Calumet Inc (CLMT) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2015 Calumet Specialty Products Partners LP earnings conference call.

(Operator Instructions)

As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Noel Ryan, Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone, and welcome to the Calumet Specialty Products Partners first-quarter 2015 results conference call. We appreciate you joining us today. Joining today's call are Bill Hatch, our interim CEO, Pat Murray, EVP and Chief Financial Officer; Bill Anderson, EVP of Sales; and Ed Juno, EVP of Operations. At the conclusion of our prepared remarks, we will open the call for questions.

Before we proceed, allow me remind everyone that during the course of this call we may provide various forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such statements are based on the beliefs of our Management, as well as assumptions made by them, and in each case, based on the information currently available to them. Although our Management believes the expectations reflected in such forward-looking statements are reasonable, neither the Partnership, its general partner, nor Management can provide any assurances that the expectations will prove to be correct. Please refer to the Partnership's press release that was issued this morning, as well as our latest filings with the Securities and Exchange Commission for a list of factors that may affect our actual results and to cause them to differ from our forward-looking statements made on this call.

As a reminder, you may download a PDF of the presentation slides that will accompany the remarks made on today's conference call, as indicated in the press release we issued this morning. You may now access these slides in the Investor Relations section of our website at Calumetspecialty.com.

As we announced on March 26, 2015, the Partnership has named Bill Hatch as interim CEO of Calumet, following the promotion of Mr. Grube to Executive Vice Chairman. We are thankful for Bill Grube's visionary leadership as co-Founder and CEO for the last 25 years, and look forward to his continued insights in this new role.

By way of background, Mr. Hatch comes to us from CITGO, a wholly-owned subsidiary of PDVSA, the national oil company of Venezuela. Prior to retiring from CITGO after 33 years with the company in 2008, Mr. Hatch was Vice President and Head of Operations for CITGO.

During his tenure, he led the executive team that helped to implement operating strategies that grew the profitability of the units he operated to record levels, while facilitating the best safety and environmental compliance record in the company's history. In addition, he had responsibility for CITGO's capital expenditures programs, which included a total annual project budget that ranged between $500 million and $900 million per year. Our Board of Directors is confident that Mr. Hatch is the right executive to lead the organization at this time, given his many years of experience, operations expertise, and his excellent reputation within our industry.

As part of an ongoing effort to identify a permanent CEO for the partnership, our Board of Directors has formed a CEO search committee comprised of its independent directors. We've also retained Spencer Stuart, one of the world's leading executive search consulting firms to assist in identifying the most qualified successors to Mr. Grube from a pool of both internal and external candidates. The Board's decision to engage Mr. Hatch as our interim CEO was intended to provide the search committee with the appropriate time to fully vet and evaluate the pool of potential candidates.

From a strategic perspective, our general partner, which is owned by the families of Fred Fehsenfeld, our Chairman, and Bill Grube, our Executive Vice Chairman, continue to guide the long-term strategy of Calumet, much as they have since our inception in 1990.

With that, I would like to introduce our interim CEO, Bill Hatch, to the call.

Thank you, Noel, for that introduction. And good afternoon to each of you joining us today. It is my great privilege to join Calumet as I begin my new responsibilities as interim CEO.

I appreciate the warm reception I've received during my time as part of this organization, and I have been impressed with the many dedicated employees I've met so far. I believe Calumet is an organization poised for great things in the future, and I am excited to be part of leading that future until a permanent CEO is named.

I want to express my deepest thanks to Fred Fehsenfeld and Bill Grube and the entire Board of Directors for the opportunity to help lead this organization, as we move closer to becoming the leading hydrocarbon, specialty hydrocarbon enterprise in North America.

My first month at Calumet has been very productive. I visited most of our refineries and I have spoken with hundreds of employees, including our plant and project managers, and more than anything else, I've done a lot of listening and learning alongside my new colleagues. My first impression of Calumet is that it is an incredible organization with significant potential, as it continues to evolve into a more mature, fully integrated Company.

From a strategic perspective, our corporate vision, as guided by our Board, remains clear. We are committed to becoming the leading producer of specialty hydrocarbon products in North America.

However, from a tactical perspective, how we achieve this vision will require that we continue to build systems and implement processes that assist us in making our business in an informed, thoughtful, and data-centric manner. I'm looking to have this organization become increasingly efficient, accountable, and conscious of the fact that we can and will be continuously improving.

From our vantage point, our decision to be better begins by ensuring that we master aspects of our business within our control, such as plant reliability, worker safety, expense management, feedstock procurement and information management, among many other areas. While we clearly can't control where the price of crude is headed, we can communicate to our people that their safety on the job is everyone's top priority.

We will keep accountable on project budgets. We will make informed data-centric decisions, and we will exploit opportunities in the market to our advantage. We will be intentional in our collective efforts to continually improve.

As Calumet transcends into the next phase of maturation and growth, we will seek to continue down a path of growing adjusted EBITDA, distributable cash flow, and our quarterly cash distribution, all while maintaining a prudent balance sheet. During the next several months, I will be traveling with Noel Ryan, our Vice President of Industrial and Media Relations, to several investor conferences where I look forward to meeting many of you for the first time.

With that, I would like to transition into a discussion of our first-quarter results. Please turn your attention to slide 3 of the slide deck for a high-level overview of our first-quarter 2015 results.

Allow me to begin by congratulating our employees on an outstanding first quarter. We generated record first-quarter adjusted EBITDA of $124.9 million versus $82.7 million in the prior year period. Excluding special items, Calumet reported adjusted net income of $58.1 million, or $0.74 per diluted unit for the first quarter of 2015.

On an as-adjusted basis, results exclude three special items. One, a charge related to a lower cost of market net inventory adjustment of $13.2 million. Two, a $6.8 million in realized gain on derivative instruments. Three, a $27.9 million non-cash unrealized loss on derivative instruments.

Distributable cash flow for the first quarter of 2015 was $94.1 million compared to $49.4 million in the prior year period, driven by year-over-year improvement in gross profit attributable to an increase in the fuel product margins. Balance contributions from our specialty products and fuels products segments contributed to record first-quarter adjusted EBITDA, primarily due to a combination of; one, consistent reliability throughout our refinery system, which contributed to higher production volumes in both specialty and fuel product segments when compared to the prior year period; two, a significant year-over-year decline in crude oil prices that contributed to improved specialty product margins; three, robust fuel refining economics.

Specialty products segment adjusted EBITDA increased 7% for the first quarter versus prior year period to $61.6 million, representing 49% of total adjusted EBITDA for the period. Although prices on many specialty products that we produce have begun to catch up with recent decline in crude oil prices, resulting in a more typical gross profit margin per barrel in the first quarter than we experienced in the fourth quarter, there remain product categories such as waxes, where industry capacity reductions have helped to support sustained above-average margins. As a result, during the first quarter, we ramped up our wax production by nearly 30% on a year-over-year basis.

Fuel product segment adjusted EBITDA increased to $67.4 million in the first quarter of 2015, from $25 million in the first quarter of 2014, representing a 54% of total adjusted EBITDA in the period. As a system, our four refineries that produce fuels products, Shreveport, Montana, Superior and San Antonio, operated well during the first quarter, with total production up nearly 10% when compared to the prior year period.

Production levels at Shreveport increased by more than 25% in the first quarter from the prior year period, while production at our San Antonio refinery increased by nearly 30% on a year-over-year basis. A robust diesel crack spread, together with much improved gasoline crack spreads resulted in fuel products gross profit per barrel ex-hedging of $8.10 versus $3.66 per barrel in the first quarter of 2014.

Please turn to slide number 4. Our distribution coverage ratio was 1.6 times in the first quarter of 2015 versus 0.9 times in the first quarter of 2014. The first quarter of 2015 was the third consecutive quarter where we have posted well above 1 times coverage.

Our leverage ratio as measured by our total outstanding debt divided by our total adjusted EBITDA on a trailing 12-month basis improved from 7.4 times as of June 30, 2014 down to 4.8 times on an adjusted basis as of March 31, 2015, including the full redemption of our 2020 senior notes in April of 2015.

During the last three quarters, periods in which we had no major or unplanned maintenance, we have reported adjusted EBITDA, excluding special items, well in excess of $100 million per quarter. Given that we have no major maintenance planned for 2015, we would anticipate the ability to further reduce our leverage ratio as we cycle out maintenance-impacted quarters from the first half of 2014. We continue to target a leverage ratio below 4 times.

As I mentioned earlier, we are very pleased with the much-improved reliability of our fuels refineries. Having concluded our prior fuels refinery maintenance cycle in the second quarter of 2014, our fuel plants have operated at elevated rates during the last three quarters.

Looking ahead, we anticipate maintenance and turnaround spending at these four fuels refinery will decline until the next turnaround cycle begins in 2018. During the 2016 and 2017 timeframe, we currently expect total capital spending, including maintenance, environmental turnaround and growth spending, to decline significantly from current levels to the benefit of our free cash flow.

While on the topic of fuels refining, Calumet and its JV partner MDU Resources officially commissioned a 20,000-barrel-a-day Dakota Prairie Refinery in April. The facility has initiated startup operations, and we expect to begin selling finished product this month.

After two years of hard work, this historic project, which marks the first greenfield construction of a fuels refinery on US soil in more than 30 years, has finally come to completion. I want to extend my congratulations to all those involved in this project.

Earlier today, we announced in our press release an EBITDA enhancing agreement that will allow us to begin shipping increased volumes of cost-advantaged crude oil to our Shreveport refinery by early 2017. Under a 10-year pipeline transportation agreement with Plains All American Pipeline, Calumet will have the option of shipping up to 20,000 barrels a day of either Midland-priced crude from Midland, Texas to Longview, or Cushing-priced crude from Cushing, Oklahoma to Longview, Texas.

Improved feedstock optionality provided by this agreement stands to provide approximately $7 million to $8 million of annualized transportation cost savings at the Shreveport refinery beginning in 2017. For point of reference, the Shreveport refinery generally runs anywhere between 40,000 and 45,000 barrels a day, so this pipeline agreement essentially seeks to lower the costs on approximately 50% of the refinery's overall crude slate.

Please turn to slide number 5. The year-over-year increase in distributable cash flow was $44.7 million in the first quarter of 2015, representing an increase of more than 90% when compared to the prior year period. A significant increase in adjusted EBITDA was responsible for virtually all of this increase. Our distribution coverage ratio continues to exceed our long-term targets and given the continued market strength we saw in April, we would expect to continue to be above 1 times coverage throughout 2015.

Turning to slide number 6, as you can see from the top chart on this slide, specialty products gross profit per barrel was relatively flat on a year-over-year basis in the first quarter of 2015, while fuel products gross profit per barrel increased significantly from prior year period, given increased fuel production volumes, coupled with much-improved gasoline crack spreads. This increase in fuel products gross profit per barrel was reflected in the year-over-year growth in fuel products adjusted EBITDA, which more than doubled in the first quarter of 2015 when compared to the prior year period. Note that our specialty products segments include the unfavorable impact of a $23.7 million lower of cost or market inventory adjustments during the first quarter of 2015.

Clearly, our oil fuel services segment has been under pressure in recent months, given the decline in domestic land rig counts. However, we see rig counts beginning to stabilize in our core markets and anticipate positive adjusted EBITDA for this segment on a full-year basis, as we adjust our cost structure to align with customer demand.

Turning to slide 7, our multi-year organic growth campaign remains on budget and on time with forecast we provided in the fourth quarter of 2014 conference call held in February. The Partnership currently forecasts a total projected cost with the organic growth project campaign to be approximately $640 million to $665 million, consistent with prior forecast. As of March 31, 2015, we had invested more than $530 million in the organic growth projects campaign.

During the next nine months, we have slated to complete all three of our remaining organic growth projects. These projects have forecasted an annualized rate of return of at least 20% to 30% and stand to provide significant incremental EBITDA growth for the partnership over time.

Our Great Falls, Montana refinery expansion, which is the largest of our three remaining growth projects, remains on track. We are expecting the new crude unit to reach completion during September of 2015, while the mild hydrocracker is expected to reach completion by December 2015, followed by approximately one month of startup activities. Importantly, all major critical path items have arrived on site.

The total estimated annual EBITDA contribution from this project is between $70 million and $90 million, subject to market conditions. Estimated annual EBITDA contributions stemming from the Montana refinery expansion assumes a per barrel discount of $10 on Bow River crude oils sourced for the Montana refinery when compared to the price of a barrel at WTI.

At our Louisiana, Missouri esters plant, we continue to make steady progress on a project designed to more than double the production capacity of this facility, from 35 million pounds per year to an estimated 75 million pounds per year. We anticipate this project to be completed during the third quarter of 2015.

Esters are key base stock used in the aviation, refrigerant, and automotive lubricants market. The total estimated annual EBITDA contribution from this project is estimated to be between $8 million and $12 million.

Finally, at our San Antonio refinery, our solvents projects continued to make good progress. This project will take a portion of our ultra-low sulfur diesel and jet fuel production at the San Antonio plant and convert it into at least 3,000 barrels a day of higher margin solvent that will meet customer requirements for low aromatic content.

Solvents production will supplement the refinery's current fuels production slate and will be targeted toward specialty product markets. This project is expected to be completed in the fourth quarter of 2015. The total estimated annual EBITDA contribution from this project is estimated to be approximately $20 million.

Looking to the second quarter of 2015, our fuels products segment is off to a solid start, with the 2/1/1 Gulf Coast crack spread well above the $20 a barrel on a quarter-to-quarter basis. While gasoline demand remains strong in our regional markets, we have hedged 1.8 million barrels of gasoline, or more than 20,000 barrels a day, at an average gasoline crack spread of $17.94 per barrel, which offers us downside protection on approximately half of our typical daily gasoline production heading into the all-important summer driving season.

In our specialty products segment, we maintain a positive outlook on the asphalt heading into the summer paving and roofing season. While the wax market remains structurally under supplied, equating to what we anticipate should be a period of elevated margins in this product line. That said, given the recent recovery of crude oil prices, we would expect to see a corresponding price increase on select specialty products during the second quarter, as we pass along higher feedstocks to our customers.

Lastly, we expect our oil fuel services segment to be EBITDA positive in 2015, as cost rationalization efforts in this business line continue. Overall, the business has a good deal of momentum, as we look to the remainder of the year.

With that, I'll hand this call over to Pat.

Thank you, Bill. On behalf of the entire Company, welcome aboard.

Let's all turn our attention to slide 9 for a discussion of adjusted EBITDA. We believe the non-GAAP measure of adjusted EBITDA is an important financial performance measure for the Partnership.

Adjusted EBITDA was $124.9 million in the first quarter of 2015 versus $82.7 million in the prior year period. As indicated in this slide, a significant year-over-year increase in fuel product segment gross profit accounted for more than 50% of the growth in adjusted EBITDA in the first quarter when compared to the prior year period. We encourage investors to review the section of our earnings press release found on our website entitled non-GAAP financial measures, and the attached tables for discussion and definitions of EBITDA, adjusted EBITDA, and distributable cash flow financial measures and reconciliations of these non-GAAP measures to the comparable GAAP measures.

Turning to slide 10, as indicated in the top portion of this slide, fuels refining economics were, on balance, fairly static on a year-over-year basis, as measured by the benchmark Gulf Coast 2/1/1 crack spread. Although the 2/1/1 crack spread averaged $19 in both the first quarters 2014 and 2015, our capture rate improved significantly on a year-over-year basis.

Crude oil differentials did contract on a year-over-year basis, as evidenced by more narrow discounts for WCS, Bow River, and Bakken during the first quarter of 2015 versus the prior year period. As we enter the second quarter, refining economics have exhibited signs of improvement with the Gulf Coast 2/1/1 crack spread exceeding $20 per barrel in April, as seasonal demand for refined products accelerates heading into the summer driving season.

Each year, the EPA may adjust the volume of renewable fuels mandated to be blended by refiners, given certain circumstances. Based on public comments from the EPA, we believe the agency will propose the revised 2014 Renewable Fuels Standard targets by June 2015 and finalize 2015 and 2016 targets by November of 2015. We anticipate that the revised 2014 targets will reflect the volumes of renewable fuel that were actually used in 2014.

Our RFS compliance costs were $7.2 million in the first quarter of 2015 compared to $7.9 million for the first quarter of last year. For the full year of 2015, excluding the potential benefit of small refinery exemptions at one or more of our refineries that might be granted to us by the EPA at a later time, we expect our gross estimated annual RINs obligation, which includes RINs that are required to be secured through either blending or through the purchase of RINs on the open market to be in the range of 90 million to 100 million RINs, versus 87 million RINs in 2014.

We record our outstanding RINs obligation as a balance sheet liability. This liability is mark-to-market on a quarterly basis to reflect the market price of RINs on the last day of each quarter. We are keeping an eye on the price of D6 ethanol RIN prices, which have increased from $0.45 per RIN in April 2014 to $0.70 per RIN in April 2015.

Turning to slide 11, the combination of improved operating cash flow, a 6 million unit equity offering completed in mid March of this year, and an opportunistic $325 million senior notes offering completed in late March of 2015 provided for this sequential uplift in our liquidity position. On March 13, 2015, we closed on an underwritten public equity offering of 6 million common units at $26.75 per unit.

The $154 million of proceeds received by us from this offering net of underwriting discounts, commissions and expenses, but before our general partners capital contribution, were used to redeem a portion of our 9.625% 2020 senior notes and to repay borrowings under revolving credit facility. Underwriting discounts on the offering totaled $6.4 million and our general partner contributed $3.3 million to maintain its 2% general partner interests. This offering effectively puts us in a position where we are fully funded with regard to their remaining portion of forecasted capital spending on our three remaining organic growth projects.

In late March, we closed on a private placement of $325 million in aggregate principle amount of 7.75% senior unsecured notes due 2023. We used a portion of the net proceeds from this private placement to fund the redemption of the remaining outstanding $275 million principle amount of 9.625% 2020 senior notes. This opportunistic refinancing of our long-term debt tranche lowers our interest expense on this portion of the debt capital structure.

Turning to slide 12, from a total liquidity perspective, our $1 billion revolving credit facility remains our primary vehicle that assists us in funding the ongoing growth of the partnership. Between cash on the balance sheet and revolver availability, we had approximately $774 million in available liquidity prior to the redemption of our 2020 notes in April of 2015, which involved the use of approximately $319 million of liquidity. Liquidity as of March 31, 2015 adjusted for this redemption of notes would have been approximately $452 million.

For the three months ended March 31, 2015, we sold approximately 308,000 common units under our at-the-market equity issuance program for net proceeds of $7.7 million. We believe we will continue to have ample liquidity from cash flow from operations, borrowing capacity under our revolving credit facility, and adequate access to capital markets to meet our financial commitments, minimum quarterly distributions to our unit holders, debt service obligations, contingencies and anticipated capital expenditures.

Now turning to slide 13, at the end of the first-quarter 2015, our adjusted total debt to LTM EBITDA ratio, including the redemption of our 2020 senior notes, was 4.8 times versus 7.4 times at the end of the second quarter of 2014. Looking ahead, we expect improved operational performance out of our key fuel refineries, seasonally robust fuel and specialty products refining margins, and contributions from our organic growth projects coming online this year to support a further reduction in our leverage ratio toward or below our long-term target of 4 times.

Turning to slide 14, we have in place a multi-year hedging program designed to help mitigate commodity risk within our fuel products segment. Historically, our hedging strategy has rested principally on the use of crack spread hedges, which lock in a fixed gross profit per barrel.

Earlier this year, in addition to the selective use of crack spread hedges, we added a percentage hedging strategy to our traditional fixed crack spread hedging strategy, which locks in a fixed percentage of gross profit on refined product in excess of the floating value of a barrel of WTI crude oil on a fixed volume of anticipated fuels production. In the case of a percentage hedge, as the value of WTI increases, so too the absolute dollar value of the gross profit realized under these hedges.

Using fixed crack spread hedges, we have locked in 2.2 million barrels of anticipated 2015 gasoline production at an average crack spread of $17.41 per barrel. Using percentage hedges, we have locked in 1 million barrels of anticipated 2015 diesel production at 133% of WTI. We have also hedged 2.2 million barrels of anticipated 2016 diesel production at 131.8% of WTI.

Looking ahead to the 2015 through 2017 timeframe, we look to opportunistically add to our hedging book, much as we have in the past.

Finally, turning to slide 15, as indicated in the press release issued this morning, we are reiterating our 2015 capital spending forecast. We currently forecast total capital expenditures of $285 million to $335 million, approximately $210 million to $245 million of which is allocated towards organic growth projects this year. The 2015 capital spending plan also includes an estimated $60 million to $70 million in replacement and environmental capital expenditures and approximately $15 million to $20 million allocated to turnaround costs.

During the first quarter of 2015, capital expenditures totaled $110.4 million, including $75.4 million related to capital improvement expenditures such as the organic growth projects. While capital expenditures for joint ventures, including Dakota Prairie and Juniper GTL investment totaled $25 million. Importantly, as the organic project growth campaign winds down during the next nine months, we anticipate significantly lower total CapEx as we transition into the 2016/2017 timeframe.

With that, I'll turn the call over to the operator so that we can begin the Q&A session. Operator?

(Operator Instructions)

Our first question comes from the line of Richard Roberts from Howard Weil. Your question, please.

Good afternoon, guys. Congrats on the good quarter here.

Thanks, Rich.

Maybe one for Bill to start, just from a high-level perspective, and maybe it's too soon, but you've been in the office for a little while here -- gotten to take a look at the Business and the assets. I'm just wondering if anything so far has jumped out at you that you would want to change near term, if you could, whether that's holes in the portfolio, maybe assets that don't fit within the rest of the portfolio, any areas you can cut costs -- just anything like that you could share with us?

Well, I've actually only been here 30 days, so I'll have to couch my comments with that view and that perspective. But, no, I was very pleasantly surprised by how professional, how well equipped, and how well run our facilities were, especially on the areas of safety and the way we manage the overall day-to-day operations of the plant. It was really a pleasant surprise. I don't know what I had anticipated, but whatever that was, it was a really, really good experience for me.

Yes, there are -- using some of the models that I'm used to, with respect to running refineries, I think there are some efficiencies that we can gain, and hopefully I can bring something to the table over the next, whatever period of time, and capture some of those efficiencies. Again, my impression, again, is it's been very, very positive.

Okay, great. Thanks.

Maybe one for Pat: Can you give us any idea how much asphalt contributed to gross profit in the quarter, or even what kind of margins you were selling asphalt for, in the first quarter?

We don't break out gross profit by product category, but as you know, asphalt was a significant contributor. In addition to higher crack spread margins, we saw elevated asphalt margins, given lower crude prices. Strong -- both the retail and on the wholesale side. It was certainly a significant contributor, especially in our refineries in the north. We don't break out gross profit by product category, but it was a significant factor.

I would add to that, Richard -- this is Noel -- that we did about 22,000 barrels a day in Q1 of 2015, and demand is going to be ramping as we transition into the summer driving, paving season, as well as the summer roofing season. We would anticipate there to be a very robust level of demand in the core markets where we operate.

Recall that we make asphalt at our Shreveport refinery, our Superior refinery, and our Montana refinery. A lot of the asphalt that we sell goes down into really three key areas. One would be a terminal in Tooele, Utah; another one would be in Muskogee, Oklahoma. The third would be through retail outlet that we have with All States back on the east coast where they sell some of our asphalt at retail where there's higher-margin asphalt sold out there.

Overall, I would say that, as Pat indicated, we don't give, for competitive reasons, what our specific per-barrel or per-ton asphalt sales are, but dramatic increase on a year-over-year basis in terms of gross profit in that area of the Business.

Okay. Thanks for that.

Then, maybe just one last one here: I guess our impression -- it seems like the way forward for growth, beyond the organic projects that will be done here over the next, call it, nine months, is going to be through third-party acquisitions. I'm just wondering if you can update us on how the market for specialties assets looks right now? Is there a lot that you're looking at -- any general commentary would be helpful, thanks.

Richard, I would say that, at this juncture, our main focus is on de-levering the balance sheet to sub-4 times, as well as completing the organic growth projects. I think where we're at right now is that, yes, there are opportunities out there, but nothing imminent. I think most of the investors that we talk to would much rather have us focus on our core specialty products business, and running that business effectively and consistently. And that's really what we're focused on doing right now.

I think, as far as fuels refining assets are concerned, I know that one of our competitors recently made the comment that, in this environment where fuels margins are as outsized as they are, there's very few quality fuels assets for sale, and I would concur with that. But even more so, I would say that, if we were in a position to do acquisitions at this point -- I don't see that as something that's really a 2015 focus -- I would say that it would be more oriented towards our specialty products businesses.

Understood. Thanks very much, guys.

All right.

Thank you. Our next question comes from the line of Ed Westlake from Credit Suisse. Your question, please.

Good morning, and welcome aboard. Just on Shreveport, obviously that Caddo Pipeline access will improve the cost of crude supply. Appreciate it's early days, but any other observations on what you could do to perhaps improve Shreveport performance going forward?

Well, yes, there's a number of initiatives. I'll give you an example of one that jumps out at me, and I've had experience with that in my refining days, is the electrical supply from the local utility company, and working with them to increase the reliability of that. There's projects that they can do that will help us, and we can assist them in that. We're working together with them on that as we speak. That will significantly improve the reliability of the refinery. That's just one; and there's several of them there.

I think, as we look at Shreveport and its increasing reliability over time, especially in the post-turnaround mode of early last year, that plant is certainly contributing in both the fuels and the specialty products segment. Now, it turns to a matter of optimization. But the plant's running very well and performing very well.

Okay. Then a follow-up just on Dakota Prairie: Obviously, it sometimes takes time for refineries to get up to the optimum conditions. Obviously, good that you started. When do you reckon we'll see that -- third quarter -- in terms of profit contribution?

They are currently ramping right now. We have some product that is being produced in the month of May -- some distillate. I think, as far as getting up to full speed, in terms of a 20,000-barrel per day, that's going to take a couple of weeks. As far as [total] full-quarter contribution, yes, I think third quarter's going to be the first full quarter, but you're going to get some contribution, we would expect, in the second quarter.

Right, okay. And then -- sorry (multiple speakers)

This is Bill Hatch. As it stands today, I mean, we're pleased with it today. We've got a few strings that we're working on, and a couple of really minor issues that we're tackling, but very pleased with the overall startup. We've got a very highly skilled, qualified team up there working on it night and day. But you're absolutely right, it does take a while to shake out all the cobwebs out of a new facility like that, but so far, so good.

Then, we're also going to ask an M&A question. On oilfield services, obviously that's a tougher business for a lot of the folks involved there right now. Clearly, shale has a lot of medium-term potential, so that creates a bit of an opportunity. Would the comment you made earlier still also reflect on the oilfield service side for some consolidation opportunities?

I think we're, right now at this point, as we said earlier in terms of our M&A focus, and completion of the capital growth projects we already have in the portfolio, as well as focusing on deleveraging and distribution coverage, I think that we've obviously been impacted in oilfield services. We are seeing some stabilization in that business. We like that business, but we're not necessarily currently focused on any potential consolidation efforts in oilfield services.

Okay. Thank you.

Thanks, Ed.

Thank you. Our next question comes from the line of Roger Read from Wells Fargo. Your question, please.

Good morning, or I guess good afternoon in this case.

Morning.

I think the acquisition questions have been hit fairly well. But I'm a little curious, in your guidance for the oil services sector, you indicated positive EBITDA for 2015. Given the Q1 result, what does that imply for the rest of the year? How does gross profit, as you report it, differ from EBITDA?

Well, so, just looking ahead, and considering where the first quarter is, we are still seeing the benefits coming through in some of the sizing issues, in terms of sizing our employee workforce to the new level of rig count. There was a one-time item in the first quarter, and that gives us some indication of what the quarter would have been without that. I think, just looking ahead, given where we think we are on stabilization on rig count, as well as sizing the Business, that leads us to the potential that it could be an EBITDA-positive for the period -- for the full year, I guess. That's the main driver.

The difference between what we would be showing gross profit, and what we would be showing as EBITDA, are for some of that one-time item stuff, which ended up being a pretty significant relative to their number. It's in the selling expenses category that you would see these.

Okay. Another question I had -- you mentioned going to the ATM this quarter. Given that you did the transaction later in the quarter, maybe the ATM was in the January/February time frame, but is that the case?

Then secondarily, is the ATM still open? Is that still a path, given what you've done? Do you need to continue to sell units that way?

The ATM activity that we reported for the quarter was indeed focused more on the earlier portions of the quarter. We felt that it was important, and continue to believe it's important, to have shored up the funding for the remainder of the capital growth projects. I would say the ATM program does remain open to us. It's one tool in the toolbox, as far as making sure we have ample liquidity, which we certainly believe we have that currently, based on our view of where the Business is and what the projected CapEx spend is. But it remains an opportunistic tool.

Of course, as you understand, there is some limit to how much you could potentially issue under an ATM, but we're not entirely focused on that. The larger, overnight offering -- of course, that provided us with the biggest uplift on the equity side of the capital structure.

Sure. Then, Bill, welcome aboard -- a question for you. You walked through some of these items at the beginning, in terms of future CapEx, executing on the projects and all. With the time you've gotten in there so far, what's your degree of confidence that the CapEx numbers should be the right numbers going forward? Part of the reason I ask this is, a lot of these projects did see relatively consistent increases in the budgets, delays and time. Just if you could give us your impressions of that going forward?

Sure. It's a fair question. The reason I am fairly confident is that we're so late in the project schedule. All of the equipment has been delivered. There's very little change going on right now. It's just really execution. We've got burning welding rods and painting tanks and all those kind of things are happening. A lot of the -- for instance, in Montana, most of the work being done right now is this OSBL type work.

And so, yes, we could run into some unexpected issues. I'm certainly aware of that. But it is very far along in the project date and schedule. So, I don't anticipate any significant alterations to it; I just don't.

San Antonio and Montana plants are really in the same time frame. We're talking starting all this stuff up in the fourth quarter or early fall. I would say, to answer your question, a pretty high degree of confidence; not absolute, but a pretty high degree.

We're not asking for absolutes, but I appreciate the color. Thank you.

Thank you. Our next question comes from the line of John Ragozzino from RBC Capital Markets. Your question, please.

Congrats on another great quarter, guys. First off, I was just wondering if you could possibly expand upon the details provided on the Dakota Prairie refinery? I was wondering if you'd just basically quantify the contribution from at least the second-quarter numbers? Also, as we think about the remainder of the year, is it fairly safe to assume that you're going to see reasonably flat contribution quarter on quarter?

I think, Dakota Prairie is in a start-up mode. We had discussed previously what -- there's a range of possible outcomes for the year. We've guided towards an estimated annualized EBITDA contribution of between $30 million and $35 million per year. Of course, that would represent our share. And it's subject to market conditions.

I mean, like I said, the first start-up phase here, we certainly will be in ramp-up mode during the second quarter. I think it leads -- probably goes to the third quarter before we'll start to see a more normalized, it's running 20,000 a day type of a setup. Then, it will just be based on where the current refining economics are at that point in time.

It will represent also, for us, the point at which there are distributions back to the Partnership from the joint venture. That's when we will consider it to be distributable cash flow from our perspective.

Okay. In the prepared remarks, you mentioned the structural shortages in the wax markets and incremental expansionary capacity by about 30%. Can you remind me what total capacity is now? Then perhaps give us a feel for where per-barrel margins are currently driving?

Well, we've been fairly consistent in our wax production. A lot of the increase this year was that we're not only selling our own wax, but we are bringing in some outside production and doing some blending to fill some voids in the market where Exxon stepped out of some lower-melt wax being produced in the fourth quarter. We're running the plant pretty much as hard as we can. We're maximizing on our lower-melt paraffins that go into products like crayons and candles, and we see margins holding very steady in the strongest side of our specialty group.

Okay, and then just one more: I noticed the Missouri esters project -- it looks to have slipped back a bit on the estimated time of completion, to the third quarter. The remaining contribution to EBITDA looks the same, except there's also a reduction in the estimate for total project returns. Is it fair to assume that there's been a bit of a cost overrun and timing delay at that project? And can you talk a little bit more about that?

Yes, there's been a slight overrun there. It's been pushed into early Q3. Again, this is a project that's generating between $8 million and $12 million a year in EBITDA. So, it's the smallest of the four projects by far.

Frankly, a lot of the decisions on the timing of, say, for example, the solvents project, as well as the esters plant expansion, were more a capital-prioritization issue for us, wanting to basically shift and prioritize Montana ahead of these other two projects, which were smaller. So, the so-called slippage, if you will, that you've seen were, in some cases, intentional and self-help initiatives in terms of managing our balance sheet in a prudent manner.

Great. One more housekeeping item: Would you expect to see a similar type of level of ATM issuances over the coming quarters?

Like I said earlier, we look at the ATM as opportunistic. I mean, I think the key for us was getting the overnight offering done. And as I spoke earlier, that provided us with, we feel, the rest of the long-term funding needed for the growth projects. So, we are not necessarily focused on the ATM program at this point in time, in terms of needing to issue.

We continue to post very solid quarters, as we proceed here, and we should see improvements there. That would make us think about it opportunistically, as we think about where our yield sits. But we don't feel compelled to issue units under that program today.

All right, great. Thanks very much. Welcome aboard, Bill.

Thank you very much, appreciate it.

Thank you. Our next question comes from the line of Cory Garcia from Raymond James. Your question, please.

Good afternoon, fellas. Turning back I guess to Shreveport, is it safe to assume that the 20,000-barrel-a-day commitment on that line is the full light-oil appetite at the refinery, recognizing the specialty yield component of it?

This is Ed Juno. The 20,000-barrel capacity is not the limit of the light-oils production at Shreveport. We've been running typically the last quarter at 40,000, 45,000 barrels a day. It just gives us more options to be able to bring in lower feedstock costs into a facility that we can still keep the same yield structure that we're developing today.

Okay, great. I guess if we pull back a little bit further, and then look strategically, while reliability there is obviously still a key focus, and the tone appears to be, obviously, more set on specialty product type of growth beyond just this next leg of organic growth. I'm trying to understand here what desire, if any, there is to expand light fuel product yields, if you will, within some of your fuels refineries -- maybe what the economics or returns would need to be for you to undertake some of these other potential projects over the next several years, say?

Good question, thank you. Well, I think your statement is basically correct. I think our bias is towards the specialty products area. However, if a growth project with an opportunity defines itself in the fuel segment that has an attractive return, and as we discuss, we look at like 30% to 40% kind of return, especially on the fuel side, as fairly attractive, then, yes, I'm saying that we might pursue something like that.

Again, our bias has been more to the specialty side, for sure. It's a good observation, yes.

Okay. That helps better frame it. Welcome aboard.

Okay. Thank you.

Thank you. Our next question comes from the line of Sean Sneeden from Oppenheimer. Your question, please.

Hi, thanks for taking the question. Maybe, Pat, can you just remind us what the planned product slate is for Dakota Prairie, and what the overall complexity of that facility is?

The planned yield from the plant is -- it's 20,000 a day, and it's allocated in thirds between atmospheric tower bottoms, which Calumet will take on ultimately for processing at other facilities as we ramp up. Then, a third is diesel, and a third is naphtha that would go into diluent markets. That's the yield.

The refinery itself is not very complex. It's actually pretty simple. It's a crude unit and a diesel hydrotreater. So, there's very little complexity in the processing. Based on running all of the Bakken, it's a pretty easy refinery in terms of complexity.

One of the things I would offer on this refinery that I think is worth mentioning is that, when you look at your Bloomberg screens, you're looking at Bakken price to Clearbrook. When we're actually purchasing crude oil, we're purchasing it locally. That transportation diff between Bakken Clearbrook and where we're purchasing it locally is a couple dollars a barrel, depending. Certainly, I think there's going to be some sort of local market benefit that's accounted for within the margin environment for that refinery, longer term.

And when did you discount -- is versus Clearbrook or TI?

Well, Bakken Clearbrook compared to WTI -- the diff between the two. So, when you look at that diff, we're getting a better diff than you would see on your screen potentially.

Okay, got it. Maybe one big-picture question, Bill, or maybe Pat: You guys talked about generating a significant amount of free cash flow next year. Did I understand the relative priority there in terms of, number one, paying down debt, and number two would be potentially looking for some, we'll call, additional specialty product acquisitions, if we're thinking about the uses of cash for next year?

Right, and I think that you've hit on a lot of the priority areas. I think that, for us, getting to a point where our distribution coverage is within our targeted ranges so that we can be comfortable with consideration of modest increases in the distribution, that is a factor that we think about; making sure that we have ample liquidity for future opportunities. Paying down debt, in terms of paying down our revolver debt, is probably a way to be thinking about it versus some kind of takeout on our long-term debt. We need to put ourselves in a position where we can grow again, and grow from a good starting platform of a solid balance sheet.

As we think about opportunities, it's going to be putting ourselves in a position with whatever the sizing of the opportunities are, we feel like that we can access the capital markets or use internally generated cash in a pretty efficient manner. And that's what guides us towards thinking about, especially as all of these growth projects come on, presuming that they come on at levels where we expect them to, that we see that as a higher quality problem to be dealt with as we look into next year. That's really the focus right now, is putting ourselves in the best position we can to further grow the Partnership.

That definitely makes sense. Maybe just very last one: Would there be any potential impact -- and I'm sure you guys followed the IRS new proposed rules for the MLP -- for you guys on [current] operations or any of your potential plans, including a potential spin-off of any of your business lines?

Right. These are the latest, the proposed -- I think it's important to clarify, these are proposed new regulations regarding publicly traded partnerships and qualifying income. We're assessing that today.

When we take a quick look at our assets and what we already have that we think clearly continues to qualify in the interpretation of the new proposed regulations, we don't see this as having a material impact on the Partnership. Some assets for which we didn't have a private letter ruling, such as Anchor, we currently hold in corporate form anyway, although it would appear that that type of activity would be qualifying in the new proposed regulations.

We're watching it closely. We don't see it as having a material impact today. There will be a comment period here, and we'll be engaged in that, along with our other colleagues in the trade groups that represent our interests.

On first look, we think we're in pretty decent shape. And there is -- I think it's also important to understand, there's a proposed 10-year phase-in period on some things that, either where someone already had a private letter ruling. So, there is some time to deal with these issues, either structurally or otherwise.

Perfect. That's very helpful. Thank you.

Thank you. Our next question comes from the line of Jeremy Tonet from JPMorgan. Your question, please.

This is Neil on for Jeremy. I just had a quick question on the oil services business. You're aiming for positive EBITDA margin this year, but looking past, what's the long-term trajectory for that business? What are you looking to do with it?

Well, I think, as many would know from looking at our results for last year, this business is certainly one that has been -- was growing and was poised for growth. We have a very engaged, a very experienced management team there. Obviously, everyone's been impacted by the reduction in rig count. We have a team that's been in place throughout various cycles. We would hope to see, as crude oil drilling activities and natural gas drilling activities would resume or come up with higher levels, that we would be well positioned to continue to grow again.

The focus now is making sure that the business is sized appropriately, given the level of rig counts that we have. I mentioned earlier that we are seeing some stabilization in the amount of the rig count, and we like that business going forward. I think we need to see where we go and how -- when drilling activity resumes, we should be well poised to continue to grow.

Thank you. We're very impressed with the share gains in that business, for sure.

Yes. And they have certainly maintained share during this period.

Thank you.

Thank you.

Thank you. This does conclude the question-and-answer session of today's program. I would like to hand the program back over to Bill Hatch, CEO. Please, go ahead.

Thank you for joining us on today's conference call. Should you have any questions, please contact our Vice President of Investor Relations, Noel Ryan. Thanks again. Bye.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.