Document
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 June 30, 2018
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth” company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ý | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | ¨
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Emerging growth company | ¨
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of the registrant’s outstanding common units at July 27, 2018, was 105,440,201.
HOLLY ENERGY PARTNERS, L.P.
INDEX
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| Item 1. | | |
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| | Consolidated Statement of Equity | |
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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 (“HFC”), Delek US Holdings, Inc. (“Delek”) 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 or cyber attacks and the consequences of any such attacks; |
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• | general economic conditions; |
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• | the impact of recent changes in the tax laws and regulations that affect master limited partnerships; 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, 2017, 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
(In thousands, except unit data)
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| | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
| | (Unaudited) | | |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 6,656 |
| | $ | 7,776 |
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Accounts receivable: | | | | |
Trade | | 13,501 |
| | 12,803 |
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Affiliates | | 36,665 |
| | 51,501 |
|
| | 50,166 |
| | 64,304 |
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Prepaid and other current assets | | 3,146 |
| | 2,311 |
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Total current assets | | 59,968 |
| | 74,391 |
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| | | | |
Properties and equipment, net | | 1,551,709 |
| | 1,569,471 |
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Intangible assets, net | | 121,935 |
| | 129,463 |
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Goodwill | | 270,336 |
| | 266,716 |
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Equity method investments | | 84,752 |
| | 85,279 |
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Other assets | | 27,363 |
| | 28,794 |
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Total assets | | $ | 2,116,063 |
| | $ | 2,154,114 |
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LIABILITIES AND EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable: | | | | |
Trade | | $ | 9,148 |
| | $ | 14,547 |
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Affiliates | | 11,250 |
| | 7,725 |
|
| | 20,398 |
| | 22,272 |
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| | | | |
Accrued interest | | 13,189 |
| | 13,256 |
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Deferred revenue | | 10,845 |
| | 9,598 |
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Accrued property taxes | | 5,540 |
| | 4,652 |
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Other current liabilities | | 3,593 |
| | 5,707 |
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Total current liabilities | | 53,565 |
| | 55,485 |
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Long-term debt | | 1,395,599 |
| | 1,507,308 |
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Other long-term liabilities | | 15,526 |
| | 15,843 |
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Deferred revenue | | 48,405 |
| | 47,272 |
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Class B unit | | 44,600 |
| | 43,141 |
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| | | | |
Equity: | | | | |
Partners’ equity: | | | | |
Common unitholders (105,440,201 and 101,568,955 units issued and outstanding at June 30, 2018 and December 31, 2017, respectively) | | 468,397 |
| | 393,959 |
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Noncontrolling interest | | 89,971 |
| | 91,106 |
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Total equity | | 558,368 |
| | 485,065 |
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Total liabilities and equity | | $ | 2,116,063 |
| | $ | 2,154,114 |
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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 June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Revenues: | | | | | | | | |
Affiliates | | $ | 94,013 |
| | $ | 93,152 |
| | $ | 195,441 |
| | $ | 182,177 |
|
Third parties | | 24,747 |
| | 15,991 |
| | 52,203 |
| | 32,600 |
|
| | 118,760 |
| | 109,143 |
| | 247,644 |
| | 214,777 |
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Operating costs and expenses: | | | | | | | | |
Operations (exclusive of depreciation and amortization) | | 34,533 |
| | 34,097 |
| | 70,735 |
| | 66,586 |
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Depreciation and amortization | | 24,608 |
| | 19,945 |
| | 49,750 |
| | 38,722 |
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General and administrative | | 2,673 |
| | 2,615 |
| | 5,795 |
| | 5,249 |
|
| | 61,814 |
| | 56,657 |
| | 126,280 |
| | 110,557 |
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Operating income | | 56,946 |
| | 52,486 |
| | 121,364 |
| | 104,220 |
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Other income (expense): | | | | | | | | |
Equity in earnings of equity method investments | | 1,734 |
| | 4,053 |
| | 3,013 |
| | 5,893 |
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Interest expense | | (17,626 | ) | | (13,748 | ) | | (35,207 | ) | | (27,287 | ) |
Interest income | | 526 |
| | 103 |
| | 1,041 |
| | 205 |
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Loss on early extinguishment of debt | | — |
| | — |
| | — |
| | (12,225 | ) |
Gain (loss) on sale of assets and other | | (53 | ) | | 89 |
| | 33 |
| | 162 |
|
| | (15,419 | ) | | (9,503 | ) | | (31,120 | ) | | (33,252 | ) |
Income before income taxes | | 41,527 |
| | 42,983 |
| | 90,244 |
| | 70,968 |
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State income tax benefit (expense) | | (28 | ) | | (127 | ) | | (110 | ) | | (233 | ) |
Net income | | 41,499 |
| | 42,856 |
| | 90,134 |
| | 70,735 |
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Allocation of net income attributable to noncontrolling interests | | (1,356 | ) | | (1,521 | ) | | (3,823 | ) | | (3,837 | ) |
Net income attributable to the partners | | 40,143 |
| | 41,335 |
| | 86,311 |
| | 66,898 |
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General partner interest in net income attributable to the Partnership, including incentive distributions | | — |
| | (18,328 | ) | | — |
| | (35,466 | ) |
Limited partners’ interest in net income | | $ | 40,143 |
| | $ | 23,007 |
| | $ | 86,311 |
| | $ | 31,432 |
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Limited partners’ per unit interest in earnings—basic and diluted | | $ | 0.38 |
| | $ | 0.36 |
| | $ | 0.82 |
| | $ | 0.49 |
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Weighted average limited partners’ units outstanding | | 105,429 |
| | 64,086 |
| | 104,637 |
| | 63,602 |
|
See accompanying notes.
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
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| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Net income | | $ | 41,499 |
| | $ | 42,856 |
| | $ | 90,134 |
| | $ | 70,735 |
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| | | | | | | | |
Other comprehensive income: | | | | | | | | |
Change in fair value of cash flow hedging instruments | | — |
| | 11 |
| | — |
| | 87 |
|
Reclassification adjustment to net income on partial settlement of cash flow hedge | | — |
| | (102 | ) | | — |
| | (115 | ) |
Other comprehensive income | | — |
| | (91 | ) | | — |
| | (28 | ) |
Comprehensive income before noncontrolling interest | | 41,499 |
| | 42,765 |
| | 90,134 |
| | 70,707 |
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Allocation of comprehensive income to noncontrolling interests | | (1,356 | ) | | (1,521 | ) | | (3,823 | ) | | (3,837 | ) |
Comprehensive income attributable to the partners | | $ | 40,143 |
| | $ | 41,244 |
| | $ | 86,311 |
| | $ | 66,870 |
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See accompanying notes.
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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| | | | | | | | |
| | Six Months Ended June 30, |
| | 2018 | | 2017 |
Cash flows from operating activities | | | | |
Net income | | $ | 90,134 |
| | $ | 70,735 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 49,750 |
| | 38,722 |
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Gain on sale of assets | | (183 | ) | | (133 | ) |
Amortization of deferred charges | | 1,516 |
| | 1,504 |
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Equity-based compensation expense | | 1,550 |
| | 1,109 |
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Equity in earnings of equity method investments, net of distributions | | 228 |
| | 594 |
|
Loss on early extinguishment of debt | | — |
| | 12,225 |
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(Increase) decrease in operating assets: | | | | |
Accounts receivable—trade | | (698 | ) | | (285 | ) |
Accounts receivable—affiliates | | 14,836 |
| | 6,033 |
|
Prepaid and other current assets | | (835 | ) | | (234 | ) |
Increase (decrease) in operating liabilities: | | | | |
Accounts payable—trade | | (1,428 | ) | | 104 |
|
Accounts payable—affiliates | | 3,546 |
| | (9,128 | ) |
Accrued interest | | (67 | ) | | (7,519 | ) |
Deferred revenue | | 3,700 |
| | 1,653 |
|
Accrued property taxes | | 888 |
| | (1,001 | ) |
Other current liabilities | | (2,023 | ) | | (442 | ) |
Other, net | | 49 |
| | (336 | ) |
Net cash provided by operating activities | | 160,963 |
| | 113,601 |
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| | | | |
Cash flows from investing activities | | | | |
Additions to properties and equipment | | (24,739 | ) | | (20,524 | ) |
Business and asset acquisitions | | (6,831 | ) | | — |
|
Proceeds from sale of assets | | 196 |
| | 635 |
|
Distributions in excess of equity in earnings of equity investments | | 299 |
| | 1,654 |
|
Net cash used for investing activities | | (31,075 | ) | | (18,235 | ) |
| | | | |
Cash flows from financing activities | | | | |
Borrowings under credit agreement | | 305,500 |
| | 479,000 |
|
Repayments of credit agreement borrowings | | (417,500 | ) | | (189,000 | ) |
Redemption of 6.5% Senior Notes | | — |
| | (309,750 | ) |
Proceeds from issuance of common units | | 114,831 |
| | 52,634 |
|
Distributions to HEP unitholders | | (130,075 | ) | | (112,195 | ) |
Distributions to noncontrolling interest | | (3,500 | ) | | (3,500 | ) |
Distribution to HFC for El Dorado tanks | | — |
| | (103 | ) |
Contributions from general partner | | 492 |
| | 995 |
|
Units withheld for tax withholding obligations | | (58 | ) | | (35 | ) |
Other | | (698 | ) | | (730 | ) |
Net cash used by financing activities | | (131,008 | ) | | (82,684 | ) |
| | | | |
Cash and cash equivalents | | | | |
Increase (decrease) for the period | | (1,120 | ) | | 12,682 |
|
Beginning of period | | 7,776 |
| | 3,657 |
|
End of period | | $ | 6,656 |
| | $ | 16,339 |
|
See accompanying notes.
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
(In thousands)
|
| | | | | | | | | | | | |
| | Common Units | | Noncontrolling Interest | | Total Equity |
| | |
Balance December 31, 2017 | | $ | 393,959 |
| | $ | 91,106 |
| | $ | 485,065 |
|
Issuance of common units | | 114,900 |
| | — |
| | 114,900 |
|
Distributions to HEP unitholders | | (130,075 | ) | | — |
| | (130,075 | ) |
Distributions to noncontrolling interest | | — |
| | (3,500 | ) | | (3,500 | ) |
Amortization of restricted and performance units | | 1,550 |
| | — |
| | 1,550 |
|
Class B unit accretion | | (1,459 | ) | | — |
| | (1,459 | ) |
Cumulative transition adjustment for adoption of revenue recognition standard | | 1,320 |
| | — |
| | 1,320 |
|
Other | | 433 |
| | — |
| | 433 |
|
Net income | | 87,769 |
| | 2,365 |
| | 90,134 |
|
Balance June 30, 2018 | | $ | 468,397 |
| | $ | 89,971 |
| | $ | 558,368 |
|
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. As of June 30, 2018, HollyFrontier Corporation (“HFC”) and its subsidiaries own a 57% limited partner interest and the non-economic general partner interest in HEP. We commenced operations on July 13, 2004, upon the completion of our initial public offering. In these consolidated financial statements, the words “we,” “our,” “ours” and “us” refer to HEP unless the context otherwise indicates.
On October 31, 2017, we closed on an equity restructuring transaction with HEP Logistics Holdings, L.P. (“HEP Logistics”), a wholly-owned subsidiary of HFC and the general partner of HEP, pursuant to which the incentive distribution rights (“IDRs”) held by HEP Logistics were canceled, and HEP Logistics' 2% general partner interest in HEP was converted into a non-economic general partner interest in HEP. In consideration, we issued 37,250,000 of our common units to HEP Logistics. In addition, HEP Logistics agreed to waive $2.5 million of limited partner cash distributions for each of twelve consecutive quarters beginning with the first quarter the units issued as consideration were eligible to receive distributions. As a result of this transaction, no distributions were made on the general partner interest after October 31, 2017.
On January 25, 2018, we entered into a common unit purchase agreement in which certain purchasers agreed to purchase in a private placement 3,700,000 common units representing limited partner interests, at a price of $29.73 per common unit. The private placement closed on February 6, 2018, and we received proceeds of approximately $110 million, which were used to repay indebtedness under our revolving credit facility.
We own and operate petroleum product and crude oil pipelines, terminal, tankage and loading rack facilities and refinery processing units that support HFC’s refining and marketing operations in the Mid-Continent, Southwest and Northwest regions of the United States and Delek US Holdings, Inc.’s (“Delek”) refinery in Big Spring, Texas. Additionally, we own a 75% interest in UNEV Pipeline, LLC (“UNEV”), a 50% interest in the Osage Pipe Line Company, LLC (“Osage”) and a 50% interest in the Cheyenne Pipeline LLC.
We operate in two reportable segments, a Pipelines and Terminals segment and a Refinery Processing Unit segment. Disclosures around these segments are discussed in Note 15.
We generate revenues by charging tariffs for transporting petroleum products and crude oil through our pipelines, by charging fees for terminalling and storing refined products and other hydrocarbons, providing other services at our storage tanks and terminals and by charging fees for processing hydrocarbon feedstocks through our refinery processing units. We do not take ownership of products that we transport, terminal, store or process, and therefore, we are not exposed directly to changes in commodity prices.
The consolidated financial statements included herein have been prepared without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The interim financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of our results for the interim periods. Such adjustments are considered to be of a normal recurring nature. Although certain notes and other information required by U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017. 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, 2018.
Principles of Consolidation and Common Control Transactions
The consolidated financial statements include our accounts and those of subsidiaries and joint ventures that we control. All significant intercompany transactions and balances have been eliminated.
Most of our acquisitions from HFC occurred while we were a consolidated variable interest entity (“VIE”) of HFC. Therefore, as an entity under common control with HFC, we recorded these acquisitions on our balance sheets at HFC's historical basis instead of our purchase price or fair value.
Accounting Pronouncements Adopted During the Periods Presented
Share-Based Compensation
In March 2016, an accounting standard update was issued which simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. We adopted this standard effective January 1, 2017, with no impact to our financial condition or results of operations. The new standard also requires that employee taxes paid when an employer withholds units for
tax withholding purposes be reported as financing activities in the statement of cash flows on a retrospective basis. Previously, this activity was included in our operating activities. The impact of this change for the six months ended June 30, 2017 was not material to our consolidated statement of cash flows. Finally, consistent with our existing policy, we have elected to account for forfeitures on an estimated basis.
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 had an effective date of January 1, 2018, and we accounted for the new guidance using the modified retrospective implementation method, whereby a cumulative effect adjustment was recorded to retained earnings as of the date of initial application. In preparing
for adoption, we evaluated the terms, conditions and performance obligations under our existing contracts with customers. Furthermore, we implemented policies to comply with this new standard. See Note 3 for additional information on our revenue recognition policies.
Business Combinations
In December 2014, an accounting standard update was issued to provide new guidance on the definition of a business in relation to accounting for identifiable intangible assets in business combinations. This standard had an effective date of January 1, 2018, and had no effect on our financial condition, results of operations or cash flows.
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 was effective beginning with our 2018 reporting year and had no effect on our financial condition, results of operations or cash flows.
Accounting Pronouncements Not Yet Adopted
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. In preparing for adoption, we have identified, reviewed and evaluated contracts containing lease and embedded lease arrangements. Additionally, we have acquired software and are implementing systems to facilitate lease capture and related accounting treatment.
SLC Pipeline and Frontier Aspen
On October 31, 2017, we acquired the remaining 75% interest in SLC Pipeline LLC (“SLC Pipeline”) and the remaining 50% interest in Frontier Aspen LLC (“Frontier Aspen”) from subsidiaries of Plains All American Pipeline, L,P. (“Plains”), for cash consideration of $250 million. Prior to this acquisition, we held noncontrolling interests of 25% of SLC Pipeline and 50% of Frontier Aspen. As a result of the acquisitions, SLC Pipeline and Frontier Aspen are wholly-owned subsidiaries of HEP.
These acquisitions were accounted for as a business combination achieved in stages. Our pre-existing equity method investments in SLC Pipeline and Frontier Aspen were remeasured at an acquisition date fair value of $112 million since we now have a controlling interest, and we recognized a gain on the remeasurement in the fourth quarter of 2017 of $36.3 million. The fair value of our pre-existing equity method investments in SLC Pipeline and Frontier Aspen was estimated using Level 3 Inputs under the income method for these entities, adjusted for lack of control and marketability.
The total consideration of $363.8 million, consisting of initial cash consideration of $250 million, working capital adjustments of $1.8 million and the fair value of our preexisting equity method investments in SLC Pipeline and Frontier Aspen of $112 million, was allocated to the acquisition date fair value of assets and liabilities acquired as of the October 31, 2017 acquisition date, with the excess purchase price recorded as goodwill. The following summarizes the value of assets and liabilities acquired:
|
| | | | |
| | (in thousands) |
Cash and cash equivalents | | $ | 4,609 |
|
Accounts receivable | | 5,164 |
|
Prepaid and other current assets | | 8 |
|
Properties and equipment | | 275,061 |
|
Intangible assets | | 70,182 |
|
Goodwill | | 13,845 |
|
Accounts payable | | (3,598 | ) |
Accrued property taxes | | (1,438 | ) |
Net assets acquired | | $ | 363,833 |
|
SLC Pipeline is the owner of a 95-mile crude pipeline that transports crude oil into the Salt Lake City area from the Utah terminal
of the Frontier Pipeline (defined below) and from Wahsatch Station. Frontier Aspen is the owner of a 289-mile crude pipeline from Casper, Wyoming to Frontier Station, Utah (the “Frontier Pipeline”) that supplies Canadian and Rocky Mountain crudes to Salt Lake City area refiners through a connection to the SLC Pipeline.
Revenues are generally recognized as products are shipped through our pipelines and terminals, feedstocks are processed through our refinery processing units or other services are rendered. The majority of our contracts with customers meet the definition of a lease since (1) performance of the contracts is dependent on specified property, plant, or equipment and (2) it is remote that one or more parties other than the customer will take more than a minor amount of the output associated with the specified property, plant, or equipment. Therefore, we bifurcate the consideration received between lease and service revenue. The service component is within the scope of Accounting Standards Codification (“ASC”) 606, which largely codified ASU 2014-09.
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.
We adopted the new revenue recognition standard (see Note 1) using the modified retrospective method, whereby the cumulative effect of applying the new standard was recorded as an adjustment to the opening balance of retained earnings as well as the carrying amounts of assets and liabilities as of January 1, 2018, which had no impact on our cash flows. The following table reflects the cumulative effect of adoption as of January 1, 2018:
|
| | | | | | | | | | | | |
| | Prior to Adoption | | Increase (Decrease) | | As Adjusted |
| | (In millions) |
Deferred revenue | | $ | 9,598 |
| | $ | (1,320 | ) | | $ | 8,278 |
|
Partners’ equity: Common unitholders | | $ | 393,959 |
| | $ | 1,320 |
| | $ | 395,279 |
|
The majority of our long-term transportation contracts specify minimum volume requirements, whereby, we bill a customer for a minimum level of shipments in the event a customer ships below their contractual requirements. If there are no future performance obligations, we will recognize these deficiency payments in revenue.
In certain of these throughput agreements, a customer may later utilize such shortfall billings as credit towards future volume shipments in excess of its minimum levels within its respective contractual shortfall make-up period. Such amounts represent an obligation to perform future services, which may be initially deferred and later recognized as revenue based on estimated future shipping levels, including the likelihood of a customer’s ability to utilize such amounts prior to the end of the contractual shortfall make-up period. We recognize the service portion of these deficiency payments in revenue when we do not expect we will be required to satisfy these performance obligations in the future based on the pattern of rights exercised by the customer. During
the three and six months ended June 30, 2018, we recognized $3.4 million and $7.0 million, respectively, of these deficiency payments in revenue, of which $0.4 million and $2.6 million, respectively, related to deficiency payments billed in prior periods. As of June 30, 2018, deferred revenue reflected in our consolidated balance sheet related to shortfalls billed was $4.4 million.
|
| | | | | | | | |
| | June 30, 2018 | | January 1, 2018 |
| | (In thousands) |
Contract asset | | $ | 1,562 |
| | $ | — |
|
Contract liability | | $ | (4,441 | ) | | $ | (2,713 | ) |
The contract assets and liabilities include both lease and service components. We recognized $0.4 million and $2.6 million in revenue during the three and six months ended June 30, 2018, respectively, that was previously included in contract liability as of January 1, 2018.
As of June 30, 2018, we expect to recognize $2.4 billion in revenue related to our unfulfilled performance obligations under the terms of our long-term throughput agreements and operating leases expiring in 2019 through 2036. These agreements provide for changes in the minimum revenue guarantees annually for increases or decreases in the Producer Price Index (“PPI”) or Federal Energy Regulatory Commission (“FERC”) index, with certain contracts having provisions that limit the level of the rate increases or decreases. We expect to recognize revenue for these unfulfilled performance obligations as shown in the table below (amounts shown in table include both service and lease revenues):
|
| | | | |
Years Ending December 31, | | (In millions) |
Remainder of 2018 | | $ | 188 |
|
2019 | | 352 |
|
2020 | | 305 |
|
2021 | | 294 |
|
2022 | | 267 |
|
Thereafter | | 1,042 |
|
Total | | $ | 2,448 |
|
Payment terms under our contracts with customers are consistent with industry norms and are typically payable within 10 to 30 days of the date of invoice.
Disaggregated revenues are as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (In thousands) | | | | |
Pipelines | | $ | 65,539 |
| | $ | 55,248 |
| | $ | 137,708 |
| | $ | 107,695 |
|
Terminals, tanks and loading racks | | 34,386 |
| | 36,356 |
| | 72,567 |
| | 70,163 |
|
Refinery processing units | | 18,835 |
| | 17,539 |
| | 37,369 |
| | 36,919 |
|
| | $ | 118,760 |
| | $ | 109,143 |
| | $ | 247,644 |
| | $ | 214,777 |
|
During the three and six months ended June 30, 2018, lease revenues amounted to $68.1 million and $138.7 million, respectively, and service revenues amounted to $50.7 million and $109.0 million, respectively. Both of these revenues were recorded within affiliates and third parties revenues on our consolidated statement of income.
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Note 4: | 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 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:
| |
• | (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. |
The carrying amounts and estimated fair values of our senior notes were as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | | June 30, 2018 | | December 31, 2017 |
Financial Instrument | | Fair Value Input Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| | | | (In thousands) |
Liabilities: | | | | | | | | | | |
6% Senior notes | | Level 2 | | 495,599 |
| | 507,025 |
| | 495,308 |
| | 525,120 |
|
| | | | $ | 495,599 |
| | $ | 507,025 |
| | $ | 495,308 |
| | $ | 525,120 |
|
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 8 for additional information.
| |
Note 5: | Properties and Equipment |
The carrying amounts of our properties and equipment are as follows:
|
| | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
| | (In thousands) |
Pipelines, terminals and tankage | | $ | 1,525,033 |
| | $ | 1,541,722 |
|
Refinery assets | | 347,338 |
| | 347,338 |
|
Land and right of way | | 85,960 |
| | 86,484 |
|
Construction in progress | | 42,811 |
| | 12,029 |
|
Other | | 40,420 |
| | 35,659 |
|
| | 2,041,562 |
| | 2,023,232 |
|
Less accumulated depreciation | | 489,853 |
| | 453,761 |
|
| | $ | 1,551,709 |
| | $ | 1,569,471 |
|
We capitalized $0.2 million and $0.4 million during the six months ended June 30, 2018 and 2017, respectively, in interest attributable to construction projects.
Depreciation expense was $41.9 million and $34.9 million for the six months ended June 30, 2018 and 2017, respectively, and includes depreciation of assets acquired under capital leases.
Intangible assets include transportation agreements and customer relationships that represent a portion of the total purchase price of certain assets acquired from Delek in 2005, from HFC in 2008 prior to HEP becoming a consolidated VIE of HFC and from Plains in 2017.
The carrying amounts of our intangible assets are as follows:
|
| | | | | | | | | | |
| | Useful Life | | June 30, 2018 | | December 31, 2017 |
| | | | (In thousands) |
Delek transportation agreement | | 30 years | | $ | 59,933 |
| | $ | 59,933 |
|
HFC transportation agreement | | 10-15 years | | 75,131 |
| | 75,131 |
|
Customer relationships | | 10 years | | 69,282 |
| | 69,282 |
|
Other | | | | 50 |
| | 50 |
|
| | | | 204,396 |
| | 204,396 |
|
Less accumulated amortization | | | | 82,461 |
| | 74,933 |
|
| | | | $ | 121,935 |
| | $ | 129,463 |
|
Amortization expense was $7.5 million and $3.5 million for the six months ended June 30, 2018 and 2017, respectively. We estimate amortization expense to be $14.0 million for each of the next four years and $9.8 million in 2023.
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 VIE of HFC; therefore, our basis in these agreements is zero and does not reflect a step-up in basis to fair value.
| |
Note 7: | 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 $1.3 million for the three months ended June 30, 2018 and 2017, respectively, and $3.4 million and $3.0 million for the six months ended June 30, 2018 and 2017, 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, and HLS reimburses HFC for its prorated portion of the wages, benefits, and other costs related to these employees.
We have a Long-Term Incentive Plan for employees and non-employee directors who perform services for us. The Long-Term Incentive Plan consists of four components: restricted or phantom units, performance units, unit options and unit appreciation rights. Our accounting policy for the recognition of compensation expense for awards with pro-rata vesting (a significant proportion of our awards) is to expense the costs ratably over the vesting periods.
As of June 30, 2018, we had two types of incentive-based awards outstanding, which are described below. The compensation cost charged against income was $0.7 million and $0.6 million for the three months ended June 30, 2018 and 2017, respectively, and $1.5 million and $0.9 million for the six months ended June 30, 2018 and 2017, respectively. We currently purchase units in the open market instead of issuing new units for settlement of all unit awards under our Long-Term Incentive Plan. As of June 30, 2018, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which 1,323,787 have not yet been granted, assuming no forfeitures of the unvested units and full achievement of goals for the unvested performance units.
Restricted and Phantom Units
Under our Long-Term Incentive Plan, we grant restricted units to non-employee directors and phantom units to selected employees who perform services for us, with most awards vesting over a period of one to three years. We previously granted restricted units to selected employees who perform services for us, which vest over a period of three years. Although full ownership of the units does not transfer to the recipients until the units vest, the recipients have distribution rights on these units from the date of grant, and the recipients of the restricted units have voting rights on the restricted units from the date of grant.
The fair value of each restricted or phantom unit award is measured at the market price as of the date of grant and is amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award.
A summary of restricted and phantom unit activity and changes during the six months ended June 30, 2018, is presented below:
|
| | | | | | | |
Restricted and Phantom Units | | Units | | Weighted Average Grant-Date Fair Value |
Outstanding at January 1, 2018 (nonvested) | | 119,009 |
| | $ | 34.77 |
|
Granted | | 12,890 |
| | 30.23 |
|
Forfeited | | (698 | ) | | 34.59 |
|
Outstanding at June 30, 2018 (nonvested) | | 131,201 |
| | $ | 34.33 |
|
No restricted units were vested and transferred to recipients during the six months ended June 30, 2018. As of June 30, 2018, there was $1.8 million of total unrecognized compensation expense related to unvested restricted and phantom unit grants, which is expected to be recognized over a weighted-average period of 1.2 years.
Performance Units
Under our Long-Term Incentive Plan, we grant performance units to selected officers who perform services for us. Performance units granted are payable in common units at the end of a three-year performance period based upon the growth in our distributable cash flow per common unit over the performance period. As of June 30, 2018, estimated unit payouts for outstanding nonvested performance unit awards ranged between 100% and 150% of the target number of performance units granted.
We granted 2,764 performance units during the six months ended June 30, 2018. Performance units granted in 2017 and 2018 vest over a three-year performance period ending December 31, 2020 and 2021, respectively, 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.
A summary of performance unit activity and changes for the six months ended June 30, 2018, is presented below: |
| | | |
Performance Units | | Units |
Outstanding at January 1, 2018 (nonvested) | | 36,911 |
|
Granted | | 2,764 |
|
Vesting and transfer of common units to recipients | | (4,283 | ) |
Outstanding at June 30, 2018 (nonvested) | | 35,392 |
|
The grant date fair value of performance units vested and transferred to recipients during both the six months ended June 30, 2018 and 2017 was $0.1 million. Based on the weighted-average fair value of performance units outstanding at June 30, 2018, of $1.2 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 1.6 years.
During the six months ended June 30, 2018, we did not purchase any common units in the open market for the issuance and
settlement of unit awards under our Long-Term Incentive Plan.
Credit Agreement
We have a $1.4 billion senior secured revolving credit facility (the “Credit Agreement”) expiring in July 2022. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit, and it contains an accordion feature giving us the ability to increase the size of the facility by up to $300 million with additional lender commitments.
Our obligations under the Credit Agreement are collateralized by substantially all of our assets, and indebtedness under the Credit Agreement is guaranteed by our material, wholly-owned subsidiaries. The Credit Agreement requires us to maintain compliance with certain financial covenants consisting of total leverage, senior secured leverage, and interest coverage. It also limits or restricts our ability to engage in certain activities. If, at any time prior to the expiration of the Credit Agreement, HEP obtains two investment grade credit ratings, the Credit Agreement will become unsecured and many of the covenants, limitations, and restrictions will be eliminated.
We may prepay all loans at any time without penalty, except for tranche breakage costs. If an event of default exists under the Credit Agreement, the lenders will be able to accelerate the maturity of all loans outstanding and exercise other rights and remedies. We were in compliance with the covenants as of June 30, 2018.
Senior Notes
On July 19, 2016, we closed a private placement of $400 million in aggregate principal amount of 6% senior unsecured notes due in 2024 (the “ 6% Senior Notes”). On September 22, 2017, we closed a private placement of an additional $100 million in aggregate principal amount of the 6% Senior Notes for a combined aggregate principal amount outstanding of $500 million maturing in 2024.
The 6% 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 6% Senior Notes as of June 30, 2018. At any time when the 6% 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% Senior Notes.
Indebtedness under the 6% Senior Notes is guaranteed by our wholly-owned subsidiaries.
On January 4, 2017, we redeemed the $300 million aggregate principal amount of 6.5% senior notes due in 2020 (the “6.5% Senior Notes”) at a redemption cost of $309.8 million at which time we recognized a $12.2 million early extinguishment loss consisting of a $9.8 million debt redemption premium and unamortized discount and financing costs of $2.4 million. We funded the redemption with borrowings under our Credit Agreement.
Long-term Debt
The carrying amounts of our long-term debt are as follows: |
| | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
| | (In thousands) |
Credit Agreement | | | | |
Amount outstanding | | $ | 900,000 |
| | $ | 1,012,000 |
|
| | | | |
6% Senior Notes | | | | |
Principal | | 500,000 |
| | 500,000 |
|
Unamortized premium and debt issuance costs | | (4,401 | ) | | (4,692 | ) |
| | 495,599 |
| | 495,308 |
|
| | | | |
Total long-term debt | | $ | 1,395,599 |
| | $ | 1,507,308 |
|
Interest Rate Risk Management
The two interest rate swaps that hedged our exposure to the cash flow risk caused by the effects of LIBOR changes on $150 million of Credit Agreement advances matured on July 31, 2017. The swaps had effectively converted $150 million of our LIBOR based debt to fixed rate debt.
Interest Expense and Other Debt Information
Interest expense consists of the following components:
|
| | | | | | | | |
| | Six Months Ended June 30, |
| | 2018 | | 2017 |
| | (In thousands) |
Interest on outstanding debt: | | | | |
Credit Agreement, net of interest on interest rate swaps | | $ | 17,850 |
| | $ | 13,299 |
|
6.5% Senior Notes | | — |
| | 162 |
|
6% Senior Notes | | 15,000 |
| | 12,000 |
|
Amortization of discount and deferred debt issuance costs | | 1,516 |
| | 1,536 |
|
Commitment fees and other | | 1,007 |
| | 720 |
|
Total interest incurred | | 35,373 |
| | 27,717 |
|
Less capitalized interest | | 166 |
| | 430 |
|
Net interest expense | | $ | 35,207 |
| | $ | 27,287 |
|
Cash paid for interest | | $ | 33,935 |
| | $ | 33,700 |
|
Capital Lease Obligations
We have capital lease obligations related to vehicle leases with initial terms of 33 to 48 months. The total cost of assets under capital leases was $5.7 million and $5.1 million as of June 30, 2018 and December 31, 2017, respectively, with accumulated depreciation of $3.7 million and $3.3 million as of June 30, 2018 and December 31, 2017, respectively. We include depreciation of capital leases in depreciation and amortization in our consolidated statements of income.
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Note 9: | Significant Customers |
All revenues are domestic revenues, of which 86% are currently generated from our two largest customers: HFC and Delek.
The following table presents the percentage of total revenues generated by each of these customers:
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
HFC | | 79 | % | | 85 | % | | 79 | % | | 85 | % |
Delek | | 7 | % | | 6 | % | | 6 | % | | 7 | % |
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Note 10: | Related Party Transactions |
We serve HFC’s refineries under long-term pipeline, terminal and tankage throughput agreements, and refinery processing unit tolling agreements expiring from 2019 to 2036. Under these agreements, HFC agrees to transport, store and process throughput volumes of refined product, crude oil and feedstocks on our pipelines, terminals, tankage, loading rack facilities and refinery processing units that result in minimum annual payments to us. These minimum annual payments or revenues are subject to annual rate adjustments on July 1st each year generally based on increases or decreases in PPI or the FERC index. As of June 30, 2018, these agreements with HFC require minimum annualized payments to us of $334.5 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.
Related party transactions with HFC are as follows:
| |
• | Revenues received from HFC were $94.0 million and $93.2 million for the three months ended June 30, 2018 and 2017, respectively, and $195.4 million and $182.2 million for the six months ended June 30, 2018 and 2017, respectively. |
| |
• | HFC charged us general and administrative services under the Omnibus Agreement of $0.6 million for each of the three months ended June 30, 2018 and 2017, and $1.2 million for the six months ended June 30, 2018 and 2017. |
| |
• | We reimbursed HFC for costs of employees supporting our operations of $12.5 million and $11.4 million for the three months ended June 30, 2018 and 2017, respectively, and $25.2 million and $22.9 million for the six months ended June 30, 2018 and 2017, respectively. |
| |
• | HFC reimbursed us $2.9 million and $1.5 million for the three months ended June 30, 2018 and 2017, respectively, for expense and capital projects and $4.2 million and $2.8 million for the six months ended June 30, 2018 and 2017, respectively. |
| |
• | We distributed $36.6 million and $72.8 million in the three and six months ended June 30, 2018, respectively, to HFC as regular distributions on its common units and $32.6 million and $63.9 million on its common units and general partner interest, including general partner incentive distributions, in the three and six months ended June 30, 2017, respectively. |
| |
• | Accounts receivable from HFC were $36.7 million and $51.5 million at June 30, 2018, and December 31, 2017, respectively. |
| |
• | Accounts payable to HFC were $11.3 million and $7.7 million at June 30, 2018, and December 31, 2017, respectively. |
| |
• | Deferred revenue in the consolidated balance sheets at June 30, 2018 and December 31, 2017, includes $1.7 million and $4.4 million, respectively, relating to certain shortfall billings to HFC. It is possible that HFC may not exceed its minimum obligations to receive credit for any of the $1.7 million deferred at June 30, 2018. |
| |
• | We received lease payments from HFC for use of our Artesia and Tulsa railyards of $0.5 million and $0.1 million for the three months ended June 30, 2018 and 2017, respectively, and $1.0 million and $0.2 million for the six months ended June 30, 2018 and 2017, respectively. |
| |
• | On October 31, 2017, we closed on an equity restructuring transaction with HEP Logistics, a wholly-owned subsidiary of HFC and the general partner of HEP, pursuant to which the incentive distribution rights held by HEP Logistics were canceled, and HEP Logistics' 2% general partner interest in HEP was converted into a non-economic general partner interest in HEP. In consideration, we issued 37,250,000 of our common units to HEP Logistics. In addition, HEP Logistics agreed to waive $2.5 million of limited partner cash distributions for each of twelve consecutive quarters beginning with the first quarter the units issued as consideration were eligible to receive distributions. |
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Note 11: | Partners’ Equity, Income Allocations and Cash Distributions |
As of June 30, 2018, HFC held 59,630,030 of our common units, constituting a 57% limited partner interest in us, and held the
non-economic general partner interest. Additionally, HEP Logistics, our general partner, owned all incentive distribution rights through October 31, 2017, at which time we closed on an equity restructuring transaction with HEP Logistics pursuant to which the incentive distribution rights were canceled. See Note 1 for a description of this equity restructuring transaction.
On January 25, 2018, we entered into a common unit purchase agreement in which certain purchasers agreed to purchase in a private placement 3,700,000 common units representing limited partnership interests, at a price of $29.73 per common unit. The private placement closed on February 6, 2018, and we received proceeds of approximately $110 million, which were used to repay indebtedness under our Credit Agreement.
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. For the six months ended June 30, 2018, HEP issued 171,246 units under this program, providing approximately $5.2 million in gross proceeds. As of June 30, 2018, HEP has issued 2,413,153 units under this program, providing $82.3 million in gross proceeds.
We intend to use our net proceeds for general partnership purposes, which may include funding working capital, repayment of debt, acquisitions and capital expenditures. Amounts repaid under our credit facility may be reborrowed from time to time.
Allocations of Net Income
Net income attributable to HEP is allocated to the partners based on their weighted-average ownership percentage during the period.
Prior to the equity restructuring of the general partner interest owned by HEP Logistics described in Note 1 that occurred on October 31, 2017, net income attributable to HEP was 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 included incentive distributions that were declared subsequent to quarter end. After incentive distributions and other priority allocations were allocated to the general partner, the remaining net income attributable to HEP was allocated to the partners based on their weighted-average ownership percentage during the period.
The following table presents the allocation of the general partner interest in net income for the periods presented below:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (In thousands) |
General partner interest in net income | | $ | — |
| | $ | 827 |
| | $ | — |
| | $ | 1,338 |
|
General partner incentive distribution | | — |
| | 17,501 |
| | — |
| | 34,128 |
|
Total general partner interest in net income | | $ | — |
| | $ | 18,328 |
| | $ | — |
| | $ | 35,466 |
|
Cash Distributions
On July 19, 2018, we announced our cash distribution for the second quarter of 2018 of $0.66 per unit. The distribution is payable on all common units and will be paid August 9, 2018, to all unitholders of record on July 30, 2018. However, HEP Logistics will waive $2.5 million in limited partner cash distributions in accordance with the equity restructuring discussed in Note 1.
Prior to the equity restructuring of the general partner interest owned by HEP Logistics that occurred on October 31, 2017, our general partner, HEP Logistics, was entitled to incentive distributions if the amount we distributed with respect to any quarter exceeded specified target levels. After the restructuring of the general partner interest, the general partner interest was no longer entitled to any distributions.
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 June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (In thousands, except per unit data) |
General partner interest in distribution | | $ | — |
| | $ | 1,188 |
| | $ | — |
| | $ | 2,336 |
|
General partner incentive distribution | | — |
| | 17,501 |
| | — |
| | 34,128 |
|
Total general partner distribution | | — |
| | 18,689 |
| | — |
| | 36,464 |
|
Limited partner distribution | | 67,091 |
| | 40,682 |
| | 133,670 |
| | 80,314 |
|
Total regular quarterly cash distribution | | $ | 67,091 |
| | $ | 59,371 |
| | $ | 133,670 |
| | $ | 116,778 |
|
Cash distribution per unit applicable to limited partners | | $ | 0.6600 |
| | $ | 0.6325 |
| | $ | 1.3150 |
| | $ | 1.2525 |
|
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.
| |
Note 12: | Net Income Per Limited Partner Unit |
Net income per unit applicable to the limited partners is computed using the two-class method, since we have more than one participating security (common units and restricted units). Prior to the equity restructuring transaction described in Note 1, which was effective October 31, 2017, we had participating securities which included the aforementioned common units and restricted units as well as general partner units and IDRs. After the equity restructuring, the general partner interest was no longer entitled to any distributions, and none were made on the general partner interest after October 31, 2017.
To the extent net income attributable to the partners exceeds or is less than cash distributions, this difference is allocated to the partners based on their weighted-average ownership percentage during the period, after consideration of any priority allocations of earnings. Our dilutive securities, restricted units, are immaterial for all periods presented.
For purposes of applying the two-class method, including the allocation of cash distributions in excess of earnings, net income per limited partner unit is computed as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (In thousands) |
Net income attributable to the partners | | $ | 40,143 |
| | $ | 41,335 |
| | $ | 86,311 |
| | $ | 66,898 |
|
Less: General partner’s distribution declared (including IDRs) | | — |
| | (18,689 | ) | | — |
| | (36,464 | ) |
Limited partner’s distribution declared on common units | | (67,091 | ) | | (40,682 | ) | | (133,670 | ) | | (80,314 | ) |
Distributions in excess of net income attributable to the partners | | $ | (26,948 | ) | | $ | (18,036 | ) | | $ | (47,359 | ) | | $ | (49,880 | ) |
|
| | | | | | | | | | | | |
| | General Partner (including IDRs) | | Limited Partners’ Common Units | | Total |
| | (In thousands, except per unit data) |
Three Months Ended June 30, 2018 | | | | | | |
Net income attributable to the partners: | | | | | | |
Distributions declared | | $ | — |
| | $ | 67,091 |
| | $ | 67,091 |
|
Distributions in excess of net income attributable to the partners | | — |
| | (26,948 | ) | | (26,948 | ) |
Net income attributable to the partners | | $ | — |
| | $ | 40,143 |
| | $ | 40,143 |
|
Weighted average limited partners' units outstanding | | | | 105,429 |
| | |
Limited partners' per unit interest in earnings - basic and diluted | | | | $ | 0.38 |
| | |
| | | | | | |
Three Months Ended June 30, 2017 | | | | | | |
Net income attributable to the partners: | | | | | | |
Distributions declared | | $ | 18,689 |
| | $ | 40,682 |
| | $ | 59,371 |
|
Distributions in excess of net income attributable to the partners | | (361 | ) | | (17,675 | ) | | (18,036 | ) |
Net income attributable to the partners | | $ | 18,328 |
| | $ | 23,007 |
| | $ | 41,335 |
|
Weighted average limited partners' units outstanding | | | | 64,086 |
| | |
Limited partners' per unit interest in earnings - basic and diluted | | | | $ | 0.36 |
| | |
|
| | | | | | | | | | | | |
| | General Partner (including IDRs) | | Limited Partners’ Common Units | | Total |
| | (In thousands, except per unit data) |
Six Months Ended June 30, 2018 | | | | | | |
Net income attributable to partnership: | | | | | | |
Distributions declared | | $ | — |
| | $ | 133,670 |
| | $ | 133,670 |
|
Distributions in excess of net income attributable to partnership | | — |
| | (47,359 | ) | | (47,359 | ) |
Net income attributable to partnership | | $ | — |
| | $ | 86,311 |
| | $ | 86,311 |
|
Weighted average limited partners' units outstanding | | | | 104,637 |
| | |
Limited partners' per unit interest in earnings - basic and diluted | | | | $ | 0.82 |
| | |
| | | | | | |
Six Months Ended June 30, 2017 | | | | | | |
Net income attributable to partnership: | | | | | | |
Distributions declared | | $ | 36,464 |
| | $ | 80,314 |
| | $ | 116,778 |
|
Distributions in excess of net income attributable to partnership | | (998 | ) | | (48,882 | ) | | (49,880 | ) |
Net income attributable to partnership | | $ | 35,466 |
| | $ | 31,432 |
| | $ | 66,898 |
|
Weighted average limited partners' units outstanding | | | | 63,602 |
| | |
Limited partners' per unit interest in earnings - basic and diluted | | | | $ | 0.49 |
| | |
We expensed $0.3 million for the three and the six months ended June 30, 2018, for environmental remediation obligations, and we incurred no expenses for the three and six months ended June 30, 2017. The accrued environmental liability, net of expected recoveries from indemnifying parties, reflected in our consolidated balance sheets was $6.3 million and $6.5 million at June 30, 2018 and December 31, 2017, respectively, of which $4.7 million and $5.0 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 June 30, 2018 and December 31, 2017, our consolidated balance sheets included additional accrued environmental liabilities of $0.7 million and $0.8 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.
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: | Operating Segments |
Although financial information is reviewed by our chief operating decision makers from a variety of perspectives, they view the business in two operating segments: pipelines and terminals, and refinery processing units. These operating segments adhere to the accounting polices used for our consolidated financial statements.
The pipelines and terminals segment has been aggregated 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 operating 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 operating segment.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | |
Revenues: | | | | | | | | |
Pipelines and terminals - affiliate | | $ | 75,178 |
| | $ | 75,613 |
| | $ | 158,072 |
| | $ | 145,258 |
|
Pipelines and terminals - third-party | | 24,747 |
| | 15,991 |
| | 52,203 |
| | 32,600 |
|
Refinery processing units - affiliate | | 18,835 |
| | 17,539 |
| | 37,369 |
| | 36,919 |
|
Total segment revenues | | $ | 118,760 |
| | $ | 109,143 |
| | $ | 247,644 |
| | $ | 214,777 |
|
| | | | | | | | |
Segment operating income: | | | | | | | | |
Pipelines and terminals | | $ | 51,004 |
| | $ | 49,164 |
| | $ | 111,217 |
| | $ | 95,649 |
|
Refinery processing units | | 8,615 |
| | 5,937 |
| | 15,942 |
| | 13,820 |
|
Total segment operating income | | 59,619 |
| | 55,101 |
| | 127,159 |
| | 109,469 |
|
Unallocated general and administrative expenses | | (2,673 | ) | | (2,615 | ) | | (5,795 | ) | | (5,249 | ) |
Interest and financing costs, net | | (17,100 | ) | | (13,645 | ) | | (34,166 | ) | | (39,307 | ) |
Equity in earnings of unconsolidated affiliates | | 1,734 |
| | 4,053 |
| | 3,013 |
| | 5,893 |
|
Gain (loss) on sale of assets and other | | (53 | ) | | 89 |
| | 33 |
| | 162 |
|
Income before income taxes | | $ | 41,527 |
| | $ | 42,983 |
| | $ | 90,244 |
| | $ | 70,968 |
|
| | | | | | | | |
Capital Expenditures: | | | | | | | | |
Pipelines and terminals | | $ | 12,127 |
| | $ | 12,157 |
| | $ | 24,739 |
| | $ | 20,286 |
|
Refinery processing units | | — |
| | 102 |
| | — |
| | 238 |
|
Total capital expenditures | | $ | 12,127 |
| | $ | 12,259 |
| | $ | 24,739 |
| | $ | 20,524 |
|
|
| | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
| | (in thousands) |
Identifiable assets: | | | | |
Pipelines and terminals (1) | | $ | 1,697,531 |
| | $ | 1,728,074 |
|
Refinery processing units | | 321,191 |
| | 328,585 |
|
Other | | 97,341 |
| | 97,455 |
|
Total identifiable assets | | $ | 2,116,063 |
| | $ | 2,154,114 |
|
(1) Includes goodwill of $270.3 million and $266.7 million as of June 30, 2018 and December 31, 2017, respectively.
| |
Note 16: | Supplemental Guarantor/Non-Guarantor Financial Information |
Obligations of HEP (“Parent”) under the 6% Senior Notes have been jointly and severally guaranteed by each of its direct and indirect 100% owned subsidiaries (“Guarantor Subsidiaries”). These guarantees are full and unconditional, subject to certain customary release provisions. These circumstances include (i) when a Guarantor Subsidiary is sold or sells all or substantially all of its assets, (ii) when a Guarantor Subsidiary is declared “unrestricted” for covenant purposes, (iii) when a Guarantor Subsidiary’s guarantee of other indebtedness is terminated or released and (iv) when the requirements for legal defeasance or covenant defeasance or to discharge the senior notes have been satisfied.
The following financial information presents condensed consolidating balance sheets, statements of comprehensive income, and statements of cash flows of the Parent, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries. The information has been presented as if the Parent accounted for its ownership in the Guarantor Subsidiaries, and the Guarantor Restricted Subsidiaries accounted for the ownership of the Non-Guarantor Non-Restricted Subsidiaries, using the equity method of accounting.
Condensed Consolidating Balance Sheet
|
| | | | | | | | | | | | | | | | | | | | |
June 30, 2018 | | Parent | | Guarantor Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated |
| | (In thousands) |
ASSETS | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 2 |
| | $ | 640 |
| | $ | 6,014 |
| | $ | — |
| | $ | 6,656 |
|
Accounts receivable | | — |
| | 45,447 |
| | 5,305 |
| | (586 | ) | | 50,166 |
|
Prepaid and other current assets | | 156 |
| | 2,629 |
| | 361 |
| | — |
| | 3,146 |
|
Total current assets | | 158 |
| | 48,716 |
| | 11,680 |
| | (586 | ) | | 59,968 |
|
| | | | | | | | | | |
Properties and equipment, net | | — |
| | 1,197,968 |
| | 353,741 |
| | — |
| | 1,551,709 |
|
Investment in subsidiaries
| | 1,866,892 |
| | 269,911 |
| | — |
| | (2,136,803 | ) | | — |
|
Intangible assets, net | | — |
| | 121,935 |
| | — |
| | — |
| | 121,935 |
|
Goodwill | | — |
| | 270,336 |
| | — |
| | — |
| | 270,336 |
|
Equity method investments | | — |
| | 84,752 |
| | — |
| | — |
| | 84,752 |
|
Other assets | | 10,483 |
| | 16,880 |
| | — |
| | — |
| | 27,363 |
|
Total assets | | $ | 1,877,533 |
| | $ | 2,010,498 |
| | $ | 365,421 |
| | $ | (2,137,389 | ) | | $ | 2,116,063 |
|
| | | | | | | | | | |
LIABILITIES AND EQUITY | | | | | | | | | | |
Current liabilities: | | | | | | | | | | |
Accounts payable | | $ | — |
| | $ | 19,284 |
| | $ | 1,700 |
| | $ | (586 | ) | | $ | 20,398 |
|
Accrued interest | | 13,189 |
| | — |
| | — |
| | — |
| | 13,189 |
|
Deferred revenue | | — |
| | 9,675 |
| | 1,170 |
| | — |
| | 10,845 |
|
Accrued property taxes | | — |
| | 3,077 |
| | 2,463 |
| | — |
| | 5,540 |
|
Other current liabilities | | 88 |
| | 3,505 |
| | — |
| | — |
| | 3,593 |
|
Total current liabilities | | 13,277 |
| | 35,541 |
| | 5,333 |
| | (586 | ) | | 53,565 |
|
| | | | | | | | | | |
Long-term debt | | 1,395,599 |
| | — |
| | — |
| | — |
| | 1,395,599 |
|
Other long-term liabilities | | 260 |
| | 15,060 |
| | 206 |
| | — |
| | 15,526 |
|
Deferred revenue | | — |
| | 48,405 |
| | — |
| | — |
| | 48,405 |
|
Class B unit | | — |
| | 44,600 |
| | — |
| | — |
| | 44,600 |
|
Equity - partners | | 468,397 |
| | 1,866,892 |
| | 269,911 |
| | (2,136,803 | ) | | 468,397 |
|
Equity - noncontrolling interest | | — |
| | — |
| | 89,971 |
| | — |
| | 89,971 |
|
Total liabilities and equity | | $ | 1,877,533 |
| | $ | 2,010,498 |
| | $ | 365,421 |
| | $ | (2,137,389 | ) | | $ | 2,116,063 |
|
Condensed Consolidating Balance Sheet
|
| | | | | | | | | | | | | | | | | | | | |
December 31, 2017 | | Parent | | Guarantor Restricted Subsidiaries | | Non-Guarantor Non-Restricted Subsidiaries | | Eliminations | | Consolidated |
| | (In thousands) |
ASSETS | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 2 |
| | $ | 511 |
| | $ | 7,263 |
| | $ | — |
| | $ | 7,776 |
|
Accounts receivable | | — |
| | 59,448 |
| | 5,038 |
| | (182 | ) | | 64,304 |
|
Prepaid and other current assets | | 13 |
| | 2,016 |
| | 282 |
| | — |
| | 2,311 |
|
Total current assets | | 15 |
| | 61,975 |
| | 12,583 |
| | (182 | ) | | 74,391 |
|
| | | | | | | | | | |
Properties and equipment, net | | — |
| | 1,213,626 |
| | 355,845 |
| | — |
| | 1,569,471 |
|
Investment in subsidiaries | | 1,902,285 |
| | 273,319 |
| | — |
| | (2,175,604 | ) | | — |
|
Intangible assets, net | | — |
| | 129,463 |
| | — |
| | — |
| | 129,463 |
|
Goodwill | | — |
| | 266,716 |
| | — |
| | — |
| | 266,716 |
|
Equity method investments | | — |
| | 85,279 |
| | — |
| | — |
| | 85,279 |
|
Other assets | | 11,753 |
| | 17,041 |
| | — |
| | — |
| | 28,794 |
|
Total assets | | $ | 1,914,053 |
| | $ | 2,047,419 |
| | $ | 368,428 |
| | $ | (2,175,786 | ) | | $ | 2,154,114 |
|
| | | | | | | | | | |
LIABILITIES AND EQUITY | | | | | | | | | | |
Current liabilities: | | | | | | | | | | |