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| HEP > SEC Filings for HEP > Form 10-Q on 1-Aug-2008 | All Recent SEC Filings |
1-Aug-2008
Quarterly Report
of revenue for the twelve months ending June 30, 2009. Under the Holly IPA, Holly agreed to transport volumes of intermediate products on the intermediate pipelines that, following the July 1, 2008 PPI adjustment, will result in minimum funds to us of $13.3 million for the twelve months ended June 30, 2009. If Holly fails to meet its minimum volume commitments in any quarter, it will be required to pay us in cash the amount of any shortfall by the last day of the month following the end of the quarter. A shortfall payment may be applied as a credit in the following four quarters after Holly's minimum obligations are met. In October 2007, we entered into an agreement with Holly that amends the Holly PTA under which we have agreed to expand our refined products pipeline system between Artesia, New Mexico and El Paso, Texas (the "South System"). The expansion of the South System will include replacing 85 miles of 8-inch pipe with 12-inch pipe, adding 150,000 barrels of refined product storage at our El Paso Terminal, improving existing pumps, adding a tie-in to the Kinder Morgan pipeline to Tucson and Phoenix, Arizona, and making related modifications. The cost of this project is estimated to be $48.3 million. Currently, we are expecting to complete this project by January 2009 Under certain provisions of the Omnibus Agreement that we entered into with Holly in July 2004 and expires in 2019, we pay Holly an annual administrative fee for the provision by Holly or its affiliates of various general and administrative services to us. Effective March 1, 2008, the annual fee was increased from $2.1 million to $2.3 million to cover additional general and administrative services attributable to the operations of our Crude Pipelines and Tankage Assets. This fee does not include the salaries of pipeline and terminal personnel or the cost of their employee benefits, such as 401(k), pension and health insurance benefits, which are separately charged to us by Holly. We also reimburse Holly and its affiliates for direct expenses they incur on our behalf.
RESULTS OF OPERATIONS (Unaudited)
Income, Distributable Cash Flow and Volumes
The following tables present income, distributable cash flow and volume
information for the three months ended June 30, 2008 and 2007.
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
(In thousands, except per unit data)
Revenues
Pipelines:
Affiliates - refined product pipelines $ 8,873 $ 9,438 $ 18,441 $ 17,677
Affiliates - intermediate pipelines 2,456 4,054 6,049 7,063
Affiliates - crude pipelines 6,553 - 8,748 -
17,882 13,492 33,238 24,740
Third parties- refined product pipelines 5,681 9,355 13,516 18,145
23,563 22,847 46,754 42,885
Terminals and truck loading racks:
Affiliates 2,264 2,861 5,235 5,403
Third parties 948 1,423 2,062 2,715
3,212 4,284 7,297 8,118
Total revenues 26,775 27,131 54,051 51,003
Operating costs and expenses
Operations 9,985 8,189 19,712 15,922
Depreciation and amortization 6,062 3,208 10,375 7,279
General and administrative 1,359 1,284 2,645 2,556
17,406 12,681 32,732 25,757
Operating income 9,369 14,450 21,319 25,246
Interest income 28 145 121 330
Interest expense, including amortization (5,233 ) (3,371 ) (9,040 ) (6,729 )
Gain on sale of assets - 1 36 298
Minority interest in Rio Grande (264 ) (154 ) (670 ) (581 )
Income before income taxes 3,900 11,071 11,766 18,564
State income tax (85 ) (65 ) (153 ) (124 )
Net income 3,815 11,006 11,613 18,440
Less general partner interest in net
income, including incentive
distributions (1) 800 726 1,621 1,306
Limited partners' interest in net income $ 3,015 $ 10,280 $ 9,992 $ 17,134
Net income per limited partner unit -
basic and diluted (1) $ 0.18 $ 0.64 $ 0.61 $ 1.06
Weighted average limited partners' units
outstanding 16,328 16,108 16,254 16,108
EBITDA (2) $ 15,167 $ 17,505 $ 31,060 $ 32,242
Distributable cash flow (3) $ 13,995 $ 12,389 $ 27,703 $ 24,983
Volumes (bpd) (4)
Pipelines:
Affiliates - refined product pipelines 75,812 82,571 80,186 77,494
Affiliates - intermediate pipelines 51,886 68,437 59,748 63,980
Affiliates - crude pipelines 130,559 - 88,979 -
258,257 151,008 228,913 141,474
Third parties- refined product pipelines 24,423 64,487 34,966 64,835
282,680 215,495 263,879 206,309
Terminals and truck loading racks:
Affiliates 93,328 123,245 110,381 121,724
Third parties 31,178 53,179 34,210 50,030
124,506 176,424 144,591 171,754
Total for pipelines and terminal assets
(bpd) 407,186 391,919 408,470 378,063
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(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 any incentive distributions declared in the period. Incentive distributions of $0.7 million and $0.5 million were declared during the three months ended June 30, 2008 and 2007, respectively, and $1.4 million and $1.0 million during the six months ended June 30, 2008 and 2007, respectively. The net income applicable to the limited partners is divided by the weighted average limited partner units outstanding in computing the net income per unit applicable to limited partners.
(2) Earnings before
interest, taxes,
depreciation and
amortization
("EBITDA") is
calculated as net
income plus
(i) interest
expense, net of
interest income
and
(ii) depreciation
and amortization.
EBITDA is not a
calculation based
upon U.S.
generally
accepted
accounting
principles ("U.S.
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 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 is also
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 Six Months Ended
June 30, June 30,
2008 2007 2008 2007
(In thousands)
Net income $ 3,815 $ 11,006 $ 11,613 $ 18,440
Add interest expense 4,976 3,067 8,560 6,122
Add amortization of discount and
deferred debt issuance costs 257 304 480 607
Subtract interest income (28 ) (145 ) (121 ) (330 )
Add state income tax 85 65 153 124
Add depreciation and amortization 6,062 3,208 10,375 7,279
EBITDA $ 15,167 $ 17,505 $ 31,060 $ 32,242
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(3) Distributable cash flow is not a calculation based upon U.S. GAAP. However, the amounts included in the calculation are derived from amounts separately presented in our consolidated financial statements, with the exception of maintenance capital expenditures. Distributable cash flow should not be considered in isolation or as an alternative to net income 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. 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 Six Months Ended
June 30, June 30,
2008 2007 2008 2007
(In thousands)
Net income $ 3,815 $ 11,006 $ 11,613 $ 18,440
Add depreciation and amortization 6,062 3,208 10,375 7,279
Add amortization of discount and
deferred debt issuance costs 257 304 480 607
Add (subtract) increase (decrease) in
deferred revenue 4,930 (1,896 ) 6,781 (990 )
Subtract maintenance capital
expenditures* (1,069 ) (233 ) (1,546 ) (353 )
Distributable cash flow $ 13,995 $ 12,389 $ 27,703 $ 24,983
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* 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.
(4) The amounts reported for the six months ended June 30, 2008 include volumes transported on the crude pipelines for the period from March 1, 2008 through June 30, 2008 only. Volumes shipped during the months of March through June 2008 averaged 133.1 thousand barrels per day ("mbpd"). For the six months ended June 30, 2008, crude pipeline volumes are based on volumes for the months of March through June, averaged over the 182 days in the first six months of 2008. Under the Holly CPTA, fees are based on volumes transported on each pipeline component comprising the crude pipeline system (the crude oil gathering pipelines and the crude oil trunk lines). Accordingly, volumes transported on the crude pipelines represent the sum of volumes transported on both pipeline components. In cases where volumes are transported over both components of the crude pipeline system, such volumes are reflected twice in the total crude oil pipeline volumes.
June 30, December 31,
2008 2007
(In thousands)
Balance Sheet Data
Cash and cash equivalents $ 6,371 $ 10,321
Working capital(5) $ (18,467 ) $ 5,446
Total assets $ 431,930 $ 238,904
Long-term debt $ 354,113 $ 181,435
Partners' equity $ 25,474 $ 27,816
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(5) Reflects $20.0 million of short-term borrowings that are classified as current liabilities.
As a master limited partnership, we distribute our available cash which historically has exceeded our net income 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 exceed our quarterly net income.
Results of Operations - Three Months Ended June 30, 2008 Compared with Three
Months Ended June 30, 2007
Summary
Net income for the three months ended June 30, 2008 was $3.8 million, a
$7.2 million decrease compared to the same period in 2007. This decrease was due
principally to the effects of limited production at Alon's Big Spring Refinery
resulting from an explosion and fire in February, production downtime at Holly's
Navajo Refinery during the second quarter of 2008, a decrease in previously
deferred revenue realized, and an increase in operating costs and expenses and
interest expense. These factors were partially offset by revenues attributable
to our crude pipeline assets that were acquired in the first quarter of 2008.
Revenue of $5.6 million relating to deficiency payments associated with certain
transportation contracts was deferred during the three months ended June 30,
2008. Such revenue will be recognized in future periods either as payment for
shipments in excess of minimum required levels or when shipping rights expire
unused after a twelve-month period.
On February 18, 2008, Alon experienced an explosion and fire at its Big Spring
refinery that resulted in the shutdown of production. In early April Alon
reopened its Big Spring refinery and has resumed production which is currently
running at about one-half of refinery capacity. Alon has announced that it plans
to complete repairs and be back at full capacity in the third quarter of 2008.
Lost production and reduced operations attributable to this incident resulted in
a decrease in third party shipments on our refined product pipelines during the
first six months of 2008. Under our pipelines and terminals agreement with Alon,
Alon has committed to a level of product shipments that generally results in a
minimum level of revenue. The amount billed to Alon for any shortfalls with
respect to these contractual commitments is recorded as deferred revenue and
later included in revenue and net income when earned and no longer subject to
recapture. Increases in deferred revenue as a result of such shortfalls are
included in distributable cash flow when the shortfall occurs.
Additionally, during the 2008 second quarter, Holly's Navajo Refinery
experienced approximately 10 days of unplanned downtime as a result of
unexpected repairs that further contributed to reduced volume shipments on our
pipeline systems.
Revenues
Total revenues for the three months ended June 30, 2008 were $26.8 million, a
$0.4 million decrease compared to the three months ended June 30, 2007. This
decrease was due to the effects of limited production at Alon's Big Spring
Refinery resulting from an explosion and fire in February, production downtime
at Holly's Navajo Refinery during the second quarter of 2008 and a decrease in
previously deferred revenue realized. These decreases were partially offset by
revenues attributable to our crude pipeline assets that were acquired in the
first quarter of 2008.
Revenues from our refined product pipelines were $14.6 million, a decrease of
$4.2 million compared to the second quarter of 2007. This decrease was due to a
decline in refined product pipeline shipments by refineries utilizing our
refined product pipeline system during the second quarter and a $0.9 million
decrease in previously deferred revenue realized. These decreases were partially
offset by the effect of the annual tariff increase on refined product shipments.
Shipments on our refined product pipeline system decreased to an average of
100.2 mbpd compared to 147.1 mbpd for the same period last year.
Revenues from our intermediate pipelines were $2.5 million, a decrease of
$1.6 million compared to the second quarter of 2007. This decrease was due to a
decline in volumes shipped on our intermediate pipelines resulting from downtime
at Holly's Navajo Refinery and a $1.0 million decrease in previously deferred
revenue realized. These decreases were partially offset by the effect of the
annual tariff increase on intermediate pipeline shipments. Shipments on our
intermediate product pipeline system decreased to an average of 51.9 mbpd
compared to 68.4 mbpd for the same period last year.
Revenues from our crude pipelines were $6.6 million; second quarter shipments
averaged 130.6 mbpd.
Revenues from terminal, tankage and truck loading rack fees were $3.2 million, a
decrease of $1.1 million compared to the second quarter of 2007. Refined
products terminalled in our facilities decreased to an average of 124.5 mbpd
compared to 176.4 mbpd for the same period last year.
Operating Costs
Operations expense for the three months ended June 30, 2008 increased by
$1.8 million compared to the three months ended June 30, 2007. This increase in
expense was principally due to the operations of our crude pipelines commencing
March 1, 2008 and increased pipeline maintenance and payroll costs.
Depreciation and Amortization
Depreciation and amortization for the three months ended June 30, 2008 increased
by $2.9 million compared to the three months ended June 30, 2007, due
principally to depreciation and amortization attributable to our newly acquired
crude pipelines, tankage assets and transportation agreement.
General and Administrative
General and administrative costs for the three months ended June 30, 2008
increased by $0.1 million compared to the three months ended June 30, 2007.
Interest Expense
Interest expense for the three months ended June 30, 2008 totaled $5.2 million,
an increase of $1.8 million compared to the three months ended June 30, 2007.
This increase is due principally to interest attributable to advances from our
revolving credit agreement that were used to finance our crude pipeline asset
purchase in the first quarter as well as capital projects. For the three months
ended June 30, 2008, our aggregate effective interest rate was 5.6% compared to
7.3% for the same period last year.
Minority Interest in Earnings of Rio Grande
The minority interest related to the 30% of Rio Grande that we do not own
reduced our income by $0.3 million for the three months ended June 30, 2008
compared to $0.2 million for the three months ended June 30, 2007.
State Income Tax
State income taxes were less than $0.1 million for the three months ended
June 30, 2008 and 2007.
Results of Operations - Six Months Ended June 30, 2008 Compared with Six Months
Ended June 30, 2007
Summary
Net income for the six months ended June 30, 2008 was $11.6 million, a
$6.8 million decrease compared to the same period in 2007. This decrease was due
principally to the effects of limited production at Alon's Big Spring Refinery
resulting from an explosion and fire in February, a decrease in intermediate
pipeline revenues as a result of downtime at Holly's Navajo Refinery in the
second quarter, a decrease in previously deferred revenue realized and an
increase in operating costs and expenses and interest expense. These factors
were partially offset by revenues attributable to our crude pipeline assets that
were acquired in the first quarter of 2008. Revenue of $8.7 million relating to
deficiency payments associated with certain transportation contracts was
deferred during the six months ended June 30, 2008. Such revenue will be
recognized in future periods either as payment for shipments in excess of
minimum required levels or when shipping rights expire unused after a
twelve-month period.
Revenues
Total revenues for the six months ended June 30, 2008 were $54.1 million, an
increase of $3.0 million compared to the six months ended June 30, 2007. This
increase was principally due to revenues attributable to our crude pipeline
assets acquired in the first quarter of 2008. This increase was partially offset
by a decrease in third party shipments, a decrease in shipments on our
intermediate pipeline system and a decrease in previously deferred revenue
realized.
. . .
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