HOLLY ENERGY PARTNERS, L.P. This Item 2, including but not limited to the sections under "Results of
Operations" and "Liquidity and Capital Resources," contains forward-looking
statements. See "Forward-Looking Statements" at the beginning of Part I of this
Quarterly Report on Form 10-Q. In this document, the words "we," "our," "ours"
and "us" refer to
OVERVIEW
HEP is a
We generate revenues by charging tariffs for transporting petroleum products and crude oil through our pipelines, by charging fees for terminalling and storing refined products and other hydrocarbons, providing other services at our storage tanks and terminals and charging a tolling fee per barrel or thousand standard cubic feet of feedstock throughput in our refinery processing units. We do not take ownership of products that we transport, terminal, store or process, and therefore, we are not directly exposed to changes in commodity prices.
We believe the long-term growth of global refined product demand and
Impact of COVID-19 on Our Business Our business depends in large part on the demand for the various petroleum products we transport, terminal and store in the markets we serve. The impact of the COVID-19 pandemic on the global macroeconomy has created unprecedented destruction of demand, as well as lack of forward visibility, for refined products and crude oil transportation, and for the terminalling and storage services that we provide. Over the course of the second quarter, demand for transportation fuels stabilized, and we saw incremental improvement in our volumes late in the quarter. We expect our customers will continue to adjust refinery production levels commensurate with market demand and ultimately expect demand to return to pre-COVID-19 levels. HFC, our largest customer, has announced that for the third quarter of 2020 it expects to run between 340,000 and 370,000 barrels per day of crude oil based on expected market demand for transportation fuels.
In response to the COVID-19 pandemic, and with the health and safety of our employees as a top priority, we took several actions, including limiting onsite staff at all of our facilities to essential operational personnel only, implementing a work from home policy for certain employees and restricting travel unless approved by senior leadership. We will continue to monitor COVID-19 developments and the dynamic environment to properly address these policies going forward.
In light of current circumstances and our expectations for the future, HEP
reduced its quarterly distribution to
On
The extent to which HEP's future results are affected by COVID-19 will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic, additional actions by businesses and governments in response to the pandemic and the speed and effectiveness of responses to combat the virus. However, we have long-term customer contracts with minimum volume commitments, which have expiration dates from 2021 to 2036. These minimum volume commitments accounted for approximately 70% of our total revenues in 2019. We are currently not aware of any reasons that would prevent such customers
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from making the minimum payments required under the contracts or potentially making payments in excess of the minimum payments. In addition to these payments, we also expect to collect payments for services provided to uncommitted shippers. There have been no material changes to customer payment terms due to the COVID-19 pandemic.
The COVID-19 pandemic, and the volatile regional and global economic conditions
stemming from it, could also exacerbate the risk factors identified in our
Annual Report on Form 10-K for the fiscal year ended
Investment in Joint Venture
On
The Cushing Connect Joint Venture will contract with an affiliate of HEP to
manage the construction and operation of the Cushing Connect Pipeline and with
an affiliate of Plains to manage the operation of the
Agreements with HFC
We serve HFC's refineries under long-term pipeline, terminal, tankage and
refinery processing unit throughput agreements expiring from 2021 to 2036. Under
these agreements, HFC agrees to transport, store and process throughput volumes
of refined product, crude oil and feedstocks on our pipelines, terminal,
tankage, and loading rack facilities and refinery processing units that result
in minimum annual payments to us. These minimum annual payments or revenues are
subject to annual rate adjustments on
If HFC fails to meet its minimum volume commitments under the agreements in any quarter, it will be required to pay us the amount of any shortfall in cash by the last day of the month following the end of the quarter. Under certain of the agreements, a shortfall payment may be applied as a credit in the following four quarters after minimum obligations are met.
A significant reduction in revenues under these agreements could have a material adverse effect on our results of operations.
On
Under certain provisions of an omnibus agreement we have with HFC (the "Omnibus
Agreement"), we pay HFC an annual administrative fee, currently
Under HLS's Secondment Agreement with HFC, certain employees of HFC are seconded to HLS to provide operational and maintenance services for certain of our processing, refining, pipeline and tankage assets, and HLS reimburses HFC for its prorated portion of the wages, benefits, and other costs of these employees for our benefit.
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We have a long-term strategic relationship with HFC that has historically
facilitated our growth. Our future growth plans include organic projects around
our existing assets and select investments or acquisitions that enhance our
service platform while creating accretion for our unitholders. While in the near
term, any acquisitions would be subject to economic conditions discussed in
"Overview - Impact of COVID-19 on Our Business" above, we also expect over the
longer term to continue to work with HFC on logistic asset acquisitions in
conjunction with
Furthermore, we plan to continue to pursue third-party logistic asset acquisitions that are accretive to our unitholders and increase the diversity of our revenues.
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RESULTS OF OPERATIONS (Unaudited)
Income, Distributable Cash Flow, Volumes and Balance Sheet Data
The following tables present income, distributable cash flow and volume
information for the three and the six months ended
Three Months Ended June 30, Change from
2020 2019 2019
(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates-refined product pipelines $ 16,302 $ 20,759 $ (4,457 )
Affiliates-intermediate pipelines 7,475 7,297 178
Affiliates-crude pipelines 19,311 20,651 (1,340 )
43,088 48,707 (5,619 )
Third parties-refined product pipelines 8,750 11,778 (3,028 )
Third parties-crude pipelines 7,116 11,778 (4,662 )
58,954 72,263 (13,309 )
Terminals, tanks and loading racks:
Affiliates 32,902 34,263 (1,361 )
Third parties 3,378 4,826 (1,448 )
36,280 39,089 (2,809 )
Affiliates-refinery processing units 19,573 19,399 174
Total revenues 114,807 130,751 (15,944 )
Operating costs and expenses:
Operations (exclusive of depreciation and
amortization) 34,737 40,602 (5,865 )
Depreciation and amortization 25,034 24,247 787
General and administrative 2,535 1,988 547
62,306 66,837 (4,531 )
Operating income 52,501 63,914 (11,413 )
Other income (expense):
Equity in earnings of equity method
investments 2,156 1,783 373
Interest expense, including amortization (13,779 ) (19,230 ) 5,451
Interest income 2,813 551 2,262
Gain on sales-type leases 33,834 - 33,834
Gain on sale of assets and other 468 111 357
25,492 (16,785 ) 42,277
Income before income taxes 77,993 47,129 30,864
State income tax benefit (expense) (39 ) 30 (69 )
Net income 77,954 47,159 30,795
Allocation of net income attributable to
noncontrolling interests (1,484 ) (1,469 ) (15 )
Net income attributable to the partners 76,470 45,690 30,780
Limited partners' earnings per unit-basic and
diluted $ 0.73 $ 0.43 $ 0.30
Weighted average limited partners' units
outstanding 105,440 105,440 -
EBITDA (1) $ 112,509 $ 88,586 $ 23,923
Adjusted EBITDA (1) $ 80,168 $ 88,586 $ (8,418 )
Distributable cash flow (2) $ 65,456 $ 67,486 $ (2,030 )
Volumes (bpd)
Pipelines:
Affiliates-refined product pipelines 100,524 130,802 (30,278 )
Affiliates-intermediate pipelines 128,464 141,345 (12,881 )
Affiliates-crude pipelines 252,570 370,351 (117,781 )
481,558 642,498 (160,940 )
Third parties-refined product pipelines 57,876 66,963 (9,087 )
Third parties-crude pipelines 85,851 140,555 (54,704 )
625,285 850,016 (224,731 )
Terminals and loading racks:
Affiliates 372,093 431,509 (59,416 )
Third parties 45,876 59,343 (13,467 )
417,969 490,852 (72,883 )
Affiliates-refinery processing units 49,891 77,728 (27,837 )
Total for pipelines and terminal and refinery
processing unit assets (bpd) 1,093,145 1,418,596 (325,451 )
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Six Months Ended June 30, Change from
2020 2019 2019
(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates-refined product pipelines $ 36,385 $ 41,491 $ (5,106 )
Affiliates-intermediate pipelines 14,949 14,578 371
Affiliates-crude pipelines 39,704 41,772 (2,068 )
91,038 97,841 (6,803 )
Third parties-refined product pipelines 23,548 27,382 (3,834 )
Third parties-crude pipelines 14,840 22,140 (7,300 )
129,426 147,363 (17,937 )
Terminals, tanks and loading racks:
Affiliates 66,496 66,669 (173 )
Third parties 7,282 9,998 (2,716 )
73,778 76,667 (2,889 )
Affiliates-refinery processing units 39,457 41,218 (1,761 )
Total revenues 242,661 265,248 (22,587 )
Operating costs and expenses:
Operations (exclusive of depreciation and
amortization) 69,718 78,121 (8,403 )
Depreciation and amortization 49,012 48,071 941
General and administrative 5,237 4,608 629
123,967 130,800 (6,833 )
Operating income 118,694 134,448 (15,754 )
Other income (expense):
Equity in earnings of equity method
investments 3,870 3,883 (13 )
Interest expense, including amortization (31,546 ) (38,252 ) 6,706
Interest income 5,031 1,079 3,952
Loss on early extinguishment of debt (25,915 ) - (25,915 )
Gain on sales-type leases 33,834 - 33,834
Gain (loss) on sale of assets and other 974 (199 ) 1,173
(13,752 ) (33,489 ) 19,737
Income before income taxes 104,942 100,959 3,983
State income tax expense (76 ) (6 ) (70 )
Net income 104,866 100,953 3,913
Allocation of net income attributable to
noncontrolling interests (3,535 ) (4,081 ) 546
Net income attributable to the partners 101,331 96,872 4,459
Limited partners' earnings per unit-basic and
diluted $ 0.96 $ 0.92 $ 0.04
Weighted average limited partners' units
outstanding 105,440 105,440 -
EBITDA (1) $ 176,934 $ 182,122 $ (5,188 )
Adjusted EBITDA (1) $ 171,276 $ 182,122 $ (10,846 )
Distributable cash flow (2) $ 136,164 $ 138,085 $ (1,921 )
Volumes (bpd)
Pipelines:
Affiliates-refined product pipelines 115,245 130,805 (15,560 )
Affiliates-intermediate pipelines 135,288 136,116 (828 )
Affiliates-crude pipelines 278,801 385,490 (106,689 )
529,334 652,411 (123,077 )
Third parties-refined product pipelines 53,756 73,975 (20,219 )
Third parties-crude pipelines 89,027 133,565 (44,538 )
672,117 859,951 (187,834 )
Terminals and loading racks:
Affiliates 400,911 402,909 (1,998 )
Third parties 45,910 64,028 (18,118 )
446,821 466,937 (20,116 )
Affiliates-refinery processing units 59,843 71,816 (11,973 )
Total for pipelines and terminal and refinery
processing unit assets (bpd) 1,178,781 1,398,704 (219,923 )
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(1) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is calculated as net income attributable to the partners plus (i) interest
expense, net of interest income, (ii) state income tax expense and (iii)
depreciation and amortization. Adjusted EBITDA is calculated as EBITDA
plus (i) loss on early extinguishment of debt and (ii) pipeline tariffs
not included in revenues due to impacts from lease accounting for certain
pipeline tariffs minus (iii) gain on sales-type leases and (iv) pipeline
lease payments not included in operating costs and expenses. Portions of
our minimum guaranteed pipeline tariffs for assets subject to sales-type
lease accounting are recorded as interest income with the remaining
amounts recorded as a reduction in net investment in leases. These
pipeline tariffs were previously recorded as revenues prior to the renewal
of the throughput agreements, which triggered sales-type lease accounting.
Similarly, certain pipeline lease payments were previously recorded as
operating costs and expenses, but the underlying lease was reclassified
from an operating lease to a financing lease, and these payments are now
recoded as interest expense and reductions in the lease liability. EBITDA
and Adjusted EBITDA are not calculations based upon generally accepted
accounting principles ("GAAP"). However, the amounts included in the
EBITDA and Adjusted EBITDA calculations are derived from amounts included
in our consolidated financial statements. EBITDA and Adjusted EBITDA
should not be considered as alternatives to net income attributable to
Holly Energy Partners or operating income, as indications of our operating
performance or as alternatives to operating cash flow as a measure of
liquidity. EBITDA and Adjusted EBITDA are not necessarily comparable to
similarly titled measures of other companies. EBITDA and Adjusted EBITDA
are presented here because they are widely used financial indicators used
by investors and analysts to measure performance. EBITDA and Adjusted
EBITDA are also used by our management for internal analysis and as a
basis for compliance with financial covenants. Set forth below are our
calculations of EBITDA and Adjusted EBITDA.
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(In thousands)
Net income attributable to the
partners $ 76,470 $ 45,690 $ 101,331 $ 96,872
Add (subtract):
Interest expense 13,779 19,230 31,546 38,252
Interest income (2,813 ) (551 ) (5,031 ) (1,079 )
State income tax (benefit) expense 39 (30 ) 76 6
Depreciation and amortization 25,034 24,247 49,012 48,071
EBITDA $ 112,509 $ 88,586 $ 176,934 $ 182,122
Loss on early extinguishment of
debt - - 25,915 -
Gain on sales-type leases (33,834 ) - (33,834 ) -
Pipeline tariffs not included in
revenues 3,099 - 5,474 -
Lease payments not included in
operating costs (1,606 ) - (3,213 ) -
Adjusted EBITDA $ 80,168 $ 88,586 $ 171,276 $ 182,122
(2) Distributable cash flow is not a calculation based upon GAAP. However, the
amounts included in the calculation are derived from amounts presented in
our consolidated financial statements, with the general exceptions of
maintenance capital expenditures. Distributable cash flow should not be
considered in isolation or as an alternative to net income or operating
income as an indication of our operating performance or as an alternative
to operating cash flow as a measure of liquidity. Distributable cash flow
is not necessarily comparable to similarly titled measures of other
companies. Distributable cash flow is presented here because it is a
widely accepted financial indicator used by investors to compare
partnership performance. It is also used by management for internal
analysis and for our performance units. We believe that this measure
provides investors an enhanced perspective of the operating performance of
our assets and the cash our business is generating. Set forth below is our
calculation of distributable cash flow.
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Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(In thousands)
Net income attributable to the
partners $ 76,470 $ 45,690 $ 101,331 $ 96,872
Add (subtract):
Depreciation and amortization 25,034 24,247 49,012 48,071
Amortization of discount and 842 769 1,641 1,535
deferred debt issuance costs
Loss on early extinguishment of
debt - - 25,915 -
Revenue recognized greater than (44 ) (297 ) (501 ) (3,331 )
customer billings
Maintenance capital
expenditures (3) (1,140 ) (625 ) (3,627 ) (1,360 )
Increase (decrease) in
environmental liability 157 (277 ) 158 (555 )
Decrease in reimbursable deferred
revenue (3,005 ) (2,061 ) (5,805 ) (3,640 )
Gain on sales-type leases (33,834 ) - (33,834 ) -
Other 976 40 1,874 493
Distributable cash flow $ 65,456 $ 67,486 $ 136,164 $ 138,085
(3) Maintenance capital expenditures are capital expenditures made to replace
partially or fully depreciated assets in order to maintain the existing
operating capacity of our assets and to extend their useful lives.
Maintenance capital expenditures include expenditures required to maintain
equipment reliability, tankage and pipeline integrity, safety and to
address environmental regulations.
June 30, December 31,
2020 2019
(In thousands)
Balance Sheet Data
Cash and cash equivalents $ 18,913 $ 13,287
Working capital $ 34,977 $ 20,758
Total assets $ 2,221,783 $ 2,199,232
Long-term debt $ 1,486,648 $ 1,462,031
Partners' equity $ 380,723 $ 381,103 Results of Operations-Three Months Ended
Summary
Net income attributable to the partners for the second quarter was
Revenues
Revenues for the second quarter were
Revenues from our refined product pipelines were
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Spring refinery and our UNEV pipeline as well as the recording of certain pipeline tariffs as interest income as the related throughput contract renewals were determined to be sales-type leases.
Revenues from our intermediate pipelines were
Revenues from our crude pipelines were
Revenues from terminal, tankage and loading rack fees were
Revenues from refinery processing units were
Operations Expense
Operations (exclusive of depreciation and amortization) expense was
Depreciation and Amortization
Depreciation and amortization for the three months ended
General and Administrative
General and administrative costs for the three months ended
Equity in Earnings of Equity Method Investments
Three Months Ended June 30,
Equity Method Investment 2020 2019
(in thousands)
Osage Pipe Line Company, LLC $ 366 $ 746
Cheyenne Pipeline LLC 1,085 1,037
Cushing Terminal 705 -
Total $ 2,156 $ 1,783 Equity in earnings of
Interest Expense
Interest expense for the three months ended
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State Income Tax
We recorded a state income tax expense of
Results of Operations-Six Months Ended
Summary
Net income attributable to the partners for the six months ended
Revenues
Revenues for the six months ended
Revenues from our refined product pipelines were
Revenues from our intermediate pipelines were
Revenues from our crude pipelines were
Revenues from terminal, tankage and loading rack fees were
Revenues from refinery processing units were
Operations Expense
Operations expense (exclusive of depreciations and amortization) for the six
months ended
Depreciation and Amortization
Depreciation and amortization for the six months ended
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General and Administrative
General and administrative costs for the six months ended
Equity in Earnings of Equity Method Investments
Six Months Ended June 30,
Equity Method Investment 2020 2019
(in thousands)
Osage Pipe Line Company, LLC 1,380 1,251
Cheyenne Pipeline LLC 2,160 2,632
Cushing Terminal 330 -
Total $ 3,870 $ 3,883 Equity in earnings of
Interest Expense
Interest expense for the six months ended
State Income Tax
We recorded a state income tax expense of
LIQUIDITY AND CAPITAL RESOURCES
Overview
We have a
During the six months endedJune 30, 2020 , we received advances totaling$168.0 million and repaid$138.5 million , resulting in a net increase of$29.5 million under the Credit Agreement and an outstanding balance of$995.0 million atJune 30, 2020 . As ofJune 30, 2020 , we have no letters of credit outstanding under the Credit Agreement and the available capacity under the Credit Agreement was$405.0 million . Amounts repaid under the Credit Agreement may be reborrowed from time to time. OnFebruary 4, 2020 , we closed a private placement of$500 million in aggregate principal amount of 5% senior unsecured notes due in 2028 (the "5% Senior Notes"). OnFebruary 5, 2020 , we redeemed the existing$500 million 6% Senior Notes at a redemption cost of$522.5 million , at which time we recognized a$25.9 million early extinguishment loss consisting of a$22.5 million debt redemption premium and unamortized financing costs of$3.4 million . We funded the$522.5 million redemption with proceeds from the issuance of our 5% Senior Notes and borrowings under our Credit Agreement. We have a continuous offering program under which we may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of$200 million . We did not issue any units under this program during the three months endedJune 30, 2020 . As ofJune 30, 2020 , HEP has issued 2,413,153 units under this program, providing$82.3 million in gross proceeds.
Under our registration statement filed with the
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things, funding acquisitions of assets or businesses, working capital, capital expenditures, investments in subsidiaries, the retirement of existing debt and/or the repurchase of common units or other securities.
We believe our current cash balances, future internally generated funds and funds available under the Credit Agreement will provide sufficient resources to meet our working capital liquidity, capital expenditure and quarterly distribution needs for the foreseeable future.
In
Cash and cash equivalents increased by
Cash Flows-Operating Activities
Cash flows from operating activities decreased by
Cash Flows-Investing Activities
Cash flows used for investing activities were
Cash Flows-Financing Activities
Cash flows used for financing activities were
Capital Requirements Our pipeline and terminalling operations are capital intensive, requiring investments to maintain, expand, upgrade or enhance existing operations and to meet environmental and operational regulations. Our capital requirements have consisted of, and are expected to continue to consist of, maintenance capital expenditures and expansion capital expenditures. "Maintenance capital expenditures" represent capital expenditures to replace partially or fully depreciated assets to maintain the operating capacity of existing assets. Maintenance capital expenditures include expenditures required to maintain equipment reliability, tankage and pipeline integrity, safety and to address environmental regulations. "Expansion capital expenditures" represent capital expenditures to expand the operating capacity of existing or new assets, whether through construction or acquisition. Expansion capital expenditures include expenditures to acquire assets, to grow our business and to expand existing facilities, such as projects that increase throughput capacity on our pipelines and in our terminals. Repair and maintenance expenses associated with existing assets that are minor in nature and do not extend the useful life of existing assets are charged to operating expenses as incurred.
Each year the board of directors of HLS, our ultimate general partner, approves
our annual capital budget, which specifies capital projects that our management
is authorized to undertake. Additionally, at times when conditions warrant or as
new opportunities arise, additional projects may be approved. The funds
allocated for a particular capital project may be expended over a period in
excess of a year, depending on the time required to complete the project.
Therefore, our planned capital expenditures for a given year consist of
expenditures approved for capital projects included in the current year's
capital budget as well as, in certain cases, expenditures approved for capital
projects in capital budgets for prior years. The 2020 capital budget as well as
our current forecast are comprised of approximately
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investments. We expect the majority of the 2020 expansion capital budget to be invested in our share of Cushing Connect Joint Venture investments. In addition to our capital budget, we may spend funds periodically to perform capital upgrades or additions to our assets where a customer reimburses us for such costs. The upgrades or additions would generally benefit the customer over the remaining life of the related service agreements. We expect that our currently planned sustaining and maintenance capital expenditures, as well as expenditures for acquisitions and capital development projects, will be funded with cash generated by operations.
Under the terms of the transaction to acquire HFC's 75% interest in UNEV, we
issued to HFC a Class B unit comprising a noncontrolling equity interest in a
wholly-owned subsidiary subject to redemption to the extent that HFC is entitled
to a 50% interest in our share of annual UNEV earnings before interest, income
taxes, depreciation, and amortization above
Credit Agreement
Our
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 all covenants as of
Senior Notes
As of
On
The 5% Senior Notes are unsecured and impose certain restrictive covenants,
including limitations on our ability to incur additional indebtedness, make
investments, sell assets, incur certain liens, pay distributions, enter into
transactions with affiliates, and enter into mergers. We were in compliance with
the restrictive covenants for the 5% Senior Notes as of
Indebtedness under the 5% Senior Notes is guaranteed by all of our existing
wholly-owned subsidiaries (other than
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Long-term Debt
The carrying amounts of our long-term debt are as follows:
June 30, December 31,
2020 2019
(In thousands)
Credit Agreement 995,000 $ 965,500
6% Senior Notes
Principal - 500,000
Unamortized debt issuance costs - (3,469 )
- 496,531
5% Senior Notes
Principal 500,000 -
Unamortized debt issuance costs (8,352 ) -
491,648 -
Total long-term debt $ 1,486,648 $ 1,462,031 Contractual Obligations There were no significant changes to our long-term contractual obligations during this period.
Impact of Inflation
Inflation in
The substantial majority of our revenues are generated under long-term contracts that provide for increases or decreases in our rates and minimum revenue guarantees annually for increases or decreases in the PPI. Certain of these contracts have provisions that limit the level of annual PPI percentage rate increases or decreases. A significant and prolonged period of high inflation or a significant and prolonged period of negative inflation could adversely affect our cash flows and results of operations if costs increase at a rate greater than the fees we charge our shippers.
Environmental Matters Our operation of pipelines, terminals, and associated facilities in connection with the transportation and storage of refined products and crude oil is subject to stringent and complex federal, state, and local laws and regulations governing the discharge of materials into the environment, or otherwise relating to the protection of the environment. As with the industry generally, compliance with existing and anticipated laws and regulations increases our overall cost of business, including our capital costs to construct, maintain, and upgrade equipment and facilities. While these laws and regulations affect our maintenance capital expenditures and net income, we believe that they do not affect our competitive position given that the operations of our competitors are similarly affected. However, these laws and regulations, and the interpretation or enforcement thereof, are subject to frequent change by regulatory authorities, and we are unable to predict the ongoing cost to us of complying with these laws and regulations or the future impact of these laws and regulations on our operations. Violation of environmental laws, regulations, and permits can result in the imposition of significant administrative, civil and criminal penalties, injunctions, and construction bans or delays. A major discharge of hydrocarbons or hazardous substances into the environment could, to the extent the event is not insured, subject us to substantial expense, including both the cost to comply with applicable laws and regulations and claims made by employees, neighboring landowners and other third parties for personal injury and property damage.
Under the Omnibus Agreement and certain transportation agreements and purchase agreements with HFC, HFC has agreed to indemnify us, subject to certain monetary and time limitations, for environmental noncompliance and remediation liabilities associated with certain assets transferred to us from HFC and occurring or existing prior to the date of such transfers. We have an environmental agreement with Delek with respect to pre-closing environmental costs and liabilities relating to the pipelines and terminals acquired from Delek in 2005, under which Delek will indemnify us subject to certain monetary and time limitations.
There are environmental remediation projects in progress that relate to certain
assets acquired from HFC. Certain of these projects were underway prior to our
purchase and represent liabilities retained by HFC. At
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that related to environmental clean-up projects for which we have assumed liability or for which the indemnity provided for by HFC has expired or will expire. The remaining projects, including assessment and monitoring activities, are covered under the HFC environmental indemnification discussed above and represent liabilities of HFC.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in
Accounting Pronouncements Adopted During the Periods Presented
Goodwill Impairment Testing
In
Leases
In
Credit Losses Measurement
In
RISK MANAGEMENT
The market risk inherent in our debt positions is the potential change arising from increases or decreases in interest rates as discussed below.
At
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For the variable rate Credit Agreement, changes in interest rates would affect
cash flows, but not the fair value. At
Our operations are subject to normal hazards of operations, including fire, explosion and weather-related perils. We maintain various insurance coverages, including business interruption insurance, subject to certain deductibles. We are not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable, or premium costs, in our judgment, do not justify such expenditures.
We have a risk management oversight committee that is made up of members from our senior management. This committee monitors our risk environment and provides direction for activities to mitigate, to an acceptable level, identified risks that may adversely affect the achievement of our goals.
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