recognized in Income
 
 
 
For the Three Months Ended
 
 
 
March 31,
 
Location
 
2015
 
2014
Fair value hedge (1)
Interest expense
 
$
2,923

 
$
(823
)
Total derivatives
 
 
$
2,923

 
$
(823
)
___________
(1)
Changes in the fair value hedge are substantially offset by changes in the hedged item.
Derivatives not designated as hedging instruments:
 
 
 
Gain (Loss) Recognized in Income
 
 
 
For the Three Months Ended
 
 
 
March 31,
 
Location
 
2015
 
2014
Commodity contracts (futures and forwards)
Cost of sales
 
$
474

 
$
623

Total derivatives
 
 
$
474

 
$
623


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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, 2015 and December 31, 2014:
 
Gross Amounts of Recognized Assets/Liabilities
 
Gross Amounts offset in the Statement of Financial Position
 
Net Amounts Presented in the Statement of Financial Position
 
Gross Amounts Not offset in the Statement of Financial Position
 
Net Amount
 
 
 
Financial Instruments
 
Cash Collateral Pledged
 
As of March 31, 2015
 
 
 
 
 
 
 
 
 
 
Derivative Assets:
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
551

 
$
(54
)
 
$
497

 
$
(271
)
 
$

 
$
226

Fair value hedge
13,146

 

 
13,146

 

 

 
13,146

Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
325

 
$
(54
)
 
$
271

 
$
(271
)
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
Derivative Assets:
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
3,309

 
$
(680
)
 
$
2,629

 
$
(1,223
)
 
$

 
$
1,406

Fair value hedge
10,223

 

 
10,223

 

 

 
10,223

Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
Commodity contracts (futures and forwards)
$
1,903

 
$
(680
)
 
$
1,223

 
$
(1,223
)
 
$

 
$

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 $4,538 and $2,926 for the three months ended March 31, 2015 and 2014, 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,
2015
 
December 31,
2014
Crude oil, refined products and blendstocks
$
20,459

 
$
30,239

Crude oil consignment inventory (Note 5)
4,995

 
5,278

Materials and supplies
9,845

 
9,645

Total inventories
$
35,299

 
$
45,162

The market value of refined products and blendstock inventories was less than inventories on a last-in, first-out (“LIFO”) cost basis which resulted in recording a lower of cost or market reserve of $2,660 and $4,650 at March 31, 2015 and December 31, 2014, respectively. At March 31, 2015, crude oil inventories on a LIFO cost basis, net of the fair value hedged item, were lower than the market value of crude oil inventories by $9,560. At December 31, 2014, the carrying value of crude oil inventories was equal to market value.
(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. As amended in February 2015, 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, 2015 and December 31, 2014, we had net current receivables of $4,707 and net current payables of $10,544, respectively, to J. Aron for sales and purchases. At March 31, 2015 and December 31, 2014, we had a consignment inventory receivable representing a deposit paid to J. Aron of $6,290 and $6,290, respectively, and non-current liabilities for the original financing of $18,370 and $17,497, respectively, net of the related fair value hedge.
Additionally, we had current payables of $271 and $1,010 at March 31, 2015 and December 31, 2014, respectively, for forward commitments related to month-end consignment inventory target levels differing from projected levels and the associated pricing with these inventory level differences.
(6)
Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following:
 
March 31,
2015
 
December 31,
2014
Refining facilities
$
688,944

 
$
685,036

Accumulated depreciation
(248,180
)
 
(239,330
)
Property, plant and equipment, net
$
440,764

 
$
445,706


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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,
2015
 
December 31,
2014
Deferred turnaround and catalyst cost
$
50,331

 
$
54,310

Deferred debt issuance costs
5,198

 
5,725

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

 
6,290

Fair value hedge (Note 5)
13,146

 
10,223

Other
8,712

 
9,331

Total other assets
$
83,677

 
$
85,879

(b)
Accrued Liabilities and Other Non-Current Liabilities
 
March 31,
2015
 
December 31,
2014
Accrued Liabilities:
 
 
 
Taxes other than income taxes, primarily excise taxes
$
28,201

 
$
41,357

Accrued finance charges
570

 
427

Environmental accrual (Note 11)
1,671

 
1,671

Commodity contracts
271

 
1,223

Other
9,589

 
9,888

Total accrued liabilities
$
40,302

 
$
54,566

 
 
 
 
Other Non-Current Liabilities:
 
 
 
Consignment inventory obligation (Note 5)
$
31,516

 
$
27,720

Environmental accrual (Note 11)
5,486

 
5,486

Asset retirement obligations
2,101

 
2,084

Other
3,456

 
3,456

Total other non-current liabilities
$
42,559

 
$
38,746

(8)
Indebtedness
Debt consisted of the following:
 
March 31,
2015
 
December 31,
2014
Term loan credit facility
$
241,896

 
$
242,376

Revolving credit facility
50,000

 
60,000

Total debt
291,896

 
302,376

Less: Current portion
2,500

 
2,500

Total long-term debt
$
289,396

 
$
299,876

Outstanding letters of credit under the revolving credit facility were $36,863 and $23,511 at March 31, 2015 and December 31, 2014, respectively.
Our revolving credit facility contains maintenance financial covenants. At March 31, 2015, we were in compliance with these covenants.
In May 2015, the revolving credit facility was amended to, among other matters, extend the expiration date to May 2019.

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


(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.
During the three months ended March 31, 2015, we paid cash distributions of $43,755, or $0.70 per unit. During the three months ended March 31, 2014, we paid cash distributions of $11,250, or $0.18 per unit.
(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 was $2,625 and $2,743 for the three months ended March 31, 2015 and 2014, 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 was $6,332 and $6,615 for the three months ended March 31, 2015 and 2014, 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 was $1,544 and $1,818 for the three months ended March 31, 2015 and 2014, 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. For the three months ended March 31, 2015, we recorded expense of $1,230 related to these agreements.
Distributions
During the three months ended March 31, 2015, we paid cash distributions of $43,755, or $0.70 per unit. The total cash distribution paid to Alon Energy was $35,700. During the three months ended March 31, 2014, we paid cash distributions of $11,250, or $0.18 per unit. The total cash distribution paid to Alon Energy was $9,180.

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


(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 $7,157 ($1,671 current liability and $5,486 non-current liability) at March 31, 2015 and December 31, 2014.
(12)
Subsequent Event
Revolving Credit Facility
In May 2015, the revolving credit facility was amended to, among other matters, extend the expiration date to May 2019.
Distribution Declared
On May 4, 2015, the board of directors of the General Partner declared a cash distribution to our common unitholders of approximately $44,380, or $0.71 per common unit. The cash distribution will be paid on May 26, 2015 to unitholders of record at the close of business on May 18, 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,” “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, 2014.
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 our largest supplier of crude oil and our largest customer 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;
the easing of logistical and infrastructure constraints at Cushing;

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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
the other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2014 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 West and Central Texas, Oklahoma, New Mexico and Arizona through our wholesale distribution network to both Alon Energy’s retail convenience stores and other third-party distributors. We distribute fuel products through a product pipeline and terminal network of seven pipelines and five terminals that we own or access through leases or long-term throughput agreements.
First Quarter Operational and Financial Highlights
Operating income for the first quarter of 2015 was $48.5 million, compared to $54.0 million for the same period last year. Our operational and financial highlights for the first quarter of 2015 include the following:
Big Spring refinery average throughput for the first quarter of 2015 was 72,360 bpd compared to 73,296 bpd for the first quarter of 2014.
Operating margin at the Big Spring refinery was $13.80 per barrel for the first quarter of 2015 compared to $14.77 per barrel for the same period in 2014. This decrease in operating margin was primarily due to a narrowing of both the WTI Cushing to WTS spread and the WTI Cushing to WTI Midland spread, partially offset by a higher Gulf Coast 3/2/1 crack spread.
The average WTI Cushing to WTS spread for the first quarter of 2015 was $1.76 per barrel compared to $3.67 per barrel for the same period in 2014. The average WTI Cushing to WTI Midland spread for the first quarter of 2015 was $1.95 per barrel compared to $3.54 per barrel for the same period in 2014.
The average Gulf Coast 3/2/1 crack spread was $17.74 per barrel for the first quarter of 2015 compared to $16.81 per barrel for the first quarter of 2014.
During the first quarter of 2015, we generated cash available for distribution of $0.71 per unit, compared to $0.69 per unit during the first quarter of 2014.
During the quarter, a new four-year labor agreement was reached with the employees of the Big Spring refinery that were covered by a collective bargaining agreement.
Major Influences on Results of Operations
Earnings and cash flow 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 affect 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 (exclusive of certain inventory adjustments).
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

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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 priced crudes.
In addition, we have been able to capitalize on the oversupply of West Texas crudes in Midland, the largest origination terminal for West Texas crude oil, resulting from increased production and infrastructure constraints in the Permian Basin. Although West Texas crudes are typically transported to Cushing and to the Gulf Coast for sale, current logistical and infrastructure constraints are limiting the ability of Permian Basin producers to transport their production to Cushing and to the Gulf Coast. The resulting oversupply of West Texas crudes at Midland has depressed Midland crude prices and enabled us to obtain an increased portion of our crude supply at discounted prices to Cushing. Moreover, by sourcing West Texas crudes at Midland, we are able to eliminate the cost of transporting crude to and from Cushing. 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, an easing of the current logistical and infrastructure constraints through new pipeline construction or expansion could reduce this differential, which will have an adverse effect on our margins.
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 margins 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 LIFO inventory valuation methodology, price fluctuations generally have little effect on our financial results.
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, 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.

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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 wholesale 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, 2015 and 2014. 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, 2014 is unaudited.
 
For the Three Months Ended
 
March 31,
 
2015
 
2014
 
(dollars in thousands, except per unit data, per barrel data and pricing statistics)
STATEMENT OF OPERATIONS DATA:
 
 
 
Net sales (1)
$
542,442

 
$
856,460

Operating costs and expenses:
 
 
 
Cost of sales
450,595

 
759,046

Direct operating expenses
23,416

 
28,941

Selling, general and administrative expenses
5,903

 
4,368

Depreciation and amortization
13,993

 
10,067

Total operating costs and expenses
493,907

 
802,422

Operating income
48,535

 
54,038

Interest expense
(11,693
)
 
(11,324
)
Other income (loss), net
(41
)
 
12

Income before state income tax expense
36,801

 
42,726

State income tax expense
350

 
485

Net income
$
36,451

 
$
42,241

Earnings per unit
$
0.58

 
$
0.68

Weighted average common units outstanding (in thousands)
62,507

 
62,502

Cash distribution per unit
$
0.70

 
$
0.18

CASH FLOW DATA:
 
 
 
Net cash provided by (used in):
 
 
 
Operating activities
$
27,087

 
$
45,267

Investing activities
(3,805
)
 
(18,627
)
Financing activities
(19,220
)
 
(11,875
)
OTHER DATA:
 
 
 
Adjusted EBITDA (2)
$
62,487

 
$
64,117

Capital expenditures
2,321

 
4,162

Capital expenditures for turnarounds and catalysts
1,484

 
14,465

KEY OPERATING STATISTICS:
 
 
 
Per barrel of throughput:
 
 
 
Refinery operating margin (3)
$
13.80

 
$
14.77

Refinery direct operating expense (4)
3.60

 
4.39

PRICING STATISTICS:
 
 
 
Crack spreads (per barrel):
 
 
 
Gulf Coast 3/2/1
$
17.74

 
$
16.81

WTI Cushing crude oil (per barrel)
$
48.48

 
$
98.65

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

 
$
3.54

WTI Cushing less WTS
1.76

 
3.67

Brent less WTI Cushing
5.44

 
10.46

Product price (dollars per gallon):
 
 
 
Gulf Coast unleaded gasoline
$
1.52

 
$
2.66

Gulf Coast ultra-low sulfur diesel
1.69

 
2.93

Natural gas (per MMBtu)
2.81

 
4.72


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March 31,
2015
 
December 31,
2014
BALANCE SHEET DATA (end of period):
(dollars in thousands)
Cash and cash equivalents
$
110,387

 
$
106,325

Working capital (deficit)
(11,383
)
 
(4,561
)
Total assets
776,652

 
770,246

Total debt
291,896

 
302,376

Total debt less cash and cash equivalents
181,509

 
196,051

Total partners’ equity
181,103

 
188,402

THROUGHPUT AND PRODUCTION DATA:
For the Three Months Ended
March 31,
 
2015
 
2014
 
bpd
 
%
 
bpd
 
%
Refinery throughput:
 
 
 
 
 
 
 
WTS crude
44,865

 
62.0

 
35,345

 
48.2

WTI crude
24,137

 
33.4

 
35,982

 
49.1

Blendstocks
3,358

 
4.6

 
1,969

 
2.7

Total refinery throughput (5)
72,360

 
100.0

 
73,296

 
100.0

Refinery production:
 
 
 
 
 
 
 
Gasoline
36,192

 
49.7

 
36,290

 
49.6

Diesel/jet
26,086

 
35.9

 
24,674

 
33.6

Asphalt
3,278

 
4.5

 
3,406

 
4.6

Petrochemicals
4,810

 
6.6

 
4,412

 
6.0

Other
2,394

 
3.3

 
4,557

 
6.2

Total refinery production (6)
72,760

 
100.0

 
73,339

 
100.0

Refinery utilization (7)
 
 
94.5
%
 
 
 
101.9
%
(1)
Includes sales to related parties of $82,889 and $139,013 for the three months ended March 31, 2015 and 2014, 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 to Adjusted EBITDA for the three months ended March 31, 2015 and 2014:
 
For the Three Months Ended
 
March 31,
 
2015
 
2014
 
(dollars in thousands)
Net income
$
36,451

 
$
42,241

State income tax expense
350

 
485

Interest expense
11,693

 
11,324

Depreciation and amortization
13,993

 
10,067

Adjusted EBITDA
$
62,487

 
$
64,117

(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.
The refinery operating margin for three months ended March 31, 2015 excludes gains related to inventory adjustments of $1,990.
(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, 2015 Compared to the Three Months Ended March 31, 2014
Net Sales. Net sales for the three months ended March 31, 2015 were $542.4 million, compared to $856.5 million for the three months ended March 31, 2014, a decrease of $314.1 million. This decrease was primarily due to lower refined product prices and lower refinery throughput. The average per gallon price of Gulf Coast gasoline for the three months ended March 31, 2015 decreased $1.14, or 42.9%, to $1.52, compared to $2.66 for the three months ended March 31, 2014. The average per gallon price of Gulf Coast ultra-low sulfur diesel for the three months ended March 31, 2015 decreased $1.24, or 42.3%, to $1.69, compared to $2.93 for the three months ended March 31, 2014. Refinery average throughput for the three months ended March 31, 2015 was 72,360 bpd compared to 73,296 bpd for the three months ended March 31, 2014, a decrease of 1.3%.
Cost of Sales. Cost of sales for the three months ended March 31, 2015 were $450.6 million, compared to $759.0 million for the three months ended March 31, 2014, a decrease of $308.4 million. This decrease was primarily due to a decrease in crude oil prices and lower refinery throughput. The average price of WTI Cushing decreased 50.9% to $48.48 per barrel for the three months ended March 31, 2015 from $98.65 per barrel for the three months ended March 31, 2014.
Direct Operating Expenses. Direct operating expenses for the three months ended March 31, 2015 were $23.4 million, compared to $28.9 million for the three months ended March 31, 2014, a decrease of $5.5 million, or 19.0%. This decrease was primarily due to lower utility and insurance costs for the three months ended March 31, 2015.
Selling, General and Administrative Expenses. SG&A expenses for the three months ended March 31, 2015 were $5.9 million, compared to $4.4 million for the three months ended March 31, 2014, an increase of $1.5 million. This increase was primarily due to higher allocated costs for the three months ended March 31, 2015.
Depreciation and Amortization. Depreciation and amortization for the three months ended March 31, 2015 was $14.0 million, compared to $10.1 million for the three months ended March 31, 2014, an increase of $3.9 million. This increase was primarily due to increased amortization of turnaround and catalyst replacement costs during the three months ended March 31, 2015 resulting from the completion of the planned turnaround during the second quarter of 2014.
Operating Income. Operating income for the three months ended March 31, 2015 was $48.5 million, compared to $54.0 million for the three months ended March 31, 2014, a decrease of $5.5 million. This decrease was primarily due to lower refinery operating margin and lower refinery throughput. Refinery operating margin was $13.80 per barrel for the three months ended March 31, 2015, compared to $14.77 per barrel for the three months ended March 31, 2014. This decrease in operating margin was primarily due to a narrowing of both the WTI Cushing to WTS spread and the WTI Cushing to WTI Midland spread, partially offset by a higher Gulf Coast 3/2/1 crack spread. The WTI Cushing to WTS spread narrowed 52.0%, to $1.76 per barrel for the three months ended March 31, 2015, compared to $3.67 per barrel for the three months ended March 31, 2014. The WTI Cushing to WTI Midland spread narrowed 44.9% to $1.95 per barrel for the three months ended March 31, 2015, compared to $3.54 per barrel for the three months ended March 31, 2014. The average Gulf Coast 3/2/1 crack spread increased 5.5% to $17.74 per barrel for the three months ended March 31, 2015, compared to $16.81 per barrel for the three months ended March 31, 2014.
Interest Expense. Interest expense was $11.7 million for the three months ended March 31, 2015, compared to $11.3 million for the three months ended March 31, 2014, an increase of $0.4 million.
Net Income. Net income for the three months ended March 31, 2015 was $36.5 million, compared to $42.2 million for the three months ended March 31, 2014, a decrease of $5.7 million. This decrease 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, which currently expires in November 2015.
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.

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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, 2015 and 2014:
 
For the Three Months Ended
 
March 31,
 
2015
 
2014
 
(dollars in thousands)
Cash provided by (used in):
 
 
 
Operating activities
$
27,087

 
$
45,267

Investing activities
(3,805
)
 
(18,627
)
Financing activities
(19,220
)
 
(11,875
)
Net increase in cash and cash equivalents
$
4,062

 
$
14,765

Cash Flows Provided by Operating Activities
Net cash provided by operating activities was $27.1 million during the three months ended March 31, 2015 compared to $45.3 million during the three months ended March 31, 2014. The decrease in net cash provided by operating activities of $18.2 million was primarily due to reduced net income after adjusting for non-cash items of $1.8 million, increased cash used for accounts payable and accrued liabilities of $17.1 million, lower cash collected on accounts receivable of $7.4 million, reduced cash used on other non-current liabilities of $4.4 million and increased cash used for other assets of $2.7 million, partially offset by increased cash provided by inventories of $11.4 million and reduced cash used for prepaid expenses and other current assets of $3.9 million.
Cash Flows Used In Investing Activities
Net cash used in investing activities was $3.8 million during the three months ended March 31, 2015 compared to $18.6 million during the three months ended March 31, 2014. The decrease in net cash used in investing activities of $14.8 million was primarily due to the first quarter 2014 capital expenditures and capital expenditures for turnarounds and catalysts associated with the planned turnaround completed during the second quarter of 2014.
Cash Flows Used In Financing Activities
Net cash used in financing activities was $19.2 million during the three months ended March 31, 2015 compared to $11.9 million during the three months ended March 31, 2014. The increase in net cash used in financing activities of $7.3 million was primarily due to higher distributions to unitholders of $32.5 million and higher payments on our revolving credit facility of $10.0 million, partially offset by increased proceeds from inventory financing arrangements of $35.2 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. We had borrowings of $50.0 million and $60.0 million and letters of credit outstanding of $36.9 million and $23.5 million under this facility at March 31, 2015 and December 31, 2014, respectively.
In May 2015, the revolving credit facility was amended to, among other matters, extend the expiration date to May 2019.
Capital Spending
Each year the board of directors of our General Partner approves capital projects, including sustaining maintenance, regulatory and planned turnaround 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 2015 is $37.0 million, which includes expenditures for catalysts and turnarounds and approximately $10.4 million of special regulatory projects. Approximately $3.8 million has been spent during the three months ended March 31, 2015.
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, 2014.

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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, 2014. 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, 2014.
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, 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 $2.7 million. At March 31, 2015, the crude oil inventories on a LIFO cost basis, net of the fair value hedged item, were lower than the market value of crude oil inventories by $9.6 million.
As of March 31, 2015, we held 0.4 million barrels of crude oil and 0.3 million barrels of refined product and blendstock inventories valued under the LIFO valuation method. If the market value of crude oil would have been $1.00 per barrel lower, the amount by which market value exceeded LIFO costs, net of the fair value hedged item, would have been lower by $0.4 million. If the market value of refined products and blendstock inventories would have been $1.00 per barrel lower, our lower of cost or market reserve would have increased by $0.3 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, 2015:
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-long (Crude)
 
32,798

 
$
45.38

 
$

 
$
1,488

 
$
1,527

 
$
39

Forwards-long (Gasoline)
 
90,928

 
75.42

 

 
6,857

 
6,644

 
(213
)
Forwards-short (Distillate)
 
(39,837
)
 

 
74.76

 
(2,978
)
 
(2,975
)
 
3

Forwards-long (Jet)
 
10,565

 
70.93

 

 
749

 
725

 
(24
)
Forwards-long (Slurry)
 
66

 
44.81

 

 
3

 
3

 

Forwards-long (Catfeed)
 
13,149

 
70.22

 

 
923

 
902

 
(21
)
Forwards-short (Slop)
 
(14,962
)
 

 
37.86

 
(566
)
 
(589
)
 
(23
)
Forwards-short (Propane)
 
(10,000
)
 

 
21.66

 
(217
)
 
(205
)
 
12

Forwards-long (Butane)
 
41,008

 
27.57

 

 
1,131

 
1,087

 
(44
)
Futures-short (Crude)
 
(13,000
)
 

 
63.59

 
(827
)
 
(619
)
 
208

Futures-short (Gasoline)
 
(93,000
)
 

 
76.17

 
(7,083
)
 
(6,914
)
 
169

Futures-short (Distillate)
 
(7,000
)
 

 
88.83

 
(622
)
 
(502
)
 
120


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Interest Rate Risk
As of March 31, 2015, our outstanding debt balance of $294.4 million, excluding discounts, was subject to floating interest rates, of which $244.4 million was charged interest at the Eurodollar rate (with a floor of 1.25%) plus a margin of 8.00% and $50.0 million was charged interest at the Eurodollar rate plus 3.5%, subject to a minimum interest rate of 4.0%.
An increase of 1% in the Eurodollar rate on our indebtedness would result in an increase in our interest expense of approximately $0.3 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. We are transitioning our assessment of our internal control effectiveness over financial reporting from the criteria outlined by the 1992 framework of the Committee of Sponsoring Organizations of the Treadway Commission to its 2013 framework. We expect to complete this transition during 2015.

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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On May 6, 2015, Alon USA, LP (“Alon USA LP”) entered into a Second Amendment to Second Amended Revolving Credit Agreement and Partial Release (the “Second Amended Alon USA LP Credit Facility”), by and among Alon USA LP, the financial institutions from time to time a party thereto (the “Lenders”), Israel Discount Bank of New York as administrative agent, co-arranger and collateral agent, and Bank Leumi USA, as co-arranger for the Lenders. The Second Amended Alon USA LP Credit Facility amended that certain Amended Revolving Credit Agreement, dated May 23, 2013 (the “Alon USA LP Credit Facility”) to amend, among other matters, certain provisions so that if the proposed acquisition of Alon Israel Oil Company Ltd.’s shares in Alon USA Energy, Inc. by Delek US Holdings, Inc. closes, such event would not be treated as a change of control.
The Second Amended Alon USA LP Credit Facility has a $240.0 million capacity and will mature in May 2019. The Second Amended Alon USA LP Credit Facility can be used both for borrowings and the issuance of letters of credit subject to a limit of the lesser of the facility amount or the borrowing base amount under the facility.
Borrowings under the Second Amended Alon USA LP Credit Facility bear interest at the Eurodollar rate plus 3.00% per annum.
The Second Amended Alon USA LP Credit Facility is secured by (i) a first lien on our cash, accounts receivables, inventories and related assets and (ii) a second lien on fixed assets and other specified property.
The Second Amended Alon USA LP Credit Facility contains certain restrictive covenants including maintenance financial covenants.
ITEM 6. EXHIBITS
Exhibit
 
 
Number
 
Description of Exhibit
10.1†
 
Second Amended and Restated Supply and Offtake Agreement dated as of February 1, 2015 between J. Aron & Company and Alon USA, LP (incorporated by reference to Exhibit 10.1 to Alon USA Energy, Inc.’s Quarterly Report on Form 10-Q filed on May 8, 2015, File No. 001-32567).
10.2
 
Second Amendment to Second Amended Revolving Credit Agreement, dated as of May 6, 2015, by and among Alon USA, LP, Israel Discount Bank of New York, Bank Leumi USA and certain other guarantor companies and financial institutions from time to time named therein (incorporated by reference to Exhibit 10.4 to Alon USA Energy, Inc.’s Quarterly Report on Form 10-Q filed on May 8, 2015, File No. 001-32567).
31.1
 
Certifications of Chief Executive Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certifications of Chief Financial Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1
 
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
101
 
The following financial information from Alon USA Partners, LP’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, 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.
____________
Filed under confidential treatment request.


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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, 2015
By:  
/s/ David Wiessman
 
 
 
David Wiessman 
 
 
 
Executive Chairman of the Board
 
 
 
 
 
 
 
 
Date:
May 8, 2015
By:  
/s/ Paul Eisman
 
 
 
Paul Eisman
 
 
 
President, Chief Executive Officer and Director
 
 
 
 
 
 
 
 
Date:
May 8, 2015
By:  
/s/ Shai Even
 
 
 
Shai Even 
 
 
 
Senior Vice President and Chief Financial Officer 
 
 
 
(Principal Accounting Officer)

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