Good morning. My name is Sarah and I'll be your conference operator today. At this time, I would like to welcome everyone to the Delek US Holdings Q3 2017 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, you may press the pound key. Thank you. I'll now turn the call over to Mr. Keith Johnson. You may begin.
Thank you, Sarah. Good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek US Holdings' third quarter 2017 financial results. Joining me on today's call is Uzi Yemin, our Chairman, President, and CEO; Kevin Kremke, EVP and CFO; and Fred Green, EVP and COO, as well as other members of our management team. As a reminder, this conference call may contain forward-looking statements as that term is defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believe, anticipate, plans, expects, and similar expressions are intended to identify forward-looking statements.
We caution that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. In addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to comparable GAAP results, which can be found in the press release, which is posted on the investor relations section of our website. I'd like to remind everyone that we are not able to comment on the pending transaction with ALDW.
As a result, we'll only be taking questions about our operation on today's call. On today's call, Kevin will begin with a review of the financial performance of the quarter before turning it over to Fred for an update on some key initiatives. Uzi will offer a few closing strategic comments. With that, I'll turn the call over to Fred. Or to Kevin.
Thanks, Keith Johnson. For the third quarter of 2017, Delek US reported net income of $104.4 million, or $1.29 per diluted share, compared to a net loss of $161.7 million or negative $2.61 per basic share in the third quarter of last year. On an adjusted basis for the third quarter of this year, Delek US reported adjusted net income of $65.3 million or $0.81 per share compared to an adjusted net loss of $17.3 million or negative $0.28 per basic share in the prior year period. Our adjusted EBITDA was $195.9 million in the third quarter of 2017, compared to $9.2 million in the prior year period. A reconciliation of reported results to adjusted results is included in the financial tables of our press release.
Improved market conditions in the refining segment and the addition of the Alon assets following the transaction close on July 1st were the primary drivers of the increase in earnings on a year-over-year basis, which I will discuss in more detail in a few minutes. On a consolidated basis, line items such as operating expenses, G&A, and interest increased primarily due to the addition of Alon. I would like to note that G&A expenses did include approximately $18.4 million of transaction costs in the third quarter of 2017. This was partially offset by a gain of approximately $6 million related to the freeze of certain pension plans. Our income tax rate, excluding the non-controlling interest income associated with Delek Logistics and Alon USA Partners of $10 million, was 55.2% in the third quarter of this year.
This tax rate included a $46.9 million net deferred tax write-off in the third quarter of 2017. Excluding this amount, the income tax rate was 35.8%. Turning now to capital spending. Our capital expenditures during the period were approximately $68.5 million compared to $10.8 million in the third quarter of last year. During the third quarter of 2017, we spent $47.6 million in our refining segment, $3.8 million in our logistics segment, $10.6 million in our retail segment, and $6.5 million at corporate. Our 2017 capital expenditures are forecast to be $161.6 million, which compares to $46.3 million in 2016. This amount includes $114.8 million in our refining segment, $17 million in our logistics segment, $15.7 million in our retail segment, and $14.1 million at the corporate level. This is a reduction from our previous estimate of $170 million for the full year.
We ended the second quarter with approximately $832 million of cash on a consolidated basis and $596 million of net debt. Excluding net debt at Delek Logistics of $396 million, we had net debt of right at $200 million at September 30th, 2017. Now I would like to discuss our results by segment. In our refining segment, we report a contribution margin of $180.1 million compared to a contribution margin of $37.8 million in the third quarter of last year. The year-over-year increase in contribution margin is primarily due to improved market conditions and higher sales volume from Tyler and El Dorado, combined with the addition of Big Spring and Krotz Springs refineries from the Alon transaction.
The contribution margin in the third quarter of 2017 was reduced by a $30.2 million charge for an inventory fair value adjustment at Delek US related to its acquisition of Alon on July 1st of 2017, which affected the Krotz Springs and Big Spring refineries. We incurred a higher other inventory charge of $13.2 million at El Dorado, partly due to increase in product prices in the quarter. Market conditions improved on a year-over-year basis as the Gulf Coast's 5-3-2 crack spread increased to $15.92 per barrel for the third quarter of this year, compared to $9.85 per barrel for the same period of last year. In addition, the refining system benefited from the Midland WTI crude differential to Brent crude that was an average discount of $4.84 per barrel, compared to $2.36 per barrel in the prior year period.
Our refining system operated near capacity in late August and all of September during the period affected by Hurricane Harvey. RINs expense was $29.3 million in the refining segment, compared to $7.9 million in the year-ago period. This increase is primarily due to the addition of Big Spring and Krotz Springs refineries. Our logistics segment contribution margin was $30.9 million in the third quarter of this year, compared to $24.8 million in the prior year period. On a year-over-year basis, improved performance was primarily due to West Texas wholesale business and the Paline Pipeline. The contribution margin in the retail segment was $13.5 million. Merchandise sales were approximately $91.3 million with an average margin of 31.4%, and approximately 54.4 million retail fuel gallons were sold at an average margin of $0.202 per gallon.
There is no year-over-year comparison for this segment, as it was acquired in the Alon transaction on July 1st. Contribution margin for the corporate/other segment was negative $24.3 million in the third quarter of this year compared to negative $9.3 million in the prior year period. This segment now includes the asphalt business acquired in the Alon transaction. Effective July 1st of this year, Delek US revised the structure of our internal financial information, which resulted in a change in the composition of our reportable segments. As a result of these changes, the result of hedging activity previously reported in refining that was not specific to a refinery location is now included in our corporate, other, and elimination segment. Following this change, we report a net hedging loss in this segment of $17.8 million for the third quarter of 2017 compared to $3.3 million in the prior year period.
Approximately $7.2 million of the hedging loss in the third quarter of this year was realized. During the latter half of the third quarter of 2017, light product prices increased as Gulf Coast refineries were shut down for a period of time related to Hurricane Harvey. This price change for light products compared to our hedging strategies in place at the time was the primary factor in the change in the net hedging loss on a year-over-year basis. Now I will turn the call over to Fred to discuss some of our strategic initiatives we have underway.
Thanks, Kevin. First, I'd like to discuss our initiatives at the Krotz Springs refinery. After further evaluation, we are moving forward with the alkylation unit project. This should provide the refiner with additional production flexibility as it improves the ability to convert low-value isobutane into higher value gasoline products such as low RVP summer grades and premium gasoline. The total capital cost is expected to be approximately $103 million, and the annual EBITDA from this project is expected to be $35 million-$40 million. Through September 30 of this year, we've spent approximately $20 million on the project, and we currently expect to complete it in the first quarter of 2019. To give you an example of the benefit of improved conversion that we expect to create by this project, you could compare Gulf Coast's 7.8-pound gasoline prices to the prices for isobutane.
Since 2011, that spread has averaged $0.89 per gallon. Our economics are based on a mid $0.60 spread, and we believe this project should enhance long-term value at the refinery. We are also exploring ways to reduce crude oil transportation costs and increase crude oil sourcing flexibility. By adding flexibility, we should be able to access more Midland crude into Krotz Springs when the price point is attractive relative to LLS. One option is to ship on the Paline Pipeline to increase our WTI Midland crude over time. Regarding our California assets, we do not think that they fit our current geographic and strategic footprint, and we're exploring ways to derive value from those assets. Both the Paramount, including AltAir, and Long Beach locations are now part of discontinued operations. At Bakersfield, we're evaluating options to reduce the cost over time, and it remains part of continuing operations.
From a modeling standpoint, I want to discuss a couple of items. During the fourth quarter of 2017, we're expecting to complete a reformer regeneration at Krotz Springs. We're taking advantage of the opportunity to also perform a mid-cycle decoke on the crude heater and replace catalyst in the isomerization unit. Taking this into account, we expect our crude throughput in the fourth quarter 2017 at Krotz Springs to be approximately 63,000 barrels per day. With that, I'll turn it over to Uzi for his closing comments.
Thank you, Fred, and good morning. This was a great quarter from a combined operation as we achieved adjusted EBITDA of $196 million
Our team made substantial progress on the integration of the companies, the teamwork used during Hurricane Harvey allowed us to operate the system near capacity. During the third quarter, our crude slate was approximately 67% Midland WTI, our refinery system is well-positioned to continue to benefit from the Midland brand discount. I am pleased that we reached an agreement to acquire the remaining 18.4% of ALDW LP units that DK does not already own in an all-equity transaction. The exchange ratio is 0.49 shares of DK for each ALDW LP unit. This transaction, subject to customary closing conditions, is expected to close in the first quarter of 2018 and does not require approval from the DK shareholders. This was one of our strategic initiatives following the purchase of Alon.
It should simplify our corporate structure, eliminate public company costs, allow us to allocate the ALDW distribution to higher return capital investments in the company. Also, we should be able to more efficiently capture cost of capital synergies and unlock the value of logistics assets through future potential drop-downs into DKL. I want to thank the employees of Delek US and the Conflict Committee of ALDW for their hard work during this process. We've made significant progress on capturing the synergies we are targeting from the acquisition of Alon. During the third quarter, we captured approximately $53 million of synergies on an annual basis and are well on our way toward the goal of $85 million-$105 million, with a midpoint of $95 million. In addition, our team are focused on unlocking the value of approximately $78 million logistics EBITDA through future potential drop-downs to DKL.
Through access to DKL's logistics system, we can support this larger operation through crude oil and light product initiatives in the future. Based on September 30th, our cash balance was approximately $832 million. This financial flexibility should enable us to support our initiatives to improve Big Spring, move forward with the integration, evaluate potential growth opportunities. As we continue to explore opportunities created by a larger, more diverse company, we remain focused on creating long-term value for our shareholders. Before I turn it over to Sarah, I would like to congratulate my dear friend, Assi Manor, for his appointment as President of DKL. Assi joined DK with the Alon transaction, I look forward to working with him in the future. With that, Sarah, will you open the call for questions, please?
Certainly. At this time, I would like to remind everyone, in order to ask a question, press star and then the number 1 on your telephone keypad. To withdraw your question, you may press the pound key. Your first question comes from the line of a participant whose information was unable to be gathered. Caller, if you've queued up for a question, please state your first and last name and your company name. Your line is open.
Hey, guys. I think it's me. It's Blake Fernandez at Scotia Howard Weil. sorry about the prompt.
my name is hard to pronounce, Blake, I don't think yours is, but now I learned something new.
congrats on the results. It's nice to see you back in the black here, Uzi. good for you guys.
Happy to be here.
Question for you. With the kind of sanctioning of this project here at Krotz Springs, I think there was some discussion previously about potential asset drops from the facility, and there was some, I guess, question marks as to whether you were going to continue operating it. Is it fair to say now, obviously, with moving forward with this project, that you're now back on track on potential EBITDA drops to DKL from that facility?
Let's back off from the drop-down. I'll answer it. I'm not going to dance around the question. I want to answer it in a different way. As we all said in the past, that in Krotz, to improve itself, we need to look at three aspects of it. The first one is the crude transportation to the refinery. The second is the facility itself. Third, the selling of the products that we didn't get the premium that we thought we should get. Let's start with the first initiative. As we all know, in the last six months, we will see it in the results. We already see it in the third quarter, we'll see it more in the fourth quarter. The Midland LLS spread in the third quarter, it was around $3.
Right now we're sitting at, for December, close to $6, or a little less than $6, maybe $5.50. We said all along that we need to utilize the combined company assets to bring Midland barrels or safe transportation to Krotz. Krotz, beginning of the year, was running 20,000 Midland and 50,000 or 55,000 LLS. We are working towards, probably be there in December, of having more than 40,000 barrels of Midland instead of LLS and capture some of that differential. We do it by utilizing the Paline Pipeline, which is over-nominated right now. DKL announced this morning that we're going to increase the capacity to 42,000 on the Paline, that will allow us to capture that big differential. We're working our way.
Our goal is to get as close as we can to capacity on Midland base pricing for Krotz, that will eliminate a big cost of the transportation. That's one component. The other one is the operation. The first one is the Alky, it's the easiest one. The return is pretty good. We were conservative when we put $30 million to $40 million. There are other projects that we are looking at. The third one, we are working on a wholesale initiative. We are not ready to announce anything to the market substantially, we're working on that along the Colonial Pipeline to capture some of the value along the Colonial Pipeline. We saw a big example of that during the hurricane. We said all along that we need to work on these three before we declare victory on Krotz. We're doing that.
Now going back to your original question, declaring victory and say we're going to drop down the assets to DK, it's premature. I would say let us work a few more quarters and improve the facility, and then we'll talk about that. That was a long answer to a short question, but I hope it covered everything.
No, that's very comprehensive. Thanks for the answer. I guess I'll just spend both of my questions on Krotz then. Given that you spent, I think it's roughly $20 million or so, it seems like that's going to obviously put the bulk of the spending into 2018. Do you have any kind of initial thoughts or modeling suggestions on capital spending for next year?
Yeah.
I'll leave it there.
How come I'm not surprised with this question? It's around $50 million, $53 million.
53 million. Okay. Do you have a total or is it just add that to the other-
The remaining is in 2019.
Okay. Okay, I'll leave it there. Thank you.
Your next question comes from a line of a participant whose information was unable to be gathered. Caller, if you've queued up for a question, please state your first and last name and your company. Your line is open. Caller, if you've queued up for a question, please state your first and last name and your company. Your line is now open. Your next question comes from one of Paul Sankey, whose company was unable to be gathered. Caller, please state your company name. Your line is open.
Yeah, I'm speechless. You've really made this call exciting for us all. I can imagine there's 20 analysts out there all yelling at the phone. I was just yelling, "Hello, hello" on the previous one. I don't know how you can work this out, but it's obviously going to be very tough for us. Anyway, more seriously at a high level, Uzi, where do you see Delek strategically right now? With things obviously advancing on the MLP consolidation front, where do you now see the company strategically and going forward? Thanks.
Mr. Sankey, without the question for you, we would have not finished the call, so thank you for saving everybody from this. Obviously, that's as usual, very smart question and very good one. In the next two, three quarters, we will complete, hopefully, the integration of Alon and with the Midland brand doing what it's doing. By the way-
Wait, Uzi, how do you, sorry, let me interrupt. How do you define the integration? When you say it's complete, is that-
Complete both the systems, i.e., IT and accounting, HR, obviously, and then capture most of the synergies. I think we are hoping to get all the synergies by the end of next year. If this is happening the way we are expecting, and so far it looks pretty good, then the next step we need to ask ourselves is to continue to look at opportunities in the marketplace. Obviously, our balance sheet, we all know is very good, and we want to continue to grow the company. We have ideas on the midstream side, and obviously in today's market, it doesn't make sense to pay 17 times multiple for something that actually doesn't make sense. We still think that there are opportunities in undervalued assets in the marketplace.
It's too early to declare victory on the Alon integration, but we already see that we made good progress on that. We feel that our ability to integrate assets, just getting better and better over the years.
Yeah. When you're thinking about the undervalued and the growth that you obviously want to keep pursuing, is that more of a midstream concept or more of a refining concept or both?
Probably look at both. We want to be very prudent with the capital allocation. We all remember downturns. During the heydays, we want to maintain strong balance sheets, which has basically allowed us to buy Alon. We want to use the same strategy in the future.
Great. Okay. That's interesting. Thanks. The next question is from an analyst. He doesn't know if he's being polled from a firm he doesn't know is being polled. Thanks, Uzi. Great to hear you.
Thank you, Paul.
Your next question comes from the line of Ryan Todd from Deutsche Bank. Your line is open.
Great. Thanks.
Ryan, this is your lucky day.
I know.
They identified your name and the firm.
Yeah. If you can't pronounce my name, you're having a tough time. Maybe first a question on cash and use of cash. I think you had talked about when you mentioned your cash balance, you talked about being able to use this to fund some of the capital projects you have ongoing. Can you talk a little bit about priorities for whether there's room for anything else in the growing cash balance, the potential as you look down the line for additional cash return to shareholders? Maybe a reminder, in the past, I think you've talked about wanting to maintain around a $500 million to $600 million cash balance. Is that still the right number?
Yes. The thought process, let me be clear. Not next week, next year. I wish next week. Next year, we have the $150 million convertible bonds that we got during the ALJ transaction, that these were ALJ converts. We obviously want to redeem them with cash. That will lower the debt and also prevent equity issuance for 2018. With the market doing what it's doing, obviously there's a growing or mounting pressure to look at the dividend as well as the buyback. We wanted to be prudent and to make sure that we are integrating Alon into the system with no problems. The way we see, obviously we saw third quarter, and fourth quarter is fixing to be, then it makes sense to visit this idea or these ideas.
Okay. Thanks, Uzi. Maybe one follow-up on your earlier comments about the potential opportunity set there at Krotz Springs. You talked about the potential to switch out maybe up to 20,000 barrels a day of LLS for Midland crude there by the end of the year. Is the benefit of running Midland crude, is it a dollar for dollar on the differential in terms of the benefit that you see of running a Midland barrel versus an LLS? Is there a difference in transport costs? Just trying to think of how big the potential prize is for swapping out 20,000 barrels a day of crude.
You're asking great question. The transportation cost is higher. I will make up a number, the transportation cost is higher, in terms of getting the crude from Midland. I don't want to start giving numbers that are coming out of my memory. We can probably provide it later on. Out of the $5 or $5.50, a big or a substantial portion of this will stay in our pocket. Actually, we already saw it in the third quarter, there was noise in the third quarter. I just want to make clear, we didn't want to allocate anything about it. In the third quarter, because of the hurricane activity, we needed to pay higher prices for barges in order to maintain the Krotz refinery, to maintain it almost full. There's noise in the third quarter numbers.
That noise will disappear in the fourth quarter, going forward in the first quarter, it's going to level down. Again, big portion of this is being paid to DKL. That's the reason we see Paline Pipeline outperforming what the expectation was. We already said that we are expanding their pipeline in the future. Big portion of it, we get it through our DKL ownership.
Okay. Thanks, Uzi. I appreciate the help.
Your next question comes from the line of Roger Read from Wells Fargo. Your line is open.
Hey, good morning. Turns out I'm not operating incognito here.
Hey, Roger.
Anyway, quick question for you.
Roger, we are confused now that we hear there's somebody with a name and a firm, so we don't know what to do with the question.
You don't know. It could be somebody else altogether. Understand the investment you're making at Krotz Springs. One of the other items at that location, if I remember correctly, does not make ULSD. I know you've talked in the past about IMO 2020 maybe providing an outlet, but once you get through the alkylation process, what would be the thought of how to address the other side of the barrel there?
Fred, I'll let you take that one since you're the expert for DHT here.
Hey, Roger. We're looking at what it's going to take to integrate hydrotreating into that facility. We also have some other options given that we have spare diesel hydrotreating capacity at both El Dorado and Tyler. As you know, we've been working on shipping products to Mexico by rail, so that may be something that we can fold into that operation.
All right. I guess still optionality for a couple of years anyway?
Yeah, we're still running the numbers. As you can imagine, we've got our hands full.
Definitely. Then, Uzi, maybe at the corporate level, hedging. I don't mean to be mean about it, but it seems to be more often a drag than a positive event. As a larger company, 4 units instead of 2, the retail assets and all, hedging still going to remain a key part of what you do? Or is there a rethink on whether or not that makes sense as a strategy here?
Absolutely, it makes sense. Obviously, we want to win all the time. In the last year, we obviously didn't win much. At the same time, let's be clear. All this hedging came from one place and one place only. The month of September with the ultra-low sulfur diesel, because of the hurricane, jumping to a much higher number. Without the hurricane, which obviously benefited us big time, the hedging would've been in black for the quarter. While I hate the $7 million, and I said to Keith, we need to highlight that so people will see that it didn't come from the operation. Still, we benefit from the hurricane big time. We want to maintain this in our toolbox.
Yeah. Well, a lot of people got flooded by that hurricane, that's for sure. All right. Thanks, guys.
Thank you, Roger.
Your next question comes from the line of Neil Mehta from Goldman Sachs. Your line is open.
Good morning, guys. Congrats on a good quarter here.
Hey, Neil. Good morning. Thanks for the support.
Uzi, the first question I had was just on Midland differentials. One of the questions we get often is what ultimately sets the product prices in your markets. Is it fair to say that it's broadly Brent, at which point you should be thinking about Midland versus Brent as the key benchmark for you guys from a profitability standpoint, where there's some of those barrels that are priced more off of local crude. Then just the follow-up there is how do you think about that differential over time evolving Midland WTI and then also Midland Brent?
These are great questions, Neil. I think we spoke about that several times in the past. First, unfortunately to me, I'm being recorded every quarter, I think we all spoke about the idea that Midland Brent will widen toward the end of the year. I honestly didn't expect to see the $6 or 6 and change that we are seeing. I was expecting to see lower than that, but we'll take it, as long as the market gives us that opportunity. One key point that we need to remember around this idea and is that Mars, and starting in the third quarter, and that benefited our company big time. Mars is still more expensive than Midland by almost $2 a $1.50 today, I think. The benefit for the Midland Brent is mainly for the light sweet crude refineries, but I'll leave it to that with that comment.
Do I believe that this will stay 6, $7? Probably not. Do we think it will go to 4 or $5? Probably yes, long term. What will dictate that is obviously one big thing, the export. While people are very focused on the off-take capacity, the barrel or the Midland barrel needs to clear itself, either at the Gulf or outside the U.S. At the Gulf, I think that you know better than I do that there's limited capacity. That over time you can increase it, but for this moment, there's limited capacity. Also, there's limited capacity for export at this point. Obviously, people are working on that. For the short term, the next few months, it will stay, we think, wide, and after that, it may normalize toward the 4 or $5. In terms of the local market setbacks. That's a great question.
It depends on the market itself, we just need to remember that our competing markets, if you will, are pipelines, and these pipelines for the most part coming from the Gulf. As long as the Gulf Coast refineries will see the crack spread not as great as they see it today because of the Mars situation or because of the Maya situation, we are in good shape. Also, please remember that in West Texas, we integrated the terminal that DKL used to have with the Alon operation. The margin that we see in West Texas are pretty good, and we hope to continue to see them in the month of October. That margin was $3.20, continued to be very strong. I hope I answered extensively enough to cover every aspect of your question, Neil.
Yeah. That was good, Uzi. That was thorough. The follow-up is just want a clarification. You talked about returning capital to shareholders, both potentially looking at the dividend or maybe even coming back to the buyback program. Is that return of capital story on hold until the Alky project is done, and you've made the big investments at Krotz, or is there the potential to look at that while simultaneously spending on the project?
Absolutely not. If the market will continue to do what it does, we are going to act rather quickly.
Okay. Uzi, one last one, if I could sneak one last in.
Please.
The $35 million-$45 million assumption that underpins the EBITDA from the Alky unit, can you just walk us through the assumptions? You said they were conservative, what are the key points that underpin that EBITDA number?
I'm going to repeat what I think the question was. What dictates the numbers behind the $35 million-$40 million benefit at the Alky? Is that the question?
Exactly.
Okay. Fred, do you want to take that one?
Sure. Neil, right now, the refinery configuration has us utilizing a cat poly unit to polymerize butylenes and selling isobutane into the market. What the Alky does is it allows us not only to stop selling isobutane, which is at a much lower value than gasoline, we can then convert those butylenes and purchase isobutane in order to make high octane gasoline. The net effect is we see an uplift of, in our assumptions, $0.65 a gallon on the difference there between CBOB 7.8 pound gasoline and the isobutane. You can back into the amount of volume that we're talking about. Our gasoline production will go up, and we'll be able to take advantage of that price differential between isobutane now as a feedstock and the CBOB 7.8 pound sales.
That's great. Thanks, guys.
Thanks, Neil.
Your next question comes from the line of Phil Gresh from J.P. Morgan. Your line is open.
Yes. Hi, good morning.
Good morning, Phil.
First question, which I think maybe Blake was trying to get at this a little bit initially. Do you have any thoughts around the total company 2018 CapEx budget? I know you said $53 million for Krotz Springs. I think you have a turnaround next year. I think you didn't have one this year. Just any thoughts you could provide there?
We'll obviously give you the numbers at beginning of the year as the board will approve it, but we do have a good sense of that. Let me walk you through some of the numbers. Obviously, this year, the guidance we gave is $160 million. That's down from the $170 million previously announced. Not including growth projects that if we identify these projects, we'll talk about them specifically. It's the general rule of $25 million per refinery on maintenance CapEx per year. The $50 million that I just mentioned on the Alky for next year, a little more than $50 million, or a little more than that, depends on the turnaround, but call it between $50 and $60 million. DKL, probably $20 million-$30 million, just the regular stuff. Corporate, depends on how much we need for integration. These are the numbers, more or less.
Got it. Somewhere in the $200 million range?
Well, probably a little more than that. If you have the Alky, the one turnaround, that's together a little more than 100. Four refineries, and then a little more than 200, maybe between 200 and 250.
Okay, got it. Maybe just asking the dividend question a slightly different way. You have a lot more cash flow now from four refineries, and you provide some diversification benefits and things like that as well. Is there a level of dividend as a percentage of CFO or earnings or something that over time you might hope to target? Have you given thought to that?
Absolutely. We talk about that almost on a regular basis. We just need to remember that all this is new to us, and we don't want to declare victory after three or four months. Obviously, what we see, we are very happy with, very pleased with the results. We'll continue to talk about that as we continue to integrate the system in the next quarter or two.
Okay. I guess last question. The asphalt drops, I apologize if I missed this. I assume you're still planning all cash to the parent based on the availability at DKL, and that can help to fund some things like the converts and whatnot.
Absolutely. The asphalt is all cash by definition. That's the reason we did the bond offering a few months ago, and we're working on that as well.
Okay. Thanks a lot.
Thank you, Phil.
Your next question comes from the line of Chi Chow from TPH. Your line is open.
Great. Thanks. Good morning.
Good morning, Chi.
Morning. I want to follow up on Neil's question on Midland. I know we've discussed this very recently together, a couple questions. One, I know Midland brand is a key spread for you, why do you think Midland is trading above Cushing right now despite.
Because of the quality of the barrel.
Okay.
I'm sorry I interrupted you. I thought you finished. Go ahead and finish your question.
No, no. That was the question. All the production is coming right there from the basin, yet we've got this premium on Midland and I guess by extension, yeah. What's the issue with the quality? Is that going to be an ongoing trend, I guess, since the barrels seem to be getting lighter and lighter there? Any comments would be helpful.
First, as you know, we can bring barrels from Midland or from Cushing to our refineries. We always prefer Midland because that's the neat barrel, and it's not being blended along the way. What is being done at Cushing, and again, we don't have operation at Cushing, but there are companies with that work for them very well that take different types of crude in Cushing and blend them. For our company or our operation, and Fred can talk about for hours, we always prefer the neat barrel coming from the well itself, and I assume that this is happening for other companies. When you get the neat barrel, that not only improves your yield, but the duration and the time that you can run the unit is growing. The quality of the barrel is always number one versus price.
Will the volume of the neat barrels start to diminish, though, as the incremental barrel, production-wise, gets lighter and lighter out of the basin there? You have any concerns on that end?
I'm not concerned about that for us, I'll tell you why. What we see around, our main hub is becoming more and more Big Spring. What we see in the Howard County and the couple of counties around that the neat barrel stays the way it is. It's getting lighter and lighter at the Eagle Ford site. In the counties that we're in, actually, that's the main reason why we are looking at other alternatives to bring crude to Big Spring. We mentioned earlier that we're building, or we built offloading rack at Big Spring. We're doing other stuff in Big Spring that it's not time to talk about that just yet. Not only to save money on transportation, but to continue to enjoy the quality of the barrel.
Okay, thanks. Secondly, on retail, I know you've talked about this before, do you have any further thoughts on whether you consider the acquired retail sites as a core asset of the company going forward here?
Retail is keeper. As we said in the past, we believe in retail. I personally believe in retail. I think that there's tremendous amount of value to be created, especially with the locations that Alon has or Alon gives to us that we have now, in key strategic areas in the entire Permian Basin. With the growth that we see in that basin, we see retail performing very well. We'll start building our mega stores in the area and together with the wholesale business that we have over there that we will continue to improve. We see this as strategic to our business.
Okay. Thanks. Maybe one quick final one. What's the size of the Alky unit at Krotz?
Fred?
It's roughly 6,000 barrels per day.
Okay.
Of Alky unit production.
Okay. Thanks, appreciate it.
Your next question comes from the line of Kaleinohea Akamine from Bank of America. Your line is open.
Hey, guys. Kalei Akamine from Bank of America. First, congratulations on ALDW. My question is on consideration. Was wondering if you can offer any thoughts on the use of equity versus cash. With all the cash on the balance sheet, I'm wondering if there were any tax considerations to navigate given the MLP structure.
That's a great question. I'll be very brief about it because honestly, we can't talk about ALDW much. I'll just say that the idea was to allow the ALDW to participate in the offset with DK, similar to what happened with ALJ. With ALJ, if you remember, we offered a price, then since then, the shareholders of DK enjoy a big portion of the performance of the combined company, the idea behind ALDW was the same.
Got you. Anything you can offer on the tax considerations?
Kevin?
Yeah. The taxes were actually negligible in the transaction. By virtue of this transaction, current ALDW unit holders get to participate in passive activity losses that they've received historically that they otherwise would not have a chance to utilize. The total tax impact was negligible.
Okay. Secondly, I was wondering if you can expand on the strategic initiatives that you're pursuing at California. Perhaps maybe talk broadly about interested parties, whether it includes shutting those facilities down, timing, and any other expectations you may have.
Obviously, putting it below the line makes a statement here. If we weren't comfortable with the strategic move with that, we wouldn't put it below the line. I'll leave it to that, but we are very comfortable where it sits right now on the balance sheet.
All right. Thanks, guys.
Your next question comes from the line of Brad Heffern from RBC. Your line is open.
Hey, morning, everyone.
Hey, Brad.
Hey, how's it going, Uzi? I think most of my questions have been asked. I'll just have one on the synergy number that you guys have given out, the $53 million achieved to date. Can you talk a little bit about sort of the buckets that that's coming from? I would imagine most of it's corporate and the cost of capital. Have you guys harvested any of the commercial or operational synergies at this point?
You're asking great questions. Out of the corporate, roughly half was achieved already. Cost of capital, actually not everything or not much. One thing that we actually did is the LC that Alon used to have is now zero. We work with our counter parties, the LCs went to zero. At the same time, we are still working on, obviously, the ALDW 9.25 bond. We're looking at other facilities that are higher. That will happen over the next 12 to 18 months. Not too much on the cost of capital just yet. Well, as of the third quarter, obviously, you'll see more of that in the fourth quarter. In terms of commercial, we're working on what we mentioned earlier, the connectivity between Midland and Krotz, and the Paline Pipeline facility is a big portion of that.
We started that in the third quarter, and we're working on that in the fourth quarter. Obviously, the margins, the consolidation of the terminals in West Texas, both operationally and from a marketing standpoint, we did some of it already. I'll leave it to that. I'll just say that we kept the range the way it is, but we feel really good about that range right now.
Okay. Got it. Thanks for that color. I guess I'll be a liar and ask a second question, actually. On Bakersfield, can you talk about just what the opportunity is that you see there that's keeping those continued operations versus the other assets?
Bakersfield, if you remember, has that rail permit. We're not planning to operate Bakersfield as a refinery, but it may have a value one way or another. We don't want to spend money just for spending money. We weren't comfortable to put it below the line just yet, before we finishing evaluating the situation.
Understood. Thanks.
Your next question comes from the line of Chris Souki from BCMI. Your line is open.
Yes. Hi, nice quarter. Could you drill down a little on the $30 million inventory fair value adjustment you made? I would've thought those adjusting journal entries would've been made when the deal closed with Alon.
Danny, do you want to take that one?
Yes. Sure. From an accounting guidance standpoint, when inventory is purchased in a business combination, that inventory is fair valued on the date of acquisition. On July 1, the finished products that we bought from Alon were valued at market prices on the 1st of July. When we sold that product in July, the beginning inventory, the cost of goods sold for that product was higher, virtually eliminating the realized margin from the sale of that product.
What about the rack? We just came off the lowest WTI for the year in mid-June. Most people are making FIFO adjustments that are unfavorable right now. You guys haven't done that.
Well, there's no connection to the rack here. What basically we did is these are accounting guidance, as Danny said. Regardless of what the price at the rack is, what you do is you take the price as it exists in the marketplace the day or the month of the acquisition, and then you basically put it on your books at that price. There's no margin with that inventory for the month of July. That's basically very typical for mergers like that, and that's what we did.
This is a refined product inventory write down.
Not write down, but basically fair value. Let's just say for a second that Big Spring had 100,000 barrels of gasoline. Instead of selling it at crude plus the margin, we put it on our books initially at the price of gasoline. When we sold the gasoline, there was no margin. The calculation was based on the crack spread just to come to this $30 million. The way we did it from accounting standpoint, similar to what we did when we completed the shares purchase of Alon, we market to the market, and we adjust these two-
Yeah
because it didn't make sense.
Okay
The earnings would've been I think back $39, something like that.
Okay. Thanks very much for the clarification.
Thank you.
There are no further questions in the queue at this time.
Thank you, Sarah. I'd like to thank the investors, you, the analysts. I'd like to thank my friends around the table, board of directors, but mostly I'd like to thank our employees for making this company what it is. Have a great day, and we'll talk to you soon.
This concludes today's conference call. Thank you for your participation, and you may now disconnect.