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

Show all filings for HOLLY ENERGY PARTNERS LP

Form 10-Q for HOLLY ENERGY PARTNERS LP


1-Nov-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 high utilization rates for 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 September 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 nine months ended September 30, 2013 and 2012.
                                                     Three Months Ended September 30,        Change from
                                                         2013               2012 (1)             2012
                                                            (In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates-refined product pipelines              $        17,196       $        16,351     $        845
Affiliates-intermediate pipelines                           6,567                 7,319             (752 )
Affiliates-crude pipelines                                 12,994                12,306              688
                                                           36,757                35,976              781
  Third parties-refined product pipelines                   9,246                 9,538             (292 )
                                                           46,003                45,514              489
Terminals, tanks and loading racks:
Affiliates                                                 28,766                26,139            2,627
Third parties                                               2,954                 2,401              553
                                                           31,720                28,540            3,180
Total revenues                                             77,723                74,054            3,669
Operating costs and expenses:
Operations                                                 21,686                22,732           (1,046 )
Depreciation and amortization                              19,449                14,351            5,098
General and administrative                                  2,415                 1,399            1,016
                                                           43,550                38,482            5,068
Operating income                                           34,173                35,572           (1,399 )
Other income (expense):
Equity in earnings of SLC Pipeline                            835                   877              (42 )
Interest expense, including amortization                  (11,816 )             (12,540 )            724
Interest income                                                 3                     -                3
Other income                                                   61                     -               61
Loss on sale of assets                                       (159 )                   -             (159 )
                                                          (11,076 )             (11,663 )            587
Income before income taxes                                 23,097                23,909             (812 )
State income tax expense                                      (40 )                (137 )             97
Net income                                                 23,057                23,772             (715 )
Allocation of net loss attributable to
Predecessor                                                     -                   146             (146 )
Allocation of net income attributable to
noncontrolling interests                                   (1,172 )                (582 )           (590 )
Net income attributable to Holly Energy
Partners                                                   21,885                23,336           (1,451 )
General partner interest in net income,
including incentive distributions (2)                      (7,128 )              (5,276 )         (1,852 )
Limited partners' interest in net income          $        14,757       $        18,060     $     (3,303 )
Limited partners' earnings per unit-basic and
diluted (2)                                       $          0.25       $          0.32     $      (0.07 )
Weighted average limited partners' units
outstanding                                                58,657                56,536            2,121
EBITDA (3)                                        $        53,187       $        49,920     $      3,267
Distributable cash flow (4)                       $        43,865       $        40,431     $      3,434

Volumes (bpd)
Pipelines:
Affiliates-refined product pipelines                      116,078               114,113            1,965
Affiliates-intermediate pipelines                         136,312               132,220            4,092
Affiliates-crude pipelines                                172,569               187,861          (15,292 )
                                                          424,959               434,194           (9,235 )
Third parties-refined product pipelines                    59,036                66,274           (7,238 )
                                                          483,995               500,468          (16,473 )
Terminals and loading racks:
Affiliates                                                261,431               267,638           (6,207 )
Third parties                                              64,615                57,496            7,119
                                                          326,046               325,134              912
Total for pipelines and terminal assets (bpd)             810,041               825,602          (15,561 )

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                                                      Nine Months Ended September 30,        Change from
                                                         2013               2012 (1)             2012
                                                            (In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates-refined product pipelines              $        50,918       $        46,727     $      4,191
Affiliates-intermediate pipelines                          20,030                21,076           (1,046 )
Affiliates-crude pipelines                                 36,760                33,844            2,916
                                                          107,708               101,647            6,061
  Third parties-refined product pipelines                  29,412                27,856            1,556
                                                          137,120               129,503            7,617
Terminals, tanks and loading racks:
Affiliates                                                 82,514                74,773            7,741
Third parties                                               7,672                 6,853              819
                                                           90,186                81,626            8,560
Total revenues                                            227,306               211,129           16,177
Operating costs and expenses:
Operations                                                 72,089                65,114            6,975
Depreciation and amortization                              48,730                42,801            5,929
General and administrative                                  8,747                 5,925            2,822
                                                          129,566               113,840           15,726
Operating income                                           97,740                97,289              451
Other income (expense):
Equity in earnings of SLC Pipeline                          2,238                 2,502             (264 )
Interest expense, including amortization                  (35,929 )             (34,269 )         (1,660 )
Interest income                                               110                     -              110
Other income                                                   61                     -               61
Loss on early extinguishment of debt                            -                (2,979 )          2,979
Gain on sale of assets                                      1,863                     -            1,863
                                                          (31,657 )             (34,746 )          3,089
Income before income taxes                                 66,083                62,543            3,540
State income tax expense                                     (440 )                (287 )           (153 )
Net income                                                 65,643                62,256            3,387
Allocation of net loss attributable to
Predecessor                                                     -                 4,199           (4,199 )
Allocation of net loss (income) attributable to
noncontrolling interests                                   (5,192 )                 658           (5,850 )
Net income attributable to Holly Energy
Partners                                                   60,451                67,113           (6,662 )
General partner interest in net income,
including incentive distributions (2)                      20,038                16,674            3,364
Limited partners' interest in net income          $        40,413       $        50,439     $    (10,026 )
Limited partners' earnings per unit-basic and
diluted (2)                                       $          0.69       $          0.91     $      (0.22 )
Weighted average limited partners' units
outstanding                                                58,108                55,332            2,776
EBITDA (3)                                        $       145,440       $       139,546     $      5,894
Distributable cash flow (4)                       $       112,316       $       111,506     $        810

Volumes (bpd)
Pipelines:
Affiliates-refined product pipelines                      109,995               104,444            5,551
Affiliates-intermediate pipelines                         133,222               130,972            2,250
Affiliates-crude pipelines                                167,685               169,922           (2,237 )
                                                          410,902               405,338            5,564
Third parties-refined product pipelines                    59,711                62,301           (2,590 )
                                                          470,613               467,639            2,974
Terminals and loading racks:
Affiliates                                                265,242               265,958             (716 )
Third parties                                              59,995                52,918            7,077
                                                          325,237               318,876            6,361
Total for pipelines and terminal assets (bpd)             795,850               786,515            9,335

(1) The financial amounts presented here have been restated from those we previously reported for this period. See Note 1 of 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

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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 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 September 30,           Nine Months Ended September 30,
                                                  2013               2012 (1)               2013               2012 (1)
                                                                            (In thousands)
Net income attributable to Holly Energy
Partners                                   $        21,885       $        23,336     $        60,451       $        67,113
Add:
Interest expense                                    11,289                10,738              33,490                29,045
Interest income                                         (3 )                   -                (110 )                   -
Amortization of discount and deferred
debt issuance costs                                    527                   528               1,590                 1,403
Loss on early extinguishment of debt                     -                     -                   -                 2,979
Amortization of unrecognized loss
attributable to terminated cash flow
hedge                                                    -                 1,274                 849                 3,821
State income tax                                        40                   137                 440                   287
Depreciation and amortization                       19,449                14,351              48,730                42,801
Predecessor depreciation and
amortization                                             -                  (444 )                 -                (7,903 )
EBITDA                                     $        53,187       $        49,920     $       145,440       $       139,546

(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 September 30,           Nine Months Ended September 30,
                                                  2013               2012 (1)               2013               2012 (1)
                                                                            (In thousands)
Net income attributable to Holly Energy
Partners                                   $        21,885       $        23,336     $        60,451       $        67,113
Add (subtract):
Depreciation and amortization                       19,449                14,351              48,730                42,801
Predecessor depreciation and
amortization                                             -                  (444 )                 -                (7,903 )
Amortization of discount and deferred
debt issuance costs                                    527                   528               1,590                 1,403
Loss on early extinguishment of debt                     -                     -                   -                 2,979
Amortization of unrecognized loss
attributable to terminated cash flow
hedge                                                    -                 1,274                 849                 3,821
Increase in deferred revenue
attributable to shortfall billings                   3,472                 2,162               3,624                 1,733
Billed crude revenue settlement                          -                   917                 918                 2,753
Maintenance capital expenditures (5)                (2,045 )              (2,287 )            (6,557 )              (3,886 )
Other non-cash adjustments                             577                   594               2,711                   692
Distributable cash flow                    $        43,865       $        40,431     $       112,316       $       111,506

(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.

                             September 30,      December 31,
                                  2013              2012
                                      (In thousands)
Balance Sheet Data
Cash and cash equivalents   $        11,220    $        5,237
Working capital             $        16,110    $       11,826
Total assets                $     1,382,372    $    1,394,110
Long-term debt              $       809,391    $      864,674
Partners' equity (6)        $       387,510    $      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 $305.3 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.

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

Summary
Net income for the third quarter was $23.1 million compared to $23.8 million for the third quarter of 2012. The decrease in net income is due principally to increased depreciation resulting from asset abandonment charges related to tankage permanently removed from service, partially offset by increased revenues and a payroll related tax refund. Net income attributable to Holly Energy Partners for the third quarter was $21.9 million compared to $23.3 million for the third quarter of 2012. The additional 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 September 30, 2013 include the recognition of $0.2 million of prior shortfalls billed to shippers in 2012. Deficiency payments of $4.0 million associated with certain guaranteed shipping contracts were deferred during

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the three months ended September 30, 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.

Revenues
Total revenues for the quarter were $77.7 million, a $3.7 million increase compared to the third quarter of 2012. The revenue increase was due the effect of annual tariff increases combined with higher cost reimbursement receipts from HFC. Overall pipeline volumes were down 3% compared to the three months ended September 30, 2012.
Revenues from our refined product pipelines were $26.4 million, an increase of $0.6 million primarily due to the effect of annual tariff increases. Shipments averaged 175.1 thousand barrels per day ("mbpd") compared to 180.4 mbpd for the third quarter of 2012.
Revenues from our intermediate pipelines were $6.6 million, a decrease of $0.8 million, on shipments averaging 136.3 mbpd compared to 132.2 mbpd for the third quarter of 2012. Although overall intermediate pipeline shipments were up, revenues decreased due to a $0.5 million decrease in deferred revenue realized . . .

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