Delek US Holdings, Inc. (DK) CEO Uzi Yemin on Q2 2021 Results - Earnings Call Transcript

Call Start: 09:30 January 1, 0000 10:34 AM ET

Delek US Holdings, Inc. (NYSE:DK)

Q2 2021 Earnings Conference Call

August 4, 2021 09:30 ET

Company Participants

Blake Fernandez - Senior Vice President of Investor Relations & Market Intelligence

Reuven Spiegel - Executive Vice President & Chief Financial Officer

Louis LaBella - Executive Vice President & President of Refining

Uzi Yemin - Chairman, President & Chief Executive Officer

Todd O'Malley - Executive Vice President/Chief Commercial Officer

Conference Call Participants

Manav Gupta - Credit Suisse Securities

Roger Read - Wells Fargo

Ryan Todd - Simmons Energy

Theresa Chen - Barclays

Phil Gresh - JP Morgan

Paul Sankey - Sankey Resources

Matthew Blair - Tudor, Pickering, Holt

Neil Mehta - Goldman Sachs

Doug Legate - Bank of America

Paul Chang - Scotiabank

Jason Gabelman - Collin

Operator

Good morning, and welcome to the Delek's US Holdings Incorporated Second Quarter 2021 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask question. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Blake Fernandez, Senior Vice President of investor relations. Please go ahead.

Blake Fernandez

Thank you and good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek US Holdings' second quarter 2021 financial results. Joining me on today's call is Uzi Yemin, our Chairman, President, and CEO; Reuven Spiegel, EVP and CFO, and Louis LaBella, EVP and President of Refining; as well as other members of our management team. The presentation materials used during today's call can be found on the Investor Relations section of the Delek US website. As a reminder, this conference call may contain forward-looking statements as that term is defined under Federal Securities Laws.

Please see slide 2 for the Safe Harbor statement. 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 the comparable GAAP results, which can be found in the press release, which is posted on the Investor Relations section of the website. Our prepared remarks are being made assuming that the earnings release has been reviewed, and we are covering less segment and market information that is incorporated into the 2Q press release.

On today's call, Reuven will review financial performance. I will cover capitalization and guidance. Louis will cover operations and CapEx. And then Uzi will offer a few closing strategic comments.

With that, I'll turn the call over to Reuven.

Reuven Spiegel

Thank you, Blake.

On an adjusted basis for the second quarter of 2021, Delek US reported a net loss of $65.2 million, or a loss of $0.88 per share, compared to net loss of $121.7 million or loss of $66 per share in the prior year period. Our adjusted EBITDA was $2 million in the second quarter, compared to a loss of $100 million in the prior year period. The second paragraph of the press release highlights $25 million of after tax tailwind, or $.34 per share of items included in adjusted results. Page 10 of the release provides a breakdown of inventory hedging impact, and page 14 provides other inventory impacts in the quarter.

Separate from these items, multiple factors impacted operation during the quarter, including residual effects of the first quarter freeze and fire as well as the colonial pipeline shutdown. While we cannot know what our EBITDA would have been, these events caused us to experience operational disruptions and incur incremental costs related to property damage that significantly affected our results. The incremental expenses combined with second quarter related business interruption insurance claim prepared to date totaled roughly $40 million to $45 million. We're actively working with insurance carriers on both our property damage and business interruption claims recoveries, which will be recognized in the coming quarters.

On slide 4, we provide the cash flow waterfall. In the second quarter of 2021, we had positive cash flow of approximately $169 million from continuing operations, which includes a working capital benefit of $227 million.

With that, I will turn it over to Blake.

Blake Fernandez

Thanks, Reuven.

Slide 5 highlights our capitalization. We ended the second quarter with $833 million of cash on a consolidated basis and $1.41 billion of net debt. Excluding net debt of Delek Logistics of $927 million, we had net debt of approximately $485 million at June 30, 2021. I would note during the third quarter, we received the full tax refund of approximately $156 million.

Moving to Slide 6, we provide our third quarter guidance for modeling. Third quarter operating costs are forecasted to be in the range of $145 million to $155 million.

With that, I will turn the call over to Louis to discuss operations and CapEx.

Louis LaBella

Thanks, Blake. During the second quarter, our total refining system crude oil throughput was approximately 267,000 barrels per day. This was impacted by turnaround activities in Tyle and El Dorado lingering freeze impacts at Big Springs, Krotz Springs, and El Dorado and Tyler, Krotz Springs do the Colonial Pipeline outage. In the third quarter of 2021, we expected crude oil throughput to average between 280,000 to 290,000 barrels per day, or approximately 94% utilization at the midpoint. We are currently back to normal operations at all four of our refineries and have no major planned downtime for the remainder of the year.

On Slide 7, capital expenditures during the second quarter were $66 million reflecting turnaround activities and fire related repairs at El Dorado. The 2021 capital plan is expected to be $175 to $185 million, including turnarounds and net of estimated insurance proceeds.

Next, I will turn the call over to Uzi.

Uzi Yemin

Thanks, Louis and good morning everybody. Multiple factors impacted operations in the first half of the year and between insurance claims and tax refunds. We expect meaningful cash benefits over the coming quarters. At the same time, we're actively pursuing small refinery exemptions. Our company has a long history of being granted SREs, and this would go a long way in positively impacting the economics of our facilities. Moving to operations, we are pleased to resume a growth in the retail segment with two new industry stores in the planning phase. New stores to market will complement our existing branded portfolio, which have been resilient throughout the pandemic. Finally, logistics performance recovered from depressed levels in the first quarter, and we expect the business to remain stable for the balance of the year. DKL continues its long history of distribution growth with 33 consecutive increases.

With that, operator, will you please open the call for questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. Our first question comes from Manav Gupta with Credit Suisse. Please go ahead.

Manav Gupta

Hey, Uzi, I had a question on SREs. If we look at the history, you did get them for as many as three refineries; I think two of your refineries are definitely eligible, there is a Supreme Court ruling out supporting the SRE, so I'm just trying to understand how confident are you, what's your opinion, how strong of a legal case you have that too Krotz and El Dorado should get the SREs, and if you could help us quantify given where the current rent prices, if you do end up getting it, what's the benefit to you?

Uzi Yemin

Good morning, Manav. I let Todd answer the quantifying thing. I'm just going to give you some color around what we think and the low confidence level that we have here. So over the last years or past years, we applied seven times for each one of the refineries, out of the seven times Krotz got it six times, El Dorado got five times and Tyle got four times and that was including Trump era and of course Obama. So, we think that we are entitled to the grant; we are actively pursuing and have discussions with administration around this situation here. Now, you probably ask yourself what the timeline is, so I'm going to give you a little color on that because it's really clear what they need to do unless they change the law. The time to turn in the 2019 race is by the end of November this year. So they need to make a decision over the next couple of months unless they change the ruling, which I don't expect that to happen. The time to turn in the 2020 race is January of next year, i.e. five months from now. And the time to turn 2021 is by the end of March 2022. So over the next six to seven months, there is time to turn three years 2019, 2020, and 2021.

With that being said, you have some maneuvering, not the EPA, but companies when to turn and what to turn in terms of rent, which is technical and there's no need for us to get into it right now. Now, you ask about the amount; so remember, we're talking about three years here, Todd will cover that. But in general, we're talking about hundreds of hundreds of millions of dollars in today's prices.

Todd, go ahead.

Todd O'Malley

Yes. Sure, Manav. If you go and you look at some of our public filings from 2019 and 2020, and look under the production line item that we list for onroad fuels, and use that with let's call it around a number of $1.50 errand, you can come up with a number that's somewhere note of $300 million per year and that's with three plants and if you do the same for 2020, you get the same thing. The only other thing I would point out, I know, in your question, you mentioned the fact that you believe we only ever been granted three waivers. In fact, there have been three years where we've actually been granted waivers for all three of the plants.

So, I just wanted to point that out as well.

Manav Gupta

Okay, now that's fair. Seems like a meaningful amount pretty big. Just the second question is during the quarter, a lot of one times fire this and that and looks like you're pursuing some insurance claims. Again, if you could give us some timeline on that your level of confidence, what's going on with these insurance claims, which could be an additional $40 million to $45 million?

Uzi Yemin

Well, first don't assume $40 million to $45 million, that we actually think that it's more than that, because there was some damage in the first quarter. We didn't quantified for the first quarter, but in our mind, it should be well we think it is more than $40 million to $45 million, that we're obviously in discussion with the insurance companies, I'm going to tell you that some of the process we already getting them as we speak in the third quarter. So, the claims themselves are in the process of being approved by the carriers. The fact that we got money, or we're getting money means that they approved these claims. And we expect this to happen over the next couple of quarters, but some of the processes are in already in the third quarter. So, I don't want you to think that is $40 million to $45 million that you can probably see what happened and calculate the normality in the third quarter and come to a number as well. But it is high enough within $40 million to $45 million; $40 million to $45 million that is only second quarter and we feel confident that we will start, actually we already did getting process around these claims.

Manav Gupta

Uzi, thank you. Very quick last question is, it looks like you're still you want to grow the retail business; you have new stores coming in, I think in the past, you have said these could potentially double your earnings. So, I know there was an attempt for you to sell your retail business and you've always said, I am open to it, but I won't do it in a hasty manner when the right time is here. So, I'm just wondering to know if anything has changed on that front.

Uzi Yemin

Manav, you see the cash flow. We ended the quarter with $830 million, SREs. We are in active discussion with the administration around getting some of the exemptions. The insurance processes are coming in. There's no need to do that unless it fits the business model. And at this point, having retail fit our business model. Obviously, if an offer comes and it makes sense for the shareholders, we will sell it. But at this point, I know I see a very low chance of selling it just because of how comfortable we are with the cash position.

Manav Gupta

Okay. Thank you so much, Uzi.

Operator

The next question is from Roger Read with Wells Fargo. Please go ahead.

Roger Read

Yes, thanks. Good morning. I guess I'd like to maybe follow back up on the SRE thing because there's a lot of moving pieces here Uzi and team. First off, we don't have an RVO for 2021. Secondly, when SREs have been granted, we've typically seen the price of a rent fall right, there's a supply demand aspect to it. So as you step back, Uzi and look, I know the timeline you gave for when the rents are due, but the whole program has been pretty mismanaged almost from the get go. What would be the right way to think about it from I think you've given us the high, but you know kind of really how you would sort of game plan this out over the next, say six to nine months.

Uzi Yemin

Roger, we have a company to manage here. It doesn't mean that we all order in at this point. So we didn't turn the RIN just yet. We do have a liability on the books; absolutely it's in the P&L, but we can maneuver with the physical RINs, as I mentioned earlier to Manav, we have some rules that you can actually maneuver with that. So I'm not going to disclose the strategy here around how we manage a program, but you're absolutely correct on one side, that if all these waivers will be granted, prices of rates will come down. I'm just going to remind you that we did not turn the RIN just yet. So the liability is sitting on the books at the current price right now. So the P&L will be impacted at the current price as it sits right now. Now, cash flow, we will see how to, we are not going to disclose it today, cash flow, we will see how we're going to move around it.

Now, do I think that's RINs will say at about 50, not really. Are they going back to $0.10, I don't think that the administration will grant 30 waivers. I don't think that the majors will get them. I think only small guidelines like us have a good chance of getting them actually very good chance of getting them. So, I don't expect RINs prices to go back to $0.10. Do I think that they'll go down of $50, absolutely. Now, you mentioned the RVO, RVO is unrelated to the time that you need to turn 2019, 2020. You're talking about only 2021 and if you remember during the pandemic, they pushed the time to turn the 2019, 2020 to November and January. Unless they do it again, the deadline is coming regardless of the RVO. And I was little technical here, but I hope it was clear enough.

Roger Read

I appreciate the clarity. I'm just trying to understand all the implications. Um, let's drop that one for now. If you look operationally, obviously, you know the industry is at a tough last four to six quarters. And we think about Delek and a lot of in one refiners it's all about crude debts, just curious with some of the pipelines that you're involved in the startup of Wink to Webster, how you're seeing the debt situation and is there anything you've been able to do in terms of changing your crude streams, such as to take advantage of any localized crude debt advantages.

Todd O'Malley

Yes, Roger, it's Todd. You know, over the last couple of months, we've actually seen a bit of a deterioration in the crude differential situation, Midland was previously trading at a kind of $0.50 to $0.60 premium relative to TI that's come off and is now trading negative relative to TI. LL [ph] has also seen a relatively large move from up in the $2 range to down around the $0.50 range. So I think, those things are positive at the same time, we're always constantly looking at optimizing our crude slate. We're looking at blending opportunities in Cushing. We're looking at various other grades that might become available as balances shift around in the mid-time and I think we're ideally positioned, given our footprint and our partnership with DKL to continue to do that.

Uzi Yemin

Roger, I would just quickly add, we know through our gathering business in the Permian, the nominations should ramp up toward fourth quarter, certainly into the beginning of next year. So to the extent that prevailing commodity prices is where it is, I think there's a chance production could start to accelerate a bit and that maybe provide a little bit of a tailwind. I don't think we're going back to double digits by any means, but that may help a little bit.

Roger Read

I appreciate the clarification. Thanks, guys.

Operator

The next question is from Ryan M. Todd with Simmons Energy. Please go ahead.

Ryan Todd

Thanks. Maybe one on M&A. There's been a pretty significant amount of recent activity over the last 12 months, including on some of your peers within the refining space and just wanted to get your views on what the environment is in the market without spreads. You're interest in adding scale and whether scale is likely to become an increasingly defining competitive trade amongst the group.

Uzi Yemin

Good morning, Ryan. Well, obviously, we also what the deal that HFC just got with Sinclair [ph]; I thought that it made sense, I don't know much about the numbers, but according to what strategically it makes sense for these small companies to come together. I do think that Delek is part of that group of small refiners that need to continue to think of how to get bigger. I think that this, obviously it needs to be the right opportunity and we are very patient, especially in light of the fact that we expect some of the SREs to be granted, because we really think that we're entitled to several of them. So if that's the case, then the situation of both El Dorado and Krotz is dramatically different compared to what it is today, just because of the fact that all four refineries will be in good position to continue to operate. And that, for itself will help maybe looking at other opportunities.

I don't think that long-term, 10 years from now, these small refineries or these small companies, Delek included, should be continued to be a small scale is very important and I'll leave it to that. There's nothing imminent right now, I don't want you to think that we're talking to anything eminent, but just I think that, like highly thought that they were too small in the mid -- the right strategic move. I think other companies will do the same thing.

Ryan Todd

Thanks. That's helpful. And then maybe a question on your throughput target for the third quarter, a pretty high level of throughput there obviously, little maintenance in the second half of the year for you guys. But I think it's a maybe the highest range that we've seen since 2018 from you, obviously a different refining operating environment than we see right now. Can you talk a little bit of how you're thinking about utilization rates versus margins right now as the industry is still kind of walking that fine line on the recovery here.

Louis LaBella

Yes, Ryan. Hey, this is Louis. Yes, we're looking at like 92% to 96% utilization going into Q3, I'm happy to say that we're all back to normal after the freeze, the turn around the fire event. So it's really stabilizing and showing what the refiners can do and optimize, and to be able to truly optimize, you got to run and run stable. So that's our outlook going into Q3.

Ryan Todd

And the margin environment is I guess in your regional markets is supportive of those types of rates.

Louis LaBella

Yes, I'm going to repeat what I just said. Ryan, the door is open for SREs and we need to think how to run the refineries assuming that we get SREs or don't get SREs and that sort of risk we need to think about and we wait on a daily basis on a weekly basis. Because if you add $0.50 to cross, you need to run it wide open. Now, obviously, these are things that we need to consider as part of our program.

Ryan Todd

Thanks, guys.

Operator

The next question is from Theresa Chen with Barclays, please go ahead.

Theresa Chen

Morning. Thank you for taking my questions. Uzi, maybe if we can just revisit this SRE situation and just put a bow around it. Just boiling it all down when I think about your upward bound of the $300 million per year using the $50 per RIN price, does that mean that you have roughly 200 million RINs between Krotz, El Dorado and Tyler between 2019 and 2020. RINs you have on hand had been sell into the market since the deadline to turn those in had not come up.

Uzi Yemin

Theresa, you asked several questions. First, let's stick to the numbers, Todd, because you have the numbers in front of you just stick to the numbers, and then I'll give an explanation about how we go about it.

Todd O'Malley

Yes, absolutely, Theresa, so you are correct in roughly $200 million RIN number for that calculation that we're doing.

Uzi Yemin

We want to be clear, it's not $200 million, its 200 million RINs per year, between the three of them. 200 million RINs per year for three refineries.

Theresa Chen

Got it.

Uzi Yemin

But now you ask how you go about it. Obviously, we own many RINs, because we didn't want to be exposed in case the Supreme Court comes with something different. But now that we know that they did and according to the history we had with the Saudis, and some discussions we had with the administration, we are looking at it as a whole program, how to balance between turning them in or not holding them, obviously the liability is sitting on the books, the P&L is already not assuming the P&L is not assuming any SREs and it reflects the $50 over $60 it is today. That's the P&L that's what you see in terms of the EBITDA. But now we need to manage the cash around it and we need to manage the situation because the there is some uncertainty about different things.

With that being said, as I said, the deadline is coming. It is not three years from today that somebody can make a decision. And we turned the 2019 applications two years ago, and recently we turned the 2020 and in the near future will turn 2021 application. And the deadline for turning the wind, as I said for 2019 is November, January of 2022, and March of 2022 as well. So for me, the type of decision [ph] is coming, and that's what investors are trusting us to do to balance between these applications, the waivers themselves, when to turn RINs, how many new RINs to keep, and how to manage that risk versus the reward. I'll leave it to that because I don't want to get too technical here.

Theresa Chen

Got it. And just thinking about the rationale for why Krotz and El Dorado were able to receive the SREs even during the last democratic administration. Can you talk about the drivers of that is it you know, lack of lending capability, any puts and takes as to why you think that, you know, this is pretty for sure.

Uzi Yemin

Well, actually, almost same criteria, if you will. And again, I'll read the applications myself several times, I'll just go by different categories, the most important ones. First, all these refiners are in small communities, that the impact on them is pretty big. Second quarter will know is a pipeline refinery. And El Dorado for the most part is the pipeline refinery. So both of them are suffering, there are no opportunity to blend for the most part any gasoline. The third part is that we got acceptance of ethanol in these areas is according to the rules and probably some others that if you want you can go to the EPA website and they say all the criteria's but and then they score it and we know already that some of them were scored in the past by the DOE. So, I especially in light of the 2019 situation two years ago, and 2020 because of the pandemic, and 2021 because of the pandemic. Then we think the situation got even worse, rather than what it used to be in the past.

Theresa Chen

Thank you.

Operator

The next question is from Phil Gresh with JP Morgan. Please, go ahead. Mr. Gresh, your line is open on our end. Perhaps you had it muted on yours.

Phil Gresh

Sorry, user error. Can you hear me or anything?

Reuven Spiegel

Hey, Phil, good morning.

Phil Gresh

I'll try that again. Renewable diesel, I know it's not your project, per se. I'm just curious how you think about what mile markers would matter for you in terms of the investment opportunity? How do you think about this? Is this six to 12 months opportunity? Or we'll just wait and see?

Blake Fernandez

Phil, it's Blake. I'll take it. Really, the reality is it's a 90-day free look once this facility's operational. And going on the global clean energy timeline, it's supposed to be in early 2022 type of time frame that we're dealing with. And so we're going to tell them a holding pattern, wait and see at this point and once we have the opportunity to get in there and make a decision, that kind of when we would do it. So, nothing has really changed on that front a lot, but that's the kind of the timeline we're on.

Phil Gresh

Okay, got it. Second question. Just around DKL. The value of your ownership in DKL appears to exceed the value of where DK is trading at this point. So, you've talked a lot about various cash opportunities between SREs, tax refund, business interruption proceeds, a lot of things coming in the door. If you get some of that cash in the door, is buying back in DSL a consideration? Are there too many tax ramifications? Do you do think it's an area of value unlock or no?

Uzi Yemin

Well, so first, Phil, you touched -- and Reuven mentioned that we touched the situation with the tax refund. We actually got it already during the third quarter. So, it's in the books as we speak. So, as you said, if the plane goes or if it goes according to our plan, there's a tremendous amount of cash coming our way. That actually doesn't change much thought process about DKL. Because we continue to think that DKL is an engine that we want to grow. Now, we are not in the business of owning 80%, but we're not also in the business of paying 9% return. So, at this point, we are just comfortable where we are. If the situation continues, that we will continue to pay 9%, then we probably need to look at it very carefully in the future and to say strategically what we want to do with it. Regardless, 80% is not the right number. It's either we need to bring it in or to sell down some units. And we'll see according to the changes in the market over the next two to three quarters what to do with it.

Phil Gresh

Got it. And the terms of the growth potential, I guess you'd be in the right environment, you're more inclined to grow and potentially do further drop downs if the valuation made sense?

Uzi Yemin

That is correct.

Phil Gresh

Okay, all right. Thanks, Uzi.

Uzi Yemin

Thank you.

Operator

The next question is from Paul Sankey with Sankey Resources. Please, go ahead.

Paul Sankey

Hello, Uzi. Paul Sankey here with Sankey Resources. Uzi, I'm trying to make some sense of the near term as a low grade question. So, if we look at Q3, we've got the tax refund how are things going? Obviously, there was very specific weather issues in Q2 and the rest. But with now the situation where everything is running well and margins are looking good, which what seems to be the case as far as margins going up great? Thanks.

Uzi Yemin

So, as Louis mentioned -- Paul, great to hear from you and again, good luck with your new endeavor.

Paul Sankey

Thank you, sir.

Uzi Yemin

Second, as Louis mentioned, we're running pretty much wide open to 280,000 to 290,000 barrels. So, 92%, 93%, 94% utilization. It makes sense to run these barrels. It will make sense even more when we get some answers around SREs. But for the most part, we're running as normal.

Paul Sankey

So, essentially, this whole rinse thing is holding you back on how much you're running just to avoid the incremental cost? And if you could continue, I might be way out of date here, but I would remember Krotz was a jet fuel type refinery. But are you more or less exposed to the weakness in jet with the lack of demands that we still see, or is that improving too, if we just go through the underlying story?

Todd O'Malley

Yes, Paul, it's Todd. We've really done a great job in conjunction with the folks that Louis has with the plant in optimizing the product make around the downturn in jet fuel. So, we've really minimized what we have. We have a knob that we can turn pretty much instantaneously to get back in the jet business and in fact, we are seeing demand come back in that localized market. Our contracts are not as exposed as you might believe to -- I'm assuming what you're referring to is just the outright Gulf Coast. If so, we're actively watching that, and we'll continue to optimize the system and as jet demand returns, we'll continue to increase that if it makes economic sense.

Paul Sankey

Understood. And then if you could do a strategic one and I think you've addressed the big part of this with the answer to Phil. But it's very striking that Greek government debt yields and negative debt is very cheap. And you've mentioned DKL for example has pretty high cost of equity. And the world is kind of confusing with rates falling, when we thought they would be rising, et cetera, et cetera. You're the kind of guy that can actually take quite rapid advantage of the shifts that we see and make a few -- take a view, perhaps against consensus on where things are heading.

So, I just wanted an update on how you see this crazy world and how that affects you to the best way forward for Delek? Thank you.

Uzi Yemin

Well, I'm not sure -- first, thanks for the compliment. I'm not sure I'm smart enough to think how the world would behave. However, I do think that the world is a little tired of the pandemic and people will find reasons why to go back to some kind of normalcy. If this is the case, then we'll see inflation going up and then rates will go up with it. I think that we just took an advantage of locking in note DKL until 2028 and I do think that there is a risk of inflation and risk of or rising interest rates. If, of course, the printing continues like usual everywhere and the amount of money that we're chasing return is just crazy, when eventually, that will catch up with the amount of money that is being moved around. Just one person's opinion.

Paul Sankey

Basically, strategically, you've taken advantage of the rates but essentially everything you're trying to do remains more or less -- I mean, I guess, for example, historically, you've run as little debt as possible, I just wanted to maybe -- it would be an idea to run higher debt in this environment while you can take advantage of them. But…

Uzi Yemin

I think Paul, SRE is a big portion of the strategy here. The -- I think that the market underestimates what the amount of cash that SREs can bring to a company like Delek. And if this is the case, then our situation -- our cash situation, which we have now $830 million and that's before the tax refund and the insurance, and of course, SREs -- this project may change rapidly for Delek over the next one or two quarters work with the potential cash coming in.

Paul Sankey

And that imply that you think there will be a resolution on it? I mean, I know it's just impossible, it's like a nightmare, but do you think there will be a resolution to this nonsense within any kind of reasonable timeframe or what would you say?

Uzi Yemin

I don't know much about the policy because I think this is at the highest level within the White House. But I think that the SRE situation in the -- the fact that Supreme Court said specifically that companies are entitled to get SREs, I think the administration will grant some waivers; this is just purely my guess. And I think that we are very much top of the line over there in getting these SREs.

Paul Sankey

Great. Thank you, Uzi. Great to hear you.

Uzi Yemin

Thanks, Paul.

Operator

The next question is from Matthew Blair with Tudor, Pickering, Holt. Please go ahead.

Matthew Blair

Hey, good morning, everyone. The $40 million to $45 million from the operational disruptions and the fire in the freeze; could you talk about exactly where that that flowed through your financial statement?

Blake Fernandez

Hey, Matthew, it's Blake. It's kind of spread throughout all the refineries. We haven't quantified specifically, but I will tell you of that about $10 million in operating costs related and the rest will be business interruption, which I guess you could argue through margin and throughput, so $10 million in operating costs. And just as an aside, while you're on the topic, we outlined in the second paragraph, a wholesale contract fee, which was about $8 million that in the operating costs of the corporate and other segment, in case that's helpful to you as well.

Matthew Blair

Thanks, Blake, and then Uzi, on your modeling El Dorado and Krotz cash flow positive in the mid-cycle environment if they do not get SREs.

Uzi Yemin

Can you repeat the question, Matt?

Matthew Blair

Sure. Do you think that El Dorado and Krotz Springs are cash flow positive, if they do not get SREs, are they dependent on SREs to be cash flow positive to you?

Uzi Yemin

I understand the question. Well, it depends on the day, obviously, if RIN is a $0.70 then it's when they'll $0.64 right now, they are marginally cash flowing, but they are not rocking and rolling. If RINs would go back to $0.20, $0.30, even when today's graphs, I'm sorry, today's graphs are very, very good. If they go to 2030, then you're talking about hundreds of millions of dollars. EBITDA without the SREs. So these two refineries and that is the reason they were granted these waivers in the past because the program was initiated and designed to deal with the refineries like El Dorado and Krotz. I didn't run the LPO [ph], I haven't looked at it in the last two, three days, but the fact that we're running them 280 and 290 [ph] means that we are in the green here.

Matthew Blair

Great, thank you.

Operator

The next question is from Neil Mehta with Goldman Sachs. Please go ahead.

Neil Mehta

Good morning Uzi, hope you're doing well.

Uzi Yemin

Hey, Neil. Good morning. How is your family by the way?

Neil Mehta

We're doing great. Thank you so much for asking Uzi. So two quick questions from me. First, on Wink to Webster, can we just talk about where we stand from a construction standpoint and the related question around that is just talk about how you see the pipeline situation in the Permian and we were clearly in a position of pipeline under supply in 2018, 2019. But we've seen a wall of these big pipes coming online that's eaten away at the differential. How do you work through that excess pipeline capacity beyond just production growth. You think the Permian will rationalize supply pipeline to enable better utilization?

Uzi Yemin

Okay. So I'm going to refresh your memory, Neil. I know that you remember that better than I do, but I'll say just because I enjoy listening to myself. So Wink to Webster is supposed to come online Foursquare, then I think there's a delay of two, three weeks, but in general, we are in line with this coming online before the end of the this year. Obviously, as we said, the fully supplied pipeline, I think 95% with the walk up shipper of another 5%. That obviously will bring the situation in the Permian to over build of pipelines. I think that companies that are not fully subscribed and run half empty, if you will, pipelines will start thinking what to do with the pipeline especially in light of the fact that natural gas is in shortage around the Permian, the natural gas pipelines is in shortage, I think there will be rationalization of pipes and the market, we always think that the market doesn't have a way out and by the end of the day, we are surprised with how the markets react to different things. Do I think that differentials will go back to minus five anytime soon? No. But probably we are over the next two, three years, something will happen with several of these pipelines and we'll get back to normalized differential.

Neil Mehta

And then, Uzi, remind us what do you think the incremental EBITDA associated with Wink to Webster is for Delek and how good should we feel about the economics. Are they locked in or there any variability in the way we should think about that.

Blake Fernandez

Neil, it's Blake, I'll take it. So from the last part of your question, I mean, it's take a pay, right, so there shouldn't be a tremendous amount of variability. We haven't disclosed specific EBITDA, but I think I can help you do some arithmetic, if you just kind of think about our net investment somewhere in the $360 million range. In order to sanction the project in the midstream, we need a 15% rate of return, so you can apply that math. And the only other piece of the equation I should mention to you, we've said publicly is we did do project financing and the interest expense associated with that as roughly $10 million or so per year. So whatever math you come up with on the EBITDA, you technically may want to take 10 million off for interest expense.

Neil Mehta

Thanks, Blake.

Operator

The next question is from Doug Legate with Bank of America. Please go ahead.

Doug Legate

Thank you. Good morning, everybody. Uzi, you've walked through a lot of the moving parts on what could happen. I'm just curious. We obviously have a new administration; they haven't been rushing to offer SREs despite the Supreme Court ruling. So I'm just curious, have you given any consideration to the possibility that runs the SREs are not granted, in which case, what are the major capital requirements across the system that might prompt for more strategic decision or does that wait into the equation as it relates to their potential causing one or more of these smaller assets?

Uzi Yemin

Doug, good morning, and happy to have you back, really, we met you. So thanks for joining the call. You asked a great question. What if you don't get the SREs, so obviously the liabilities and the winds are on our books right now. So it's not that we are sitting here not doing anything, we are taken care of. By the end of the day, companies like us need to manage mostly cash that's what you see on the balance sheet, we're managing our cash very carefully. We got all that cash coming in. Eventually, the market will change and the demand will come back. I said it all along I think you and I spoke about even when I said that 21 won't be a great year, I think 22 is going to be an awesome year. And we just look at it and work through the situation, shutting down any of these refineries at this point is not on the table. I think that SREs you mentioned that there is a deadline to that, for 2019 it has been on their desk for two years.

Blake Fernandez

And Doug, if I could just chime in, I think maybe, to your specific question. As you well know, turnaround activity typically is a capital event that drives a lot of these closures and we have just finished turnarounds at both, Krotz and El Dorado; so that's behind at this point,

Doug Legate

Okay. So you guys are running it or not, that's what I was looking for. Thank you very much indeed. I didn't go anywhere else, I'm not sure where I've been, still here. Anyway, my follow-up is you your point on the return to maybe a better year in 2022. So to kind of cut through all the moving parts of the Wink to Webster on what's going on with DKL and all the other bits and pieces you've talked about. What would you frame for us perhaps as your view of the mid cycle EBITDA capacity of the portfolio you have today, just so we can kind of benchmark what we think, you know, fair value of our portfolio could look like? So under mid cycle conditions, however you define that; what do you think the mid-cycle counting part -- the cash flow part of the portfolio is today? How do we do that? Thanks.

Uzi Yemin

I'll let Blake do that because he does the modeling day in day out and it's above my pay grade, so Blake go ahead.

Blake Fernandez

Doug, I'll try and piecemeal it together for you. And maybe at the end of the day, you can you can apply some sensitivities on your end, but think about logistics, it's a pretty ratable business. Let's just be conservative and call that $250 million a year of EBITDA, the retail business has proven very resilient even through the pandemic. We say it's about $50 million. So collectively there you got $300 million of EBITDA that's from very stable businesses. And then that takes you to the refining piece of it, which as you know is very volatile and it's been a drag on the overall portfolio. We've said publicly, we think $9 or $10 Gold Code 532-crack [ph]. Assuming a normalized RIN environment, not where we are now would be about a breakeven level. So, for every dollar per barrel, it's about $75 million of annual EBITDA.

And if you look, historically, that midcycle been $15 or $16; so technically speaking, if we can move from a net rim environment today of about $9 or $10, up towards $15, you know, you're looking for $400 million to $500 million from refining, so that on top of $300 million. I mean, you get to some lofty numbers, but obviously, that's not the environment we're in with the red environment where we are today. So hopefully, that's helpful.

Doug Legate

It's really helpful. Neither do we expect this to continue just for clarity of work. What are you assuming as the TI brand spread in there?

Blake Fernandez

Well, that's a, that's a WTI base crack. So you know, at the end of the day, it's just kind of a normalized call. And you know, we're not, we're not looking for a big expansion in the spread. So call it $2 to $3.

Doug Legate

Okay, great. Thanks, guys. Appreciate it. Thanks.

Operator

The next question is from Paul Chang with Scotiabank. Please go ahead. Hey, guys, good morning.

Paul Chang

Hey guys, good morning.

Uzi Yemin

Mr. Chang, we couldn't wait for you to show up.

Paul Chang

Several questions. Can you remind me in the past when you receive the SRE? Did you get the full SRE nor the plan? Or some of them just partial SRE?

Uzi Yemin

No, we when you get a waiver, it's a full waiver.

Paul Chang

So, you get the full waiver? Because I mean that in some cases, some we finally that the they get maybe a quarter of the ways in the LBO and some get 50%. So I just want I just don't remember whether you get 100% in your facility?

Uzi Yemin

We do.

Paul Chang

Okay, great. And for the 40 to 45 minutes, Blake is saying that, that's not include any of the property damage, is all BI?.

Blake Fernandez

Paul, there's an element in there of both. So there you have…

Paul Chang

Do you have a breakdown between the BI and the property damage?

Blake Fernandez

Yes. And again, this is just the 2Q components, but $30 million is BI and $10 million is property damage.

Uzi Yemin

Now, Paul, remember, we mentioned that earlier? And I'm sure you've heard it, but we'll say it again. That's only Q2, there's some damage before Q1, that is not in the $40 to $45 million.

Paul Chang

Now I understand, we're just trying to understand on a going forward basis, if we use the second quarter as the base, because BI in theory that once you fix it, then it should come back. Right. So with the same market condition, what we should add back as a baseline. Just to is that I understand for the last two quarters, whether is the winter storm or that colonial pipeline rotation? That's nothing you can do. So we liabilities that guests suffer on that. But in general, what, when you're looking at your portfolio, I mean, excluding those two years, and are you happy with your overall reliability of your operation? And if not, what the initiatives that you guys are taking?

Uzi Yemin

Well, you know, the bad guy used to be El Dorado. El Dorado is now after turnaround, and after fixing a lot of units in Eldorado; so El Dorado, knock on wood is running very well. Over the last couple of months, we have over there a new plant manager that is doing tremendous work. We'll see we don't want to declare victory just yet. But we're hoping to see a level of continuity to perform the way it is, obviously means that $60 are weighing on both Eldorado and cloth. But we believe that $50 is not sustainable, regardless of how the administration will go about it. And we'll see how it's going to be dealt.

Paul Chang

And just curious that, Do you guys [indiscernible] survey? And if you do, how El Dorado and Chorus being how they rank on the unit profitability and the reliability in that survey? Today in the middle of the pack, in the second quarter or in the fourth quarter, any kind of number you can share on the inside?

Uzi Yemin

Well, we usually don't share Solomon study, we do get that for each refinery actually, if you remember Solomon is doing it every two years every other year, we're actually doing it with them every year because we get we want to get bare. I'm just going to tell you that you can look at equalization at Eldorado over the last two years before the turnaround. And it wasn't great. So, the results weren't great cause actually is, is performing operationally pretty good.

Paul Chang

The two final question one, just curious if there's any insight you can share about on the southwest market demand and also that you guys have a big gathering system, what you hear from your customer of their operating plan, particularly on the piping operator, do you get the I get on there that the activity level is going to moving progressively higher over the years more gradual pace? So that's first and then the final question, I think in the in the last, say 6 to 12 months, you start to talking you may not want to make any further acquisitions in the refining side, you think that after settlement that may be used to one you will be more focusing on? And but you in the answer of the earlier question, we're also talking about how to improve the economy of scale. So from that standpoint, is that building crew? are we finding this potential area of acquisition or that refining is not something that you want to expand further?

Uzi Yemin

Okay, let me take each one of them. First of all, EMP, as you know, are still discipline, the product demand in our areas, it is down. margins are very strong, but the gallons, especially of diesel in the southwestern region, it is down. And you know, as you know, we gather from a lot of producers. So for the most part, it is flat, we don't see the growth, just yet. You know what you hear it from every MP company that they will be disciplined, and they want to be free cash flowing. So for me got Justin evidence on that. We do see other companies coming in, we signed several new producers, to the gathering over the last couple of quarters, I thought the targeting team did an outstanding job in getting that done. In terms of the M&A and I said it in the past that we want to make sure that the energy transformation, we want to understand what energy transformation means before we move on any aspects. So that's the reason we thought that we should probably sit on the sidelines and wait to see where things are going.

With that being said, regardless of where energy transformation is. I think companies by the size of Delek 58:21 should be bigger. Not in the near future. There's nothing imminent right now. But going forward, I thought that what we did with both acquisition was outstanding to get bigger. I think there was more to come from the market in I'm not being specific about Delek, I was very clear that there's nothing that I'm aware of that is imminent.

Paul Chang

Right, but that's including refining right. So, in other words that when you say getting factories including also getting picked up in refining.

Uzi Yemin

If refining is the part energy future, yes.

Paul Chang

Okay, will do. Thank you.

Operator

The next question is from Jason Gabelman with Collin. Please go ahead.

Jason Gabelman

Yes. Hey, guys. I wanted to ask, first on OpEx and SG&A cost, I know last year you were talking about, I think, an $80 million reduction from 2020 levels. But look at 2020 it was about $800 million OpEx and SG&A; that's about where the annualized run rate is guided to for 3Q. So you just discuss what's going on there in terms of those reductions, you still expect those to come through?

Blake Fernandez

Hey, Jason is Blake. I'll take it. So there's been a lot of moving pieces. Since we gave original guidance part of which is operational in terms of fire, freeze, etc. Keep in mind too, when we gave the guidance for '21 the original guidance contemplated that cross was not running and that as century started, so I think the last public commentary we gave is that we thought on an underlying quarterly run rate, it would be about $139 million to $140 million. And what I would just tell you, you can see the 3Q guidances is a bit above that somewhere about $150 million. There's two things to point out in there. One, we have some one time work that's going to occur in the third quarter, some unplanned, sorry, not unplanned, but it's some work at KSR, Krotz springs, in boiler repair at big spring. So that's $5 million that'll come off into 4Q. So I think without giving hard guidance on 4Q, I think $145-ish million should be the range.

And the only other thing to point out that's in there that's leading to some upward pressure is natural gas prices. And the sensitivity on that annual is about $20 million per dollar per MCF. So, we have seen an upward pressure and natural gas. And that's adding about $5 million to the 3Q guidance. A lot of answers your question.

Jason Gabelman

Yes, that's really helpful. And just two other quick ones. For me, firstly, you just discussed the puts and takes on working capital being a benefit in three key of that, and that's going to reverse and then lastly, just on the global clean energy fields project, I know you're limited in what you can say. But as I understand there's some priority given to creditors in terms of cash flow, before Delek would receive any material cash from that project. So, I guess the question is, if you do invest in that project, when do you expect that to be material cash contributor to Delek? Thanks.

Blake Fernandez

Jason its Blake, I'll take the second part of the question, and then Ruben can answer your working capital question. So, we haven't disclosed an outlook. Obviously, we're not in the project. But conceptually, I think you're describing it correct. We've said all along that there are multiple layers of interest expense, mezzanine financing, whatever arrangements global clean energy has, the way I would characterize it is that we have an option to participate in 33% of the project, free cash flow. So, in other words, once all of those obligations are satisfied, we would take our share of the free cash flow. So I think that answers your question.

Reuven Spiegel

And let me complete the part about the working capital question. So the increased crude prices caused corresponding increase in accounts payable, and inventory and supply of steak. However, we still need to settle some expenses related to the El Dorado turnaround and other expenses, along with some Reins obligation, so it will unwind in the third quarter and will some of the positive working capital, this was in the second?

Jason Gabelman

Thanks.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Uzi Yemin for any closing remarks.

Uzi Yemin

Yes, that was a long one. I've done many of these calls. That was probably one of the longest so I appreciate everybody's interest on the call. I appreciate the confidence that investors have in us. I'd like to thank my colleagues around the table, like to thank our board of directors for their continued support and trust in us. But mainly, I'd like to thank each one of the employees of this great company. And that couldn't be what it is without them.

Thank you and we'll talk to you soon. Have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.