UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________________________
FORM 10-Q
______________________________________________________________________________________
(Mark One)
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20202021
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to _____________
Commission File Number: 1-32225
_____________________________________________________________________________________
HOLLY ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
______________________________________________________________________________________
| | | | | | | | |
| Delaware | | 20-0833098 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
| 2828 N. Harwood, Suite 1300 | | |
| Dallas | | |
| Texas | | 75201 |
| (Address of principal executive offices) | | (Zip code) |
(214) 871-3555
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
| | | | | | | | | | | | | | |
| Securities registered pursuant to 12(b) of the Securities Exchange Act of 1934: |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common Limited Partner Units | | HEP | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth” company in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| Emerging growth company | ☐ | | | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of the registrant’s outstanding common units at October 29, 2020,July 30, 2021, was 105,440,201.
HOLLY ENERGY PARTNERS, L.P.
INDEX
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical fact included in this Form 10-Q, including, but not limited to, statements regarding funding of capital expenditures and distributions, distributable cash flow coverage and leverage targets, and statements under “Results of Operations” and “Liquidity and Capital Resources” in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I are forward-looking statements. Forward-looking statements use words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “intend,” “should,” “would,” “could,” “believe,” “may,” and similar expressions and statements regarding our plans and objectives for future operations are intended to identify forward-looking statements. These statements are based on our beliefs and assumptions and those of our general partner using currently available information and expectations as of the date hereof, are not guarantees of future performance and involve certain risks and uncertainties. Although we and our general partner believe that such expectations reflected in such forward-looking statements are reasonable, neither we nor our general partner can give assurance that our expectations will prove to be correct. All statements concerning our expectations for future results of operations are based on forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. Certain factors could cause actual results to differ materially from results anticipated in the forward-looking statements. These factors include, but are not limited to:
•the extraordinary market environment and effects of the COVID-19 pandemic, including the continuation of a materialsignificant decline in demand for refined petroleum products in markets we serve;
•(i) our ability to successfully close the Sinclair acquisition, which requires certain regulatory approvals (including clearance by antitrust authorities); (ii) disruption the Sinclair acquisition may cause to customers, vendors, business partners and our ongoing business; (iii) once closed, our ability to integrate the operations of Sinclair with our existing operations and fully realize the expected synergies of the Sinclair acquisition on the expected timeline; and (iv) legal proceedings that may be instituted against us or HollyFrontier Corporation (“HFC”) following the announcement of the Sinclair acquisition;
•risks and uncertainties with respect to the actual quantities of petroleum products and crude oil shipped on our pipelines and/or terminalled, stored or throughput in our terminals and refinery processing units;
•the economic viability of HollyFrontier Corporation (“HFC”),HFC, our other customers and our joint ventures’ other customers, including any refusal or inability of our or our joint ventures’ customers or counterparties to perform their obligations under their contracts;
•the demand for refined petroleum products in the markets we serve;
•our ability to purchase and integrate future acquired operations;
•our ability to complete previously announced or contemplated acquisitions;
•the availability and cost of additional debt and equity financing;
•the possibility of temporary or permanent reductions in production or shutdowns at refineries utilizing our pipelines, terminal facilities and refinery processing units, due to reasons such as infection in the workforce, in response to reductions in demand or lower gross margins due to the economic impact of the COVID-19 pandemic, and any potential asset impairments resulting from such actions;
•the effects of current and future government regulations and policies, including the effects of current and future restrictions on various commercial and economic activities in response to the COVID-19 pandemic;
•delay by government authorities in issuing permits necessary for our business or our capital projects;
•our and our joint venture partners’ ability to complete and maintain operational efficiency in carrying out routine operations and capital construction projects;
•the possibility of terrorist or cyber attackscyberattacks and the consequences of any such attacks;
•general economic conditions, including uncertainty regarding the timing, pace and extent of an economic recovery in the United States;
•the impact of recent or proposed changes in the tax laws and regulations that affect master limited partnerships; and
•other financial, operational and legal risks and uncertainties detailed from time to time in our Securities and Exchange Commission filings.
Cautionary statements identifying important factors that could cause actual results to differ materially from our expectations are set forth in this Form 10-Q, including, without limitation, the forward-looking statements that are referred to above. You should not put any undue reliance on any forward-looking statements. When considering forward-looking statements, you should keep in mind the known material risk factors and other cautionary statements set forth in our Annual Report on Form
10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, and in this Quarterly Report on Form 10-Q, and in connection with the discussion in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All forward-looking statements included in this Form 10-Q and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands, except unit data)
| | | September 30, 2020 | | December 31, 2019 | | June 30,
2021 | | December 31, 2020 |
| | (Unaudited) | | | | (Unaudited) | | |
| ASSETS | ASSETS | | ASSETS | |
| Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents (Cushing Connect VIEs: $9,288 and $6,842, respectively) | | $ | 18,091 | | | $ | 13,287 | | |
Cash and cash equivalents (Cushing Connect VIEs: $14,055 and $18,259, respectively) | | Cash and cash equivalents (Cushing Connect VIEs: $14,055 and $18,259, respectively) | | $ | 19,561 | | | $ | 21,990 | |
| Accounts receivable: | Accounts receivable: | | Accounts receivable: | |
Trade (Cushing Connect VIEs: $712 and $79, respectively) | | 13,857 | | | 18,731 | | |
| Trade | | Trade | | 14,749 | | | 14,543 | |
| Affiliates | Affiliates | | 46,504 | | | 49,716 | | Affiliates | | 46,323 | | | 47,972 | |
| | 60,361 | | | 68,447 | | | 61,072 | | | 62,515 | |
| Prepaid and other current assets | Prepaid and other current assets | | 6,282 | | | 7,629 | | Prepaid and other current assets | | 9,277 | | | 9,487 | |
| Total current assets | Total current assets | | 84,734 | | | 89,363 | | Total current assets | | 89,910 | | | 93,992 | |
| Properties and equipment, net (Cushing Connect VIEs: $32,092 and $2,916, respectively) | | 1,447,924 | | | 1,467,099 | | |
Properties and equipment, net (Cushing Connect VIEs: $84,263 and $47,801, respectively) | | Properties and equipment, net (Cushing Connect VIEs: $84,263 and $47,801, respectively) | | 1,430,311 | | | 1,450,685 | |
| Operating lease right-of-use assets, net | Operating lease right-of-use assets, net | | 3,164 | | | 3,255 | | Operating lease right-of-use assets, net | | 2,724 | | | 2,979 | |
| Net investment in leases | Net investment in leases | | 167,238 | | | 134,886 | | Net investment in leases | | 211,550 | | | 166,316 | |
| Intangible assets, net | Intangible assets, net | | 90,817 | | | 101,322 | | Intangible assets, net | | 80,311 | | | 87,315 | |
| Goodwill | Goodwill | | 234,684 | | | 270,336 | | Goodwill | | 223,650 | | | 234,684 | |
Equity method investments (Cushing Connect VIEs: $39,658 and $37,084, respectively) | | 122,046 | | | 120,071 | | |
Equity method investments (Cushing Connect VIEs: $37,988 and $39,456, respectively) | | Equity method investments (Cushing Connect VIEs: $37,988 and $39,456, respectively) | | 117,436 | | | 120,544 | |
| Other assets | Other assets | | 11,278 | | | 12,900 | | Other assets | | 16,930 | | | 11,050 | |
| Total assets | Total assets | | $ | 2,161,885 | | | $ | 2,199,232 | | Total assets | | $ | 2,172,822 | | | $ | 2,167,565 | |
| | LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | LIABILITIES AND EQUITY | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Accounts payable: | Accounts payable: | | Accounts payable: | |
Trade (Cushing Connect VIEs: $6,030 and $2,082, respectively) | | $ | 21,022 | | | $ | 17,818 | | |
Trade (Cushing Connect VIEs: $9,994 and $14,076, respectively) | | Trade (Cushing Connect VIEs: $9,994 and $14,076, respectively) | | $ | 25,591 | | | $ | 28,280 | |
| Affiliates | Affiliates | | 6,922 | | | 16,737 | | Affiliates | | 14,964 | | | 18,120 | |
| | 27,944 | | | 34,555 | | | 40,555 | | | 46,400 | |
| | Accrued interest | Accrued interest | | 4,691 | | | 13,206 | | Accrued interest | | 10,869 | | | 10,892 | |
| Deferred revenue | Deferred revenue | | 11,020 | | | 10,390 | | Deferred revenue | | 10,569 | | | 11,368 | |
| Accrued property taxes | Accrued property taxes | | 8,972 | | | 3,799 | | Accrued property taxes | | 5,057 | | | 3,992 | |
| Current operating lease liabilities | Current operating lease liabilities | | 1,199 | | | 1,126 | | Current operating lease liabilities | | 795 | | | 875 | |
| Current finance lease liabilities | Current finance lease liabilities | | 3,459 | | | 3,224 | | Current finance lease liabilities | | 3,755 | | | 3,713 | |
| Other current liabilities | Other current liabilities | | 2,849 | | | 2,305 | | Other current liabilities | | 2,943 | | | 2,505 | |
| Total current liabilities | Total current liabilities | | 60,134 | | | 68,605 | | Total current liabilities | | 74,543 | | | 79,745 | |
| | Long-term debt | Long-term debt | | 1,439,874 | | | 1,462,031 | | Long-term debt | | 1,362,570 | | | 1,405,603 | |
| Noncurrent operating lease liabilities | Noncurrent operating lease liabilities | | 2,333 | | | 2,482 | | Noncurrent operating lease liabilities | | 2,303 | | | 2,476 | |
| Noncurrent finance lease liabilities | Noncurrent finance lease liabilities | | 69,180 | | | 70,475 | | Noncurrent finance lease liabilities | | 66,434 | | | 68,047 | |
| Other long-term liabilities | Other long-term liabilities | | 13,861 | | | 12,808 | | Other long-term liabilities | | 11,913 | | | 12,905 | |
| Deferred revenue | Deferred revenue | | 41,376 | | | 45,681 | | Deferred revenue | | 32,645 | | | 40,581 | |
| | Class B unit | Class B unit | | 51,956 | | | 49,392 | | Class B unit | | 54,637 | | | 52,850 | |
| | Equity: | Equity: | | Equity: | |
| Partners’ equity: | Partners’ equity: | | Partners’ equity: | |
Common unitholders (105,440 units issued and outstanding at September 30, 2020 and December 31, 2019) | | 364,821 | | | 381,103 | | |
| Noncontrolling interest | | 118,350 | | | 106,655 | | |
Common unitholders (105,440 units issued and outstanding at June 30, 2021 and December 31, 2020) | | Common unitholders (105,440 units issued and outstanding at June 30, 2021 and December 31, 2020) | | 425,218 | | | 379,292 | |
| Noncontrolling interests | | Noncontrolling interests | | 142,559 | | | 126,066 | |
| Total equity | Total equity | | 483,171 | | | 487,758 | | Total equity | | 567,777 | | | 505,358 | |
| Total liabilities and equity | Total liabilities and equity | | $ | 2,161,885 | | | $ | 2,199,232 | | Total liabilities and equity | | $ | 2,172,822 | | | $ | 2,167,565 | |
See accompanying notes.
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per unit data)
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Revenues: | Revenues: | | | | | | | | | Revenues: | | | | | | | | |
| Affiliates | Affiliates | | $ | 100,992 | | | $ | 106,027 | | | $ | 297,983 | | | $ | 311,755 | | Affiliates | | $ | 99,142 | | | $ | 95,563 | | | $ | 201,068 | | | $ | 196,991 | |
| Third parties | Third parties | | 26,739 | | | 29,868 | | | 72,409 | | | 89,388 | | Third parties | | 27,093 | | | 19,244 | | | 52,350 | | | 45,670 | |
| | 127,731 | | | 135,895 | | | 370,392 | | | 401,143 | | | 126,235 | | | 114,807 | | | 253,418 | | | 242,661 | |
| Operating costs and expenses: | Operating costs and expenses: | | | | | | | | | Operating costs and expenses: | | | | | | | | |
| Operations (exclusive of depreciation and amortization) | Operations (exclusive of depreciation and amortization) | | 40,003 | | | 44,924 | | | 109,721 | | | 123,045 | | Operations (exclusive of depreciation and amortization) | | 42,068 | | | 34,737 | | | 83,433 | | | 69,718 | |
| Depreciation and amortization | Depreciation and amortization | | 26,190 | | | 24,121 | | | 75,202 | | | 72,192 | | Depreciation and amortization | | 25,003 | | | 25,034 | | | 50,068 | | | 49,012 | |
| General and administrative | General and administrative | | 2,332 | | | 2,714 | | | 7,569 | | | 7,322 | | General and administrative | | 2,847 | | | 2,535 | | | 5,815 | | | 5,237 | |
| Goodwill impairment | Goodwill impairment | | 35,653 | | | 0 | | | 35,653 | | | 0 | | Goodwill impairment | | 0 | | | 0 | | | 11,034 | | | 0 | |
| | 104,178 | | | 71,759 | | | 228,145 | | | 202,559 | | | 69,918 | | | 62,306 | | | 150,350 | | | 123,967 | |
| Operating income | Operating income | | 23,553 | | | 64,136 | | | 142,247 | | | 198,584 | | Operating income | | 56,317 | | | 52,501 | | | 103,068 | | | 118,694 | |
| | Other income (expense): | Other income (expense): | | Other income (expense): | |
| Equity in earnings of equity method investments | Equity in earnings of equity method investments | | 1,316 | | | 1,334 | | | 5,186 | | | 5,217 | | Equity in earnings of equity method investments | | 3,423 | | | 2,156 | | | 5,186 | | | 3,870 | |
| Interest expense | Interest expense | | (14,104) | | | (18,807) | | | (45,650) | | | (57,059) | | Interest expense | | (13,938) | | | (13,779) | | | (27,178) | | | (31,546) | |
| Interest income | Interest income | | 2,803 | | | 2,243 | | | 7,834 | | | 3,322 | | Interest income | | 6,614 | | | 2,813 | | | 13,162 | | | 5,031 | |
| Loss on early extinguishment of debt | | Loss on early extinguishment of debt | | 0 | | | 0 | | | 0 | | | (25,915) | |
| Gain on sales-type leases | Gain on sales-type leases | | 0 | | | 35,166 | | | 33,834 | | | 35,166 | | Gain on sales-type leases | | 27 | | | 33,834 | | | 24,677 | | | 33,834 | |
| Loss on early extinguishment of debt | | 0 | | | 0 | | | (25,915) | | | 0 | | |
| Other income (loss) | | 7,465 | | | 142 | | | 8,439 | | | (57) | | |
| Gain on sale of assets and other | | Gain on sale of assets and other | | 5,415 | | | 468 | | | 5,917 | | | 974 | |
| | (2,520) | | | 20,078 | | | (16,272) | | | (13,411) | | | 1,541 | | | 25,492 | | | 21,764 | | | (13,752) | |
| Income before income taxes | Income before income taxes | | 21,033 | | | 84,214 | | | 125,975 | | | 185,173 | | Income before income taxes | | 57,858 | | | 77,993 | | | 124,832 | | | 104,942 | |
| State income tax expense | State income tax expense | | (34) | | | (30) | | | (110) | | | (36) | | State income tax expense | | (27) | | | (39) | | | (64) | | | (76) | |
| Net income | Net income | | 20,999 | | | 84,184 | | | 125,865 | | | 185,137 | | Net income | | 57,831 | | | 77,954 | | | 124,768 | | | 104,866 | |
| Allocation of net income attributable to noncontrolling interests | Allocation of net income attributable to noncontrolling interests | | (3,186) | | | (1,839) | | | (6,721) | | | (5,920) | | Allocation of net income attributable to noncontrolling interests | | (2,086) | | | (1,484) | | | (4,626) | | | (3,535) | |
| Net income attributable to the partners | Net income attributable to the partners | | 17,813 | | | 82,345 | | | 119,144 | | | 179,217 | | Net income attributable to the partners | | 55,745 | | | 76,470 | | | 120,142 | | | 101,331 | |
| Limited partners’ per unit interest in earnings—basic and diluted | Limited partners’ per unit interest in earnings—basic and diluted | | $ | 0.17 | | | $ | 0.78 | | | $ | 1.13 | | | $ | 1.70 | | Limited partners’ per unit interest in earnings—basic and diluted | | $ | 0.53 | | | $ | 0.73 | | | $ | 1.14 | | | $ | 0.96 | |
| Weighted average limited partners’ units outstanding | Weighted average limited partners’ units outstanding | | 105,440 | | | 105,440 | | | 105,440 | | | 105,440 | | Weighted average limited partners’ units outstanding | | 105,440 | | | 105,440 | | | 105,440 | | | 105,440 | |
Net income and comprehensive income are the same in all periods presented.
See accompanying notes.
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| | | Nine Months Ended
September 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
| Cash flows from operating activities | Cash flows from operating activities | | | | | Cash flows from operating activities | | | | |
| Net income | Net income | | $ | 125,865 | | | $ | 185,137 | | Net income | | $ | 124,768 | | | $ | 104,866 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
| Depreciation and amortization | Depreciation and amortization | | 75,202 | | | 72,192 | | Depreciation and amortization | | 50,068 | | | 49,012 | |
| (Gain) loss on sale of assets | | (887) | | | (19) | | |
| Gain on sale of assets | | Gain on sale of assets | | (5,586) | | | (797) | |
| Loss on early extinguishment of debt | Loss on early extinguishment of debt | | 25,915 | | | 0 | | Loss on early extinguishment of debt | | 0 | | | 25,915 | |
| Gain on sales-type leases | Gain on sales-type leases | | (33,834) | | | (35,166) | | Gain on sales-type leases | | (24,677) | | | (33,834) | |
| Goodwill impairment | Goodwill impairment | | 35,653 | | | 0 | | Goodwill impairment | | 11,034 | | | 0 | |
| Amortization of deferred charges | Amortization of deferred charges | | 2,479 | | | 2,307 | | Amortization of deferred charges | | 2,229 | | | 1,641 | |
| Equity-based compensation expense | Equity-based compensation expense | | 1,547 | | | 1,774 | | Equity-based compensation expense | | 1,210 | | | 980 | |
| Equity in earnings of equity method investments, net of distributions | Equity in earnings of equity method investments, net of distributions | | (238) | | | 263 | | Equity in earnings of equity method investments, net of distributions | | 0 | | | (1,298) | |
| (Increase) decrease in operating assets: | (Increase) decrease in operating assets: | | (Increase) decrease in operating assets: | |
| Accounts receivable—trade | Accounts receivable—trade | | 4,874 | | | (3,850) | | Accounts receivable—trade | | 1,726 | | | 3,803 | |
| Accounts receivable—affiliates | Accounts receivable—affiliates | | 3,212 | | | 11,016 | | Accounts receivable—affiliates | | 1,649 | | | (131) | |
| Prepaid and other current assets | Prepaid and other current assets | | 1,885 | | | 1,694 | | Prepaid and other current assets | | 825 | | | 216 | |
| Increase (decrease) in operating liabilities: | Increase (decrease) in operating liabilities: | | Increase (decrease) in operating liabilities: | |
| Accounts payable—trade | Accounts payable—trade | | (2,258) | | | 2,622 | | Accounts payable—trade | | 3,068 | | | (4,959) | |
| Accounts payable—affiliates | Accounts payable—affiliates | | (9,815) | | | (7,475) | | Accounts payable—affiliates | | (3,157) | | | (9,452) | |
| Accrued interest | Accrued interest | | (8,515) | | | (7,418) | | Accrued interest | | (23) | | | (2,523) | |
| Deferred revenue | Deferred revenue | | (3,675) | | | 413 | | Deferred revenue | | (2,176) | | | (2,378) | |
| Accrued property taxes | Accrued property taxes | | 5,173 | | | 7,487 | | Accrued property taxes | | 1,065 | | | 1,727 | |
| Other current liabilities | Other current liabilities | | 544 | | | 400 | | Other current liabilities | | 438 | | | 669 | |
| Other, net | Other, net | | 1,913 | | | (3,160) | | Other, net | | (353) | | | 1,137 | |
| Net cash provided by operating activities | Net cash provided by operating activities | | 225,040 | | | 228,217 | | Net cash provided by operating activities | | 162,108 | | | 134,594 | |
| | Cash flows from investing activities | Cash flows from investing activities | | Cash flows from investing activities | |
| Additions to properties and equipment | Additions to properties and equipment | | (38,642) | | | (23,828) | | Additions to properties and equipment | | (59,375) | | | (30,740) | |
| Investment in Cushing Connect JV Terminal | Investment in Cushing Connect JV Terminal | | (2,438) | | | 0 | | Investment in Cushing Connect JV Terminal | | 0 | | | (2,400) | |
| Proceeds from sale of assets | Proceeds from sale of assets | | 961 | | | 265 | | Proceeds from sale of assets | | 7,343 | | | 816 | |
| Distributions in excess of equity in earnings of equity investments | Distributions in excess of equity in earnings of equity investments | | 701 | | | 693 | | Distributions in excess of equity in earnings of equity investments | | 3,107 | | | 470 | |
| Net cash used for investing activities | Net cash used for investing activities | | (39,418) | | | (22,870) | | Net cash used for investing activities | | (48,925) | | | (31,854) | |
| | Cash flows from financing activities | Cash flows from financing activities | | Cash flows from financing activities | |
| Borrowings under credit agreement | Borrowings under credit agreement | | 219,500 | | | 269,500 | | Borrowings under credit agreement | | 141,000 | | | 168,000 | |
| Repayments of credit agreement borrowings | Repayments of credit agreement borrowings | | (237,000) | | | (257,000) | | Repayments of credit agreement borrowings | | (184,500) | | | (138,500) | |
| Redemption of senior notes | Redemption of senior notes | | (522,500) | | | 0 | | Redemption of senior notes | | 0 | | | (522,500) | |
| Proceeds from issuance of debt | Proceeds from issuance of debt | | 500,000 | | | 0 | | Proceeds from issuance of debt | | 0 | | | 500,000 | |
| Contributions from general partner | Contributions from general partner | | 611 | | | 182 | | Contributions from general partner | | 0 | | | 435 | |
| Contributions from noncontrolling interest | | 15,382 | | | 0 | | |
| Contributions from noncontrolling interests | | Contributions from noncontrolling interests | | 17,593 | | | 13,263 | |
| Distributions to HEP unitholders | Distributions to HEP unitholders | | (137,437) | | | (204,701) | | Distributions to HEP unitholders | | (75,356) | | | (102,979) | |
| Distributions to noncontrolling interest | | (7,845) | | | (7,750) | | |
| Distributions to noncontrolling interests | | Distributions to noncontrolling interests | | (5,872) | | | (4,000) | |
| Payments on finance leases | Payments on finance leases | | (2,666) | | | (780) | | Payments on finance leases | | (1,747) | | | (1,972) | |
| Deferred financing costs | Deferred financing costs | | (8,714) | | | 0 | | Deferred financing costs | | (6,661) | | | (8,714) | |
| Purchase of units for incentive grants | | 0 | | | (255) | | |
| | Units withheld for tax withholding obligations | Units withheld for tax withholding obligations | | (149) | | | (119) | | Units withheld for tax withholding obligations | | (69) | | | (147) | |
| Net cash used by financing activities | Net cash used by financing activities | | (180,818) | | | (200,923) | | Net cash used by financing activities | | (115,612) | | | (97,114) | |
| | Cash and cash equivalents | Cash and cash equivalents | | Cash and cash equivalents | |
| Increase for the period | | 4,804 | | | 4,424 | | |
| Increase (decrease) for the period | | Increase (decrease) for the period | | (2,429) | | | 5,626 | |
| Beginning of period | Beginning of period | | 13,287 | | | 3,045 | | Beginning of period | | 21,990 | | | 13,287 | |
| End of period | End of period | | $ | 18,091 | | | $ | 7,469 | | End of period | | $ | 19,561 | | | $ | 18,913 | |
| | Supplemental disclosure of cash flow information: | | Supplemental disclosure of cash flow information: | |
| Cash paid during the period for interest | | Cash paid during the period for interest | | $25,072 | | $32,118 |
See accompanying notes.
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
| | | Common
Units | | Noncontrolling Interest | | Total Equity | | Common
Units | | Noncontrolling Interests | | Total Equity |
| | | | | | | |
| Balance December 31, 2019 | | $ | 381,103 | | | $ | 106,655 | | | $ | 487,758 | | |
| Balance December 31, 2020 | | Balance December 31, 2020 | | $ | 379,292 | | | $ | 126,066 | | | $ | 505,358 | |
| Contributions from noncontrolling interest | | Contributions from noncontrolling interest | | — | | | 9,746 | | | 9,746 | |
| | Distributions to HEP unitholders | | Distributions to HEP unitholders | | (38,328) | | | — | | | (38,328) | |
| Distributions to noncontrolling interests | | Distributions to noncontrolling interests | | — | | | (3,819) | | | (3,819) | |
| | Equity-based compensation | | Equity-based compensation | | 683 | | | — | | | 683 | |
| Class B unit accretion | | Class B unit accretion | | (893) | | | — | | | (893) | |
| Other | | Other | | (68) | | | — | | | (68) | |
| Net income | | Net income | | 65,290 | | | 1,647 | | | 66,937 | |
| Balance March 31, 2021 | | Balance March 31, 2021 | | $ | 405,976 | | | $ | 133,640 | | | $ | 539,616 | |
| Contributions from noncontrolling interest | Contributions from noncontrolling interest | | — | | | 7,304 | | | 7,304 | | Contributions from noncontrolling interest | | — | | | 9,780 | | | 9,780 | |
| Distributions to HEP unitholders | Distributions to HEP unitholders | | (68,519) | | | — | | | (68,519) | | Distributions to HEP unitholders | | (37,028) | | | — | | | (37,028) | |
| Distributions to noncontrolling interest | Distributions to noncontrolling interest | | — | | | (3,000) | | | (3,000) | | Distributions to noncontrolling interest | | — | | | (2,053) | | | (2,053) | |
| Equity-based compensation | Equity-based compensation | | 506 | | | — | | | 506 | | Equity-based compensation | | 527 | | | — | | | 527 | |
| Class B unit accretion | Class B unit accretion | | (835) | | | — | | | (835) | | Class B unit accretion | | (894) | | | — | | | (894) | |
| Other | Other | | 208 | | | — | | | 208 | | Other | | (2) | | | — | | | (2) | |
| Net income | Net income | | 25,696 | | | 1,216 | | | 26,912 | | Net income | | 56,639 | | | 1,192 | | | 57,831 | |
| Balance March 31, 2020 | | $ | 338,159 | | | $ | 112,175 | | | $ | 450,334 | | |
| Contributions from noncontrolling interest | | — | | | 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 | | |
| Contributions from noncontrolling interest | | — | | | 2,119 | | | 2,119 | | |
| Distributions to HEP unitholders | | (34,458) | | | — | | | (34,458) | | |
| Distributions to noncontrolling interest | | — | | | (3,845) | | | (3,845) | | |
| Equity-based compensation | | 567 | | | — | | | 567 | | |
| Class B unit accretion | | (894) | | | — | | | (894) | | |
| Other | | 177 | | | — | | | 177 | | |
| Net income | | 18,706 | | | 2,293 | | | 20,999 | | |
| Balance September 30, 2020 | | $ | 364,821 | | | $ | 118,350 | | | $ | 483,171 | | |
| Balance June 30, 2021 | | Balance June 30, 2021 | | $ | 425,218 | | | $ | 142,559 | | | $ | 567,777 | |
| |
| | | Common
Units | | Noncontrolling Interest | | Total Equity | | Common
Units | | Noncontrolling Interests | | Total Equity |
| | | | | | | |
| Balance December 31, 2018 | | $ | 427,435 | | | $ | 88,126 | | | $ | 515,561 | | |
| Balance December 31, 2019 | | Balance December 31, 2019 | | $ | 381,103 | | | $ | 106,655 | | | $ | 487,758 | |
| Contributions from noncontrolling interest | | Contributions from noncontrolling interest | | — | | | 7,304 | | | 7,304 | |
| Distributions to HEP unitholders | | Distributions to HEP unitholders | | (68,519) | | | — | | | (68,519) | |
| Distributions to noncontrolling interests | | Distributions to noncontrolling interests | | — | | | (3,000) | | | (3,000) | |
| Equity-based compensation | | Equity-based compensation | | 506 | | | — | | | 506 | |
| Class B unit accretion | | Class B unit accretion | | (835) | | | — | | | (835) | |
| Other | | Other | | 208 | | | — | | | 208 | |
| Net income | | Net income | | 25,696 | | | 1,216 | | | 26,912 | |
| Balance March 31, 2020 | | Balance March 31, 2020 | | $ | 338,159 | | | $ | 112,175 | | | $ | 450,334 | |
| Contributions from noncontrolling interest | | Contributions from noncontrolling interest | | — | | | 5,959 | | | 5,959 | |
| Distributions to HEP unitholders | Distributions to HEP unitholders | | (67,975) | | | — | | | (67,975) | | Distributions to HEP unitholders | | (34,460) | | | — | | | (34,460) | |
| Distributions to noncontrolling interest | Distributions to noncontrolling interest | | — | | | (3,000) | | | (3,000) | | Distributions to noncontrolling interest | | — | | | (1,000) | | | (1,000) | |
| Equity-based compensation | Equity-based compensation | | 661 | | | — | | | 661 | | Equity-based compensation | | 474 | | | — | | | 474 | |
| Class B unit accretion | Class B unit accretion | | (780) | | | — | | | (780) | | Class B unit accretion | | (835) | | | — | | | (835) | |
| Other | Other | | 814 | | | — | | | 814 | | Other | | 80 | | | — | | | 80 | |
| Net income | Net income | | 51,962 | | | 1,832 | | | 53,794 | | Net income | | 77,305 | | | 649 | | | 77,954 | |
| 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 | | |
| Distributions to HEP unitholders | | (68,493) | | | — | | | (68,493) | | |
| Distributions to noncontrolling interest | | — | | | (2,500) | | | (2,500) | | |
| Equity-based compensation | | 528 | | | — | | | 528 | | |
| Class B unit accretion | | (835) | | | — | | | (835) | | |
| Other | | 182 | | | — | | | 182 | | |
| Net income | | 83,180 | | | 1,004 | | | 84,184 | | |
| Balance September 30, 2019 | | $ | 404,584 | | | $ | 83,900 | | | $ | 488,484 | | |
| Balance June 30, 2020 | | Balance June 30, 2020 | | $ | 380,723 | | | $ | 117,783 | | | $ | 498,506 | |
| |
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 SeptemberJune 30, 2020,2021, 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.
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. As a result of this transaction, 0 distributions were made on the general partner interest after October 31, 2017. This waiver of limited partner cash distributions expired after the cash distribution for the second quarter of 2020, which was made during the third quarter of 2020.
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 itsthe Cheyenne Refinery on August 3, 2020. As of September 30, 2020, our throughput agreement with HFC required minimum annualized payments to us of approximately $17.6 million related to our Cheyenne assets. 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. NaN impairment of our Cheyenne long-lived assets was required.
Our annual goodwill impairment testing was performed during the third quarter of 2020. The estimated fair value of our reporting units were derived using a combination of both income and market approaches. The income approach reflects expected future cash flows based on anticipated gross margins, operating costs, and capital expenditures. The market approach includes both the guideline public company and guideline transaction methods. Both market approach methods use 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 testing of goodwill did not identify any impairments other than our Cheyenne reporting unit, which reported a goodwill impairment charge of $35.7 million.
Subsequent to the third quarter of 2020,On February 8, 2021, HEP and HFC reached an agreement in principle to terminate the existing minimum volume commitmentsfinalized and executed new agreements for HEP'sHEP’s Cheyenne assets and enter into new agreements onwith the following terms, in each case effective January 1, 2021: (1) a ten-year lease with 2 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 2 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, 2019.2020. 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, 2020.2021.
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.
Accounting Pronouncements Adopted During the Periods Presented
Goodwill Impairment Testing
In January 2017, Accounting Standard Update (“ASU”) 2017-04, “Simplifyingrepresents the Test for Goodwill Impairment,” was issued amendingexcess of our cost of an acquired business over 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 athe assets acquired, less liabilities assumed. Goodwill is not amortized. We test goodwill at the reporting unit’s goodwill withunit level for impairment annually and between annual tests if events or changes in circumstances indicate the carrying amount of that goodwill. Under this standard,may exceed fair value. Our goodwill impairment is measuredtesting 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. We adopted this standard effective in
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 second quarterdefinition of 2019,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 standard hadelection 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 effectfuture 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 financial condition, resultsthroughput / 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 operations or cash flows.the cost. Deferred revenue is recognized over the remaining contractual term of the related throughput agreement.
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 standardASC 842 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 continuepractical 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 be reporteduse an underlying asset for the lease term, and lease liabilities represent our payment obligation under the leasing arrangement. Right-of-use assets and lease accounting standard in effect during those periods. We also elected practical expedients provided byliabilities are recognized at the new standard, including the package of practical expedients and the short-term lease recognition practical expedient, which allow an entity to not recognizecommencement 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 sheetsheet. 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. Upon adoptionless 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 this standard, we recognized $78.4 millionnet present value of lease liabilitiespayment 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 corresponding right-of-useresidual value of the underlying 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.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 was fullywent in service beginning in April 2020. Theduring the second quarter of 2020, and the Cushing Connect Pipeline is expected to be placed in service during the firstthird 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 proportionatelyequally among the partners, andpartners. 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 $65$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. The majoritySee Note 1 for further discussion 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 componentsrevenue recognition.
Disaggregated revenues were 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.follows:
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. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (In thousands) | | (In thousands) |
| Pipelines | | $ | 68,322 | | | $ | 58,954 | | | $ | 134,827 | | | $ | 129,426 | |
| Terminals, tanks and loading racks | | 36,887 | | | 36,280 | | | 75,069 | | | 73,778 | |
| Refinery processing units | | 21,026 | | | 19,573 | | | 43,522 | | | 39,457 | |
| | $ | 126,235 | | | $ | 114,807 | | | $ | 253,418 | | | $ | 242,661 | |
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 likelihoodRevenues on our consolidated statements of a customer’s ability to utilize such amounts prior to the endincome were composed of the contractual shortfall make-up period. We recognize thefollowing lease and 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 nine months ended September 30, 2020, we recognized $1.1 million and $13.8 million of these deficiency payments in revenue, of which $0.2 million and $0.7 million, respectively, related to deficiency payments billed in prior periods. As of September 30, 2020, deferred revenue reflected in our consolidated balance sheet related to shortfalls billed was $0.4 million.revenues:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (In thousands) | | (In thousands) |
| Lease revenues | | $ | 86,867 | | | $ | 86,346 | | | $ | 174,803 | | | $ | 179,493 | |
| Service revenues | | 39,368 | | | 28,461 | | | 78,615 | | | 63,168 | |
| | $ | 126,235 | | | $ | 114,807 | | | $ | 253,418 | | | $ | 242,661 | |
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:
| | | September 30,
2020 | | December 31,
2019 | | June 30,
2021 | | December 31,
2020 |
| | | | (In thousands) | | | (In thousands) |
| Contract assets | Contract assets | | $ | 6,187 | | | $ | 5,675 | | Contract assets | | $ | 6,545 | | | $ | 6,306 | |
| Contract liabilities | Contract liabilities | | $ | (400) | | | $ | (650) | | Contract liabilities | | $ | (400) | | | $ | (500) | |
The contract assets and liabilities include both lease and service components. We did not recognize any revenue duringDuring the threesix months ended SeptemberJune 30, 2020,2021, we recognized $0.5 million of revenue that was previously included in contract liability as of December 31, 2019, and we recognized $0.7 million of revenue during2020. During the ninesix months ended SeptemberJune 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 September 30, 2019, that was previously included in contract liability as of December 31, 2018, and we recognized $0.6 million of revenue during the nine months ended September 30, 2019, that was previously included in contract liability as of December 31, 2018. During the three and the nine months ended September 30, 2020,2021, we also recognized $0.1$0.2 million and $0.5 million, respectively, of revenue included in contract assets at September 30, 2020.assets.
As of SeptemberJune 30, 2020,2021, we expect to recognize $2.2$1.8 billion in revenue related to our unfulfilled performance obligations under the terms of our long-term throughput agreements and leases expiring in 20212022 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, | Years Ending December 31, | | (In millions) | Years Ending December 31, | | (In millions) |
| Remainder of 2020 | | $ | 92 | | |
| 2021 | | 362 | | |
| Remainder of 2021 | | Remainder of 2021 | | $ | 168 | |
| 2022 | 2022 | | 332 | | 2022 | | 311 | |
| 2023 | 2023 | | 295 | | 2023 | | 275 | |
| 2024 | 2024 | | 255 | | 2024 | | 237 | |
| 2025 | 2025 | | 188 | | 2025 | | 171 | |
| 2026 | | 2026 | | 157 | |
| Thereafter | Thereafter | | 650 | | Thereafter | | 484 | |
| Total | Total | | $ | 2,174 | | Total | | $ | 1,803 | |
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
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (In thousands) |
| Pipelines | | $ | 68,292 | | | $ | 73,163 | | | $ | 197,718 | | | $ | 220,526 | |
| Terminals, tanks and loading racks | | 39,036 | | | 42,454 | | | 112,814 | | | 119,121 | |
| Refinery processing units | | 20,403 | | | 20,278 | | | 59,860 | | | 61,496 | |
| | $ | 127,731 | | | $ | 135,895 | | | $ | 370,392 | | | $ | 401,143 | |
During the three and nine months ended September 30, 2020, lease revenues amounted to $90.1 million and $269.9 million, respectively, and service revenues amounted to $37.7 million and $100.5 million, respectively. Both of these revenues were recorded within affiliates and third parties revenues on our consolidated statement of income.
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
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 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 $6.6$6.0 million and $7.0$6.4 million as of SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively, with accumulated depreciation of $3.4$3.3 million and $4.5$3.4 million as of SeptemberJune 30, 20202021 and December 31, 2019,2020, 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 1 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):
| | | September 30, 2020 | | December 31, 2019 | | June 30,
2021 | | December 31, 2020 |
| | Operating leases: | Operating leases: | | Operating leases: | |
| Operating lease right-of-use assets, net | Operating lease right-of-use assets, net | | $ | 3,164 | | | $ | 3,255 | | Operating lease right-of-use assets, net | | $ | 2,724 | | | $ | 2,979 | |
| | Current operating lease liabilities | Current operating lease liabilities | | 1,199 | | | 1,126 | | Current operating lease liabilities | | 795 | | | 875 | |
| Noncurrent operating lease liabilities | Noncurrent operating lease liabilities | | 2,333 | | | 2,482 | | Noncurrent operating lease liabilities | | 2,303 | | | 2,476 | |
| Total operating lease liabilities | Total operating lease liabilities | | $ | 3,532 | | | $ | 3,608 | | Total operating lease liabilities | | $ | 3,098 | | | $ | 3,351 | |
| | Finance leases: | Finance leases: | | Finance leases: | |
| Properties and equipment | Properties and equipment | | $ | 6,554 | | | $ | 6,968 | | Properties and equipment | | $ | 6,019 | | | $ | 6,410 | |
| Accumulated amortization | Accumulated amortization | | (3,354) | | | (4,547) | | Accumulated amortization | | (3,255) | | | (3,390) | |
| Properties and equipment, net | Properties and equipment, net | | $ | 3,200 | | | $ | 2,421 | | Properties and equipment, net | | $ | 2,764 | | | $ | 3,020 | |
| | Current finance lease liabilities | Current finance lease liabilities | | $ | 3,459 | | | $ | 3,224 | | Current finance lease liabilities | | $ | 3,755 | | | $ | 3,713 | |
| Noncurrent finance lease liabilities | Noncurrent finance lease liabilities | | 69,180 | | | 70,475 | | Noncurrent finance lease liabilities | | 66,434 | | | 68,047 | |
| Total finance lease liabilities | Total finance lease liabilities | | $ | 72,639 | | | $ | 73,699 | | Total finance lease liabilities | | $ | 70,189 | | | $ | 71,760 | |
| | Weighted average remaining lease term (in years) | Weighted average remaining lease term (in years) | | Weighted average remaining lease term (in years) | |
| Operating leases | Operating leases | | 6.0 | | 6.5 | Operating leases | | 5.8 | | 5.9 |
| Finance leases | Finance leases | | 16.2 | | 17.0 | Finance leases | | 15.5 | | 15.9 |
| | Weighted average discount rate | Weighted average discount rate | | Weighted average discount rate | |
| Operating leases | Operating leases | | 4.8% | | 5.0% | Operating leases | | 4.7% | | 4.8% |
| Finance leases | Finance leases | | 5.6% | | 6.0% | Finance leases | | 5.6% | | 5.6% |
Supplemental cash flow and other information related to leases were as follows:
| | | | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | |
| | 2020 | | 2019 | | |
| | (In thousands) |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
| Operating cash flows on operating leases | | $ | 773 | | | $ | 5,467 | | | |
| Operating cash flows on finance leases | | $ | 3,241 | | | $ | 75 | | | |
| Financing cash flows on finance leases | | $ | 2,666 | | | $ | 780 | | | |
| | | | | | | | | | | | | | | | |
| | Six Months Ended
June 30, | | |
| | 2021 | | 2020 | | |
| | (In thousands) |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
| Operating cash flows on operating leases | | $ | 576 | | | $ | 518 | | | |
| Operating cash flows on finance leases | | $ | 2,105 | | | $ | 2,157 | | | |
| Financing cash flows on finance leases | | $ | 1,747 | | | $ | 1,972 | | | |
Maturities of lease liabilities were as follows:
| | | September 30, 2020 | | June 30, 2021 |
| | Operating | | Finance | | Operating | | Finance |
| | (In thousands) | | (In thousands) |
| 2020 | | $ | 257 | | | $ | 1,931 | | |
| 2021 | 2021 | | 906 | | | 7,403 | | 2021 | | $ | 507 | | | $ | 3,662 | |
| 2022 | 2022 | | 627 | | | 7,277 | | 2022 | | 690 | | | 7,332 | |
| 2023 | 2023 | | 607 | | | 7,320 | | 2023 | | 603 | | | 7,375 | |
| 2024 | 2024 | | 494 | | | 6,856 | | 2024 | | 497 | | | 6,918 | |
| 2025 and thereafter | | 1,179 | | | 80,313 | | |
| 2025 | | 2025 | | 429 | | | 6,456 | |
| 2026 and thereafter | | 2026 and thereafter | | 787 | | | 73,888 | |
| Total lease payments | Total lease payments | | 4,070 | | | 111,100 | | Total lease payments | | 3,513 | | | 105,631 | |
| Less: Imputed interest | Less: Imputed interest | | (538) | | | (38,461) | | Less: Imputed interest | | (415) | | | (35,442) | |
| Total lease obligations | Total lease obligations | | 3,532 | | | 72,639 | | Total lease obligations | | 3,098 | | | 70,189 | |
| Less: Current lease liabilities | Less: Current lease liabilities | | (1,199) | | | (3,459) | | Less: Current lease liabilities | | (795) | | | (3,755) | |
| Noncurrent lease liabilities | Noncurrent lease liabilities | | $ | 2,333 | | | $ | 69,180 | | Noncurrent lease liabilities | | $ | 2,303 | | | $ | 66,434 | |
The components of lease expense were as follows:
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| | (In thousands) | | (In thousands) |
| Operating lease costs | Operating lease costs | | $ | 242 | | | $ | 1,852 | | | $ | 745 | | | $ | 5,420 | | Operating lease costs | | $ | 249 | | | $ | 230 | | | $ | 547 | | | $ | 503 | |
| Finance lease costs | Finance lease costs | | Finance lease costs | |
| Amortization of assets | Amortization of assets | | 251 | | | 213 | | | 766 | | | 711 | | Amortization of assets | | 200 | | | 273 | | | 412 | | | 515 | |
| Interest on lease liabilities | Interest on lease liabilities | | 1,032 | | | 24 | | | 3,108 | | | 75 | | Interest on lease liabilities | | 994 | | | 1,040 | | | 2,001 | | | 2,077 | |
| Variable lease cost | Variable lease cost | | 64 | | | 41 | | | 159 | | | 112 | | Variable lease cost | | 67 | | | 46 | | | 133 | | | 95 | |
| Total net lease cost | Total net lease cost | | $ | 1,589 | | | $ | 2,130 | | | $ | 4,778 | | | $ | 6,318 | | Total net lease cost | | $ | 1,510 | | | $ | 1,589 | | | $ | 3,093 | | | $ | 3,190 | |
Lessor Accounting
As discussed in Note 3,1, 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 throughputDuring the six months ended June 30, 2021, we entered into new agreements and modified other agreements with Delek was renewed during the three months ending June 30, 2020. Certain components of this agreementHFC 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 termterms to anyone
other than Delek.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 ninesix months ended SeptemberJune 30, 20202021 composed of the following:
| | | | | | | | |
| | |
| | (In thousands)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 leaseslease | | $ | 33,834 | |
ThisThese sales-type lease transaction,transactions, including the related gain, was awere non-cash transaction.transactions.
Lease income recognized was as follows:
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| | (In thousands) | | (In thousands) |
| Operating lease revenues | Operating lease revenues | | $ | 87,125 | | | $ | 94,459 | | | $ | 262,518 | | | $ | 282,747 | | Operating lease revenues | | $ | 84,426 | | | $ | 84,872 | | | $ | 170,698 | | | $ | 175,671 | |
| Direct financing lease interest income | Direct financing lease interest income | | 525 | | | 539 | | | 1,572 | | | 1,558 | | Direct financing lease interest income | | 523 | | | 524 | | | 1,047 | | | 1,048 | |
| Gain on sales-type leases | Gain on sales-type leases | | 0 | | | 35,166 | | | 33,834 | | | 35,166 | | Gain on sales-type leases | | 27 | | | 33,834 | | | 24,677 | | | 33,834 | |
| Sales-type lease interest income | Sales-type lease interest income | | 2,278 | | | 1,675 | | | 6,218 | | | 1,675 | | 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 | Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable | | 2,952 | | | 3,075 | | | 7,413 | | | 3,075 | | 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 SeptemberJune 30, 2020:2021:
| | | Operating | | Finance | | Sales-type | | Operating | | Finance | | Sales-type |
| Years Ending December 31, | Years Ending December 31, | | (In thousands) | Years Ending December 31, | | (In thousands) |
| Remainder of 2020 | | $ | 77,568 | | | $ | 530 | | | $ | 3,114 | | |
| 2021 | | 306,771 | | | 2,128 | | | 12,456 | | |
| Remainder of 2021 | | Remainder of 2021 | | $ | 141,624 | | | $ | 1,088 | | | $ | 14,481 | |
| 2022 | 2022 | | 304,315 | | | 2,145 | | | 12,456 | | 2022 | | 283,151 | | | 2,171 | | | 28,962 | |
| 2023 | 2023 | | 273,362 | | | 2,162 | | | 12,456 | | 2023 | | 252,705 | | | 2,175 | | | 25,056 | |
| 2024 | 2024 | | 235,280 | | | 2,179 | | | 12,456 | | 2024 | | 216,601 | | | 2,192 | | | 21,827 | |
| 2025 and thereafter | | 739,158 | | | 40,787 | | | 73,044 | | |
| Total | | $ | 1,936,454 | | | $ | 49,931 | | | $ | 125,982 | | |
| 2025 | | 2025 | | 153,746 | | | 2,209 | | | 18,399 | |
| 2026 and thereafter | | 2026 and thereafter | | 558,415 | | | 38,837 | | | 144,721 | |
| Total lease receipt payments | | Total lease receipt payments | | $ | 1,606,242 | | | $ | 48,672 | | | $ | 253,446 | |
| Less: Imputed interest | | Less: Imputed interest | | | | (32,255) | | | (198,123) | |
| | | 16,417 | | | 55,323 | |
| Unguaranteed residual assets at end of leases | | Unguaranteed residual assets at end of leases | | 0 | | | 144,036 | |
| Net investment in leases | | Net investment in leases | | $ | 16,417 | | | $ | 199,359 | |
Net investments in leases recorded on our balance sheet were composed of the following:
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| | Sales-type Leases | | Direct Financing Leases | | Sales-type Leases | | Direct Financing Leases | | Sales-type Leases | | Direct Financing Leases | | Sales-type Leases | | Direct Financing Leases |
| | (In thousands) | | (In thousands) | | (In thousands) | | (In thousands) |
Lease receivables (1) | Lease receivables (1) | | $ | 90,606 | | | $ | 16,469 | | | $ | 68,457 | | | $ | 16,511 | | Lease receivables (1) | | $ | 126,147 | | | $ | 16,417 | | | $ | 88,922 | | | $ | 16,452 | |
| Unguaranteed residual assets | Unguaranteed residual assets | | 63,718 | | | 0 | | | 52,933 | | | 0 | | Unguaranteed residual assets | | 73,212 | | | 0 | | | 64,551 | | | 0 | |
| Net investment in leases | Net investment in leases | | $ | 154,324 | | | $ | 16,469 | | | $ | 121,390 | | | $ | 16,511 | | 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:
| | | | | September 30, 2020 | | December 31, 2019 | | | June 30, 2021 | | December 31, 2020 |
| Financial Instrument | Financial Instrument | | Fair Value Input Level | | Carrying
Value | | Fair Value | | Carrying
Value | | Fair Value | Financial Instrument | | Fair Value Input Level | | Carrying
Value | | Fair Value | | Carrying
Value | | Fair Value |
| | | | | (In thousands) | | | | | (In thousands) |
| Liabilities: | Liabilities: | | Liabilities: | |
| 6% Senior Notes | | Level 2 | | 0 | | | 0 | | | 496,531 | | | 522,045 | | |
| | 5% Senior Notes | 5% Senior Notes | | Level 2 | | 491,874 | | | 490,155 | | | 0 | | | 0 | | 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 third quarter of 2020,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 threesix months ended SeptemberJune 30, 2020,2021, 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 arewere as follows:
| | | September 30,
2020 | | December 31,
2019 | | June 30,
2021 | | December 31,
2020 |
| | | | (In thousands) | | | (In thousands) |
| Pipelines, terminals and tankage | | $ | 1,609,453 | | | $ | 1,602,231 | | |
Pipelines, terminals and tankage1 | | Pipelines, terminals and tankage1 | | $ | 1,538,892 | | | $ | 1,575,815 | |
| Refinery assets | Refinery assets | | 349,030 | | | 348,093 | | Refinery assets | | 348,882 | | | 348,882 | |
| Land and right of way | Land and right of way | | 87,076 | | | 86,190 | | Land and right of way | | 86,781 | | | 87,076 | |
| Construction in progress | Construction in progress | | 40,734 | | | 10,930 | | Construction in progress | | 99,420 | | | 58,467 | |
| Other | | 9,266 | | | 14,110 | | |
Other1 | | Other1 | | 44,819 | | | 46,201 | |
| | 2,095,559 | | | 2,061,554 | | | 2,118,794 | | | 2,116,441 | |
| Less accumulated depreciation | Less accumulated depreciation | | 647,635 | | | 594,455 | | Less accumulated depreciation | | (688,483) | | | (665,756) | |
| | $ | 1,447,924 | | | $ | 1,467,099 | | | $ | 1,430,311 | | | $ | 1,450,685 | |
(1)Prior period balances have been reclassified to be comparative to current period.
Depreciation expense was $64.3$42.7 million and $61.7$41.7 million for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, 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 arewere as follows:
| | | Useful Life | | September 30,
2020 | | December 31,
2019 | | Useful Life | | June 30,
2021 | | December 31,
2020 |
| | | | | | (In thousands) | | | | | (In thousands) |
| Delek transportation agreement | Delek transportation agreement | | 30 years | | $ | 59,933 | | | $ | 59,933 | | Delek transportation agreement | | 30 years | | $ | 59,933 | | | $ | 59,933 | |
| HFC transportation agreement | HFC transportation agreement | | 10-15 years | | 75,131 | | | 75,131 | | HFC transportation agreement | | 10-15 years | | 75,131 | | | 75,131 | |
| Customer relationships | Customer relationships | | 10 years | | 69,683 | | | 69,683 | | Customer relationships | | 10 years | | 69,683 | | | 69,683 | |
| Other | Other | | 50 | | | 50 | | Other | | 20 years | | 50 | | | 50 | |
| | 204,797 | | | 204,797 | | | 204,797 | | | 204,797 | |
| Less accumulated amortization | Less accumulated amortization | | 113,980 | | | 103,475 | | Less accumulated amortization | | (124,486) | | | (117,482) | |
| | $ | 90,817 | | | $ | 101,322 | | | $ | 80,311 | | | $ | 87,315 | |
Amortization expense was $10.5$7.0 million for both of the ninesix months ended SeptemberJune 30, 20202021 and 2019.2020. We estimate amortization expense to be $14.0 million for each of the next two years,2022, $9.9 million in 2023, and $9.1 million infor 2024 and 2025.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 zero0 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 $1.8$1.6 million for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, and $5.7$4.1 million and $5.4$3.7 million for the ninesix months ended SeptemberJune 30, 20202021 and 2019, respectively.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 4 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 SeptemberJune 30, 2020,2021, we had 2 types of incentive-based awards outstanding, which are described below. The compensation cost charged against income was $0.6 million and $0.5 million for both the three months ended SeptemberJune 30, 2021 and 2020, and 2019, respectively, and $1.5$1.2 million and $1.8$1.0 million for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, 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 SeptemberJune 30, 2020,2021, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which 1,122,230856,171 were available to be 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, as of September 30, 2020, we granted restrictedgrant phantom units to our 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 ninesix months ended SeptemberJune 30, 2020,2021, 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 | | (5,646) | | | 29.94 | |
| Forfeited | | (8,578) | | | 25.47 | |
| Outstanding at September 30, 2020 (nonvested) | | 130,981 | | | $ | 26.11 | |
| | | | | | | | | | | | | | |
| 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 valuevalues of phantom units that were vested and transferred to recipients during the ninesix months ended SeptemberJune 30, 2021 and 2020 was $0.2 million. NaN restricted or phantom units vestedwere $2 thousand and transferred to recipients during the nine months ended September 30, 2019.$0.1 million, respectively. As of SeptemberJune 30, 2020, $0.92021, $2.0 million of total unrecognized compensation expense related to unvested restricted and phantom unit grants is expected to be recognized over a weighted-average period of 1.11.3 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 50% to 150% or 0% to 200%. As of September 30, 2020, estimated unit payouts for outstanding nonvested performance unit awards ranged between 100% and 120% of the target number of performance units granted.
We did not grant any performance units during the ninesix months ended SeptemberJune 30, 2020.2021. 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 ninesix months ended SeptemberJune 30, 2020,2021, is presented below:
| | | | | | | | |
| Performance Units | | Units |
Outstanding at January 1, 20202021 (nonvested) | | 53,44577,472 | |
| | |
| Vesting and transfer of common units to recipients | | (11,634)(10,881) | |
| | |
Outstanding at SeptemberJune 30, 20202021 (nonvested) | | 41,81166,591 | |
The grant date fair value of performance units vested and transferred to recipients during both of the ninesix months ended SeptemberJune 30, 20202021 and 20192020 was $0.4 million and $0.3 million, respectively.million. Based on the weighted-average fair value of performance units outstanding at SeptemberJune 30, 2020,2021, of $1.2 million, there was $0.4$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 1.31.7 years.
During the ninesix months ended SeptemberJune 30, 2020,2021, 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
We have a $1.4 billionIn April 2021, we amended our senior secured revolving credit facility (the “Credit Agreement”) expiring indecreasing the size of the facility from $1.4 billion to $1.2 billion and extending the maturity date to July 2022.27, 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 it containscontinues to provide for an accordion feature givingthat allows us the ability to increase commitments under the size of the facility byCredit Agreement up to $300 million with additional lender commitments.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 expirationmaturity 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 SeptemberJune 30, 2020.2021.
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 SeptemberJune 30, 2020.2021. 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 waswere as follows:
| | | September 30,
2020 | | December 31,
2019 | | June 30,
2021 | | December 31,
2020 |
| | (In thousands) | | (In thousands) |
| Credit Agreement | Credit Agreement | | Credit Agreement | |
| Amount outstanding | Amount outstanding | | 948,000 | | | $ | 965,500 | | Amount outstanding | | $ | 870,000 | | | 913,500 | |
| | 6% Senior Notes | | |
| Principal | | 0 | | | 500,000 | | |
| Unamortized premium and debt issuance costs | | 0 | | | (3,469) | | |
| | | 0 | | | 496,531 | | |
| | 5% Senior Notes | 5% Senior Notes | | 5% Senior Notes | |
| Principal | Principal | | 500,000 | | | 0 | | Principal | | 500,000 | | | 500,000 | |
| Unamortized premium and debt issuance costs | Unamortized premium and debt issuance costs | | (8,126) | | | 0 | | Unamortized premium and debt issuance costs | | (7,430) | | | (7,897) | |
| | 491,874 | | | 0 | | | 492,570 | | | 492,103 | |
| | Total long-term debt | Total long-term debt | | $ | 1,439,874 | | | $ | 1,462,031 | | 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 20212022 to 2036, and revenues from these agreementsHFC accounted for 79% and 80% of our total revenues for both the three months and ninesix months ended SeptemberJune 30, 2020, respectively.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 SeptemberJune 30, 2020,2021, these agreements with HFC require minimum annualized payments to us of $351.1$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 arewere as follows:
•Revenues received from HFC were $101.0$99.1 million and $106.0$95.6 million for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, and $298.0$201.1 million and $311.8$197.0 million for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively.
•HFC charged us general and administrative services under the Omnibus Agreement of $0.7 million for both of the three months ended SeptemberJune 30, 2021 and 2020, and 2019, and $2.0 million and 1.9$1.3 million for both the ninesix months ended SeptemberJune 30, 20202021 and 2019, respectively.2020.
•We reimbursed HFC for costs of employees supporting our operations of $14.0$14.3 million and $13.7$13.2 million for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, and $41.3$28.7 million and $40.5$27.3 million for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively.
•HFC reimbursed us $2.3$1.2 million and $4.6$0.9 million for the three months ended SeptemberJune 30, 2021 and 2020, respectively, and 2019,$4.3 million and $4.0 million for the six months ended June 30, 2021 and 2020, respectively, for expense and capital projects, and $6.3 million and $10.4 million for the nine months ended September 30, 2020 and 2019, respectively.projects.
•We distributed $18.4$20.9 million and $37.6$18.4 million in the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, and $74.3$41.7 million and $112.4$56.0 million forin the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, to HFC as regular distributions on its common units.
•Accounts receivable from HFC were $46.5$46.3 million and $49.7$48.0 million at SeptemberJune 30, 2020,2021, and December 31, 2019,2020, respectively.
•Accounts payable to HFC were $6.9$15.0 million and $16.7$18.1 million at SeptemberJune 30, 2020,2021, and December 31, 2019,2020, respectively.
•Deferred revenue in the consolidated balance sheets at Septemberincluded $0.4 million for both June 30, 20202021 and December 31, 2019, included $0.4 million and $0.5 million, respectively,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 SeptemberJune 30, 2021 and 2020, respectively, and 2019, and $1.5$1.0 million for both of the ninesix months ended SeptemberJune 30, 20202021 and 2019 .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 both of the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, and $7.1$12.5 million and $2.4$4.8 million for the ninesix months ended SeptemberJune 30, 2021 and 2020, respectively.
•HEP and 2019, respectively.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
•On October 31, 2017, we closedterms, in each case effective January 1, 2021: (1) a ten-year lease with 2 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 equity restructuring transaction withannual lease payment of approximately $5 million, (2) a five-year contango service fee arrangement that will utilize HEP Logistics,tank assets inside the Cheyenne Refinery where HFC will pay a wholly-owned subsidiary ofbase 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 general partnertermination 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 which the incentive distribution rights held by HEP Logistics were canceled, and HEP Logistics' 2% general partner interestContribution Agreement (described in HEP was convertedNote 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 non-economic general partner interestdefinitive agreement to divest its refinery in HEP. InDavis 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 we issued 37,250,000equal to $232.5 million plus the certain accounts receivable of our common unitsHEP in respect of such assets, with such sale to HEP Logistics. In addition, HEP Logistics agreedbe effective immediately prior to waive $2.5 millionthe closing of limited partner cash distributions for eachthe sale of twelve consecutive quarters beginning with the first quarterWoods 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 units issued as consideration were eligible to receive distributions. This waiverclosing of limited partner cash distributions expired after the cash distribution for the second quarter of 2020, which was made during the third quarter of 2020.such sale.
Note 11: Partners’ Equity, Income Allocations and Cash Distributions
As of SeptemberJune 30, 2020,2021, 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 SeptemberJune 30, 2020,2021, 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 OctoberJuly 22, 2020,2021, we announced our cash distribution for the thirdsecond quarter of 20202021 of $0.35 per unit. The distribution is payable on all common units and will be paid November 12, 2020, August 13, 2021, to all unitholders of record on NovemberAugust 2, 2020.2021.
Our regular quarterly cash distribution to the limited partners will be $37.0 million for the three months ended SeptemberJune 30, 20202021 and was $68.5$34.5 million for the three months ended SeptemberJune 30, 2019.2020. For the ninesix months ended SeptemberJune 30, 2020,2021, the regular quarterly distribution to the limited partners will be $105.9$74.1 million and was $205.2$68.9 million for the ninesix months ended SeptemberJune 30, 2019.2020. 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 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
September 30, | | Nine Months Ended
September 30, | | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| | (In thousands, except per unit data) | | (In thousands, except per unit data) |
| | Net income attributable to the partners | Net income attributable to the partners | | $ | 17,813 | | | $ | 82,345 | | | $ | 119,144 | | | $ | 179,217 | | Net income attributable to the partners | | $ | 55,745 | | | $ | 76,470 | | | $ | 120,142 | | | $ | 101,331 | |
| Less: Participating securities’ share in earnings | | Less: Participating securities’ share in earnings | | (190) | | | 0 | | | (411) | | | 0 | |
| Net income attributable to common units | | Net income attributable to common units | | 55,555 | | | 76,470 | | | 119,731 | | | 101,331 | |
| Weighted average limited partners' units outstanding | Weighted average limited partners' units outstanding | | 105,440 | | | 105,440 | | | 105,440 | | | 105,440 | | Weighted average limited partners' units outstanding | | 105,440 | | | 105,440 | | | 105,440 | | | 105,440 | |
| Limited partners' per unit interest in earnings - basic and diluted | Limited partners' per unit interest in earnings - basic and diluted | | $ | 0.17 | | | $ | 0.78 | | | $ | 1.13 | | | $ | 1.70 | | Limited partners' per unit interest in earnings - basic and diluted | | $ | 0.53 | | | $ | 0.73 | | | $ | 1.14 | | | $ | 0.96 | |
Note 13:Environmental
We expensed $1.0 million and $1.6$0.5 million for the three and ninesix months ended SeptemberJune 30, 2020, respectively,2021 for environmental remediation obligations, and we expensed $0.3$0.5 million and $0.7 million for both of the three and ninesix months ended SeptemberJune 30, 2019.2020, respectively. The accrued environmental liability, net of expected recoveries from indemnifying parties, reflected in our consolidated balance sheets was $5.7$4.3 million and $5.5$4.5 million at SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively, of which $3.5$2.2 million and $2.5 million, was classified as other long-term liabilities for both periods.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 for the periods ending Septemberas of June 30, 20202021 and December 31, 2019,2020, 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 2 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, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (In thousands) |
| Revenues: | | | | | | | | |
| Pipelines and terminals - affiliate | | $ | 78,116 | | | $ | 75,990 | | | $ | 157,546 | | | $ | 157,534 | |
| Pipelines and terminals - third-party | | 27,093 | | | 19,244 | | | 52,350 | | | 45,670 | |
| Refinery processing units - affiliate | | 21,026 | | | 19,573 | | | 43,522 | | | 39,457 | |
| Total segment revenues | | $ | 126,235 | | | $ | 114,807 | | | $ | 253,418 | | | $ | 242,661 | |
| | | | | | | | |
| Segment operating income: | | | | | | | | |
Pipelines and terminals(1) | | $ | 49,391 | | | $ | 45,630 | | | $ | 90,875 | | | $ | 104,533 | |
| Refinery processing units | | 9,773 | | | 9,406 | | | 18,008 | | | 19,398 | |
| 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) | |
| Interest and financing costs, net | | (7,324) | | | (10,966) | | | (14,016) | | | (26,515) | |
| | | | | | | | |
| Loss on early extinguishment of debt | | 0 | | | 0 | | | 0 | | | (25,915) | |
| Equity in earnings of equity method investments | | 3,423 | | | 2,156 | | | 5,186 | | | 3,870 | |
| Gain on sales-type leases | | 27 | | | 33,834 | | | 24,677 | | | 33,834 | |
| Gain (loss) on sale of assets and other | | 5,415 | | | 468 | | | 5,917 | | | 974 | |
| Income before income taxes | | $ | 57,858 | | | $ | 77,993 | | | $ | 124,832 | | | $ | 104,942 | |
| | | | | | | | |
| Capital Expenditures: | | | | | | | | |
| Pipelines and terminals | | $ | 25,559 | | | $ | 11,798 | | | $ | 58,777 | | | $ | 30,416 | |
| Refinery processing units | | 598 | | | 0 | | | 598 | | | 324 | |
| Total capital expenditures | | $ | 26,157 | | | $ | 11,798 | | | $ | 59,375 | | | $ | 30,740 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | |
| | 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (In thousands) |
| Revenues: | | | | | | | | |
| Pipelines and terminals - affiliate | | $ | 80,589 | | | $ | 85,749 | | | $ | 238,123 | | | $ | 250,259 | |
| Pipelines and terminals - third-party | | 26,739 | | | 29,868 | | | 72,409 | | | 89,388 | |
| Refinery processing units - affiliate | | 20,403 | | | 20,278 | | | 59,860 | | | 61,496 | |
| Total segment revenues | | $ | 127,731 | | | $ | 135,895 | | | $ | 370,392 | | | $ | 401,143 | |
| | | | | | | | |
| Segment operating income: | | | | | | | | |
| Pipelines and terminals | | $ | 15,912 | | | $ | 56,944 | | | $ | 120,445 | | | $ | 178,112 | |
| Refinery processing units | | 9,973 | | | 9,906 | | | 29,371 | | | 27,794 | |
| Total segment operating income | | 25,885 | | | 66,850 | | | 149,816 | | | 205,906 | |
| Unallocated general and administrative expenses | | (2,332) | | | (2,714) | | | (7,569) | | | (7,322) | |
| Interest and financing costs, net | | (11,301) | | | (16,564) | | | (37,816) | | | (53,737) | |
| | | | | | | | |
| Loss on early extinguishment of debt | | 0 | | | 0 | | | (25,915) | | | 0 | |
| Equity in earnings of equity method investments | | 1,316 | | | 1,334 | | | 5,186 | | | 5,217 | |
| Gain on sales-type leases | | 0 | | | 35,166 | | | 33,834 | | | 35,166 | |
| Gain (loss) on sale of assets and other | | 7,465 | | | 142 | | | 8,439 | | | (57) | |
| Income before income taxes | | $ | 21,033 | | | $ | 84,214 | | | $ | 125,975 | | | $ | 185,173 | |
| | | | | | | | |
| Capital Expenditures: | | | | | | | | |
| Pipelines and terminals | | $ | 7,902 | | | $ | 5,320 | | | $ | 38,318 | | | $ | 23,072 | |
| Refinery processing units | | 0 | | | 756 | | | 324 | | | 756 | |
| Total capital expenditures | | $ | 7,902 | | | $ | 6,076 | | | $ | 38,642 | | | $ | 23,828 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| | (In thousands) |
| Identifiable assets: | | | | |
Pipelines and terminals (1) | | $ | 1,712,033 | | | $ | 1,749,843 | |
| Refinery processing units | | 305,999 | | | 305,897 | |
| Other | | 143,853 | | | 143,492 | |
| Total identifiable assets | | $ | 2,161,885 | | | $ | 2,199,232 | |
(1) Includes goodwill of $234.7 million as of September 30, 2020 and $270.3 million as of 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, other than Holly Energy Finance Corp. and certain immaterial 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
| | September 30, 2020 | | Parent | | Guarantor
Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated | |
| June 30, 2021 | | June 30, 2021 | | Parent | | Guarantor
Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated |
| | | | (In thousands) | | | (In thousands) |
| ASSETS | ASSETS | | ASSETS | |
| Current assets: | Current assets: | | Current assets: | |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 4,000 | | | $ | (1,113) | | | $ | 15,204 | | | $ | 0 | | | $ | 18,091 | | Cash and cash equivalents | | $ | 871 | | | $ | (423) | | | $ | 19,113 | | | $ | 0 | | | $ | 19,561 | |
| Accounts receivable | Accounts receivable | | 0 | | | 56,434 | | | 4,982 | | | (1,055) | | | 60,361 | | Accounts receivable | | 0 | | | 53,348 | | | 7,931 | | | (207) | | | 61,072 | |
| Prepaid and other current assets | Prepaid and other current assets | | 149 | | | 5,818 | | | 315 | | | 6,282 | | Prepaid and other current assets | | 368 | | | 8,156 | | | 753 | | | 0 | | | 9,277 | |
| Total current assets | Total current assets | | 4,149 | | | 61,139 | | | 20,501 | | | (1,055) | | | 84,734 | | Total current assets | | 1,239 | | | 61,081 | | | 27,797 | | | (207) | | | 89,910 | |
| | Properties and equipment, net | Properties and equipment, net | | 0 | | | 1,096,454 | | | 351,470 | | | 0 | | | 1,447,924 | | Properties and equipment, net | | 0 | | | 1,037,480 | | | 392,831 | | | 0 | | | 1,430,311 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | | 0 | | | 2,990 | | | 174 | | | 0 | | | 3,164 | | Operating lease right-of-use assets | | 0 | | | 2,603 | | | 121 | | | 0 | | | 2,724 | |
| Net investment in leases | Net investment in leases | | 0 | | | 167,238 | | | 0 | | | 167,238 | | Net investment in leases | | 0 | | | 211,550 | | | 0 | | | 0 | | | 211,550 | |
Investment in subsidiaries
| Investment in subsidiaries
| | 1,800,621 | | | 280,277 | | | 0 | | | (2,080,898) | | | 0 | | Investment in subsidiaries
| | 1,788,648 | | | 299,779 | | | 0 | | | (2,088,427) | | | 0 | |
| Intangible assets, net | Intangible assets, net | | 0 | | | 90,817 | | | 0 | | | 0 | | | 90,817 | | Intangible assets, net | | 0 | | | 80,311 | | | 0 | | | 0 | | | 80,311 | |
| Goodwill | Goodwill | | 0 | | | 234,684 | | | 0 | | | 0 | | | 234,684 | | Goodwill | | 0 | | | 223,650 | | | 0 | | | 0 | | | 223,650 | |
| Equity method investments | Equity method investments | | 0 | | | 82,389 | | | 39,657 | | | 0 | | | 122,046 | | Equity method investments | | 0 | | | 79,448 | | | 37,988 | | | 0 | | | 117,436 | |
| Other assets | Other assets | | 4,879 | | | 6,399 | | | 0 | | | 0 | | | 11,278 | | Other assets | | 9,167 | | | 7,763 | | | 0 | | | 0 | | | 16,930 | |
| Total assets | Total assets | | $ | 1,809,649 | | | $ | 2,022,387 | | | $ | 411,802 | | | $ | (2,081,953) | | | $ | 2,161,885 | | Total assets | | $ | 1,799,054 | | | $ | 2,003,665 | | | $ | 458,737 | | | $ | (2,088,634) | | | $ | 2,172,822 | |
| | LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | LIABILITIES AND EQUITY | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Accounts payable | Accounts payable | | $ | 0 | | | $ | 20,494 | | | $ | 8,505 | | | $ | (1,055) | | | $ | 27,944 | | Accounts payable | | $ | 0 | | | $ | 28,247 | | | $ | 12,515 | | | $ | (207) | | | $ | 40,555 | |
| Accrued interest | Accrued interest | | 4,691 | | | 0 | | | 0 | | | 0 | | | 4,691 | | Accrued interest | | 10,869 | | | 0 | | | 0 | | | 0 | | | 10,869 | |
| Deferred revenue | Deferred revenue | | 0 | | | 10,620 | | | 400 | | | 0 | | | 11,020 | | Deferred revenue | | 0 | | | 10,169 | | | 400 | | | 0 | | | 10,569 | |
| Accrued property taxes | Accrued property taxes | | 0 | | | 5,377 | | | 3,595 | | | 0 | | | 8,972 | | Accrued property taxes | | 0 | | | 2,391 | | | 2,666 | | | 0 | | | 5,057 | |
| Current operating lease liabilities | Current operating lease liabilities | | 0 | | | 1,130 | | | 69 | | | 0 | | | 1,199 | | Current operating lease liabilities | | 0 | | | 722 | | | 73 | | | 0 | | | 795 | |
| Current finance lease liabilities | Current finance lease liabilities | | 0 | | | 3,459 | | | 0 | | | 0 | | | 3,459 | | Current finance lease liabilities | | 0 | | | 3,755 | | | 0 | | | 0 | | | 3,755 | |
| Other current liabilities | Other current liabilities | | 3 | | | 2,748 | | | 98 | | | 0 | | | 2,849 | | Other current liabilities | | 137 | | | 2,499 | | | 307 | | | 0 | | | 2,943 | |
| Total current liabilities | Total current liabilities | | 4,694 | | | 43,828 | | | 12,667 | | | (1,055) | | | 60,134 | | Total current liabilities | | 11,006 | | | 47,783 | | | 15,961 | | | (207) | | | 74,543 | |
| | Long-term debt | Long-term debt | | 1,439,874 | | | 0 | | | 0 | | | 0 | | | 1,439,874 | | Long-term debt | | 1,362,570 | | | 0 | | | 0 | | | 0 | | | 1,362,570 | |
| Noncurrent operating lease liabilities | Noncurrent operating lease liabilities | | 0 | | | 2,333 | | | 0 | | | 0 | | | 2,333 | | Noncurrent operating lease liabilities | | 0 | | | 2,303 | | | 0 | | | 0 | | | 2,303 | |
| Noncurrent finance lease liabilities | Noncurrent finance lease liabilities | | 0 | | | 69,180 | | | 0 | | | 0 | | | 69,180 | | Noncurrent finance lease liabilities | | 0 | | | 66,434 | | | 0 | | | 0 | | | 66,434 | |
| Other long-term liabilities | Other long-term liabilities | | 260 | | | 13,093 | | | 508 | | | 0 | | | 13,861 | | Other long-term liabilities | | 260 | | | 11,215 | | | 438 | | | 0 | | | 11,913 | |
| Deferred revenue | Deferred revenue | | 0 | | | 41,376 | | | 0 | | | 0 | | | 41,376 | | Deferred revenue | | 0 | | | 32,645 | | | 0 | | | 0 | | | 32,645 | |
| Class B unit | Class B unit | | 0 | | | 51,956 | | | 0 | | | 0 | | | 51,956 | | Class B unit | | 0 | | | 54,637 | | | 0 | | | 0 | | | 54,637 | |
| Equity - partners | Equity - partners | | 364,821 | | | 1,800,621 | | | 280,277 | | | (2,080,898) | | | 364,821 | | Equity - partners | | 425,218 | | | 1,788,648 | | | 299,779 | | | (2,088,427) | | | 425,218 | |
| Equity - noncontrolling interest | | 0 | | | 0 | | | 118,350 | | | 0 | | | 118,350 | | |
| Equity - noncontrolling interests | | Equity - noncontrolling interests | | 0 | | | 0 | | | 142,559 | | | 0 | | | 142,559 | |
| Total liabilities and equity | Total liabilities and equity | | $ | 1,809,649 | | | $ | 2,022,387 | | | $ | 411,802 | | | $ | (2,081,953) | | | $ | 2,161,885 | | Total liabilities and equity | | $ | 1,799,054 | | | $ | 2,003,665 | | | $ | 458,737 | | | $ | (2,088,634) | | | $ | 2,172,822 | |
Condensed Consolidating Balance Sheet
| | December 31, 2019 | | Parent | | Guarantor
Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated | |
| December 31, 2020 | | December 31, 2020 | | Parent | | Guarantor
Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated |
| | | | (In thousands) | | | (In thousands) |
| ASSETS | ASSETS | | ASSETS | |
| Current assets: | Current assets: | | Current assets: | |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 4,790 | | | $ | (709) | | | $ | 9,206 | | | $ | 0 | | | $ | 13,287 | | Cash and cash equivalents | | $ | 1,627 | | | $ | (987) | | | $ | 21,350 | | | $ | 0 | | | $ | 21,990 | |
| Accounts receivable | Accounts receivable | | 0 | | | 60,229 | | | 8,549 | | | (331) | | | 68,447 | | Accounts receivable | | 0 | | | 56,522 | | | 6,308 | | | (315) | | | 62,515 | |
| Prepaid and other current assets | Prepaid and other current assets | | 282 | | | 6,710 | | | 637 | | | 0 | | | 7,629 | | Prepaid and other current assets | | 349 | | | 8,366 | | | 772 | | | 0 | | | 9,487 | |
| Total current assets | Total current assets | | 5,072 | | | 66,230 | | | 18,392 | | | (331) | | | 89,363 | | Total current assets | | 1,976 | | | 63,901 | | | 28,430 | | | (315) | | | 93,992 | |
| | Properties and equipment, net | Properties and equipment, net | | 0 | | | 1,133,534 | | | 333,565 | | | 0 | | | 1,467,099 | | Properties and equipment, net | | 0 | | | 1,087,184 | | | 363,501 | | | 0 | | | 1,450,685 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | | 0 | | | 3,243 | | | 12 | | | 0 | | | 3,255 | | Operating lease right-of-use assets | | 0 | | | 2,822 | | | 157 | | | 0 | | | 2,979 | |
| Net investment in leases | Net investment in leases | | 0 | | | 134,886 | | | 0 | | | 0 | | | 134,886 | | Net investment in leases | | 0 | | | 166,316 | | | 0 | | | 0 | | | 166,316 | |
| Investment in subsidiaries | Investment in subsidiaries | | 1,844,812 | | | 275,279 | | | 0 | | | (2,120,091) | | | 0 | | Investment in subsidiaries | | 1,789,808 | | | 286,883 | | | 0 | | | (2,076,691) | | | 0 | |
| Intangible assets, net | Intangible assets, net | | 0 | | | 101,322 | | | 0 | | | 0 | | | 101,322 | | Intangible assets, net | | 0 | | | 87,315 | | | 0 | | | 0 | | | 87,315 | |
| Goodwill | Goodwill | | 0 | | | 270,336 | | | 0 | | | 0 | | | 270,336 | | Goodwill | | 0 | | | 234,684 | | | 0 | | | 0 | | | 234,684 | |
| Equity method investments | Equity method investments | | 0 | | | 82,987 | | | 37,084 | | | 0 | | | 120,071 | | Equity method investments | | 0 | | | 81,089 | | | 39,455 | | | 0 | | | 120,544 | |
| Other assets | Other assets | | 6,722 | | | 6,178 | | | 0 | | | 0 | | | 12,900 | | Other assets | | 4,268 | | | 6,782 | | | 0 | | | 0 | | | 11,050 | |
| Total assets | Total assets | | $ | 1,856,606 | | | $ | 2,073,995 | | | $ | 389,053 | | | $ | (2,120,422) | | | $ | 2,199,232 | | Total assets | | $ | 1,796,052 | | | $ | 2,016,976 | | | $ | 431,543 | | | $ | (2,077,006) | | | $ | 2,167,565 | |
| | LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | LIABILITIES AND EQUITY | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Accounts payable | Accounts payable | | $ | 0 | | | $ | 29,895 | | | $ | 4,991 | | | $ | (331) | | | $ | 34,555 | | Accounts payable | | $ | 0 | | | $ | 30,252 | | | $ | 16,463 | | | $ | (315) | | | $ | 46,400 | |
| Accrued interest | Accrued interest | | 13,206 | | | 0 | | | 0 | | | 0 | | | 13,206 | | Accrued interest | | 10,892 | | | 0 | | | 0 | | | 0 | | | 10,892 | |
| Deferred revenue | Deferred revenue | | 0 | | | 9,740 | | | 650 | | | 0 | | | 10,390 | | Deferred revenue | | 0 | | | 10,868 | | | 500 | | | 0 | | | 11,368 | |
| Accrued property taxes | Accrued property taxes | | 0 | | | 2,737 | | | 1,062 | | | 0 | | | 3,799 | | Accrued property taxes | | 0 | | | 2,915 | | | 1,077 | | | 0 | | | 3,992 | |
| Current operating lease liabilities | Current operating lease liabilities | | 0 | | | 1,114 | | | 12 | | | 0 | | | 1,126 | | Current operating lease liabilities | | 0 | | | 804 | | | 71 | | | 0 | | | 875 | |
| Current finance lease liabilities | Current finance lease liabilities | | 0 | | | 3,224 | | | 0 | | | 0 | | | 3,224 | | Current finance lease liabilities | | 0 | | | 3,713 | | | 0 | | | 0 | | | 3,713 | |
| Other current liabilities | Other current liabilities | | 6 | | | 2,293 | | | 6 | | | 0 | | | 2,305 | | Other current liabilities | | 5 | | | 2,491 | | | 9 | | | 0 | | | 2,505 | |
| Total current liabilities | Total current liabilities | | 13,212 | | | 49,003 | | | 6,721 | | | (331) | | | 68,605 | | Total current liabilities | | 10,897 | | | 51,043 | | | 18,120 | | | (315) | | | 79,745 | |
| | Long-term debt | Long-term debt | | 1,462,031 | | | 0 | | | 0 | | | 0 | | | 1,462,031 | | Long-term debt | | 1,405,603 | | | 0 | | | 0 | | | 0 | | | 1,405,603 | |
| Noncurrent operating lease liabilities | Noncurrent operating lease liabilities | | 0 | | | 2,482 | | | 0 | | | 0 | | | 2,482 | | Noncurrent operating lease liabilities | | 0 | | | 2,476 | | | 0 | | | 0 | | | 2,476 | |
| Noncurrent finance lease liabilities | Noncurrent finance lease liabilities | | 0 | | | 70,475 | | | 0 | | | 0 | | | 70,475 | | Noncurrent finance lease liabilities | | 0 | | | 68,047 | | | 0 | | | 0 | | | 68,047 | |
| Other long-term liabilities | Other long-term liabilities | | 260 | | | 12,150 | | | 398 | | | 0 | | | 12,808 | | Other long-term liabilities | | 260 | | | 12,171 | | | 474 | | | 0 | | | 12,905 | |
| Deferred revenue | Deferred revenue | | 0 | | | 45,681 | | | 0 | | | 0 | | | 45,681 | | Deferred revenue | | 0 | | | 40,581 | | | 0 | | | 0 | | | 40,581 | |
| Class B unit | Class B unit | | 0 | | | 49,392 | | | 0 | | | 0 | | | 49,392 | | Class B unit | | 0 | | | 52,850 | | | 0 | | | 0 | | | 52,850 | |
| Equity - partners | Equity - partners | | 381,103 | | | 1,844,812 | | | 275,279 | | | (2,120,091) | | | 381,103 | | Equity - partners | | 379,292 | | | 1,789,808 | | | 286,883 | | | (2,076,691) | | | 379,292 | |
| Equity - noncontrolling interest | | 0 | | | 0 | | | 106,655 | | | 0 | | | 106,655 | | |
| Equity - noncontrolling interests | | Equity - noncontrolling interests | | 0 | | | 0 | | | 126,066 | | | 0 | | | 126,066 | |
| Total liabilities and equity | Total liabilities and equity | | $ | 1,856,606 | | | $ | 2,073,995 | | | $ | 389,053 | | | $ | (2,120,422) | | | $ | 2,199,232 | | Total liabilities and equity | | $ | 1,796,052 | | | $ | 2,016,976 | | | $ | 431,543 | | | $ | (2,077,006) | | | $ | 2,167,565 | |
Condensed Consolidating Statement of Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 | | Parent | | Guarantor Restricted
Subsidiaries | | Non-Guarantor Non-restricted Subsidiaries | | Eliminations | | Consolidated |
| | | (In thousands) |
| Revenues: | | | | | | | | | | |
| Affiliates | | $ | 0 | | | $ | 92,911 | | | $ | 6,231 | | | $ | 0 | | | $ | 99,142 | |
| Third parties | | 0 | | | 20,479 | | | 6,614 | | | 0 | | | 27,093 | |
| | 0 | | | 113,390 | | | 12,845 | | | 0 | | | 126,235 | |
| Operating costs and expenses: | | | | | | | | | | |
| Operations (exclusive of depreciation and amortization) | | 0 | | | 37,742 | | | 4,326 | | | 0 | | | 42,068 | |
| Depreciation and amortization | | 0 | | | 20,651 | | | 4,352 | | | 0 | | | 25,003 | |
| General and administrative | | 907 | | | 1,940 | | | 0 | | | 0 | | | 2,847 | |
| | | | | | | | | | |
| | 907 | | | 60,333 | | | 8,678 | | | 0 | | | 69,918 | |
| Operating income (loss) | | (907) | | | 53,057 | | | 4,167 | | | 0 | | | 56,317 | |
| | | | | | | | | | |
| Other income (expense): | | | | | | | | | | |
| Equity in earnings of subsidiaries | | 69,596 | | | 3,605 | | | 0 | | | (73,201) | | | 0 | |
| Equity in earnings of equity method investments | | 0 | | 2,793 | | | 630 | | | 0 | | | 3,423 | |
| Interest expense | | (12,944) | | | (994) | | | 0 | | | 0 | | | (13,938) | |
| Interest income | | 0 | | 6,614 | | | 0 | | | 0 | | | 6,614 | |
| Gain on sales-type lease | | 0 | | | 27 | | | 0 | | | 0 | | | 27 | |
| Gain on sale of assets and other | | 0 | | | 5,414 | | | 1 | | | 0 | | | 5,415 | |
| | 56,652 | | | 17,459 | | | 631 | | | (73,201) | | | 1,541 | |
| Income before income taxes | | 55,745 | | | 70,516 | | | 4,798 | | | (73,201) | | | 57,858 | |
| State income tax expense | | 0 | | | (27) | | | 0 | | | 0 | | | (27) | |
| Net income | | 55,745 | | | 70,489 | | | 4,798 | | | (73,201) | | | 57,831 | |
| Allocation of net income attributable to noncontrolling interests | | 0 | | | (894) | | | (1,192) | | | 0 | | | (2,086) | |
| | | | | | | | | | |
| Net income attributable to the partners | | $ | 55,745 | | | $ | 69,595 | | | $ | 3,606 | | | $ | (73,201) | | | $ | 55,745 | |
Condensed Consolidating Statement of Comprehensive Income
| | Three Months Ended September 30, 2020 | | Parent | | Guarantor Restricted
Subsidiaries | | Non-Guarantor Non-restricted Subsidiaries | | Eliminations | | Consolidated | |
| Three Months Ended June 30, 2020 | | Three Months Ended June 30, 2020 | | Parent | | Guarantor
Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated |
| | | | (In thousands) | | | (In thousands) |
| Revenues: | Revenues: | | Revenues: | |
| Affiliates | Affiliates | | $ | 0 | | | $ | 94,595 | | | $ | 6,397 | | | $ | 0 | | | $ | 100,992 | | Affiliates | | $ | 0 | | | $ | 89,417 | | | $ | 6,146 | | | $ | 0 | | | $ | 95,563 | |
| Third parties | Third parties | | 0 | | | 21,550 | | | 5,189 | | | 0 | | | 26,739 | | Third parties | | 0 | | | 15,887 | | | 3,357 | | | 0 | | | 19,244 | |
| | 0 | | | 116,145 | | | 11,586 | | | 0 | | | 127,731 | | | 0 | | | 105,304 | | | 9,503 | | | 0 | | | 114,807 | |
| Operating costs and expenses: | Operating costs and expenses: | | | | | | | | | | | Operating costs and expenses: | | | | | | | | | | |
| Operations (exclusive of depreciation and amortization) | Operations (exclusive of depreciation and amortization) | | 0 | | | 36,065 | | | 3,938 | | | 0 | | | 40,003 | | Operations (exclusive of depreciation and amortization) | | 0 | | | 30,980 | | | 3,757 | | | 0 | | | 34,737 | |
| Depreciation and amortization | Depreciation and amortization | | 0 | | | 21,997 | | | 4,193 | | | 0 | | | 26,190 | | Depreciation and amortization | | 0 | | | 20,739 | | | 4,295 | | | 0 | | | 25,034 | |
| General and administrative | General and administrative | | 649 | | | 1,683 | | | 0 | | | 0 | | | 2,332 | | General and administrative | | 780 | | | 1,755 | | | 0 | | | 0 | | | 2,535 | |
| Goodwill impairment | | 0 | | | 35,653 | | | 0 | | | 0 | | | 35,653 | | |
| | 649 | | | 95,398 | | | 8,131 | | | 0 | | | 104,178 | | | 780 | | | 53,474 | | | 8,052 | | | 0 | | | 62,306 | |
| Operating income (loss) | Operating income (loss) | | (649) | | | 20,747 | | | 3,455 | | | 0 | | | 23,553 | | Operating income (loss) | | (780) | | | 51,830 | | | 1,451 | | | 0 | | | 52,501 | |
| | Other income (expense): | Other income (expense): | | Other income (expense): | |
| Equity in earnings of subsidiaries | Equity in earnings of subsidiaries | | 31,461 | | | 6,589 | | | 0 | | | (38,050) | | | 0 | | Equity in earnings of subsidiaries | | 89,893 | | | 1,510 | | | 0 | | | (91,403) | | | 0 | |
| Equity in earnings of equity method investments | Equity in earnings of equity method investments | | 0 | | | 755 | | | 561 | | | 0 | | | 1,316 | | Equity in earnings of equity method investments | | 0 | | | 1,449 | | | 707 | | | 0 | | | 2,156 | |
| Interest expense | Interest expense | | (13,072) | | | (1,032) | | | 0 | | | 0 | | | (14,104) | | Interest expense | | (12,740) | | | (1,039) | | | 0 | | | 0 | | | (13,779) | |
| Interest income | Interest income | | 0 | | | 2,787 | | | 16 | | | 0 | | | 2,803 | | Interest income | | 26 | | | 2,787 | | | 0 | | | 0 | | | 2,813 | |
| | Other income | | 73 | | | 2,542 | | | 4,850 | | | 0 | | | 7,465 | | |
| Gain on sales-type lease | | Gain on sales-type lease | | 0 | | | 33,834 | | | 0 | | | 0 | | | 33,834 | |
| Gain on sale of assets and other | | Gain on sale of assets and other | | 71 | | | 396 | | | 1 | | | 0 | | | 468 | |
| | 18,462 | | | 11,641 | | | 5,427 | | | (38,050) | | | (2,520) | | | 77,250 | | | 38,937 | | | 708 | | | (91,403) | | | 25,492 | |
| Income before income taxes | Income before income taxes | | 17,813 | | | 32,388 | | | 8,882 | | | (38,050) | | | 21,033 | | Income before income taxes | | 76,470 | | | 90,767 | | | 2,159 | | | (91,403) | | | 77,993 | |
| State income tax expense | State income tax expense | | 0 | | | (34) | | | 0 | | | 0 | | | (34) | | State income tax expense | | 0 | | | (39) | | | 0 | | | 0 | | | (39) | |
| Net income | Net income | | 17,813 | | | 32,354 | | | 8,882 | | | (38,050) | | | 20,999 | | Net income | | 76,470 | | | 90,728 | | | 2,159 | | | (91,403) | | | 77,954 | |
| Allocation of net income attributable to noncontrolling interests | Allocation of net income attributable to noncontrolling interests | | 0 | | | (893) | | | (2,293) | | | 0 | | | (3,186) | | Allocation of net income attributable to noncontrolling interests | | 0 | | | (835) | | | (649) | | | 0 | | | (1,484) | |
| | | Net income attributable to the partners | Net income attributable to the partners | | $ | 17,813 | | | $ | 31,461 | | | $ | 6,589 | | | $ | (38,050) | | | $ | 17,813 | | 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 September 30, 2019 | | Parent | | Guarantor
Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated | |
| Six Months Ended June 30, 2021 | | Six Months Ended June 30, 2021 | | Parent | | Guarantor Restricted
Subsidiaries | | Non-Guarantor Non-restricted Subsidiaries | | Eliminations | | Consolidated | |
| | | | (In thousands) | | | (In thousands) | |
| Revenues: | Revenues: | | Revenues: | | |
| Affiliates | Affiliates | | $ | 0 | | | $ | 99,482 | | | $ | 6,545 | | | $ | 0 | | | $ | 106,027 | | Affiliates | | $ | 0 | | | $ | 188,612 | | | $ | 12,456 | | | $ | 0 | | | $ | 201,068 | | |
| Third parties | Third parties | | 0 | | | 23,999 | | | 5,869 | | | 0 | | | 29,868 | | Third parties | | 0 | | | 39,530 | | | 12,820 | | | 0 | | | 52,350 | | |
| | 0 | | | 123,481 | | | 12,414 | | | 0 | | | 135,895 | | | 0 | | | 228,142 | | | 25,276 | | | 0 | | | 253,418 | | |
| Operating costs and expenses: | Operating costs and expenses: | | | | | | | | | | | Operating costs and expenses: | | | | | | | | | | | |
| Operations (exclusive of depreciation and amortization) | Operations (exclusive of depreciation and amortization) | | 0 | | | 40,866 | | | 4,058 | | | 0 | | | 44,924 | | Operations (exclusive of depreciation and amortization) | | 0 | | | 75,541 | | | 7,892 | | | 0 | | | 83,433 | | |
| Depreciation and amortization | Depreciation and amortization | | 19,757 | | | 4,364 | | | 0 | | | 24,121 | | Depreciation and amortization | | 0 | | | 41,487 | | | 8,581 | | | 0 | | | 50,068 | | |
| General and administrative | General and administrative | | 569 | | | 2,145 | | | 0 | | | 0 | | | 2,714 | | General and administrative | | 2,085 | | | 3,730 | | | 0 | | | 0 | | | 5,815 | | |
| Goodwill impairment | | Goodwill impairment | | 0 | | | 11,034 | | | 0 | | | 0 | | | 11,034 | | |
| | 569 | | | 62,768 | | | 8,422 | | | 0 | | | 71,759 | | | 2,085 | | | 131,792 | | | 16,473 | | | 0 | | | 150,350 | | |
| Operating income (loss) | Operating income (loss) | | (569) | | | 60,713 | | | 3,992 | | | 0 | | | 64,136 | | Operating income (loss) | | (2,085) | | | 96,350 | | | 8,803 | | | 0 | | | 103,068 | | |
| | Other income (expense): | Other income (expense): | | Other income (expense): | | |
| Equity in earnings of subsidiaries | Equity in earnings of subsidiaries | | 101,638 | | | 3,013 | | | 0 | | | (104,651) | | | 0 | | Equity in earnings of subsidiaries | | 147,405 | | | 7,741 | | | 0 | | | (155,146) | | | 0 | | |
| Equity in earnings of equity method investments | Equity in earnings of equity method investments | | 0 | | | 1,334 | | | 0 | | | 0 | | | 1,334 | | Equity in earnings of equity method investments | | 0 | | | 3,411 | | | 1,775 | | | 0 | | | 5,186 | | |
| Interest expense | Interest expense | | (18,945) | | | 138 | | | 0 | | | 0 | | | (18,807) | | Interest expense | | (25,178) | | | (2,000) | | | 0 | | | 0 | | | (27,178) | | |
| Interest income | Interest income | | 0 | | | 2,243 | | | 0 | | | 0 | | | 2,243 | | Interest income | | 0 | | | 13,162 | | | 0 | | | 0 | | | 13,162 | | |
| | Gain on sales-type lease | Gain on sales-type lease | | 0 | | | 35,166 | | | 0 | | | 0 | | | 35,166 | | Gain on sales-type lease | | 0 | | | 24,677 | | | 0 | | | 0 | | | 24,677 | | |
| Other income (loss) | | 221 | | | (104) | | | 25 | | | 0 | | | 142 | | |
| Gain on sale of assets and other | | Gain on sale of assets and other | | 0 | | | 5,915 | | | 2 | | | 0 | | | 5,917 | | |
| | 82,914 | | | 41,790 | | | 25 | | | (104,651) | | | 20,078 | | | 122,227 | | | 52,906 | | | 1,777 | | | (155,146) | | | 21,764 | | |
| Income before income taxes | Income before income taxes | | 82,345 | | | 102,503 | | | 4,017 | | | (104,651) | | | 84,214 | | Income before income taxes | | 120,142 | | | 149,256 | | | 10,580 | | | (155,146) | | | 124,832 | | |
| State income tax expense | State income tax expense | | 0 | | | (30) | | | 0 | | | 0 | | | (30) | | State income tax expense | | 0 | | | (64) | | | 0 | | | 0 | | | (64) | | |
| Net income | Net income | | 82,345 | | | 102,473 | | | 4,017 | | | (104,651) | | | 84,184 | | Net income | | 120,142 | | | 149,192 | | | 10,580 | | | (155,146) | | | 124,768 | | |
| Allocation of net income attributable to noncontrolling interests | Allocation of net income attributable to noncontrolling interests | | 0 | | | (835) | | | (1,004) | | | 0 | | | (1,839) | | Allocation of net income attributable to noncontrolling interests | | 0 | | | (1,787) | | | (2,839) | | | 0 | | | (4,626) | | |
| | Net income attributable to the partners | Net income attributable to the partners | | $ | 82,345 | | | $ | 101,638 | | | $ | 3,013 | | | $ | (104,651) | | | $ | 82,345 | | Net income attributable to the partners | | $ | 120,142 | | | $ | 147,405 | | | $ | 7,741 | | | $ | (155,146) | | | $ | 120,142 | | |
Condensed Consolidating Statement of Comprehensive Income
| | Nine Months Ended September 30, 2020 | | Parent | | Guarantor Restricted
Subsidiaries | | Non-Guarantor Non-restricted Subsidiaries | | Eliminations | | Consolidated | |
| Six Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 | | Parent | | Guarantor Restricted
Subsidiaries | | Non-Guarantor Non-restricted Subsidiaries | | Eliminations | | Consolidated |
| | | | (In thousands) | | | (In thousands) |
| Revenues: | Revenues: | | Revenues: | |
| Affiliates | Affiliates | | $ | 0 | | | $ | 278,767 | | | $ | 19,216 | | | $ | 0 | | | $ | 297,983 | | Affiliates | | $ | 0 | | | $ | 184,172 | | | $ | 12,819 | | | $ | 0 | | | $ | 196,991 | |
| Third parties | Third parties | | 0 | | | 56,592 | | | 15,817 | | | 0 | | | 72,409 | | Third parties | | 0 | | | 35,042 | | | 10,628 | | | 0 | | | 45,670 | |
| | 0 | | | 335,359 | | | 35,033 | | | 0 | | | 370,392 | | | 0 | | | 219,214 | | | 23,447 | | | 0 | | | 242,661 | |
| Operating costs and expenses: | Operating costs and expenses: | | | | | | | | | | | Operating costs and expenses: | | | | | | | | | | |
| Operations (exclusive of depreciation and amortization) | Operations (exclusive of depreciation and amortization) | | 0 | | | 98,176 | | | 11,545 | | | 0 | | | 109,721 | | Operations (exclusive of depreciation and amortization) | | 0 | | | 62,111 | | | 7,607 | | | 0 | | | 69,718 | |
| Depreciation and amortization | Depreciation and amortization | | 0 | | | 62,489 | | | 12,713 | | | 0 | | | 75,202 | | Depreciation and amortization | | — | | | 40,492 | | | 8,520 | | | 0 | | | 49,012 | |
| General and administrative | General and administrative | | 2,528 | | | 5,041 | | | 0 | | | 0 | | | 7,569 | | General and administrative | | 1,879 | | | 3,358 | | | 0 | | | 0 | | | 5,237 | |
| Goodwill impairment | | 0 | | | 35,653 | | | 0 | | | 0 | | | 35,653 | | |
| | 2,528 | | | 201,359 | | | 24,258 | | | 0 | | | 228,145 | | | 1,879 | | | 105,961 | | | 16,127 | | | 0 | | | 123,967 | |
| Operating income (loss) | Operating income (loss) | | (2,528) | | | 134,000 | | | 10,775 | | | 0 | | — | | 142,247 | | Operating income (loss) | | (1,879) | | | 113,253 | | | 7,320 | | | 0 | | | 118,694 | |
| | Other income (expense): | Other income (expense): | | Other income (expense): | |
| Equity in earnings of subsidiaries | Equity in earnings of subsidiaries | | 189,889 | | | 12,394 | | | 0 | | | (202,283) | | | 0 | | Equity in earnings of subsidiaries | | 158,428 | | | 5,805 | | | 0 | | | (164,233) | | | 0 | |
| Equity in earnings of equity method investments | Equity in earnings of equity method investments | | 0 | | | 4,292 | | | 894 | | | 0 | | | 5,186 | | Equity in earnings of equity method investments | | 0 | | | 3,537 | | | 333 | | | 0 | | | 3,870 | |
| Interest expense | Interest expense | | (42,542) | | | (3,108) | | | 0 | | | 0 | | | (45,650) | | Interest expense | | (29,470) | | | (2,076) | | | 0 | | | 0 | | | (31,546) | |
| Interest income | Interest income | | 26 | | | 7,792 | | | 16 | | | 0 | | | 7,834 | | Interest income | | 26 | | | 5,005 | | | 0 | | | 0 | | | 5,031 | |
| Loss on early extinguishment of debt | Loss on early extinguishment of debt | | (25,915) | | | 0 | | | 0 | | | 0 | | | (25,915) | | Loss on early extinguishment of debt | | (25,915) | | | 0 | | | 0 | | | 0 | | | (25,915) | |
| Gain on sales-type lease | Gain on sales-type lease | | 0 | | | 33,834 | | | 0 | | | 0 | | | 33,834 | | Gain on sales-type lease | | 0 | | | 33,834 | | | 0 | | | 0 | | | 33,834 | |
| Gain on sale of assets and other | Gain on sale of assets and other | | 214 | | | 3,358 | | | 4,867 | | | 0 | | | 8,439 | | Gain on sale of assets and other | | 141 | | | 816 | | | 17 | | | 0 | | | 974 | |
| | 121,672 | | | 58,562 | | | 5,777 | | | (202,283) | | | (16,272) | | | 103,210 | | | 46,921 | | | 350 | | | (164,233) | | | (13,752) | |
| Income before income taxes | Income before income taxes | | 119,144 | | | 192,562 | | | 16,552 | | | (202,283) | | | 125,975 | | Income before income taxes | | 101,331 | | | 160,174 | | | 7,670 | | | (164,233) | | | 104,942 | |
| State income tax expense | State income tax expense | | 0 | | | (110) | | | 0 | | | 0 | | | (110) | | State income tax expense | | 0 | | | (76) | | | 0 | | | 0 | | | (76) | |
| Net income | Net income | | 119,144 | | | 192,452 | | | 16,552 | | | (202,283) | | | 125,865 | | Net income | | 101,331 | | | 160,098 | | | 7,670 | | | (164,233) | | | 104,866 | |
| Allocation of net income attributable to noncontrolling interests | Allocation of net income attributable to noncontrolling interests | | 0 | | | (2,563) | | | (4,158) | | | 0 | | | (6,721) | | Allocation of net income attributable to noncontrolling interests | | 0 | | | (1,670) | | | (1,865) | | | 0 | | | (3,535) | |
| | Net income attributable to the partners | Net income attributable to the partners | | $ | 119,144 | | | $ | 189,889 | | | $ | 12,394 | | | $ | (202,283) | | | $ | 119,144 | | Net income attributable to the partners | | $ | 101,331 | | | $ | 158,428 | | | $ | 5,805 | | | $ | (164,233) | | | $ | 101,331 | |
Condensed Consolidating Statement of Comprehensive Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 | | Parent | | Guarantor Restricted
Subsidiaries | | Non-Guarantor Non-restricted Subsidiaries | | Eliminations | | Consolidated |
| | | (In thousands) |
| Revenues: | | | | | | | | | | |
| Affiliates | | $ | 0 | | | $ | 293,096 | | | $ | 18,659 | | | $ | 0 | | | $ | 311,755 | |
| Third parties | | 0 | | | 69,764 | | | 19,624 | | | 0 | | | 89,388 | |
| | 0 | | | 362,860 | | | 38,283 | | | 0 | | | 401,143 | |
| Operating costs and expenses: | | | | | | | | | | |
| Operations (exclusive of depreciation and amortization) | | 0 | | | 111,644 | | | 11,401 | | | 0 | | | 123,045 | |
| Depreciation and amortization | | | | 59,320 | | | 12,872 | | | 0 | | | 72,192 | |
| General and administrative | | 2,390 | | | 4,932 | | | 0 | | | 0 | | | 7,322 | |
| | 2,390 | | | 175,896 | | | 24,273 | | | 0 | | | 202,559 | |
| Operating income (loss) | | (2,390) | | | 186,964 | | | 14,010 | | | 0 | | | 198,584 | |
| | | | | | | | | | |
| Other income (expense): | | | | | | | | | | |
| Equity in earnings of subsidiaries | | 238,368 | | | 10,572 | | | 0 | | | (248,940) | | | 0 | |
| Equity in earnings of equity method investments | | 0 | | | 5,217 | | | 0 | | | 0 | | | 5,217 | |
| Interest expense | | (56,982) | | | (77) | | | 0 | | | 0 | | | (57,059) | |
| Interest income | | 0 | | | 3,322 | | | 0 | | | 0 | | | 3,322 | |
| Gain on sales-type lease | | 0 | | | 35,166 | | | 0 | | | 0 | | | 35,166 | |
| Gain on sale of assets and other | | 221 | | | (364) | | | 86 | | | 0 | | | (57) | |
| | 181,607 | | | 53,836 | | | 86 | | | (248,940) | | | (13,411) | |
| Income before income taxes | | 179,217 | | | 240,800 | | | 14,096 | | | (248,940) | | | 185,173 | |
| State income tax expense | | 0 | | | (36) | | | 0 | | | 0 | | | (36) | |
| Net income | | 179,217 | | | 240,764 | | | 14,096 | | | (248,940) | | | 185,137 | |
| Allocation of net income attributable to noncontrolling interests | | 0 | | | (2,396) | | | (3,524) | | | 0 | | | (5,920) | |
| | | | | | | | | | |
| Net income attributable to the partners | | $ | 179,217 | | | $ | 238,368 | | | $ | 10,572 | | | $ | (248,940) | | | $ | 179,217 | |
Condensed Consolidating Statement of Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 | | Parent | | Guarantor
Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated |
| | | (In thousands) |
| Cash flows from operating activities | | $ | (49,182) | | | $ | 250,355 | | | $ | 36,261 | | | $ | (12,394) | | | $ | 225,040 | |
| | | | | | | | | | |
| Cash flows from investing activities | | | | | | | | | | |
| Additions to properties and equipment | | 0 | | | (10,675) | | | (27,967) | | | 0 | | | (38,642) | |
| Investment in Cushing Connect | | 0 | | | (15,382) | | | (2,438) | | | 15,382 | | | (2,438) | |
| | | | | | | | | | |
| Proceeds from sale of assets | | 0 | | | 961 | | | 0 | | | 0 | | | 961 | |
| Distributions in excess of equity in earnings of equity investments | | 0 | | | 11,084 | | | 0 | | | (10,383) | | | 701 | |
| | | | | | | | | | |
| | 0 | | | (14,012) | | | (30,405) | | | 4,999 | | | (39,418) | |
| | | | | | | | | | |
| Cash flows from financing activities | | | | | | | | | | |
| Net borrowings under credit agreement | | (17,500) | | | 0 | | | 0 | | | 0 | | | (17,500) | |
| Net intercompany financing activities | | 234,081 | | | (234,081) | | | 0 | | | 0 | | | 0 | |
| | | | | | | | | | |
| Redemption of senior notes | | (522,500) | | | 0 | | | 0 | | | 0 | | | (522,500) | |
| Proceeds from issuance of senior notes | | 500,000 | | | 0 | | | 0 | | | 0 | | | 500,000 | |
| Contribution from general partner | | 611 | | | 0 | | | 15,382 | | | (15,382) | | | 611 | |
| Contribution from noncontrolling interest | | 0 | | | 0 | | | 15,382 | | | 0 | | | 15,382 | |
| Distributions to HEP unitholders | | (137,437) | | | 0 | | | 0 | | | 0 | | | (137,437) | |
| Distributions to noncontrolling interests | | 0 | | | 0 | | | (30,622) | | | 22,777 | | | (7,845) | |
| Units withheld for tax withholding obligations | | (149) | | | 0 | | | 0 | | | 0 | | | (149) | |
| | | | | | | | | | |
| Deferred financing costs | | (8,714) | | | 0 | | | 0 | | | 0 | | | (8,714) | |
| Payments on finance leases | | 0 | | | (2,666) | | | 0 | | | 0 | | | (2,666) | |
| | | | | | | | | | |
| | 48,392 | | | (236,747) | | | 142 | | | 7,395 | | | (180,818) | |
| | | | | | | | | | |
| Cash and cash equivalents | | | | | | | | | | |
| Increase (decrease) for the period | | (790) | | | (404) | | | 5,998 | | | 0 | | | 4,804 | |
| Beginning of period | | 4,790 | | | (709) | | | 9,206 | | | 0 | | | 13,287 | |
| End of period | | $ | 4,000 | | | $ | (1,113) | | | $ | 15,204 | | | $ | 0 | | | $ | 18,091 | |
Condensed Consolidating Statement of Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 | | Parent | | Guarantor
Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated |
| | | (In thousands) |
| Cash flows from operating activities | | $ | (62,229) | | | $ | 271,657 | | | $ | 31,467 | | | $ | (12,678) | | | $ | 228,217 | |
| | | | | | | | | | |
| Cash flows from investing activities | | | | | | | | | | |
| Additions to properties and equipment | | 0 | | | (23,227) | | | (601) | | | 0 | | | (23,828) | |
| Distributions from UNEV in excess of earnings | | 0 | | | 10,572 | | | 0 | | | (10,572) | | | 0 | |
| Proceeds from sale of assets | | 0 | | | 265 | | | 0 | | | 0 | | | 265 | |
| Distributions in excess of equity in earnings of equity investments | | 0 | | | 693 | | | 0 | | | 0 | | | 693 | |
| | 0 | | | (11,697) | | | (601) | | | (10,572) | | | (22,870) | |
| | | | | | | | | | |
| Cash flows from financing activities | | | | | | | | | | |
| Net borrowings under credit agreement | | 12,500 | | | 0 | | | 0 | | | 0 | | | 12,500 | |
| Net intercompany financing activities | | 260,362 | | | (260,362) | | | 0 | | | 0 | | | 0 | |
| Contributions from general partner | | 182 | | | 0 | | | 0 | | | 0 | | | 182 | |
| Distributions to HEP unitholders | | (204,701) | | | 0 | | | 0 | | | 0 | | | (204,701) | |
| Distributions to noncontrolling interests | | 0 | | | 0 | | | (31,000) | | | 23,250 | | | (7,750) | |
| | | | | | | | | | |
| Units withheld for tax withholding obligations | | (119) | | | 0 | | | 0 | | | 0 | | | (119) | |
| Purchase units for incentive grants | | (255) | | | | | 0 | | | 0 | | | (255) | |
| Payments on finance leases | | 0 | | | (780) | | | 0 | | | 0 | | | (780) | |
| Other | | (139) | | | 139 | | | 0 | | | 0 | | | 0 | |
| | 67,830 | | | (261,003) | | | (31,000) | | | 23,250 | | | (200,923) | |
| | | | | | | | | | |
| Cash and cash equivalents | | | | | | | | | | |
| Increase for the period | | 5,601 | | | (1,043) | | | (134) | | | 0 | | | 4,424 | |
| Beginning of period | | 2 | | | 0 | | | 3,043 | | | 0 | | | 3,045 | |
| End of period | | $ | 5,603 | | | $ | (1,043) | | | $ | 2,909 | | | $ | 0 | | | $ | 7,469 | |
HEP Transactions
On August 2, 2021, HEP, The Sinclair Companies (“Sinclair”), and Sinclair Transportation Company, a wholly owned subsidiary of Sinclair (“STC”), entered into a Contribution Agreement (the “Contribution Agreement”) pursuant to which HEP will acquire all of the outstanding shares of STC in exchange for 21 million newly issued common units of HEP and cash consideration equal to $325 million (the “HEP Transactions”). On the same date, HFC, Sinclair and certain other parties entered into a Business Combination Agreement pursuant to which Sinclair will contribute all of the equity interests of Hippo Holding LLC, which owns Sinclair Oil Corporation, to a new HFC parent holding company that will be named “HF Sinclair Corporation” in exchange for 60,230,036 shares of common stock in HF Sinclair Corporation (the “HFC Transactions”, and together with the HEP Transactions, the “Sinclair Transactions”).
The cash consideration for the HEP Transactions is subject to customary adjustments at closing for working capital of STC. The number of HEP common units to be issued to Sinclair at closing is subject to downward adjustment if, as a condition to obtaining antitrust clearance for the Sinclair Transactions, HEP agrees to divest a portion of its equity interest in UNEV Pipeline LLC and the sales price for such interests does not exceed the threshold provided in the Contribution Agreement.
The Contribution Agreement contains customary representations, warranties and covenants of HEP, Sinclair, and STC. The HEP Transactions are expected to close in mid-2022, subject to the satisfaction or waiver of certain customary conditions, including, among others, the receipt of certain required regulatory consents and clearance, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, and the consummation of the HFC Transactions.
The Contribution Agreement automatically terminates if the HFC Transactions are terminated, and contains other customary termination rights, including a termination right for each of HEP and Sinclair if, under certain circumstances, the closing does not occur by May 2, 2022 (the “Outside Date”), except that the Outside Date can be extended by either party by up to 2 90 day periods to obtain any required antitrust clearance.
Upon closing of the HEP Transactions, HEP’s existing senior management team will continue to operate HEP. Under the definitive agreements, Sinclair will be granted the right to nominate 1 director to the HEP board of directors at the closing. The Sinclair stockholders have also agreed to certain customary lock-up restrictions and registration rights for the HEP common units to be issued to the stockholders of Sinclair. HEP will continue to operate under the name Holly Energy Partners, L.P.
See Note 10 for a description of the Letter Agreement between HFC and HEP entered into in connection with the Contribution Agreement.
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 SeptemberJune 30, 2020.2021.
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.
On August 2, 2021, HEP, The Sinclair Companies (“Sinclair”), and Sinclair Transportation Company, a wholly owned subsidiary of Sinclair (“STC”), entered into a Contribution Agreement (the “Contribution Agreement”) pursuant to which the HEP will acquire all of the outstanding shares of STC in exchange for 21 million newly issued common units of HEP and cash consideration equal to $325 million (the “HEP Transactions”), subject to downward adjustment if, as a condition to obtaining antitrust clearance for the Sinclair Transactions (as defined below), HEP agrees to divest a portion of its equity interest in UNEV Pipeline LLC and the sales price for such interests does not exceed the threshold provided in the Contribution Agreement.
The Sinclair Transactions are expected to close in mid-2022, subject to customary closing conditions and regulatory clearance, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. In addition, the HEP Transactions are conditioned on the closing of the transactions contemplated by that certain Business Combination Agreement, dated as of August 2, 2021, by and among HollyFrontier, Sinclair and certain other parties, which will occur immediately following the HEP Transactions (the “HFC Transactions,” and together with the HEP Transactions, the “Sinclair Transactions”). See Note 17 of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements” for additional information.
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 ofdiminished 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. OverSince the coursedeclines in demand at the beginning of the third quarter,COVID-19 pandemic, we began to see improvement in demand for transportation fuels showed incremental improvement overthese products and services beginning late in the second quarter of 2020.2020 that continued through the second quarter of 2021 with volumes in many of our regions returning to pre-pandemic levels. We expect our customers will continue to adjust refinery production levels commensurate with market demand, and ultimately expectwith the increasing availability of vaccines, we believe there is a path to a fulsome recovery in demand to return to pre-COVID-19 levels.in 2021.
In response toWith the COVID-19 pandemic, and with the health and safetyincreasing vaccination rates, most of our employees as a top priority,have returned to work at our locations and we took several actions, including limiting onsite staff at all of our facilities, implementing a work-from-home policycontinue to follow Centers for certain employeesDisease Control and restricting travel unless approved by senior leadership.local government guidance. We will continue to monitor developments in the COVID-19 developmentspandemic and the dynamic environment it has created 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 operating cash flow and improving distributable cash flow coverage to 1.3x or greater with the goal of 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 included 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 the COVID-19 pandemic will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic, the effects of any new variant strains of the underlying virus, 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 datesdates from 20212022 to 2036. These minimum volume commitments accounted for approximately 70%approximately 66% and 76% of our total revenues in 2019.the six months ended June 30, 2021 and the twelve months ended December 31, 2020, respectively. 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, other than with resect to the agreement in principle reached with HFC subsequent to the third quarter of 2020 with respect to HEP’s Cheyenne assets. 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 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, construction, ownership and constructionoperation 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 intoin service during the second quarter of 2020, and the Cushing Connect Pipeline is expected to be placed in service during the firstthird 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 contracthas 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 proportionatelyequally among HEP and Plains. However, we are solely responsible for any Cushing Connect Pipeline construction costs that exceed the partners, andbudget 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 beare approximately $65$70 million to $75 million.
Agreements with HFC
We serve HFC’sHFC's refineries under long-term pipeline, terminal, tankage and refinery processing unit throughput agreements expiring from 20212022 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 PPI or the FERC index. On December 17, 2020, FERC established a new price index for the five-year period commencing July 1, 2021 and ending June 30, 2026, in which common carriers charging indexed rates are permitted to adjust their indexed ceilings annually by Producer Price Index (“PPI”) or Federal Energy Regulatory Commission index.plus 0.78%. FERC has received requests for rehearing of its December 17, 2020 order, which remain pending in FERC Docket No. RM20-14-000. As of SeptemberJune 30, 2020,2021, these agreements with HFC require minimum annualized payments to us of $351.1$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 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 September 30, 2020, our throughput agreement with HFC required minimum annualized payments to us of approximately $17.6 million related to our Cheyenne assets. 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. No impairment of our Cheyenne long-lived assets was required.
Our annual goodwill impairment testing was performed during the third quarter of 2020. The estimated fair value of our reporting units were derived using a combination of both income and market approaches. The income approach reflects expected future cash flows based on anticipated gross margins, operating costs, and capital expenditures. The market approach includes both the guideline public company and guideline transaction methods. Both market approach methods use 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 testing of goodwill did not identify any impairments other than our Cheyenne reporting unit, which reported a goodwill impairment charge of $35.7 million.
Subsequent to the third quarter of 2020,On February 8, 2021, HEP and HFC reached an agreement in principle to terminate the existing minimum volume commitmentsfinalized and executed new agreements for HEP's Cheyenne assets and enter into new agreements onwith 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.
Indicators of goodwill and long-lived asset impairment
During the three months ended March 31, 2021, changes in our 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 values of our Cheyenne reporting unit were 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.
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. See “Overview” above for a discussion of the Sinclair Transactions.
Furthermore, as we are doing with the previously discussed HEP Transactions with Sinclair, 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 ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Change from |
| | | 2021 | | 2020 | | 2020 |
| | | (In thousands, except per unit data) |
| Revenues: | | | | | | |
| Pipelines: | | | | | | |
| Affiliates—refined product pipelines | | $ | 19,213 | | | $ | 16,302 | | | $ | 2,911 | |
| Affiliates—intermediate pipelines | | 7,521 | | | 7,475 | | | 46 | |
| Affiliates—crude pipelines | | 19,251 | | | 19,311 | | | (60) | |
| | 45,985 | | | 43,088 | | | 2,897 | |
| Third parties—refined product pipelines | | 9,526 | | | 8,750 | | | 776 | |
| Third parties—crude pipelines | | 12,811 | | | 7,116 | | | 5,695 | |
| | 68,322 | | | 58,954 | | | 9,368 | |
| Terminals, tanks and loading racks: | | | | | | |
| Affiliates | | 32,131 | | | 32,902 | | | (771) | |
| Third parties | | 4,756 | | | 3,378 | | | 1,378 | |
| | 36,887 | | | 36,280 | | | 607 | |
| | | | | | |
| Refinery processing units—Affiliates | | 21,026 | | | 19,573 | | | 1,453 | |
| | | | | | |
| Total revenues | | 126,235 | | | 114,807 | | | 11,428 | |
| Operating costs and expenses: | | | | | | |
| Operations (exclusive of depreciation and amortization) | | 42,068 | | | 34,737 | | | 7,331 | |
| Depreciation and amortization | | 25,003 | | | 25,034 | | | (31) | |
| General and administrative | | 2,847 | | | 2,535 | | | 312 | |
| | | | | | |
| | 69,918 | | | 62,306 | | | 7,612 | |
| Operating income | | 56,317 | | | 52,501 | | | 3,816 | |
| Other income (expense): | | | | | | |
| Equity in earnings of equity method investments | | 3,423 | | | 2,156 | | | 1,267 | |
| Interest expense, including amortization | | (13,938) | | | (13,779) | | | (159) | |
| Interest income | | 6,614 | | | 2,813 | | | 3,801 | |
| | | | | | |
| Gain on sales-type leases | | 27 | | | 33,834 | | | (33,807) | |
| Gain on sale of assets and other | | 5,415 | | | 468 | | | 4,947 | |
| | 1,541 | | | 25,492 | | | (23,951) | |
| Income before income taxes | | 57,858 | | | 77,993 | | | (20,135) | |
| State income tax expense | | (27) | | | (39) | | | 12 | |
| Net income | | 57,831 | | | 77,954 | | | (20,123) | |
| | | | | | |
| Allocation of net income attributable to noncontrolling interests | | (2,086) | | | (1,484) | | | (602) | |
| Net income attributable to the partners | | 55,745 | | | 76,470 | | | (20,725) | |
| | | | | | |
| | | | | | |
| Limited partners’ earnings per unit—basic and diluted | | $ | 0.53 | | | $ | 0.73 | | | $ | (0.20) | |
| Weighted average limited partners’ units outstanding | | 105,440 | | | 105,440 | | | — | |
EBITDA (1) | | $ | 88,099 | | | $ | 112,509 | | | $ | (24,410) | |
Adjusted EBITDA (1) | | $ | 88,261 | | | $ | 80,168 | | | $ | 8,093 | |
Distributable cash flow (2) | | $ | 66,680 | | | $ | 65,456 | | | $ | 1,224 | |
| | | | | | |
| Volumes (bpd) | | | | | | |
| Pipelines: | | | | | | |
| Affiliates—refined product pipelines | | 119,046 | | | 100,524 | | | 18,522 | |
| Affiliates—intermediate pipelines | | 143,762 | | | 128,464 | | | 15,298 | |
| Affiliates—crude pipelines | | 260,756 | | | 252,570 | | | 8,186 | |
| | 523,564 | | | 481,558 | | | 42,006 | |
| Third parties—refined product pipelines | | 52,126 | | | 57,876 | | | (5,750) | |
| Third parties—crude pipelines | | 135,904 | | | 85,851 | | | 50,053 | |
| | 711,594 | | | 625,285 | | | 86,309 | |
| Terminals and loading racks: | | | | | | |
| Affiliates | | 413,441 | | | 372,093 | | | 41,348 | |
| Third parties | | 53,257 | | | 45,876 | | | 7,381 | |
| | 466,698 | | | 417,969 | | | 48,729 | |
| Refinery processing units—Affiliates | | 76,589 | | | 49,891 | | | 26,698 | |
| Total for pipelines and terminal and refinery processing unit assets (bpd) | | 1,254,881 | | | 1,093,145 | | | 161,736 | |
| | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, | | Change from |
| | | 2021 | | 2020 | | 2020 |
| | | (In thousands, except per unit data) |
| Revenues: | | | | | | |
| Pipelines: | | | | | | |
| Affiliates—refined product pipelines | | $ | 37,819 | | | $ | 36,385 | | | $ | 1,434 | |
| Affiliates—intermediate pipelines | | 15,027 | | | 14,949 | | | 78 | |
| Affiliates—crude pipelines | | 38,705 | | | 39,704 | | | (999) | |
| | 91,551 | | | 91,038 | | | 513 | |
| Third parties—refined product pipelines | | 19,389 | | | 23,548 | | | (4,159) | |
| Third parties—crude pipelines | | 23,887 | | | 14,840 | | | 9,047 | |
| | 134,827 | | | 129,426 | | | 5,401 | |
| Terminals, tanks and loading racks: | | | | | | |
| Affiliates | | 65,995 | | | 66,496 | | | (501) | |
| Third parties | | 9,074 | | | 7,282 | | | 1,792 | |
| | 75,069 | | | 73,778 | | | 1,291 | |
| | | | | | |
| Refinery processing units—Affiliates | | 43,522 | | | 39,457 | | | 4,065 | |
| | | | | | |
| Total revenues | | 253,418 | | | 242,661 | | | 10,757 | |
| Operating costs and expenses: | | | | | | |
| Operations (exclusive of depreciation and amortization) | | 83,433 | | | 69,718 | | | 13,715 | |
| Depreciation and amortization | | 50,068 | | | 49,012 | | | 1,056 | |
| General and administrative | | 5,815 | | | 5,237 | | | 578 | |
| Goodwill impairment | | 11,034 | | | — | | | 11,034 | |
| | 150,350 | | | 123,967 | | | 26,383 | |
| Operating income | | 103,068 | | | 118,694 | | | (15,626) | |
| Other income (expense): | | | | | | |
| Equity in earnings of equity method investments | | 5,186 | | | 3,870 | | | 1,316 | |
| Interest expense, including amortization | | (27,178) | | | (31,546) | | | 4,368 | |
| Interest income | | 13,162 | | | 5,031 | | | 8,131 | |
| Loss on early extinguishment of debt | | — | | | (25,915) | | | 25,915 | |
| Gain on sales-type leases | | 24,677 | | | 33,834 | | | (9,157) | |
| Gain on sale of assets and other | | 5,917 | | | 974 | | | 4,943 | |
| | 21,764 | | | (13,752) | | | 35,516 | |
| Income before income taxes | | 124,832 | | | 104,942 | | | 19,890 | |
| State income tax expense | | (64) | | | (76) | | | 12 | |
| Net income | | 124,768 | | | 104,866 | | | 19,902 | |
| | | | | | |
| Allocation of net income attributable to noncontrolling interests | | (4,626) | | | (3,535) | | | (1,091) | |
| Net income attributable to the partners | | 120,142 | | | 101,331 | | | 18,811 | |
| | | | | | |
| | | | | | |
| Limited partners’ earnings per unit—basic and diluted | | $ | 1.14 | | | $ | 0.96 | | | $ | 0.18 | |
| Weighted average limited partners’ units outstanding | | 105,440 | | | 105,440 | | | — | |
EBITDA (1) | | $ | 184,290 | | | $ | 176,934 | | | $ | 7,356 | |
Adjusted EBITDA (1) | | $ | 176,196 | | | $ | 171,276 | | | $ | 4,920 | |
Distributable cash flow (2) | | $ | 139,899 | | | $ | 136,164 | | | $ | 3,735 | |
| | | | | | |
| Volumes (bpd) | | | | | | |
| Pipelines: | | | | | | |
| Affiliates—refined product pipelines | | 119,316 | | | 115,245 | | | 4,071 | |
| Affiliates—intermediate pipelines | | 129,573 | | | 135,288 | | | (5,715) | |
| Affiliates—crude pipelines | | 255,730 | | | 278,801 | | | (23,071) | |
| | 504,619 | | | 529,334 | | | (24,715) | |
| Third parties—refined product pipelines | | 48,298 | | | 53,756 | | | (5,458) | |
| Third parties—crude pipelines | | 129,603 | | | 89,027 | | | 40,576 | |
| | 682,520 | | | 672,117 | | | 10,403 | |
| Terminals and loading racks: | | | | | | |
| Affiliates | | 368,612 | | | 400,911 | | | (32,299) | |
| Third parties | | 49,526 | | | 45,910 | | | 3,616 | |
| | 418,138 | | | 446,821 | | | (28,683) | |
| Refinery processing units—Affiliates | | 68,688 | | | 59,843 | | | 8,845 | |
| Total for pipelines and terminal and refinery processing unit assets (bpd) | | 1,169,346 | | | 1,178,781 | | | (9,435) | |
| | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Change from |
| | | 2020 | | 2019 | | 2019 |
| | | (In thousands, except per unit data) |
| Revenues: | | | | | | |
| Pipelines: | | | | | | |
| Affiliates—refined product pipelines | | $ | 18,619 | | | $ | 19,401 | | | $ | (782) | |
| Affiliates—intermediate pipelines | | 7,537 | | | 7,490 | | | 47 | |
| Affiliates—crude pipelines | | 20,218 | | | 21,675 | | | (1,457) | |
| | 46,374 | | | 48,566 | | | (2,192) | |
| Third parties—refined product pipelines | | 9,812 | | | 13,270 | | | (3,458) | |
| Third parties—crude pipelines | | 12,106 | | | 11,327 | | | 779 | |
| | 68,292 | | | 73,163 | | | (4,871) | |
| Terminals, tanks and loading racks: | | | | | | |
| Affiliates | | 34,215 | | | 37,183 | | | (2,968) | |
| Third parties | | 4,821 | | | 5,271 | | | (450) | |
| | 39,036 | | | 42,454 | | | (3,418) | |
| | | | | | |
| Refinery processing units—Affiliates | | 20,403 | | | 20,278 | | | 125 | |
| | | | | | |
| Total revenues | | 127,731 | | | 135,895 | | | (8,164) | |
| Operating costs and expenses: | | | | | | |
| Operations (exclusive of depreciation and amortization) | | 40,003 | | | 44,924 | | | (4,921) | |
| Depreciation and amortization | | 26,190 | | | 24,121 | | | 2,069 | |
| General and administrative | | 2,332 | | | 2,714 | | | (382) | |
| Goodwill impairment | | 35,653 | | | — | | | 35,653 | |
| | 104,178 | | | 71,759 | | | 32,419 | |
| Operating income | | 23,553 | | | 64,136 | | | (40,583) | |
| Other income (expense): | | | | | | |
| Equity in earnings of equity method investments | | 1,316 | | | 1,334 | | | (18) | |
| Interest expense, including amortization | | (14,104) | | | (18,807) | | | 4,703 | |
| Interest income | | 2,803 | | | 2,243 | | | 560 | |
| | | | | | |
| Gain on sales-type leases | | — | | | 35,166 | | | (35,166) | |
| Gain on sale of assets and other | | 7,465 | | | 142 | | | 7,323 | |
| | (2,520) | | | 20,078 | | | (22,598) | |
| Income before income taxes | | 21,033 | | | 84,214 | | | (63,181) | |
| State income tax expense | | (34) | | | (30) | | | (4) | |
| Net income | | 20,999 | | | 84,184 | | | (63,185) | |
| | | | | | |
| Allocation of net income attributable to noncontrolling interests | | (3,186) | | | (1,839) | | | (1,347) | |
| Net income attributable to the partners | | 17,813 | | | 82,345 | | | (64,532) | |
| | | | | | |
| | | | | | |
| Limited partners’ earnings per unit—basic and diluted | | $ | 0.17 | | | $ | 0.78 | | | $ | (0.61) | |
| Weighted average limited partners’ units outstanding | | 105,440 | | | 105,440 | | | — | |
EBITDA (1) | | $ | 55,338 | | | $ | 123,060 | | | $ | (67,722) | |
Adjusted EBITDA (1) | | $ | 86,435 | | | $ | 90,269 | | | $ | (3,834) | |
Distributable cash flow (2) | | $ | 76,894 | | | $ | 68,838 | | | $ | 8,056 | |
| | | | | | |
| Volumes (bpd) | | | | | | |
| Pipelines: | | | | | | |
| Affiliates—refined product pipelines | | 119,403 | | | 129,681 | | | (10,278) | |
| Affiliates—intermediate pipelines | | 142,817 | | | 153,547 | | | (10,730) | |
| Affiliates—crude pipelines | | 270,840 | | | 358,867 | | | (88,027) | |
| | 533,060 | | | 642,095 | | | (109,035) | |
| Third parties—refined product pipelines | | 60,203 | | | 67,440 | | | (7,237) | |
| Third parties—crude pipelines | | 133,487 | | | 129,222 | | | 4,265 | |
| | 726,750 | | | 838,757 | | | (112,007) | |
| Terminals and loading racks: | | | | | | |
| Affiliates | | 401,904 | | | 482,291 | | | (80,387) | |
| Third parties | | 57,355 | | | 59,307 | | | (1,952) | |
| | 459,259 | | | 541,598 | | | (82,339) | |
| Refinery processing units—Affiliates | | 62,016 | | | 75,857 | | | (13,841) | |
| Total for pipelines and terminal and refinery processing unit assets (bpd) | | 1,248,025 | | | 1,456,212 | | | (208,187) | |
| | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, | | Change from |
| | | 2020 | | 2019 | | 2019 |
| | | (In thousands, except per unit data) |
| Revenues: | | | | | | |
| Pipelines: | | | | | | |
| Affiliates—refined product pipelines | | $ | 55,004 | | | $ | 60,892 | | | $ | (5,888) | |
| Affiliates—intermediate pipelines | | 22,486 | | | 22,068 | | | 418 | |
| Affiliates—crude pipelines | | 59,922 | | | 63,447 | | | (3,525) | |
| | 137,412 | | | 146,407 | | | (8,995) | |
| Third parties—refined product pipelines | | 33,360 | | | 40,652 | | | (7,292) | |
| Third parties—crude pipelines | | 26,946 | | | 33,467 | | | (6,521) | |
| | 197,718 | | | 220,526 | | | (22,808) | |
| Terminals, tanks and loading racks: | | | | | | |
| Affiliates | | 100,711 | | | 103,852 | | | (3,141) | |
| Third parties | | 12,103 | | | 15,269 | | | (3,166) | |
| | 112,814 | | | 119,121 | | | (6,307) | |
| | | | | | |
| Refinery processing units—Affiliates | | 59,860 | | | 61,496 | | | (1,636) | |
| | | | | | |
| Total revenues | | 370,392 | | | 401,143 | | | (30,751) | |
| Operating costs and expenses: | | | | | | |
| Operations (exclusive of depreciation and amortization) | | 109,721 | | | 123,045 | | | (13,324) | |
| Depreciation and amortization | | 75,202 | | | 72,192 | | | 3,010 | |
| General and administrative | | 7,569 | | | 7,322 | | | 247 | |
| Goodwill impairment | | 35,653 | | | — | | | 35,653 | |
| | 228,145 | | | 202,559 | | | 25,586 | |
| Operating income | | 142,247 | | | 198,584 | | | (56,337) | |
| Other income (expense): | | | | | | |
| Equity in earnings of equity method investments | | 5,186 | | | 5,217 | | | (31) | |
| Interest expense, including amortization | | (45,650) | | | (57,059) | | | 11,409 | |
| Interest income | | 7,834 | | | 3,322 | | | 4,512 | |
| Loss on early extinguishment of debt | | (25,915) | | | — | | | (25,915) | |
| Gain on sales-type leases | | 33,834 | | | 35,166 | | | (1,332) | |
| Gain (loss) on sale of assets and other | | 8,439 | | | (57) | | | 8,496 | |
| | (16,272) | | | (13,411) | | | (2,861) | |
| Income before income taxes | | 125,975 | | | 185,173 | | | (59,198) | |
| State income tax expense | | (110) | | | (36) | | | (74) | |
| Net income | | 125,865 | | | 185,137 | | | (59,272) | |
| | | | | | |
| Allocation of net income attributable to noncontrolling interests | | (6,721) | | | (5,920) | | | (801) | |
| Net income attributable to the partners | | 119,144 | | | 179,217 | | | (60,073) | |
| | | | | | |
| | | | | | |
| Limited partners’ earnings per unit—basic and diluted | | $ | 1.13 | | | $ | 1.70 | | | $ | (0.57) | |
| Weighted average limited partners’ units outstanding | | 105,440 | | | 105,440 | | | — | |
EBITDA (1) | | $ | 232,272 | | | $ | 305,182 | | | $ | (72,910) | |
Adjusted EBITDA (1) | | $ | 257,711 | | | $ | 272,391 | | | $ | (14,680) | |
Distributable cash flow (2) | | $ | 213,058 | | | $ | 206,923 | | | $ | 6,135 | |
| | | | | | |
| Volumes (bpd) | | | | | | |
| Pipelines: | | | | | | |
| Affiliates—refined product pipelines | | 116,641 | | | 130,426 | | | (13,785) | |
| Affiliates—intermediate pipelines | | 137,816 | | | 141,991 | | | (4,175) | |
| Affiliates—crude pipelines | | 276,128 | | | 376,518 | | | (100,390) | |
| | 530,585 | | | 648,935 | | | (118,350) | |
| Third parties—refined product pipelines | | 55,921 | | | 71,773 | | | (15,852) | |
| Third parties—crude pipelines | | 103,955 | | | 132,101 | | | (28,146) | |
| | 690,461 | | | 852,809 | | | (162,348) | |
| Terminals and loading racks: | | | | | | |
| Affiliates | | 401,245 | | | 429,660 | | | (28,415) | |
| Third parties | | 49,753 | | | 62,437 | | | (12,684) | |
| | 450,998 | | | 492,097 | | | (41,099) | |
| Refinery processing units—Affiliates | | 60,573 | | | 73,178 | | | (12,605) | |
| Total for pipelines and terminal and refinery processing unit assets (bpd) | | 1,202,032 | | | 1,418,084 | | | (216,052) | |
(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, (ii) goodwill impairment and (iii) pipeline tariffs not included in revenues due to impacts from lease accounting for certain pipeline tariffs minus (iv) gain on sales-type leases, (v) HEP's pro-rata share of gain on business interruption insurance settlementsignificant asset sales, and (vi) 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 recorded 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
September 30, | | Nine Months Ended
September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | (In thousands) |
| Net income attributable to the partners | | $ | 17,813 | | | $ | 82,345 | | | $ | 119,144 | | | $ | 179,217 | |
| Add (subtract): | | | | | | | | |
| Interest expense | | 14,104 | | | 18,807 | | | 45,650 | | | 57,059 | |
| Interest income | | (2,803) | | | (2,243) | | | (7,834) | | | (3,322) | |
| State income tax expense | | 34 | | | 30 | | | 110 | | | 36 | |
| Depreciation and amortization | | 26,190 | | | 24,121 | | | 75,202 | | | 72,192 | |
| EBITDA | | $ | 55,338 | | | $ | 123,060 | | | $ | 232,272 | | | $ | 305,182 | |
| Loss on early extinguishment of debt | | — | | | — | | | 25,915 | | | — | |
| Gain on sales-type leases | | — | | | (35,166) | | | (33,834) | | | (35,166) | |
| Goodwill impairment | | 35,653 | | | — | | | 35,653 | | | — | |
| HEP's pro-rata share of gain on business interruption insurance settlement | | (6,079) | | | — | | | (6,079) | | | — | |
| Pipeline tariffs not included in revenues | | 3,129 | | | 2,375 | | | 8,603 | | | 2,375 | |
| Lease payments not included in operating costs | | (1,606) | | | — | | | (4,819) | | | — | |
| Adjusted EBITDA | | $ | 86,435 | | | $ | 90,269 | | | $ | 257,711 | | | $ | 272,391 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 |
| | | (In thousands) |
| Net income attributable to the partners | | $ | 55,745 | | | $ | 76,470 | | | $ | 120,142 | | | $ | 101,331 | |
| Add (subtract): | | | | | | | | |
| Interest expense | | 13,938 | | | 13,779 | | | 27,178 | | | 31,546 | |
| Interest income | | (6,614) | | | (2,813) | | | (13,162) | | | (5,031) | |
| State income tax expense | | 27 | | | 39 | | | 64 | | | 76 | |
| Depreciation and amortization | | 25,003 | | | 25,034 | | | 50,068 | | | 49,012 | |
| EBITDA | | $ | 88,099 | | | $ | 112,509 | | | $ | 184,290 | | | $ | 176,934 | |
| Loss on early extinguishment of debt | | — | | | — | | | — | | | 25,915 | |
| Gain on sales-type leases | | (27) | | | (33,834) | | | (24,677) | | | (33,834) | |
| Gain on significant asset sales | | (5,263) | | | — | | | (5,263) | | | — | |
| Goodwill impairment | | — | | | — | | | 11,034 | | | — | |
| | | | | | | | |
| Pipeline tariffs not included in revenues | | 7,058 | | | 3,099 | | | 14,025 | | | 5,474 | |
| Lease payments not included in operating costs | | (1,606) | | | (1,606) | | | (3,213) | | | (3,213) | |
| Adjusted EBITDA | | $ | 88,261 | | | $ | 80,168 | | | $ | 176,196 | | | $ | 171,276 | |
(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
September 30, | | Nine Months Ended
September 30, | | | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | | | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | | 2021 | | 2020 |
| | | | (In thousands) | | | (In thousands) |
| Net income attributable to the partners | Net income attributable to the partners | | $ | 17,813 | | | $ | 82,345 | | | $ | 119,144 | | | $ | 179,217 | | Net income attributable to the partners | | $ | 55,745 | | | $ | 76,470 | | | $ | 120,142 | | | $ | 101,331 | |
| Add (subtract): | Add (subtract): | | Add (subtract): | |
| Depreciation and amortization | Depreciation and amortization | | 26,190 | | | 24,121 | | | 75,202 | | | 72,192 | | Depreciation and amortization | | 25,003 | | | 25,034 | | | 50,068 | | | 49,012 | |
| Amortization of discount and deferred debt issuance costs | Amortization of discount and deferred debt issuance costs | | 838 | | | 771 | | | 2,479 | | | 2,307 | | Amortization of discount and deferred debt issuance costs | | 1,385 | | | 842 | | | 2,229 | | | 1,641 | |
| Loss on early extinguishment of debt | Loss on early extinguishment of debt | | — | | | — | | | 25,915 | | | — | | Loss on early extinguishment of debt | | — | | | — | | | — | | | 25,915 | |
| Revenue recognized greater than customer billings | | (198) | | | 504 | | | (699) | | | (2,827) | | |
| Customer billings greater than revenue recognized | | Customer billings greater than revenue recognized | | (3,573) | | | (44) | | | (179) | | | (501) | |
Maintenance capital expenditures (3) | Maintenance capital expenditures (3) | | (1,565) | | | (2,118) | | | (5,192) | | | (3,477) | | Maintenance capital expenditures (3) | | (4,111) | | | (1,140) | | | (5,482) | | | (3,627) | |
| Increase (decrease) in environmental liability | Increase (decrease) in environmental liability | | 29 | | | 91 | | | 187 | | | (464) | | Increase (decrease) in environmental liability | | (78) | | | 157 | | | (234) | | | 158 | |
| Decrease in reimbursable deferred revenue | Decrease in reimbursable deferred revenue | | (3,257) | | | (1,964) | | | (9,062) | | | (5,604) | | Decrease in reimbursable deferred revenue | | (3,502) | | | (3,005) | | | (7,516) | | | (5,805) | |
| Gain on sales-type leases | Gain on sales-type leases | | — | | | (35,166) | | | (33,834) | | | (35,166) | | Gain on sales-type leases | | (27) | | | (33,834) | | | (24,677) | | | (33,834) | |
| Gain on significant asset sales | | Gain on significant asset sales | | (5,263) | | | — | | | (5,263) | | | — | |
| Goodwill impairment | Goodwill impairment | | 35,653 | | | — | | | 35,653 | | | — | | Goodwill impairment | | — | | | — | | | 11,034 | | | — | |
| Other | Other | | 1,391 | | | 254 | | | 3,265 | | | 745 | | Other | | 1,101 | | | 976 | | | (223) | | | 1,874 | |
| Distributable cash flow | Distributable cash flow | | $ | 76,894 | | | $ | 68,838 | | | $ | 213,058 | | | $ | 206,923 | | Distributable cash flow | | $ | 66,680 | | | $ | 65,456 | | | $ | 139,899 | | | $ | 136,164 | |
(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.
| | | September 30,
2020 | | December 31,
2019 | | June 30,
2021 | | December 31,
2020 |
| | (In thousands) | | (In thousands) |
| Balance Sheet Data | Balance Sheet Data | | Balance Sheet Data | |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 18,091 | | | $ | 13,287 | | Cash and cash equivalents | | $ | 19,561 | | | $ | 21,990 | |
| Working capital | Working capital | | $ | 24,600 | | | $ | 20,758 | | Working capital | | $ | 15,367 | | | $ | 14,247 | |
| Total assets | Total assets | | $ | 2,161,885 | | | $ | 2,199,232 | | Total assets | | $ | 2,172,822 | | | $ | 2,167,565 | |
| Long-term debt | Long-term debt | | $ | 1,439,874 | | | $ | 1,462,031 | | Long-term debt | | $ | 1,362,570 | | | $ | 1,405,603 | |
| Partners’ equity | Partners’ equity | | $ | 364,821 | | | $ | 381,103 | | Partners’ equity | | $ | 425,218 | | | $ | 379,292 | |
Results of Operations—Three Months Ended SeptemberJune 30, 20202021 Compared with Three Months Ended SeptemberJune 30, 20192020
Summary
Net income attributable to the partners for the thirdsecond quarter was $17.8$55.7 million ($0.170.53 per basic and diluted limited partner unit) compared to $82.3$76.5 million ($0.780.73 per basic and diluted limited partner unit) for the thirdsecond quarter of 2019. The third2020. Results for the second quarter of 2020 results2021 reflect special items that collectively decreased net income attributable to HEP by a totalgain on significant asset sales of $29.6 million. These items include a goodwill impairment charge of $35.7$5.3 million related to our Cheyenne reporting unit and a $6.1 million gain related to HEP's pro-rata sharethe sale of a business interruption insurance claim settlement resulting from a loss at HollyFrontier's Woods Cross Refinery. In addition, net6-inch refined product pipeline that connected HFC’s Navajo refinery to terminals in El Paso for gross proceeds of $7.0 millon. Net income attributable to HEP for the thirdsecond quarter of 20192020 included a gain on sales-type leases of $35.2$33.8 million. Excluding these items, net income attributable to HEPthe partners for the third quartersecond quarters of 2021 and 2020 was $47.4were $50.5 million ($0.450.48 per basic and diluted limited partner unit) compared to net income attributable to HEP for the third quarter of 2019 of $47.2and $42.6 million ($0.450.40 per basis canbasic and diluted limited partner unit)., respectively. The increase in earnings was mainly due to higher volumes across our pipelines and higher interest income associated with sales-type leases, partially offset by higher operating expenses.
Revenues
Revenues for the thirdsecond quarter were $127.7$126.2 million, a decreasean increase of $8.2$11.4 million compared to the thirdsecond quarter of 2019.2020. The decreaseincrease was mainly attributable to a 13% reduction14% increase in overall crude and product pipeline volumes predominantly in our Southwest region.volumes.
Revenues from our refined product pipelines were $28.4$28.7 million, a decreasean increase of $4.2$3.7 million compared to the thirdsecond quarter of 2019.2020. Shipments averaged 179.6171.2 thousand barrels per day (“mbpd”) compared to 197.1158.4 mbpd for the thirdsecond quarter of 2019.2020. The volume and revenue decreasesincreases were mainly due to lowerhigher volumes on pipelines servicing HFC's Navajo Refineryrefinery and Delek's Big Spring refinery largely as a result of demand destruction associated with the COVID-19 pandemic 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.our UNEV pipeline.
Revenues from our intermediate pipelines were $7.5 million, consistent with the thirdsecond quarter of 2019.2020. Shipments averaged 142.8143.8 mbpd for the thirdsecond quarter of 20202021 compared to 153.5128.5 mbpd for the thirdsecond quarter of 2019.2020. The decreaseincrease in volumes was mainly due to lowerhigher 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 $32.3$32.1 million, a decreasean increase of $0.7$5.6 million compared to the thirdsecond quarter of 2019,2020, and shipments averaged 404.3396.7 mbpd compared to 488.1338.4 mbpd for the thirdsecond quarter of 2019.2020. The decreasesrevenue and volume increases were mainly attributable to decreasedhigher volumes on our crude pipeline systems in New MexicoWyoming and Texas partially offset by increased volumes on our crude pipeline systems in Utah. Revenues did not decrease in proportion to the decrease in volumes mainly due to contractual minimum volume guarantees.
Revenues from terminal, tankage and loading rack fees were $39.0$36.9 million, a decreasean increase of $3.4$0.6 million compared to the thirdsecond quarter of 2019.2020. Refined products and crude oil terminalled in the facilities averaged 459.3466.7 mbpd compared to 541.6418.0 mbpd for the thirdsecond quarter of 2019.2020. The volume and revenue decreases wereincrease was mainly as athe result of demand destruction associated with the COVID-19 pandemic across most of our facilities.higher throughputs at HFC's El Dorado refinery. Revenues did not decreaseincrease in proportion to the decreaseincrease in volumes mainly due to contractual minimum volume guarantees.guarantees and lower on-going revenues on our Cheyenne assets as a result of the conversion of the HFC Cheyenne refinery to renewable diesel production.
Revenues from refinery processing units were $20.4$21.0 million, an increase of $0.1$1.5 million compared to the thirdsecond quarter of 2019,2020, and throughputs averaged 62.076.6 mbpd compared to 75.949.9 mbpd for the thirdsecond quarter of 2019. The decrease2020. The increase in volumes was mainly due to reducedincreased throughput for both our Woods Cross and El Dorado processing units largely as a result of demand destruction associated withunits. Revenues did not increase in proportion to the COVID-19 pandemic while revenue remained relatively constantincrease in volumes mainly due to contractual minimum volume guarantees.
Operations Expense
Operations (exclusive of depreciation and amortization)amortization and goodwill impairment) expense was $40.0$42.1 million for the three months ended SeptemberJune 30, 2020, a decrease2021, an increase of $4.9$7.3 million compared to the thirdsecond quarter of 2019.2020. The decreaseincrease was mainly due to lowerhigher pipeline rental expensescosts, natural gas costs, maintenance expense project costs, employee costs, and maintenance costschemicals and catalysts for the three months ended SeptemberJune 30, 2020.2021.
Depreciation and Amortization
Depreciation and amortization for the three months ended SeptemberJune 30, 20202021 remained constant compared to the three months ended June 30, 2020.
General and Administrative
General and administrative costs for the three months ended June 30, 2021 increased by $2.1$0.3 million compared to the three months ended SeptemberJune 30, 2019.2020, mainly due to higher legal expenses for the three months ended June 30, 2021.
Equity in Earnings of Equity Method Investments
| | | | | | | | | | | |
| Three Months Ended June 30, |
| Equity Method Investment | 2021 | | 2020 |
| (in thousands) |
| Osage Pipe Line Company, LLC | $ | 914 | | | $ | 366 | |
| Cheyenne Pipeline LLC | 1,879 | | | 1,085 | |
| Cushing Terminal | 630 | | | 705 | |
| Total | $ | 3,423 | | | $ | 2,156 | |
Equity in earnings of Osage Pipe Line Company, LLC increased for the three months ended June 30, 2021, mainly due to higher throughput volumes. Equity in earnings of Cheyenne Pipeline LLC increased for the three months ended June 30, 2021, mainly due to the recognition in revenue of prior contractual minimum commitment billings.
Interest Expense, including Amortization
Interest expense for the three months ended June 30, 2021, totaled $13.9 million, an increase of $0.2 million compared to the three months ended June 30, 2020. Our aggregate effective interest rates were 3.8% and 3.4% for the three months ended June 30, 2021 and 2020, respectively.
State Income Tax Expense
We recorded state income tax expense of $27,000 and $39,000 for the three months ended June 30, 2021 and 2020, respectively. All tax expense is solely attributable to the Texas margin tax.
Results of Operations—Six Months Ended June 30, 2021 Compared with Six Months Ended June 30, 2020
Summary
Net income attributable to the partners for the six months ended June 30, 2021, was $120.1 million ($1.14 per basic and diluted limited partner unit) compared to $101.3 million ($0.96 per basic and diluted limited partner unit) for the six months ended June 30, 2020. Results for the six months ended June 30, 2021, include special items that collectively increased net income attributable to the partners by a total of $18.9 million. These items include a gain on sales-type leases of $24.7 million, a gain on significant asset sales of $5.3 million and a goodwill impairment charge of $11.0 million. In addition, the net income attributable to the partners for the six months ended June 30, 2020, included a gain on sales-type leases of $33.8 million and a loss on early extinguishment of debt of $25.9 million. Excluding these items, net income attributable to the partners for the six months ended June 30, 2021 and 2020, were $101.2 million ($0.96 per basic and diluted limited partner unit) and $93.4 million ($0.89 per basic and diluted limited partner unit), respectively. The increase in earnings was mainly due to higher volumes across our crude pipelines and higher interest income associated with sales-type leases, partially offset by higher operating expenses.
Revenues
Revenues for the six months ended June 30, 2021, were $253.4 million, an increase of $10.8 million compared to the six months ended June 30, 2020. The increase was mainly attributable to increased volumes on our crude pipeline systems in Wyoming and Utah, the recognition of $9.9 million of the $10 million termination fee related to the termination of HollyFrontier's minimum volume commitment on our Cheyenne assets and higher revenues on our refinery processing units partially offset by lower on-going revenues on our Cheyenne assets as well as a reclassification of certain income from revenue to interest income under sales-type lease accounting.
Revenues from our refined product pipelines were $57.2 million, a decrease of $2.7 million compared to the six months ended June 30, 2020. Shipments averaged 167.6 mbpd compared to 169.0 mbpd for the six months ended June 30, 2020. The volume and revenue decreases were mainly due to lower volumes on pipelines servicing Delek's Big Spring refinery. Revenue also decreased due to a reclassification of certain pipeline income from revenue to interest income under sales-type lease accounting.
Revenues from our intermediate pipelines were $15.0 million, an increase of $0.1 million compared to the six months ended June 30, 2020. Shipments averaged 129.6 mbpd compared to 135.3 mbpd for the six months ended June 30, 2020. The decrease in volumes was mainly due to lower throughputs on our intermediate pipelines servicing HFC's Tulsa refinery while revenue remained relatively constant mainly due to contractual minimum volume guarantees.
Revenues from our crude pipelines were $62.6 million, an increase of $8.0 million compared to the six months ended June 30, 2020. Shipments averaged 385.3 mbpd compared to 367.8 mbpd for the six months ended June 30, 2020. The increases were mainly attributable to increased volumes on our crude pipeline systems in Wyoming and Utah.
Revenues from terminal, tankage and loading rack fees were $75.1 million, an increase of $1.3 million compared to the six months ended June 30, 2020. Refined products and crude oil terminalled in the facilities averaged 418.1 mbpd compared to 446.8 mbpd for the six months ended June 30, 2020. The volume decrease was mainly the result of lower throughputs at HFC's Tulsa refinery as well as the cessation of petroleum refinery operations at HFC's Cheyenne refinery. Revenues increased mainly due to the recognition of $9.9 million of the $10 million termination fee related to the termination of HFC's minimum volume commitment on our Cheyenne assets partially offset by lower on-going revenues on our Cheyenne assets as a result of the conversion of the HFC Cheyenne refinery to renewable diesel production as well as a reclassification of certain income from revenue to interest income under sales-type lease accounting.
Revenues from refinery processing units were $43.5 million, an increase of $4.1 million compared to the six months ended June 30, 2020. Throughputs averaged 68.7 mbpd compared to 59.8 mbpd for the six months ended June 30, 2020. The increase in volumes was mainly due to increased throughput for both our Woods Cross and El Dorado processing units. Revenues increased mainly due to higher recovery of natural gas costs as well as higher throughputs.
Operations Expense
Operations expense (exclusive of depreciation and amortization) for the six months ended June 30, 2021, increased by $13.7 million compared to the six months ended June 30, 2020. The increase was mainly due to higher maintenance, natural gas, and pipeline rental costs, partially offset by lower materials and supplies and property taxes.
Depreciation and Amortization
Depreciation and amortization for the six months ended June 30, 2021, increased by $1.1 million compared to the six months ended June 30, 2020. 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 threesix months ended SeptemberJune 30, 2020 decreased2021, increased by $0.4$0.6 million compared to the threesix months ended SeptemberJune 30, 2019,2020 mainly due to lowerhigher legal expenses forincurred in the threesix months ended SeptemberJune 30, 2020.2021.
Equity in Earnings of Equity Method Investments
| | | Three Months Ended September 30, | | Six Months Ended June 30, |
| Equity Method Investment | Equity Method Investment | 2020 | | 2019 | Equity Method Investment | 2021 | | 2020 |
| | (in thousands) | | (in thousands) |
| Osage Pipe Line Company, LLC | Osage Pipe Line Company, LLC | $ | 219 | | | $ | 606 | | Osage Pipe Line Company, LLC | 1,636 | | | 1,380 | |
| Cheyenne Pipeline LLC | Cheyenne Pipeline LLC | 533 | | | 728 | | Cheyenne Pipeline LLC | 1,774 | | | 2,160 | |
| Cushing Terminal | Cushing Terminal | 564 | | | — | | Cushing Terminal | 1,776 | | | 330 | |
| Total | Total | $ | 1,316 | | | $ | 1,334 | | Total | $ | 5,186 | | | $ | 3,870 | |
Equity in earnings of Osage Pipe Line Company, LLC decreasedCushing Terminal increased for the threesix months ended SeptemberJune 30, 2020, mainly due to lower throughput volumes.
Interest Expense, including Amortization
Interest expense for the threesix months ended SeptemberJune 30, 2020,2021, totaled $14.1$27.2 million, a decrease of $4.7$4.4 million compared to the threesix months ended SeptemberJune 30, 2019.2020. The decrease was mainly due to market interest rate decreases under our senior secured revolving credit facility and refinancingour $500 million aggregate principal amount of 6% Senior Notes6.0% senior notes due 2024 (“6% Senior Notes”) with $500 million aggregate principal amount of 5% Senior Notes5.0% senior notes due 2028 (“5% Senior Notes”).2028. Our aggregate effective interest rates were 3.6% and 5.2%4.0% for the threesix months ended SeptemberJune 30, 2021 and 2020, and 2019, respectively.
State Income Tax Expense
We recorded a state income tax expense of $34,000$64,000 and $30,000$76,000 for the threesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. All tax expense is solely attributable to the Texas margin tax.
Results of Operations—Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019
Summary
Net income attributable to the partners for the nine months ended September 30, 2020 was $119.1 million ($1.13 per basic and diluted limited partner unit) compared to $179.2 million ($1.70 per basic and diluted limited partner unit) for the third quarter of 2019. Results for the nine months ended September 30, 2020 reflect special items that collectively decreased net income attributable to HEP by a total of $21.7 million. These items include a goodwill impairment charge of $35.7 million related to our Cheyenne reporting unit, 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, a gain on sales-type leases of $33.8 million and a $6.1 million gain related to HEP's pro-rata share of a business interruption insurance claim settlement resulting from a loss at HollyFrontier's Woods Cross Refinery. In addition, net income attributable to HEP for the nine months ended September 30, 2019 included a gain on sales-type leases of $35.2 million. Excluding these items, net income attributable to the partners for the nine months ended September 30, 2020 was $140.8 million ($1.34 per basic and diluted limited partner unit) compared to net income attributable to HEP for the nine months ended September 30, 2019 of $144.1 million ($1.37 per basis can diluted limited partner unit).
Revenues
Revenues for the nine months ended September 30, 2020, were $370.4 million, a decrease of $30.8 million compared to the nine months ended September 30, 2019. The decrease was mainly attributable to a 19% reduction in overall crude and product pipeline volumes predominantly in our Southwest and Rockies regions.
Revenues from our refined product pipelines were $88.4 million, a decrease of $13.2 million compared to the nine months ended September 30, 2019. Shipments averaged 172.6 mbpd compared to 202.2 mbpd for the nine months ended September 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 largely as a result of demand destruction associated with the COVID-19 pandemic 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 $22.5 million, an increase of $0.4 million compared to the nine months ended September 30, 2019. Shipments averaged 137.8 mbpd compared to 142.0 mbpd for the nine months ended September 30, 2019.
Revenues from our crude pipelines were $86.9 million, a decrease of $10.0 million compared to the nine months ended September 30, 2019. Shipments averaged 380.1 mbpd compared to 508.6 mbpd for the nine months ended September 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 largely as a result of demand destruction associated with the COVID-19 pandemic.
Revenues from terminal, tankage and loading rack fees were $112.8 million, a decrease of $6.3 million compared to the nine months ended September 30, 2019. Refined products and crude oil terminalled in the facilities averaged 451.0 mbpd compared to 492.1 mbpd for the nine months ended September 30, 2019. The volume and revenue decreases were mainly as a result of demand destruction associated with the COVID-19 pandemic across most of our facilities.
Revenues from refinery processing units were $59.9 million, a decrease of $1.6 million compared to the nine months ended September 30, 2019. Throughputs averaged 60.6 mbpd compared to 73.2 mbpd for the nine months ended September 30, 2019. The decrease in volumes was mainly due to reduced throughput for both our Woods Cross and El Dorado processing units largely as a result of demand destruction associated with the COVID-19 pandemic. Revenues were higher in the nine months ended September 30, 2019 due to an adjustment in revenue recognition recorded during that period; otherwise, revenues for the two nine-month periods remained relatively constant due to contractual minimum volume guarantees.
Operations Expense
Operations expense (exclusive of depreciation and amortization) for the nine months ended September 30, 2020, decreased by $13.3 million compared to the nine months ended September 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 nine months ended September 30, 2020, increased by $3.0 million compared to the nine months ended September 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 nine months ended September 30, 2020, increased by $0.2 million compared to the nine months ended September 30, 2019 mainly due to higher legal expenses incurred in the nine months ended September 30, 2020.
Equity in Earnings of Equity Method Investments
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| Equity Method Investment | 2020 | | 2019 |
| (in thousands) |
| Osage Pipe Line Company, LLC | 1,599 | | | 1,857 | |
| Cheyenne Pipeline LLC | 2,693 | | | 3,360 | |
| Cushing Terminal | 894 | | | — | |
| Total | $ | 5,186 | | | $ | 5,217 | |
Equity in earnings of Cheyenne Pipeline LLC decreased for the nine months ended September 30, 2020, mainly due to lower throughput volumes.
Interest Expense
Interest expense for the nine months ended September 30, 2020, totaled $45.7 million, a decrease of $11.4 million compared to the nine months ended September 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 3.8% and 5.3% for the nine months ended September 30, 2020 and 2019, respectively.
State Income Tax
We recorded a state income tax expense of $110,000 and $36,000 for the nine months ended September 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 billionIn April 2021, we amended our senior secured revolving credit facility (the “Credit Agreement”) expiring indecreasing the size of the facility from $1.4 billion to $1.2 billion and extending the maturity date to July 2022.27, 2025. 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 containscontinues to provide for an accordion feature givingthat allows us the ability to increase commitments under the size of the facility byCredit Agreement up to $300 million with additional lender commitments.a maximum amount of $1.7 billion.
During the ninesix months ended SeptemberJune 30, 2020,2021, we received advances totaling $219.5$141.0 million and repaid $237.0$184.5 million under the Credit Agreement, resulting in a net decrease of $17.5$43.5 million under the Credit Agreement and an outstanding balance of $948.0$870.0 million at SeptemberJune 30, 2020.2021 under the Credit Agreement. As of SeptemberJune 30, 2020,2021, we have no letters of credit outstanding under the Credit Agreement and the available capacity under the Credit Agreement was $452.0$330.0 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 Notes due in 2028. 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 threesix months ended SeptemberJune 30, 2020.2021. As of SeptemberJune 30, 2020,2021, 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 are expected to 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 sources of liquidity, including cash balances, future internally generated funds, any future issuances of debt or equity securities 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.future, including funding the cash portion of the HEP Transactions with Sinclair.
In August 2020,May 2021, we paid a regular quarterly 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.$37.0 million.
Cash and cash equivalents increaseddecreased by $4.8$2.4 million during the ninesix months ended SeptemberJune 30, 2020.2021. The cash flows provided by operating activities of $225.0$162.1 million were moreless than the cash flows used for financing activities of $180.8$115.6 million and investing activities of $39.4$48.9 million. Working capital increased by $3.8$1.1 million to $24.6$15.4 million at SeptemberJune 30, 2020,2021, from $20.8$14.2 million at December 31, 2019.2020.
Cash Flows—Operating Activities
Cash flows from operating activities decreased increased by $3.2$27.5 million from $228.2$134.6 million for the ninesix months ended SeptemberJune 30, 2019,2020, to $225.0$162.1 million for the ninesix months ended SeptemberJune 30, 2020.2021. The decrease increase was mainly due to lowerhigher cash receipts from customers partially offset byand lower payments for operating expenses and interest expenses during the ninesix months ended SeptemberJune 30, 2020,2021, as compared to the ninesix months ended SeptemberJune 30, 2019.2020.
Cash Flows—Investing Activities
Cash flows used for investing activities were $39.4$48.9 million for the ninesix months ended SeptemberJune 30, 2020,2021, compared to $22.9$31.9 million for the ninesix months ended SeptemberJune 30, 2019,2020, an increase of $16.5$17.1 million. During the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, we invested $38.6$59.4 million and $23.8$30.7 million, respectively, in additions to properties and equipment. During the nine months ended September 30, 2020, we invested $2.4 million in our equity method investment in Cushing Connect JV Terminal. We received $0.7$3.1 million in excess of equity in earnings and $7.3 million in proceeds from the sale of assets during both the ninesix months ended SeptemberJune 30, 2020 and September 30, 2019.2021.
Cash Flows—Financing Activities
Cash flows used for financing activities were $180.8$115.6 million for the ninesix months ended SeptemberJune 30, 2020,2021, compared to $200.9$97.1 million for the ninesix months ended SeptemberJune 30, 2019, a decrease2020, an increase of $20.1$18.5 million. During the ninesix months ended SeptemberJune 30, 2020,2021, we received $219.5$141.0 million and repaid $237.0$184.5 million in advances under the Credit Agreement. Additionally, we paid $137.4$75.4 million in regular quarterly cash distributions to our limited partners and $7.8$5.9 million to our noncontrolling interest.interests. We received $15.4$17.6 million in contributions from noncontrolling interestinterests during the ninesix months ended SeptemberJune 30, 2020.2021. During the six months ended June 30, 2020, we received $168.0 million and repaid $138.5 million in advances under the Credit Agreement. We paid $103.0 million in regular quarterly cash distributions to our limited partners, and distributed $4.0 million to our noncontrolling interests. We also received net proceeds of $491.3 million from thefor issuance of our 5% Senior Notes and paid $522.5 million to retire our 6% Senior Notes. DuringIn addition, we received $13.3 million in contributions from noncontrolling interests during the ninesix months ended SeptemberJune 30, 2019, we received $269.5 million and repaid $257.0 million in advances under the Credit Agreement. We paid $204.7 million in regular quarterly cash distributions to our limited partners, and distributed $7.8 million to our noncontrolling interest.2020.
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. Our current 20202021 capital forecast is comprised of approximately $8$17 million to $12$21 million for maintenance capital expenditures, up$5 million to $1$8 million for refinery unit turnarounds and $35$38 million to $45$42 million for expansion capital expenditures and our share of Cushing Connect Joint Venture investments. We expect the majority of the 20202021 expansion capital 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 planned 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
OurIn April 2021, we amended our Credit Agreement decreasing the commitments under the facility from $1.4 billion Credit Agreement expires into $1.2 billion and extending the maturity date to July 2022.27, 2025. 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 containscontinues to provide for an accordion feature givingthat allows us the ability to increase the size ofcommitments under the facility byCredit Agreement up to $300 million with additional lender commitments.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 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 allthe covenants under the Credit Agreement as of SeptemberJune 30, 2020.2021.
Senior Notes
As of December 31, 2019,June 30, 2021, we had $500 million in aggregate principal amount of 6%5% Senior Notes due in 2024.2028.
On February 4, 2020, we closed a private placement of $500 million in aggregate principal amount of 5% Senior Notes due in 2028. 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 SeptemberJune 30, 2020.2021. 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 are as follows:
| | | September 30,
2020 | | December 31,
2019 | | June 30,
2021 | | December 31,
2020 |
| | | | (In thousands) | | | (In thousands) |
| Credit Agreement | Credit Agreement | | 948,000 | | | $ | 965,500 | | Credit Agreement | | $ | 870,000 | | | 913,500 | |
| | 6% Senior Notes | | |
| Principal | | — | | | 500,000 | | |
| Unamortized debt issuance costs | | — | | | (3,469) | | |
| — | | | 496,531 | | |
| | 5% Senior Notes | 5% Senior Notes | | 5% Senior Notes | |
| Principal | Principal | | 500,000 | | | — | Principal | | 500,000 | | | 500,000 | |
| Unamortized debt issuance costs | Unamortized debt issuance costs | | (8,126) | | | — | Unamortized debt issuance costs | | (7,430) | | | (7,897) | |
| | 491,874 | | | — | | 492,570 | | | 492,103 | |
| | Total long-term debt | Total long-term debt | | $ | 1,439,874 | | | $ | 1,462,031 | | Total long-term debt | | $ | 1,362,570 | | | $ | 1,405,603 | |
Contractual Obligations
There were no significant changes to our long-term contractual obligations during the quarter ended SeptemberJune 30, 2020.2021.
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 ninesix months ended SeptemberJune 30, 20202021 and 2019. 2020. PPI has increased an average of 0.6%0.9% annually over the past five calendar years, including increasesa decrease of 1.4% in 2020 and an increase of 0.8% and 3.1% in 2019 and 2018, respectively.2019. PPI for the first six months of 2021 increased by 6.0% over the first six months of 2020.
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.decreases, and the majority of our rates do not decrease when PPI is negative. 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 SeptemberJune 30, 2020,2021, we had an accrual of $5.7$4.3 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, 2019.2020. 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 2020.2021. 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 SeptemberJune 30, 2020,2021, 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 SeptemberJune 30, 2020,2021, the fair value of our 5% Senior Notes was $490.2$512.2 million. We estimate a hypothetical 10% change in the yield-to-maturity applicable to the 5% Senior Notes at SeptemberJune 30, 20202021 would result in a change of approximately $16$13.2 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 SeptemberJune 30, 2020,2021, borrowings outstanding under the Credit Agreement were $948.0$870.0 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 but not limited to fire, explosion, cyberattacks and weather-related perils. We maintain various insurance coverages, including property damage, and business interruption and cyber insurance, subject to certain deductibles and insurance policy terms and conditions. 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.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices. See “Risk Management” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of market risk exposures that we have with respect to our long-term debt, which disclosure should be read in conjunction with the quantitative and qualitative disclosures about market risk contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.2020.
Since we do not own products shipped on our pipelines or terminalled at our terminal facilities, we do not have direct market risks associated with commodity prices.
Item 4.Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Our principal executive officer and principal financial officer have evaluated, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 2020,2021, at a reasonable level of assurance.
(b) Changes in internal control over financial reporting
During the three months ended SeptemberJune 30, 2020,2021, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
In the ordinary course of business, we may become party to legal, regulatory or administrative proceedings or governmental investigations, including environmental and other matters. Damages or penalties may be sought from us in some matters and certain matters may require years to resolve. While the outcome and impact of these proceedings and investigations on us cannot be predicted with certainty, based on advice of counsel and information currently available to us, management believes that the resolution of these proceedings and investigations, through settlement or adverse judgment, will not, either individually or in the aggregate, have a materially adverse effect on our financial condition, results of operations or cash flows.
Item 1A.Risk Factors
ThereExcept for the risk factors below, there have been no material changes in our risk factors as previously disclosed in Part 1, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and in Part II, “Item 1A Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. In addition to the other information set forth in this quarterly report, you should consider carefully the information discussed in our 20192020 Form 10-K, and our first quarter 2020 Form 10-Q, which could materially affect our business, financial condition or future results. The risks described in our 20192020 Form 10-K and our first quarter 2020 Form 10-Q are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition or future results.
The pending HEP Transactions may not be consummated on a timely basis or at all.Failure to complete the acquisition within the expected timeframe or at all could adversely affect our common unit price and our future business and financial results.
On August 2, 2021, we entered into the Contribution Agreement with Sinclair and certain other parties thereto to acquire all of the issued and outstanding capital stock of STC. We expect the acquisition to close in mid-2022. The HEP Transactions are subject to closing conditions. If these conditions are not satisfied or waived, the acquisition will not be consummated. If the closing of the HEP Transactions is substantially delayed or do not occur at all, or if the terms of the acquisition are required to be modified substantially, we may not realize the anticipated benefits of the acquisition fully or at all, or they may take longer to realize than expected. The closing conditions include, among others, the absence of a law or order prohibiting the transactions contemplated by the business combination agreement and the termination or expiration of any waiting periods under the Hart-Scott Rodino Act, as amended, with respect to the acquisition. We will also incur substantial transaction costs whether or not the acquisition is completed. Any failure to complete the HEP Transactions could have a material adverse effect on our common unit price, our competitiveness and reputation in the marketplace, and our future business and financial results, including our ability to execute on our strategy to return capital to our unitholders that was described in our press release and investor presentation announcing the HEP Transactions.
The anticipated benefits of our pending HEP Transactionsmay not be realized fully or at all or may take longer to realize than expected.
The HEP Transactions will require management to devote significant attention and resources to integrating the Sinclair business with our business. Potential difficulties that may be encountered in the integration process include, among others:
a.the inability to successfully integrate the Sinclair business into the HEP business in a manner that permits us to achieve the full revenue and cost savings anticipated from the Sinclair Transactions;
b.complexities associated with managing the larger, integrated business;
c.potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the acquisition;
d.integrating personnel from the two companies while maintaining focus on providing consistent, high-quality products and services;
e.loss of key employees;
f.integrating relationships with customers, vendors and business partners;
g.performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the acquisition and integrating Sinclair’s operations into HEP; and
h.the disruption of, or the loss of momentum in, each company’s ongoing business or inconsistencies in standards, controls, procedures and policies.
Delays or difficulties in the integration process could adversely affect our business, financial results, financial condition and common unit price. Even if we are able to integrate our business operations successfully, there can be no assurance that this integration will result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that we currently expect from this integration or that these benefits will be achieved within the anticipated time frame.
The actual value of the consideration we will pay to Sinclair may exceed the value allocated to such consideration at the time we entered into the Contribution Agreement.
Under the Contribution Agreement, at closing, we will pay Sinclair a cash payment of $325 million and issue Sinclair 21 million common units, which represents a transaction value of approximately $758 million based on the closing price of our common units on July 30, 2021. Neither we nor the Sinclair stockholders are permitted to “walk away” from the transaction solely because of changes in the market price of our common units between the signing of the Contribution Agreement and the closing. Our common units have historically experienced volatility. Common unit price changes may result from a variety of factors that are beyond our control, including changes in our business, operations and prospects, regulatory considerations and general market and economic conditions. The closing price of our common units on the New York Stock Exchange on July 30, 2021, was $20.60; and on August 5, 2021, the closing price of our common units was $17.75. The value of the common units we issue in connection with the closing of the Sinclair Transactions may be significantly higher at the closing than when we entered into the Contribution Agreement.
We will issue a large number of common units in connection with the HEP Transactions, which will result in dilution to our existing unitholders and may cause the market price of our common units to decline in the future as the result of sales of our common units owned by Sinclair stockholders or current HEP unitholders. Our unitholders may not realize a benefit from the Sinclair Transactions commensurate with the ownership dilution they will experience.
At the closing of the HEP Transactions, we will issue 21 million common units to Sinclair. Our issuance of such common units will result in dilution of our existing unitholders’ ownership interests and may also have an adverse impact on our net income per unit in fiscal periods that include (or follow) the closing. The Unitholders Agreement (the “Unitholders Agreement”) between HEP, its ultimate general partner, certain other parties, and the stockholders of Sinclair (the “Sinclair Parties”) also subjects 15.75 million of the HEP common limited partner units issued to the Sinclair Parties (the “Restricted Units”) to a “lock-up” period commencing on the closing date, during which the Sinclair Parties will be prohibited from selling the Restricted Units, except for certain permitted transfers. One-third of such Restricted Units will be released from such restrictions on the date that is six months after the closing, one-third of the Restricted Units will be released from such restrictions on the first anniversary of the closing date, and the remainder will be released from such restrictions on the date that is 15 months from the closing date. In addition, the Unitholders Agreement contains customary registration rights, requiring us to file, within five business days following the closing date, a shelf registration statement on Form S-3 under the Securities Act, to permit the public resale of all the registrable securities held by the Sinclair Parties once such securities are no longer subject to a lock-up.
Following their receipt of common units as consideration in the HEP Transactions, subject to release from the associated lock-up provisions and the filing of a resale registration statement or satisfaction of the requirements of Rule 144, the Sinclair Parties may seek to sell the common units delivered to them. Other HEP unitholders may also seek to sell our common units held by them following, or in anticipation of, completion of the HEP Transactions. These sales (or the perception that these sales may occur), coupled with the increase in the outstanding number of common units, may affect the market for, and the market price of, our common units in an adverse manner.
If we are unable to realize the strategic and financial benefits currently anticipated from the Sinclair Transactions, our unitholders will have experienced dilution of their ownership interest without receiving commensurate benefit, and we may be unable to execute on our strategy to return capital to our unitholders that was described in our press release and investor presentation announcing the Sinclair Transactions.
Potential litigation relating to the Sinclair Transactions could result in substantial costs to HEP.
Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into acquisition, merger or other business combination agreements. Even if such a lawsuit is without merit, defending against these claims can result in substantial costs and divert the time and resources of management. An adverse judgment could result in monetary damages, which could have a negative impact on HEP's liquidity and financial condition.
Item 6.Exhibits
The Exhibit Index beginning on page 54 of this Quarterly Report on Form 10-Q lists the exhibits that are filed or furnished, as applicable, as part of this Quarterly Report on Form 10-Q.
Exhibit Index
| | | | | | | | |
Exhibit
Number | | Description |
| | |
| 2.1† | | Contribution Agreement, dated as of August 2, 2021, by and among Holly Energy Partners, L.P., The Sinclair Companies, and Sinclair Transportation Company (incorporated by reference to Exhibit 2.1 of Registrant’s Current Report on Form 8-K filed on August 3, 2021, File No. 1-32225). |
| 3.1 | | |
| 3.2 | | |
| 3.3 | | |
| 3.4 | | |
| 3.5 | | |
| 3.6 | | |
| 10.1 | | First Amendment to FifthSeventh Amended and Restated Master Lease and AccessThroughput Agreement, datedentered into as of August 4, 2020,April 30, 2021, effective as of January 23, 2020,April 1, 2021 by and among certain subsidiaries ofbetween HollyFrontier Refining & Marketing LLC and Holly Energy Partners - Operating, L.P. and certain subsidiaries of HollyFrontier Corporation (incorporated(incorporated by reference to Exhibit 1.510.9 of Registrant’s Quarterly Report on Form 10-Q for the quarterly periodquarter ended June 30, 2020,March 31, 2021, File No. 1-03876)1-32225). |
10.2*+10.2† | | Amendment No. 1 to Third Amended and Restated Credit Agreement dated April 30, 2021, among Holly Energy Partners, L.P., as borrower, certain of its affiliates, as guarantors, Wells Fargo Bank, National Association, as administrative agent, an issuing bank and a lender, and certain other lenders party thereto (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form of Performance Unit Agreement.8-K filed on May 3, 2021, File No.1-32225). |
10.3*+ | | |
| 10.4† | | Unitholders Agreement, dated as of August 2, 2021, by and among Holly Energy Partners, L.P., Holly Logistic Services, L.L.C., Navajo Pipeline Co., L.P., The Sinclair Companies, and the unitholders set forth on Schedule I thereto, as may be amended from time to time (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form of Phantom Unit Agreement (Employee)8-K filed on August 3, 2021, File No. 1-32225). |
10.4*+10.5 | | |
10.5*+ | | |
10.6*+ | | |
| 31.1* | | |
| 31.2* | | |
| 32.1** | | |
| 32.2** | | |
| 101++ | | The following financial information from Holly Energy Partners, L.P.’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 20202021 formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, (v)(iv) Consolidated Statement of Partners’ Equity, and (vi)(v) Notes to Consolidated Financial Statements. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
| | | | | |
| * | Filed herewith. |
| ** | Furnished herewith. |
| + | Constitutes management contracts or compensatory plans or arrangements. |
| ++ | Filed electronically herewith. |
| † | Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of regulation S-K. The registrant agrees to furnish supplementally a copy of the omitted schedules and exhibits to the SEC upon request. |
| |
| |
HOLLY ENERGY PARTNERS, L.P.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| HOLLY ENERGY PARTNERS, L.P. |
| (Registrant) |
| | |
| | By: HEP LOGISTICS HOLDINGS, L.P.
its General Partner |
| | |
| | By: HOLLY LOGISTIC SERVICES, L.L.C.
its General Partner |
| | |
Date: November 5, 2020August 6, 2021 | | /s/ John Harrison |
| | John Harrison |
| | Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer) |
| | |
Date: November 5, 2020August 6, 2021 | | /s/ Kenneth P. Norwood |
| | Kenneth P. Norwood |
| | Vice President and Controller
(Principal Accounting Officer) |