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Alon USA Energy, Inc. (NYSE:ALJ)

Q3 2008 Earnings Call Transcript

November 6, 2008 10:00 a.m. ET

Executives

Claire A. Hart – Senior Vice President

Jeff Morris – President & CEO

Shai Even – Senior Vice President and Chief Financial Officer

Analysts

Ann Kohler – Caris & Company

Paul Sankey – Deutsche Bank North America

Jeff Dietert – Simmons & Company

Chi Chow – Tristone Capital

Paul Cheng – Barclay's Capital

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Alon USA Energy third quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) This conference is being recorded today, Thursday, November 6, 2008.

I would now like to turn the conference over to Mr. Claire Hart, Senior Vice President. Please go ahead, sir.

Claire Hart

Thank you, Nicole. Good morning everyone and welcome to Alon USA’s third quarter 2008 earnings conference call. With me are Jeff Morris, President and CEO; Joseph Israel, Chief Operating Officer; Shai Even, Chief Financial Officer, and other members of our senior management team.

You should have received yesterday our earnings release, but in case you didn't, you can obtain a copy from our website, alonusa.com, under the Investor Relations section.

Before I turn the call over to Jeff, please be aware that information reported on this call speaks only as of today, November 6, 2008, and therefore you are advised that time-sensitive information may no longer be accurate as of time of any replay.

Also let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control, that may cause the company's actual results or performance to materially differ from any future results or performance expressed or implied by those statements.

These risks and uncertainties include the risk factors disclosed by the company from time to time in the filings with the SEC. Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated in our news release issued yesterday. And please note that the contents of our conference call today are covered by those statements.

With that, I'll turn the call over to Jeff.

Jeff Morris

Thank you, Claire. And thank you all for joining us today. I will make a few remarks and take questions, of course.

The third quarter for Alon was primarily an event-driven quarter. The major events that occurred were the acquisition of our Krotz Springs refinery in July and the restart of our Cat cracker at the Big Spring refinery in late September.

With these events I am quite pleased with the financial performance for the quarter and the progress we have made. The Krotz Springs refinery broadens and strengthens the company and the restart of Big Spring will return us to normal performance.

I am also very pleased with our continued progress at Paramount and Paramount Asphalt. Average asphalt pricing per ton ended the quarter at $679 per ton and margins of $94 per ton. Thus as we proposed earlier in the year, the Paramount system is profitable now even after current low west coast 3-2-1 crack spreads. In addition, we are completing other improvements in California.

The construction of the naphtha hydrotreater project is on schedule and budget to be completed by year end. And our LPG recovery project is online and has improved our LPG recovery by a few hundred barrels per day.

We are also taking the opportunity in the fourth quarter to do a full turn-around at Paramount as we complete the new hydrotreater and address other reliability issues. During this time we will be operating the Long Beach refinery in a topping mode to supply our asphalt customers.

Krotz Springs’ throughput was reduced in September due to the lack of power for eight days and the slow restart of many of the gathering systems, especially to the southwest of the refinery following hurricanes Gustav and Ike. I was very please with the response of all of our personnel and we are now returning to our normal operating rates.

Also the crack spread hedge which we have in place has protected our cash flows as expected. In August and September we received about $2 million per month and that amount is projected to increase to about three to $4 million per month in the current environment.

Also our liquidity remains good. At the end of the quarter we had almost $215 million of availability under our revolvers. It should be noted that today we have received $280 million in advances from our insurers. But we have spent to today about $335 million in repairs for the Big Spring refinery. And also we have the agreements that at least another $30 million of business interruption proceeds.

So this will improve our liquidity further towards the end of the year as we reach settlement with the insurance companies. And they have indicated to us that they believe we can reach settlement by year end.

Looking forward we are finalizing our 2009 business plan and will be discussing it with our board in December. I can tell you that our approach in 2009 will be conservative and provide significant room for debt reduction even in a cautious refining margin environment.

Also we will be filing our S1 for the Alon brands IPO in November such that we will be prepared to move forward quickly when the opportunity arises.

In closing I want to thank my colleagues at the Big Spring refinery who performed remarkably in completing repairs to the Cat cracker and other major sections of the refinery in only seven months. I also look forward to the value created by the addition of the Krotz Springs refinery and the improvements we are making at the Paramount refinery and asphalt marketing segments.

With that I would be happy to address any questions you may have. Nicole, can we poll for questions please?

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. At this time we will begin the question and answer session. (Operator instructions)

And our first question comes from the line of Ann Kohler with Caris & Company. Please go ahead.

Ann Kohler – Caris & Company

Good morning, gentlemen.

Jeff Morris

Good morning, Ann.

Ann Kohler – Caris & Company

My question is regarding asphalt. Certainly you had great results during the third quarter and certainly it looks like it is starting off very strong in the fourth quarter. Could you kind of walk us through sort of how you see the supply and demand dynamics as we move into next year? Given kind of what is going on in California, any budgetary issues, and certainly decreasing supply from some of the other producers as they have upgraded their equipment.

Jeff Morris

Sure, Ann, I would be happy to do that. Certainly demand is off versus 2007. We had seen that both in the roofing sector and the paving sector. Roofing is being effected by housing starts, of course. And paving is being effected by state budgets. State budgets as you know are in dollars not in tons, so as the dollars per ton go up there are fewer tons that are purchased. So generally you can see the reduction in work being done on the state budgets as the pricing goes up.

That said, interestingly we have seen supply in ’08 decrease more than demand has decreased. It had been due to two major events–one of which we anticipated, one we did not. The major even we anticipated was the start up of the cokers in the Rockies. The Cenex coker is online, the Sinclair coker is online and the Frontier expansions are coming online and so those are all reducing supply of asphalt (inaudible 00:08:40) stock especially in the west, since all of those are in the west. That has had a significant effect on the market.

The surprise–another significant effect occurred in July with the SemGroup bankruptcy. And that took a significant amount of supply out of the market. Obviously the asphalt producers that were selling through the SemGroup are restructuring their marketing arrangements and will be moving those products in a different way. But that said, we are still seeing a significant effect of the SemGroup bankruptcy and we expect that to continue.

So we look forward believing that the demand will be off but supply will be off even further. Therefore supporting margins. And it is our intent to continue to maintain the discipline that we have this year, to sustain what we believe are fair asphalt margins and that are margins that are necessary to justify us to produce it at our California facilities and we think that the market going forward will provide that opportunity.

Another market to keep in mind, that is important to me, is the price of winter fill asphalt. That is a good indicator because many of our customers, large customers, fill their inventories or build inventories during the winter months to run during the summer so the pricing of asphalt in the winter helps establish the perceptions for the coming season.

But what we are seeing at this point in time, we expect winter fill asphalt to average at least $100 a ton above what it was in 2007 during the winter of 2008.

Ann Kohler – Caris & Company

Great. Thank you.

Jeff Morris

You’re welcome.

Operator

Thank you. Our next question comes from the line of Paul Sankey with Deutsche Bank. Please go ahead.

Paul Sankey – Deutsche Bank North America

Hi, everyone. Could you just remind us of the strategic rationale for the IPO of the retail? And really what you are hoping to achieve, how necessary it is for you guys. Thanks.

Jeff Morris

Well, it is not necessary but we believe it is an opportunity and it creates shareholder value and without getting into pre-selling, I’ll mention two things. One, we can compare how companies like (inaudible 00:11:16) or Casey’s or Pantry or others are valued on a multiple basis versus what refiners are valued. That is an apparent fact that is in the market. The other thing that we are keenly aware of is that in a company like ours the retail division competes for capital with the refining division and sometimes the retailers are very successful and sometimes they are not and we think it would be advantageous for this segment to have the opportunity to have access to other markets or raise capital on its own. And we believe that would help strengthen the business. So in that way this division would react more appropriately, if you will, versus what others react like the (inaudible 00:12:11) that I have described.

I will remind you that Alon Energy does intend to retain a majority ownership even in the IPO so it will still be an integrated, in our view and integrated portion of the business.

Paul Sankey – Deutsche Bank North America

Great, thanks. Can you just give us a bit more detail to the extent you can on your CapEx for the next year and whether that is changed in the light of the market conditions?

Jeff Morris

I can not give you specific numbers, Paul, because I haven’t yet reviewed our proposals or finalized proposals yet that I will be making to the directors in December. I can tell you that my approach is changed somewhat. I am certainly feeling more conservative, cautious than I was earlier in the year. And so that will be reflected in the proposals I make to the board. I think it is critical that we significantly de-lever in 2009 regardless what the refining environment may be. So I intend to propose a business plan that allows that or provides that even in a various type refining margin environment. If the refining margin environment surprises me and is much better than expected then we will certainly have opportunities to add other projects.

Paul Sankey – Deutsche Bank North America

Can you give us a sense for what your required CapEx is for the sustaining maintenance and regulatory CapEx for next year so that we can at least–?

Jeff Morris

Generally, we believe that a good number for sustaining a regulatory capital is about 25 million per refinery. And then we would have some incremental spending, a relatively small amount of incremental sustaining regulatory capital above that for the marketing divisions.

Paul Sankey – Deutsche Bank North America

Sorry, was that just sustaining or did it include regulatory?

Jeff Morris

Both. It included both.

Paul Sankey – Deutsche Bank North America

Okay, so that is sustaining and regulatory. And then everything else that you would spend would essentially be discretionary growth or profit improvement projects?

Jeff Morris

Right.

Paul Sankey – Deutsche Bank North America

Yes, okay, I have got you. And then you referenced your de-leveraging. I think one of the things that I struggle with is the fact that you are 80% owned by a private entity. Does that mean that you can run a much higher level of debt than some of your competitors who do not have the parent over them or would you still be aiming to get your dept to cap down to some of the extremely conservative levels that we are seeing with some of the other players out there?

Jeff Morris

I will answer that in a couple of ways, Paul. We do have a very strong majority owner and I appreciate the support of Alon Israel (ph 00:15:10) very much, and that was indicated this year in two ways. One is when they had taken the opportunity to take advantage of the market and buy shares, increase their ownership and they felt that–I will not speak for them, but I presume they felt that the value of the shares was a good buy for them. Secondly buy putting $80 million into the Krotz Springs acquisition that occurred in July. So that strength and support is apparent.

The second thing I would say is that our style as a company is somewhat different than our peers. We are a growth company, we said that from the beginning, we will continue to say it. And that is also indicated in 2008 when we will likely be the only refiner that will complete and acquisition in 2008. We believe it was a good price and a good time to buy when others are not. And so we are a growth company, leave it there.

So that means to me that while we may not be–I do not feel the need to go down to 10% or 20% (inaudible 00:16:30) ratio or below zero. I think we can sustain ourselves quite well with something above that. But that said, we stand on our own two feet and I want to treat all the shareholders fairly. And I think it is right for all shareholders to de-lever from this level where this is not the level we want to stay at. When we get down in the 30 and 40% range, then I feel that I think it is a comfortable range to be.

Paul Sankey – Deutsche Bank North America

Okay. Thank you. And finally from me. It feels like there is too much refining capacity being built globally and you are still seeing (inaudible 00:17:15) some reaction very high imports into the U.S. Jeff, with your experience how do you expect this to rationalize itself? I mean obviously we have got unit shutdowns going on very clearly in the U.S., but at the same time it feels like we need to use, if you like, an entire (inaudible 00:17:31) capacity. How do you see this rationalizing itself over the coming period of economic weakness?

Jeff Morris

I will give you two macro views, Paul. I will say that my macro views are no better than anybody else’s, probably not as good as some, but I will give you my view regardless. I think we have built and continue to build too much gasoline conversion capacity in the world. I think that is one of the issues around Reliance, that it is basically a gasoline type refinery and I do not think we have overbuilt distillate capacity. And so the world is low on gasoline, it is not particularly low on distillate. Now that said, in the coming economic environment distillate may get a little loose but it is going to be a lot less than the gasoline.

Now the key to me looking forward on a worldwide basis is what fleet does China build? Does China build a European fleet or do they build a U.S. fleet, or something in between? Because that is going to be the biggest demand grower of the world, we know that, China and India. They may have a slow period for a while but they are going to come back. But the refining capacity that is being built in the world or that is going to be successful in the world needs to match, in my view, the fleet that is going to be built in China. And it is not clear to me what type of fleet they are going to build. If they want to address greenhouse gas emissions, then they would build a fleet more similar to Europe. Although they have started on building on a fleet that is more similar to what we have.

It will be interesting to see how they establish, going forward, tax policies on distillate versus gasoline, whether they adopt a U.S. type of taxing policy or European taxing policy. I think that long-term gasoline, predominantly gasoline type refineries will struggle and we will move more towards a distillate structure.

Paul Sankey – Deutsche Bank North America

And I can see built in that you see yourselves as long distillate, basically?

Jeff Morris

Absolutely, we are. Hot Springs this last quarter was 47% distillate. We are moving the California refinery to distillate and that is really important for us in regard to Reliance because if the Pacific Basin is low on gasoline, which I believe it is going to be, then we are better positioned to be in the distillate mode, which we will be.

Our long-term goal is that the gasoline conversion of the Paramount refinery, the west coast refinery, is only 20% and the remainder is distillate, other products. The refinery that will be more classical will be the Big Spring refinery. We believe we can get it up into the mid-30s on distillate yield, but that is probably about as high as we can get it. But that is more of a local niche kind of market and so I am not as concerned there.

But on our markets, our refiners that are exposed to the world a little more like at Krotz Springs, on the Gulf Coast, and Paramount will be on the Pacific Basin, we started two years ago going towards the predominant distillate mode and we will continue that way.

Paul Sankey – Deutsche Bank North America

Are you worried about everyone doing the same thing?

Jeff Morris

Well, sure. If everybody–but it is not so important if everybody does the same thing, it is who goes first? And I think we are far advanced versus others in adopting this strategy moving forward. I think we will be there earlier and we will establish our markets earlier and let others follow us. The market always over does it, Paul. It always goes too high, always goes too low. That is just part of the deal. It has been that way since I have been in the business. But those who succeed are those who position themselves first.

Paul Sankey – Deutsche Bank North America

Fair enough, Jeff. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Jeff Dietert with Simmons. Please go ahead.

Jeff Dietert – Simmons & Company

Good morning. Jeff Dietert with Simmons & Company.

Jeff Morris

Hi, Jeff.

Jeff Dietert – Simmons & Company

Jeff, impressive effort from your team in a challenging quarter and in with the difficulties at Big Springs. We certainly appreciate that.

Jeff Morris

Thank you.

Jeff Dietert – Simmons & Company

You have been operating Krotz Springs for a few months now, granted working through hurricanes, etcetera. Given your experience, do you see opportunities there that you did not anticipate in the original acquisition?

Jeff Morris

I would say possibly, Jeff. I am cautiously optimistic that we can see things beyond what we intended. We knew when we purchased the plant that it had some great upside by adding to sulfur capacity to adding hydrogen. And it is in our plans to do that, but those are investments we made after we paid off the debt. Of course with our 100% cash sweep structure we have to pay of the debt first. So, but we are beginning to see some more interim kind of ideas that could work.

I really like the way the Cat cracker is structured. It is one of the few refiners in the country which takes bottoms directly to the Cat cracker. That is one of the reasons we have 95% fuel yield. And interestingly over 100% total liquid yield. We do about 101% liquid recovery at the plant because of that crack unit (inaudible 00:23:47).

But it is a nice unit, it does very well. But one of the limits we have on the plant is basically is the number on our jet. And we think we have some opportunities to adjust the crude slate to the refinery to help optimize that. We also, interestingly, are shutting down a jet treater in Paramount this fourth quarter after we do our hydro-treater revamp. So we are investigating moving that to Krotz Springs to do an interim improvement in the jet treating. It is a few thousand barrels per day. But it can be a nice number to improve Krotz Springs.

So I think the areas I see now that were not included in recent plans are some optimization of the crude. One thing we are taking advantage of right now, Jeff, is with the local gathering systems being down, we are buying some cargos and taking the opportunity to test run them. We test ran an (inaudible 00:24:50) cargo just recently and we have another Nigerian cargo that we are considering to operate in December. So we are evaluating other crudes and I think we will develop some opportunities out of that.

Bottom line, I would like to see the distillate yield from Krotz Springs up over 50% with the right choices, and I think that's the right direction to go. It helps us with our–more lines with our hedge, our two on one hedge, and I believe if cracks are going to be low, that the distillate cracks will still remain above the gas link cracks, so the more we can go that direction the better. So I'm hopeful that in 2009 we'll be around 50% distillate yield.

Jeff Dietert – Simmons & Company

It appears some of the distillate, sweet crudes that traded at huge premiums to WTI early in the year, and now it's starting to trade at nice discounts to WTI. Are you seeing that in your portfolio?

Jeff Morris

Well certainly we're seeing generally the spreads come down, (inaudible 00:26:03) ITS spreads, they're declining and I think that goes back to my original problem from previous comments with Paul is as the gasoline cracks come down, sweet crudes I think will–the gasoline refiners will cut back surplus, which they're doing now, and then sweet crudes will decline somewhat, so the spreads will decrease and that's going to help us at Krotz Springs, because we don't just talk the sweet crude or Cat Cracker, we crack the whole thing, and some nice structure I would say. I think longer term Krotz Springs may surprise some people in its performance.

Jeff Dietert – Simmons & Company

I appreciate the balance sheet information you provided in the press release. Do you have the assets associated with risk management activity associated with the hedges; do you have those available? I assume that–or will I need to wait for the 10Q?

Jeff Morris

Well we have–it depends specifically what you like Jeff, if you have a specific question we can try to answer it, but there are more detail in the Q of course.

Jeff Dietert – Simmons & Company

Okay. And lastly, as you repair and bring Big Springs back to normal operations, are you expecting any difference in the operations there relative there to before the fire?

Jeff Morris

Well I'm hopeful. I mean we should see improvements, because whenever you rebuild something, you rebuild it to current standards. We have to be fair about our Cat Cracker in Big Spring as an example, although we've had many upgrades over the years, and especially reactor regenerator, et cetera. Some of the portions of the plant were still original in 1948, pipe racks and things of that sort, so when we rebuilt it, we rebuilt it to 2008 standards, so that just–that changed from 48 to 2008 standards improved reliability et cetera.

I'll give you a specific example also; sometimes when you replace equipment, you can can't replace it in kind because it's no longer available. Our drive is an example for a wet gas compressor (ph 00:28:39). It is a variable speed, electrical drive and we did that project in 1993. Well the type of drive that we had at that time no longer exists, so today, we bought the current model of drive, the 2008 model, although it certainly has significant improvements over the 1993 model and we can see that in the ease of starting the unit and things of that sort. So it's embedded in replacement and kind come upgrades that you have, and I would expect that we would see those.

Jeff Dietert – Simmons & Company

Noticeable reliability improvement, I could see that. Any change in yield or feed stock flexibility?

Jeff Morris

It's too early to tell. I don't know, but we have to look at the basics of (inaudible 00:29:38) it is a West Texas refinery, and this is high under MWTS, and WTS is a good market of crude, so we've run 95% in the past, so I would presume that we will continue to run WTS or WTS look a likes. We'll use Amdels (ph 00:29:55) to build WTS clones, if WTS gets expensive, but I don't expect a significant change in the crude in Big Spring.

Jeff Dietert – Simmons & Company

Very good, I appreciate your comments.

Operator

Thank you, our next question comes from the line of Chi Chow with Tristone Capital. Please go ahead.

Chi Chow – Tristone Capital

Thanks, good morning. Jeff, I'm trying to reconcile your debt balance at the end of the third quarter. It seems like it increased more than just putting the new Krotz Springs head on in the revolver. Is there something else going on there?

Jeff Morris

Well I think Chi, you just need to pay attention to the difference that I told you in my remarks, that we've spent to date, $335 million on the preparers of Big Screen received $280, and we of course expect to receive that settlement in the fourth quarter, but that may be a difference.

Chi Chow – Tristone Capital

Okay. Do you have the debt level at the end of October by chance?

Jeff Morris

I don't have it with me right now. I'm looking at Shai Even, I don't know if he has it or not. By view it's pretty much flat I believe Chi.

Chi Chow – Tristone Capital

And then do you expect any additional business interruption proceeds beyond the third quarter?

Jeff Morris

I do. I think that the $30 million-dollars was the undisputed amount through the month of June, and we've made business interruption claims for July/August, we will maybe make it into September, that have not been reviewed by the adjusters as yet. Also, the claim that we made through June was higher than the $30 million that was advanced, but we agreed with the insurers just to advance right now what was undisputed, and we'll leave the rest for discussion later. I certainly expect the business interruption piece to increase.

Chi Chow – Tristone Capital

Okay, great. Then in California, I'm trying to understand the margins you've realized there, were there any inventory impacts that's going through the gross margin number?

Jeff Morris

There were, yes, and you probably will see that–I wouldn't be surprised Chi if you don't see that going forward, because the asphalt business is a seasonal business, and we do have inventory changes. Inventories increase in the early quarters to build inventory for the season, and they decrease in the later quarters, so that's one of the reasons that we've put it in the reoccurring, because it will reoccur year after year, and there'll be market environments, so there was a significant reduction in inventories in the California system, but they were primarily associated with the seasonality of the asphalt business.

Chi Chow – Tristone Capital

Did you sell down any crude inventory during the quarter?

Jeff Morris

We did sell–well we didn't sell outright any crude, but as you know we reduced our through puts (ph 00:33:12) at the refinery during the third quarter, so by doing that we needed to buy less cargo, and so we had less–our peaks were lower. If you want to look at it that way, then it would have been otherwise. So that just related to through put.

Chi Chow – Tristone Capital

Got it. Is there any way to quantify that impact during (inaudible 00:33:37) California?

Jeff Morris

I don't have the numbers.

Shai Even

There is no way to specifically to quantify that, because that's part of the normal way that we are calculating the variable inventories for the end of the period (inaudible 00:33:55).

Chi Chow – Tristone Capital

Okay. One final question; what's the status of the alky unit (ph 00:34:01) at Big Spring?

Jeff Morris

Right now the alky unit remains down. We have bought most of the equipment needed for the repair. We, at this point, have taken a breather. We've worked the people very, very hard at Big Spring, and I'm going to address the timing for the alkylation unit repairs and the other things with our 2009-business plan, but it's something we want to get back up and running quickly, and it's first on our list.

In the interim, we're not restricted in the (inaudible 00:34:37) at Big Spring, because we have arranged to–we're blending the C4's. Here in the winter seasons, you know we have a vapor pressure advantage there in West Texas, being in an attainment zone (ph 00:34:53), and so we're blending many of them, and we're also selling BB's into the market, it's not a major effect, but we certainly want to get it online as quickly as we can.

Chi Chow – Tristone Capital

All right, great. Thanks Jeff.

Operator

Thank you, our next question comes from the line of Paul Cheng with Barclay's Capital. Please go ahead.

Paul Cheng -Barclay's Capital

Hi guys. If I could, a number of quick questions. Jeff, I understand that it may be difficult to quantify the (inaudible 00:35:26) impact. Can you tell us how much is the (inaudible 00:35:29) down in the quarter? In terms of how many barrels?

Jeff Morris

We've pulled down a few hundred thousand barrels I think it's 300, 400 hundred-thousand barrels Paul.

Paul Cheng -Barclay's Capital

Three or four hundred-thousand barrels?

Jeff Morris

We're in ton per year you know, as small producers. So we have to have significant bills going into the summer.

Paul Cheng -Barclay's Capital

And that's the only (inaudible 00:35:52) right? You do not have other say crude or other part of being (inaudible 00:35:58)?

Jeff Morris

Well I addressed the crude with Chi, so we did run lower through-puts as you know, and paramount, so there were crude productions simply associated with us through–

Paul Cheng -Barclay's Capital

And any idea then how (inaudible 00:36:12) done?

Jeff Morris

Not specifically, though we have a pool–a (inaudible 00:36:17) pool, we look at all of the–we don't try to calculate the effect of one element over the other.

Paul Cheng -Barclay's Capital

I suppose that then you probably did not do the exercise given the rapid move in the oil prices that the reselling in this quarter, and probably in the next quarter is going to have some temporary timing effect, so that's supposed to–you guys never were going to go into and try to take (inaudible 00:36:46). What made that timing effect benefit in the quarter?

Jeff Morris

Yes I've learned not to worry about that. If I had worried about it, I'd have been working on it in the first quarter–the second quarter, when we were going from 70 to 150, so I'm 34 years in the business, and the last thing I can predict is the price of crude, so I'm not going to spend our time worrying about. We're just going to maintain sufficient liquidity to deal with whatever the price of crude is, and we're going to control our cost at all times so that we can deal with whatever the environment may bring us, and we'll look forward to your prediction for crude oil for next year.

Paul Cheng -Barclay's Capital

Well my prediction is probably not too good anyway. Jeff, can you share with us that what is the fourth quarter through-put level you expect on a buy system (ph 00:37:35). And also, how that unit operating quote that you think is a swing from the third quarter (ph 00:37:41).

Jeff Morris

I think what you will see Paul, is similar types of through-put levels at paramount effected somewhat, not of (inaudible 00:37:52) to the turn around I've just described, which we will be running at Long Beach, a little lower rates than we would run at Paramount facilities. So, prosperings will be getting back, to it's normal level. We're still seeing, oddly to me, on the south marsh line–we call it the south bend line–we're still not seeing any crude availability yet. We've gotten a few shipments, our shippers are not really telling us when that's going to be running again.

So we're having to buy cargos and work off a loop and things of that sort. We're getting close to full rate there. Big Spring will be coming up to full rates with all new start up on the 26th. We've still been dealing with some mechanical issues of downstream units, getting them all running just properly, but I would expect over 60 in the two bigger refineries and slightly lower at paramount.

Paul Cheng -Barclay's Capital

I see. On the bottom sheet, I can see the total debt, $1.1 billion-dollars. That's not including the preferred stock right? The preferred stock is under the equity?

Jeff Morris

Yes.

Paul Cheng -Barclay's Capital

Jeff, can you tell us that what insight at $1.1 billion-dollars and what is the soft-term debt, or that the soft-term component after long-term debt?

Jeff Morris

Well the biggest piece of this of course, is the revolver, and just to give you the short-term percent of a portion of long-term debts is relatively small.

Shai Even

Approximately $22 million-dollars.

Paul Cheng -Barclay's Capital

Okay. And what's the total short-term debt including revolver and everything else at the end of the third quarter?

Shai Even

The revolver is long-term debt (inaudible 00:39:50) facilities of long-term facility.

Paul Cheng -Barclay's Capital

Okay, so it's a revolver (inaudible 00:39:57) in the long-term.

Shai Even

Exactly.

Paul Cheng -Barclay's Capital

Okay. And can you share with us what's in your current inventory, market (inaudible 00:40:05) in excess of the (inaudible 00:40:06).

Jeff Morris

Yes, we're at a $240 million-dollar excess.

Paul Cheng -Barclay's Capital

And also, Jeff, did I get your number–I think early in your comment you're talking about a $94 per ton margin in (inaudible 00:40:23). Is that the current margin? Or what are you referring to? I'm sorry that I may have missed it.

Jeff Morris

Well actually, current margins are higher than that. That was the margin as of the end of September, but as crude has fallen down to 60, our asphalt margins have continued to increase.

Paul Cheng -Barclay's Capital

Right. What's the current margin? Is there a number you can share?

Jeff Morris

I don't have the specific October numbers, but I'm pretty sure it will be over $100 a ton.

Paul Cheng -Barclay's Capital

And also, it's a repressed, if possible, if you can put (inaudible 00:41:07) into the (inaudible 00:41:10) so that we don't have to wait until the 10Q come up? I know you guys think that you don't need to look at the (inaudible 00:41:17) but since all my other companies (inaudible 00:41:21), so it will be useful for us then.

Jeff Morris

Thank you for the request.

Paul Cheng -Barclay's Capital

And a final one, Jeff, earlier you said that the sustainable capital is about $25 million-dollars per refinery; when we look at your California system long-vision common (ph 00:41:41) do we treat them as two refineries or one refinery in this calculation?

Jeff Morris

We treat them as one, we look at them as a system, we operate them as one system.

Paul Cheng -Barclay's Capital

So that means that your sustainable capital will be somewhere about in the $85 million or so a year?

Jeff Morris

Somewhere in that range, yes.

Paul Cheng -Barclay's Capital

A final one is no big deal, but on accounting treatment; if in the event that your total repair costs are in excess of say, $355 million, since you already booked $30 million in the business interruption insurance, how is that accounting going to work?

Jeff Morris

Well it all depends upon what the adjusters say, and that work is still being done in our own assessments. As I've described earlier, some of the differences between the 1948 standard and the 2008 standard; and adjusters take those things into account, so I really don't think I can give you a very clear answer until we see what the adjusters do. They told me that they expect to complete their work by the end of November.

Paul Cheng -Barclay's Capital

Okay I see, very good. Thank you.

Operator

Thank you. (Operator instructions). And there are no further questions in the queue. I'd like to turn the call back over to management for any closing remarks.

Claire Hart

Well again thank you all for your support and interest, and I do want to particularly note that some of you described the efforts put forth by our colleagues in Big Spring earlier in the year. Many of us wouldn't believe we'd be running this quickly, and so it's really very, very good, significant work and I appreciate it very much. And also I want to recognize the support of all of our colleagues at Krotz Springs. It's easier for us to talk about hurricanes, but it's another thing to live through them, and sit through the plant when it was coming through and getting it back running with a tree on top of your house, and I appreciate everything that they've done also. It's been a challenging quarter, but I'm again very, very pleased with our results. Thank you again. Bye.

Operator

Thank you ladies and gentlemen, that does conclude our Alon USA Energy third quarter earnings conference call. This conference is available for replay, if you would like to access the replay system, you may dial 303-590-3000 and enter in the pass code number of 11120481. You may also dial 1-800-405-2236. Thank you again for your participation, you may now disconnect.

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Source: Alon USA Energy, Inc. Q3 2008 Earnings Call Transcript

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