HEP 6-30-2013 10Q


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

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
OR

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

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

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  ¨   No  ý
The number of the registrant’s outstanding common units at July 26, 2013 was 58,657,048.

Table of Contentsril 19,

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

- 2 -
Table of Contentsril 19,


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical fact included in this Form 10-Q, including, but not limited to, those under “Results of Operations” and “Liquidity and Capital Resources” in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I are forward-looking statements. Forward looking statements use words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “intend,” “should,” “would,” “could,” “believe,” “may,” and similar expressions and statements regarding our plans and objectives for future operations. These statements are based on our beliefs and assumptions and those of our general partner using currently available information and expectations as of the date hereof, are not guarantees of future performance and involve certain risks and uncertainties. Although we and our general partner believe that such expectations reflected in such forward-looking statements are reasonable, neither we nor our general partner can give assurance that our expectations will prove to be correct. All statements concerning our expectations for future results of operations are based on forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. Certain factors could cause actual results to differ materially from results anticipated in the forward-looking statements. These factors include, but are not limited to:
•
risks and uncertainties with respect to the actual quantities of petroleum products and crude oil shipped on our pipelines and/or terminalled, stored or throughput in our terminals;
•
the economic viability of HollyFrontier Corporation, Alon USA, Inc. and our other customers;
•
the demand for refined petroleum products in markets we serve;
•
our ability to purchase and integrate additional operations in the future successfully;
•
our ability to complete previously announced or contemplated acquisitions;
•
the availability and cost of additional debt and equity financing;
•
the possibility of reductions in production or shutdowns at refineries utilizing our pipeline and terminal facilities;
•
the effects of current and future government regulations and policies;
•
our operational efficiency in carrying out routine operations and capital construction projects;
•
the possibility of terrorist attacks and the consequences of any such attacks;
•
general economic conditions; and
•
other financial, operational and legal risks and uncertainties detailed from time to time in our Securities and Exchange Commission filings.

Cautionary statements identifying important factors that could cause actual results to differ materially from our expectations are set forth in this Form 10-Q, including without limitation, the forward-looking statements that are referred to above. When considering forward-looking statements, you should keep in mind the known material risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2012 in “Risk Factors” and in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All forward-looking statements included in this Form 10-Q and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


- 3 -
Table of Contentsril 19,

PART I. FINANCIAL INFORMATION


Item 1.
Financial Statements
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS  
(Unaudited)
 
 
June 30, 2013
 
December 31, 2012
 
 
(In thousands, except unit data)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
8,716

 
$
5,237

Accounts receivable:
 
 
 
 
Trade
 
4,550

 
7,126

Affiliates
 
31,571

 
31,594

 
 
36,121

 
38,720

Prepaid and other current assets
 
4,314

 
3,619

Total current assets
 
49,151

 
47,576

 
 
 
 
 
Properties and equipment, net
 
954,132

 
960,535

Transportation agreements, net
 
91,123

 
94,596

Goodwill
 
256,498

 
256,498

Investment in SLC Pipeline
 
24,882

 
25,041

Other assets
 
10,925

 
9,864

Total assets
 
$
1,386,711

 
$
1,394,110

 
 
 
 
 
LIABILITIES AND PARTNERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable:
 
 
 
 
Trade
 
$
9,358

 
$
7,045

Affiliates
 
4,362

 
4,985

 
 
13,720

 
12,030

 
 
 
 
 
Accrued interest
 
10,314

 
10,226

Deferred revenue
 
8,601

 
8,901

Accrued property taxes
 
3,649

 
2,688

Other current liabilities
 
2,042

 
1,905

Total current liabilities
 
38,326

 
35,750

 
 
 
 
 
Long-term debt
 
799,152

 
864,674

Other long-term liabilities
 
13,525

 
15,433

Deferred revenue
 
17,581

 
11,494

 
 
 
 
 
Class B unit
 
16,960

 
13,903

 
 
 
 
 
Equity:
 
 
 
 
Partners’ equity:
 
 
 
 
Common unitholders (58,657,048 and 56,782,048 units issued and outstanding
    at June 30, 2013 and December 31, 2012, respectively)
 
547,261

 
502,809

General partner interest (2% interest)
 
(145,805
)
 
(145,877
)
Accumulated other comprehensive income (loss)
 
545

 
(4,279
)
Total partners’ equity
 
402,001

 
352,653

Noncontrolling interest
 
99,166

 
100,203

Total equity
 
501,167

 
452,856

Total liabilities and equity
 
$
1,386,711

 
$
1,394,110


See accompanying notes.

- 4 -
Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2013
 
2012 (1)
 
2013
 
2012 (1)
 
 
(In thousands, except per unit data)
Revenues:
 
 
 
 
 
 
 
 
Affiliates
 
$
63,187

 
$
57,774

 
$
124,699

 
$
114,305

Third parties
 
12,098

 
10,886

 
24,884

 
22,770

 
 
75,285

 
68,660

 
149,583

 
137,075

Operating costs and expenses:
 
 
 
 
 
 
 
 
Operations
 
24,538

 
21,907

 
50,403

 
42,382

Depreciation and amortization
 
15,127

 
14,150

 
29,281

 
28,450

General and administrative
 
3,100

 
2,487

 
6,332

 
4,526

 
 
42,765

 
38,544

 
86,016

 
75,358

Operating income
 
32,520

 
30,116

 
63,567

 
61,717

 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
Equity in earnings of SLC Pipeline
 
746

 
794

 
1,403

 
1,625

Interest expense
 
(11,629
)
 
(11,324
)
 
(24,113
)
 
(21,729
)
Interest income
 
4

 
—

 
107

 
—

Loss on early extinguishment of debt
 
—

 
(383
)
 
—

 
(2,979
)
Gain on sale of assets
 
—

 
—

 
2,022

 
—

 
 
(10,879
)
 
(10,913
)
 
(20,581
)
 
(23,083
)
Income before income taxes
 
21,641

 
19,203

 
42,986

 
38,634

State income tax expense
 
(344
)
 
(75
)
 
(400
)
 
(150
)
Net income
 
21,297

 
19,128

 
42,586

 
38,484

Allocation of net loss attributable to Predecessors
 
—

 
2,192

 
—

 
4,053

Allocation of net loss (income) attributable to noncontrolling interests
 
(1,130
)
 
683

 
(4,020
)
 
1,240

Net income attributable to Holly Energy Partners
 
20,167

 
22,003

 
38,566

 
43,777

General partner interest in net income, including incentive distributions
 
(6,680
)
 
(5,894
)
 
(12,910
)
 
(11,398
)
Limited partners’ interest in net income
 
$
13,487

 
$
16,109

 
$
25,656

 
$
32,379

Limited partners’ per unit interest in earnings—basic and diluted
 
$
0.23

 
$
0.29

 
$
0.44

 
$
0.59

Weighted average limited partners’ units outstanding
 
58,657

 
54,722

 
57,828

 
54,722


(1) Restated as described in Note 1.

See accompanying notes.


- 5 -

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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2013
 
2012 (1)
 
2013
 
2012 (1)
 
 
(In thousands)
Net income
 
$
21,297

 
$
19,128

 
$
42,586

 
$
38,484

Allocation of net loss attributable to Predecessors
 
—

 
2,192

 
—

 
4,053

Net income before noncontrolling interests
 
21,297

 
21,320

 
42,586

 
42,537

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Change in fair value of cash flow hedge
 
3,413

 
(1,508
)
 
3,975

 
(1,862
)
Amortization of unrealized loss attributable to discontinued cash flow hedge
 
—

 
1,273

 
849

 
2,547

Other comprehensive income (loss)
 
3,413

 
(235
)
 
4,824

 
685

Comprehensive income before noncontrolling interest
 
24,710

 
21,085

 
47,410

 
43,222

Allocation of comprehensive (income) loss to noncontrolling interests
 
(1,130
)
 
683

 
(4,020
)
 
1,240

Comprehensive income attributable to Holly Energy Partners
 
$
23,580

 
$
21,768

 
$
43,390

 
$
44,462


(1) Restated as described in Note 1.

See accompanying notes.


- 6 -
Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
Six Months Ended June 30,
 
 
2013
 
2012 (1)
 
 
(In thousands)
Cash flows from operating activities
 
 
 
 
Net income
 
$
42,586

 
$
38,484

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
29,281

 
28,450

Gain on sale of assets
 
(2,022
)
 
—

Amortization of deferred charges
 
1,910

 
3,949

Equity in earnings of SLC Pipeline, net of distributions
 
159

 
(125
)
Amortization of restricted and performance units
 
1,880

 
1,629

(Increase) decrease in operating assets:
 
 
 
 
Accounts receivable—trade
 
2,576

 
(3,443
)
Accounts receivable—affiliates
 
22

 
3,331

Prepaid and other current assets
 
(695
)
 
(723
)
Increase (decrease) in operating liabilities:
 
 
 
 
Accounts payable—trade
 
(518
)
 
(6,235
)
Accounts payable—affiliates
 
(301
)
 
(1,264
)
Accrued interest
 
88

 
1,375

Deferred revenue
 
5,787

 
(429
)
Accrued property taxes
 
961

 
(286
)
Other current liabilities
 
153

 
4,711

Other, net
 
335

 
342

Net cash provided by operating activities
 
82,202

 
69,766

 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Additions to properties and equipment
 
(17,224
)
 
(26,374
)
Proceeds from sale of assets
 
2,481

 
—

Net cash used for investing activities
 
(14,743
)
 
(26,374
)
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
Borrowings under credit agreement
 
154,500

 
99,000

Repayments of credit agreement borrowings
 
(220,500
)
 
(129,000
)
Proceeds from issuance of senior notes
 
—

 
294,750

Proceeds from issuance of common units
 
73,444

 
—

Repayment of notes
 
—

 
(257,900
)
Contribution from general partner
 
1,499

 
—

Contributions from UNEV joint venture partners
 
—

 
15,000

Distributions to HEP unitholders
 
(67,419
)
 
(59,977
)
Distributions to noncontrolling interest
 
(2,000
)
 
—

Purchase of units for incentive grants
 
(3,254
)
 
(4,533
)
Deferred financing costs
 
—

 
(3,162
)
Other
 
(250
)
 
277

Net cash used by financing activities
 
(63,980
)
 
(45,545
)
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
Increase for the period
 
3,479

 
(2,153
)
Beginning of period
 
5,237

 
6,369

End of period
 
$
8,716

 
$
4,216

     
(1) Restated as described in Note 1.
See accompanying notes.

- 7 -
Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
(Unaudited)
 
 
 
Common
Units
 
General
Partner
Interest
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling Interest
 
Total Equity
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
$
502,809

 
$
(145,877
)
 
$
(4,279
)
 
$
100,203

 
$
452,856

Issuance of common units
 
73,444

 
—

 
—

 
—

 
73,444

Net income
 
29,753

 
11,870

 
—

 
963

 
42,586

Other comprehensive income
 
—

 
—

 
4,824

 
—

 
4,824

Capital contribution
 
—

 
1,499

 
—

 
—

 
1,499

Distributions to HEP unitholders
 
(54,696
)
 
(12,723
)
 
—

 
—

 
(67,419
)
Distributions to UNEV joint venture partners
 
—

 
—

 
—

 
(2,000
)
 
(2,000
)
Purchase of units for restricted grants
 
(2,933
)
 
—

 
—

 
—

 
(2,933
)
Amortization of restricted and performance units
 
1,880

 
—

 
—

 
—

 
1,880

   Class B unit accretion
 
(2,996
)
 
(61
)
 
—

 
—

 
(3,057
)
   Other
 
—

 
(513
)
 
—

 
—

 
(513
)
Balance June 30, 2013
 
$
547,261

 
$
(145,805
)
 
$
545

 
$
99,166

 
$
501,167



See accompanying notes.



- 8 -
Table of Contentsril 19,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1:
Description of Business and Presentation of Financial Statements

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

We own and operate petroleum product and crude oil pipelines and terminal, tankage and loading rack facilities that support HFC’s refining and marketing operations in the Mid-Continent, Southwest and Rocky Mountain regions of the United States and Alon USA, Inc.’s (“Alon”) refinery in Big Spring, Texas. Additionally, we own a 75% interest in UNEV Pipeline, LLC (“UNEV”), which owns a 400-mile, 12-inch refined products pipeline running from Woods Cross, Utah to Las Vegas, Nevada (the “UNEV Pipeline”), product terminals near Cedar City, Utah and Las Vegas, Nevada and related assets, and a 25% interest in SLC Pipeline LLC, which owns a 95-mile intrastate crude oil pipeline system (the “SLC Pipeline”) that serves refineries in the Salt Lake City, Utah area.

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

The consolidated financial statements included herein have been prepared without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The interim financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of our results for the interim periods. Such adjustments are considered to be of a normal recurring nature. Although certain notes and other information required by U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our Form 10-K for the year ended December 31, 2012. Results of operations for interim periods are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2013.

On January 16, 2013, a two-for-one unit split was paid in the form of a common unit distribution for each issued and outstanding common unit to all unitholders of record on January 7, 2013. All references to unit and per unit amounts in this document and related disclosures have been adjusted to reflect the effect of the unit split.

In March 2013, we closed on a public offering of 1,875,000 of our common units. Additionally, an affiliate of HFC, as a selling unitholder, closed on a public sale of 1,875,000 of its HEP common units. We used our net proceeds of $73.4 million to repay indebtedness incurred under our credit facility and for general partnership purposes. Amounts repaid under our credit facility may be reborrowed from time to time, and we intend to reborrow certain amounts to fund capital expenditures.

The financial information for the three and six months ended June 30, 2012 included in the accompanying financial statements and notes thereto were revised from the amounts previously reported for those periods due to accounting rules that require retrospective restatement of previously reported results in cases of business combinations between entities under common control. We have therefore included herein the results of UNEV prior to our acquisition on July 12, 2012 referred to as results attributable to the Predecessor. See Note 2 below for additional information on the UNEV acquisition. Additional revisions were made in order to correct certain immaterial items in previously reported amounts. These revisions reduced net income attributable to Holly Energy Partners for the three and six months ended June 30, 2012 by $1.2 million and $1.4 million, respectively, and reduced the limited partners' per unit interest in net earnings - basic and diluted by $0.02 and $0.03, respectively, and were comprised principally of an adjustment of depreciation expense related to certain property and equipment.  For more information about these revisions, see the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012.

New Accounting Pronouncements

Presentation of Comprehensive Income
Effective January 1, 2013 we adopted the accounting standard update that requires the disclosure of significant amounts reclassified out of accumulated other comprehensive income by component either on the face of the financial statements or in the notes. The adoption of this accounting standard did not have an impact on our financial condition, results of operations or cash flows.


- 9 -

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


Note 2.
Acquisitions

UNEV Pipeline Interest Acquisition
On July 12, 2012, we acquired HFC's 75% interest in UNEV. We paid consideration consisting of $260.0 million in cash and 2,059,800 of our common units. We paid an additional $0.9 million to HFC for a post-closing working capital adjustment. Also under the terms of the transaction, we issued to HFC a Class B unit comprising a noncontrolling equity interest in a wholly-owned subsidiary subject to redemption to the extent that HFC is entitled to a 50% interest in our share of annual UNEV earnings before interest, income taxes, depreciation, and amortization above $30 million beginning July 1, 2016 and ending in June 2032, subject to certain limitations. Such contingent redemption payments are limited to a maximum payment amount calculated as described below. However, to the extent earnings thresholds are not achieved, no redemption payments are required. Contemporaneously with this transaction, HFC (our general partner) agreed to forego its right to incentive distributions of up to $1.25 million per quarter over twelve consecutive quarterly periods following the closing of the transaction and up to an additional four quarters in certain circumstances. The Class B unit increases with each foregone incentive distribution as described above and by a 7% factor compounded annually on the outstanding unredeemed balance through its expiration date. At our option, we may redeem, in whole or in part, the Class B unit at the current unredeemed value based on the calculation described. The Class B unit had a value of $13.9 million at December 31, 2012 and $17.0 million at June 30, 2013.

Noncontrolling interests reported in the consolidated statements of income include the minority partner's 25% interest in UNEV and income attributable to the Class B unit representing foregone incentive distribution rights and the 7% accretion factor, which collectively amounted to $1.1 million and $4.0 million for the three and six months ended June 30, 2013, respectively.

We are a consolidated variable interest entity of HFC. Therefore, this transaction was recorded as a transfer between entities under common control and reflects HFC's carrying basis in UNEV's assets and liabilities. We have retrospectively adjusted our financial position and operating results as if UNEV were a consolidated subsidiary for all periods while we were under common control of HFC. For the three and six months ended June 30, 2012 our consolidated statement of income includes Predecessor revenues from UNEV of $3.9 million and $7.8 million, respectively, and Predecessor net losses of $2.2 million and $4.1 million, respectively.


Note 3:
Financial Instruments

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

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


- 10 -

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


The carrying amounts and estimated fair values of our senior notes and interest rate swaps were as follows:
 
 
 
 
June 30, 2013
 
December 31, 2012
Financial Instrument
 
Fair Value Input Level
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
 
 
 
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Level 2
 
$
545

 
$
545

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
Senior notes:
 
 
 
 
 
 
 
 
 
 
6.5% senior notes
 
Level 2
 
$
295,601

 
$
294,000

 
$
295,275

 
$
321,000

8.25% senior notes
 
Level 2
 
148,551

 
158,625

 
148,399

 
163,125

 
 
 
 
444,152

 
452,625

 
443,674

 
484,125

 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Level 2
 
—

 
—

 
3,430

 
3,430

 
 
 
 
$
444,152

 
$
452,625

 
$
447,104

 
$
487,555


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

See Note 7 for additional information on these instruments.


Note 4:
Properties and Equipment 

The carrying amounts of our properties and equipment are as follows:
 
 
June 30, 2013
 
December 31, 2012
 
 
(In thousands)
Pipelines, terminals and tankage
 
$
1,061,626

 
$
1,049,531

Land and right of way
 
63,196

 
63,248

Construction in progress
 
37,032

 
27,150

Other
 
18,251

 
24,462

 
 
1,180,105

 
1,164,391

Less accumulated depreciation
 
225,973

 
203,856

 
 
$
954,132

 
$
960,535


We capitalized $0.2 million and $0.1 million in interest related to construction projects during the six months ended June 30, 2013 and 2012, respectively.



- 11 -

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


Note 5:
Transportation Agreements

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

The carrying amounts of our transportation agreements are as follows:
 
 
June 30, 2013
 
December 31, 2012
 
 
(In thousands)
Alon transportation agreement
 
$
59,933

 
$
59,933

HFC transportation agreement
 
74,231

 
74,231

 
 
134,164

 
134,164

Less accumulated amortization
 
43,041

 
39,568

 
 
$
91,123

 
$
94,596


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


Note 6:
Employees, Retirement and Incentive Plans

Employees who provide direct services to us are employed by Holly Logistic Services, L.L.C., an HFC subsidiary. Their costs, including salaries, bonuses, payroll taxes, benefits and other direct costs, are charged to us monthly in accordance with an omnibus agreement that we have with HFC. These employees participate in the retirement and benefit plans of HFC. Our share of retirement and benefit plan costs was $1.9 million and $1.7 million for the three months ended June 30, 2013 and 2012, respectively, and $3.8 million and $3.1 million for the six months ended June 30, 2013 and 2012, respectively.

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

As of June 30, 2013, we have two types of incentive-based awards which are described below. The compensation cost charged against income was $0.8 million and $0.7 million for the three months ended June 30, 2013 and 2012, respectively, and $1.9 million and $1.6 million for the six months ended June 30, 2013 and 2012, respectively. We currently purchase units in the open market instead of issuing new units for settlement of all unit awards under our Long-Term Incentive Plan. As of June 30, 2013, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which 1,732,433 have not yet been granted, assuming no forfeitures of the unvested units and full achievement of goals for the performance units already granted.

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


- 12 -

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


A summary of restricted unit activity and changes during the six months ended June 30, 2013 is presented below: 
Restricted Units
 
Units
 
Weighted-
Average
Grant-Date
Fair Value
Outstanding at January 1, 2013 (nonvested)
 
58,472

 
$
31.21

Granted
 
37,815

 
41.18

Vesting and transfer of full ownership to recipients
 
—

 
—

Outstanding at June 30, 2013 (nonvested)
 
96,287

 
$
35.08


As of June 30, 2013, there was $1.6 million of total unrecognized compensation expense related to nonvested restricted unit grants which is expected to be recognized over a weighted-average period of 1.1 years.

Performance Units
Under our Long-Term Incentive Plan, we grant performance units to selected executives who perform services for us. Performance units granted are payable based upon the growth in our distributable cash flow per common unit over the performance period, and vest over a period of three years. As of June 30, 2013, estimated unit payouts for outstanding nonvested performance unit awards were at 100% to 125%.

We granted 32,888 target performance units to certain officers in March 2013. These units will vest over a three-year performance period ending December 31, 2015 and are payable in HEP common units. The number of units actually earned will be based on the growth of our distributable cash flow per common unit over the performance period and can range from 0% to 200% of the target number of performance units granted (in the case of our Chief Executive Officer) or from 50% to 150% of the target number of performance units granted (in the case of other officers granted performance units). Although common units are not transferred to the recipients until the performance units vest, the recipients have distribution rights with respect to the common units from the date of grant. The fair value of these performance units is based on the grant date closing unit price of $40.86 and will apply to the number of units ultimately awarded.

A summary of performance unit activity and changes during the six months ended June 30, 2013 is presented below:
Performance Units
 
Units
Outstanding at January 1, 2013 (nonvested)
 
54,498

Granted
 
32,888

Vesting and transfer of common units to recipients
 
(25,124
)
Outstanding at June 30, 2013 (nonvested)
 
62,262


The grant-date fair value of performance units vested and transferred to recipients during the six months ended June 30, 2013 was $0.5 million. As of June 30, 2013, there was $1.4 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of 1.7 years.


Note 7:
Debt

Credit Agreement
We have a $550 million senior secured revolving credit facility expiring in June 2017 (the “Credit Agreement”) that is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. It is available also to fund letters of credit up to a $50 million sub-limit and to fund distributions to unitholders up to a $60 million sub-limit.

Our obligations under the Credit Agreement are collateralized by substantially all of our assets. Indebtedness under the Credit Agreement is recourse to HEP Logistics Holdings, L.P. (“HEP Logistics”), our general partner, and guaranteed by our material wholly-owned subsidiaries. Any recourse to HEP Logistics would be limited to the extent of its assets, which other than its

- 13 -

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


investment in us, are not significant. We may prepay all loans at any time without penalty, except for payment of certain breakage and related costs.

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

Senior Notes
In March 2012, we issued $300 million in aggregate principal amount outstanding of 6.5% senior notes maturing March 1, 2020 (the “6.5% Senior Notes”). Net proceeds of $294.8 million were used in March and April 2012 to redeem $185.0 million aggregate principal amount of our 6.25% senior notes maturing March 1, 2015 (the “6.25% Senior Notes”) tendered pursuant to a cash tender offer and consent solicitation, to repay HFC $72.9 million in promissory notes related to our November 2011 acquisition of assets located at HFC's El Dorado and Cheyenne refineries, to pay related fees, expenses and accrued interest in connection with these transactions and to repay borrowings under the Credit Agreement.

Also, we have $150 million in aggregate principal amount outstanding of 8.25% senior notes maturing March 15, 2018 (the “8.25% Senior Notes”).

The 6.5% Senior Notes and 8.25% Senior Notes (collectively, the “Senior Notes”) are unsecured and impose certain restrictive covenants, which we are currently in compliance with, including limitations on our ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. At any time when the Senior Notes are rated investment grade by both Moody’s and Standard & Poor’s and no default or event of default exists, we will not be subject to many of the foregoing covenants. Additionally, we have certain redemption rights under the Senior Notes.

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

Long-term Debt
The carrying amounts of our long-term debt are as follows:
 
 
June 30,
2013
 
December 31,
2012
 
 
(In thousands)
Credit Agreement
 
$
355,000

 
$
421,000

6.5% Senior Notes
 
 
 
 
Principal
 
300,000

 
300,000

Unamortized discount
 
(4,399
)
 
(4,725
)
 
 
295,601

 
295,275

8.25% Senior Notes
 
 
 
 
Principal
 
150,000

 
150,000

Unamortized discount
 
(1,449
)
 
(1,601
)
 
 
148,551

 
148,399

 
 
 
 
 
Total long-term debt
 
$
799,152

 
$
864,674



- 14 -

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


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

As of June 30, 2013, we have three interest rate swaps that hedge our exposure to the cash flow risk caused by the effects of LIBOR changes on $305.0 million of Credit Agreement advances. Our first interest rate swap entered into in December 2011, effectively converts $155.0 million of our LIBOR-based debt to fixed rate debt having an interest rate of 0.99% plus an applicable margin of 2.50% as of June 30, 2013, which equaled an effective interest rate of 3.49%. This swap contract matures in February 2016. In August 2012, we entered into two similar interest rate swaps with identical terms which effectively convert $150.0 million of our LIBOR-based debt to fixed rate debt having an interest rate of 0.74% plus an applicable margin of 2.50% as of June 30, 2013, which equaled an effective interest rate of 3.24%. Both of these swap contracts mature in July 2017.

We have designated these interest rate swaps as cash flow hedges. Based on our assessment of effectiveness using the change in variable cash flows method, we have determined that these interest rate swaps are effective in offsetting the variability in interest payments on $305.0 million of our variable-rate debt resulting from changes in LIBOR. Under hedge accounting, we adjust our cash flow hedges on a quarterly basis to their fair values with the offsetting fair value adjustments to accumulated other comprehensive income (loss). Also on a quarterly basis, we measure hedge effectiveness by comparing the present value of the cumulative change in the expected future interest to be paid or received on the variable leg of our swaps against the expected future interest payments on $305.0 million of our variable rate debt. Any ineffectiveness is recorded directly to interest expense. As of June 30, 2013, we had no ineffectiveness on our cash flow hedges.

At June 30, 2013, we have accumulated other comprehensive income of $0.5 million that relates to our current cash flow hedging instruments. For the three and six months ended June 30, 2013, $0.5 million and $1.9 million, respectively, of other comprehensive loss was reclassified to interest expense due to cash flow hedge settlements. Approximately $0.1 million will be transferred from accumulated other comprehensive loss into interest expense as interest is paid on the underlying swap agreement over the next twelve-month period, assuming interest rates remain unchanged.

Additional information on our interest rate swaps is as follows:

Derivative Instrument
 
Balance Sheet
Location
 
Fair Value
 
Location of Offsetting
Balance
 
Offsetting
Amount
 
 
(In thousands)
June 30, 2013
 
 
 
 
 
 
 
 
Interest rate swaps designated as cash flow hedging instrument:
 
 
 
 
 
 
Variable-to-fixed interest rate swap contracts ($305.0 million of LIBOR-based debt interest)
 
Other long-term
    assets
 
$
545

 
Accumulated other
    comprehensive income
 
$
545

 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
Interest rate swaps designated as cash flow hedging instrument:
 
 
 
 
 
 
Variable-to-fixed interest rate swap contracts ($305.0 million of LIBOR-based debt interest)
 
Other long-term
    liabilities
 
$
3,430

 
Accumulated other
    comprehensive (loss)
 
$
(3,430
)



- 15 -

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


Interest Expense and Other Debt Information
Interest expense consists of the following components:
 
 
Six Months Ended June 30,
 
 
2013
 
2012
 
 
(In thousands)
Interest on outstanding debt:
 
 
 
 
Credit Agreement, net of interest on interest rate swaps
 
$
6,043

 
$
2,953

6.5% Senior Notes
 
9,755

 
5,966

6.25% Senior Notes
 
—

 
2,422

8.25% Senior Notes
 
6,193

 
6,193

Promissory Notes
 
—

 
543

Amortization of discount and deferred debt issuance costs
 
849

 
2,547

Increase in interest expense - non-cash charges attributable to interest rate swaps
 
1,063

 
875

Commitment fees
 
365

 
362

Total interest incurred
 
24,268

 
21,861

Less capitalized interest
 
155

 
132

Net interest expense
 
$
24,113

 
$
21,729

Cash paid for interest
 
$
22,258

 
$
17,039


We recognized a charge of $3.0 million upon the early extinguishment of debt for the six months ended June 30, 2012. This charge represents the premium paid to our 6.25% Senior Note holders upon their tender of an aggregate principal amount of $185.0 million and related net discount.


Note 8:
Significant Customers

All revenues are domestic revenues, of which 95% are generated currently from our two largest customers: HFC and Alon. The vast majority of our revenues are derived from activities conducted in the southwest United States.

The following table presents the percentage of total revenues generated by each of these customers:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
HFC
 
84
%
 
84
%
 
83
%
 
83
%
Alon
 
11
%
 
11
%
 
10
%
 
11
%


Note 9:
Related Party Transactions

We serve HFC's refineries under long-term pipeline and terminal, tankage and throughput agreements expiring from 2019 to 2026. Under these agreements, HFC agreed to transport, store and throughput volumes of refined product and crude oil on our pipelines and terminal, tankage and loading rack facilities that result in minimum annual payments to us. These minimum annual payments or revenues are subject to annual tariff rate adjustments on July 1, based on the Producer Price Index (“PPI”) or Federal Energy Regulatory Commission (“FERC”) index. Additionally such agreements require HFC to reimburse us for certain costs. Following the July 1, 2013 PPI adjustment HFC's minimum annualized payments to us under these agreements increased by $4.7 million to$225.5 million.

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


- 16 -

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


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

Related party transactions with HFC are as follows:
•
Revenues received from HFC were $63.2 million and $57.8 million for the three months ended June 30, 2013 and 2012, respectively, and $124.7 million and $114.3 million for the six months ended June 30, 2013 and 2012, respectively.
•
HFC charged us general and administrative services under the Omnibus Agreement of $0.6 million for the three months ended June 30, 2013 and 2012, respectively, and $1.2 million for the six months ended June 30, 2013 and 2012, respectively.
•
We reimbursed HFC for costs of employees supporting our operations of $9.4 million and $7.1 million for the three months ended June 30, 2013 and 2012, respectively, and $19.2 million and $14.8 million for the six months ended June 30, 2013 and 2012, respectively.
•
HFC reimbursed us $4.3 million and $2.2 million for the three months ended June 30, 2013 and 2012, respectively, and $9.2 million and $4.7 million for the six months ended June 30, 2013 and 2012, respectively, for certain reimbursable costs and capital projects.
•
We distributed $17.4 million and $15.7 million for the three months ended June 30, 2013 and 2012, respectively, to HFC as regular distributions on its common units and general partner interest, including general partner incentive distributions. For the six months ended June 30, 2013 and 2012 we distributed $34.8 million and $31.0 million, respectively.
•
Accounts receivable from HFC were $31.6 million and $31.6 million at June 30, 2013 and December 31, 2012, respectively.
•
Accounts payable to HFC were $4.4 million and $5.0 million at June 30, 2013 and December 31, 2012, respectively.
•
Revenues for the three and the six months ended June 30, 2013 include $0.7 million and $4.7 million, respectively, of shortfall payments billed in 2012, as HFC did not exceed its minimum volume commitment in any of the subsequent four quarters. Deferred revenue in the consolidated balance sheets at June 30, 2013 and December 31, 2012, includes $5.0 million and $5.1 million, respectively, relating to certain shortfall billings. It is possible that HFC may not exceed its minimum obligations to receive credit for any of the $5.0 million deferred at June 30, 2013.
•
We acquired from HFC 75% interest in the UNEV Pipeline in July 2012. See Note 2 for a description of this transaction.


Note 10:
Partners’ Equity

As of June 30, 2013, HFC held 22,380,030 of our common units and the 2% general partner interest, which together constituted a 39% ownership interest in us.

On January 16, 2013, a two-for-one unit split was paid in the form of a common unit distribution for each issued and outstanding common unit to all unitholders of record on January 7, 2013. All references to unit and per unit amounts in this document and related disclosures have been adjusted to reflect the effect of the unit split.

In March 2013, we closed on a public offering of 1,875,000 of our common units. Additionally, an affiliate of HFC, as a selling unitholder, closed on a public sale of 1,875,000 of its HEP common units. We used our net proceeds of $73.4 million to repay indebtedness incurred under our credit facility and for general partnership purposes. Amounts repaid under our credit facility may be reborrowed from time to time, and we intend to reborrow certain amounts to fund capital expenditures.

Allocations of Net Income
Net income attributable to HEP is allocated between limited partners and the general partner interest in accordance with the provisions of the partnership agreement. HEP net income allocated to the general partner includes incentive distributions that are declared subsequent to quarter end. After the amount of incentive distributions is allocated to the general partner, the remaining net income attributable to HEP is allocated to the partners based on their weighted-average ownership percentage during the period.


- 17 -

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


The following table presents the allocation of the general partner interest in net income for the periods presented below: 

 
 
Three Months Ended June 30,
 
  Six Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(In thousands)
General partner interest in net income
 
$
275

 
$
329

 
$
522

 
$
661

General partner incentive distribution
 
6,405

 
5,565

 
12,388

 
10,737

Total general partner interest in net income
 
$
6,680

 
$
5,894

 
$
12,910

 
$
11,398


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

On July 26, 2013 we announced our cash distribution for the second quarter of 2013 of $0.4850 per unit. The distribution is payable on all common and general partner units and will be paid August 14, 2013 to all unitholders of record on August 5, 2013.

The following table presents the allocation of our regular quarterly cash distributions to the general and limited partners for the periods in which they apply. Our distributions are declared subsequent to quarter end; therefore, the amounts presented do not reflect distributions paid during the periods presented below.
 
 
Three Months Ended June 30,
 
  Six Months Ended June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(In thousands, except per unit data)
General partner interest in net income
 
$
737

 
$
622

 
$
1,456

 
$
1,227

General partner incentive distribution
 
6,405

 
5,565

 
12,388

 
10,737

Total general partner distribution
 
7,142

 
6,187

 
13,844

 
11,964

Limited partner distribution
 
28,448

 
24,899

 
56,457

 
49,387

Total regular quarterly cash distribution
 
$
35,590

 
$
31,086

 
$
70,301

 
$
61,351

Cash distribution per unit applicable to limited partners
 
$
0.485

 
$
0.455

 
$
0.963

 
$
0.903


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


Note 11:
Supplemental Guarantor/Non-Guarantor Financial Information

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

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


- 18 -

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


Prior period amounts have been recast to include UNEV operations acquired July 12, 2012, as if it had been acquired January 1, 2012. This treatment is required as the transactions were between entities under common control. Additionally, certain reclassifications for prior periods have been made to conform to the current year presentation.

Condensed Consolidating Balance Sheet
June 30, 2013
 
Parent
 
Guarantor
Restricted Subsidiaries
 
Non-Guarantor Non-Restricted Subsidiaries
 
Eliminations
 
Consolidated
 
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2

 
$
—

 
$
8,714

 
$
—

 
$
8,716

Accounts receivable
 
—

 
32,791

 
3,604

 
(274
)
 
36,121

Intercompany accounts receivable (payable)
 
27,621

 
(27,621
)
 
—

 
—

 
—

Prepaid and other current assets
 
81

 
2,837

 
1,396

 
—

 
4,314

Total current assets
 
27,704

 
8,007

 
13,714

 
(274
)
 
49,151

Properties and equipment, net
 
—

 
562,282

 
391,850

 
—

 
954,132

Investment in subsidiaries
 
827,307

 
297,498

 
—

 
(1,124,805
)
 
—

Transportation agreements, net
 
—

 
91,123

 
—

 
—

 
91,123

Goodwill
 
—

 
256,498

 
—

 
—

 
256,498

Investment in SLC Pipeline
 
—

 
24,882

 
—

 
—

 
24,882

Other assets
 
1,752

 
9,173

 
—

 
—

 
10,925

Total assets
 
$
856,763

 
$
1,249,463

 
$
405,564

 
$
(1,125,079
)
 
$
1,386,711

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

 
$
11,094

 
$
2,900

 
$
(274
)
 
$
13,720

Accrued interest
 
10,198

 
116

 
—

 
—

 
10,314

Deferred revenue
 
—

 
5,094

 
3,507

 
—

 
8,601

Accrued property taxes
 
—

 
1,349

 
2,300

 
—

 
3,649

Other current liabilities
 
334

 
1,657

 
51

 
—

 
2,042

Total current liabilities
 
10,532

 
19,310

 
8,758

 
(274
)
 
38,326


 
 
 
 
 
 
 
 
 
 
Long-term debt
 
444,152

 
355,000

 
—

 
—

 
799,152

Other long-term liabilities
 
78

 
13,305

 
142

 
—

 
13,525

Deferred revenue
 
—

 
17,581

 
—

 
—

 
17,581

Class B unit
 
—

 
16,960

 
—

 
—

 
16,960

Equity - partners
 
402,001

 
827,307

 
396,664

 
(1,223,971
)
 
402,001

Equity - noncontrolling interest
 
—

 
—

 
—

 
99,166

 
99,166

Total liabilities and partners’ equity
 
$
856,763

 
$
1,249,463

 
$
405,564

 
$
(1,125,079
)
 
$
1,386,711




- 19 -

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




Condensed Consolidating Balance Sheet
December 31, 2012
 
Parent
 
Guarantor
Restricted Subsidiaries
 
Non-Guarantor Non-Restricted Subsidiaries
 
Eliminations
 
Consolidated
 
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2

 
$
823

 
$
4,412

 
$
—

 
$
5,237

Accounts receivable
 
—

 
32,319

 
6,401

 
—

 
38,720

Intercompany accounts receivable (payable)
 
42,194

 
(42,194
)
 
—

 
—

 
—

Prepaid and other current assets
 
224

 
2,395

 
1,000

 
—

 
3,619

Total current assets
 
42,420

 
(6,657
)
 
11,813

 
—

 
47,576

Properties and equipment, net
 
—

 
563,701

 
396,834

 
—

 
960,535

Investment in subsidiaries
 
763,569

 
300,607

 
—

 
(1,064,176
)
 
—

Transportation agreements, net
 
—

 
94,596

 
—

 
—

 
94,596

Goodwill
 
—

 
256,498

 
—

 
—

 
256,498

Investment in SLC Pipeline
 
—

 
25,041

 
—

 
—

 
25,041

Other assets
 
1,154

 
8,710

 
—

 
—

 
9,864

Total assets
 
$
807,143

 
$
1,242,496

 
$
408,647

 
$
(1,064,176
)
 
$
1,394,110

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

 
$
10,745

 
$
1,285

 
$
—

 
$
12,030

Accrued interest
 
10,198

 
28

 
—

 
—

 
10,226

Deferred revenue
 
—

 
3,319

 
5,582

 
—

 
8,901

Accrued property taxes
 
—

 
1,923

 
765

 
—

 
2,688

Other current liabilities
 
563

 
1,274

 
68

 
—

 
1,905

Total current liabilities
 
10,761

 
17,289

 
7,700

 
—

 
35,750

Long-term debt
 
443,674

 
421,000

 
—

 
—

 
864,674

Other long-term liabilities
 
55

 
15,241

 
137

 
—

 
15,433

Deferred revenue
 
—

 
11,494

 
—

 
—

 
11,494

Class B unit
 
—

 
13,903

 
—

 
—

 
13,903

Equity - partners
 
352,653

 
763,569

 
400,810

 
(1,164,379
)
 
352,653

Equity - noncontrolling interest
 
—

 
—

 
—

 
100,203

 
100,203

Total liabilities and partners’ equity
 
$
807,143

 
$
1,242,496

 
$
408,647

 
$
(1,064,176
)
 
$
1,394,110



- 20 -

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




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

 
$
60,797

 
$
2,698

 
$
(308
)
 
$
63,187

Third parties
 
—

 
10,116

 
1,982

 
—

 
12,098

 
 
—

 
70,913

 
4,680

 
(308
)
 
75,285

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
 
Operations
 
—

 
22,104

 
2,742

 
(308
)
 
24,538

Depreciation and amortization
 
—

 
11,543

 
3,584

 
—

 
15,127

General and administrative
 
983

 
2,117

 
—

 
—

 
3,100

 
 
983

 
35,764

 
6,326

 
(308
)
 
42,765

Operating income (loss)
 
(983
)
 
35,149

 
(1,646
)
 
—

 
32,520

Equity in earnings (loss) of subsidiaries
 
29,413

 
(1,234
)
 
—

 
(28,179
)
 
—

Equity in earnings of SLC Pipeline
 
—

 
746

 
—

 
—

 
746

Interest expense
 
(8,263
)
 
(3,366
)
 
—

 
—

 
(11,629
)
Interest income
 
—

 
3

 
1

 
—

 
4

 
 
21,150

 
(3,851
)
 
1

 
(28,179
)
 
(10,879
)
Income (loss) before income taxes
 
20,167

 
31,298

 
(1,645
)
 
(28,179
)
 
21,641

State income tax expense
 
—

 
(344
)
 
—

 
—

 
(344
)
Net income (loss)
 
20,167

 
30,954

 
(1,645
)
 
(28,179
)
 
21,297

Allocation of net (income) attributable to noncontrolling interests
 
—

 
—

 
—

 
(1,130
)
 
(1,130
)
Net income (loss) attributable to Holly Energy Partners
 
20,167

 
30,954

 
(1,645
)
 
(29,309
)
 
20,167

Other comprehensive income
 
3,413

 
3,413

 
—

 
(3,413
)
 
3,413

Comprehensive income (loss)
 
$
23,580

 
$
34,367

 
$
(1,645
)
 
$
(32,722
)
 
$
23,580




- 21 -

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



Condensed Consolidating Statement of Comprehensive Income
Three Months Ended June 30, 2012
 
Parent
 
Guarantor
Restricted Subsidiaries
 
Non-Guarantor Non-Restricted Subsidiaries
 
Eliminations
 
Consolidated
 
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
Affiliates
 
$
—

 
$
55,263

 
$
2,776

 
$
(265
)
 
$
57,774

Third parties
 
—

 
9,752

 
1,134

 
—

 
10,886

 
 
—

 
65,015

 
3,910

 
(265
)
 
68,660

Operating costs and expenses: