January 10, 2013 / 11:00 PM / in 5 years

TEXT - S&P raises Alon USA Partners LP

Overview
     -- Alon USA Partners L.P. was formed in August 2012 by Alon USA Energy 
Inc. as a variable master limited partnership (MLP) to own and operate their 
strategically located Big Springs Refinery and petroleum products marketing 
business.
     -- The MLP raised about $184 million through an initial public offering 
and used proceeds along with cash on hand to pay down $200 million of the term 
loan at Alon USA Energy. Alon USA Partners has assumed $250 million of term 
loan debt from its parent.
     -- We are assigning our 'B' corporate credit rating to the MLP Alon USA 
Partners. We are also assigning our 'B+' rating with a recovery rating of '2' 
to the partnership's $250 million term loan, which was assigned by Alon USA 
Energy.  
     -- We are withdrawing the B/Stable/-- corporate credit rating for Alon 
USA Energy, removing the $450 million term loan issue rating of 'B+' from 
CreditWatch with negative implications, and withdrawing the issue rating.

Rating Action
On Jan. 10, 2013, Standard & Poor's Ratings Services assigned its 'B' issuer 
credit rating to Alon USA Partners L.P., a variable master limited partnership 
(MLP) in the refining sector. The outlook on the rating is stable. We also 
assigned our 'B+' rating and a recovery rating of' '2' to the $250 million 
term loan. The '2' recovery rating indicates that we expect lenders would 
receive a substantial recovery (70% to 90%) if a payment default occurs. 

At the same time, we withdrew the B/Stable/-- corporate credit rating on Alon 
USA Energy Inc., removed the $450 million term loan issue rating of 'B+' from 
CreditWatch where we placed it with negative implications on Oct. 22, 2012, 
and withdrew the issue rating.

Rationale
The rating on Alon USA Partners reflects its "vulnerable" business risk 
profile and its "significant" financial risk profile. 

We base the company's vulnerable business risk profile on its lack of 
operating diversity and exposure to volatile commodity prices. The refinery is 
small relative to its peers, and the partnership's lack of operational 
diversity makes it vulnerable to regional economic downturns, supply shocks, 
cost increases, and margin volatility. We also see some added risk from the 
company's variable MLP formation. In our view, this structure puts added 
pressure on the company to manage distributions to unitholders, which could 
reduce financial flexibility and prove challenging given the refining 
business' highly cyclical nature. The variable MLP structure should offer 
better credit protection than traditional MLPs because payouts will 
automatically decrease in down markets, but relative to a corporation, it will 
have a greater reliance on capital markets for growth capital and acquisition 
funding. Also, given that variable MLPs are so new and lack a track record of 
raising equity subsequent to a distribution decline, we will remain cautious 
in our credit evaluations, until it establishes a successful track record. 

The MLP has a refining and a marketing segment. The refining segment consists 
of the 70,000 barrel-per-day (bpd) Big Spring refinery in West Texas. Big 
Spring's proximity to Midland, Texas, the largest origination terminal for 
West Texas crude oil provides it with cost-effective sources of West Texas 
Sour and West Texas Intermediate crude, which allows it to earn higher 
margins. This has been incremental to the large discount in Cushing-based 
crudes driven by surplus production in the Mid-Continent region and 
constrained pipeline take-away capacity. The Cushing-based West Texas 
Intermediate discount to Brent crude has averaged $16.04 per barrel for the 
nine months ended Sept. 30, 2012, and has spiked to near $30 per barrel at 
times. We expect this dynamic is likely to persist in 2013, although at more 
modest levels as take-away pipelines come into service, gradually moderating 
to about $5 per barrel longer term. The refinery's 10.2 Nelson Complexity 
rating allows it to process lower-cost crude oil into higher value light 
refined products, like gasoline and distillates, resulting in good product 
yields. The feedstock conversion percentage for the refinery for the nine 
months ended Sept. 30, 2012 was about 49.6% gasoline, 32.8% diesel/jet fuel, 
6.3% asphalt, 5.9% petrochemicals, and 5.4% other refined products. 
Operational performance has been stable, with a utilization rate of 97.3% for 
the nine months ended Sept. 30, 2012.

The marketing business focuses on transporting fuels to Texas, Oklahoma, New 
Mexico, and Arizona through its physically integrated refining and 
distribution system. It distributes fuel products through a product pipeline 
and terminal network of seven pipelines totaling about 840 miles and five 
terminals that it owns or accesses through leases or long-term throughput 
agreements. It sells refined products from the Big Spring refinery in both the 
wholesale rack and bulk markets. Through its wholesale marketing operations it 
supplies refined products to branded distributors, as well as Alon USA 
Energy's retail convenience stores.

The partnership's significant financial profile reflects our expectation that 
debt to EBITDA is likely to be in the 1x to 2x range in 2013 and 2014. While 
indicative of a "modest" financial risk profile under our criteria, the 
assessment incorporates our view of the broader refining sector as having high 
fixed costs--including substantial turnaround costs--that add a high degree of 
operating leverage to a cash flow stream that can be volatile. We view the 
refining industry to be highly competitive and highly capital-intensive, and 
its profitability is often very low. MLPs also rely much more than 
corporations on outside sources of capital to fund growth spending and are 
more vulnerable to frozen capital markets. Security interests for lenders to 
the $250 million term loan will also become limited to the assets of Alon USA 
Partners and its subsidiaries, and they will face single-asset risk.

Liquidity
Liquidity is "adequate" for the next 12 months, with sources over uses of more 
than 2x. We estimate about $361 million in sources, consisting of about $160 
million in funds from operations under our mid-cycle assumptions and about 
$191 million of assumed credit line availability as of Dec. 31, 2012. We 
assume uses of about $165 million, including about $41 million for capital 
spending and distributions of $105 million, as well as changes in working 
capital. Although the sources and uses point to a "strong" descriptor, more 
qualitative factors--such as the variable MLP structure, capital market 
access, and the refining sector's highly volatile cash flows--limit our 
liquidity descriptor to "adequate".

Recovery analysis
We rate the company's $250 million term loan due 2018 'B+', with a recovery 
rating of '2'. The '2' recovery rating indicates our expectation of 
substantial (70% to 90%) recovery if a payment default occurs, and is based on 
a $2,750 value assumption per barrel of throughput capacity at Big Spring. For 
more information, please see our recovery report to be published shortly on 
RatingsDirect and "Assumptions For Assigning Recovery Ratings To The Debt Of 
U.S. Oil Refining Companies," published March 14, 2011.

Outlook
The stable outlook reflects our expectation that Alon USA Partners will 
generate strong financial measures, with a mid-cycle debt to EBITDA leverage 
of about 2x as a result of low leverage and strong EBITDA driven by access to 
discounted crude supply. We could raise the rating if Alon can demonstrate a 
track record of operational performance and financial discipline under the new 
MLP structure, such that we expect debt to EBITDA will remain below 2x in the 
longer term. We believe there is significant financial cushion in the current 
rating, but we could lower it if leverage increases beyond our expectations, 
operating problems occur at the refinery, or a compression of crack spreads or 
crude differentials lead to lower margins and we expect sustained debt to 
EBITDA approaching 4x.

Related Criteria And Research
     -- Key Credit Factors: Criteria For Rating The Global Oil Refining 
Industry, Nov. 28, 2011
     -- Assumptions For Assigning Recovery Ratings To The Debt Of U.S. Oil 
Refining Companies, March 14, 2011

Ratings List
New Ratings

Alon USA Partners L.P.
Corporate Credit Rating        B/Stable/--
$250 mil term loan due 2018    B+
  Recovery Rating              2

Rating Affirmed; Off CreditWatch 
                               To     From
Alon USA Energy Inc.
$450 mil term loan             B+     B+/Watch Neg
  Recovery Rating              2      2

Ratings Withdrawn
                               To     From
Alon USA Energy Inc.
Corporate Credit Rating        NR     B/Stable/-- 
$450 mil term loan             NR     B+
  Recovery Rating              NR     2

Our Standards:The Thomson Reuters Trust Principles.
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