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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-32721

WESTERN REFINING, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		20-3472415 (I.R.S. Employer Identification No.)
123 W. Mills Ave., Suite 200 El Paso, Texas (Address of principal executive offices)		79901 (Zip Code)

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 o       No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		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 April 29, 2011, there were 90,817,024 shares outstanding, par value $0.01, of the registrant’s common stock.

 

 

WESTERN REFINING, INC. AND SUBSIDIARIES
INDEX

PART I
Item 1. Financial Information			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosure About Market Risk			46
Item 4. Controls and Procedures			47
PART II
Item 1A. Risk Factors			47
Item 6. Exhibits			48
SIGNATURES			49
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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 are forward-looking statements that represent management’s beliefs and assumptions based on currently available information. These forward-looking statements relate to matters such as our industry, business strategy, goals, future operations, including our expected timeframe for restarting refining operations at our Yorktown refinery, margins, profitability, deferred taxes, capital expenditures, liquidity and capital resources, our working capital requirements, our ability to improve our capital structure through asset sales and/or through certain financings, and other financial and operating information. Forward-looking statements also include those regarding future refining capacity, timing of future maintenance turnarounds, the amount or sufficiency of future cash flows and earnings growth, future expenditures and future contributions related to pension and postretirement obligations, our ability to manage our inventory price exposure through commodity derivative instruments, the impact on 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,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “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. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations, and cash flows.

     Actual events, results, and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, the following:

•

changes in the underlying demand for our refined products;

•

availability, costs, and price volatility of crude oil, other refinery feedstocks, and refined products;

•

availability of renewable fuels for blending and Renewal Identification Numbers, or RIN, to meet Renewable Fuel Standards or RFS obligations;

•

changes in crack spreads;

•

changes in the spread between West Texas Intermediate, or WTI, crude oil and West Texas Sour, or WTS, crude oil, also known as the sweet/sour spread;

•

changes in the spread between WTI crude oil and Maya crude oil, also known as the light/heavy spread;

•

changes in the spread between WTI crude oil and Dated Brent crude oil;

•

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

•

conditions in the capital markets;

•

instability and volatility in the financial markets;

•

construction of new, or expansion of existing product pipelines in the areas that we serve;

•

actions of customers and competitors;

•

changes in fuel and utility costs incurred by our refineries;

•

the effect of weather-related problems on 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, 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;

•

operating hazards, natural disasters, casualty losses, acts of terrorism, 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, 2010, or 2010 10-K, which are incorporated herein by this reference.

     Any one of these factors or a combination of these factors could materially affect our results of operations 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 on these forward-looking statements.

     Although we believe that our plans, intentions, and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can provide no assurance that such plans, intentions, or expectations will be achieved. These statements are based on assumptions made by us based on 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 update any information to reflect events or circumstances that may occur after the date of this report, except as required by applicable law.

Part I
Financial Information

Item 1. Financial Statements

WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)

		March 31,				December 31,
		2011				2010
ASSETS
Current assets:
Cash and cash equivalents		$	11,933			$	59,912
Accounts receivable trade, net of a reserve for doubtful accounts of $3,594 and $3,896, respectively			325,274				269,596
Inventories			369,078				365,673
Prepaid expenses			111,204				73,391
Other current assets			97,639				57,131
Total current assets			915,128				825,703
Property, plant, and equipment, net			1,656,921				1,688,154
Intangible assets, net			58,814				59,945
Other assets, net			50,914				54,344
Total assets		$	2,681,777			$	2,628,146
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	333,960			$	294,662
Accrued liabilities			154,161				136,362
Deferred income tax liability, net			58,180				58,929
Current portion of long-term debt			3,250				63,000
Total current liabilities			549,551				552,953
Long-term liabilities:
Long-term debt, less current portion			1,050,630				1,006,531
Deferred income tax liability, net			366,121				361,292
Other liabilities			22,352				31,777
Total long-term liabilities			1,439,103				1,399,600
Commitments and contingencies (Note 18)
Stockholders’ equity:
Common stock, par value $0.01, 240,000,000 shares authorized; 89,776,491 and 89,025,010 shares issued, respectively			898				890
Preferred stock, par value $0.01, 10,000,000 shares authorized; no shares issued and outstanding			—				—
Additional paid-in capital			593,057				588,215
Retained earnings			122,096				109,871
Accumulated other comprehensive loss, net of tax			(1,485	)			(1,940	)
Treasury stock, 698,006 shares, at cost			(21,443	)			(21,443	)
Total stockholders’ equity			693,123				675,593
Total liabilities and stockholders’ equity		$	2,681,777			$	2,628,146

     The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

		Three Months Ended
		March 31,
		2011				2010
Net sales		$	1,839,588			$	1,915,395
Operating costs and expenses:
Cost of products sold (exclusive of depreciation and amortization)			1,612,727				1,765,461
Direct operating expenses (exclusive of depreciation and amortization)			111,007				106,980
Selling, general, and administrative expenses			20,397				16,430
Maintenance turnaround expense			—				23,286
Depreciation and amortization			35,371				34,282
Total operating costs and expenses			1,779,502				1,946,439
Operating income (loss)			60,086				(31,044	)
Other income (expense):
Interest income			92				30
Interest expense and other financing costs			(34,492	)			(36,774	)
Amortization of loan fees			(2,335	)			(2,414	)
Loss on extinguishment of debt			(4,641	)			—
Other income (expense), net			288				(365	)
Income (loss) before income taxes			18,998				(70,567	)
Provision for income taxes			(6,773	)			39,878
Net income (loss)		$	12,225			$	(30,689	)
Net earnings (loss) per share:
Basic		$	0.13			$	(0.35	)
Diluted		$	0.13			$	(0.35	)
Weighted average common shares outstanding:
Basic			88,367				88,006
Diluted			88,367				88,006

     The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

		Three Months Ended
		March 31,
		2011				2010
Cash flows from operating activities:
Net income (loss)		$	12,225			$	(30,689	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization			35,371				34,282
Reserve for doubtful accounts			(302	)			153
Amortization of loan fees			2,335				2,414
Amortization of original issue discount			4,406				3,894
Loss on extinguishment of debt			4,641				—
Stock-based compensation expense			2,201				1,177
Deferred income taxes			4,080				(41,038	)
Excess tax benefit from stock-based compensation			2,576				—
Gain on disposal of assets			(3,802	)			(71	)
Changes in operating assets and liabilities:
Accounts receivable			(55,375	)			3,358
Inventories			(3,405	)			(37,335	)
Prepaid expenses			(37,813	)			(67,431	)
Other assets			(40,113	)			1,274
Accounts payable			39,298				(5,437	)
Accrued liabilities			21,620				813
Other long-term liabilities			(8,984	)			(12,936	)
Net cash used in operating activities			(21,041	)			(147,572	)
Cash flows from investing activities:
Capital expenditures			(10,779	)			(18,843	)
Proceeds from the sale of assets			11,607				105
Net cash provided by (used in) investing activities			828				(18,738	)
Cash flows from financing activities:
Payments on long-term debt			(25,000	)			(3,250	)
Revolving credit facility, net			—				120,000
Deferred financing costs			(190	)			—
Excess tax benefit from stock-based compensation			(2,576	)			—
Net cash provided by (used in) financing activities			(27,766	)			116,750
Net decrease in cash and cash equivalents			(47,979	)			(49,560	)
Cash and cash equivalents at beginning of period			59,912				74,890
Cash and cash equivalents at end of period		$	11,933			$	25,330
Supplemental disclosures of cash flow information for:
Income taxes refunded		$	18,101			$	50,732
Interest paid			28,254				20,968
Non-cash investing and financing activities:
Increase in debt from modification of long-term debt agreement			8,193				—
Debt costs incurred for modification of long-term debt agreement			3,693				—
Reduction of long-term debt for original issue discount			3,250				—
Accrued interest paid from long-term debt proceeds			1,250				—
Accrued capital expenditures			—				379

     The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)

		Three Months Ended
		March 31,
		2011				2010
Net income (loss)		$	12,225			$	(30,689	)
Other comprehensive income (loss) items:
Defined benefit plans:
Reclassification of (gain) loss to income			(4	)			54
Recognition of pension plan settlement			860				441
Other comprehensive income before tax			856				495
Income tax			(401	)			(192	)
Other comprehensive income, net of tax			455				303
Comprehensive income (loss)		$	12,680			$	(30,386	)

     The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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

1. Organization

     The “Company” or “Western” may be used to refer to Western Refining, Inc. and, unless the context otherwise requires, its subsidiaries. Any references to the “Company” as of a date prior to September 16, 2005 (the date of Western Refining, Inc.’s formation) are to Western Refining Company, L.P. (“Western Refining LP”). On May 31, 2007, the Company completed the acquisition of Giant Industries, Inc. (“Giant”). Any references to the “Company” prior to this date exclude the operations of Giant.

     The Company is an independent crude oil refiner and marketer of refined products and also operates service stations and convenience stores. The Company owns and currently operates two refineries. In addition to the Company’s refinery in El Paso, Texas, the Company also owns and operates a refinery near Gallup in the Four Corners region of Northern New Mexico. Prior to September 2010, the Company operated a refinery near Yorktown, Virginia. The Company temporarily suspended refining operations at the Yorktown facility in September 2010. The Yorktown facility is currently operated as a product distribution terminal, primarily for the benefit of the Company. The Company’s primary operating areas encompass West Texas, Arizona, New Mexico, Utah, Colorado, and the Mid-Atlantic region. In addition to the refineries, the Company also owns and operates stand-alone refined product distribution terminals in Bloomfield, New Mexico; Albuquerque, New Mexico; and Yorktown, Virginia, as well as asphalt terminals in Phoenix and Tucson, Arizona; Albuquerque; and El Paso. As of March 31, 2011, the Company also owned and operated 150 retail service stations and convenience stores in Arizona, Colorado, and New Mexico; a fleet of crude oil and finished product truck transports; and a wholesale petroleum products distributor that operates in Arizona, California, Colorado, Nevada, New Mexico, Texas, Utah, and Virginia.

     The Company’s operations include three business segments: the refining group, the wholesale group, and the retail group. See Note 3, Segment Information, for a further discussion of the Company’s business segments.

2. Basis of Presentation, Significant Accounting Policies, and Recent Accounting Pronouncements

     The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011, or for any other period.

     The Condensed Consolidated Balance Sheet at December 31, 2010, has been derived from the audited financial statements of the Company 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 Form 10-K”).

     The Condensed Consolidated Financial Statements include the accounts of Western Refining, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

     Cash Equivalents

     The Company considers all highly liquid investments purchased with an original maturity of three months or less to be a cash equivalent. There were no cash equivalents at March 31, 2011 or December 31, 2010.

     Use of Estimates

     The preparation of financial statements in conformity with U.S. GAAP 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.

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

     Continuing losses due to narrow heavy light crude oil differentials, poor coking economics, changes in Yorktown crude oil purchase contract terms, and potentially significant regulatory capital spending requirements caused the Company to temporarily suspend its Yorktown refining operations during the third quarter of 2010. The Company performed an impairment analysis in connection with the temporary suspension of the Yorktown refining operations. No indication of impairment existed as a result of that analysis. No significant changes have occurred since the Company performed its analysis that would require it to revise its impairment analysis related to the temporary suspension of refining operations at Yorktown.

     Due to the uncertainty of various assumptions used in the Company’s impairment analysis, the potential for future impairment remains. The longer the period of dormancy of the refining equipment, the more problematic a restart of reliable refining operations can become. The Company currently anticipates a six to nine month pre-restart maintenance period will be required before the Yorktown refinery can be restarted, at an estimated cost of at least $50.0 million, which includes the cost of a maintenance turnaround. If it becomes apparent to management in the future that the Company will not restart the refining operations or if its future cash flow forecasts change significantly, an indication of potential impairment could exist at that time. Impairments related to Yorktown could have a material impact on the Company’s results of operations. The carrying value of the long-lived assets related to refining operations that were temporarily idled could be subject to impairment upon a change in management’s plans to restart refinery operations within three years. The carrying value of total long-lived and intangible assets at Yorktown as of March 31, 2011 was $655.4 million, of which $461.1 million were related to Yorktown refining assets.

     Reclassifications

     Prepaid expenses and other current assets include $1,456 and $12,845, respectively, previously reported as accounts receivable, principally trade in the December 31, 2010 Consolidated Balance Sheet. Accrued liabilities includes $13,984 previously reported as accounts payable in the December 31, 2010 Consolidated Balance Sheet. Items reclassified from accounts receivable included tax refund receivables, prepaid income taxes, product rebate receivables, and other non-trade related receivables. Items reclassified from accounts payable included accrued utilities and various routine non-invoice related accrued expenses. These prior year reclassifications were made to conform to the current presentation. Inclusion of these amounts in prepaid expenses, other current assets, and accrued liabilities provides a better compilation of these assets and liabilities that is consistent with the current eXtensible Business Reporting Language U.S. GAAP Taxonomy.

     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 the Company’s accounting and reporting. The Company believes that such recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting or reporting or that such impact will not be material to its financial position, results of operations, and cash flows when implemented.

3. Segment Information

     The Company is organized into three operating segments based on manufacturing and marketing criteria and the nature of their products and services, their production processes, and their types of customers. These segments are the refining group, the wholesale group, and the retail group. A description of each segment and its principal products follows:

     Refining Group. The Company’s refining group currently operates two refineries: one in El Paso, Texas (the “El Paso refinery”) and one near Gallup, New Mexico (the “Gallup refinery”). The refining group also operates a crude oil transportation and gathering pipeline system in New Mexico, an asphalt plant in El Paso, three stand-alone refined product distribution terminals, and four asphalt terminals. The two refineries make various grades of gasoline, diesel fuel, and other products from crude oil; other feedstocks; and blending components. The Company purchases crude oil, other feedstocks, and blending components from various suppliers. The Company also acquires refined products through exchange agreements and from various third-party suppliers. The Company sells these products through its own service stations, its own wholesale group, independent wholesalers and retailers, commercial accounts, and sales and exchanges with major oil companies.

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

     Beginning in the second quarter of 2009, price differentials between sour and heavy crude oil and light sweet crude oil narrowed significantly. Narrow heavy light crude oil differentials negatively impacted the results of operations for the Yorktown refinery. Due to narrow heavy light crude oil differentials and other continuing unfavorable economic conditions, the Company temporarily suspended refining operations at the Yorktown facility in September 2010. The Company continues to operate the Yorktown facility as a refined product distribution terminal, primarily for the benefit of the Company.

     Wholesale Group. The Company’s wholesale group includes several lubricant and bulk petroleum distribution plants, unmanned fleet fueling operations, a bulk lubricant terminal facility, and a fleet of refined product and lubricant delivery trucks. The wholesale group distributes commercial wholesale petroleum products primarily in Arizona, California, Colorado, Nevada, New Mexico, Texas, Utah, and Virginia. The Company’s wholesale group purchases petroleum fuels and lubricants from third-party suppliers and from the refining group. The wholesale group began selling finished product through our Yorktown facility during January 2011. The finished products sold through the Yorktown facility were purchased from third parties.

     Retail Group. The Company’s retail group operates service stations that include convenience stores or kiosks. The service stations sell various grades of gasoline, diesel fuel, general merchandise, and beverage and food products to the general public. The Company’s wholesale group supplies the gasoline and diesel fuel that the retail group sells. The Company purchases general merchandise and beverage and food products from various third-party suppliers. At March 31, 2011, the Company’s retail group operated 150 service stations located in Arizona, New Mexico, and Colorado.

     Seasonality. Demand for gasoline is generally higher during the summer months than during the winter months. In addition, higher volumes of ethanol are blended to the gasoline produced in the Southwest region during the winter months, thereby increasing the supply of gasoline. This combination of decreased demand and increased supply during the winter months can lower gasoline prices. As a result, the Company’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. The effects of seasonal demand for gasoline are partially offset by increased demand during the winter months for diesel fuel in the Southwest and heating oil in the Northeast.

     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; maintenance turnaround expense; and depreciation and amortization. Cost of products sold 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.

     Operations that are not included in any of the three segments mentioned above are included in the category Other. These operations consist primarily of corporate staff operations and other items not considered to be related to the normal business operations of the other segments. Other items of income and expense not specifically related to the other segments, including income taxes, are not allocated to operating segments.

     The total assets of each segment consist primarily of cash and cash equivalents; net property, plant, and equipment; inventories; net accounts receivable; 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 receivables, net of reserve for doubtful accounts; property, plant, and equipment; and other long-term assets.

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

     Disclosures regarding the Company’s reportable segments with reconciliations to consolidated totals for the three months ended March 31, 2011 and 2010 are presented below:

		For the Three Months Ended March 31, 2011
		Refining				Wholesale				Retail
		Group (2)				Group (3) (4)				Group				Other				Consolidated
										(In thousands)
Net sales to external customers		$	766,152			$	895,941			$	177,495			$	—			$	1,839,588
Intersegment revenues (1)			944,565				150,080				6,248				—				—
Operating income (loss)		$	57,790			$	16,919			$	777			$	(15,400	)		$	60,086
Other income (expense), net																			(41,088	)
Income before income taxes																		$	18,998
Depreciation and amortization		$	31,052			$	1,136			$	2,436			$	747			$	35,371
Capital expenditures			9,525				200				480				574				10,779
Total assets at March 31, 2011			2,270,512				190,346				155,060				65,859				2,681,777

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

		For the Three Months Ended March 31, 2010
		Refining				Wholesale				Retail
		Group				Group				Group				Other				Consolidated
										(In thousands)
Net sales to external customers		$	1,332,383			$	429,082			$	153,930			$	—			$	1,915,395
Intersegment revenues (1)			585,575				84,756				4,650				—				—
Operating income (loss)		$	(26,943	)		$	6,734			$	1,159			$	(11,994	)		$	(31,044	)
Other income (expense), net																			(39,523	)
Loss before income taxes																		$	(70,567	)
Depreciation and amortization		$	29,276			$	1,385			$	2,406			$	1,215			$	34,282
Capital expenditures			18,455				272				46				70				18,843
Total assets at March 31, 2010			2,475,928				173,187				153,843				54,367				2,857,325

4. Fair Value Measurement

     The Company utilizes the market approach to measure fair value for its 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 used for making fair value measurements 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, which 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 equivalents, accounts receivables, accounts payable, and accrued liabilities approximated their fair values at March 31, 2011 and December 31, 2010 due to their short-term maturities. The following tables represent the Company’s assets measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010, and the basis for that measurement:

Fair Value Measurement at March 31, 2011 Using

Quoted Prices in

Active Markets

Significant

for Identical

Other

Significant

Carrying

Assets or

Observable

Unobservable

Value at

Liabilities

Inputs

Inputs

March 31, 2011

(Level 1)

(Level 2)

(Level 3)

(In thousands)

Financial liabilities:

Derivative contracts

$

16,783

$

—

$

16,783

$

—

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

Fair Value Measurement at December 31, 2010 Using

Quoted Prices in

Active Markets

Significant

for Identical

Other

Significant

Carrying

Assets or

Observable

Unobservable

Value at

Liabilities

Inputs

Inputs

December 31, 2010

(Level 1)

(Level 2)

(Level 3)

(In thousands)

Financial liabilities:

Derivative contracts

$

1,173

$

—

$

1,173

$

—

     As of March 31, 2011 and December 31, 2010, the carrying amount and estimated fair value of the Company’s debt was as follows:

		March 31,				December 31,
		2011				2010
		(In thousands)
Carrying amount		$	1,053,880			$	1,069,531
Fair value			1,378,038				1,261,704

     The carrying amount of the Company’s debt is the amount reflected in our 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).

5. Inventories

     Inventories were as follows:

		March 31,				December 31,
		2011				2010
		(In thousands)
Refined products (1)		$	188,098			$	189,994
Crude oil and other raw materials			157,725				152,155
Lubricants			11,589				11,456
Convenience store merchandise			11,666				12,068
Inventories		$	369,078			$	365,673

     The Company values its crude oil, other raw materials, and asphalt inventories at the lower of cost or market under the LIFO valuation method. Other than refined products inventories held by the Company’s retail and wholesale groups, refined products inventories are valued under the LIFO valuation method. Lubricants and convenience store merchandise are valued under the FIFO valuation method.

     As of March 31, 2011 and December 31, 2010, refined products valued under the LIFO method and crude oil and other raw materials totaled 5.7 million barrels in both periods. At March 31, 2011, the excess of the current cost of these crude oil, refined product, and other feedstock and blendstock inventories over LIFO cost was $235.0 million. At December 31, 2010, the excess of the current cost of these crude oil, refined product, and other feedstock and blendstock inventories over LIFO cost was $173.5 million.

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

     Average LIFO cost per barrel of the Company’s refined products and crude oil and other raw materials inventories as of March 31, 2011 and December 31, 2010 is shown below:

		March 31,												December 31,
		2011												2010
										Average												Average
										LIFO												LIFO
										Cost Per												Cost Per
		Barrels				LIFO Cost				Barrel				Barrels				LIFO Cost				Barrel
										(In thousands, except cost per barrel)
Refined products			2,480			$	162,004			$	65.32				2,574			$	180,031			$	69.94
Crude oil and other			3,188				157,725				49.47				3,115				152,155				48.85
			5,668			$	319,729				56.41				5,689			$	332,186				58.39

6. Prepaid Expenses

     Prepaid expenses were as follows:

		March 31,				December 31,
		2011				2010
		(In thousands)
Prepaid crude oil and other raw materials inventories		$	98,766			$	56,257
Prepaid insurance and other			12,438				17,134
Prepaid expenses		$	111,204			$	73,391

7. Other Current Assets

     Other current assets were as follows:

		March 31,				December 31,
		2011				2010
		(In thousands)
Materials and chemicals inventories		$	38,962			$	38,591
Derivative activities receivable			30,882				3,173
Taxes receivable			13,072				10,946
Miscellaneous receivables			8,451				3,304
Other			6,272				1,117
Other current assets		$	97,639			$	57,131

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

8. Property, Plant, and Equipment

     Property, plant, and equipment were as follows:

		March 31,				December 31,
		2011				2010
		(In thousands)
Refinery facilities and related equipment		$	1,727,235			$	1,733,803
Pipelines, terminals, and transportation equipment			92,815				91,149
Retail and wholesale facilities and related equipment			185,704				185,359
Other			21,385				20,856
Construction in progress			100,430				94,894
			2,127,569				2,126,061
Accumulated depreciation			(470,648	)			(437,907	)
Property, plant, and equipment, net		$	1,656,921			$	1,688,154

     Depreciation expense was $34.2 million and $33.3 million for the three months ended March 31, 2011 and 2010, respectively. Included in property, plant, and equipment, net, at March 31, 2011 were $481.3 million in idled assets related primarily to our temporarily idled Yorktown ($461.1 million) and indefinitely idled Bloomfield ($12.2 million) refineries. The majority of these assets are included under refinery facilities and related equipment and pipelines, terminals, and transportation equipment in the table above. All idled assets continue to be depreciated over their respective estimated useful lives and are subject to the same impairment considerations and periodic review of estimated useful lives as productive assets.

9. Intangible Assets, Net

     Intangible assets, net were as follows:

		March 31, 2011												December 31, 2010
																										Weighted
																										Average
		Gross								Net				Gross								Net				Amortization
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying				Period
		Value				Amortization				Value				Value				Amortization				Value				(Years)
										(In thousands)
Amortizable assets:
Licenses and permits		$	39,151			$	(11,444	)		$	27,707			$	39,151			$	(10,698	)		$	28,453				9.3
Customer relationships			6,300				(1,410	)			4,890				6,300				(1,305	)			4,995				11.7
Rights-of-way			6,525				(1,438	)			5,087				6,525				(1,267	)			5,258				6.2
Other			1,653				(1,072	)			581				1,360				(670	)			690				5.9
			53,629				(15,364	)			38,265				53,336				(13,940	)			39,396
Unamortizable assets:
Trademarks			4,800				—				4,800				4,800				—				4,800
Liquor licenses			15,749				—				15,749				15,749				—				15,749
Intangible assets, net		$	74,178			$	(15,364	)		$	58,814			$	73,885			$	(13,940	)		$	59,945

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

     Intangible asset amortization expense for the three months ended March 31, 2011 was $1.1 million based upon estimated useful lives ranging from 6 to 20 years. Intangible asset amortization expense for the three months ended March 31, 2010 was $1.0 million based upon estimated useful lives ranging from 10 to 15 years. Estimated amortization expense for the indicated periods is as follows (in thousands):

Remainder of 2011		$	3,484
2012			4,639
2013			4,334
2014			4,144
2015			3,666
2016			3,495

10. Other Assets, Net

     Other assets, net of amortization, were as follows:

		March 31,				December 31,
		2011				2010
		(In thousands)
Unamortized loan fees		$	35,795			$	38,930
Other			15,119				15,414
Other assets, net		$	50,914			$	54,344

11. Accrued Liabilities

     Accrued liabilities were as follows:

		March 31,				December 31,
		2011				2010
		(In thousands)
Professional fees and other		$	43,140			$	38,230
Excise taxes			38,050				39,086
Accrued income taxes			18,460				—
Interest			16,012				3,672
Payroll and related costs			15,842				26,402
Environmental reserve			9,642				10,565
Short-term pension obligation			7,201				7,084
Property taxes			5,814				11,323
Accrued liabilities		$	154,161			$	136,362

     During the latter part of March 2010, the Company reversed $14.7 million related to its accrued bonus estimate for 2009. This revision of the Company’s 2009 bonus estimate reduced direct operating expenses (exclusive of depreciation and amortization) and selling, general, and administrative expenses reported in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 by $8.5 million and $6.2 million, respectively.

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

12. Long-Term Debt

     Long-term debt was as follows:

		March 31,				December 31,
		2011				2010
		(In thousands)
11.25% Senior Secured Notes, due 2017, net of unamortized discount of $23,984 and $24,619, respectively		$	301,016			$	300,382
Floating Rate Senior Secured Notes, due 2014, net of unamortized discount of $15,767 and $16,822, respectively			259,233				258,177
5.75% Senior Convertible Notes, due 2014, net of conversion feature of $43,573 and $46,285, respectively			171,877				169,165
Term Loan, due 2017, net of unamortized discount of $3,246			321,754				341,807
Revolving Credit Agreement, due 2015			—				—
Total long-term debt			1,053,880				1,069,531
Current portion of long-term debt			(3,250	)			(63,000	)
Long-term debt, net of current portion		$	1,050,630			$	1,006,531

     Amounts outstanding under the Revolving Credit Agreement are included in the current portion of long-term debt.

     Interest expense and other financing costs were as follows:

		Three Months Ended
		March 31,
		2011				2010
		(In thousands)
Contractual interest:
11.25% Senior Secured Notes		$	9,140			$	9,140
Floating Rate Senior Secured Notes			7,391				7,391
5.75% Senior Convertible Notes			3,097				3,097
Term Loan			8,652				9,404
Revolving Credit Agreement			564				1,292
			28,844				30,324
Amortization of original issuance discount:
11.25% Senior Secured Notes			635				563
Floating Rate Senior Secured Notes			1,055				940
5.75% Senior Convertible Notes			2,712				2,391
Term Loan			4				—
			4,406				3,894
Other interest expense			2,786				3,308
Capitalized interest			(1,544	)			(752	)
Interest expense and other financing costs		$	34,492			$	36,774

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

     The Company is amortizing original issue discounts using the effective interest method over the respective term of the debt.

     Senior Secured Notes. The Senior Secured Notes consist of $325.0 million in aggregate principal amount of 11.25% Senior Secured Notes (the “Fixed Rate Notes”) and $275.0 million Senior Secured Floating Rate Notes (the “Floating Rate Notes,” and together with the Fixed Rate Notes, the “Senior Secured Notes”). The Fixed Rate Notes pay interest semi-annually in cash in arrears at a rate of 11.25% per annum. The Fixed Rate Notes may be redeemed by the Company at the Company’s option beginning on June 15, 2013 through June 14, 2014 at a premium of 5.625%; from June 15, 2014 through June 14, 2015 at a premium of 2.813%; and at par thereafter. The Floating Rate Notes pay interest quarterly at a per annum rate, reset quarterly, equal to three-month LIBOR (subject to a LIBOR floor of 3.25%) plus 7.50%. The interest rate on the Floating Rate Notes as of March 31, 2011 was 10.75%. The Floating Rate Notes may be redeemed by the Company at the Company’s option beginning on December 15, 2011 through June 14, 2012 at a premium of 5.0%; from June 15, 2012 through June 14, 2013 at a premium of 3.0%; and at a premium of 1.0% thereafter. The Senior Secured Notes are guaranteed by all of the Company’s domestic restricted subsidiaries. The Senior Secured Notes are also secured on a first priority basis, equally and ratably with the Company’s Term Loan and any future other pari passu obligations, by the collateral securing the Term Loan, which consists of the Company’s fixed assets, and on a second priority basis, equally and ratably with the Term Loan and any future other pari passu secured obligation, by the collateral securing the Revolving Credit Agreement, which consists of the Company’s cash and cash equivalents, trade accounts receivables, and inventory.

     The Company may issue additional notes from time to time pursuant to the indenture governing the Senior Secured Notes.

     Convertible Senior Notes. The Convertible Senior Notes are unsecured and pay interest semi-annually in arrears at a rate of 5.75% per year. The initial conversion rate for the Convertible Senior Notes is 92.5926 shares of common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $10.80 per share of common stock). In lieu of delivery of shares of common stock in satisfaction of the Company’s obligation upon conversion of the Convertible Senior Notes, the Company may elect to settle conversions entirely in cash or by net share settlement. The Company valued the conversion feature at June 30, 2009 using a borrowing rate of 13.75% at $60.9 million and recorded additional paid-in capital of $36.3 million, net of deferred income taxes of $22.6 million and transaction costs of $2.0 million, related to the equity portion of this convertible debt. As of March 31, 2011, the if-converted value of the Convertible Senior Notes exceeded its principal amount by $122.7 million.

     The Convertible Senior Notes are convertible, at the option of the holder, during the period commencing on, and including, April 1, 2011, and ending on, and including, June 30, 2011. The conversion right was triggered on March 17, 2011, when the last reported sale price of the Company’s common stock exceeded $14.04 for the twentieth day in the thirty consecutive trading day period ending on the last trading day of the calendar quarter. If any Convertible Senior Notes are surrendered for conversion, the Company may elect to satisfy its obligations upon conversion through the delivery of shares of its common stock, in cash or a combination thereof.

     Term Loan Credit Agreement. On March 29, 2011, the Company entered into an amended and restated Term Loan Credit Agreement. Lenders under the Term Loan extended a $325.0 million term loan at a discount of 1.00%, the proceeds of which were principally used to refinance the Company’s term loans outstanding under the Term Loan Credit Agreement prior to the amendment and restatement. The Term Loan, together with the Senior Secured Notes and any future other pari passu secured obligations, is secured on a first priority basis by the Company’s fixed assets, and on a second priority basis by the collateral securing the Revolving Credit Agreement, which consists of the Company’s cash and cash equivalents, trade accounts receivable, and inventory. The amended and restated Term Loan Credit Agreement eliminated the financial maintenance covenants previously contained in the Term Loan Credit Agreement. The Term Loan Credit Agreement provides for principal payments on a quarterly basis of $0.8 million, with the remaining balance due on the maturity date. The maturity date was extended to March 2017. To effect this amendment, the Company paid $3.7 million in amendment fees. As a result of this amendment, the Company recognized a $4.6 million loss on extinguishment of debt.

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

     As a result of the amendment and restatement, the Term Loan bears interest equal to LIBOR (subject to a floor of 1.5%) plus 6.00%. Prior to the amendment and restatement, the Term Loan bore interest equal to LIBOR (subject to a floor of 3.25%) plus 7.50%. The average interest rate under the Term Loan for the three months ended March 31, 2011 and 2010 were 10.62% and 10.75%, respectively.

     Revolving Credit Agreement. The Revolving Credit Agreement includes commitments of $800.0 million composed of a $145.0 million tranche that matures on May 31, 2012 and a $655.0 million tranche that matures on January 1, 2015. The Revolving Credit Facility is an asset-based facility with borrowing base capacity primarily dependent on the Company’s eligible receivables and inventory. The Revolving Credit Agreement is secured on a first priority basis by the Company’s cash and cash equivalents, trade accounts receivable, and inventory, and on a second priority basis by the collateral securing the Term Loan, the Senior Secured Notes, and any future other pari passu secured obligations, which consist of the Company’s fixed assets. Interest rates for the $145.0 million tranche vary based on the Company’s consolidated leverage ratio and range from 3.75% to 4.50% over LIBOR. Interest rates for the $655.0 million tranche vary based on the Company’s borrowing base capacity under the Revolving Credit Agreement and range from 3.00% to 3.75% over LIBOR. The Revolving Credit Agreement provides for a cash dominion requirement that is in effect only if the excess availability under the Revolving Credit Agreement falls below thresholds ranging from 15.0% to 17.5% of the Borrowing Base. As of March 31, 2011, the Company had gross availability under the Revolving Credit Agreement of $719.7 million, of which $318.1 million was used for outstanding letters of credit. The average interest rates under the two tranches of the Revolving Credit Agreement for the three months ended March 31, 2011 and 2010 were 5.78% and 6.25%, respectively.

13. Income Taxes

     Compared to the federal statutory rate of 35%, the effective tax rates for the three months ended March 31, 2011 and 2010 were 35.7% and 56.5%, respectively. The effective tax rate for the three months ended March 31, 2011 was slightly higher than the statutory rate, primarily due to state tax obligations. The effective tax rate for the three months ended March 31, 2011 was lower than March 31, 2010 due to the exhaustion of federal income tax credits available to small business refiners for production of ultra low sulfur diesel fuel.

     The Company is currently under examination by the Internal Revenue Service (“IRS”) for tax years ended December 31, 2007 and December 31, 2008. The Company will continue to work with the IRS to expedite the completion of the 2007 and 2008 examinations. While the Company does not believe the results of these examinations will have a material adverse effect on the Company’s financial position or results of operations, the timing and results of any final determination remain uncertain.

     The Company believes 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 $0.8 million has been provided at March 31, 2011 against the deferred tax assets relating to these state NOL carryforwards.

     The Company classifies interest to be paid on an underpayment of income taxes and any related penalties as income tax expense. The Company recognized no interest or penalties related to uncertain tax positions for March 31, 2011 and the three years ended December 31, 2010.

14. Retirement Plans

     The Company fully recognizes the obligations associated with its single-employer defined benefit pension, retiree healthcare, and other postretirement plans in its financial statements.

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

Pensions

     Through March 31, 2011, the Company had distributed $16.8 million ($12.8 million in 2010 and $4.0 million in 2011) from plan assets to plan participants as a result of the temporary idling of Yorktown refining operations and resultant termination of several participants of the Yorktown pension plan.

     The components of the net periodic benefit cost associated with the Company’s pension plans for certain employees at the El Paso and Yorktown refineries were as follows:

		Three Months Ended
		March 31,
		2011				2010 (1)
		(In thousands)
Net periodic benefit cost includes:
Service cost		$	—			$	445
Interest cost			125				318
Amortization of net loss			25				7
Expected return on assets			(33	)			(307	)
Settlement expense			860				441
Plan amendment			—				375
Net periodic benefit cost		$	977			$	1,279

     In 2011, the Company expects to contribute $6.5 million to the Yorktown pension plan.

Postretirement Obligations

     The components of the net periodic benefit cost associated with the Company’s postretirement medical benefit plans covering certain employees at the El Paso and Yorktown refineries were as follows:

		Three Months Ended
		March 31,
		2011				2010
		(In thousands)
Net periodic benefit cost includes:
Service cost		$	20			$	133
Interest cost			56				125
Amortization of net gain			(4	)			(4	)
Net periodic benefit cost		$	72			$	254

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

Defined Contribution Plans and Deferred Compensation Plan

     The Company sponsors a 401(k) defined contribution plan under which participants may contribute a percentage of their eligible compensation to the plan and invest in various investment options. The Company will match participant contributions to the plan subject to certain limitations and a per participant maximum contribution. For each 1% of eligible compensation contributed by the participant, the Company will match 1% up to a maximum of 4% of eligible compensation, provided the participant has a minimum of one year of service with the Company. For the three months ended March 31, 2011 and 2010, the Company expensed $1.3 million and $1.4 million, respectively, in connection with this plan.

15. Crude Oil and Refined Product Risk Management

     The Company enters into crude oil forward contracts to facilitate the supply of crude oil to the refineries. During the three months ended March 31, 2011, the Company 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.

     The Company also uses crude oil and refined products futures, swap contracts, or options to mitigate the change in value for a portion of its volumes subject to market prices. Under a refined products swap contract, the Company agrees to buy or sell an amount equal to a fixed price times a set number of barrels, and to buy or sell in return an amount equal to a specified variable price times the same amount of barrels. The physical volumes are not exchanged, and these contracts are net settled with cash. The Company elected not to pursue hedge accounting treatment for these instruments, for financial accounting purposes, generally because of the difficulty of establishing the required documentation that would allow for hedge accounting at the date that the derivative instrument is entered into. The contract fair value is reflected on 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 for the purpose of marking to market the derivative instruments at each period end. At March 31, 2011, the Company had open commodity derivative instruments consisting of crude oil futures and finished products price swaps on 4,784,000 barrels primarily to protect the value of certain crude oil, finished product, and blendstock inventories for future quarters in 2011. The fair value of the outstanding contracts at March 31, 2011, was a net unrealized loss reported under accrued liabilities of $16.8 million, of which $2.1 million were unrealized gains and $18.9 million were unrealized losses. At December 31, 2010, the Company had open commodity derivative instruments consisting of crude oil futures, and finished products price and crack spread swaps on 1,023,000 barrels primarily to protect the value of certain crude oil, finished product, and blendstock inventories for the first quarter of 2011. The Company recognized $36.5 million and $2.8 million, within cost of products sold, of net realized and unrealized losses from derivative activities during the quarters ended March 31, 2011 and 2010, respectively.

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

16. Stock-Based Compensation

     The Company has two share-based compensation plans, the Western Refining 2006 Long-Term Incentive Plan (the “2006 LTIP”) and the 2010 Incentive Plan of Western Refining (the “2010 Incentive Plan”) under which remaining reserves allow for restricted share awards and restricted share unit awards (collectively, the “Unvested Restricted Stock Awards”). As of March 31, 2011, there were 37,645 and 3,488,444 shares of common stock reserved for future grants under the 2006 LTIP and the 2010 Incentive Plan, respectively. Awards granted under both plans generally vest over a three-year period and their market value at the date of the grant is amortized over the restricted period on a straight-line basis.

     Restricted Shares

     Ownership of the shares does not transfer to the recipient until the shares have vested; recipients have voting and nonforfeitable dividend rights on these shares from the date of the grant. As of March 31, 2011, there were 1,738,539 restricted shares outstanding.

     Restricted Share Units (“RSUs”)

     Ownership of the shares does not transfer to the recipient until the shares have vested; recipients do not have voting or nonforfeitable dividend rights on these shares. Upon vesting, the recipient will be entitled to receive, at the Compensation Committee’s election, the number of shares underlying the RSUs or a cash payment, or a combination of both. As of March 31, 2011, there were 251,881 unvested RSUs.

     The Company recorded stock compensation expense of $2.2 million for the three months ended March 31, 2011, of which $0.4 million was included in direct operating expenses and $1.8 million in selling, general, and administrative expenses. The tax benefit related to the shares that vested during the three months ended March 31, 2011 was $2.6 million using a statutory blended rate of 37.54%. The aggregate fair value at the grant date of the shares that vested during the three months ended March 31, 2011 was $5.7 million. The related aggregate intrinsic value of these shares was $12.7 million at the vesting date.

     The Company recorded stock compensation expense of $1.2 million for the three months ended March 31, 2010, of which $0.3 million was included in direct operating expenses and $0.9 million in selling, general, and administrative expenses. The tax deficiency related to the shares that vested during the three months ended March 31, 2010 was $0.9 million using a statutory blended rate of 37.17%. The aggregate fair value at the grant date of the shares that vested during the three months ended March 31, 2010 was $3.5 million. The related aggregate intrinsic value of these shares was $1.2 million at the vesting date.

     As of March 31, 2011, there were 1,990,420 shares of Unvested Restricted Stock Awards with an aggregate fair value at grant date of $15.4 million and an aggregate intrinsic value of $33.7 million. The compensation cost of nonvested awards not recognized as of March 31, 2011 was $12.7 million, which will be recognized over a weighted average period of 2 years. The following table summarizes the Company’s restricted stock activity for the three months ended March 31, 2011:

						Weighted Average
		Number				Grant Date
		of Shares				Fair Value
Nonvested at December 31, 2010			2,438,147			$	6.73
Awards granted			303,914				15.56
Awards vested			(751,481	)			7.58
Awards forfeited			(160	)			13.93
Nonvested at March 31, 2011			1,990,420				7.75

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

17. Earnings Per Share

     As discussed in Note 16, Stock-Based Compensation, the Company has granted shares of restricted stock to certain employees and outside directors of the Company. Although ownership of these shares does not transfer to the recipients until the shares have vested, recipients have voting and nonforfeitable dividend rights on these shares from the date of grant. Accordingly, the Company applies the two-class method to determine its earnings per share.

     The computation of basic and diluted earnings per share under the two-class method is as follows:

		Three Months Ended
		March 31,
		2011				2010
		(In thousands, except per share data)
Allocation of earnings (losses):
Net income (loss)		$	12,225			$	(30,689	)
Distributed earnings			—				—
Income allocated to participating securities			(327	)			—
Undistributed income (loss) available to common shareholders		$	11,898			$	(30,689	)
Weighted average number of common shares outstanding:
Basic and dilutive number of common shares outstanding			88,367				88,006
Basic earnings (loss) per common share:
Distributed earnings per share		$	—			$	—
Undistributed earnings (loss) per share			0.13				(0.35	)
Earnings (loss) per common share		$	0.13			$	(0.35	)
Diluted earnings (loss) per common share:
Distributed earnings per share		$	—			$	—
Undistributed earnings (loss) per share			0.13				(0.35	)
Diluted earnings (loss) per common share		$	0.13			$	(0.35	)

     The following table reflects potentially dilutive securities that were excluded from the diluted earnings (loss) per common share calculation as the effect of including such shares would have been antidilutive:

		Three Months Ended
		March 31,
		2011				2010
		(In thousands)
Common equivalent shares from Convertible
Senior Notes			19,949				19,949
Restricted stock			1,143				6

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

18.		Contingencies
		Environmental Matters

     Like other petroleum refiners, the Company’s 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. The Company’s 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, the Company receives communications from various federal, state, and local governmental authorities asserting violation(s) of environmental laws and/or regulations. These governmental entities may also propose or assess fines or require corrective action for these asserted violations. The Company intends to respond in a timely manner to all such communications and to take appropriate corrective action. The Company does not anticipate that any such matters currently asserted will have a material adverse impact on its financial condition, results of operations, or cash flows.

     Environmental remediation accruals are recorded in the current and long-term sections of the Company’s Condensed Consolidated Balance Sheets, according to their nature. As of March 31, 2011, the Company had environmental liability accruals of $17.4 million, of which $9.6 million was in accrued liabilities as a current liability. These liabilities have been recorded using an inflation factor of 2.7% and a discount rate of 7.1%. Environmental liabilities of $1.5 million accrued at March 31, 2011 have not been discounted. As of March 31, 2011, the unescalated, undiscounted environmental reserve related to these liabilities totaled $20.9 million, leaving $4.9 million to be accreted over time.

     The table below summarizes the Company’s environmental liability accruals:

		December 31,				Increase								March 31,
		2010				(Decrease)				Payments				2011
		(In thousands)
Discounted liabilities		$	16,934			$	2,582			$	(3,634	)		$	15,882
Undiscounted liabilities			1,320				325				(122	)			1,523
Total environmental liabilities		$	18,254			$	2,907			$	(3,756	)		$	17,405

El Paso Refinery

     The groundwater and certain solid waste management units and other areas at and adjacent to the El Paso refinery have been impacted by prior spills, releases, and discharges of petroleum or hazardous substances and are currently undergoing remediation by the Company and Chevron Products Company (“Chevron”) pursuant to certain agreed administrative orders with the Texas Commission on Environmental Quality (the “TCEQ”). Pursuant to the Company’s purchase of the north side of the El Paso refinery from Chevron, Chevron retained responsibility to remediate their solid waste management units in accordance with its Resource Conservation Recovery Act (“RCRA”) permit, which Chevron has fulfilled. Chevron also retained liability for, and control of, certain groundwater remediation responsibilities that are ongoing.

     In May 2000, the Company entered into an Agreed Order with the Texas Natural Resources Conservation Commission, now known as the TCEQ, for remediation of the south side of the El Paso refinery property. In August 2000, the Company purchased a Pollution and Legal Liability and Clean-Up Cost Cap Insurance policy at a cost of $10.3 million, which the Company expensed in 2000. The policy is non-cancelable and covers environmental clean-up costs related to contamination that occurred prior to December 31, 1999, including the costs of the Agreed Order activities. The insurance provider assumed responsibility for all environmental clean-up costs related to the Agreed Order up to $20 million. In addition, under a settlement agreement with the Company, a subsidiary of Chevron is obligated to pay 60% of any Agreed Order environmental clean-up costs that would otherwise have been covered under the policy but that exceed the $20 million threshold. Under the policy, environmental costs outside the scope of the Agreed Order are covered up to $20 million and require payment by the Company of a deductible of $0.1 million per incident as well as any costs that exceed the covered limits of the insurance policy.

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

     The U.S. Environmental Protection Agency (“EPA”) has embarked on a Petroleum Refinery Enforcement Initiative (“EPA Initiative”) whereby it is investigating industry-wide noncompliance with certain Clean Air Act rules. The EPA Initiative has resulted in many refiners entering into consent decrees typically requiring penalties and substantial capital expenditures for additional air pollution control equipment. Since December 2003, the Company has been voluntarily discussing a settlement pursuant to the EPA Initiative related to the El Paso refinery. Negotiations with the EPA regarding this Initiative have focused exclusively on air emission programs. The Company does not expect these negotiations to result in any soil or groundwater remediation or clean-up requirements. In May 2008, the EPA and the Company agreed on the basic EPA Initiative requirements related to the Fluid Catalytic Cracking Unit (“FCCU”) and heaters and boilers that the Company expects will ultimately be incorporated into a final settlement agreement between the Company and the EPA. Based on current negotiations and information, the Company estimates the total capital expenditures necessary to address the EPA Initiative issues would be approximately $60.0 million of which $38.8 million has already been expended; $15.2 million for the installation of a flare gas recovery system that was completed in 2007 and $23.8 million for nitrogen oxides (“NOx”) emission controls on heaters and boilers has been expended through March 2011. The Company estimates remaining expenditures of approximately $21.0 million for the NOx emission controls on heaters and boilers during 2011 through 2013. This amount is included in the Company’s estimated capital expenditures for regulatory projects and could change depending upon the actual final settlement reached. The Company anticipates meeting the EPA Initiative NOx requirements for the FCCU using catalyst additives and therefore does not expect additional capital expenditures related to the EPA Initiative NOx requirements for the FCCU.

     The Company received a proposed draft settlement agreement from the EPA in April 2009. In August 2009, the EPA demanded penalties of $1.5 million. As of March 31, 2011, a final settlement between the Company and the EPA relating to this matter is still pending. The Company currently has $1.5 million accrued for this matter.

     In March 2008, the TCEQ notified the Company that it would present the Company with a proposed Agreed Order regarding six excess air emission incidents that occurred at the El Paso refinery during 2007 and early 2008. While at this time it is not known precisely how or when the Agreed Order may affect the Company, the Company may be required to implement corrective action under the Agreed Order and may be assessed penalties. The Company does not expect any penalties or corrective action requested to have a material adverse effect on its business, financial condition, or results of operations or that any penalties assessed or increased costs associated with the corrective action will be material.

     In 2004 and 2005, the El Paso refinery applied for and was issued a Texas Flexible Permit by the TCEQ Flexible Permits program, under which the refinery continues to operate. Established in 1994 under the Texas Clean Air Act, the program grants operational flexibility to industrial facilities and permits the allocation of emissions on a facility-wide basis in exchange for emissions reduction and controlling previously unregulated “grandfathered” emission sources. The TCEQ submitted its Flexible Permits Program rules to the EPA for approval in 1994 and has administered the program for 16 years with the EPA’s full knowledge. In May 2010, the El Paso refinery received a request from the EPA, pursuant to Section 114 of the Clean Air Act, seeking information about the refinery’s air permits. The Company responded to the EPA’s request in June 2010. Also in June 2010, the EPA disapproved the TCEQ Flexible Permits Program. In July 2010, the Texas Attorney General filed a legal challenge to the EPA’s disapproval in a federal appeals court asking for reconsideration. Although the Company believes its Texas Flexible Permit is federally enforceable, the Company agreed in December 2010 to submit within one year an application to TCEQ for a permit amendment to obtain a State Implementation Plan (“SIP”) approved state air quality permit to address concerns raised by the EPA about all flexible permits. Sufficient time has not elapsed for the Company to reasonably estimate any potential impact of these regulatory developments in the Texas air permits program.

     In September 2010, the Company received a notice of intent to sue under the Clean Air Act from several environmental groups. While not entirely clear, the notice apparently contends that the Company’s El Paso refinery is not operating under a valid permit or permits because the EPA has disapproved the TCEQ Flexible Permits program and that the Company’s El Paso refinery may have exceeded certain emission limitations under these same permits. The Company disputes these claims and maintains its El Paso refinery is properly operating, and has not exceeded emissions limitations, under the validly issued TCEQ permits. The Company intends to defend itself accordingly.

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

Four Corners Refineries

     Four Corners 2005 Consent Agreements. In July 2005, as part of the EPA Initiative, Giant reached an administrative settlement with the New Mexico Environment Department (“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 (“the 2005 NMED Agreement”). In January 2009, the Company and the NMED agreed to an amendment of the 2005 administrative settlement with the NMED (“the 2009 NMED Amendment”), which altered certain deadlines and allowed for alternative air pollution controls.

     In November 2009, the Company indefinitely suspended refining operations at the Bloomfield refinery. The Company currently operates the site as a products distribution terminal and crude storage facility. Bloomfield continues to use some of the refinery equipment to support the terminal and to store crude for the Gallup refinery. The Company has begun negotiations with the NMED to revise the 2009 NMED Amendment to reflect the indefinite suspension. During March 2011, the Company filed a request for a second amendment to the NMED agreement. This amendment is intended to revise the order with respect to the Company’s idling the Bloomfield refinery and to delay NOx controls on the Gallup refinery’s carbon monoxide boiler. The Company does not expect any penalties or corrective actions requested by the NMED in connection with the Company’s request for a second amendment to have a material effect on its business, financial condition, or results of operations or that any penalties, if assessed, will be material.

     Based on current information and the 2009 NMED Amendment, and favorably negotiating a revision to reflect the indefinite suspension of refining operations at the Bloomfield facility, the Company estimates $17.6 million total remaining capital expenditures will be required pursuant to the 2009 NMED Amendment. Through 2010, the Company has expended $5.9 million and expects to spend the remaining $11.7 million during 2011 and 2012. These capital expenditures will primarily be for installation of emission controls on the heaters, boilers, and FCCU, and for reducing sulfur in fuel gas to reduce emissions of sulfur dioxide, NOx, and particulate matter from the refineries. The 2009 NMED Amendment also provided for a $2.4 million penalty. The Company completed payment of the penalty between November 2009 and September 2010 to fund a Supplemental Environmental Project (“SEP”). The Company does not expect implementation of the requirements in the 2005 NMED Agreement and the associated 2009 NMED Amendment will result in any soil or groundwater remediation or clean-up costs.

     Bloomfield 2007 NMED Remediation Order. In July 2007, the Company 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 the Company to:

	•		investigate and determine the nature and extent of such releases of contaminants and hazardous substances;
	•		perform interim remediation measures, or continue interim measures already begun, to mitigate any potential threats to human health or the environment from such releases;
	•		identify and evaluate alternatives for corrective measures to clean up any contaminants and hazardous substances released at the refinery and prevent or mitigate their migration at or from the site;
	•		implement any corrective measures that may be approved by the NMED;
	•		develop investigation work plans over a period of approximately four years; and
	•		implement corrective measures pursuant to the investigation.

     The order recognizes that prior work satisfactorily completed may fulfill some of the foregoing requirements. In that regard, the Company has already put in place some remediation measures with the approval of the NMED and New Mexico Oil Conservation Division.

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

     Based on current information, the Company estimates a remaining undiscounted cost of $3.3 million for implementing the investigation and interim measures of the order. At March 31, 2011, the Company had a discounted liability of $2.4 million relating to the investigation and interim measures of the final order implementation costs. As of March 31, 2011, the Company had expended $2.5 million to implement the order.

     Gallup 2007 Resource Conservational Recovery Act (“RCRA”) Inspection. In September 2007, the Gallup refinery was inspected jointly by the EPA and the NMED (“the Gallup 2007 RCRA Inspection”) to determine compliance with the EPA’s hazardous waste regulations promulgated pursuant to the RCRA. The Company reached and paid a final settlement of $0.7 million with the agencies in prior years. The Company does not expect implementation of the requirements in the final settlement will result in any soil or groundwater remediation or clean-up costs. Based on current information, the Company estimates capital expenditures of approximately $15.4 million to upgrade the wastewater treatment plant at the Gallup refinery pursuant to the requirements of the final settlement. Through March 31, 2011, the Company has expended $6.6 million on the upgrade of the wastewater treatment plant and expects to spend the remaining $8.8 million through 2011 and 2012. In April 2010, the Company submitted to the NMED, for approval, a plan with the design and construction schedule to upgrade the wastewater treatment plant. The Company negotiated with the NMED and the EPA regarding modifications to the plan issued by the NMED in its May 2010 approval letter, which resulted in a September 2010 modification to the August 2009 final settlement establishing a May 2010 deadline for start-up of the upgraded wastewater treatment plant.

     Gallup 2010 NMED AQB Compliance Order. In October 2010, NMED Air Quality Bureau (“NMED AQB”) issued the Gallup refinery a Compliance Order alleging certain violations related to compressor engines and demanded a penalty of $0.6 million. The Company responded in December 2010 disputing the allegations and requested a hearing. A joint motion filed by the parties to vacate setting and stay the proceedings was granted on December 16, 2010. Although the Company believes no violations occurred and the assessment of a penalty is not appropriate, the Company offered to pay a penalty of $0.3 million, including a SEP for $0.2 million, to settle the matter. The NMED AQB did not accept the Company’s settlement offer and informal negotiations are ongoing.

Yorktown Refinery

     Yorktown 1991 and 2006 Orders. In August 2006, Giant agreed to the terms of the final administrative consent order pursuant to which Giant would implement a clean-up plan for the refinery. Following the acquisition of Giant, the Company completed the first phase of the soil clean-up plan and negotiated revisions with the EPA for the remainder of the soil clean-up plan. The Company anticipates completing the soil clean-up in 2011. The EPA issued an approval in January 2010 that allowed the Company to begin implementing its revised soil clean-up plan. The January 2010 EPA approval and a prior EPA approval in 2008 allowed adjustments to the cost estimates for the groundwater monitoring plan and reductions to the Company’s estimate of total remediation expenditures.

     The Company currently estimates that total remediation expenditures associated with the EPA order are approximately $41.6 million. Through March 2011, the Company has expended $26.2 million related to the EPA order. The Company currently anticipates further expenditures of $15.4 million primarily during 2011 with the remainder over the next 29 years, ending in 2040.

     Yorktown 2002 Amended Consent Decree. In May 2002, Giant acquired the Yorktown refinery and assumed certain environmental obligations including responsibilities under a consent decree among various parties covering many locations (the “Consent Decree”) entered in August 2001 under the EPA Initiative. Parties to the Consent Decree include the United States, BP Exploration and Oil Co., Amoco Oil Company, and Atlantic Richfield Company. As applicable to the Yorktown refinery, the Consent Decree required, among other things, a reduction of NOx, sulfur dioxide, and particulate matter emissions and upgrades to the refinery’s leak detection and repair program. The Company does not expect implementation of the Consent Decree requirements will result in any soil or groundwater remediation or clean-up requirements. Pursuant to the Consent Decree and prior to May 31, 2007, Giant had installed a new sour water stripper and sulfur recovery unit with a tail gas treating unit and an electrostatic precipitator on the FCCU and had begun using sulfur dioxide emissions reducing catalyst additives in the FCCU. The Company estimates additional capital expenditures of approximately $5 million to complete implementation of the Consent Decree requirements. The schedule for project

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

implementation has not been defined. The Company does not expect completing the requirements of the Consent Decree will result in material increased operating costs, nor does it expect the completion of these requirements to have a material adverse effect on its business, financial condition, or results of operations.

Legal Matters

     Over the last several years, lawsuits have been filed in numerous states alleging that methyl tertiary butyl ether (“MTBE”), a high octane blendstock used by many refiners in producing specially formulated gasoline, has contaminated water supplies and/or damaged natural resources. A subsidiary of the Company, Western Refining Yorktown, Inc. (“Western Yorktown”), is currently a defendant in a lawsuit brought by the State of New Jersey alleging damage to the State of New Jersey’s natural resources. Western Yorktown denies these allegations and intends to defend itself accordingly.

     Owners of a small hotel in Aztec, New Mexico filed a lawsuit in San Juan County, New Mexico alleging migration of underground gasoline onto their property from underground storage tanks located on a convenience store property across the street, which is owned by a subsidiary of the Company. Plaintiffs claim a component of the gasoline, MTBE, has contaminated their property as a result of this release. The Trial Court granted summary judgment against Plaintiffs and dismissed all claims related to the alleged 1992 release. On appeal by Plaintiffs to the New Mexico Court of Appeals, the Court reversed and reinstated certain of its claims but only to the extent they relate to releases that occurred after January 1, 1999. The Company denies these allegations and intends to defend itself accordingly.

     A lawsuit has been filed in the Federal District Court for the District of New Mexico by certain Plaintiffs who allege the Bureau of Indian Affairs (“BIA”), acted improperly in approving certain rights-of-way on land allotted to the individual Plaintiffs by the Navajo Nation, Arizona, New Mexico, and Utah (“Navajo Nation”). The lawsuit names the Company and numerous other defendants (“Right-of-Way Defendants”), and seeks imposition of a constructive trust and asserts these Right-of-Way Defendants are in trespass on the Allottee’s lands. The Court dismissed Plaintiffs’ claims in this matter. Plaintiffs then attempted to re-file these claims with the Department of Interior, which also dismissed Plaintiffs claims. Plaintiffs are now attempting to appeal this dismissal within the Department of Interior. The Company disputes these claims and will defend itself accordingly.

     In February 2009, subsidiaries of the Company, Western Refining Pipeline, Co. (“Western Pipeline”) and Western Refining Southwest, Inc. (“Western Southwest”) filed a Complaint at the Federal Energy Regulatory Commission (“FERC”) against TEPPCO Crude Pipeline, LLC (“TEPPCO Pipeline”) and TEPPCO Crude Oil, LLC (“TEPPCO Crude”) and collectively (“TEPPCO”), asserting violations of the Interstate Commerce Act and breaches of contracts between the parties including that TEPPCO Pipeline had wrongfully seized crude oil belonging to Western Southwest and Western Pipeline and wrongfully taken pipeline capacity lease payments from Western Pipeline in a cumulative amount in excess of $5 million. After filing this Complaint, Western Pipeline and Western Southwest gave TEPPCO Pipeline and TEPPCO Crude notification of termination of pipeline capacity lease agreements and a crude oil purchase agreement with TEPPCO Pipeline and TEPPCO Crude. The FERC dismissed the Complaint on the basis that it did not have jurisdiction. Western Pipeline and Western Southwest appealed the FERC’s ruling to the United States Fifth Circuit Court of Appeals, which has also ruled that the FERC did not have jurisdiction of these claims. After the initial FERC dismissal, TEPPCO Pipeline and TEPPCO Crude filed a lawsuit against Western Pipeline and Western Southwest in the Midland Texas District Court, which alleges breach of contract and seeks damages in excess of $16.4 million. Western Pipeline and Western Southwest believe their termination of the contracts was appropriate and believe that TEPPCO owes Western compensation for the crude oil that TEPPCO wrongfully seized. Western intends to defend itself against TEPPCO’s claims accordingly.

     In January 2011, 13 current and former employees of the Company’s Yorktown facility asserted that the elimination of a temporary annuity supplement under the Company’s Yorktown pension plan was not permitted by the Employee Retirement Income Security Act (“ERISA”). These employees have filed an administrative claim with the administrator of the Company’s cash balance plan, which has been denied by the administrator. These same 13 employees have also filed a charge of discrimination with the Norfolk, Virginia Area Office of the Equal Employment Opportunity Commission asserting that the above mentioned benefit changes to the cash balance plan and the substitution of severance benefits in

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

lieu of retiree medical benefits, which the Company made prior to the shutdown of Yorktown facilities, violated the Age Discrimination in Employment Act. The Company does not think there is any merit to this assertion and will defend itself accordingly.

     Regarding the claims asserted against the Company referenced above, potentially applicable factual and legal issues have not been resolved, the Company has yet to determine if a liability is probable and the Company cannot reasonably estimate the amount of any loss associated with these matters. Accordingly, the Company has not recorded a liability for these pending lawsuits.

Other Matters

     The Company is party to various other claims and legal actions arising in the normal course of business. The Company believes that the resolution of these matters will not have a material adverse effect on its financial condition, results of operations, or cash flows.

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 management’s 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, 2010, or 2010 Form 10-K, and elsewhere in this report. You should read such 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., or WNR, and the entities that became its subsidiaries upon closing of our initial public offering (including Western Refining Company, L.P., or Western Refining LP), and Giant Industries, Inc., or Giant, and its subsidiaries, which became wholly-owned subsidiaries on May 31, 2007, unless the context otherwise requires or where otherwise indicated.

Company Overview

     We are an independent crude oil refiner and marketer of refined products and also operate service stations and convenience stores. We own and operate two refineries with a total crude oil throughput capacity of approximately 151,000 barrels per day, or bpd. In addition to our 128,000 bpd refinery in El Paso, Texas, we own and operate a refinery near Gallup, New Mexico with a throughput capacity of approximately 23,000 bpd. Until September 2010, we operated a 70,000 bpd refinery on the East Coast of the United States near Yorktown, Virginia, and until November 2009, we also operated a 17,000 bpd refinery near Bloomfield, New Mexico. We temporarily suspended refining operations at our Yorktown facility in September 2010 and we indefinitely suspended refining operations at the Bloomfield refinery in November 2009. We continue to operate Yorktown and Bloomfield as product distribution terminals and supply refined products to those areas. Our primary operating areas encompass West Texas, Arizona, New Mexico, Utah, Colorado, and the Mid-Atlantic region. In addition to the refineries, we also own and operate stand-alone refined product distribution terminals in Albuquerque, New Mexico; Yorktown; and Bloomfield; as well as asphalt terminals in Phoenix and Tucson, Arizona; Albuquerque; and El Paso. As of March 31, 2011, we also own and operate 150 retail service stations and convenience stores in Arizona, Colorado, and New Mexico; a fleet of crude oil and finished product truck transports; and a wholesale petroleum products distributor, that operates in Arizona, California, Colorado, Nevada, New Mexico, Texas, Utah, and Virginia.

     We report our operating results in three business segments: the refining group, the wholesale group, and the retail group. Our refining group currently operates the two refineries and related refined product distribution terminals and asphalt terminals. At the refineries, we refine crude oil and other feedstocks into finished products such as gasoline, diesel fuel, jet fuel, and asphalt. Our refineries market finished products to a diverse customer base including wholesale distributors and retail chains. Our wholesale group distributes gasoline, diesel fuel, and lubricant products. Our retail group operates service stations and convenience stores and sells gasoline, diesel fuel, and merchandise. See Note 3, Segment Information, in the Notes to Condensed Consolidated Financial Statements included elsewhere in this quarterly report for detailed information on our operating results by segment.

Major Influences on Results of Operations

     Refining. Our net sales fluctuate significantly with movements in refined product prices and the cost of crude oil and other feedstocks, all of which are commodities. The spread between crude oil and refined product prices is the primary factor affecting our earnings and cash flows from operations. The cost to acquire feedstocks and the price of the refined products that we ultimately sell depends on numerous factors beyond our control. These factors include the supply of and demand for crude oil, gasoline, and other refined products. Supply and demand for these products depend on changes in domestic and foreign economies; weather conditions; domestic and foreign political affairs; production levels; availability of imports; marketing of competitive fuels; price differentials between heavy and sour crude oils and light sweet crude oils, known as the heavy light crude oil differential; and government regulation. Another factor impacting our margins in recent years is the narrowing of the heavy light crude oil differential. Since the second quarter of 2009, the heavy light crude oil differential has narrowed significantly, particularly impacting our Yorktown refinery that, when operating, can process up to 100% of heavy crude oil. Narrowing of the heavy light crude oil differential can have significant negative impact on our Yorktown refining margins. During the first quarter of 2011, a supply/demand imbalance of WTI crude oil in the Mid-Continent has resulted in lower prices for WTI crude oil relative to Brent crude oil.

     Other factors that impact our overall refinery gross margins are the sale of lower value products such as residuum and propane, particularly when crude costs are higher. In addition, our refinery gross margin is further reduced because our refinery product yield is less than our total refinery throughput volume. Our results of operations are also significantly affected by our refineries’ direct operating expenses, especially the cost of natural gas used for fuel and the cost of electricity. Natural gas prices have historically been volatile. Typically, electricity prices fluctuate with natural gas prices.

     Demand for gasoline is generally higher during the summer months than during the winter months. In addition, higher volumes of ethanol are blended with gasoline produced in the Southwest region during the winter months, thereby increasing the supply of gasoline. This combination of decreased demand and increased supply during the winter months can lower gasoline prices. 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. The effects of seasonal demand for gasoline are partially offset by increased demand during the winter months for diesel fuel in the Southwest and heating oil in the Northeast. Refining margins remain volatile and our results of operations may not reflect these historical seasonal trends.

     Safety, reliability, and the environmental performance of our refineries’ operations are critical to our financial performance. Unplanned downtime of our refineries, such as the unplanned weather-related outage our El Paso refinery experienced during February 2011, generally results in lost refinery gross margin opportunity, increased maintenance costs, and a temporary increase in working capital investment and inventory. We attempt to mitigate the financial impact of planned downtime, such as a turnaround or a major maintenance project, through a planning process that considers product availability, margin environment, and the availability of resources to perform the required maintenance.

     Periodically we have planned maintenance turnarounds at our refineries, which are expensed as incurred. We completed a scheduled turnaround at the south side of the El Paso refinery during the first quarter of 2010. Our next scheduled maintenance turnarounds are during the first quarter of 2013 for the El Paso refinery and the fourth quarter of 2012 for the Gallup refinery.

     The nature of our business requires us to maintain substantial quantities of crude oil and refined product inventories. Because crude oil and refined products are commodities, we have no control over the changing market value of these inventories. Our inventory of crude oil and the majority of our refined products are valued at the lower of cost or market, or LCM, value under the last-in, first-out, or LIFO, inventory valuation methodology. If the market values of our inventories decline below our cost basis, we would record a write-down of our inventories resulting in a non-cash charge to our cost of products sold. Under the LIFO inventory valuation method, this write-down is subject to recovery in future periods to the extent the market values of our inventories equal our cost basis relative to any LIFO inventory valuation write-downs previously recorded. See Note 5, Inventories, in the Notes to Condensed Consolidated Financial Statements included in this quarterly report for detailed information on the impact of LIFO inventory accounting.

     Wholesale. Our earnings and cash flows from our wholesale business segment are primarily affected by the sales volumes and margins of gasoline, diesel fuel, and lubricants sold. Margins for gasoline, diesel fuel, and lubricant sales are equal to the sales price less cost of sales. Margins are impacted by local supply, demand, and competition.

     Retail. Our earnings and cash flows from our retail business segment are primarily affected by the sales volumes and margins of gasoline and diesel fuel sold, and by the sales and margins of merchandise sold at our service stations and convenience 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 cents per gallon, or cpg, basis. Fuel margins are impacted by local supply, demand, and competition. Margins for retail merchandise sold are equal to retail merchandise sales less the delivered cost of the merchandise, net of supplier discounts and rebates 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 are seasonal. Our retail business segment operating results for the first and fourth calendar quarters are generally lower than those for the second and third calendar quarters of each year.

Critical Accounting Policies and Estimates

     We prepare our financial statements in conformity with U.S. generally accepted accounting principles, or GAAP. In order to apply these principles, we must make judgments, assumptions, and estimates based on the best available information at the time. Actual results may differ based on the accuracy of the information utilized and subsequent events, some of which we may have little or no control over. Our critical accounting policies 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 2010 annual report on Form 10-K.

Results of Operations

     The following tables summarize our consolidated and operating segment financial data and key operating statistics for the three months ended March 31, 2011 and 2010. 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
		March 31,
		2011				2010
		(In thousands, except per share data)
Statement of Operations Data
Net sales (1)		$	1,839,588			$	1,915,395
Operating costs and expenses:
Cost of products sold (exclusive of depreciation and amortization) (1)			1,612,727				1,765,461
Direct operating expenses (exclusive of depreciation and amortization) (1)			111,007				106,980
Selling, general, and administrative expenses			20,397				16,430
Maintenance turnaround expense			—				23,286
Depreciation and amortization			35,371				34,282
Total operating costs and expenses			1,779,502				1,946,439
Operating income (loss)			60,086				(31,044	)
Other income (expense):
Interest income			92				30
Interest expense and other financing costs			(34,492	)			(36,774	)
Amortization of loan fees			(2,335	)			(2,414	)
Loss on extinguishment of debt			(4,641	)			—
Other income (expense), net			288				(365	)
Income (loss) before income taxes			18,998				(70,567	)
Provision for income taxes			(6,773	)			39,878
Net income (loss)		$	12,225			$	(30,689	)
Basic earnings (loss) per share		$	0.13			$	(0.35	)
Dilutive earnings (loss) per share			0.13				(0.35	)
Weighted average basic shares outstanding			88,367				88,006
Weighted average dilutive shares outstanding			88,367				88,006
Cash Flow Data
Net cash provided by (used in):
Operating activities		$	(21,041	)		$	(147,572	)
Investing activities			828				(18,738	)
Financing activities			(27,766	)			116,750
Other Data
Adjusted EBITDA (2)		$	95,837			$	26,189
Capital expenditures			10,779				18,843
Balance Sheet Data (at end of period)
Cash and cash equivalents			11,933				25,330
Working capital			365,577				249,361
Total assets			2,681,777				2,857,325
Total debt			1,053,880				1,237,308
Stockholders’ equity			693,123				658,385

	•		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 calculated by us may differ from the Adjusted EBITDA calculations of other companies in our industry, thereby limiting its usefulness as a comparative measure.

		Three Months Ended
		March 31,
		2011				2010
		(In thousands)
Net income (loss)		$	12,225			$	(30,689	)
Interest expense and other financing costs			34,492				36,774
Provision for income taxes			6,773				(39,878	)
Amortization of loan fees			2,335				2,414
Depreciation and amortization			35,371				34,282
Loss on extinguishment of debt			4,641				—
Maintenance turnaround expense			—				23,286
Adjusted EBITDA		$	95,837			$	26,189

Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010

     Net Sales. Net sales primarily consist of gross sales of refined products, lubricants, and merchandise, net of customer rebates or discounts and excise taxes. Net sales for the three months ended March 31, 2011 were $1,839.6 million, compared to $1,915.4 million for the three months ended March 31, 2010, a decrease of $75.8 million, or 4.0%. This decrease was the result of decreased sales of $303.2 million, and increased sales of $203.8 million and $23.6 million in our refining, wholesale, and retail groups, respectively, net of intercompany transactions that eliminate in consolidation. This decrease was primarily due to decreased sales volumes. Our sales volume decreased by 7.3 million barrels, or 25.3%, from 28.8 million barrels for the three months ended March 31, 2010 to 21.5 million barrels for the three months ended March 31, 2011. Partially offsetting this decrease were increased sales prices. The average sales price per barrel of refined products for all operating segments increased from $87.32 in 2010 to $132.98 in 2011.

     Cost of Products Sold (exclusive of depreciation and amortization). Cost of products sold primarily includes cost of crude oil, other feedstocks and blendstocks, purchased refined products, lubricants and merchandise for resale, and transportation and distribution costs. Cost of products sold was $1,612.7 million for the three months ended March 31, 2011, compared to $1,765.5 million for the three months ended March 31, 2010, a decrease of $152.8 million, or 8.7%. This decrease was primarily the result of decreased cost of products sold of $627.0 million and increased cost of products sold of $450.9 million and $23.3 million in our refining, wholesale, and retail groups, respectively, net of intercompany transactions that eliminate in consolidation. The average cost per barrel of crude oil, feedstocks, and refined products for all operating segments increased from $82.72 for the three months ended March 31, 2010 to $123.31 for the three months ended March 31, 2011. Cost of products sold included $36.5 million and $2.8 million in realized and unrealized economic hedging losses for the three months ended March 31, 2011 and 2010, respectively.

     Direct Operating Expenses (exclusive of depreciation and amortization). Direct operating expenses include direct costs of labor, maintenance materials and services, transportation expenses, chemicals and catalysts, natural gas, utilities, insurance expense, property taxes, and other direct operating expenses. Direct operating expenses were $111.0 million for the three months ended March 31, 2011, compared to $107.0 million for the three months ended March 31, 2010, an increase of $4.0 million, or 3.7%. Direct operating expenses for the three months ended March 31, 2010 include $8.5 million related to the first quarter 2010 reversal of our December 2009 incentive bonus accrual. The increase in direct operating expenses resulted from a decrease of $2.0 million and increases of $5.8 million and $0.2 million in direct operating expenses of our refining, wholesale, and retail groups, respectively, net of intercompany transactions that eliminate in consolidation.

     In total, we reversed $14.7 million related to our December 2009 incentive bonus accrual including the $6.2 million reversal discussed below under Selling, General, and Administrative Expenses for the three months ended March 31, 2010. We consider the awarding of a bonus for any period to be discretionary and subject to not only the earnings during the bonus period, but also to the economic conditions and refining industry environment at the time the bonus is to be paid. Our first quarter 2010 results, coupled with our near-term forecasts of operating results and our expectations for the economy, were such that we did not deem the pay-out of the previously accrued 2009 bonus prudent as such payment would not be in the best interests of the Company or our shareholders. On March 29, 2010, we determined that 2009 bonuses would not be paid.

     Selling, General, and Administrative Expenses. Selling, general, and administrative expenses consist primarily of corporate overhead, marketing expenses, public company costs, and stock-based compensation. Selling, general, and administrative expenses were $20.4 million for the three months ended March 31, 2011, compared to $16.4 million for the three months ended March 31, 2010, an increase of $4.0 million, or 24.4%. Selling, general, and administrative expenses included $6.2 million related to the reversal of our December 2009 incentive bonus accrual during the first quarter of 2010. The increase in selling, general, and administrative expenses resulted from increased corporate overhead of $3.9 million along with decreased expenses of $0.5 million and increased expenses of $0.2 million and $0.4 million in our refining, wholesale, and retail groups, respectively.

     The increase of $3.9 million in corporate overhead was primarily due to the reversal of the incentive compensation accrual in 2010 ($3.3 million) and stock-based compensation ($0.5 million).

     Maintenance Turnaround Expense. Maintenance turnaround expense includes planned periodic maintenance and repairs generally performed every two to six years, depending on the processing units involved. During the quarter ended March 31, 2010, we incurred costs of $23.3 million for the turnaround of the Southside FCCU and catalytic gasoline hydrotreater at the El Paso refinery.

     Depreciation and Amortization. Depreciation and amortization for the three months ended March 31, 2011 was $35.4 million, compared to $34.3 million for the three months ended March 31, 2010, an increase of $1.1 million, or 3.2%.

     Operating Income (Loss). Operating income was $60.1 million for the three months ended March 31, 2011, compared to an operating loss of $31.0 million for the three months ended March 31, 2010, an increase of $91.1 million. This increase was attributable primarily to higher refinery gross margins and no turnaround expense for the three months ended March 31, 2011 compared to lower refinery gross margins and the maintenance turnaround completed in El Paso during the three months ended March 31, 2010.

     Interest Income. Interest income for the three months ended March 31, 2011 and 2010 was $0.09 million and $0.03 million, respectively. This increase was primarily attributable to increased balances of cash available for investment.

     Interest Expense. Interest expense for the three months ended March 31, 2011 was $34.5 million (net of capitalized interest of $1.5 million) compared to $36.8 million (net of capitalized interest of $0.8 million) for the three months ended March 31, 2010, a decrease of $2.3 million, or 6.3%. This decrease was primarily attributable to lower levels of outstanding debt and a lower overall interest rate in the first quarter of 2011 versus the first quarter of 2010.

     Amortization of Loan Fees. Amortization of loan fees for the three months ended March 31, 2011 was $2.3 million, compared to $2.4 million for the three months ended March 31, 2010, a decrease of $0.1 million, or 4.2%.

     Loss on Extinguishment of Debt. Loss on extinguishment of debt for the three months ended March 31, 2011 was $4.6 million. This increase was attributable to the amendment of our Term Loan Credit Agreement.

     Provision for Income Taxes. We recorded an income tax expense of $6.8 million for the three months ended March 31, 2011, using an estimated effective tax rate of 35.7%, as compared to the federal statutory rate of 35%.

     We recorded a benefit for income taxes of $39.9 million for the three months ended March 31, 2010, using an estimated effective tax rate of 56.5%, as compared to the federal statutory rate of 35%. The effective tax rate was higher primarily due to the federal income tax credit available to small business refiners related to the production of ultra low sulfur diesel fuel and our currently estimated annual taxable income relative to the current period net loss.

     Net Income (Loss). We reported net income of $12.2 million for the three months ended March 31, 2011, representing $0.13 net income per share on weighted average dilutive shares outstanding of 88.4 million.

     We reported a net loss of $30.7 million for the three months ended March 31, 2010, representing $0.35 net loss per share on weighted average dilutive shares outstanding of 88.0 million.

     See additional analysis under the Refining Segment, Wholesale Segment, and Retail Segment.

Refining Segment

		Three Months Ended
		March 31,
		2011				2010
		(In thousands, except per barrel data)
Net sales (including intersegment sales)		$	1,710,717			$	1,917,958
Operating costs and expenses:
Cost of products sold (exclusive of depreciation and amortization)			1,538,166				1,807,155
Direct operating expenses (exclusive of depreciation and amortization)			81,137				82,103
Selling, general, and administrative expenses			2,572				3,081
Maintenance turnaround expense			—				23,286
Depreciation and amortization			31,052				29,276
Total operating costs and expenses			1,652,927				1,944,901
Operating income (loss)		$	57,790			$	(26,943	)
Key Operating Statistics
Total sales volume (bpd) (1)			164,270				249,623
Total refinery production (bpd)			119,504				192,502
Total refinery throughput (bpd) (2)			121,549				192,974
Per barrel of throughput:
Refinery gross margin (3)		$	15.77			$	6.38
Gross profit (3)			12.93				4.69
Direct operating expenses (4)			7.42				4.73