Holly Energy Partners, L.P.

At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press the star, then the number one on your touch-tone phone. If at any 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. We ask that you please pick up your handset to allow optimal sound quality. Please note that this conference call is being recorded. It is now my pleasure to turn the floor over to Trey Shonter. Trey, you may begin.

Thanks, Simon, and thank you all for joining our third quarter 2020 earnings call. I'm Trey Shonter with Investor Relations for Holley Energy Partners. Joining us today are Rich Volova, President, and John Harrison, Senior Vice President and CFO. This morning, we issued a press release announcing results for the quarter ending September 30th, 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, November 4, 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 gap financial measures. And with that, I'll turn the call over to Rich. Thanks, Trey.

Good afternoon, everyone, and thank you for joining our call today. On behalf of Holley 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'm happy to report that we maintain safe and reliable operations. Despite the ongoing volatility and challenging macro environment, HEP 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 ramped 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 distribute cash to our shareholders, and in the third quarter, repay $47 million of debt. In October, we announced a $0.35 per unit quarterly cash distribution to be paid on November 12th. 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 10,000 barrels per day of crude oil transport 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 a tank project at Holly Frontier's Navajo Refinery. We plan to build and operate four new refined product tanks with a total shell capacity of 200,000 barrels. These additional tanks will help Holly Frontier optimize refined product deliveries out of its Navajo refinery. Estimated cost of this project is $7.5 million, and it is expected to be in service in the third quarter of 2021. HEP and Holly Frontier have reached an agreement in principle on a long-term minimum volume commitment. Additionally, Following Holly Frontier's previously announced conversion of the Cheyenne Refinery to renewable diesel production, HEP and HFC have reached an agreement in principle to terminate the existing minimum volume commitments related to HEP's Cheyenne assets and enter into new agreements effective January 2021. These new agreements will provide for a 10-year annual lease for HFC's use of certain HEP tanks and racks with an annual lease payment of approximately $5 million, a five-year contango service fee arrangement that will utilize HEP tank assets inside the Cheyenne Refinery where Holly Frontier will pay a base tariff to HEP for available crude storage, and Holly Frontier and HEP will split profits generated in crude oil trading opportunities, and a $10 million one-time cash payment from Holly Frontier to HEP for the termination of the existing contract. And with that, I'll turn the call over to John. Thanks, Rich. For the third quarter of 2020, net income attributable to Holley 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 decrease net income attributable to HEP by a total of $29.6 million. These items include 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 at Holly Frontier's Woods Cross Refinery. In addition, net income attributable to HEP 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 HEP is $47.4 million or $0.45 per diluted LP unit compared to third quarter 2019 net income attributable to HEP of $47.2 million or $0.45 per diluted LP unit. 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, ATP generated distributable cash flow of $76.9 million, an $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 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 30th, 2020, HEP had approximately 1.4 billion of total debt outstanding, consisting of 500 million of senior notes due 2028 and approximately 950 million drawn on our $1.4 billion revolving credit facility. Our liquidity at the end of the third quarter was 470 million, and 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. With that, I'd like to turn the call back to the operator to answer 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 your touch tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Again, we ask that you please pick up your handset to allow optimal sound quality. Thank you. Your first question comes from the line of Spiro Dunas with Credit Suisse. Your line is open.

Hey, Rich. Hey, John. I want to start off with the Cheyenne recontracting. I was hoping for a little more color there. I was hoping you guys could walk us through what you were solving for in that renegotiation. On my math, I'm struggling a bit to get to NPV neutral, but 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 Katango storage fee?

Sure, Sparrow. So I don't think NPV is the way to think about this. What we were trying to solve for there was a few things, obviously. Holly Frontier, there were assets there, tanks and the rack, that Holly Frontier very much wanted to use as part of a new renewable diesel service. There were also, frankly, some tanks that needed to be demolished in order to make room for the logistics necessary for renewable service. And really, I'm talking about rail there. So those were the first two things that we were trying to solve for as part of this renegotiation. And so then that left us, frankly, with some additional tankage that we wanted to find an opportunity to use. And that plant, as you know, is really well connected to several pipelines in and then connects on to several pipelines down to Cushing. So it was well positioned for a crude trading hub. So there, what we did was look really for an opportunity at what tanks would repurpose well to that service. So really end up with those three pieces, if you will. The fee around the way probably to think best about our crew training arrangement is really it's meant to be sort of a share the cost situation. So the fees that Holly Frontier will pay to HEP is effectively its share of the operating cost, if you will. And then what we'll do, obviously, is we'll be looking for opportunities to trade crude profitably and split those proceeds.

Understood. And then do you have a sense of how much maybe latent capacity there is with these assets for third parties to come in and use them as well? Is Holly taking up effectively all of the capacity, or could we see you go out and chin up some third-party business too?

Yeah, we've got some additional tankage and probably a few related assets around the plant that we can still use for other opportunities, so we'll continue to pursue that.

Got it. The second question, just maybe this one for John. Do you have a general timeframe on when you'd expect to reach your leverage goal? And ultimately, once you get there, I guess, what's the plan right now as you see it for the use of that access-free cash flow?

Yeah, so overarching goal is obviously live within cash flow, so First and foremost, we want to maintain our assets, then make sure we cover that distribution. And then excess cash flow then will go to pay down debt until we get down to that 3.0 to 3.5 times level. In terms of pace or when we can get there, Q4, we have a little bit more capital to spend with Cushing Connect. But after that, I think you could see a pretty rateable decrease from there. So, you know, Short to medium term is probably the best way to describe it.

Okay. And I guess once you reach that level, you know, you obviously have a few options in front of you between share buybacks or increasing the dividend again or, of course, buying something. Are you guys thinking about any one of those buckets more than others?

No, Spiro. I think you've – I would 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.

Thank you.

Once again, if you do have a question, you may press star one on your touch tone phone at this time. Your next question comes from the line of Joe with JP Morgan. Your line is open.

Hi, guys. One more question here just related to the Cheyenne assets. Is there any capex required to repurpose those for the renewable diesel production?

Hey, Joe. It's Rich. So for renewable diesel, there's really not any capital to speak of, and that will be covered by Howley Frontier. We've got a couple million dollars of capital around repurposing the assets for for crude storage and trading, and we'll split those dollars with Holly for this year.

Okay, that makes sense. Then I also wanted to ask on the Cheyenne pipeline, the crude pipeline that connects there, that's your JV, what's kind of the outlook for that pipeline, and are there opportunities to repurpose that? or do you still expect some volumes there?

Yeah, Joe, we do expect to continue to see volumes there. That line connects Guernsey and, in a way, Casper down into a couple different hubs and onto Cushing. So there is some regular business that flows through there. Important, I think that line would get very full in the event that you had a DAPL shutdown. Not that I have an opinion whether that's going to happen or not, but So we do see opportunities around that line. We'll look at all the options around it, too. For us at this point, it's not integrated with Holly Frontier's system, really, to speak of. But it's a good asset, and we'll look to find ways, working with planes, to optimize that.

OK, that makes sense. That's helpful. And then one more, just kind of a bigger picture question, I guess. What are the industry dynamics driving the couple expansion projects, the Frontier Aspen and the Navajo one? It just kind of seems like bigger picture kind of crude demand is down and refining product demand is down, but you're kind of able to add those two projects. So kind of what was driving that?

Sure, thank you. To your point, let's speak about the short term and the longer term. In the short term, Salt Lake City and sort of the surrounding refined product markets have held up probably the best of any single area in the U.S. through the 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, of seeing crude production declines in the Uinta Basin and some of the Rocky Mountain, Wyoming, and the Utah sweet barrels. That we see as more of a longer-term issue, and that's 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's really a very good product market combined with declining local crude production, and they have to go find ways to feed their plants going forward, which is why we're able to see a few plants sign up for long-term capacity on Frontier. I think you'll probably see Marathon have a successful open season with Airline as well. At the end of the day, you're talking about long-term need to move crude from the east into Salt Lake to feed those refineries.

Got it. That's helpful. Thanks. That's all for me. Absolutely.

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

All right. 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. Thank you.