Holly Energy Partners, L.P.
Q4 2016 Earnings Call Transcript

Published: 21 Feb 2017

[Operator:]

Welcome to the Holly Energy Partners Fourth Quarter 2016 Conference Call and Webcast. At this time, all participants have been placed in 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, Kevin. And thanks to each of you for joining this afternoon. I am Craig Biery, Investor Relations for Holly Energy Partners and welcome to our fourth quarter 2016 earnings call. Joining us today are George Damiris, President and CEO; and Rich Voliva, Senior Vice President and CFO. This morning, we issued a press release announcing results for the quarter ending December 31, 2016. If you would 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, February 21, 2017. 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. HEP had a very successful 2016, led by significant operational and financial achievement. We continued our history of steady growth by increasing total throughput volumes at 8% versus 2015. Our strong and stable cash generation allowed us to accelerate our year-over-year distribution growth and maintain our record of continuous quarterly distribution increases. With over 90% of our revenues tied to long term, fee based contracts with minimum volume commitments; HEP has a solid business model that will continue to drive financial results while supporting our positive growth outlook. In 2015, we continued to execute on our growth strategies by completing several acquisitions current sponsor dropdowns. During the year, we successfully acquired a 6% interest in Osage and Cheyenne pipelines, increasing our equity income by $5.6 million annually. We also expanded our storage footprint with the acquisition of our Tulsa crude tanks in March taking our total storage capacity to 14 million barrels. The largest transaction of 2016 was the addition of the newly constructed refinery processing units, the HollyFrontier Woods Cross refinery, which could drop down and -- over providing an estimated $32 million in annual EBITDA. Overall, our internal and external growth initiatives resulted in a 17% increase in annual EBITDA versus 2015. Going forward, we are optimistic about the year ahead and continue to explore acquisition opportunities. Given the quality and location of our asset base, talented employees with the support of general partners, HEP has a strong foundation for growth. With that, I’ll turn it over to Rich Voliva

[Rich Voliva:]

Thanks, George. On January 26, Holly Energy Partners announced their quarterly distribution of $0.6075per unit, a 7.5% increase over the same period in 2015. This distribution marks the 49th consecutive increase for HEP unit holders since our IPO in 2004. This represents acceleration in year-over-year distribution growth as well as progress towards our 8% distribution growth rate target. For the fourth quarter of 2016, HEP generated distributable cash flow of $59 million, $4.9 million higher than the same period last year. WE ran a distribution coverage ratio of 1.07 times for the quarter and 1.09 times for the full year 2016. Net income attributable to HEP for the fourth quarter was $41.4 million compared to $40.5 million for the same period in 2015. This increase in earnings was primarily driven by the newly acquired Wood Cross refinery processing units and partially offset by higher interest expense associated with our 6% notes as well as inflation driven tariff increases. Operating expenditures in the period totaled $35 million including $850,000 of OpEx reimbursed by HollyFrontier. Capital expendituresfor the quarter were $12 million including approximately $2.6 million in maintenance CapEx and $2.7 million of CapEx reimbursed by HFC. In 2017 excluding CapEx reimbursed by HFC, we expect to spend approximately $9 million for maintenance CapEx and approximately $30 million for expansion capital excluding acquisitions. HEP successfully participate in the capital markets since 2016 providing us with the necessary funding to take advantage of asset opportunities. We raised $400 million of 6% notes and upside the capacity of our revolver by $350 million in order to strengthen our balance sheet. Additionally we issued a $103 million of equity through a private placement and $24 million through our ATM program. Our current liquidity and ability to access the capital markets enable us to achieve future growth both organically and through M&A. As of December 31, 2016 HEP had approximately $1.2 billion of total debt outstanding comprised of $300 million of 6.5% notes due in 2020, $400 million of 6% notes due in 2024 and approximately $550 million drawn on our $1.2 billion credit facility. On January 4th of this year we redeemed our 6.5% note using revolver borrowings and by reducing our quarterly interest expense by roughly $2.6 million. Including cash and revolver availability our current stands at over $330 million at the end of January 2017. For the fourth quarter of 2016 we recognized $2.7 million of deferred revenue from prior shortfalls billed to shippers, as of December 31 HEP carried $5.6 million in deferred revenue on our balances sheet. In the first quarter of 2017, we anticipate recognizing approximately $2.9 million in deferred revenue. And with that, I’ll turn the call over to Kevin for the Q&A period.

[Operator:]

The floor is now open for questions. [Operator Instructions] Our first question is from Theresa Chen from Barclays. Your line is open.

[Theresa Chen:]

Good afternoon.

[George Damiris:]

Hi, Theresa.

[Theresa Chen:]

Hi. I had a question related to your expected contribution on UNEV. Now that you have about a full winter of volumes behind you, are you still comfortable with that $15 million number for 2017 versus 2014 levels?

[Rich Voliva:]

Theresa, I think maybe a little short of that number. That pipeline can be very driven by the arbitrage between Salt Lake City and Los Angeles ultimately that really that shows through in Las Vegas. So, we saw that swing pretty hard for example in the fourth quarter where it was close in October/November. We did not see the volume growth we were hoping for during those months, that have opened up in December and we saw more than what we’ve expected on a run rate basis. So, we’re expecting it to be volatile and that opened the $15 million number on an annualized basis is very good. But I don’t have a crystal ball and whether ours going to be opened or closed date that I saw. I think 15 is the upside probably the short answer.

[Theresa Chen:]

Got it. And then on your internal initiative operational improvements that you’ve given in your previous Analyst Day, can you just give us an update on how that’s going and hitting those run rates?

[Rich Voliva:]

Yes. I’d say we’re probably three quarters of the way through hitting those run rates. That’s really going to sharpen in two places. It’s kind of hard to call out right, because part of its operating expense that’s avoided, but yet because we’re growing we’re still operating expense growth in total and part of it is capital that’s [Indiscernible] and you could see our maintenance capital numbers its said to be down 2017 versus 2016, so if you can see a tangibly there. But we are very pleased with the progress on those initiatives.

[Theresa Chen:]

Great. Thank you very much.

[Operator:]

[Operator Instructions] Your next question comes from the line of Jerren Holder with Goldman Sachs. Your line is open.

[Jerren Holder:]

Hi, good afternoon. I was just wondering was there anything that happened in the quarter unplanned sort like a turnaround or disruption in the pipes that may have led to lower year-over-year volumes.

[George Damiris:]

Yes, Jerren I think we called this out in our press release. We had – HollyFrontier had some downtime during the quarter at the Navajo refinery, which did here accrued income from the intermediate line. It was not extensive, but versus certainly versus the fourth quarter of 2015 which show up.

[Jerren Holder:]

Anything else we should expect maybe year-to-date as we kind of compare numbers between last year and this quarter so far?

[George Damiris:]

Well I think in the first quarter HollyFrontier has a scheduled turnaround at the Navajo plant. Out of the four refinery turnaround, basically taking the plain [ph] offline for 45 days – we served the vast majority of which will be in the first quarter we do expect to see some impact here on a year-over-year.

[Jerren Holder:]

Okay, nothing in Utah sort of area, now those your big Frontier pipeline or SLC pipeline?

[George Damiris:]

Sure Jerren so obviously refer the plains for details as the operator [Indiscernible] those lines. We have had some downtimes on the SLC lines in the last one to two weeks and that has backed up and in fact the Frontier lines there is some impact there and if you look at our 2016 equity and income, we had about $4.5 million for the year on SLC and delivered $4 million for the year on Frontier. So depending on how long that downtime goes, we’ll see some impact there. We are very optimistic that we’re going to get those results shortly there.

[Jerren Holder:]

Okay. And there’s no flow through to UNEV just given that you guys are pretty much or expected to be at NDC [ph] levels?

[George Damiris:]

Yes I mean maybe a little bit on my earlier comments from the arbitrage. The crack spreads and the product prices between Salt Lake and Las Vegas are very vulnerable at the moment as if you would expect given what we are seeing in the pipe itself. It’s quite a little early to say, frankly.

[Jerren Holder:]

Okay. That’s it from me. Thank you for the time.

[George Damiris:]

Sure.

[Operator:]

If there are no further questions, I will turn the floor back over to Craig for any 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 first quarter results with you in May.

[Operator:]

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