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Edited Transcript of HEP earnings conference call or presentation 30-Oct-19 8:00pm GMT

Q3 2019 Holly Energy Partners LP Earnings Call

Dallas Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Holly Energy Partners LP earnings conference call or presentation Wednesday, October 30, 2019 at 8:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* George J. Damiris

Holly Energy Partners, L.P. - President, CEO & Director of Holly Logistic Services LLC

* Richard Lawrence Voliva

Holly Energy Partners, L.P. - Executive VP & CFO of Holly Logistic Services LLC

* Trey Schonter

Holly Energy Partners, L.P. - Executive of IR

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Conference Call Participants

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* James M. Kirby

JP Morgan Chase & Co, Research Division - Research Analyst

* Shneur Z. Gershuni

UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst

* Spiro Michael Dounis

Crédit Suisse AG, Research Division - Director

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Presentation

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Operator [1]

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Welcome to Holly Energy Partners Third Quarter 2019 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 Trey Schonter. Trey, you may begin.

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Trey Schonter, Holly Energy Partners, L.P. - Executive of IR [2]

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Thanks, Julie, and thank you all for joining our third quarter 2019 earnings call. I'm Trey Schonter, investor relations representative for Holly Energy Partners. Joining us today are George Damiris, President and CEO; and Rich Voliva, Executive Vice President and CFO.

This morning, we issued a press release announcing results for the quarter ending September 30, 2019. If you would like a copy of today's press release, you may find one on our website at hollyenergy.com.

Before George and Rich 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, October 30, 2019. 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 George.

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George J. Damiris, Holly Energy Partners, L.P. - President, CEO & Director of Holly Logistic Services LLC [3]

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Thanks, Trey, and thanks to each of you for joining the call this afternoon.

HEP generated solid earnings in the third quarter, which allowed us to maintain our distribution of $0.6725 per unit, representing a 1.1% increase to the distribution from the third quarter of 2018. The distribution will be paid on November 12 to unitholders of record on October 28.

For the third quarter, volumes remained strong as HEP's total volumes increased 10% year-over-year due to the continued strength of our crude oil pipeline systems in Wyoming and Utah as well as strong shipments in our UNEV product pipeline.

We recently announced our Cushing Connect joint venture with Plains All American. The joint venture will construct a 160,000 barrel per day pipeline connecting the Cushing, Oklahoma crude oil hub to HollyFrontier's Tulsa refinery as well as own and operate 1.5 million barrels of crude oil storage in Cushing, supporting HollyFrontier's Tulsa and El Dorado refineries.

The joint venture provides added growth to HEP by insourcing HFC's logistics spend. The JV terminal is expected to begin service during the second quarter of 2020, and we anticipate the pipeline coming online during the first quarter of 2021.

Combined, we expect initial annual EBITDA of $7 million to $8 million, representing a transaction multiple of 8 to 9x. Looking forward, we plan to hold the distribution constant at $0.6725 per LP unit per quarter through 2020 while maintaining a distribution coverage of 1x.

HEP's distribution guidance reflects growth from contractual tariff escalators and the recently announced Cushing Connect joint venture and balances our commitment to both a healthy balance sheet and distributing cash flow to our unitholders.

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

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Richard Lawrence Voliva, Holly Energy Partners, L.P. - Executive VP & CFO of Holly Logistic Services LLC [4]

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Thank you, George.

For the third quarter of 2019, net income attributable to HEP was $82.3 million compared to $45 million in the third quarter of 2018. The increase was mainly due to a $35.2 million noncash gain triggered by the renewal of the original throughput agreement between HEP and HollyFrontier Corporation.

Under ASC 842, the new lease accounting standard that went into effect at the beginning of 2019, we determined portions of this agreement qualified as a sales-type lease, which generated the gain. Excluding this gain, net income attributable to HEP for the quarter was $47.2 million or $0.45 per basic and diluted LP unit. This represents a $2.2 million increase compared to the third quarter of 2018.

In the third quarter of 2019, adjusted EBITDA was $90.3 million compared to $86.9 million in the prior year. The new lease standard requires us to recognize a tariff revenue on the assets classified as sales leases as either interest income or the amortization of the net investment in leases.

During the third quarter, we recognized a total of $2.4 million of tariffs outside of the revenue line, $1.7 million in the form of interest income and approximately $700,000 as amortization. Going forward, as we renew old contracts or initiate new contracts, we will evaluate them under the new lease standard and expect growth in the amount of tariff revenue we are recognizing as either interest expense or amortization.

To aid in comparison and economic analysis, we will report an adjusted EBITDA number that reverses this treatment of tariff revenue. A table reflecting these adjustments is available in our press release.

During the period, HEP generated distributable cash flow of $68.8 million, a $2.2 million increase over the same period last year. As George mentioned, for the remainder of 2019 and through 2020, we expect to hold the distribution constant at $0.6725 per LP unit per quarter. For the third quarter, our distribution coverage ratio was 1.01x, averaging 1.01x year-to-date.

Our capital expenditures for the quarter were approximately $6 million, including $2 million in maintenance CapEx and $3 million of reimbursable CapEx. For the full year of 2019, we expect to spend approximately $7 million in maintenance capital, $35 million in expansion capital and $18 million in joint venture investments. The increase in spending is driven by the Cushing Connect JV.

Interest expense rose approximately $800,000 compared to the third quarter of 2018 primarily due to higher average balances outstanding under our senior secured revolving credit facility. As of September 30, HEP had $1.4 billion of total debt outstanding, resulting in a debt-to-adjusted EBITDA ratio of 4.0x. Including cash and revolver availability, our current liquidity is over $472 million.

During the quarter, Moody's upgraded HEP's corporate family credit rating to Ba2 from Ba3, further reinforcing the strength of HEP's stable cash flows and advantageous relationship with our parent, HollyFrontier. Together, this support in our strong liquidity position will enable HEP to pursue future organic and third-party growth opportunities, as demonstrated by our recently announced Cushing Connect JV.

And with that, I'll turn the call over to Julie for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Jeremy Tonet with JPMorgan.

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James M. Kirby, JP Morgan Chase & Co, Research Division - Research Analyst [2]

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This is James on for Jeremy. I just want to start off with the Delek contracts. If there's any update on the portion that was not renewed and coming due next year.

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George J. Damiris, Holly Energy Partners, L.P. - President, CEO & Director of Holly Logistic Services LLC [3]

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Not really. We continue to evaluate alternatives for the -- those assets in both crude oil and product service, but no update at this time.

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James M. Kirby, JP Morgan Chase & Co, Research Division - Research Analyst [4]

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Okay. And I guess just following up that question. For the distribution guidance for next year, is there any -- what is the assumption there for the capacity being utilized on that system?

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George J. Damiris, Holly Energy Partners, L.P. - President, CEO & Director of Holly Logistic Services LLC [5]

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So we've assumed no utilization after the expiration of the contract at the end of the first quarter.

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James M. Kirby, JP Morgan Chase & Co, Research Division - Research Analyst [6]

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Okay. And then just one more, if I could. Do you see leverage ticking above the target to fund the Cushing Connect JV?

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Richard Lawrence Voliva, Holly Energy Partners, L.P. - Executive VP & CFO of Holly Logistic Services LLC [7]

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I think we're probably going to see it rise a little bit as we're spending capital but not yet earning on that capital with the JV here and then come back down as the earnings kick in from the joint venture.

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Operator [8]

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Our next question comes from Spiro Dounis from Crédit Suisse.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [9]

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Just maybe following up on Cushing Connect. Just curious with the 8 to 9 multiple. What sort of opportunities do you guys have within the JV to kind of work that multiple down over time either with or without incremental CapEx?

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George J. Damiris, Holly Energy Partners, L.P. - President, CEO & Director of Holly Logistic Services LLC [10]

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Well, there's additional crude oil volume we could potentially put on that system. We get some crude oil from other locations besides Cushing. And as those volumes could potentially migrate under Cushing, then we'd have more crude oil volume from Cushing to Tulsa for that line.

There's also probably some opportunity for us to terminal more barrels in the long run. I wouldn't -- don't think that's a near-term issue, but there's some upside around that.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [11]

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Got it. Appreciate that. Then also just to follow up on the DK contract assets. Maybe just a little bit additional color in terms of the marketability of those assets. I think there's probably some other people out there that would like to get their hands on them. But maybe just describe what some of the alternatives are and who the types of, I guess, counterparties would be that would want those assets.

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George J. Damiris, Holly Energy Partners, L.P. - President, CEO & Director of Holly Logistic Services LLC [12]

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Yes. At the end of the day, these are well-located assets. They're in the Permian Basin. They are primarily currently in product service, but they obviously have the potential to be converted to crude oil service to get the crude barrels from the Permian to a Gulf Coast location. So to your point, I think there are other parties that may be interested in these lines as well some internal project ideas that we're looking at.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [13]

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Yes. No, that's fair. Last one if I could sneak it in just on the distribution. Totally get your guys' point on being able to hold it flat next year. I think that's well within reach. I guess just curious as you guys sort of weighed your options just given where the yield is.

Did you at one point consider maybe retaining more cash for growth? Or as you looked out at the slate of opportunities out there, maybe it just didn't seem like it was worth risking your investor base, which I get the sense is a little more yield focused to sort of go after any of that stuff. Just thoughts around how you sort of got to that conclusion.

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George J. Damiris, Holly Energy Partners, L.P. - President, CEO & Director of Holly Logistic Services LLC [14]

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Yes. I think to your point, Spiro, we looked at our options here. Really historically, what we've seen, and the way we thought -- consistent with what we thought about as you really cut the distribution for 1 or 2 reasons. One will be if you have a leverage problem, which we don't have here; or two, to your point, if we had billion-dollar capital project-type program and you needed to finance that.

We've got some good growth opportunities, but it's not -- we're not seeing them on the order of magnitude that would argue for a real distribution cut here, to your point. Now when you combine that with our shareholders and they're -- they do appreciate the yield here and the steady distribution, we didn't see a lot of value for anyone in cutting the distribution.

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Operator [15]

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(Operator Instructions) Our next question comes from Shneur Gershuni with UBS.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [16]

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Just a few quick questions here. There was -- if I remember correctly, I think it was a $2.5 million a quarter waiver at the HFC to the HEP level. And I think if I remember correctly, that expires in the second quarter of 2020. Your expectation about coverage, does that assume that, that gets re-upped or that, that expires?

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George J. Damiris, Holly Energy Partners, L.P. - President, CEO & Director of Holly Logistic Services LLC [17]

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No. We've assumed that expires consistent with the existing contract. And you're right on the date.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [18]

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Okay. And so -- and is there any discussion about maybe extending it? Or do you feel comfortable where you're at right now?

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George J. Damiris, Holly Energy Partners, L.P. - President, CEO & Director of Holly Logistic Services LLC [19]

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No. We're comfortable where we're at.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [20]

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All right. In the question -- the first question, I can't remember who had asked it, he had asked if you included the Delek expiration inside the coverage ratio number. Is that just in the most recent Delek expiration? Or is that any future expirations that were considered in that as well, too?

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George J. Damiris, Holly Energy Partners, L.P. - President, CEO & Director of Holly Logistic Services LLC [21]

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Yes. We've considered everything that's coming up through 2020 already.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [22]

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Through 2020? Okay. Perfect. One last question about CapEx related to the Plains joint venture. What is HEP's actual dollars spent for that? Because I remember that there's a terminal contribution from Plains that, I think, had a $40 million valuation. Just kind of wanted to understand what is your cash component that's going to come from HEP.

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George J. Damiris, Holly Energy Partners, L.P. - President, CEO & Director of Holly Logistic Services LLC [23]

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Yes. Total cash component will be about $65 million. And that -- it combines the investment in the JV and then the capital around the pipeline.

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Operator [24]

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If there are no further questions, I will turn the floor back over to Trey for any closing remarks.

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Trey Schonter, Holly Energy Partners, L.P. - Executive of IR [25]

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Thanks again for joining the call today. Feel free to reach out to Investor Relations if you have any questions.

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Operator [26]

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