Alon USA Partners' (ALDW) CEO Paul Eisman on Q2 2016 Results - Earnings Call Transcript

| About: Alon USA (ALDW)

Alon USA Partners (NYSE:ALDW)

Q2 2016 Earnings Conference Call

July 29, 2016 9:30 a.m. ET

Executives

Paul Eisman – CEO

Shai Even – CFO

Stacey Morris – IR

Analysts

Johannes Van Der Tuin – Credit Suisse

Operator

Greetings and welcome to the Alon USA Partners Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I’d now like to turn the conference over to your host, Miss Stacey Morris. Manager. Thank you. You may begin.

Stacey Morris

Thank you, Matt. Good morning everyone, and welcome to Alon USA Partners second quarter 2016 earnings conference call. With me are Paul Eisman, President and Chief Executive Officer; Shai Even, Chief Financial Officer; along with other members of our senior management team.

During the course of this call, we may make forward-looking statements based on our current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties and our actual results may differ materially. For a discussion of factors that could affect our future financial results and businesses, please refer to the disclosure and risk factors disclosed by the Company from time to time in its filings with the SEC. Furthermore, please also refer to the statement regarding forward-looking statements incorporated in our news release issued yesterday and note that the contents of our conference call today are covered by these statements.

On this call, we’ll discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP in our financial release which is posted on our website. Finally, please be aware that all our statements are made as of today, July 29, 2016 based on information available to us as of today and except as required by law, we assume no obligation to update any such statements.

With that, I’ll turn the call over to Paul.

Paul Eisman

Thank you, Stacey, and good morning everyone. Refining margins in the second quarter continue to be under pressure as a result of relatively high domestic product inventories and higher RINs prices. In addition to the challenging margin environment, our results in the quarter were also negatively impacted by operational issues at Big Spring. As previously discussed in our press release dated June 3, a storm related power failure at Big Spring refinery resulted in damage to one of our flares, which led to an extended outage in our [FCC] and Appalachian units.

Despite these difficulties, we recorded net income of $1.2 million, or $0.02 per unit. As a result, the board of directors declared a cash distribution for the second quarter of 2016 of $0.14 per unit payable on August 25, 2016 based on cash available for distribution of $8.8 million.

The power failure at Big Spring occurred on May 30 during a severe thunderstorm when both external electrical feeders supplying the refinery experienced power dips from lightning strikes. Our operators were able to bring the refinery down safely, but upon inspection we had noted that our south side flare, which serves several process units, including the [FCC} and the Appalachian unit, failed during the event. This required extensive repairs and resulted in approximately two weeks of downtime for the affected units.

As a result, our total throughput at the refinery averaged 71,200 barrels per day for the quarter. Our estimate of the lost opportunity in increased costs resulting from the power failure and repairs, hit $10 million which negatively impacted our second quarter distribution by $0.16 per unit. This includes approximately $1.2 million in repair costs, with the remainder resulting from both lost throughput and lower gross margin. The refinery operating margin for the quarter was $8.53 per barrel, which was negatively impacted by approximately $1.30 per barrel due to the unplanned outage. Other than these events, the refinery ran relatively well during the quarter.

As I mentioned, operating costs were impacted by the [indiscernible]. Despite this, we reported fairly good direct operating expense of $3.59 on a per barrel basis for the quarter. Despite the downtime from the power outage, our integrated wholesale marketing volumes increased by approximately 0.5% from the same quarter last year.

The total cost of meeting our RINs obligation in the second quarter was $2.1 million and we project our RINs cost for the entire year will be approximately $10 million based on RINs pricing as of June 30. We have the capability to offset much of our RINs obligation at Big Spring and are working to further reduce these costs.

Looking forward to the third quarter, crack spreads are similar to what we experienced in the second quarter. We will take the Big Spring reformer down for a catalyst regeneration during the third quarter and we’ll operate at reduced rates during this 12 day period. We do not expect a meaningful change to our full year capital budget due to the catalyst regeneration. Our total capital expenditure for the plant for the year is $30 million. Aside from the plant work on the reformer, we expect to operate at capacity and average 69,000 barrels per day at total throughput during the third quarter and 70,000 barrels per day for the entire year. Based on current forward crack spreads, it is our expectation that with operations consistent with our plan, we should generate sufficient cash available for distribution during the third quarter of 2016.

With that, we’re glad to take your questions.

Question-and-Answer Session

Operator

Thank you. Now we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Ed Westlake from Credit Suisse. Please go ahead.

Johannes Van Der Tuin

Hi, it’s actually Johannes here. Thanks for taking my call. Quick question on the RINs obligation. You mentioned that it was $2.1 million for the quarter and $10 million for the entire year. Could you go into a little bit more detail on how RINs obligations are allocated between ALDW and ALJ?

Paul Eisman

ALDW consists of the Big Spring refinery and the wholesale marketing associated with that. The RINs that are -- the obligation that’s generated at Big Spring refinery represents a total obligation for ALDW and the sale of product out of wholesale that’s associated with Big Spring to the extent that we blend either ethanol or biodiesel, that’s how we generate the RINs out of ALDW.

Johannes Van Der Tuin

Okay. And so the remaining RINs obligation for ALJ as a whole would then be coming from across? And I know that’s a little bit off topic but just fully understand the distinction there.

Paul Eisman

And that’s correct and we’ll be talking about that in that call.

Johannes Van Der Tuin

Thank you very much. Also you said $30 million CapEx for the year. Is that something that would be rolled forward into 2017 at this point? Have you given a thought into future CapEx given the overall refining market where the crack has been?

Paul Eisman

We’re in the middle or we’re actually kicking off our planning process. We plan that we do that this time of year. So I don’t really have a number. I would tell you directionally that in times like these, we do all we can to conserve cash, to generate cash and just keep our -- frankly, keep our powder dry. So I don’t know what the numbers will be, but we’ll look at capital pretty hard.

Johannes Van Der Tuin

Is there a lower bounce to that just from how you know the refinery runs if you really wanted to do the minimum just for a year to again keep your powder dry?

Paul Eisman

I think to some degree it’s event related. You have some regulatory requirements. You might have particularly regulatory environments that increase costs a certain year. Typically we’ll say that our sustaining cost in the refinery is …

Shai Even

Big Spring is around $25 million.

Paul Eisman

Yeah, $25 million minimum sustaining cost.

Johannes Van Der Tuin

And then just a final question. The asphalt segment did fairly well. Volumes were up significantly, but margins were also down at the same time on a quarter over quarter basis or at least relative to our expectations. Sorry, it wasn’t quarter over quarter basis, but relative to our expectations it wasn’t up as much as we thought it would be internally here. Is that just because of the crude market coming up and it’s affecting the actual margin or is there something going on there?

Paul Eisman

I’m going to have to ask you to refer that question to the ALJ. Our asphalt marketing business sits in ALJ. So it’s a good question, and perhaps we can talk about it on the next call.

Johannes Van Der Tuin

Okay, I’ll let you go then. Thank you very much.

Operator

I’d now like to turn the floor back over to management for any closing comments.

Paul Eisman

Okay. Thanks everybody for your time, and we look forward to talking to you next quarter. Thank you.

Operator

This does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.

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