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Holly Energy Partners LP (NYSE:HEP)
Q1 2020 Earnings Call
May 6, 2020, 4:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Holly Energy Partners First Quarter 2020 Conference Call and Webcast. [Operator Instructions].

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

Trey Schonter -- Investor Relations

Thanks Julianne and thank you to all of you for joining our first 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 the results for the quarter ending March 31, 2020. If you would like a copy of today's press release, you may find one on our site 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 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, May 6, 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 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 III -- President

Thanks Trey. Good afternoon, everyone and thank you for joining the call today. On behalf of Holly Energy Partners, we hope you and your families are safe and well during this unprecedented time. The COVID-19 pandemic has created a challenging environment for all and I would like to applaud our employees for their continued hard work and dedication. In response to COVID-19 and with the health and safety of our employees as our top priority, we implemented several actions to help protect our team. These include limiting onsite staff to essential operational personnel only; staggering shifts, and monitoring health for everyone in our pipeline control center, and work-from-home policy for certain employees. These actions have allowed for seamless operation and we continue to closely monitor the COVID-19 developments to properly address these policies going forward.

Despite the challenges presented by COVID-19, HEP delivered solid first quarter 2020 results, driven by safe and reliable operations. As always, these results are supported by long-term, minimum volume commitments across our assets and for context, in 2019, these commitments represented approximately 70% of our revenue. The majority of our uncommitted revenue is tied to our Salt Lake City and Southwest area assets. Aside from the Uinta Basin, the SLC and Frontier pipelines are the primary source of crude oil supply to the Salt Lake City refiners. The UNEV pipeline plays a similar role as the route from Salt Lake to Southern Utah and the Las Vegas product markets.

Looking ahead to the second quarter, consistent with public disclosure and data, we expect to see reduced run rates across our customers. However, these assets play a strategic role and operational support to the refineries in these regions, and we expect to see continued non-MVC related revenue from across these assets. Additionally, it's important to note that approximately 87% of our 2019 revenue was generated from investment grade customers.

Turning to our project updates; we're excited to announce the start of the terminal portion of the Cushing Connect joint venture. The 1.5 million barrels of crude storage is projected to generate approximately $2.5 million in annualized EBITDA to HEP. The Cushing Connect pipeline remains on schedule with an anticipated start date in the first quarter of 2021. We expect the pipeline to produce $5 million of annualized EBITDA to HEP. Both joint venture assets are supported by long term minimum volume commitment. In addition to the Cushing Connect assets effective April 1, we have recontracted the unused pipeline that connects Big Spring to our terminal in Wichita Falls, Texas. We expect the new contract to provide over $4 million in annualized revenue.

As we previously announced, HEP has changed its distribution strategy, to allow for improved near and long term financial strength and flexibility. The new quarterly cash distribution of $0.35 per limited partner unit or a $1.40 annually is projected to retain an incremental $130 million per year. This strategic shift is a disciplined and prudent measure intended to fund all capital projects and growth within cash flow, while reducing leverage and will provide HEP with a stronger coverage ratio going forward.

As we continue to navigate the COVID-19 pandemic, the health and safety of our employees remains our top priority and as an essential infrastructure business, we remain focused on operating safely and responsibly, in order to support the continuity of our business during this challenging time. Again, we hope everyone stays healthy during this period.

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

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

Thanks Rich. For the first quarter of 2020, net income attributable to HEP was $24.9 million compared to $51.2 million in the first quarter of 2019. The decrease was primarily due to a charge of $25.9 million related to the early redemption of our 6% senior notes. Excluding that charge, net income attributable to HEP was $50.8 million. First quarter adjusted EBITDA was $91.1 million compared to $93.5 million in the first quarter of 2019. We have provided a table reflecting these adjustments in our press release.

During the quarter, HEP generated distributable cash flow of $70.7 million, which is a $100,000 increase over the same period last year. As Rich mentioned, we previously announced a quarterly cash distribution of $0,35 per LP unit, resulting in a distribution coverage ratio just over 2.0 times for the first quarter. This is significantly over our new long term target of 1.3 times.

Capital expenditures and joint venture investments during the quarter were approximately $18 million, including $2 million in maintenance capex and $12 million for the Cushing Connect joint venture. HEP's projected capital expenditures and share of joint venture investments for 2020 remain unchanged at $58 million to $69 million.

During the quarter, we refinanced 500 million of our 6% senior notes due 2024, with a new issuance of 5% senior notes due 2028. This refinancing will save approximately $4 million per year of interest expense, while extending maturity in other four years. As of March 31, 2020, HEP had $1.5 billion of total debt outstanding, consisting of $500 million of senior notes due to 2028 and approximately $1 billion drawn on our $1.4 billion dollar revolving credit facility. The revolver matures in July of 2022 and does not have any borrowing base restrictions.

Our liquidity at the end of the first quarter was over $400 million and our current debt to trailing 12 month adjusted EBITDA ratio was 4.2 times, which is well below our leverage covenant of 5.25 times.

Looking ahead, we intend to fund all capital investment with cash flow from operations and we'll use incremental retained cash flow to reduce leverage. Our revised long term leverage target is now 3 to 3.5 times. In summary, HEP delivered a solid quarter despite the challenging market environment and we believe we'll be well-positioned when conditions improve.

And with that, I will turn the call back to the operator for questions.

Questions and Answers:

Operator

[Operator Instructions]. Thank you. Your first question comes from Spiro Dounis from Credit Suisse. Your line is open.

Spiro Dounis -- Credit Suisse -- Analyst

Hey. Afternoon, guys. I'd like to start with MVCs...

Richard L. Voliva III -- President

Hi, Spiro.

Spiro Dounis -- Credit Suisse -- Analyst

Hi Rich. Thinking about MVCs here, I think they're about 70% of your revenues based on 2019. But Rich, you mentioned that you expect to see revenues, I guess, in excess of MVC through some of this downturn. How should we think about the impact in 2Q with refineries running below 80% utilization? Sounds like you might not actually absorb that entire move down, is that fair?

Richard L. Voliva III -- President

When you say that Spiro, do you mean absorbing 100% of the -- non-committed revenue?

Spiro Dounis -- Credit Suisse -- Analyst

Yeah. So in other words, if refineries are running at 70%, in other words down 30%, are you shielded in any part of that way down, as the refinery runs decrease?

Richard L. Voliva III -- President

Yeah, absolutely. So the best example I can give you and I think this logic extends, would be on the Frontier and SLC pipelines. There's effectively no commitment on those lines and that represents a large portion of our uncommitted revenue. That said, the Salt Lake -- it's not perfect, and it's moving around depending on Uinta Basin production. But the reality is, you know, if plants are running at 70%, these lines are probably going to be utilized in that order of magnitude, the value can't run without crude off that system.

So now we don't expect to lose 30% of our revenue, anywhere even close to that on a year-over-year basis in the second quarter. As you can imagine right, its changing week to weeks, so its little hard to get more specific than that. But I think your concept here is correct, that we're not going to absorb that kind of shut down.

Spiro Dounis -- Credit Suisse -- Analyst

OK. No, that makes sense and yes, I think everyone's crystal ball is a bit foggy these days. So I appreciate you brought in a little color there. Second question, just sticking with the MVCs, but looking a little bit forward here. Can you just walk us through any upcoming expirations with HFC specifically and maybe what mechanisms are already in place when it comes to automatic renewals and maintaining the current tariff rate?

Richard L. Voliva III -- President

Yeah. I'm just checking here. Our next expiry with HFC specifically, is in 2022. Look realistically, on the list of things that I lose sleep over, HFC and HEP renewals is not high on the list. The assets that HEP owns are critical infrastructure to HFC, and there is a strong desire on both sides to continue to do business. I think the renewal we executed last year on some of the initial drop-down assets, if you will, is probably a good guidebook for how these renewals will go going forward.

Spiro Dounis -- Credit Suisse -- Analyst

OK. And then just for our benefit, just maybe remind us kind of some of the metrics around that or how that went?

Richard L. Voliva III -- President

Yeah, that was-effectively we moved some of the pieces at the edges and redesigned the commitment. But at the end of the day, the economics are very similar to both sides and the renewed contract from the prior.

Spiro Dounis -- Credit Suisse -- Analyst

Perfect. Thanks for your time today, guys. Be well.

Richard L. Voliva III -- President

Absolutely. Thank you. You too.

Operator

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

Trey Schonter -- Investor Relations

Thanks again for joining the call today. Feel free to reach out to investor relations if you have any questions.

Operator

[Operator Closing Remarks].

Duration: 14 minutes

Call participants:

Trey Schonter -- Investor Relations

Richard L. Voliva III -- President

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

Spiro Dounis -- Credit Suisse -- Analyst

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