HOLLY ENERGY PARTNERS LP - FORM 8-K - EX-99.1 - EXHIBIT - November 4, 2014

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Earnings Release
November 4, 2014
Holly Energy Partners, L.P. Reports Third Quarter Results
Dallas, Texas -- Holly Energy Partners, L.P. (“HEP” or the “Partnership”) (NYSE:HEP) today reported financial results for the third quarter of 2014. For the quarter, distributable cash flow was $45.6 million, up $1.7 million, or 4% compared to the third quarter of 2013. HEP announced its 40th consecutive distribution increase on October 23, 2014, raising the quarterly distribution from $0.515 to $0.5225 per unit, representing a 6% increase over the distribution for the third quarter of 2013.
Net income attributable to Holly Energy Partners for the third quarter was $29.7 million ($0.35 per basic and diluted limited partner unit) compared to $21.9 million ($0.25 per basic and diluted limited partner unit) for the third quarter of 2013. The increase in earnings is primarily due to higher pipeline volumes and annual tariff increases as well as decreased interest expense due to the early retirement of our 8.25% Senior Notes in March 2014.
Commenting on the third quarter of 2014, Mike Jennings, Chief Executive Officer, stated, “We are pleased our financial results for the third quarter of 2014 allowed us to maintain our record of raising quarterly distributions. Our expanded New Mexico gathering system is now substantially complete, and we continue to see increasing volumes. Additionally, we are pursuing potential new growth opportunities that leverage our capabilities and HollyFrontier Corporation's refining footprint."
“As we look forward, we believe HEP is well positioned for continued growth due to the quality and geographic location of our assets, our talented employee base, and our financially strong and supportive general partner, HollyFrontier."
Third Quarter 2014 Revenue Highlights
Revenues for the quarter were $82.1 million, a $4.4 million increase compared to the third quarter of 2013 due to the effect of higher pipeline volumes and annual tariff increases. Overall pipeline volumes were up 9% compared to the three months ended September 30, 2013.

•
Revenues from our refined product pipelines were $28.8 million, an increase of $2.3 million compared to the third quarter of 2013 primarily due to increased volumes. Shipments averaged 188.0 mbpd compared to 175.1 mbpd for the third quarter of 2013.

•
Revenues from our intermediate pipelines were $7.0 million, an increase of $0.5 million, on shipments averaging 139.5 mbpd compared to 136.3 mbpd for the third quarter of 2013. Revenues increased mainly due to a $0.4 million increase in deferred revenue recognized.

•
Revenues from our crude pipelines were $14.6 million, an increase of $1.6 million, on shipments averaging 199.6 mbpd compared to 172.6 mbpd for the third quarter of 2013.

•
Revenues from terminal, tankage and loading rack fees were $31.8 million, an increase of $0.1 million compared to the third quarter of 2013. Refined products terminalled in our facilities averaged 325.9 mbpd compared to 326.0 mbpd, for the third quarter of 2013. Although volumes were slightly down at the loading rack facilities, revenue increased due to annual fee increases, higher tank cost reimbursement receipts from HFC and minimum quarterly revenue billings at facilities where volumes decreased.



1





Revenues for the three months ended September 30, 2014, include the recognition of $0.6 million of prior shortfalls billed to shippers in 2013, as they did not meet their minimum volume commitments within the contractual make-up period. As of September 30, 2014, shortfall deferred revenue in our consolidated balance sheet was $11.4 million. Such deferred revenue will be recognized in earnings either as (a) payment for shipments in excess of guaranteed levels, if and to the extent the pipeline system has the necessary capacity for shipments in excess of guaranteed levels, or (b) when shipping rights expire unused over the contractual make-up period.
Nine Months Ended September 30, 2014
Revenues for nine months ended September 30, 2014, were $244.1 million, a $16.8 million increase compared to the first nine months of 2013. This is due principally to increased pipeline shipments, the effect of annual tariff increases, and a $2.6 million increase in deferred revenue realized. Overall pipeline volumes were up 7.5% for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013.

•
Revenues from our refined product pipelines were $89.6 million, an increase of $9.2 million compared to the nine months ended September 30, 2013, primarily due to increased volumes and due to the effects of a $2.0 million increase in deferred revenue realized. Shipments averaged 180.2 mbpd compared to 169.7 mbpd for the nine months ended September 30, 2013.

•
Revenues from our intermediate pipelines were $21.6 million, an increase of $1.6 million, on shipments averaging 140.5 mbpd compared to 133.2 mbpd for the nine months ended September 30, 2013. Overall intermediate pipeline shipments were up and revenues also increased due to a $0.6 million increase in deferred revenue realized.

•
Revenues from our crude pipelines were $40.2 million, an increase of $3.4 million, on shipments averaging 185.1 mbpd compared to 167.7 mbpd for the nine months ended September 30, 2013.

•
Revenues from terminal, tankage and loading rack fees were $92.7 million, an increase of $2.6 million compared to the nine months ended September 30, 2013. This increase is due principally to increased volumes. Refined products terminalled in our facilities averaged 330.6 mbpd compared to 325.2 mbpd for the nine months ended September 30, 2013.

Revenues for the nine months ended September 30, 2014, include the recognition of $10.2 million of prior shortfalls billed to shippers in 2013, 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 $43.2 million and $127.7 million for the three and nine months ended September 30, 2014, respectively, representing decreases of $0.3 million and $1.8 million over the same periods last year. The decreases are primarily due to lower depreciation and amortization caused by lower abandonment charges related to tankage permanently removed from service offset by a $3.5 million tax refund related to payroll costs recorded in the third quarter of 2013. In addition, maintenance costs are lower for the nine months ended September 30, 2014.
Interest expense was $8.6 million and $27.4 million for the three and nine months ended September 30, 2014, representing decreases of $3.2 million and $8.6 million over the same periods of 2013. The decreases are principally due to the early retirement of our 8.25% Senior Notes in March 2014. Also, we recognized a loss of $7.7 million on the early extinguishment of our 8.25% Senior Notes in March 2014.
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=1044060.
An audio archive of this webcast will be available using the above noted link through November 18, 2014.


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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, L.L.C., the owner of a Holly Energy operated refined products pipeline running from Salt Lake City, Utah to Las Vegas, Nevada, and related product terminals and a 25% interest in SLC Pipeline, L.L.C., 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 also 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,” “should,” “would,” “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. All statements concerning our expectations for future results of operations are based on forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking 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 future acquired operations;
•
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 nine months ended September 30, 2014.
 
Three Months Ended September 30,
 

Change from
 
2014
 
2013
 
2013
 
(In thousands, except per unit data)
Revenues
 
 
 
 
 
Pipelines:
 
 
 
 
 
Affiliates – refined product pipelines
$
17,811

 
$
17,196

 
$
615

Affiliates – intermediate pipelines
7,038

 
6,567

 
471

Affiliates – crude pipelines
14,557

 
12,994

 
1,563

 
39,406

 
36,757

 
2,649

   Third parties – refined product pipelines
10,939

 
9,246

 
1,693

 
50,345

 
46,003

 
4,342

Terminals, tanks and loading racks:
 
 
 
 
 
Affiliates
28,044

 
28,766

 
(722
)
Third parties
3,741

 
2,954

 
787

 
31,785

 
31,720

 
65

Total revenues
82,130

 
77,723

 
4,407

Operating costs and expenses:
 
 
 
 
 
Operations
25,456

 
21,686

 
3,770

Depreciation and amortization
15,483

 
19,449

 
(3,966
)
General and administrative
2,266

 
2,415

 
(149
)
 
43,205

 
43,550

 
(345
)
Operating income
38,925

 
34,173

 
4,752

 
 
 
 
 
 
Equity in earnings of SLC Pipeline
880

 
835

 
45

Interest expense, including amortization
(8,585
)
 
(11,816
)
 
3,231

Interest income
—

 
3

 
(3
)
Gain on sale of assets
—

 
(159
)
 
159

Other income
11

 
61

 
(50
)
 
(7,694
)
 
(11,076
)
 
3,382

Income before income taxes
31,231

 
23,097

 
8,134

State income tax expense
(42
)
 
(40
)
 
(2
)
Net income
31,189

 
23,057

 
8,132

Allocation of net income attributable to noncontrolling interests
(1,509
)
 
(1,172
)
 
(337
)
Net income attributable to Holly Energy Partners
29,680

 
21,885

 
7,795

General partner interest in net income, including incentive distributions(1)
(8,940
)
 
(7,128
)
 
(1,812
)
Limited partners’ interest in net income
$
20,740

 
$
14,757

 
$
5,983

Limited partners’ earnings per unit – basic and diluted:(1)
$
0.35

 
$
0.25

 
$
0.10

Weighted average limited partners’ units outstanding
58,657

 
58,657

 
—

EBITDA(2)
$
53,790

 
$
53,187

 
$
603

Distributable cash flow(3)
$
45,581

 
$
43,865

 
$
1,716

Volumes (bpd)
 
 
 
 
 
Pipelines:
 
 
 
 
 
Affiliates – refined product pipelines
116,727

 
116,078

 
649

Affiliates – intermediate pipelines
139,502

 
136,312

 
3,190

Affiliates – crude pipelines 
199,627

 
172,569

 
27,058

 
455,856

 
424,959

 
30,897

  Third parties – refined product pipelines
71,271

 
59,036

 
12,235

 
527,127

 
483,995

 
43,132

Terminals and loading racks:
 
 
 
 
 
Affiliates
255,556

 
261,431

 
(5,875
)
Third parties
70,364

 
64,615

 
5,749

 
325,920

 
326,046

 
(126
)
Total for pipelines and terminal assets (bpd)
853,047

 
810,041

 
43,006




4



 
Nine Months Ended September 30,
 
Change from
 
2014
 
2013
 
2013
 
(In thousands, except per unit data)
Revenues:
 
 
 
 
 
Pipelines:
 
 
 
 
 
Affiliates—refined product pipelines
$
59,520

 
$
50,918

 
$
8,602

Affiliates—intermediate pipelines
21,632

 
20,030

 
1,602

Affiliates—crude pipelines
40,207

 
36,760

 
3,447

 
121,359

 
107,708

 
13,651

   Third parties—refined product pipelines
30,037

 
29,412

 
625

 
151,396

 
137,120

 
14,276

Terminals, tanks and loading racks:
 
 
 
 
 
Affiliates
82,403

 
82,514

 
(111
)
Third parties
10,333

 
7,672

 
2,661

 
92,736

 
90,186

 
2,550

Total revenues
244,132

 
227,306

 
16,826

Operating costs and expenses:
 
 
 
 
 
Operations (exclusive of depreciation and amortization)
72,835

 
72,089

 
746

Depreciation and amortization
46,953

 
48,730

 
(1,777
)
General and administrative
7,933

 
8,747

 
(814
)
 
127,721

 
129,566

 
(1,845
)
Operating income
116,411

 
97,740

 
18,671

Other income (expense):
 
 
 
 
 
Equity in earnings of SLC Pipeline
2,150

 
2,238

 
(88
)
Interest expense, including amortization
(27,368
)
 
(35,929
)
 
8,561

Interest income
3

 
110

 
(107
)
Loss on early extinguishment of debt
(7,677
)
 
—

 
(7,677
)
Gain on sale of assets
—

 
1,863

 
(1,863
)
Other income
45

 
61

 
(16
)
 
(32,847
)
 
(31,657
)
 
(1,190
)
Income before income taxes
83,564

 
66,083

 
17,481

State income tax
(145
)
 
(440
)
 
295

Net income
83,419

 
65,643

 
17,776

Allocation of net income attributable to noncontrolling interests
(6,562
)
 
(5,192
)
 
(1,370
)
Net income attributable to Holly Energy Partners
76,857

 
60,451

 
16,406

General partner interest in net income, including incentive distributions (1)
(25,334
)
 
(20,038
)
 
(5,296
)
Limited partners’ interest in net income
$
51,523

 
$
40,413

 
$
11,110

Limited partners’ earnings per unit—basic and diluted (1)
$
0.87

 
$
0.69

 
$
0.18

Weighted average limited partners’ units outstanding
58,657

 
58,108

 
549

EBITDA (2)
$
158,997

 
$
145,440

 
$
13,557

Distributable cash flow (3)
$
130,883

 
$
112,316

 
$
18,567

 
 
 
 
 
 
Volumes (bpd)
 
 
 
 
 
Pipelines:
 
 
 
 
 
Affiliates—refined product pipelines
119,718

 
109,995

 
9,723

Affiliates—intermediate pipelines
140,505

 
133,222

 
7,283

Affiliates—crude pipelines
185,131

 
167,685

 
17,446

 
445,354

 
410,902

 
34,452

Third parties—refined product pipelines
60,492

 
59,711

 
781

 
505,846

 
470,613

 
35,233

Terminals and loading racks:
 
 
 
 

Affiliates
262,458

 
265,242

 
(2,784
)
Third parties
68,185

 
59,995

 
8,190

 
330,643

 
325,237

 
5,406

Total for pipelines and terminal assets (bpd)
836,489

 
795,850

 
40,639






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(1)
Net income attributable to Holly Energy Partners 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 $8.5 million and $6.8 million for the three months ended September 30, 2014 and 2013, respectively, and $24.3 million and $19.2 million for the nine months ended September 30, 2014 and 2013, respectively.
(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. 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 September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Net income attributable to Holly Energy Partners
$
29,680

 
$
21,885

 
$
76,857

 
$
60,451

Add (subtract):
 
 
 
 
 
 
 
Interest expense
8,148

 
11,289

 
25,984

 
33,490

Interest Income
—

 
(3
)
 
(3
)
 
(110
)
Amortization of discount and deferred debt charges
437

 
527

 
1,384

 
1,590

Loss on early extinguishment of debt
—

 
—

 
7,677

 
—

Amortization of unrecognized loss attributable to terminated cash flow hedge
—

 
—

 
—

 
849

State income tax
42

 
40

 
145

 
440

Depreciation and amortization
15,483

 
19,449

 
46,953

 
48,730

EBITDA
$
53,790

 
$
53,187

 
$
158,997

 
$
145,440

(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 exception of 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. It is also 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.


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Set forth below is our calculation of distributable cash flow.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Net income attributable to Holly Energy Partners
$
29,680

 
$
21,885

 
$
76,857

 
$
60,451

Add (subtract):
 
 
 
 
 
 
 
Depreciation and amortization
15,483

 
19,449

 
46,953

 
48,730

Amortization of discount and deferred debt charges
437

 
527

 
1,384

 
1,590

Loss on early extinguishment of debt
—

 
—

 
7,677

 
—

Amortization of unrecognized loss attributable to terminated cash flow hedge
—

 
—

 
—

 
849

Increase (decrease) in deferred revenue attributable to shortfall billings
1,090

 
3,472

 
(49
)
 
3,624

Maintenance capital expenditures*
(653
)
 
(2,045
)
 
(2,344
)
 
(6,557
)
Billed crude revenue settlement
—

 
—

 
—

 
918

Other non-cash adjustments
(456
)
 
577

 
405

 
2,711

Distributable cash flow
$
45,581

 
$
43,865

 
$
130,883

 
$
112,316

    
*
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.
        
 
September 30,
 
December 31,
 
2014
 
2013
 
(In thousands)
Balance Sheet Data
 
 
 
Cash and cash equivalents
$
1,667

 
$
6,352

Working capital (deficit)
$
1,548

 
$
(6,604
)
Total assets
$
1,386,169

 
$
1,382,508

Long-term debt
$
851,416

 
$
807,630

Partners' equity(4)
$
333,513

 
$
369,446


(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 at the time of acquisition 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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HOLLY ENERGY PARTNERS LP Reports