Holly Energy Partners, L.P.
Q3 2016 Earnings Call Transcript

Published: 2 Nov 2016

[Operator:]

Welcome to the Holly Energy Partners Third 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 questions following the presentation. [Operator Instructions] Please note that this conference is being record. It is now my pleasure to turn the floor over to Craig Biery. Craig, you may begin.

[Craig Biery:]

Thanks, Nicole. And thanks to each of you for joining this afternoon. I am Craig Biery, Investor Relations for Holly Energy Partners and welcome to our third quarter 2016 earnings call. Joining us today are Mark Plake, President; and Rich Voliva, Senior Vice President and CFO. This morning, we issued a press release announcing results for the quarter ending September 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, November 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.

[Rich Voliva:]

Thanks, Craig, and thanks to each of you for joining the call this afternoon. On October 1, Holly Energy Partners increased its quarterly distribution to $0.595 per unit. That distribution will be paid on November 10 to unit holders on record as of October 31 and represents year-over-year distribution growth of 7.2%. We continue to progress towards our target of 8% distribution growth. Net income attributable to HEP for the third quarter was $34.8 million compared to $34.3 million for the same period in 2015. The increase was driven by recent acquisitions including the El Dorado processing units, Tulsa crude tank and joint venture interests in the Osage, and Cheyenne pipeline. For the third quarter, distribution coverage fell to an artificially low of 0.93 times due to the timing of financing for the Wood Cross drop down. In short, we felt the full burden of the necessary financing expenses during the quarter, but did not see any of the cash flows from the drop down. As these are income through in the fourth quarter, we anticipate that our coverage ratio will revert to historic levels of 1 to 1.2 times. Specifically in the third quarter, HEP generated distributable cash flow of $49.3 million compared to $49.7 million in the same period last year. The decrease was driven primarily by the increased interest expense associated with our July debt issuance. During the third quarter, we raised over $8 million of common equity through our continuous offering or ATM program. In October, HEP issued just over $100 million of common equity through private placement to Tortoise Capital Advisors. We do not anticipate further equity financing needs for the remainder of 2016. Operating expenses in the period totaled $28 million and depreciation and amortization totaled $15.5 million. Going forward, we expect the Wood Cross drop down will add an incremental $6 million of OpEx and $3 million of depreciation per quarter. Our capital expenditures for third quarter were over $15 million, booking approximately $4 million in maintenance CapEx and $4 million of reimbursable CapEx. We expect to spend between $60 million and $65 million of total capital excluding acquisitions for the year. This includes $10 million to $15 million of maintenance CapEx and $10 million to $15 million of reimbursable CapEx. As of September 30, HEP had approximately $1.1 billion in total debt outstanding comprised of $400 million of 6% notes due in 2024, $300 million of 6.5% notes due in 2020 and approximately $370 million drawn on our credit facility. For the third quarter of 2016, we recognized roughly $240,000 in differed revenue from prior short falls billed to shippers. As of September 30, HEP carried $6.7 million in deferred revenue on our balance sheet. And in the fourth quarter of 2016, we anticipate recognizing approximately $250,000 of deferred revenue. With that I’ll turn the call over to Mark for some few comments.

[Mark Plake:]

Thanks Rich. Good afternoon everyone and happy birthday Craig. We are pleased with our solid financial performance in the quarter. As rich mentioned, we announced $0.01 increase to our quarterly distribution for the third quarter representing the 48th consecutive distribution increase since our IPO in 2004. This increase demonstrates our continued commitment to achieving a targeted 8% distribution growth rate. Through its long history of building, maintaining and operating midstream assets, HEP has created a solid business foundation. Our positive growth that is reinforced by solid fee-based model coupled with minimum volume commitments supporting almost 80% of our revenues. I would like to highlight the previously announced acquisition by HEP of certain Wood Cross refinery assets on October 1. These assets includes the newly constructed crude, fluid catalytic cracking unit and polymerization unit. HFC and HEP have entered into 15-year tolling agreement for each respecting unit containing minimum quarterly throughput commitments from HFC. These new units are expected to generate annual EBITDA of approximately $32 million in 2017 representing a transaction multiple of 8.5 times. This acquisition not only provides HEP with significant earnings potential but demonstrates strong relationship between HEP and HollyFrontier. We expect 2017 will bring external opportunities for growth in the midstream space. Given the quality of our assets, our talented employees and a financially strong and supportive partner in HollyFrontier, we believe HEP is in a position to participate. Over the past 12 months, we've had great success adding stakes in the Frontier, Osage and Cheyenne crude pipelines, acquiring additional storage assets at Tulsa as well as adding the Woods Cross Refinery assets we just discussed. In addition to bolt-on acquisitions the dropdown from HFC, we plan to evaluate larger external opportunities with the long-term goal of reaching $500 million in EBITDA. We're now ready to turn the call over to Nicole for questions.

[Operator:]

[Operator Instructions] Your first comes from the line of Brian Gamble. Your line is open.

[Brian Gamble:]

Good afternoon, guys. Maybe we could start where you just left off, larger external opportunities, what - in this current market, given volatility in pretty much every commodity, as you look out into ‘17 and think about your positioning in it, what pieces of the market, what types of assets excites you the most, either opportunistically or strategically or obviously a combination of both as well.

[Mark Plake:]

Sure. So I think, Brian, generally speaking, we view our biggest and best opportunities are probably in the geographies where we currently operate, call it the Rockies, the midcontinent and the Permian Basin, really in Delaware within the Permian Basin. We think we've got a great staff of operators who, with experience across both liquids, gas storage pipelining, you name it. So we've got a great team and we can have a lot of value in those geographies where we’ve got very clear operating synergies. That’s what we’ll be looking as a market and we are optimistic for next year.

[Brian Gamble:]

Any sort of - is there any limitation, as you see them today from a capital market standpoint or is it just about finding the right opportunity?

[Mark Plake:]

No, we feel like we’ve had some pretty good success with the capital markets this year and feel like they're open to us. But to your point, it’s more an exercise and finding those opportunities and finding the ones that are really going to make us and our stakeholders, returns they want to see.

[Brian Gamble:]

Great. And then Rich, you gave us a couple of numbers on the Woods Cross benefit, do we have the EBITDA number, you gave us the OpEx and the D&A number moving forward. As those assets start to contribute this quarter, I guess how should we think about - how should we think about it from a refining standpoint? I know you've taken out a lot of the variability due to the way that that contract is structured between you guys and HFC. Are there any points that you want to clarify as to how to best think about any potential moving pieces on a quarter-over-quarter basis or are you taking the stance that, in general, it's going to be a relatively consistent $8 million give or take a little bit quarter - every quarter with really only outliers being extreme circumstances at the refining complex?

[Rich Voliva:]

Yeah. I think Brian to your point, we're expecting this to be a pretty consistent and pipeline like, if you will, revenue stream and earnings stream going forward. These contracts are set up very much like pipeline contracts, if the units are available to run, the minimum volume commitment in force. The obvious exception here will be turn around periods, because again just like a pipeline if we have maintenance stake, those minimums were not enforced. But obviously, refinery units are going to be on a typical three to five year turnaround cycle. So we've got several years before that’s going to be something to think about.

[Brian Gamble:]

Right. And last one from me, the deferred number at Q3 was 6.7, I think I got this right. You're expecting to recognize just 250,000 in Q4, is that right?

[Rich Voliva:]

Yeah. Oh, I’m sorry, it looks like my number was wrong. It’s going to be a little more like 2.5 million.

[Brian Gamble:]

Yes. That was hopefully what I was getting at there, and you recognized how much during Q3?

[Rich Voliva:]

It was about $0.25 million.

[Brian Gamble:]

Okay. The $0.25 million was in Q3, that was down quarter-on-quarter. We should be back up to kind of a more consistent 2.5 million.

[Rich Voliva:]

Generally speaking, the fourth and the first quarter is when we tend to recognize the most and that's really the two specific assets, one, our contractual arrangements for our lawn, and the two, [indiscernible] itself.

[Brian Gamble:]

Great. That’s helpful, Rich. I appreciate it guys.

[Operator:]

[Operator Instructions] There are no further questions at this time. I will turn the call back over to Craig for closing remarks.

[Craig Biery:]

Thanks again for joining the call today. If you have any follow-up questions, please reach out to Investor Relations. Otherwise, we look forward to sharing our fourth quarter results with you in February. Thank you.

[Operator:]

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