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Alon USA Energy (NYSE:ALJ)

Q3 2012 Earnings Call

November 07, 2012 9:00 am ET

Executives

Amir Barash - Vice President of Investors Relations

Paul Eisman - Chief Executive Officer

Shai Even - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

Analysts

Jeffrey A. Dietert - Simmons & Company International, Research Division

Evan Calio - Morgan Stanley, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Chi Chow - Macquarie Research

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Alon USA's Third Quarter Earnings Conference Call [Operator Instructions] Following the presentation, the conference will be opened for questions. [Operator Instructions] This conference is being recorded today, Wednesday, November 7, 2012. At this time, I'd like to turn the conference over to Amir Barash, Vice President, Investor Relations. Please go ahead, sir.

Amir Barash

Thank you, Vince. Good morning, everyone, and welcome to Alon USA's Third Quarter 2012 Earnings Conference Call. With me are Paul Eisman, President and CEO; Shai Even, Chief Financial Officer; along with other members of our senior management team.

You should have received by now our earnings release. But in case you didn't, you can obtain a copy from our website, alonusa.com, under the Investor Relations section.

Before I turn the call over to Paul, please be aware that information reported on this call speaks only as of today, November 7, 2012, 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 on management's current expectation 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 risk and uncertainties include the risk factors disclosed by the company from time to time in its filing with the SEC. Furthermore, as we start this call, please also refer to the statements regarding forward-looking statements incorporated in our news release. And please note that the contents of our call are covered by those statements.

With that, I will turn the call over to Paul.

Paul Eisman

Thank you, Amir, and good morning, everyone. We're pleased with our third quarter results. As you've seen in our earnings release, we earned $0.76 per basic share during the quarter and $0.84 per basic share, excluding special items. This compares to $0.51 and $0.70 per share, respectively, for the same period last year. On a fully diluted basis, we earned $0.69 per share and $0.76 per share, excluding special items. Adjusted EBITDA in the quarter was in excess of $134 million, a 19% increase over the same period last year. We generated over $100 million of cash from operations during the quarter and did so despite results that were negatively impacted by $39 million of hedging losses during the period.

Before I get into the details of our operations in the quarter, I want to highlight several significant developments related to our capitalization and the strengthening of our balance sheet. First of all, I'm most pleased with the progress we are making reducing our debt. In the third quarter, we reduced total debt by over $75 million, putting our total debt reduction for the year at $251 million. Secondly, we have launched syndication of a $450 million of new term debt and expect funding within a week. Proceeds will be used to retire existing debt of $422 million due in August of 2013. Finally, we recently announced the formation of Alon USA Partners, LP, consisting of our Big Spring refinery and associated wholesale marketing assets, and filed the registration statement to take this entity public. It is important to note that proceeds from the offering will be used to accelerate the debt reduction of the company. All of these actions strengthen our balance sheet and by doing so, strengthen our company.

Now let's move on to a discussion of our third quarter results. Our West Texas refining and marketing system continues to operate well and take advantage of opportunities provided to us in the market. Refining margins were excellent, and WTI discounts continue to support the profitability of the refinery. The total throughput of our Big Spring refinery in the second quarter was just short of 70,000 barrels per day. Our capture rate of industry cracks continues to be strong, and we have been able to take advantage of the low price of Midland WTI to further improve our margins. The only negative in the market in the quarter was LPG pricing. In the third quarter, the price that we received for all of our LPG products at Big Spring was only 61% of WTI, which is at an historic low. This compares to 110% for the same quarter last year. Low LPG prices are negatively impacting the results at all of our refineries.

Cash operating expenses during the quarter were good at $3.92 per barrel, which compares to $4.68 per barrel in the same quarter last year. In our wholesale marketing business, we exceeded 100 million gallons of branded fuel sold during the quarter for the first time in our history. Fuel sales were up 6% versus the same quarter last year. However, we did see pressure on wholesale fuel margins and reported a negative $0.025-per-gallon margin during the quarter.

During the quarter, we completed conversion from the legacy FINA brand to our new Alon Brand. Our people did a very good job getting this done quickly and at a reasonable cost. The market response has been excellent, as demonstrated by record fuel sales in the period.

In our retail business, fuel sales were up 8% over the same period last year. Fuel margins fell during the quarter to $0.145 per gallon from $0.187 per gallon in the prior quarter. Merchandise sales were up 3% versus the same quarter last year, with a merchandise margin at 32%. This business continues to deliver strong results.

At Krotz Springs, we generated the best financial results since we purchased the refinery in 2008. Throughput at the refinery was the highest that we've seen since the first quarter of 2011 at nearly 70,000 barrels per day. This was achieved despite the operational impact during the quarter of Hurricane Isaac. Our people did a tremendous job preparing for -- the refinery for this event and operating through the storm. It was necessary to operate reduced rates for a period during and after the storm primarily because of the storm's impact on Gulf of Mexico crude oil production and the terminal -- and terminal and pipeline facilities.

We averaged over 23,000 barrels per day at Midland-priced WTI during the quarter, up from 17,000 barrels per day in the second quarter. We expect this to increase in the fourth quarter to about 28,000 barrels per day, with 30,000 barrels per day targeted starting in December as we have exercised contractual rights to expand its pipeline capacity.

Cash operating expenses were under control at $3.76 per barrel as compared to $3.83 per barrel in the second quarter and $3.61 in the same quarter last year.

In California, our financial results during the quarter were disappointing. There were several factors contributing to this, but the largest one continues to be the difficulties associated with being an asphalt refiner on the West Coast. The combination of very low demand for asphalt along with low asphalt prices driven by mid-continent Refiners that have a crude cost advantage makes it difficult to operate profitably with high West Coast crude prices. Given these results in the end of the asphalt season, we are electing to temporarily suspend refining operations on the West Coast while we reconfigure the Bakersfield refinery to receive and operate on lighter mid-continent crude oils. Paramount was shut down in late October, and Bakersfield is currently in the process of shutting down.

We are working on a project to bring light mid-continent crude oils to the West Coast. There are 3 drivers for this project. First, we feel we can deliver higher-quality crude oil to the West Coast at a price that is competitive with other crude oils available in the region. Secondly, the mid-continent crude oils are lighter than our West Coast alternatives and will produce less asphalt. This improves our refining economics and allows us to run more crude in any given asphalt demand scenario. Finally, by running crude at Bakersfield, we can significantly lower our logistical costs on the West Coast. We've submitted our environmental permit applications to move this project forward. Longer term, we expect to replace rail barrels with increasing local shale oil production from the large Monterey field of Central California.

Our Asphalt Marketing business was also hit by weak demand during the quarter. Versus the same period last year, asphalt sales were off nearly 15%. Margins and operating costs were very close to what we experienced in the same quarter last year. However, for the year, we see improvement in this business. Year-to-date margins improved by more than $30 per ton over the same period last year, and we've reduced our operating expenses by $6 million. This allowed us to generate a small profit in the business through the first 9 months as compared to a loss for the same period in 2011. Our expectation for this business points to continued incremental improvement in the future as an improving economy provides funds for a significant pent-up demand for asphalt. We like our asset base in this business and the technological advantage that we have in the production of premium asphalt grades.

Looking forward to the fourth quarter, we're getting off to a good start. Margins have been very good thus far in the quarter, and we expect to process 71,000 barrels per day at Big Spring, 74,000 barrels per day at Krotz Springs during the quarter. As mentioned earlier in the call, we are shutting down our California refining operations with the end of the asphalt season. Forward pricing curves driven by strong pricing for Brent curve -- Brent crude oil versus both WTI and LLS point to continued strong margins for WTI-based crude oils and to reasonable margins for LLS-priced crude oil.

In every quarterly call this year, I've emphasized that our focus is operating well, generating cash and using this cash to reduce our debt. We've been very successful meeting this goal and have frankly exceeded our expectations. This will continue to be our focus.

With that, we're glad to answer any questions that you might have.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from the line of Jeff Dietert with Simmons & Company.

Jeffrey A. Dietert - Simmons & Company International, Research Division

You talked about evaluating alternatives for your California operations. And in some cases, when we read that, that's code for selling the asset, but it seems like your focus is more on completing the rail and then optimizing lighter crudes through your system. Am I interpreting that correctly?

Paul Eisman

Yes.

Jeffrey A. Dietert - Simmons & Company International, Research Division

And if you can share a little bit about what types of alternatives you're considering.

Paul Eisman

Yes, our focus really has been trying to find an operating mode out there that generates profitability for the assets. We feel like we've got good assets out in California. We -- but we're hindered by the issues around asphalt. And so moving towards a lighter crude, which allows -- proves the return per barrel of crude that we run, but also allowed us to run more crude oil in an asphalt-constrained environment seems to make sense. We've looked at various alternatives to bring mid-continent crude out. We're focused on light oil again to reduce the asphalt production. And so the issue is really how we do it and what the economics of those projects are, and that's what we're working through right now. Our preliminary results from the study that we've done thus far are positive, and we think there's potential to have an operation out there that provides a positive result. I mean, you think about it, Bakersfield in this mode can be somewhere between a 50,000- and 70,000-barrel-per-day refinery with a hydrocracker, and I don't see that there's any reason why you can't make that work.

Jeffrey A. Dietert - Simmons & Company International, Research Division

Yes. And during the period that operations are suspended in your California refining segment, is there a monthly or a quarterly cost that we should think about during this temporary suspension?

Paul Eisman

Yes. I mean, on an annualized basis, our estimate is somewhere in the $21 million to $25 million range.

Jeffrey A. Dietert - Simmons & Company International, Research Division

Okay. And then for -- how is your asphalt segment influenced by the suspension of the California operations? How should we think about sales volumes and profitability in the asphalt segment during the suspension?

Paul Eisman

Yes, basically, what we're doing in the asphalt segment is moving from one where we produce internally to one where we buy externally. I mean, the way you make money in the asphalt business is, out of season, going out and buying asphalt at lower prices, there's a big seasonality impact on pricing for asphalt. If you've got logistical assets, where you can go get the asphalt, deliver it, if you've got tankage, you have place to storage, you can go buy the asphalt, put it in tankage, and then through the -- sell it, number one, in a higher market season, during the asphalt season; but secondly, we get additional value added because we make the premium grade of asphalt. So we see still that even without the production of asphalt on the West Coast, that our asphalt business we expect to be profitable.

Jeffrey A. Dietert - Simmons & Company International, Research Division

And probably lower volumes but not materially so?

Paul Eisman

Yes, that's right. I think that's right.

Operator

Our next question comes from the line of Evan Calio with Morgan Stanley.

Evan Calio - Morgan Stanley, Research Division

Just a follow-up, first, on California. So you're not running until rail barrels are delivered or lightly running until rail barrels will be delivered via rail. I mean what is your expected time frame there? What Bakken discount do you -- would you expect to need to make that work? And maybe just kind of where are you in either the railcar queue or you mentioned permitting, I presume that's for transloading facility, maybe you could give us some more color there, so we can understand the time frame, please?

Paul Eisman

Yes, the permitting issue, and that's really what drives a lot of this, is trying to get through the permitting process. And we're looking at alternatives to reduce or compress the time required to get the necessary permits. But the longest permits that might be required can take up to a year to get. Of course, we've been in that queue for a few months, so we think that the permit process, at this point is less than a year away. And then the construction time, and that is for the transloading or the rail facilities, as you described, and so the construction period is somewhere in the range of 3 to 5 months, I think, to construct. So we're probably -- what we're thinking about is that the earliest we could possibly do this is sometime in the fourth quarter of 2013, and that's what we're shooting for. Now as I mentioned, we're looking at alternatives to try to compress the permitting process, and we're in the middle of evaluating that, that could potentially speed this up. But there's a lot of uncertainty related to that at this point, but we are working steadfast [ph].

Evan Calio - Morgan Stanley, Research Division

I mean, are alternatives some of these proposed pipeline solutions? Is that -- was that what you mean when you say alternatives?

Paul Eisman

No, because pipeline solutions are likely take a lot longer, and so we don't see that. We just -- the permit process from a different perspective is what I'm talking about, a different kind of permit. And so we think there's opportunities possibly to do that.

Evan Calio - Morgan Stanley, Research Division

I have a follow-up, if I could. I know you guys have filed the fifth amendment to your refining variable-pay MLP, Alon Partners, I think it was today or yesterday. Just a few questions. To the extent that you can answer that, I mean should we assume that, that is a 4Q event, or do you have any kind of target time frame there? And then -- and secondly, more generally, I mean, how do we think about the suitability of the rest of your refining portfolio for that structure? And specifically, are there any debt restrictions limiting your ability to move Krotz Springs at some point into that vehicle?

Paul Eisman

Yes, first of all, and I'll let Shai talk about some of this too, but we generally can't really today talk about -- very much about the MLP and have directed our people -- directed people that have questions to the S-1, and we'll do that here too. We'll mention that -- as I mentioned in the call, that the intention is to use proceeds to reduce debt, and that's really the focus of the company. In terms of the rest of the company, we think that it's positive, has no -- does not create a problem within the rest of the company's structure, well, to operate in this mode. In terms of drop-down opportunities, I mean, we're really not at the point to evaluate those kind of things. We'd like to get this done. And in the future, depending on what happens and depending on the market, there's any number of things you can do. One of the advantages for the parent company in this is it provides a lower cost of capital and another currency to grow. And so we think that's one of the advantages to the parent to doing the MLP, and that's basically one of the reasons we're doing it.

Evan Calio - Morgan Stanley, Research Division

Yes, you mentioned the attempt to de-lever. Can you provide some guidance where -- what you're targeting there on any kind of metric, debt-to-cap or otherwise, and I'll leave it there.

Shai Even

Yes, our intent is actually to reduce the debt with the potential proceeds from the potential IPO. Our intent is to continue to use cash from operations to reduce debt. And based on our projections, we'll be in a -- we'll reduce -- we'll significantly reduce debt by the end of 2013. But we can't really give, because of the IPO, we can't really give specific targets of debt for year-end.

Operator

Our next question comes from the line of Paul Cheng with Barclays Capital.

Paul Y. Cheng - Barclays Capital, Research Division

Paul, I just -- sorry to ask you, back on California again. Just wanted to make sure that I understand what is the game plan here. So you're saying that you may not get -- the earliest that you get the permit is by the fourth quarter. So does that mean that from now until then, even when the asphalt season come back, California will remain shut down? Or that you actually will say sometime in the second quarter, like this year, as the asphalt season come back, you will restart the facility? How should we look at it?

Paul Eisman

Yes, our plan today is to keep it shut down through the asphalt season until we get a supply of crude oil that generates positive results for the operations out there. Now as I mentioned in an earlier question, we're looking at alternatives that could possibly speed that up a little bit. But that -- we just don't know if those are going to work, but we're looking at all that. In terms of the asphalt season, also as I mentioned earlier, the way we plan to supply our asphalt business is through the purchase of third-party asphalt.

Paul Y. Cheng - Barclays Capital, Research Division

Sure. So that's -- the plan is that you're actually going to shut down until you actually get an alternative way of getting some cheaper crude and lighter crude into the operation?

Paul Eisman

That's correct. And I'll mention that we -- people talk about cheaper crude. And when you look at the differentials and the cost to transport, depending on the market, it may be cheaper at times, and certainly, we think it's going to be competitive. But a lot -- the big driver of the economics are 2 other things: number one is less production of asphalt in any given market because we're an asphalt producer; and then secondly, the ability to run more barrels because you produce less asphalt per barrel crude. And in an asphalt-constrained market, we're somewhat constrained how much crude we can run. So the economics are really driven by improved refining economics, not by inexpensive crude, although that can contribute.

Paul Y. Cheng - Barclays Capital, Research Division

And, Paul, let's assume that tomorrow, you get all the permit and that the Midland crude actually start flowing into the operation, what -- or how is the operation at that point will run at? Are we just running the Bakersfield or that Paramount will also be run and you'll still be shipping between the 2 facilities? And what kind of yield that we may be talking about?

Paul Eisman

No, we would expect to run the Bakersfield, run crude at Bakersfield. And I mentioned in the comments that one of the advantages of this operating mode is the reduce of logistical costs. We've got significant costs moving the gas, oil between the 2 facilities, that's eliminated in this mode. We also have logistical costs associated with receiving crude and delivering product at Paramount. Those costs are removed. And so there's a significant cost-reduction component to this approach also.

Paul Y. Cheng - Barclays Capital, Research Division

Sure. And so that means that Paramount will be shut one way or the other permanently?

Paul Eisman

Paramount, we think we've got opportunities in Paramount, and it continues to operate as an asphalt terminal. It's our largest asphalt terminal, and so we'll deliver asphalt to that terminal and make all the high-quality products that we currently make out of that facility. In addition, we think there's opportunities for terminaling – use it as a terminaling facility and some other opportunities that we're looking at also. So we think there's opportunity and value at Paramount but not necessarily to run crude. Now I will tell you that if the economics change, and all of a sudden, asphalt is a premium product and we can go out and buy crude and make money, we could restart Paramount. But that's really not what we're envisioning and what we're planning for thus far.

Paul Y. Cheng - Barclays Capital, Research Division

Are you, say, [indiscernible] hydrogen, nitrogen, and keep it in a potential restart up mode or that you are not doing any of that in Paramount?

Paul Eisman

I'm sorry, I didn't get it.

Paul Y. Cheng - Barclays Capital, Research Division

Paramount, that since that right now at this point, your expectation is that you're not going to run it at all, unless that the economic change dramatically. So you're spending money in keeping the facility in a workable shape or you're not doing it?

Paul Eisman

I mean, we'll put the facility down in a mode that protects the asset, and so that doesn't cost a lot of money, and we'll either put -- sometimes you put gas, and sometimes you use nitrogen. But in any case, we'll put the equipment down in a mode that protects the integrity of the equipment.

Paul Y. Cheng - Barclays Capital, Research Division

Any idea to how much it's costing you a year?

Paul Eisman

To do that?

Paul Y. Cheng - Barclays Capital, Research Division

Yes.

Paul Eisman

It's not material. It's not that much.

Paul Y. Cheng - Barclays Capital, Research Division

So just talking about $1 million or $2 million at most?

Paul Eisman

I'd be surprised if it were that much.

Paul Y. Cheng - Barclays Capital, Research Division

I see. Okay. All right, so that's good. And what are yield that you run at Bakersfield, that Bakersfield will give you, total yields?

Paul Eisman

I -- what it'll be is a hydrocracking refinery. One of the advantages of a hydrocracking refinery in today's world is you take low-priced natural gas, you convert it to hydrogen, you put it in the hydrocracker, you get volumetric gain and you sell more barrels. More barrels come out than you put into it. And our yields for our hydrocracking refinery will be typical, I think, of other hydrocracking refineries, and those are typically pretty good. We like hydrocracking. And our hydrocracker is configured to make primarily diesel, so...

Paul Y. Cheng - Barclays Capital, Research Division

I understand that, but do you have a product yield estimate that you can share?

Paul Eisman

I really -- honestly, I don't have one that I can give you today.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. And do we need to do any write-down on your carrying costs in Paramount? I mean, at the time that when you guys bought several years ago, you paid I think it's about $330 million, so I don't know what is the carrying costs at this point. Are we -- since that you're going to shut down permanently into a terminal, should we assume that you may need to do a write-down on that?

Shai Even

For the first quarter, we examined this issue, and we believe there is no need for an impairment today. We have, as Paul mentioned today, we're not in a position to talk about other alternatives, but we have a few other alternatives that based on our projections, are going to generate cash flows that will exceed the book value of the asset.

Paul Y. Cheng - Barclays Capital, Research Division

Can you tell me, Shai, what is the carrying cost on your book?

Shai Even

The carrying costs for the Paramount facility are approximately $300 million on the book.

Paul Y. Cheng - Barclays Capital, Research Division

And you don't think that you actually need to do a write-down?

Shai Even

Right now, Paul, based on what I just said, based on our internal modeling, we don't believe there is an impairment.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. And just final question. How much is the WTI link that you're running at Krotz Spring now and how much more that you think you could run in 2013?

Paul Eisman

We are running -- how much -- the volume?

Paul Y. Cheng - Barclays Capital, Research Division

Yes.

Paul Eisman

Okay, so we ran -- the number was 23 in the third quarter. We mentioned in the – in our presentation that we expect to run 28. We've exercised contractual rights to run at 30 starting in December. So and that's our plan for most of next year is, obviously, to run at maximum rates of WTI. If from a processing standpoint, we can run more, we're looking at alternatives to increase that further.

Operator

Our next question comes from the line of Chi Chow with Macquarie Capital.

Chi Chow - Macquarie Research

So at Bakersfield, could you give us some more details on the reconfiguration? I mean, that plant used to be a stand-alone operating refinery. I think you guys reconfigured it just to keep the hydrocracking going. And are you restoring it to its former configuration, or are you making some other alterations?

Paul Eisman

Yes, not exactly. We're -- historically, there's a coker there, and we do not -- given that we do sell -- produce and sell asphalt, we don't expect to run the coker. And frankly, one of the issues that the prior owner had with running in a coking mode is what to do with the product out of the coker. And they were short one hydrotreater to treat all those products and basically had to sand the coker gas hole down and blend it into fuel on the West Coast, which was a big negative for that asset. And what we plan to do, and one of the advantages of running these crudes out at Mid-continent and not running the coker is we have enough processing capability to make finished product. And so what we'll do is we'll run the mild hydrocracker as a diesel hydrotreater. We'll run the hydrocracker as a hydrocracker, and we can make car diesel, car gasoline, and really have no unfinished intermediate products that we have to sell into the market. So it's a different configuration running at lower rates, but the key is not running the coker.

Chi Chow - Macquarie Research

Got it. So what's the condition of the crude unit, is that still operational at this point?

Paul Eisman

Well, we'll have to do a turnaround on it. But we've been through the assets, and we understand the condition they're in, and we see no problem with that -- all it takes is a turnaround to get things restarted. Those are good assets. It's a nice crude unit, nice vacuum unit, and don't think there's any big issues with getting it to run.

Chi Chow - Macquarie Research

Okay. And again, just following up on Paul's question, so Bakersfield will be shut down until you can get mid-con crudes supplied into that facility, is that correct?

Paul Eisman

That is correct.

Chi Chow - Macquarie Research

Okay. I guess just higher level, the whole idea with the Bakersfield integration with Paramount was specifically meant to be able to run properly regardless of asphalt fundamentals. I mean, is the problem really just due to the crude pricing and asphalt deterioration of the market or transport cost to Bakersfield? Can you just, at a high level, kind of talk about what hasn't worked there?

Paul Eisman

Yes. I think the biggest issue is the one I talked about in the call, and that is asphalt. To make any operation profitable, you need to be able to run at a high utilization rates. And because of limitations in the asphalt market, we weren't able to do that. So that's the biggest issue, right? But there are other issues and I mentioned there were other issues in my comments. We think there are opportunities to improve the yields. And we're not getting the yields that were anticipated. We think we understand the reasons why, and we're moving to correct those, and that's something that will get done between now and the time we restart. But the biggest issue continues to be asphalt, the under-utilization of our assets. You still have high -- relatively high operating costs. It doesn't matter if you operate 30,000 or 60,000, most of your costs are fixed, and we need to distribute those over more barrels to be profitable. So if we get that done, we'll improve the yields and everything we look at says that we can make this work.

Chi Chow - Macquarie Research

Okay. So on the crude slate, are you running or have you run mostly the California heavy grades, what's gone through Paramount?

Paul Eisman

Yes, we've done that, but there's -- we've also run Bauer crude and Oriente crude to that facility. Those have probably been the crudes we've run more than the heavy California.

Chi Chow - Macquarie Research

Okay. And still running those lighter grades still doesn't work?

Paul Eisman

Were we -- they're not that light. I mean, they're light relative to California heavy, but they're still not -- they're not that light.

Chi Chow - Macquarie Research

Okay, got it. Okay, just one other question on hedging. Have you changed any of your crack spread hedge positions here in the fourth quarter? And I don't believe you had any hedges in 2013. Is that correct?

Shai Even

No, we have hedges for 2013. We have the hedges for the year. For the annual year 2013, we have announced 2013 approximately 16,000 barrels a day of ULSD crack spread; half of that against WTI and half of that against LLS.

Chi Chow - Macquarie Research

And what are the spreads you're hedged at on 2013, Shai?

Shai Even

We have about -- on average for all barrels, we have about $25.

Operator

[Operator Instructions] Our next question is from the line of Roger Read with Wells Fargo.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Think pretty much most of the questions have been covered, but maybe if we could talk a little bit about once you get the offering done on the MLP for Big Springs, you obviously made some progress here on the debt side this quarter, what opportunities are there for spending above and beyond something on the rail side or even maybe pipeline side in Southern California? I mean, what have you not been able to do as a result of balance sheet kind of handcuffs that you would like to do going forward?

Paul Eisman

Well, I think in terms of California, we're focused on this primary project and then building upon that. We think that the crude unit out there, with the kind of crudes we're running, can run up to about 70,000 barrels per day. That will take some incremental investment to get done. It's not a tremendous amount of investment, but there would be some investment. And then as we get into the assets, I don't know, if you go out to Bakersfield, there's an awful lot of equipment, and we think there's additional opportunities, but we're really focused on this one, getting it up and running with the light crudes. And after that, we'll look at opportunities. But we really don't feel like we've been handcuffed by anything.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Well, I guess maybe in the time frame that you acquired Krotz Springs, obviously, progress being made on bringing WTI kind of priced crudes in there, I mean, is there anything to do with that unit in terms of upgrades, expansion, et cetera?

Paul Eisman

No, we've got teams that at each one of our assets, they really look at incremental improvements at their refineries. So we've got one at Big Spring, Krotz Springs and California really focused on trying to find additional opportunities. And that's where the opportunities came at Krotz Springs, not only to run the WTI there, but also we changed a feed nozzle in the FCC, we restarted a vacuum tire, so we could control the quality of the feed going to the FCC. And those projects were relatively minor costs that generated significant returns. I mean, that's what we'd like to do is continuously improve the asset. And so we've institutionalized these teams. And I go and a group of us go to the facilities on a frequent basis, pretty regular basis, to review the results and look at plants. And those are continually incorporated both into our operating and also our capital plans.

Operator

Ladies and gentlemen, that is all the time we have for questions today. At this time, I'd like to turn the conference over to Mr. Eisman for any closing remarks.

Paul Eisman

Well, thank you all very much for your time. We appreciate your interest in the company and look forward to talking to you in about 3 months. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, that does conclude the Alon USA's Third Quarter Earnings Conference Call. I'd like to thank you all very much for your participation. You may now disconnect.

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