Holly Energy Partners, L.P.
Oct 30, 2013

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

DALLAS--(BUSINESS WIRE)-- Holly Energy Partners, L.P. ("HEP" or the "Partnership") (NYSE:HEP) today reported financial results for the third quarter of 2013. For the quarter, distributable cash flow was $43.9 million, up $3.4 million, or 8% compared to the third quarter of 2012. HEP announced its 36th consecutive distribution increase on October 25, 2013, raising the quarterly distribution from $0.4850 to $0.4925 per unit, representing a 6% increase over the distribution for the third quarter of 2012.

Net income for the second quarter was $23.1 million compared to $23.8 million for the third quarter of 2012. The decrease in net income is due principally to increased depreciation resulting from asset abandonment charges for tankage permanently removed from service, partially offset by increased revenues and a payroll related tax refund. Though accounting rules require us to write down tank assets that are replaced or taken out of service, HEP's cash flow is not affected since minimum commitments do not change and costs to construct the replacement tanks are, in certain cases, reimbursed per the terms of our contracts with HollyFrontier Corporation ("HFC"). Net income attributable to Holly Energy Partners for the third quarter was $21.9 million ($0.25 per basic and diluted limited partner unit) compared to $23.3 million ($0.32 per basic and diluted limited partner unit) for the third quarter of 2012. The additional decrease in net income attributable to Holly Energy Partners is due principally to allocations of income to noncontrolling interests.

Commenting on the third quarter of 2013, Matt Clifton, Chairman of the Board and Chief Executive Officer, stated, "We are pleased that financial results for the third quarter of 2013 allowed us to continue our record of raising our quarterly distribution in all quarters since our initial public offering nine years ago. Our previously announced New Mexico crude gathering expansion project will be completed in phases starting this fall. We expect this project will begin contributing to our results during the first quarter of 2014.

"As we look forward we believe HEP is well positioned due to the quality and geographic location of our assets, our superior employee base, and our financially strong and supportive general partner, HollyFrontier. HEP's future growth is underpinned by strong industry fundamentals, planned capital projects and our existing long-term fee-based contracts with built-in annual escalators."

Third Quarter 2013 Revenue Highlights

Revenues for the quarter were $77.7 million, a $3.7 million increase compared to the third quarter of 2012 due to the effect of annual tariff increases combined with higher cost reimbursement receipts from HFC. Overall pipeline volumes were down 3% compared to the three months ended September 30, 2012.

Revenues for the three months ended September 30, 2013 include the recognition of $0.2 million of prior shortfalls billed to shippers in 2012, as they did not meet their minimum volume commitments within the contractual make-up period. As of September 30, 2013, shortfall deferred revenue in our consolidated balance sheet was $11.2 million. Such deferred revenue will be recognized in earnings either as payment for shipments in excess of guaranteed levels, if and to the extent the pipeline system will not have the necessary capacity for shipments in excess of guaranteed levels, or when shipping rights expire unused over the contractual make-up period.

Nine Months Ended September 30, 2013 Revenue Highlights

Revenues for nine months ended September 30, 2013 were $227.3 million, a $16.2 million increase compared to the nine months ended September 30, 2012. This is due principally to a $4.4 million increase in deferred revenue realized, the effect of annual tariff increases, increased pipeline shipments in the second quarter and higher cost reimbursement receipts from HFC.

Revenues for nine months ended September 30, 2013 include the recognition of $7.6 million of prior shortfalls billed to shippers in 2012, as they did not meet their minimum volume commitments within the contractual make-up period.

Operating Costs and Expenses Highlights

Operating costs and expenses were $43.6 million and $129.6 million for the three and nine months ended September 30, 2013, representing increases of $5.1 million and $15.7 million over the respective periods of 2012. These increases are due to higher throughput levels on our assets, as well as year-over-year increases in maintenance costs, environmental accruals, employee costs and depreciation expense due to asset abandonment charges related to tankage permanently removed from service. Operating expenses for the three and nine months ended September 30, 2013 were reduced by $3.5 million due to a net tax refund related to payroll costs covering a multi-year period.

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=1022774.

An audio archive of this webcast will be available using the above noted link through November 13, 2013.

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 owns and operates petroleum product and crude gathering pipelines, tankage and terminals in Texas, New Mexico, Arizona, Washington, Idaho, Oklahoma, Utah, Wyoming and Kansas. In addition, the Partnership owns a 75% interest in UNEV Pipeline, LLC, the owner of a Holly Energy operated refined products pipeline running from Salt Lake City, Utah to Las Vegas, Nevada, and related product terminals and a 25% interest in SLC Pipeline LLC, a 95-mile intrastate pipeline system serving refineries in the Salt Lake City, Utah area.

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 31,000 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. A subsidiary of HollyFrontier owns a 39% 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. Forward looking statements use words such as "anticipate," "project," "expect," "plan," "goal," "forecast," "intend," "could," "believe," "may," and similar expressions and statements regarding our plans and objectives for future operations. 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. Such statements are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. Certain factors could cause actual results to differ materially from results anticipated in the forward-looking statements. These factors include, but are 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 and nine months ended September 30, 2013.

    Three Months Ended September 30,    

Change from

2013     2012 2012
(In thousands, except per unit data)
Revenues
Pipelines:
Affiliates — refined product pipelines $ 17,196 $ 16,351 $ 845
Affiliates — intermediate pipelines 6,567 7,319 (752 )
Affiliates — crude pipelines   12,994     12,306     688  
36,757 35,976 781
Third parties — refined product pipelines   9,246     9,538     (292 )
46,003 45,514 489
Terminals, tanks and loading racks:
Affiliates 28,766 26,139 2,627
Third parties   2,954     2,401     553  
  31,720     28,540     3,180  
Total revenues 77,723 74,054 3,669
Operating costs and expenses:
Operations 21,686 22,732 (1,046 )
Depreciation and amortization 19,449 14,351 5,098
General and administrative   2,415     1,399     1,016  
  43,550     38,482     5,068  
Operating income 34,173 35,572 (1,399 )
Equity in earnings of SLC Pipeline 835 877 (42 )
Interest expense, including amortization (11,816 ) (12,540 ) 724
Interest income 3 3
Other income 61 61
Gain (loss) on sale of assets   (159 )       (159 )
  (11,076 )   (11,663 )   587  
Income before income taxes 23,097 23,909 (812 )
State income tax expense   (40 )   (137 )   97  
Net income 23,057 23,772 (715 )
Allocation of net loss attributable to Predecessors 146 (146 )
Allocation of net income attributable to noncontrolling interests   (1,172 )   (582 )   (590 )
Net income attributable to Holly Energy Partners 21,885 23,336 (1,451 )
General partner interest in net income, including incentive distributions(1)   (7,128 )   (5,276 )   (1,852 )
Limited partners' interest in net income $ 14,757   $ 18,060   $ (3,303 )
Limited partners' earnings per unit — basic and diluted:(1) $ 0.25   $ 0.32   $ (0.07 )
Weighted average limited partners' units outstanding   58,657     56,536     2,121  
EBITDA(2) $ 53,187   $ 49,920   $ 3,267  
Distributable cash flow(3) $ 43,865   $ 40,431   $ 3,434  
 
Volumes (bpd)
Pipelines:
Affiliates — refined product pipelines 116,078 114,113 1,965
Affiliates — intermediate pipelines 136,312 132,220 4,092
Affiliates — crude pipelines   172,569     187,861     (15,292 )
424,959 434,194 (9,235 )
Third parties — refined product pipelines   59,036     66,274     (7,238 )
483,995 500,468 (16,473 )
Terminals and loading racks:
Affiliates 261,431 267,638 (6,207 )
Third parties   64,615     57,496     7,119  
  326,046     325,134     912  
Total for pipelines and terminal assets (bpd)   810,041     825,602     (15,561 )
 
       
Nine Months Ended September 30, Change from
2013     2012 2012
(In thousands, except per unit data)
Revenues
Pipelines:
Affiliates—refined product pipelines $ 50,918 $ 46,727 $ 4,191
Affiliates—intermediate pipelines 20,030 21,076 (1,046 )
Affiliates—crude pipelines   36,760     33,844     2,916  
107,708 101,647 6,061
Third parties—refined product pipelines   29,412     27,856     1,556  
137,120 129,503 7,617
Terminals, tanks and loading racks:
Affiliates 82,514 74,773 7,741
Third parties   7,672     6,853     819  
  90,186     81,626     8,560  
Total revenues 227,306 211,129 16,177
Operating costs and expenses
Operations 72,089 65,114 6,975
Depreciation and amortization 48,730 42,801 5,929
General and administrative   8,747     5,925     2,822  
  129,566     113,840     15,726  
Operating income 97,740 97,289 451
Equity in earnings of SLC Pipeline 2,238 2,502 (264 )
Interest expense, including amortization (35,929 ) (34,269 ) (1,660 )
Interest income 110 110
Other income 61 61
Loss on early extinguishment of debt (2,979 ) 2,979
Gain (loss) on sale of assets   1,863         1,863  
  (31,657 )   (34,746 )   3,089  
Income before income taxes 66,083 62,543 3,540
State income tax expense   (440 )   (287 )   (153 )
Net income 65,643 62,256 3,387
Allocation of net loss attributable to Predecessors 4,199 (4,199 )
Allocation of net loss (income) attributable to noncontrolling interests   (5,192 )   658     (5,850 )
Net income attributable to Holly Energy Partners 60,451 67,113 (6,662 )
General partner interest in net income, including incentive distributions (1)   20,038     16,674     3,364  
Limited partners' interest in net income $ 40,413   $ 50,439   $ (10,026 )
Limited partners' earnings per unit—basic and diluted (1) $ 0.69   $ 0.91   $ (0.22 )
Weighted average limited partners' units outstanding   58,108     55,332     2,776  
EBITDA (2) $ 145,440   $ 139,546   $ 5,894  
Distributable cash flow (3) $ 112,316   $ 111,506   $ 810  
 
Volumes (bpd)
Pipelines:
Affiliates—refined product pipelines 109,995 104,444 5,551
Affiliates—intermediate pipelines 133,222 130,972 2,250
Affiliates—crude pipelines   167,685     169,922     (2,237 )
410,902 405,338 5,564
Third parties—refined product pipelines   59,711     62,301     (2,590 )
470,613 467,639 2,974
Terminals and loading racks:
Affiliates 265,242 265,958 (716 )
Third parties   59,995     52,918     7,077  
  325,237     318,876     6,361  
Total for pipelines and terminal assets (bpd)   795,850     786,515     9,335  
 

(1) Net income 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 $6.8 million and $4.9 million for the three months ended September 30, 2013 and 2012, respectively, and $19.2 million and $15.6 million for the nine months ended September 30, 2013 and 2012, respectively. Net income attributable to the limited partners is divided by the weighted average limited partner units outstanding in computing the limited partners' per unit interest in net income.

(2) Earnings before interest, taxes, depreciation and amortization ("EBITDA") is calculated as net income attributable to Holly Energy Partners plus (i) interest expense, net of interest income, (ii) state income tax and (iii) depreciation and amortization (excluding Predecessor amounts). EBITDA is not a calculation based upon 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
September 30,

     

Nine Months Ended
September 30,

2013     2012 2013     2012
(In thousands)
Net income attributable to Holly Energy Partners $ 21,885 $ 23,336 $ 60,451 $ 67,113
Add (subtract):
Interest expense 11,289 10,738 33,490 29,045
Interest Income (3 ) (110 )
Amortization of discount and deferred debt charges 527 528 1,590 1,403
Loss on early extinguishment of debt 2,979
Amortization of unrecognized loss attributable to terminated cash flow hedge 1,274 849 3,821
State income tax 40 137 440 287
Depreciation and amortization 19,449 14,351 48,730 42,801
Predecessor depreciation and amortization       (444 )       (7,903 )
EBITDA $ 53,187   $ 49,920   $ 145,440   $ 139,546  
 

(3) Distributable cash flow is not a calculation based upon GAAP. However, the amounts included in the calculation are derived from amounts separately presented in our consolidated financial statements, with the exception of billed crude revenue settlement and 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. Also, it is 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
September 30,

     

Nine Months Ended
September 30,

2013     2012 2013     2012
(In thousands)
Net income attributable to Holly Energy Partners $ 21,885 $ 23,336 $ 60,451 $ 67,113
Add (subtract):
Depreciation and amortization 19,449 14,351 48,730 42,801
Predecessor depreciation and amortization (444 ) (7,903 )
Amortization of discount and deferred debt charges 527 528 1,590 1,403
Loss on early extinguishment of debt 2,979
Amortization of unrecognized loss attributable to terminated cash flow hedge 1,274 849 3,821
Increase (decrease) in deferred revenue attributable to shortfall billings 3,472 2,162 3,624 1,733
Billed crude revenue settlement 917 918 2,753
Maintenance capital expenditures* (2,045 ) (2,287 ) (6,557 ) (3,886 )
Other non-cash adjustments   577     594     2,711     692  
Distributable cash flow $ 43,865   $ 40,431   $ 112,316   $ 111,506  
 

* 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.

    September 30,     December 31,
2013 2012
(In thousands)
Balance Sheet Data
Cash and cash equivalents $ 11,220 $ 5,237
Working capital $ 16,110 $ 11,826
Total assets $ 1,382,372 $ 1,394,110
Long-term debt $ 809,391 $ 864,674
Partners' equity(4) $ 387,510 $ 352,653
 

(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 of $305.3 million would have been recorded as increases to our properties and equipment and intangible assets instead of decreases to partners' equity.

Holly Energy Partners, L.P.
Douglas S. Aron, 214-954-6511
Executive Vice President and
Chief Financial Officer
or
Julia Heidenreich, 214-954-6511
Vice President, Investor Relations
or
Blake Barfield, 214-954-6511
Investor Relations

Source: Holly Energy Partners, L.P.

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