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Holly Energy Partners, L.P. Reports Third Quarter Results

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DALLAS--(BUSINESS WIRE)--

Holly Energy Partners, L.P. (“HEP” or the “Partnership”) (NYSE: HEP) today reported financial results for the third quarter of 2012. For the quarter, distributable cash flow was $40.4 million, up $14.7 million, or 57% compared to the third quarter of 2011. Based on these results, HEP announced its 32nd consecutive distribution increase on October 26, 2012, raising the quarterly distribution from $0.91 to $0.925, representing a 6% increase over the distribution for the third quarter of 2011.

Net income attributable to Holly Energy Partners for the third quarter was $24.5 million ($0.68 per basic and diluted limited partner unit) compared to $16.7 million ($0.58 per basic and diluted limited partner unit) for the third quarter of 2011. This increase in earnings is due principally to increased pipeline shipments, earnings attributable to our November 2011 asset acquisition and annual tariff increases. These factors were offset partially by increased operating costs and expenses and higher interest expense.

Commenting on the third quarter of 2012, Matt Clifton, Chairman of the Board and Chief Executive Officer stated, “We are extremely pleased with our financial results, particularly with the record levels of our distributable cash flow and EBITDA. EBITDA for the third quarter was $49.8 million, an increase of $16.5 million, or 50%, over last year's third quarter."

“Increased domestic oil production has positively impacted the gross margins of the refineries we serve throughout our Midcontinent, Rocky Mountain and Southwest asset base. This has given our refinery shippers strong incentives to increase their production levels, which has correspondingly raised our pipeline and terminal utilization rates. Additionally, increased oil drilling activity near our crude oil gathering pipelines in Southeast New Mexico has continued to raise the amount of oil we gather and transport on our New Mexico crude oil pipeline assets. These positive industry fundamentals have increased the financial contribution from our heritage assets while our tankage and terminals acquisition in November 2011 and our UNEV pipeline acquisition in July 2012 further fueled significant additions to our year over year growth in distributable cash flow,” Clifton said.

Third Quarter 2012 Revenue Highlights

Revenues for the quarter were $72.5 million, a $23.5 million increase compared to the third quarter of 2011. The revenue increase was due to increased pipeline shipments, revenues attributable to our July 2012 and November 2011 acquisitions and the effect of annual tariff increases. Overall pipeline volumes were up 23% compared to the third quarter of 2011.

  • Revenues from our refined product pipelines were $25.9 million, an increase of $6.9 million primarily due to increased refined pipeline shipments, revenues attributable to UNEV and annual tariff increases. Shipments averaged 180.4 thousand barrels per day (“mbpd”) compared to 140.3 mbpd for the third quarter of 2011.
  • Revenues from our intermediate pipelines were $7.3 million, an increase of $1.4 million, on shipments averaging 132.2 mbpd compared to 91.8 mbpd for the third quarter of 2011. This includes $1.3 million in revenues attributable to our Tulsa interconnect pipelines that were placed in service in September 2011.
  • Revenues from our crude pipelines were $12.3 million, an increase of $1.5 million, on shipments averaging 187.9 mbpd compared to 175.5 mbpd for the third quarter of 2011.
  • Revenues from terminal, tankage and loading rack fees were $27.0 million, an increase of $13.7 million compared to the third quarter of 2011. This includes $12.4 million in revenues attributable to our assets acquired in November 2011 that serve HollyFrontier's El Dorado and Cheyenne refineries. Refined products terminalled in our facilities increased to an average of 325.1 mbpd compared to 227.2 mbpd for the third quarter of 2011.

Revenues for the three months ended September 30, 2012 include the recognition of $0.7 million of prior shortfalls billed to shippers in 2011, as they did not meet their minimum volume commitments within the contractual make-up period. As of September 30, 2012, deferred revenue in our consolidated balance sheet was $9.3 million. Such deferred revenue will be recognized in earnings either as payment for shipments in excess of guaranteed levels or when shipping rights expire unused over the contractual make-up period.

Nine Months Ended September 30, 2012 Revenue Highlights

Revenues for the nine months ended September 30, 2012 were $207.0 million, a $62.1 million increase compared to the same period of 2011. The revenue increase was due to increased pipeline shipments, revenues attributable to our July 2012 and November 2011 acquisitions and the effect of annual tariff increases, partially offset by a $6.7 million decrease in previously deferred revenue realized. Overall pipeline volumes were up 25% compared to the same period of 2011.

  • Revenues from our refined product pipelines were $74.6 million, an increase of $13.6 million primarily due to increased refined pipeline shipments, revenues attributable to UNEV and annual tariff increases partially offset by the effects of a $7.2 million decrease in previously deferred revenue realized. Shipments averaged 166.7 mbpd compared to 136.3 mbpd for the nine months ended September 30, 2011.
  • Revenues from our intermediate pipelines were $21.1 million, an increase of $5.4 million, on shipments averaging 131.0 mbpd compared to 81.6 mbpd for the nine months ended September 30, 2011. This includes $3.7 million in revenues attributable to our Tulsa interconnect pipelines and the effects of a $0.5 million increase in previously deferred revenue realized.
  • Revenues from our crude pipelines were $33.8 million, an increase of $3.5 million, on shipments averaging 169.9 mbpd compared to 157.6 mbpd for the nine months ended September 30, 2011.
  • Revenues from terminal, tankage and loading rack fees were $77.5 million, an increase of $39.5 million compared to the nine months ended September 30, 2011. This includes $36.0 million in revenues attributable to our terminal, tankage and loading racks serving HollyFrontier's El Dorado and Cheyenne refineries. Refined products terminalled in our facilities increased to an average of 318.9 mbpd compared to 217.0 mbpd for the nine months ended September 30, 2011.

Revenues for the nine months ended September 30, 2012 include the recognition of $3.2 million of prior shortfalls billed to shippers in 2011, as they did not meet their minimum volume commitments within the contractual make-up period.

Cost and Expense Highlights

Operating costs and expenses were $35.8 million and $107.2 million for the three and the nine months ended September 30, 2012, respectively, representing increases of $8.4 million and $33.8 million over the respective periods of 2011. These increases reflect incremental operating costs and expenses attributable to UNEV and our recently acquired assets serving HollyFrontier's El Dorado and Cheyenne refineries and higher throughput levels on our legacy assets, as well as year-over-year increases in depreciation expense, maintenance service and payroll costs and professional fees.

Interest expense was $12.5 million and $34.3 million for the three and the nine months ended September 30, 2012, respectively, representing increases of $3.7 million and $8.2 million over the respective periods of 2011 due to higher year-over-year debt levels. Also, we recognized a loss of $3.0 million for the nine months ended September 30, 2012, on the early extinguishment of our $185 million 6.25% senior notes.

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=1009340.

An audio archive of this webcast will be available using the above noted link through November 15, 2012.

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 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 44% 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 successfully purchase and integrate additional operations in the future;
  • 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.

         

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 nine months ended September 30, 2012 and 2011.

 

Three Months Ended

September 30,

Change from

2012     2011 2011
(In thousands, except per unit data)
Revenues
Pipelines:
Affiliates – refined product pipelines $ 16,350 $ 12,414 $ 3,936
Affiliates – intermediate pipelines 7,319 5,935 1,384
Affiliates – crude pipelines 12,306   10,846   1,460  
35,975 29,195 6,780
Third parties – refined product pipelines 9,538   6,525   3,013  
45,513 35,720 9,793
Terminals, tanks and loading racks:
Affiliates 24,601 11,519 13,082
Third parties 2,382   1,797   585  
26,983   13,316   13,667  
Total revenues 72,496 49,036 23,460
Operating costs and expenses:
Operations 21,324 16,398 4,926
Depreciation and amortization 13,044 8,916 4,128
General and administrative 1,399   2,012   (613 )
35,767   27,326   8,441  
Operating income 36,729 21,710 15,019
 
Equity in earnings of SLC Pipeline 877 641 236
Interest expense, including amortization (12,540 ) (8,828 ) (3,712 )
Other income   20   (20 )
(11,663 ) (8,167 ) (3,496 )
Income before income taxes 25,066 13,543 11,523
State income tax expense (137 ) 77   (214 )
Net income 24,929 13,620 11,309
Allocation of net loss attributable to Predecessors(1) 146 3,000 (2,854 )
Allocation of net loss (income) attributable to noncontrolling interests (582 ) 124   (706 )
Net income attributable to Holly Energy Partners 24,493 16,744 7,749
General partner interest in net income, including incentive distributions(2) (5,299 ) (4,009 ) (1,290 )
Limited partners' interest in net income $ 19,194   $ 12,735   $ 6,459  
Limited partners' earnings per unit – basic and diluted:(2) $ 0.68   $ 0.58   $ 0.10  
Weighted average limited partners' units outstanding 28,268   22,079   6,189  
EBITDA(3) $ 49,770   $ 33,228   $ 16,542  
Distributable cash flow(4) $ 40,431   $ 25,731   $ 14,700  
 
Volumes (bpd)
Pipelines:
Affiliates – refined product pipelines 114,113 96,105 18,008
Affiliates – intermediate pipelines 132,220 91,783 40,437
Affiliates – crude pipelines 187,861 175,459   12,402
434,194 363,347 70,847
Third parties – refined product pipelines 66,274 44,212   22,062
500,468 407,559 92,909
Terminals and loading racks:
Affiliates 267,638 183,987 83,651
Third parties 57,496 43,224   14,272
325,134 227,211   97,923
Total for pipelines and terminal assets (bpd) 825,602 634,770   190,832
 

 

Nine Months Ended

September 30,

Change from

2012 2011 2011
(In thousands, except per unit data)
Revenues
Pipelines:
Affiliates – refined product pipelines $ 46,726 $ 33,370 $ 13,356
Affiliates – intermediate pipelines 21,076 15,637 5,439
Affiliates – crude pipelines 33,844   30,296   3,548  
101,646 79,303 22,343
Third parties – refined product pipelines 27,856   27,588   268  
129,502 106,891 22,611
Terminals, tanks and loading racks:
Affiliates 70,695 32,571 38,124
Third parties 6,792   5,447   1,345  
77,487   38,018   39,469  
Total revenues 206,989 144,909 62,080
Operating costs and expenses:
Operations 61,355 43,804 17,551
Depreciation and amortization 39,899 24,627 15,272
General and administrative 5,925   4,948   977  
107,179   73,379   33,800  
Operating income 99,810 71,530 28,280
 
Equity in earnings of SLC Pipeline 2,502 1,848 654
Interest expense, including amortization (34,269 ) (26,101 ) (8,168 )
Loss on early extinguishment of debt (2,979 ) (2,979 )
Other expense   8   (8 )
(34,746 ) (24,245 ) (10,501 )
Income before income taxes 65,064 47,285 17,779
State income tax expense (287 ) (169 ) (118 )
Net income 64,777 47,116 17,661
Allocation of net loss attributable to Predecessors(1) 4,199 3,515 684
Allocation of net loss attributable to noncontrolling interests 658   295   363  
Net income attributable to Holly Energy Partners 69,634 50,926 18,708
General partner interest in net income, including incentive distributions(2) (16,724 ) (11,418 ) (5,306 )
Limited partners' interest in net income $ 52,910   $ 39,508   $ 13,402  
Limited partners' earnings per unit – basic and diluted:(2) $ 1.91   $ 1.79   $ 0.12  
Weighted average limited partners' units outstanding 27,666   22,079   5,587  
EBITDA(3) $ 139,165   $ 100,282   $ 38,883  
Distributable cash flow(4) $ 111,506 $ 67,924 $ 43,582
 
Volumes (bpd)
Pipelines:
Affiliates – refined product pipelines 104,444 88,172 16,272
Affiliates – intermediate pipelines 130,972 81,618 49,354
Affiliates – crude pipelines 169,922   157,598   12,324  
405,338 327,388 77,950
Third parties – refined product pipelines 62,301   48,107   14,194  
467,639 375,495 92,144
Terminals and loading racks:
Affiliates 265,958 174,866 91,092
Third parties 52,918   42,102   10,816  
318,876   216,968   101,908  
Total for pipelines and terminal assets (bpd) 786,515   592,463   194,052  

(1) We are a consolidated variable interest entity and under common control of HollyFrontier. With respect to the July 2012 acquisition of HollyFrontier's 75% interest in UNEV, U.S. generally accepted accounting principles (“GAAP”) require that our financial statements reflect the historical operations of the assets recognized by HollyFrontier, effectively as if the assets were already under our ownership and control. Accordingly, we recognized additional revenues of $0.3 million and $8.1 million and net losses of $0.1 million and $4.2 million for the three and nine months ended September 30, 2012, respectively, that relate to the operations of UNEV prior to our acquisition date. We recognized net losses of $0.4 million and $0.9 million for the three and nine months ended September 30, 2011, respectively, that relate to the operations of UNEV. This retrospective adjustment did not have a significant impact on our operating results prior to 2012 as initial start-up activities of the pipeline commenced December 2011. Results of operations of UNEV prior to the acquisition on July 12, 2012 are herein referred to as the Predecessor's results. Additionally, volume information does not reflect volumes prior to our acquisition date.

(2) 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 $4.9 million and $3.7 million for the three months ended September 30, 2012 and 2011, respectively, and $15.6 million and $10.6 million for the nine months ended September 30, 2012 and 2011, 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.

(3) 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

September 30,

Nine Months Ended

September 30,

2012   2011 2012   2011
(In thousands)
Net income attributable to Holly Energy Partners $ 24,493 $ 16,744 $ 69,634 $ 50,926
Add (subtract):
Interest expense 10,738 8,520 29,045 25,198
Amortization of discount and deferred debt charges 1,802 308 5,224 903
Loss on early extinguishment of debt 2,979
State income tax 137 (77 ) 287 169
Depreciation and amortization 13,044 8,916 39,899 24,627
Predecessor depreciation and amortization (444 ) (1,183 ) (7,903 ) (1,541 )
EBITDA $ 49,770   $ 33,228   $ 139,165   $ 100,282  
 

(4) 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. It also 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.

Set forth below is our calculation of distributable cash flow.

       

Three Months Ended

September 30,

Nine Months Ended

September 30,

 
2012     2011 2012     2011
(In thousands)
Net income attributable to Holly Energy Partners $ 24,493 $ 16,744 $ 69,634 $ 50,926
Add (subtract):
Depreciation and amortization 13,044 8,916 39,899 24,627
Predecessor depreciation and amortization (444 ) (1,183 ) (7,903 ) (1,541 )
Amortization of discount and deferred debt charges 1,802 308 5,224 903
Loss on early extinguishment of debt 2,979
Billed crude revenue settlement 917 2,753
Increase (decrease) in deferred revenue 2,162 1,201 1,733 (3,917 )
Maintenance capital expenditures* (2,287 ) (453 ) (3,886 ) (3,586 )
Other non-cash adjustments 744   198   1,073   512  
Distributable cash flow $ 40,431   $ 25,731   $ 111,506   $ 67,924  
 

* 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,
2012 2011 (6)
(In thousands)
Balance Sheet Data
Cash and cash equivalents $ 1,993 $ 7,369
Working capital $ 18,520 $ 7,016
Total assets $ 1,379,773 $ 1,393,561
Long-term debt $ 874,434 $ 605,888
Partners' equity(5) $ 354,852 $ 643,537
 

(5) 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 $312.8 million would have been recorded as increases to our properties and equipment and intangible assets instead of decreases to partners' equity.

(6) Such amounts have been recast as if UNEV had been under our control at December 31, 2011. The impact on partners' equity from this recast was an increase of $314 million at December 31, 2011. Accounting rules for transactions between companies under common control require pre-acquisition periods to reflect HFC's historic basis in transferred assets and liabilities, notwithstanding how the transaction is ultimately financed. With the close of the UNEV acquisition in July 2012, we adjusted partners' equity to reflect the actual financing of the transaction. This included cash consideration of approximately $260.9 million which was financed through long-term borrowings. The reduction in partners' equity when comparing the reported periods is due principally to the recast accounting treatment.

Holly Energy Partners, L.P.
Douglas S. Aron, 214-871-3555
Executive Vice President and
Chief Financial Officer
or
M. Neale Hickerson, 214-871-3555
Investor Relations

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