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Form 10-Q Western Refining, Inc. For: Sep 30

November 4, 2015 6:30 PM EST

 
 
 
 
 
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 September 30, 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: 001-32721
WESTERN REFINING, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-3472415
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
123 W. Mills Ave., Suite 200
 
79901
El Paso, Texas
 
(Zip Code)
(Address of principal executive offices)
 
 
Registrant’s telephone number, including area code: (915) 534-1400
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 þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of October 30, 2015, there were 93,684,082 shares outstanding, par value $0.01, of the registrant’s common stock.
 
 
 
 
 



WESTERN REFINING, INC. AND SUBSIDIARIES
INDEX

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101





Forward-Looking Statements
As provided by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, certain statements included throughout this Quarterly Report on Form 10-Q and in particular under the section entitled Part I — Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations relating to matters that are not historical fact should be deemed forward-looking statements that represent management’s beliefs and assumptions based upon currently available information. These forward-looking statements relate to matters such as our industry, including the regulation of our industry, business strategy, our proposal to acquire all of the publicly-held common units of Northern Tier Energy LP ("NTI") not presently held by us, future operations, our expectations for margins and crack spreads, seasonality, the discount between West Texas Intermediate ("WTI") crude oil and Dated Brent crude oil as well as the discount between WTI Cushing and WTI Midland crude oils, volatility of crude oil prices, additions to pipeline capacity in the Permian Basin and at Cushing, Oklahoma, pipeline access to cost-advantaged crude oil, expected share repurchases and dividends, volatility in pricing of Renewable Identification Numbers ("RINs"), taxes, capital expenditures, liquidity and capital resources and other financial and operating information. Forward-looking statements also include those regarding the timing of completion of certain operational and maintenance improvements we are making at our refineries, future operational and refinery efficiencies and cost savings, timing of future maintenance turnarounds, the amount or sufficiency of future cash flows and earnings growth, future expenditures, future contributions related to pension and postretirement obligations, our ability to manage our inventory price exposure through commodity hedging instruments, the impact upon our business of existing and future state and federal regulatory requirements, environmental loss contingency accruals, projected remediation costs or requirements and the expected outcomes of legal proceedings in which we are involved. We have used the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “position,” “potential,” “predict,” “project,” “strategy,” “will,” “future” and similar terms and phrases to identify forward-looking statements in this report.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect or that are affected by unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. In addition, our business and operations involve numerous risks and uncertainties, many that are beyond our control, that could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows.
When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this quarterly report on Form 10-Q. Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to predict or identify all of these factors, they include, among others, the following:
changes in crack spreads;
changes in the spread between WTI crude oil and West Texas Sour crude oil, also known as the sweet/sour spread;
changes in the spread between WTI crude oil and Dated Brent crude oil;
changes in the spread between WTI Cushing crude oil and WTI Midland crude oil;
availability, costs and price volatility of crude oil, other refinery feedstocks and refined products;
effects of and exposure to risks related to our commodity hedging strategies and transactions;
availability and costs of renewable fuels for blending and RINs to meet Renewable Fuel Standards ("RFS") obligations;
the views of the board of directors and the conflicts committee thereof and unitholders of NTI as to our proposal to acquire all the publicly-held units of NTI not presently held by us;
construction of new, or expansion of existing, product or crude oil pipelines, including in the Permian Basin, in the San Juan Basin and at Cushing, Oklahoma;
changes in the underlying demand for our refined products;
instability and volatility in global financial markets, including as a result of potential disruptions caused by economic uncertainties;
a potential economic recession in the United States and/or abroad;
adverse changes in the credit ratings assigned to our and our subsidiaries' debt instruments;
changes in the availability and cost of capital;

i


actions of customers and competitors;
successful integration and future performance of acquired assets, businesses or third-party product supply and processing relationships;
actions of third-party operators, processors and transporters;
changes in fuel and utility costs incurred by our refineries;
the effect of weather-related problems upon our operations;
disruptions due to equipment interruption, pipeline disruptions or failure at our or third-party facilities;
execution of planned capital projects, cost overruns relating to those projects and failure to realize the expected benefits from those projects;
effects of and costs relating to compliance with current and future local, state and federal environmental, economic, climate change, safety, tax and other laws, policies and regulations and enforcement initiatives;
rulings, judgments or settlements in litigation, tax or other legal or regulatory matters, including unexpected environmental remediation costs in excess of any reserves or insurance coverage;
the price, availability and acceptance of alternative fuels and alternative fuel vehicles;
labor relations;
operating hazards, natural disasters, casualty losses, acts of terrorism including cyber-attacks and other matters beyond our control; and
other factors discussed in more detail under Part I — Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2014 ("2014 10‑K") that are incorporated herein by this reference.
Any one of these factors or a combination of these factors could materially affect our financial condition, results of operations or cash flows and could influence whether any forward-looking statements ultimately prove to be accurate. You are urged to consider these factors carefully in evaluating any forward-looking statements and are cautioned not to place undue reliance upon these forward-looking statements.
Although we believe the forward-looking statements we make in this report related to our plans, intentions and expectations are reasonable, we can provide no assurance that such plans, intentions or expectations will be achieved. These statements are based upon assumptions made by us based upon our experience and perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate in the circumstances. Such statements are subject to a number of risks and uncertainties, many of which are beyond our control. The forward-looking statements included herein are made only as of the date of this report and we are not required to (and will not) update any information to reflect events or circumstances that may occur after the date of this report, except as required by applicable law.





ii


Part I
Financial Information
Item 1.
Financial Statements
WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
709,570

 
$
431,159

Accounts receivable, trade, net of a reserve for doubtful accounts of $587 and $484, respectively
416,934

 
467,527

Inventories
651,847

 
629,237

Prepaid expenses
99,121

 
88,415

Other current assets
172,373

 
152,125

Total current assets
2,049,845

 
1,768,463

Restricted cash
12,328

 
167,009

Equity method investment
97,900

 
96,080

Property, plant and equipment, net
2,240,827

 
2,153,189

Goodwill
1,289,443

 
1,289,443

Intangible assets, net
84,297

 
85,952

Other assets, net
107,246

 
122,422

Total assets
$
5,881,886

 
$
5,682,558

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
573,717

 
$
681,803

Accrued liabilities
289,397

 
268,449

Deferred income tax liability, net
43,279

 
57,949

Current portion of long-term debt
5,500

 
5,500

Total current liabilities
911,893

 
1,013,701

Long-term liabilities:
 
 
 
Long-term debt, less current portion
1,541,084

 
1,515,037

Lease financing obligations
49,066

 
27,489

Deferred income tax liability, net
311,577

 
296,860

Other liabilities
35,771

 
41,827

Total long-term liabilities
1,937,498

 
1,881,213

Commitments and contingencies


 


Equity:
 
 
 
Western shareholders' equity:
 
 
 
Common stock, par value $0.01, 240,000,000 shares authorized; 102,770,432 and 102,642,540 shares issued, respectively
1,028

 
1,026

Preferred stock, par value $0.01, 10,000,000 shares authorized; no shares issued or outstanding

 

Additional paid-in capital
491,841

 
487,748

Retained earnings
1,189,992

 
890,393

Accumulated other comprehensive loss, net of tax
(1,226
)
 
(1,291
)
Treasury stock, 9,089,623 and 6,441,883 shares, respectively at cost
(363,168
)
 
(258,168
)
Total Western shareholders' equity
1,318,467

 
1,119,708

Non-controlling interests
1,714,028

 
1,667,936

Total equity
3,032,495

 
2,787,644

Total liabilities and equity
$
5,881,886

 
$
5,682,558


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




WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net sales
$
2,569,090

 
$
4,052,324

 
$
7,716,712

 
$
12,128,757

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of products sold (exclusive of depreciation and amortization)
1,895,772

 
3,379,555

 
5,814,969

 
10,271,461

Direct operating expenses (exclusive of depreciation and amortization)
234,440

 
218,183

 
674,474

 
619,995

Selling, general and administrative expenses
54,465

 
57,206

 
169,808

 
170,578

Affiliate severance costs

 

 

 
12,878

Loss (gain) on disposal of assets, net
(52
)
 
(66
)
 
(157
)
 
939

Maintenance turnaround expense
490

 
1,883

 
1,188

 
48,329

Depreciation and amortization
51,377

 
46,910

 
152,446

 
141,168

Total operating costs and expenses
2,236,492

 
3,703,671

 
6,812,728

 
11,265,348

Operating income
332,598

 
348,653

 
903,984

 
863,409

Other income (expense):
 
 
 
 
 
 
 
Interest income
186

 
483

 
550

 
899

Interest expense and other financing costs
(26,896
)
 
(18,250
)
 
(79,169
)
 
(75,008
)
Loss on extinguishment of debt

 

 

 
(9
)
Other, net
4,327

 
(2,816
)
 
11,557

 
(351
)
Income before income taxes
310,215

 
328,070

 
836,922

 
788,940

Provision for income taxes
(92,117
)
 
(80,713
)
 
(229,989
)
 
(223,319
)
Net income
218,098

 
247,357

 
606,933

 
565,621

Less net income attributable to non-controlling interests
64,795

 
60,608

 
213,722

 
136,630

Net income attributable to Western Refining, Inc.
$
153,303

 
$
186,749

 
$
393,211

 
$
428,991

 
 
 
 
 
 
 
 
Net earnings per share:
 
 
 
 
 
 
 
Basic
$
1.61

 
$
1.85

 
$
4.12

 
$
4.86

Diluted
1.61

 
1.84

 
4.12

 
4.28

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
94,826

 
101,199

 
95,308

 
88,240

Diluted
94,924

 
101,325

 
95,408

 
102,207

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.34

 
$
0.26

 
$
0.98

 
$
0.78






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




WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
218,098

 
$
247,357

 
$
606,933

 
$
565,621

Other comprehensive income items:
 
 
 
 
 
 
 
Benefit plans:
 
 
 
 
 
 
 
Amortization of net prior service cost

 
80

 
107

 
161

Reclassification of loss to income
13

 
5

 
38

 
15

Other comprehensive income before tax
13

 
85

 
145

 
176

Income tax
(5
)
 
(2
)
 
(14
)
 
(6
)
Other comprehensive income, net of tax
8

 
83

 
131

 
170

Comprehensive income
218,106

 
247,440

 
607,064

 
565,791

Less comprehensive income attributable to non-controlling interests
64,795

 
60,657

 
213,788

 
136,729

Comprehensive income attributable to Western Refining, Inc.
$
153,311

 
$
186,783

 
$
393,276

 
$
429,062




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




WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Nine Months Ended
 
September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
606,933

 
$
565,621

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
152,446

 
141,168

Changes in fair value of commodity hedging instruments
42,073

 
(136,371
)
Reserve for doubtful accounts
103

 
210

Amortization of loan fees and original issue discount
4,801

 
13,052

Loss on extinguishment of debt

 
9

Stock-based compensation expense
12,576

 
16,613

Deferred income taxes
47

 
91,450

Excess tax benefit from stock-based compensation
(879
)
 
(1,133
)
Income from equity method investment
(12,029
)
 
44

Loss (gain) on disposal of assets, net
(157
)
 
939

Changes in operating assets and liabilities:
 
 
 

Accounts receivable
54,738

 
5,712

Inventories
(22,610
)
 
(109,911
)
Prepaid expenses
(10,706
)
 
(20,636
)
Other assets
(43,093
)
 
27,270

Accounts payable and accrued liabilities
(113,051
)
 
(100,302
)
Other long-term liabilities
(5,528
)
 
323

Net cash provided by operating activities
665,664

 
494,058

Cash flows from investing activities:
 
 
 
Capital expenditures
(195,976
)
 
(147,254
)
Decrease in restricted cash
154,681

 

Return of capital from equity method investment
5,780

 
3,910

Proceeds from the sale of assets
1,061

 
1,308

Net cash used in investing activities
(34,454
)
 
(142,036
)
Cash flows from financing activities:
 
 
 
Additions to long-term debt
300,000

 
79,311

Payments on long-term debt and capital lease obligations
(5,559
)
 
(4,546
)
Payments on revolving credit facility
(269,000
)
 

Deferred financing costs
(6,820
)
 
(4,485
)
Purchase of treasury stock
(105,000
)
 
(61,540
)
Distribution to non-controlling interest holders
(173,687
)
 
(111,235
)
Dividends paid
(93,612
)
 
(67,767
)
Convertible debt redemption

 
(809
)
Excess tax benefit from stock-based compensation
879

 
1,133

Net cash used in financing activities
(352,799
)
 
(169,938
)
Net increase in cash and cash equivalents
278,411

 
182,084

Cash and cash equivalents at beginning of period
431,159

 
468,070

Cash and cash equivalents at end of period
$
709,570

 
$
650,154



The accompanying notes are an integral part of these condensed consolidated financial statements.
4




WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Organization
"Western," "we," "us," "our" and the "Company" refer to Western Refining, Inc. and, unless the context otherwise requires, our subsidiaries. Western Refining, Inc. was formed on September 16, 2005, as a holding company prior to our initial public offering and is incorporated in Delaware.
We produce refined products at three refineries: one in El Paso, Texas, one near Gallup, New Mexico and one in St. Paul Park, Minnesota. We sell refined products primarily in Arizona, Colorado, Minnesota, New Mexico, Wisconsin, West Texas, the Mid-Atlantic region and Mexico. Our product sales occur through bulk distribution terminals, wholesale marketing networks and two retail networks with a total of 528 company-owned and franchised retail sites in the U.S.
At September 30, 2015, we owned a 38.4% limited partner interest in Northern Tier Energy LP ("NTI"). We control NTI through our 100% ownership of its general partner. NTI owns and operates a refinery in St. Paul Park, Minnesota and has a retail-marketing network of 267 convenience stores; 102 of which operate through franchise agreements. NTI's primary areas of operation include Minnesota and Wisconsin.
At September 30, 2015, we owned a 66.1% limited partner interest in Western Refining Logistics, LP ("WNRL") and the public held a 33.9% limited partner interest. We control WNRL through our 100% ownership of its general partner and we own the majority of WNRL's limited partnership interests. WNRL owns and operates logistics assets consisting of pipeline and gathering, terminalling, storage and transportation assets as well a wholesale business that operates primarily in the Southwest. WNRL operates its logistics assets primarily for the benefit of the Company.
On October 15, 2014, we sold all of the outstanding limited liability company interests of Western Refining Wholesale, LLC ("WRW") to WNRL. The sale of WRW to WNRL was a transaction between entities under common control and WNRL recorded the purchase of WRW's assets at our historical book value as required by U.S. generally accepted accounting principles ("GAAP") related to segment reporting to treat this transaction as a reorganization of entities under common control. We have retrospectively adjusted the historical financial and operational data of WNRL for all periods presented to reflect the purchase and consolidation of WRW into WNRL. We refer to this transaction as the "Wholesale Acquisition."
We changed our reportable segments during the fourth quarter of 2014 due to changes in our organization. Our operations include four business segments: refining, NTI, WNRL and retail. See Note 3, Segment Information, for further discussion of our business segments.
2. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim consolidated financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In management's opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015, or for any other period.
The Condensed Consolidated Balance Sheet at December 31, 2014 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Western and subsidiaries in which we have a controlling interest. We own a 38.4% limited partner interest in NTI and a 66.1% limited partner interest in WNRL. We own 100% of NTI's and WNRL's respective general partners. As the general partner of NTI and WNRL, we have the ability to direct the activities of NTI and WNRL that most significantly impact their respective economic performance. We have reported non-controlling interests for NTI and WNRL of $1,714.0 million and $1,667.9 million in our Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014, respectively. All intercompany accounts and transactions have been eliminated for all periods presented. Investments in significant non-controlled entities are accounted for using the equity method.

5

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Goodwill and Other Unamortizable Intangible Assets
Goodwill represents the excess of the purchase price (cost) over the fair value of the net assets acquired and is carried at cost. We do not amortize goodwill for financial reporting purposes. We test goodwill for impairment at the reporting unit level. The reporting unit or units used to evaluate and measure goodwill for impairment are determined primarily from the manner in which the business is managed. Our policy is to test goodwill and other unamortizable intangible assets for impairment annually at June 30, or more frequently if indications of impairment exist.
Use of Estimates and Seasonality
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Demand for gasoline is generally higher during the summer months than during the winter months. 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 of each year. During 2014 and continuing into 2015, the volatility in crude oil prices and refining margins contributed to the variability of our results of operations.
Recent Accounting Pronouncements
Effective January 1, 2015, we adopted the accounting and reporting requirements included in the Accounting Standards Codification ("ASC") for disposals when such disposal represents a strategic shift that will have a significant impact on the entity’s operations and financial results. These requirements have been applied prospectively. Our adoption of these changes, effective January 1, 2015, had no impact on our financial position, results of operations or cash flows.
From time to time, new accounting pronouncements are issued by various standard setting bodies that may have an impact on our accounting and reporting. We are currently evaluating the effect that certain of these new accounting requirements may have on our accounting and related reporting and disclosures in our consolidated financial statements.
Recognition and reporting of revenues - the requirements were amended to remove inconsistencies in revenue requirements and to provide a more complete framework for addressing revenue issues across a broad range of industries and transaction types. The revised standard’s core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. These provisions are effective January 1, 2018, and are to be applied retrospectively, with early adoption permitted for periods beginning after December 15, 2016, and interim periods thereafter.
Evaluation of going concern - management of an entity is required to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern and to provide related footnote disclosures. The new requirements will become effective for annual periods beginning after December 15, 2016, and interim periods thereafter with early application permitted. The changed requirements are intended to reduce diversity in the timing and content of footnote disclosures.
Consolidation considerations - reporting entities are required to evaluate whether certain legal entities should be consolidated effective for interim and annual periods beginning after December 15, 2015.
Presentation of debt issuance costs - debt issuance costs are presented as an offset to the related debt and will become effective for interim and annual periods and retrospectively for all periods presented beginning after December 15, 2015.
Accounting for internal use software licenses - entities will be required to evaluate their accounting for hosted software licenses and service contracts effective for interim and annual periods beginning after December 15, 2015.

6

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3. Segment Information
We changed our reportable segments during the fourth quarter of 2014 due to changes in our organization. We treated the WRW assets we sold to WNRL in the Wholesale Acquisition as a transfer of assets between entities under common control. Accordingly, we have retrospectively adjusted the financial information for the affected reporting segments to include or exclude the historical results of the transferred WRW assets for periods prior to the effective date of the transaction. The primary effects of this reporting change were:
The wholesale segment moved into the WNRL segment, except for unmanned fleet fueling ("cardlock") operations and product sales activity in the Mid-Atlantic region;
Mid-Atlantic region product sales activity moved into the refining segment; and
Cardlock related activity moved into the retail segment.
Our operations are organized into four reportable segments based on manufacturing and marketing criteria, the nature of our products and services, our production processes and our types of customers. Our reportable segments are refining, NTI, WNRL and retail.
Refining. We report the operations of two refineries in our refining segment: one in El Paso, Texas (the "El Paso refinery") with a 131,000 barrel per day ("bpd") capacity and one near Gallup, New Mexico (the "Gallup refinery") with a 25,000 bpd capacity. Refining reports the operations of certain logistics assets that include a 375 mile section of the TexNew Mex Pipeline system that extends from WNRL's crude oil station in Star Lake, New Mexico, in the Four Corners region to its T station in Eddy County, New Mexico. On October 30, 2015, we sold this section of the pipeline to WNRL. See Note 21, Subsequent Events, for a discussion of this transaction.
Our refineries make various grades of gasoline, diesel fuel and other products from crude oil, other feedstocks and blending components. We purchase crude oil, other feedstocks and blending components from various third-party suppliers. We also acquire refined products through exchange agreements and from various third-party suppliers to supplement supply to our customers. We sell these products to WNRL, other independent wholesalers and retailers, commercial accounts and sales and exchanges with major oil companies. Net sales for the three and nine months ended September 30, 2014, included $3.4 million in business interruption recoveries related to a weather related processing outage that occurred during the first quarter of 2011 at the El Paso refinery.
We have an exclusive supply and marketing agreement with a third party covering activities related to our refined product supply, sales and hedging in the Mid-Atlantic region. We recorded $3.5 million and $0.1 million in assets at September 30, 2015 and December 31, 2014, respectively, related to this supply agreement in our Condensed Consolidated Balance Sheets. The revenues and costs recorded under the supply agreement included $23.3 million and $12.3 million in net hedging gains for the three months ended September 30, 2015 and 2014, respectively, and $39.3 million and $2.9 million in net hedging gains for the nine months ended September 30, 2015 and 2014, respectively.
NTI. NTI is an independent crude oil refiner and marketer of refined products with a 97,800 bpd refinery in St. Paul Park, Minnesota and a network of retail convenience stores selling various grades of gasoline, diesel fuel and convenience store merchandise, primarily in Minnesota and Wisconsin. NTI's operations are separate from those of Western. At September 30, 2015, NTI included the operations of 165 retail convenience stores and supported 102 franchised retail convenience stores. NTI's refinery supplies the majority of the gasoline and diesel fuel sold through its retail convenience stores.
WNRL. WNRL owns and operates certain logistics assets that consist of pipeline and gathering, terminalling, storage and transportation assets, providing related services primarily to our refining segment in the Southwest, including approximately 300 miles of pipelines and 8.1 million barrels of active storage capacity. The majority of WNRL's logistics assets are integral to the operations of the El Paso and Gallup refineries. On October 30, 2015, WNRL purchased a section of the TexNew Mex Pipeline system, described above in Refining, from Western. See Note 21, Subsequent Events, for a discussion of this transaction.
WNRL also owns a wholesale business that operates primarily in the Southwest. WNRL's wholesale business includes the operations of several lubricant and bulk petroleum distribution plants and a fleet of crude oil, refined product and lubricant delivery trucks. WNRL distributes commercial wholesale petroleum products primarily in Arizona, California, Colorado, Nevada, New Mexico and Texas. WNRL purchases petroleum fuels and lubricants from our refining segment and from third-party suppliers.

7

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Retail. Our retail segment located in the Southwest sells various grades of gasoline, diesel fuel, convenience store merchandise and beverage and food products to the general public through retail convenience stores and various grades of gasoline and diesel fuel to commercial vehicle fleets through cardlocks. WNRL supplies the majority of gasoline and diesel fuel that our retail segment sells. We purchase general merchandise and beverage and food products from various third-party suppliers. At September 30, 2015, the retail segment operated 261 service stations and convenience stores or kiosks located in Arizona, Colorado, New Mexico and Texas compared to 230 service stations and convenience stores or kiosks at September 30, 2014. The additional stores were added under various operating and capital leases. At September 30, 2015, the retail segment included 52 cardlocks located in Arizona, California and New Mexico compared to 54 cardlocks at September 30, 2014.
Segment Accounting Principles. Operating income for each segment consists of net revenues less cost of products sold; direct operating expenses; selling, general and administrative expenses; net impact of the disposal of assets and depreciation and amortization. The refining and NTI segments also include costs related to periodic maintenance turnaround activities. Cost of products sold includes net realized and unrealized gains and losses related to our commodity hedging activities and reflects current costs adjusted, where appropriate, for "last-in, first-out" ("LIFO") and lower of cost or market ("LCM") inventory adjustments. Intersegment revenues are reported at prices that approximate market.
Activities of our business that are not included in the four segments mentioned above are included in the Other category. These activities consist primarily of corporate staff operations and other items that are not specific to the normal business of our four operating segments. We do not allocate certain items of other income and expense, including income taxes, to the individual segments. NTI and WNRL are primarily pass-through entities with respect to income taxes.
The total assets of each segment consist primarily of cash and cash equivalents; inventories; net accounts receivable; net property, plant and equipment and other assets directly associated with the individual segment’s operations. Included in the total assets of the corporate operations are cash and cash equivalents; various net accounts receivable; prepaid expenses; other current assets; net property, plant and equipment and other long-term assets.
Disclosures regarding our reportable segments with reconciliations to consolidated totals for the three and nine months ended September 30, 2015 and 2014 are presented below:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014 (2)
 
2015
 
2014 (2)
 
(In thousands)
Operating Results:
 
 
 
 
 
 
 
Refining
 
 
 
 
 
 
 
Net sales
$
1,652,934

 
$
2,498,226

 
$
4,963,407

 
$
7,566,741

Intersegment eliminations
664,049

 
905,671

 
1,872,405

 
2,669,069

Net refining sales to external customers
988,885

 
1,592,555

 
3,091,002

 
4,897,672

NTI
 
 
 
 
 
 
 
Net sales
798,025

 
1,449,033

 
2,348,621

 
4,205,732

Intersegment eliminations
7,638

 
2,571

 
36,684

 
13,653

Net NTI sales to external customers
790,387

 
1,446,462

 
2,311,937

 
4,192,079

WNRL
 
 
 
 
 
 
 
Net sales
674,479

 
915,719

 
2,016,376

 
2,750,666

Intersegment eliminations
210,768

 
279,501

 
599,655

 
789,806

Net WNRL sales to external customers
463,711

 
636,218

 
1,416,721

 
1,960,860

Retail
 
 
 
 
 
 
 
Net sales
328,895

 
381,873

 
905,569

 
1,092,389

Intersegment eliminations
2,788

 
5,235

 
8,517

 
15,286

Net retail sales to external customers
326,107

 
376,638

 
897,052

 
1,077,103


8

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014 (2)
 
2015
 
2014 (2)
Other
 
 
 
 
 
 
 
Other revenue, net

 
451

 

 
1,043

Intersegment eliminations

 

 

 

Net other sales to external customers

 
451

 

 
1,043

 
 
 
 
 
 
 
 
Consolidated net sales to external customers
$
2,569,090

 
$
4,052,324

 
$
7,716,712

 
$
12,128,757

 
 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
 
Refining (1)
$
210,347

 
$
244,576


$
541,084

 
$
631,837

NTI (1)
101,661

 
96,799

 
334,783

 
222,735

WNRL
22,684

 
16,719

 
64,450

 
50,954

Retail
16,463

 
10,203

 
20,679

 
12,748

Other
(18,557
)
 
(19,644
)
 
(57,012
)
 
(54,865
)
Operating income from segments
332,598

 
348,653

 
903,984

 
863,409

Other income (expense), net
(22,383
)
 
(20,583
)
 
(67,062
)
 
(74,469
)
Consolidated income before income taxes
$
310,215

 
$
328,070

 
$
836,922

 
$
788,940

 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
Refining
$
22,013

 
$
20,280

 
$
65,535

 
$
60,145

NTI
19,746

 
18,482

 
58,626

 
56,829

WNRL
4,983

 
4,292

 
14,458

 
12,898

Retail
3,676

 
3,069

 
10,993

 
8,821

Other
959

 
787

 
2,834

 
2,475

Consolidated depreciation and amortization
$
51,377

 
$
46,910

 
$
152,446

 
$
141,168

 
 
 
 
 
 
 
 
Capital expenditures
 
 
 
 
 
 
 
Refining
$
48,912

 
$
33,840

 
$
126,800

 
$
89,384

NTI
17,439

 
15,949

 
35,267

 
34,339

WNRL
6,699

 
5,248

 
22,463

 
17,335

Retail
2,900

 
1,415

 
9,019

 
5,085

Other
481

 
183

 
2,427

 
1,111

Consolidated capital expenditures
$
76,431

 
$
56,635

 
$
195,976

 
$
147,254

 
 
 
 
 
 
 
 
Total assets
 
 
 
 
 
 
 
Refining
 
 
 
 
$
1,781,449

 
$
1,743,622

NTI (including $1,289,443 and $1,297,043 of goodwill, respectively)
 
 
 
 
2,327,852

 
3,030,830

WNRL
 
 
 
 
369,863

 
374,604

Retail
 
 
 
 
248,000

 
204,764

Other
 
 
 
 
1,154,722

 
510,064

Consolidated total assets


 


 
$
5,881,886

 
$
5,863,884


9

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1)
The effect of our economic hedging activity is included within operating income of our refining and NTI segments as a component of cost of products sold. The cost of products sold within our refining segment included $24.7 million and $8.8 million in net realized and unrealized economic hedging gains for the three and nine months ended September 30, 2015, respectively, and $36.9 million and $176.6 million in net realized and unrealized economic hedging gains for the three and nine months ended September 30, 2014, respectively. NTI cost of products sold included $2.5 million, $1.5 million, $6.8 million and $4.0 million in net realized and unrealized economic hedging gains for the three and nine months ended September 30, 2015 and 2014, respectively.
(2)
WNRL's financial data includes its historical financial results and an allocated portion of corporate general and administrative expenses, previously reported as Other, for the three and nine months ended September 30, 2014. Refining operating results include activity of our Mid-Atlantic business that was previously recorded within our wholesale segment. Net sales to external customers and intersegment sales for our retail segment include the operating results of cardlock stations that were formerly recorded in our wholesale segment. Other operating results include activity of the wholesale fleet service department that was previously recorded within our wholesale segment.
4. Fair Value Measurement
We utilize the market approach when measuring fair value of our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The fair value hierarchy consists of the following three levels:
Level 1
Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2
Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs that are derived principally from or corroborated by observable market data.
Level 3
Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable and cannot be corroborated by market data or other entity-specific inputs.
The carrying amounts of cash and cash equivalents, which we consider Level 1 assets and liabilities, approximated their fair values at September 30, 2015 and December 31, 2014, due to their short-term maturities. Our fair value assessment incorporates a variety of considerations, including the short-term duration of the instruments and an evaluation of counterparty credit risk. Cash equivalents totaling $70.1 million and $70.0 million consisting of short-term money market deposits and commercial paper, were included in the Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014, respectively.
We maintain cash deposits with various counterparties in support of our hedging and trading activities. These deposits are required by counterparties as collateral and cannot be offset against the fair value of open contracts except in the event of default. Certain of our commodity derivative contracts under master netting arrangements include both asset and liability positions. We have elected to offset the fair value amounts recognized for multiple similar derivative instruments executed with the same counterparty under the column "Netting Adjustments" below; however, fair value amounts by hierarchy level are presented on a gross basis in the tables below. See Note 13, Crude Oil and Refined Product Risk Management, for further discussion of master netting arrangements.

10

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following tables represent our assets and liabilities for our commodity hedging contracts measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014, and the basis for that measurement:
 
Carrying Value at September 30, 2015
 
Fair Value Measurement Using
 
Netting Adjustments
 
Net Fair Value at September 30, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(In thousands)
Gross financial assets:
 
 
 
 
 
 
 
 
 
 
 
Other current assets
$
82,361


$


$
82,285


$
76


$
(7,422
)

$
74,939

Other assets
19,247




19,247




(1,451
)

17,796

Gross financial liabilities:
 

 

 

 




Accrued liabilities
(10,562
)



(9,585
)

(977
)

6,446


(4,116
)
Other long-term liabilities
(3,153
)



(2,875
)

(278
)

2,427


(726
)
 
$
87,893

 
$

 
$
89,072

 
$
(1,179
)
 
$

 
$
87,893

 
Carrying Value at December 31, 2014
 
Fair Value Measurement Using
 
Netting Adjustments
 
Net Fair Value at December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(In thousands)
Gross financial assets:
 
 
 
 
 
 
 
 
 
 
 
Other current assets
$
86,659


$


$
86,329


$
330


$
(6,937
)

$
79,722

Other assets
58,182




58,182




(1,649
)

56,533

Gross financial liabilities:
 

 

 

 




Accrued liabilities
(11,826
)



(11,826
)



6,937


(4,889
)
Other long-term liabilities
(3,049
)



(3,049
)



1,649


(1,400
)
 
$
129,966

 
$

 
$
129,636

 
$
330

 
$

 
$
129,966

Commodity hedging contracts designated as Level 3 financial assets consisted of jet fuel crack spread swaps. Ultra-low sulfur diesel ("ULSD") pricing has had a strong historical correlation to jet fuel crack spread swaps. We estimate the fair value of our Level 3 instruments based on the differential between quoted market settlement prices on ULSD futures and quoted market settlement prices on jet fuel futures for settlement dates corresponding to each of our outstanding Level 3 jet fuel crack spread swaps. As quoted prices for similar assets or liabilities in an active market are available, we reclassify the underlying financial asset or liability and designate them as Level 2 prior to final settlement.
Carrying amounts of commodity hedging contracts reflected as financial assets are included in both current and non-current other assets in the Condensed Consolidated Balance Sheets. Carrying amounts of commodity hedging contracts reflected as financial liabilities are included in both accrued and other long-term liabilities in the Condensed Consolidated Balance Sheets. Fair value adjustments referred to as credit valuation adjustments ("CVA") are included in the carrying amounts of commodity hedging contracts. CVAs are intended to adjust the fair value of counterparty contracts as a function of a counterparty's credit rating and reflect the credit quality of each counterparty to arrive at contract fair values.

11

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table presents the changes in fair value of our Level 3 assets and liabilities (all related to commodity price swap contracts) for the three and nine months ended September 30, 2015 and 2014.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Asset (liability) balance at beginning of period
$
1,614

 
$
3,745

 
$
330

 
$
(1,935
)
Change in fair value
(2,505
)
 
249

 

 
4,428

Fair value of trades entered into during the period

 

 
(1,262
)
 
(609
)
Fair value reclassification from Level 3 to Level 2
(288
)
 
(1,909
)
 
(247
)
 
201

Asset (liability) balance at end of period
$
(1,179
)
 
$
2,085

 
$
(1,179
)
 
$
2,085

A hypothetical change of 10% to the estimated future cash flows attributable to our Level 3 commodity price swaps would result in a $0.1 million change in the estimated fair value.
As of September 30, 2015 and December 31, 2014, the carrying amount and estimated fair value of our debt was as follows:
 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Western obligations:
 
 
 
Carrying amount
$
890,375

 
$
894,500

Fair value
881,072

 
878,360

NTI obligations:
 
 
 
Carrying amount
$
356,209

 
$
357,037

Fair value
353,500

 
351,313

WNRL obligations:
 
 
 
Carrying amount
$
300,000

 
$
269,000

Fair value
300,750

 
269,000

The carrying amount of our debt is the amount reflected in the Condensed Consolidated Balance Sheets, including the current portion. The fair value of the debt was determined using Level 2 inputs.
There have been no transfers between assets or liabilities whose fair value is determined through the use of quoted prices in active markets (Level 1) and those determined through the use of significant other observable inputs (Level 2).

12

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5. Inventories
Inventories were as follows:
 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Refined products (1)
$
247,906

 
$
257,476

Crude oil and other raw materials
345,431

 
318,565

Lubricants
17,318

 
14,265

Retail store merchandise
41,192

 
38,931

Inventories
$
651,847

 
$
629,237

(1)
Includes $16.7 million and $18.2 million of inventory valued using the first-in, first-out ("FIFO") valuation method at September 30, 2015 and December 31, 2014, respectively.
We value our refinery inventories of crude oil, other raw materials and asphalt at the lower of cost or market under the LIFO valuation method. Other than refined products inventories held by WNRL and our retail segment, refined products inventories are valued under the LIFO valuation method. WNRL's wholesale refined product, lubricants and related inventories are valued using the FIFO inventory valuation method. Retail refined product inventory is valued using the FIFO inventory valuation method. Retail merchandise inventory is valued using the retail inventory method.
As of September 30, 2015 and December 31, 2014, refined products valued under the LIFO method and crude oil and other raw materials totaled 9.4 million barrels and 9.3 million barrels, respectively. At September 30, 2015 and December 31, 2014, the excess of the LIFO cost over the current cost of these crude oil, refined product and other feedstock and blendstock inventories was $157.4 million and $28.4 million, respectively.
During the three months ended September 30, 2015 and 2014, cost of products sold included net non-cash credits of $105.0 million and $61.6 million, respectively, from changes in our LIFO reserves. During the nine months ended September 30, 2015 and 2014, cost of products sold included net non-cash credits of $129.0 million and $35.5 million, respectively, from changes in our LIFO reserves. In order to state our inventories at market values that were lower than our LIFO costs, we reduced the carrying values of our inventory through non-cash LCM inventory adjustments of $61.4 million and $78.6 million at September 30, 2015 and December 31, 2014, respectively.
Average LIFO cost per barrel of our refined products and crude oil and other raw materials inventories as of September 30, 2015 and December 31, 2014, was as follows:
 
September 30, 2015
 
December 31, 2014
 
Barrels
 
LIFO Cost
 
Average
LIFO
Cost Per
Barrel
 
Barrels
 
LIFO Cost
 
Average
LIFO
Cost Per
Barrel
 
(In thousands, except cost per barrel)
Refined products
3,442

 
$
268,010

 
$
77.86

 
3,707

 
$
283,333

 
$
76.43

Crude oil and other
5,955

 
370,090

 
62.15

 
5,577

 
355,470

 
63.74

 
9,397

 
$
638,100

 
67.90

 
9,284

 
$
638,803

 
68.81

6. Equity Method Investment
NTI owns a 17% common equity interest in Minnesota Pipe Line Company, LLC ("MPL"). The carrying value of this equity method investment was $97.9 million and $96.1 million at September 30, 2015 and December 31, 2014, respectively.
As of September 30, 2015 and December 31, 2014, the carrying amount of the equity method investment was $21.4 million and $21.6 million greater, respectively, than the underlying net assets of the investee. We are amortizing this difference over the remaining life of MPL’s primary asset (the fixed asset life of the pipeline).
During the three months ended September 30, 2015, we recognized $4.2 million in declared but unpaid distributions from MPL. We recorded $10.0 million in distributions during the nine months ended September 30, 2015. Distributions from MPL during the three and nine months ended September 30, 2014, were $2.5 million and $3.9 million, respectively. Equity income (loss) from MPL for the three and nine months ended September 30, 2015 and 2014, was $4.2 million, $12.0 million,

13

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

$0.9 million and $(0.04) million, respectively. Equity income has been included in other, net in the accompanying Condensed Consolidated Statements of Operations.
7. Property, Plant and Equipment, Net
Property, plant and equipment, net was as follows:
 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Refinery facilities and related equipment
$
2,285,762

 
$
2,217,013

Pipelines, terminals and transportation equipment
492,140

 
369,080

Retail facilities and related equipment
322,759

 
288,338

Wholesale facilities and related equipment
59,764

 
57,158

Corporate
50,691

 
48,871

 
3,211,116

 
2,980,460

Accumulated depreciation
(970,289
)
 
(827,271
)
Property, plant and equipment, net
$
2,240,827

 
$
2,153,189

Depreciation expense was $50.4 million and $149.3 million for the three and nine months ended September 30, 2015, respectively, and $45.8 million and $138.0 million for the three and nine months ended September 30, 2014, respectively.
8. Intangible Assets, Net
Intangible assets, net was as follows:
 
September 30, 2015
 
December 31, 2014
 
Weighted Average Amortization Period (Years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
 
(In thousands)
 
 
Amortizable assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Licenses and permits
$
20,427

 
$
(13,335
)
 
$
7,092

 
$
20,427

 
$
(12,148
)
 
$
8,279

 
4.5
Customer relationships
7,551

 
(3,782
)
 
3,769

 
7,551

 
(3,366
)
 
4,185

 
6.8
Rights-of-way and other
7,947

 
(4,086
)
 
3,861

 
7,878

 
(3,613
)
 
4,265

 
7.2
 
35,925

 
(21,203
)
 
14,722

 
35,856

 
(19,127
)
 
16,729

 
 
Unamortizable assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Franchise rights and trademarks
50,500

 

 
50,500

 
50,500

 

 
50,500

 
 
Liquor licenses
19,075

 

 
19,075

 
18,723

 

 
18,723

 
 
Intangible assets, net
$
105,500

 
$
(21,203
)
 
$
84,297

 
$
105,079

 
$
(19,127
)
 
$
85,952

 
 
Intangible asset amortization expense for the three and nine months ended September 30, 2015, was $0.7 million and $2.1 million, respectively, based on estimated useful lives ranging from 1 to 23 years. Intangible asset amortization expense for the three and nine months ended September 30, 2014, was $0.7 million and $2.1 million, respectively, based on estimated useful lives ranging from 1 to 23 years.
Estimated amortization expense for the indicated periods is as follows (in thousands):
Remainder of 2015
$
679

2016
2,620

2017
2,679

2018
2,678

2019
2,011

2020
1,066


14

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9. Long-Term Debt
Long-term debt was as follows:
 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Western obligations:
 
 
 
Revolving Credit Facility due 2019
$

 
$

Term Loan Credit Facility due 2020
540,375

 
544,500

6.25% Senior Unsecured Notes due 2021
350,000

 
350,000

Total Western obligations
890,375

 
894,500

NTI obligations:
 
 
 
Revolving Credit Facility due 2018

 

7.125% Senior Secured Notes due 2020, net of unamortized premium of $6,209 and $7,037, respectively
356,209

 
357,037

Total NTI obligations
356,209

 
357,037

WNRL obligations:
 
 
 
Revolving Credit Facility due 2018

 
269,000

7.5% Senior Notes due 2023
300,000

 

Total WNRL obligations
300,000

 
269,000

Long-term debt
1,546,584

 
1,520,537

Current portion of long-term debt
(5,500
)
 
(5,500
)
Long-term debt, net of current portion
$
1,541,084

 
$
1,515,037

As of September 30, 2015, annual maturities of long-term debt for the remainder of 2015 are $1.4 million. From 2016 through 2019, long-term debt maturities are $5.5 million. Thereafter, total long-term debt maturities are $1,517.0 million.
Interest expense and other financing costs were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Contractual interest:
 
 
 
 
 
 
 
Western obligations
$
12,150

 
$
12,381

 
$
36,250

 
$
42,423

NTI obligations
6,970

 
5,477

 
20,173

 
16,186

WNRL obligations
5,854

 
230

 
15,481

 
683

 
24,974

 
18,088

 
71,904

 
59,292

Amortization of loan fees
1,932

 
1,892

 
5,630

 
6,068

Amortization of original issuance discount

 

 

 
7,352

Other interest expense
747

 
(308
)
 
2,973

 
4,045

Capitalized interest
(757
)
 
(1,422
)
 
(1,338
)
 
(1,749
)
Interest expense and other financing costs
$
26,896

 
$
18,250

 
$
79,169

 
$
75,008

We amortize original issue discounts and financing fees using the effective interest method over the respective term of the debt. Our creditors have no recourse to the assets owned by either of NTI or WNRL, and the creditors of NTI and WNRL have no recourse to our assets or those of our other subsidiaries.

15

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Western Obligations
Revolving Credit Facility
On October 2, 2014, we entered into the Third Amended and Restated Revolving Credit Agreement (the "Western 2019 Revolving Credit Facility"). Lenders committed $900.0 million, all of which will mature on October 2, 2019. The commitments under the Western 2019 Revolving Credit Facility may be increased in the future to $1.4 billion, subject to certain conditions (including the agreement of financial institutions, in their sole discretion, to provide such additional commitments). The amended terms of the agreement include revised borrowing rates. Borrowings can be either base rate loans plus a margin ranging from 0.50% to 1.00% or LIBOR loans plus a margin ranging from 1.50% to 2.00%, subject to adjustment based upon the average excess availability. The Western 2019 Revolving Credit Facility also provides for a quarterly commitment fee ranging from 0.25% to 0.375% per annum, subject to adjustment based upon the average utilization ratio, and letter of credit fees ranging from 1.50% to 2.00% per annum payable quarterly, subject to adjustment based upon the average excess availability. Borrowing availability under the Western 2019 Revolving Credit Facility is tied to the amount of our and our restricted subsidiaries' eligible accounts receivable and inventory. The Western 2019 Revolving Credit Facility is guaranteed, on a joint and several basis, by certain of our subsidiaries and will be guaranteed by certain newly acquired or formed subsidiaries, subject to certain limited exceptions. The Western 2019 Revolving Credit Facility is secured by our cash and cash equivalents, accounts receivable and inventory. The Western 2019 Revolving Credit Facility contains certain covenants, including, but not limited to, limitations on debt, investments and dividends and the maintenance of a minimum fixed charge coverage ratio in certain circumstances.
As of and during the nine month period ended September 30, 2015, we had no direct borrowings under the Western 2019 Revolving Credit Facility, with availability of $307.7 million at September 30, 2015. This availability is net of $69.2 million in outstanding letters of credit.
Term Loan Credit Agreement
On November 12, 2013, we entered into a term loan credit agreement (the "Western 2020 Term Loan Credit Facility"). The Western 2020 Term Loan Credit Facility provides for loans of $550.0 million, matures on November 12, 2020, and provides for quarterly principal payments of $1.4 million until September 30, 2020, with the remaining balance then outstanding due on the maturity date. The Western 2020 Term Loan Credit Facility bears interest at a rate based either on the base rate (as defined in the Western 2020 Term Loan Credit Facility) plus 2.25% or the Eurodollar Rate (as defined in the Western 2020 Term Loan Credit Facility) plus 3.25% (with a Eurodollar Rate floor of 1.00%). The Western 2020 Term Loan Credit Facility is secured by both the El Paso and Gallup refineries and is fully and unconditionally guaranteed on a joint and several basis by substantially all of Western's material subsidiaries. The Western 2020 Term Loan Credit Facility contains customary restrictive covenants including limitations on debt, investments and dividends and does not contain any financial maintenance covenants.
6.25% Senior Unsecured Notes
On March 25, 2013, we entered into an indenture (the "Western 2021 Indenture") for the issuance of $350.0 million in aggregate principal amount of 6.25% Senior Unsecured Notes due 2021 (the "Western 2021 Senior Unsecured Notes"). The Western 2021 Senior Unsecured Notes are guaranteed on a senior unsecured basis by each of our wholly-owned domestic restricted subsidiaries. We pay interest on the Western 2021 Senior Unsecured Notes semi-annually in arrears on April 1 and October 1 of each year. The Western 2021 Senior Unsecured Notes mature on April 1, 2021.
5.75% Convertible Senior Unsecured Notes
On March 7, 2014, we provided notice to the Trustee and the holders (the “Noteholders”) of our 5.75% Convertible Senior Unsecured Notes (the "Western Convertible Notes") informing the Trustee and the Noteholders of our election, with respect to all conversions requested by Noteholders in accordance with the terms of the Indenture received by the conversion agent on or after March 20, 2014, to settle conversions of the Western Convertible Notes through the issuance of shares of our common stock. On various dates between March 26, 2014 and June 2, 2014, we delivered an aggregate of 9,155 shares of common stock to Noteholders to satisfy the conversion of $87,000 aggregate principal amount of Western Convertible Notes based on conversion rates, dependent on conversion date, of 105.2394 or 105.8731 shares of common stock for each $1,000 of principal amount of Western Convertible Notes converted. On June 16, 2014, we delivered 22,750,088 shares of common stock to Noteholders, to satisfy the conversion of $214,881,000 aggregate principal amount of Western Convertible Notes, based on a conversion rate of 105.8731 shares of common stock for each $1,000 of principal amount of Western Convertible Notes converted.

16

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In addition to these conversions, we paid cash for the remainder of the outstanding amount of the Western Convertible Notes with a nominal loss on extinguishment of debt.
Our payment of dividends is limited under the terms of the Western 2019 Revolving Credit Facility, the Western 2021 Indenture and the Western 2020 Term Loan Credit Facility, and in part, depends on our ability to satisfy certain financial covenants. Note guarantors will be released if they cease to be a Restricted Subsidiary as the result of a transaction permitted under the terms of the indenture, including through the disposition of capital stock of the guarantor.
NTI Obligations
Revolving Credit Facility
On September 29, 2014, NTI amended its senior secured Revolving Credit Facility (the "NTI Revolving Credit Facility"), increasing the aggregate principal amount available prior to the amendment from $300.0 million to $500.0 million. The NTI Revolving Credit Facility that matures on September 29, 2019, incorporates a borrowing base tied to eligible accounts receivable and inventory and provides for up to $500.0 million for the issuance of letters of credit and up to $45.0 million for swing line loans. The NTI Revolving Credit Facility may be increased up to a maximum aggregate principal amount of $750.0 million, subject to certain conditions. Obligations under the NTI Revolving Credit Facility are secured by substantially all of NTI’s assets. Indebtedness under the NTI Revolving Credit Facility is recourse to Northern Tier Energy GP LLC, NTI's general partner, and is guaranteed by NTI and certain of its subsidiaries. Borrowings under the NTI Revolving Credit Facility bear interest at either (a) an alternative base rate plus an applicable margin (ranging between 0.50% and 1.00%) or (b) a LIBOR rate plus an applicable margin (ranging between 1.50% and 2.00%), in each case based upon the average excess availability. In addition to paying interest on outstanding borrowings, NTI is also required to pay quarterly commitment fees ranging from 0.250% to 0.375% and letter of credit fees ranging from 1.50% to 2.00%. The NTI Revolving Credit Facility contains certain covenants, including but not limited to, limitations on debt, investments and dividends and the maintenance of a minimum fixed charge coverage ratio in certain circumstances. NTI incurred financing costs of $3.0 million associated with the amended NTI Revolving Credit Facility.
At September 30, 2015, the availability under the NTI Revolving Credit Facility was $207.8 million. This availability is net of $38.4 million in outstanding letters of credit. There were no borrowings under the NTI Revolving Credit Facility during the nine month period ended September 30, 2015.
7.125% Secured Notes
On November 8, 2012, Northern Tier Energy LLC, NTI's wholly owned subsidiary ("NTI LLC"), and Northern Tier Finance Corporation issued $275.0 million in aggregate principal amount of 7.125% senior secured notes due 2020 (the "NTI 2020 Secured Notes").
NTI increased the principal amount of the NTI 2020 Secured Notes in September 2014 through issuance of a private placement of an additional $75.0 million in principal value. This offering was issued under the same indenture and under the same terms as the existing NTI 2020 Secured Notes. The offering generated total cash proceeds of $79.2 million including an issuance premium of $4.2 million. NTI incurred financing costs of $2.5 million associated with this offering. The issuance premium and financing costs will be amortized to interest expense over the remaining life of the notes.
The obligations under the NTI 2020 Secured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by Northern Tier Energy LP and on a senior secured basis by (i) all of NTI LLC’s restricted subsidiaries that borrow, or guarantee obligations, under the NTI Revolving Credit Facility or any other indebtedness of NTI LLC or another subsidiary of NTI LLC that guarantees the NTI 2020 Secured Notes and (ii) all other material wholly owned domestic subsidiaries of NTI LLC. The indenture governing the NTI 2020 Secured Notes contains covenants that limit or restrict dividends or other payments from restricted subsidiaries. Indebtedness under the NTI 2020 Secured Notes is guaranteed by NTI and certain of their subsidiaries.

17

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

WNRL Obligations
Revolving Credit Facility
On October 16, 2013, WNRL entered into a $300.0 million senior secured revolving credit facility ("WNRL Revolving Credit Facility"). WNRL has the ability to increase the total commitment of the WNRL Revolving Credit Facility by up to $200.0 million for a total facility size of up to $500.0 million, subject to certain conditions. The WNRL Revolving Credit Facility includes a $25.0 million sub-limit for standby letters of credit and a $10.0 million sub-limit for swing line loans. Obligations under the WNRL Revolving Credit Facility and certain cash management obligations are guaranteed by all of WNRL's subsidiaries. Obligations under the WNRL Revolving Credit Facility are secured by a first priority lien on substantially all of WNRL's and its subsidiaries' significant assets. WNRL creditors under the WNRL Revolving Credit Facility have no recourse to Western's assets, except to the extent of the assets of Western Refining Logistics GP, LLC, the general partner of WNRL that Western wholly owns. The WNRL Revolving Credit Facility will mature on October 16, 2018. Borrowings under the WNRL Revolving Credit Facility bear interest at either a base rate plus an applicable margin ranging from 0.75% to 1.75%, or at LIBOR plus an applicable margin ranging from 1.75% to 2.75%. The applicable margin will vary based upon WNRL's Consolidated Total Leverage Ratio, as defined in the WNRL Revolving Credit Facility.
During the nine months ended September 30, 2015, WNRL repaid its outstanding direct borrowings under the WNRL Revolving Credit Facility with a portion of the proceeds from the issuance of its 7.5% Senior Notes, discussed below, resulting in no direct or swing line borrowings under the WNRL Revolving Credit Facility as of September 30, 2015. At September 30, 2015, the availability under the WNRL Revolving Credit Facility was $299.3 million. This availability is net of $0.7 million in outstanding letters of credit.
The WNRL Revolving Credit Facility contains covenants that limit or restrict WNRL's ability to make cash distributions. WNRL is required to maintain certain financial ratios that are tested on a quarterly basis for the immediately preceding four quarter period.
7.5% Senior Notes
On February 11, 2015, WNRL entered into an indenture (the “WNRL Indenture”) among WNRL, WNRL Finance Corp., a Delaware corporation and wholly-owned subsidiary of WNRL (“Finance Corp.” and together with WNRL, the “Issuers”), the guarantors named therein and U.S. Bank National Association, as trustee under which the Issuers issued $300.0 million in aggregate principal amount of 7.5% Senior Notes due 2023 (the "WNRL 2023 Senior Notes"). WNRL will pay interest on the WNRL 2023 Senior Notes semi-annually in cash in arrears on February 15 and August 15 of each year, beginning on August 15, 2015. The WNRL 2023 Senior Notes will mature on February 15, 2023. WNRL used the proceeds from the notes to repay the full balance due under the WNRL Revolving Credit Facility on February 11, 2015.
The WNRL Indenture contains covenants that limit WNRL’s and its restricted subsidiaries’ ability to, among other things: (i) incur, assume or guarantee additional indebtedness or issue preferred units, (ii) create liens to secure indebtedness, (iii) pay distributions on equity securities, repurchase equity securities or redeem subordinated indebtedness, (iv) make investments, (v) effect distributions, loans or other asset transfers from WNRL’s restricted subsidiaries, (vi) consolidate with or merge with or into, or sell substantially all of WNRL’s properties to, another person, (vii) sell or otherwise dispose of assets, including equity interests in subsidiaries and (viii) enter into transactions with affiliates. These covenants are subject to a number of limitations and exceptions. The WNRL Indenture also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, and interest on all the then outstanding WNRL 2023 Senior Notes to be due and payable immediately.

18

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

10. Equity
Changes to equity during the nine months ended September 30, 2015, were as follows:
 
Western Shareholders' Equity
 
Non-controlling Interest
 
Total Equity
 
(In thousands)
Balance at December 31, 2014
$
1,119,708

 
$
1,667,936

 
$
2,787,644

Net income
393,211

 
213,722

 
606,933

Other comprehensive income, net of tax
65

 
66

 
131

Dividends
(93,612
)
 

 
(93,612
)
Stock-based compensation
3,216

 
8,814

 
12,030

Excess tax benefit from stock-based compensation
879

 

 
879

Distributions to non-controlling interests

 
(176,289
)
 
(176,289
)
Treasury stock purchases
(105,000
)
 

 
(105,000
)
Other

 
(221
)
 
(221
)
Balance at September 30, 2015
$
1,318,467

 
$
1,714,028

 
$
3,032,495

Changes to equity during the nine months ended September 30, 2014, were as follows:
 
Western Shareholders' Equity
 
Non-controlling Interest
 
Total Equity
 
(In thousands)
Balance at December 31, 2013
$
894,052

 
$
1,676,535

 
$
2,570,587

Net income
428,991

 
136,630

 
565,621

Convertible debt redemption
(809
)
 

 
(809
)
Convertible debt settlement - treasury stock issuance in additional paid-in capital
(142,642
)
 

 
(142,642
)
Other comprehensive income, net of tax
71

 
99

 
170

Dividends
(67,767
)
 

 
(67,767
)
Stock-based compensation
3,234

 
13,379

 
16,613

Excess tax benefit from stock-based compensation
1,133

 

 
1,133

Distributions to non-controlling interests

 
(111,235
)
 
(111,235
)
Offering costs

 
66

 
66

Treasury stock purchases
(61,540
)
 

 
(61,540
)
Treasury stock issuance
357,608

 

 
357,608

Balance at September 30, 2014
$
1,412,331

 
$
1,715,474

 
$
3,127,805

Share Repurchase Programs
Our board of directors has periodically approved various share repurchase programs authorizing us to repuchase specified dollar amounts of our outstanding common stock. We had two common stock repurchase programs that were active as of September 30, 2015: the November 2014 Program and the September 2015 Program. Under each program, we were authorized to repurchase up to $200 million of our outstanding common stock. Subject to market conditions as well as corporate, regulatory and other considerations, we repurchase shares from time-to-time through open market transactions, block trades, privately negotiated transactions or otherwise. The November 2014 Program expired on November 3, 2015. The September 2015 program is scheduled to expire on December 31, 2016. Our common stock repurchase programs are subject to discontinuance by our board of directors at any time.

19

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table summarizes our share repurchase activity for the November 2014 and September 2015 share repurchase programs:
 
November 2014 Program
 
September 2015 Program
 
Number of shares purchased
 
Cost of share purchases (In thousands)
 
Number of shares purchased
 
Cost of share purchases (In thousands)
Shares purchased at December 31, 2014
1,492,874

 
$
59,222

 

 
$

Shares purchased during Q1, 2015
740,859

 
25,000

 

 

Shares purchased at March 31, 2015
2,233,733

 
84,222

 

 

Shares purchased during Q2, 2015

 

 

 

Shares purchased at June 30, 2015
2,233,733

 
84,222

 

 

Shares purchased during Q3, 2015
1,906,881

 
80,000

 

 

Shares purchased at September 30, 2015
4,140,614

 
$
164,222

 

 
$

As of September 30, 2015, we had $35.8 million and $200.0 million remaining in authorized expenditures under the November 2014 Program and the September 2015 Program, respectively.
Dividends
The table below summarizes our 2015 cash dividend declarations, payments and scheduled payments:
 
Declaration Date
 
Record Date
 
Payment Date
 
Dividend per Common Share
 
Total Payment (In thousands)
First quarter
February 6
 
February 20
 
March 6
 
$
0.30

 
$
28,638

Second quarter
April 21
 
May 5
 
May 20
 
0.34

 
32,476

Third quarter
July 17
 
July 27
 
August 12
 
0.34

 
32,498

Fourth quarter (1)
October 16
 
October 27
 
November 12
 
0.38

 

Total
 
 
 
 
 
 
 
 
$
93,612

(1) The fourth quarter 2015 cash dividend of $0.38 per common share will result in an estimated aggregate payment of $35.6 million.
NTI Distributions
The table below summarizes NTI's 2015 quarterly distribution declarations, payments and scheduled payments:
Declaration Date
 
Record Date
 
Payment Date
 
Distribution per Unit
February 5, 2015
 
February 21, 2015
 
February 27, 2015
 
$
0.49

May 5, 2015
 
May 18, 2015
 
May 29, 2015
 
1.08

August 4, 2015
 
August 17, 2015
 
August 28, 2015
 
1.19

November 3, 2015
 
November 16, 2015
 
November 25, 2015
 
1.04

Total
 
$
3.80


20

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

WNRL Distributions
The table below summarizes WNRL's 2015 quarterly distribution declarations, payments and scheduled payments:
Declaration Date
 
Record Date
 
Payment Date
 
Distribution per Common and Subordinated Unit
January 30, 2015
 
February 13, 2015
 
February 23, 2015
 
$
0.3325

May 1, 2015
 
May 15, 2015
 
May 26, 2015
 
0.3475

July 31, 2015
 
August 14, 2015
 
August 24, 2015
 
0.3650

October 30, 2015
 
November 13, 2015
 
November 23, 2015
 
0.3825

Total
 
$
1.4275

In addition to its quarterly distributions, WNRL paid incentive distributions of $0.3 million and $0.5 million for the three and nine months ended September 30, 2015, respectively, to Western as its General Partner and holder of its incentive distribution rights.
11. Income Taxes
Compared to the federal statutory rate of 35%, our effective tax rates for the three and nine months ended September 30, 2015 and 2014, were 29.7%, 27.5%, 24.6% and 28.3%, respectively. The effective tax rates for the three and nine months ended September 30, 2015 and 2014, were lower than the statutory rate primarily due to the reduction of taxable income associated with the non-controlling interests in NTI and WNRL.
We are subject to examination by the Internal Revenue Service for tax years ending December 31, 2012, or after and by various state and local taxing jurisdictions for tax years ending December 31, 2011, or after.
We believe that it is more likely than not that the benefit from certain state net operating loss ("NOL") carryforwards related to the Yorktown refinery will not be realized. Accordingly, a valuation allowance of $20.8 million was provided against the deferred tax assets relating to these NOL carryforwards at September 30, 2015. There was no change in the valuation allowance for the Yorktown NOL carryforwards from December 31, 2014.
As of September 30, 2015, we have recorded a liability of $12.6 million for unrecognized tax benefits, of which $12.6 million would affect our effective tax rate if recognized. We recognized a net decrease of $1.2 million for unrecognized benefits for the three and nine months ended September 30, 2015. We also recognized $0.1 million and $0.3 million in interest and penalties for the three and nine months ended September 30, 2015, respectively.
12. Retirement Plans
We fully recognize the obligations associated with our retiree healthcare and other postretirement plans and NTI's single-employer defined benefit cash balance plan in our financial statements.
Pensions
The net periodic benefit cost associated with NTI's cash balance plan for the three and nine months ended September 30, 2015 and 2014, was $0.6 million, $1.9 million, $0.5 million and $1.6 million, respectively.
Postretirement Obligations
The net periodic benefit cost associated with our postretirement medical benefit plans for both the three and nine months ended September 30, 2015 and 2014, was $0.2 million, $0.7 million, $0.2 million and $0.6 million, respectively.
Our benefit obligation at December 31, 2014, for our postretirement medical benefit plans was $9.8 million. We fund our medical benefit plans on an as-needed basis.

21

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table presents cumulative changes in other comprehensive income related to our benefit plans included as a component of equity for the periods presented, net of income tax. The related expenses are included in direct operating expenses in the Condensed Consolidated Statements of Operations.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Beginning of period balance
$
(1,234
)
 
$
(313
)
 
$
(1,291
)
 
$
(350
)
Amortization of net prior service cost

 
31

 
41

 
62

Reclassification of loss to income
13

 
5

 
38

 
15

Income tax
(5
)
 
(2
)
 
(14
)
 
(6
)
End of period balance
$
(1,226
)
 
$
(279
)
 
$
(1,226
)
 
$
(279
)
Defined Contribution Plan
Western sponsors a 401(k) defined contribution plan under which Western and WNRL participants may contribute a percentage of their eligible compensation to various investment choices offered by the plan. For the three and nine months ended September 30, 2015 and 2014, we expensed $2.6 million, $7.2 million, $2.4 million and $6.7 million, respectively, in connection with this plan.
NTI sponsors qualified defined contribution plans for eligible employees. For the three and nine months ended September 30, 2015 and 2014, NTI expensed $1.6 million, $5.6 million, $1.5 million and $5.4 million, respectively, in connection with its qualified defined contribution plans.
13. Crude Oil and Refined Product Risk Management
We enter into crude oil forward contracts primarily to facilitate the supply of crude oil to our refineries. During the nine months ended September 30, 2015, we entered into net forward, fixed-price contracts to physically receive and deliver crude oil that qualify as normal purchases and normal sales and are exempt from derivative reporting requirements.
We also use crude oil and refined products futures, swap contracts or options to mitigate the change in value for a portion of our LIFO inventory volumes subject to market price fluctuations and swap contracts to fix the margin on a portion of our future gasoline and distillate production. The physical volumes are not exchanged; these contracts are net settled with cash. These hedging activities do not qualify for hedge accounting treatment.
The fair value of these contracts is reflected in the Condensed Consolidated Balance Sheets and the related net gain or loss is recorded within cost of products sold in the Condensed Consolidated Statements of Operations. Quoted prices for similar assets or liabilities in active markets (Level 2) are considered to determine the fair values of the majority of the contracts for the purpose of marking the hedging instruments to market at each period end.
The following tables summarize our economic hedging activity recognized within cost of products sold for the three and nine months ended September 30, 2015 and 2014, and open commodity hedging positions as of September 30, 2015 and December 31, 2014:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Economic hedging results
 
 
 
 
 
 
 
Realized hedging gain, net
$
26,949

 
$
26,716

 
$
52,325

 
$
44,272

Unrealized hedging gain (loss), net
271

 
17,020

 
(42,073
)
 
136,371

Total hedging gain, net
$
27,220

 
$
43,736

 
$
10,252

 
$
180,643


22

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Open commodity hedging instruments (barrels)
 
 
 
Crude oil and refined product futures, net long (short) positions
5,785

 
(864
)
Refined product crack spread swaps, net short positions
(7,599
)
 
(8,781
)
Total open barrels commodity hedging instruments, net short positions
(1,814
)
 
(9,645
)
 
 
 
 
Fair value of outstanding contracts, net
 
 
 
Other current assets
$
74,939

 
$
79,722

Other assets
17,796

 
56,533

Accrued liabilities
(4,116
)
 
(4,889
)
Other long-term liabilities
(726
)
 
(1,400
)
Fair value of outstanding contracts - unrealized gain, net
$
87,893

 
$
129,966

Offsetting Assets and Liabilities
Western's derivative financial instruments are subject to master netting arrangements to manage counterparty credit risk associated with derivatives; however, Western does not offset the fair value amounts recorded for derivative instruments under these agreements in the Condensed Consolidated Balance Sheets. We have posted or received margin collateral with various counterparties in support of our hedging and trading activities. The margin collateral posted or received is required by counterparties as collateral deposits and cannot be offset against the fair value of open contracts except in the event of default.
The following table presents offsetting information regarding Western's commodity hedging contracts as of September 30, 2015 and December 31, 2014:
 
Gross Amounts of Recognized Assets (Liabilities)
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Amounts of Assets (Liabilities) Presented in the Consolidated Balance Sheet
As of September 30, 2015
 
 
 
(In thousands)
Financial assets:
 
 
 
 
 
Current assets
$
82,361

 
$
(7,422
)
 
$
74,939

Other assets
19,247

 
(1,451
)
 
17,796

Financial liabilities:
 
 
 
 
 
Accrued liabilities
(10,562
)
 
6,446

 
(4,116
)
Other long-term liabilities
(3,153
)
 
2,427

 
(726
)
 
$
87,893

 
$

 
$
87,893

 
Gross Amounts of Recognized Assets (Liabilities)
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Amounts of Assets (Liabilities) Presented in the Consolidated Balance Sheet
As of December 31, 2014
 
 
 
(In thousands)
Financial assets:
 
 
 
 
 
Current assets
$
86,659

 
$
(6,937
)
 
$
79,722

Other assets
58,182

 
(1,649
)
 
56,533

Financial liabilities:
 
 
 
 
 
Accrued liabilities
(11,826
)
 
6,937

 
(4,889
)
Other long-term liabilities
(3,049
)
 
1,649

 
(1,400
)
 
$
129,966

 
$

 
$
129,966


23

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Our commodity hedging activities are initiated within guidelines established by management and approved by our board of directors. Due to mark-to-market accounting during the term of the various commodity hedging contracts, significant unrealized, non-cash net gains and losses could be recorded in our results of operations. Additionally, we may be required to collateralize any mark-to-market losses on outstanding commodity hedging contracts.
As of September 30, 2015, we had outstanding crude oil and refined product hedging instruments that were entered into as economic hedges. Settlement prices for our unleaded gasoline crack spread swaps range from $7.36 to $8.25 per contract. Settlement prices for our distillate crack spread swaps range from $14.68 to $18.04 per contract. The information below presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels):
 
Notional Contract Volumes by Year of Maturity
 
2015
 
2016
 
2017
Inventory positions (futures and swaps):
 
 
 
 
 
Crude oil and refined products — net long (short) positions
(881
)
 
3,860

 

Natural gas futures — net long positions
598

 
2,207

 

Refined product positions (crack spread swaps):
 
 
 
 
 
Distillate — net short positions
(1,719
)
 
(3,780
)
 
(825
)
Unleaded gasoline — net short positions
(1,275
)
 

 

14. Stock-Based Compensation
The Western Refining 2006 Long-Term Incentive Plan (the "2006 LTIP") and the Amended and Restated 2010 Incentive Plan of Western Refining (the "2010 Incentive Plan") allow for restricted share unit awards ("RSUs") among other forms of awards. As of September 30, 2015, there were 19,856 and 2,730,269 shares of common stock reserved for future grants under the 2006 LTIP and the 2010 Incentive Plan, respectively. Awards granted under both plans vest over a scheduled vesting period of either one, three or five years and their market value at the date of the grant is amortized over the vesting period on a straight-line basis. Effective March 25, 2015, our board of directors approved administrative amendments to the 2010 Incentive Plan.
As of September 30, 2015, there were 402,487 unvested RSUs outstanding. The final vesting for remaining awards of restricted shares occurred during the first quarter of 2014. We recorded stock compensation of $1.1 million, $3.2 million, $1.0 million and $3.2 million for the three and nine months ended September 30, 2015 and 2014, respectively, which is included in selling, general and administrative expenses.
As of September 30, 2015, the aggregate grant date fair value of outstanding RSUs was $15.1 million. The aggregate intrinsic value of outstanding RSUs was $17.8 million. The unrecognized compensation cost of unvested RSUs was $11.7 million. Unrecognized compensation costs for RSUs will be recognized over a weighted-average period of 3.61 years.
The excess tax benefit related to the RSUs that vested during the three and nine months ended September 30, 2015, was $0.03 million and $0.9 million, respectively, using a statutory blended rate of 38.1%. The aggregate grant date fair value of the RSUs that vested during the three and nine months ended September 30, 2015, was $0.1 million and $3.7 million, respectively. The related aggregate intrinsic value of these RSUs was $0.2 million and $6.0 million, respectively, at the vesting date.
The excess tax benefit related to the RSUs and restricted shares that vested during the three and nine months ended September 30, 2014, was $0.03 million and $1.1 million, respectively, using a statutory blended rate of 38.3%. The aggregate grant date fair value of the RSUs and restricted shares that vested during the three and nine months ended September 30, 2014, was $0.2 million and $4.1 million, respectively. The related aggregate intrinsic value of these RSUs and restricted shares was $0.2 million and $7.1 million, respectively, at the vesting date.

24

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table summarizes our restricted share unit activity for the nine months ended September 30, 2015:
 
Number
of Units
 
Weighted Average
Grant Date
Fair Value
Not vested at December 31, 2014
380,695

 
$
30.14

Awards granted
155,828

 
48.26

Awards vested
(127,892
)
 
28.77

Awards forfeited
(6,144
)
 
36.76

Not vested at September 30, 2015
402,487

 
37.50

NTI 2012 Long-Term Incentive Plan
NTI has approximately 7.4 million common units reserved for issuance under the NTI 2012 Long-Term Incentive Plan ("NTI LTIP"). The NTI LTIP permits the award of unit options, restricted units, phantom units, distribution equivalent rights, unit appreciation rights and other awards that derive their value from the market price of NTI's common units. As of September 30, 2015, approximately 1.2 million units were outstanding under the NTI LTIP. NTI recognizes the expense on all NTI LTIP awards ratably from the grant date until all units become unrestricted or vest. Awards generally vest ratably over a three-year period beginning on the award's first anniversary date. Compensation expense related to these restricted units is based on the grant date fair value as determined by the closing market price on the grant date, reduced by the fair value of estimated forfeitures. For awards to employees, NTI estimates a forfeiture rate that is subject to revision depending on the actual forfeiture experience.
As of September 30, 2015, the total unrecognized compensation cost for units awarded under the NTI LTIP was $16.4 million.
NTI incurred $2.4 million, $7.9 million, $2.0 million and $12.3 million of unit-based compensation expense for the three and nine months ended September 30, 2015 and 2014, respectively.
Restricted Common Units
As of September 30, 2015, NTI had 0.3 million restricted common units outstanding. Upon vesting, these common units will no longer be restricted. All restricted common units participate in distributions on an equal basis with NTI common units and must be paid no later than 30 days after the distribution date to common unitholders. For restricted common unit awards outstanding at September 30, 2015, the forfeiture rates on NTI LTIP awards ranged from zero to 30%, depending on the employee classification and the length of the award's vesting period. NTI has one restricted common unit award with a clause stating distributions are to be accrued until the underlying units vest, at which time the accrued distributions applicable to those units will be paid to the award holder. The accrued distributions on that award at September 30, 2015 and December 31, 2014, were $1.1 million and $0.4 million, respectively.
Phantom Common Units
Service-based Awards
During 2014, NTI began awarding service-based phantom common units to key employees. As of September 30, 2015, NTI had 0.6 million service-based phantom common units outstanding. Upon vesting, NTI may settle these units in NTI common units or cash at the discretion of NTI's board of directors or its Compensation Committee. Like the restricted common units, the phantom common units participate in distributions on an equal basis with common units. However, distributions on phantom common units are accrued until the underlying units vest at which time the distributions are paid in cash. In the event that unvested phantom common units are canceled, any accrued distributions on the underlying units are forfeited by the grantee. As of September 30, 2015 and December 31, 2014, NTI had $1.9 million and $0.8 million, respectively, in accrued service-based phantom common unit distributions included in accrued liabilities in the Condensed Consolidated Balance Sheets. For phantom common unit awards outstanding at September 30, 2015, the forfeiture rates on NTI LTIP awards ranged from zero to 20%, depending on the employee classification.

25

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Performance-based Phantom Units
In January 2015, NTI granted 0.3 million Performance-based Phantom Units ("NTI Performance LTIPs"), under the NTI LTIP. Assuming a threshold EBITDA is achieved, participants are entitled an award under the NTI Performance LTIPs based on NTI’s achievement of two criteria compared to the performance peer group over the performance period: (a) return on capital employed, referred to as a performance condition and (b) total unitholder return, referred to as a market condition. NTI accounts for the performance conditions and market conditions in each NTI Performance LTIPs as separate awards. Each of the performance condition awards and market condition awards represent the right to receive NTI common units or cash, at the discretion of NTI's board of directors or its Compensation Committee, at the end of a three-year performance period, in an amount ranging from 0% to 200% of the original number of units granted depending on NTI’s achievement of the performance conditions and market conditions, respectively.
Performance Condition Awards. The 0.3 million NTI Performance LTIPs include 0.2 million performance condition awards. The fair value of performance condition awards is estimated using the market price of NTI's common units on the grant date and NTI management's assessment of the probability of the number of performance condition awards that will ultimately be awarded. The estimated fair value of these performance condition awards is amortized over a three-year vesting period using the straight-line method. On a quarterly basis, NTI estimates the ultimate payout percentage, relative to target, and adjusts compensation expense accordingly. At September 30, 2015, NTI estimates that 200% of the target unit count will be achieved at the end of the vesting term.
Market Condition Awards. The 0.3 million NTI Performance LTIPs include 0.1 million market condition awards. The estimated fair value for market condition awards is estimated using a Monte Carlo simulation model as of the grant date and the related expense is amortized over a three-year vesting period using the straight-line method. The compensation expense relating to the market condition awards is determined at the award's date and expensed ratably at a fixed rate over the vesting term. However, for purposes of the phantom common unit activity table below, NTI estimates at September 30, 2015, that 100% of the target unit count will be achieved at the end of the vesting term.
Expected volatilities are based on the historical volatility over the most recent three-year period. The risk-free rate is based on the U.S. Treasury yield curve in effect at the date of valuation. The assumptions used in the Monte Carlo simulation used to value NTI's market condition awards as of September 30, 2015, are presented below:
Expected volatility
34.10
%
Risk-free interest rate
0.84
%
As of September 30, 2015, NTI had $0.7 million in accrued performance-based phantom common unit distributions included in accrued liabilities in the Condensed Consolidated Balance Sheet.
A summary of the NTI LTIP common unit activity for the nine months ended September 30, 2015, is set forth below:
 
Restricted Units
 
Phantom Units
 
 
Service-Based Units
 
Performance-Based Units
 
Total
 
Weighted Average
Grant Date
Fair Value
 
Number of Units
 
Weighted Average
Grant Date
Fair Value
 
Number of Units
 
Number of Units
 
 
Not vested at December 31, 2014
396,109

 
$
24.73

 
337,693

 

 
337,693

 
$
26.99

Awards granted
1,026

 
24.90

 
447,880

 
181,049

 
628,929

 
23.27

Incremental performance units

 

 

 
90,526

 
90,526

 
22.64

Awards vested
(68,212
)
 
25.85

 
(112,446
)
 

 
(112,446
)
 
27.02

Awards forfeited

 

 
(89,859
)
 

 
(89,859
)
 
26.32

Not vested at September 30, 2015
328,923

 
24.49

 
583,268

 
271,575

 
854,843

 
21.54

Western Refining Logistics, LP 2013 Long-Term Incentive Plan
The Western Refining Logistics, LP 2013 Long-Term Incentive Plan (the "WNRL LTIP") provides, among other awards, for grants of phantom units and distribution equivalent rights. As of September 30, 2015, there were 4.2 million phantom units reserved for future grants under the WNRL LTIP.

26

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The fair value of the phantom units is determined based on the closing price of WNRL common units on the grant date. The estimated fair value of the phantom units is amortized on a straight-line basis over the scheduled vesting periods of individual awards. WNRL incurred unit-based compensation expense of $0.6 million, $1.5 million, $0.5 million and $1.1 million for the three and nine months ended September 30, 2015 and 2014, respectively.
The aggregate grant date fair value of non-vested phantom units outstanding as of September 30, 2015, was $7.9 million. The aggregate intrinsic value of such phantom units was $5.8 million. Total unrecognized compensation cost related to unvested phantom units totaled $6.8 million as of September 30, 2015, that is expected to be recognized over a weighted-average period of 3.59 years.
A summary of WNRL's common and phantom unit award activity for the nine months ended September 30, 2015, is set forth below:
 
Number of Phantom Units
 
Weighted Average
Grant Date
Fair Value
Not vested at December 31, 2014
280,251

 
$
28.30

Awards granted
72,005

 
28.33

Awards vested
(60,556
)
 
28.95

Awards forfeited
(11,913
)
 
30.78

Not vested at September 30, 2015
279,787

 
28.06

15. Earnings per Share
In periods subsequent to March 31, 2014, we applied the treasury stock method for determining the number of fully dilutive shares outstanding used in our computation of fully diluted earnings per share. In periods prior to April 1, 2014, we followed the provisions related to the two-class method for the purpose of determining earnings per share. As discussed in Note 14, Stock-Based Compensation, we previously granted shares of restricted stock to certain employees and outside directors. Although ownership of these shares did not transfer to the recipients until the shares vested, recipients had voting and nonforfeitable dividend rights on these shares from the date of grant. Accordingly, we utilized the two-class method to determine our earnings per share. The final vesting for restricted stock awards occurred during the first quarter of 2014.
Diluted earnings per common share includes the effects of potentially dilutive shares that consist of unvested RSUs. These awards are non-participating securities due to the forfeitable nature of their associated dividend equivalent rights, prior to vesting and we do not consider the restricted share units in the two-class method when calculating earnings per share.

27

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The computation of basic and diluted earnings per share under the two-class method is presented as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share data)
Basic earnings per common share:
 
 
 
 
 
 
 
Allocation of earnings:
 
 
 
 
 
 
 
Net income attributable to Western Refining, Inc.
$
153,303

 
$
186,749

 
$
393,211

 
$
428,991

Distributed earnings
(32,498
)
 
(26,292
)
 
(93,612
)
 
(67,767
)
Income allocated to participating securities

 

 

 
(5
)
Distributed earnings allocated to participating securities

 

 

 
1

Undistributed income available to Western Refining, Inc.
$
120,805

 
$
160,457

 
$
299,599

 
$
361,220

Weighted-average number of common shares outstanding (1)
94,826

 
101,199

 
95,308

 
88,240

Basic earnings per common share:
 
 
 
 
 
 
 
Distributed earnings per share
$
0.34

 
$
0.26

 
$
0.98

 
$
0.77

Undistributed earnings per share
1.27

 
1.59

 
3.14

 
4.09

Basic earnings per common share
$
1.61

 
$
1.85

 
$
4.12

 
$
4.86

 
 
 
 
 
 
 
 
Diluted earnings per common share:
 
 
 
 
 
 
 
Net income attributable to Western Refining, Inc.
$
153,303

 
$
186,749

 
$
393,211

 
$
428,991

Tax effected interest related to convertible debt

 

 

 
8,010

Net income available to Western Refining, Inc., assuming dilution
$
153,303

 
$
186,749

 
$
393,211

 
$
437,001

Weighted-average diluted common shares outstanding
94,924

 
101,325

 
95,408

 
102,207

Diluted earnings per common share
$
1.61

 
$
1.84

 
$
4.12

 
$
4.28

(1) Excludes the weighted-average number of common shares outstanding associated with participating securities of 1,182 shares for the nine months ended September 30, 2014.
The computation of the weighted average number of diluted shares outstanding is presented below:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Weighted-average number of common shares outstanding
94,826

 
101,199

 
95,308

 
88,240

Common equivalent shares from Western Convertible Notes

 

 

 
13,837

Restricted shares and share units
98

 
126

 
100

 
130

Weighted-average number of diluted shares outstanding
94,924

 
101,325

 
95,408

 
102,207

A shareholder's interest in our common stock could become diluted as a result of vestings of RSUs and, prior to the settlement of the Western Convertible Notes during the second quarter of 2014 (see Note 9, Long-Term Debt for further discussion), conversion of the Western Convertible Notes through issuance of shares of our common stock. In calculating our fully diluted earnings per common share, we consider the impact of RSUs that have not vested and common equivalent shares related to the Western Convertible Notes. We include unvested RSUs in our diluted earnings calculation when the trading price of our common stock equals or exceeds the per share or per share unit grant price. Common equivalent shares from the Western Convertible Notes are generally included in our diluted earnings calculation when net income exceeds certain thresholds above

28

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

which the effect of the shares becomes dilutive. The Western Convertible Notes were converted into actual shares of our common stock during the first six months of 2014.
16. Cash Flows
Restricted Cash
Restricted cash reported in our Condensed Consolidated Balance Sheets at September 30, 2015 and December 31, 2014, relates to net proceeds from the sale of Western wholesale assets to WNRL. This cash is restricted through October 14, 2015, and must be used to either fund capital projects or to repay amounts outstanding under the Western 2020 Term Loan Credit Facility.
Supplemental Cash Flow Information
Supplemental disclosures of cash flow information were as follows:
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
(In thousands)
Income taxes paid
$
210,656

 
$
140,482

Interest paid, excluding amounts capitalized
62,216

 
51,523

 
 
 
 
Non-cash investing and financing activities were as follows:
 
 
 
Assets acquired through capital lease obligations
24,578

 

Accrued capital expenditures
31,744

 
19,082

Distributions receivable from equity method investee
4,250

 

PP&E derecognized from sale leaseback continuing involvement release
1,773

 

Transfer of capital spares from fixed asset to inventory
1,490

 

Distributions accrued on unvested NTI equity awards
2,602

 

Issuance of common shares for redemption of Western Convertible Notes

 
357,608

17. Leases and Other Commitments
We have commitments under various operating leases with initial terms greater than one year for retail convenience stores, office space, warehouses, cardlocks, railcars and other facilities, some of which have renewal options and rent escalation clauses. These leases have terms that will expire on various dates through 2036. We expect that in the normal course of business, these leases will be renewed or replaced by other leases. Certain of our lease agreements provide for the fair value purchase of the leased asset at the end of the lease. Rent expense for operating leases that provide for periodic rent escalations or rent holidays over the term of the lease and for renewal periods that are reasonably assured at the inception of the lease are recognized on a straight-line basis over the term of the lease.
In the normal course of business, we also have long-term commitments to purchase products and services, such as natural gas, electricity, water and transportation services for use by our refineries and logistic assets at market-based rates. We are also party to various refined product and crude oil supply and exchange agreements.
The Chemours Company FC, LLC (“Chemours” - an affiliate and assignee of E.I. du Pont de Nemours (“DuPont”)) operates two sulfuric acid regeneration plants that were constructed and previously operated by DuPont on leased property within the El Paso refinery. Our annual estimated cost for processing sulfuric acid and sulfur gas under this agreement is $15.7 million through March of 2028.
In November 2007, we entered into a ten-year lease agreement for office space in downtown El Paso, Texas. The building serves as our headquarters. In December 2007, we entered into an eleven-year lease agreement for an office building in Tempe, Arizona. The building centralized our operational and administrative offices in the Phoenix, Arizona area.
We are party to thirty-one capital leases, with initial terms of 20 years, expiring in 2017 through 2035. The current portion of our capital lease obligations of $1.0 million and $0.6 million is included in accrued liabilities and the non-current portion of $49.1 million and $27.5 million is included in lease financing obligations in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014, respectively. The capital lease obligations include a deferred

29

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

gain of $2.3 million. These capital leases were discounted using annual interest rates between 3.24% and 10.51%. Total remaining interest related to these leases was $40.8 million and $21.6 million at September 30, 2015 and December 31, 2014, respectively. Annual payments, including interest, average $4.6 million through the end of 2019 with the remaining $69.0 million due through 2035. Of the thirty-one capital leases, twelve are NTI obligations with annual lease payments, including interest, that average $0.8 million annually through the end of 2019 with the remaining $8.2 million due through 2034. There is no recourse to Western on the NTI capital leases. The remaining nineteen capital leases are held by our retail segment and make up the balance of the annual payments for the periods noted above.
The following table presents our future minimum lease commitments under capital leases and non-cancelable operating leases that have lease terms of one year or more (in thousands) as of September 30, 2015:
 
Operating
 
Capital
Remaining 2015
$
12,375

 
$
1,152

2016
50,070

 
4,652

2017
46,786

 
4,563

2018
43,556

 
4,584

2019
39,889

 
4,691

2020 and thereafter
325,838

 
68,956

Total minimum lease payments
$
518,514

 
88,598

Less amount that represents interest
 
 
40,835

Present value of net minimum capital lease payments
 
 
$
47,763

Total rental expense was $16.2 million, $47.8 million, $14.2 million and $41.7 million for the three and nine months ended September 30, 2015 and September 30, 2014, respectively. Contingent rentals and subleases were not significant in any period.
18. Contingencies
Environmental Matters
Similar to other petroleum refiners, our operations are subject to extensive and periodically changing federal and state environmental regulations governing air emissions, wastewater discharges and solid and hazardous waste management activities. Many of these regulations are becoming increasingly stringent and the cost of compliance can be expected to increase over time. Our policy is to accrue environmental and clean-up related costs of a non-capital nature when it is probable that a liability has been incurred and the amount can be reasonably estimated. Such estimates may be subject to revision in the future as regulations and other conditions change.
Periodically, we receive communications from various federal, state and local governmental authorities asserting violations of environmental laws and/or regulations. These governmental entities may also propose or assess fines or require corrective action for these asserted violations. We intend to respond in a timely manner to all such communications and to take appropriate corrective action. We do not anticipate that any such matters currently asserted will have a material impact on our financial condition, results of operations or cash flows. As of September 30, 2015 and December 31, 2014, we had consolidated environmental accruals of $20.2 million and $18.5 million, respectively.
El Paso Refinery
Prior spills, releases and discharges of petroleum or hazardous substances have impacted the groundwater and soils in certain areas at and adjacent to our El Paso refinery. We are currently remediating, in conjunction with Chevron U.S.A., Inc. ("Chevron"), these areas in accordance with certain agreed administrative orders with the Texas Commission on Environmental Quality (the "TCEQ"). Pursuant to our purchase of the north side of the El Paso refinery from Chevron, Chevron retained responsibility to remediate its solid waste management units in accordance with its Resource Conservation Recovery Act ("RCRA") permit that Chevron has fulfilled. Chevron also retained control of and liability for certain groundwater remediation responsibilities that are ongoing.
In May 2000, we entered into an Agreed Order with the TCEQ for remediation of the south side of our El Paso refinery property. We purchased a non-cancelable Pollution and Legal Liability and Clean-Up Cost Cap Insurance policy that covers environmental clean-up costs related to contamination that occurred prior to December 31, 1999, including the costs of the

30

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Agreed Order activities. The insurance provider assumed responsibility for all environmental clean-up costs related to the Agreed Order up to $20.0 million, of which $6.9 million remained as of September 30, 2015. In addition, a subsidiary of Chevron is obligated under a settlement agreement to pay 60% of any Agreed Order environmental clean-up costs that exceed the $20.0 million policy coverage.
In September 2011, we and the U.S. Environmental Protection Agency (the “EPA”) entered into a Consent Decree under the Petroleum Refinery Enforcement Initiative (“EPA Initiative”). Under the EPA Initiative, the EPA is investigating industry-wide non-compliance with certain Clean Air Act rules. The EPA Initiative has resulted in many refiners entering into similar consent decrees typically requiring penalties and substantial capital expenditures for additional air pollution control equipment. The Consent Decree does not require any soil or groundwater remediation or clean-up.
We have completed our capital expenditures to address the Consent Decree issues totaling $43.2 million, including $15.2 million for the installation of a flare gas recovery system completed in 2007 and $28.0 million for nitrogen oxides ("NOx") emission controls on heaters and boilers completed in 2013. Under the terms of the Consent Decree, we paid a civil penalty of $1.5 million in September 2011.
In April 2014, we entered two Agreed Orders with TCEQ to settle unresolved air enforcement at our El Paso refinery between 2004 and April 2008. We paid $0.2 million in penalties in May 2014 that included the funding of a Supplemental Environmental Project benefiting El Paso County.
Four Corners Refineries
Four Corners 2005 Consent Agreements. In July 2005, as part of the EPA Initiative, Giant Industries, Inc., our wholly-owned subsidiary, reached an administrative settlement with the New Mexico Environment Department (the "NMED") and the EPA in the form of consent agreements that resolved certain alleged violations of air quality regulations at the Gallup and Bloomfield refineries in the Four Corners area of New Mexico. In January 2009 and June 2012, we and the NMED agreed to amendments of the 2005 administrative settlement (the "2005 NMED Amended Agreement") that altered certain deadlines and allowed for alternative air pollution controls.
We incurred $50.8 million in total capital expenditures between 2009 and 2013 to address the requirements of the 2005 NMED Amended Agreement. These capital expenditures were primarily for installation of emission controls on the heaters, boilers and Fluid Catalytic Cracking Unit ("FCCU") and for reducing sulfur in fuel gas to reduce emissions of sulfur dioxide, NOx and particulate matter from our Gallup refinery. We will incur additional capital expenditures to implement one or more FCCU offset projects to be completed by the end of 2017. In 2014, we incurred $1.9 million to implement FCCU emissions offset projects. We paid penalties between 2009 and 2012 totaling $2.7 million.
Bloomfield 2007 NMED Remediation Order. In July 2007, we received a final administrative compliance order from the NMED alleging that releases of contaminants and hazardous substances that have occurred at the Bloomfield refinery over the course of its operation prior to June 1, 2007, have resulted in soil and groundwater contamination. Among other things, the order requires that we investigate the extent of such releases, perform interim remediation measures and implement corrective measures. Prior to July 2007, with the approval of the NMED and the New Mexico Oil Conservation Division, we placed into operation certain remediation measures that remain operational. As of September 30, 2015, we have expended $4.4 million and have accrued the remaining estimated costs of $3.6 million for implementing the investigation, interim measures and the reasonably known corrective actions of the order.
Gallup 2007 Resource Conservation Recovery Act ("RCRA") Inspection. In September 2007, the Gallup refinery was inspected jointly by the EPA and the NMED to determine compliance with the EPA’s hazardous waste regulations promulgated pursuant to the RCRA. We reached a final settlement with the agencies in August 2009 and paid a penalty of $0.7 million in October 2009. Between September 2010 and July 2012, the EPA demanded and we paid penalties totaling $0.2 million in accordance with the settlement. Implementation of the requirements in the final settlement will not result in any additional soil or groundwater remediation or clean-up costs not otherwise required. We incurred a total of $38.6 million in capital expenditures, between 2010 and 2013, to upgrade the wastewater treatment plant at the Gallup refinery in accordance with the requirements and there are no further capital requirements, under the final settlement.
Gallup 2013 Risk Management Plan General Duty Settlement. In July 2013, we entered a final settlement with the EPA for five alleged violations of the Clean Air Act Risk Management Plan 112(r) General Duty clause at our Gallup refinery and paid a total penalty of $0.2 million. No capital expenditures are required under the settlement.
Gallup 2014 Environment Protection Division of NMED Settlement. In March 2014, we received a revised notice of violation and offer of settlement from the NMED Air Quality Bureau for alleged violations of the Clean Air Act. We agreed to settle and paid a penalty of $0.1 million in May 2014. No capital expenditures are required under the settlement.

31

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NTI
At September 30, 2015 and December 31, 2014, liabilities for remediation and closure obligations by NTI totaled $10.0 million and $8.7 million, respectively. These liabilities consist of $2.6 million and $2.9 million recorded on a discounted basis as of September 30, 2015 and December 31, 2014, respectively. These discounted liabilities are expected to be settled over at least the next 22 years. At September 30, 2015, the estimated future cash flows to settle these discounted liabilities totaled $3.2 million and are discounted at a rate of 2.6%. Receivables for recoverable costs from the state, under programs to assist companies in clean-up efforts related to underground storage tanks at retail marketing outlets, and others were $0.2 million at September 30, 2015 and December 31, 2014, respectively.
On June 3, 2014, the St. Paul Park refinery was issued a National Pollutant Discharge Elimination Permit/State Disposal System Permit by the Minnesota Pollution Control Agency ("MPCA") relating to its upgraded wastewater treatment plant at its St. Paul Park refinery. This permit required the refinery to conduct additional testing of its remaining lagoon. The testing was completed in the fourth quarter of 2014, following NTI's review of the test results and additional discussions with MPCA, NTI now regards the likelihood of future remediation and closure costs related to the lagoon as probable. At September 30, 2015, NTI estimated the remaining remediation costs to be approximately $7.4 million subject to further engineering and methodology studies. In connection with NTI's December 2010 acquisition of the St. Paul Park refinery, among other assets, from the Marathon Petroleum Company LP ("Marathon"), NTI entered into an agreement with Marathon that required Marathon to share in the future remediation costs of this Lagoon, should they be required. During the third quarter of 2015, NTI entered into a settlement and release agreement with Marathon and received $3.5 million pursuant to this settlement that NTI recorded as a reduction of direct operating expenses.
Other Matters
The EPA has issued Renewable Fuels Standards ("RFS"), that require us and other refiners to blend renewable fuels into the refined products produced at our refineries. Annually, the EPA is required to establish a volume of renewable fuels that refineries must blend into their refined petroleum fuels. However, the EPA has not established the final renewable blending volume level for 2014 or 2015. To the extent we are unable to blend at the rate necessary to satisfy the EPA mandated volume, we purchase Renewable Identification Numbers ("RINs"). The purchase price for RINs is volatile and may vary significantly from period to period. Historically, the cost of purchased RINs has not had a significant impact on our operating results. We anticipate that 2014 and 2015 will be consistent with this history. The net cost of meeting our estimated renewable volume obligations, including sales and purchases of RINs, was $13.1 million, $25.8 million, $12.5 million and $23.8 million for the three and nine months ended September 30, 2015 and 2014, respectively.
In addition, the EPA has investigated and brought enforcement actions against companies it believes produced invalid RINs. We may have purchased RINs that the EPA will determine are invalid. Previously, we have entered into settlements and entered into another settlement in May 2015, with the EPA regarding RINs we purchased that the EPA ultimately determined were invalid. While we do not know if the EPA will determine that other RINs we have purchased are invalid, at this time we do not expect any settlements we would enter into with the EPA would have a material effect on our financial condition, results of operations or cash flows.
In August 2014, the TCEQ offered an expedited settlement with a proposed penalty of $0.2 million related to enforcement issued to our retail segment. We agreed to the settlement, which became effective in July 2015, and have paid the penalty of less than $0.1 million. The settlement requires no capital expenditures or soil or groundwater remediation or clean-up.
In April 2015, we successfully re-negotiated the collective bargaining agreement covering the El Paso refinery employees. The resulting six year labor agreement is scheduled to expire in April of 2021.
We are party to various other claims and legal actions arising in the normal course of business. We believe that the resolution of these matters will not have a material effect on our financial condition, results of operations or cash flows.
19. Related Party Transactions
We lease office space in a building located in El Paso, Texas that is owned by an entity controlled by one of our officers. The lease agreement expires in May 2017. Under the terms of the lease, we make annual payments of $0.2 million. For the three and nine months ended September 30, 2015 and 2014, we made rental payments under this lease to the related party of $0.06 million, $0.2 million, $0.05 million and $0.2 million, respectively. We have no amounts due as of September 30, 2015, related to this lease agreement.

32

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

MPL is a related party of NTI. However, NTI had a crude oil supply and logistics agreement with a third party until September 30, 2014, and had no direct supply transactions with MPL prior to this date. Beginning on September 30, 2014, NTI began paying MPL for transportation services at published tariff rates. For the three and nine months ended September 30, 2015, NTI paid $13.9 million and $41.3 million for transportation services to MPL.
20. Condensed Consolidating Financial Information
Separate condensed consolidating financial information of Western Refining, Inc. (the "Parent") and subsidiary guarantors and non-guarantors is presented below. At September 30, 2015, the Parent and certain subsidiary guarantors have fully and unconditionally guaranteed our Western 2021 Unsecured Notes on a joint and several basis. As a result of these guarantee arrangements, we are required to present condensed consolidating financial information. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto.
NTI, WNRL and Navajo Convenient Stores Co., LLC are subsidiaries that have not guaranteed the Western 2021 Senior Unsecured Notes. NTI and WNRL are publicly-traded master limited partnerships. As of September 30, 2015, we owned a 38.4% limited partnership interest in NTI and a 66.1% limited partnership interest in WNRL and the non-economic general partner interests of both entities. We are the primary beneficiary of WNRL's earnings and cash flows. We exercise control of both NTI and WNRL through our 100% ownership of the respective general partners. Accordingly, NTI and WNRL are consolidated with the other accounts of Western.
Due to the change in the guarantor structure resulting from WNRL's acquisition of WRW, the condensed consolidating financial information for the three and nine months ended September 30, 2014 has been revised.
Our transactions with WNRL including fees paid under our pipeline, terminalling and services agreements are eliminated and have no significant impact on our condensed consolidated financial statements. During the nine months ended September 30, 2015, there have been no significant intercompany accounts or transactions between Western and NTI. All intercompany accounts and transactions with NTI and WNRL are eliminated in our condensed consolidated financial statements.
NTI's long-term debt is comprised of its NTI 2020 Secured Notes and the NTI Revolving Credit Facility. NTI creditors under the NTI 2020 Secured Notes and the NTI Revolving Credit Facility have no recourse to the Parent's assets except to the extent of the assets of Northern Tier Energy GP LLC, the general partner of NTI that we wholly own. Any recourse to NTI’s general partner would be limited to the extent of the general partner’s assets that other than its investment in NTI are not significant. Furthermore, the Parent's creditors have no recourse to the assets of NTI's general partner, NTI and its consolidated subsidiaries. See Note 9, Long-Term Debt, for a description of NTI’s debt obligations.
WNRL generates revenues by charging fees and tariffs for transporting crude oil through its pipelines and truck fleet, for transporting refined and other products through its terminals and pipelines, for providing storage in its storage tanks and at its terminals and selling refined products through its wholesale distribution network. We do not provide financial or equity support through any liquidity arrangements and/or debt guarantees to WNRL.
WNRL's long-term debt is comprised of the WNRL 2023 Senior Notes and the WNRL Revolving Credit Facility. With the exception of the assets of Western Refining Logistics GP, LLC, the general partner of WNRL, creditors have no recourse to our assets. Any recourse to WNRL’s general partner would be limited to the extent of Western Refining Logistics GP, LLC's assets which, other than its investment in WNRL, are not significant. Furthermore, our creditors have no recourse to the assets of WNRL and its consolidated subsidiaries. See Note 9, Long-Term Debt, for a description of WNRL’s debt obligations.
NTI and WNRL have risks associated with their respective operations. NTI’s risks, while similar to ours because it experiences similar industry dynamics, are not associated with our operations. WNRL’s risks are directly associated with our operations. If we suffer significant decreases in our throughput or fail to meet desired shipping or throughput levels for an extended period of time, WNRL revenues could be reduced and WNRL could suffer substantial losses.
In the event that NTI or WNRL incur a loss, our operating results will reflect NTI's or WNRL’s loss, net of intercompany eliminations, to the extent of our ownership interests in NTI and WNRL at that point in time.
The following condensed consolidating financial information is provided as an alternative to providing separate financial statements for guarantor subsidiaries. Separate financial statements of Western’s subsidiary guarantors are not included because the guarantees are full and unconditional and these subsidiary guarantors are 100% owned and jointly and severally liable for the Parent’s outstanding debt. The information is presented using the equity method of accounting for investments in subsidiaries.

33

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEETS
As of September 30, 2015
(In thousands)
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
21

 
$
523,569

 
$
185,980

 
$

 
$
709,570

Accounts receivable, trade, net of a reserve for doubtful accounts

 
174,953

 
241,981

 

 
416,934

Accounts receivable, affiliate

 
69,256

 
2,033

 
(71,289
)
 

Inventories

 
369,644

 
282,203

 

 
651,847

Prepaid expenses

 
76,811

 
22,310

 

 
99,121

Other current assets

 
143,111

 
29,262

 

 
172,373

Total current assets
21

 
1,357,344

 
763,769

 
(71,289
)
 
2,049,845

Restricted cash

 
12,328

 

 

 
12,328

Equity method investment

 

 
97,900

 

 
97,900

Property, plant and equipment, net

 
1,190,545

 
1,050,282

 

 
2,240,827

Goodwill

 

 
1,289,443

 

 
1,289,443

Intangible assets, net

 
34,739

 
49,558

 

 
84,297

Investment in subsidiaries
3,973,251

 

 

 
(3,973,251
)
 

Due from affiliate

 
1,780,511

 

 
(1,780,511
)
 

Other assets, net
28,758

 
49,349

 
29,139

 

 
107,246

Total assets
$
4,002,030

 
$
4,424,816

 
$
3,280,091

 
$
(5,825,051
)
 
$
5,881,886

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable, trade
$
36

 
$
321,644

 
$
252,037

 
$

 
$
573,717

Accounts payable, affiliate
1,712

 

 
69,577

 
(71,289
)
 

Accrued liabilities
10,929

 
189,768

 
88,700

 

 
289,397

Current deferred income tax liability, net

 
43,279

 

 

 
43,279

Current portion of long-term debt
5,500

 

 

 

 
5,500

Total current liabilities
18,177

 
554,691

 
410,314

 
(71,289
)
 
911,893

Long-term liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt, less current portion
884,875

 

 
656,209

 

 
1,541,084

Due to affiliate
1,780,511

 

 

 
(1,780,511
)
 

Lease financing obligation

 
42,381

 
6,685

 

 
49,066

Deferred income tax liability, net

 
274,297

 
37,280

 

 
311,577

Deficit in subsidiaries


355,959



 
(355,959
)
 

Other liabilities

 
35,771

 

 

 
35,771

Total long-term liabilities
2,665,386

 
708,408

 
700,174

 
(2,136,470
)
 
1,937,498

Equity:
 
 
 
 
 
 
 
 
 
Equity - Western
1,318,467

 
3,161,717

 
455,575

 
(3,617,292
)
 
1,318,467

Equity - Non-controlling interest

 

 
1,714,028

 

 
1,714,028

Total equity
1,318,467

 
3,161,717

 
2,169,603

 
(3,617,292
)
 
3,032,495

Total liabilities and equity
$
4,002,030

 
$
4,424,816

 
$
3,280,091

 
$
(5,825,051
)
 
$
5,881,886


34

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 2014
(In thousands)
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
21

 
$
288,986

 
$
142,152

 
$

 
$
431,159

Accounts receivable, trade, net of a reserve for doubtful accounts

 
178,786

 
288,741

 

 
467,527

Accounts receivable, affiliate
5,035

 
1,710,015

 
2,045

 
(1,717,095
)
 

Inventories

 
379,563

 
249,674

 

 
629,237

Prepaid expenses

 
69,580

 
18,835

 

 
88,415

Other current assets

 
128,564

 
23,561

 

 
152,125

Total current assets
5,056

 
2,755,494

 
725,008

 
(1,717,095
)
 
1,768,463

Restricted cash

 
167,009

 

 

 
167,009

Equity method investment

 

 
96,080

 

 
96,080

Property, plant and equipment, net

 
1,092,667

 
1,060,522

 

 
2,153,189

Goodwill

 

 
1,289,443

 

 
1,289,443

Intangible assets, net

 
35,974

 
49,978

 

 
85,952

Investment in subsidiaries
3,637,607

 

 

 
(3,637,607
)
 

Other assets, net
33,463

 
67,652

 
21,307

 

 
122,422

Total assets
$
3,676,126

 
$
4,118,796

 
$
3,242,338

 
$
(5,354,702
)
 
$
5,682,558

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable, trade
$

 
$
354,223

 
$
327,580

 
$

 
$
681,803

Accounts payable, affiliate
1,656,412

 

 
60,683

 
(1,717,095
)
 

Accrued liabilities
5,506

 
179,926

 
83,017

 

 
268,449

Current deferred income tax liability, net

 
57,949

 

 

 
57,949

Current portion of long-term debt
5,500

 

 

 

 
5,500

Total current liabilities
1,667,418

 
592,098

 
471,280

 
(1,717,095
)
 
1,013,701

Long-term liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt, less current portion
889,000

 

 
626,037

 

 
1,515,037

Lease financing obligation

 
18,860

 
8,629

 

 
27,489

Deferred income tax liability, net

 
259,581

 
37,279

 

 
296,860

Deficit in subsidiaries

 
354,686

 

 
(354,686
)
 

Other liabilities

 
36,530

 
5,297

 

 
41,827

Total long-term liabilities
889,000

 
669,657

 
677,242

 
(354,686
)
 
1,881,213

Equity:
 
 
 
 
 
 
 
 
 
Equity - Western
1,119,708

 
2,857,041

 
425,880

 
(3,282,921
)
 
1,119,708

Equity - Non-controlling interest

 

 
1,667,936

 

 
1,667,936

Total equity
1,119,708

 
2,857,041

 
2,093,816

 
(3,282,921
)
 
2,787,644

Total liabilities and equity
$
3,676,126

 
$
4,118,796

 
$
3,242,338

 
$
(5,354,702
)
 
$
5,682,558


35

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
Three Months Ended September 30, 2015
(In thousands)
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net sales
$

 
$
1,852,488

 
$
1,472,504

 
$
(755,902
)
 
$
2,569,090

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of products sold (exclusive of depreciation and amortization)

 
1,476,431

 
1,175,243

 
(755,902
)
 
1,895,772

Direct operating expenses (exclusive of depreciation and amortization)

 
112,532

 
121,908

 

 
234,440

Selling, general and administrative expenses
48

 
28,092

 
26,325

 

 
54,465

Gain on disposal of assets, net

 
(6
)
 
(46
)
 

 
(52
)
Maintenance turnaround expense

 
490

 

 

 
490

Depreciation and amortization

 
26,648

 
24,729

 

 
51,377

Total operating costs and expenses
48

 
1,644,187

 
1,348,159

 
(755,902
)
 
2,236,492

Operating income (loss)
(48
)
 
208,301

 
124,345

 

 
332,598

Other income (expense):
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
166,608

 
10,907

 

 
(177,515
)
 

Interest income

 
106

 
80

 

 
186

Interest expense and other financing costs
(13,257
)
 
(703
)
 
(12,936
)
 

 
(26,896
)
Other, net

 
(6
)
 
4,333

 

 
4,327

Income before income taxes
153,303

 
218,605

 
115,822

 
(177,515
)
 
310,215

Provision for income taxes

 
(92,114
)
 
(3
)
 

 
(92,117
)
Net income
153,303

 
126,491

 
115,819

 
(177,515
)
 
218,098

Less net income attributable to non-controlling interest

 

 
64,795

 

 
64,795

Net income attributable to Western Refining, Inc.
$
153,303

 
$
126,491

 
$
51,024

 
$
(177,515
)
 
$
153,303

Comprehensive income attributable to Western Refining, Inc.
$
153,303

 
$
126,499

 
$
51,024

 
$
(177,515
)
 
$
153,311


36

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
Nine Months Ended September 30, 2015
(In thousands)
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net sales
$

 
$
5,619,409

 
$
4,364,997

 
$
(2,267,694
)
 
$
7,716,712

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of products sold (exclusive of depreciation and amortization)

 
4,612,431

 
3,470,232

 
(2,267,694
)
 
5,814,969

Direct operating expenses (exclusive of depreciation and amortization)

 
333,521

 
340,953

 

 
674,474

Selling, general and administrative expenses
142

 
87,570

 
82,096

 

 
169,808

Loss (gain) on disposal of assets, net

 
444

 
(601
)
 

 
(157
)
Maintenance turnaround expense

 
1,188

 

 

 
1,188

Depreciation and amortization

 
79,362

 
73,084

 

 
152,446

Total operating costs and expenses
142

 
5,114,516

 
3,965,764

 
(2,267,694
)
 
6,812,728

Operating income (loss)
(142
)
 
504,893

 
399,233

 

 
903,984

Other income (expense):
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
433,921

 
31,572

 

 
(465,493
)
 

Interest income

 
308

 
242

 

 
550

Interest expense and other financing costs
(40,568
)
 
(1,943
)
 
(36,658
)
 

 
(79,169
)
Other, net

 
(519
)
 
12,076

 

 
11,557

Income before income taxes
393,211

 
534,311

 
374,893

 
(465,493
)
 
836,922

Provision for income taxes

 
(229,635
)
 
(354
)
 

 
(229,989
)
Net income
393,211

 
304,676

 
374,539

 
(465,493
)
 
606,933

Less net income attributable to non-controlling interest

 

 
213,722

 

 
213,722

Net income attributable to Western Refining, Inc.
$
393,211

 
$
304,676

 
$
160,817

 
$
(465,493
)
 
$
393,211

Comprehensive income attributable to Western Refining, Inc.
$
393,211

 
$
304,700

 
$
160,858

 
$
(465,493
)
 
$
393,276



37

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
Three Months Ended September 30, 2014
(In thousands)
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net sales
$

 
$
2,912,152

 
$
2,364,752

 
$
(1,224,580
)
 
$
4,052,324

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of products sold (exclusive of depreciation and amortization)

 
2,513,260

 
2,086,939

 
(1,220,644
)
 
3,379,555

Direct operating expenses (exclusive of depreciation and amortization)

 
109,098

 
113,021

 
(3,936
)
 
218,183

Selling, general and administrative expenses
46

 
27,297

 
29,863

 

 
57,206

Gain on disposal of assets, net

 
(31
)
 
(35
)
 

 
(66
)
Maintenance turnaround expense

 
1,883

 

 

 
1,883

Depreciation and amortization

 
24,136

 
22,774

 

 
46,910

Total operating costs and expenses
46

 
2,675,643

 
2,252,562

 
(1,224,580
)
 
3,703,671

Operating income (loss)
(46
)
 
236,509

 
112,190

 

 
348,653

Other income (expense):
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
200,198

 
10,671

 

 
(210,869
)
 

Interest income

 
384

 
99

 

 
483

Interest expense and other financing costs
(13,403
)
 
(210
)
 
(4,637
)
 

 
(18,250
)
Other, net

 
(1,289
)
 
(1,527
)
 

 
(2,816
)
Income before income taxes
186,749

 
246,065

 
106,125

 
(210,869
)
 
328,070

Provision for income taxes

 
(80,578
)
 
(135
)
 

 
(80,713
)
Net income
186,749

 
165,487

 
105,990

 
(210,869
)
 
247,357

Less net income attributable to non-controlling interest

 

 
60,608

 

 
60,608

Net income attributable to Western Refining, Inc.
$
186,749

 
$
165,487

 
$
45,382

 
$
(210,869
)
 
$
186,749

Comprehensive income attributable to Western Refining, Inc.
$
186,749

 
$
165,490

 
$
45,413

 
$
(210,869
)
 
$
186,783


38

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
Nine Months Ended September 30, 2014
(In thousands)
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net sales
$

 
$
8,751,019

 
$
7,044,156

 
$
(3,666,418
)
 
$
12,128,757

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of products sold (exclusive of depreciation and amortization)

 
7,644,119

 
6,281,454

 
(3,654,112
)
 
10,271,461

Direct operating expenses (exclusive of depreciation and amortization)

 
314,935

 
317,366

 
(12,306
)
 
619,995

Selling, general and administrative expenses
139

 
81,280

 
89,159

 

 
170,578

Affiliate severance costs

 

 
12,878

 

 
12,878

Loss (gain) on disposal of assets, net

 
1,056

 
(117
)
 

 
939

Maintenance turnaround expense

 
48,329

 

 

 
48,329

Depreciation and amortization

 
71,441

 
69,727

 

 
141,168

Total operating costs and expenses
139

 
8,161,160

 
6,770,467

 
(3,666,418
)
 
11,265,348

Operating income (loss)
(139
)
 
589,859

 
273,689

 

 
863,409

Other income (expense):
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
485,724

 
37,790

 

 
(523,514
)
 

Interest income

 
623

 
276

 

 
899

Interest expense and other financing costs
(56,585
)
 
(760
)
 
(17,663
)
 

 
(75,008
)
Loss on extinguishment of debt
(9
)
 

 

 

 
(9
)
Other, net

 
(645
)
 
294

 

 
(351
)
Income before income taxes
428,991

 
626,867

 
256,596

 
(523,514
)
 
788,940

Provision for income taxes

 
(222,980
)
 
(339
)
 

 
(223,319
)
Net income
428,991

 
403,887

 
256,257

 
(523,514
)
 
565,621

Less net income attributable to non-controlling interest

 

 
136,630

 

 
136,630

Net income attributable to Western Refining, Inc.
$
428,991

 
$
403,887

 
$
119,627

 
$
(523,514
)
 
$
428,991

Comprehensive income attributable to Western Refining, Inc.
$
428,991

 
$
403,896

 
$
119,689

 
$
(523,514
)
 
$
429,062




39

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2015
(In thousands)
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantors
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
67,772

 
$
350,863

 
$
378,192

 
$
(131,163
)
 
$
665,664

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(138,245
)
 
(59,288
)
 
1,557

 
(195,976
)
Decrease in restricted cash

 
154,681

 

 

 
154,681

Return of capital from equity method investment

 

 
5,780

 

 
5,780

Contributions to affiliate

 
(134,965
)
 

 
134,965

 

Proceeds from the sale of assets

 
2,028

 
590

 
(1,557
)
 
1,061

Net cash provided by (used in) investing activities

 
(116,501
)
 
(52,918
)
 
134,965

 
(34,454
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Additions to long-term debt

 

 
300,000

 

 
300,000

Payments on long-term debt and capital lease obligations
(4,125
)
 
(658
)
 
(776
)
 

 
(5,559
)
Payments on revolving credit facility

 

 
(269,000
)
 

 
(269,000
)
Deferred financing costs

 

 
(6,820
)
 

 
(6,820
)
Distribution to affiliate

 

 
(131,163
)
 
131,163

 

Purchases of treasury stock
(105,000
)
 

 

 

 
(105,000
)
Distribution to non-controlling interest holders

 

 
(173,687
)
 

 
(173,687
)
Dividends paid
(93,612
)
 

 

 

 
(93,612
)
Contributions from affiliates
134,965

 

 

 
(134,965
)
 

Excess tax benefit from stock-based compensation

 
879

 

 

 
879

Net cash provided by (used in) financing activities
(67,772
)
 
221

 
(281,446
)
 
(3,802
)
 
(352,799
)
Net increase in cash and cash equivalents

 
234,583

 
43,828

 

 
278,411

Cash and cash equivalents at beginning of year
21

 
288,986

 
142,152

 

 
431,159

Cash and cash equivalents at end of year
$
21

 
$
523,569

 
$
185,980

 
$

 
$
709,570


40

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2014
(In thousands)
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantors
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
(38,847
)
 
$
455,901

 
$
163,128

 
$
(86,124
)
 
$
494,058

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(95,580
)
 
(51,674
)
 

 
(147,254
)
Return of capital from equity method investment

 

 
3,910

 

 
3,910

Contributions to affiliate

 
(194,413
)
 

 
194,413

 

Proceeds from the sale of assets

 
862

 
446

 

 
1,308

Net cash provided by (used in) investing activities

 
(289,131
)
 
(47,318
)
 
194,413

 
(142,036
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Additions to long-term debt

 

 
79,311

 

 
79,311

Payments on long-term debt and capital lease obligations
(4,384
)
 

 
(162
)
 

 
(4,546
)
Distribution to affiliate

 

 
(86,124
)
 
86,124

 

Deferred financing costs

 

 
(4,485
)
 

 
(4,485
)
Purchases of treasury stock
(61,540
)
 

 

 

 
(61,540
)
Distribution to non-controlling interest holders

 

 
(111,235
)
 

 
(111,235
)
Dividends paid
(67,767
)
 

 

 

 
(67,767
)
Convertible debt redemption
(809
)
 

 

 

 
(809
)
Contributions from affiliates
173,347

 

 
21,066

 
(194,413
)
 

Excess tax benefit from stock-based compensation

 
1,133

 

 

 
1,133

Net cash provided by (used in) financing activities
38,847

 
1,133

 
(101,629
)
 
(108,289
)
 
(169,938
)
Net increase in cash and cash equivalents

 
167,903

 
14,181

 

 
182,084

Cash and cash equivalents at beginning of year
21

 
296,905

 
171,144

 

 
468,070

Cash and cash equivalents at end of year
$
21

 
$
464,808

 
$
185,325

 
$

 
$
650,154


21. Subsequent Events
On October 23, 2015, we submitted a proposal to the Conflicts Committee of the Board of Directors of the general partner of NTI to acquire all of its outstanding publicly-held common units. The proposed purchase price for each NTI common unit was comprised of $17.50 in cash and 0.2266 of a share of Western's common stock. The proposed consideration represented a 15% premium to the 20-day volume weighted average price ("VWAP") of NTI's common unit price as of October 23, 2015, and represented aggregate consideration of $27.62 per common unit of NTI based on the 20-day VWAPs for NTI and Western as of October 23, 2015. Assuming completion of the proposed transaction, NTI will become a wholly-owned subsidiary of Western and NTI common units will cease to be publicly traded. The NTI 2020 Secured Notes will remain outstanding. We anticipate funding the cash portion of the offer with a combination of Western cash-on-hand, debt issued in the capital markets or a bank-sponsored bridge loan. There can be no assurance that a transaction will be approved or consummated.
On October 30, 2015 (the “Purchase Date”), we sold to WNRL a 375 mile segment of the TexNew Mex Pipeline system that extends from WNRL's crude oil station in Star Lake, New Mexico, in the Four Corners region to its T station in Eddy County, New Mexico (the "Contributed TexNew Mex Pipeline"). We also sold an 80,000 barrel crude oil storage tank located at WNRL's crude oil pumping station in Star Lake, New Mexico and certain other related assets. WNRL acquired these assets from us in exchange for $170 million in cash and 421,031 common units representing limited partner interests in WNRL.

41

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In connection with the closing, we also entered into an amendment to our Pipeline and Gathering Services Agreement with WNRL (the "Amendment to the Pipeline Agreement"). The Amendment to the Pipeline Agreement amends the scope of the existing agreement to include the provision of storage services and a minimum volume commitment of 80,000 barrels of storage at the Star Lake storage tank. In this Amendment to the Pipeline Agreement, we have agreed to provide a minimum volume commitment of 13,000 bpd of crude oil for shipment on the Contributed TexNew Mex Pipeline for 10 years from the date of the Amendment to the Pipeline Agreement. We also amended our limited partnership agreement with WNRL whereby WNRL will issue us a new class of WNRL partnership interests, in connection with the acquisition, that entitle us to 80% of the economics resulting from crude oil throughput on the Contributed TexNew Mex Pipeline above 13,000 bpd. WNRL will be entitled to 20% of the economics resulting from crude oil throughput on the Contributed TexNew Mex Pipeline above our 13,000 bpd minimum volume commitment.
WNRL funded the cash consideration through $145.0 million in new borrowings under its Revolving Credit Facility and $25.0 million from cash on hand. As required for accounting purposes, WNRL recorded the acquired assets at the historical book value as the asset transaction was between entities under common control.




42


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with the financial statements and the notes thereto included elsewhere in this report. This discussion contains forward-looking statements that are based on current expectations, estimates and projections about our business and operations. The cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under Part I, Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2014 ("2014 Form 10-K") and elsewhere in this report. You should read "Risk Factors" and "Forward-Looking Statements" in this report. In this Item 2, all references to "Western Refining," "the Company," "Western," "we," "us," and "our" refer to Western Refining, Inc. and its consolidated subsidiaries including Northern Tier Energy LP ("NTI") and Western Refining Logistics, LP ("WNRL"), unless the context otherwise requires or where otherwise indicated.
Company Overview
We are an independent crude oil refiner and marketer of refined products incorporated in September 2005 under Delaware law with principal offices located in El Paso, Texas. Our common stock trades on the New York Stock Exchange ("NYSE") under the symbol “WNR.” We own certain operating assets directly: the controlling general partner interest and a 38.4% limited partner interest in NTI and the controlling general partner interest, incentive distribution rights and, as of September 30, 2015, a 66.1% limited partner interest in WNRL. NTI and WNRL common partnership units trade on the NYSE under the symbols "NTI" and "WNRL," respectively. See Note 21, Subsequent Events, in the Notes to Condensed Consolidated Financial Statements for a discussion of our ownership interest in WNRL subsequent to September 30, 2015.
We produce refined products at our refineries in El Paso, Texas (131,000 barrels per day, or bpd), near Gallup, New Mexico (25,000 bpd) and NTI's refinery in St. Paul Park, Minnesota (97,800 bpd). We sell refined products primarily in Arizona, Colorado, Minnesota, New Mexico, Wisconsin, West Texas, the Mid-Atlantic region and Mexico, through bulk distribution terminals and wholesale marketing networks. We also sell refined products through two retail networks with a total of 528 company-owned and franchised retail sites in the U.S.
NTI owns and operates a refinery in St. Paul Park, Minnesota and, at September 30, 2015, NTI included the operations of 165 retail convenience stores and supported 102 franchised retail convenience stores. NTI's primary areas of operation include Minnesota and Wisconsin.
WNRL provides logistical services to our refineries in the Southwest and operates several lubricant and bulk petroleum distribution plants and a fleet of crude oil and refined product delivery trucks. WNRL distributes wholesale petroleum products primarily in Arizona, California, Colorado, Nevada, New Mexico and Texas.
On October 15, 2014, we sold all of the outstanding limited liability company interests of Western Refining Wholesale, LLC ("WRW") to WNRL. The sale of WRW to WNRL was a transaction between entities under common control. We have recast historical financial and operational data of WNRL, for all periods presented, to reflect the purchase and consolidation of WRW into WNRL. We refer to this transaction as the "Wholesale Acquisition."
We changed our reportable segments during the fourth quarter of 2014 due to changes in our organization and have retrospectively adjusted our historical and financial data to account for these changes. Our operations include four business segments: refining, NTI, WNRL and retail. See Note 3, Segment Information, in the Notes to Condensed Consolidated Financial Statements for further discussion of our business segments.
A description of our four reportable business segments follows:
Refining. Our refining segment owns and operates two refineries in the Southwest that process crude oil and other feedstocks primarily into gasoline, diesel fuel, jet fuel and asphalt. Our refining segment also owns and operates certain logistics assets including a 375 mile section of the TexNew Mex Pipeline system that extends from WNRL's crude oil station in Star Lake, New Mexico, in the Four Corners region to its T station in Eddy County, New Mexico. We market refined products to a diverse customer base including wholesale distributors and retail chains. The refining segment also sells refined products in the Mid-Atlantic region and Mexico. On October 30, 2015, we sold this section of the pipeline to WNRL. See Note 21, Subsequent Events, in the Notes to Condensed Consolidated Financial Statements for a discussion of this transaction.
NTI. NTI owns and operates refining and transportation assets and operates and supports retail convenience stores primarily in Minnesota and Wisconsin.
WNRL. WNRL owns and operates terminal, storage and transportation assets and provides related services primarily to our refining segment in the Southwest. The WNRL segment also includes wholesale assets consisting of a fleet of crude oil and refined product truck transports and wholesale petroleum product and lubricant distribution operations in the Southwest region. WNRL receives its product supply from the refining segment and third-party suppliers.

43


Retail. Our retail segment operates retail convenience stores and unmanned commercial fleet fueling ("cardlock") locations located in the Southwest. The retail convenience stores sell gasoline, diesel fuel and convenience store merchandise.
Major Influences on Results of Operations
Summary of Third Quarter 2015
We averaged total throughput of 138,916 bpd at the El Paso refinery for the three months ended September 30, 2015, a 6.3% increase from the three months ended September 30, 2014.
We averaged total throughput of 25,664 bpd at the Gallup refinery for the three months ended September 30, 2015, a 7.6% decrease from the three months ended September 30, 2014. The decreased throughput was the result of outages from planned maintenance activity during the current period.
NTI averaged total throughput of 90,590 bpd at the St. Paul Park refinery for the three months ended September 30, 2015, a 6.1% decrease from the three months ended September 30, 2014. The decreased throughput was primarily the result of an unplanned outage at the refinery during the current period.
We purchased 1,906,881 shares under our share repurchase programs at a total cost of $80.0 million and an average price of $41.95 per share.
We declared and paid dividends of $0.34 per common share for an aggregate payment of $32.5 million.
NTI declared and paid a quarterly cash distribution of $1.19 per unit.
WNRL declared and paid a quarterly cash distribution of $0.3650 per unit.
2015 Year-to-Date Operating and Financial Highlights
Net income attributable to Western was $393.2 million, or $4.12 per diluted share for the nine months ended September 30, 2015, compared to $429.0 million, or $4.28 per diluted share for the nine months ended September 30, 2014.
Our operating income increased $40.6 million from September 30, 2014, to September 30, 2015, as shown by segment in the following table:
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands)
Refining
$
541,084

 
$
631,837

 
$
(90,753
)
NTI
334,783

 
222,735

 
112,048

WNRL
64,450

 
50,954

 
13,496

Retail
20,679

 
12,748

 
7,931

Other
(57,012
)
 
(54,865
)
 
(2,147
)
Total operating income
$
903,984

 
$
863,409

 
$
40,575

The WNRL financial and operational data presented includes the historical results of all assets acquired from Western in the Wholesale Acquisition. This transaction was a transfer of assets between entities under common control. The financial information for the affected reporting segments has been retrospectively adjusted to include or exclude the historical results of the transferred WRW assets for periods prior to the effective date of the transaction. See Note 3, Segment Information, in the Notes to Condensed Consolidated Financial Statements for further discussion of these retrospective adjustments.
Overview of Segments
Refining. The following items have a significant impact on our overall refinery gross margin, results of operations and cash flows:
fluctuations in petroleum based commodity values such as refined product prices and the cost of crude oil and other feedstocks resulting from changes in supply and demand;
product yield volumes that are less than total refinery throughput volume, resulting in yield loss and lower refinery gross margin;
seasonal fluctuations in demand for refined products;
the impact of our economic hedging activity;

44


fluctuations in our direct operating expenses, especially the cost of natural gas and the cost of electricity;
planned maintenance turnarounds, generally significant in both downtime and cost, are expensed as incurred; and
unplanned downtime of our refineries generally leads to increased maintenance costs and a temporary increase in working capital investment.
Key factors affecting petroleum based commodity values include: supply and demand for crude oil, gasoline and other refined products; changes in domestic and foreign economies; weather conditions; domestic and foreign political affairs; crude oil and refined petroleum product production levels; logistics constraints; availability of imports; marketing of competitive fuels; price differentials between heavy and sour crude oils and light sweet crude oils and government regulation.
We engage in hedging activity primarily to fix the margin on a portion of our future gasoline and distillate production and to protect the value of certain crude oil, refined product and blendstock inventories.
Excise and other taxes collected from customers and remitted to governmental authorities are not included in revenues or cost of products sold. In addition to the crude oil that we purchase to supply our refinery production, we also purchase crude oil quantities that are transported to different locations and sold to third parties. We record these sales on a gross basis with the sales price recorded as revenues and the related costs within cost of products sold. Consolidated cost of products sold for the nine months ended September 30, 2015, includes $10.3 million of realized and non-cash unrealized net gains from our economic hedging activities including refining segment gains of $8.8 million and NTI gains of $1.5 million. The non-cash unrealized net losses included in this total for the nine months ended September 30, 2015, were $42.1 million, including $42.4 million related to refining segment losses offset by $0.3 million in NTI gains.
Demand for gasoline is generally higher during the summer months than during the winter months. 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 of each year. During 2014 and continuing into 2015, the volatility in crude oil prices and refining margins contributed to the variability of our results of operations.
Safety, reliability and the environmental performance of our refineries’ operations are critical components of our financial performance. Unplanned downtime of our refineries generally results in lost refinery gross margin, increased maintenance costs and a temporary increase in our working capital investment. We attempt to mitigate the financial impact of planned downtime, such as a turnaround or a major maintenance project, through our planning process that considers product availability, the margin environment and the availability of resources to perform the required maintenance. We occasionally experience unplanned downtime due to circumstances outside of our control. Certain of these outages may lead to losses that qualify for reimbursement under our business interruption insurance and we record such reimbursements as revenues when received.
Under an exclusive supply agreement with a third party, we receive monthly distribution amounts from the supplier equal to one-half of the amount by which our refined product sales in the Mid-Atlantic exceeds the supplier's costs of acquiring, transporting and hedging the refined product related to such sales. To the extent our refined product sales do not exceed the refined product costs during any month, we pay one-half of that amount to the supplier. Our payments to the supplier are limited to an aggregate annual amount of $2.0 million.
NTI. NTI's gross margins, results of operations and cash flows are primarily affected by the following:
fluctuations in petroleum based commodity values such as refined product prices and the cost of crude oil and other feedstocks resulting from changes in supply and demand;
product yield volumes that are less than total refinery throughput volume, resulting in yield loss and lower refinery gross margin;
adjustments to reflect the lower of cost or market value of crude oil, finished product and retail last-in, first-out ("LIFO") inventory values;
fluctuations in its direct operating expenses, especially related to the cost of natural gas and the cost of electricity;
planned maintenance turnarounds, generally significant in both downtime and cost, are expensed as incurred;
seasonal fluctuations in demand for refined products; and
unplanned refinery downtime generally leads to increased maintenance costs and a temporary increase in working capital investment.
Demand for gasoline is generally higher during the summer months than during the winter months due to seasonal increases in highway traffic. Decreased demand during the winter months can lower gasoline prices and margins. As a result, NTI's operating results for the first and fourth calendar quarters are generally lower than those for the second and third calendar quarters of each year.

45


WNRL. As WNRL's logistics operations primarily support the operations of Western, its results of operations and cash flows are indirectly affected by operational items that affect Western. WNRL's terminal throughput volumes depend primarily on the volume of refined and other products produced at Western’s refineries that, in turn, is ultimately dependent on supply and demand for refined product, crude oil and other feedstocks and Western’s response to changes in demand and supply.
Earnings and cash flows from WNRL's wholesale business are primarily affected by the sales volumes and margins of gasoline, diesel fuel and lubricants sold and transportation revenues from crude oil trucking and delivery. These margins are equal to the sales price, net of discounts, less total cost of sales and are measured on a cents per gallon ("cpg") basis. Factors that influence margins include local supply, demand and competition.
Retail. Earnings and cash flows from our retail business are primarily affected by the sales volumes and margins of gasoline and diesel fuel and by the sales and margins of merchandise sold at our retail stores. Margins for gasoline and diesel fuel sales are equal to the sales price less the delivered cost of the fuel and motor fuel taxes and are measured on a cpg basis. Fuel margins are impacted by competition and local and regional supply and demand. Margins for retail merchandise sold are equal to retail merchandise sales less the delivered cost of the merchandise, net of supplier discounts and inventory shrinkage and are measured as a percentage of merchandise sales. Merchandise sales are impacted by convenience or location, branding and competition. Our retail sales reflect seasonal trends such that operating results for the first and fourth calendar quarters are generally lower than those for the second and third calendar quarters of each year primarily driven by lower volumes of fuel being sold. Earnings and cash flows from our cardlock business are primarily affected by the sales volumes and margins of gasoline and diesel fuel sold. These margins are equal to the sales price, net of discounts less the delivered cost of the fuel and motor fuel taxes and are measured on a cpg basis. Factors that influence margins include local supply, demand and competition.
Critical Accounting Policies and Estimates
We prepare our financial statements in conformity with U.S. generally accepted accounting principles ("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 continuing development of the information utilized and subsequent events, some of which we may have little or no control over. Our critical accounting policies could materially affect the amounts recorded in our financial statements. Our critical accounting policies, estimates and recent accounting pronouncements that potentially impact us are discussed in detail under Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2014 Form 10-K.
Recent Accounting Pronouncements. From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that may have an impact on our accounting and reporting. We are currently evaluating the effect that certain of these new accounting requirements may have on our accounting and related reporting and disclosures in our consolidated financial statements. For further discussion of the impact of recent accounting pronouncements, see Note 2, Basis of Presentation and Significant Accounting Policies.

46


Results of Operations
The following tables summarize our consolidated and operating segment financial data and key operating statistics for the three and nine months ended September 30, 2015 and 2014. The following data should be read in conjunction with our Condensed Consolidated Financial Statements and the notes thereto included elsewhere in this quarterly report.
Consolidated
Three Months Ended September 30, 2015, Compared to the Three Months Ended September 30, 2014
 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands, except per share data)
Statements of Operations Data
 
 
 
 
 
Net sales (1)
$
2,569,090

 
$
4,052,324

 
$
(1,483,234
)
Operating costs and expenses:
 
 
 
 
 
Cost of products sold (exclusive of depreciation and amortization) (1)
1,895,772

 
3,379,555

 
(1,483,783
)
Direct operating expenses (exclusive of depreciation and amortization) (1)
234,440

 
218,183

 
16,257

Selling, general and administrative expenses
54,465

 
57,206

 
(2,741
)
Gain on disposal of assets, net
(52
)
 
(66
)
 
14

Maintenance turnaround expense
490

 
1,883

 
(1,393
)
Depreciation and amortization
51,377

 
46,910

 
4,467

Total operating costs and expenses
2,236,492

 
3,703,671

 
(1,467,179
)
Operating income
332,598

 
348,653

 
(16,055
)
Other income (expense):
 
 
 
 

Interest income
186

 
483

 
(297
)
Interest expense and other financing costs
(26,896
)
 
(18,250
)
 
(8,646
)
Other, net
4,327

 
(2,816
)
 
7,143

Income before income taxes
310,215

 
328,070

 
(17,855
)
Provision for income taxes
(92,117
)
 
(80,713
)
 
(11,404
)
Net income
218,098

 
247,357

 
(29,259
)
Less net income attributable to non-controlling interests (2)
64,795

 
60,608

 
4,187

Net income attributable to Western Refining, Inc.
$
153,303

 
$
186,749

 
$
(33,446
)
 
 
 
 
 
 
Basic earnings per share
$
1.61

 
$
1.85

 
$
(0.24
)
Diluted earnings per share
$
1.61

 
$
1.84

 
$
(0.23
)
Dividends declared per common share
$
0.34

 
$
0.26

 
$
0.08

Weighted average basic shares outstanding
94,826

 
101,199

 
(6,373
)
Weighted average dilutive shares outstanding
94,924

 
101,325

 
(6,401
)
(1)
Excludes $885.2 million and $1,193.0 million of intercompany sales and $885.2 million and $1,189.0 million of intercompany cost of products sold for the three months ended September 30, 2015 and September 30, 2014, respectively, and $4.0 million of intercompany direct operating expenses for the three months ended September 30, 2014 with no comparable activity for the three months ended September 30, 2015.
(2)
Net income attributable to non-controlling interests for the three months ended September 30, 2015, consisted of income from NTI and WNRL in the amount of $59.2 million and $5.6 million, respectively. Net income attributable to non-controlling interests for the three months ended September 30, 2014, consisted of income from NTI and WNRL in the amount of $56.4 million and $4.3 million, respectively.

47


 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands)
Economic Hedging Activities Reported within Cost of Products Sold
 
 
 
 
 
Realized hedging gain, net
$
26,949


$
26,716

 
$
233

Unrealized hedging gain, net
271


17,020

 
(16,749
)
Total hedging gain, net
$
27,220

 
$
43,736

 
$
(16,516
)
 
 
 
 
 
 
Cash Flow Data
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
373,620

 
$
208,959

 
$
164,661

Investing activities
(20,321
)
 
(46,875
)
 
26,554

Financing activities
(187,665
)
 
(43,743
)
 
(143,922
)
Capital expenditures
$
76,431

 
$
49,923

 
$
26,508

Gross Margin. Gross margin is calculated as net sales less cost of products sold (exclusive of depreciation and amortization). Compared to the three months ended September 30, 2014, our current quarter consolidated gross margin increased by 0.1%. This increase was primarily due to refining margins and economic hedging activities, both of which we discuss in our refining and NTI segments.
Direct Operating Expenses (exclusive of depreciation and amortization). The increase in direct operating expenses was primarily due to increases of $6.5 million, $6.3 million and $4.6 million in our WNRL, NTI and retail segments, respectively, partially offset by a decrease of $0.9 million in our refining segment.
Selling, General and Administrative Expenses. The decrease in selling, general and administrative expenses resulted from decreases of $1.4 million, $1.4 million and $0.8 million in our corporate overhead and NTI and WNRL segments, respectively, partially offset by increases of $0.6 million and $0.3 million in our retail and refining segments, respectively. The decrease in corporate overhead was primarily due to lower professional and legal expenses and insurance expenses in the current period.
Depreciation and Amortization. The increase between periods was primarily due to additional depreciation associated with logistics assets capitalized through the ongoing expansion of our Delaware Basin logistics system.
Interest Expense and Other Financing Costs. The increase in interest expense from prior periods was attributable to interest incurred resulting from WNRL's issuance of $300.0 million in aggregate principal amount of 7.5% Senior Notes due 2023 (the "WNRL 2023 Senior Notes") in February 2015.


48


Nine Months Ended September 30, 2015, Compared to the Nine Months Ended September 30, 2014
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands, except per share data)
Statements of Operations Data
 
 
 
 
 
Net sales (1)
$
7,716,712

 
$
12,128,757

 
$
(4,412,045
)
Operating costs and expenses:
 
 
 
 
 
Cost of products sold (exclusive of depreciation and amortization) (1)
5,814,969

 
10,271,461

 
(4,456,492
)
Direct operating expenses (exclusive of depreciation and amortization) (1)
674,474

 
619,995

 
54,479

Selling, general and administrative expenses
169,808

 
170,578

 
(770
)
Affiliate severance costs

 
12,878

 
(12,878
)
Loss (gain) on disposal of assets, net
(157
)
 
939

 
(1,096
)
Maintenance turnaround expense
1,188

 
48,329

 
(47,141
)
Depreciation and amortization
152,446

 
141,168

 
11,278

Total operating costs and expenses
6,812,728

 
11,265,348

 
(4,452,620
)
Operating income
903,984

 
863,409

 
40,575

Other income (expense):
 
 
 
 
 
Interest income
550

 
899

 
(349
)
Interest expense and other financing costs
(79,169
)
 
(75,008
)
 
(4,161
)
Loss on extinguishment of debt

 
(9
)
 
9

Other, net
11,557

 
(351
)
 
11,908

Income before income taxes
836,922

 
788,940

 
47,982

Provision for income taxes
(229,989
)
 
(223,319
)
 
(6,670
)
Net income
606,933

 
565,621

 
41,312

Less net income attributable to non-controlling interests (2)
213,722

 
136,630

 
77,092

Net income attributable to Western Refining, Inc.
$
393,211

 
$
428,991

 
$
(35,780
)
 
 
 
 
 
 
Basic earnings per share
$
4.12

 
$
4.86

 
$
(0.74
)
Diluted earnings per share
$
4.12

 
$
4.28

 
$
(0.16
)
Dividends declared per common share
$
0.98

 
$
0.78

 
$
0.20

Weighted average basic shares outstanding
95,308

 
88,240

 
7,068

Weighted average dilutive shares outstanding
95,408

 
102,207

 
(6,799
)
(1)
Excludes $2,517.3 million and $3,487.8 million of intercompany sales and $2,517.3 million and $3,475.5 million of intercompany cost of products sold for the nine months ended September 30, 2015 and September 30, 2014, respectively, and $12.3 million of intercompany direct operating expenses for the nine months ended September 30, 2014 with no comparable activity for nine months ended September 30, 2015.
(2)
Net income attributable to non-controlling interests for the nine months ended September 30, 2015, consisted of income from NTI and WNRL in the amount of $197.6 million and $16.2 million, respectively. Net income attributable to non-controlling interests for the nine months ended September 30, 2014, consisted of income from NTI and WNRL in the amount of $124.8 million and $11.8 million, respectively.

49


 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands)
Economic Hedging Activities Recognized within Cost of Products Sold
 
 
 
 
 
Realized hedging gain, net
$
52,325

 
$
44,272

 
$
8,053

Unrealized hedging gain (loss), net
(42,073
)
 
136,371

 
(178,444
)
Total hedging gain, net
$
10,252

 
$
180,643

 
$
(170,391
)
 
 
 
 
 
 
Cash Flow Data
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
665,664

 
$
494,058

 
$
171,606

Investing activities
(34,454
)
 
(142,036
)
 
107,582

Financing activities
(352,799
)
 
(169,938
)
 
(182,861
)
Capital expenditures
$
195,976

 
$
147,254

 
$
48,722

Gross Margin. Gross margin is calculated as net sales less cost of products sold (exclusive of depreciation and amortization). Compared to the nine months ended September 30, 2014, our consolidated gross margin increased by 2.4% for the current year period. This increase was primarily due to refining margins and economic hedging activities. We discuss refining margins and economic hedging activities under our refining and NTI segments.
Direct Operating Expenses (exclusive of depreciation and amortization). The increase in direct operating expenses was primarily due to increases of $18.7 million, $17.2 million, $12.2 million and $6.9 million in our NTI, WNRL, retail and refining segments, respectively.
Selling, General and Administrative Expenses. The decrease in selling, general and administrative expenses resulted from a decrease of $7.5 million in our NTI segment, partially offset by an increase of $2.5 million, $2.1 million, $1.7 million and $0.5 million in our refining segment, corporate overhead, retail segment and WNRL segment, respectively. The increase in corporate overhead was due to higher employee expenses based primarily on higher incentive compensation expenses in the current period.
Affiliate Severance Costs. The severance costs incurred during the nine months ended September 30, 2014, relate to severance payments resulting from Western's acquisition of NTI's general partner.
Maintenance Turnaround Expense. We reported minimal turnaround expenses during the nine months ended September 30, 2015. During the nine months ended September 30, 2014, we reported turnaround expenses in connection with the 2014 turnaround of the south side units of the El Paso refinery.
Depreciation and Amortization. The increase between periods was primarily due to additional depreciation at our El Paso refinery primarily resulting from assets capitalized during the first quarter of 2014 in El Paso and additional depreciation associated with our logistics assets related to the ongoing expansion of our Delaware Basin logistics system.
Interest Expense and Other Financing Costs. The increase in interest expense from prior periods was attributable to interest incurred through WNRL's issuance of $300.0 million in aggregate principal amount of the WNRL 2023 Senior Notes. This increase was partially offset during the current year by the retirement of our 5.75% Convertible Senior Unsecured Notes during the second quarter of 2014.

50


Results by Segment
The following tables set forth our historical financial data by segment for the periods presented. During the fourth quarter of 2014, we changed our reportable segments due to changes in our organization. Our operations are organized into four operating segments based on manufacturing and marketing criteria and the nature of our products and services, our production processes and our types of customers. These segments are refining, NTI, WNRL and retail. See Note 3, Segment Information, in the Notes to Condensed Consolidated Financial Statements for more information. The historical financial data was retrospectively adjusted for the periods presented to conform to the current presentation.
 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands)
Gross Margin by Segment
 
 
 
 
 
Refining
$
317,608

 
$
352,242

 
$
(34,634
)
NTI
224,339

 
213,336

 
11,003

WNRL (1)
72,922

 
60,540

 
12,382

Retail
58,679

 
46,496

 
12,183

Other
(230
)
 
155

 
(385
)
Consolidated gross margin
$
673,318

 
$
672,769

 
$
549

Direct Operating Expenses by Segment
 
 
 
 
 
Refining
$
77,249

 
$
78,184

 
$
(935
)
NTI
82,203

 
75,909

 
6,294

WNRL
39,705

 
33,175

 
6,530

Retail
35,283

 
30,710

 
4,573

Other

 
205

 
(205
)
Consolidated direct operating expenses
$
234,440

 
$
218,183

 
$
16,257

Depreciation and Amortization by Segment
 
 
 
 
 
Refining
$
22,013

 
$
20,280

 
$
1,733

NTI
19,746

 
18,482

 
1,264

WNRL
4,983

 
4,292

 
691

Retail
3,676

 
3,069

 
607

Other
959

 
787

 
172

Consolidated depreciation and amortization
$
51,377

 
$
46,910

 
$
4,467

(1)
WNRL gross margin includes $51.9 million and $45.0 million of intersegment fee based revenues for the three months ended September 30, 2015 and 2014, respectively.
See additional analysis under discussions of our refining, NTI, WNRL and retail segments.

51



 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands)
Gross Margin by Segment
 
 
 
 
 
Refining
$
864,673

 
$
988,010

 
$
(123,337
)
NTI
685,673

 
573,759

 
111,914

WNRL (1)
209,092

 
176,636

 
32,456

Retail
142,535

 
118,506

 
24,029

Other
(230
)
 
385

 
(615
)
Consolidated gross margin
$
1,901,743

 
$
1,857,296

 
$
44,447

Direct Operating Expenses by Segment
 
 
 
 
 
Refining
$
232,160

 
$
225,224

 
$
6,936

NTI
228,256

 
209,535

 
18,721

WNRL
112,697

 
95,524

 
17,173

Retail
101,278

 
89,115

 
12,163

Other
83

 
597

 
(514
)
Consolidated direct operating expenses
$
674,474

 
$
619,995

 
$
54,479

Depreciation and Amortization by Segment
 
 
 
 
 
Refining
$
65,535

 
$
60,145

 
$
5,390

NTI
58,626

 
56,829

 
1,797

WNRL
14,458

 
12,898

 
1,560

Retail
10,993

 
8,821

 
2,172

Other
2,834

 
2,475

 
359

Consolidated depreciation and amortization
$
152,446

 
$
141,168

 
$
11,278

(1)
WNRL gross margin includes $143.5 million and $129.0 million of intersegment fee based revenues for the nine months ended September 30, 2015 and 2014, respectively.
See additional analysis under discussions of our refining, NTI, WNRL and retail segments.


52


Adjusted EBITDA
Adjusted EBITDA represents earnings before interest expense and other financing costs, provision for income taxes, depreciation, amortization, maintenance turnaround expense and certain other non-cash income and expense items. However, Adjusted EBITDA is not a recognized measurement under U.S. GAAP. 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 financings, income taxes, the accounting effects of significant turnaround activities (that many of our competitors capitalize and thereby exclude from their measures of EBITDA) and certain non-cash charges that are 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 significant turnaround activities, 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
Adjusted EBITDA, as we calculate it, may differ from the Adjusted EBITDA calculations of other companies in our industry, thereby 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.
Three Months Ended September 30, 2015, Compared to the Three Months Ended September 30, 2014
 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands)
Net income attributable to Western Refining, Inc.
$
153,303

 
$
186,749

 
$
(33,446
)
Net income attributable to non-controlling interests
64,795

 
60,608

 
4,187

Interest expense and other financing costs
26,896

 
18,250

 
8,646

Provision for income taxes
92,117

 
80,713

 
11,404

Gain on disposal of assets, net
(52
)
 
(66
)
 
14

Depreciation and amortization
51,377

 
46,910

 
4,467

Maintenance turnaround expense
490

 
1,883

 
(1,393
)
Net change in lower of cost or market inventory reserve
36,795

 

 
36,795

Unrealized gain on commodity hedging transactions
(271
)
 
(17,020
)
 
16,749

Adjusted EBITDA
$
425,450

 
$
378,027

 
$
47,423


53


Nine Months Ended September 30, 2015, Compared to the Nine Months Ended September 30, 2014
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands)
Net income attributable to Western Refining, Inc.
$
393,211

 
$
428,991

 
$
(35,780
)
Net income attributable to non-controlling interests
213,722

 
136,630

 
77,092

Interest expense and other financing costs
79,169

 
75,008

 
4,161

Provision for income taxes
229,989

 
223,319

 
6,670

Loss (gain) on disposal of assets, net
(157
)
 
939

 
(1,096
)
Depreciation and amortization
152,446

 
141,168

 
11,278

Maintenance turnaround expense
1,188

 
48,329

 
(47,141
)
Loss on extinguishment of debt

 
9

 
(9
)
Net change in lower of cost or market inventory reserve
(17,131
)
 

 
(17,131
)
Unrealized loss (gain) on commodity hedging transactions
42,073

 
(136,371
)
 
178,444

Adjusted EBITDA
$
1,094,510

 
$
918,022

 
$
176,488




54


Refining Segment
Three Months Ended September 30, 2015, Compared to the Three Months Ended September 30, 2014
 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands, except bpd and per barrel data)
Statement of Operations Data:
 
 
 
 
 
Net sales (including intersegment sales) (1)
$
1,652,934

 
$
2,498,226

 
$
(845,292
)
Operating costs and expenses:
 
 
 
 
 
Cost of products sold (exclusive of depreciation and amortization) (2)
1,335,326

 
2,145,984

 
(810,658
)
Direct operating expenses (exclusive of depreciation and amortization)
77,249

 
78,184

 
(935
)
Selling, general and administrative expenses
7,509

 
7,216

 
293

Loss on disposal of assets, net

 
103

 
(103
)
Maintenance turnaround expense
490

 
1,883

 
(1,393
)
Depreciation and amortization
22,013

 
20,280

 
1,733

Total operating costs and expenses
1,442,587

 
2,253,650

 
(811,063
)
Operating income
$
210,347

 
$
244,576

 
$
(34,229
)
Key Operating Statistics
 
 
 
 
 
Total sales volume (bpd) (1) (3)
247,839

 
219,755

 
28,084

Total production (bpd)
162,058

 
156,291

 
5,767

Total throughput (bpd)
164,580

 
158,452

 
6,128

Per barrel of throughput:
 
 
 
 
 
Refinery gross margin (2) (4)
$
21.11

 
$
24.04

 
$
(2.93
)
Direct operating expenses (5)
5.10

 
5.36

 
(0.26
)
Mid-Atlantic sales volume (bbls)
2,144

 
2,005

 
139

Mid-Atlantic margin per barrel
$
(1.10
)
 
$
0.91

 
$
(2.01
)
The following tables set forth our summary refining throughput and production data for the periods and refineries presented:
El Paso and Gallup Refineries
 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
Key Operating Statistics
 
 
 
 
 
Product yields (bpd):
 
 
 
 
 
Gasoline
87,816

 
81,350

 
6,466

Diesel and jet fuel
63,545

 
65,786

 
(2,241
)
Residuum
4,121

 
5,569

 
(1,448
)
Other
6,576

 
3,586

 
2,990

Total production (bpd)
162,058

 
156,291

 
5,767

Throughput (bpd):
 
 
 
 

Sweet crude oil
131,465

 
122,282

 
9,183

Sour crude oil
23,854

 
26,319

 
(2,465
)
Other feedstocks and blendstocks
9,261

 
9,851

 
(590
)
Total throughput (bpd)
164,580

 
158,452

 
6,128


55


El Paso Refinery
 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
Key Operating Statistics
 
 
 
 
 
Product yields (bpd):
 
 
 
 
 
Gasoline
71,855

 
64,614

 
7,241

Diesel and jet fuel
55,667

 
56,278

 
(611
)
Residuum
4,121

 
5,569

 
(1,448
)
Other
5,016

 
2,517

 
2,499

Total production (bpd)
136,659

 
128,978

 
7,681

Throughput (bpd):
 
 
 
 

Sweet crude oil
107,577

 
97,514

 
10,063

Sour crude oil
23,854

 
26,319

 
(2,465
)
Other feedstocks and blendstocks
7,485

 
6,844

 
641

Total throughput (bpd)
138,916

 
130,677

 
8,239

Total sales volume (bpd) (3)
149,861

 
138,212

 
11,649

Per barrel of throughput:
 
 
 
 

Refinery gross margin (2) (4)
$
18.51

 
$
20.99

 
$
(2.48
)
Direct operating expenses (5)
3.64

 
4.32

 
(0.68
)

Gallup Refinery
 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
Key Operating Statistics
 
 
 
 
 
Product yields (bpd):
 
 
 
 
 
Gasoline
15,961

 
16,736

 
(775
)
Diesel and jet fuel
7,878

 
9,508

 
(1,630
)
Other
1,560

 
1,069

 
491

Total production (bpd)
25,399

 
27,313

 
(1,914
)
Throughput (bpd):
 
 
 
 

Sweet crude oil
23,888

 
24,768

 
(880
)
Other feedstocks and blendstocks
1,776

 
3,007

 
(1,231
)
Total throughput (bpd)
25,664

 
27,775

 
(2,111
)
Total sales volume (bpd) (3)
33,489

 
35,705

 
(2,216
)
Per barrel of throughput:
 
 
 
 

Refinery gross margin (2) (4)
$
23.08

 
$
20.65

 
$
2.43

Direct operating expenses (5)
9.10

 
8.29

 
0.81

(1)
Refining net sales for the three months ended September 30, 2015 and 2014, includes $279.4 million and $410.4 million, respectively, representing a period average of 64,488 bpd and 45,837 bpd, respectively, in crude oil sales to third parties.

56


(2)
Cost of products sold for the refining segment includes the segment's net realized and net non-cash unrealized hedging activity shown in the table below. The hedging gains and losses are also included in the combined gross profit and refinery gross margin but are not included in those measures for the individual refineries.
 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands)
Realized hedging gain, net
$
23,134

 
$
20,737

 
$
2,397

Unrealized hedging gain, net
1,531

 
16,190

 
(14,659
)
Total hedging gain, net
$
24,665

 
$
36,927

 
$
(12,262
)
(3)
Sales volume includes sales of refined products sourced primarily from our refinery production as well as refined products purchased from third parties. We purchase additional refined products from third parties to supplement supply to our customers. These products are similar to the products that we currently manufacture and represented 8.4% and 8.7% of our total consolidated sales volumes for the three months ended September 30, 2015 and 2014, respectively. The majority of the purchased refined products are distributed through our refined product sales activities in the Mid-Atlantic region where we satisfy our refined product customer sales requirements through a third-party supply agreement.
(4)
Refinery gross margin for the respective periods presented is a per barrel measurement calculated by subtracting cost of products sold from net sales and dividing that difference by our refineries’ total throughput volumes. Net realized and net non-cash unrealized economic hedging gains and losses included in the combined refining segment gross margin are not allocated to the individual refineries. Refinery gross margin is a non-GAAP performance measure that we believe is useful for evaluating our refinery performance as a general indication of the excess of the refined product sales amount over the related cost of products sold. Our calculation of refinery gross margin excludes the sales and costs related to our Mid-Atlantic business that we report within the refining segment. The following table reconciles the sales and cost of sales used to calculate refinery gross margin with the total sales and cost of sales reported in the refining statement of operations data above:
 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands)
Refinery net sales (including intersegment sales)
$
1,498,049

 
$
2,263,053

 
$
(765,004
)
Mid-Atlantic sales
154,885

 
235,173

 
(80,288
)
Net sales (including intersegment sales)
$
1,652,934


$
2,498,226


$
(845,292
)
 
 
 
 
 
 
Refinery cost of products sold (exclusive of depreciation and amortization)
$
1,178,412

 
$
1,912,640

 
$
(734,228
)
Mid-Atlantic cost of products sold
156,914

 
233,344

 
(76,430
)
Cost of products sold (exclusive of depreciation and amortization)
$
1,335,326


$
2,145,984


$
(810,658
)

57


Our calculation of refinery gross margin may differ from similar calculations of other companies in our industry, thereby limiting its usefulness as a comparative measure. The following table reconciles combined gross profit for our refineries to combined gross margin for our refineries for the periods presented:
 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands, except per barrel data)
Refinery net sales (including intersegment sales)
$
1,498,049

 
$
2,263,053

 
$
(765,004
)
Refinery cost of products sold (exclusive of depreciation and amortization)
1,178,412

 
1,912,640

 
(734,228
)
Depreciation and amortization
22,013

 
20,280

 
1,733

Gross profit
297,624

 
330,133

 
(32,509
)
Plus depreciation and amortization
22,013

 
20,280

 
1,733

Refinery gross margin
$
319,637

 
$
350,413

 
$
(30,776
)
Refinery gross margin per throughput barrel
$
21.11

 
$
24.04

 
$
(2.93
)
Gross profit per throughput barrel
$
19.66

 
$
22.65

 
$
(2.99
)
(5)
Refinery direct operating expenses per throughput barrel is calculated by dividing direct operating expenses by total throughput volumes for the respective periods presented. Direct operating expenses do not include any depreciation or amortization.
Gross Margin. Refinery gross margin is calculated as net sales (including intersegment sales) less cost of products sold (exclusive of depreciation and amortization). Excluding the impact of hedging activities, refinery gross margin per throughput barrel increased in a manner consistent with the increase in industry benchmarks. The Gulf Coast benchmark 3:2:1 crack spread rose to $21.43 in the third quarter of 2015 from $18.10 in the third quarter of 2014. Our crude oil purchases are based on pricing tied to West Texas Intermediate ("WTI") that, in recent quarters, has experienced price volatility relative to Brent crude oil. During the third quarter of 2015, this differential decreased to an average of $4.03 per barrel from an average of $4.36 per barrel for the third quarter of 2014. During 2014 and in the first half of 2015, our El Paso refinery margins reflected the positive impact of the WTI Midland/Cushing discount. The discount reversed in the third quarter of 2015 as the differential averaged a WTI Midland premium of $0.71 per barrel during the third quarter of 2015 compared to a third quarter 2014 WTI Midland discount of $9.96 per barrel.
Refinery gross margin was also affected by third quarter 2015 net realized and unrealized economic hedging gains of $24.7 million compared to gains of $36.9 million during the third quarter of 2014. We enter into hedge contracts to manage our exposure to commodity price risks or to fix sales margins on a portion of our future gasoline and distillate production. Unrealized mark-to-market gains and losses related to our economic hedging instruments are the result of differences between forward crack spreads and the fixed margins from our hedge contracts. We incur unrealized commodity hedging losses when forward spreads are in excess of our fixed contract margins. Hedging gains or losses are included within cost of product sold, directly impacting our refining gross margin.
Other impacts to margin include the net cost of Renewable Identification Numbers ("RIN"), which was $13.1 million for the three months ended September 30, 2015, compared to $12.5 million for the three months ended September 30, 2014. Total refinery throughput increased by 0.6 million barrels quarter over quarter. Our refined product sales volume increased to 22.8 million barrels during the third quarter of 2015 from 20.2 million barrels during the third quarter of 2014.
Direct Operating Expenses (exclusive of depreciation and amortization). Direct operating expenses decreased quarter over quarter primarily due to a decrease in chemical and energy expenses of $3.1 million, resulting from lower commodity prices, and decreases in environmental and maintenance expenses of $1.7 million and $1.5 million, respectively. Offsetting the total decrease were increases to outside support services, railcar leases and employee expenses of $2.2 million, $1.0 million and $0.5 million, respectively, as well as increases in property taxes, insurance and other items of $1.4 million.
Depreciation and Amortization. Depreciation and amortization increased due to additional depreciation associated with recently capitalized assets.

58


Nine Months Ended September 30, 2015, Compared to the Nine Months Ended September 30, 2014
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands, except bpd and per barrel data)
Statement of Operations Data:
 
 
 
 
 
Net sales (including intersegment sales) (1)
$
4,963,407

 
$
7,566,741

 
$
(2,603,334
)
Operating costs and expenses:
 
 
 
 
 
Cost of products sold (exclusive of depreciation and amortization) (2)
4,098,734

 
6,578,731

 
(2,479,997
)
Direct operating expenses (exclusive of depreciation and amortization)
232,160

 
225,224

 
6,936

Selling, general and administrative expenses
24,211

 
21,700

 
2,511

Loss on disposal of assets, net
495

 
775

 
(280
)
Maintenance turnaround expense
1,188

 
48,329

 
(47,141
)
Depreciation and amortization
65,535

 
60,145

 
5,390

Total operating costs and expenses
4,422,323

 
6,934,904

 
(2,512,581
)
Operating income
$
541,084

 
$
631,837

 
$
(90,753
)
Key Operating Statistics
 
 
 
 
 
Total sales volume (bpd) (1) (3)
238,375

 
216,009

 
22,366

Total production (bpd)
162,377

 
151,697

 
10,680

Total throughput (bpd)
164,616

 
153,937

 
10,679

Per barrel of throughput:
 
 
 
 
 
Refinery gross margin (2) (4)
$
19.22

 
$
23.45

 
$
(4.23
)
Direct operating expenses (5)
5.17

 
5.36

 
(0.19
)
Mid-Atlantic sales volume (bbls)
6,597

 
6,883

 
(286
)
Mid-Atlantic margin per barrel
$
0.15

 
$
0.37

 
$
(0.22
)
The following tables set forth our summary refining throughput and production data for the periods and refineries presented:
El Paso and Gallup Refineries
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
Key Operating Statistics
 
 
 
 
 
Product yields (bpd):
 
 
 
 
 
Gasoline
87,678

 
77,732

 
9,946

Diesel and jet fuel
63,941

 
63,692

 
249

Residuum
4,730

 
5,241

 
(511
)
Other
6,028

 
5,032

 
996

Total production (bpd)
162,377

 
151,697

 
10,680

Throughput (bpd):
 
 
 
 
 
Sweet crude oil
131,626

 
120,873

 
10,753

Sour crude oil
23,055

 
24,841

 
(1,786
)
Other feedstocks and blendstocks
9,935

 
8,223

 
1,712

Total throughput (bpd)
164,616

 
153,937

 
10,679


59


El Paso Refinery
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
Key Operating Statistics
 
 
 
 
 
Product yields (bpd):
 
 
 
 
 
Gasoline
70,613

 
60,904

 
9,709

Diesel and jet fuel
55,804

 
54,911

 
893

Residuum
4,730

 
5,241

 
(511
)
Other
4,503

 
3,588

 
915

Total production (bpd)
135,650

 
124,644

 
11,006

Throughput (bpd):
 
 
 
 
 
Sweet crude oil
106,850

 
95,881

 
10,969

Sour crude oil
23,055

 
24,841

 
(1,786
)
Other feedstocks and blendstocks
7,604

 
5,709

 
1,895

Total throughput (bpd)
137,509

 
126,431

 
11,078

Total sales volume (bpd) (3)
150,404

 
138,851

 
11,553

Per barrel of throughput:
 
 
 
 
 
Refinery gross margin (2) (4)
$
18.65

 
$
19.50

 
$
(0.85
)
Direct operating expenses (5)
3.96

 
4.31

 
(0.35
)

Gallup Refinery
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
Key Operating Statistics
 
 
 
 
 
Product yields (bpd):
 
 
 
 
 
Gasoline
17,065

 
16,828

 
237

Diesel and jet fuel
8,137

 
8,781

 
(644
)
Other
1,525

 
1,444

 
81

Total production (bpd)
26,727

 
27,053

 
(326
)
Throughput (bpd):
 
 
 
 
 
Sweet crude oil
24,776

 
24,992

 
(216
)
Other feedstocks and blendstocks
2,331

 
2,514

 
(183
)
Total throughput (bpd)
27,107

 
27,506

 
(399
)
Total sales volume (bpd) (3)
33,339

 
34,257

 
(918
)
Per barrel of throughput:
 
 
 
 
 
Refinery gross margin (2) (4)
$
19.85

 
$
16.54

 
$
3.31

Direct operating expenses (5)
8.30

 
8.58

 
(0.28
)
(1)
Refining net sales for the nine months ended September 30, 2015 and 2014, includes $753.8 million and $1,163.8 million, respectively, representing a period average of 54,631 bpd and 42,901 bpd, respectively, in crude oil sales to third parties.

60


(2)
Cost of products sold for the refining segment includes the segment's net realized and net non-cash unrealized hedging activity shown in the table below. The hedging gains and losses are also included in the combined gross profit and refinery gross margin but are not included in those measures for the individual refineries.
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands)
Realized hedging gain, net
$
51,275

 
$
41,399

 
$
9,876

Unrealized hedging gain (loss), net
(42,446
)
 
135,246

 
(177,692
)
Total hedging gain (loss), net
$
8,829

 
$
176,645

 
$
(167,816
)
(3)
Sales volume includes sales of refined products sourced primarily from our refinery production as well as refined products purchased from third parties. We purchase additional refined products from third parties to supplement supply to our customers. These products are similar to the products that we currently manufacture and represented 9.4% and 10.3% of our total consolidated sales volumes for the nine months ended September 30, 2015 and 2014, respectively. The majority of the purchased refined products are distributed through our refined product sales activities in the Mid-Atlantic region where we satisfy our refined product customer sales requirements through a third-party supply agreement.
(4)
Refinery gross margin for the respective periods presented is a per barrel measurement calculated by subtracting cost of products sold from net sales and dividing that difference by our refineries’ total throughput volumes. Net realized and net non-cash unrealized economic hedging gains and losses included in the combined refining segment gross margin are not allocated to the individual refineries. Refinery gross margin is a non-GAAP performance measure that we believe is useful for evaluating our refinery performance as a general indication of the excess of the refined product sales amount over the related cost of products sold. Our calculation of refinery gross margin excludes the sales and costs related to our Mid-Atlantic business that we report within the refining segment. The following table reconciles the sales and cost of sales used to calculate refinery gross margin with the total sales and cost of sales reported in the refining statement of operations data above:
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands)
Refinery net sales (including intersegment sales)
$
4,466,544

 
$
6,734,253

 
$
(2,267,709
)
Mid-Atlantic sales
496,863

 
832,488

 
(335,625
)
Net sales (including intersegment sales)
$
4,963,407

 
$
7,566,741

 
$
(2,603,334
)
 
 
 
 
 
 
Refinery cost of products sold (exclusive of depreciation and amortization)
$
3,602,870

 
$
5,748,784

 
$
(2,145,914
)
Mid-Atlantic cost of products sold
495,864

 
829,947

 
(334,083
)
Cost of products sold (exclusive of depreciation and amortization)
$
4,098,734

 
$
6,578,731

 
$
(2,479,997
)

61


Our calculation of refinery gross margin may differ from similar calculations of other companies in our industry, thereby limiting its usefulness as a comparative measure. The following table reconciles combined gross profit for our refineries to combined gross margin for our refineries for the periods presented:
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands, except per barrel data)
Refinery net sales (including intersegment sales)
$
4,466,544

 
$
6,734,253

 
$
(2,267,709
)
Refinery cost of products sold (exclusive of depreciation and amortization)
3,602,870

 
5,748,784

 
(2,145,914
)
Depreciation and amortization
65,535

 
60,145

 
5,390

Gross profit
798,139

 
925,324

 
(127,185
)
Plus depreciation and amortization
65,535

 
60,145

 
5,390

Refinery gross margin
$
863,674

 
$
985,469

 
$
(121,795
)
Refinery gross margin per throughput barrel
$
19.22

 
$
23.45

 
$
(4.23
)
Gross profit per throughput barrel
$
17.76

 
$
22.02

 
$
(4.26
)
(5)
Refinery direct operating expenses per throughput barrel is calculated by dividing direct operating expenses by total throughput volumes for the respective periods presented. Direct operating expenses do not include any depreciation or amortization.
Gross Margin. Refinery gross margin is calculated as net sales (including intersegment sales) less cost of products sold (exclusive of depreciation and amortization). Excluding the impact of hedging activities, refinery gross margin per throughput barrel increased in a manner consistent with the increase in industry benchmarks. The Gulf Coast benchmark 3:2:1 crack spread rose to $20.72 in the first nine months of 2015 from $17.96 in the first nine months of 2014. Our crude oil purchases are based on pricing tied to WTI that, in recent quarters, has experienced price volatility relative to Brent crude oil. During the first nine months of 2015, this differential decreased to an average of $4.37 per barrel from an average of $6.75 per barrel for the first nine months of 2014. During 2014 and through the first nine months of 2015, our El Paso refinery margins have reflected the positive impact of the WTI Midland/Cushing discount. The discount relationship reversed in the current period and WTI Midland pricing averaged a premium over WTI Cushing for the third quarter of 2015. This reversal caused a decrease in the WTI Midland/Cushing discount to an average of $0.57 per barrel during the first nine months of 2015, compared to an average discount of $8.10 for the first nine months of 2014.
Refinery gross margin was also affected by net realized and unrealized economic hedging gains of $8.8 million for the first nine months of 2015, compared to net realized and unrealized economic hedging gains of $176.6 million for the first nine months of 2014. We enter into hedge contracts to manage our exposure to commodity price risks or to fix sales margins on a portion of our future gasoline and distillate production. Unrealized mark-to-market gains and losses related to our economic hedging instruments are the result of differences between forward crack spreads and the fixed margins from our hedge contracts. We incur unrealized commodity hedging losses when forward spreads are in excess of our fixed contract margins. Hedging gains or losses are included within cost of product sold, directly impacting our refining gross margin.
Other impacts to margin include the net cost of RINs, which was $25.8 million for the first nine months of 2015, compared to $23.8 million for the first nine months of 2014. Total refinery throughput increased by 2.9 million barrels. Our refined product sales volume increased to 65.1 million barrels during the first nine months of 2015 from 59.0 million barrels during the first nine months of 2014. The year over year increase in refinery throughput and refined product sales volume was primarily due to the 2014 impact of the first quarter turnaround at the El Paso refinery's south side units with no comparable outage in 2015.
Direct Operating Expenses (exclusive of depreciation and amortization). Direct operating expenses increased primarily due to an increase in employee expenses of $4.1 million primarily generated by greater headcount, an increase in maintenance expense of $3.5 million due to maintenance projects at the El Paso refinery, an increase in railcar lease expense of $3.1 million due to new short term leases in 2015 and increases in property tax and outside services totaling $2.0 million. A partial offset to these increases was a decrease in energy expense of $6.0 million due to decreased natural gas prices.
Maintenance Turnaround Expense. During the nine months ended September 30, 2014, we reported turnaround expenses in connection with a turnaround of the south side units of the El Paso refinery.
Depreciation and Amortization. Depreciation and amortization increased due to additional depreciation at our El Paso refinery primarily resulting from assets capitalized during the first quarter of 2014 in El Paso and additional depreciation associated with recently capitalized assets.

62


NTI
Three Months Ended September 30, 2015, Compared to the Three Months Ended September 30, 2014
 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands, except bpd and per barrel data)
Statement of Operations Data:
 
 
 
 
 
Net sales
$
798,025

 
$
1,449,033

 
$
(651,008
)
Operating costs and expenses:
 
 
 
 
 
Cost of products sold (exclusive of depreciation and amortization) (1)
573,686

 
1,235,697

 
(662,011
)
Direct operating expenses (exclusive of depreciation and amortization)
82,203

 
75,909

 
6,294

Selling, general and administrative expenses
20,762

 
22,146

 
(1,384
)
Gain on disposal of assets, net
(33
)
 

 
(33
)
Depreciation and amortization
19,746

 
18,482

 
1,264

Total operating costs and expenses
696,364

 
1,352,234

 
(655,870
)
Operating income
$
101,661

 
$
96,799

 
$
4,862

Key Operating Statistics
 
 
 
 


Total sales volume (bpd)
99,617

 
100,064

 
(447
)
Total refinery production (bpd)
90,362

 
96,625

 
(6,263
)
Total refinery throughput (bpd) (2)
90,590

 
96,464

 
(5,874
)
Per barrel of throughput:
 
 
 
 


Refinery gross margin (1) (3)
$
20.65

 
$
18.87

 
$
1.78

Direct operating expenses (4)
4.84

 
4.46

 
0.38

 
 
 
 
 
 
Retail fuel gallons sold (in thousands)
78,414

 
79,674

 
(1,260
)
Retail fuel margin per gallon (5)
$
0.27

 
$
0.20

 
$
0.07

Merchandise sales
100,645

 
95,647

 
4,998

Merchandise margin (6)
25.8
%
 
25.7
%
 
0.1
%
(1)
Cost of products sold for NTI includes the net realized and net non-cash unrealized hedging activity shown in the table below. Hedging gains and losses are also included in the combined gross profit and refinery gross margin.
 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands)
Realized hedging gain, net
$
3,815

 
$
5,978

 
$
(2,163
)
Unrealized hedging gain (loss), net
(1,260
)
 
830

 
(2,090
)
Total hedging gain, net
$
2,555

 
$
6,808

 
$
(4,253
)
(2)
Total refinery throughput includes crude oil, other feedstocks and blendstocks.
(3)
Refinery gross margin is a per barrel measurement calculated by dividing the difference between net sales and cost of products sold by the refinery's total throughput volumes for the respective periods presented. Refinery net sales include $35.3 million and $322.6 million related to crude oil sales during the third quarter of 2015 and 2014, respectively. Refinery gross margin is a non-GAAP performance measure that we believe is useful in evaluating refinery performance as a general indication of the excess of the refined product sales amount over the related cost of products sold. Each of the components used in this calculation (net sales and cost of products sold) can be reconciled to corresponding amounts included in the statement of operations. Our calculation of refinery gross margin may differ from similar calculations of other companies in our industry, thereby limiting its usefulness as a comparative measure. Cost of products sold for the third quarter of 2015 includes a non-cash adjustment of $36.8 million in order to state the inventory value at market prices that were lower than cost.

63


The following table reconciles gross profit to gross margin for the St. Paul Park refinery for the periods presented:
 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands, except per barrel data)
Net refinery sales (including intersegment sales)
$
762,275

 
$
1,425,308

 
$
(663,033
)
Refinery cost of products sold (exclusive of depreciation and amortization)
590,138

 
1,257,837

 
(667,699
)
Refinery depreciation and amortization
17,366

 
15,890

 
1,476

Gross profit
154,771

 
151,581

 
3,190

Plus depreciation and amortization
17,366

 
15,890

 
1,476

Refinery gross margin
$
172,137

 
$
167,471

 
$
4,666

Refinery gross margin per refinery throughput barrel
$
20.65

 
$
18.87

 
$
1.78

Gross profit per refinery throughput barrel
$
18.57

 
$
17.08

 
$
1.49

(4)
NTI's direct operating expenses per throughput barrel are calculated by dividing refining direct operating expenses by total throughput volumes for the respective periods presented. Direct operating expenses do not include any depreciation or amortization.
(5)
Retail fuel margin per gallon is a measurement calculated by dividing the difference between retail fuel sales and retail fuel cost of products sold by the number of gallons sold. Retail fuel margin per gallon is a measure frequently used in the retail industry to measure operating results related to fuel sales.
(6)
Merchandise margin is a measurement calculated by dividing the difference between merchandise sales and merchandise cost of products sold by merchandise sales. Merchandise margin is a measure frequently used in the retail industry to measure operating results related to merchandise sales.

Gross Margin. Gross margin is calculated as net sales (including intersegment sales) less cost of products sold (exclusive of depreciation and amortization). NTI gross margin increased primarily due to increased gross margin per barrel sold, partially offset by a volume decrease in barrels sold of 0.4% due to lower throughput in the three months ended September 30, 2015. Gross margin for the three months ended September 30, 2015, includes a non-cash adjustment, reducing gross margin by $36.8 million, to state NTI's LIFO inventory at market prices that were lower than LIFO cost.
Direct Operating Expenses (exclusive of depreciation and amortization). Direct operating expenses increased quarter over quarter due to increased maintenance costs for planned maintenance at certain refinery units, increased refining personnel costs caused by higher staffing levels, higher personnel costs due to increases in Minnesota's minimum wage and higher incentive compensation expense. These increases were partially offset by lower natural gas costs during the three months ended September 30, 2015.
Selling, General and Administrative Expenses. The decrease relates primarily to lower legal and insurance expenses, partially offset by higher incentive compensation and professional service expenses.
Depreciation and Amortization. Depreciation and amortization increased primarily due to increased refining assets placed in service since September 30, 2014.

64


Nine Months Ended September 30, 2015, Compared to the Nine Months Ended September 30, 2014
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands, except bpd, per gallon and outlet data)
Statement of Operations Data:
 
 
 
 
 
Net sales
$
2,348,621

 
$
4,205,732

 
$
(1,857,111
)
Operating costs and expenses:
 
 
 
 
 
Cost of products sold (exclusive of depreciation and amortization) (1)
1,662,948

 
3,631,911

 
(1,968,963
)
Direct operating expenses (exclusive of depreciation and amortization)
228,256

 
209,597

 
18,659

Selling, general and administrative expenses
64,352

 
71,883

 
(7,531
)
Affiliate severance costs

 
12,878

 
(12,878
)
Gain on disposal of assets, net
(344
)
 
(101
)
 
(243
)
Depreciation and amortization
58,626

 
56,829

 
1,797

Total operating costs and expenses
2,013,838

 
3,982,997

 
(1,969,159
)
Operating income
$
334,783

 
$
222,735

 
$
112,048

Key Operating Statistics
 
 
 
 
 
Total sales volume (bpd)
100,630

 
97,252

 
3,378

Total refinery production (bpd)
94,451

 
94,314

 
137

Total refinery throughput (bpd) (2)
94,538

 
94,054

 
484

Per barrel of throughput:
 
 
 
 
 
Refinery gross margin (1) (3)
$
21.15

 
$
17.35

 
$
3.80

Direct operating expenses (4)
4.74

 
4.37

 
0.37

 
 
 
 
 
 
Retail fuel gallons sold (in thousands)
227,673

 
229,453

 
(1,780
)
Retail fuel margin per gallon (5)
$
0.23

 
$
0.20

 
$
0.03

Merchandise sales
279,058

 
264,090

 
14,968

Merchandise margin (6)
25.9
%
 
26.0
%
 
(0.1
)%
Company-operated retail outlets at period end
165

 
165

 

Franchised retail outlets at period end
102

 
82

 
20

(1)
Cost of products sold for NTI includes the net realized and net non-cash unrealized hedging activity shown in the table below. Hedging gains and losses are also included in the combined gross profit and refinery gross margin.
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands)
Realized hedging gain, net
$
1,050

 
$
2,874

 
$
(1,824
)
Unrealized hedging gain, net
373

 
1,125

 
(752
)
Total hedging gain, net
$
1,423

 
$
3,999

 
$
(2,576
)
(2)
Total refinery throughput includes crude oil, other feedstocks and blendstocks.
(3)
Refinery gross margin is a per barrel measurement calculated by dividing the difference between net sales and cost of products sold by the refinery's total throughput volumes for the respective periods presented. Refinery net sales include $94.4 million and $891.7 million related to crude oil sales during the first nine months of 2015 and 2014, respectively. Refinery gross margin is a non-GAAP performance measure that we believe is useful in evaluating refinery performance as a general indication of the excess of the refined product sales amount over the related cost of products sold. Each of the components used in this calculation (net sales and cost of products sold) can be reconciled to corresponding amounts included in the statement of operations. Our calculation of refinery gross margin may differ from similar calculations of other companies in our industry, thereby limiting its usefulness as a comparative measure. Cost of products sold for the

65


first nine months of 2015 includes a non-cash recovery of $12.2 million in order to state the inventory value at market prices that were lower than cost.
The following table reconciles gross profit to gross margin for the St. Paul Park refinery for the periods presented:
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands, except per barrel data)
Net refinery sales (including intersegment sales)
$
2,291,681

 
$
4,155,644

 
$
(1,863,963
)
Refinery cost of products sold (exclusive of depreciation and amortization)
1,745,756

 
3,710,268

 
(1,964,512
)
Refinery depreciation and amortization
51,734

 
50,378

 
1,356

Gross profit
494,191

 
394,998

 
99,193

Plus depreciation and amortization
51,734

 
50,378

 
1,356

Refinery gross margin
$
545,925

 
$
445,376

 
$
100,549

Refinery gross margin per refinery throughput barrel
$
21.15

 
$
17.35

 
$
3.80

Gross profit per refinery throughput barrel
$
19.15

 
$
15.38

 
$
3.77

(4)
NTI's direct operating expenses per throughput barrel are calculated by dividing refining direct operating expenses by total throughput volumes for the respective periods presented. Direct operating expenses do not include any depreciation or amortization.
(5)
Retail fuel margin per gallon is a measurement calculated by dividing the difference between retail fuel sales and retail fuel cost of products sold by the number of gallons sold. Retail fuel margin per gallon is a measure frequently used in the retail industry to measure operating results related to fuel sales.
(6)
Merchandise margin is a measurement calculated by dividing the difference between merchandise sales and merchandise cost of products sold by merchandise sales. Merchandise margin is a measure frequently used in the retail industry to measure operating results related to merchandise sales.

Gross Margin. Gross margin is calculated as net sales (including intersegment sales) less cost of products sold (exclusive of depreciation and amortization). NTI gross margin increased primarily due to an 18.4% increase in gross margin
per barrel sold. Additionally, gross margin increased due to 3.5% higher sales volumes due to higher throughput in the nine months ended September 30, 2015. Gross margin for the nine months ended September 30, 2015, includes a non-cash recovery that increased gross margin by $12.2 million to state NTI's LIFO inventory at market prices that were lower than LIFO cost.
Direct Operating Expenses (exclusive of depreciation and amortization). Direct operating expenses increased due to higher refining personnel costs caused by higher staffing levels, higher personnel costs due to increases in Minnesota's minimum wage and higher incentive compensation expense. These increases were partially offset by lower natural gas costs during the nine months ended September 30, 2015.
Selling, General and Administrative Expenses. This decrease relates primarily to lower variable compensation, legal and insurance expenses, partially offset by higher information technology, incentive compensation and professional service costs.
Affiliate Severance Costs. The severance costs incurred during the nine months ended September 30, 2014, relate to severance payments resulting from Western's acquisition of NTI's general partner.
Depreciation and Amortization. Depreciation and amortization increased primarily due to increased refining assets placed in service since September 30, 2014, the most significant of which was NTI's waste water treatment plant.


66


WNRL
The WNRL financial and operational data presented includes the historical results of all assets acquired from Western in the Wholesale Acquisition. This transaction was a transfer of assets between entities under common control. We have retrospectively adjusted historical financial and operational data of WNRL, for all periods presented, to reflect the purchase and consolidation of WRW into WNRL.
Three Months Ended September 30, 2015, Compared to the Three Months Ended September 30, 2014
 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands)
Statement of Operations Data:
 
 
 
 
 
Net sales
$
674,479

 
$
915,719

 
$
(241,240
)
Operating costs and expenses:
 

 
 

 


Cost of products sold
601,557

 
851,242

 
(249,685
)
Direct operating expenses
39,705

 
37,112

 
2,593

Selling, general and administrative expenses
5,563

 
6,388

 
(825
)
Gain on disposal of assets, net
(13
)
 
(34
)
 
21

Depreciation and amortization
4,983

 
4,292

 
691

Total operating costs and expenses
651,795

 
899,000

 
(247,205
)
Operating income
$
22,684

 
$
16,719

 
$
5,965

 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
Key Operating Statistics
 
 
 
 
 
Pipeline and gathering (bpd):
 
 
 
 
 
Mainline movements:
 
 
 
 
 
Permian/Delaware Basin system
56,745

 
27,382

 
29,363

Four Corners system (1)
66,602

 
38,623

 
27,979

Gathering (truck offloading):
 
 
 
 


Permian/Delaware Basin system
25,961

 
24,250

 
1,711

Four Corners system
16,487

 
10,979

 
5,508

Terminalling, transportation and storage (bpd):
 
 
 
 


Shipments into and out of storage (includes asphalt)
408,787

 
389,773

 
19,014

Wholesale:
 
 
 
 
 
Fuel gallons sold (in thousands)
305,566

 
289,822

 
15,744

Fuel gallons sold to retail (included in fuel gallons sold above) (in thousands)
81,538

 
68,064

 
13,474

Fuel margin per gallon (2)
$
0.029

 
$
0.019

 
$
0.010

Lubricant gallons sold (in thousands)
2,998

 
3,071

 
(73
)
Lubricant margin per gallon (3)
$
0.70

 
$
0.83

 
$
(0.13
)
Crude oil trucking volume (bpd)
49,620

 
39,473

 
10,147

Average crude oil revenue per barrel
$
2.51

 
$
2.78

 
$
(0.27
)
(1)
Some barrels of crude oil in route to Western's Gallup refinery and Permian/Delaware Basin are transported on more than one mainline. Mainline movements for the Four Corners and Delaware Basin systems include each barrel transported on each mainline.
(2)
Fuel margin per gallon is a measurement calculated by dividing the difference between fuel sales, net of transportation charges, and cost of fuel sales for WNRL's wholesale business by the number of gallons sold. Fuel margin per gallon is a measure frequently used in the petroleum products wholesale industry to measure operating results related to fuel sales.

67


(3)
Lubricant margin per gallon is a measurement calculated by dividing the difference between lubricant sales, net of transportation charges, and lubricant cost of products sold by the number of gallons sold. Lubricant margin is a measure frequently used in the petroleum products wholesale industry to measure operating results related to lubricant sales.

Gross Margin. Gross margin is calculated as net sales (including intersegment sales) less cost of products sold (exclusive of depreciation and amortization). WNRL's gross margin increased by 13.1% primarily due to truck freight revenue from increased crude oil gathering activity in the Permian Basin area.
Direct Operating Expenses (exclusive of depreciation and amortization). Direct operating expenses increased quarter over quarter due to an increase in outside support services ($1.4 million) due to in-line inspections for pipeline segments and various tank repairs and employee expenses resulting from increased headcount primarily to our staff of drivers due to additions to our truck fleet ($1.3 million).
WNRL's logistics maintenance costs are generally cyclical in nature. WNRL's terminal facilities are subject to recurring maintenance for normal wear and related maintenance costs are generally consistent from period to period. The routine service cycle for tank inspections and maintenance at WNRL's storage facilities is generally every 10 years. Pipelines are also subject to routine periodic inspections. When WNRL changes the service use of a storage tank, maintenance costs will generally be greater due to increased costs of tank cleaning and hazardous material disposal. The cost of WNRL's maintenance is dependent upon the level of repairs deemed necessary as a result of the inspection of the specified asset.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased quarter over quarter due to a decrease in employee expenses ($1.0 million).
Depreciation and Amortization. Depreciation and amortization increased due to the expansion of WNRL's Delaware Basin logistics system and the addition of crude oil tanker trailers during the second half of 2014.
Nine Months Ended September 30, 2015, Compared to the Nine Months Ended September 30, 2014
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands)
Statement of Operations Data:
 
 
 
 
 
Net sales
$
2,016,376

 
$
2,750,666

 
$
(734,290
)
Operating costs and expenses:
 
 
 

 
 
Cost of products sold
1,807,284

 
2,561,785

 
(754,501
)
Direct operating expenses
112,697

 
107,769

 
4,928

Selling, general and administrative expenses
17,744

 
17,276

 
468

Gain on disposal of assets, net
(257
)
 
(16
)
 
(241
)
Depreciation and amortization
14,458

 
12,898

 
1,560

Total operating costs and expenses
1,951,926

 
2,699,712

 
(747,786
)
Operating income
$
64,450

 
$
50,954

 
$
13,496


68


 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
Key Operating Statistics
 
 
 
 
 
Pipeline and gathering (bpd):
 
 
 
 
 
Mainline movements:
 
 
 
 
 
Permian/Delaware Basin system
45,784

 
22,351

 
23,433

Four Corners system (1)
54,719

 
38,483

 
16,236

Gathering (truck offloading):
 
 
 
 
 
Permian/Delaware Basin system
24,207

 
24,205

 
2

Four Corners system
13,387

 
11,187

 
2,200

Terminalling, transportation and storage (bpd):
 
 
 
 
 
Shipments into and out of storage (includes asphalt)
396,506

 
379,261

 
17,245

Wholesale:
 
 
 
 
 
Fuel gallons sold (in thousands)
919,808

 
850,840

 
68,968

Fuel gallons sold to retail (included in fuel gallons sold above) (in thousands)
235,824

 
194,753

 
41,071

Fuel margin per gallon (2)
$
0.031

 
$
0.021

 
$
0.010

Lubricant gallons sold (in thousands)
8,969

 
9,163

 
(194
)
Lubricant margin per gallon (3)
$
0.71

 
$
0.81

 
$
(0.10
)
Crude oil trucking volume (bpd)
47,245

 
34,610

 
12,635

Average crude oil revenue per barrel
$
2.58

 
$
2.94

 
$
(0.36
)
(1)
Some barrels of crude oil in route to Western's Gallup refinery and Permian/Delaware Basin are transported on more than one mainline. Mainline movements for the Four Corners and Delaware Basin systems include each barrel transported on each mainline.
(2)
Fuel margin per gallon is a measurement calculated by dividing the difference between fuel sales, net of transportation charges, and cost of fuel sales for WNRL's wholesale business by the number of gallons sold. Fuel margin per gallon is a measure frequently used in the petroleum products wholesale industry to measure operating results related to fuel sales.
(3)
Lubricant margin per gallon is a measurement calculated by dividing the difference between lubricant sales, net of transportation charges, and lubricant cost of products sold by the number of gallons sold. Lubricant margin is a measure frequently used in the petroleum products wholesale industry to measure operating results related to lubricant sales.

Gross Margin. Gross margin is calculated as net sales (including intersegment sales) less cost of products sold (exclusive of depreciation and amortization). WNRL's gross margin increased by 10.7% primarily due to truck freight revenue from increased crude oil gathering activity in the Permian Basin area.
Direct Operating Expenses (exclusive of depreciation and amortization). Direct operating expenses increased primarily based on higher employee expenses ($4.5 million) resulting from an increase in the number of drivers in our truck fleet, outside support services ($1.3 million) due to in-line inspections for pipeline segments and various tank repairs and increased energy expense ($0.4 million) specifically due to chemical additives used in the pipeline transportation process, partially offset by lower fuel expense for our transportation department ($2.6 million).
WNRL's logistics maintenance costs are generally cyclical in nature. WNRL's terminal facilities are subject to recurring maintenance for normal wear and related maintenance costs are generally consistent from period to period. A routine service cycle for tank inspections and maintenance at WNRL's storage facilities is generally every 10 years. Pipelines are also subject to routine periodic inspections. When WNRL changes the service use of a storage tank, maintenance costs will generally be greater due to increased costs of tank cleaning and hazardous material disposal. The cost of WNRL's maintenance is dependent upon the level of repairs deemed necessary as a result of the inspection of the specified asset.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased primarily due to an increase in professional and legal services ($1.2 million).
Depreciation and Amortization. Depreciation and amortization increased due to the expansion of WNRL's Delaware Basin logistics system and the addition of crude oil tanker trailers during 2014.

69


Retail Segment
Three Months Ended September 30, 2015, Compared to the Three Months Ended September 30, 2014
 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands, except per gallon data)
Statement of Operations Data
 
 
 
 
 
Net sales (including intersegment sales)
$
328,895

 
$
381,873

 
$
(52,978
)
Operating costs and expenses:
 
 
 
 
 
Cost of products sold (exclusive of depreciation and amortization)
270,216

 
335,377

 
(65,161
)
Direct operating expenses (exclusive of depreciation and amortization)
35,283

 
30,710

 
4,573

Selling, general and administrative expenses
3,263

 
2,654

 
609

Gain on disposal of assets, net
(6
)
 
(140
)
 
134

Depreciation and amortization
3,676

 
3,069

 
607

Total operating costs and expenses
312,432

 
371,670

 
(59,238
)
Operating income
$
16,463

 
$
10,203

 
$
6,260

Key Operating Statistics
 
 
 
 

Retail fuel gallons sold
92,939

 
80,705

 
12,234

Average retail fuel sales price per gallon (net of excise taxes)
$
2.26

 
$
3.12

 
$
(0.86
)
Average retail fuel cost per gallon (net of excise taxes)
1.95

 
2.86

 
(0.91
)
Fuel margin per gallon (1)
0.31

 
0.26

 
0.05

Merchandise sales
$
83,146

 
$
70,900

 
$
12,246

Merchandise margin (2)
29.4
%
 
28.7
%
 
0.7
%
Cardlock fuel gallons sold
16,990

 
16,906

 
84

Cardlock fuel margin per gallon
$
0.176

 
$
0.185

 
$
(0.009
)
The following table reconciles retail fuel sales and cost of retail fuel sales to net sales and cost of products sold:
 
Three Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands, except per gallon data)
Net Sales
 
 
 
 
 
Retail fuel sales (net of excise taxes)
$
209,705

 
$
251,709

 
$
(42,004
)
Merchandise sales
83,146

 
70,900

 
12,246

Cardlock sales
33,184

 
56,831

 
(23,647
)
Other sales
2,860

 
2,433

 
427

Net sales
$
328,895

 
$
381,873

 
$
(52,978
)
Cost of Products Sold
 
 
 
 

Retail fuel cost of products sold (net of excise taxes)
$
181,282

 
$
231,143

 
$
(49,861
)
Merchandise cost of products sold
58,737

 
50,531

 
8,206

Cardlock cost of products sold
30,141

 
53,671

 
(23,530
)
Other cost of products sold
56

 
32

 
24

Cost of products sold
$
270,216

 
$
335,377

 
$
(65,161
)
Retail fuel margin per gallon (1)
$
0.31

 
$
0.26

 
$
0.05

(1)
Retail fuel margin per gallon is a measurement calculated by dividing the difference between retail fuel sales and cost of retail fuel sales by the number of gallons sold. Retail fuel margin per gallon is a measure frequently used in the convenience store industry to measure operating results related to retail fuel sales.

70


(2)
Merchandise margin is a measurement calculated by dividing the difference between merchandise sales and merchandise cost of products sold by merchandise sales. Merchandise margin is a measure frequently used in the convenience store industry to measure operating results related to merchandise sales.
Gross Margin. Gross margin is calculated as net sales (including intersegment sales) less cost of products sold (exclusive of depreciation and amortization). The effect of the 32 new retail outlets added during the first half of 2015 and two retail outlets added in the third and fourth quarters of 2014 was an increase in retail gross margin of $7.7 million. The increase in retail gross margin quarter over quarter was also the result of increased same store fuel margins coupled with higher fuel sales volumes and increased merchandise gross margin.
Direct Operating Expenses (exclusive of depreciation and amortization). The increase in direct operating expenses quarter over quarter was primarily due to the addition of the new outlets which generated an additional $4.7 million in current quarter's expenses and an increase in cardlock employee expenses of $0.2 million. This increase was partially offset by decreased same store credit card processing fees of $0.6 million.
Depreciation and Amortization. The increase in depreciation and amortization expense quarter over quarter was primarily due to the addition of the new retail outlets resulting in an additional $0.7 million in the current quarter's depreciation expense.
Nine Months Ended September 30, 2015, Compared to the Nine Months Ended September 30, 2014
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands, except per gallon data)
Statement of Operations Data
 
 
 
 
 
Net sales (including intersegment sales)
$
905,569

 
$
1,092,389

 
$
(186,820
)
Operating costs and expenses:
 
 
 
 
 
Cost of products sold (exclusive of depreciation and amortization)
763,034

 
973,883

 
(210,849
)
Direct operating expenses (exclusive of depreciation and amortization)
101,278

 
89,115

 
12,163

Selling, general and administrative expenses
9,636

 
7,962

 
1,674

Gain on disposal of assets, net
(51
)
 
(140
)
 
89

Depreciation and amortization
10,993

 
8,821

 
2,172

Total operating costs and expenses
884,890

 
1,079,641

 
(194,751
)
Operating income
$
20,679

 
$
12,748

 
$
7,931

Key Operating Statistics
 
 
 
 
 
Retail fuel gallons sold
267,102

 
232,236

 
34,866

Average retail fuel sales price per gallon (net of excise taxes)
$
2.10

 
$
3.07

 
$
(0.97
)
Average retail fuel cost per gallon (net of excise taxes)
1.89

 
2.88

 
(0.99
)
Fuel margin per gallon (1)
0.21

 
0.19

 
0.02

Merchandise sales
$
234,014

 
$
199,684

 
$
34,330

Merchandise margin (2)
29.5
%
 
28.8
%
 
0.7
%
Operating retail outlets at period end
261

 
230

 
31

Cardlock fuel gallons sold
50,013

 
51,235

 
(1,222
)
Cardlock fuel margin per gallon
$
0.174

 
$
0.176

 
$
(0.002
)
Operating cardlocks at period end
52

 
54

 
(2
)

71


The following table reconciles retail fuel sales and cost of retail fuel sales to net sales and cost of products sold:
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands, except per gallon data)
Net Sales
 
 
 
 
 
Retail fuel sales (net of excise taxes)
$
561,416

 
$
712,839

 
$
(151,423
)
Merchandise sales
234,014

 
199,684

 
34,330

Cardlock sales
100,960

 
171,755

 
(70,795
)
Other sales
9,179

 
8,111

 
1,068

Net sales
$
905,569

 
$
1,092,389

 
$
(186,820
)
Cost of Products Sold
 
 
 
 
 
Retail fuel cost of products sold (net of excise taxes)
$
505,875

 
$
668,642

 
$
(162,767
)
Merchandise cost of products sold
164,906

 
142,235

 
22,671

Cardlock cost of products sold
92,077

 
162,656

 
(70,579
)
Other cost of products sold
176

 
350

 
(174
)
Cost of products sold
$
763,034

 
$
973,883

 
$
(210,849
)
Retail fuel margin per gallon (1)
$
0.21

 
$
0.19

 
$
0.02

(1)
Retail fuel margin per gallon is a measurement calculated by dividing the difference between retail fuel sales and cost of retail fuel sales by the number of gallons sold. Retail fuel margin per gallon is a measure frequently used in the convenience store industry to measure operating results related to retail fuel sales.
(2)
Merchandise margin is a measurement calculated by dividing the difference between merchandise sales and merchandise cost of products sold by merchandise sales. Merchandise margin is a measure frequently used in the convenience store industry to measure operating results related to merchandise sales.
Gross Margin. Gross margin is calculated as net sales (including intersegment sales) less cost of products sold (exclusive of depreciation and amortization). The effect of the 32 new retail outlets added during the first half of 2015 and two retail outlets added in the third and fourth quarters of 2014 was an increase in retail gross margin of $16.5 million. The increase in retail gross margin was also the result of same store higher fuel sales volumes and increased same store merchandise gross margin.
Direct Operating Expenses (exclusive of depreciation and amortization). The increase in direct operating expenses was primarily due to the addition of the new outlets which generated an additional $13.2 million in expenses, an increase in same store outside support services of $0.9 million and an increase in cardlock employee expenses of $0.8 million. This increase was partially offset by decreased same store credit card processing fees ($2.1 million).
Selling, General and Administrative Expenses. The increase in selling, general and administrative expenses was primarily due to increased cardlock employee expenses ($1.8 million).
Depreciation and Amortization. The increase in depreciation and amortization expense was primarily due to the addition of the new retail outlets that resulted in an additional $1.4 million in depreciation expense. This increase was also due to accelerated depreciation of four closed outlets, accelerated depreciation of retail's point of sale system and additional depreciation incurred from major remodels at three locations.


72


Outlook
Our refining margins, excluding hedging activities, were slightly stronger at Gallup and NTI, but weaker at El Paso in the third quarter of 2015 compared to the third quarter of 2014. The Gulf Coast benchmark 3:2:1 crack spread improved from an average of $18.10 for the three months ended September 30, 2014, to an average of $21.43 for the three months ended September 30, 2015. The WTI Midland/Cushing differential can have a significant impact on our refining margin at El Paso. On a trade-month basis, the WTI Midland/Cushing differential averaged a premium of $0.71 per barrel for the third quarter of 2015, negatively impacting our El Paso refining margins for the quarter compared to the Midland/Cushing trade-month discount of $9.96 that we realized in El Paso during the third quarter of 2014. The WTI Midland/Cushing differential averaged a trade-month premium of $1.51 in October 2015.
Western's and NTI's refining margins in recent years have benefited from the price relationship between WTI crude oil and Brent crude oil. Western and NTI both base their crude oil purchases on pricing tied to WTI. During the third quarter of 2015, the discount of WTI crude oil to Brent crude oil (the "WTI/Brent discount") averaged $4.03 per barrel compared to an average of $4.36 per barrel for the third quarter of 2014. However, the WTI/Brent discount has been volatile in recent years. The Gulf Coast benchmark 3:2:1 crack spread and the WTI/Brent discount for October 2015 averaged $9.72 and $2.25 per barrel, respectively.
NTI’s location also allows direct access, via pipeline, to cost-advantaged crude oil from the Bakken Shale in North Dakota and other Canadian crude oils that may price at substantial discounts to WTI. Although crude oil differentials narrowed in the third quarter of 2015, our gasoline and asphalt margins improved during the quarter and contributed to our stronger refining margins. We expect continued volatility in crude oil pricing differentials and crack spreads given the recent drop in Brent and WTI crude oil prices.

Liquidity and Capital Resources
Our primary sources of liquidity are cash from operations, cash on hand, availability under our revolving credit facilities and distributions attributable to us from NTI and WNRL. To a lesser extent, we also generate liquidity from the issuance of securities.
As of September 30, 2015, we had cash and cash equivalents of $709.6 million, including NTI cash of $114.6 million and WNRL cash of $71.4 million, and had no direct borrowings under the Western, NTI or WNRL revolving credit facilities. WNR, NTI and WNRL had net availability under our revolving credit facilities of $307.7 million, $207.8 million and $299.3 million, respectively. We held restricted cash of $12.3 million remaining from the proceeds generated by the sale of WRW. As a result, Western had $843.6 million in total liquidity as of September 30, 2015, defined as Western’s cash and cash equivalents plus restricted cash and net availability under Western's revolving credit facility.
Our board of directors has periodically approved various share repurchase programs authorizing us to repurchase specified dollar amounts of our outstanding common stock. Our board of directors approved our current $200 million share repurchase program in November of 2014 (the "November 2014 Program") that expired on November 3, 2015. We have repurchased 4.1 million shares of our common stock at a cost of $164.2 million under the November 2014 Program. On September 21, 2015, our board of directors authorized another share repurchase program of up to $200 million (the "September 2015 Program"). As of September 30, 2015, we had $35.8 million and $200.0 million remaining in authorized expenditures under the November 2014 Program and the September 2015 Program, respectively.
We will repurchase shares from time-to-time through open market transactions, block trades, privately negotiated transactions or otherwise and subject to market conditions, as well as corporate, regulatory and other considerations. The share repurchase program may be modified or discontinued at any time by our board of directors.

73


Cash Flows
The following table sets forth our cash flows for the periods indicated:
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
Change
 
(In thousands)
Net cash provided by operating activities
$
665,664

 
$
494,058

 
$
171,606

Net cash used in investing activities
(34,454
)
 
(142,036
)
 
107,582

Net cash used in financing activities
(352,799
)
 
(169,938
)
 
(182,861
)
Net increase in cash and cash equivalents
$
278,411

 
$
182,084

 
$
96,327

The increase in net cash from operating activities period over period was primarily the result of the increase in net income and the results of our commodity hedging activity as discussed above, offset by changes in our working capital as disclosed in our Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014.
Cash flows from operating activities for the nine months ended September 30, 2015, combined with $300.0 million from the issuance of long-term debt were primarily used for the following investing and financing activities:
Repayment of revolving credit facility debt ($269.0 million);
Fund capital expenditures ($196.0 million) including the use of $154.7 million of restricted cash;
Payment of distributions to non-controlling interest holders ($173.7 million);
Purchase of treasury stock ($105.0 million);
Payment of cash dividends ($93.6 million); and
Payment of deferred financing costs ($6.8 million).
Cash flows used in operating activities for the nine months ended September 30, 2014, were primarily used for the following investing and financing activities:
Fund capital expenditures ($147.3 million);
Payments of distributions to non-controlling interest holders ($111.2 million);
Payment of cash dividends ($67.8 million); and
Purchase of treasury stock ($61.5 million).
Future Capital Expenditures
We expect to fund future capital expenditures primarily through cash from operations supplemented as needed by borrowings under our revolving credit facilities. The following table summarizes our 2015 forecasted spending allocation between sustaining, discretionary and regulatory projects for 2015:
 
Western (1)
 
NTI
 
WNRL
 
Totals
 
(In thousands)
Sustaining
$
39,800

 
$
21,700

 
$
8,300

 
$
69,800

Discretionary
155,200

 
30,300

 
27,300

 
212,800

Regulatory
26,100

 
10,000

 
2,400

 
38,500

Total
$
221,100

 
$
62,000

 
$
38,000

 
$
321,100

(1)
Western's capital expenditure forecast for the full year 2015 is $221.1 million, of which $203.7 million is for our refining segment, $13.3 million for our retail segment and $4.1 million for other general projects.
Our discretionary projects include crude oil logistics projects, such as the new 70 mile pipeline project in the Permian Basin of Southeast New Mexico that was completed in the first quarter of 2015, as well as improvements on the existing pipeline in the San Juan Basin in Northwest New Mexico that was also completed in the first quarter of 2015. WNRL’s discretionary projects include improvement projects of the on-site refined product distribution terminals at the El Paso and Gallup refineries and further expansion of the Mason Station pipeline system.


74


Capital Structure
Our capital structure at September 30, 2015 and 2014 was as follows:
 
September 30,
2015
 
September 30,
2014
 
(In thousands)
Debt, including current maturities:
 
 
 
Western obligations:
 
 
 
Revolving Credit Facility due 2019
$

 
$

Term Loan Credit Facility due 2020
540,375

 
545,875

6.25% Senior Unsecured Notes due 2021
350,000

 
350,000

5.50% promissory note due 2015

 
151

Total Western obligations
890,375

 
896,026

NTI obligations:
 
 
 
Revolving Credit Facility due 2018

 

7.125% Senior Secured Notes due 2020
356,209

 
357,312

Total NTI obligations
356,209

 
357,312

WNRL obligations:
 
 
 
Revolving Credit Facility due 2018

 

7.5% Senior Notes due 2023
300,000

 

Total WNRL obligations
300,000

 

Long-term debt
1,546,584

 
1,253,338

Equity
3,032,495

 
3,127,805

Total capitalization
$
4,579,079

 
$
4,381,143

See Note 9, Long-Term Debt and Note 10, Equity, in the Notes to Condensed Consolidated Financial Statements for further information.
Contractual Obligations and Commercial Commitments
In January 2015, our retail segment entered into leases for 31 additional retail store locations under a master lease agreement. Total average annual commitments for these additional retail store leases are approximately $4.5 million for 20 years. We include a complete summary of our future contractual obligations and commercial commitments as of December 31, 2014 in our 2014 Form 10-K under Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Contractual Obligations and Commercial Commitments.
Dividends
We anticipate paying future quarterly dividends, subject to the board of directors' approval and compliance with the restrictions in our outstanding financing agreements. The table below summarizes our 2015 cash dividend declarations, payments and scheduled payments through October 30, 2015:
 
Declaration Date
 
Record Date
 
Payment Date
 
Dividend per Common Share
 
Total Payment (In thousands)
First quarter
February 6
 
February 20
 
March 6
 
$
0.30

 
$
28,638

Second quarter
April 21
 
May 5
 
May 20
 
0.34

 
32,476

Third quarter
July 17
 
July 27
 
August 12
 
0.34

 
32,498

Fourth quarter (1)
October 16
 
October 27
 
November 12
 
0.38

 

Total
 
 
 
 
 
 
 
 
$
93,612

(1)
The fourth quarter 2015 cash dividend of $0.38 per common share will result in an estimated aggregate payment of $35.6 million.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.

75


Item 3.
Quantitative and Qualitative Disclosure About Market Risk
Commodity price fluctuation is our primary source of market risk.
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 that depend on many factors, including demand for crude oil, gasoline and other refined products; changes in the economy; worldwide and domestic production levels; worldwide inventory levels; and governmental regulatory initiatives. Our risk management strategy identifies circumstances in which we may utilize the commodity futures market to manage risk associated with these price fluctuations or to fix sales margins on future gasoline and distillate production.
In order to manage the uncertainty relating to inventory price volatility, we have generally applied a policy of maintaining inventories at or below a targeted operating level. In the past, circumstances have occurred, such as turnaround schedules or shifts in market demand, that have resulted in variances between our actual inventory level and our desired target level. We may utilize the commodity futures market to manage these anticipated inventory variances.
We maintain inventories of crude oil, other feedstocks and blendstocks and refined products with values that are subject to wide fluctuations in market prices driven by worldwide economic conditions, regional and global inventory levels and seasonal conditions.
At September 30, 2015, we held approximately 9.4 million barrels of crude oil, refined product and other inventories valued under the LIFO valuation method with an average cost of $67.90 per barrel. At September 30, 2015, the excess of the current cost of our crude oil, refined products and other feedstocks and blendstocks inventories over aggregated LIFO costs was $157.4 million.
All commodity futures contracts, price swaps and options are recorded at fair value and any changes in fair value between periods are recorded under cost of products sold in our Condensed Consolidated Statements of Operations.
We selectively utilize commodity hedging instruments to manage our price exposure to our LIFO inventory positions or to fix margins on certain future sales volumes. The commodity hedging instruments may take the form of futures contracts, price and crack spread swaps or options and are entered into with counterparties that we believe to be creditworthy. The financial instruments used to fix margins on future sales volumes do not qualify for hedge accounting. Therefore, changes in the fair value of these hedging instruments are included in income in the period of change. Net gains or losses associated with these transactions are reflected within cost of products sold at the end of each period.
The following tables summarize our economic hedging activity recognized within cost of products sold for the three and nine months ended September 30, 2015 and 2014 and open commodity hedging positions as of September 30, 2015 and December 31, 2014:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Economic hedging results
 
 
 
 
 
 
 
Realized hedging gain, net
$
26,949

 
$
26,716

 
$
52,325

 
$
44,272

Unrealized hedging gain (loss), net
271

 
17,020

 
(42,073
)
 
136,371

Total hedging gain, net
$
27,220

 
$
43,736

 
$
10,252

 
$
180,643


76


 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Open commodity hedging instruments (barrels)
 
 
 
Crude oil and refined product futures, net long (short) positions
5,785

 
(864
)
Refined product crack spread swaps, net short positions
(7,599
)
 
(8,781
)
Total open barrels commodity hedging instruments, net short positions
(1,814
)
 
(9,645
)
 
 
 
 
Fair value of outstanding contracts, net
 
 
 
Other current assets
$
74,939

 
$
79,722

Other assets
17,796

 
56,533

Accrued liabilities
(4,116
)
 
(4,889
)
Other long-term liabilities
(726
)
 
(1,400
)
Fair value of outstanding contracts - unrealized gain, net
$
87,893

 
$
129,966

During the three and nine months ended September 30, 2015 and 2014, we did not have any commodity derivative instruments that were designated or accounted for as hedges.
Item 4.
Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of September 30, 2015. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2015.
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II
Other Information
Item 1A. Risk Factors
There have been no material changes from the risk factors disclosed in the section entitled "Risk Factors" in our 2014 Form 10-K under Part I, Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Since 2012, our board of directors has approved five separate share repurchase programs authorizing us to repurchase up to $200 million, per program, of our outstanding common stock. Our November 2014 Program expired on November 3, 2015. On September 21, 2015, our board of directors authorized the September 2015 Program for up to $200 million for the repurchase of our outstanding common stock. The September 2015 Program is scheduled to expire on December 31, 2016 and is subject to discontinuance by our board of directors at any time.

77


The following table presents shares repurchased, by month, during the third quarter of 2015:
 
Total number of shares purchased
 
Average price paid per share (1)
 
Total number of shares purchased as part of publicly announced plans or programs
 
Maximum dollar value that may yet be purchased under the program (In thousands)
July 1 - July 31

 
$

 

 
$
115,778

August 1 - August 31
1,785,339

 
41.97

 
1,785,339

 
40,806

September 1 - September 30
121,542

 
41.34

 
121,542

 
235,779

 
1,906,881

 
41.93

 
1,906,881

 
 
(1) Average price per share excludes commissions.
We will repurchase shares from time-to-time through open market transactions, block trades, privately negotiated transactions or otherwise and subject to market conditions, as well as corporate, regulatory and other considerations. The share repurchase programs may be modified or discontinued at any time by our board of directors.
Our payment of dividends is limited under the terms of our Revolving Credit Agreement and our 2021 Notes, and depends, in part, on our ability to satisfy certain financial covenants.

Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit Index***
Number
 
Exhibit Title
 
31.1*
 
Certification Statement of Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2*
 
Certification Statement of Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32.1**
 
Certification Statement of Chief Executive Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.2**
 
Certification Statement of Chief Financial Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101
 
Interactive Data Files
*
 
Filed herewith.
 
 
 
**
 
Furnished herewith.
 
 
 
***
 
Reports filed under the Securities Exchange Act of 1934, as amended, (Form 10-K, Form 10-Q and Form 8-K) are filed under File No. 001-32721.
 
 
 

78


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.
WESTERN REFINING, INC.
 
 
 
 
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ Gary R. Dalke
 
 
Chief Financial Officer 
 
November 4, 2015
Gary R. Dalke
 
(Principal Financial Officer and Duly Authorized Signatory)
 
 

79


Exhibit 31.1
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
Pursuant to Rule 13a-14(a) and 15d-14(a)
I, Jeff A. Stevens, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Western Refining, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: November 4, 2015
/s/ Jeff A. Stevens
Jeff A. Stevens
Chief Executive Officer



 
 






Exhibit 31.2
CERTIFICATION BY CHIEF FINANCIAL OFFICER
Pursuant to Rule 13a-14(a) and 15d-14(a)
I, Gary R. Dalke, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Western Refining, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: November 4, 2015
/s/ Gary R. Dalke
Gary R. Dalke
Chief Financial Officer





Exhibit 32.1
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Jeff A. Stevens, Chief Executive Officer, of Western Refining, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1.
The Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2015 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 4, 2015
/s/ Jeff A. Stevens
Jeff A. Stevens
Chief Executive Officer





Exhibit 32.2
CERTIFICATION BY CHIEF FINANCIAL OFFICER
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Gary R. Dalke, Chief Financial Officer, of Western Refining, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1.
The Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2015 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 4, 2015
/s/ Gary R. Dalke
Gary R. Dalke
Chief Financial Officer





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