HEP 3-31-2014 10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ______________________________________________________________________________________
FORM 10-Q
 ______________________________________________________________________________________

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________                    
Commission File Number: 1-32225
  ______________________________________________________________________________________
HOLLY ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
 ______________________________________________________________________________________
Delaware
 
20-0833098
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

2828 N. Harwood, Suite 1300
Dallas, Texas 75201
(Address of principal executive offices), (Zip code)
(214) 871-3555
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
 
 
 
 
 
 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  ¨   No  ý
The number of the registrant’s outstanding common units at April 25, 2014 was 58,657,048.

Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 

- 2 -
Table of Contentsril 19,


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical fact included in this Form 10-Q, including, but not limited to, those under “Results of Operations” and “Liquidity and Capital Resources” in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I are forward-looking statements. Forward-looking statements use words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “intend,” “should,” “would,” “could,” “believe,” “may,” and similar expressions and statements regarding our plans and objectives for future operations. These statements are based on our beliefs and assumptions and those of our general partner using currently available information and expectations as of the date hereof, are not guarantees of future performance and involve certain risks and uncertainties. Although we and our general partner believe that such expectations reflected in such forward-looking statements are reasonable, neither we nor our general partner can give assurance that our expectations will prove to be correct. All statements concerning our expectations for future results of operations are based on forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. Certain factors could cause actual results to differ materially from results anticipated in the forward-looking statements. These factors include, but are not limited to:
•
risks and uncertainties with respect to the actual quantities of petroleum products and crude oil shipped on our pipelines and/or terminalled, stored or 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, operational and legal risks and uncertainties detailed from time to time in our Securities and Exchange Commission filings.

Cautionary statements identifying important factors that could cause actual results to differ materially from our expectations are set forth in this Form 10-Q, including without limitation, the forward-looking statements that are referred to above. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2013 in “Risk Factors” and in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All forward-looking statements included in this Form 10-Q and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. 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.


- 3 -
Table of Contentsril 19,

PART I. FINANCIAL INFORMATION


Item 1.
Financial Statements
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS  
(in thousands, except unit data)

 
 
March 31, 2014
 
December 31, 2013
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
4,879

 
$
6,352

Accounts receivable:
 
 
 
 
Trade
 
5,365

 
5,061

Affiliates
 
29,060

 
29,675

 
 
34,425

 
34,736

Prepaid and other current assets
 
3,499

 
3,874

Total current assets
 
42,803

 
44,962

 
 
 
 
 
Properties and equipment, net
 
958,749

 
957,814

Transportation agreements, net
 
85,913

 
87,650

Goodwill
 
256,498

 
256,498

Investment in SLC Pipeline
 
24,701

 
24,741

Other assets
 
10,067

 
10,843

Total assets
 
$
1,378,731

 
$
1,382,508

 
 
 
 
 
LIABILITIES AND PARTNERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable:
 
 
 
 
Trade
 
$
11,163

 
$
14,414

Affiliates
 
4,590

 
8,484

 
 
15,753

 
22,898

 
 
 
 
 
Accrued interest
 
1,776

 
10,239

Deferred revenue
 
6,854

 
13,981

Accrued property taxes
 
3,328

 
2,603

Other current liabilities
 
2,149

 
1,845

Total current liabilities
 
29,860

 
51,566

 
 
 
 
 
Long-term debt
 
833,790

 
807,630

Other long-term liabilities
 
13,817

 
14,585

Deferred revenue
 
23,939

 
21,669

 
 
 
 
 
Class B unit
 
21,748

 
20,124

 
 
 
 
 
Equity:
 
 
 
 
Partners’ equity:
 
 
 
 
Common unitholders (58,657,048 units issued and outstanding
    at March 31, 2014 and December 31, 2013)
 
503,899

 
516,147

General partner interest (2% interest)
 
(147,024
)
 
(146,557
)
Accumulated other comprehensive loss
 
(49
)
 
(144
)
Total partners’ equity
 
356,826

 
369,446

Noncontrolling interest
 
98,751

 
97,488

Total equity
 
455,577

 
466,934

Total liabilities and equity
 
$
1,378,731

 
$
1,382,508


See accompanying notes.

- 4 -
Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                      (In thousands, except per unit data)

 
 
Three Months Ended March 31,
 
 
2014
 
2013
Revenues:
 
 
 
 
Affiliates
 
$
71,832

 
$
61,512

Third parties
 
15,172

 
12,786

 
 
87,004

 
74,298

Operating costs and expenses:
 
 
 
 
Operations (exclusive of depreciation and amortization)
 
22,812

 
25,865

Depreciation and amortization
 
15,588

 
14,154

General and administrative
 
3,151

 
3,232

 
 
41,551

 
43,251

Operating income
 
45,453

 
31,047

 
 
 
 
 
Other income (expense):
 
 
 
 
Equity in earnings of SLC Pipeline
 
522

 
657

Interest expense
 
(10,454
)
 
(12,484
)
Interest income
 
3

 
103

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

Gain on sale of assets
 
—

 
2,022

Other (income) expense
 
8

 
—

 
 
(17,598
)
 
(9,702
)
Income before income taxes
 
27,855

 
21,345

State income tax expense
 
(75
)
 
(56
)
Net income
 
27,780

 
21,289

Allocation of net income attributable to noncontrolling interests
 
(3,637
)
 
(2,890
)
Net income attributable to Holly Energy Partners
 
24,143

 
18,399

General partner interest in net income, including incentive distributions
 
(8,001
)
 
(6,231
)
Limited partners’ interest in net income
 
$
16,142

 
$
12,168

Limited partners’ per unit interest in earnings—basic and diluted
 
$
0.27

 
$
0.21

Weighted average limited partners’ units outstanding
 
58,657

 
56,990


See accompanying notes.


- 5 -

HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)

 
 
Three Months Ended March 31,
 
 
2014
 
2013
Net income
 
$
27,780

 
$
21,289

Other comprehensive income:
 
 
 
 
Change in fair value of cash flow hedging instruments
 
(443
)
 
58

Amortization of unrealized loss attributable to discontinued cash flow hedge
 
—

 
849

Reclassification adjustment to net income on partial settlement of cash flow hedge
 
538

 
504

Other comprehensive income
 
95

 
1,411

Comprehensive income before noncontrolling interest
 
27,875

 
22,700

Allocation of comprehensive income to noncontrolling interests
 
(3,637
)
 
(2,890
)
Comprehensive income attributable to Holly Energy Partners
 
$
24,238

 
$
19,810


See accompanying notes.


- 6 -
Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
 
Three Months Ended March 31,
 
 
2014
 
2013
Cash flows from operating activities
 
 
 
 
Net income
 
$
27,780

 
$
21,289

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
15,588

 
14,154

Gain on sale of assets
 
—

 
(2,022
)
Amortization of deferred charges
 
511

 
1,379

Amortization of restricted and performance units
 
820

 
1,123

Loss on early extinguishment of debt
 
7,677

 
—

(Increase) decrease in operating assets:
 
 
 
 
Accounts receivable—trade
 
(302
)
 
1,053

Accounts receivable—affiliates
 
615

 
539

Prepaid and other current assets
 
374

 
145

Increase (decrease) in operating liabilities:
 
 
 
 
Accounts payable—trade
 
2,568

 
(1,808
)
Accounts payable—affiliates
 
(3,894
)
 
253

Accrued interest
 
(8,463
)
 
(7,860
)
Deferred revenue
 
(4,857
)
 
1,686

Accrued property taxes
 
725

 
33

Other current liabilities
 
304

 
531

Other, net
 
(430
)
 
354

Net cash provided by operating activities
 
39,016

 
30,849

 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Additions to properties and equipment
 
(20,604
)
 
(6,645
)
Proceeds from sale of assets
 
—

 
2,481

Distributions in excess of equity in earnings of SLC Pipeline
 
40

 
30

Net cash used for investing activities
 
(20,564
)
 
(4,134
)
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
Borrowings under credit agreement
 
421,300

 
57,000

Repayments of credit agreement borrowings
 
(246,600
)
 
(110,000
)
Proceeds from issuance of common units
 
—

 
73,444

Redemption of senior notes
 
(156,188
)
 
—

Contribution from general partner
 
—

 
1,499

Distributions to HEP unitholders
 
(37,342
)
 
(32,709
)
Distributions to noncontrolling interest
 
(750
)
 
—

Purchase of units for incentive grants
 
(336
)
 
(2,719
)
Deferred financing costs
 
(9
)
 
—

Other
 
—

 
(274
)
Net cash used by financing activities
 
(19,925
)
 
(13,759
)
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
Increase (decrease) for the period
 
(1,473
)
 
12,956

Beginning of period
 
6,352

 
5,237

End of period
 
$
4,879

 
$
18,193

     

See accompanying notes.

- 7 -
Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
(Unaudited)
(In thousands)
 
 
 
Common
Units
 
General
Partner
Interest
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling Interest
 
Total Equity
 
 
 
Balance December 31, 2013
 
$
516,147

 
$
(146,557
)
 
$
(144
)
 
$
97,488

 
$
466,934

Distributions to HEP unitholders
 
(29,320
)
 
(8,022
)
 
—

 
—

 
(37,342
)
Distributions to UNEV joint venture partners
 
—

 
—

 
—

 
(750
)
 
(750
)
Purchase of units for incentive grants
 
(336
)
 
—

 
—

 
—

 
(336
)
Amortization of restricted and performance units
 
820

 
—

 
—

 
—

 
820

   Class B unit accretion
 
(1,592
)
 
(32
)
 
—

 
—

 
(1,624
)
Net income
 
18,180

 
7,587

 
—

 
2,013

 
27,780

Other comprehensive income
 
—

 
—

 
95

 
—

 
95

Balance March 31, 2014
 
$
503,899

 
$
(147,024
)
 
$
(49
)
 
$
98,751

 
$
455,577



See accompanying notes.



- 8 -
Table of Contentsril 19,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1:
Description of Business and Presentation of Financial Statements

Holly Energy Partners, L.P. (“HEP”) together with its consolidated subsidiaries, is a publicly held master limited partnership which is 39% owned (including the 2% general partner interest) by HollyFrontier Corporation (“HFC”) and its subsidiaries. We commenced operations on July 13, 2004 upon the completion of our initial public offering. In these consolidated financial statements, the words “we,” “our,” “ours” and “us” refer to HEP unless the context otherwise indicates.

We own and operate petroleum product and crude oil pipelines and terminal, tankage and loading rack facilities that support HFC’s refining and marketing operations in the Mid-Continent, Southwest and Rocky Mountain regions of the United States and Alon USA, Inc.’s (“Alon”) refinery in Big Spring, Texas. Additionally, we own a 75% interest in UNEV Pipeline, LLC (“UNEV”), which owns a 417-mile, 12-inch refined products pipeline running from Woods Cross, Utah to Las Vegas, Nevada (the “UNEV Pipeline”), product terminals near Cedar City, Utah and Las Vegas, Nevada and related assets, and a 25% interest in SLC Pipeline LLC, which owns a 95-mile intrastate crude oil pipeline system (the “SLC Pipeline”) that serves refineries in the Salt Lake City, Utah area.

We generate revenues by charging tariffs for transporting petroleum products and crude oil through our pipelines, by charging fees for terminalling and storing refined products and other hydrocarbons, and providing other services at our storage tanks and terminals. We do not take ownership of products that we transport, terminal or store, and therefore, we are not exposed directly to changes in commodity prices.

The consolidated financial statements included herein have been prepared without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The interim financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of our results for the interim periods. Such adjustments are considered to be of a normal recurring nature. Although certain notes and other information required by U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our Form 10-K for the year ended December 31, 2013. Results of operations for interim periods are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2014.


Note 2:
Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, debt and interest rate swaps. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value. Debt consists of outstanding principal under our revolving credit agreement (which approximates fair value as interest rates are reset frequently at current interest rates) and our fixed interest rate senior notes.

Fair value measurements are derived using inputs (assumptions that market participants would use in pricing an asset or liability including assumptions about risk). GAAP categorizes inputs used in fair value measurements into three broad levels as follows:
•
(Level 1) Quoted prices in active markets for identical assets or liabilities.
•
(Level 2) Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, similar assets and liabilities in markets that are not active or can be corroborated by observable market data.
•
(Level 3) Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes valuation techniques that involve significant unobservable inputs.


- 9 -

HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


The carrying amounts and estimated fair values of our senior notes and interest rate swaps were as follows:
 
 
 
 
March 31, 2014
 
December 31, 2013
Financial Instrument
 
Fair Value Input Level
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
 
 
 
 
(In thousands)
Liabilities:
 
 
 
 
 
 
 
 
 
 
Senior notes:
 
 
 
 
 
 
 
 
 
 
6.5% senior notes
 
Level 2
 
$
296,090

 
$
319,500

 
$
295,927

 
$
313,500

8.25% senior notes
 
Level 2
 
—

 
—

 
148,703

 
158,250

 
 
 
 
296,090

 
319,500

 
444,630

 
471,750

 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Level 2
 
49

 
49

 
144

 
144

 
 
 
 
$
296,139

 
$
319,549

 
$
444,774

 
$
471,894


Level 2 Financial Instruments
Our senior notes and interest rate swaps are measured at fair value using Level 2 inputs. The fair value of the senior notes is based on market values provided by a third-party, which were derived using market quotes for similar type instruments, a Level 2 input. The fair value of our interest rate swaps is based on the net present value of expected future cash flows related to both variable and fixed-rate legs of the swap agreement. The measurements are computed using the forward London Interbank Offered Rate (“LIBOR”) yield curve, a market-based observable input.

See Note 6 for additional information on these instruments.


Note 3:
Properties and Equipment 

The carrying amounts of our properties and equipment are as follows:
 
 
March 31,
2014
 
December 31,
2013
 
 
(In thousands)
Pipelines, terminals and tankage
 
$
1,077,058

 
$
1,077,037

Land and right of way
 
63,425

 
63,425

Construction in progress
 
63,828

 
50,454

Other
 
19,995

 
19,997

 
 
1,224,306

 
1,210,913

Less accumulated depreciation
 
265,557

 
253,099

 
 
$
958,749

 
$
957,814


We capitalized $0.4 million and $0.1 million in interest attributable to construction projects during the three months ended March 31, 2014 and 2013, respectively.

Depreciation expense was $13.7 million and $12.3 million for the three months ended March 31, 2014 and 2013, respectively.


Note 4:
Transportation Agreements

Our transportation agreements represent a portion of the total purchase price of certain assets acquired from Alon in 2005 and from HFC in 2008. The Alon agreement is being amortized over 30 years ending 2035 (the initial 15-year term of the agreement plus an expected 15-year extension period), and the HFC agreement is being amortized over 15 years ending 2023 (the term of the HFC agreement).


- 10 -

HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


The carrying amounts of our transportation agreements are as follows:
 
 
March 31,
2014
 
December 31,
2013
 
 
(In thousands)
Alon transportation agreement
 
$
59,933

 
$
59,933

HFC transportation agreement
 
74,231

 
74,231

 
 
134,164

 
134,164

Less accumulated amortization
 
48,251

 
46,514

 
 
$
85,913

 
$
87,650


We have additional transportation agreements with HFC resulting from historical transactions consisting of pipeline, terminal and tankage assets contributed to us or acquired from HFC. These transactions occurred while we were a consolidated variable interest entity of HFC, therefore, our basis in these agreements is zero and does not reflect a step-up in basis to fair value.


Note 5:
Employees, Retirement and Incentive Plans

Direct support for our operations is provided by Holly Logistic Services, L.L.C., an HFC subsidiary, which utilizes personnel employed by HFC who are dedicated to performing services for us. Their costs, including salaries, bonuses, payroll taxes, benefits and other direct costs, are charged to us monthly in accordance with an omnibus agreement that we have with HFC. These employees participate in the retirement and benefit plans of HFC. Our share of retirement and benefit plan costs was $1.7 million and $1.9 million for the three months ended March 31, 2014 and 2013, respectively.

We have an incentive plan (“Long-Term Incentive Plan”) for employees and non-employee directors who perform services for us. The Long-Term Incentive Plan consists of four components: restricted or phantom units, performance units, unit options and unit appreciation rights. Our accounting policy for the recognition of compensation expense for awards with pro-rata vesting (a significant proportion of our awards) is to expense the costs ratably over the vesting periods.

As of March 31, 2014, we have three types of incentive-based awards which are described below. The compensation cost charged against income was $0.8 million and $1.1 million for the three months ended March 31, 2014 and 2013, respectively. We currently purchase units in the open market instead of issuing new units for settlement of all unit awards under our Long-Term Incentive Plan. As of March 31, 2014, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which 1,635,469 have not yet been granted, assuming no forfeitures of the unvested units and full achievement of goals for the performance units already granted.

Restricted and Phantom Units
Under our Long-Term Incentive Plan, we grant restricted units to non-employee directors and selected employees who perform services for us, with most awards vesting over a period of one to three years. Although full ownership of the units does not transfer to the recipients until the units vest, the recipients have distribution and voting rights on these units from the date of grant.

In addition, we grant phantom units to certain employees, which vest over a period of one year. Vested units are paid in common units. Full ownership of the units does not transfer to the recipient until the units vest, and the recipients do not have voting or distribution rights on these units until they vest.

The fair value of each restricted unit and phantom unit award is measured at the market price as of the date of grant and is amortized over the vesting period.

There was no activity or changes for the restricted unit and phantom units during the three months ended March 31, 2014. There were 122,951 nonvested units outstanding as of March 31, 2014, at a weighted average grant date fair value of $33.36 per share. As of March 31, 2014, there was $2.2 million of total unrecognized compensation expense related to nonvested restricted unit and phantom unit grants, which is expected to be recognized over a weighted-average period of 1.2 years.


- 11 -

HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


Performance Units
Under our Long-Term Incentive Plan, we grant performance units to selected executives who perform services for us. Performance units granted are payable based upon the growth in our distributable cash flow per common unit over the performance period, and vest over a period of three years. As of March 31, 2014, estimated unit payouts for outstanding nonvested performance unit awards were at 100%.

No performance units were granted during three months ended March 31, 2014. Performance units granted in 2013 vest over a three-year performance period ending December 31, 2015, for performance units granted in February 2013 and December 31, 2016, for performance units granted in November 2013 and are payable in HEP common units. The number of units actually earned will be based on the growth of our distributable cash flow per common unit over the performance period and can range from 0% to 200% of the target number of performance units granted (in the case of our Chairman, who received a performance unit award in March 2013 prior to his retirement from Holly Logistic Services, L.L.C., our ultimate general partner ("HLS")) or from 50% to 150% of the target number of performance units granted (in the case of other officers granted performance units). Although common units are not transferred to the recipients until the performance units vest, the recipients have distribution rights with respect to the common units from the date of grant.

A summary of performance unit activity and changes during the three months ended March 31, 2014, is presented below:
Performance Units
 
Units
Outstanding at January 1, 2014 (nonvested)
 
75,216

Vesting and transfer of common units to recipients
 
(17,938
)
Outstanding at March 31, 2014 (nonvested)
 
57,278


The grant-date fair value of performance units vested and transferred to recipients during the three months ended March 31, 2014, was $0.5 million. Based on the weighted average fair value at March 31, 2014, of $2.1 million, there was $1.2 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of 1.8 years.


Note 6:
Debt

Credit Agreement
We have a $650 million senior secured revolving credit facility expiring in November 2018 (the “Credit Agreement”) that is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. It is also available to fund letters of credit up to a $50 million sub-limit.

Our obligations under the Credit Agreement are collateralized by substantially all of our assets. Indebtedness under the Credit Agreement involves recourse to HEP Logistics Holdings, L.P. (“HEP Logistics”), our general partner, and is guaranteed by our material wholly-owned subsidiaries. Any recourse to HEP Logistics would be limited to the extent of its assets, which other than its investment in us, are not significant. We may prepay all loans at any time without penalty, except for payment of certain breakage and related costs.

The Credit Agreement imposes certain requirements on us which we are currently in compliance with, including: a prohibition against distribution to unitholders if, before or after the distribution, a potential default or an event of default as defined in the agreement would occur; limitations on our ability to incur debt, make loans, acquire other companies, change the nature of our business, enter into a merger or consolidation, or sell assets; and covenants that require maintenance of a specified EBITDA to interest expense ratio, total debt to EBITDA ratio and senior debt to EBITDA ratio. If an event of default exists under the Credit Agreement, the lenders will be able to accelerate the maturity of the debt and exercise other rights and remedies.

Senior Notes
In March 2014, we redeemed the $150 million aggregate principal amount of 8.25% senior notes (the "8.25% Senior Notes")maturing March 2018 at a redemption cost of $156.2 million, at which time we recognized a $7.7 million early extinguishment loss consisting of a $6.2 million debt redemption premium and unamortized discount and financing costs of $1.5 million. We funded the redemption with borrowings under our Credit Agreement.


- 12 -

HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


We have $300 million in aggregate principal amount outstanding of 6.5% senior notes (the "6.5% Senior Notes") maturing March 2020. The 6.5% Senior Notes are unsecured and impose certain restrictive covenants, with which we are currently in compliance, including limitations on our ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. At any time when the 6.5% Senior Notes are rated investment grade by both Moody’s and Standard & Poor’s and no default or event of default exists, we will not be subject to many of the foregoing covenants. Additionally, we have certain redemption rights at varying premiums over face value under the 6.5% Senior Notes.

Indebtedness under the 6.5% Senior Notes involves recourse to HEP Logistics, our general partner, and is guaranteed by our wholly-owned subsidiaries. However, any recourse to HEP Logistics would be limited to the extent of its assets, which other than its investment in us, are not significant.

Long-term Debt
The carrying amounts of our long-term debt are as follows:
 
 
March 31,
2014
 
December 31,
2013
 
 
(In thousands)
Credit Agreement
 
$
537,700

 
$
363,000

6.5% Senior Notes
 
 
 
 
Principal
 
300,000

 
300,000

Unamortized discount
 
(3,910
)
 
(4,073
)
 
 
296,090

 
295,927

8.25% Senior Notes
 
 
 
 
Principal
 
—

 
150,000

Unamortized discount
 
—

 
(1,297
)
 
 
—

 
148,703

 
 
 
 
 
Total long-term debt
 
$
833,790

 
$
807,630


Interest Rate Risk Management
We use interest rate swaps (derivative instruments) to manage our exposure to interest rate risk.

As of March 31, 2014, we have three interest rate swaps that hedge our exposure to the cash flow risk caused by the effects of LIBOR changes on $305 million of Credit Agreement advances. Our first interest rate swap effectively converts $155 million of our LIBOR based debt to fixed rate debt having an interest rate of 0.99% plus an applicable margin of 2.00% as of March 31, 2014, which equaled an effective interest rate of 2.99%. This swap contract matures in February 2016. We also have two additional interest rate swaps with identical terms which effectively convert $150 million of our LIBOR based debt to fixed rate debt having an interest rate of 0.74% plus an applicable margin of 2.00% as of March 31, 2014, which equaled an effective interest rate of 2.74%. Both of these swap contracts mature in July 2017.

We have designated these interest rate swaps as cash flow hedges. Based on our assessment of effectiveness using the change in variable cash flows method, we have determined that these interest rate swaps are effective in offsetting the variability in interest payments on $305 million of our variable rate debt resulting from changes in LIBOR. Under hedge accounting, we adjust our cash flow hedges on a quarterly basis to their fair values with the offsetting fair value adjustments to accumulated other comprehensive income (loss). Also on a quarterly basis, we measure hedge effectiveness by comparing the present value of the cumulative change in the expected future interest to be paid or received on the variable leg of our swaps against the expected future interest payments on $305 million of our variable rate debt. Any ineffectiveness is recorded directly to interest expense. As of March 31, 2014, we had no ineffectiveness on our cash flow hedges.

At March 31, 2014, we have accumulated other comprehensive loss of $49 thousand that relates to our current cash flow hedging instruments. Approximately $0.4 million will be transferred from accumulated other comprehensive loss into interest expense as interest is paid on the underlying swap agreement over the next twelve-month period, assuming interest rates remain unchanged.


- 13 -

HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


Additional information on our interest rate swaps is as follows:
Derivative Instrument
 
Balance Sheet
Location
 
Fair Value
 
Location of Offsetting
Balance
 
Offsetting
Amount
 
 
(In thousands)
March 31, 2014
 
 
 
 
 
 
 
 
Interest rate swaps designated as cash flow hedging instrument:
 
 
 
 
 
 
Variable-to-fixed interest rate swap contracts ($155 million of LIBOR-based debt interest)
 
Other long-term
    liabilities
 
$
(1,677
)
 
Accumulated other
    comprehensive loss
 
$
(1,677
)
Variable-to-fixed interest rate swap contracts ($150 million of LIBOR-based debt interest)
 
Other long-term
    assets
 
1,628

 
Accumulated other
    comprehensive gain
 
1,628

 
 
 
 
$
(49
)
 
 
 
$
(49
)
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
Interest rate swaps designated as cash flow hedging instrument:
 
 
 
 
 
 
Variable-to-fixed interest rate swap contracts ($155 million of LIBOR-based debt interest)
 
Other long-term
    liabilities
 
$
(1,814
)
 
Accumulated other
    comprehensive loss
 
$
(1,814
)
Variable-to-fixed interest rate swap contracts ($150 million of LIBOR-based debt interest)
 
Other long-term
    assets
 
1,670

 
Accumulated other
    comprehensive gain
 
1,670

 
 
 
 
$
(144
)
 
 
 
$
(144
)

Interest Expense and Other Debt Information
Interest expense consists of the following components:
 
 
Three Months Ended March 31,
 
 
2014
 
2013
 
 
(In thousands)
Interest on outstanding debt:
 
 
 
 
Credit Agreement, net of interest on interest rate swaps
 
$
2,698

 
$
3,081

6.5% Senior Notes
 
4,875

 
4,875

8.25% Senior Notes
 
2,544

 
3,094

Amortization of discount and deferred debt issuance costs
 
511

 
530

Amortization of unrecognized loss attributable to terminated cash flow hedge
 
—

 
849

Commitment fees
 
202

 
124

Total interest incurred
 
10,830

 
12,553

Less capitalized interest
 
376

 
69

Net interest expense
 
$
10,454

 
$
12,484

Cash paid for interest
 
$
18,782

 
$
19,033



Note 7:
Significant Customers

All revenues are domestic revenues, of which 93% are generated currently from our two largest customers: HFC and Alon. The vast majority of our revenues are derived from activities conducted in the southwest United States.

The following table presents the percentage of total revenues generated by each of these customers:
 
 
Three Months Ended March 31,
 
 
2014
 
2013
HFC
 
83
%
 
83
%
Alon
 
10
%
 
9
%


- 14 -

HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


Note 8:
Related Party Transactions

We serve HFC's refineries under long-term pipeline and terminal, tankage and throughput agreements expiring from 2019 to 2026. Under these agreements, HFC agrees to transport, store and throughput volumes of refined product and crude oil on our pipelines and terminal, tankage and loading rack facilities that result in minimum annual payments to us. These minimum annual payments or revenues are subject to annual tariff rate adjustments on July 1, based on the Producer Price Index (“PPI”) or Federal Energy Regulatory Commission (“FERC”) index. As of March 31, 2014, these agreements with HFC will result in minimum annual payments to us of $225.5 million.

If HFC fails to meet its minimum volume commitments under the agreements in any quarter, it will be required to pay us the amount of any shortfall in cash by the last day of the month following the end of the quarter. Under certain of these agreements, a shortfall payment may be applied as a credit in the following four quarters after its minimum obligations are met.

Under certain provisions of an omnibus agreement we have with HFC (the “Omnibus Agreement”), we pay HFC an annual administrative fee (currently $2.3 million) for the provision by HFC or its affiliates of various general and administrative services to us. This fee does not include the salaries of personnel employed by HFC who perform services for us on behalf of HLS or the cost of their employee benefits, which are charged to us separately by HFC. Also, we reimburse HFC and its affiliates for direct expenses they incur on our behalf.

Related party transactions with HFC are as follows:
•
Revenues received from HFC were $71.8 million and $61.5 million for the three months ended March 31, 2014 and 2013, respectively.
•
HFC charged us general and administrative services under the Omnibus Agreement of $0.6 million for the three months ended March 31, 2014 and 2013, respectively.
•
We reimbursed HFC for costs of employees supporting our operations of $9.2 million and $9.8 million for the three months ended March 31, 2014 and 2013, respectively.
•
HFC reimbursed us $4.5 million and $4.9 million for the three months ended March 31, 2014 and 2013, respectively, for certain reimbursable costs and capital projects.
•
We distributed $19.2 million and $17.4 million for the three months ended March 31, 2014 and 2013, respectively, to HFC as regular distributions on its common units and general partner interest, including general partner incentive distributions.
•
Accounts receivable from HFC were $29.1 million and $29.7 million at March 31, 2014, and December 31, 2013, respectively.
•
Accounts payable to HFC were $4.6 million and $8.5 million at March 31, 2014, and December 31, 2013, respectively.
•
Revenues for the three months ended March 31, 2014, include $7.4 million of shortfall payments billed in 2013, as HFC did not exceed its minimum volume commitment in any of the subsequent four quarters. Deferred revenue in the consolidated balance sheets at March 31, 2014, and December 31, 2013, includes $3.7 million and $10.1 million, respectively, relating to certain shortfall billings. It is possible that HFC may not exceed its minimum obligations to receive credit for any of the $3.7 million deferred at March 31, 2014.


Note 9:
Partners’ Equity

As of March 31, 2014, HFC held 22,380,030 of our common units and the 2% general partner interest, which together constituted a 39% ownership interest in us.

Allocations of Net Income
Net income attributable to HEP is 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 includes incentive distributions that are declared subsequent to quarter end. After the amount of incentive distributions is allocated to the general partner, the remaining net income attributable to HEP is allocated to the partners based on their weighted-average ownership percentage during the period.


- 15 -

HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


The following table presents the allocation of the general partner interest in net income for the periods presented below: 
 
 
Three Months Ended March 31,
 
 
2014
 
2013
 
 
(In thousands)
General partner interest in net income
 
$
329

 
$
248

General partner incentive distribution
 
7,672

 
5,983

Total general partner interest in net income
 
$
8,001

 
$
6,231


Cash Distributions
Our general partner, HEP Logistics, is entitled to incentive distributions if the amount we distribute with respect to any quarter exceeds specified target levels.

On April 24, 2014 we announced our cash distribution for the first quarter of 2014 of $0.5075 per unit. The distribution is payable on all common and general partner units and will be paid May 15, 2014 to all unitholders of record on May 4, 2014.

The following table presents the allocation of our regular quarterly cash distributions to the general and limited partners for the periods in which they apply. Our distributions are declared subsequent to quarter end; therefore, the amounts presented do not reflect distributions paid during the periods presented below.
 
 
Three Months Ended March 31,
 
 
2014
 
2013
 
 
(In thousands, except per unit data)
General partner interest in distribution
 
$
790

 
$
719

General partner incentive distribution
 
7,672

 
5,983

Total general partner distribution
 
8,462

 
6,702

Limited partner distribution
 
29,768

 
28,009

Total regular quarterly cash distribution
 
$
38,230

 
$
34,711

Cash distribution per unit applicable to limited partners
 
$
0.5075

 
$
0.4775


As a master limited partnership, we distribute our available cash, which historically has exceeded our net income attributable to HEP because depreciation and amortization expense represents a non-cash charge against income. The result is a decline in our partners’ equity since our regular quarterly distributions have exceeded our quarterly net income attributable to HEP. Additionally, if the asset contributions and acquisitions from HFC had occurred while we were not a consolidated variable interest entity of HFC, our acquisition cost, in excess of HFC’s historical basis in the transferred assets of $305.3 million would have been recorded in our financial statements at the time of acquisition, as increases to our properties and equipment and intangible assets instead of decreases to our partners’ equity.


Note 10:
Supplemental Guarantor/Non-Guarantor Financial Information

Obligations of HEP (“Parent”) under the Senior Notes have been jointly and severally guaranteed by each of its direct and indirect 100% owned subsidiaries (“Guarantor Subsidiaries”). These guarantees are full and unconditional, subject to certain customary release provisions. These circumstances include (i) when a Guarantor Subsidiary is sold or sells all or substantially all of its assets, (ii) when a Guarantor Subsidiary is declared “unrestricted” for covenant purposes, (iii) when a Guarantor Subsidiary's guarantee of other indebtedness is terminated or released and (iv) when the requirements for legal defeasance or covenant defeasance or to discharge the Senior Notes have been satisfied.

The following financial information presents condensed consolidating balance sheets, statements of comprehensive income, and statements of cash flows of the Parent, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries. The information has been presented as if the Parent accounted for its ownership in the Guarantor Subsidiaries, and the Guarantor Restricted Subsidiaries accounted for the ownership of the Non-Guarantor Non-Restricted Subsidiaries, using the equity method of accounting.


- 16 -

HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


Condensed Consolidating Balance Sheet
March 31, 2014
 
Parent
 
Guarantor
Restricted Subsidiaries
 
Non-Guarantor Non-Restricted Subsidiaries
 
Eliminations
 
Consolidated
 
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2

 
$
(423
)
 
$
5,300

 
$
—

 
$
4,879

Accounts receivable
 
—

 
31,352

 
3,275

 
(202
)
 
34,425

Intercompany accounts receivable
 
—

 
272,467

 
—

 
(272,467
)
 
—

Prepaid and other current assets
 
156

 
2,359

 
984

 
—

 
3,499

Total current assets
 
158

 
305,755

 
9,559

 
(272,669
)
 
42,803

 
 
 
 
 
 
 
 
 
 
 
Properties and equipment, net
 
—

 
568,047

 
390,702

 
—

 
958,749

Investment in subsidiaries
 
926,369

 
296,253

 
—

 
(1,222,622
)
 
—

Transportation agreements, net
 
—

 
85,913

 
—

 
—

 
85,913

Goodwill
 
—

 
256,498

 
—

 
—

 
256,498

Investment in SLC Pipeline
 
—

 
24,701

 
—

 
—

 
24,701

Other assets
 
1,399

 
8,668

 
—

 
—

 
10,067

Total assets
 
$
927,926

 
$
1,545,835

 
$
400,261

 
$
(1,495,291
)
 
$
1,378,731

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND PARTNERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
—

 
$
13,540

 
$
2,415

 
$
(202
)
 
$
15,753

Intercompany accounts payable
 
272,467

 
—

 
—

 
(272,467
)
 
—

Accrued interest
 
1,679

 
97

 
—

 
—

 
1,776

Deferred revenue
 
—

 
5,834

 
1,020

 
—

 
6,854

Accrued property taxes
 
—

 
1,656

 
1,672

 
—

 
3,328

Other current liabilities
 
642

 
1,507

 
—

 
—

 
2,149

Total current liabilities
 
274,788

 
22,634

 
5,107

 
(272,669
)
 
29,860


 
 
 
 
 
 
 
 
 
 
Long-term debt
 
296,201

 
537,589

 
—

 
—

 
833,790

Other long-term liabilities
 
111

 
13,556

 
150

 
—

 
13,817

Deferred revenue
 
—

 
23,939

 
—

 
—

 
23,939

Class B unit
 
—

 
21,748

 
—

 
—

 
21,748

Equity - partners
 
356,826

 
926,369

 
395,004

 
(1,321,373
)
 
356,826

Equity - noncontrolling interest
 
—

 
—

 
—

 
98,751

 
98,751

Total liabilities and partners’ equity
 
$
927,926

 
$
1,545,835

 
$
400,261

 
$
(1,495,291
)
 
$
1,378,731



- 17 -

HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



Condensed Consolidating Balance Sheet
December 31, 2013
 
Parent
 
Guarantor
Restricted Subsidiaries
 
Non-Guarantor Non-Restricted Subsidiaries
 
Eliminations
 
Consolidated
 
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2

 
$
1,447

 
$
4,903

 
$
—

 
$
6,352

Accounts receivable
 
—

 
31,107

 
4,543

 
(914
)
 
34,736

Intercompany accounts receivable
 
—

 
62,516

 
—

 
(62,516
)
 
—

Prepaid and other current assets
 
234

 
2,590

 
1,050

 
—

 
3,874

Total current assets
 
236

 
97,660

 
10,496

 
(63,430
)
 
44,962

 
 
 
 
 
 
 
 
 
 
 
Properties and equipment, net
 
—

 
564,847

 
392,967

 
—

 
957,814

Investment in subsidiaries
 
885,598

 
292,464

 
—

 
(1,178,062
)
 
—

Transportation agreements, net
 
—

 
87,650

 
—

 
—

 
87,650

Goodwill
 
—

 
256,498

 
—

 
—

 
256,498

Investment in SLC Pipeline
 
—

 
24,741

 
—

 
—

 
24,741

Other assets
 
1,684

 
9,159

 
—

 
—

 
10,843

Total assets
 
$
887,518

 
$
1,333,019

 
$
403,463

 
$
(1,241,492
)
 
$
1,382,508

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND PARTNERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
—

 
$
18,966

 
$
4,846

 
$
(914
)
 
$
22,898

Intercompany accounts payable
 
62,516

 
—

 
—

 
(62,516
)
 
—

Accrued interest
 
10,198

 
41

 
—

 
—

 
10,239

Deferred revenue
 
—

 
6,406

 
7,575

 
—

 
13,981

Accrued property taxes
 
—

 
1,661

 
942

 
—

 
2,603

Other current liabilities
 
629

 
1,216

 
—

 
—

 
1,845

Total current liabilities
 
73,343

 
28,290

 
13,363

 
(63,430
)
 
51,566

 
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
444,630

 
363,000

 
—

 
—

 
807,630

Other long-term liabilities
 
99

 
14,338

 
148

 
—

 
14,585

Deferred revenue
 
—

 
21,669

 
—

 
—

 
21,669

Class B unit
 
—

 
20,124

 
—

 
—

 
20,124

Equity - partners
 
369,446

 
885,598

 
389,952

 
(1,275,550
)
 
369,446

Equity - noncontrolling interest
 
—

 
—

 
—

 
97,488

 
97,488

Total liabilities and partners’ equity
 
$
887,518

 
$
1,333,019

 
$
403,463

 
$
(1,241,492
)
 
$
1,382,508


- 18 -

HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


Condensed Consolidating Statement of Comprehensive Income
Three Months Ended March 31, 2014
 
Parent
 
Guarantor Restricted
Subsidiaries
 
Non-Guarantor Non-restricted Subsidiaries
 
Eliminations
 
Consolidated
 
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
Affiliates
 
$
—

 
$
61,615

 
$
10,524

 
$
(307
)
 
$
71,832

Third parties
 
—

 
11,081

 
4,091

 
—

 
15,172

 
 
—

 
72,696

 
14,615

 
(307
)
 
87,004

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
 
Operations (exclusive of depreciation and amortization)
 
—

 
20,151

 
2,968

 
(307
)
 
22,812

Depreciation and amortization
 
—

 
11,993

 
3,595

 
—

 
15,588

General and administrative
 
1,058

 
2,093

 
—

 
—

 
3,151

 
 
1,058

 
34,237

 
6,563

 
(307
)
 
41,551

Operating income (loss)
 
(1,058
)
 
38,459

 
8,052

 
—

 
45,453

Equity in earnings of subsidiaries
 
40,564

 
6,039

 
—

 
(46,603
)
 
—

Equity in earnings of SLC Pipeline
 
—

 
522

 
—

 
—

 
522

Interest expense
 
(7,686
)
 
(2,768
)
 
—

 
—

 
(10,454
)
Interest income
 
—

 
3

 
—

 
—

 
3

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

 
—

 
—

 
(7,677
)
Other (income) expense
 
—

 
8

 
—

 
—

 
8

 
 
25,201

 
3,804

 
—

 
(46,603
)
 
(17,598
)
Income before income taxes
 
24,143

 
42,263

 
8,052

 
(46,603
)
 
27,855

State income tax expense
 
—

 
(75
)
 
—

 
—

 
(75
)
Net income
 
24,143

 
42,188

 
8,052

 
(46,603
)
 
27,780

Allocation of net income attributable to noncontrolling interests
 
—

 
—

 
—

 
(3,637
)
 
(3,637
)
Net income attributable to Holly Energy Partners
 
24,143

 
42,188

 
8,052

 
(50,240
)
 
24,143

Other comprehensive income
 
95

 
95

 
—

 
(95
)
 
95

Comprehensive income
 
$
24,238

 
$
42,283

 
$
8,052

 
$
(50,335
)
 
$
24,238




- 19 -

HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



Condensed Consolidating Statement of Comprehensive Income
Three Months Ended March 31, 2013
 
Parent
 
Guarantor
Restricted Subsidiaries
 
Non-Guarantor Non-Restricted Subsidiaries
 
Eliminations
 
Consolidated
 
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
Affiliates
 
$
—

 
$
54,412

 
$
7,402

 
$
(302
)
 
$
61,512

Third parties
 
—

 
8,407

 
4,379

 
—

 
12,786

 
 
—

 
62,819

 
11,781

 
(302
)
 
74,298

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
 
Operations (exclusive of depreciation and amortization)
 
—

 
23,366

 
2,801

 
(302
)
 
25,865

Depreciation and amortization
 
—

 
10,570

 
3,584

 
—

 
14,154

General and administrative
 
808

 
2,424

 
—

 
—

 
3,232

 
 
808

 
36,360

 
6,385

 
(302
)
 
43,251

Operating income (loss)
 
(808
)
 
26,459

 
5,396

 
—

 
31,047

Equity in earnings of subsidiaries
 
27,459

 
4,124

 
—

 
(31,583
)
 
—

Equity in earnings of SLC Pipeline
 
—

 
657

 
—

 
—

 
657

Interest expense
 
(8,252
)
 
(4,232
)
 
—

 
—

 
(12,484
)
Interest income
 
—

 
—

 
103

 
—

 
103

Gain on sale of assets
 
—

 
2,022

 
—

 
—

 
2,022

 
 
19,207

 
2,571

 
103

 
(31,583
)
 
(9,702
)
Income before income taxes
 
18,399

 
29,030

 
5,499

 
(31,583
)
 
21,345

State income tax expense
 
—

 
(56
)
 
—

 
—

 
(56
)
Net income
 
18,399

 
28,974

 
5,499

 
(31,583
)
 
21,289

Allocation of net income attributable to noncontrolling interests
 
—

 
—

 
—

 
(2,890
)
 
(2,890
)
Net income attributable to Holly Energy Partners
 
18,399

 
28,974

 
5,499

 
(34,473
)
 
18,399

Other comprehensive income
 
1,411

 
1,411

 
—

 
(1,411
)
 
1,411

Comprehensive income
 
$
19,810

 
$
30,385

 
$
5,499

 
$
(35,884
)
 
$
19,810




- 20 -

HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



Condensed Consolidating Statement of Cash Flows
Three Months Ended March 31, 2014
 
Parent
 
Guarantor
Restricted Subsidiaries
 
Non-Guarantor Non-Restricted Subsidiaries
 
Eliminations
 
Consolidated
 
 
(In thousands)
Cash flows from operating activities
 
$
(16,085
)
 
$
48,054

 
$
7,047

 
$
—

 
$
39,016

 
 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
 
 
 
 
 
 
Additions to properties and equipment
 
—

 
(16,954
)
 
(3,650
)
 
—

 
(20,604
)
Distributions from UNEV joint venture partners
 
—

 
2,250

 
—

 
(2,250
)
 
—

Distributions in excess of earnings of SLC Pipeline
 
—

 
40

 
—

 
—

 
40

 
 
—

 
(14,664
)
 
(3,650
)
 
(2,250
)
 
(20,564
)
 
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
 
Net borrowings under credit agreement
 
—

 
174,700

 
—

 
—

 
174,700

Net intercompany financing activities
 
209,951

 
(209,951
)
 
—

 
—

 
—

Redemption of senior notes
 
(156,188
)