May 5, 2016
Operator
Good day, ladies and gentlemen, and welcome to the Calumet Specialty Products Partners First Quarter Results 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, this conference call maybe recorded.
I would now like to turn the conference over to Noel Ryan, Vice President of Investor Relations. You may begin.
Noel Ryan
Good afternoon. Thank you, Nicole.
And welcome to the Calumet Specialty Products Partners’ first quarter 2016 results conference call. Thank you for joining us today.
On today’s call are Tim Go, our CEO; Pat Murray, EVP and Chief Financial Officer; Bill Anderson, EVP of Sales; Ed Juno, EVP of Operations, and Bruce Fleming, EVP of Strategy and Growth. 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, its 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.
Tim Go
Thank you, Noel. And good afternoon to all of you joining us today.
For the first quarter, Calumet reported adjusted EBITDA of $6.6 million in line with the financial guidance we issued publicly on April 15. Our first quarter adjusted EBITDA includes a favorable lower of cost or market inventory adjustment of $9.5 million.
Clearly these results are wholly unacceptable and underperform the high expectations I have for this organization. The responsibility for this performance sits entirely with me and my management team.
Our vision for growth is sound, yet we must execute on this vision through continuous improvement and self-help at each level of the organization with end-goal being positive growth in cash flows from every part of our asset portfolio. Pronounced weakness in our fuels products segment was the main cause for our poor first quarter results due to a combination of a 45% year-over-year decline in the benchmark 2/1/1 Gulf Coast spread and soft refining economics in the regional markets we serve.
Further weighing on results was our oil field services segment which remains challenged in a lower for longer crude oil price environment. On the other hand, our core specialty products segment continued to generate stable cash flows from operations during the first quarter, consistent with what we've come to expect from this business.
On an adjusted basis, gross profit margin in the specialty products segment were solid, averaging just under $40 per barrel on an adjusted basis, while segment level adjusted EBITDA came in at just under $52 million in the first quarter. Our diverse base of specialty assets and product lines are a strong foundation on which to grow Calumet, particularly as we seek to reshape our cash flow profile requirements in a way that over time can support a new distribution policy.
From an operations perspective, our plants ran well in the first quarter as we took care to manage those factors within our control. We processed record volumes of cost advantaged heavy Canadian crude oil, we achieved record system-wide utilization, and our growth projects are all up and running.
Our Montana refinery expansion has reached completion and is currently running at planned capacity. San Antonio is producing and selling on-spec solvents, and the Missouri esters plant is currently producing and selling on-spec esters for valued customers.
Most importantly, we operated without any major safety incidents which allowed us to better optimize our asset portfolio. I'm very proud of our employees for staying focused on delivering these results in spite of the challenges evident in the fuel segment and in the broader commodity markets.
Please turn to page 4. In my first 100 days as CEO, my focus has been largely directed towards three areas: first, develop and introduce a new strategic framework to the organization guided by a new long-term vision for Calumet; second, bolster near-term liquidity; and third, effect change through a series of organizational initiatives that I will touch on later.
As I first introduced to you in February, our vision for Calumet is to become the leading petroleum-based specialty products company in the world. In application, this means our focus will be on developing niche specialty businesses where we have a proven sustainable competitive advantage.
We're getting back to basics; investing in markets where we know we can win over the long-term. There are two primary changes in this new vision.
First, our attention will not be diluted across multiple downstream markets. It will be focused on the optimization of specialty products assets, products and brands.
Second, growth will need to originate from the internal assets we own today. Acquisitions cannot be used as a crutch to achieve growth.
We must first extract value from the portfolio we own today in order to consistently achieve organic growth. Since this messaging was rolled out to my employees in January, cross-functional business teams have come together to develop an operations excellence dashboard that includes dozens of low to no cost organic growth projects capable of generating meaningful benefits over time The second area of considerable focus has been around ensuring the partnership's continued access to liquidity to support ongoing operations and business growth while emphasizing the importance of balance sheet discipline and cost control.
To that end, on April 15, we issued a press release that announced the pricing of the $400 million senior secured notes offering, and the suspension of our quarterly cash distribution. The completion of the notes offering in late April was a financial imperative for us, particularly given the rapid pace at which the declining crude oil prices reduced the availability on the borrowing base of our revolver.
The lower availability coupled with the rapid deterioration in the fuels refining economics in our local markets required we come to market to ensure we have sufficient liquidity to manage the business. The offering was well received by a group of institutional investors who threw their support and the offering, exhibited their support of our business and the changes we're making to reinvigorate profitable growth.
Our liquidity to manage the business was significantly enhanced by this successful offer. Given the weakness in fuels refining economics evidenced in late 2015 and into early 2016, our Board unanimously approved the expansion of our quarterly cash distribution that was announced on April 15.
While the decision to suspend the distribution was a difficult one, this action was necessary to further support our liquidity position and financial flexibility. Our Board expects to evaluate our reinstatement of a quarterly cash distribution in due course taking into account a number of factors, including our liquidity requirements, the relative health of cash flows from operations, balance sheet leverage, broader market conditions and the overall performance of our business.
However, in order for us to be a position to get back to paying a distribution, we not only need to better optimize the assets in our portfolio, we need to effect the organizational changes required for our long-term success. The third area of focus involved a series of organizational changes that show clear progress towards developing the required infrastructure required to achieve our vision.
In March, we named Steve Mawer, the former President of Koch Supply and Trading and a 27 year energy industry veteran to our Board of Directors. Steve shares with the Board a deep understanding of the commodity markets and risk mitigation strategies that will help us to be successful.
In addition, we recently hired Bruce Fleming as our EVP of Strategy and Growth. Bruce has more than 30 years of industry experience including the last 10 years where he served as VP of M&A for a large publicly traded independent refiner.
At Calumet, Bruce will lead internal growth initiatives, business development and strategic advisory for the partnership reporting to me. I want to welcome both Steve and Bruce to the team.
We look forward to reaping the benefits of their leadership in the years to come. Importantly, I want to emphasize that personnel changes have not been limited to the senior leadership of our organization.
At an operational level, we recently added a new VP Operations for our Specialty plant, new plant managers at our Montana and Missouri esters facilities, and new operations managers at Shreveport, Montana and DPR facilities. At the same time, we have reorganized our supply chain management group positioning us to fully realize synergies around significant areas, including procurement, transportation and crude oil trade.
Further in an effort to transition our company toward an increasingly data centric management culture, we have moved forward with a full-scale conversion of our enterprise systems to SAP, a project which should reach conclusion by early 2017. Overall, these changes have brought about a sense of urgency within the organization, along with a growing awareness that status quo is not acceptable.
We have a long way to go, but we are making considerable strides towards improving how we manage the business on a day-to-day basis with an emphasis on staying scrappy, fighting for the lose ball and taking accountability at an individual level. Please turn to pages 5 and 6.
Our specialty product segment has remained stable on both the gross profit per barrel basis and on an adjusted EBITDA basis. Over the last three years, our specialty products segment has generated average adjusted EBITDA of approximately $50 million to $60 million per quarter.
During the same period, our fuels product segment EBITDA has been more volatile, particularly in the last two quarters where negative contributions from fuels and oilfield services has more than offset the positive contributions from specialty products. Please turn to page 7.
Not all specialty products are created equal. Some products are more specialized than others as determined by factors of quality, formulation specifications and scarcity of supply.
Historically, Calumet has produced a wide range of specialty products ranging from paraffinic and naphthenic base oils to specialty waxes and branded formulations such as Royal Purple, Bel-Ray, TruFuel and Quantum. While this diversification across multiple product markets has been a competitive advantage for us, setting us apart from other smaller less diversified producers, the opportunity set becomes incrementally more rewarding as we move further into markets where formulations are unique and gross profit margins are consistently higher relative to other specialty based refined products.
For Calumet, our goal is to increase cash flows generated from quality-driven and brand-driven product lines as listed on this slide. If we can leverage our size in niche specialty markets like these, we believe there is a significant opportunity to reshape our free cash flow profile over time, particularly given the low capital intensity of these product lines.
Please turn to pages 8 and 9. When it comes to fuels refining, Calumet is a small niche inland player.
Despite our small size, our refiners are strategically located in markets that enjoy unfettered access to some of the most cost advantage crude oils available in the domestic market. Back on our February conference call, I introduced our heavy-up strategy, an approach that calls for us to process increasing volumes of discounted heavy Canadian crude oil in our fuels refining system overtime to capitalize on this feedstock advantage.
As illustrated on top of page 8, heavy Canadian crude oil continues to trade at a significant discount to WTI, averaging nearly $12 below WTI on the year-to-date 2016 basis. While this discount isn't quite what it was back in the 2012 to 2014 timeframe, it remains a highly advantaged feedstock that is easily accessible to our refineries in Superior and Montana, given their connection to feeder lines out of Canada.
Current indications are that this discount should remain wide over the next several years given the continued imbalance between increasing Canadian production and the insufficient pipeline offtake capacity in the region. As you can see on the bottom of page 8, we purchased a record 31,900 a barrels a day of heavy Canadian crude oil in the first quarter 2016, up from 23,900 barrels per day in the prior year period.
We remain well on pace to reach our full year 2016 goal to process 40,000 to 45,000 barrels per day of heavy Canadian crude oil by year-end. Longer term, we anticipate the ability to process up to 70,000 barrels a day of heavy crude oil, all of which would be run at our Montana and Superior refineries.
As our Northern refineries have processed an increased diet of heavy Canadian feedstock, our asphalt production increased as was intended. We remain bullish on the asphalt outlook for this year and then work to further expand our wholesale and retail distribution footprint through direct sales and third-party marketing relationships such as those we have on the West and East Coasts.
In the first quarter 2016, we produced more than 17,800 barrels a day of asphalt, representing just over one quarter of our total fuels production versus 14,800 barrels per day in the year-ago period. Recall however that asphalt paving and roofing season is highly seasonal.
Generally, we will produce and store asphalt in November through April timeframe and sell it to customers in the May through October timeframe. On page 9, you can see that we have locked in approximately half of our anticipated 2016 WCS purchases using the combination of percentage and fixed basis differential hedges.
Net net, we have locked in an average discount of roughly $14 to WTI in 2016 based on these positions. Please turn your attention to Page 10 of the slide deck.
In the near term, having completed the recent senior secured notes offering and having made the tough decision around our current distribution, our access to liquidity has improved, although we must be prudent in our stewardship of capital in what remains a volatile commodity price environment. It is this intense focus on disciplined capital management and cost control.
Together with ongoing efforts to energize our existing businesses through low or no cost self-help projects that will position us to generate positive free cash flow in the business. In the mid-term, we will focus on executing on our operations excellence initiatives while continuing to identifying new and existing challenge to help us achieve our goals and manage our business for the long term profitable growth.
Further, we will complete a comprehensive internal valuation of our portfolio assets to better understand the relative contributions from these assets over time. Longer term, once we have build the infrastructure and processes to support a leaner more competitive organizations, we intend to once again return to the market as an opportunistic acquirer of specialty assets.
However, for now our focus is entirely on strengthening our balance sheet and optimizing the portfolio of assets we own today. Please turn to page 11, looking ahead to second quarter, fuels refining economics have improved through April when compared to the first quarter.
The 211 Gulf Coast crack spread averaged nearly $2 per barrel higher in April than in the first quarter 2016 supported by a seasonal strengthening in the gasoline crack. Further, the WCF WTI differential widened slightly in the first quarter which should benefit our Northern refinery, which run mainly heavy Canadian feedstock.
Local rack prices for gasoline and distillate sold in our local fuels markets when compared to Gulf Coast rack prices have improved during the last 30 days which should provide some benefit to the realized margins at our fuels refineries in the second quarter. Further, we intend to begin selling the asphalt we built during the winter fill season beginning this month.
So we should have a working capital benefit as asphalt inventory decline in the coming months. Finally, we anticipate that a significant year-over-year decline in capital spending which Pat will touch on shortly should put us in a good position to generate positive free cash flow as we made progress in the remainder of 2016.
On one final note, I'm pleased to report that beginning in the second quarter of 2016, we'll start providing guidance around the anticipated benefits we expect to realize from our operations excellence self-help initiative. Internally, we are holding ourselves individually accountable for the success of this initiative.
With that, I would like to turn the call over to Pat.
Pat Murray
Thanks Tim. Good afternoon everyone and thank you for joining us today.
Please turn to page 13 of the slide deck. Including a $9.5 million net favorable lower cost to market inventory benefit, we reported adjusted EBITDA of $6.6 million in the first quarter 2016 versus adjusted EBITDA including special items of $124.9 million in the prior-year period.
The year-over-year decline in fuel product segment adjusted EBITDA was the story in the first quarter given the market-related headwinds Tim outlined in his remarks. Specialty product segment adjusted EBITDA declined on a year-over-year basis as well but to a much lesser extent as profit margins returned to more normalized levels in the first quarter.
Please turn to page 14, distributable cash flow excluding special items declined by $141 million in the first quarter of 2016 when compared to the prior year period. A factor which weighed heavily into our Board of Directors' decision to suspend the quarterly cash distributions in April.
While replacement and environmental CapEx, cash interest expense and turnaround cost were all relatively flat year-over-year, our loss from DPR more than doubled on a year-over-year basis to a loss of $11 million in the first quarter 2016. Please turn to page 15, the benchmark 211 Gulf Coast crack spread declined from $19 in the first quarter of 2015 to $10 in the first quarter of 2016, due mainly to a steep decline in distillate crack and to a lesser degree gasoline cracks.
In April 2016, gasoline cracks have gapped considerably higher versus first quarter levels as supported by seasonal demand, while distillate cracks have remained relatively static with first quarter levels. As shown in the top portion of this slide, heavy Canadian crude oil as measured by the WCS contract has continued to trade at a more than $10 discount to WTI during the past year.
Our market structure which we intend to more fully capitalize on by running increased volumes of heavy Canadian in our refining systems over time. Please turn to page 16, on April 20, we closed on $400 million offering of senior secured notes due 2021.
The notes are secured by a first priority lien on all of the fixed assets that secure our obligations under our secured hedging agreement. These fixed assets include substantially all the partnerships, real property, plant and equipment and certain other assets.
The notes are callable beginning in April, 2018 with an initial call premium of 111.5% of par. From a covenant standpoint, these bonds include a restricted payment provision that requires a fixed charge ratio of greater than 2.25 times in order for the partnership to reinstate cash distributions without drawing on a small restricted payment basket.
And now please turn to pages 17 and 18 in the slide deck. On slide 17, we bridge cash and liquidity between the fourth quarter of 2015 and the first quarter of 2016.
Between December 31 and March 31, we had revolver borrowings of 183.9 million used mainly for a combination of capital spending are now suspended quarterly cash distribution paid in February and working capital increases which included increased volumes of asphalt inventories that we will begin to sell as the paving and roofing season begins in May. On slide 18, pro forma for the completion of the notes offering in April, our total cash and availability as of March 31 was $492 million.
Investors should note that a change in crude oil prices will affect 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. Please turn to page 19.
On slide 19, we said that our debt to trailing 12 month EBITDA stood at 14 times as of March 31, 2016. We are long ways from our leverage target of four times yet currently evaluating a number of strategic options to help reduce our debt outstanding and to repair the balance sheet.
At present, we believe the partnership has sufficient liquidity from cash on-hand and from operations as well as availability under our revolving credit facility to fund general business requirements subject to market conditions. Now please turn to page 20.
Calumet is in an uniquely advantaged position right now with regard to our capital spending outlook. In the first quarter 2016, we concluded the major multi-year 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. In the first quarter of 2016, total capital spending was nearly $47 million, representing our heaviest anticipated quarter of capital spending plans for the current year, but still well below $110.4 million of total capital spending we reported in the first quarter of 2015.
And with that I'll turn the call over to the operator so that we can begin the Q&A session. Operator?
Operator
[Operator Instructions] Our first question comes from the line of Richard Roberts of Howard Weil. Your line is now open.
Richard Roberts
Couple of questions, maybe to start with, can you just talk a little bit about what's happening with product prices in your local markets, I guess. Maybe if you could just touch on what kind of premiums you historical were able to realize out there and then just what's happened to those premiums for the past couple of quarters?
Tim Go
Yeah, Richard this is Tim Go, good to talk to you again. Happy to talk about the product pricing, we covered this a little bit on the last call and we saw this continuing here in the first quarter.
So local rack premiums that we historically compare ourselves against is the Gulf Coast pricing, and we typically try to target premiums at the Gulf Coast as we sit in niche markets and we try to command the premiums associated with that. Late in the fourth quarter and early in the first quarter, we saw weakness especially in the northern tier for those gasoline and diesel products.
At our rack, it was trading at discounts to the Gulf Coast which we tend not to see for a long period of time, I think pricing always fluctuates in the market. But what was happening was the rebalancing in the North Dakota market as the diesel demand was dropping in North Dakota, a lot of the supply that was being imported into that space was getting pushed back into the space that the products were being produced causing length in inventory and depressed pricing.
In the first quarter we saw that bottom out probably in that kind of mid to late February time frame, and we started seeing the rack pricing recovering Robert in March. And I can tell you in April that recovery has been sustained, we're seeing rack prices both at Superior and Montana that are typically at or above Gulf Coast.
Superior I think it's still trying to rebalance probably not as strong as Montana but we've seen a significant recovery overall versus what we saw in the first quarter.
Richard Roberts
Maybe I’ll move on to the lower side, so I think in general, and correct me if I’m wrong but in general I think it’s fair to say your facilities run at a bit of a higher operating cost than most of your peers do. So I was wondering if you could maybe comment on what you can do or what maybe you are doing to bring those cost down and if you think it’s possible to get some of your plant’s cost profiles more in line within industry average?
Tim Go
Robert that’s a good question something that we talk about daily within my management team. We do have smaller facilities which are historically cost disadvantaged versus some of the larger scale refineries out there.
What I can tell you is we’re focused on some of the transportation and procurement opportunities that we think exist within our larger portfolio of assets. I’ve talked to several of you in the past several months about the opportunities that we've not yet been able to run capitalize on by having critical mass of fuels, refineries and multiple branded and packaging businesses first of all in transportation.
We're still operating most of those plants independently and not taking advantage of the transportation lanes that are crossing those different regions. We think there is significant value running the portfolio as a portfolio as opposed to individual plants and the transportation needs of that plant.
We also think there is significant procurement opportunities associated with the strategic sourcing initiative that we are taking off. Historically our plants have handled their procurement needs individually.
We think there is tens of millions of dollars to be saved by leveraging our strategic sourcing ability. So that's where there is significant amount of focus right now, we think there is capability Robert to continue to drop our cost to be more competitive.
Having said all that we're still relentlessly focusing on each plant's cost structure as well and we can tell you in March we’ve made some significant strides to lower our operating costs and lower our expenses and we're going to continue to look to do that in the quarters to come.
Richard Roberts
Thank Tim, last one from me and I guess kind of tying into the portfolio review process but I think over the last two quarters have showed just the difficulty of having fuels refineries inside of a fixed MLP structure. So I'm wondering just outside of asset sales, is there any other maybe larger structural changes you're thinking about just the way that Calumet should be put together?
Thank you.
Tim Go
A lot of people have asked changes, what I can tell you is we are still structured legally as a fixed distribution MLP and we have no intention to change that structure at this time. We believe it's the right model for our GP.
We believe that we may have to adjust our portfolio to fit that model but that we believe it’s the right model at this point going forward.
Operator
Thank you. Our next question comes from the line of Johannes Van Der Tuin from Credit Suisse.
Your line is now open.
Johannes Van Der Tuin
Hi, thank you for taking my call. Few questions, I’ll start off with - I see the CapEx level is at $125 million to $150 million, is that a run rate CapEx going forward?
Is there possibility that you could get that CapEx lower if you need to? And then kind of on the details of it, is it possible to breakout which part of that CapEx is dedicated to the fuels business versus the specialties business?
Tim Go
Johannes, you are kind of weak, can you speak up just a little bit?
Johannes Van Der Tuin
Sorry about that. Is that better?
Tim Go
That’s better.
Johannes Van Der Tuin
The two question were, one is there anything that you can do going forward to lower your CapEx if necessary over time from this existing level that we have which is $125 million to $150 million or is that kind of the basement level? And is it possible to break out the fuels CapEx spending versus the specialty products CapEx spending?
Pat Murray
Johannes, thanks for speaking up, that’s much better. On a CapEx standpoint $125 million to $150 million is what we're projecting for this year.
Of course this is coming off of high capital spending program over the last three years. I will tell you that included in that $125 million to $150 million range is a significant amount of money associated the SAP conversion that I just mentioned to you.
We broadcast that as a $30 million spend and that's included in that $125 million to $150 million estimate. That’s a one-time spend and we would not anticipate that continuing in the ongoing years.
Having said that, though, Johannes, we're not in a turnaround cycle right now, and obviously as we get into the next turnaround cycle that capital costs will fluctuate back up again associated with those turnaround needs.
Johannes Van Der Tuin
Okay. And then in terms of fuels?
Pat Murray
Yeah, in terms of your question around fuels and specialties, we don't typically break that out, but I can tell you it's primarily fuels and if I had to give you a ballpark figure it's probably 75% fuels.
Johannes Van Der Tuin
Okay. And then I think what has a lot of people nervous in the investor community when it comes to leverage is the leverage amount but also the context which is the fact that we're kind of in a late cycle area in terms of business expansion over a period and there is not multiple years or decades to bring down this leverage.
And because the fuels business is so cyclical there is nervousness there. Could you kind of give a sense of the specialties business and how that usually performs during a downturn and how it's navigated forward?
Tim Go
Yeah, again, Johannes, I would be happy. This is another aspect of our portfolio where we do have a fairly stable earnings arm in the specialties business.
If you look back into that 2008, 2009 time frame where we had the last real economic slowdown, I would say our specialties business maybe was down 10% to 20% associated with that slow down both in volumes and in margins. So we're not immune to the economic slowdowns, but I think in many of our products, going to the cosmetics, going to healthcare, going to daily needs around WD-40 and duct tape and tend to weather through recessionary periods better than other products.
But I wouldn't say that we're immune.
Johannes Van Der Tuin
Okay. And then perhaps as a final question when it comes to the amount of leverage that’s currently in the balance sheet, obviously you've had a target previously of getting to four times below and that's a long way away at this point.
Do you have intermediate targets between point A and Point D at this point that you can kind of target and specific time frames?
Tim Go
Well, I think it’s you are right, the 15 times leverage that we are at today the ballpark is entirely too high. We are completely focused on strategies to get that leverage down.
I will tell you that four times leverage is still our target and we will get back to those levels. It will take some time as you mentioned.
In terms of intermediate goals, what I can tell you is we're focused on free cash flow and as we look at the full year 2016, the stretch goal that I'm giving my management team is we are going to target to try to get to single digits in terms of leverage ratios as soon as we can. That’s the intermediate target we are trying to get to.
Johannes Van Der Tuin
Excellent. Thank you very much.
Operator
Thank you. Our next question comes from Sean Sneeden of Oppenheimer.
Your line is now open.
Sean Sneeden
Hi, thank you for taking the questions. Tim or Pat, I guess thinking about the 8-K that you guys put out kind of announcing the 11.5 issuance, you guys referenced $100 million annualized EBITDA from growth projects that you’ve now completed.
Can you maybe walk us through little bit in terms of how you are planning to get there and if I'm thinking about it right, is that mainly coming from your Montana expansion and what you put into specialty just kind of given the performance that we've seen so far from DPR?
Tim Go
Yeah I think that’s right. I mean I think as with the capital spend that was largely allocated towards the Montana project that we do see Montana contributing the most largely to that incremental performance number.
We do see incremental contributions also from the other projects as well from the expansion of solvents at San Antonio and the expansion of the esters plant in Missouri. So all three we believe have an opportunity to help us in 2016.
So, all three of those now completed projects are online and helpful to us as we continue to try to improve over the course of this fiscal year.
Pat Murray
I will tell you that $100 million, Sean, was based on more like mid-cycle pricing. So clearly we're going to expect the markets not to stay at the depressed levels they are now.
When the markets return, they return back to normal levels. We do expect to be able to be here to capitalize them.
Sean Sneeden
Okay, that’s helpful. I guess maybe just thinking kind of bigger picture I think someone touched on this already, but Tim, strategically can you talk about how you're thinking about fuels.
And I guess your comment before about the fixed distribution model and whether some of your business lines are appropriate for that type of structure that you have. Can you give us a sense of how you're thinking through fuels portfolio?
Tim Go
Sure, Sean. When you look at the fuels refining cycle and where we are in that cycle, it's no surprise that Calumet since the acquisition of Superior in 2012 has really only seen kind of the upside of that cycle until just recently and so as a company we're starting to think through the full cycle effects of having fuels refining in our portfolio.
There is value and a lot of value in our fuels refining business. So please don’t read into those remarks that we don't see any value in our fuels refining group.
In fact the employees in our fuels refining segment have done an outstanding job of operating their plants well, optimizing the plants and capturing the available margins that they can catch over these last six months. They've done a great job and I am really proud of them.
Having said that the refining cycle is cyclical, the volatility of those margins is much wider than what you would typically think of in terms of a fixed distribution MLP. And we are thinking about that in trying to understand how that impacts the overall distribution policy.
So a couple of different ways you might be able to approach this is as we put together a new distribution policy when our balance sheet is repaired and we're ready to go, we may factor that into our distribution policy that we have a stable EBITDA stream for specialty, but that we have an unstable or more volatile EBITDA stream from refining and so we can shape that into our distribution policy as opposed to just treating all EBITDA as the same. So that's one way Sean that we can do that without making a portfolio change as you know lot of people jump to the conclusion of that we're going to go do.
Having said that we are going to consider options to divest some of our assets whether they’d be fuels, whether they’d be oilfield services or whether they’d be specialties. I mentioned this on the call last time too, but any time someone else values these assets higher than we have a value for them in our portfolio through their own synergies and through their own portfolio strength, we need to consider monetizing that value and helping us pay down our balance sheet.
So we're going through a very rigorous process right now to debt internal evaluation both of our fuels, assets, our oilfield services assets and our specialties assets so that we can understand what they have, the true value they have in our portfolio from a long-term perspective including all the self-help and operational excellence projects and initiatives that we're currently embarking on, so that as third parties come and share what they value our assets at we can compare that to our own internal valuations and make a decision of whether there's some sort of opportunity that we ought to pursue. I mentioned that we brought Bruce Fleming, a longtime veteran in the energy industry into Calumet.
He is very experienced in internal valuations of assets and we've asked him as his first project here to go through every one of our assets and help us update our valuations of all our assets in our portfolio.
Sean Sneeden
Okay. That’s actually very helpful.
I appreciate that Tim. Pat, maybe for you, specifically on the 11.5 if I read the indention correctly, it looks like your RP basket there is really only about $50 million which will allow you to go out and repurchase junior debt or what have you.
I guess when you think about your deleveraging plans that you kind of outlined here and kind of factoring the 2018 first call on those 11.5%, how are you guys thinking about how being able to repay debt as we go along here. Is it just through EBITDA growth that you are going to delever or can you talk a little bit about that?
Tim Go
I think, Sean, it’s a combination of strategies. Certainly we see opportunities through achieving the excellence initiatives that we've been talking about on last couple of calls improving and really challenging across the business and portfolio of assets of improving our earnings.
I think that is certainly an opportunity for us to grow into the balance sheet, but I think as Tim said, the internal evaluation of assets and looking at what is in our portfolio does offer potential other avenues for an acceleration of deleveraging strategy. I think it's going to be a combination of factors and it is – there is a relatively small basket available to us for some debt repurchases.
They are relatively small until we are out of these particular tranche of secured notes, but I think that the restricted payment limitations speak to sort of the setting the stage for what it will take for us to be in being successful under this. It is going to be improving our interest coverage, improving our leverage significantly, continuing to bolster our liquidity and grow our EBITDA across the business and not waiting until market factors may give us the benefit of higher earnings in fuels.
So there's definitely a focus across the business not only on cost of our operations, but also our SG&A costs to work the angle from multiple levels of the organization and really looking at these decisions. Small numbers at a time that add up and are significant, so that's how we see the deleveraging strategy occurring over time and ultimately our ability to repay debt and accelerate the overall strategies are going to be dependent on all those – us sort of hitting on all those success factors.
Sean Sneeden
Okay, I appreciate that. Perhaps if I can just squeeze two quick ones in, I guess number one, the collective bargaining agreements that you guys re-signed, are there any expected increased cost associated with that or should we basically see kind of consistent cost?
Pat Murray
Well, we are still in the middle of some of those collective bargaining agreements, Sean, so I don't think it would be appropriate to comment here on the call. Let me just - I think I better just leave it at that.
Sean Sneeden
Okay, that's fair enough. And then maybe just lastly, close to minus $50 million of EBIT DA from fuels, can you help us understand I guess, is there one particular facility within that that was really the problem area for that that kind of cause it or was it kind of across the board?
Tim Go
Well, John, when I look back on the portfolio and I think we’ve been very clear with this in terms of our remarks and in our press release that really there were two main assets that have underperformed and have had kind of consistent challenges. North Dakota refinery and our oilfield services.
So nothing changed in the first quarter from that standpoint. I would say from the rest of the fuels assets, they all had challenges in the first quarter associated with the market conditions, but I wouldn’t point to any one in particular that we would say we were specifically worried about or we thought there was any significant change in their competitive position.
Operator
Thank you. Our next question comes from the line of Mike Gyure of Janney.
Your line is now open.
Mike Gyure
Great, thanks. Can you just talk a little bit, you talked about sort of the free cash flow process and what you’re thinking there, can you specifically maybe go into a little more detail on the inventories and specifically maybe what you’re budgeting or your goal is to sort of get that inventory level down and free up some working capital there?
Pat Murray
Yeah. Mike, I’d be happy to talk about that.
So we’ve built significant amount of inventory in the first quarter, primarily associated with asphalts. We do believe that with the pending asphalt season here in the second and third quarters that we will be bringing those asphalt inventories back down and that we would be able to monetize that working capital as expected.
We also -- most people don’t really appreciate this, but when we started up the Montana expansion project, we are moving some of those products from Montana to areas in the West Coast, which generally require basically some working capital as we transport those materials to the West Coast and that has increased our overall inventory levels slightly as a result of that, additional movement that is happening, that, we believe will continue in the working capital inventory, but by far the majority of the inventory that we built in the first quarter, we anticipate running off ratably here in the second and third quarters.
Operator
Thank you. Our next question comes from the line of Brad Heffern of RBC Capital Markets.
Your line is now open.
Brad Heffern
Hi, everyone. Tim, I was hoping we could just expand a little bit upon an earlier answer you gave about potentially if the distribution was reinstated in the future and then you said earlier on the call that you think that fixed rate is correct structure for the business, but it sounded like potentially you are saying that there will be a fixed rate component in the distribution related to the specialties business, and then a variable rate related to the fuels business, did I understand that right or could you sort of square that for me?
Tim Go
Brad, you did understand that right. I was referring to that as one of the options.
So again, don't go thinking that management or the board has made any decisions at this point on distribution. It's way too early in the process for us to even be thinking along those lines, as we have 100% of our focus on repairing the balance sheet right now.
So what I was trying to explain was some of the options that we could consider as we move forward and get to a point where we can start thinking about restarting the distribution again. So Brad, you are right, and then in terms of what I was referencing.
But it was only an idea and an option that is available to us, no decisions have been made or discussed at this point.
Brad Heffern
Okay, understood. I know it's probably going in to the future.
Thinking about the leverage target, obviously the forex has been around for a while and I think that that is similar to what a lot of MLP peers used, but I'm curious if the recent downturn has made you rethink that in any way. Obviously the fuels business is more volatile than maybe the businesses a lot of your peers have and so why is it that 4 is the right target and maybe not something lower than that?
Tim Go
Well, I think that you’re correct in saying that 4 is a number that we have stated for a while, we do think that makes us very competitive with our fixed distribution MLP peers. We certainly see 4 times as something from a long-term health as being attractive, we think it lines up sufficiently with the types of assets that we own in specialty products, but we have certainly operated in the not-too-distant past at leverages rates that are lower than that.
We see the 4 times as a target, but our ability to move even lower into the leveraged profile certainly would not be an unwelcome thing for us. So we do think that with lower leverage brings more flexibility and certainly will lower our cost of capital.
So we’re not necessarily bound by once we achieved the 4 times operating level, and we certainly have done that in our past.
Pat Murray
I would just add that, asked about intermediate targets, we are focused on getting back to single digits right now. After we do that, then we’ll be focused on getting to 4 and after that, we can talk about if it’s the right level or not, but we definitely have our sights on intermediate milestones right now.
Brad Heffern
Sure, understood. And then I guess finally with regard to operating expenses, I think Tim, you mentioned that we’ll expect to see some of the benefits of the new programs in the second quarter, but when I look at the first quarter numbers, the SG&A and transportation were all down pretty substantially quarter-over-quarter.
So I'm curious, is that a result of the new plan that you are putting in place or is that more related to the rolling off of other growth projects?
Tim Go
No, Brad. That is definitely a concerted effort that we have been working on here for the last several months.
Again, I am very proud of our employees for understanding the sense of urgency and managing their business in the way they need to, cutting out waste where we can find it and making us more competitive. What I would tell you is a gain, while we continue to do that as plant by plant, asset by asset basis, we do think a larger price is in the cross plant and overall coordination of things like procurement and transportation across multiple assets.
And that we are going to need to have some leadership at the corporate level to help us manage those kind of cross functional cross plant costs.
Operator
Thank you. And our next question comes from the line of Gregg Brody of Bank of America.
Your line is open.
Gregg Brody
I'm sorry, have you given a timing on when do you expect to conclude the comprehensive review of your portfolio? I don't know if you have mentioned it on the call.
Tim Go
Gregg, good question. We have not mentioned it on the call.
What I told you is, Bruce Fleming has begun that refresh process. I would also argue that it’s a continuous refresh process.
Once we get through this first round, we will continue to keep it active as one of the tasks that Bruce will have. What I can tell you is probably over the next three months or so, we should have a much better view of what those values are in our own portfolio, but in parallel to that, we will continue to drive our operations excellence initiatives, continue to fine tune what we think the price is at each of these assets and bake those in to the internal valuation process.
Gregg Brody
That's helpful. And then a few more, just bigger picture, you mentioned your part in the asphalt business, could you tell us how good the environment is today in terms of the supply relative to demand.
And I know you guys access asphalt, which I think some others do as well, just curious how oversupply the market may be or if it's not? And maybe within there, could you break out how much -- is it possible to break out how much of an impact it’s historically had to the second and third quarter and sort of a dollar amount to think about on the crack spread?
That's sort of the bigger question.
Tim Go
Let me start with your kind of with your current status question on asphalt so far. We have seen increased asphalt inventories across-the-board.
Of course, we typically see that at this time of the year and we start bidding the asphalt contracts for the summer about now. We're starting to see some of those bids go out at fairly attractive prices, but I would argue that asphalt inventories are still high and we haven't placed all of our asphalt yet either.
We had a great year last year in asphalt. I think that's where a lot of people are pointing back to.
There is no reason that this year shouldn't be a good year as well and I think that's where a lot of the comments are coming as the transportation bill is passed and as the price of crude remains low to favor asphalt, but I will tell you that we’re still in the middle of bidding on business right now and it’s probably too early to be able to indicate if it's going to be as strong as last year or any relative basis to last year.
Gregg Brody
That's very helpful. Are you willing to break out how much it's been in second and third quarter?
Tim Go
Gregg, we tend not to give guidance in that area. What I can tell you is we have built $15 million worth of asphalt inventory in the first quarter and we would expect to be able to run that off here in the second and third quarters, but otherwise I don't think we're prepared to give any guidance on the impact of the asphalt.
Gregg Brody
Got it. And just last one for you, the Dakota JV, not a lot talk about that, are there any capital needs associated with that business and how are you thinking about and just in the context also the, I know there is a term loan that is coming due in June, I was wondering if there is -- what's happening there?
Bill Anderson
Well, with respect to Dakota Prairie, we have continued to focus along with our partner, MDU on making that refinery as competitive as possible. There is the revolver, the revolving credit facility where the joint venture is the borrower is up for renewal at the end of June, so that's a conversation that we are having with our partners and the timing with respect to that.
So there is certainly a focus on trying to improve the situation there. We are treating that as an entity that needs to make its own way in terms of capital contributions and certainly given Calumet’s own liquidity profile needs, we need to make sure that our needs are satisfied and that Dakota Prairie can be as competitive as possible on its own.
So we have not made any additional contributions in the first quarter of significance to Dakota Prairie. As Tim said, it remains an underperforming asset and remains a concern for us.
Gregg Brody
Got it. And one small thing, [indiscernible] Are you planning on paying those back in this quarter, do you have some time to pay that back?
Noel Ryan
The note, the unsecured note from related party is slated for repayment over the course of the year. So we reflected it as a current liability in our balance sheet and there is an intention to repay it according to its schedule.
Just reminding, Gregg, a portion of that is actually note playable and another two thirds of that $75 million is comprised of basically prepayments on asphalt inventory to a related party. So some of it is, I think about 25 million, 27 million thereabouts is actually cash loan where the other two-thirds is prepayment on inventory.
Tim Go
It might be slightly flipped there. It's more heavily focused on actual note component.
We look at that as a current year obligation. We intend to repay it over time, but as Noel said, there is a component that's involved in the commercial activity between the Heritage Group as a purchaser of some of our asphalt.
Pat Murray
Yes. And then Gregg, following up on your asphalt question, let me just say, while we’re not prepared to give any guidance, we have talked about the partnerships that we have been forming with retail asphalters, both on the west coast and on the east coast.
We believe that is part of our overall heavy up strategy, knowing that we are going to have more volume of asphalt coming out and the partnerships were lining up starting this year, we believe will help us to place our asphalt in attractive locations.
Operator
Thank you. I'm showing no further questions at this time.
I'd like to hand the call back over to management for any closing remarks.
Noel Ryan
Thank you, Nicole and thank you everybody for joining on today’s conference call. If you have any questions, please contact our IR department and we will assist you.
That concludes the call. Have a good day.
Operator
Ladies and gentlemen, thank you for participating in today's conference. That does conclude today’s program.
You may all disconnect. Have a great day everyone.