Holly Energy Partners, L.P.
Nov 4, 2014

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 2014. For the quarter, distributable cash flow was $45.6 million, up $1.7 million, or 4% compared to the third quarter of 2013. HEP announced its 40th consecutive distribution increase on October 23, 2014, raising the quarterly distribution from $0.515 to $0.5225 per unit, representing a 6% increase over the distribution for the third quarter of 2013.

Net income attributable to Holly Energy Partners for the third quarter was $29.7 million ($0.35 per basic and diluted limited partner unit) compared to $21.9 million ($0.25 per basic and diluted limited partner unit) for the third quarter of 2013. The increase in earnings is primarily due to higher pipeline volumes and annual tariff increases as well as decreased interest expense due to the early retirement of our 8.25% Senior Notes in March 2014.

Commenting on the third quarter of 2014, Mike Jennings, Chief Executive Officer, stated, "We are pleased our financial results for the third quarter of 2014 allowed us to maintain our record of raising quarterly distributions. Our expanded New Mexico gathering system is now substantially complete, and we continue to see increasing volumes. Additionally, we are pursuing potential new growth opportunities that leverage our capabilities and HollyFrontier Corporation's refining footprint."

"As we look forward, we believe HEP is well positioned for continued growth due to the quality and geographic location of our assets, our talented employee base, and our financially strong and supportive general partner, HollyFrontier."

Third Quarter 2014 Revenue Highlights

Revenues for the quarter were $82.1 million, a $4.4 million increase compared to the third quarter of 2013 due to the effect of higher pipeline volumes and annual tariff increases. Overall pipeline volumes were up 9% compared to the three months ended September 30, 2013.

Revenues for the three months ended September 30, 2014, include the recognition of $0.6 million of prior shortfalls billed to shippers in 2013, as they did not meet their minimum volume commitments within the contractual make-up period. As of September 30, 2014, shortfall deferred revenue in our consolidated balance sheet was $11.4 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.

Nine Months Ended September 30, 2014

Revenues for nine months ended September 30, 2014, were $244.1 million, a $16.8 million increase compared to the first nine months of 2013. This is due principally to increased pipeline shipments, the effect of annual tariff increases, and a $2.6 million increase in deferred revenue realized. Overall pipeline volumes were up 7.5% for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013.

Revenues for the nine months ended September 30, 2014, include the recognition of $10.2 million of prior shortfalls billed to shippers in 2013, 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 $43.2 million and $127.7 million for the three and nine months ended September 30, 2014, respectively, representing decreases of $0.3 million and $1.8 million over the same periods last year. The decreases are primarily due to lower depreciation and amortization caused by lower abandonment charges related to tankage permanently removed from service offset by a $3.5 million tax refund related to payroll costs recorded in the third quarter of 2013. In addition, maintenance costs are lower for the nine months ended September 30, 2014.

Interest expense was $8.6 million and $27.4 million for the three and nine months ended September 30, 2014, representing decreases of $3.2 million and $8.6 million over the same periods of 2013. The decreases are principally due to the early retirement of our 8.25% Senior Notes in March 2014. Also, we recognized a loss of $7.7 million on the early extinguishment of our 8.25% Senior Notes in March 2014.

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=1044060.

An audio archive of this webcast will be available using the above noted link through November 18, 2014.

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, L.L.C., 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, L.L.C., 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 also 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," "should," "would," "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. All statements concerning our expectations for future results of operations are based on forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking 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, 2014.

 

Three Months Ended
September 30,

Change from

2014     2013   2013  
(In thousands, except per unit data)
Revenues
Pipelines:
Affiliates - refined product pipelines $ 17,811 $ 17,196 $ 615
Affiliates - intermediate pipelines 7,038 6,567 471
Affiliates - crude pipelines 14,557   12,994   1,563  
39,406 36,757 2,649
Third parties - refined product pipelines 10,939   9,246   1,693  
50,345 46,003 4,342
Terminals, tanks and loading racks:
Affiliates 28,044 28,766 (722 )
Third parties 3,741   2,954   787  
31,785   31,720   65  
Total revenues 82,130 77,723 4,407
Operating costs and expenses:
Operations 25,456 21,686 3,770
Depreciation and amortization 15,483 19,449 (3,966 )
General and administrative 2,266   2,415   (149 )
43,205   43,550   (345 )
Operating income 38,925 34,173 4,752
 
Equity in earnings of SLC Pipeline 880 835 45
Interest expense, including amortization (8,585 ) (11,816 ) 3,231
Interest income 3 (3 )
Gain on sale of assets (159 ) 159
Other income 11   61   (50 )
(7,694 ) (11,076 ) 3,382  
Income before income taxes 31,231 23,097 8,134
State income tax expense (42 ) (40 ) (2 )
Net income 31,189 23,057 8,132
Allocation of net income attributable to noncontrolling interests (1,509 ) (1,172 ) (337 )
Net income attributable to Holly Energy Partners 29,680 21,885 7,795
General partner interest in net income, including incentive distributions(1) (8,940 ) (7,128 ) (1,812 )
Limited partners' interest in net income $ 20,740   $ 14,757   $ 5,983  
Limited partners' earnings per unit - basic and diluted:(1) $ 0.35   $ 0.25   $ 0.10  
Weighted average limited partners' units outstanding 58,657   58,657    
EBITDA(2) $ 53,790   $ 53,187   $ 603  
Distributable cash flow(3) $ 45,581   $ 43,865   $ 1,716  
Volumes (bpd)          
Pipelines:
Affiliates - refined product pipelines 116,727 116,078 649
Affiliates - intermediate pipelines 139,502 136,312 3,190
Affiliates - crude pipelines 199,627   172,569   27,058  
455,856 424,959 30,897
Third parties - refined product pipelines 71,271   59,036   12,235  
527,127 483,995 43,132
Terminals and loading racks:
Affiliates 255,556 261,431 (5,875 )
Third parties 70,364   64,615   5,749  
325,920   326,046   (126 )
Total for pipelines and terminal assets (bpd) 853,047   810,041   43,006  
   

Nine Months Ended
September 30,

Change from
2014   2013 2013
(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates—refined product pipelines $ 59,520 $ 50,918 $ 8,602
Affiliates—intermediate pipelines 21,632 20,030 1,602
Affiliates—crude pipelines 40,207   36,760   3,447  
121,359 107,708 13,651
Third parties—refined product pipelines 30,037   29,412   625  
151,396 137,120 14,276
Terminals, tanks and loading racks:
Affiliates 82,403 82,514 (111 )
Third parties 10,333   7,672   2,661  
92,736   90,186   2,550  
Total revenues 244,132 227,306 16,826
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) 72,835 72,089 746
Depreciation and amortization 46,953 48,730 (1,777 )
General and administrative 7,933   8,747   (814 )
127,721   129,566   (1,845 )
Operating income 116,411 97,740 18,671
Other income (expense):
Equity in earnings of SLC Pipeline 2,150 2,238 (88 )
Interest expense, including amortization (27,368 ) (35,929 ) 8,561
Interest income 3 110 (107 )
Loss on early extinguishment of debt (7,677 ) (7,677 )
Gain on sale of assets 1,863 (1,863 )
Other income 45   61   (16 )
(32,847 ) (31,657 ) (1,190 )
Income before income taxes 83,564 66,083 17,481
State income tax (145 ) (440 ) 295  
Net income 83,419 65,643 17,776
Allocation of net income attributable to noncontrolling interests (6,562 ) (5,192 ) (1,370 )
Net income attributable to Holly Energy Partners 76,857 60,451 16,406
General partner interest in net income, including incentive distributions (1) (25,334 ) (20,038 ) (5,296 )
Limited partners' interest in net income $ 51,523   $ 40,413   $ 11,110  
Limited partners' earnings per unit—basic and diluted (1) $ 0.87   $ 0.69   $ 0.18  
Weighted average limited partners' units outstanding 58,657   58,108   549  
EBITDA (2) $ 158,997   $ 145,440   $ 13,557  
Distributable cash flow (3) $ 130,883   $ 112,316   $ 18,567  
 
Volumes (bpd)
Pipelines:
Affiliates—refined product pipelines 119,718 109,995 9,723
Affiliates—intermediate pipelines 140,505 133,222 7,283
Affiliates—crude pipelines 185,131   167,685   17,446  
445,354 410,902 34,452
Third parties—refined product pipelines 60,492   59,711   781  
505,846 470,613 35,233
Terminals and loading racks:
Affiliates 262,458 265,242 (2,784 )
Third parties 68,185   59,995   8,190  
330,643   325,237   5,406  
Total for pipelines and terminal assets (bpd) 836,489   795,850   40,639  

(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 $8.5 million and $6.8 million for the three months ended September 30, 2014 and 2013, respectively, and $24.3 million and $19.2 million for the nine months ended September 30, 2014 and 2013, respectively.

(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. 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,

2014     2013   2014     2013  
(In thousands)
Net income attributable to Holly Energy Partners $ 29,680   $ 21,885 $ 76,857 $ 60,451
Add (subtract):
Interest expense 8,148 11,289 25,984 33,490
Interest Income (3 ) (3 ) (110 )
Amortization of discount and deferred debt charges 437 527 1,384 1,590
Loss on early extinguishment of debt 7,677
Amortization of unrecognized loss attributable to terminated cash flow hedge 849
State income tax 42 40 145 440
Depreciation and amortization 15,483   19,449   46,953   48,730  
EBITDA $ 53,790   $ 53,187   $ 158,997   $ 145,440  
 

(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
September 30,

 

Nine Months Ended
September 30,

2014     2013   2014     2013  
(In thousands)
Net income attributable to Holly Energy Partners $ 29,680 $ 21,885 $ 76,857 $ 60,451
Add (subtract):
Depreciation and amortization 15,483 19,449 46,953 48,730
Amortization of discount and deferred debt charges 437 527 1,384 1,590
Loss on early extinguishment of debt 7,677
Amortization of unrecognized loss attributable to terminated cash flow hedge 849
Increase (decrease) in deferred revenue attributable to shortfall billings 1,090 3,472 (49 ) 3,624
Maintenance capital expenditures* (653 ) (2,045 ) (2,344 ) (6,557 )
Billed crude revenue settlement 918
Other non-cash adjustments (456 ) 577   405   2,711  
Distributable cash flow $ 45,581   $ 43,865   $ 130,883   $ 112,316  

* 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,
2014   2013  
(In thousands)
Balance Sheet Data
Cash and cash equivalents $ 1,667 $ 6,352
Working capital (deficit) $ 1,548 $ (6,604 )
Total assets $ 1,386,169 $ 1,382,508
Long-term debt $ 851,416 $ 807,630
Partners' equity(4) $ 333,513 $ 369,446

(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 at the time of acquisition 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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