HOLLY ENERGY PARTNERS LP - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - August 2, 2016

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Earnings Release
August 2, 2016
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 2016. Net income attributable to Holly Energy Partners for the second quarter was $39.1 million ($0.45 per basic and diluted limited partner unit) compared to $30.2 million ($0.34 per basic and diluted limited partner unit) for the second quarter of 2015.
Distributable cash flow was $55.7 million for the quarter, up $8.4 million, or 18% compared to the second quarter of 2015. HEP announced its 47th consecutive distribution increase on July 22, 2016, raising the quarterly distribution from $0.575 to $0.585 per unit, which represents an increase of 7.3% over the distribution for the second quarter of 2015.
The increase in earnings is primarily due to recent acquisitions including interests in the Frontier, Osage, and Cheyenne pipelines, the Tulsa crude tanks acquired in the first quarter of 2016, and the refinery process units dropped down in the fourth quarter of 2015 as well as increased revenues from our 75% interest in the UNEV products pipeline.
Commenting on the second quarter of 2016, Mike Jennings, Chief Executive Officer, stated, “We are pleased with our solid financial results for the second quarter of 2016, which allowed us to maintain our record of quarterly distribution increases, while maintaining a very strong distribution coverage ratio. We remain optimistic about organic growth on the UNEV products pipeline. Additionally, we continue to leverage our logistics capabilities and HollyFrontier Corporation's refining footprint to create third party acquisition opportunities as demonstrated by our acquisition of a 50% interest in the Cheyenne Pipeline during the second quarter of 2016.
"As we look forward, we believe HEP is 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."
Second Quarter 2016 Revenue Highlights
Revenues for the quarter were $94.9 million, an increase of $11.4 million compared to the second quarter of 2015 due to revenues from the El Dorado processing units acquired in the fourth quarter of 2015, increased UNEV pipeline revenues, the inclusion of Tulsa crude tanks revenues as well as the effect of annual tariff increases. Overall pipeline volumes were down 3% compared to the three months ended June 30, 2015, largely due to decreased volumes from pipelines servicing HFC's Navajo refinery offset by increased volumes on the UNEV pipeline.

•
Revenues from our refined product pipelines were $30.8 million, an increase of $1.4 million compared to the second quarter of 2015 mainly due to increased revenue from the UNEV pipeline of $1.3 million in addition to increased volumes and annual tariff increases. Shipments averaged 199.9 mbpd compared to 195.6 mbpd for the second quarter of 2015 mainly due to increased throughput volumes on the UNEV pipeline.

•
Revenues from our intermediate pipelines were $6.8 million, a decrease of $0.4 million, on shipments averaging 135.2 mbpd compared to 143.1 mbpd for the second quarter of 2015. The lower revenues were mainly due to lower volumes from pipelines servicing HFC's Navajo refinery.



1





•
Revenues from our crude pipelines were $18.6 million, an increase of $3.5 million, on shipments averaging 278.4 mbpd compared to 295.8 mbpd for the second quarter of 2015. Revenues increased mainly due to tariff increases and an increase in deferred revenue recognized.

•
Revenues from terminal, tankage and loading rack fees were $34.5 million, an increase of $2.8 million compared to the second quarter of 2015. Refined products terminalled in the facilities averaged 489.6 mbpd compared to 499.7 mbpd for the second quarter of 2015. The volume decrease is mainly due to the transfer of the El Paso terminal to HollyFrontier in the first quarter of 2016 offset by the inclusion of volumes from our Tulsa crude tanks acquired in the first quarter of 2016. Revenues increased due to increased revenue from the Tulsa crude tanks as well as annual tariff increases.

Revenues for the three months ended June 30, 2016, include the recognition of $0.3 million of prior shortfalls billed to shippers in 2015 as they did not meet their minimum volume commitments within the contractual make-up period. As of June 30, 2016, shortfall deferred revenue in our consolidated balance sheet was $4.8 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.
Six Months Ended June 30, 2016 Revenue Highlights
Revenues for the six months ended June 30, 2016, were $196.9 million, an increase of $23.7 million compared to the six months ended June 30, 2015. This is due principally to increased revenue from the El Dorado processing units, increased UNEV pipeline revenues, and the inclusion of Tulsa crude tanks revenues as well the effect of annual tariff increases and increased pipeline shipments.
•
Revenues from our refined product pipelines were $70.8 million, an increase of $5.1 million mainly due to increased revenue from the UNEV pipeline of $4.2 million due to increased volumes and annual tariff increases. Shipments averaged 205.3 mbpd compared to 191.3 mbpd for the six months ended June 30, 2015, largely due to increased volumes from pipelines servicing HFC's Navajo refinery and the UNEV pipeline.
•
Revenues from our intermediate pipelines were $14.2 million, an increase of $0.2 million, on shipments averaging 136.3 mbpd compared to 140.6 mbpd for the six months ended June 30, 2015. The increase in revenue was due to the effects of annual tariff increases.
•
Revenues from our crude pipelines were $36.1 million, an increase of $4.0 million, on shipments averaging 282.9 mbpd compared to 289.3 mbpd for the six months ended June 30, 2015. Revenues increased due to the annual tariff increases and increase in deferred revenue recognized.
•
Revenues from terminal, tankage and loading rack fees were $67.2 million, an increase of $5.8 million compared to the six months ended June 30, 2015. Revenues increased due to increased revenue from the El Dorado and Tulsa crude tanks, higher volumes through the UNEV terminals as well as annual tariff increases. Refined products terminalled in the facilities averaged 464.0 mbpd compared to 444.1 mbpd for the six months ended June 30, 2015, largely due to the El Dorado and Tulsa crude tank volumes offset by lower volumes through the El Paso terminal.
Revenues for the six months ended June 30, 2016, include the recognition of $7.0 million of prior shortfalls billed to shippers in 2015, 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 $45.8 million and $92.4 million for the three and six months ended June 30, 2016, representing an increase of $2.6 million and $3.0 million from the three and six months ended June 30, 2015. The increases are primarily due to operating expenses for our El Dorado processing units acquired in the fourth quarter of 2015, and higher depreciation expense partially offset by lower environmental costs.


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Interest expense was $11.3 million and $21.8 million for the three and six months ended June 30, 2016, representing increases of $2.2 million and $4.0 million over the same periods of 2015. The increases are due to increases in borrowings under our credit agreement.
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=1109621.
An audio archive of this webcast will be available using the above noted link through August 16, 2016.
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, through its subsidiaries and joint ventures, owns and/or operates petroleum product and crude gathering pipelines, tankage and terminals in Texas, New Mexico, Arizona, Washington, Idaho, Oklahoma, Utah, Nevada, Wyoming and Kansas as well as refinery processing units in Kansas.

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. 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. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in these statements. Any differences could be caused by a number of factors including, but 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 the six months ended June 30, 2016 and 2015.
 
Three Months Ended June 30,
 
Change from
 
2016
 
2015
 
2015
 
(In thousands, except per unit data)
Revenues
 
 
 
 
 
Pipelines:
 
 
 
 
 
Affiliates – refined product pipelines
$
19,392

 
$
18,245

 
$
1,147

Affiliates – intermediate pipelines
6,780

 
7,172

 
(392
)
Affiliates – crude pipelines
18,581

 
15,096

 
3,485

 
44,753

 
40,513

 
4,240

   Third parties – refined product pipelines
11,434

 
11,213

 
221

 
56,187

 
51,726

 
4,461

Terminals, tanks and loading racks:
 
 
 
 
 
Affiliates
30,250

 
27,784

 
2,466

Third parties
4,285

 
3,969

 
316

 
34,535

 
31,753

 
2,782

 
 
 
 
 
 
Affiliates - refinery processing units
4,175

 
—

 
4,175

 
 
 
 
 
 
Total revenues
94,897

 
83,479

 
11,418

Operating costs and expenses:
 
 
 
 
 
Operations
27,255

 
25,400

 
1,855

Depreciation and amortization
15,709

 
15,179

 
530

General and administrative
2,863

 
2,696

 
167

 
45,827

 
43,275

 
2,552

Operating income
49,070

 
40,204

 
8,866

 
 
 
 
 
 
Equity in earnings of equity method investments
3,623

 
631

 
2,992

Interest expense, including amortization
(11,276
)
 
(9,056
)
 
(2,220
)
Interest income
112

 
3

 
109

Gain (loss) on sale of assets
(5
)
 
50

 
(55
)
Other income
5

 
21

 
(16
)
 
(7,541
)
 
(8,351
)
 
810

Income before income taxes
41,529

 
31,853

 
9,676

State income tax benefit (expense)
(54
)
 
64

 
(118
)
Net income
41,475

 
31,917

 
9,558

Allocation of net income attributable to noncontrolling interests
(2,355
)
 
(1,743
)
 
(612
)
Net income attributable to Holly Energy Partners
39,120

 
30,174

 
8,946

General partner interest in net income, including incentive distributions(1)
(12,677
)
 
(9,969
)
 
(2,708
)
Limited partners’ interest in net income
$
26,443

 
$
20,205

 
$
6,238

Limited partners’ earnings per unit – basic and diluted:(1)
$
0.45

 
$
0.34

 
$
0.11

Weighted average limited partners’ units outstanding
58,865

 
58,657

 
208

EBITDA(2)
$
66,047

 
$
54,342

 
$
11,705

Distributable cash flow(3)
$
55,709

 
$
47,299

 
$
8,410

Volumes (bpd)
 
 
 
 
 
Pipelines:
 
 
 
 
 
Affiliates – refined product pipelines
125,535

 
121,982

 
3,553

Affiliates – intermediate pipelines
135,165

 
143,140

 
(7,975
)
Affiliates – crude pipelines 
278,414

 
295,793

 
(17,379
)
 
539,114

 
560,915

 
(21,801
)
  Third parties – refined product pipelines
74,386

 
73,659

 
727

 
613,500

 
634,574

 
(21,074
)
Terminals and loading racks:
 
 
 
 
 
Affiliates
418,233

 
420,564

 
(2,331
)
Third parties
71,415

 
79,133

 
(7,718
)
 
489,648

 
499,697

 
(10,049
)
 
 
 
 
 
 
Affiliates- refinery processing units
50,376

 
—

 
50,376

 
 
 
 
 
 
Total for pipelines and terminal assets (bpd)
1,153,524

 
1,134,271

 
19,253



4



 
Six Months Ended
June 30,
 
Change from
 
2016
 
2015
 
2015
 
(In thousands, except per unit data)
Revenues
 
 
 
 
 
Pipelines:
 
 
 
 
 
Affiliates—refined product pipelines
$
44,574

 
$
40,786

 
$
3,788

Affiliates—intermediate pipelines
14,193

 
14,034

 
159

Affiliates—crude pipelines
36,072

 
32,090

 
3,982

 
94,839

 
86,910

 
7,929

   Third parties—refined product pipelines
26,200

 
24,936

 
1,264

 
121,039

 
111,846

 
9,193

Terminals, tanks and loading racks:
 
 
 
 
 
Affiliates
58,503

 
53,642

 
4,861

Third parties
8,683

 
7,747

 
936

 
67,186

 
61,389

 
5,797

 
 
 
 
 
 
Affiliates - refinery processing units
8,682

 
—

 
8,682

 
 
 
 
 
 
Total revenues
196,907

 
173,235

 
23,672

Operating costs and expenses
 
 
 
 
 
Operations
54,177

 
53,465

 
712

Depreciation and amortization
32,260

 
29,977

 
2,283

General and administrative
5,954

 
5,986

 
(32
)
 
92,391

 
89,428

 
2,963

Operating income
104,516

 
83,807

 
20,709

Equity in earnings of equity method investments
6,388

 
1,365

 
5,023

Interest expense, including amortization
(21,811
)
 
(17,824
)
 
(3,987
)
Interest income
224

 
3

 
221

Gain (loss) on sale of assets
(5
)
 
209

 
(214
)
Other
(3
)
 
21

 
(24
)
 
(15,207
)
 
(16,226
)
 
1,019

Income before income taxes
89,309

 
67,581

 
21,728

State income tax expense
(149
)
 
(37
)
 
(112
)
Net income
89,160

 
67,544

 
21,616

Allocation of net income attributable to noncontrolling interests
(7,282
)
 
(5,770
)
 
(1,512
)
Net income attributable to Holly Energy Partners
81,878

 
61,774

 
20,104

General partner interest in net income, including incentive distributions (1)
(24,562
)
 
(19,576
)
 
(4,986
)
Limited partners’ interest in net income
$
57,316

 
$
42,198

 
$
15,118

Limited partners’ earnings per unit—basic and diluted (1)
$
0.96

 
$
0.71

 
$
0.25

Weighted average limited partners’ units outstanding
58,761

 
58,657

 
104

EBITDA (2)
$
135,874

 
$
109,609

 
$
26,265

Distributable cash flow (3)
$
111,075

 
$
93,189

 
$
17,886

 
 
 
 
 
 
Volumes (bpd)
 
 
 
 
 
Pipelines:
 
 
 
 
 
Affiliates—refined product pipelines
128,983

 
118,724

 
10,259

Affiliates—intermediate pipelines
136,288

 
140,620

 
(4,332
)
Affiliates—crude pipelines
282,923

 
289,285

 
(6,362
)
 
548,194

 
548,629

 
(435
)
Third parties—refined product pipelines
76,360

 
72,546

 
3,814

 
624,554

 
621,175

 
3,379

Terminals and loading racks:
 
 
 
 

Affiliates
387,628

 
367,538

 
20,090

Third parties
76,370

 
76,574

 
(204
)
 
463,998

 
444,112

 
19,886

 
 
 
 
 
 
Affiliates - refinery processing units
46,409

 
—

 
46,409

 
 
 
 
 
 
Total for pipelines and terminal assets (bpd)
1,134,961

 
1,065,287

 
69,674





5



 
June 30,
 
December 31,
 
2016
 
2015
 
(In thousands)
Balance Sheet Data
 
 
 
Cash and cash equivalents
$
4,882

 
$
15,013

Working capital
$
13,540

 
$
12,218

Total assets
$
1,617,329

 
$
1,543,765

Long-term debt
$
1,083,136

 
$
1,008,752

Partners' equity(4)
$
295,264

 
$
297,912

(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 $12.1 million and $9.8 million for the three months ended June 30, 2016 and 2015, respectively, and $23.6 million and $19.1 million for the six months ended June 30, 2016 and 2015, respectively.
(2)
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is calculated as net income attributable to Holly Energy Partners plus (i) interest expense and loss on early extinguishment of debt, net of interest income, (ii) state income tax and (iii) depreciation and amortization. EBITDA is not a calculation based upon 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 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,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
Net income attributable to Holly Energy Partners
 
$
39,120

 
$
30,174

 
$
81,878

 
$
61,774

Add (subtract):
 
 
 
 
 
 
 
 
Interest expense
 
10,493

 
8,562

 
20,435

 
16,894

Interest Income
 
(112
)
 
(3
)
 
(224
)
 
(3
)
Amortization of discount and deferred debt charges
 
783

 
494

 
1,376

 
930

State income tax expense (benefit)
 
54

 
(64
)
 
149

 
37

Depreciation and amortization
 
15,709

 
15,179

 
32,260

 
29,977

EBITDA
 
$
66,047

 
$
54,342

 
$
135,874

 
$
109,609

(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
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
Net income attributable to Holly Energy Partners
 
$
39,120

 
$
30,174

 
$
81,878

 
$
61,774

Add (subtract):
 
 
 
 
 
 
 
 
Depreciation and amortization
 
15,709

 
15,179

 
32,260

 
29,977

Amortization of discount and deferred debt charges
 
783

 
494

 
1,376

 
930

Increase (decrease) in deferred revenue attributable to shortfall billings
 
1,731

 
1,355

 
(1,927
)
 
(2,195
)
Maintenance capital expenditures*
 
(2,661
)
 
(1,870
)
 
(4,322
)
 
(3,519
)
Increase (decrease) in environmental liability
 
(113
)
 
(386
)
 
(442
)
 
3,471

Increase (decrease) in reimbursable deferred revenue
 
(628
)
 
1,537

 
(1,155
)
 
992

Other non-cash adjustments
 
1,768

 
816

 
3,407

 
1,759

Distributable cash flow
 
$
55,709

 
$
47,299

 
$
111,075

 
$
93,189

    
*
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.

(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 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:

Richard L. Voliva III, Senior Vice President and
Chief Financial Officer
Julia Heidenreich, Vice President, Investor Relations
Craig Biery, Investor Relations
Holly Energy Partners, L.P.
214/954-6511


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