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Holly Energy Partners LP (HEP) Q4 2018 Earnings Conference Call Transcript

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HEP earnings call for the period ending December 31, 2018.

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Holly Energy Partners LP  (HEP -1.11%)
Q4 2018 Earnings Conference Call
Feb. 19, 2019, 4:00 p.m. ET


Prepared Remarks:


Good afternoon and welcome to Holly Energy Partners Fourth Quarter 2018 Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode. The floor will be opened for your questions following the presentation.

(Operator Instructions) Please note that this conference is being recorded. It's now my pleasure to turn the floor over to Jared Harding. Jared, you may begin.

Jared Harding -- Investor Relations

Thanks, Adam. Thank you all for joining our fourth quarter 2018 earnings call. I'm Jared Harding with Investor Relations 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 fourth -- for the quarter ending, December 31, 2018. If you would like a copy of today's press release, you may find one on our website at

Before George and Rich, proceed with their remarks, please note the safe harbor disclosure statement in today's press release. In summary, it's a 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, February 19, 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.

George J. Damiris -- President and Chief Executive Officer

Thanks, Jared. And thanks to each of you for joining the call this afternoon.

HEP ramped up 2018, with solid fourth quarter results and announced a distribution of $0.6675 per unit, our 57th consecutive distribution increase, since our IPO in 2004 and a 3% increase over the same period last year. Overall pipeline volumes increased 8% compared to the fourth quarter of 2017. Primarily driven by the acquisition of the remaining interests of the Salt Lake City and Frontier pipelines, as well as higher crude oil volumes from our Permian Gathering System.

This increase was partially offset by lower refined products and refinery processing unit volumes, resulting from maintenance at HFC's Woods Cross refinery. The refinery is now operating at normal rates and we anticipate stronger seasonal volumes on the unit pipeline, next quarter is the arbitrage between the Las Vegas and Salt Lake City market have since reopened.

During the quarter, we completed several small organic projects that expanded the capacity of our Permian crude oil gathering system to approximately 160,000 barrels per day. In January, we completed the construction of the diesel truck loading rack in Orla, Texas. This diesel rack is a prime example of a win-win project, for HEP Partners with HFC to capitalize on commercial opportunities that benefit and add value to both companies.

Looking ahead to 2019. We will continue to leverage our existing footprint to execute organic projects. As production continues to increase in the Permian, we'll pursue opportunities to expand our crude gathering and product distribution systems in the region. And with that, I'll turn the call over to Rich.

Richard L. Voliva III -- Executive Vice President and Chief Financial Officer

Thanks George. Net income attributable to HEP for the fourth quarter was $48 million compared to $86 million in the fourth quarter of 2017. This decrease was primarily driven by a one-time non-cash gain of $36 million, which was included in the fourth quarter of 2017, relating to HEP's acquisition of the SLC and Frontier pipelines.

HEP generated distributable cash flow of $64.2 million in the quarter, a 2% decrease compared to the same period in 2017. The decrease is primarily due to unplanned maintenance on HEP's fluid cat cracker at the Woods Cross refinery, which resulted in lower processing unit revenue, as well as higher OpEx related to these (ph) repairs. Fut the quarter, HEP's coverage ratio was 0.94 times and for full-year 2018, 0.98 times. In 2019, we expect to increase our distribution by a $0.0025 per LP unit, per quarter, with an average distribution coverage ratio of 1.0 times for the year and higher coverage ratios in the second half of the year, due to contractual tariff escalators.

Our capital expenditures for the quarter were approximately $19 million, including $4 million of maintenance CapEx and $2 million of reimbursable CapEx. In 2019, we expect to spend approximately $7 million to $10 million for maintenance CapEx and $20 million to $25 million for expansion capital, excluding any acquisitions and capital expenditures reimbursed by HollyFrontier. As of December 31st, HEP had $1.4 billion of total debt outstanding, resulting in year-end debt-to-EBITDA ratio of 4.1 times. A reasonable leverage coupled with a strong liquidity position of almost $500 million, allows us full-flexibility in financing growth opportunities.

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

Questions and Answers:


Thank you. And the floor is now open for questions. (Operator Instructions) And your first question comes from Jeremy Tonet or Tony from JPMorgan. Jeremy, your line is open.

Joseph Martoglio -- JPMorgan -- Analyst

Hi, this is Joe on for Jeremy.

George J. Damiris -- President and Chief Executive Officer

Hi, Joe.

Joseph Martoglio -- JPMorgan -- Analyst

First, I wanted to --. How are you? First I wanted to ask about leverage. I wanted to see if you're still expecting the hit -- the 4.0 times leverage in early 2019. And then also get your views on unleveraged longer-term, whether you would still target 4 times or potentially look at how lower leverage in the long-term?

George J. Damiris -- President and Chief Executive Officer

Yeah, I think, Joe, we're probably sometime in 2019, I'm not sure, it's necessarily going to be in the first quarter -- first half, but we do expect to have 4 times during 2019. I think, that is still our long-run target level. And we feel very -- given the commercial profile of HEP. We feel very, very comfortable with that -- that leverage level.

Joseph Martoglio -- JPMorgan -- Analyst

Okay, that's helpful, thanks. And then maybe also one on the coverage you're targeting. I know, you said 1 times for 2019, but wanted to see, if the 1 times to 1.2 times target was still intact and is after 2019 you expected to move more toward the middle of that range.

George J. Damiris -- President and Chief Executive Officer

Yeah, Joe. I think, we'll look at this annually. Our desire is to continue to grow the distribution and we believe that's very important to our unit holders and that's said we're going to do that with no less than a 1 times coverage ratio in the long-term. But we'll continue to evaluate that as we go.

Joseph Martoglio -- JPMorgan -- Analyst

Okay. Sure. Thanks. That's all for me.

George J. Damiris -- President and Chief Executive Officer

Thank you.


(Operator Instructions) And if there are no further questions, I'll now turn the floor back over to Jared for any closing remarks.

Jared Harding -- Investor Relations

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


And this does conclude today's conference call. You may now disconnect. Thank you for joining and have a great day.

Duration: 9 minutes

Call participants:

Jared Harding -- Investor Relations

George J. Damiris -- President and Chief Executive Officer

Richard L. Voliva III -- Executive Vice President and Chief Financial Officer

Joseph Martoglio -- JPMorgan -- Analyst

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