Delek U.S. Holdings' (DK) CEO Uzi Yemin on Q2 2014 Results - Earnings Call Transcript

| About: Delek US (DK)

Delek U.S. Holdings, Inc. (NYSE:DK)

Q2 2014 Earnings Conference Call

August 7, 2014 10:00 AM ET

Executives

Keith Johnson - IR

Uzi Yemin - Chairman, President and CEO

Assi Ginzburg - CFO

Fred Green - EVP and President, Refining

Danny Norris - CAO

Analysts

Roger Read - Wells Fargo Securities

Edward Westlake - Credit Suisse

Doug Leggett - Bank of America Merrill Lynch

Paul Cheng - Barclays Capital

Jeff Dietert - Simmons & Company

Minit Gupta - Morgan Stanley

Paul Sankey - Wolfe Research

Operator

Good morning. My name is Kaitlin and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek U.S. Holdings Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session (Operator Instructions) Thank you.

Keith Johnson, you may begin your conference.

Keith Johnson

Thank you, Kaitlin. Good morning. I would like to thank everyone for joining us on today’s conference call and webcast to discuss Delek U.S. Holdings’ second quarter 2014 financial results.

Joining me on today’s call will be Uzi Yemin, our Chairman, President and CEO; Assi Ginzburg, our CFO; Fred Green, our Executive VP and President of Refining; Danny Norris, our CAO; 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 facts may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are cautioned 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.

Today’s call is being recorded and will be available for replay beginning today and ending November 10, 2014 by dialing 855-859-2056 with the confirmation ID number 73519622. An online replay may also be accessed for the next 90 days at the Company’s web site at delekus.com. Last night, we distributed a press release that provides a summary of our second quarter 2014 results. This press release is available on our corporate Web site and through various news outlets.

On today’s call, Assi will begin with a few opening remarks on financial performance for the quarter. Danny will cover additional financial details before turning it over to Fred to discuss initiatives in our Refining segment. Then Uzi will offer a few closing strategic comment.

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

Assi Ginzburg

Thanks, Keith. Our outstanding second quarter 2014 results benefited from widely accrued trends in the market and a record performance in our logistics segment. These factors more than offset the lower gross [indiscernible] expect on a year over year basis. We generated $156.8 million of EBITDA in the second quarter from our operations. We ended the second quarter in a solid financial position with approximately $560 million of cash on a consolidated basis and $56.1 million of net debt. Excluding debt and cash at Delek Logistics, we had net cash of $180 million at Delek U.S.

We continue to focus on allocating our capital to create long-term value to our shareholders. We are pleased to announce plans to expand our Tyler Refinery which Fred will discuss in more detail later in the call. Also, our share repurchase program has been increased to $100 million in August from the previous levels of $50 million. We initiated repurchases late in the second quarter and this transaction amounted to share repurchase of approximately $12.7 million year to date.

Now I will turn it over to Danny to discussion additional financial details.

Danny Norris

Thank you, Assi. For the second quarter of 2014 Delek U.S. reported net income of $54.9 million or $0.92 per diluted share. This compares to a net income of $46.6 million or $0.78 per diluted share in the second quarter last year. Included in the second quarter of 2014 results and a one-time non-cash $22.6 million before tax expense or $0.24 per diluted share that is related to the financial settlement under the restated supply and off-take agreement with J. Aron.

The change in year over year earnings in the second quarter was driven primarily by improved margins in our refining segment due to a wider discount between Midland and Cushing WTI which averaged $8.37 per barrel in the second quarter 2014 compared to $0.14 per barrel in the prior year period. In addition, our El Dorado refinery ran at higher utilization rates on a year over year basis due to the turnaround on light crude flexibility projects completed in the first quarter 2014. These factors offset a decline in the Gulf Coast 5-3-2 crack spread that averaged $17.10 per barrel in the second quarter this year compared to $19.83 per barrel in the prior year period.

Now I’d like to discuss a few additional items on the income statement. General and administrative expenses increased to $32.9 million in the second quarter of 2014 compared to $28.1 million in the prior year period. This increase was primarily due to professional services and employee related expenses. Depreciation expense was $28.2 million in the second quarter 2014 compared to $21.6 million in the second quarter of 2013. This increase was primarily due to capital spending in the first quarter of 2014 for turnaround and other capital projects at the El Dorado Refinery.

Interest expense was $10.1 million compared to $9.2 million in the second quarter of 2013. This year-over-year increase was primarily due to higher borrowing levels. Finally our income tax rate adjusted for minority interest associated with Delek Logistics of $8.3 million was 37.3% in the second quarter of 2014 compared to 34.4% on the same basis in the second quarter of 2013.

We expect the income tax rate for 2014 to be 37% to 38% which is similar to 2013 adjusted for the minority interest.

Turning now to capital spending; our capital expenditures during the period were approximately $39.1 million compared to approximately $36.5 million in the second quarter of 2013. During the second quarter of 2014 we spent $24.1 million in our refining segment, $1 million in our logistics segment, $6.5 million in retail segment and $7.5 million at the corporate level. Our 2014 capital expenditures or forecast to be approximately $290.3 million, this amount includes $225.5 million in our refining segment, $13.1 million in our logistics segment, $30.5 million in our retail segment and 21.2 million at the corporate level.

This increase from $259.8 million in our previous projection is primarily related to spending for the tower expansion project to be completed during the turnaround of first quarter 2015.

Now I would like to discuss our results by segment. Our refining segment represented approximately 75.2% of the total contribution margin generated in the second quarter of 2014. As mentioned earlier performance benefited from a wider discount for Midland WTI. Our refining segment contribution margin was $125.7 million during the second quarter of 2014. This was reduced by approximately $22.6 million related to the supply and uptake agreement financial settlement.

Excluding this one-time expense the refining contribution margin was $148.3 million. In the second quarter of 2013 the contribution margin was $102.4 million. El Dorado contribution margin was $59.3 million, excluding the one-time expense, compared to $32.4 million in Q2 of ‘13. Our tower refinery Tyler refinery contribution margin was $86.3 million in Q2 of ‘14 compared to $66.7 million in the same period last year.

At Tyler we processed approximately $58,000 per barrel per day of crude compared to our record level of approximately 64,000 for 100 barrels per day reached in the second quarter of 2013. Our El Dorado refinery processed approximately 79,000 barrels per day of crude during the second quarter of 2014 compared to approximately 67,860 barrels per day in the year ago period. This increase can be attributed to improved flexibility to process light crude from projects implemented during the first quarter of 2014 turnaround.

Now I would like to review our logistics segment which is comprised of the results from Delek Logistics partners. Our logistics segment contribution margin was $30.2 million in the second quarter 2014 compared to $12.3 million in the second quarter of 2013. Results benefited primarily from an improved margin in the West Texas wholesale business and acquisitions completed by Delek Logistics over the past year, Delek U.S. to hold substantially all of the storage tanks and the product both the Tyler refineries and El Dorado refinery in July of 2013 and February of 2014 respectively to Delek Logistics.

Moving on to the retail segment. Retail’s contribution margin was $16.7 million in the second quarter of 2014 compared to $16 million in the second quarter of the prior year. This change was primarily due to higher merchandise sales and fuel volumes on a year-over-year basis. We continue to focus on our initiative of building large format stores and we completed three during the second quarter of 2014. Our goal is to complete an additional four to six stores in 2014. At the end of the second quarter of 2014, we had 59 large format stores out of our total store count of 362.

I will now turn the call over to Fred to review initiatives in our Refining segment.

Fred Green

Thanks Danny. I’d like to discuss our second quarter 2014 performance at the refineries and our plans for the Tyler refinery turnaround scheduled for the first quarter of 2015.

During the El Dorado turnaround, we completed projects including debottlenecking the crude pre-flash tower, expanding the gasoline hydrotreater and diesel hydrotreater and replacing the reactor on the FCC. Our goal is to increase our flexibility to process an additional 10,000 barrels per day of light crude. I’m pleased to report that during the second quarter the refinery processed approximately 79,000 barrels per day of mostly light crude. Our asphalt yield was 8.5% during the quarter. This compares to 67,860 barrels per day of crude in the second quarter 2013 with an asphalt yield of 11.7%.

As Danny mentioned, we processed 58,000 barrels per day of crude in the second quarter at the Tyler refinery. A portion of this decline on a year over year basis is related to the Tyler operating at approximately 42,000 barrels per day during the last 10 days of June due to a mechanical issue with the FCC. At our Tyler refinery planning is underway for the turnaround scheduled for the first quarter 2015. In addition to the turnaround work we’re planning to replace the FCC reactor at Tyler with state of the art technology.

During this downtime we also plan to complete a project to expand crude nameplate capacity at the Tyler refinery to 75,000 barrels per day. In addition, we will also expand the diesel hydrotreater to 36,000 barrels per day and expand and at the hydrotreater to 28,000 barrels per day. These expansion projects are expected to cost approximately $70 million of which an estimated $53 million is to be spent during 2014. Assuming an incremental 10,000 barrels per day crude throughput we expect an incremental product yield of approximately 10,100 barrels per day. This is made up of 5,000 barrels per day of gasoline, 4,300 barrels per day of ultra low sulfur diesel and 800 barrels per day of other products.

Assuming a $17.50 per barrel Gulf Coast 5-3-2 high sulfur diesel crack spread WTI Cushing at $97 per barrel approximately $2 per barrel of crude transportation and the $0.50 per barrel back relation effect we expect that these projects will generate between 30 million and 35 million of EBITDA annually. To support this expansion we will use our crude supply flexibility to access additional crude from the Cushing, Longview and Midland areas. We will use our logistics assets in East and West Texas along with other terminals in the area to move this product to market.

Now I’ll turn the call over to Uzi for his closing remarks.

Uzi Yemin

Thank you, Fred. Our refining operations performed extremely well during the second quarter as we benefited from our access to cost advantage crude in our system and increase throughput at the El Dorado refinery.

The logistics segment reported a record quarter and with the recent increase by Delek Logistics in its quarterly distribution, the incentive distribution rights payments to the general partner will begin in the third quarter. Our recent segment another solid quarter and we continue to investment in the future as it opens additional large format stores. So far during the third quarter we have continued to benefit from the cost advantage Midland crude which was approximately $6.60 per barrel below Cushing for July and $10.50 per barrel below for August. Currently, September crude is trading in a range of $10 to $11 per barrel below Cushing. In this environment we’ve been able to lock in the majority of our crude slate to take advantage of these differentials for the third quarter.

Our financial position continued to improve this quarter and we remain focused on allocating capital to create long term value for our shareholders. A portion of this program is funding future growth of the company by investing in our operation. We enhanced the crude collectability at El Dorado refinery during the first quarter and we are now planning for the upcoming Tyler turnaround and expansion. In addition to funding for future growth we’ve been returning cash to our shareholders through special and regular dividends.

During the second quarter we began repurchasing shares and the authorization for 2014 has been increased to $100 million. As we move forward we will continue to manage our capital allocation strategy to support investment in our business and return cash to shareholders.

With that operator will you please open the call for questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Roger Read from Wells Fargo. Your line is open.

Roger Read - Wells Fargo Securities

Good morning. I guess I would like to delve in a little bit more into the Tyler expansion to understand the barrels you're adding and then how that breaks down. But is there a yield improvement anywhere else within Tyler that we should think about here better? I think a lot of times you all talked about issues with asphalt out of more so El Dorado, but just wondering if there's any yield uplift that we are not otherwise seeing and the expansion itself?

Fred Green

Roger this is Fred. We’re expecting some yield benefits from the SEC that is certainly going to help with handling some of the extra products coming out the expansions. We do expect a good payout from the SEC investment which we still got about $12 million on that project.

Roger Read - Wells Fargo Securities

And then of the $54 million if I'm getting in that correct, I believe that you're spending $53 million you are spending in ‘14. I assume that is mostly equipment you are getting in place? Any critical path items we need to be aware of here?

Fred Green

The 53 million takes us obviously through the end of the year and it captures all of the equipment purchases, all of the engineering and the majority of the pre-turnaround construction activity for the full project.

Roger Read - Wells Fargo Securities

Any permitting issues anything else that could potentially slow you down here?

Fred Green

No, permits are in good shape.

Roger Read - Wells Fargo Securities

And then just last question for you on El Dorado, obviously the first 1.5 quarters, I guess, here of having the expansion under your belt and the Midland barrels coming in, what have you learned so far? What’s surprised you if anything in terms of yield better, worse, et cetera? Just kind of curious how you're looking at it now that you've had experience running it?

Fred Green

The first few months of operations with the expanded refinery we really pushed as many Midland barrels through the plant as we could and balance them more like naphtha and less heavy naphtha than we expected. So we still have a little work to do on the top of the tower. But at a 37 to 38 gravity average crude, we’ve been able to achieve runs in the low to mid 80s on the refinery. So we’re pretty pleased with the performance of the various projects.

Roger Read - Wells Fargo Securities

And where would you expect to see improvements? Is it's strictly the naphtha or is there different crude blend you might want to run to get a better yield output there?

Fred Green

We watch probably 60 different crudes on a monthly basis to optimize the yields of the refinery and the flexibility that we have is tremendous so it just depends on the economics of the day where we need to take it.

Operator

Your next question comes from the line of Edward Westlake from Credit Suisse. Your line is open.

Edward Westlake - Credit Suisse

Congratulations on the earnings and it looks like a profitable expansion on Tyler. Maybe logistics. You clearly have opportunities in your area to grow that business. Maybe give us an of date of where you think you will be by the end of this year next year terms of the EBITDA run rate?

Fred Green

First logistics as you know had a wonderful quarter; we came with $28 million. The new normal we think that with respect is much more than the 50 that we used to see because of the ethanol program and the wins. In terms of logistics, we said it all along there are tremendous amount of opportunities either third party or expanding our own logistics assets. We were very clear that DKL was very clear yesterday on the call that on top of the run rate that we see today we’re expecting $25 million to $35 million of EBITDA within the next call it eight to 10 months, beginning of next year.

And that 25 to 35 is not with tremendous amount of CapEx. We’re talking about $80 million to $85 million of capital that needs to be dedicated. So if we take the medium $30 million then with no leverage or very minimum leverage at DKL, the future is very bright for DKL for the next call it six to 10 months. On top of that we say that we feel that we’re on track to get the 150 million that EBITDA goal by the end of next year, by the end of 2015. And that 150 was our goal all along and we have projects that are being engineered as we speak to get up to that goal.

Just in that regard I want to mention one thing that to build on what Fred said, we have been working very hard on the Tyler expansion in the last six to eight months. And only when we were ready to announce that we came to the public. So it’s not that the project that we’re working on just were born yesterday. We work on them for long time and then when they’re mature to be disclosed we come to public. So everybody needs to assume that this is the case with DKL projects.

Edward Westlake - Credit Suisse

So a follow-up really on capital allocation. Thank you for raising the buybacks and $100 million is it decent chunk of equity. Just to put it in context you got MPC talking about 20% authorization or an extra $2 billion and then to sort of an extra $1 billion and then [Holly] is maybe even talking about buyback. So maybe just talk a bit through with the cash that you've got on the balance sheet -- why not be more aggressive on the buybacks now that the some of the flow issues with the shares have reduced?

Uzi Yemin

Well, first of all, we feel that we went up we double up now obviously if the situation continue and Midland will continue to do what it does and the company continue to what we’re doing then 100 is not enough, we know that. At the same time wanted to go through the expansion of El Dorado we’ve got the payback very heavily. Besides that on Tyler the $30 million that we published is a very, very conservative number and it’s a conservative number because of the fact that we give a zero discount to the crude that we’re bringing in and oil for the year is very conservative.

So the return on this project is very, very nice. Other projects we have in the base we always targeted with refining assets 100% return and with logistics assets eight times EBITDA that’s much better than the market. It doesn’t mean that if we continue to perform the way we are performing and this continues that we should in-visit that $100 million we just started two months ago with 50 we doubled now to 100 so we are well going to right director. And please remember now we are talking about between the dividend and the buyback close to 10% return to shareholders.

Edward Westlake - Credit Suisse

That's a very good direction to go into thank you.

Operator

Your next question comes from the line of Doug Leggett from Bank of America Merrill Lynch. Your line is open.

Doug Leggett - Bank of America Merrill Lynch

Hi, everybody. I wonder if I could do a follow-up on the Tyler expansion. Can you guys frame, I don't know if I missed this in the prepared remarks, but what was that you have been planning for seven or eight months what is the spending to-date -- basically the project capital they to be collect those so to speak and can you talk a little bit about product marketing and specifically what I'm thinking not so much that the incremental gasoline as a huge deal but I'm thinking about more how you are seeing dynamics generally for what looks now like an over-supplied gulf coast market at least in terms of gasoline as we go into the fall. And I have got a follow up with.

Uzi Yemin

Well, these are two different questions and we’ll take them one at a time. The first one is how much capital which I think how much capital we spend so far and what the allocation. Assi, do you want to take that one?

Assi Ginzburg

Sure good morning Doug. We have spent in the first six months of the year approximately $24 million on the project so out of the $53 million, $24 million is already spent and paid and the remaining should be paid by the end of this year. And we had a small piece which is $70 million that will be paid in the 2015.

Uzi Yemin

So hopefully that answers that question. Do you have any follow up product topic, Doug?

Doug Leggett - Bank of America Merrill Lynch

No. That's great just on the marketing of the product place.

Uzi Yemin

Okay. Well, I’ll be clear about that next to Tyler only 80 miles from Tyler there is a small town by the name of Dallas. And Dallas last I checked there was no refinery there and I don’t think that they have plans to build any. So, obviously I’ve been and we are having fun this morning. So the short answer is that 80 miles west of us the Dallas market is a huge market. We tap into that market before in order to check the work and we think that we can supply this market very handsomely. It means that we need to find some kind of solution which we think we have. But that’s the direction we are going to.

Doug Leggett - Bank of America Merrill Lynch

Uzi, just to be clear what I'm asking is that, as you go in to the low demand period in the lower 48, utilization in the Gulf coast is obviously extremely high and one of your competitors talked last year about Gulf Coast gasoline finding as we enter this market and basically depressing the margin. So what I'm trying to understand is how do you see the gasoline market in your backyard as we go into the fall? Are you seeing the same kind of seasonal dynamics that give us pressure in your gasoline margins? That's what I'm trying to get at.

Uzi Yemin

That’s a wonderful question the short answer is no. I misunderstood you and obviously we all go by indexes by we still enjoy in our niche market both El Dorado, Tyler obviously Memphis was great deal all these places we enjoy nice premium for gasoline on top of what the market is from an industry standpoint.

Doug Leggett - Bank of America Merrill Lynch

Thanks, my final one, if I can squeeze it in. just real quick the long-term, you have bridge tags and a few other pipelines, obviously, coming on through you are huge beneficiary of the middle and differential. What is your long-term prognosis or maybe your medium-term and long-term prognosis for the Midland WTI and I'll leave it there. Thanks.

Uzi Yemin

That’s a great one again. That’s a huge focus for us I think we said on previous calls that we think that BridgeTex is going to make an impact or huge impact as much as people thought they were, if we’re going to do. And the answer, the reason that is coming out of Colorado City and in previous calls we said it is Colorado City not Midland and the bottleneck is not in Colorado City, because we have other pipelines coming out of Colorado City.

So as long as BridgeTex is not being fed by Midland, I don’t see a big impact on that. By the way market doesn’t see any big impact on that. Just the point of reference you can log in this morning and I checked it just before we came in for fourth quarter after BridgeTex is coming up Midland differential for 875 for the entire quarter. So we say first quarter is now 650 roughly which you can login again. So for the next eight, 10 months Midland should stay strong, after that our production is growing but there are more projects coming on line, we just heard in other project yesterday Sunoco announced open season for something.

So I think that by call it a year from now we won’t see the $9, $10 that we see right now. However with productions growing the way it’s growing and the fact that people hesitate because they got burned in other areas, Cushing for example or Colorado City itself, I think that early 2016 we will see again healthy differentials assuming that the production will continue to wait if growing and I hope it wasn’t too long of answer but I try to be comprehensive here.

Operator

Your next question comes from the line of Paul Cheng from Barclays. Your line is open.

Paul Cheng - Barclays Capital

In going forward that maybe, Assi, if you guys can put the GP cash flow for any incentive pace start to kick in that into your press release and also that LP unit that you hold. Even through all this information we can find in your TKL document, but I think for many your method would be helpful just looking at the press release and be able to find all this information.

Assi Ginzburg

Sure, I don’t see any issue with that.

Paul Cheng - Barclays Capital

Fred after the Tyler expansion, by the second quarter, is there a corresponding increase in your Midland oil availability in the refinery for the pipeline? Right now you have 51,000 barrel per day. Is the number going to change?

Fred Green

I’ll be very clear Paul in that regard. The Midland differential found themselves into other areas, part of this surprise -- of this earnings is the fact that we actually buy sometimes Midland differentials outside Midland, because of these barrels that exist in other places. So it depends what we want to do, we said in the press release or I think in the presentation that we attached to the press release that it will be a combination of different areas based on discount. It doesn’t mean that we are -- Midland barrels and it doesn’t mean that we can’t get there. But it depends what we want to do and how much we want to maintain flexibility of other areas that are discounted as well and are big on these areas if you will.

Paul Cheng - Barclays Capital

You are not telling me that had any concurrent additional commitment to the pipeline to increase your uptake through the pipeline from Midland into Tyler. The commitment they’re going to be 51,000 barrels per day.

Assi Ginzburg

Well there are ways to get Midland barrels or Midland discount to Tyler without being committed to something. And I don’t want to go to too many details here because of just commercial secret. But there are ways to get these barrels.

Danny Norris

Paul having said that we didn’t take any of that into account for the economics of the project it’s based on buying oil in Cushing for the incremental.

Fred Green

And the reason we did that because we looked at this as a long-term project, and who knows what will happen to Midland differentials a year from now. So we want to be very conservative.

Paul Cheng - Barclays Capital

Sure. What is the second quarter warning that you evaluate to El Dorado, both in terms of my light oil and heavy oil?

Fred Green

Paul is that how much rail you asked?

Paul Cheng - Barclays Capital

Yes.

Fred Green

I want to say the rail that we -- railing is probably around 4,600 to 4,800 barrels a day probably had a very little heavy and it’s because of differentials that were in the market coming to the quarter.

Paul Cheng - Barclays Capital

Any expected third-quarter warning you can share?

Uzi Yemin

We can talk about rolling third quarter is going to be small amount however again let’s be clear about that and going back being tied to your previous question. We have right now we look at Canadian heavy 24, 25 under when this late in El Dorado is coming with nice discount. Now it doesn’t make sense just yet but if the discount is widening to above 28, 29 now to some barely actually bared and sharpening enough Midland because of the WTI decline. So that goes back to the previous question at this quarter we didn’t do anything but it depends on the financials and we maintain the flexibility to move barrel from other areas.

Paul Cheng - Barclays Capital

Sure. You say, I mean there is a market rumor talking about Sysco refining systems will be up for sale, so the question is then, overall refining M&A is how significant in terms of your overall strategy for the next one to two years?

Uzi Yemin

Well we always said Paul that in order for us to buy a refinery first of all we don’t want to leverage the balance sheet tremendously so I would like determine is that I don’t see that growing more than two times EBITDA on the balance sheet so that’s one thing. Second, we always said that we don’t want to issue because we think that we are undervalued where we’re not going to issue tremendous amount of stock so that’s another topic that is on our mind and we continue to maintain this policy. But for the most part is to buy a refinery or refining asset we need to have the same four criterias that we were guided by over the years.

And these four criterias are; one, can we improve the crude slate; second, if we have capital projects that can have quick payback; third, if we can increase the capacity of the refineries; and fourth, if we can get higher netbacks. These are four criterias and we were very clear about them and very transparent about them. So, any of the assets that are on the block and there are several of them need to meet; one, no high leverage for the company; second, not huge equity; third, meet these four criterias.

Paul Cheng - Barclays Capital

Sure. Uzi, any kind of rough estimate how quickly you can get the DKLGP moved to the high speed?

Uzi Yemin

I’ll let Assi do that I’ll just say right after that now, but go ahead Assi.

Assi Ginzburg

Right now we are paying at $0.0475 dividend so we need to increase the dividend by $0.09 to get to the high split. $0.09 is a very small amount when you only have 24 million shares it’s less than it is around $2 million increase in dividend. I will say on a quarterly base I will say it with our 15% at least expected growth in distribution at DKL we expect sometimes in 2015 to achieve that goal.

Paul Cheng - Barclays Capital

Okay. And Assi can you remind us that mostly will you say on G&R terms look like?

Assi Ginzburg

They are three years, they are extended until April of 2017 and they are in general similar terms financial and cost to [delicate].

Paul Cheng - Barclays Capital

Okay. And the expansion corporate time is very impressive how low it is given there's a pretty super expansion. Is there anything unique about Tyler to make it so cost effective for the expansion comparing to the other guys?

Fred Green

Paul, probably the biggest cost savings is in the crude a portion itself. The Tyler crude unit only has a flash drum and no tower so all of that right now it has to go on the main crude tower main crude column. So by installing a pre flash tower in that system we’re going to get a pretty significant boost in throughput without a lot of spending. So that’s probably the most unique portion of the project.

Paul Cheng - Barclays Capital

Assi, do you have a preliminary 2015 CapEx number that you can share?

Assi Ginzburg

Well we are finalizing that. Let me tell you that it’s going to be much lower than 2014 despite the expansion first because we are spending $53 million of the expansion in this year out of the $70 million. And because of the fact that El Dorado now CapEx is very, very low after the enormous investment we have done. So it’s going to be much lower than the CapEx today and honestly that goes back to what Ed said the reason we look at increasing the buyback and thinking about that as we get, as we progress with the year maybe to look at it again.

Paul Cheng - Barclays Capital

Assi, do you have the market value of your inventory?

Assi Ginzburg

Absolutely I was waiting for that question I wrote it on the first page of my script so it’s $52 million.

Paul Cheng - Barclays Capital

And then final, just want to make several comments, and I noticed that in the refining, now that you put the realized margin in that. I think therefore a lot of us that the probably separated out hedging gain or loss from your realized margin probably is more useful for us than including them. And also that don’t know whether you will consider just giving the refining margin by product sales that you’re really looking at what is the refining margin by throughput and what is the profit on loss on your volume. Because I think you eliminate on lot of, maybe noises in the system. And finally, for El Dorado is very difficult for us from outside to really track that quarter. If there's any benchmark indicator pricing that you guys can share and put into your Web site that would be really helpful.

Fred Green

Both comments are welcomed we’ll think about them.

Operator

Your next question comes from the line of Jeff Dietert from Simmons. Your line is open.

Jeff Dietert - Simmons & Company

So if we think back just seven or 10 days ago we had the Philips 66 border refinery down in the Permian basin, Western had some unplanned downtime at El Paso and BridgeTex had not started line pack. And you fast forward to today and last week Philips 66 confirmed that Border was back up and Western confirmed the El Paso’s up. Earlier this week, Magellan said that they have already started line pack on BridgeTex. 10 days ago the Midland diff was $10 a barrel, today it's $11.50.

So a number of the incremental demand for Midland have already come into the marketplace, and yet the Midland differential is wider now than it was even 10 days ago. BridgeTex has talked about coming online next month so that will be some incremental demand. Are there any other sources of demand that you see that might compress that Midland differential here in the third quarter or early in the fourth quarter?

Fred Green

Well the market doesn’t know, because if can lock in and I mentioned that earlier if we can lock in Midland at 875 this morning for the fourth quarter, the market expected this to continue. Now I mentioned that earlier in the call, BridgeTex is Colorado City. And Colorado City unless you fit it and it’s 80 miles from Midland somehow either by truck or something then the pressure in Midland won’t be released. It cost money to get it from Midland to Colorado City you need an unloading facility. I don’t know if anybody can unload by truck 300,000 barrels.

So until we see the pressure being released in Midland itself. And from the gathering systems themselves into even in Midland there are some system that comprise themselves because of unloading facilities from other pipeline until the system will be more efficient and the system will be more mature, we’ll see this up and down up and down.

This store in Midland is very, very expensive. We have stores both in Midland and in Colorado City, something that we worked very hard to get in the last couple of years. And it’s very, very expensive to get it. So until stores will come online in these two areas we will continue to see this. It doesn’t mean that when the next system coming out both the systems, and there are two of them. And what Sun is doing with express 2 that we wanted the market going down. But unlike Cushing that is you need to feed Cushing from somewhere in Midland they both exist in that area in different systems that are not connected between themselves, so that’s the reason we’re optimistic for the next call it eight to 10 months.

Jeff Dietert - Simmons & Company

I think the next major gathering system is the plane systems scheduled to come on early first quarter, after that I believe that's the only one I'm aware of between now and the end of the year. Is that consistent with your intelligence?

Fred Green

There are three pipelines, first of all sunrise is coming by the end of this year, it was supposed to come earlier it is being pushed. Then we have cactus and then we have PE2. Now Sun announced yesterday, two years from now or 1.5 years from now that want to do expansion of PE2 and their target is another 100. But that’s sometime in 2016.

Operator

Your next question comes from the line of Minit Gupta from Morgan Stanley. Your line is open.

Minit Gupta - Morgan Stanley

Coming back to the Tyler expansion, when I'm doing the math $17 barrel WTI, $1.08 for crude transportation, $1.80 for product transportation, $50 CMI normal OpxEx, $2 to $3 Midland spread, I am ending up at about $45 million in EBITDA versus your $30 million to $35 million. Just trying to understand, am I missing something, or are you just being very conservative here? The project looks about 25% more profitable to me versus what you guys are projecting right now.

Assi Ginzburg

Minit, good morning, it’s Assi. First in for the interest if you look at the presentation that we filed the economics were down based on 10,000 barrels a day of incremental crude. With that being said if you look at the press release Tyler ran in the last six months this year and the six months last year around 58,000 barrels a day on average. So we’re taking the refinery that runs 58 with an average capacity of 60 to potentially 75,000 barrels a day refinery. And that’s why and we’re using the economics only 10,000 barrels a day. And that’s why we now mine we’re using a very conservative approach.

With that being said we know that refineries from time to time have issues. We have looked also on an alternative way to look at it that the incremental crude will be actually 12,000 to 13,000 barrels a day and using a $2 margin and then even the $45 million number that you mentioned sounds conservative.

Minit Gupta - Morgan Stanley

But you will be sourcing some Midland crude here, right? All the crude will not be coming from Cushing.

Assi Ginzburg

You are correct we’re just like to be conservative.

Minit Gupta - Morgan Stanley

So if you add those two or three barrels in there and then the project profitably starts pushing 40 plus right or am I getting it wrong?

Assi Ginzburg

You are getting it right.

Minit Gupta - Morgan Stanley

Okay fair enough. Second question was how much of MLP EBITDA is currently at DK level that can be moved into DKL, some color on these assets, what's the timeframe of drops? And just trying to understand the cash proceeds that you could generate at DK level by moving these assets to DKL?

Assi Ginzburg

Sure. If you look at the DKL presentation that we filed in the ongoing IR information we have $5 million to $10 million of additional EBITDA that we plan to drop in the next I’ll say eight months to the MLP probably Q1 2015 that’s one of our target. And historically we use multiple of around nine times for those assets. That cash can be used one to finance the remaining turnaround in the Tyler refinery and it’s expected to happen in the Q1 of 2015, and to allow us to continue with our aggressive buyback program.

Minit Gupta - Morgan Stanley

Perfect, thank you so much guys.

Operator

Your next question comes from the line of Paul Sankey from Wolfe Research. Your line is open.

Paul Sankey - Wolfe Research

Good morning, Uzi. Obviously you have answered a tremendous number of questions I just with regard to high level continuation of your comment that there's no refineries in Dallas. How did you think about the risks of more and more refineries adding more and more capacity in terms of how you looked at the investment you decided to make. And I guess that's pretty specific to your region, obviously, but it would be real interesting to hear your perspective on the whole of the U.S. and potential for refiners to start adding more and more capacity. Thanks.

Uzi Yemin

Great. First of all we did ask ourselves that question many times. But why that’s the reason we are using W Cushing and not giving us the benefit of differential in the projection obviously anybody can think about any differentials in the future. But for the most part it depends about our outlook of and I think you hit hard on that, exporting crude. As long as this band is in place adding refining capacity I don’t think is a big problem especially in light of the fact that we are doing it as an industry more disciplined and we used to do it in the past.

In the past we saw big margins and band there were big expansion. This time we have more disciplined as an industry. This may change toward our view to 2017-2018 is this then will be listed and band our crude can be exported to other countries. But as long as this band exist I think the small pace that we go as an industry is just marginal and that will help exporting more products to other nations.

Paul Sankey - Wolfe Research

I'm not sure I understand that, Uzi. So what you're saying is that the industry is basically showing more discipline, but wouldn't you expect people to add more capacity as a result of the export band? Or earlier -- are you saying, the fact that it may be lifted will prevent demanding capacity?

Uzi Yemin

Yes, people think about that well we do and I believe that other companies do because we stick to other companies about that. The refining industry is actually thinking about okay what will happen if this band will be lifted and that’s the reason people are seeing are trying to be more conservative in putting more capital to work. We enjoy some areas of the country, not all of them, but some areas enjoy very healthy crack spreads. And then we still chose not to go after big capital projects but we return back cash back as an industry to the shareholders.

Paul Sankey - Wolfe Research

Right I’ve got you. Okay, it’s approaching the end of the call, so I'll leave it there. Just one joke question for you, Uzi. Do you know if there are any comedy clubs in Dallas? Thanks.

Uzi Yemin

Only with British accent, I am sorry.

Operator

There are no further questions at this time. I turn the call back over to the presenters.

Keith Johnson

Thank you so much. Again I’d like to thank each employee of this great company that helped making this as great as it was. I’d like to thank my colleagues here on the table and outside the office for creating the value for our shareholders and everything I’d like to thank each one of you the investors for your confidence in our company. Have a great day and we’ll talk to you soon.

Operator

This concludes today’s conference call. You may now disconnect.

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