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Holly Energy Partners, L.P. (NYSE:HEP)

Q1 2010 Earnings Call Transcript

April 29, 2010 4:00 pm ET

Executives

Neale Hickerson – VP, IR

Bruce Shaw – SVP and CFO

David Blair – President

Analysts

Michael Cerasoli – Goldman Sachs

Darren Horowitz – Raymond James

Ron Londe – Wells Fargo

Brian Zarahn – Barclays Capital

Charlotte Chamberlain – Chamberlain Associates

Operator

Good afternoon. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Holly Energy Partners first quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) I would now like to hand the program over to Mr. Neale Hickerson. Please begin.

Neale Hickerson

Well, good afternoon, everyone, and welcome to Holly Energy Partners first quarter earnings webcast conference call. I’m Neale Hickerson, Vice President of Investor Relations at HEP. With us this afternoon from HEP are Matt Clifton, Chairman and CEO; David Blair, President; Bruce Shaw, our Senior Vice President and Chief Financial Officer; Steve Wise, Vice President and Treasurer; and Scott Surplus, Vice President and Controller.

This morning we issued a press release announcing results for our first quarter year-end 2010. This press release can be found on our website at www.hollyenergy.com. For this afternoon call, Bruce Shaw will begin with some comments regarding our financial performance. David Blair will then follow up with some additional prepared remarks. And at the conclusion of these prepared remarks and comments, our team will be available for your questions.

Before we turn things over to Bruce and David for their comments, we are required to make the following Safe Harbor disclosure statement. Also please note our Safe Harbor statement in our press release from this morning. The following is the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995

The statements in our conference call today related to matters that are not historical facts are forward-looking statements within the meaning of federal securities laws.

These statements are based on our beliefs and assumptions using currently available information and expectations and are not guarantees of future performance and do involve certain risks and uncertainties, including those which we have noted in the Safe Harbor portion of our press release today and in our filings which we make with the Securities and Exchange Commission.

Also please note that these forward-looking statements speak only as of today, April 29, 2010, and any time sensitive information provided may no longer be accurate at the time of any webcast replay or your reading of the transcript of our call. Other than as required by law, we assume no obligation to publicly update or revise such statements, whether as a result of new information, future events or otherwise.

Lastly, please note that on the call today, we may have a discussion of non-GAAP financial measures that we use in analyzing our financial results. Please refer to today’s press release for required reconciliations to GAAP financial measures and other related disclosures or information on where you may find them.

And now I’d like to turn things over to Bruce Shaw.

Bruce Shaw

Thank you, Neale. And good afternoon, everyone. On April 23, 2010, we announced an increase in our distribution to $0.815 per unit, which is a 5% increase over the $0.775 per unit we declared for the same quarter last year.

As you’ve seen from our press release this morning, our distributable cash flow for the first quarter ended on March 31 was $20.2 million, up $5.6 million or 38% from the same period last year. The increase in distributable cash flow resulted primarily from contributions from our 2009 acquisitions, though volumes on our heritage pipeline systems were lower than the recent quarterly levels due to scheduled project work in our Navajo refinery.

Our income for the quarter was $10.7 million or $0.36 per unit versus $5.4 million or $0.25 per unit for the same period last year. Revenues increased compared to first quarter ’09 again due to our 2009 acquisitions. But we are below expected go-forward quarterly run rate due to the planned downtime at Navajo and lower third-party shipments.

We recognize slightly less deferred revenue this quarter than we did during last year’s first quarter. Deferred revenue recognized results from shortfall billings in prior quarters, for which clawback rights were used or expired. As a reminder, the payments we received from Holly and Alon for quarterly shortfall billings under their minimum commitments are included in distributable cash flow in the current accounting period but classified as deferred revenues are not recognized on our income statement until such time that they can be recognized, which is typically four quarters later.

Our current minimum commitments from our major customers are approximately $160 million per year or $40 million per quarter. For the remainder of 2010, revenues should be in the $45 million range per quarter. Operating expenses other than depreciation and amortization of approximately $13.1 million for the quarter were $2.7 million higher than last year’s first quarter due to increased throughput volumes, higher payroll, and higher maintenance expense, mostly related to our 2009 acquisitions. Going forward, incorporating recent acquisitions, the normal run rate should be in the $13 million to $13.5 million per quarter range.

G&A expenses were $1.2 million higher than last year’s first quarter number and also above the normal run rate due primarily to professional expenses related to recently completed acquisitions. The normal run rate for G&A should be less than $2 million per quarter. Compared to the first quarter of ’09, we had a $0.6 million decrease in deferred revenue recognized.

Shortfalls build for the first quarter 2010 for shipments below committed volumes was $3.6 million, including $1.2 million for affiliate pipelines and $2.4 million for third-party pipelines. Offsetting this amount and recognized as revenue were total forfeitures at $2.5 million from first quarter 2009, including $1.8 million for affiliate pipeline shipments and $0.7 million for third-party pipeline movements.

On March 31, 2010, we had $9.5 million in deferred revenue on the balance sheet. These deferrals will be recognized in revenue over the course of the next four quarters as the shippers’ contractual clawback rights are either utilized or expired. The deferred revenue increase in the second quarter of 2009, for which clawback rights expire on June 30, 2010 or during the second quarter of this year, was approximately $1.6 million. This is about $4 million less than was recognized in the second quarter of ’09, since the second quarter of ’09 included revenue recognition generated during Alon’s significant downtime in 2008.

EBITDA for the quarter was $25.5 million, benefiting from previously discussed acquisitions compared to last year’s first quarter. But at this level, it was lower than we expect for our future quarterly run rate because of lower heritage pipeline volumes due to planned work at Holly’s Navajo refinery. Going forward, we would expect quarterly EBITDA to be in the $30 million to $35 million range per quarter.

The total distribution will amount to approximately $20.9 million and will be paid on May 14, 2010 to unit holders of record as of May 4, 2010. At March 31, we had $335 million of senior notes outstanding and $171 million drawn under our $300 million credit facility. Recall that we issued $150 million of 8.25% senior notes in early March to fund our recent $93 million acquisition of storage and loading facilities from Holly Corporation. The excess proceeds were used to pay down our revolving credit facility and for general partnership purposes.

Now, I think David has a few comments before we turn things over to questions. David?

David Blair

Thanks, Bruce. Thank you, everyone, for listening to the call today. We are very pleased with our year-over-year growth and our position for the balance of 2010. We continued to add to our logistics asset portfolio with the acquisition of an additional 2.1 million barrels of storage and a rail loading rack at Holly's Tulsa refinery during the quarter, as well as (inaudible) loading rack at Holly’s Lovington, New Mexico facility. These acquisitions should add to our revenues about $13.8 million per year.

Pipeline volumes during the quarter on our systems were lower than anticipated due to downtime for maintenance in our larger customers’ facilities although distributable cash flow remained strong as a result of our minimum revenue contracts. Pipeline volumes have returned to expected levels during April. Our first quarter operating expenses were higher than we had planned, resulting from increased expenses related to the Tulsa acquisition, unplanned tank maintenance, and an environmental accrual cost. We expect our operating expenses to level out the remainder of the year.

Maintenance capital expenditures were about 50% as expected due to project timing. We anticipate catching up the next three quarters to around $5.5 million total spend for 2010. We have completed all major expansion projects around our New Mexico operations and currently have WTS crude oil in the Roadrunner and Lovington to Artesia pipelines.

We are working on expansion pipelines. We are working on expansion pipeline projects connecting Holly’s Tulsa facility as well as ethanol blending upgrades at our Tulsa rack. We are also evaluating expansion to our crude oil gathering at current volumes in Southeast New Mexico.

As we look to the future, we continue to be excited about the UNEV project, which should start construction on the pipeline in June of 2010. We also continue to evaluate third-party acquisitions that come about in the marketplace. We are pleased to have increased our distribution to $0.815 a unit per quarter, a $3.26 a unit on a full year basis. We are very proud of our track record of 22 consecutive increases. We plan to continue to prudently growing our business to provide additional increases in the future.

I’ll turn it back to Neale.

Neale Hickerson

And I’d like to turn it back over to Christie. Christie, if you could repeat the process to ask a question, we’ll move to that part of our call.

Question-and-Answer Session

Operator

Yes, sir. (Operator instructions) Your first question comes from the line of Michael Cerasoli with Goldman Sachs.

Michael Cerasoli – Goldman Sachs

Thanks. A few quick questions. On the (inaudible) if you could give me – maybe adjust that for (inaudible)? Are you guys seeing a trend upwards or is it a bit more flattish?

David Blair

Mike –

Michael Cerasoli – Goldman Sachs

I'm sorry. Can you hear me now?

David Blair

Yes, much better.

Michael Cerasoli – Goldman Sachs

My apologies. On refined product demand, if you were to adjust that for the upgrades that occurred or some of the turnaround, can you guys give us some sense of if the trend is upwards or if it's more flattish? As it progress – as the quarter progresses, is demand improving for refined products or not?

Bruce Shaw

Mike, are you just asking overall or just what we see in our markets or both?

Michael Cerasoli – Goldman Sachs

Both would be great.

Bruce Shaw

I think overall we are seeing kind of consistent with many of the refining – Holly's refining peers that refine product demand is picking up a little bit, both in the gasoline side and the diesel side. And certainly we are seeing that – the similar trends in our markets. We were depressed kind of over the wintertime, but now that trains and trucks are starting to move, moving industrial production around, again that helps on the diesel side, and it seems like miles driven. It’s up kind of year-over-year as well.

David Blair

It seems like it’s picking up more towards the start of the second quarter than earlier in the first quarter.

Bruce Shaw

Yes, I think late March –

David Blair

Early April is kind of getting back more to a normalized basis in our markets.

Michael Cerasoli – Goldman Sachs

That’s helpful. Then just kind of quickly turning the UNEV, if you could just give an update on the timeline and just the progress there.

David Blair

Sure. UNEV expects to have the permit around mid-May and they've got the contracts all wind up. The latest number, I think that was in the Q, as we are still anticipating a $275 million construction cost. The Cedar City terminal was virtually completed and the Las Vegas terminal is probably in the 70% range complete. Most of the tanks are up and painted, and they are kind of working on the rack and some of the infrastructure piping there. Anticipate completion late in the year to early next year, and start up and running sometime during the late first quarter, early second quarter of 2011.

Michael Cerasoli – Goldman Sachs

Okay. And then just my last question, which is a little bit more high level. Now that a lot of the – I think a lot of the low-hanging fruit that existed at HOC is passed on to HEP ex-UNEV. Could you guys just talk a little bit about how you're thinking about third-party acquisitions and maybe your cost of capital as it relates to the IDR structure?

David Blair

Sure. We continue to look and see if there is any other organic opportunities at the refineries that make sense. As I mentioned earlier, we are looking at some connecting pipelines between the two Tulsa facilities, ethanol blending, and there is a lot of packages out from some of the majors on third-party assets that we are looking at. And we are just kind of evaluating those as they come along to see if any of them make sense and would complement our existing assets.

Bruce Shaw

And as far as the cost of capital question, I mean, we see our – we recognize that being in the high splits on the IDRs just raised our cost of capital somewhat. If not as big an added for us as it is for some of our peers given where we are in the splits or how early we are kind of in the 50% splits. But some of the deals we look at aren’t that are smaller that are attractive for us, really aren’t as highly – more hyper-competitive as some of the great big packages that might draw all the investment grade MLPs. And so we’re not – we'd surely keep an eye on that, recognize it does add a bit to our cost of capital, but we don’t feel like it’s really holding us back right now.

Michael Cerasoli – Goldman Sachs

Okay. Appreciate the feedback.

Bruce Shaw

Sure.

Operator

Your next question comes from the line of Darren Horowitz with Raymond James.

Darren Horowitz – Raymond James

Hey, guys. Just a couple quick questions. You had mentioned the pipeline volumes returning to more normalized levels this month. And specifically focusing within the affiliate side, is it safe to aside that crude pipeline volumes should kind of bounce back into the low-to-mid 140s and maybe intermediate volumes in the mid-80s similar to what you had experienced in the second half of 2009?

David Blair

Yes, Darren, I think that’s right. I think there is opportunity for to be even a little bit higher than that, but the ranges you talked about stand about right.

Darren Horowitz – Raymond James

Okay. And then just a quick follow-up question on UNEV. As we're trying to get our arms around the volumetric ramp, is it safe to assume based on the time limit you laid out that it's possible, 30,000 barrels a day could be achieved by the end of next year?

David Blair

We clearly think that’s possible, Darren.

Darren Horowitz – Raymond James

Okay.

Bruce Shaw

At the end of 2011?

Darren Horowitz – Raymond James

That’s right.

Bruce Shaw

I think we do see –

David Blair

We hope startup volumes after everything running smooth at the committed volumes and the spot volumes around 30,000 barrels a day pretty quick.

Darren Horowitz – Raymond James

Okay. And that could be online as early as June, call it?

David Blair

Possibly earlier than that. I’m saying more of the April timeframe.

Darren Horowitz – Raymond James

Okay. All right. Thanks for the update, guys.

David Blair

Thank you.

Operator

Your next question comes from the line of Ron Londe with Wells Fargo.

Ron Londe – Wells Fargo

Thanks. A lot of my questions have been asked already. Just curious on the refined product pipeline area, there is a client in third-party refined product shipments. Was that mainly from Alon, and can you put some numbers behind that if you can – volume numbers?

Bruce Shaw

Sure, Ron. The third-party refined product pipelines are down over what you would have seen in 2009 primarily because of the loss that we would count the Rio Grande volume pipelines in that category. So that was anywhere from 15,000 to 20,000 barrels a day of it. A lot of it is certainly down a little bit from where they were. They are probably – but it’s a pretty small number versus 2009 compared to the major change – driver for the change, which is the absence of the Rio Grande volumes.

Ron Londe – Wells Fargo

Okay. Very good. Thanks.

Bruce Shaw

Sure.

Operator

Your next question comes from the line of Brian Zarahn with Barclays Capital.

Brian Zarahn – Barclays Capital

Good afternoon.

David Blair

Hi, Brian.

Brian Zarahn – Barclays Capital

Can you provide CapEx for the first quarter?

Bruce Shaw

Total CapEx, I believe, was slightly under $2 million. And I think you mentioned, David –

David Blair

Yes, we had besides that $93 million acquisition, Brian, we have got another $1.1 million on expansion, and maintenance CapEx was right around $700,000.

Brian Zarahn – Barclays Capital

Okay. You mentioned some organic projects you're pursuing. What's your sort of expected 2010 growth CapEx budget?

Bruce Shaw

We haven’t framed up the numbers on those expansion projects yet. So I hate to hazard a guess on that. But our other expansion budget was around $6 million that we approved – the Board approved last year that has some ethanol upgrades at some of the – Alon and Holly terminals, et cetera.

Brian Zarahn – Barclays Capital

Okay. And then, I guess given your recent acquisition, what's a reasonable run rate for your terminal and truck loading rack throughput?

Bruce Shaw

Well, it’s probably going to be – I know in the – as you look at the end of the first quarter, we’ve got slightly, for affiliates, about 164,000 barrels a day. But because of the contracts around the Tulsa assets and the loading rack over in Artesia, that’s going to more than double, I would think.

David Blair

The way the Tulsa deals are structured, you may want to call us back and we can go offline and walk through the thesis with you, Brian, later on the – the way the revenue streams are built up and what’s filed with the 8-Ks on these agreements. We’d be happy to walk through those with you. But the Tulsa volumes on a throughput basis add up to around 230,000 barrels a day that there is some fee associated with. So we can walk through that and more detail later.

Brian Zarahn – Barclays Capital

Okay. Appreciate that.

David Blair

Sure.

Operator

(Operator instructions) Your next question comes from Charlotte Chamberlain with Chamberlain Associates.

Charlotte Chamberlain – Chamberlain Associates

Good afternoon. A quick question on EBITDA. Could you go over for us the increase in expense on interest rate swaps and what they are tied to? And it's not clear if that's the change in fair value that kicked up so much year-over-year or just what you're paying out. Thank you.

Bruce Shaw

Charlotte, you hit the nail on the head. That was reflective of the change in fair value, and it’s – if you look at how we add back up the distributable cash flow, you will see about $1.4 million, I believe, added back in the quarter for the change in the fair value. So that’s what that number is and what it’s related to. That number is driven by the swap we have around our $171 million of balance under our credit facility where we had locked in a LIBOR rate or a base interest rate of about 3.75% versus the market rate. And so that’s going to change quarter-to-quarter, but obviously it’s non-cash and doesn’t affect the distributable cash flow fee.

Charlotte Chamberlain – Chamberlain Associates

Right, right. Okay. So you are paying short and receiving long or vice versa? I guess it would be vice versa.

Bruce Shaw

I think it’s –

Charlotte Chamberlain – Chamberlain Associates

On the swap.

Bruce Shaw

We are locking in the 3.75%. So it’s opposite of the first thing you said.

Charlotte Chamberlain – Chamberlain Associates

Okay, great. Thanks.

Bruce Shaw

Yes.

Operator

(Operator instructions) I’ll hand the program back over to management for any closing remarks.

Neale Hickerson

We appreciate everyone listening today and we look forward to sharing our results for the second quarter with you later on this summer. Thanks a lot, everyone.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Holly Energy Partners, L.P. Q1 2010 Earnings Call Transcript

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