Alon Emerges

Alon USA At a Glance:

Alon USA is a Dallas-based independent refiner and marketer majority owned by Alon Israel Oil Co. Ltd. It was formed in 2000 when Alon Israel purchased the downstream operations of Atofina Petrochemical.

Today, Alon owns and operates the Fina fuel brand and Southwest Convenience Stores LLC (SCS), the largest 7-Eleven licensee in the U.S. with more than 300 stores in West Texas and New Mexico. The company also owns four crude oil refineries in Texas, California, Louisiana and Oregon, with an aggregate throughput capacity of approximately 250,000 barrels per day. Alon supplies an additional 800 Fina-branded stations from the Big Spring facility.

Headquarters: Dallas Refineries: Krotz Springs, La.
(83,100 bpd); Big Spring, Texas
Brands: 7-Eleven, Fina (70,000 bpd); Paramount, Ore.
(54,000 bpd); and Long Beach,
Store Count: 308 Calif. (34,000 bpd).

On Feb. 17, Jeff Morris, president and CEO of Alon USA had your typical executive concerns—keeping the troops happy, exploring potential acquisitions and finding the money to finance them. That was one day prior to the fateful day that would change Alon’s history forever.

On Feb. 18, Morris got the call refiners fear most. There was an explosion at the Big Spring plant in Texas, and it was bad.

"The call was simply one of the most traumatic experiences of my life," Morris said, with the pain and discomfort still very much audible in his voice. "It was really, really hard for me to comprehend what had happened for a number of weeks, but we were blessed in many ways because things could have been much worse."

Miraculously, no one died and the half-dozen or so injuries weren’t considered life-threatening. But for Morris, it was personal. "I reacted the way you do to a major loss in your life," he said. "It took me a fair amount of time to accept that we had an event of this size and that people were hurt. There was some comfort in our good fortune that there was no loss of life and that God was looking over our people to help us through a difficult time."

The fire in the plant’s propylene unit was a harsh reminder of the dangers refineries pose in the effort to get fuel to thousands of convenience stores and gas stations everyday. But the event at Big Spring, tragic as it was, also put the spotlight on the outstanding training and procedures in place at Big Spring, which were developed for just such a catastrophe. Turns out the training of the refinery staff, quick response and outstanding leadership minimized what could have been a disaster for the ages.

"One of the difficult facts for me to accept is that the people at Big Spring have never been better trained, the equipment is as good as it ever was and our procedures have never been better," Morris said. "The Big Spring refinery is one of the safest in the country. It is a well-operated, highly rated, very reliable refinery. To have something of this magnitude happen at a plant of this quality is a reminder that even with good procedures, good equipment and outstanding people, you can reduce the probability of a catastrophic event from occurring, but you can’t reduce the probability to zero.

"There is always that chance something can go wrong, so you have to be prepared and willing to accept that risk when you’re in this business."

Spring Cleaning
The Big Spring plant, built in 1929, is relatively small for a refinery. Previous owners considered shutting it down for financial reasons in the 1990s, but Morris challenged workers to make the plant run so well that the owners wouldn’t dare.

Employees rewrote safety procedures, and Morris asked each worker to take personal responsibility for safe operations. He also switched the wage model for the plant. Wages are now based on the level of training a worker achieves, not the job the worker does.

This system gives Alon a well-trained, flexible workforce. And it helped the Big Spring refinery become one of the most efficient in the nation, according to industry group Solomon Associates.

While analysts estimated it would take upwards of 15 months to repair the facility, Alon was preparing at presstime to bring the plant back online in September, just seven months after the accident, which again had Morris extolling the professionalism and dedication of Alon’s crew.

"Completing the infrastructure repairs in such a timely manner has been quite miraculous when you recognize the size of the event," Morris said. "That’s a big testament to the people at Big Spring and the support we have received from our vendors and suppliers.

During a three-month span from June to August, there were more than 1,500 people on site at Big Spring working to get the facility back up to speed. The support from vendors and suppliers that Morris is speaking of included some of the oil company’s closest competitors. For example, there is a scarcity of equipment that refiners can use to perform plant maintenance and repairs. Rather than purchase this equipment, it is leased and shared by the oil companies based on a rotating schedule. Other refiners gave up their turn in line to allow Alon to have the equipment, which helped keep repairs on track.

"I’m very grateful for the generosity so many people showed us during what was a difficult time," Morris said. "It made all difference in getting the facility back online."

Effects of Big Spring
While the refinery is back in production, the huge financial hit the company took can’t be overlooked. The refinery’s insurance policy has a $2 million deductible, but the biggest financial hit was the interruption of business. The company had to start buying fuel to supply refinery customers and preventing shortages.

To understand Alon’s marketing system is to understand just how pivotal Big Spring is to the company. Alon owns and operates the Fina fuel brand and Southwest Convenience Stores LLC (SCS), the largest 7-Eleven licensee in the U.S. with more than 300 stores in west Texas and New Mexico.

The company owns a total of four refineries in Texas, California, Louisiana and Oregon, with an aggregate throughput capacity of approximately 250,000 barrels per day. However, Alon supplies 800 independent Fina-branded stations directly from the Big Spring facility, which produces 70,000 barrels per day

Growing Retail Portfolio
Big Spring is also crucial to Alon’s $70-million acquisition of the Skinny’s convenience store chain in 2007. The chain recently completed brand conversions at 80 of the 102 stores it acquired from Skinny’s to the 7-Eleven brand. All are supplied by Big Spring.

The Skinny’s deal was a natural fit for Alon since it was already one of the largest Fina-branded marketers in its network. Joe Davis, the former president and CEO of Skinny’s, was a Fina distributor for 25 years.

"We knew Joe and his two boys for a long, long time so when they were looking to sell the family business the first call was to us," Morris said. "It was a perfect fit from the markets the stores served to the values our two companies shared. The integration of operations was flawless."

Like with Skinny’s, Alon and 7-Eleven have the closest of bonds, which was nearly tested over the Skinny’s deal. Alon has the exclusive rights to 7-Eleven in west Texas and New Mexico. The majority of the Skinny’s stores Alon acquired were inside that marketing area. All of those were rebranded. However, the remaining 22 stores are in the Waco, Texas area, which is outside Alon’s licensing area. The company has the right to rebrand them, but it’s not in perpetuity for that market, meaning 7-Eleven has some options to buy them back.

The main issue for 7-Eleven: Rebranding the 22 Skinny’s units could have put them in competition with other 7-Eleven franchisees. As a result, the units will not fly the 7-Eleven banner, but will continue to sell Fina fuel. "7-Eleven worked very closely with us to resolve this issue and protect their franchisees," Morris said. "They acted very honorably and will continue to be an important partner for us going forward."

Moving East
As if the Big Spring incident and the Skinny’s integration weren’t enough to deal with, Alon was smack in the middle of a key transitional period at the time of the fire. It was engaged in a high-level bidding sweepstakes to acquire Valero’s Krotz Spring refinery in New Orleans, an acquisition that could potentially double or triple the size of the business.

The days immediately following Big Spring will become part of business lore. Rather than sitting back feeling sorry for himself and his company, Morris displayed the focus and determination that has guided Alon to the upper echelon of profitability in the convenience store and petroleum industry.

Alon’s due diligence tour of the Krotz Springs plant was scheduled for Feb. 22, just four days after the Big Spring fire. With Morris and his team overwhelmed with the cleanup efforts at Big Spring, Valero—no stranger to disaster relief after its own recovery efforts following hurricanes Katrina and Rita in 2005—quickly offered to push back the tour until the situation was under control.

Instead of backing off its plan to acquire the refinery, Morris huddled with David Wiessman, executive chairman of parent company Alon Israel. Weissman arrived from Israel by Feb. 20 and was "absolutely adamant that we go forward with completing this transaction despite what occurred at Big Spring," Morris said. "So we sent a team from Big Spring just a few days later to New Orleans to do our due diligence, which led to us completing the deal a few months later. Even faced with the traumatic events at Big Spring, David’s first reaction was to move forward and attack, and that’s just what we did."

The Krotz Springs deal closed in July for $473 million.

Concentrating on the task at hand wasn’t easy, but imperative for the long-term stability of the company. "Staying focused on completing such a large deal at the time was extremely challenging, no question. But this is indicative of the personality of our company," Morris said. "A big part of focus is discipline and that’s one of the forgotten elements on Wall St. that has led to the country’s current financial crisis."

Fiscally Responsible
Financing for the Krotz deal included a $302 million term loan arranged by Credit Suisse. In addition, Bank of America arranged a $400 million revolver facility with an accordion feature of an additional $100 million for ongoing working capital needs. The timing of these loans is what’s so important. The deals were arranged just weeks after the Big Spring fire.

"Over the past few years we have built a strong credibility with the financial community, but we understand that an incident like Big Spring can change the ballgame overnight," Morris said. "The support we received from all of these companies right in the middle of repairs to Big Spring showed a lot of confidence in the people that make up our entire organization."

For example, Morris said, since he began running the company its primary financial measure was cash flow. "We review our financial performance every month by first looking at cash flow, not the earnings statement," he said. "There’s an old adage that earnings is an opinion and cash is a fact. We have lived by this credo from day one."

In fact, Wiessman and Morris share the opinion that a company should be operated with the same discipline and fiscal prudence through good times and bad. "I’ve also learned from David through the years that earnings can be whatever earnings are, but you can’t pay dividends from earnings. They are paid from cash. I can’t fund capital expenditures from earnings, they are paid in cash. That discipline got us through the rebuild of Big Spring and helped us get financing for Krotz Springs."

Over the next few months, Morris and his crew will begin integrating Krotz Springs into its distribution network and will most assuredly seek to acquire a retail network around the plant, the way it has in west Texas and New Mexico with Big Spring. Whether that deal comes sooner or later, 2008 will remain one long year the company will not soon forget.

"It’s been an amazing 12 months for Alon USA," Morris said. "To have to deal with the most traumatic events in the company’s history and end of the year by increasing the size of the business by more than 50% is extraordinary, and that shows the strength and character of all the people in the organization. It’s a pleasure to work with them." CSD


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