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

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Holly Energy Partners, L.P. ("HEP" or the "Partnership") (NYSE:HEP)
today reported financial results for the second quarter of 2018. Net
income attributable to HEP for the second quarter was $40.1 million
($0.38 per basic and diluted limited partner unit) compared to $41.3
million ($0.36 per basic and diluted limited partner unit) for the
second quarter of 2017.

Distributable cash flow was $65.2 million for the quarter, up $4.3
million, or 7.0% compared to the second quarter of 2017. HEP announced
its 55th consecutive distribution increase on July 19, 2018,
raising the quarterly distribution from $0.655 to $0.660 per unit, which
represents an increase of 4.3% over the distribution for the second
quarter of 2017.

The decrease in earnings is primarily due to higher interest expense
partially offset by higher crude pipeline throughputs and revenues.

Commenting on our 2018 second quarter results, George Damiris, Chief
Executive Officer, stated, "Normal seasonality masks the underlying
strength in our business, particularly our Delaware Basin crude
gathering system.

"Looking forward, we expect the continued strength in crude gathering,
combined with contractual tariff escalators effective in the third
quarter, will drive a strong rebound in earnings growth and our
distribution coverage ratio, which we expect to be greater than 1.0x for
the second half of the year."

Second Quarter 2018 Revenue Highlights

Revenues for the quarter were $118.8 million, an increase of $9.6
million compared to the second quarter of 2017. The increase is
primarily attributable to our acquisition of the remaining interest in
the SLC and Frontier pipelines, which led to an increase in overall
pipeline volumes of 24%.

  • Revenues from our refined product pipelines were $31.1 million
    for both the second quarters of 2018 and 2017, and shipments averaged
    185.6 thousand barrels per day ("mbpd") compared to 206.0 mbpd for the
    second quarter of 2017. The volume decrease is mainly due to pipelines
    servicing HollyFrontier Corporation's ("HFC" or "HollyFrontier") Woods
    Cross refinery, which had lower throughput due to operational issues
    at the refinery. Revenue remained constant due to contractual minimum
    volume guarantees.
  • Revenues from our intermediate pipelines were $7.3 million for
    both the second quarters ended 2018 and 2017, on shipments averaging
    151.5 mbpd compared to 151.7 mbpd for the second quarter of 2017.
  • Revenues from our crude pipelines were $27.2 million, an
    increase of $10.3 million, on shipments averaging 437.9 mbpd compared
    to 269.4 mbpd for the second quarter of 2017. The increases are mainly
    attributable to our acquisition of the remaining interest in the SLC
    and Frontier pipelines in the fourth quarter of 2017 as well as
    increased volumes on our crude pipeline systems in New Mexico and
    Texas.
  • Revenues from terminal, tankage and loading rack fees were
    $34.4 million, a decrease of $2.0 million compared to the second
    quarter of 2017. Refined products and crude oil terminalled in the
    facilities averaged 505.1 mbpd compared to 529.0 mbpd for the second
    quarter of 2017. The revenue and volume decreases are mainly due to
    lower volumes at terminals associated with UNEV Pipeline, LLC and
    lower volumes at our Tulsa tanks.
  • Revenues from refinery processing units were $18.8 million, an
    increase of $1.3 million on throughputs averaging 71.1 mbpd compared
    to 67.3 mbpd for the third quarter of 2017. The increase in revenue is
    mainly due to higher volumes at our Woods Cross refinery processing
    units.

Revenues for the second quarter of 2018, include the recognition of $0.4
million of prior shortfalls billed to shippers in 2017. As of June 30,
2018, deferred revenue reflected in our consolidated balance sheet
related to shortfalls billed was $4.4 million.

Six Months Ended June 30, 2018 Revenue Highlights

Revenues for the six months ended June 30, 2018, were $247.6 million, an
increase of $32.9 million compared to the six months ended June 30,
2017. The increase is primarily attributable to our acquisition of the
remaining interest in the SLC and Frontier pipelines and the turnaround
at HollyFrontier's Navajo refinery in the first quarter of 2017.

  • Revenues from our refined product pipelines were $66.0 million,
    an increase of $4.6 million, on shipments averaging 201.2 mbpd
    compared to 199.2 mbpd for the six months ended June 30, 2017.
    Revenues increased due to the turnaround at HFC's Navajo refinery in
    the first quarter of 2017.
  • Revenues from our intermediate pipelines were $15.7 million, an
    increase of $3.2 million, on shipments averaging 139.3 mbpd compared
    to 128.1 mbpd for the six months ended June 30, 2017. These increases
    were principally due to the turnaround at HFC's Navajo refinery in the
    first quarter of 2017.
  • Revenues from our crude pipelines were $56.0 million, an
    increase of $22.2 million, on shipments averaging 462.5 mbpd compared
    to 269.2 mbpd for the six months ended June 30, 2017. The increases
    are mainly attributable to our acquisition of the remaining interest
    in the SLC and Frontier pipelines in the fourth quarter of 2017 as
    well as increased volumes on our crude pipeline systems in New Mexico
    and Texas.
  • Revenues from terminal, tankage and loading rack fees were
    $72.6 million, an increase of $2.4 million compared to the six months
    ended June 30, 2017. Refined products and crude oil terminalled in the
    facilities averaged 479.1 mbpd compared to 487.0 mbpd for the six
    months ended June 30, 2017. The increase in revenue is primarily due
    to higher volumes in several of our terminals as well as an adjustment
    in revenue recognition. Total volumes decreased mainly due to lower
    volumes at our Tulsa tanks, which are supported by minimum volume
    commitments.
  • Revenues from refinery processing units were $37.4 million, an
    increase of $0.5 million on throughputs averaging 69.0 mbpd compared
    to 65.1 mbpd for the six months ended June 30, 2017. The increase in
    revenue is mainly due to higher volumes at our Woods Cross refinery
    processing units.

Revenues for the six months ended June 30, 2018, include the recognition
of $2.6 million of prior shortfalls billed to shippers in 2017 as they
did not exceed their minimum volume commitments within the contractual
make-up period.

Operating Costs and Expenses Highlights

Operating costs and expenses were $61.8 million and $126.3 million for
the three and six months ended June 30, 2018, representing an increase
of $5.2 million and $15.7 million from the three and six months ended
June 30, 2017. The increase is primarily due to new operating costs and
expenses related to our acquisition of the remaining interest in the SLC
and Frontier pipelines in the fourth quarter of 2017.

Interest expense was $17.6 million and $35.2 million for the three and
six months ended June 30, 2018, representing an increase of $3.9 million
and $7.9 million over the same periods of 2017. These increases are
primarily due to interest expense associated with the private placement
of an additional $100 million in aggregate principal amount of our 6%
Senior Notes due 2024 completed in the third quarter of 2017, higher
average balances outstanding under our senior secured revolving credit
facility, and market interest rate increases under that facility.

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=1200323&tp_key=3e74bee54b.

An audio archive of this webcast will be available using the above noted
link through August 15, 2018.

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 pipelines, tankage and terminals in Texas, New Mexico,
Arizona, Washington, Idaho, Oklahoma, Utah, Nevada, Wyoming and Kansas,
as well as refinery processing units in Utah and 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 45,000 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. Additionally, HollyFrontier owns
Petro-Canada Lubricants Inc., whose Mississauga, Ontario facility
produces 15,600 barrels per day of base oils and other specialized
lubricant products, and owns a 57% limited partner interest and the
non-economic 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, Delek US
    Holdings, 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 or cyber attacks and the consequences of
    any such attacks;
  • general economic conditions;
  • the impact of recent changes in tax laws and regulations that affect
    master limited partnerships; 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 six months ended June 30, 2018 and
2017.

         
Three Months Ended June 30, Change from
2018     2017 2017
(In thousands, except per unit data)
Revenues
Pipelines:
Affiliates – refined product pipelines $ 18,744 $ 19,432 $ (688 )
Affiliates – intermediate pipelines 7,255 7,250 5
Affiliates – crude pipelines   18,479     16,919     1,560  
44,478 43,601 877
Third parties – refined product pipelines 12,348 11,647 701
Third parties – crude pipelines   8,713         8,713  
65,539 55,248 10,291
Terminals, tanks and loading racks:
Affiliates 30,700 32,012 (1,312 )
Third parties   3,686     4,344     (658 )
  34,386     36,356     (1,970 )
 
Affiliates - refinery processing units   18,835     17,539     1,296  
 
Total revenues   118,760     109,143     9,617  
Operating costs and expenses
Operations 34,533 34,097 436
Depreciation and amortization 24,608 19,945 4,663
General and administrative   2,673     2,615     58  
  61,814     56,657     5,157  
Operating income 56,946 52,486 4,460
 
Equity in earnings of equity method investments 1,734 4,053 (2,319 )
Interest expense, including amortization (17,626 ) (13,748 ) (3,878 )
Interest income 526 103 423
Gain on sale of assets and other   (53 )   89     (142 )
  (15,419 )   (9,503 )   (5,916 )
Income before income taxes 41,527 42,983 (1,456 )
State income tax expense   (28 )   (127 )   99  
Net income 41,499 42,856 (1,357 )
Allocation of net income attributable to noncontrolling interests   (1,356 )   (1,521 )   165  
Net income attributable to Holly Energy Partners 40,143 41,335 (1,192 )
General partner interest in net income, including incentive
distributions(1)
      (18,328 )   18,328  
Limited partners' interest in net income $ 40,143   $ 23,007   $ 17,136  
Limited partners' earnings per unit – basic and diluted(1) $ 0.38   $ 0.36   $ 0.36  
Weighted average limited partners' units outstanding   105,429     64,086     64,086  
EBITDA(2) $ 81,879   $ 75,052   $ 6,827  
Distributable cash flow(3) $ 65,180   $ 60,908   $ 4,272  
 
Volumes (bpd)
Pipelines:
Affiliates – refined product pipelines 112,371 134,357 (21,986 )
Affiliates – intermediate pipelines 151,537 151,683 (146 )
Affiliates – crude pipelines   322,850     269,418     53,432  
586,758 555,458 31,300
Third parties – refined product pipelines 73,196 71,612 1,584
Third parties – crude pipelines   115,011         115,011  
774,965 627,070 147,895
Terminals and loading racks:
Affiliates 446,089 461,329 (15,240 )
Third parties   59,035     67,657     (8,622 )
  505,124     528,986     (23,862 )
 
Affiliates – refinery processing units   71,117     67,310     3,807  
 
Total for pipelines and terminal assets (bpd)   1,351,206     1,223,366     127,840  
 
         
Six Months Ended June 30, Change from
2018     2017 2017
(In thousands, except per unit data)
Revenues
Pipelines:

Affiliates – refined product pipelines

$ 40,038 $ 37,176 $ 2,862

Affiliates – intermediate pipelines

15,724 12,534 3,190

Affiliates – crude pipelines

  38,276     33,800     4,476  
94,038 83,510 10,528

Third parties – refined product pipelines

25,930 24,185 1,745

Third parties – crude pipelines

  17,740         17,740  
137,708 107,695 30,013
Terminals, tanks and loading racks:
Affiliates 64,034 61,748 2,286
Third parties   8,533     8,415     118  
  72,567     70,163     2,404  
 
Affiliates - refinery processing units   37,369     36,919     450  
 
Total revenues   247,644     214,777     32,867  
Operating costs and expenses
Operations 70,735 66,586 4,149
Depreciation and amortization 49,750 38,722 11,028
General and administrative   5,795     5,249     546  
  126,280     110,557     15,723  
Operating income 121,364 104,220 17,144
 
Equity in earnings of equity method investments 3,013 5,893 (2,880 )
Interest expense, including amortization (35,207 ) (27,287 ) (7,920 )
Interest income 1,041 205 836
Loss on early extinguishment of debt (12,225 ) 12,225
Gain (loss) on sale of assets and other   33     162     (129 )
  (31,120 )   (33,252 )   2,132  
Income before income taxes 90,244 70,968 19,276
State income tax expense   (110 )   (233 )   123  
Net income 90,134 70,735 19,399
Allocation of net income attributable to noncontrolling interests   (3,823 )   (3,837 )   14  
Net income attributable to Holly Energy Partners 86,311 66,898 19,413
General partner interest in net income, including incentive
distributions(1)
      (35,466 )   35,466  
Limited partners' interest in net income $ 86,311   $ 31,432   $ 54,879  
Limited partners' earnings per unit—basic and diluted(1) $ 0.82   $ 0.49   $ 0.33  
Weighted average limited partners' units outstanding   104,637     63,602     41,035  
EBITDA(2) $ 170,337   $ 132,935   $ 37,402  
Adjusted EBITDA(2) $ 170,337   $ 145,160   $ 25,177  
Distributable cash flow(3) $ 134,279   $ 118,197   $ 16,082  
 
Volumes (bpd)
Pipelines:
Affiliates – refined product pipelines 128,498 120,886 7,612
Affiliates – intermediate pipelines 139,333 128,143 11,190
Affiliates – crude pipelines   341,922     269,155     72,767  
609,753 518,184 91,569
Third parties – refined product pipelines 72,720 78,339 (5,619 )
Third parties – crude pipelines   120,568         120,568  
803,041 596,523 206,518
Terminals and loading racks:
Affiliates 418,439 418,365 74
Third parties   60,684     68,646     (7,962 )
  479,123     487,011     (7,888 )
 
Affiliates – refinery processing units   69,008     65,082     3,926  
 
Total for pipelines and terminal assets (bpd)   1,351,172     1,148,616     202,556  
 
(1)   Prior to the equity restructuring transaction on October 31, 2017,
net income attributable to Holly Energy Partners was allocated
between limited partners and the general partner interest in
accordance with the provisions of the partnership agreement. HEP net
income allocated to the general partner included incentive
distributions that were declared subsequent to quarter end. There
were no distributions made on the general partner interest after
October 31, 2017, and general partner distributions were $18.7
million and $36.5 million for the three and the six months ended
June 30, 2017, 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. Adjusted
EBITDA is calculated as EBITDA plus loss on early extinguishment of
debt. EBITDA and Adjusted EBITDA are not calculations based upon
generally accepted accounting principles ("GAAP"). However, the
amounts included in the EBITDA and Adjusted EBITDA calculations are
derived from amounts included in our consolidated financial
statements. EBITDA and Adjusted EBITDA should not be considered as
alternatives to net income attributable to Holly Energy Partners or
operating income, as indications of our operating performance or as
alternatives to operating cash flow as a measure of liquidity.
EBITDA and Adjusted EBITDA are not necessarily comparable to
similarly titled measures of other companies. EBITDA and Adjusted
EBITDA are presented here because they are widely used financial
indicators used by investors and analysts to measure performance.
EBITDA and Adjusted EBITDA are also used by our management for
internal analysis and as a basis for compliance with financial
covenants.
 

Set forth below is our calculation of EBITDA and Adjusted EBITDA.

         
Three Months Ended June 30, Six Months Ended June 30,
2018     2017 2018     2017
(In thousands)
Net income attributable to Holly Energy Partners $ 40,143 $ 41,335 $ 86,311 $ 66,898
Add (subtract):
Interest expense 16,867 12,982 33,691 25,751
Interest Income (526 ) (103 ) (1,041 ) (205 )
Amortization of discount and deferred debt charges 759 766 1,516 1,536
State income tax expense 28 127 110 233
Depreciation and amortization   24,608     19,945     49,750     38,722  
EBITDA $ 81,879 $ 75,052 $ 170,337 $ 132,935
Add loss on early extinguishment of debt               12,225  
Adjusted EBITDA $ 81,879   $ 75,052   $ 170,337   $ 145,160  
 
(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.
 

Set forth below is our calculation of distributable cash flow.

         
Three Months Ended June 30, Six Months Ended June 30,
2018     2017 2018     2017
(In thousands)
Net income attributable to Holly Energy Partners $ 40,143 $ 41,335 $ 86,311 $ 66,898
Add (subtract):
Depreciation and amortization 24,608 19,945 49,750 38,722
Amortization of discount and deferred debt charges 759 766 1,516 1,536
Loss on early extinguishment of debt 12,225
Customer billings greater than revenue recognized 1,819 1,524 138 2,701
Maintenance capital expenditures (4) (987 ) (2,242 ) (1,305 ) (3,067 )
Decrease in environmental liability (78 ) (313 ) (218 ) (559 )
Decrease in reimbursable deferred revenue (1,243 ) (923 ) (2,420 ) (1,848 )
Other non-cash adjustments   159       816     507     1,589  
Distributable cash flow $ 65,180     $ 60,908   $ 134,279   $ 118,197  
 
(4)   Maintenance capital expenditures are capital expenditures made to
replace partially or fully depreciated assets in order to maintain
the existing operating capacity of our assets and to extend their
useful lives. Maintenance capital expenditures include expenditures
required to maintain equipment reliability, tankage and pipeline
integrity, safety and to address environmental regulations.
 

Set forth below is certain balance sheet data.

         
June 30, December 31,
2018 2017
(In thousands)
Balance Sheet Data
Cash and cash equivalents $ 6,656 $ 7,776
Working capital $ 6,403 $ 18,906
Total assets $ 2,116,063 $ 2,154,114
Long-term debt $ 1,395,599 $ 1,507,308
Partners' equity (5) $ 468,397 $ 393,959
 
(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 would have been recorded in our financial
statements as increases to our properties and equipment and
intangible assets at the time of acquisition instead of decreases to
partners' equity.

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