Holly Energy Partners, L.P.
Nov 4, 2015

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 2015. For the quarter, distributable cash flow was $50.3 million, up $4.7 million, or 10% compared to the third quarter of 2014. HEP announced its 44th consecutive distribution increase on October 22, 2015, raising the quarterly distribution from $0.545 to $0.555 per unit, which represents an increase of 6.2% over the distribution for the third quarter of 2014.

Net income attributable to Holly Energy Partners for the third quarter was $34.5 million ($0.40 per basic and diluted limited partner unit) compared to $29.7 million ($0.35 per basic and diluted limited partner unit) for the third quarter of 2014. The increase in earnings is primarily due to higher pipeline and terminal volumes and annual tariff increases.

Commenting on the third quarter of 2015, Mike Jennings, Chief Executive Officer, stated, "We are pleased our financial results for the third quarter of 2015 allowed us to maintain our record of raising quarterly distributions. Recent performance and future prospects enabled us to raise our distribution by a full $0.01 per unit this quarter. HEP's steady growth is supported by our fee-based commercial structure with underlying long-term minimum commitments by our key customers.

"We continue to leverage our logistic capabilities and HollyFrontier Corporation's refining footprint to create unique third party acquisition opportunities like our acquisition of a 50% interest in the Frontier Pipeline during the third quarter of 2015. In addition, we completed our acquisition of dropdown assets including the naphtha fractionation and hydrogen generation units at HollyFrontier's El Dorado refinery as of November 1, 2015. This acquisition, which is supported by a long-term contract with HollyFrontier, is 100% fee-based with no commodity risk or exposure, like all of HEP's past acquisitions from HollyFrontier.

"I am optimistic about HEP's growth outlook given our talented employees, high quality assets in traditionally favorable geographic locations, and ongoing support from our general partner, HollyFrontier."

Third Quarter 2015 Revenue Highlights

Revenues for the quarter were $88.4 million, an increase of $6.3 million compared to the third quarter of 2014 due to the effect of higher pipeline volumes and annual tariff increases. Overall pipeline volumes were up 22% compared to the three months ended September 30, 2014, largely due to increased volumes from the New Mexico gathering system expansion.

Revenues for the three months ended September 30, 2015, include the recognition of $0.6 million of prior shortfalls billed to shippers in 2014 as they did not meet their minimum volume commitments within the contractual make-up period. As of September 30, 2015, shortfall deferred revenue in our consolidated balance sheet was $7.8 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, 2015 Revenue Highlights

Revenues for the nine months ended September 30, 2015, were $261.6 million, an increase of $17.5 million compared to the nine months ended September 30, 2014. This is due principally to the effect of annual tariff increases and increased pipeline shipments largely due to increased volumes from the New Mexico gathering system expansion.

Revenues for the nine months ended September 30, 2015, include the recognition of $8.6 million of prior shortfalls billed to shippers in 2014, 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 $44.1 million and $133.1 million for the three and the nine months ended September 30, 2015, respectively, representing an increase of $0.9 million from the three months ended September 30, 2014, and an increase of $5.4 million from the nine months ended September 30, 2014. The increase for the nine months ended September 30, 2015, is primarily due to higher maintenance project expenses of $6.8 million and an increase in environmental remediation provisions, net of recovery from third parties, of $1.7 million offset by lower employee costs of $3.5 million as a result of the secondment of employees in El Dorado and Cheyenne.

Interest expense was $9.5 million and $27.3 million for the three and the nine months ended September 30, 2015, respectively, representing an increase of $0.9 million and a decrease of $0.1 million over the same periods of 2014. The increase for the three months ended September 30, 2015, is due to an increase in borrowings under our credit agreement. The decrease for the nine months ended September 30, 2015, is principally due to 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=1079834.

An audio archive of this webcast will be available using the above noted link through November 18, 2015.

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; a 50% interest in Frontier Pipeline Company, the owner of a 289-mile crude oil pipeline running from Casper, Wyoming to Frontier Station, Utah; and a 25% interest in SLC Pipeline LLC, the owner of 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 the nine months ended September 30, 2015 and 2014.

   

Three Months Ended
September 30,

   

Change from

2015     2014 2014
(In thousands, except per unit data)
Revenues
Pipelines:
Affiliates - refined product pipelines $ 19,945 $ 17,811 $ 2,134
Affiliates - intermediate pipelines 7,488 7,038 450
Affiliates - crude pipelines   17,393     14,557     2,836  
44,826 39,406 5,420
Third parties - refined product pipelines   11,095     10,939     156  
55,921 50,345 5,576
Terminals, tanks and loading racks:
Affiliates 28,890 28,044 846
Third parties   3,578     3,741     (163 )
  32,468     31,785     683  
Total revenues 88,389 82,130 6,259
Operating costs and expenses:
Operations 24,095 25,456 (1,361 )
Depreciation and amortization 16,326 15,483 843
General and administrative   3,673     2,266     1,407  
  44,094     43,205     889  
Operating income 44,295 38,925 5,370
 
Equity in earnings of equity method investments 1,269 880 389
Interest expense, including amortization (9,486 ) (8,585 ) (901 )
Interest income 381 381
Other income   176     11     165  
  (7,660 )   (7,694 )   34  
Income before income taxes 36,635 31,231 5,404
State income tax expense   (69 )   (42 )   (27 )
Net income 36,566 31,189 5,377
Allocation of net income attributable to noncontrolling interests   (2,081 )   (1,509 )   (572 )
Net income attributable to Holly Energy Partners 34,485 29,680 4,805
General partner interest in net income, including incentive distributions(1)   (10,830 )   (8,940 )   (1,890 )
Limited partners' interest in net income $ 23,655   $ 20,740   $ 2,915  
Limited partners' earnings per unit - basic and diluted:(1) $ 0.40   $ 0.35   $ 0.05  
Weighted average limited partners' units outstanding   58,657     58,657      
EBITDA(2) $ 59,985   $ 53,790   $ 6,195  
Distributable cash flow(3) $ 50,306   $ 45,581   $ 4,725  
 
Volumes (bpd)
Pipelines:
Affiliates - refined product pipelines 127,151 116,727 10,424
Affiliates - intermediate pipelines 148,753 139,502 9,251
Affiliates - crude pipelines   297,810     199,627     98,183  
573,714 455,856 117,858
Third parties - refined product pipelines   70,675     71,271     (596 )
644,389 527,127 117,262
Terminals and loading racks:
Affiliates 293,074 255,556 37,518
Third parties   77,869     70,364     7,505  
  370,943     325,920     45,023  
Total for pipelines and terminal assets (bpd)   1,015,332     853,047     162,285  
 
       

Nine Months Ended
September 30,

Change from
2015     2014 2014
(In thousands, except per unit data)
Revenues
Pipelines:
Affiliates—refined product pipelines $ 60,731 $ 59,520 $ 1,211
Affiliates—intermediate pipelines 21,522 21,632 (110 )
Affiliates—crude pipelines   49,483     40,207     9,276  
131,736 121,359 10,377
Third parties—refined product pipelines   36,031     30,037     5,994  
167,767 151,396 16,371
Terminals, tanks and loading racks:
Affiliates 82,532 82,403 129
Third parties   11,325     10,333     992  
  93,857     92,736     1,121  
Total revenues 261,624 244,132 17,492
Operating costs and expenses
Operations 77,350 72,835 4,515
Depreciation and amortization 46,083 46,953 (870 )
General and administrative   9,659     7,933     1,726  
  133,092     127,721     5,371  
Operating income 128,532 116,411 12,121
Equity in earnings of equity method investments 2,634 2,150 484
Interest expense, including amortization (27,310 ) (27,368 ) 58
Interest income 384 3 381
Loss on early extinguishment of debt (7,677 ) 7,677
Other   406     45     361  
  (23,886 )   (32,847 )   8,961  
Income before income taxes 104,646 83,564 21,082
State income tax expense   (106 )   (145 )   39  
Net income 104,540 83,419 21,121
Allocation of net income attributable to noncontrolling interests   (7,851 )   (6,562 )   (1,289 )
Net income attributable to Holly Energy Partners 96,689 76,857 19,832
General partner interest in net income, including incentive distributions (1)   (30,835 )   (25,334 )   (5,501 )
Limited partners' interest in net income $ 65,854   $ 51,523   $ 14,331  
Limited partners' earnings per unit—basic and diluted (1) $ 1.11   $ 0.87   $ 0.24  
Weighted average limited partners' units outstanding   58,657     58,657      
EBITDA (2) $ 169,804   $ 158,997   $ 10,807  
Distributable cash flow (3) $ 143,495   $ 130,883   $ 12,612  
 
Volumes (bpd)
Pipelines:
Affiliates—refined product pipelines 121,564 119,718 1,846
Affiliates—intermediate pipelines 143,361 140,505 2,856
Affiliates—crude pipelines   292,158     185,131     107,027  
557,083 445,354 111,729
Third parties—refined product pipelines   71,915     60,492     11,423  
628,998 505,846 123,152
Terminals and loading racks:
Affiliates 282,299 262,458 19,841
Third parties   77,011     68,185     8,826  
  359,310     330,643     28,667  
Total for pipelines and terminal assets (bpd)   988,308     836,489     151,819  
 
       
September 30, December 31,
2015 2014
(In thousands)
Balance Sheet Data
Cash and cash equivalents $ 10,856 $ 2,830
Working capital $ 13,857 $ 3,140
Total assets $ 1,466,029 $ 1,401,555
Long-term debt $ 951,067 $ 867,579
Partners' equity(4) $ 293,797 $ 320,362
 
(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 $10.3 million and $8.5 million for the three months ended September 30, 2015 and 2014, respectively, and $29.5 million and $24.3 million for the nine months ended September 30, 2015 and 2014, 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 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,

2015     2014 2015     2014
(In thousands)
Net income attributable to Holly Energy Partners $ 34,485 $ 29,680 $ 96,689 $ 76,857
Add (subtract):
Interest expense 8,992 8,148 25,885 25,984
Interest Income (381 ) (384 ) (3 )
Amortization of discount and deferred debt charges 494 437 1,425 1,384
Loss on early extinguishment of debt 7,677
State income tax expense 69 42 106 145
Depreciation and amortization   16,326     15,483   46,083     46,953  
EBITDA $ 59,985   $ 53,790 $ 169,804   $ 158,997  
 
(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,

2015     2014 2015     2014
(In thousands)
Net income attributable to Holly Energy Partners $ 34,485 $ 29,680 $ 96,689 $ 76,857
Add (subtract):
Depreciation and amortization 16,326 15,483 46,083 46,953
Amortization of discount and deferred debt charges 494 437 1,425 1,384
Loss on early extinguishment of debt 7,677
Increase (decrease) in deferred revenue attributable to shortfall billings 1,152 1,090 (1,043 ) (49 )
Maintenance capital expenditures* (2,121 ) (653 ) (5,640 ) (2,344 )
Increase (decrease) in environmental liability (526 ) (657 ) 2,944 (296 )
Increase (decrease) in reimbursable deferred revenue (321 ) (676 ) 671 (1,887 )
Other non-cash adjustments   817     877     2,366     2,588  
Distributable cash flow $ 50,306   $ 45,581   $ 143,495   $ 130,883  
 
  *   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 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.
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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