Calumet, Inc. (CLMT) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2015, Calumet Specialty Products Partners Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, today’s program is being recorded. I would now like to introduce your host for today’s program, Noel Ryan, the Vice President of Investor Relations. Please go ahead.

Thank you John for that introduction. Good afternoon and welcome to the Calumet Specialty Products Partners’ fourth quarter and full year 2015 results conference call. We appreciate everybody joining us today. On today’s call are Tim Go, our CEO; Pat Murray, our EVP and Chief Financial Officer; Bill Anderson, EVP of Sales; Ed Juno, EVP of Operations, and Steve Kosik, our new VP of Specialty Operations. Before we proceed, allow me to remind everyone that during the course of this call, we may provide various forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such statements are based on the beliefs of our management, as well as assumptions made by them, and in each case, based on the information currently available to them. Although, our management believes that the expectations reflected in such forward-looking statements are reasonable, neither the Partnership, it's general partner, nor our management can provide any assurances that the expectations will prove to be correct. Please refer to the Partnership’s press release that was issued this morning, as well as our latest filings with the Securities and Exchange Commission for a list of factors that may affect our actual results and could cause them to differ from our forward-looking statements made on this call. As a reminder, you may now download a PDF of the presentation slides that will accompany the remarks made on today’s conference call, as indicated in the press release we issued earlier today. You may access these slides in the Investor Relations section of our website at calumetspecialty.com. With that, I’d like to introduce Tim Go to the call.

Thank you Noel. And Good afternoon to all of you joining us today. Since I joined Calumet as CEO just 50 days ago, we have witnessed significant volatility in both the commodities and capital markets, as crude oil prices have fallen more than 20% and our equity unit price has declined nearly 30%. While I had hoped for a warm welcome, the past two months have more closely resembled to trial by fire. Suffice it to say, this isn’t my first rodeo and it won't be my last. One of the key lessons my three decades in the energy industry have taught me is to manage businesses with a long term investment horizon in mind, while adopting to near term market realities in a way that mitigates risk. The reality is this; my leadership team and I are focused on managing all those factors within our control. If we optimize our assets, improve our operating efficiency, capture increase feedstock advantages and expand our product distribution efforts, among a long list of potential opportunities that we will discuss today, we will generate stable to growing cash flows that justify a premium value for public debt and equity. Our fourth quarter results were disappointing, and for our team we view this as the bottom from an operations perspective. From a capital spending perspective, we are hitting the reset button as we commit ourselves to doing more with less. From here, we will work our way up and we will do it together, as one team with a well-defined vision. No excuses, only accountability. In my first conference call as CEO, I will begin by discussing our full year financial performance, although the bulk of my prepared comments will introduce my vision for Calumet, with specific emphasis on the supporting strategic initiatives that we expect to be instrumental in driving long term profitable growth for the partnership. After my remarks, Pat will provide a comprehensive financial review of our fourth quarter results, followed by Q&A session. With that please turn your attention to Page 3 of the slide deck. On a full year basis, our core businesses performed well, as demonstrated by nearly 22% year-over-year increase in distributable cash flow, excluding special items, as refining system utilization and product sales volumes reached all-time records in 2015. Despite challenging market conditions evident during the fourth quarter, our full year results highlighted stable growth in our specialty product segment where gross profit per specialty product's barrel sold increased to $45.39 versus $41.82 in 2014, driven mainly by lower feedstock costs and record annual sales in the branded and packaged product category. After more than three years of heavy capital investment, our Montana refinery heavy crude oil expansion, our San Antonio refinery specialty solvents project and our Missouri specialty esters plant expansion project, have all reached completion. Our new crude unit in Montana is currently operating at 17,000 barrels per day, and is expected to reach 25,000 barrels per day by the end of March. San Antonio has started selling specialty solvents to customers, while our Missouri plant has started selling specialty esters post its expansion. On balance we anticipate all three projects will begin contributing material EBITDA beginning in the second quarter 2016. With the organic growth projects complete, our current focus remains on capital conservation, as our capital spending is poised to decline more than 60% in 2016 versus the 2015 period. Pat will speak to this in more detail in his remarks. Although I officially become CEO of Calumet just 50 days ago, I have had the past five months to visit all fourteen of our operating plans, while meeting with our employees, our senior management team and our Board of Directors on a regular basis. In January, I rolled out a new long term strategic vision for Calumet; one that is intended to provide a well define roadmap for how we intend to become the leading petroleum based specialty products company in the world. I will walk you through this strategic vision in the remainder of my remarks today. Please turn your attention to Page 4 of the slide deck. In recent years, Calumet's business has become increasingly diversified, away from its core specialty products business. This investment philosophy has yielded some home runs such as the acquisition of the Superior in Montana refineries. It has also resulted in several less successful investments. Looking forward, our focus will be on developing snitch specialty businesses, where we have a proven sustainable competitive advantage. We are getting back to basics, investing in markets where we know we can win over the long term. For us to successfully executive on this strategy, we have laid out three central focus areas for Calumet. First, as shown at the base of the pyramid diagram, our organization will be committed to operational excellence in all that we do. In application, this mean we will better optimize our base operations, whether by running at higher utilization rates, processing more cost advantage feedstocks, improving product yields or upgrading our products to support higher net backs. We will capitalize on organic opportunities within our portfolio of assets to extract incremental value for our unitholders. Second, our organization will pursue opportunistic self-help projects that are smaller in size, scope and duration, as compared to our prior capital campaigns, but which carry attractive return profiles capable of supporting sustained growth in EBITDA. We will be disciplined in our evaluation of projects, requiring a high degree of confidence in the return profile as supported by fully engineered plans prior to allocating capital to a project. These projects will be self-help in scope, will be conducted in phases, several at a time and will likely cost less than $50 million in capital spend per project. We expect such projects to carry one to two year paybacks. Third, our organization will engage in targeted strategic acquisitions of specialty assets that leverage an existing core competency, and that have an identifiable competitive advantage we can exploit as the new owner. At the same time, we will begin evaluating our portfolio to identify potential divestiture candidates that are non-core to our business and which are worth more to a strategic responser than to us, while seeking to maximize our return on invested capital. So given that overview, let me dig a bit deeper into each of these focus areas and how they translate into new opportunities for Calumet. Please turn to Page 5 of the slide deck. Between 2011 and 2014, Calumet completed a series of fuels and specialties products acquisitions in rapid succession, resulting in a material expansion of our asset portfolio. While many of these assets have performed well in our portfolio, none of them have been optimized to their fullest potential. I believe Calumet has a unique opportunity to build a more efficient, more profitable version of its current self, beginning with the assets we own today. From my vantage point, asset optimization requires a commitment to operational excellence through continuous improvement. In application, continuous improvement can mean increased processing of cost advantage condensate in heavy Canadian crude. It can mean upgrading intermediate streams into higher value finished products. It can mean capturing transportation and logistics efficiencies across our asset portfolio. I've listed a few examples on this slide to illustrate these points. Today Calumet is winning as a specialty refiner. When I refer to the concept of specialty refining, I think it's important to pause for a moment, and be clear how high define specialty businesses is going forward. A specialty business isn't just one where we engage in the production and sale of lubricants, waxes or solvents. Rather a specialty business describes a unique market dynamic, where we have a clear cut competitive advantage, whether it be a niche market advantage, a feedstock advantage, a formulation advantage, a quality advantage, a technical service advantage, or innovation advantages, you name it. In a Specialty Business the products being produced aren't fungible, they aren't commoditized. They have some unique aspect that customers are willing to pay a premium for. It is these types of businesses where Calumet will focus its attention moving forward. As you can see on Slide 6 gross profit margins in our Specialty Product segment, where we are a price maker and recognized market leader, are stable. However, margin in the fuels products segment where products are commoditized is noticeably more volatile. While we have taken steps to offset the inherent volatility of the fuels business to derivative activities, the fact remains that as a fixed distribution MLP, fuels refining adds significant volatility to our cash flows, as evidenced by our fourth quarter results. Over time, we will grow our presence in specialty businesses, while mitigating exposure to higher risk cash flow strengths. While we are not currently shopping any of our fuels assets, Calumet must become increasingly disciplined when it comes to what it owns and why it owns it. Our return on invested capital has been well below expectations in recent years, and going forward we have an opportunity to put capital to work in a more disciplined manner that plays to our strengths. Please turn to Page 7 of the slide deck. During the past five years we have invested approximately $750 million in growth projects and joint ventures that have a total anticipated return of approximately $100 million. From my vantage point, these projects were challenged in several regards, although I have the benefit of hindsight. First, several projects, such as the Grass Roots Dakota Prairie Refinery, had multiyear lead times, periods in which market dynamics and return profiles changed dramatically. Second, these projects were highly capital intensive, so much though, that they required significant capital be raised in the public markets to be completed. And third, given the long lead time associated with the projects, we were forced to invest significant capital on the front end of these projects, putting ourselves in a position where we were capital constrained during the course of their completion, limiting our ability to grow the quarterly cash distribution at that time. Beginning this year and moving forward, we will seek to identify and capitalize on a series of opportunistic self-help projects that are shorter in duration, much lower in cost, and which generate one to two-year payback profiles; although, we only intend to pursue a few of these projects at a time to pace our spending conservatively. As illustrated on Slide 7, we recently entered the evaluation phase on three self-help projects. At our Shreveport Refinery, we have a project under review that is expected to increase the DS bolting [ph] capacity at our PDA unit, which will allow us to make more specialty products at our plants. At both our San Antonio and Superior Refineries, we are reviewing projects that would allow us significant feedstock optimizations by increasing the volumes of discounted condensate and WCS that we run at each of these facilities. Please turn to Page 8 of the Slide deck. A big part of our fuels refining story this year that will involve our ability to lower our feedstock cost by processing increased volumes of heavy Canadian crude oil at our Superior and Montana refineries. While many crude oil differentials have evaporated in recent quarters, the WCS WTI differentials remain intact, with WCS priced $12 per barrel below WTI on a 2016 year-to-date basis. We expect this differential to remain structurally advantaged over the next several years, given a combination of continued production growth out of the Canadian Oil Sands coupled with limited pipeline offtake capacity from the region. On Slide 9, you can see that by year end 2016, we intend to increase the volume of WCS processed at our refineries from 20,000 to 25,000 barrels a day to 40,000 to 45,000 barrels a day. This is very significant for us. Part of this increase involves the expansion at Montana, where we are going from 10,000 barrels a day to 25,000 barrels a day in total capacity by March 2016, with the remaining increase being at our Superior Refinery, where we are looking to step up WCS processing from 15,000 to 20,000 barrels a day. Longer term, we believe we have the opportunity to increase WCS processing up to 70,000 barrels a day at both refineries, subject to market conditions, representing well over half of our total fuels feedstock slate. Notably, as we increase our appetite for heavy crude oil, our fuels product slate will become increasingly weighted toward asphalt. While we currently sell asphalt out of our refineries and through a series of third party terminals in the Mid-West, we recently entered an agreement with Alan [ph] to begin marketing our asphalt out of their terminals in the Southwest. Through this agreement, which is significant from a product marketing perspective, we will avoid oversupply in our traditional markets, while capitalizing on incremental demand in new markets. As we increase our exposure to the WCS WTI differential, we believe it is important to use selective hedging strategies to mitigate downside risk. With this in mind, between the second quarter and fourth quarter of 2016, we have hedged approximately 15% -- we’ve hedged approximately 50% of our anticipated WCS WTI exposure, as indicated on Slide 10. For the vast majority of this position, we have utilized percentage hedges, which essentially means that we capture more of the discount as crude oil prices rise and vice versa. We intend to layer on additional positions in out years on an opportunistic basis over time. Please turn to Page 11 of the slide deck. Thus far, we have discussed our plans around operational excellence and self-help projects. The final layer of our strategic plan involves targeted acquisitions. Let's pause here for a moment and discus how we have approached M&A in the past and how we will approach it going forward. Historically we have cast when evaluating potential acquisition candidates. We explored assets across the energy supply chain from assets and the oil field services business to a wide range of refining assets. Going forward, we will tailor our approach toward owning business with stable to growing cash flows that support our quarterly cash distribution. Today, many of our businesses fit this description, while others do not. Our Superior and Montana refineries are niche, inland assets with significant feedstock advantages. Our Cotton Valley facility makes some of the best solvents in the United States. Our branded products, such as TruFuel and Royal Purple capture elevated margins in a very brand loyal market. These are just a few examples of what we mean, when we say we want to own assets with competitive advantages. Over time we will look to have assets and brands that support the stable to growing cash flow model I mentioned earlier, and become the vast maturity of our operating cash flow. Please turn to Page 12 of the slide deck. Before I turn the call over to Pat, for a review of our fourth quarter results. I wanted to outline our priorities in the near, mid and long term. Near term, liquidity and capital conservation remain a top priority. We have many opportunities to grow our business, but we will maintain a high level of balance sheet discipline when pursuing such opportunities, most of which will have no or low capital requirements. We will seek to grow our core business with a goal of supporting our current distribution, subject to market conditions. Over the midterm, we will be very focused on optimizing our base operations, and executing on the operational excellence initiatives I led out earlier, while deepening our talent bench help to lead the best practices required to take our businesses to the next level. Importantly, we will build the infrastructure and systems to help us make increasingly data centric informed business decisions, that will facilitate organic growth in our business. Finally, longer term, we will focus on layering on additional self-help projects, that grow EBITDA while pursuing the acquisition of competitively advantaged specialty assets. We will manage liquidity in a prudent manner, seeking to improve our return on invested capital well above historical levels. In closing, I want to be very clear that while Calumet's performance was significantly improved during the first nine months of 2015, our fourth quarter results were disappointing. I view this performance as unacceptable and am personally committed along with the rest of my management team to driving improved results going forward. I want to affirm our great group of employees, who are committed to leveraging our competitive advantages and growing this Company, with a long term investment horizon in mind, and I look forward to sharing with you the progress being made in future business updates. With that, I’ll turn the call over to Pat.

Thanks Tim. Good afternoon everyone and thank you for joining us today. Please turn to Page 14 of the slide deck for a review of our fourth quarter results. As Tim mentioned clearly our fourth quarter results did not reflect the level of strength evidenced in our overall business during the first nine months of 2015. Although we achieved record fourth quarter throughput and record sales volume within our fuel product segment, fuels refining margins decrease materially between the third and fourth quarters, as reflected a by 45% quarter-over-quarter decline in the 2/1/1 Gulf Coast crack spread, along with a significant narrowing in select crude oil price differentials. Our ability to source increased volumes of cost advantaged crude oil is possibly one of the most important actions we can take to increase profitability within our fuel product segment. As Tim referenced earlier, we have initiated efforts to increase the volumes of heavy Canadian crude oil processed in our system. To that end, we processed 14% more WCS linked crude oil in the fourth quarter of 2015, which is priced at $12 below WTI when compared to the prior period. As we continue to increase our WCS exposure within our refining system, we anticipate significant raw material cost savings, subject to market conditions. In January, we declared a quarterly cash distribution of $0.685 per unit or $2.74 per unit on an annualized basis for the fourth quarter on all of our outstanding limited partner units. This distribution level is consistent with the amount paid to unit holders in the previous quarter, and on a trailing four quarter basis distribution coverage excluding special items is 1.1 times. During the fourth quarter 2015, affiliates of our general partner provided Calumet with an unsecured $75 million loan at an annual interest rate of 6%, demonstrating their continued long term support for the partnership. This loan, in concert with additional measures aimed at increasing our liquidity cushion have helped to support our liquidity position at year end. Please turn to Page 15 of the slide deck. Our reported fourth quarter adjusted EBITDA included $59.3 million of special items that if added back bridges you to our adjusted EBITDA, excluding special items of $21.7 million in the period. These special items included charge related to a lower cost to market inventory adjustment of $31.2 million, a $21.7 million loss related to the liquidation of lipo inventory layers at yearend, a $22.3 million gain on the early settlement of select derivatives contracts and a $28.7 million adverse mark to market impact from the partnership existing RIMS [ph] liability. Looking beyond these noncash items, the single biggest variance in our business on a year-over-year basis was the deterioration in fuels refining economics, together with losses at our DPR joint venture and in our oil fuels services segment. As you can see on Slide 16, these factors combine to result in significantly lower BCF on a year-over-year basis. Although we continue to maintain 1.1 times coverage exiting the year, excluding special items. Now please turn to Page 17 of the slide deck. As referenced earlier, fuels refining economics faced seasonal headwinds during the fourth quarter, as lingering strength in gasoline margins exiting the driving season dissipated during the final months of the year, while diesel margins declined on both a quarter-over-quarter and year-over-year basis. Although WCS maintained a healthy discount to WTI, our refineries exposed to less advantaged crude oil grades were impacted by the narrowing crude oil spreads. Please turn to Page 18 of the slide deck. On Slide 18 we bridge cash and liquidity between the third and fourth quarters of 2015. Combination of lower working capital requirements and the $75 million loan from affiliates of our GP during the fourth quarter was offset by higher capital expenditures and lower operating cash flows. On Slide 19, we see that as of December 31, 2015 we had $240 million of cash and availability on our revolver combined, a decline from the prior year level. Investors should note that a decline in crude oil prices affects the value of the crude oil and refined product inventories our lenders use as collateral to determine the borrowing base under our revolving credit facility. The decline in crude oil prices during the fourth quarter impacted our borrowing base resulting in lower availability at year end. On Slide 20, we see that on a pro forma basis, excluding special items our debt to trailing 12 month EBITDA stood at 5.3 times as of yearend 2015, down from 5.6 times as of yearend 2014. At present we believe the partnership has sufficient liquidity from cash on hand and from operations as well as availability under our asset based revolving credit facility to fund general business requirements, subject to market conditions. We are currently evaluating a number of liquidity enhancing initiatives internally that could help us improve the situation relatively to year end position. And finally, please turn to Page 21 of the slide deck. Calumet is in a uniquely advantaged position right now with regard to our capital spending outlook. In the first quarter 2016, we concluded a major multiyear capital spending campaign. With this campaign having ended, our capital spending is expected to decline by more than 60% to $125 million to $150 million in 2016 as the growth component of our capital program is forecasted to decline by more than 75% on a year-over-year basis. Beginning in 2018 through 2020, we will commence our next fuel refinery turnaround cycle, which will require a step up in maintenance and turnaround capital spending. However, during 2016 into 2017, we anticipate capital spending to remain closer to maintenance levels, not including smaller self-help projects Tim referenced earlier. And with that, I’ll turn the call over to the operator so that we can begin the Q&A session. Operator?

Certainly, [Operator Instructions]. Our first question comes from the line of Richard Roberts from Howard Weil. Your question please.

Maybe to start on the shift to running more Canadian crude, can you maybe just walk us through how much of that shift is really just on the logistics side and getting more crude to the refineries versus how much actual change of the steel you have to make in the plants themselves? And then maybe to follow on with that, just how much you would expect your product yield to change as you increase the Canadian crude throughput this year?

Richard, this is Tim. Let me try to answer your question. So, from a logistics standpoint, we’ve talked a lot about the Montana expansion project, which involve quite a bit of steel, as you mentioned, as we’ve completed that project or in the process of starting up now, most of that increase is going to be happening in that Montana site, where the expansion project has already been built. When you look over at our Superior Refinery, where we’ll have the other knob to turn on increasing WCS, at least in the short term we’re trying to do this with existing facilities, with no additional processing units; although we may have to do some debottlenecking on loading and transportation of the asphalt outside of the plant.

Maybe to stay on the fuel side, so generally you’re selling into some pretty niche markets with your fuels refineries. Can you just update us on maybe how the demand picture looks in some of your primarily markets? And maybe, what kind of competition, if any, you’re starting to see some coming in from the outside and trying to push into those markets?

Richard this is Tim. I’ll try to take your question on again. We do have local niche markets that we believe we are advantaged for in the long-term. I think what we saw in the fourth quarter was as the Bakken drilling was the slowing down, as diesel demand continued to drop in that North Dakota region, obviously that impacted our DPR Refinery significantly. We also saw some carry on effects in both our Montana, and specifically our Superior refiners. So what’s happening is as diesel demand was extremely high one or two years ago, it was pulling diesel in from those out of state markets, and as the diesel demand started coming back in, what we saw was a backing up of the diesel back into those respective production areas. And so we saw a significant drop in the fourth quarter at both our Superior racks, as well as our Montana rack. As we continue to launch that, we've seen that the inventory is starting to clear, and the Superior racks in particular have rebounded significantly here in the last week or two. So we’re hopeful that as the inventory has been run off, that we’re going to return back to the more typical supply demand balances that we have seen in those local regions.

Great thanks. And then maybe one more from me. So another past couple of quarters you guys have been talking about looking at distribution increase in 2016. I'm just wondering, given yield is today, certainly a clear shift in the MLP settlement towards having more coverage and not so concerned about distribution growth. Just does it make sense still trying to raise distribution this year? Is that on the radar? Maybe just any comments around the distribution that you could provide would be very helpful?

Okay Richard. Let me take one shot and then I’ll let Pat answer more of your questions there too. But back on your fuels demand question, I will point out that we had a record fuel sales year last year. So that in the market that we serve, it just shows we do have local advantage, where we can place our products and we continue to see that through the course of 2015. In terms of our use of cash, let me turn that over to Pat, let him answer that question.

Okay, thanks Tim and thanks for the question Richard. I think that there are always a lot of factors that go into consideration of distribution strategy and policy and I think where we are today and what we've have said repeatedly over prior quarters is it's -- to screen quarterly discussion that we have with our Board of Directors and we make recommendations, I think that as we looked up previously, a lot of our decision making is focused around getting the organic projects online and operating in -- we're really pleased to report that those projects have completed now and we think long term those are going to be very good contributors for us. I think that we remain highly focused on distribution coverage as another metric that we would use to inform decision making. We look at overall leverage, and I think that our goal is to of course serve everybody in the capital structure. But I think with this focus on liquidity, we're going to continue to have to take that on a quarter-by-quarter basis, see where we are and see what our outlooks are at that time that we have to make those types of decisions. I think that’s been -- consideration of all those types of items -- it leads us to continuing to look at this on quarter-by-quarter basis.

Richard, I would just chime in and say, when we look at our strategy around use of cash, clearly in today's environment, reducing debt is our top priority and managing that. We do have some small quick hit growth projects that I mentioned and we would consider additional cash flow, but it would have to be a robust project like I described earlier. And then of course as Pat mentioned on a quarter-by-quarter basis we would look at impacts to the distribution and whether we would increase it or not].

Thank you. Our next question comes from the line of Neil Mehta from Goldman Sachs. Your question please.

Good afternoon this is Christina Seaborn [ph] for Neil Mehta. Just a follow up on the distribution question. What is the risk that Calumet actually would need to reduce the payout or potentially switch to an alternative structure such as a variable rate distribution versus the current fixed rate distribution?

Again, to echo our response to the prior question, I think that it becomes a question of looking at several factors each quarter, not only the outlook of where we see the business today, and then also considering leverage, considering where distribution coverage is. Certainly in this environment of a volatile crude oil situation and product pricing, we do have to evaluate the changes in our liquidity around those factors. So there is a lot that goes into that decision each quarter. And so I wouldn’t want to place any one item as the particular risk, but it's a combination of several factors. Our view and our position is that we are fixed distribution MLP and that’s where we are today. Consideration of alternative structures, we are not in a position at this point of comment on this call.

Christine, this is Tim. What I would say is, we are committed to growing cash distributions in the long term. We've got a track record of 40 consecutive quarters where we've paid a distribution. The last 28 were at or above the previous level. So we take that seriously and we will consider to look at all options before we would have to make a decision of changing the distribution like that.

That's very helpful, thank you. Just two quick follow-ups. One, can you provide any color on what the current asset sale opportunities might be, and just any additional information on what the Company is doing to mitigate near term losses at the oil services business as well as the Dakota Prairie Refinery.

Okay Christina you've asked a couple of big questions there that I'll try to tackle one at a time. Let's start with the last one on Dakota Prairie. You know, clearly that has been weighing on our earnings in the fourth quarter as the Bakken field has slowed down significantly. We've made several -- we've taken several steps to improve the profitability of that operation. Remember in the first place that we just started that plant up in the middle of last year, and as we work through some of the startup kinks, I think we're in a position now where our reliability has been significantly improved, and we hope to be able to realize an improvement 2016 based on that improvement. We have also taken some leadership changes, just to be frank at the plant, and we think that has made a significant change. We've already seen the difference here in the last couple of months. And one example of that is we were running a diesel yield at the plant somewhere in the 32%-33% range, and after we brought in some additional resources from some of our other assets that were more familiar and experienced with distillation columns, we were able to make some significant moves to increase our diesel yield to 44% or in that range. So those are some of the significant opportunities that we believe we still have to take at our Dakota Prairie refinery. Our objective is to be cash flow neutral during this bottom of cycle condition. I would tell you we're not there yet, but we have many more steps that we're trying to execute on today to get us into that position. At that point, once we become cash flow neutral, then the role that an asset like Dakota Prairie refinery has in my portfolio is it's a call. It's a call on future increases in crude price, and that has some value in my portfolio. So when I say we have a vision of becoming a premier specialties petroleum products company in the world, what I mean is going forward that's what we're going to be focusing on in terms of our growth strategy. It doesn't mean we're going to try to fire sale any of our assets that are currently in our portfolio, because they do have value to me. However, in the event that someone else views any one of our assets in our portfolio with a higher valuation than what we view it at, of course we would consider selling that asset. That would include any of our field assets, any of our specialty asset, any of our oil sub services assets to the extent that it has higher value to someone else because their portfolio has different synergies or competitive advantages that could take advantage of that asset, we would certainly consider moving that asset out. And what I would say Christina, is in the past I don’t think we really held that view. We pretty much held on the assets until like they were in our portfolio for good. And I think what I'm bringing to the discussion now is an openness to say hey, maybe other people view these assets at a higher valuation than we do. So that's our philosophy going forward.

Thank you and our next question comes from the line of Johannes Van Der Tuin from Credit Suisse. Your question please.

A couple of quick questions, but first one is, in the past you all have signaled a desired to get to a leverage ratio of four times or below. Is that still kind of the target that you are looking at? And if so, what is sort of the cadence of that? How long do you think it would take to work to that kind of goal?

That certainly remains our goal. I think that the cadence to which we’re able to reach that goal depends on several things, including the outlook of where earnings may play out over the course of the year and given where fuels refining economics play out. I think though that as we singled before, in terms of our capital spending and our focus on quick hit, quick return projects versus a long cycle time between capital investment and ultimately harvesting earnings, I think under this model and vision, I think we have certainly on balance a better opportunity to get there faster, all other things being equal. But that firmly remains our goal. We didn’t make as much progress on that goal in 2015 near the end of the year based on what we’ve already talked about, but that certainly remains a goal, for us to be below the 4 times leverage.

And not to press the point on the dividend too much, but I was curious if you could give us some framing as to what sort of trends in the market or in your actual balance sheet would cause you to have really think about whether or not you needed to cut the dividend or adjust that in any particular way?

I think that -- to go back to earlier comments, I think it's a view on overall liquidity. It's a view on trend of earnings in the segments. I think it's where we are overall on distribution coverage. So I don’t think there is any -- it’s a convocation of all those factors more so than setting a specific line item. It has to be this or it has to be that in one factor or another. So it's really a combination. To reiterate what Tim said, our goal is to keep the distribution unchanged. But again, we have to look at that on a discrete quarter by quarter basis and see where we are. And in this type of volatility, we have to think about things in multidimensional levels and that’s what we’re going to do a couple of months from now. And we’ll know more in a couple of months than we know today.

Okay. Then more on the operational side, in the past you’ve given some amount of guidance as to what you saw the EBITDA generation capacity of Montana and Missouri esters and the other recently completed projects would be. Given the current macro environment, is that guidance in your mind still the target that you’d be looking at or is there risk to it?

This is Noel Ryan. The single biggest driver underlying the economics or our portfolio of organic growth projects is the WCS WTI spread, as it pertains to specifically the Montana project. And currently the WCS discount is about $12 below WTI, which is within the range of what we had forecasted for purposes of that EBITDA contribution that we’ve previously given. With regard to the opportunities around say the Montana refinery, we do increase, or do intend to increase the amount of processing of heavy Canadian crude oil than we have in the past by virtue of the increase in capacity of that facility. But I would say that really the story has become increasingly on the fuel side of the business oriented towards the pace at which the Canadians continue to produce and the apparent lack of pipeline offtake capacity that has resulted in the structural disconnect between WCS and WTI. I think moreover, as it pertains to say our solvents and esters products, we are selling on test products in both facilities and we do intend to take advantage of that in the full year ’16.

And apologies for being a little bit greedy, but just one last quick question. I do appreciate, good to hear from you Noel as well. For the Canadian that you’re going to be increasingly running in Montana and at Superior, how is that likely to change the product slate for those refineries, given the heavier molecule going into them?

Sure. So basically we’re going to be producing incrementally more asphalt. And as Tim referenced in the prepared comments and the script, we recently entered into a long-term marketing contract with Alan [ph] that we’re going to be taking product of our midcon markets where we sell asphalts. And we produce asphalt at refineries like Superior and Montana, at Shreveport and I believe Princeton as well. And those four refineries generally sell their product into the midcon. We have a retail marketing relationship on the East coast with off states. But we have never really done much on the west side -- western portion of the country. So our marketing efforts with regard to that incremental production a lot of it is going to be going through Alan [ph] and their southwestern marketing terminal.

Johannes, this is Tim. What I would echo into what Noel said is you've asked about how the product slate changes. It really does blow down to the asphalt pool, but the diesel and gasoline pools don’t really get impacted significantly. But on the asphalt side we make considerably more asphalt. That’s why we entered into this agreement with Alan [ph], to help us retail that asphalt. I think that is consistent with what we have been planning all along in terms of this Montana project. I would also tell you that our asphalt business was very profitable in 2015, and all signs seem to indicate that it will continue to be very profitable in 2016 as well. So we are looking forward to that summer season of the asphalt.

Okay. Are there any particular aspects of the deal that you are doing for distribution with ALJ that you would like to highlight? Something that you think is particularly interesting about it?

Probably not at this time, but in a future time we will speak with our partner and we choose to disclose more maybe at that time, but not at the present time.

Thank you. Our next question comes from the line of Brad Heffern from RBC Capital. Your question please.

So Tim, obviously you spend a lot on the fuels business, I was curious if you could just a little bit about how demand has worked on the specialty product side? Obviously the fuel side is probably a little more consumer driven, specialties probably a little more industrial driven and we have seen a lot of sort of industrial headwinds of late. Have you seen any softness in demand, how the margins looked and so on, kind of the trend over the past several months?

Yes, that’s a great question. Let me ask Bill Anderson, our VP of Specialty Sales to comment on that.

Sure, thanks Tim. In 2015, we actually sold more specialty volume throughout the course of the year than we had in the previous year. We moved all of our products consistent with the types of volumes we have in the past, maintained inventory levels that we were desiring to hit by yearend and continue to see volumes moving nicely out here in 2016.

And Brad, what I would say too is I think we have talked about this on a previous earnings call, but the solvents, that group of our specialty segment has seen some slowdown in relationship to the oil fuel services slowdown. But all of the other segments, as Bill just mentioned saw increased volumes. The other thing I would mention is in the past we talked about the lag that we see in specialty pricing associated with dropping crude oil prices. That has been going on pretty much for the year of 2015. What I would tell is that that lag is catching up now, and so you've seen a lot of announcements from some of the large base oil manufactures and price cuts in those areas. Those will certainly put pressure on our base level margins. What I would tell you though is the base oil is just a fraction of our specialty portfolio. The wax is the solvent season, the petrol items, the wide oils, some of our branded products, the Royal Purple, a Bel-Ray, the TruFuel all of those as they are further away from the crude oil supply chain and closer to the retail customer, have continued to see the strong margins that we typically see.

Okay great, thanks for that color. And then I guess in your prepared comments Tim you mentioned, liquidity enhancing initiatives. Obviously you have the loan from the GP and you spoke about potential divestitures as well. Is there anything else you would throw in that bucket that you would like to put a finer point on?

Well, a lot of these are items that I don’t think are appropriate to talk on the phone, but we settled some derivatives early, and liquidated and monetized the value of some of those derivatives. So things like that, that would free up cash.

I mean there are several -- we've certainly been through cycles of volatile commodity prices before. We understand how the business operates in that type of an environment. So we're always working on several initiatives all at once to enhance, and I think if some of those are operational and some of those are strategic. So it's a -- we think there are multiple options here to improve our situation and we're focused on all of those simultaneously.

And I think just to your reference on heritage group, we've got a very supportive general partner. They continue to own about 22% of the LP units and a 100% of the GP. And I think that 6% loan that they gave us was highly supportive. It was unsecured and it really illustrates the long term support that they intend to give this company. So in an environment where MLPs are out of favor, I think having a GP as supportive as ours is a competitive advantage.

Sure, okay, understood and I guess just one more on liquidity. For the borrowing base, how is [indiscernible] accordion on that? Is it -- was it basically just mark to market for the value of the inventory at the end of the year and so the -- it probably has integrated any more since then or is there sort of a lag effect.

Well, there's a little bit of a lag effect. Our borrowing base is calculated at different points in time, based on where our overall usage of the facility lies. So currently we measure that on a monthly basis. And so there's a little bit of a lag effect in that construction. I think it's one of those -- it does take some time for a change in a commodity price like a change in the price of crude to work its way through. Ultimately the product pricing changes but it flexes up and down based on those changes at the required frequencies that we have to measure it.

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

Pat or Tim. Maybe I missed a little bit of the discussion on cash flow neutrality, but can you maybe comment on when you think that you're actually going to get to that point. And just to be clear, when you think about cash flow neutrality, is that really including distributions? Are you just looking at your operating cash flow as CapEx?

Sean, this is Tim. Are you referring to DPR in particular, or are you referring the Company as a whole?

I guess my comments were about the Company as a whole, but maybe your comments were just about DPR.

Yes, that's right Sean. When I use the term cash flow neutrality, and I don't know if anyone else used that as well, we were specifically talking about the Dakota Prairie Refinery. We did see a significant loss in the fourth quarter. That's probably one of the significant bridges for why our fuels numbers were lower than what you might have thought, and the focus of our management team right now is to get that Dakota Prairie Refinery in a cash flow neutral position and we're working very closely with our partners, MDU to make that happen.

Okay, got it. I guess maybe on the topic, when you think about general margins for the businesses as we kind of look forward throughout '16, how are you guys thinking about your cash flow position? It would appear to me that you're likely be free cash negative for the full year, but any kind of commentary on how you're thinking about that would be helpful.

I mean Sean, we don't give EBITDA guidance. We do give capital spending guidance and our capital spending is now at 60% or more year-over-year. So I think the variable in the model right now, the single biggest variable is not specialty. We’re seeing stability there. It's tremendous business, and the margins are strong. We’re really seeing variability and is whether or not you know fuels demand holds up the way it did last year, whether we begin to see inventory build in major markets, things like that that people are talking about with reference to the I guess five consecutive weeks we see in the DOE inventory numbers in terms of refined product build. So the question becomes can refiners begin to cut runs [ph], be disciplined in an industry so that we could have refined product margins stay at a healthy level. The other question, and probably for us an equally important question, it goes back again to where does that WCS spread go. If WCS blows out, those fuels refineries in the north would do really well, and vice versa. And so I think that speaks to Tim’s comments around hedging that spread to the tune of 50% of our WCS WTI -- 50% of our WCS intended purchases in the second half of the year have been hedged. And we’ve done that on a percentage hedge basis to the tune of about anywhere from 69% to 71% of WTI. And then we’ve done a modest amount -- a nominal amount of fixed priced hedges, I think to the tune of about 6,000 barrels a day, but you can see that in the Slide deck. The bottom line is that cash flow is going to depend -- the variance in our cash flow is going to depend on the variability of fuels refined product margins.

And Sean, let me just make it clear to you and everyone else on the line, just so that we make sure we don’t spread any false rumors here. When we talk cash flow neutrality, we are only talking about the Dakota Prairie refining. We don’t believe we’re going to be anywhere near cash flow neutrality at the Company. We believe we’re going to be well above that.

Okay. And when you talk about cash flow neutrality, you’re talking of just operating cash flow less CapEx before distributions or?

Yes.

And so I guess, and kind of funding that you’re going to need in the near-term as you kind of walk through the self-help that you’ve outlined and increasing your WCS runs. Should we really be thinking about that being funded entirely under the ABL, or are there further conversations going on with the GP, or how should we think about that in the near term?

I think in the near term a lot of the projects remain in the evaluation phase. And as Tim said, we’re looking at certainly priorities for things that require less capital versus more capital. So, I don’t think at this point based on the scale at what we’re talking about in the near term, our abilities to fund would be from available sources of liquidity and not necessarily requiring some special form of funding.

And then maybe just as a follow up on the $75 million note. Can you talk a little bit about the terms there? Is that piece paper paired with the unsecured bonds? And what’s the maturity of that facility?

We’re going to offer more disclosure around that note as part of our 10-K filing. It is a note from a related party. Its tenure is relatively short term, but again it's with the support of general partners. So we’ll work through those matters as we proceed. And it is a low level of interest loan basically to continue to support the ongoing needs of the partnership. I think it demonstrates again a very supportive general partner. When we file our 10-K, we’ll offer some additional disclosure around the note itself.

And if I can sneak just one last one in there. On your slide about potentially growing WCS volumes from your 2016 targets, that 70,000 target, what do you think the capital you would need to be able to get there would roughly be?

Again I think Sean, we’re going to wait for another day to discuss that. I think it's going to be fairly modest, compared to some of the capital spending you’ve seen us do in past years. But it’s something that we’re going to save for another day.

I think that’s the right answer, Noel. What I would say is on that chart we show what our 2016 target is and we talked about that. That requires no additional capital, just to reiterate what we said earlier on the call.

Thank you. Our next question comes from the line of Greg Brody from Bank of America Merrill Lynch. Your question please.

Hey guys, most of my questions were answered. Just a few of mine. Liquidating the hedges, it sounds like that was primarily just for liquidity enhancement. Is there any more to that, that I should be thinking about or that's what really drove it.

Yes, Greg I think you are thinking about aligned with our consideration as we look at again levers that would be helpful and constructive during the fourth quarter, and that was the driving decision.

And then just trying to think about your EBITDA this year. I know you don’t give guidance but -- clearly sort of Prairie has been -- you putting out was the big overhang. The other three segments -- are those still sort of in the framework of what you started would be in terms of EBITDA. I think last quarter you even said it might be over $100 million. But is that still the way to think about it or is there other things impacting that, just at the Montana refinery?

I'm not sure I understand the question Greg. I can't say that we had a very strong year that was supported by a combination of unbelievably strong refined margins on the Specialty side and still very healthy fuels cracks. And again back to the prior question that Sean Sneeden asked at Oppenheimer, a lot of the variance in 2016 is going to be predicated on whether or not we see a consistent strength in fuels refining margins. We don’t expect to see large variances in our cash flow generation within Specialty products. And I would say that oilfield services segment has obviously been very hard hit, but we have been affected at cutting cost there try to get us back to of close to cash flow neutral there. So really, when you talk about the major deltas in the model, it's going to be how well or not well did fuels refining do and we're again taking a conservative tact by hedging a significant portion of anticipated fuels production as well as our hedging around WCS. So we're trying to take out any risk that we can that we think is prudent.

Thank you. Our next question comes from the line of Mike Gyure of Janney. Your question please.

Yes, I think all my questions have been answered. Thanks, guys.

Thank you. This does conclude the question-and-answer session of today's program. I would like to hand the program back to Noel Ryan for any further comments.

Thank you everybody for joining us on today’s conference call. If you have any questions, please contact our Investor Relations department and we will be happy to assist you. That concludes the call. Talk to you soon.

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