Holly Energy Partners, L.P.
Q2 2016 Earnings Call Transcript

Published: 3 Aug 2016

[Operator:]

Welcome to the Holly Energy Partners Second Quarter 2016 Conference Call and Webcast. At this time, all participants have been placed on a listen-only mode. The floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Craig Biery. Craig, you may begin your conference.

[Craig Biery:]

Thanks, Marcella. And thanks to each of you for joining this afternoon. I am Craig Biery, Investor Relations for Holly Energy Partners. And welcome to our second quarter 2016 earnings call. Joining us today are Mark Plake, President; and Rich Voliva, Senior Vice President and Chief Financial Officer. This morning, we issued a press release announcing results for the quarter ending June 30, 2016. If you would like a copy of today’s press release, you may find one on our website at HollyEnergy.com. Before Rich and Mark 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 2, 2016. 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 discussion 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 Rich Voliva.

[Richard Voliva:]

Thanks, Craig, and thanks to each of you for joining the call this afternoon. On July 22, Holly Energy Partners announced its 47th consecutive quarterly distribution increase to $0.585 per unit. This distribution, which will be paid on August 12 to unitholders on record as of August 1, represent an acceleration in year-over-year distribution growth to 7.3% and continued progress towards our 8% distribution growth rate target. For the second quarter of 2016, HEP generated distributable cash flow of $55.7 million, an increase of $8.4 million or 18% over the same period last year. Distribution coverage for the quarter was very strong at 1.17 times. Net income attributable to HEP for the second quarter was $39.1 million, compared to $30.2 million for the same period in 2015. This increase was driven by recent acquisition, including interest in the Frontier, Osage, and Cheyenne Pipelines, the Tulsa crude tanks acquired in March, and the refinery process units drop down in the fourth quarter of 2015. Operating expenditures in the period totaled $27 million, including $1.7 million of OpEx reimbursed by HollyFrontier. Our capital expenditures for the quarter were $14 million, including approximately $2.8 million in maintenance CapEx and $4.1 million of reimbursable CapEx. For the full year of 2016, we expect to spend $65 million to $85 million in total CapEx excluding acquisition. This includes $10 million to $15 million of maintenance capital, and $15 to $20 million of reimbursable CapEx. As of June 30, HEP had approximately $1.1 billion of total debt outstanding comprised of $300 million of 6.5% notes due in 2020, and approximately $786 million drawn on our credit facility. Interest expense was $11.3 million in the second quarter, representing an increase of $2.2 million over the same period in 2015. In July, HEP issued $400 million of 6% unsecured senior notes due in 2024 to repay borrowings on its revolving credit facility. We are very pleased with this issuance and are well positioned for long-term growth. On May 10, 2016 we established a continuous offering program, where HEP may issue common units representing limited partner interests up to an aggregate gross sales amount of $200 million. As of June 30, HEP issued approximately 445,000 units under this program, providing $15 million in gross proceeds. For the second quarter of 2016, we recognized roughly $300,000 of deferred revenue from prior shortfalls billed to shippers. As of June 30, HEP carried $4.8 million in deferred revenue on our balance sheet. In the third quarter of 2016, we anticipate recognizing approximately $250,000 of deferred revenue. Following the July 1 2016 FERC and PPI tariff adjustments, long-term minimum commitment contracts will result in consolidated annualized payments of approximately $300 million. Now, I’ll turn the call over to Mark for a few comments.

[Mark Plake:]

Thanks, Rich. We are pleased to report a strong financial performance for the second quarter. As Rich mentioned, we recently announced a $0.01 increase to our quarterly distribution, marking the 47th consecutive distribution increase since our IPO in 2004. We continue to execute on our distribution growth strategy and remain confident in our ability to continue to grow, while maintaining our long history of delivering solid financial results. On June 3, 2016 we acquired a 50% interest in Cheyenne Pipeline LLC, owner of the Cheyenne Pipeline. The 87 mile 80,000 barrel per day crude oil pipeline runs from Fort Laramie to Cheyenne, Wyoming, and supplies HollyFrontier’s Cheyenne refinery with Canadian crude. Following the closing, HFC and Cheyenne Pipeline LLC executed a long-term extension and increase of HFC’s minimum volume commitment on the Cheyenne Pipeline. Also, it is important to note that the pipeline has spare capacity, allowing for future potential growth once the connection to the Saddlehorn Pipeline is complete. We continue to leverage our logistics capabilities in HFC’s refining footprint to create unique third-party acquisition opportunities as evidenced by our recent purchases of the Cheyenne Pipeline and Tulsa crude tanks. In addition to third party opportunities, we are targeting a second-half 2016 dropdown of certain assets related to the Woods Cross refinery expansion which was completed last quarter. With the recent launch of our at-the-market equity program, newly issued bonds and liquidity from our revolver, HEP is in a great position to capitalize on future growth opportunities. We are now ready to turn the call over to Marcella for questions.

[Operator:]

The floor is now open for questions. [Operator Instructions] Theresa Chen from Simon & Co, your line is open.

[Theresa Chen:]

Hi, this is Theresa Chen from Barclays. My first question is related to the broader topic of refinery run cuts in the industry in light of excess supply in the market. Can you just comment on if that’s something the parent is thinking of doing in the second-half, just in the context of the fact that there is a portion of volumes tied to the parent? But that’s currently above the MVCs and I’m trying to gauge how much downside there might be for the partnership if HFC decides to lower its utilization.

[Richard Voliva:]

Hey, Theresa, this is Rich. What I would say is obviously this is really a question for HollyFrontier and not HEP. That said, obviously, HollyFrontier’s refineries are generally in advantaged market. So we feel very good about our customer in general. And obviously our downside as long as these plants are running is pretty limited. So I’d really - I’d direct you to tomorrow’s call at HFC.

[Theresa Chen:]

Okay. On HEP’s plan to drop down for the second-half, can you comment on your plans for financing and what kind of valuation multiple we should expect?

[Richard Voliva:]

Sure. So on financing, obviously, we’re really pleased with the bond. We just got done in the month of July. So generally, speaking we’re trying - we’re planning on trying to fund our capital on our acquisitions 50-50 debt and equity. Obviously, our debt side of our book is in great shape right now. We have the ATM program in place, so we’ll expect and continue to operate that. And really as we get to then the dropdown and the timing, still a little bit of flex, obviously it will be later this year. And the size, we’ll see where we are with respect to credit metrics and everything and take a look at if we need additional equity beyond the ATM program. With respect to valuation, I think we continue to guide you that this is - it’s a refinery dropdown asset and we expect this to look very much in line with that peer group of dropdown multiple.

[Theresa Chen:]

Okay. And then just following up on your comment on size, you had in your Investor Day previously that $200 million number annually of dropdowns. Is that still a good number to model?

[Richard Voliva:]

Yes. And I think the one thing I would say there is that’s going to be lumpy. So obviously, we’re going to have a larger number this year. And then, we’ll kind of come to next year as we go. I think that’s what we had targeted on a smoothed out basis if you will. So I think that will be a little more erratic than that, but broadly speaking, it’s probably reasonable.

[Theresa Chen:]

Great, thank you. And lastly, would you mind just giving some color on your pipeline and third-party terminalling volume metrics? Just any incremental information about what caused the decline sequentially would be great?

[Richard Voliva:]

Sure. On terminals in particular, yes, I was going to say, so obviously we executed that transactional deal with HollyFrontier of the Osage dropdown in El Paso. So I think terminal volume, any decline there is primarily related to that.

[Theresa Chen:]

And then on the pipeline?

[Richard Voliva:]

The pipeline side, sure, obviously we saw some good growth in a couple different spots, thanks to UNEV. What I would say is then on the crude and intermediate pipes that tie into HollyFrontiers in Navajo refinery, roughly they’re going to be flat. Around this area last quarter, there was not much movement either way. Generally, we expect that to be pretty flat in this range going forward.

[Theresa Chen:]

Great, thank you very much.

[Operator:]

Your next question comes from Parisa Alizadeh from Simmons & Co. Your line is open.

[Parisa Alizadeh:]

Hi, good afternoon. I guess, my first question is around the acquisition of the 50% interest in Cheyenne. Could you maybe quantify like the cash flow uplift from this asset that you’re expecting over the second-half of 2016, maybe in the 2017 with all the future growth opportunities coming online, once Saddlehorn’s connected?

[Richard Voliva:]

Sure. So, Parisa, what I’d say - I think what we’d say there is HollyFrontier Cheyenne refinery is the primary customer currently on that line. Generally speaking, HFC runs about 40,000 barrels a day of Canadian crude. There’s a published tariff in there, last I looked it was around $0.96, so you can quickly back into a revenue number of $13 million, $15 million, obviously were 50% of this pipe. Saddlehorn is just about to get started up. So we would expect that then to be upside over time, obviously right now with crude prices where they are, there is not a lot of incremental drilling in the Bakken, for example. So that’s - then in the long-term that we’re optimistic that we will see some volumes come down to Cheyenne and get on the Saddlehorn ultimately.

[Parisa Alizadeh:]

Okay, great. And then moving over to UNEV at the Q1 call, I remember you talked about how UNEV in third-party volume growth would be expected to bring on about $10 million, $15 million of incremental revenue over the following six months. Could you maybe talk about approximately how much of that was recognized in Q2 and how much more you could expect in Q3 in the second half of 2016?

[Richard Voliva:]

Sure, that $10 million to $15 million is less than an annualized number.

[Parisa Alizadeh:]

Okay.

[Richard Voliva:]

We saw, I’d say a little bit of it in the second quarter, not an enormous amount. We fully expect UNEV to remain a very seasonal pipeline for the fourth and first quarter. So we’ll see much higher volumes in the second, third. And really that - we expect to really feel that impact in the second half so as the HollyFrontier expansion is online and moving product ultimately, whether it’s HollyFrontier or third-party on the UNEV.

[Parisa Alizadeh:]

Okay. And I guess, along the lines with the third-party volumes on UNEV. How is that trending so far, what can we expect through the course of 2016?

[Richard Voliva:]

Sure. We continue to see some growth there. We are finishing up a connection with the last refiner in the Salt Lake Valley that was not connected to UNEV, so everybody online. That said, obviously it’s - UNEV is a little bit in arbitrage play. And with some of the downtime we’ve seen in the Salt Lake City market, Salt Lake City cracks had been pretty attractive. So we have seen growth on third-party volumes on UNEV, not an enormous amount, just given the economics currently. And we’d expect to see some more in the second-half. Again, really the winter time is when we expect to see it.

[Parisa Alizadeh:]

Okay. And then, I guess my last question is kind of a follow-up to that. With Torrance refinery back up over the past few weeks, do you see the Calnev pipeline as a potential determinant to demand on UNEV over the remainder of the year?

[Richard Voliva:]

Yes, potentially, obviously at the end of the day, the play for UNEV and the market it’s capitalizing on is the fact that Salt Lake City barrels are lower cost than LA basin barrels into Los Vegas ultimately. And that economics - those economics remain in place. Yes, there’s no question though that what’s going on in LA and Calnev does impact UNEV ultimately.

[Parisa Alizadeh:]

Okay, great. That’s it for me. Thanks a lot.

[Operator:]

[Operator Instructions] There are no further questions at this time. I turn the call back over to the presenters.

[Craig Biery:]

Thank you all for joining us on the call today. If you have any follow-up questions, please to reach out to Investor Relations, otherwise we look forward to sharing our third quarter results with you in November.

[Operator:]

This concludes today’s conference call. You may now disconnect.