Q3 2020 Holly Energy Partners LP Earnings Call

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Welcome to Holly Energy partners third quarter, Twentytwenty conference call and webcast.

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It is now my pleasure to turn the floor over to trade shorter trains you may begin.

Thanks, Simon and thank you all for joining our third quarter 2020 earnings call Entre shorter with Investor Relations for Holly Energy partners, joining us today, our revolver, President and John Harrison Senior Vice President and CFO Bill.

This morning, we issued a press release announcing results for the quarter ending September Thirtyth 2020, if you would like a copy of today's press release, you may find one on our website at Holly energy Dotcom before Retune. Jon proceed with their remarks. Please note the safe Harbor disclosure statement in today's press release in summary, if the statements made regarding management X.

Dictation 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 November 4th 2020.

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.

Please see today's press release for reconciliations to GAAP financial measures and with that I'll turn the call over to rich. Thanks.

Thanks, Craig.

Afternoon, everyone and thank you for joining our call today on.

On behalf of Holly Energy partners, we hope that you and your families are healthy and safe.

I'd like to take a moment to thank our employees for their hard work and their flexibility as we continue to navigate these challenging conditions.

During the quarter I am happy to report that we maintain safe and reliable operations.

Despite the ongoing volatility and challenging macro environment CTP delivered solid third quarter results.

Highlighting the consistency of our fee based business model underpinned by long term minimum volume commitments.

During the quarter total volumes improved 14% across our system driven by improvement in refined product demand, which in turn drove our customers refinery utilization.

This was most visible on the frontier and SLC pipelines.

Where volumes ramp substantially as Salt Lake Valley product demand rebounded.

As a result of our minimum volume contracts and customer base total revenue has remained relatively stable.

And we have been able to generate cash flow, which allows us to both distributed cash to our shareholders and in the third quarter repay $47 million of debt.

In October we announced a 35 cents per unit quarterly cash distributions paid on November 12. This represents the same amount paid in the previous quarter.

Turning to project updates the pipeline portion of our Cushing connect joint venture is currently on schedule and expected to be in service in the first quarter of 2021.

We are also excited to announce the expansion of the frontier pipeline, which will allow for an additional 10000 barrels per day of crude oil transported into the Salt Lake City market.

Thanks to a successful open season. The project is backed by long term minimum volume commitments with third party refiners and is expected to be completed in the third quarter of 2021.

Total cost is estimated to be $7 million.

We also announced the tank project Hollyfrontiers Navajo refinery.

We plan to build and operate four new refined product tanks with a total shell capacity of 200000 barrels.

These additional tanks will help hollyfrontier optimize refined product deliveries out of its Navajo refinery.

Estimated cost of this project is seven and a half million dollars.

And is expected to be expected to be in service in the third quarter of 2021.

HCP and Hollyfrontier have reached an agreement in principle on the long term minimum volume commitment.

Additionally, following Hollyfrontiers previously announced conversion of the Cheyenne refinery to renewable diesel production EGP, an HFC have reached an agreement in principle to terminate the existing minimum volume commitments.

Related to the GPS Shane assets and enter into new agreements effective January 2021.

These new agreements will provide for a 10 year annual lease.

For Hfcs use of certain AHGP tanks, and racks with an annual lease payments of approximately $5 million.

A five year contango service fee arrangements that will utilize EGP tank assets inside the Cheyenne refinery.

Hollyfrontier will pay a base tariffs AHGP for available crude storage.

At Hollyfrontier in HCP will split profits generated in.

Crude oil trading opportunities.

And a 10 million dollar one time cash payment from Hollyfrontier two each in fee for the termination of the existing contracts.

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

Thanks, Rich for the third quarter of 2020 net income attributable to Holly energy partners was $17.8 million compared to $82.3 million in the third quarter of 2019.

Third quarter results reflect special items that collectively decreased net income attributable to HBP by a total of $29.6 million.

These items included a $36 million goodwill impairment charge related to our Cheyenne business unit and a $6 million gain related to a business interruption insurance settlement, resulting from a loss Hollyfrontiers Woods Cross refinery.

In addition, net income attributable to HCP for the third quarter of 2019 included a gain on sales type leases of $35.2 million.

Excluding these items third quarter 2020, net income attributable to HCP was $47.4 million or 45 cents per diluted LP unit compare.

Compared to third quarter 2019, net income attributable to HCP of $47.2 million or 45 cents per diluted LP units.

Third quarter 2020, adjusted EBITDA was $86.4 million compared to $90.3 million in the same period last year.

A reconciliation table, reflecting these adjustments can be found in our press release.

During the quarter AHGP generated distributable cash flow of $76.9 million and $8 million increase compared to the same period last year.

Our distribution coverage ratio was 2.1 times for the quarter, bringing us to just over 2.0 times year to date.

Capital expenditures and joint venture investments during the quarter were approximately $11 million, including $6 million for the Cushing connect joint venture and approximately $2 million in maintenance Capex.

We are reducing our full year 2020, capex forecast from a range of $58 million to $69 million down to 43% to $58 million inclusive of our share of joint venture investments.

This 20% reduction is largely a result of deferred maintenance and turnaround related expenditures.

As of September Thirtyth, 2020, AHGP had approximately $1.4 billion of total debt outstanding.

Assisting a $500 million of senior notes due 2028, and approximately 950 million drawn on our $1.4 billion of revolving credit facility.

Our liquidity at the end of the third quarter was $470 million in our debt to trailing 12 month. Adjusted EBITDA was 4.1 times, which continues to be well below our leverage covenant of 5.25 times.

During the quarter, we repaid $47 million on our revolving credit facility and we plan to continue using retained cash flow with a goal of reducing leverage down to 3.0 to 3.5 times.

In summary, despite the challenging macro conditions, our fee based business model, which is underpinned by long term minimum volume commitments allows us to generate positive free cash flow after capital investment and distributions.

And with that I'd like to turn the call back to the operator to answer questions.

The floor is now open for questions.

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Your first question comes from the line of Spielo games with Credit Suisse. Your line is open.

Eric.

Barry I want to spend about eight out so on top of the Cheyenne re contracting some for a little more color. There I was hoping you guys could will walk us through what you were solving for in that renegotiation on my math I am struggling a bit to get the NPV neutral.

Maybe that's not the right way to think about it and then if you could are you able to disclose the base tariff related to the contango storage space.

Sure Sara so.

I don't think NPV is the way to think about this.

Well, we are trying to solve for there was a few things obviously.

Hollyfrontier their assets their tanks and the rack.

That hollyfrontier very much wanted to use as part of a new renewable diesel service. They're also frankly, some tanks that needed to be demolished in order to make room for the logistics necessary for renewable service and really talk about rail there.

So those are the first two things that we're trying to solve for them as part of this renegotiation and.

Let's say then that left us frankly with.

Some additional tankage that we wanted to find an opportunity to use and those that plan. As you know is really well connected to several pipelines in and then connects on to several pipelines down to Cushing. So.

So as well position for crude trading hub.

So there what we did was look really for an opportunity is what tanks with re purpose well to that service. So really enough of those three pieces. If you will.

The fee around the way probably to think best about the ER.

Our crude trading arrangement.

Really it's meant to be sort of a share the cost situation. So the fees at Hollyfrontier will pay to HCP is effectively its share of the.

The operating cost if you will.

And then what we will do obviously, we'll be we'll be looking for opportunities to trade crude profitably and put those proceeds.

Understood and then.

Give us a sense of how much maybe latent capacity. There there is with these assets for third parties come in and use them as well is is how you're taking up.

Basically all the capacity or could we see you, adding some third party business too.

Yes, we've got some additional tankage and probably a few related assets around the plant.

We can still you still use for further opportunity. So we'll continue to pursue them.

Great got it second question, just maybe just one for John given general timeframe on when you'd expect to reach your lover Golan and ultimately once you get there I guess, what's the plan right now you see it for the use of that excess free cash flow.

Yes show overarching goal is obviously to live within cash flow, So first and foremost want to maintain our assets.

The extra recover that distribution and then excess cash flow then we'll go to pay down debt until we get down to that 3.0 to 3.3 0.5 times level.

And in terms of pace or when we can get there in Q4, we have a little bit more capital spend on Cushing connect.

But after that I think you could see a pretty ratable decrease from there.

So.

In short to medium term is probably the best way to describe it.

Okay, and then I guess once you reach that level you have you said a few option in front end between share buybacks or increasing the dividend again. There are of course buying some banks are you guys thinking about any one of those buckets more than others.

No that's fair I think.

Correct, who agree with the buckets you laid out and we'll do the thing that makes the most economic sense at that time.

Perfect. That's it for me thanks, guys.

Q.

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Your next question comes from the line of Joe Altobello with JP Morgan Your line is open.

Hi, guys.

One more question here just related to the Cheyenne assets.

There any capex required to re purpose those further the renewable diesel production.

Hey, John tourists. So for renewable diesel there is really not any capital to speak of and that will be covered by Hollyfrontier. We've got.

A couple of million dollars of capital around repurchasing the assets for for crude storage and trading.

And we'll split that those dollars with Hollyfrontier.

Okay that makes sense.

Then also wanted to ask on the.

Cheyenne pipeline the crude pipeline that connects fair that's your JV.

It's kind of the outlook for for that pipeline and are there opportunities to re purpose that.

Or do you still expect some volumes there.

Yes, we do expect to continue to see volumes there that line.

Connex, Guernsey and in a way Kasper down.

Into a couple of different hubs that on to Cushing. So there is some regular business that flows through there.

Important I think deadline, we get very useful in the event that you have a dapple shutdown not.

Not that I have an opinion whats going to happen or not but.

So we do see opportunities around that line.

We'll look at all the options around that too I would.

Yeah for us at this point, it's not integrated with them.

With Hollyfrontier system really to speak of.

It is a good asset and we will look to.

Find ways working with points to optimize that.

Okay that makes sense that's helpful.

And then then one more just kind of a bigger picture question I guess.

Where are the industry dynamics driving the capital expansion projects, you noted franchise and the Navajo on just kind of seems like bigger picture kind of crude demand.

It's down in refining product demand is down, but you're kind of able to add those two projects. So kind of what was driving that.

Sure, saying Theres.

To your point will speak about the short term and the longer term in the short term Salt Lake city in the sort of the surrounding refined product margins have held up probably the best of any single area in the us through that COVID-19 effects.

So we continue to see pretty high volumes through that area.

That is being coupled frankly with something the longer term issue.

Seeing crude production declines in the Uinta basin and some of the Rocky Mountain in Wyoming, and Utah Sweet barrels.

That we see as more of a longer term issue thats tied more to what we're seeing in the upstream space.

So when you look at the longer term, that's where the refiners in the valley are seeing.

What is really a very good product market combined with declining local crude production and they have to go find ways to feed their their plans going forward, which is why we are able to see them.

A few plants shelf sign up for long term capacity on frontier.

I think you probably see marathon another successful open season with airline as well.

So there really is.

At the end of the day, you are talking about long term need to move crude from the east into Salt Lake to feed those refineries.

Got it Thats helpful. Thanks, That's all for me.

Food.

Thank you there are no further questions I will turn the floor back over to train for any closing remarks.

Alright, well, 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 day.

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