Holly Energy Partners, L.P.
Q2 2018 Earnings Call Transcript

Published: 1 Aug 2018

[Operator:]

Good afternoon, and welcome to Holly Energy Partners Second Quarter 2018 Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the presentation. [Operator Instructions] Please note that this conference is being recorded. It is now my pleasure to turn the floor over to Jared Harding. Jared, you may begin.

[Jared Harding:]

Thanks, Thasha. Thank you all for joining our second quarter 2018 earnings call. I am Jared Harding with Investor Relations for Holly Energy Partners. Joining us today are George Damiris, President and CEO; and Rich Voliva, Executive Vice President and CFO. This morning, we issued a press release announcing results for the quarter ending June 30, 2018. If you'd like a copy of today's press release, you may find one on our website at hollyenergy.com. Before George and Rich proceed with their remarks, please note the Safe Harbor disclosure statement in today's press release. In summary, it says statements made regarding management expectations, judgments or predictions are forward-looking statements. These statements are intended to be covered under the Safe Harbor provisions of Federal Securities Laws. There are many factors that could cause results to differ from expectations, including those noted in our SEC filings. Today's statements are not guarantees of future outcomes. Also, please note that information presented on today's call speaks only as of today, August 1st, 2018. Any time-sensitive information provided may no longer be accurate at the time of any webcast replay or reading of the transcript. Finally, today's call may include discussions of non-GAAP measures. Please see today's press release for reconciliations to GAAP financial measures. And with that, I'll turn the call over to George.

[George Damiris:]

Thanks, Jared. And thanks to each of you for joining the call this afternoon. HEP generated solid earnings in the second quarter, which allows to continue our track record for distribution growth, increasing our distribution to $0.66 per unit. This distribution march the 55th consecutive distribution increase since our IPO in 2004. Despite typical seasonality experienced in the quarter, we are encouraged by the underlying fundamental of our business, which provides stable cash flows underpinned by long-term minimum volume commitments. Our primary focus for 2018 has been leverage our existing footprint to grow organically. I am happy to report that we have successfully completed the previously announced the format of the Malaga crude oil pipeline system, the expansion on the Salt Lake City and Frontier pipelines. These projects will now be completed ahead of schedule but under budget as well, which is a testament for the hard work and dedication of our team. As we look towards the second half of 2018, HEP plans to continue expanding our logistics infrastructure to serve the growing distillate demand in the Permian Basin. In May, we announced our intention to construct a new truck loading rack in Orla, Texas. This facility will be able to deliver up to 30,000 barrels per day of diesel that would otherwise be rail or tuck into the area. Construction is underway, so we expect this rack to be operational by the end of the year. With regard to the third party M&A, we continue to take a discipline approach to leverage our relationship with HollyFrontier to explore our position opportunities. In the second quarter, we completed the acquisition of Catoosa Lubricants Terminal of approximately $5 million. Terminals is roughly 20 miles from HollyFrontier's lubricant plant and HollyFrontier is the primary customer. Acquisitions like Catoosa potential opportunities, we believe there are more opportunities across the HollyFrontier family. And with that I'll turn the call over to Rich.

[Rich Voliva:]

Thanks George. As previously mentioned, on July 19th, Holly Energy Partners, announced a quarterly distribution of $0.66 per unit, which represents 4.3% increase over the distribution of the second quarter of 2017. Distribution is scheduled to be paid on August 9th, the unitholders on record as of July 30th. During the quarter, HEP generated distributable cash flow of $65 million, $4 million higher than the same period last year. Our distribution coverage ratio was 0.97 times for the quarter. Coverage was adversely effected by typical seasonal factors on UNEV, while we expect a significant improvement in the second half of 2018 to the contractual tariff escalators effective on July 1st. We continue to expect our coverage ratio to be 1 times or higher for the full year 2018. Capital expenditures for the quarter were $8.9 million including approximately $1 million maintenance CapEx and $2.3 million of CapEx reimbursed by HollyFrontier. For the full year of 2018, we report total CapEx between $16 and $70 million, which includes $8 million of maintenance CapEx and $7 million of reimbursement CapEx. The second quarter of 2018, we recognized $400,000 of differed revenue for prior shortfall billed to shippers. As of June 30th, HEP carried $4.4 million in differed revenue on our balance sheet and in the third quarter, we anticipate recognizing less than a $100,000 of differed revenue. Interest expense increased $3.9 million, compared to the second quarter of 2017, due to ports of tack-on offering of an additional $100 million of our 6% senior notes which was completed in the third quarter of 2017, as well as higher interest rates on our revolving credit facilities. As the end of the second quarter, our leverage was roughly 4.2 times debt to trailing 12 months adjusted EBITDA and we still expect leverage to be at 4 times by the end of 2018. Including cash and revolver availability, our current liquidity is over $500 million. We are confident that this strong liquidity position will enable us to achieve our planned organic growth, despite the weak equity market. Now with that I will turn the call over to Thasha for questions.

[Operator:]

Thank you. [Operator Instructions] Thank you. And our first question comes from the line of Jeremy Tonet from JP Morgan. Your line is open.

[Jeremy Tonet:]

Good afternoon.

[George Damiris:]

Good afternoon, Jeremy.

[Jeremy Tonet:]

I was just hoping, you could touch a bit more on the feasibility study for the Permian product pipeline that you guys had just recently press release there kind of what steps going forward, so if you are looking for and when do you expect the whole process to conclude?

[George Damiris:]

Yeah, Jeremy, this is George. I think it's a typical feasibility study process where we're looking that only at our cost to get to other markets such as Midland, but also the market demand in pricing to get to those markets. So we're doing work on both sides of the equation to develop our cost and develop the benefits volumes in potential tariff for HEP. We don't have a specific guideline, but we expect to make good progress over the next quarter or so.

[Jeremy Tonet:]

That's helpful. Thanks. And as you think about the balance of the year here, just wondering if there is any items we should be watching out for those which finally had issues, this quarter here, are there any turnarounds or other items we should be thinking about in the back half of the year? What you kind of expect as normal seasonality to HEP?

[George Damiris:]

So Jeremy, we generally we expecting more seasonality but one think I'll call out is we do have a planned turnaround and you just see those finally really in the fourth quarter. We don't expect that to be huge impact given the minimum volume commitments in and around that assets.

[Jeremy Tonet:]

Great. That's it for me. Thanks for taking my questions.

[George Damiris:]

Thank you, Jeremy.

[Operator:]

And our next question comes from the line of Justin Jenkins of Raymond James. Your line is open.

[Justin Jenkins:]

Great. Thanks. Good afternoon, guys. I guess maybe quickly following-up on Jeremy's question on diesel plan on Permian. George, are you concerned about the number of competing project that are looking to supply the Permian over the long term or how should we think about kind of the medium to longer term pictures of supply demand for diesel?

[George Damiris:]

Well, I think demand is obviously growing in the area. We are familiar with this market through the marketing we do through Artesia refinery. We think our all of the first natural extension from that, and that we already have tankage in that area there is pipeline supply directly from HFCs refineries, so just a matter of building the rack as we've previously announced. We're seeing demand from not only our HollyFrontier owners but also other customers to get diesel into the area. It's - the market is short product, it's been trucked and railed from other markets. The closer has been get to the actual drilling rig or large using the diesel the better especially is top drivers are short supply in the Permian. There is always going to be competition for business. We are afraid of competition and we think we're well positioned to take advantage of that opportunity.

[Justin Jenkins:]

Perfect. That's great. Transitioning on the credit side, you mentioned shortage of truck drivers in the Permian. And at least made my next question on maybe it's for HFC to call them on, but I'm curious if there is an opportunity to get more access to Permian barrels across the rest of the HFC refining system beside that?

[George Damiris:]

I am sure what you get that Justin. You're talking about getting Permian barrels out to the other refineries or?

[Justin Jenkins:]

Yes.

[George Damiris:]

So I think we done a quiet a bit of that in the past, again it's better last for HFC to talk about that HEP, but HFC is bring barrels up from the Permian to Cushing primarily for the all the way down.

[Justin Jenkins:]

Perfect. I'll leave it there. Thanks, guys.

[George Damiris:]

Thanks, Justin.

[Operator:]

[Operator Instructions] Our next question comes from line of Theresa Chen from Barclays. Your line is open.

[Theresa Chen:]

Hi. Just wanted to ask about the parents plans to acquire Red Giant Oil and given the logistics assets that sit there, any idea or intention for some these assets to maybe make its way to NLP?

[George Damiris:]

Yeah. I think we're probably better half leaving that question to the parent tomorrow.

[Theresa Chen:]

Okay. Thank you.

[George Damiris:]

Anything else, Thasha?

[Operator:]

And as there are no further questions, I would like to turn the call back over to you George for any closing remarks.

[George Damiris:]

Thanks again everyone for joining. Feel free to reach out our Investor Relations if you have any follow-ups.

[Operator:]

Thank you. This concludes today's conference call. You may now disconnect. Thanks for joining and have a great day.