Holly Energy Partners, L.P.
Q2 2015 Earnings Call Transcript

Published: 4 Aug 2015

[Operator:]

Welcome to the Holly Energy Partners Second Quarter 2015 Conference Call and Webcast. [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, Cowen and thanks to each of you for joining this afternoon. I'm Craig Biery, Investor Relations for Holly Energy Partners and welcome to our second 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 second quarter ending June 30, 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 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 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, August 4th, 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:]

Thank you, Craig. On July 23rd, Holly Energy Partners announced a quarterly distribution of $0. 5450 [ph] per unit, nearly a 6% over the same period in 2014. The quarterly distribution will be paid August 14h to unit holders of record as of today or yesterday, sorry, August 3rd, 2015. This distribution marks the 43rd consecutive increase for HEP unit holders since our IPO in 2004. For the second quarter of 2015, Holly Energy Partners generated distributable cash flow of $47.3 million. DCF in a quarter was $3.8 million higher than the same period last year. Net income attributable to HEP for the second quarter was $30.4 million, compared to $23 million for the same period in 2014. This increase was driven by higher pipeline volumes and annual tariff increases. In addition, HEP realized a four quarters contribution of the [indiscernible] crude gathering system, as well as the El Dorado crude tank farm purchased in March. Operating expenditures in the period totaled $25.3 million, including $900,000 of reimbursable OpEx for which there was offsetting revenue. G&A expenses for the period were $2.7 million and depreciation was $15 million, both within our expected guidance ranges for the quarter. As of June 30, 2015, HEP had $900 million of total debt outstanding comprised of approximately $300 million of 6.5% notes due in 2020 and $600 million drawn on our $850 million credit facility. Interest expense was $9.1 million in the second quarter, representing an increase of $700,000 over the same period in 2014. This increase is principally due to increased borrowings under our credit agreement. For the second quarter 2015, we recognized $500,000 of deferred revenues from prior shortfalls billed to shippers. As of June 30th, HEP carried $6.3 million of deferred revenue on our balances sheet. In the third quarter of 2015, we anticipate recognizing approximately $600,000 of deferred revenue. Following the July 1, 2015 PPI tariff adjustments, long-term minimum commitment contracts that was open [ph] consolidated annual payments of approximately $279 million. With that, I'll turn the call over to Bruce for a few concluding comments.

[Bruce Shaw:]

Thank you, Doug. And thanks to each of you all for joining us this afternoon. I'll now cover highlights from our quarterly results, a summary of capital expenditures and our expectations looking ahead. As you likely concluded from our press release and from Doug's comment, this was a very solid quarter for HEP. Our quarterly EBITDA was $7.2 million higher than in the second quarter of 2014, driven by strong volumes for both crude and products, by our southeastern New Mexico crude system expansion, which started contributing in September of last year. The annual tariff increases and by our acquisition of El Dorado crude tank farm in March. Revenues from UNEV were also ahead of last year’s tank. On July 1, 2015 our HFC and UNEV tariffs and fees increased some by the [indiscernible] based on the PPI Finished Good Index. These contractual increases should result in $8 plus million in additional revenue through next June 30, assuming volumes are constant. Our capital expenditures were $11.7 million for the quarter, bringing CapEx to date of $22.9 million, excluding spending for the acquisition of El Dorado crude tanks. Year-to-date CapEx is consisted of approximately $3.5 million in maintenance capital, $5.3 million in CapEx reimbursable to us and about $40 million of expansion capital. The main confirmers [ph] of expansion capital during the year are the consumption of the crude system expansion earlier in the year, enhancements to our availing [ph] delivery capacity, improvements to our TJ [ph] rack and UNEV origin connection work. Our outlook for CapEx for the full year 2015 has not changed much with approximately $8 million to $10 million from maintenance capital and $50 million to $60 million for expansion capital for crude projects, including the acquisition of the El Dorado crude tank. Looking ahead, we are optimistic that we can continue to leverage our logistic capabilities and HFCs refining footprint to secure growth from third party sources. The purchase of the El Dorado crude tank farm is a good example, where HFC can commit to extend or commit volume to third party logistics assets and exchange for HEPs participation in third party asset or projects. We're also anticipating growth via dropdown from HFC and as you know HFC has recently highlighted its commitment to internal profit improvement efforts. Our initial focus is the naphtha fractionation unit, is HFC's El Dorado refinery and certain supporting assets related to HFCs expansion at its Woods Cross refinery. We expect to have more details to outline them, the growth plans at HFCs upcoming Analyst Day in early September in Dallas. Before I turn the call back over to our operator, I'd like to thank our employees for the daily commitment to safety, liability and customer service. Cowen, I think we're ready for questions.

[Operator:]

The floor is now open for questions. [Operator Instructions] Our first question comes from the line of Mark Reichman with Simmons & Company. Your line is open.

[Mark Reichman:]

Thank you. As you I know you have probably covered at the Analyst Day as you indicated. But could you just drill over the potential drop down opportunities, at least what's been communicated thus far at HEP, and how you are thinking about it, what you estimate [ph] of the EBITDA that’s eligible for dropdown, is just kind of a refresher there?

[Doug Aron:]

Yes. Mark, this is Doug. What I would tell you is that as you suggested, we preferred not to talk around our Analyst day, this upcoming, as we're still kind of finalizing the details there. What I would tell you for ballpark estimate, if you go back to both the HFC and HEP first quarter earnings calls, we outlined that and I wouldn’t expect dramatic changes to those numbers, but rather than sort of reaffirming them or giving them three at a day, we'd rather stay with that for September 3rd.

[Mark Reichman:]

Okay. What about on the naphtha fractionation – the El Dorado naphtha fractionation either, was there some date, what's kind of communicated as the earliest possible dropdown date, I though it was third quarter, is that [indiscernible]?

[Doug Aron:]

Yes. I believe that is what we said and I think that that’s still potentially achievable by the end of September. Again, we'll certainly have a better feel for that by the early part of next month. And we'd say there is still a reason, well chance that that could happen, if not I would expect early fourth quarter, but still feel like certainly a good chance to have that happen in Q3.

[Mark Reichman:]

Okay. Thank you. And then also on the maintenance CapEx, $8 million to $10 million, $3.5 million in the first half. What's the reason for the lumpiness there, I mean, what specific projects are included in the maintenance CapEx?

[Doug Aron:]

Maintenance capital is pretty steady year-to-year Mark and it’s really a function of when we can get the work done and as we scheduled some of the works that’s included there are inspections that we have to do in and then repairs that may result in that, that can be categorized with maintenance capital. And so you do your best estimate to how that’s going to fall across the year. But you have hit it exactly right. So really the $3.5 million already spend we're not far off a pretty even pace for the year, especially when you end up closer to that $8 million or $9 million kind of total range. So not any special thought there, its just kind of – we do our best to predict it and how to fall ratably just given the project life, but nothing special than out there.

[Mark Reichman:]

Okay. And then just lastly on just kind of the – over the last several conference calls, Bruce you've kind of outlined kind of where you are sources of incremental revenue would come from. And it seems like the tariff increase was probably a little better than your expectation because I think you'd kind of highlighted kind of 1% to 3% increase? What other in terms of, is there any – had there been any positive surprises sort of right to just say whether it’s the southeastern New Mexico crude gathering system expansion where you had - in terms of your incremental revenue expectations and I guess associated with that anything that might have come up a little short?

[Bruce Shaw:]

Yes. We have seen too much coming up on the short side, some of the gathering estimates we had just on a couple of different production areas maybe a little lower than we thought. But really when it comes to the crude system expansion we've been kind of honored, little ahead of our budgeted volumes. And where we stand a little bit of up side perhaps that we couldn’t say it a year ago its just the volumes on this now like expansion and given the ability to ship there all through cushioning, we've seen a bit more kind of trust revenue getting there also [indiscernible] and then on the out towards the cushion hub, than we would have kind of conservatively estimated going into the year. So I think that answers your question.

[Mark Reichman:]

It does. Thank you very much for the color.

[Bruce Shaw:]

Sure.

[Operator:]

Our next question comes from the line of Richard Roberts with Howard Weil. Your line is open.

[Richard Roberts:]

Hey. Good afternoon, guys. Couple of quick ones for me. So one, crude oil throughput volumes were up pretty significantly this quarter and then also in the first quarter over 4Q. But revenues in the second quarter were down versus the prior two. So I am curios if you could just maybe walk us through a little of the revenue movements there in the past couple of quarters and then how do you expect the trends for the rest of the year?

[Doug Aron:]

Yes. You're looking – you are comparing crude throughput volumes to the fourth quarter, did I hear you right?

[Richard Roberts:]

Really, yes, 4Q and 1Q, '15 and then also the revenue movements for those three quarters as well?

[Doug Aron:]

Right. So the volumes that you see I mean, that’s accurate. We actually seen some increases there and primarily related to what we [indiscernible] just an increase in trunk [ph] movement, that includes cushion. We had a little bit of change in how we encountered for some of that crude movement that affected our revenue reported in the quarter, that make that look just a little bit kind of different in the same kind of pro rata increase in revenue versus volumes. But overall that’s just a real positive story for us and of course now that have continues to ruin, go out and we continue to see these movements into the expanded system and probably it’s been a good news.

[Richard Roberts:]

Okay. Maybe on the dropdown, and this will probably cover the two analyst day. But I am wondering just with our leverage position where it is right now, is it pretty fair to think you would probably finance those primarily with equity?

[Doug Aron:]

I am not sure we really given guidance in terms of how we would look at transactions, but not trying to highly borrow. If you look comparatively across time and our sort of debt to EBITDA and other metrics that depends on the transaction, I think we still got some room for incremental debt. I wouldn’t say, I would use your terminology which was predominantly real equity, but depending on size and scale of dropdowns and timing of them likely some use of debt and equity over the next 12 months to fund dropdowns were low.

[Bruce Shaw:]

Another thing I would add is that, if you look at our expanded credit facility and we've got in excess of a couple of hundred million dollars of capacity there.

[Richard Roberts:]

Understood. Thanks for the color.

[Bruce Shaw:]

Thanks, Richard.

[Operator:]

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

[Theresa Chen:]

Good afternoon.

[Bruce Shaw:]

Hi, Theresa.

[Theresa Chen:]

Hi. Just a quick follow up on the previous question on the funding. So given when I think about the general timelines for plans dropdowns, given the currently higher cost of equity capital, has that altered the timeline at all or is the timeline really contingent upon when the assets get build and you might drop them soon after you not incur any sort of taxable gain at the parent?

[Doug Aron:]

I think Theresa, what I would tell you is one of the great things about HEP is its capital flexibility, particularly given a strong supporting highly frontier corporation and when you think about dropdowns and how we might finance the, that’s why we are [indiscernible] as to giving guidance as to how we do that. Obviously we are disappointed with the performance of the unit price over the last 30 days or so, scratching our heads a little bit as to whether that specific to HEP, which we don’t think is the case or rather to just the MLP states in general. So would tell we certainly won't be forced to do anything given the capital structure. As Bruce pointed out, $200 million or so dollars of availability under revolver in HEP and a current company if you will that has plenty of flexibility. Yes, we've mentioned previously that tax considerations of new lease put in service assets and those with high basis make more sense and that will continue to be the case. But we think as HEP historically has we'll see a recovery in that unit price and we have the ability to sort of use whichever lever makes the most sense at the time of the dropdown.

[Theresa Chen:]

Got it. When you speak about flexibility, and support at the parent do you think that HFC maybe willing to support the dropdown by taking some units, is that the potential option?

[Doug Aron:]

What I would tell you is that, that’s certainly been option historically, may or may not be again depending on timing and the economics that go with the transaction.

[Theresa Chen:]

Fair enough. Okay. And in terms of the operating metrics during the quarter clearly very strong volumes across the board, is this a normalized run rate, plus, minus some seasonality or do you think there were any particular areas in which you saw some unique strength actions be expected going forward?

[Doug Aron:]

Yes. I wouldn’t say there was any mix strength besides basic seasonality of product demand so obviously you see a little weakness some times in product demand in the winter time but it doesn’t affect HFC refineries, as much as it does some others. But really nothing kind of out of the ordinary for kind of April through June quarter across the business.

[Theresa Chen:]

Great. Thank you very much.

[Doug Aron:]

Thank you.

[Operator:]

Your next question comes from the line of Steve Sherowski with Goldman Sachs. Your line is open.

[Steve Sherowski:]

Hi, good afternoon, I guess just a follow up on the last question I've heard that the product supply demand down from Las Vegas is pretty tight right now, just wondering could you comment on what you're seeing in that market and is that at all – if that is a case benefiting your UNEV pipeline and if you could perhaps quantify that, that be great?

[Bruce Shaw:]

Thanks, Steve. Yes, we have heard this, there is been issues with the other supply store to Las Vegas. We don’t really know much about that. We have seen a little stronger demand at our Las Vegas terminal and other than just kind of shipping those barrels, we don’t really make decisions on whether the barrels out of the Vegas [ph] versus the strong summer market in South Lake City, we leave that out to the refineries. But so far we certainly haven’t seen that we would categorize there is any kind of – Russia on the terminal, it’s a little better than we though this time last year, but wouldn’t call it anything kind of out of the normal kind of bulk curve range.

[Doug Aron:]

From a refining side certainly West Coast is seeing extraordinary refining margins as a result of some unplanned outages at the plant there. What that’s really done has – it’s a pull of margin everywhere sort of west of I don’t know even the Denver market and so as Bruce said we're seeing a little bit of volumes I guess on UNEV but also seeing some very good crack spread in the Rocky mountains, as well as in the South Lake City market. I think in some instances with cracks even being better in the Rockies than they are in Los Angeles. So volatile summer times not typically the peak season on UNEV, but we've seen pretty good volumes stayed through there nonetheless.

[Steve Sherowski:]

Got you. That’s it from me. Appreciate the insight.

[Doug Aron:]

Thanks, Steve.

[Operator:]

If there are no further questions, I will turn the floor back off to Craig for any closing remarks

[Craig Biery:]

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

[Operator:]

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