Q4 2020 Holly Energy Partners LP Earnings Call

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Welcome to Holly Energy partners fourth quarter, 'twenty, and 'twenty conference call and webcast.

At this time, all participants have been placed in a listen only mode and the floor will be open for your questions. Following the presentation. If you would like to ask a question at that time. Please press Star then the number one on your Touchtone phone and Mike.

And your point. Your question has been answered you may remove yourself from the queue by pressing the pound key if you should require operator assistance. Please press star zero and we ask that you. Please pickup your handset to allow optimal sound quality. Please note that this conference is being recorded.

And it's now my pleasure to turn to flow over the trade show Andre Trey you may begin.

Thanks Katrina and thank you all for joining our fourth quarter 2020 earnings call entree shorter with Investor Relations for Holly Energy partners. Joining us today are Richard Roth, President and John Harrison Senior Vice President and CFO.

This morning, we issued a press release announcing our results for the quarter ending December 31, 2020 and.

If you would like a copy of today's press release, you may find one on our website and Holly energy Dot com.

Before rich and John proceed with their remarks. Please note the safe Harbor disclosure statement and 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 provision for 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 23 2021.

And time sensitive information provided may no longer be accurate at the time were going to webcast replay or reading of the transcript environment for 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 rich.

Thank you Trey.

Good afternoon, everyone and thank you for joining our call today on behalf of Holly Energy Partners. We hope you and your families are safe and and 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 am proud to report displace.

Despite the challenges Holly energy partners has maintained safe and reliable operations.

2020 was an incredibly dynamic and challenging year for HCP was able to deliver strong financial results against the challenging macro environment and.

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 <unk> 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.

Pounded by the severe weather over the past few weeks.

We expect the pipeline to begin service leader and the second quarter.

And we continue to expect approximately $5 million and annual EBITDA and net to HCP.

During the past year, we announced the expansion of the frontier pipeline as well as the construction of additional tankage and Holly frontier and Navajo refinery.

Both projects leverage hep's existing footprint and customer base and are supported by long term minimum volume commitments and.

We anticipate the Navajo tanks, III and service during the second quarter and the frontier expansion to be complete and the fourth quarter of 2021.

Looking forward, we are optimistic that other vaccines become more widely available we will see demand for fuels and the related transportation and terminal services, we provide return to pre pandemic levels.

Our focus remains on consistent operational execution with the safety of our employees is our top priority.

And I'll turn the call over to John.

Thanks Rich for.

For the fourth quarter of 2020 net income attributable to Holly energy partners was $51 $3 million.

Compared to $45 7 million and 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 2020, adjusted EBITDA was $88 3 million.

Compared to $86 9 million and the same period last year, a reconciliation table, reflecting these adjustments can be found in our press release.

During the quarter Hep's generated distributable cash flow of $70 million.

$5 5 billion increase compared to the same period last year.

Our distribution coverage ratio was one nine times for the quarter, bringing us to just under two point out 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 and maintenance Capex for.

For 2021, we expect to spend between 14 and $18 million and maintenance capex $5 million to $8 million for refinery unit turnarounds and 30% to $35 million for expansion and capital inclusive of our share of the Cushing connect joint venture.

And we intend to fund all capital expenditures with cash generated from operations.

As of December 31, 2020, HEB had approximately $1 4 billion and total debt outstanding consisting of $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 debt to trailing 12 month adjusted EBITDA was four eight times.

Also during the quarter, we repaid approximately $35 million for our credit facility and.

We plan to continue using retained cash flow to further reduce leverage to our target range of three point out to three five 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 and 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.

And with that ready to take 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 their Touchtone phone if at any point. Your question has been answered you may remove yourself from the queue by pressing the Passkey and generally ask Mr. Wood. Please pickup your handset to allow optimal channel.

All day.

Thank you. Our first question is from <unk> from Credit Suisse. Your line is open.

Hi, This is Chad on for Spiro just wanted to start off rich you've been consistent and the past when I asked this question, but it's one we're getting again, how do you all think about the prospects for <unk> as its hold and candidate. It seems are rare events occurring and that HFC is trading at a premium to HCP, which removes one.

And the major carriers.

Hey, Chad afternoon.

I don't know that I would agree with the statement and training and a premium if you look at 'twenty, two which I would consider to be more normalized year.

I think last night and consensus.

EBITDA multiples for something like six and nine for HFC and AGP, respectively.

So.

I'm not sure I would agree with the premium argument.

But in general and this is really an HFC question and can we point to a couple of things and the ATP is still trading and a premium.

Which and this becomes a corporate finance debate and that makes the math.

Difficult and.

And then the other and keep in mind here is Holly frontier, obviously is a very heavy capital spend year and we're all aware of the current economic conditions and I think you can safely say Holly frontier's cash is spoken for and in 2021.

And so.

Mike.

And we'll continue to evaluate this and I'm sure Holly Frontier will continue to evaluate this and do what's in the best interest of everybody shareholders and unitholders accordingly.

Okay understood that's clear and.

And then my second question, how are you thinking about the impact from the Texas free locks on your system.

And Fortunately for us and they were pretty minor.

Keep in mind that <unk>, obviously under some pretty substantial minimum volume commitments.

So really the exposure that <unk> has from a.

And non NBC perspective centers, largely on the northwest or the Salt Lake area and that was basically unaffected. The weather there was normal for to help them last couple of weeks.

Sales for <unk> were expecting and relatively little impact to be honest.

Okay, Great. That's all I had thanks for the time guys.

Thanks, Ed.

Once again. Thank you for you do have a question you May press star one on your Touchtone phone at this time.

Our next question is from Joel and Mitel meal from Jpmorgan. Your line is open.

Hi, Thanks for taking my question.

And just wanted to ask.

Hi, Chris.

I wanted to ask kind of a capital allocation question with two parts for.

First part I guess what growth.

Why does.

Are you thinking about.

Paying down debt versus increasing.

Returns to shareholders, either through buybacks or distribution growth at this time and and kind of like why does it make sense to hit the leverage target.

Just kind of on the cost of debt is so cheap and then.

And then also kind of a second part of the capital allocation question is when.

You do return.

Excess cash to shareholders.

And just how are you thinking about those priorities, how do we like buybacks versus distribution growth stack up.

Okay, Hey, Joe its Sean.

Deleveraging is definitely our top priority for incremental retained cash flow as we've demonstrated the last few quarters and we have every intention to continue to work that number down.

Down to our target of three <unk> to three five 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 of them, probably not going and get to that leverage target. This year.

But once we do.

To your point and we'll be looking at repurchasing stock or increasing the distribution.

On the circumstances and place at that time.

Yes, Joe just to follow on there and we believe that and we've heard loud and clear from unit holders that are getting to the leverage target we've got.

There's something they want.

We believe that there's going to be we're hopeful and believe there's going to be and opportunity to grow <unk> 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 will evaluate all the options to create the most value for our unit holders.

Yes, I hear you loud and clear on the cost of debt and no argument there, but just because of the cheap doesn't mean you want to take it either.

So we feel like this is the right path to go on and it will give us a lot of flexibility.

As we go into 'twenty, two and beyond.

Yes, yes that makes sense and I hear your day, I guess just kind of.

A follow up I guess, how are you thinking about.

The three to three and a half and.

Leverage target and and why.

Is that the right level for for you guys.

And just.

Re contracting risk plant at all into that or just kind of growth in general and and.

Do you mind, just kind of <unk>.

And reminding us what what are your contract and risk you have I think glass and that's all I was relatively little over and over the next couple of years, but and then.

Kind of more and a middle of the decade.

Okay.

So let me take a for Joe on the three to three and a half we've done a fair amount of math. We've also talked to obviously a lot of folks from the market. We feel like that's a good number to your point, we've got a very stable.

<unk> business here, so we feel like we could handle more leverage, but we would like that incremental flexibility.

No.

And for whatever May come here.

Good bad Ugly.

So we expect them to be and a good position to do a lot of things there.

And.

There is no plan.

I would say specific but for three to three and a half, which really puts us and a great position.

And to enable to your point distribution growth.

Share repurchase if necessary or if not for the most attractive option I should say for growth in general and so.

As John will speak to the contract renewals.

Sure. So we do have one contract renewal in 2022 and Thats for you now.

And then we have another and 2023 and for our crude pipeline assets and our southwest region.

Net contracts for with Holly frontier, and and other refining company and.

And I would just say that that pipe is a key outlet for clearing the salt Lake City refining complex. So has strategic importance to the region and we have every expectation that will be utilized and 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.

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

And.

Once again for you do have a question you May press star one on your Touchtone phone at this time.

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

Alright. Thank you all for joining our call again today feel free to reach out for Investor Relations. If you have any questions.

Sure.

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

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