HEP 9-30-2014 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 September 30, 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 October 24, 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)
 
 
September 30, 2014
 
December 31, 2013
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
1,667

 
$
6,352

Accounts receivable:
 
 
 
 
Trade
 
5,761

 
5,061

Affiliates
 
30,211

 
29,675

 
 
35,972

 
34,736

Prepaid and other current assets
 
4,419

 
3,874

Total current assets
 
42,058

 
44,962

 
 
 
 
 
Properties and equipment, net
 
971,560

 
957,814

Transportation agreements, net
 
82,440

 
87,650

Goodwill
 
256,498

 
256,498

Investment in SLC Pipeline
 
24,579

 
24,741

Other assets
 
9,034

 
10,843

Total assets
 
$
1,386,169

 
$
1,382,508

 
 
 
 
 
LIABILITIES AND PARTNERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable:
 
 
 
 
Trade
 
$
10,792

 
$
14,414

Affiliates
 
4,293

 
8,484

 
 
15,085

 
22,898

 
 
 
 
 
Accrued interest
 
1,823

 
10,239

Deferred revenue
 
14,271

 
13,981

Accrued property taxes
 
6,469

 
2,603

Other current liabilities
 
2,862

 
1,845

Total current liabilities
 
40,510

 
51,566

 
 
 
 
 
Long-term debt
 
851,416

 
807,630

Other long-term liabilities
 
13,374

 
14,585

Deferred revenue
 
26,432

 
21,669

 
 
 
 
 
Class B unit
 
25,082

 
20,124

 
 
 
 
 
Equity:
 
 
 
 
Partners’ equity:
 
 
 
 
Common unitholders (58,657,048 units issued and outstanding
    at September 30, 2014 and December 31, 2013)
 
481,147

 
516,147

General partner interest (2% interest)
 
(147,948
)
 
(146,557
)
Accumulated other comprehensive income (loss)
 
314

 
(144
)
Total partners’ equity
 
333,513

 
369,446

Noncontrolling interest
 
95,842

 
97,488

Total equity
 
429,355

 
466,934

Total liabilities and equity
 
$
1,386,169

 
$
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 September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
 
Affiliates
 
$
67,450

 
$
65,523

 
$
203,762

 
$
190,222

Third parties
 
14,680

 
12,200

 
40,370

 
37,084

 
 
82,130

 
77,723

 
244,132

 
227,306

Operating costs and expenses:
 
 
 
 
 
 
 
 
Operations (exclusive of depreciation and amortization)
 
25,456

 
21,686

 
72,835

 
72,089

Depreciation and amortization
 
15,483

 
19,449

 
46,953

 
48,730

General and administrative
 
2,266

 
2,415

 
7,933

 
8,747

 
 
43,205

 
43,550

 
127,721

 
129,566

Operating income
 
38,925

 
34,173

 
116,411

 
97,740

 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
Equity in earnings of SLC Pipeline
 
880

 
835

 
2,150

 
2,238

Interest expense
 
(8,585
)
 
(11,816
)
 
(27,368
)
 
(35,929
)
Interest income
 
—

 
3

 
3

 
110

Loss on early extinguishment of debt
 
—

 
—

 
(7,677
)
 
—

Gain (loss) on sale of assets
 
—

 
(159
)
 
—

 
1,863

Other income
 
11

 
61

 
45

 
61

 
 
(7,694
)
 
(11,076
)
 
(32,847
)
 
(31,657
)
Income before income taxes
 
31,231

 
23,097

 
83,564

 
66,083

State income tax expense
 
(42
)
 
(40
)
 
(145
)
 
(440
)
Net income
 
31,189

 
23,057

 
83,419

 
65,643

Allocation of net income attributable to noncontrolling interests
 
(1,509
)
 
(1,172
)
 
(6,562
)
 
(5,192
)
Net income attributable to Holly Energy Partners
 
29,680

 
21,885

 
76,857

 
60,451

General partner interest in net income, including incentive distributions
 
(8,940
)
 
(7,128
)
 
(25,334
)
 
(20,038
)
Limited partners’ interest in net income
 
$
20,740

 
$
14,757

 
$
51,523

 
$
40,413

Limited partners’ per unit interest in earnings—basic and diluted
 
$
0.35

 
$
0.25

 
$
0.87

 
$
0.69

Weighted average limited partners’ units outstanding
 
58,657

 
58,657

 
58,657

 
58,108


See accompanying notes.


- 5 -

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

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
31,189

 
$
23,057

 
$
83,419

 
$
65,643

Other comprehensive income:
 
 
 
 
 
 
 
 
Change in fair value of cash flow hedging instruments
 
553

 
(1,626
)
 
(1,189
)
 
1,329

Amortization of unrealized loss attributable to discontinued cash flow hedge
 
—

 
—

 
—

 
849

Reclassification adjustment to net income on partial settlement of cash flow hedge
 
556

 
529

 
1,647

 
1,549

Other comprehensive income (loss)
 
1,109

 
(1,097
)
 
458

 
3,727

Comprehensive income before noncontrolling interest
 
32,298

 
21,960

 
83,877

 
69,370

Allocation of comprehensive income to noncontrolling interests
 
(1,509
)
 
(1,172
)
 
(6,562
)
 
(5,192
)
Comprehensive income attributable to Holly Energy Partners
 
$
30,789

 
$
20,788

 
$
77,315

 
$
64,178


See accompanying notes.


- 6 -
Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
 
Nine Months Ended September 30,
 
 
2014
 
2013
Cash flows from operating activities
 
 
 
 
Net income
 
$
83,419

 
$
65,643

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
46,953

 
48,730

Gain on sale of assets
 
—

 
(1,863
)
Amortization of deferred charges
 
1,384

 
2,440

Amortization of restricted and performance units
 
2,493

 
2,642

Loss on early extinguishment of debt
 
7,677

 
—

(Increase) decrease in operating assets:
 
 
 
 
Accounts receivable—trade
 
(700
)
 
2,191

Accounts receivable—affiliates
 
(536
)
 
903

Prepaid and other current assets
 
(545
)
 
(720
)
Increase (decrease) in operating liabilities:
 
 
 
 
Accounts payable—trade
 
608

 
821

Accounts payable—affiliates
 
(4,191
)
 
(501
)
Accrued interest
 
(8,417
)
 
(7,946
)
Deferred revenue
 
5,051

 
11,867

Accrued property taxes
 
3,867

 
2,521

Other current liabilities
 
467

 
519

Other, net
 
(877
)
 
366

Net cash provided by operating activities
 
136,653

 
127,613

 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Additions to properties and equipment
 
(58,313
)
 
(33,539
)
Proceeds from sale of assets
 
—

 
2,481

Distributions in excess of equity in earnings of SLC Pipeline
 
163

 
75

Net cash used for investing activities
 
(58,150
)
 
(30,983
)
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
Borrowings under credit agreement
 
538,600

 
256,500

Repayments of credit agreement borrowings
 
(346,600
)
 
(312,500
)
Proceeds from issuance of common units
 
—

 
73,444

Redemption of senior notes
 
(156,188
)
 
—

Contribution from general partner
 
—

 
1,499

Distributions to HEP unitholders
 
(114,680
)
 
(103,016
)
Distributions to noncontrolling interest
 
(3,250
)
 
(2,625
)
Purchase of units for incentive grants
 
(1,064
)
 
(3,700
)
Other
 
(6
)
 
(249
)
Net cash used by financing activities
 
(83,188
)
 
(90,647
)
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
Increase (decrease) for the period
 
(4,685
)
 
5,983

Beginning of period
 
6,352

 
5,237

End of period
 
$
1,667

 
$
11,220

     

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
 
(89,296
)
 
(25,384
)
 
—

 
—

 
(114,680
)
Distributions to noncontrolling interest
 
—

 
—

 
—

 
(3,250
)
 
(3,250
)
Purchase of units for incentive grants
 
(1,064
)
 
—

 
—

 
—

 
(1,064
)
Amortization of restricted and performance units
 
2,493

 
—

 
—

 
—

 
2,493

Class B unit accretion
 
(4,859
)
 
(99
)
 
—

 
—

 
(4,958
)
   Other
 
3

 
—

 
—

 
—

 
3

Net income
 
57,723

 
24,092

 
—

 
1,604

 
83,419

Other comprehensive income
 
—

 
—

 
458

 
—

 
458

Balance September 30, 2014
 
$
481,147

 
$
(147,948
)
 
$
314

 
$
95,842

 
$
429,355



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 by 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.

New Accounting Pronouncements

Revenue Recognition
In May 2014, an accounting standard update (ASU 2014-09, "Revenue from Contracts with Customers") was issued requiring revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the expected consideration for these goods or services. This standard is effective January 1, 2017, and we are evaluating the impact of this standard.


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:
 
 
 
 
September 30, 2014
 
December 31, 2013
Financial Instrument
 
Fair Value Input Level
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
 
 
 
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Level 2
 
$
1,545

 
$
1,545

 
$
1,670

 
$
1,670

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
Senior notes:
 
 
 
 
 
 
 
 
 
 
6.5% senior notes
 
Level 2
 
$
296,416

 
$
309,000

 
$
295,927

 
$
313,500

8.25% senior notes
 
Level 2
 
—

 
—

 
148,703

 
158,250

 
 
 
 
296,416

 
309,000

 
444,630

 
471,750

 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Level 2
 
1,231

 
1,231

 
1,814

 
1,814

 
 
 
 
$
297,647

 
$
310,231

 
$
446,444

 
$
473,564


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:
 
 
September 30,
2014
 
December 31,
2013
 
 
(In thousands)
Pipelines, terminals and tankage
 
$
1,081,154

 
$
1,077,037

Construction in progress
 
97,604

 
50,454

Land and right of way
 
63,222

 
63,425

Other
 
21,409

 
19,997

 
 
1,263,389

 
1,210,913

Less accumulated depreciation
 
(291,829
)
 
(253,099
)
 
 
$
971,560

 
$
957,814


We capitalized $1.2 million and $0.3 million in interest attributable to construction projects during the nine months ended September 30, 2014 and 2013, respectively.

Depreciation expense was $41.4 million and $43.2 million for the nine months ended September 30, 2014 and 2013, respectively. Included in depreciation expense were asset abandonment charges of $1.9 million and $5.4 million for the nine months ended September 30, 2014 and 2013, respectively, for assets permanently removed from service.



- 10 -

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


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).

The carrying amounts of our transportation agreements are as follows:
 
 
September 30,
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
 
(51,724
)
 
(46,514
)
 
 
$
82,440

 
$
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 $1.9 million for each of the three months ended September 30, 2014 and 2013, and $5.5 million and $5.7 million for the nine months ended September 30, 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 September 30, 2014, we have three types of incentive-based awards which are described below. The compensation cost charged against income was $0.8 million and $0.7 million for the three months ended September 30, 2014 and 2013, respectively, and $2.5 million and $2.6 million for the nine months ended September 30, 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 September 30, 2014, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which 1,611,423 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.


- 11 -

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


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.

A summary of restricted and phantom unit activity and changes during the nine months ended September 30, 2014, is presented below:
Restricted and Phantom Units
 
Units
 
Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2014 (nonvested)
 
122,951

 
$
33.36

Granted
 
24,046

 
33.28

Vesting and transfer of common units to recipients
 
(14,130
)
 
38.34

Forfeited
 
(3,968
)
 
37.82

Outstanding at September 30, 2014 (nonvested)
 
128,899

 
$
32.66


As of September 30, 2014, there was $1.7 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 0.9 years.

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 September 30, 2014, estimated unit payouts for outstanding nonvested performance unit awards were at 100%.

No performance units were granted during the nine months ended September 30, 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. The performance units granted 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 nine months ended September 30, 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 September 30, 2014 (nonvested)
 
57,278


The grant-date fair value of performance units vested and transferred to recipients during the nine months ended September 30, 2014, was $0.5 million. As of September 30, 2014, there was $0.9 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of 1.3 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.


- 12 -

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


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 with which we are currently in compliance, 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.

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:
 
 
September 30,
2014
 
December 31,
2013
 
 
(In thousands)
Credit Agreement
 
$
555,000

 
$
363,000

6.5% Senior Notes
 
 
 
 
Principal
 
300,000

 
300,000

Unamortized discount
 
(3,584
)
 
(4,073
)
 
 
296,416

 
295,927

8.25% Senior Notes
 
 
 
 
Principal
 
—

 
150,000

Unamortized discount
 
—

 
(1,297
)
 
 
—

 
148,703

 
 
 
 
 
Total long-term debt
 
$
851,416

 
$
807,630


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

As of September 30, 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 September 30, 2014, which equaled an effective interest rate of 2.99%. This swap contract matures in February 2016. We also have two additional

- 13 -

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


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 September 30, 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 September 30, 2014, we had no ineffectiveness on our cash flow hedges.

At September 30, 2014, we have accumulated other comprehensive income of $0.3 million that relates to our current cash flow hedging instruments. Approximately $0.3 million will be transferred from accumulated other comprehensive income into interest expense as interest is paid on the underlying swap agreement over the next twelve-month period, assuming interest rates remain unchanged.

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)
September 30, 2014
 
 
 
 
 
 
 
 
Interest rate swaps designated as cash flow hedging instrument:
 
 
 
 
 
 
Variable-to-fixed interest rate swap contracts ($150 million of LIBOR-based debt interest)
 
Other long-term assets
 
$
1,545

 
Accumulated other
    comprehensive income
 
$
1,545

Variable-to-fixed interest rate swap contracts ($155 million of LIBOR-based debt interest)
 
Other long-term  liabilities
 
(1,231
)
 
Accumulated other
    comprehensive loss
 
(1,231
)
 
 
 
 
$
314

 
 
 
$
314

 
 
 
 
 
 
 
 
 
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 income
 
1,670

 
 
 
 
$
(144
)
 
 
 
$
(144
)


- 14 -

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


Interest Expense and Other Debt Information
Interest expense consists of the following components:
 
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
 
(In thousands)
Interest on outstanding debt:
 
 
 
 
Credit Agreement, net of interest on interest rate swaps
 
$
9,717

 
$
9,273

6.5% Senior Notes
 
14,571

 
14,631

8.25% Senior Notes
 
2,544

 
9,286

Amortization of discount and deferred debt issuance costs
 
1,384

 
1,590

Amortization of unrecognized loss attributable to terminated cash flow hedge
 
—

 
849

Commitment fees
 
378

 
629

Total interest incurred
 
28,594

 
36,258

Less capitalized interest
 
1,226

 
329

Net interest expense
 
$
27,368

 
$
35,929

Cash paid for interest
 
$
35,627

 
$
41,751



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 September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
HFC
 
82
%
 
84
%
 
84
%
 
84
%
Alon
 
11
%
 
10
%
 
9
%
 
10
%


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 1st each year, based on the Producer Price Index (“PPI”) or Federal Energy Regulatory Commission (“FERC”) index. As of September 30, 2014, these agreements with HFC will result in minimum annual payments to us of $236.2 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.

- 15 -

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



Related party transactions with HFC are as follows:
•
Revenues received from HFC were $67.5 million and $65.5 million for the three months ended September 30, 2014 and 2013, respectively, and $203.8 million and $190.2 million for the nine months ended September 30, 2014 and 2013, respectively.
•
HFC charged us general and administrative services under the Omnibus Agreement of $0.6 million for each of the three months ended September 30, 2014 and 2013, and $1.7 million for each of the nine months ended September 30, 2014 and 2013.
•
We reimbursed HFC for costs of employees supporting our operations of $9.9 million and $5.9 million for the three months ended September 30, 2014 and 2013, respectively, and $28.7 million and $25.0 million for the nine months ended September 30, 2014 and 2013, respectively. Netted against the cost of employees for the three and nine months ended September 30, 2013, is a $3.5 million refund from HFC related to refunds of taxes covering a multi-year period.
•
HFC reimbursed us $3.1 million and $5.8 million for the three months ended September 30, 2014 and 2013, respectively, and $11.6 million and $15.1 million for the nine months ended September 30, 2014 and 2013, respectively, for certain reimbursable costs and capital projects.
•
We distributed $20.4 million and $18.0 million for the three months ended September 30, 2014 and 2013, respectively, to HFC as regular distributions on its common units and general partner interest, including general partner incentive distributions. For the nine months ended September 30, 2014 and 2013, we distributed $59.5 million and $52.8 million, respectively.
•
Accounts receivable from HFC were $30.2 million and $29.7 million at September 30, 2014, and December 31, 2013, respectively.
•
Accounts payable to HFC were $4.3 million and $8.5 million at September 30, 2014, and December 31, 2013, respectively.
•
Revenues for the three and the nine months ended September 30, 2014, include $0.6 million and $8.2 million, respectively, 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 September 30, 2014, and December 31, 2013, include $7.5 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 $7.5 million deferred at September 30, 2014.


Note 9:
Partners’ Equity

As of September 30, 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.

The following table presents the allocation of the general partner interest in net income for the periods presented below: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In thousands)
General partner interest in net income
 
$
423

 
$
301

 
$
1,051

 
$
823

General partner incentive distribution
 
8,517

 
6,827

 
24,283

 
19,215

Total general partner interest in net income
 
$
8,940

 
$
7,128

 
$
25,334

 
$
20,038



- 16 -

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


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 October 23, 2014, we announced our cash distribution for the third quarter of 2014 of $0.5225 per unit. The distribution is payable on all common and general partner units and will be paid November 14, 2014, to all unitholders of record on November 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 September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In thousands, except per unit data)
General partner interest in distribution
 
$
825

 
$
754

 
$
2,422

 
$
2,210

General partner incentive distribution
 
8,517

 
6,827

 
24,283

 
19,215

Total general partner distribution
 
9,342

 
7,581

 
26,705

 
21,425

Limited partner distribution
 
30,648

 
28,889

 
90,625

 
85,346

Total regular quarterly cash distribution
 
$
39,990

 
$
36,470

 
$
117,330

 
$
106,771

Cash distribution per unit applicable to limited partners
 
$
0.5225

 
$
0.4925

 
$
1.5450

 
$
1.455


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:
Contingencies

We are a party to various legal and regulatory proceedings, none of which we believe will have a material adverse impact on our financial condition, results of operation or cash flows.


Note 11:
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.


- 17 -

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


Condensed Consolidating Balance Sheet
September 30, 2014
 
Parent
 
Guarantor
Restricted Subsidiaries
 
Non-Guarantor Non-Restricted Subsidiaries
 
Eliminations
 
Consolidated
 
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2

 
$
18

 
$
1,647

 
$
—

 
$
1,667

Accounts receivable
 
—

 
30,971

 
5,231

 
(230
)
 
35,972

Intercompany accounts receivable
 
—

 
360,189

 
—

 
(360,189
)
 
—

Prepaid and other current assets
 
342

 
2,786

 
1,291

 
—

 
4,419

Total current assets
 
344

 
393,964

 
8,169

 
(360,419
)
 
42,058

 
 
 
 
 
 
 
 
 
 
 
Properties and equipment, net
 
—

 
586,175

 
385,385

 
—

 
971,560

Investment in subsidiaries
 
990,270

 
287,524

 
—

 
(1,277,794
)
 
—

Transportation agreements, net
 
—

 
82,440

 
—

 
—

 
82,440

Goodwill
 
—

 
256,498

 
—

 
—

 
256,498

Investment in SLC Pipeline
 
—

 
24,579

 
—

 
—

 
24,579

Other assets
 
1,335

 
7,699

 
—

 
—

 
9,034

Total assets
 
$
991,949

 
$
1,638,879

 
$
393,554

 
$
(1,638,213
)
 
$
1,386,169

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

 
$
14,418

 
$
897

 
$
(230
)
 
$
15,085

Intercompany accounts payable
 
360,189

 
—

 
—

 
(360,189
)
 
—

Accrued interest
 
1,625

 
198

 
—

 
—

 
1,823

Deferred revenue
 
—

 
8,820

 
5,451

 
—

 
14,271

Accrued property taxes
 
—

 
2,786

 
3,683

 
—

 
6,469

Other current liabilities
 
73

 
2,788

 
1

 
—

 
2,862

Total current liabilities
 
361,887

 
29,010

 
10,032

 
(360,419
)
 
40,510


 
 
 
 
 
 
 
 
 
 
Long-term debt
 
296,416

 
555,000

 
—

 
—

 
851,416

Other long-term liabilities
 
133

 
13,085

 
156

 
—

 
13,374

Deferred revenue
 
—

 
26,432

 
—

 
—

 
26,432

Class B unit
 
—

 
25,082

 
—

 
—

 
25,082

Equity - partners
 
333,513

 
990,270

 
383,366

 
(1,373,636
)
 
333,513

Equity - noncontrolling interest
 
—

 
—

 
—

 
95,842

 
95,842

Total liabilities and partners’ equity
 
$
991,949

 
$
1,638,879

 
$
393,554

 
$
(1,638,213
)
 
$
1,386,169



- 18 -

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




- 19 -

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


Condensed Consolidating Statement of Comprehensive Income
Three Months Ended September 30, 2014
 
Parent
 
Guarantor Restricted
Subsidiaries
 
Non-Guarantor Non-restricted Subsidiaries
 
Eliminations
 
Consolidated
 
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
Affiliates
 
$
—

 
$
64,200

 
$
3,562

 
$
(312
)
 
$
67,450

Third parties
 
—

 
12,218

 
2,462

 
—

 
14,680

 
 
—

 
76,418

 
6,024

 
(312
)
 
82,130

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

 
22,678

 
3,090

 
(312
)
 
25,456

Depreciation and amortization
 


 
11,855

 
3,628

 
—

 
15,483

General and administrative
 
273

 
1,993

 
—

 
—

 
2,266

 
 
273

 
36,526

 
6,718

 
(312
)
 
43,205

Operating income (loss)
 
(273
)
 
39,892

 
(694
)
 
—

 
38,925

Equity in earnings (loss) of subsidiaries
 
35,020

 
(521
)
 
—

 
(34,499
)
 
—

Equity in earnings of SLC Pipeline
 
—

 
880

 
—

 
—

 
880

Interest expense
 
(5,067
)
 
(3,518
)
 
—

 
—

 
(8,585
)
Other income
 
—

 
11

 
—

 
—

 
11

 
 
29,953

 
(3,148
)
 
—

 
(34,499
)
 
(7,694
)
Income (loss) before income taxes
 
29,680

 
36,744

 
(694
)
 
(34,499
)
 
31,231

State income tax expense
 
—

 
(42
)
 
—

 
—

 
(42
)
Net income (loss)
 
29,680

 
36,702

 
(694
)
 
(34,499
)
 
31,189

Allocation of net income attributable to noncontrolling interests
 
—

 
—

 
—

 
(1,509
)
 
(1,509
)
Net income (loss) attributable to Holly Energy Partners
 
29,680

 
36,702

 
(694
)
 
(36,008
)
 
29,680

Other comprehensive income (loss)
 
1,109

 
1,109

 
—

 
(1,109
)
 
1,109

Comprehensive income (loss)
 
$
30,789

 
$
37,811

 
$
(694
)
 
$
(37,117
)
 
$
30,789



- 20 -

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



Condensed Consolidating Statement of Comprehensive Income
Three Months Ended September 30, 2013
 
Parent
 
Guarantor
Restricted Subsidiaries
 
Non-Guarantor Non-Restricted Subsidiaries
 
Eliminations
 
Consolidated
 
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
Affiliates
 
$
—

 
$
62,903

 
$
2,930

 
$
(310
)
 
$
65,523

Third parties
 
—

 
10,644

 
1,556

 
—

 
12,200

 
 
—

 
73,547

 
4,486

 
(310
)
 
77,723

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

 
19,501

 
2,495

 
(310
)
 
21,686

Depreciation and amortization
 
—

 
15,867

 
3,582

 
—

 
19,449

General and administrative
 
752

 
1,663

 
—

 
—

 
2,415

 
 
752

 
37,031