Holly Energy Partners, L.P.
Aug 1, 2017

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

DALLAS--(BUSINESS WIRE)-- Holly Energy Partners, L.P. ("HEP" or the "Partnership") (NYSE:HEP) today reported financial results for the second quarter of 2017. Net income attributable to HEP for the second quarter was $41.3 million ($0.36 per basic and diluted limited partner unit) compared to $39.1 million ($0.45 per basic and diluted limited partner unit) for the second quarter of 2016.

Distributable cash flow was $60.9 million for the quarter, up $5.2 million, or 9.3% compared to the second quarter of 2016. HEP announced its 51st consecutive distribution increase on July 27, 2017, raising the quarterly distribution from $0.62 to $0.6325 per unit, which represents an increase of 8.1% over the distribution for the second quarter of 2016, exceeding HEP's distribution growth target of 8%.

The increase in earnings is primarily due to increased operating income from our Woods Cross refinery processing units of $4.5 million, offset by higher interest expense of $2.5 million.

Commenting on 2017 second quarter results, George Damiris, Chief Executive Officer, stated, "We are pleased with our solid financial performance in the second quarter, which allowed us to maintain our record of continuous quarterly distribution increases and achieve our distribution growth target of 8%, while still maintaining a distribution coverage ratio greater than 1.0. Looking forward, we will continue to leverage our talented employee base, our relationship with HollyFrontier and our Mid-Continent, Northwest and Southwest logistics footprint to generate new organic and external growth opportunities."

Second Quarter 2017 Revenue Highlights

Revenues for the quarter were $109.1 million, an increase of $14.2 million compared to the second quarter of 2016. The increase is primarily attributable to the $12.9 million of revenue recorded for the Woods Cross processing units acquired in the fourth quarter of 2016. Overall pipeline volumes were up 2% compared to the three months ended June 30, 2016, largely due to an increase in intermediate pipeline shipments.

Revenues for the three months ended June 30, 2017, include the recognition of $0.6 million of prior shortfalls billed to shippers in 2016 as they did not exceed their minimum volume commitments within the contractual make-up period. As of June 30, 2017, shortfall deferred revenue reflected in our consolidated balance sheet was $8.0 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 has the necessary capacity for shipments in excess of guaranteed levels, or (b) when shipping rights expire unused over the contractual make-up period.

Six Months Ended June 30, 2017 Revenue Highlights

Revenues for the six months ended June 30, 2017, were $214.8 million, an increase of $17.9 million compared to the six months ended June 20, 2016. The increase is primarily attributable to the $27.6 million of revenue recorded for the Woods Cross refinery processing units acquired in the fourth quarter of 2016, offset by a $7.9 million decrease in revenues around assets serving HFC's Navajo refinery due to the substantial turnaround at the Navajo refinery during the first quarter of 2017.

Revenues for the six months ended June 30, 2017, include the recognition of $2.7 million of prior shortfalls billed to shippers in 2016 as they did not exceed their minimum volume commitments within the contractual make-up period.

Operating Costs and Expenses Highlights

Operating costs and expenses were $56.7 million and $110.6 million for the three and six months ended June 30, 2017, representing increases of $8.9 million and $15.3 million from the three and six months ended June 30, 2016. The increases are primarily due to new operating costs and expenses for our Woods Cross refinery processing units acquired in the fourth quarter of 2016.

Interest expense was $13.7 million and $27.3 million for the three and six months ended June 30, 2017, representing increases of $2.5 million and $5.5 million over the same periods of 2016. The increases are due to the offering of $400 million aggregate principal 6% senior notes in July 2016, higher average balances outstanding under our senior secured revolving credit facility, and market interest rate increases.

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=1154339.

An audio archive of this webcast will be available using the above noted link through August 15, 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. In addition, HollyFrontier, through its subsidiary, owns Petro-Canada Lubricants Inc., whose Mississauga, Ontario facility produces 15,600 barrels per day of base oils and other specialized lubricant products, and owns a 36% interest (including a 2% 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 six months ended June 30, 2017 and 2016.

         
Three Months Ended June 30, Change from
2017     2016 2016
(In thousands, except per unit data)
Revenues
Pipelines:
Affiliates - refined product pipelines $ 19,432 $ 19,392 $ 40
Affiliates - intermediate pipelines 7,250 6,780 470
Affiliates - crude pipelines   16,919     18,581     (1,662 )
43,601 44,753 (1,152 )
Third parties - refined product pipelines   11,647     11,434     213  
55,248 56,187 (939 )
Terminals, tanks and loading racks:
Affiliates 32,012 30,250 1,762
Third parties   4,344     4,285     59  
  36,356     34,535     1,821  
 
Affiliates - refinery processing units   17,539     4,175     13,364  
 
Total revenues   109,143     94,897     14,246  
Operating costs and expenses
Operations 34,097 29,212 4,885
Depreciation and amortization 19,945 15,712 4,233
General and administrative   2,615     2,863     (248 )
  56,657     47,787     8,870  
Operating income 52,486 47,110 5,376
 
Equity in earnings of equity method investments 4,053 3,623 430
Interest expense, including amortization (13,748 ) (11,276 ) (2,472 )
Interest income 103 112 (9 )
Gain (loss) on sale of assets and other   89         89  
  (9,503 )   (7,541 )   (1,962 )
Income before income taxes 42,983 39,569 3,414
State income tax expense   (127 )   (54 )   (73 )
Net income 42,856 39,515 3,341
Allocation of net loss to Predecessor 1,960 (1,960 )
Allocation of net income attributable to noncontrolling interests   (1,521 )   (2,355 )   834  
Net income attributable to Holly Energy Partners 41,335 39,120 2,215
General partner interest in net income, including incentive distributions(1)   (18,328 )   (12,677 )   (5,651 )
Limited partners' interest in net income $ 23,007   $ 26,443   $ (3,436 )
Limited partners' earnings per unit - basic and diluted(1) $ 0.36   $ 0.45   $ (0.09 )
Weighted average limited partners' units outstanding   64,086     58,865     5,221  
EBITDA(2) $ 75,052   $ 66,047   $ 9,005  
Distributable cash flow(3) $ 60,908   $ 55,709   $ 5,199  
 
Volumes (bpd)
Pipelines:
Affiliates - refined product pipelines 134,357 125,535 8,822
Affiliates - intermediate pipelines 151,683 135,165 16,518
Affiliates - crude pipelines   269,418     278,414     (8,996 )
555,458 539,114 16,344
Third parties - refined product pipelines   71,612     74,386     (2,774 )
627,070 613,500 13,570
Terminals and loading racks:
Affiliates 461,329 418,233 43,096
Third parties   67,657     71,415     (3,758 )
  528,986     489,648     39,338  
 
Affiliates - refinery processing units   67,310     50,376     16,934  
 
Total for pipelines and terminal assets (bpd)   1,223,366     1,153,524     69,842  
 
         
Six Months Ended
June 30,
Change from
2017     2016 2016
(In thousands, except per unit data)
Revenues
Pipelines:
Affiliates—refined product pipelines $ 37,176 $ 44,574 $ (7,398 )
Affiliates—intermediate pipelines 12,534 14,193 (1,659 )
Affiliates—crude pipelines   33,800     36,072     (2,272 )
83,510 94,839 (11,329 )
Third parties—refined product pipelines   24,185     26,200     (2,015 )
107,695 121,039 (13,344 )
Terminals, tanks and loading racks:
Affiliates 61,748 58,503 3,245
Third parties   8,415     8,683     (268 )
  70,163     67,186     2,977  
 
Affiliates - refinery processing units   36,919     8,682     28,237  
 
Total revenues   214,777     196,907     17,870  
Operating costs and expenses
Operations 66,586 57,067 9,519
Depreciation and amortization 38,722 32,263 6,459
General and administrative   5,249     5,954     (705 )
  110,557     95,284     15,273  
Operating income 104,220 101,623 2,597
 
Equity in earnings of equity method investments 5,893 6,388 (495 )
Interest expense, including amortization (27,287 ) (21,811 ) (5,476 )
Interest income 205 224 (19 )
Loss on early extinguishment of debt (12,225 ) (12,225 )
Gain (loss) on sale of assets and other   162     (8 )   170  
  (33,252 )   (15,207 )   (18,045 )
Income before income taxes 70,968 86,416 (15,448 )
State income tax expense   (233 )   (149 )   (84 )
Net income 70,735 86,267 (15,532 )
Allocation of net loss to Predecessor 3,110 (3,110 )
Allocation of net income attributable to noncontrolling interests   (3,837 )   (7,282 )   3,445  
Net income attributable to Holly Energy Partners 66,898 82,095 (15,197 )
General partner interest in net income, including incentive distributions(1)   (35,466 )   (24,779 )   (10,687 )
Limited partners' interest in net income $ 31,432   $ 57,316   $ (25,884 )
Limited partners' earnings per unit—basic and diluted(1) $ 0.49   $ 0.96   $ (0.47 )
Weighted average limited partners' units outstanding   63,602     58,761     4,841  
EBITDA(2) $ 145,160   $ 135,973   $ 9,187  
Distributable cash flow(3) $ 118,197   $ 111,075   $ 7,122  
 
Volumes (bpd)
Pipelines:
Affiliates - refined product pipelines 120,886 128,983 (8,097 )
Affiliates - intermediate pipelines 128,143 136,288 (8,145 )
Affiliates - crude pipelines   269,155     282,923     (13,768 )
518,184 548,194 (30,010 )
Third parties - refined product pipelines   78,339     76,360     1,979  
596,523 624,554 (28,031 )
Terminals and loading racks:
Affiliates 418,365 387,628 30,737
Third parties   68,646     76,370     (7,724 )
  487,011     463,998     23,013  
 
Affiliates - refinery processing units   65,082     46,409     18,673  
 
Total for pipelines and terminal assets (bpd)   1,148,616     1,134,961     13,655  
 
       
June 30, December 31,
2017 2016
(In thousands)
Balance Sheet Data
Cash and cash equivalents $ 16,339 $ 3,657
Working capital (deficit) $ 16,591 $ (7,782 )
Total assets $ 1,867,891 $ 1,884,237
Long-term debt $ 1,236,739 $ 1,243,912
Partners' equity(4) $ 387,370 $ 378,234
 
(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. Net income allocated to the general partner includes incentive distributions declared subsequent to quarter end. General partner incentive distributions were $17.5 million and $12.1 million for the three months ended June 30, 2017 and 2016, respectively, and $34.1 million and $23.6 million for the six months ended June 30, 2017 and 2016, 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 also is 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
June 30,
      Six Months Ended
June 30,
2017     2016 2017     2016
(In thousands)
Net income attributable to Holly Energy Partners $ 41,335 $ 39,120 $ 66,898 $ 82,095
Add (subtract):
Interest expense 12,982 10,493 25,751 20,435
Interest Income (103 ) (112 ) (205 ) (224 )
Amortization of discount and deferred debt charges 766 783 1,536 1,376
Loss on early extinguishment of debt 12,225
State income tax expense 127 54 233 149
Depreciation and amortization 19,945 15,712 38,722 32,263
Predecessor depreciation and amortization       (3 )       (121 )
EBITDA $ 75,052   $ 66,047   $ 145,160   $ 135,973  
 
(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
June 30,
      Six Months Ended
June 30,
2017     2016 2017     2016
(In thousands)
Net income attributable to Holly Energy Partners $ 41,335 $ 39,120 $ 66,898 $ 82,095
Add (subtract):
Depreciation and amortization 19,945 15,712 38,722 32,263
Amortization of discount and deferred debt charges 766 783 1,536 1,376
Loss on early extinguishment of debt 12,225
Increase (decrease) in deferred revenue attributable to shortfall billings 1,524 1,731 2,701 (1,927 )
Maintenance capital expenditures* (2,242 ) (2,661 ) (3,067 ) (4,322 )
Decrease in environmental liability (313 ) (113 ) (559 ) (442 )
Decrease in reimbursable deferred revenue (923 ) (628 ) (1,848 ) (1,155 )
Other non-cash adjustments 816 1,768 1,589 3,308
Predecessor depreciation and amortization       (3 )       (121 )
Distributable cash flow $ 60,908   $ 55,709   $ 118,197   $ 111,075  
 
  *   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, and safety and to address environmental regulations.
 
(4) As a master limited partnership, we distribute our available cash, which historically has exceeded our net income attributable to Holly Energy Partners 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 Holly Energy Partners. Additionally, if the assets contributed and acquired from HollyFrontier while we were a consolidated variable interest entity of HollyFrontier had been acquired from third parties, our acquisition cost in excess of HollyFrontier's basis in the transferred assets would have been recorded as increases to our properties and equipment and intangible assets at the time of acquisition instead of decreases to partners' equity.

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

Source: Holly Energy Partners, L.P.

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