10-Q


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

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR

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

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  ¨   No  ý
The number of the registrant’s outstanding common units at October 30, 2015 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 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 known material risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2014, in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, and in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in "Risk Factors." All forward-looking statements included in this Form 10-Q and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


- 3 -
Table of Contentsril 19,

PART I. FINANCIAL INFORMATION


Item 1.
Financial Statements

HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS  
(in thousands, except unit data)
 
 
September 30, 2015
 
December 31, 2014
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
10,856

 
$
2,830

Accounts receivable:
 
 
 
 
Trade
 
7,867

 
6,737

Affiliates
 
26,101

 
33,392

 
 
33,968

 
40,129

Prepaid and other current assets
 
4,573

 
4,383

Total current assets
 
49,397

 
47,342

 
 
 
 
 
Properties and equipment, net
 
990,567

 
980,479

Transportation agreements, net
 
75,542

 
80,703

Goodwill
 
256,498

 
256,498

Equity method investments
 
79,378

 
24,478

Other assets
 
14,647

 
12,055

Total assets
 
$
1,466,029

 
$
1,401,555

 
 
 
 
 
LIABILITIES AND PARTNERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable:
 
 
 
 
Trade
 
$
7,522

 
$
12,642

Affiliates
 
3,714

 
5,239

 
 
11,236

 
17,881

 
 
 
 
 
Accrued interest
 
1,851

 
6,615

Deferred revenue
 
11,674

 
12,432

Accrued property taxes
 
6,477

 
2,703

Other current liabilities
 
4,302

 
4,571

Total current liabilities
 
35,540

 
44,202

 
 
 
 
 
Long-term debt
 
951,067

 
867,579

Other long-term liabilities
 
21,532

 
18,145

Deferred revenue
 
37,242

 
29,392

 
 
 
 
 
Class B unit
 
32,107

 
26,793

 
 
 
 
 
Equity:
 
 
 
 
Partners’ equity:
 
 
 
 
Common unitholders (58,657,048 units issued and outstanding
    at September 30, 2015 and December 31, 2014)
 
434,210

 
468,813

General partner interest (2% interest)
 
(139,579
)
 
(148,405
)
Accumulated other comprehensive loss
 
(834
)
 
(46
)
Total partners’ equity
 
293,797

 
320,362

Noncontrolling interest
 
94,744

 
95,082

Total equity
 
388,541

 
415,444

Total liabilities and equity
 
$
1,466,029

 
$
1,401,555


See accompanying notes.

- 4 -
Table of Contentsril 19,

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

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
 
Affiliates
 
$
73,716

 
$
67,450

 
$
214,268

 
$
203,762

Third parties
 
14,673

 
14,680

 
47,356

 
40,370

 
 
88,389

 
82,130

 
261,624

 
244,132

Operating costs and expenses:
 
 
 
 
 
 
 
 
Operations (exclusive of depreciation and amortization)
 
24,095

 
25,456

 
77,350

 
72,835

Depreciation and amortization
 
16,326

 
15,483

 
46,083

 
46,953

General and administrative
 
3,673

 
2,266

 
9,659

 
7,933

 
 
44,094

 
43,205

 
133,092

 
127,721

Operating income
 
44,295

 
38,925

 
128,532

 
116,411

 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
Equity in earnings of equity method investments
 
1,269

 
880

 
2,634

 
2,150

Interest expense
 
(9,486
)
 
(8,585
)
 
(27,310
)
 
(27,368
)
Interest income
 
381

 
—

 
384

 
3

Loss on early extinguishment of debt
 
—

 
—

 
—

 
(7,677
)
Other expense
 
176

 
11

 
406

 
45

 
 
(7,660
)
 
(7,694
)
 
(23,886
)
 
(32,847
)
Income before income taxes
 
36,635

 
31,231

 
104,646

 
83,564

State income tax expense
 
(69
)
 
(42
)
 
(106
)
 
(145
)
Net income
 
36,566

 
31,189

 
104,540

 
83,419

Allocation of net income attributable to noncontrolling interests
 
(2,081
)
 
(1,509
)
 
(7,851
)
 
(6,562
)
Net income attributable to Holly Energy Partners
 
34,485

 
29,680

 
96,689

 
76,857

General partner interest in net income, including incentive distributions
 
(10,830
)
 
(8,940
)
 
(30,835
)
 
(25,334
)
Limited partners’ interest in net income
 
$
23,655

 
$
20,740

 
$
65,854

 
$
51,523

Limited partners’ per unit interest in earnings—basic and diluted
 
$
0.40

 
$
0.35

 
$
1.11

 
$
0.87

Weighted average limited partners’ units outstanding
 
58,657

 
58,657

 
58,657

 
58,657


See accompanying notes.


- 5 -

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

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
36,566

 
$
31,189

 
$
104,540

 
$
83,419

Other comprehensive income:
 
 
 
 
 
 
 
 
Change in fair value of cash flow hedging instruments
 
(787
)
 
553

 
(2,373
)
 
(1,189
)
Reclassification adjustment to net income on partial settlement of cash flow hedge
 
526

 
556

 
1,585

 
1,647

Other comprehensive income (loss)
 
(261
)
 
1,109

 
(788
)
 
458

Comprehensive income before noncontrolling interest
 
36,305

 
32,298

 
103,752

 
83,877

Allocation of comprehensive income to noncontrolling interests
 
(2,081
)
 
(1,509
)
 
(7,851
)
 
(6,562
)
Comprehensive income attributable to Holly Energy Partners
 
$
34,224

 
$
30,789

 
$
95,901

 
$
77,315


See accompanying notes.


- 6 -
Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
Cash flows from operating activities
 
 
 
 
Net income
 
$
104,540

 
$
83,419

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
46,083

 
46,953

Gain on sale of assets
 
(351
)
 
—

Amortization of deferred charges
 
1,425

 
1,384

Amortization of restricted and performance units
 
3,023

 
2,493

Distributions less than income from equity investments
 
(416
)
 
—

Loss on early extinguishment of debt
 
—

 
7,677

(Increase) decrease in operating assets:
 
 
 
 
Accounts receivable—trade
 
(1,094
)
 
(700
)
Accounts receivable—affiliates
 
7,800

 
(536
)
Prepaid and other current assets
 
(146
)
 
(545
)
Increase (decrease) in operating liabilities:
 
 
 
 
Accounts payable—trade
 
(2,943
)
 
608

Accounts payable—affiliates
 
(1,525
)
 
(4,191
)
Accrued interest
 
(4,764
)
 
(8,417
)
Deferred revenue
 
7,092

 
5,051

Accrued property taxes
 
3,774

 
3,867

Other current liabilities
 
(365
)
 
467

Other, net
 
3,773

 
(877
)
Net cash provided by operating activities
 
165,906

 
136,653

 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Additions to properties and equipment
 
(30,923
)
 
(58,313
)
Purchase of El Dorado crude tanks
 
(27,500
)
 
—

Purchase of investment in Frontier Pipeline
 
(54,641
)
 
—

Proceeds from sale of assets
 
1,244

 
—

Distributions in excess of equity in earnings of equity investments
 
158

 
163

Net cash used for investing activities
 
(111,662
)
 
(58,150
)
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
Borrowings under credit agreement
 
443,000

 
538,600

Repayments of credit agreement borrowings
 
(360,000
)
 
(346,600
)
Redemption of senior notes
 
—

 
(156,188
)
Distributions to HEP unitholders
 
(125,242
)
 
(114,680
)
Distributions to noncontrolling interest
 
(2,875
)
 
(3,250
)
Purchase of units for incentive grants
 
(247
)
 
(1,064
)
Other
 
(854
)
 
(6
)
Net cash used by financing activities
 
(46,218
)
 
(83,188
)
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
Increase (decrease) for the period
 
8,026

 
(4,685
)
Beginning of period
 
2,830

 
6,352

End of period
 
$
10,856

 
$
1,667

     

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
Loss
 
Noncontrolling Interest
 
Total Equity
 
 
 
Balance December 31, 2014
 
$
468,813

 
$
(148,405
)
 
$
(46
)
 
$
95,082

 
$
415,444

Distributions to HEP unitholders
 
(94,579
)
 
(30,663
)
 
—

 
—

 
(125,242
)
Distributions to noncontrolling interest
 
—

 
—

 
—

 
(2,875
)
 
(2,875
)
Purchase of units for incentive grants
 
(247
)
 
—

 
—

 
—

 
(247
)
Amortization of restricted and performance units
 
3,023

 
—

 
—

 
—

 
3,023

Class B unit accretion
 
(5,208
)
 
(106
)
 
—

 
—

 
(5,314
)
Net income
 
62,408

 
39,595

 
—

 
2,537

 
104,540

Other comprehensive loss
 
—

 
—

 
(788
)
 
—

 
(788
)
Balance September 30, 2015
 
$
434,210

 
$
(139,579
)
 
$
(834
)
 
$
94,744

 
$
388,541



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 operate in one reportable segment which represents the aggregation of our petroleum product and crude pipelines business and terminals, tankage and loading rack facilities operation.

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 427-mile, 12-inch refined products pipeline running from Woods Cross, Utah to Las Vegas, Nevada (the “UNEV Pipeline”), product terminals near Cedar City, Utah and Las Vegas, Nevada and related assets, and a 25% interest in SLC Pipeline LLC, which owns a 95-mile intrastate crude oil pipeline system (the “SLC Pipeline”) that serves refineries in the Salt Lake City, Utah area.

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

The consolidated financial statements included herein have been prepared without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The interim financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of our results for the interim periods. Such adjustments are considered to be of a normal recurring nature. Although certain notes and other information required by U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014. 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, 2015.

Acquisitions

On August 31, 2015, we purchased a 50% interest in Frontier Pipeline Company, which owns a 289-mile crude oil pipeline running from Casper, Wyoming to Frontier Station, Utah (the "Frontier Pipeline"), from an affiliate of Enbridge, Inc. for cash consideration of $54.6 million. Frontier Pipeline will continue to be operated by an affiliate of Plains All American Pipeline, L.P., which owns the remaining 50% interest. The Frontier Pipeline has a 72,000 barrel per day ("bpd") capacity and supplies Canadian and Rocky Mountain crudes to Salt Lake City area refiners through a connection to the SLC Pipeline.

On November 1, 2015, we acquired from Frontier El Dorado Refining LLC, a wholly owned subsidiary of HFC, all the outstanding membership interests in El Dorado Operating LLC ("El Dorado Operating"), which owns the newly constructed naphtha fractionation and hydrogen generation units at HFC’s El Dorado refinery for cash consideration of $62.0 million. In connection with this transaction, we entered into 15-year tolling agreements containing minimum quarterly throughput commitments from HFC that provide minimum annualized revenues of $15.3 million.

We are a consolidated variable interest entity of HFC. Therefore, this transaction will be recorded as a transfer between entities under common control and reflect HFC's carrying basis in El Dorado Operating's assets and liabilities. Also, we will retrospectively adjust our financial position and operating results as if El Dorado Operating were a consolidated subsidiary for all periods while we were under common control of HFC. Assuming this acquisition was effective as of September 30, 2015, our assets, liabilities and partners' equity would have been retrospectively adjusted to include El Dorado Operating's assets, liabilities and partners' equity as presented below:


- 9 -

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



 
 
September 30,
2015
 
December 31,
2014
 
 
(In thousands)
Properties and equipment, net
 
$
60,320

 
$
38,119

Accounts payable
 
$
776

 
$
3,742

Partners' equity
 
$
59,544

 
$
34,377


This retrospective adjustment will not have significant impact on our operating results prior to September 30, 2015, since the hydrogen generation unit became operational in the third quarter of 2015 and the naphtha fractionation unit was not operational until the fourth quarter of 2015.

New Accounting Pronouncements

Revenue Recognition
In May 2014, an accounting standard update 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 has an effective date of January 1, 2018. We are evaluating the impact of this standard.

Debt Issuance Costs
In April 2015, an accounting standard update was issued requiring debt issuance costs to be presented as a direct deduction from the carrying amount of the debt liability. The amount of deferred debt issuance costs reported in long-term assets was $4.3 million and $4.4 million as of September 30, 2015 and December 31, 2014, respectively. This standard will become effective beginning with our 2016 reporting year.


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 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:
 
 
 
 
September 30, 2015
 
December 31, 2014
Financial Instrument
 
Fair Value Input Level
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
 
 
 
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Level 2
 
$
—

 
$
—

 
$
1,019

 
$
1,019

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
6.5% Senior notes
 
Level 2
 
$
297,067

 
$
288,000

 
$
296,579

 
$
291,000

Interest rate swaps
 
Level 2
 
834

 
834

 
1,065

 
1,065

 
 
 
 
$
297,901

 
$
288,834

 
$
297,644

 
$
292,065


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 6 for additional information on these instruments.


Note 3:
Properties and Equipment 

The carrying amounts of our properties and equipment are as follows:
 
 
September 30,
2015
 
December 31,
2014
 
 
(In thousands)
Pipelines, terminals and tankage
 
$
1,182,134

 
$
1,137,157

Land and right of way
 
65,023

 
64,458

Construction in progress
 
58,344

 
56,228

Other
 
22,309

 
22,636

 
 
1,327,810

 
1,280,479

Less accumulated depreciation
 
337,243

 
300,000

 
 
$
990,567

 
$
980,479


On March 6, 2015, we completed the acquisition of an existing crude tank farm adjacent to HFC's El Dorado Refinery from an unrelated third-party for $27.5 million in cash. We recorded the assets acquired and liabilities assumed at their fair values at the date of acquisition based on preliminary valuations. Substantially all of the purchase price was allocated to properties and equipment and no goodwill has been recorded. We expect to finalize the purchase price allocation during the fourth quarter of 2015. HFC is the main customer of this crude tank farm.

We capitalized $0.7 million and $1.2 million in interest attributable to construction projects during the nine months ended September 30, 2015 and 2014, respectively.

Depreciation expense was $40.5 million and $41.4 million for the nine months ended September 30, 2015 and 2014, respectively.



- 11 -

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



Note 4:
Transportation Agreements

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

The carrying amounts of our transportation agreements are as follows:
 
 
September 30,
2015
 
December 31,
2014
 
 
(In thousands)
Alon transportation agreement
 
$
59,933

 
$
59,933

HFC transportation agreement
 
74,231

 
74,231

Other
 
50

 
—

 
 
134,214

 
134,164

Less accumulated amortization
 
58,672

 
53,461

 
 
$
75,542

 
$
80,703


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. ("HLS"), 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 $1.4 million and $1.9 million for the three months ended September 30, 2015 and 2014, respectively, and $4.1 million and $5.5 million for the nine months ended September 30, 2015 and 2014, respectively.

Under HLS’s secondment agreement with HFC (the “Secondment Agreement”), certain employees of HFC are seconded to HLS, our ultimate general partner, to provide operational and maintenance services for certain of our processing, refining, pipeline and tankage assets at the El Dorado and Cheyenne refineries, and HLS reimburses HFC for its prorated portion of the wages, benefits, and other costs of these employees for our benefit.
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.

As of September 30, 2015, we have three types of incentive-based awards outstanding, which are described below. The compensation cost charged against income was $1.3 million and $0.9 million for the three months ended September 30, 2015 and 2014, respectively, and $2.9 million and $2.5 million for the the nine months ended September 30, 2015 and 2014, respectively. We currently purchase units in the open market instead of issuing new units for settlement of all unit awards under our Long-Term Incentive Plan. As of September 30, 2015, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which 1,541,714 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.


- 12 -

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



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.

A summary of restricted and phantom unit activity and changes during the nine months ended September 30, 2015, is presented below:
Restricted and Phantom Units
 
Units
 
Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2015 (nonvested)
 
126,077

 
$
33.43

Forfeited
 
(5,591
)
 
33.51

Outstanding at September 30, 2015 (nonvested)
 
120,486

 
$
33.42


As of September 30, 2015, there was $1.1 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 1.1 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 September 30, 2015, estimated unit payouts for outstanding nonvested performance unit awards ranged between 100% and 150%.

No performance units were granted during the nine months ended September 30, 2015. Performance units granted in 2014 vest over a three-year performance period ending December 31, 2017. These 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 50% to 150% of the target number of performance units granted. Although common units are not transferred to the recipients until the performance units vest, the recipients have distribution rights with respect to the common units from the date of grant.

A summary of performance unit activity and changes during the nine months ended September 30, 2015, is presented below:
Performance Units
 
Units
Outstanding at January 1, 2015 (nonvested)
 
71,245

Vesting and transfer of common units to recipients
 
(11,436
)
Outstanding at September 30, 2015 (Nonvested)
 
59,809


The grant-date fair value of performance units vested and transferred to recipients during the nine months ended September 30, 2015, was $0.4 million. Based on the weighted average fair value of performance units outstanding at September 30, 2015, of $2.2 million, there was $0.7 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of 0.9 years.


Note 6:
Debt

Credit Agreement
In April 2015, we amended our senior secured revolving credit facility (the “Credit Agreement”) increasing the size of the Credit Agreement from $650 million to $850 million. The Credit Agreement 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.


- 13 -

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



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

The Credit Agreement imposes certain requirements on us with which we were in compliance as of September 30, 2015, 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
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 were in compliance as of September 30, 2015, 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.

In March 2014, we redeemed the $150 million aggregate principal amount of 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.

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

Long-term Debt
The carrying amounts of our long-term debt are as follows:
 
 
September 30,
2015
 
December 31,
2014
 
 
(In thousands)
Credit Agreement
 
$
654,000

 
$
571,000

6.5% Senior Notes
 
 
 
 
Principal
 
300,000

 
300,000

Unamortized discount
 
(2,933
)
 
(3,421
)
 
 
297,067

 
296,579

 
 
 
 
 
Total long-term debt
 
$
951,067

 
$
867,579


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

As of September 30, 2015, we have three interest rate swaps that hedge our exposure to the cash flow risk caused by the effects of LIBOR changes on $305 million of Credit Agreement advances. Our first interest rate swap effectively converts $155 million of our LIBOR based debt to fixed rate debt having an interest rate of 0.99% plus an applicable margin of 2.00% as of September 30, 2015, which equaled an effective interest rate of 2.99%. This swap contract matures in February 2016. We 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 September 30, 2015, which equaled an effective interest rate of 2.74%. Both of these swap contracts mature in July 2017.

- 14 -

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 September 30, 2015, we had no ineffectiveness on our cash flow hedges.

At September 30, 2015, 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)
September 30, 2015
 
 
 
 
 
 
 
 
Interest rate swaps designated as cash flow hedging instrument:
 
 
 
 
 
 
Variable-to-fixed interest rate swap contract ($155 million of LIBOR-based debt interest)
 
Other current   liabilities
 
$
(438
)
 
Accumulated other
    comprehensive loss
 
$
(438
)
Variable-to-fixed interest rate swap contracts ($150 million of LIBOR-based debt interest)
 
Other long-term   liabilities
 
(396
)
 
Accumulated other
    comprehensive loss
 
(396
)
 
 
 
 
$
(834
)
 
 
 
$
(834
)
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
Interest rate swaps designated as cash flow hedging instrument:
 
 
 
 
 
 
Variable-to-fixed interest rate swap contract ($155 million of LIBOR-based debt interest)
 
Other long-term   liabilities
 
$
(1,065
)
 
Accumulated other
    comprehensive loss
 
$
(1,065
)
Variable-to-fixed interest rate swap contracts ($150 million of LIBOR-based debt interest)
 
Other long-term   assets
 
1,019

 
Accumulated other
    comprehensive income
 
1,019

 
 
 
 
$
(46
)
 
 
 
$
(46
)

Interest Expense and Other Debt Information
Interest expense consists of the following components:
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
 
(In thousands)
Interest on outstanding debt:
 
 
 
 
Credit Agreement, net of interest on interest rate swaps
 
$
11,447

 
$
9,717

6.5% Senior Notes
 
14,631

 
14,571

8.25% Senior Notes
 
—

 
2,544

Amortization of discount and deferred debt issuance costs
 
1,425

 
1,384

Commitment fees
 
475

 
378

Total interest incurred
 
27,978

 
28,594

Less capitalized interest
 
668

 
1,226

Net interest expense
 
$
27,310

 
$
27,368

Cash paid for interest
 
$
31,165

 
$
35,627




- 15 -

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

The following table presents the percentage of total revenues generated by each of these customers:
 
 
Three Months Ended
September 30, 2015
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
HFC
 
84
%
 
82
%
 
82
%
 
84
%
Alon
 
9
%
 
11
%
 
10
%
 
9
%


Note 8:
Related Party Transactions

We serve HFC's refineries under long-term pipeline and terminal, tankage and throughput agreements expiring from 2019 to 2026. Under these agreements, HFC agrees to transport, store and throughput volumes of refined product and crude oil on our pipelines and terminal, tankage and loading rack facilities that result in minimum annual payments to us. These minimum annual payments or revenues are subject to annual tariff rate adjustments on July 1st each year based on the Producer Price Index (“PPI”) or Federal Energy Regulatory Commission (“FERC”) index. As of September 30, 2015, these agreements with HFC will result in minimum annual payments to us of $236.6 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 $2.4 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 $73.7 million and $67.5 million for the three months ended September 30, 2015 and 2014, respectively, and $214.3 million and $203.8 million for the nine months ended September 30, 2015 and 2014, respectively.
•
HFC charged us general and administrative services under the Omnibus Agreement of $0.6 million for each of the three months ended September 30, 2015 and 2014, and $1.8 million and $1.7 million for nine months ended September 30, 2015 and 2014, respectively.
•
We reimbursed HFC for costs of employees supporting our operations of $8.5 million and $9.9 million for the three months ended September 30, 2015 and 2014, respectively, and $24.7 million and $28.7 million for the nine months ended September 30, 2015 and 2014, respectively.
•
HFC reimbursed us $3.0 million and $3.1 million for the three months ended September 30, 2015 and 2014, respectively, for certain reimbursable costs and capital projects and $10.0 million and $11.6 million for the nine months ended September 30, 2015 and 2014, respectively.
•
We distributed $22.9 million and $20.4 million for the three months ended September 30, 2015 and 2014, respectively, to HFC as regular distributions on its common units and general partner interest, including general partner incentive distributions. For the nine months ended September 30, 2015 and 2014, we distributed $66.8 million and $59.5 million, respectively
•
Accounts receivable from HFC were $26.1 million and $33.4 million at September 30, 2015, and December 31, 2014, respectively.
•
Accounts payable to HFC were $3.7 million and $5.2 million at September 30, 2015, and December 31, 2014, respectively.

- 16 -

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



•
Revenues for the nine months ended September 30, 2015 and 2014, include $6.6 million and $8.2 million, respectively, of shortfall payments billed in 2014 and 2013, as HFC did not exceed its minimum volume commitment in any of the subsequent four quarters. Deferred revenue in the consolidated balance sheets at September 30, 2015, and December 31, 2014, includes $6.0 million and $7.3 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 $6.0 million deferred at September 30, 2015.


Note 9:
Partners’ Equity

As of September 30, 2015, HFC held 22,380,030 of our common units and the 2% general partner interest, which together constituted a 39% ownership interest in us.

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

The following table presents the allocation of the general partner interest in net income for the periods presented below: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(In thousands)
General partner interest in net income
 
$
483

 
$
423

 
$
1,344

 
$
1,051

General partner incentive distribution
 
10,347

 
8,517

 
29,491

 
24,283

Total general partner interest in net income
 
$
10,830

 
$
8,940

 
$
30,835

 
$
25,334


In addition to the allocation of net income as presented above, the consolidated statement of partners equity for the nine months ended September 30, 2015, reflects a cumulative revision of net income allocations between the general partnership interest and common units of approximately $8.8 million for net income related to years ended 2014 and prior.  This revision had no impact on historical limited partners’ per unit interest in earnings.

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

On October 22, 2015, we announced our cash distribution for the third quarter of 2015 of $0.555 per unit. The distribution is payable on all common and general partner units and will be paid November 13, 2015, to all unitholders of record on November 2, 2015.

The following table presents the allocation of our regular quarterly cash distributions to the general and limited partners for the periods in which they apply. Our distributions are declared subsequent to quarter end; therefore, the amounts presented do not reflect distributions paid during the periods presented below.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(In thousands, except per unit data)
General partner interest in distribution
 
$
901

 
$
825

 
$
2,639

 
$
2,422

General partner incentive distribution
 
10,347

 
8,517

 
29,491

 
24,283

Total general partner distribution
 
11,248

 
9,342

 
32,130

 
26,705

Limited partner distribution
 
32,554

 
30,648

 
96,051

 
90,625

Total regular quarterly cash distribution
 
$
43,802

 
$
39,990

 
$
128,181

 
$
117,330

Cash distribution per unit applicable to limited partners
 
$
0.5550

 
$
0.5225

 
$
1.6375

 
$
1.5450


- 17 -

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




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 would have been recorded in our financial statements at the time of acquisition as increases to our properties and equipment and intangible assets instead of decreases to our partners’ equity.


Note 10:
Environmental

We incurred no expense for environmental remediation obligations for the three months ended September 30, 2015 and 2014. For the nine months ended September 30, 2015 and 2014, we incurred expenses of $4.2 million and $0.7 million, respectively, for environmental remediation obligations. During the nine months ended September 30, 2015, we increased certain environmental cost accruals to reflect revisions to the cost estimates and the time frame for which the related environmental remediation and monitoring activities are expected to occur. The accrued environmental liability reflected in our consolidated balance sheets was $14.9 million and $12.0 million at September 30, 2015 and December 31, 2014, respectively, of which $12.0 million and $8.7 million, respectively, were classified as other long-term liabilities. These accruals include remediation and monitoring costs expected to be incurred over an extended period of time.

Under the Omnibus Agreement and certain transportation agreements and purchase agreements with HFC, HFC has agreed to indemnify us, subject to certain monetary and time limitations, for environmental noncompliance and remediation liabilities associated with certain assets transferred to us from HFC and occurring or existing prior to the date of such transfers. As of September 30, 2015, and December 31, 2014, our accrued environmental liability included $6.4 million and $6.8 million, respectively, for HFC indemnified liabilities. In addition, as of September 30, 2015, and December 31, 2014, $6.4 million and $6.8 million, respectively, was included in other assets representing amounts due from HFC related to indemnifications for environmental remediation liabilities.


Note 11:
Contingencies

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


Note 12:
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.


- 18 -

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




Condensed Consolidating Balance Sheet
September 30, 2015
 
Parent
 
Guarantor
Restricted Subsidiaries
 
Non-Guarantor Non-Restricted Subsidiaries
 
Eliminations
 
Consolidated
 
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2

 
$
42

 
$
10,812

 
$
—

 
$
10,856

Accounts receivable
 
—

 
30,027

 
4,146

 
(205
)
 
33,968

Prepaid and other current assets
 
285

 
3,113

 
1,175

 
—

 
4,573

Total current assets
 
287

 
33,182

 
16,133

 
(205
)
 
49,397

 
 
 
 
 
 
 
 
 
 
 
Properties and equipment, net
 
—

 
617,880

 
372,687

 
—

 
990,567

Investment in subsidiaries

 
591,162

 
284,232

 
—

 
(875,394
)
 
—

Transportation agreements, net
 
—

 
75,542

 
—

 
—

 
75,542

Goodwill
 
—

 
256,498

 
—

 
—

 
256,498

Equity method investments
 
—

 
79,378

 
—

 
—

 
79,378

Other assets
 
1,289

 
13,358

 
—

 
—

 
14,647

Total assets
 
$
592,738

 
$
1,360,070

 
$
388,820

 
$
(875,599
)
 
$
1,466,029

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

 
$
10,380

 
$
1,061

 
$
(205
)
 
$
11,236

Accrued interest
 
1,625

 
226

 
—

 
—

 
1,851

Deferred revenue
 
—

 
6,747

 
4,927

 
—

 
11,674

Accrued property taxes
 
—

 
2,789

 
3,688

 
—

 
6,477

Other current liabilities
 
57

 
4,245

 
—

 
—

 
4,302

Total current liabilities
 
1,682

 
24,387

 
9,676

 
(205
)
 
35,540


 
 
 
 
 
 
 
 
 
 
Long-term debt
 
297,067

 
654,000

 
—

 
—

 
951,067

Other long-term liabilities
 
192

 
21,172

 
168

 
—

 
21,532

Deferred revenue
 
—

 
37,242

 
—

 
—

 
37,242

Class B unit
 
—

 
32,107

 
—

 
—

 
32,107

Equity - partners
 
293,797

 
591,162

 
378,976

 
(970,138
)
 
293,797

Equity - noncontrolling interest
 
—

 
—

 
—

 
94,744

 
94,744

Total liabilities and partners’ equity
 
$
592,738

 
$
1,360,070

 
$
388,820

 
$
(875,599
)
 
$
1,466,029



- 19 -

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




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

 
$
2,828

 
$
—

 
$
—

 
$
2,830

Accounts receivable
 
—

 
34,274

 
6,044

 
(189
)
 
40,129

Prepaid and other current assets
 
212

 
2,856

 
1,315

 
—

 
4,383

Total current assets
 
214

 
39,958

 
7,359

 
(189
)
 
47,342

 
 
 
 
 
 
 
 
 
 
 
Properties and equipment, net
 
—

 
596,988

 
383,491

 
—

 
980,479

Investment in subsidiaries
 
622,100

 
285,247

 
—

 
(907,347
)
 
—

Transportation agreements, net
 
—

 
80,703

 
—

 
—

 
80,703

Goodwill
 
—

 
256,498

 
—

 
—

 
256,498

Equity method investments
 
—

 
24,478

 
—

 
—

 
24,478

Other assets
 
1,319

 
10,736

 
—

 
—

 
12,055

Total assets
 
$
623,633

 
$
1,294,608

 
$
390,850

 
$
(907,536
)
 
$
1,401,555

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

 
$
15,495

 
$
2,575

 
$
(189
)
 
$
17,881

Accrued interest
 
6,500

 
115

 
—

 
—

 
6,615

Deferred revenue
 
—

 
5,672

 
6,760

 
—

 
12,432

Accrued property taxes
 
—

 
1,902

 
801

 
—

 
2,703

Other current liabilities
 
45

 
4,408

 
118

 
—

 
4,571

Total current liabilities
 
6,545

 
27,592

 
10,254

 
(189
)
 
44,202

 
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
296,579

 
571,000

 
—

 
—

 
867,579

Other long-term liabilities
 
147

 
17,731

 
267

 
—

 
18,145

Deferred revenue
 
—

 
29,392

 
—

 
—

 
29,392

Class B unit
 
—

 
26,793

 
—

 
—

 
26,793

Equity - partners
 
320,362

 
622,100

 
380,329

 
(1,002,429
)
 
320,362

Equity - noncontrolling interest
 
—

 
—

 
—

 
95,082

 
95,082

Total liabilities and partners’ equity
 
$
623,633

 
$
1,294,608

 
$
390,850

 
$
(907,536
)
 
$
1,401,555




- 20 -

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




Condensed Consolidating Statement of Comprehensive Income
Three Months Ended September 30, 2015
 
Parent
 
Guarantor Restricted
Subsidiaries
 
Non-Guarantor Non-restricted Subsidiaries
 
Eliminations
 
Consolidated
 
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
Affiliates
 
$
—

 
$
68,989

 
$
4,727

 
$
—

 
$
73,716

Third parties
 
—

 
11,183

 
3,490

 
—

 
14,673

 
 
—

 
80,172

 
8,217

 
—

 
88,389

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

 
20,766

 
3,329

 
—

 
24,095

Depreciation and amortization
 


 
12,556

 
3,770

 
—

 
16,326

General and administrative
 
792

 
2,881

 
—

 
—

 
3,673

 
 
792

 
36,203

 
7,099

 
—

 
44,094

Operating income (loss)
 
(792
)
 
43,969

 
1,118

 
—

 
44,295

Equity in earnings (loss) of subsidiaries
 
40,343

 
838

 
—

 
(41,181
)
 
—

Equity in earnings of equity method investments
 
—

 
1,269

 
—

 
—

 
1,269

Interest expense
 
(5,066
)
 
(4,420
)
 
—

 
—

 
(9,486
)
Interest income
 
—

 
381

 
—

 
—

 
381

Other income (expense)
 
—

 
176

 
—

 
—

 
176

 
 
35,277

 
(1,756
)
 
—

 
(41,181
)
 
(7,660
)
Income (loss) before income taxes
 
34,485

 
42,213

 
1,118

 
(41,181
)
 
36,635

State income tax expense
 
—

 
(69
)
 
—

 
—

 
(69
)
Net income (loss)
 
34,485

 
42,144

 
1,118

 
(41,181
)
 
36,566

Allocation of net income attributable to noncontrolling interests
 
—

 
—

 
—

 
(2,081
)
 
(2,081
)
Net income (loss) attributable to Holly Energy Partners
 
34,485

 
42,144

 
1,118

 
(43,262
)
 
34,485

Other comprehensive income (loss)
 
(261
)
 
(261
)
 
—

 
261

 
(261
)
Comprehensive income (loss)
 
$
34,224

 
$
41,883

 
$
1,118

 
$
(43,001
)
 
$
34,224



- 21 -

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




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

 
$
64,200

 
$
3,562

 
$
(312
)
 
$
67,450

Third parties
 
—

 
12,218

 
2,462

 
—

 
14,680

 
 
—

 
76,418

 
6,024

 
(312
)
 
82,130

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

 
22,678

 
3,090

 
(312
)
 
25,456

Depreciation and amortization
 
—

 
11,855

 
3,628

 
—

 
15,483

General and administrative
 
273

 
1,993

 
—

 
—

 
2,266

 
 
273

 
36,526

 
6,718

 
(312
)
 
43,205

Operating income (loss)
 
(273
)
 
39,892

 
(694
)
 
—

 
38,925

Equity in earnings (loss) of subsidiaries
 
35,020

 
(521
)
 
—

 
(34,499
)
 
—

Equity in earnings of equity method investments
 
—

 
880

 
—

 
—

 
880

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

 
—

 
(8,585
)
Other income