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

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 2016. Net income attributable to Holly Energy Partners for the third quarter was $34.8 million ($0.33 per basic and diluted limited partner unit) compared to $34.3 million ($0.40 per basic and diluted limited partner unit) for the third quarter of 2015.

Distributable cash flow was $49.3 million for the quarter, down $1.0 million, or 2% compared to the third quarter of 2015. HEP announced its 48th consecutive distribution increase on October 21, 2016, raising the quarterly distribution from $0.585 to $0.595 per unit, which represents an increase of 7.2% over the distribution for the third 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 El Dorado 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 offset by higher interest expense associated with our 6% Senior Notes, which we issued in July in anticipation of our Woods Cross processing units acquisition.

Commenting on the third quarter of 2016, George Damiris, Chief Executive Officer, stated, "We are pleased with our solid financial performance in the third quarter, which allowed us to maintain our record of continuous quarterly distribution increases. Effective as of October 1, 2016, we successfully completed our acquisition of an atmospheric distillation tower, a fluid catalytic cracking unit, and a polymerization unit located at the HollyFrontier Woods Cross refinery. The debt and equity financing related to this acquisition impacted our third quarter distributable cash flow coverage ratio, but as we begin to realize expected EBITDA from this acquisition, we anticipate it will be accretive to distributable cash flow in future quarters. Additionally, we remain optimistic about organic growth across our existing systems. We will continue to leverage our relationship with HollyFrontier and our Mid-Continent, Rocky Mountains and Southwest logistics footprint to generate new organic and external growth opportunities.

"Looking forward, we believe HEP is positioned to continue its growth based on the quality and location of our assets, our talented employee base, and our strong and supportive general partner, HollyFrontier."

Third Quarter 2016 Revenue Highlights

Revenues for the quarter were $92.6 million, an increase of $4.2 million compared to the third quarter of 2015 primarily due to revenues from the El Dorado processing units acquired in the fourth quarter of 2015 and the inclusion of Tulsa crude tanks revenues. Overall pipeline volumes were down 5% compared to the three months ended September 30, 2015, largely due to lower crude pipeline volumes.

Revenues for the three months ended September 30, 2016, include the recognition of $0.2 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 September 30, 2016, shortfall deferred revenue reflected in our consolidated balance sheet was $6.7 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, 2016 Revenue Highlights

Revenues for the nine months ended September 30, 2016, were $289.5 million, an increase of $27.9 million compared to the nine months ended September 30, 2015. This is due principally to increased revenues from the El Dorado processing units, increased UNEV pipeline revenues, increased revenues on our crude pipelines servicing HollyFrontier's Navajo refinery, and the inclusion of Tulsa crude tanks revenues.

Revenues for the nine months ended September 30, 2016, include the recognition of $7.2 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 $46.1 million and $138.5 million for the three and nine months ended September 30, 2016, representing an increase of $1.8 million and $4.8 million from the three and nine months ended September 30, 2015. The increase for the nine months ended September 30, 2016, is 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 and maintenance project expenses.

Interest expense was $14.4 million and $36.3 million for the three and nine months ended September 30, 2016, representing increases of $5.0 million and $8.9 million over the same periods of 2015. The increases are due to issuance of our 6% Senior Notes in July 2016.

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=1120081.

An audio archive of this webcast will be available using the above noted link through November 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 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 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 37% 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 nine months ended September 30, 2016 and 2015.

       

Three Months Ended
September 30,

Change from
2016     2015 2015
(In thousands, except per unit data)
Revenues
Pipelines:
Affiliates - refined product pipelines $ 19,227 $ 19,945 $ (718 )
Affiliates - intermediate pipelines 6,628 7,488 (860 )
Affiliates - crude pipelines   17,034     17,393     (359 )
42,889 44,826 (1,937 )
Third parties - refined product pipelines   11,176     11,095     81  
54,065 55,921 (1,856 )
Terminals, tanks and loading racks:
Affiliates 30,322 28,890 1,432
Third parties   4,035     3,578     457  
  34,357     32,468     1,889  
 
Affiliates - refinery processing units   4,188         4,188  
 
Total revenues   92,610     88,389     4,221  
Operating costs and expenses:
Operations 27,954 24,196 3,758
Depreciation and amortization 15,520 16,444 (924 )
General and administrative   2,664     3,673     (1,009 )
  46,138     44,313     1,825  
Operating income 46,472 44,076 2,396
 
Equity in earnings of equity method investments 3,767 1,269 2,498
Interest expense, including amortization (14,447 ) (9,486 ) (4,961 )
Interest income 108 381 (273 )
Gain (loss) on sale of assets   112     176     (64 )
  (10,460 )   (7,660 )   (2,800 )
Income before income taxes 36,012 36,416 (404 )
State income tax benefit (expense)   (61 )   (69 )   8  
Net income 35,951 36,347 (396 )
Allocation of net income attributable to noncontrolling interests   (1,166 )   (2,081 )   915  
Net income attributable to Holly Energy Partners 34,785 34,266 519
General partner interest in net income, including incentive distributions(1)   (15,222 )   (10,611 )   (4,611 )
Limited partners' interest in net income $ 19,563   $ 23,655   $ (4,092 )
Limited partners' earnings per unit - basic and diluted:(1) $ 0.33   $ 0.40   $ (0.07 )
Weighted average limited partners' units outstanding   59,223     58,657     566  
EBITDA(2) $ 64,705   $ 59,884   $ 4,821  
Distributable cash flow(3) $ 49,257   $ 50,306   $ (1,049 )
 
Volumes (bpd)
Pipelines:
Affiliates - refined product pipelines 128,020 127,151 869
Affiliates - intermediate pipelines 142,417 148,753 (6,336 )
Affiliates - crude pipelines   271,278     297,810     (26,532 )
541,715 573,714 (31,999 )
Third parties - refined product pipelines   73,517     70,675     2,842  
615,232 644,389 (29,157 )
Terminals and loading racks:
Affiliates 437,560 431,843 5,717
Third parties   68,276     77,869     (9,593 )
  505,836     509,712     (3,876 )
 
Affiliates- refinery processing units   46,451         46,451  
 
Total for pipelines and terminal assets (bpd)   1,167,519     1,154,101     13,418  
       
 

Nine Months Ended
September 30,

Change from
2016     2015 2015
(In thousands, except per unit data)
Revenues
Pipelines:
Affiliates—refined product pipelines $ 63,801 $ 60,731 $ 3,070
Affiliates—intermediate pipelines 20,821 21,522 (701 )
Affiliates—crude pipelines   53,106     49,483     3,623  
137,728 131,736 5,992
Third parties—refined product pipelines   37,376     36,031     1,345  
175,104 167,767 7,337
Terminals, tanks and loading racks:
Affiliates 88,825 82,532 6,293
Third parties   12,718     11,325     1,393  
  101,543     93,857     7,686  
 
Affiliates - refinery processing units   12,870         12,870  
 
Total revenues   289,517     261,624     27,893  
Operating costs and expenses
Operations 82,131 77,661 4,470
Depreciation and amortization 47,780 46,421 1,359
General and administrative   8,618     9,659     (1,041 )
  138,529     133,741     4,788  
Operating income 150,988 127,883 23,105
Equity in earnings of equity method investments 10,155 2,634 7,521
Interest expense, including amortization (36,258 ) (27,310 ) (8,948 )
Interest income 332 384 (52 )
Gain (loss) on sale of assets   104     406     (302 )
  (25,667 )   (23,886 )   (1,781 )
Income before income taxes 125,321 103,997 21,324
State income tax expense   (210 )   (106 )   (104 )
Net income 125,111 103,891 21,220
Allocation of net income attributable to noncontrolling interests   (8,448 )   (7,851 )   (597 )
Net income attributable to Holly Energy Partners 116,663 96,040 20,623
General partner interest in net income, including incentive distributions (1)   (39,784 )   (30,186 )   (9,598 )
Limited partners' interest in net income $ 76,879   $ 65,854   $ 11,025  
Limited partners' earnings per unit—basic and diluted (1) $ 1.29   $ 1.11   $ 0.18  
Weighted average limited partners' units outstanding   58,895     58,657     238  
EBITDA (2) $ 200,579   $ 169,493   $ 31,086  
Distributable cash flow (3) $ 160,331   $ 143,495   $ 16,836  
 
Volumes (bpd)
Pipelines:
Affiliates—refined product pipelines 128,659 121,564 7,095
Affiliates—intermediate pipelines 138,346 143,361 (5,015 )
Affiliates—crude pipelines   279,014     292,158     (13,144 )
546,019 557,083 (11,064 )
Third parties—refined product pipelines   75,405     71,915     3,490  
621,424 628,998 (7,574 )
Terminals and loading racks:
Affiliates 404,393 389,209 15,184
Third parties   73,653     77,011     (3,358 )
  478,046     466,220     11,826  
 
Affiliates - refinery processing units   46,423         46,423  
 
Total for pipelines and terminal assets (bpd)   1,145,893     1,095,218     50,675  
       
 
September 30, December 31,
2016 2015
(In thousands)
Balance Sheet Data
Cash and cash equivalents $ 7,208 $ 15,013
Working capital $ 903 $ 12,218
Total assets $ 1,604,497 $ 1,543,765
Long-term debt $ 1,070,615 $ 1,008,752
Partners' equity(4) $ 290,256 $ 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 $14.8 million and $10.3 million for the three months ended September 30, 2016 and 2015, respectively, and $38.4 million and $29.5 million for the nine months ended September 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
September 30,

 

Nine Months Ended
September 30,

2016   2015 2016   2015
(In thousands)
Net income attributable to Holly Energy Partners $ 34,785 $ 34,266 $ 116,663 $ 96,040
Add (subtract):
Interest expense 13,529 8,992 33,964 25,885
Interest Income (108 ) (381 ) (332 ) (384 )
Amortization of discount and deferred debt charges 918 494 2,294 1,425
State income tax expense (benefit) 61 69 210 106
Depreciation and amortization   15,520     16,444     47,780     46,421  
EBITDA $ 64,705   $ 59,884   $ 200,579   $ 169,493  
 
(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,
2016     2015 2016     2015
(In thousands)
Net income attributable to Holly Energy Partners $ 34,785 $ 34,266 $ 116,663 $ 96,040
Add (subtract):
Depreciation and amortization 15,520 16,444 47,780 46,421
Amortization of discount and deferred debt charges 918 494 2,294 1,425
Increase (decrease) in deferred revenue attributable to shortfall billings 1,748 1,152 (179 ) (1,043 )
Maintenance capital expenditures* (3,475 ) (2,121 ) (7,797 ) (5,640 )
Increase (decrease) in environmental liability (277 ) (526 ) (719 ) 2,944
Increase (decrease) in reimbursable deferred revenue (750 ) (321 ) (1,906 ) 671
Other non-cash adjustments   788     918     4,195     2,677  
Distributable cash flow $ 49,257   $ 50,306   $ 160,331   $ 143,495  
   
* 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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