CVR Energy Inc (CVI) 2010 Q2 法說會逐字稿

Greetings and welcome to the CVR Energy Second Quarter 2010 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stirling Pack, Vice President of Investor Relations for CVR Energy. Thank you, Mr. Pack. You may begin.

Thank you, Jan. I appreciate that very much. Good afternoon, everyone. We very much appreciate your being here for our call this afternoon. With me this afternoon is Jack Lipinski, our Chief Executive Officer, Ed Morgan, our Chief Financial Officer and Stan Riemann, our Chief Operating Officer. Other officers of the Company are present as well.

Prior to the discussion of our 2010 second quarter results, we are required to make the following Safe Harbor statement. In accordance with federal securities laws, the statements in this earnings call relating to matters that are not historical facts are forward-looking statements based on management's beliefs and assumptions using currently available information and expectations as of this date and are not guarantees of future performance and do involve certain risks and uncertainties including those noted in our filings with the Securities and Exchange Commission.

This presentation also includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures including reconciliation to the most directly comparable GAAP financial measures are included in our second quarter 2010 earnings release which we filed with the SEC yesterday after the close of the market.

With that preliminary said, I'll turn the call over to Jack Lipinski, our Chief Executive Officer. Jack?

Thank you, Stirling, and good morning, all, and thanks for joining us. Our results are available to you in the news release we issued last night. So, today I'd like to add a little color about the release and talk about the special items that affected our results. Ed will then talk in more detail about our financials and after Ed is done, he and I will join Stan Riemann, our Chief Operating Officer in taking your questions.

The highlight of our quarter was our successful high-yield bond transaction. As the second quarter began, we completed two offerings, a first and second lien senior secured notes totaling $500 million. These notes with a blended interest rate of 9.84% give us enhanced flexibility and stability. These notes replaced the original term loans with which we launched our businesses. The expenses for this refinancing are among the several special items impacting the second quarter results.

During the quarter we also completed our ultra-low sulfur gasoline project. With the commissioning of the ULSG, the company has now completed on-time and under budget, the last major project in its five-year capital expansion plan. Also, I want to note that we recently expanded our crude oil intermediation agreement with Vitol Incorporated. The term will now run through December 31, 2012.

This is a valuable intermediate credit intermediation facility which allows us to attractively finance the purchase of our crudes. Last night after the market closed, we reported second quarter net income of $1.2 million or $0.01 per share. These results are not reflective of our actual performance because they're impacted by a number of special items including the negative impact of roughly $15 million in expenses associated with our bond offerings and related financing costs.

In addition, we are a FIFO company; first-in first-out accounting. And as the price of crude and products dropped during the second quarter, we realized a negative impact of $17.5 million. Unfortunately, we had outages on our cat cracker and coker that resulted in additional maintenance expense of $3.4 million, pre-tax, or $0.03 per share. These outages had the effect of reducing our crude throughputs for the quarter by 350,000 barrels and limited blending and processing opportunities as well. You'll recall that I mentioned this during our last earnings call.

Ed will provide more details on these impacts in his remarks. Despite the noise in this quarter's results from the one-time impact and FIFO adjustments, our liquidity is excellent. At the end of the quarter, we had 53.3 million in cash and approximately $34 million of additional cash tied up in excess inventory built to take advantage of the contango crude market. This morning we had $110 million in cash and the equivalent of $28 million of cash in excess inventories and our revolver remains undrawn at $120 million.

As you know we have two diversified and complementary businesses, petroleum and nitrogen fertilizers. As I mentioned in our last quarterly call, we had operational issues with our cat cracker and our coker in April. At that time, as a result of the outages, we anticipated drawing between 108 and 110,000 barrels per day for - of crude to the quarter. Actually we improved on that forecast because in June we increased crude runs to approximately 119,600 barrels a day which by the way is a monthly crude processing record for us. For full quarter we averaged 113,400 barrels a day of crude.

Our ability to achieve these higher crude rates resulted from our prior expansion projects and opportunistic maintenance we performed during the first and second quarters. Margins improved enough that we chose to run crude at the expense of outside feedstocks and blendstocks. As I said in a number of prior calls, we don't run our refineries just for the highest possible crude rate. We run it for the best economic return, in this instance we chose to run the crude.

Now compared to the first quarter, we saw an improvement in cracks. We started the second quarter with a NYMEX 2-1-1 crack at $10.48 and ended the quarter at $9.94. The NYMEX crack averaged $10.95 in April climbed $13.11 in May and June averaged $11.27. What was unusual for the second quarter was that our Group 3 basis remained negative. Our Group 3 basis which is the differential between our realized finished product prices than that of the NYMEX averaged in the negative $0.15 per barrel. Historically, we would have expected this to be a positive number.

In July, the Basis turned positive to the tune of the $1.07 a barrel. Which is a more normal situation for this time of year, today it stands at $0.87 barrel. Of our total production 45.7% was gasoline and 41.6% was distillate. Putting that in other terms as a percentage of the transportation fuels produced we made 52.3% gasoline and 47.7% diesel, probably one of the highest achievable distillate rates in the industry and please keep in mind, that our gasoline production is inflated due to blending.

Contango attrition during the quarter was a roller coaster. The second quarter opened with a contango of $0.49 per barrel and ended at $0.54 per barrel. In between it reached a higher $4.70 a barrel and a low of $0.40. For the quarter overall it averaged a $1.70.

As of yesterday, the contango stood at $0.42 per barrel. We adjusted inventories to take advantage of the contango market and since the end of the quarter, as contango has softened, we've begun to reduce inventory and Hardesty cash. Today we have 350,000 barrels of excess inventory and at market price that's about $28 million of equivalent cash.

An important segment of our petroleum business is crude gathering. During the second quarter, we averaged 31,500 barrels per day. In June that rose to 32,700 barrels per day. Looking back to last year in the second quarter we gathered less than 27,000 barrels per day and we continue to look for ways to expand this business. These fairly priced, locally gathered barrels are important to our refinery economics. Parenthetically we added four terminals on the NuStar and Magellan pipelines in the second quarter as well.

Let me turn to the fertilizers. For the second quarter our plant ran better than the same period last year, with the gasification unit on-stream 92.2% of the time, our ammonia synthesis loop 90.4% of the time and our UAN plant at 89.1% of the time. Had it not been for an outage at our third-party air separation plant, on-stream times would been approximately 6% higher across the board.

In the second quarter, we produced 105,200 tons of ammonia, of that 38,700 tons were available for sale and the remainder was converted into 162,900 tons of UAN, and again, for those of you who are not familiar with it, UAN is urea ammonia nitrate solution.

We carry a fairly substantial book of forward orders and changes in current fertilizer prices take time to roll through our financials. We book sales upon delivery with the prices set at the time the order is taken. As I noted in our call in May, we expect the net-back prices to improve from the first quarter to the second quarter. We did realize $30 per ton higher prices for ammonia sold in the second quarter versus the first quarter and net-back prices for UAN were up $38 from the first to the second quarter. Still, that's far off from the net-back prices realized in the second quarter a year ago when ammonia sold for $351 per ton versus $312 a ton this past quarter. Similarly, UAN went for an average of $249 a ton in the second quarter last year and this year we realized $205 a ton.

With the spring summer planting season complete, we're now taking fill orders rather than spot orders. Last year, our forward book at this time, was in the range of $130 ton per UAN. This year our forward book is roughly $40 per ton higher. Our current fiscal book will carry us through the end of the year and we foresee a continuing positive fertilizer market.

Now let me take a few minutes and talk about the business and what we see coming in the third quarter and second half of the year. In general, we see the economy coming back in our geography, although slowly. We've not been affected as severely as refineries in other areas of the country because we serve the Mid Continent.

Agriculture was not as heavily impacted by the recession. So diesel demand in our Group 3, top-two market has remained fairly stable. We've seen continued distillate demand from rail and truck and at the same time we've seen a general weakness in the gasoline market which we believe will recover slowly as the economy improves.

Agriculture has been one of the least affected segments in our economy by the economic downturn. After strong plantings, and nitrogen fertilizer consumption this past spring, we expect a bumper harvest of corn across the Mid Continent during the fall. We see fertilizer markets stable to improving.

We expect crude runs at our refinery to average about 115,000 barrels per day this quarter and a lot of that depends on margins and the other blending and feedstock opportunities we may have. We anticipate running more heavy Canadian crudes which has come under pressure for a variety of reasons. In the first half of 2010 Canadian heavy grades traded at an average of 85% of WTI value, FOB harvesting.

In July it dropped to 80% and currently September injectors of heavy Canadian grades are trading just below 77% of WTI, further reflecting the declining relative cost of the barrel. In the second quarter we averaged 14,000 barrels a day of heavy Canadian process and today we're processing more than 20,000 barrels a day.

After the major hurricane in the Gulf, we anticipate crack spreads will generally soften over the next quarter as they generally due this time of year. Yesterday the NYMEX 2-1-1 stood at $9.45. Contango was $0.42 and the West Texas Intermediate, West Texas Sour differential was an even $2. What this reflects is the softening of the heavy sour differential, but the sweet/sour differential remains tight. We believe that the actions we've taken to restructure our debt leave us well positioned for the future, with our successful bond offerings and our new covenant-light capital structure they will provide us long-term stability and flexibility to counter any volatility in our market.

In addition, completion of our five-year capital expansion program will make it possible to take advantage of anticipated improving margins. In short, we believe we've taken the right steps to benefit from an improving national economy. Now with that I'll turn it over to Ed, discuss our financials. Ed?

Thanks, Jack. And let me take a moment to thank everyone for joining our call today. And we do appreciate your continued support of CVR Energy. Now, I'll start today with a quick recap of our continued improvement in the Company's liquidity position. We ended the quarter with $63.3 million of cash as we did receive $18.1 million of a 2007 income tax refund in the second quarter. We do expect to receive the remainder of this refund which approximates $3.3 million during the course of the third quarter.

With the widening of the Contango which took place during the second quarter our excess inventory did grow to 458,000 barrels. Excess inventory position that we had funded with extra cash equates to $34 million of additional liquidity at the end of the second quarter. With the tightening of the Contango that we're currently experiencing our plan is to process these excess barrels through the refinery and monetize a portion of this specific inventory.

Our total debt at the end of the quarter was just over $500 million leaving us with the net debt position of $437.6 million and a net debt to capital ratio of 38%, which is a slight improvement since the beginning of the year. Maintaining ample liquidity while being able to use our excess cash flow to deleverage our company will continue to be our strategy going forward.

Our capital spending approximated $5.4 million in the second quarter and totaled $16.8 million year-to-date. We continue to scrutinize our capital spending needs and we are reducing our approved capital plan by $14 million to $54 million in 2010. There are two primary reasons for the reduction in our plans which includes coming in under budget by $2 million on our ULSG unit which we currently have online, plus the shifting out of capital dollars related to our wet gas scrubber project.

Note that our approved capital plan does include projects that are approved in this calendar year, but these total expenditures may fall into future years. Therefore, any additional reduction in our capital spending in this year is not the elimination of projects, but rather the movement of projects to 2011 or beyond. We are still planning to complete our fertilizer turnaround during the fourth quarter at additional costs of $3.8 million which will be expensed as incurred.

We had a number of one-time adjustments that occurred in the second quarter that I will briefly discuss. First, we did complete our $500 million bond offering on April 6, but the write off of deferred financing costs and the premiums required to settle our previous debt totaled $14.6 million pre-tax and were a one-time event during the quarter.

Secondarily, as Jack mentioned, we do account for our inventory on a first-in first-out or FIFO basis and the volatility in commodity prices during the second quarter resulted in a loss of $17.5 million pre-tax. And finally, the company also had a one-time write off which totaled $1.3 million on a pre-tax basis. By using our statutory tax rate of just under 40%, our adjusted net income reflective of these one-time costs is $21.3 million or again $0.25 per diluted share.

Next let's turn to our operating segments. In the Petroleum segment, the realized refining margin excluding the impact of FIFO was $8.40 per barrel or $0.56, less than the second quarter of 2009. The impacts to our refining margin this quarter versus the prior do include a higher liquid volume loss of $1.09 per barrel primarily due to higher commodity prices and our crude differential was $0.94 lower than the prior year at $2.90 per barrel. Offsetting these negative impacts is the fact that the PADD II Group 3 location provided for a stronger basis on distillate products, that was $2.51 per barrel or $2.04 better than the prior year.

Our crude differential was lower than the prior year as the direct results of us realizing a higher contango amount for the full quarter in 2009 versus, really, the limited benefit we received in June of this year. Expanding our crude gathering platform is a key strategic initiative for the company going forward as well. In addition, our fertilizer segment realized operating income of $16.5 million in the second quarter which is equal to what we earned in the same quarter of the prior year.

Our realized sales prices on ammonia and UAN were $39 -- I apologize, probably $44 per ton respectively lower than the prior year. This negative impact to our fertilizer gross margin was completely offset by increases in our ammonia and UAN sales volumes of 85% and 6% respectively during the quarter. Overall, our realized product margin in the fertilizer segment have strengthened considerably compared to the sales pricing we did realize in the second half of 2009.

As a wrap up, and I mentioned earlier, during the second quarter of 2010 we did receive a federal tax refund of $18.1 million including interest. This refund was associated with tax losses generated in 2007 that had been carried back. CVR's effective tax rate for the six months was approximately 42% on the six-month loss.

The six-month effective tax rate benefit is higher than the expected statutory rate due to the net benefit of the interest income we received in the second quarter on our tax refund. Adjusting out the income tax for the income benefit would have resulted in an effective tax rate in the year-to-date of 38.7%. For the year, we are still -- expect to be giving guidance to a tax rate in the 34% to 36% range. At this point, I'd like to turn the call back to Jack for any remaining comments.

Thank you, Ed. Since I pretty much gave my outlook when I was speaking before, probably the best thing for us to do right now is turn it back to Stirling for questions. Stirling?

Thank you, gentlemen; good presentations. Jan, we'll turn the call over to you now. We'll take any questions in the queue.

Thank you.

(Operator Instructions)

Our first question comes from the line of Stephen Carpell with Credit Suisse. Please proceed with your question.

Good afternoon, gentlemen.

Hello, how are you?

Good. Can you talk a bit about as you're kind of growing the collection business and the gathering business, I should say, A first, how much you can grow it additionally and what it takes to be able to do that.

Then, secondly, can you kind of -- I know you're a bit resistant to give some of the margin information -- but can you give us kind of a thought on what that's been like and the additional barrels that are coming on? Are they similar to what you've had previously?

Okay, our mean gathering in the business has been focused in Kansas. We have grown that pretty much about as far as we can take it. So we're spreading our tentacles out further. So Kansas common crude, you can see the postings. It's generally profitable for us to post and pay for the crude based on a posting plus basis, deliver the crude and have a WTI look-alike or a similar crude deliver below WTI and cost. Again, we don't generally share because of competitive consequences what we deliver the barrels at.

But the best way of answering it is to say that we only gather barrels that are profitable for us to bring home. They range in quality from heavier sour to actually crudes that are lighter and sweeter than WTI with which we blend. We expect to grow this business. We grew it at a little over 10%, year over year, more than that. We continue to expect to grow somewhere between 10% to 20% a year for the next few years.

We buy somewhere in the range of 65,000 barrels a day or more of light sweet crudes. If can do that by gathering them, we prefer to do it. It requires some infrastructure. But once you add the infrastructure in the form of terminals and tanks and the back office, the incremental cost associated with spreading our footprint further is fairly small.

And a couple of bigger pictures, and maybe this one's for Stan first off. Can you kind of give some thoughts on the fertilizer market in general, kind of pricing has been fairly volatile the last couple of years of course. This quarter wasn't bad for you. Can you talk about with where NYMEX gas prices are, kind of your latest thought on the outlook there on pricing as we go over the next six months?

Sure, Steve, I'd be more than happy to. This is Stan Riemann. We're pretty bullish and that's backed up by what we see in the marketplace in terms of pricing going forward. Current natural gas price I think it's bounced around the Mid Continent in the $4.50 range. And it's well below where your normal North American producer would have any floor pricing issues.

But our sale went off this year much more rapidly than it did last year and it went off at about $40 a ton higher and we continue to see the prices move up. I would expect to see some of the same escalation this year as we saw last year and at last year, remember, we started in the 130 range, 125, 130, 135 and we got well in excess of 200, 220, so I would expect that same type of momentum build in the first and second quarter. The crops look good and we'll have a good harvest.

There are some grain issues worldwide which is going to help the corn price and wheat price which will obviously be reflective in the producer's purchasing intentions going into the spring planting next year. So, we feel pretty good where we're at and we're ahead of last year and we expect the same appreciation in the price.

How about on contract booking versus, in essence, the backlog versus the previous?

Yes, we haven't taken any contracts for spring. Or we haven't taken fill tons, and we are about 20% more tons in our filled book as of today than we were last year, same time, August 5. On a physical basis, we're -- we have physical shipments, if we want to do nothing, but ship, filled orders, we could ship into early January. Obviously, we will get additional orders between now and then, but it's a book, it's historically about where it normally is and maybe a little bit better in terms of tons. So, there has been some aggressive buying out there. We haven't seen the retailers pull back at all in terms of purchasing intentions and positioning themselves for the spring.

Great. Then one final one for you, Jack; we saw this morning in an announcement of one of the East Coast refiners. Given your outlook here on the near term, can you talk a bit -- you've talked a bit in the past -- and kind of give your updated thoughts on refining capacity kind of in general? What do you see occurring in the next 18 to 24 months now?

Again, I guess, yes, I don't mind. You saw where the Montreal refinery talks broke off about a potential sale for it, that's a 125,000-barrel-a day plant. We heard about Yorktown this morning. It goes back to location, location, location. Where we are in the Mid Continent, particularly in the group, Group 3 portion of PADD II, the refineries that supply the area do not supply 100% of the demand. We are somewhat protected because in order to fill the demand, product has to be imported into our area from the Gulf or the Northern Tier. That gives us and our other peers in the area a little bit of a leg up on everybody else.

I believe that and I continue to believe that the Gulf Coast and the East Coast plants will be under pressure particularly smaller Gulf Coast plants. At some point in time you just have to ask yourself when will Europe start falling out of bed as well because if you think our margins are, East Coast and Gulf Coast margins look poor, European margins are abysmal.

And as you know, we're also an import nation, a great deal of gasoline and not so much distillate, the gasoline comes into our markets from Europe. So I continue to believe there is going to be more rationalization. I think you may see either shutdowns or conversion to terminals of the smaller Gulf Coast and East Coast facilities.

Thank you, guys.

Thank you. Our next question comes from the line of [Greg Somero] with [Accelerated Investors]. Please proceed with your question.

Hi, good afternoon, guys. I had a question for you. In terms of comparing your refining margin adjusted for FIFO versus the PADD II Group 3 2-1-1 crack spread, it looks like there's a pretty negative differential. You guys reported a margin of $8.40 versus the $11.60 for the group. Can you kind of just maybe walk me through what caused that negative difference?

Sure Greg. It's Ed. I'll give you the couple of items for you. Year-over-year we had a substantial increase in our crude costs, so our liquid volume loss was higher, I'd mentioned that in my prepared remarks, by just over $1. Although we had a somewhat of a stronger base this is -- our blending economics was somewhat more limited in the second quarter of this year versus last year and that also -- on our 2-1-1 mix was quite a bit lighter this quarter versus last year. Those were the two primary impacts.

And Greg just to be clear and I'm not sure everybody fully understands. When you have coking refinery, particularly a full coking refinery like ours, we convert a portion of our back entire bounds coke or feed, road asphalt, you call it whatever, into lighter products in the coker. But at the same time we make petroleum coke. So every refiner that has cokers generally has a volumetric loss associated with that. So 100 barrels of crude into a refinery does not translate into 100 barrels out.

In our case it's -- our yield is 94.5% to 95% of the barrel in. The heavier the crude you run, the larger that loss because you end up coking more as a percentage of your crude input. So, when you look these gross margins, there are lot of impacts i.e., the cost of crude when you actually have the volumetric loss and the cost of crude is higher. That means your volumetric loss is larger. I don't know if that's clear but --.

Besides the feed stock, what else causes volume metric loss? Is it like pumping less volume? Does that also impact --?

No, no it has to do with the processing. Basically if you consider a refinery, just a big molecule munching machine, when you take a molecule and you crack it, say in a cat cracker or hybrid cracker, you make more smaller molecules which give you, you don't change the mass, but you change the volume.

And then there are other processes such as alkylation and catalytic reforming, and particularly coking, that reduce volume as you process oil. So, depending on each refinery's configuration, you will then get a liquid yield based on crude from what you've done to those molecules. And generally when you have a volumetric loss, it's not like you're drawing it up to the flare or you're spilling it somewhere, you're converting the molecules into solids, such as for example sulfur and coke.

Okay. I had a question for you. In terms of another question, contango process, are those reflected in your gross margin? Or are they an offset to your operating costs?

No, they're --.

They're in our realized margin.

Okay.

As would a FIFO loss or a change, contango and FIFO and all of that roll in.

Okay. All right, well, thank you very much.

Thank you.

Thank you. Our next question comes from the line of David Shapiro with Aegis Financial. Please proceed with your question.

Good afternoon.

Good afternoon. How are you?

Hi, David.

Okay. I just thought. What was the cash G&A? I'm not sure if you released that number earlier in the call.

I didn't speak to cash G&A. It was in our press release for the three months. It was just under $11 million.

Okay, and --.

I think you can say that's overall G&A, David.

Okay, and that's a pretty good run rate to use going forward?

I talked about it last quarter. We talked about a $50 million on an annual basis.

Okay.

So.

Then in the fertilizer segment, for the past few quarters, maybe you could talk about some of the inventory movements in there that sort of altered the cost of goods sold line. It's been a little bit volatile here and there. I'm just wondering if you can talk about the quarterly movements there.

Well, this is Stan Riemann. I'll talk about physical and Ed can back me up as he talks to the cost part. We have been working off, ever since last June, as we came in and this is not unique you'd hear the same thing from every producer. We come out of the last spring with somewhat higher inventories and we've been working it off ever since.

On top of that we anticipated a good ammonia run this year and we allowed the inventories to build for the quarter, if you'd remember Ed's comments of having slightly lower margins as making it up entirely in volume, that's what that was. We went into the second quarter with probably higher ammonia inventories than we normally do and we blew through those in April during the ammonia run. So it was a good call, with respect to our fertilizer marketing team. And with UAN, in a normal year the UAN inventory should be somewhat stagnant, but this year it did not, it started off higher and has drawn down to a stagnant level of a 5,000 or 6,000 tons. Does that help or does that answer your question?

Yes, that's helpful.

Thank you. Our next question comes from the line of Kathryn O'Connor with Deutsche Bank. Please proceed with your question.

Hi, good afternoon.

Hi, how are you?

Good. I was just wondering. I missed the Q2 heavy crude number, what you were running. Can you tell me what that --?

It was about 14,000 barrels a day.

Then you had said that it had gone up substantially in the quarter so far, right?

We plan to run about 20 a day based on the purchases. We're seeing the widening of the spreads

Just so everybody's clear, when you buy heavy Canadian at $20 off [FOB harvesting], you're not getting WTI quality crude. It's $20 off for a very good reason. That is it's pretty tough crude to process and its pretty -- give you lower-value products. I mean, just in general, we think, depending on the market at current margins, we make an additional $2, $3 or $4 a barrel, maybe not $4, but maybe $3 a barrel more than WTI.

More that WTI running that --.

Running that barrel right at that price.

Okay, and then maybe you kind of jumped to my next question, which was, given what's going on with increased supply from Canada and sort of where you've been historically in terms of running the heavy crudes, can you just talk about because I think in the past you've only in a certain year run 9% to 11% heavy? Do you think that the change in the market and the increased heavy supply out there is going to bring you guys maybe to a new level in terms of the amount of heavy crude you might run this year?

Jack Lipinski Well, certainly there is a finite limit because we're a mid-sour refinery we typically run to about a 1.2% sulfur blend. One of the questions earlier on gathering, I'll just jump to it, is the quality the same as what we what we've bought historically? One of the things we focus on is buying some of the better grades so that we can run more heavy Canadian in our blend. If you go back over time, you go back four or five years ago heavy Canadian used to trade at roughly 70% to 72% or 73% of WTI. When petroleum prices, crude prices started leading the charge and we went from $70 to a $140 for crude.

The differential of heavy Canadian did not keep pace on a percentage basis. And actually this is the first time we're seeing at any point that we're actually getting below 80% in the near-term. I think if you start looking at other people what they're talking about, the Canadian producers themselves I think long-term they're thinking that it should stick around that 80%. I'd be happy to see it below that, but long-term we think it's going to be about 80% of WTI. Which makes it attractive for us to run 15%, 20% of our crude of our processing as heavy Canadian.

Some of the reasons why you're currently seeing an improvement is we have 6B line going up to Sarnia and Bridges line is down right now, it's putting pressure on the crude. Basically you have production that was going elsewhere and now market forces are driving the price down. What I find kind of interesting is that the heavy sour is widening, I mentioned in my comments, but the sweet sour isn't losing at all and as a matter of facts it's pretty pathetic at $2 between WTI and WTS at an $82 crude level.

Okay, so just back to one of the comments you made; so you think that this year you could run more like 15% to 20% in terms of heavy crude?

Maybe the remainder of the year, depending where it's going; we might run 20,000, 21,000, 22,000 barrels a day, something in that range.

Okay, so that's more a number for the second half of the year.

Yes.

Okay, that was helpful. Thank you. In terms of your free cash flow plan, it seems like you don't have anything really drawing the revolver, and you're going to generate the significant or a decent amount of free cash flow, especially including that tax refund you got. Are you considering using the ability to take out some of the bonds, 10% of the bonds?

Jack Lipinski That's always under consideration. We have some time to do that. Obviously, that's been our goal, that's been our stated goal to gen -- or to use our free cash flow to improve our leverage. I mean we -- you could see from the -- this morning, even though the cash I had this morning is not going to be reflective of what I have at the end of the year because we pay for gathered crude on the 20th of the month and things like that. But, it's been a long time since this company has seen $100 million-plus of cash, plus another $30 million sitting -- of its cash, sitting in inventory. Yeah, we have very strong cash flow.

So I guess maybe asked another way, is there another project that you can think of that you could use that cash for then, aside from paying down the debt?

I mean, we're always looking for small stuff. We may put some money into gathering but that certainly wouldn't even be big. We do that all the time and it just kind of goes as product improvement projects since we have the infrastructure. We have other projects on the books that we could look at but right now we're just happy sitting on our cash.

Okay, thank you.

Thanks.

Thank you.

(Operator Instructions)

Gentlemen, it appears there are no further questions at this time.

Thank you very much, Jan. We do appreciate everyone being on the call today, and we'll certainly be available for any follow-up questions that you may have over the next several days. We appreciate your support of CVR and what we're doing here. Thanks very much. Bye. Thank you.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.