Holly Energy Partners, L.P.
Q4 2020 Earnings Call Transcript

Published: 23 Feb 2021

[Operator:]

Welcome to Holly Energy Partners Fourth Quarter 2020 Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the presentation. Please note that this conference call is being recorded. It is now my pleasure to turn the floor over to Trey Schonter. Trey, you may begin.

[Trey Schonter:]

Thanks, Katrina. And thank you all for joining our fourth quarter 2020 earnings call. I'm Trey Schonter with Investor Relations for Holly Energy Partners. Joining us today are Rich Voliva, President; and John Harrison, Senior Vice President and CFO. This morning, we issued a press release announcing results for the quarter ending December 31, 2020. If you'd like a copy of today's press release, you may find one on our website at hollyenergy.com. Before, Rich and John proceed with their remarks, please note the Safe Harbor disclosure statement in today's press release.

[Rich Voliva:]

Thanks, Trey. Good afternoon, everyone, and thank you for joining our call today. On behalf of Holly Energy Partners, we hope that you and your families are safe and in good health as we continue to navigate the ongoing pandemic. I would especially like to thank our employees for their hard work and flexibility during the past 12 months. And I'm proud to report, despite the challenges Holly Energy Partners has maintained safe and reliable operation. 2020 was an incredibly dynamic and challenging year, our HEP was able to deliver strong financial results against the challenging macro environment. Annual adjusted EBITDA of $346 million declined only 4% compared to 2019, emphasizing the stability and resiliency of our business, which is underpinned by a strong customer base, and long-term fee based cash flows. Earlier this year, we announced and paid a $0.35 per unit quarterly cash distribution, which represents the same amount from the fourth quarter of 2019. Looking at our growth projects for 2021. Our Cushing Connect pipeline project has been impacted by construction delays, compounded by the severe weather of the past few weeks. We expect the pipeline to begin service later in the second quarter. And we continue to expect approximately $5 million in annual EBITDA net to HEP. During the past year, we announced the expansion of the Frontier pipeline, as well as the construction of additional tankage HollyFrontier’s Navajo refinery. Both projects leveraged HEPs existing footprint and customer base and are supported by long-term minimum volume commitments. We anticipate the Navajo tanks to be in service during the second quarter, and the Frontier expansion to be complete in the fourth quarter of 2021.

[John Harrison:]

Thanks, Rich. For the fourth quarter of 2020 net income attributable to Holly Energy Partners was $51.3 million, compared to $45.7 million in the fourth quarter of 2019. The increase was primarily due to lower interest expense and an increase in earnings from our joint ventures. Fourth quarter of 2020 adjusted EBITDA was $88.3 million, compared to $86.9 million in the same period last year. The reconciliation table reflecting these adjustments can be found in our press release. During the quarter, HEP generated distributable cash flow of $70 million, a $5.5 million increase compared to the same period last year. Our distribution coverage ratio was 1.9 times for the quarter, bringing us to just under 2.0 times for the full year of 2020. Capital expenditures and joint venture investments during the quarter were approximately $20 million, including $16 million for the Cushing Connect joint venture, and $4 million in maintenance CapEx. For 2021, we expect to spend between $14 million and $18 million in maintenance CapEx, $5 million to $8 million for refinery unit turnarounds, and $30 million to $35 million for expansion capital, inclusive of our share of the Cushing Connect joint venture. We intend to fund all our capital expenditures with cash generated from operations. As of December 31, 2020, HEP had approximately $1.4 billion of total debt outstanding, consisting a $500 million of senior notes due 2028 and $914 million drawn on our $1.4 billion revolving credit facility. Our liquidity at the end of the fourth quarter was over $500 million and our debts to trailing 12 months adjusted EBITDA was 4.0 times. Also during the quarter, we repaid approximately $35 million on our credit facility, and we plan to continue using retained cash flow to further reduce leverage to our target range of 3.0 to 3.5 times. In summary, despite the challenging macro conditions during the year, our fee based business model which is underpinned by long term minimum volume commitments, demonstrated our ability to generate positive free cash flow after capital investment and distributions, allowing us to continue to pay down debt and return cash to our unit holders.

[Operator:]

Your floor is now open for questions. Thank you. Our first question is from Spiro Dounis from Credit Suisse. Your line is open.

[Unidentified Analyst:]

Hi. This is Chad on for Spiro. Just wanted to start off Rich, you've been consistent in the past when I asked this question, but it's one we're getting again. How do you all think about the prospects for HEP as its holding candidate, it seems a rare event is occurring in that HFC, is trading at a premium to HEP, which removes one of the major barriers?

[John Harrison:]

Hey. Chad, afternoon. I don't know, but I'd agree with the statement of trading at a premium. If you look at ‘22, which I would consider to be more normalized here. I think last night consensus, EBITDA multiples are something like six and nine for HFC and HEP respectively. So I'm not sure I would agree with the premium argument. But in general, and this is really an HFC question. I think it – we’d point to a couple things. I think HEP is still trading at a premium, which - this becomes a corporate finance to be and that makes the math difficult. And then the other thing to keep in mind here is HollyFrontier obviously has a very heavy capital spend year and we're all aware of the current economic conditions. So I think you can safely say HollyFrontier cash is spoken for in 2021. So like, we will continue to evaluate this and I'm sure HollyFrontier will continue to evaluate this and do what's in the best interest of everybody shareholders and unit holders accordingly.

[Unidentified Analyst:]

Okay, understood. That's clear. And then my second question, how are you thinking about the impact from the Texas freeze also on your system?

[John Harrison:]

Unfortunately, for us, I think they were pretty minor. Keep in mind that HEP is obviously under some pretty substantial minimum volume commitments. So really the exposure that HEP has from a non-MVC perspective centers largely on the Northwest or the Salt Lake area. And that was basically an effect of the weather that was a normal few home last couple of weeks. So for HEP we're expecting relatively little impact, to be honest.

[Unidentified Analyst:]

Okay, great. That's all I had. Thanks for the time, guys.

[John Harrison:]

Thanks, Chad.

[Operator:]

Our next question is from Joe Martoglio from JPMorgan. Your line is open.

[Joe Martoglio:]

Hi. Thanks for taking my question.

[John Harrison:]

Hey, Joe.

[Joe Martoglio:]

Just wanted to ask kind of a – personally ask kind of a capital allocation question with two parts. First part, I guess, why does this - you know how are you thinking about paying down debt versus increasing returns to shareholders either through buybacks or distribution growth at this time? And kind of like, why does it make sense to hit the leverage target just kind of when the cost of debt is so cheap?

[John Harrison:]

Okay. Hey, Joe. Its John. So deleveraging is everything our top priority for incremental retained cash flow, as we've demonstrated the last few quarters. So we have every intention to continue to work that number down, down to our target of 3.0 to 3.5 times. In terms of pace, the amount of the repayment each quarter is going to vary with CapEx. But if you take the last couple of years of our DCF as a proxy, and you combine that with our CapEx and distribution guidance for 2021, we're probably not going to get to that leverage target this year. But once we do, we'll to your point, we'll be looking at repurchasing stock or increasing the distribution based on the circumstances in place at that time.

[Rich Voliva:]

Yeah. Joe, just to follow on there. We believe that we've heard loud and clear from unit holders that getting to the leverage target, we've got to something they want. We believe that there's going to be - we're hopeful and believe there's going to be an opportunity to grow HEP as well, which we intend to do. So we'd like to have some more flexibility. And to John's point, look, when we get to that point, we'll evaluate all the options to create the most value for our unit holders. Yeah, I hear you loud and clear on the cost of debt, and no arguments there. But just because it's cheap, doesn't mean you want to take it either. So we feel like this is the right path to go on. And it'll give us a lot of flexibility as we go into ‘22 and beyond.

[Joe Martoglio:]

Yeah, yeah. That that makes sense. I hear you there. I guess just kind of a follow up, I guess, how are you thinking about, you know, the 3 to 3.5 leverage target? And why is that the right level for you guys? And just does re-contracting risk playing at all into that or just kind of growth in general? And do you mind just kind of reminding us what are re-contracting risks, you have I think last was relatively little over the next couple of years, but then that's kind of more in the middle of the decade

[Rich Voliva:]

So let me take – so Joe, on that 3 to 3.5, we've done a fair amount of math. We've also talked to obviously a lot of folks in the market. We feel like that's a good number. To your point, we've got a very stable base business here. So we feel like we could handle more leverage. But we would like add incremental flexibility for whatever may come here, good, bad, ugly. So we expect them to be in a good position to do a lot of things.

[John Harrison:]

Sure. So we do have one contract renewal in 2022. And that's for UNEV. Then we have another in 2023 for crude pipeline assets in our Southwest region. The UNEV contracts are with HollyFrontier, and another refining company. And I would just say that that pipe is a key outlet for clearing the Salt Lake City refining complex. So it has strategic importance to the region and we have every expectation that will be utilized in the future. To give you a feel for the size of that one, that makes up about 6% of our 2020 total revenue. And then in terms of the Southwest crude assets, those are critical to the HFC Navajo refinery, so don't foresee any contract renewal issues there.

[Joe Martoglio:]

Okay. That's very helpful. Thanks for taking my question.

[Operator:]

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

[Trey Schonter:]

All right, thank you all for joining our call again today. Feel free to reach out to Investor Relations if you have any questions. Thank you.

[Operator:]

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