Holly Energy Partners, LP (HEP) Q3 2021 Earnings Call Transcript

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Holly Energy Partners, LP (HEP)
Q3 2021 Earnings Call
Nov 2, 2021, 4:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Holly Energy Partners Third Quarter 2021 Conference Call and Webcast. [Operator Instructions] [Operator Instructions]

It is now my pleasure to turn the floor over to Trey Schonter. Trey, you may begin.

Trey Schonter -- Executive of Investor Relations

Thanks, Julianne, and thank you all for joining our Third Quarter 2021 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 September 30, 2021.

If you would 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. In summary, it says statements made regarding management's 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, November 2, 2021. 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 Rich.

Richard L. Voliva -- President

Thanks, Trey. Thanks to each of you for joining the call this afternoon. HEP delivered solid results in the third quarter, driven by record volumes on our SLC and Frontier pipelines and outstanding operations across our business. During the third quarter, we surpassed one year without an employee recordable injury. Congratulations to our entire team on this important milestone. HEP announced a $0.35 per LP unit quarterly cash distribution to be paid on November 12 to unitholders of record as of November 1.

Turning to project updates. We are excited to announce the completion of the Cushing Connect pipeline, which went into service at the end of September. We also advanced construction on the Frontier Pipeline expansion, which is expected to be in service at the beginning of 2022.

This expansion will allow for an additional 10,000 barrels per day of crude oil into the Salt Lake City market and is supported by long-term minimum volume commitments with third-party refiners. Looking forward, we still expect to close the acquisition of Sinclair's logistics assets by mid-2022 subject to closing conditions. And we remain focused on strong operational execution and our near-term leverage target of 3.5 times debt to EBITDA.

I will now turn the call over to John.

John Harrison -- Senior Vice President, Chief Financial Officer and Treasurer

Thanks, Rich. For the third quarter of 2021, net income attributable to Holly Energy Partners was $49.2 million compared to $17.8 million in the third quarter of 2020, which included special items that collectively decreased net income by a total of $29.6 million. Excluding these items, third quarter 2020 net income was $47.4 million. The year-over-year increase was primarily due to higher joint venture earnings and lower depreciation partially offset by lower revenues and higher operating expenses.

Third quarter 2021 adjusted EBITDA was $83.3 million compared to $86.4 million in the same period last year. A reconciliation table reflecting these adjustments can be found in our press release. During the quarter, HEP generated distributable cash flow of $66.8 million with a quarterly distribution coverage ratio of 1.8 times and 1.9 times year-to-date.

Capital expenditures and joint venture investments during the quarter were approximately $19 million, including $11 million for the Cushing Connect joint venture and $3 million in maintenance capex. For full year 2021, we are slightly reducing our capital guidance from $60 million to $71 million, down to $57 million to $69 million. Our updated capital guidance includes $40 million to $45 million of expansion capital and joint venture investment, $15 million to $20 million for maintenance capital and $2 million to $4 million for refinery processing unit turnarounds.

As of September 30, HEP had approximately $1.3 billion of total debt outstanding, consisting of $500 million of senior notes due 2028 and $841 million drawn on our revolving credit facility. Our liquidity at the end of the third quarter was approximately $360 million and our debt to trailing 12-month adjusted EBITDA ratio was 3.8 times. During the quarter, we continued to execute on our deleveraging strategy by repaying $30 million of borrowings on our credit facility. Looking forward, we plan to continue using retained cash flow to reduce debt down to our target leverage ratio of 3.0 to 3.5 times.

Now I'd like to turn the call over to the operator for any questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Spiro Dounis from Credit Suisse. Please go ahead, your line is open.

Spiro Dounis -- Credit Suisse -- Analyst

Thanks, operator. Hey, Richard John Spiro no. I'll give a good. Well, just want to start maybe with Puget Sound just on the back of the transaction closing earlier this week and maybe just get your latest thinking around some of the logistics assets there, I think, at some point, maybe slated for drop-down. Of course, you've got Sinclair in the mix now and that process proceeding. So just curious how to think about maybe the potential timing and how we're thinking about structuring that drop at some point.

Richard L. Voliva -- President

Yes. I think we've put that on the back burner, Spiro with, obviously, Sinclair coming. Focus is there right now. So no immediate plans with respect to Puget Sound.

Spiro Dounis -- Credit Suisse -- Analyst

Okay. Got it. And then just as we're thinking about volumes and the outlook here for the rest of the year, I think you all had some turnarounds and maybe some maintenance this quarter that impacted volumes a little bit. So just curious as we get into the fourth quarter, anything to call out there just from a volume trajectory and how you're thinking about volumes overall as we head into next year?

Richard L. Voliva -- President

Yes. We will not -- HollyFrontier's Navajo refinery is in the latter stages of a turnaround right now, so we will see impact from that both in terms of crude and, to a greater extent, on affiliate product. Volumes in the fourth quarter, we would expect that to bounce back then in the first quarter and going forward from there.

Spiro Dounis -- Credit Suisse -- Analyst

Okay. Perfect. Last one, if I could sneak it in. So one of your peers had mentioned just tracking renewables and the potential for that to be MLP qualifying income at some point and potentially opening up some opportunities for them on the renewable side. I would imagine you're watching that as well, but I don't know how sort of close you are to moving on some renewable projects, but is that something you're also watching? And is there any else coming out of Washington right now that you're sort of focused on from an MLP perspective?

Richard L. Voliva -- President

So I -- look, Spiro, I don't think we know anything more or less than anyone else does. We read the daily updates on the last-minute changes to $1 trillion bills. So look, we are -- we're actively paying attention here. It is -- it could be very -- potentially very interesting for HEP but more to come. We'll clearly pay attention to what's happening there.

Operator

[Operator Instructions] If there are no further questions, I will turn the floor back over to Trey for any closing remarks.

Trey Schonter -- Executive of Investor Relations

All right. Thanks again for joining the call today. And feel free to reach out to Investor Relations if you have any questions. Thank you.

Operator

[Operator Closing Remarks]

Duration: 9 minutes

Call participants:

Trey Schonter -- Executive of Investor Relations

Richard L. Voliva -- President

John Harrison -- Senior Vice President, Chief Financial Officer and Treasurer

Spiro Dounis -- Credit Suisse -- Analyst

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