10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________________________
FORM 10-Q
______________________________________________________________________________________
(Mark One)
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2016
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to _____________
Commission File Number: 1-32225
______________________________________________________________________________________
HOLLY ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
______________________________________________________________________________________
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Delaware | | 20-0833098 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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2828 N. Harwood, Suite 1300 Dallas, Texas | | 75201 |
(Address of principal executive offices) | | (Zip code) |
(214) 871-3555
(Registrant’s telephone number, including area code)
________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ý | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of the registrant’s outstanding common units at April 29, 2016 was 58,657,048.
HOLLY ENERGY PARTNERS, L.P.
INDEX
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| Item 1. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| Item 1. | | |
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| Item 1A. | | |
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| Item 6. | | |
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical fact included in this Form 10-Q, including, but not limited to, those under “Results of Operations” and “Liquidity and Capital Resources” in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I are forward-looking statements. Forward-looking statements use words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “intend,” “should,” “would,” “could,” “believe,” “may,” and similar expressions and statements regarding our plans and objectives for future operations. 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:
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• | risks and uncertainties with respect to the actual quantities of petroleum products and crude oil shipped on our pipelines and/or terminalled, stored or throughput in our terminals; |
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• | the economic viability of HollyFrontier Corporation, Alon USA, Inc. and our other customers; |
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• | the demand for refined petroleum products in markets we serve; |
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• | our ability to purchase and integrate future acquired operations; |
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• | our ability to complete previously announced or contemplated acquisitions; |
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• | the availability and cost of additional debt and equity financing; |
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• | the possibility of reductions in production or shutdowns at refineries utilizing our pipeline and terminal facilities; |
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• | the effects of current and future government regulations and policies; |
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• | our operational efficiency in carrying out routine operations and capital construction projects; |
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• | the possibility of terrorist attacks and the consequences of any such attacks; |
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• | general economic conditions; and |
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• | other financial, operational and legal risks and uncertainties detailed from time to time in our Securities and Exchange Commission filings. |
Cautionary statements identifying important factors that could cause actual results to differ materially from our expectations are set forth in this Form 10-Q, including without limitation, the forward-looking statements that are referred to above. When considering forward-looking statements, you should keep in mind the known material risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2015 and in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Risk Factors.” 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
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Item 1. | Financial Statements |
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except unit data)
|
| | | | | | | | |
| | March 31, 2016 | | December 31, 2015 (1) |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 9,034 |
| | $ | 15,013 |
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Accounts receivable: | | | | |
Trade | | 7,936 |
| | 8,593 |
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Affiliates | | 33,120 |
| | 32,482 |
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| | 41,056 |
| | 41,075 |
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Prepaid and other current assets | | 5,181 |
| | 5,054 |
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Total current assets | | 55,271 |
| | 61,142 |
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Properties and equipment, net | | 1,052,772 |
| | 1,059,179 |
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Transportation agreements, net | | 72,067 |
| | 73,805 |
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Goodwill | | 256,498 |
| | 256,498 |
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Equity method investments | | 124,134 |
| | 79,438 |
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Other assets | | 11,819 |
| | 13,703 |
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Total assets | | $ | 1,572,561 |
| | $ | 1,543,765 |
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LIABILITIES AND EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable: | | | | |
Trade | | $ | 12,305 |
| | $ | 10,948 |
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Affiliates | | 6,175 |
| | 11,635 |
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| | 18,480 |
| | 22,583 |
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Accrued interest | | 1,972 |
| | 6,752 |
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Deferred revenue | | 7,050 |
| | 12,016 |
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Accrued property taxes | | 4,107 |
| | 3,764 |
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Other current liabilities | | 2,945 |
| | 3,809 |
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Total current liabilities | | 34,554 |
| | 48,924 |
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Long-term debt | | 1,061,944 |
| | 1,008,752 |
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Other long-term liabilities | | 16,397 |
| | 20,744 |
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Deferred revenue | | 39,441 |
| | 39,063 |
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Class B unit | | 35,807 |
| | 33,941 |
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Equity: | | | | |
Partners’ equity: | | | | |
Common unitholders (58,657,048 units issued and outstanding at March 31, 2016 and December 31, 2015) | | 425,669 |
| | 428,019 |
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General partner interest (2% interest) | | (137,228 | ) | | (130,297 | ) |
Accumulated other comprehensive income (loss) | | (263 | ) | | 190 |
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Total partners’ equity | | 288,178 |
| | 297,912 |
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Noncontrolling interest | | 96,240 |
| | 94,429 |
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Total equity | | 384,418 |
| | 392,341 |
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Total liabilities and equity | | $ | 1,572,561 |
| | $ | 1,543,765 |
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(1) Retrospectively adjusted as described in Note 1.
See accompanying notes.
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per unit data)
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| | | | | | | | |
| | Three Months Ended March 31, |
| | 2016 | | 2015 (1) |
Revenues: | | | | |
Affiliates | | $ | 82,846 |
| | $ | 72,255 |
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Third parties | | 19,164 |
| | 17,501 |
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| | 102,010 |
| | 89,756 |
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Operating costs and expenses: | | | | |
Operations (exclusive of depreciation and amortization) | | 26,922 |
| | 28,065 |
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Depreciation and amortization | | 16,551 |
| | 14,798 |
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General and administrative | | 3,091 |
| | 3,290 |
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| | 46,564 |
| | 46,153 |
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Operating income | | 55,446 |
| | 43,603 |
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| | | | |
Other income (expense): | | | | |
Equity in earnings of equity method investments | | 2,765 |
| | 734 |
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Interest expense | | (10,535 | ) | | (8,768 | ) |
Interest income | | 112 |
| | — |
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Gain on sale of assets | | — |
| | 159 |
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Other expense | | (8 | ) | | — |
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| | (7,666 | ) | | (7,875 | ) |
Income before income taxes | | 47,780 |
| | 35,728 |
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State income tax expense | | (95 | ) | | (101 | ) |
Net income | | 47,685 |
| | 35,627 |
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Allocation of net income attributable to noncontrolling interests | | (4,927 | ) | | (4,027 | ) |
Net income attributable to Holly Energy Partners | | 42,758 |
| | 31,600 |
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General partner interest in net income, including incentive distributions | | (11,886 | ) | | (9,607 | ) |
Limited partners’ interest in net income | | $ | 30,872 |
| | $ | 21,993 |
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Limited partners’ per unit interest in earnings—basic and diluted | | $ | 0.52 |
| | $ | 0.37 |
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Weighted average limited partners’ units outstanding | | 58,657 |
| | 58,657 |
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(1) Retrospectively adjusted as described in Note 1.
See accompanying notes.
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
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| | Three Months Ended March 31, |
| | 2016 | | 2015 (1) |
Net income | | $ | 47,685 |
| | $ | 35,627 |
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Other comprehensive income: | | | | |
Change in fair value of cash flow hedging instruments | | (683 | ) | | (1,280 | ) |
Reclassification adjustment to net income on partial settlement of cash flow hedge | | 230 |
| | 531 |
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Other comprehensive income (loss) | | (453 | ) | | (749 | ) |
Comprehensive income before noncontrolling interest | | 47,232 |
| | 34,878 |
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Allocation of comprehensive income to noncontrolling interests | | (4,927 | ) | | (4,027 | ) |
Comprehensive income attributable to Holly Energy Partners | | $ | 42,305 |
| | $ | 30,851 |
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(1) Retrospectively adjusted as described in Note 1.
See accompanying notes.
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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| | Three Months Ended March 31, |
| | 2016 | | 2015 (1) |
Cash flows from operating activities | | | | |
Net income | | $ | 47,685 |
| | $ | 35,627 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 16,551 |
| | 14,798 |
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(Gain) loss on sale of assets | | — |
| | (159 | ) |
Amortization of deferred charges | | 593 |
| | 436 |
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Amortization of restricted and performance units | | 651 |
| | 896 |
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Distributions less than income from equity investments | | (365 | ) | | — |
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(Increase) decrease in operating assets: | | | | |
Accounts receivable—trade | | 657 |
| | (5,065 | ) |
Accounts receivable—affiliates | | (637 | ) | | 5,804 |
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Prepaid and other current assets | | (128 | ) | | 39 |
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Increase (decrease) in operating liabilities: | | | | |
Accounts payable—trade | | (1,082 | ) | | 1,748 |
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Accounts payable—affiliates | | (5,460 | ) | | 10,564 |
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Accrued interest | | (4,780 | ) | | (4,811 | ) |
Deferred revenue | | (4,588 | ) | | (3,355 | ) |
Accrued property taxes | | 343 |
| | 42 |
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Other current liabilities | | (843 | ) | | 57 |
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Other, net | | (295 | ) | | 4,171 |
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Net cash provided by operating activities | | 48,302 |
| | 60,792 |
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| | | | |
Cash flows from investing activities | | | | |
Additions to properties and equipment | | (17,873 | ) | | (24,227 | ) |
Purchase of El Dorado crude tanks | | — |
| | (27,500 | ) |
Proceeds from sale of assets and other | | 12 |
| | 218 |
|
Distributions in excess of equity in earnings of equity investments | | 99 |
| | 16 |
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Net cash used for investing activities | | (17,762 | ) | | (51,493 | ) |
| | | | |
Cash flows from financing activities | | | | |
Borrowings under credit agreement | | 522,000 |
| | 153,500 |
|
Repayments of credit agreement borrowings | | (469,000 | ) | | (130,500 | ) |
Contributions from HFC for El Dorado Operating acquisition | | — |
| | 12,563 |
|
Distributions to HEP unitholders | | (44,960 | ) | | (40,865 | ) |
Distributions to noncontrolling interest | | (1,250 | ) | | (1,250 | ) |
Distribution to HFC for Tulsa Tank acquisition | | (39,500 | ) | | — |
|
Contributions from HFC for Tulsa Tank expenditures | | 99 |
| | 472 |
|
Purchase of units for incentive grants | | (784 | ) | | (247 | ) |
Deferred financing costs | | (2,964 | ) | | — |
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Other | | (160 | ) | | — |
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Net cash used by financing activities | | (36,519 | ) | | (6,327 | ) |
| | | | |
Cash and cash equivalents | | | | |
Increase (decrease) for the period | | (5,979 | ) | | 2,972 |
|
Beginning of period | | 15,013 |
| | 2,830 |
|
End of period | | $ | 9,034 |
| | $ | 5,802 |
|
(1) Retrospectively adjusted as described in Note 1.
See accompanying notes.
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| | Common Units | | General Partner Interest | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest | | Total Equity |
| | |
Balance December 31, 2015 (1) | | $ | 428,019 |
| | $ | (130,297 | ) | | $ | 190 |
| | $ | 94,429 |
| | $ | 392,341 |
|
Contribution from HFC for Osage transaction | | — |
| | 32,455 |
| | — |
| | — |
| | 32,455 |
|
Distribution to HFC for Tulsa Tank acquisition
| | — |
| | (39,500 | ) | | — |
| | — |
| | (39,500 | ) |
Contribution from HFC for Tulsa Tank expenditures | | — |
| | 99 |
| | — |
| | — |
| | 99 |
|
Distributions to HEP unitholders | | (33,126 | ) | | (11,834 | ) | | — |
| | — |
| | (44,960 | ) |
Distributions to noncontrolling interest | | — |
| | — |
| | — |
| | (1,250 | ) | | (1,250 | ) |
Purchase of units for incentive grants | | (784 | ) | | — |
| | — |
| | — |
| | (784 | ) |
Amortization of restricted and performance units | | 651 |
| | — |
| | — |
| | — |
| | 651 |
|
Class B unit accretion | | (1,829 | ) | | (37 | ) | | — |
| | — |
| | (1,866 | ) |
Net income | | 32,738 |
| | 11,886 |
| | — |
| | 3,061 |
| | 47,685 |
|
Other comprehensive loss | | — |
| | — |
| | (453 | ) | | — |
| | (453 | ) |
Balance March 31, 2016 | | $ | 425,669 |
| | $ | (137,228 | ) | | $ | (263 | ) | | $ | 96,240 |
| | $ | 384,418 |
|
(1) Retrospectively adjusted as described in Note 1.
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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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 which is 39% owned (including the 2% general partner interest) by HollyFrontier Corporation (“HFC”) and its subsidiaries. We commenced operations on July 13, 2004, upon the completion of our initial public offering. In these consolidated financial statements, the words “we,” “our,” “ours” and “us” refer to HEP unless the context otherwise indicates.
We operate in one reportable segment which represents the aggregation of our petroleum product and crude pipelines business and terminals, tankage, loading rack facilities and refinery processing units.
We own and operate petroleum product and crude oil pipelines, terminals, tankage and loading rack facilities and refinery processing units that support HFC’s refining and marketing operations in the Mid-Continent, Southwest and Rocky Mountain regions of the United States and Alon USA, Inc.’s (“Alon”) refinery in Big Spring, Texas. Additionally, we own a 75% interest in UNEV Pipeline, LLC, a 50% interest in Frontier Pipeline Company, a 50% interest in Osage Pipe Line Company, LLC (“Osage”), and a 25% interest in SLC Pipeline LLC.
We generate revenues by charging tariffs for transporting petroleum products and crude oil through our pipelines, by charging fees for terminalling and storing refined products and other hydrocarbons, providing other services at our storage tanks and terminals and by charging fees for processing hydrocarbon feedstocks through our refinery processing units. We do not take ownership of products that we transport, terminal, store or process, and therefore, we are not exposed directly to changes in commodity prices.
The consolidated financial statements included herein have been prepared without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The interim financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of our results for the interim periods. Such adjustments are considered to be of a normal recurring nature. Although certain notes and other information required by U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2015. 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, 2016.
Acquisitions
Tulsa Tanks
On March 31, 2016, we acquired crude oil tanks located at HFC’s Tulsa refinery from an affiliate of Plains All American Pipeline, L.P. (“Plains”) for $39.5 million. Previously in 2009, HFC sold these tanks to Plains and leased them back, and due to HFC’s continuing interest in the tanks, HFC accounted for the transaction as a financing arrangement. Accordingly, the tanks remained on HFC’s balance sheet and were depreciated for accounting purposes.
As we are a consolidated variable interest entity of HFC, this transaction was recorded as a transfer between entities under common control and reflects HFC’s carrying basis in the net assets acquired. We have retrospectively adjusted our financial position and operating results as if these crude oil tanks were owned for all periods while we were under common control of HFC. The 2015 consolidated income statement was adjusted to reflect a $0.2 million increase in operating costs and expenses for the three months ended March 31, 2015, the consolidated balance sheet was adjusted to reflect increases of $9.3 million in net properties and equipment, $0.1 million in other long-term liabilities and $9.2 million in general partner interest at March 31, 2015. The consolidated statement of cash flows for the three months ended March 31, 2015, reflects these changes in cash flows from investing and financing activities.
In connection with this transaction, we expect to enter into a 10-year throughput agreement containing minimum quarterly throughput commitments from HFC that are expected to provide minimum annualized revenues of $6.1 million.
HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Osage
On February 22, 2016, HFC obtained a 50% membership interest in Osage in a non-monetary exchange for a 20-year terminalling services agreement, whereby a subsidiary of Magellan Midstream Partners (“Magellan”) will provide terminalling services for all HFC products originating in Artesia, New Mexico requiring terminalling in or through El Paso, Texas. Osage is the owner of the Osage Pipeline, a 135-mile pipeline that transports crude oil from Cushing, Oklahoma to HFC’s El Dorado Refinery in Kansas and also connects to the Jayhawk pipeline serving the CHS Inc. refinery in McPherson, Kansas. The Osage Pipeline is the primary pipeline supplying HFC’s El Dorado refinery with crude oil.
Concurrent with this transaction, we entered into a non-monetary exchange with HFC, whereby we received HFC’s interest in Osage in exchange for our El Paso terminal. Under this exchange, we agreed to build two connections on our south products pipeline system that will permit HFC access to Magellan’s El Paso terminal. Effective upon the closing of this exchange, we are the named operator of the Osage Pipeline and are working to transition into that role. Since we are a consolidated variable interest entity of HFC, this transaction was recorded as a transfer between entities under common control and reflects HFC’s carrying basis of its 50% membership interest in Osage of $44.0 million offset by our net carrying basis in the El Paso terminal of $12.0 million with the difference treated as a contribution from HFC. The carrying value of our 50% membership interest in Osage of $44.0 million exceeds the amount of the underlying equity in net assets recorded by Osage by $33.0 million.
El Dorado Operating
On November 1, 2015, we acquired from HollyFrontier El Dorado Refining LLC, a wholly owned subsidiary of HFC, all the outstanding membership interests in El Dorado Operating LLC (“El Dorado Operating”), which owns the newly constructed naphtha fractionation and hydrogen generation units at HFC’s El Dorado refinery, for cash consideration of $62.0 million. In connection with this transaction, we entered into 15-year tolling agreements containing minimum quarterly throughput commitments from HFC that provide minimum annualized revenues of $15.3 million.
As we are a consolidated variable interest entity of HFC, this transaction was recorded as a transfer between entities under common control and reflects HFC’s carrying basis in El Dorado Operating’s assets and liabilities. We have retrospectively adjusted our financial position and operating results as if El Dorado Operating were a consolidated subsidiary for all periods while we were under common control of HFC. The consolidated statement of cash flows for the three months ending March 31, 2015, reflects a $12.6 million recast between investing activities and financing activities.
New Accounting Pronouncements
Revenue Recognition
In May 2014, an accounting standard update was issued requiring revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the expected consideration for these goods or services. This standard has an effective date of January 1, 2018. We are evaluating the impact of this standard.
Consolidation
In February 2015, the FASB issued a standard that modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. We adopted the new standard effective January 1, 2016. This standard had no impact on the entities we consolidate.
Financial Assets and Liabilities
In January 2016, an accounting standard update was issued requiring changes in the accounting and disclosures for financial instruments. This standard will become effective beginning with our 2018 reporting year. We are evaluating the impact of this standard.
Leases
In February 2016, an accounting standard update was issued requiring leases to be measured and recognized as a lease liability, with a corresponding right-of-use asset on the balance sheet. This standard has an effective date of January 1, 2019, and we are evaluating the impact of this standard.
Earnings Per Unit
In April 2015, an accounting standard update was issued requiring changes to the allocation of the earnings or losses of a transferred business for periods before the date of a dropdown of net assets accounted for as a common control transaction entirely to the general partner for purposes of calculating historical earnings per unit. We have adopted this standard as of January 1, 2016, as
HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
required. In connection with the dropdown of assets from HFC’s Tulsa refinery on March 31, 2016, we reduced net income by $0.2 million for the three months ending March 31, 2015. This reduction had no impact on the historical earnings per unit.
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Note 2: | Financial Instruments |
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, debt and interest rate swaps. The carrying amounts of cash and 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.
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:
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• | (Level 1) Quoted prices in active markets for identical assets or liabilities. |
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• | (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. |
The carrying amounts and estimated fair values of our senior notes and interest rate swaps were as follows:
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| | | | | | | | | | | | | | | | | | |
| | | | March 31, 2016 | | December 31, 2015 |
Financial Instrument | | Fair Value Input Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| | | | (In thousands) |
Assets: | | | | | | | | | | |
Interest rate swaps | | Level 2 | | $ | — |
| | $ | — |
| | $ | 304 |
| | $ | 304 |
|
| | | | | | | | | | |
Liabilities: | | | | | | | | | | |
6.5% Senior notes | | Level 2 | | $ | 296,944 |
| | $ | 295,500 |
| | $ | 296,752 |
| | $ | 295,500 |
|
Interest rate swaps | | Level 2 | | 263 |
| | 263 |
| | 114 |
| | 114 |
|
| | | | $ | 297,207 |
| | $ | 295,763 |
| | $ | 296,866 |
| | $ | 295,614 |
|
Level 2 Financial Instruments
Our senior notes and interest rate swaps 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. The fair value of our interest rate swaps is based on the net present value of expected future cash flows related to both variable and fixed-rate legs of the swap agreement. This measurement is computed using the forward London Interbank Offered Rate (“LIBOR”) yield curve, a market-based observable input.
See Note 6 for additional information on these instruments.
HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
| |
Note 3: | Properties and Equipment |
The carrying amounts of our properties and equipment are as follows:
|
| | | | | | | | |
| | March 31, 2016 | | December 31, 2015 (1) |
| | (In thousands) |
Pipelines, terminals and tankage | | $ | 1,200,516 |
| | $ | 1,231,597 |
|
Land and right of way | | 65,274 |
| | 66,215 |
|
Refinery assets | | 64,371 |
| | 63,336 |
|
Construction in progress | | 43,201 |
| | 28,249 |
|
Other | | 23,573 |
| | 22,200 |
|
| | 1,396,935 |
| | 1,411,597 |
|
Less accumulated depreciation | | 344,163 |
| | 352,418 |
|
| | $ | 1,052,772 |
| | $ | 1,059,179 |
|
(1) Retrospectively adjusted as described in Note 1.
We capitalized $0.1 million and $0.3 million in interest attributable to construction projects during the three months ended March 31, 2016 and 2015, respectively.
Depreciation expense was $14.7 million and $12.9 million for the three months ended March 31, 2016 and 2015, respectively.
| |
Note 4: | Transportation Agreements |
Our transportation agreements represent a portion of the total purchase price of certain assets acquired from Alon in 2005 and from HFC in 2008. The Alon agreement is being amortized over 30 years ending 2035 (the initial 15-year term of the agreement plus an expected 15-year extension period), and the HFC agreement is being amortized over 15 years ending 2023 (the term of the HFC agreement).
The carrying amounts of our transportation agreements are as follows:
|
| | | | | | | | |
| | March 31, 2016 | | December 31, 2015 |
| | (In thousands) |
Alon transportation agreement | | $ | 59,933 |
| | $ | 59,933 |
|
HFC transportation agreement | | 74,231 |
| | 74,231 |
|
Other | | 50 |
| | 50 |
|
| | 134,214 |
| | 134,214 |
|
Less accumulated amortization | | 62,147 |
| | 60,409 |
|
| | $ | 72,067 |
| | $ | 73,805 |
|
We have additional transportation agreements with HFC resulting from historical transactions consisting of pipeline, terminal and tankage assets contributed to us or acquired from HFC. These transactions occurred while we were a consolidated variable interest entity of HFC; therefore, our basis in these agreements is zero and does not reflect a step-up in basis to fair value.
| |
Note 5: | Employees, Retirement and Incentive Plans |
Direct support for our operations is provided by Holly Logistic Services, L.L.C. (“HLS”), an HFC subsidiary, which utilizes personnel employed by HFC who are dedicated to performing services for us. Their costs, including salaries, bonuses, payroll taxes, benefits and other direct costs, are charged to us monthly in accordance with an omnibus agreement that we have with HFC. These employees participate in the retirement and benefit plans of HFC. Our share of retirement and benefit plan costs was $1.6 million and $1.4 million for the three months ended March 31, 2016 and 2015, respectively.
Under HLS’s secondment agreement with HFC (the “Secondment Agreement”), certain employees of HFC are seconded to HLS to provide operational and maintenance services for certain of our processing, refining, pipeline and tankage assets at the El Dorado,
HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Cheyenne and Tulsa refineries, and HLS reimburses HFC for its prorated portion of the wages, benefits, and other costs related to these employees.
We have a Long-Term Incentive Plan for employees and non-employee directors who perform services for us. The Long-Term Incentive Plan consists of four components: restricted or phantom units, performance units, unit options and unit appreciation rights.
As of March 31, 2016, we have two types of incentive-based awards outstanding, which are described below. The compensation cost charged against income was $0.7 million and $0.8 million for the three months ended March 31, 2016 and 2015, respectively. We currently purchase units in the open market instead of issuing new units for settlement of all unit awards under our Long-Term Incentive Plan. As of March 31, 2016, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which 1,480,449 have not yet been granted, assuming no forfeitures of the unvested units and full achievement of goals for the performance units already granted.
Restricted and Phantom Units
Under our Long-Term Incentive Plan, we grant restricted units to 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 and voting rights on these units from the date of grant.
In addition, we previously granted phantom units to certain employees. All outstanding phantom units vested in 2015, and no phantom units are currently outstanding. Vested units were paid in common units. Full ownership of the units transferred to the recipients at vesting, and the recipients did not have voting or distribution rights on these units until they vested.
The fair value of each restricted unit award is measured at the market price as of the date of grant and is amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award.
A summary of restricted unit activity and changes during the three months ended March 31, 2016, is presented below:
|
| | | | | | | |
Restricted Units | | Units | | Weighted Average Grant-Date Fair Value |
Outstanding at January 1, 2016 (nonvested) | | 101,408 |
| | $ | 33.63 |
|
Granted | | 10,725 |
| | 24.48 |
|
Outstanding at March 31, 2016 (nonvested) | | 112,133 |
| | $ | 32.76 |
|
As of March 31, 2016, there was $2.2 million of total unrecognized compensation expense related to nonvested restricted unit grants, which is expected to be recognized over a weighted-average period of 1.3 years.
Performance Units
Under our Long-Term Incentive Plan, we grant performance units to selected executives who perform services for us. Performance units granted are payable in common units at the end of a three-year performance period based upon the growth in our distributable cash flow per common unit over the performance period. As of March 31, 2016, estimated unit payouts for outstanding nonvested performance unit awards ranged between 100% and 150%.
We granted 10,725 performance units during the three months ended March 31, 2016. Performance units granted in 2015 and during the three months ended March 31, 2016, vest over a three-year performance period ending December 31, 2018 and are payable in HEP common units. The number of units actually earned will be based on the growth of our distributable cash flow per common unit over the performance period, and can range from 50% to 150% of the target number of performance units granted. Although common units are not transferred to the recipients until the performance units vest, the recipients have distribution rights with respect to the common units from the date of grant.
HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
A summary of performance unit activity and changes during the three months ended March 31, 2016, is presented below: |
| | | |
Performance Units | | Units |
Outstanding at January 1, 2016 (nonvested) | | 45,494 |
|
Granted | | 10,725 |
|
Vesting and transfer of common units to recipients | | (26,157 | ) |
Outstanding at March 31, 2016 (Nonvested) | | 30,062 |
|
The grant-date fair value of performance units vested and transferred to recipients during the three months ended March 31, 2016, was $1.1 million. Based on the weighted average fair value of performance units outstanding at March 31, 2016, of $0.9 million, there was $0.7 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of 2.4 years.
Credit Agreement
In March 2016, we amended our senior secured revolving credit facility (the “Credit Agreement”) expiring in November 2018, increasing the size of the Credit Agreement from $850 million to $1.2 billion. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. It is also available to fund letters of credit up to a $50 million sub-limit.
Our obligations under the Credit Agreement are collateralized by substantially all of our assets. Indebtedness under the Credit Agreement involves recourse to HEP Logistics Holdings, L.P. (“HEP Logistics”), our general partner, and is guaranteed by our material, wholly-owned subsidiaries. Any recourse to HEP Logistics would be limited to the extent of its assets, which other than its investment in us are not significant. We may prepay all loans at any time without penalty, except for payment of certain breakage and related costs.
The Credit Agreement imposes certain requirements on us with which we were in compliance as of March 31, 2016, including: a prohibition against distribution to unitholders if, before or after the distribution, a potential default or an event of default as defined in the agreement would occur; limitations on our ability to incur debt, make loans, acquire other companies, change the nature of our business, enter into a merger or consolidation, or sell assets; and covenants that require maintenance of a specified EBITDA to interest expense ratio, total debt to EBITDA ratio and senior debt to EBITDA ratio. If an event of default exists under the Credit Agreement, the lenders will be able to accelerate the maturity of the debt and exercise other rights and remedies.
Senior Notes
We have $300 million in aggregate principal amount outstanding of 6.5% senior notes (the “6.5% Senior Notes”) maturing March 2020. The 6.5% Senior Notes are unsecured and impose certain restrictive covenants, with which we were in compliance as of March 31, 2016, 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. At any time when the 6.5% Senior Notes are rated investment grade by both Moody’s and 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 6.5% Senior Notes.
Indebtedness under the 6.5% Senior Notes involves recourse to HEP Logistics, our general partner, and is guaranteed by our wholly-owned subsidiaries. However, any recourse to HEP Logistics would be limited to the extent of its assets, which, other than its investment in us, are not significant.
HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Long-term Debt
The carrying amounts of our long-term debt are as follows: |
| | | | | | | | |
| | March 31, 2016 | | December 31, 2015 |
| | (In thousands) |
Credit Agreement | | | | |
Amount outstanding | | $ | 765,000 |
| | $ | 712,000 |
|
| | | | |
6.5% Senior Notes | | | | |
Principal | | 300,000 |
| | 300,000 |
|
Unamortized discount and debt issuance costs | | (3,056 | ) | | (3,248 | ) |
| | 296,944 |
| | 296,752 |
|
| | | | |
Total long-term debt | | $ | 1,061,944 |
| | $ | 1,008,752 |
|
Interest Rate Risk Management
We use interest rate swaps (derivative instruments) to manage our exposure to interest rate risk.
As of March 31, 2016, we have two interest rate swaps with identical terms that hedge our exposure to the cash flow risk caused by the effects of LIBOR changes on $150 million of Credit Agreement advances. The swaps effectively convert $150 million of our LIBOR based debt to fixed rate debt having an interest rate of 0.74% plus an applicable margin of 2.25% as of March 31, 2016, which equaled an effective interest rate of 2.99%. Both of these swap contracts mature in July 2017.
We have designated these interest rate swaps as cash flow hedges. Based on our assessment of effectiveness using the change in variable cash flows method, we have determined these interest rate swaps are effective in offsetting the variability in interest payments on $150 million of our variable rate debt resulting from changes in LIBOR. Under hedge accounting, we adjust our cash flow hedges on a quarterly basis to their fair values with the offsetting fair value adjustments to accumulated other comprehensive income (loss). Also on a quarterly basis, we measure hedge effectiveness by comparing the present value of the cumulative change in the expected future interest to be paid or received on the variable leg of our swaps against the expected future interest payments on $150 million of our variable rate debt. Any ineffectiveness is recorded directly to interest expense. As of March 31, 2016, we had no ineffectiveness on our cash flow hedges.
At March 31, 2016, we have accumulated other comprehensive loss of $0.3 million that relates to our current cash flow hedging instruments. Approximately $0.2 million will be transferred from accumulated other comprehensive loss into interest expense as interest is paid on the underlying swap agreement over the next twelve-month period, assuming interest rates remain unchanged.
Additional information on our interest rate swaps is as follows:
|
| | | | | | | | | | | | |
Derivative Instrument | | Balance Sheet Location | | Fair Value | | Location of Offsetting Balance | | Offsetting Amount |
| | (In thousands) |
March 31, 2016 | | | | | | | | |
Interest rate swaps designated as cash flow hedging instrument: | | | | | | |
Variable-to-fixed interest rate swap contracts ($150 million of LIBOR-based debt interest) | | Other long-term liabilities | | $ | (263 | ) | | Accumulated other comprehensive income | | $ | (263 | ) |
| | | | $ | (263 | ) | | | | $ | (263 | ) |
| | | | | | | | |
December 31, 2015 | | | | | | | | |
Interest rate swaps designated as cash flow hedging instrument: | | | | | | |
Variable-to-fixed interest rate swap contract ($150 million of LIBOR-based debt interest) | | Other long-term assets | | $ | 304 |
| | Accumulated other comprehensive loss | | $ | 304 |
|
Variable-to-fixed interest rate swap contracts ($155 million of LIBOR-based debt interest) | | Other long-term liabilities | | (114 | ) | | Accumulated other comprehensive income | | (114 | ) |
| | | | $ | 190 |
| | | | $ | 190 |
|
HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Interest Expense and Other Debt Information
Interest expense consists of the following components:
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2016 | | 2015 |
| | (In thousands) |
Interest on outstanding debt: | | | | |
Credit Agreement, net of interest on interest rate swaps | | $ | 5,006 |
| | $ | 3,657 |
|
6.5% Senior Notes | | 4,875 |
| | 4,875 |
|
Amortization of discount and deferred debt issuance costs | | 593 |
| | 436 |
|
Commitment fees | | 201 |
| | 77 |
|
Total interest incurred | | 10,675 |
| | 9,045 |
|
Less capitalized interest | | 140 |
| | 277 |
|
Net interest expense | | $ | 10,535 |
| | $ | 8,768 |
|
Cash paid for interest | | $ | 14,841 |
| | $ | 13,400 |
|
Capital Lease Obligations
Our capital lease obligations, which relate to vehicle leases with initial terms of 33 to 36 months, are $1.8 million as of both March 31, 2016 and December 31, 2015. The total cost of assets under capital leases was $3.3 million and $3.0 million as of March 31, 2016 and December 31, 2015, respectively, with accumulated depreciation of $1.3 million and $1.1 million as of March 31, 2016 and December 31, 2015, respectively. We include depreciation of capital leases in depreciation and amortization in our consolidated statements of income.
| |
Note 7: | Significant Customers |
All revenues are domestic revenues, of which 89% are currently generated from our two largest customers: HFC and Alon.
The following table presents the percentage of total revenues generated by each of these customers:
|
| | | | | | |
| | Three Months Ended March 31, |
| | 2016 | | 2015 |
HFC | | 81 | % | | 81 | % |
Alon | | 8 | % | | 9 | % |
| |
Note 8: | Related Party Transactions |
We serve HFC’s refineries under long-term pipeline, terminal and tankage throughput agreements, and refinery processing unit tolling agreements expiring from 2019 to 2030. Under these agreements, HFC agrees to transport, store and process throughput volumes of refined product, crude oil and feedstocks on our pipelines, terminals, tankage, loading rack facilities and refinery processing units that result in minimum annual payments to us. These minimum annual payments or revenues are subject to annual rate adjustments on July 1st each year based on the Producer Price Index (“PPI”) or Federal Energy Regulatory Commission (“FERC”) index. As of March 31, 2016, these agreements with HFC require minimum annualized payments to us of $263.7 million.
If HFC fails to meet its minimum volume commitments under the agreements in any quarter, it will be required to pay us the amount of any shortfall in cash by the last day of the month following the end of the quarter. Under certain of these agreements, a shortfall payment may be applied as a credit in the following four quarters after its minimum obligations are met.
Under certain provisions of an omnibus agreement we have with HFC (the “Omnibus Agreement”), we pay HFC an annual administrative fee (currently $2.5 million) for the provision by HFC or its affiliates of various general and administrative services to us. This fee does not include the salaries of personnel employed by HFC who perform services for us on behalf of HLS or the cost of their employee benefits, which are charged to us separately by HFC. Also, we reimburse HFC and its affiliates for direct expenses they incur on our behalf.
HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Related party transactions with HFC are as follows:
| |
• | Revenues received from HFC were $82.8 million and $72.3 million for the three months ended March 31, 2016 and 2015, respectively. |
| |
• | HFC charged us general and administrative services under the Omnibus Agreement of $0.6 million for each of the three months ended March 31, 2016 and 2015. |
| |
• | We reimbursed HFC for costs of employees supporting our operations of $9.8 million and $8.8 million for the three months ended March 31, 2016 and 2015, respectively. |
| |
• | HFC reimbursed us $1.8 million and $2.6 million for the three months ended March 31, 2016 and 2015, respectively, for certain reimbursable costs and capital projects. |
| |
• | We distributed $24.5 million and $21.6 million for the three months ended March 31, 2016 and 2015, respectively, to HFC as regular distributions on its common units and general partner interest, including general partner incentive distributions. |
| |
• | Accounts receivable from HFC were $33.1 million and $32.5 million at March 31, 2016, and December 31, 2015, respectively. |
| |
• | Accounts payable to HFC were $6.2 million and $11.6 million at March 31, 2016, and December 31, 2015, respectively. |
| |
• | Revenues for the three months ended March 31, 2016 and 2015, include $5.2 million and $5.6 million, respectively, of shortfall payments billed in 2015 and 2014, respectively, as HFC did not exceed its minimum volume commitment in any of the subsequent four quarters. Deferred revenue in the consolidated balance sheets at March 31, 2016, and December 31, 2015, includes $1.5 million and $6.4 million, respectively, relating to certain shortfall billings. It is possible that HFC may not exceed its minimum obligations to receive credit for any of the $1.5 million deferred at March 31, 2016. |
| |
• | On February 22, 2016, HFC obtained a 50% membership interest in Osage in a non-monetary exchange, whereby a subsidiary of Magellan will provide terminalling services for all HFC products originating in Artesia, New Mexico that require terminalling in or through El Paso, Texas. Concurrent with this transaction, we entered into a non-monetary exchange with HFC, whereby we received HFC’s interest in Osage in exchange for our El Paso terminal. See Note 1 for a description of this transaction. |
| |
• | On March 31, 2016, we acquired crude oil tanks located at HFC’s Tulsa refinery from an affiliate of Plains All American Pipeline, L.P. for $39.5 million. See Note 1 for a description of this transaction. |
As of March 31, 2016, HFC held 22,380,030 of our common units and the 2% general partner interest, which together constituted a 39% ownership interest in us. Additionally, HFC owned all incentive distribution rights in us.
Allocations of Net Income
Net income attributable to HEP is allocated between limited partners and the general partner interest in accordance with the provisions of the partnership agreement. HEP net income allocated to the general partner includes incentive distributions that are declared subsequent to quarter end. After the amount of incentive distributions is allocated to the general partner, the remaining net income attributable to HEP is allocated to the partners based on their weighted-average ownership percentage during the period.
HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
The following table presents the allocation of the general partner interest in net income for the periods presented below:
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2016 | | 2015 |
| | (In thousands) |
General partner interest in net income | | $ | 413 |
| | $ | 246 |
|
General partner incentive distribution | | 11,473 |
| | 9,361 |
|
Total general partner interest in net income | | $ | 11,886 |
| | $ | 9,607 |
|
Cash Distributions
Our general partner, HEP Logistics, is entitled to incentive distributions if the amount we distribute with respect to any quarter exceeds specified target levels.
On April 22, 2016, we announced our cash distribution for the first quarter of 2016 of $0.575 per unit. The distribution is payable on all common and general partner units and will be paid May 13, 2016, to all unitholders of record on May 2, 2016.
The following table presents the allocation of our regular quarterly cash distributions to the general and limited partners for the periods in which they apply. Our distributions are declared subsequent to quarter end; therefore, the amounts presented do not reflect distributions paid during the periods presented below.
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2016 | | 2015 |
| | (In thousands, except per unit data) |
General partner interest in distribution | | $ | 948 |
| | $ | 860 |
|
General partner incentive distribution | | 11,473 |
| | 9,361 |
|
Total general partner distribution | | 12,421 |
| | 10,221 |
|
Limited partner distribution | | 33,728 |
| | 31,528 |
|
Total regular quarterly cash distribution | | $ | 46,149 |
| | $ | 41,749 |
|
Cash distribution per unit applicable to limited partners | | $ | 0.5750 |
| | $ | 0.5375 |
|
As a master limited partnership, we distribute our available cash, which historically has exceeded our net income attributable to HEP because depreciation and amortization expense represents a non-cash charge against income. The result is a decline in our partners’ equity since our regular quarterly distributions have exceeded our quarterly net income attributable to HEP. Additionally, if the asset contributions and acquisitions from HFC had occurred while we were not a consolidated variable interest entity of HFC, our acquisition cost in excess of HFC’s historical basis in the transferred assets would have been recorded in our financial statements at the time of acquisition as increases to our properties and equipment and intangible assets instead of decreases to our partners’ equity.
We incurred no expenses for the three months ended March 31, 2016 and $4.2 million for the three months ended March 31, 2015, for environmental remediation obligations. The accrued environmental liability, net of expected recoveries from indemnifying parties, reflected in our consolidated balance sheets was $7.4 million and $7.7 million at March 31, 2016, and December 31, 2015, respectively, of which $5.8 million and $6.1 million, respectively, were classified as other long-term liabilities. These accruals include remediation and monitoring costs expected to be incurred over an extended period of time.
Under the Omnibus Agreement and certain transportation agreements and purchase agreements with HFC, HFC has agreed to indemnify us, subject to certain monetary and time limitations, for environmental noncompliance and remediation liabilities associated with certain assets transferred to us from HFC and occurring or existing prior to the date of such transfers. As of March 31, 2016, and December 31, 2015, our accrued environmental liability included $1.0 million and $6.4 million, respectively, for HFC indemnified liabilities, and other assets included equal and offsetting balances representing amounts due from HFC related to indemnifications for environmental remediation liabilities.
HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
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 operation or cash flows.
| |
Note 12: | Supplemental Guarantor/Non-Guarantor Financial Information |
Obligations of HEP (“Parent”) under the Senior Notes have been jointly and severally guaranteed by each of its direct and indirect 100% owned subsidiaries (“Guarantor Subsidiaries”). These guarantees are full and unconditional, subject to certain customary release provisions. These circumstances include (i) when a Guarantor Subsidiary is sold or sells all or substantially all of its assets, (ii) when a Guarantor Subsidiary is declared “unrestricted” for covenant purposes, (iii) when a Guarantor Subsidiary’s guarantee of other indebtedness is terminated or released and (iv) when the requirements for legal defeasance or covenant defeasance or to discharge the Senior Notes have been satisfied.
The following financial information presents condensed consolidating balance sheets, statements of comprehensive income, and statements of cash flows of the Parent, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries. The information has been presented as if the Parent accounted for its ownership in the Guarantor Subsidiaries, and the Guarantor Restricted Subsidiaries accounted for the ownership of the Non-Guarantor Non-Restricted Subsidiaries, using the equity method of accounting.
HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Condensed Consolidating Balance Sheet
|
| | | | | | | | | | | | | | | | | | | | |
March 31, 2016 | | Parent | | Guarantor Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated |
| | (In thousands) |
ASSETS | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 2 |
| | $ | 1,003 |
| | $ | 8,029 |
| | $ | — |
| | $ | 9,034 |
|
Accounts receivable | | — |
| | 36,505 |
| | 4,721 |
| | (170 | ) | | 41,056 |
|
Prepaid and other current assets | | 199 |
| | 3,766 |
| | 1,216 |
| | — |
| | 5,181 |
|
Total current assets | | 201 |
| | 41,274 |
| | 13,966 |
| | (170 | ) | | 55,271 |
|
| | | | | | | | | | |
Properties and equipment, net | | — |
| | 672,825 |
| | 379,947 |
| | — |
| | 1,052,772 |
|
Investment in subsidiaries
| | 586,328 |
| | 288,721 |
| | — |
| | (875,049 | ) | | — |
|
Transportation agreements, net | | — |
| | 72,067 |
| | — |
| | — |
| | 72,067 |
|
Goodwill | | — |
| | 256,498 |
| | — |
| | — |
| | 256,498 |
|
Equity method investments | | — |
| | 124,134 |
| | — |
| | — |
| | 124,134 |
|
Other assets | | 658 |
| | 11,161 |
| | — |
| | — |
| | 11,819 |
|
Total assets | | $ | 587,187 |
| | $ | 1,466,680 |
| | $ | 393,913 |
| | $ | (875,219 | ) | | $ | 1,572,561 |
|
| | | | | | | | | | |
LIABILITIES AND EQUITY | | | | | | | | | | |
Current liabilities: | | | | | | | | | | |
Accounts payable | | $ | — |
| | $ | 12,124 |
| | $ | 6,526 |
| | $ | (170 | ) | | $ | 18,480 |
|
Accrued interest | | 1,625 |
| | 347 |
| | — |
| | — |
| | 1,972 |
|
Deferred revenue | | — |
| | 6,736 |
| | 314 |
| | — |
| | 7,050 |
|
Accrued property taxes | | — |
| | 2,210 |
| | 1,897 |
| | — |
| | 4,107 |
|
Other current liabilities | | 213 |
| | 2,692 |
| | 40 |
| | — |
| | 2,945 |
|
Total current liabilities | | 1,838 |
| | 24,109 |
| | 8,777 |
| | (170 | ) | | 34,554 |
|
| | | | | | | | | | |
Long-term debt | | 296,944 |
| | 765,000 |
| | — |
| | — |
| | 1,061,944 |
|
Other long-term liabilities | | 227 |
| | 15,995 |
| | 175 |
| | — |
| | 16,397 |
|
Deferred revenue | | — |
| | 39,441 |
| | — |
| | — |
| | 39,441 |
|
Class B unit | | — |
| | 35,807 |
| | — |
| | — |
| | 35,807 |
|
Equity - partners | | 288,178 |
| | 586,328 |
| | 384,961 |
| | (971,289 | ) | | 288,178 |
|
Equity - noncontrolling interest | | — |
| | — |
| | — |
| | 96,240 |
| | 96,240 |
|
Total liabilities and equity | | $ | 587,187 |
| | $ | 1,466,680 |
| | $ | 393,913 |
| | $ | (875,219 | ) | | $ | 1,572,561 |
|
HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Condensed Consolidating Balance Sheet
|
| | | | | | | | | | | | | | | | | | | | |
December 31, 2015 (1) | | Parent | | Guarantor Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated |
| | (In thousands) |
ASSETS | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 2 |
| | $ | 5,452 |
| | $ | 9,559 |
| | $ | — |
| | $ | 15,013 |
|
Accounts receivable | | — |
| | 35,558 |
| | 5,715 |
| | (198 | ) | | 41,075 |
|
Prepaid and other current assets | | 174 |
| | 3,634 |
| | 1,246 |
| | — |
| | 5,054 |
|
Total current assets | | 176 |
| | 44,644 |
| | 16,520 |
| | (198 | ) | | 61,142 |
|
| | | | | | | | | | |
Properties and equipment, net | | — |
| | 687,336 |
| | 371,843 |
| | — |
| | 1,059,179 |
|
Investment in subsidiaries | | 600,563 |
| | 283,287 |
| | — |
| | (883,850 | ) | | — |
|
Transportation agreements, net | | — |
| | 73,805 |
| | — |
| | — |
| | 73,805 |
|
Goodwill | | — |
| | 256,498 |
| | — |
| | — |
| | 256,498 |
|
Equity method investments | | — |
| | 79,438 |
| | — |
| | — |
| | 79,438 |
|
Other assets | | 642 |
| | 13,061 |
| | — |
| | — |
| | 13,703 |
|
Total assets | | $ | 601,381 |
| | $ | 1,438,069 |
| | $ | 388,363 |
| | $ | (884,048 | ) | | $ | 1,543,765 |
|
| | | | | | | | | | |
LIABILITIES AND EQUITY | | | | | | | | | | |
Current liabilities: | | | | | | | | | | |
Accounts payable | | $ | — |
| | $ | 19,448 |
| | $ | 3,333 |
| | $ | (198 | ) | | $ | 22,583 |
|
Accrued interest | | 6,500 |
| | 252 |
| | — |
| | — |
| | 6,752 |
|
Deferred revenue | | — |
| | 6,010 |
| | 6,006 |
| | — |
| | 12,016 |
|
Accrued property taxes | | — |
| | 2,627 |
| | 1,137 |
| | — |
| | 3,764 |
|
Other current liabilities | | 7 |
| | 3,802 |
| | — |
| | — |
| | 3,809 |
|
Total current liabilities | | 6,507 |
| | 32,139 |
| | 10,476 |
| | (198 | ) | | 48,924 |
|
| | | | | | | | | | |
Long-term debt | | 296,752 |
| | 712,000 |
| | — |
| | — |
| | 1,008,752 |
|
Other long-term liabilities | | 210 |
| | 20,363 |
| | 171 |
| | — |
| | 20,744 |
|
Deferred revenue | | — |
| | 39,063 |
| | — |
| | — |
| | 39,063 |
|
Class B unit | | — |
| | 33,941 |
| | — |
| | — |
| | 33,941 |
|
Equity - partners | | 297,912 |
| | 600,563 |
| | 377,716 |
| | (978,279 | ) | | 297,912 |
|
Equity - noncontrolling interest | | — |
| | — |
| | — |
| | 94,429 |
| | 94,429 |
|
Total liabilities and equity | | $ | 601,381 |
| | $ | 1,438,069 |
| | $ | 388,363 |
| | $ | (884,048 | ) | | $ | 1,543,765 |
|
(1) Retrospectively adjusted as described in Note 1.
HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Condensed Consolidating Statement of Comprehensive Income
|
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2016 | | Parent | | Guarantor Restricted Subsidiaries | | Non-Guarantor Non-restricted Subsidiaries | | Eliminations | | Consolidated |
| | (In thousands) |
Revenues: | | | | | | | | | | |
Affiliates | | $ | — |
| | $ | 72,252 |
| | $ | 10,594 |
| | $ | — |
| | $ | 82,846 |
|
Third parties | | — |
| | 10,732 |
| | 8,432 |
| | — |
| | 19,164 |
|
| | — |
| | 82,984 |
| | 19,026 |
| | — |
| | 102,010 |
|
Operating costs and expenses: | | | | | | | | | | |
Operations (exclusive of depreciation and amortization) | | — |
| | 23,891 |
| | 3,031 |
| | — |
| | 26,922 |
|
Depreciation and amortization | |
|
| | 12,793 |
| | 3,758 |
| | — |
| | 16,551 |
|
General and administrative | | 1,165 |
| | 1,926 |
| | — |
| | — |
| | 3,091 |
|
| | 1,165 |
| | 38,610 |
| | 6,789 |
| | — |
| | 46,564 |
|
Operating income (loss) | | (1,165 | ) | | 44,374 |
| | 12,237 |
| | — |
| | 55,446 |
|
Equity in earnings of subsidiaries | | 48,990 |
| | 9,184 |
| | — |
| | (58,174 | ) | | — |
|
Equity in earnings of equity method investments | | — |
| | 2,765 |
| | — |
| | — |
| | 2,765 |
|
Interest expense | | (5,067 | ) | | (5,468 | ) | | — |
| | — |
| | (10,535 | ) |
Interest income | | — |
| | 105 |
| | 7 |
| | — |
| | 112 |
|
Other income (expense) | | — |
| | (9 | ) | | 1 |
| | — |
| | (8 | ) |
| | 43,923 |
| | 6,577 |
| | 8 |
| | (58,174 | ) | | (7,666 | ) |
Income (loss) before income taxes | | 42,758 |
| | 50,951 |
| | 12,245 |
| | (58,174 | ) | | 47,780 |
|
State income tax expense | | — |
| | (95 | ) | | — |
| | — |
| | (95 | ) |
Net income (loss) | | 42,758 |
| | 50,856 |
| | 12,245 |
| | (58,174 | ) | | 47,685 |
|
Allocation of net (income) attributable to noncontrolling interests | | — |
| | — |
| | — |
| | (4,927 | ) | | (4,927 | ) |
Net income (loss) attributable to Holly Energy Partners | | 42,758 |
| | 50,856 |
| | 12,245 |
| | (63,101 | ) | | 42,758 |
|
Other comprehensive income (loss) | | (453 | ) | | (453 | ) | | — |
| | 453 |
| | (453 | ) |
Comprehensive income (loss) attributable to Holly Energy Partners | | $ | 42,305 |
| | $ | 50,403 |
| | $ | 12,245 |
| | $ | (62,648 | ) | | $ | 42,305 |
|
HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Condensed Consolidating Statement of Comprehensive Income |
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2015 (1) | | Parent | | Guarantor Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated |
| | (In thousands) |
Revenues: | | | | | | | | | | |
Affiliates | | $ | — |
| | $ | 63,056 |
| | $ | 9,224 |
| | $ | (25 | ) | | $ | 72,255 |
|
Third parties | | — |
| | 11,387 |
| | 6,114 |
| | — |
| | 17,501 |
|
| | — |
| | 74,443 |
| | 15,338 |
| | (25 | ) | | 89,756 |
|
Operating costs and expenses: | | | | | | | | | | |
Operations (exclusive of depreciation and amortization) | | — |
| | 25,630 |
| | 2,460 |
| | (25 | ) | | 28,065 |
|
Depreciation and amortization | | — |
| | 11,066 |
| | 3,732 |
| | — |
| | 14,798 |
|
General and administrative | | 1,063 |
| | 2,227 |
| | — |
| | — |
| | 3,290 |
|
| | 1,063 |
| | 38,923 |
| | 6,192 |
| | (25 | ) | | 46,153 |
|
Operating income (loss) | | (1,063 | ) | | 35,520 |
| | 9,146 |
| | — |
| | 43,603 |
|
Equity in earnings of subsidiaries | | 37,730 |
| | 6,860 |
| | — |
| | (44,590 | ) | | — |
|
Equity in earnings of equity method investments | | — |
| | 734 |
| | — |
| | — |
| | 734 |
|
Interest expense | | (5,067 | ) | | (3,701 | ) | | — |
| | — |
| | (8,768 | ) |
Gain on sale of assets | | — |
| | 159 |
| | — |
| | — |
| | 159 |
|
| | 32,663 |
| | 4,052 |
| | — |
| | (44,590 | ) | | (7,875 | ) |
Income (loss) before income taxes | | 31,600 |
| | 39,572 |
| | 9,146 |
| | (44,590 | ) | | 35,728 |
|
State income tax expense | | — |
| | (101 | ) | | — |
| | — |
| | (101 | ) |
Net income (loss) | | 31,600 |
| | 39,471 |
| | 9,146 |
| | (44,590 | ) | | 35,627 |
|
Allocation of net (income) attributable to noncontrolling interests | | — |
| | — |
| | — |
| | (4,027 | ) | | (4,027 | ) |
Net income (loss) attributable to Holly Energy Partners | | 31,600 |
| | 39,471 |
| | 9,146 |
| | (48,617 | ) | | 31,600 |
|
Other comprehensive income (loss) | | (749 | ) | | (749 | ) | | — |
| | 749 |
| | (749 | ) |
Comprehensive income (loss) attributable to Holly Energy Partners | | $ | 30,851 |
| | $ | 38,722 |
| | $ | 9,146 |
| | $ | (47,868 | ) | | $ | 30,851 |
|
(1) Retrospectively adjusted as described in Note 1.
HOLLY ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Condensed Consolidating Statement of Cash Flows
|
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2016 | | Parent | | Guarantor Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated |
| | (In thousands) |
Cash flows from operating activities | | $ | (10,084 | ) | | $ | 48,712 |
| | $ | 13,424 |
| | $ | (3,750 | ) | | $ | 48,302 |
|
| | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | |
Additions to properties and equipment | | — |
| | (7,919 | ) | | (9,954 | ) | | — |
| | (17,873 | ) |
Proceeds from sale of assets | | — |
| | 12 |
| | — |
| | — |
| | 12 |
|
Distributions in excess of equity in earnings of equity investments | | — |
| | 99 |
| | — |
| | — |
| | 99 |
|
| | — |
| | (7,808 | ) | | (9,954 | ) | | — |
| | |