Delek US Holdings Inc (DK) 2017 Q4 法說會逐字稿

Good morning. My name is Tasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek US Q4 and the Full Year 2017's Earnings Call. (Operator Instructions) Thank you.

I'd now like to turn the call over to your host, Mr. Keith Johnson. Please go ahead.

Thank you, Tasha. Good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek US Holdings' fourth quarter and full year 2017 financial results.

Joining me on today's call is Uzi Yemin, our Chairman, President and CEO; Kevin Kremke, EVP and CFO; and Fred Green, our EVP and COO as well as other members of our management team.

As a reminder, this conference call may contain forward-looking statements as that term is defined under Federal Securities Laws. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements.

Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You're cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

In addition to reporting financial results in accordance with generally accepted accounting principles, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to comparable GAAP results, which can be found in the press release, which is posted on the Investor Relations section of our website.

On today's call, Kevin will begin with a review of financial performance for the quarter before turning it over to Fred for an update on some key initiatives. Then Uzi will offer a few closing strategic comments.

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

Thanks, Keith. For the fourth quarter of 2017, Delek US reported net income of $211.1 million or $2.56 per diluted share compared to a net loss of $44.2 million or $0.72 per diluted share in the fourth quarter of 2016.

On an adjusted basis, for the fourth quarter of 2017, Delek US reported adjusted net income of $40.7 million or $0.50 per diluted share compared to an adjusted net loss of $27.9 million or $0.45 per basic share in the prior-year period.

Our adjusted EBITDA was $154 million in the fourth quarter of 2017 compared to negative $10.4 million in the prior-year period. A reconciliation of reported results to adjusted results is included in the financial tables of our press release.

Improved market conditions in the refining segment and the addition of the Alon assets, following the transaction close on July 1, were the primary drivers of the increase in earnings on a year-over-year basis, which I'll discuss in more detail in a few minutes.

On a consolidated basis, line items such as operating expenses, G&A and interests increased, primarily due to the addition of Alon. I like to note that G&A expense did include approximately $2.3 million of transaction costs this quarter.

Our income tax rate, excluding the noncontrolling interest income associated with Delek Logistics and Alon USA Partners of $14 million was a benefit of 195% in the fourth quarter of 2017. This rate included a $166.9 million income tax-related benefit from remeasuring certain net deferred tax liabilities as a result of Tax Cuts and Jobs Act. Excluding the Tax Cuts and Jobs Act impact, the income tax rate was approximately 36.3%. For full year 2018, we expect to the combined annual effective rate -- effective tax rate to be in a range of approximately 21% to 23%.

Turning now to capital spending. Our capital expenditures during the period were approximately $78.8 million compared to $22.1 million in the fourth quarter of 2016. During the fourth quarter of 2017, we spent $58.6 million in our refining segment, $9.7 million in our logistics segment, $1.1 million in our retail segment and $9.4 million at corporate. Our 2018 CapEx forecast is right at $211.4 million. This amount includes $163 million in our refining segment, $17.5 million in our logistics segment, $20 million in our retail segment and $10.9 million at corporate. This amount for 2018 does not include approximately $40 million of midstream projects to enhance our position in the Permian Basin. In 2017, CapEx was $177.5 million total.

We ended the fourth quarter with approximately $932 million of cash on a consolidated basis and $533.8 million of net debt. Excluding net debt at Delek Logistics of $418 million, we had net debt of approximately $116 million at December 31, 2017.

Next I would like to discuss our results by segment. In our refining segment, we reported a contribution margin of $185.8 million compared to a contribution of $13.2 million in the fourth quarter of 2016. The year-over-year increase in contribution margin is primarily due to improved market conditions and higher sales volume from Tyler and El Dorado, combined with the addition of Big Spring and Krotz Springs refineries from the Alon transaction.

Market conditions as measured by Gulf Coast 5-3-2 crack spread increased on a year-over-year basis to $14.66 per barrel for the fourth quarter of 2017 compared to $9.33 per barrel for the same period in 2016. In addition, the refining systems benefited from the Midland WTI crude differential to Brent crude that was an average discount of $5.95 per barrel compared to $1.63 per barrel in the prior-year period. RINs expense was $25.9 million in the refining segment compared to $10 million in the year-ago period. This increase is primarily due to the addition of Big Spring and Krotz Springs refineries.

Our logistics segment contribution margin was $32.7 million in the fourth quarter of this year compared to $27.1 million in the prior-year period. On a year-over-year basis, improved performance was primarily due to the West Texas wholesale business and the Paline Pipeline.

Contribution margin in the retail segment was $13.3 million. Merchandise sales were approximately $84.2 million with an average margin of 31.5% and approximately $53.2 million retail fuel gallons sold at an average margin of $0.17 per gallon. There is no year-over-year comparison for this segment as it was acquired in the Alon transaction on July 1.

Contribution margin for the Corporate/Other segment was a negative $17.5 million in the fourth quarter of 2017 compared to negative $23.4 million in the prior-year period. Included in these results was a net hedging loss of $5.9 million for the fourth quarter of 2017 compared to a loss of $16.8 million in the prior-year period. This hedging amount represents systemwide hedges that are not applicable to a specific refinery.

Now I'll turn the call over to Fred.

Thanks, Kevin. I'd like to give you an update on some of our initiatives. First, our alkylation unit project at the Krotz Springs refinery is moving forward and on schedule to be completed in the first quarter of 2019. Through December 2017, we spent $29 million, and we expect to spend approximately $59 million in 2018. The expected total cost remains $103 million, and we expect annual EBITDA from this project to be $35 million to $40 million. As a reminder, this project should provide additional production flexibilities and improves the ability to convert low-value isobutane into higher-value gasoline products such as low RVP summer grades and premium gasoline.

We've made progress to divest noncore assets on the West Coast. On February 12, we entered into an agreement to sell some of our West Coast asphalt terminals for $75 million. Work continues to divest the Long Beach and Paramount, California assets. As a reminder, the Paramount and Long Beach assets are included in discontinued operations.

Our drop down of the logistics assets at Big Spring should close in March with an effective date of March 1 for $315 million in cash. These assets are expected to generate approximately $40.2 million of EBITDA to DKL that should support its growth. We have approximately $32 million of logistics EBITDA remaining at the Krotz Springs refinery that could be a future potential drop down to DKL.

From a modeling standpoint, I wanted to discuss our crude oil throughput expectations for the first quarter of 2018. Due mostly to planned work at the Big Spring and Tyler refineries, we expect total crude oil throughput to average approximately 267,000 barrels per day. By refinery, we expect crude oil throughput to average 60,000 barrels per day at Big Spring; 65,000 barrels per day at Tyler; 68,000 barrels per day at El Dorado; and 74,000 barrels per day at Krotz Springs for the quarter.

Now I'll turn the call over to Uzi.

Thank you, Fred. We'd a strong finish to 2017. During the second half of the year, we generated approximately $350 million of adjusted EBITDA from our larger operation -- operating platform. Our team made substantial progress on the integration of ALJ.

As of December, we've captured $89 million of synergies on an annual basis since July 1, 2017. This exceeds our previous targeted range of $85 million to $105 million. We now believe that we can capture $105 million to $120 million of synergies on an annual -- annualized basis in 2018.

On February 7, we completed our strategic initiative to acquire the remaining units of ALDW. We did not own in an all-stock transaction. This was the final step in the Alon transaction and simplifies our corporate structure to DK and DKL. It should also reduce public company costs and allow us to allocate the ALDW distribution to a higher return capital investment in the company.

We ended 2017 with a cash balance of approximately $932 million. We became active in repurchasing Delek shares in December 2017. Through February 23, 2018, we have repurchased 3.3 million shares for approximately $119 million under our $150 million repurchase program.

To further support our ability to retain cash to shareholders, our Board of Directors approved a new $150 million repurchase plan and a 33% increase in our quarterly dividend. As we continue to explore opportunities created by a larger, more diverse company, we remain focused on creating long-term value for our shareholders.

With that, Tasha, would you please open the call for questions?

(Operator Instructions) Our first question comes from the line of Neil Mehta from Goldman Sachs.

Uzi, I just wanted to start with a big picture question is, what do you do with all this cash? With the drop downs, the potential monetization of Alt Air still to come, plus the asphalt monetization, you guys are going to be in a strong balance sheet position. So how do you think about the allocation between going forward here?

Well, thanks, Neil. Obviously, we feel very good with the quarter and feel very good with the company as we start the year. You raised a great question. From a modeling standpoint, though I'd like to point couple of things here. As we [selled] the 2017 RINs obligation, we, I think, did it in January. So as we did it, that had around $150 million obligation and that was all with cash. We can talk about that later, but just for all of us to remember. So still, we have a very, very, very good cash position and that's the reason what we did is we increased the dividend and obviously increased the buyback. If you look, in the quarter, we bought less than $100 million so far of shares. So we promised ourselves and the shareholders that we are going to be very aggressive once we see that the market is stabilizing and the integration of Alon is going the way we want. And that situation allowed us to buy almost $100 million of shares. We do look at the market opportunities. We had an opportunity to buy the 2 terminals together with GPRE. That was a great deal and expect to create synergies both on DK and DKL. We think that there are more opportunities around the gathering and the logistics assets, especially in the -- in light of the fact that we are in the Permian and the Permian is growing substantially year-over-year. So the balance between logistics assets, returning cash to shareholders and improving our assets, obviously, if we see that the situation continues, we'll continue to be aggressive.

Thanks, Uzi. And then on the synergy raise. What was the driver of the delta versus your initial expectations?

Three areas. First of all, commercial delivered a strong ending to the year, supported by Brent-TI. Second, the cost of capital. We actually surprised to the good. We have a couple of good surprises to come in the next few weeks with the cost of capital. We didn't finish that yet, but the cost of capital is going to be lower than what we expected. And also, obviously, the corporate side, we kept some savings in our back pocket. And now that we see that it matures, we don't hesitate to talk about that.

Last question from me. The Permian differentials, you had Sealy, the Houston, Sealy come online. So those tightened up a little bit, but there is no real pipeline capacity for the balance of 2018 at least in our numbers. So how do you see these spreads playing out from your Brent versus Midland?

Well, Neil, when you hosted us for a call, 3 months ago, we were expecting this to tighten to around Midland Brent to [$4 to $4.50]. Today, we are at a little more than $4, $3.60 plus $0.50 or $0.60. The Midland differentials, we expect them to widen especially in light of the fact that crude is now or WTI is $63, $62 or $63. I wouldn't be surprised if we get back to the $2 or (inaudible) towards the third -- fourth quarter and mainly, first quarter of next year.

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

Couple of things. Uzi, one of the most impressive in the quarter is the margin category of Krotz Springs. And maybe this is for Fred, is there any one-off item in there we should be aware? Or that this is, what do you say, a good baseline? What may have changed since you took over Alon to make such an impressive improvement in the capture rate?

Well, first of all, as we discussed in the past, Paul, we took Krotz as a major initiative for us. I think their refinery is performing very well. If you look, we performed work in the fourth quarter that will allow us and as Fred said to run that -- close to capacity the first quarter. So the operation itself is doing very well. Second, the -- we had an initiative to play in between LLS and Midland. And as Midland, LLS was widened or was wide, during the fourth quarter, we ran almost 60% of Midland base. And together with the ability to utilize the Paline Pipeline and reduce transportation costs, that's helped on that side of the business. Third, we are starting to work on the wholesale along the Colonial. If you remember, we said in the past that the fact that Krotz is selling everything at the refinery gate doesn't serve the refinery very well. And with the fact that -- we have Colonial space, as a combined company, that allows us to ship on Colonial and capture more or higher margin on the wholesale side. These components, again, we had 2 quarters. We expect the first quarter to continue with that trend. I wouldn't declare victory as we need to continue to improve. But I'm going to give you another piece of news on the alky project, which is progressing very well, and we're hoping to finish it in the first -- towards the end of the first quarter of next year, i.e., a year from now with aim -- with the widening or the increase of WTI price and the fact that isobutane didn't keep up with that. We see bare margins and result of this alky project in the past, we used to say $35 billion to $40 billion. We now believe, based on core markets, that this number is higher. Our goal is to get close to a situation at the survival refinery. And last point, the -- because of the good operation at Krotz and the leadership of the refinery manager, we are able to improve the year losses or year's gain. In the quarter, we were enjoying 101.5, i.e. 1.5% [bare, or yield] gain versus in the past, some lower numbers. So these are the factors that contribute to the performance of the refinery.

You see order incremental -- Midland crude that you attribute to Krotz Springs. Is that also the pipeline, including the tightening or that some of them just further way out?

I'm sorry, I'm not sure I understood the question, Paul. Can you just repeat it?

You've been able to run more benign crude in the Krotz Spring in the fourth quarter. If the incremental running of the crude from the Midland, are those shipped through into the refinery all through the pipeline or some of them incrementally from the pipe -- from the railroad or the other alternative transportation?

I understand the question. There is no railroad, all pipes. Remember, we have both -- a part that designated to us, the Amdel pipeline and also the Paline Pipeline that we own. So that together with the fact that we continue to gather barrels in the Big Spring area helped the situation. So there is no rail.

And is the 60% is the maximum?

Well, it depends on market conditions. Obviously, fourth quarter was good margin. The way we expect the market to behave in the third and fourth quarter with the Midland differential that we expect to widen because of no [indiscernible] capacity coming online, we will probably try to push that number to a higher percentage, if you will, may be 70% or 75%.

Two final questions. One is really short. Fred, you are saying that the total hedging loss is $5.9 million. So that means that the realized hedging loss is $3.9 million, and I presume that is also in the corporate? And also that you used to have some long-term contract on the ethanol hedging. Is those hedging gain or losses also in the corporate? Or that does it include as part of your cost of goods sold and will you reflect that in your result for refining margin?

So the physical ethanol that we're buying, that physical change is actually the refinery. But if there is some hedging noise into it, it will be in corporate because we don't allocate those hedging to the refineries. And as I would say in general that there is almost -- there is very limited hedging happening at the refinery level. Almost all of it is in the Delek US on an overall basis.

A final one. Do you see that for DKL on the GP, Alon or the other logistic company that's sponsored by the refiner have seen a change by collapsing the IDR into the LP? Is that something that you guys would look at in order to permanently reduce the cost of capital in the subsidiary?

Well, Paul, obviously, you know that we are looking at that -- or we should look at it very carefully. We still think that we are not as mature as some of our peers, but is -- and also, we think that we have very, very good project at DKL. Fred mentioned logistics project that we expect to come to the market with some good ideas as the Permian grows. But by the end of the day, we will need to look at it very carefully over the next 24 to 36 months.

Okay. But it's not over the next 12 months. It is going to be, say, 2 to 3 years out?

Probably not in 2018.

Our next question comes from the line of Prashant Rao from Citigroup.

I wanted to drill down a little on the synergies, the raise on the guide there. On the cost of capital part, just wanted to get a sense of how much lower, what kind of a step down we could see? And then maybe longer-term, is there more there in terms of bringing down the cost of capital kind of -- and understand that we will get some more detail in the coming weeks, but maybe bigger picture, just wanted to get a sense of your thinking there? And so how we should be thinking about it in terms of the volume cash flows on a go-forward basis?

Yes. So this is Kevin. On the cost of capital synergies, we increased our total synergy capture to the $30 million range based on several things. So the lower interest expense on our debt is certainly a part of it and some of the opportunities that we're seeing as we're looking at kind of recapitalizing the balance sheet are driving some meaningful savings there. But in addition to that, we've got a reduction in letters of credit that is driving probably in the order of $7 million or so in annual cost savings. And then, some of the J. Aron agreements that we're looking at are also reducing interest expense considerably. But the opportunities on kind of recapitalizing the balance sheet and getting rid of all of the stuff at the DK level and consolidating into one new credit facility is a significant portion of that new $30 million revised target.

Okay. That's really helpful. And then turning to California, it is in good progress and getting those asphalt terminals sold. And I wanted to talk about Long Beach and Paramount. We've gotten questions about some volatility, obviously in the margin environment in PADD V and people doing the work to figure out is it just near term or how much longer that could extend into 2018. Could you talk may be a little bit about how that affects the sales process for those assets or sort of agnostic to that? And maybe how you are thinking about the progress on those 2 assets as we sort of are turning the corner here in 2018?

Well, obviously, we put them below the line for a reason. If we didn't think that we can sell them, they weren't there. And we didn't change our mind and move them back up. So I think, Fred and Melissa did great job finishing the asphalt terminals. We were busy buying the 2 terminals, the 2 Mid-Continent terminals that will serve DKL and DK together with GPRE. And we continue to believe that the sale of Paramount and Long Beach should happen over the next few months.

Okay. And then just one quick one on Big Spring. I noticed that the -- on your crude site there the sours that you are using ticked up a little bit and just sort of wanted to get a sense of if we could be -- how we should be thinking about crude slate at Big Spring if you could be running a higher throughput of sour sort of in 2018 and maybe if there is anything to call out as to what the Q-on-Q improvement was?

Yes. You are touching a great point. I'll explain beyond 2018. First of all, 2018, if the market stays the way it is, we'll continue to run mainly sweet. However, both Big Spring and El Dorado have the flexibility to run sour crudes if needed. And in light of the 2020 IMO, we look at that optionality and consider that as we continue to optimize our crude fleet.

Okay. So you would be able to -- you would look at that and to flex up as we start to see maybe these [indiscernible] flow out potentially as we get towards the IMO deadline that would be the right way to think about it.

Right.

Our next question comes from Brad Heffern from RBC Capital Markets.

Uzi, you've talked about it a couple of times now the Green Plains JV, I was wondering if you could just go into a little more detail as to how that helps the DK refining system? And any sort of quantification you could give in terms of EBITDA or anything else of the benefit of that for DK?

Well, absolutely. The two best markets -- let me start all over. Let's go one by one. Tyler. If you look at the capture rate of Tyler in the third quarter and fourth quarter, capture rate at Tyler exceeded expectations. And third quarter, it was blamed on the hurricanes, and we said -- now, there's a step change here. And now, in the fourth quarter, we are proving it again. And the reason for that is exports to Mexico. We do export to Mexico out of both Tyler and El Dorado and that allows the niche market to grow and us to enjoy bear and netbacks. Now that we are buying the Caddo terminal, which is basically North Dallas, we will be able -- we're looking at a plan to connect Tyler. We have several pipelines that we own in the area. We're looking at optionality to connect this to assets and capture more netbacks as we increase the niche in the area. Now obviously, the Caddo pipeline is now full -- I'm sorry, the Caddo terminal is full. And we do have the Greenville terminal, which is only 200 feet away. So we connect that and now increase the capacity. So both our companies, DK and DKL, can enjoy from that. On the North Little Rock as we all know, the biggest market for El Dorado outside the trucking is North Little Rock, and we believe that, that will allow us to increase the throughput both to the benefit of DK and DKL.

Okay. Thanks for all that color, Uzi. And then maybe a couple for Kevin. So OpEx on the refining front was pretty low this quarter. So I was wondering if you could talk about whether that's a run rate? And then also on the G&A front, what's the run rate there?

Well, on the OpEx, we have a target to stay always below $4. We just need to remember that we ran the refineries very hard in the fourth quarter with the exception of the turnaround that we had in -- at Krotz. So we -- at the current situation, we don't expect much change with -- as long as we are running full. I'm going to remind you that we are conducting work both in Big Spring and in Tyler. So per barrel, you should see an increase in the costs. In regard to G&A, and that's an area that probably we may confuse several people. What happened in the quarter, our bonus play -- our bonus program is based on progress we made during the year. And until the third quarter, we weren't sure that we will pay bonuses because we have minimum target, which bonuses are being paid only if we exceed that target. So we booked some bonuses accruals of around $5 million in the third quarter, but since the fourth quarter was strong and compared to the fourth quarter of last year, then we booked the majority of the bonuses in the fourth quarter. And that number is around $14 million or $15 million. Half of it is on the OpEx and half of it is on the G&A. We don't expect this to continue on a normalized basis. So for the quarter, we probably -- the normalized G&A and normalized OpEx should have been lower by $11 million. We didn't want to confuse people by putting it in the press release, but we just wanted to give an explanation here.

And the quarter also included $2.3 million of transaction costs, which I mentioned. So tracking the bonus and the transaction costs, I would say, normalized run rate G&A probably in the $45 million to $50 million per quarter range.

Okay. Got it. And then finally, Kevin, you gave the cash tax -- or sorry, the tax rate guidance in the prepared comments. Can you talk about the cash taxes specifically? I don't think you guys have actually paid meaningful cash taxes since 2014. How do you think about that now as it relates to the higher bonus depreciation provisions, but at the same time, the market being better than it's been in a couple of years?

Right. So from a cash tax standpoint, the effective cash tax rate when you account for now expensing CapEx, to remind you, the way the rules work is that you can only expense the capital when the project actually comes in service. So you can't expect to expense all of your capital in any given year. So if you assume that we can expense capital in the 70 -- 50% to 75% range, cash taxes are $60 million to $70 million a year.

And our next question comes from the line of Blake Fernandez from Howard Weil.

I wanted to go back to the cash question earlier. Where do you think the kind of level is that you need to maintain on hand in order to just kind of operate the business?

Good morning, Blake. Great to hear from you. The -- all along, we say to ourselves that we want at least $100 million per refinery and another $100 million at the corporate. So call it $500 million. That's what we need to operate the business comfortably. Obviously, we are in higher situation today and with the things that are happening within our company, we expect this to continue. That's the reason we are -- we were more aggressive on the buyback in the quarter -- I mean the first quarter. So -- and we will continue to do that. I do want to emphasize that a very important point is that we do see opportunities in the Permian area where our majority of our assets are, and we want to maintain the flexibility, especially on the logistics side.

Understood. Okay. Secondly, can you give us an update on both the RIN waiver and biodiesel tax credits?

Well, let's start with the easy one. The biodiesel credit was passed 2 weeks ago. And obviously that will assure good benefit for our company in the first quarter. Some of it will go to discontinued ops because of the Alt Air situation. Some of it will go to our partners, but the benefit is there. That's the easy question. It got it in the pocket or in the sack, if you will.

Uzi, can I stop you there real quick to -- is there a dollar amount you can quantify or is it...

I obviously can do that. The two -- we allocate that, as you remember, you will not see it as a special item because we allocate it to the refineries. But the 2 plants that we have that support the DK, Tyler and El Dorado, their capacity is around 20 million gallons, and they ran very close to capacity. So that's -- the other one is the Alt Air. Alt Air is around $30 million. However some of it will be under discontinued ops, and we do have a partner over there that will get 40% of these wins. So the impact is 50%, but if you take the partner portion of 40% or out of 30%, that's altogether 38%.

Got it.

Yes. That's already -- that increases our optimism, good catch by the way. The waiver, which, it's another good catch, there is no update yet. However, we -- first, we believe that the administration will do something about it in 2018 or 2019 and the waiver is only for 2017. So we continue to believe that there is a fair chance that we get it. Obviously, once we get or if we get it, we will continue to work with the administration. And if we get and when we get, we'll update the market.

Okay. Fair enough. The last one just for you. I know you kind of outlined the crude slate in the press release and maybe I'm totally mistaken. But I thought in the past, there was some discussion of railing WCS down to some of your facilities and all. And then just given the blowout and some of those differentials, can you remind us, is there any access to WCS to maybe get some of those barrels down to your system?

Absolutely. We have that flexibility to get to El Dorado. We're looking at that. We haven't done much of it yet. And also, we've now connected to Cushing with the pipeline. So it discontinues. We may not even use the rail, but some blended barrel of Midland and WCS to bring to El Dorado.

Our next question comes from the line of Phil Gresh from JP Morgan.

First question, just to clarify. In your answer to Blake's question, the $38 million net on the biodiesel credit. You said some of that goes to discounts? Or is that the net to you guys before discounts?

No. Some of it will go to discounts.

Okay. Got it. In terms of the dividends, pretty big hike in the dividend this quarter. Yet, when I look at the numbers, the dividend as a percentage of CFO or free cash flow, it actually still looks pretty conservative relative to some of your peers. I guess, you could kind of whether you'd agree with that or not. But how do you think about this dividend increase in the context of the longer term view?

If we compare our peers, Phil, to our buyback in the first quarter, I don't know there is any company that bought as much shares in the first quarter or in terms of percentage, obviously as part of our market cap. We are -- that's a balance that we want to find between dividend and buyback. Obviously, I -- we're very familiar with the fact that we are still a little below the market. As our confidence grows, we will continue to look at that and update the market if we make a different decision. But we felt that hiking the dividend, buying shares almost $100 million in the first quarter and then hiking the share repurchase program by another $150 million should be more than sufficient at this point for investors.

Understood. The question is more just to understand if we should expect these type of dividend increases kind of an ongoing annual basis since it's been a little while since we've seen a dividend increase?

You are absolutely right. And we will continue to look at that. You're bringing up a great point.

Okay. Second question, I guess, it kind of relates to what was asked before on the buybacks and the cash on the balance sheet. Do you see an ability to do buybacks up to the point that you would get to the target leverage? Or kind of the net of the cash you've on the balance sheet? Or would you like to maintain additional flexibility for other M&A or other opportunities?

We obviously, over the years, Phil, and you know us very well, try to be nimble in the market and look at what is available for us. Obviously, don't want to overpay. I said it in the past, we've said in the past that we are not going to pay high multiples not for refining assets and not for logistics assets. As a matter of fact, logistics assets, we will not pay more than 10 times for logistics assets and many assets we bet. At the same time, we want to be mindful to the shareholders' needs and to retain shareholders. So all that creates some balance that we're trying to find in between leaving cash on the balance sheet and ready for acquisitions, be aggressive on the buyback and the dividend. And obviously, get ready for, if there are rainy days to be able to have ample liquidity.

Okay. And just one last one just on the throughput, for the first quarter, obviously, lower than the second half of last year because of these turnarounds you mentioned. Just kind of wondering how you think about the year from a throughput perspective? If you have any color there? Should we be expecting any other maintenance effects? Or should we be running more like a second half of '17 for the rest of the year?

We're actually hoping to do better than the second half, and I'll tell you why. Because we -- first of all, there is no turnaround this year. And the work we're doing allows us to push turnarounds further up. So that's one thing. Second, we are hoping to run our Big Spring at -- Big Spring was running in the last few months at 70,000, and we are hoping to get up to 73,000. We -- it's not in the guidelines because we still need to prove -- we are just completing the work, and we still need to prove it to ourselves. But if we can do that, and also in light of the fact that Krotz and Tyler don't need any work anymore, we are hoping to run close to capacity as you can see. Once margins are there, we try to push where as much as we can and Tyler had a record throughput for their fourth quarter.

Our next question comes from the line of Ryan Todd from Deutsche Bank.

Maybe since you just mentioned in the last one about acquisitions. Can you talk about your current appetite for deals? And maybe how you would characterize the markets either in the refining, midstream or retail?

These are all great questions. So let me talk one by one. On the refining side, as we all know, we had -- we all had great year. We're all swimming in cash. So M&A activities in that area I see at low probability. On the corporate side, there will be still assets here and there that can be picked. But for the most part, everybody is -- everybody lives their lives pretty comfortably. On the logistics side, it's a different animal. A lot of MLPs are under pressure with the yield that is not sustainable. We need to ask ourselves if how this needs to work, but we think that the opportunities are over there. I want to be clear. There is nothing that we are doing actively today, but we keep our ears open. As I said earlier, we do not plan to pay double-digit multiple on EBITDA. And the last example is the 2 terminals we just picked. And so we will be very cautious about overpaying here. The last thing we will need to remember is that there are opportunities for organic growth, especially around the Big Spring refinery and the Permian area that is growing substantially, and we are looking at these opportunities as well to bring value to the shareholder.

Okay. And then maybe one on midstream drops. I mean, congrats on getting the drop down complete. The EBITDA range on the dropped asset that you just announced is probably even a little above the high end of the range. Can you may be mention what it was that drove the increase in the range there? And then, perhaps any comments you'd have on the time line of the drops at Krotz Springs? Is that something that's contingent on some of the activity that we're going out across? How should we think about that how that plays out over time?

In regards to Krotz, we want to still continue to see the improvements in Krotz, and so we'll update the market when we feel comfortable to drop it down. We don't want to create damage over there. In regard to Big Spring, Kevin spent a lot of time doing it. So I'll let take that.

Yes. So the increase in EBITDA is driven by a couple of things. As we dug in and kind to further analyze the assets, once we took operational control, the OpEx was lower than our original expectations and then, to bring the minimum volume commitments and revenue in line with precedent transactions, including our own previous drops, the EBITDA just materialized higher than what we originally modeled out.

Our next question comes from the line of Matthew Blair from Tudor, Pickering, Holt.

I wanted to follow up on the potential asset divestitures. So you mentioned that you are looking to sell Long Beach, Paramount and Alt Air. Could you provide an update on the Bakersfield plant? What are your options going forward there? And then also, I believe that the current drag on all these California assets is about $40 million in operating costs. Do you have a breakout of how much Bakersfield makes up of that $40 million? And how much of the $40 million is attributable to Long Beach, Paramount and Alt Air?

First of all, Matthew, good luck. I'm sure you'll do great. Second, the -- I'll -- that was a long question. So I'll -- that will be a long answer with it. I'll try to give enough color with that. First, we do believe that, in the next few months, there is a good chance that both Long Beach, Paramount and Alt Air will be sold. And that's the reason we put them below the line. The total drag on California, it is $40 million to $50 million -- it was $40 million to $50 million. We just need to remember that we said it all along that's without the tax credit. But if you take the tax credit and you apply the $18 million that I just mentioned, it's around $20 million or $25 million drag on California. Out of this $20 million to $25 million, $10 million is Bakersfield. You asked about the plans -- the plans for Bakersfield, and I want to give you some color on that. We're looking -- we have active interested parties looking at it. I think we had 6 or 8 people looking at that. Obviously, there is an option for us to do something with it. That's the reason it's not below the line, but we will -- we believe today that all these assets can be, if we decide, can be monetized over the next few quarters.

Got it. And then, I guess, the may be a question for Kevin. So on the logistics side, in terms of the drop, it looks like the Big Spring assets, the $315 million will come in all in cash. Do you have an estimate on what kind of tax hit we should expect on that sale? And then for the 2019 Krotz Springs logistics drop, any early thoughts on how you'd finance that? Would that again be all cash back to DK? And what kind of tax hit should we expect there?

Sure. So the tax hit on the Big Spring, as you would expect, the tax bases on those assets is pretty low. So the current estimate of cash taxes on the Big Spring drops is in the $60 million to $65 million range. And then on Krotz, it's still a year away before that drop down happens. We have plans to increase the capacity on the DKL revolver. So we'll have plenty of debt capacity. Then we just run into leverage constrain issues, and I think it's a little early to tell on whether it will lead equity or not, see how 2018 goes, and we'll make that determination in Q1 of next year. And then, also on the cash taxes for the Krotz drop down, similar type relative cash tax impact, pretty low basis, tax basis on those assets.

Our next question comes from the line of Roger Read from Wells Fargo.

Got to say congratulations on what you did at Krotz Springs this quarter because at the time of the acquisition, I remember the thought was this thing was like a thoroughbred with a broken leg and it should be treated as such, but really impressive performance.

We warned you about it, right? We told you, don't discount this one.

I have listened. I've listened. Jumping into a couple of quick questions here. Good job obviously on the integration process here at Alon. As you think about additional acquisitions, let's say, more on the meaningful side as opposed to a bolt-on transaction here or there. Do you feel you have the positioning and the capacity at this point to do something, thinking of a single unit refining acquisition or something along those lines?

Well, as I said earlier, we keep our eyes looking all the -- keep our eyes open, and we look all the time. We do not want to overpay. And we feel that what we did with the Alon acquisition and before that the El Dorado acquisition, the timing was good. We knew what we were going into or getting into, and we don't want to overpay. So do we look at stuff all the time? Yes. Our commitment to you as the investment community is that we will not overpay.

Certainly, I appreciate that. Next question for you, obviously a lot more production is going to come out of the Midland basin over the next several years. Big Spring, pretty well locked in, Tyler, locked in. Presumably, incremental capacity to take Midland barrels at El Dorado and Krotz as you can get the barrels there. What do you see in terms of potential of bringing more Midland or let's call it, discounted inland barrels to those 2 locations? Or referring back to some of the previous commentary on maybe running more sour barrels, that's really the way we should think about what happens at El Dorado.

Well, it depends on the differential. We want to maintain the flexibility. So we will probably look very carefully to increase the ability to get more Midland barrels into both Krotz, as you said, and El Dorado. However, we do want to maintain flexibility, and we do think that there will be other opportunities to do with the barrels that we gather as we continue to see a tremendous growth in our gathering system in the area. So that's something that we will continue to look at it very carefully.

Okay. And then the last question is just a follow up on the third part of the improved -- I'm sorry, second part of the improved synergies and lower cost of capital. I presume that's lower debt financing costs we're going to see something on shortly?

That's exactly right, Roger.

And our next question comes from the line of Kalei Akamine from Bank of America.

A lot has been touch, but I got a couple of quick ones. Just a follow up on the Alt Air's renewable facility. Just wondering if the Blender's Tax Credit would transfer with the facility if it was sold? And how much is the working capital piece at the terminal sold in the quarter? And I'll leave it there guys.

That's a great question. The tax, the BTC there, Blender's Tax Credit is a 2017 event. It's not 2018 event. So if it's been sold then the 2017 regardless, it's going to stay with us. Second, on the working capital, I'm not sure it's material. So I don't know off the top of my head, what that number is.

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

Well, that was a great quarter and a great year. I'd like to thank our Board of Directors, the -- you investors and analysts for your trust in us. We don't take this lightly, and we feel obligated to satisfy the investment community as well as our Board of Directors. I'd like to thank my colleagues around the table here for creating this company or making this company what it is. But mostly, I'd like to thank our employees, who did great job over the last year, both the Alon employees as well as the DK employees creating value for all of us. Thank you, and have a great day. We'll talk to you soon.

This concludes today's conference. You may now disconnect.

Thank you, guys.