UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 14, 2022
(Exact name of registrant as specified in its charter)
Delaware | 001-32225 | 20-0833098 | ||
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(I.R.S. Employer Identification Number) |
2828 N. Harwood, Suite 1300 | Dallas | Texas | 75201 | |||
(Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: (214) 871-3555
N/A
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to 12(b) of the Securities Exchange Act of 1934:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
Common Limited Partner Units | HEP | New York Stock Exchange |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
EXPLANATORY NOTE
On March 14, 2022, Holly Energy Partners, L.P. (the “Partnership”) filed a Current Report on Form 8-K (the “Original Form 8-K”) with the U.S. Securities and Exchange Commission regarding, among other things, the HEP Transaction (as defined in the Original Form 8-K). The Partnership is filing this Amendment No. 1 on Form 8-K/A to the Original Form 8-K to provide the historical audited financial statements and pro forma financial information required by Item 9.01(a) and (b) and to file the Consulting Agreement referenced in Item 5.02 of the Original Form 8-K. The pro forma condensed combined financial information included as Exhibit 99.2 to this Amendment No. 1 on Form 8-K/A has been presented for illustrative purposes only as required by Form 8-K, and is not intended to, and does not purport to, represent what the Partnership’s actual results or financial condition would have been if the HEP Transaction had occurred on the relevant date, and is not intended to project the future results or the financial condition that the Company may achieve following the HEP Transaction.
Item 9.01 | Financial Statements and Exhibits. |
(a) Financial Statements of Business Acquired.
Audited consolidated financial statements of Sinclair Transportation Company and its subsidiaries comprised of the consolidated balance sheets as of December 31, 2021 and 2020, and the related consolidated statements of income, changes of stockholder’s equity, and cash flows for the years ended December 31, 2021 and 2020 are included as Exhibit 99.1 hereto and incorporated herein by reference.
(b) Pro Forma Financial Information.
The unaudited pro forma condensed combined financial information of the Partnership for and as of the year ended December 31, 2021, and the notes related thereto, are included as Exhibit 99.2 hereto and incorporated herein by reference.
(d) | Exhibits. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
HOLLY ENERGY PARTNERS, L.P. | ||||||
By: HEP LOGISTICS HOLDINGS, L.P., its general partner | ||||||
By: HOLLY LOGISTIC SERVICES, L.L.C., its general partner | ||||||
Date: March 16, 2022 | By: | /s/ Richard L. Voliva III | ||||
Name: | Richard L. Voliva III | |||||
Title: | President |
Exhibit 10.1
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the Agreement), is entered into as of March 14, 2022, by and between HF Sinclair Corporation (f/k/a Hippo Parent Corporation), a Delaware corporation (the Company) and Mark Petersen (Consultant).
WHEREAS, the Company is a party to that certain Business Combination Agreement, dated as of August 2, 2021 (the BCA), by and among The Sinclair Companies, a Wyoming corporation (Sinclair HoldCo), Hippo Holding LLC, a Delaware limited liability company (Hippo Holding), HollyFrontier Corporation, a Delaware corporation, the Company and Hippo Merger Sub, Inc., a Delaware corporation, pursuant to which, among other things, Sinclair HoldCo contributed all of the outstanding equity interests of Hippo Holding to the Company, resulting in Hippo Holding becoming a direct wholly owned subsidiary of the Company;
WHEREAS, the date that the closing of the transaction contemplated by the BCA will be hereinafter referred to as the Closing (Closing);
WHEREAS, this Agreement shall be effective as of, and only upon, the Closing (the Effective Date);
WHEREAS, effective as of the Closing, Consultant will no longer have an employment relationship with Sinclair HoldCo or any of its subsidiaries;
WHEREAS, effective as of the Closing, Consultant will not be an employee of the Company;
WHEREAS, the Company desires to engage Consultant to perform certain services in connection with the Downstream Business (as defined in the BCA) as of the Closing; and
WHEREAS, Consultant desires to perform such services upon the terms and conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the mutual promises hereinafter set forth and intending to be legally bound hereby, the Company and Consultant do hereby agree as follows:
1. Engagement of Consultant. Subject to the terms and conditions hereof, the Company hereby engages and appoints Consultant as its consultant and advisor with respect to the matters specified in Section 3 hereof, and Consultant hereby accepts his appointment and engagement by the Company with respect to such matters.
2. Term.
(a). The term of this Agreement shall begin on the Effective Date and shall continue until six months after Closing (the Term) unless earlier terminated pursuant to Section 2(b). This Agreement will terminate upon the expiration of the Term or as may be extended on a month to month basis by mutual agreement of the parties.
(b). The Company shall have the right to terminate this Agreement immediately for any reason or no reason.
3. Activities of Consultant.
(a). During the Term, Consultant shall undertake for and on behalf of the Company any reasonable services requested by the Company with respect to the Downstream Business or the Company and its subsidiaries (the Company Group), including but not limited supporting the transition of operations managed by Consultant for Sinclair HoldCo and its subsidiaries prior to Closing and assisting as questions arise related to operations managed by the Consultant for Sinclair HoldCo and its subsidiaries prior to Closing (the Services).
(b). Consultant shall devote such time, attention and energy as is necessary to perform and discharge the Services under this Section 3 in an efficient, trustworthy and businesslike manner.
(c). During the Term, Consultant shall comply with all applicable codes, rules, regulations and guidelines governing the conduct of employees and officers of the Company (collectively, the Rules), to the same extent such Rules would apply to Consultant if he were employed by the Company during the Term. Consultant hereby represents that he has been provided and has read and understood all such Rules and understands his compliance obligations notwithstanding that he is not an employee of the Company.
4. Compensation.
(a). In consideration for the Services to be performed hereunder, the Company shall pay Consultant a fee of $20,000 per month for the Term. Consultant may provide up to 38 hours per month of service. Nothing in this Agreement shall affect, alter or replace any payments to be made by the Company or any of its affiliates to Consultant under any other agreement or arrangement.
(b). The Company shall reimburse Consultant for all ordinary and necessary out-of-pocket business expenses incurred by him in connection with the discharge of the Services hereunder, provided that such expenses have been approved in accordance with any procedures of the Company then in effect.
(c). Upon the effectiveness of any termination of this Agreement, Consultants right to compensation (other than accrued but unpaid compensation) pursuant to this Agreement shall cease. In such event, the Company agrees to pay Consultant for his Services performed in accordance with the terms and requirements of this Agreement up to the date of termination at the agreed upon rate set forth in Section 4(a) above, subject to proration for any partially completed month.
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5. Independent Contractor.
(a) It is understood between the Company and the Consultant that, in rendering services pursuant to this Agreement, Consultant is and shall act in the capacity of an independent contractor and shall not be subject to the direction, control or supervision of the Company with respect to the performance of his services hereunder. Consultant will have exclusive control over the manner and means by which he performs the services rendered. Consultant will set his own schedule, hours, and location for performance of the services rendered.
(b) Consultant shall not be considered or be deemed in any way to be an employee of the Company and Consultant has no right or power, express or implied, to do any act or thing that would bind the Company in any away. Nothing herein shall create nor be deemed to create an employment relationship between Consultant and the Company.
(c) Consultant will provide the supplies, materials or other items needed to perform the services pursuant to this Agreement.
(d) Consultant is free to perform services for other entities during the Term, subject to the terms of this Agreement and the BCA, and there is no expectation that services provided to the Company are exclusive or will continue following the termination of this Agreement. The Company is free to engage other consultants who perform services similar to the services provided by Consultant.
(e) The Company will issue Consultant an IRS Form 1099 for payments made under this Agreement. It is Consultants sole responsibility, and not that of the Company, to pay any federal, state or local taxes that may be associated with these payments. Consultant agrees to indemnify and hold the Company harmless with respect to any tax liabilities that may arise relating to such payments. Consultant agrees to indemnify and hold the Company harmless with respect to any and all such taxes, penalties, premiums, or other liabilities or obligations that may arise relating to services provided by him or payments made to him pursuant to this Agreement. Consultant also shall be directly responsible for all returns and reports required by any governmental body.
6. Confidential and Proprietary Information. Consultant recognizes and acknowledges that by reason of his service to the Company, he will have access to confidential information concerning the Company and its affiliates (Confidential Information), including, without limitation, information and knowledge pertaining to their business, strategic plans, cost data and organizational information, and other proprietary information. Consultant acknowledges that such Confidential Information is a valuable and unique asset and covenants that he will not, either during or after the term of this Agreement, disclose any such Confidential Information to any person for any reason whatsoever or use such Confidential Information (except as his duties hereunder may require) without the prior written authorization of the Company, unless such information is in the public domain through no fault of Consultant or except as may be required by law.
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7. Reports to Government Entities. Nothing in this Agreement restricts or prohibits Consultant from initiating communications directly with, responding to any inquiries from, providing testimony before, providing confidential information to, reporting possible violations of law or regulation to, or from filing a claim or assisting with an investigation directly with a self-regulatory authority or a government agency or entity, including the U.S. Equal Employment Opportunity Commission, the Department of Labor, the National Labor Relations Board, the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General (collectively, the Regulators), or from making other disclosures that are protected under the whistleblower provisions of state or federal law or regulation. This Agreement does not limit Consultants right to receive an award from any Regulator that provides awards for providing information relating to a potential violation of law. Consultant does not need the prior authorization of the Company to engage in conduct protected by this paragraph, and Consultant does not need to notify the Company that Consultant has engaged in such conduct. Please take notice that federal law provides criminal and civil immunity to federal and state claims for trade secret misappropriation to individuals who disclose a trade secret to their attorney, a court, or a government official in certain, confidential circumstances that are set forth at 18 U.S.C. §§ 1833(b)(1) and 1833(b)(2), related to the reporting or investigation of a suspected violation of the law, or in connection with a lawsuit for retaliation for reporting a suspected violation of the law.
8. Restrictive Covenants.
(a). As part of the consideration for the compensation provided for hereunder, Consultant agrees that during the two (2) year period following the Effective Date, Consultant shall not, directly or indirectly, in his own capacity or through any other Person (as defined in the BCA):
(i). (A) engage or assist others to engage in or provide Services (as defined herein) directly or indirectly, in whole or in part, as an employee, employer, owner, operator, manager, advisor, consultant, contractor, agent, partner, director, stockholder, officer, volunteer, intern, or any other similar capacity to an entity in the United States in competition with the Company Group or engaged in the same or similar business as the Company Group; provided however, Consultant may perform services for the retained companies of Sinclair HoldCo or entities owned by the Holding family (Retained Sinclair Entities) subject to prior approval of Holly Logistic Services, L.L.C.s Board of Directors (HLS Board); (B) divert or attempt to divert any business or customer for such products and related services of the Company Group, or (C) otherwise do or perform any other act injurious or prejudicial to the sale of such products and related services by the Company Group; or
(ii). employ, engage or solicit for employment or engagement any Person employed by or engaged by the Company Group at any time during such period or any former employee or consultant of the Company Group who was employed by or engaged by with the Company during the twelve (12) months prior to the Effective Date.
(iii). call, solicit or engage for a commercial purpose any person who is or was a customer or supplier of the Company Group at any time during such period or any former customer or supplier of the Company Group who was a customer or supplier of the Company Group during the twelve (12) months prior to the Effective Date.
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(b). Consistent with the obligations set forth in Section 8(a)(1) above, Consultant agrees to notify and obtain the approval of the HLS Board prior to engaging in any consulting services for Retained Sinclair Entities and acknowledges and agrees to provide all such information regarding the proposed consulting services that the HLS Board deems necessary to evaluate the request.
(c). Notwithstanding the foregoing, Consultant shall in no way be restricted from acquiring or holding an ownership interest, or right to acquire an ownership interest in any publicly traded company that competes with the Company Group, provided that such interest does not represent more than five percent (5%) of the outstanding ownership interest in any such business.
9. Remedies. Consultant expressly agrees that the Companys remedy at law for any breach of the provisions of this Agreement will be inadequate and that upon such breach, the Company shall be entitled as a matter of right, in any court of competent jurisdiction, in equity or otherwise, to enforce the specific performance of Consultants obligations under this Agreement and to seek temporary and permanent injunctive relief, in any case without the necessity of proving the actual damage to the Company or the inadequacy of a legal remedy. The rights conferred upon the Company by the preceding sentence shall not be exclusive of any other rights or remedies that the Company may have at law, in equity or otherwise.
10. Indemnification. Consultant will indemnify and hold harmless the Company and its parents, subsidiaries, affiliated entities, fiduciaries, administrators, officers, directors, legal representatives, agents, successors, and assigns from and against any and all loss, damage, liability, judgment, or expense, including reasonable attorneys fees and litigation costs, arising out of Consultants negligence, misconduct, violation or default of this Agreement, including without limitation all reasonable attorneys fees and litigation costs incurred by the Company in the event the Company prevails in any claim(s) against Consultant arising out of Consultants negligence, misconduct, violation or breach of this Agreement.
11. Consultants Representation. Consultant represents and warrants that (i) he has the right, power, and authority to enter into this Agreement and to perform his obligations hereunder, (ii) the services performed by Consultant hereunder will be of professional quality, consistent with generally accepted industry standards and expectations for work of a similar nature and (iii) Consultant shall comply with all existing and future laws, rules, and regulations relating to or affecting this Agreement or the work to be performed by Consultant hereunder.
12. Choice of Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Texas without giving effect to any conflict of laws provisions.
13. Assignment. This Agreement is a contract for personal services by Consultant and may not be assigned by Consultant without the prior written consent of the Company.
14. Modifications; Waiver. No modification or waiver of any provision of this Agreement shall be valid unless it is in writing and signed by the party against whom it is sought to be enforced. No waiver at any time of any provision of this Agreement shall be deemed a waiver of any other provision of this Agreement at that time or a waiver of that or any other provision at any other time.
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15. Entire Agreement. This Agreement constitutes the entire agreement between the parties with regard to consulting services to be provided by Consultant to the Company and supersedes all prior agreements or understandings between the Company and Consultant or their agents with regard to such services.
[Signature Pages Follows]
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IN WITNESS WHEREOF, Consultant and the Company have executed this Agreement effective as of the day and year first above written.
HF SINCLAIR CORPORATION | ||
By: | /s/ Richard L. Voliva III | |
Name: | Richard L. Voliva III | |
Title: | Executive Vice President and Chief Financial Officer | |
CONSULTANT | ||
/s/ Mark Petersen | ||
Mark Petersen |
[Signature Page to Consulting Agreement (HF Sinclair)]
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the registration statements on Form S-3/A (No. 333-228715) and on Form S-8 (No. 333-182865) of Holly Energy Partners, L.P. of our report dated February 15, 2022, with respect to the consolidated financial statements of Sinclair Transportation Company and its subsidiaries, which report appears in the Form 8-K/A of Holly Energy Partners, L.P. dated March 16, 2022.
/s/ KPMG LLP
Salt Lake City, Utah
March 16, 2022
Exhibit 99.1
SINCLAIR TRANSPORTATION COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
C O N T E N T S
P a g e | ||||
INDEPENDENT AUDITORS REPORT |
1 | |||
FINANCIAL STATEMENTS |
||||
CONSOLIDATED BALANCE SHEETS |
3 | |||
CONSOLIDATED STATEMENTS OF INCOME |
4 | |||
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY |
5 | |||
CONSOLIDATED STATEMENTS OF CASH FLOWS |
6 | |||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
7 |
KPMG LLP
Suite 1500
15 W. South Temple
Salt Lake City, UT 84101
Independent Auditors Report
Stockholders and Board of Directors
Sinclair Transportation Company:
Opinion
We have audited the consolidated financial statements of Sinclair Transportation Company and its subsidiaries (the Company), which comprise the consolidated balance sheets as of December 31, 2021 and 2020, and the related consolidated statements of income, changes in stockholders equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
In our opinion, based on our audits and the report of the other auditors, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.
We did not audit the financial statements of certain investments in affiliates, which statements reflect investment in affiliate balances of $82,622 and $167,414 as of December 31, 2021 and 2020, respectively and equity in (loss) income of affiliates of $(3,346) and $2,928 for the years ended December 31, 2021 and 2020, respectively. Those statements were audited by other auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to those investments in affiliates, is based solely on the reports of the other auditors.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Emphasis of Matter
We draw attention to Note 1 to the consolidated financial statements, which describes the Companys basis of presentation used in preparing the consolidated financial statements. Our opinion is not modified with respect to this matter.
Responsibilities of Management for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Companys ability to continue as a going concern for one year after the date that the consolidated financial statements are available to be issued.
Auditors Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements.
In performing an audit in accordance with GAAS, we:
| Exercise professional judgment and maintain professional skepticism throughout the audit. |
| Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. |
| Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control. Accordingly, no such opinion is expressed. |
| Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements. |
| Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Companys ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.
Salt Lake City, Utah
February 15, 2022
Sinclair Transportation Company and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
December 31, | ||||||||
2021 | 2020 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 111 | $ | 547 | ||||
Trade and other accounts receivable |
1,649 | 1,261 | ||||||
Related party receivable |
87,972 | 36,354 | ||||||
Inventories |
111 | 595 | ||||||
Prepaid expenses and other assets |
375 | 782 | ||||||
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Total current assets |
90,218 | 39,539 | ||||||
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Other Assets: |
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Investment in affiliates |
194,629 | 196,767 | ||||||
Other noncurrent assets |
40 | 1,270 | ||||||
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Total other assets |
194,669 | 198,037 | ||||||
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Property, plant and equipment, at cost |
266,904 | 264,763 | ||||||
Less accumulated depreciation |
(120,841 | ) | (113,666 | ) | ||||
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Property, plant and equipment (net) |
146,063 | 151,097 | ||||||
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Total Assets |
$ | 430,950 | $ | 388,673 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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Accounts payable and accrued liabilities |
$ | 5,989 | $ | 3,141 | ||||
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Total current liabilities |
5,989 | 3,141 | ||||||
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Long Term Liabilities |
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Other long term liabilities |
454 | 393 | ||||||
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Total long term liabilities |
454 | 393 | ||||||
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Total Liabilities |
6,443 | 3,534 | ||||||
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Stockholders Equity |
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Common Stock, $1 par value; authorized 1,000 shares; issued and outstanding 1,000 shares at 2021 and 2020 |
1 | 1 | ||||||
Retained earnings |
424,506 | 385,138 | ||||||
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Total Stockholders equity |
424,507 | 385,139 | ||||||
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Total Liabilities and Stockholders Equity |
$ | 430,950 | $ | 388,673 | ||||
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See accompanying notes to these consolidated financial statements
- 3 -
Sinclair Transportation Company and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands)
Year ended | ||||||||
December 31, | ||||||||
2021 | 2020 | |||||||
Revenues and Other Income: |
||||||||
Sales and operating revenues |
$ | 5,579 | $ | 7,727 | ||||
Sales to related parties |
65,041 | 51,787 | ||||||
Other (loss) income, net |
(254 | ) | 178 | |||||
Equity in income of affiliates |
12,700 | 14,529 | ||||||
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Total revenues and other income |
83,066 | 74,221 | ||||||
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Costs and Expenses: |
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Cost of sales |
32,475 | 29,692 | ||||||
Administrative, general and selling |
1,640 | 1,347 | ||||||
Depreciation |
9,583 | 9,574 | ||||||
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Total costs and expenses |
43,698 | 40,613 | ||||||
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Net Income |
$ | 39,368 | $ | 33,608 | ||||
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See accompanying notes to these consolidated financial statements
- 4 -
Sinclair Transportation Company and Subsidiaries
Consolidated Statements of Stockholders Equity
(Dollars in thousands, except share data)
Shares Outstanding |
Common Stock |
Retained Earnings |
Total Stockholders Equity |
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Balance at December 31, 2019 |
1,000 | $ | 1 | $ | 352,069 | $ | 352,070 | |||||||||
Dividends |
(539 | ) | (539 | ) | ||||||||||||
Net Income |
33,608 | 33,608 | ||||||||||||||
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Balance at December 31, 2020 |
1,000 | 1 | 385,138 | 385,139 | ||||||||||||
Net Income |
39,368 | 39,368 | ||||||||||||||
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Balance at December 31, 2021 |
1,000 | $ | 1 | $ | 424,506 | $ | 424,507 | |||||||||
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See accompanying notes to these consolidated financial statements
- 5 -
Sinclair Transportation Company and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Year ended December 31, |
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2021 | 2020 | |||||||
Cash Flows From Operating Activities: |
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Net income |
$ | 39,368 | $ | 33,608 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
9,583 | 9,574 | ||||||
Earnings of equity method investments, inclusive of distributions |
3,346 | 4,684 | ||||||
Loss on sale of property, plant and equipment |
20 | 450 | ||||||
Changes in assets and liabilities: |
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Trade and other accounts receivable |
(388 | ) | 2,810 | |||||
Inventories |
484 | 40 | ||||||
Prepaid expenses and other assets |
407 | (9 | ) | |||||
Other noncurrent assets |
1,230 | (53 | ) | |||||
Accounts payable and accrued liabilities |
2,409 | (459 | ) | |||||
Other long term liabilites |
61 | (168 | ) | |||||
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Net cash provided by operating activities |
56,520 | 50,477 | ||||||
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Cash Flows From Investing Activities: |
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Proceeds from sale of investments |
| 2,478 | ||||||
Distributions from affiliates |
5,302 | 3,902 | ||||||
Investment in affiliates |
(6,510 | ) | (24,412 | ) | ||||
Purchase of property, plant and equipment |
(4,133 | ) | (9,021 | ) | ||||
Proceeds from sale of property, plant and equipment |
3 | 7 | ||||||
Advances from cash management arrangement with related party, net |
(51,618 | ) | (27,219 | ) | ||||
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Net cash used in investing activities |
(56,956 | ) | (54,265 | ) | ||||
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Cash Flows From Financing Activities: |
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Dividends |
| (539 | ) | |||||
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Net cash used in financing activities |
| (539 | ) | |||||
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Decrease in Cash and cash equivalents |
(436 | ) | (4,327 | ) | ||||
Cash and cash equivalents, Beginning of Year |
547 | 4,874 | ||||||
|
|
|
|
|||||
Cash and cash equivalents, End of Year |
$ | 111 | $ | 547 | ||||
|
|
|
|
|||||
Supplemental Disclosures of Cash Flow Information |
||||||||
Supplemental Disclosures of Non-Cash Investing Activities: |
||||||||
Purchases of property, plant, and equipment included in accounts payable |
$ | 553 | $ | 114 | ||||
Transfer of PP&E to affiliate through related party receivable |
$ | | $ | 2,958 |
See accompanying notes to these consolidated financial statements
- 6 -
Sinclair Transportation Company and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2021 and 2020
(Dollars in Thousands)
1. | The Company, Basis of Presentation, and Summary of Significant Accounting Policies |
The Company
Sinclair Transportation Company and its wholly owned subsidiaries, which include Sinclair Logistics LLC, Sinclair Terminals, Sinclair Pipelines and Sinclair Pipeline Company LLC (collectively the Company), owns and operates various pipelines, and terminals and consolidates its financial statements. The Company is wholly owned by The Sinclair Companies (Parent).
The Company owns and operates various pipelines, and terminals.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles from the consolidated financial statements and accounting records of the Parent using the historical results of operations and historical cost basis of the assets and liabilities that comprise the Company. These consolidated financial statements have been prepared to demonstrate the Companys consolidated historical financial positions results of operations, and cash flows. All intercompany balances and transactions within the Companys consolidated financial statements have been eliminated.
The consolidated financial statements include the assets, liabilities, revenues, and expenses that are specifically identifiable to the Company. The consolidated financial statements also include allocations of certain administrative, accounting, legal, human resources and information technology expenses from the Parent based on estimated hours incurred for the respective entities. These allocated costs are primarily related to corporate administrative expenses, employee related costs for corporate and shared employees. Nevertheless, the consolidated financial statements may not include all of the actual expenses that would have been incurred had the Company operated as a standalone company during the periods presented and may not reflect the consolidated results of operations, financial position and cash flows had the Company operated as a standalone business during the periods presented. Actual costs that would have been incurred if the Company had operated as a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. The Company also may incur additional costs associated with being a standalone company that were not included in the expense allocations and therefore would result in additional costs that are not reflected in the consolidated historical results of operations, financial position and cash flow. Consequently, future results of operations should the Company operate separately from the Parent will include costs and expenses that may be materially different than the Companys historical results of operations, financial position, and cash flows. Accordingly, the consolidated financial statements for the periods presented are not indicative of the Companys future results of operations, financial position and cash flow.
Related Party Transactions
The Company has a financing and cash management arrangement for all periods presented with Sinclair Finance Company, a wholly owned subsidiary of the Parent. Under this financing and cash management arrangement the Company delivers available cash, borrows, and makes repayments with Sinclair Finance Company throughout the year in the normal course of business. Funds on deposit with Sinclair Finance Company earn an adjusted money market rate and borrowed funds bear interest at one-month LIBOR plus 1.75%. Outstanding balances are due on demand. As of December 31, 2021 and 2020, the outstanding balances are presented on the consolidated balance sheets as a related party receivable of $87,972 and $36,354, respectively.
In the normal course of business, the Company provides terminal and transportation of petroleum products to affiliates of the Parent. For the years ending December 31, 2021 and 2020, the Company has sales to these affiliates in the amount of $65,041 and $51,787, respectively. In addition, the Company has recognized expenses related to services provided by the Parent and relate to administrative, accounting, legal, human resources and information technology support of $951 and $809 for the years ending December 31, 2021 and 2020, respectively.
- 7 -
Sinclair Transportation Company and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2021 and 2020
(Dollars in Thousands)
The Company has no long-term debt under credit agreements to which it is the legal obligor. However, the Company is a guarantor to the Parents $750,000 line of credit which had no outstanding balance as of December 31, 2021 and 2020. The Companys accounts receivable and inventories are subject to the Parents line of credit collateral. The Parents line of credit contains covenants that include a minimum debt service coverage ratio, maximum leverage ratio and minimum current ratio. The line of credit matures in July 2023. If a change in control were to occur, the Company would no longer have access to the Parents line of credit.
A summary of the significant accounting policies of the Company follows.
Use of Estimates
The preparation of the Companys financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Actual results may differ from such estimates.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of highly liquid investments with original maturities of three months or less.
Accounts Receivable
Accounts receivable consists of amounts due from customers who utilize the pipelines and terminals for transfer of petroleum products throughout the Mid-West and Rocky Mountain regions as well as other receivables. Credit is extended based on the Companys evaluation of the customers financial condition and in certain circumstances, collateral, such as a letter of credit, cash deposits or guarantee is required.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company has categorized its financial assets and liabilities based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
Financial assets recorded on the balance sheets are categorized based on the lowest level of inputs to the valuation techniques as follows:
Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.
Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 assets include the quoted prices for similar assets in active markets; quoted prices for identical or similar assets in non-active markets; pricing models whose inputs are observable for substantially the full term of the asset; and pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.
- 8 -
Sinclair Transportation Company and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2021 and 2020
(Dollars in Thousands)
Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect managements own assumptions about the assumptions a market participant would use in pricing the asset or liability.
A review of fair value hierarchy classifications is conducted on an annual basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities, there were no changes in classification in the current or prior year.
The Companys assessment of the significance of a particular input to fair value requires judgment and may affect the fair value of assets and their placement within the fair value hierarchy.
Inventories
Inventories are determined by the weighted average method and are valued at the lower of cost or net realizable value.
Investment in Affiliates
The Company has investments in three pipelines, over which it has significant influence but not a controlling financial interest. Pioneer Pipeline, with a 49% ownership and UNEV Pipeline, with a 25% ownership are accounted for by the equity method. In 2019, the Company obtained a 32.5% ownership in Saddle Butte Pipeline and invested $6,510 and $24,412, in 2021 and 2020, respectively, which is accounted for by the equity method. The Company recorded $12,700 and $14,529 of equity income from these companies in 2021 and 2020, respectively.
Summary financial information for the investee companies is presented below:
December 31, | ||||||||
2021 | 2020 | |||||||
Balance Sheets |
||||||||
Current assets |
$ | 43,203 | $ | 38,160 | ||||
Property, plant and equipment (net) |
593,311 | 602,472 | ||||||
Other assets |
86 | 156 | ||||||
|
|
|
|
|||||
Total assets |
$ | 636,600 | $ | 640,788 | ||||
|
|
|
|
|||||
Current liabilities |
$ | 9,216 | $ | 5,592 | ||||
Noncurrent liabilities |
11,379 | 12,858 | ||||||
|
|
|
|
|||||
Total liabilities |
20,595 | 18,450 | ||||||
Stockholders equity |
616,005 | 622,338 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 636,600 | $ | 640,788 | ||||
|
|
|
|
Year ended December 31, |
||||||||
2021 | 2020 | |||||||
Results of operations: |
||||||||
Sales |
$ | 567,324 | $ | 298,319 | ||||
Operating income |
37,523 | 37,288 | ||||||
Net income |
31,665 | 37,647 |
The Company has a difference of $7,301 and $7,548 as of December 31, 2021 and 2020, respectively related to its investment in UNEV when compared to its proportional interest in the underlying carrying value of UNEV. The Company amortizes this basis difference on a straight-line basis over 40 years. The Company has recorded a reduction to Equity in income of the affiliates of $247 for the years ended December 31, 2021 and 2020, respectively.
- 9 -
Sinclair Transportation Company and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2021 and 2020
(Dollars in Thousands)
Property, Plant and Equipment
Depreciation is provided on the straight-line method for property, plant and equipment. Maintenance and repairs are expensed as incurred and substantial improvements that extend the life of the asset are capitalized.
The Company reviews long-lived assets for impairments whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the undiscounted future cash flow of an asset group to be held and used in operations is less than the carrying value, an impairment loss is recognized for the excess, if any, of the propertys net book value over its estimated fair value.
Revenue Recognition
Company revenues are recognized as customer petroleum products are shipped through our pipelines and terminals. Revenue is recognized related to services provided to Sinclair Oil Corporation and affiliates of The Sinclair Companies which is presented in the Sales to related parties caption. Additionally, pipeline transportation and terminal storage services are also provided to unrelated third parties which is presented in the Sales and operating revenues caption.
Revenue recognized for services provided to related parties are satisfied over time as the transportation and terminal storage services are fulfilled, at the contractual agreed upon pricing. Consideration associated with these services are settled through the Companys financing and cash management arrangement. Arrangements with related parties do not include minimum contractual commitments.
Revenue recognized for services provided to unrelated third parties are satisfied over time as the transportation and terminal storage services are fulfilled, at the contractual agreed upon pricing. Payment is typically due in full within ten to thirty days.The Company contracts with customers state the terms of the sale, including the description of the services and the associated agreed upon pricing. The Companys contracts do not include terms which include returns, refunds, or other similar terms. As of December 31, 2021 and 2020, the receivables for revenue from unrelated third party customers was $1,022 and $851, respectively.
We have elected to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction and collected by us from a customer.
Other Income
Other income includes net gains and losses on investments, interest income and expense from related parties and gains and losses from sales of property, plant and equipment and other assets, unless otherwise identified on the consolidated statements of income.
Income Taxes
The Company consists of wholly owned subsidiaries of the Parent. These subsidiaries are disregarded entities for income tax purposes. Income and loss flows directly to the Parents income tax return. The Parent has elected to be taxed as an S Corporation under the Internal Revenue Code. As an S Corporation, taxable income (loss) for federal income tax purposes, as well as for certain states, flows directly to the Parents stockholders.
The Parent evaluates the Companys tax positions taken in the course of the preparation of the Parents tax return to determine whether the tax positions will more likely than not be sustained by the applicable tax authority.The Parent has determined that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions. The Parent is subject to tax examination for each of its open tax years, which extend back to 2018.
- 10 -
Sinclair Transportation Company and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2021 and 2020
(Dollars in Thousands)
2. | Fair Value Measurements |
As of December 31, 2021 and 2020 the Company had fair value hierarchy of money market funds at fair market value recorded in Cash of $64 and $491, respectively. These assets are considered level 1 fair value assets.
3. | Property, Plant and Equipment |
Property, plant and equipment consist of the following:
December 31, | Depreciable Lives (Years) |
|||||||||||
2021 | 2020 | |||||||||||
Equipment and furnishings |
$ | 64,489 | $ | 55,834 | 5-15 | |||||||
Land |
2,808 | 2,848 | ||||||||||
Marketing and distribution facilities |
4,218 | 4,189 | 5-30 | |||||||||
Petroleum transporting and other vehicles |
259 | 288 | 5-10 | |||||||||
Pipelines and related property |
192,079 | 199,693 | 5-40 | |||||||||
Construction-in-progress |
3,051 | 1,911 | ||||||||||
|
|
|
|
|||||||||
$ | 266,904 | $ | 264,763 | |||||||||
Less accumulated depreciation |
(120,841 | ) | (113,666 | ) | ||||||||
|
|
|
|
|||||||||
Property, plant and equipment (net) |
$ | 146,063 | $ | 151,097 | ||||||||
|
|
|
|
4. | Employee Benefit Plans |
Defined Contribution Plans
The Parent has defined contribution 401(k) plans that cover substantially all employees of the Company. Contributions are based on employees compensation and the Company partially matches employee contributions. The Companys contributions to these plans were $853 and $794 for 2021 and 2020, respectively.
Current and Postretirement Medical Plans
The Parent provides health insurance, life insurance and long-term disability insurance coverage through current and postretirement medical plans (the Plan) to current qualified employees as well as certain retirees and other terminated employees of the Parents subsidiaries. The Plan is funded by Parents subsidiaries contributions to a trust account. The Parents subsidiaries contribute sufficient monies to meet minimum funding requirements and to pay claims. Employees are required to contribute toward certain coverage levels as determined by the Plan. The costs of the postretirement and postemployment benefits are shared by the Parents subsidiaries and retirees.
The Plan does not offer new early retirees age 55 to 61 post employment healthcare. Employees with at least 12 years of service may retire at age 62 to 65 and receive a cash payment equal to 50% of the Companys full premium related to the actual employees historical coverage since age 60 (last 36 months) prorated to age 65. The Plan offers retirees age 65 or older the Medicare Supplement Plan for a maximum benefit of $10 per covered person.
- 11 -
Sinclair Transportation Company and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2021 and 2020
(Dollars in Thousands)
Sinclair Services Company, a subsidiary of the Parent, is the sponsor of the plan, The Company has contributed $2,755 and $1,966 to the plan for the years ended December 31, 2021 and 2020, respectively.
5. | Commitments and Contingent Liabilities |
Lease Commitments
As of December 31, 2021, the minimum future rental commitments on non-cancelable leases with a term in excess of one year are as follows:
Year Ending December 31, | ||||||
2022 |
$ | 34 | ||||
2023 |
34 | |||||
2024 |
34 | |||||
2025 |
9 | |||||
2026 |
| |||||
Thereafter |
| |||||
|
|
|||||
$ | 111 | |||||
|
|
The Company recorded $396 and $329 of operating lease expense in 2021 and 2020, respectively, in cost of sales.
Environmental Issues
Liabilities are recorded when environmental assessments and/or cleanups are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with the Companys commitment to a formal plan of action. The environmental reserves are recorded in Accounts payable and accrued liabilities for the current portion of $256 and $271, for 2021 and 2020, respectively, and Other long-term liabilities for the long-term portion of $454 and $393, for 2021 and 2020, respectively.
No obligations to retire petroleum pipeline and terminals long-lived assets have been recognized, as indeterminate settlement dates for the asset retirements prevent estimation of the fair value of the associated retirement obligation. The Company performs periodic reviews of such assets for any changes in facts and circumstances that might require recognition of a retirement obligation. If the settlement dates become determinable, the associated retirement obligation could be material to the financial statements.
Commitments
The Company has a 10-year financial commitment, which began March 2012 with UNEV Pipeline, LLC, a pipeline affiliate, for pipeline capacity for a minimum of $7,400 annually.
Litigation
The Company is involved in certain litigation related to its business activities. Management does not believe that it is reasonably possible the resolution of these matters will have a material adverse effect on the Companys financial position or results of operations.
6. | Subsequent events |
Subsequent events were evaluated through February 15, 2022, the date the financial statements were available to be issued.
- 12 -
Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On March 14, 2022 (the Closing Date), Holly Energy Partners, L.P. (HEP or the Partnership), The Sinclair Companies (Sinclair), and Sinclair Transportation Company, a wholly-owned subsidiary of Sinclair (STC), completed the previously announced transaction whereby HEP acquired all of the outstanding equity interests of STC in exchange for 21 million newly issued common limited partner units of HEP (common units), representing 17% of the outstanding HEP common units, with a value of approximately $349.0 million based on HEPs fully diluted common units outstanding and the closing unit price on March 11, 2022, plus cash consideration equal to $321.4 million (the HEP Transaction), inclusive of estimated working capital adjustments as set forth in the contribution agreement executed between the parties on August 2, 2021 (as amended on March 14, 2022, the Contribution Agreement). The aggregate transaction value was $670.4 million, with the cash consideration funded through a draw under HEPs senior secured revolving credit facility.
The unaudited pro forma condensed combined financial information and related footnotes (the Pro Forma Financial Statements) have been prepared in accordance with Article 11 of Regulation S-X, Pro Forma Financial Information, which is herein referred to as Article 11. The Pro Forma Financial Statements present the combination of the financial information and the pro forma effect with respect to the HEP Transaction, further details of which are included within the footnotes to the Pro Forma Financial Statements.
The Pro Forma Financial Statements are presented for informational purposes only and are not necessarily indicative of the financial position or results of operations that would have occurred had the HEP Transaction been consummated as of the dates indicated, nor do they project the financial position or results of operations of the combined company following the effective date. The information presented in the Pro Forma Financial Statements does not give effect to the potential impact of current financial conditions, or any anticipated revenue enhancements, cost savings or operating synergies that may result from the HEP Transaction.
The Pro Forma Financial Statements are intended to provide information about the continuing impact of the HEP Transaction as if it had been consummated as of an earlier date. The transaction accounting adjustments are based on available information and certain assumptions that management believes are factually supportable as of the closing date of the HEP Transaction. In the opinion of management, all adjustments necessary to present fairly the Pro Forma Financial Statements have been made.
The HEP Transaction is accounted for using the acquisition method of accounting with HEP identified as the accounting acquirer. Under the acquisition method of accounting, HEP will record the assets acquired and liabilities assumed from STC at their respective acquisition date fair values at the effective date.
The Pro Forma Financial Statements have been prepared from the respective historical consolidated financial statements of HEP and STC, adjusted to give effect to the HEP Transaction. The unaudited pro forma condensed combined balance sheet (the Pro Forma Balance Sheet) combines the historical consolidated balance sheets of HEP and STC as of December 31, 2021, giving effect to the HEP Transaction as if it had been consummated on December 31, 2021. The unaudited pro forma condensed combined statement of operations (the Pro Forma Statement of Operations) for the year ended December 31, 2021 combines the historical consolidated statements of operations of HEP and STC, giving effect to the HEP Transaction as if it had been consummated on January 1, 2021. The Pro Forma Financial Statements contain certain reclassification adjustments to conform the historical STC financial statement presentation to HEPs financial statement presentation.
HEP has incurred certain non-recurring charges in connection with the HEP Transaction, the substantial majority of which consist of transaction costs related to financial advisors, legal advisors, financial advisory and professional accounting services. Any such charge could affect the future results of the post-acquisition company in the period in which such charges are incurred; however, these costs are not expected to be incurred in any period beyond 12 months from the effective date. Accordingly, the Pro Forma Statement of Operations for the year ended December 31, 2021, reflects the effects of these estimated non-recurring charges to the extent such charges are not included in the historical balance sheet of HEP as of December 31, 2021. Further, there may be additional charges related to other integration activities resulting from the HEP Transaction, the timing, nature, and amount of which HEPs management could not identify as of the closing date of the HEP Transaction, and thus, such charges are not reflected in the Pro Forma Financial Statements.
1
The fair value estimates of the STC assets acquired and liabilities assumed are preliminary as HEP continues to complete the detailed valuation analysis to arrive at the required final estimates, which will be completed as soon as practicable, and will not extend beyond the one-year measurement period provided under Accounting Standards Codification 805, Business Combinations (ASC 805).
The final determination of the fair values of the assets and liabilities of STC will be based on the actual net tangible and intangible assets and liabilities of STC that existed as of the closing date of the HEP Transaction. In addition, the portion of the purchase consideration paid in HEP common limited partner units was determined based on the closing price of HEPs common limited partner units on the effective date of the HEP Transaction.
The Pro Forma Financial Statements should be read in conjunction with:
| the audited consolidated financial statements contained in HEPs Annual Report on Form 10-K for the year ended December 31, 2021, which is incorporated by reference into this HEP Current Report on Form 8-K; and |
| the audited consolidated financial statements contained in STCs annual financial statements for the year ended December 31, 2021, which are included as an exhibit to this HEP Current Report on Form 8-K. |
2
HOLLY ENERGY PARTNERS, L.P.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of December 31, 2021
Historical | Transaction Accounting Adjustments |
Holly Energy Partners Pro Forma Combined |
||||||||||||||||||||||
Holly Energy Partners |
Sinclair Transportation Company |
Reclass Adjustments - Note 2 |
Pro Forma Adjustments - Note 4 |
|||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 14,381 | $ | 111 | $ | | $ | 3,461 | (a | ) | $ | 17,953 | ||||||||||||
Accounts receivable: |
||||||||||||||||||||||||
Trade |
12,745 | 1,649 | | | 14,394 | |||||||||||||||||||
Affiliates |
56,154 | | | | 56,154 | |||||||||||||||||||
Related party receivable |
| 87,972 | | (87,972 | ) | (b | ) | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
68,899 | 89,621 | | (87,972 | ) | 70,548 | |||||||||||||||||||
Inventories |
| 111 | (111 | ) | | | ||||||||||||||||||
Prepaid and other current assets |
11,033 | 375 | 111 | | 11,519 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total current assets |
94,313 | 90,218 | | (84,511 | ) | 100,020 | ||||||||||||||||||
Properties and equipment, net |
1,329,028 | | 146,063 | 210,149 | (c | ) | 1,685,240 | |||||||||||||||||
Properties and equipment, at cost |
| 266,904 | (266,904 | ) | | | ||||||||||||||||||
Less accumulated depreciation |
| (120,841 | ) | 120,841 | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
1,329,028 | 146,063 | | 210,149 | 1,685,240 | ||||||||||||||||||||
Operating lease right-of-use assets, net |
2,275 | | | | 2,275 | |||||||||||||||||||
Net investment in leases |
309,303 | | | | 309,303 | |||||||||||||||||||
Intangible assets, net |
73,307 | | | | 73,307 | |||||||||||||||||||
Goodwill |
223,650 | | | 81,493 | (a | )(b)(c)(f)(g)(h) | 305,143 | |||||||||||||||||
Equity method investments |
116,378 | 194,629 | | (17,796 | ) | (c | )(d) | 293,211 | ||||||||||||||||
Other assets |
17,613 | 40 | | | 17,653 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total assets |
$ | 2,165,867 | $ | 430,950 | $ | | $ | 189,335 | $ | 2,786,152 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
3
HOLLY ENERGY PARTNERS, L.P.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (Continued)
As of December 31, 2021
Historical | Transaction Accounting Adjustments |
Holly Energy Partners Pro Forma Combined |
||||||||||||||||||||||
Holly Energy Partners |
Sinclair Transportation Company |
Reclass Adjustments - Note 2 |
Pro Forma Adjustments - Note 4 |
|||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
LIABILITIES AND EQUITY |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Accounts payable: |
||||||||||||||||||||||||
Trade |
$ | 28,577 | $ | 5,989 | $ | | $ | 7,020 | (e | ) | $ | 41,586 | ||||||||||||
Affiliates |
11,703 | | | | 11,703 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
40,280 | 5,989 | | 7,020 | 53,289 | ||||||||||||||||||||
Accrued Interest |
11,258 | | | | 11,258 | |||||||||||||||||||
Deferred revenue |
14,585 | | | | 14,585 | |||||||||||||||||||
Accrued property taxes |
4,542 | | | | 4,542 | |||||||||||||||||||
Current operating lease liabilities |
620 | | | | 620 | |||||||||||||||||||
Current finance lease liabilities |
3,786 | | | | 3,786 | |||||||||||||||||||
Other current liabilities |
1,781 | | | | 1,781 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total current liabilities |
76,852 | 5,989 | | 7,020 | 89,861 | |||||||||||||||||||
Long-term debt |
1,333,049 | | | 325,000 | (a | ) | 1,658,049 | |||||||||||||||||
Noncurrent operating lease liabilities |
2,030 | | | | 2,030 | |||||||||||||||||||
Noncurrent finance lease liabilities |
64,649 | | | | 64,649 | |||||||||||||||||||
Other long-term liabilities |
12,527 | 454 | | 1,472 | (f | ) | 14,453 | |||||||||||||||||
Deferred revenue |
29,662 | | | | 29,662 | |||||||||||||||||||
Class B unit |
56,549 | | | | 56,549 | |||||||||||||||||||
Equity: |
||||||||||||||||||||||||
Holly Energy Partners equity: |
||||||||||||||||||||||||
Common unitholders |
443,017 | | | 357,445 | (d | )(e)(g) | 800,462 | |||||||||||||||||
Common stock |
| 1 | | (1 | ) | (h | ) | | ||||||||||||||||
Retained earnings |
| 424,506 | | (424,506 | ) | (h | ) | | ||||||||||||||||
Noncontrolling interests |
147,532 | | | (77,095 | ) | (d | ) | 70,437 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total equity |
590,549 | 424,507 | | (144,157 | ) | 870,899 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total liabilities and equity |
$ | 2,165,867 | $ | 430,950 | $ | | $ | 189,335 | $ | 2,786,152 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements
4
HOLLY ENERGY PARTNERS, L.P.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Year Ended December 31, 2021
Historical | Transaction Accounting Adjustments | Holly Energy Partners Pro Forma Combined |
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Holly Energy Partners |
Sinclair Transportation Company |
Reclass Adjustments - Note 2 |
Pro Forma Adjustments - Note 4 |
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(in thousands, except per unit amounts) | ||||||||||||||||||||
Revenues: |
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Affiliates |
$ | 390,849 | $ | | $ | 65,041 | $ | | $ | 455,890 | ||||||||||
Third parties |
103,646 | | 5,579 | | 109,225 | |||||||||||||||
Sales and operating revenues |
| 5,579 | (5,579 | ) | | | ||||||||||||||
Sales to related parties |
| 65,041 | (65,041 | ) | | | ||||||||||||||
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494,495 | 70,620 | | | 565,115 | ||||||||||||||||
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Operating costs and expenses: |
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Operations (exclusive of depreciation and amortization) |
170,524 | | 32,475 | | 202,999 | |||||||||||||||
Depreciation and amortization |
93,800 | 9,583 | | 6,578 | (i) | 109,961 | ||||||||||||||
Cost of sales |
| 32,475 | (32,475 | ) | | | ||||||||||||||
General and administrative |
12,637 | 1,640 | | 7,020 | (e) | 21,297 | ||||||||||||||
Goodwill impairment |
11,034 | | | | 11,034 | |||||||||||||||
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287,995 | 43,698 | | 13,598 | 345,291 | ||||||||||||||||
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Operating income |
206,500 | 26,922 | | (13,598 | ) | 219,824 | ||||||||||||||
Other income (expense): |
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Equity in earnings of equity method investments |
12,432 | 12,700 | | (4,438 | ) (j) | 20,694 | ||||||||||||||
Interest expense |
(53,818 | ) | | | (7,475 | ) (k) | (61,293 | ) | ||||||||||||
Interest income |
29,925 | | | | 29,925 | |||||||||||||||
Gain on sales-type leases |
24,677 | | | | 24,677 | |||||||||||||||
Gain on sale of assets and other |
6,179 | | (254 | ) | | 5,925 | ||||||||||||||
Other income (net) |
| (254 | ) | 254 | | | ||||||||||||||
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19,395 | 12,446 | | (11,913 | ) | 19,928 | |||||||||||||||
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Income before income taxes |
225,895 | 39,368 | | (25,511 | ) | 239,752 | ||||||||||||||
State income tax expense |
(32 | ) | | | | (32 | ) | |||||||||||||
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Net income |
225,863 | 39,368 | | (25,511 | ) | 239,720 | ||||||||||||||
Allocation of net (income) loss attributable to noncontrolling interests |
(10,917 | ) | | | 4,686 | (j) | (6,231 | ) | ||||||||||||
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Net income attributable to the partners |
$ | 214,946 | $ | 39,368 | $ | | $ | (20,825 | ) | $ | 233,489 | |||||||||
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Limited partners per unit interest in earnings - basic and diluted |
$ | 2.03 | $ | 1.85 | ||||||||||||||||
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Weighted average limited partners units outstanding |
105,440 | 21,000 | (g) | 126,440 | ||||||||||||||||
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See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The HEP and STC historical financial information has been derived from each companys historical financial statements. which are incorporated by reference and included as an exhibit to this HEP Current Report on Form 8-K, respectively. Certain of STCs historical amounts have been reclassified to conform to HEPs financial statement presentation, as discussed further in Note 2. The Pro Forma Financial Statements should be read in conjunction with each companys historical financial statements and the notes thereto. The Pro Forma Balance Sheet gives effect to the HEP Transaction as if it had been completed on December 31, 2021. The Pro Forma Statement of Operations gives effect to the HEP Transaction as if it had been completed on January 1, 2021. In the opinion of HEPs management, all material adjustments have been made that are necessary to present fairly the Pro Forma Financial Statements in accordance with Article 11.
The Pro Forma Financial Statements do not purport to be indicative of the financial position or results of operations of the combined company that would have occurred if the HEP Transaction had occurred on the dates indicated, nor are they indicative of HEPs future financial position or results of operations. In addition, future results may differ significantly from those reflected in the Pro Forma Financial Statements.
NOTE 2 RECLASSIFICATION ADJUSTMENTS
The Pro Forma Financial Statements have been adjusted as follows to reflect reclassifications of STCs historical financial statements to conform to HEPs financial statement presentation.
Pro Forma Balance Sheet as of December 31, 2021
| Reclassification of $0.1 million from Inventories to Prepaid and other current assets; and |
| Reclassification of $266.9 million and $120.8 million from Properties and equipment, at cost and Accumulated depreciation, respectively to Properties and equipment, net. |
Pro Forma Statement of Operations for the year ended December 31, 2021
| Reclassification of $5.6 million from Sales and operating revenues to Revenues: Third parties; |
| Reclassification of $65.0 million from Sales to related parties to Revenues: Affiliates; |
| Reclassification of $32.5 million from Cost of goods sold to Operations (exclusive of depreciation and amortization); and |
| Reclassification of $0.3 million from Other income (net) to Gain on sale of assets and other. |
NOTE 3 PRELIMINARY ACQUISITION ACCOUNTING
On August 2, 2021, HEP, Sinclair, and STC entered into the Contribution Agreement pursuant to which, on March 14, 2022, HEP acquired all of the outstanding equity interests of STC in exchange for 21 million newly issued common units of HEP and cash consideration equal to $321.4 million, inclusive of estimated working capital adjustments as set forth in the Contribution Agreement. Based on the HEP closing unit price as of March 11, 2022, of $16.62 per common unit, the estimated purchase price for the assets acquired and the liabilities assumed by HEP in the HEP Transaction is $670.4 million. The cash consideration was funded through a draw under HEPs senior secured revolving credit facility.
HEP has determined it is the accounting acquirer in the HEP Transaction, which is accounted for under the acquisition method of accounting for business combinations in accordance with ASC 805. The allocation of the preliminary purchase price is based upon HEP managements estimates of, and assumptions related to, the fair values of assets acquired and liabilities assumed as of December 31, 2021, using currently available information.
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The preliminary purchase price allocation is subject to change due to several factors, including, but not limited to, changes in the estimated fair value of STCs assets acquired and liabilities assumed as of the closing date of the HEP Transaction, which could result from HEPs additional valuation analysis, changes in discount rates and other factors.
The following tables present the preliminary purchase consideration and preliminary purchase price allocation of the assets acquired and the liabilities assumed in the HEP Transaction:
Preliminary Purchase Price Allocation |
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(in thousands) | ||||
Assets Acquired: |
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Accounts receivable: Trade |
$ | 1,649 | ||
Prepaid and other current assets |
486 | |||
Properties and equipment, net |
356,212 | |||
Equity method investments |
238,483 | |||
Other assets |
40 | |||
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Total assets acquired |
$ | 596,870 | ||
Liabilities Assumed: |
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Accounts payable: Trade |
5,989 | |||
Other long-term liabilities |
1,926 | |||
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Total liabilities assumed |
$ | 7,915 | ||
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Net assets acquired |
$ | 588,955 | ||
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Goodwill |
$ | 81,493 | ||
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From August 2, 2021, the last trading date prior to the initial public announcement of the HEP Transaction, to March 11, 2022, the preliminary value of the Partnership interest consideration issued decreased by approximately $73.7 million, as a result of the decrease in the price of HEPs common units from $20.13 per common unit to $16.62 per common unit.
A 20% increase or decrease in the closing price of HEPs common units, as compared to the March 11, 2022 closing price, would increase or decrease the total transaction consideration by approximately $69.8 million, assuming all other factors are held constant. A 20% increase or decrease in the closing price of HEPs common units would potentially result in goodwill within the range of $11.7 million to $151.3 million as of the closing date of the HEP Transaction based on the preliminary estimates of the fair values of the assets acquired and liabilities assumed.
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NOTE 4 PRO FORMA ADJUSTMENTS
The Pro Forma Financial Statements have been adjusted to reflect adjustments to historical book values of STC to their preliminary estimated fair values in accordance with the acquisition method of accounting, the estimated closing price paid by HEP for the Common Stock and Retained Earnings of STC and estimated direct transaction costs. These adjustments include the following:
(a) | Reflects the change in Cash and cash equivalents for the following: |
| Borrowings of $325.0 million on the HEP senior secured revolving credit facility as used to fund the $325.0 million cash portion of the preliminary purchase consideration; |
| The receipt of $3.6 million for the Estimated Adjustment Payment, as defined in the Contribution Agreement, which is also part of the preliminary purchase consideration for the HEP Transaction; and |
| The elimination of cash of $0.1 million not acquired as part of the HEP Transaction. |
(b) | Reflects the elimination of the historical STC Related party receivable, as this amount was settled by STC prior to the closing date of the HEP Transaction. The historical STC Related Party Receivable was $88.0 million as of December 31, 2021. |
(c) | Reflects the adjustments to recognize at the completion of the HEP Transaction the preliminary estimated fair value of HEP common units issued as the Partnership interest consideration, plus cash and the Estimated Adjustment Payment, for total consideration of $670.4 million, which has been allocated to the estimated fair value of the assets acquired and liabilities assumed based on the following: |
| An increase of $210.1 million to Properties and equipment, net; and |
| A decrease of $17.8 million to Equity method investments, comprised of an increase of $66.6 million related to the historical equity method investments owned by STC, excluding its 25.0% interest in UNEV Pipeline LLC, which was eliminated at the closing date of the HEP Transaction. The carrying value of STCs 25.0% interest in UNEV Pipeline, LLC was $84.4 million as of December 31, 2021. |
(d) | As previously mentioned, as part of HEPs acquisition of STC, it acquired the 25.0% of UNEV Pipeline LLC owned by one of STCs subsidiaries, Sinclair Logistics LLC, and as such, UNEV Pipeline LLC became a wholly owned subsidiary of HEP. Accordingly, a pro forma adjustment has been made to the Pro Forma Balance Sheet to eliminate $61.7 million related to the fair value of the UNEV Pipeline LLC equity method investment acquired by HEP, with a corresponding reduction to Noncontrolling interests for HEPs historical carrying amount of the investment as of December 31, 2021, of $77.1 million, with the offset reflected within Common unitholders for $15.4 million. |
(e) | Reflects the accrual of estimated non-recurring costs of $7.0 million related to the HEP Transaction including, among others, fees paid for financial advisors, legal services, and professional accounting services. These estimated and incurred costs are not reflected in the historical December 31, 2021 consolidated balance sheets of HEP and STC but are reflected in the Pro Forma Balance Sheet as of December 31, 2021, as an increase to Accounts payable: Trade and a decrease to Common unitholders for $7.0 million, with a corresponding increase to General and administrative on the Pro Forma Statement of Operations for the year ended December 31, 2021. |
(f) | Reflects the fair value adjustment to recognize asset retirement obligations for $1.5 million to align STCs historical accounting policy with that of HEP as the accounting acquirer. |
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(g) | Reflects the issuance of 21 million common units of HEP for an estimated $349.0 million to STC as part of the preliminary purchase consideration for the HEP Transaction. |
(h) | Reflects the elimination of STCs historical equity consisting of a combined Common stock and Retained earnings balance in accordance with the acquisition method of accounting. The combined Common stock and Retained earnings balance was $424.5 million as of December 31, 2021. |
(i) | Reflects the pro forma adjustments to Depreciation and amortization, related to depreciation expense for the properties and equipment acquired based on the preliminary estimated fair value, calculated on a straight-line basis assuming an estimated 20.4 year weighted average useful life of the assets. |
(j) | Reflects the pro forma adjustment related to the acquisition by HEP of STCs 25.0% ownership in UNEV Pipeline LLC, which is reflected as an elimination from STCs historical Equity in earnings of equity method investments and an elimination from HEPs historical Allocation of net (income) loss attributable to noncontrolling interests. As of December 31, 2021, STCs historical Equity in earnings of equity method investments was $4.4 million. As of December 31, 2021, HEPs historical Allocation of net (income) loss attributable to noncontrolling interests was $4.7 million. The difference of $0.3 million related to historical amortization expense recorded by STC for the year ended December 31, 2021. |
(k) | Reflects the pro forma adjustment to Interest expense for an increase of $7.5 million for the year ended December 31, 2021, related to the $325.0 million of borrowings on the HEP senior secured revolving credit facility based on an effective interest rate of 2.3% per annum. |
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