Holly Energy Partners, L.P.
Feb 21, 2017

Holly Energy Partners, L.P. Reports Fourth Quarter Results

DALLAS--(BUSINESS WIRE)-- Holly Energy Partners, L.P. ("HEP" or the "Partnership") (NYSE:HEP) today reported financial results for the fourth quarter of 2016. Net income attributable to Holly Energy Partners for the fourth quarter was $41.4 million ($0.40 per basic and diluted limited partner unit) compared to $40.5 million ($0.49 per basic and diluted limited partner unit) for the fourth quarter of 2015.

Distributable cash flow was $58.5 million, an increase of $4.9 million, or 9.2% compared to the fourth quarter of 2015. HEP announced its 49th consecutive distribution increase on January 26, 2017, raising the quarterly distribution from $0.595 to $0.6075 per unit, representing a 7.5% increase over the distribution for the fourth quarter of 2015. This distribution represents an acceleration in year over year distribution growth and progress towards HEP's 8% distribution growth rate target.

This increase in earnings is primarily due to newly acquired Woods Cross refinery processing units as well as recent acquisitions including interests in the Osage and Cheyenne pipelines and the Tulsa crude tanks acquired in the first quarter of 2016, offset by higher interest expense associated with our 6% Senior Notes due 2024, which we issued in July 2016 in anticipation of our Woods Cross processing units acquisition.

Commenting on the fourth quarter of 2016, George Damiris, Chief Executive Officer, stated, "We are pleased with our solid financial performance in the fourth quarter. Our strong and stable cash generation allowed us to accelerate our year over year distribution growth and progress towards our 8% distribution growth target as we maintained our record of continuous quarterly distribution increases. Effective as of October 1, 2016, we successfully completed our acquisition of an atmospheric distillation tower, a fluid catalytic cracking unit, and a polymerization unit located at the HollyFrontier Woods Cross refinery, and these units were accretive to distributable cash flow in the quarter. We will continue to leverage our relationship with HollyFrontier and our Mid-Continent, Northwest and Southwest logistics footprint to generate new organic and external growth opportunities.

"Looking forward, we believe HEP is positioned to continue its growth based on the quality and location of our assets, our talented employee base, and our strong and supportive general partner, HollyFrontier."

Fourth Quarter 2016 Revenue Highlights

Revenues for the quarter were $112.5 million, an increase of $15.3 million compared to the fourth quarter of 2015. The revenue increase was mainly due to our newly acquired Woods Cross refinery processing units, the El Dorado refinery processing units acquired in the fourth quarter of 2015, and the Tulsa crude tanks acquired in the 1st quarter of 2016 offset by lower pipeline revenues. Overall pipeline volumes were down 5% compared to the fourth quarter of 2015.

Revenues for the three months ended December 31, 2016, include the recognition of $2.7 million of prior shortfalls billed to shippers in 2015 and 2016, as they did not meet their minimum volume commitments within the contractual make-up period. As of December 31, 2016, deferred revenue on our consolidated balance sheet related to shortfalls billed was $5.6 million. Such deferred revenue will be recognized in earnings either as (a) payment for shipments in excess of guaranteed levels, if and to the extent the pipeline system will have the necessary capacity for shipments in excess of guaranteed levels, or (b) when shipping rights expire unused over the contractual make-up period.

Year Ended December 31, 2016 Revenue Highlights

Revenues for the year ended December 31, 2016, were $402.0 million, a $43.2 million increase compared to the year ended December 31, 2015. The revenue increase was primarily due to our newly acquired Woods Cross processing units, the El Dorado processing units acquired in the fourth quarter of 2015, higher UNEV pipeline revenues, and revenues from the Tulsa crude tanks acquired in the first quarter of 2016.

Revenues for the year ended December 31, 2016, include the recognition of $10.0 million of prior shortfalls billed to shippers in 2015 and 2016.

Operating Costs and Expenses Highlights

Operating costs and expenses were $58.0 million and $206.9 million for the three months and year ended December 31, 2016, respectively, representing increases of $11.7 million and $25.5 million over the respective periods of 2015. The increase is mainly due to operating costs for the Woods Cross and El Dorado refinery processing units.

We have scheduled a webcast conference call today at 4:00 PM Eastern Time to discuss financial results. This webcast may be accessed at: https://event.webcasts.com/starthere.jsp?ei=1131681.

An audio archive of this webcast will be available using the above noted link through March 9, 2017.

About Holly Energy Partners, L.P.

Holly Energy Partners, L.P., headquartered in Dallas, Texas, provides petroleum product and crude oil transportation, terminalling, storage and throughput services to the petroleum industry, including HollyFrontier Corporation subsidiaries. The Partnership, through its subsidiaries and joint ventures, owns and/or operates petroleum product and crude gathering pipelines, tankage and terminals in Texas, New Mexico, Arizona, Washington, Idaho, Oklahoma, Utah, Nevada, Wyoming and Kansas as well as refinery processing units in Utah and Kansas.

HollyFrontier Corporation, headquartered in Dallas, Texas, is an independent petroleum refiner and marketer that produces high value light products such as gasoline, diesel fuel, jet fuel and other specialty products. HollyFrontier operates through its subsidiaries a 135,000 barrels-per-stream-day ("bpsd") refinery located in El Dorado, Kansas, a 125,000 bpsd refinery in Tulsa, Oklahoma, a 100,000 bpsd refinery located in Artesia, New Mexico, a 52,000 bpsd refinery located in Cheyenne, Wyoming, and a 45,000 bpsd refinery in Woods Cross, Utah. HollyFrontier markets its refined products principally in the Southwest U.S., the Rocky Mountains extending into the Pacific Northwest and in other neighboring Plains states. Additionally, HollyFrontier owns Petro-Canada Lubricants Inc. whose Mississauga, Ontario facility produces 15,600 BPD of base oils and other specialized lubricant products. A subsidiary of HollyFrontier also owns a 37% interest (including the general partner interest) in Holly Energy Partners, L.P.

The statements in this press release relating to matters that are not historical facts are "forward-looking statements" within the meaning of the federal securities laws. These statements are based on our beliefs and assumptions and those of our general partner using currently available information and expectations as of the date hereof, are not guarantees of future performance and involve certain risks and uncertainties. Although we and our general partner believe that such expectations reflected in such forward-looking statements are reasonable, neither we nor our general partner can give assurance that our expectations will prove to be correct. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in these statements. Any differences could be caused by a number of factors including, but not limited to:

The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

RESULTS OF OPERATIONS (Unaudited)

Income, Distributable Cash Flow and Volumes

The following tables present income, distributable cash flow and volume information for the three months and years ended December 31, 2016 and 2015.

   

Three Months Ended
December 31,

     

Change from

2016    

2015 (5)

2015
(In thousands, except per unit data)
Revenues
Pipelines:
Affiliates - refined product pipelines $ 19,301 $ 20,563 $ (1,262 )
Affiliates - intermediate pipelines 6,175 7,420 (1,245 )
Affiliates - crude pipelines   17,235     17,605     (370 )
42,711 45,588 (2,877 )
Third parties - refined product pipelines   14,819     14,991     (172 )
57,530 60,579 (3,049 )
Terminals, tanks and loading racks:
Affiliates 30,808 29,401 1,407
Third parties   4,014     4,308     (294 )
34,822 33,709 1,113
Affiliates - refinery processing units   20,174     2,963     17,211  
Total revenues 112,526 97,251 15,275
 
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) 34,818 26,516 8,302
Depreciation and amortization 19,245 16,886 2,359
General and administrative   3,914     2,897     1,017  
  57,977     46,299     11,678  
Operating income 54,549 50,952 3,597
 
Equity in earnings of equity method investments 4,058 2,169 1,889
Interest expense, including amortization (16,294 ) (10,107 ) (6,187 )
Interest income 108 142 (34 )
Gain (loss) on sale of assets and other income   574     80     494  
  (11,554 )   (7,716 )   (3,838 )
Income before income taxes 42,995 43,236 (241 )
State income tax (expense) benefit   (76 )   (123 )   47  
Net income 42,919 43,113 (194 )
Add net loss applicable to predecessor 676 (676 )
Allocation of net income attributable to noncontrolling interests   (1,558 )   (3,269 )   1,711  
Net income attributable to Holly Energy Partners 41,361 40,520 841
General partner interest in net income, including incentive distributions(1)   (17,172 )   (11,502 )   5,670  
Limited partners' interest in net income $ 24,189   $ 29,018   $ (4,829 )
Limited partners' earnings per unit - basic and diluted:(1) $ 0.40   $ 0.49   $ (0.09 )
Weighted average limited partners' units outstanding   62,781     58,657     4,124  
EBITDA(2) $ 76,868   $ 67,376   $ 9,492  
Distributable cash flow(3) $ 58,479   $ 53,551   $ 4,928  
 
Volumes (bpd)
Pipelines:
Affiliates - refined product pipelines 126,594 131,472 (4,878 )
Affiliates - intermediate pipelines 134,509 139,847 (5,338 )
Affiliates - crude pipelines   271,962     289,513     (17,551 )
533,065 560,832 (27,767 )
Third parties - refined product pipelines   77,410     78,422     (1,012 )
610,475 639,254 (28,779 )
Terminals and loading racks:
Affiliates 440,569 397,473 43,096
Third parties   68,437     82,533     (14,096 )
509,006 480,006 29,000
Affiliates - refinery processing units   67,725     26,875     40,850  
Total for pipelines and terminal assets (bpd)   1,187,206     1,146,135     41,071  
 
         

Years Ended
December 31,

Change from
2016    

2015 (5)

2015
(In thousands, except per unit data)
Revenues
Pipelines:
Affiliates - refined product pipelines $ 83,102 $ 81,294 $ 1,808
Affiliates - intermediate pipelines 26,996 28,943 (1,947 )
Affiliates - crude pipelines   70,341     67,088     3,253  
180,439 177,325 3,114
Third parties - refined product pipelines   52,195     51,022     1,173  
232,634 228,347 4,287
Terminals, tanks and loading racks:
Affiliates 119,633 111,933 7,700
Third parties   16,732     15,632     1,100  
136,365 127,565 8,800
Affiliates - refinery processing units   33,044     2,963     30,081  
Total revenues 402,043 358,875 43,168
 
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) 123,986 105,556 18,430
Depreciation and amortization 70,428 63,306 7,122
General and administrative   12,532     12,556     (24 )
  206,946     181,418     25,528  
Operating income 195,097 177,457 17,640
 
Equity in earnings of equity method investments 14,213 4,803 9,410
Interest expense, including amortization (52,552 ) (37,418 ) (15,134 )
Interest income 440 526 (86 )
Gain on sale of assets and other income   677     486     191  
  (37,222 )   (31,603 )   (5,619 )
Income before income taxes 157,875 145,854 12,021
State income tax expense   (285 )   (228 )   (57 )
Net income 157,590 145,626 11,964
Add net loss applicable to predecessor 10,657 2,702 7,955
Allocation of net income attributable to noncontrolling interests   (10,006 )   (11,120 )   1,114  
Net income attributable to Holly Energy Partners 158,241 137,208 21,033
General partner interest in net income, including incentive distributions(1)   (57,173 )   (42,337 )   (14,836 )
Limited partners' interest in net income $ 101,068   $ 94,871   $ 6,197  
Limited partners' earnings per unit - basic and diluted:(1) $ 1.69   $ 1.60   $ 0.09  
Weighted average limited partners' units outstanding   59,872     58,657     1,215  
EBITDA(2) $ 277,545   $ 237,180   $ 40,365  
Distributable cash flow(3) $ 218,810   $ 197,046   $ 21,764  
 
Volumes (bpd)
Pipelines:
Affiliates - refined product pipelines 128,140 124,061 4,079
Affiliates - intermediate pipelines 137,381 142,475 (5,094 )
Affiliates - crude pipelines   277,241     291,491     (14,250 )
542,762 558,027 (15,265 )
Third parties - refined product pipelines   75,909     73,555     2,354  
618,671 631,582 (12,911 )
Terminals and loading racks:
Affiliates 413,487 391,292 22,195
Third parties   72,342     78,403     (6,061 )
485,829 469,695 16,134
Affiliates - refinery processing units   51,778     6,774     45,004  
Total for pipelines and terminal assets (bpd)   1,156,278     1,108,051     48,227  
 
(1) Net income attributable to Holly Energy Partners is allocated between limited partners and the general partner interest in accordance with the provisions of the partnership agreement. HEP net income allocated to the general partner includes incentive distributions that are declared subsequent to quarter end. General partner incentive distributions were $15.6 million and $10.9 million for the three months ended December 31, 2016 and 2015, respectively, and $54.0 million and $40.4 million for the years ended December 31, 2016 and 2015, respectively.
 
(2) Earnings before interest, taxes, depreciation and amortization ("EBITDA") is calculated as net income attributable to Holly Energy Partners plus (i) interest expense and loss on early extinguishment of debt, net of interest income, (ii) state income tax and (iii) depreciation and amortization. EBITDA is not a calculation based upon generally accepted accounting principles ("GAAP"). However, the amounts included in the EBITDA calculation are derived from amounts included in our consolidated financial statements. EBITDA should not be considered as an alternative to net income attributable to Holly Energy Partners or operating income, as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of other companies. EBITDA is presented here because it is a widely used financial indicator used by investors and analysts to measure performance. EBITDA is also used by our management for internal analysis and as a basis for compliance with financial covenants.
 
Set forth below is our calculation of EBITDA.
 
   

Three Months Ended
December 31,

     

Years Ended
December 31,

2016    

2015 (5)

2016    

2015 (5)

(In thousands)
Net income attributable to Holly Energy Partners $ 41,361 $ 40,520 $ 158,241 $ 137,208
Add (subtract):
Interest expense 15,399 9,604 49,306 35,490
Interest income (108 ) (142 ) (440 ) (526 )
Amortization of discount and deferred debt charges 895 503 3,246 1,928
State income tax 76 123 285 228
Depreciation and amortization 19,245 16,886 70,428 63,306
Predecessor depreciation and amortization       (118 )   (3,521 )   (454 )
EBITDA $ 76,868   $ 67,376   $ 277,545   $ 237,180  
 
(3) Distributable cash flow is not a calculation based upon GAAP. However, the amounts included in the calculation are derived from amounts presented in our consolidated financial statements, with the general exception of maintenance capital expenditures. Distributable cash flow should not be considered in isolation or as an alternative to net income attributable to Holly Energy Partners or operating income, as an indication of our operating performance, or as an alternative to operating cash flow as a measure of liquidity. Distributable cash flow is not necessarily comparable to similarly titled measures of other companies. Distributable cash flow is presented here because it is a widely accepted financial indicator used by investors to compare partnership performance. It is also used by management for internal analysis and our performance units. We believe that this measure provides investors an enhanced perspective of the operating performance of our assets and the cash our business is generating.
 
Set forth below is our calculation of distributable cash flow.
 
   

Three Months Ended
December 31,

     

Years Ended
December 31,

2016    

2015 (5)

2016    

2015 (5)

(In thousands)
Net income attributable to Holly Energy Partners $ 41,361 $ 40,520 $ 158,241 $ 137,208
Add (subtract):
Depreciation and amortization 19,245 16,886 70,428 63,306
Amortization of discount and deferred debt charges 895 503 3,246 1,928
Loss on early extinguishment of debt
Increase (decrease) in deferred revenue attributable to shortfall billings (1,113 ) (190 ) (1,292 ) (1,233 )
Maintenance capital expenditures* (1,861 ) (3,286 ) (9,658 ) (8,926 )
Increase (decrease) in environmental liability 135 (1,837 ) (584 ) 1,107
Increase (decrease) in reimbursable deferred revenue (827 ) (495 ) (2,733 ) 176
Other non-cash adjustments 644 1,568 4,683 3,934
Predecessor depreciation and amortization $   $ (118 ) $ (3,521 ) $ (454 )
Distributable cash flow $ 58,479   $ 53,551   $ 218,810   $ 197,046  
     
* Maintenance capital expenditures are capital expenditures made to replace partially or fully depreciated assets in order to maintain the existing operating capacity of our assets and to extend their useful lives. Maintenance capital expenditures include expenditures required to maintain equipment reliability, tankage and pipeline integrity, safety and to address environmental regulations.
 
    December 31,     December 31,
2016

2015 (5)

(In thousands)
Balance Sheet Data
Cash and cash equivalents $ 3,657 $ 15,013
Working capital (deficit) $ (7,782 ) $ 12,218
Total assets $ 1,884,237 $ 1,777,646
Long-term debt $ 1,243,912 $ 1,008,752
Partners' equity(4) $ 378,234 $ 531,793
 
(4) As a master limited partnership, we distribute our available cash, which historically has exceeded our net income attributable to HEP because depreciation and amortization expense represents a non-cash charge against income. The result is a decline in partners' equity since our regular quarterly distributions have exceeded our quarterly net income attributable to HEP. Additionally, if the assets contributed and acquired from HFC while we were a consolidated variable interest entity of HFC had been acquired from third parties, our acquisition cost in excess of HFC's basis in the transferred assets would have been recorded in our financial statements as increases to our properties and equipment and intangible assets at the time of acquisition instead of decreases to partners' equity.
 
(5) We have retrospectively adjusted our historical financial results for all periods to include the atmospheric distillation tower, fluid catalytic cracking unit, and polymerization unit located at HFC's Woods Cross Refinery and crude oil tanks located at HFC's Tulsa refinery for the periods we were under common control of HFC. The 2015 Balance Sheet presentation was revised to reflect increases of $243.2 million in properties and equipment, net, $0.1 million in other long-term liabilities and $243.1 million in general partner interest. The 2015 Income Statement presentation was revised to include increases of $2.2 million in operating expenses and $0.5 million in depreciation and amortization.
 

Holly Energy Partners, L.P.
Richard L. Voliva III, 214-954-6511
Vice President and
Chief Financial Officer
or
Julia Heidenreich, 214-954-6511
Vice President, Investor Relations
or
Craig Biery, 214-954-6511
Investor Relations

Source: Holly Energy Partners, L.P.

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