e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
For the quarterly period ended March 31, 2007
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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)
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Delaware
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20-0833098 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
100 Crescent Court, Suite 1600
Dallas, Texas 75201-6915
(Address of principal executive offices)
(214) 871-3555
(Registrants telephone number, including area code)
None
(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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o |
Accelerated filer þ |
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of
the Exchange Act).
Yes o No þ
The number of the registrants outstanding common units at April 25, 2007 was 8,170,000.
HOLLY ENERGY PARTNERS, L.P.
INDEX
-2-
PART I. FINANCIAL INFORMATION
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 Managements Discussion and Analysis of Financial
Condition and Results of Operations in Part I are forward-looking statements. These statements
are based on managements beliefs and assumptions 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 believe that the expectations reflected in these
forward-looking statements are reasonable, we cannot assure you that our expectations will prove
correct. Therefore, actual outcomes and results could differ materially from what is expressed,
implied or forecast in these statements. Any differences could be caused by a number of factors,
including, but not limited to:
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Risks and uncertainties with respect to the actual quantities of petroleum products
shipped on our pipelines and/or terminalled in our terminals; |
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The economic viability of Holly Corporation, Alon USA, Inc. and our other customers; |
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The demand for refined petroleum products in markets we serve; |
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Our ability to successfully purchase and integrate any future acquired operations; |
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The availability and cost of our financing; |
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The possibility of reductions in production or shutdowns at refineries utilizing our
pipeline and terminal facilities; |
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The effects of current and future government regulations and policies; |
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Our operational efficiency in carrying out routine operations and capital construction projects; |
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The possibility of terrorist attacks and the consequences of any such attacks; |
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General economic conditions; and |
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Other financial, operations and legal risks and uncertainties detailed from time to time
in our Securities and Exchange Commission filings. |
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, in
conjunction with the forward-looking statements included in this Form 10-Q 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, 2006 in Risk Factors, and in this Form 10-Q in Managements 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-
Item 1. Financial Statements
Holly Energy Partners, L.P.
Consolidated Balance Sheets
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March 31, 2007 |
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December 31, |
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(Unaudited) |
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2006 |
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(In thousands, except unit data) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
11,100 |
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$ |
11,555 |
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Accounts receivable: |
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Trade |
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5,571 |
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7,339 |
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Affiliates |
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1,866 |
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3,518 |
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7,437 |
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10,857 |
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Prepaid and other current assets |
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821 |
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1,212 |
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Total current assets |
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19,358 |
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23,624 |
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Properties and equipment, net |
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158,324 |
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160,484 |
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Transportation agreements, net |
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55,801 |
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56,821 |
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Other assets |
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2,470 |
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2,644 |
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Total assets |
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$ |
235,953 |
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$ |
243,573 |
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LIABILITIES AND PARTNERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
2,117 |
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$ |
3,781 |
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Accrued interest |
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988 |
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2,941 |
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Deferred revenue |
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6,392 |
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5,486 |
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Accrued property taxes |
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508 |
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868 |
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Other current liabilities |
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730 |
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1,098 |
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Total current liabilities |
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10,735 |
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14,174 |
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Commitments and contingencies |
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Long-term debt |
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181,048 |
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180,660 |
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Other long-term liabilities |
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1,264 |
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1,550 |
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Minority interest |
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11,390 |
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10,963 |
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Partners equity (deficit): |
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Common unitholders (8,170,000 units issued and outstanding) |
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174,197 |
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176,844 |
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Subordinated unitholders (7,000,000 units issued and outstanding) |
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(71,769 |
) |
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(70,022 |
) |
Class B subordinated unitholders (937,500 units issued and
outstanding) |
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23,235 |
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23,469 |
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General partner interest (2% interest) |
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(94,147 |
) |
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(94,065 |
) |
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Total partners equity |
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31,516 |
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36,226 |
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Total liabilities and partners equity |
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$ |
235,953 |
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$ |
243,573 |
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See accompanying notes.
-4-
Holly Energy Partners, L.P.
Consolidated Statements of Income
(Unaudited)
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Three Months Ended March 31, |
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2007 |
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2006 |
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(In thousands, except per unit data) |
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Revenues: |
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Affiliates |
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$ |
13,790 |
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$ |
12,482 |
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Third parties |
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10,082 |
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9,956 |
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23,872 |
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22,438 |
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Operating costs and expenses: |
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Operations |
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7,777 |
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7,109 |
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Depreciation and amortization |
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4,071 |
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3,793 |
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General and administrative |
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1,287 |
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1,224 |
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13,135 |
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12,126 |
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Operating income |
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10,737 |
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10,312 |
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Other income (expense): |
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Interest income |
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185 |
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243 |
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Interest expense |
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(3,358 |
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(3,175 |
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Gain on sale of assets |
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297 |
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(2,876 |
) |
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(2,932 |
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Income before minority interest |
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7,861 |
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7,380 |
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Minority interest in Rio Grande Pipeline Company |
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(427 |
) |
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(245 |
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Net income |
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7,434 |
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7,135 |
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Less general partner interest in net income |
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580 |
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327 |
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Limited partners interest in net income |
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$ |
6,854 |
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$ |
6,808 |
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Net income per limited partner unit -
basic and diluted |
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$ |
0.43 |
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$ |
0.42 |
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Weighted average limited partners units
outstanding |
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16,108 |
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16,108 |
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See accompanying notes.
-5-
Holly Energy Partners, L.P.
Consolidated Statements of Cash Flows
(Unaudited)
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Three Months Ended March 31, |
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2007 |
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2006 |
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(In thousands) |
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Cash flows from operating activities |
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Net income |
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$ |
7,434 |
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$ |
7,135 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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4,071 |
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3,793 |
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Minority interest in Rio Grande Pipeline Company |
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427 |
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245 |
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Amortization of restricted and performance units |
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302 |
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143 |
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Gain on sale of assets |
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(297 |
) |
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(Increase) decrease in current assets: |
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Accounts receivable trade |
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1,768 |
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(283 |
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Accounts receivable affiliates |
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1,652 |
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86 |
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Prepaid and other current assets |
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391 |
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(172 |
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Increase (decrease) in current liabilities: |
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Accounts payable |
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(1,664 |
) |
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(481 |
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Accrued interest |
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(1,953 |
) |
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(1,932 |
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Deferred revenue |
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906 |
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|
484 |
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Accrued property tax |
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(360 |
) |
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(385 |
) |
Other current liabilities |
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(368 |
) |
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(197 |
) |
Other, net |
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284 |
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126 |
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Net cash provided by operating activities |
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12,593 |
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8,562 |
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Cash flows from investing activities |
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Additions to properties and equipment |
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(912 |
) |
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(817 |
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Proceeds from sale of assets |
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325 |
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Net cash used for investing activities |
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(587 |
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(817 |
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Cash flows from financing activities |
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Distributions to partners |
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(11,538 |
) |
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(10,461 |
) |
Purchase of units for restricted grants |
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(908 |
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Cash distributions to minority interest |
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(600 |
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Other |
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(15 |
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Net cash used for financing activities |
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(12,461 |
) |
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(11,061 |
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Cash and cash equivalents |
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Decrease for period |
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(455 |
) |
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(3,316 |
) |
Beginning of period |
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11,555 |
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20,583 |
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End of period |
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$ |
11,100 |
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$ |
17,267 |
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See accompanying notes.
-6-
Holly Energy Partners, L.P.
Consolidated Statement of Partners Equity (Deficit)
(Unaudited)
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Class B |
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Common |
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Subordinated |
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Subordinated |
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General Partner |
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Units |
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Units |
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Units |
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Interest |
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Total |
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(In thousands) |
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Balance December 31, 2006 |
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$ |
176,844 |
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|
$ |
(70,022 |
) |
|
$ |
23,469 |
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$ |
(94,065 |
) |
|
$ |
36,226 |
|
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Distributions to partners |
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(5,518 |
) |
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|
(4,725 |
) |
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|
(633 |
) |
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|
(662 |
) |
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|
(11,538 |
) |
Purchase of units for
restricted grants |
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(908 |
) |
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|
(908 |
) |
Amortization of
restricted and
performance units |
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|
302 |
|
|
|
|
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|
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|
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|
302 |
|
Net income |
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|
3,477 |
|
|
|
2,978 |
|
|
|
399 |
|
|
|
580 |
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|
7,434 |
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Balance March 31, 2007 |
|
$ |
174,197 |
|
|
$ |
(71,769 |
) |
|
$ |
23,235 |
|
|
$ |
(94,147 |
) |
|
$ |
31,516 |
|
|
|
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|
See accompanying notes.
-7-
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, currently 45% owned by Holly Corporation and its subsidiaries
(collectively Holly). HEP commenced operations July 13, 2004 upon the completion of its initial
public offering. In this document, the words we, our, ours and us refer to HEP unless the
context otherwise indicates.
We operate in one business segment the operation of petroleum pipelines and terminal facilities.
One of Hollys wholly-owned subsidiaries owns a refinery in Artesia, New Mexico, which Holly
operates in conjunction with crude, vacuum distillation and other facilities situated in Lovington,
New Mexico (collectively, the Navajo Refinery). In July 2005, we acquired the two parallel
intermediate feedstock pipelines, which connect the Lovington, New Mexico and Artesia, New Mexico
refining facilities. The Navajo Refinery produces high-value refined products such as gasoline,
diesel fuel and jet fuel and serves markets in the southwestern United States and northern Mexico.
In conjunction with Hollys operation of the Navajo Refinery, we operate refined product pipelines
as part of the product distribution network of the Navajo Refinery. Our terminal operations
serving the Navajo Refinery include a truck rack at the Navajo Refinery and five integrated refined
product terminals located in New Mexico, Texas and Arizona.
Another of Hollys wholly-owned subsidiaries owns a refinery located near Salt Lake City, Utah (the
Woods Cross Refinery). Our operations serving the Woods Cross Refinery include a truck rack at
the Woods Cross Refinery, a refined product terminal in Spokane, Washington and a 50% non-operating
interest in product terminals in Boise and Burley, Idaho.
In February 2005, we acquired from Alon USA, Inc. and several of its wholly-owned subsidiaries
(collectively, Alon) four refined products pipelines, an associated tank farm and two refined
products terminals. These pipelines and terminals are located primarily in Texas and transport and
terminal light refined products for Alons refinery in Big Spring, Texas.
Additionally, we own a refined product terminal in Mountain Home, Idaho, and a 70% interest in Rio
Grande Pipeline Company (Rio Grande), which provides transportation of liquid petroleum gases to
northern Mexico.
The consolidated financial statements for the three months ended March 31, 2007 and 2006 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 are, in the opinion of management, 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 accounting principles generally
accepted in the United States of America 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, 2006. 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, 2007. Certain reclassifications have been made to prior reported amounts to
conform to current classifications.
Recent Accounting Pronouncements
Interpretation No. 48 Accounting for Uncertainty in Income Taxes
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes.
This interpretation clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements by prescribing a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return.
-8-
This interpretation also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. We adopted this standard
effective January 1, 2007. The adoption of this standard did not have a material impact on our
financial condition, results of operations and cash flows.
Note 2: Properties and Equipment
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|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Pipelines and terminals |
|
$ |
194,152 |
|
|
$ |
194,008 |
|
Land and right of way |
|
|
22,458 |
|
|
|
22,486 |
|
Other |
|
|
6,947 |
|
|
|
6,947 |
|
Construction in progress |
|
|
2,451 |
|
|
|
1,539 |
|
|
|
|
|
|
|
|
|
|
|
226,008 |
|
|
|
224,980 |
|
Less accumulated depreciation |
|
|
67,684 |
|
|
|
64,496 |
|
|
|
|
|
|
|
|
|
|
$ |
158,324 |
|
|
$ |
160,484 |
|
|
|
|
|
|
|
|
During the three months ended March 31, 2007 and 2006, we did not capitalize any interest
related to major construction projects.
Note 3: Transportation Agreements
The costs of two transportation agreements are recorded on our consolidated balance sheets at March
31, 2007:
|
|
Costs incurred by Rio Grande in constructing certain
pipeline and terminal facilities located in Mexico, which were
then contributed to an affiliate of Pemex, the national oil
company of Mexico. In exchange, Rio Grande received a 10-year
transportation agreement from BP plc (BP) expiring in April
2007. This asset is being amortized over the 10-year term of
the agreement. |
|
|
|
A portion of the total purchase price of the Alon assets
was allocated to the transportation agreement asset based on
the fair value appraisal provided by an independent firm.
This asset is being amortized over 30 years ending 2035, the
15-year initial term of the Alon PTA plus the expected 15-year
extension period. |
The carrying amounts of the transportation agreements are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Rio Grande transportation agreement |
|
$ |
20,836 |
|
|
$ |
20,836 |
|
Alon transportation agreement |
|
|
59,933 |
|
|
|
59,933 |
|
|
|
|
|
|
|
|
|
|
|
80,769 |
|
|
|
80,769 |
|
Less accumulated amortization |
|
|
24,968 |
|
|
|
23,948 |
|
|
|
|
|
|
|
|
|
|
$ |
55,801 |
|
|
$ |
56,821 |
|
|
|
|
|
|
|
|
Note 4: Debt
Credit Agreement
In conjunction with our initial public offering on July 13, 2004, we entered into a four-year,
$100.0 million senior secured revolving credit agreement (the Credit Agreement) expiring in July
2008. Union Bank of California, N.A. is one of the lenders and serves as administrative agent
under this agreement. As of March 31, 2007 and December 31, 2006, we had no amounts outstanding
under the Credit Agreement.
-9-
The Credit Agreement is available to fund capital expenditures, acquisitions, and working capital
and for general partnership purposes. Advances under the Credit Agreement that are designated for
working capital are short-term liabilities. Other advances under the Credit Agreement are
classified as long-term liabilities. In addition, the Credit Agreement is available to fund
letters of credit up to a $50.0 million sub-limit. Up to $5.0 million is available to fund
distributions to unitholders.
We have the right to request an increase in the maximum amount of the Credit Agreement, up to
$175.0 million. Such request will become effective if (a) certain conditions specified in the
Credit Agreement are met and (b) existing lenders under the Credit Agreement or other financial
institutions reasonably acceptable to the administrative agent commit to lend such increased
amounts under the agreement.
Our obligations under the Credit Agreement are secured by substantially all of our assets.
Indebtedness under the Credit Agreement is recourse to HEP Logistics Holdings, L.P., our general
partner, and guaranteed by our wholly-owned subsidiaries.
We may prepay all loans at any time without penalty. We are required to reduce all working capital
borrowings under the Credit Agreement to zero for a period of at least 15 consecutive days once
each twelve-month period prior to the maturity date of the agreement.
Indebtedness under the Credit Agreement bears interest, at our option, at either (a) the base rate
as announced by the administrative agent plus an applicable margin (ranging from 0.25% to 1.00%) or
(b) at a rate equal to the London Interbank Offered Rate (LIBOR) plus an applicable margin
(ranging from 1.50% to 2.25%). In each case, the applicable margin is based upon the ratio of our
funded debt (as defined in the agreement) to EBITDA (earnings before interest, taxes, depreciation
and amortization, as defined in the Credit Agreement). We incur a commitment fee on the unused
portion of the Credit Agreement at a rate of 0.375% or 0.500% based upon the ratio of our funded
debt to EBITDA for the four most recently completed fiscal quarters. At March 31, 2007, we are
subject to the 0.500% rate on the $100.0 million of the unused commitment on the Credit Agreement.
The agreement matures in July 2008. At that time, the agreement will terminate and all outstanding
amounts thereunder will be due and payable.
The Credit Agreement imposes certain requirements, 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 a merger or consolidation, or sell
assets; and covenants that require maintenance of EBITDA to interest expense ratio and debt to
EBITDA ratio. If an event of default exists under the agreement, the lenders will be able to
accelerate the maturity of the debt and exercise other rights and remedies.
Senior Notes Due 2015
Our senior notes maturing March 1, 2015 are registered with the SEC and bear interest at 6.25%
(Senior Notes). The Senior Notes are unsecured and impose certain restrictive covenants,
including limitations on our ability to incur additional indebtedness, make investments, sell
assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter
into mergers. At any time when the Senior Notes are rated investment grade by both Moodys and
Standard & Poors and no default or event of default exists, we will not be subject to many of the
foregoing covenants. Additionally, we have certain redemption rights under the Senior Notes.
The $185.0 million principal amount of Senior Notes is recorded at $181.0 million on our
consolidated balance sheets at March 31, 2007. The difference of $4.0 million is due to $3.0
million of unamortized discount and $1.0 million relating to the fair value of the interest rate
swap contract discussed below.
-10-
Interest Rate Risk Management
We have entered into an interest rate swap contract to effectively convert the interest expense
associated with $60.0 million of our 6.25% Senior Notes from a fixed rate to a variable rate. The
interest rate on the $60.0 million notional amount is equal to three-month LIBOR plus an applicable
margin of 1.1575%, which equaled an effective interest rate of 6.52% on $60.0 million of the debt
during the quarter ended March 31, 2007. The maturity of the swap contract is March 1, 2015,
matching the maturity of the Senior Notes.
This interest rate swap has been designated as a fair value hedge as defined by SFAS No. 133. Our
interest rate swap meets the conditions required to assume no ineffectiveness under SFAS No. 133
and, therefore, we have used the shortcut method of accounting prescribed for fair value hedges
by SFAS No. 133. Accordingly, we adjust the carrying value of the swap to its fair value each
quarter, with an offsetting entry to adjust the carrying value of the debt securities whose fair
value is being hedged. We record interest expense equal to the variable rate payments under the
swap.
The fair value of our interest rate swap of $1.0 million and $1.2 million is included in Other
long-term liabilities in our consolidated balance sheets at March 31, 2007 and December 31, 2006,
respectively. The offsetting entry to adjust the carrying value of the debt securities whose fair
value is being hedged is recognized as a reduction of Long-term debt on our consolidated balance
sheets at March 31, 2007 and December 31, 2006.
Other Debt Information
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Interest on outstanding debt: |
|
|
|
|
|
|
|
|
Senior Notes, net of interest rate swap |
|
$ |
2,932 |
|
|
$ |
2,810 |
|
Credit Agreement |
|
|
|
|
|
|
|
|
Amortization of discount and deferred issuance costs |
|
|
303 |
|
|
|
242 |
|
Commitment fees |
|
|
123 |
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense |
|
$ |
3,358 |
|
|
$ |
3,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest(1) |
|
$ |
5,135 |
|
|
$ |
4,865 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of cash received under our interest rate swap agreement of $1.9 million in each of
the quarters ended March 31, 2007 and 2006. |
We estimate that the fair value of our Senior Notes was $176.7 million at March 31, 2007, based on
a determination by a third-party investment firm.
Note 5: Employees, Retirement and Benefit Plans
Employees who provide direct services to us are employed by Holly Logistic Services, L.L.C., a
Holly subsidiary. Their costs, including salaries, bonuses, payroll taxes, benefits, and other
direct costs, are charged to us monthly in accordance with a three-year omnibus agreement we
entered into with Holly in July 2004 (the Omnibus Agreement).
These employees participate in the retirement and benefit plans of Holly. Our share of retirement
and benefits costs was $0.4 million and 0.2 million for the three months ended March 31, 2007 and
2006, respectively.
We have adopted a Long-Term Incentive Plan for employees, consultants and directors who perform
services for us. The Long-Term Incentive Plan consists of four components: restricted units,
performance units, unit options and unit appreciation rights.
-11-
On March 31, 2007, we had two types of equity-based compensation, which are described below. The
compensation cost charged against income for these plans was $0.3 million and $0.2 million for the
three months ended March 31, 2007 and 2006, respectively. It is currently our policy to purchase
units in the open market instead of issuing new units for settlement of restricted unit grants. At
March 31, 2007, 350,000 units were authorized to be granted under the equity-based compensation
plans, of which 253,255 had not yet been granted.
Restricted Units
Under our Long-Term Incentive Plan, we grant restricted units to selected employees, consultants
and directors who perform services for us, with vesting generally over a period of one to five
years. Although full ownership of the units does not transfer to the recipients until the units
vest, the recipients have distribution and voting rights on these units from the date of grant.
The vesting for certain key executives is contingent upon certain earnings per unit targets being
realized. The fair value of each unit of restricted unit awards was measured at the market price
as of the date of grant and is being amortized over the vesting period, including the units issued
to the key executives, as we expect those units to fully vest.
A summary of restricted unit activity as of March 31, 2007, and changes during the three months
ended March 31, 2007, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
|
|
|
|
Grant-Date |
|
|
Contractual |
|
|
Value |
|
Restricted Units |
|
Grants |
|
|
Fair Value |
|
|
Term |
|
|
($000) |
|
Outstanding January 1, 2007 (not vested) |
|
|
36,597 |
|
|
|
40.21 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
19,687 |
|
|
|
46.12 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting and transfer of full ownership to recipients |
|
|
(4,170 |
) |
|
|
39.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 (not vested) |
|
|
52,114 |
|
|
$ |
42.50 |
|
|
1.4 years |
|
$ |
2,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were 4,170 units vested and transferred to recipients during the three months ended March 31,
2007. As of March 31, 2007, there was $1.1 million of total unrecognized compensation costs
related to nonvested restricted unit grants. That cost is expected to be recognized over a
weighted-average period of 1.4 years.
Performance Units
Under our Long-Term Incentive Plan, we grant performance units to selected executives and employees
who perform services for us. These performance units are payable upon meeting the performance
criteria over a service period, and generally vest over a period of three years. The amount
payable under the initial performance grant of 1,514 units in 2005 is based upon our unit price and
upon our total unitholder return during the requisite period as compared to the total unitholder
return of a selected peer group of partnerships. The amount payable under all other performance
unit grants is based upon the growth in distributions per limited partner unit during the requisite
period.
We granted 12,321 performance units to certain officers in February 2007. These units will vest
over a three-year performance period ending December 31, 2009, and are payable in HEP common units.
The number of units actually earned will be based on the growth of distributions to limited
partners over the performance period, and can range from 50% to 150% of the number of performance
units issued. The fair value of these performance units is based on the grant date closing unit
price of $46.12 and will apply to the number of units ultimately awarded.
-12-
A summary of performance units activity as of March 31, 2007 and changes during the three months
ended March 31, 2007 is presented below:
|
|
|
|
|
|
|
Payable |
Performance Units |
|
In Units |
Outstanding at January 1, 2007 (not vested) |
|
|
14,015 |
|
Vesting and payment of cash benefit to recipients |
|
|
|
|
Granted |
|
|
12,321 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 (not vested) |
|
|
26,336 |
|
|
|
|
|
|
There were no payments for performance units vesting during the three months ended March 31,
2007. Based on the weighted average fair value at March 31, 2007 of $47.62, there was $0.8 million
of total unrecognized compensation cost related to nonvested performance units. That cost is
expected to be recognized over a weighted-average period of 2.2 years.
Note 6: Significant Customers
All revenues are domestic revenues, of which over 90% are currently generated from our three
largest customers: Holly, Alon and BP. The major concentration of our petroleum products pipeline
systems revenues is derived from activities conducted in the southwest United States. The
following table presents the percentage of total revenues generated by each of these three
customers:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
Holly |
|
|
58 |
% |
|
|
56 |
% |
Alon |
|
|
26 |
% |
|
|
31 |
% |
BP |
|
|
13 |
% |
|
|
11 |
% |
Note 7: Related Party Transactions
Holly
We serve Hollys refineries in New Mexico and Utah under two 15-year pipeline and terminal
agreements. One of these agreements relates to the pipelines and terminals contributed by Holly to
us at the time of our initial public offering and expires in 2019 (Holly PTA). Our other
agreement with Holly relates to the Intermediate Pipelines acquired from Holly in July 2005 and
expires in 2020 (Holly IPA). The substantial majority of our business is devoted to providing
transportation and terminalling services to Holly. The minimum revenue commitments under the Holly
PTA and the Holly IPA increase each year at a rate equal to the percentage change in the producer
price index (PPI), but will not decrease as a result of a decrease in the PPI.
Following the July 1, 2006 PPI rate adjustment, the volume commitments by Holly under the Holly PTA
will produce at least $38.5 million of revenue for the twelve months ending June 30, 2007. Under
the Holly IPA, Holly agreed to transport volumes of intermediate products on the Intermediate
Pipelines that following the July 1, 2006 PPI rate adjustment, will result in minimum funds to us
of $12.4 million for the twelve months ended June 30, 2007.
If Holly fails to meet its minimum revenue commitments in any quarter, it is required to pay us in
cash the amount of any shortfall by the last day of the month following the end of the quarter. A
shortfall payment may be applied as a credit in the following four quarters after Hollys minimum
obligations are met.
Under the Omnibus Agreement expiring in 2019 that we entered with Holly in July 2004, we pay Holly
an annual administrative fee, currently in the amount of $2.0 million, for the provision by Holly
or its affiliates of various general and administrative services to us for three years following
the closing of our initial
-13-
public offering. This fee does not include the salaries of pipeline and terminal personnel or the
cost of their employee benefits, such as 401(k), pension and health insurance benefits, which are
separately charged to us by Holly. We also reimburse Holly and its affiliates for direct expenses
they incur on our behalf.
|
|
Pipeline and terminal revenues received from Holly were
$13.8 million and $12.5 million for the three months ended
March 31, 2007 and 2006, respectively. These amounts include
the revenues received under the Holly PTA and Holly IPA. |
|
|
|
Holly charged general and administrative services under
the Omnibus Agreement of $0.5 million for the three months
ended March 31, 2007 and 2006. |
|
|
|
We reimbursed Holly for costs of employees supporting our
operations of $2.3 million and $1.9 million for the three
months ended March 31, 2007 and 2006, respectively. |
|
|
|
Holly reimbursed $74,000 and $56,000 to us for certain
costs paid on their behalf for the three months ended March
31, 2007 and 2006, respectively. |
|
|
|
In the three months ended March 31, 2007 and 2006, we
distributed $5.4 million and $4.8 million, respectively, to
Holly as regular distributions on its subordinated units,
common units and general partner interest. |
|
|
|
Our net accounts receivable from Holly were $1.9 million
and $3.5 million at March 31, 2007 and December 31, 2006,
respectively. |
|
|
|
Holly has failed to meet its minimum revenue commitment
for each of the first seven quarters of the Holly IPA. We
have charged Holly $4.0 million for these shortfalls to date,
$0.6 million and $0.2 million of which are included in
affiliate accounts receivable at March 31, 2007 and December
31, 2006, respectively. |
|
|
|
We recognized $0.5 million of shortfalls billed under the Holly IPA in 2006 as additional
revenues in the first quarter of 2007, as Holly did not exceed its minimum revenue obligation in
any of the subsequent four quarters. Deferred revenue in the consolidated balance sheets at
March 31, 2007 and December 31, includes $2.5 million and $2.4 million, respectively, relating
to the Holly IPA. It is possible that Holly may not exceed its minimum obligations under the
Holly IPA to allow Holly to receive credit for any of the $2.5 million deferred at March 31,
2007. |
BP
We have a 70% ownership interest in Rio Grande and BP owns the other 30%. Due to the ownership
interest and resulting consolidation, BP is a related party to us.
|
|
BP is the sole customer of Rio Grande. BPs agreement to ship on the Rio Grande pipeline expires in April
2007, and will continue year-to-year thereafter unless cancelled by either party prior to the beginning of the
previous contract year. We recorded revenues from them of $3.0 million and $2.4 million in the three months ended
March 31, 2007 and 2006, respectively. |
|
|
|
Rio Grande paid distributions to BP of $0.6 million in the three months ended March 31, 2006. |
|
|
|
Included in our accounts receivable trade at March 31, 2007 and December 31, 2006 were $1.2 million and $2.1
million, respectively, which represented the receivable balance of Rio Grande from BP. |
Alon
We have a 15-year pipelines and terminals agreement with Alon (the Alon PTA), expiring in 2020,
under which Alon has agreed to transport on our pipelines and throughput through our terminals
volumes of refined products that results in a minimum level of annual revenue. The agreed upon
tariffs are increased
-14-
or decreased annually at a rate equal to the percentage change in PPI, but not below the initial
tariff rate. The total annual commitment for 2007, including the effect of the March 1, 2007 PPI
adjustment, is $20.8 million.
Alon became a related party when it acquired all of our Class B subordinated units in connection
with our acquisition of assets from them on February 28, 2005.
|
|
We recognized $4.4 million and $5.1 million of revenues
for pipeline transportation and terminalling services under
the Alon PTA and $1.8 million and $1.7 million under a
pipeline capacity lease for the three months ended March 31,
2007 and 2006, respectively. The capacity lease agreements
have remaining terms from less than a year up to three and
one-quarter years. |
|
|
|
We paid $0.6 million to Alon for distributions on our
Class B subordinated units for the three months ended March
31, 2007 and 2006. |
|
|
|
Included in our accounts receivable trade at March 31,
2007 and December 31, 2006 were $4.5 million and $5.0 million,
respectively, which represented the receivable balance from
Alon. |
|
|
|
Deferred revenue includes $3.9 million and $3.1 million
of minimum revenue commitments under the Alon PTA at March 31,
2007 and December 31, 2006, respectively. |
Note 8: Partners Equity and Cash Distributions
Issuances of units
Holly currently holds 7,000,000 of our subordinated units and 70,000 of our common units, which
constitutes a 45% ownership interest in us, including the 2% general partner interest.
Hollys subordinated units have the right to receive distributions of available cash from operating
surplus in an amount equal to the minimum quarterly distribution of $0.50 per quarter, plus any
arrearages in the payment of the minimum quarterly distribution on the common units from prior
quarters, before any distributions of available cash from operating surplus may be made on the
subordinated units. The purpose of the subordinated units is to increase the likelihood that cash
is available for common unit distributions during the subordination period. The subordination
period will extend until the first day of any quarter beginning after June 30, 2009 that each of
the following tests are met: distributions of available cash from operating surplus on each of the
outstanding common units and subordinated units equaled or exceeded the minimum quarterly
distribution for each of the three consecutive, non-overlapping four-quarter periods immediately
preceding that date; the adjusted operating surplus (as defined in its partnership agreement)
generated during each of the three consecutive, non-overlapping four-quarter periods immediately
preceding that date equaled or exceeded the sum of the minimum quarterly distributions on all of
the outstanding common units and subordinated units during those periods on a fully diluted basis
and the related distribution on the 2% general partner interest during those periods; and there are
no arrearages in payment of the minimum quarterly distribution on the common units. If the
unitholders remove the general partner without cause, the subordination period may end before June
30, 2009. The Holly subordinated units may convert to common units on a one-for-one basis when
certain conditions are met. The partnership agreement sets forth the calculation to be used to
determine the amount and priority of cash distributions that the common unitholders, subordinated
unitholders and general partner will receive.
Under our registration statement filed with the SEC using a shelf registration process, we may
offer from time to time up to $800.0 million of our securities, through one or more prospectus
supplements that would describe, among other things, the specific amounts, prices and terms of any
securities offered and how the proceeds would be used. Any proceeds from the sale of securities
would be used for general business purposes, which may include, among other things, funding
acquisitions of assets or businesses, working capital, capital expenditures, investments in
subsidiaries, the retirement of existing debt and/or the repurchase of common units or other
securities.
-15-
Allocations of Net Income
Net income is allocated between limited partners and the general partner interest in accordance
with the provisions of the partnership agreement. Net income allocated to the general partner
includes any incentive distributions declared in the period. After the amount of incentive
distributions is allocated to the general partner, the remaining net income for the period is
generally allocated to the partners based on their weighted average ownership percentage during the
period.
Cash Distributions
We consider regular cash distributions to unitholders on a quarterly basis, although there is no
assurance as to the future cash distributions since they are dependent upon future earnings, cash
flows, capital requirements, financial condition and other factors. Our Credit Agreement prohibits
us from making cash distributions if any potential default or event of default, as defined in the
Credit Agreement, occurs or would result from the cash distribution.
Within 45 days after the end of each quarter, we will distribute all of our available cash (as
defined in our partnership agreement) to unitholders of record on the applicable record date. The
amount of available cash generally is all cash on hand at the end of the quarter; less the amount
of cash reserves established by our general partner to provide for the proper conduct of our
business, comply with applicable law, any of our debt instruments, or other agreements; or provide
funds for distributions to our unitholders and to our general partner for any one or more of the
next four quarters; plus all cash on hand on the date of determination of available cash for the
quarter resulting from working capital borrowings made after the end of the quarter. Working
capital borrowings are generally borrowings that are made under our revolving Credit Agreement and
in all cases are used solely for working capital purposes or to pay distributions to partners.
We make distributions of available cash from operating surplus for any quarter during any
subordination period in the following manner: firstly, 98% to the common unitholders, pro rata, and
2% to the general partner, until we distribute for each outstanding common unit an amount equal to
the minimum quarterly distribution for that quarter; secondly, 98% to the common unitholders, pro
rata, and 2% to the general partner, until we distribute for each outstanding common unit an amount
equal to any arrearages in payment of the minimum quarterly distribution on the common units for
any prior quarters during the subordination period; thirdly, 98% to the subordinated unitholders,
pro rata, and 2% to the general partner, until we distribute for each subordinated unit an amount
equal to the minimum quarterly distribution for that quarter; and thereafter, cash in excess of the
minimum quarterly distributions is distributed to the unitholders and the general partner based on
the percentages below.
The general partner, HEP Logistics Holdings, L.P., is entitled to incentive distributions if the
amount we distribute with respect to any quarter exceeds specified target levels shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marginal Percentage Interest in |
|
|
Total Quarterly Distribution |
|
Distributions |
|
|
Target Amount |
|
Unitholders |
|
General Partner |
Minimum Quarterly Distribution |
|
$0.50 |
|
98% |
|
|
2 |
% |
First Target Distribution |
|
Up to $0.55 |
|
98% |
|
|
2 |
% |
Second Target Distribution |
|
above $0.55 up to $0.625 |
|
85% |
|
|
15 |
% |
Third Target distribution |
|
above $0.625 up to $0.75 |
|
75% |
|
|
25 |
% |
Thereafter |
|
Above $0.75 |
|
50% |
|
|
50 |
% |
-16-
The following table presents the allocation of our regular quarterly cash distributions to the
general and limited partners for each period in which declared.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands, except per unit data) |
|
General partner interest |
|
$ |
222 |
|
|
$ |
205 |
|
General partner incentive distribution |
|
|
440 |
|
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general partner distribution |
|
|
662 |
|
|
|
394 |
|
Limited partner distribution |
|
|
10,876 |
|
|
|
10,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total regular quarterly cash distribution |
|
$ |
11,538 |
|
|
$ |
10,461 |
|
|
|
|
|
|
|
|
Cash distribution per unit applicable to limited partners |
|
$ |
0.675 |
|
|
$ |
0.625 |
|
|
|
|
|
|
|
|
On April 27, 2007, we announced a cash distribution for the first quarter of 2007 of $0.69 per
unit. The distribution is payable on all common, subordinated, and general partner units and will
be paid May 15, 2007 to all unitholders of record on May 7, 2007. The aggregate amount of the
distribution will be $11.9 million, including $0.5 million paid to the general partner as an
incentive distribution.
As a master limited partnership, we distribute our available cash, which exceeds our net income
because depreciation and amortization expense represents a non-cash charge against income. The
result is a decline in partners equity since our regular quarterly distributions exceed our
quarterly net income.
Note 9: Supplemental Guarantor/Non-Guarantor Financial Information
Obligations of Holly Energy Partners, L.P. (Parent) under the 6.25% Senior Notes have been
jointly and severally guaranteed by each of its direct and indirect wholly-owned subsidiaries
(Guarantor Subsidiaries). These guarantees are full and unconditional. Rio Grande
(Non-Guarantor), in which we have a 70% ownership interest, is the only subsidiary which has not
guaranteed these obligations.
The following financial information presents condensed consolidating balance sheets, statements of
income, and statements of cash flows of the Parent, the Guarantor Subsidiaries and the
Non-Guarantor. The information has been presented as if the Parent accounted for its ownership in
the Guarantor Subsidiaries, and the Guarantor Subsidiaries accounted for the ownership of the
Non-Guarantor, using the equity method of accounting.
-17-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet |
|
|
|
|
|
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
March 31, 2007 |
|
Parent |
|
|
Subsidiaries |
|
|
Guarantor |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(in thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2 |
|
|
$ |
6,287 |
|
|
$ |
4,811 |
|
|
$ |
|
|
|
$ |
11,100 |
|
Accounts receivable |
|
|
|
|
|
|
6,277 |
|
|
|
1,160 |
|
|
|
|
|
|
|
7,437 |
|
Intercompany accounts receivable (payable) |
|
|
(96,799 |
) |
|
|
97,027 |
|
|
|
(228 |
) |
|
|
|
|
|
|
|
|
Prepaid and other current assets |
|
|
105 |
|
|
|
716 |
|
|
|
|
|
|
|
|
|
|
|
821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
(96,692 |
) |
|
|
110,307 |
|
|
|
5,743 |
|
|
|
|
|
|
|
19,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties and equipment, net |
|
|
|
|
|
|
125,520 |
|
|
|
32,804 |
|
|
|
|
|
|
|
158,324 |
|
Investment in subsidiaries |
|
|
310,137 |
|
|
|
26,579 |
|
|
|
|
|
|
|
(336,716 |
) |
|
|
|
|
Transportation agreements, net |
|
|
|
|
|
|
55,771 |
|
|
|
30 |
|
|
|
|
|
|
|
55,801 |
|
Other assets |
|
|
1,415 |
|
|
|
1,055 |
|
|
|
|
|
|
|
|
|
|
|
2,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
214,860 |
|
|
$ |
319,232 |
|
|
$ |
38,577 |
|
|
$ |
(336,716 |
) |
|
$ |
235,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
|
|
|
$ |
1,761 |
|
|
$ |
356 |
|
|
$ |
|
|
|
$ |
2,117 |
|
Accrued interest |
|
|
988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
988 |
|
Deferred revenue |
|
|
|
|
|
|
6,392 |
|
|
|
|
|
|
|
|
|
|
|
6,392 |
|
Accrued property taxes |
|
|
|
|
|
|
464 |
|
|
|
44 |
|
|
|
|
|
|
|
508 |
|
Other current liabilities |
|
|
365 |
|
|
|
157 |
|
|
|
208 |
|
|
|
|
|
|
|
730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,353 |
|
|
|
8,774 |
|
|
|
608 |
|
|
|
|
|
|
|
10,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
181,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181,048 |
|
Other long-term liabilities |
|
|
943 |
|
|
|
321 |
|
|
|
|
|
|
|
|
|
|
|
1,264 |
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,390 |
|
|
|
11,390 |
|
Partners equity |
|
|
31,516 |
|
|
|
310,137 |
|
|
|
37,969 |
|
|
|
(348,106 |
) |
|
|
31,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners equity |
|
$ |
214,860 |
|
|
$ |
319,232 |
|
|
$ |
38,577 |
|
|
$ |
(336,716 |
) |
|
$ |
235,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet |
|
|
|
|
|
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
December 31, 2006 |
|
Parent |
|
|
Subsidiaries |
|
|
Guarantor |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(in thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2 |
|
|
$ |
9,819 |
|
|
$ |
1,734 |
|
|
$ |
|
|
|
$ |
11,555 |
|
Accounts receivable |
|
|
|
|
|
|
8,772 |
|
|
|
2,085 |
|
|
|
|
|
|
|
10,857 |
|
Intercompany accounts receivable (payable) |
|
|
(78,952 |
) |
|
|
79,144 |
|
|
|
(192 |
) |
|
|
|
|
|
|
|
|
Prepaid and other current assets |
|
|
203 |
|
|
|
1,009 |
|
|
|
|
|
|
|
|
|
|
|
1,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
(78,747 |
) |
|
|
98,744 |
|
|
|
3,627 |
|
|
|
|
|
|
|
23,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties and equipment, net |
|
|
|
|
|
|
127,357 |
|
|
|
33,127 |
|
|
|
|
|
|
|
160,484 |
|
Investment in subsidiaries |
|
|
298,872 |
|
|
|
25,581 |
|
|
|
|
|
|
|
(324,453 |
) |
|
|
|
|
Transportation agreements, net |
|
|
|
|
|
|
56,271 |
|
|
|
550 |
|
|
|
|
|
|
|
56,821 |
|
Other assets |
|
|
1,453 |
|
|
|
1,191 |
|
|
|
|
|
|
|
|
|
|
|
2,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
221,578 |
|
|
$ |
309,144 |
|
|
$ |
37,304 |
|
|
$ |
(324,453 |
) |
|
$ |
243,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
|
|
|
$ |
3,356 |
|
|
$ |
425 |
|
|
$ |
|
|
|
$ |
3,781 |
|
Accrued interest |
|
|
2,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,941 |
|
Deferred revenue |
|
|
|
|
|
|
5,486 |
|
|
|
|
|
|
|
|
|
|
|
5,486 |
|
Accrued property taxes |
|
|
|
|
|
|
726 |
|
|
|
142 |
|
|
|
|
|
|
|
868 |
|
Other current liabilities |
|
|
516 |
|
|
|
389 |
|
|
|
193 |
|
|
|
|
|
|
|
1,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
3,457 |
|
|
|
9,957 |
|
|
|
760 |
|
|
|
|
|
|
|
14,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
180,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180,660 |
|
Other long-term liabilities |
|
|
1,235 |
|
|
|
315 |
|
|
|
|
|
|
|
|
|
|
|
1,550 |
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,963 |
|
|
|
10,963 |
|
Partners equity |
|
|
36,226 |
|
|
|
298,872 |
|
|
|
36,544 |
|
|
|
(335,416 |
) |
|
|
36,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners equity |
|
$ |
221,578 |
|
|
$ |
309,144 |
|
|
$ |
37,304 |
|
|
$ |
(324,453 |
) |
|
$ |
243,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-18-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Income |
|
|
|
|
|
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
Three months ended March 31, 2007 |
|
Parent |
|
|
Subsidiaries |
|
|
Guarantor |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(in thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates |
|
$ |
|
|
|
$ |
13,790 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
13,790 |
|
Third parties |
|
|
|
|
|
|
7,349 |
|
|
|
3,026 |
|
|
|
(293 |
) |
|
|
10,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,139 |
|
|
|
3,026 |
|
|
|
(293 |
) |
|
|
23,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations |
|
|
|
|
|
|
7,277 |
|
|
|
793 |
|
|
|
(293 |
) |
|
|
7,777 |
|
Depreciation and amortization |
|
|
|
|
|
|
3,223 |
|
|
|
848 |
|
|
|
|
|
|
|
4,071 |
|
General and administrative |
|
|
766 |
|
|
|
520 |
|
|
|
1 |
|
|
|
|
|
|
|
1,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
766 |
|
|
|
11,020 |
|
|
|
1,642 |
|
|
|
(293 |
) |
|
|
13,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(766 |
) |
|
|
10,119 |
|
|
|
1,384 |
|
|
|
|
|
|
|
10,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries |
|
|
11,264 |
|
|
|
997 |
|
|
|
|
|
|
|
(12,261 |
) |
|
|
|
|
Interest income (expense) |
|
|
(3,064 |
) |
|
|
(149 |
) |
|
|
40 |
|
|
|
|
|
|
|
(3,173 |
) |
Gain on sale of assets |
|
|
|
|
|
|
297 |
|
|
|
|
|
|
|
|
|
|
|
297 |
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(427 |
) |
|
|
(427 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,434 |
|
|
$ |
11,264 |
|
|
$ |
1,424 |
|
|
$ |
(12,688 |
) |
|
$ |
7,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Income |
|
|
|
|
|
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
Three months ended March 31, 2006 |
|
Parent |
|
|
Subsidiaries |
|
|
Guarantor |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(in thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates |
|
$ |
|
|
|
$ |
12,482 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
12,482 |
|
Third parties |
|
|
|
|
|
|
7,881 |
|
|
|
2,369 |
|
|
|
(294 |
) |
|
|
9,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,363 |
|
|
|
2,369 |
|
|
|
(294 |
) |
|
|
22,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations |
|
|
|
|
|
|
6,670 |
|
|
|
733 |
|
|
|
(294 |
) |
|
|
7,109 |
|
Depreciation and amortization |
|
|
|
|
|
|
2,949 |
|
|
|
844 |
|
|
|
|
|
|
|
3,793 |
|
General and administrative |
|
|
712 |
|
|
|
511 |
|
|
|
1 |
|
|
|
|
|
|
|
1,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
712 |
|
|
|
10,130 |
|
|
|
1,578 |
|
|
|
(294 |
) |
|
|
12,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(712 |
) |
|
|
10,233 |
|
|
|
791 |
|
|
|
|
|
|
|
10,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries |
|
|
10,789 |
|
|
|
572 |
|
|
|
|
|
|
|
(11,361 |
) |
|
|
|
|
Interest income (expense) |
|
|
(2,942 |
) |
|
|
(16 |
) |
|
|
26 |
|
|
|
|
|
|
|
(2,932 |
) |
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(245 |
) |
|
|
(245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,135 |
|
|
$ |
10,789 |
|
|
$ |
817 |
|
|
$ |
(11,606 |
) |
|
$ |
7,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-19-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Cash Flows |
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
Three months ended March 31, 2007 |
|
Parent |
|
|
Subsidiaries |
|
|
Guarantor |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(in thousands) |
|
Cash flows from operating activities |
|
$ |
12,446 |
|
|
$ |
(2,934 |
) |
|
$ |
3,081 |
|
|
$ |
|
|
|
$ |
12,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to properties and equipment |
|
|
|
|
|
|
(908 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
(912 |
) |
Proceeds from sale of assets |
|
|
|
|
|
|
325 |
|
|
|
|
|
|
|
|
|
|
|
325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(583 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
(587 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to partners |
|
|
(11,538 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,538 |
) |
Purchase of units for restricted grants |
|
|
(908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(908 |
) |
Other |
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,446 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
(12,461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) for the period |
|
|
|
|
|
|
(3,532 |
) |
|
|
3,077 |
|
|
|
|
|
|
|
(455 |
) |
Beginning of period |
|
|
2 |
|
|
|
9,819 |
|
|
|
1,734 |
|
|
|
|
|
|
|
11,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
$ |
2 |
|
|
$ |
6,287 |
|
|
$ |
4,811 |
|
|
$ |
|
|
|
$ |
11,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
Three months ended March 31, 2006 |
|
Parent |
|
|
Subsidiaries |
|
|
Guarantor |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
(in thousands) |
|
Cash flows from operating activities |
|
$ |
10,461 |
|
|
$ |
(1,959 |
) |
|
$ |
1,460 |
|
|
$ |
(1,400 |
) |
|
$ |
8,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities additions to
properties and equipment |
|
|
|
|
|
|
(782 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
(817 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to partners |
|
|
(10,461 |
) |
|
|
|
|
|
|
(2,000 |
) |
|
|
2,000 |
|
|
|
(10,461 |
) |
Cash distribution to minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(600 |
) |
|
|
(600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,461 |
) |
|
|
|
|
|
|
(2,000 |
) |
|
|
1,400 |
|
|
|
(11,061 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease for the period |
|
|
|
|
|
|
(2,741 |
) |
|
|
(575 |
) |
|
|
|
|
|
|
(3,316 |
) |
Beginning of period |
|
|
2 |
|
|
|
17,770 |
|
|
|
2,811 |
|
|
|
|
|
|
|
20,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
$ |
2 |
|
|
$ |
15,029 |
|
|
$ |
2,236 |
|
|
$ |
|
|
|
$ |
17,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10: Investment in Joint Venture
In February 2007, the HLS board of directors authorized a letter of intent with Plains All American
Pipeline, L.P. (Plains) for HEP to acquire a 25% joint venture interest in a new 95-mile
intrastate pipeline system, now being constructed by Plains, for the shipment of up to 120,000 bpd
of crude oil into the Salt Lake City area. The pipeline would be owned by a new joint venture
company which would be owned 75% by Plains and 25% by HEP. Subject to the actual construction
cost, HEP would purchase its interest for between $22.0 and $25.5 million in the first quarter of
2008, when the new pipeline system is expected to become fully operational.
-20-
HOLLY ENERGY PARTNERS, L.P.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
This Item 2, including but not limited to the sections on Results of Operations and Liquidity
and Capital Resources, contains forward-looking statements. See Forward-Looking Statements at
the beginning of Part I.
OVERVIEW
Holly Energy Partners, L.P. (HEP) is a Delaware limited partnership formed by Holly Corporation
(Holly) and was initially formed to acquire, own and operate substantially all of the refined
product pipeline and terminalling assets that support Hollys refining and marketing operations in
west Texas, New Mexico, Utah and Arizona and a 70% interest in Rio Grande Pipeline Company (Rio
Grande). HEP commenced operations July 13, 2004 upon the completion of its initial public
offering and is currently 45% owned by Holly.
We operate a system of petroleum product pipelines in Texas, New Mexico and Oklahoma, and
distribution terminals in Texas, New Mexico, Arizona, Utah, Idaho, and Washington. We generate
revenues by charging tariffs for transporting petroleum products through our pipelines and by
charging fees for terminalling refined products and other hydrocarbons, and storing and providing
other services at our terminals. We do not take ownership of products that we transport or
terminal; therefore, we are not directly exposed to changes in commodity prices.
Our revenues for the three months ended March 31, 2007 were $23.9 million and our net income for
the three months ended March 31, 2007 was $7.4 million. Our revenues and net income for the three
months ended March 31, 2006 were $22.4 million and $7.1 million, respectively. Our total operating
costs and expenses for the three months ended March 31, 2007 were $13.1 million, as compared to
$12.1 million for the three months ended March 31, 2006.
Agreements with Holly Corporation
We serve Hollys refineries in New Mexico and Utah under two 15-year pipeline and terminal
agreements. One of these agreements relates to the pipelines and terminals contributed by Holly to
us at the time of our initial public offering and expires in 2019 (Holly PTA). Our other
agreement with Holly relates to the Intermediate Pipelines acquired from Holly in July 2005 and
expires in 2020 (Holly IPA). The substantial majority of our business is devoted to providing
transportation and terminalling services to Holly. Following the July 1, 2006 rate adjustment for
the increased producer price index (PPI), the volume commitments by Holly under the Holly PTA
will produce at least $38.5 million of revenue for the twelve months ending June 30, 2007. Under
the Holly IPA, Holly agreed to transport volumes of intermediate products on the Intermediate
Pipelines that following the July 1, 2006 PPI adjustment, will result in minimum funds to us of
$12.4 million for the twelve months ended June 30, 2007. If Holly fails to meet its minimum
revenue commitments in any quarter, it will be required to pay us in cash the amount of any
shortfall by the last day of the month following the end of the quarter. A shortfall payment may
be applied as a credit in the following four quarters after Hollys minimum obligations are met.
Under an omnibus agreement expiring in 2019 that we entered with Holly in July 2004 (the Omnibus
Agreement), we pay Holly an annual administrative fee, currently in the amount of $2.0 million,
for the provision by Holly or its affiliates of various general and administrative services to us
for three years following the closing of our initial public offering. This fee does not include
the salaries of pipeline and terminal personnel or the cost of their employee benefits, such as
401(k), pension and health insurance benefits, which are separately charged to us by Holly. We
also reimburse Holly and its affiliates for direct expenses they incur on our behalf.
-21-
RESULTS OF OPERATIONS (Unaudited)
Income, Distributable Cash Flow and Volumes
The following tables present income, distributable cash flow and volume information for the three
months ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands, except per unit data) |
|
Revenues |
|
|
|
|
|
|
|
|
Pipelines: |
|
|
|
|
|
|
|
|
Affiliates refined product pipelines |
|
$ |
8,239 |
|
|
$ |
7,323 |
|
Affiliates intermediate pipelines |
|
|
3,009 |
|
|
|
2,473 |
|
Third parties |
|
|
8,790 |
|
|
|
8,777 |
|
|
|
|
|
|
|
|
|
|
|
20,038 |
|
|
|
18,573 |
|
|
|
|
|
|
|
|
|
|
Terminals and truck loading racks: |
|
|
|
|
|
|
|
|
Affiliates |
|
|
2,542 |
|
|
|
2,686 |
|
Third parties |
|
|
1,292 |
|
|
|
1,179 |
|
|
|
|
|
|
|
|
|
|
|
3,834 |
|
|
|
3,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
23,872 |
|
|
|
22,438 |
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses |
|
|
|
|
|
|
|
|
Operations |
|
|
7,777 |
|
|
|
7,109 |
|
Depreciation and amortization |
|
|
4,071 |
|
|
|
3,793 |
|
General and administrative |
|
|
1,287 |
|
|
|
1,224 |
|
|
|
|
|
|
|
|
|
|
|
13,135 |
|
|
|
12,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
10,737 |
|
|
|
10,312 |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
185 |
|
|
|
243 |
|
Interest expense, including amortization |
|
|
(3,358 |
) |
|
|
(3,175 |
) |
Gain on sale of assets |
|
|
297 |
|
|
|
|
|
Minority interest in Rio Grande |
|
|
(427 |
) |
|
|
(245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
7,434 |
|
|
|
7,135 |
|
|
|
|
|
|
|
|
|
|
Less general partner interest in net income, including incentive distributions (1) |
|
|
580 |
|
|
|
327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners interest in net income |
|
$ |
6,854 |
|
|
$ |
6,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit basic and diluted (1) |
|
$ |
0.43 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average limited partners units outstanding |
|
|
16,108 |
|
|
|
16,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (2) |
|
$ |
14,678 |
|
|
$ |
13,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable cash flow (3) |
|
$ |
12,594 |
|
|
$ |
11,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes (bpd) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipelines: |
|
|
|
|
|
|
|
|
Affiliates refined product pipelines |
|
|
72,361 |
|
|
|
66,570 |
|
Affiliates intermediate pipelines |
|
|
59,474 |
|
|
|
61,052 |
|
Third parties |
|
|
65,187 |
|
|
|
77,338 |
|
|
|
|
|
|
|
|
|
|
|
197,022 |
|
|
|
204,960 |
|
|
|
|
|
|
|
|
|
|
Terminals and truck loading racks: |
|
|
|
|
|
|
|
|
Affiliates |
|
|
120,186 |
|
|
|
119,168 |
|
Third parties |
|
|
46,846 |
|
|
|
47,056 |
|
|
|
|
|
|
|
|
|
|
|
167,032 |
|
|
|
166,224 |
|
|
|
|
|
|
|
|
Total for pipelines and terminal assets (bpd) |
|
|
364,054 |
|
|
|
371,184 |
|
|
|
|
|
|
|
|
-22-
|
|
|
(1) |
|
Net income is allocated between limited partners and the general partner interest in
accordance with the provisions of the partnership agreement. Net income allocated to the
general partner includes any incentive distributions declared in the period. Incentive
distributions of $0.4 million and $0.2 million were declared during the three months ended
March 31, 2007 and 2006, respectively. The net income applicable to the limited partners
is divided by the weighted average limited partner units outstanding in computing the net
income per unit applicable to limited partners. |
|
(2) |
|
Earnings before interest, taxes, depreciation and amortization (EBITDA) is calculated
as net income plus (i) interest expense net of interest income and (ii) depreciation and
amortization. EBITDA is not a calculation based upon U.S. generally accepted accounting
principles (U.S. GAAP). However, the amounts included in the EBITDA calculation are
derived from amounts included in our consolidated financial statements. EBITDA should not
be considered as an alternative to net income or operating income, as an indication of our
operating performance or as an alternative to operating cash flow as a measure of
liquidity. EBITDA is not necessarily comparable to similarly titled measures of other
companies. EBITDA is presented here because it is a widely used financial indicator used
by investors and analysts to measure performance. EBITDA is also used by our management
for internal analysis and as a basis for compliance with financial covenants. |
|
|
|
Set forth below is our calculation of EBITDA. |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Net income |
|
$ |
7,434 |
|
|
$ |
7,135 |
|
Add interest expense |
|
|
3,055 |
|
|
|
2,933 |
|
Add amortization of discount and deferred debt issuance costs |
|
|
303 |
|
|
|
242 |
|
Subtract interest income |
|
|
(185 |
) |
|
|
(243 |
) |
Add depreciation and amortization |
|
|
4,071 |
|
|
|
3,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
14,678 |
|
|
$ |
13,860 |
|
|
|
|
|
|
|
|
(3) |
|
Distributable cash flow is not a calculation based upon U.S. GAAP. However, the
amounts included in the calculation are derived from amounts separately presented in our
consolidated financial statements, with the exception of maintenance capital expenditures.
Distributable cash flow should not be considered in isolation or as an alternative to net
income or operating income, as an indication of our operating performance or as an
alternative to operating cash flow as a measure of liquidity. Distributable cash flow is
not necessarily comparable to similarly titled measures of other companies. Distributable
cash flow is presented here because it is a widely accepted financial indicator used by
investors to compare partnership performance. We believe that this measure provides
investors an enhanced perspective of the operating performance of our assets and the cash
our business is generating. |
|
|
|
Set forth below is our calculation of distributable cash flow. |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Net income |
|
$ |
7,434 |
|
|
$ |
7,135 |
|
Add depreciation and amortization |
|
|
4,071 |
|
|
|
3,793 |
|
Add amortization of discount and deferred debt issuance costs |
|
|
303 |
|
|
|
242 |
|
Add increase in deferred revenue |
|
|
906 |
|
|
|
484 |
|
Subtract maintenance capital expenditures* |
|
|
(120 |
) |
|
|
(440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable cash flow |
|
$ |
12,594 |
|
|
$ |
11,214 |
|
|
|
|
|
|
|
|
-23-
* |
|
Maintenance capital expenditures are capital expenditures made to replace partially
or fully depreciated assets in order to maintain the existing operating capacity of our
assets and to extend their useful lives. |
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(In thousands) |
Balance Sheet Data |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
11,100 |
|
|
$ |
11,555 |
|
Working capital |
|
$ |
8,623 |
|
|
$ |
9,450 |
|
Total assets |
|
$ |
235,953 |
|
|
$ |
243,573 |
|
Long-term debt |
|
$ |
181,048 |
|
|
$ |
180,660 |
|
Partners equity |
|
$ |
31,516 |
|
|
$ |
36,226 |
|
As a master limited partnership, we distribute our available cash, which exceeds our net
income because depreciation and amortization expense represents a non-cash charge against income.
The result is a decline in partners equity since our regular quarterly distributions exceed our
quarterly net income.
Results of Operations Three Months Ended March 31, 2007 Compared with Three Months Ended March
31, 2006
Summary
Net income was $7.4 million for the three months ended March 31, 2007, an increase of $0.3 million
from $7.1 million for the three months ended March 31, 2006. The increase in overall earnings was
principally due to the effects of annual tariff increases on our pipelines and the recognition of
certain previously deferred revenue, offset by the effect of a net decrease in volumes transported
on our pipeline systems combined with an increase in our operating costs and expenses.
Approximately $1.4 million of revenue relating to deficiency payments associated with certain
guaranteed shipping contracts was deferred during the first quarter. Such revenue will be
recognized in future periods either as payment for shipments in excess of guaranteed levels or when
shipping rights expire unused after a twelve month period.
Revenues
Revenues for the three months ended March 31, 2007 increased $1.5 million from the three months
ended March 31, 2006. This increase resulted principally from the effects of annual tariff
increases on our pipelines and the recognition of $0.5 million of certain previously deferred
revenue.
Revenues from refined product pipelines increased by $0.9 million from $16.1 million for the three
months ended March 31, 2006 to $17.0 million for the three months ended March 31, 2007. This
increase in refined product pipeline revenue is principally due to the effect of the annual tariff
increase on refined product shipments. This favorable factor was partially offset by the effect of
a net decrease in volumes transported on our refined product pipeline systems. Shipments on the
Partnerships refined product pipelines averaged 137.6 thousand barrels per day (mbpd) for the
three months ended March 31, 2007 as compared to 143.9 mbpd for the three months ended March 31,
2006. This decrease was due to a decline in third-party shipments, partially offset by an increase
in shipments by our affiliates.
Revenues from the intermediate product pipelines were $3.0 million and $2.5 million for the three
months ended March 31, 2007 and 2006, respectively. This increase in intermediate pipeline revenue
is principally due to the recognition of $0.5 million of previously deferred revenue as the
contractual period to provide certain pipeline services had expired. Shipments on the
Partnerships intermediate product pipelines averaged 59.5 mbpd for the three months ended March
31, 2007 as compared to 61.1 mbpd for the three months ended March 31, 2006. The effect of this
small decrease in volumes shipped was offset by the annual increase in the intermediate pipeline
tariff.
-24-
Although net volumes shipped on our refined product and intermediate pipelines were below
expectations for the quarter due to the impact of refinery problems of certain shippers, the
effects on our distributable cash were mitigated due to the terms of certain pipeline agreements
which commit those shippers to minimum shipment levels.
Revenues from terminal and truck loading rack service fees decreased slightly from $3.9 million for
the three months ended March 31, 2006 to $3.8 million for the three months ended March 31, 2007.
Refined products terminalled in our facilities were 167.0 mbpd for the three months ended March 31,
2007 as compared to 166.2 mbpd for the three months ended March 31, 2006.
Operating Costs
Operations expense increased by $0.7 million from the three months ended March 31, 2006 to the
three months ended March 31, 2007. This increase in expense was principally due a $0.4 million
increase in the cost of employees who perform services for us including the addition of two new
senior level executives.
Depreciation and Amortization
Depreciation and amortization was $0.3 million higher for the three months ended March 31, 2007 as
compared to the three months ended March 31, 2006, due principally to depreciation and amortization
on fixed asset additions.
General and Administrative
General and administrative costs increased less than $0.1 million from the three months ended March
31, 2006 to the three months ended March 31, 2007.
Interest Expense
Interest expense for the three months ended March 31, 2007 totaled $3.4 million, an increase of
$0.2 million from $3.2 million for the three months ended March 31, 2006. For the three months
ended March 31, 2007, interest expense consisted of: $3.0 million of interest on our outstanding
debt, net of the impact of the interest rate swap; $0.1 million of commitment fees on the unused
portion of the credit facility; and $0.3 million of amortization of the discount on the senior
notes and deferred debt issuance costs. For the three months ended March 31, 2006, interest
expense consisted of: $2.8 million of interest on our outstanding debt, net of the impact of the
interest rate swap; $0.1 million of commitment fees on the unused portion of the credit facility;
and $0.3 million of amortization of the discount on the senior notes and deferred debt issuance
costs.
Minority Interest in Earnings of Rio Grande
The minority interest related to the 30% of Rio Grande that we do not own reduced our income by
$0.4 million for the three months ended March 31, 2007 as compared to $0.2 million for the three
months ended March 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
Overview
In conjunction with our initial public offering on July 13, 2004, we entered into a four-year,
$100.0 million senior secured revolving credit agreement (the Credit Agreement) expiring in July
2008. The Credit Agreement is available to fund capital expenditures, acquisitions, and working
capital and for general partnership purposes. As of March 31, 2007, we had no amounts outstanding
under the Credit Agreement.
-25-
Our senior notes maturing March 1, 2015 are registered with the SEC and bear interest at 6.25%
(Senior Notes). The Senior Notes are unsecured and impose certain restrictive covenants,
including limitations on our ability to incur additional indebtedness, make investments, sell
assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter
into mergers. At any time when the Senior Notes are rated investment grade by both Moodys and
Standard & Poors and no default or event of default exists, we will not be subject to many of the
foregoing covenants. Additionally, we have certain redemption rights under the Senior Notes.
Under our shelf registration process, filed September 2, 2005, we may offer from time to time up
to $800.0 million of our securities, through one or more prospectus supplements that would
describe, among other things, the specific amounts, prices and terms of any securities offered and
how the proceeds would be used. Any proceeds from the sale of securities would be used for general
business purposes, which may include, among other things, funding acquisitions of assets or
businesses, working capital, capital expenditures, investments in subsidiaries, the retirement of
existing debt and/or the repurchase of common units or other securities.
We believe our current cash balances, future internally-generated funds and funds available under
our Credit Agreement will provide sufficient resources to meet our working capital liquidity needs
for the foreseeable future. In February 2007, we paid a regular cash distribution for the fourth
quarter of 2006 of $0.675 on all units, an aggregate amount of $11.5 million. Included in this
distribution was $0.4 million paid to the general partner as an incentive distribution, as the
distribution per unit exceeded $0.55.
Cash and cash equivalents decreased by $0.5 million during the quarter ended March 31, 2007. The
cash flows used for financing activities of $12.5 million, in addition to cash flows used for
investing activities of $0.6 million, exceeded cash flows generated from operating activities of
$12.6 million. Working capital decreased during the quarter by $0.8 million to $8.6 million at
March 31, 2007.
Cash Flows Operating Activities
Cash flows from operating activities increased by $4.0 million from $8.6 million for the three
months ended March 31, 2006 to $12.6 million for the three months ended March 31, 2007. This
increase is mainly due to $3.9 million in additional cash collections from our major customers,
resulting principally from increased revenues and shortfall billings. The remaining increase in
cash flows from operating activities is due to miscellaneous year-over-year changes in collections
and payments.
As discussed above, our major shippers are obligated to make deficiency payments to us if we do not
receive certain minimum revenue payments. Certain of these shippers then have the right to
recapture these amounts if future revenues exceed minimum levels. During the first three months of
2007, we received cash payments of approximately $1.3 million under these commitments. We billed
$0.5 million in the first quarter of 2006 related to first quarter shortfalls, which expired
without recapture and was recognized as revenue in the first quarter of 2007. Another $1.4 million
is included in our accounts receivable at March 31, 2007 related to shortfalls produced in the
first quarter of 2007.
Cash Flows Investing Activities
Cash flows used for investing activities decreased by $0.2 million from $0.8 million for the first
quarter of 2006 to $0.6 million for first quarter of 2007. Additions to properties and equipment
for the quarter ended March 31, 2007 was $0.9 million, an increase of $0.1 million from $0.8
million for the quarter ended March 31, 2006. For the quarter ended March 31, 2007, we received
cash proceeds of $0.3 million on the sale of certain assets.
Cash Flows Financing Activities
Cash flows used for financing activities amounted to $12.5 million for the three months ended March
31, 2007. This compared to cash flows used for financing activities of $11.1 million in the three
months ended March 31, 2006. In the first quarter of 2007, we paid cash distributions on all units
and the general partner interest in the aggregate amount of $11.5 million, an increase of $1.0
million from $10.5 million in distributions paid in the first quarter of 2006. There were no
distributions to the minority interest owner in
-26-
Rio Grande for the quarter ended March 31, 2007, as compared to $0.6 million for the quarter ended
March 31, 2006.
Capital Requirements
Our pipeline and terminalling operations are capital intensive, requiring investments to maintain,
expand, upgrade or enhance existing operations and to meet environmental and operational
regulations. Our capital requirements have consisted of, and are expected to continue to consist
of, maintenance capital expenditures and expansion capital expenditures. Maintenance capital
expenditures represent capital expenditures to replace partially or fully depreciated assets to
maintain the operating capacity of existing assets. Maintenance capital expenditures include
expenditures required to maintain equipment reliability, tankage and pipeline integrity, and safety
and to address environmental regulations. Expansion capital expenditures represent capital
expenditures to expand the operating capacity of existing or new assets, whether through
construction or acquisition. Expansion capital expenditures include expenditures to acquire assets
to grow our business and to expand existing facilities, such as projects that increase throughput
capacity on our pipelines and in our terminals. Repair and maintenance expenses associated with
existing assets that are minor in nature and do not extend the useful life of existing assets are
charged to operating expenses as incurred.
Each year the HLS board of directors approves our annual capital budget, which specifies capital
projects that our management is authorized to undertake. Additionally, at times when conditions
warrant or as new opportunities arise, special projects may be approved. The funds allocated for a
particular capital project may be expended over a period of years, depending on the time required
to complete the project. Therefore, our planned capital expenditures for a given year consist of
expenditures approved for capital projects included in the current years capital budget as well
as, in certain cases, expenditures approved for capital projects in capital budgets for prior
years.
In February 2007, the HLS board of directors authorized a letter of intent with Plains All American
Pipeline, L.P. (Plains) for HEP to acquire a 25% joint venture interest in a new 95-mile
intrastate pipeline system, now being constructed by Plains, for the shipment of up to 120,000 bpd
of crude oil into the Salt Lake City area. The pipeline would be owned by a new joint venture
company which would be owned 75% by Plains and 25% by HEP. Subject to the actual construction
cost, HEP would purchase its interest for between $22.0 and $25.5 million in the first quarter of
2008, when the new pipeline system is expected to become fully operational. The pipeline is being
built to allow various refiners in the Salt Lake City area, including Hollys Woods Cross Refinery,
to ship crude oil into the Salt Lake City area from the Utah terminus of the Frontier Pipeline as
well as crude oil from Wyoming and Utah, which is currently flowing on Plains Rocky Mountain
Pipeline. Our investment in the project is subject to various conditions, including the
negotiation and execution of mutually satisfactory definitive agreements. This investment is
expected to take the place of a project that we had been considering to construct and operate a new
pipeline called the Porcupine Ridge Pipeline to transport crude oil from the Utah terminus of the
Frontier Pipeline to Salt Lake City.
We anticipate that our currently planned expenditures for sustaining and maintenance capital as
well as expenditures for smaller capital development projects (including the investment in the Utah
crude oil pipeline project as described in the preceding paragraph) will be funded with existing
cash balances, cash generated by operations and advances under our Credit Agreement.
The HLS board of directors is also considering a project to construct a 12-inch pipeline from Salt
Lake City to Las Vegas, with service also to the Cedar City, Utah area. The initial capacity of
the pipeline would be approximately 62,000 bpd, and it is expected that the capacity could be later
increased up to approximately 118,000 bpd by adding pump stations. The cost of the pipeline is
expected to be approximately $235.0 million, and the total cost of the project including terminals
is expected to be approximately $300.0 million. We are currently in the process of evaluating bids
solicited through an open season that ended in March 2007, and we expect to make a final decision
on whether to proceed with this project based on the level of commitment from shippers. Certain
preliminary work has already been carried out on this project by Holly, but as of the date of this
report we have not expended HEP funds or committed to do so with respect to the project. If we
choose to carry out this project, our financing for the project would include reimbursement to
Holly for previous expenditures and assumption of any commitments previously made by Holly with
respect
-27-
to the project, and might also involve an investment in the project by one or more other companies,
making our investment proportionately less.
We are also studying several other projects which are in the early stages of analysis.
We expect to use the issuance of common units and/or debt securities as the principal means of
financing large investments in major capital projects such as the proposed Salt Lake City to Las
Vegas pipeline project described in the preceding paragraph.
Credit Agreement
In conjunction with our initial public offering on July 13, 2004, we entered into a four-year,
$100.0 million senior secured revolving Credit Agreement expiring in July 2008. Union Bank of
California, N.A. is a lender and serves as administrative agent under this agreement. The Credit
Agreement is available to fund capital expenditures, acquisitions, and working capital and for
general partnership purposes. Advances under the Credit Agreement that are designated for working
capital are short-term liabilities. Other advances under the Credit Agreement are classified as
long-term liabilities. In addition, the Credit Agreement is available to fund letters of credit up
to a $50.0 million sub-limit. Up to $5.0 million is available to fund distributions to
unitholders. As of March 31, 2007, we had no amounts outstanding under the Credit Agreement.
We have the right to request an increase in the maximum amount of the Credit Agreement, up to
$175.0 million. Such request will become effective if (a) certain conditions specified in the
Credit Agreement are met and (b) existing lenders under the Credit Agreement or other financial
institutions reasonably acceptable to the administrative agent commit to lend such increased
amounts under the agreement.
Our obligations under the Credit Agreement are secured by substantially all of our assets.
Indebtedness under the Credit Agreement is recourse to our general partner and guaranteed by our
wholly-owned subsidiaries.
We may prepay all loans at any time without penalty. We are required to reduce all working capital
borrowings under the Credit Agreement to zero for a period of at least 15 consecutive days once
each twelve-month period prior to the maturity date of the agreement.
Indebtedness under the Credit Agreement bears interest, at our option, at either (a) the base rate
as announced by the administrative agent plus an applicable margin (ranging from 0.25% to 1.00%) or
(b) at a rate equal to the London Interbank Offered Rate (LIBOR) plus an applicable margin
(ranging from 1.50% to 2.25%). In each case, the applicable margin is based upon the ratio of our
funded debt (as defined in the agreement) to EBITDA (earnings before interest, taxes, depreciation
and amortization, as defined in the Credit Agreement). We incur a commitment fee on the unused
portion of the Credit Agreement at a rate of 0.375% or 0.500% based upon the ratio of our funded
debt to EBITDA for the four most recently completed fiscal quarters. The agreement matures in July
2008. At that time, the agreement will terminate and all outstanding amounts thereunder will be
due and payable.
The Credit Agreement imposes certain requirements, 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 a merger or consolidation, or sell
assets; and covenants that require maintenance of EBITDA to interest expense ratio and debt to
EBITDA ratio. If an event of default exists under the agreement, the lenders will be able to
accelerate the maturity of the debt and exercise other rights and remedies.
Senior Notes Due 2015
The Senior Notes mature on March 1, 2015 and bear interest at 6.25%. The Senior Notes are
unsecured and impose certain restrictive covenants, including limitations on our ability to incur
additional indebtedness, make investments, sell assets, incur certain liens, pay distributions,
enter into transactions with affiliates, and enter into mergers. At any time when the Senior Notes
are rated investment grade by
-28-
both Moodys and Standard & Poors and no default or event of default exists, we will not be
subject to many of the foregoing covenants. Additionally, we have certain redemption rights under
the Senior Notes.
The $185.0 million principal amount of Senior Notes is recorded at $181.0 million on our
accompanying consolidated balance sheet at March 31, 2007. The difference is due to the $3.0
million unamortized discount and $1.0 million relating to the fair value of the interest rate swap
contract as further discussed under Risk Management.
Impact of Inflation
Inflation in the United States has been relatively low in recent years and did not have a material
impact on our results of operations for the quarters ended March 31, 2007 and 2006.
A substantial majority of our revenues are generated under long-term contracts that include the
right to increase our rates and minimum revenue guarantees annually for increases in the PPI.
Historically, the PPI has increased an average of 3.9% annually over the past 3 calendar years.
Environmental Matters
Our operation of pipelines, terminals, and associated facilities in connection with the storage and
transportation of refined products is subject to stringent and complex federal, state, and local
laws and regulations governing the discharge of materials into the environment, or otherwise
relating to the protection of the environment. As with the industry generally, compliance with
existing and anticipated laws and regulations increases our overall cost of business, including our
capital costs to construct, maintain, and upgrade equipment and facilities. While these laws and
regulations affect our maintenance capital expenditures and net income, we believe that they do not
affect our competitive position in that the operations of our competitors are similarly affected.
We believe that our operations are in substantial compliance with applicable environmental laws and
regulations. However, these laws and regulations, and the interpretation or enforcement thereof,
are subject to frequent change by regulatory authorities, and we are unable to predict the ongoing
cost to us of complying with these laws and regulations or the future impact of these laws and
regulations on our operations. Violation of environmental laws, regulations, and permits can
result in the imposition of significant administrative, civil and criminal penalties, injunctions,
and construction bans or delays. A discharge of hydrocarbons or hazardous substances into the
environment could, to the extent the event is not insured, subject us to substantial expense,
including both the cost to comply with applicable laws and regulations and claims made by
employees, neighboring landowners and other third parties for personal injury and property damage.
We inspect our pipelines regularly using equipment rented from third-party suppliers. Third
parties also assist us in interpreting the results of the inspections.
Holly has agreed to indemnify us in an aggregate amount not to exceed $15.0 million for ten years
after the closing of our initial public offering on July 13, 2004 for environmental noncompliance
and remediation liabilities associated with the assets initially transferred to us and occurring or
existing before that date, and provide $2.5 million of additional indemnification for the
Intermediate Pipelines acquired in July 2005. Additionally, we entered into an
environmental agreement with Alon with respect to pre-closing environmental costs and liabilities
relating to the pipelines and terminals acquired from Alon in February 2005, where Alon will
indemnify us for ten years subject to a $100,000 deductible and a $20.0 million maximum liability
cap.
Contamination resulting from spills of refined products and crude oil is not unusual within the
petroleum pipeline industry. Historic spills along our existing pipelines and terminals as a
result of past operations have resulted in contamination of the environment, including soils and
groundwater. Site conditions, including soils and groundwater, are being evaluated at a few of our
properties where operations may have resulted in releases of hydrocarbons and other wastes, none of
which we believe will have a significant effect on our operations as they would be covered under an
environmental indemnification agreement.
-29-
An environmental remediation project is in progress currently at our El Paso terminal, the
remaining costs of which are projected to be approximately $1.2 million over the next five years.
Other parties are undertaking remediation projects at our Boise, Burley and Albuquerque terminals,
and we are obligated to pay a portion of these costs at the Albuquerque terminal, but not at the
Boise or Burley terminals. As of March 31, 2007, we estimate the total remaining remediation cost
for the Albuquerque terminal to be insignificant. A remediation project is also under way in New
Mexico concerning a leak on our refined product pipeline from Artesia, New Mexico to Orla, Texas.
As of March 31, 2007, we estimate the remaining cost on this project to be $0.2 million, half of
which will be incurred in 2007. Holly has agreed, subject to a $15.0 million limit, to indemnify
us for environmental liabilities related to the assets transferred to us by Holly to the extent
such liabilities existed or arose from operation of these assets prior to the closing of our
initial public offering on July 13, 2004 and are asserted within 10 years after that date. The
Holly indemnification will cover the costs associated with the remediation projects mentioned
above, including assessment, monitoring, and remediation programs.
In the fourth quarter of 2005, we experienced a refined product release near Sweetwater, Texas. As
of March 31, 2007, we estimate that the total remaining remediation cost for this incident to be
insignificant. This occurrence is not subject to indemnification from Alon.
We may experience future releases into the environment from our pipelines and terminals, or
discover historical releases that were previously unidentified or not assessed. Although we
maintain an extensive inspection and audit program designed, as applicable, to prevent, detect and
address these releases promptly, damages and liabilities incurred due to any future environmental
releases from our assets nevertheless have the potential to substantially affect our business.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities as
of the date of the financial statements. Actual results may differ from these estimates under
different assumptions or conditions. We consider the following policies to be the most critical to
understanding the judgments that are involved and the uncertainties that could impact our results
of operations, financial condition and cash flows.
Our significant accounting policies are described in Item 7. Managements Discussion and Analysis
of Financial Conditions and Operations Critical Accounting Policies in our Annual Report on Form
10-K for the year ended December 31, 2006. Certain critical accounting policies that materially
affect the amounts recorded in our consolidated financial statements include revenue recognition,
assessing the possible impairment of certain long-lived assets and assessing contingent liabilities
for probable losses. There have been no changes to these policies in 2007.
Recent Accounting Pronouncements
Interpretation No. 48 Accounting for Uncertainty in Income Taxes
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes.
This interpretation clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements by prescribing a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. This interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
We adopted this standard effective January 1, 2007. The adoption of this standard did not have a
material impact on our financial condition, results of operations and cash flows.
-30-
RISK MANAGEMENT
We have entered into an interest rate swap contract to effectively convert the interest expense
associated with $60.0 million of our 6.25% Senior Notes from a fixed rate to variable rates. Under
the swap agreement, we receive 6.25% fixed rate on the notional amount and pay a variable rate
equal to three-month LIBOR plus an applicable margin of 1.1575%. The variable rate being paid on
the notional amount at March 31, 2007 was 6.5175%, including the applicable margin. The maturity
of the swap contract is March 1, 2015, matching the maturity of the Senior Notes.
This interest rate swap has been designated as a fair value hedge as defined by SFAS No. 133. Our
interest rate swap meets the conditions required to assume no ineffectiveness under SFAS No. 133
and, therefore, we have used the shortcut method of accounting prescribed for fair value hedges
by SFAS No. 133. Accordingly, we adjust the carrying value of the swap to its fair value each
quarter, with an offsetting entry to adjust the carrying value of the debt securities whose fair
value is being hedged. We record interest expense equal to the variable rate payments under the
swaps.
The fair value of the interest rate swap agreement of $1.0 million is included in Other long-term
liabilities in our accompanying consolidated balance sheet at March 31, 2007. The offsetting
entry to adjust the carrying value of the debt securities whose fair value is being hedged is
recognized as a reduction of Long-term debt on our accompanying consolidated balance sheet at
March 31, 2007.
The market risk inherent in our debt instruments and positions is the potential change arising from
increases or decreases in interest rates as discussed below.
At March 31, 2007, we had an outstanding principal balance on our unsecured Senior Notes of $185.0
million. By means of our interest rate swap contract, we have effectively converted $60.0 million
of the Senior Notes from a fixed rate to variable rate. For the fixed rate debt portion of $125.0
million, changes in interest rates would generally affect the fair value of the debt, but not our
earnings or cash flows. Conversely, for the variable rate debt portion of $60.0 million, changes
in interest rates would generally not impact the fair value of the debt, but may affect our future
earnings and cash flows. We estimate a hypothetical 10% change in the yield-to-maturity applicable
to our fixed rate debt portion of $125.0 million as of March 31, 2006 would result in a change of
approximately $5.0 million in the fair value of the debt. A hypothetical 10% change in the
interest rate applicable to our variable rate debt portion of $60.0 million would not have a
material effect on our earnings or cash flows.
At March 31, 2007, our cash and cash equivalents included highly liquid investments with a maturity
of three months or less at the time of purchase. Due to the short-term nature of our cash and cash
equivalents, a hypothetical 10% increase in interest rates would not have a material effect on the
fair market value of our portfolio. Since we have the ability to liquidate this portfolio, we do
not expect our operating results or cash flows to be materially affected to any significant degree
by the effect of a sudden change in market interest rates on our investment portfolio.
Our operations are subject to normal hazards of operations, including fire, explosion and
weather-related perils. We maintain various insurance coverages, including business interruption
insurance, subject to certain deductibles. We are not fully insured against certain risks because
such risks are not fully insurable, coverage is unavailable, or premium costs, in our judgment, do
not justify such expenditures.
-31-
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Market risk is the risk of loss arising from adverse changes in market rates and prices. See Risk
Management under Managements Discussion and Analysis of Financial Condition and Results of
Operations for a discussion of market risk exposures that we have with respect to our cash and
cash equivalents and long-term debt. We utilize derivative instruments to hedge our interest rate
exposure, also discussed under Risk Management.
Since we do not own products shipped on our pipelines or terminalled at our terminal facilities we
do not have market risks associated with commodity prices.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Our principal executive officer and principal financial officer have evaluated, as required by Rule
13a-15(b) under the Securities Exchange Act of 1934 (the Exchange Act), our disclosure controls
and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by
this quarterly report on Form 10-Q. Based on that evaluation, the principal executive officer and
principal financial officer concluded that the design and operation of our disclosure controls and
procedures are effective in ensuring that information we are required to disclose in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commissions rules and forms.
(b) Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially
affected or are reasonably likely to materially affect our internal control over financial
reporting.
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PART II. OTHER INFORMATION
Item 1. Legal proceedings
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 operations or cash flows.
Item 2. Unregistered Sales of Securities and Use of Proceeds
(c) Common unit repurchases made in the quarter
In the first quarter of 2007, we paid $0.9 million for the purchase of 19,687 of our common units
in the open market for the recipients of our February 2007 restricted unit grants.
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Maximum Number |
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Total Number of |
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of Units that May |
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Units Purchased as |
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Yet Be Purchased |
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Part of Publicly |
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Under a Publicly |
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Total Number of |
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Average Price |
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Announced Plan or |
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Announced Plan or |
Period |
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Units Purchased |
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Paid Per Unit |
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Program |
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Program |
January 2007 |
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$ |
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February 2007 |
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$ |
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March 2007 |
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19,687 |
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$ |
47.17 |
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Total |
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19,687 |
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$ |
47.17 |
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Item 6. Exhibits
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12.1*
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Computation of Ratio of Earnings to Fixed Charges |
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31.1*
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Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002. |
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31.2*
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Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002. |
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32.1*
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Certification of Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act of 2002. |
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32.2*
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Certification of Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002. |
-33-
HOLLY ENERGY PARTNERS, L.P.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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HOLLY ENERGY PARTNERS, L.P. |
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(Registrant) |
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By: HEP LOGISTICS HOLDINGS, L.P. |
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its General Partner |
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By: HOLLY LOGISTIC SERVICES, L.L.C. |
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its General Partner |
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Date: May 4, 2007
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/s/ P. Dean Ridenour
P. Dean Ridenour
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Vice President and Chief Accounting Officer |
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and Director |
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(Principal Accounting Officer) |
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/s/ Stephen J. McDonnell
Stephen J. McDonnell
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Vice President and Chief Financial
Officer
(Principal Financial Officer) |
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-34-