Holly Energy Partners L.P (HEP) Q2 2014 Results - Earnings Call Transcript

Aug. 5.14 | About: Holly Energy (HEP)

Holly Energy Partners L.P (NYSE:HEP)

Q2 2014 Earnings Call

August 05, 2014 4:00 pm ET

Executives

Blake Barfield -

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

Analysts

Theresa Chen - Barclays Capital, Research Division

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

Operator

Welcome to Holly Energy Partners' Second Quarter 2014 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 Blake Barfield. Blake, you may begin.

Blake Barfield

Thanks, Lisa. Thanks to each of you for joining this afternoon. I'm Blake Barfield, Investor Relations for Holly Energy Partners. Welcome to our second quarter 2014 earnings call. 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 June 30, 2014. If you'd like a copy of today's press release, you may find it on our website, hollyenergy.com.

Before Doug and Bruce proceed with prepared 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, August 5, 2014. Any time-sensitive information 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.

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

Douglas S. Aron

Thanks, Blake, and thanks to all of you for joining us today. On July 24, Holly Energy Partners announced a quarterly distribution of $0.515 per unit. The quarterly distribution will be paid Thursday, August 14, to unitholders of record as of yesterday, August 4, 2014. This distribution, which represents a 6.2% increase over the distribution for the second quarter of last year, marks the 39th consecutive increase in HEP's quarterly distribution.

For the second quarter of 2014, Holly Energy Partners generated distributable cash flow of $43.5 million. DCF in the quarter was better than the same period of last year by over $7 million and enabled HEP to continue the record of raising our quarterly distribution to unitholders every quarter since our IPO, now more than 10 years ago.

Second quarter EBITDA was $47.3 million. EBITDA totals more than $52 million when adjusting for shortfalls billed and deferred revenue recognized in the period. Net income attributable to HEP for the second quarter was $23 million, an increase from the $20 million in the same period of last year. Operating expenditures in the period totaled $24.6 million, including $1.3 million of reimbursable OpEx for which there was offsetting revenue. Depreciation and amortization was $15.9 million in the quarter. And G&A expenses were $2.5 million, within our expected range of $2.5 million to $3 million per quarter. Interest expense in the period was $8.3 million, down from the $11.6 million during the same time last year, reflecting savings largely due to HEP's redemption of 8.25% notes earlier this year.

HEP billed approximately $5.5 million in shortfalls, resulting from second quarter throughputs below minimum volume commitments, largely resulting from planned maintenance at Alon's Big Spring refinery. This amount was offset in part by $200,000 of deferred revenue recognized in the second quarter that was built in 2013.

As a reminder, quarterly revenues billed for volumes below minimum commitments on HEP assets serving the Big Spring refinery are typically recognized in the fourth quarter each year. At June 30, we had $9.7 million in deferred revenue on our balance sheet and anticipate recognizing $600,000 of deferred revenue in the third quarter.

Following the July 1, 2014 PPI tariff adjustments, long-term minimum commitment contracts with major customers will result in consolidated annualized payments of approximately $270 million. HEP had $843 million of debt outstanding at June 30, comprised of $300 million of 6.5% senior notes due 2020 and $543 million drawn on our $650 million credit facility.

Now I'd like to turn the call over to Bruce for a few comments.

Bruce R. Shaw

Thank you, Doug. And thanks again, everyone, for listening today. My comments this afternoon will briefly touch on second quarter results, capital expenditures and growth projects.

As for result, the second quarter was a solid one, operationally and business-wise for HEP. Crude gathering volumes continue to increase. And unit volumes, though below contractual minimums, given the summer seasonality, were ahead of last year's shipments. And though Alon's turnaround negatively impacted recorded revenue and EBITDA in the quarter. DCF remained on track, given minimum commitments. As Doug mentioned, EBITDA would've been about $52 million if accounting rules allowed us to count shortfalls billed when cash is received.

On capital spending, our CapEx for the second quarter of 2014 was approximately $16 million, excluding CapEx that was reimbursed to us by HollyFrontier, of which just under $1 million were maintenance capital expenditures. The majority of the spending went toward the expansions of our Southeastern New Mexico crude system and UNEV's North Las Vegas truck rack. We expect 2014 maintenance CapEx to be about $7 million, and expansion capital expenditures, excluding reimbursable expenditures, to be in the $40 million to $50 million range.

Next, an update on growth projects. We're on schedule to complete the expansion of our Southeastern New Mexico gathering system by September, and once complete, we estimate the system will add approximately $10 million of annual revenue in year 1 of operations. Production volume continues to increase in close proximity to the system, and since June, we've begun operating newly built pipelines, serving 2 new gathering areas now connected to the Southeastern New Mexico system.

The commissioning of the expanded UNEV North Las Vegas rack will take place later this month, and as a reminder, this expansion from 2 truck loading spots to 4 will equip the pipeline to handle increased volumes we expect to ship beginning later this year. In addition to the seasonal increase in volumes UNEV sees in the winter months, the first of 2 refinery expansions is expected to come online in the fourth quarter. And by the fourth quarter of 2015, we expect the refineries in Salt Lake City to be producing an additional 20,000 barrels a day approximately of refined product. So in 2016, if UNEV transports an additional 15,000 barrels a day of that expanded volume, for Salt Lake City shippers, this will translate into over $20 million of additional revenue for UNEV. And with very little incremental operating expense, this means an additional $15 million approximately of EBITDA for HEP for its 75% share.

We expect these visible projects, along with our annual contractual tariff and fee increases, to add about $30 million in annual EBITDA by early 2016.

In addition to our ongoing evaluation of potential acquisitions, we're focused on adding to HEP's visible growth by pursuing organic newbuild projects that leverage HEP's and HollyFrontier's existing asset footprints and organizational capabilities.

Recently, HollyFrontier has asked HEP to evaluate building several new crude tanks, as well as additional pipeline connections at HollyFrontier's El Dorado refinery, that could increase the refinery's crude flexibility. The project could be a significant one, with capital expenditures possibly in the $50 million to $80 million range. We should know later this fall if the project is moving forward once the scope is finalized and we're able to fully assess project economics.

To conclude, I'd like to thank every HEP employee. Your hard work, dedication and continuing focus on safety, system reliability and customer service continue to enable HEP to create value for our customers, communities and investors.

Now, Lisa, I believe we're ready to take a few questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Theresa Chen from Barclays Capital.

Theresa Chen - Barclays Capital, Research Division

Question about one of the previously mentioned projects. Can we get an update about the Rockies crude gathering project? And is that still likely to go forward?

Bruce R. Shaw

Yes, we're still working on additional gathering potential projects, Theresa. We -- as we continue to look at places that would make sense, the Rockies still appear to be the right next place after the Permian Basin or the Delaware Basin where our current system is. We just haven't made enough progress to report anything new to you. So we continue to look at it and work on it. As soon as we have something to say, we'll be sure to communicate it to you.

Theresa Chen - Barclays Capital, Research Division

Got it. And then next on the cost of the New Mexico project, now that we are very close to the finishing line, can you give us a sense if that's going to shake out closer to $45 million or $50 million?

Bruce R. Shaw

It's going to be closer to the top end of that range.

Theresa Chen - Barclays Capital, Research Division

Great. And then lastly, on maintenance CapEx, given that you reiterated the previous guidance for the year and given that the first half was light on maintenance, should we see the balance to be equally split between the third and fourth quarter? Or primarily concentrated in one or the other?

Bruce R. Shaw

I think it's best to think about them equally split. You're not going to go too far wrong with that assumption.

Operator

Your next question comes from Cory Garcia from Raymond James.

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

Just one quick follow-up, I guess, to the New Mexico's gathering project, given that we are sort of close to the end of the finish line. Any color on how to look at the ramp of that to get up to sort of the $10 million that you guys sort of illustrated?

Bruce R. Shaw

Yes, Cory, this is Bruce. We -- the $10 million is made up of really 2 pieces. It's the minimum commitment from HollyFrontier on a system, it's about $7.5 million a year. So that's very kind of safe and easy to count on right away once we complete here by September. The rest of that balance is primarily made up of additional gathering that will come into the system in addition to that minimum. And so we feel pretty good about the $10 million number overall. That's a pretty conservative number, really, startingfrom the first couple of months of the operation.

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

Okay, so above and beyond that rate it sounds like the initial gathering is going to be enhanced pretty quickly?

Bruce R. Shaw

Exactly.

Operator

[Operator Instructions]

Blake Barfield

Okay. Thanks, everyone, for joining the call today. Please feel free to reach out to Investor Relations if you have any follow-up questions. Otherwise, we look forward to sharing our third quarter results in November.

Operator

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

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