Summary of ALON USA ENERGY, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008. In this document, the words "Alon," "the Company," "we" and "our" refer to Alon USA Energy, Inc. and its subsidiaries. Forward-Looking Statements
Certain statements contained in this report and other materials we file with the SEC, or in other written or oral statements made by us, other than statements of historical fact, are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. 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.
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 general economic conditions and capital markets;

• changes in the underlying demand for our products;

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

• changes in the sweet/sour spread;

• changes in the light/heavy spread;

• the effects of transactions involving forward contracts and derivative instruments;

• actions of customers and competitors;

• changes in fuel and utility costs incurred by our facilities;

• disruptions due to equipment interruption, pipeline disruptions or failure at our or third-party facilities;

• the execution of planned capital projects;

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

• the effects of and cost of compliance with current and future state and federal environmental, economic, safety and other laws, policies and regulations;

• operating hazards, natural disasters, casualty losses and other matters beyond our control;

• our planned project of the design and construction of a hydrocracker unit at our California refineries may not be completed within the expected time frame or within the budgeted costs for such project due to factors outside of our control;

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• the global financial crisis' impact on our business and financial condition in ways that we currently cannot predict. We may face significant challenges if conditions in the financial markets do not improve or continue to worsen, such as adversely impacting our ability to refinance existing credit facilities or extend their terms; and

• the other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2008 under the caption "Risk Factors."

Any one of these factors or a combination of these factors could materially affect our future results of operations and could influence whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required by the securities laws to do so. Company Overview
We are an independent refiner and marketer of petroleum products operating primarily in the South Central, Southwestern and Western regions of the United States. Our crude oil refineries are located in Texas, California, Oregon and Louisiana and have a combined throughput capacity of approximately 250,000 barrels per day ("bpd"). Our refineries produce petroleum products including various grades of gasoline, diesel fuel, jet fuel, petrochemicals, feedstocks, asphalt and other petroleum-based products.
Refining and Unbranded Marketing Segment. Our refining and unbranded marketing segment includes sour and heavy crude oil refineries that are located in Big Spring, Texas; Paramount and Long Beach, California; and a light sweet crude oil refinery located in Krotz Springs, Louisiana. Because we operate the Long Beach refinery as an extension of the Paramount refinery and due to their physical proximity to one another, we refer to the Long Beach and Paramount refineries together as our "California refineries." The refineries in our refining and unbranded marketing segment have a combined throughput capacity of approximately 240,000 bpd. At these refineries we refine crude oil into petroleum products, including gasoline, diesel fuel, jet fuel, petrochemicals, feedstocks and asphalts, which are marketed primarily in the South Central, Southwestern and Western United States.
We market transportation fuels produced at our Big Spring refinery in West and Central Texas, Oklahoma, New Mexico and Arizona. We refer to our operations in these regions as our "physically integrated system" because we supply our retail and branded marketing segment convenience stores and unbranded distributors in this region with motor fuels produced at our Big Spring refinery and distributed through a network of pipelines and terminals which we either own or have access to through leases or long-term throughput agreements.
We market refined products produced at our Paramount refinery to wholesale distributors, other refiners and third parties primarily on the West Coast. Our Long Beach refinery produces asphalt products. Unfinished fuel products and intermediates produced at our Long Beach refinery are transferred to our Paramount refinery via pipeline and truck for further processing or sold to third parties.
Krotz Springs' liquid product yield is approximately 101.5% of total feedstock input, meaning that for each 100 barrels of crude oil and feedstocks input into the refinery, it produces 101.5 barrels of refined products. Of the 101.5%, on average 99.3% is light finished products such as gasoline and distillates, including diesel and jet fuel, petrochemical feedstocks and liquefied petroleum gas, and the remaining 2.2% is primarily heavy oils. We market refined products from the Krotz Springs refinery to wholesale distributors, other refiners, and third parties. The Krotz Springs refinery uses its direct access to the Colonial products pipeline system to transport products to markets in the Southern and Eastern United States. The Krotz Springs refinery's location also provides access to upriver markets on the Mississippi and Ohio Rivers and barge access through its docking facilities along the Atchafalaya River.
Asphalt Segment. Our asphalt segment markets asphalt produced at our Texas and California refineries included in the refining and unbranded marketing segment and at our Willbridge, Oregon refinery. Asphalt produced by the refineries in our refining and unbranded marketing segment is transferred to the asphalt segment at prices substantially determined by reference to the cost of crude oil, which is intended to approximate wholesale market prices. Our asphalt segment markets asphalt through 12 refinery/terminal locations in Texas (Big Spring), California (Paramount, Long Beach, Elk Grove, Bakersfield and Mojave), Oregon (Willbridge), Washington (Richmond Beach), Arizona (Phoenix, Flagstaff and Fredonia) and Nevada (Fernley) (50% interest) as well as a 50% interest in Wright

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Asphalt Products Company, LLC ("Wright"). We produce both paving and roofing grades of asphalt, including performance-graded asphalts, emulsions and cutbacks.
Retail and Branded Marketing Segment. Our retail and branded marketing segment operates 305 convenience stores primarily in Central and West Texas and New Mexico. These convenience stores typically offer various grades of gasoline, diesel fuel, general merchandise and food and beverage products to the general public, primarily under the 7-Eleven and FINA brand names. In the first nine months of 2009, approximately 92% of the motor fuel requirements of Alon's branded marketing operations, including retail operations, were supplied by our Big Spring refinery. As a result of the February 18, 2008 fire at our Big Spring refinery, branded marketing primarily acquired motor fuel from third-party suppliers during the three and nine months ended September 30, 2008.
We market gasoline and diesel under the FINA brand name through a network of approximately 660 locations, including our convenience stores. Other than in 2008 due to the February 18, 2008 fire, approximately 50% of the gasoline and 10% of the diesel motor fuel produced at our Big Spring refinery was transferred to our retail and branded marketing segment at prices substantially determined by reference to Platts. Additionally, our retail and branded marketing segment licenses the use of the FINA brand name and provides credit card processing services to 313 licensed locations that are not under fuel supply agreements with us. Branded distributors that are not part of our integrated supply system, primarily in Central Texas, are supplied with motor fuels we obtain from third-party suppliers.
Third Quarter Operational and Financial Highlights Third quarter of 2009 operating loss was ($34.3) million, compared to operating income of $92.5 million in the same period last year. Operating income in 2009 was lower compared to 2008 principally due to the recognition of net gains from the involuntary conversion of assets and recoveries for business interruption claims in the third quarter of 2008. These 2008 gains were partially offset by an increase in production volumes in 2009 as a result of the rebuild of the Big Spring refinery. Other operational and financial highlights for the third quarter of 2009 include the following:
• The combined refineries throughput for the third quarter of 2009 averaged 157,660 barrels per day ("bpd"), consisting of 62,500 bpd at the Big Spring refinery, 35,470 bpd at the California refineries and 59,690 bpd at the Krotz Springs refinery compared to a combined average of 122,252 bpd in the third quarter of 2008, consisting of 35,204 bpd at the Big Spring refinery, 28,661 bpd at the California refineries and 58,387 bpd at the Krotz Springs refinery. The Big Spring refinery had higher throughput in the third quarter of 2009 compared to the third quarter of 2008 primarily due to last year's fire.

• Our average refinery operating margin for the Big Spring refinery, which was negatively impacted by the absence of the alkylation unit and additional feedstock costs related to preparations for start up of the ultra low-sulfur gasoline unit, decreased $6.83 per barrel to $1.34 per barrel for the three months ended September 30, 2009, compared to $8.17 per barrel for the three months ended September 30, 2008. This decrease was also attributable to the contractions in the Gulf Coast and Group III 3/2/1 crack spreads.

• Our California refineries operating margin for the three months ended September 30, 2009 decreased $9.68 per barrel to ($0.55) per barrel, compared to $9.13 per barrel for the three months ended September 30, 2008. This decrease was primarily due to the lower light/heavy crude oil spread.

• The average operating margin for the Krotz Springs refinery for the three months ended September 30, 2009 decreased $4.75 per barrel to $2.45 per barrel, compared to $7.20 per barrel for the three months ended September 30, 2008. This decrease was attributable mainly to the contractions in the Gulf Coast 2/1/1 crack spreads.

• The third quarter of 2009 saw the continued contraction of sweet/sour and light/heavy crude oil differentials compared to the prior period. The average sweet/sour spread for the three months ended September 30, 2009 was $1.68 per barrel compared to $2.16 per barrel for the three months ended September 30, 2008. The average light/heavy spread for the three months ended September 30, 2009 was $4.97 per barrel compared to $11.23 per barrel for the three months ended September 30, 2008.

• The average 3/2/1 Gulf Coast crack spread for the three months ended September 30, 2009 was $6.52 per barrel compared to $16.05 per barrel for the three months ended September 30, 2008. The average 2/1/1

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Gulf Coast high sulfur diesel crack spread for the three months ended September 30, 2009 was $5.36 per barrel compared to $15.86 per barrel for the three months ended September 30, 2008. Additionally, the average 3/2/1 West Coast crack spread for the three months ended September 30, 2009 was $14.85 per barrel compared to $14.68 per barrel for the three months ended September 30, 2008.

• Asphalt margins in the third quarter of 2009 were $82.99 per ton compared to $80.30 per ton in the third quarter of 2008, primarily due to lower crude oil costs. The average blended asphalt sales price decreased 27.9% from $618.53 per ton in the third quarter of 2008 to $446.26 per ton in the third quarter of 2009 and the average non-blended asphalt sales price decreased 64.8% from $541.04 per ton in the third quarter of 2008 to $190.23 per ton in the third quarter of 2009. The blended asphalt sales accounted for 93.5% of total asphalt sales in the third quarter of 2009. The decrease in the blended asphalt sales price of 27.9% was less than the 42.2% decrease in WTI prices in the third quarter of 2009.

• Our retail fuel sales gallons for the three months ended September 30, 2009 increased 7.1 million gallons, or 29.9%, to 30.9 million gallons from 23.8 million gallons for the three months ended September 30, 2008. Our integrated branded fuel sales gallons for the three months ended September 30, 2009 increased 10.0 million gallons, or 18.0%, to 64.7 million gallons from 54.7 million gallons for the three months ended September 30, 2008.

• On September 15, 2009, we paid a regular quarterly cash dividend of $0.04 per share on our common stock to stockholders of record at the close of business on August 31, 2009.

Major Influences on Results of Operations Refining and Unbranded Marketing
Our earnings and cash flow from our refining and unbranded marketing segment are primarily affected by the difference between refined product prices and the prices for crude oil and other feedstocks. The cost to acquire crude oil and other feedstocks and the price of the refined products we ultimately sell depend on numerous factors beyond our control, including the supply of, and demand for, crude oil, gasoline and other refined products which, in turn, depend on, among other factors, changes in domestic and foreign economies, weather conditions, domestic and foreign political affairs, production levels, the availability of imports, the marketing of competitive fuels and government regulation. While our sales and operating revenues fluctuate significantly with movements in crude oil and refined product prices, it is the spread between crude oil and refined product prices, and not necessarily fluctuations in those prices that affect our earnings.
In order to measure our operating performance, we compare our per barrel refinery operating margins to certain industry benchmarks. We compare our Big Spring refinery's per barrel operating margin to the Gulf Coast and Group III, or mid-continent, 3/2/1 crack spreads. A 3/2/1 crack spread in a given region is calculated assuming that three barrels of a benchmark crude oil are converted, or cracked, into two barrels of gasoline and one barrel of diesel. We calculate the Gulf Coast 3/2/1 crack spread using the market values of Gulf Coast conventional gasoline and ultra low-sulfur diesel and the market value of West Texas Intermediate, or WTI, a light, sweet crude oil. We calculate the Group III 3/2/1 crack spread using the market values of Group III conventional gasoline and ultra low-sulfur diesel and the market value of WTI crude oil. We calculate the per barrel operating margin for our Big Spring refinery by dividing the Big Spring refinery's gross margin by its throughput volumes. Gross margin is the difference between net sales and cost of sales (exclusive of unrealized hedging gains and losses).
We compare our California refineries' per barrel operating margin to the West Coast 6/1/2/3 crack spread. A 6/1/2/3 crack spread is calculated assuming that six barrels of a benchmark crude oil are converted, or cracked, into one barrel of gasoline, two barrels of diesel and three barrels of fuel oil. We calculate the West Coast 6/1/2/3 crack spread using the market values of West Coast LA CARB pipeline gasoline, LA ultra low-sulfur pipeline diesel, LA 380 pipeline CST (fuel oil) and the market value of WTI crude oil. The per barrel operating margin of the California refineries is calculated by dividing the California refineries' gross margin by their throughput volumes. Another comparison to other West Coast refineries that we use is the West Coast 3/2/1 crack spread. This is calculated using the market values of West Coast LA CARB pipeline gasoline, LA ultra low-sulfur pipeline diesel and the market value of WTI crude oil.
We compare our Krotz Springs refinery's per barrel margin to the Gulf Coast 2/1/1 crack spread. A 2/1/1 crack spread is calculated assuming that two barrels of a benchmark crude oil are converted, or cracked, into one barrel of gasoline and one barrel of diesel. We calculate the Gulf Coast 2/1/1 crack spread using the market values of Gulf Coast conventional gasoline and Gulf Coast high sulfur diesel and the market value of WTI crude oil. The per barrel operating margin of the Krotz Springs refinery is calculated by dividing the Krotz Springs refinery's gross margin by its throughput volumes.

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Our Big Spring refinery and California refineries are capable of processing substantial volumes of sour crude oil, which has historically cost less than intermediate and sweet crude oils. We measure the cost advantage of refining sour crude oil at our refineries by calculating the difference between the value of WTI crude oil less the value of West Texas Sour, or WTS, a medium, sour crude oil. We refer to this differential as the sweet/sour spread. A widening of the sweet/sour spread can favorably influence the operating margin for our Big Spring and California refineries. In addition, our California refineries are capable of processing significant volumes of heavy crude oils which historically have cost less than light crude oils. We measure the cost advantage of refining heavy crude oils by calculating the difference between the value of WTI crude oil less the value of MAYA crude, which we refer to as the light/heavy spread. A widening of the light/heavy spread can favorably influence the refinery operating margins for our California refineries.
The results of operations from our refining and unbranded marketing segment are also significantly affected by our refineries' operating costs, particularly the cost of natural gas used for fuel and the cost of electricity. Natural gas prices have historically been volatile. For example, natural gas prices ranged between $5.29 and $13.58 per million British thermal units, or MMBTU, in 2008. Typically, electricity prices fluctuate with natural gas prices.
Demand for gasoline products is generally higher during summer months than during winter months due to seasonal increases in highway traffic. As a result, the operating results for our refining and unbranded marketing segment for the first and fourth calendar quarters are generally lower than those for the second and third calendar quarters. The effects of seasonal demand for gasoline are partially offset by seasonality in demand for diesel, which in our region is generally higher in winter months as east-west trucking traffic moves south to avoid winter conditions on northern routes.
Safety, reliability and the environmental performance of our refineries are critical to our financial performance. The financial impact of planned downtime, such as a turnaround or major maintenance project, is mitigated through a diligent planning process that considers product availability, margin environment and the availability of resources to perform the required maintenance.
The nature of our business requires us to maintain substantial quantities of crude oil and refined product inventories. Crude oil and refined products are essentially commodities, and we have no control over the changing market value of these inventories. Because our inventory is valued at the lower of cost or market value under the LIFO inventory valuation methodology, price fluctuations generally have little effect on our financial results.
Asphalt
Our earnings from our asphalt segment depend primarily upon the margin between the price at which we sell our asphalt and the transfer prices for asphalt produced at our refineries in the refining and unbranded marketing segment. Asphalt is transferred to our asphalt segment at prices substantially determined by reference to the cost of crude oil, which is intended to approximate wholesale market prices. The asphalt segment also conducts operations at and markets asphalt produced by our refinery located in Willbridge, Oregon. In addition to producing asphalt at our refineries, at times when refining margins are unfavorable we opportunistically purchase asphalt from other producers for resale. A portion of our asphalt sales are made using fixed price contracts for delivery of asphalt products at future dates. Because these contracts are priced at the market prices for asphalt at the time of the contract, a change in the cost of crude oil between the time we enter into the contract and the time we produce the asphalt can positively or negatively influence the earnings of our asphalt segment. Demand for paving asphalt products is higher during warmer months than during colder months due to seasonal increases in road construction work. As a result, the revenues for our asphalt segment for the first and fourth calendar quarters are expected to be lower than those for the second and third calendar quarters.
Retail and Branded Marketing
Our earnings and cash flows from our retail and branded marketing segment are primarily affected by merchandise and motor fuel sales and margins at our convenience stores and the motor fuel sales volumes and margins from sales to our FINA-branded distributors. Retail merchandise margin is equal to retail merchandise sales less the delivered cost of the retail merchandise, net of vendor discounts and rebates, measured as a percentage of total retail merchandise sales. Retail merchandise sales are driven by convenience, branding and competitive pricing. Motor fuel margin is equal to motor fuel sales less the delivered cost of fuel and motor fuel taxes, measured on a cents per gallon ("cpg") basis. Our motor fuel margins are driven by local supply, demand and competitor pricing. Our convenience store sales are seasonal and we experience increased demand for our products in the second and third quarters of the year, while the first and fourth quarters usually experience lower overall demand.

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Factors Affecting Comparability
Our financial condition and operating results over the three and nine months ended September 30, 2009 and 2008 have been influenced by the following factors which are fundamental to understanding comparisons of our period-to-period financial performance.
On July 3, 2008, we completed the acquisition of all the capital stock of the refining business located in Krotz Springs, Louisiana, from Valero Energy Corporation ("Valero"). The purchase price was $333,000 in cash plus $141,494 for working capital, including inventories. The completion of the Krotz Springs refinery acquisition increased our crude refining capacity by 50% to approximately 250,000 barrels per day ("bpd") including our refineries located on the West Coast and West Texas. The results from our Krotz Springs refinery are included in our results of operations for the three and nine months ending September 30, 2009 and for the three months ended September 30, 2008.
On February 18, 2008, a fire at the Big Spring refinery destroyed the propylene recovery unit and damaged equipment in the alkylation and gas concentration units. The re-start of the crude unit in a hydroskimming mode began on April 5, 2008 and the Fluid Catalytic Cracking Unit ("FCCU") resumed operations on September 26, 2008. Consequently, our results of operations for the three and nine months ended September 30, 2008 reflect the impacts of this event.
In the three and nine months ended September 30, 2008, an involuntary gain on conversion of assets was recorded of $103.1 million and $199.7 million, respectively, for the insurance proceeds received in excess of the book value of the assets impaired of $25.3 million and demolition and repair expenses of $25.0 million incurred through September 30, 2008.
A gain on disposition of assets of $42.9 million in the second quarter of 2008 represented the recognition of all the remaining deferred gain associated with the contribution of certain pipelines and terminals to Holly Energy Partners, LP ("HEP"), in March 2005 and was due to the termination of an indemnification agreement with HEP.
Results of Operations
Net Sales. Net sales consist primarily of sales of refined petroleum products through our refining and unbranded marketing segment and asphalt segment and sales of merchandise, including food products, and motor fuels, through our retail and branded marketing segment.
For the refining and unbranded marketing segment, net sales consist of gross sales, net of customer rebates, discounts and excise taxes and include inter-segment sales to our asphalt and retail and branded marketing segments, which are eliminated through consolidation of our financial statements. Asphalt sales consist of gross sales, net of any discounts and applicable taxes. Retail net sales consist of gross merchandise sales, less rebates, commissions and discounts, and gross fuel sales, including motor fuel taxes. For our petroleum and asphalt products, net sales are mainly affected by crude oil and refined product prices and volume changes caused by operations. Our retail merchandise sales are affected primarily by competition and seasonal influences.
Cost of Sales. Refining and unbranded marketing cost of sales includes crude oil and other raw materials, inclusive of transportation costs. Asphalt cost of sales includes costs of purchased asphalt, blending materials and transportation costs. Retail cost of sales includes cost of sales for motor fuels and for merchandise. Motor fuel cost of sales represents the net cost of purchased fuel, including transportation costs and associated motor fuel taxes. Merchandise cost of sales includes the delivered cost of merchandise purchases, . . .