Holly Energy Partners, L.P.
Aug 2, 2016

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 2016. Net income attributable to Holly Energy Partners for the second quarter was $39.1 million ($0.45 per basic and diluted limited partner unit) compared to $30.2 million ($0.34 per basic and diluted limited partner unit) for the second quarter of 2015.

Distributable cash flow was $55.7 million for the quarter, up $8.4 million, or 18% compared to the second quarter of 2015. HEP announced its 47th consecutive distribution increase on July 22, 2016, raising the quarterly distribution from $0.575 to $0.585 per unit, which represents an increase of 7.3% over the distribution for the second quarter of 2015.

The increase in earnings is primarily due to recent acquisitions including interests in the Frontier, Osage, and Cheyenne pipelines, the Tulsa crude tanks acquired in the first quarter of 2016, and the refinery process units dropped down in the fourth quarter of 2015 as well as increased revenues from our 75% interest in the UNEV products pipeline.

Commenting on the second quarter of 2016, Mike Jennings, Chief Executive Officer, stated, "We are pleased with our solid financial results for the second quarter of 2016, which allowed us to maintain our record of quarterly distribution increases, while maintaining a very strong distribution coverage ratio. We remain optimistic about organic growth on the UNEV products pipeline. Additionally, we continue to leverage our logistics capabilities and HollyFrontier Corporation's refining footprint to create third party acquisition opportunities as demonstrated by our acquisition of a 50% interest in the Cheyenne Pipeline during the second quarter of 2016.

"As we look forward, we believe HEP is 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."

Second Quarter 2016 Revenue Highlights

Revenues for the quarter were $94.9 million, an increase of $11.4 million compared to the second quarter of 2015 due to revenues from the El Dorado processing units acquired in the fourth quarter of 2015, increased UNEV pipeline revenues, the inclusion of Tulsa crude tanks revenues as well as the effect of annual tariff increases. Overall pipeline volumes were down 3% compared to the three months ended June 30, 2015, largely due to decreased volumes from pipelines servicing HFC's Navajo refinery offset by increased volumes on the UNEV pipeline.

Revenues for the three months ended June 30, 2016, include the recognition of $0.3 million of prior shortfalls billed to shippers in 2015 as they did not meet their minimum volume commitments within the contractual make-up period. As of June 30, 2016, shortfall deferred revenue in our consolidated balance sheet was $4.8 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.

Six Months Ended June 30, 2016 Revenue Highlights

Revenues for the six months ended June 30, 2016, were $196.9 million, an increase of $23.7 million compared to the six months ended June 30, 2015. This is due principally to increased revenue from the El Dorado processing units, increased UNEV pipeline revenues, and the inclusion of Tulsa crude tanks revenues as well the effect of annual tariff increases and increased pipeline shipments.

Revenues for the six months ended June 30, 2016, include the recognition of $7.0 million of prior shortfalls billed to shippers in 2015, 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 $45.8 million and $92.4 million for the three and six months ended June 30, 2016, representing an increase of $2.6 million and $3.0 million from the three and six months ended June 30, 2015. The increases are primarily due to operating expenses for our El Dorado processing units acquired in the fourth quarter of 2015, and higher depreciation expense partially offset by lower environmental costs.

Interest expense was $11.3 million and $21.8 million for the three and six months ended June 30, 2016, representing increases of $2.2 million and $4.0 million over the same periods of 2015. The increases are due to increases in borrowings under our credit agreement.

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=1109621.

An audio archive of this webcast will be available using the above noted link through August 16, 2016.

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 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 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. 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 and the six months ended June 30, 2016 and 2015.

       
Three Months Ended June 30, Change from
2016     2015 2015
(In thousands, except per unit data)
Revenues
Pipelines:
Affiliates - refined product pipelines $ 19,392 $ 18,245 $ 1,147
Affiliates - intermediate pipelines 6,780 7,172 (392 )
Affiliates - crude pipelines   18,581     15,096     3,485  
44,753 40,513 4,240
Third parties - refined product pipelines   11,434     11,213     221  
56,187 51,726 4,461
Terminals, tanks and loading racks:
Affiliates 30,250 27,784 2,466
Third parties   4,285     3,969     316  
  34,535     31,753     2,782  
 
Affiliates - refinery processing units   4,175         4,175  
 
Total revenues   94,897     83,479     11,418  
Operating costs and expenses:
Operations 27,255 25,400 1,855
Depreciation and amortization 15,709 15,179 530
General and administrative   2,863     2,696     167  
  45,827     43,275     2,552  
Operating income 49,070 40,204 8,866
 
Equity in earnings of equity method investments 3,623 631 2,992
Interest expense, including amortization (11,276 ) (9,056 ) (2,220 )
Interest income 112 3 109
Gain (loss) on sale of assets (5 ) 50 (55 )
Other income   5     21     (16 )
  (7,541 )   (8,351 )   810  
Income before income taxes 41,529 31,853 9,676
State income tax benefit (expense)   (54 )   64     (118 )
Net income 41,475 31,917 9,558
Allocation of net income attributable to noncontrolling interests   (2,355 )   (1,743 )   (612 )
Net income attributable to Holly Energy Partners 39,120 30,174 8,946
General partner interest in net income, including incentive distributions(1)   (12,677 )   (9,969 )   (2,708 )
Limited partners' interest in net income $ 26,443   $ 20,205   $ 6,238  
Limited partners' earnings per unit - basic and diluted:(1) $ 0.45   $ 0.34   $ 0.11  
Weighted average limited partners' units outstanding   58,865     58,657     208  
EBITDA(2) $ 66,047   $ 54,342   $ 11,705  
Distributable cash flow(3) $ 55,709   $ 47,299   $ 8,410  
 
Volumes (bpd)
Pipelines:
Affiliates - refined product pipelines 125,535 121,982 3,553
Affiliates - intermediate pipelines 135,165 143,140 (7,975 )
Affiliates - crude pipelines   278,414     295,793     (17,379 )
539,114 560,915 (21,801 )
Third parties - refined product pipelines   74,386     73,659     727  
613,500 634,574 (21,074 )
Terminals and loading racks:
Affiliates 418,233 420,564 (2,331 )
Third parties   71,415     79,133     (7,718 )
  489,648     499,697     (10,049 )
 
Affiliates- refinery processing units   50,376         50,376  
 
Total for pipelines and terminal assets (bpd)   1,153,524     1,134,271     19,253  
       
 
Six Months Ended
June 30,
Change from
2016     2015 2015
(In thousands, except per unit data)
Revenues
Pipelines:
Affiliates—refined product pipelines $ 44,574 $ 40,786 $ 3,788
Affiliates—intermediate pipelines 14,193 14,034 159
Affiliates—crude pipelines   36,072     32,090     3,982  
94,839 86,910 7,929
Third parties—refined product pipelines   26,200     24,936     1,264  
121,039 111,846 9,193
Terminals, tanks and loading racks:
Affiliates 58,503 53,642 4,861
Third parties   8,683     7,747     936  
  67,186     61,389     5,797  
 
Affiliates - refinery processing units   8,682         8,682  
 
Total revenues   196,907     173,235     23,672  
Operating costs and expenses
Operations 54,177 53,465 712
Depreciation and amortization 32,260 29,977 2,283
General and administrative   5,954     5,986     (32 )
  92,391     89,428     2,963  
Operating income 104,516 83,807 20,709
Equity in earnings of equity method investments 6,388 1,365 5,023
Interest expense, including amortization (21,811 ) (17,824 ) (3,987 )
Interest income 224 3 221
Gain (loss) on sale of assets (5 ) 209 (214 )
Other   (3 )   21     (24 )
  (15,207 )   (16,226 )   1,019  
Income before income taxes 89,309 67,581 21,728
State income tax expense   (149 )   (37 )   (112 )
Net income 89,160 67,544 21,616
Allocation of net income attributable to noncontrolling interests   (7,282 )   (5,770 )   (1,512 )
Net income attributable to Holly Energy Partners 81,878 61,774 20,104
General partner interest in net income, including incentive distributions (1)   (24,562 )   (19,576 )   (4,986 )
Limited partners' interest in net income $ 57,316   $ 42,198   $ 15,118  
Limited partners' earnings per unit—basic and diluted (1) $ 0.96   $ 0.71   $ 0.25  
Weighted average limited partners' units outstanding   58,761     58,657     104  
EBITDA (2) $ 135,874   $ 109,609   $ 26,265  
Distributable cash flow (3) $ 111,075   $ 93,189   $ 17,886  
 
Volumes (bpd)
Pipelines:
Affiliates—refined product pipelines 128,983 118,724 10,259
Affiliates—intermediate pipelines 136,288 140,620 (4,332 )
Affiliates—crude pipelines   282,923     289,285     (6,362 )
548,194 548,629 (435 )
Third parties—refined product pipelines   76,360     72,546     3,814  
624,554 621,175 3,379
Terminals and loading racks:
Affiliates 387,628 367,538 20,090
Third parties   76,370     76,574     (204 )
  463,998     444,112     19,886  
 
Affiliates - refinery processing units   46,409         46,409  
 
Total for pipelines and terminal assets (bpd)   1,134,961     1,065,287     69,674  
       
 
June 30, December 31,
2016 2015
(In thousands)
Balance Sheet Data
Cash and cash equivalents $ 4,882 $ 15,013
Working capital $ 13,540 $ 12,218
Total assets $ 1,617,329 $ 1,543,765
Long-term debt $ 1,083,136 $ 1,008,752
Partners' equity(4) $ 295,264 $ 297,912
 
(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 $12.1 million and $9.8 million for the three months ended June 30, 2016 and 2015, respectively, and $23.6 million and $19.1 million for the six months ended June 30, 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 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,
2016     2015 2016     2015
(In thousands)
Net income attributable to Holly Energy Partners $ 39,120 $ 30,174 $ 81,878 $ 61,774
Add (subtract):
Interest expense 10,493 8,562 20,435 16,894
Interest Income (112 ) (3 ) (224 ) (3 )
Amortization of discount and deferred debt charges 783 494 1,376 930
State income tax expense (benefit) 54 (64 ) 149 37
Depreciation and amortization   15,709     15,179     32,260     29,977  
EBITDA $ 66,047   $ 54,342   $ 135,874   $ 109,609  
 
(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,
2016     2015 2016     2015
(In thousands)
Net income attributable to Holly Energy Partners $ 39,120 $ 30,174 $ 81,878 $ 61,774
Add (subtract):
Depreciation and amortization 15,709 15,179 32,260 29,977
Amortization of discount and deferred debt charges 783 494 1,376 930
Increase (decrease) in deferred revenue attributable to shortfall billings 1,731 1,355 (1,927 ) (2,195 )
Maintenance capital expenditures* (2,661 ) (1,870 ) (4,322 ) (3,519 )
Increase (decrease) in environmental liability (113 ) (386 ) (442 ) 3,471
Increase (decrease) in reimbursable deferred revenue (628 ) 1,537 (1,155 ) 992
Other non-cash adjustments   1,768     816     3,407     1,759  
Distributable cash flow $ 55,709   $ 47,299   $ 111,075   $ 93,189  
   

*

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
Senior 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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