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Alon USA Energy Inc. (NYSE:ALJ)

Q4 2008 Earnings Call

March 6 2009 10:00 am ET

Executives

Claire A. Hart – Senior Vice President

Jeff Morris – President and Chief Executive Officer

Shai Even – Senior Vice President and Chief Financial Officer

[Joseph A. Concienne] – Senior Vice President of Refining & Supply

Analysts

Ann Kohler – Caris & Company

Paul Cheng – Barclays Capital

Chi Chow – Tristone Capital

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Alon USA fourth quarter earnings conference call. During today's presentation all parties will be in a listen only mode and following the presentation the conference will be opened for questions.

(Operator Instructions) This conference is being recorded today, Friday, March 6, 2009. I would now like to turn the conference over to Claire Hart, Senior Vice President.

Claire Hart

Thank you operator. Good morning everyone and welcome to Alon USA's fourth quarter 2008 earnings conference call. With me are Jeff Morris, President and CEO, along with other members of our senior management team. You should have received yesterday a 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 the information reported on this call speaks only as today, March 6, 2009, and therefore, you are advised that time sensitive information may no longer be accurate as of the 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 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 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 Claire, 2008 was an eventful year for Alon. There were four major events during the year which impacted our results, both positively and negatively. These were the fire at Big Spring, the acquisition of the Krotz Springs refinery, the unprecedented volatility in crude prices over the year, and the dramatic reduction of suppliers of asphalt, especially in the Western United States.

Each of these events caused significant noise in our numbers. First, I want to comment on the resiliency of the people of this company. This is a volatile, challenging business in the base case, but the challenges and volatility of 2008 for us were unprecedented. I could not be more thankful and proud to work with an exceptional group of people, supported by exceptional ownership, located in exceptional communities.

We depended upon each of these constituencies during 2008 and each supported us in ways we will never be able to repay. Now let me get back to the numbers.

First let's discuss Big Spring. Big Spring is back on line and performing well. Total repair costs for Big Spring is expected to be about $420 million, and we have already received the full policy limit from our insurers of $395 million. Special items associated with Big Spring in 2008 are a $155 million after-tax gain associated with the involuntary conversion of assets due to the fire, of which $38 million was recognized in the fourth quarter, and a $25 million after-tax gain associated with the contribution of our pipeline assets to Holly Energy Partners in 2005, of which none was recognized in the fourth quarter.

We also booked $55 million of pre-tax business interruption recovery, of which $25 million was booked in the fourth quarter. In addition, the Big Spring margins reported in the 10-Q include about a $47 million LIFO loss.

We are very optimistic going forward. For the first two months of 2009 Big Spring is expected to contribute about $25 million of EBITDA and is operating at about 65,000 barrels per day.

Now onto Krotz Springs. Krotz Springs has been an excellent addition to Alon. Margins averaged $7.30 per barrel in the fourth quarter, even though Gulf Coast Gasoline Cracks were negative for much of the quarter, showing the benefit of the distal yield on the facility. Through puts averaged 58,000 barrel per day affected primarily by the gradual recovery of the crude gathering systems in the gulf coast following Hurricane Ike. In the first two months of 2009 Krotz Springs is expected to contribute over $20 million of EBITDA, all of these are very good numbers.

Going to the special items, the special items associated with Krotz Springs include a $70 million net of tax loss associated with inventories acquired in the July transaction, of which $35 million net of tax was recognized in the fourth quarter. A very important element relating to Krotz Springs with which we are very happy is the heating oil hedge which we put on at the time of the acquisition.

We hedged over 18,000 barrel per day through October 2010, at about $22 per barrel based on NYMEX heating oil versus crude. At year end, our unrealized position was in the money by $167 million. We are now realizing about $5 million per month gain on the hedge and the unrealized portion has continued to improve.

We've been refiners a long time and realize we need to take a conservative approach, especially in times like these. This hedge is indicative of our conservatism and is serving us very well in these unprecedented times.

Let's now discuss Paramount. We're very pleased with the progress we've made at Paramount. We have completed turnarounds and upgrades for all units at both Long Beach and Paramount during 2008, and completed the installation of our new Nafta hydrotreater on budget and schedule. The margins for Paramount were excellent in the fourth quarter at about $11.74 per barrel. I'll let you know that these margins also include a LIFO loss of about $5 million.

The plan to run Paramount was 20090 consistent of asphalt demand and currently at about 45,000 barrel per day with expectations to increase to 60,000 barrel per day in the second quarter. In the first two months of 2009 the Paramount Refinery is expected to contribute over $10 million of EBITDA excluding the benefits of asphalt marketing. We are especially happy with the results and with our asphalt business.

Operating income for the asphalt marketing segment was $97 million for the year and $77 million of that was in the fourth quarter. We feel our asphalt marketing business is very well positioned. Supply blended asphalt's been reduced more than demand has declined, due to the successful start up of the Coker projects in the West, plus the bankruptcy of The SIM Group.

Also, we have made significant progress in increasing the use of modified and ground tire grades of asphalt in California and believe we are particularly well positioned to take advantage of the infrastructure elements of the federal stimulus package. Our understanding is that over $2.5 billion of infrastructure spending is planned for California, about $2.25 billion for Texas, and about $1 billion combined in the other states we serve.

Our margins of over $200 per ton excluding a $40 million LIFO gain for the fourth quarter are indicative of what can happen when the price of crude is where it is today.

Our business plan calls for $60 per ton margins in 2009 but I am optimistic we will be able to exceed these levels and I believe we are in the right place at the right time.

We have progressed our planned IPO for our Alon brands and have received the second round of comments from our filings. We plan to update our year end numbers and then to proceed with the IPO when we believe we can obtain appropriate value for the company. Our merchandise sales continue to be a bright spot with over $72,000 average per store per month.

The class of crude oil price in the quarter consumed liquidity for all independent refineries including us, thus I'd like to spend some time on this subject.

At year end our availability under our revolvers was about $250 million with total facilities of $900 million. Also due to excellent management of our working capital we were slightly positive in cash from working capital in the fourth quarter, and $90 million positive for the entire year, truly an exceptional accomplishment in this environment.

In addition, we are expecting a $100 million tax return of income tax in the second quarter, which will further enhance our liquidity. Never the less, the dramatic reduction in crude price in the fourth quarter is requiring us to work with our lenders to adjust our debt at Krotz Springs to match the current environment.

We have agreed in principle that an additional $50 million in cash and letters of credit support will be provided to this subsidiary. In addition, the heating oil crack previously discussed will continue to contribute to Krotz Springs. The total unrealized value of this hedge is over $200 million at this time, including a $50 million collateral deposit.

We plan to have the necessary adjustments made to our debt structure in the near future, and will update you at that time. As always I want to thank you for your support and want to reinforce again appreciation for all the efforts and support of our employees, shareholders, lenders, vendors, and communities. I believe we are well positioned to deal with and take advantage of whatever may occur in 2009. I'd be happy to address any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Ann Kohler – Caris & Company.

Ann Kohler – Caris & Company

Good morning, gentlemen, nice quarter, congratulations. Could you provide us with just a little bit of color regarding your looking at the Krotz Springs and the margin environment and sort of looking at the distillate environment and how you see that playing out over the balance of the year, and kind of looking at your margins at the beginning of the year, and just kind of where they are quarter to date.

Jeff Morris

Well, as you're aware Ann, in the first two months of 2009 have been quite good. We have been above the, what the forward curve was we expected at year end, so for us and other refiners it's been a good situation. The distillate cracks remained above gasoline cracks for all of January and much of February. Now, for the first time in a long time, gasoline cracks are above distillate.

I can give you my view. My view is that over time, I can't look at this market month to month, that distillate cracks on average will exceed gasoline cracks. I think there is more downward pressure on gasoline demand generally than there is distillate demand worldwide specifically.

You saw the exports for distillate to Europe of the United States were up in fact at year end, so we believe we are still properly positioned to lean harder on the distillate cracks and the gasoline cracks going forward. Today in March, the gasoline is a little better but I don't think that's going to last for the year.

Ann Kohler – Caris & Company

Ok, great and could you give us a little color regarding the, an update regarding the 2009 capital budget looking at sort of growth and then basic maintenance levels?

Jeff Morris

Sure, we, on our business plan we are projecting $100 million of CapEx in 2009, a vast majority of that is sustaining regulatory capital. There's a couple of significant investments we have in there, at Big Spring we had planned to spend $15 million on a low sulfur gasoline project that's required to be operating in September of this year, so we will be doing that.

In addition, we are going to begin a significant upgrade of our control systems at Paramount. The Paramount refinery still has some of the old pneumatic and analog type controllers. We need to bring it up to the new digital types of controls. That total project will be in the $20 million range over a number of years, we'll probably spend about $5 to $10 million on that project this year. All of the remainder of the budget is sustaining and regulatory type of capital.

Ann Kohler – Caris & Company

Great, thank you very much.

Operator

Our next question is from the line of Paul Cheng – Barclays Capital, please go ahead.

Paul Cheng – Barclays Capital

Jeff, you give an EBITDA estimate for the asphalt business, what's the current asphalt margin?

Jeff Morris

Today we're, interestingly Paul, asphalt is still selling for more than WTI.

Paul Cheng – Barclays Capital

Right, so what's the current margin, because the oil part has stabled as over the last say, three months, curious that as we now get back to a more normalized asphalt margin, will it be $40 to $50 ton or that is lower or higher?

Jeff Morris

That's higher, now I would expect if things continue as we plan, we're at the $100 a ton range right now, and another thing to be, that's interesting Paul, just to point out and we've talked in the past about this forward pricing for asphalt, especially in Texas, and we do our bidding in Texas in November for delivery in the summer.

Of course, last year that squeezed our margins. This year we've already fixed our pricing for this summer so our business plan calls for $60 per ton margins for this year. I fully expect to beat that, how much it's hard to tell, but it could be as high as $100 a ton.

Paul Cheng – Barclays Capital

And you say now is $100 but this is not quarter. Today, its right at this moment or the last several days, is $100?

Jeff Morris

Yes, in this range, that's the range we're in at this point in time.

Paul Cheng – Barclays Capital

Okay, and it appears that you may have changed your accounting practice on hitting all hedging, I think in the third quarter that you triggered a hedging accounting and look like in your fourth quarter we saw now that you have to mark-to-market gain including in the resource so it is no longer triggered a hedging are coming, any reason why that from one quarter to another, would change?

Jeff Morris

It's just the accounting rules, Paul. We fell out of the 80 to 125% range with the tremendous fall in crude price in the fourth quarter that just correlation is no longer there. So per the rules we have to and chose to book it as mark-to-market and we'll continue that way because we're out of the range for hedge accounting.

Paul Cheng – Barclays Capital

Okay, so going forward we should assume that now it is mark-to-market?

Jeff Morris

That's correct.

Paul Cheng – Barclays Capital

And as of the end of the year can you tell us what heating oil crack you are marked to?

Jeff Morris

Well, we took the forward curve, we have to take the curve that was at that time

Paul Cheng – Barclays Capital

Can you tell us what is that may be?

Jeff Morris

Well the range, I don't have the year end curve in front of me, but I have today's curve in front of me, and

Paul Cheng – Barclays Capital

No, but I mean that when we are looking at the first quarter, how that impact – we need to know what is at the end of the year that you mark to, right?

[Joseph A. Concienne]

About $20 bucks.

Jeff Morris.

Joseph's here and I'll let him, go ahead Joseph.

[Joseph A. Concienne]

Yes, year end the future curve for the dividend crack, averaged about $12 a barrel.

Paul Cheng – Barclays Capital

Twenty?

[Joseph A. Concienne]

No, twelve.

Paul Cheng – Barclays Capital

Oh, $12, I'm sorry.

Jeff Morris

And just to add to that, today the forward curve average is $6.

[Joseph A. Concienne]

Right and we funded for $22 of the difference times the barrels we're in.

Paul Cheng – Barclays Capital

Yes, that I sort of understand, just trying to understand what is the incremental [trial benefit] in the first quarter may be, some debt hedging. And Jeff, earlier when you say that you expect Krotz Springs $20 million EBITDA contribution in January and February, that in crude and heating oil gain, or not including the heating oil gain and debt?

Jeff Morris

That's included. It's inside.

Paul Cheng – Barclays Capital

That's inside and that is from a realized hedging gain or that is mark-to-market gain that you include?

Jeff Morris

That's realized. Our realized gain for the first two months was around $9 million.

Paul Cheng – Barclays Capital

Okay, so that excluding the realized gain is $11 million for EBITDA?

Jeff Morris

Correct.

Paul Cheng – Barclays Capital

But of course, the realized gain had nothing to do with the report P&L seeing how you went mark-to-market gain, right?

Jeff Morris

No, but it has everything to do with cash.

Paul Cheng – Barclays Capital

Right, I understand, I just trying to make sure I understand that how it's different in accounting right now.

Shai Even

Actually the unrealized gain is in addition to the realized, we have a $90 million realized and in addition we have unrealized

Paul Cheng – Barclays Capital

Yes. So I understand – I just wanted to make sure that when you say you include a hedging gain, if that just included the realized portion but not the mark-to-market in here.

Jeff Morris

Yes that's correct.

Paul Cheng – Barclays Capital

Okay perfect and Jeff, are we expecting anymore BI payment in 2009?

Jeff Morris

No we're not. We're finished with the accounting on the fire as of the end of 2008.

Paul Cheng – Barclays Capital

Okay, for the [Alkaline] unit, are we planning to rebuild that or that you're not going to repeat that one?

Jeff Morris

We are going to rebuild it. Our current expectations are it'll probably begin sometime in the third quarter.

Paul Cheng – Barclays Capital

And how much is that going to be?

Jeff Morris

It's not very significant for the incremental cost. We have already spent a large part of the money to rebuild it. The last testament I saw for the remaining expenditure was around $7 million.

Paul Cheng – Barclays Capital

Seven million? And how long it may take?

Jeff Morris

Just – not very long, a few quarters. Maybe one quarter.

Paul Cheng – Barclays Capital

So sometime before the year end we should be complete already?

Jeff Morris

Yes, it's primarily repaired already. There's just some remaining items to do.

Paul Cheng – Barclays Capital

Can you tell us, what is the total repair cost related to the fire? That's assuming now that you have a pretty good number.

Jeff Morris

In my remarks I said, I told you Paul, it was about $420 million.

Paul Cheng – Barclays Capital

Four hundred and twenty million?

Jeff Morris

And that we received from our insurers $385 million.

Paul Cheng – Barclays Capital

Okay so that means that you decided out of the $385 you used $55 you consider as BI, so you assume that you are not being paid for the full amount of all the repair costs?

Jeff Morris

Correct.

Operator

Our next question is from the line of Chi Chow – Tristone Capital.

Chi Chow – Tristone Capital

Jeff, in your comments I think you mentioned the asphalt margin you realized in the fourth quarter, was it – did you say it was around $200 a ton excluding the LIFO gain?

Jeff Morris

Yes I did.

Chi Chow – Tristone Capital

Okay great. You sound pretty positive on the asphalt business longer term do you have any consideration of splitting that unit off like you were going to?

Jeff Morris

Well Chi, it's something we've thought about off and on over the years and as long as we feel like we're getting appropriate values for it, we're in. But it's – well I'll leave it this way, it's a potential opportunity. It's not something we're planning on at this point in time, but we realize that opportunities exist. It's all in the past how we monetized our pipelines, maintained control using the pipelines, so it's on the radar as something we would consider, but it's not imminent at all.

Shai Even

Chi, I think the opportunity is really more on the logistic side and not on the know how and blending and marketing.

Chi Chow – Tristone Capital

Right, well that's – the logistic is really the entity that you've got broken out right?

Jeff Morris

Right, that's correct.

Chi Chow – Tristone Capital

Right. The additional $50 million that you mention on cash and the LT capacity, is that coming from ALJ or [Alliance]?

Jeff Morris

Both. When we finalize this, we'll provide you the details but there'll be – the way it's structured now is there's support from both Alon Energy and the [Alliance] rep.

Chi Chow – Tristone Capital

And the Krotz Springs term loan, are you still at $302 million at year end?

Jeff Morris

Right at $300.

Chi Chow – Tristone Capital

Three hundred. How does the cash flow sweep function work at Krotz Springs?

Jeff Morris

Well there's 100% cash flow sweep but there has to be a certain – we have to meet certain availability levels and certain minimum requirements of liquidity in the business to provide the cash flow sweep. On our current projection for 2009, we do not see – we're not projecting any cash flow going to the term from the cash flow sweep in 2009.

Chi Chow – Tristone Capital

Okay, but are you required to make repayment on that loan beginning in the first quarter?

Jeff Morris

Yes we are. There's a amortization I believe it's

Shai Even

Approximately $4 million per quarter for 2009.

Chi Chow – Tristone Capital

How much was that Shai?

Shai Even

Around $4 million per quarter.

Chi Chow – Tristone Capital

Okay and then one real quick housekeeping item, looks like your diluted share differs from basic now after the fourth quarter. What changed?

Shai Even

The [material] change is the change with the special costs in which we have deferred [inaudible] company.

Chi Chow – Tristone Capital

Okay so you're accounting for that in diluted?

Shai Even

Yes.

Operator

Thank you. (Operator Instructions). And we do have a follow-up question from the line of Chi Chow – Tristone Capital.

Chi Chow – Tristone Capital

Hi thanks. Sorry it sounds like not many more questions, so I'll just continue here if you don't mind. Would you consider monetizing the hedges at Krotz Springs, the unrealized portion?

Jeff Morris

It's something we've discussed, but to do that Chi, requires not only our desire but it requires the approval of all the lenders, both the term and the ABL facilities, so it's a matter of discussion. I'll just leave it at that.

Chi Chow – Tristone Capital

Okay and then one other thing. The $100 million tax receivable, what's the nature of that? Is that just an overpayment on taxes during the year?

Shai Even

That's NOL carry backs for [inaudible]. This year we have taxable losses that we're going to carry back to previous year.

Operator

Thank you. (Operator Instructions) And there are no further questions in the queue at this time. I would like to turn it back to management for any closing remarks.

Jeff Morris

Thank you operator. Thank you all, as I said earlier this '08 was a very eventful year for Alon and I'll reinforce again how much we appreciate the support of you our shareholders, the people I work with, the ownership, and the communities which we sere. And I look forward to the next quarter. Thank you.

Operator

Thank you. Ladies and gentlemen this concludes the Alon USA fourth quarter earnings conference call. Thank you for your participation, you may now disconnect.

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