Holly Energy Partners, L.P.
Q3 2015 Earnings Call Transcript

Published: 4 Nov 2015

[Operator:]

Welcome to the Holly Energy Partners Third Quarter 2015 Conference Call and Webcast. At this time all participants have 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 Craig Biery. Craig, you may begin.

[Craig Biery:]

Thanks, Robbie and thanks to each of you for joining us afternoon. I'm Craig Biery, Investor Relations for Holly Energy Partners and welcome to our third quarter 2015 earnings call. Joining us today are Mike Jennings, President and CEO, Doug Aron, Executive Vice President and Richard Voliva, Vice President and CFO. This morning we issued a press release announcing results for the quarter ending September 30, 2015. If you would like the copy of today's press release you may find one on our website at hollyenergy.com. Before Doug, Rich and Mike 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, November 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. Thanks each of your for joining us on our call this afternoon. Presumably all of you saw our announcement last Friday regarding management changes at HEP. If not, a copy of that press release is available on our website at hollyenergy.com. I will mention that this management team is very focused on continuing with strategic dropdowns and our organic growth and we believe the current opportunities set is better than we've seen in the long time. Mike, will give you bit more color in his remarks shortly. I'd also like to remind you that on October 22nd, Holly Energy Partners announced a quarterly distribution to $0.555 per unit, a 6.2% increase over the same period in 2014. This quarterly distribution will be paid November 13 to unit holders of record, as of November 2nd, 2015. This distribution marched the 44th consecutive increase for HEP unit holders since our IOP in 2004. Now I'd like to take the opportunity introduce you to HEPs new Chief Financial Officer, Rich Voliva. Rich, joined HEP in 2014 in a Corporate Development role and he is been a great asset for our company. We look forward to you getting a chance to meet him in person soon. But now I'd like to turn the call over to our new CFO, Rich Voliva.

[Richard Voliva:]

Thank you, Doug. For the third quarter of 2015, Holly Energy Partners generated distributable cash flow of $50.3 million. DCF in a quarter was $4.7 million higher than the same period last year. Net income attributable to HEP for the third quarter was $34.5 million, compared to $29.7 million for the same period of 2014. This increase was driven by higher volumes across all segment of our business, further supported by annual tariff increases, as well as the contribution from the El Dorado crude tanks purchased in March. Operating expenditures in the period totaled $24.1 million, including $800,000 of reimbursable OpEx. Our capital expenditures for the quarter were $8 million, including approximately $2 million of maintenance CapEx and $1.8 million of CapEx reimbursed by HollyFrontier. In 2015, excluding capital expenditures reimbursed HFC, we expect to spend a total of $8 to $10 million for maintenance CapEx and between $20 million and $30 million for expansion capital, excluding acquisitions. As of September 30th, 2015, HEP had $951 million of total debt outstanding comprised of approximately $300 million of 6.5% notes due in 2020 with a balance drawn on our $850 million credit facility. Interest expense was $9.5 million in the third quarter, compared to $8.6 million in the same period of 2014. This increase is principally due to higher borrowings in order to fund both acquisitions and capital expenditures. For the third quarter 2015, we recognized $600,000 of deferred revenues from prior shortfalls billed to shippers. As of September 30th, HEP carried $7.8 million in deferred revenue on our balances sheet. In the fourth quarter of 2015, we anticipate recognizing approximately $1.4 million of deferred revenue. And with that, I'll turn the call over to Mike for a few comments.

[Mike Jennings:]

Thanks, Rich. As Doug mentioned HEP announced a $0.01 increase to its quarterly distribution for the third quarter. This increase demonstrates our commitment to achieving a targeted 8% distribution growth rate in the next few years. Our positive outlook is supported by a strategy focused on organic projects and parent sponsored dropdowns. On November 1, HEP completed the acquisition of the newly constructed naphtha fractionation and hydrogen units at HollyFrontier's El Dorado refinery. Concurrent with this, HollyFrontier and Holly Energy entered into a 15 year tolling agreement containing minimum quarterly throughput commitments from HollyFrontier. We believe this tolling model can serve as a template for future processing [ph] unit dropdown opportunities. To that end, we are currently evaluating assets related to HollyFrontier's Woods Cross refinery expansion, as a potential dropdown opportunity in the first half of 2016. In addition, we continue to explore acquisition opportunities. In August we closed the acquisition of our 50% interest in Frontier Pipeline Company, the owner of a 289 mile crude pipeline that runs from Casper, Wyoming to Frontier Station, Utah. This pipeline will supply crude to HollyFrontier's Salt Lake City refinery and other regional refineries. This transaction highlights the importance of our relationship with HollyFrontier, which we expect will represent a large component of our future growth. And with that Robbie, I'll turn the call back over to you for questions.

[Operator:]

The floor is now open for questions. [Operator Instructions] Our first question is from Mark Reichman from Simmons. Your line is open.

[Mark Reichman:]

Good afternoon. Just a couple of questions. First on the dropdown, I had the $62 million that was expected, and I think in the past you kind of indicated the look for kind of estimated EBITDA of about $7 million. But just looking at that tolling agreement, just at the rate, and the minimum volume commitments, it looks to me like it be more like around $8 or $9 million, am I thinking about that wrong or is $7 a good number to use for expected EBITDA contribution from the dropdown?

[Mike Jennings:]

I think that that’s not a bad number to use. I think we have the opportunity to exceed it through volumes. But we cannot give guidance. So you've got the agreement, you've got the purchase price. The range of these multiples tends to be in the 9, 10 area code and so there is some opportunity for volumetric exceedance by HEP.

[Mark Reichman:]

Okay. And then just for this quarter, relative to my estimate, it looks like the equity and earnings - the equity investment, earnings were - maybe a little higher than what I was looking for. Is Frontier's contribution included in that or is that separate, is that reported…

[Richard Voliva:]

No. Hey, Mark. It’s Rich. You're correct Frontier Pipeline shows up there. So that is most likely the difference you're going to see.

[Mark Reichman:]

Okay. And then…

[Richard Voliva:]

He is correct.

[Mark Reichman:]

Okay. And then just lastly, just a follow up on the Analyst Day, you kind of laid out kind of the number of projects and kind of the expected EBITDA contribution through 2017, but then you also said that you had identified a sort of internal initiatives that would generate kind of $14 million of annual incremental cash flow beginning in 2016 and then '17. Where did those projects stand? I mean, I think you had identified maintenance savings and project management improvements and I just wasn’t quite sure exactly what all those were related to and the timing?

[Mike Jennings:]

Sure. Well, there are various stages of execution. The maintenance project is something that we have up in going or nearly so and there will be others to come. But I think if we talk about run rate in 2016, we certainly think we can get half of that probably more of it, it just depends on timing of execution.

[Mark Reichman:]

Okay. And then I did see the release on the management changes, is Bruce, h e is – is probably that correct, is he serving in a consulting role and how long is this path for, what's the term of his contract?

[Mike Jennings:]

Certainly. Yes, Bruce continues to help us a consultant. The current the term of his contract is a year and I guess, I would expect that we may have a relationship that goes on well past that.

[Mark Reichman:]

Okay. Great. Thank you very much.

[Mike Jennings:]

Thanks, Mark.

[Operator:]

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

[Theresa Chen:]

Good afternoon. Looking to 2016, and the potential dropdowns coming online there. Can you give you us an update of how the Woods Cross expansion assets are going and what the time line is with – within 2016 for those to come down to HEP?

[Mike Jennings:]

Sure.

[Mike Jennings:]

Really, there hasn’t been a change in either of the two timelines. Project completion is looking towards year end for the refinery equipment in term of mechanical completions, start up follows immediately thereafter, and studying the dropdown currently with potential to execute that in the first half of 2016. So that’s very consistent with what we have been saying.

[Theresa Chen:]

Great. And then in terms of funding, I understand that your unit price has held up, much better, especially relative to the sector. But if these markets headwinds persist across the MLP sector would that deter you from issuing public equity as a means of funding?

[Mike Jennings:]

Sure, Theresa. So I think we've been consistently saying that are target capitalization for the business is a 50-50 debt to equity ratio NL [ph] We're definitely aware of what's going on in the outside world. And so with that said, we have plenty of liquidity in our balance sheet. We're also very fortunate to have a general partner HollyFrontier with an incredibly strong balance sheet. So we feel we've got plenty of flexibility to manage around what's going on and generally manage that 50-50 target. But obviously it’s dependent on what the conditions and we look at all the options that are available.

[Theresa Chen:]

Okay…

[Richard Voliva:]

Beyond that I guess, I would add, that these market windows do open and close. But the value proposition in this security in particular we think is really strong. And so whether there is window today or next week, or next month, I guess doesn’t matter as much as we have good growth in front of us. And it’s a very attractive both yield and growth proposition when we do the math.

[Theresa Chen:]

Okay. And then in relation to the value proposition, should we assume that a similar kind of multiple to your most recent dropdown?

[Mike Jennings:]

Now you're getting into the sausage making. We really haven’t said that yet, I told you what I think the range of pioneer [ph] sponsor dropdown multiples are and I would expect that we probably work within that range. But you appreciate that these are the subject of both negotiations and complex committees. So we're just not that far along as yet.

[Theresa Chen:]

Understood. Thank you very much.

[Operator:]

[Operator Instructions]

[Craig Biery:]

Okay. Well, thanks so much for joining us on today' call and we look forward to seeing you again soon.

[Operator:]

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