HOLLY ENERGY PARTNERS LP - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - July 30, 2013

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Earnings Release
July 30, 2013
Holly Energy Partners, L.P. Reports Second Quarter Results
Dallas, Texas -- Holly Energy Partners, L.P. (“HEP” or the “Partnership”) (NYSE:HEP) today reported financial results for the second quarter of 2013. For the quarter, distributable cash flow was $36.1 million, up $1.5 million, or 4% compared to the second quarter of 2012. HEP announced its 35th consecutive distribution increase on July 26, 2013, raising the quarterly distribution from $0.4775 to $0.4850 per unit, representing a 7% increase over the distribution for the second quarter of 2012.
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 ($0.23 per basic and diluted limited partner unit) compared to $22.0 million ($0.29 per basic and diluted limited partner unit) 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.
Commenting on the second quarter of 2013, Matt Clifton, Chairman of the Board and Chief Executive Officer stated, “We are pleased with the improvement in distributable cash flow and EBITDA compared to the second quarter of 2012 and the first quarter of 2013. As expected, pipeline shipments improved this quarter following the major maintenance turnarounds at both HollyFrontier's Navajo refinery and Alon's Big Spring refinery in the first quarter of 2013. Looking forward, positive industry fundamentals combined with HEP's strong asset base and our planned capital projects should drive continued growth in our distributable cash flow.”
Second Quarter 2013 Revenue Highlights
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.
Revenues for the three months ended June 30, 2013 include the recognition of $0.7 million of prior shortfalls billed to shippers in 2012, as they did not meet their minimum volume commitments within the contractual make-up period. As of June 30, 2013, shortfall deferred revenue in our consolidated balance sheet was $7.4 million. 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.
Six Months Ended June 30, 2013 Revenue Highlights


1





Revenues for six months ended June 30, 2013 were $149.6 million, a $12.5 million increase compared to the first six months of quarter of 2012. This is due principally to a $4.8 million increase in deferred revenue realized, increased pipeline shipments in the second quarter and the effect of annual tariff increases.
•
Revenues from our refined product pipelines were $53.9 million, an increase of $5.2 million primarily due to the effects of a $5.6 million increase in deferred revenue realized. Shipments averaged 167.0 thousand barrels per day (“mbpd”) compared to 159.8 mbpd for the six months ended June 30, 2012.
•
Revenues from our intermediate pipelines were $13.5 million, a decrease of $0.3 million, on shipments averaging 131.7 mbpd compared to 130.3 mbpd for the six months ended June 30, 2012. The decrease in revenue is due to the effects of a $0.7 million decrease in deferred revenue realized.
•
Revenues from our crude pipelines were $23.8 million, an increase of $2.2 million, on shipments averaging 165.2 mbpd compared to 160.9 mbpd for the six months ended June 30, 2012.
•
Revenues from terminal, tankage and loading rack fees were $58.5 million, an increase of $5.4 million compared to the six months ended June 30, 2012. This increase is due principally to increased tankage revenues. Refined products terminalled in our facilities averaged 324.8 mbpd compared to 315.7 mbpd for the six months ended June 30, 2012.
Revenues for six months ended June 30, 2013 include the recognition of $7.3 million of prior shortfalls billed to shippers in 2012, as they did not meet their minimum volume commitments within the contractual make-up period.
Operating Costs and Expenses Highlights
Operating costs and expenses were $42.8 million and $86.0 million for the three and six months ended June 30, 2013, representing increases of $4.2 million and $10.7 million over the respective periods of 2012. These increases are due to higher throughput levels on our assets, as well as year-over-year increases in maintenance costs, environmental accruals, employee costs and depreciation expense.
We have scheduled a webcast conference call today at 4:00 PM Eastern Time to discuss financial results. This webcast may be accessed at: https://event.webcasts.com/starthere.jsp?ei=1018662.
An audio archive of this webcast will be available using the above noted link through August 13, 2013.


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About Holly Energy Partners, L.P.
Holly Energy Partners, L.P., headquartered in Dallas, Texas, provides petroleum product and crude oil transportation, terminalling, storage and throughput services to the petroleum industry, including HollyFrontier Corporation subsidiaries. The Partnership owns and operates petroleum product and crude gathering pipelines, tankage and terminals in Texas, New Mexico, Arizona, Washington, Idaho, Oklahoma, Utah, Wyoming and Kansas. In addition, the Partnership owns a 75% interest in UNEV Pipeline, LLC, the owner of a Holly Energy operated refined products pipeline running from Utah to Las Vegas, Nevada, and related product terminals and a 25% interest in SLC Pipeline LLC, a 95-mile intrastate pipeline system serving refineries in the Salt Lake City, Utah area.
HollyFrontier Corporation, headquartered in Dallas, Texas, is an independent petroleum refiner and marketer that produces high value light products such as gasoline, diesel fuel, jet fuel and other specialty products. HollyFrontier operates through its subsidiaries a 135,000 barrels-per-stream-day (“bpsd”) refinery located in El Dorado, Kansas, a 125,000 bpsd refinery in Tulsa, Oklahoma, a 100,000 bpsd refinery located in Artesia, New Mexico, a 52,000 bpsd refinery located in Cheyenne, Wyoming, and a 31,000 bpsd refinery in Woods Cross, Utah. HollyFrontier markets its refined products principally in the Southwest U.S., the Rocky Mountains extending into the Pacific Northwest and in other neighboring Plains states. A subsidiary of HollyFrontier owns a 39% interest (including the general partner interest) in Holly Energy Partners, L.P.
The statements in this press release relating to matters that are not historical facts are “forward-looking statements” within the meaning of the federal securities laws. Forward looking statements use words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “intend,” “could,” “believe,” “may,” and similar expressions and statements regarding our plans and objectives for future operations. These statements are based on our beliefs and assumptions and those of our general partner using currently available information and expectations as of the date hereof, are not guarantees of future performance and involve certain risks and uncertainties. Although we and our general partner believe that such expectations reflected in such forward-looking statements are reasonable, neither we nor our general partner can give assurance that our expectations will prove to be correct. Such statements are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. Certain factors could cause actual results to differ materially from results anticipated in the forward-looking statements. These factors include, but are not limited to:
•
risks and uncertainties with respect to the actual quantities of petroleum products and crude oil shipped on our pipelines and/or terminalled, stored and throughput in our terminals;
•
the economic viability of HollyFrontier Corporation, Alon USA, Inc. and our other customers;
•
the demand for refined petroleum products in markets we serve;
•
our ability to purchase and integrate additional operations in the future successfully;
•
our ability to complete previously announced or contemplated acquisitions;
•
the availability and cost of additional debt and equity financing;
•
the possibility of reductions in production or shutdowns at refineries utilizing our pipeline and terminal facilities;
•
the effects of current and future government regulations and policies;
•
our operational efficiency in carrying out routine operations and capital construction projects;
•
the possibility of terrorist attacks and the consequences of any such attacks;
•
general economic conditions; and
•
other financial, operations and legal risks and uncertainties detailed from time to time in our Securities and Exchange Commission filings.

The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


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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.
 
Three Months Ended June 30,
 

Change from
 
2013
 
2012
 
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

 
 
 
 
 
 
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(1)
(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:(1)
$
0.23

 
$
0.29

 
$
(0.06
)
Weighted average limited partners’ units outstanding
58,657

 
54,722

 
3,935

EBITDA(2)
$
47,263

 
$
44,201

 
$
3,062

Distributable cash flow(3)
$
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





4



 
 
Six Months Ended June 30,
 
Change from
 
 
2013
 
2012
 
2012
 
 
(In thousands, except per unit data)
Revenues
 
 
 
 
 
 
Pipelines:
 
 
 
 
 
 
Affiliates—refined product pipelines
 
$
33,723

 
$
30,376

 
$
3,347

Affiliates—intermediate pipelines
 
13,463

 
13,757

 
(294
)
Affiliates—crude pipelines
 
23,765

 
21,538

 
2,227

 
 
70,951

 
65,671

 
5,280

   Third parties—refined product pipelines
 
20,166

 
18,326

 
1,840

 
 
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

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 (1)
 
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 (1)
 
$
0.44

 
$
0.59

 
$
(0.15
)
Weighted average limited partners’ units outstanding
 
57,828

 
54,722

 
3,106

EBITDA (2)
 
$
92,253

 
$
89,626

 
$
2,627

Distributable cash flow (3)
 
$
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




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(1)
Net income is allocated between limited partners and the general partner interest in accordance with the provisions of the partnership agreement. Net income allocated to the general partner includes incentive distributions declared subsequent to quarter end. General partner incentive distributions were $6.4 million and $5.6 million for the three months ended June 30, 2013 and 2012, respectively, and $12.4 million and $10.7 million for the six months ended June 30, 2013 and 2012, respectively. 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.
(2)
Earnings before interest, taxes, depreciation and amortization (“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 Predecessor amounts). EBITDA is not a calculation based upon 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 attributable to Holly Energy Partners 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
 
2013
 
2012
 
(In thousands)
Net income attributable to Holly Energy Partners
$
20,167

 
$
22,003

 
$
38,566

 
$
43,777

Add (subtract):
 
 
 
 
 
 
 
Interest expense
11,096

 
9,547

 
22,201

 
18,307

Interest Income
(4
)
 
—

 
(107
)
 
—

Amortization of discount and deferred debt charges
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

(3)
Distributable cash flow is not a calculation based upon GAAP. However, the amounts included in the calculation are derived from amounts separately presented in our consolidated financial statements, with the exception of billed crude revenue settlement and maintenance capital expenditures. Distributable cash flow should not be considered in isolation or as an alternative to net income attributable to Holly Energy Partners 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 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.


6



Set forth below is our calculation of distributable cash flow.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(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 charges
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*
(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

    
*
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, and safety and to address environmental regulations.
        
 
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(4)
$
402,001

 
$
352,653


(4)
As a master limited partnership, we distribute our available cash, which historically has exceeded our net income attributable to Holly Energy Partners 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 attributable to Holly Energy Partners. Additionally, if the assets contributed and acquired from HollyFrontier while we were a consolidated variable interest entity of HollyFrontier had been acquired from third parties, our acquisition cost in excess of HollyFrontier’s basis in the transferred assets of $305.3 million would have been recorded as increases to our properties and equipment and intangible assets instead of decreases to partners’ equity.


FOR FURTHER INFORMATION, Contact:

Douglas S. Aron, Executive Vice President and
Chief Financial Officer
Julia Heidenreich, Vice President, Investor Relations
Blake Barfield, Investor Relations
Holly Energy Partners, L.P.
214/954-6511


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