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Alon USA Energy, Inc. (NYSE:ALJ)

Q1 2010 Earnings Call Transcript

May 7, 2010 10:00 am ET

Executives

Claire Hart – Senior Vice President.

Jeff Morris – Chief Executive Officer

Shai Even – Chief Financial Officer

Analysts

Ben Hur – Morgan Stanley

Jeff Dietert – Simmons

Paul Cheng – Barclays Capital

Chi Chow – Macquarie Capital

Ann Kohler – Caris & Company

Evan Templeton – Jefferies and Company

Operator

Good morning, ladies and gentlemen and thank you for standing by. Welcome to Alon USA's first quarter 2010 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, May 7th, 2010.

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

Claire Hart

Thank you, Greg. Good morning everyone and welcome to Alon USA's first quarter 2010 earnings conference call. With me are 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 contain a copy from our website, alonusa.com under the Investor Relations section. Before I turn the call over to Jeff, please be aware, information report on these calls speaks only as of today, May 7th, to 10 and therefore you'll by the time sensitive information may no longer be accurate as at the time of any replay.

Also let 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 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 the statement regarding forward-looking statements incorporated in our news release issued yesterday, and please note that these contents of our conference call today are covered by these statements.

With that I will turn call over to Jeff.

Jeff Morris

Thank you, Claire. Excuse me. I will start by making a few commenting regarding the industry and then continue into the more specific comments regarding the Company, and then obviously take your questions.

During the last conference call as I said my view was that we were near the end of the worst, and I can tell you my current view is that for a sector, and far as our company that we are at the end of the worst or using the quotes I have heard someone else worst is behind us.

We can see the positives in the second quarter, and then feel very good about those. The key economic indicator that we need to is track which affects our industry right now is industrial production. As we know, the loss and distillate demand last year was greater than that for gasoline, and we are now seeing a real distillate recovery at this point in time.

We know that the long-term has been very high correlation between distillate demand and industrial production, and industrial production bottomed in the middle of last year, and has been steadily improving since, both here in the U.S. and worldwide. Therefore, I agree with the expectations of others that refining margins and utilizations will continue to improve going forward following the first quarter.

Excuse me. I am getting over a cold. As far as our Company, we made significant progress financially this first quarter. As we previously announced we terminated our revolvers facility would be away, and have now replaced it with a multi-year agreement with another major financial institution. Not only will this new facility be at lower cost than our previous facility, it will allow us to operate Krotz Springs fully with no limitations.

So, it's our intent to restart Krotz Springs within the next few weeks. We fully expect the cross springs will generate significant positive EBITDA at the current Gulf Coast 211 margins. Additionally we obtained in the first quarter, an additional $60 million facility from one of our existing lenders, where use is LC support, throughout the company.

We certainly appreciate the trust and confidence we received from these financial institutions entering into these facilities with us. As we noted in our release, refining margins were low across the nation in the first quarter, were particularly low on the West Coast. Thus we took advantage of this time period to complete the restart of our Appalachian unit at Big Spring, and also completed a catalyst change in our reformer hydrotreaters in Big Spring, which we have previously scheduled for April.

Therefore, our throughputs were usually low at Big Spring in the first quarter, but are now running to full rates. My view is that our equipment at Big Spring is now in the best condition that it has been in several years. Due to the very low West Coast margins we ran Paramount Refinery to only support our asphalt business in the first quarter. Now the West Coast margins are improving. We will begin to raise the rates at Paramount.

And finally we close to leave the Krotz Springs refinery down due to the low margin environment in the first quarter and decided not to restart until our new credit facility was in place. This is now complete and we will now soon restart Krotz Springs. There has been quite a bit of discussion about asphalt recently, and I feel good about the choice that we made some years to focus upon the asphalt business rather than the coking business, and that's paying off these days.

And also our focus on premium grades of asphalt; I will remind you that Alon is the number one manufacturer of ground tire rubber and rubber modified asphalts in the U.S. We continue to see a decline in the first quarter in paving volumes in the country because the project work is now restarted and government budgets are still under pressure. We have begun to see an increase in demand in roofing sector, due primarily to weather events during the first quarter.

Nevertheless due to low utilization refineries and other events people running lighter types crude's, supply has fallen more than demand over the, for asphalt. So we've seen a very strong pricing during the winter months where we do the winter fill pricing that kind o sets the floor if you will for the season. We've had not seen the significant discounts that we have seen in previous years.

In fact, winter fill pricing is as much as $100 per ton above the expectations that we have. We believe that boats us well for this coming season. Therefore, our base asphalt pricing has increased substantially. In fact in the first quarter, we were able to sell blended asphalts at above the cost of WTI. So, again it's because of our focus on the premium grades of asphalt. Therefore, we continue to be optimistic about the asphalt segment this year and expect the higher margins to more than offset above lower paving volumes.

In addition, we're particularly well positioned in California, where our rubber modified and power modified grades continue to take market share. I'll point out that the rubber modified grades have a preferential advantage in the maintenance market versus the new road market.

Regard to retail and branding market, we're also encouraged. We sustained our gross profit from fuel by increasing our fuel sales by around 15%. Although our fuel margins were under pressure from the general increase in crude pricing. Inside sales were also up although margins declined due to the structural change in cigarette taxes, which occurred last year. We're continuing the best and grow our food service offering to increase our inside margin and sales.

Finally, before I turn to questions, I'd like to update you on the [ph] forehand Bakersfield transaction. I'm moving forward to finalize this transaction, and primarily, as we've discussed this in past, we believe this is advantages of the Company because it provides the best alternative we have found to convert our Bakken gas oil production in the California facilities into gasoline and distillate products.

This acquisition because of that upgrade and increase in margin capture will allow us to increase the throughputs of our California refineries. Substantially based upon our work, we're currently selling under contract, our gas oil in California something around Gulf Coast plus seven in the OPUS [ph] markets in Bakersfield where gasoline diesel are somewhere around Gulf Coast plus 20. That is the uplift we believe we will gain from this project.

In closing as I said earlier I think the worst is behind us. This is a sector and certainly for Alon USA, we look forward to proving that going forward. I will be happy to address your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question does come from the line of Ben Hur with Morgan Stanley. Please go ahead.

Ben Hur – Morgan Stanley

Good morning gentlemen. Thanks for taking my call. I just had a few questions here, first starting out Krotz Springs. The asset is been down since November. You now have secured lines of credit, can you just tell me just refresh my memory about the asset, are you looking at a Gulf Coast LLS spread, is that what you are using for your benchmark margin out there?

Jeff Morris

As we show, the benchmark we've used in our release, we used the Gulf Coast 211, and that's base of WTI spread. So there is LLS premium above that, but that's our benchmark. We're showing that the 211, the first quarter was 625. Now it's much closer to the 10 range, and we are using 211 because the yield of refinery is 40% to 50% distillate fuel, and 40% to 50% gasoline, very low bottoms. So it was a very high correlation for the refinery to the Gulf Coast 211. We will have a discount under the 211 that we were showing based on whatever the spread is between TI and LLS HLS. We were in about 60% LLS, 40% HLS..

Ben Hur – Morgan Stanley

So you're really not taking – I mean you're taking a heavy light, do not really taking anything much more than that.

Jeff Morris

No. we're not.

Ben Hur – Morgan Stanley

It's a simple refinery, correct?

Jeff Morris

It's quite good. The liquid recovery plants a 100, and 1.5%, we're only 2.5% bottoms. So the yield is similar to a 13 complexity while coping refinery. And that's one of the reasons that were attracted to that.

There was a couple of attributes, one is its high distillate yield and we've had that focus for a long time, and we continue to view that the distillate curve going forward will outperform the gasoline curve going forward. And secondly the plant produces a very good yield. There's – I guess yield as a high complexity refinery.

The singular issue for the plant is that the price of the crude. We also knew when we purchase a facility that we would have the opportunity in the future to add some sulfur plant capacity and hydrogen capacity which will allow us to run half solar the crude, in the refinery in the future. The crude unit itself has the metallurgy to run half solar today. So, it's our intent as we move forward r to make the upgrades to lower our crude costs, and when we do that then the economics of the plant will improve even further and approach of the straight WTI Gulf Coast 211. Right now we have this discount that's just based on the spread to LLS.

Ben Hur – Morgan Stanley

Great. Can you just address maybe you are going to come out, you're going to start running the facility late May, is that correct?

Jeff Morris

That's our intent.

Ben Hur – Morgan Stanley

And obviously, I guess like Gulf Coast competition, I would guess I'd look at Garyville, Marathon's Garyville out there and they have come out and turn around and I think they're fully functional at this point. What do you make of Garyville, Krotz Springs?

Jeff Morris

Garyville is a very good refinery, very competitive refinery whether how much it affects the one refinery or another overall Gulf coast balances I don't it's kind of hardly thinking we have half of the refining capacity on the Gulf if you asked on the Gulf Coast in any regard.

Ben Hur – Morgan Stanley

Sure.

Jeff Morris

So, it's just a piece of that, and clearly Garyville is not the – this cost of goods is in the range of some of the other better refineries down there. So, I don't think it lowers the cost of goods or incremental cost, and I don't know that's better than some of the other larger refineries on the Gulf.

So I haven't seen this has a specific effect on the pricing in regard to demand. Obviously, Colonial is not running full, but I'm more focused upon the increases in demand in the distillate area than, and that during the increases in distillate demand from '09 to 2010 are more than enough to absorb this refinery and other.

Key variable for me is again industrial production and we see that it's come on pretty strongly. I think in hindsight, things we did not we not, at least I did not anticipate as an industry was the industrial production falling from '08 to '09 by 15%, and I don't know if anybody anticipated that.

Ben Hur – Morgan Stanley

Sure.

Jeff Morris

And I don't know if anybody that has the view that this economy is not going to recover. I believe it will recover, and it's just a matter of time, and as industrial production returns where there's a 93% correlation to between industrial production and distillate demand over the past 40 years.

So, distillate demand is coming back that I believe by the middle of the summer. We will be positive year-on-year, but we are all positive comparing immediate time now to the same time last year already. We just haven't overcome the under demand in the first quarter. The second quarter will be better than last year, and I think that's the more important element, and with the high advantage of Krotz Springs, this is probably the highest distillate yield refinery on the Gulf Coast at approaching 50%.

And I think that's what creates the advantage for it. I just view Garyville as another competitor. No, we're just next door to Exxon Baton Rouge. It's about a good a competitor you can find.

Ben Hur – Morgan Stanley

Great. Fair enough. Can I ask a follow-on question on a different note, and it has to do a little bit more with your retail, and your C stores.

Jeff Morris

Right.

Ben Hur – Morgan Stanley

Earlier in April we saw to start come after I believe it was KC, and they rejected and I don't even know where the deal is right now. Does that make you think that maybe you are somewhat closer to go in public? I mean kind of normalize what happened in the market yesterday in the market – it was there. Are you closer? Do you feel more comfortable trying to take your retail segment public and spending it out of the main company?

Jeff Morris

That again Questar are making all (inaudible) season other activities that are occurring in the retail sector are certainly helpful. And so we see those as positives, and what's happening is the multiple for the enterprise value versus EBITDA now returning to more of a historical level if you will. Historically, the multiples were in the seven day range, and over the last year or two, we've seen them as low as, lot of lows five, and a little below that.

Obviously we did not believe that was a competitive level. Questar started offered something around 74 KCs. They may not get the deal done with that level. There were some scenes at these and they are going to get it done that is going to take more than that. So, the multiples in the sector have all increased, and we believe that's appropriate. These are kind of multiples are sustained and then certainly it's positive for our ideal considerations.

Ben Hur – Morgan Stanley

Do you have that type of like KCC store. I'm not really positive here, but do have any of this type of food offering that you can get this greater margin on within many of your C stores, or is it more simple? Am I looking at the right way?.

Jeff Morris

We – let's take as an example, maybe you maybe the sheets [ph] wall are. Our food offering is not as the level of Roseland [ph]. We have a good offering. The biggest advantage is that we have, and what gives us significant value we believe is our 7-Eleven brand. We're the largest 7-Eleven licensee in the United States.

Ben Hur – Morgan Stanley

Sure.

Jeff Morris

We have exclusive rights to the 7-Eleven brand in our market region, and the 7-Eleven brand on its space provides higher margins and we have proprietary products that we are allowed to offer since we're 7-Eleven licensee which are direct-to-food service, example Slurpee. That's a well known, very high margin and very well recognized brand.

We also as a 7-Eleven license get the support from all of the 7-Eleven promotions and marketing that is done around the country. So, to me the premium value that we have in our retail of our large part goes to the 7-Eleven presence. So our 7-Eleven stores of Jubilant two and El Paso and Albuquerque are similar to the 7-Elevens that you would see in the other parts of the country, and we operate them in that way.

We have had a few specific benefits that are going to help our EBITDA long-term in the retail, one of our larger market that is a lot of taxes, just recently with VAT fuel allowed the sale of beer after decades and decades and that's increased our sales substantially. Our stores there, we are increasing our food service offering and that's increasing our inside sales you can see when others may have reported some losses inside. We are continuing to grow. We are growing outside and outside.

Ben Hur – Morgan Stanley

Great. Thank you very much for taking my call.

Jeff Morris

Thank you.

Operator

And our next question comes from the line of Jeff Dietert with Simmons. Please go ahead.

Jeff Morris

Good morning, Jeff. How are you?

Jeff Dietert – Simmons

I'm doing fine. We are experiencing really wide Contango in the forward curve, for WTI and I just wanted to confirm a couple of things at Big Spring, I assume you're buying the vast majority of your crude under CMA contract, and that gets a discount for that Contango. Is that accurate?

Jeff Morris

That is accurate. And also just to remind you that not only since Big Spring is the closest refinery to Midland, and where the WTI WTS originates in addition to the CMA which we all have. Big Spring enjoys normally about $0.20 per barrel, location advantage versus to upstream in [ph] cushing. So, but we get the full advantage there, 100%.

Jeff Dietert – Simmons

Very good, and now at Krotz Springs with your purchases of LLS and HLS, are you getting any kind of Contango benefited at that location?

Jeff Morris

I guess Contango benefited because we do buy it in advance, and we don't, we are not getting the benefits of the WTI discount that's currently in the market at cushion, but we do get the full Contango benefits across quite since its all domestic crude, and it's all priced on a month average basis.

Jeff Dietert – Simmons

Is that, do you use a CMA contract for Krotz Springs as well?

Jeff Morris

We do.

Jeff Dietert – Simmons

Okay. Good. As far as California goes for the second quarter, could you talk about volume expectations, on average for 2Q?

Jeff Morris

California particularly going to be in the mid-20s for throughput. We maintain the throughputs low in April, and gradually increasing them at this point in time.

Jeff Dietert – Simmons

Okay. And now, perhaps it is too early to comment on this but it would be helpful if you could talk about how you would plan to run California incorporating the Bakersfield assets as far as crude feedstock in and product yield? Can you help us with that at this time.

Jeff Morris

Well, I'll give you our general concept. We have done the work at Bakersfield, and we have shown that the existing hydrocracker, there can run with little or no modification, about 15,000 barrels per day of gas oil that we will produce from Paramount in a full hydrocracking mode meeting that we would have no bottoms left. We would be converting the gas oil entirely to gasoline and diesel and some LPGs. So that work has been done. Now, we nominally for a California crudes produce about a quarter to 30% gas oil. So we run the hydrocracker Bakersfield at around 15,000 barrel per day. That implies 60,000 barrel per day a rate for a topping at the Paramount refinery.

So we know that. We also know that the longer term we believe we can race a throughput of that unit with so investment up to around 20,000 barrel per day which would imply 80,000 barrel per day topping capacity at Paramount. We also know there's a out of service crude line that runs from this times, which is a big terminal in the Long Beach area, which is just less than a mile from our Long Beach facility, that runs from there all the way to Bakersfield.

So our longer term view is that it' a appropriate use of that now service lines to reverse it and to move the gas oil using that line. We have done the feasibility studies, smart pegged the line, and proven that it is feasible and that the line is serviceable. We are currently in negotiations with the owner to get some terms for long-term use of that line.

Nevertheless, that may take some significant permitting time. So, we've also developed a strategy where in the interim told that we didn't get the line in service, that we can either truck or rail from Paramount to Bakersfield. We have gotten contracts for both, and both are competitive price wise with the pipe lining, pipe lining simpler of course.

The benefits of the truck or rail, so we can do that more quickly, so in our current modeling we are assuming we can start to plan within a year, and believe that's conservative but we're trying to be conservative in this. We start within a year using truck or rail. We need to get the racks in service in a hdrocracking mode I just described, and sums squarely converted over to pipeline.

So, the operating mode would be initially running the Paramount facility around 60,000 barrel per day ascending 15,000 barrel gas oil to Bakersfield converting it entirely into gasoline, diesel and selling it in that market. We have reached an agreement with Shell that who operates the terminal there adjacent to the refinery, and we would sell the products on a wholesale basis over those racks.

Jeff Dietert – Simmons

Very helpful, Jeff. On that hydrocracker, what's your expected yield of gasoline, diesel and LPG out of the hydrocracker?.

Jeff Morris

We've chosen as our strategy is a discipline strategy. So, you can adjust that based upon the catalyst that you select and the operating conditions that you select. The way we model the plant, the way we would expect it to operate it would make 70% distillate yield, and approximately 30% gasoline yield and 5% or 10% LPGS, and another thing to keep in mind on a hydrocrack, you did get a pretty good volume swell, so we would have a yield at the plant on liquid recovery basis of over 10%.

So, but the concept is to operate in a preferenced distillate mode. That's been our view for a long time. We stay with that view.

Jeff Dietert – Simmons

Very helpful commentary. Could you comment on the asphalt volumes, that you're expecting, you talked about better roofing demand and still some state budgetary issues on the paving side, where do you anticipate total sales volume of asphalt will be for 2Q or maybe for the full year 2010?

Jeff Morris

We are projecting right now in our original business plan. We were projecting 1.2 million tons of asphalt sales from the Company, we are now projecting for the year 1.0 million tons, but we are projecting also going forward a improvement in margins, and the margins are quite strong in the business.

Jeff Dietert Simmons

Very good. Thanks for your comments.

Jeff Morris

You're welcome.

Operator

And our next question will come from Paul Cheng with Barclays Capital. Please go ahead.

Paul Cheng – Barclays Capital

Thank you. Several quick questions. In the margin in total [ph] in March and April, can you share with us, that whether but on the other hand that Kortz Spring was still down, can you tell us whether in April the Company as a whole, did you make money?

Jeff Morris

The money as a whole in April with Krotz Springs being down.

Paul Cheng – Barclays Capital

Okay. So you are not.

Jeff Morris

We are still service the fixed costs there.

Paul Cheng – Barclays Capital

Right.

Jeff Morris

It's significantly improved over March, but we were not profitable as a whole.

Paul Cheng – Barclays Capital

Okay. And you talked about that the asphalt margin is actually quite robust right now. Can you tell us that what was – what is the current spot asphalt margin that you are realizing?

Jeff Morris

Well, our pricing today is in the mid-400s for the base grades of asphalt, 450 or so and then our pricing on the premium grades is between $550 to $600 a ton. Our projected margins for the year were around $80 a ton. We think we will achieve those. As we showed in the first quarter, $14, I think at this point in time we are in the transition phase from the lower margins, the higher margin, probably over $50 a ton right now.

Paul Cheng – Barclays Capital

Can you remind me that, is it half of your want is in the higher margin to modify grade or I mean what's the split?

Jeff Morris

Probably around 30 to 40%, Paul if it is in the modified grades. Our largest market for modified grade is in Texas, as those were introduced earlier. We are largest supplier of modified grades of all suppliers in Texas. And it's has about a 30%, 40% market share. Our highest growth opportunities in California, we doubled the sales of our modified sales in California last year and expect to double again this year. With that doubling, we will probably would be 15% range in California.

Arizona is already converted, so we have a very high market share there, Utah is – I mean Nevada is already converted. We have a very high share there. The last market that's converting now to a high level of modified grades is in California.

Paul Cheng – Barclays Capital

Jeff, in your bottom shift, the long-term, the total debt is 955 million or so. How – what's the component, is it long-term debt?

Jeff Morris

We have – just to remind you, and it will be in our 10-Q but we have our term facility at the Alon Energy levels and the $430 million range, at this point in time. (inaudible) give you the details.

Shai Even

So the long-term debt is about 978.

Paul Cheng – Barclays Capital

978, is the long-term debt?

Shai Even

Yes, we have about 65 on [ph] shelter?

Paul Cheng – Barclays Capital

Okay. And that just seem that is the Krotz Spring will not start until end of the month? Should we assume that very quickly you are going to ramp to the full capacity or what kind of run rate you expect that to do?

Jeff Morris

We expect our current operating plans to bring it up at half rate for a few days, a week, to get everything kind of lined out and then take it all the way to full rates.

Paul Cheng – Barclays Capital

So you to expect that going to run at full rate?

Jeff Morris

Absolutely.

Paul Cheng – Barclays Capital

Okay. The first week, and then – okay. And on the – can you tell us that whether you have any hedging or trading position outstanding for the second quarter? Anything meaningful?

Jeff Morris

Currently, we don't have any significant hedge positions in addition to those that we reported early near the fourth quarter of 2009.

Paul Cheng – Barclays Capital

Okay. And is there any meaningful inventory gain or loss by segment in the first quarter?

Jeff Morris

We have a shortage in the asphalt segment, that we have $6.5 million inventory LIFO adjustment.

Paul Cheng – Barclays Capital

Right. You have a $6.5 million LIFO adjustment in those. How about any gain or loss on inventory on the refining side?

Jeff Morris

We have some inventories affected in Big Spring and some in Krotz Spring even though with the inventory on Krotz Spring we had $3 million Krotz Spring and $5 million in Big Springs.

Paul Cheng – Barclays Capital

$5 million in Big Spring and $3 million in Krotz Spring?

Jeff Morris

Yes.

Paul Cheng – Barclays Capital

And California is nothing.

Jeff Morris

California is nothing, yes.

Paul Cheng – Barclays Capital

And the $5 million and $3 million, are they LIFO loss or LIFO gain.

Jeff Morris

Positive difference – positive inventory impact.

Paul Cheng – Barclays Capital

Okay. So Big Spring is a $5 million positive and Krotz Spring is a $3 million positive. So your net total company is (inaudible) is $1.5 million gain.

Jeff Morris

Yes, that's about right.

Paul Cheng – Barclays Capital

And what is your expected total tax refund for this year from the government?

Jeff Morris

As of the balance sheet date we have approximately $30 million of tax refund expected to come to us.

Paul Cheng – Barclays Capital

I am sorry, how much?

Jeff Morris

$30 million.

Paul Cheng – Barclays Capital

30 million for the remaining of the year?

Jeff Morris

That's not including a loss related to first quarter, which we expecting with the profit that will come throughout this year, to offset them or to use them.

Paul Cheng – Barclays Capital

I see, okay. Jeff, I just want to make sure I get the number correct. Earlier you are talking about right now the Gulf Coast 211 you are looking at about $10. I think your saying that that is based on the WTI; right? And since you are running the LLS and LSS is about $4 premium. So that means that you're realized margin may be around in the $6 million if you're running the Krotz Spring. Is that how?

Jeff Morris

I agree with that math Paul but we have to take the HLS into account too. We run about 60% LLS, 40% HLS. So the spread is not as high.

Paul Cheng – Barclays Capital

Sure. And then on top of that you just got CMA benefit.

Jeff Morris

Correct.

Paul Cheng – Barclays Capital

So that's the math that we should be going through; right?

Jeff Morris

Agreed.

Paul Cheng – Barclays Capital

Okay, very good. Thank you.

Operator

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

Chi Chow – Macquarie Capital

Thank you. Good morning.

Jeff Morris

Hi Chi.

Chi Chow – Macquarie Capital

Jeff, back on the Flying J deal, it sounds like you've got a lot of the pieces in place already. What are the remaining hurdles and risks to closing the deal at this point?

Jeff Morris

We don 't see any big hurdles getting close. We have met with the Board this week and we've finalized our plans and so it's just a matter of just getting it executed now over the next few weeks. So I don 't foresee any significant hurdles.

Chi Chow – Macquarie Capital

Do you expect to close the deal before the end of the current quarter?

Jeff Morris

Yes, the contract we have, since you can see the contract those got approved requires closing by June 1st. So we get this done before June 1st.

Chi Chow – Macquarie Capital

Okay, great. Do you have any plans for the hydro treating capacity at the Bakersfield plant.

Jeff Morris

We're going to use part of it to spin our configuration. Chi, one of the ways in which we can get full conversion off of our hydrocracker is by pretreating the gas oil through one of the hydrotreaters. So that allows us to inject enough hydrogen so that we can run the plan with no bottoms. That was part of our overall consideration and main plan. So we will take one of the hydrotreaters, the highest pressure hydrotreater and run gas oil through it first, pretreat, then put it through the high pressure hydrocrackers.

So those will be the two primary units. We'll also operate reformer to produce hydrogen. We will operate the hydrogen plant that is there to high produce hydrogen and we will operate the sulfur plants and so the maine treaters and things of that sort that we need to handle the sulfur that comes off. So the primary operating units will be the hydrotreater, the hydrocracker, the reformer and the LPG recovery facilities.

Chi Chow – Macquarie Capital

Okay, great, thanks for that. On Krotz Springs, you had that plant down for quite a while. Can you talk about the maintenance or the project work you completed when that plant was down and secondly, what can we expect for operating costs at that plant going forward?

Jeff Morris

Okay. Well, obviously since it was down, we took advantage of that time to look at the plant in good shape. We completed the cat cracker turnaround. As we discussed earlier, it's been six years. So we went through that unit completely and it's in good order, ready to run. Subsequently we did some of our smaller upgrade projects throughout the plant and so the plant is basically in and that is in good condition is it is going be the – it didn't have any major upgrade projects that we had in our budget.

Our next significant investment at the plant is – we have set two investments, petroleum making related this year and reprogress the engineering and all of that and have the permits in place when we're doing the construction here beginning I think late July, early August is when we'll start the construction on that facility. So the plant, while it's been down has been managed as you would under natural gas atmospheres and big equipment has been slow rolling and all other things that you normally do in this environment. Now we're as confident as we can be that it will start up smoothly and the equipment ought to be in much better condition even than when we shut it down.

For me, my comfort's right now is that I believe the equipment for the Company as a whole is probably in the best condition it has ever been. Big Spring is probably in the best condition it has been in years and years and years. Krotz Springs is in very, very good condition. As far as your OpEx question, the plan for Krotz Springs has OpEx in the 350 range. It might be a little lower than that with current natural gas price. It might actually get down to 320 but since it's a relatively simple plant, its cost is relatively low.

The advantages that we view Krotz Springs as well it kind of feels actually moronic, but we think the low complexity may actually longer term be an advantage for the plant. It is an unusual plant because it has a residual [ph] cat cracker. So, we get high yields for low complexity, and with that low complexity, we also get low OpEx. So, we address longer termed price approved which we intent to do it really are and advantageous facility.

Chi Chow – Macquarie Capital

Okay. Thanks. And then over at Big Spring, you talked about the equipment being in great shape, how is the plant operating now, and are you achieving the same yields off the cat cracker now versus before the accident?

Jeff Morris

The cat crackers yields are good. The plant right now is ramping up. We are probably in the mid-40s right now going up to 50s and 60s as the month ends.

Chi Chow – Macquarie Capital

Do you still have an issue with the oil payments [ph] or the SEC?

Jeff Morris

No. The Appalachian unit is running as planned. We are running all the old for instance the Appalachian unit as we always have. We are not out buying Octane as we were early in the year, we are back to selling LPGs and all of those things are back to normal.

Chi Chow – Macquarie Capital

Okay. Great. Final question, what do you expect for CapEx for 2010?

Jeff Morris

Our budget was $71 million. We have under spent in the first quarter by a few million, and we have been conservative, the vast majority, that $71 million was sustained capital. We had one profit improvement which was an expansion of our ground tire rubber faculties at Big Spring. We went ahead and completed that in the first quarter, that's within the money we have already spent. We haven't officially lowered our number but I would expect that we would spend less in the $71 million maybe in the $60 million range something like that.

Chi Chow – Macquarie Capital

Okay. Thanks Jeff.

Operator

And our next question does come from the line of Ann. Please go ahead.

Ann Kohler – Caris & Company

Good morning. Kind of falling on the capital budget question, given the plans that you Bakersfield, what would be the incremental capital and is that included in your capital budget?

Jeff Morris

It is not in the base capital budget. We didn't have the Bakersfield sold in our base plant. The incremental capital to get the plant up and running, is two pieces, there was a turn around which Flying J did not complete, that would have to be completed, that's in the $9 million to $10 million range, and then to reconfigure the plant so we can charge it with gas oil rather than charging directly with crude oil is another $10 million or so. So we're expecting around $20 million in investment to get the plant up and running.

Ann Kohler – Caris & Company

Great. And then what is the cost of the MSAT2 project at Krotz?

Jeff Morris

7.5 million for the remainder of the year.

Ann Kohler – Caris & Company

Great. Thank you.

Jeff Morris

You're welcome.

Operator

(Operator Instructions). And our next question does come from the line of Evan Templeton with Jefferies and Company. Please go ahead.

Evan Templeton – Jefferies and Company

Hi. Thanks. Just actually a follow-up on the MSAT2 question, would you have to take any of the (inaudible) facility down in order to, to implement those, that project?

Jeff Morris

No, it is ties were made while we were down and just need to, it's a reference [ph] expect just one column, rather the investment is relatively low, and corrected, I didn't start it up.

Evan Templeton – Jefferies and Company

Perfect. And then, just a question maybe you can help me just kind of understand the timing of restart just from an operational standpoint, how long does that take? I mean is that a couple of days to get it back.

Jeff Morris

It is a multiple day process. We have all planned up and going and people are – we are doing right now the basics of pressuring up and inventorying and circulating and doing all of those types of things that you do in advance.

So, there's probably a week's or more worth of work getting the plant ready to introduce oil to it and we have begun those processes and then you introduce the oil and it takes another week or so from a cold start to get all of the equipment up and running and heated up and hot, and generating yields, and then, once you get it up to that point you crank up full rates. That's another few days. So, it doesn't take a real long time, but you want to be cautious in your preparation, that's what we are doing.

Evan Templeton – Jefferies and Company

That's great. That's helpful in understanding the time frame. And then I guess just the last question, can you give us maybe just cash maybe just operating expenses, you did incur at Krotz or do we need to hold out for queue on that?

Jeff Morris

Well as you can see the fixed run rate at Krotz Springs is around 5 million a month.

Evan Templeton – Jefferies and Company

Okay. And would you happen to have cash balance again in the quarter at Krotz?

Jeff Morris

Cash for Krotz specifically?

Shai Even

No. We don't have the cash balance for Krotz.

Jeff Morris

Again I think Evan we have it coming 10-K being probably prepared and sent out for the Krotz facility.

Evan Templeton – Jefferies and Company

Okay. Just one other question, just any implication whatsoever that you see, you know near term or maybe the longer term just regarding the whole BP incident with potential crude coming into the loop or otherwise?

Jeff Morris

Long term, no, I don't know why it would affect loop short term. There's some concerns about shipping delays and things of that sort, I don't know if those will occur or not. But I don't see why the long-term effect I mean you get into this class for argument, how much additional drilling is going to be allowed in the Gulf we drill less in Gulf we will need loop more, we go back to normal levels we will need less. So, I think loop is a valuable asset either way and I really don't see it being significantly affected long term or short term maybe something might happen. But I have not heard any of the crude suppliers expressing worry in Louisiana or crude in the St. James. We can – rescheduling crude and we don't – I am being provided any concerns.

Evan Templeton – Jefferies and Company

That's great. Thank you.

Operator

(Operator Instructions). And management I am showing no further questions I would like to turn it back for closing comments you may have.

Jeff Morris

Well, I'd like to thank you all again as always for your interest and just to reinforce how optimistic I am looking forward it has been a rough few years. There's no question about that, starting with the incident at Big Spring. I am really confident in our strategy, and I believe we are seeing the fruits of that especially the asphalt side are really doing well for us. I think that was a good strategy and I believed Bakersfield will help us address the issues at Paramount and I am continuing to feel more and more comfortable with our strategy. We are focusing on distillate. Distillate curves are certainly stronger today than they are in gasoline. So, with that I look toward to speaking to you next quarter.

Operator

Thank you. Ladies and gentlemen, this does conclude the Alon USA's first quarter 2010 earnings conference call. If you would like to listen to a replay of this conference, you may do so by dialing either 303-590-3030 or 1-800-406-7325. You will need to enter the access code of 428-0015. Those telephone numbers once again are 303-590-3030 or 1-800-406-7325, with the access code of 428-0015. We do thank you for your participation on today's call. You may now disconnect your lines at this time.

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Source: Alon USA Energy, Inc. Q1 2010 Earnings Call Transcript
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