This Item 2, including but not limited to the sections under "Results of Operations" and "Liquidity and Capital Resources," contains forward-looking statements. See "Forward-Looking Statements" at the beginning of Part I of this Quarterly Report on Form 10-Q. In this document, the words "we," "our," "ours" and "us" refer to
Holly Energy Partners, L.P.("HEP") and its consolidated subsidiaries or to HEP or an individual subsidiary and not to any other person. OVERVIEW Holly Energy Partners, L.P.("HEP"), together with its consolidated subsidiaries, is a publicly held master limited partnership. On March 14, 2022(the "Closing Date"), HollyFrontier Corporation("HFC") and HEP announced the establishment of HF Sinclair Corporation, a Delawarecorporation ("HF Sinclair"), as the new parent holding company of HFC and HEP and their subsidiaries, and the completion of their respective acquisitions of Sinclair Oil Corporation(now known as Sinclair Oil LLC, ("Sinclair Oil")) and Sinclair Transportation Company LLC("Sinclair Transportation") from REH Company(formerly known as The Sinclair Companies, referred to herein as "Sinclair HoldCo"). On the Closing Date, pursuant to that certain Business Combination Agreement, dated as of August 2, 2021(as amended on March 14, 2022, the "Business Combination Agreement"), by and among HFC, HF Sinclair (formerly known as Hippo Parent Corporation), Hippo Merger Sub, Inc., a wholly owned subsidiary of HF Sinclair ("Parent Merger Sub"), Sinclair HoldCo, and Hippo Holding LLC, a wholly owned subsidiary of Sinclair HoldCo (the " Target Company"), HF Sinclair completed its acquisition of the Target Companyby effecting (a) a holding company merger in accordance with Section 251(g) of the Delaware General Corporation Law whereby HFC merged with and into Parent Merger Sub, with HFC surviving such merger as a direct wholly owned subsidiary of HF Sinclair (the "HFC Merger"), and (b) immediately following the HFC Merger, a contribution whereby Sinclair HoldCo contributed all of the equity interests of the Target Companyto HF Sinclair in exchange for shares of HF Sinclair, resulting in the Target Companybecoming a direct wholly owned subsidiary of HF Sinclair (together with the HFC Merger, the "HFC Transactions").
Additionally, on the Closing Date and immediately prior to consummation of the HFC Transactions, pursuant to that certain Contribution Agreement, dated
August 2, 2021(as amended on March 14, 2022, the "Contribution Agreement") by and among Sinclair HoldCo, Sinclair Transportation and HEP, 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 millionbased on HEP's fully diluted common limited partner units outstanding and closing unit price on March 11, 2022, and cash consideration equal to $321.4 million, inclusive of estimated working capital adjustments pursuant to the Contribution Agreement for an aggregate transaction value of $670.4 million(the "HEP Transaction" and together with the HFC Transactions, the "Sinclair Transactions"). Of the 21 million HEP Units, 5.29 million units are currently held in escrow to secure Sinclair HoldCo's renewable identification numbers ("RINs") credit obligations under Section 6.22 of the Business Combination Agreement. HF Sinclair, and not HEP, would be entitled to the HEP common units held in escrow in the event of Sinclair HoldCo'sbreach of its RINs credit obligations to HF Sinclair under the Business Combination Agreement. 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. References herein to HF Sinclair with respect to time periods prior to March 14, 2022refer to HFC and its consolidated subsidiaries and do not include the Target Company, Sinclair Transportation or their respective consolidated subsidiaries. References herein to HF Sinclair with respect to time periods from and after March 14, 2022refer to HF Sinclair and its consolidated subsidiaries, which include the operations of the combined Sinclair HoldCo businesses. 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 in UNEV Pipeline, LLCbecoming a wholly owned subsidiary of HEP). - 35 - -------------------------------------------------------------------------------- Table o 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 of HF Sinclair and other refineries in the Mid-Continent, Southwest and Northwest regions of the United States. HEP, through its subsidiaries and joint ventures, owns and/or operates petroleum product and crude pipelines, tankage and terminals in Colorado, Idaho, Iowa, Kansas, Missouri, Nevada, New Mexico, Oklahoma, Texas, Utah, Washingtonand Wyomingas well as refinery processing units in Utahand Kansas. 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 and U.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.
See note 2 of the notes to the consolidated financial statements included in “Item 1. Financial statements” for more information.
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 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. Since the declines in demand at the beginning of the COVID-19 pandemic, we began to see improvement in demand for these products and services beginning late in the second quarter of 2020 that continued through the first quarter of 2022, with aggregate volumes approaching pre-pandemic levels. We expect our customers will continue to adjust refinery production levels commensurate with market demand. With the increasing vaccination rates, most of our employees have returned to work at our locations, and we continue to follow
Centers for Disease Controland local government guidance. We will continue to monitor developments in the COVID-19 pandemic and the dynamic environment it has created to properly address these policies going forward. 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, the effects of any new variant strains of the underlying virus, 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 2023 to 2037. These minimum volume commitments accounted for approximately 69% and 71% of our total revenues in the three months ended March 31, 2022and March 31, 2021, 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. In addition to these payments, we also expect to collect payments for services provided to uncommitted shippers. There have been no material changes to customer payment terms due to the COVID-19 pandemic. The COVID-19 pandemic, and the volatile regional and global economic conditions stemming from it, could also exacerbate the risk factors identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. 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 On October 2, 2019, HEP Cushing LLC("HEP Cushing"), a wholly owned subsidiary of HEP, and Plains 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 the Cushing, Oklahomacrude oil hub to the Tulsa, Oklahomarefining complex owned by a subsidiary of HF Sinclair and (ii) the ownership and operation of 1.5 million barrels of crude oil storage in Cushing, Oklahoma(the " Cushing Connect JV Terminal"). The Cushing Connect JV Terminalwent 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. - 36 - -------------------------------------------------------------------------------- Table o 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 the Cushing 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 the Cushing Connect JV Terminalcontributed by Plains and Cushing Connect Pipeline construction costs are approximately $70 millionto $75 million, including $4 millionto $6 millionof Cushing Connect Pipeline construction costs exceeding the budget by more than 10% to be borne solely by HEP. Agreements with HF Sinclair We serve HF 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 on July 1steach year based on the PPI or the FERCindex. On December 17, 2020, FERCestablished a new price index for the five-year period commencing July 1, 2021and ending June 30, 2026, in which common carriers charging indexed rates were permitted to adjust their indexed ceilings annually by Producer Price Index plus 0.78%. FERCreceived requests for rehearing of its December 17, 2020order, and on January 20, 2022, FERCrevised 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 the July 1, 2021index ceilings to be effective as of March 1, 2022. As of March 31, 2022, these agreements with HF Sinclair require minimum annualized payments to us of $424 million. If HF 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 material reduction in revenues under these agreements could have a material adverse effect on our results of operations.
June 1, 2020, HF Sinclair announced plans to permanently cease petroleum refining operations at its Cheyenne Refineryand to convert certain assets at that refinery to renewable diesel production. HF Sinclair subsequently began winding down petroleum refining operations at its Cheyenne Refineryon August 3, 2020. On February 8, 2021, HEP and HF Sinclair finalized and executed new agreements for HEP's Cheyenneassets with the following terms, in each case effective January 1, 2021: (1) a ten-year lease with two five-year renewal option periods for HF Sinclair's use of certain HEP tank and rack assets in the Cheyenne Refineryto 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 Refinerywhere HF Sinclair will pay a base tariff to HEP for available crude oil storage and HF Sinclair and HEP will split any profits generated on crude oil contango opportunities and (3) a $10 millionone-time cash payment from HF Sinclair 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 $62,500relating 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’ secondment agreement with HF Sinclair, certain HF Sinclair employees are seconded to HLS to provide operations and maintenance services for certain of our processing, refining, pipeline and storage, and HLS reimburses HF Sinclair for its prorated share of salaries, benefits, and other costs of such employees for our benefit.
We have a long-term strategic relationship with HFC (and now HF 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 - Impact of COVID-19 on Our Business" above, we also expect over the longer term to continue to work with HF Sinclair on logistic asset acquisitions in conjunction with HF Sinclair's refinery acquisition strategies. See "Overview" above for a discussion of the Sinclair Transactions. - 37 - -------------------------------------------------------------------------------- Table o 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 of
Goodwilland Long-lived Asset Impairment During the three months ended March 31, 2021, changes in our agreements with HF Sinclair related to our Cheyenneassets resulted in an increase in the net book value of our Cheyennereporting unit due to sales-type lease accounting, which led us to determine indicators of potential goodwill impairment for our Cheyennereporting unit were present. The estimated fair values of our Cheyennereporting 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 test of our
We performed our annual goodwill impairment testing qualitatively as of
July 1, 2021, 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. - 38 - -------------------------------------------------------------------------------- Table o RESULTS OF OPERATIONS (Unaudited)
Earnings, distributable cash flow, volumes and balance sheet data The following tables present income, distributable cash flow and volume information for the three months ended
- 39 -
Three Months Ended March 31, Change from 2022 2021 2021 (In thousands, except per unit data) Revenues: Pipelines: Affiliates-refined product pipelines $
7,506 7,506 - Affiliates-crude pipelines 18,277 19,454 (1,177) 42,643 45,566 (2,923) Third parties-refined product pipelines 9,260 9,863 (603) Third parties-crude pipelines 12,877 11,076 1,801 64,780 66,505 (1,725) Terminals, tanks and loading racks: Affiliates 31,208 33,864 (2,656) Third parties 5,807 4,318 1,489 37,015 38,182 (1,167) Refinery processing units-Affiliates 18,403 22,496 (4,093) Total revenues 120,198 127,183 (6,985) Operating costs and expenses: Operations (exclusive of depreciation and amortization) 42,625 41,365 1,260 Depreciation and amortization 22,187 25,065 (2,878) General and administrative 4,312 2,968 1,344 Goodwill impairment - 11,034 (11,034) 69,124 80,432 (11,308) Operating income 51,074 46,751 4,323 Other income (expense): Equity in earnings of equity method investments 3,626 1,763 1,863 Interest expense, including amortization (13,639) (13,240) (399) Interest income 12,647 6,548 6,099 Gain on sales-type leases - 24,650 (24,650) Gain on sale of assets and other 101 502 (401) 2,735 20,223 (17,488) Income before income taxes 53,809 66,974 (13,165) State income tax expense (31) (37) 6 Net income 53,778 66,937 (13,159)
Allocation of net income attributable to non-controlling interests
(4,219) (2,540) (1,679) Net income attributable to the partners 49,559 64,397 (14,838) Limited partners' earnings per unit-basic and diluted $
Weighted average limited partnership units outstanding
109,640 105,440 4,200 EBITDA (1)
$ 72,769 $ 96,191 $ (23,422)Adjusted EBITDA (1) $
Distributable cash (2)
Volumes (bpd) Pipelines: Affiliates-refined product pipelines 107,210 119,590 (12,380) Affiliates-intermediate pipelines 117,802 115,225 2,577 Affiliates-crude pipelines 396,040 250,647 145,393 621,052 485,462 135,590 Third parties-refined product pipelines 49,029 44,428 4,601 Third parties-crude pipelines 131,126 123,232 7,894 801,207 653,122 148,085 Terminals and loading racks: Affiliates 446,032 323,286 122,746 Third parties 48,354 45,753 2,601 494,386 369,039 125,347 Refinery processing units-Affiliates 65,227 60,699 4,528 Total for pipelines and terminal and refinery processing unit assets (bpd) 1,360,820 1,082,860 277,960 - 40 -
(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 and (iii) tariffs and fees not included in revenues due to impacts from lease accounting for certain tariffs and fees 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 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. These tariffs and fees 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 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 March 31, 2022 2021 (In thousands) Net income attributable to the partners
$ 49,559 $ 64,397Add (subtract): Interest expense 13,639 13,240 Interest income (12,647) (6,548) State income tax expense 31 37 Depreciation and amortization 22,187 25,065 EBITDA $ 72,769 $ 96,191Gain on sales-type leases - (24,650) Goodwill impairment - 11,034 Acquisition integration and regulatory costs 836 - Tariffs and fees not included in revenues 13,339
Lease payments not included in operating expenses (1,606) (1,606) Adjusted EBITDA
$ 85,338 $ 87,936(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. - 41 -
Table o Three Months Ended March 31, 2022 2021 (In thousands) Net income attributable to the partners
$ 49,559 $ 64,397Add (subtract): Depreciation and amortization 22,187
Amortization of discount and deferred debt issuance costs 770
Customer billings greater than net income recognized 497
Maintenance capital expenditures (3) (5,620)
Increase in environmental liability (120)
Decrease in reimbursable deferred revenue (3,234) (4,014) Gain on sales-type leases - (24,650) Goodwill impairment - 11,034 Other 416 (2,266) Distributable cash flow
$ 64,455 $ 73,218(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, 2022 2021 (In thousands) Balance Sheet Data Cash and cash equivalents $ 15,016 $ 14,381Working capital $ 8,866 $ 17,461Total assets $ 2,777,276 $ 2,165,867Long-term debt $ 1,634,367 $ 1,333,049Partners' equity $ 821,609 $ 443,017
Results of operations-Three months ended
Net income attributable to the partners for the first quarter of 2022 was
$49.6 million( $0.45per basic and diluted limited partner unit) compared to $64.4 million( $0.61per basic and diluted limited partner unit) for the first quarter of 2021. Results for the first quarter of 2021 reflect special items that collectively increased net income attributable to HEP by a total of $13.6 million. These items included a gain on sales-type leases of $24.7 millionand a goodwill impairment charge of $11.0 millionrelated to our Cheyenneassets. Excluding these items, net income attributable to HEP for the first quarter of 2021 was $50.8 million( $0.48per basic and diluted limited partner unit).
Revenues for the first quarter were
$120.2 million, a decrease of $7.0 millioncompared to the first quarter of 2021. The decrease was mainly due to lower revenues on our Cheyenneassets as a result of the conversion of HF Sinclair's Cheyenne refineryto renewable diesel production, lower revenues on our Woods Cross refineryprocessing units, which were down for planned maintenance in March 2022, and lower revenues on our product pipelines servicing HF Sinclair's Navajo refinery. These revenue decreases were partially offset by higher revenues on our UNEV pipeline and revenues on our newly acquired Sinclair Transportation assets. Revenues from our refined product pipelines were $26.1 million, a decrease of $2.3 millioncompared to the first quarter of 2021. Shipments averaged 156.2 thousand barrels per day ("mbpd") compared to 164.0 mbpd for the first quarter of 2021. The volume and revenue decreases were mainly due to lower volumes on pipelines servicing HF Sinclair's Navajo refinery, - 42 - -------------------------------------------------------------------------------- Table o partially offset by higher volumes and revenues on our UNEV pipeline and our newly acquired Sinclair Transportation product pipelines. Revenues from our intermediate pipelines were $7.5 million, consistent with the first quarter of 2021. Shipments averaged 117.8 mbpd for the first quarter of 2022 compared to 115.2 mbpd for the first quarter of 2021. The increase in volumes was mainly due to higher throughputs on our intermediate pipelines servicing HF Sinclair's Tulsa refinerywhile revenue remained constant mainly due to contractual minimum volume guarantees. Revenues from our crude pipelines were $31.2 million, an increase of $0.6 millioncompared to the first quarter of 2021. Shipments averaged 527.2 mbpd compared to 373.9 mbpd for the first quarter of 2021. The increase in volumes was mainly attributable to our Cushing Connect Pipeline, which went into service in September 2021, as well as volumes on our newly acquired Sinclair Transportation crude pipelines. The increase in revenues was mainly due to our crude pipeline systems in Wyomingand Utah, including the Sinclair Transportation crude pipelines. Revenues did not increase in proportion to volumes due to recognizing most of the Cushing Connect Pipeline and Sinclair Transportation crude pipeline tariffs as interest income under sales-type lease accounting. Revenues from terminal, tankage and loading rack fees were $37.0 million, a decrease of $1.2 millioncompared to the first quarter of 2021. Refined products and crude oil terminalled in the facilities averaged 494.4 mbpd compared to 369.0 mbpd for the first quarter of 2021. The increase in volumes was mainly the result of higher throughputs at HF Sinclair's Tulsa refinery. Revenues decreased mainly because the first quarter of 2021 included the recognition of $6.5 millionof the $10 milliontermination fee related to the termination of HFC's minimum volume commitment on our Cheyenneassets as a result of the conversion of the HF Sinclair Cheyenne refineryto renewable diesel production, partially offset by revenues on our newly acquired Sinclair Transportation terminal assets and higher revenues at our Tulsaand El Doradotank farms. Revenues from refinery processing units were $18.4 million, an decrease of $4.1 millioncompared to the first quarter of 2021, and throughputs averaged 65.2 mbpd compared to 60.7 mbpd for the first quarter of 2021. The increase in volumes was mainly due to increased throughput at our El Dorado refineryprocessing units, partially offset by lower throughput at our Woods Cross refineryprocessing unit, which were down for a scheduled turnaround in March 2022. Revenues decreased mainly due to the turnaround at Woods Cross, partially offset by higher natural gas recoveries in revenues. Revenues did not increase in proportion to the increase in volumes mainly due to contractual minimum volume guarantees. Operations Expense Operations (exclusive of depreciation and amortization and goodwill impairment) expense was $42.6 millionfor the three months ended March 31, 2022, an increase of $1.3 millioncompared to the first quarter of 2021. The increase was mainly due to higher employee costs, insurance, property tax and materials and supplies, partially offset by lower maintenance costs and natural gas costs for the three months ended March 31, 2022. Depreciation and Amortization Depreciation and amortization for the three months ended March 31, 2022decreased by $2.9 millioncompared to the three months ended March 31, 2021. The decrease was mainly due to the acceleration of depreciation on certain of our Cheyennetanks in 2021. General and Administrative General and administrative costs for the three months ended March 31, 2022increased by $1.3 millioncompared to the three months ended March 31, 2021, mainly due to higher legal and professional expenses associated with the HEP Transaction. - 43 - -------------------------------------------------------------------------------- Table o Equity in Earnings of Equity Method Investments Three Months Ended March 31, Equity Method Investment 2022 2021 (in thousands) Osage Pipe Line Company, LLC 643 721 Cheyenne Pipeline LLC 1,774 (104) Cushing Connect Terminal Holdings LLC 906 1,146 Pioneer Investment Corporation 465 - Saddle Butte Pipeline III, LLC (162) - Total $ 3,626 $ 1,763Equity in earnings of Cheyenne Pipeline LLCincreased for the three months ended March 31, 2022, mainly due to the recognition in revenue of prior contractual minimum commitment billings. Equity in earnings of Cushing Connect Terminal Holdings LLCdecreased for the three months ended March 31, 2022, mainly due to higher property tax expense. Equity in earnings of Pioneer Investment Corporation and Saddle Butte Pipeline III, LLCwere acquired during the first quarter of 2022 as part of the HEP Transaction. Interest Expense, including Amortization Interest expense for the three months ended March 31, 2022, totaled $13.6 million, an increase of $0.4 millioncompared to the three months ended March 31, 2021. The increase was mainly due to higher average borrowings outstanding under our senior secured revolving credit facility (the "Credit Agreement") during the first quarter of 2022 related to the funding of the cash portion of the Sinclair Transportation acquisition. Our aggregate effective interest rates was 3.5% for both the three months ended March 31, 2022and 2021, respectively. Interest Income Interest income for the three months ended March 31, 2022, totaled $12.6 million, an increase of $6.1 millioncompared to the three months ended March 31, 2021. The increase was mainly due to higher sales-type lease interest income from our Cushing Connect Pipeline, which was placed into service at the end of the third quarter of 2021, and our newly acquired Sinclair Transportation pipelines and terminals. State Income Tax Expense We recorded state income tax expense of $31,000and $37,000for the three months ended March 31, 2022and 2021, respectively. All tax expense is solely attributable to the Texasmargin tax. - 44 - -------------------------------------------------------------------------------- Table o LIQUIDITY AND CAPITAL RESOURCES
April 2021, we amended our Credit Agreement decreasing the size of the facility from $1.4 billionto $1.2 billionand extending the maturity date to July 27, 2025. 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 millionsub-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 three months ended March 31, 2022, we received advances totaling $360.0 millionand repaid $58.5 millionunder the Credit Agreement, resulting in a net increase of $301.5 millionand an outstanding balance of $1,141.5 millionat March 31, 2022. As of March 31, 2022, we have no letters of credit outstanding under the Credit Agreement and the available capacity under the Credit Agreement was $58.5 million. Amounts repaid under the Credit Agreement may be reborrowed from time to time. On April 8, 2022, we closed a private placement of $400 millionin 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.
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 ended March 31, 2022. As of March 31, 2022, HEP has issued 2,413,153 units under this program, providing $82.3 millionin gross proceeds. Under our registration statement filed with the Securities and Exchange Commission("SEC") using a "shelf" registration process, we currently have the authority to raise up to $2.0 billionby 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.
We have reduced our quarterly distribution to
Cash and cash equivalents increased by
$0.6 millionduring the three months ended March 31, 2022. The cash flows provided by operating activities of $71.8 millionand financing activities of $262.6 millionwere more than the cash flows used for investing activities of $333.8 million. Working capital decreased by $8.6 millionto $8.9 millionat March 31, 2022, from $17.5 millionat December 31, 2021. - 45 - -------------------------------------------------------------------------------- Table o Cash Flows-Operating Activities Cash flows from operating activities decreased by $10.3 millionfrom $82.1 millionfor the three months ended March 31, 2021, to $71.8 millionfor the three months ended March 31, 2022. The decrease was mainly due to higher payments for turnaround expenses at our Woods Cross refineryprocessing units partially offset by higher cash receipts from customers and lower payments for operating expenses during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. Cash Flows-Investing Activities Cash flows used for investing activities were $333.8 millionfor the three months ended March 31, 2022, compared to $30.0 millionfor the three months ended March 31, 2021, an increase of $303.7 million. During the three months ended March 31, 2022, we paid the $321.4 millioncash portion of the purchase price consideration for our acquisition of Sinclair Transportation. During the three months ended March 31, 2022and 2021, we invested $14.1 millionand $33.2 million, respectively, in additions to properties and equipment. Cash Flows-Financing Activities Cash flows provided by financing activities were $262.6 millionfor the three months ended March 31, 2022, compared to cash flows used by financing activities of $54.3 millionfor the three months ended March 31, 2021, an increase of $316.9 million. During the three months ended March 31, 2022, we received $360.0 millionand repaid $58.5 millionin advances under the Credit Agreement. Additionally, we paid $37.0 millionin regular quarterly cash distributions to our limited partners and $0.9 millionto our noncontrolling interests. During the three months ended March 31, 2021, we received $73.0 millionand repaid $90.5 millionin advances under the Credit Agreement. We paid $38.3 millionin regular quarterly cash distributions to our limited partners, and distributed $3.8 millionto our noncontrolling interests. In addition, we received $6.3 millionin contributions from noncontrolling interests during the three months ended March 31, 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 newly acquired Sinclair Transportation assets and is comprised of approximately $20 millionto $25 millionfor maintenance capital expenditures, $30 millionto $40 millionfor refinery unit turnarounds and $5 millionto $10 millionfor expansion capital expenditures and our share of Cushing Connect Joint Venture investments. In addition to our capital budget, we may spend funds periodically to perform capital upgrades or additions to our assets where a customer reimburses us for such costs. The upgrades or additions would generally benefit the customer over the remaining life of the related service agreements.
We anticipate that our currently planned sustaining and maintenance capital expenditures, as well as planned expenditures for acquisitions and capital development projects, will be funded by cash flow generated from operations.
Under the terms of the transaction to acquire HF Sinclair's 75% interest in UNEV, we issued to HF Sinclair a Class B unit comprising a noncontrolling equity interest in a wholly owned subsidiary subject to redemption to the extent that HF Sinclair is entitled to a 50% interest in our share of annual UNEV earnings before interest, income taxes, depreciation, and - 46 - -------------------------------------------------------------------------------- Table o amortization above
$30 millionbeginning 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 billionto $1.2 billionand extending the maturity date to July 27, 2025. 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 millionsub-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 March 31, 2022. Senior Notes As of March 31, 2022, we had $500 millionin aggregate principal amount of 5% Senior Notes due in 2028. On April 8, 2022, we closed a private placement of $400 millionin 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. The 5% Senior Notes and the 6.375% Senior Notes are unsecured and impose certain restrictive covenants, including limitations on our ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. We were in compliance with the restrictive covenants for the 5% Senior Notes as of March 31, 2022. At any time when the 5% Senior Notes and the 6.375% Senior Notes are rated investment grade by either Moody's or Standard & Poor'sand 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 and the 6.375% Senior Notes.
Indebtedness under the 5% Senior Notes and 6.375% Senior Notes is guaranteed by all of our existing wholly-owned subsidiaries (other than
- 47 - -------------------------------------------------------------------------------- Table o Long-term Debt The carrying amounts of our long-term debt are as follows: March 31, December 31, 2022 2021 (In thousands) Credit Agreement
$ 1,141,500840,000 5% Senior Notes Principal 500,000 500,000 Unamortized debt issuance costs (7,133) (6,951) 492,867 493,049 Total long-term debt $ 1,634,367 $ 1,333,049
Contractual obligations There were no material changes to our long-term contractual obligations during the quarter ended
Impact of Inflation Inflation in
the United Statesdid not have a material impact on our results of operations for the three months ended March 31, 2022and 2021. 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. 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, and the majority of our rates do not decrease when PPI is negative. 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 HF 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 from HF Sinclair and occurring or existing prior to the date of such transfers.
We entered into an environmental agreement with Delek US Holdings, Inc. (“Delek”) regarding pre-closing environmental costs and liabilities related to the pipelines and terminals acquired from Delek in 2005, pursuant to which Delek will indemnify us subject to certain monetary conditions and time limits.
- 48 - -------------------------------------------------------------------------------- Table o At
March 31, 2022, we had an accrual of $8.7 millionrelated 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 $5.0 million, or for which the indemnity provided for by HF Sinclair has expired or will expire. There are environmental remediation projects in progress, including assessment and monitoring activities, that relate to certain assets acquired from HF Sinclair. Certain of these projects were underway prior to our purchase, are covered under the HF Sinclair environmental indemnification discussed above, and represent liabilities retained by HF Sinclair.
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 in
the 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 ended December 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 resulting from increases or decreases in interest rates, as explained below.
March 31, 2022, we had an outstanding principal balance of $500 millionon 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. At March 31, 2022, the fair value of our 5% Senior Notes was $474.6 million. We estimate a hypothetical 10% change in the yield-to-maturity applicable to the 5% Senior Notes at March 31, 2022would result in a change of approximately $14.5 millionin 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. At March 31, 2022, borrowings outstanding under the Credit Agreement were $1,141.5 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, cyberattacks and weather-related perils. We maintain various insurance coverages, including 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. - 49 -
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