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HEP > SEC Filings for HEP > Form 10-Q on 1-May-2013All Recent SEC Filings

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Form 10-Q for HOLLY ENERGY PARTNERS LP


1-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Item 2, including but not limited to the sections on "Results of Operations" and "Liquidity and Capital Resources," contains forward-looking statements. See "Forward-Looking Statements" at the beginning of Part I of this Quarterly Report on Form 10-Q. In this document, the words "we," "our," "ours" and "us" refer to Holly Energy Partners, L.P. ("HEP") and its consolidated subsidiaries or to HEP or an individual subsidiary and not to any other person.

OVERVIEW
HEP is a Delaware limited partnership. We own and operate petroleum product and crude pipelines and terminal, tankage and loading rack facilities that support the refining and marketing operations of HollyFrontier Corporation ("HFC") in the Mid-Continent, Southwest and Rocky Mountain regions of the United States and Alon USA, Inc's ("Alon") refinery in Big Spring, Texas. HFC owns a 39% interest in us including the 2% general partnership interest. Additionally, we own a 75% interest in UNEV Pipeline, LLC ("UNEV"), which owns a 400-mile, 12-inch refined products pipeline running from Woods Cross, Utah to Las Vegas, Nevada (the "UNEV Pipeline"), product terminals near Cedar City, Utah and Las Vegas, Nevada and related assets, and a 25% interest in SLC Pipeline LLC, which owns a 95-mile intrastate crude oil pipeline system (the "SLC Pipeline"), that serves refineries in the Salt Lake City area.

We generate revenues by charging tariffs for transporting petroleum products and crude oil through our pipelines, by charging fees for terminalling and storing refined products and other hydrocarbons and providing other services at our storage tanks and terminals. We do not take ownership of products that we transport, terminal or store, and therefore we are not directly exposed to changes in commodity prices.

In March 2013, we closed on a public offering of 1,875,000 of our common units. Additionally, an affiliate of HFC, as a selling unitholder, closed on a public sale of 1,875,000 of its HEP common units. We used our net proceeds of $73.4 million to repay indebtedness incurred under our credit facility and for general partnership purposes. Amounts repaid under our credit facility may be reborrowed from time to time, and we intend to reborrow certain amounts to fund capital expenditures.

On January 16, 2013, a two-for-one unit split was paid in the form of a common unit distribution for each issued and outstanding common unit to all unitholders of record on January 7, 2013. All references to unit and per unit amounts in this document and related disclosures have been adjusted to reflect the effect of the unit split for all periods presented.

UNEV Pipeline Interest Acquisition
We acquired HFC's 75% interest in UNEV on July 12, 2012. We paid consideration consisting of $260.9 million in cash and 2,059,800 of our common units. Under the terms of the transaction, we also issued to HFC a Class B unit comprising an equity interest in a wholly-owned subsidiary that entitles HFC to an interest in our share of annual UNEV earnings before interest, income taxes, depreciation, and amortization above $30 million beginning July 1, 2016 and ending in June 2032, subject to certain limitations. Contemporaneously with this transaction, HFC (our general partner) agreed to forego its right to incentive distributions of up to $1.25 million per quarter over twelve consecutive quarterly periods following the closing of the transaction and up to an additional four quarters in certain circumstances.

Agreements with HFC and Alon
We serve HFC's refineries under long-term pipeline and terminal, tankage and throughput agreements expiring from 2019 to 2026. Under these agreements, HFC agreed to transport, store and throughput volumes of refined product and crude oil on our pipelines and terminal, tankage and loading rack facilities that result in minimum annual payments to us. These minimum annual payments or revenues are subject to annual tariff rate adjustments on July 1, based on the Producer Price Index ("PPI") or Federal Energy Regulatory Commission ("FERC") index. As of March 31, 2013, these agreements with HFC will result in minimum annualized payments to us of $220.8 million.

If HFC fails to meet its minimum volume commitments under the agreements 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. Under certain of the agreements, a shortfall payment may be applied as a credit in the following four quarters after minimum obligations are met.

We also have a pipelines and terminals agreement with Alon expiring in 2020 under which Alon has agreed to transport on our pipelines and throughput through our terminals volumes of refined products that result in a minimum level of annual revenue that also is subject to annual tariff rate adjustments. The terms under this agreement expire beginning in 2018 through 2022. We also have a capacity lease agreement under which we lease Alon space on our Orla to El Paso pipeline for the shipment of refined product. As of March 31, 2013, these agreements with Alon will result in minimum annualized payments to us of $31.7 million.

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A significant reduction in revenues under these agreements could have a material adverse effect on our results of operations.

Under certain provisions of the Omnibus Agreement ("Omnibus Agreement") that we have with HFC, we pay HFC an annual administrative fee, currently $2.3 million, for the provision by HFC or its affiliates of various general and administrative services to us. This fee does not include the salaries of personnel employed by HLS who perform services for us or the cost of their employee benefits, which are separately charged to us by HFC. We also reimburse HFC and its affiliates for direct expenses they incur on our behalf.

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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 March 31, 2013 and 2012.
                                                     Three Months Ended March 31,        Change from
                                                        2013             2012 (1)            2012
                                                          (In thousands, except per unit data)
Revenues
Pipelines:
Affiliates-refined product pipelines              $      16,770       $      14,856     $      1,914
Affiliates-intermediate pipelines                         6,172               7,045             (873 )
Affiliates-crude pipelines                               11,579              10,545            1,034
                                                         34,521              32,446            2,075
  Third parties-refined product pipelines                10,343               9,469              874
                                                         44,864              41,915            2,949
Terminals, tanks and loading racks:
Affiliates                                               26,991              24,085            2,906
Third parties                                             2,443               2,415               28
                                                         29,434              26,500            2,934
Total revenues                                           74,298              68,415            5,883
Operating costs and expenses
Operations                                               25,865              20,475            5,390
Depreciation and amortization                            14,154              14,300             (146 )
General and administrative                                3,232               2,039            1,193
                                                         43,251              36,814            6,437
Operating income                                         31,047              31,601             (554 )
Equity in earnings of SLC Pipeline                          657                 831             (174 )
Interest expense, including amortization                (12,484 )           (10,405 )         (2,079 )
Interest income                                             103                   -              103
Loss on early extinguishment of debt                          -              (2,596 )          2,596
Gain on sale of assets                                    2,022                   -            2,022
                                                         (9,702 )           (12,170 )          2,468
Income before income taxes                               21,345              19,431            1,914
State income tax expense                                    (56 )               (75 )             19
Net income                                               21,289              19,356            1,933
Allocation of net loss attributable to
Predecessors                                                  -               1,861           (1,861 )
Allocation of net loss (income) attributable to
noncontrolling interests                                 (2,890 )               557           (3,447 )
Net income attributable to Holly Energy
Partners                                                 18,399              21,774           (3,375 )
General partner interest in net income,
including incentive distributions (2)                    (6,231 )            (5,503 )           (728 )
Limited partners' interest in net income          $      12,168       $      16,271     $     (4,103 )
Limited partners' earnings per unit-basic and
diluted (2)                                       $        0.21       $        0.30     $      (0.09 )
Weighted average limited partners' units
outstanding                                              56,990              54,722            2,268
EBITDA (3)                                        $      44,990       $      45,426     $       (436 )
Distributable cash flow (4)                       $      32,385       $      36,555     $     (4,170 )

Volumes (bpd)
Pipelines:
Affiliates-refined product pipelines                     94,148              97,226           (3,078 )
Affiliates-intermediate pipelines                       120,777             123,568           (2,791 )
Affiliates-crude pipelines                              145,926             153,662           (7,736 )
                                                        360,851             374,456          (13,605 )
Third parties-refined product pipelines                  52,986              64,287          (11,301 )
                                                        413,837             438,743          (24,906 )
Terminals and loading racks:
Affiliates                                              260,242             262,230           (1,988 )
Third parties                                            55,459              52,383            3,076
                                                        315,701             314,613            1,088
Total for pipelines and terminal assets (bpd)           729,538             753,356          (23,818 )

(1) The amounts presented here have been restated from those we previously reported for this period. See Note 1 in Notes to Consolidated Financial Statements included in Item 1 for a discussion of these revisions.

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(2) 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 incentive distributions declared subsequent to quarter end. Net income attributable to the limited partners is divided by the weighted average limited partner units outstanding in computing the limited partners' per unit interest in net income.

(3) EBITDA is calculated as net income plus (i) interest expense, net of interest income, (ii) state income tax and (iii) depreciation and amortization (excluding amounts related to Predecessor operations). EBITDA is not a calculation based upon U.S. 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 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 March 31,
                                                               2013             2012 (1)
                                                                   (In thousands)
Net income attributable to Holly Energy Partners         $      18,399       $      21,774
Add:
Interest expense                                                11,105               8,760
Interest income                                                   (103 )                 -
Amortization of discount and deferred debt issuance
costs                                                              530                 371
Loss on early extinguishment of debt                                 -               2,596
Increase in interest expense - non-cash charges
attributable to interest rate swaps                                849               1,274
State income tax                                                    56                  75
Depreciation and amortization                                   14,154              14,300
Predecessor depreciation and amortization                            -              (3,724 )
EBITDA                                                   $      44,990       $      45,426

(4) 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 exceptions of a billed crude revenue settlement and 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. It is also used by management for internal analysis and for 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.

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Three Months Ended March 31, 2013 2012 (1)
(In thousands)
Net income attributable to Holly Energy Partners $ 18,399 $ 21,774 Add (subtract):
Depreciation and amortization 14,154 14,300 Predecessor depreciation and amortization - (3,724 ) Amortization of discount and deferred debt issuance costs 530 371 Loss on early extinguishment of debt - 2,596 Increase in interest expense - non-cash charges attributable to interest rate swaps 849 1,274 Increase (decrease) in deferred revenue attributable to shortfall billings (1,224 ) (592 ) Billed crude revenue settlement 918 918 Maintenance capital expenditures (5) (2,335 ) (307 ) Other non-cash adjustments 1,094 (55 ) Distributable cash flow $ 32,385 $ 36,555

(5) 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, safety and to address environmental regulations.

                             March 31,      December 31,
                                2013            2012
                                    (In thousands)
Balance Sheet Data
Cash and cash equivalents   $    18,193    $        5,237
Working capital             $    32,315    $       11,826
Total assets                $ 1,398,186    $    1,394,110
Long-term debt              $   811,913    $      864,674
Partners' equity (6)        $   412,604    $      352,653

(6) 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 have exceeded our quarterly net income. Additionally, if the assets contributed and acquired from HFC while under common control of HFC had been acquired from third parties, our acquisition cost in excess of HFC's basis in the transferred assets of $305.5 million would have been recorded in our financial statements, as increases to our properties and equipment and intangible assets instead of decreases to partners' equity.

Results of Operations-Three Months Ended March 31, 2013 Compared with Three Months Ended March 31, 2012

Summary
Net income attributable to Holly Energy Partners for the three months ended March 31, 2013 was $18.4 million, a $3.4 million decrease compared to the three months ended March 31, 2012. This decrease in earnings is due principally to increased operating costs and expenses, lower pipeline shipments and income allocations to noncontrolling interests in the current year. Major maintenance turnarounds at both HFC's Navajo refinery and Alon's Big Spring refinery had a significant impact on pipeline and terminal volumes, contributing to the lower 2013 first quarter earnings.

Revenues for the three months ended March 31, 2013 include the recognition of $6.7 million of prior shortfalls billed to shippers in 2012. Deficiency payments of $4.5 million associated with certain guaranteed shipping contracts were deferred during the three months ended March 31, 2013. Such deferred revenue will be recognized in earnings either as payment for shipments in excess of guaranteed levels, if and to the extent the pipeline system will not have the necessary capacity for shipments in excess of guaranteed levels, or when shipping rights expire unused.

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Revenues
Total revenues for the three months ended March 31, 2013 were $74.3 million, a $5.9 million increase compared to the three months ended March 31, 2012. This is due principally to a $5.0 million increase in deferred revenue realized, increased shipments on the UNEV Pipeline and the effect of annual tariff increases. However major maintenance performed at the two refineries significantly impacted revenue and resulted in overall pipeline volumes being down 6% compared to the three months ended March 31, 2012.

Revenues from our refined product pipelines were $27.1 million, an increase of $2.8 million compared to the three months ended March 31, 2012. This includes the effects of a $5.6 million increase in deferred revenue realized, increased revenues of $1.7 million from increased volumes on the UNEV Pipeline and the effect of annual tariff increases. Volumes shipped on our refined product pipelines averaged 147.1 thousand barrels per day ("mbpd") compared to 161.5 mbpd for the same period last year, with the decrease due principally to major maintenance performed at two refineries.

Revenues from our intermediate pipelines were $6.2 million, a decrease of $0.9 million compared to the three months ended March 31, 2012. This includes the effects of a $0.6 million decrease in deferred revenue realized. Volumes shipped on our intermediate pipelines averaged 120.8 mbpd compared to 123.6 mbpd for the same period last year.

Revenues from our crude pipelines were $11.6 million, an increase of $1.0 million compared to the three months ended March 31, 2012. Volumes shipped on our crude pipelines decreased to an average of 145.9 mbpd compared to 153.7 mbpd for the same period last year. Although crude pipeline shipments were down, revenues from our crude pipelines increased due to annual tariff increases, increased volumes on certain pipeline segments and minimum quarterly revenue billings on segments where volumes decreased.

Revenues from terminal, tankage and loading rack fees were $29.4 million, an increase of $2.9 million compared to the three months ended March 31, 2012. This increase is due principally to increased tankage revenues. Refined products terminalled in our facilities averaged 315.7 mbpd compared to 314.6 mbpd for the same period last year.

Operations Expense
Operations expense for the three months ended March 31, 2013 increased by $5.4 million compared to the three months ended March 31, 2012. This increase is due to higher maintenance costs incurred to coincide with refinery turnaround, environmental accruals and employee costs.

Depreciation and Amortization
Depreciation and amortization for the three months ended March 31, 2013 decreased by $0.1 million compared to the three months ended March 31, 2012.

General and Administrative
General and administrative costs for the three months ended March 31, 2013 increased by $1.2 million compared to the three months ended March 31, 2012 due to increased employee costs and professional fees.

Equity in Earnings of SLC Pipeline
Our equity in earnings of the SLC Pipeline was $0.7 million for the three months ended March 31, 2013 compared to $0.8 million for the three months ended March 31, 2012.

Interest Expense
Interest expense for the three months ended March 31, 2013 totaled $12.5 million, an increase of $2.1 million compared to the three months ended March 31, 2012. This increase reflects interest on a year-over-year increase in debt levels. Our aggregate effective interest rate was 5.9% for the three months ended March 31, 2013 and 2012.

Loss on Early Extinguishment of Debt
We recognized a charge of $2.6 million upon the early extinguishment of our 6.25% senior notes for the three months ended March 31, 2012.

Gain on Sale of Assets
Gain on sale of assets for the three months ended March 31, 2013 of $2.0 million is from a gain on the sale of property in El Paso, Texas.

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State Income Tax
We recorded state income tax expense of $56,000 or the three months ended March 31, 2013 which is solely attributable to the Texas margin tax. For the three months ended March 31, 2012, we recorded expense of $75,000.

LIQUIDITY AND CAPITAL RESOURCES

Overview
We have a $550 million senior secured revolving credit facility expiring in June 2017 (the "Credit Agreement") that is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. It also is available to fund letters of credit up to a $50 million sub-limit and to fund distributions to unitholders up to a $60 million sub-limit.

During the three months ended March 31, 2013, we received advances totaling $57.0 million and repaid $110.0 million under the Credit Agreement, resulting in net repayments of $53.0 million and an outstanding balance of $368.0 million at March 31, 2013.

In March 2013, we closed on a public offering of 1,875,000 of our common units. Additionally, an affiliate of HFC, as a selling unitholder, closed on a public sale of 1,875,000 of its HEP common units. We used our net proceeds of $73.4 million to repay indebtedness incurred under our credit facility and for general partnership purposes. Amounts repaid under our credit facility may be reborrowed from time to time, and we intend to reborrow certain amounts to fund capital expenditures.

Under our registration statement filed with the SEC using a "shelf" registration process, we currently have the ability to raise up to $2.0 billion by offering securities, through one or more prospectus supplements that would describe, among other things, the specific amounts, prices and terms of any securities offered and how the proceeds would be used. Any proceeds from the sale of securities would be used for general business purposes, which may include, among other things, funding acquisitions of assets or businesses, working capital, capital expenditures, investments in subsidiaries, the retirement of existing debt and/or the repurchase of common units or other securities.

We believe our current cash balances, future internally generated funds and funds available under the Credit Agreement will provide sufficient resources to meet our working capital liquidity needs for the foreseeable future.

In February 2013, we paid regular quarterly cash distributions of $0.470, on all units in an aggregate amount of $32.7 million. Included in these distributions were $5.3 million of incentive distribution payments to the general partner.

Contemporaneously with our UNEV Pipeline interest acquisition on July 12, 2012, HFC (our general partner) agreed to forego its right to incentive distributions of $1.25 million per quarter over twelve consecutive quarterly periods following the close of the transaction and up to an additional four quarters in certain circumstances.

Cash and cash equivalents increased by $13.0 million during the three months ended March 31, 2013. The cash flows provided by operating activities of $30.9 million was greater than the cash flows used for financing and investing activities of $13.8 million and $4.2 million, respectively. Working capital increased by $20.5 million to $32.3 million at March 31, 2013 from $11.8 million at December 31, 2012.

Cash Flows-Operating Activities
Cash flows from operating activities increased by $6.8 million from $24.1 million for the three months ended March 31, 2012 to $30.9 million for the three months ended March 31, 2013. This increase is due principally to $8.5 million in additional cash collections from our customers.

Our major shippers are obligated to make deficiency payments to us if they do not meet their minimum volume shipping obligations. Under certain agreements with these shippers, they have the right to recapture these amounts if future volumes exceed minimum levels. We billed $6.7 million during 2012 related to shortfalls that subsequently expired without recapture and were recognized as revenue during the three months ended March 31, 2013. Another $4.5 million is . . .

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