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. OVERVIEW HEP is aDelaware limited partnership. 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 ofHollyFrontier Corporation ("HFC") 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 inTexas ,New Mexico ,Washington ,Idaho ,Oklahoma ,Utah ,Nevada ,Wyoming andKansas as well as refinery processing units inUtah andKansas . HFC owned 57% of our outstanding common units and the non-economic general partnership interest as ofMarch 31, 2021 . We generate revenues by charging tariffs for transporting petroleum products and crude oil through our pipelines, by charging fees for terminalling and storing refined products and other hydrocarbons, providing other services at our storage tanks and terminals and charging a tolling fee per barrel or thousand standard cubic feet of feedstock throughput in our refinery processing units. We do not take ownership of products that we transport, terminal, store or process, and therefore, we are not directly exposed to changes in commodity prices. We believe the long-term growth of global refined product demand 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. 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 diminished demand, as well as lack of forward visibility, for refined products and crude oil transportation, and for the terminalling and storage services that we provide. Over the course of the last three quarters, demand for transportation fuels showed incremental improvement over the second quarter of 2020. 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. 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, 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$0.35 per unit beginning with the distribution for the first quarter of 2020, representative of a new distribution strategy focused on funding all capital expenditures and distributions within operating cash flow and improving distributable cash flow coverage to 1.3x or greater with the goal of reducing leverage to 3.0-3.5x. The extent to which HEP's future results are affected by the COVID-19 pandemic 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 71% and 76% of our total revenues in the three months endedMarch 31, 2021 and the twelve months endedDecember 31, 2020 , respectively. We are currently not aware of any reasons that would prevent such customers from making the minimum payments required under the contracts or potentially making payments in excess of the minimum payments, other than with respect to the agreement reached with HFC with respect to HEP'sCheyenne assets, which became effective onJanuary 1, 2021 and is discussed below. In addition to these payments, we - 30 - -------------------------------------------------------------------------------- Table of 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 endedDecember 31, 2020 . The COVID-19 pandemic may also materially adversely affect our results in a manner that is either not currently known or that we do not currently consider to be a significant risk to our business. Investment in Joint Venture OnOctober 2, 2019 ,HEP Cushing LLC ("HEP Cushing"), a wholly-owned subsidiary of HEP, andPlains Marketing, L.P. , a wholly-owned subsidiary of 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 of HFC 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 theCushing Connect Pipeline is expected to be placed in service during 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, and HEP estimates its share of the cost of theCushing Connect JV Terminal contributed by Plains and Cushing Connect Pipeline construction costs are approximately$65 million to$70 million . However, we are solely responsible for any Cushing Connect Pipeline construction costs which exceed 10% of the budget. 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, 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 are permitted to adjust their indexed ceilings annually by Producer Price Index plus 0.78%.FERC has received requests for rehearing of itsDecember 17, 2020 order, which remain pending inFERC Docket No. RM20-14-000. As ofMarch 31, 2021 , these agreements with HFC require minimum annualized payments to us of$338 million . If HFC fails to meet its minimum volume commitments under the agreements in any quarter, it will be required to pay us the amount of any shortfall in cash by the last day of the month following the end of the quarter. Under certain of 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.
OnJune 1, 2020 , HFC announced plans to permanently cease petroleum refining operations at itsCheyenne Refinery and to convert certain assets at that refinery to renewable diesel production. HFC subsequently began winding down petroleum refining operations at itsCheyenne Refinery onAugust 3, 2020 . HEP and HFC finalized and executed new agreements for HEP'sCheyenne assets onFebruary 8, 2021 , with the following terms, in each case effectiveJanuary 1, 2021 : (1) a ten-year lease with two five-year renewal option periods for HFC's use of certain HEP tank and rack assets in theCheyenne 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 theCheyenne Refinery where HFC will pay a base tariff to HEP for available crude oil storage and HFC 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. - 31 - -------------------------------------------------------------------------------- Table of Indicators of goodwill and long-lived asset impairment The changes in our new 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 5 for further discussion of Level 3 inputs.
Our interim impairment testing of our
Under certain provisions of an omnibus agreement we have with HFC (the "Omnibus Agreement"), we pay HFC an annual administrative fee, currently$2.6 million , for the provision by HFC or its affiliates of various general and administrative services to us. This fee does not include the salaries of personnel employed by HFC who perform services for us on behalf ofHolly Logistic Services, L.L.C. ("HLS"), or the cost of their employee benefits, which are separately charged to us by HFC. We also reimburse HFC and its affiliates for direct expenses they incur on our behalf. Under HLS's Secondment Agreement with HFC, certain employees of HFC are seconded to HLS to provide operational and maintenance services for certain of our processing, refining, pipeline and tankage assets, and HLS reimburses HFC for its prorated portion of the wages, benefits, and other costs of these employees for our benefit. We have a long-term strategic relationship with HFC that has historically facilitated our growth. Our future growth plans include organic projects around our existing assets and select investments or acquisitions that enhance our service platform while creating accretion for our unitholders. While in the near term, any acquisitions would be subject to economic conditions discussed in "Overview - Impact of COVID-19 on Our Business" above, we also expect over the longer term to continue to work with HFC on logistic asset acquisitions in conjunction withHFC's refinery acquisition strategies.
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.
- 32 -
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Table of
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 months ended
- 33 ---------------------------------------------------------------------------------
Table of
Three Months Ended March 31, Change from
2021 2020 2020
(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates-refined product pipelines $
18,606
7,506 7,474 32
Affiliates-crude pipelines 19,454 20,393 (939)
45,566 47,950 (2,384)
Third parties-refined product pipelines 9,863 14,798 (4,935)
Third parties-crude pipelines 11,076 7,724 3,352
66,505 70,472 (3,967)
Terminals, tanks and loading racks:
Affiliates 33,864 33,594 270
Third parties 4,318 3,904 414
38,182 37,498 684
Refinery processing units-Affiliates 22,496 19,884 2,612
Total revenues 127,183 127,854 (671)
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) 41,365 34,981 6,384
Depreciation and amortization 25,065 23,978 1,087
General and administrative 2,968 2,702 266
Goodwill impairment 11,034 - 11,034
80,432 61,661 18,771
Operating income 46,751 66,193 (19,442)
Other income (expense):
Equity in earnings of equity method investments 1,763 1,714 49
Interest expense, including amortization (13,240) (17,767) 4,527
Interest income 6,548 2,218 4,330
Loss on early extinguishment of debt - (25,915) 25,915
Gain on sales-type leases 24,650 - 24,650
Gain on sale of assets and other 502 506 (4)
20,223 (39,244) 59,467
Income before income taxes 66,974 26,949 40,025
State income tax expense (37) (37) -
Net income 66,937 26,912 40,025
Allocation of net income attributable to noncontrolling interests
(2,540) (2,051) (489)
Net income attributable to the partners 64,397 24,861 39,536
Limited partners' earnings per unit-basic and diluted $
0.61
105,440 105,440 -
EBITDA (1) $ 96,191 $ 64,425 $ 31,766
Adjusted EBITDA (1) $
87,936
$
73,218
Volumes (bpd)
Pipelines:
Affiliates-refined product pipelines 119,590 129,966 (10,376)
Affiliates-intermediate pipelines 115,225 142,112 (26,887)
Affiliates-crude pipelines 250,647 305,031 (54,384)
485,462 577,109 (91,647)
Third parties-refined product pipelines 44,428 49,637 (5,209)
Third parties-crude pipelines 123,232 92,203 31,029
653,122 718,949 (65,827)
Terminals and loading racks:
Affiliates 323,286 429,730 (106,444)
Third parties 45,753 45,945 (192)
369,039 475,675 (106,636)
Refinery processing units-Affiliates 60,699 69,795 (9,096)
Total for pipelines and terminal and refinery processing unit
assets (bpd) 1,082,860 1,264,419 (181,559)
- 34 ---------------------------------------------------------------------------------
Table of
(1)Earnings before interest, taxes, depreciation and amortization ("EBITDA") is
calculated as net income attributable to the partners plus (i) interest expense,
net of interest income, (ii) state income tax expense and (iii) depreciation and
amortization. Adjusted EBITDA is calculated as EBITDA plus (i) loss on early
extinguishment of debt, (ii) goodwill impairment and (iii) pipeline tariffs not
included in revenues due to impacts from lease accounting for certain pipeline
tariffs minus (iv) gain on sales-type leases, and (v) 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 recorded as interest expense and reductions in the lease
liability. EBITDA and Adjusted EBITDA are not calculations based upon generally
accepted accounting principles ("GAAP"). However, the amounts included in the
EBITDA and Adjusted EBITDA calculations are derived from amounts included in our
consolidated financial statements. EBITDA and Adjusted EBITDA should not be
considered as alternatives to net income attributable to Holly Energy 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
March 31,
2021 2020
(In thousands)
Net income attributable to the partners $ 64,397 $ 24,861
Add (subtract):
Interest expense 13,240 17,767
Interest income (6,548) (2,218)
State income tax expense 37 37
Depreciation and amortization 25,065 23,978
EBITDA$ 96,191 $
64,425
Loss on early extinguishment of debt - 25,915 Gain on sales-type leases (24,650) - Goodwill impairment 11,034 - Pipeline tariffs not included in revenues 6,967
2,375
Lease payments not included in operating costs (1,606) (1,606) Adjusted EBITDA
$ 87,936 $ 91,109 (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. - 35 -
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Table of
Three Months Ended
March 31,
2021 2020
(In thousands)
Net income attributable to the partners $ 64,397 $ 24,861
Add (subtract):
Depreciation and amortization 25,065 23,978
Amortization of discount and deferred debt issuance costs 844
799
Loss on early extinguishment of debt -
25,915
Customer billings greater than revenue recognized 3,394
264
Maintenance capital expenditures (3) (1,372)
(2,487)
Increase (decrease) in environmental liability (156)
1
Decrease in reimbursable deferred revenue (4,014) (2,800) Gain on sales-type leases (24,650) - Goodwill impairment 11,034 - Other (1,324) 177 Distributable cash flow$ 73,218 $ 70,708 (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. March 31, December 31, 2021 2020 (In thousands) Balance Sheet Data Cash and cash equivalents$ 19,753 $ 21,990 Working capital$ 20,275 $ 14,247 Total assets$ 2,170,526 $ 2,167,565 Long-term debt$ 1,388,335 $ 1,405,603 Partners' equity$ 405,976 $ 379,292
Results of Operations-Three Months Ended
Summary
Net income attributable to the partners for the first quarter was$64.4 million ($0.61 per basic and diluted limited partner unit) compared to$24.9 million ($0.24 per basic and diluted limited partner unit) for the first quarter of 2020. Results for the first quarter of 2021 reflect special items that collectively increased net income attributable to the partners by a total of$13.6 million . These items included a gain on sales-type leases of$24.7 million and a goodwill impairment charge of$11.0 million related to ourCheyenne assets. In addition, net income attributable to the partners for the first quarter of 2020 included a loss on early extinguishment of debt of$25.9 million . Excluding these items, net income attributable to the partners for both the first quarters of 2021 and 2020 was$50.8 million ($0.48 per basic and diluted limited partner unit).
Revenues
Revenues for the first quarter were$127.2 million , a decrease of$0.7 million compared to the first quarter of 2020. The decrease was mainly attributable to a 9% reduction in overall crude and product pipeline volumes. Revenues did not decrease in proportion to the decrease in volumes mainly due to contractual minimum volume guarantees as well as the recognition in revenue of$6.5 million of the$10 million termination fee related to the termination of HFC's existing minimum volume commitment on ourCheyenne assets. Revenues from our refined product pipelines were$28.5 million , a decrease of$6.4 million compared to the first quarter of 2020. Shipments averaged 164.0 thousand barrels per day ("mbpd") compared to 179.6 mbpd for the first quarter of 2020. - 36 - -------------------------------------------------------------------------------- Table of The volume and revenue decreases were mainly due to lower volumes on pipelines servicingHFC's Navajo refinery , Delek'sBig Spring refinery and our UNEV pipeline. Revenue also decreased due to a reclassification of certain pipeline income from revenue to interest income under sales-type lease accounting. Revenues from our intermediate pipelines were$7.5 million , consistent with the first quarter of 2020. Shipments averaged 115.2 mbpd for the first quarter of 2021 compared to 142.1 mbpd for the first quarter of 2020. The decrease in volumes was mainly due to lower throughputs on our intermediate pipelines servicingHFC's Navajo refinery while revenue remained relatively constant mainly due to contractual minimum volume guarantees. Revenues from our crude pipelines were$30.5 million , an increase of$2.4 million compared to the first quarter of 2020, and shipments averaged 373.9 mbpd compared to 397.2 mbpd for the first quarter of 2020. The revenue increase was mainly attributable to higher volumes on our crude pipeline systems inWyoming andUtah . Those volume increases were more than offset by decreased volumes on our crude pipeline systems inNew Mexico andTexas . Revenues did not decrease in proportion to the decrease in volumes mainly due to contractual minimum volume guarantees. Revenues from terminal, tankage and loading rack fees were$38.2 million , an increase of$0.7 million compared to the first quarter of 2020. Refined products and crude oil terminalled in the facilities averaged 369.0 mbpd compared to 475.7 mbpd for the first quarter of 2020. The volume decrease was mainly the result of lower throughputs atHFC's Tulsa refinery as well as the cessation of petroleum refinery operations atHFC's Cheyenne refinery . Revenues did not decrease in proportion to the decrease in volumes mainly due to the recognition of$6.5 million of the$10 million termination fee related to the termination of HFC's existing minimum volume commitment on ourCheyenne assets and contractual minimum volume guarantees partially offset by lower on-going revenues on ourCheyenne assets as a result of the conversion of theHFC Cheyenne refinery to renewable diesel production. Revenues from refinery processing units were$22.5 million , an increase of$2.6 million compared to the first quarter of 2020, and throughputs averaged 60.7 mbpd compared to 69.8 mbpd for the first quarter of 2020. The decrease in volumes was mainly due to reduced throughput for both ourWoods Cross andEl Dorado processing units largely as a result of extreme weather while revenue increased due to higher recovery of natural gas costs. Operations Expense Operations (exclusive of depreciation and amortization and goodwill impairment) expense was$41.4 million for the three months endedMarch 31, 2021 , an increase of$6.4 million compared to the first quarter of 2020. The increase was mainly due to higher natural gas costs and maintenance expense project costs, partially offset by lower expenses for materials and supplies, chemicals and catalysts and property tax for the three months endedMarch 31, 2021 . Depreciation and Amortization Depreciation and amortization for the three months endedMarch 31, 2021 increased by$1.1 million compared to the three months endedMarch 31, 2020 . The increase was mainly due to the acceleration of depreciation on certain of ourCheyenne tanks. General and Administrative General and administrative costs for the three months endedMarch 31, 2021 increased by$0.3 million compared to the three months endedMarch 31, 2020 , mainly due to higher legal expenses for the three months endedMarch 31, 2021 .
Equity in Earnings of Equity Method Investments
Three Months Ended March 31 ,
Equity Method Investment 2021 2020
(in thousands)
Osage Pipe Line Company, LLC $ 721 $ 1,014
Cheyenne Pipeline LLC (104) 1,075
Cushing Terminal 1,146 (375)
Total $ 1,763 $ 1,714
- 37 --------------------------------------------------------------------------------- Table of Equity in earnings ofOsage Pipe Line Company, LLC andCheyenne Pipeline LLC decreased for the three months endedMarch 31, 2021 , mainly due to lower throughput volumes. Equity in earnings ofCushing Terminal increased for the three months endedMarch 31, 2021 as the terminal started operations in the second quarter of 2020. Interest Expense Interest expense for the three months endedMarch 31, 2021 , totaled$13.2 million , a decrease of$4.5 million compared to the three months endedMarch 31, 2020 . The decrease was mainly due to market interest rate decreases under our senior secured revolving credit facility and refinancing our$500 million aggregate principal amount of 6% Senior Notes due 2024 ("6% Senior Notes") with$500 million aggregate principal amount of 5% Senior Notes due 2028 ("5% Senior Notes"). Our aggregate effective interest rates were 3.5% and 4.5% for the three months endedMarch 31, 2021 and 2020, respectively. State Income Tax We recorded a state income tax expense of$37,000 for both the three months endedMarch 31, 2021 and 2020. All tax expense is solely attributable to theTexas margin tax.
LIQUIDITY AND CAPITAL RESOURCES
Overview
As ofMarch 31, 2021 , we had a$1.4 billion senior secured revolving credit facility (the "Credit Agreement") maturing inJuly 2022 . OnApril 30, 2021 , the Credit Agreement was amended, (the "Amended Credit Agreement"), decreasing the size of the facility from$1.4 billion to$1.2 billion and extending the maturity date toJuly 27, 2025 . The Amended Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Amended 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 Amended Credit Agreement up to a maximum amount of$1.7 billion . During the three months endedMarch 31, 2021 , we received advances totaling$73.0 million and repaid$90.5 million , resulting in a net decrease of$17.5 million under the Credit Agreement and an outstanding balance of$896.0 million atMarch 31, 2021 . As ofMarch 31, 2021 , we have no letters of credit outstanding under the Credit Agreement and the available capacity under the Credit Agreement was$504.0 million . Amounts repaid under the Credit Agreement may be reborrowed under the Amended Credit Agreement from time to time. OnFebruary 4, 2020 , we closed a private placement of$500 million in aggregate principal amount of 5% Senior Notes due in 2028. 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 endedMarch 31, 2021 . As ofMarch 31, 2021 , 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 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
- 38 ---------------------------------------------------------------------------------
Table of
Cash and cash equivalents decreased by$2.2 million during the three months endedMarch 31, 2021 . The cash flows provided by operating activities of$82.1 million were less than the cash flows used for financing activities of$54.3 million and investing activities of$30.0 million . Working capital increased by$6.0 million to$20.3 million atMarch 31, 2021 , from$14.2 million atDecember 31, 2020 . Cash Flows-Operating Activities Cash flows from operating activities increased by$4.2 million from$77.9 million for the three months endedMarch 31, 2020 , to$82.1 million for the three months endedMarch 31, 2021 . The increase was mainly due to lower payments for interest expenses and operating expenses partially offset by lower cash receipts from customers during the three months endedMarch 31, 2021 , as compared to the three months endedMarch 31, 2020 . Cash Flows-Investing Activities Cash flows used for investing activities were$30.0 million for the three months endedMarch 31, 2021 , compared to$20.9 million for the three months endedMarch 31, 2020 , an increase of$9.2 million . During the three months endedMarch 31, 2021 and 2020, we invested$33.2 million and$18.9 million , respectively, in additions to properties and equipment. We received$2.9 million in excess of equity in earnings during the three months endedMarch 31, 2021 . Cash Flows-Financing Activities Cash flows used for financing activities were$54.3 million for the three months endedMarch 31, 2021 , compared to$51.1 million for the three months endedMarch 31, 2020 , an increase of$3.3 million . During the three months endedMarch 31, 2021 , we received$73.0 million and repaid$90.5 million in advances under the Credit Agreement. Additionally, we paid$38.3 million in regular quarterly cash distributions to our limited partners and$3.8 million to our noncontrolling interests. We received$6.3 million in contributions from noncontrolling interests during the three months endedMarch 31, 2021 . During the three months endedMarch 31, 2020 , we received$112.0 million and repaid$67.0 million in advances under the Credit Agreement. We paid$68.5 million in regular quarterly cash distributions to our limited partners, and distributed$3.0 million to our noncontrolling interests. We also received net proceeds of$491.5 million for issuance of our 5% Senior Notes and paid$522.5 million to retire our 6% Senior Notes. 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 2021 capital forecast is comprised of approximately$14 million to$18 million for maintenance capital expenditures,$5 million to$8 million for refinery unit turnarounds and$30 million to$35 million for expansion capital expenditures and our share of Cushing Connect Joint Venture investments. We expect the majority of the 2021 expansion capital to be invested in our share of Cushing Connect Joint Venture investments. In addition to our capital budget, we may spend funds periodically to perform capital upgrades or additions to our assets where a customer reimburses us for such costs. The upgrades or additions would generally benefit the customer over the remaining life of the related service agreements. - 39 -
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Table of 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 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$30 million beginningJuly 1, 2015 , and ending inJune 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 OnMarch 31, 2021 , we had a$1.4 billion Credit Agreement maturing inJuly 2022 . OnApril 30, 2021 , the Credit Agreement was amended (the "Amended Credit Agreement"), decreasing the commitments under the facility from$1.4 billion to$1.2 billion and extending the maturity date toJuly 27, 2025 . The amended Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Amended 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 Amended Credit Agreement up to a maximum amount of$1.7 billion . Our obligations under the Amended Credit Agreement are collateralized by substantially all of our assets, and indebtedness under the Amended Credit Agreement is guaranteed by our material, wholly-owned subsidiaries. The Amended 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 Amended Credit Agreement, HEP obtains two investment grade credit ratings, the Amended 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 Amended 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 ofMarch 31, 2021 . Senior Notes As ofMarch 31, 2021 , we had$500 million in aggregate principal amount of 5% Senior Notes due in 2028. OnFebruary 4, 2020 , we closed a private placement of$500 million in aggregate principal amount of 5% Senior Notes due in 2028. 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. 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 ofMarch 31, 2021 . At any time when the 5% Senior Notes are rated investment grade by either Moody's orStandard & Poor's and no default or event of default exists, we will not be subject to many of the foregoing covenants. Additionally, we have certain redemption rights at varying premiums over face value under the 5% Senior Notes.
Indebtedness under the 5% Senior Notes is guaranteed by all of our existing
wholly-owned subsidiaries (other than
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Table of
Long-term Debt
The carrying amounts of our long-term debt are as follows:
March 31, December 31,
2021 2020
(In thousands)
Credit Agreement $ 896,000 $ 913,500
5% Senior Notes
Principal 500,000 500,000
Unamortized debt issuance costs (7,665) (7,897)
492,335 492,103
Total long-term debt $ 1,388,335 $ 1,405,603 Contractual Obligations
There were no significant changes to our long-term contractual obligations
during the quarter ended
Impact of Inflation Inflation inthe United States has been relatively moderate in recent years and did not have a material impact on our results of operations for the three months endedMarch 31, 2021 and 2020. PPI has increased an average of 0.9% annually over the past five calendar years, including a decrease of 1.3% in 2020 and an increase of 0.8% in 2019. 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. AtMarch 31, 2021 , we had an accrual of$4.4 million that related to environmental clean-up projects for which we have assumed liability or for which the indemnity - 41 -
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Table of 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 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 may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in "Item 7. Management's Discussion and Analysis of Financial Condition and Operations-Critical Accounting Policies" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Certain critical accounting policies that materially affect the amounts recorded in our consolidated financial statements include revenue recognition, assessing the possible impairment of certain long-lived assets and goodwill, and assessing contingent liabilities for probable losses. There have been no changes to these policies in 2021. We consider these policies to be critical to understanding the judgments that are involved and the uncertainties that could impact our results of operations, financial condition and cash flows.
Accounting Pronouncements Adopted During the Periods Presented
Credit Losses Measurement InJune 2016 , ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," was issued requiring measurement of all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This standard was effectiveJanuary 1, 2020 . Adoption of the standard did not have a material impact on our financial condition, results of operations or cash flows.
RISK MANAGEMENT
The market risk inherent in our debt positions is the potential change arising from increases or decreases in interest rates as discussed below.
AtMarch 31, 2021 , we had an outstanding principal balance of$500 million on our 5% Senior Notes. A change in interest rates generally would affect the fair value of the 5% Senior Notes, but not our earnings or cash flows. AtMarch 31, 2021 , the fair value of our 5% Senior Notes was$505.0 million . We estimate a hypothetical 10% change in the yield-to-maturity applicable to the 5% Senior Notes atMarch 31, 2021 would result in a change of approximately$14.2 million in the fair value of the underlying 5% Senior Notes. For the variable rate Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. AtMarch 31, 2021 , borrowings outstanding under the Credit Agreement were$896.0 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 normal hazards of operations, including but not limited to fire, explosion and weather-related perils. We maintain various insurance coverages, including property damage and business interruption 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. - 42 -
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