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67
NOTE 3: Variable Interest Entities
Holly Energy Partners
HEP, a consolidated VIE, is a publicly held master limited partnership that was formed to acquire, own and operate the petroleum
product and crude oil pipeline and terminal, tankage and loading rack facilities that support our refining and marketing operations
in the Mid-Continent, Southwest and Rocky Mountain regions of the United States. HEP also owns and operates refined product
pipelines and terminals, located primarily in Texas, that serve Alon's refinery in Big Spring, Texas.
As of December 31, 2013, we owned a 39% interest in HEP, including the 2% general partner interest. As the general partner of
HEP, we have the sole ability to direct the activities that most significantly impact HEP's financial performance. We are the primary
beneficiary of HEP's earnings and cash flows and therefore we consolidate HEP. See Note 21 for supplemental guarantor/non-
guarantor financial information, including HEP balances included in these consolidated financial statements.
HEP has two primary customers (including us) and generates revenues by charging tariffs for transporting petroleum products and
crude oil though its pipelines, by charging fees for terminalling refined products and other hydrocarbons, and storing and providing
other services at its storage tanks and terminals. Under our long-term transportation agreements with HEP (discussed further
below), we accounted for 83% of HEP’s total revenues for the year ended December 31, 2013. We do not provide financial or
equity support through any liquidity arrangements and / or debt guarantees to HEP.
HEP has outstanding debt under a senior secured revolving credit agreement and its senior notes. With the exception of the assets
of HEP Logistics Holdings, L.P., one of our wholly-owned subsidiaries and HEP’s general partner, HEP’s creditors have no recourse
to our other assets. Any recourse to HEP’s general partner would be limited to the extent of HEP Logistics Holdings, L.P.’s assets,
which other than its investment in HEP, are not significant. Furthermore, our creditors have no recourse to the assets of HEP and
its consolidated subsidiaries. See Note 12 for a description of HEP’s debt obligations.
HEP has risk associated with its operations. If a major customer of HEP were to terminate its contracts or fail to meet desired
shipping or throughput levels for an extended period of time, revenue would be reduced and HEP could suffer substantial losses
to the extent that a new customer is not found. In the event that HEP incurs a loss, our operating results will reflect HEP’s loss,
net of intercompany eliminations, to the extent of our ownership interest in HEP at that point in time.
HEP's recent acquisitions (2011 through present) are summarized below:
UNEV Interest Transaction
On July 12, 2012, HEP acquired from us our 75% interest in UNEV. We received consideration consisting of $260.0 million in
cash and 1.0 million HEP common units.
Legacy Frontier Tankage and Terminal Asset Transaction
On November 9, 2011, HEP acquired from us certain tankage, loading rack and crude receiving assets located at our El Dorado
and Cheyenne Refineries. We received non-cash consideration consisting of promissory notes with an aggregate principal amount
of $150.0 million and 3.8 million HEP common units.
Transportation Agreements
HEP serves our refineries under long-term pipeline and terminal, tankage and throughput agreements expiring from 2019 through
2026. Under these agreements, we pay HEP fees to transport, store and throughput volumes of refined product and crude oil on
HEP's pipeline and terminal, tankage and loading rack facilities that result in minimum annual payments to HEP including UNEV
(a consolidated subsidiary of HEP). Under these agreements, the agreed upon tariff rates are subject to annual tariff rate adjustments
on July 1 at a rate based upon the percentage change in Producer Price Index (“PPI”) or Federal Energy Regulatory Commission
(“FERC”) index. As of December 31, 2013, these agreements result in minimum annualized payments to HEP of $225.5 million.
Our transactions with HEP including the acquisitions discussed above and fees paid under our transportation agreements with
HEP and UNEV are eliminated and have no impact on our consolidated financial statements.
Table of Contents HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued