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Holly Energy Partners L.P (NYSE:HEP)

Q1 2013 Earnings Call

April 30, 2013 4:00 pm ET

Executives

Julia Heidenreich

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

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

Matthew P. Clifton - Chairman of Holly Logistic Services LLC, Chief Executive Officer of Holly Logistic Services LLC and Chairman of Executive Committee

Analysts

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

Connie Hsu - Morningstar Inc., Research Division

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

Operator

Welcome to Holly Energy Partners' First Quarter 2013 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, everybody, and welcome to Holly Energy Partners' First Quarter Earnings Call. I'm Julia Heidenreich, Vice President of Investor Relations. With us today are Matt Clifton, Chairman and CEO; Bruce Shaw, President; and Doug Aron, Executive VP and CFO.

This morning, we issued a press release announcing results for the quarter ending March 31, 2013. 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 discussion of non-GAAP measures. Please see today's press release for reconciliations to GAAP financial measures. Also, please note that information presented on today's call speaks only as of today, April 30, 2013. Any time-sensitive information provided may no longer be accurate at the time of any webcast replay or rereading of the transcript.

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

Douglas S. Aron

Thank you, Julia, and thanks to all of you for joining us this afternoon. On Friday, April 26, we announced the 34th consecutive increase in our quarterly distribution to 47 and 75 -- $0.4775 per unit or a 6.7% increase over the presplit $0.895 per unit we declared for 2012's first quarter.

Our distributable cash flow for the quarter ended March 31, 2013, was $32.4 million compared to $36.6 million distributable cash flow in the first quarter of 2012. Net income attributable to HEP for the first quarter was $18.4 million or $0.21 per unit versus $21.8 million or $0.30 per unit for the same period in 2012. The decrease in earnings compared to last year's first quarter is mainly a result of higher operating costs and lower pipeline volumes due to turnaround work at both HollyFrontier Corporation's Navajo refinery and Alon's Big Spring's refinery. Both refineries have fully completed their turnaround work and are operating at normal, pre-turnaround throughput rates. As a reminder, approximately 80% of HEP revenues and, therefore, income and discounted cash flow -- I'm sorry, rather distributable cash flow are supported by minimum commitments from major customers. Annual minimum commitments are approximately $250 million, including 75% of the UNEV minimum commitments, or $62.5 million per quarter.

Operating expenses of approximately $25.9 million for the quarter were higher than the 2012 first quarter amount of $20.5 million because of additional maintenance cost planned to coincide with the Navajo turnaround, increased employee costs and environmental accrual and the inclusion of reimbursable tank maintenance costs. The reimbursable portion of operating expenses for which there is an offsetting revenue was $1.5 million and nonrecurring or out-of-period maintenance operating expenses totaled approximately $2.4 million. The majority of maintenance expense related to hydro-testing and repair of the 6-inch Artesia to El Paso products line.

Going forward, for 2013 and excluding $2 million to $4 million of reimbursable expenses, we expect operating expenses to be in the $20 million to $22 million per quarter range. SG&A expenses were $3.2 million for the quarter, slightly above our expected quarterly range of $2.5 million to $3 million per quarter as a result of onetime costs related to our March equity offering and investments in additional staff.

Now I'll cover a few details relating to shortfalls billed and deferred revenue recognized during the quarter. As a reminder, the 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 as they can be recognized. Deferred revenue recognitions results primarily from the shortfall billings in prior quarters for which clawback rights were used or expired. Recognition of deferred amounts can also occur when system capacity limits a shippers future ability to ship all volumes necessary to capture the full value of the shippers clawback credit. Shortfalls billed for the first quarter of 2013 for shipments below commitments totaled $4.5 million. Offsetting this amount and recognized as revenue in the quarter were total forfeitures of $6.7 million. As of March 31 of this year, we have $5.4 million in deferred revenue recorded on the balance sheet. We expect approximately $700,000 of the deferred revenue to be recognized in the second quarter of 2013. This decrease relative to the first quarter is due to the timing of UNEV shortfalls, which are typically recognized in March rather than on a rolling four-quarter basis.

EBITDA for the first quarter of this year was $45 million, adjusting to add shortfall billings and subtract deferred revenue. This quarter's EBITDA total would have been $42.8 million. We expect EBITDA going forward to be approximately $50 million per quarter. As of March 31 of this year, we have $368 million borrowed under our credit facility, leaving $182 million of remaining availability. As a reminder, the facility contains a $200 million accordion feature and its terms extend through June of 2017. We have $450 million aggregate principal amounts of senior notes outstanding, made up of $150 million 8 1/4% notes due 2018 and $300 million of 6 1/2% notes due 2020. The $0.4775 distribution declared last week will be paid May 15, 2013, to unitholders of record as of May 6, 2013.

Now I believe Bruce has a few comments before we turn to questions.

Bruce R. Shaw

Thanks, Doug, and thanks, everyone for listening. Consistent with my comments on the February call and as Doug has highlighted already HEP's volume and financial performance were negatively affected in the first quarter by turnarounds at 2 of the refineries we serve. We're pleased that both HFC's Navajo refinery and Alon's Big Spring refinery are now running at pre-turnaround levels, giving us confidence about the remainder of 2013. With crude production continuing to grow in the Permian Basin and throughout the mid-continent and with product demand entering its spring-summer up-cycle, favorable refining economics should support strong throughput to the refineries we serve, which in turn will support volumes on our product pipelines, crude gathering system and terminals. For UNEV, though volumes exceeded minimum commitments on a few occasions this past winter, we don't expect significant volume upside for UNEV until refinery expansions in Salt Lake City are completed in late 2014 or early 2015. Until then, UNEV is supported by minimum commitments from HFC in Sinclair and the GP giveback from HFC related to HEP's ownership interest. As for our current growth initiatives, we're proceeding with the expansion of our crude gathering system in Southeastern New Mexico and we've announced several potential opportunities in varying stages of development, including the crude-by-rail capability in Artesia and/or Lovington, New Mexico, a potential crude pipeline providing additional access for HFC's Tulsa Refinery to Cushing, Oklahoma, and a possible product pipeline between HFC's Cheyenne Refinery and Denver, Colorado. The crude gathering system expansion is underway and scheduled for completion by early 2014. We'll update you on the other development opportunities as soon as we have more definitive details to provide and/or have made a decision to proceed.

Our CapEx for the first quarter of 2013 totaled about $7 million, including $2 million of maintenance capital expenditures. The majority of the expansion capital was spent on the work related to our Southeastern New Mexico crude gathering system. Our 2013 capital spending is forecast to be approximately $50 million, of which the majority will be spent on our crude gathering expansion project with the remaining $10 million from maintenance CapEx.

I'd like to spend -- I'd like to finish by thanking the entire HEP team for completing another quarter of safe and reliable operations. HEP's continued success and readiness for future growth wouldn't be possible without the hard work and dedication of each and every employee.

Now I'll turn it back to Julia and we'll take a few questions.

Julia Heidenreich

Maria, if you could prompt questions, that would be great. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mark Reichman of Simmons.

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

Just a couple of real quick questions. On the fourth quarter earnings call, the G&A expenses were kind of forecasted to be in the range of $2.5 million to $3 million. This quarter, they came in at $3.2 million. Is that $2.5 million to $3 million still a good number moving forward or do you think $3.2 million is a more normal number for SG&A for the remainder of the year?

Bruce R. Shaw

We think $2.5 million to $3 million is a good estimate, Mark. We had a few extra G&A expenses this past quarter, some related to the equity offering that we had in the quarter.

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

Okay, okay, that makes sense. And just with regard to the rail facility. I know that it's still pretty -- still early days but can you talk at all about how you're envisioning the structure? I mean, is that likely to be developed up at the parent HollyFrontier and then just later drop down. Or what -- is there any additional color you can provide on the structure?

Bruce R. Shaw

Not too much we can provide right at the moment. I would say all options about the initial funding are on the table. But the first step is really estimating the capital, which we're beginning to get our arms around, as well as kind of dividing the responsibilities between HFC and HEP. So we'll give you an update on that -- should be able to update you on that next quarter.

Operator

Our next question comes from the line of Connie Hsu of Morningstar.

Connie Hsu - Morningstar Inc., Research Division

I just had a couple of questions on the Southeastern New Mexico crude expansion announced in March. Do you have any estimated returns in terms of EBITDA for that project? And also, since part of it involves a pipeline conversion, I was just wondering if this line was previously out of service before or if we should expect a decline in refined products volumes, as well?

Matthew P. Clifton

Sure. This is Matt Clifton. On the last part of the question, there is about a 50-mile segment of line that was previously in product service that -- we looped that line several years ago. So since that time it's been out of service. So we're going to be reactivating that and basically reversing the flow from north -- from south to north. So that's one piece of the component. As far as EBITDAs, I don't think we've disclosed what the EBITDAs are. I would say that the -- we feel that the initial EBITDAs will be a better result than our previous drop downs, some of that by virtue of the fact that we're utilizing that idled asset and starting to get a return on that. But that's probably as much detail we're going to give right now.

Operator

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

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

Just one quick question on the New Mexico rail facility and respecting that you guys are still in the midst of sort of engineering this whole project. I'd imagine you guys are sort of viewing this and looking at it from a minimum commitments standpoint. Just what are your thoughts as to what sort of targets you need to sort of secure and move forward with this? Would it be an 80% type of commitment level? And ultimately, what's sort of the scope that you guys could be looking at, call it 3 years from now, given the significant growth opportunities we see out of the Permian Basin?

Bruce R. Shaw

Cory, when you say scope, do you mean in terms of barrels per day or what are you thinking there?

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

Yes, exactly. So you guys obviously came out and sort of said there was a 70,000 barrel a day project. What sort of commitment levels would you guys look to on this? Are you viewing it as a typical pipeline type of project, where you'd need to secure that?

Bruce R. Shaw

Well, as much as we'd like to answer that one, I think until we get our arms around the CapEx required -- and we benefit from some infrastructure that's already in place at a couple of -- at either Artesia or Lovington, as we look at it, it's hard to pin down what kind of commitments you need. Matt, I don't know if you want to add anything to that.

Matthew P. Clifton

I think that's right. It's just a little bit early. I think if there's -- as Bruce said, if we can utilize a lot of the existing infrastructure and drive down the cost and that, obviously, will reduce the need for commitments. I think early on, the project will be looking for customers that have their own cars secured because of the long delay in buying or procuring new rail cars. So I think there's interest and -- but as we've said, it's kind of early but we should have a lot of details on our next call.

Bruce R. Shaw

And Cory, of that 70,000 barrels a day, it wouldn't be surprising to find out that you don't have to have a vast majority of 70,000 barrels a day signed up in order to make the economics work. But just a little bit too early on the CapEx side to comment.

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

Yes, and that was sort of the angle I was coming. On a lot of these projects, you didn't need a kind of commitment, particularly because you guys are looking at it as more of a flexible facility also, bringing in crudes and also shipping out. But sounds like we're going to get a lot more color here in a couple of months.

Operator

[Operator Instructions] I'm showing there's no questions at this time. I'd like to turn the floor back over to Julia Heidenreich for any closing remarks.

Julia Heidenreich

Thank you, everyone, for joining us on the call today. If you have any follow-up questions, Neale Hickerson and myself will be in the office this afternoon to take any questions. Otherwise, we look forward to sharing our second quarter results with you in early August. Have a good afternoon.

Bruce R. Shaw

Thanks, everyone.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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