|
|
|
|
Item 1.
|
Financial Statements
|
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands, except unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents (Cushing Connect VIEs: $10,773 and $6,842, respectively)
|
|
$
|
18,913
|
|
|
$
|
13,287
|
|
|
Accounts receivable:
|
|
|
|
|
|
Trade (Cushing Connect VIEs: $2,170 and $79, respectively)
|
|
14,929
|
|
|
18,731
|
|
|
Affiliates
|
|
49,847
|
|
|
49,716
|
|
|
|
|
64,776
|
|
|
68,447
|
|
|
Prepaid and other current assets
|
|
7,905
|
|
|
7,629
|
|
|
Total current assets
|
|
91,594
|
|
|
89,363
|
|
|
|
|
|
|
|
|
Properties and equipment, net (Cushing Connect VIEs: $25,832 and $2,916, respectively)
|
|
1,458,934
|
|
|
1,467,099
|
|
|
Operating lease right-of-use assets, net
|
|
3,377
|
|
|
3,255
|
|
|
Net investment in leases
|
|
168,153
|
|
|
134,886
|
|
|
Intangible assets, net
|
|
94,318
|
|
|
101,322
|
|
|
Goodwill
|
|
270,336
|
|
|
270,336
|
|
|
Equity method investments (Cushing Connect VIEs: $39,815 and $37,084, respectively)
|
|
123,299
|
|
|
120,071
|
|
|
Other assets
|
|
11,772
|
|
|
12,900
|
|
|
Total assets
|
|
$
|
2,221,783
|
|
|
$
|
2,199,232
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable:
|
|
|
|
|
|
Trade (Cushing Connect VIEs: $6,421 and $2,082, respectively)
|
|
$
|
14,639
|
|
|
$
|
17,818
|
|
|
Affiliates
|
|
7,286
|
|
|
16,737
|
|
|
|
|
21,925
|
|
|
34,555
|
|
|
|
|
|
|
|
|
Accrued interest
|
|
10,683
|
|
|
13,206
|
|
|
Deferred revenue
|
|
11,002
|
|
|
10,390
|
|
|
Accrued property taxes
|
|
5,526
|
|
|
3,799
|
|
|
Current operating lease liabilities
|
|
1,213
|
|
|
1,126
|
|
|
Current finance lease liabilities
|
|
3,293
|
|
|
3,224
|
|
|
Other current liabilities
|
|
2,975
|
|
|
2,305
|
|
|
Total current liabilities
|
|
56,617
|
|
|
68,605
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
1,486,648
|
|
|
1,462,031
|
|
|
Noncurrent operating lease liabilities
|
|
2,530
|
|
|
2,482
|
|
|
Noncurrent finance lease liabilities
|
|
70,039
|
|
|
70,475
|
|
|
Other long-term liabilities
|
|
13,689
|
|
|
12,808
|
|
|
Deferred revenue
|
|
42,692
|
|
|
45,681
|
|
|
|
|
|
|
|
|
Class B unit
|
|
51,062
|
|
|
49,392
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
Partners’ equity:
|
|
|
|
|
|
Common unitholders (105,440,201 units issued and outstanding
at June 30, 2020 and December 31, 2019)
|
|
380,723
|
|
|
381,103
|
|
|
Noncontrolling interest
|
|
117,783
|
|
|
106,655
|
|
|
Total equity
|
|
498,506
|
|
|
487,758
|
|
|
Total liabilities and equity
|
|
$
|
2,221,783
|
|
|
$
|
2,199,232
|
|
See accompanying notes.
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Affiliates
|
|
$
|
95,563
|
|
|
$
|
102,369
|
|
|
$
|
196,991
|
|
|
$
|
205,728
|
|
|
Third parties
|
|
19,244
|
|
|
28,382
|
|
|
45,670
|
|
|
59,520
|
|
|
|
|
114,807
|
|
|
130,751
|
|
|
242,661
|
|
|
265,248
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
Operations (exclusive of depreciation and amortization)
|
|
34,737
|
|
|
40,602
|
|
|
69,718
|
|
|
78,121
|
|
|
Depreciation and amortization
|
|
25,034
|
|
|
24,247
|
|
|
49,012
|
|
|
48,071
|
|
|
General and administrative
|
|
2,535
|
|
|
1,988
|
|
|
5,237
|
|
|
4,608
|
|
|
|
|
62,306
|
|
|
66,837
|
|
|
123,967
|
|
|
130,800
|
|
|
Operating income
|
|
52,501
|
|
|
63,914
|
|
|
118,694
|
|
|
134,448
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Equity in earnings of equity method investments
|
|
2,156
|
|
|
1,783
|
|
|
3,870
|
|
|
3,883
|
|
|
Interest expense
|
|
(13,779
|
)
|
|
(19,230
|
)
|
|
(31,546
|
)
|
|
(38,252
|
)
|
|
Interest income
|
|
2,813
|
|
|
551
|
|
|
5,031
|
|
|
1,079
|
|
|
Gain on sales-type leases
|
|
33,834
|
|
|
—
|
|
|
33,834
|
|
|
—
|
|
|
Loss on early extinguishment of debt
|
|
—
|
|
|
—
|
|
|
(25,915
|
)
|
|
—
|
|
|
Gain (loss) on sale of assets and other
|
|
468
|
|
|
111
|
|
|
974
|
|
|
(199
|
)
|
|
|
|
25,492
|
|
|
(16,785
|
)
|
|
(13,752
|
)
|
|
(33,489
|
)
|
|
Income before income taxes
|
|
77,993
|
|
|
47,129
|
|
|
104,942
|
|
|
100,959
|
|
|
State income tax benefit (expense)
|
|
(39
|
)
|
|
30
|
|
|
(76
|
)
|
|
(6
|
)
|
|
Net income
|
|
77,954
|
|
|
47,159
|
|
|
104,866
|
|
|
100,953
|
|
|
Allocation of net income attributable to noncontrolling interests
|
|
(1,484
|
)
|
|
(1,469
|
)
|
|
(3,535
|
)
|
|
(4,081
|
)
|
|
Net income attributable to the partners
|
|
76,470
|
|
|
45,690
|
|
|
101,331
|
|
|
96,872
|
|
|
Limited partners’ per unit interest in earnings—basic and diluted
|
|
$
|
0.73
|
|
|
$
|
0.43
|
|
|
$
|
0.96
|
|
|
$
|
0.92
|
|
|
Weighted average limited partners’ units outstanding
|
|
105,440
|
|
|
105,440
|
|
|
105,440
|
|
|
105,440
|
|
See accompanying notes.
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
2019
|
|
Cash flows from operating activities
|
|
|
|
|
|
Net income
|
|
$
|
104,866
|
|
|
$
|
100,953
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
49,012
|
|
|
48,071
|
|
|
(Gain) loss on sale of assets
|
|
(797
|
)
|
|
48
|
|
|
Loss on early extinguishment of debt
|
|
25,915
|
|
|
—
|
|
|
Gain on sales-type leases
|
|
(33,834
|
)
|
|
—
|
|
|
Amortization of deferred charges
|
|
1,641
|
|
|
1,535
|
|
|
Equity-based compensation expense
|
|
980
|
|
|
1,246
|
|
|
Equity in earnings of equity method investments, net of distributions
|
|
(1,298
|
)
|
|
526
|
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
Accounts receivable—trade
|
|
3,803
|
|
|
(2,742
|
)
|
|
Accounts receivable—affiliates
|
|
(131
|
)
|
|
704
|
|
|
Prepaid and other current assets
|
|
216
|
|
|
426
|
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
Accounts payable—trade
|
|
(4,959
|
)
|
|
420
|
|
|
Accounts payable—affiliates
|
|
(9,452
|
)
|
|
(6,489
|
)
|
|
Accrued interest
|
|
(2,523
|
)
|
|
27
|
|
|
Deferred revenue
|
|
(2,378
|
)
|
|
339
|
|
|
Accrued property taxes
|
|
1,727
|
|
|
3,658
|
|
|
Other current liabilities
|
|
669
|
|
|
—
|
|
|
Other, net
|
|
1,137
|
|
|
(3,733
|
)
|
|
Net cash provided by operating activities
|
|
134,594
|
|
|
144,989
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
Additions to properties and equipment
|
|
(30,740
|
)
|
|
(17,752
|
)
|
|
Investment in Cushing Connect
|
|
(2,400
|
)
|
|
—
|
|
|
Proceeds from sale of assets
|
|
816
|
|
|
194
|
|
|
Distributions in excess of equity in earnings of equity investments
|
|
470
|
|
|
299
|
|
|
Net cash used for investing activities
|
|
(31,854
|
)
|
|
(17,259
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
Borrowings under credit agreement
|
|
168,000
|
|
|
175,000
|
|
|
Repayments of credit agreement borrowings
|
|
(138,500
|
)
|
|
(156,500
|
)
|
|
Redemption of senior notes
|
|
(522,500
|
)
|
|
—
|
|
|
Proceeds from issuance of debt
|
|
500,000
|
|
|
—
|
|
|
Contributions from general partner
|
|
435
|
|
|
—
|
|
|
Contributions from noncontrolling interest
|
|
13,263
|
|
|
—
|
|
|
Distributions to HEP unitholders
|
|
(102,979
|
)
|
|
(136,207
|
)
|
|
Distributions to noncontrolling interest
|
|
(4,000
|
)
|
|
(5,250
|
)
|
|
Payments on finance leases
|
|
(1,972
|
)
|
|
(503
|
)
|
|
Deferred financing costs
|
|
(8,714
|
)
|
|
—
|
|
|
Purchase of units for incentive grants
|
|
—
|
|
|
(255
|
)
|
|
Units withheld for tax withholding obligations
|
|
(147
|
)
|
|
(119
|
)
|
|
Net cash used by financing activities
|
|
(97,114
|
)
|
|
(123,834
|
)
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
Increase for the period
|
|
5,626
|
|
|
3,896
|
|
|
Beginning of period
|
|
13,287
|
|
|
3,045
|
|
|
End of period
|
|
$
|
18,913
|
|
|
$
|
6,941
|
|
See accompanying notes.
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Units
|
|
Noncontrolling Interest
|
|
Total Equity
|
|
|
|
|
|
Balance December 31, 2019
|
|
$
|
381,103
|
|
|
$
|
106,655
|
|
|
$
|
487,758
|
|
|
Capital contribution - Cushing Connect
|
|
—
|
|
|
7,304
|
|
|
7,304
|
|
|
Distributions to HEP unitholders
|
|
(68,519
|
)
|
|
—
|
|
|
(68,519
|
)
|
|
Distributions to noncontrolling interest
|
|
—
|
|
|
(3,000
|
)
|
|
(3,000
|
)
|
|
Equity-based compensation
|
|
506
|
|
|
—
|
|
|
506
|
|
|
Class B unit accretion
|
|
(835
|
)
|
|
—
|
|
|
(835
|
)
|
|
Other
|
|
208
|
|
|
—
|
|
|
208
|
|
|
Net income
|
|
25,696
|
|
|
1,216
|
|
|
26,912
|
|
|
Balance March 31, 2020
|
|
338,159
|
|
|
112,175
|
|
|
450,334
|
|
|
Capital Contribution - Cushing Connect
|
|
—
|
|
|
5,959
|
|
|
$
|
5,959
|
|
|
Distributions to HEP unitholders
|
|
(34,460
|
)
|
|
—
|
|
|
(34,460
|
)
|
|
Distributions to noncontrolling interest
|
|
—
|
|
|
(1,000
|
)
|
|
(1,000
|
)
|
|
Equity-based compensation
|
|
474
|
|
|
—
|
|
|
474
|
|
|
Class B unit accretion
|
|
(835
|
)
|
|
—
|
|
|
(835
|
)
|
|
Other
|
|
80
|
|
|
—
|
|
|
80
|
|
|
Net income
|
|
77,305
|
|
|
649
|
|
|
77,954
|
|
|
Balance June 30, 2020
|
|
$
|
380,723
|
|
|
$
|
117,783
|
|
|
$
|
498,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Units
|
|
Noncontrolling Interest
|
|
Total Equity
|
|
|
|
|
|
Balance December 31, 2018
|
|
$
|
427,435
|
|
|
$
|
88,126
|
|
|
$
|
515,561
|
|
|
Distributions to HEP unitholders
|
|
(67,975
|
)
|
|
—
|
|
|
(67,975
|
)
|
|
Distributions to noncontrolling interest
|
|
—
|
|
|
(3,000
|
)
|
|
(3,000
|
)
|
|
Equity-based compensation
|
|
661
|
|
|
—
|
|
|
661
|
|
|
Class B unit accretion
|
|
(780
|
)
|
|
—
|
|
|
(780
|
)
|
|
Other
|
|
814
|
|
|
—
|
|
|
814
|
|
|
Net income
|
|
51,962
|
|
|
1,832
|
|
|
53,794
|
|
|
Balance March 31, 2019
|
|
412,117
|
|
|
86,958
|
|
|
499,075
|
|
|
Distributions to HEP unitholders
|
|
(68,232
|
)
|
|
—
|
|
|
(68,232
|
)
|
|
Distributions to noncontrolling interest
|
|
—
|
|
|
(2,250
|
)
|
|
(2,250
|
)
|
|
Equity-based compensation
|
|
585
|
|
|
—
|
|
|
585
|
|
|
Class B unit accretion
|
|
(781
|
)
|
|
—
|
|
|
(781
|
)
|
|
Other
|
|
(138
|
)
|
|
—
|
|
|
(138
|
)
|
|
Net income
|
|
46,471
|
|
|
688
|
|
|
47,159
|
|
|
Balance June 30, 2019
|
|
$
|
390,022
|
|
|
$
|
85,396
|
|
|
$
|
475,418
|
|
See accompanying notes.
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. As of June 30, 2020, HollyFrontier Corporation (“HFC”) and its subsidiaries own a 57% limited partner interest and the non-economic general partner interest in HEP. We commenced operations on July 13, 2004, upon the completion of our initial public offering. In these consolidated financial statements, the words “we,” “our,” “ours” and “us” refer to HEP unless the context otherwise indicates.
On October 31, 2017, we closed on an equity restructuring transaction with HEP Logistics Holdings, L.P. (“HEP Logistics”), a wholly-owned subsidiary of HFC and the general partner of HEP, pursuant to which the incentive distribution rights ("IDRs") held by HEP Logistics were canceled, and HEP Logistics' 2% general partner interest in HEP was converted into a non-economic general partner interest in HEP. In consideration, we issued 37,250,000 of our common units to HEP Logistics. In addition, HEP Logistics agreed to waive $2.5 million of limited partner cash distributions for each of twelve consecutive quarters beginning with the first quarter the units issued as consideration were eligible to receive distributions. This waiver of limited partner cash distributions will expire after the cash distribution for the second quarter of 2020, which will be made during the third quarter of 2020. As a result of this transaction, no distributions were made on the general partner interest after October 31, 2017.
We own and operate petroleum product and crude oil pipelines, terminal, tankage and loading rack facilities and refinery processing units that support refining and marketing operations of HFC and other refineries in the Mid-Continent, Southwest and Northwest regions of the United States. Additionally, we own a 75% interest in UNEV Pipeline, LLC (“UNEV”), a 50% interest in Osage Pipe Line Company, LLC (“Osage”), a 50% interest in Cheyenne Pipeline LLC, and a 50% interest in Cushing Connect Pipeline & Terminal LLC.
On June 1, 2020, HFC announced plans to permanently cease petroleum refining operations at its Cheyenne Refinery and to convert certain assets at that refinery to renewable diesel production. HFC subsequently began winding down petroleum refining operations at its Cheyenne Refinery on August 3, 2020. As of June 30, 2020, our throughput agreement with HFC required minimum annualized payments to us of approximately $17.6 million related to our Cheyenne assets. During the third quarter of 2020, we expect to begin negotiations with HFC related to potential changes to our existing throughput agreement. The net book value of our Cheyenne assets as of June 30, 2020 was approximately $88.5 million, including $28.1 million of long-lived assets and $68.7 million of goodwill. Additionally, our annual goodwill impairment test is scheduled for the third quarter of 2020. Depending upon the outcome of negotiations related to our throughput agreement or other changes in anticipated commercial uses of our Cheyenne assets, such assets could be at risk of impairment in the future and such impairment charges could be material.
We operate in two reportable segments, a Pipelines and Terminals segment and a Refinery Processing Unit segment. Disclosures around these segments are discussed in Note 15.
We generate revenues by charging tariffs for transporting petroleum products and crude oil through our pipelines, by charging fees for terminalling and storing refined products and other hydrocarbons, providing other services at our storage tanks and terminals and by charging fees for processing hydrocarbon feedstocks through our refinery processing units. We do not take ownership of products that we transport, terminal, store or process, and therefore, we are not exposed directly to changes in commodity prices.
The consolidated financial statements included herein have been prepared without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The interim financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of our results for the interim periods. Such adjustments are considered to be of a normal recurring nature. Although certain notes and other information required by U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019. 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, 2020.
Principles of Consolidation and Common Control Transactions
The consolidated financial statements include our accounts and those of subsidiaries and joint ventures that we control. All significant intercompany transactions and balances have been eliminated.
Most of our acquisitions from HFC occurred while we were a consolidated variable interest entity (“VIE”) of HFC. Therefore, as an entity under common control with HFC, we recorded these acquisitions on our balance sheets at HFC's historical basis instead of our purchase price or fair value.
Accounting Pronouncements Adopted During the Periods Presented
Goodwill Impairment Testing
In January 2017, Accounting Standard Update (“ASU”) 2017-04, “Simplifying the Test for Goodwill Impairment,” was issued amending the testing for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under this standard, goodwill impairment is measured as the excess of the carrying amount of the reporting unit over the related fair value. We adopted this standard effective in the second quarter of 2019, and the adoption of this standard had no effect on our financial condition, results of operations or cash flows.
Leases
In February 2016, ASU No. 2016-02, “Leases” (“ASC 842”) was issued requiring leases to be measured and recognized as a lease liability, with a corresponding right-of-use asset on the balance sheet. We adopted this standard effective January 1, 2019, and we elected to adopt using the modified retrospective transition method, whereby comparative prior period financial information will not be restated and will continue to be reported under the lease accounting standard in effect during those periods. We also elected practical expedients provided by the new standard, including the package of practical expedients and the short-term lease recognition practical expedient, which allow an entity to not recognize on the balance sheet leases with a term of 12 months or less. Upon adoption of this standard, we recognized $78.4 million of lease liabilities and corresponding right-of-use assets on our consolidated balance sheet. Adoption of this standard did not have a material impact on our results of operations or cash flows. See Notes 3 and 4 for additional information on our lease policies.
Credit Losses Measurement
In June 2016, ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” was issued requiring measurement of all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. We adopted this standard effective January 1, 2020, and adoption of the standard did not have a material impact on our financial condition, results of operations or cash flows.
|
|
|
|
Note 2:
|
Investment in Joint Venture
|
On October 2, 2019, HEP Cushing LLC (“HEP Cushing”), a wholly-owned subsidiary of HEP, and Plains Marketing, L.P. (“PMLP”), a wholly-owned subsidiary of Plains All American Pipeline, L.P. (“Plains”), formed a 50/50 joint venture, Cushing Connect Pipeline & Terminal LLC (the “Cushing Connect Joint Venture”), for (i) the development and construction of a new 160,000 barrel per day common carrier crude oil pipeline (the “Cushing Connect Pipeline”) that will connect the Cushing, Oklahoma crude oil hub to the Tulsa, Oklahoma refining complex owned by a subsidiary of HFC and (ii) the ownership and operation of 1.5 million barrels of crude oil storage in Cushing, Oklahoma (the “ Cushing Connect JV Terminal”). The Cushing Connect JV Terminal was fully in service beginning in April 2020. The Cushing Connect Pipeline is expected to be in service during the first quarter of 2021. Long-term commercial agreements have been entered into to support the Cushing Connect Joint Venture assets.
The Cushing Connect Joint Venture contracted with an affiliate of HEP to manage the construction and operation of the Cushing Connect Pipeline and with an affiliate of Plains to manage the operation of the Cushing Connect JV Terminal. The total Cushing Connect Joint Venture investment will be shared proportionately among the partners, and HEP estimates its share of the cost of the Cushing Connect JV Terminal contributed by Plains and Cushing Connect Pipeline construction costs will be approximately $65 million.
The Cushing Connect Joint Venture legal entities are variable interest entities ("VIEs") as defined under GAAP. A VIE is a legal entity if it has any one of the following characteristics: (i) the entity does not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support; (ii) the at risk equity holders, as a group, lack the characteristics of a controlling financial interest; or (iii) the entity is structured with non-substantive voting rights. The Cushing Connect Joint Venture legal entities do not have sufficient equity at risk to finance their activities without additional financial support. Since HEP is constructing and will operate the Cushing Connect Pipeline, HEP has more ability to direct the activities that most significantly impact the financial performance of the Cushing Connect Joint Venture and Cushing Connect Pipeline legal entities.
Therefore, HEP consolidates those legal entities. We do not have the ability to direct the activities that most significantly impact the Cushing Connect JV Terminal legal entity, and therefore, we account for our interest in the Cushing Connect JV Terminal legal entity using the equity method of accounting.
Revenues are generally recognized as products are shipped through our pipelines and terminals, feedstocks are processed through our refinery processing units or other services are rendered. The majority of our contracts with customers meet the definition of a lease since (1) performance of the contracts is dependent on specified property, plant, or equipment and (2) it is remote that one or more parties other than the customer will take more than a minor amount of the output associated with the specified property, plant, or equipment. Prior to the adoption of the new lease standard (see Note 1), we bifurcated the consideration received between lease and service revenue. The new lease standard allows the election of a practical expedient whereby a lessor does not have to separate non-lease (service) components from lease components under certain conditions. The majority of our contracts meet these conditions, and we have made this election for those contracts. Under this practical expedient, we treat the combined components as a single performance obligation in accordance with Accounting Standards Codification (“ASC”) 606, which largely codified ASU 2014-09, if the non-lease (service) component is the dominant component. If the lease component is the dominant component, we treat the combined components as a lease in accordance with ASC 842, which largely codified ASU 2016-02.
Several of our contracts include incentive or reduced tariffs once a certain quarterly volume is met. Revenue from the variable element of these transactions is recognized based on the actual volumes shipped as it relates specifically to rendering the services during the applicable quarter.
The majority of our long-term transportation contracts specify minimum volume requirements, whereby, we bill a customer for a minimum level of shipments in the event a customer ships below their contractual requirements. If there are no future performance obligations, we will recognize these deficiency payments in revenue.
In certain of these throughput agreements, a customer may later utilize such shortfall billings as credit towards future volume shipments in excess of its minimum levels within its respective contractual shortfall make-up period. Such amounts represent an obligation to perform future services, which may be initially deferred and later recognized as revenue based on estimated future shipping levels, including the likelihood of a customer’s ability to utilize such amounts prior to the end of the contractual shortfall make-up period. We recognize the service portion of these deficiency payments in revenue when we do not expect we will be required to satisfy these performance obligations in the future based on the pattern of rights exercised by the customer. During the three and six months ended June 30, 2020, we recognized $5.1 million and $12.6 million of these deficiency payments in revenue, of which none and $0.7 million, respectively, related to deficiency payments billed in prior periods. As of June 30, 2020, deferred revenue reflected in our consolidated balance sheet related to shortfalls billed was $0.5 million.
A contract liability exists when an entity is obligated to perform future services for a customer for which the entity has received consideration. Since HEP may be required to perform future services for these deficiency payments received, the deferred revenues on our balance sheets were considered contract liabilities. A contract asset exists when an entity has a right to consideration in exchange for goods or services transferred to a customer. Our consolidated balance sheets included the contract assets and liabilities in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
|
|
(In thousands)
|
|
Contract assets
|
|
$
|
6,064
|
|
|
$
|
5,675
|
|
|
Contract liabilities
|
|
$
|
(500
|
)
|
|
$
|
(650
|
)
|
The contract assets and liabilities include both lease and service components. We did not recognize any revenue during the three months ended June 30, 2020, that was previously included in contract liability as of December 31, 2019, and we recognized $0.7 million of revenue during the six months ended June 30, 2020, that was previously included in contract liability as of December 31, 2019. We did not recognize any revenue during the three months ended June 30, 2019, that was previously included in contract liability as of December 31, 2018, and we recognized $0.6 million of revenue during the six months ended June 30, 2019, that was previously included in contract liability as of December 31, 2018. During the three and the six months ended June 30, 2020, we also recognized $0.2 million and $0.4 million, respectively, of revenue included in contract assets at June 30, 2020.
As of June 30, 2020, we expect to recognize $2.3 billion in revenue related to our unfulfilled performance obligations under the terms of our long-term throughput agreements and leases expiring in 2021 through 2036. These agreements generally provide for changes in the minimum revenue guarantees annually for increases or decreases in the Producer Price Index (“PPI”) or Federal Energy Regulatory Commission (“FERC”) index, with certain contracts having provisions that limit the level of the rate increases or decreases. We expect to recognize revenue for these unfulfilled performance obligations as shown in the table below (amounts shown in table include both service and lease revenues):
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
(In millions)
|
|
Remainder of 2020
|
|
$
|
185
|
|
|
2021
|
|
362
|
|
|
2022
|
|
332
|
|
|
2023
|
|
295
|
|
|
2024
|
|
257
|
|
|
2025
|
|
188
|
|
|
Thereafter
|
|
650
|
|
|
Total
|
|
$
|
2,269
|
|
Payment terms under our contracts with customers are consistent with industry norms and are typically payable within 10 to 30 days of the date of invoice.
Disaggregated revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(In thousands)
|
|
Pipelines
|
|
$
|
58,954
|
|
|
$
|
72,263
|
|
|
$
|
129,426
|
|
|
$
|
147,363
|
|
|
Terminals, tanks and loading racks
|
|
36,280
|
|
|
39,089
|
|
|
73,778
|
|
|
76,667
|
|
|
Refinery processing units
|
|
19,573
|
|
|
19,399
|
|
|
39,457
|
|
|
41,218
|
|
|
|
|
$
|
114,807
|
|
|
$
|
130,751
|
|
|
$
|
242,661
|
|
|
$
|
265,248
|
|
During the three and six months ended June 30, 2020, lease revenues amounted to $86.3 million and $179.5 million, respectively, and service revenues amounted to $28.5 million and $63.2 million, respectively. Both of these revenues were recorded within affiliates and third parties revenues on our consolidated statement of income.
We adopted ASC 842 effective January 1, 2019, and elected to adopt using the modified retrospective transition method and practical expedients, both of which are provided as options by the standard and further defined in Note 1.
Lessee Accounting
At inception, we determine if an arrangement is or contains a lease. Right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our payment obligation under the leasing arrangement. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We use our estimated incremental borrowing rate (“IBR”) to determine the present value of lease payments as most of our leases do not contain an implicit rate. Our IBR represents the interest rate which we would pay to borrow, on a collateralized basis, an amount equal to the lease payments over a similar term in a similar economic environment. We use the implicit rate when readily determinable.
As a lessee, we lease land, buildings, pipelines, transportation and other equipment to support our operations. These leases can be categorized into operating and finance leases. Operating leases are recorded in operating lease right-of-use assets and current and noncurrent operating lease liabilities on our consolidated balance sheet. Finance leases are included in properties and equipment, current finance lease liabilities and noncurrent finance lease liabilities on our consolidated balance sheet.
When renewal options are defined in a lease, our lease term includes an option to extend the lease when it is reasonably certain we will exercise that option. Leases with a term of 12 months or less are not recorded on our balance sheet, and lease expense is accounted for on a straight-line basis. In addition, as a lessee, we separate non-lease components that are identifiable and exclude them from the determination of net present value of lease payment obligations.
Our leases have remaining terms of less than 1 year to 25 years, some of which include options to extend the leases for up to 10 years.
Finance Lease Obligations
We have finance lease obligations related to vehicle leases with initial terms of 33 to 48 months. The total cost of assets under finance leases was $6.9 million and $7.0 million as of June 30, 2020 and December 31, 2019, respectively, with accumulated depreciation of $3.4 million and $4.5 million as of June 30, 2020 and December 31, 2019, respectively. We include depreciation of finance leases in depreciation and amortization in our consolidated statements of income.
In addition, we have a finance lease obligation related to a pipeline lease with an initial term of 10 years with one remaining subsequent renewal option for an additional 10 years.
Supplemental balance sheet information related to leases was as follows (in thousands, except for lease term and discount rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
|
Operating leases:
|
|
|
|
|
|
Operating lease right-of-use assets, net
|
|
$
|
3,377
|
|
|
3,255
|
|
|
|
|
|
|
|
|
Current operating lease liabilities
|
|
1,213
|
|
|
1,126
|
|
|
Noncurrent operating lease liabilities
|
|
2,530
|
|
|
2,482
|
|
|
Total operating lease liabilities
|
|
$
|
3,743
|
|
|
3,608
|
|
|
|
|
|
|
|
|
Finance leases:
|
|
|
|
|
|
Properties and equipment
|
|
$
|
6,851
|
|
|
6,968
|
|
|
Accumulated amortization
|
|
(3,358
|
)
|
|
(4,547
|
)
|
|
Properties and equipment, net
|
|
$
|
3,493
|
|
|
2,421
|
|
|
|
|
|
|
|
|
Current finance lease liabilities
|
|
$
|
3,293
|
|
|
3,224
|
|
|
Noncurrent finance lease liabilities
|
|
70,039
|
|
|
70,475
|
|
|
Total finance lease liabilities
|
|
$
|
73,332
|
|
|
73,699
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years)
|
|
|
|
|
|
Operating leases
|
|
6.1
|
|
6.5
|
|
Finance leases
|
|
16.3
|
|
17.0
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
|
|
|
Operating leases
|
|
4.8%
|
|
5.0%
|
|
Finance leases
|
|
5.6%
|
|
6.0%
|
Supplemental cash flow and other information related to leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
2019
|
|
|
|
(In thousands)
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
Operating cash flows on operating leases
|
|
$
|
518
|
|
|
$
|
3,589
|
|
|
Operating cash flows on finance leases
|
|
$
|
2,157
|
|
|
$
|
51
|
|
|
Financing cash flows on finance leases
|
|
$
|
1,972
|
|
|
$
|
503
|
|
Maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
Operating
|
|
Finance
|
|
|
|
(In thousands)
|
|
2020
|
|
$
|
491
|
|
|
$
|
3,865
|
|
|
2021
|
|
906
|
|
|
7,411
|
|
|
2022
|
|
627
|
|
|
7,285
|
|
|
2023
|
|
607
|
|
|
7,332
|
|
|
2024
|
|
494
|
|
|
6,856
|
|
|
2025 and thereafter
|
|
1,179
|
|
|
80,313
|
|
|
Total lease payments
|
|
4,304
|
|
|
113,062
|
|
|
Less: Imputed interest
|
|
(561
|
)
|
|
(39,730
|
)
|
|
Total lease obligations
|
|
3,743
|
|
|
73,332
|
|
|
Less: Current lease liabilities
|
|
(1,213
|
)
|
|
(3,293
|
)
|
|
Noncurrent lease liabilities
|
|
$
|
2,530
|
|
|
$
|
70,039
|
|
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(In thousands)
|
|
Operating lease costs
|
|
$
|
230
|
|
|
$
|
1,798
|
|
|
$
|
503
|
|
|
$
|
3,568
|
|
|
Finance lease costs
|
|
|
|
|
|
|
|
|
|
Amortization of assets
|
|
273
|
|
|
254
|
|
|
515
|
|
|
498
|
|
|
Interest on lease liabilities
|
|
1,040
|
|
|
24
|
|
|
2,077
|
|
|
51
|
|
|
Variable lease cost
|
|
46
|
|
|
35
|
|
|
95
|
|
|
71
|
|
|
Total net lease cost
|
|
$
|
1,589
|
|
|
$
|
2,111
|
|
|
$
|
3,190
|
|
|
$
|
4,188
|
|
Lessor Accounting
As discussed in Note 3, the majority of our contracts with customers meet the definition of a lease. See Note 3 for further discussion of the impact of adoption of this standard on our activities as a lessor.
Customer contracts that contain leases are generally classified as either operating leases, direct finance leases or sales-type leases. We consider inputs such as the lease term, fair value of the underlying asset and residual value of the underlying assets when assessing the classification.
Substantially all of the assets supporting contracts meeting the definition of a lease have long useful lives, and we believe these assets will continue to have value when the current agreements expire due to our risk management strategy for protecting the residual fair value of the underlying assets by performing ongoing maintenance during the lease term. HFC generally has the option to purchase assets located within HFC refinery boundaries, including refinery tankage, truck racks and refinery processing units, at fair market value when the related agreements expire.
One of our throughput agreements with Delek was renewed during the three months ending June 30, 2020. Certain components of this agreement met the criteria of sales-type leases since the underlying assets are not expected to have an alternative use at the end of the lease term to anyone other than Delek. Under sales-type lease accounting, at the commencement date, the lessor recognizes a net investment in the lease, based on the estimated fair value of the underlying leased assets at contract inception, and derecognizes the underlying assets with the difference recorded as selling profit or loss arising from the lease. Therefore, we recognized a gain on sales-type leases during the three months ending June 30, 2020 composed of the following:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net investment in leases
|
|
$
|
35,319
|
|
|
Properties and equipment, net
|
|
(1,485
|
)
|
|
Gain on sales-type leases
|
|
$
|
33,834
|
|
This sales-type lease transaction, including the related gain, was a non-cash transaction.
Lease income recognized was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(In thousands)
|
|
Operating lease revenues
|
|
$
|
84,872
|
|
|
$
|
94,783
|
|
|
$
|
175,671
|
|
|
$
|
188,287
|
|
|
Direct financing lease interest income
|
|
524
|
|
|
509
|
|
|
1,048
|
|
|
1,019
|
|
|
Gain on sales-type leases
|
|
33,834
|
|
|
—
|
|
|
33,834
|
|
|
—
|
|
|
Sales-type lease interest income
|
|
2,286
|
|
|
—
|
|
|
3,940
|
|
|
—
|
|
|
Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable
|
|
1,474
|
|
|
—
|
|
|
3,822
|
|
|
—
|
|
For our sales-type leases, we included customer obligations related to minimum volume requirements in guaranteed minimum lease payments. Portions of our minimum guaranteed pipeline tariffs for assets subject to sales-type lease accounting are recorded as interest income with the remaining amounts recorded as a reduction in net investment in leases. We recognized any billings for throughput volumes in excess of minimum volume requirements as variable lease payments, and these variable lease payments were recorded in lease revenues.
Annual minimum undiscounted lease payments under our leases were as follows as of June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Finance
|
|
Sales-type
|
|
Years Ending December 31,
|
|
(In thousands)
|
|
Remainder of 2020
|
|
$
|
155,376
|
|
|
$
|
1,060
|
|
|
$
|
6,198
|
|
|
2021
|
|
306,771
|
|
|
2,128
|
|
|
12,396
|
|
|
2022
|
|
304,315
|
|
|
2,145
|
|
|
12,396
|
|
|
2023
|
|
273,362
|
|
|
2,162
|
|
|
12,396
|
|
|
2024
|
|
235,280
|
|
|
2,179
|
|
|
12,396
|
|
|
2025 and thereafter
|
|
739,158
|
|
|
40,787
|
|
|
72,432
|
|
|
Total
|
|
$
|
2,014,262
|
|
|
$
|
50,461
|
|
|
$
|
128,214
|
|
Net investments in leases recorded on our balance sheet were composed of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
|
|
Sales-type Leases
|
|
Direct Financing Leases
|
|
Sales-type Leases
|
|
Direct Financing Leases
|
|
|
|
(In thousands)
|
|
(In thousands)
|
|
Lease receivables (1)
|
|
$
|
92,041
|
|
|
$
|
16,486
|
|
|
$
|
68,457
|
|
|
$
|
16,511
|
|
|
Unguaranteed residual assets
|
|
63,134
|
|
|
—
|
|
|
52,933
|
|
|
—
|
|
|
Net investment in leases
|
|
$
|
155,175
|
|
|
$
|
16,486
|
|
|
$
|
121,390
|
|
|
$
|
16,511
|
|
|
|
|
|
(1)
|
Current portion of lease receivables included in prepaid and other current assets on the balance sheet.
|
|
|
|
|
Note 5:
|
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. Fair value measurements are derived using inputs (assumptions that market participants would use in pricing an asset or liability) including assumptions about risk. GAAP categorizes inputs used in fair value measurements into three broad levels as follows:
|
|
|
|
•
|
(Level 1) Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
•
|
(Level 2) Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, similar assets and liabilities in markets that are not active or can be corroborated by observable market data.
|
|
|
|
|
•
|
(Level 3) Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes valuation techniques that involve significant unobservable inputs.
|
Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and debt. The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. Debt consists of outstanding principal under our revolving credit agreement (which approximates fair value as interest rates are reset frequently at current interest rates) and our fixed interest rate senior notes.
The carrying amounts and estimated fair values of our senior notes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Financial Instrument
|
|
Fair Value Input Level
|
|
Carrying
Value
|
|
Fair Value
|
|
Carrying
Value
|
|
Fair Value
|
|
|
|
|
|
(In thousands)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
6% Senior Notes
|
|
Level 2
|
|
—
|
|
|
—
|
|
|
496,531
|
|
|
522,045
|
|
|
5% Senior Notes
|
|
Level 2
|
|
491,648
|
|
|
477,835
|
|
|
—
|
|
|
—
|
|
Level 2 Financial Instruments
Our senior notes are measured at fair value using Level 2 inputs. The fair value of the senior notes is based on market values provided by a third-party bank, which were derived using market quotes for similar type debt instruments. See Note 9 for additional information.
Non-Recurring Fair Value Measurements
For gains on sales-type leases recognized during the second quarter of 2020, the estimated fair value of the underlying leased assets at contract inception and the present value of the estimated unguaranteed residual asset at the end of the lease term are used in determining the net investment in leases and related gain on sales-type leases recorded. The asset valuation estimates include Level 3 inputs based on a replacement cost valuation method.
|
|
|
|
Note 6:
|
Properties and Equipment
|
The carrying amounts of our properties and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
|
|
(In thousands)
|
|
Pipelines, terminals and tankage
|
|
$
|
1,610,916
|
|
|
$
|
1,602,231
|
|
|
Refinery assets
|
|
349,030
|
|
|
348,093
|
|
|
Land and right of way
|
|
87,076
|
|
|
86,190
|
|
|
Construction in progress
|
|
30,892
|
|
|
10,930
|
|
|
Other
|
|
9,829
|
|
|
14,110
|
|
|
|
|
2,087,743
|
|
|
2,061,554
|
|
|
Less accumulated depreciation
|
|
628,809
|
|
|
594,455
|
|
|
|
|
$
|
1,458,934
|
|
|
$
|
1,467,099
|
|
We capitalized $24 thousand and $8 thousand during the six months ended June 30, 2020 and 2019, respectively, in interest attributable to construction projects.
Depreciation expense was $41.7 million and $41.3 million for the six months ended June 30, 2020 and 2019, respectively, and includes depreciation of assets acquired under capital leases.
|
|
|
|
Note 7:
|
Intangible Assets
|
Intangible assets include transportation agreements and customer relationships that represent a portion of the total purchase price of certain assets acquired from Delek in 2005, from HFC in 2008 prior to HEP becoming a consolidated VIE of HFC, from Plains in 2017, and from other minor acquisitions in 2018.
The carrying amounts of our intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
June 30,
2020
|
|
December 31,
2019
|
|
|
|
|
|
(In thousands)
|
|
Delek transportation agreement
|
|
30 years
|
|
$
|
59,933
|
|
|
$
|
59,933
|
|
|
HFC transportation agreement
|
|
10-15 years
|
|
75,131
|
|
|
75,131
|
|
|
Customer relationships
|
|
10 years
|
|
69,683
|
|
|
69,683
|
|
|
Other
|
|
|
|
50
|
|
|
50
|
|
|
|
|
|
|
204,797
|
|
|
204,797
|
|
|
Less accumulated amortization
|
|
|
|
110,479
|
|
|
103,475
|
|
|
|
|
|
|
$
|
94,318
|
|
|
$
|
101,322
|
|
Amortization expense was $7.0 million for both of the six months ended June 30, 2020 and 2019. We estimate amortization expense to be $14.0 million for each of the next two years, $9.9 million in 2023, and $9.1 million in 2024 and 2025.
We have additional transportation agreements with HFC resulting from historical transactions consisting of pipeline, terminal and tankage assets contributed to us or acquired from HFC. These transactions occurred while we were a consolidated variable interest entity of HFC; therefore, our basis in these agreements is zero and does not reflect a step-up in basis to fair value.
|
|
|
|
Note 8:
|
Employees, Retirement and Incentive Plans
|
Direct support for our operations is provided by Holly Logistic Services, L.L.C. (“HLS”), an HFC subsidiary, which utilizes personnel employed by HFC who are dedicated to performing services for us. Their costs, including salaries, bonuses, payroll taxes, benefits and other direct costs, are charged to us monthly in accordance with an omnibus agreement that we have with HFC (the “Omnibus Agreement”). These employees participate in the retirement and benefit plans of HFC. Our share of retirement and benefit plan costs was $1.6 million and $1.7 million for the three months ended June 30, 2020 and 2019, respectively, and $3.7 million for the six months ended June 30, 2020 and 2019.
Under HLS’s secondment agreement with HFC (the “Secondment Agreement”), certain employees of HFC are seconded to HLS to provide operational and maintenance services for certain of our processing, refining, pipeline and tankage assets, and HLS reimburses HFC for its prorated portion of the wages, benefits, and other costs related to these employees.
We have a Long-Term Incentive Plan for employees and non-employee directors who perform services for us. The Long-Term Incentive Plan consists of four components: restricted or phantom units, performance units, unit options and unit appreciation rights. Our accounting policy for the recognition of compensation expense for awards with pro-rata vesting (a significant proportion of our awards) is to expense the costs ratably over the vesting periods.
As of June 30, 2020, we had two types of incentive-based awards outstanding, which are described below. The compensation cost charged against income was $0.5 million and $0.6 million for the three months ended June 30, 2020 and 2019, respectively, and $1.0 million and $1.2 million for the six months ended June 30, 2020 and 2019. We currently purchase units in the open market instead of issuing new units for settlement of all unit awards under our Long-Term Incentive Plan. As of June 30, 2020, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which 1,119,542 have not yet been granted, assuming no forfeitures of the unvested units and full achievement of goals for the unvested performance units.
Restricted and Phantom Units
Under our Long-Term Incentive Plan, we grant restricted units to non-employee directors and phantom units to selected employees who perform services for us, with most awards vesting over a period of one to three years. Although full ownership of the units does not transfer to the recipients until the units vest, the recipients have distribution rights on these units from the date of grant, and the recipients of the restricted units have voting rights on the restricted units from the date of grant.
The fair value of each restricted or phantom unit award is measured at the market price as of the date of grant and is amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award.
A summary of restricted and phantom unit activity and changes during the six months ended June 30, 2020, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted and Phantom Units
|
|
Units
|
|
Weighted Average Grant-Date Fair Value
|
|
Outstanding at January 1, 2020 (nonvested)
|
|
145,205
|
|
|
$
|
26.22
|
|
|
Vesting and transfer of full ownership to recipients
|
|
(4,397
|
)
|
|
30.29
|
|
|
Forfeited
|
|
(5,890
|
)
|
|
25.33
|
|
|
Outstanding at June 30, 2020 (nonvested)
|
|
134,918
|
|
|
$
|
26.13
|
|
The grant date fair values of phantom units that were vested and transferred to recipients during the six months ended June 30, 2020 were $0.1 million. No restricted or phantom units were vested and transferred to recipients during the six months ended June 30, 2019. As of June 30, 2020, there was $1.4 million of total unrecognized compensation expense related to unvested restricted and phantom unit grants, which is expected to be recognized over a weighted-average period of 1.2 years.
Performance Units
Under our Long-Term Incentive Plan, we grant performance units to selected officers who perform services for us. Performance units granted are payable in common units at the end of a three-year performance period based upon meeting certain criteria over the performance period. Under the terms of our performance unit grants, some awards are subject to the growth in our distributable cash flow per common unit over the performance period while other awards are subject to "financial performance" and "market performance." Financial performance is based on meeting certain earnings before interest, taxes, depreciation and amortization ("EBITDA") targets, while market performance is based on the relative standing of total unitholder return achieved by HEP compared to peer group companies. The number of units ultimately issued under these awards can range from 50% to 150% or 0% to 200%. As of June 30, 2020, estimated unit payouts for outstanding nonvested performance unit awards ranged between 100% and 150% of the target number of performance units granted.
We did not grant any performance units during the six months ended June 30, 2020. Although common units are not transferred to the recipients until the performance units vest, the recipients have distribution rights with respect to the target number of performance units subject to the award from the date of grant at the same rate as distributions paid on our common units.
A summary of performance unit activity and changes for the six months ended June 30, 2020, is presented below:
|
|
|
|
|
|
|
|
Performance Units
|
|
Units
|
|
Outstanding at January 1, 2020 (nonvested)
|
|
53,445
|
|
|
Vesting and transfer of common units to recipients
|
|
(11,634
|
)
|
|
Outstanding at June 30, 2020 (nonvested)
|
|
41,811
|
|
The grant date fair value of performance units vested and transferred to recipients during the six months ended June 30, 2020 and 2019 was $0.4 million and $0.3 million, respectively. Based on the weighted-average fair value of performance units outstanding at June 30, 2020, of $1.2 million, there was $0.4 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of 1.6 years.
During the six months ended June 30, 2020, we did not purchase any of our common units in the open market for the issuance and settlement of unit awards under our Long-Term Incentive Plan.
Credit Agreement
We have a $1.4 billion senior secured revolving credit facility (the “Credit Agreement”) expiring in July 2022. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit, and it contains an accordion feature giving us the ability to increase the size of the facility by up to $300 million with additional lender commitments.
Our obligations under the Credit Agreement are collateralized by substantially all of our assets, and indebtedness under the Credit Agreement is guaranteed by our material, wholly-owned subsidiaries. The Credit Agreement requires us to maintain compliance with certain financial covenants consisting of total leverage, senior secured leverage, and interest coverage. It also limits or restricts our ability to engage in certain activities. If, at any time prior to the expiration of the Credit Agreement, HEP obtains two investment grade credit ratings, the Credit Agreement will become unsecured and many of the covenants, limitations, and restrictions will be eliminated.
We may prepay all loans at any time without penalty, except for tranche breakage costs. If an event of default exists under the Credit Agreement, the lenders will be able to accelerate the maturity of all loans outstanding and exercise other rights and remedies. We were in compliance with the covenants as of June 30, 2020.
Senior Notes
As of December 31, 2019, we had $500 million aggregate principal amount of 6% senior unsecured notes due in 2024 (the "6% Senior Notes") outstanding. The 6% Senior Notes were unsecured and imposed 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.
On February 4, 2020, we closed a private placement of $500 million in aggregate principal amount of 5% senior unsecured notes due in 2028 (the "5% Senior Notes"). On February 5, 2020, we redeemed the existing $500 million 6% Senior Notes at a redemption cost of $522.5 million, at which time we recognized a $25.9 million early extinguishment loss consisting of a $22.5 million debt redemption premium and unamortized financing costs of $3.4 million. We funded the $522.5 million redemption with net proceeds from the issuance of our 5% Senior Notes and borrowings under our Credit Agreement.
The 5% 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. We were in compliance with the restrictive covenants for the 5% Senior Notes as of June 30, 2020. At any time when the 5% Senior Notes are rated investment grade by either Moody’s or Standard & Poor’s and no default or event of default exists, we will not be subject to many of the foregoing covenants. Additionally, we have certain redemption rights at varying premiums over face value under the 5% Senior Notes.
Indebtedness under the 5% Senior Notes is guaranteed by all of our existing wholly-owned subsidiaries (other than Holly Energy Finance Corp. and certain immaterial subsidiaries).
Long-term Debt
The carrying amounts of our long-term debt was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
|
|
(In thousands)
|
|
Credit Agreement
|
|
|
|
|
|
Amount outstanding
|
|
995,000
|
|
|
$
|
965,500
|
|
|
|
|
|
|
|
|
6% Senior Notes
|
|
|
|
|
|
Principal
|
|
—
|
|
|
500,000
|
|
|
Unamortized premium and debt issuance costs
|
|
—
|
|
|
(3,469
|
)
|
|
|
|
—
|
|
|
496,531
|
|
|
|
|
|
|
|
|
5% Senior Notes
|
|
|
|
|
|
Principal
|
|
500,000
|
|
|
—
|
|
|
Unamortized premium and debt issuance costs
|
|
(8,352
|
)
|
|
—
|
|
|
|
|
491,648
|
|
|
—
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,486,648
|
|
|
$
|
1,462,031
|
|
|
|
|
|
Note 10:
|
Related Party Transactions
|
We serve HFC’s refineries under long-term pipeline, terminal and tankage throughput agreements, and refinery processing unit tolling agreements expiring from 2021 to 2036, and revenues from these agreements accounted for 83% and 81% of our total revenues for the three months and six months ended June 30, 2020, respectively. Under these agreements, HFC agrees to transport, store and process throughput volumes of refined product, crude oil and feedstocks on our pipelines, terminals, tankage, loading rack facilities and refinery processing units that result in minimum annual payments to us. These minimum annual payments or revenues are subject to annual rate adjustments on July 1st each year generally based on increases or decreases in PPI or the FERC index. As of July 1, 2020, these agreements with HFC require minimum annualized payments to us of $351.1 million.
If HFC fails to meet its minimum volume commitments under the agreements in any quarter, it will be required to pay us the amount of any shortfall in cash by the last day of the month following the end of the quarter. Under certain of these agreements, a shortfall payment may be applied as a credit in the following four quarters after its minimum obligations are met.
Under certain provisions of the Omnibus Agreement, we pay HFC an annual administrative fee (currently $2.6 million) for the provision by HFC or its affiliates of various general and administrative services to us. This fee does not include the salaries of personnel employed by HFC who perform services for us on behalf of HLS or the cost of their employee benefits, which are charged to us separately by HFC. Also, we reimburse HFC and its affiliates for direct expenses they incur on our behalf.
Related party transactions with HFC are as follows:
|
|
|
|
•
|
Revenues received from HFC were $95.6 million and $102.4 million for the three months ended June 30, 2020 and 2019, respectively, and $197.0 million and $205.7 million for the six months ended June 30, 2020 and 2019, respectively.
|
|
|
|
|
•
|
HFC charged us general and administrative services under the Omnibus Agreement of $0.7 million and $0.6 million for the three months ended June 30, 2020 and 2019, and $1.3 million for the six months ended June 30, 2020 and 2019.
|
|
|
|
|
•
|
We reimbursed HFC for costs of employees supporting our operations of $13.2 million for the three months ended June 30, 2020 and 2019, and $27.3 million and $26.8 million for the six months ended June 30, 2020 and 2019.
|
|
|
|
|
•
|
HFC reimbursed us $0.9 million and $3.6 million for the three months ended June 30, 2020 and 2019, respectively, for expense and capital projects, and $4.0 million and $5.8 million for the six months ended June 30, 2020 and 2019.
|
|
|
|
|
•
|
We distributed $18.4 million and $37.5 million in the three months ended June 30, 2020 and 2019, respectively, and $56.0 million and $74.8 million for the six months ended June 30, 2020 and 2019, respectively, to HFC as regular distributions on its common units.
|
|
|
|
|
•
|
Accounts receivable from HFC were $49.8 million and $49.7 million at June 30, 2020, and December 31, 2019, respectively.
|
|
|
|
|
•
|
Accounts payable to HFC were $7.3 million and $16.7 million at June 30, 2020, and December 31, 2019, respectively.
|
|
|
|
|
•
|
Deferred revenue in the consolidated balance sheets at June 30, 2020 and December 31, 2019, included $0.3 million and $0.5 million, respectively, relating to certain shortfall billings to HFC.
|
|
|
|
|
•
|
We received direct financing lease payments from HFC for use of our Artesia and Tulsa railyards of $0.5 million for the three months ended June 30, 2020 and 2019, respectively, and $1.0 million for both the six months ended June 30, 2020 and 2019 .
|
|
|
|
|
•
|
We received sales-type lease payments of $2.4 million from HFC that were not included in revenues for the three months ended June 30, 2020 and no payments for the same period in 2019, respectively, and $4.8 million for the six months ended June 30, 2020 and no payments for the same period in 2019.
|
|
|
|
|
•
|
On October 31, 2017, we closed on an equity restructuring transaction with HEP Logistics, a wholly-owned subsidiary of HFC and the general partner of HEP, pursuant to which the incentive distribution rights held by HEP Logistics were canceled, and HEP Logistics' 2% general partner interest in HEP was converted into a non-economic general partner interest in HEP. In consideration, we issued 37,250,000 of our common units to HEP Logistics. In addition, HEP Logistics agreed to waive $2.5 million of limited partner cash distributions for each of twelve consecutive quarters beginning with the first quarter the units issued as consideration were eligible to receive distributions. This waiver of limited partner cash distributions will expire after the cash distribution for the second quarter of 2020, which will be made during the third quarter of 2020.
|
|
|
|
|
Note 11:
|
Partners’ Equity, Income Allocations and Cash Distributions
|
As of June 30, 2020, HFC held 59,630,030 of our common units, constituting a 57% limited partner interest in us, and held the non-economic general partner interest.
Continuous Offering Program
We have a continuous offering program under which we may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200 million. As of June 30, 2020, HEP has issued 2,413,153 units under this program, providing $82.3 million in gross proceeds.
Allocations of Net Income
Net income attributable to HEP is allocated to the partners based on their weighted-average ownership percentage during the period.
Cash Distributions
On July 23, 2020, we announced our cash distribution for the second quarter of 2020 of $0.35 per unit. The distribution is payable on all common units and will be paid August 13, 2020, to all unitholders of record on August 3, 2020. However, HEP Logistics waived $2.5 million in limited partner cash distributions due to them as discussed in Note 1.
Our regular quarterly cash distribution to the limited partners will be $34.5 million for the three months ended June 30, 2020 and was $68.5 million for the three months ended June 30, 2019. For the six months ended June 30, 2020, the regular quarterly distribution to the limited partners will be $68.9 million and was $136.7 million for the six months ended June 30, 2019. Our distributions are declared subsequent to quarter end; therefore, these amounts do not reflect distributions paid during the respective period.
Note 12: Net Income Per Limited Partner Unit
Basic net income per unit applicable to the limited partners is calculated as net income attributable to the partners divided by the weighted average limited partners’ units outstanding. Diluted net income per unit assumes, when dilutive, the issuance of the net incremental units from restricted units, phantom units and performance units.To the extent net income attributable to the partners exceeds or is less than cash distributions, this difference is allocated to the partners based on their weighted-average ownership percentage during the period, after consideration of any priority allocations of earnings. Our dilutive securities are immaterial for all periods presented.
Net income per limited partner unit is computed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(In thousands, except per unit data)
|
|
Net income attributable to the partners
|
|
$
|
76,470
|
|
|
$
|
45,690
|
|
|
$
|
101,331
|
|
|
$
|
96,872
|
|
|
Weighted average limited partners' units outstanding
|
|
105,440
|
|
|
105,440
|
|
|
105,440
|
|
|
105,440
|
|
|
Limited partners' per unit interest in earnings - basic and diluted
|
|
$
|
0.73
|
|
|
$
|
0.43
|
|
|
$
|
0.96
|
|
|
$
|
0.92
|
|
We expensed $0.5 million and $0.7 million for the three and six months ended June 30, 2020, for environmental remediation obligations, and we expensed $0.1 million for the three and six months ended June 30, 2019. The accrued environmental liability, net of expected recoveries from indemnifying parties, reflected in our consolidated balance sheets was $5.7 million and $5.5 million at June 30, 2020 and December 31, 2019, respectively, of which $3.5 million was classified as other long-term liabilities for both periods. These accruals include remediation and monitoring costs expected to be incurred over an extended period of time.
Under the Omnibus Agreement and certain transportation agreements and purchase agreements with HFC, HFC has agreed to indemnify us, subject to certain monetary and time limitations, for environmental noncompliance and remediation liabilities associated with certain assets transferred to us from HFC and occurring or existing prior to the date of such transfers. Our consolidated balance sheets included additional accrued environmental liabilities of $0.4 million and $0.5 million for HFC indemnified liabilities for the periods ending June 30, 2020 and December 31, 2019, respectively, and other assets included equal and offsetting balances representing amounts due from HFC related to indemnifications for environmental remediation liabilities.
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.
|
|
|
|
Note 15:
|
Segment Information
|
Although financial information is reviewed by our chief operating decision makers from a variety of perspectives, they view the business in two reportable operating segments: pipelines and terminals, and refinery processing units. These operating segments adhere to the accounting polices used for our consolidated financial statements.
Pipelines and terminals have been aggregated as one reportable segment as both pipeline and terminals (1) have similar economic characteristics, (2) similarly provide logistics services of transportation and storage of petroleum products, (3) similarly support the petroleum refining business, including distribution of its products, (4) have principally the same customers and (5) are subject to similar regulatory requirements.
We evaluate the performance of each segment based on its respective operating income. Certain general and administrative expenses and interest and financing costs are excluded from segment operating income as they are not directly attributable to a specific reportable segment. Identifiable assets are those used by the segment, whereas other assets are principally equity method investments, cash, deposits and other assets that are not associated with a specific reportable reportable segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(In thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Pipelines and terminals - affiliate
|
|
$
|
75,990
|
|
|
$
|
82,970
|
|
|
$
|
157,534
|
|
|
$
|
164,510
|
|
|
Pipelines and terminals - third-party
|
|
19,244
|
|
|
28,382
|
|
|
45,670
|
|
|
59,520
|
|
|
Refinery processing units - affiliate
|
|
19,573
|
|
|
19,399
|
|
|
39,457
|
|
|
41,218
|
|
|
Total segment revenues
|
|
$
|
114,807
|
|
|
$
|
130,751
|
|
|
$
|
242,661
|
|
|
$
|
265,248
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income:
|
|
|
|
|
|
|
|
|
|
Pipelines and terminals
|
|
$
|
45,630
|
|
|
$
|
57,936
|
|
|
$
|
104,533
|
|
|
$
|
121,168
|
|
|
Refinery processing units
|
|
9,406
|
|
|
7,966
|
|
|
19,398
|
|
|
17,888
|
|
|
Total segment operating income
|
|
55,036
|
|
|
65,902
|
|
|
123,931
|
|
|
139,056
|
|
|
Unallocated general and administrative expenses
|
|
(2,535
|
)
|
|
(1,988
|
)
|
|
(5,237
|
)
|
|
(4,608
|
)
|
|
Interest and financing costs, net
|
|
(10,966
|
)
|
|
(18,679
|
)
|
|
(26,515
|
)
|
|
(37,173
|
)
|
|
Loss on early extinguishment of debt
|
|
—
|
|
|
—
|
|
|
(25,915
|
)
|
|
—
|
|
|
Equity in earnings of equity method investments
|
|
2,156
|
|
|
1,783
|
|
|
3,870
|
|
|
3,883
|
|
|
Gain on sales-type leases
|
|
33,834
|
|
|
—
|
|
|
33,834
|
|
|
—
|
|
|
Gain (loss) on sale of assets and other
|
|
468
|
|
|
111
|
|
|
974
|
|
|
(199
|
)
|
|
Income before income taxes
|
|
$
|
77,993
|
|
|
$
|
47,129
|
|
|
$
|
104,942
|
|
|
$
|
100,959
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
Pipelines and terminals
|
|
$
|
11,798
|
|
|
$
|
7,034
|
|
|
$
|
30,416
|
|
|
$
|
17,752
|
|
|
Refinery processing units
|
|
—
|
|
|
—
|
|
|
324
|
|
|
—
|
|
|
Total capital expenditures
|
|
$
|
11,798
|
|
|
$
|
7,034
|
|
|
$
|
30,740
|
|
|
$
|
17,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
|
|
(In thousands)
|
|
Identifiable assets:
|
|
|
|
|
|
Pipelines and terminals (1)
|
|
$
|
1,765,038
|
|
|
$
|
1,749,843
|
|
|
Refinery processing units
|
|
307,900
|
|
|
305,897
|
|
|
Other
|
|
148,845
|
|
|
143,492
|
|
|
Total identifiable assets
|
|
$
|
2,221,783
|
|
|
$
|
2,199,232
|
|
(1) Includes goodwill of $270.3 million as of June 30, 2020 and December 31, 2019.
|
|
|
|
Note 16:
|
Supplemental Guarantor/Non-Guarantor Financial Information
|
Obligations of HEP (“Parent”) under the 5% Senior Notes have been jointly and severally guaranteed by each of its direct and indirect 100% owned subsidiaries (“Guarantor Subsidiaries”). These guarantees are full and unconditional, subject to certain customary release provisions. These circumstances include (i) when a Guarantor Subsidiary is sold or sells all or substantially all of its assets, (ii) when a Guarantor Subsidiary is declared “unrestricted” for covenant purposes, (iii) when a Guarantor Subsidiary’s guarantee of other indebtedness is terminated or released and (iv) when the requirements for legal defeasance or covenant defeasance or to discharge the senior notes have been satisfied.
The following financial information presents condensed consolidating balance sheets, statements of comprehensive income, and statements of cash flows of the Parent, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries. The information has been presented as if the Parent accounted for its ownership in the Guarantor Subsidiaries, and the Guarantor Restricted Subsidiaries accounted for the ownership of the Non-Guarantor Non-Restricted Subsidiaries, using the equity method of accounting.
Condensed Consolidating Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
Parent
|
|
Guarantor
Restricted Subsidiaries
|
|
Non-Guarantor Non-Restricted Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
(In thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,927
|
|
|
$
|
(766
|
)
|
|
$
|
15,752
|
|
|
$
|
—
|
|
|
$
|
18,913
|
|
|
Accounts receivable
|
|
—
|
|
|
58,197
|
|
|
7,840
|
|
|
(1,261
|
)
|
|
64,776
|
|
|
Prepaid and other current assets
|
|
337
|
|
|
6,992
|
|
|
576
|
|
|
|
|
|
7,905
|
|
|
Total current assets
|
|
4,264
|
|
|
64,423
|
|
|
24,168
|
|
|
(1,261
|
)
|
|
91,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties and equipment, net
|
|
—
|
|
|
1,110,139
|
|
|
348,795
|
|
|
—
|
|
|
1,458,934
|
|
|
Operating lease right-of-use assets
|
0
|
—
|
|
|
3,185
|
|
|
192
|
|
|
—
|
|
|
3,377
|
|
|
Net investment in leases
|
|
—
|
|
|
168,153
|
|
|
|
|
|
—
|
|
|
168,153
|
|
|
Investment in subsidiaries
|
|
1,868,595
|
|
|
282,348
|
|
|
—
|
|
|
(2,150,943
|
)
|
|
—
|
|
|
Intangible assets, net
|
|
—
|
|
|
94,318
|
|
|
—
|
|
|
—
|
|
|
94,318
|
|
|
Goodwill
|
|
—
|
|
|
270,336
|
|
|
—
|
|
|
—
|
|
|
270,336
|
|
|
Equity method investments
|
|
—
|
|
|
83,484
|
|
|
39,815
|
|
|
—
|
|
|
123,299
|
|
|
Other assets
|
|
5,497
|
|
|
6,275
|
|
|
—
|
|
|
—
|
|
|
11,772
|
|
|
Total assets
|
|
$
|
1,878,356
|
|
|
$
|
2,082,661
|
|
|
$
|
412,970
|
|
|
$
|
(2,152,204
|
)
|
|
$
|
2,221,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
—
|
|
|
$
|
14,343
|
|
|
$
|
8,843
|
|
|
$
|
(1,261
|
)
|
|
$
|
21,925
|
|
|
Accrued interest
|
|
10,683
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,683
|
|
|
Deferred revenue
|
|
—
|
|
|
10,502
|
|
|
500
|
|
|
—
|
|
|
11,002
|
|
|
Accrued property taxes
|
|
—
|
|
|
2,732
|
|
|
2,794
|
|
|
—
|
|
|
5,526
|
|
|
Current operating lease liabilities
|
|
—
|
|
|
1,145
|
|
|
68
|
|
|
—
|
|
|
1,213
|
|
|
Current finance lease liabilities
|
|
—
|
|
|
3,293
|
|
|
—
|
|
|
—
|
|
|
3,293
|
|
|
Other current liabilities
|
|
42
|
|
|
2,819
|
|
|
114
|
|
|
—
|
|
|
2,975
|
|
|
Total current liabilities
|
|
10,725
|
|
|
34,834
|
|
|
12,319
|
|
|
(1,261
|
)
|
|
56,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
1,486,648
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,486,648
|
|
|
Noncurrent operating lease liabilities
|
|
—
|
|
|
2,530
|
|
|
—
|
|
|
—
|
|
|
2,530
|
|
|
Noncurrent finance lease liabilities
|
|
—
|
|
|
70,039
|
|
|
—
|
|
|
—
|
|
|
70,039
|
|
|
Other long-term liabilities
|
|
260
|
|
|
12,909
|
|
|
520
|
|
|
—
|
|
|
13,689
|
|
|
Deferred revenue
|
|
—
|
|
|
42,692
|
|
|
—
|
|
|
—
|
|
|
42,692
|
|
|
Class B unit
|
|
—
|
|
|
51,062
|
|
|
—
|
|
|
—
|
|
|
51,062
|
|
|
Equity - partners
|
|
380,723
|
|
|
1,868,595
|
|
|
282,348
|
|
|
(2,150,943
|
)
|
|
380,723
|
|
|
Equity - noncontrolling interest
|
|
—
|
|
|
—
|
|
|
117,783
|
|
|
—
|
|
|
117,783
|
|
|
Total liabilities and equity
|
|
$
|
1,878,356
|
|
|
$
|
2,082,661
|
|
|
$
|
412,970
|
|
|
$
|
(2,152,204
|
)
|
|
$
|
2,221,783
|
|
Condensed Consolidating Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Parent
|
|
Guarantor
Restricted Subsidiaries
|
|
Non-Guarantor Non-Restricted Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
(In thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,790
|
|
|
$
|
(709
|
)
|
|
$
|
9,206
|
|
|
$
|
—
|
|
|
$
|
13,287
|
|
|
Accounts receivable
|
|
—
|
|
|
60,229
|
|
|
8,549
|
|
|
(331
|
)
|
|
68,447
|
|
|
Prepaid and other current assets
|
|
282
|
|
|
6,710
|
|
|
637
|
|
|
—
|
|
|
7,629
|
|
|
Total current assets
|
|
5,072
|
|
|
66,230
|
|
|
18,392
|
|
|
(331
|
)
|
|
89,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties and equipment, net
|
|
—
|
|
|
1,133,534
|
|
|
333,565
|
|
|
—
|
|
|
1,467,099
|
|
|
Operating lease right-of-use assets
|
|
—
|
|
|
3,243
|
|
|
12
|
|
|
—
|
|
|
3,255
|
|
|
Net investment in leases
|
|
—
|
|
|
134,886
|
|
|
—
|
|
|
—
|
|
|
134,886
|
|
|
Investment in subsidiaries
|
|
1,844,812
|
|
|
275,279
|
|
|
—
|
|
|
(2,120,091
|
)
|
|
—
|
|
|
Intangible assets, net
|
|
—
|
|
|
101,322
|
|
|
—
|
|
|
—
|
|
|
101,322
|
|
|
Goodwill
|
|
—
|
|
|
270,336
|
|
|
—
|
|
|
—
|
|
|
270,336
|
|
|
Equity method investments
|
|
—
|
|
|
82,987
|
|
|
37,084
|
|
|
—
|
|
|
120,071
|
|
|
Other assets
|
|
6,722
|
|
|
6,178
|
|
|
—
|
|
|
—
|
|
|
12,900
|
|
|
Total assets
|
|
$
|
1,856,606
|
|
|
$
|
2,073,995
|
|
|
$
|
389,053
|
|
|
$
|
(2,120,422
|
)
|
|
$
|
2,199,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
—
|
|
|
$
|
29,895
|
|
|
$
|
4,991
|
|
|
$
|
(331
|
)
|
|
$
|
34,555
|
|
|
Accrued interest
|
|
13,206
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,206
|
|
|
Deferred revenue
|
|
—
|
|
|
9,740
|
|
|
650
|
|
|
—
|
|
|
10,390
|
|
|
Accrued property taxes
|
|
—
|
|
|
2,737
|
|
|
1,062
|
|
|
—
|
|
|
3,799
|
|
|
Current operating lease liabilities
|
|
—
|
|
|
1,114
|
|
|
12
|
|
|
—
|
|
|
1,126
|
|
|
Current finance lease liabilities
|
|
—
|
|
|
3,224
|
|
|
—
|
|
|
—
|
|
|
3,224
|
|
|
Other current liabilities
|
|
6
|
|
|
2,293
|
|
|
6
|
|
|
—
|
|
|
2,305
|
|
|
Total current liabilities
|
|
13,212
|
|
|
49,003
|
|
|
6,721
|
|
|
(331
|
)
|
|
68,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
1,462,031
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,462,031
|
|
|
Noncurrent operating lease liabilities
|
|
—
|
|
|
2,482
|
|
|
—
|
|
|
—
|
|
|
2,482
|
|
|
Noncurrent finance lease liabilities
|
|
—
|
|
|
70,475
|
|
|
—
|
|
|
—
|
|
|
70,475
|
|
|
Other long-term liabilities
|
|
260
|
|
|
12,150
|
|
|
398
|
|
|
—
|
|
|
12,808
|
|
|
Deferred revenue
|
|
—
|
|
|
45,681
|
|
|
—
|
|
|
—
|
|
|
45,681
|
|
|
Class B unit
|
|
—
|
|
|
49,392
|
|
|
—
|
|
|
—
|
|
|
49,392
|
|
|
Equity - partners
|
|
381,103
|
|
|
1,844,812
|
|
|
275,279
|
|
|
(2,120,091
|
)
|
|
381,103
|
|
|
Equity - noncontrolling interest
|
|
—
|
|
|
—
|
|
|
106,655
|
|
|
—
|
|
|
106,655
|
|
|
Total liabilities and equity
|
|
$
|
1,856,606
|
|
|
$
|
2,073,995
|
|
|
$
|
389,053
|
|
|
$
|
(2,120,422
|
)
|
|
$
|
2,199,232
|
|
Condensed Consolidating Statement of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020
|
|
Parent
|
|
Guarantor Restricted
Subsidiaries
|
|
Non-Guarantor Non-restricted Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
(In thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates
|
|
$
|
—
|
|
|
$
|
89,417
|
|
|
$
|
6,146
|
|
|
$
|
—
|
|
|
$
|
95,563
|
|
|
Third parties
|
|
—
|
|
|
15,887
|
|
|
3,357
|
|
|
—
|
|
|
19,244
|
|
|
|
|
—
|
|
|
105,304
|
|
|
9,503
|
|
|
—
|
|
|
114,807
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Operations (exclusive of depreciation and amortization)
|
|
—
|
|
|
30,980
|
|
|
3,757
|
|
|
—
|
|
|
34,737
|
|
|
Depreciation and amortization
|
|
—
|
|
|
20,739
|
|
|
4,295
|
|
|
—
|
|
|
25,034
|
|
|
General and administrative
|
|
780
|
|
|
1,755
|
|
|
—
|
|
|
—
|
|
|
2,535
|
|
|
|
|
780
|
|
|
53,474
|
|
|
8,052
|
|
|
—
|
|
|
62,306
|
|
|
Operating income (loss)
|
|
(780
|
)
|
|
51,830
|
|
|
1,451
|
|
|
—
|
|
|
52,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries
|
|
89,893
|
|
|
1,510
|
|
|
—
|
|
|
(91,403
|
)
|
|
—
|
|
|
Equity in earnings of equity method investments
|
|
—
|
|
|
1,449
|
|
|
707
|
|
|
—
|
|
|
2,156
|
|
|
Interest expense
|
|
(12,740
|
)
|
|
(1,039
|
)
|
|
—
|
|
|
—
|
|
|
(13,779
|
)
|
|
Interest income
|
|
26
|
|
|
2,787
|
|
|
—
|
|
|
—
|
|
|
2,813
|
|
|
Gain on sales-type lease
|
|
—
|
|
|
33,834
|
|
|
—
|
|
|
—
|
|
|
33,834
|
|
|
Gain on sale of assets and other
|
|
71
|
|
|
396
|
|
|
1
|
|
|
—
|
|
|
468
|
|
|
|
|
77,250
|
|
|
38,937
|
|
|
708
|
|
|
(91,403
|
)
|
|
25,492
|
|
|
Income before income taxes
|
|
76,470
|
|
|
90,767
|
|
|
2,159
|
|
|
(91,403
|
)
|
|
77,993
|
|
|
State income tax expense
|
|
—
|
|
|
(39
|
)
|
|
—
|
|
|
—
|
|
|
(39
|
)
|
|
Net income
|
|
76,470
|
|
|
90,728
|
|
|
2,159
|
|
|
(91,403
|
)
|
|
77,954
|
|
|
Allocation of net income attributable to noncontrolling interests
|
|
—
|
|
|
(835
|
)
|
|
(649
|
)
|
|
—
|
|
|
(1,484
|
)
|
|
Net income attributable to the partners
|
|
$
|
76,470
|
|
|
$
|
89,893
|
|
|
$
|
1,510
|
|
|
$
|
(91,403
|
)
|
|
$
|
76,470
|
|
Condensed Consolidating Statement of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Parent
|
|
Guarantor
Restricted Subsidiaries
|
|
Non-Guarantor Non-Restricted Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
(In thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates
|
|
$
|
—
|
|
|
$
|
96,221
|
|
|
$
|
6,148
|
|
|
$
|
—
|
|
|
$
|
102,369
|
|
|
Third parties
|
|
—
|
|
|
23,700
|
|
|
4,682
|
|
|
—
|
|
|
28,382
|
|
|
|
|
—
|
|
|
119,921
|
|
|
10,830
|
|
|
—
|
|
|
130,751
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Operations (exclusive of depreciation and amortization)
|
|
—
|
|
|
36,701
|
|
|
3,901
|
|
|
—
|
|
|
40,602
|
|
|
Depreciation and amortization
|
|
|
|
|
20,027
|
|
|
4,220
|
|
|
—
|
|
|
24,247
|
|
|
General and administrative
|
|
745
|
|
|
1,243
|
|
|
—
|
|
|
—
|
|
|
1,988
|
|
|
|
|
745
|
|
|
57,971
|
|
|
8,121
|
|
|
—
|
|
|
66,837
|
|
|
Operating income (loss)
|
|
(745
|
)
|
|
61,950
|
|
|
2,709
|
|
|
—
|
|
|
63,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries
|
|
65,431
|
|
|
2,063
|
|
|
—
|
|
|
(67,494
|
)
|
|
—
|
|
|
Equity in earnings of equity method investments
|
|
—
|
|
|
1,783
|
|
|
—
|
|
|
—
|
|
|
1,783
|
|
|
Interest expense
|
|
(18,996
|
)
|
|
(234
|
)
|
|
—
|
|
|
—
|
|
|
(19,230
|
)
|
|
Interest income
|
|
—
|
|
|
551
|
|
|
—
|
|
|
—
|
|
|
551
|
|
|
Gain (loss) on sale of assets and other
|
|
—
|
|
|
69
|
|
|
42
|
|
|
—
|
|
|
111
|
|
|
|
|
46,435
|
|
|
4,232
|
|
|
42
|
|
|
(67,494
|
)
|
|
(16,785
|
)
|
|
Income before income taxes
|
|
45,690
|
|
|
66,182
|
|
|
2,751
|
|
|
(67,494
|
)
|
|
47,129
|
|
|
State income tax benefit
|
|
—
|
|
|
30
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
Net income
|
|
45,690
|
|
|
66,212
|
|
|
2,751
|
|
|
(67,494
|
)
|
|
47,159
|
|
|
Allocation of net income attributable to noncontrolling interests
|
|
—
|
|
|
(781
|
)
|
|
(688
|
)
|
|
—
|
|
|
(1,469
|
)
|
|
Net income attributable to the partners
|
|
$
|
45,690
|
|
|
$
|
65,431
|
|
|
$
|
2,063
|
|
|
$
|
(67,494
|
)
|
|
$
|
45,690
|
|
Condensed Consolidating Statement of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
|
Parent
|
|
Guarantor Restricted
Subsidiaries
|
|
Non-Guarantor Non-restricted Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
(In thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates
|
|
$
|
—
|
|
|
$
|
184,172
|
|
|
$
|
12,819
|
|
|
$
|
—
|
|
|
$
|
196,991
|
|
|
Third parties
|
|
—
|
|
|
35,042
|
|
|
10,628
|
|
|
—
|
|
|
45,670
|
|
|
|
|
—
|
|
|
219,214
|
|
|
23,447
|
|
|
—
|
|
|
242,661
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Operations (exclusive of depreciation and amortization)
|
|
—
|
|
|
62,111
|
|
|
7,607
|
|
|
—
|
|
|
69,718
|
|
|
Depreciation and amortization
|
|
—
|
|
|
40,492
|
|
|
8,520
|
|
|
—
|
|
|
49,012
|
|
|
General and administrative
|
|
1,879
|
|
|
3,358
|
|
|
—
|
|
|
—
|
|
|
5,237
|
|
|
|
|
1,879
|
|
|
105,961
|
|
|
16,127
|
|
|
—
|
|
|
123,967
|
|
|
Operating income (loss)
|
|
(1,879
|
)
|
|
113,253
|
|
|
7,320
|
|
|
—
|
|
—
|
|
118,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries
|
|
158,428
|
|
|
5,805
|
|
|
—
|
|
|
(164,233
|
)
|
|
—
|
|
|
Equity in earnings of equity method investments
|
|
—
|
|
|
3,537
|
|
|
333
|
|
—
|
|
—
|
|
|
3,870
|
|
|
Interest expense
|
|
(29,470
|
)
|
|
(2,076
|
)
|
|
—
|
|
|
—
|
|
|
(31,546
|
)
|
|
Interest income
|
|
26
|
|
|
5,005
|
|
|
—
|
|
|
—
|
|
|
5,031
|
|
|
Loss on early extinguishment of debt
|
|
(25,915
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25,915
|
)
|
|
Gain on sales-type lease
|
|
—
|
|
|
33,834
|
|
|
—
|
|
|
—
|
|
|
33,834
|
|
|
Gain on sale of assets and other
|
|
141
|
|
|
816
|
|
|
17
|
|
—
|
|
—
|
|
|
974
|
|
|
|
|
103,210
|
|
|
46,921
|
|
|
350
|
|
|
(164,233
|
)
|
|
(13,752
|
)
|
|
Income before income taxes
|
|
101,331
|
|
|
160,174
|
|
|
7,670
|
|
|
(164,233
|
)
|
|
104,942
|
|
|
State income tax expense
|
|
—
|
|
|
(76
|
)
|
|
—
|
|
|
—
|
|
|
(76
|
)
|
|
Net income
|
|
101,331
|
|
|
160,098
|
|
|
7,670
|
|
|
(164,233
|
)
|
|
104,866
|
|
|
Allocation of net income attributable to noncontrolling interests
|
|
—
|
|
|
(1,670
|
)
|
|
(1,865
|
)
|
|
—
|
|
|
(3,535
|
)
|
|
Net income attributable to the partners
|
|
$
|
101,331
|
|
|
$
|
158,428
|
|
|
$
|
5,805
|
|
|
$
|
(164,233
|
)
|
|
$
|
101,331
|
|
Condensed Consolidating Statement of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Parent
|
|
Guarantor Restricted
Subsidiaries
|
|
Non-Guarantor Non-restricted Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
(In thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates
|
|
$
|
—
|
|
|
$
|
193,614
|
|
|
$
|
12,114
|
|
|
$
|
—
|
|
|
$
|
205,728
|
|
|
Third parties
|
|
—
|
|
|
45,765
|
|
|
13,755
|
|
|
—
|
|
|
59,520
|
|
|
|
|
—
|
|
|
239,379
|
|
|
25,869
|
|
|
—
|
|
|
265,248
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Operations (exclusive of depreciation and amortization)
|
|
—
|
|
|
70,778
|
|
|
7,343
|
|
|
—
|
|
|
78,121
|
|
|
Depreciation and amortization
|
|
|
|
39,563
|
|
|
8,508
|
|
|
—
|
|
|
48,071
|
|
|
General and administrative
|
|
1,821
|
|
|
2,787
|
|
|
—
|
|
|
—
|
|
|
4,608
|
|
|
|
|
1,821
|
|
|
113,128
|
|
|
15,851
|
|
|
—
|
|
|
130,800
|
|
|
Operating income (loss)
|
|
(1,821
|
)
|
|
126,251
|
|
|
10,018
|
|
|
—
|
|
|
134,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries
|
|
136,730
|
|
|
7,559
|
|
|
—
|
|
|
(144,289
|
)
|
|
—
|
|
|
Equity in earnings of equity method investments
|
|
—
|
|
|
3,883
|
|
|
—
|
|
—
|
|
—
|
|
|
3,883
|
|
|
Interest expense
|
|
(38,037
|
)
|
|
(215
|
)
|
|
—
|
|
|
—
|
|
|
(38,252
|
)
|
|
Interest income
|
|
—
|
|
|
1,079
|
|
|
—
|
|
—
|
|
—
|
|
|
1,079
|
|
|
Gain on sale of assets and other
|
|
—
|
|
|
(260
|
)
|
|
61
|
|
|
—
|
|
|
(199
|
)
|
|
|
|
98,693
|
|
|
12,046
|
|
|
61
|
|
|
(144,289
|
)
|
|
(33,489
|
)
|
|
Income before income taxes
|
|
96,872
|
|
|
138,297
|
|
|
10,079
|
|
|
(144,289
|
)
|
|
100,959
|
|
|
State income tax expense
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
Net income
|
|
96,872
|
|
|
138,291
|
|
|
10,079
|
|
|
(144,289
|
)
|
|
100,953
|
|
|
Allocation of net income attributable to noncontrolling interests
|
|
—
|
|
|
(1,561
|
)
|
|
(2,520
|
)
|
|
—
|
|
|
(4,081
|
)
|
|
Net income attributable to the partners
|
|
$
|
96,872
|
|
|
$
|
136,730
|
|
|
$
|
7,559
|
|
|
$
|
(144,289
|
)
|
|
$
|
96,872
|
|
Condensed Consolidating Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
|
Parent
|
|
Guarantor
Restricted Subsidiaries
|
|
Non-Guarantor Non-Restricted Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities
|
|
$
|
(31,103
|
)
|
|
$
|
151,331
|
|
|
$
|
20,277
|
|
|
$
|
(5,911
|
)
|
|
$
|
134,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
Additions to properties and equipment
|
|
—
|
|
|
(8,883
|
)
|
|
(21,857
|
)
|
|
—
|
|
|
(30,740
|
)
|
|
Investment in Cushing Connect
|
|
—
|
|
|
(13,263
|
)
|
|
(2,400
|
)
|
|
13,263
|
|
|
(2,400
|
)
|
|
Proceeds from sale of assets
|
|
—
|
|
|
816
|
|
|
—
|
|
|
—
|
|
|
816
|
|
|
Distributions in excess of equity in earnings of equity investments
|
|
—
|
|
|
6,559
|
|
|
—
|
|
|
(6,089
|
)
|
|
470
|
|
|
|
|
—
|
|
|
(14,771
|
)
|
|
(24,257
|
)
|
|
7,174
|
|
|
(31,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings under credit agreement
|
|
29,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29,500
|
|
|
Net intercompany financing activities
|
|
134,645
|
|
|
(134,645
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Redemption of senior notes
|
|
(522,500
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(522,500
|
)
|
|
Proceeds from issuance of senior notes
|
|
500,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
500,000
|
|
|
Contribution from general partner
|
|
435
|
|
|
—
|
|
|
13,263
|
|
|
(13,263
|
)
|
|
435
|
|
|
Contribution from noncontrolling interest
|
|
—
|
|
|
—
|
|
|
13,263
|
|
|
—
|
|
|
13,263
|
|
|
Distributions to HEP unitholders
|
|
(102,979
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(102,979
|
)
|
|
Distributions to noncontrolling interests
|
|
—
|
|
|
—
|
|
|
(16,000
|
)
|
|
12,000
|
|
|
(4,000
|
)
|
|
Units withheld for tax withholding obligations
|
|
(147
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(147
|
)
|
|
Deferred financing costs
|
|
(8,714
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,714
|
)
|
|
Payments on finance leases
|
|
—
|
|
|
(1,972
|
)
|
|
—
|
|
|
—
|
|
|
(1,972
|
)
|
|
|
|
30,240
|
|
|
(136,617
|
)
|
|
10,526
|
|
|
(1,263
|
)
|
|
(97,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) for the period
|
|
(863
|
)
|
|
(57
|
)
|
|
6,546
|
|
|
—
|
|
|
5,626
|
|
|
Beginning of period
|
|
4,790
|
|
|
(709
|
)
|
|
9,206
|
|
|
—
|
|
|
13,287
|
|
|
End of period
|
|
$
|
3,927
|
|
|
$
|
(766
|
)
|
|
$
|
15,752
|
|
|
$
|
—
|
|
|
$
|
18,913
|
|
Condensed Consolidating Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Parent
|
|
Guarantor
Restricted Subsidiaries
|
|
Non-Guarantor Non-Restricted Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities
|
|
$
|
(37,005
|
)
|
|
$
|
165,882
|
|
|
$
|
23,671
|
|
|
$
|
(7,559
|
)
|
|
$
|
144,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
Additions to properties and equipment
|
|
—
|
|
|
(17,274
|
)
|
|
(478
|
)
|
|
—
|
|
|
(17,752
|
)
|
|
Distributions from UNEV in excess of earnings
|
|
—
|
|
|
8,191
|
|
|
—
|
|
|
(8,191
|
)
|
|
—
|
|
|
Proceeds from sale of assets
|
|
—
|
|
|
194
|
|
|
—
|
|
|
—
|
|
|
194
|
|
|
Distributions in excess of equity in earnings of equity investments
|
|
—
|
|
|
299
|
|
|
—
|
|
|
—
|
|
|
299
|
|
|
|
|
—
|
|
|
(8,590
|
)
|
|
(478
|
)
|
|
(8,191
|
)
|
|
(17,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings under credit agreement
|
|
18,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18,500
|
|
|
Net intercompany financing activities
|
|
155,225
|
|
|
(155,225
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Distributions to HEP unitholders
|
|
(136,207
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(136,207
|
)
|
|
Distributions to noncontrolling interests
|
|
—
|
|
|
—
|
|
|
(21,000
|
)
|
|
15,750
|
|
|
(5,250
|
)
|
|
Units withheld for tax withholding obligations
|
|
(119
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(119
|
)
|
|
Purchase units for incentive grants
|
|
(255
|
)
|
|
|
|
|
—
|
|
|
—
|
|
|
(255
|
)
|
|
Payments on finance leases
|
|
(139
|
)
|
|
(364
|
)
|
|
—
|
|
|
—
|
|
|
(503
|
)
|
|
|
|
37,005
|
|
|
(155,589
|
)
|
|
(21,000
|
)
|
|
15,750
|
|
|
(123,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
Increase for the period
|
|
—
|
|
|
1,703
|
|
|
2,193
|
|
|
—
|
|
|
3,896
|
|
|
Beginning of period
|
|
2
|
|
|
—
|
|
|
3,043
|
|
|
—
|
|
|
3,045
|
|
|
End of period
|
|
$
|
2
|
|
|
$
|
1,703
|
|
|
$
|
5,236
|
|
|
$
|
—
|
|
|
$
|
6,941
|
|
|
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
This Item 2, including but not limited to the sections under “Results of Operations” and “Liquidity and Capital Resources,” contains forward-looking statements. See “Forward-Looking Statements” at the beginning of Part I of this Quarterly Report on Form 10-Q. In this document, the words “we,” “our,” “ours” and “us” refer to Holly Energy Partners, L.P. (“HEP”) and its consolidated subsidiaries or to HEP or an individual subsidiary and not to any other person.
OVERVIEW
HEP is a Delaware limited partnership. Through our subsidiaries and joint ventures, we own and/or operate petroleum product and crude oil pipelines, terminal, tankage and loading rack facilities and refinery processing units that support the refining and marketing operations of HollyFrontier Corporation (“HFC”) and other refineries in the Mid-Continent, Southwest and Northwest regions of the United States. HEP, through its subsidiaries and joint ventures, owns and/or operates petroleum product and crude pipelines, tankage and terminals in Texas, New Mexico, Washington, Idaho, Oklahoma, Utah, Nevada, Wyoming and Kansas as well as refinery processing units in Utah and Kansas. HFC owned 57% of our outstanding common units and the non-economic general partnership interest, as of June 30, 2020.
We generate revenues by charging tariffs for transporting petroleum products and crude oil through our pipelines, by charging fees for terminalling and storing refined products and other hydrocarbons, providing other services at our storage tanks and terminals and charging a tolling fee per barrel or thousand standard cubic feet of feedstock throughput in our refinery processing units. We do not take ownership of products that we transport, terminal, store or process, and therefore, we are not directly exposed to changes in commodity prices.
We believe the long-term growth of global refined product demand and U.S. crude production should support high utilization rates for the refineries we serve, which in turn should support volumes in our product pipelines, crude gathering systems and terminals.
Impact of COVID-19 on Our Business
Our business depends in large part on the demand for the various petroleum products we transport, terminal and store in the markets we serve. The impact of the COVID-19 pandemic on the global macroeconomy has created unprecedented destruction of demand, as well as lack of forward visibility, for refined products and crude oil transportation, and for the terminalling and storage services that we provide. Over the course of the second quarter, demand for transportation fuels stabilized, and we saw incremental improvement in our volumes late in the quarter. We expect our customers will continue to adjust refinery production levels commensurate with market demand and ultimately expect demand to return to pre-COVID-19 levels. HFC, our largest customer, has announced that for the third quarter of 2020 it expects to run between 340,000 and 370,000 barrels per day of crude oil based on expected market demand for transportation fuels.
In response to the COVID-19 pandemic, and with the health and safety of our employees as a top priority, we took several actions, including limiting onsite staff at all of our facilities to essential operational personnel only, implementing a work from home policy for certain employees and restricting travel unless approved by senior leadership. We will continue to monitor COVID-19 developments and the dynamic environment to properly address these policies going forward.
In light of current circumstances and our expectations for the future, HEP reduced its quarterly distribution to $0.35 per unit beginning with the distribution for the first quarter of 2020, representative of a new distribution strategy focused on funding all capital expenditures and distributions within cash flow, improving distributable cash flow coverage to 1.3x or greater and reducing leverage to 3.0-3.5x.
On March 27, 2020, the United States government passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), an approximately $2 trillion stimulus package that includes various provisions intended to provide relief to individuals and businesses in the form of tax changes, loans and grants, among others. At this time, we have not sought relief in the form of loans or grants from the CARES Act; however, we have benefited from certain tax deferrals in the CARES Act and may benefit from other tax provisions if we meet the requirements to do so.
The extent to which HEP’s future results are affected by COVID-19 will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic, additional actions by businesses and governments in response to the pandemic and the speed and effectiveness of responses to combat the virus. However, we have long-term customer contracts with minimum volume commitments, which have expiration dates from 2021 to 2036. These minimum volume commitments accounted for approximately 70% of our total revenues in 2019. We are currently not aware of any reasons that would prevent such customers
from making the minimum payments required under the contracts or potentially making payments in excess of the minimum payments. In addition to these payments, we also expect to collect payments for services provided to uncommitted shippers. There have been no material changes to customer payment terms due to the COVID-19 pandemic.
The COVID-19 pandemic, and the volatile regional and global economic conditions stemming from it, could also exacerbate the risk factors identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. The COVID-19 pandemic may also materially adversely affect our results in a manner that is either not currently known or that we do not currently consider to be a significant risk to our business.
Investment in Joint Venture
On October 2, 2019, HEP Cushing (“HEP Cushing”), a wholly-owned subsidiary of HEP, and Plains Marketing, L.P. (“PMLP”), a wholly-owned subsidiary of Plains All American Pipeline, L.P. (“Plains”), formed a 50/50 joint venture, Cushing Connect Pipeline & Terminal LLC (the “Cushing Connect Joint Venture”), for (i) the development and construction of a new 160,000 barrel per day common carrier crude oil pipeline (the “Cushing Connect Pipeline”) that will connect the Cushing, Oklahoma crude oil hub to the Tulsa, Oklahoma refining complex owned by a subsidiary of HFC and (ii) the ownership and operation of 1.5 million barrels of crude oil storage in Cushing, Oklahoma (the “Cushing Connect JV Terminal”). The Cushing Connect JV Terminal went into service during the second quarter of 2020, and the Cushing Connect Pipeline is expected to be in service during the first quarter of 2021. Long-term commercial agreements have been entered into to support the Cushing Connect Joint Venture assets.
The Cushing Connect Joint Venture will contract with an affiliate of HEP to manage the construction and operation of the Cushing Connect Pipeline and with an affiliate of Plains to manage the operation of the Cushing Connect JV Terminal. The total Cushing Connect Joint Venture investment will be shared proportionately among the partners, and HEP estimates its share of the cost of the Cushing Connect JV Terminal contributed by Plains and Cushing Connect Pipeline construction costs will be approximately $65 million.
Agreements with HFC
We serve HFC’s refineries under long-term pipeline, terminal, tankage and refinery processing unit throughput agreements expiring from 2021 to 2036. Under these agreements, HFC agrees to transport, store and process throughput volumes of refined product, crude oil and feedstocks on our pipelines, terminal, tankage, and loading rack facilities and refinery processing units that result in minimum annual payments to us. These minimum annual payments or revenues are subject to annual rate adjustments on July 1st each year, based on the Producer Price Index (“PPI”) or Federal Energy Regulatory Commission index. As of July 1, 2020, these agreements with HFC require minimum annualized payments to us of $351.1 million.
If HFC fails to meet its minimum volume commitments under the agreements in any quarter, it will be required to pay us the amount of any shortfall in cash by the last day of the month following the end of the quarter. Under certain of the agreements, a shortfall payment may be applied as a credit in the following four quarters after minimum obligations are met.
A significant reduction in revenues under these agreements could have a material adverse effect on our results of operations.
On June 1, 2020, HFC announced plans to permanently cease petroleum refining operations at its Cheyenne Refinery and to convert certain assets at that refinery to renewable diesel production. HFC subsequently began winding down petroleum refining operations at its Cheyenne Refinery on August 3, 2020. As of June 30, 2020, our throughput agreement with HFC required minimum annualized payments to us of approximately $17.6 million related to our Cheyenne assets. During the third quarter of 2020, we expect to begin negotiations with HFC related to potential changes to our existing throughput agreement. The net book value of our Cheyenne related net assets as of June 30, 2020 was approximately $88.5 million, including $28.1 million of long-lived assets and $68.7 million of goodwill. Additionally, our annual goodwill impairment test is scheduled for the third quarter of 2020. Depending upon the outcome of negotiations related to our throughput agreement or other changes in anticipated commercial uses of our Cheyenne assets, such assets could be at risk of impairment in the future and such impairment charges could be material.
Under certain provisions of an omnibus agreement we have with HFC (the “Omnibus Agreement”), we pay HFC an annual administrative fee, currently $2.6 million, for the provision by HFC or its affiliates of various general and administrative services to us. This fee does not include the salaries of personnel employed by HFC who perform services for us on behalf of Holly Logistic Services, L.L.C. (“HLS”), or the cost of their employee benefits, which are separately charged to us by HFC. We also reimburse HFC and its affiliates for direct expenses they incur on our behalf.
Under HLS’s Secondment Agreement with HFC, certain employees of HFC are seconded to HLS to provide operational and maintenance services for certain of our processing, refining, pipeline and tankage assets, and HLS reimburses HFC for its prorated portion of the wages, benefits, and other costs of these employees for our benefit.
We have a long-term strategic relationship with HFC that has historically facilitated our growth. Our future growth plans include organic projects around our existing assets and select investments or acquisitions that enhance our service platform while creating accretion for our unitholders. While in the near term, any acquisitions would be subject to economic conditions discussed in “Overview - Impact of COVID-19 on Our Business” above, we also expect over the longer term to continue to work with HFC on logistic asset acquisitions in conjunction with HFC’s refinery acquisition strategies.
Furthermore, we plan to continue to pursue third-party logistic asset acquisitions that are accretive to our unitholders and increase the diversity of our revenues.
RESULTS OF OPERATIONS (Unaudited)
Income, Distributable Cash Flow, Volumes and Balance Sheet Data
The following tables present income, distributable cash flow and volume information for the three and the six months ended June 30, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Change from
|
|
|
|
2020
|
|
2019
|
|
2019
|
|
|
|
(In thousands, except per unit data)
|
|
Revenues:
|
|
|
|
|
|
|
|
Pipelines:
|
|
|
|
|
|
|
|
Affiliates—refined product pipelines
|
|
$
|
16,302
|
|
|
$
|
20,759
|
|
|
$
|
(4,457
|
)
|
|
Affiliates—intermediate pipelines
|
|
7,475
|
|
|
7,297
|
|
|
178
|
|
|
Affiliates—crude pipelines
|
|
19,311
|
|
|
20,651
|
|
|
(1,340
|
)
|
|
|
|
43,088
|
|
|
48,707
|
|
|
(5,619
|
)
|
|
Third parties—refined product pipelines
|
|
8,750
|
|
|
11,778
|
|
|
(3,028
|
)
|
|
Third parties—crude pipelines
|
|
7,116
|
|
|
11,778
|
|
|
(4,662
|
)
|
|
|
|
58,954
|
|
|
72,263
|
|
|
(13,309
|
)
|
|
Terminals, tanks and loading racks:
|
|
|
|
|
|
|
|
Affiliates
|
|
32,902
|
|
|
34,263
|
|
|
(1,361
|
)
|
|
Third parties
|
|
3,378
|
|
|
4,826
|
|
|
(1,448
|
)
|
|
|
|
36,280
|
|
|
39,089
|
|
|
(2,809
|
)
|
|
|
|
|
|
|
|
|
|
Affiliates—refinery processing units
|
|
19,573
|
|
|
19,399
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
114,807
|
|
|
130,751
|
|
|
(15,944
|
)
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Operations (exclusive of depreciation and amortization)
|
|
34,737
|
|
|
40,602
|
|
|
(5,865
|
)
|
|
Depreciation and amortization
|
|
25,034
|
|
|
24,247
|
|
|
787
|
|
|
General and administrative
|
|
2,535
|
|
|
1,988
|
|
|
547
|
|
|
|
|
62,306
|
|
|
66,837
|
|
|
(4,531
|
)
|
|
Operating income
|
|
52,501
|
|
|
63,914
|
|
|
(11,413
|
)
|
|
Other income (expense):
|
|
|
|
|
|
|
|
Equity in earnings of equity method investments
|
|
2,156
|
|
|
1,783
|
|
|
373
|
|
|
Interest expense, including amortization
|
|
(13,779
|
)
|
|
(19,230
|
)
|
|
5,451
|
|
|
Interest income
|
|
2,813
|
|
|
551
|
|
|
2,262
|
|
|
Gain on sales-type leases
|
|
33,834
|
|
|
—
|
|
|
33,834
|
|
|
Gain on sale of assets and other
|
|
468
|
|
|
111
|
|
|
357
|
|
|
|
|
25,492
|
|
|
(16,785
|
)
|
|
42,277
|
|
|
Income before income taxes
|
|
77,993
|
|
|
47,129
|
|
|
30,864
|
|
|
State income tax benefit (expense)
|
|
(39
|
)
|
|
30
|
|
|
(69
|
)
|
|
Net income
|
|
77,954
|
|
|
47,159
|
|
|
30,795
|
|
|
Allocation of net income attributable to noncontrolling interests
|
|
(1,484
|
)
|
|
(1,469
|
)
|
|
(15
|
)
|
|
Net income attributable to the partners
|
|
76,470
|
|
|
45,690
|
|
|
30,780
|
|
|
Limited partners’ earnings per unit—basic and diluted
|
|
$
|
0.73
|
|
|
$
|
0.43
|
|
|
$
|
0.30
|
|
|
Weighted average limited partners’ units outstanding
|
|
105,440
|
|
|
105,440
|
|
|
—
|
|
|
EBITDA (1)
|
|
$
|
112,509
|
|
|
$
|
88,586
|
|
|
$
|
23,923
|
|
|
Adjusted EBITDA (1)
|
|
$
|
80,168
|
|
|
$
|
88,586
|
|
|
$
|
(8,418
|
)
|
|
Distributable cash flow (2)
|
|
$
|
65,456
|
|
|
$
|
67,486
|
|
|
$
|
(2,030
|
)
|
|
|
|
|
|
|
|
|
|
Volumes (bpd)
|
|
|
|
|
|
|
|
Pipelines:
|
|
|
|
|
|
|
|
Affiliates—refined product pipelines
|
|
100,524
|
|
|
130,802
|
|
|
(30,278
|
)
|
|
Affiliates—intermediate pipelines
|
|
128,464
|
|
|
141,345
|
|
|
(12,881
|
)
|
|
Affiliates—crude pipelines
|
|
252,570
|
|
|
370,351
|
|
|
(117,781
|
)
|
|
|
|
481,558
|
|
|
642,498
|
|
|
(160,940
|
)
|
|
Third parties—refined product pipelines
|
|
57,876
|
|
|
66,963
|
|
|
(9,087
|
)
|
|
Third parties—crude pipelines
|
|
85,851
|
|
|
140,555
|
|
|
(54,704
|
)
|
|
|
|
625,285
|
|
|
850,016
|
|
|
(224,731
|
)
|
|
Terminals and loading racks:
|
|
|
|
|
|
|
|
Affiliates
|
|
372,093
|
|
|
431,509
|
|
|
(59,416
|
)
|
|
Third parties
|
|
45,876
|
|
|
59,343
|
|
|
(13,467
|
)
|
|
|
|
417,969
|
|
|
490,852
|
|
|
(72,883
|
)
|
|
|
|
|
|
|
|
|
|
Affiliates—refinery processing units
|
|
49,891
|
|
|
77,728
|
|
|
(27,837
|
)
|
|
|
|
|
|
|
|
|
|
Total for pipelines and terminal and refinery processing unit assets (bpd)
|
|
1,093,145
|
|
|
1,418,596
|
|
|
(325,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Change from
|
|
|
|
2020
|
|
2019
|
|
2019
|
|
|
|
(In thousands, except per unit data)
|
|
Revenues:
|
|
|
|
|
|
|
|
Pipelines:
|
|
|
|
|
|
|
|
Affiliates—refined product pipelines
|
|
$
|
36,385
|
|
|
$
|
41,491
|
|
|
$
|
(5,106
|
)
|
|
Affiliates—intermediate pipelines
|
|
14,949
|
|
|
14,578
|
|
|
371
|
|
|
Affiliates—crude pipelines
|
|
39,704
|
|
|
41,772
|
|
|
(2,068
|
)
|
|
|
|
91,038
|
|
|
97,841
|
|
|
(6,803
|
)
|
|
Third parties—refined product pipelines
|
|
23,548
|
|
|
27,382
|
|
|
(3,834
|
)
|
|
Third parties—crude pipelines
|
|
14,840
|
|
|
22,140
|
|
|
(7,300
|
)
|
|
|
|
129,426
|
|
|
147,363
|
|
|
(17,937
|
)
|
|
Terminals, tanks and loading racks:
|
|
|
|
|
|
|
|
Affiliates
|
|
66,496
|
|
|
66,669
|
|
|
(173
|
)
|
|
Third parties
|
|
7,282
|
|
|
9,998
|
|
|
(2,716
|
)
|
|
|
|
73,778
|
|
|
76,667
|
|
|
(2,889
|
)
|
|
|
|
|
|
|
|
|
|
Affiliates—refinery processing units
|
|
39,457
|
|
|
41,218
|
|
|
(1,761
|
)
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
242,661
|
|
|
265,248
|
|
|
(22,587
|
)
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Operations (exclusive of depreciation and amortization)
|
|
69,718
|
|
|
78,121
|
|
|
(8,403
|
)
|
|
Depreciation and amortization
|
|
49,012
|
|
|
48,071
|
|
|
941
|
|
|
General and administrative
|
|
5,237
|
|
|
4,608
|
|
|
629
|
|
|
|
|
123,967
|
|
|
130,800
|
|
|
(6,833
|
)
|
|
Operating income
|
|
118,694
|
|
|
134,448
|
|
|
(15,754
|
)
|
|
Other income (expense):
|
|
|
|
|
|
|
|
Equity in earnings of equity method investments
|
|
3,870
|
|
|
3,883
|
|
|
(13
|
)
|
|
Interest expense, including amortization
|
|
(31,546
|
)
|
|
(38,252
|
)
|
|
6,706
|
|
|
Interest income
|
|
5,031
|
|
|
1,079
|
|
|
3,952
|
|
|
Loss on early extinguishment of debt
|
|
(25,915
|
)
|
|
—
|
|
|
(25,915
|
)
|
|
Gain on sales-type leases
|
|
33,834
|
|
|
—
|
|
|
33,834
|
|
|
Gain (loss) on sale of assets and other
|
|
974
|
|
|
(199
|
)
|
|
1,173
|
|
|
|
|
(13,752
|
)
|
|
(33,489
|
)
|
|
19,737
|
|
|
Income before income taxes
|
|
104,942
|
|
|
100,959
|
|
|
3,983
|
|
|
State income tax expense
|
|
(76
|
)
|
|
(6
|
)
|
|
(70
|
)
|
|
Net income
|
|
104,866
|
|
|
100,953
|
|
|
3,913
|
|
|
Allocation of net income attributable to noncontrolling interests
|
|
(3,535
|
)
|
|
(4,081
|
)
|
|
546
|
|
|
Net income attributable to the partners
|
|
101,331
|
|
|
96,872
|
|
|
4,459
|
|
|
Limited partners’ earnings per unit—basic and diluted
|
|
$
|
0.96
|
|
|
$
|
0.92
|
|
|
$
|
0.04
|
|
|
Weighted average limited partners’ units outstanding
|
|
105,440
|
|
|
105,440
|
|
|
—
|
|
|
EBITDA (1)
|
|
$
|
176,934
|
|
|
$
|
182,122
|
|
|
$
|
(5,188
|
)
|
|
Adjusted EBITDA (1)
|
|
$
|
171,276
|
|
|
$
|
182,122
|
|
|
$
|
(10,846
|
)
|
|
Distributable cash flow (2)
|
|
$
|
136,164
|
|
|
$
|
138,085
|
|
|
$
|
(1,921
|
)
|
|
|
|
|
|
|
|
|
|
Volumes (bpd)
|
|
|
|
|
|
|
|
Pipelines:
|
|
|
|
|
|
|
|
Affiliates—refined product pipelines
|
|
115,245
|
|
|
130,805
|
|
|
(15,560
|
)
|
|
Affiliates—intermediate pipelines
|
|
135,288
|
|
|
136,116
|
|
|
(828
|
)
|
|
Affiliates—crude pipelines
|
|
278,801
|
|
|
385,490
|
|
|
(106,689
|
)
|
|
|
|
529,334
|
|
|
652,411
|
|
|
(123,077
|
)
|
|
Third parties—refined product pipelines
|
|
53,756
|
|
|
73,975
|
|
|
(20,219
|
)
|
|
Third parties—crude pipelines
|
|
89,027
|
|
|
133,565
|
|
|
(44,538
|
)
|
|
|
|
672,117
|
|
|
859,951
|
|
|
(187,834
|
)
|
|
Terminals and loading racks:
|
|
|
|
|
|
|
|
Affiliates
|
|
400,911
|
|
|
402,909
|
|
|
(1,998
|
)
|
|
Third parties
|
|
45,910
|
|
|
64,028
|
|
|
(18,118
|
)
|
|
|
|
446,821
|
|
|
466,937
|
|
|
(20,116
|
)
|
|
|
|
|
|
|
|
|
|
Affiliates—refinery processing units
|
|
59,843
|
|
|
71,816
|
|
|
(11,973
|
)
|
|
|
|
|
|
|
|
|
|
Total for pipelines and terminal and refinery processing unit assets (bpd)
|
|
1,178,781
|
|
|
1,398,704
|
|
|
(219,923
|
)
|
|
|
|
|
(1)
|
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is calculated as net income attributable to the partners plus (i) interest expense, net of interest income, (ii) state income tax expense and (iii) depreciation and amortization. Adjusted EBITDA is calculated as EBITDA plus (i) loss on early extinguishment of debt and (ii) pipeline tariffs not included in revenues due to impacts from lease accounting for certain pipeline tariffs minus (iii) gain on sales-type leases and (iv) pipeline lease payments not included in operating costs and expenses. Portions of our minimum guaranteed pipeline tariffs for assets subject to sales-type lease accounting are recorded as interest income with the remaining amounts recorded as a reduction in net investment in leases. These pipeline tariffs were previously recorded as revenues prior to the renewal of the throughput agreements, which triggered sales-type lease accounting. Similarly, certain pipeline lease payments were previously recorded as operating costs and expenses, but the underlying lease was reclassified from an operating lease to a financing lease, and these payments are now recoded as interest expense and reductions in the lease liability. EBITDA and Adjusted EBITDA are not calculations based upon generally accepted accounting principles ("GAAP"). However, the amounts included in the EBITDA and Adjusted EBITDA calculations are derived from amounts included in our consolidated financial statements. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income attributable to Holly Energy Partners or operating income, as indications of our operating performance or as alternatives to operating cash flow as a measure of liquidity. EBITDA and Adjusted EBITDA are not necessarily comparable to similarly titled measures of other companies. EBITDA and Adjusted EBITDA are presented here because they are widely used financial indicators used by investors and analysts to measure performance. EBITDA and Adjusted EBITDA are also used by our management for internal analysis and as a basis for compliance with financial covenants. Set forth below are our calculations of EBITDA and Adjusted EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(In thousands)
|
|
Net income attributable to the partners
|
|
$
|
76,470
|
|
|
$
|
45,690
|
|
|
$
|
101,331
|
|
|
$
|
96,872
|
|
|
Add (subtract):
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
13,779
|
|
|
19,230
|
|
|
31,546
|
|
|
38,252
|
|
|
Interest income
|
|
(2,813
|
)
|
|
(551
|
)
|
|
(5,031
|
)
|
|
(1,079
|
)
|
|
State income tax (benefit) expense
|
|
39
|
|
|
(30
|
)
|
|
76
|
|
|
6
|
|
|
Depreciation and amortization
|
|
25,034
|
|
|
24,247
|
|
|
49,012
|
|
|
48,071
|
|
|
EBITDA
|
|
$
|
112,509
|
|
|
$
|
88,586
|
|
|
$
|
176,934
|
|
|
$
|
182,122
|
|
|
Loss on early extinguishment of debt
|
|
—
|
|
|
—
|
|
|
25,915
|
|
|
—
|
|
|
Gain on sales-type leases
|
|
(33,834
|
)
|
|
—
|
|
|
(33,834
|
)
|
|
—
|
|
|
Pipeline tariffs not included in revenues
|
|
3,099
|
|
|
—
|
|
|
5,474
|
|
|
—
|
|
|
Lease payments not included in operating costs
|
|
(1,606
|
)
|
|
—
|
|
|
(3,213
|
)
|
|
—
|
|
|
Adjusted EBITDA
|
|
$
|
80,168
|
|
|
$
|
88,586
|
|
|
$
|
171,276
|
|
|
$
|
182,122
|
|
|
|
|
|
(2)
|
Distributable cash flow is not a calculation based upon GAAP. However, the amounts included in the calculation are derived from amounts presented in our consolidated financial statements, with the general exceptions 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. It is also used by management for internal analysis and for our performance units. 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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(In thousands)
|
|
Net income attributable to the partners
|
|
$
|
76,470
|
|
|
$
|
45,690
|
|
|
$
|
101,331
|
|
|
$
|
96,872
|
|
|
Add (subtract):
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
25,034
|
|
|
24,247
|
|
|
49,012
|
|
|
48,071
|
|
|
Amortization of discount and deferred debt issuance costs
|
|
842
|
|
|
769
|
|
|
1,641
|
|
|
1,535
|
|
|
Loss on early extinguishment of debt
|
|
—
|
|
|
—
|
|
|
25,915
|
|
|
—
|
|
|
Revenue recognized greater than customer billings
|
|
(44
|
)
|
|
(297
|
)
|
|
(501
|
)
|
|
(3,331
|
)
|
|
Maintenance capital expenditures (3)
|
|
(1,140
|
)
|
|
(625
|
)
|
|
(3,627
|
)
|
|
(1,360
|
)
|
|
Increase (decrease) in environmental liability
|
|
157
|
|
|
(277
|
)
|
|
158
|
|
|
(555
|
)
|
|
Decrease in reimbursable deferred revenue
|
|
(3,005
|
)
|
|
(2,061
|
)
|
|
(5,805
|
)
|
|
(3,640
|
)
|
|
Gain on sales-type leases
|
|
(33,834
|
)
|
|
—
|
|
|
(33,834
|
)
|
|
—
|
|
|
Other
|
|
976
|
|
|
40
|
|
|
1,874
|
|
|
493
|
|
|
Distributable cash flow
|
|
$
|
65,456
|
|
|
$
|
67,486
|
|
|
$
|
136,164
|
|
|
$
|
138,085
|
|
|
|
|
|
(3)
|
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. Maintenance capital expenditures include expenditures required to maintain equipment reliability, tankage and pipeline integrity, safety and to address environmental regulations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
|
|
(In thousands)
|
|
Balance Sheet Data
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,913
|
|
|
$
|
13,287
|
|
|
Working capital
|
|
$
|
34,977
|
|
|
$
|
20,758
|
|
|
Total assets
|
|
$
|
2,221,783
|
|
|
$
|
2,199,232
|
|
|
Long-term debt
|
|
$
|
1,486,648
|
|
|
$
|
1,462,031
|
|
|
Partners’ equity
|
|
$
|
380,723
|
|
|
$
|
381,103
|
|
Results of Operations—Three Months Ended June 30, 2020 Compared with Three Months Ended June 30, 2019
Summary
Net income attributable to the partners for the second quarter was $76.5 million ($0.73 per basic and diluted limited partner unit) compared to $45.7 million ($0.43 per basic and diluted limited partner unit) for the second quarter of 2019. The increase in earnings was primarily due to the recognition of a non-cash gain on sales-type leases resulting from the renewal of a third-party throughput agreement during the second quarter of 2020. A portion of the new throughput agreement met the definition of a sales-type lease, which resulted in a non-cash gain of $33.8 million million upon the initial recognition of the sales-type lease during the second quarter. Excluding this gain, net income attributable to HEP for the quarter was $42.6 million ($0.40 per basic and diluted limited partner unit), a decrease of $3.1 million compared to the same period of 2019. The decrease in earnings was mainly due to lower volumes due to demand destruction caused by the COVID-19 pandemic substantially offset by lower operating expenses and lower interest expense.
Revenues
Revenues for the second quarter were $114.8 million, a decrease of $15.9 million compared to the second quarter of 2019. The decrease was mainly attributable to a 26% reduction in overall crude and product pipeline volumes predominantly in our Southwest and Rockies regions.
Revenues from our refined product pipelines were $25.1 million, a decrease of $7.5 million compared to the second quarter of 2019. Shipments averaged 158.4 thousand barrels per day (“mbpd”) compared to 197.8 mbpd for the second quarter of 2019. The volume and revenue decreases were mainly due to lower volumes on pipelines servicing HFC's Navajo refinery, Delek's Big
Spring refinery and our UNEV pipeline as well as the recording of certain pipeline tariffs as interest income as the related throughput contract renewals were determined to be sales-type leases.
Revenues from our intermediate pipelines were $7.5 million, an increase of $0.2 million compared to the second quarter of 2019. Shipments averaged 128.5 mbpd for the second quarter of 2020 compared to 141.3 mbpd for the second quarter of 2019. The decrease in volumes was mainly due to lower throughputs on our intermediate pipelines servicing HFC's Navajo refinery while revenue remained relatively constant mainly due to contractual minimum volume guarantees.
Revenues from our crude pipelines were $26.4 million, a decrease of $6.0 million compared to the second quarter of 2019, and shipments averaged 338.4 mbpd compared to 510.9 mbpd for the second quarter of 2019. The decreases were mainly attributable to decreased volumes on our crude pipeline systems in New Mexico and Texas and on our crude pipeline systems in Wyoming and Utah.
Revenues from terminal, tankage and loading rack fees were $36.3 million, a decrease of $2.8 million compared to the second quarter of 2019. Refined products and crude oil terminalled in the facilities averaged 418.0 mbpd compared to 490.9 mbpd for the second quarter of 2019. The volume and revenue decreases were mainly due to demand destruction associated with COVID-19 across most of our facilities. Revenue did not decrease in proportion to the decrease in volumes mainly due to contractual minimum volume guarantees.
Revenues from refinery processing units were $19.6 million, an increase of $0.2 million compared to the second quarter of 2019, and throughputs averaged 49.9 mbpd compared to 77.7 mbpd for the second quarter of 2019. The decrease in volumes was mainly due to reduced throughput for both our Woods Cross and El Dorado processing units while revenue remained relatively constant mainly due to contractual minimum volume guarantees.
Operations Expense
Operations (exclusive of depreciation and amortization) expense was $34.7 million for the three months ended June 30, 2020, a decrease of $5.9 million compared to the second quarter of 2019. The decrease was mainly due to lower rental expenses, maintenance costs and variable costs such as electricity and chemicals associated with lower volumes for the three months ended June 30, 2020.
Depreciation and Amortization
Depreciation and amortization for the three months ended June 30, 2020 increased by $0.8 million compared to the three months ended June 30, 2019. The increase was mainly due to the acceleration of depreciation on certain of our Cheyenne tanks.
General and Administrative
General and administrative costs for the three months ended June 30, 2020 increased by $0.5 million compared to the three months ended June 30, 2019, mainly due to higher legal expenses for the three months ended June 30, 2020.
Equity in Earnings of Equity Method Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Equity Method Investment
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
Osage Pipe Line Company, LLC
|
$
|
366
|
|
|
$
|
746
|
|
|
Cheyenne Pipeline LLC
|
1,085
|
|
|
1,037
|
|
|
Cushing Terminal
|
705
|
|
|
—
|
|
|
Total
|
$
|
2,156
|
|
|
$
|
1,783
|
|
Equity in earnings of Osage Pipe Line Company, LLC decreased for the three months ended June 30, 2020, mainly due to lower throughput volumes.
Interest Expense
Interest expense for the three months ended June 30, 2020, totaled $13.8 million, a decrease of $5.5 million compared to the three months ended June 30, 2019. The decrease was mainly due to market interest rate decreases under our senior secured revolving credit facility and refinancing our $500 million 6% Senior Notes with $500 million 5% Senior Notes. Our aggregate effective interest rates were 3.4% and 5.3% for the three months ended June 30, 2020 and 2019, respectively.
State Income Tax
We recorded a state income tax expense of $39,000 and a state income tax benefit of $30,000 for the three months ended June 30, 2020 and 2019, respectively. All tax expense is solely attributable to the Texas margin tax.
Results of Operations—Six Months Ended June 30, 2020 Compared with Six Months Ended June 30, 2019
Summary
Net income attributable to the partners for the six months ended June 30, 2020 was $101.3 million ($0.96 per basic and diluted limited partner unit) compared to $96.9 million ($0.92 per basic and diluted limited partner unit) for the second quarter of 2019. The six months ended June 30, 2020 included a non-cash gain on sales-type leases of $33.8 million discussed above as well as a charge of $25.9 million related to the early redemption of our previously outstanding $500 million aggregate principal amount of 6% senior notes, due in 2024. Excluding the gain on sales-type leases and the loss on early extinguishment of debt, net income attributable to the partners for the six months ended June 30, 2020 was $93.4 million ($0.89 per basic and diluted limited partner unit), a decrease of $3.5 million compared to the same period of 2019. The decrease in earnings was mainly due to lower volumes due to demand destruction caused by the COVID-19 pandemic substantially offset by lower operating expenses and lower interest expense.
Revenues
Revenues for the six months ended June 30, 2020, were $242.7 million, a decrease of $22.6 million compared to the six months ended June 30, 2019. The decrease was mainly attributable to a 22% reduction in overall crude and product pipeline volumes predominantly in our Southwest and Rockies regions.
Revenues from our refined product pipelines were $59.9 million, a decrease of $8.9 million compared to the six months ended June 30, 2019. Shipments averaged 169.0 mbpd compared to 204.8 mbpd for the six months ended June 30, 2019. The volume and revenue decreases were mainly due to lower volumes on pipelines servicing HFC's Navajo refinery, Delek's Big Spring refinery and our UNEV pipeline as well as the recording of certain pipeline tariffs as interest income as the related throughput contract renewals were determined to be sales-type leases.
Revenues from our intermediate pipelines were $14.9 million, an increase of $0.4 million compared to the six months ended June 30, 2019. Shipments averaged 135.3 mbpd compared to 136.1 mbpd for the six months ended June 30, 2019.
Revenues from our crude pipelines were $54.5 million, a decrease of $9.4 million compared to the six months ended June 30, 2019. Shipments averaged 367.8 mbpd compared to 519.1 mbpd for the six months ended June 30, 2019. The decreases were mainly attributable to decreased volumes on our crude pipeline systems in New Mexico and Texas and on our crude pipeline systems in Wyoming and Utah.
Revenues from terminal, tankage and loading rack fees were $73.8 million, a decrease of $2.9 million compared to the six months ended June 30, 2019. Refined products and crude oil terminalled in the facilities averaged 446.8 mbpd compared to 466.9 mbpd for the six months ended June 30, 2019. The volume and revenue decreases were mainly due to demand destruction associated with the COVID-19 pandemic across most of our facilities.
Revenues from refinery processing units were $39.5 million, a decrease of $1.8 million compared to the six months ended June 30, 2019. Throughputs averaged 59.8 mbpd compared to 71.8 mbpd for the six months ended June 30, 2019. The decrease in volumes was mainly due to reduced throughput for both our Woods Cross and El Dorado processing units. Revenues were higher in the six months ended June 30, 2019 due to an adjustment in revenue recognition recorded during that period.
Operations Expense
Operations expense (exclusive of depreciations and amortization) for the six months ended June 30, 2020, decreased by $8.4 million compared to the six months ended June 30, 2019. The decrease was mainly due to lower rental expenses, maintenance costs and variable costs such as electricity and chemicals associated with lower volumes.
Depreciation and Amortization
Depreciation and amortization for the six months ended June 30, 2020, increased by $0.9 million compared to the six months ended June 30, 2019. The increase was mainly due to the acceleration of depreciation on certain of our Cheyenne tanks.
General and Administrative
General and administrative costs for the six months ended June 30, 2020, increased by $0.6 million compared to the six months ended June 30, 2019 mainly due to higher legal expenses incurred in the six months ended June 30, 2020.
Equity in Earnings of Equity Method Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Equity Method Investment
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
Osage Pipe Line Company, LLC
|
1,380
|
|
|
1,251
|
|
|
Cheyenne Pipeline LLC
|
2,160
|
|
|
2,632
|
|
|
Cushing Terminal
|
330
|
|
|
—
|
|
|
Total
|
$
|
3,870
|
|
|
$
|
3,883
|
|
Equity in earnings of Cheyenne Pipeline LLC decreased for the six months ended June 30, 2020, mainly due to lower throughput volumes.
Interest Expense
Interest expense for the six months ended June 30, 2020, totaled $31.5 million, a decrease of $6.7 million compared to the six months ended June 30, 2019. The decrease was mainly due to market interest rate decreases under our senior secured revolving credit facility and refinancing our $500 million 6% Senior Notes with $500 million 5% Senior Notes. Our aggregate effective interest rates were 4.0% and 5.3% for the six months ended June 30, 2020 and 2019, respectively.
State Income Tax
We recorded a state income tax expense of $76,000 and $6,000 for the six months ended June 30, 2020 and 2019, respectively. All tax expense is solely attributable to the Texas margin tax.
LIQUIDITY AND CAPITAL RESOURCES
Overview
We have a $1.4 billion senior secured revolving credit facility (the “Credit Agreement”) expiring in July 2022. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit, and it contains an accordion feature giving us the ability to increase the size of the facility by up to $300 million with additional lender commitments.
During the six months ended June 30, 2020, we received advances totaling $168.0 million and repaid $138.5 million, resulting in a net increase of $29.5 million under the Credit Agreement and an outstanding balance of $995.0 million at June 30, 2020. As of June 30, 2020, we have no letters of credit outstanding under the Credit Agreement and the available capacity under the Credit Agreement was $405.0 million. Amounts repaid under the Credit Agreement may be reborrowed from time to time.
On February 4, 2020, we closed a private placement of $500 million in aggregate principal amount of 5% senior unsecured notes due in 2028 (the "5% Senior Notes"). On February 5, 2020, we redeemed the existing $500 million 6% Senior Notes at a redemption cost of $522.5 million, at which time we recognized a $25.9 million early extinguishment loss consisting of a $22.5 million debt redemption premium and unamortized financing costs of $3.4 million. We funded the $522.5 million redemption with proceeds from the issuance of our 5% Senior Notes and borrowings under our Credit Agreement.
We have a continuous offering program under which we may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200 million. We did not issue any units under this program during the three months ended June 30, 2020. As of June 30, 2020, HEP has issued 2,413,153 units under this program, providing $82.3 million in gross proceeds.
Under our registration statement filed with the Securities and Exchange Commission (“SEC”) using a “shelf” registration process, we currently have the authority to raise up to $2.0 billion by offering 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 the Credit Agreement will provide sufficient resources to meet our working capital liquidity, capital expenditure and quarterly distribution needs for the foreseeable future.
In May 2020, we paid a regular cash distribution of $0.35 on all units in an aggregate amount of $34.5 million after deducting HEP Logistics' waiver of $2.5 million of limited partner cash distributions.
Cash and cash equivalents increased by $5.6 million during the six months ended June 30, 2020. The cash flows provided by operating activities of $134.6 million were more than the cash flows used for financing activities of $97.1 million and investing activities of $31.9 million. Working capital increased by $14.2 million to $35.0 million at June 30, 2020, from $20.8 million at December 31, 2019.
Cash Flows—Operating Activities
Cash flows from operating activities decreased by $10.4 million from $145.0 million for the six months ended June 30, 2019, to $134.6 million for the six months ended June 30, 2020. The decrease was mainly due to lower cash receipts from customers and higher payments for operating expenses, partially offset by lower payment for interest expenses during the six months ended June 30, 2020, as compared to the six months ended June 30, 2019.
Cash Flows—Investing Activities
Cash flows used for investing activities were $31.9 million for the six months ended June 30, 2020, compared to $17.3 million for the six months ended June 30, 2019, an increase of $14.6 million. During the six months ended June 30, 2020 and 2019, we invested $30.7 million and $17.8 million in additions to properties and equipment, respectively. During the six months ended June 30, 2020, we invested $2.4 million in our equity method investment in Cushing Connect JV Terminal. We received $0.5 million in excess of equity in earnings during the six months ended June 30, 2020 and $0.3 million during the six months ended June 30, 2019.
Cash Flows—Financing Activities
Cash flows used for financing activities were $97.1 million for the six months ended June 30, 2020, compared to $123.8 million for the six months ended June 30, 2019, a decrease of $26.7 million. During the six months ended June 30, 2020, we received $168.0 million and repaid $138.5 million in advances under the Credit Agreement. Additionally, we paid $103.0 million in regular quarterly cash distributions to our limited partners and $4.0 million to our noncontrolling interest. We received $13.3 million in contributions from noncontrolling interest during the six months ended June 30, 2020. We also received net proceeds of $491.3 million for issuance of our 5% Senior Notes and paid $522.5 million to retire our 6% Senior Notes. During the six months ended June 30, 2019, we received $175.0 million and repaid $156.5 million in advances under the Credit Agreement. We paid $136.2 million in regular quarterly cash distributions to our limited partners, and distributed $5.3 million to our noncontrolling interest.
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, 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 board of directors of HLS, our ultimate general partner, 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, additional projects may be approved. The funds allocated for a particular capital project may be expended over a period in excess of a year, 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 year’s capital budget as well as, in certain cases, expenditures approved for capital projects in capital budgets for prior years. The 2020 capital budget as well as our current forecast are comprised of approximately $8 million to $12 million for maintenance capital expenditures, $4 million to $6 million for refinery unit turnarounds and $45 million to $50 million for expansion capital expenditures and our share of Cushing Connect Joint Venture
investments. We expect the majority of the 2020 expansion capital budget to be invested in our share of Cushing Connect Joint Venture investments. In addition to our capital budget, we may spend funds periodically to perform capital upgrades or additions to our assets where a customer reimburses us for such costs. The upgrades or additions would generally benefit the customer over the remaining life of the related service agreements.
We expect that our currently planned sustaining and maintenance capital expenditures, as well as expenditures for acquisitions and capital development projects, will be funded with cash generated by operations.
Under the terms of the transaction to acquire HFC’s 75% interest in UNEV, we issued to HFC a Class B unit comprising a noncontrolling equity interest in a wholly-owned subsidiary subject to redemption to the extent that HFC is entitled to a 50% interest in our share of annual UNEV earnings before interest, income taxes, depreciation, and amortization above $30 million beginning July 1, 2015, and ending in June 2032, subject to certain limitations. However, to the extent earnings thresholds are not achieved, no redemption payments are required. No redemption payments have been required to date.
Credit Agreement
Our $1.4 billion Credit Agreement expires in July 2022. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit, and it contains an accordion feature giving us the ability to increase the size of the facility by up to $300 million with additional lender commitments.
Our obligations under the Credit Agreement are collateralized by substantially all of our assets, and indebtedness under the Credit Agreement is guaranteed by our material, wholly-owned subsidiaries. The Credit Agreement requires us to maintain compliance with certain financial covenants consisting of total leverage, senior secured leverage, and interest coverage. It also limits or restricts our ability to engage in certain activities. If, at any time prior to the expiration of the Credit Agreement, HEP obtains two investment grade credit ratings, the Credit Agreement will become unsecured and many of the covenants, limitations, and restrictions will be eliminated.
We may prepay all loans at any time without penalty, except for tranche breakage costs. If an event of default exists under the Credit Agreement, the lenders will be able to accelerate the maturity of all loans outstanding and exercise other rights and remedies. We were in compliance with all covenants as of June 30, 2020.
Senior Notes
As of December 31, 2019, we had $500 million in aggregate principal amount of 6% Senior Notes due in 2024 (the “ 6% Senior Notes”).
On February 4, 2020, we closed a private placement of $500 million in aggregate principal amount of 5% senior unsecured notes due in 2028 (the "5% Senior Notes"). On February 5, 2020, we redeemed the existing $500 million 6% Senior Notes at a redemption cost of $522.5 million, at which time we recognized a $25.9 million early extinguishment loss consisting of a $22.5 million debt redemption premium and unamortized financing costs of $3.4 million. We funded the $522.5 million redemption with proceeds from the issuance of our 5% Senior Notes and borrowings under our Credit Agreement.
The 5% 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. We were in compliance with the restrictive covenants for the 5% Senior Notes as of June 30, 2020. At any time when the 5% Senior Notes are rated investment grade by either Moody’s or Standard & Poor’s and no default or event of default exists, we will not be subject to many of the foregoing covenants. Additionally, we have certain redemption rights at varying premiums over face value under the 5% Senior Notes.
Indebtedness under the 5% Senior Notes is guaranteed by all of our existing wholly-owned subsidiaries (other than Holly Energy Finance Corp. and certain immaterial subsidiaries).
Long-term Debt
The carrying amounts of our long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
|
|
(In thousands)
|
|
Credit Agreement
|
|
995,000
|
|
|
$
|
965,500
|
|
|
|
|
|
|
|
|
6% Senior Notes
|
|
|
|
|
|
Principal
|
|
—
|
|
|
500,000
|
|
|
Unamortized debt issuance costs
|
|
—
|
|
|
(3,469
|
)
|
|
|
|
—
|
|
|
496,531
|
|
|
|
|
|
|
|
|
5% Senior Notes
|
|
|
|
|
|
Principal
|
|
500,000
|
|
|
—
|
|
Unamortized debt issuance costs
|
|
(8,352
|
)
|
|
—
|
|
|
|
491,648
|
|
|
—
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,486,648
|
|
|
$
|
1,462,031
|
|
Contractual Obligations
There were no significant changes to our long-term contractual obligations during this period.
Impact of Inflation
Inflation in the United States has been relatively moderate in recent years and did not have a material impact on our results of operations for the six months ended June 30, 2020 and 2019. PPI has increased an average of 0.6% annually over the past five calendar years, including increases of 0.8% and 3.1% in 2019 and 2018, respectively.
The substantial majority of our revenues are generated under long-term contracts that provide for increases or decreases in our rates and minimum revenue guarantees annually for increases or decreases in the PPI. Certain of these contracts have provisions that limit the level of annual PPI percentage rate increases or decreases. A significant and prolonged period of high inflation or a significant and prolonged period of negative inflation could adversely affect our cash flows and results of operations if costs increase at a rate greater than the fees we charge our shippers.
Environmental Matters
Our operation of pipelines, terminals, and associated facilities in connection with the transportation and storage of refined products and crude oil 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 given that the operations of our competitors are similarly affected. 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 major 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.
Under the Omnibus Agreement and certain transportation agreements and purchase agreements with HFC, HFC has agreed to indemnify us, subject to certain monetary and time limitations, for environmental noncompliance and remediation liabilities associated with certain assets transferred to us from HFC and occurring or existing prior to the date of such transfers.
We have an environmental agreement with Delek with respect to pre-closing environmental costs and liabilities relating to the pipelines and terminals acquired from Delek in 2005, under which Delek will indemnify us subject to certain monetary and time limitations.
There are environmental remediation projects in progress that relate to certain assets acquired from HFC. Certain of these projects were underway prior to our purchase and represent liabilities retained by HFC. At June 30, 2020, we had an accrual of $5.7 million
that related to environmental clean-up projects for which we have assumed liability or for which the indemnity provided for by HFC has expired or will expire. The remaining projects, including assessment and monitoring activities, are covered under the HFC environmental indemnification discussed above and represent liabilities of HFC.
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. Our significant accounting policies are described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2019. 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 goodwill, and assessing contingent liabilities for probable losses. There have been no changes to these policies in 2020. We consider these 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.
Accounting Pronouncements Adopted During the Periods Presented
Goodwill Impairment Testing
In January 2017, Accounting Standard Update (“ASU”) 2017-04, “Simplifying the Test for Goodwill Impairment,” was issued amending the testing for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under this standard, goodwill impairment is measured as the excess of the carrying amount of the reporting unit over the related fair value. We adopted this standard effective in the second quarter of 2019, and the adoption of this standard had no effect on our financial condition, results of operations or cash flows.
Leases
In February 2016, ASU No. 2016-02, “Leases” (“ASC 842”) was issued requiring leases to be measured and recognized as a lease liability, with a corresponding right-of-use asset on the balance sheet. We adopted this standard effective January 1, 2019, and we elected to adopt using the modified retrospective transition method, whereby comparative prior period financial information will not be restated and will continue to be reported under the lease accounting standard in effect during those periods. We also elected practical expedients provided by the new standard, including the package of practical expedients and the short-term lease recognition practical expedient, which allows an entity to not recognize on the balance sheet leases with a term of 12 months or less. Upon adoption of this standard, we recognized $78.4 million of lease liabilities and corresponding right-of-use assets on our consolidated balance sheet. Adoption of the standard did not have a material impact on our results of operations or cash flows. See Notes 3 and 4 of Notes to the Consolidated Financial Statements for additional information on our lease policies.
Credit Losses Measurement
In June 2016, ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” was issued requiring measurement of all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This standard was effective January 1, 2020. Adoption of the standard did not have a material impact on our financial condition, results of operations or cash flows.
RISK MANAGEMENT
The market risk inherent in our debt positions is the potential change arising from increases or decreases in interest rates as discussed below.
At June 30, 2020, we had an outstanding principal balance of $500 million on our 5% Senior Notes. A change in interest rates generally would affect the fair value of the 5% Senior Notes, but not our earnings or cash flows. At June 30, 2020, the fair value of our 5% Senior Notes was $477.8 million. We estimate a hypothetical 10% change in the yield-to-maturity applicable to the 5% Senior Notes at June 30, 2020 would result in a change of approximately $17 million in the fair value of the underlying 5% Senior Notes.
For the variable rate Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. At June 30, 2020, borrowings outstanding under the Credit Agreement were $995.0 million. A hypothetical 10% change in interest rates applicable to the Credit Agreement would not materially affect our cash flows.
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.
We have a risk management oversight committee that is made up of members from our senior management. This committee monitors our risk environment and provides direction for activities to mitigate, to an acceptable level, identified risks that may adversely affect the achievement of our goals.
