Good morning, my name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek US Holdings Q3 2017 Earnings Call. [Operator Instructions] Thank you. I will now turn the call over to Mr. Keith Johnson. You may begin.

Thank you, Sarah. Good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek U.S. Holdings third quarter 2017 financial results. Joining me on today's call is Uzi Yemin, our Chairman, President and CEO; Kevin Kremke, EVP and CFO; and Fred Green, EVP and COO as well as other members of our management team. As a reminder, this conference call may contain forward-looking statements as that term is defined under Federal Securities Laws. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. In addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to comparable GAAP results, which can be found in the press release, which is posted on the Investor Relations section of our website. I'd like to remind everyone that we are not able to comment on the pending transaction with ALDW. As a result, we will only be taking questions about our operation on today's call. On today's call, Kevin will begin with a review of the financial performance of the quarter before turning it over to Fred for an update on some key initiatives. And Uzi will offer a few closing strategic comments. With that, I will turn the call over to Fred - Kevin.

For the third quarter of 2017, Delek U.S. reported net income of $104.4 million or $1.29 per diluted share compared to a net loss of $161.7 million or negative $2.61 per basic share in the third quarter of last year. On an adjusted basis for the third quarter of this year, Delek U.S. reported adjusted net income of $65.3 million or $0.81 per share compared to an adjusted net loss of $17.3 million or a negative $0.28 per basic share in the prior year period. Our adjusted EBITDA was $195.9 million in the third quarter of 2017 compared to $9.2 million in the prior year period. A reconciliation of reported results to adjusted results is included in the financial tables of our press release. Improved market conditions in the refining segment and the addition of the Alon assets following the transaction close on July 1 were the primary drivers of the increase in earnings on a year-over-year basis, which I will discuss in more detail in a few minutes. On a consolidated basis, line items such as operating expenses, G&A and interest increased primarily due to the addition of Alon. I would like to note that G&A expenses did include approximately $18.4 million of transaction costs in the third quarter of 2017. This was partially offset by a gain of approximately $6 million related to the freeze of certain pension plans. Our income tax rate, excluding the noncontrolling interest income associated with Delek Logistics and Alon USA partners of $10 million, was 55.2% in the third quarter of this year. This tax rate included a $46.9 million net deferred tax write-off in the third quarter 2017. Excluding this amount, the income tax rate was 35.8%. Turning now to capital spending. Our capital expenditures during the period were approximately $68.5 million…

Thanks, Kevin. First, I'd like to discuss our initiatives at the Krotz Springs refinery. After further evaluation, we are moving forward with the alkylation unit project. This should provide the refinery with additional production flexibility as it improves the ability to convert low-value isobutane into higher-value gasoline products such as low RVP summer grades and premium gasoline. The total capital cost is expected to be approximately $103 million, and the annual EBITDA from this project is expected to be $35 million to $40 million. Through September 30 of this year, we spent approximately $20 million on the project and we currently expect to complete it in the first quarter of 2019. To give you an example of the benefit of improved conversion, we expect that - we expect to create by this project, you could compare Gulf Coast 7.8-pound gasoline prices to the prices for isobutane. Since 2011, that spread has averaged $0.89 per gallon. Our economics are based on a mid-$0.60 spread, and we believe this project should enhance long-term value at the refinery. We are also exploring ways to reduce crude oil transportation cost and increase crude oil sourcing flexibility. By adding flexibility, we should be able to access more Midland crude into Krotz Springs when the price point is attractive relative to LLS. One option is to ship on the Paline pipeline to increase our WTI Midland crude over time. Regarding our California assets, we do not think that they fit our current geographic and strategic footprint, and we are exploring ways to derive value from those assets. Both the Paramount, including AltAir, and Long Beach locations are now part of discontinued operations. At Bakersfield, we're evaluating options to reduce the cost over time, and it remains part of the continuing operations. From a modeling standpoint, I want to discuss a couple of items. During the fourth quarter 2017, we're expecting to complete a reform of regeneration at Krotz Springs. We're taking advantage of the opportunity to also perform a mid-cycle decoke on the crude heater and replace catalysts in the isomerization unit. Taking this into account, we expect our crude throughput in the fourth quarter 2017 at Krotz Springs to be approximately 63,000 barrels per day. With that, I'll turn it over to Uzi for his closing comments.

Thank you, Fred, and good morning. This was a great quarter from a combined operation as we achieved adjusted EBITDA of $196 million and our teammate's substantial progress on the integration of the companies and the teamwork used during Hurricane Harvey allowed us to operate the system near capacity. During the third quarter, our crude sale was approximately 67% Midland WTI, and our refinery system is well-positioned to continue to benefit from the Midland brand discount. I'm pleased that we reached an agreement to acquire the remaining 18.4% of ALDW LP units that DK does not already own in an all-equity transaction. The exchange ratio is 0.49 shares of DK for each ALDW LP unit. This transaction, subject to customary closing conditions, is expected to close in the first quarter of 2018 and does not require approval from the DK shareholders. This was one of our strategic initiatives following the purchase of ALJ. It should simplify our corporate structure, eliminate public company cost and allow us to allocate the ALDW distribution to a higher retake capital investment in the company. Also, we should be able to more efficiently capture cost of capital synergies and unlock the value of logistics assets through future potential growth into DKL. I want to thank the employees of Delek U.S. and the conference committee of ALDW for their hard work during this process. We've made significant progress on capturing the synergy we're targeting for the acquisition of ALJ. During the third quarter, we captured approximately $53 million of synergies on an annual basis and are well on our way towards the goal of $85 million to $105 million with a midpoint of $95 million. In addition, our team are focused on unlocking the well of approximately $78 million logistics EBITDA through future potential growth down to DKL. Also, through access to DKL's logistics system, we can support this large operation through crude oil and large-product initiatives in the future. Based on September 30, our cash balance was approximately $832 million. This financial flexibility should enable us to support our initiative to improve Krotz Springs, move forward with the integration and evaluate potential growth opportunities. As we continue to explore opportunities created by a larger, more diverse company, we remain focused on creating long-term value for our shareholders. Before I turn it over to the operator, to Sarah, I would like to congratulate my dear friend Alan Moret for his appointment as the President of DKL. Alan joined DK with the Alon transaction, and I look forward to working with him in the future. With that, Sarah, will you open the call for questions, please?

[Operator Instructions] Your first question comes from a line of a participant whose information was unable to be gathered. [Operator Instructions]

I think it's me, it's Blake Fernandez at Scotia Howard Weil.

Well, my name is hard to read and to pronounce, Blake. I don't think yours is but now I learn something new.

Congrats on the results. It's nice to see you back in the black here, Uzi. So good for you guys.

Happy to be here.

Yes. So, question for you. So, with the sanctioning of this project here at Krotz Springs, I think there was some discussion previously about potential asset drops from this facility and there was some question marks as to whether you're going to continue operating it. Is it fair to say now obviously, with moving forward with this project that you are now back on track on potential EBITDA drops to DKL?

Let's back up from the drop-down. I'll answer it. I'm not going to dance around the question. I want to answer it in a different way. As we all said in the past, that we - in order Krotz to improve itself, we need to look at 3 aspects of it. The first one is the crude transportation to the refinery. The second is the facility itself. And third, the selling of the products that we didn't get the premium that we thought we should get. So, let's start with the first initiative. As we all know in the last 6 months, and we will see it in the results, we already see it in the third quarter, but we'll see it more in the fourth quarter. The LLS - Midland LLS spread in the third quarter it was around $3 and right now we're sitting at - for December close to $6 or a little less than $6, maybe $5.50. So, we said all along that we need to utilize the combined company assets to bring Midland barrels or say transportation to Krotz. Krotz, beginning of the year was running 20,000 Midland and 50,000 or 55,000 LLS. We are working towards and probably be there by the - in December, of having more than 40,000 barrels of Midland instead of LLS and capture some of that differential. We do it that by having utilized the Paline pipeline, which is over-nominated right now, and DKL announced this morning that we are going to increase the capacity to 43,000 - 42,000 on the Paline. That will allow us to capture that big differential. So, we're working our way. Our goal is to get as close as we can to capacity on Midland base pricing for Krotz and that will eliminate a big cost of the transportation. That's one component. The other one is the operation. The first one is the alky. It's the easiest one. The return is pretty, pretty good. We were conservative when we put $35 million to $40 million. There are other projects that we are looking at. And the third one, we are working on a wholesale initiative. We are not ready to announce anything to the market substantially but we are working on that, along the Colonial pipeline to capture some of the value along the Colonial pipeline. We saw a big example of that during the hurricane. So, with - and we've said all along that we need to work on these 3 before we declare victory on Krotz. We're doing that. So now going back to your original question, declaring victory and say we are going to drop down the assets to DKL is premature. So, I would say, let us work a few more quarters and improve the facility and then we'll talk about that. That was a long answer to a short question, but I hope it covers everything.

No. That's very comprehensive. I guess, I'll just spend both of my questions on Krotz, then. Just given that you spent, I think it's roughly $20 million or so, it seems like that's going to obviously put the bulk of the spending into 2018. Do you have kind of initial thoughts or modeling suggestions on the capital spending for it? And I'll leave it there.

How come I'm not surprised with this question? It's around $50 million. $53 million.

$53 million. Okay. And do you have a total? Or is that - just add that.

And the remaining is in 2019.

Your next question comes from the line of a participant whose information was unable to be gathered. [Operator Instructions] Your next question comes from the line of Paul Sankey, whose company was not able to be gathered. [Operator Instructions]

You really made this call exciting for us. There's 20 analysts out there all yelling on the phone. I was just yelling "hello, hello, hello" on the previous one. I don't know how you can work this out, but it's obviously going to be very tough for us. But anyway, more seriously, at a high level Uzi, where do you see Delek strategically right now with things obviously advancing on the MLP consolidation front? Where do you now see the company strategically and going forward?

Without the question for you, we would not finish the call. So, thank you for saving everybody from this. Obviously, as usual, it's a very smart question and a very good one. In the next 2, 3 quarters, we will complete hopefully integration of Alon and with the Midland Brent doing what it's doing. And by the way...

Uzi, let me interrupt. How do you define the integration? I mean, when it is complete, is that...

Complete both the systems i.e., IT and accounting, HR, obviously. And then capture most of the synergies. I think we are hoping to get all the synergies by the end of next year. So, if this is happening the way we are expecting and so far, it looks pretty good, then the next step we need to ask ourselves is to continue to look at opportunities in the marketplace. Obviously, our balance sheet we all know is very good. And we want to continue to grow the company. We have ideas on the midstream side. And obviously, into that market, it doesn't make sense to pay 17x multiple for something that actually doesn't make sense. But we still think that there are opportunities in undervalued assets in the marketplace. It's too early to declare victory on the Alon integration. But we already see that we made good progress on that so we feel that our ability to integrate assets just getting better and better over the years.

Yes. What are you thinking about the undervalued and the growth that you obviously want to keep pursuing? Is that the more of a midstream concept or more of a refining concept or both?

Probably look at both. We want to be very prudent with the capital allocation. We all remember downturn and we don't want to during - the heydays. We don't want - we want to maintain strong balance sheet, which has basically allowed us to buy ALJ, so we want to use the same strategy in the future.

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

So maybe first a question on cash and use of cash. I think you had talked about, when you mentioned your cash balance, you talked about being able to use this to fund some of the capital projects you have ongoing. But can you talk a little bit about priorities for the - whether there's room for anything else in the growing cash balance? The potential as you look down the line for additional cash return to shareholders? And maybe a reminder. In the past, I think you've talked about wanting to maintain around a $500 million to $600 million cash balance. Is that still the right number?

Yes. And the thought process. Let me be clear, next week - not next week, next year. I wish next week. Next year we have the convertible, the $150 million convertible bonds that we got during the ALJ transaction. These were ALJ convert. And we, obviously, want to redeem them with cash. So that will lower the debt. And also prevent equity issuance for 2018. With the market doing what it's doing, obviously, there's a growing, mounting pressure to look at the dividend as well as the buyback. We wanted to be prudent and to make sure that we are integrating Alon into the system with no problems. But the way we see, obviously, we thought third quarter and fourth quarter expecting to be then it makes sense to visit this idea or these ideas.

And then maybe 1 follow-up on your earlier comments about the potential opportunities out there at Krotz Springs. I mean, you talked about the potential to switch out maybe up to 20,000 barrels a day of LLS for Midland crude there by the end of the year. Is the benefit of running Midland crude, is it a dollar-for-dollar on the differential in terms of the benefit that you see of running a Midland barrel versus an LLS? Is there a difference in transport costs? Just trying to think of how big the potential prize is for swapping out 20,000 crude.

You're asking great questions. The transportation cost is higher. I'm not going, I will make up a number, but the transportation cost is higher in terms of getting the crude for Midland. I think it costs - I don't want to start giving numbers coming out my memory, we can probably provide it later on. But out of the $5 or $5.50, a big or substantial portion of this will stay in our pockets. Actually, we already saw it in the third quarter, but there was noise in the third quarter. Just want to make clear, we didn't want to allocate anything about it. But in the third quarter, because of the hurricane activity, we need to pay higher prices for barges in order to maintain the Krotz refinery to maintain it almost full. So, there's noise in the third quarter numbers. That noise will disappear in the fourth quarter. And going forward in the first quarter, it's going to level down. Now again, a big portion of this is being paid to DKL. And that's the reason we see Paline are performing what the expectation was and actually we already said that we are expanding the pipeline in the future. So, a big portion of it, we'd get it through our DKL ownership.

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

It turns out I'm not operating incognito here. Anyway, quick question for you.

We are confused now when we hear there is somebody with a name and so we don't know what to do with the question.

You don't know, it could be somebody else altogether. Understand the investment you're making at Krotz Springs. One of the other items at that location, if I remember correctly, does not make ULSD. I know you talked in the past about IMO 2020 maybe providing an outlet. But once you get through the alkylation process, what would be the thought on how to address the other side of the barrel there?

Fred, I'll let you take that one, since you are the expert for DHT here.

Roger, so we're looking at what it's going to take to integrate hydrotreating into that facility. But we also have some other options given that we have spare diesel hydrotreating capacity at both El Dorado and Tyler. As you know, we've been working on shipping products to Mexico by rail. So that may be something that we can fold into that operation.

All right. So, if I get still optionality for a couple of years, anyway?

Yes. We're still running the numbers. As you can imagine, we've got our hands full.

Definitely. And then, Uzi, maybe at the corporate level. Hedging. I don't mean to be mean about it, but it seems to be more often a drag than a positive event. As a larger company, 4 units instead of 2, the retail assets and all. Hedging still going to remain a key part of what do you do? Or is there a rethink on whether or not that makes sense as a strategy here?

Absolutely, it makes sense. We check it - obviously, we want to win all the time. In the last year, we obviously, didn't win much. But at the same time, let's be clear, all this hedging came from 1 place and 1 place only. The month of September with the ultra-low sulfur diesel jumping because of the hurricanes jumping to is much higher number. Without the hurricane, which obviously, benefited us big time, the hedging would have been in black for the quarter. So, I was, while I hate the $7 million and I said to Keith, "We need to highlight that." So, people would see that it didn't come from the operation. Still we benefit from the hurricane big time. So, we want to maintain this toolbox.

Yes. A lot of people got flooded by the hurricane, that's for sure.

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

Uzi, the first question I had was just on Midland differentials. One of the questions we get often is, what ultimately sets the product prices in your markets? Is it fair to say that it's probably Brent, at which point you should be thinking about Midland versus Brent as the key benchmark for you guys from a profitability standpoint? Or are there some of those barrels that are priced more off of local crude? And then just to follow up there, how do you think about that differential over time evolving Midland, PI and also Midland Brent?

This is great question, Neil. I think we spoke about this several times in the past. Unfortunately for me I'm being recorded every quarter. So, I think we all spoke about the idea that our Midland Brent will widen toward the end of the year. I honestly didn't expect to see the $6 or season change that we're seeing. Was expecting to see lower than that, but we'll take it as long as the market gives us that opportunity. One key point that we need to remember on this idea is that Mars, starting the third quarter, and that benefited our company big time, Mars is still more expensive than Midland by almost $2 or $1.50 today, I think. So, the benefit for the Midland Brent is mainly for the large-width crude refineries. But I'll leave to that with that comment. Do I believe that this will stay $6, $7? Probably not. Do we think it will go to $4, $5? Probably yes, long-term. What will dictate that is obviously, one big thing, the export. While we're getting - people are very focused on the offtake capacity, the barrel or the Midland barrel needs to clear itself either at the Gulf or outside the U.S. And at the Gulf, I think that you know better than I do that there's limited capacity. Over time, you can increase it. But for this moment, there's limited capacity. Also, there's limited capacity for export at this point. Obviously, people are working on that. So, for the short and the next few months, it will stay we think wide and after that, it may normalize towards $4, $5. In terms of the local market index, that's a great question. It depends on the market itself. But we just need to remember that our competing market, if you will, are pipelines and these pipelines for the most part is coming from the Gulf. So as long as the Gulf Coast refineries will see the crack spread not as great as they see it today because of this market situation or because of the market situation, we are in good shape. Also, please remember that in West Texas, we integrated the terminals that DKL used to have with the ALJ operation. So, the margins that we're seeing in West Texas are pretty good, and we hope to continue to see them. In the month of October, that margin was $3.20 so continues to be very strong. I hope I answered extensively enough to cover every aspect of your question, Neil.

Yes. That was good. That was thorough. A follow-up, I just want a clarification, you talked about returning capital to shareholders both potentially looking at the dividend or maybe even coming back to the buyback program. Is that return of capital story on hold until the alky project is done and you made the big investment at Krotz, or is there the potential to look at that while simultaneously standing on the project?

Absolutely not. The project, if the market will continue to do what it does, then we are going to act rather quickly.

Okay. Uzi, one last one, if I could sneak one last in. The $30 million to $45 million assumption that underpins the EBITDA from the alky unit. Can you just walk us through the assumptions? You said they were conservative. But what are the key points that underpin that EBITDA number?

I'm going to repeat the question. What I think the question was that what dictates the numbers behind the $35 million to $40 million benefit in the alky. Is that the question?

Exactly.

Okay. Fred, do you want to take that one?

Sure. Neil, right now the refinery configuration has us utilizing a cat poly unit to polymerize butylenes and selling isobutane into the market. And what the alky does is that it and allows us not only to stop selling isobutane, which is at a much lower value than gasoline, but we can then convert those butylenes and purchase isobutane in order to make high octane gasoline. So, the net effect is we see an uplift of, in our assumptions, $0.65 a gallon on the difference there between CBOB 7.8-pound gasoline and the isobutane. So, you can back into the amount of volume that we're talking about. But our gasoline production will go up and we'll be able to take advantage of that price differential between isobutane now as the feedstock and the CBOB 7.8-pound sales.

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

First question, which I think maybe Blake was trying to get at this a little bit initially. Do you have any thoughts around the total company 2018 CapEx budget? I know you said $53 million for Krotz Springs. I think you have a turnaround next year. I think you didn't have one this year. So just any thoughts you could provide there?

We'll obviously give you the numbers beginning of the year as the Board will approve it, but we do have a good sense of that. So, let me walk you through some of the numbers. Obviously, this year, the number, the guidance we gave you, the $160 million, that's down from the $170 million previously announced. If you look, not including growth project that we should - it will - thereby, this project will talk about it specifically, if the rule of $25 million per refinery on maintenance CapEx per year, the $50 million that I just mentioned on the alky for next year is a little more than $50 million or a little more than that. Depends on the turnaround. But call it between $50 million and $60 million. And then corporate DKL probably $20 million to $30 million, just the regular stuff. And corporate depends on how much we need for integration. These are the numbers, more or less.

Got it. So somewhere in the $200 million range?

Well, probably a little more than that. If you have the alky, that's - to get a little more than $100 million, then for refinery and then a little bit more than $200 million, maybe between $200 million and $250 million.

Okay, got it. And then maybe just asking a dividend question a slightly different way. You have a lot more cash flow now from core refineries and you provide some diversification benefits and things like that as well. So, is there a level of dividend as a percentage of CFO or earnings or something that you - over time, you might hope to target? Have you given thought to that?

Absolutely. Absolutely, we talk about that almost on a regular basis. We just need to remember that all these is new to us. And we don't want to declare victory after 3 or 4 months. Obviously, what we see, we're very happy with. Very pleased with the result and we'll continue to talk about that as we continue to integrate the system in the next quarter or 2.

Okay. I guess, last question. So, in the asphalt drops. I apologize if I missed this. I assume you're still planning all cash to the parent based on the availability at DKL and that can help to fund some things like the converts and whatnot.

Absolutely. The asphalt is all cash by definition. That's the reason we did the all bond offering a few months ago. And we're working on that as well.

Your next question comes from the line of Chi Chow from TPH.

I want to follow up on Neil's question on Midland. I know we discussed this very recently together. But a couple questions. One, why do you think Midland is - I know Midland Brent is the key spread for you, but why do you think Midland is a trading above Cushing right now?

Because of the quality of the barrels. I'm sorry, I interrupted you. I thought you finished.

No. That was the question. All the production is coming right there from the base and yet we've got this premium on Midland and I guess, by extension, yes. What's the issue with the quality? Is that going to be an ongoing trend, I guess, since the barrels seem to be getting lighter and lighter there? Any comments would be helpful.

First, as you know, we can bring barrels from Midland or from Cushing to our refinery. We always prefer Midland because that's the neat barrel and it's something blended along the way. What is being done at Cushing, and again, we don't have operation at Cushing but there are companies really small that works for them very well that take different types of crude in Cushing and blend them and for our company for our operation, and Fred can talk about it for hours, we always prefer the neat barrel coming from the well itself. And I assume that this is happening for other companies. When you get the neat barrels, that not only improve your yield, but the duration and the time that you can run the unit is growing. So, the quality of the barrel is always #1 best of price.

Will the volume of the neat barrels start to diminish, though, as the incremental barrel gets - production wise, gets lighter and lighter out of the basin there?

I'm not concerned about that for us and I'll tell you why. Because what we see around - in our main hobby is becoming more and more Big Spring. What we see in the Howard County and the couple of counties around that, that the neat barrels stays the way it is. It's getting lighter and lighter at the Eagle Ford side. But in the counties that we're in, actually, that's the main reason why we are looking at other alternatives to bring crude to Big Spring and we mentioned earlier that we are building offloading rack at Big Spring. We're doing other stuff in Big Spring that it's not time to talk about that just yet. But to not only to save money on transportation, but to continue to enjoy the quality of the barrel.

Okay. And then secondly, on retail, I know you talked about this before, but do you have any further thoughts on whether you consider the acquired retail site as a core asset of the company going forward here?

Retail is keeper. As we said in the past, we believe in retail. I, personally, believe in retail. I think there's tremendous amount of value to be created, especially with the locations that Alon has or Alon is to have that we have now. In key strategic areas in the entire Permian Basin and with the growth that we see in that basin, we see retail performing very, very well. We'll start building our megastores in the area and together with the wholesale business that we have over there, we will continue to improve. We see this as strategic to our business.

Okay. So maybe one quick final one. What's the size of the alky unit at Krotz?

Fred?

It's roughly 6,000 barrels per day of alkylate production.

And your next question comes from the line of Kelly Akamine from Bank of America.

Kelly Akamine from Bank of America. First, congratulations on ALWD. My question is on consideration. I was wondering if you could offer any thoughts on the use of equity versus cash. With all the cash on the balance sheet, I'm wondering if there were any tax considerations to navigate given the MLP structure.

That's a great question. I'll be very brief about it because honestly, we can't talk about ALDW much. I'll just say, the idea was to allow the ALDW to participate in the outset with DK similar to what happen with ALJ. With ALJ, if you remember, we offered a price and then since then, the shareholders of DK enjoy a big portion of the performance of the combined company and the idea behind ALDW was the same.

Got you. Anything you could offer on the tax consideration?

Kevin?

Yes. The taxes are actually negligible in the transaction. But by virtue of this transaction, current ALDW unitholders get to participate in passive activity losses that they've received historically, that they otherwise would not have a chance to utilize. So, the total tax impact was negligible.

Okay. Secondly, I was wondering if you can expand on the strategic initiatives that you're pursuing in California. Perhaps maybe talk broadly about interested parties, whether it includes shutting those facilities down, timing and any other expectations you may have.

Obviously, putting it below the line makes a statement here. So, if we weren't comfortable with the strategic move with that, we wouldn't put it below the line. I'll leave it to that, but we do have - we are very comfortable where it sits right now on the balance sheet.

And your next question comes from the line of Brad Heffern from RBC.

I think most of my questions have been asked. But I'll just have one on the synergy number that you guys are giving out, the $53 million achieved to date. Can you talk a little bit about the buckets that that's coming from? I would imagine most of it is corporate and the cost of capital. But have you guys harvested any of the commercial or operational synergies at this point?

You're asking great questions. Out of the corporate and roughly half was achieved already. Cost of capital actually not everything or not much. One thing that we actually did is the LC that Alon used to have is now 0. We worked with parties or counterparties and the LC went to 0. And at the same time, we are still working on, obviously, the ALDW 925 bonds. We're looking at other facilities that are higher. That will happen over the next 12 to 18 months. Not too much on the cost of capital just yet. Well, as of this third quarter, obviously, you see more of that in the fourth quarter. In terms of commercial, we're working on what we mentioned earlier, the connectivity between Midland and Krotz. And the Paline facilities, a big portion of that. So, we saw that in the third quarter and we're working on that in the fourth quarter. Obviously, the margins, the consolidation of the terminals in West Texas, both operationally and from a marketing standpoint, we did some of it already. And I'll leave it to that. I'll just say that we kept the range the way it is, but we feel really good about that range right now.

Okay. And I guess I'll be a liar and ask a second question, actually. On Bakersfield, can you talk about just what the opportunity is that you see there that's keeping it as continued operations versus the other assets?

Bakersfield, as you remember, has that rail permit and we still need to - we're not planning to operate Bakersfield as a refinery but it may have value one way or another. We don't want to spend money just for spending money. We weren't comfortable to put it below the line just yet before we finishing evaluating the situation.

And your next question comes from the line of Chris Damas [ph] from BCMI.

Could you drill down a little on the $30 million inventory fair value adjustment you made? I would have thought those adjusting journal entries would have been made when the deal closed with Alon.

Danny, do you want to take that one?

Yes, sure. From an accounting guidance standpoint, when inventory is purchased in a business combination, that inventory is fair valued on the date of acquisition. So, on July 1, the finished products that we bought from Alon were valued at market prices on the 1st of July. So, when we sold that product, in July, the beginning inventory, the cost of goods sold for that product was higher, virtually eliminating the realized margin from the sale of that product.

What about the rack? I mean, we just came off the lowest WTI for the year in mid-June. So, I mean, most people are making FIFO adjustments that are unfavorable right now. You guys haven't done that.

Well, there's no connection to the rack here. What basically we did is basically these are accounting guidance, as Danny said, regardless of what the price in the rack is. What do you do, if you take the price as it exists in the marketplace, the same the day or the month of the acquisition? And then you basically put it on your book at that price, so there's no margin for this - with that inventory for the month of July. That's basically very typical for mergers like that. And that's what we did.

So, this is a refined product inventory right now?

Not right now, but basically fair value. We took the - it's refined. Let's just say for a second that Big Spring had 100,000 barrels of gasoline. So instead of selling it at crude, plus the margin, we put it on our books initially at the price of gasoline. So, when we sold the gasoline, there was no margin, so the calculation was based on the crack spread just to come to this $30 million. But the way we did it from accounting standpoint, similar to what we did with - when we completed the stock, the share purchase of Alon, we market to the market. And we adjust these 2 because it didn't make sense. Otherwise the earnings would have been $1.39 or something like that.

And there are no further questions in the queue at this time.

Thank you, Sarah. I'd like to thank the investors, you, the analysts. I'd like to thank my friends around the table, Board of Directors. But mostly, I'd like to thank our employees for making this company what it is. Have a great day, and we'll talk to you soon.

This concludes today's conference call. Thank you for your participation. And you may now disconnect.