Holly Energy Partners, L.P.
Q3 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Operator:]

Welcome to Holly Energy Partners' Third Quarter 2014 Conference Call and Webcast. At this time all participants had 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 Blake Barfield. Blake, you may begin.

[Blake Barfield:]

Thanks, Sheryl. And thanks to each of you for joining this afternoon. I'm Blake Barfield, Investor Relations for Holly Energy Partners. Welcome to our third quarter 2014 earnings call. With us today are Bruce Shaw, President; and Doug Aron, Executive Vice President and CFO. This morning, we issued a press release announcing results for the quarter ending September 30, 2014. If you'd like a copy of today's press release, you may find one on our website at hollyenergy.com. Before Doug and Bruce proceed with prepared 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 4, 2014. 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. With that, I'll turn the call over to Doug Aron.

[Douglas Aron:]

Thanks, Blake, and thanks to each of you for joining the call this afternoon. On October 23, Holly Energy Partners announced a quarterly distribution of $0.5225 per unit. This distribution was the 40th consecutive distribution increase for HEP unitholders every quarter since our IPO in 2004. The most recent distribution of 6.1% increase over the distribution paid in the third quarter of 2013 will be paid Friday, November 14, to unitholders of record as of today. Moving to the results for the third quarter of 2014, HEP generated distributable cash flow of $45.6 million and net income attributable to HEP of $29.7 million. Net income increased by approximately $7.8 million compared to the third quarter of 2013, driven by higher volume shift for affiliated and third-party customers as well as annual revenue escalators on many of HEP’s contracts. Third quarter EBITDA was $53.8 million. EBITDA totals more than $56 million when adjusting for the $2.9 million of short falls billed and approximately $600,000 dollars of deferred revenue recognized in the period. Operating expenditures in the period totaled $25.5 million including the $1.5 million of reimbursable OpEx for which there was offsetting revenue. Depreciation and Amortization was $15.5 million in the quarter, down noticeably from the $19.4 million recorded in the third quarter of last year when HEP was requiring to accelerate depreciation on several storage tanks that were taken out of service. G&A expenses for period were $2.3 million and generally in line with our expected range of $2.5 million to $3 million per quarter. Interest expense in the period was $8.6 million, down from $11.8 million during the same period last year to reflect continued savings as a result of HEP's redemption of 8.25% senior notes earlier this year. At quarter end, HEP had $851 million of total debt outstanding comprised of $300 million of 6.5% senior notes due 2020, and $555 million drawn under our $650 million revolving credit facility. As a reminder, deferred revenue for shortfalls billed on assets serving the Big Spring refinery are typically recognized in the fourth quarter each year. Forecasting the fourth quarter, we anticipate recognizing about $4.5 million of deferred revenue. At September 30, HEP carried $11.4 million in deferred revenue on our balance sheet. For additional modeling purposes, we have been notified by HollyFrontier that much of the turnaround work at its Navajo refinery, which was originally scheduled for the fourth quarter of this year, has been postponed to early 2015. Some work will continue as planned, but at this time, we anticipate minimal fourth quarter impact to HEP's assets serving the Navajo refinery. Now, I will turn over the call to Bruce for a few comments.

[Bruce Shaw:]

Thank you, Doug, and thanks, everybody, for joining us this afternoon. My comments will cover third quarter results, capital expenditures, and growth projects. So starting with results, we are very pleased with our third quarter financial results, producing an HEP record in quarterly distributable cash flow, demonstrating the strength of our overall business in light of recent crude price volatility, and enabling us to increase our distribution as Doug mentioned for the 40th consecutive quarter. Our Southeastern New Mexico crude system expansion is now substantially complete. And as we have throughout 2014, we saw crude volumes continue to increase this quarter on a system. I would say, substantially complete, our work is – our work on our part of the system is mechanically complete, and most of the segments of the system are operating. I used the word, substantially, because we do have one-half system connection, where a third-party has a little more work to do before we can ship on that pipeline. The UNEV volumes, though below minimum commitment levels showed an increase over last year's third quarter. And as of this week, UNEV is receiving barrels from a new origin connection in Salt Lake City, in addition to its already existing origin connection. Also UNEV is now operating four truck loading racks at the North Las Vegas terminal doubling its capacity – delivery capacity at that terminal location. Our third-party product pipeline volumes were strong this quarter, thanks in large part to solid refinery production at Alon's Big Spring refinery after completing its turnaround earlier in the year. On capital spending, our CapEx year-to-date for 2014 has been approximately $48 million and that excludes capital expenditures that will reimburse by HollyFrontier. Of which about $2.4 million was for maintenance capital expenditures. The majority of the spending went toward the expansions of our Southeastern New Mexico crude system and UNEV's North Las Vegas truck rack. Though we're fairly behind schedule on a few maintenance CapEx projects, we expect to catch up for the most part in the fourth quarter spending all, but $1 million or $2 million of our $7 million 2014 budget. We expect expansion capital expenditures, excluding reimbursable expenditures to be in the $50 million range for 2014. Next, an update on growth projects. Our minimum commitment contract with HollyFrontier on the expanded Southeastern New Mexico crude system began on September 1, and as we've estimated previously, we believe that this system will produce, at least, $10 million in incremental annual revenue and its first 12 months of operation. For UNEV, we are working on other – on another possible origin connection in the Salt Lake City area that has been proved and completed by the fall of 2015, should result in all Salt Lake City refineries having access to the UNEV pipeline. And as a reminder, if the Salt Lake City refinery expansions that have been announced now on schedule, we estimate that UNEV will be generating approximately $20 million of additional annual revenue by 2016. So putting it altogether along with our annual contractual tariff and fee increases, we expect this visible growth sources to add about $30 million in annual EBITDA run rate by early 2016. In addition to our ongoing valuation of potential acquisitions, we are focused on adding the HEP's visible growth by pursuing organic newbuild projects that leverage HEP's and HollyFrontier's existing asset footprints and organizational capabilities. To that end, HFC and HEP are working together to evaluate building several new crude tanks, as well as additional pipeline connections at HFC's El Dorado refinery, that could increase the refinery's crude flexibility. The project could be a significant one, with capital expenditures possibly in the $50 million to $80 million range. We expect to finalize the project scope and assess project economics over the next several months. To conclude, I'd like to thank each and every HEP employee for their hard work, dedication, and continuing focus on safety, system reliability, and customer service. Now, Sheryl, I think, we're ready to take a few questions.

[Operator:]

Thank you. The floor is now open for questions. (Operator Instructions) Thank you. Our first question is from Theresa Chen.

[Theresa Chen:]

Good afternoon.

[Bruce Shaw:]

Hi, Theresa.

[Theresa Chen:]

Hi. My first question is related to the New Mexico gathering system. I just wanted to know what kind of operating – incremental operating expense, do you expect from this project to strength you get a profit number from that $10 million revenue contribution number?

[Bruce Shaw:]

Sure. The good news about that expansion is, there is going to be a pretty minimal incremental operating expense, but I think you would be safe if you are in the range of $1 million to $1.5 million a year for that.

[Theresa Chen:]

Right. Okay. And then on your comments on the maintenance CapEx, so I – if I heard correctly, I think you said, you would spend all, but $1 million or $2 million of the $7 million that you've budged and having spent already $2.4 million year-to-date, so does that mean total year would be $5 million to $6 million for maintenance?

[Bruce Shaw:]

You've got it, that’s right.

[Theresa Chen:]

Okay, perfect.

[Bruce Shaw:]

We got one project that’s scheduled to 2015 that reduces the budget by about $1 million.

[Theresa Chen:]

Okay, great. And then lastly, on M&A, given that one of your competitors recently acquired a gathering, processing business, do you have any interest in doing something similar diversifying out of your existing businesses and branching out, any color there?

[Bruce Shaw:]

Well, as we talked about before, we certainly take a look at opportunities to diversify, focusing first on assets that would overlap with our current assets geographically. So that there is no bias against doing something like that. But for us that we need – we need to be able to see strategic rationale, as well as believe in the long-term return of an acquisition like that.

[Theresa Chen:]

Understood. And what are you seeing in the market right now in terms of competition for assets, couple of quarters ago we discussed this, and I think at that point you had said that the prices were somewhat unrealistic, and I just wanted to know what the update on that was?

[Bruce Shaw:]

I would say, we haven’t seen a lot of change in terms of the number of active bidders when asset packages are offered, so really very little change in that setup since we last discussed it, still very competitive.

[Theresa Chen:]

Got it. Thank you very much.

[Bruce Shaw:]

Sure. Thank you.

[Operator:]

(Operator Instructions) Our next question comes from Justin Jenkins, Raymond James.

[Justin Jenkins:]

This is Justin on for Cory Garcia, and thanks for taking the questions. I guess, I'll start with one on the product side, if I could. So with the usual seasonality of gasoline up in the Rockies and even the tendencies for some of the local areas to get a little long and pricing to become a little floppy compared to the benchmark indicators. We've seen this yes, thus far in 4Q, and is still, I guess, I'm just wondering if we started to realize maybe a pickup in terms of higher shipments on UNEV?

[Bruce Shaw:]

So Justin, you are asking a sort of a refining economics question, as well as UNEV question?

[Justin Jenkins:]

Indeed.

[Bruce Shaw:]

Yes, I'm going to answer the refining economics question. I can tell you that, UNEV would expect to see increased volumes in November, December, January, February, the way we normally do.

[Justin Jenkins:]

Right.

[Bruce Shaw:]

That ramp up is similar to what we've seen in past years. But the good news on the HEP side of things, before I turn to Doug on the refining economics question is it very little of our revenue varies with the Rockies refining economics in the winter time. So…

[Justin Jenkins:]

Okay.

[Douglas Aron:]

Yes. What I would tell you is, we’ve got HFC’s call tomorrow morning at 7

[Justin Jenkins:]

Now, perfect. I appreciate the color there. And then I guess, if I could move on to maybe looking at the positive supply trends and opportunities that in the Niobrara, and seeing some positive announcements coming from the region, and recognizing that you guys have in the past analyzed some possible takeaway and gathering options out of the basin, is there any updates you could share in terms of possibly leveraging the exciting footprint with maybe a project in that region?

[Bruce Shaw:]

Justin, it’s something we continue to work on given an existing pipeline that’s underutilized up there that is owned by the HollyFrontier, Holly Energy Partners family. Today, there has been so many moving parts, it’s been hard to get any firm commitments from producers to make a project like that to make sense but we certainly haven’t de-emphasized thinking about that and continue to do our best to get our project going up there, but nothing concrete to talk about today.

[Douglas Aron:]

And just would add some color, which I think addresses both your question and the one Theresa asked. The reality is this market remains very competitive. There are – Holly Energy Partners is not the only company looking for growth in that region but also fair to say that we’re very active in looking in the Niobrara, the Uintah, the Permian, New Mexico. All opportunities are ones that we’re considering but we’re doing so with the discipline that we think is prudent and wouldn’t dilute what is an existing very high quality earning stream for HEP. So, it’s – I can assure you we’re frustrated by not having as many announcements as perhaps you’d like to see us have, it’s not for lack of trying. It’s more from a really competitive market today.

[Bruce Shaw:]

And just one thing I’d add Doug is in that competitive market we look to use what advantages we do have and the relationship with Holly Frontier and its desire to source crude or create crude flexibility has been a driver of projects over our history and we’d one like at El Dorado that we continue to work hard to develop.

[Justin Jenkins:]

Perfect. Thanks a lot guys.

[Bruce Shaw:]

Thank you.

[Operator:]

(Operator Instructions) If there are no further questions I will turn the floor back over to Blake for any closing remarks.

[Blake Barfield:]

Okay. Thanks everyone for joining today. If you have any follow up questions feel free to reach out to investor relations. Otherwise look forward to sharing our fourth quarter and full year results early next year.

[Operator:]

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