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Executives

Julia Heidenreich

Douglas S. Aron - Chief Financial Officer of Holly Logistic Services, L.L.C- General Partner and Executive Vice President of Holly Logistics Services, L.L.C-General Partner

Bruce R. Shaw - President of Holly Logistic Services L.L.C.

Analysts

Brian J. Zarahn - Barclays Capital, Research Division

Cory J. Garcia - Raymond James & Associates, Inc., Research Division

Mark L. Reichman - Simmons & Company International, Research Division

Holly Energy Partners L.P (HEP) Q4 2012 Earnings Call February 21, 2013 4:00 PM ET

Operator

Welcome to Holly Energy Partners' Fourth Quarter 2012 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 Julia Heidenreich. Julia, you may begin.

Julia Heidenreich

Hello, everyone, and welcome to the Holly Energy Partners Fourth Quarter Earnings Call. I'm Julia Heidenreich, Vice President of Investor Relations. With us today are Bruce Shaw, our President; and Doug Aron, Executive Vice President and CFO. This morning, we issued a press release announcing results for the quarter ending December 31, 2012. If you would like a copy of today's press release, you can find one on our website, www.hollyenergy.com. Before Bruce and Doug proceed with their prepared remarks, please note the Safe Harbor disclosure statement in today's press release. In summary, it says statements made regarding management's 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.

Today's call may also include a discussion of non-GAAP measures. Please see today's press release for reconciliations to GAAP financial measures. Also, please note that the information presented on today's call speaks only as of today, February 21, 2012. Any time sensitive information provided may no longer be accurate at the time of any webcast replay or rereading of the transcript.

With that, I'll turn the call over to Doug Aron.

Douglas S. Aron

Thank you, Julia. Before I cover HEP's financial results for the fourth quarter and full year, I want to remind you that HEP purchased HollyFrontier's 75% interest in the UNEV Pipeline on July 12, 2012, and UNEV results are now included in HEP's financial statements. 100% of UNEV revenues and operating expenses are included on HEP's income statement, with 25% of UNEV net income backed out via noncontrolling interest. Also, GAAP rules require us to adjust our historical financial statements as if UNEV were a consolidated subsidiary since 2008. For more detailed accounting-related questions, we'll be happy to follow up with anyone after the call.

Now on to the results. On Thursday, January 24 of this year, we announced the 33rd consecutive increase in our quarterly distribution to $0.47 per unit, a 6% increase over the pre-split 88.5% unit price we declared for 2011's fourth quarter. Our distributable cash flow for the quarter ended December 31, 2012, was $41.6 million, up $9.2 million from the same period in 2011. For the full year 2012, our distributable cash flow was $153.1 million versus $100.3 million in 2011. Distributable cash flow compared to the year-ago periods increased due to the contribution of the assets HEP acquired from HollyFrontier in November 2011, increased pipeline volumes and annual tariff increases. DCF also benefited from the UNEV interest acquisition in July 2012.

Net income attributable to HEP for the fourth quarter was $27 million or $0.37 per unit versus $30.9 million for the same period in 2011. This decrease in earnings compared to last year's fourth quarter is mainly a result of the recognition of a crude oil pipeline settlement with HFC in 2011, increased operating cost and expenses and higher interest expense. Net income attributable to HEP for the full year 2012 was $94.2 million compared to $79.8 million for 2011. This year-over-year increase was due to increased pipeline volumes, annual tariff increases and a November 2011 asset acquisition. As a reminder, the majority of HEP revenues, and therefore, income and discounted cash flow, are supported by minimum commitments from our major customers. These commitments, as of December 31, 2012, totaled approximately $250 million per year or $62.5 million per quarter and amount to about 85% of our total revenue. These totals now include HEP's 75% of the UNEV minimum commitments. Operating expenses of approximately $24.1 million for the quarter were higher than 2011's fourth quarter amount of $20.2 million, primarily due to the incremental operating cost of the UNEV Pipeline and of the assets we acquired last November, serving HFC's El Dorado and Cheyenne refineries. Also contributing to the increase were year-over-year increases in maintenance service, payroll, power costs due to higher shipment volumes and a reimbursable adjustment related to the November 2011 acquisition.

Going forward for 2013 and excluding reimbursable expenses, we expect operating expenses to be in the $20 million to $22 million per quarter range. G&A expenses were $1.7 million for the quarter, which is within our historical range of $1.5 million to $2 million per quarter. In 2013, we're investing in additional staff to allow us to capture more organic growth opportunities and to manage our growing base business, and as a result, we expect G&A to be in the $2.5 million to $3 million per quarter range.

Now I'll cover a few deals -- details relating to shortfalls billed and deferred revenue recognized during the quarter. As a reminder, these payments we received for quarterly shortfall billings under the minimum commitments in certain contracts are included in distributable cash flow in the current accounting period, but classified as deferred revenue so not recorded as revenue on our income statement until such time they can be recognized. Deferred revenue recognitions results primarily from shortfall billings in prior quarters for which we clawback rights are either used or expired. Recognition of deferred amounts can also occur when system capacity limits the shippers' future ability to ship all volumes necessary to capture the full value of the shippers clawback credit. Shortfall billed for the fourth quarter 2012 for shipments below commitments totaled $3.1 million, including shortfall billings for UNEV. Offsetting this amount and recognized as revenue in the quarter were total forfeitures of $4.6 million related to affiliate and UNEV shipments. As of December 31, 2012, we have $7.8 million in deferred revenue recorded on our balance sheet. We expect approximately $6.7 million of that deferred revenue to be recognized in the first quarter of 2013, the majority of which is related to UNEV shortfalls billed in 2012 for which clawback rights expire on March 31.

EBITDA for the quarter was $54.7 million, benefiting from the previously discussed higher pipeline volumes, tariff increases and EBITDA from the November 2011 and UNEV acquisitions as compared to the last year's fourth quarter. Adjusting to add shortfall billings and subtract deferred revenue, this quarter's EBITDA total would have been $53.2 million. Total EBITDA for 2012 was $194.2 million, a 30% improvement over 2011 EBITDA. As of December 31, 2012, we had $421 million of credit facility borrowings, giving us $129 million of availability under the facility. As a reminder, the facility contains a $200 million accordion feature, and its term extends through June 2017.

We have $450 million of aggregate principal amount of senior notes outstanding made up of $150 million of 8.25% notes due 2018 and $300 million of 6.5% notes due 2020. The distributions declared on January 24 resulted in $32.7 million of distributions paid February 14, 2013, to unitholders of record as of February 4, 2013. Now I believe Bruce has a few comments before we turn to questions. Bruce?

Bruce R. Shaw

Thanks, Doug and thanks, everyone, for listening this afternoon. No doubt 2012 was another strong growth year for HEP, with an increase in DCF of over 50 million compared to 2011 and with EBITDA running at an annualized rate of more than $200 million in the last 2 quarters of the year. Not only did HEP fully integrate new assets and operations at El Dorado and Cheyenne, acquired from HollyFrontier in late 2011, but we also closed the acquisition of HFC's 75% interest in the unit pipeline. We have high expectations for UNEV's volume growth once refinery expansions in Salt Lake City are completed in late 2014, including HFC's 15,000-barrel-a-day expansion at its Woods Cross refinery. Until then, UNEV is supported by minimum commitments from HFC and Sinclair and a GP giveback from HFC. A key driver of organic growth during the year was very strong volume shipped on HEP's product and crude pipeline systems, serving HFC's Navajo refinery in New Mexico, as the refinery maximizes the output potential and producers continue to use new methods to extract more oil in the Permian Basin.

Refining economics and stronger operations also supported increased shipment volume on our product pipeline system originating at Alon's refinery in Big Spring, Texas. Though downtime resulting from scheduled maintenance at 2 of the refineries we serve will result in decrease in volumes, revenue and income in the first quarter of 2013, we're optimistic about the remainder of the year.

Excluding spending related to our purchase of the UNEV pipeline interest and expenditures related to storage tank inspection and repair that is contractually reimbursed, our CapEx for 2012 totaled about $22 million, including $6 million of maintenance capital expenditures. Most of the expansion capital was spent on terminal vending capability enhancements and incremental capacity expansions of our crude gathering assets.

In 2013, looking forward, we project our capital spending to be about $40 million to $50 million, of which most will be directed at our [indiscernible] crude gathering expansion project and about $10 million will be for maintenance CapEx.

As we have over our almost 9-year history, we'll continue to seek out ways to capitalize on growth opportunities in at least 3 areas: investment at existing assets to support further organic growth, synergistic opportunities to support HFC's strategic initiatives; and third-party acquisitions. Our past performance and readiness for continued growth wouldn't be possible without the hard work and dedication of each and every employee at HEP. I'd like to thank them for completing another year of safe and reliable operations. And with that, I think I'll turn things back to Susan for Q&A. Susan?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Zarahn with Barclays Capital.

Brian J. Zarahn - Barclays Capital, Research Division

On UNEV, can you give a little more color as to its performance in the quarter and any update on your expectations for 2013?

Bruce R. Shaw

We did see increased volumes on UNEV as we got into the winter time. We saw a few periods of time when we were shipping at or above our minimum volume commitments. But for the quarter, still supported by those minimum volume commitments. So although we'll continue to expect seasonal volume to be higher in the winter time, we'll obviously rely on those minimum commitments until the refinery expansions take place here in a couple of years.

Brian J. Zarahn - Barclays Capital, Research Division

And then for the -- looking forward to the next winter, no change in your expectations for what kind of volume ramp you expect?

Bruce R. Shaw

No significant change. I will say that we've gotten requests for a couple more connections in the Salt Lake City area, not to call any out specifically, but that gives us a bit of optionality for more spot volume next winter time or throughout 2013 as soon as those connections are completed versus what we had in 2012.

Brian J. Zarahn - Barclays Capital, Research Division

In terms of your organic projects, can you provide -- maybe elaborate on what additional projects you're evaluating?

Bruce R. Shaw

Sure. I mean, I think the most visible organic project is going to be the workaround our West Texas gathering, crude gathering assets that are kind of Southeastern, New Mexico and the West Texas Permian Basin related. And so the CapEx that we referred to for 2013, most of that expansion CapEx will be focused on that set of assets. And we've talked about that project in the past, but that's something we'll be building out in 2013, and should see the kind of income coming in from that project once we get into the beginning of 2014.

Brian J. Zarahn - Barclays Capital, Research Division

And within the existing assets at HEP or HFC, are there any additional projects that you're currently looking at?

Bruce R. Shaw

Well, the 2 that I highlighted, the ones we talked about in our December press release, we are evaluating a potential pipeline -- crude pipeline between Cushing and Tulsa that would support HFC's Tulsa Refining operations with additional crude transportation capacity there. We also talked in the press release about a potential pipeline that we're examining, products pipeline from Cheyenne to Denver. Both of those are still in the very early stages of evaluation. So nothing definitive on whether either one of those would go forward, but we'll -- should have a better update for you this time next quarter.

Operator

Your next question comes from the line of Cory Garcia with Raymond James.

Cory J. Garcia - Raymond James & Associates, Inc., Research Division

Just sort of wanted to, I guess, follow up to that last question regarding your 2 new proposed pipeline projects and try not to jump the gun too much here. But assuming that a go-ahead was, in fact, made by year-end and sort of given the scope of what it looks like today, would it be okay to assume that these are completed by year-end 2014? Just trying to better gauge sort of the overall timeline in sort of these new build projects?

Bruce R. Shaw

Cory, you're talking about the 2 that we're currently exploring, the one -- the products line from Cheyenne to Denver and the Cushing to Tulsa crude line?

Cory J. Garcia - Raymond James & Associates, Inc., Research Division

Yes. Exactly, yes.

Bruce R. Shaw

Those right now, I'd hesitate to predict any kind of timeline because we're not even sure we want to go ahead with those projects. We're trying to get a good cost estimate for each project and obviously line those once we understand what the capital cost involved would be, work with our peers at HollyFrontier to see if they -- how that stacks up against the other alternatives. So we're not even prepared to say those projects are going forward, but we are actively exploring the economics of them.

Cory J. Garcia - Raymond James & Associates, Inc., Research Division

Okay. And this would be something that perhaps you guys would co-invest with your parent?

Bruce R. Shaw

Well, I think if either one of these pipelines go forward, it would be most logical for HEP to kind of handle all the capital expenditures required that may or may not be supported by commitments from HFC so that's kind of how both would contribute.

Operator

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

Mark L. Reichman - Simmons & Company International, Research Division

I just want to clarify on these. On the Permian Basin projects, what's the amount of the EBITDA contribution that you're expecting to -- for 2014 as a result of the projects that you'll be spending money on this year?

Bruce R. Shaw

Mark, we don't usually spell out the EBITDA till we get further into the project. I will tell you that if you think about the capital we're going to spend here, that's kind of in the $30 million to $40 million range. And just as we think about the EBITDA contribution that could come from that investment, the multiple on the face of it will look a little lower on EBITDA than projects we've done in the past. Still a little bit early to give you any specifics. But we're also having to restart and utilize some dormant pipelines that we have to contribute so once you factor those in, the EBIT -- the kind of spend the EBITDA multiple is a bit more in line with what you've seen in the past. So just to give you a little bit of feel for what that magnitude could be if you keep in mind the $30 million to $40 million of spend.

Operator

There are no further questions at this time. I would now like to turn the floor back over to Matt Vantackles (sic) [Julia Heidenreich] for any closing remarks.

Julia Heidenreich

Thank you, everyone, for joining us on today's conference call. We look forward to sharing our first quarter results with you in late April.

Bruce R. Shaw

Thanks, everyone.

Operator

Thank you for your participating in today's conference. You may now disconnect.

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