Holly Energy Partners, L.P.

Welcome to Holley Energy Partners' fourth quarter 2020 conference call and webcast. 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 star, then the number one on your touchstone 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 is being recorded. It is now my pleasure to turn the floor over to Trey Shonter. Trey, you may begin.

Thanks, Katrina, and thank you all for joining our fourth 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 December 31, 2020. If you would like a copy of today's press release, you may find one on our website at HolleyEnergy.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 23rd, 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 Pressure Leads to Reconciliations to GAAP Financial Measures. And with that, I'll turn the call over to Rich.

Thank you, Trey. Good afternoon, everyone. Thank you for joining our call today. On behalf of Holley 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, how the energy partners have maintained safe and reliable operations. 2020 was an incredibly dynamic and challenging year. Our 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 35 cent per unit quarterly cash distribution, which represents the same amount from the fourth quarter of 2019. Looking at our growth projects for 2021, our Christian Connect pipeline project has been impacted by construction delays, compounded by the severe weather of 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 Holly Frontier'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 the 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.

Thanks, Rich. For the fourth quarter of 2020, net income attributable to Holley 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. A reconciliation table reflecting these adjustments can be found in our press release. During the quarter, ATP 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 and $18 million in maintenance capex and $5 to $8 million for refinery unit turnarounds, and $30 to $35 million for expansion capital, inclusive of our share of the Cushion Connect joint venture. We intend to fund all capital expenditures with cash generated from operations. As of December 31, 2020, ATP 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-month 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 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 bond 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 unit holders. 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 your touchtone 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 would please pick up your handset to allow optimal sound quality. Thank you. Our first question is from from Credit Suisse. Your line is open.

Hi. This is Chad. I'm for Spiro. Just wanted to start off, Rich, you've been consistent in the past when I ask this question, but it's one we're getting again. How do you all think about the prospects for HEP as a folding candidate? It seems a rare event is occurring in that HFC is trading at a premium to HEP, which removes one of the major barriers.

Hey, Chad. Afternoon. I don't know that I'd agree with the statement of trading at a premium. If you look at 22, which I would consider to be more normalized here. I think last night, consensus, he was on multiples for 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 point to a couple things. I think HEP is still trading at a premium, which this becomes a corporate finance debate, and that makes the math difficult. And then the other thing to keep in mind here is Holly Frontier 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 Holly Frontier's cash is spoken for in 2021. So we will 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's shareholders and shareholders accordingly.

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?

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

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

Once again, if you do have a question, you may press star 1 on your touchstone phone at this time. Our next question is from Joel Martelvio from J.P. Morgan. Your line is open.

Hi. Thanks for taking my question. First, I wanted to ask kind of a capital allocation question with two parts. First part, I guess, 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 buybacks versus distribution growth stack up?

Okay. Hey, Joe. It's Sean. So deleveraging is definitely our top priority for incremental retained cash flow, as we've demonstrated in the last few quarters. So 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, to your point, we'll be looking at repurchasing stock or increasing the distribution based on the circumstances in place at that time.

Yeah. Joe, just to follow on there, we believe that, and we've heard loud and clear from unit holders, that getting to the leverage target we've got is something they want. We believe that there's going to be, we're hopeful, we 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 unit holders. 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.

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

So let me take a – so, 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 the folks in the market. We feel like that's a good number. To your point, we've got a very stable-based 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, whatever. So we expect them to be in a good position to do a lot of things. There's no plan, I would say, specific, but the three to three and a half, which I feel like puts us in a great position to enable, to your point, distribution growth, share repurchase if necessary, or if that's the most attractive option, I should say, or growth in general. So I want to ask John to speak to the contract renewals.

Sure. So we do have one contract renewal in 2022, and that's for UNEV. Then we have another in 2023 for crude pipeline assets in our southwest region. The UNEV contracts are with Holley Frontier 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 it 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.

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

Once again, if you do have a question, you may press star 1 on your touch-tone phone at this time. If there are no further questions, I will turn the floor back over to Trey for any closing remarks.

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.

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