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HEP > SEC Filings for HEP > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for HOLLY ENERGY PARTNERS LP

Form 10-Q for HOLLY ENERGY PARTNERS LP


6-Aug-2014

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"), the owner of a pipeline running from Woods Cross, Utah to Las Vegas, Nevada (the "UNEV Pipeline"), product terminals and a 25% interest in SLC Pipeline LLC, a 95-mile intrastate crude oil pipeline system (the "SLC Pipeline"), that serves refineries in the Salt Lake City, Utah 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.
We have a long-term strategic relationship with HFC. Our current growth plan is to continue to pursue purchases of logistic assets at HFC's existing refining locations in New Mexico, Utah, Oklahoma, Kansas and Wyoming. We also expect to work with HFC on logistic asset acquisitions in conjunction with HFC's refinery acquisition strategies. Furthermore, we plan to continue to pursue third-party logistic asset acquisitions that are accretive to our unitholders and increase the diversity of our revenues.

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 has 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 1st each year, based on the Producer Price Index ("PPI") or Federal Energy Regulatory Commission ("FERC") index. Following the July 1, 2014, PPI adjustment, HFC's minimum annual payments to us under these agreements increased by $3.3 million to $228.7 million.

If HFC fails to meet its minimum volume commitments under the agreements in any quarter, it will be required to pay us the amount of any shortfall in cash 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 is also subject to annual tariff rate adjustments. 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. The terms under this agreement expire beginning in 2018 through 2022. As of June 30, 2014, these agreements with Alon will result in minimum annualized payments to us of $32.1 million.

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

Under certain provisions of an omnibus agreement we have with HFC ("Omnibus Agreement"), 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 HFC who perform services for us on behalf of HLS 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 the six months ended June 30, 2014 and 2013.

                                                      Three Months Ended June 30,        Change from
                                                        2014               2013             2013
                                                         (In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates-refined product pipelines              $      17,536       $      16,952     $       584
Affiliates-intermediate pipelines                         6,683               7,291            (608 )
Affiliates-crude pipelines                               13,032              12,187             845
                                                         37,251              36,430             821
  Third parties-refined product pipelines                 7,480               9,823          (2,343 )
                                                         44,731              46,253          (1,522 )
Terminals, tanks and loading racks:
Affiliates                                               27,229              26,757             472
Third parties                                             3,038               2,275             763
                                                         30,267              29,032           1,235
Total revenues                                           74,998              75,285            (287 )
Operating costs and expenses:
Operations (exclusive of depreciation and
amortization)                                            24,567              24,538              29
Depreciation and amortization                            15,882              15,127             755
General and administrative                                2,516               3,100            (584 )
                                                         42,965              42,765             200
Operating income                                         32,033              32,520            (487 )
Other income (expense):
Equity in earnings of SLC Pipeline                          748                 746               2
Interest expense, including amortization                 (8,329 )           (11,629 )         3,300
Interest income                                               -                   4              (4 )
Other                                                        26                   -              26
                                                         (7,555 )           (10,879 )         3,324
Income before income taxes                               24,478              21,641           2,837
State income tax                                            (28 )              (344 )           316
Net income                                               24,450              21,297           3,153
Allocation of net income attributable to
noncontrolling interests                                 (1,416 )            (1,130 )          (286 )
Net income attributable to Holly Energy
Partners                                                 23,034              20,167           2,867
General partner interest in net income,
including incentive distributions (1)                    (8,393 )            (6,680 )        (1,713 )
Limited partners' interest in net income          $      14,641       $      13,487     $     1,154
Limited partners' earnings per unit-basic and
diluted (1)                                       $        0.25       $        0.23     $      0.02
Weighted average limited partners' units
outstanding                                              58,657              58,657               -
EBITDA (2)                                        $      47,273       $      47,263     $        10
Distributable cash flow (3)                       $      43,495       $      36,065     $     7,430

Volumes (bpd)
Pipelines:
Affiliates-refined product pipelines                    119,328             119,519            (191 )
Affiliates-intermediate pipelines                       143,396             142,406             990
Affiliates-crude pipelines                              178,564             184,267          (5,703 )
                                                        441,288             446,192          (4,904 )
Third parties-refined product pipelines                  43,858              67,044         (23,186 )
                                                        485,146             513,236         (28,090 )
Terminals and loading racks:
Affiliates                                              269,260             274,040          (4,780 )
Third parties                                            56,563              59,810          (3,247 )
                                                        325,823             333,850          (8,027 )
Total for pipelines and terminal assets (bpd)           810,969             847,086         (36,117 )

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  Table of Contents  ril 19,

                                                      Six Months Ended June 30,        Change from
                                                        2014              2013             2013
                                                         (In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates-refined product pipelines              $      41,709       $    33,723     $      7,986
Affiliates-intermediate pipelines                        14,594            13,463            1,131
Affiliates-crude pipelines                               25,650            23,765            1,885
                                                         81,953            70,951           11,002
  Third parties-refined product pipelines                19,098            20,166           (1,068 )
                                                        101,051            91,117            9,934
Terminals, tanks and loading racks:
Affiliates                                               54,359            53,748              611
Third parties                                             6,592             4,718            1,874
                                                         60,951            58,466            2,485
Total revenues                                          162,002           149,583           12,419
Operating costs and expenses:
Operations (exclusive of depreciation and
amortization)                                            47,379            50,403           (3,024 )
Depreciation and amortization                            31,470            29,281            2,189
General and administrative                                5,667             6,332             (665 )
                                                         84,516            86,016           (1,500 )
Operating income                                         77,486            63,567           13,919
Other income (expense):
Equity in earnings of SLC Pipeline                        1,270             1,403             (133 )
Interest expense, including amortization                (18,783 )         (24,113 )          5,330
Interest income                                               3               107             (104 )
Loss on early extinguishment of debt                     (7,677 )               -           (7,677 )
Gain on sale of assets                                        -             2,022           (2,022 )
Other                                                        34                 -               34
                                                        (25,153 )         (20,581 )         (4,572 )
Income before income taxes                               52,333            42,986            9,347
State income tax                                           (103 )            (400 )            297
Net income                                               52,230            42,586            9,644
Allocation of net income attributable to
noncontrolling interests                                 (5,053 )          (4,020 )         (1,033 )
Net income attributable to Holly Energy
Partners                                                 47,177            38,566            8,611
General partner interest in net income,
including incentive distributions (1)                   (16,394 )         (12,910 )         (3,484 )
Limited partners' interest in net income          $      30,783       $    25,656     $      5,127
Limited partners' earnings per unit-basic and
diluted (1)                                       $        0.52       $      0.44     $       0.08
Weighted average limited partners' units
outstanding                                              58,657            57,828              829
EBITDA (2)                                        $     105,207       $    92,253     $     12,954
Distributable cash flow (3)                       $      85,303       $    68,450     $     16,853

Volumes (bpd)
Pipelines:
Affiliates-refined product pipelines                    121,239           106,904           14,335
Affiliates-intermediate pipelines                       141,015           131,651            9,364
Affiliates-crude pipelines                              177,763           165,203           12,560
                                                        440,017           403,758           36,259
Third parties-refined product pipelines                  55,014            60,054           (5,040 )
                                                        495,031           463,812           31,219
Terminals and loading racks:
Affiliates                                              265,966           267,179           (1,213 )
Third parties                                            67,075            57,647            9,428
                                                        333,041           324,826            8,215
Total for pipelines and terminal assets (bpd)           828,072           788,638           39,434

(1) Net income attributable to HEP is allocated between limited partners and the general partner interest in accordance with the provisions of the partnership agreement. HEP net income allocated to the general partner includes incentive distributions that are declared subsequent to quarter end. After the amount of incentive distributions is allocated to the general partner, the remaining net income attributable to HEP is allocated to the partners based on their weighted average ownership percentage during the period.

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(2) 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. 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 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 June 30,       Six Months Ended June 30,
                                                         2014            2013            2014             2013
                                                                           (In thousands)
Net income attributable to Holly Energy Partners   $       23,034     $ 20,167     $      47,177       $  38,566
Add (subtract):
Interest expense                                            7,893       11,096            17,836          22,201
Interest income                                                 -           (4 )              (3 )          (107 )
Amortization of discount and deferred debt
issuance costs                                                436          533               947           1,063
Loss on early extinguishment of debt                            -            -             7,677               -
Increase in interest expense - non-cash charges
attributable to interest rate swaps and swap
settlement amortization                                         -            -                 -             849
State income tax                                               28          344               103             400
Depreciation and amortization                              15,882       15,127            31,470          29,281
EBITDA                                             $       47,273     $ 47,263     $     105,207       $  92,253

(3) Distributable cash flow is not a calculation based upon GAAP. However, the amounts included in the calculation are derived from amounts presented in our consolidated financial statements, with the general exceptions 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. 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.

                                                       Three Months Ended June 30,           Six Months Ended June 30,
                                                         2014               2013              2014               2013
                                                                               (In thousands)
Net income attributable to Holly Energy Partners   $      23,034       $      20,167     $     47,177       $     38,566
Add (subtract):
Depreciation and amortization                             15,882              15,127           31,470             29,281
Amortization of discount and deferred debt
issuance costs                                               436                 533              947              1,063
Loss on early extinguishment of debt                           -                   -            7,677                  -
Increase in interest expense - non-cash charges
attributable to interest rate swaps and swap
settlement amortization                                        -                   -                -                849
Increase (decrease) in deferred revenue related
to minimum revenue commitments                             4,760               1,375           (1,138 )              152
Maintenance capital expenditures (4)                        (842 )            (2,176 )         (1,691 )           (4,512 )
Crude revenue settlement                                       -                   -                -                918
Other non-cash adjustments                                   225               1,039              861              2,133
Distributable cash flow                            $      43,495       $      36,065     $     85,303       $     68,450

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(4) 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.

                              June 30,       December 31,
                                2014             2013
                                    (In thousands)
Balance Sheet Data
Cash and cash equivalents   $     6,066     $      6,352
Working capital (deficit)   $       (62 )   $     (6,604 )
Total assets                $ 1,384,744     $  1,382,508
Long-term debt              $   839,253     $    807,630
Partners' equity (5)        $   341,646     $    369,446

(5) 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 June 30, 2014 Compared with Three Months Ended June 30, 2013

Summary
Net income attributable to HEP for the second quarter was $23.0 million compared to $20.2 million for the second quarter of 2013. The increase in earnings is primarily due to decreased interest expense incurred on our 8.25% Senior Notes due to early retirement in March 2014, which was partially offset by lower pipeline shipments due to a major maintenance turnaround at Alon's Big Spring refinery.

Revenues for the three months ended June 30, 2014, include the recognition of $0.2 million of prior shortfalls billed to shippers in 2013 compared to revenues at June 30, 2013, which included the recognition of $0.7 million of prior shortfalls billed to shippers in 2012. Deficiency payments of $5.5 million associated with certain guaranteed shipping contracts were deferred during the three months ended June 30, 2014. 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 over the contractual make-up period.

Revenues
Revenues for the quarter were $75.0 million, a $0.3 million decrease compared to the second quarter of 2013 due to the effect of lower pipeline volumes offset by higher terminal volumes. Major maintenance performed at Alon's Big Spring refinery affected revenue and resulted in overall pipeline volumes being down 5% compared to the three months ended June 30, 2013.

Revenues from our refined product pipelines were $25.0 million, a decrease of $1.8 million compared to the second quarter of 2013, primarily due to decreased volumes. Shipments averaged 163.2 mbpd compared to 186.6 mbpd for the second quarter of 2013.
Revenues from our intermediate pipelines were $6.7 million, a decrease of $0.6 million, on shipments averaging 143.4 mbpd compared to 142.4 mbpd for the second quarter of 2013. Revenues decreased mainly due to a $0.5 million decrease in deferred revenue recognized.
Revenues from our crude pipelines were $13.0 million, an increase of $0.8 million, on shipments averaging 178.6 mbpd compared to 184.3 mbpd for the second quarter of 2013. 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 $30.3 million, an increase of $1.2 million compared to the second quarter of 2013. Refined products terminalled in our facilities averaged 325.8 mbpd compared to 333.9 mbpd for the second quarter of 2013. Although volumes were down at the loading rack facilities, revenue increased due to annual fee increases,

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higher tank cost reimbursement receipts from HFC and minimum quarterly revenue billings at facilities where volumes decreased.

Operations Expense
Operations expense for the three months ended June 30, 2014, remained level compared to the three months ended June 30, 2013.

Depreciation and Amortization
Depreciation and amortization for the three months ended June 30, 2014 increased by $0.8 million compared to the three months ended June 30, 2013. The increase is due principally to asset abandonment charges related to tankage permanently removed from service.

General and Administrative
General and administrative costs for the three months ended June 30, 2014, decreased by $0.6 million compared to the three months ended June 30, 2013, due to decreased employee costs and professional fees.

Equity in Earnings of SLC Pipeline
Our equity in earnings of the SLC Pipeline was $0.7 million for each of the three months ended June 30, 2014, and 2013.

Interest Expense
Interest expense for the three months ended June 30, 2014, totaled $8.3 million, a decrease of $3.3 million compared to the three months ended June 30, 2013. The decrease is due primarily to the early retirement of our 8.25% Senior Notes in March 2014. Our aggregate effective interest rates were 4.0% and 5.8% for the three months ended June 30, 2014 and 2013, respectively.

State Income Tax
We recorded state income tax expense of $28,000 and $344,000 for the three months ended June 30, 2014 and 2013, respectively. All tax expense is solely attributable to the Texas margin tax. Due to a statutory change in June 2013, there was a one-time charge of $366,000 to establish a deferred tax liability. This statutory change will result in lower cash taxes to HEP from 2013 forward.

Results of Operations-Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013

Summary
Net income attributable to Holly Energy Partners for the six months ended June 30, 2014, was $47.2 million compared to $38.6 million for the six months ended June 30, 2013. The increase in net income is due primarily to higher pipeline and terminal volumes. Additionally, a charge of $7.7 million related to the redemption of our $150 million 8.25% Senior Notes significantly impacted earnings in the first quarter of 2014.

Revenues for the six months ended June 30, 2014, include the recognition of $9.5 million of prior shortfalls billed to shippers in 2013. Deficiency payments of $7.3 million associated with certain guaranteed shipping contracts were deferred . . .

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