Holly Energy Partners, L.P.
Q4 2014 Earnings Call Transcript

Published: 24 Feb 2015

[Operator:]

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

[Craig Biery:]

Thanks, Sally 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 and full year 2014 earnings call. Joining 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 fourth quarter and full year ending December 31, 2014. If you would like a copy of today’s press release, you may find one on our website at www.hollyenergy.com. Before Doug and Bruce proceed with prepared remarks, please note the Safe Harbor disclosure statement in today’s press release. In summary, its 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 24, 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. And with that, I will turn the call over to Doug Aron.

[Doug Aron:]

Good afternoon. Thanks, Craig and thanks to each of you for joining the call this afternoon. On January 22, Holly Energy Partners announced a quarterly distribution of $0.53 per unit, a 6% increase over the same period of 2013. This distribution was the 41st consecutive increase for HEP unitholders. We have raised our distribution every quarter since our IPO in 2004. For the full year 2014, Holly Energy Partners declared distributions of $2.08 per LP unit totaling more than $158 million for the year. HEP generated fourth quarter distributable cash flow of $41.8 million and net income attributable to HEP of $28.7 million. Net income increased by approximately $10 million compared to the fourth quarter of 2013. This increase was driven by higher pipeline volumes and annual tariff increases. Fourth quarter EBITDA was $52.7 million compared to $46.6 million for the same period in ‘13. For the year ended December 31, 2014, EBITDA totaled $212 million or a 10% increase over last year. Operating costs and expenditures in the period totaled $50 million, including $1.5 million of reimbursable OpEx for which there was offsetting revenue. Depreciation and amortization was $15 million in the quarter, down noticeably from the $16.7 million reported in the fourth quarter of 2013 when HEP was required to accelerate depreciation on several storage tanks taken out of service. G&A expenses for the period were $2.9 million in line with our expected range of $2.5 million to $3 million per quarter. Interest expense in the period was $8.7 million, down from $11.1 million during the same time last year reflecting continued savings as a result of HEP’s redemption of its 8.25% notes earlier this year. At quarter end, HEP had $867.6 million of total debt outstanding comprised of approximately $300 million of 6.5% senior notes due 2020 and $571 million drawn on our $650 million credit facility. For the fourth quarter 2014 – for the 2014 we have recognized $3.4 million of deferred revenues from prior shortfalls billed at shippers. At December 31 HEP carried $9.3 million in deferred revenue on our balance sheet. In the first quarter of 2015, we anticipate recognizing approximately $7.5 million of deferred revenue relating principally to shortfalls on the UNEV pipeline. Now, I will turn the call over to Bruce for you a few other comments.

[Bruce Shaw:]

Thank you, Doug and let me add my thanks to everyone for listening to the call this afternoon. 2014 was an important year Holly Energy Partners. We completed a number of significant projects including our Southeastern New Mexico gathering system expansion, UNEV’s North Las Vegas rack expansion and the new origin connection for UNEV in South Lake City. At the same time HEP generated an annual record of $173 million in distributable cash flow, increasing distributions each quarter, while maintaining $1.09 distribution coverage for the calendar year 2014. While volatility in the crude market caused uncertainty for some MLP business models we celebrated HEP’s 10th birthday since its IPO with the new commitment to the model that has served us well over our history. HEP’s fee based revenue model coupled with minimum commitments from our main shippers to support over 80% of our revenue gives us a strong foundation to weather the variances of commodity markets and a solid base from which to continue to building. As we pointed out before we believe the organic investments completed in 2014 coupled with our annual contractual fee increases should result in approximately $30 million in additional annual EBITDA run rate by 2016, with about a third of that realized in 2015. In addition, we are working hard to add new growth initiatives. And to that end we are currently working with an expansion capital budget for 2015 of over $75 million. We expect the majority of this budget in 2015 to be invested in crude storage for HollyFrontier’s El Dorado refinery which we talked about, potential product distribution enhancements for HollyFrontier’s Navajo refinery and for UNEV’s North Las Vegas terminal, new storage tanks for HollyFrontier in Cheyenne, El Dorado and Tulsa that assist with the refine processes there and an additional UNEV origin connection. Our maintenance capital budget for 2015 is approximately $10 million. Before concluding my remarks I will give some context on one of that impacting the current quarter. HollyFrontier’s Navajo refinery conducted a planned maintenance turnaround on several units during late January and early February which reduced the refinery’s output during this time as a result HEP expects distributable cash flow along with revenue and EBITDA to be negatively impacted by approximately $1 million to $2 million during the first quarter of 2015. Finally, I would like to finish by again thanking the entire HEP team for their strong commitment to safety, reliability and customer service. And now I will turn the call back over to Sally, our operator for questions.

[Operator:]

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

[Theresa Chen:]

Good afternoon. Just a quick question for me Bruce, can you give us an update about your appetite for third-party acquisitions given the new crude price environment that we are in I imagine that there are a lot of willing sellers and do you think that there are any assets out there that might make strategic sense for you that maybe previously did not given the new environment?

[Bruce Shaw:]

Theresa sure, we have not lessened our efforts kind of on the third party acquisitions front. And to your point we have seen a few more willing sellers than we saw perhaps call it 12 months to 18 months ago when more folks were thinking about hanging on to their own MLP type assets what we haven’t seen a lot of is adjustment in valuation expectations. So, we will continue to work hard on that front and we are likely to see a higher volume of those assets available, but today, especially given just kind of the bouncing back and forth of prices in both outlook kind of when prices have come back, we haven’t seen a significant change in valuation expectations.

[Theresa Chen:]

How long do you think that we need to remain in this backdrop for the valuation to change?

[Bruce Shaw:]

Well, that’s a great question. I wish I had to run crystal ball on that one. I would think folks would have to be convinced that this is more than a 2-year kind of episode of depressed prices, but that’s just one person’s opinion. So, take it for what you pay for it.

[Theresa Chen:]

Got it. Thank you.

[Bruce Shaw:]

Sure. Thank you.

[Operator:]

[Operator Instructions] Your next question comes from the line of Mark Reichman with Simmons. Your line is open.

[Mark Reichman:]

During the third quarter call, you had referenced that you are evaluating constructing these tanks of El Dorado and you have said that the project would require between $50 million and $80 million. I mean, you kind of hit a laundry list of projects in your comments. I mean, were all of those considered in that $50 million to $80 million, I mean, when you are coming in at $75 million, I mean, were there any new projects or I mean I guess the question is there anything new?

[Bruce Shaw:]

Sure, Mark. Speaking of $80 million, so the $80 million would have included some new pipeline connections, but it’s unclear whether it will get built. So, we are only kind of focusing on the $50 million range for new tank construction. And what we found is that we have kind of started engineering and getting ready to look seriously at building these new tanks there from existing assets that may make sense to try to find a deal on and then modify. So, that’s why the budget is shifting around a little bit, but those dollars will be directed toward either building or buying and modifying existing assets are included in that capital budget for 2015 just it excludes the additional $25 million or $30 million for pipeline connections.

[Mark Reichman:]

I see. So, the crude storage at El Dorado, that’s $50 million or kind of the $75 million and then these others like the UNEV connection and all the rest is kind of the remaining $25 million?

[Bruce Shaw:]

The only clarification, Mark, will just be that for building all new tanks if we could find some existing assets in the decent amount of modifications we might be able to reduce that budget a bit.

[Mark Reichman:]

Okay. And then also just to touch based on UNEV, the Las Vegas rack expansion, I think the past guidance has been that $20 million of incremental revenue could be generated if UNEV shifts that 15,000 barrels per day of incremental barrels as a result of the refinery expansions and then your 75% interest is $15 million. So, is that kind of your expectation, I mean, which you will be shipping in the full 15,000 barrels per day?

[Bruce Shaw:]

Right. So, currently as we look forward to 2015, that $20 million on a 100% basis or the 15,000 barrels a day would assume that the HollyFrontier with crop [ph] expansion is fully up and running by the beginning of 2015, but that continues to be our expectation, but the assumptions you walk through are correct as we see the world right now.

[Mark Reichman:]

Okay. And then also could you just kind of walk us through your balance sheet in terms of what’s outstanding on your revolver and how you are – in the financing plans over the course of the next 6 to 12 months?

[Bruce Shaw:]

Sure. So, on the revolver, Doug, do you want to cover that?

[Doug Aron:]

Yes, we have got $571 million outstanding on a $650 million facility. So, a little bit of cushion, but I wouldn’t want to put on either an expansion of that revolver or any sort of public offering by telling you that we have got anything concrete in front of us, but as Bruce outlined some CapEx plans for 2015, it might be reasonable to assume that we look at one or both of those markets during 2015.

[Mark Reichman:]

Okay. And just remind me, do you have kind of an asset market program in place?

[Doug Aron:]

We don’t today. It’s something that we have considered – again that would be another area of possible incremental capital raising. I think that we do feel like we could take on some more debt before we would need to be in the equity markets.

[Mark Reichman:]

Okay, great. Thank you very much. That’s helpful.

[Bruce Shaw:]

Sure. Thank you, Mark.

[Operator:]

[Operator Instructions] I think 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 in May.

[Operator:]

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