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Alon USA Energy, Inc. (NYSE:ALJ)

Q3 2010 Earnings Call Transcript

November 5, 2010 10:00 am ET

Executives

Amir Barash – VP, IR

Jeff Morris – CEO

Paul Eisman – President

Analysts

Jeff Dietert – Simmons & Company

Evan Templeton – Jefferies & Company

Paul Cheng – Barclays Capital

Paul Sankey – Deutsche Bank

Chi Chow – Macquarie Capital

Matthew Mulligan – BNP Paribas

Matt Hall – 40/86 Advisors

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Alon USA's Third Quarter Earnings Conference Call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) As a reminder, today’s conference is being recorded, Friday, the 5th of November, 2010. I’d now like to hand the conference over to Amir Barash, Vice President, Investor Relations. Go ahead, please.

Amir Barash

Thank you, Josh [ph]. Good morning, everyone and welcome to Alon USA’s third quarter 2010 earnings conference call. With me Jeff Morris, Chief Executive Officer; Paul Eisman, President; Joseph Israel, Chief Operating Officer; Shai Even, Chief Financial Officer; along with 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 the information reported on this call speaks only as of today, November 5, 2010 and therefore you're 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 the Private Securities Litigation Reform Act of 1995.

These forward looking statements are based on 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 its 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 these statements. With that, I’ll turn the call over to Jeff.

Jeff Morris

Thank you, Amir and thank you all for joining us today. Alon USA is in transition and we’re transitioning Big Spring to higher throughputs quarter-by-quarter while integrating retail fuel’s marketing business continues to have record quarters and its projected to have a second record year.

Paul will provide more details about our retails and fuels marketing but we are very proud of the contribution of this segment to our overall business. We are transitioning our Paramount facility by the conversion of startup of Bakersfield as a gad oil hydrocracker, while our integrated asphalt business continues to focus on the growth of our specialty asphalts.

We are transitioning our Krotz Springs facility to operate that with a broader array of crude oils and operating modes to address the high WTI LLS spreads. And importantly, we’re providing the financial resources to support this transition.

Paul will more provide details later regarding operations and plans as I will provide some color around our resources. In October, we completed a direct offering of preferred stock for $40 million. In addition, we obtained $23million of letters of credit outside of our existing facilities.

We have also identified offers and opportunities, which would add $60 million to $100 million to our resources over the next few quarters. At this time, it would be premature for me to provide details regarding these opportunities. And since we are sometimes asked, the market value of our inventories exceeds our LIFO value by $104 million.

In addition, you will see a $17 million after-tax gain on bargain purchase in our 10-Qs – in our press release. This is evidence of the good price for which we were able to obtain the Bakersfield refinery.

In the second quarter, we successfully monetized inventory in place of Bakersfield and recovered the metals from catalyst, which we will not use long-term. Both of these have higher values than we anticipated.

We are well aware of the near-term issues, which have affected our profitability. The throughputs of Big Spring have been lower than historical but we are continuing our disciplined operations review and raising rates quarter-by-quarter. And our integrated retail wholesale fuel business is performing at record levels with continued improvement opportunities.

West coast margins are low and asphalt demand has been below historical levels but we will transform our margin capture on the West Coast with the startup of Bakersfield. And we continue to obtain pricing for asphalt well above WTI pricing due to our focus on premium grades.

Finally, the spreads between LLS and WTI have been at record levels. Thus we are already test running alternative crude such as Bakken and undertaking initiatives to receive crude such as a WTI at Krotz Springs. We are not naive to our challenges but have specific initiatives in place to address each of these challenges and are providing the financial resources to implement these initiatives.

I will now turn the call over to Paul to provide more details around our operations.

Paul Eisman

Thank you, Jeff. In the third quarter, we continue to make progress operationally and to prove profitability and capture the margins given by the market. We are pleased with the performance of our integrated West Texas refining and marketing system.

The Big Spring refinery ran well during the quarter. We told you in the second quarter call that we were investing in an operational review and training process at the refinery. This is proceeding well and as a result, we were able to increase charge rate in the third quarter, processing just over 50,000 barrels per day of total feedstock at the refinery as compared to almost 43,000 barrels per day in the second quarter.

The refinery operated reliably in the fourth quarter with the exception of a short FCC outage in July and the yield structure of the refinery is finally back to where it was about before the 2008 fire with the completion of repairs earlier this year.

We continue to work to lower operating costs at the refinery. The $4.66 – $4.66 per barrel direct operating expense in the third quarter was improved versus the $5.78 per barrel in the second quarter as we increased charge rates of the refinery and improved operating efficiency.

We expect further improvements in the operating cost structure of the refinery going forward. Big Spring is benefiting from the discounted price of West Texas crude oil. And we expect the benefit to continue over the next several quarters.

As we continue to make progress are our operational review, we also expect to increase charge rate at Big Spring in the fourth quarter to somewhere between 55,000 barrels per day and 60,000 barrels per day for the quarter. And it's nice to see Big Spring returning to its position as a cash flow generator for the company.

Of course, critical to the profitability of the Big Spring refinery is the Alon brands which is performing exceptionally and generating record levels of profitability. Versus the same quarter last year, retail gasoline sales volume is up 19% and in-store sales are up almost 8%.

We’ve been able to improve the in-store growth margins to 32.2% from 31.4% reported in the same quarter last year. Our total brand of sales increased by a remarkable 24% versus the same quarter last year.

Our improved performance is attributable to focus on the business and attention to detail that has been excellent. We will set a record for profitability in this business this year and we’ll have accomplished this for the second year in a row.

At the Krotz Spring refinery, we completed our first full quarter of operations since the extended turnaround. After an extended turnaround such as this, it takes a period of time to optimize a refinery and its individual process units.

We made very good progress during the quarter, returning the refinery to the operation, yield and cost structure that we expect that the refinery can achieve on an ongoing basis.

I’m very pleased with the efforts of our employees at Krotz Springs, spring refinery safely and reliably. In the third quarter, we averaged 64,200 barrels per day of total throughput, as compared to just 22,000 barrels per day in the second quarter.

The yields improved every month during the quarter and we are now exceeding the yields that were achieved prior to the shut down. For example, in September, we realized a liquid volume recovery of 101.4% from the refinery, of which 90.3% was higher value gasoline and distillates products.

The direct operating cost of the Krotz Springs refinery during the quarter was $3.39 per barrel. This was obviously lower than the $7.69 per barrel experienced in the second quarter, which was impacted by the extended turnaround. As with Big Spring, we see opportunities to further reduce the operating costs at Krotz Springs and are working hard to implement these.

For example, during the quarter, we changed our SEC catalyst formulation with little or no impact on the yields; we were able to cut or to lower our catalyst costs by approximately $500,000 per month.

The profitability of the refinery has been negatively impacted by the relatively [ph] high cost of LLS compared to the WTI benchmark. The average LLS WTI differential during the quarter was $3.59 per barrel and was almost $5 per barrel in September.

We are working hard to mitigate the impact of this and find alternative crude oils for the refinery that will either decrease throughput costs or improve our yields and margins. We are increasing our purchase of foreign crudes, other Gulf Coast crudes and even finding ways to bring Mid-continent crudes to the refinery.

As an example, we will run some Bakken crude at Krotz Springs in November. We’re also undertaking initiatives with crude suppliers and other third parties to be able to receive crudes such as West Texas Intermediate at our Krotz Springs refinery.

This new crude supply flexibility will enable us to reduce our cost during the price spikes in Louisiana crudes. Finally, in our California refining and asphalt business, our emphasis is the work to combine the Paramount and Bakersfield refineries into one full conversion California refinery.

The Paramount refinery ran very well during the quarter, with no reliability issues. However, it runs at low rates due primarily to weak asphalt demand and high crude costs. The differential between the California benchmark crude Buena Vista and WTI is contracted to nearly nothing from the historic $4 per barrel level.

While some of this is due to the much discussed WTI weakness, much of it is due to factors unique to the California market. We view this contraction and differentials unsustainable in the longer-term, but it’s clearly impacting our profitability in the short-term. We are taking and considering several actions to cope with this. We’re renegotiating crude oil contracts and actually backing away from some other contracts where we cannot negotiate larger discounts.

In addition, we’ve completed work to rationalize the cost structure at Paramount and recently took several steps, which we expect to reduce operating costs in our California system by $10 million per year. Some of these cost reduction are extremely painful, but they are clearly necessary with these market conditions.

One of the issues limiting throughput in Paramount during the quarter was contraction in the market for asphalt due to weakness in the housing market and pressure on city and state budgets. As we wind down the 2010 paving season, demand for our products for the year is down approximately 29% from 2009 levels. This is consistent with a contraction in the asphalt market in general and we’ve been able to maintain our market share during this period.

While this has been tough on our asphalt business, what is remarkable is that we’ve been able to sustain pretty good margins in this contracting market. Year-to-date, our asphalt margin has averaged just over $50 per ton as compared to $46 per ton for the same period last year. We attribute this performance in part on our strong position in the premium asphalt business.

The ground tire rubber and the polymer offsite businesses have performed well as our customers recognize the better long-term performance of these products. We’re planning for 2011 to be similar to 2010 in terms of overall asphalt demand, but we also expect the demand for this premium asphalt rates to continue to grow.

However, as I mentioned earlier, our top priority in California remains the integration of Paramount and Bakersfield. We’ve made significant progress in our engineering and planning effort and still believe that in mid 2011 restarting the Bakersfield hydrocracker will be accomplished. As we have discussed before, the restart of the Bakersfield allows us to both increase the throughput at Paramount and result in an increased gross margin of the combined refinery system.

We told you in the last quarter that while we’re certainly not satisfied with our overall financial performance in 2010, we’re confident about where we are headed. We still firmly believe this. We have plans in place to improve the financial performance of all refineries and continue to believe that all three can be cash flow positive in a tough environment.

With that, I’ll turn it back to Jeff.

Jeff Morris

Thank you, Paul. And we’d be happy to take the questions at this time.

Question-and-Answer Session

Operator

Yes, sir. (Operator Instructions) Our first question comes from the line of Jeff Dietert with Simmons & Company. Please go ahead.

Jeff Dietert – Simmons & Company

Good morning.

Jeff Morris

Good morning, Jeff.

Jeff Dietert – Simmons & Company

I was wondering if you could talk a little bit about the Krotz Springs, feedstock in excess in Bakken and Midcontinent crude, that’s primarily through real access, is that correct?

Jeff Morris

That is correct.

Jeff Dietert – Simmons & Company

And how do you see the scalability of that opportunity to bring in Midcontinent crude, how much volume can you receive today and how do you see that increasing over time?

Jeff Morris

We expect to receive about 8,000 barrels per day. We don’t see Bakken as a long-term solution. We do see it as short-term solution to bridge this period where there is an inability the movement in Continent crude’s to the Gulf coast, we expect that bottleneck to eventually be resolved, but in the year we do see opportunities because of the issue, the transportation from North Dakota, how do that market, they are railing the product and it’s an opportunity for us to get that crude oil in to Krotz Springs.

Jeff Dietert – Simmons & Company

And you are taking advantage of existing industry infrastructure, there is no meaningful capital going out on the launch part?

Jeff Morris

That’s correct.

Jeff Dietert – Simmons & Company

You talked a little bit about foreign crude as well, what opportunities are you seeing on the foreign crude input side for shifting away from LLS?

Jeff Morris

The critics that are unique to us because of the configuration the Krotz Springs refinery are those crude oils that have a low carbon level. We are seeing crack at the refinery. So we are looking for crude oils to have a low carbon in the feedstock and for an example, so Hornblende is a good example of that. Again, it’s crude oils – fairly light crude oils, but once that uniquely fed our refinery and again so Hornblende is a good example of that.

Jeff Dietert – Simmons & Company

Good. On Paramount, could you talk about the integration of Paramount and Bakersfield and what the feedstocks and yields look like post the integration?

Paul Eisman

Well, we first of all, we’ve got a – as you know, we are focused towards diesel production throughout our system, but especially on the West Coast. And the Bakersfield refinery will take 15 to 20,000 barrels per day of feedstock out of Paramount and with the Hydrocracker configuration, we will be able to produce about 70% diesel out of that product.

So if you take the existing deal structure at Paramount and again, sledged up for the higher charge rate and then get 70% diesel production out of the 15 to 20,000 barrels per day of gas oil that’s moved from Paramount to Bakersfield. I think that will give you a pretty good feel of what the overall yield structure will look like.

Jeff Morris

Well, Jeff, the overall structure, we’ll still make the asphalt, about a third asphalt from 50% diesel and 20% gasoline in that range. Also remind you that at Bakersfield, we’ll get about a 110%, we’ll get about 10% volume gain also which is going to help our margin capture.

Now alternatively, we are again not going to be naive about this. If the heavy crudes continue to be expensive or if the asphalt markets are not large enough to support 60,000 barrel day of throughput, we are also developing the alternatives to run the lighter crudes through the refinery with Bakersfield change our configuration, so that when can run the lighter crudes, whereas the Paramount’s configured, so it doesn’t give us that opportunity.

So we will have a much broader range of crudes that which we can consider once we get back industry to running. That will be one new thing.

Paul Eisman

I think that’s good. I think that’s right.

Jeff Dietert – Simmons & Company

Thanks, Jeff. Thanks Paul.

Operator

Thank you. And our next question comes from the line of Evan Templeton with Jefferies & Company. Please go ahead.

Evan Templeton – Jefferies & Company

Hi, guys. You actually addressed my question on the sourcing additional crudes at Krotz. But can you just give us an indication of where you think production might end up versus a throughput might end up at Krotz for the fourth quarter. How you perceive that ramp up?

Jeff Morris

We are optimizing the crude slate at the refinery and we’ve done some tests. One of the things we’ve done at the refinery is run a number of test runs at the refinery to optimize the crude slate. So, one month, we run heavier and we’ll run lighter crudes, try to make share. We understand where the optimal slate is. We’re through those test and we expect to run somewhere in the 70,000 barrel per day range I think for the fourth quarter.

Evan Templeton – Jefferies & Company

Okay. That’s great. That’s it. Thank you.

Operator

Thank you. And our next question comes from the line of Paul Cheng with Barclays Capital. Go ahead.

Paul Cheng – Barclays Capital

Hey, guys. Good morning.

Jeff Morris

Good morning, Paul.

Paul Cheng – Barclays Capital

Jeff, in Bakersfield, maybe it’s a bit too early, but can you tell us that initial, I think you’re just going to – not through the pipe, but through the rail or truck. What is the initial shipping cost going to be for that 15, 20,000 barrel per day of the retail and in Bakersfield that as we restock, what is the incremental operating cost, we should assume for the Bakersfield part?

Jeff Morris

I’ll start, Paul on that. As I recall our analysis, our costs of truck and rails about $0.03 a gallon. So it’s actually in the same range with pipe, which is we find interesting. Secondly, our target overall cost Paramount, Bakersfield, all in combined is around $5 a barrel.

Paul Eisman

It’s important to us that even though there is two facilities operating apart from each other that we have an overall cost structure that’s competitive in the industry, so the dollar per barrel cost structure that Jeff mentioned is correct.

Paul Cheng – Barclays Capital

So that is for the 60,000 barrel per day consideration.

Paul Eisman

Yes.

Paul Cheng – Barclays Capital

Okay. And that – Jeff, on the asphalt, do you have a quarter to day and also the last week asphalt margin number that you can share?

Jeff Morris

All I can tell you, Paul, is that we haven’t seen a significant decline in our volumes or pricing over the last few weeks, but have been pretty steady. We are in the fourth quarter, so volumes are beginning to drop-off.

Paul Cheng – Barclays Capital

Right.

Jeff Morris

Margins – it has been really good job in margins. As you can see in the results, we were 110% of WTI pricing. We are sustaining that. I’ll give you just a small example, some things we’re doing. We talked for the ground tire rubber asphalt in Californian. That’s continuing to grow. We are doubling the sales this year of TTR asphalt versus last year in Californian and our current projections are to double it again next year.

We get about a $50-$70 per ton better – net margin of the GTR grade they way we do the others and that growing has helped us. It fits into some of the environmental strategies in California. I will remind you that AB 338 which is the legislation which requires that by 2013, I believe it is, all paving grades of asphalt in California have to have some level of tire rubber. So that’s causing an increase in sales.

Also this year, we just recently required authority under the CalRecycle Grant Program, that’s for the grant program where the $1.65 per tire charge goes. The GTRs not only qualified for the seal coat maintenance grade type asphalt, we just recently got approval for the ground tire rubber in the full run, the full depth of the road is qualified for grants under the CalRecycle.

That fund is about $5.5 million per year. It’s not an enormous amount of money but it is funded, if you will, outside the state budgets and so we have had many of our customers are filing for grants on the CalRecycle GTR projects through that funding. So, it’s a relatively small volume but high margin. So we’ve been able to – I’ve been really pleased with asphalt tires [ph] have done in sustaining their margin.

Paul Cheng – Barclays Capital

And in the third quarter, your average margin was about $78 per ton, very good, should we assume that so far into the fourth quarter it has been similar to that – total has been turning down somewhat?

Jeff Morris

I don’t have any reason to believe it’s been down any so far in the fourth quarter. But as the quarter progresses in November and December, you know the volumes drop off, as you know.

Paul Cheng – Barclays Capital

Right. Jeff on the earlier, you mentioned about California is going to reduce the cost by about $10 million, when is that going to start being in and also can you elaborate they being more in terms of the nature what has been done – lead to that saving. And also the $5 per barrel operating costs number that you mentioned earlier the target when Bakersfield is up, is that already incorporate that $10 million savings?

Shai Even

Paul, first of all to answer the question about the nature of the cost and how fast they are achievable, a good portion of that was a reduction in force at the Paramount facility. We looked with the Bakersfield facility what we needed in terms of personnel to run the Joaquin [ph] facility where they needed to be and so we, unfortunately, had to go through a reduction of force of 62 people at the Paramount facility. Those costs, that has been done and those cost will be accruing immediately.

The remainder of the costs are generally energy costs related to taking the Long Beach facility, cold [ph] and we will continue to us some tankage in that area, to use it as a terminal for various reasons. But we can reduce the energy consumption in that area and that’s about $3 million per year and there was $0.5 million of miscellaneous expense and all that will be achieved very quickly.

Paul Cheng – Barclays Capital

And is the $5 per barrel – that is already incorporated or this is on top of that?

Shai Even

That incorporates it. That is a part of this, yes.

Paul Cheng – Barclays Capital

Okay. And final question on, Jeff when we are looking at recently that you raised $40 million on the mandatory convertible prefer, I know you guys don’t pay a lot of dividend, but still I feel that every quarter you have a cash outflow and equity reduction as a result on the dividend payment. Is there any reason why the management won’t recommend to the board that to suspend the dividend if you serve the cash for making more productive use for your projects and everything else?

Shai Even

Paul, I’m not going to get into what the management recommends to the board or what the board recommends to the management. This is the board’s decision and we execute it.

Paul Cheng – Barclays Capital

Okay. Thanks.

Operator

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

Paul Sankey – Deutsche Bank

Hi guys.

Jeff Morris

Hi, Paul.

Paul Sankey – Deutsche Bank

I think just about the very last statement you made in your prepared rashes before the Q&A was something along the lines, if we believe so we can be profitable in a more positive environment, I might have slightly missed that. But I wondered if I could just dig around into what you were already saying there in terms of how much more positive the environment needs to get and what sort of margins would need to see for you to return to that point? Thanks.

Jeff Morris

Well, that’s in Paul’s remarks. So I’ll ask him to address that.

Paul Eisman

We’ve always felt that the focus of what we do is to make sure we’ve got facilities that can be cash flow breakeven in a very low margin environment. And so that’s been an emphasis of everything that we are doing to making sure we can do that. And as obviously in some cases, we’ve not been.

The Big Spring System we clearly are today, Big Spring is configured in a system and can operate with yields and operating costs such that it can generate profitability in almost any margin environment that we’re likely to see. The challenges that have been at Krotz Springs and at Paramount and so those are the areas that we’ve been working hard to develop appliance.

So you’ll look at what we are doing, first of all, in Krotz Springs to reiterate. We’re looking in different times of crude slide. We’re looking at optimizing the operation of the refinery and specifically of the FCC, which is a big operating unit in the refinery that contributes most of the profitability. We run any number of test runs to make sure in terms of crude slide, in terms of operating mode and we’ve seen significant improvements in yields and as I mentioned in my remarks, our yields at the refinery have improved every month in the quarter.

And, in addition we’ve got this entire effort going to bring different crudes to the refinery, either that reduces the crude cost to the refinery or crudes that generate and improve yield slide and therefore improved margins. So, that’s been the emphasis across Springs. Of course, Paramount, as we continue to talk about the primary emphasis, it’s getting Bakersfield running and our analysis of it is that once we get Bakersfield running with the hydrocracker and the yield slide that we expect that, that system can be profitable in almost any kind of margin environment that we’re likely to see.

Jeff Morris

If I could add mean, we’ve always – feel today that to be competitive in this industry we have to have free cash flow in down cycles. And we’ve talked about that often and Big Spring does that. It didn’t see in ‘09 or in 2010 – 2008, ‘09 because of the fire, but its back to the level now and you can generate cash recycle.

My expectation is that we would mitigate and will get Krotz Springs will be cash flow breakeven in a – WTI, HSB’s crack of six. And my expectation is that we’ll get the West Coast for it will be cash flow breakeven in a WTI of 321 of 10. And that’s even with the WTI discounts we have. So, that’s our expect and I think we’ll get there and those are relatively low margins or lower than we have seen with – those are the kind of margins sometimes we see – times like Q4 of this year, Q4 last year.

Paul Sankey – Deutsche Bank

Yeah. I was hoping but thinking that you wouldn’t be specific, so I appreciate that. Krotz Springs, I guess, is going to be limited to sea crudes whatever happens to that, let’s see?

Jeff Morris

That’s why (inaudible) Bill, Paul as he joined us came up with some ideas that we are working with the plant on potentially, we have a back indicator there at the plant that’s not operating today, that we may bring online for relatively small investment that allow us to take a little carbon out of cath [ph] feed that may increase the flexibility, some – I don’t, we’re not going to get the run-in showers across Springs, but we will be able to run some of our carbon crudes and we are today and we have already done the analysis of that feedstock and we’ve shown that the carbon that we will discharge can go into our asphalt business. So we will get the upgrade for that. So there is some moderate investment improvements, which we have gone up with that we’re developing.

It was part – part of that’s in this strategy I just described earlier. But it’s a sweet crude refinery at the end of the day and that’s what we will focus on Bakken and the Eagle Ford and WTI and all that stuff.

Paul Sankey – Deutsche Bank

Yeah. I think it’s a positive regular trend. Actually there will be more supply available quite clearly. Just keeping it really simple for me, then you told me that through the sweet crude piece or crack, that’s going to be at Krotz Springs story, you’ve told me that the WTI 321 that Paramount, Big Spring, we follow the sweet shallow spread, I guess, closely as being the kind of marginal driver of how well that plant is doing. Is that fair?

Jeff Morris

Right and it’s – Big Spring is proving little – free cash flow and, of course, WTI 321s have been as low as 4, 5. I can do that, just OpEx is around four and was running well.

Paul Sankey – Deutsche Bank

Sure. Okay. Thanks very much guys. That’s helpful.

Jeff Morris

Thank you.

Operator

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

Chi Chow – Macquarie Capital

Hi. Thank you. I had a question back on Big Spring. I noticed that you have got the light product yields up to 83% last couple of quarters, but this quarter the gross margin dropped down to $5 a barrel, is there any explanation for that?

Paul Eisman

Sure. I mean, we do track our yields and what we saw was generally for the quarter pretty good yields. We did have an outage of our tax rate in July, a week to ten days in lake, while we made some repairs and that's the only reason that we can attribute to lower than – if their margins begins were lower but generally our margin capture was fairly good in the quarter.

Chi Chow – Macquarie Capital

Is anything going on in the specific markets you were selling into?

Jeff Morris

Chi, this is Jeff. Not particularly, I think another thing, just to highlight, this is an integrated business and we integrate with the Alon brand, the FINA brand and the retail business. And Chi, you can see, we have really outstanding quarter for that segment. So we – in a way, view that in total. The margin capture, we certainly had the margin capture on the retail side of the business. It's a very good quarter, you could see.

Chi Chow – Macquarie Capital

Right. Okay. And then on SG&A, it looks like total SG&A kind of popped up 2Q to Q3. Is there any story there?

Jeff Morris

Yeah. We paid very specific bonuses in the company. We did paid some bonuses into the ALON brands segment which performed very well and we paid some bonuses into the asphalt segment which performed very well. So there was a couple million of bonus payments in Q2 that we paid.

Chi Chow – Macquarie Capital

Hey, Jeff, is that going to carry forward into fourth quarter as well?

Jeff Morris

No. That was one time.

Chi Chow – Macquarie Capital

Okay. And finally, I'm sure, Jeff, you've looked at this. What are your thoughts on how the Prop 23 vote went out in California and what do you think the impacts of AB 32, we are going to have on the market out there?

Jeff Morris

Well, I will speak for us but won't speak for the others because it was a very – as a lot of its dialogue going on. As you know, Chi, we have taken – if you will, an agnostic view on AB 32 over the years, when we bought the Paramount refinery in 2006, AB 32 was already in place and being put in place at that point in time. So our business strategy was to build a business that would succeed even in AB 32 environment.

So we’ve shown over the last year and provided the data to Cal EPA and carb that our refineries are – we believe the lowest mission’s refineries in the state. So and that’s primarily because of the large part of asphalt, we make asphalt, or coker which has much lower emissions than our coking facility. And interesting for us if we can sell Asphalt, which we are today at 110% of WTI, we’re getting close to the coking kind of margins but without that having in investment.

So we are not – I’m not particularly concerned one way. The other I have said and I will continue to say that, if carbon is expensive we will be advantage versus our peers, so if carbon is $30 a ton, is somewhat speculated or let’s say its $22 per ton like it is in Europe, we’re going to be possibly impacted on a cost of goods basis and our view by from $2 to $ 4 per barrels and that’s a significant number.

And so we’ve – we are taking that approach. We are dealing structuring our plans so that we can succeed in an environment of AB 32 that we can succeed in environment of AB 338 and the different types of regulatory environments that are in California. And do we relish gasoline being more expensive in California? No, I’m not saying that, but am saying that’s what the choices are made and that’s where the people of California chose to do. And we are positioning ourselves to deal with that and be successful in that environment.

Chi Chow – Macquarie Capital

Yeah. I think your mission strategy probably comes to forefront.

Jeff Morris

All right. The other thing I will point out is someone has said already today, it’s been said often, sometimes California is a precursor to what happens in the U.S. now and again we have change in DC and things will be different. But long-term, let’s say several years 10 years, 20 years, sometimes what happens in California, it becomes, is a premonition of what happens across the country.

Chi Chow – Macquarie Capital

Right. So what are your thoughts on the low carbon fuel standard, it sounds like the emissions, you have got a pretty good strategy, but it seems like the fuel standard, it’s both gasoline and diesel, pretty much equally.

Paul Eisman

It does the way it’s currently structured. We’re in dialog with the – because in reality when you look at the science and all we really want is for regulations of all signs, diesels and lower carbon, fuel and gasoline and a lot, but it is. And so our diesel strategy kind of goes that direction if you will.

The more hydrogen input into molecule the less – that’s relatively less carbon is going to have. And but I think you are right, I think it’s going to – low carbon fuel standards going to hit both, so I can’t say we are going to be relatively advantaged in California, just low carbon fuel standard, because we make diesel. I do think we’ll be advantaged on the demand curve.

A large part – the imports that come in the United States are going to continue to come in to the West Coast.

As you know, already 40% of the containers which come into the U.S. come through the ports of Long Beach in Los Angeles. Container traffic is up 30% coming through the port of Long Beach. It’s the highest diesel demand market in the country. So our focus on diesel I think is more of a focus towards demand and – but I agree with you. I think the low carbon fuel standard is going to affect both somewhat equally although I do believe the sign shows that diesel is a lower carbon than gasoline.

Chi Chow – Macquarie Capital

That’s great. Thanks, gentlemen. I really appreciate that.

Jeff Morris

Certainly.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Matthew Mulligan with BNP Paribas. Please go ahead.

Matthew Mulligan – BNP Paribas

Hi. Good morning. My question was answered. Thank you.

Operator

(Operator Instruction). Our next question comes from line of Matt Hall with 4086 Advisers. Please go ahead.

Matt Hall – 40/86 Advisors

Hey. Good morning, guys. Just a few questions around liquidity. Could you give us how much revolver availability you had at quarter end and then may be some sense of the CapEx budget for the fourth quarter may be first half of the ‘11?

Paul Eisman

I’ll address the CapEx question and then Shai on this liquidity question. We’ve spent this year 10, $15 million of quarter. We’ve been controlling our CapEx and we spend 11 million in Q3. I expect that we’ll be continuing in Q4.

So putting aside the investment at Bakersfield, our sustaining regular capital spend minimum level is around that $10 million range which I would expect. In Q1, we’ll begin adding the investment for Bakersfield. The total investment at Bakersfield is about $30 million. To get it up in the running, so that will be added to the $10 million base. Now, I’ll let Shai to address the liquidity question.

Shai Even

The availability and revolver credit facility, there was the non-indicate dollars seems that we should if – seems the mentality, we also improve liquidity by the offering the just discussed earlier $40 million as well as the $23 million of letter of credit but outside of the existing credit facilities.

Matt Hall – 40/86 Advisors

You said $100 million of the revolver availability at quarter end?

Shai Even

The average availability during September ex availability was $100 million as over 930 in addition seems – we have improved at vision, by the $40 million coming from the public offering as well as the $23 million from the LC that had achieved outside of our existing credit facility.

Matt Hall – 40/86 Advisors

And that 23 million was post quarter and?

Shai Even

That’s right, during October.

Matt Hall – 40/86 Advisors

And then couple of other questions. What is the size of your restricted payment basket under your current credit facility?

Shai Even

I would said, that this is under the credit agreement. It’s not public information.

Matt Hall – 40/86 Advisors

Okay. And then one last question, I know you mentioned that the, you can give a lot of details around the potential additional 50 to 100 million of resources, but can you give us any sense in terms of timing, when maybe some of this might start to flow into the company?

Jeff Morris

As I’ve said in my remarks, I expect that over the next two quarters.

Matt Hall – 40/86 Advisors

All right. That’s just all I got. Thanks.

Operator

Thank you. (Operator Instructions) And management, I have no further questions in the queue. I’ll hand it back for any further remarks.

Jeff Morris

Great. Thank you. Thank you all for joining us today. You can see our focus, I can tell you I’m very, very pleased with the contribution, the focus, the intensity of the management team with which I work and everyone with which I work in the company. And I remain very, very confident about our future. Thank you.

Operator

Again ladies and gentlemen, that does conclude the Alon USA’s third quarter earnings conference call. Thank you for your participation. You may now disconnect.

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