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 toHolly Energy Partners, L.P. ("HEP") and its consolidated subsidiaries or to HEP or an individual subsidiary and not to any other person. References herein toHF Sinclair Corporation ("HF Sinclair") with respect to time periods prior toMarch 14, 2022 refer toHollyFrontier Corporation ("HFC") and its consolidated subsidiaries and do not includeHippo Holding LLC (now known asSinclair Holding LLC ),Sinclair Transportation Company LLC or their respective consolidated subsidiaries (collectively, the "Acquired Sinclair Businesses"). References herein toHF Sinclair with respect to time periods from and afterMarch 14, 2022 refer toHF Sinclair and its consolidated subsidiaries, which include the operations of the combined business operations of HFC and the Acquired Sinclair Businesses. OVERVIEW HEP, together with its consolidated subsidiaries, is a publicly held master limited partnership. OnMarch 14, 2022 (the "Closing Date"), HFC and HEP announced the establishment ofHF Sinclair , as the new parent holding company of HFC and HEP and their subsidiaries, and the completion of their respective acquisitions ofSinclair Oil Corporation (now known asSinclair Oil LLC ) andSinclair Transportation Company LLC ("Sinclair Transportation") fromREH Company (referred to herein as "Sinclair HoldCo"). On the Closing Date,HF Sinclair completed its acquisition of Sinclair Oil by effecting (a) a holding company merger with HFC surviving such merger as a direct wholly owned subsidiary ofHF Sinclair (the "HFC Merger"), and (b) immediately following the HFC Merger, a contribution whereby Sinclair HoldCo contributed all of the equity interests ofHippo Holding LLC (now known asSinclair Holding LLC ), the parent company of Sinclair Oil (the "Target Company "), toHF Sinclair in exchange for shares ofHF Sinclair , resulting in theTarget Company becoming a direct wholly owned subsidiary ofHF Sinclair (together with the HFC Merger, the "HFC Transactions").
As of
Additionally, on the Closing Date and immediately prior to consummation of the HFC Transactions, HEP acquired all of the outstanding equity interests of Sinclair Transportation from Sinclair HoldCo in exchange for 21 million newly issued common limited partner units of HEP (the "HEP Units"), representing 16.6% of the pro forma outstanding HEP Units with a value of approximately$349 million based on HEP's fully diluted common limited partner units outstanding and closing unit price onMarch 11, 2022 , and cash consideration equal to$329.0 million , inclusive of final working capital adjustments for an aggregate transaction value of$678.0 million (the "HEP Transaction" and together with the HFC Transactions, the "Sinclair Transactions"). The cash consideration was funded through a draw under HEP's senior secured revolving credit facility. The HEP Transaction was conditioned on the closing of the HFC Transactions, which occurred immediately following the HEP Transaction. Sinclair Transportation, together with its subsidiaries, owned Sinclair HoldCo's integrated crude and refined products pipelines and terminal assets, including approximately 1,200 miles of integrated crude and refined product pipeline supporting the Sinclair HoldCo refineries and other third-party refineries, eight product terminals and two crude terminals with approximately 4.5 million barrels of operated storage. In addition, HEP acquired Sinclair Transportation's interests in three pipeline joint ventures for crude gathering and product offtake including:Saddle Butte Pipeline III, LLC (25.06% non-operated interest); Pioneer Pipeline (49.995% non-operated interest); and UNEV Pipeline (the 25% non-operated interest not already owned by HEP, resulting inUNEV Pipeline, LLC becoming a wholly owned subsidiary of HEP).
See Notes 1 and 2 of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information regarding the acquisitions.
Through our subsidiaries and joint ventures, we own and/or operate petroleum product and crude oil pipelines, terminal, tankage and loading rack facilities and refinery processing units that support the refining and marketing operations ofHF Sinclair and other refineries in the Mid-Continent, Southwest and Northwest regions ofthe United States . HEP, through its subsidiaries and joint ventures, owns and/or operates petroleum product and crude pipelines, tankage and terminals inColorado ,Idaho ,Iowa ,Kansas ,Missouri ,Nevada ,New Mexico ,Oklahoma ,Texas ,Utah ,Washington andWyoming as well as refinery processing units inUtah andKansas . - 40 - -------------------------------------------------------------------------------- Table o 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 global refined product demand andU.S. crude production should support high utilization rates for the refineries we serve, which in turn should support volumes in our product pipelines, crude gathering systems and terminals. Market Developments Our results for the third quarter and the nine months endedSeptember 30, 2022 were favorably impacted by global demand for transportation fuels, lubricants and transportation and terminal services having returned to pre-pandemic levels. We expect our customers will continue to adjust refinery production levels commensurate with market demand. The extent to which HEP's future results are affected by the COVID-19 pandemic or volatile regional and global economic conditions will depend on various factors and consequences beyond our control. However, we have long-term customer contracts with minimum volume commitments, which have expiration dates from 2023 to 2037. These minimum volume commitments accounted for approximately 70% of our total tariffs and fees billed to customers for both the nine months endedSeptember 30, 2022 andSeptember 30, 2021 . We are currently not aware of any reasons that would prevent such customers from making the minimum payments required under the contracts or potentially making payments in excess of the minimum payments. In addition to these payments, we also expect to collect payments for services provided to uncommitted shippers. Investment in Joint Venture OnOctober 2, 2019 ,HEP Cushing LLC ("HEP Cushing"), a wholly owned subsidiary of HEP, andPlains Marketing, L.P. , a wholly owned subsidiary of Plains All American Pipeline, L.P. ("Plains"), formed a 50/50 joint venture,Cushing Connect Pipeline & Terminal LLC (the "Cushing Connect Joint Venture"), for (i) the development, construction, ownership and operation of a new 160,000 barrel per day common carrier crude oil pipeline (the "Cushing Connect Pipeline") that will connect theCushing, Oklahoma crude oil hub to theTulsa, Oklahoma refining complex owned by a subsidiary ofHF Sinclair and (ii) the ownership and operation of 1.5 million barrels of crude oil storage inCushing, Oklahoma (the "Cushing Connect JV Terminal ").The Cushing Connect JV Terminal went in service during the second quarter of 2020, and the Cushing Connect Pipeline was placed into service at the end of the third quarter of 2021. Long-term commercial agreements have been entered into to support the Cushing Connect Joint Venture assets. The Cushing Connect Joint Venture has contracted with an affiliate of HEP to manage the construction and operation of the Cushing Connect Pipeline and with an affiliate of Plains to manage the operation of theCushing Connect JV Terminal . The total Cushing Connect Joint Venture investment will generally be shared equally among HEP and Plains. However, we are solely responsible for any Cushing Connect Pipeline construction costs that exceed the budget by more than 10%. HEP estimates its share of the cost of theCushing Connect JV Terminal contributed by Plains and Cushing Connect Pipeline construction costs are approximately$73 million , including approximately$5 million of Cushing Connect Pipeline construction costs exceeding the budget by more than 10% borne solely by HEP. Agreements withHF Sinclair We serveHF Sinclair's refineries under long-term pipeline, terminal, tankage and refinery processing unit throughput agreements expiring from 2023 to 2037. Under these agreements,HF Sinclair agrees to transport, store, and process throughput volumes of refined product, crude oil and feedstocks on our pipelines, terminal, tankage, loading rack facilities and refinery processing units that result in minimum annual payments to us. These minimum annual payments or revenues are subject to annual rate adjustments onJuly 1st each year based on the PPI or theFERC index. OnDecember 17, 2020 ,FERC established a new price index for the five-year period commencingJuly 1, 2021 and endingJune 30, 2026 , in which common carriers charging indexed rates were permitted to adjust their indexed ceilings annually by Producer Price Index plus 0.78%.FERC received requests for rehearing of itsDecember 17, 2020 order, and onJanuary 20, 2022 ,FERC revised the index level used to determine the annual changes to interstate oil pipeline rate ceilings to Producer Price Index minus 0.21%. The order required the recalculation of theJuly 1, 2021 index ceilings to be effective as ofMarch 1, 2022 . As ofSeptember 30, 2022 , these agreements withHF Sinclair require minimum annualized payments to us of$446 million . IfHF Sinclair fails to meet its minimum volume commitments under the agreements in any quarter, it will be required to pay us the amount of any shortfall in cash by the last day of the month following the end of the quarter. Under certain of the agreements, a shortfall payment may be applied as a credit in the following four quarters after minimum obligations are met.
A significant reduction in revenues under these agreements could have a material adverse effect on our results of operations.
- 41 -
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Table o
On June 1, 2020 , HFC announced plans to permanently cease petroleum refining
operations at its Cheyenne Refinery (the "Cheyenne Refinery ") and to convert
certain assets at that refinery to renewable diesel production. HFC subsequently
began winding down petroleum refining operations at its Cheyenne Refinery on
August 3, 2020 .
On February 8, 2021 , HEP and HFC finalized and executed new agreements for HEP's
Cheyenne assets with the following terms, in each case effective January 1,
2021 : (1) a ten-year lease with two five-year renewal option periods for HFC's
(and now HF Sinclair's ) use of certain HEP tank and rack assets in the Cheyenne
Refinery to facilitate renewable diesel production with an annual lease payment
of approximately $5 million , (2) a five-year contango service fee arrangement
that will utilize HEP tank assets inside the Cheyenne Refinery where HFC (and
now HF Sinclair ) will pay a base tariff to HEP for available crude oil storage
and HFC (and now HF Sinclair ) and HEP will split any profits generated on crude
oil contango opportunities and (3) a $10 million one-time cash payment from HFC
to HEP for the termination of the existing minimum volume commitment.
Under certain provisions of an omnibus agreement we have with HF Sinclair (the
"Omnibus Agreement"), we pay HF Sinclair an annual administrative fee, currently
$5.0 million , for the provision by HF Sinclair or its affiliates of various
general and administrative services to us. In connection with the HEP
Transaction, we pay HF Sinclair a temporary monthly fee of $62,500 relating to
transition services to be provided to HEP by HF Sinclair . Neither the annual
administrative fee nor the temporary monthly fee includes the salaries of
personnel employed by HF Sinclair who perform services for us on behalf of Holly
Logistic Services, L.L.C. ("HLS"), or the cost of their employee benefits, which
are separately charged to us by HF Sinclair . We also reimburse HF Sinclair and
its affiliates for direct expenses they incur on our behalf.
Under HLS's Secondment Agreement with
We have a long-term strategic relationship with HFC (and nowHF Sinclair ) that has historically facilitated our growth. Our future growth plans include organic projects around our existing assets and select investments or acquisitions that enhance our service platform while creating accretion for our unitholders. While in the near term, any acquisitions would be subject to economic conditions discussed in "Overview - Market Developments" above, we also expect over the longer term to continue to work withHF Sinclair on logistic asset acquisitions in conjunction withHF Sinclair's refinery acquisition strategies. See "Overview" above for a discussion of the Sinclair Transactions.
Furthermore, as demonstrated by our recent transaction with Sinclair HoldCo, we plan to continue to pursue third-party logistic asset acquisitions that are accretive to our unitholders and increase the diversity of our revenues.
Indicators ofGoodwill and Long-lived Asset Impairment During the three months endedMarch 31, 2021 , changes in our agreements with HFC related to ourCheyenne assets resulted in an increase in the net book value of ourCheyenne reporting unit due to sales-type lease accounting, which led us to determine indicators of potential goodwill impairment for ourCheyenne reporting unit were present. The estimated fair values of ourCheyenne reporting unit were derived using a combination of income and market approaches. The income approach reflects expected future cash flows based on anticipated gross margins, operating costs, and capital expenditures. The market approaches include both the guideline public company and guideline transaction methods. Both methods utilize pricing multiples derived from historical market transactions of other like-kind assets. These fair value measurements involve significant unobservable inputs (Level 3 inputs). See Note 6 for further discussion of Level 3 inputs.
Our interim impairment testing of our
We performed our annual goodwill impairment testing qualitatively as ofJuly 1, 2022 , and determined it was not more likely than not that the carrying amount of each reporting unit was greater than its fair value. Therefore, a quantitative test was not necessary, and no additional impairment of goodwill was recorded. - 42 - -------------------------------------------------------------------------------- Table o 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 nine months ended
- 43 ---------------------------------------------------------------------------------
Table o
Three Months Ended September 30, Change from
2022 2021 2021
(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates-refined product pipelines $
24,731
7,988 7,537 451
Affiliates-crude pipelines 23,169 19,536 3,633
55,888 45,775 10,113
Third parties-refined product pipelines 6,694 8,799 (2,105)
Third parties-crude pipelines 14,565 12,780 1,785
77,147 67,354 9,793
Terminals, tanks and loading racks:
Affiliates 39,557 29,436 10,121
Third parties 4,875 3,881 994
44,432 33,317 11,115
Refinery processing units-Affiliates 27,423 21,913 5,510
Total revenues 149,002 122,584 26,418
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) 60,470 42,793 17,677
Depreciation and amortization 25,236 21,826 3,410
General and administrative 3,751 3,849 (98)
89,457 68,468 20,989
Operating income 59,545 54,116 5,429
Other income (expense):
Equity in earnings of equity method investments (16,334) 3,689 (20,023)
Interest expense, including amortization (22,965) (13,417) (9,548)
Interest income 24,234 6,835 17,399
Gain on sale of assets and other 494 77 417
(14,571) (2,816) (11,755)
Income before income taxes 44,974 51,300 (6,326)
State income tax benefit (expense) (38) 4 (42)
Net income 44,936 51,304 (6,368)
Allocation of net income attributable to noncontrolling interests
(2,985) (2,144) (841) Net income attributable to the partners 41,951 49,160 (7,209) Limited partners' earnings per unit-basic and diluted $
0.33
126,440 105,440 21,000 EBITDA (1)$ 65,956 $ 77,564 $ (11,608) Adjusted EBITDA (1)$ 110,092 $ 83,270 $ 26,822 Distributable cash flow (2)$ 78,731 $ 66,810 $ 11,921 Volumes (bpd) Pipelines: Affiliates-refined product pipelines 167,618 115,507 52,111 Affiliates-intermediate pipelines 137,049 136,398 651 Affiliates-crude pipelines 507,419 271,717 235,702 812,086 523,622 288,464 Third parties-refined product pipelines 38,040 46,834 (8,794) Third parties-crude pipelines 131,622 136,247 (4,625) 981,748 706,703 275,045 Terminals and loading racks: Affiliates 583,089 419,665 163,424 Third parties 37,782 52,541 (14,759) 620,871 472,206 148,665 Refinery processing units-Affiliates 72,065 72,297 (232) Total for pipelines and terminal and refinery processing unit assets (bpd) 1,674,684 1,251,206 423,478 - 44 -
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Table o
Nine Months Ended September 30, Change from
2022 2021 2021
(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates-refined product pipelines $
62,511
23,015 22,564 451
Affiliates-crude pipelines 62,417 58,241 4,176
147,943 137,325 10,618
Third parties-refined product pipelines 21,169 28,188 (7,019)
Third parties-crude pipelines 41,134 36,667 4,467
210,246 202,180 8,066
Terminals, tanks and loading racks:
Affiliates 108,997 95,431 13,566
Third parties 17,008 12,955 4,053
126,005 108,386 17,619
Refinery processing units-Affiliates 68,719 65,436 3,283
Total revenues 404,970 376,002 28,968
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) 156,994 126,226 30,768
Depreciation and amortization 74,397 71,894 2,503
General and administrative 12,745 9,664 3,081
Goodwill impairment - 11,034 (11,034)
244,136 218,818 25,318
Operating income 160,834 157,184 3,650
Other income (expense):
Equity in earnings of equity method investments (7,261) 8,875 (16,136)
Interest expense, including amortization (56,951) (40,595) (16,356)
Interest income 61,212 19,997 41,215
Gain on sales-type leases - 24,677 (24,677)
Gain on sale of assets and other 640 5,994 (5,354)
(2,360) 18,948 (21,308)
Income before income taxes 158,474 176,132 (17,658)
State income tax (expense) (83) (60) (23)
Net income 158,391 176,072 (17,681)
Allocation of net income attributable to noncontrolling interests
(10,089) (6,770) (3,319)
Net income attributable to the partners 148,302 169,302 (21,000)
Limited partners' earnings per unit-basic and diluted $
1.22
120,902 105,440 15,462
EBITDA (1) $ 218,521 $ 261,854 $ (43,333)
Adjusted EBITDA (1) $
299,673
$
221,643
Volumes (bpd)
Pipelines:
Affiliates-refined product pipelines 138,608 118,033 20,575
Affiliates-intermediate pipelines 126,550 131,873 (5,323)
Affiliates-crude pipelines 460,641 261,117 199,524
725,799 511,023 214,776
Third parties-refined product pipelines 41,646 47,805 (6,159)
Third parties-crude pipelines 133,598 131,842 1,756
901,043 690,670 210,373
Terminals and loading racks:
Affiliates 534,305 386,400 147,905
Third parties 40,923 50,542 (9,619)
575,228 436,942 138,286
Refinery processing units-Affiliates 69,903 69,904 (1)
Total for pipelines and terminal and refinery processing unit
assets (bpd) 1,546,174 1,197,516 348,658
- 45 -
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Table o
(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) goodwill
impairment, (ii) acquisition integration and regulatory costs, (iii) our share
of Osage environmental expenses included in equity in earnings of equity method
investments, and (iv) tariffs and fees not included in revenues due to impacts
from lease accounting for certain tariffs and fees minus (v) gain on sales-type
leases, (vi) gain on significant asset sales and (vii) pipeline lease payments
not included in operating costs and expenses. Portions of our minimum guaranteed
pipeline and terminal tariffs and fees for assets subject to sales-type lease
accounting are recorded as interest income with the remaining amounts recorded
as a reduction in net investment in leases. Similarly, certain pipeline lease
payments were previously recorded as operating costs and expenses, but the
underlying lease was reclassified from an operating lease to a financing lease,
and these payments are now recorded as interest expense and reductions in the
lease liability. EBITDA and Adjusted EBITDA are not calculations based upon
generally accepted accounting principles ("GAAP"). However, the amounts included
in the EBITDA and Adjusted EBITDA calculations are derived from amounts included
in our consolidated financial statements. EBITDA and Adjusted EBITDA should not
be considered as alternatives to net income attributable to HEP 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 Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(In thousands)
Net income attributable to the partners $ 41,951 $ 49,160 $ 148,302 $ 169,302
Add (subtract):
Interest expense 22,965 13,417 56,951 40,595
Interest income (24,234) (6,835) (61,212) (19,997)
State income tax expense (benefit) 38 (4) 83 60
Depreciation and amortization 25,236 21,826 74,397 71,894
EBITDA $ 65,956 $ 77,564 $ 218,521 $ 261,854
Gain on sales-type leases - - - (24,677)
Gain on significant asset sales - - - (5,263)
Goodwill impairment - - - 11,034
Share of Osage environmental remediation costs 20,297 - 20,297 -
Acquisition integration and regulatory costs 373 - 2,095 -
Tariffs and fees not included in revenues 25,072 7,312 63,579 21,337
Lease payments not included in operating costs (1,606) (1,606) (4,819) (4,819)
Adjusted EBITDA $ 110,092 $
83,270
(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.
- 46 ---------------------------------------------------------------------------------
Table o
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(In thousands)
Net income attributable to the partners $ 41,951 $ 49,160 $ 148,302 $ 169,302
Add (subtract):
Depreciation and amortization 25,236 21,826 74,397 71,894
Amortization of discount and deferred debt 1,060 763 2,863 2,992
issuance costs
Customer billings greater than net income (587) (122) 34 (301)
recognized
Maintenance capital expenditures (3) (4,679) (3,351) (15,262) (8,834) Increase in environmental liability 5,364 271 5,120 36 Share of remaining Osage insurance coverage 12,500 - 12,500 - Decrease in reimbursable deferred revenue (3,538) (2,991) (10,127) (10,507) Gain on sales-type leases - - - (24,677) Gain on significant asset sales - - - (5,263) Goodwill impairment - - - 11,034 Other 1,424 1,254 3,816 1,031 Distributable cash flow$ 78,731 $ 66,810 $ 221,643 $ 206,707 (3)Maintenance capital expenditures are capital expenditures made to replace partially or fully depreciated assets in order to maintain the existing operating capacity of our assets and to extend their useful lives. Maintenance capital expenditures include expenditures required to maintain equipment reliability, tankage and pipeline integrity, safety and to address environmental regulations. September 30, December 31, 2022 2021 (In thousands) Balance Sheet Data Cash and cash equivalents$ 15,551 $ 14,381 Working capital$ 20,570 $ 17,461 Total assets$ 2,764,971 $ 2,165,867 Long-term debt$ 1,593,797 $ 1,333,049 Partners' equity$ 835,178 $ 443,017
Results of Operations-Three Months Ended
Summary
Net income attributable to the partners for the third quarter of 2022 was$42.0 million ($0.33 per basic and diluted limited partner unit) compared to$49.2 million ($0.46 per basic and diluted limited partner unit) for the third quarter of 2021. Results for the third quarter of 2022 reflect the impact to our equity in earnings of equity method investments of HEP's 50% share of incurred and estimated environmental remediation and recovery expenses, net of insurance proceeds received to date, associated with a release of crude oil on theOsage pipeline of$20.3 million . Excluding this impact, net income attributable to the partners for the third quarter of 2022 was$62.2 million ($0.49 per basic and diluted limited partner unit). The increase in net income attributable to the partners was mainly due to net income from Sinclair Transportation, which was acquired onMarch 14, 2022 , partially offset by higher interest expense and higher operating costs and expenses.
Revenues
Revenues for the third quarter were$149.0 million , an increase of$26.4 million compared to the third quarter of 2021. The increase was mainly due to revenues on our recently acquired Sinclair Transportation assets, higher revenues on our refinery processing units and rate increases that went into effect onJuly 1, 2022 . - 47 - -------------------------------------------------------------------------------- Table o Revenues from our refined product pipelines were$31.4 million , an increase of$3.9 million compared to the third quarter of 2021. Shipments averaged 205.7 thousand barrels per day ("mbpd") compared to 162.3 mbpd for the third quarter of 2021. The revenue and volume increases were mainly due to higher volumes on our recently acquired Sinclair Transportation product pipelines, higher volumes on our UNEV pipeline and rate increases that went into effect onJuly 1, 2022 . Revenues did not increase in proportion to volumes due to our recognition of a significant portion of the Sinclair Transportation refined product pipeline tariffs as interest income under sales-type lease accounting. Revenues from our intermediate pipelines were$8.0 million , an increase of$0.5 million compared to the third quarter of 2021. Shipments averaged 137.0 mbpd for the third quarter of 2022 compared to 136.4 mbpd for the third quarter of 2021. The increase in revenue was mainly due to rate increases that went into effect onJuly 1, 2022 . Revenues from our crude pipelines were$37.7 million , an increase of$5.4 million compared to the third quarter of 2021. Shipments averaged 639.0 mbpd compared to 408.0 mbpd for the third quarter of 2021. The increase in volumes was mainly attributable to our Cushing Connect pipeline, which went into service inSeptember 2021 , volumes on our recently acquired Sinclair Transportation crude pipelines and higher volumes on our crude pipeline systems inNew Mexico andTexas . The increase in revenues was mainly due to our recently acquired Sinclair Transportation crude pipelines, higher volumes on our crude pipeline systems inNew Mexico andTexas and rate increases that went into effect onJuly 1, 2022 . Revenues did not increase in proportion to volumes due to our recognition of most of the Cushing Connect pipeline tariffs and a significant portion of Sinclair Transportation crude pipeline tariffs as interest income under sales-type lease accounting. Revenues from terminal, tankage and loading rack fees were$44.4 million , an increase of$11.1 million compared to the third quarter of 2021. Refined products and crude oil terminalled in the facilities averaged 620.9 mbpd compared to 472.2 mbpd for the third quarter of 2021. The increase in volumes was mainly due to our recently acquired Sinclair Transportation assets. Revenues increased mainly due to revenues on our recently acquired Sinclair Transportation assets and rate increases that went into effect onJuly 1, 2022 . Revenues from refinery processing units were$27.4 million , an increase of$5.5 million compared to the third quarter of 2021, and throughputs averaged 72.1 mbpd compared to 72.3 mbpd for the third quarter of 2021. Revenues increased mainly due to higher natural gas cost recoveries in revenues, higher throughput at ourWoods Cross refinery processing units and rate increases that went into effect onJuly 1, 2022 . Operations Expense Operations (exclusive of depreciation and amortization and goodwill impairment) expense was$60.5 million for the three months endedSeptember 30, 2022 , an increase of$17.7 million compared to the third quarter of 2021. The increase was mainly due to operations expenses associated with our recently acquired Sinclair Transportation assets as well as higher employee costs, natural gas costs, maintenance costs and materials and supplies costs, partially offset by lower rentals and leases for the three months endedSeptember 30, 2022 . Depreciation and Amortization Depreciation and amortization for the three months endedSeptember 30, 2022 increased by$3.4 million compared to the three months endedSeptember 30, 2021 . The increase was mainly due to depreciation on our recently acquired Sinclair Transportation assets and amortization of theWoods Cross refinery processing units turnaround. General and Administrative General and administrative costs for the three months endedSeptember 30, 2022 decreased by$0.1 million compared to the three months endedSeptember 30, 2021 , mainly due to lower legal and professional expenses associated with the HEP Transaction. - 48 - -------------------------------------------------------------------------------- Table o Equity in Earnings of Equity Method Investments Three Months Ended September 30, Equity Method Investment 2022 2021 (in thousands) Osage Pipe Line Company, LLC (22,020) 1,090 Cheyenne Pipeline LLC 1,576 1,654 Cushing Connect Terminal Holdings LLC 782 945 Pioneer Investments Corp. 3,708 - Saddle Butte Pipeline III, LLC (380) - Total $ (16,334)$ 3,689 Equity in earnings ofOsage Pipe Line Company, LLC ("Osage") decreased for the three months endedSeptember 30, 2022 , mainly due to our 50% share of environmental remediation and recovery expenses, net of insurance recoveries to date, associated with the release of crude oil on theOsage pipeline. Additional insurance recoveries will be recorded as they are received. Our share of the remaining insurance coverage is$12.5 million . The pipeline resumed operations in the third quarter of 2022 and remediation efforts are underway.Pioneer Investments Corp. andSaddle Butte Pipeline III, LLC were acquired during the first quarter of 2022 as part of the HEP Transaction. Interest Expense, including Amortization Interest expense for the three months endedSeptember 30, 2022 , totaled$23.0 million , an increase of$9.5 million compared to the three months endedSeptember 30, 2021 . The increase was mainly due to ourApril 2022 issuance of$400 million in aggregate principal amount of 6.375% senior unsecured notes maturing inApril 2027 related to the funding of the cash portion of the Sinclair Transportation acquisition. In addition, market interest rates increased on our senior secured revolving credit facility. Our aggregate effective interest rates were 5.5% and 3.7% for the three months endedSeptember 30, 2022 and 2021, respectively. Interest Income Interest income for the three months endedSeptember 30, 2022 , totaled$24.2 million , an increase of$17.4 million compared to the three months endedSeptember 30, 2021 . The increase was mainly due to higher sales-type lease interest income from our recently acquired Sinclair Transportation pipelines and terminals and our Cushing Connect Pipeline, which was placed into service at the end of the third quarter of 2021. State Income Tax Expense We recorded state income tax expense of$38,000 and a state income tax benefit of$4,000 for the three months endedSeptember 30, 2022 and 2021, respectively. All tax expense is solely attributable to theTexas margin tax. - 49 -
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Table o
Results of Operations-Nine Months Ended
Summary
Net income attributable to the partners for the nine months endedSeptember 30, 2022 , was$148.3 million ($1.22 per basic and diluted limited partner unit) compared to$169.3 million ($1.60 per basic and diluted limited partner unit) for the nine months endedSeptember 30, 2021 . Results for the nine months endedSeptember 30, 2022 reflect the impact to our equity in earnings (loss) of equity method investments of HEP's 50% share of incurred and estimated environmental remediation and recovery expenses, net of insurance proceeds received to date, associated with a release of crude oil on theOsage pipeline of$20.3 million . In addition, results for the nine months endedSeptember 30, 2021 , reflect special items that collectively increased net income attributable to the partners by a total of$18.9 million . These items included a gain on sales-type leases of$24.7 million , a gain on significant asset sales of$5.3 million and a goodwill impairment charge of$11.0 million related to ourCheyenne reporting unit. Excluding these items, net income attributable to the partners for the nine months endedSeptember 30, 2022 and 2021 were$168.6 million ($1.39 per basic and diluted limited partner unit) and$150.4 million ($1.43 per basic and diluted limited partner unit), respectively. The increase in earnings was mainly due to net income from Sinclair Transportation, which was acquired onMarch 14, 2022 , higher revenues on our UNEV pipeline and higher net income from our Cushing Connect Joint Venture as the Cushing Connect pipeline which went into service inSeptember 2021 ; partially offset by higher interest expense and higher operating costs and expenses. In addition, the nine months endedSeptember 30, 2021 included the recognition of the$10 million termination fee related to the termination ofHF Sinclair's minimum volume commitment on ourCheyenne assets.
Revenues
Revenues for the nine months endedSeptember 30, 2022 , were$405.0 million , an increase of$29.0 million compared to the nine months endedSeptember 30, 2021 . The increase was mainly attributable to revenues on our recently acquired Sinclair Transportation assets and increased revenues from our UNEV assets, partially offset by lower revenues on ourCheyenne assets as a result of the conversion ofHF Sinclair's Cheyenne refinery to renewable diesel production and lower revenues on our product pipelines servicingHF Sinclair's Navajo refinery . The nine months endedSeptember 30, 2021 included the recognition of the$10 million termination fee related to the termination ofHF Sinclair's minimum volume commitment on ourCheyenne assets. Revenues from our refined product pipelines were$83.7 million , a decrease of$1.0 million compared to the nine months endedSeptember 30, 2021 . Shipments averaged 180.3 mbpd compared to 165.8 mbpd for the nine months endedSeptember 30, 2021 . The volume increase was mainly due to volumes on our recently acquired Sinclair Transportation assets and higher volumes on our UNEV pipeline, partially offset by lower volumes on our product pipelines servicingHF Sinclair's Navajo refinery due to lower throughput at the refinery. We recognized a significant portion of the Sinclair Transportation refined product pipeline tariffs as interest income under sales-type lease accounting. Revenues from our intermediate pipelines were$23.0 million , an increase of$0.5 million compared to the nine months endedSeptember 30, 2021 . Shipments averaged 126.6 mbpd compared to 131.9 mbpd for the nine months endedSeptember 30, 2021 . The decrease in volumes was mainly due to lower throughputs on our intermediate pipelines servicingHF Sinclair's Navajo refinery while revenue increased due to contractual minimum volume guarantees and rate increases that went into effect onJuly 1, 2022 . Revenues from our crude pipelines were$103.6 million , an increase of$8.6 million compared to the nine months endedSeptember 30, 2021 . Shipments averaged 594.2 mbpd compared to 393.0 mbpd for the nine months endedSeptember 30, 2021 . The increase in volumes was mainly attributable to our Cushing Connect pipeline, which went into service inSeptember 2021 , volumes on our recently acquired Sinclair Transportation crude pipelines and higher volumes on our crude pipeline systems inNew Mexico andTexas . The increase in revenues was mainly due to our recently acquired Sinclair Transportation crude pipelines and higher volumes on our crude pipelines inNew Mexico andTexas . Revenues did not increase in proportion to volumes due to our recognition of most of the Cushing Connect pipeline tariffs and a significant portion of Sinclair Transportation crude pipeline tariffs as interest income under sales-type lease accounting. Revenues from terminal, tankage and loading rack fees were$126.0 million , an increase of$17.6 million compared to the nine months endedSeptember 30, 2021 . Refined products and crude oil terminalled in the facilities averaged 575.2 mbpd compared to 436.9 mbpd for the nine months endedSeptember 30, 2021 . Volumes increased mainly due to volumes on our - 50 - -------------------------------------------------------------------------------- Table o recently acquired Sinclair Transportation assets and higher throughputs atHF Sinclair's Tulsa refinery . Revenues increased mainly due to revenues on our recently acquired Sinclair Transportation assets, higher butane blending revenues, and higher revenues on ourTulsa assets. In addition, the nine months endedSeptember 30, 2021 included the recognition of the$10 million termination fee related to the termination ofHF Sinclair's minimum volume commitment on ourCheyenne assets as a result of the conversion of theHF Sinclair Cheyenne refinery to renewable diesel production. Revenues from refinery processing units were$68.7 million , an increase of$3.3 million compared to the nine months endedSeptember 30, 2021 . Throughputs averaged 69.9 mbpd for both the nine months endedSeptember 30, 2022 and 2021. Revenues increased mainly due to higher natural gas cost recoveries in revenues as well as rate increases that went into effect onJuly 1, 2022 . Operations Expense Operations expense (exclusive of depreciation and amortization) for the nine months endedSeptember 30, 2022 , increased by$30.8 million compared to the nine months endedSeptember 30, 2021 . The increase was mainly due to operations expenses associated with our recently acquired Sinclair Transportation assets as well as higher employee costs, natural gas costs, maintenance costs and materials and supplies costs, partially offset by lower rentals and leases. In addition, the nine months endedSeptember 30, 2021 included a goodwill impairment charge of$11.0 million related to ourCheyenne reporting unit. Depreciation and Amortization Depreciation and amortization for the nine months endedSeptember 30, 2022 , increased by$2.5 million compared to the nine months endedSeptember 30, 2021 . The increase was mainly due to depreciation on our recently acquired Sinclair Transportation assets partially offset by the acceleration of depreciation on certain of ourCheyenne tanks in 2021 as well as retirement of assets due to sales-type lease accounting. General and Administrative General and administrative costs for the nine months endedSeptember 30, 2022 , increased by$3.1 million compared to the nine months endedSeptember 30, 2021 mainly due to higher legal and professional expenses incurred in the nine months endedSeptember 30, 2022 .
Equity in Earnings of Equity Method Investments
Nine Months Ended September 30,
Equity Method Investment 2022 2021
(in thousands)
Osage Pipe Line Company, LLC (20,771) 2,726
Cheyenne Pipeline LLC 4,936 3,428
Cushing Connect Terminal Holdings LLC 2,494 2,721
Pioneer Investments Corp. 7,393 -
Saddle Butte Pipeline III, LLC (1,313) -
Total $ (7,261) $ 8,875
Equity in earnings of Osage Pipe Line Company, LLC decreased for the nine months
ended September 30, 2022 , mainly due to our 50% share of environmental
remediation and recovery expenses, net of insurance recoveries to date,
associated with the release of crude oil on the Osage pipeline. Additional
insurance recoveries will be recorded as they are received. Our share of the
remaining insurance coverage is $12.5 million . The pipeline resumed operations
in the third quarter of 2022 and remediation efforts are underway. Equity in
earnings of Cheyenne Pipeline LLC increased for the nine months ended
September 30, 2022 , mainly due to the recognition in revenue of prior
contractual minimum commitment billings. Pioneer Investments Corp. and Saddle
Butte Pipeline III, LLC were acquired during the first quarter of 2022 as part
of the HEP Transaction.
Interest Expense, including Amortization
Interest expense for the nine months ended September 30, 2022 , totaled $57.0
million , an increase of $16.4 million compared to the nine months ended
September 30, 2021 . The increase was mainly due to our April 2022 issuance of
$400 million in aggregate principal amount of 6.375% senior unsecured notes
maturing in April 2027 related to the funding of the cash portion of the
Sinclair Transportation acquisition. In addition, market interest rates
increased on our senior secured revolving credit
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facility. Our aggregate effective interest rates were 4.6% and 3.7% for the nine
months ended September 30, 2022 and 2021, respectively.
Interest Income
Interest income for the nine months ended September 30, 2022 , totaled $61.2
million , an increase of $41.2 million compared to the nine months ended
September 30, 2021 . The increase was mainly due to higher sales-type lease
interest income from our recently acquired Sinclair Transportation pipelines and
terminals and our Cushing Connect Pipeline, which was placed into service at the
end of the third quarter of 2021.
State Income Tax Expense
We recorded state income tax expense of $83,000 and $60,000 for the nine months
ended September 30, 2022 and 2021, respectively. All tax expense is solely
attributable to the Texas margin tax.
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LIQUIDITY AND CAPITAL RESOURCES
Overview
InApril 2021 , we amended our Credit Agreement decreasing the size of the facility from$1.4 billion to$1.2 billion and extending the maturity date toJuly 27, 2025 . InAugust 2022 , the Credit Agreement was amended to, among other things, provide an alternative reference rate for LIBOR. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a$50 million sub-limit and continues to provide for an accordion feature that allows us to increase commitments under the Credit Agreement up to a maximum amount of$1.7 billion . During the nine months endedSeptember 30, 2022 , we received advances totaling$460.0 million and repaid$594.0 million under the Credit Agreement, resulting in a net decrease of$134.0 million and an outstanding balance of$706.0 million atSeptember 30, 2022 . As ofSeptember 30, 2022 , we have no letters of credit outstanding under the Credit Agreement and the available capacity under the Credit Agreement was$494.0 million . Amounts repaid under the Credit Agreement may be reborrowed from time to time. OnApril 8, 2022 , we closed a private placement of$400 million in aggregate principal amount of 6.375% senior unsecured notes due in 2027 (the "6.375% Senior Notes"). The 6.375% Senior Notes were issued at par for net proceeds of approximately$393 million , after deducting the initial purchasers' discounts and commissions and estimated offering expenses. The total net proceeds from the offering of the 6.375% Senior Notes were used to partially repay outstanding borrowings under the Credit Agreement, increasing our available liquidity. As ofSeptember 30, 2022 , we had$500 million in aggregate principal amount of 5% Senior Notes due in 2028 (the "5% Senior Notes", and together with the 6.375% Senior Notes, the "Senior Notes"). We have a continuous offering program under which we may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of$200 million . We did not issue any units under this program during the nine months endedSeptember 30, 2022 . As ofSeptember 30, 2022 , HEP has issued 2,413,153 units under this program, providing$82.3 million in gross proceeds. Under our registration statement filed with theSecurities and Exchange Commission ("SEC") using a "shelf" registration process, we currently have the authority to raise up to$2.0 billion by offering securities, through one or more prospectus supplements that would describe, among other things, the specific amounts, prices and terms of any securities offered and how the proceeds would be used. Any proceeds from the sale of securities are expected to be used for general business purposes, which may include, among other things, funding acquisitions of assets or businesses, working capital, capital expenditures, investments in subsidiaries, the retirement of existing debt and/or the repurchase of common units or other securities. We believe our current sources of liquidity, including cash balances, future internally generated funds, any future issuances of debt or equity securities and funds available under the Credit Agreement will provide sufficient resources to meet our working capital liquidity, capital expenditure and quarterly distribution needs for the foreseeable future. Future securities issuances, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
In
OnOctober 20, 2022 , we announced our cash distribution for the third quarter of 2022 of$0.35 per unit, or$1.40 on an annualized basis. Looking forward, we remain committed to our capital allocation strategy and expect to reach our short-term leverage target of 3.5x in the first half of 2023. Cash and cash equivalents increased by$1.2 million during the nine months endedSeptember 30, 2022 . The cash flows provided by operating activities of$238.5 million and financing activities of$123.1 million were more than the cash flows used for investing activities of$360.4 million . Working capital increased by$3.1 million to$20.6 million atSeptember 30, 2022 , from$17.5 million atDecember 31, 2021 . - 53 - -------------------------------------------------------------------------------- Table o Cash Flows-Operating Activities Cash flows from operating activities decreased by$2.3 million from$240.8 million for the nine months endedSeptember 30, 2021 , to$238.5 million for the nine months endedSeptember 30, 2022 . The decrease was mainly due to higher payments for turnaround expenses at ourWoods Cross refinery processing units and higher payments for operating expenses, partially offset by higher cash receipts from customers during the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 . Cash Flows-Investing Activities Cash flows used for investing activities were$360.4 million for the nine months endedSeptember 30, 2022 , compared to$67.7 million for the nine months endedSeptember 30, 2021 , an increase of$292.7 million . During the nine months endedSeptember 30, 2022 , we paid the$329.0 million cash portion of the purchase price consideration for our acquisition of Sinclair Transportation. During the nine months endedSeptember 30, 2022 and 2021, we invested$31.2 million and$78.6 million , respectively, in additions to properties and equipment. Cash Flows-Financing Activities Cash flows provided by financing activities were$123.1 million for the nine months endedSeptember 30, 2022 , compared to cash flows used by financing activities of$182.2 million for the nine months endedSeptember 30, 2021 , an increase of$305.3 million . During the nine months endedSeptember 30, 2022 , we received$460.0 million and repaid$594.0 million in advances under the Credit Agreement, and we received net proceeds of$393.5 million related to the issuance of our 6.375% Senior Notes. Additionally, we paid$125.7 million in regular quarterly cash distributions to our limited partners and$7.3 million to our noncontrolling interests. During the nine months endedSeptember 30, 2021 , we received$210.5 million and repaid$283.5 million in advances under the Credit Agreement. We paid$112.4 million in regular quarterly cash distributions to our limited partners, and distributed$8.7 million to our noncontrolling interests. In addition, we received$21.3 million in contributions from noncontrolling interests during the nine months endedSeptember 30, 2021 . Capital Requirements Our pipeline and terminalling operations are capital intensive, requiring investments to maintain, expand, upgrade or enhance existing operations and to meet environmental and operational regulations. Our capital requirements have consisted of, and are expected to continue to consist of, maintenance capital expenditures and expansion capital expenditures. "Maintenance capital expenditures" represent capital expenditures to replace partially or fully depreciated assets to maintain the operating capacity of existing assets. Maintenance capital expenditures include expenditures required to maintain equipment reliability, tankage and pipeline integrity, safety and to address environmental regulations. "Expansion capital expenditures" represent capital expenditures to expand the operating capacity of existing or new assets, whether through construction or acquisition. Expansion capital expenditures include expenditures to acquire assets, to grow our business and to expand existing facilities, such as projects that increase throughput capacity on our pipelines and in our terminals. Repair and maintenance expenses associated with existing assets that are minor in nature and do not extend the useful life of existing assets are charged to operating expenses as incurred. Each year the board of directors of HLS, our ultimate general partner, approves our annual capital budget, which specifies capital projects that our management is authorized to undertake. Additionally, at times when conditions warrant or as new opportunities arise, additional projects may be approved. The funds allocated for a particular capital project may be expended over a period in excess of a year, depending on the time required to complete the project. Therefore, our planned capital expenditures for a given year consist of expenditures approved for capital projects included in the current year's capital budget as well as, in certain cases, expenditures approved for capital projects in capital budgets for prior years. Our current 2022 capital forecast includes forecasted expenditures for our recently acquired Sinclair Transportation assets and is comprised of approximately$20 million to$30 million for maintenance capital expenditures,$25 million to$30 million for refinery unit turnarounds and$10 million to$15 million for expansion capital expenditures and our share of Joint Venture investments. In addition to our capital budget, we may spend funds periodically to perform capital upgrades or additions to our assets where a customer reimburses us for such costs. The upgrades or additions would generally benefit the customer over the remaining life of the related service agreements.
We expect that our currently planned sustaining and maintenance capital expenditures, as well as planned expenditures for acquisitions and capital development projects, will be funded with cash generated by operations.
Under the terms of the transaction to acquire HFC's 75% interest in UNEV, we
issued to a subsidiary of HFC a Class B unit comprising a noncontrolling equity
interest in a wholly owned subsidiary subject to redemption to the extent that
HFC is
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entitled to a 50% interest in 75% of annual UNEV earnings before interest,
income taxes, depreciation, and amortization above $40 million beginning July 1,
2015 , and ending in June 2032 , subject to certain limitations. However, to the
extent earnings thresholds are not achieved, no redemption payments are
required. No redemption payments have been required to date.
Credit Agreement
In April 2021 , we amended our Credit Agreement decreasing the commitments under
the facility from $1.4 billion to $1.2 billion and extending the maturity date
to July 27, 2025 . In August 2022 , the Credit Agreement was amended to, among
other things, provide an alternative reference rate for LIBOR. The Credit
Agreement is available to fund capital expenditures, investments, acquisitions,
distribution payments and working capital and for general partnership purposes.
The Credit Agreement is also available to fund letters of credit up to a $50
million sub-limit, and it continues to provide for an accordion feature that
allows us to increase the commitments under the Credit Agreement up to a maximum
amount of $1.7 billion .
Our obligations under the Credit Agreement are collateralized by substantially
all of our assets, and indebtedness under the Credit Agreement is guaranteed by
our material, wholly owned subsidiaries. The Credit Agreement requires us to
maintain compliance with certain financial covenants consisting of total
leverage, senior secured leverage, and interest coverage. It also limits or
restricts our ability to engage in certain activities. If, at any time prior to
the expiration of the Credit Agreement, HEP obtains two investment grade credit
ratings, the Credit Agreement will become unsecured and many of the covenants,
limitations and restrictions will be eliminated.
We may prepay all loans at any time without penalty, except for tranche breakage
costs. If an event of default exists under the Credit Agreement, the lenders
will be able to accelerate the maturity of all loans outstanding and exercise
other rights and remedies. We were in compliance with the covenants under the
Credit Agreement as of September 30, 2022 .
Senior Notes
As of September 30, 2022 , we had $500 million in aggregate principal amount of
5% Senior Notes due in 2028.
On April 8, 2022 , we closed a private placement of $400 million in aggregate
principal amount of the 6.375% Senior Notes. The 6.375% Senior Notes were issued
at par for net proceeds of approximately $393 million , after deducting the
initial purchasers' discounts and commissions and offering expenses. The total
net proceeds from the offering of the 6.375% Senior Notes were used to partially
repay outstanding borrowings under the Credit Agreement, increasing our
available liquidity.
The 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 Senior Notes as of September 30, 2022 . At any
time when the Senior Notes are rated investment grade by either Moody's or
Standard & Poor's and no default or event of default exists, we will not be
subject to many of the foregoing covenants. Additionally, we have certain
redemption rights at varying premiums over face value under the Senior Notes.
Indebtedness under the Senior Notes is guaranteed by all of our existing wholly
owned subsidiaries (other than Holly Energy Finance Corp. and certain immaterial
subsidiaries).
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Long-term Debt
The carrying amounts of our long-term debt are as follows:
September 30, December 31,
2022 2021
(In thousands)
Credit Agreement
Amount outstanding $ 706,000 $ 840,000
5% Senior Notes
Principal 500,000 500,000
Unamortized debt issuance costs (6,207) (6,951)
493,793 493,049
6.375% Senior Notes
Principal 400,000 -
Unamortized debt issuance costs (5,996) -
394,004 -
Total long-term debt $ 1,593,797 $ 1,333,049 Contractual Obligations
There were no significant changes to our long-term contractual obligations
during the quarter ended
Impact of Inflation PPI has increased an average of 2.9% annually over the past five calendar years, including an increase of 8.9% in 2021 and a decrease of 1.3% in 2020. PPI for the first nine months of 2022 increased by 14.7% over the first nine months of 2021. 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. These annual rate adjustments generally occur onJuly 1st each year based on the PPI or theFERC index increase or decrease during the prior year. Certain of these contracts have provisions that limit the level of annual PPI percentage rate increases or decreases, and the majority of our rates do not decrease when PPI is negative. The substantial majority of our rates and minimum revenue guarantees used the 2021 PPI increase of 8.9% in theJuly 1, 2022 rate increase calculations. 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. However, for the nine months endedSeptember 30, 2022 , the fees we charged our shippers increased at a rate greater than our inflationary cost increase. 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. - 56 - -------------------------------------------------------------------------------- Table o Under the Omnibus Agreement and certain transportation agreements and purchase agreements withHF Sinclair ,HF Sinclair has agreed to indemnify us, subject to certain monetary and time limitations, for environmental noncompliance and remediation liabilities associated with certain assets transferred to us fromHF Sinclair and occurring or existing prior to the date of such transfers.
We have an environmental agreement with Delek with respect to pre-closing environmental costs and liabilities relating to the pipelines and terminals acquired from Delek in 2005, under which Delek will indemnify us subject to certain monetary and time limitations.
AtSeptember 30, 2022 , we had an accrual of$13.4 million related to environmental clean-up projects for which we have assumed liability, including accrued environmental liabilities assumed in the Sinclair Transportation acquisition that have preliminarily been fair valued at$10 million as of the acquisition date, or for which the indemnity provided for byHF Sinclair has expired or will expire. There are environmental remediation projects in progress, including assessment and monitoring activities, that relate to certain assets acquired fromHF Sinclair . Certain of these projects were underway prior to our purchase, are covered under theHF Sinclair environmental indemnification discussed above, and represent liabilities retained byHF Sinclair . OnJuly 8, 2022 , theOsage pipeline, which carries crude oil fromCushing, Oklahoma toEl Dorado, Kansas , suffered a release of crude oil. Our equity in earnings (loss) of equity method investments was reduced in the three and nine months endedSeptember 30, 2022 by$20.3 million for our 50% share of incurred and estimated environmental remediation and recovery expenses associated with the release, net of our share of insurance proceeds received to date of$0.5 million . Additional insurance recoveries will be recorded as they are received. Our share of the remaining insurance coverage is$12.5 million . The pipeline resumed operations in the third quarter of 2022 and remediation efforts are underway. It may be necessary for Osage to accrue additional amounts for environmental remediation or other release-related expenses in future periods, but we cannot estimate those amounts at this time. Future costs and accruals could have a material impact on our results of operations and cash flows in the period recorded; however, we do not expect them to have a material impact on our financial position.
CRITICAL ACCOUNTING ESTIMATES
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 inthe United States . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results could materially differ from these estimates under different assumptions or conditions and have an impact on our financial position, results of operations and cash flows. Our significant accounting policies are described in "Item 7. Management's Discussion and Analysis of Financial Condition and Operations-Critical Accounting Policies" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Certain critical accounting policies that materially affect the amounts recorded in our consolidated financial statements include revenue recognition, assessing the possible impairment of certain long-lived assets and goodwill, and assessing contingent liabilities for probable losses. There have been no changes to these policies in 2022. We consider these policies to be critical to understanding the judgments that are involved and the uncertainties that could impact our results of operations, financial condition and cash flows.
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.
AtSeptember 30, 2022 , we had an outstanding principal balance of$900 million on our Senior Notes. A change in interest rates generally would affect the fair value of the Senior Notes, but not our earnings or cash flows. AtSeptember 30, 2022 , the fair value of our Senior Notes was$822.6 million . We estimate a hypothetical 10% change in the yield-to-maturity applicable to the Senior Notes atSeptember 30, 2022 would result in a change of approximately$27.2 million in the fair value of the underlying Senior Notes. - 57 -
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Table o For the variable rate Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. AtSeptember 30, 2022 , borrowings outstanding under the Credit Agreement were$706.0 million . A hypothetical 10% change in interest rates applicable to the Credit Agreement would not materially affect our cash flows. Our operations are subject to catastrophic losses, operational hazards and unforeseen interruptions, including but not limited to fire, explosion, releases or spills, cyberattacks, weather-related perils, vandalism, power failures, mechanical failures and other events beyond our control. We maintain various insurance coverages, including general liability, property damage, business interruption and cyber insurance, subject to certain deductibles and insurance policy terms and conditions. We are not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable, or premium costs, in our judgment, do not justify such expenditures. We have a risk management oversight committee that is made up of members from our senior management. This committee monitors our risk environment and provides direction for activities to mitigate, to an acceptable level, identified risks that may adversely affect the achievement of our goals.
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