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, 2021, 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.
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 (the “Cheyenne Refinery”) and to convert certain assets at that refinery to renewable diesel production. HFC subsequently began winding down petroleum refining operations at the Cheyenne Refinery on August 3, 2020.
On February 8, 2021, HEP and HFC finalized and executed new agreements for HEP’s Cheyenne assets with the following terms, in each case effective January 1, 2021: (1) a ten-year lease with two five-year renewal option periods for HFC’s use of certain HEP tank and rack assets in the Cheyenne Refinery to facilitate renewable diesel production with an annual lease payment of approximately $5 million, (2) a five-year contango service fee arrangement that will utilize HEP tank assets inside the Cheyenne Refinery where HFC will pay a base tariff to HEP for available crude oil storage and HFC and HEP will split any profits generated on crude oil contango opportunities and (3) a $10 million one-time cash payment from HFC to HEP for the termination of the existing minimum volume commitment.
On April 1, 2021, we sold our 156-mile, 6-inch refined product pipeline that connected HFC’s Navajo Refinery to terminals in El Paso for gross proceeds of $7.0 million and recognized a gain on sale of $5.3 million.
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, 2020. 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, 2021.
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.
Goodwill and Long-Lived Assets
Goodwill represents the excess of our cost of an acquired business over the fair value of the assets acquired, less liabilities assumed. Goodwill is not amortized. We test goodwill at the reporting unit level for impairment annually and between annual tests if events or changes in circumstances indicate the carrying amount may exceed fair value. Our goodwill impairment testing first entails a comparison of our reporting unit fair values relative to their respective carrying values, including goodwill. If carrying value exceeds the estimated fair value for a reporting unit, we measure goodwill impairment as the excess of the carrying amount of the reporting unit over the estimated fair value of the reporting unit.
Indicators of goodwill and long-lived asset impairment
The changes in our new agreements with HFC related to our Cheyenne assets resulted in an increase in the net book value of our Cheyenne reporting unit due to sales-type lease accounting, which led us to determine indicators of potential goodwill impairment for our Cheyenne reporting unit were present.
The estimated fair value of our Cheyenne reporting unit was derived using a combination of income and market approaches. The income approach reflects expected future cash flows based on anticipated gross margins, operating costs, and capital expenditures. The market approaches include both the guideline public company and guideline transaction methods. Both methods utilize pricing multiples derived from historical market transactions of other like-kind assets. These fair value measurements involve significant unobservable inputs (Level 3 inputs). See Note 5 for further discussion of Level 3 inputs.
Our interim impairment testing of our Cheyenne reporting unit goodwill identified an impairment charge of $11.0 million, which was recorded in the three months ended March 31, 2021.
We evaluate long-lived assets, including finite-lived intangible assets, for potential impairment by identifying whether indicators of impairment exist and, if so, assessing whether the long-lived assets are recoverable from estimated future undiscounted cash flows. The actual amount of impairment loss, if any, to be recorded is equal to the amount by which a long-lived asset’s carrying value exceeds its fair value.
Revenue Recognition
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 unlikely 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 below), 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 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 projected to be exercised by the customer. During the six months ended June 30, 2021 and 2020, we recognized $6.9 million and $12.6 million, respectively, of these deficiency payments in revenue, of which $0.5 million and $0.7 million, respectively, related to deficiency payments billed in prior periods.
We have other cost reimbursement provisions in our throughput / storage agreements providing that customers (including HFC) reimburse us for certain costs. Such reimbursements are recorded as revenue or deferred revenue depending on the nature of the cost. Deferred revenue is recognized over the remaining contractual term of the related throughput agreement.
Leases
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 below.
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.
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.
Lessor Accounting - 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.
Accounting Pronouncements Adopted During the Periods Presented
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 went in service during the second quarter of 2020, and the Cushing Connect Pipeline is expected to be placed in service during the third 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 generally be shared equally among the partners. However, we are solely responsible for any Cushing Connect Pipeline construction costs that exceed the budget by more than 10%. 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 $70 million to $75 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.
With the exception of the assets of HEP Cushing, creditors of the Cushing Connect Joint Venture legal entities have no recourse to our assets. Any recourse to HEP Cushing would be limited to the extent of HEP Cushing's assets, which other than its investment in Cushing Connect Joint Venture, are not significant. Furthermore, our creditors have no recourse to the assets of the Cushing Connect Joint Venture legal entities.
Note 3:Revenues
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. See Note 1 for further discussion of revenue recognition.
Disaggregated revenues were as follows:
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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|
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2021
|
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2020
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2021
|
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2020
|
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|
(In thousands)
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(In thousands)
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|
Pipelines
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$
|
68,322
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|
|
$
|
58,954
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|
|
$
|
134,827
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|
|
$
|
129,426
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|
Terminals, tanks and loading racks
|
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36,887
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|
|
36,280
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|
|
75,069
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|
|
73,778
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|
Refinery processing units
|
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21,026
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|
|
19,573
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|
|
43,522
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|
|
39,457
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|
|
|
$
|
126,235
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|
|
$
|
114,807
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|
$
|
253,418
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|
|
$
|
242,661
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Revenues on our consolidated statements of income were composed of the following lease and service revenues:
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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|
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2021
|
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2020
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2021
|
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2020
|
|
|
|
(In thousands)
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(In thousands)
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|
Lease revenues
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|
$
|
86,867
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|
|
$
|
86,346
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|
|
$
|
174,803
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|
|
$
|
179,493
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|
|
Service revenues
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39,368
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|
28,461
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|
|
78,615
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|
|
63,168
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|
|
|
$
|
126,235
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|
|
$
|
114,807
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|
|
$
|
253,418
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|
|
$
|
242,661
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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:
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June 30,
2021
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|
December 31,
2020
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(In thousands)
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Contract assets
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$
|
6,545
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|
|
$
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6,306
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Contract liabilities
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$
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(400)
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|
|
$
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(500)
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The contract assets and liabilities include both lease and service components. During the six months ended June 30, 2021, we recognized $0.5 million of revenue that was previously included in contract liability as of December 31, 2020. During the six months ended June 30, 2021, we also recognized $0.2 million of revenue included in contract assets.
As of June 30, 2021, we expect to recognize $1.8 billion in revenue related to our unfulfilled performance obligations under the terms of our long-term throughput agreements and leases expiring in 2022 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):
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Years Ending December 31,
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(In millions)
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Remainder of 2021
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|
$
|
168
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|
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2022
|
|
311
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|
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2023
|
|
275
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|
|
2024
|
|
237
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|
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2025
|
|
171
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|
|
2026
|
|
157
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Thereafter
|
|
484
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Total
|
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$
|
1,803
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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.
Note 4:Leases
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. See Note 1 for further discussion of lease accounting.
Lessee Accounting
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.
Our leases have remaining terms of less than 1 year to 24 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 $6.0 million and $6.4 million as of June 30, 2021 and December 31, 2020, respectively, with accumulated depreciation of $3.3 million and $3.4 million as of June 30, 2021 and December 31, 2020, 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):
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|
|
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|
|
June 30,
2021
|
|
December 31, 2020
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|
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|
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Operating leases:
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|
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|
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Operating lease right-of-use assets, net
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|
$
|
2,724
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|
|
$
|
2,979
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|
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|
|
|
|
|
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Current operating lease liabilities
|
|
795
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|
|
875
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|
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Noncurrent operating lease liabilities
|
|
2,303
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|
|
2,476
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Total operating lease liabilities
|
|
$
|
3,098
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|
|
$
|
3,351
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|
|
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Finance leases:
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Properties and equipment
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|
$
|
6,019
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|
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$
|
6,410
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Accumulated amortization
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|
(3,255)
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|
|
(3,390)
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Properties and equipment, net
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|
$
|
2,764
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|
|
$
|
3,020
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|
|
|
|
|
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|
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Current finance lease liabilities
|
|
$
|
3,755
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|
|
$
|
3,713
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Noncurrent finance lease liabilities
|
|
66,434
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|
|
68,047
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Total finance lease liabilities
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|
$
|
70,189
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|
|
$
|
71,760
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Weighted average remaining lease term (in years)
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Operating leases
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|
5.8
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|
5.9
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Finance leases
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|
15.5
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|
15.9
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Weighted average discount rate
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|
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Operating leases
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|
4.7%
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|
4.8%
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Finance leases
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|
5.6%
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|
5.6%
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Supplemental cash flow and other information related to leases were as follows:
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|
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Six Months Ended
June 30,
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|
|
|
|
|
2021
|
|
2020
|
|
|
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(In thousands)
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|
Cash paid for amounts included in the measurement of lease liabilities:
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|
|
|
|
|
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Operating cash flows on operating leases
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|
$
|
576
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|
|
$
|
518
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|
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Operating cash flows on finance leases
|
|
$
|
2,105
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|
|
$
|
2,157
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|
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Financing cash flows on finance leases
|
|
$
|
1,747
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|
|
$
|
1,972
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|
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Maturities of lease liabilities were as follows:
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|
|
|
|
|
|
|
June 30, 2021
|
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|
|
Operating
|
|
Finance
|
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(In thousands)
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|
2021
|
|
$
|
507
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|
|
$
|
3,662
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|
|
2022
|
|
690
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|
|
7,332
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|
|
2023
|
|
603
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|
|
7,375
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|
|
2024
|
|
497
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|
|
6,918
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|
|
2025
|
|
429
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|
|
6,456
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|
|
2026 and thereafter
|
|
787
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|
|
73,888
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|
|
Total lease payments
|
|
3,513
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|
|
105,631
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|
Less: Imputed interest
|
|
(415)
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|
|
(35,442)
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|
|
Total lease obligations
|
|
3,098
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|
|
70,189
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Less: Current lease liabilities
|
|
(795)
|
|
|
(3,755)
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|
|
Noncurrent lease liabilities
|
|
$
|
2,303
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|
|
$
|
66,434
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|
The components of lease expense were as follows:
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
(In thousands)
|
|
Operating lease costs
|
|
$
|
249
|
|
|
$
|
230
|
|
|
$
|
547
|
|
|
$
|
503
|
|
|
Finance lease costs
|
|
|
|
|
|
|
|
|
|
Amortization of assets
|
|
200
|
|
|
273
|
|
|
412
|
|
|
515
|
|
|
Interest on lease liabilities
|
|
994
|
|
|
1,040
|
|
|
2,001
|
|
|
2,077
|
|
|
Variable lease cost
|
|
67
|
|
|
46
|
|
|
133
|
|
|
95
|
|
|
Total net lease cost
|
|
$
|
1,510
|
|
|
$
|
1,589
|
|
|
$
|
3,093
|
|
|
$
|
3,190
|
|
Lessor Accounting
As discussed in Note 1, the majority of our contracts with customers meet the definition of a lease.
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.
During the six months ended June 30, 2021, we entered into new agreements and modified other agreements with HFC related to our Cheyenne assets, Tulsa West lube racks, various crude tanks, and new Navajo tanks. These agreements 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 terms to anyone
other than HFC. 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 six months ended June 30, 2021 composed of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2021
|
|
|
|
(In thousands)
|
|
Net investment in leases
|
|
$
|
47,795
|
|
|
Properties and equipment, net
|
|
(29,677)
|
|
|
Deferred revenue
|
|
6,559
|
|
|
Gain on sales-type leases
|
|
$
|
24,677
|
|
During the six months ended June 30, 2020, one of our throughput agreements with Delek was partially renewed. A component of this agreement met the criteria of sales-type leases since the underlying asset is 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 the commencement date of the lease, 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 six months ended June 30, 2020 composed of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
(In thousands)
|
|
Net investment in lease
|
|
$
|
35,319
|
|
|
Properties and equipment, net
|
|
(1,485)
|
|
|
|
|
|
|
Gain on sales-type lease
|
|
$
|
33,834
|
|
These sales-type lease transactions, including the related gain, were non-cash transactions.
Lease income recognized was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
(In thousands)
|
|
Operating lease revenues
|
|
$
|
84,426
|
|
|
$
|
84,872
|
|
|
$
|
170,698
|
|
|
$
|
175,671
|
|
|
Direct financing lease interest income
|
|
523
|
|
|
524
|
|
|
1,047
|
|
|
1,048
|
|
|
Gain on sales-type leases
|
|
27
|
|
|
33,834
|
|
|
24,677
|
|
|
33,834
|
|
|
Sales-type lease interest income
|
|
6,091
|
|
|
2,286
|
|
|
12,115
|
|
|
3,940
|
|
|
Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable
|
|
2,441
|
|
|
1,474
|
|
|
4,105
|
|
|
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, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Finance
|
|
Sales-type
|
|
Years Ending December 31,
|
|
(In thousands)
|
|
Remainder of 2021
|
|
$
|
141,624
|
|
|
$
|
1,088
|
|
|
$
|
14,481
|
|
|
2022
|
|
283,151
|
|
|
2,171
|
|
|
28,962
|
|
|
2023
|
|
252,705
|
|
|
2,175
|
|
|
25,056
|
|
|
2024
|
|
216,601
|
|
|
2,192
|
|
|
21,827
|
|
|
2025
|
|
153,746
|
|
|
2,209
|
|
|
18,399
|
|
|
2026 and thereafter
|
|
558,415
|
|
|
38,837
|
|
|
144,721
|
|
|
Total lease receipt payments
|
|
$
|
1,606,242
|
|
|
$
|
48,672
|
|
|
$
|
253,446
|
|
|
Less: Imputed interest
|
|
|
|
(32,255)
|
|
|
(198,123)
|
|
|
|
|
|
|
16,417
|
|
|
55,323
|
|
|
Unguaranteed residual assets at end of leases
|
|
|
|
—
|
|
|
144,036
|
|
|
Net investment in leases
|
|
|
|
$
|
16,417
|
|
|
$
|
199,359
|
|
Net investments in leases recorded on our balance sheet were composed of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
|
|
Sales-type Leases
|
|
Direct Financing Leases
|
|
Sales-type Leases
|
|
Direct Financing Leases
|
|
|
|
(In thousands)
|
|
(In thousands)
|
|
Lease receivables (1)
|
|
$
|
126,147
|
|
|
$
|
16,417
|
|
|
$
|
88,922
|
|
|
$
|
16,452
|
|
|
Unguaranteed residual assets
|
|
73,212
|
|
|
—
|
|
|
64,551
|
|
|
—
|
|
|
Net investment in leases
|
|
$
|
199,359
|
|
|
$
|
16,417
|
|
|
$
|
153,473
|
|
|
$
|
16,452
|
|
(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, 2021
|
|
December 31, 2020
|
|
Financial Instrument
|
|
Fair Value Input Level
|
|
Carrying
Value
|
|
Fair Value
|
|
Carrying
Value
|
|
Fair Value
|
|
|
|
|
|
(In thousands)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% Senior Notes
|
|
Level 2
|
|
492,570
|
|
|
512,245
|
|
|
492,103
|
|
|
506,540
|
|
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 six months ended June 30, 2021, 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.
During the six months ended June 30, 2021, we recognized goodwill impairment based on fair value measurements utilized during our goodwill testing (see Note 1). The fair value measurements were based on a combination of valuation methods including discounted cash flows, the guideline public company and guideline transaction methods and obsolescence adjusted replacement costs, all of which are Level 3 inputs.
Note 6:Properties and Equipment
The carrying amounts of our properties and equipment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
December 31,
2020
|
|
|
|
(In thousands)
|
|
Pipelines, terminals and tankage1
|
|
$
|
1,538,892
|
|
|
$
|
1,575,815
|
|
|
Refinery assets
|
|
348,882
|
|
|
348,882
|
|
|
Land and right of way
|
|
86,781
|
|
|
87,076
|
|
|
Construction in progress
|
|
99,420
|
|
|
58,467
|
|
|
Other1
|
|
44,819
|
|
|
46,201
|
|
|
|
|
2,118,794
|
|
|
2,116,441
|
|
|
Less accumulated depreciation
|
|
(688,483)
|
|
|
(665,756)
|
|
|
|
|
$
|
1,430,311
|
|
|
$
|
1,450,685
|
|
(1)Prior period balances have been reclassified to be comparative to current period.
Depreciation expense was $42.7 million and $41.7 million for the six months ended June 30, 2021 and 2020, 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 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
June 30,
2021
|
|
December 31,
2020
|
|
|
|
|
|
(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
|
|
20 years
|
|
50
|
|
|
50
|
|
|
|
|
|
|
204,797
|
|
|
204,797
|
|
|
Less accumulated amortization
|
|
|
|
(124,486)
|
|
|
(117,482)
|
|
|
|
|
|
|
$
|
80,311
|
|
|
$
|
87,315
|
|
Amortization expense was $7.0 million for both the six months ended June 30, 2021 and 2020. We estimate amortization expense to be $14.0 million for 2022, $9.9 million in 2023, and $9.1 million for 2024 through 2026.
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 $1.9 million and $1.6 million for the three months ended June 30, 2021 and 2020, respectively, and $4.1 million and $3.7 million for the six months ended June 30, 2021 and 2020.
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, 2021, we had two types of incentive-based awards outstanding, which are described below. The compensation cost charged against income was $0.5 million for both the three months ended June 30, 2021 and 2020, and $1.2 million and $1.0 million for the six months ended June 30, 2021 and 2020, respectively. We currently purchase units in the open market instead of issuing new units for settlement of all unit awards under our Long-Term Incentive Plan. As of June 30, 2021, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which 856,171 were available to be granted, assuming no forfeitures of the unvested units and full achievement of goals for the unvested performance units.
Phantom Units
Under our Long-Term Incentive Plan, we grant phantom units to our non-employee directors and selected employees who perform services for us, with most awards vesting over a period of one to three years. Although full ownership of the units does not transfer to the recipients until the units vest, the recipients have distribution rights on these units from the date of grant.
The fair value of each 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 phantom unit activity and changes during the six months ended June 30, 2021, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phantom Units
|
|
Units
|
|
Weighted Average Grant-Date Fair Value
|
|
Outstanding at January 1, 2021 (nonvested)
|
|
295,992
|
|
|
$
|
14.48
|
|
|
|
|
|
|
|
|
Vesting and transfer of full ownership to recipients
|
|
(189)
|
|
|
11.92
|
|
|
Forfeited
|
|
(3,483)
|
|
|
14.69
|
|
|
Outstanding at June 30, 2021 (nonvested)
|
|
292,320
|
|
|
14.48
|
|
The grant date fair values of phantom units that were vested and transferred to recipients during the six months ended June 30, 2021 and 2020 were $2 thousand and $0.1 million, respectively. As of June 30, 2021, $2.0 million of total unrecognized compensation expense related to unvested phantom unit grants is expected to be recognized over a weighted-average period of 1.3 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 0% to 200%.
We did not grant any performance units during the six months ended June 30, 2021. 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, 2021, is presented below:
|
|
|
|
|
|
|
|
|
|
|
Performance Units
|
|
Units
|
|
Outstanding at January 1, 2021 (nonvested)
|
|
77,472
|
|
|
|
|
|
|
Vesting and transfer of common units to recipients
|
|
(10,881)
|
|
|
|
|
|
|
Outstanding at June 30, 2021 (nonvested)
|
|
66,591
|
|
The grant date fair value of performance units vested and transferred to recipients during both of the six months ended June 30, 2021 and 2020 was $0.4 million. Based on the weighted-average fair value of performance units outstanding at June 30, 2021, of $1.2 million, there was $0.5 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of 1.7 years.
During the six months ended June 30, 2021, 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.
Note 9:Debt
Credit Agreement
In April 2021, we amended our senior secured revolving credit facility (the “Credit Agreement”) decreasing the size of the facility from $1.4 billion to $1.2 billion and extending the maturity date to July 27, 2025. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments, 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 continues to provide for an accordion feature that allows us to increase commitments under the Credit Agreement up to a maximum amount of $1.7 billion.
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 maturity 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 under the Credit Agreement as of June 30, 2021.
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 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, 2021. 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 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
December 31,
2020
|
|
|
|
(In thousands)
|
|
Credit Agreement
|
|
|
|
|
|
Amount outstanding
|
|
$
|
870,000
|
|
|
913,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% Senior Notes
|
|
|
|
|
|
Principal
|
|
500,000
|
|
|
500,000
|
|
|
Unamortized premium and debt issuance costs
|
|
(7,430)
|
|
|
(7,897)
|
|
|
|
|
492,570
|
|
|
492,103
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,362,570
|
|
|
$
|
1,405,603
|
|
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 2022 to 2036, and revenues from HFC accounted for 79% of our total revenues for both the three and six months ended June 30, 2021. 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 June 30, 2021, these agreements with HFC require minimum annualized payments to us of $340 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 were as follows:
•Revenues received from HFC were $99.1 million and $95.6 million for the three months ended June 30, 2021 and 2020, respectively, and $201.1 million and $197.0 million for the six months ended June 30, 2021 and 2020, respectively.
•HFC charged us general and administrative services under the Omnibus Agreement of $0.7 million for both the three months ended June 30, 2021 and 2020, and $1.3 million for both the six months ended June 30, 2021 and 2020.
•We reimbursed HFC for costs of employees supporting our operations of $14.3 million and $13.2 million for the three months ended June 30, 2021 and 2020, respectively, and $28.7 million and $27.3 million for the six months ended June 30, 2021 and 2020, respectively.
•HFC reimbursed us $1.2 million and $0.9 million for the three months ended June 30, 2021 and 2020, respectively, and $4.3 million and $4.0 million for the six months ended June 30, 2021 and 2020, respectively, for expense and capital projects.
•We distributed $20.9 million and $18.4 million in the three months ended June 30, 2021 and 2020, respectively, and $41.7 million and $56.0 million in the six months ended June 30, 2021 and 2020, respectively, to HFC as regular distributions on its common units.
•Accounts receivable from HFC were $46.3 million and $48.0 million at June 30, 2021, and December 31, 2020, respectively.
•Accounts payable to HFC were $15.0 million and $18.1 million at June 30, 2021, and December 31, 2020, respectively.
•Deferred revenue in the consolidated balance sheets included $0.4 million for both June 30, 2021 and December 31, 2020, relating to certain shortfall billings to HFC.
•We received direct financing lease payments from HFC for use of our Artesia and Tulsa rail yards of $0.5 million for both of the three months ended June 30, 2021 and 2020, respectively, and $1.0 million for both the six months ended June 30, 2021 and 2020.
•We recorded a gain on sales-type leases with HFC of $24.7 million for the six months ended June 30, 2021, and we received sales-type lease payments of $6.3 million and $2.4 million from HFC that were not recorded in revenues for the three months ended June 30, 2021 and 2020, respectively, and $12.5 million and $4.8 million for the six months ended June 30, 2021 and 2020, respectively.
•HEP and HFC reached an agreement to terminate the existing minimum volume commitments for HEP’s Cheyenne assets and enter into new agreements, which were finalized and executed on February 8, 2021, with the following
terms, in each case effective January 1, 2021: (1) a ten-year lease with two five-year renewal option periods for HFC’s use of certain HEP tank and rack assets in the Cheyenne Refinery to facilitate renewable diesel production with an annual lease payment of approximately $5 million, (2) a five-year contango service fee arrangement that will utilize HEP tank assets inside the Cheyenne Refinery where HFC will pay a base tariff to HEP for available crude oil storage and HFC and HEP will split any profits generated on crude oil contango opportunities and (3) a $10 million one-time cash payment from HFC to HEP for the termination of the existing minimum volume commitment.
On August 2, 2021, in connection with the Sinclair Transactions (described in Note 17 below), HEP and HFC entered into a Letter Agreement (“Letter Agreement”) pursuant to which, among other things, HEP and HFC agreed, upon the consummation of the Sinclair Transactions, to enter into amendments to certain of the agreements by and among HEP and HFC, including the master throughput agreement, to include within the scope of such agreements the assets to be acquired by HEP pursuant to the Contribution Agreement (described in Note 17 below).
In addition, the Letter Agreement provides that if, as a condition to obtaining antitrust clearance for the Sinclair Transactions, HFC enters into a definitive agreement to divest its refinery in Davis County, Utah (the “Woods Cross Refinery”), then HEP would sell certain assets located at, or relating to, the Woods Cross Refinery to HFC in exchange for cash consideration equal to $232.5 million plus the certain accounts receivable of HEP in respect of such assets, with such sale to be effective immediately prior to the closing of the sale of the Woods Cross Refinery by HFC. The Letter Agreement also provides that HEP’s right to future revenues from HFC in respect of such Woods Cross Refinery assets will terminate at the closing of such sale.
Note 11: Partners’ Equity, Income Allocations and Cash Distributions
As of June 30, 2021, 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, 2021, 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 22, 2021, we announced our cash distribution for the second quarter of 2021 of $0.35 per unit. The distribution is payable on all common units and will be paid August 13, 2021, to all unitholders of record on August 2, 2021.
Our regular quarterly cash distribution to the limited partners will be $37.0 million for the three months ended June 30, 2021 and was $34.5 million for the three months ended June 30, 2020. For the six months ended June 30, 2021, the regular quarterly distribution to the limited partners will be $74.1 million and was $68.9 million for the six months ended June 30, 2020. 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 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:
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|
|
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|
|
|
Three Months Ended
June 30,
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Six Months Ended
June 30,
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|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
(In thousands, except per unit data)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the partners
|
|
$
|
55,745
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|
|
$
|
76,470
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|
|
$
|
120,142
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|
|
$
|
101,331
|
|
|
Less: Participating securities’ share in earnings
|
|
(190)
|
|
|
—
|
|
|
(411)
|
|
|
—
|
|
|
Net income attributable to common units
|
|
55,555
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|
|
76,470
|
|
|
119,731
|
|
|
101,331
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|
|
Weighted average limited partners' units outstanding
|
|
105,440
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|
|
105,440
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|
|
105,440
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|
|
105,440
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|
|
Limited partners' per unit interest in earnings - basic and diluted
|
|
$
|
0.53
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|
|
$
|
0.73
|
|
|
$
|
1.14
|
|
|
$
|
0.96
|
|
Note 13:Environmental
We expensed $0.5 million for the three and six months ended June 30, 2021 for environmental remediation obligations, and we expensed $0.5 million and $0.7 million for the three and six months ended June 30, 2020, respectively. The accrued environmental liability, net of expected recoveries from indemnifying parties, reflected in our consolidated balance sheets was $4.3 million and $4.5 million at June 30, 2021 and December 31, 2020, respectively, of which $2.2 million and $2.5 million, was classified as other long-term liabilities at June 30, 2021 and December 31, 2020. 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 as of June 30, 2021 and December 31, 2020, respectively, and other assets included equal and offsetting balances representing amounts due from HFC related to indemnifications for environmental remediation liabilities.
Note 14: Contingencies
We are a party to various legal and regulatory proceedings, none of which we believe will have a material adverse impact on our financial condition, results of 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 segment.
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Three Months Ended
June 30,
|
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Six Months Ended
June 30,
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|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
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(In thousands)
|
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Revenues:
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|
|
|
|
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|
|
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Pipelines and terminals - affiliate
|
|
$
|
78,116
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|
|
$
|
75,990
|
|
|
$
|
157,546
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|
|
$
|
157,534
|
|
|
Pipelines and terminals - third-party
|
|
27,093
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|
|
19,244
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|
|
52,350
|
|
|
45,670
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|
|
Refinery processing units - affiliate
|
|
21,026
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|
|
19,573
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|
|
43,522
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|
|
39,457
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|
|
Total segment revenues
|
|
$
|
126,235
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|
|
$
|
114,807
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|
|
$
|
253,418
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|
|
$
|
242,661
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|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income:
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|
|
|
|
|
|
|
|
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Pipelines and terminals(1)
|
|
$
|
49,391
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|
|
$
|
45,630
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|
|
$
|
90,875
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|
|
$
|
104,533
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|
|
Refinery processing units
|
|
9,773
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|
|
9,406
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|
|
18,008
|
|
|
19,398
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|
|
Total segment operating income
|
|
59,164
|
|
|
55,036
|
|
|
108,883
|
|
|
123,931
|
|
|
Unallocated general and administrative expenses
|
|
(2,847)
|
|
|
(2,535)
|
|
|
(5,815)
|
|
|
(5,237)
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|
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Interest and financing costs, net
|
|
(7,324)
|
|
|
(10,966)
|
|
|
(14,016)
|
|
|
(26,515)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on early extinguishment of debt
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25,915)
|
|
|
Equity in earnings of equity method investments
|
|
3,423
|
|
|
2,156
|
|
|
5,186
|
|
|
3,870
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|
|
Gain on sales-type leases
|
|
27
|
|
|
33,834
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|
|
24,677
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|
|
33,834
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|
|
Gain (loss) on sale of assets and other
|
|
5,415
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|
|
468
|
|
|
5,917
|
|
|
974
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|
|
Income before income taxes
|
|
$
|
57,858
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|
|
$
|
77,993
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|
|
$
|
124,832
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|
|
$
|
104,942
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|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
Pipelines and terminals
|
|
$
|
25,559
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|
|
$
|
11,798
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|
|
$
|
58,777
|
|
|
$
|
30,416
|
|
|
Refinery processing units
|
|
598
|
|
|
—
|
|
|
598
|
|
|
324
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|
|
Total capital expenditures
|
|
$
|
26,157
|
|
|
$
|
11,798
|
|
|
$
|
59,375
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|
|
$
|
30,740
|
|
|
|
|
|
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|
|
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|
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|
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|
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|
|
|
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|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
|
|
(In thousands)
|
|
Identifiable assets:
|
|
|
|
|
|
Pipelines and terminals (2)
|
|
$
|
1,743,374
|
|
|
$
|
1,729,547
|
|
|
Refinery processing units
|
|
295,098
|
|
|
305,090
|
|
|
Other
|
|
134,350
|
|
|
132,928
|
|
|
Total identifiable assets
|
|
$
|
2,172,822
|
|
|
$
|
2,167,565
|
|
(1) Pipelines and terminals segment operating income includes goodwill impairment charge of $11.0 million for the six months ended June 30, 2021.
(2) Includes goodwill of $223.7 million as of June 30, 2021 and $234.7 million as of December 31, 2020.
