Holly Energy Partners LP (HEP) Q4 2020 Earnings Call Transcript

Image source: The Motley Fool.

Holly Energy Partners LP (HEP)
Q4 2020 Earnings Call
Feb 23, 2021, 4:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Holly Energy Partners' Fourth Quarter 2020 Conference Call and Webcast. [Operator Instructions]. The floor will be open for your questions following the presentation [Operator Instructions].

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

Trey Schonter -- Investor Relations

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 31st 2020. 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 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, February 23, 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. 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 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 operations.

2020 was an incredibly dynamic and challenging year. However, 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 over 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 at HollyFrontier's Navajo refinery. Both projects leverage HEP's 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 fourth quarter of 2021.

Looking forward, we are optimistic that as 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 as our top priority.

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

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

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 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 capital expenditures with cash generated from operations.

As of December 31st, 2020, HEP had approximately $1.4 billion of 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 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 times 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 unitholders.

With that, we're ready to take questions.

Questions and Answers:

Operator

The floor is now open for questions. [Operator Instructions]. Thank you. Our first question is from Spiro Dounis, from Credit Suisse. Your line is open.

Chad -- Spiro -- Analyst

Hi, this is Chad [Phonetic] 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 a fold in candidate? It seems a rare event is occurring given that HFC is trading at a premium to HEP, which removes one of the major barriers.

Richard L. Voliva -- President

Hey, Chad, afternoon. I don't know that I'd agree with the statement that trading at a premium. If you look at '22, which I would consider to be more normalized year, my last night consensus EBITDA multiples were 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 we'd point to a couple of things. 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's cash is spoken for in 2021. So 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 unitholders accordingly.

Chad -- Spiro -- Analyst

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

Richard L. Voliva -- President

Fortunately for us I think they were pretty minor. Keep in mind that HEP has obviously had some pretty substantial minimum volume commitments. So, really the exposure that HEP has from a non-MVP perspective centers largely on the Northwest or the Salt Lake area and that was basically unaffected, the weather there was a normal if you look at last couple of weeks. So for HEP, we're expecting relatively little impact to be honest.

Chad -- Spiro -- Analyst

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

Richard L. Voliva -- President

Thanks, Chad.

Operator

[Operator Instructions] Our next question is from Joe Martoglio from JP Morgan. Your line is open.

Joe Martoglio -- JP Morgan -- Analyst

Hi, thanks for taking my question. Just want to ask kind of a -- hi -- first one I wanted to ask, kind of a capital allocation question with two parts. First part, I guess, why does -- 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?

And then also kind of a second part of the capital allocation question is, when you do return excess cash to shareholders? Just how are you thinking about those priorities? How do you like buybacks versus distribution growth stack up?

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

Okay. Hey, Joe. It's John. So deleveraging is definitely our top priority for incremental retained cash flow, as we've demonstrated in the last few quarters. And 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.

Richard L. Voliva -- President

Yes. Joe, just to to follow-on there. We believe that we've heard loud and clear from unitholders that getting to the leverage target we've got is 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 unitholders. Yeah, I hear you loud and clear on the cost of debt and no argument 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 will give us a lot of flexibility as we go into '22 and beyond.

Joe Martoglio -- JP Morgan -- Analyst

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

Richard L. Voliva -- President

So let me take it to Joe on that the 3 to 3.5, we've -- 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 that 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. There is not -- there is no plan, I would say, specific, but the 3 to 3.5, we feel like puts us in a great position to enable, to your point, distribution growth, share repurchase, if necessary or if that's most attractive option I should say or growth in general. So why don't I ask John to look -- to speak to the contract renewals.

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

Sure. So we do have one contract renewal in 2022, and that's for UNEV, that 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, has strategic importance to the region and we have every expectation that it 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 -- JP Morgan -- Analyst

Okay, that's very helpful. Thanks for taking my question.

Operator

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

Trey Schonter -- Investor Relations

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

[Operator Closing Remarks]

Duration: 15 minutes

Call participants:

Trey Schonter -- Investor Relations

Richard L. Voliva -- President

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

Chad -- Spiro -- Analyst

Joe Martoglio -- JP Morgan -- Analyst

More HEP analysis

All earnings call transcripts