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

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

Business Wire

DALLAS -- November 01, 2012

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                      Change
                                                                    from
                            September 30,
                            2012                 2011               2011
                            (In thousands, except per unit data)
Revenues
Pipelines:
Affiliates –
refined product             $  16,350            $  12,414          $ 3,936
pipelines
Affiliates –
intermediate                7,319                5,935              1,384
pipelines
Affiliates – crude          12,306               10,846             1,460     
pipelines
                            35,975               29,195             6,780
Third parties –
refined product             9,538                6,525              3,013     
pipelines
                            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            13,044               8,916              4,128
amortization
General and                 1,399                2,012              (613     )
administrative
                            35,767               27,326             8,441     
Operating income            36,729               21,710             15,019
                                                                     
Equity in earnings          877                  641                236
of SLC Pipeline
Interest expense,
including                   (12,540     )        (8,828      )      (3,712   )
amortization
Other income                —                    20                 (20      )
                            (11,663     )        (8,167      )      (3,496   )
Income before               25,066               13,543             11,523
income taxes
State income tax            (137        )        77                 (214     )
expense
Net income                  24,929               13,620             11,309
Allocation of net
loss attributable           146                  3,000              (2,854   )
to
Predecessors^(1)
Allocation of net
loss (income)
attributable to             (582        )        124                (706     )
noncontrolling
interests
Net income
attributable to             24,493               16,744             7,749
Holly Energy
Partners
General partner
interest in net
income, including           (5,299      )        (4,009      )      (1,290   )
incentive
distributions^(2)
Limited partners’
interest in net             $  19,194            $  12,735          $ 6,459   
income
Limited partners’
earnings per unit           $  0.68              $  0.58            $ 0.10    
– basic and
diluted:^(2)
Weighted average
limited partners’           28,268               22,079             6,189     
units outstanding
EBITDA^(3)                  $  49,770            $  33,228          $ 16,542  
Distributable cash          $  40,431            $  25,731          $ 14,700  
flow^(4)
                                                                              
Volumes (bpd)
Pipelines:
Affiliates –
refined product             114,113              96,105             18,008
pipelines
Affiliates –
intermediate                132,220              91,783             40,437
pipelines
Affiliates – crude          187,861              175,459            12,402
pipelines
                            434,194              363,347            70,847
Third parties –
refined product             66,274               44,212             22,062
pipelines
                            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               825,602              634,770            190,832
terminal assets
(bpd)
                                                                     
                            Nine Months Ended                       Change
                                                                    from
                            September 30,
                            2012                 2011               2011
                            (In thousands, except per unit data)
Revenues
Pipelines:
Affiliates –
refined product             $  46,726            $  33,370          $ 13,356
pipelines
Affiliates –
intermediate                21,076               15,637             5,439
pipelines
Affiliates – crude          33,844               30,296             3,548     
pipelines
                            101,646              79,303             22,343
Third parties –
refined product             27,856               27,588             268       
pipelines
                            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            39,899               24,627             15,272
amortization
General and                 5,925                4,948              977       
administrative
                            107,179              73,379             33,800    
Operating income            99,810               71,530             28,280
                                                                     
Equity in earnings          2,502                1,848              654
of SLC Pipeline
Interest expense,
including                   (34,269     )        (26,101     )      (8,168   )
amortization
Loss on early
extinguishment of           (2,979      )        —                  (2,979   )
debt
Other expense               —                    8                  (8       )
                            (34,746     )        (24,245     )      (10,501  )
Income before               65,064               47,285             17,779
income taxes
State income tax            (287        )        (169        )      (118     )
expense
Net income                  64,777               47,116             17,661
Allocation of net
loss attributable           4,199                3,515              684
to
Predecessors^(1)
Allocation of net
loss attributable           658                  295                363       
to noncontrolling
interests
Net income
attributable to             69,634               50,926             18,708
Holly Energy
Partners
General partner
interest in net
income, including           (16,724     )        (11,418     )      (5,306   )
incentive
distributions^(2)
Limited partners’
interest in net             $  52,910            $  39,508          $ 13,402  
income
Limited partners’
earnings per unit           $  1.91              $  1.79            $ 0.12    
– basic and
diluted:^(2)
Weighted average
limited partners’           27,666               22,079             5,587     
units outstanding
EBITDA^(3)                  $  139,165           $  100,282         $ 38,883  
Distributable cash          $  111,506           $  67,924          $ 43,582
flow^(4)
                                                                              
Volumes (bpd)
Pipelines:
Affiliates –
refined product             104,444              88,172             16,272
pipelines
Affiliates –
intermediate                130,972              81,618             49,354
pipelines
Affiliates – crude          169,922              157,598            12,324    
pipelines
                            405,338              327,388            77,950
Third parties –
refined product             62,301               48,107             14,194    
pipelines
                            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               786,515              592,463            194,052   
terminal assets
(bpd)

(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          Nine Months Ended

                         September 30,               September 30,
                         2012         2011           2012          2011
                         (In thousands)
Net income
attributable to          $ 24,493     $ 16,744       $ 69,634      $ 50,926
Holly Energy
Partners
Add (subtract):
Interest expense         10,738       8,520          29,045        25,198
Amortization of
discount and             1,802        308            5,224         903
deferred debt
charges
Loss on early
extinguishment of        —            —              2,979         —
debt
State income tax         137          (77      )     287           169
Depreciation and         13,044       8,916          39,899        24,627
amortization
Predecessor
depreciation and         (444     )   (1,183   )     (7,903    )   (1,541    )
amortization
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            Nine Months Ended

                      September 30,                 September 30,
                                                     
                      2012           2011           2012            2011
                      (In thousands)
Net income
attributable to       $ 24,493       $ 16,744       $ 69,634        $ 50,926
Holly Energy
Partners
Add (subtract):
Depreciation and      13,044         8,916          39,899          24,627
amortization
Predecessor
depreciation and      (444     )     (1,183   )     (7,903    )     (1,541   )
amortization
Amortization of
discount and          1,802          308            5,224           903
deferred debt
charges
Loss on early
extinguishment of     —              —              2,979           —
debt
Billed crude
revenue               917            —              2,753           —
settlement
Increase
(decrease) in         2,162          1,201          1,733           (3,917   )
deferred revenue
Maintenance
capital               (2,287   )     (453     )     (3,886    )     (3,586   )
expenditures*
Other non-cash        744            198            1,073           512       
adjustments
Distributable         $ 40,431       $ 25,731       $ 111,506       $ 67,924  
cash flow
                                                                              

* 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.

Contact:

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