Earnings Transcript for HEP - Q4 Fiscal Year 2021

Operator: Welcome to Holly Energy Partners Fourth Quarter 2021 Conference Call and Webcast. . At this time, all participants have been placed in listen-only mode. The floor will be open for your questions following the presentation. [Operator Instructions] Please note that, this conference is being recorded. It is now my pleasure to turn the floor over to Trey Schonter. Trey, you may begin.

Trey Schonter: Thanks, Audra, and thank you all for joining our fourth 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 the results for the quarter ending December 31, 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, February 22, 2022. 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.

Rich Voliva: Thanks, Trey, and thanks to each of you for joining the call this afternoon. HEP finished 2021 with another quarter of consistent results. We completed the year without an employee recordable injury, and we are incredibly proud of our team for achieving a significant accomplishment. Overall, transportation volumes were down slightly quarter-over-quarter, primarily due to planned turnaround and unplanned maintenance at HollyFrontier's Navajo refinery, partially offset by a full quarter's contribution from the Cushing Connect pipeline. We are happy to announce the Frontier pipeline expansion came online in January and expect the expansion to provide approximately $6 million in annualized EBITDA, underpinned by long-term minimum volume commitments. We also announced a $0.35 per LP unit quarterly cash distribution to be paid on February 11 to unitholders of record as of February 1. For 2022, we expect to hold the quarterly distribution constant at $0.35 per LP unit or $1.40 on an annualized basis, while we continue to reduce financial leverage. Looking forward into 2022, we remain focused on completion with the pending acquisition of Sinclair's logistics assets and our commitment to strong operational performance. I'll now turn the call over to John.

John Harrison: Thanks, Rich. For the fourth quarter of 2021 net income attributable to Holly Energy Partners was $45.6 million compared to $51.3 million in the fourth quarter of 2020. The year-over-year decrease was mainly due to lower volumes on our pipeline systems, lower ongoing revenues from our Cheyenne assets as a result of the conversion of HollyFrontier Cheyenne refinery to renewable diesel production and higher operating expenses, partially offset by lower interest expense and an increase in joint venture earnings. Fourth quarter 2021 adjusted EBITDA was $80 million compared to $88 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 $63 million with a quarterly distribution coverage ratio of 1.7 times and 1.8 times for the full year. Capital expenditures and joint venture investments during the quarter were approximately $18 million including $6 million in maintenance CapEx and $5 million for the Cushing Connect joint venture. For 2022, we expect to spend between $35 million and $50 million for refinery processing unit turnarounds, $15 million to $20 million for maintenance capital and $5 million to $10 million in expansion capital. As of December 31, HEP had approximately $1.3 billion of total debt outstanding consisting of $500 million of senior notes due 2028 and $840 million drawn on our $1.2 billion revolving credit facility. Our liquidity at the end of the year was approximately $360 million and our debt to trailing 12-month adjusted EBITDA ratio was 3.9 times. During the year we repaid over $70 million in debt. And we expect to continue using retained cash flow to further reduce leverage down to our target range of 3.0 times to 3.5 times. Now I'd like to turn the call over to the operator for any questions.

Operator: Thank you. The floor is now open for questions. [Operator Instructions] And we will go first to Spiro Dounis at Credit Suisse.

Spiro Dounis: Thanks, operator. Good afternoon, guys. If we could maybe just start with CapEx, I've got a few on that. Starting with the guidance. It seems to point to kind of a heavier turnaround year in 2022. Can you speak maybe roughly when we should expect some of those turnarounds? And then, how we should think about the ultimate impact that HEP would get there?

John Harrison: Sure, Spiro. It's John. So the turnaround that we have scheduled this year is for the Woods Cross refinery processing units and that's scheduled to begin in March, and will essentially be down for about 40 days or so. And you can think about the impact of not only the CapEx but also the loss revenue associated with the downtime. So the MVC won't apply when that asset is down for service.

Spiro Dounis: Okay, got it. And is that the only one or is that just a close one coming up?

John Harrison: That's the only one.

Spiro Dounis: Got it. Perfect. And then sticking with CapEx, switching to expansion CapEx, seeing that come in a little bit lighter here in 2022. But if I go back to your slides from December, you guys have pointed out several avenues for growth. You gave a few sort of generic examples of what that could look like. I was wondering if you could give us a little bit more color on that front. And maybe focus our attention on what you see is maybe more in the near-term tangible areas for you guys to grow?

Rich Voliva: Hey Spiro, it's Rich. So yes, generally speaking right, I think what we're seeing this year is a lot of the smaller projects that we typically find in the year. So normal year we'll find $30 million, $40 million of seven to nine times multiple type spending. These are projects in the $0.5 million to $2 million type range. So, none of them are worth spiking out from here as perspective. We don't have anything larger this year, at least currently scheduled all at the Frontier expansion the Cushing Connect line. Looking forward, right, we're really excited about what we think we're going to be able to do when we get Sinclair closed in the portfolio. So a lot of our attention and focus in this area is going to be there I think once we get the deal completed.

Spiro Dounis: Yeah. That makes sense. And I guess on that anything you could share in terms of the timing around Sinclair some milestones to look for going forward? And then while you're on that point, if you go back to the original slides, I think you guys have talked about sort of pro forma EBITDA in the $400 million to $450 million range. Curious, if that's still a good benchmark to use for now?

Rich Voliva: Yeah. So with regards to the closing, we are working diligently with Sinclair to satisfy all the closing conditions. Currently, the primary or the gating factor is the FTC process. And we're cooperating with the FTC. Sinclair is working with us. We expect to close the transaction as soon as possible. And right now, kind of our best guidance would be sometime in 2022. To your question on the earnings power of the deal, yeah, I think that's still a good number. Broadly speaking right, we expect the Sinclair assets to add $70-plus million of EBITDA a year to our existing base.

Spiro Dounis: Perfect. Thanks for the color guys. Good luck.

Rich Voliva: Thank you.

Operator: [Operator Instructions] And at this time, we have no further questions. I'll turn the conference back over to management for any additional remarks.

Trey Schonter: All right. Well, thanks all for joining the call today. Feel free to reach out to Investor Relations, if you have any questions.

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