e424b5
The
information in this preliminary prospectus supplement and
accompanying base prospectus is not complete and may be changed.
This preliminary prospectus supplement and accompanying base
prospectus is not an offer to sell these securities nor does it
seek an offer to buy these securities in any jurisdiction where
the offer or sale is not permitted.
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Filed Pursuant to
Rule 424(b)(5)
Registration Statement
333-155537
Subject to Completion, Dated
November 2, 2009,
Preliminary Prospectus Supplement to Prospectus dated
December 4, 2008
1,900,000 Common
Units
Representing Limited Partner
Interests
HOLLY ENERGY PARTNERS,
L.P.
Holly Energy Partners, L.P. is offering 1,900,000 common units
to be sold in this offering.
The common units are listed on the New York Stock Exchange under
the symbol HEP. The last reported sale price of the
common units on October 30, 2009 was $38.30 per common unit.
See Risk Factors in Item 1A of our Annual
Report on
Form 10-K
for the year ended December 31, 2008, as amended, and on
page S-14
of this prospectus supplement to read about factors you should
consider before buying common units.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus supplement or the accompanying base prospectus. Any
representation to the contrary is a criminal offense.
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Per Common
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Unit
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Total
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Initial public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to Holly Energy Partners, L.P.
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$
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$
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To the extent that the underwriters sell more than 1,900,000
common units, the underwriters have the option to purchase up to
an additional 285,000 common units from Holly Energy Partners,
L.P. at the initial public offering price less the underwriting
discount.
The underwriters expect to deliver the common units against
payment in New York, New York on November ,
2009.
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Goldman,
Sachs & Co. |
UBS Investment Bank |
SMH Capital
Prospectus Supplement dated November , 2009
TABLE OF
CONTENTS
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Prospectus Supplement
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S-1
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S-14
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S-18
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S-19
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S-20
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S-21
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S-24
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S-25
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S-25
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S-26
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S-27
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S-27
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Prospectus Dated December 4, 2008
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ABOUT THIS PROSPECTUS
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1
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WHO WE ARE
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1
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THE SUBSIDIARY GUARANTORS
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2
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RISK FACTORS
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3
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FORWARD-LOOKING STATEMENTS
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3
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USE OF PROCEEDS
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4
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RATIO OF EARNINGS TO FIXED CHARGES
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4
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DESCRIPTION OF DEBT SECURITIES
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4
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DESCRIPTION OF OUR COMMON UNITS AND PREFERRED UNITS
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16
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CASH DISTRIBUTION POLICY
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22
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DESCRIPTION OF OUR PARTNERSHIP AGREEMENT
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29
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CONFLICTS OF INTEREST AND FIDUCIARY DUTIES
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34
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MATERIAL TAX CONSEQUENCES
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38
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PLAN OF DISTRIBUTION
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53
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WHERE YOU CAN FIND MORE INFORMATION
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54
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LEGAL MATTERS
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EXPERTS
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This document is in two parts. The first part is this
prospectus supplement, which describes the specific terms of and
other information relating to this offering. The second part is
the accompanying base prospectus, which gives more general
information, some of which may not apply to this offering.
Generally, when we refer only to the prospectus, we
are referring to both parts combined. If information varies
between the prospectus supplement and the accompanying base
prospectus, you should rely on the information in this
prospectus supplement.
No dealer, salesperson or other person is authorized to give
any information or to represent anything not contained in this
prospectus supplement and the accompanying prospectus. You must
not rely on any unauthorized information or representations.
This prospectus supplement is an offer to sell only the common
units offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information
contained in this prospectus supplement and the accompanying
prospectus is current only as of its date.
S-i
SUMMARY
This summary highlights information contained elsewhere in
this prospectus supplement or the documents incorporated by
reference herein. It does not contain all of the information
that you should consider before investing in the common units.
You should carefully read the entire prospectus supplement, the
accompanying base prospectus and the other documents
incorporated by reference to understand fully the terms of the
common units, as well as the tax and other considerations that
are important in making your investment decision. Unless
otherwise indicated, the information in this prospectus
supplement assumes no exercise of the underwriters
over-allotment option.
You should read Risk Factors beginning on
page S-14
of this prospectus supplement as well as the risk factors
discussed in our Annual Report on
Form 10-K
for the year ended December 31, 2008, as amended,
incorporated by reference herein for more information about
important factors that you should consider before purchasing the
common units. References in this prospectus supplement to
Holly Energy Partners, we,
our, us, or similar terms refer either
to Holly Energy Partners, L.P. or to Holly Energy Partners, L.P.
and its subsidiaries collectively, as the context requires.
Holly Energy
Partners, L.P.
Holly Energy Partners, L.P. is a Delaware limited partnership
engaged principally in the business of operating a system of
refined product and crude oil pipelines, storage tanks,
distribution terminals and loading rack assets in west Texas,
New Mexico, Utah, Oklahoma, Arizona, Idaho, and Washington. We
generate revenues by charging tariffs for transporting refined
product and crude oil through our pipelines and by charging fees
for terminalling refined products and other hydrocarbons, and
storing and providing other services at our terminals. We do not
take ownership of products that we transport or terminal, and
therefore, we are not directly exposed to changes in commodity
prices. We serve refineries of Holly Corporation in New Mexico
and Utah under four long-term pipeline, throughput, tankage
and/or
terminal agreements with Holly Corporation. The first of these
agreements relates to the pipelines and terminals contributed to
us by Holly Corporation at the time of our initial public
offering and expires in 2019. The second of these agreements
relates to the intermediate pipelines acquired from Holly
Corporation in July 2005 that serve Holly Corporations
Lovington and Artesia, New Mexico refinery facilities and, as
amended, expires in 2024. The third agreement relates to the
crude pipelines and tankage assets acquired from Holly
Corporation in February 2008 and expires in 2023. The fourth
agreement relates to the truck and rail loading/unloading
facilities located at Holly Corporations Tulsa, Oklahoma
refinery and expires in 2024. Holly Corporation controls our
general partner and owns a 41% interest in us (before we issue
the common units offered hereby or the common units to be issued
to Sinclair Tulsa Refining Company See Recent
Developments below), including the 2% general partner
interest. We also serve Alon USA, Inc.s, or Alons,
Big Spring Refinery in Texas under a pipelines and terminals
agreement expiring 2020. Our assets currently include:
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approximately 820 miles of refined product pipelines,
including 340 miles of leased pipelines, that transport
gasoline, diesel and jet fuel principally from Holly
Corporations Navajo Refinery in New Mexico to its
customers in the metropolitan and rural areas of Texas,
New Mexico, Arizona, Colorado, Utah and northern Mexico;
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approximately 510 miles of refined product pipelines that
transport refined products from Alons Big Spring Refinery
in Texas to its customers in Texas and Oklahoma;
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three
65-mile
pipelines that transport intermediate feedstocks and crude oil
from Holly Corporations Lovington, New Mexico refinery
facilities to Holly Corporations Artesia, New Mexico
refinery facilities;
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approximately 860 miles of crude oil trunk, gathering and
lease connection pipelines which service Holly
Corporations Lovington and Artesia refining facilities;
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S-1
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approximately 10 miles of crude oil and refined product
pipelines that support Holly Corporations Woods Cross
Refinery near Salt Lake City, Utah;
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a 70% interest in Rio Grande Pipeline Company (Rio
Grande), a joint venture that owns a
249-mile
refined product pipeline that transports liquid petroleum gases,
or LPGs, from west Texas to the Texas/Mexico border near
El Paso for further transport into northern Mexico (see
Recent Developments regarding the sale of our 70%
interest in Rio Grande, which is expected to close in December
2009); and
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a 25% interest in the joint venture that owns and operates the
Salt Lake City Pipeline, a new 95 mile intrastate crude oil
pipeline system which transports crude oil into the Salt Lake
City, Utah area from the Utah terminus of the Frontier Pipeline
as well as crude oil flowing from Wyoming and Utah via Plains
All American Pipeline, L.P.s Rocky Mountain Pipeline.
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Refined Product Terminals and Refinery Tankage:
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four refined product terminals, located in El Paso, Texas;
Moriarty and Bloomfield, New Mexico; and Tucson, Arizona,
with an aggregate capacity of approximately 1.0 million
barrels, that are integrated with our refined product pipeline
system that serves Holly Corporations Navajo Refinery;
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three refined product terminals (two of which are 50% owned),
located in Burley and Boise, Idaho and Spokane, Washington, with
an aggregate capacity of approximately 500,000 barrels,
that serve third-party common carrier pipelines;
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one refined product terminal near Mountain Home, Idaho with a
capacity of 120,000 barrels, that serves a nearby United
States Air Force Base;
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two refined product terminals, located in Wichita Falls and
Abilene, Texas, and one tank farm in Orla, Texas with aggregate
capacity of 480,000 barrels, that are integrated with our
refined product pipelines that serve Alons Big Spring
Refinery;
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two refined product truck loading racks, one located within
Holly Corporations Navajo Refinery that is permitted to
load over 40,000 barrels per day (bpd) of light
refined products, and one located within Holly
Corporations Woods Cross Refinery, that is permitted to
load over 25,000 bpd of light refined products;
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a Roswell, New Mexico jet fuel terminal leased through September
2011;
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on-site
crude oil tankage at Holly Corporations Navajo and Woods
Cross Refineries having an aggregate storage capacity of
approximately 600,000 barrels; and
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truck and rail loading/unloading facilities located at Holly
Corporations Tulsa, Oklahoma refinery.
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Recent
Developments
On October 19, 2009, our wholly-owned subsidiary, HEP Tulsa
LLC, entered into an asset sale and purchase agreement with
Sinclair Tulsa Refining Company, or Sinclair, pursuant to which
HEP Tulsa LLC will purchase tankage, loading racks and pipeline
assets at Sinclairs refining facility in Tulsa, Oklahoma
for a total purchase price of $75 million, consisting of
1,373,609 of our common units to be issued by us to Sinclair
(which under the asset sale and purchase agreement are valued at
$53.5 million based on the average price of common units
during the 20 trading day period prior to the date of the asset
sale and purchase agreement) and $21.5 million in cash from
HEP Tulsa LLC. We intend to use a portion of the net proceeds of
this offering to fund HEP Tulsa LLCs payment of the
$21.5 million cash portion of the total purchase price. For
more detailed information regarding the use of proceeds from
this offering, see Use of Proceeds.
S-2
We refer to the acquisition by HEP Tulsa LLC of tankage, loading
racks and pipeline assets from Sinclair as the acquisition of
the Sinclair logistics assets.
Simultaneously with the acquisition of the Sinclair logistics
assets and under the same asset sale and purchase agreement,
Holly Refining & Marketing-Tulsa LLC, an affiliate of
our general partner, will purchase Sinclairs refining
facility in Tulsa, Oklahoma for an aggregate consideration of
$128.5 million, consisting of $74 million of Holly
Corporation common stock to be issued by Holly Corporation to
Sinclair and $54.5 million in cash from Holly Corporation.
In addition, Holly Refining & Marketing-Tulsa LLC will
purchase the inventory at the site.
In connection with the closing of the acquisition of the
Sinclair logistics assets, we anticipate that Holly
Refining & Marketing-Tulsa LLC will enter into a
15 year pipelines, tankage and loading rack throughput
agreement with HEP Tulsa LLC, to pay us, subject to various
adjustments:
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a pipeline tariff of $.10 for each barrel of refined products
moved on the pipelines acquired in connection with the Sinclair
logistics assets with a guaranteed minimum throughput of
60,000 bpd of crude oil or refined products moved;
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a tankage base tariff of $.30 for each barrel of refined
products stored using tankage acquired in connection with the
Sinclair logistics assets with a guaranteed minimum throughput
of 80,000 bpd of refined products, $.10 per barrel for
volumes in excess of 80,000 bpd to 120,000 bpd, and
$.22 per barrel for volumes in excess of
120,000 bpd; and
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a loading racks tariff of $.30 for each barrel of refined
products, LPG, and heavy products loaded over the loading racks
acquired in connection with the Sinclair logistics assets with a
guaranteed minimum throughput of 26,000 bpd.
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The assets acquired from Sinclair include tanks with a combined
capacity of 1,362,500 bbls of refined products, a light products
truck loading rack, a propane truck loading rack, and an asphalt
truck loading rack, as well as refined products delivery
pipelines which are connected to common carrier pipelines
serving the Sinclair Tulsa refinery.
On October 19, 2009, BP Plc, our Rio Grande joint venture
partner, consented to an agreement between us, HEP Navajo
Southern, L.P. (one of our wholly-owned subsidiaries) and
Enterprise Products Operating LLC (Enterprise) under
which we have agreed to sell HEP Navajo Southern, L.P.s
70% ownership interest in Rio Grande to Enterprise for
$35.0 million. We expect the closing of this transaction to
occur in December 2009.
On August 18, 2009, 7,000,000 of our subordinated units
held by a subsidiary of Holly Corporation converted into an
equal number of our common units. Holly Corporation has the
right to cause us to register for resale under the Securities
Act of 1933 those common units held by Holly Corporation.
On August 1, 2009, we acquired from Holly Refining &
Marketing-Tulsa LLC, for a purchase price of $17.5 million,
certain truck and rail loading/unloading facilities located at
Holly Corporations Tulsa, Oklahoma refinery.
Competitive
Strengths
We believe our business possesses the following competitive
strengths:
We operate a substantial part of our business under
long-term contracts, which provides significant stability to our
future cash flows. We conduct a significant
portion of our operations pursuant to long-term contracts, which
we believe will enhance the stability and predictability of our
revenues and cash flows. Revenues from contracts extending
beyond one year constituted approximately 88% of our revenues
for the fiscal year ended December 31, 2008. We have
entered into four long-term contracts with Holly Corporation
expiring in 2019, 2023, and two expiring in 2024, not including
the contract with Holly Corporation relating to the Sinclair
logistics assets. We also have
S-3
long-term contracts with Alon. The long-term contracts
representing a majority of our revenue stream from Alon expire
between 2018 and 2020. In addition, where we operate under
contracts with terms of less than one year, we believe our
long-standing customer relationships will lead to ongoing
business and the renewal of such short-term contracts.
Our assets are efficient and well
maintained. We continually invest in the
maintenance and integrity of our assets, including
state-of-the-art internal mechanical integrity inspection and
repair programs to comply with federal regulations. Since 1998,
we have inspected and, to the extent required, repaired 100% of
the total miles of the pipelines that we owned upon our initial
public offering in 2004, 100% of the intermediate pipelines
acquired from Holly Corporation in 2005 and 100% of the
pipelines acquired from Alon in 2005 using internal inspection
devices known as smart pigs, which have instruments
capable of detecting cracks, line erosion and other structural
deficiencies. The operating pressures of these lines have been
hydrotested as required by the Department of Transportation. All
of our existing pipeline and terminal assets are operated via
satellite communications systems from our control center in
Artesia, New Mexico. The control center operates with
state-of-the-art computer systems designed to continuously
monitor real time operational data, including product
quantities, flow rates and pressures.
We have a strategic relationship with Holly Corporation,
which provides us with access to stable volumes, growth
opportunities and management expertise. A
substantial majority of our existing petroleum pipelines are
directly linked to Holly Corporations refineries and
provide Holly Corporation with the safest and most
cost-effective means to transport and distribute petroleum
products to its major markets. Following our acquisition from
Holly Corporation of certain pipeline and tankage assets
effective March 1, 2008, Holly Corporation now transports
through our petroleum pipelines or loading racks 100% of the
refined products from its Navajo Refinery and its Woods Cross
Refinery, 100% and 15% of the crude oil coming into its Navajo
Refinery and Woods Cross Refinery, respectively, and 100% of the
intermediate products between Navajo Refinerys Artesia and
Lovington facilities. Holly Corporation has agreed to continue
using our assets to transport, terminal and store petroleum
products pursuant to three separate pipelines and terminals
agreements expiring in 2019, 2023 and 2024. In addition, in
connection with our acquisition from Holly Corporation of
certain truck and rail loading/unloading facilities located at
Holly Corporations existing Tulsa, Oklahoma refinery,
Holly Corporation has agreed to use these facilities with a
minimum guaranteed throughput of 12,500 bpd for
15 years. Furthermore, Holly Corporation has a significant
economic interest to see that our pipeline and terminal assets
are managed in the best interests of unitholders because it and
its affiliates own the 2% general partner interest and a 39%
limited partner interest in us (before we issue the common units
offered hereby and the issuance of common units to Sinclair in
connection with the acquisition of the Sinclair logistics
assets) and certain incentive distribution rights. Our recent
investment in the Salt Lake City Pipeline, and our investment in
the previously announced UNEV Pipeline (which will run from Salt
Lake City, Utah to Las Vegas, Nevada), assuming in the case of
the UNEV Pipeline that such pipeline is completed and we
exercise our option to purchase Holly Corporations 75%
interest in such pipeline, along with our proposed purchase of
the Sinclair logistics assets, will serve to further strengthen
our relationship with Holly Corporation.
We are contractually and strategically positioned to
benefit from growth initiatives by Holly
Corporation. In the past four years, we
benefited from Holly Corporations expansions of its Navajo
and Woods Cross Refineries as well as Holly Corporations
purchase of Sunoco Inc.s Tulsa refinery. In the event that
Holly Corporation further expands its Navajo or Woods Cross
Refineries, we believe that the additional production may also
be transported, stored and distributed through our existing
pipelines and terminals. We recently benefited from two such
projects. On July 22, 2008, Holly Corporation announced an
agreement by one of its subsidiaries to transport crude oil on
Centurion Pipeline L.P.s pipeline from Cushing, Oklahoma
to Centurions Slaughter station in west Texas. In
connection with such agreement, Holly Corporation approved
capital expenditures of up to $90.0 million to build the
necessary infrastructure, including a
70-mile
pipeline from Centurions Slaughter station in west Texas
to Lovington, New Mexico that was recently completed and is
S-4
expected to be fully operational in November 2009, a recently
completed
37-mile
pipeline project that connects our Artesia crude gathering
system to Holly Corporations Lovington facility, and a
65-mile
pipeline from Lovington to Artesia, New Mexico which has been
completed and was recently acquired by us. Under provisions of
our omnibus agreement with Holly Corporation we will have an
option to purchase Holly Corporations investment in these
additional transportation assets at a purchase price to be
negotiated with Holly Corporation. On August 1, 2009, after
Holly Corporations purchase of Sunoco Inc.s Tulsa
refinery, we purchased certain truck and rail loading/unloading
facilities located at that refinery for a purchase price of
$17.5 million. Holly Refining & Marketing-Tulsa LLC
entered into a
15-year
equipment and throughput agreement with us to pay us a per
barrel fee for each barrel loaded or unloaded at the truck and
rail loading facilities.
Substantially all of our assets serve markets with above
average population growth. Our pipelines and
terminals serve our customers marketing operations in the
Southwest and Rocky Mountain regions of the United States as
well as northern Mexico and the Mid-Continent region. In many of
our customers core markets, demand for petroleum products
exceeds local production, due in part to population growth rates
that are higher than the national average. We expect that the
population growth in the states of Texas, New Mexico, Colorado,
Utah, Washington, Nevada, Arizona, Idaho, and the Mid-Continent
region will result in increased demand for petroleum products
shipped on our pipelines and through our terminals.
We have an experienced management
team. We benefit from the experience and
long-standing industry relationships of our senior management
team. Our senior management has an average of over 25 years
of experience in the energy industry.
Partnership
Structure and Management
As is common with publicly traded limited partnerships and in
order to maximize operational flexibility, we conduct our
operations through subsidiaries. We have three direct
subsidiaries: Holly Energy Finance Corp., Holly Energy
Partners Operating, L.P., a limited partnership that
conducts all of our operations through itself and its
subsidiaries, and HEP Logistics GP, L.L.C., its general partner.
Holly Energy Partners Operating, L.P. owns directly
or indirectly 100% of the membership or partnership interests in
its subsidiaries, other than Rio Grande Pipeline Company, in
which it indirectly owns a 70% interest, and SLC Pipeline LLC in
which it indirectly owns a 25% interest.
Holly Logistic Services, L.L.C., as the general partner of HEP
Logistics Holdings, L.P., our general partner, manages our
operations and activities. Neither our general partner nor the
board of directors of Holly Logistic Services, L.L.C. are
elected by our unitholders. Unlike shareholders in a publicly
traded corporation, our unitholders are not entitled to elect
the directors of Holly Logistic Services, L.L.C.
The chart on
page S-6
depicts the current structure and ownership of Holly Energy
Partners, L.P., our operating partnership and its subsidiaries
prior to this offering of common units and the issuance of
common units to Sinclair in connection with the acquisition of
the Sinclair logistics assets.
S-5
The
Offering
The summary below describes the principal terms of the common
units offered hereby. Certain of the terms and conditions
described below are subject to important limitations and
exceptions. You should read the full text and more specific
details contained elsewhere in this prospectus supplement and in
the base prospectus under the heading Description of Our
Common Units And Preferred Units.
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Common units offered |
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1,900,000 common units (or 2,185,000 common units if the
underwriters over-allotment option is exercised in full). |
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Units outstanding before this offering |
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17,582,400 common units and 937,500 Class B subordinated
units. |
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Units outstanding after this offering |
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19,482,400 common units, or 19,767,400 common units if the
underwriters over-allotment option is exercised in full,
and 937,500 Class B subordinated units. We will issue an
additional 1,373,609 common units to Sinclair as a portion of
the aggregate consideration for the acquisition of the Sinclair
logistics assets. |
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Use of proceeds |
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We will receive net proceeds of approximately
$ million from the sale of
the 1,900,000 common units we are offering after deducting
underwriting discounts but before paying offering expenses, or
approximately $ million if
the underwriters over-allotment option is exercised in
full. We intend to use a portion of the net proceeds of this
offering, including any exercise of the underwriters
over-allotment option, to fund HEP Tulsa LLCs payment
of the $21.5 million cash portion of the $75.0 million
total purchase price for the pending acquisition of the Sinclair
logistics assets and to pay costs related to that acquisition.
We intend to use the remaining net proceeds either to pay a
portion of the purchase price for our potential acquisition from
Holly Corporation of its investments in two pipeline projects
pursuant to our option to purchase those investments at prices
to be negotiated with Holly Corporation or, instead, to repay
bank debt incurred under our credit agreement, for other
potential future acquisitions or for general partnership
purposes. If the acquisition of the Sinclair logistics assets
does not close, we intend to use the net proceeds of this
offering for one or more of the following: to pay for all or
substantially all of the purchase price and related costs for
the potential acquisitions from Holly Corporation described
above, to repay bank debt incurred under our credit agreement,
for other potential future acquisitions or for general
partnership purposes. For more detailed information regarding
the use of proceeds from this offering, see Use of
Proceeds. |
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Cash distributions |
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Under our partnership agreement, we must distribute all of our
cash on hand within 45 days after the end of each quarter,
after payment of fees and expenses and the establishment of cash
reserves by our general partner in its discretion. We refer to
this cash as available cash and we define this term
in our partnership agreement. |
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If cash distributions per common unit exceed $0.50 in any
quarter, our general partner will receive, in addition to
amounts associated with its 2% general partner interest,
increasing percentages, up to 50%, of the cash we distribute |
S-7
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in excess of that amount. We refer to the general partners
right to receive such distributions as incentive
distribution rights. The most recent cash distribution
declared of $0.795 per common unit will provide unitholders and
our general partner each with 50% of the marginal percentage
interest in distributions. For a description of our cash
distribution policy and the incentive distribution rights,
please read Cash Distribution Policy in the
accompanying base prospectus. |
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Subordination period |
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In addition to our common units, we previously issued two
separate classes of subordinated units representing limited
partnership interests, and the rights of the holders of each
class of subordinated units to participate in distributions are
subordinated to the rights of the holders of the common units.
When the subordination period for any class of subordinated
units ends, all remaining subordinated units of such class will
convert into common units on a one-for-one basis and will
thereafter participate pro rata with the other common units in
distributions of available cash. For more information regarding
the effects of the end of the subordination period applicable to
each class of subordinated units, see the discussion under
Cash Distribution Policy Subordination
Periods Effect of Expiration of the Subordination
Period in the base prospectus accompanying this prospectus
supplement. |
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In August 2009, all of the conditions necessary to end the
subordination period for the 7,000,000 subordinated units owned
by our general partner were met and the units were converted
into our common units on a one-for-one basis. In addition, under
our partnership agreement, because the subordination period for
this class of subordinated units has expired, we may issue an
unlimited number of limited partner interests of any type
without the approval of our unitholders. |
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With respect to the 937,500 subordinated units held by Alon USA
(all of which are designated as our Class B subordinated
units), the subordination period will end on the last day of any
quarter ending on or after March 31, 2010 if Alon USA has
not defaulted on its minimum volume commitment payment
obligations under our pipelines and terminals agreement with
Alon USA for certain prior periods, subject to certain grace
periods. In addition, the subordination period for units held by
Alon USA will terminate if our general partner is removed
without cause. |
|
Estimated ratio of taxable income to distributions |
|
We estimate that if you own the common units you purchase in
this offering through the record date for distributions with
respect to the quarter ending December 31, 2011, you will
be allocated, on a cumulative basis, an amount of federal
taxable income for the taxable years 2009 through 2011 that will
be 25% or less of the cash distributed with respect to such
common units for that period. Please read Certain United
States Federal Income Tax Considerations in this
prospectus supplement for the basis of this estimate. |
|
New York Stock Exchange Symbol |
|
HEP |
S-8
Summary Selected
Historical Financial and Operating Data
The table on the following page sets forth summary selected
historical financial and operating data as of and for each of
the years ended December 31, 2006, 2007 and 2008 and for
the nine months ended September 30, 2008 and 2009. The
summary financial data presented is derived from (i) the
audited financial statements of Holly Energy Partners, L.P.,
which are included in our Annual Report on
Form 10-K
for the year ended December 31, 2008, except that the
information presented herein has been adjusted to present the
impact of our adoption of Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standard No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB 51 and Emerging Issues
Task Force Issue
No. 07-4,
Application of the Two-Class Method under FASB
Statement No. 128 to Master Limited Partnerships,
both of which were effective for us as of January 1, 2009
and (ii) the unaudited financial statements included in our
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2009. The results of
operations for the nine months ended September 30, 2009 are
not necessarily indicative of the operating results for the
entire year or any future period. Our Annual Report on
Form 10-K
for the year ended December 31, 2008 and our Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2009 are incorporated
herein by reference.
The summary selected historical financial and operating data
should be read together with, and is qualified in its entirety
by reference to, our historical financial statements and the
accompanying notes and Managements Discussion and
Analysis of Financial Condition and Results of Operations,
which are set forth in our Annual Report on
Form 10-K
for the year ended December 31, 2008 and in our Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2009.
S-9
Summary Selected
Historical Financial and Operating Data (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(In thousands, except per unit and barrels per day data)
|
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
89,194
|
|
|
$
|
105,407
|
|
|
$
|
118,088
|
|
|
$
|
83,562
|
|
|
$
|
115,470
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
28,630
|
|
|
|
32,911
|
|
|
|
41,270
|
|
|
|
30,745
|
|
|
|
33,332
|
|
General and administrative
|
|
|
4,854
|
|
|
|
5,043
|
|
|
|
6,377
|
|
|
|
4,241
|
|
|
|
4,990
|
|
Depreciation and amortization
|
|
|
15,330
|
|
|
|
14,382
|
|
|
|
22,889
|
|
|
|
16,259
|
|
|
|
19,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
48,814
|
|
|
|
52,336
|
|
|
|
70,536
|
|
|
|
51,245
|
|
|
|
58,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
40,380
|
|
|
|
53,071
|
|
|
|
47,552
|
|
|
|
32,317
|
|
|
|
57,219
|
|
Equity in earnings of SLC Pipeline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,309
|
|
SLC Pipeline acquisition costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,500
|
)
|
Interest
expense(1)
|
|
|
(13,056
|
)
|
|
|
(13,289
|
)
|
|
|
(21,763
|
)
|
|
|
(14,201
|
)
|
|
|
(16,225
|
)
|
Interest income
|
|
|
899
|
|
|
|
533
|
|
|
|
159
|
|
|
|
146
|
|
|
|
10
|
|
Gain on sale of assets
|
|
|
|
|
|
|
298
|
|
|
|
36
|
|
|
|
36
|
|
|
|
|
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
996
|
|
|
|
1,007
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,157
|
)
|
|
|
(12,458
|
)
|
|
|
(20,572
|
)
|
|
|
(13,012
|
)
|
|
|
(17,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
28,223
|
|
|
|
40,613
|
|
|
|
26,980
|
|
|
|
19,305
|
|
|
|
39,878
|
|
State income tax
|
|
|
|
|
|
|
(275
|
)
|
|
|
(335
|
)
|
|
|
(237
|
)
|
|
|
(317
|
)
|
Net income
|
|
|
28,223
|
|
|
|
40,338
|
|
|
|
26,645
|
|
|
|
19,068
|
|
|
|
39,561
|
|
Less noncontrolling interest in net income
|
|
|
680
|
|
|
|
1,067
|
|
|
|
1,278
|
|
|
|
834
|
|
|
|
1,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Holly Energy Partners, L.P.
|
|
|
27,543
|
|
|
|
39,271
|
|
|
|
25,367
|
|
|
|
18,234
|
|
|
|
38,370
|
|
Less general partner interest in net income attributable to
Holly Energy Partners, L.P.
|
|
|
1,710
|
|
|
|
2,932
|
|
|
|
3,543
|
|
|
|
2,736
|
|
|
|
5,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners interest in net income attributable to
Holly Energy Partners, L.P.
|
|
$
|
25,833
|
|
|
$
|
36,339
|
|
|
$
|
21,824
|
|
|
$
|
15,498
|
|
|
$
|
33,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners per unit interest in net income
attributable to Holly Energy Partners, L.P. basic
and diluted
|
|
$
|
1.59
|
|
|
$
|
2.24
|
|
|
$
|
1.32
|
|
|
$
|
0.95
|
|
|
$
|
1.89
|
|
Weighted average limited partners units outstanding
|
|
|
16,108
|
|
|
|
16,108
|
|
|
|
16,291
|
|
|
|
16,279
|
|
|
|
17,546
|
|
S-10
Summary Selected
Historical Financial and Operating Data (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(In thousands, except per unit and barrels per day data)
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
55,030
|
|
|
$
|
66,684
|
|
|
$
|
70,195
|
|
|
$
|
48,785
|
|
|
$
|
74,831
|
|
Distributable cash flow
|
|
$
|
47,219
|
|
|
$
|
51,012
|
|
|
$
|
60,365
|
|
|
$
|
43,452
|
|
|
$
|
51,677
|
|
Distributions to unitholders
|
|
$
|
43,670
|
|
|
$
|
47,974
|
|
|
$
|
52,426
|
|
|
$
|
38,908
|
|
|
$
|
44,393
|
|
Cash flows from operating activities
|
|
$
|
45,853
|
|
|
$
|
59,056
|
|
|
$
|
63,651
|
|
|
$
|
38,090
|
|
|
$
|
44,788
|
|
Cash flows from investing activities
|
|
$
|
(9,107
|
)
|
|
$
|
(9,632
|
)
|
|
$
|
(213,267
|
)
|
|
$
|
(199,988
|
)
|
|
$
|
(98,978
|
)
|
Cash flows from financing activities
|
|
$
|
(45,774
|
)
|
|
$
|
(50,658
|
)
|
|
$
|
144,564
|
|
|
$
|
153,695
|
|
|
$
|
52,971
|
|
Maintenance capital expenditures
|
|
$
|
1,095
|
|
|
$
|
1,863
|
|
|
$
|
3,133
|
|
|
$
|
2,418
|
|
|
$
|
2,262
|
|
Expansion capital expenditures
|
|
|
8,012
|
|
|
|
8,094
|
|
|
|
39,170
|
|
|
|
26,606
|
|
|
|
25,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
9,107
|
|
|
$
|
9,957
|
|
|
$
|
42,303
|
|
|
$
|
29,024
|
|
|
$
|
27,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data (barrels per day):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline throughput
|
|
|
189,584
|
|
|
|
205,167
|
|
|
|
291,814
|
|
|
|
272,966
|
|
|
|
345,769
|
|
Refined product terminal throughput
|
|
|
161,487
|
|
|
|
165,367
|
|
|
|
142,276
|
|
|
|
139,684
|
|
|
|
149,842
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
$
|
160,484
|
|
|
$
|
158,600
|
|
|
$
|
290,284
|
|
|
$
|
283,628
|
|
|
$
|
349,062
|
|
Total assets
|
|
|
245,771
|
|
|
|
238,904
|
|
|
|
439,688
|
|
|
|
430,086
|
|
|
|
518,965
|
|
Long-term debt
|
|
|
180,660
|
|
|
|
181,435
|
|
|
|
355,793
|
|
|
|
354,522
|
|
|
|
429,819
|
|
Total liabilities
|
|
|
198,582
|
|
|
|
200,348
|
|
|
|
431,568
|
|
|
|
402,127
|
|
|
|
459,896
|
|
Total equity
|
|
|
47,189
|
|
|
|
38,556
|
|
|
|
8,120
|
|
|
|
27,959
|
|
|
|
59,069
|
|
|
|
|
(1) |
|
Includes amortization of discount and deferred debt issuance
costs. |
S-11
Non-GAAP Financial
Measures
Earnings before interest, taxes, depreciation and amortization
(EBITDA) is calculated as net income attributable to
Holly Energy Partners, L.P. plus (i) interest expense net
of interest income, (ii) state income tax and
(iii) depreciation and amortization. EBITDA is not a
calculation based upon U.S. GAAP. EBITDA is used as a
supplemental financial measure by management and by external
users of our financial statements, such as investors and
commercial banks, to assess:
|
|
|
|
|
the financial performance of our assets without regard to
financing methods, capital structure or historical cost basis;
|
|
|
|
the ability of our assets to generate cash sufficient to pay
interest on our indebtedness and to make distributions to our
partners;
|
|
|
|
our operating performance and return on invested capital as
compared to those of other companies in the pipelines and
terminals business, without regard to financing methods, capital
structure or historical cost basis; and
|
|
|
|
our compliance with certain financial covenants included in our
debt agreements.
|
EBITDA should not be considered an alternative to net income,
operating income, cash flow from operating activities or any
other measure of financial performance or liquidity presented in
accordance with U.S. GAAP. EBITDA excludes some, but not
all, items that affect net income and operating income, and
these measures may vary among other companies. Therefore, EBITDA
as presented below may not be comparable to similarly titled
measures of other companies.
The following table presents a reconciliation of EBITDA to the
most directly comparable GAAP financial measure for each of the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(In thousands)
|
|
|
Reconciliation of EBITDA to net income attributable to Holly
Energy Partners, L.P.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Holly Energy Partners, L.P.
|
|
$
|
27,543
|
|
|
$
|
39,271
|
|
|
$
|
25,367
|
|
|
$
|
18,234
|
|
|
$
|
38,370
|
|
Add (Subtract):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
15,330
|
|
|
|
14,382
|
|
|
|
22,889
|
|
|
|
16,259
|
|
|
|
19,929
|
|
Amortization of discount and deferred debt issuance costs
|
|
|
968
|
|
|
|
1,008
|
|
|
|
1,002
|
|
|
|
739
|
|
|
|
529
|
|
Increase in interest expense change in fair value of
interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
2,282
|
|
|
|
|
|
|
|
300
|
|
Interest expense
|
|
|
12,088
|
|
|
|
12,281
|
|
|
|
18,479
|
|
|
|
13,462
|
|
|
|
15,396
|
|
State income tax
|
|
|
|
|
|
|
275
|
|
|
|
335
|
|
|
|
237
|
|
|
|
317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,929
|
|
|
|
67,217
|
|
|
|
70,354
|
|
|
|
48,931
|
|
|
|
74,841
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
899
|
|
|
|
533
|
|
|
|
159
|
|
|
|
146
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
55,030
|
|
|
$
|
66,684
|
|
|
$
|
70,195
|
|
|
$
|
48,785
|
|
|
$
|
74,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable cash flow is used as a supplemental financial
measure by our management and is presented here because it is a
widely accepted financial indicator used by investors to compare
S-12
partnership performance. We believe that this measure provides
investors an enhanced perspective of the operating performance
of our assets and the cash our business is generating.
Distributable cash flow is not a calculation based upon
U.S. GAAP. However, the amounts included in the calculation
are derived from amounts separately presented in our
consolidated financial statements, with the exception of
maintenance capital expenditures. Distributable cash flow should
not be considered in isolation or as an alternative to net
income or operating income, as an indication of our operating
performance or as an alternative to operating cash flow as a
measure of liquidity. Distributable cash flow is not necessarily
comparable to similarly titled measures of other companies.
The following table presents a reconciliation of distributable
cash flow to the most directly comparable GAAP financial measure
for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(In thousands)
|
|
|
Reconciliation of Distributable cash flow to net income
attributable to Holly Energy Partners, L.P.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Holly Energy Partners, L.P.
|
|
$
|
27,543
|
|
|
$
|
39,271
|
|
|
$
|
25,367
|
|
|
$
|
18,234
|
|
|
$
|
38,370
|
|
Add depreciation and amortization
|
|
|
15,330
|
|
|
|
14,382
|
|
|
|
22,889
|
|
|
|
16,259
|
|
|
|
19,929
|
|
Add amortization of discount and deferred debt issuance costs
|
|
|
968
|
|
|
|
1,008
|
|
|
|
1,002
|
|
|
|
739
|
|
|
|
529
|
|
Add (subtract) increase (decrease) in deferred revenue
|
|
|
4,473
|
|
|
|
(1,786
|
)
|
|
|
11,958
|
|
|
|
10,638
|
|
|
|
(8,076
|
)
|
Add increase in interest expenses change in fair
value of interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
2,282
|
|
|
|
|
|
|
|
300
|
|
Add equity in excess cash flows over earnings of SLC Pipeline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
387
|
|
Add SLC Pipeline acquisition
costs(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
Subtract maintenance capital
expenditures(2)
|
|
|
(1,095
|
)
|
|
|
(1,863
|
)
|
|
|
(3,133
|
)
|
|
|
(2,418
|
)
|
|
|
(2,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable cash flow
|
|
$
|
47,219
|
|
|
$
|
51,012
|
|
|
$
|
60,365
|
|
|
$
|
43,452
|
|
|
$
|
51,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Under provisions of accounting standards codification
(ASC) topic Business Combinations
(previously statement of financial accounting standards
(SFAS) No. 141(R)), effective January 1,
2009, we were required to expense rather than capitalize
acquisition costs of $2.5 million paid to Holly Corporation
associated with our joint venture agreement with Plains All
American Pipeline, L.P. that closed in March 2009. As these
costs directly related to our interest in the new joint venture
pipeline and are similar to expansion capital expenditures, we
have added back those costs to arrive at distributable cash flow. |
|
(2) |
|
Maintenance capital expenditures represent capital expenditures
made to replace partially or fully depreciated assets in order
to maintain the existing operating capacity of our assets and to
extend their useful lives. Maintenance capital expenditures
include expenditures required to maintain equipment reliability,
tankage and pipeline integrity, and safety and to comply with
environmental regulations. |
S-13
RISK
FACTORS
This offering involves a high degree of risk, including the
risks described below and other risks described in our Annual
Report on
Form 10-K
for the year ended December 31, 2008, our Quarterly Reports
on
Form 10-Q
for the quarters ended March 31, 2009, June 30, 2009,
and September 30, 2009, and the risks described in any
other documents incorporated by reference into this prospectus.
You should carefully consider all of these risks together with
all of the other information included in this prospectus and the
documents incorporated by reference herein before deciding to
invest in the common units offered hereby. Additional risks and
uncertainties not currently known to us or that we currently
deem to be immaterial may also materially and adversely affect
our business operations. If any of the following risks actually
occurs, our business, financial condition or results of
operations could be materially and adversely affected. In that
case, our ability to pay distributions on our common units may
be reduced, the trading price of our securities could decline,
and you could lose all or part of your investment.
We depend on
Holly Corporation and particularly its Navajo Refinery for a
majority of our revenues; if those revenues were significantly
reduced or if Holly Corporations financial condition
materially deteriorated, there would be a material adverse
effect on our results of operations.
For the year ended December 31, 2008, Holly Corporation
accounted for 72% of the revenues of our petroleum product and
crude pipelines and 70% of the revenues of our terminals and
truck loading racks. We expect to continue to derive a majority
of our revenues from Holly Corporation for the foreseeable
future, and the percentage of revenues from Holly Corporation
are expected to increase following the acquisition of the
Sinclair logistics assets and the disposition of our interest in
the Rio Grande pipeline. If Holly Corporation satisfies
only its minimum obligations under the four pipeline,
throughput, tankage
and/or
terminal agreements we entered into with Holly Corporation or is
unable to meet its minimum annual payment commitment for any
reason, including due to prolonged downtime or a shutdown at the
Navajo Refinery, the Woods Cross Refinery or the Tulsa refinery,
our revenues and cash flow would decline.
Any significant curtailing of production at the Navajo Refinery
could, by reducing throughput in our pipelines and terminals,
result in our realizing materially lower levels of revenues and
cash flow for the duration of the shutdown. For the year ended
December 31, 2008, production from the Navajo Refinery
accounted for 67% of the throughput volumes transported by our
refined product and crude pipelines. The Navajo Refinery also
received 100% of the petroleum products shipped on our
intermediate pipelines. Operations at the Navajo Refinery could
be partially or completely shut down, temporarily or
permanently, as the result of:
|
|
|
|
|
competition from other refineries and pipelines that may be able
to supply the refinerys end-user markets on a more
cost-effective basis;
|
|
|
|
operational problems such as catastrophic events at the
refinery, labor difficulties or environmental proceedings or
other litigation that compel the cessation of all or a portion
of the operations at the refinery;
|
|
|
|
planned maintenance or capital projects;
|
|
|
|
increasingly stringent environmental laws and regulations, such
as the U.S. Environmental Protection Agencys gasoline
and diesel sulfur control requirements that limit the
concentration of sulfur in motor gasoline and diesel fuel for
both on-road and non-road usage as well as various state and
federal emission requirements that may affect the refinery
itself and potential future climate change regulations;
|
|
|
|
an inability to obtain crude oil for the refinery at competitive
prices; or
|
S-14
|
|
|
|
|
a general reduction in demand for refined products in the area
due to:
|
|
|
|
|
|
a local or national recession or other adverse economic
condition that results in lower spending by businesses and
consumers on gasoline and diesel fuel;
|
|
|
|
higher gasoline prices due to higher crude oil prices, higher
taxes or stricter environmental laws or regulations; or
|
|
|
|
a shift by consumers to more fuel-efficient or alternative fuel
vehicles or an increase in fuel economy, whether as a result of
technological advances by manufacturers, legislation either
mandating or encouraging higher fuel economy or the use of
alternative fuel or otherwise.
|
The magnitude of the effect on us of any shutdown would depend
on the length of the shutdown and the extent of the refinery
operations affected by the shutdown. We have no control over the
factors that may lead to a shutdown or the measures Holly
Corporation may take in response to a shutdown. Holly
Corporation makes all decisions at the Navajo Refinery
concerning levels of production, regulatory compliance, refinery
turnarounds (planned shutdowns of individual process units
within a refinery to perform major maintenance activities),
labor relations, environmental remediation, emission control,
and capital expenditures; is responsible for all related costs;
and is under no contractual obligation to us to maintain
operations at the Navajo Refinery.
Furthermore, Holly Corporations obligations under our
three pipeline, tankage
and/or
terminal agreements with Holly Corporation, would be temporarily
suspended during the occurrence of a force majeure that renders
performance impossible with respect to an asset for at least
30 days. If such an event were to continue for a year, we
or Holly Corporation could terminate the agreements. The
occurrence of any of these events could reduce our revenues and
cash flows.
We depend on
Alon and particularly its Big Spring Refinery for a substantial
portion of our revenues; if those revenues were significantly
reduced, there would be a material adverse effect on our results
of operations.
For the year ended December 31, 2008, Alon accounted for
16% of the combined revenues of our petroleum product and crude
pipelines and of our terminals and truck loading racks,
including revenues we received from Alon under a capacity lease
agreement.
On February 18, 2008, Alon experienced an explosion and
fire at its Big Spring Refinery that resulted in the shutdown of
production. In early April 2008, Alon reopened its Big Spring
Refinery and resumed production at one-half of refinery capacity
until late September when production was restored to full
capacity. Lost production and reduced operations attributable to
this incident resulted in a significant decrease in third party
shipments and related revenues on our refined product pipelines
during the first nine months of 2008. As a result of related
contractual minimum commitments and resulting shortfall
billings, the incidents did not materially affect our
distributable cash flow.
Another decline in production at Alons Big Spring Refinery
would materially reduce the volume of refined products we
transport and terminal for Alon. As a result, our revenues would
be materially adversely affected. The Big Spring Refinery could
partially or completely shut down its operations, temporarily or
permanently, due to factors affecting its ability to produce
refined products or for planned maintenance or capital projects.
Such factors would include the factors discussed above under the
discussion of risk factors for the Navajo Refinery.
The magnitude of the effect on us of any shutdown depends on the
length of the shutdown and the extent of the refinery operations
affected. We have no control over the factors that may lead to a
shutdown or the measures Alon may take in response to a
shutdown. Alon makes all decisions and is responsible for all
costs at the Big Spring Refinery concerning levels of
production, regulatory compliance, refinery turnarounds, labor
relations, environmental remediation, emission control, and
capital expenditures.
S-15
In addition, under the Alon pipelines and terminals agreement,
if we are unable to transport or terminal refined products that
Alon is prepared to ship, then Alon has the right to reduce its
minimum volume commitment to us during the period of
interruption. If a force majeure event occurs beyond the control
of either of us, we or Alon could terminate the Alon pipelines
and terminals agreement after the expiration of certain time
periods. The occurrence of any of these events could reduce our
revenues and cash flows.
Our leverage
may limit our ability to borrow additional funds, comply with
the terms of our indebtedness or capitalize on business
opportunities.
As of September 30, 2009, the principal amount of our total
outstanding debt was $430.0 million. See
Capitalization for additional information. Our
results of operations, cash flows and financial position could
be adversely affected by significant increases in interest rates
above current levels. Various limitations in our Credit
Agreement and the indentures for our outstanding
61/4% senior
notes due 2015 may reduce our ability to incur additional
debt, to engage in some transactions and to capitalize on
business opportunities. Any subsequent refinancing of our
current indebtedness or any new indebtedness could have similar
or greater restrictions.
Our leverage could have important consequences. We will require
substantial cash flow to meet our payment obligations with
respect to our indebtedness. Our ability to make scheduled
payments, to refinance our obligations with respect to our
indebtedness or our ability to obtain additional financing in
the future will depend on our financial and operating
performance, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors. We
believe that we will have sufficient cash flow from operations
and available borrowings under our Credit Agreement to service
our indebtedness. However, a significant downturn in our
business or other development adversely affecting our cash flow
could materially impair our ability to service our indebtedness.
If our cash flow and capital resources are insufficient to fund
our debt service obligations, we may be forced to refinance all
or a portion of our debt or sell assets. We cannot assure you
that we would be able to refinance our existing indebtedness at
maturity or otherwise or sell assets on terms that are
commercially reasonable.
The instruments governing our debt contain restrictive covenants
that may prevent us from engaging in certain beneficial
transactions. The agreements governing our debt generally
require us to comply with various affirmative and negative
covenants including the maintenance of certain financial ratios
and restrictions on incurring additional debt, entering into
mergers, consolidations and sales of assets, making investments
and granting liens. Additionally, our contribution agreements
with Alon, and our purchase and contribution agreements with
Holly Corporation with respect to the intermediate pipelines and
the crude pipelines and tankage assets, restrict us from selling
the pipelines and terminals acquired from Alon or Holly
Corporation, as applicable, and from prepaying more than
$30.0 million of our outstanding
61/4% senior
notes due 2015 until 2015 and any of the $171.0 million
borrowed under the Credit Agreement for the purchase of the
crude pipelines and tankage assets until 2018, subject to
certain limited exceptions. Our leverage may adversely affect
our ability to fund future working capital, capital expenditures
and other general partnership requirements, future acquisitions,
construction or development activities, or to otherwise fully
realize the value of our assets and opportunities because of the
need to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness or to comply with any
restrictive terms of our indebtedness. Our leverage may also
make our results of operations more susceptible to adverse
economic and industry conditions by limiting our flexibility in
planning for, or reacting to, changes in our business and the
industry in which we operate and may place us at a competitive
disadvantage as compared to our competitors that have less debt.
S-16
We may not be
able to obtain funding on acceptable terms or at all because of
volatility and uncertainty in the credit and capital markets.
This may hinder or prevent us from meeting our future capital
needs.
While the domestic capital markets have shown signs of
improvement in 2009, global financial markets and economic
conditions have been, and continue to be, disrupted and volatile
due to a variety of factors, including significant write-offs in
the financial services sector, declining consumer confidence,
increased unemployment, geopolitical issues, and the current
weak economic conditions. In addition, the fixed-income markets
have experienced periods of extreme volatility which negatively
impacted market liquidity conditions. As a result, the cost of
raising money in the debt and equity capital markets has
increased volatility, while the availability of funds from those
markets has diminished significantly at times. In particular, as
a result of concerns about the stability of financial markets
generally and the solvency of lending counterparties
specifically, the cost of obtaining money from the credit
markets generally may increase as many lenders and institutional
investors increase interest rates, enact tighter lending
standards, refuse to refinance existing debt on similar terms or
at all and reduce, or in some cases cease, to provide funding to
borrowers. In addition, lending counterparties under existing
revolving credit facilities and other debt instruments may be
unwilling or unable to meet their funding obligations. Due to
these factors, we cannot be certain that new debt or equity
financing will be available on acceptable terms. If funding is
not available when needed, or is available only on unfavorable
terms, we may be unable to meet our obligations as they come
due. Moreover, without adequate funding, we may be unable to
execute our growth strategy, complete future acquisitions or
announced and future pipeline construction projects, take
advantage of other business opportunities or respond to
competitive pressures, any of which could have a material
adverse effect on our revenues and results of operations.
We may not be
able to fully execute our growth strategy if we encounter
illiquid capital markets or increased competition for investment
opportunities.
Our strategy contemplates growth through the development and
acquisition of crude, intermediate and refined products
transportation and storage assets while maintaining a strong
balance sheet. This strategy includes constructing and acquiring
additional assets and businesses to enhance our ability to
compete effectively and diversifying our asset portfolio,
thereby providing more stable cash flow. We regularly consider
and enter into discussions regarding, and are currently
contemplating
and/or
pursuing, potential joint ventures, stand alone projects or
other transactions that we believe will present opportunities to
realize synergies, expand our role in our chosen businesses and
increase our market position.
We will require substantial new capital to finance the future
development and acquisition of assets and businesses. Any
limitations on our access to capital will impair our ability to
execute this strategy. If the cost of such capital becomes too
expensive, our ability to develop or acquire accretive assets
will be limited. We may not be able to raise the necessary funds
on satisfactory terms, if at all. The primary factors that
influence our cost of equity include market conditions, fees we
pay to underwriters and other offering costs, which include
amounts we pay for legal and accounting services. The primary
factors influencing our cost of borrowing include interest
rates, credit spreads, covenants, underwriting or loan
origination fees and similar charges we pay to lenders.
In addition, we are experiencing increased competition for the
types of assets and businesses we have historically purchased or
acquired. Increased competition for a limited pool of assets
could result in our losing to other bidders more often or
acquiring assets at less attractive prices. Either occurrence
would limit our ability to fully execute our growth strategy.
Our inability to execute our growth strategy may materially
adversely affect our ability to maintain or pay higher
distributions in the future.
S-17
USE OF
PROCEEDS
We will receive net proceeds of approximately
$ million from the sale of
the 1,900,000 common units we are offering after deducting
underwriting discounts but before paying offering expenses, or
approximately $ million if
the underwriters over-allotment option is exercised in
full.
We intend to use a portion of the net proceeds of this offering,
including any exercise of the underwriters over-allotment
option, to fund HEP Tulsa LLCs payment of the
$21.5 million cash portion of the $75.0 million total
purchase price for the pending acquisition of the Sinclair
logistics assets and to pay costs related to that acquisition.
We intend to use the remaining net proceeds either to pay a
portion of the purchase price for our potential acquisition from
Holly Corporation of its investments in two pipeline projects (a
70-mile
pipeline from Centurion Pipeline L.P.s Slaughter station
in west Texas to Lovington, New Mexico and a
37-mile
pipeline that connects our Artesia crude gathering system to
Holly Corporations Lovington facility) pursuant to our
option to purchase those investments at prices to be negotiated
with Holly Corporation or, instead, to repay bank debt incurred
under our credit agreement, for other potential future
acquisitions or for general partnership purposes.
The pending acquisition of the Sinclair logistics assets is
subject to customary closing conditions, including regulatory
approval. If that acquisition does not close, we intend to use
the net proceeds of this offering for one or more of the
following: to pay for all or substantially all of the purchase
price and related costs for our potential acquisitions from
Holly Corporation of its investments in the two pipeline
projects described above, to repay bank debt incurred under our
credit agreement, for other potential future acquisitions or for
general partnership purposes. For more information regarding the
acquisition of the Sinclair logistics assets, see Recent
Developments.
The bank debt that may be repaid with the net proceeds of this
offering was incurred primarily to fund capital expenditures,
including the acquisition from Holly Corporation of a newly
constructed intermediate pipeline from their Lovington facility
to their Artesia, New Mexico facility in June 2009 for
$34.2 million and the truck and rail loading/unloading
facilities at Holly Corporations Tulsa refinery in August
2009 for $17.5 million. Indebtedness under the Credit
Agreement bears interest, at our option, at either (a) the
reference rate as announced by the administrative agent plus an
applicable margin (ranging from 0.25% to 1.50%) or (b) at a
rate equal to the London Interbank Offered Rate
(LIBOR) plus an applicable margin (ranging from
1.00% to 2.50%). In each case, the applicable margin is based
upon the ratio of our funded debt (as defined in the Credit
Agreement) to EBITDA (earnings before interest, taxes,
depreciation and amortization, as defined in the Credit
Agreement). The Credit Agreement matures on August 27,
2011. At September 30, 2009, we had $245 million of
borrowings outstanding under our credit agreement.
S-18
CAPITALIZATION
The following table sets forth our capitalization as of
September 30, 2009:
|
|
|
|
|
on a historical basis; and
|
|
|
|
as adjusted to give effect to
|
|
|
|
|
|
the sale of 1,900,000 common units offered hereby at an assumed
public offering price of $38.30 per common unit, the last
reported sales price of our common units on the New York Stock
Exchange on October 30, 2009, not including estimated
offering expenses and underwriting discounts and commissions;
|
|
|
|
the use of net proceeds from this offering to fund HEP
Tulsa LLCs payment of the $21.5 million cash portion
of the $75.0 million total purchase price for the
acquisition of the Sinclair logistics assets and to pay costs
related to that acquisition; and
|
|
|
|
the issuance by us to Sinclair of 1,373,609 of our common units
as payment of the remainder of the $75.0 million total
purchase price for the acquisition of the Sinclair logistics
assets.
|
This table should be read in conjunction with our financial
statements (including the accompanying notes) and
Managements Discussion and Analysis of Financial
Condition and Results of Operations set forth in our
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2009 incorporated by
reference in this prospectus supplement. The table does not
reflect the application of any proceeds of this offering for any
purpose other than in connection with the acquisition of the
Sinclair logistics assets.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30, 2009
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
(In thousands, unaudited)
|
|
|
Cash and cash equivalents
|
|
$
|
4,050
|
|
|
$
|
57,897
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
Revolving credit agreement
|
|
$
|
245,000
|
|
|
$
|
245,000
|
(1)
|
61/4% senior
notes due 2015
|
|
|
184,819
|
(2)
|
|
|
184,819
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
429,819
|
|
|
|
429,819
|
|
Equity:
|
|
|
|
|
|
|
|
|
Common units
|
|
|
136,746
|
|
|
|
263,016
|
|
Class B subordinated units
|
|
|
21,054
|
|
|
|
21,054
|
|
General partner interest
|
|
|
(99,359
|
)
|
|
|
(96,782
|
)(3)
|
Accumulated other comprehensive loss
|
|
|
(10,181
|
)
|
|
|
(10,181
|
)
|
Noncontrolling interest
|
|
|
10,809
|
|
|
|
10,809
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
59,069
|
|
|
|
187,916
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
488,888
|
|
|
$
|
617,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A total of approximately $239.0 million was outstanding
under our Credit Agreement as of October 30, 2009. |
|
(2) |
|
Principal amount outstanding was $185.0 million as of
September 30, 2009. |
|
(3) |
|
This number includes an estimated $2.6 million capital
contribution by our general partner in connection with this
offering and in connection with the issuance of 1,373,609 common
units to Sinclair in order to maintain its 2.0% general partner
interest in us. |
This table does not reflect the issuance of up to 285,000 common
units that may be sold to the underwriters upon exercise of
their option to purchase additional common units, the proceeds
of which will be used in the manner described under Use of
Proceeds.
S-19
PRICE RANGE OF
COMMON UNITS AND DISTRIBUTIONS
As of November 2, 2009, there were 17,582,400 common units
outstanding, held by approximately 120 holders of record,
including our general partner. Our common units are traded on
the New York Stock Exchange under the symbol HEP.
As of November 2, 2009, there were 937,500 Class B
subordinated units outstanding. These subordinated units are
privately held and are not publicly traded.
The following table sets forth, for the periods indicated, the
high and low sales prices for our common units, as reported on
the New York Stock Exchange, and quarterly cash distributions
declared and paid to our unitholders. The last reported closing
sales price of our common units on the New York Stock Exchange
on October 30, 2009 was $38.30 per common unit.
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Sales
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Cash
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Price Ranges
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Distributions
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High
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Low
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Per
Unit(1)
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2009
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Fourth Quarter (through October 30, 2009)
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$
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41.65
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$
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36.00
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Third Quarter
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$
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40.05
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$
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31.30
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$
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0.795
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(2)
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Second Quarter
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$
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33.29
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$
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23.19
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$
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0.785
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First Quarter
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$
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30.43
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$
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20.96
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$
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0.775
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2008
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Fourth Quarter
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$
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33.46
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$
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14.93
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$
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0.765
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Third Quarter
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$
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39.16
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$
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26.01
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$
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0.755
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Second Quarter
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$
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47.03
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$
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37.33
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$
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0.745
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First Quarter
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$
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44.23
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$
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36.06
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$
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0.735
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2007
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Fourth Quarter
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$
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48.09
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$
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42.04
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$
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0.725
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Third Quarter
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$
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57.24
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$
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43.10
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$
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0.715
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Second Quarter
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$
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56.69
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$
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46.55
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$
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0.705
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First Quarter
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$
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49.97
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$
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39.50
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$
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0.690
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(1) |
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Represents cash distributions attributable to the quarter and
declared or to be paid within 45 days after quarter end to
all holders of common, subordinated and general partner units on
the record date, including incentive distributions to our
general partner. |
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(2) |
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This distribution will be paid November 13, 2009 to all
unitholders of record on November 2, 2009. Accordingly,
investors in this offering will not receive this distribution. |
S-20
CERTAIN UNITED
STATES FEDERAL INCOME TAX CONSIDERATIONS
The tax consequences to you of an investment in our common units
will depend in part on your own tax circumstances. For a
discussion of the principal federal income tax considerations
associated with our operations and the purchase, ownership and
disposition of our common units, please read Material Tax
Consequences beginning on page 38 in the accompanying
base prospectus, as updated and supplemented by the paragraphs
included herein. You are urged to consult with your own tax
advisor about the federal, state, local and foreign tax
consequences particular to your circumstances.
Tax Opinion of
Fulbright & Jaworski L.L.P.
Subject to the representations, assumptions, qualifications and
limitations stated in the accompanying prospectus and as
modified and supplemented by this prospectus supplement,
Fulbright & Jaworski L.L.P. concurs with the
statements contained in the section captioned Material Tax
Consequences beginning on page 38 of the accompanying
base prospectus, to the extent that such statements constitute
matters of law and legal conclusions. In rendering its opinion
that we will be classified as a partnership and our operating
partnership will be disregarded as an entity separate from us
for federal income tax purposes, Fulbright & Jaworski
L.L.P. (1) has assumed the accuracy of the opinion of
Vinson & Elkins L.L.P. to the effect that we were
classified as a partnership and our operating partnership was
disregarded as an entity separate from us for each taxable year
ending prior to January 1, 2009, as stated in the
accompanying base prospectus and (2) has relied on factual
representations made by us and our general partner including
that (a) neither we, the general partner of the operating
partnership nor the operating partnership has elected or will
elect to be classified as an association taxable as a
corporation for federal income tax purposes, and (b) for
each taxable year ending after January 1, 2009, at least
90% of our gross income has been and will be income from
activities that Fulbright & Jaworski L.L.P. has opined
or will opine is qualifying income within the
meaning of Section 7704(d) of the Internal Revenue Code, as
amended (the Internal Revenue Code).
Partnership
Status
The anticipated after-tax economic benefit of an investment in
our common units depends largely on our being treated as a
partnership for federal income tax purposes. We have not
requested, and do not plan to request, a ruling from the IRS on
this or any other tax matter affecting us. Instead, we will rely
on the opinion of Fulbright & Jaworski, L.L.P. that we
will be classified as a partnership for federal income tax
purposes.
Current law may change so as to cause us to be treated as a
corporation for federal income tax purposes or otherwise subject
us to entity-level taxation. At the federal level, legislation
has been proposed that would eliminate partnership tax treatment
for certain publicly traded partnerships. Although such
legislation would not apply to us as currently proposed, it
could be amended prior to enactment in a manner that does apply
to us. We are unable to predict whether any of these changes, or
other proposals will ultimately be enacted. Any such changes
could negatively impact the value of an investment in our common
units. Moreover, any such changes may or may not be applied
retroactively. At the state level, because of widespread state
budget deficits and other reasons, several states are evaluating
ways to subject partnerships to entity-level taxation through
the imposition of state income, franchise and other forms of
taxation. For example, we are required to pay Texas franchise
tax at a maximum effective rate of 0.7% of our gross income
apportioned to Texas in the prior year. Imposition of such a tax
on us by Texas and, if applicable, by any other state will
reduce the cash available for distribution to you.
If we were treated as a corporation for federal income tax
purposes, we would pay federal income tax on our taxable income
at the corporate tax rate, which is currently a maximum of 35%,
and would likely pay state income tax at varying rates.
Distributions to you would generally be taxed
S-21
again as corporate distributions, and no income, gains, losses
or deductions would flow through to you. Because a tax would be
imposed upon us as a corporation, our cash available for
distribution to you would be substantially reduced. Therefore,
treatment of us as a corporation would result in a material
reduction in the anticipated cash flow and after-tax return to
the unitholders, likely causing a substantial reduction in the
value of our common units. Please read Material Tax
Consequences Partnership Status in the
accompanying base prospectus for additional information
regarding our partnership status.
Tax Consequences
of Unit Ownership
Tax Rates. In general, the highest
marginal federal income tax rate applicable to ordinary income
of individuals is currently 35%, and the highest marginal
federal income tax rate applicable to long-term capital gains
(generally, capital gains on certain assets held for more than
12 months) of individuals is 15%. However, absent new
legislation extending the current rates, beginning
January 1, 2011, the highest marginal federal income tax
rate applicable to ordinary income and long-term capital gains
of individuals will increase to 39.6% and 20%, respectively.
Allocation of Income, Gain, Loss and
Deduction. In general, if we have a net
profit, our items of income, gain, loss and deduction will be
allocated among our general partner and the unitholders in
accordance with their percentage interests in us. At any time
that distributions are made to the common units in excess of
distributions to the subordinated units, or incentive
distributions are made to our general partner, gross income will
be allocated to the recipients to the extent of these
distributions. If we have a net loss, that loss will be
allocated first to our general partner and the unitholders in
accordance with their percentage interests in us to the extent
of their positive capital accounts and, second, to our general
partner.
Specified items of our income, gain, loss and deduction will be
allocated to account for (i) any difference between the tax
basis and fair market value of our assets that exists at the
time of an offering and (ii) any difference between the tax
basis and fair market value of any property contributed to us by
our general partner and its affiliates that exists at the time
of contribution, referred to in this discussion as the
Adjusted Property. The effect of these allocations,
referred to as Section 704(c) Allocations, to a
unitholder purchasing common units from us in an offering will
be essentially the same as if the tax bases of our assets were
equal to their fair market value at the time of such offering.
In the event we issue additional common units or engage in
certain other transactions in the future, reverse
Section 704(c) Allocations, similar to the
Section 704(c) Allocations described above, will be made to
our general partner and persons that hold our units immediately
prior to such issuance or other transactions to account for the
difference between the book basis for purposes of
maintaining capital accounts and the fair market value of all
property held by us at the time of such future issuance or other
transaction. In addition, items of recapture income will be
allocated to the extent possible to the unitholder who was
allocated the deduction giving rise to the treatment of that
gain as recapture income in order to minimize the recognition of
ordinary income by some unitholders. Finally, although we do not
expect that our operations will result in the creation of
negative capital accounts, if negative capital accounts
nevertheless result, items of our income and gain will be
allocated in an amount and manner sufficient to eliminate the
negative balance as quickly as possible.
An allocation of items of our income, gain, loss or deduction,
other than an allocation required by the Internal Revenue Code
to eliminate the difference between a partners
book capital account, credited with the fair market
value of Adjusted Property, and tax capital account,
credited with the tax basis of Adjusted Property, referred to in
this discussion as the Book-Tax Disparity, will
generally be given effect for federal income tax purposes in
determining a partners share of an item of income, gain,
loss or deduction only if the allocation has substantial
economic effect. In any other case, a
S-22
partners share of an item will be determined on the basis
of his interest in us, which will be determined by taking into
account all the facts and circumstances, including:
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his relative contributions to us;
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the interests of all the partners in profits and losses;
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the interest of all the partners in cash flow; and
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the rights of all the partners to distributions of capital upon
liquidation.
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Ratio of Taxable Income to
Distributions. We estimate that if you
purchase common units in this offering and hold those common
units through the record date for distributions with respect to
the quarter ending December 31, 2011, you will be
allocated, on a cumulative basis, an amount of federal taxable
income for the taxable years 2009 through 2011, that will be 25%
or less of the cash distributed to you with respect to such
common units. This estimate is based upon many assumptions
regarding our business and operations, including assumptions
with respect to capital expenditures, cash flows, net working
capital and anticipated cash distributions. These estimates and
assumptions are subject to, among other things, numerous
business, economic, regulatory, competitive and political
uncertainties beyond our control. Further, the estimates are
based on current tax law and tax reporting positions that we
will adopt and with which the IRS could disagree. Accordingly,
we cannot assure you that these estimates will prove to be
correct. The actual percentage of distributions that will
constitute taxable income could be higher or lower than
expected, and any differences could be material and could
materially affect the value of the common units. For example,
the ratio of allocable taxable income to cash distributions to a
purchaser of common units in this offering will be greater, and
perhaps substantially greater, than our estimate with respect to
the period described above if:
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gross income from operations exceeds the amount required to make
the current level of quarterly distributions on all units, yet
we only distribute the current level of quarterly distributions
on all units; or
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we make a future offering of common units and use the proceeds
of the offering in a manner that does not produce substantial
additional deductions during the period described above, such as
to repay indebtedness outstanding at the time of this offering
or to acquire property that is not eligible for depreciation or
amortization for federal income tax purposes or that is
depreciable or amortizable at a rate significantly slower than
the rate applicable to our assets at the time of this offering.
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Tax-Exempt
Organizations and Other Investors.
Ownership of common units by tax-exempt entities and
non-U.S. persons
raises issues unique to such persons. Such tax exempt entities
or
non-U.S. persons
should consult an independent tax advisor before investing in
our common units. Please read Material Tax
Consequences Tax-Exempt Organizations and Other
Investors in the accompanying base prospectus.
S-23
UNDERWRITING
We and the underwriters named below have entered into an
underwriting agreement with respect to the common units being
offered. Subject to certain conditions, each underwriter has
severally agreed to purchase the number of common units
indicated in the following table. Goldman, Sachs & Co.
and UBS Securities LLC are acting as the representatives of the
underwriters.
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Number of
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Underwriters
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Common Units
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Goldman, Sachs & Co.
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UBS Securities LLC
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SMH Capital Inc.
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Total
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1,900,000
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The underwriters are committed to take and pay for all of the
common units being offered, if any are taken, other than the
common units covered by the option described below unless and
until this option is exercised.
If the underwriters sell more common units than the total number
set forth in the table above, the underwriters have an option to
buy up to an additional 285,000 common units from us. They may
exercise that option for 30 days. If any common units are
purchased pursuant to this option, the underwriters will
severally purchase common units in approximately the same
proportion as set forth in the table above.
The following table shows the per common unit and total
underwriting discounts and commissions to be paid to the
underwriters by us. Such amounts are shown assuming both no
exercise and full exercise of the underwriters option to
purchase an additional 285,000 common units.
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No Exercise
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Full Exercise
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Per Common Unit
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$
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$
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Total
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$
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$
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Common units sold by the underwriters to the public will
initially be offered at the initial public offering price set
forth on the cover of this prospectus supplement. Any common
units sold by the underwriters to securities dealers may be sold
at a discount of up to $ per
common unit from the initial public offering price. If all the
common units are not sold at the initial public offering price,
the representatives may change the offering price and the other
selling terms. The offering of the shares by the underwriters is
subject to receipt and acceptance and subject to the
underwriters right to reject any order in whole or in part.
We, certain of our affiliates (including our general partner and
Holly Logistic Services, L.L.C., which is the general partner of
our general partner) and the officers and directors of Holly
Logistic Services, L.L.C. have agreed with the underwriters,
subject to certain exceptions, not to dispose of or hedge any
common units or securities convertible into or exchangeable for
common units during the period from the date of this prospectus
supplement continuing through the date 90 days after the
date of this prospectus supplement, except with the prior
written consent of Goldman, Sachs & Co. and UBS
Securities LLC. This agreement does not apply to any existing
employee benefit plans and will permit the issuance of our
common units by us to Sinclair in connection with the
acquisition of the Sinclair logistics assets.
In connection with the offering, the underwriters may purchase
and sell common units in the open market. These transactions may
include short sales, stabilizing transactions and purchases to
cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of common units
than they are required to purchase in the offering.
Covered short sales are sales made in an amount not
greater than the underwriters option to purchase
additional common units from us in the offering. The
underwriters may close out any covered short position by either
S-24
exercising their option to purchase additional common units or
purchasing common units in the open market. In determining the
source of common units to close out the covered short position,
the underwriters will consider, among other things, the price of
common units available for purchase in the open market as
compared to the price at which they may purchase additional
common units pursuant to the option granted to it.
Naked short sales are any sales in excess of such
option. The underwriters must close out any naked short position
by purchasing common units in the open market. A naked short
position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of
the common units in the open market after pricing that could
adversely affect investors who purchase in the offering.
Stabilizing transactions consist of certain bids or purchases
made for the purpose of preventing or retarding a decline in the
market price of the common units while the offering is in
progress.
The underwriters also may impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased common units sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing
transactions, as well as other purchases by the underwriters for
their own accounts may have the effect of preventing or
retarding a decline in the market price of the common units, and
together with the imposition of the penalty bid, may stabilize,
maintain or otherwise affect the market price of the common
units. As a result, the price of the common units may be higher
than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued at any
time. These transactions may be effected on the NYSE, in the
over-the-counter market or otherwise.
We estimate that our total expenses for the offering, excluding
underwriting discounts and commissions, will be approximately
$250,000.
We have agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities
Act of 1933.
Certain of the underwriters and their respective affiliates
have, from time to time, performed, and may in the future
perform, various financial advisory and investment banking
services for the issuer, for which they received or will receive
customary fees and expenses.
Because the Financial Industry Regulatory Authority
(FINRA) views the common units offered hereby as
interests in a direct participation program, the offering is
being made in compliance with FINRA Rule 2310.
LEGAL
MATTERS
The validity of the common units is being passed upon for us by
Fulbright & Jaworski L.L.P., as our counsel. Certain
legal matters are being passed upon for the underwriters by
Latham & Watkins LLP.
EXPERTS
The consolidated financial statements of Holly Energy Partners,
L.P. appearing in Holly Energy Partners, L.P.s Annual
Report on
Form 10-K
for the year ended December 31, 2008, as amended, have been
audited by Ernst & Young LLP, independent registered
public accounting firm, as set forth in their report thereon,
included therein, and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by
reference in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
S-25
FORWARD-LOOKING
STATEMENTS
All statements, other than statements of historical fact,
included or incorporated by reference in this prospectus
supplement are forward-looking statements, including, but not
limited to, statements identified by the words
anticipate, believe,
estimate, expect, plan,
intend and forecast, and similar
expressions and statements regarding our business strategy,
plans and objectives for future operations. These statements
reflect our current views with respect to future events, based
on what we believe are reasonable assumptions. 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:
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risks and uncertainties with respect to the actual quantities of
petroleum products and crude oil shipped on our pipelines
and/or
terminalled in our terminals;
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the successful acquisition of the Sinclair logistics assets;
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the successful closing of the UNEV pipeline transaction and the
future performance of such asset;
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the grant to us of an option to purchase, and our exercise of
such option, with respect to Holly Corporations recently
constructed pipeline from Centurion Pipeline, L.P.s
Slaughter station in west Texas to Lovington, New Mexico, and a
pipeline project that connects our Artesia crude gathering
system to Holly Corporations Lovington facility, and the
performance of such assets;
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the economic viability of Holly Corporation, Alon USA, Inc. and
our other customers;
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the demand for refined petroleum products in markets we serve;
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our ability to successfully purchase and integrate additional
operations in the future;
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our ability to complete previously announced pending or
contemplated acquisitions and dispositions;
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the availability and cost of additional debt and equity
financing;
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the possibility of reductions in production or shutdowns at
refineries utilizing our pipeline and terminal facilities;
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the effects of current and future government regulations and
policies;
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our operational efficiency in carrying out routine operations
and capital construction projects;
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the possibility of terrorist attacks and the consequences of any
such attacks;
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general economic conditions; and
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other financial, operations and legal risks and uncertainties
set forth in Item 1A Risk Factors in our 2008
Annual Report on Form
10-K and the
other documents incorporated by reference herein.
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Other factors described herein, or factors that are unknown or
unpredictable, could also have a material adverse effect on
future results. Please read Risk Factors in
Item 1A of our Annual Report on
Form 10-K
for the year ended December 31, 2008 and beginning on
page S-14
of this prospectus supplement. Except as required by securities
laws, we do not intend to update these forward-looking
statements and information.
S-26
WHERE YOU CAN
FIND MORE INFORMATION
We are subject to the informational requirements of the
Securities Exchange Act of 1934 (the Exchange Act)
and in accordance therewith file reports and other information
with the Securities and Exchange Commission (SEC).
For further information regarding us, you may desire to review
reports and other information filed under the Exchange Act,
including the reports and other information incorporated by
reference into this prospectus. Such reports and other
information may be inspected and copied at the public reference
room maintained by the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. Copies can be obtained by mail at
prescribed rates by writing to the public reference room
mentioned above. You may obtain information on the operation of
the public reference room by calling the SEC at
1-800-SEC-0330.
INCORPORATION BY
REFERENCE
The SEC allows us to incorporate by reference into this
prospectus the information we file with it, which means that we
can disclose important information to you by referring you to
those documents. The information incorporated by reference is
considered to be a part of this prospectus, and later
information that we file with the SEC will automatically update
and supersede this information. Therefore, before you decide to
invest in the common units offered hereby, you should always
check for reports we may have filed with the SEC after the date
of this prospectus. We incorporate by reference the documents
listed below filed by us and any future filings made after the
date of this prospectus with the SEC under sections 13(a),
13(c), 14 or 15(d) of the Exchange Act until the termination of
this offering (other than information furnished and not filed
with the SEC):
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the amendment to the Annual Report on
Form 10-K
of Holly Energy Partners, L.P. for the year ended
December 31, 2008, as filed with the SEC on May 1,
2009;
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the Annual Report on
Form 10-K
of Holly Energy Partners, L.P. for the year ended
December 31, 2008, as filed with the SEC on
February 17, 2009;
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the Quarterly Report on
Form 10-Q
of Holly Energy Partners, L.P. for the quarter ended
March 31, 2009, as filed with the SEC on April 30,
2009;
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the Quarterly Report on
Form 10-Q
of Holly Energy Partners, L.P. for the quarter ended
June 30, 2009, as filed with the SEC on July 31, 2009;
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the Quarterly Report on
Form 10-Q
of Holly Energy Partners, L.P. for the quarter ended
September 30, 2009, as filed with the SEC on October 30,
2009;
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the Current Reports on
Form 8-K
of Holly Energy Partners, L.P., as filed with the SEC on
January 7, 2009, May 6, 2009, June 5, 2009,
August 6, 2009, and October 21, 2009 (excluding any
information furnished pursuant to Item 2.02 or
Item 7.01 on any Current Report on
Form 8-K); and
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the description of our common units contained in our
registration statement on
Form 8-A,
as filed with the SEC on June 21, 2004, and any subsequent
amendment thereto filed for the purpose of updating such
description.
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The SEC maintains a web site on the Internet at
http://www.sec.gov.
Our periodic reports and other information filed by us with the
SEC can be downloaded from the SECs web site and can also
be inspected at the offices of the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005.
We will provide without charge to each person, including any
beneficial owner, to whom this prospectus is delivered, upon
written or oral request, a copy of any document incorporated by
reference in this prospectus (other than exhibits to any such
document not described above) and our partnership agreement.
Requests for such documents should be directed to Holly Energy
Partners, L.P., 100 Crescent Court, Suite 1600, Dallas,
Texas 75201, Attention: Chief Financial Officer; telephone
number
(214) 871-3555.
S-27
PROSPECTUS
Holly Energy Partners,
L.P.
Holly Energy Finance
Corp.
$1,000,000,000
COMMON UNITS
PREFERRED UNITS
DEBT SECURITIES
We may from time to time offer the following securities under
this prospectus:
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common units representing limited partner interests in Holly
Energy Partners, L.P.;
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preferred units representing limited partner interests in Holly
Energy Partners, L.P.; and
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debt securities of Holly Energy Partners, L.P.
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Holly Energy Finance Corp. may act as co-issuer of the debt
securities and certain other subsidiaries of Holly Energy
Partners, L.P. may guarantee the debt securities.
This prospectus provides you with a general description of the
securities we may offer. Each time we sell securities we will
provide a prospectus supplement that will contain specific
information about the terms of that offering. The amount of any
securities offered and the price at which those securities are
offered will be determined at the time of each offering. Any
prospectus supplement may also add, update or change information
contained in this prospectus. You should read carefully this
prospectus and any prospectus supplement before you invest. You
should also read the documents we have referred you to in the
Where You Can Find More Information section of this
prospectus for information about us, including our financial
statements.
Our common units are listed on the New York Stock Exchange under
the trading symbol HEP. We will provide information
in the prospectus supplement for the expected trading market, if
any, for any preferred units or debt securities that we issue.
Unless otherwise specified in a prospectus supplement, any of
our senior debt securities, when and if issued, will be
unsecured and will rank equally with our other unsecured and
unsubordinated indebtedness, and any of our subordinated debt
securities, when and if issued, will be subordinated in right of
payment to our senior debt.
Limited partnerships are inherently different from
corporations. You should review carefully each of the factors
referred to under Risk Factors beginning on
page 3 of this prospectus and contained in the applicable
prospectus supplement and in the documents incorporated by
reference herein and therein for a discussion of important risks
you should consider before investing in our securities.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
This prospectus may not be used to consummate sales of
securities by the Registrants unless accompanied by a prospectus
supplement.
The date of this prospectus is December 4, 2008.
TABLE OF
CONTENTS
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You should rely only on the information contained or
incorporated by reference in this prospectus or any prospectus
supplement. We have not authorized any other person to provide
you with different information. If anyone provides you with
different or inconsistent information, you should not rely on
it. You should not assume that the information incorporated by
reference or provided in this prospectus or any prospectus
supplement is accurate as of any date other than the date on the
front of each document.
Our, we, us and Holly
Energy Partners as used in this prospectus refer to Holly
Energy Partners, L.P. or to Holly Energy Partners, L.P. and
certain of its subsidiaries collectively, including its
subsidiary Holly Energy Finance Corp., as the context requires.
ABOUT
THIS PROSPECTUS
This prospectus is part of a registration statement that we
filed with the Securities and Exchange Commission (the
Commission) using a shelf registration
process. Under this shelf registration process, we may offer
from time to time up to $1,000,000,000 of our securities. Each
time we offer securities, we will provide you with a prospectus
supplement that will describe, among other things, the specific
amounts and prices of the securities being offered and the terms
of the offering. Any prospectus supplement may add, update or
change information contained in this prospectus. Any statement
that we make in this prospectus will be modified or superseded
by any inconsistent statement made by us in any prospectus
supplement. The information in this prospectus is accurate as of
its date. Therefore, before you invest in our securities, you
should carefully read this prospectus and any prospectus
supplement relating to the securities offered to you together
with the additional information described under the heading
Where You Can Find More Information.
WHO WE
ARE
Holly Energy Partners, L.P. is a Delaware limited partnership
engaged principally in the business of operating a system of
petroleum product and crude oil pipelines in Texas, New Mexico,
Oklahoma and Utah, distribution terminals in Texas, New Mexico,
Arizona, Utah, Idaho and Washington and refinery tankage in New
Mexico and Utah. We generate revenues by charging tariffs for
transporting petroleum products and crude oil through our
pipelines and by charging fees for terminalling petroleum
products and other hydrocarbons, and storing and providing other
services at our storage tanks and terminals. We do not take
ownership of products that we transport or terminal; therefore,
we are not directly exposed to changes in commodity prices. We
serve Holly Corporations refineries in New Mexico and Utah
under three
15-year
pipeline, tankage and terminal agreements expiring in July 2019,
July 2020 and February 2023 and Alon USA, Inc.s
(Alon) Big Spring Refinery under a separate
pipelines and terminals agreement expiring in February 2020. We
are dedicated to generating stable cash flows and growing our
business. Our assets include:
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approximately 780 miles of refined product pipelines,
including 340 miles of leased pipelines, that transport
gasoline, diesel and jet fuel principally from Holly
Corporations Navajo Refinery in New Mexico to Holly
Corporations customers in the metropolitan and rural areas
of Texas, New Mexico, Arizona, Colorado, Utah and northern
Mexico;
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approximately 510 miles of refined product pipelines that
transport refined products from Alons Big Spring refinery
in Texas to customers in Texas and Oklahoma;
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two parallel
65-mile
pipelines that transport intermediate feedstocks and crude oil
from Holly Corporations Lovington, New Mexico refining
facilities to Holly Corporations Artesia, New Mexico
refining facilities;
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a 36-mile
jet fuel pipeline which runs from Artesia to Roswell, New Mexico;
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approximately 10 miles of crude and refined product
pipelines which service Holly Corporations Woods Cross
refinery;
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approximately 860 miles of crude oil trunk, gathering and
lease connection pipelines which service Holly
Corporations Lovington and Artesia refining
facilities; and
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a 70% interest in Rio Grande Pipeline Company, a joint venture
that owns a
249-mile
refined product pipeline that transports liquid petroleum gases,
or LPGs, from West Texas to the Texas/Mexico border near
El Paso for further transport into northern Mexico.
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Refined Product Terminals:
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four refined product terminals, located in El Paso, Texas;
Moriarty and Bloomfield, New Mexico; and Tucson, Arizona, with
an aggregate capacity of approximately 1 million barrels,
that are integrated with our refined product pipeline system
that serves Holly Corporations Navajo Refinery;
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three refined product terminals (two of which are 50% owned),
located in Burley and Boise, Idaho, and Spokane, Washington,
with an aggregate capacity of approximately
500,000 barrels, that serve third-party common carrier
pipelines;
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one refined product terminal near Mountain Home, Idaho, with a
capacity of 120,000 barrels, that serves a nearby United
States Air Force Base;
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two refined product terminals, located in Wichita Falls and
Abilene, Texas, and one tank farm in Orla, Texas with aggregate
capacity of 480,000 barrels, that are integrated with our
refined product pipelines that serve Alons Big Spring,
Texas refinery;
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two refined product truck loading racks, one located within
Holly Corporations Navajo Refinery and one located within
Holly Corporations Woods Cross Refinery near Salt Lake
City, Utah; and
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a Roswell, New Mexico jet fuel terminal leased through September
2011.
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approximately 600,000 barrels of
on-site
crude oil tankage at Holly Corporations Navajo and Woods
Cross Refineries.
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Holly Energy Finance Corp. (Holly Energy Finance) is
a Delaware corporation and wholly-owned subsidiary of Holly
Energy Partners organized for the sole purpose of co-issuing
certain of our debt securities. Holly Energy Finance does not
have any operations of any kind and does not generate any
revenue other than as may be incidental to its activities as a
co-issuer of any of our debt securities.
Our principal executive offices are located at 100 Crescent
Court, Suite 1600, Dallas, Texas 75201, and our telephone
number is
(214) 871-3555.
Our website is located at
http://www.hollyenergypartners.com.
We make our periodic reports and other information filed with or
furnished to the Commission available, free of charge, through
our website, as soon as reasonably practicable. Information on
our website or any other website, is not incorporated by
reference into this prospectus and does not constitute a part of
this prospectus unless specifically so designated and filed with
the Commission.
THE
SUBSIDIARY GUARANTORS
Throughout this prospectus, we refer to each of the following
subsidiaries of Holly Energy Partners as the Subsidiary
Guarantors: HEP Logistics GP, L.L.C., Holly Energy
Partners Operating, L.P., HEP Pipeline GP, L.L.C.,
HEP Refining GP, L.L.C., HEP Mountain Home, L.L.C., HEP
Pipeline, L.L.C., HEP Refining, L.L.C., HEP Woods Cross, L.L.C.,
HEP Navajo Southern, L.P., HEP Pipeline Assets, Limited
Partnership, HEP Refining Assets, L.P. and HEP Fin
Tex/Trust River, L.P. Each of the Subsidiary
Guarantors may jointly and severally and unconditionally
guarantee our payment obligations under any series of debt
securities offered by this prospectus and any prospectus
supplement.
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RISK
FACTORS
An investment in our securities involves risks. Before you
invest in our securities you should carefully consider those
risk factors included in our most recent Annual Report on
Form 10-K,
as supplemented by our Quarterly Reports on
Form 10-Q,
each of which is incorporated herein by reference, and those
risk factors that may be included in the applicable prospectus
supplement together with all of the other information included
in this prospectus, any prospectus supplement and the documents
we incorporate by reference in evaluating an investment in our
securities. This prospectus also contains forward-looking
statements that involve risks and uncertainties. Please read
Forward-Looking Statements. Our actual results could
differ materially from those anticipated in the forward-looking
statements as a result of certain factors, including the risks
described in the foregoing documents and the other information
included in, or incorporated by reference into, this prospectus.
If any of these risks occur, our business, financial condition
or results of operations could be adversely affected. In that
case, we may be unable to pay distributions to our untiholders,
or to pay interest on, or the principal of, any debt securities.
In that event, the trading price of our securities could decline
and you could lose all or part of your investment. When we offer
and sell any securities pursuant to a prospectus supplement, we
may include additional risk factors relevant to such securities
in the prospectus supplement.
FORWARD-LOOKING
STATEMENTS
This prospectus and some of the documents we incorporate by
reference contain various forward-looking statements and
information that are based on our beliefs and those of our
general partner, as well as assumptions made by and information
currently available to us. These forward-looking statements are
identified as any statement that does not relate strictly to
historical or current facts. When used in this prospectus or the
documents we have incorporated herein or therein by reference,
words such as anticipate, project,
expect, plan, goal,
forecast, intend, could,
believe, may, and similar expressions
and statements regarding our plans and objectives for future
operations, are intended to identify forward-looking statements.
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
assurances that such expectations will prove to be correct. Such
statements are subject to a variety of risks, uncertainties and
assumptions. If one or more of these risks or uncertainties
materialize, or if underlying assumptions prove incorrect, our
actual results may vary materially from those anticipated,
estimated, projected or expected. Among the key risk factors
that may have a direct bearing on our results of operations and
financial condition are:
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Risks and uncertainties with respect to the actual quantities of
petroleum products and crude oil shipped on our pipelines
and/or
terminalled in our terminals;
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The economic viability of those Holly Corporation subsidiaries
we contract with as well as Alon USA, Inc. and our other
customers;
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The demand for refined petroleum products in markets we serve;
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Our ability to successfully purchase and integrate additional
operations in the future;
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Our ability to complete previously announced pending or
contemplated acquisitions;
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The availability and cost of additional debt and equity
financing;
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The possibility of reductions in production or shutdowns at
refineries utilizing our pipeline and terminal facilities;
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The effects of current and future government regulations and
policies;
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Our operational efficiency in carrying out routine operations
and capital construction projects;
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The possibility of terrorist attacks and the consequences of any
such attacks;
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General economic conditions; and
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Other financial, operations and legal risks and uncertainties
detailed from time to time in our Securities and Exchange
Commission filings.
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Other factors described herein, or factors that are unknown or
unpredictable, could also have a material adverse effect on
future results. You should not put undue reliance on any
forward-looking statements. Please review the risk factors
described under Risk Factors in this prospectus and
any prospectus supplement and in the Risk Factors
section of our most recent Annual Report on
Form 10-K
and, to the extent applicable, our Quarterly Reports on
Form 10-Q.
Except as required by securities laws, we do not intend to
update these forward-looking statements and information.
USE OF
PROCEEDS
Except as otherwise provided in the applicable prospectus
supplement, we will use the net proceeds from any sale of
securities described in this prospectus for general partnership
purposes, which may include, among other things, funding
acquisitions of assets or businesses, working capital, capital
expenditures, investments in subsidiaries, the retirement of
existing debt
and/or the
repurchase of common units or other securities. The prospectus
supplement for any particular offering of securities using this
prospectus will disclose the actual use of the net proceeds from
the sale of such securities. The exact amounts to be used and
when the net proceeds will be applied to partnership purposes
will depend on a number of factors, including our funding
requirements and the availability of alternative funding sources.
RATIO OF
EARNINGS TO FIXED CHARGES
For purposes of calculating the ratio of earnings to fixed
charges, earnings represent income before income tax expense
before deducting fixed charges. Fixed charges include interest
and 30% of the total operating lease rental expense, which is
the portion deemed to be interest. Our ratio of earnings to
fixed charges for each of the periods indicated is as follows:
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Nine Months Ended
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September 30,
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Years Ended December 31,
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2008
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2007
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2006
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2005
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2004
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2003
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Ratio of earnings to fixed charges
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2.22
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3.67
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2.91
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3.43
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16.13
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1.27
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DESCRIPTION
OF DEBT SECURITIES
Holly Energy Partners may issue debt securities in one or more
series and Holly Energy Finance may be a co-issuer of one or
more series of such debt securities. When used in this section,
references to we, us and our
refer to Holly Energy Partners and, if Holly Energy Finance
co-issues any debt securities, Holly Energy Finance. References
to an Indenture refer to the particular Indenture
under which we issue a series of debt securities.
The following description sets forth the general terms and
provisions that will apply to any of our debt securities. Each
prospectus supplement will state the particular terms that will
apply to any debt securities included in the supplement.
General
The
Indentures
We will issue our debt securities under either a Senior
Indenture or a Subordinated Indenture, among us, a trustee that
we will name in the related prospectus supplement and, as
applicable, any Subsidiary Guarantors. The term
Trustee as used in this prospectus shall refer to
the trustee under any Indenture. Any debt securities will be
governed by the applicable provisions of the Indenture and those
made part of the Indenture by reference to the
Trust Indenture Act of 1939. We, the Trustee and, as
applicable, the Subsidiary Guarantors, may enter into
supplements to the applicable Indenture from time to time. The
debt securities will be either senior debt securities or
subordinated debt securities.
Neither Indenture contains provisions that would afford holders
of debt securities protection in the event of a sudden and
significant decline in our credit quality or a takeover,
recapitalization or highly leveraged or
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similar transaction. Accordingly, we could in the future enter
into transactions that could increase the amount of indebtedness
outstanding at that time or otherwise adversely affect our
capital structure or credit rating.
This description is a summary of the material provisions of the
debt securities and the Indentures. We urge you to read the
forms of Senior Indenture and Subordinated Indenture filed as
exhibits to the registration statement of which this prospectus
is a part because those Indentures, and not this description,
govern your rights as a holder of our debt securities.
The
Debt Securities
Any series of debt securities that we issue:
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will be the general obligations of Holly Energy Partners and
Holly Energy Finance, if Holly Energy Finance co-issues such
debt securities;
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will be general obligations of the Subsidiary Guarantors, if
guaranteed by them; and
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may be subordinated to our Senior Indebtedness and that of any
Subsidiary Guarantors.
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The Indenture does not limit the total amount of debt securities
that we may issue. We may issue debt securities under the
Indenture from time to time in separate series, up to the
aggregate amount authorized for each such series.
Specific
Terms of Each Series of Debt Securities to be Described in the
Prospectus Supplement
We will prepare a prospectus supplement and either a
supplemental indenture, or authorizing resolutions of the board
of directors of our general partners general partner,
accompanied by the officers certificate, relating to any
series of debt securities that we offer, which will include
specific terms relating to some or all of the following:
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the form and title of the debt securities;
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the total principal amount of the debt securities;
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the date or dates on which the debt securities may be issued;
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whether the debt securities are senior or subordinated debt
securities;
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the currency or currencies in which principal and interest will
be paid, if not in U.S. dollars;
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the portion of the principal amount which will be payable if the
maturity of the debt securities is accelerated;
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any right we may have to defer payments of interest by extending
the dates payments are due and whether interest on those
deferred amounts will be payable;
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the dates on which the principal and premium, if any, of the
debt securities will be payable;
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the interest rate or rates which the debt securities will bear,
or by which the debt securities will accrete in value, and the
interest payment dates for the debt securities;
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any conversion or exchange provisions;
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any optional redemption provisions;
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any sinking fund or other provisions that would obligate us to
repurchase or otherwise redeem the debt securities;
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whether the debt securities are (i) to be co-issued by
Holly Energy Finance and (ii) entitled to the benefits of
any guarantees by the Subsidiary Guarantors;
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whether the debt securities may be issued in amounts other than
$1,000 each or multiples thereof;
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any changes to or additional events of default or covenants;
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any changes to the defeasance or discharge provisions of the
Indenture;
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the subordination, if any, of the debt securities and any
changes to the subordination provisions of the Subordinated
Indenture; and
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any other terms of the debt securities.
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This description of debt securities will be deemed modified,
amended or supplemented by any description of any series of debt
securities set forth in a prospectus supplement related to that
series.
The prospectus supplement also will describe any material United
States federal income tax consequences or other special
considerations regarding the applicable series of debt
securities, including, without limitation, those relating to:
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debt securities with respect to which payments of principal,
premium or interest are determined with reference to an index or
formula, including changes in prices of particular securities,
currencies or commodities;
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debt securities with respect to which payments of interest may
be made in kind in lieu of, or in addition to, cash;
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debt securities with respect to which principal, premium or
interest is payable in a foreign or composite currency;
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debt securities that are issued at a discount below their stated
principal amount, bearing no interest or interest at a rate that
at the time of issuance is below market rates; and
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variable rate debt securities that are exchangeable for fixed
rate debt securities.
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At our option, we may make cash interest payments by check
mailed to the registered holders of debt securities or, if so
stated in the applicable prospectus supplement, at the option of
a holder by wire transfer to an account designated by the holder.
Unless otherwise provided in the applicable prospectus
supplement, fully registered securities may be transferred or
exchanged at the office of the Trustee at which its corporate
trust business is principally administered in the United States,
subject to the limitations provided in the Indenture, without
the payment of any service charge, other than any applicable tax
or governmental charge.
Any funds we pay to a paying agent for the payment of amounts
due on any debt securities that remain unclaimed for two years
will be returned to us, and the holders of the debt securities
must look only to us for payment after that time.
The
Subsidiary Guarantees
Our payment obligations under any series of debt securities may
be jointly and severally, fully and unconditionally guaranteed
by any of the Subsidiary Guarantors. If a series of debt
securities is so guaranteed, the Subsidiary Guarantors will
execute a notation of guarantee as further evidence of their
guarantee. The applicable prospectus supplement will describe
the terms of any guarantee by the Subsidiary Guarantors.
The obligations of each Subsidiary Guarantor under its guarantee
of the debt securities will be limited to the maximum amount
that will not result in the obligations of the Subsidiary
Guarantor under the guarantee constituting a fraudulent
conveyance or fraudulent transfer under federal or state law,
after giving effect to:
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all other contingent and fixed liabilities of the Subsidiary
Guarantor; and
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any collections from or payments made by or on behalf of any
other Subsidiary Guarantors in respect of the obligations of the
Subsidiary Guarantor under its guarantee.
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The guarantee of any Subsidiary Guarantor may be released under
certain circumstances. If we exercise our legal or covenant
defeasance option with respect to debt securities of a
particular series, or satisfy and discharge the Indenture with
respect to that series, as described below under
Defeasance and Discharge, then
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any Subsidiary Guarantor will be released with respect to that
series. Further, if no default has occurred and is continuing
under the Indenture, and to the extent not otherwise prohibited
by the Indenture, a Subsidiary Guarantor will be unconditionally
released and discharged from its guarantee:
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automatically upon any sale, exchange or transfer, whether by
way of merger or otherwise, to any person that is not our
affiliate, of all of our direct or indirect limited partnership
or other equity interests in the Subsidiary Guarantor;
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automatically upon the merger of the Subsidiary Guarantor into
us or any other Subsidiary Guarantor or the liquidation and
dissolution of the Subsidiary Guarantor; or
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following delivery of a written notice by us to the Trustee,
upon the discharge or release of all guarantees by the
Subsidiary Guarantor of any debt of ours under any credit
facility, except a discharge or release by or as a result of
payment under such guarantee.
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If a series of debt securities is guaranteed by the Subsidiary
Guarantors and is designated as subordinate to our Senior
Indebtedness, then the guarantees by the Subsidiary Guarantors
will be subordinated to the Senior Indebtedness of the
Subsidiary Guarantors to substantially the same extent as the
series is subordinated to our Senior Indebtedness. See
Subordination.
Specific
Covenants
The prospectus supplement applicable to any particular series of
debt securities will contain a description of the important
financial and other covenants that apply to us and our
subsidiaries that are added to the Indenture specifically for
the benefit of holders of a particular series.
The Indenture will contain the following covenants for the
benefit of the holders of all series of debt securities:
Reports
So long as any debt securities are outstanding, we will:
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for as long as we are required to file information with the
Commission pursuant to the Securities and Exchange Act of 1934
(the Exchange Act), file with the Trustee, within
15 days after we file the same with the Commission, copies
of the annual reports and of the information, documents and
other reports which we are required to file with the Commission
pursuant to the Exchange Act;
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if we are not required to file information with the Commission
pursuant to the Exchange Act, file with the Trustee, within
15 days after we would have been required to file the same
with the Commission, financial statements and a
Managements Discussion and Analysis of Financial Condition
and Results of Operations, both comparable to what we would have
been required to file with the Commission had we been subject to
the reporting requirements of the Exchange Act; and
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if we are required to furnish annual or quarterly reports to our
unitholders pursuant to the Exchange Act, file with the Trustee
and mail to the holders any annual report or other reports sent
to unitholders generally.
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The availability to the public of the foregoing materials on the
Commissions website or on our website shall be deemed to
satisfy the foregoing delivery obligations.
Merger,
Consolidation or Sale of Assets
We may, without the consent of the holders of any of the debt
securities, consolidate with or sell, lease, convey or otherwise
dispose of all or substantially all of our assets to, or merge
with or into, any partnership, limited liability company or
corporation if:
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the entity surviving any such consolidation or merger or to
which such assets shall have been transferred (the
successor) is us or the successor is a domestic
partnership, limited liability company
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or corporation and expressly assumes all of our obligations and
liabilities under the Indenture and the debt securities;
provided that Holly Energy Finance may not consolidate with or
merge into any entity other than a domestic corporation so long
as we are not a corporation;
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immediately after giving effect to the transaction, no default
or Event of Default (as defined below) has occurred and is
continuing;
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if we are not the continuing entity, then any Subsidiary
Guarantor has confirmed that its guarantee will continue to
apply to the debt securities; and
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we have delivered to the Trustee an officers certificate
and an opinion of counsel, each stating that such consolidation,
merger or disposition complies with the Indenture.
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The successor will be substituted for us in the Indenture with
the same effect as if it had been an original party to the
Indenture. Thereafter, the successor may exercise the rights and
powers of us under the Indenture, in our name or in its own
name. If we dispose of all or substantially all of our assets,
we will be released from all liabilities and obligations under
the Indenture and under the debt securities except that no such
release will occur in the case of a lease of all or
substantially all of our assets.
Events of
Default, Remedies and Default
Events
of Default
Each of the following events will be an Event of
Default under the Indenture with respect to a series of
debt securities, except as set forth in any prospectus
supplement:
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default in any payment of interest on any debt securities of
that series when due that continues for 30 days;
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default in the payment of principal of or premium, if any, on
any debt securities of that series when due at its stated
maturity, upon redemption, upon required repurchase or otherwise;
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default in the payment of any sinking fund payment on any debt
securities of that series when due;
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failure by us or, if the series of debt securities is guaranteed
by any Subsidiary Guarantor, by such Subsidiary Guarantor, for
60 days (or 180 days in the case of a failure to
deliver to the Trustee the reports described under
Reports above) after written notice to
comply with any of the other agreements contained in the
Indenture, any supplement to the Indenture or any board
resolution authorizing the issuance of that series;
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certain events of bankruptcy, insolvency or reorganization of us
or, if the series of debt securities is guaranteed by any
Subsidiary Guarantor, of any such Subsidiary Guarantor that is a
Significant Subsidiary Guarantor (as defined below) or any group
of Subsidiary Guarantors that, taken together, would constitute
a Significant Subsidiary Guarantor; or
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if the series of debt securities is guaranteed by any Subsidiary
Guarantor:
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any of the guarantees ceases to be in full force and effect,
except as otherwise provided in the Indenture;
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any of the guarantees is declared null and void in a judicial
proceeding; or
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any Subsidiary Guarantor denies or disaffirms its obligations
under the Indenture or its guarantee.
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A Significant Subsidiary Guarantor means any
Subsidiary Guarantor that would be a significant
subsidiary as defined in Article 1,
Rule 1-02
of
Regulation S-X,
promulgated pursuant to the Securities Act of 1933 (the
Securities Act), as such Regulation is in effect on
the date of the Indenture.
8
Exercise
of Remedies
If an Event of Default, other than an Event of Default described
in the fifth bullet point above, occurs and is continuing, the
Trustee or the holders of at least 25% in principal amount of
the outstanding debt securities of that series may declare the
entire principal of, premium, if any, and accrued and unpaid
interest, if any, on all the debt securities of that series to
be due and payable immediately.
A default under the fourth bullet point above will not
constitute an Event of Default until the Trustee or the holders
of 25% in principal amount of the outstanding debt securities of
that series notify us and, if the series of debt securities is
guaranteed by any Subsidiary Guarantor, any such Subsidiary
Guarantor, of the default and such default is not cured within
60 days (or 180 days in the case of a failure to
deliver to the Trustee the reports described under
Reports above) after receipt of notice.
If an Event of Default described in the fifth bullet point above
occurs and is continuing, the principal of, premium, if any, and
accrued and unpaid interest on all outstanding debt securities
of all series will become immediately due and payable without
any declaration of acceleration or other act on the part of the
Trustee or any holders.
The holders of a majority in principal amount of the outstanding
debt securities of a series may rescind any declaration of
acceleration by the Trustee or the holders with respect to the
debt securities of that series but only if:
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rescinding the declaration of acceleration would not conflict
with any judgment or decree of a court of competent
jurisdiction; and
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all existing Events of Default have been cured or waived, other
than the nonpayment of principal, premium or interest on the
debt securities of that series that has become due solely by the
declaration of acceleration.
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If an Event of Default occurs and is continuing, the Trustee
will be under no obligation, except as otherwise provided in the
Indenture, to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders
unless such holders have offered to the Trustee reasonable
indemnity or security against any costs, liability or expense.
No holder may pursue any remedy with respect to the Indenture or
the debt securities of any series, except to enforce the right
to receive payment of principal, premium, if any, or interest
when due, unless:
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such holder has previously given the Trustee notice that an
Event of Default with respect to that series is continuing;
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holders of at least 25% in principal amount of the outstanding
debt securities of that series have requested that the Trustee
pursue the remedy;
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such holders have offered the Trustee reasonable indemnity or
security against any cost, liability or expense;
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the Trustee has not complied with such request within
60 days after the receipt of the request and the offer of
indemnity or security; and
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the holders of a majority in principal amount of the outstanding
debt securities of that series have not given the Trustee a
direction that, in the opinion of the Trustee, is inconsistent
with such request within such
60-day
period.
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The holders of a majority in principal amount of the outstanding
debt securities of a series have the right, subject to certain
restrictions, to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or of
exercising any right or power conferred on the Trustee with
respect to that series of debt securities. The Trustee, however,
may refuse to follow any direction that:
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conflicts with law;
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is inconsistent with any provision of the Indenture;
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the Trustee determines is unduly prejudicial to the rights of
any other holder;
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would involve the Trustee in personal liability.
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Notice
of an Event of Default
Within 30 days after the occurrence of any default (meaning
an event that is, or after the notice or passage of time would
be, an Event of Default) or Event of Default, we are required to
give written notice to the Trustee and indicate the status of
the default or Event of Default and what action we are taking or
propose to take to cure it. In addition, we are required to
deliver to the Trustee, within 120 days after the end of
each fiscal year, a compliance certificate indicating that we
have complied with all covenants contained in the Indenture or
whether any default or Event of Default has occurred during the
previous year.
If a default occurs and is continuing, the Trustee must mail to
each holder a notice of the default by the later of 90 days
after the default occurs or 30 days after the Trustee knows
of the default. Except in the case of a default in the payment
of principal, premium, if any, or interest with respect to any
debt securities, the Trustee may withhold such notice, but only
if and so long as the board of directors, the executive
committee or a committee of directors or responsible officers of
the Trustee in good faith determines that withholding such
notice is in the interests of the holders.
Amendments
and Waivers
Without the consent of any holder of debt securities affected,
we, the Trustee and any Subsidiary Guarantors, as applicable,
may amend or supplement the Indenture to:
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cure any ambiguity, omission, defect or inconsistency;
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convey, transfer, assign, mortgage or pledge any property to or
with the Trustee;
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provide for the assumption by a successor of our obligations
under the Indenture;
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add any Subsidiary Guarantor with respect to the debt securities;
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release Holly Energy Finance as an issuer under the Indenture
under certain circumstances;
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change or eliminate any restriction on the payment of principal
of, or premium, if any, on, any debt securities;
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add covenants for the benefit of the holders or surrender any
right or power conferred upon us or any Subsidiary Guarantor;
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make any change that does not adversely affect the interests of
any holder;
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add or appoint a successor or separate Trustee;
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comply with any requirement of the Commission in connection with
the qualification of the Indenture under the
Trust Indenture Act of 1939;
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conform the text of the Indenture or any guarantee to any
provision of the Description of Debt Securities in this
prospectus or any prospectus supplement, to the extent that such
provision was intended to be a verbatim recitation of a
provision of the Indenture or the guarantee;
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provide for the issuance of additional debt securities in
accordance with the limitations set forth in the Indenture as of
the date of the Indenture; or
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establish the form or terms of debt securities of any series to
be issued under the Indenture.
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In addition, we, the Trustee and any Subsidiary Guarantors, may
amend the Indenture if the holders of a majority in principal
amount of all debt securities of each series that would be
affected then outstanding under such Indenture consent to it.
We, the Trustee and any Subsidiary Guarantors, as applicable,
may not, however,
10
without the consent of each holder of outstanding debt
securities of each series that would be affected, amend the
Indenture to:
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reduce the percentage in principal amount of debt securities of
any series whose holders must consent to an amendment;
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reduce the rate of or extend the time for payment of interest on
any debt securities;
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reduce the principal of or extend the stated maturity of any
debt securities;
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reduce the premium payable upon the redemption of any debt
securities or change the time at which any debt securities may
or shall be redeemed;
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make any debt securities payable in other than U.S. dollars;
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impair the right of any holder to receive payment of premium,
principal or interest with respect to such holders debt
securities on or after the applicable due date;
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impair the right of any holder to institute suit for the
enforcement of any payment with respect to such holders
debt securities;
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in the case of any subordinated debt securities, make any
changes to the subordination provisions that adversely affects
any holder of such securities;
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release any security that has been granted in respect of the
debt securities, other than in accordance with the Indenture;
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make any change in the amendment provisions which require each
holders consent;
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make any change in the waiver provisions; or
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except as provided in the Indenture, release any Subsidiary
Guarantor or modify the guarantee of any Subsidiary Guarantor in
any manner adverse to the holders.
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The consent of the holders is not necessary under the Indenture
to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the
proposed amendment. After an amendment under the Indenture
requiring the consent of any holders becomes effective, we are
required to mail to all holders a notice briefly describing the
amendment. The failure to give, or any defect in, such notice,
however, will not impair or affect the validity of the amendment.
The holders of a majority in principal amount of the outstanding
debt securities of each affected series, on behalf of all such
holders, and subject to certain rights of the Trustee, may waive:
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compliance by us or a Subsidiary Guarantor with certain
restrictive provisions of the Indenture; and
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any past default or Event of Default under the Indenture;
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except that such majority of holders may not waive a default:
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in the payment of principal, premium or interest; or
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in respect of a provision that under the Indenture cannot be
amended without the consent of all holders of the series of debt
securities that is affected.
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Defeasance
and Discharge
At any time, we may terminate, with respect to debt securities
of a particular series, all our obligations under such series of
debt securities and the Indenture, which we call a legal
defeasance. If we decide to make a legal defeasance,
however, we may not terminate our obligations:
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relating to the defeasance trust;
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to register the transfer or exchange of the debt securities;
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to replace mutilated, destroyed, lost or stolen debt
securities; or
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to maintain a registrar and paying agent in respect of the debt
securities.
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At any time we may also effect a covenant
defeasance, which means we have elected to terminate our
obligations under:
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covenants applicable to a series of debt securities, including
any covenant that is added specifically for such series and is
described in a prospectus supplement;
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the bankruptcy provisions with respect to any Significant
Subsidiary Guarantor or group of Subsidiary Guarantors that,
taken together, constitute a Significant Subsidiary
Guarantor; and
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the guarantee provision described under Events
of Default, Remedies and Notices Events of
Default above with respect to a series of debt securities,
if applicable, and any Events of Default that is added
specifically for such series and described in a prospectus
supplement.
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We may exercise our legal defeasance option notwithstanding our
prior exercise of our covenant defeasance option. If we exercise
our legal defeasance option, payment of the affected series of
debt securities may not be accelerated because of an Event of
Default with respect to that series. If we exercise our covenant
defeasance option, payment of the defeased series of debt
securities may not be accelerated because of an Event of Default
with respect to that series specified in the fourth, fifth (with
respect only to a Subsidiary Guarantor (if any)) or sixth bullet
points under Events of Default
above or an Event of Default that is added specifically for such
series and described in a prospectus supplement.
In order to exercise either defeasance option, we must:
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irrevocably deposit in trust with the Trustee money or certain
U.S. government obligations for the payment of principal,
premium, if any, and interest on the series of debt securities
to redemption or stated maturity, as the case may be;
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comply with certain other conditions, including that no default
has occurred and is continuing after the deposit in
trust; and
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deliver to the Trustee of an opinion of counsel to the effect
that holders of the series of debt securities will not recognize
income, gain or loss for federal income tax purposes as a result
of such defeasance and will be subject to federal income tax on
the same amount and in the same manner and at the same times as
would have been the case if such deposit and defeasance had not
occurred. In the case of legal defeasance only, such opinion of
counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable federal income tax law.
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If we exercise either our legal defeasance option or our
covenant defeasance option, any guarantee by a Subsidiary
Guarantor will terminate with respect to the defeased series of
debt securities.
In addition, we may satisfy and discharge all our obligations
under the Indenture with respect to debt securities of a
particular series, other than our obligation to register the
transfer of and exchange such debt securities, provided that we
either:
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deliver all outstanding debt securities of such series to the
Trustee for cancellation; or
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all such debt securities not so delivered for cancellation have
either become due and payable or will become due and payable at
their stated maturity within one year or are called for
redemption within one year, and in the case of this bullet
point, we have deposited with the Trustee in trust an amount of
cash sufficient to pay the entire indebtedness of such debt
securities, including interest to the stated maturity or
applicable redemption date.
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No
Personal Liability of Directors, Officers, Employees and
Unitholders
No past, present or future director, officer, partner, member,
employee, incorporator, manager or unitholder or other owner of
any equity interest in us, our general partner or any Subsidiary
Guarantors, as
12
applicable, will have any liability for any obligations of us or
any Subsidiary Guarantors under any debt securities, any
Indenture, any guarantee of any debt securities or for any claim
based on, in respect of, or by reason of, such obligations or
their creation. Each holder of any debt security accepting such
debt security waives and releases all such liability. The waiver
and release are part of the consideration for issuance of any
debt securities and any guarantee. The waiver may not be
effective to waive liabilities under the federal securities laws.
Subordination
Debt securities of a series may be subordinated to our
Senior Indebtedness, which we define generally to
include any obligation created or assumed by us (or, if the
series is guaranteed, any Subsidiary Guarantors) for the
repayment of borrowed money and any guarantee thereof, whether
outstanding or hereafter issued, unless, by the terms of the
instrument creating or evidencing such obligation, it is
provided that such obligation is subordinate or not superior in
right of payment to the subordinated debt securities (or, if the
series is guaranteed, the guarantee of any Subsidiary
Guarantor), or to other obligations which are pari passu with or
subordinated to the subordinated debt securities (or, if the
series is guaranteed, the guarantee of any Subsidiary
Guarantor). Subordinated debt securities will be subordinate in
right of payment, to the extent and in the manner set forth in
the Indenture and the prospectus supplement relating to such
series, to the prior payment of all of our indebtedness and that
of any Subsidiary Guarantor that is designated as Senior
Indebtedness with respect to the series.
The holders of Senior Indebtedness of ours or, if applicable,
any Subsidiary Guarantor, will receive payment in full of the
Senior Indebtedness before holders of any subordinated debt
securities will receive any payment of principal, premium or
interest with respect to the subordinated debt securities upon
any payment or distribution of our assets or, if applicable to
any series of outstanding debt securities, the Subsidiary
Guarantors assets, to creditors:
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upon a liquidation or dissolution of us or, if applicable to any
series of outstanding debt securities, the Subsidiary
Guarantors; or
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in a bankruptcy, receivership or similar proceeding relating to
us or, if applicable to any series of outstanding debt
securities, to the Subsidiary Guarantors.
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Until the Senior Indebtedness is paid in full, any distribution
to which holders of subordinated debt securities would otherwise
be entitled will be made to the holders of Senior Indebtedness,
except that the holders of subordinated debt securities may
receive units representing limited partner interests and any
debt securities that are subordinated to Senior Indebtedness to
at least the same extent as the subordinated debt securities.
If we do not pay any principal, premium or interest with respect
to Senior Indebtedness within any applicable grace period
(including at maturity), or any other default on Senior
Indebtedness occurs and the maturity of the Senior Indebtedness
is accelerated in accordance with its terms, we may not:
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make any payments of principal, premium, if any, or interest
with respect to subordinated debt securities;
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make any deposit for the purpose of defeasance or discharge of
the subordinated debt securities; or
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repurchase, redeem or otherwise retire any subordinated debt
securities, except that in the case of subordinated debt
securities that provide for a mandatory sinking fund, we may
deliver subordinated debt securities to the Trustee in
satisfaction of our sinking fund obligation, unless, in any case,
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the default has been cured or waived and any declaration of
acceleration has been rescinded;
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the Senior Indebtedness has been paid in full in cash; or
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we and the Trustee receive written notice approving the payment
from the representative of each issue of Designated Senior
Indebtedness.
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During the continuance of any default, other than a default
described in the immediately preceding paragraph, that may cause
the maturity of any Designated Senior Indebtedness to be
accelerated immediately without further notice, other than any
notice required to effect such acceleration, or the expiration
of any applicable grace periods, we may not pay the subordinated
debt securities for a period called the Payment Blockage
Period. Generally, Designated Senior
Indebtedness will include:
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any specified issue of Senior Indebtedness of at least
$100 million; and
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any other Senior Indebtedness that we may designate in respect
of any series of subordinated debt securities.
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A Payment Blockage Period will commence on the receipt by us and
the Trustee of written notice of the default, called a
Blockage Notice, from the representative of any
Designated Senior Indebtedness specifying an election to effect
a Payment Blockage Period and will end 179 days thereafter.
The Payment Blockage Period may be terminated before its
expiration:
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by written notice from the person or persons who gave the
Blockage Notice;
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by repayment in full in cash of the Designated Senior
Indebtedness with respect to which the Blockage Notice was
given; or
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if the default giving rise to the Payment Blockage Period is no
longer continuing.
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Unless the holders of the Designated Senior Indebtedness have
accelerated the maturity of the Designated Senior Indebtedness,
we may resume payments on the subordinated debt securities after
the expiration of the Payment Blockage Period.
Generally, not more than one Blockage Notice may be given in any
period of 360 consecutive days. The total number of days during
which any one or more Payment Blockage Periods are in effect,
however, may not exceed an aggregate of 179 days during any
period of 360 consecutive days.
After all Senior Indebtedness is paid in full and until the
subordinated debt securities are paid in full, holders of the
subordinated debt securities shall be subrogated to the rights
of holders of Senior Indebtedness to receive distributions
applicable to Senior Indebtedness.
As a result of the subordination provisions described above, in
the event of insolvency, the holders of Senior Indebtedness, as
well as certain of our general creditors, may recover more,
ratably, than the holders of the subordinated debt securities.
Book-Entry
System
We may issue debt securities of a series in the form of one or
more global certificates, each of which we refer to as a global
security, registered in the name of a depositary or a nominee of
a depositary. We expect that The Depository Trust Company,
New York, New York, or DTC, will act as depositary. If we issue
debt securities of a series in book-entry form, we will issue
one or more global certificates that will be deposited with or
on behalf of DTC and will not issue physical certificates to
each holder. A global security may not be transferred unless it
is exchanged in whole or in part for a certificated security,
except that DTC, its nominees and their successors may transfer
a global security as a whole to one another.
Beneficial interests in global debt securities will be shown on,
and transfers of global debt securities will be made only
through, records maintained by DTC and its participants.
DTC has advised us as follows:
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DTC is a limited-purpose trust company organized under the New
York Banking Law, a banking organization within the
meaning of the New York Banking Law, a member of the Federal
Reserve System, a clearing corporation within the
meaning of the New York Uniform Commercial Code, and a
clearing agency registered pursuant to the
provisions of Section 17A of the Exchange Act.
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DTC holds and provides asset servicing for securities that its
participants (known as direct participants) deposit with DTC.
DTC also facilitates the post-trade settlement among direct
participants of sales and other securities transactions in
deposited securities, through electronic computerized book-entry
transfers and pledges between direct participants
accounts, thereby eliminating the need for physical movement of
securities certificates.
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Direct participants in DTC include both U.S. and
non-U.S. securities
brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations.
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Access to the DTC system is also available to others, known as
indirect participants, such as U.S. and
non-U.S. securities
brokers and dealers, banks, trust companies and clearing
corporations that clear through or maintain a custodial
relationship with a direct participant, either directly or
indirectly.
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The rules applicable to DTC participants are on file with the
Commission.
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Any purchases of debt securities under the DTC system must be
made by or through direct participants, which will receive a
credit for the debt securities on DTCs records. The
ownership interest of each actual purchaser of debt securities
is in turn to be recorded on the direct and indirect
participants records. Beneficial owners of the debt
securities will not receive written confirmation from DTC of
their purchase, but beneficial owners are expected to receive
written confirmations providing details of the transaction, as
well as periodic statements of their holdings, from the direct
or indirect participants through which the beneficial owner
entered into the transaction. Transfers of ownership interests
in the debt securities are to be accomplished by entries made on
the books of direct and indirect participants acting on behalf
of beneficial owners. Beneficial owners will not receive
certificates representing their ownership interests in the debt
securities, except in the event that use of the book-entry
system for the debt securities is discontinued.
Because DTC can only act on behalf of direct participants, who
in turn act on behalf of indirect DTC participants and certain
banks, the ability of a person having a beneficial interest in a
security held in DTC to transfer or pledge that interest to
persons or entities that do not participate in the DTC system,
or otherwise take actions in respect of that interest, may be
affected by the lack of a physical certificate of that interest.
The laws of some states of the United States require that
certain persons take physical delivery of securities in
definitive form in order to transfer or perfect a security
interest in those securities. Consequently, the ability to
transfer beneficial interests in a security held in DTC to those
persons may be limited.
DTC has advised us that it will take any action permitted to be
taken by a holder of debt securities (including, without
limitation, the presentation of debt securities for exchange)
only at the direction of one or more of the participants to
whose accounts with DTC interests in the relevant debt
securities are credited, and only in respect of the portion of
the aggregate principal amount of the debt securities as to
which that participant or those participants has or have given
the direction. However, in certain circumstances, DTC will
exchange the global securities held by it for certificated debt
securities, which it will distribute to its participants.
To facilitate subsequent transfers of ownership interests in the
debt securities, all debt securities deposited by direct
participants with DTC are registered in the name of DTCs
partnership nominee, Cede & Co., or such other name as
may be requested by an authorized representative of DTC. The
deposit of debt securities with DTC and their registration in
the name of Cede & Co. or such other nominee do not
effect any change in beneficial ownership. DTC has no knowledge
of the actual beneficial owners of the debt securities;
DTCs records reflect only the identity of the direct
participants to whose accounts such debt securities are
credited, which may or may not be the beneficial owners. The
direct and indirect participants will remain responsible for
keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to direct
participants, by, direct participants to indirect participants,
and by direct participants and indirect participants to
beneficial owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in
effect from time to time.
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Neither DTC nor Cede & Co. (nor any other DTC nominee)
will consent or vote with respect to the global securities.
Under its usual procedures, DTC mails an omnibus proxy to the
issuer as soon as possible after the record date. The omnibus
proxy assigns Cede & Co.s consenting or voting
rights to those direct participants to whose accounts the debt
securities are credited on the record date (identified in the
listing attached to the omnibus proxy).
All payments on the global securities will be made to
Cede & Co., as holder of record, or such other nominee
as may be requested by an authorized representative of DTC.
DTCs practice is to credit direct participants
accounts upon DTCs receipt of funds and corresponding
detail information from us or the Trustee on payment dates in
accordance with their respective holdings shown on DTCs
records. Payments by participants to beneficial owners will be
governed by standing instructions and customary practices, as is
the case with securities held for the accounts of customers in
bearer form or registered in street name, and will
be the responsibility of such participant and not of DTC, us,
the Trustee or any Subsidiary Guarantor, as applicable, subject
to any statutory or regulatory requirements as may be in effect
from time to time. Payment of principal, premium, if any, and
interest to Cede & Co. (or such other nominee as may
be requested by an authorized representative of DTC) shall be
the responsibility of us or the Trustee. Disbursement of such
payments to direct participants shall be the responsibility of
DTC, and disbursement of such payments to the beneficial owners
shall be the responsibility of direct and indirect participants.
Neither we, the Trustee nor any Subsidiary Guarantor, as
applicable, will have any responsibility or obligation to direct
or indirect participants, or the persons for whom they act as
nominees, with respect to the accuracy of the records of DTC,
its nominee, any other depositary or its nominee, or any
participant with respect to any ownership interest in any debt
securities, or payments to, or the providing of notice to
participants or beneficial owners.
The
Trustee
We may appoint a separate trustee for any series of debt
securities. We may maintain banking and other commercial
relationships with the Trustee and its affiliates in the
ordinary course of business, and the Trustee may own debt
securities.
Governing
Law
The Indenture and any series of debt securities will be governed
by, and construed in accordance with, the laws of the State of
New York.
DESCRIPTION
OF OUR COMMON UNITS AND PREFERRED UNITS
Common
Units
Our common units represent limited partner interests that
entitle the holders to participate in our cash distributions and
to exercise the rights and privileges available to limited
partners under our partnership agreement. For a description of
the relative rights and preferences of holders of common units
and our general partner in and to cash distributions, please
carefully review this section and the section Cash
Distribution Policy in this prospectus.
Our outstanding common units are listed on the New York Stock
Exchange, or NYSE, under the symbol HEP. Any
additional common units we issue will also be listed on the NYSE.
The transfer agent and registrar for our common units is
American Stock Transfer & Trust Company.
Number
of Units
We currently have outstanding 8,390,000 common units, 7,000,000
subordinated units and 937,500 Class B subordinated units
which were issued to Alon in connection with the acquisition of
certain pipelines,
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terminals and related assets. See Subordinated
Units. There is currently no established public trading
market for our subordinated units or Class B subordinated
units.
Status
as Limited Partner or Assignee
Except as described below under Limited
Liability, the common units will be fully paid, and
unitholders will not be required to make additional capital
contributions to us.
Limited
Liability
Assuming that a limited partner does not participate in the
control of our business within the meaning of the Delaware
Revised Uniform Limited Partnership Act (the Delaware
Act) and that he otherwise acts in conformity with the
provisions of our partnership agreement, his liability under the
Delaware Act will be limited, subject to some possible
exceptions, generally to the amount of capital he is obligated
to contribute to us in respect of his units plus his share of
any undistributed profits and assets. If it were determined,
however, that the right of, or exercise of the right by, the
limited partners as a group:
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to remove or replace our general partner;
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to approve some amendments to our partnership agreement; or
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to take other action under our partnership agreement;
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constituted participation in the control of our
business for the purposes of the Delaware Act, then the limited
partners could be held personally liable for our obligations
under the laws of Delaware to the same extent as our general
partner. This liability would additionally extend to persons who
transact business with us who reasonably believe that the
limited partner is a general partner. Neither our partnership
agreement nor the Delaware Act specifically provides for legal
recourse against our general partner if a limited partner were
to lose limited liability through any fault of our general
partner. While this does not mean that a limited partner could
not seek legal recourse, we know of no precedent for such a
claim in Delaware case law.
Under the Delaware Act, a limited partnership may not make a
distribution to a partner to the extent that at the time of the
distribution, after giving effect to the distribution, all
liabilities of the partnership, other than liabilities to
partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to
specific property of the partnership, exceed the fair value of
the assets of the limited partnership.
For the purposes of determining the fair value of the assets of
a limited partnership, the Delaware Act provides that the fair
value of the property subject to liability of which recourse of
creditors is limited shall be included in the assets of the
limited partnership only to the extent that the fair value of
that property exceeds the nonrecourse liability. The Delaware
Act provides that a limited partner who receives a distribution
and knew at the time of the distribution that the distribution
was in violation of the Delaware Act is liable to the limited
partnership for the amount of the distribution for three years
from the date of the distribution. Under the Delaware Act, an
assignee who becomes a substituted limited partner of a limited
partnership is liable for the obligations of his assignor to
make contributions to the partnership, except the assignee is
not obligated for liabilities unknown to him at the time he
became a limited partner and that could not be ascertained from
our partnership agreement.
We conduct business in seven states. We may conduct business in
other states in the future. Maintenance of our limited liability
as a limited partner of our operating partnership may require
compliance with legal requirements in the jurisdictions in which
our operating partnership conducts business, including
qualifying our subsidiaries to do business there.
Limitations on the liability of limited partners for the
obligations of a limited partnership have not been clearly
established in many jurisdictions. If, by virtue of our limited
partner interest in our operating partnership or otherwise, it
were determined that we were conducting business in any state
without compliance with the applicable limited partnership or
limited liability company statute, or that the right of, or
exercise of the right by, the limited partners as a group, to
remove or replace our general partner, to approve some
amendments to our partnership agreement, or to take other action
under our partnership agreement constituted
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participation in the control of our business for
purposes of the statutes of any relevant jurisdiction, then the
limited partners could be held personally liable for our
obligations under the law of that jurisdiction to the same
extent as our general partner under the circumstances. We will
operate in a manner that our general partner considers
reasonable and necessary or appropriate to preserve the limited
liability of the limited partners.
Voting
Rights
Unless otherwise noted or the context otherwise requires,
references in this section Voting Rights
to subordinated units include both our subordinated
units and our Class B subordinated units.
Our general partner manages and operates us. Unlike the holders
of common stock in a corporation, the holders of our units have
only limited voting rights on matters affecting our business.
They have no right to elect our general partner, or the
directors of our general partner, on an annual or other
continuing basis. On those matters that are submitted to a vote
of unitholders, each record holder of a unit has a vote
according to his percentage interest in us, although additional
limited partner interests having special voting rights could be
issued. However, if at any time any person or group, other than
the general partner and its affiliates, or a direct or
subsequently approved transferee of the general partner or its
affiliates, acquires, in the aggregate, beneficial ownership of
20% or more of any class of units then outstanding, that person
or group will lose voting rights on all of its units and the
units may not be voted on any matter and will not be considered
to be outstanding when sending notices of a meeting of
unitholders, calculating required votes, determining the
presence of a quorum, or for other similar purposes.
Unitholders will not have voting rights except with respect to
the following matters which require the unitholder vote
specified below. Matters requiring the approval of a unit
majority require:
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during the subordination period for the subordinated units,
(i) the approval of a majority of the common units,
excluding those common units held by our general partner and its
affiliates, and (ii) the approval of a majority of the
subordinated units and Class B subordinated units voting as
a single class;
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after the end of the subordination period for the subordinated
units but prior to the end of the subordination period for the
Class B subordinated units, the approval of a majority of
the outstanding units; and
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after the end of the subordination periods for both our
subordinated units and our Class B subordinated units, the
approval of a majority of the outstanding units.
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In voting their common and subordinated units, the general
partner and its affiliates will have no fiduciary duly or
obligation whatsoever to us or the limited partners, including
any duty to act in good faith or in the best interests of us and
the limited partners.
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Issuance of additional common units or units of equal rank with
the common units during the subordination period
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Unit majority, with certain exceptions.
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Issuance of units senior to the common units during the
subordination period
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Unit majority.
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Issuance of units junior to the common units during the
subordination period
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No approval rights.
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Issuance of additional units after the subordination period
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No approval rights.
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Amendment of the partnership agreement
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Certain amendments may be made by the general partner without
the approval of the unitholders. Other amendments generally
require the approval of a unit majority.
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Merger of our partnership or the sale of all or substantially
all of our assets
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Unit majority.
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Amendment of the partnership agreement of our operating
partnership and other action taken by us as a limited partner of
the operating partnership
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Unit majority if such amendment or other action would adversely
affect our limited partners (or any particular class of limited
partners) in any material respect.
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Dissolution of our partnership
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Unit majority.
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Reconstitution of our partnership upon dissolution
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Unit majority.
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Withdrawal of the general partner
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Under most circumstances, the approval of a majority of the
common units, excluding common units held by the general partner
and its affiliates, is required for the withdrawal of the
general partner prior to June 30, 2014 in a manner which would
cause a dissolution of our partnership.
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Removal of the general partner
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Not less than
662/3%
of the outstanding units, voting as a single class, including
units held by our general partner and its affiliates.
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Transfer of the general partner interest
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Our general partner may transfer all, but not less than all, of
its general partner interest in us without a vote of our
unitholders to an affiliate or another person in connection with
its merger or consolidation with or into, or sale of all or
substantially all of its assets to such person. The approval of
a majority of the common units, excluding common units held by
the general partner and its affiliates, is required in other
circumstances for a transfer of the general partner interest to
a third party prior to June 30, 2014.
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Transfer of incentive distribution rights
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Except for transfers to an affiliate or another person as part
of the general partners merger or consolidation with or
into, or sale of all or substantially all of its assets to such
person, the approval of a majority of the common units,
excluding common units held by our general partner and its
affiliates, voting separately as a class, is required in most
circumstances for a transfer of the incentive distribution
rights to a third party prior to June 30, 2014.
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Transfer of ownership interests in the general partner
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No approval required at any time.
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Transfer
of Common Units
The purchase of any common units offered by this prospectus and
any prospectus supplement is accomplished through the
completion, execution and delivery of a transfer application.
Additionally, any later transfers of common units will not be
recorded by the transfer agent or recognized by us unless the
transferee executes and delivers a transfer application. By
executing and delivering a transfer application, a purchaser or
transferee of common units:
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becomes the record holder of the common units and is an assignee
until admitted into our partnership as a substituted limited
partner;
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automatically requests admission as a substituted limited
partner in our partnership;
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agrees to be bound by the terms and conditions of, and executes,
our partnership agreement;
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represents that such transferee has the capacity, power and
authority to enter into the partnership agreement;
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grants powers of attorney to officers of our general partner and
any liquidator of us as specified in the partnership
agreement; and
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gives the consents and approvals contained in our partnership
agreement.
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An assignee will become a substituted limited partner of our
partnership for the transferred common units upon admission by
our general partner and the recording of the name of the
assignee on our books and records. Our general partner intends
to admit assignees as substituted limited partners on a
quarterly basis.
A transferees broker, agent or nominee may complete,
execute and deliver a transfer application. We are entitled to
treat the nominee holder of a common unit as the absolute owner.
In that case, the beneficial holders rights are limited
solely to those that it has against the nominee holder as a
result of any agreement between the beneficial owner and the
nominee holder.
Common units are securities and are transferable according to
the laws governing transfer of securities. In addition to other
rights acquired upon transfer, the transferor gives the
transferee the right to request admission as a substituted
limited partner in our partnership for the transferred common
units. A purchaser or transferee of common units who does not
execute and deliver a transfer application obtains only:
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the right to assign the common unit to a purchaser or other
transferee; and
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the right to transfer the right to seek admission as a
substituted limited partner in our partnership for the
transferred common units.
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Thus, a purchaser or transferee of common units who does not
execute and deliver a transfer application:
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will not receive cash distributions or federal income tax
allocations, unless the common units are held in a nominee or
street name account and the nominee or broker has
executed and delivered a transfer application; and may not
receive some federal income tax information or reports furnished
to record holders of common units.
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The transferor of common units has a duty to provide the
transferee with all information that may be necessary to
transfer the common units. The transferor does not have a duty
to insure the execution of the transfer application by the
transferee and has no liability or responsibility if the
transferee neglects or chooses not to execute and forward the
transfer application to the transfer agent. Until a common unit
has been transferred on our books, we and the transfer agent may
treat the record holder of the unit as the absolute owner for
all purposes, except as otherwise required by law or stock
exchange regulations.
Reports
and Records
As soon as practicable, but in no event later than 120 days
after the close of each fiscal year, our general partner will
furnish or make available to each unitholder of record (as of a
record date selected by our general partner) an annual report
containing our audited financial statements and a report on
those financial statements by our independent public
accountants. These financial statements will be prepared in
accordance with generally accepted accounting principles. Except
for our fourth quarter, we will also furnish or make available
summary financial information within 90 days after the
close of each quarter.
We will also furnish each unitholder of record with information
reasonably required for tax reporting purposes within
90 days after the close of each calendar year. This
information is expected to be furnished in summary form so that
some complex calculations normally required of partners can be
avoided. Our ability to furnish this summary information to
unitholders will depend on the cooperation of unitholders in
supplying us with specific information. Every unitholder will
receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax
returns, regardless of whether he supplies us with information.
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A limited partner can, for a purpose reasonably related to the
limited partners interest as a limited partner, upon
reasonable demand and at his own expense, have furnished to him:
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a current list of the name and last known address of each
partner;
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a copy of our tax returns;
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information as to the amount of cash and a description and
statement of the agreed value of any other property or services,
contributed or to be contributed by each partner and the date on
which each became a partner;
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copies of our partnership agreement, our certificate of limited
partnership, amendments to either of them and powers of attorney
which have been executed under our partnership agreement;
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information regarding the status of our business and financial
condition; and
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any other information regarding our affairs as is just and
reasonable.
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Our general partner may, and intends to, keep confidential from
the limited partners trade secrets and other information the
disclosure of which our general partner believes in good faith
is not in our best interest or which we are required by law or
by agreements with third parties to keep confidential.
Subordinated
Units
Our subordinated units are a separate class of limited partner
interests in our partnership, and the rights of holders of
subordinated units to participate in distributions to partners
differ from, and are subordinated to, the rights of the holders
of our common units. Our Class B subordinated units are a
separate series of subordinated units and generally rank equally
with our other subordinated units and are entitled to the same
cash distributions and to exercise the same rights and
privileges available to holders of our subordinated units,
except under certain circumstances described below. During the
subordination period, our subordinated units and our
Class B subordinated units will not be entitled to receive
any distributions until our common units have received the
minimum quarterly distribution plus any arrearages from prior
quarters.
The subordination period for our subordinated units will end
once we meet the financial tests in the partnership agreement
and as further described in the section Cash Distribution
Policy Subordination Periods Definition
of Subordination Period, but generally cannot end before
June 30, 2009.
Our Class B subordinated units were created by Amendment
No. 1 to our partnership agreement and issued to Alon USA,
Inc. on February 28, 2005 as partial consideration for
certain pipelines, terminals and related assets acquired by us
from Alon. The Class B subordinated units rank equally with
our previously existing subordinated units and receive the same
cash distributions, rights and privileges as such subordinated
units, except (i) the subordination period with respect to
the Class B subordinated units will terminate on the first
day of any quarter ending on or after March 31, 2010 if
Alon has not defaulted on its minimum volume commitment payment
obligations under the pipelines and terminals agreement it
entered into with us, subject to certain conditions, and
(ii) distributions to Alon with respect to the Class B
subordinated units will be suspended if Alon defaults on its
payments due us pursuant to its minimum volume commitment under
the Alon pipelines and terminals agreement.
When the applicable subordination period ends, all related
subordinated units will convert into common units on a
one-for-one
basis, and the common units will no longer be entitled to
arrearages once all subordination periods have ended.
Preferred
Units
Except as set forth below, our partnership agreement authorizes
us to issue an unlimited number of additional limited partner
interests and other equity securities for the consideration and
with the rights, preferences and privileges established by our
general partner in its sole discretion without the approval of
any of our limited partners. In accordance with Delaware law and
the provisions of our partnership agreement, we may also issue
additional partnership interests that, in the sole discretion of
our general partner, have special
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voting rights to which our common units are not entitled. As of
the date of this prospectus, we have no preferred units
outstanding.
Should we offer preferred units under this prospectus, a
prospectus supplement relating to the particular series of
preferred units offered will include the specific terms of those
preferred units, including the following:
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the designation, stated value and liquidation preference of the
preferred units and the number of preferred units offered;
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the initial public offering price at which the preferred units
will be issued;
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the conversion or exchange provisions of the preferred units;
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any redemption or sinking fund provisions of the preferred units;
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the distribution rights of the preferred units, if any;
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a discussion of material federal income tax considerations, if
any, regarding the preferred units; and
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any additional rights, preferences, privileges, limitations and
restrictions of the preferred units.
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As described in Description of our Partnership
Agreement Issuance of Additional Securities,
until the expiration of the subordination period (see Cash
Distribution Policy Subordination Period
Definition of Subordination Period), our ability to issue
preferred units is limited and requires the consent of
(i) at least a majority of our outstanding common units
(excluding common units held by our general partner and its
affiliates) and (ii) at least a majority of our outstanding
subordinated units and Class B subordinated units voting as
a single class. (See also the discussion under
Common Units Voting Rights.)
CASH
DISTRIBUTION POLICY
Unless otherwise noted or the context otherwise requires,
references in this section to subordinated units
includes both subordinated units and Class B subordinated
units of Holly Energy Partners. We have not issued any preferred
units and the discussion below assumes that no preferred units
are outstanding. A description of the material terms of our cash
distribution policy as it applies to any preferred units will be
set forth in the prospectus supplement relating to the offering
of such preferred units.
Distributions
of Available Cash
General. Our partnership agreement provides
that we will distribute all of our available cash to unitholders
of record on the applicable record date within 45 days
after the end of each quarter.
Definition of Available Cash. Available cash
generally means, for each fiscal quarter, all cash on hand at
the end of the quarter:
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less the amount of cash reserves established by our general
partner to:
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provide for the proper conduct of our business;
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comply with applicable law, any of our debt instruments, or
other agreements; or
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provide funds for distributions to our unitholders and to our
general partner for any one or more of the next four quarters;
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plus all cash on hand on the date of determination of available
cash for the quarter resulting from working capital borrowings
made after the end of the quarter. Working capital borrowings
are generally borrowings that are made under our credit facility
and in all cases are used solely for working capital purposes or
to pay distributions to partners.
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Operating
Surplus and Capital Surplus
General. All cash distributed to unitholders
will be characterized as either operating surplus or
capital surplus. We distribute available cash from
operating surplus differently than available cash from capital
surplus.
Definition of Operating Surplus. Operating
surplus for any period generally means:
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our cash balance on the closing date of our initial public
offering; plus
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$10.0 million (as described below); plus
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all of our cash receipts after the closing of our initial public
offering, excluding cash from borrowings that are not working
capital borrowings, sales of equity and debt securities and
sales or other dispositions of assets outside the ordinary
course of business; plus
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working capital borrowings made after the end of a quarter but
before the date of determination of operating surplus for the
quarter; less
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all of our operating expenditures after the closing of our
initial public offering, including the repayment of working
capital borrowings, but not the repayment of other borrowings,
and including maintenance capital expenditures; less
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the amount of cash reserves established by our general partner
to provide funds for future operating expenditures.
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Definition of Capital Surplus. Generally,
capital surplus will be generated only by:
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borrowings other than working capital borrowings;
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sales of debt and equity securities; and
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sales or other disposition of assets for cash, other than
inventory, accounts receivable and other current assets sold in
the ordinary course of business or as part of normal retirements
or replacements of assets.
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Characterization of Cash Distributions. We
will treat all available cash distributed as coming from
operating surplus until the sum of all available cash
distributed since we began operations equals the operating
surplus as of the most recent date of determination of available
cash. We will treat any amount distributed in excess of
operating surplus, regardless of its source, as capital surplus.
As reflected above, operating surplus includes
$10.0 million in addition to our cash balance on
July 13, 2004, the closing date of our initial public
offering, cash receipts from our operations and cash from
working capital borrowings. This amount does not reflect actual
cash on hand at closing that is available for distribution to
our unitholders. Rather, it is a provision that will enable us,
if we choose, to distribute as operating surplus up to
$10.0 million of cash we receive in the future from
non-operating sources, such as asset sales, issuances of
securities, and long-term borrowings, that would otherwise be
distributed as capital surplus.
Subordination
Periods
General. During the subordination periods, the
common units will have the right to receive distributions of
available cash from operating surplus in an amount equal to the
minimum quarterly distribution, plus any arrearages in the
payment of the minimum quarterly distribution on the common
units from prior quarters, before any distributions of available
cash from operating surplus may be made on the subordinated
units. As described in the section Description of Our
Common Units Subordinated Units, our
Class B subordinated units are subject to additional
possible restrictions on cash distributions. The purpose of the
subordinated units is to increase the likelihood that during the
subordination period there is available cash to be distributed
on the common units.
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Definition of Subordination Period. The
subordination period for the subordinated units commenced upon
the closing of our initial public offering and generally extends
until the first day of any quarter beginning after June 30,
2009, that each of the following tests are met:
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distributions of available cash from operating surplus on each
of the outstanding common units and subordinated units equaled
or exceeded the minimum quarterly distribution for each of the
three consecutive, non-overlapping four-quarter periods
immediately preceding that date;
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the adjusted operating surplus generated during each of the
three consecutive, non-overlapping four-quarter periods
immediately preceding that date equaled or exceeded the sum of
the minimum quarterly distributions on all of the outstanding
common units and subordinated units during those periods on a
fully diluted basis and the related distribution on the 2%
general partner interest during those periods; and
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there are no arrearages in payment of the minimum quarterly
distribution on the common units.
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Definition of Class B Subordination
Period. The subordination period for the
Class B subordinated units commenced upon the issuance of
the Class B subordinated units and generally extends until
the first day of any quarter beginning after March 31, 2010
provided that no Alon event of default in respect of payments
due under Alons pipelines and terminals agreement existed
with respect to each of the three consecutive, non-overlapping
four-quarter periods immediately preceding such date.
Definition of Adjusted Operating
Surplus. Adjusted operating surplus for any
period generally means:
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operating surplus generated with respect to that period; less
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any net increase in working capital borrowings with respect to
that period; less
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any net reduction in cash reserves for operating expenditures
with respect to that period not relating to an operating
expenditure made with respect to that period; plus
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any net decrease in working capital borrowings with respect to
that period; plus
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any net increase in cash reserves for operating expenditures
with respect to that period required by any debt instrument for
the repayment of principal, interest or premium.
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Adjusted operating surplus is intended to reflect the cash
generated from operations during a particular period and
therefore excludes net increases in working capital borrowings
and net drawdowns of reserves of cash generated in prior periods.
Effect of Expiration of the Subordination
Period. Upon expiration of the applicable
subordination period, each outstanding subordinated unit or
Class B subordinated unit, as the case may be, will convert
into one common unit and will then participate pro rata with the
other common units in distributions of available cash. In
addition, if the unitholders remove our general partner other
than for cause and units held by the general partner and its
affiliates are not voted in favor of such removal:
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the subordination period for our subordinated units and our
Class B subordinated units will end and each subordinated
unit and Class B subordinated unit will immediately convert
into one common unit;
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any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
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the general partner will have the right to convert its general
partner interest and its incentive distribution rights into
common units or to receive cash in exchange for those interests.
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24
Distributions
of Available Cash from Operating Surplus during the
Subordination Periods
We make distributions of available cash from operating surplus
for any quarter during the subordination periods in the
following manner:
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First, 98% to the common unitholders, pro rata, and 2% to
the general partner, until we distribute for each outstanding
common unit an amount equal to the minimum quarterly
distribution for that quarter;
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Second, 98% to the common unitholders, pro rata, and 2%
to the general partner, until we distribute for each outstanding
common unit an amount equal to any arrearages in payment of the
minimum quarterly distribution on the common units for any prior
quarters during the subordination period;
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Third, 98% to the subordinated unitholders and the
Class B subordinated unitholders, pro rata, and 2% to the
general partner, until we distribute for each subordinated unit
and Class B subordinated unit an amount equal to the
minimum quarterly distribution for that quarter; and
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Thereafter, in the manner described in
Incentive Distribution Rights below;
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provided, however, that distributions on the Class B
subordinated units may be suspended or reduced if Alon defaults
on its payments due us pursuant to its minimum volume commitment
under the Alon pipelines and terminals agreement.
Distributions
of Available Cash from Operating Surplus after the Subordination
Period
We make distributions of available cash from operating surplus
for any quarter after the subordination period in the following
manner:
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First, 98% to all unitholders, pro rata, and 2% to the
general partner, until we distribute for each outstanding unit
an amount equal to the minimum quarterly distribution for that
quarter; and
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Thereafter, in the manner described in
Incentive Distribution Rights below.
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Incentive
Distribution Rights
Incentive distribution rights represent the right to receive an
increasing percentage of quarterly distributions of available
cash from operating surplus after the minimum quarterly
distribution and the target distribution levels have been
achieved. Our general partner currently holds the incentive
distribution rights, but may transfer these rights separately
from its general partner interest, subject to restrictions in
the partnership agreement.
If for any quarter:
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we have distributed available cash from operating surplus to the
common and subordinated unitholders in an amount equal to the
minimum quarterly distribution; and
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we have distributed available cash from operating surplus on
outstanding common units in an amount necessary to eliminate any
cumulative arrearages in payment of the minimum quarterly
distribution;
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then, we will distribute any additional available cash from
operating surplus for that quarter among the unitholders and the
general partner in the following manner:
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First, 98% to all unitholders, pro rata, and 2% to the
general partner, until each unitholder receives a total of $0.55
per unit for that quarter (the first target
distribution);
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Second, 85% to all unitholders, pro rata, and 15% to the
general partner, until each unitholder receives a total of
$0.625 per unit for that quarter (the second target
distribution);
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Third, 75% to all unitholders, pro rata, and 25% to the
general partner, until each unitholder receives a total of $0.75
per unit for that quarter (the third target
distribution); and
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Thereafter, 50% to all unitholders, pro rata, and 50% to
the general partner.
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25
In each case, the amount of the target distribution set forth
above is exclusive of any distributions to common unitholders to
eliminate any cumulative arrearages in payment of the minimum
quarterly distribution. The percentage interests set forth above
for our general partner include its 2% general partner interest
and assume the general partner has not transferred its incentive
distribution rights.
Percentage
Allocations of Available Cash from Operating Surplus
The following table illustrates the percentage allocations of
the additional available cash from operating surplus between the
unitholders and our general partner up to the various target
distribution levels. The amounts set forth under Marginal
Percentage Interest in Distributions are the percentage
interests of our general partner and the unitholders in any
available cash from operating surplus we distribute up to and
including the corresponding amount in the column Total
Quarterly Distribution, until available cash from
operating surplus we distribute reaches the next target
distribution level, if any. The percentage interests shown for
the unitholders and the general partner for the minimum
quarterly distribution are also applicable to quarterly
distribution amounts that are less than the minimum quarterly
distribution. The percentage interests set forth below for our
general partner include its 2% general partner interest and
assume the general partner has not transferred its incentive
distribution rights.
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Total Quarterly
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Marginal Percentage Interest
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Distribution
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in Distributions
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Target Amount
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Unitholders
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General Partner
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Minimum Quarterly Distribution
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$0.50
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98
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%
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2
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%
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First Target Distribution
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up to $0.55
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98
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%
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2
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%
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Second Target Distribution
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above $0.55 up to $0.625
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85
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%
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15
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%
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Third Target Distribution
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above $0.625 up to $0.75
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75
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%
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25
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%
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Thereafter
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above $0.75
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50
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%
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50
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%
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Distributions
from Capital Surplus
How Distributions from Capital Surplus Are
Made. We will make distributions of available
cash from capital surplus, if any, in the following manner:
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First, 98% to all unitholders, pro rata, and 2% to the
general partner, until we distribute for each common unit, an
amount of available cash from capital surplus equal to the
initial public offering price;
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Second, 98% to the common unitholders, pro rata, and 2%
to the general partner, until we distribute for each common
unit, an amount of available cash from capital surplus equal to
any unpaid arrearages in payment of the minimum quarterly
distribution on the common units; and
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Thereafter, we will make all distributions of available
cash from capital surplus as if they were from operating surplus.
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Effect of a Distribution from Capital
Surplus. The partnership agreement treats a
distribution of capital surplus as the repayment of the initial
unit price from our initial public offering, which is a return
of capital. The initial public offering price less any
distributions of capital surplus per unit is referred to as the
unrecovered initial unit price. Each time a
distribution of capital surplus is made, the minimum quarterly
distribution and the target distribution levels are reduced in
the same proportion as the corresponding reduction in the
unrecovered initial unit price. Because distributions of capital
surplus will reduce the minimum quarterly distribution, after
any of these distributions are made, it may be easier for the
general partner to receive incentive distributions and for the
subordinated units to convert into common units. However, any
distribution of capital surplus before the unrecovered initial
unit price is reduced to zero cannot be applied to the payment
of the minimum quarterly distribution or any arrearages.
Once we distribute capital surplus on a unit equal to the
initial unit price, we will reduce the minimum quarterly
distribution and the target distribution levels to zero. We will
then make all future distributions from operating surplus, with
50% being paid to the holders of units and 50% to the general
partner. The percentage
26
interests shown for our general partner include its 2% general
partner interest and assume the general partner has not
transferred the incentive distribution rights.
Adjustment
to the Minimum Quarterly Distribution and Target Distribution
Levels
In addition to adjusting the minimum quarterly distribution and
target distribution levels to reflect a distribution of capital
surplus, if we combine our units into fewer units or subdivide
our units into a greater number of units, we will
proportionately adjust:
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the minimum quarterly distribution;
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target distribution levels;
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the unrecovered initial unit price;
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the number of common units issuable during the subordination
period without a unitholder vote; and
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the number of common units into which a subordinated unit is
convertible.
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For example, if a
two-for-one
split of the common units should occur, the minimum quarterly
distribution, the target distribution levels and the unrecovered
initial unit price would each be reduced to 50% of its initial
level, the number of common units issuable during the
subordination period without unitholder vote would double and
each subordinated unit would be convertible into two common
units. We will not make any adjustment by reason of the issuance
of additional units for cash or property.
In addition, if legislation is enacted or if existing law is
modified or interpreted by a governmental taxing authority, so
that we become taxable as a corporation or otherwise subject to
taxation as an entity for federal, state or local income tax
purposes, we will reduce the minimum quarterly distribution and
the target distribution levels for each quarter by multiplying
each distribution level by a fraction, the numerator of which is
available cash for that quarter and the denominator of which is
the sum of available cash for that quarter plus the general
partners estimate of our aggregate liability for the
quarter for such income taxes payable by reason of such
legislation or interpretation. To the extent that the actual tax
liability differs from the estimated tax liability for any
quarter, the difference will be accounted for in subsequent
quarters.
Distributions
of Cash Upon Liquidation
General. If we dissolve in accordance with the
partnership agreement, we will sell or otherwise dispose of our
assets in a process called liquidation. We will first apply the
proceeds of liquidation to the payment of our creditors. We will
distribute any remaining proceeds to the unitholders and the
general partner, in accordance with their capital account
balances, as adjusted to reflect any gain or loss upon the sale
or other disposition of our assets in liquidation.
The allocations of gain and loss upon liquidation are intended,
to the extent possible, to entitle the holders of outstanding
common units to a preference over the holders of outstanding
subordinated units upon our liquidation, to the extent required
to permit common unitholders to receive their unrecovered
initial unit price plus the minimum quarterly distribution for
the quarter during which liquidation occurs plus any unpaid
arrearages in payment of the minimum quarterly distribution on
the common units. However, there may not be sufficient gain upon
our liquidation to enable the holders of common units to fully
recover all of these amounts, even though there may be cash
available for distribution to the holders of subordinated units.
Any further net gain recognized upon liquidation will be
allocated in a manner that takes into account the incentive
distribution rights of the general partner.
Manner of Adjustments for Gain. The manner of
the adjustment for gain is set forth in the partnership
agreement. If our liquidation occurs before the end of the
subordination period, we will allocate any gain to the partners
in the following manner:
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First, to the general partner and the holders of units
who have negative balances in their capital accounts to the
extent of and in proportion to those negative balances;
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Second, 98% to the common unitholders, pro rata, and 2%
to the general partner, until the capital account for each
common unit is equal to the sum of: (1) the unrecovered
initial unit price; (2) the amount of the minimum quarterly
distribution for the quarter during which our liquidation
occurs; and (3) any unpaid arrearages in payment of the
minimum quarterly distribution;
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Third, 98% to the subordinated unitholders, pro rata, and
2% to the general partner until the capital account for each
subordinated unit is equal to the sum of: (1) the
unrecovered initial unit price; and (2) the amount of the
minimum quarterly distribution for the quarter during which our
liquidation occurs;
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Fourth, 98% to all unitholders, pro rata, and 2% to the
general partner, until we allocate under this paragraph an
amount per unit equal to: (1) the sum of the excess of the
first target distribution per unit over the minimum quarterly
distribution per unit for each quarter of our existence; less
(2) the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the minimum
quarterly distribution per unit that we distributed 98% to the
unitholders, pro rata, and 2% to the general partner, for each
quarter of our existence;
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Fifth, 85% to all unitholders, pro rata, and 15% to the
general partner, until we allocate under this paragraph an
amount per unit equal to: (1) the sum of the excess of the
second target distribution per unit over the first target
distribution per unit for each quarter of our existence; less
(2) the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the first
target distribution per unit that we distributed 85% to the
unitholders, pro rata, and 15% to the general partner for each
quarter of our existence;
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Sixth, 75% to all unitholders, pro rata, and 25% to the
general partner, until we allocate under this paragraph an
amount per unit equal to: (1) the sum of the excess of the
third target distribution per unit over the second target
distribution per unit for each quarter of our existence; less
(2) the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the second
target distribution per unit that we distributed 75% to the
unitholders, pro rata, and 25% to the general partner for each
quarter of our existence; and
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Thereafter, 50% to all unitholders, pro rata, and 50% to
the general partner.
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The percentage interests set forth above for our general partner
include its 2% general partner interest and assume the general
partner has not transferred the incentive distribution rights.
If the liquidation occurs after the end of the subordination
period, the distinction between common units and subordinated
units will disappear, so that clause (3) of the second
bullet point above and all of the third bullet point above will
no longer be applicable.
Manner of Adjustments for Losses. If our
liquidation occurs before the end of the subordination period,
we will generally allocate any loss to the general partner and
the unitholders in the following manner:
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First, 98% to holders of subordinated units in proportion
to the positive balances in their capital accounts and 2% to the
general partner, until the capital accounts of the subordinated
unitholders have been reduced to zero;
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Second, 98% to the holders of common units in proportion
to the positive balances in their capital accounts and 2% to the
general partner, until the capital accounts of the common
unitholders have been reduced to zero; and
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Thereafter, 100% to the general partner.
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If the liquidation occurs after the end of the subordination
period, the distinction between common units and subordinated
units will disappear, so that all of the first bullet point
above will no longer be applicable.
Adjustments to Capital Accounts. We will make
adjustments to capital accounts upon the issuance of additional
units. In doing so, we will allocate any unrealized and, for tax
purposes, unrecognized gain or loss resulting from the
adjustments to the unitholders and the general partner in the
same manner as we allocate
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gain or loss upon liquidation. In the event that we make
positive adjustments to the capital accounts upon the issuance
of additional units, we will allocate any later negative
adjustments to the capital accounts resulting from the issuance
of additional units or upon our liquidation in a manner which
results, to the extent possible, in the general partners
capital account balances equaling the amount which they would
have been if no earlier positive adjustments to the capital
accounts had been made.
DESCRIPTION
OF OUR PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our
partnership agreement. Our amended and restated partnership
agreement, as amended, has been filed with the Commission. The
following provisions of our partnership agreement are summarized
elsewhere in this prospectus:
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distributions of our available cash are described under
Cash Distribution Policy;
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allocations of taxable income and other matters are described
under Material Tax Consequences;
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rights of holders of common units are described under
Description of Our Common Units; and
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fiduciary duties of our general partner are described under
Conflicts of Interest and Fiduciary Duties.
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Unless otherwise noted, references in this Description of
Our Partnership Agreement to subordinated
units include both of Holly Energy Partners
subordinated units and Class B subordinated units.
Purpose
Our purpose under our partnership agreement is to serve as the
limited partner of our operating partnership and to engage in
any business activities that may be engaged in by our operating
partnership or that are approved by our general partner. The
partnership agreement of our operating partnership provides that
the operating partnership may, directly or indirectly, engage in
(i) its operations as conducted immediately before our
initial public offering, (ii) any other activity approved
by the general partner but only to the extent that the general
partner determines that, as of the date of the acquisition or
commencement of the activity, the activity generates
qualifying income as this term is defined in
Section 7704 of the Internal Revenue Code, or
(iii) any activity that enhances the operations of an
activity that is described in clause (i) or (ii).
Power of
Attorney
Each limited partner, and each person who acquires a unit from a
unitholder and executes and delivers a transfer application,
grants to our general partner and, if appointed, a liquidator, a
power of attorney to, among other things, execute and file
documents required for our qualification, continuance or
dissolution. The power of attorney also grants the authority for
the amendment of, and to make consents and waivers under, our
partnership agreement.
Reimbursements
of Our General Partner
Our general partner does not receive any compensation for its
services as our general partner. It is, however, entitled to be
reimbursed for all of its costs incurred in managing and
operating our business. Our partnership agreement provides that
our general partner will determine the expenses that are
allocable to us in any reasonable manner determined by our
general partner in its sole discretion.
Issuance
of Additional Securities
Our partnership agreement authorizes us to issue an unlimited
number of additional partnership securities and rights to buy
partnership securities for the consideration and on the terms
and conditions determined by our general partner in its sole
discretion without the approval of the unitholders. During the
subordination periods, however, except as we discuss in the
following paragraph, we may not issue equity securities ranking
senior to the common units or an aggregate of more than
3,500,000 additional common units or units on a parity with the
common units, in each case, without the approval of the holders
of a unit majority.
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During or after the subordination period, we may issue an
unlimited number of common units as follows:
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upon conversion of the subordinated units;
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under employee benefit plans;
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upon conversion of the general partner interest and incentive
distribution rights as a result of a withdrawal or removal of
the general partner;
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in connection with the conversion of units of equal rank with
the common units into common units under certain circumstances;
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in the event of a combination or subdivision of common units;
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in connection with an acquisition or a capital improvement that
increases cash flow from operations per unit on an estimated pro
forma basis;
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if the proceeds of the issuance are used to repay indebtedness
the cost of which to service is greater than the distribution
obligations associated with the units issued in connection with
the debts retirement; or
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in connection with the redemption of common units if the net
proceeds from the issuance of the new common units are used to
redeem an equal number of common units outstanding at the time
of such issuance, at a price per unit equal to the net proceeds
per newly issued common unit, before expenses.
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It is possible that we will fund acquisitions through the
issuance of additional common units, subordinated units,
Class B subordinated units or other equity securities.
Holders of any additional common units, subordinated units,
Class B subordinated units or other equity securities we
issue may be entitled to share equally with the then-existing
holders of such common units, subordinated units, Class B
subordinated units or other equity securities in our cash
distributions. In addition, the issuance of additional
partnership interests may dilute the value of the interests of
the then-existing holders of common units in our net assets.
In accordance with Delaware law and the provisions of our
partnership agreement, we may also issue additional partnership
interests that, in the sole discretion of our general partner,
may have special voting rights to which common units are not
entitled.
Upon issuance of additional partnership securities, the general
partner will be required to make additional capital
contributions to the extent necessary to maintain its 2% general
partner interest in us. Moreover, the general partner will have
the right, which it may from time to time assign in whole or in
part to any of its affiliates, to purchase common units,
subordinated units or other equity securities whenever, and on
the same terms that, we issue those securities to persons other
than the general partner and its affiliates, to the extent
necessary to maintain its and its affiliates percentage
interest, including its interest represented by common units and
subordinated units, that existed immediately prior to each
issuance. The holders of common units do not have preemptive
rights to acquire additional common units or other partnership
securities.
Amendments
to Our Partnership Agreement
Amendments to our partnership agreement may be proposed only by,
or with the consent of, our general partner, which consent may
be given or withheld at its option, except as set forth in our
partnership agreement. Any amendment that materially and
adversely affects the rights or preferences of any type or class
of limited partner interests in relation to other types or
classes of limited partner interests or our general partner
interest will require the approval of at least a majority of the
type or class of limited partner interests or general partner
interests so affected. However, in some circumstances, more
particularly described in our partnership agreement, our general
partner may make amendments to our partnership agreement without
the approval of our limited partners or assignees.
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Withdrawal
or Removal of Our General Partner
Except as described below, our general partner has agreed not to
withdraw voluntarily as our general partner prior to
June 30, 2014 without obtaining the approval of the holders
of at least a majority of the outstanding common units,
excluding common units held by the general partner and its
affiliates, and furnishing an opinion of counsel regarding
limited liability and tax matters. On or after June 30,
2014, our general partner may withdraw as general partner
without first obtaining approval of any unitholder by giving
90 days written notice, and that withdrawal will not
constitute a violation of the partnership agreement.
Notwithstanding the information above, our general partner may
withdraw without unitholder approval upon 90 days
notice to the limited partners if at least 50% of the
outstanding common units are held or controlled by one person
and its affiliates other than the general partner and its
affiliates. In addition, the partnership agreement permits our
general partner in some instances to sell or otherwise transfer
all of its general partner interest in us without the approval
of the unitholders.
Upon withdrawal of our general partner under any circumstances,
other than as a result of a transfer by the general partner of
all or a part of its general partner interest in us, the holders
of a majority of the outstanding common units and subordinated
units, voting as separate classes, may select a successor to
that withdrawing general partner. If a successor is not elected,
or is elected but an opinion of counsel regarding limited
liability and tax matters cannot be obtained, we will be
dissolved, wound up, and liquidated, unless within a specified
period of time after that withdrawal, the holders of a unit
majority agree in writing to continue our business and to
appoint a successor general partner.
Our general partner may not be removed unless that removal is
approved by the vote of the holders of not less than
662/3%
of our outstanding units, voting together as a single class,
including units held by the general partner and its affiliates,
and we receive an opinion of counsel regarding limited liability
and tax matters. Any removal of our general partner is also
subject to the approval of a successor general partner by the
vote of the holders of a majority of the outstanding common
units and subordinated units, voting as separate classes.
Our partnership agreement also provides that if our general
partner is removed as our general partner under circumstances
where cause does not exist and units held by the general partner
and its affiliates are not voted in favor of that removal:
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the subordination period will end and all outstanding
subordinated units will immediately convert into common units on
a one-for-one basis;
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any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
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the general partner will have the right to convert its general
partner interest and its incentive distribution rights into
common units or to receive cash in exchange for those interests
based on the fair market value of the interests at the time.
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In the event of removal of our general partner under
circumstances where cause exists or withdrawal of the general
partner where that withdrawal violates the partnership
agreement, a successor general partner will have the option to
purchase the general partner interest and incentive distribution
rights of the departing general partner for a cash payment equal
to the fair market value of those interests. Under all other
circumstances where the general partner withdraws or is removed
by the limited partners, the departing general partner will have
the option to require the successor general partner to purchase
the general partner interest of the departing general partner
and its incentive distribution rights for their fair market
value. In each case, this fair market value will be determined
by agreement between the departing general partner and the
successor general partner. If no agreement is reached, an
independent investment banking firm or other independent expert
selected by the departing general partner and the successor
general partner will determine the fair market value. Or, if the
departing general partner and the successor general partner
cannot agree upon an expert, then an expert chosen by agreement
of the experts selected by each of them will determine the fair
market value.
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If the option described above is not exercised by either the
departing general partner or the successor general partner, the
departing general partners general partner interest and
its incentive distribution rights will automatically convert
into common units equal to the fair market value of those
interests as determined by an investment banking firm or other
independent expert selected in the manner described in the
preceding paragraph.
In addition, we will be required to reimburse the departing
general partner for all amounts due the departing general
partner, including, without limitation, all employee-related
liabilities, including severance liabilities, incurred for the
termination of any employees employed by the departing general
partner or its affiliates for our benefit.
Liquidation
and Distribution of Proceeds
Upon our dissolution, unless we are reconstituted and continued
as a new limited partnership, the person authorized to wind up
our affairs (the liquidator) will, acting with all the powers of
our general partner that the liquidator deems necessary or
desirable in its good faith judgment, liquidate our assets and
apply the proceeds of the liquidation as provided in Cash
Distribution Policy Distributions of Cash Upon
Liquidation. The liquidator may defer liquidation or
distribution of our assets for a reasonable period or distribute
assets to partners in kind if it determines that a sale would be
impractical or would cause undue loss to the partners.
Transfer
of General Partner Interests
Except for transfer by our general partner of all, but not less
than all, of its general partner interest in us to:
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an affiliate of the general partner (other than an
individual), or
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another entity as part of the merger or consolidation of the
general partner with or into another entity or the transfer by
the general partner of all or substantially all of its assets to
another entity,
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our general partner may not transfer all or any part of its
general partner interest in us to another person prior to
June 30, 2014 without the approval of the holders of at
least a majority of the outstanding common units, excluding
common units held by the general partner and its affiliates. As
a condition of this transfer, the transferee must, among other
things, assume the rights and duties of the general partner,
agree to be bound by the provisions of the partnership
agreement, and furnish an opinion of counsel regarding limited
liability and tax matters.
Our general partner and its affiliates may at any time transfer
units to one or more persons, without unitholder approval,
except that they may not transfer subordinated units to us.
Transfer
of Ownership Interests in Our General Partner and in Holly
Logistic Services, L.L.C.
At any time, the partners of our general partner and the members
of Holly Logistic Services, L.L.C. may sell or transfer all or
part of their respective partnership or membership interests in
our general partner or Holly Logistic Services, L.L.C. to an
affiliate or a third party without the approval of our
unitholders.
Transfer
of Incentive Distribution Rights
Our general partner or its affiliates or a subsequent holder may
transfer its incentive distribution rights to an affiliate of
the holder (other than an individual) or another entity as part
of the merger or consolidation of such holder with or into
another entity, or sale of all or substantially all of its
assets to, that entity without the prior approval of the
unitholders. Prior to June 30, 2014, other transfers of the
incentive distribution rights will require the affirmative vote
of holders of a majority of the outstanding common units
excluding common units held by the general partner and its
affiliates. On or after June 30, 2014, the incentive
distribution rights will be freely transferable.
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Change of
Management Provisions
Our partnership agreement contains specific provisions that are
intended to discourage a person or group from attempting to
remove HEP Logistics Holdings, L.P. as our general partner or
otherwise change management. If any person or group other than
the general partner and its affiliates acquires beneficial
ownership of 20% or more of any class of units, that person or
group loses voting rights on all of its units. This loss of
voting rights does not apply to any person or group that
acquires the units from our general partner or its affiliates
and any transferees of that person or group approved by our
general partner or to any person or group who acquires the units
with the prior approval of the board of directors.
The partnership agreement also provides that if the general
partner is removed under circumstances where cause does not
exist and units held by the general partner and its affiliates
are not voted in favor of that removal:
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the subordination period will end and all outstanding
subordinated units will immediately convert into common units on
a one-for-one basis;
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any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
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the general partner will have the right to convert its general
partner interest and its incentive distribution rights into
common units or to receive cash in exchange for those interests.
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Limited
Call Right
If at any time the general partner and its affiliates hold more
than 80% of the then-issued and outstanding partnership
securities of any class, the general partner will have the
right, which it may assign in whole or in part to any of its
affiliates or to us, to acquire all, but not less than all, of
the remaining partnership securities of the class held by
unaffiliated persons as of a record date to be selected by the
general partner, on at least ten but not more than 60 days
notice. The purchase price in the event of this purchase is the
greater of: (1) the highest cash price paid by either of
the general partner or any of its affiliates for any partnership
securities of the class purchased within the 90 days
preceding the date on which the general partner first mails
notice of its election to purchase those partnership securities;
and (2) the current market price as of the date three days
before the date the notice is mailed.
As a result of the general partners right to purchase
outstanding partnership securities, a holder of partnership
securities may have his partnership securities purchased at an
undesirable time or price. The tax consequences to a unitholder
of the exercise of this call right are the same as a sale by
that unitholder of his common units in the market. Please read
Material Tax Consequences Disposition of
Common Units.
Indemnification
Under our partnership agreement, in most circumstances, we will
indemnify the following persons, to the fullest extent permitted
by law, from and against all losses, claims, damages, or similar
events:
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our general partner;
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the general partner of our general partner;
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any departing general partner;
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any person who is or was an affiliate of our general partner or
the general partner of our general partner or any departing
general partner;
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any person who is or was a member, partner, officer, director,
fiduciary or trustee of any entity described above;
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any person who is or was serving as a director, officer, member,
partner, fiduciary or trustee of another person at the request
of our general partner, the general partner of our general
partner or any departing general partner; or
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any person designated by our general partner.
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Any indemnification under these provisions will only be out of
our assets. Unless it otherwise agrees, the general partner will
not be personally liable for, or have any obligation to
contribute or loan funds or assets to us to enable us to
effectuate, indemnification. We may purchase insurance against
liabilities asserted against and expenses incurred by persons
for our activities, regardless of whether we would have the
power to indemnify the person against liabilities under the
partnership agreement.
Registration
Rights
Under our partnership agreement, we have agreed to register for
resale under the Securities Act and applicable state securities
laws any common units, subordinated units or other partnership
securities proposed to be sold by our general partner or any of
its affiliates or their assignees if an exemption from the
registration requirements is not otherwise available. These
registration rights continue for two years following any
withdrawal or removal of HEP Logistics Holdings, L.P. as our
general partner. We are obligated to pay all expenses incidental
to the registration, excluding underwriting discounts and
commissions.
CONFLICTS
OF INTEREST AND FIDUCIARY DUTIES
Conflicts
of Interest
Conflicts of interest exist and may arise in the future as a
result of the relationships between our general partner and its
affiliates, including Holly Corporation, on the one hand, and us
and our limited partners, on the other hand. The directors and
officers of the general partner of our general partner, Holly
Logistic Services, L.L.C., have fiduciary duties to manage the
general partner in a manner beneficial to its owners. At the
same time, our general partner has a fiduciary duty to manage us
in a manner beneficial to us and our unitholders.
Whenever a conflict arises between our general partner or its
affiliates, on the one hand, and us or any other partner, on the
other, our general partner will resolve that conflict. Our
partnership agreement contains provisions that modify and limit
our general partners fiduciary duties to the unitholders.
Our partnership agreement also restricts the remedies available
to unitholders for actions taken that, without those
limitations, might constitute breaches of fiduciary duty.
Our general partner will not be in breach of its obligations
under the partnership agreement or its duties to us or our
unitholders if the resolution of the conflict is:
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approved by the conflicts committee, although our general
partner is not obligated to seek such approval;
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approved by the vote of a majority of the outstanding common
units, excluding any common units owned by our general partner
or any of its affiliates;
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on terms no less favorable to us than those generally being
provided to or available from unrelated third parties; or
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fair and reasonable to us, taking into account the totality of
the relationships between the parties involved, including other
transactions that may be particularly favorable or advantageous
to us.
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Our general partner may, but is not required to, seek the
approval of such resolution from the conflicts committee of the
board of directors of Holly Logistic Services, L.L.C. If our
general partner does not seek approval from the conflicts
committee and the board of directors of Holly Logistic Services,
L.L.C. determines that the resolution or course of action taken
with respect to the conflict of interest satisfies either of the
standards set forth in the third and fourth bullet points above,
then the resolution or course of action taken by the general
partner will be permitted and deemed approved by the unitholders
and will not constitute a breach
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of its obligations under the partnership agreement or its duties
to us or the unitholders. Unless the resolution of a conflict is
specifically provided for in our partnership agreement, our
general partner or the conflicts committee may consider any
factors it determines in good faith to consider when resolving a
conflict. When our partnership agreement requires someone to act
in good faith, it requires that person to reasonably believe
that he is acting in the best interests of the partnership,
unless the context otherwise requires.
Conflicts of interest could arise in the situations described
below, among others.
Actions
taken by our general partner may affect the amount of cash
available for distribution to unitholders or accelerate the
right to convert subordinated units.
The amount of cash that is available for distribution to
unitholders is affected by decisions of our general partner
regarding such matters as:
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amount and timing of asset purchases and sales;
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cash expenditures;
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borrowings;
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issuance of additional units; and
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the creation, reduction, or increase of reserves in any quarter.
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In addition, borrowings by us and our affiliates do not
constitute a breach of any duty owed by the general partner to
our unitholders, including borrowings that have the purpose or
effect of:
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enabling our general partner or its affiliates to receive
distributions on any subordinated units held by them or the
incentive distribution rights; or
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hastening the expiration of the subordination period.
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For example, in the event we have not generated sufficient cash
from our operations to pay the minimum quarterly distribution on
our common units and our subordinated units, our partnership
agreement permits us to borrow funds, which would enable us to
make this distribution on all outstanding units.
Our partnership agreement provides that we and our subsidiaries
may borrow funds from our general partner and its affiliates.
Our general partner and its affiliates may not borrow funds from
us, our operating partnership, or its operating subsidiaries,
other than in connection with Holly Corporations
centralized cash management program.
We do
not have any officers or employees and rely solely on officers
and employees of Holly Logistic Services, L.L.C. and its
affiliates.
Affiliates of Holly Logistic Services, L.L.C. conduct businesses
and activities of their own in which we have no economic
interest. If these separate activities are significantly greater
than our activities, there could be material competition for the
time and effort of the officers and employees who provide
services to Holly Logistic Services, L.L.C. Most of the officers
of Holly Logistic Services, L.L.C. are not required to work full
time on our affairs. These officers are required to devote time
to the affairs of Holly Corporation or its affiliates and are
compensated by them for the services rendered to them.
We
will reimburse the general partner and its affiliates for
expenses.
We will reimburse the general partner and its affiliates for
costs incurred in managing and operating us, including costs
incurred in rendering corporate staff and support services to
us. Our partnership agreement provides that the general partner
will determine the expenses that are allocable to us in good
faith.
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Our
general partner intends to limit its liability regarding our
obligations.
Our general partner intends to limit its liability under
contractual arrangements so that the other party has recourse
only to our assets and not against the general partner or its
assets or any affiliate of the general partner or its assets.
Our partnership agreement provides that any action taken by our
general partner to limit its or our liability is not a breach of
the general partners fiduciary duties, even if we could
have obtained terms that are more favorable without the
limitation on liability.
Unitholders
will have no right to enforce obligations of our general partner
and its affiliates under agreements with us.
Any agreements between us, on the one hand, and our general
partner and its affiliates, on the other, will not grant to the
unitholders, separate and apart from us, the right to enforce
the obligations of our general partner and its affiliates in our
favor.
Contracts
between us, on the one hand, and our general partner and its
affiliates, on the other, will not be the result of
arms-length negotiations.
Our partnership agreement allows our general partner to
determine, in good faith, any amounts to pay itself or its
affiliates for any services rendered to us. Our general partner
may also enter into additional contractual arrangements with any
of its affiliates on our behalf. Neither our partnership
agreement nor any of the other agreements, contracts, and
arrangements between us and the general partner and its
affiliates are or will be the result of arms-length
negotiations. However, any of these transactions are to be on
terms that are fair and reasonable to us.
Our general partner and its affiliates will have no obligation
to permit us to use any facilities or assets of the general
partner and its affiliates, except as may be provided in
contracts entered into specifically dealing with that use. There
is no obligation of our general partner and its affiliates to
enter into any contracts of this kind.
Our
units are subject to our general partners limited call
right.
Our general partner may exercise its right to call and purchase
our units as provided in the partnership agreement or assign
this right to one of its affiliates or to us. Our general
partner may use its own discretion, free of fiduciary duty
restrictions, in determining whether to exercise this right. As
a result, a common unitholder may have his common units
purchased from him at an undesirable time or price.
We may
not choose to retain separate counsel for ourselves or for
unitholders.
The attorneys, independent accountants, and others who perform
services for us have been retained by our general partner.
Attorneys, independent accountants, and others who perform
services for us are selected by our general partner or the
conflicts committee and may perform services for our general
partner and its affiliates. We may retain separate counsel for
ourselves or the unitholders in the event of a conflict of
interest between our general partner and its affiliates, on the
one hand, and us or the unitholders, on the other, depending on
the nature of the conflict. We do not intend to do so in most
cases.
Our
general partners affiliates may compete with
us.
Our partnership agreement provides that our general partner will
be restricted from engaging in any business activities other
than those incidental to its ownership of interests in us and
certain services the employees of our general partner are
currently providing to Holly Corporation and its affiliates.
Except as provided in our partnership agreement and the omnibus
agreement among us, Holly Corporation and our general partner,
affiliates of our general partner are not prohibited from
engaging in other businesses or activities, including those that
might be in direct competition with us.
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Fiduciary
Duties
Our general partner is accountable to us and our unitholders as
a fiduciary. Fiduciary duties owed to unitholders by our general
partner are prescribed by law and the partnership agreement. The
Delaware Revised Uniform Limited Partnership Act, which we refer
to in this prospectus as the Delaware Act, provides that
Delaware limited partnerships may, in their partnership
agreements, restrict or expand the fiduciary duties owed by a
general partner to limited partners and the partnership.
Our partnership agreement contains various provisions
restricting the fiduciary duties that might otherwise be owed by
our general partner. These modifications are detrimental to the
unitholders because they restrict the remedies available to
unitholders for actions that, without those limitations, might
constitute breaches of fiduciary duty, as described below. The
following is a summary of the material restrictions of the
fiduciary duties owed by our general partner to the limited
partners:
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State law fiduciary duty standards |
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Fiduciary duties are generally considered to include an
obligation to act in good faith and with due care and loyalty.
The duty of care, in the absence of a provision in a partnership
agreement providing otherwise, would generally require a general
partner to act for the partnership in the same manner as a
prudent person would act on his own behalf. The duty of loyalty,
in the absence of a provision in a partnership agreement
providing otherwise, would generally prohibit a general partner
of a Delaware limited partnership from taking any action or
engaging in any transaction where a conflict of interest is
present. |
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The Delaware Act generally provides that a limited partner may
institute legal action on behalf of the partnership to recover
damages from a third party where a general partner has refused
to institute the action or where an effort to cause a general
partner to do so is not likely to succeed. In addition, the
statutory or case law of some jurisdictions may permit a limited
partner to institute legal action on behalf of himself and all
other similarly situated limited partners to recover damages
from a general partner for violations of its fiduciary duties to
the limited partners. |
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Partnership agreement modified standards |
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Our partnership agreement contains provisions that waive or
consent to conduct by our general partner and its affiliates
that might otherwise raise issues as to compliance with
fiduciary duties or applicable law. For example, our partnership
agreement provides that when our general partner is acting in
its capacity as our general partner, as opposed to in its
individual capacity, it must act in good faith and
will not be subject to any other standard under applicable law.
In addition, when our general partner is acting in its
individual capacity, as opposed to in its capacity as our
general partner, it may act without any fiduciary obligation to
us or the unitholders whatsoever. These standards reduce the
obligations to which the general partner would otherwise be held. |
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Our partnership agreement generally provides that affiliated
transactions and resolutions of conflicts of interest not
involving a vote of unitholders and that are not approved by the
conflicts committee of the board of directors of our general
partners general partner must be: |
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on terms no less favorable to us than those
generally being provided to or available from unrelated third
parties; or
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fair and reasonable to us, taking into
account the totality of the relationships between the parties
involved (including other transactions that may be particularly
favorable or advantageous to us).
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If our general partner does not seek approval from the conflicts
committee and the board of directors of our general
partners general partner determines that the resolution or
course of action taken with respect to the conflict of interest
satisfies either of the standards set forth in the bullet points
above, then the resolution or course of action taken by the
general partner will be permitted and deemed approved by the
unitholders and will not constitute a breach of its obligations
under the partnership agreement or its duties to us or the
unitholders. These standards reduce the obligations to which our
general partner would otherwise be held. |
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In addition to the other more specific provisions limiting the
obligations of our general partner, our partnership agreement
further provides that our general partner, its general partner
and its officers and directors will not be liable for monetary
damages to us, our limited partners, or assignees for errors of
judgment or for any acts or omissions unless there has been a
final and non-appealable judgment by a court of competent
jurisdiction determining that the general partner or its
officers and directors acted in bad faith or engaged in fraud,
willful misconduct or gross negligence. |
In order to become one of our limited partners, a common
unitholder is required to agree to be bound by the provisions in
the partnership agreement, including the provisions discussed
above. This is in accordance with the policy of the Delaware Act
favoring the principle of freedom of contract and the
enforceability of partnership agreements. The failure of a
limited partner or assignee to sign a partnership agreement does
not render the partnership agreement unenforceable against that
person.
We must indemnify our general partner and Holly Logistic
Services, L.L.C. and their officers, directors, and managers, to
the fullest extent permitted by law, against liabilities, costs
and expenses incurred by the general partner, Holly Logistic
Services, L.L.C. or these other persons. We must provide this
indemnification unless there has been a final and non-appealable
judgment by a court of competent jurisdiction determining that
these persons acted in bad faith or engaged in fraud, willful
misconduct or gross negligence. We also must provide this
indemnification for criminal proceedings unless our general
partner, Holly Logistic Services, L.L.C. or these other persons
acted with knowledge that their conduct was unlawful. Thus, our
general partner and Holly Logistic Services, L.L.C. could be
indemnified for their negligent acts if they met requirements
set forth above. To the extent that these provisions purport to
include indemnification for liabilities arising under the
Securities Act, in the opinion of the Securities and Exchange
Commission, such indemnification is contrary to public policy
and therefore unenforceable.
MATERIAL
TAX CONSEQUENCES
This section is a summary of the material tax considerations
that may be relevant to prospective unitholders who are
individual citizens or residents of the United States and,
unless otherwise noted in the following discussion, is the
opinion of Vinson & Elkins L.L.P., counsel to our
general partner and us, insofar as it relates to legal
conclusions with respect to matters of U.S. federal income
tax law. This section is based upon current provisions of the
Internal Revenue Code of 1986, as amended (the Internal
Revenue Code), existing and proposed Treasury regulations
promulgated under the Internal Revenue Code (the Treasury
Regulations) and current administrative rulings and court
decisions, all of which are subject to change. Later changes in
these authorities may cause the tax consequences to vary
substantially from the consequences described below. Unless the
context otherwise requires, references in this section to
us or we are references to Holly Energy
Partners.
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The following discussion does not comment on all federal income
tax matters affecting us or our unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or
residents of the United States and has only limited application
to corporations, estates, trusts, nonresident aliens or other
unitholders subject to specialized tax treatment, such as
tax-exempt institutions, foreign persons, individual retirement
accounts (IRAs), real estate investment trusts (REITs) or mutual
funds. Accordingly, we encourage each prospective unitholder to
consult, and depend on, his own tax advisor in analyzing the
federal, state, local and foreign tax consequences particular to
him of the ownership or disposition of common units.
No ruling has been or will be requested from the IRS regarding
any matter affecting us or prospective unitholders. Instead, we
will rely on opinions of Vinson & Elkins L.L.P. Unlike
a ruling, an opinion of counsel represents only that
counsels best legal judgment and does not bind the IRS or
the courts. Accordingly, the opinions and statements made herein
may not be sustained by a court if contested by the IRS. Any
contest of this sort with the IRS may materially and adversely
impact the market for the common units and the prices at which
common units trade. In addition, the costs of any contest with
the IRS, principally legal, accounting and related fees, will
result in a reduction in cash available for distribution to our
unitholders and our general partner and thus will be borne
indirectly by our unitholders and our general partner.
Furthermore, the tax treatment of us, or of an investment in us,
may be significantly modified by future legislative or
administrative changes or court decisions. Any modifications may
or may not be retroactively applied.
All statements as to matters of law and legal conclusions, but
not as to factual matters, contained in this section, unless
otherwise noted, are the opinion of Vinson & Elkins
L.L.P. and are based on the accuracy of the representations made
by us.
For the reasons described below, Vinson & Elkins
L.L.P. has not rendered an opinion with respect to the following
specific federal income tax issues:
(1) the treatment of a unitholder whose common units are
loaned to a short seller to cover a short sale of common units
(please read Tax Consequences of Unit
Ownership Treatment of Short Sales);
(2) whether our monthly convention for allocating taxable
income and losses is permitted by existing Treasury Regulations
(please read Disposition of Common
Units Allocations Between Transferors and
Transferees); and
(3) whether our method for depreciating Section 743
adjustments is sustainable in certain cases (please read
Tax Consequences of Unit Ownership
Section 754 Election).
Partnership
Status
A partnership is not a taxable entity and incurs no federal
income tax liability. Instead, each partner of a partnership is
required to take into account his share of items of income,
gain, loss and deduction of the partnership in computing his
federal income tax liability, regardless of whether cash
distributions are made to him by the partnership. Distributions
by a partnership to a partner are generally not taxable to the
partnership or the partner unless the amount of cash distributed
to him is in excess of the partners adjusted basis in his
partnership interest.
Section 7704 of the Internal Revenue Code provides that
publicly traded partnerships will, as a general rule, be taxed
as corporations. However, an exception, referred to as the
Qualifying Income Exception, exists with respect to
publicly traded partnerships of which 90% or more of the gross
income for every taxable year consists of qualifying
income. Qualifying income includes income and gains
derived from the transportation, storage and processing of crude
oil, natural gas and products thereof. Other types of qualifying
income include interest (other than from a financial business),
dividends, gains from the sale of real property and gains from
the sale or other disposition of capital assets held for the
production of income that otherwise constitutes qualifying
income. We estimate that less than 6% of our current gross
income is not qualifying income; however, this estimate could
change from time to time. Based upon and subject to this
estimate, the factual representations made by us and our general
partner and a review of the applicable legal authorities,
Vinson &
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Elkins L.L.P. is of the opinion that at least 90% of our current
gross income constitutes qualifying income. The portion of our
income that is qualifying income may change from time to time.
No ruling has been or will be sought from the IRS and the IRS
has made no determination as to our status as a partnership for
federal income tax purposes or whether our operations generate
qualifying income under Section 7704 of the
Internal Revenue Code. Instead, we will rely on the opinion of
Vinson & Elkins L.L.P. on such matters. It is the
opinion of Vinson & Elkins L.L.P. that, based upon the
Internal Revenue Code, the Treasury Regulations, published
revenue rulings and court decisions and the representations
described below, we will be classified as a partnership and our
operating partnership will be disregarded as an entity separate
from us for federal income tax purposes.
In rendering its opinion, Vinson & Elkins L.L.P. has
relied on factual representations made by us and our general
partner. The representations made by us and our general partner
upon which Vinson & Elkins L.L.P. has relied are:
(a) Neither we, the general partner of the operating
partnership nor the operating partnership has elected or will
elect to be treated as a corporation for federal income tax
purposes; and
(b) For each taxable year, more than 90% of our gross
income has been and will be income that Vinson &
Elkins L.L.P. has opined or will opine is qualifying
income within the meaning of Section 7704(d) of the
Internal Revenue Code.
If we fail to meet the Qualifying Income Exception, other than a
failure that is determined by the IRS to be inadvertent and that
is cured within a reasonable time after discovery (in which case
the IRS may also require us to make adjustments with respect to
our unitholders or pay other amounts), we will be treated as if
we had transferred all of our assets, subject to liabilities, to
a newly formed corporation, on the first day of the year in
which we fail to meet the Qualifying Income Exception, in return
for stock in that corporation, and then distributed that stock
to the unitholders in liquidation of their interests in us. This
deemed contribution and liquidation should be tax-free to
unitholders and us so long as we, at that time, do not have
liabilities in excess of the tax basis of our assets.
Thereafter, we would be treated as a corporation for federal
income tax purposes.
If we were treated as an association taxable as a corporation in
any taxable year, either as a result of a failure to meet the
Qualifying Income Exception or otherwise, our items of income,
gain, loss and deduction would be reflected only on our tax
return rather than being passed through to our unitholders, and
our net income would be taxed to us at corporate rates. In
addition, any distribution made to a unitholder would be treated
as either taxable dividend income, to the extent of our current
or accumulated earnings and profits, or, in the absence of
earnings and profits, a nontaxable return of capital, to the
extent of the unitholders tax basis in his common units,
or taxable capital gain, after the unitholders tax basis
in his common units is reduced to zero. Accordingly, taxation as
a corporation would result in a material reduction in a
unitholders cash flow and after-tax return and thus would
likely result in a substantial reduction of the value of the
units.
The discussion below is based on Vinson & Elkins
L.L.P.s opinion that we will be classified as a
partnership for federal income tax purposes.
Limited
Partner Status
Unitholders who have become limited partners of Holly Energy
Partners will be treated as partners of Holly Energy Partners
for federal income tax purposes. Also:
(a) assignees who have executed and delivered transfer
applications, and are awaiting admission as limited
partners, and
(b) unitholders whose common units are held in street name
or by a nominee and who have the right to direct the nominee in
the exercise of all substantive rights attendant to the
ownership of their common units,
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will be treated as partners of Holly Energy Partners for federal
income tax purposes. As there is no direct authority addressing
assignees of common units who are entitled to execute and
deliver transfer applications and thereby become entitled to
direct the exercise of attendant rights, but who fail to execute
and deliver transfer applications, Vinson & Elkins
L.L.P.s opinion does not extend to these persons.
Furthermore, a purchaser or other transferee of common units who
does not execute and deliver a transfer application may not
receive some federal income tax information or reports furnished
to record holders of common units unless the common units are
held in a nominee or street name account and the nominee or
broker has executed and delivered a transfer application for
those common units.
A beneficial owner of common units whose units have been
transferred to a short seller to complete a short sale would
appear to lose his status as a partner with respect to those
units for federal income tax purposes. Please read
Tax Consequences of Unit Ownership
Treatment of Short Sales.
Income, gains, deductions or losses would not appear to be
reportable by a unitholder who is not a partner for federal
income tax purposes, and any cash distributions received by a
unitholder who is not a partner for federal income tax purposes
would therefore appear to be fully taxable as ordinary income.
These holders are urged to consult their own tax advisors with
respect to their tax consequences of holding common units in
Holly Energy Partners.
Tax
Consequences of Unit Ownership
Flow-through of Taxable Income. We will not
pay any federal income tax. Instead, each unitholder will be
required to report on his income tax return his share of our
income, gains, losses and deductions without regard to whether
we make cash distributions to him. Consequently, we may allocate
income to a unitholder even if he has not received a cash
distribution. Each unitholder will be required to include in
income his allocable share of our income, gains, losses and
deductions for our taxable year ending with or within his
taxable year.
Treatment of Distributions. Distributions by
us to a unitholder generally will not be taxable to the
unitholder for federal income tax purposes, except to the extent
the amount of any such cash distribution exceeds his tax basis
in his common units immediately before the distribution. Our
cash distributions in excess of a unitholders tax basis
generally will be considered to be gain from the sale or
exchange of the common units, taxable in accordance with the
rules described under Disposition of Common
Units below. Any reduction in a unitholders share of
our liabilities for which no partner, including the general
partner, bears the economic risk of loss, known as
nonrecourse liabilities, will be treated as a
distribution by us of cash to that unitholder. To the extent our
distributions cause a unitholders at-risk
amount to be less than zero at the end of any taxable year, he
must recapture any losses deducted in previous years. Please
read Limitations on Deductibility of
Losses.
A decrease in a unitholders percentage interest in us
because of our issuance of additional common units will decrease
his share of our nonrecourse liabilities, and thus will result
in a corresponding deemed distribution of cash. This deemed
distribution may constitute a non-pro rata distribution. A
non-pro rata distribution of money or property may result in
ordinary income to a unitholder, regardless of his tax basis in
his common units, if the distribution reduces the
unitholders share of our unrealized
receivables, including depreciation recapture,
and/or
substantially appreciated inventory items, both as
defined in the Internal Revenue Code, and collectively,
Section 751 Assets. To that extent, he will be
treated as having been distributed his proportionate share of
the Section 751 Assets and then having exchanged those
assets with us in return for the non-pro rata portion of the
actual distribution made to him. This latter deemed exchange
will generally result in the unitholders realization of
ordinary income, which will equal the excess of (1) the
non-pro rata portion of that distribution over (2) the
unitholders tax basis (generally zero) for the share of
Section 751 Assets deemed relinquished in the exchange.
Basis of Common Units. A unitholders
initial tax basis for his common units will be the amount he
paid for the common units plus his share of our nonrecourse
liabilities. That basis will be increased by his share of our
income and by any increases in his share of our nonrecourse
liabilities. That basis will be decreased, but not below zero,
by distributions from us, by the unitholders share of our
losses, by any
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decreases in his share of our nonrecourse liabilities and by his
share of our expenditures that are not deductible in computing
taxable income and are not required to be capitalized. A
unitholder will have no share of our debt that is recourse to
our general partner, but will have a share, generally based on
his share of profits, of our nonrecourse liabilities. Please
read Disposition of Common Units
Recognition of Gain or Loss.
Limitations on Deductibility of Losses. The
deduction by a unitholder of his share of our losses will be
limited to the tax basis in his units and, in the case of an
individual unitholder, estate, trust, or corporate unitholder
(if more than 50% of the value of the corporate
unitholders stock is owned directly or indirectly by or
for five or fewer individuals or some tax-exempt organizations)
to the amount for which the unitholder is considered to be
at risk with respect to our activities, if that is
less than his tax basis. A common unitholder subject to these
limitations must recapture losses deducted in previous years to
the extent that distributions cause his at-risk amount to be
less than zero at the end of any taxable year. Losses disallowed
to a unitholder or recaptured as a result of these limitations
will carry forward and will be allowable as a deduction to the
extent that his at-risk amount is subsequently increased,
provided such losses do not exceed such common unitholders
tax basis in his common units. Upon the taxable disposition of a
unit, any gain recognized by a unitholder can be offset by
losses that were previously suspended by the at-risk limitation
but may not be offset by losses suspended by the basis
limitation. Any loss previously suspended by the at-risk
limitation in excess of that gain would no longer be utilizable.
In general, a unitholder will be at risk to the extent of the
tax basis of his units, excluding any portion of that basis
attributable to his share of our nonrecourse liabilities,
reduced by (i) any portion of that basis representing
amounts otherwise protected against loss because of a guarantee,
stop loss agreement or other similar arrangement and
(ii) any amount of money he borrows to acquire or hold his
units, if the lender of those borrowed funds owns an interest in
us, is related to the unitholder or can look only to the units
for repayment. A unitholders at-risk amount will increase
or decrease as the tax basis of the unitholders units
increases or decreases, other than tax basis increases or
decreases attributable to increases or decreases in his share of
our nonrecourse liabilities.
In addition to the basis and at-risk limitations on the
deductibility of losses, the passive loss limitations generally
provide that individuals, estates, trusts and some closely-held
corporations and personal service corporations can deduct losses
from passive activities, which are generally trade or business
activities in which the taxpayer does not materially
participate, only to the extent of the taxpayers income
from those passive activities. The passive loss limitations are
applied separately with respect to each publicly traded
partnership. Consequently, any passive losses we generate will
only be available to offset our passive income generated in the
future and will not be available to offset income from other
passive activities or investments, including our investments or
investments in other publicly traded partnerships, or salary or
active business income. Passive losses that are not deductible
because they exceed a unitholders share of income we
generate may be deducted in full when he disposes of his entire
investment in us in a fully taxable transaction with an
unrelated party. The passive loss limitations are applied after
other applicable limitations on deductions, including the
at-risk rules and the basis limitation.
A unitholders share of our net income may be offset by any
of our suspended passive losses, but it may not be offset by any
other current or carryover losses from other passive activities,
including those attributable to other publicly traded
partnerships.
Limitations on Interest Deductions. The
deductibility of a non-corporate taxpayers
investment interest expense is generally limited to
the amount of that taxpayers net investment
income. Investment interest expense includes:
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interest on indebtedness properly allocable to property held for
investment;
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our interest expense attributed to portfolio income; and
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the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to
portfolio income.
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The computation of a unitholders investment interest
expense will take into account interest on any margin account
borrowing or other loan incurred to purchase or carry a unit.
Net investment income includes gross income from property held
for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than
interest, directly connected with the production of investment
income, but generally does not include gains attributable to the
disposition of property held for investment or qualified
dividend income. The IRS has indicated that the net passive
income earned by a publicly traded partnership will be treated
as investment income to its unitholders. In addition, the
unitholders share of our portfolio income will be treated
as investment income.
Entity-Level Collections. If we are
required or elect under applicable law to pay any federal,
state, local or foreign income tax on behalf of any unitholder
or our general partner or any former unitholder, we are
authorized to pay those taxes from our funds. That payment, if
made, will be treated as a distribution of cash to the
unitholder on whose behalf the payment was made. If the payment
is made on behalf of a person whose identity cannot be
determined, we are authorized to treat the payment as a
distribution to all current unitholders. We are authorized to
amend our partnership agreement in the manner necessary to
maintain uniformity of intrinsic tax characteristics of units
and to adjust later distributions, so that after giving effect
to these distributions, the priority and characterization of
distributions otherwise applicable under our partnership
agreement is maintained as nearly as is practicable. Payments by
us as described above could give rise to an overpayment of tax
on behalf of an individual unitholder in which event the
unitholder would be required to file a claim in order to obtain
a credit or refund.
Allocation of Income, Gain, Loss and
Deduction. In general, if we have a net profit,
our items of income, gain, loss and deduction will be allocated
among our general partner and the unitholders in accordance with
their percentage interests in us. At any time that distributions
are made to the common units in excess of distributions to the
subordinated units, or incentive distributions are made to our
general partner, gross income will be allocated to the
recipients to the extent of these distributions. If we have a
net loss, that loss will be allocated first to our general
partner and the unitholders in accordance with their percentage
interests in us to the extent of their positive capital accounts
and, second, to our general partner.
Specified items of our income, gain, loss and deduction will be
allocated to account for (i) any difference between the tax
basis and fair market value of our assets that exists at the
time of an offering and (ii) any difference between the tax
basis and fair market value of any property contributed to us by
our general partner and its affiliates that exists at the time
of contribution, referred to in this discussion as the
Adjusted Property. The effect of these allocations,
referred to as Section 704(c) Allocations, to a unitholder
purchasing common units from us in an offering will be
essentially the same as if the tax bases of our assets were
equal to their fair market value at the time of such offering.
In the event we issue additional common units or engage in
certain other transactions in the future, reverse
Section 704(c) Allocations, similar to the
Section 704(c) Allocations described above, will be made to
our general partner and persons that hold our units immediately
prior to such issuance or other transactions to account for the
difference between the book basis for purposes of
maintaining capital accounts and the fair market value of all
property held by us at the time of such future issuance or other
transaction. In addition, items of recapture income will be
allocated to the extent possible to the unitholder who was
allocated the deduction giving rise to the treatment of that
gain as recapture income in order to minimize the recognition of
ordinary income by some unitholders. Finally, although we do not
expect that our operations will result in the creation of
negative capital accounts, if negative capital accounts
nevertheless result, items of our income and gain will be
allocated in an amount and manner sufficient to eliminate the
negative balance as quickly as possible.
An allocation of items of our income, gain, loss or deduction,
other than an allocation required by the Internal Revenue Code
to eliminate the difference between a partners
book capital account, credited with the fair market
value of Adjusted Property, and tax capital account,
credited with the tax basis of Adjusted Property, referred to in
this discussion as the Book-Tax Disparity, will
generally be given effect for federal income tax purposes in
determining a partners share of an item of income, gain,
loss or deduction only if the allocation has substantial
economic effect. In any other case, a partners share of an
item will be determined
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on the basis of his interest in us, which will be determined by
taking into account all the facts and circumstances, including:
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his relative contributions to us;
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the interests of all the partners in profits and losses;
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the interest of all the partners in cash flow; and
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the rights of all the partners to distributions of capital upon
liquidation.
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Vinson & Elkins L.L.P. is of the opinion that, with
the exception of the issues described in
Section 754 Election and
Disposition of Common Units
Allocations Between Transferors and Transferees,
allocations under our partnership agreement will be given effect
for federal income tax purposes in determining a partners
share of an item of income, gain, loss or deduction.
Treatment of Short Sales. A unitholder whose
units are loaned to a short seller to cover a short
sale of units may be considered as having disposed of those
units. If so, he would no longer be a partner for those units
during the period of the loan and may recognize gain or loss
from the disposition. As a result, during this period:
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any of our income, gain, loss or deduction with respect to those
units would not be reportable by the unitholder;
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any cash distributions received by the unitholder as to those
units would be fully taxable; and
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all of these distributions would appear to be ordinary income.
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Vinson & Elkins L.L.P. has not rendered an opinion
regarding the tax treatment of a unitholder whose common units
are loaned to a short seller to cover a short sale of common
units; therefore, unitholders desiring to assure their status as
partners and avoid the risk of gain recognition from a loan to a
short seller are urged to modify any applicable brokerage
account agreements to prohibit their brokers from borrowing and
loaning their units. The IRS has announced that it is actively
studying issues relating to the tax treatment of short sales of
partnership interests. Please also read
Disposition of Common Units
Recognition of Gain or Loss.
Alternative Minimum Tax. Each unitholder will
be required to take into account his distributive share of any
items of our income, gain, loss or deduction for purposes of the
alternative minimum tax. The current minimum tax rate for
noncorporate taxpayers is 26% on the first $175,000 of
alternative minimum taxable income in excess of the exemption
amount and 28% on any additional alternative minimum taxable
income. Prospective unitholders are urged to consult with their
tax advisors as to the impact of an investment in units on their
liability for the alternative minimum tax.
Tax Rates. Under current law, the highest
marginal U.S. federal income tax rate applicable to
ordinary income of individuals is 35% and the highest marginal
U.S. federal income tax rate applicable to long-term
capital gains (generally, capital gains on certain assets held
for more than 12 months) of individuals is 15%. However,
absent new legislation extending the current rates, beginning
January 1, 2011, the highest marginal U.S. federal
income tax rate applicable to ordinary income and long-term
capital gains of individuals will increase to 39.6% and 20%,
respectively.
Section 754 Election. We have made the
election permitted by Section 754 of the Internal Revenue
Code. That election is irrevocable without the consent of the
IRS. The election will generally permit us to adjust a common
unit purchasers tax basis in our assets (inside
basis) under Section 743(b) of the Internal Revenue
Code to reflect his purchase price. This election does not apply
to a person who purchases common units directly from us. The
Section 743(b) adjustment belongs to the purchaser and not
to other unitholders. For purposes of this discussion, a
unitholders inside basis in our assets will be considered
to have two components: (1) his share of our tax basis in
our assets (common basis) and (2) his
Section 743(b) adjustment to that basis.
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Where the remedial allocation method is adopted (which we have
adopted as to our properties), the Treasury Regulations under
Section 743 of the Internal Revenue Code require a portion
of the Section 743(b) adjustment that is attributable to
recovery property subject to depreciation under Section 168
of the Internal Revenue Code whose book basis is in excess of
its tax basis to be depreciated over the remaining cost recovery
period for the propertys unamortized book-tax disparity.
Under Treasury
Regulation Section 1.167(c)-1(a)(6),
a Section 743(b) adjustment attributable to property
subject to depreciation under Section 167 of the Internal
Revenue Code, rather than cost recovery deductions under
Section 168, is generally required to be depreciated using
either the straight-line method or the 150% declining balance
method. Under our partnership agreement, our general partner is
authorized to take a position to preserve the uniformity of
units even if that position is not consistent with these and any
other Treasury Regulations. Please read
Uniformity of Units.
Although Vinson & Elkins L.L.P. is unable to opine as
to the validity of this approach because there is no direct or
indirect controlling authority on this issue, we intend to
depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Adjusted
Property, to the extent of any unamortized Book-Tax Disparity,
using a rate of depreciation or amortization derived from the
depreciation or amortization method and useful life applied to
the propertys unamortized book-tax disparity, or treat
that portion as
non-amortizable
to the extent attributable to property which is not amortizable.
This method is consistent with the methods employed by other
publicly traded partnerships but is arguably inconsistent with
Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets, and Treasury
Regulation Section 1.197-2(g)(3).
To the extent this Section 743(b) adjustment is
attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, we will apply the rules
described in the Treasury Regulations and legislative history.
If we determine that this position cannot reasonably be taken,
we may take a depreciation or amortization position under which
all purchasers acquiring units in the same month would receive
depreciation or amortization, whether attributable to common
basis or a Section 743(b) adjustment, based upon the same
applicable rate as if they had purchased a direct interest in
our assets. This kind of aggregate approach may result in lower
annual depreciation or amortization deductions than would
otherwise be allowable to some unitholders. Please read
Uniformity of Units. A unitholders
tax basis for his common units is reduced by his share of our
deductions (whether or not such deductions were claimed on an
individuals income tax return) so that any position we
take that understates deductions will overstate the common
unitholders basis in his common units, which may cause the
unitholder to understate gain or overstate loss on any sale of
such units. Please read Disposition of Common
Units Recognition of Gain or Loss. The IRS may
challenge our position with respect to depreciating or
amortizing the Section 743(b) adjustment we take to
preserve the uniformity of the units. If such a challenge were
sustained, the gain from the sale of units might be increased
without the benefit of additional deductions.
A Section 754 election is advantageous if the
transferees tax basis in his units is higher than the
units share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of
the election, the transferee would have, among other items, a
greater amount of depreciation deductions and his share of any
gain or loss on a sale of our assets would be less. Conversely,
a Section 754 election is disadvantageous if the
transferees tax basis in his units is lower than those
units share of the aggregate tax basis of our assets
immediately prior to the transfer. Thus, the fair market value
of the units may be affected either favorably or unfavorably by
the election. A basis adjustment is required regardless of
whether a Section 754 election is made in the case of a
transfer of an interest in us if we have a substantial
built in loss immediately after the transfer, or if
we distribute property and have a substantial basis reduction.
Generally a built in loss or a basis reduction is
substantial if it exceeds $250,000.
The calculations involved in the Section 754 election are
complex and will be made on the basis of assumptions as to the
value of our assets and other matters. For example, the
allocation of the Section 743(b) adjustment among our
assets must be made in accordance with the Internal Revenue
Code. The IRS could seek to reallocate some or all of any
Section 743(b) adjustment allocated by us to our tangible
assets to goodwill instead. Goodwill, as an intangible asset, is
generally nonamortizable or amortizable over a longer period of
time or under a less accelerated method than our tangible
assets. We cannot assure you that the determinations we make
will not be successfully challenged by the IRS and that the
deductions resulting from
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them will not be reduced or disallowed altogether. Should the
IRS require a different basis adjustment to be made, and should,
in our opinion, the expense of compliance exceed the benefit of
the election, we may seek permission from the IRS to revoke our
Section 754 election. If permission is granted, a
subsequent purchaser of units may be allocated more income than
he would have been allocated had the election not been revoked.
Tax
Treatment of Operations
Accounting Method and Taxable Year. We use the
year ending December 31 as our taxable year and the accrual
method of accounting for federal income tax purposes. Each
unitholder will be required to include in income his share of
our income, gain, loss and deduction for our taxable year ending
within or with his taxable year. In addition, a unitholder who
has a taxable year ending on a date other than December 31 and
who disposes of all of his units following the close of our
taxable year but before the close of his taxable year must
include his share of our income, gain, loss and deduction in
income for his taxable year, with the result that he will be
required to include in income for his taxable year his share of
more than twelve months of our income, gain, loss and deduction.
Please read Disposition of Common
Units Allocations Between Transferors and
Transferees.
Tax Basis, Depreciation and Amortization. The
tax basis of our assets will be used for purposes of computing
depreciation and cost recovery deductions and, ultimately, gain
or loss on the disposition of these assets. The federal income
tax burden associated with the difference between the fair
market value of our assets and their tax basis immediately prior
to an offering will be borne by partners holding interests in us
immediately prior to that offering. Please read
Tax Consequences of Unit Ownership
Allocation of Income, Gain, Loss and Deduction.
To the extent allowable, we may elect to use the depreciation
and cost recovery methods that will result in the largest
deductions being taken in the early years after assets are
placed in service. We are not entitled to any amortization
deductions with respect to any goodwill conveyed to us on
formation. Property we subsequently acquire or construct may be
depreciated using accelerated methods permitted by the Internal
Revenue Code.
If we dispose of depreciable property by sale, foreclosure or
otherwise, all or a portion of any gain, determined by reference
to the amount of depreciation previously deducted and the nature
of the property, may be subject to the recapture rules and taxed
as ordinary income rather than capital gain. Similarly, a
unitholder who has taken cost recovery or depreciation
deductions with respect to property we own will likely be
required to recapture some or all of those deductions as
ordinary income upon a sale of his interest in us. Please read
Tax Consequences of Unit Ownership
Allocation of Income, Gain, Loss and Deduction and
Disposition of Common Units
Recognition of Gain or Loss.
The costs incurred in selling our units (called
syndication expenses) must be capitalized and cannot
be deducted currently, ratably or upon our termination. There
are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as
syndication expenses, which may not be amortized by us. The
underwriting discounts and commissions we incur will be treated
as syndication expenses.
Valuation and Tax Basis of Our Properties. The
federal income tax consequences of the ownership and disposition
of units will depend in part on our estimates of the relative
fair market values, and the initial tax bases, of our assets.
Although we may from time to time consult with professional
appraisers regarding valuation matters, we will make many of the
relative fair market value estimates ourselves. These estimates
and determinations of basis are subject to challenge and will
not be binding on the IRS or the courts. If the estimates of
fair market value or basis are later found to be incorrect, the
character and amount of items of income, gain, loss or
deductions previously reported by unitholders might change, and
unitholders might be required to adjust their tax liability for
prior years and incur interest and penalties with respect to
those adjustments.
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Disposition
of Common Units
Recognition of Gain or Loss. Gain or loss will
be recognized on a sale of units equal to the difference between
the amount realized and the unitholders tax basis for the
units sold. A unitholders amount realized will be measured
by the sum of the cash or the fair market value of other
property received by him plus his share of our nonrecourse
liabilities. Because the amount realized includes a
unitholders share of our nonrecourse liabilities, the gain
recognized on the sale of units could result in a tax liability
in excess of any cash received from the sale.
Prior distributions from us in excess of cumulative net taxable
income for a common unit that decreased a unitholders tax
basis in that common unit will, in effect, become taxable income
if the common unit is sold at a price greater than the
unitholders tax basis in that common unit, even if the
price received is less than his original cost.
Except as noted below, gain or loss recognized by a unitholder,
other than a dealer in units, on the sale or
exchange of a unit will generally be taxable as capital gain or
loss. Capital gain recognized by an individual on the sale of
units held for more than 12 months will generally be taxed
at a maximum U.S. federal income tax rate of 15% through
December 31, 2010 and 20% thereafter (absent new
legislation extending the current rate). However, a portion of
this gain or loss, which will likely be substantial, will be
separately computed and taxed as ordinary income or loss under
Section 751 of the Internal Revenue Code to the extent
attributable to assets giving rise to depreciation recapture or
other unrealized receivables or to inventory
items we own. The term unrealized receivables
includes potential recapture items, including depreciation
recapture. Ordinary income attributable to unrealized
receivables, inventory items and depreciation recapture may
exceed net taxable gain realized upon the sale of a unit and may
be recognized even if there is a net taxable loss realized on
the sale of a unit. Thus, a unitholder may recognize both
ordinary income and a capital loss upon a sale of units. Net
capital losses may offset capital gains and no more than $3,000
of ordinary income, in the case of individuals, and may only be
used to offset capital gains in the case of corporations.
The IRS has ruled that a partner who acquires interests in a
partnership in separate transactions must combine those
interests and maintain a single adjusted tax basis for all those
interests. Upon a sale or other disposition of less than all of
those interests, a portion of that tax basis must be allocated
to the interests sold using an equitable
apportionment method, which generally means that the tax
basis allocated to the interest sold equals an amount that bears
the same relation to the partners tax basis in his entire
interest in the partnership as the value of the interest sold
bears to the value of the partners entire interest in the
partnership. Treasury Regulations under Section 1223 of the
Internal Revenue Code allow a selling unitholder who can
identify common units transferred with an ascertainable holding
period to elect to use the actual holding period of the common
units transferred. Thus, according to the ruling described
above, a common unitholder will be unable to select high or low
basis common units to sell as would be the case with corporate
stock, but, according to the Treasury Regulations, he may
designate specific common units sold for purposes of determining
the holding period of units transferred. A unitholder electing
to use the actual holding period of common units transferred
must consistently use that identification method for all
subsequent sales or exchanges of common units. A unitholder
considering the purchase of additional units or a sale of common
units purchased in separate transactions is urged to consult his
tax advisor as to the possible consequences of this ruling and
application of the Treasury Regulations.
Specific provisions of the Internal Revenue Code affect the
taxation of some financial products and securities, including
partnership interests, by treating a taxpayer as having sold an
appreciated partnership interest, one in which gain
would be recognized if it were sold, assigned or terminated at
its fair market value, if the taxpayer or related persons
enter(s) into:
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a short sale;
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an offsetting notional principal contract; or
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a futures or forward contract with respect to the partnership
interest or substantially identical property.
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Moreover, if a taxpayer has previously entered into a short
sale, an offsetting notional principal contract or a futures or
forward contract with respect to the partnership interest, the
taxpayer will be treated as having sold that position if the
taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of
the Treasury is also authorized to issue regulations that treat
a taxpayer that enters into transactions or positions that have
substantially the same effect as the preceding transactions as
having constructively sold the financial position.
Allocations Between Transferors and
Transferees. In general, our taxable income and
losses will be determined annually, will be prorated on a
monthly basis and will be subsequently apportioned among the
unitholders in proportion to the number of units owned by each
of them as of the opening of the applicable exchange on the
first business day of the month, which we refer to in this
prospectus as the Allocation Date. However, gain or
loss realized on a sale or other disposition of our assets other
than in the ordinary course of business will be allocated among
the unitholders on the Allocation Date in the month in which
that gain or loss is recognized. As a result, a unitholder
transferring units may be allocated income, gain, loss and
deduction realized after the date of transfer.
Although simplifying conventions are contemplated by the
Internal Revenue Code and most publicly traded partnerships use
similar simplifying conventions, the use of this method may not
be permitted under existing Treasury Regulations. Accordingly,
Vinson & Elkins L.L.P. is unable to opine on the
validity of this method of allocating income and deductions
between transferor and transferee unitholders. If this method is
not allowed under the Treasury Regulations, or only applies to
transfers of less than all of the unitholders interest,
our taxable income or losses might be reallocated among the
unitholders. We are authorized to revise our method of
allocation between transferor and transferee unitholders, as
well as unitholders whose interests vary during a taxable year,
to conform to a method permitted under future Treasury
Regulations.
A unitholder who owns units at any time during a quarter and who
disposes of them prior to the record date set for a cash
distribution for that quarter will be allocated items of our
income, gain, loss and deductions attributable to that quarter
but will not be entitled to receive that cash distribution.
Notification Requirements. A unitholder who
sells any of his units is generally required to notify us in
writing of that sale within 30 days after the sale (or, if
earlier, January 15 of the year following the sale). A purchaser
of units who purchases units from another unitholder is also
generally required to notify us in writing of that purchase
within 30 days after the purchase. Upon receiving such
notifications, we are required to notify the IRS of that
transaction and to furnish specified information to the
transferor and transferee. Failure to notify us of a purchase
may, in some cases, lead to the imposition of penalties.
However, these reporting requirements do not apply to a sale by
an individual who is a citizen of the United States and who
effects the sale or exchange through a broker who will satisfy
such requirements.
Constructive Termination. We will be
considered to have been terminated for tax purposes if there are
sales or exchanges which, in the aggregate, constitute 50% or
more of the total interests in our capital and profits within a
twelve-month period. For purposes of measuring whether the 50%
threshold is reached, multiple sales of the same interest are
counted only once. A constructive termination results in the
closing of our taxable year for all unitholders. In the case of
a unitholder reporting on a taxable year other than a fiscal
year ending December 31, the closing of our taxable year
may result in more than twelve months of our taxable income or
loss being includable in his taxable income for the year of
termination. A constructive termination occurring on a date
other than December 31 will result in us filing two tax returns
(and unitholders receiving two Schedules K-1) for one fiscal
year and the cost of the preparation of these returns will be
borne by all common unitholders. We would be required to make
new tax elections after a termination, including a new election
under Section 754 of the Internal Revenue Code, and a
termination would result in a deferral of our deductions for
depreciation. A termination could also result in penalties if we
were unable to determine that the termination had occurred.
Moreover, a termination might either accelerate the application
of, or subject us to, any tax legislation enacted before the
termination.
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Uniformity
of Units
Because we cannot match transferors and transferees of units, we
must maintain uniformity of the economic and tax characteristics
of the units to a purchaser of these units. In the absence of
uniformity, we may be unable to completely comply with a number
of federal income tax requirements, both statutory and
regulatory. A lack of uniformity can result from a literal
application of Treasury
Regulation Section 1.167(c)-1(a)(6).
Any non-uniformity could have a negative impact on the value of
the units. Please read Tax Consequences of
Unit Ownership Section 754 Election.
We intend to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value
of Adjusted Property, to the extent of any unamortized Book-Tax
Disparity, using a rate of depreciation or amortization derived
from the depreciation or amortization method and useful life
applied to the propertys unamortized book-tax disparity,
or treat that portion as nonamortizable, to the extent
attributable to property the common basis of which is not
amortizable, consistent with the regulations under
Section 743 of the Internal Revenue Code, even though that
position may be inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets, and Treasury
Regulation Section 1.197-2(g)(3).
Please read Tax Consequences of Unit
Ownership Section 754 Election. To the
extent that the Section 743(b) adjustment is attributable
to appreciation in value in excess of the unamortized Book-Tax
Disparity, we will apply the rules described in the Treasury
Regulations and legislative history. If we determine that this
position cannot reasonably be taken, we may adopt a depreciation
and amortization position under which all purchasers acquiring
units in the same month would receive depreciation and
amortization deductions, whether attributable to a common basis
or Section 743(b) adjustment, based upon the same
applicable methods and lives as if they had purchased a direct
interest in our property. If this position is adopted, it may
result in lower annual depreciation and amortization deductions
than would otherwise be allowable to some unitholders and risk
the loss of depreciation and amortization deductions not taken
in the year that these deductions are otherwise allowable. This
position will not be adopted if we determine that the loss of
depreciation and amortization deductions will have a material
adverse effect on the unitholders. If we choose not to utilize
this aggregate method, we may use any other reasonable
depreciation and amortization method to preserve the uniformity
of the intrinsic tax characteristics of any units that would not
have a material adverse effect on the unitholders. The IRS may
challenge any method of depreciating the Section 743(b)
adjustment described in this paragraph. If this challenge were
sustained, the uniformity of units might be affected, and the
gain from the sale of units might be increased without the
benefit of additional deductions. Please read
Disposition of Common Units
Recognition of Gain or Loss.
Tax-Exempt
Organizations and Other Investors
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations and
other foreign persons raises issues unique to those investors
and, as described below, may have substantially adverse tax
consequences to them. If you are a tax-exempt entity or a
non-U.S. person,
you should consult you tax advisor before investing in our
common units.
Employee benefit plans and most other organizations exempt from
federal income tax, including individual retirement accounts and
other retirement plans, are subject to federal income tax on
unrelated business taxable income. Virtually all of our income
allocated to a unitholder that is a tax-exempt organization will
be unrelated business taxable income and will be taxable to them.
Non-resident aliens and foreign corporations, trusts or estates
that own units will be considered to be engaged in business in
the United States because of the ownership of units. As a
consequence, they will be required to file federal tax returns
to report their share of our income, gain, loss or deduction and
pay federal income tax at regular rates on their share of our
net income or gain. Moreover, under rules applicable to publicly
traded partnerships, we will withhold at the highest applicable
effective tax rate from cash distributions made quarterly to
foreign unitholders. Each foreign unitholder must obtain a
taxpayer identification number from the IRS and submit that
number to our transfer agent on a
Form W-8BEN
or applicable
49
substitute form in order to obtain credit for these withholding
taxes. A change in applicable law may require us to change these
procedures.
In addition, because a foreign corporation that owns units will
be treated as engaged in a United States trade or business, that
corporation may be subject to the United States branch profits
tax at a rate of 30%, in addition to regular federal income tax,
on its share of our income and gain, as adjusted for changes in
the foreign corporations U.S. net equity,
which is effectively connected with the conduct of a United
States trade or business. That tax may be reduced or eliminated
by an income tax treaty between the United States and the
country in which the foreign corporate unitholder is a
qualified resident. In addition, this type of
unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue
Code.
A foreign unitholder who sells or otherwise disposes of a common
unit will be subject to U.S. federal income tax on gain
realized from the sale or disposition of that unit to the extent
the gain is effectively connected with a U.S. trade or
business of the foreign unitholder. Under a ruling published by
the IRS, interpreting the scope of effectively connected
income, a foreign unitholder would be considered to be
engaged in a trade or business in the U.S. by virtue of the
U.S. activities of the partnership, and part or all of that
unitholders gain would be effectively connected with that
unitholders indirect U.S. trade or business.
Moreover, under the Foreign Investment in Real Property Tax Act,
a foreign common unitholder generally will be subject to
U.S. federal income tax upon the sale or disposition of a
common unit if (i) he owned (directly or constructively
applying certain attribution rules) more than 5% of our common
units at any time during the five-year period ending on the date
of such disposition and (ii) 50% or more of the fair market
value of all of our assets consisted of U.S. real property
interests at any time during the shorter of the period during
which such unitholder held the common units or the
5-year
period ending on the date of disposition. Currently, more than
50% of our assets consist of U.S. real property interests
and we do not expect that to change in the foreseeable future.
Therefore, foreign unitholders may be subject to federal income
tax on gain from the sale or disposition of their units.
Administrative
Matters
Information Returns and Audit Procedures. We
intend to furnish to each unitholder, within 90 days after
the close of each calendar year, specific tax information,
including a
Schedule K-1,
which describes his share of our income, gain, loss and
deduction for our preceding taxable year. In preparing this
information, which will not be reviewed by counsel, we will take
various accounting and reporting positions, some of which have
been mentioned earlier, to determine each unitholders
share of income, gain, loss and deduction. We cannot assure you
that those positions will yield a result that conforms to the
requirements of the Internal Revenue Code, Treasury Regulations
or administrative interpretations of the IRS. Neither we nor
Vinson & Elkins L.L.P. can assure prospective
unitholders that the IRS will not successfully contend in court
that those positions are impermissible. Any challenge by the IRS
could negatively affect the value of the units.
The IRS may audit our federal income tax information returns.
Adjustments resulting from an IRS audit may require each
unitholder to adjust a prior years tax liability, and
possibly may result in an audit of his return. Any audit of a
unitholders return could result in adjustments not related
to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for
purposes of federal tax audits, judicial review of
administrative adjustments by the IRS and tax settlement
proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership
proceeding rather than in separate proceedings with the
partners. The Internal Revenue Code requires that one partner be
designated as the Tax Matters Partner for these
purposes. Our partnership agreement names our general partner as
our Tax Matters Partner.
The Tax Matters Partner has made and will make some elections on
our behalf and on behalf of unitholders. In addition, the Tax
Matters Partner can extend the statute of limitations for
assessment of tax deficiencies against unitholders for items in
our returns. The Tax Matters Partner may bind a unitholder with
less than a 1% profits interest in us to a settlement with the
IRS unless that unitholder elects, by filing a
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statement with the IRS, not to give that authority to the Tax
Matters Partner. The Tax Matters Partner may seek judicial
review, by which all the unitholders are bound, of a final
partnership administrative adjustment and, if the Tax Matters
Partner fails to seek judicial review, judicial review may be
sought by any unitholder having at least a 1% interest in
profits or by any group of unitholders having in the aggregate
at least a 5% interest in profits. However, only one action for
judicial review will go forward, and each unitholder with an
interest in the outcome may participate.
A unitholder must file a statement with the IRS identifying the
treatment of any item on his federal income tax return that is
not consistent with the treatment of the item on our return.
Intentional or negligent disregard of this consistency
requirement may subject a unitholder to substantial penalties.
Nominee Reporting. Persons who hold an
interest in us as a nominee for another person are required to
furnish to us:
(a) the name, address and taxpayer identification number of
the beneficial owner and the nominee;
(b) whether the beneficial owner is
(1) a person that is not a United States person,
(2) a foreign government, an international organization or
any wholly owned agency or instrumentality of either of the
foregoing, or
(3) a tax-exempt entity;
(c) the amount and description of units held, acquired or
transferred for the beneficial owner; and
(d) specific information including the dates of
acquisitions and transfers, means of acquisitions and transfers,
and acquisition cost for purchases, as well as the amount of net
proceeds from sales.
Brokers and financial institutions are required to furnish
additional information, including whether they are United States
persons and specific information on units they acquire, hold or
transfer for their own account. A penalty of $50 per failure, up
to a maximum of $100,000 per calendar year, is imposed by the
Internal Revenue Code for failure to report that information to
us. The nominee is required to supply the beneficial owner of
the units with the information furnished to us.
Accuracy-related Penalties. An additional tax
equal to 20% of the amount of any portion of an underpayment of
tax that is attributable to one or more specified causes,
including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial
valuation misstatements, is imposed by the Internal Revenue
Code. No penalty will be imposed, however, for any portion of an
underpayment if it is shown that there was a reasonable cause
for that portion and that the taxpayer acted in good faith
regarding that portion.
For individuals, a substantial understatement of income tax in
any taxable year exists if the amount of the understatement
exceeds the greater of 10% of the tax required to be shown on
the return for the taxable year or $5,000. The amount of any
understatement subject to penalty generally is reduced if any
portion is attributable to a position adopted on the return:
(1) for which there is, or was, substantial
authority, or
(2) as to which there is a reasonable basis and the
pertinent facts of that position are disclosed on the return.
If any item of income, gain, loss or deduction included in the
distributive shares of unitholders might result in that kind of
an understatement of income for which no
substantial authority exists, we must disclose the
pertinent facts on our return. In addition, we will make a
reasonable effort to furnish sufficient information for
unitholders to make adequate disclosure on their returns and to
take other actions as may be appropriate to permit unitholders
to avoid liability for this penalty. More stringent rules apply
to tax shelters, which we do not believe includes
us, or any of our investments, plans or arrangements.
51
A substantial valuation misstatement exists if the value of any
property, or the adjusted basis of any property, claimed on a
tax return is 150% or more of the amount determined to be the
correct amount of the valuation or adjusted basis. No penalty is
imposed unless the portion of the underpayment attributable to a
substantial valuation misstatement exceeds $5,000 ($10,000 for
most corporations). If the valuation claimed on a return is 200%
or more than the correct valuation, the penalty imposed
increases to 40%. We do not anticipate making any valuation
misstatements.
Reportable Transactions. If we were to engage
in a reportable transaction, we (and possibly you
and others) would be required to make a detailed disclosure of
the transaction to the IRS. A transaction may be a reportable
transaction based upon any of several factors, including the
fact that it is a type of tax avoidance transaction publicly
identified by the IRS as a listed transaction or
that it produces certain kinds of losses for partnerships,
individuals, S corporations, and trusts in excess of
$2 million in any single year, or $4 million in any
combination of 6 successive tax years. Our participation in a
reportable transaction could increase the likelihood that our
federal income tax information return (and possibly your tax
return) would be audited by the IRS. Please read
Information Returns and Audit Procedures.
Moreover, if we were to participate in a reportable transaction
with a significant purpose to avoid or evade tax, or in any
listed transaction, you may be subject to the following
provisions of the American Jobs Creation Act of 2004:
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accuracy-related penalties with a broader scope, significantly
narrower exceptions, and potentially greater amounts than
described above at Accuracy-related
Penalties,
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for those persons otherwise entitled to deduct interest on
federal tax deficiencies, nondeductibility of interest on any
resulting tax liability, and
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in the case of a listed transaction, an extended statute of
limitations.
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We do not expect to engage in any reportable
transactions.
State,
Local, Foreign and Other Tax Considerations
In addition to federal income taxes, a unitholder will likely be
subject to other taxes, including state, local and foreign
income taxes, unincorporated business taxes, and estate,
inheritance or intangible taxes that may be imposed by the
various jurisdictions in which we do business or own property or
in which a unitholder is a resident. Although an analysis of
those various taxes is not presented here, each prospective
unitholder should consider their potential impact on his
investment in us. We currently own property or do business in
New Mexico, Arizona, Washington, Texas, Utah and Idaho. We
may also own property or do business in other jurisdictions in
the future. Although a unitholder may not be required to file a
return and pay taxes in some jurisdictions because its income
from that jurisdiction falls below the filing and payment
requirement, unitholders will be required to file state income
tax returns and to pay state income taxes in some or all of the
states in which we do business or own property and may be
subject to penalties for failure to comply with those
requirements. In some states, tax losses may not produce a tax
benefit in the year incurred and also may not be available to
offset income in subsequent taxable years. Some of the states
may require us, or we may elect, to withhold a percentage of
income from amounts to be distributed to a unitholder who is not
a resident of the state. Withholding, the amount of which may be
greater or less than a particular unitholders income tax
liability to the state, generally does not relieve a nonresident
unitholder from the obligation to file an income tax return.
Amounts withheld may be treated as if distributed to unitholders
for purposes of determining the amounts distributed by us.
Please read Tax Consequences of Unit
Ownership Entity-Level Collections. Based
on current law and our estimate of our future operations, our
general partner anticipates that any amounts required to be
withheld will not be material. We may also own property or do
business in other states in the future.
It is the responsibility of each unitholder to investigate
the legal and tax consequences, under the laws of pertinent
jurisdictions, of his investment in us. Accordingly, each
prospective unitholder is urged to consult, and depend upon, his
own tax counsel or other advisor with regard to those matters.
Further, it is the responsibility of each unitholder to file all
state, local, and foreign as well as United States federal tax
returns,
52
that may be required of him. Vinson & Elkins L.L.P.
has not rendered an opinion on the state, local or foreign tax
consequences of an investment in us.
Tax
Consequences of Ownership of Preferred Units or Debt
Securities
A description of the material federal income tax consequences of
the acquisition, ownership and disposition of preferred units or
debt securities will be set forth in the prospectus supplement
relating to the offering of any preferred units or debt
securities, as applicable.
PLAN OF
DISTRIBUTION
We may sell the common units, preferred units and debt
securities being offered hereby directly, through agents or to
or through underwriters or dealers. We may distribute the common
units, preferred units or debt securities from time to time in
one or more transactions at: a fixed price; market prices
prevailing at the time of sale; prices related to prevailing
market prices; or negotiated prices.
We, or agents designated by us, may directly solicit, from time
to time, offers to purchase the securities. Any such agent may
be deemed to be an underwriter as that term is defined in the
Securities Act. We will name the agents involved in the offer or
sale of the securities and describe any commissions payable by
us to these agents in the prospectus supplement. Unless
otherwise indicated in the prospectus supplement, these agents
will be acting on a best efforts basis for the period of their
appointment. The agents may be entitled under agreements which
may be entered into with us to indemnification by us against
specific civil liabilities, including liabilities under the
Securities Act. The agents may also be our customers or may
engage in transactions with or perform services for us in the
ordinary course of business.
If we utilize any underwriters in the sale of the securities in
respect of which this prospectus is delivered, we will enter
into an underwriting agreement with those underwriters at the
time of sale to them. We will set forth the names of these
underwriters and the terms of the transaction in the prospectus
supplement, which will be used by the underwriters to make
resales of the securities in respect of which this prospectus is
delivered to the public. We may indemnify the underwriters under
the relevant underwriting agreement against specific
liabilities, including liabilities under the Securities Act. The
underwriters may also be our customers or may engage in
transactions with or perform services for us in the ordinary
course of business.
If we utilize a dealer in the sale of the securities in respect
of which this prospectus is delivered, we will sell those
securities to the dealer, as principal. The dealer may then
resell those securities to the public at varying prices to be
determined by the dealer at the time of resale. We may indemnify
the dealers against specific liabilities, including liabilities
under the Securities Act. The dealers may also be our customers
or may engage in transactions with, or perform services for us
in the ordinary course of business.
Common units, preferred units and debt securities may also be
sold directly by us. In this case, no underwriters or agents
would be involved. We may use electronic media, including the
Internet, to sell offered securities directly.
Unless otherwise specified in the prospectus supplement, each
series of the securities will be a new issue with no established
trading market, other than the common units which are currently
listed on the New York Stock Exchange. We may elect to list
any series of debt securities or preferred units on an exchange,
but are not obligated to do so. It is possible that one or more
underwriters may make a market in a series of the securities,
but underwriters will not be obligated to do so and may
discontinue any market making at any time without notice.
Therefore, we can give no assurance about the liquidity of the
trading market for any of the securities.
To the extent required, this prospectus may be amended or
supplemented from time to time to describe a specific plan of
distribution. The place and time of delivery for the securities
in respect of which this prospectus is delivered are set forth
in the accompanying prospectus supplement.
53
WHERE YOU
CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, and other
information with the Commission under the Exchange Act. You may
read and copy any document we file at the Commissions
public reference room at 100 F Street, NE,
Washington, D.C. 20549. Please call the Commission at
1-800-732-0330
for further information on the public reference room. Our
filings are also available to the public at the
Commissions web site at
http://www.sec.gov.
Documents filed by us can also be inspected at the offices of
the New York Stock Exchange, Inc. 20 Broad Street, New
York, New York 10002. You can also obtain our filings on our
website at
http://www.hollyenergypartners.com.
Information on our website or any other website is not
incorporated by reference into this prospectus and does not
constitute part of this prospectus unless specifically so
designated and filed with the Commission.
The Commission allows us to incorporate by reference into this
prospectus the information we file with it, which means that we
can disclose important information to you by referring you to
those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information
that we file with the Commission will automatically update and
supersede this information. Therefore, before you decide to
invest in a particular offering under this shelf registration,
you should always check for reports we may have filed with the
Commission after the date of this prospectus. We incorporate by
reference the documents listed below filed by us and any future
filings made after the date of the initial filing of the
registration statement of which this prospectus is a part with
the Commission under sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act until the termination of each offering under
this prospectus (other than information furnished and not filed
with the Commission).
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the Annual Report on
Form 10-K
of Holly Energy Partners, L.P. for the year ended
December 31, 2007, as filed with the Commission on
February 15, 2008;
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the Quarterly Report on
Form 10-Q
of Holly Energy Partners, L.P. for the quarter ended
March 31, 2008, as filed with the Commission on May 5,
2008;
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the Quarterly Report on
Form 10-Q
of Holly Energy Partners, L.P. for the quarter ended
June 30, 2008, as filed with the Commission on
August 1, 2008;
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the Quarterly Report on
Form 10-Q
of Holly Energy Partners, L.P. for the quarter ended
September 30, 2008, as filed with the Commission on
October 31, 2008;
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the Current Reports on
Form 8-K
of Holly Energy Partners, L.P., as filed with the Commission on
January 7, 2008, February 5, 2008 (only incorporated
with respect to the
Form 8-K
disclosing information under Items 1.01, 3.02 and 9.01),
February 20, 2008, February 27, 2008 (excluding the
information disclosed under Item 7.01 and Exhibit 99.2),
February 29, 2008, March 6, 2008, April 15, 2008,
April 21, 2008 and July 7, 2008; and
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the description of our common units contained in our
registration statement on
Form 8-A,
as filed with the Commission on June 21, 2004, and any
subsequent amendment thereto filed for the purpose of updating
such description.
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We will provide without charge to each person, including any
beneficial owner, to whom this prospectus is delivered, upon
written or oral request, a copy of any document incorporated by
reference in this prospectus, other than exhibits to any such
document not specifically described above. Requests for such
documents should be directed to Holly Energy Partners, L.P., 100
Crescent Court, Suite 1600, Dallas, Texas 75201, Attention:
Chief Financial Officer; telephone number:
(214) 871-3555.
You should rely only on the information contained in or
incorporated by reference in this prospectus or any prospectus
supplement. We have not authorized anyone else to provide you
with any information. We are not making an offer of these
securities in any state where the offer is not permitted. You
should not assume that the information incorporated by reference
or provided in this prospectus or any prospectus supplement is
accurate as of any date other than its respective date.
54
LEGAL
MATTERS
Certain legal matters in connection with the securities will be
passed upon by Vinson & Elkins L.L.P., as our counsel.
Any underwriter will be advised about other issues relating to
any offering by its own legal counsel.
EXPERTS
Ernst & Young LLP, independent registered public
accounting firm, has audited our consolidated financial
statements included in our Annual Report on
Form 10-K
for the year ended December 31, 2007, and the effectiveness
of our internal control over financial reporting as of
December 31, 2007, as set forth in their reports, which are
incorporated by reference in this prospectus. Our financial
statements are incorporated by reference in this prospectus in
reliance on Ernst & Young LLPs reports, given on
their authority as experts in accounting and auditing.
55
1,900,000 Common Units
Representing Limited Partner
Interests
Holly Energy Partners,
L.P.
PROSPECTUS SUPPLEMENT
Goldman, Sachs &
Co.
UBS Investment Bank
SMH Capital