After last quarter's rare dip in distributable cash flow, Holly Energy Partners (NYSE: HEP) came back strong in the fourth quarter with an impressive earnings report. The addition of new assets was the reason for these impressive results. Let's take a look at Holly Energy Partners' most recent results to see how the company was able to so quickly reverse course after a tough prior quarter.
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By the numbers
|Results*||Q4 2016||Q3 2016||Q4 2015|
|Earnings per share||$0.40||$0.33||$0.49|
|Distributable cash flow||$58.4||$49.3||$53.5|
*in millions, except per-share data. Source: Holly Energy Partners earnings release.
The big uptick this past quarter came from the addition of new assets including the Woods Cross refinery units that were brought on in the prior quarter. The addition of new assets added $18.3 million in new revenue, which also offset some modest revenue declines at its existing pipeline and storage facilities. Not all of that additional revenue flowed to the bottom line because there were also some increased interest expenses. To fund the acquisition of its newest refining assets, the company took out $400 million in 6% senior notes back in June. These added about $6 million in quarterly interest expenses that were part of the reason we saw lower earnings per share compared to this time last year.
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What matters more to Holly Energy Partners investors, though, is the cash flow results, and the company didn't disappoint on that end. Total distributable cash flow increased by 9% compared to this time last year, which gave management enough confidence to raise its distribution by 7.5% compared to the prior quarter. This marked the 49th consecutive quarter with a distribution increase.
As far as operations, it was a pretty quiet quarter. The acquisition of its new refining assets at parent company HollyFrontier's (NYSE: HFC) Woods Cross refinery were brought online at the beginning of the month and we got to see what a full quarter of those assets will do for the bottom line. Pipeline volumes for refined product and crude oil pipelines was less than several of its clients' contracted minimum volumes, and as a result it received$2.7 million in prior shortfalls billed to shippers. Holly Energy Partners expects these shortfall payments will continue for some time as several shippers are not meeting minimum volume commitments at this time.
On a little housekeeping note, the company did break out its results into five segments: Refinedproduct pipelines, intermediate pipelines, crude pipelines, terminal, tankage, and lading racks, and refinery processing units. Expect future quarterly results to be broken down based on these lines.
What management had to say
CEO George Damiris on the company's performance following the acquisition of the Woods Cross refining units:
We are pleased with our solid financial performance in the fourth quarter. Our strong and stable cash generation allowed us to accelerate our year over year distribution growth and progress toward our 8% distribution growth target as we maintained our record of continuous quarterly distribution increases. Effective as ofOct. 1, 2016, we successfully completed our acquisition of an atmospheric distillation tower, a fluid catalytic cracking unit, and a polymerization unit located at theHollyFrontier Woods Cross refinery, and these units were accretive to distributable cash flow in the quarter. We will continue to leverage our relationship withHollyFrontierand our Mid-Continent, Northwest and Southwest logistics footprint to generate new organic and external growth opportunities.
Looking forward, we believe HEP is positioned to continue its growth based on the quality and location of our assets, our talented employee base, and our strong and supportive general partner,HollyFrontier.
What a Fool believes
Based on the initial results from the Wood Cross refining acquisition, it looks as though it has so far met expectations. Distributable cash flow is up and is helping to offset some weakness in its pipeline segments. This should help to keep the company's quarterly distribution increase streak alive for a few more quarters. Investors in Holly Energy Partners should be encouraged by these results, but should keep an eye out for future growth because the backlog of new projects is looking quite thin.
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