HEP 6-30-2014 10Q


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

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________                    
Commission File Number: 1-32225
  ______________________________________________________________________________________
HOLLY ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
 ______________________________________________________________________________________
Delaware
 
20-0833098
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
2828 N. Harwood, Suite 1300
Dallas, Texas
 
75201
(Address of principal executive offices)
 
 (Zip code)
(214) 871-3555
(Registrant’s telephone number, including area code) ________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨

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

Table of Contentsril 19,

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

- 2 -
Table of Contentsril 19,


FORWARD-LOOKING STATEMENTS

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

Cautionary statements identifying important factors that could cause actual results to differ materially from our expectations are set forth in this Form 10-Q, including without limitation, the forward-looking statements that are referred to above. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2013, in “Risk Factors” and in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All forward-looking statements included in this Form 10-Q and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


- 3 -
Table of Contentsril 19,

PART I. FINANCIAL INFORMATION


Item 1.
Financial Statements
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS  
(in thousands, except unit data)
 
 
June 30, 2014
 
December 31, 2013
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
6,066

 
$
6,352

Accounts receivable:
 
 
 
 
Trade
 
6,507

 
5,061

Affiliates
 
27,852

 
29,675

 
 
34,359

 
34,736

Prepaid and other current assets
 
3,746

 
3,874

Total current assets
 
44,171

 
44,962

 
 
 
 
 
Properties and equipment, net
 
966,464

 
957,814

Transportation agreements, net
 
84,177

 
87,650

Goodwill
 
256,498

 
256,498

Investment in SLC Pipeline
 
24,637

 
24,741

Other assets
 
8,797

 
10,843

Total assets
 
$
1,384,744

 
$
1,382,508

 
 
 
 
 
LIABILITIES AND PARTNERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable:
 
 
 
 
Trade
 
$
13,717

 
$
14,414

Affiliates
 
3,989

 
8,484

 
 
17,706

 
22,898

 
 
 
 
 
Accrued interest
 
6,688

 
10,239

Deferred revenue
 
12,327

 
13,981

Accrued property taxes
 
4,514

 
2,603

Other current liabilities
 
2,998

 
1,845

Total current liabilities
 
44,233

 
51,566

 
 
 
 
 
Long-term debt
 
839,253

 
807,630

Other long-term liabilities
 
13,306

 
14,585

Deferred revenue
 
25,640

 
21,669

 
 
 
 
 
Class B unit
 
23,401

 
20,124

 
 
 
 
 
Equity:
 
 
 
 
Partners’ equity:
 
 
 
 
Common unitholders (58,657,048 units issued and outstanding
    at June 30, 2014 and December 31, 2013)
 
489,980

 
516,147

General partner interest (2% interest)
 
(147,539
)
 
(146,557
)
Accumulated other comprehensive loss
 
(795
)
 
(144
)
Total partners’ equity
 
341,646

 
369,446

Noncontrolling interest
 
97,265

 
97,488

Total equity
 
438,911

 
466,934

Total liabilities and equity
 
$
1,384,744

 
$
1,382,508


See accompanying notes.

- 4 -
Table of Contentsril 19,

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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
 
Affiliates
 
$
64,480

 
$
63,187

 
$
136,312

 
$
124,699

Third parties
 
10,518

 
12,098

 
25,690

 
24,884

 
 
74,998

 
75,285

 
162,002

 
149,583

Operating costs and expenses:
 
 
 
 
 
 
 
 
Operations (exclusive of depreciation and amortization)
 
24,567

 
24,538

 
47,379

 
50,403

Depreciation and amortization
 
15,882

 
15,127

 
31,470

 
29,281

General and administrative
 
2,516

 
3,100

 
5,667

 
6,332

 
 
42,965

 
42,765

 
84,516

 
86,016

Operating income
 
32,033

 
32,520

 
77,486

 
63,567

 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
Equity in earnings of SLC Pipeline
 
748

 
746

 
1,270

 
1,403

Interest expense
 
(8,329
)
 
(11,629
)
 
(18,783
)
 
(24,113
)
Interest income
 
—

 
4

 
3

 
107

Loss on early extinguishment of debt
 
—

 
—

 
(7,677
)
 
—

Gain on sale of assets
 
—

 
—

 
—

 
2,022

Other (income) expense
 
26

 
—

 
34

 
—

 
 
(7,555
)
 
(10,879
)
 
(25,153
)
 
(20,581
)
Income before income taxes
 
24,478

 
21,641

 
52,333

 
42,986

State income tax expense
 
(28
)
 
(344
)
 
(103
)
 
(400
)
Net income
 
24,450

 
21,297

 
52,230

 
42,586

Allocation of net income attributable to noncontrolling interests
 
(1,416
)
 
(1,130
)
 
(5,053
)
 
(4,020
)
Net income attributable to Holly Energy Partners
 
23,034

 
20,167

 
47,177

 
38,566

General partner interest in net income, including incentive distributions
 
(8,393
)
 
(6,680
)
 
(16,394
)
 
(12,910
)
Limited partners’ interest in net income
 
$
14,641

 
$
13,487

 
$
30,783

 
$
25,656

Limited partners’ per unit interest in earnings—basic and diluted
 
$
0.25

 
$
0.23

 
$
0.52

 
$
0.44

Weighted average limited partners’ units outstanding
 
58,657

 
58,657

 
58,657

 
57,828


See accompanying notes.


- 5 -

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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
24,450

 
$
21,297

 
$
52,230

 
$
42,586

Other comprehensive income:
 
 
 
 
 
 
 
 
Change in fair value of cash flow hedging instruments
 
(1,299
)
 
2,897

 
(1,742
)
 
2,955

Amortization of unrealized loss attributable to discontinued cash flow hedge
 
—

 
—

 
—

 
849

Reclassification adjustment to net income on partial settlement of cash flow hedge
 
553

 
516

 
1,091

 
1,020

Other comprehensive income
 
(746
)
 
3,413

 
(651
)
 
4,824

Comprehensive income before noncontrolling interest
 
23,704

 
24,710

 
51,579

 
47,410

Allocation of comprehensive income to noncontrolling interests
 
(1,416
)
 
(1,130
)
 
(5,053
)
 
(4,020
)
Comprehensive income attributable to Holly Energy Partners
 
$
22,288

 
$
23,580

 
$
46,526

 
$
43,390


See accompanying notes.


- 6 -
Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
 
Six Months Ended June 30,
 
 
2014
 
2013
Cash flows from operating activities
 
 
 
 
Net income
 
$
52,230

 
$
42,586

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
31,470

 
29,281

Gain on sale of assets
 
—

 
(2,022
)
Amortization of deferred charges
 
947

 
1,910

Amortization of restricted and performance units
 
1,658

 
1,880

Loss on early extinguishment of debt
 
7,677

 
—

(Increase) decrease in operating assets:
 
 
 
 
Accounts receivable—trade
 
(1,446
)
 
2,576

Accounts receivable—affiliates
 
1,823

 
22

Prepaid and other current assets
 
128

 
(695
)
Increase (decrease) in operating liabilities:
 
 
 
 
Accounts payable—trade
 
1,280

 
(518
)
Accounts payable—affiliates
 
(4,495
)
 
(301
)
Accrued interest
 
(3,552
)
 
88

Deferred revenue
 
2,315

 
5,787

Accrued property taxes
 
1,912

 
961

Other current liabilities
 
1,153

 
153

Other, net
 
(737
)
 
335

Net cash provided by operating activities
 
92,363

 
82,043

 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Additions to properties and equipment
 
(38,574
)
 
(17,224
)
Proceeds from sale of assets
 
—

 
2,481

Distributions in excess of equity in earnings of SLC Pipeline
 
105

 
159

Net cash used for investing activities
 
(38,469
)
 
(14,584
)
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
Borrowings under credit agreement
 
477,100

 
154,500

Repayments of credit agreement borrowings
 
(297,100
)
 
(220,500
)
Proceeds from issuance of common units
 
—

 
73,444

Redemption of senior notes
 
(156,188
)
 
—

Contribution from general partner
 
—

 
1,499

Distributions to HEP unitholders
 
(75,577
)
 
(67,419
)
Distributions to noncontrolling interest
 
(2,000
)
 
(2,000
)
Purchase of units for incentive grants
 
(406
)
 
(3,254
)
Deferred financing costs
 
(9
)
 
—

Other
 
—

 
(250
)
Net cash used by financing activities
 
(54,180
)
 
(63,980
)
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
Increase (decrease) for the period
 
(286
)
 
3,479

Beginning of period
 
6,352

 
5,237

End of period
 
$
6,066

 
$
8,716

     

See accompanying notes.

- 7 -
Table of Contentsril 19,

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

 
$
(146,557
)
 
$
(144
)
 
$
97,488

 
$
466,934

Distributions to HEP unitholders
 
(59,095
)
 
(16,482
)
 
—

 
—

 
(75,577
)
Distributions to noncontrolling interest
 
—

 
—

 
—

 
(2,000
)
 
(2,000
)
Purchase of units for incentive grants
 
(406
)
 
—

 
—

 
—

 
(406
)
Amortization of restricted and performance units
 
1,658

 
—

 
—

 
—

 
1,658

   Class B unit accretion
 
(3,211
)
 
(66
)
 
—

 
—

 
(3,277
)
Net income
 
34,887

 
15,566

 
—

 
1,777

 
52,230

Other comprehensive income
 
—

 
—

 
(651
)
 
—

 
(651
)
Balance June 30, 2014
 
$
489,980

 
$
(147,539
)
 
$
(795
)
 
$
97,265

 
$
438,911



See accompanying notes.



- 8 -
Table of Contentsril 19,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1:
Description of Business and Presentation of Financial Statements

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

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

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

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

New Accounting Pronouncements

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


Note 2:
Financial Instruments

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

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


- 9 -

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


The carrying amounts and estimated fair values of our senior notes and interest rate swaps were as follows:
 
 
 
 
June 30, 2014
 
December 31, 2013
Financial Instrument
 
Fair Value Input Level
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
 
 
 
 
(In thousands)
Liabilities:
 
 
 
 
 
 
 
 
 
 
Senior notes:
 
 
 
 
 
 
 
 
 
 
6.5% senior notes
 
Level 2
 
$
296,253

 
$
320,250

 
$
295,927

 
$
313,500

8.25% senior notes
 
Level 2
 
—

 
—

 
148,703

 
158,250

 
 
 
 
296,253

 
320,250

 
444,630

 
471,750

 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Level 2
 
795

 
795

 
144

 
144

 
 
 
 
$
297,048

 
$
321,045

 
$
444,774

 
$
471,894


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

See Note 6 for additional information on these instruments.


Note 3:
Properties and Equipment 

The carrying amounts of our properties and equipment are as follows:
 
 
June 30,
2014
 
December 31,
2013
 
 
(In thousands)
Pipelines, terminals and tankage
 
$
1,077,189

 
$
1,077,037

Construction in progress
 
84,953

 
50,454

Land and right of way
 
63,430

 
63,425

Other
 
20,088

 
19,997

 
 
1,245,660

 
1,210,913

Less accumulated depreciation
 
279,196

 
253,099

 
 
$
966,464

 
$
957,814


We capitalized $0.9 million and $0.2 million in interest attributable to construction projects during the six months ended June 30, 2014 and 2013, respectively.

Depreciation expense was $27.8 million and $25.6 million for the six months ended June 30, 2014 and 2013, respectively.


Note 4:
Transportation Agreements

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


- 10 -

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


The carrying amounts of our transportation agreements are as follows:
 
 
June 30,
2014
 
December 31,
2013
 
 
(In thousands)
Alon transportation agreement
 
$
59,933

 
$
59,933

HFC transportation agreement
 
74,231

 
74,231

 
 
134,164

 
134,164

Less accumulated amortization
 
49,987

 
46,514

 
 
$
84,177

 
$
87,650


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


Note 5:
Employees, Retirement and Incentive Plans

Direct support for our operations is provided by Holly Logistic Services, L.L.C., an HFC subsidiary, which utilizes personnel employed by HFC who are dedicated to performing services for us. Their costs, including salaries, bonuses, payroll taxes, benefits and other direct costs, are charged to us monthly in accordance with an omnibus agreement that we have with HFC. These employees participate in the retirement and benefit plans of HFC. Our share of retirement and benefit plan costs was $1.9 million for each of the three months ended June 30, 2014 and 2013, and $3.6 million and $3.8 million for the six months ended June 30, 2014 and 2013, respectively.

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

As of June 30, 2014, we have three types of incentive-based awards which are described below. The compensation cost charged against income was $0.8 million for each of the three months ended June 30, 2014 and 2013, and $1.7 million and $1.9 million for the six months ended June 30, 2014 and 2013, respectively. We currently purchase units in the open market instead of issuing new units for settlement of all unit awards under our Long-Term Incentive Plan. As of June 30, 2014, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which 1,632,388 have not yet been granted, assuming no forfeitures of the unvested units and full achievement of goals for the performance units already granted.

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

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

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


- 11 -

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


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

 
$
33.36

Granted
 
3,081

 
32.46

Vesting and transfer of common units to recipients
 
(2,244
)
 
40.86

Forfeited
 
(3,968
)
 
37.82

Outstanding at June 30, 2014 (nonvested)
 
119,820

 
$
33.05


As of June 30, 2014, there was $1.6 million of total unrecognized compensation expense related to nonvested restricted unit and phantom unit grants, which is expected to be recognized over a weighted-average period of 1.0 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, 2014, estimated unit payouts for outstanding nonvested performance unit awards were at 100%.

No performance units were granted during the six months ended June 30, 2014. Performance units granted in 2013 vest over a three-year performance period ending December 31, 2015, for performance units granted in February 2013, and December 31, 2016, for performance units granted in November 2013. The performance units granted are payable in HEP common units. The number of units actually earned will be based on the growth of our distributable cash flow per common unit over the performance period and can range from 0% to 200% of the target number of performance units granted (in the case of our Chairman, who received a performance unit award in March 2013 prior to his retirement from Holly Logistic Services, L.L.C., our ultimate general partner ("HLS")) or from 50% to 150% of the target number of performance units granted (in the case of other officers granted performance units). Although common units are not transferred to the recipients until the performance units vest, the recipients have distribution rights with respect to the common units from the date of grant.

A summary of performance unit activity and changes during the six months ended June 30, 2014, is presented below:
Performance Units
 
Units
Outstanding at January 1, 2014 (nonvested)
 
75,216

Granted
 
—

Vesting and transfer of common units to recipients
 
(17,938
)
Outstanding at June 30, 2014 (nonvested)
 
57,278


The grant-date fair value of performance units vested and transferred to recipients during the six months ended June 30, 2014, was $0.5 million. As of June 30, 2014, there was $1.0 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of 1.5 years.


Note 6:
Debt

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

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

- 12 -

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


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

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

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

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

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

Long-term Debt
The carrying amounts of our long-term debt are as follows:
 
 
June 30,
2014
 
December 31,
2013
 
 
(In thousands)
Credit Agreement
 
$
543,000

 
$
363,000

6.5% Senior Notes
 
 
 
 
Principal
 
300,000

 
300,000

Unamortized discount
 
(3,747
)
 
(4,073
)
 
 
296,253

 
295,927

8.25% Senior Notes
 
 
 
 
Principal
 
—

 
150,000

Unamortized discount
 
—

 
(1,297
)
 
 
—

 
148,703

 
 
 
 
 
Total long-term debt
 
$
839,253

 
$
807,630


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

As of June 30, 2014, we have three interest rate swaps that hedge our exposure to the cash flow risk caused by the effects of LIBOR changes on $305 million of Credit Agreement advances. Our first interest rate swap effectively converts $155 million of our LIBOR based debt to fixed rate debt having an interest rate of 0.99% plus an applicable margin of 2.00% as of June 30, 2014, which equaled an effective interest rate of 2.99%. This swap contract matures in February 2016. We also have two additional interest rate swaps with identical terms which effectively convert $150 million of our LIBOR based debt to fixed rate debt having an interest rate of 0.74% plus an applicable margin of 2.00% as of June 30, 2014, which equaled an effective interest rate of 2.74%. Both of these swap contracts mature in July 2017.

- 13 -

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



We have designated these interest rate swaps as cash flow hedges. Based on our assessment of effectiveness using the change in variable cash flows method, we have determined that these interest rate swaps are effective in offsetting the variability in interest payments on $305 million of our variable rate debt resulting from changes in LIBOR. Under hedge accounting, we adjust our cash flow hedges on a quarterly basis to their fair values with the offsetting fair value adjustments to accumulated other comprehensive income (loss). Also on a quarterly basis, we measure hedge effectiveness by comparing the present value of the cumulative change in the expected future interest to be paid or received on the variable leg of our swaps against the expected future interest payments on $305 million of our variable rate debt. Any ineffectiveness is recorded directly to interest expense. As of June 30, 2014, we had no ineffectiveness on our cash flow hedges.

At June 30, 2014, we have accumulated other comprehensive loss of $0.8 million that relates to our current cash flow hedging instruments. Approximately $0.7 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, 2014
 
 
 
 
 
 
 
 
Interest rate swaps designated as cash flow hedging instrument:
 
 
 
 
 
 
Variable-to-fixed interest rate swap contracts ($155 million of LIBOR-based debt interest)
 
Other long-term
    liabilities
 
$
(1,629
)
 
Accumulated other
    comprehensive loss
 
$
(1,629
)
Variable-to-fixed interest rate swap contracts ($150 million of LIBOR-based debt interest)
 
Other long-term
    assets
 
834

 
Accumulated other
    comprehensive gain
 
834

 
 
 
 
$
(795
)
 
 
 
$
(795
)
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
Interest rate swaps designated as cash flow hedging instrument:
 
 
 
 
 
 
Variable-to-fixed interest rate swap contracts ($155 million of LIBOR-based debt interest)
 
Other long-term
    liabilities
 
$
(1,814
)
 
Accumulated other
    comprehensive loss
 
$
(1,814
)
Variable-to-fixed interest rate swap contracts ($150 million of LIBOR-based debt interest)
 
Other long-term
    assets
 
1,670

 
Accumulated other
    comprehensive gain
 
1,670

 
 
 
 
$
(144
)
 
 
 
$
(144
)

Interest Expense and Other Debt Information
Interest expense consists of the following components:
 
 
Six Months Ended June 30,
 
 
2014
 
2013
 
 
(In thousands)
Interest on outstanding debt:
 
 
 
 
Credit Agreement, net of interest on interest rate swaps
 
$
6,165

 
$
6,043

6.5% Senior Notes
 
9,696

 
9,755

8.25% Senior Notes
 
2,544

 
6,193

Amortization of discount and deferred debt issuance costs
 
948

 
1,063

Amortization of unrecognized loss attributable to terminated cash flow hedge
 
—

 
849

Commitment fees
 
293

 
365

Total interest incurred
 
19,646

 
24,268

Less capitalized interest
 
863

 
155

Net interest expense
 
$
18,783

 
$
24,113

Cash paid for interest
 
$
22,249

 
$
22,258




- 14 -

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


Note 7:
Significant Customers

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

The following table presents the percentage of total revenues generated by each of these customers:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
HFC
 
86
%
 
84
%
 
84
%
 
83
%
Alon
 
7
%
 
11
%
 
9
%
 
10
%


Note 8:
Related Party Transactions

We serve HFC's refineries under long-term pipeline and terminal, tankage and throughput agreements expiring from 2019 to 2026. Under these agreements, HFC agrees to transport, store and throughput volumes of refined product and crude oil on our pipelines and terminal, tankage and loading rack facilities that result in minimum annual payments to us. These minimum annual payments or revenues are subject to annual tariff rate adjustments on July 1st each year, based on the Producer Price Index (“PPI”) or Federal Energy Regulatory Commission (“FERC”) index. Following the July 1, 2014, PPI adjustment, HFC's minimum annual payments to us under these agreements increased by $3.3 million to $228.7 million.

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

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

Related party transactions with HFC are as follows:
•
Revenues received from HFC were $64.5 million and $63.2 million for the three months ended June 30, 2014 and 2013, respectively, and $136.3 million and $124.7 million for the six months ended June 30, 2014 and 2013, respectively.
•
HFC charged us general and administrative services under the Omnibus Agreement of $0.6 million for each of the three months ended June 30, 2014 and 2013, and $1.2 million for each of the six months ended June 30, 2014 and 2013.
•
We reimbursed HFC for costs of employees supporting our operations of $9.6 million and $9.4 million for the three months ended June 30, 2014 and 2013, respectively, and $18.8 million and $19.2 million for the six months ended June 30, 2014 and 2013, respectively.
•
HFC reimbursed us $3.9 million and $4.3 million for the three months ended June 30, 2014 and 2013, respectively, and $8.4 million and $9.2 million for the six months ended June 30, 2014 and 2013, respectively, for certain reimbursable costs and capital projects.
•
We distributed $19.8 million and $17.4 million for the three months ended June 30, 2014 and 2013, respectively, to HFC as regular distributions on its common units and general partner interest, including general partner incentive distributions. For the six months ended June 30, 2014 and 2013, we distributed $39.0 million and $34.8 million, respectively.
•
Accounts receivable from HFC were $27.9 million and $29.7 million at June 30, 2014, and December 31, 2013, respectively.
•
Accounts payable to HFC were $4.0 million and $8.5 million at June 30, 2014, and December 31, 2013, respectively.
•
Revenues for the three and the six months ended June 30, 2014, include $0.2 million and $7.6 million, respectively, of shortfall payments billed in 2013, as HFC did not exceed its minimum volume commitment in any of the subsequent four quarters. Deferred revenue in the consolidated balance sheets at June 30, 2014, and December 31, 2013, includes

- 15 -

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


$5.7 million and $10.1 million, respectively, relating to certain shortfall billings. It is possible that HFC may not exceed its minimum obligations to receive credit for any of the $5.7 million deferred at June 30, 2014.


Note 9:
Partners’ Equity

As of June 30, 2014, HFC held 22,380,030 of our common units and the 2% general partner interest, which together constituted a 39% ownership interest in us.

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

The following table presents the allocation of the general partner interest in net income for the periods presented below: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In thousands)
General partner interest in net income
 
$
299

 
$
275

 
$
628

 
$
522

General partner incentive distribution
 
8,094

 
6,405

 
15,766

 
12,388

Total general partner interest in net income
 
$
8,393

 
$
6,680

 
$
16,394

 
$
12,910


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 24, 2014, we announced our cash distribution for the second quarter of 2014 of $0.515 per unit. The distribution is payable on all common and general partner units and will be paid August 14, 2014, to all unitholders of record on August 4, 2014.

The following table presents the allocation of our regular quarterly cash distributions to the general and limited partners for the periods in which they apply. Our distributions are declared subsequent to quarter end; therefore, the amounts presented do not reflect distributions paid during the periods presented below.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In thousands, except per unit data)
General partner interest in distribution
 
$
807

 
$
737

 
$
1,597

 
$
1,456

General partner incentive distribution
 
8,094

 
6,405

 
15,766

 
12,388

Total general partner distribution
 
8,901

 
7,142

 
17,363

 
13,844

Limited partner distribution
 
30,209

 
28,448

 
59,977

 
56,457

Total regular quarterly cash distribution
 
$
39,110

 
$
35,590

 
$
77,340

 
$
70,301

Cash distribution per unit applicable to limited partners
 
$
0.515

 
$
0.485

 
$
1.0225

 
$
0.9625


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


- 16 -

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


Note 10:
Supplemental Guarantor/Non-Guarantor Financial Information

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

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

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

 
$
2,085

 
$
3,979

 
$
—

 
$
6,066

Accounts receivable
 
—

 
30,619

 
3,936

 
(196
)
 
34,359

Intercompany accounts receivable
 
—

 
310,451

 
—

 
(310,451
)
 
—

Prepaid and other current assets
 
16

 
2,690

 
1,040

 
—

 
3,746

Total current assets
 
18

 
345,845

 
8,955

 
(310,647
)
 
44,171

 
 
 
 
 
 
 
 
 
 
 
Properties and equipment, net
 
—

 
577,883

 
388,581

 
—

 
966,464

Investment in subsidiaries
 
954,142

 
291,795

 
—

 
(1,245,937
)
 
—

Transportation agreements, net
 
—

 
84,177

 
—

 
—

 
84,177

Goodwill
 
—

 
256,498

 
—

 
—

 
256,498

Investment in SLC Pipeline
 
—

 
24,637

 
—

 
—

 
24,637

Other assets
 
1,381

 
7,416

 
—

 
—

 
8,797

Total assets
 
$
955,541

 
$
1,588,251

 
$
397,536

 
$
(1,556,584
)
 
$
1,384,744

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

 
$
15,467

 
$
2,435

 
$
(196
)
 
$
17,706

Intercompany accounts payable
 
310,451

 
—

 
—

 
(310,451
)
 
—

Accrued interest
 
6,500

 
188

 
—

 
—

 
6,688

Deferred revenue
 
—

 
9,193

 
3,134

 
—

 
12,327

Accrued property taxes
 
—

 
1,763

 
2,751

 
—

 
4,514

Other current liabilities
 
569

 
2,426

 
3

 
—

 
2,998

Total current liabilities
 
317,520

 
29,037

 
8,323

 
(310,647
)
 
44,233


 
 
 
 
 
 
 
 
 
 
Long-term debt
 
296,253

 
543,000

 
—

 
—

 
839,253

Other long-term liabilities
 
122

 
13,031

 
153

 
—

 
13,306

Deferred revenue
 
—

 
25,640

 
—

 
—

 
25,640

Class B unit
 
—

 
23,401

 
—

 
—

 
23,401

Equity - partners
 
341,646

 
954,142

 
389,060

 
(1,343,202
)
 
341,646

Equity - noncontrolling interest
 
—

 
—

 
—

 
97,265

 
97,265

Total liabilities and partners’ equity
 
$
955,541

 
$
1,588,251

 
$
397,536

 
$
(1,556,584
)
 
$
1,384,744



- 17 -

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



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

 
$
1,447

 
$
4,903

 
$
—

 
$
6,352

Accounts receivable
 
—

 
31,107

 
4,543

 
(914
)
 
34,736

Intercompany accounts receivable
 
—

 
62,516

 
—

 
(62,516
)
 
—

Prepaid and other current assets
 
234

 
2,590

 
1,050

 
—

 
3,874

Total current assets
 
236

 
97,660

 
10,496

 
(63,430
)
 
44,962

 
 
 
 
 
 
 
 
 
 
 
Properties and equipment, net
 
—

 
564,847

 
392,967

 
—

 
957,814

Investment in subsidiaries
 
885,598

 
292,464

 
—

 
(1,178,062
)
 
—

Transportation agreements, net
 
—

 
87,650

 
—

 
—

 
87,650

Goodwill
 
—

 
256,498

 
—

 
—

 
256,498

Investment in SLC Pipeline
 
—

 
24,741

 
—

 
—

 
24,741

Other assets
 
1,684

 
9,159

 
—

 
—

 
10,843

Total assets
 
$
887,518

 
$
1,333,019

 
$
403,463

 
$
(1,241,492
)
 
$
1,382,508

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

 
$
18,966

 
$
4,846

 
$
(914
)
 
$
22,898

Intercompany accounts payable
 
62,516

 
—

 
—

 
(62,516
)
 
—

Accrued interest
 
10,198

 
41

 
—

 
—

 
10,239

Deferred revenue
 
—

 
6,406

 
7,575

 
—

 
13,981

Accrued property taxes
 
—

 
1,661

 
942

 
—

 
2,603

Other current liabilities
 
629

 
1,216

 
—

 
—

 
1,845

Total current liabilities
 
73,343

 
28,290

 
13,363

 
(63,430
)
 
51,566

 
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
444,630

 
363,000

 
—

 
—

 
807,630

Other long-term liabilities
 
99

 
14,338

 
148

 
—

 
14,585

Deferred revenue
 
—

 
21,669

 
—

 
—

 
21,669

Class B unit
 
—

 
20,124

 
—

 
—

 
20,124

Equity - partners
 
369,446

 
885,598

 
389,952

 
(1,275,550
)
 
369,446

Equity - noncontrolling interest
 
—

 
—

 
—

 
97,488

 
97,488

Total liabilities and partners’ equity
 
$
887,518

 
$
1,333,019

 
$
403,463

 
$
(1,241,492
)
 
$
1,382,508




- 18 -

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


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

 
$
61,427

 
$
3,359

 
$
(306
)
 
$
64,480

Third parties
 
—

 
8,533

 
1,985

 
—

 
10,518

 
 
—

 
69,960

 
5,344

 
(306
)
 
74,998

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

 
22,179

 
2,694

 
(306
)
 
24,567

Depreciation and amortization
 
—

 
12,288

 
3,594

 
—

 
15,882

General and administrative
 
585

 
1,931

 
—

 
—

 
2,516

 
 
585

 
36,398

 
6,288

 
(306
)
 
42,965

Operating income (loss)
 
(585
)
 
33,562

 
(944
)
 
—

 
32,033

Equity in earnings (loss) of subsidiaries
 
28,631

 
(708
)
 
—

 
(27,923
)
 
—

Equity in earnings of SLC Pipeline
 
—

 
748

 
—

 
—

 
748

Interest expense
 
(5,012
)
 
(3,317
)
 
—

 
—

 
(8,329
)
Other (income) expense
 
—

 
26

 
—

 
—

 
26

 
 
23,619

 
(3,251
)
 
—

 
(27,923
)
 
(7,555
)
Income before income taxes
 
23,034

 
30,311

 
(944
)
 
(27,923
)
 
24,478

State income tax expense
 
—

 
(28
)
 
—

 
—

 
(28
)
Net income
 
23,034

 
30,283

 
(944
)
 
(27,923
)
 
24,450

Allocation of net income attributable to noncontrolling interests
 
—

 
—

 
—

 
(1,416
)
 
(1,416
)
Net income attributable to Holly Energy Partners
 
23,034

 
30,283

 
(944
)
 
(29,339
)
 
23,034

Other comprehensive income
 
(746
)
 
(746
)
 
—

 
746

 
(746
)
Comprehensive income
 
$
22,288

 
$
29,537

 
$
(944
)
 
$
(28,593
)
 
$
22,288



- 19 -

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 (exclusive of depreciation and amortization)
 
—

 
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