Q3 2019 Earnings Call

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It is now my pleasure to turn the floor over to trace shorter Trey you may begin.

Thanks, Julie and thank you all for joining our third quarter 2019 earnings call Entre shorter Investor Relations representative for Holly Energy partners, joining us today, our George Damiris, President and CEO and rich of all of the executive Vice President and CFO . This morning, we issued a press release announcing.

Results for the quarter ending September Thirtyth 2019, if you would like a copy of today's press release, you may find one on our website at Holly energy Dotcom.

For George Enrich proceed with their remarks. Please note the safe Harbor disclosure statements 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 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 Thirtyth 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 reconciled reconciliations to GAAP financial measures and with that I'll turn the call over to George.

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

AHGP generated solid earnings in the third quarter, which allowed us to maintain our distribution.

67 to four cents per unit.

Representing a 1.1% increase to the distribution from the third quarter of 2018.

The distribution, we paid on November 12.

To unit holders of record on October 28.

For the third quarter volumes remained strong.

Total volumes increased 10% year over year due to the continuous strength of our crude oil pipeline systems in Wyoming in Utah.

Well as strong shipments and our unit product pipeline.

We recently announced are pushing connect joint venture with Plains All American.

Joint venture will construct a 160000 barrels per day pipeline connecting the Cushing, Oklahoma crude oil hub.

The Hollyfrontiers Tulsa refinery.

As well as own and operate 1.5 million barrels of crude oil storage in Cushing supporting Hollyfrontiers, Tulsa and El Dorado refineries.

The joint venture provides added growth the AHGP by Insourcing Hfcs 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 transmit transaction multiple of mate eight to nine times.

Looking forward, we plan to hold the distribution constant at 67 in the quarter cents per LP unit per quarter through 2020.

While maintaining a distribution coverage of one times.

Ahgps distribution guidance.

Reflects growth from contractual tariff escalators and the recently announced Cushing can connect to joint venture.

And balances our commitment to both a healthy balance sheet.

And distributing cash flow to our unit holders.

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

Thank you George.

For the third quarter of 2019 net income attributable to EGP was $82.3 million compared to $45 million in the third quarter of 2018.

The increase was mainly due to a 35.2 million dollar noncash gain triggered by the renewal of the original throughput agreement between EGP and Hollyfrontier Corporation.

Under a FC 840 to the new lease accounting standard that went into effect at the beginning of 2019.

We determine portions of this agreement qualified as a sales type lease which generated the game.

Excluding this gain net income attributable to AHGP for the quarter was $47.2 million were 45 cents.

Per basic and diluted LP unit.

This represents a $2.2 million increased compared to third quarter of 2018.

And third quarter 2019, adjusted EBITDA was $90.3 million compared to $86.9 million in the prior year.

The new lease standard requires us to recognize the tariff revenue on the asset 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 $700000 as amortization.

Going forward as we renew old contracts are initiate new contracts.

We will evaluate them under the new lease standard and expect growth and the amount of tariff revenue, we are recognizing as either interest expense or amortization.

To aid in comparison and economic analysis, we will report and adjusted EBITDA number that reverses this treatment of tariff revenue.

Table, reflecting these adjustments is available in our press release.

During the period AHGP 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 the whole distribution constant.

At 67 on a quarter cents per LP unit per quarter.

For the third quarter, our distribution coverage ratio was 1.01 times, averaging 1.01 times year to date.

Our capital expenditures for the quarter were approximately $6 million, including $2 million and maintenance Capex and $3 million Reimbursable Capex.

For the full year 2019, we expect to spend approximately $7 million maintenance capital.

$35 million, an expansion capital and $18 million and joint venture investments the increase in spending is driven by the Cushing connect JV.

Interest expense.

Gross.

Approximately $800000 compared to the third quarter of 2018, primarily due to higher average balances outstanding under our senior secured revolving credit facility.

As of September Thirtyth AHGP.

$1.4 billion as total debt outstanding.

Resulting in a debt to adjusted EBITDA ratio of 4.0 times.

Including cash and revolver availability, our current liquidity is over $472 million.

During the quarter Moodys upgraded Ahgps corporate family credit rating to be a two from be athree further reinforcing the strength of EGP stable cash flows.

And advantageous relationship with our parent Holly frontier.

Together to support and our strong liquidity position will enable EGP to pursue future organic and third party growth opportunities as demonstrated by our recently announced Christian connect JV.

And with that ill turn the call over to Julie for any questions.

The floor is now open for questions. If you would like to ask a question at this time. Please press Star then the number one on your Touchtone phone.

At any point. Your question has been answered you may remove yourself from the Q by pressing the pound Keith.

Again, we ask that.

Would you please pick up your handset to allow optimal sound quality.

Yes.

Your first question comes from Jeremy Tonet with JP Morgan.

Hey, Good afternoon, guys. This is James on for Jeremy.

Hey, I am just wanted to start off with the.

Delek contracts.

If there's any update on the portion that was not renewed and coming due next year.

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

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.

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

Okay. Thank you and then just one more if I could do.

Do you see leverage at ticking above the target.

On the crushing connect JV.

I think we're probably you see a 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 a joint venture.

Gotcha. Thanks, a lot that's a different.

Sure. Thanks.

Our next question comes from Spiro Dounis from credit Suisse.

Hey, Rich Hey, George.

Maybe following up on because you can act just curious with Eightnine multiple what's sort of opportunities do you guys have with within the JV to kind of work that multiple down over time, either with or without incremental capex.

Well, there's additional crude oil volume, we could potentially put on that system.

We get some crude oil.

Other locations besides Cushing.

And as those volumes.

Potentially migrate on to Cushing, then we'd have more.

Cruel volume from Cushing to to Tulsa for that line. There's also probably some opportunity for us the terminal more barrels in the long run it wouldnt, helping get the near term issue, but there are some upside around that.

Got it appreciate that.

That also just a follow up on the the DJ 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 maybe just describe what some of the alternatives are and who the types of Ah I guess counterparties would be that would want those assets.

Yes, Dan today. These are these are well located assets there in the Permian basin.

The are primarily currently in product service.

But they obviously have the potential to be converted to crude oil service to get a.

Your barrels from the Permian.

Two.

Gulf Coast location, so to your point I think.

There are.

Other parties that may be interested in these lines as well as.

Internal project ideas that we're looking yet.

Yes, now that sat that's fair last last one if I could sneak it and just on the distribution.

Totally get your guys point on being able to hold it flat next year, thank thats well within reach.

I guess just curious if you guys sort of weighed your options just given where the yield is did you had one point consider maybe retaining more cash for gross or or as you looked out of the slate of opportunities out there maybe just didn't seem like it was worth risking your investor base switch I get a sense. It a little more yield focus to a sort of go after any of that stuff just just.

It's around how you sort of got to that conclusion.

Yeah. Thanks to your point Spiro, we we looked at our options here.

Really historically, what we've seen in way, we thought was consistent with what we thought about as you really cut the distribution for one or two reasons one would be if you had 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 him on the order of magnitude that would argue for a rail distribution cut here.

To your point, though when you combine that with.

Our shareholders and they are they do appreciate the yield here in the study distribution, we didnt see a lot of value.

For anyone and cutting the distribution.

Yeah that makes a lot of sense I appreciate the color. Thanks, guys. Thank there.

Once again, if you do have a question you May press star one on your Touchtone phone.

Our next question comes from Shneur Gershuni with can you be yes.

Hi, good afternoon guys.

Sure.

Hey.

Just a few quick questions here or there was if I remember correctly I think it was it two and half billion dollar quarter waiver.

HFC to the GP level, and I think if I remember correctly and expires in the second quarter 2020.

Your expectation about coverage just data showing that that catch up or is that that expires.

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

Okay and show and is there any discussion about maybe extending it or.

Do you feel comfortable where you're out right now.

We are comfortable were at.

Right.

Yeah.

In the question. The first question I can't remember could asked it.

If you included Delek exploration inside the coverage ratio number is that just the most recent delek expiration or is that.

Any future exploration.

That were considered that as well too.

Yes, we've considered everything thats coming up through 2020 already.

Sure 2020, Okay perfect. One last question about the Capex related to the the planes joint venture.

What is.

HM Keith actual dollar spent for that because I remember that theres a.

Terminal contribution from planes, I think kind of $40 million valuation I'm, just kind of want to understand what is your cash ponant, that's going to come from.

Yes, total cash component would be about $65 million.

And that combines the investment in the JV and then the capital around the pipeline.

Got it alright, perfect that answers all my questions really appreciate your color Tonight.

Happy too.

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

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

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