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Edited Transcript of DK.N earnings conference call or presentation 5-Nov-19 2:30pm GMT

Q3 2019 Delek US Holdings Inc Earnings Call

BRENTWOOD Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Delek US Holdings Inc earnings conference call or presentation Tuesday, November 5, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Assaf Ginzburg

Delek US Holdings, Inc. - Executive VP & CFO

* Avigal Soreq

Delek US Holdings, Inc. - Executive VP & Chief Commercial Officer

* Blake Michael Fernandez

Delek US Holdings, Inc. - SVP of IR and Market Intelligence

* Ezra Uzi Yemin

Delek US Holdings, Inc. - Chairman, President & CEO

* Frederec Charles Green

Delek US Holdings, Inc. - Executive VP & COO

* Louis Labella

Delek US Holdings, Inc. - EVP

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Conference Call Participants

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* Benny Wong

Morgan Stanley, Research Division - VP

* Bradley Barrett Heffern

RBC Capital Markets, Research Division - Analyst

* Manav Gupta

Crédit Suisse AG, Research Division - Research Analyst

* Neil Singhvi Mehta

Goldman Sachs Group Inc., Research Division - VP and Integrated Oil & Refining Analyst

* Paul Cheng

Scotiabank Global Banking and Markets, Research Division - Research Analyst

* Paul Benedict Sankey

Mizuho Securities USA LLC, Research Division - MD of Americas Research

* Philip Mulkey Gresh

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* Prashant Raghavendra Rao

Citigroup Inc, Research Division - Senior Associate

* Roger David Read

Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the third quarter earnings call for Delek US Holdings Inc. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Blake Fernandez, Senior Vice President of Investor Relations, Market Intelligence. Thank you. Please go ahead.

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Blake Michael Fernandez, Delek US Holdings, Inc. - SVP of IR and Market Intelligence [2]

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Thank you, Jerome, and good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek US Holdings' third quarter 2019 financial results. Joining me on today's call is Uzi Yemin, our Chairman, President and CEO; Assi Ginsburg, Executive Vice President and CFO; Fred Green, EVP and COO as well as other members of our management team. The presentation materials we'll be using during today's call can be found on the Investor Relations section of the Delek US website.

As a reminder, this conference call may contain forward-looking statements as that term is defined under the federal securities laws. Please see Slide 2 for the safe harbor statement. In addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results, which can be found in the press release, which is posted on the Investor Relations section of our website. Our prepared remarks are being made, assuming that earnings press release has been reviewed, and we are covering less segment and market information that is incorporated into the third quarter press release. On today's call, Assi will review the financial performance, and Fred will cover operations for the quarter, then Uzi will offer a few closing strategic comments.

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

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Assaf Ginzburg, Delek US Holdings, Inc. - Executive VP & CFO [3]

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Thanks, Blake. We had strong financial result this quarter despite the lower Midland differential and planned maintenance at our El Dorado refinery. As you can see on Slide 3, on an adjusted basis, for the third quarter 2019, Delek US reported net income of $58.7 million or $0.78 per diluted share compared to net income of $186.4 million or $2.15 per diluted share in the prior year period. Our adjusted EBITDA was $163.1 million in the third quarter 2019 compared to $325.5 million in the prior year period. Adjusted results this quarter include a $20.7 million pretax benefit from RIN waivers granted for Krotz Spring, El Dorado and Tyler refineries. However, this was partially offset by a negative refinery inventory impact, excluding LCM, of $13.5 million.

I would like to highlight that year-to-date, adjusted earnings and EBITDA are above year-ago level despite a compressing Midland differential.

On Slide 4, we provide a cash flow waterfall. In the third quarter of 2019, we generated significant cash flow of approximately $213 million from continuing operations, which include a working capital benefit of $81 million. This strong cash generation allows us to fund cash capital expenditure of $106 million, along with a $75.3 million contribution to Wink to Webster.

We are on track to complete project financing by as early as year-end for Wink to Webster. And the remaining contribution should be funded to that vehicle on a nonrecurring basis. As a reminder, we expect total net investment for Wink to Webster of $340 million or to $380 million. Finally, we returned approximately $65 million of cash to our shareholders between buybacks and dividend.

Slide 5 highlights our capitalization. We ended the third quarter with over a $1 billion of cash on a consolidated basis and $994 million of net debt. Excluding net debt of Delek Logistics of $834 million, we had net debt of approximately $159 million at September 30, 2019. On Slide 6, we provide fourth quarter guidance. We estimate, based on the forward curve that our realized Midland differential in our gross margin will be in the range of $0.15 to $0.35 per barrel premium to WTI.

With that, I will now turn the call over to Fred to discuss our operations.

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Frederec Charles Green, Delek US Holdings, Inc. - Executive VP & COO [4]

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Thanks, Assi. During the third quarter, our total refining system crude oil throughput was approximately 274,000 barrels per day, which reflects downtime at El Dorado. As shown on Slide 6, for the fourth quarter of 2019, we expect crude oil throughput to average between 275,000 and 280,000 barrels per day. Separately, I'd like to point out that in the first quarter of 2020, we have a turnaround planned at our Big Spring refinery. Crude oil throughput for Big Spring in the first quarter should be in the range of 30,000 to 35,000 barrels per day.

On Slide 7, I want to highlight our capital spending. Capital expenditures during the third quarter of 2019 were $111 million compared to $86 million in the third quarter of 2018. Our full year 2019 capital expenditures are forecast to be $415 million. This amount includes $247 million in our refining segment, $10 million in our logistics segment, $21 million in retail and $137 million at the corporate level. The Big Spring gathering system is included at the corporate level and will comprise approximately $132 million this year.

As a reminder, CapEx excludes joint venture investments like Red River and Wink to Webster. While CapEx for 2019 is expected to come in about 5% above our prior forecast, this is mainly a function of pulling forward spending from 2020 as the timing of the Big Spring turnaround was moved from March to January. We now expect CapEx next year to be meaningfully lower on a year-over-year basis.

Next, I'll turn the call over to Uzi for closing comments.

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [5]

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Thanks, Fred, and good morning, everybody. Cash generation was significant in the quarter, and I'm pleased with the progress on our strategic ambition of building out our midstream business and increasing utilization of our own logistics assets versus third parties.

Moving to Slide 8. Big Spring gathering acreage continues expanding. And now we have more over 275,000 dedicated acres on the system, up from 250,000 acres previously. With ongoing progress at Big Spring gathering, we now expect $20 million to $25 million of EBITDA from that system next year. As gathering continues to grow, it places Delek in a unique position among refiners with availability to equity accrued in excess of our refining capacity. This dynamic underpins our decision to enter Wink to Webster JV as it offered fuller integration potential. Once the project is complete, we will have optionality to place barrels at our own refineries. Selling into local markets or accessing the premium Gulf Coast market.

Moving to El Dorado. We're excited about the vacuum tower upgrade that was completed at the end of the third quarter. We are now positioned to run at increased utilization rates with a substantial improvement in product yield, including increased distillate output. These improvements should allow El Dorado to take advantage of potential IMO benefits, including strong distillate cracks and increase capacity to run West Texas Sour feedstock.

As shown on Slide 9, cash returned to shareholders remains a priority. Year-to-date, we have repurchased $147.8 million of our stock. Our share count has been reduced by 16% from the peak in the second quarter of last year. Our capital allocation program balances cash to shareholders with potential opportunities for growth. We intend to repurchase $30 million of Delek stocks in the fourth quarter of 2019. In addition, our Board of Directors approved a 3.5% increase in our regular quarterly dividend for the second quarter 2019 level. This marks our sixth consecutive increase since the first quarter of 2018.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from the line of Roger Read of Wells Fargo.

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Roger David Read, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [2]

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And apologies for any background noise, on my way through an airport right now. Uzi, I just wanted to, I guess first ask, or maybe this is for you, Assi. Cash flow in the quarter was pretty good, especially the recapture of the working capital and you gave a pretty good idea of what the gathering and processing system should add in EBITDA. But as we think about a relatively modest or even maybe slightly negative, Midland versus Cushing premium, how should we think about cash flow generation as we look at '20 and '21? If not an absolute number, maybe sort of a rough contribution as we think about the 3 segments of the company?

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Assaf Ginzburg, Delek US Holdings, Inc. - Executive VP & CFO [3]

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I think it's first -- I think it's too early to talk about contribution for 2020. We do know that we have meaningfully decreasing our 2020 CapEx plan below our 2019 plan in order to make sure we have a material available cash flow to continue our dividend growth and buyback program. With that being said, we do think that our gathering business through other aspects of it can generate much more money next year than what we have on our base case. And also, there is a good chance that some of the Wink to Webster will start producing cash as early as next year. So we are very confident in our performance of our logistics segment, our retail segment and even our refining segment.

When you look at the 2019 numbers, please remember that El Dorado ran almost every quarter in the first 3 quarters of the year below 65,000 barrels a day, producing a distillate yield of 37%. When you look at the IMO environment, we're going to be in a much better place because as we mentioned on our call earlier, we're looking at higher distillate yield. So I think that is yet to be seen, but Delek will be a big beneficiary of the increase in distillates cracks, something we haven't seen as much in 2019, especially in El Dorado.

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Roger David Read, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [4]

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Yes. Fully agreed. Distillate market looks tight pretty much everywhere. I'm just curious without getting too deep into that particular project, do you see other similar type tweaks into your system, whether at Tyler or Krotz Spring that you can affect sort of changes like this in short order and get a better product yield? I mean your yield is pretty solid already. But I was just curious if there's any other tweaks you have there?

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [5]

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Well, first, we are very excited about El Dorado, increasing El Dorado distillate yield by at least 4% is something that we are very excited. We always work on other projects, sometimes they do require a downtime like it happened in the third quarter with El Dorado. So that's something that you need to balance between, hey, how big is the benefit versus the downtime? But for sure, there are several projects that will enhance our system. I just want to make sure, or we just want to make sure that we balance the downtime and the returns. Obviously, with El Dorado, it's no-brainer. It was no-brainer to take the vacuum tower down for 45 days because of the enormous benefit from that.

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Operator [6]

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Your next question comes from the line of Manav Gupta of Crédit Suisse.

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Manav Gupta, Crédit Suisse AG, Research Division - Research Analyst [7]

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A quick clarification. So when you initially announced Wink to Webster, the CapEx was $340 million to $380 million. Now what you're saying is after the spend of $75 million, which is already done, there is no more spend associated with Wink to Webster as you secure project finance? Am I understanding that right?

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Assaf Ginzburg, Delek US Holdings, Inc. - Executive VP & CFO [8]

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Let's start with the facts. If you use 20% need for the project and use the midpoint of the project of $360 million, you'll end up with roughly equity need for the project of $72 million. Already in Q3, we invested $75 million. We haven't secured yet the project financing, but we believe that we are on track to close it as early as the end of 2019. And therefore, meaningfully, we shouldn't have too much outlay of cash, when you look at the continuation of the project.

I will say that there is actually a situation that we will even have a cash inflow when we complete the project because at that point if we elect potentially, we can reduce the equity in the business or in the investment to 15%. So right now, we are on track to close the financing. It's not secured yet. We're going to launch it in the next 2 weeks, but the markets are good, and we have good -- secured, I would say, commitment from some banks.

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Manav Gupta, Crédit Suisse AG, Research Division - Research Analyst [9]

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So the midstream or refining spend you said would be down next year. But if there is no material contribution, we should also assume that the midstream spend at DK next year would be lower because Wink to Webster would be hopefully, project financed. Is that the right way to think about it?

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Assaf Ginzburg, Delek US Holdings, Inc. - Executive VP & CFO [10]

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Correct. Now when we talk about CapEx, just to be clear, Wink to Webster is not CapEx. It's investment in a JV but you are right. First, we don't have any burden of Wink to Webster next year. It may be -- even generate free cash flow back to us. On top of it, we do expect overall DK CapEx to go down meaningfully, including the DPG person, which is a gathering system.

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Manav Gupta, Crédit Suisse AG, Research Division - Research Analyst [11]

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Okay. So next question is more on the line of El Dorado, you indicated it's besides the higher diesel yield, you're also increasing utilization. Can you help us quantify, in your terms, if you look at the forward cracks, the change you made at El Dorado? Are we looking at a $15 million, $20 million EBITDA uplift, what kind of EBITDA uplift are we looking at from the change you made, if you can help us quantify the benefit?

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Assaf Ginzburg, Delek US Holdings, Inc. - Executive VP & CFO [12]

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Let's start with the facts. When you look at this quarter, just this quarter, the loss profit opportunity was $20 million to $25 million. And when you look year-to-date, on average, every quarter, that was the number, anywhere from $15 million to $20 million every quarter year-to-date of basically impact on us. And that's before we are using the new curve. So this can be a significant number when you just look at this year compared to next year.

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Manav Gupta, Crédit Suisse AG, Research Division - Research Analyst [13]

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And last question. Assi and Uzi, every quarter we're getting a 3.5% increase in dividend, which is very good. I think your dividend from 2017 ended up like 90% or so. So I'm just trying to understand where does -- like how does this game go on? Is it all about getting to a competitive yield? Or is it balancing dividend and buybacks here?

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [14]

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Manav, that's a great question. We continue to generate significant cash flow. You see it even in this quarter, that -- the cash flow that we generated. And we told you, not you personally, but we told the market that there will be a reversal of working capital drain that happened in the first quarter and the second quarter. And now we say -- we see that this came in. So even after we spend the $75 million, which we believe is the -- is what we need to put as equity for the Wink to Webster project. We see that we are continuing to generate cash flow. That we will not stop hiking the dividend yield in the foreseeable future just because of the fact that we are committed to returning cash to shareholders.

And as Assi said, the combination of barrel performance at El Dorado, which includes eliminating the fuel oil or eliminating almost completely the fuel oil make together with IMO, together with cash flow from the gathering. We are committed to returning cash to our shareholders. So I would, for modeling standpoint, just assume that these dividend hikes will continue in the -- for the foreseeable future.

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Operator [15]

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Your next question comes from the line of Benny Wong of Morgan Stanley.

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Benny Wong, Morgan Stanley, Research Division - VP [16]

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Just had a quick question regarding your balance sheet. Obviously, important, I know you have $1 billion in cash. It sounds like you guys are going to be generating a higher level of cash flow next year, potentially. Just how are you thinking about that strategically? Is there a target level of cash you'd like and is the rest more of kept dry powder to be opportunistic? Or is it more Cushing to beat the fence or how are you thinking about that?

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Assaf Ginzburg, Delek US Holdings, Inc. - Executive VP & CFO [17]

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Benny. First, we are very proud about their ability to continue and produce cash flow every quarter. Even when we invest in CapEx like we did this quarter and the Wink to Webster, we're still able to generate and have cash of more than $1 billion. There is no secret amount of what is that number that we need to be at. With that being said, we always like to have probably more cash flow as a percentage of other -- of the balance sheet or the equity value of the company compared to the others. With that being said, the reason why we're doing it, it's positive 2, and you answered it. One, opportunity. We always like to look at other things, and we want to be able to act fast when the opportunity showed up.

Second, Cushing, we won't be able to use our balance sheet [we] needed to continue the buybacks, to continue the dividends, to continue investing in the company. And that allow us to operate -- operate the company in a way that 2, 3, 4 bad quarters doesn't impact our ability to continue and basically, continue with our capital allocation program. Hopefully, I answered the question.

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Benny Wong, Morgan Stanley, Research Division - VP [18]

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No, you did. I appreciate the color there. Just the second question is really around your upgrading of El Dorado. And I mean 4% increase in distillate yield, sounds pretty good. And I'm just wondering, for you guys to do the upgrade, should we read, as your view in IMO has changed? I remember previously, you kind of had a view that it was going to be relatively short-lived for you to guide -- for you guys to make a decision go forward with this, is that IMO based? Are you seeing something different, you think it might be a little long-lived. How do I reconcile that?

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Blake Michael Fernandez, Delek US Holdings, Inc. - SVP of IR and Market Intelligence [19]

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Benny, it's Blake. I guess I'll just address a broader IMO question and then tie it in. For one, 2 components to IMO. And as you know, we have very little high sulfur fuel oil production. And so we're not in a situation where we're forced to recycle that through the system. Moving to the distillate side, which is really where we have significant leverage, as you know, we're actually seeing market dynamics drive the distillate crack right now. And it's hard to say for sure, but we're not really -- there's no real evidence that IMO is necessarily driving this. There's some broader market factors.

For one, we've got heavy global maintenance. You see the Saudi strike took a lot of the distillate-rich volumes off the market. We have PES off the market. And now with cold weather, we're actually seeing a fairly wide arbitrage to send ULSD from the Gulf Coast over to the East Coast. So in our view, the distillate margin is very strong, but it's not necessarily reflecting all the IMO benefits. And so some of these decisions that we're taking to improve the distillate yield is partially driven just by fundamentals, but then also tying in potential uplift from IMO going forward.

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Operator [20]

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

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Prashant Raghavendra Rao, Citigroup Inc, Research Division - Senior Associate [21]

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I wanted to ask first on the gathering projects and sort of a broader question. I mean obviously, we've been hearing in the upstream should rig counts come down where there are some concerns about production levels sort of maybe bottoming out here and maybe some change in, call it, the next 12 months of what supply will be in the overall U.S. shale base. I just wanted to get a sense of your gathering as it sits in the context of that background. And as we look forward to further gathering enhancements. Maybe if you could talk a little bit to remind us about the nature of your gathering projects and how they might be differentiated from maybe some of the production declines that most of us are expecting in the greater shale play in the U.S. and the upstream?

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [22]

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Well, that's a great question. First, let me give you our perspective as it stands today. We made years ago a decision that our gathering will focus on the, if you will, the best counties in the Permian. And only now, people are starting to understand that there is a difference between different counties. Our counties are multi county, Martin, Midland and Howard counties. These barrels that are coming from these counties are 37, 38 APIs. We watch it every day. We have a report come from every producer. As you know, we have dozens of producers. And we don't see any slowdown in these 3 counties.

Also, we checked in light of the last talk, the political talk about fracking and further lend. There's very minimum impact on -- in these 3 counties on us. With the price of crude at $55, $56. In these 3 counties, we see 0 slowdown from producers at any given moment. As a matter fact, the projections they gave us for next year, meet what they told us a year ago. These are really good barrels. And once -- and we spoke about that, that now we are basically, come the end of the year, we will be long crude oil. So Delek will be in a unique situation that we will have quality barrels, and we are long both crude and end products. So for me or for us, that's the best position to be, especially in these 3 counties that are so good to produce.

And obviously, we just said that we increased the dedicated acreage this quarter to above -- to more than 275,000 acres. I'm just going to remind you and others that similar gathering systems are being sold for hundreds and hundreds of millions of dollars. We just bought the last deal. So we continue to believe that there will be more production coming from the, if you will, best counties, and we don't hear anything from any producers. So I hope -- that was a long answer, but I hope answered every angle of your question.

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Prashant Raghavendra Rao, Citigroup Inc, Research Division - Senior Associate [23]

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No, that was very helpful. And just one quick follow-up on the cash flow statement. The working capital benefit. That was really -- I just wanted to confirm that we should be thinking of that more as sort of a reversal of I think the working capital build in the first half? And then a further confirmation, sort of, of how to think about it for 4Q that that sort of -- that it's not -- there isn't -- it doesn't turn into a headwind going forward. And last year, perhaps depending upon crude purchases or something else that might change it. But as it stands, that doesn't reverse into some sort of a headwind in 4Q or 1Q?

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Assaf Ginzburg, Delek US Holdings, Inc. - Executive VP & CFO [24]

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Correct. When you look at the year-to-date numbers, you'll see there was basically no material change in working capital. And in Q1 and 2, when prices of oil came up, we had a 5 inventory gains, basically, that we reported. They doesn't come with cash flow. And then this year -- this quarter, when prices came down, we actually collected some of that cash basically to the working capital changes. We don't see right now any tailwind or headwind for Q4. Like you said, if we're going to run less or more barrels, there may be some change, but we don't anticipate one.

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Operator [25]

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Your next question from the line of Paul Sankey of Mizuho.

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Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [26]

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Apologies for the short-term question Uzi, but the Keystone pipeline, we're highlighting that you guys would be a relative winner if we can say that from the outage. Can you just talk a bit about what's happening from your perspective and how it affects your markets?

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [27]

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Yes, I'll let Avigal, our Chief Commercial Officer, take that one as he watches it.

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Avigal Soreq, Delek US Holdings, Inc. - Executive VP & Chief Commercial Officer [28]

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How are you, sir?

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [29]

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As he watches it very carefully.

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Avigal Soreq, Delek US Holdings, Inc. - Executive VP & Chief Commercial Officer [30]

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So we believe that Cushing is still a long barrels obviously when the market is present opportunity. Everyone wants to use the last logistics aspect that they can. We are still -- remain very optimistic about the investments we made in the area and most of our investments in Red River is based upon T&Ds and the firm supply. So all in all, Cushing is still long barrels and that's obviously something that every midstream would like to look how to utilize the last piece of pie, but around our investment, we're very optimistic.

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Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [31]

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There's a perspective that you're going to suffer from Keystone, the longer it's out. Is that misguided? Or how would we get to that because my understanding, obviously, is that you're not a big user of the pipeline?

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Avigal Soreq, Delek US Holdings, Inc. - Executive VP & Chief Commercial Officer [32]

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No, we obviously are not a user of that pipeline, but there's another pipeline that take volume out of Cushing, and that's something that the -- changed the balance of Cushing, but it's not something that's material for what we do because we are mostly mid-continent around that.

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Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [33]

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Right. If I could switch slightly to another big announcement this quarter, which is the work that you've done on improving distillate yields. That's really kind of surprising the scale to which you've managed there. Can you just talk a bit more about it because it's obviously going to be very important in terms of profitability, given current market conditions?

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [34]

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Well, I'll let -- I want to introduce to everybody, our President of Refining, the guy that actually constructed all that, Louis Labella. I don't think the market has seen you, but welcome to the call. So go ahead, Louis.

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Louis Labella, Delek US Holdings, Inc. - EVP [35]

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Thank you, Uzi. So yes, during our IMO scenario planning, we recognized a potential opportunity to take advantage of the oversized design of the crude vac unit, the El Dorado refinery. So in Q3, we planned a slowdown of the refinery to go after a design change and an upgrade to the vacuum tower. Preliminary test results have shown to be very effective. The design change allowed more lift in the vacuum tower to produce on-spec asphalt straight off the tower as well as increase in gas oil and distillate make yield, while we minimized our fuel oil production. These results will provide us a flexibility of what type crude we like to run, whether it's light, medium or heavy crudes, depending on the LP model, how it predicts going in IMO. And then as we look at it, our current models and also our field test run, all indicate that we have consistently shown a 4% above, 4% distillate yield increase.

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Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [36]

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Got it. Finally, Uzi, on the market, there's a view that the Keystone effect will be one to narrow the Brent TI spreads. I know you've always got a view on these things, I'd be interested in. I'll leave it there.

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [37]

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Well, obviously, there are some competing factors here. First, the world needs to absorb all that crude that is coming from United States. We're doing a huge work right now to understand what destinations for light crude is -- exist in the world. So also, the shipping cost is going up. And at the same time, Keystone, obviously impacting into the other side. We believe that the market found -- around $6 benchmark as we stand. It -- still, I'm not smart enough or we are not smart enough to know what the impact of trying to dump on another 2 million, 3 million barrels on the world light pool. But I assume that there will be some impact to that. We -- in our models, we always assume $5 to $6 Midland brand, and that's what we see right now.

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Operator [38]

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Your next question comes from the line of Brad Heffern of RBC.

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Bradley Barrett Heffern, RBC Capital Markets, Research Division - Analyst [39]

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Sorry to harp on the El Dorado questions, but just one further one on the yield. So when I look at the yield structure of the refinery, it's like 8% asphalt yield, something like that and maybe 1% petchem and 1% other. So where is that 4% yield coming from? Is it that the overall production of the refinery is going up some? Or is it taking some out of the asphalt category? Just any color you can give me as to how that's going to be accounted for going forward?

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Louis Labella, Delek US Holdings, Inc. - EVP [40]

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So this is Louis again. Looking at the design, the crude vac units designed for 100,000 barrels for a medium sour design. So with the new upgrades to the tower, we actually have the choice not to make fuel. So we drive everything into the gas oil yield as well as making spec product of asphalt. So it's really splitting the tower up to get -- to drive up the tower to get captured additional yield, straight off the tower.

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Bradley Barrett Heffern, RBC Capital Markets, Research Division - Analyst [41]

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Okay. And sorry if I missed this, but Assi, did you give the exact working capital number for the quarter? That's all I have.

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Assaf Ginzburg, Delek US Holdings, Inc. - Executive VP & CFO [42]

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Yes, it was a benefit of $80 million. Brad?

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Operator [43]

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And the next question comes from the line of Neil Mehta of Goldman Sachs.

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Neil Singhvi Mehta, Goldman Sachs Group Inc., Research Division - VP and Integrated Oil & Refining Analyst [44]

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One of the things that we've talked about with you guys lately, is the transformation of your business and how you're shifting away from being heavily levered to refining and switching increasingly into nonrefining businesses. Can you just provide sort of that big-picture perspective of what you're trying to accomplish over the next 3 to 5 years? Kind of quantify how big you want to get in nonrefining and what the path is? So there's a lot there, but I think it's probably the most important strategic question for you guys.

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [45]

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As usual, Neil, your questions are spot on. So we are in the middle of creating or expanding our integrated business model. And more and more, we want to rely on our logistics assets versus third party. We -- right now, as we look at it, we expect in the next 3 or 4 years to get to midstream, around $400 million. This quarter, obviously, we had a decay of $52 million. And -- which was a record quarter. We need to see -- we're probably going to see this trend continue to evolve higher as more and more assets we get out of a third-party commitment and enjoy our assets. And together with the gathering and our gathering is picking up steam very nicely. We already have positive returns on a monthly basis.

And as Blake said, next year, we gave guidance of $20 million to $25 million only from gathering. So the number that we have in our head is around $400 million in 3 years, by the end of 2020. And that doesn't take into account any other ideas that we have. These are only the projects that we are involved as we speak.

I hope I answered your question, Neil.

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Neil Singhvi Mehta, Goldman Sachs Group Inc., Research Division - VP and Integrated Oil & Refining Analyst [46]

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No, that's helpful. The -- and so the focus right now is to focus on sort of the core midstream growth platform, is there another area or avenue of diversification that the company would look at? Historically, you guys have played in retail. I think that's less of a focus now, but just trying to understand, again, what Delek is going to look like in a couple of years?

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [47]

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Well, we are dipping our toe into renewables even more. We used to have 2 plants, 2 very different plants. Now we have a third one. We just bought another one a month ago. Obviously, none of the numbers include any benefit from the -- from BTC, which -- who knows what's going on in Washington, but the prospects look pretty good. So we look at renewables. And at the same time, we need to continue to develop our integrated business model. So we are not shy of making acquisitions, as you know. But the multiples should be right. And right now, what we look around is too expensive. So we will continue with the course of developing our organic growth.

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Operator [48]

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Your next question comes from the line of Phil Gresh of JPMorgan.

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Philip Mulkey Gresh, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [49]

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I guess sort of a follow-up to what Neil was asking, maybe slightly differently. There are a lot of refining assets on the market, many of which are outside of the region in which you operate, but they are out there nonetheless. So I guess as you look at those opportunities and your desire to grow midstream in other areas. Are you ruling out the idea of a refining M&A at this point to grow your footprint? Or is it primarily just the midstream growth?

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [50]

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Well, we are not ruling out anything. If it's the right opportunity and the right multiple. We are not going -- I read somewhere that Kenai is for sale. I don't think that as much as I love Alaska, I don't think that we're going to buy Kenai. So -- and we were very loud and clear about other opportunities that came to the market that we thought the prices were too high. When you buy a refining asset, and we have done several acquisitions, as you know, Phil, you watched us over the years. Anybody can write a big check and buy a refinery. In order to buy a good refining asset and the last example is, along with the 2 refineries we bought, you need to have the opportunity to improve the crude slate or the cost of the crude, that's what we did in both Big Spring and in Krotz, when we lowered the cost of crude with the gathering or other means using pipelines.

Second, you need to be able to improve operation. That's what we did in Krotz and a little bit in Big Spring. Of course, we -- obviously, with running the refinery barrel and building the alky that is now giving us $50 million on a yearly basis. And you need to do better in selling your products. Other than that, if you just write a big check and the multiples are -- or the EBITDA is high, then you don't do yourselves a good favor. So as long as these criteria are not being met, we don't want to be in the acquisition mode. However, if there are opportunities that we think that there will be assets that are in reasonable price, and we can improve the operation day-in, day-out, then we'll look at it.

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Philip Mulkey Gresh, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [51]

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Sure. Yes. I was not thinking of Alaska more just there are several opportunities in PADD IV. And you -- obviously, you don't operate in PADD IV today, so that was more the line of the questioning there. I don't know if you have any views on diversification of footprint in that regard?

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [52]

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Absolutely. We diversify the company, that's a great question, Phil. By the way, you're more than welcome to come to me -- with me to Alaska, if you like Alaska. We can just go and look at barrels, we don't need to buy a refinery. But on the first note, we do understand that the market perceives us as Midland company. And it was very good and tremendous benefit to our company as we grow it. But there will be a point in the future that we will need to look at diversification of our portfolio. We're doing it through the midstream right now, but maybe in the future, we look at diversifying our refining portfolio.

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Philip Mulkey Gresh, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [53]

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Yes, sure. Okay. That makes sense. And then I guess on the capital spending. I know you don't -- it doesn't sound like you want to give a number for next year, but perhaps you could just remind us of what a normalized level of spending looks like in a given year, as we try to frame out where your spending was this year and where it might go over time?

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Assaf Ginzburg, Delek US Holdings, Inc. - Executive VP & CFO [54]

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So let's start. When you look at the CapEx this year, we expect to spend roughly $450 million. Including in that number, $250 million in the refining segment, and these are the big numbers. And then between retail and logistics, roughly $30 million. And then on other, which is mostly the discretionary CapEx related to the gathering, we're talking about $135 million. So when you add it all up, you'll see that this year, with a lot of spend in the refining, a big spend on the gathering we're over $400 million. Now please remember that this year CapEx when we look at the refining side, includes the projects in El Dorado that we mentioned earlier, includes the completion of the alky. And also, we brought back turnaround costs from 2020 associated -- related to the Big Spring. So we don't think refining should be $250 million, more like -- somewhere around $200 million, and when you include the turnaround and maintenance CapEx.

Between retail and logistics, I think our $30 million that we did this year is something that makes sense. So that puts us at $230 million. And then the question is how much we want to spend on gathering. And we mentioned that next year, we're going to spend less on gathering than this year. So that puts you in a much lower number compared to the $450 million that we've spent this year. And when I say much more, it's significant and significant for me, it's not 5%. And I will say for all this, significant is not even a 10% decline. So we're looking at meaningful decline next year.

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Philip Mulkey Gresh, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [55]

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Okay. Very helpful. Last one, was not on the DKL call, but just wondering about your desire to leverage DKL as the growth vehicle here for the midstream growth and possible drop-downs, not just in 2020, but maybe over the next couple of years.

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [56]

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Well, DKL, as we all know, the MLP market is not functioning the way we want. The MLP market to function. We are still looking at what to do with DKL because we want to continue to grow our midstream segment. But maybe we shouldn't do it at the DKL level. We look at it as a combined situation. Still -- DKL is still an option, and we don't want to eliminate that option at this point. But we look at the midstream segment to -- between what is sitting at DK and DKL as a combined segment and not just DKL.

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Philip Mulkey Gresh, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [57]

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Would you ever buy it in?

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [58]

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Obviously, that's a possibility. VLP or Valero have done it. It's -- I don't want to say that we're going to do it, but it is a possibility.

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Operator [59]

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

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Paul Cheng, Scotiabank Global Banking and Markets, Research Division - Research Analyst [60]

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Uzi, on the M&A, if it is refining, what will be the 2 or 3 most important valuation metrics that you're going to use?

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [61]

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Valuation. Well, first, I wouldn't assume that we're buying a refinery tomorrow morning. So just let's -- we are not engaged in any discussion with anybody, to my knowledge about buying a refinery. So that's a question that belongs to the past and maybe to the future, but doesn't belong to the present. So as I mentioned, the 3 criterias is that improving the crude slate or the cost of crude, improving the operation and improving the netbacks. These are the 3 criteria that we look at when we buy a refinery. Also, we just need to make sure that we don't pay a high -- too high multiple as this going to be dilutive to our shareholders.

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Paul Cheng, Scotiabank Global Banking and Markets, Research Division - Research Analyst [62]

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Right. I understand. So I guess my question is that when you're talking about you don't want to overpay or paying too high multiple, what valuation metric, what multiple that you will be looking at?

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [63]

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Paul, I don't think that I can give you on a theoretical deal what the multiple is without knowing if we're -- if we can improve the operation or not. So that's not just -- at the time, we paid 10x for Krotz. Today, it looks really cheap.

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Paul Cheng, Scotiabank Global Banking and Markets, Research Division - Research Analyst [64]

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Okay. For -- I think this is for Assi. For Big Spring Gathering, let's assume next year that you are $20 million, $25 million. And given that if the spending is actually in the C corp, not in the MLP so that earning is that going to show up in the Big Spring refinery by way that we should assume the earnings going to show up?

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Assaf Ginzburg, Delek US Holdings, Inc. - Executive VP & CFO [65]

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So right now that -- no those numbers, as you know, are not material, in this quarter it's actually showed up in the corporate and other and the contribution margin from the -- for DPG, which is the Delek Permian Gathering was around $3 million this quarter in corporate and other. As it grows, and next year, it's going to be meaningful. We will look into what percentage needs to be in the Big Spring or in the logistics. So we haven't made that decision, but I want to share with you that this quarter, it was in the corporate and other, and it was a benefit of $3 million.

When you look at 2018, when we just had a spend that number was a negative $1 million in corporate and other. So we do see an improvement, and we will look into it. Is it going to be in Big Spring corporate and other or maybe even part of the logistics segment.

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Paul Cheng, Scotiabank Global Banking and Markets, Research Division - Research Analyst [66]

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I see. But you haven't made up your mind where that you're going to put it?

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Assaf Ginzburg, Delek US Holdings, Inc. - Executive VP & CFO [67]

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Correct. Probably by year-end, when we'll start having meaningful numbers, we have to make that decision. As you know, at this point, $3 million in the quarter, it's not material, and that's why it's part of corporate and other.

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Paul Cheng, Scotiabank Global Banking and Markets, Research Division - Research Analyst [68]

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And for threats in El Dorado, you talk about the distillate yield changes and all that. That's -- how does it change in terms of your crude slate? And I think you guys several years ago that have resigned yet, even though the crude unit is 100. But effectively, I think you resigned into 80 and to 190 strip, how that may change under the new design? And whether that the unit cost, operating cost, is going to have any changes?

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [69]

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Okay. So that's a tricky question. I'll take the first part, and then Louis will answer the technical part. In regard to running more barrels in El Dorado, absolutely, we can run more than 75,000. We actually can run more than 80,000 and enjoy the same yield. However, there's a gain here between running 80,000 and the RINs waivers or small refinery exemptions. As you know, if you -- if we're running more than 75,000 then the RINs waiver doesn't exist for us. So that's something that we need to watch both ends. As you know, I know that you excluded that and others from our earnings, but at the same time, this is a real cash flow that we get every year, and that's something that we need to watch. But to answer your question, running more than 75,000 we can do it easily, any day. Running even more than 80,000 is easy. We just need to understand the economics. In regard to the crude slate and the product slate, Louis, I'll let you take that one.

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Louis Labella, Delek US Holdings, Inc. - EVP [70]

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So yes. So it really opens up our flexibility of the crude that we can run. And it all drives through minimizing fuel oil make. So as we minimize the fuel oil make, we can draw the diesel up the tower into the gas oil. And actually -- we actually yield diesel off the vacuum tower at sales. So it just -- it opens up to a wide range of what the market would tell us which crude to run.

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Paul Cheng, Scotiabank Global Banking and Markets, Research Division - Research Analyst [71]

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Final one for me, either for Assi or for Uzi. J. Aron deal as the company become bigger in your cash flow position, your balance sheet is stronger. Why we still have that deal? I mean is it better off, therefore, you don't have that deal? Or you think that is still advantageous?

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Assaf Ginzburg, Delek US Holdings, Inc. - Executive VP & CFO [72]

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So great question. First, we can actually terminate all of the J. Aron deal as early as Q2 2020. With that being said, the capital costs that are being allocated for inventory just to put another $450 million of debt on the balance sheet and net leverage is not something that we're not ignoring. And therefore, it's all a question of cost. We are targeting basically to move the J. Aron deal to the same cost of our debt. And from a cash flow perspective, it means that, overall, we will have the benefit of not having it as part of our debt, on one hand. And on the other hand, reduce materially our interest costs, and we do hope that in the next renewal, including alternative that we have in the market to renew such a deal, we'll be able to reduce materially those costs.

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Operator [73]

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Okay. Thank you. Ladies and gentlemen and I would now like to turn the call back over to your presenters today. Please go ahead.

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Ezra Uzi Yemin, Delek US Holdings, Inc. - Chairman, President & CEO [74]

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Yes. Thank you. I'd like to thank my friends around the table here for the hard work that they put together, the Board of Directors for their trust in us. Obviously, everybody that took, that listened to the call this morning, analysts, investors for your trust and belief in us. And mainly, I'd like to thank each one of the employees of this great company. I appreciate everything -- everybody who got here today. Thank you. Have a great day.

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Operator [75]

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This concludes today's conference call. Thank you for participating. You may now disconnect.