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

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Form 10-Q for HOLLY ENERGY PARTNERS LP


1-Aug-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.

We believe the continuing growth of crude production in the Permian Basin and throughout the Mid-Continent and favorable refining economics should support strong throughput to the refineries we serve, which in turn will support volumes in our product pipelines, crude gathering system and terminals.

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. Also, under the terms of the transaction, we 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. Following the July 1, 2013 PPI adjustment HFC's minimum annualized payments to us under these agreements increased by $4.7 million to $225.5 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.

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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 June 30, 2013, these agreements with Alon will result in minimum annualized payments to us of $31.7 million.

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 and six months ended June 30, 2013 and 2012.
                                                      Three Months Ended June 30,        Change from
                                                        2013             2012 (1)            2012
                                                          (In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates-refined product pipelines              $      16,952       $      15,520     $      1,432
Affiliates-intermediate pipelines                         7,291               6,712              579
Affiliates-crude pipelines                               12,187              10,994            1,193
                                                         36,430              33,226            3,204
  Third parties-refined product pipelines                 9,823               8,857              966
                                                         46,253              42,083            4,170
Terminals, tanks and loading racks:
Affiliates                                               26,757              24,540            2,217
Third parties                                             2,275               2,037              238
                                                         29,032              26,577            2,455
Total revenues                                           75,285              68,660            6,625
Operating costs and expenses:
Operations                                               24,538              21,907            2,631
Depreciation and amortization                            15,127              14,150              977
General and administrative                                3,100               2,487              613
                                                         42,765              38,544            4,221
Operating income                                         32,520              30,116            2,404
Other income (expense):
Equity in earnings of SLC Pipeline                          746                 794              (48 )
Interest expense, including amortization                (11,629 )           (11,324 )           (305 )
Interest income                                               4                   -                4
Loss on early extinguishment of debt                          -                (383 )            383
                                                        (10,879 )           (10,913 )             34
Income before income taxes                               21,641              19,203            2,438
State income tax expense                                   (344 )               (75 )           (269 )
Net income                                               21,297              19,128            2,169
Allocation of net loss attributable to
Predecessors                                                  -               2,192           (2,192 )
Allocation of net loss (income) attributable to
noncontrolling interests                                 (1,130 )               683           (1,813 )
Net income attributable to Holly Energy
Partners                                                 20,167              22,003           (1,836 )
General partner interest in net income,
including incentive distributions (2)                    (6,680 )            (5,894 )           (786 )
Limited partners' interest in net income          $      13,487       $      16,109     $     (2,622 )
Limited partners' earnings per unit-basic and
diluted (2)                                       $        0.23       $        0.29     $      (0.06 )
Weighted average limited partners' units
outstanding                                              58,657              54,722            3,935
EBITDA (3)                                        $      47,263       $      44,201     $      3,062
Distributable cash flow (4)                       $      36,065       $      34,520     $      1,545

Volumes (bpd)
Pipelines:
Affiliates-refined product pipelines                    119,519             101,886           17,633
Affiliates-intermediate pipelines                       142,406             137,115            5,291
Affiliates-crude pipelines                              184,267             168,047           16,220
                                                        446,192             407,048           39,144
Third parties-refined product pipelines                  67,044              56,297           10,747
                                                        513,236             463,345           49,891
Terminals and loading racks:
Affiliates                                              274,040             267,988            6,052
Third parties                                            59,810              48,825           10,985
                                                        333,850             316,813           17,037
Total for pipelines and terminal assets (bpd)           847,086             780,158           66,928

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                                                      Six Months Ended June 30,        Change from
                                                       2013             2012 (1)           2012
                                                         (In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates-refined product pipelines              $     33,723       $     30,384     $      3,339
Affiliates-intermediate pipelines                       13,463             13,757             (294 )
Affiliates-crude pipelines                              23,765             21,538            2,227
                                                        70,951             65,679            5,272
  Third parties-refined product pipelines               20,166             18,318            1,848
                                                        91,117             83,997            7,120
Terminals, tanks and loading racks:
Affiliates                                              53,748             48,626            5,122
Third parties                                            4,718              4,452              266
                                                        58,466             53,078            5,388
Total revenues                                         149,583            137,075           12,508
Operating costs and expenses:
Operations                                              50,403             42,382            8,021
Depreciation and amortization                           29,281             28,450              831
General and administrative                               6,332              4,526            1,806
                                                        86,016             75,358           10,658
Operating income                                        63,567             61,717            1,850
Other income (expense):
Equity in earnings of SLC Pipeline                       1,403              1,625             (222 )
Interest expense, including amortization               (24,113 )          (21,729 )         (2,384 )
Interest income                                            107                  -              107
Loss on early extinguishment of debt                         -             (2,979 )          2,979
Gain on sale of assets                                   2,022                  -            2,022
                                                       (20,581 )          (23,083 )          2,502
Income before income taxes                              42,986             38,634            4,352
State income tax expense                                  (400 )             (150 )           (250 )
Net income                                              42,586             38,484            4,102
Allocation of net loss attributable to
Predecessors                                                 -              4,053           (4,053 )
Allocation of net loss (income) attributable to
noncontrolling interests                                (4,020 )            1,240           (5,260 )
Net income attributable to Holly Energy
Partners                                                38,566             43,777           (5,211 )
General partner interest in net income,
including incentive distributions (2)                   12,910             11,398            1,512
Limited partners' interest in net income          $     25,656       $     32,379     $     (6,723 )
Limited partners' earnings per unit-basic and
diluted (2)                                       $       0.44       $       0.59     $      (0.15 )
Weighted average limited partners' units
outstanding                                             57,828             54,722            3,106
EBITDA (3)                                        $     92,253       $     89,626     $      2,627
Distributable cash flow (4)                       $     68,450       $     71,075     $     (2,625 )

Volumes (bpd)
Pipelines:
Affiliates-refined product pipelines                   106,904             99,556            7,348
Affiliates-intermediate pipelines                      131,651            130,341            1,310
Affiliates-crude pipelines                             165,203            160,855            4,348
                                                       403,758            390,752           13,006
Third parties-refined product pipelines                 60,054             60,292             (238 )
                                                       463,812            451,044           12,768
Terminals and loading racks:
Affiliates                                             267,179            265,109            2,070
Third parties                                           57,647             50,604            7,043
                                                       324,826            315,713            9,113
Total for pipelines and terminal assets (bpd)          788,638            766,757           21,881

(1) The financial 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.

(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.

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(3) EBITDA is calculated as net income attributable to Holly Energy Partners 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 June 30,           Six Months Ended June 30,
                                                 2013             2012 (1)            2013             2012 (1)
                                                                       (In thousands)
Net income attributable to Holly Energy
Partners                                   $      20,167       $      22,003     $     38,566       $     43,777
Add:
Interest expense                                  11,096               9,547           22,201             18,307
Interest income                                       (4 )                 -             (107 )                -
Amortization of discount and deferred
debt issuance costs                                  533                 503            1,063                875
Loss on early extinguishment of debt                   -                 383                -              2,979
Increase in interest expense - non-cash
charges attributable to interest rate
swaps                                                  -               1,274              849              2,547
State income tax                                     344                  75              400                150
Depreciation and amortization                     15,127              14,150           29,281             28,450
Predecessor depreciation and
amortization                                           -              (3,734 )              -             (7,459 )
EBITDA                                     $      47,263       $      44,201     $     92,253       $     89,626

(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. Also it is 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 June 30,           Six Months Ended June 30,
                                                 2013             2012 (1)            2013             2012 (1)
                                                                       (In thousands)
Net income attributable to Holly Energy
Partners                                   $      20,167       $      22,003     $     38,566       $     43,777
Add (subtract):
Depreciation and amortization                     15,127              14,150           29,281             28,450
Predecessor depreciation and
amortization                                           -              (3,734 )              -             (7,459 )
Amortization of discount and deferred
debt issuance costs                                  533                 503            1,063                875
Loss on early extinguishment of debt                   -                 383                -              2,979
Increase in interest expense - non-cash
charges attributable to interest rate
swaps                                                  -               1,274              849              2,547
Increase (decrease) in deferred revenue
attributable to shortfall billings                 1,375                 163              152               (429 )
Billed crude revenue settlement                        -                 917              918              1,835
Maintenance capital expenditures (5)              (2,176 )            (1,292 )         (4,512 )           (1,599 )
Other non-cash adjustments                         1,039                 153            2,133                 99
Distributable cash flow                    $      36,065       $      34,520     $     68,450       $     71,075

(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.

(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 $305.3 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.

                              June 30,      December 31,
                                2013            2012
                                    (In thousands)
Balance Sheet Data
Cash and cash equivalents   $     8,716    $        5,237
Working capital             $    10,825    $       11,826
Total assets                $ 1,386,711    $    1,394,110
Long-term debt              $   799,152    $      864,674
Partners' equity (6)        $   402,001    $      352,653

Results of Operations-Three Months Ended June 30, 2013 Compared with Three Months Ended June 30, 2012

Summary
Net income for the second quarter was $21.3 million compared to $19.1 million for the second quarter of 2012. The increase in net income is due principally to increased pipeline shipments and annual tariff increases, partially offset by increased operating costs and expenses. Net income attributable to Holly Energy Partners for the second quarter was $20.2 million compared to $22.0 million for the second quarter of 2012. The decrease in net income attributable to Holly Energy Partners is due principally to allocations of income to noncontrolling interests.

Revenues for the three months ended June 30, 2013 include the recognition of $0.7 million of prior shortfalls billed to shippers in 2012. Deficiency payments of $2.8 million associated with certain guaranteed shipping contracts were deferred during the three months ended June 30, 2013. Such deferred revenue will be recognized in earnings either as payment for shipments in excess

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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.

Revenues
Total revenues for the quarter were $75.3 million, a $6.6 million increase compared to the second quarter of 2012. The revenue increase was due to increased pipeline shipments and the effect of annual tariff increases. Overall pipeline volumes were up 11% compared to the three months ended June 30, 2012. Revenues from our refined product pipelines were $26.8 million, an increase of $2.4 million primarily due to increased refined product shipments and the effect of annual tariff increases. Shipments averaged 186.6 thousand barrels per day ("mbpd") compared to 158.2 mbpd for the second quarter of 2012.
Revenues from our intermediate pipelines were $7.3 million, an increase of $0.6 million, on shipments averaging 142.4 mbpd compared to 137.1 mbpd for the second quarter of 2012.
Revenues from our crude pipelines were $12.2 million, an increase of $1.2 million, on shipments averaging 184.3 mbpd compared to 168.0 mbpd for the second quarter of 2012.
Revenues from terminal, tankage and loading rack fees were $29.0 million, an increase of $2.5 million compared to the second quarter of 2012. Refined products terminalled in our facilities averaged 333.9 mbpd compared to 316.8 mbpd for the second quarter of 2012.
Operations Expense
Operations expense for the three months ended June 30, 2013 increased by $2.6 million compared to the three months ended June 30, 2012. This increase is due to higher maintenance costs, environmental accruals and employee costs.

Depreciation and Amortization
Depreciation and amortization for the three months ended June 30, 2013 increased by $1.0 million compared to the three months ended June 30, 2012 due to asset abandonment charges related to tankage.

General and Administrative
General and administrative costs for the three months ended June 30, 2013 increased by $0.6 million compared to the three months ended June 30, 2012 due to increased employee costs and professional fees.

. . .

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