Holly Energy Partners, L.P.
Q1 2015 Earnings Call Transcript

Published: 10 May 2015

[Operator:]

Welcome to the Holly Energy's First Quarter 2015 Conference Call And Webcast. [Operator Instructions]. 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'm Craig Biery, Investor Relations for Holly Energy Partners and welcome to our first quarter 2015 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 first quarter ending March 31, 2015. If you would like a copy of today's press release you may find one on our website, 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, 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 law. 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, May 5, 2015. 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 Doug Aron.

[Doug Aron:]

Thanks, Craig and thanks to each of you for joining our call this afternoon. On April 23rd, Holly Energy Partners announced a quarterly distribution of $0.5375 per unit, a 5.9% increase over the same period in 2014. The quarterly distribution will be paid May 15th to unit owners of record on May 6, 2015. This distribution marks the 42nd consecutive increase for HEP unit holders since our IPO in 2004. For the first quarter of 2015, Holly Energy Partners generated distributable cash flow of $45.9 million. Net income attributable to HEP for the first quarter was $31.8 million, an increase of approximately $8 million over the same period in 2014. This increase was driven by higher pipeline volumes and annual tariff increases as well as the early retirement of our senior notes in March of last year. Operating expenditures in the period totaled $28 million including $500,000 of reimbursable OpEx for which there was offsetting revenue. G&A expenses for the period were $3.3 million. [indiscernible] were slightly higher than our recent guidance due to increases in environmental remediation, utilities costs and legal expenses. Depreciation and amortization was $15 million in the quarter, down approximately $1 million from the first quarter of 2014 due to past tank write-downs. As of March 31, 2015, HEP had $891 million of total debt outstanding comprised of approximately $300 million of 6.5% notes due in 2020 and $594 million drawn on our $650 million revolver. On April 28 of 2015, the HEP credit agreement was amended, increasing in size from $650 million to $850 million. The HEP credit agreement which matures in November of 2018, is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital needs. For the first quarter 2015, we recognized $7.5 million of deferred revenue from prior shortfalls billed to shippers, most of which was related to 2014 shortfalls on the UNEV pipeline. At March 31st, HEP carried $4.4 million in deferred revenue on our balances sheet. In the second quarter of 2015, we anticipate recognizing approximately $500,000 of deferred revenue. And now, I'll turn the call over to Bruce for a few comments.

[Bruce Shaw:]

Thank you, Doug. And, yes, I'll just add a few comments before turning to questions this afternoon. As we noted in our press release this morning, we acquired an existing crude tank farm that serves HollyFrontier's El Dorado refinery, in March. The tank farm which receives crude delivered from Cushing via the Osage pipeline and also locally-produced crude via pipeline, provides the only nearby crude storage for the El Dorado refinery and we're glad to now have it in the HFC/HEP family. We expect the tank farm to generate between $3.0 million and $3.5 million a year in annual incremental EBITDA. With HollyFrontier, we'll evaluate additional connection and improvement opportunities at the facility to enhance crude supply flexibility in the future. Base business-wise, despite a scheduled turnaround at HollyFrontier's Navajo refinery and a non-cash increase in our environmental accrual that inflated operating expenses, HEP had a very solid quarter including strong crude volumes and seasonally-high UNEV pipeline flows. First, on the crude system, healthy crude production from existing wells near our assets and our ability to now deliver non-refinery supply barrels off system helped us set a quarterly record in crude volume transportation. On UNEV, seasonally-wide product price differentials between Salt Lake and Las Vegas during the quarter coupled with a new pipeline origin connection in Salt Lake facilitated the shipment of almost 3000 barrels per day of spot barrels on UNEV during the quarter. These spot shipments generate incremental revenue above and beyond the minimums of our committed shippers. We're currently working on an additional origin connection in Salt Lake City which we expect to have completed by the end of the calendar year. When the new connection is complete, refineries representing over 95% of Salt Lake City refining capacity will have physical delivery access to the UNEV pipeline. Our capital expenditures for the quarter were $33 million. That number excludes approximately $2 million in maintenance capital and $2 million of CapEx reimbursed by HollyFrontier. The majority of that capital amount was used for the acquisition of the El Dorado crude tank farm. In 2015, excluding capital expenditures reimbursed by HollyFrontier, we expect to spend a total of about $10 million for maintenance capital and between $50 million and $70 million for expansion capital. We will continue to seek out ways to increase our expansion spending for the year including working with HollyFrontier on potential drop downs and/or joint projects, plus seeking out third-party acquisitions. To that end, HFC's naphtha fractionation project at its El Dorado refinery is still in the construction phase. We're discussing a tolling-based revenue model for the potential transaction and with HollyFrontier we have a common goal of getting a deal done in the second half of 2015. Finally, I would like to say thank you to all of our HEP team members for their daily hard work and dedication, mainly their commitment to safety, system reliability and customer service. And with that, I'll turn the call back over to Nicole for questions.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Theresa Chen from Barclays Capital. Your line is open.

[Theresa Chen:]

Thank you, Bruce, for the color on the third-party acquisition and the potential drop downs. Related to that; so, first, on the acquisition of the tank farm, what was the purchase price? Again, so I think you said it was around like $30 million since most of the expansion CapEx was spent on the tank farm. Correct?

[Bruce Shaw:]

I did say that. That's right. And, Theresa, we agreed contractually with the seller not to disclose the purchase price unless required by SEC rules or other rules. So, you might want to take a close look at the Q when it comes out, but that's the guidance, at least, I'm comfortable giving you on the call today.

[Theresa Chen:]

Can you tell us what the capacity is of the tank farm? And when was the transaction executed in March?

[Bruce Shaw:]

The transaction was executed in early March, first week or so of March. And we talk about capacity either in terms of barrels or tanks. I didn't bring the exact barrel count with me, but I can tell you that the capacity is such that it not only can handle the requirements at the El Dorado refinery, but also handle some crude for transportation on up north, north of El Dorado. So, plenty adequate for El Dorado.

[Theresa Chen:]

And, in terms of the potential drop-down of the naphtha fractionation facility; so, clearly HFC has laid out their plans for how much EBITDA that facility will generate. Roughly, when you execute a tolling agreement, how much of that EBITDA will come down to HEP, do you estimate? And related to that, since this is a tolling agreement, do you still expect to maintain your 80% MVCs as HEP cash flows?

[Bruce Shaw:]

You know, Theresa, I would be surprised if we kind of veered off of that fairway that we've been on for other transactions. But, as you might imagine, those terms are still to come. So, what we do know is that we'd like for it to be a tolling-type revenue model for HEP and we don't expect the transaction economics to be a lot different than what you've seen in the past. Obviously, both work committees will take a look at it and make sure that it looks fair in today's market environment. And I believe that HollyFrontier has commented on the cost of the project at right around $100 million.

[Doug Aron:]

The only thing I'd add, Theresa - this is Doug Aron - is that what makes a project like this so attractive as a potential candidate is, one, recent dollars spent or high-cost basis that doesn't create a need for any tax leakage or issues there. And then, secondarily, as you point out, we have enumerated at the HollyFrontier level that this is going to increase the EBITDA on sort of steady state within our refining organization. So we're not cutting into our existing EBITDA stream, but rather dropping down a new EBITDA stream. And so, trying to identify both this El Dorado naphtha fraction and potential future projects like it are what makes these attractive. And, as Bruce points out, still some details to be sorted out. We hope to have those to you late second, early third or some point later this year. It's just not yet determined until we get them done. But, appreciate that there is a lot of anticipation and desire to see these kind of transactions happen. And we think they're certainly good for both companies.

[Theresa Chen:]

And, lastly, so just in terms of high level of throughput on your crude pipeline volumes this quarter, clearly there were a couple things going on. And I was just wondering on like a go-forward basis, what kind of like a steady-state volume throughput we should anticipate for the rest of the year.

[Bruce Shaw:]

You know, Theresa, if market differentials stay where they are and production continues to be solid as it has been, we'd expect those volumes to look a lot like they did in the first quarter. Some of that increase in volume over the first quarter of last year is due to barrels being shipped, as I mentioned in my brief remarks, to market clearing centers non-refinery. And that's a business that just kind of depends on differentials and availability of that crude. But I'd be awfully surprised if we drop much below the level you saw in the first quarter, at least for the foreseeable future here.

[Operator:]

Your next question comes from the line of Mark Reichman from Simmons and Company. Your line is open.

[Mark Reichman:]

I just wanted to ask a little bit about the UNEV pipeline. I know the expansion was completed in advance of the Salt Lake City refinery expansions. And could you just kind of walk us through your expectations, I mean in terms of the refinery expansions and what your expectation is for the additional incremental revenue both in timing and as to whether it would be at committed tariff levels or spot rates?

[Bruce Shaw:]

Sure, Mark. The basic expansions in Salt Lake City, to summarize; you've got HollyFrontier's Woods Cross refinery expanding from about 30,000 barrels a day to about 45,000 barrels a day. So, call that an additional 14,000 barrels or 15,000 barrels of crude capacity in Salt Lake. Then, as we understand it, in the fall of last year, Tesoro expanded their plant in Salt Lake by 4,000 barrels or 5,000 barrels a day. So, we've heard mention of some tweaks at some of the other plants based on crude slates, but if you just kind of round that off to 20,000 barrels a day of expansion and, again, the Woods Cross expansion at HollyFrontier is not due to be complete until the end of this year, by the time we get to 2016, call it 20,000 barrels a day available looking for a home year round. I think in one of our recent IR presentations, even if we get 15,000 of those product barrels, say, on UNEV that would be a good thing. And it would be one of those, as we're modelling it out in revenue, we would expect, given that those barrels ought to come out the refinery year round, the shippers would have the option to, obviously, add that to their committed shipments and ship those at incentive tariff rates. But, putting all that together, I think we would expect, conservatively, $15 million or so of additional revenue with very little OpEx, incremental OpEx. So, call it, $15 million of revenue and close to $15 million of additional EBITDA that could flow for UNEV starting in 2016.

[Mark Reichman:]

So then, just looking kind of at your growth profile, I mean you've got the tariff increases each year and that would have the impact on 2015. You've got the benefit of the New Mexico crude gathering system expansion which you haven't fully utilized yet. And then, the UNEV pipeline kind of captures the Woods Cross Phase 1 and Phase 2 expansions. That really kind of extends the path into 2016. And then you've got the potential drop down and, of course, this tank farm acquisition benefitting 2015.

[Bruce Shaw:]

Correct.

[Mark Reichman:]

I guess the drop down would be - the timing is undetermined on that. But that would probably be a second half 2015 benefit, practically speaking.

[Bruce Shaw:]

That's correct, yes.

[Mark Reichman:]

Okay.

[Bruce Shaw:]

Yes.

[Mark Reichman:]

Okay and then was there a little bit of an impact from the Woods Cross turnaround in the second quarter, expectations for second quarter?

[Bruce Shaw:]

You know, the Woods Cross turnaround really doesn't have much impact on HEP only because when it comes to UNEV in the summertime, shipments are kind of below minimums anyway. So minimums are what we would expect in summertime or in the springtime. And then when it comes to other revenue generated around Woods Cross for HEP, it's really around the truck rack. And one thing the refinery will do is make sure that the local customers are served first. So, very minimal impact on HEP in the quarter.

[Mark Reichman:]

Okay. And then, just lastly and Doug may have already addressed it; just to kind of summarize your available liquidity at the end of this quarter.

[Bruce Shaw:]

Sure. So, with the upsized credit facility, right, we've got $850 million available and almost $600 million--

[Doug Aron:]

Well, call it $600 million drawn against $850 million total. So, $250 million of unused capacity, basically. A little more than $250 million.

[Mark Reichman:]

And any change to the expected maintenance CapEx?

[Bruce Shaw:]

No, we're still expecting about $10 million in 2015 total.

[Operator:]

[Operator Instructions]. Your next question comes from the line of Cory Garcia from Raymond James. Your line is open.

[Cory Garcia:]

A lot of my questions have already been touched on. But, I guess if we think about UNEV, it may be a little bit of a reach, but we saw a little bit of downtime, obviously, on the West Coast with the Torrance facility. Did you guys see any spillover of sort of higher gasoline cracks maybe pulling some more volumes down into that Vegas market above and beyond what you'd think is sort of just the normal winter seasonality?

[Bruce Shaw:]

You know, Cory, we did. So, earlier, January, February and I forget the exact timing of the widest part of the R, but I think at one point we saw $0.60, $0.70 a gallon differentials between Salt Lake gasoline rack and the Las Vegas rack, driven by the disruptions you're talking about in addition to the normal seasonality.

[Cory Garcia:]

And kind of assuming - I guess it's tough to assume anything in terms of gasoline cracks, but we could potentially see something similar before we get, actually, the completion of the Woods Cross expansion as we look into the back half of this year. Is that safe to say?

[Bruce Shaw:]

You know, I hate to look right into crystal ball, but, basically, the months, Cory, where we expect the differentials to help or encourage spot flow on UNEV would be kind of November, December, January, February. And so, given that I don't have like California's scheduled maintenance in front of me, but if you have other outages up there in addition to that seasonal difference, then we could also see some spot barrels flow that might not otherwise flow.

[Operator:]

There are no further questions. I'll turn the call back over to Craig for any closing remarks.

[Craig Biery:]

Thank again, everyone, 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 second quarter results with you in August.

[Operator:]

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