Washington, D.C. 20549
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HOLLY ENERGY PARTNERS, L.P.
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(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth” companygrowth company” in Rule 12b-2 of the Exchange Act.
HOLLY ENERGY PARTNERS, L.P.
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,” “expect,” “project,” “expect,“will,” “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:
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 risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2020,2021, 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
HOLLY ENERGY PARTNERS, L.P.
See accompanying notes.
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per unit data)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Revenues: | Revenues: | | | | | | | | | Revenues: | | | | | | | | |
Affiliates | Affiliates | | $ | 99,142 | | | $ | 95,563 | | | $ | 201,068 | | | $ | 196,991 | | Affiliates | | $ | 110,537 | | | $ | 99,142 | | | $ | 202,791 | | | $ | 201,068 | |
Third parties | Third parties | | 27,093 | | | 19,244 | | | 52,350 | | | 45,670 | | Third parties | | 25,233 | | | 27,093 | | | 53,177 | | | 52,350 | |
| | 126,235 | | | 114,807 | | | 253,418 | | | 242,661 | | | 135,770 | | | 126,235 | | | 255,968 | | | 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) | | 42,068 | | | 34,737 | | | 83,433 | | | 69,718 | | Operations (exclusive of depreciation and amortization) | | 53,899 | | | 42,068 | | | 96,524 | | | 83,433 | |
Depreciation and amortization | Depreciation and amortization | | 25,003 | | | 25,034 | | | 50,068 | | | 49,012 | | Depreciation and amortization | | 26,974 | | | 25,003 | | | 49,161 | | | 50,068 | |
General and administrative | General and administrative | | 2,847 | | | 2,535 | | | 5,815 | | | 5,237 | | General and administrative | | 4,682 | | | 2,847 | | | 8,994 | | | 5,815 | |
Goodwill impairment | Goodwill impairment | | 0 | | | 0 | | | 11,034 | | | 0 | | Goodwill impairment | | — | | | — | | | — | | | 11,034 | |
| | 69,918 | | | 62,306 | | | 150,350 | | | 123,967 | | | 85,555 | | | 69,918 | | | 154,679 | | | 150,350 | |
Operating income | Operating income | | 56,317 | | | 52,501 | | | 103,068 | | | 118,694 | | Operating income | | 50,215 | | | 56,317 | | | 101,289 | | | 103,068 | |
| Other income (expense): | Other income (expense): | | Other income (expense): | |
Equity in earnings of equity method investments | Equity in earnings of equity method investments | | 3,423 | | | 2,156 | | | 5,186 | | | 3,870 | | Equity in earnings of equity method investments | | 5,447 | | | 3,423 | | | 9,073 | | | 5,186 | |
Interest expense | Interest expense | | (13,938) | | | (13,779) | | | (27,178) | | | (31,546) | | Interest expense | | (20,347) | | | (13,938) | | | (33,986) | | | (27,178) | |
Interest income | Interest income | | 6,614 | | | 2,813 | | | 13,162 | | | 5,031 | | Interest income | | 24,331 | | | 6,614 | | | 36,978 | | | 13,162 | |
Loss on early extinguishment of debt | | 0 | | | 0 | | | 0 | | | (25,915) | | |
Gain on sales-type leases | Gain on sales-type leases | | 27 | | | 33,834 | | | 24,677 | | | 33,834 | | Gain on sales-type leases | | — | | | 27 | | | — | | | 24,677 | |
| Gain on sale of assets and other | Gain on sale of assets and other | | 5,415 | | | 468 | | | 5,917 | | | 974 | | Gain on sale of assets and other | | 45 | | | 5,415 | | | 146 | | | 5,917 | |
| | 1,541 | | | 25,492 | | | 21,764 | | | (13,752) | | | 9,476 | | | 1,541 | | | 12,211 | | | 21,764 | |
Income before income taxes | Income before income taxes | | 57,858 | | | 77,993 | | | 124,832 | | | 104,942 | | Income before income taxes | | 59,691 | | | 57,858 | | | 113,500 | | | 124,832 | |
State income tax expense | State income tax expense | | (27) | | | (39) | | | (64) | | | (76) | | State income tax expense | | (14) | | | (27) | | | (45) | | | (64) | |
Net income | Net income | | 57,831 | | | 77,954 | | | 124,768 | | | 104,866 | | Net income | | 59,677 | | | 57,831 | | | 113,455 | | | 124,768 | |
Allocation of net income attributable to noncontrolling interests | Allocation of net income attributable to noncontrolling interests | | (2,086) | | | (1,484) | | | (4,626) | | | (3,535) | | Allocation of net income attributable to noncontrolling interests | | (2,885) | | | (2,086) | | | (7,104) | | | (4,626) | |
Net income attributable to the partners | Net income attributable to the partners | | 55,745 | | | 76,470 | | | 120,142 | | | 101,331 | | Net income attributable to the partners | | 56,792 | | | 55,745 | | | 106,351 | | | 120,142 | |
Limited partners’ per unit interest in earnings—basic and diluted | Limited partners’ per unit interest in earnings—basic and diluted | | $ | 0.53 | | | $ | 0.73 | | | $ | 1.14 | | | $ | 0.96 | | Limited partners’ per unit interest in earnings—basic and diluted | | $ | 0.45 | | | $ | 0.53 | | | $ | 0.90 | | | $ | 1.14 | |
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 | | 126,440 | | | 105,440 | | | 118,087 | | | 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)
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2021 | | 2020 |
Cash flows from operating activities | | | | |
Net income | | $ | 124,768 | | | $ | 104,866 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 50,068 | | | 49,012 | |
Gain on sale of assets | | (5,586) | | | (797) | |
Loss on early extinguishment of debt | | 0 | | | 25,915 | |
Gain on sales-type leases | | (24,677) | | | (33,834) | |
Goodwill impairment | | 11,034 | | | 0 | |
Amortization of deferred charges | | 2,229 | | | 1,641 | |
Equity-based compensation expense | | 1,210 | | | 980 | |
Equity in earnings of equity method investments, net of distributions | | 0 | | | (1,298) | |
(Increase) decrease in operating assets: | | | | |
Accounts receivable—trade | | 1,726 | | | 3,803 | |
Accounts receivable—affiliates | | 1,649 | | | (131) | |
Prepaid and other current assets | | 825 | | | 216 | |
Increase (decrease) in operating liabilities: | | | | |
Accounts payable—trade | | 3,068 | | | (4,959) | |
Accounts payable—affiliates | | (3,157) | | | (9,452) | |
Accrued interest | | (23) | | | (2,523) | |
Deferred revenue | | (2,176) | | | (2,378) | |
Accrued property taxes | | 1,065 | | | 1,727 | |
Other current liabilities | | 438 | | | 669 | |
Other, net | | (353) | | | 1,137 | |
Net cash provided by operating activities | | 162,108 | | | 134,594 | |
| | | | |
Cash flows from investing activities | | | | |
Additions to properties and equipment | | (59,375) | | | (30,740) | |
Investment in Cushing Connect JV Terminal | | 0 | | | (2,400) | |
Proceeds from sale of assets | | 7,343 | | | 816 | |
Distributions in excess of equity in earnings of equity investments | | 3,107 | | | 470 | |
Net cash used for investing activities | | (48,925) | | | (31,854) | |
| | | | |
Cash flows from financing activities | | | | |
Borrowings under credit agreement | | 141,000 | | | 168,000 | |
Repayments of credit agreement borrowings | | (184,500) | | | (138,500) | |
Redemption of senior notes | | 0 | | | (522,500) | |
Proceeds from issuance of debt | | 0 | | | 500,000 | |
Contributions from general partner | | 0 | | | 435 | |
Contributions from noncontrolling interests | | 17,593 | | | 13,263 | |
Distributions to HEP unitholders | | (75,356) | | | (102,979) | |
Distributions to noncontrolling interests | | (5,872) | | | (4,000) | |
Payments on finance leases | | (1,747) | | | (1,972) | |
Deferred financing costs | | (6,661) | | | (8,714) | |
| | | | |
Units withheld for tax withholding obligations | | (69) | | | (147) | |
Net cash used by financing activities | | (115,612) | | | (97,114) | |
| | | | |
Cash and cash equivalents | | | | |
Increase (decrease) for the period | | (2,429) | | | 5,626 | |
Beginning of period | | 21,990 | | | 13,287 | |
End of period | | $ | 19,561 | | | $ | 18,913 | |
| | | | |
Supplemental disclosure of cash flow information: | | | | |
Cash paid during the period for interest | | $25,072 | | $32,118 |
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2022 | | 2021 |
Cash flows from operating activities | | | | |
Net income | | $ | 113,455 | | | $ | 124,768 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 49,161 | | | 50,068 | |
Gain on sale of assets | | (25) | | | (5,586) | |
| | | | |
Gain on sales-type leases | | — | | | (24,677) | |
Goodwill impairment | | — | | | 11,034 | |
Amortization of deferred charges | | 1,803 | | | 2,229 | |
Equity-based compensation expense | | 1,227 | | | 1,210 | |
Equity in earnings of equity method investments, net of distributions | | 933 | | | — | |
(Increase) decrease in operating assets: | | | | |
Accounts receivable—trade | | 1,071 | | | 1,726 | |
Accounts receivable—affiliates | | (2,815) | | | 1,649 | |
Prepaid and other current assets | | 60 | | | 825 | |
Increase (decrease) in operating liabilities: | | | | |
Accounts payable—trade | | 1,355 | | | 3,068 | |
Accounts payable—affiliates | | 993 | | | (3,157) | |
Accrued interest | | 6,705 | | | (23) | |
Deferred revenue | | (1,612) | | | (2,176) | |
Accrued property taxes | | 1,630 | | | 1,065 | |
Other current liabilities | | 77 | | | 438 | |
Turnaround expenditures | | (24,158) | | | (882) | |
Other, net | | 2,626 | | | 529 | |
Net cash provided by operating activities | | 152,486 | | | 162,108 | |
| | | | |
Cash flows from investing activities | | | | |
Additions to properties and equipment | | (23,246) | | | (59,375) | |
Acquisition of Sinclair Transportation | | (321,366) | | | — | |
| | | | |
Proceeds from sale of assets | | 33 | | | 7,343 | |
Distributions in excess of equity in earnings of equity investments | | 6,589 | | | 3,107 | |
Net cash used for investing activities | | (337,990) | | | (48,925) | |
| | | | |
Cash flows from financing activities | | | | |
Borrowings under credit agreement | | 410,000 | | | 141,000 | |
Repayments of credit agreement borrowings | | (529,000) | | | (184,500) | |
| | | | |
Proceeds from issuance of debt | | 400,000 | | | — | |
| | | | |
Contributions from noncontrolling interests | | — | | | 17,593 | |
Distributions to HEP unitholders | | (81,333) | | | (75,356) | |
Distributions to noncontrolling interests | | (5,308) | | | (5,872) | |
Payments on finance leases | | (1,776) | | | (1,747) | |
Deferred financing costs | | (6,343) | | | (6,661) | |
| | | | |
Units withheld for tax withholding obligations | | (65) | | | (69) | |
Other | | (168) | | | — | |
Net cash provided (used) by financing activities | | 186,007 | | | (115,612) | |
| | | | |
Cash and cash equivalents | | | | |
Increase (decrease) for the period | | 503 | | | (2,429) | |
Beginning of period | | 14,381 | | | 21,990 | |
End of period | | $ | 14,884 | | | $ | 19,561 | |
| | | | |
Supplemental disclosure of cash flow information | | | | |
Cash paid during the period for interest | | $25,814 | | $25,072 |
See accompanying notes.
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
| | | Common Units | | Noncontrolling Interests | | Total Equity | | Common Units | | Noncontrolling Interests | | Total Equity |
| | | | | | |
Balance December 31, 2020 | | $ | 379,292 | | | $ | 126,066 | | | $ | 505,358 | | |
Contributions from noncontrolling interest | | — | | | 9,746 | | | 9,746 | | |
Balance December 31, 2021 | | Balance December 31, 2021 | | $ | 443,017 | | | $ | 147,532 | | | $ | 590,549 | |
Issuance of common units | | Issuance of common units | | 349,020 | | | — | | | 349,020 | |
| Distributions to HEP unitholders | Distributions to HEP unitholders | | (38,328) | | | — | | | (38,328) | | Distributions to HEP unitholders | | (36,997) | | | — | | | (36,997) | |
Distributions to noncontrolling interests | Distributions to noncontrolling interests | | — | | | (3,819) | | | (3,819) | | Distributions to noncontrolling interests | | — | | | (877) | | | (877) | |
Acquisition of remaining UNEV interests | | Acquisition of remaining UNEV interests | | 16,537 | | | (78,187) | | | (61,650) | |
| Equity-based compensation | | 683 | | | — | | | 683 | | |
Amortization of restricted and performance units | | Amortization of restricted and performance units | | 620 | | | — | | | 620 | |
Class B unit accretion | Class B unit accretion | | (893) | | | — | | | (893) | | Class B unit accretion | | (956) | | | — | | | (956) | |
Other | Other | | (68) | | | — | | | (68) | | Other | | (147) | | | — | | | (147) | |
Net income | Net income | | 65,290 | | | 1,647 | | | 66,937 | | Net income | | 50,515 | | | 3,263 | | | 53,778 | |
Balance March 31, 2021 | | $ | 405,976 | | | $ | 133,640 | | | $ | 539,616 | | |
Contributions from noncontrolling interest | | — | | | 9,780 | | | 9,780 | | |
Balance March 31, 2022 | | Balance March 31, 2022 | | $ | 821,609 | | | $ | 71,731 | | | $ | 893,340 | |
| Distributions to HEP unitholders | Distributions to HEP unitholders | | (37,028) | | | — | | | (37,028) | | Distributions to HEP unitholders | | (44,336) | | | — | | | (44,336) | |
Distributions to noncontrolling interest | Distributions to noncontrolling interest | | — | | | (2,053) | | | (2,053) | | Distributions to noncontrolling interest | | — | | | (4,431) | | | (4,431) | |
Equity-based compensation | | 527 | | | — | | | 527 | | |
Acquisition of remaining UNEV interests | | Acquisition of remaining UNEV interests | | 3,198 | | | 177 | | | 3,375 | |
Amortization of restricted and performance units | | Amortization of restricted and performance units | | 607 | | | — | | | 607 | |
Class B unit accretion | Class B unit accretion | | (894) | | | — | | | (894) | | Class B unit accretion | | (956) | | | — | | | (956) | |
Other | Other | | (2) | | | — | | | (2) | | Other | | (86) | | | — | | | (86) | |
Net income | Net income | | 56,639 | | | 1,192 | | | 57,831 | | Net income | | 57,749 | | | 1,928 | | | 59,677 | |
Balance June 30, 2021 | | $ | 425,218 | | | $ | 142,559 | | | $ | 567,777 | | |
Balance June 30, 2022 | | Balance June 30, 2022 | | $ | 837,785 | | | $ | 69,405 | | | $ | 907,190 | |
|
| | | Common Units | | Noncontrolling Interests | | Total Equity | | Common Units | | Noncontrolling Interests | | Total Equity |
| | | | | | |
Balance December 31, 2019 | | $ | 381,103 | | | $ | 106,655 | | | $ | 487,758 | | |
Contributions from noncontrolling interest | | — | | | 7,304 | | | 7,304 | | |
Balance December 31, 2020 | | Balance December 31, 2020 | | $ | 379,292 | | | $ | 126,066 | | | $ | 505,358 | |
Capital Contribution - Cushing Connect | | Capital Contribution - Cushing Connect | | — | | | 9,746 | | | 9,746 | |
| Distributions to HEP unitholders | Distributions to HEP unitholders | | (68,519) | | | — | | | (68,519) | | Distributions to HEP unitholders | | (38,328) | | | — | | | (38,328) | |
Distributions to noncontrolling interests | Distributions to noncontrolling interests | | — | | | (3,000) | | | (3,000) | | Distributions to noncontrolling interests | | — | | | (3,819) | | | (3,819) | |
Equity-based compensation | | 506 | | | — | | | 506 | | |
Amortization of restricted and performance units | | Amortization of restricted and performance units | | 683 | | | — | | | 683 | |
Class B unit accretion | Class B unit accretion | | (835) | | | — | | | (835) | | Class B unit accretion | | (893) | | | — | | | (893) | |
Other | Other | | 208 | | | — | | | 208 | | Other | | (68) | | | — | | | (68) | |
Net income | Net income | | 25,696 | | | 1,216 | | | 26,912 | | Net income | | 65,290 | | | 1,647 | | | 66,937 | |
Balance March 31, 2020 | | $ | 338,159 | | | $ | 112,175 | | | $ | 450,334 | | |
Balance March 31, 2021 | | Balance March 31, 2021 | | $ | 405,976 | | | $ | 133,640 | | | $ | 539,616 | |
Contributions from noncontrolling interest | Contributions from noncontrolling interest | | — | | | 5,959 | | | 5,959 | | Contributions from noncontrolling interest | | — | | | 9,780 | | | 9,780 | |
Distributions to HEP unitholders | Distributions to HEP unitholders | | (34,460) | | | — | | | (34,460) | | Distributions to HEP unitholders | | (37,028) | | | — | | | (37,028) | |
Distributions to noncontrolling interest | Distributions to noncontrolling interest | | — | | | (1,000) | | | (1,000) | | Distributions to noncontrolling interest | | — | | | (2,053) | | | (2,053) | |
Equity-based compensation | Equity-based compensation | | 474 | | | — | | | 474 | | Equity-based compensation | | 527 | | | — | | | 527 | |
Class B unit accretion | Class B unit accretion | | (835) | | | — | | | (835) | | Class B unit accretion | | (894) | | | — | | | (894) | |
Other | Other | | 80 | | | — | | | 80 | | Other | | (2) | | | — | | | (2) | |
Net income | Net income | | 77,305 | | | 649 | | | 77,954 | | Net income | | 56,639 | | | 1,192 | | | 57,831 | |
Balance June 30, 2020 | | $ | 380,723 | | | $ | 117,783 | | | $ | 498,506 | | |
Balance June 30, 2021 | | Balance June 30, 2021 | | $ | 425,218 | | | $ | 142,559 | | | $ | 567,777 | |
| |
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1:Description of Business and Presentation of Financial Statements
Holly Energy Partners, L.P. (“HEP”), together with its consolidated subsidiaries, is a publicly held master limited partnership. As of June 30, 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,On March 14, 2022 (the “Closing Date”), HollyFrontier Corporation (“HFC”) and HEP announced the words “we,” “our,” “ours”establishment of HF Sinclair Corporation, a Delaware corporation (“HF Sinclair”), as the new parent holding company of HFC and “us” referHEP and their subsidiaries, and the completion of their respective acquisitions of Sinclair Oil Corporation (now known as Sinclair Oil LLC (“Sinclair Oil”)) and Sinclair Transportation Company LLC (“Sinclair Transportation”) from The Sinclair Companies (now known as REH Company and referred to HEP unlessherein as “Sinclair HoldCo”). On the context otherwise indicates.Closing Date, pursuant to that certain Business Combination Agreement, dated as of August 2, 2021 (as amended on March 14, 2022, the “Business Combination Agreement”), by and among HFC, HF Sinclair (formerly known as Hippo Parent Corporation), Hippo Merger Sub, Inc., a wholly owned subsidiary of HF Sinclair (“Parent Merger Sub”), Sinclair HoldCo, and Hippo Holding LLC, a wholly owned subsidiary of Sinclair HoldCo (the “Target Company”), HF Sinclair completed its acquisition of the Target Company by effecting (a) a holding company merger in accordance with Section 251(g) of the Delaware General Corporation Law whereby HFC merged with and into Parent Merger Sub, with HFC surviving such merger as a direct wholly owned subsidiary of HF Sinclair (the “HFC Merger”), and (b) immediately following the HFC Merger, a contribution whereby Sinclair HoldCo contributed all of the equity interests of the Target Company to HF Sinclair in exchange for shares of HF Sinclair, resulting in the Target Company becoming a direct wholly owned subsidiary of HF Sinclair (together with the HFC Merger, the “HFC Transactions”).
WeAs of June 30, 2022, HF Sinclair and its subsidiaries owned a 47% limited partner interest and the non-economic general partner interest in HEP.
In connection with the closing of the HFC Transactions, HF Sinclair issued 60,230,036 shares of HF Sinclair common stock to Sinclair HoldCo, representing 27.0% of the pro forma equity of HF Sinclair with a value of approximately $2,149 million based on HFC’s fully diluted shares of common stock outstanding and closing stock price on March 11, 2022. References herein to HF Sinclair with respect to time periods prior to March 14, 2022 refer to HFC and its consolidated subsidiaries and do not include the Target Company, Sinclair Transportation or their respective consolidated subsidiaries. References herein to HF Sinclair with respect to time periods from and after March 14, 2022 refer to HF Sinclair and its consolidated subsidiaries, which includes the operations of the combined Sinclair HoldCo businesses.
Additionally, on the Closing Date, pursuant to that certain Contribution Agreement, dated August 2, 2021 (as amended on March 14, 2022, the “Contribution Agreement”) by and among Sinclair HoldCo, Sinclair Transportation and HEP, HEP acquired all of the outstanding equity interests of Sinclair Transportation from Sinclair HoldCo in exchange for 21 million newly issued common limited partner units of HEP (the “HEP Units”), representing 16.6% of the pro forma outstanding HEP Units with a value of approximately $349 million based on HEP’s fully diluted common limited partner units outstanding and closing unit price on March 11, 2022, and cash consideration equal to $321.4 million, inclusive of estimated working capital adjustments pursuant to the Contribution Agreement for an aggregate transaction value of $670.4 million (the “HEP Transaction” and together with the HFC Transactions, the “Sinclair Transactions”). Of the 21 million HEP Units, 5.29 million units are currently held in escrow to secure Sinclair HoldCo’s renewable identification numbers (“RINs”) credit obligations to HF Sinclair under Section 6.22 of the Business Combination Agreement. HF Sinclair, and not HEP, would be entitled to the HEP common units held in escrow in the event of Sinclair HoldCo’s breach of its RINs credit obligations under the Business Combination Agreement. The cash consideration was funded through a draw under HEP’s senior secured revolving credit facility. The HEP Transaction was conditioned on the closing of the HFC Transactions, which occurred immediately following the HEP Transaction.
Sinclair Transportation, which together with its subsidiaries, owns integrated crude and refined products pipelines and terminal assets, including approximately 1,200 miles of integrated crude and refined product pipeline supporting the Sinclair HoldCo refineries and other third party refineries, 8 product terminals and 2 crude terminals with approximately 4.5 million barrels of operated storage. In addition, HEP acquired Sinclair Transportation’s interests in three pipeline joint ventures for crude gathering and product offtake.
References herein to HEP with respect to time periods prior to March 14, 2022, include HEP and its consolidated subsidiaries and do not include Sinclair Transportation and its consolidated subsidiaries (collectively, the “Acquired Sinclair Businesses”). References herein to HEP with respect to time periods from and after March 14, 2022 include the operations of the Acquired Sinclair Businesses.
Through our subsidiaries and joint ventures, we own andand/or operate petroleum product and crude oil pipelines, terminal, tankage and loading rack facilities and refinery processing units that support refining and marketing operations of HFCHF Sinclair and other refineries in the Mid-Continent, Southwest and Northwest regions of the United States. Additionally, we own (a) a 75% interest in UNEV Pipeline, LLC (“UNEV”), a 50% interest in Osage Pipe Line Company, LLC (“Osage”), (b) a 50% interest in Cheyenne Pipeline LLC, and(c) a 50% interest in Cushing Connect Pipeline & Terminal LLC.LLC, (d) a 25.06% interest in Saddle Butte Pipeline III, LLC and (e) a 49.995% interest in Pioneer Investments Corp. Following the HEP Transaction, we now own the remaining 25% interest in UNEV Pipeline, LLC and as a result, UNEV Pipeline, LLC is our wholly owned subsidiary.
On June 1, 2020, HFC announced plans to permanently cease petroleum refining operations at its Cheyenne Refinery (the “Cheyenne Refinery”) and to convert certain assets at that refinery to renewable diesel production. HFC subsequently began winding down petroleum refining operations at the Cheyenne Refinery on August 3, 2020.
On February 8, 2021, HEP and HFC finalized and executed new agreements for HEP’s Cheyenne assets with the following terms, in each case effective January 1, 2021: (1) a ten-year lease with 2 five-year renewal option periods for HFC’s (and now HF Sinclair’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 (and now HF Sinclair) will pay a base tariff to HEP for available crude oil storage and HFC (and now HF Sinclair) 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 15.16.
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 througha 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 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”).SEC. The interim financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of our results for the interim periods. Such adjustments are considered to be of a normal recurring nature. Although certain notes and other information required by U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020.2021. Results of operations for interim periods are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2021.2022.
Principles of Consolidation and Common Control Transactions
The consolidated financial statements include our accounts and those of subsidiaries and joint ventures that we control. All significant intercompany transactions and balances have been eliminated.
Most of our acquisitions from HFC occurred while we were a consolidated variable interest entity (“VIE”) of HFC. Therefore, as an entity under common control with HFC, we recorded these acquisitions on our balance sheets at HFC's historical basis instead of our purchase price or fair value.
Goodwill and Long-LivedLong-lived Assets
Goodwill represents the excess of our cost of an acquired business over the fair value of the assets acquired, less liabilities assumed. Goodwill is not amortized. We test goodwill atsubject to amortization and is tested annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit level for impairment annually and between annual tests if events or changes in circumstances indicate thebelow its carrying amount may exceed fair value.amount. Our goodwill
impairment testing first entails either a comparisonquantitative assessment or an optional qualitative assessment to determine whether it is more likely than not that the fair value of oura reporting unit fair values relative to their respectiveis less than its carrying values, including goodwill.amount. If we determine that based on the qualitative factors that it is more likely than not that the carrying value exceedsamount of the estimatedreporting unit is greater than its fair value, fora quantitative test is performed in which we estimate the fair value of the related reporting unit. If the carrying amount of a reporting unit exceeds its fair value, the goodwill of that reporting unit is impaired, and we measure goodwill impairment as the excess of the carrying amount of the reporting unit over the estimatedrelated fair value of the reporting unit.value.
Indicators of goodwillGoodwill and long-lived asset impairmentLong-lived Asset Impairment
TheDuring the first quarter of 2021, 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 56 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 performed our annual goodwill impairment testing qualitatively as of July 1, 2021, and determined it was not more likely than not that the carrying amount of each reporting unit was greater than its fair value. Therefore, a quantitative test was not necessary, and no additional impairment of goodwill was recorded.
We evaluate long-lived assets, including finite-lived intangible assets, for potential impairment by identifying whether indicators of impairment exist and, if so, assessing whether the long-lived assets are recoverable from estimated future undiscounted cash flows. The actual amount of impairment loss, if any, to be recorded is equal to the amount by which a long-lived asset’s carrying value exceeds its fair value.
Revenue Recognition
Revenues are generally recognized as products are shipped through our pipelines and terminals, feedstocks are processed through our refinery processing units or other services are rendered. The majority of our contracts with customers meet the definition of a lease since (1) performance of the contracts is dependent on specified property, plant, or equipment and (2) it is unlikely that one or more parties other than the customer will take more than a minor amount of the output associated with the specified property, plant, or equipment. Prior to the adoption of the new lease standard (see below), we bifurcated the consideration received between lease and service revenue. The new lease standard allows the election of a practical expedient whereby a lessor does not have to separate non-lease (service) components from lease components under certain conditions. The majority of our contracts meet these conditions, and we have made this election for those contracts. Under this practical expedient, we treat the combined components as a single performance obligation in accordance with Accounting Standards Codification (“ASC”) 606, which largely codified ASU 2014-09, if the non-lease (service) component is the dominant component. If the lease component is the dominant component, we treat the combined components as a lease in accordance with ASC 842, which largely codified ASU 2016-02.
Several of our contracts include incentive or reduced tariffs once a certain quarterly volume is met. Revenue from the variable element of these transactions is recognized based on the actual volumes shipped as it relates specifically to rendering the services during the applicable quarter.
The majority of our long-term transportation contracts specify minimum volume requirements, whereby, we bill a customer for a minimum level of shipments in the event a customer ships below their contractual requirements. If there are no future performance obligations, we will recognize these deficiency payments in revenue.
In certain of these throughput agreements, a customer may later utilize such shortfall billings as credit towards future volume shipments in excess of its minimum levels within its respective contractual shortfall make-up period. Such amounts represent an obligation to perform future services, which may be initially deferred and later recognized as revenue based on estimated future
shipping levels, including the likelihood of a customer’s ability to utilize such amounts prior to the end of the contractual
shortfall make-up period. We recognize these deficiency payments in revenue when we do not expect we will be required to satisfy these performance obligations in the future based on the pattern of rights projected to be exercised by the customer. During the six months ended June 30, 20212022 and 2020,2021, we recognized $6.9$10.4 million and $12.6$8.8 million, respectively, of these deficiency payments in revenue, of which $0.5$1.9 million and $0.7$0.5 million, respectively, related to deficiency payments billed in prior periods.
We have other cost reimbursement provisions in our throughput / storage agreements providing that customers (including HFC)HF Sinclair) reimburse us for certain costs. Such reimbursements are recorded as revenue or deferred revenue depending on the nature of the cost. Deferred revenue is recognized over the remaining contractual term of the related throughput agreement.
Leases
We adopted ASC 842 effective January 1, 2019, and elected to adopt using the modified retrospective transition method and practical expedients, both of which are provided as options by the standard and further defined below.
Lessee Accounting -
At inception, we determine if an arrangement is or contains a lease. Right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our payment obligation under the leasing arrangement. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We use our estimated incremental borrowing rate (“IBR”) to determine the present value of lease payments as most of our leases do not contain an implicit rate. Our IBR represents the interest rate which we would pay to borrow, on a collateralized basis, an amount equal to the lease payments over a similar term in a similar economic environment. We use the implicit rate when readily determinable.
Operating leases are recorded in operating lease right-of-use assets and current and noncurrent operating lease liabilities on our consolidated balance sheet. Finance leases are included in properties and equipment, current finance lease liabilities and noncurrent finance lease liabilities on our consolidated balance sheet.
When renewal options are defined in a lease, our lease term includes an option to extend the lease when it is reasonably certain we will exercise that option. Leases with a term of 12 months or less are not recorded on our balance sheet, and lease expense is accounted for on a straight-line basis. In addition, as a lessee, we separate non-lease components that are identifiable and exclude them from the determination of net present value of lease payment obligations.
Lessor Accounting -
Customer contracts that contain leases are generally classified as either operating leases, direct finance leases or sales-type leases. We consider inputs such as the lease term, fair value of the underlying asset and residual value of the underlying assets when assessing the classification.
Deferred Turnaround Costs
Our refinery processing units require regular major maintenance and repairs which are commonly referred to as “turnarounds.” The required frequency of the maintenance varies by unit, but generally is every four to five years. Turnaround costs are deferred and amortized over the period until the next scheduled turnaround.
Accounting Pronouncements Adopted During the Periods Presented
Credit Losses MeasurementNote 2:Sinclair Acquisition
In June 2016, ASU 2016-13, “Measurement
HEP Transaction
On March 14, 2022, pursuant to the Contribution Agreement, HEP acquired all of Credit Lossesthe outstanding equity interests of Sinclair Transportation in exchange for 21 million newly issued HEP Units, representing 16.6% of the pro forma outstanding HEP Units with a value of approximately $349 million based on Financial Instruments,HEP’s fully diluted common limited partner units outstanding and closing unit price on March 11, 2022, and cash consideration equal to $321.4 million, inclusive of estimated working capital adjustments pursuant to the Contribution Agreement for an aggregate transaction value of $670.4 million. On the same date and immediately following the consummation of the HEP Transaction, pursuant to the Business Combination Agreement, Sinclair HoldCo contributed all of the equity interests of the Target Company to HF Sinclair in exchange for 60,230,036 shares of common stock in HF Sinclair,representing 27.0% of the pro forma equity of HF Sinclair with a value of approximately
$2,149 million based on HF Sinclair’s fully diluted shares of common stock outstanding and closing stock price on March 11, 2022.
On August 2, 2021, in connection with the Contribution Agreement, HEP, Holly Logistics Services, L.L.C., the ultimate general partner of HEP (“HLS”) and Navajo Pipeline Co., L.P., the sole member of HLS (the “Sole Member”), entered into a unitholders agreement (the “Unitholders Agreement”) by and among HEP, HLS, the Sole Member, Sinclair HoldCo and the stockholders of Sinclair HoldCo (each a “Unitholder” and collectively, the “Unitholders,” was issued requiring measurementand along with Sinclair HoldCo and each of their permitted transferees, the “Sinclair Parties”), which became effective on the Closing Date.
Pursuant to the Unitholders Agreement, the Sinclair Parties have the right to nominate, and have nominated, 1 person to the board of directors of HLS until such time that (x) the Sinclair Parties beneficially own less than 10.5 million HEP Units or (y) the HEP Units beneficially owned by the Sinclair Parties constitute less than 5% of all expected credit lossesoutstanding HEP Units. The Unitholders Agreement also subjects 15.75 million of the HEP 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 typespermitted transfers. One-third of financial instruments,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.
Under the terms of the Contribution Agreement, HEP acquired Sinclair Transportation, which together with its subsidiaries, owned Sinclair HoldCo’s integrated crude and refined products pipelines and terminal assets, including trade receivables, heldapproximately 1,200 miles of integrated crude and refined product pipelines supporting the Sinclair HoldCo refineries and other third-party refineries, 8 product terminals and 2 crude terminals with approximately 4.5 million barrels of operated storage. In addition, HEP acquired Sinclair Transportation’s interests in three pipeline joint ventures for crude gathering and product offtake including: Saddle Butte Pipeline III, LLC (25.06% non-operated interest); Pioneer Pipeline (49.995% non-operated interest); and UNEV Pipeline (the 25% non-operated interest not already owned by HEP, resulting in UNEV Pipeline, LLC becoming a wholly owned subsidiary of HEP).
The HEP Transaction was accounted for as a business combination using the acquisition method of accounting, with the assets acquired and liabilities assumed at their respective acquisition date fair values at the reporting date basedClosing Date, with the excess consideration recorded as goodwill. The preliminary purchase consideration allocation resulted in the recognition of $90.8 million in goodwill.
The following tables present the preliminary purchase consideration and preliminary purchase price allocation to the assets acquired and liabilities assumed on historical experience, current conditions and reasonable and supportable forecasts. We adopted this standard effective January 1, 2020, and adoptionMarch 14, 2022:
| | | | | | | | |
Preliminary Purchase Consideration (in thousands except for per share amounts) | | |
HEP common units issued | | 21,000 | |
Closing price per unit of HEP common units(1) | | $ | 16.62 | |
Purchase consideration paid in HEP common units | | 349,020 | |
Cash consideration paid by HEP | | 325,000 | |
Estimated Adjusted Payments HEP(2) | | (3,634) | |
Total cash consideration | | 321,366 | |
Total purchase consideration | | $ | 670,386 | |
(1) Based on the HEP closing unit price on March 11, 2022.
(2) Net of the standard did not have a material impact on our financial condition, results of operations or cash flows.acquired
| | | | | | | | |
| | (In thousands) |
Assets Acquired | | |
Accounts receivable | | $ | 1,910 | |
Prepaid and other current assets | | 59 | |
Properties and equipment | | 357,819 | |
Operating lease right-of-use assets | | 105 | |
Other assets | | 3,500 | |
Goodwill | | 90,768 | |
Equity method investments | | 229,891 | |
Total assets acquired | | $ | 684,052 | |
| | |
Liabilities Assumed | | |
Accounts payable | | 1,528 | |
Accrued property taxes | | 973 | |
Other current liabilities | | 789 | |
Operating lease liabilities | | 33 | |
Noncurrent operating lease liabilities | | 72 | |
Other long-term liabilities | | 10,271 | |
Total liabilities assumed | | $ | 13,666 | |
Net assets acquired | | $ | 670,386 | |
The fair value of properties, plants and equipment was based on the combination of the cost and market approaches. Key assumptions in the cost approach include determining the replacement cost by evaluating recently published data and adjusting replacement cost for physical deterioration, functional and economic obsolescence. We used the market approach to measure the value of certain assets through an analysis of recent sales or offerings of comparable properties.
The fair value of the equity method investments were based on a combination of valuation methods including discounted cash flows and the guideline public company method.
The fair values discussed above were based on significant inputs that are not observable in the market and, therefore, represent Level 3 measurements. See Note 6.
The fair values of all other current receivable and payables were equivalent to their carrying values due to their short-term nature.
These fair value estimates are preliminary and, therefore, the final fair values of assets acquired and liabilities assumed and the resulting effect on our financial position may change once all needed information has become available, the working capital true-up is complete, and we finalize our valuations.
Our consolidated financial and operating results reflect the Sinclair Transportation operations beginning March 14, 2022. Our results of operations for the three months ended June 30, 2022 included revenue, interest income from sales-type leases and net income of $10.5 million, $14.5 million and $19.2 million, respectively, and revenue, interest income from sales-type leases and net income of $12.1 million, $17.2 million and $21.8 million for the period from March 14, 2022 through June 30, 2022, respectively, related to these operations.
For the six months ended June 30, 2022, we incurred $1.7 million in incremental direct acquisition and integration costs that principally relate to legal, advisory and other professional fees and are presented as general and administrative expenses in our statements of operations.
The following unaudited pro forma combined condensed financial data for the six months ended June 30, 2022 and the three and six months ended June 30, 2021 was derived from our historical financial statements giving effect to the HEP Transaction as if it had occurred on January 1, 2021. The below information reflects pro forma adjustments based on available information and certain assumptions that we believe are reasonable, including the depreciation of Sinclair Transportation’s fair-valued properties, plants and equipment.
Additionally, pro forma earnings include certain non-recurring charges, the substantial majority of which consist of transaction costs related to financial advisors, legal advisors, financial advisory and professional accounting services.
The pro forma results of operations do not include any contract adjustments to tariffs made after closing, cost savings or other synergies that may result from the HEP Transaction. The pro forma combined condensed financial data has been included for comparative purposes only and is not necessarily indicative of the results that might have occurred had the HEP Transaction taken place on January 1, 2021 and is not intended to be a projection of future results.
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | | 2021 | | 2022 | | 2021 |
| | | | (In thousands) |
Sales and other revenues | | | | $ | 143,279 | | | $ | 270,730 | | | $ | 286,469 | |
Net income attributable to the partners | | | | $ | 62,739 | | | $ | 107,574 | | | $ | 133,164 | |
Contemporaneous with the closing of the Sinclair Transactions, HEP and HFC amended certain intercompany agreements, including the master throughput agreement, to include within the scope of such agreements certain of the assets acquired by HEP pursuant to the Contribution Agreement.
Note 2:3:Investment in Joint Venture
On October 2, 2019, HEP Cushing LLC (“HEP Cushing”), a wholly-ownedwholly owned subsidiary of HEP, and Plains Marketing, L.P. (“PMLP”), a wholly-ownedwholly 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 connectconnected the Cushing, Oklahoma crude oil hub to the Tulsa, Oklahoma refining complex owned by a subsidiary of HFCHF Sinclair and (ii) the ownership and operation of 1.5 million barrels of crude oil storage in Cushing, Oklahoma (the “Cushing Connect JV Terminal”). The Cushing Connect JV Terminal went in service during the second quarter of 2020, and the Cushing Connect Pipeline is expected to bewas placed ininto service during the third quarter of 2021. Long-termLong-term commercial agreements have been entered into to support the Cushing Connect Joint Venture assets.
The Cushing Connect Joint Venture contracted with an affiliate of HEP to manage the construction and operation of the Cushing Connect Pipeline and with an affiliate of Plains to manage the operation of the Cushing Connect JV Terminal. The total Cushing Connect Joint Venture investment will generally be shared equally among the partners. However, we are solely responsible for any Cushing Connect Pipeline construction costs that exceed the budget by more than 10%. HEP estimates its share of the cost of the Cushing Connect JV Terminal contributed by Plains and Cushing Connect Pipeline construction costs will beare approximately $70$73 million, to $75 million.including approximately $5 million of Cushing Connect Pipeline construction costs exceeding the budget by more than 10% borne solely by HEP.
The Cushing Connect Joint Venture legal entities are variable interest entities ("VIEs"(“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 constructed and is constructing and will operateoperating 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. HEP’s maximum exposure to loss as a result of its involvement with the Cushing Connect JV Terminal legal entity is not expected to be material due to the long-term terminalling agreements in place to support its operations.
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 3:4:Revenues
Revenues are generally recognized as products are shipped through our pipelines and terminals, feedstocks are processed through our refinery processing units or other services are rendered. See Note 1 for further discussion of revenue recognition.
Disaggregated revenues were as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | (In thousands) | | (In thousands) | | (In thousands) | | (In thousands) |
Pipelines | Pipelines | | $ | 68,322 | | | $ | 58,954 | | | $ | 134,827 | | | $ | 129,426 | | Pipelines | | $ | 68,319 | | | $ | 68,322 | | | $ | 133,099 | | | $ | 134,827 | |
Terminals, tanks and loading racks | Terminals, tanks and loading racks | | 36,887 | | | 36,280 | | | 75,069 | | | 73,778 | | Terminals, tanks and loading racks | | 44,558 | | | 36,887 | | | 81,573 | | | 75,069 | |
Refinery processing units | Refinery processing units | | 21,026 | | | 19,573 | | | 43,522 | | | 39,457 | | Refinery processing units | | 22,893 | | | 21,026 | | | 41,296 | | | 43,522 | |
| | $ | 126,235 | | | $ | 114,807 | | | $ | 253,418 | | | $ | 242,661 | | | $ | 135,770 | | | $ | 126,235 | | | $ | 255,968 | | | $ | 253,418 | |
Revenues on our consolidated statements of income were composed of the following lease and service revenues:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | (In thousands) | | (In thousands) | | (In thousands) | | (In thousands) |
Lease revenues | Lease revenues | | $ | 86,867 | | | $ | 86,346 | | | $ | 174,803 | | | $ | 179,493 | | Lease revenues | | $ | 82,445 | | | $ | 86,867 | | | $ | 155,736 | | | $ | 174,803 | |
Service revenues | Service revenues | | 39,368 | | | 28,461 | | | 78,615 | | | 63,168 | | Service revenues | | 53,325 | | | 39,368 | | | 100,232 | | | 78,615 | |
| | $ | 126,235 | | | $ | 114,807 | | | $ | 253,418 | | | $ | 242,661 | | | $ | 135,770 | | | $ | 126,235 | | | $ | 255,968 | | | $ | 253,418 | |
A contract liability exists when an entity is obligated to perform future services for a customer for which the entity has received consideration. Since HEP may be required to perform future services for these deficiency payments received, the deferred revenues on our balance sheets were considered contract liabilities. A contract asset exists when an entity has a right to consideration in exchange for goods or services transferred to a customer. Our consolidated balance sheets included the contract assets and liabilities in the table below:
| | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | | (In thousands) | | | (In thousands) |
Contract assets | Contract assets | | $ | 6,545 | | | $ | 6,306 | | Contract assets | | $ | 6,727 | | | $ | 6,637 | |
Contract liabilities | Contract liabilities | | $ | (400) | | | $ | (500) | | Contract liabilities | | $ | (2,247) | | | $ | (4,185) | |
The contract assets and liabilities include both lease and service components. During the six months ended June 30, 2022 and 2021, we recognized $1.9 million and $0.5 million, respectively, of revenue that was previously included in contract liability as
of December 31, 2020.2021 and 2020, respectively. During the six months ended June 30, 2022 and 2021, we also recognized $0.1 million and $0.2 million, respectively, of revenue included in contract assets.
As of June 30, 2021,2022, we expect to recognize $1.8$1.6 billion in revenue related to our unfulfilled performance obligations under the terms of our long-term throughput agreements and leases expiring in 20222023 through 2036.2037. 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 2021 | | $ | 168 | | |
2022 | | 311 | | |
Remainder of 2022 | | Remainder of 2022 | | $ | 182 | |
2023 | 2023 | | 275 | | 2023 | | 301 | |
2024 | 2024 | | 237 | | 2024 | | 266 | |
2025 | 2025 | | 171 | | 2025 | | 185 | |
2026 | 2026 | | 157 | | 2026 | | 170 | |
2027 | | 2027 | | 137 | |
Thereafter | Thereafter | | 484 | | Thereafter | | 407 | |
Total | Total | | $ | 1,803 | | Total | | $ | 1,648 | |
Payment terms under our contracts with customers are consistent with industry norms and are typically payable within 10 to 30 days of the date of invoice.
Note 4:5:Leases
We adopted ASC 842 effective January 1, 2019, and elected to adopt using the modified retrospective transition method and practical expedients, both of which are provided as options by the standard and further defined in Note 1. See Note 1 for further discussion of lease accounting.
Lessee Accounting
As a lessee, we lease land, buildings, pipelines, transportation and other equipment to support our operations. These leases can be categorized into operating and finance leases.
Our leases have remaining terms of less than 1 year to 2423 years, some of which include options to extend the leases for up to 10 years.
Finance Lease Obligations
We have finance lease obligations related to vehicle leases with initial terms of 33 to 48 months. The total cost of assets under finance leases was $6.0$6.2 million and $6.4$6.0 million as of June 30, 20212022 and December 31, 2020,2021, respectively, with accumulated depreciation of $3.3$4.0 million and $3.4$3.6 million as of June 30, 20212022 and December 31, 2020,2021, 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):
| | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| Operating leases: | Operating leases: | | Operating leases: | |
Operating lease right-of-use assets, net | Operating lease right-of-use assets, net | | $ | 2,724 | | | $ | 2,979 | | Operating lease right-of-use assets, net | | $ | 2,502 | | | $ | 2,275 | |
| Current operating lease liabilities | Current operating lease liabilities | | 795 | | | 875 | | Current operating lease liabilities | | 963 | | | 620 | |
Noncurrent operating lease liabilities | Noncurrent operating lease liabilities | | 2,303 | | | 2,476 | | Noncurrent operating lease liabilities | | 2,006 | | | 2,030 | |
Total operating lease liabilities | Total operating lease liabilities | | $ | 3,098 | | | $ | 3,351 | | Total operating lease liabilities | | $ | 2,969 | | | $ | 2,650 | |
| Finance leases: | Finance leases: | | Finance leases: | |
Properties and equipment | Properties and equipment | | $ | 6,019 | | | $ | 6,410 | | Properties and equipment | | $ | 6,160 | | | $ | 6,031 | |
Accumulated amortization | Accumulated amortization | | (3,255) | | | (3,390) | | Accumulated amortization | | (4,013) | | | (3,632) | |
Properties and equipment, net | Properties and equipment, net | | $ | 2,764 | | | $ | 3,020 | | Properties and equipment, net | | $ | 2,147 | | | $ | 2,399 | |
| Current finance lease liabilities | Current finance lease liabilities | | $ | 3,755 | | | $ | 3,713 | | Current finance lease liabilities | | $ | 3,857 | | | $ | 3,786 | |
Noncurrent finance lease liabilities | Noncurrent finance lease liabilities | | 66,434 | | | 68,047 | | Noncurrent finance lease liabilities | | 62,838 | | | 64,649 | |
Total finance lease liabilities | Total finance lease liabilities | | $ | 70,189 | | | $ | 71,760 | | Total finance lease liabilities | | $ | 66,695 | | | $ | 68,435 | |
| 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 | | 5.8 | | 5.9 | Operating leases | | 4.8 | | 5.8 |
Finance leases | Finance leases | | 15.5 | | 15.9 | Finance leases | | 14.6 | | 15.0 |
| Weighted average discount rate | | |
Weighted average discount rate: | | Weighted average discount rate: | |
Operating leases | Operating leases | | 4.7% | | 4.8% | Operating leases | | 4.5% | | 4.8% |
Finance leases | Finance leases | | 5.6% | | 5.6% | Finance leases | | 5.6% | | 5.6% |
Supplemental cash flow and other information related to leases were as follows:
| | | Six Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2021 | | 2020 | | | 2022 | | 2021 | |
| | (In thousands) | | (In thousands) |
Cash paid for amounts included in the measurement of lease liabilities: | Cash paid for amounts included in the measurement of lease liabilities: | | | Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows on operating leases | Operating cash flows on operating leases | | $ | 576 | | | $ | 518 | | | Operating cash flows on operating leases | | $ | 518 | | | $ | 576 | | |
Operating cash flows on finance leases | Operating cash flows on finance leases | | $ | 2,105 | | | $ | 2,157 | | | Operating cash flows on finance leases | | $ | 1,950 | | | $ | 2,105 | | |
Financing cash flows on finance leases | Financing cash flows on finance leases | | $ | 1,747 | | | $ | 1,972 | | | Financing cash flows on finance leases | | $ | 1,776 | | | $ | 1,747 | | |
Maturities of lease liabilities were as follows:
| | | June 30, 2021 | | June 30, 2022 |
| | Operating | | Finance | | Operating | | Finance |
| | (In thousands) | | (In thousands) |
2021 | | $ | 507 | | | $ | 3,662 | | |
2022 | 2022 | | 690 | | | 7,332 | | 2022 | | $ | 504 | | | $ | 3,672 | |
2023 | 2023 | | 603 | | | 7,375 | | 2023 | | 935 | | | 7,383 | |
2024 | 2024 | | 497 | | | 6,918 | | 2024 | | 524 | | | 6,938 | |
2025 | 2025 | | 429 | | | 6,456 | | 2025 | | 443 | | | 6,479 | |
2026 and thereafter | | 787 | | | 73,888 | | |
2026 | | 2026 | | 289 | | | 6,432 | |
2027 and thereafter | | 2027 and thereafter | | 501 | | | 67,463 | |
Total lease payments | Total lease payments | | 3,513 | | | 105,631 | | Total lease payments | | 3,196 | | | 98,367 | |
Less: Imputed interest | Less: Imputed interest | | (415) | | | (35,442) | | Less: Imputed interest | | (227) | | | (31,672) | |
Total lease obligations | Total lease obligations | | 3,098 | | | 70,189 | | Total lease obligations | | 2,969 | | | 66,695 | |
Less: Current lease liabilities | Less: Current lease liabilities | | (795) | | | (3,755) | | Less: Current lease liabilities | | (963) | | | (3,857) | |
Noncurrent lease liabilities | Noncurrent lease liabilities | | $ | 2,303 | | | $ | 66,434 | | Noncurrent lease liabilities | | $ | 2,006 | | | $ | 62,838 | |
The components of lease expense were as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | (In thousands) | | (In thousands) |
Operating lease costs | Operating lease costs | | $ | 249 | | | $ | 230 | | | $ | 547 | | | $ | 503 | | Operating lease costs | | $ | 242 | | | $ | 249 | | | $ | 504 | | | $ | 547 | |
Finance lease costs | Finance lease costs | | Finance lease costs | |
Amortization of assets | Amortization of assets | | 200 | | | 273 | | | 412 | | | 515 | | Amortization of assets | | 189 | | | 200 | | | 381 | | | 412 | |
Interest on lease liabilities | Interest on lease liabilities | | 994 | | | 1,040 | | | 2,001 | | | 2,077 | | Interest on lease liabilities | | 946 | | | 994 | | | 1,905 | | | 2,001 | |
Variable lease cost | Variable lease cost | | 67 | | | 46 | | | 133 | | | 95 | | Variable lease cost | | 23 | | | 67 | | | 59 | | | 133 | |
Total net lease cost | Total net lease cost | | $ | 1,510 | | | $ | 1,589 | | | $ | 3,093 | | | $ | 3,190 | | Total net lease cost | | $ | 1,400 | | | $ | 1,510 | | | $ | 2,849 | | | $ | 3,093 | |
Lessor Accounting
As discussed in Note 1, the majority of our contracts with customers meet the definition of a lease.
Substantially all of the assets supporting contracts meeting the definition of a lease have long useful lives, and we believe these assets will continue to have value when the current agreements expire due to our risk management strategy for protecting the residual fair value of the underlying assets by performing ongoing maintenance during the lease term. HFCHF Sinclair generally has the option to purchase assets located within HFCHF Sinclair refinery boundaries, including refinery tankage, truck racks and refinery processing units, at fair market value when the related agreements expire.
During the six months ended June 30, 2022, we entered into new agreements, and amended other agreements, with HFC related to our newly acquired Sinclair Transportation assets. Certain of these agreements met the criteria of sales-type leases. 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. Because we recorded these assets at fair values under purchase price accounting, there was no gain or loss on these sales-type leases during the six months ended June 30, 2022. The balance sheet impacts were composed of the following:
| | | | | | | | |
| | |
| | Six Months Ended June 30, 2022 |
| | (In thousands) |
Net investment in leases | | $ | 235,620 | |
Properties and equipment, net | | (235,620) | |
Gain on sales-type leases | | $ | — | |
During the six months ended June 30, 2021, we entered into new agreements and modified other agreements with HFCHF Sinclair related to our Cheyenne assets, Tulsa West lube racks, various crude tanks and new Navajo tanks. These agreements met the criteria of sales-type leases since the underlying assets are not expected to have an alternative use at the end of the lease terms to anyone
other than HFC.HF Sinclair. Under sales-type lease accounting, at the commencement date, the lessor recognizes a net investment in the lease, based on the estimated fair value of the underlying leased assets at contract inception, and derecognizes the underlying assets with the difference recorded as selling profit or loss arising from the lease. Therefore, we recognized a gain on sales-type leases during the six months ended June 30, 2021 composed of the following:
| | | | | | | | |
| | |
| | Six Months Ended June 30, 2021 |
| | (In thousands) |
| | |
Net investment in leases | | $ | 47,795 | |
Properties and equipment, net | | (29,677) | |
Deferred revenue | | 6,559 | |
Gain on sales-type leases | | $ | 24,677 | |
During the six months ended June 30, 2020, one of our throughput agreements with Delek was partially renewed. A component of this agreement met the criteria of sales-type leases since the underlying asset is not expected to have an alternative use at the end of the lease term to anyone other than Delek. Under sales-type lease accounting, at the commencement date, the lessor recognizes a net investment in the lease, based on the estimated fair value of the underlying leased assets at the commencement date of the lease, and derecognizes the underlying assets with the difference recorded as selling profit or loss arising from the lease. Therefore, we recognized a gain on sales-type leases during the six months ended June 30, 2020 composed of the following:
| | | | | | | | |
| | Six Months Ended June 30, 2020 |
| | (In thousands) |
Net investment in lease | | $ | 35,319 | |
Properties and equipment, net | | (1,485) | |
| | |
Gain on sales-type lease | | $ | 33,834 | |
These sales-type lease transactions, including the related gain, were non-cash transactions.
Lease income recognized was as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | (In thousands) | | (In thousands) |
Operating lease revenues | Operating lease revenues | | $ | 84,426 | | | $ | 84,872 | | | $ | 170,698 | | | $ | 175,671 | | Operating lease revenues | | $ | 76,538 | | | $ | 84,426 | | | $ | 146,891 | | | $ | 170,698 | |
Direct financing lease interest income | Direct financing lease interest income | | 523 | | | 524 | | | 1,047 | | | 1,048 | | Direct financing lease interest income | | 520 | | | 523 | | | 1,040 | | | 1,047 | |
Gain on sales-type leases | Gain on sales-type leases | | 27 | | | 33,834 | | | 24,677 | | | 33,834 | | Gain on sales-type leases | | — | | | 27 | | | — | | | 24,677 | |
Sales-type lease interest income | Sales-type lease interest income | | 6,091 | | | 2,286 | | | 12,115 | | | 3,940 | | Sales-type lease interest income | | 23,814 | | | 6,091 | | | 35,938 | | | 12,115 | |
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 | | 2,441 | | | 1,474 | | | 4,105 | | | 3,822 | | Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable | | 5,906 | | | 2,441 | | | 8,846 | | | 4,105 | |
For our sales-type leases, we included customer obligations related to minimum volume requirements in guaranteed minimum lease payments. Portions of our minimum guaranteed pipeline tariffs for assets subject to sales-type lease accounting are recorded as interest income with the remaining amounts recorded as a reduction in net investment in leases. We recognized any billings for throughput volumes in excess of minimum volume requirements as variable lease payments, and these variable lease payments were recorded in lease revenues.
Annual minimum undiscounted lease payments under our leases were as follows as of June 30, 2021:2022:
| | | 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 2021 | | $ | 141,624 | | | $ | 1,088 | | | $ | 14,481 | | |
2022 | | 283,151 | | | 2,171 | | | 28,962 | | |
Remainder of 2022 | | Remainder of 2022 | | $ | 152,623 | | | $ | 1,083 | | | $ | 50,144 | |
2023 | 2023 | | 252,705 | | | 2,175 | | | 25,056 | | 2023 | | 272,169 | | | 2,175 | | | 96,383 | |
2024 | 2024 | | 216,601 | | | 2,192 | | | 21,827 | | 2024 | | 242,476 | | | 2,192 | | | 93,154 | |
2025 | 2025 | | 153,746 | | | 2,209 | | | 18,399 | | 2025 | | 166,290 | | | 2,209 | | | 89,727 | |
2026 and thereafter | | 558,415 | | | 38,837 | | | 144,721 | | |
2026 | | 2026 | | 151,745 | | | 2,227 | | | 89,727 | |
2027 and thereafter | | 2027 and thereafter | | 473,243 | | | 36,610 | | | 841,406 | |
Total lease receipt payments | Total lease receipt payments | | $ | 1,606,242 | | | $ | 48,672 | | | $ | 253,446 | | Total lease receipt payments | | $ | 1,458,546 | | | $ | 46,496 | | | $ | 1,260,541 | |
Less: Imputed interest | Less: Imputed interest | | | | (32,255) | | | (198,123) | | Less: Imputed interest | | | | (30,173) | | | (1,131,594) | |
| | 16,417 | | | 55,323 | | | 16,323 | | | 128,947 | |
Unguaranteed residual assets at end of leases | Unguaranteed residual assets at end of leases | | 0 | | | 144,036 | | Unguaranteed residual assets at end of leases | | — | | | 402,895 | |
Net investment in leases | Net investment in leases | | $ | 16,417 | | | $ | 199,359 | | Net investment in leases | | $ | 16,323 | | | $ | 531,842 | |
Net investments in leases recorded on our balance sheet were composed of the following:
| | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | 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) | | $ | 126,147 | | | $ | 16,417 | | | $ | 88,922 | | | $ | 16,452 | | Lease receivables (1) | | $ | 426,582 | | | $ | 16,323 | | | $ | 207,768 | | | $ | 16,371 | |
Unguaranteed residual assets | Unguaranteed residual assets | | 73,212 | | | 0 | | | 64,551 | | | 0 | | Unguaranteed residual assets | | 105,260 | | | — | | | 90,097 | | | — | |
Net investment in leases | Net investment in leases | | $ | 199,359 | | | $ | 16,417 | | | $ | 153,473 | | | $ | 16,452 | | Net investment in leases | | $ | 531,842 | | | $ | 16,323 | | | $ | 297,865 | | | $ | 16,371 | |
(1) Current portion of lease receivables included in prepaid and other current assets on the balance sheet.
Note 5:6:Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are derived using inputs (assumptions that market participants would use in pricing an asset or liability) including assumptions about risk. GAAP categorizes inputs used in fair value measurements into three broad levels as follows:
•(Level 1) Quoted prices in active markets for identical assets or liabilities.
•(Level 2) Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, similar assets and liabilities in markets that are not active or can be corroborated by observable market data.
•(Level 3) Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes valuation techniques that involve significant unobservable inputs.
Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and debt. The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. Debt consists of outstanding principal under our revolving credit agreement (which approximates fair value as interest rates are reset frequently at current interest rates) and our fixed interest rate senior notes.
The carrying amounts and estimated fair values of our senior notes were as follows:
| | | | June 30, 2021 | | December 31, 2020 | | | June 30, 2022 | | December 31, 2021 |
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: | |
| 5% Senior Notes | 5% Senior Notes | | Level 2 | | 492,570 | | | 512,245 | | | 492,103 | | | 506,540 | | 5% Senior Notes | | Level 2 | | 493,541 | | | 430,710 | | | 493,049 | | | 502,705 | |
6.375% Senior Notes | | 6.375% Senior Notes | | Level 2 | | 393,919 | | | 377,996 | | | — | | | — | |
Total Liabilities | | Total Liabilities | | 887,460 | | | 808,706 | | | 493,049 | | | 502,705 | |
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 910 for additional information.
Non-Recurring Fair Value Measurements
The HEP Transaction was accounted for as a business combination using the acquisition method of accounting, with the assets acquired and liabilities assumed at their respective acquisition date fair values at the Closing Date. The fair value measurements were based on a combination of valuation methods including discounted cash flows, the guideline public company method, the market approach and obsolescence adjusted replacement costs, all of which are Level 3 inputs.
For gains onthe net investments in sales-type leases recognized during the six months ended June 30, 2021,2022, the estimated fair value of the underlying leased assets at contract inception and the present value of the estimated unguaranteed residual asset at the end of the lease term are used in determining the net investment in leases and related gain on sales-type leases recorded. The asset valuation estimates include Level 3 inputs based on a replacement cost valuation method.
During the six months ended June 30, 2021, we recognized goodwill impairment based on fair value measurements utilized during our goodwill testing (see Note 1). The fair value measurements were based on a combination of valuation methods including discounted cash flows, the guideline public company and guideline transaction methods and obsolescence adjusted replacement costs, all of which are Level 3 inputs.
Note 6:7:Properties and Equipment
The carrying amounts of our properties and equipment were as follows:
| | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
| | (In thousands) |
Pipelines, terminals and tankage1 | | $ | 1,538,892 | | | $ | 1,575,815 | |
Refinery assets | | 348,882 | | | 348,882 | |
Land and right of way | | 86,781 | | | 87,076 | |
Construction in progress | | 99,420 | | | 58,467 | |
Other1 | | 44,819 | | | 46,201 | |
| | 2,118,794 | | | 2,116,441 | |
Less accumulated depreciation | | (688,483) | | | (665,756) | |
| | $ | 1,430,311 | | | $ | 1,450,685 | |
(1)Prior period balances have been reclassified to be comparative to current period. | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
| | (In thousands) |
Pipelines, terminals and tankage | | $ | 1,611,170 | | | $ | 1,527,697 | |
Refinery assets | | 352,274 | | | 348,882 | |
Land and right of way | | 124,984 | | | 98,837 | |
Construction in progress | | 31,864 | | | 26,446 | |
Other | | 63,372 | | | 48,203 | |
| | 2,183,664 | | | 2,050,065 | |
Less accumulated depreciation | | (757,172) | | | (721,037) | |
| | $ | 1,426,492 | | | $ | 1,329,028 | |
Depreciation expense was $42.7$40.8 million and $41.7$42.7 million for the six months ended June 30, 20212022 and 2020,2021, respectively, and includes depreciation of assets acquired under capital leases.
Note 7:8: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 US Holdings, Inc. (“Delek”) in 2005, from HFC in 2008 prior to HEP becoming a consolidated VIE of HFC, from Plains in 2017, and from other minor acquisitions in 2018.
The carrying amounts of our intangible assets were as follows:
| | | Useful Life | | June 30, 2021 | | December 31, 2020 | | Useful Life | | June 30, 2022 | | December 31, 2021 |
| | | | | (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 | | 10-15 years | | 75,131 | | | 75,131 | | |
HF Sinclair transportation agreement | | HF Sinclair 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 | | 20 years | | 50 | | | 50 | | Other | | 20 years | | 50 | | | 50 | |
| | 204,797 | | | 204,797 | | | 204,797 | | | 204,797 | |
Less accumulated amortization | Less accumulated amortization | | (124,486) | | | (117,482) | | Less accumulated amortization | | (138,493) | | | (131,490) | |
| | $ | 80,311 | | | $ | 87,315 | | | $ | 66,304 | | | $ | 73,307 | |
Amortization expense was $7.0 million for botheach of the six months ended June 30, 20212022 and 2020.2021. We estimate amortization expense to be $14.0$9.9 million for 2022, $9.9 million in 2023, and $9.1 million for 2024 through 2026.2027.
We have additional transportation agreements with HFCsubsidiaries of HF Sinclair resulting from historical transactions consisting of pipeline, terminal and tankage assets contributed to us or acquired from HFC.subsidiaries of HF Sinclair. These transactions occurred while we were a consolidated variable interest entity of HFC;HF Sinclair; therefore, our basis in these agreements is 0zero and does not reflect a step-up in basis to fair value.
Note 8:9:Employees, Retirement and Incentive Plans
Direct support for our operations is provided by Holly Logistic Services, L.L.C. (“HLS”), an HFC subsidiary,HLS, which utilizes personnel employed by HFCHF Sinclair 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 HFCHF Sinclair (the “Omnibus Agreement”). These employees participate in the retirement and benefit plans of HFC.HF Sinclair. Our share of retirement and benefit plan costs was $1.9$2.7 million and $1.6$1.9 million for the three months ended June 30, 20212022 and 2020,2021, respectively, and $4.1$5.1 million and $3.7$4.1 million for the six months ended June 30, 2022 and 2021, and 2020.respectively.
Under HLS’s secondment agreement with HFCHF Sinclair (the “Secondment Agreement”), certain employees of HFCHF Sinclair are seconded to HLS to provide operational and maintenance services for certain of our processing, refining, pipeline and tankage assets, and HLS reimburses HFCHF Sinclair 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 45 components: restricted or phantom units, performance units, unit options, and unit appreciation rights.rights and cash awards. Our accounting policy for the recognition of compensation expense for awards with pro-rata vesting (a significant proportion of our awards) is to expense the costs ratably over the vesting periods.
As of June 30, 2021,2022, we had 2 types of incentive-basedunit-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 June 30, 2022 and 2021, and 2020,respectively, and $1.2 million and $1.0 million for both the six months ended June 30, 20212022 and 2020, respectively.2021. We currently purchase units in the open market instead of issuing new units for settlement of all unit awards under our Long-Term Incentive Plan. As of June 30, 2021,2022, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which 856,171819,513 were available to be granted, assuming no forfeitures of the unvested units and full achievement of goals for the unvested performance units.
Phantom Units
Under our Long-Term Incentive Plan, we grant phantom units to our non-employee directors and selected employees who perform services for us, with most awards vesting over a period of one to three years. Although full ownership of the units does not transfer to the recipients until the units vest, the recipients have distribution rights on these units from the date of grant.
The fair value of each phantom unit award is measured at the market price as of the date of grant and is amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award.
A summary of phantom unit activity and changes during the six months ended June 30, 2021,2022, is presented below:
| Phantom Units | Phantom Units | | Units | | Weighted Average Grant-Date Fair Value | Phantom Units | | Units | | Weighted Average Grant-Date Fair Value |
Outstanding at January 1, 2021 (nonvested) | | 295,992 | | | $ | 14.48 | | |
| Outstanding at January 1, 2022 (nonvested) | | Outstanding at January 1, 2022 (nonvested) | | 203,263 | | | $ | 14.85 | |
Granted | | Granted | | 4,313 | | | 17.40 | |
Vesting and transfer of full ownership to recipients | Vesting and transfer of full ownership to recipients | | (189) | | | 11.92 | | Vesting and transfer of full ownership to recipients | | (3,833) | | | 15.54 | |
Forfeited | Forfeited | | (3,483) | | | 14.69 | | Forfeited | | (18,158) | | | 14.60 | |
Outstanding at June 30, 2021 (nonvested) | | 292,320 | | | 14.48 | | |
Outstanding at June 30, 2022 (nonvested) | | Outstanding at June 30, 2022 (nonvested) | | 185,585 | | | 14.92 | |
The grant date fair values of phantom units that were vested and transferred to recipients during the six months ended June 30, 2022 and 2021 were $60 thousand and 2020 were $2 thousand, and $0.1 million, respectively. The grant date fair values of phantom units that were granted during the six months ended June 30, 2022 were $75 thousand. No units were granted during the six months ended June 30, 2021. As of June 30, 2021, $2.02022, $1.0 million of total unrecognized compensation expense related to unvested phantom unit grants is expected to be recognized over a weighted-average period of 1.3 years.1.0 year.
Performance Units
Under our Long-Term Incentive Plan, we grant performance units to selected officers who perform services for us. Performance units granted are payable in common units at the end of a three-year performance period based upon meeting certain criteria over the performance period. Under the terms of our performance unit grants, some awards are subject to the growth in our distributable cash flow per common unit over the performance period while other awards are subject to "financial performance" and "market performance." Financial performance is based on meeting certain earnings before interest, taxes, depreciation and amortization ("EBITDA") targets, while market performance is based on the relative standing of total unitholder return achieved by HEP compared to peer group companies. The number of units ultimately issued under these awards can range from 0% to 200%.
We did not grant any performance units during the six months ended June 30, 2021.2022. Although common units are not transferred to the recipients until the performance units vest, the recipients have distribution rights with respect to the target number of performance units subject to the award from the date of grant at the same rate as distributions paid on our common units.
A summary of performance unit activity and changes for the six months ended June 30, 2021,2022, is presented below:
| | | | | | | | |
Performance Units | | Units |
Outstanding at January 1, 20212022 (nonvested) | | 77,47276,719 | |
| | |
Vesting and transfer of common units to recipients | | (10,881)(13,920) | |
Forfeited | | (9,124) | |
Outstanding at June 30, 20212022 (nonvested) | | 66,59153,675 | |
The grant date fair value of performance units vested and transferred to recipients during both of the six months ended June 30, 20212022 and 20202021 was $0.4 million. Based on the weighted-average fair value of performance units outstanding at June 30, 2021,2022, of $1.2$0.9 million, there was $0.5 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of 1.71.3 years.
During the six months ended June 30, 2021,2022, 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 9:10:Debt
Credit Agreement
In April 2021, we amended our senior secured revolving credit facility (the “Credit Agreement”) decreasing the size of the facility from $1.4 billion to $1.2 billion and extending the maturity date to July 27, 2025. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments, working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit and continues to provide for an accordion feature that allows us to increase commitments under the Credit Agreement up to a maximum amount of $1.7 billion.
Our obligations under the Credit Agreement are collateralized by substantially all of our assets, and indebtedness under the Credit Agreement is guaranteed by our material, wholly-ownedwholly owned subsidiaries. The Credit Agreement requires us to maintain compliance with certain financial covenants consisting of total leverage, senior secured leverage, and interest coverage. It also limits or restricts our ability to engage in certain activities. If, at any time prior to the maturity of the Credit Agreement, HEP obtains two investment grade credit ratings, the Credit Agreement will become unsecured and many of the covenants, limitations, and restrictions will be eliminated.
We may prepay all loans at any time without penalty, except for tranche breakage costs. If an event of default exists under the Credit Agreement, the lenders will be able to accelerate the maturity of all loans outstanding and exercise other rights and remedies. We were in compliance with the covenants under the Credit Agreement as of June 30, 2021.2022.
Senior Notes
On February 4, 2020,April 8, 2022, we closed a private placement of $400 million in aggregate principal amount of 6.375% senior unsecured notes due in 2027 (the “6.375% Senior Notes”). The 6.375% Senior Notes were issued at par for net proceeds of approximately $393 million, after deducting the initial purchasers’ discounts and commissions and estimated offering expenses. The total net proceeds from the offering of the 6.375% Senior Notes were used to partially repay outstanding borrowings under the Credit Agreement, increasing our available liquidity.
As of June 30, 2022, we had $500 million in aggregate principal amount of 5% senior unsecured notes due in 2028 (the "5%“5% Senior Notes"). On February 5, 2020, we redeemedNotes,” and together with the existing $500 million 6%6.375% 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.“Senior Notes”).
The 5% Senior Notes are unsecured and impose certain restrictive covenants, including limitations on our ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. We were in compliance with the restrictive covenants for the 5% Senior Notes as of June 30, 2021.2022. 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-ownedwholly owned subsidiaries (other than Holly Energy Finance Corp. and certain immaterial subsidiaries).
Long-term Debt
The carrying amounts of our long-term debt were as follows:
| | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | (In thousands) | | (In thousands) |
Credit Agreement | Credit Agreement | | Credit Agreement | |
Amount outstanding | Amount outstanding | | $ | 870,000 | | | 913,500 | | Amount outstanding | | $ | 721,000 | | | 840,000 | |
| | 5% Senior Notes | 5% Senior Notes | | 5% Senior Notes | |
Principal | Principal | | 500,000 | | | 500,000 | | Principal | | 500,000 | | | 500,000 | |
Unamortized premium and debt issuance costs | Unamortized premium and debt issuance costs | | (7,430) | | | (7,897) | | Unamortized premium and debt issuance costs | | (6,459) | | | (6,951) | |
| | 492,570 | | | 492,103 | | | 493,541 | | | 493,049 | |
| 6.375% Senior Notes | | 6.375% Senior Notes | |
Principal | | Principal | | 400,000 | | | — | |
Unamortized premium and debt issuance costs | | Unamortized premium and debt issuance costs | | (6,081) | | | — | |
| | | 393,919 | | | — | |
| Total long-term debt | Total long-term debt | | $ | 1,362,570 | | | $ | 1,405,603 | | Total long-term debt | | $ | 1,608,460 | | | $ | 1,333,049 | |
Note 10:11:Related Party Transactions
We serve HFC’sHF Sinclair’s refineries under long-term pipeline, terminal and tankage throughput agreements, and refinery processing unit tolling agreements expiring from 20222023 to 2036,2037, and revenues from HFCHF Sinclair accounted for 81% and 79% of our total revenues for both the three and six months ended June 30, 2021.2022, respectively. Under these agreements, HFCHF Sinclair 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 generally subject to annual rate adjustments on July 1st each year generally based on increases or decreases in PPI or the FERC index. As of June 30, 2021,July 1, 2022, these agreements with HFCHF Sinclair require minimum annualized payments to us of $340$445.9 million.
If HFCHF Sinclair 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 HFCHF Sinclair an annual administrative fee (currently $2.6$5.0 million) for the provision by HFCHF Sinclair or its affiliates of various general and administrative services to us. ThisIn connection with the HEP Transaction, we pay HF Sinclair a temporary monthly fee does not includeof $62,500 relating to transition services to be provided to HEP by HF Sinclair. Neither the annual administrative fee nor the temporary monthly fee includes the salaries of personnel employed by HFCHF Sinclair who perform services for us on behalf of HLS or the cost of their employee benefits, which are charged to us separately by HFC.HF Sinclair. Also, we reimburse HFCHF Sinclair and its affiliates for direct expenses they incur on our behalf.
Related party transactions with HFCHF Sinclair and its subsidiaries were as follows:
•Revenues received from HFCHF Sinclair were $99.1$110.5 million and $95.6$99.1 million for the three months ended June 30, 20212022 and 2020,2021, respectively, and $201.1$202.8 million and $197.0$201.1 million for the six months ended June 30, 20212022 and 2020,2021, respectively.
•HFCHF Sinclair charged us general and administrative services under the Omnibus Agreement of $1.3 million and $0.7 million for both the three months ended June 30, 2022 and 2021, respectively, and 2020,$2.0 million and $1.3 million for both the six months ended June 30, 2022 and 2021, and 2020.respectively. In addition, HF Sinclair charged us $0.2 million for a prorated portion of the temporary administrative fee during the six months ended June 30, 2022.
•We reimbursed HFCHF Sinclair for costs of employees supporting our operations of $14.3$19.9 million and $13.2$14.3 million for the three months ended June 30, 20212022 and 2020,2021, respectively, and $28.7$36.1 million and $27.3$28.7 million for the six months ended June 30, 2022 and 2021, and 2020, respectively.
•HFCHF Sinclair reimbursed us $1.2$4.2 million and $0.9$1.2 million for the three months ended June 30, 2022 and 2021, for expense and 2020,capital projects, respectively, and $4.3$8.6 million and $4.0$4.3 million for the six months ended June 30, 2022 and 2021, and 2020, respectively, for expense and capital projects.respectively.
•We distributed $20.9 million and $18.4 million in both the three months ended June 30, 20212022 and 2020, respectively,2021, and $41.7 million and $56.0 million in both the six months ended June 30, 2022 and 2021, and 2020, respectively, to HFCHF Sinclair as regular distributions on its common units.
•Accounts receivable from HFCHF Sinclair were $46.3$59.0 million and $48.0$56.2 million at June 30, 2021,2022, and December 31, 2020,2021, respectively.
•Accounts payable to HFCHF Sinclair were $15.0$12.7 million and $18.1$11.7 million at June 30, 2021,2022, and December 31, 2020,2021, respectively.
•Deferred revenue in the consolidated balance sheets included $0.4 million for bothat June 30, 20212022 and December 31, 2020,2021, includes $2.2 million and $4.1 million, respectively, relating to certain shortfall billings to HFC.HF Sinclair.
•We received direct financing lease payments from HFCHF Sinclair for use of our Artesia and Tulsa rail yards of $0.5 million for botheach of the three months ended June 30, 20212022 and 2020, respectively,2021 and $1.0 million for both of the six months ended June 30, 20212022 and 2020.2021.
•We recorded a gain on sales-type leases with HFCHF Sinclair of $24.7 million for the six months ended June 30, 2021, and we received sales-type lease payments of $24.4 million and $6.3 million and $2.4 million from HFC that were not recorded in revenuesHF Sinclair for the three months ended June 30, 20212022 and 2020,2021, respectively, and $12.5$37.0 million and $4.8$12.5 million for the six months ended June 30, 20212022 and 2020,2021, respectively.
•HEP and HFC reached an agreement to terminate the existing minimum volume commitments for HEP’s Cheyenne assets and enter into new agreements, which were finalized and executed on February 8, 2021, with the following
terms, in each case effective January 1, 2021: (1) a ten-year lease with 2 five-year renewal option periods for HFC’s (and now HF Sinclair’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 (and now HF Sinclair) will pay a base tariff to HEP for available crude oil storage and HFCHF Sinclair and HEP will split any profits generated on crude oil contango opportunities and (3) a $10 million one-time cash payment from HFCHF Sinclair to HEP for the termination of the existing minimum volume commitment.
On August 2, 2021, in connectionContemporaneous 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 consummationclosing of the Sinclair Transactions, to enter into amendments to certain of the agreements by and among HEP and HFC amended certain intercompany agreements, including the master throughput agreement, to include within the scope of such agreements certain of the assets to be acquired by HEP pursuant to the Contribution Agreement (described in Note 17 below).
In addition, the Letter Agreement provides that if, as a condition to obtaining antitrust clearance for the Sinclair Transactions, HFC enters into a definitive agreement to divest its refinery in Davis County, Utah (the “Woods Cross Refinery”), then HEP would sell certain assets located at, or relating to, the Woods Cross Refinery to HFC in exchange for cash consideration equal to $232.5 million plus the certain accounts receivable of HEP in respect of such assets, with such sale to be effective immediately prior to the closing of the sale of the Woods Cross Refinery by HFC. The Letter Agreement also provides that HEP’s right to future revenues from HFC in respect of such Woods Cross Refinery assets will terminate at the closing of such sale.Agreement.
Note 11:12: Partners’ Equity, Income Allocations and Cash Distributions
As of June 30, 2021, HFC2022, HF Sinclair held 59,630,030 of our common units, constituting a 57%47% limited partner interest in us, and held the non-economic general partner interest.
Continuous Offering Program
We have a continuous offering program under which we may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200 million. As of June 30, 2021,2022, HEP has issued 2,413,153 units under this program, providing $82.3 million in gross proceeds.
Allocations of Net Income
Net income attributable to HEP is allocated to the partners based on their weighted-average ownership percentage during the period.
Cash Distributions
On July 22, 2021,21, 2022, we announced our cash distribution for the second quarter of 20212022 of $0.35 $0.35 per unit. The distribution is payable on all common units and will be paid August 13, 2021,12, 2022, to all unitholders of record on August 2, 2021.1, 2022.
Our regular quarterly cash distribution to the limited partners will be $44.3 million for the three months ended June 30, 2022 and was $37.0 million for the three months ended June 30, 2021 and was $34.5 million for the three months ended June 30, 2020.2021. For the six months ended June 30, 2021,2022, the regular quarterly distribution to the limited partners will be $74.1$88.7 million and was $68.9$74.1 million for the six months ended June 30, 2020.2021. Our distributions are declared subsequent to quarter end; therefore, these amounts do not reflect distributions paid during the respective period.
Note 12:13: 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, adjusted for participating securities’ share in earnings, divided by the weighted average limited partners’ units outstanding. Diluted net income per unit assumes, when dilutive, the issuance of the net incremental units from phantom units and performance units. To the extent net income attributable to the partners exceeds or is less than cash distributions, this difference is allocated to the partners based on their weighted-average ownership percentage during the period, after consideration of any priority allocations of earnings.period. Our dilutive securities are immaterial for all periods presented.
Net income per limited partner unit is computed as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | (In thousands, except per unit data) | | (In thousands, except per unit data) |
| Net income attributable to the partners | Net income attributable to the partners | | $ | 55,745 | | | $ | 76,470 | | | $ | 120,142 | | | $ | 101,331 | | Net income attributable to the partners | | $ | 56,792 | | | $ | 55,745 | | | $ | 106,351 | | | $ | 120,142 | |
Less: Participating securities’ share in earnings | Less: Participating securities’ share in earnings | | (190) | | | 0 | | | (411) | | | 0 | | Less: Participating securities’ share in earnings | | (107) | | | (190) | | | (222) | | | (411) | |
Net income attributable to common units | Net income attributable to common units | | 55,555 | | | 76,470 | | | 119,731 | | | 101,331 | | Net income attributable to common units | | 56,685 | | | 55,555 | | | 106,129 | | | 119,731 | |
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 | | 126,440 | | | 105,440 | | | 118,087 | | | 105,440 | |
Limited partners' per unit interest in earnings - basic and diluted | Limited partners' per unit interest in earnings - basic and diluted | | $ | 0.53 | | | $ | 0.73 | | | $ | 1.14 | | | $ | 0.96 | | Limited partners' per unit interest in earnings - basic and diluted | | $ | 0.45 | | | $ | 0.53 | | | $ | 0.90 | | | $ | 1.14 | |
Note 13:14:Environmental
We expensed $0.5$0.2 million for both the three and six months ended June 30, 20212022, respectively, for environmental remediation obligations and we expensed $0.5 million and $0.7 million for both the three and six months ended June 30, 2020,2021, respectively. The accrued environmental liability, net of expected recoveries from indemnifying parties, reflected in our consolidated balance sheets was $4.3$13.6 million and $4.5$3.9 million at June 30, 20212022 and December 31, 2020, respectively,2021, of which $2.2$11.6 million and $2.5$2.4 million was classified as other long-term liabilities atfor June 30, 20212022 and December 31, 2020.2021, respectively. These accruals include remediation and monitoring costs expected to be incurred over an extended period of time. Accrued environmental liabilities assumed in the Sinclair acquisition have preliminarily been fair valued at $10.0 million as of March 14, 2022. Estimated liabilities could increase in the future as the purchase price allocation for the Sinclair Transportation acquisition is finalized and when the results of ongoing investigations become known, are considered probable and can be reasonably estimated.
Under the Omnibus Agreement and certain transportation agreements and purchase agreements with HFC, HFCHF Sinclair and/or its subsidiaries, HF Sinclair 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 HFCHF Sinclair and its subsidiaries and occurring or existing prior to the date of such transfers. Our consolidated balance sheets included additional accrued environmental liabilities of $0.4$0.2 million and $0.5$0.3 million for HFCHF Sinclair indemnified liabilities as of June 30, 20212022 and December 31, 2020,2021, respectively, and other assets included equal and offsetting balances representing amounts due from HFCHF Sinclair related to indemnifications for environmental remediation liabilities.
Note 14:15: 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 15:16: 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 segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (In thousands) |
Revenues: | | | | | | | | |
Pipelines and terminals - affiliate | | $ | 87,644 | | | $ | 78,116 | | | $ | 161,495 | | | $ | 157,546 | |
Pipelines and terminals - third-party | | 25,233 | | | 27,093 | | | 53,177 | | | 52,350 | |
Refinery processing units - affiliate | | 22,893 | | | 21,026 | | | 41,296 | | | 43,522 | |
Total segment revenues | | $ | 135,770 | | | $ | 126,235 | | | $ | 255,968 | | | $ | 253,418 | |
| | | | | | | | |
Segment operating income: | | | | | | | | |
Pipelines and terminals (1) | | $ | 48,673 | | | $ | 49,391 | | | $ | 98,477 | | | $ | 90,875 | |
Refinery processing units | | 6,224 | | | 9,773 | | | 11,806 | | | 18,008 | |
Total segment operating income | | 54,897 | | | 59,164 | | | 110,283 | | | 108,883 | |
Unallocated general and administrative expenses | | (4,682) | | | (2,847) | | | (8,994) | | | (5,815) | |
Interest expense | | (20,347) | | | (13,938) | | | (33,986) | | | (27,178) | |
Interest income | | 24,331 | | | 6,614 | | | 36,978 | | | 13,162 | |
| | | | | | | | |
Equity in earnings of equity method investments | | 5,447 | | | 3,423 | | | 9,073 | | | 5,186 | |
Gain on sales-type leases | | — | | | 27 | | | — | | | 24,677 | |
Gain (loss) on sale of assets and other | | 45 | | | 5,415 | | | 146 | | | 5,917 | |
Income before income taxes | | $ | 59,691 | | | $ | 57,858 | | | $ | 113,500 | | | $ | 124,832 | |
| | | | | | | | |
Capital Expenditures: | | | | | | | | |
Pipelines and terminals | | $ | 7,397 | | | $ | 25,559 | | | $ | 17,817 | | | $ | 58,777 | |
Refinery processing units | | 1,703 | | | 598 | | | 5,429 | | | 598 | |
Total capital expenditures | | $ | 9,100 | | | $ | 26,157 | | | $ | 23,246 | | | $ | 59,375 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2022 | | December 31, 2021 |
| | (In thousands) |
Identifiable assets: | | | | |
Pipelines and terminals (2) | | $ | 2,157,472 | | | $ | 1,737,388 | |
Refinery processing units | | 312,931 | | | 294,452 | |
Other | | 304,635 | | | 134,027 | |
Total identifiable assets | | $ | 2,775,038 | | | $ | 2,165,867 | |
| | | | | | | | | | | | | | |
| | 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 includesincluded goodwill impairment chargecharges of $11.0 million for the six months ended June 30, 2021.
(2) IncludesIncluded goodwill of $223.7$314.4 million as of June 30, 20212022 and $234.7$223.7 million as of December 31, 2020.2021.
Note 16:17: 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 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.
As a result of the HEP Transaction, UNEV Pipeline, LLC became a 100% owned subsidiary, and it was subsequently added as a guarantor of the obligations of HEP under the Senior Notes during the second quarter of 2022. UNEV Pipeline, LLC financial information has been included in the Guarantor Subsidiaries financial information for all periods presented.
Condensed Consolidating Balance Sheet
| June 30, 2021 | | Parent | | Guarantor Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated | |
June 30, 2022 | | June 30, 2022 | | 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 | | $ | 871 | | | $ | (423) | | | $ | 19,113 | | | $ | 0 | | | $ | 19,561 | | Cash and cash equivalents | | $ | 4,879 | | | $ | 5,409 | | | $ | 4,596 | | | $ | — | | | $ | 14,884 | |
Accounts receivable | Accounts receivable | | 0 | | | 53,348 | | | 7,931 | | | (207) | | | 61,072 | | Accounts receivable | | — | | | 72,418 | | | 1,343 | | | (1,209) | | | 72,552 | |
Prepaid and other current assets | Prepaid and other current assets | | 368 | | | 8,156 | | | 753 | | | 0 | | | 9,277 | | Prepaid and other current assets | | 322 | | | 11,647 | | | 329 | | | (329) | | | 11,969 | |
Total current assets | Total current assets | | 1,239 | | | 61,081 | | | 27,797 | | | (207) | | | 89,910 | | Total current assets | | 5,201 | | | 89,474 | | | 6,268 | | | (1,538) | | | 99,405 | |
| Properties and equipment, net | Properties and equipment, net | | 0 | | | 1,037,480 | | | 392,831 | | | 0 | | | 1,430,311 | | Properties and equipment, net | | — | | | 1,426,492 | | | — | | | — | | | 1,426,492 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | | 0 | | | 2,603 | | | 121 | | | 0 | | | 2,724 | | Operating lease right-of-use assets | | — | | | 2,502 | | | — | | | — | | | 2,502 | |
Net investment in leases | Net investment in leases | | 0 | | | 211,550 | | | 0 | | | 0 | | | 211,550 | | Net investment in leases | | — | | | 542,281 | | | 100,867 | | | (100,867) | | | 542,281 | |
Investment in subsidiaries
| Investment in subsidiaries
| | 1,788,648 | | | 299,779 | | | 0 | | | (2,088,427) | | | 0 | | Investment in subsidiaries
| | 2,461,802 | | | 69,405 | | | — | | | (2,531,207) | | | — | |
Intangible assets, net | Intangible assets, net | | 0 | | | 80,311 | | | 0 | | | 0 | | | 80,311 | | Intangible assets, net | | — | | | 66,304 | | | — | | | — | | | 66,304 | |
Goodwill | Goodwill | | 0 | | | 223,650 | | | 0 | | | 0 | | | 223,650 | | Goodwill | | — | | | 314,418 | | | — | | | — | | | 314,418 | |
Equity method investments | Equity method investments | | 0 | | | 79,448 | | | 37,988 | | | 0 | | | 117,436 | | Equity method investments | | — | | | 244,517 | | | 35,955 | | | — | | | 280,472 | |
Deferred turnaround costs | | Deferred turnaround costs | | — | | | 25,813 | | | — | | | — | | | 25,813 | |
Other assets | Other assets | | 9,167 | | | 7,763 | | | 0 | | | 0 | | | 16,930 | | Other assets | | 6,830 | | | 10,521 | | | — | | | — | | | 17,351 | |
Total assets | Total assets | | $ | 1,799,054 | | | $ | 2,003,665 | | | $ | 458,737 | | | $ | (2,088,634) | | | $ | 2,172,822 | | Total assets | | $ | 2,473,833 | | | $ | 2,791,727 | | | $ | 143,090 | | | $ | (2,633,612) | | | $ | 2,775,038 | |
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | LIABILITIES AND EQUITY | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | | $ | 0 | | | $ | 28,247 | | | $ | 12,515 | | | $ | (207) | | | $ | 40,555 | | Accounts payable | | $ | — | | | $ | 35,448 | | | $ | 3,561 | | | $ | (1,209) | | | $ | 37,800 | |
Accrued interest | Accrued interest | | 10,869 | | | 0 | | | 0 | | | 0 | | | 10,869 | | Accrued interest | | 17,963 | | | — | | | — | | | — | | | 17,963 | |
Deferred revenue | Deferred revenue | | 0 | | | 10,169 | | | 400 | | | 0 | | | 10,569 | | Deferred revenue | | — | | | 13,770 | | | — | | | — | | | 13,770 | |
Accrued property taxes | Accrued property taxes | | 0 | | | 2,391 | | | 2,666 | | | 0 | | | 5,057 | | Accrued property taxes | | — | | | 7,145 | | | — | | | — | | | 7,145 | |
Current operating lease liabilities | Current operating lease liabilities | | 0 | | | 722 | | | 73 | | | 0 | | | 795 | | Current operating lease liabilities | | — | | | 963 | | | — | | | — | | | 963 | |
Current finance lease liabilities | Current finance lease liabilities | | 0 | | | 3,755 | | | 0 | | | 0 | | | 3,755 | | Current finance lease liabilities | | — | | | 5,862 | | | — | | | (2,005) | | | 3,857 | |
Other current liabilities | Other current liabilities | | 137 | | | 2,499 | | | 307 | | | 0 | | | 2,943 | | Other current liabilities | | 79 | | | 1,850 | | | 719 | | | — | | | 2,648 | |
Total current liabilities | Total current liabilities | | 11,006 | | | 47,783 | | | 15,961 | | | (207) | | | 74,543 | | Total current liabilities | | 18,042 | | | 65,038 | | | 4,280 | | | (3,214) | | | 84,146 | |
| Long-term debt | Long-term debt | | 1,362,570 | | | 0 | | | 0 | | | 0 | | | 1,362,570 | | Long-term debt | | 1,608,460 | | | — | | | — | | | — | | | 1,608,460 | |
Noncurrent operating lease liabilities | Noncurrent operating lease liabilities | | 0 | | | 2,303 | | | 0 | | | 0 | | | 2,303 | | Noncurrent operating lease liabilities | | — | | | 2,006 | | | — | | | — | | | 2,006 | |
Noncurrent finance lease liabilities | Noncurrent finance lease liabilities | | 0 | | | 66,434 | | | 0 | | | 0 | | | 66,434 | | Noncurrent finance lease liabilities | | — | | | 152,749 | | | — | | | (89,911) | | | 62,838 | |
Other long-term liabilities | Other long-term liabilities | | 260 | | | 11,215 | | | 438 | | | 0 | | | 11,913 | | Other long-term liabilities | | 266 | | | 22,806 | | | — | | | — | | | 23,072 | |
Deferred revenue | Deferred revenue | | 0 | | | 32,645 | | | 0 | | | 0 | | | 32,645 | | Deferred revenue | | — | | | 28,865 | | | — | | | — | | | 28,865 | |
Class B unit | Class B unit | | 0 | | | 54,637 | | | 0 | | | 0 | | | 54,637 | | Class B unit | | — | | | 58,461 | | | — | | | — | | | 58,461 | |
Equity - partners | Equity - partners | | 425,218 | | | 1,788,648 | | | 299,779 | | | (2,088,427) | | | 425,218 | | Equity - partners | | 847,065 | | | 2,461,802 | | | 69,405 | | | (2,540,487) | | | 837,785 | |
Equity - noncontrolling interests | Equity - noncontrolling interests | | 0 | | | 0 | | | 142,559 | | | 0 | | | 142,559 | | Equity - noncontrolling interests | | — | | | — | | | 69,405 | | | — | | | 69,405 | |
Total liabilities and equity | Total liabilities and equity | | $ | 1,799,054 | | | $ | 2,003,665 | | | $ | 458,737 | | | $ | (2,088,634) | | | $ | 2,172,822 | | Total liabilities and equity | | $ | 2,473,833 | | | $ | 2,791,727 | | | $ | 143,090 | | | $ | (2,633,612) | | | $ | 2,775,038 | |
Condensed Consolidating Balance Sheet
| December 31, 2020 | | Parent | | Guarantor Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated | |
December 31, 2021 | | December 31, 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 | | $ | 1,627 | | | $ | (987) | | | $ | 21,350 | | | $ | 0 | | | $ | 21,990 | | Cash and cash equivalents | | $ | 1,273 | | | $ | 4,227 | | | $ | 8,881 | | | $ | — | | | $ | 14,381 | |
Accounts receivable | Accounts receivable | | 0 | | | 56,522 | | | 6,308 | | | (315) | | | 62,515 | | Accounts receivable | | — | | | 68,768 | | | 2,833 | | | (2,702) | | | 68,899 | |
Prepaid and other current assets | Prepaid and other current assets | | 349 | | | 8,366 | | | 772 | | | 0 | | | 9,487 | | Prepaid and other current assets | | 353 | | | 10,680 | | | 304 | | | (304) | | | 11,033 | |
Total current assets | Total current assets | | 1,976 | | | 63,901 | | | 28,430 | | | (315) | | | 93,992 | | Total current assets | | 1,626 | | | 83,675 | | | 12,018 | | | (3,006) | | | 94,313 | |
| Properties and equipment, net | Properties and equipment, net | | 0 | | | 1,087,184 | | | 363,501 | | | 0 | | | 1,450,685 | | Properties and equipment, net | | — | | | 1,329,028 | | | — | | | — | | | 1,329,028 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | | 0 | | | 2,822 | | | 157 | | | 0 | | | 2,979 | | Operating lease right-of-use assets | | — | | | 2,275 | | | — | | | — | | | 2,275 | |
Net investment in leases | Net investment in leases | | 0 | | | 166,316 | | | 0 | | | 0 | | | 166,316 | | Net investment in leases | | — | | | 309,301 | | | 100,032 | | | (100,030) | | | 309,303 | |
Investment in subsidiaries | Investment in subsidiaries | | 1,789,808 | | | 286,883 | | | 0 | | | (2,076,691) | | | 0 | | Investment in subsidiaries | | 1,785,024 | | | 70,437 | | | — | | | (1,855,461) | | | — | |
Intangible assets, net | Intangible assets, net | | 0 | | | 87,315 | | | 0 | | | 0 | | | 87,315 | | Intangible assets, net | | — | | | 73,307 | | | — | | | — | | | 73,307 | |
Goodwill | Goodwill | | 0 | | | 234,684 | | | 0 | | | 0 | | | 234,684 | | Goodwill | | — | | | 223,650 | | | — | | | — | | | 223,650 | |
Equity method investments | Equity method investments | | 0 | | | 81,089 | | | 39,455 | | | 0 | | | 120,544 | | Equity method investments | | — | | | 78,873 | | | 37,505 | | | — | | | 116,378 | |
Deferred turnaround costs | | Deferred turnaround costs | | — | | | 2,632 | | | — | | | — | | | 2,632 | |
Other assets | Other assets | | 4,268 | | | 6,782 | | | 0 | | | 0 | | | 11,050 | | Other assets | | 8,118 | | | 6,863 | | | — | | | — | | | 14,981 | |
Total assets | Total assets | | $ | 1,796,052 | | | $ | 2,016,976 | | | $ | 431,543 | | | $ | (2,077,006) | | | $ | 2,167,565 | | Total assets | | $ | 1,794,768 | | | $ | 2,180,041 | | | $ | 149,555 | | | $ | (1,958,497) | | | $ | 2,165,867 | |
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | LIABILITIES AND EQUITY | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | | $ | 0 | | | $ | 30,252 | | | $ | 16,463 | | | $ | (315) | | | $ | 46,400 | | Accounts payable | | $ | — | | | $ | 34,566 | | | $ | 8,416 | | | $ | (2,702) | | | $ | 40,280 | |
Accrued interest | Accrued interest | | 10,892 | | | 0 | | | 0 | | | 0 | | | 10,892 | | Accrued interest | | 11,258 | | | — | | | — | | | — | | | 11,258 | |
Deferred revenue | Deferred revenue | | 0 | | | 10,868 | | | 500 | | | 0 | | | 11,368 | | Deferred revenue | | — | | | 14,585 | | | — | | | — | | | 14,585 | |
Accrued property taxes | Accrued property taxes | | 0 | | | 2,915 | | | 1,077 | | | 0 | | | 3,992 | | Accrued property taxes | | — | | | 4,542 | | | — | | | — | | | 4,542 | |
Current operating lease liabilities | Current operating lease liabilities | | 0 | | | 804 | | | 71 | | | 0 | | | 875 | | Current operating lease liabilities | | — | | | 620 | | | — | | | — | | | 620 | |
Current finance lease liabilities | Current finance lease liabilities | | 0 | | | 3,713 | | | 0 | | | 0 | | | 3,713 | | Current finance lease liabilities | | — | | | 5,566 | | | — | | | (1,780) | | | 3,786 | |
Other current liabilities | Other current liabilities | | 5 | | | 2,491 | | | 9 | | | 0 | | | 2,505 | | Other current liabilities | | 3 | | | 1,513 | | | 265 | | | — | | | 1,781 | |
Total current liabilities | Total current liabilities | | 10,897 | | | 51,043 | | | 18,120 | | | (315) | | | 79,745 | | Total current liabilities | | 11,261 | | | 61,392 | | | 8,681 | | | (4,482) | | | 76,852 | |
| Long-term debt | Long-term debt | | 1,405,603 | | | 0 | | | 0 | | | 0 | | | 1,405,603 | | Long-term debt | | 1,333,049 | | | — | | | — | | | — | | | 1,333,049 | |
Noncurrent operating lease liabilities | Noncurrent operating lease liabilities | | 0 | | | 2,476 | | | 0 | | | 0 | | | 2,476 | | Noncurrent operating lease liabilities | | — | | | 2,030 | | | — | | | — | | | 2,030 | |
Noncurrent finance lease liabilities | Noncurrent finance lease liabilities | | 0 | | | 68,047 | | | 0 | | | 0 | | | 68,047 | | Noncurrent finance lease liabilities | | — | | | 156,102 | | | — | | | (91,453) | | | 64,649 | |
Other long-term liabilities | Other long-term liabilities | | 260 | | | 12,171 | | | 474 | | | 0 | | | 12,905 | | Other long-term liabilities | | 340 | | | 12,187 | | | — | | | — | | | 12,527 | |
Deferred revenue | Deferred revenue | | 0 | | | 40,581 | | | 0 | | | 0 | | | 40,581 | | Deferred revenue | | — | | | 29,662 | | | — | | | — | | | 29,662 | |
Class B unit | Class B unit | | 0 | | | 52,850 | | | 0 | | | 0 | | | 52,850 | | Class B unit | | — | | | 56,549 | | | — | | | — | | | 56,549 | |
Equity - partners | Equity - partners | | 379,292 | | | 1,789,808 | | | 286,883 | | | (2,076,691) | | | 379,292 | | Equity - partners | | 450,118 | | | 1,785,024 | | | 70,437 | | | (1,862,562) | | | 443,017 | |
Equity - noncontrolling interests | Equity - noncontrolling interests | | 0 | | | 0 | | | 126,066 | | | 0 | | | 126,066 | | Equity - noncontrolling interests | | — | | | 77,095 | | | 70,437 | | | — | | | 147,532 | |
Total liabilities and equity | Total liabilities and equity | | $ | 1,796,052 | | | $ | 2,016,976 | | | $ | 431,543 | | | $ | (2,077,006) | | | $ | 2,167,565 | | Total liabilities and equity | | $ | 1,794,768 | | | $ | 2,180,041 | | | $ | 149,555 | | | $ | (1,958,497) | | | $ | 2,165,867 | |
Condensed Consolidating Statement of Income
| Three Months Ended June 30, 2021 | | Parent | | Guarantor Restricted Subsidiaries | | Non-Guarantor Non-restricted Subsidiaries | | Eliminations | | Consolidated | |
Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2022 | | Parent | | Guarantor Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated |
| | | (In thousands) | | | (In thousands) |
Revenues: | Revenues: | | Revenues: | |
Affiliates | Affiliates | | $ | 0 | | | $ | 92,911 | | | $ | 6,231 | | | $ | 0 | | | $ | 99,142 | | Affiliates | | $ | — | | | $ | 110,537 | | | $ | — | | | $ | — | | | $ | 110,537 | |
Third parties | Third parties | | 0 | | | 20,479 | | | 6,614 | | | 0 | | | 27,093 | | Third parties | | — | | | 25,233 | | | — | | | — | | | 25,233 | |
| | 0 | | | 113,390 | | | 12,845 | | | 0 | | | 126,235 | | | — | | | 135,770 | | | — | | | — | | | 135,770 | |
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 | | | 37,742 | | | 4,326 | | | 0 | | | 42,068 | | Operations (exclusive of depreciation and amortization) | | — | | | 52,823 | | | 1,076 | | | — | | | 53,899 | |
Depreciation and amortization | Depreciation and amortization | | 0 | | | 20,651 | | | 4,352 | | | 0 | | | 25,003 | | Depreciation and amortization | | — | | | 26,974 | | | — | | | — | | | 26,974 | |
General and administrative | General and administrative | | 907 | | | 1,940 | | | 0 | | | 0 | | | 2,847 | | General and administrative | | 912 | | | 3,770 | | | — | | | — | | | 4,682 | |
| | | 907 | | | 60,333 | | | 8,678 | | | 0 | | | 69,918 | | | 912 | | | 83,567 | | | 1,076 | | | — | | | 85,555 | |
Operating income (loss) | Operating income (loss) | | (907) | | | 53,057 | | | 4,167 | | | 0 | | | 56,317 | | Operating income (loss) | | (912) | | | 52,203 | | | (1,076) | | | — | | | 50,215 | |
| Other income (expense): | Other income (expense): | | Other income (expense): | |
Equity in earnings of subsidiaries | Equity in earnings of subsidiaries | | 69,596 | | | 3,605 | | | 0 | | | (73,201) | | | 0 | | Equity in earnings of subsidiaries | | 77,104 | | | 1,927 | | | — | | | (79,031) | | | — | |
Equity in earnings of equity method investments | Equity in earnings of equity method investments | | 0 | | 2,793 | | | 630 | | | 0 | | | 3,423 | | Equity in earnings of equity method investments | | — | | | 4,641 | | | 806 | | | — | | | 5,447 | |
Interest expense | Interest expense | | (12,944) | | | (994) | | | 0 | | | 0 | | | (13,938) | | Interest expense | | (19,400) | | | (5,071) | | | — | | | 4,124 | | | (20,347) | |
Interest income | Interest income | | 0 | | 6,614 | | | 0 | | | 0 | | | 6,614 | | Interest income | | — | | | 24,331 | | | 4,124 | | | (4,124) | | | 24,331 | |
Gain on sales-type lease | | 0 | | | 27 | | | 0 | | | 0 | | | 27 | | |
| Gain on sale of assets and other | Gain on sale of assets and other | | 0 | | | 5,414 | | | 1 | | | 0 | | | 5,415 | | Gain on sale of assets and other | | — | | | 45 | | | — | | | — | | | 45 | |
| | 56,652 | | | 17,459 | | | 631 | | | (73,201) | | | 1,541 | | | 57,704 | | | 25,873 | | | 4,930 | | | (79,031) | | | 9,476 | |
Income before income taxes | Income before income taxes | | 55,745 | | | 70,516 | | | 4,798 | | | (73,201) | | | 57,858 | | Income before income taxes | | 56,792 | | | 78,076 | | | 3,854 | | | (79,031) | | | 59,691 | |
State income tax expense | State income tax expense | | 0 | | | (27) | | | 0 | | | 0 | | | (27) | | State income tax expense | | — | | | (14) | | | — | | | — | | | (14) | |
Net income | Net income | | 55,745 | | | 70,489 | | | 4,798 | | | (73,201) | | | 57,831 | | Net income | | 56,792 | | | 78,062 | | | 3,854 | | | (79,031) | | | 59,677 | |
Allocation of net income attributable to noncontrolling interests | Allocation of net income attributable to noncontrolling interests | | 0 | | | (894) | | | (1,192) | | | 0 | | | (2,086) | | Allocation of net income attributable to noncontrolling interests | | — | | | (958) | | | (1,927) | | | — | | | (2,885) | |
| Net income attributable to the partners | Net income attributable to the partners | | $ | 55,745 | | | $ | 69,595 | | | $ | 3,606 | | | $ | (73,201) | | | $ | 55,745 | | Net income attributable to the partners | | $ | 56,792 | | | $ | 77,104 | | | $ | 1,927 | | | $ | (79,031) | | | $ | 56,792 | |
Condensed Consolidating Statement of Income
| Three Months Ended June 30, 2020 | | Parent | | Guarantor Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated | |
Three Months Ended June 30, 2021 | | Three 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 | | | $ | 89,417 | | | $ | 6,146 | | | $ | 0 | | | $ | 95,563 | | Affiliates | | $ | — | | | $ | 99,142 | | | $ | — | | | $ | — | | | $ | 99,142 | |
Third parties | Third parties | | 0 | | | 15,887 | | | 3,357 | | | 0 | | | 19,244 | | Third parties | | — | | | 27,093 | | | — | | | — | | | 27,093 | |
| | 0 | | | 105,304 | | | 9,503 | | | 0 | | | 114,807 | | | — | | | 126,235 | | | — | | | — | | | 126,235 | |
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 | | | 30,980 | | | 3,757 | | | 0 | | | 34,737 | | Operations (exclusive of depreciation and amortization) | | — | | | 41,411 | | | 657 | | | — | | | 42,068 | |
Depreciation and amortization | Depreciation and amortization | | 0 | | | 20,739 | | | 4,295 | | | 0 | | | 25,034 | | Depreciation and amortization | | — | | | 25,003 | | | — | | | — | | | 25,003 | |
General and administrative | General and administrative | | 780 | | | 1,755 | | | 0 | | | 0 | | | 2,535 | | General and administrative | | 907 | | | 1,940 | | | — | | | — | | | 2,847 | |
| | | 780 | | | 53,474 | | | 8,052 | | | 0 | | | 62,306 | | | 907 | | | 68,354 | | | 657 | | | — | | | 69,918 | |
Operating income (loss) | Operating income (loss) | | (780) | | | 51,830 | | | 1,451 | | | 0 | | | 52,501 | | Operating income (loss) | | (907) | | | 57,881 | | | (657) | | | — | | | 56,317 | |
| Other income (expense): | Other income (expense): | | Other income (expense): | |
Equity in earnings of subsidiaries | Equity in earnings of subsidiaries | | 89,893 | | | 1,510 | | | 0 | | | (91,403) | | | 0 | | Equity in earnings of subsidiaries | | 69,596 | | | (14) | | | — | | | (69,582) | | | — | |
Equity in earnings of equity method investments | Equity in earnings of equity method investments | | 0 | | | 1,449 | | | 707 | | | 0 | | | 2,156 | | Equity in earnings of equity method investments | | 0 | | 2,793 | | | 630 | | | — | | | 3,423 | |
Interest expense | Interest expense | | (12,740) | | | (1,039) | | | 0 | | | 0 | | | (13,779) | | Interest expense | | (12,944) | | | (994) | | | — | | | — | | | (13,938) | |
Interest income | Interest income | | 26 | | | 2,787 | | | 0 | | | 0 | | | 2,813 | | Interest income | | 0 | | 6,614 | | | — | | | — | | | 6,614 | |
| Gain on sales-type lease | Gain on sales-type lease | | 0 | | | 33,834 | | | 0 | | | 0 | | | 33,834 | | Gain on sales-type lease | | — | | | 27 | | | — | | | — | | | 27 | |
Gain on sale of assets and other | Gain on sale of assets and other | | 71 | | | 396 | | | 1 | | | 0 | | | 468 | | Gain on sale of assets and other | | — | | | 5,415 | | | — | | | — | | | 5,415 | |
| | 77,250 | | | 38,937 | | | 708 | | | (91,403) | | | 25,492 | | | 56,652 | | | 13,841 | | | 630 | | | (69,582) | | | 1,541 | |
Income before income taxes | Income before income taxes | | 76,470 | | | 90,767 | | | 2,159 | | | (91,403) | | | 77,993 | | Income before income taxes | | 55,745 | | | 71,722 | | | (27) | | | (69,582) | | | 57,858 | |
State income tax expense | State income tax expense | | 0 | | | (39) | | | 0 | | | 0 | | | (39) | | State income tax expense | | — | | | (27) | | | — | | | — | | | (27) | |
Net income | Net income | | 76,470 | | | 90,728 | | | 2,159 | | | (91,403) | | | 77,954 | | Net income | | 55,745 | | | 71,695 | | | (27) | | | (69,582) | | | 57,831 | |
Allocation of net income attributable to noncontrolling interests | Allocation of net income attributable to noncontrolling interests | | 0 | | | (835) | | | (649) | | | 0 | | | (1,484) | | Allocation of net income attributable to noncontrolling interests | | — | | | (2,099) | | | 13 | | | — | | | (2,086) | |
| Net income attributable to the partners | Net income attributable to the partners | | $ | 76,470 | | | $ | 89,893 | | | $ | 1,510 | | | $ | (91,403) | | | $ | 76,470 | | Net income attributable to the partners | | $ | 55,745 | | | $ | 69,596 | | | $ | (14) | | | $ | (69,582) | | | $ | 55,745 | |
|
Condensed Consolidating Statement of Income
| Six Months Ended June 30, 2021 | | Parent | | Guarantor Restricted Subsidiaries | | Non-Guarantor Non-restricted Subsidiaries | | Eliminations | | Consolidated | | |
Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2022 | | Parent | | Guarantor Restricted Subsidiaries | | Non-Guarantor Non-restricted Subsidiaries | | Eliminations | | Consolidated |
| | | (In thousands) | | | | (In thousands) |
Revenues: | Revenues: | | | Revenues: | |
Affiliates | Affiliates | | $ | 0 | | | $ | 188,612 | | | $ | 12,456 | | | $ | 0 | | | $ | 201,068 | | | Affiliates | | $ | — | | | $ | 202,791 | | | $ | — | | | $ | — | | | $ | 202,791 | |
Third parties | Third parties | | 0 | | | 39,530 | | | 12,820 | | | 0 | | | 52,350 | | | Third parties | | — | | | 53,177 | | | — | | | — | | | 53,177 | |
| | 0 | | | 228,142 | | | 25,276 | | | 0 | | | 253,418 | | | | — | | | 255,968 | | | — | | | — | | | 255,968 | |
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 | | | 75,541 | | | 7,892 | | | 0 | | | 83,433 | | | Operations (exclusive of depreciation and amortization) | | — | | | 94,757 | | | 1,767 | | | — | | | 96,524 | |
Depreciation and amortization | Depreciation and amortization | | 0 | | | 41,487 | | | 8,581 | | | 0 | | | 50,068 | | | Depreciation and amortization | | — | | | 49,161 | | | — | | | — | | | 49,161 | |
General and administrative | General and administrative | | 2,085 | | | 3,730 | | | 0 | | | 0 | | | 5,815 | | | General and administrative | | 2,000 | | | 6,994 | | | — | | | — | | | 8,994 | |
Goodwill impairment | | 0 | | | 11,034 | | | 0 | | | 0 | | | 11,034 | | | |
| | 2,085 | | | 131,792 | | | 16,473 | | | 0 | | | 150,350 | | | | 2,000 | | | 150,912 | | | 1,767 | | | — | | | 154,679 | |
Operating income (loss) | Operating income (loss) | | (2,085) | | | 96,350 | | | 8,803 | | | 0 | | | 103,068 | | | Operating income (loss) | | (2,000) | | | 105,056 | | | (1,767) | | | — | | 0 | 101,289 | |
| Other income (expense): | Other income (expense): | | | Other income (expense): | |
Equity in earnings of subsidiaries | Equity in earnings of subsidiaries | | 147,405 | | | 7,741 | | | 0 | | | (155,146) | | | 0 | | | Equity in earnings of subsidiaries | | 140,431 | | | 4,098 | | | — | | | (144,529) | | | — | |
Equity in earnings of equity method investments | Equity in earnings of equity method investments | | 0 | | | 3,411 | | | 1,775 | | | 0 | | | 5,186 | | | Equity in earnings of equity method investments | | — | | | 7,361 | | | 1,712 | | | — | | | 9,073 | |
Interest expense | Interest expense | | (25,178) | | | (2,000) | | | 0 | | | 0 | | | (27,178) | | | Interest expense | | (32,080) | | | (10,157) | | | — | | | 8,251 | | | (33,986) | |
Interest income | Interest income | | 0 | | | 13,162 | | | 0 | | | 0 | | | 13,162 | | | Interest income | | — | | | 36,978 | | | 8,251 | | | (8,251) | | | 36,978 | |
| Gain on sales-type lease | | 0 | | | 24,677 | | | 0 | | | 0 | | | 24,677 | | | |
Gain on sale of assets and other | Gain on sale of assets and other | | 0 | | | 5,915 | | | 2 | | | 0 | | | 5,917 | | | Gain on sale of assets and other | | — | | | 146 | | | — | | | — | | | 146 | |
| | 122,227 | | | 52,906 | | | 1,777 | | | (155,146) | | | 21,764 | | | | 108,351 | | | 38,426 | | | 9,963 | | | (144,529) | | | 12,211 | |
Income before income taxes | Income before income taxes | | 120,142 | | | 149,256 | | | 10,580 | | | (155,146) | | | 124,832 | | | Income before income taxes | | 106,351 | | | 143,482 | | | 8,196 | | | (144,529) | | | 113,500 | |
State income tax expense | State income tax expense | | 0 | | | (64) | | | 0 | | | 0 | | | (64) | | | State income tax expense | | — | | | (45) | | | — | | | — | | | (45) | |
Net income | Net income | | 120,142 | | | 149,192 | | | 10,580 | | | (155,146) | | | 124,768 | | | Net income | | 106,351 | | | 143,437 | | | 8,196 | | | (144,529) | | | 113,455 | |
Allocation of net income attributable to noncontrolling interests | Allocation of net income attributable to noncontrolling interests | | 0 | | | (1,787) | | | (2,839) | | | 0 | | | (4,626) | | | Allocation of net income attributable to noncontrolling interests | | — | | | (3,006) | | | (4,098) | | | — | | | (7,104) | |
| Net income attributable to the partners | | Net income attributable to the partners | | $ | 106,351 | | | $ | 140,431 | | | $ | 4,098 | | | $ | (144,529) | | | $ | 106,351 | |
| Net income attributable to the partners | | $ | 120,142 | | | $ | 147,405 | | | $ | 7,741 | | | $ | (155,146) | | | $ | 120,142 | | | |
Condensed Consolidating Statement of Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2020 | | Parent | | Guarantor Restricted Subsidiaries | | Non-Guarantor Non-restricted Subsidiaries | | Eliminations | | Consolidated |
| | (In thousands) |
Revenues: | | | | | | | | | | |
Affiliates | | $ | 0 | | | $ | 184,172 | | | $ | 12,819 | | | $ | 0 | | | $ | 196,991 | |
Third parties | | 0 | | | 35,042 | | | 10,628 | | | 0 | | | 45,670 | |
| | 0 | | | 219,214 | | | 23,447 | | | 0 | | | 242,661 | |
Operating costs and expenses: | | | | | | | | | | |
Operations (exclusive of depreciation and amortization) | | 0 | | | 62,111 | | | 7,607 | | | 0 | | | 69,718 | |
Depreciation and amortization | | — | | | 40,492 | | | 8,520 | | | 0 | | | 49,012 | |
General and administrative | | 1,879 | | | 3,358 | | | 0 | | | 0 | | | 5,237 | |
| | 1,879 | | | 105,961 | | | 16,127 | | | 0 | | | 123,967 | |
Operating income (loss) | | (1,879) | | | 113,253 | | | 7,320 | | | 0 | | | 118,694 | |
| | | | | | | | | | |
Other income (expense): | | | | | | | | | | |
Equity in earnings of subsidiaries | | 158,428 | | | 5,805 | | | 0 | | | (164,233) | | | 0 | |
Equity in earnings of equity method investments | | 0 | | | 3,537 | | | 333 | | | 0 | | | 3,870 | |
Interest expense | | (29,470) | | | (2,076) | | | 0 | | | 0 | | | (31,546) | |
Interest income | | 26 | | | 5,005 | | | 0 | | | 0 | | | 5,031 | |
Loss on early extinguishment of debt | | (25,915) | | | 0 | | | 0 | | | 0 | | | (25,915) | |
Gain on sales-type lease | | 0 | | | 33,834 | | | 0 | | | 0 | | | 33,834 | |
Gain on sale of assets and other | | 141 | | | 816 | | | 17 | | | 0 | | | 974 | |
| | 103,210 | | | 46,921 | | | 350 | | | (164,233) | | | (13,752) | |
Income before income taxes | | 101,331 | | | 160,174 | | | 7,670 | | | (164,233) | | | 104,942 | |
State income tax expense | | 0 | | | (76) | | | 0 | | | 0 | | | (76) | |
Net income | | 101,331 | | | 160,098 | | | 7,670 | | | (164,233) | | | 104,866 | |
Allocation of net income attributable to noncontrolling interests | | 0 | | | (1,670) | | | (1,865) | | | 0 | | | (3,535) | |
| | | | | | | | | | |
Net income attributable to the partners | | $ | 101,331 | | | $ | 158,428 | | | $ | 5,805 | | | $ | (164,233) | | | $ | 101,331 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2021 | | Parent | | Guarantor Restricted Subsidiaries | | Non-Guarantor Non-restricted Subsidiaries | | Eliminations | | Consolidated |
| | (In thousands) |
Revenues: | | | | | | | | | | |
Affiliates | | $ | — | | | $ | 201,068 | | | $ | — | | | $ | — | | | $ | 201,068 | |
Third parties | | — | | | 52,350 | | | — | | | — | | | 52,350 | |
| | — | | | 253,418 | | | — | | | — | | | 253,418 | |
Operating costs and expenses: | | | | | | | | | | |
Operations (exclusive of depreciation and amortization) | | — | | | 82,434 | | | 999 | | | — | | | 83,433 | |
Depreciation and amortization | | — | | | 50,068 | | | — | | | — | | | 50,068 | |
General and administrative | | 2,085 | | | 3,730 | | | — | | | — | | | 5,815 | |
Goodwill impairment | | — | | | 11,034 | | | — | | | — | | | 11,034 | |
| | 2,085 | | | 147,266 | | | 999 | | | — | | | 150,350 | |
Operating income (loss) | | (2,085) | | | 106,152 | | | (999) | | | — | | | 103,068 | |
| | | | | | | | | | |
Other income (expense): | | | | | | | | | | |
Equity in earnings of subsidiaries | | 147,405 | | | 388 | | | — | | | (147,793) | | | — | |
Equity in earnings of equity method investments | | — | | | 3,411 | | | 1,775 | | | — | | | 5,186 | |
Interest expense | | (25,178) | | | (2,000) | | | — | | | — | | | (27,178) | |
Interest income | | — | | | 13,162 | | | — | | | — | | | 13,162 | |
Gain on sales-type lease | | — | | | 24,677 | | | — | | | — | | | 24,677 | |
Gain on sale of assets and other | | — | | | 5,917 | | | — | | | — | | | 5,917 | |
| | 122,227 | | | 45,555 | | | 1,775 | | | (147,793) | | | 21,764 | |
Income before income taxes | | 120,142 | | | 151,707 | | | 776 | | | (147,793) | | | 124,832 | |
State income tax expense | | — | | | (64) | | | — | | | — | | | (64) | |
Net income | | 120,142 | | | 151,643 | | | 776 | | | (147,793) | | | 124,768 | |
Allocation of net income attributable to noncontrolling interests | | — | | | (4,238) | | | (388) | | | — | | | (4,626) | |
| | | | | | | | | | |
Net income attributable to the partners | | 120,142 | | | 147,405 | | | 388 | | | (147,793) | | | 120,142 | |
Note 17: Subsequent Event
HEP Transactions
Note 18: Osage Pipeline
On August 2, 2021, HEP,July 8, 2022, the Osage pipeline, which carries crude oil from Cushing, Oklahoma to El Dorado, Kansas, suffered a release of crude oil. The Sinclair Companies (“Sinclair”),pipeline has resumed operations and Sinclair Transportation Company, a wholly owned subsidiary of Sinclair (“STC”), entered into a Contribution Agreement (the “Contribution Agreement”) pursuantrecovery operations are ongoing. We expect to which HEP will acquire all of the outstanding shares of STC in exchange for 21 million newly issued common units of HEPaccrue amounts related to recovery 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 providedremediation in the Contribution Agreement.
The Contribution Agreement contains customary representations, warranties and covenantsthird quarter of HEP, Sinclair, and STC. The HEP Transactions are expected to close in mid-2022, subject to2022, but cannot estimate those amounts at this time. We do not expect 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, includingaccrual will have 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.material impact on our financial position.
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. References herein to HF Sinclair Corporation (“HF Sinclair”) with respect to time periods prior to March 14, 2022 refer to HollyFrontier Corporation (“HFC”) and its consolidated subsidiaries and do not include Hippo Holding LLC, the parent company of Sinclair Oil LLC, Sinclair Transportation Company LLC or their respective consolidated subsidiaries (collectively, the “Acquired Sinclair Businesses”). References herein to HF Sinclair with respect to time periods from and after March 14, 2022 refer to HF Sinclair and its consolidated subsidiaries, which include the operations of the combined business operations of HFC and the Acquired Sinclair Businesses.
OVERVIEW
HEP, together with its consolidated subsidiaries, is a Delawarepublicly held master limited partnership. On March 14, 2022 (the “Closing Date”), HFC and HEP announced the establishment of HF Sinclair, as the new parent holding company of HFC and HEP and their subsidiaries, and the completion of their respective acquisitions of Sinclair Oil Corporation (now known as Sinclair Oil LLC (“Sinclair Oil”)) and Sinclair Transportation Company LLC (“Sinclair Transportation”) from REH Company (formerly known as The Sinclair Companies, referred to herein as “Sinclair HoldCo”). On the Closing Date, HF Sinclair completed its acquisition of Sinclair Oil by effecting (a) a holding company merger with HFC surviving such merger as a direct wholly owned subsidiary of HF Sinclair (the “HFC Merger”), and (b) immediately following the HFC Merger, a contribution whereby Sinclair HoldCo contributed all of the equity interests of Hippo Holding LLC, the parent company of Sinclair Oil (the “Target Company”), to HF Sinclair in exchange for shares of HF Sinclair, resulting in the Target Company becoming a direct wholly owned subsidiary of HF Sinclair (together with the HFC Merger, the “HFC Transactions”).
As of June 30, 2022, HF Sinclair and its subsidiaries owned a 47% limited partner interest and the non-economic general partner interest in HEP.
Additionally, on the Closing Date and immediately prior to consummation of the HFC Transactions, HEP acquired all of the outstanding equity interests of Sinclair Transportation from Sinclair HoldCo in exchange for 21 million newly issued common limited partner units of HEP (the “HEP Units”), representing 16.6% of the pro forma outstanding HEP Units with a value of approximately $349 million based on HEP’s fully diluted common limited partner units outstanding and closing unit price on March 11, 2022, and cash consideration equal to $321.4 million, inclusive of estimated working capital adjustments for an aggregate transaction value of $670.4 million (the “HEP Transaction” and together with the HFC Transactions, the “Sinclair Transactions”). The cash consideration was funded through a draw under HEP’s senior secured revolving credit facility. The HEP Transaction was conditioned on the closing of the HFC Transactions, which occurred immediately following the HEP Transaction.
Sinclair Transportation, together with its subsidiaries, owned Sinclair HoldCo’s integrated crude and refined products pipelines and terminal assets, including approximately 1,200 miles of integrated crude and refined product pipeline supporting the Sinclair HoldCo refineries and other third-party refineries, eight product terminals and two crude terminals with approximately 4.5 million barrels of operated storage. In addition, HEP acquired Sinclair Transportation’s interests in three pipeline joint ventures for crude gathering and product offtake including: Saddle Butte Pipeline III, LLC (25.06% non-operated interest); Pioneer Pipeline (49.995% non-operated interest); and UNEV Pipeline (the 25% non-operated interest not already owned by HEP, resulting in UNEV Pipeline, LLC becoming a wholly owned subsidiary of HEP).
See Notes 1 and 2 of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements” for additional information regarding the acquisitions.
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”)HF Sinclair 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,Colorado, Idaho, Iowa, Kansas, Missouri, Nevada, New Mexico, Oklahoma, Texas, Utah, Washington Idaho, Oklahoma, Utah, Nevada,and Wyoming and Kansas as well as refinery processing units in Utah and Kansas. HFC owned 57% of our outstanding common units and the non-economic general partnership interest as of June 30, 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 BusinessMarket Developments
Our business depends in large part on the demandresults 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 created diminished 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. Since the declines in demand at the beginning of the COVID-19 pandemic, we began to see improvement in demand for these products and services beginning late in the second quarter and first six months of 2020 that2022 were favorably impacted by continued through the second quarter of 2021strong global economic activity with volumes in many of our regions returningglobal demand for transportation fuels, lubricants and transportation and terminal services having returned to pre-pandemic levels. We expect our customers will continue to adjust refinery production levels commensurate with market demand, and with the increasing availability of vaccines, we believe there is a path to a fulsome recovery in demand in 2021.
With the increasing vaccination rates, most of our employees have returned to work at our locations and we continue to follow Centers for Disease Control and local government guidance. We will continue to monitor developments in the COVID-19 pandemic 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.
demand. The extent to which HEP’s future results are affected by the COVID-19 pandemic or volatile regional and global economic conditions 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.control. However, we have long-term customer contracts with minimum volume commitments, which have expiration datesdates from 20222023 to 2036.2037. These minimum volume commitments accounted for approximatelyapproximately 64% and 66% and 76% of our total revenues in the six months ended June 30, 20212022 and the twelve months ended December 31, 2020,June 30, 2021, 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. 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, 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-ownedwholly owned subsidiary of HEP, and Plains Marketing, L.P., a wholly-ownedwholly 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 operation 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 HFCHF Sinclair and (ii) the ownership and operation of 1.5 million barrels of crude oil storage in Cushing, Oklahoma (the “Cushing Connect JV Terminal”). The Cushing Connect JV Terminal went in service during the second quarter of 2020, and the Cushing Connect Pipeline is expected to bewas placed ininto service duringat the end of the third quarter of 2021. Long-term commercial agreements have been entered into to support the Cushing Connect Joint Venture assets.
The Cushing Connect Joint Venture has contracted with an affiliate of HEP to manage the construction and operation of the Cushing Connect Pipeline and with an affiliate of Plains to manage the operation of the Cushing Connect JV Terminal. The total Cushing Connect Joint Venture investment will generally be shared equally among HEP and Plains. 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 are approximately $70$73 million, to $75 million.including approximately $5 million of Cushing Connect Pipeline construction costs exceeding the budget by more than 10% borne solely by HEP.
Agreements with HFCHF Sinclair
We serve HFC'sHF Sinclair’s refineries under long-term pipeline, terminal, tankage and refinery processing unit throughput agreements expiring from 20222023 to 2036.2037. Under these agreements, HFCHF Sinclair agrees to transport, store, and process throughput volumes of refined product, crude oil and feedstocks on our pipelines, terminal, 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 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 arewere permitted to adjust their indexed ceilings annually by Producer Price Index plus 0.78%. FERC has received requests for rehearing of its December 17, 2020 order, which remain pending inand on January 20, 2022, FERC Docket No. RM20-14-000.revised the index level used to determine the annual changes to interstate oil pipeline rate ceilings to Producer Price Index minus 0.21%. The order required the recalculation of the July 1, 2021 index ceilings to be effective as of March 1, 2022. As of June 30, 2021,July 1, 2022, these agreements with HFCHF Sinclair require minimum annualized payments to us of $340$446 million.
If HFCHF Sinclair 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 (the “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.
On February 8, 2021, HEP and HFC finalized and executed new agreements for HEP's Cheyenne assets with the following terms, in each case effective January 1, 2021: (1) a ten-year lease with two five-year renewal option periods for HFC’s (and now HF Sinclair’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 (and now HF Sinclair) will pay a base tariff to HEP for available crude oil storage and HFC (and now HF Sinclair) 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.
Under certain provisions of an omnibus agreement we have with HF Sinclair (the “Omnibus Agreement”), we pay HF Sinclair an annual administrative fee, currently $5.0 million, for the provision by HF Sinclair or its affiliates of various general and administrative services to us. In connection with the HEP Transaction, we pay HF Sinclair a temporary monthly fee of $62,500 relating to transition services to be provided to HEP by HF Sinclair. Neither the annual administrative fee nor the temporary monthly fee includes the salaries of personnel employed by HF Sinclair 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 HF Sinclair. We also reimburse HF Sinclair and its affiliates for direct expenses they incur on our behalf.
Under HLS’s Secondment Agreement with HF Sinclair, certain employees of HF Sinclair are seconded to HLS to provide operational and maintenance services for certain of our processing, refining, pipeline and tankage assets, and HLS reimburses HF Sinclair 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 (and now HF Sinclair) 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 - Market Developments” above, we also expect over the longer term to continue to work with HF Sinclair on logistic asset acquisitions in conjunction with HF Sinclair’s refinery acquisition strategies. See “Overview” above for a discussion of the Sinclair Transactions.
Furthermore, as demonstrated by our recent transaction with Sinclair HoldCo, we plan to continue to pursue third-party logistic asset acquisitions that are accretive to our unitholders and increase the diversity of our revenues.
Indicators of goodwillGoodwill and long-lived asset impairmentLong-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 56 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 provisionsWe performed our annual goodwill impairment testing qualitatively as of an omnibus agreement we have with HFC (the “Omnibus Agreement”), we pay HFC an annual administrative fee, currently $2.6 million, forJuly 1, 2021, and determined it was not more likely than not that the provision by HFC orcarrying amount of each reporting unit was greater than its affiliatesfair value. Therefore, a quantitative test was not necessary, and no additional impairment 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.goodwill was recorded.
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 six months ended June 30, 20212022 and 2020.2021.
| | | | Three Months Ended June 30, | | Change from | | | Three Months Ended June 30, | | Change from |
| | | 2021 | | 2020 | | 2020 | | | 2022 | | 2021 | | 2021 |
| | | (In thousands, except per unit data) | | | (In thousands, except per unit data) |
Revenues: | Revenues: | | Revenues: | |
Pipelines: | Pipelines: | | Pipelines: | |
Affiliates—refined product pipelines | Affiliates—refined product pipelines | | $ | 19,213 | | | $ | 16,302 | | | $ | 2,911 | | Affiliates—refined product pipelines | | $ | 20,920 | | | $ | 19,213 | | | $ | 1,707 | |
Affiliates—intermediate pipelines | Affiliates—intermediate pipelines | | 7,521 | | | 7,475 | | | 46 | | Affiliates—intermediate pipelines | | 7,521 | | | 7,521 | | | — | |
Affiliates—crude pipelines | Affiliates—crude pipelines | | 19,251 | | | 19,311 | | | (60) | | Affiliates—crude pipelines | | 20,971 | | | 19,251 | | | 1,720 | |
| | 45,985 | | | 43,088 | | | 2,897 | | | 49,412 | | | 45,985 | | | 3,427 | |
Third parties—refined product pipelines | Third parties—refined product pipelines | | 9,526 | | | 8,750 | | | 776 | | Third parties—refined product pipelines | | 5,215 | | | 9,526 | | | (4,311) | |
Third parties—crude pipelines | Third parties—crude pipelines | | 12,811 | | | 7,116 | | | 5,695 | | Third parties—crude pipelines | | 13,692 | | | 12,811 | | | 881 | |
| | 68,322 | | | 58,954 | | | 9,368 | | | 68,319 | | | 68,322 | | | (3) | |
Terminals, tanks and loading racks: | Terminals, tanks and loading racks: | | Terminals, tanks and loading racks: | |
Affiliates | Affiliates | | 32,131 | | | 32,902 | | | (771) | | Affiliates | | 38,232 | | | 32,131 | | | 6,101 | |
Third parties | Third parties | | 4,756 | | | 3,378 | | | 1,378 | | Third parties | | 6,326 | | | 4,756 | | | 1,570 | |
| | 36,887 | | | 36,280 | | | 607 | | | 44,558 | | | 36,887 | | | 7,671 | |
| Refinery processing units—Affiliates | Refinery processing units—Affiliates | | 21,026 | | | 19,573 | | | 1,453 | | Refinery processing units—Affiliates | | 22,893 | | | 21,026 | | | 1,867 | |
| Total revenues | Total revenues | | 126,235 | | | 114,807 | | | 11,428 | | Total revenues | | 135,770 | | | 126,235 | | | 9,535 | |
Operating costs and expenses: | Operating costs and expenses: | | | | | | | Operating costs and expenses: | | | | | | |
Operations (exclusive of depreciation and amortization) | Operations (exclusive of depreciation and amortization) | | 42,068 | | | 34,737 | | | 7,331 | | Operations (exclusive of depreciation and amortization) | | 53,899 | | | 42,068 | | | 11,831 | |
Depreciation and amortization | Depreciation and amortization | | 25,003 | | | 25,034 | | | (31) | | Depreciation and amortization | | 26,974 | | | 25,003 | | | 1,971 | |
General and administrative | General and administrative | | 2,847 | | | 2,535 | | | 312 | | General and administrative | | 4,682 | | | 2,847 | | | 1,835 | |
| | | 69,918 | | | 62,306 | | | 7,612 | | | 85,555 | | | 69,918 | | | 15,637 | |
Operating income | Operating income | | 56,317 | | | 52,501 | | | 3,816 | | Operating income | | 50,215 | | | 56,317 | | | (6,102) | |
Other income (expense): | Other income (expense): | | Other income (expense): | |
Equity in earnings of equity method investments | Equity in earnings of equity method investments | | 3,423 | | | 2,156 | | | 1,267 | | Equity in earnings of equity method investments | | 5,447 | | | 3,423 | | | 2,024 | |
Interest expense, including amortization | Interest expense, including amortization | | (13,938) | | | (13,779) | | | (159) | | Interest expense, including amortization | | (20,347) | | | (13,938) | | | (6,409) | |
Interest income | Interest income | | 6,614 | | | 2,813 | | | 3,801 | | Interest income | | 24,331 | | | 6,614 | | | 17,717 | |
| Gain on sales-type leases | Gain on sales-type leases | | 27 | | | 33,834 | | | (33,807) | | Gain on sales-type leases | | — | | | 27 | | | (27) | |
Gain on sale of assets and other | Gain on sale of assets and other | | 5,415 | | | 468 | | | 4,947 | | Gain on sale of assets and other | | 45 | | | 5,415 | | | (5,370) | |
| | 1,541 | | | 25,492 | | | (23,951) | | | 9,476 | | | 1,541 | | | 7,935 | |
Income before income taxes | Income before income taxes | | 57,858 | | | 77,993 | | | (20,135) | | Income before income taxes | | 59,691 | | | 57,858 | | | 1,833 | |
State income tax expense | State income tax expense | | (27) | | | (39) | | | 12 | | State income tax expense | | (14) | | | (27) | | | 13 | |
Net income | Net income | | 57,831 | | | 77,954 | | | (20,123) | | Net income | | 59,677 | | | 57,831 | | | 1,846 | |
| Allocation of net income attributable to noncontrolling interests | Allocation of net income attributable to noncontrolling interests | | (2,086) | | | (1,484) | | | (602) | | Allocation of net income attributable to noncontrolling interests | | (2,885) | | | (2,086) | | | (799) | |
Net income attributable to the partners | Net income attributable to the partners | | 55,745 | | | 76,470 | | | (20,725) | | Net income attributable to the partners | | 56,792 | | | 55,745 | | | 1,047 | |
| Limited partners’ earnings per unit—basic and diluted | Limited partners’ earnings per unit—basic and diluted | | $ | 0.53 | | | $ | 0.73 | | | $ | (0.20) | | Limited partners’ earnings per unit—basic and diluted | | $ | 0.45 | | | $ | 0.53 | | | $ | (0.08) | |
Weighted average limited partners’ units outstanding | Weighted average limited partners’ units outstanding | | 105,440 | | | 105,440 | | | — | | Weighted average limited partners’ units outstanding | | 126,440 | | | 105,440 | | | 21,000 | |
EBITDA (1) | EBITDA (1) | | $ | 88,099 | | | $ | 112,509 | | | $ | (24,410) | | EBITDA (1) | | $ | 79,796 | | | $ | 88,099 | | | $ | (8,303) | |
Adjusted EBITDA (1) | Adjusted EBITDA (1) | | $ | 88,261 | | | $ | 80,168 | | | $ | 8,093 | | Adjusted EBITDA (1) | | $ | 104,244 | | | $ | 88,261 | | | $ | 15,983 | |
Distributable cash flow (2) | Distributable cash flow (2) | | $ | 66,680 | | | $ | 65,456 | | | $ | 1,224 | | Distributable cash flow (2) | | $ | 78,458 | | | $ | 66,680 | | | $ | 11,778 | |
| Volumes (bpd) | Volumes (bpd) | | Volumes (bpd) | |
Pipelines: | Pipelines: | | Pipelines: | |
Affiliates—refined product pipelines | Affiliates—refined product pipelines | | 119,046 | | | 100,524 | | | 18,522 | | Affiliates—refined product pipelines | | 140,333 | | | 119,046 | | | 21,287 | |
Affiliates—intermediate pipelines | Affiliates—intermediate pipelines | | 143,762 | | | 128,464 | | | 15,298 | | Affiliates—intermediate pipelines | | 124,588 | | | 143,762 | | | (19,174) | |
Affiliates—crude pipelines | Affiliates—crude pipelines | | 260,756 | | | 252,570 | | | 8,186 | | Affiliates—crude pipelines | | 477,241 | | | 260,756 | | | 216,485 | |
| | 523,564 | | | 481,558 | | | 42,006 | | | 742,162 | | | 523,564 | | | 218,598 | |
Third parties—refined product pipelines | Third parties—refined product pipelines | | 52,126 | | | 57,876 | | | (5,750) | | Third parties—refined product pipelines | | 37,989 | | | 52,126 | | | (14,137) | |
Third parties—crude pipelines | Third parties—crude pipelines | | 135,904 | | | 85,851 | | | 50,053 | | Third parties—crude pipelines | | 138,040 | | | 135,904 | | | 2,136 | |
| | 711,594 | | | 625,285 | | | 86,309 | | | 918,191 | | | 711,594 | | | 206,597 | |
Terminals and loading racks: | Terminals and loading racks: | | Terminals and loading racks: | |
Affiliates | Affiliates | | 413,441 | | | 372,093 | | | 41,348 | | Affiliates | | 572,289 | | | 413,441 | | | 158,848 | |
Third parties | Third parties | | 53,257 | | | 45,876 | | | 7,381 | | Third parties | | 36,748 | | | 53,257 | | | (16,509) | |
| | 466,698 | | | 417,969 | | | 48,729 | | | 609,037 | | | 466,698 | | | 142,339 | |
Refinery processing units—Affiliates | Refinery processing units—Affiliates | | 76,589 | | | 49,891 | | | 26,698 | | Refinery processing units—Affiliates | | 72,342 | | | 76,589 | | | (4,247) | |
Total for pipelines and terminal and refinery processing unit assets (bpd) | Total for pipelines and terminal and refinery processing unit assets (bpd) | | 1,254,881 | | | 1,093,145 | | | 161,736 | | Total for pipelines and terminal and refinery processing unit assets (bpd) | | 1,599,570 | | | 1,254,881 | | | 344,689 | |
| | | | Six Months Ended June 30, | | Change from | | | Six Months Ended June 30, | | Change from |
| | | 2021 | | 2020 | | 2020 | | | 2022 | | 2021 | | 2021 |
| | | (In thousands, except per unit data) | | | (In thousands, except per unit data) |
Revenues: | Revenues: | | Revenues: | |
Pipelines: | Pipelines: | | Pipelines: | |
Affiliates—refined product pipelines | Affiliates—refined product pipelines | | $ | 37,819 | | | $ | 36,385 | | | $ | 1,434 | | Affiliates—refined product pipelines | | $ | 37,780 | | | $ | 37,819 | | | $ | (39) | |
Affiliates—intermediate pipelines | Affiliates—intermediate pipelines | | 15,027 | | | 14,949 | | | 78 | | Affiliates—intermediate pipelines | | 15,027 | | | 15,027 | | | — | |
Affiliates—crude pipelines | Affiliates—crude pipelines | | 38,705 | | | 39,704 | | | (999) | | Affiliates—crude pipelines | | 39,248 | | | 38,705 | | | 543 | |
| | 91,551 | | | 91,038 | | | 513 | | | 92,055 | | | 91,551 | | | 504 | |
Third parties—refined product pipelines | Third parties—refined product pipelines | | 19,389 | | | 23,548 | | | (4,159) | | Third parties—refined product pipelines | | 14,475 | | | 19,389 | | | (4,914) | |
Third parties—crude pipelines | Third parties—crude pipelines | | 23,887 | | | 14,840 | | | 9,047 | | Third parties—crude pipelines | | 26,569 | | | 23,887 | | | 2,682 | |
| | 134,827 | | | 129,426 | | | 5,401 | | | 133,099 | | | 134,827 | | | (1,728) | |
Terminals, tanks and loading racks: | Terminals, tanks and loading racks: | | Terminals, tanks and loading racks: | |
Affiliates | Affiliates | | 65,995 | | | 66,496 | | | (501) | | Affiliates | | 69,440 | | | 65,995 | | | 3,445 | |
Third parties | Third parties | | 9,074 | | | 7,282 | | | 1,792 | | Third parties | | 12,133 | | | 9,074 | | | 3,059 | |
| | 75,069 | | | 73,778 | | | 1,291 | | | 81,573 | | | 75,069 | | | 6,504 | |
| Refinery processing units—Affiliates | Refinery processing units—Affiliates | | 43,522 | | | 39,457 | | | 4,065 | | Refinery processing units—Affiliates | | 41,296 | | | 43,522 | | | (2,226) | |
| Total revenues | Total revenues | | 253,418 | | | 242,661 | | | 10,757 | | Total revenues | | 255,968 | | | 253,418 | | | 2,550 | |
Operating costs and expenses: | Operating costs and expenses: | | | | | | | Operating costs and expenses: | | | | | | |
Operations (exclusive of depreciation and amortization) | Operations (exclusive of depreciation and amortization) | | 83,433 | | | 69,718 | | | 13,715 | | Operations (exclusive of depreciation and amortization) | | 96,524 | | | 83,433 | | | 13,091 | |
Depreciation and amortization | Depreciation and amortization | | 50,068 | | | 49,012 | | | 1,056 | | Depreciation and amortization | | 49,161 | | | 50,068 | | | (907) | |
General and administrative | General and administrative | | 5,815 | | | 5,237 | | | 578 | | General and administrative | | 8,994 | | | 5,815 | | | 3,179 | |
Goodwill impairment | Goodwill impairment | | 11,034 | | | — | | | 11,034 | | Goodwill impairment | | — | | | 11,034 | | | (11,034) | |
| | 150,350 | | | 123,967 | | | 26,383 | | | 154,679 | | | 150,350 | | | 4,329 | |
Operating income | Operating income | | 103,068 | | | 118,694 | | | (15,626) | | Operating income | | 101,289 | | | 103,068 | | | (1,779) | |
Other income (expense): | Other income (expense): | | Other income (expense): | |
Equity in earnings of equity method investments | Equity in earnings of equity method investments | | 5,186 | | | 3,870 | | | 1,316 | | Equity in earnings of equity method investments | | 9,073 | | | 5,186 | | | 3,887 | |
Interest expense, including amortization | Interest expense, including amortization | | (27,178) | | | (31,546) | | | 4,368 | | Interest expense, including amortization | | (33,986) | | | (27,178) | | | (6,808) | |
Interest income | Interest income | | 13,162 | | | 5,031 | | | 8,131 | | Interest income | | 36,978 | | | 13,162 | | | 23,816 | |
Loss on early extinguishment of debt | | — | | | (25,915) | | | 25,915 | | |
| Gain on sales-type leases | Gain on sales-type leases | | 24,677 | | | 33,834 | | | (9,157) | | Gain on sales-type leases | | — | | | 24,677 | | | (24,677) | |
Gain on sale of assets and other | Gain on sale of assets and other | | 5,917 | | | 974 | | | 4,943 | | Gain on sale of assets and other | | 146 | | | 5,917 | | | (5,771) | |
| | 21,764 | | | (13,752) | | | 35,516 | | | 12,211 | | | 21,764 | | | (9,553) | |
Income before income taxes | Income before income taxes | | 124,832 | | | 104,942 | | | 19,890 | | Income before income taxes | | 113,500 | | | 124,832 | | | (11,332) | |
State income tax expense | State income tax expense | | (64) | | | (76) | | | 12 | | State income tax expense | | (45) | | | (64) | | | 19 | |
Net income | Net income | | 124,768 | | | 104,866 | | | 19,902 | | Net income | | 113,455 | | | 124,768 | | | (11,313) | |
| Allocation of net income attributable to noncontrolling interests | Allocation of net income attributable to noncontrolling interests | | (4,626) | | | (3,535) | | | (1,091) | | Allocation of net income attributable to noncontrolling interests | | (7,104) | | | (4,626) | | | (2,478) | |
Net income attributable to the partners | Net income attributable to the partners | | 120,142 | | | 101,331 | | | 18,811 | | Net income attributable to the partners | | 106,351 | | | 120,142 | | | (13,791) | |
| Limited partners’ earnings per unit—basic and diluted | Limited partners’ earnings per unit—basic and diluted | | $ | 1.14 | | | $ | 0.96 | | | $ | 0.18 | | Limited partners’ earnings per unit—basic and diluted | | $ | 0.90 | | | $ | 1.14 | | | $ | (0.24) | |
Weighted average limited partners’ units outstanding | Weighted average limited partners’ units outstanding | | 105,440 | | | 105,440 | | | — | | Weighted average limited partners’ units outstanding | | 118,087 | | | 105,440 | | | 12,647 | |
EBITDA (1) | EBITDA (1) | | $ | 184,290 | | | $ | 176,934 | | | $ | 7,356 | | EBITDA (1) | | $ | 152,565 | | | $ | 184,290 | | | $ | (31,725) | |
Adjusted EBITDA (1) | Adjusted EBITDA (1) | | $ | 176,196 | | | $ | 171,276 | | | $ | 4,920 | | Adjusted EBITDA (1) | | $ | 189,581 | | | $ | 176,196 | | | $ | 13,385 | |
Distributable cash flow (2) | Distributable cash flow (2) | | $ | 139,899 | | | $ | 136,164 | | | $ | 3,735 | | Distributable cash flow (2) | | $ | 142,912 | | | $ | 139,899 | | | $ | 3,013 | |
| Volumes (bpd) | Volumes (bpd) | | Volumes (bpd) | |
Pipelines: | Pipelines: | | Pipelines: | |
Affiliates—refined product pipelines | Affiliates—refined product pipelines | | 119,316 | | | 115,245 | | | 4,071 | | Affiliates—refined product pipelines | | 123,863 | | | 119,316 | | | 4,547 | |
Affiliates—intermediate pipelines | Affiliates—intermediate pipelines | | 129,573 | | | 135,288 | | | (5,715) | | Affiliates—intermediate pipelines | | 121,213 | | | 129,573 | | | (8,360) | |
Affiliates—crude pipelines | Affiliates—crude pipelines | | 255,730 | | | 278,801 | | | (23,071) | | Affiliates—crude pipelines | | 436,865 | | | 255,730 | | | 181,135 | |
| | 504,619 | | | 529,334 | | | (24,715) | | | 681,941 | | | 504,619 | | | 177,322 | |
Third parties—refined product pipelines | Third parties—refined product pipelines | | 48,298 | | | 53,756 | | | (5,458) | | Third parties—refined product pipelines | | 43,479 | | | 48,298 | | | (4,819) | |
Third parties—crude pipelines | Third parties—crude pipelines | | 129,603 | | | 89,027 | | | 40,576 | | Third parties—crude pipelines | | 134,602 | | | 129,603 | | | 4,999 | |
| | 682,520 | | | 672,117 | | | 10,403 | | | 860,022 | | | 682,520 | | | 177,502 | |
Terminals and loading racks: | Terminals and loading racks: | | Terminals and loading racks: | |
Affiliates | Affiliates | | 368,612 | | | 400,911 | | | (32,299) | | Affiliates | | 509,509 | | | 368,612 | | | 140,897 | |
Third parties | Third parties | | 49,526 | | | 45,910 | | | 3,616 | | Third parties | | 42,519 | | | 49,526 | | | (7,007) | |
| | 418,138 | | | 446,821 | | | (28,683) | | | 552,028 | | | 418,138 | | | 133,890 | |
Refinery processing units—Affiliates | Refinery processing units—Affiliates | | 68,688 | | | 59,843 | | | 8,845 | | Refinery processing units—Affiliates | | 68,804 | | | 68,688 | | | 116 | |
Total for pipelines and terminal and refinery processing unit assets (bpd) | Total for pipelines and terminal and refinery processing unit assets (bpd) | | 1,169,346 | | | 1,178,781 | | | (9,435) | | Total for pipelines and terminal and refinery processing unit assets (bpd) | | 1,480,854 | | | 1,169,346 | | | 311,508 | |
(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, (ii) acquisition integration and regulatory costs and (iii) pipeline tariffs and fees not included in revenues due to impacts from lease accounting for certain pipeline tariffs and fees minus (iv) gain on sales-type leases, (v) gain on significant asset sales and (vi) pipeline lease payments not included in operating costs and expenses. Portions of our minimum guaranteed pipeline and terminal tariffs and fees 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 and fees 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 PartnersHEP or operating income, as indications of our operating performance or as alternatives to operating cash flow as a measure of liquidity. EBITDA and Adjusted EBITDA are not necessarily comparable to similarly titled measures of other companies. EBITDA and Adjusted EBITDA are presented here because they are widely used financial indicators used by investors and analysts to measure performance. EBITDA and Adjusted EBITDA are also used by our management for internal analysis and as a basis for compliance with financial covenants. Set forth below are our calculations of EBITDA and Adjusted EBITDA.
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 |
| | | (In thousands) | | | (In thousands) |
Net income attributable to the partners | Net income attributable to the partners | | $ | 55,745 | | | $ | 76,470 | | | $ | 120,142 | | | $ | 101,331 | | Net income attributable to the partners | | $ | 56,792 | | | $ | 55,745 | | | $ | 106,351 | | | $ | 120,142 | |
Add (subtract): | Add (subtract): | | Add (subtract): | |
Interest expense | Interest expense | | 13,938 | | | 13,779 | | | 27,178 | | | 31,546 | | Interest expense | | 20,347 | | | 13,938 | | | 33,986 | | | 27,178 | |
Interest income | Interest income | | (6,614) | | | (2,813) | | | (13,162) | | | (5,031) | | Interest income | | (24,331) | | | (6,614) | | | (36,978) | | | (13,162) | |
State income tax expense | State income tax expense | | 27 | | | 39 | | | 64 | | | 76 | | State income tax expense | | 14 | | | 27 | | | 45 | | | 64 | |
Depreciation and amortization | Depreciation and amortization | | 25,003 | | | 25,034 | | | 50,068 | | | 49,012 | | Depreciation and amortization | | 26,974 | | | 25,003 | | | 49,161 | | | 50,068 | |
EBITDA | EBITDA | | $ | 88,099 | | | $ | 112,509 | | | $ | 184,290 | | | $ | 176,934 | | EBITDA | | $ | 79,796 | | | $ | 88,099 | | | $ | 152,565 | | | $ | 184,290 | |
Loss on early extinguishment of debt | | — | | | — | | | — | | | 25,915 | | |
| Gain on sales-type leases | Gain on sales-type leases | | (27) | | | (33,834) | | | (24,677) | | | (33,834) | | Gain on sales-type leases | | — | | | (27) | | | — | | | (24,677) | |
Gain on significant asset sales | Gain on significant asset sales | | (5,263) | | | — | | | (5,263) | | | — | | Gain on significant asset sales | | — | | | (5,263) | | | — | | | (5,263) | |
Goodwill impairment | Goodwill impairment | | — | | | — | | | 11,034 | | | — | | Goodwill impairment | | — | | | — | | | — | | | 11,034 | |
| Pipeline tariffs not included in revenues | | 7,058 | | | 3,099 | | | 14,025 | | | 5,474 | | |
Acquisition integration and regulatory costs | | Acquisition integration and regulatory costs | | 886 | | | — | | | 1,722 | | | — | |
Tariffs and fees not included in revenues | | Tariffs and fees not included in revenues | | 25,168 | | | 7,058 | | | 38,507 | | | 14,025 | |
Lease payments not included in operating costs | Lease payments not included in operating costs | | (1,606) | | | (1,606) | | | (3,213) | | | (3,213) | | Lease payments not included in operating costs | | (1,606) | | | (1,606) | | | (3,213) | | | (3,213) | |
Adjusted EBITDA | Adjusted EBITDA | | $ | 88,261 | | | $ | 80,168 | | | $ | 176,196 | | | $ | 171,276 | | Adjusted EBITDA | | $ | 104,244 | | | $ | 88,261 | | | $ | 189,581 | | | $ | 176,196 | |
(2)Distributable cash flow is not a calculation based upon GAAP. However, the amounts included in the calculation are derived from amounts presented in our consolidated financial statements, with the general exceptions of maintenance capital expenditures. Distributable cash flow should not be considered in isolation or as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. Distributable cash flow is not necessarily comparable to similarly titled measures of other companies. Distributable cash flow is presented here because it is a widely accepted financial indicator used by investors to compare partnership performance. It is also used by management for internal analysis and for our performance units. We believe that this measure provides investors an enhanced perspective of the operating performance of our assets and the cash our business is generating. Set forth below is our calculation of distributable cash flow.
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 |
| | | (In thousands) | | | (In thousands) |
Net income attributable to the partners | Net income attributable to the partners | | $ | 55,745 | | | $ | 76,470 | | | $ | 120,142 | | | $ | 101,331 | | Net income attributable to the partners | | $ | 56,792 | | | $ | 55,745 | | | $ | 106,351 | | | $ | 120,142 | |
Add (subtract): | Add (subtract): | | Add (subtract): | |
Depreciation and amortization | Depreciation and amortization | | 25,003 | | | 25,034 | | | 50,068 | | | 49,012 | | Depreciation and amortization | | 26,974 | | | 25,003 | | | 49,161 | | | 50,068 | |
Amortization of discount and deferred debt issuance costs | Amortization of discount and deferred debt issuance costs | | 1,385 | | | 842 | | | 2,229 | | | 1,641 | | Amortization of discount and deferred debt issuance costs | | 1,033 | | | 1,385 | | | 1,803 | | | 2,229 | |
Loss on early extinguishment of debt | | — | | | — | | | — | | | 25,915 | | |
Customer billings greater than revenue recognized | | (3,573) | | | (44) | | | (179) | | | (501) | | |
| Customer billings greater than net income recognized | | Customer billings greater than net income recognized | | 125 | | | (3,573) | | | 621 | | | (179) | |
Maintenance capital expenditures (3) | Maintenance capital expenditures (3) | | (4,111) | | | (1,140) | | | (5,482) | | | (3,627) | | Maintenance capital expenditures (3) | | (4,963) | | | (4,111) | | | (10,583) | | | (5,482) | |
Increase (decrease) in environmental liability | | (78) | | | 157 | | | (234) | | | 158 | | |
Increase in environmental liability | | Increase in environmental liability | | (124) | | | (78) | | | (244) | | | (234) | |
Decrease in reimbursable deferred revenue | Decrease in reimbursable deferred revenue | | (3,502) | | | (3,005) | | | (7,516) | | | (5,805) | | Decrease in reimbursable deferred revenue | | (3,356) | | | (3,502) | | | (6,590) | | | (7,516) | |
Gain on sales-type leases | Gain on sales-type leases | | (27) | | | (33,834) | | | (24,677) | | | (33,834) | | Gain on sales-type leases | | — | | | (27) | | | — | | | (24,677) | |
Gain on significant asset sales | Gain on significant asset sales | | (5,263) | | | — | | | (5,263) | | | — | | Gain on significant asset sales | | — | | | (5,263) | | | — | | | (5,263) | |
Goodwill impairment | Goodwill impairment | | — | | | — | | | 11,034 | | | — | | Goodwill impairment | | — | | | — | | | — | | | 11,034 | |
Other | Other | | 1,101 | | | 976 | | | (223) | | | 1,874 | | Other | | 1,977 | | | 1,101 | | | 2,393 | | | (223) | |
Distributable cash flow | Distributable cash flow | | $ | 66,680 | | | $ | 65,456 | | | $ | 139,899 | | | $ | 136,164 | | Distributable cash flow | | $ | 78,458 | | | $ | 66,680 | | | $ | 142,912 | | | $ | 139,899 | |
(3)Maintenance capital expenditures are capital expenditures made to replace partially or fully depreciated assets in order to maintain the existing operating capacity of our assets and to extend their useful lives. Maintenance capital expenditures include expenditures required to maintain equipment reliability, tankage and pipeline integrity, safety and to address environmental regulations.
| | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | (In thousands) | | (In thousands) |
Balance Sheet Data | Balance Sheet Data | | Balance Sheet Data | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 19,561 | | | $ | 21,990 | | Cash and cash equivalents | | $ | 14,884 | | | $ | 14,381 | |
Working capital | Working capital | | $ | 15,367 | | | $ | 14,247 | | Working capital | | $ | 15,259 | | | $ | 17,461 | |
Total assets | Total assets | | $ | 2,172,822 | | | $ | 2,167,565 | | Total assets | | $ | 2,775,038 | | | $ | 2,165,867 | |
Long-term debt | Long-term debt | | $ | 1,362,570 | | | $ | 1,405,603 | | Long-term debt | | $ | 1,608,460 | | | $ | 1,333,049 | |
Partners’ equity | Partners’ equity | | $ | 425,218 | | | $ | 379,292 | | Partners’ equity | | $ | 837,785 | | | $ | 443,017 | |
Results of Operations—Three Months Ended June 30, 20212022 Compared with Three Months Ended June 30, 20202021
Summary
Net income attributable to the partners for the second quarter of 2022 was $55.7$56.8 million ($0.530.45 per basic and diluted limited partner unit) compared to $76.5$55.7 million ($0.730.53 per basic and diluted limited partner unit) for the second quarter of 2020.2021. Results for the second quarter of 2021 reflect a gain on significant asset sales of $5.3 million related to the sale of a 6-inch refined product pipeline that connected HFC’s Navajo refinery to terminals in El Paso for gross proceeds of $7.0 millon. Netpipeline. Excluding this gain, net income attributable to HEP for the second quarter of 2020 included a gain on sales-type leases of $33.8 million. Excluding these items, net income attributable to the partners for the second quarters of 2021 and 2020 were $50.5was $50. million ($0.48 per basic and diluted limited partner unit) and $42.6 million ($0.40 per basic and diluted limited partner unit), respectively.. The increase in earningsnet income attributable to HEP was mainly due to higher volumes across our pipelines and higher interestnet income associated with sales-type leases,from Sinclair Transportation, which was acquired on March 14, 2022, partially offset by higher interest expense and higher operating costs and expenses.
Revenues
Revenues for the second quarter were $126.2$135.8 million, an increase of $11.4$9.5 million compared to the second quarter of 2020.2021. The increase was mainly attributabledue to revenues on our recently acquired Sinclair Transportation assets and higher revenues on our UNEV pipeline, partially offset by lower revenues on our Cheyenne assets as a 14% increase in overall cruderesult of the conversion of HF Sinclair's Cheyenne refinery to renewable diesel production and lower volumes on our product pipeline volumes.pipelines servicing HF Sinclair's Navajo refinery due to lower throughput at the refinery.
Revenues from our refined product pipelines were $28.7$26.1 million, an increasea decrease of $3.7$2.6 million compared to the second quarter of 2020.2021. Shipments averaged 171.2178.3 thousand barrels per day (“mbpd”) compared to 158.4171.2 mbpd for the second quarter of 2020.2021. The volume and revenue increases wereincrease was mainly due to higher volumes on our recently acquired Sinclair Transportation product
pipelines, partially offset by lower volumes on pipelines servicing HFC'sHF Sinclair's Navajo refinery. The revenue decrease was mainly due to lower volumes on pipelines servicing HF Sinclair's Navajo refinery and lower revenues from Delek US Holdings, Inc. (“Delek”) due to the expiration of a capacity lease, partially offset by revenues on our UNEV pipeline.recently acquired Sinclair Transportation product pipelines. Revenues did not increase in proportion to volumes due to our recognition of a portion of the Sinclair Transportation refined product pipeline tariffs as interest income under sales-type lease accounting.
Revenues from our intermediate pipelines were $7.5 million, consistent with the second quarter of 2020.2021. Shipments averaged 124.6 mbpd for the second quarter of 2022 compared to 143.8 mbpd for the second quarter of 2021 compared to 128.5 mbpd for the second quarter of 2020.2021. The increasedecrease in volumes was mainly due to higherlower throughputs on our intermediate pipelines servicing HFC'sHF Sinclair’s Navajo refinery while revenue remained relatively constant mainly due to contractual minimum volume guarantees.
Revenues from our crude pipelines were $32.1$34.7 million, an increase of $5.6$2.6 million compared to the second quarter of 2020, and shipments2021. Shipments averaged 396.7615.3 mbpd compared to 338.4396.7 mbpd for the second quarter of 2020.2021. The revenue and volume increases wereincrease in volumes was mainly attributable to higherour Cushing Connect Pipeline, which went into service in September 2021, as well as volumes on our recently acquired Sinclair Transportation crude pipelines. The increase in revenues was mainly due to our recently acquired Sinclair Transportation crude pipelines. Revenues did not increase in proportion to volumes due to our recognition of most of the Cushing Connect Pipeline and Sinclair Transportation crude pipeline systems in Wyoming and Utah.tariffs as interest income under sales-type lease accounting.
Revenues from terminal, tankage and loading rack fees were $36.9$44.6 million, an increase of $0.6$7.7 million compared to the second quarter of 2020.2021. Refined products and crude oil terminalled in the facilities averaged 466.7609.0 mbpd compared to 418.0466.7 mbpd for the second quarter of 2020.2021. The volume increase was mainly the result of higher throughputs at HFC's El Dorado refinery. Revenues did not increase in proportion to the increase in volumes was mainly due to contractualour recently acquired Sinclair Transportation assets. Revenues increased mainly due to revenues on our recently acquired Sinclair Transportation assets and higher butane blending revenues. In addition, the second quarter of 2021 included the recognition of $3.4 million of the $10 million termination fee related to the termination of HF Sinclair's minimum volume guarantees and lower on-going revenuescommitment on our Cheyenne assets as a result of the conversion of the HFCHF Sinclair Cheyenne refinery to renewable diesel production.
Revenues from refinery processing units were $21.0$22.9 million, an increase of $1.5$1.9 million compared to the second quarter of 2020,2021, and throughputs averaged 76.672.3 mbpd compared to 49.976.6 mbpd for the second quarter of 2020. The increase2021. The decrease in volumes was mainly due to increaseddecreased throughput for bothat our Woods Cross and El Dorado refinery processing units. Revenues increased mainly due to the higher natural gas cost recoveries in revenues. Revenues did not increasedecrease in proportion to the increasedecrease in volumes mainly due to contractual minimum volume guarantees.
Operations Expense
Operations (exclusive of depreciation and amortization and goodwill impairment) expense was $42.1$53.9 million for the three months ended June 30, 2021,2022, an increase of $7.3$11.8 million compared to the second quarter of 2020.2021. The increase was mainly due to operations expenses associated with our recently acquired Sinclair Transportation assets as well as higher pipeline rentalemployee costs, natural gas costs, maintenance expense project costs, employee costs and chemicalsmaterials and catalystssupplies costs, partially offset by lower rentals and leases for the three months ended June 30, 2021.2022.
Depreciation and Amortization
Depreciation and amortization for the three months ended June 30, 2021 remained constant2022 increased by $2.0 million compared to the three months ended June 30, 2020.2021. The increase was mainly due to depreciation on our recently acquired Sinclair Transportation assets and amortization of the Woods Cross refinery processing units turnaround.
General and Administrative
General and administrative costs for the three months ended June 30, 20212022 increased by $0.3$1.8 million compared to the three months ended June 30, 2020,2021, mainly due to higher legal and professional expenses forassociated with the three months ended June 30, 2021.HEP Transaction.
Equity in Earnings of Equity Method Investments
| | | Three Months Ended June 30, | | Three Months Ended June 30, |
Equity Method Investment | Equity Method Investment | 2021 | | 2020 | Equity Method Investment | 2022 | | 2021 |
| | (in thousands) | | (in thousands) |
Osage Pipe Line Company, LLC | Osage Pipe Line Company, LLC | $ | 914 | | | $ | 366 | | Osage Pipe Line Company, LLC | 606 | | | 914 | |
Cheyenne Pipeline LLC | Cheyenne Pipeline LLC | 1,879 | | | 1,085 | | Cheyenne Pipeline LLC | 1,586 | | | 1,879 | |
Cushing Terminal | 630 | | | 705 | | |
Cushing Connect Terminal Holdings LLC | | Cushing Connect Terminal Holdings LLC | 805 | | | 630 | |
Pioneer Investments Corp. | | Pioneer Investments Corp. | 3,221 | | | — | |
Saddle Butte Pipeline III, LLC | | Saddle Butte Pipeline III, LLC | (771) | | | — | |
Total | Total | $ | 3,423 | | | $ | 2,156 | | Total | $ | 5,447 | | | $ | 3,423 | |
Equity in earnings of Osage Pipe Line Company, LLC increaseddecreased for the three months ended June 30, 2021,2022, mainly due to higher throughput volumes.maintenance costs. Equity in earnings of Cheyenne Pipeline LLC increaseddecreased for the three months ended June 30, 2021,2022, mainly due to the recognition in revenue of prior contractual minimum commitment billings.billings in the three months ended June 30, 2021. Equity in earnings of Cushing Connect Terminal Holdings LLC increased for the three months ended June 30, 2022, mainly due to lower property tax expense. Pioneer Investments Corp. and Saddle Butte Pipeline III, LLC were acquired during the first quarter of 2022 as part of the HEP Transaction.
Interest Expense, including Amortization
Interest expense for the three months ended June 30, 2021,2022, totaled $13.9$20.3 million, an increase of $0.2$6.4 million compared to the three months ended June 30, 2020.2021. The increase was mainly due to our April 2022 issuance of $400 million in aggregate principal amount of 6.375% senior unsecured notes maturing in April 2027 and higher average borrowings outstanding under our senior secured revolving credit facility related to the funding of the cash portion of the Sinclair Transportation acquisition. In addition, market interest rates increased on our senior secured revolving credit facility. Our aggregate effective interest rates were 3.8%4.7% and 3.4%3.8% for the three months ended June 30, 2022 and 2021, respectively.
Interest Income
Interest income for the three months ended June 30, 2022, totaled $24.3 million, an increase of $17.7 million compared to the three months ended June 30, 2021. The increase was mainly due to higher sales-type lease interest income from our newly acquired Sinclair Transportation pipelines and 2020, respectively.terminals and our Cushing Connect Pipeline, which was placed into service at the end of the third quarter of 2021.
State Income Tax Expense
We recorded state income tax expense of $27,000$14,000 and $39,000$27,000 for the three months ended June 30, 20212022 and 2020,2021, respectively. All tax expense is solely attributable to the Texas margin tax.
Results of Operations—Six Months Ended June 30, 20212022 Compared with Six Months Ended June 30, 20202021
Summary
Net income attributable to the partners for the six months ended June 30, 2021,2022, was $120.1$106.4 million ($1.140.90 per basic and diluted limited partner unit) compared to $101.3$120.1 million ($0.961.14 per basic and diluted limited partner unit) for the six months ended June 30, 2020.2021. Results for the six months ended June 30, 2021, includereflect special items that collectively increased net income attributable to the partners by a total of $18.9$19.0 million. These items includeincluded 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 attributablemillion related 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.our Cheyenne reporting unit. Excluding these items, net income attributable to the partners for the six months ended June 30, 2021, and 2020, were $101.2was $101.1 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 interestnet income associated with sales-type leases,from Sinclair Transportation, which was acquired on March 14, 2022, partially offset by higher interest expense and higher operating costs and expenses.
Revenues
Revenues for In addition, 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,included the recognition of $9.9 million of the $10 million termination fee related to the termination of HollyFrontier'sHF Sinclair's minimum volume commitment on our Cheyenne assets and higherassets.
Revenues
Revenues for the six months ended June 30, 2022, were $256.0 million, an increase of $2.6 million compared to the six months ended June 30, 2021. The increase was mainly attributable to revenues on our refinery processing unitsrecently acquired Sinclair Transportation assets and increased revenues from our UNEV assets, partially offset by lower on-going revenues on our Cheyenne assets as well as a reclassificationresult of certain income from revenuethe conversion of HF Sinclair’s Cheyenne refinery to interest income under sales-type lease accounting.renewable diesel production and lower revenues on our product pipelines servicing HF Sinclair's Navajo refinery. The six months ended June 30, 2021 included the recognition of the $10 million termination fee related to the termination of HF Sinclair's minimum volume commitment on our Cheyenne assets.
Revenues from our refined product pipelines were $57.2$52.3 million, a decrease of $2.7$5.0 million compared to the six months ended June 30, 2020.2021. Shipments averaged 167.6167.3 mbpd compared to 169.0167.6 mbpd for the six months ended June 30, 2020.2021. The volume and revenue decreases were mainly due to lower volumes on pipelines servicing Delek's Big Spring refinery. Revenue also decreased due toHF Sinclair's Navajo refinery, partially offset by volumes on our recently acquired Sinclair Transportation assets and higher volumes on our UNEV pipeline. We recognized a reclassificationsignificant portion of certainthe Sinclair Transportation refined product pipeline income from revenue totariffs as interest income under sales-type lease accounting.
Revenues from our intermediate pipelines were $15.0 million, an increase of $0.1 million compared toconsistent with the six months ended June 30, 2020.2021. Shipments averaged 129.6121.2 mbpd compared to 135.3129.6 mbpd for the six months ended June 30, 2020.2021. The decrease in volumes was mainly due to lower throughputs on our intermediate pipelines servicing HFC's TulsaHF Sinclair's Navajo refinery while revenue remained relatively constant mainly due to contractual minimum volume guarantees.
Revenues from our crude pipelines were $62.6$65.8 million, an increase of $8.0$3.2 million compared to the six months ended June 30, 2020.2021. Shipments averaged 385.3571.5 mbpd compared to 367.8385.3 mbpd for the six months ended June 30, 2020.2021. The increases wereincrease in volumes was mainly attributable to increasedour Cushing Connect Pipeline, which went into service in September 2021, as well as volumes on our recently acquired Sinclair Transportation crude pipeline systemspipelines. The increase in revenues was mainly due to our recently acquired Sinclair Transportation crude pipelines and higher volumes revenues on our legacy crude pipelines in Wyoming and Utah. Revenues did not increase in proportion to volumes due to our recognition of most of the Cushing Connect Pipeline and Sinclair Transportation crude pipeline tariffs as interest income under sales-type lease accounting.
Revenues from terminal, tankage and loading rack fees were $75.1$81.6 million, an increase of $1.3$6.5 million compared to the six months ended June 30, 2020.2021. Refined products and crude oil terminalled in the facilities averaged 418.1552.0 mbpd compared to 446.8418.1 mbpd for the six months ended June 30, 2020. 2021. VThe volume decrease wasolumes increased mainly the result of lowerdue to volumes on our recently acquired Sinclair Transportation assets and higher throughputs at HFC'sHF Sinclair's Tulsa refinery as well as the cessation of petroleum refinery operations at HFC's Cheyenne refinery. Revenues increased mainly due to revenues on our recently acquired Sinclair Transportation assets and higher butane blending revenues. In addition, the six months ended June 30, 2021 included the recognition of $9.9 million of the $10 million termination fee related to the termination of HFC'sHF Sinclair'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 HFCHF Sinclair Cheyenne refinery to renewable diesel production as well as a reclassification of certain income from revenue to interest income under sales-type lease accounting.production.
Revenues from refinery processing units were $43.5$41.3 million, an increasea decrease of $4.1$2.2 million compared to the six months ended June 30, 2020.2021. Throughputs averaged 68.768.8 mbpd compared to 59.868.7 mbpd for the six months ended June 30, 2020.2021 The increasewith increased throughputs at our El Dorado refinery processing units offset by lower throughputs at our Woods Cross refinery processing units, which were down for a scheduled turnaround in volumes wasMarch 2022. Revenues decreased mainly due to increasedthe lower throughput for bothat our Woods Cross and El Doradorefinery processing units. Revenues increased mainly due tounits, partially offset by higher recovery of natural gas costs as well as higher throughputs.cost recoveries in revenues.
Operations Expense
Operations expense (exclusive of depreciation and amortization) for the six months ended June 30, 2021,2022, increased by $13.7$13.1 million compared to the six months ended June 30, 2020.2021. The increase was mainly due to operations expenses associated with our recently acquired Sinclair Transportation assets as well as higher maintenance,employee costs, natural gas costs, and pipeline rentalmaterials and supplies costs, partially offset by lower materialsrentals and supplies and property taxes.leases.
Depreciation and Amortization
Depreciation and amortization for the six months ended June 30, 2021, increased2022, decreased by $1.1$0.9 million compared to the six months ended June 30, 2020. 2021. The increasedecrease was mainly due to the acceleration of depreciation on certain of our Cheyenne tanks.tanks in 2021 as well as retirement of assets due to sales-type lease accounting.
General and Administrative
General and administrative costs for the six months ended June 30, 2021,2022, increased by $0.6$3.2 million compared to the six months ended June 30, 2020 2021 mainly due to higher legal and professional expenses incurred in the six months ended June 30, 2021.2022.
Equity in Earnings of Equity Method Investments
| | | Six Months Ended June 30, | | Six Months Ended June 30, |
Equity Method Investment | Equity Method Investment | 2021 | | 2020 | Equity Method Investment | 2022 | | 2021 |
| | (in thousands) | | (in thousands) |
Osage Pipe Line Company, LLC | Osage Pipe Line Company, LLC | 1,636 | | | 1,380 | | Osage Pipe Line Company, LLC | 1,249 | | | 1,636 | |
Cheyenne Pipeline LLC | Cheyenne Pipeline LLC | 1,774 | | | 2,160 | | Cheyenne Pipeline LLC | 3,360 | | | 1,774 | |
Cushing Terminal | 1,776 | | | 330 | | |
Cushing Connect Terminal Holdings LLC | | Cushing Connect Terminal Holdings LLC | 1,711 | | | 1,776 | |
Pioneer Investments Corp. | | Pioneer Investments Corp. | 3,686 | | | — | |
Saddle Butte Pipeline III, LLC | | Saddle Butte Pipeline III, LLC | (933) | | | — | |
Total | Total | $ | 5,186 | | | $ | 3,870 | | Total | $ | 9,073 | | | $ | 5,186 | |
Equity in earnings of Cushing TerminalOsage Pipe Line Company, LLC decreased for the six months ended June 30, 2022, mainly due to higher maintenance costs. Equity in earnings of Cheyenne Pipeline LLC increased for the six months ended June 30, 2021 as2022, mainly due to the terminal started operationsrecognition in revenue of prior contractual minimum commitment billings. Pioneer Investments Corp. and Saddle Butte Pipeline III, LLC were acquired during the secondfirst quarter of 2020.2022 as part of the HEP Transaction.
Interest Expense, including Amortization
Interest expense for the six months ended June 30, 2021,2022, totaled $27.2$34.0 million, a decreasean increase of $4.4$6.8 million compared to the six months ended June 30, 2020.2021. The decreaseincrease was mainly due to market interest rate decreasesour April 2022 issuance of $400 million in aggregate principal amount of 6.375% senior unsecured notes maturing in April 2027 and higher average borrowings outstanding under our senior secured revolving credit facility and refinancingrelated to the funding of the cash portion of the Sinclair Transportation acquisition. In addition, market interest rates increased on our senior secured revolving credit facility. our $500 million aggregate principal amount of 6.0% senior notes due 2024 with $500 million aggregate principal amount of 5.0% senior notes due 2028. Our aggregate effective interest rates were 3.6%4.2% and 4.0%3.6% for the six months ended June 30, 20212022 and 2020,2021, respectively.
State Income Tax Expense
We recorded state income tax expense of $64,000$45,000 and $76,000$64,000 for the six months ended June 30, 20212022 and 2020,2021, respectively. All tax expense is solely attributable to the Texas margin tax.
LIQUIDITY AND CAPITAL RESOURCES
Overview
In April 2021, we amended our senior secured revolving credit facility (the “Credit Agreement”)Credit Agreement decreasing the size of the facility from $1.4 billion to $1.2 billion and extending the maturity date to July 27, 2025. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments 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 continues to provide for an accordion feature that allows us to increase commitments under the Credit Agreement up to a maximum amount of $1.7 billion.
During the six months ended June 30, 2021,2022, we received advances totaling $141.0$410.0 million and repaid $184.5$529.0 million under the Credit Agreement, resulting in a net decrease of $43.5$119.0 million and an outstanding balance of $870.0$721.0 million at June 30, 2021 under the Credit Agreement.2022. As of June 30, 2021,2022, we have no letters of credit outstanding under the Credit Agreement and the available capacity under the Credit Agreement was $330.0$479.0 million. Amounts repaid under the Credit Agreement may be reborrowed from time to time.
On February 4, 2020,April 8, 2022, we closed a private placement of $400 million in aggregate principal amount of 6.375% senior unsecured notes due in 2027 (the “6.375% Senior Notes”). The 6.375% Senior Notes were issued at par for net proceeds of approximately $393 million, after deducting the initial purchasers’ discounts and commissions and estimated offering expenses. The total net proceeds from the offering of the 6.375% Senior Notes were used to partially repay outstanding borrowings under the Credit Agreement, increasing our available liquidity.
As of June 30, 2022, we had $500 million in aggregate principal amount of 5% Senior Notes due in 2028. On February 5, 2020, we redeemed2028 (the “5% Senior Notes”, and together with the existing $500 million 6%6.375 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.“Senior Notes”).
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 six months ended June 30, 2021.2022. As of June 30, 2021,2022, 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, including fundingfuture. Future securities issuances, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
In the cash portionthird quarter of 2022, HEP expects to hold the HEP Transactionsquarterly distribution constant at $0.35 per unit, or $1.40 on an annualized basis. We are on track to achieve our short-term leverage target of 3.5x by year-end. Consistent with Sinclair.our disciplined capital allocation framework, we expect to increase unitholder returns in 2023.
In May 2021,2022, we paid a regular quarterly cash distribution of $0.35 on all units in an aggregate amount of $37.0$44.3 million.
Cash and cash equivalents indecreasedcreased by $2.4$0.5 million during the six months ended June 30, 2021.2022. The cash flows provided by operating activities of $162.1$152.5 million and financing activities of $186.0 million were lessmore than the cash flows used for financing activities of $115.6 million and investing activities of $48.9$338.0 million. Working capital increaseddecreased by $1.1$2.2 million to $15.4$15.3 million at June 30, 2021,2022, from $14.2$17.5 million at December 31, 2020.2021.
Cash Flows—Operating Activities
Cash flows from operating activities incredecreased by $27.5$9.6 million from $134.6 million for the six months ended June 30, 2020, to $162.1 million for the six months ended June 30, 2021.2021, to $152.5 million for the six months ended June 30, 2022. The increasedecrease was mainly due to higher payments for turnaround expenses at our Woods Cross refinery processing units and higher payments for operating expenses, partially offset by higher cash receipts from customers and lower payments for interest expenses during the six months ended June 30, 2021,2022, as compared to the six months ended June 30, 2020.2021.
Cash Flows—Investing Activities
Cash flows used for investing activities were $338.0 million for the six months ended June 30, 2022, compared to $48.9 million for the six months ended June 30, 2021, comparedan increase of $289.1 million. During the six months ended June 30, 2022, we paid the $321.4 million cash portion of the purchase price consideration for our acquisition of Sinclair Transportation. During the six months ended June 30, 2022 and 2021, we invested $23.2 million and $59.4 million, respectively, in addition to $31.9properties and equipment.
Cash Flows—Financing Activities
Cash flows provided by financing activities were $186.0 million for the six months ended June 30, 2020, an increase of $17.1 million. During the six months ended June 30, 2021 and 2020, we invested $59.4 million and $30.7 million, respectively, in additions2022, compared to properties and equipment. We received $3.1 million in excess of equity in earnings and $7.3 million in proceeds from the sale of assets during the six months ended June 30, 2021.
Cash Flows—Financing Activities
Cashcash flows used forby financing activities wereof $115.6 million for the six months ended June 30, 2021, compared to $97.1 million foran increase of $301.6 million. During the six months ended June 30, 2020, an increase2022, we received $410.0 million and repaid $529.0 million in advances under the Credit Agreement, and we received net proceeds of $18.5 million.$393.7 million related to the issuance of our 6.375% Senior Notes. Additionally, we paid $81.3 million in regular quarterly cash distributions to our limited partners and $5.3 million to our noncontrolling interests. During the six months ended June 30, 2021, we received $141.0 million and repaid $184.5 million in advances under the Credit Agreement. Additionally, weWe paid $75.4 million in regular quarterly cash distributions to our limited partners, and distributed $5.9 million to our noncontrolling interests. WeIn addition, we received $17.6 million in contributions from noncontrolling interests during the six months ended June 30, 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 for issuance of our 5% Senior Notes and paid $522.5 million to retire our 6% Senior Notes. In addition, we received $13.3 million in contributions from noncontrolling interests during the six months ended June 30, 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 20212022 capital forecast includes forecasted expenditures for our recently acquired Sinclair Transportation assets and is comprised of approximately $17$20 million to $21$30 million for maintenance capital expenditures, $5$25 million to $8$35 million for refinery unit turnarounds and $38$5 million to $42$10 million for expansion capital expenditures and our share of Cushing Connect Joint Venture investments. We expect the majority of the 2021 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 a subsidiary of HFC a Class B unit comprising a noncontrolling equity interest in a wholly-ownedwholly owned subsidiary subject to redemption to the extent that HFC is entitled to a 50% interest in our share75% of annual UNEV earnings before interest, income taxes, depreciation, and amortization above $30
$40 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
In April 2021, we amended our Credit Agreement decreasing the commitments under the facility from $1.4 billion to $1.2 billion and extending the maturity date to July 27, 2025. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments 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 continues to provide for an accordion feature that allows us to increase the commitments under the Credit Agreement up to a maximum amount of $1.7 billion.
Our obligations under the Credit Agreement are collateralized by substantially all of our assets, and indebtedness under the Credit Agreement is guaranteed by our material, wholly-ownedwholly owned subsidiaries. The Credit Agreement requires us to maintain compliance with certain financial covenants consisting of total leverage, senior secured leverage, and interest coverage. It also limits or restricts our ability to engage in certain activities. If, at any time prior to the expiration of the Credit Agreement, HEP obtains two investment grade credit ratings, the Credit Agreement will become unsecured and many of the covenants, limitations and restrictions will be eliminated.
We may prepay all loans at any time without penalty, except for tranche breakage costs. If an event of default exists under the Credit Agreement, the lenders will be able to accelerate the maturity of all loans outstanding and exercise other rights and remedies. We were in compliance with the covenants under the Credit Agreement as of June 30, 2021.2022.
Senior Notes
As of June 30, 2021,2022, we had $500 million in aggregate principal amount of 5% Senior Notes due in 2028.
On February 4, 2020,April 8, 2022, we closed a private placement of $500$400 million in aggregate principal amount of 5%the 6.375% Senior Notes. The 6.375% Senior Notes due in 2028. On February 5, 2020, we redeemedwere issued at par for net proceeds of approximately $393 million, after deducting 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 premiuminitial purchasers’ discounts and unamortized financing costs of $3.4 million. We funded the $522.5 million redemption withcommissions and offering expenses. The total net proceeds from the issuanceoffering of our 5%the 6.375% Senior Notes andwere used to partially repay outstanding borrowings under the Credit Agreement, increasing our Credit Agreement.available liquidity.
The 5% Senior Notes are unsecured and impose certain restrictive covenants, including limitations on our ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. We were in compliance with the restrictive covenants for the 5% Senior Notes as of June 30, 2021.2022. 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-ownedwholly owned subsidiaries (other than Holly Energy Finance Corp. and certain immaterial subsidiaries).
Long-term Debt
The carrying amounts of our long-term debt are as follows:
| | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | | (In thousands) | | | (In thousands) |
Credit Agreement | Credit Agreement | | $ | 870,000 | | | 913,500 | | Credit Agreement | |
Amount outstanding | | Amount outstanding | | 721,000 | | | 840,000 | |
| 5% Senior Notes | 5% Senior Notes | | 5% Senior Notes | |
Principal | Principal | | 500,000 | | | 500,000 | | Principal | | 500,000 | | | 500,000 | |
Unamortized debt issuance costs | Unamortized debt issuance costs | | (7,430) | | | (7,897) | | Unamortized debt issuance costs | | (6,459) | | | (6,951) | |
| | 492,570 | | | 492,103 | | | 493,541 | | | 493,049 | |
| 6.375% Senior Notes | | 6.375% Senior Notes | |
Principal | | Principal | | 400,000 | | | — |
Unamortized debt issuance costs | | Unamortized debt issuance costs | | (6,081) | | | — |
| | | 393,919 | | | — | |
| Total long-term debt | Total long-term debt | | $ | 1,362,570 | | | $ | 1,405,603 | | Total long-term debt | | $ | 1,608,460 | | | $ | 1,333,049 | |
Contractual Obligations
There were no significant changes to our long-term contractual obligations during the quarter ended June 30, 2021.2022.
Impact of Inflation
Inflation in the United States did not have a material impact on our results of operations for the six months ended June 30, 20212022 and 2020. 2021. PPI has increased an average of 0.9%2.9% annually over the past five calendar years, including an increase of 8.9% in 2021 and a decrease of 1.4%1.3% in 2020 and an increase of 0.8% in 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, 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, HFCHF Sinclair, HF Sinclair 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 HFCHF Sinclair and occurring or existing prior to the date of such transfers.
We have an environmental agreement with Delek with respect to pre-closing environmental costs and liabilities relating to the pipelines and terminals acquired from Delek in 2005, under which Delek will indemnify us subject to certain monetary and time limitations.
There are environmental remediation projects in progress that relate to certain assets acquired from HFC. Certain of these projects were underway prior to our purchase and represent liabilities retained by HFC. At June 30, 2021,2022, we had an accrual of $4.3$13.6 million that related to environmental clean-up projects for which we have assumed liability, including accrued environmental liabilities assumed in the Sinclair Transportation acquisition that have preliminarily been fair valued at $10.0 million as of the acquisition date, or for which the indemnity provided for by HFCHF Sinclair has expired or will expire. The remainingThere are environmental remediation projects in progress, including assessment and monitoring activities, that relate to certain assets acquired from HF Sinclair. Certain of these projects were underway prior to our purchase, are covered under the HFCHF Sinclair environmental indemnification discussed above, and represent liabilities retained by HF Sinclair.
On July 8, 2022, the Osage pipeline, which carries crude oil from Cushing, Oklahoma to El Dorado, Kansas, suffered a release of HFC.crude oil. The pipeline has resumed operations and recovery operations are ongoing. We expect to accrue amounts related to recovery and remediation in the third quarter of 2022, but cannot estimate those amounts at this time. We do not expect the accrual will have a material impact on our financial position.
CRITICAL ACCOUNTING POLICIESESTIMATES
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, 2020.2021. 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 2021.2022. We consider these policies to be 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
Credit Losses Measurement
In June 2016, ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” was issued requiring measurement of all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This standard was effective January 1, 2020. Adoption of the standard did not have a material impact on our financial condition, results of operations or cash flows.
RISK MANAGEMENT
The market risk inherent in our debt positions is the potential change arising from increases or decreases in interest rates as discussed below.
At June 30, 2021,2022, we had an outstanding principal balance of $500$900 million on our 5% Senior Notes. A change in interest rates generally would affect the fair value of the 5% Senior Notes, but not our earnings or cash flows. At June 30, 2021,2022, the fair value of our 5% Senior Notes was $512.2$808.7 million. We estimate a hypothetical 10% change in the yield-to-maturity applicable to the 5% Senior Notes at June 30, 20212022 would result in a change of approximately $13.2$28.9 million in the fair value of the underlying 5% Senior Notes.
For the variable rate Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. At June 30, 2021,2022, borrowings outstanding under the Credit Agreement were $870.0$721.0 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 normalcatastrophic losses, operational hazards of operations,and unforeseen interruptions, including but not limited to fire, explosion, releases or spills, cyberattacks, weather-related perils, vandalism, power failures, mechanical failures and weather-related perils.other events beyond our control. We maintain various insurance coverages, including general liability, property damage, 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, 2020.2021.
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 June 30, 2021,2022, at a reasonable level of assurance.
(b) Changes in internal control over financial reporting
DuringWe acquired Sinclair Transportation effective March 14, 2022, and have included the three months endedoperating results and assets and liabilities of Sinclair Transportation in our consolidated financial statements as of June 30, 2021,2022 and for the 109 days then ended. Other than our internal controls for Sinclair Transportation, 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
Except for the risk factors below, thereThere have been no material changes in our risk factors as previously disclosed in Part 1,I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2021. In addition to the other information set forth in this quarterly report, you should consider carefully the information discussed in our 20202021 Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our 20202021 Form 10-K 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 5458 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 | | |
10.14.1 | | First Amendment to Seventh Amended and Restated Master Throughput Agreement, entered into as ofIndenture, dated April 30, 2021, effective as of April 1, 20218, 2022, by and between HollyFrontier Refining & Marketing LLC and Holly Energy Partners - Operating, L.P. (incorporated by reference to Exhibit 10.9 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, File No. 1-32225). |
10.2† | | Amendment No. 1 to Third Amended and Restated Credit Agreement dated April 30, 2021, among Holly Energy Partners, L.P., as borrower, certainHolly Energy Finance Corp., each of its affiliates, as guarantors, Wells Fargothe Guarantors party thereto and U.S. Bank Trust Company, National Association, as administrative agent, an issuing bank and a lender, and certain other lenders party theretorelating to the offering of the Notes (incorporated by reference to Exhibit 10.14.1 of Registrant’s Current Report on Form 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 8-K filed on August 3, 2021,April 8, 2022, File No. 1-32225). |
10.54.2 | | Letter Agreement,First Supplemental Indenture, dated as of August 2, 2021, by andMay 22, 2022, among HollyFrontier CorporationUNEV Pipeline, LLC, Holly Energy Partners, L.P. and Holly Energy Finance Corp. and the other Guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee, related to Holly Energy Partners, L.P.’s 6.375% Senior Notes due 2027 (incorporated by reference to Exhibit 10.24.9 of Registrant’s Current ReportRegistration Statement on Form 8-KS-3 filed on August 3, 2021,May 23, 2022, File No. 1-32225)333-265140). |
4.3 | | Second Supplemental Indenture, dated as of May 22, 2022, among UNEV Pipeline, LLC, Holly Energy Partners, L.P. and Holly Energy Finance Corp. and the other Guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee, related to Holly Energy Partners, L.P.’s 5.000% Senior Notes due 2028 (incorporated by reference to Exhibit 4.7 of Registrant’s Registration Statement on Form S-3 filed May 23, 2022, File No. 333-26514). |
22.1* | | |
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 June 30, 20212022 formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statement of Partners’ Equity, and (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). |
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* | 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 regulationRegulation S-K. The registrant agrees to furnish supplementally a copy of the omitted schedules and exhibits to the SEC upon request. |
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HOLLY ENERGY PARTNERS, L.P.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| HOLLY ENERGY PARTNERS, L.P. |
| (Registrant) |
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| | By: HEP LOGISTICS HOLDINGS, L.P. its General Partner |
| | |
| | By: HOLLY LOGISTIC SERVICES, L.L.C. its General Partner |
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Date: August 6, 20218, 2022 | | /s/ John Harrison |
| | John Harrison |
| | Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) |
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Date: August 6, 20218, 2022 | | /s/ Kenneth P. Norwood |
| | Kenneth P. Norwood |
| | Vice President and Controller (Principal Accounting Officer) |