Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ______________________________________________________________________________________
FORM 10-Q
 ______________________________________________________________________________________

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________                    
Commission File Number: 1-32225
  _____________________________________________________________________________________
HOLLY ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
 ______________________________________________________________________________________
Delaware
 
20-0833098
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
2828 N. Harwood, Suite 1300
Dallas, Texas
 
75201
(Address of principal executive offices)
 
 (Zip code)
(214) 871-3555
(Registrant’s telephone number, including area code)
________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth” company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨

Emerging growth company
¨

 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
    
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  ¨ No  ý

The number of the registrant’s outstanding common units at April 27, 2018, was 105,421,124.



Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statement of Equity
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

- 2 -

Table of Contentsril 19,


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical fact included in this Form 10-Q, including, but not limited to, those under “Results of Operations” and “Liquidity and Capital Resources” in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I are forward-looking statements. Forward-looking statements use words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “intend,” “should,” “would,” “could,” “believe,” “may,” and similar expressions and statements regarding our plans and objectives for future operations. These statements are based on our beliefs and assumptions and those of our general partner using currently available information and expectations as of the date hereof, are not guarantees of future performance and involve certain risks and uncertainties. Although we and our general partner believe that such expectations reflected in such forward-looking statements are reasonable, neither we nor our general partner can give assurance that our expectations will prove to be correct. All statements concerning our expectations for future results of operations are based on forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. Certain factors could cause actual results to differ materially from results anticipated in the forward-looking statements. These factors include, but are not limited to:
risks and uncertainties with respect to the actual quantities of petroleum products and crude oil shipped on our pipelines and/or terminalled, stored or throughput in our terminals;
the economic viability of HollyFrontier Corporation, Delek US Holdings, Inc. and our other customers;
the demand for refined petroleum products in markets we serve;
our ability to purchase and integrate future acquired operations;
our ability to complete previously announced or contemplated acquisitions;
the availability and cost of additional debt and equity financing;
the possibility of reductions in production or shutdowns at refineries utilizing our pipeline and terminal facilities;
the effects of current and future government regulations and policies;
our operational efficiency in carrying out routine operations and capital construction projects;
the possibility of terrorist attacks and the consequences of any such attacks;
general economic conditions;
the impact of recent changes in the tax laws and regulations that affect master limited partnerships; and
other financial, operational and legal risks and uncertainties detailed from time to time in our Securities and Exchange Commission filings.

Cautionary statements identifying important factors that could cause actual results to differ materially from our expectations are set forth in this Form 10-Q, including, without limitation, the forward-looking statements that are referred to above. When considering forward-looking statements, you should keep in mind the known material risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2017, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Risk Factors.” All forward-looking statements included in this Form 10-Q and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


- 3 -

Table of Contentsril 19,

PART I. FINANCIAL INFORMATION


Item 1.
Financial Statements
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands, except unit data)
 
 
March 31, 2018
 
December 31, 2017
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
8,565

 
$
7,776

Accounts receivable:
 
 
 
 
Trade
 
14,534

 
12,803

Affiliates
 
41,631

 
51,501

 
 
56,165

 
64,304

Prepaid and other current assets
 
3,008

 
2,311

Total current assets
 
67,738

 
74,391

 
 
 
 
 
Properties and equipment, net
 
1,561,054

 
1,569,471

Intangible assets, net
 
125,427

 
129,463

Goodwill
 
268,166

 
266,716

Equity method investments
 
84,678

 
85,279

Other assets
 
27,726

 
28,794

Total assets
 
$
2,134,789

 
$
2,154,114

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable:
 
 
 
 
Trade
 
$
13,213

 
$
14,547

Affiliates
 
10,741

 
7,725

 
 
23,954

 
22,272

 
 
 
 
 
Accrued interest
 
6,079

 
13,256

Deferred revenue
 
8,497

 
9,598

Accrued property taxes
 
6,136

 
4,652

Other current liabilities
 
7,602

 
5,707

Total current liabilities
 
52,268

 
55,485

 
 
 
 
 
Long-term debt
 
1,390,952

 
1,507,308

Other long-term liabilities
 
15,711

 
15,843

Deferred revenue
 
47,740

 
47,272

 
 
 
 
 
Class B unit
 
43,870

 
43,141

 
 
 
 
 
Equity:
 
 
 
 
Partners’ equity:
 
 
 
 
Common unitholders (105,421,124 and 101,568,955 units issued and outstanding
    at March 31, 2018 and December 31, 2017, respectively)
 
493,404

 
393,959

Noncontrolling interest
 
90,844

 
91,106

Total equity
 
584,248

 
485,065

Total liabilities and equity
 
$
2,134,789

 
$
2,154,114


See accompanying notes.


- 4 -

Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per unit data)

 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Revenues:
 
 
 
 
Affiliates
 
$
101,428

 
$
89,025

Third parties
 
27,456

 
16,609

 
 
128,884

 
105,634

Operating costs and expenses:
 
 
 
 
Operations (exclusive of depreciation and amortization)
 
36,202

 
32,489

Depreciation and amortization
 
25,142

 
18,777

General and administrative
 
3,122

 
2,634

 
 
64,466

 
53,900

Operating income
 
64,418

 
51,734

 
 
 
 
 
Other income (expense):
 
 
 
 
Equity in earnings of equity method investments
 
1,279

 
1,840

Interest expense
 
(17,581
)
 
(13,539
)
Interest income
 
515

 
102

Loss on early extinguishment of debt
 

 
(12,225
)
Gain on sale of assets and other
 
86

 
73

 
 
(15,701
)
 
(23,749
)
Income before income taxes
 
48,717

 
27,985

State income tax benefit (expense)
 
(82
)
 
(106
)
Net income
 
48,635

 
27,879

Allocation of net income attributable to noncontrolling interests
 
(2,467
)
 
(2,316
)
Net income attributable to the partners
 
46,168

 
25,563

General partner interest in net income attributable to the Partnership, including incentive distributions
 

 
(17,138
)
Limited partners’ interest in net income
 
$
46,168

 
$
8,425

Limited partners’ per unit interest in earnings—basic and diluted
 
$
0.44

 
$
0.13

Weighted average limited partners’ units outstanding
 
103,836

 
63,113



See accompanying notes.


- 5 -


HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)

 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Net income
 
$
48,635

 
$
27,879

 
 
 
 
 
Other comprehensive income:
 
 
 
 
Change in fair value of cash flow hedging instruments
 

 
76

Reclassification adjustment to net income on partial settlement of cash flow hedge
 

 
(13
)
Other comprehensive income
 

 
63

Comprehensive income before noncontrolling interest
 
48,635

 
27,942

Allocation of comprehensive income to noncontrolling interests
 
(2,467
)
 
(2,316
)
Comprehensive income attributable to the partners
 
$
46,168

 
$
25,626



See accompanying notes.


- 6 -

Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Cash flows from operating activities
 
 
 
 
Net income
 
$
48,635

 
$
27,879

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
25,142

 
18,777

(Gain) loss on sale of assets
 
(22
)
 
(58
)
Amortization of deferred charges
 
757

 
770

Equity-based compensation expense
 
837

 
433

Equity in earnings of equity method investments, net of distributions
 
243

 
273

Loss on early extinguishment of debt
 

 
12,225

(Increase) decrease in operating assets:
 
 
 
 
Accounts receivable—trade
 
(1,731
)
 
375

Accounts receivable—affiliates
 
9,870

 
7,733

Prepaid and other current assets
 
(697
)
 
(282
)
Increase (decrease) in operating liabilities:
 
 
 
 
Accounts payable—trade
 
(814
)
 
(1,122
)
Accounts payable—affiliates
 
3,016

 
(9,943
)
Accrued interest
 
(7,177
)
 
(13,551
)
Deferred revenue
 
687

 
551

Accrued property taxes
 
1,484

 
9

Other current liabilities
 
375

 
(328
)
Other, net
 
(85
)
 
(106
)
Net cash provided by operating activities
 
80,520

 
43,635

 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Additions to properties and equipment
 
(12,612
)
 
(8,265
)
Proceeds from sale of assets
 
22

 
424

Distributions in excess of equity in earnings of equity investments
 
358

 
3,016

Net cash used for investing activities
 
(12,232
)
 
(4,825
)
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
Borrowings under credit agreement
 
227,000

 
380,000

Repayments of credit agreement borrowings
 
(343,500
)
 
(86,000
)
Redemption of 6.5% Senior Notes
 

 
(309,750
)
Proceeds from issuance of common units
 
114,529

 
37,563

Distributions to HEP unitholders
 
(63,496
)
 
(54,805
)
Distributions to noncontrolling interest
 
(2,000
)
 
(2,000
)
Distribution to HFC for El Dorado tanks
 

 
(103
)
Contributions from general partner
 
297

 

Units withheld for tax withholding obligations
 
(58
)
 
(35
)
Deferred financing costs
 
6

 

Other
 
(277
)
 
(330
)
Net cash used by financing activities
 
(67,499
)
 
(35,460
)
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
Increase (decrease) for the period
 
789

 
3,350

Beginning of period
 
7,776

 
3,657

End of period
 
$
8,565

 
$
7,007


See accompanying notes.

- 7 -

Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
(In thousands)
 
 
 
Common
Units
 
Noncontrolling Interest
 
Total Equity
 
 
 
Balance December 31, 2017
 
$
393,959

 
$
91,106

 
$
485,065

Issuance of common units
 
114,376

 

 
114,376

Distributions to HEP unitholders
 
(63,496
)
 

 
(63,496
)
Distributions to noncontrolling interest
 

 
(2,000
)
 
(2,000
)
Amortization of restricted and performance units
 
837

 

 
837

Class B unit accretion
 
(729
)
 

 
(729
)
Cumulative transition adjustment for adoption of revenue recognition standard
 
1,320

 

 
1,320

   Other
 
240

 

 
240

Net income
 
46,897

 
1,738

 
48,635

Balance March 31, 2018
 
$
493,404

 
$
90,844

 
$
584,248


See accompanying notes.



- 8 -

Table of Contentsril 19,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1:
Description of Business and Presentation of Financial Statements

Holly Energy Partners, L.P. (“HEP”), together with its consolidated subsidiaries, is a publicly held master limited partnership. As of March 31, 2018, HollyFrontier Corporation (“HFC”) and its subsidiaries own a 57% limited partner interest and the non-economic general partner interest in HEP. We commenced operations on July 13, 2004, upon the completion of our initial public offering. In these consolidated financial statements, the words “we,” “our,” “ours” and “us” refer to HEP unless the context otherwise indicates.

On October 31, 2017, we closed on an equity restructuring transaction with HEP Logistics Holdings, L.P. (“HEP Logistics”), a wholly-owned subsidiary of HFC and the general partner of HEP, pursuant to which the incentive distribution rights (“IDRs”) held by HEP Logistics were canceled, and HEP Logistics' 2% general partner interest in HEP was converted into a non-economic general partner interest in HEP. In consideration, we issued 37,250,000 of our common units to HEP Logistics. In addition, HEP Logistics agreed to waive $2.5 million of limited partner cash distributions for each of twelve consecutive quarters beginning with the first quarter the units issued as consideration were eligible to receive distributions. As a result of this transaction, no distributions were made on the general partner interest after October 31, 2017.

On January 25, 2018, we entered into a common unit purchase agreement in which certain purchasers agreed to purchase in a private placement 3,700,000 common units representing limited partner interests, at a price of $29.73 per common unit. The private placement closed on February 6, 2018, and we received proceeds of approximately $110 million, which were used to repay indebtedness under our revolving credit facility.
 
We own and operate petroleum product and crude oil pipelines, terminal, tankage and loading rack facilities and refinery processing units that support HFC’s refining and marketing operations in the Mid-Continent, Southwest and Northwest regions of the United States and Delek US Holdings, Inc.’s (“Delek”) refinery in Big Spring, Texas. Additionally, we own a 75% interest in UNEV Pipeline, LLC (“UNEV”), a 50% interest in the Osage Pipe Line Company, LLC (“Osage”) and a 50% interest in the Cheyenne Pipeline LLC.

We operate in two reportable segments, a Pipelines and Terminals segment and a Refinery Processing Unit segment. Disclosures around these segments are discussed in Note 15.

We generate revenues by charging tariffs for transporting petroleum products and crude oil through our pipelines, by charging fees for terminalling and storing refined products and other hydrocarbons, providing other services at our storage tanks and terminals and by charging fees for processing hydrocarbon feedstocks through our refinery processing units. We do not take ownership of products that we transport, terminal, store or process, and therefore, we are not exposed directly to changes in commodity prices.

The consolidated financial statements included herein have been prepared without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The interim financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of our results for the interim periods. Such adjustments are considered to be of a normal recurring nature. Although certain notes and other information required by U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017. Results of operations for interim periods are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2018.

Principles of Consolidation and Common Control Transactions
The consolidated financial statements include our accounts and those of subsidiaries and joint ventures that we control. All significant intercompany transactions and balances have been eliminated.

Most of our acquisitions from HFC occurred while we were a consolidated variable interest entity (“VIE”) of HFC. Therefore, as an entity under common control with HFC, we recorded these acquisitions on our balance sheets at HFC's historical basis instead of our purchase price or fair value.




- 9 -


Accounting Pronouncements Adopted During the Periods Presented

Share-Based Compensation
In March 2016, an accounting standard update was issued which simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. We adopted this standard effective January 1, 2017, with no impact to our financial condition or results of operations. The new standard also requires that employee taxes paid when an employer withholds units for
tax withholding purposes be reported as financing activities in the statement of cash flows on a retrospective basis. Previously, this activity was included in our operating activities. The impact of this change for the three months ended March 31, 2017 was not material to our consolidated statement of cash flows. Finally, consistent with our existing policy, we have elected to account for forfeitures on an estimated basis.

Revenue Recognition
In May 2014, an accounting standard update was issued requiring revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the expected consideration for these goods or services. This standard had an effective date of January 1, 2018, and we have accounted for the new guidance using the modified retrospective implementation method, whereby a cumulative effect adjustment is recorded to retained earnings as of the date of initial application. In preparing
for adoption, we evaluated the terms, conditions and performance obligations under our existing contracts with customers. Furthermore, we implemented policies to comply with this new standard. See Note 3 for additional information on our revenue recognition policies.

Business Combinations
In December 2014, an accounting standard update was issued to provide new guidance on the definition of a business in relation to accounting for identifiable intangible assets in business combinations. This standard had an effective date of January 1, 2018, and had no effect on our financial condition, results of operations or cash flows.

Financial Assets and Liabilities
In January 2016, an accounting standard update was issued requiring changes in the accounting and disclosures for financial instruments. This standard was effective beginning with our 2018 reporting year and had no effect on our financial condition, results of operations or cash flows.

Accounting Pronouncements Not Yet Adopted

Leases
In February 2016, an accounting standard update was issued requiring leases to be measured and recognized as a lease liability, with a corresponding right-of-use asset on the balance sheet. This standard has an effective date of January 1, 2019, and we are evaluating the impact of this standard. In preparing for adoption, we have identified, reviewed and evaluated contracts containing lease and embedded lease arrangements. Additionally, we have acquired software and are implementing systems to facilitate lease capture and related accounting treatment.


Note 2:
Acquisitions

SLC Pipeline and Frontier Aspen
On October 31, 2017, we acquired the remaining 75% interest in SLC Pipeline LLC (“SLC Pipeline”) and the remaining 50% interest in Frontier Aspen LLC (“Frontier Aspen”) from subsidiaries of Plains All American Pipeline, L,P. (“Plains”), for cash consideration of $250 million. Prior to this acquisition, we held noncontrolling interests of 25% of SLC Pipeline and 50% of Frontier Aspen. As a result of the acquisitions, SLC Pipeline and Frontier Aspen are wholly-owned subsidiaries of HEP.

These acquisitions were accounted for as a business combination achieved in stages. Our pre-existing equity method investments in SLC Pipeline and Frontier Aspen were remeasured at an acquisition date fair value of $112 million since we now have a controlling interest, and we recognized a gain on the remeasurement in the fourth quarter of 2017 of $36.3 million. The fair value of our pre-existing equity method investments in SLC Pipeline and Frontier Aspen was estimated using Level 3 Inputs under the income method for these entities, adjusted for lack of control and marketability.


- 10 -


The total consideration of $363.8 million, consisting of initial cash consideration of $250 million, working capital adjustments of $1.8 million and the fair value of our preexisting equity method investments in SLC Pipeline and Frontier Aspen of $112 million, was allocated to the acquisition date fair value of assets and liabilities acquired as of the October 31, 2017 acquisition date, with the excess purchase price recorded as goodwill. The following summarizes the value of assets and liabilities acquired:
 
 
(in thousands)
Cash and cash equivalents
 
$
4,609

Accounts receivable
 
4,919

Prepaid and other current assets
 
253

Properties and equipment
 
277,016

Intangible assets
 
70,182

Goodwill
 
11,615

Accounts payable
 
(3,311
)
Accrued property taxes
 
(1,438
)
Other current liabilities
 
(65
)
Net assets acquired
 
$
363,780


We have assigned a preliminary estimate of fair value to the assets acquired and liabilities assumed, and, therefore, our allocation
may change once all needed information has become available and we complete our valuations.

SLC Pipeline is the owner of a 95-mile crude pipeline that transports crude oil into the Salt Lake City area from the Utah terminal
of the Frontier Pipeline (defined below) and from Wahsatch Station. Frontier Aspen is the owner of a 289-mile crude pipeline from Casper, Wyoming to Frontier Station, Utah (the “Frontier Pipeline”) that supplies Canadian and Rocky Mountain crudes to Salt Lake City area refiners through a connection to the SLC Pipeline.


Note 3:
Revenues

Revenues are generally recognized as products are shipped through our pipelines and terminals, feedstocks are processed through our refinery processing units or other services are rendered. The majority of our contracts with customers meet the definition of a lease since (1) performance of the contracts is dependent on specified property, plant, or equipment and (2) it is remote that one or more parties other than the customer will take more than a minor amount of the output associated with the specified property, plant, or equipment. Therefore, we bifurcate the consideration received between lease and service revenue. The service component is within the scope of Accounting Standards Codification (“ASC”) 606, which largely codified ASU 2014-09.
Several of our contracts include incentive or reduced tariffs once a certain quarterly volume is met. Revenue from the variable element of these transactions is recognized based on the actual volumes shipped as it relates specifically to rendering the services during the applicable quarter.
We adopted the new revenue recognition standard (see Note 1) using the modified retrospective method, whereby the cumulative effect of applying the new standard was recorded as an adjustment to the opening balance of retained earnings as well as the carrying amounts of assets and liabilities as of January 1, 2018, which had no impact on our cash flows. The following table reflects the cumulative effect of adoption as of January 1, 2018:
 
 
Prior to Adoption
 
Increase (Decrease)
 
As Adjusted
 
 
(In millions)
Deferred revenue
 
$
9,598

 
$
(1,320
)
 
$
8,278

Partners’ equity: Common unitholders
 
$
393,959

 
$
1,320

 
$
395,279

The majority of our long-term transportation contracts specify minimum volume requirements, whereby, we bill a customer for a minimum level of shipments in the event a customer ships below their contractual requirements. If there are no future performance obligations, we will recognize these deficiency payments in revenue.

- 11 -


In certain of these throughput agreements, a customer may later utilize such shortfall billings as credit towards future volume shipments in excess of its minimum levels within its respective contractual shortfall make-up period. Such amounts represent an obligation to perform future services, which may be initially deferred and later recognized as revenue based on estimated future shipping levels, including the likelihood of a customer’s ability to utilize such amounts prior to the end of the contractual shortfall make-up period. We recognize the service portion of these deficiency payments in revenue when we do not expect we will be required to satisfy these performance obligations in the future based on the pattern of rights exercised by the customer. During the first quarter of 2018, we recognized $3.6 million of these deficiency payments in revenue, of which $2.2 million related to deficiency payments billed in prior periods, and we have recorded $2.5 million as deferred revenue.
 
 
March 31,
2018
 
January 1,
2018
 
 
(In thousands)
Contract asset
 
$
1,711

 
$

Contract liability
 
$
(2,479
)
 
$
(2,713
)

The contract assets and liabilities include both lease and service components. We recognized $2.2 million in revenue during the three months ended March 31, 2018, that was previously included in contract liability as of January 1, 2018.
As of March 31, 2018, we expect to recognize $2.5 billion in revenue related to our unfulfilled performance obligations under the terms of our long-term throughput agreements and operating leases expiring in 2019 through 2036. These agreements provide for changes in the minimum revenue guarantees annually for increases or decreases in the Producer Price Index (“PPI”) or Federal Energy Regulatory Commission (“FERC”) index, with certain contracts having provisions that limit the level of the rate increases or decreases. We expect to recognize revenue for these unfulfilled performance obligation as shown in the table below (amounts shown in table include both service and lease revenues):
Years Ending December 31,
 
(In millions)
Remainder of 2018
 
$
284

2019
 
350

2020
 
300

2021
 
293

2022
 
267

Thereafter
 
1,004

Total
 
$
2,498

Payment terms under our contracts with customers are consistent with industry norms and are typically payable within 10 to 30 days of the date of invoice.
Disaggregated revenues are as follows:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(In thousands)
Pipelines
 
$
72,169

 
$
52,447

Terminals, tanks and loading racks
 
38,181

 
33,807

Refinery processing units
 
18,534

 
19,380

 
 
$
128,884

 
$
105,634

During the three months ended March 31, 2018, lease revenues amounted to $71.0 million and service revenues amounted to $57.9 million. Both of these revenues were recorded within affiliates and third parties revenues on our consolidated statement of income.

Note 4:
Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, debt and interest rate swaps. The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. Debt consists of outstanding principal under our revolving credit agreement (which approximates fair value as interest rates are reset frequently at current interest rates) and our fixed interest rate senior notes.

Fair value measurements are derived using inputs (assumptions that market participants would use in pricing an asset or liability) including assumptions about risk. GAAP categorizes inputs used in fair value measurements into three broad levels as follows:
(Level 1) Quoted prices in active markets for identical assets or liabilities.
(Level 2) Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, similar assets and liabilities in markets that are not active or can be corroborated by observable market data.
(Level 3) Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes valuation techniques that involve significant unobservable inputs.

The carrying amounts and estimated fair values of our senior notes were as follows:
 
 
 
 
March 31, 2018
 
December 31, 2017
Financial Instrument
 
Fair Value Input Level
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
 
 
 
 
(In thousands)
Liabilities:
 
 
 
 
 
 
 
 
 
 
6% Senior notes
 
Level 2
 
495,452

 
511,740

 
495,308

 
525,120

 
 
 
 
$
495,452

 
$
511,740

 
$
495,308

 
$
525,120


Level 2 Financial Instruments
Our senior notes are measured at fair value using Level 2 inputs. The fair value of the senior notes is based on market values provided by a third-party bank, which were derived using market quotes for similar type debt instruments. See Note 8 for additional information.


Note 5:
Properties and Equipment 

The carrying amounts of our properties and equipment are as follows:
 
 
March 31,
2018
 
December 31,
2017
 
 
(In thousands)
Pipelines, terminals and tankage
 
$
1,541,596

 
$
1,541,722

Refinery assets
 
347,338

 
347,338

Land and right of way
 
86,445

 
86,484

Construction in progress
 
24,134

 
12,029

Other
 
36,210

 
35,659

 
 
2,035,723

 
2,023,232

Less accumulated depreciation
 
474,669

 
453,761

 
 
$
1,561,054

 
$
1,569,471


We capitalized $0.1 million and $0.2 million during the three months ended March 31, 2018 and 2017, respectively, in interest attributable to construction projects.

Depreciation expense was $20.9 million and $16.9 million for the three months ended March 31, 2018 and 2017, respectively, and includes depreciation of assets acquired under capital leases.

- 12 -




Note 6:
Intangible Assets

Intangible assets include transportation agreements and customer relationships that represent a portion of the total purchase price of certain assets acquired from Delek in 2005, from HFC in 2008 prior to HEP becoming a consolidated VIE of HFC and from Plains in 2017.

The carrying amounts of our intangible assets are as follows:
 
 
Useful Life
 
March 31,
2018
 
December 31,
2017
 
 
 
 
(In thousands)
Delek transportation agreement
 
30 years
 
$
59,933

 
$
59,933

HFC transportation agreement
 
10-15 years
 
75,131

 
75,131

Customer relationships
 
10 years
 
69,282

 
69,282

Other
 
 
 
50

 
50

 
 
 
 
204,396

 
204,396

Less accumulated amortization
 
 
 
78,969

 
74,933

 
 
 
 
$
125,427

 
$
129,463


Amortization expense was $4.0 million and $1.7 million for the three months ended March 31, 2018 and 2017, respectively. We estimate amortization expense to be $14.0 million for each of the next four years and $9.8 million in 2023.

We have additional transportation agreements with HFC resulting from historical transactions consisting of pipeline, terminal and tankage assets contributed to us or acquired from HFC. These transactions occurred while we were a consolidated VIE of HFC; therefore, our basis in these agreements is zero and does not reflect a step-up in basis to fair value.


Note 7:
Employees, Retirement and Incentive Plans

Direct support for our operations is provided by Holly Logistic Services, L.L.C. (“HLS”), an HFC subsidiary, which utilizes personnel employed by HFC who are dedicated to performing services for us. Their costs, including salaries, bonuses, payroll taxes, benefits and other direct costs, are charged to us monthly in accordance with an omnibus agreement that we have with HFC. These employees participate in the retirement and benefit plans of HFC. Our share of retirement and benefit plan costs was $1.8 million and $1.7 million for the three months ended March 31, 2018 and 2017, respectively.

Under HLS’s secondment agreement with HFC (the “Secondment Agreement”), certain employees of HFC are seconded to HLS to provide operational and maintenance services for certain of our processing, refining, pipeline and tankage assets, and HLS reimburses HFC for its prorated portion of the wages, benefits, and other costs related to these employees.
We have a Long-Term Incentive Plan for employees and non-employee directors who perform services for us. The Long-Term Incentive Plan consists of four components: restricted or phantom units, performance units, unit options and unit appreciation rights. Our accounting policy for the recognition of compensation expense for awards with pro-rata vesting (a significant proportion of our awards) is to expense the costs ratably over the vesting periods.

As of March 31, 2018, we had two types of incentive-based awards outstanding, which are described below. The compensation cost charged against income was $0.8 million and $0.3 million for the three months ended March 31, 2018 and 2017, respectively. We currently purchase units in the open market instead of issuing new units for settlement of all unit awards under our Long-Term Incentive Plan. As of March 31, 2018, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which 1,323,089 have not yet been granted, assuming no forfeitures of the unvested units and full achievement of goals for the unvested performance units.


- 13 -


Restricted and Phantom Units
Under our Long-Term Incentive Plan, we grant restricted units to non-employee directors and phantom units to selected employees who perform services for us, with most awards vesting over a period of one to three years. We previously granted restricted units to selected employees who perform services for us, which vest over a period of three years. Although full ownership of the units does not transfer to the recipients until the units vest, the recipients have distribution rights on these units from the date of grant, and the recipients of the restricted units have voting rights on the restricted units from the date of grant.

The fair value of each restricted or phantom unit award is measured at the market price as of the date of grant and is amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award.

A summary of restricted and phantom unit activity and changes during the three months ended March 31, 2018, is presented below:
Restricted and Phantom Units
 
Units
 
Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2018 (nonvested)
 
119,009

 
$
34.77

Granted
 
12,890

 
30.23

Outstanding at March 31, 2018 (nonvested)
 
131,899

 
$
34.33


No restricted units were vested and transferred to recipients during the three months ended March 31, 2018. As of March 31, 2018, there was $2.3 million of total unrecognized compensation expense related to unvested restricted and phantom unit grants, which is expected to be recognized over a weighted-average period of 1.3 years.

Performance Units
Under our Long-Term Incentive Plan, we grant performance units to selected officers who perform services for us. Performance units granted are payable in common units at the end of a three-year performance period based upon the growth in our distributable cash flow per common unit over the performance period. As of March 31, 2018, estimated unit payouts for outstanding nonvested performance unit awards ranged between 100% and 150% of the target number of performance units granted.

We granted 2,764 performance units during the three months ended March 31, 2018. Performance units granted in 2017 and 2018 vest over a three-year performance period ending December 31, 2020 and 2021, respectively, and are payable in HEP common units. The number of units actually earned will be based on the growth of our distributable cash flow per common unit over the performance period, and can range from 50% to 150% of the target number of performance units granted. Although common units are not transferred to the recipients until the performance units vest, the recipients have distribution rights with respect to the common units from the date of grant.

A summary of performance unit activity and changes for the three months ended March 31, 2018, is presented below:
Performance Units
 
Units
Outstanding at January 1, 2018 (nonvested)
 
36,911

Granted
 
2,764

Vesting and transfer of common units to recipients
 
(4,283
)
Outstanding at March 31, 2018 (nonvested)
 
35,392


The grant date fair value of performance units vested and transferred to recipients during both the three months ended March 31, 2018 and 2017 was $0.1 million. Based on the weighted average fair value of performance units outstanding at March 31, 2018, of $1.2 million, there was $0.8 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of 1.8 years.

During the three months ended March 31, 2018, we did not purchase any common units in the open market for the issuance and
settlement of unit awards under our Long-Term Incentive Plan.


- 14 -


Note 8:
Debt

Credit Agreement
We have a $1.4 billion senior secured revolving credit facility (the “Credit Agreement”) expiring in July 2022. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit, and it contains an accordion feature giving us the ability to increase the size of the facility by up to $300 million with additional lender commitments.

Our obligations under the Credit Agreement are collateralized by substantially all of our assets, and indebtedness under the Credit Agreement is guaranteed by our material, wholly-owned subsidiaries.  The Credit Agreement requires us to maintain compliance with certain financial covenants consisting of total leverage, senior secured leverage, and interest coverage.  It also limits or restricts our ability to engage in certain activities.  If, at any time prior to the expiration of the Credit Agreement, HEP obtains two investment grade credit ratings, the Credit Agreement will become unsecured and many of the covenants, limitations, and restrictions will be eliminated.

We may prepay all loans at any time without penalty, except for tranche breakage costs.  If an event of default exists under the Credit Agreement, the lenders will be able to accelerate the maturity of all loans outstanding and exercise other rights and remedies.  We were in compliance with the covenants as of March 31, 2018.

Senior Notes
On July 19, 2016, we closed a private placement of $400 million in aggregate principal amount of 6% senior unsecured notes due in 2024 (the “ 6% Senior Notes”). On September 22, 2017, we closed a private placement of an additional $100 million in aggregate principal amount of the 6% Senior Notes for a combined aggregate principal amount outstanding of $500 million maturing in 2024.

The 6% Senior Notes are unsecured and impose certain restrictive covenants, including limitations on our ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates and enter into mergers. We were in compliance with the restrictive covenants for the 6% Senior Notes as of March 31, 2018. At any time when the 6% Senior Notes are rated investment grade by both Moody’s and Standard & Poor’s and no default or event of default exists, we will not be subject to many of the foregoing covenants. Additionally, we have certain redemption rights at varying premiums over face value under the 6% Senior Notes.

Indebtedness under the 6% Senior Notes is guaranteed by our wholly-owned subsidiaries.

On January 4, 2017, we redeemed the $300 million aggregate principal amount of 6.5% senior notes due in 2020 (the “6.5% Senior Notes”) at a redemption cost of $309.8 million at which time we recognized a $12.2 million early extinguishment loss consisting of a $9.8 million debt redemption premium and unamortized discount and financing costs of $2.4 million. We funded the redemption with borrowings under our Credit Agreement.

Long-term Debt
The carrying amounts of our long-term debt are as follows:
 
 
March 31,
2018
 
December 31,
2017
 
 
(In thousands)
Credit Agreement
 
 
 
 
Amount outstanding
 
$
895,500

 
$
1,012,000

 
 
 
 
 
6% Senior Notes
 
 
 
 
Principal
 
500,000

 
500,000

Unamortized premium and debt issuance costs
 
(4,548
)
 
(4,692
)
 
 
495,452

 
495,308

 
 
 
 
 
Total long-term debt
 
$
1,390,952

 
$
1,507,308



- 15 -


Interest Rate Risk Management
The two interest rate swaps that hedged our exposure to the cash flow risk caused by the effects of LIBOR changes on $150 million of Credit Agreement advances matured on July 31, 2017. The swaps had effectively converted $150 million of our LIBOR based debt to fixed rate debt.

Interest Expense and Other Debt Information
Interest expense consists of the following components:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(In thousands)
Interest on outstanding debt:
 
 
 
 
Credit Agreement, net of interest on interest rate swaps
 
$
8,944

 
$
6,449

6.5% Senior Notes
 

 
162

6% Senior Notes
 
7,500

 
6,000

Amortization of discount and deferred debt issuance costs
 
757

 
770

Commitment fees and other
 
477

 
354

Total interest incurred
 
17,678

 
13,735

Less capitalized interest
 
97

 
196

Net interest expense
 
$
17,581

 
$
13,539

Cash paid for interest
 
$
16,599

 
$
26,517


Capital Lease Obligations
We have capital lease obligations related to vehicle leases with initial terms of 33 to 48 months. Such obligations totaled $2.2 million and $1.9 million as of March 31, 2018 and December 31, 2017, respectively, and are included in other current and long-term liabilities on the consolidated balance sheets. The total cost of assets under capital leases was $5.7 million and $5.1 million as of March 31, 2018 and December 31, 2017, respectively, with accumulated depreciation of $3.5 million and $3.3 million as of March 31, 2018 and December 31, 2017, respectively. We include depreciation of capital leases in depreciation and amortization in our consolidated statements of income.


Note 9:
Significant Customers

All revenues are domestic revenues, of which 84% are currently generated from our two largest customers: HFC and Delek.

The following table presents the percentage of total revenues generated by each of these customers:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
HFC
 
79
%
 
84
%
Delek
 
5
%
 
8
%


Note 10:
Related Party Transactions

We serve HFC’s refineries under long-term pipeline, terminal and tankage throughput agreements, and refinery processing unit tolling agreements expiring from 2019 to 2036. Under these agreements, HFC agrees to transport, store and process throughput volumes of refined product, crude oil and feedstocks on our pipelines, terminals, tankage, loading rack facilities and refinery processing units that result in minimum annual payments to us. These minimum annual payments or revenues are subject to annual rate adjustments on July 1st each year generally based on increases or decreases in PPI or the FERC index. As of March 31, 2018, these agreements with HFC require minimum annualized payments to us of $332.7 million.

If HFC fails to meet its minimum volume commitments under the agreements in any quarter, it will be required to pay us the amount of any shortfall in cash by the last day of the month following the end of the quarter. Under certain of these agreements, a shortfall payment may be applied as a credit in the following four quarters after its minimum obligations are met.

Under certain provisions of an omnibus agreement we have with HFC (the “Omnibus Agreement”), we pay HFC an annual administrative fee (currently $2.5 million) for the provision by HFC or its affiliates of various general and administrative services to us. This fee does not include the salaries of personnel employed by HFC who perform services for us on behalf of HLS or the cost of their employee benefits, which are charged to us separately by HFC. Also, we reimburse HFC and its affiliates for direct expenses they incur on our behalf.

Related party transactions with HFC are as follows:
Revenues received from HFC were $101.4 million and $89.0 million for the three months ended March 31, 2018 and 2017, respectively.
HFC charged us general and administrative services under the Omnibus Agreement of $0.6 million for each of the three months ended March 31, 2018 and 2017.
We reimbursed HFC for costs of employees supporting our operations of $12.7 million and $11.4 million for the three months ended March 31, 2018 and 2017, respectively.
HFC reimbursed us $1.2 million and $1.3 million for the three months ended March 31, 2018 and 2017, respectively, for expense and capital projects.
We distributed $36.3 million and $30.3 million in the three months ended March 31, 2018 and 2017, respectively, to HFC as regular distributions on its common units in the three months ended March 31, 2018 and on its common units and general partner interest, including general partner incentive distributions, in the three months ended March 31, 2017.
Accounts receivable from HFC were $41.6 million and $51.5 million at March 31, 2018, and December 31, 2017, respectively.
Accounts payable to HFC were $10.7 million and $7.7 million at March 31, 2018, and December 31, 2017, respectively.
Deferred revenue in the consolidated balance sheets at March 31, 2018 and December 31, 2017, includes $0.9 million and $4.4 million, respectively, relating to certain shortfall billings to HFC. It is possible that HFC may not exceed its minimum obligations to receive credit for any of the $0.9 million deferred at March 31, 2018.

- 16 -


We received operating lease payments from HFC for use of our Artesia and Tulsa railyards of $0.5 million and $0.1 million for the three months ended March 31, 2018 and 2017, respectively.
On October 31, 2017, we closed on an equity restructuring transaction with HEP Logistics, a wholly-owned subsidiary of HFC and the general partner of HEP, pursuant to which the incentive distribution rights held by HEP Logistics were canceled, and HEP Logistics' 2% general partner interest in HEP was converted into a non-economic general partner interest in HEP. In consideration, we issued 37,250,000 of our common units to HEP Logistics. In addition, HEP Logistics agreed to waive $2.5 million of limited partner cash distributions for each of twelve consecutive quarters beginning with the first quarter the units issued as consideration were eligible to receive distributions.


Note 11:
Partners’ Equity, Income Allocations and Cash Distributions

As of March 31, 2018, HFC held 59,630,030 of our common units, constituting a 57%limited partner interest in us, and held the
non-economic general partner interest. Additionally, HEP Logistics, our general partner, owned all incentive distribution rights through October 31, 2017, at which time we closed on an equity restructuring transaction with HEP Logistics pursuant to which the incentive distribution rights were canceled. See Note 1 for a description of this equity restructuring transaction.

On January 25, 2018, we entered into a common unit purchase agreement in which certain purchasers agreed to purchase in a private placement 3,700,000 common units representing limited partnership interests, at a price of $29.73 per common unit. The private placement closed on February 6, 2018, and we received proceeds of approximately $110 million, which were used to repay indebtedness under our Credit Agreement.

Continuous Offering Program
We have a continuous offering program under which we may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200 million. For the three months ended March 31, 2018, HEP issued 152,169 units under this program, providing approximately $4.6 million in gross proceeds. As of March 31, 2018, HEP has issued 2,394,076 units under this program, providing $81.7 million in gross proceeds.

We intend to use our net proceeds for general partnership purposes, which may include funding working capital, repayment of debt, acquisitions and capital expenditures. Amounts repaid under our credit facility may be reborrowed from time to time.

Allocations of Net Income

Net income attributable to HEP is allocated to the partners based on their weighted-average ownership percentage during the period.

Prior to the equity restructuring of the general partner interest owned by HEP Logistics described in Note 1 that occurred on October 31, 2017, net income attributable to HEP was allocated between limited partners and the general partner interest in accordance with the provisions of the partnership agreement. HEP net income allocated to the general partner included incentive distributions that were declared subsequent to quarter end. After incentive distributions and other priority allocations were allocated to the general partner, the remaining net income attributable to HEP was allocated to the partners based on their weighted-average ownership percentage during the period.

The following table presents the allocation of the general partner interest in net income for the periods presented below: 
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(In thousands)
General partner interest in net income
 
$

 
$
511

General partner incentive distribution
 

 
16,627

Total general partner interest in net income
 
$

 
$
17,138


Cash Distributions
On April 19, 2018, we announced our cash distribution for the first quarter of 2018 of $0.6550 per unit. The distribution is payable on all common units and will be paid May 10, 2018, to all unitholders of record on April 30, 2018. However, HEP Logistics will waive $2.5 million in limited partner cash distributions in accordance with the equity restructuring discussed in Note 1.

Prior to the equity restructuring of the general partner interest owned by HEP Logistics that occurred on October 31, 2017, our general partner, HEP Logistics, was entitled to incentive distributions if the amount we distributed with respect to any quarter exceeded specified target levels. After the restructuring of the general partner interest, the general partner interest was no longer entitled to any distributions.

The following table presents the allocation of our regular quarterly cash distributions to the general and limited partners for the periods in which they apply. Our distributions are declared subsequent to quarter end; therefore, the amounts presented do not reflect distributions paid during the periods presented below.

- 17 -


 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(In thousands, except per unit data)
General partner interest in distribution
 
$

 
$
1,148

General partner incentive distribution
 

 
16,627

Total general partner distribution
 

 
17,775

Limited partner distribution
 
66,551

 
39,632

Total regular quarterly cash distribution
 
$
66,551

 
$
57,407

Cash distribution per unit applicable to limited partners
 
$
0.6550

 
$
0.6200


As a master limited partnership, we distribute our available cash, which historically has exceeded our net income attributable to HEP because depreciation and amortization expense represents a non-cash charge against income. The result is a decline in our partners’ equity since our regular quarterly distributions have exceeded our quarterly net income attributable to HEP. Additionally, if the asset contributions and acquisitions from HFC had occurred while we were not a consolidated variable interest entity of HFC, our acquisition cost, in excess of HFC’s historical basis in the transferred assets, would have been recorded in our financial statements at the time of acquisition as increases to our properties and equipment and intangible assets instead of decreases to our partners’ equity.


Note 12:
Net Income Per Limited Partner Unit

Net income per unit applicable to the limited partners is computed using the two-class method, since we have more than one participating security as of March 31, 2018, common units and restricted units. Prior to the equity restructuring transaction described in Note 1, which was effective October 31, 2017, we had participating securities which included the aforementioned common units and restricted units as well as general partner units and IDRs. After the equity restructuring, the general partner interest was no longer entitled to any distributions, and none were made on the general partner interest after October 31, 2017.

To the extent net income attributable to the partners exceeds or is less than cash distributions, this difference is allocated to the partners based on their weighted-average ownership percentage during the period, after consideration of any priority allocations of earnings. Our dilutive securities, restricted units, are immaterial for all periods presented.

For purposes of applying the two-class method, including the allocation of cash distributions in excess of earnings, net income per limited partner unit is computed as follows:
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
 
 
(In thousands)
Net income attributable to the partners
 
$
46,168

 
$
25,563

Less: General partner’s distribution declared (including IDRs)
 

 
(17,775
)
Limited partner’s distribution declared on common units
 
(66,551
)
 
(39,632
)
Distributions in excess of net income attributable to the partners
 
$
(20,383
)
 
$
(31,844
)


- 18 -


 
 
General Partner (including IDRs)
 
Limited Partners’ Common Units
 
Total
 
 
(In thousands, except per unit data)
Three Months Ended March 31, 2018
 
 
 
 
 
 
Net income attributable to the partners:
 
 
 
 
 
 
Distributions declared
 
$

 
$
66,551

 
$
66,551

Distributions in excess of net income attributable to the partners
 

 
(20,383
)
 
(20,383
)
Net income attributable to the partners
 
$

 
$
46,168

 
$
46,168

Weighted average limited partners' units outstanding
 
 
 
103,836

 
 
Limited partners' per unit interest in earnings - basic and diluted
 
 
 
$
0.44

 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
 
 
 
 
 
Net income attributable to the partners:
 
 
 
 
 
 
Distributions declared
 
$
17,775

 
$
39,632

 
$
57,407

Distributions in excess of net income attributable to the partners
 
(637
)
 
(31,207
)
 
(31,844
)
Net income attributable to the partners
 
$
17,138

 
$
8,425

 
$
25,563

Weighted average limited partners' units outstanding
 
 
 
63,113

 
 
Limited partners' per unit interest in earnings - basic and diluted
 
 
 
$
0.13

 
 



- 19 -


Note 13:
Environmental

We incurred no expenses for the three months ended March 31, 2018 and 2017 for environmental remediation obligations. The accrued environmental liability, net of expected recoveries from indemnifying parties, reflected in our consolidated balance sheets was $6.4 million and $6.5 million at March 31, 2018 and December 31, 2017, respectively, of which $4.9 million and $5.0 million, respectively, were classified as other long-term liabilities. These accruals include remediation and monitoring costs expected to be incurred over an extended period of time.

Under the Omnibus Agreement and certain transportation agreements and purchase agreements with HFC, HFC has agreed to indemnify us, subject to certain monetary and time limitations, for environmental noncompliance and remediation liabilities associated with certain assets transferred to us from HFC and occurring or existing prior to the date of such transfers. As of March 31, 2018 and December 31, 2017, our consolidated balance sheets included additional accrued environmental liabilities of $0.7 million and $0.8 million, respectively, for HFC indemnified liabilities, and other assets included equal and offsetting balances representing amounts due from HFC related to indemnifications for environmental remediation liabilities.


Note 14:
Contingencies

We are a party to various legal and regulatory proceedings, none of which we believe will have a material adverse impact on our financial condition, results of operations or cash flows.


Note 15:
Operating Segments

Although financial information is reviewed by our chief operating decision makers from a variety of perspectives, they view the business in two operating segments: pipelines and terminals, and refinery processing units. These operating segments adhere to the accounting polices used for our consolidated financial statements.

The pipelines and terminals segment has been aggregated as both pipeline and terminals (1) have similar economic characteristics,(2) similarly provide logistics services of transportation and storage of petroleum products, (3) similarly support the petroleum refining business, including distribution of its products, (4) have principally the same customers and (5) are subject to similar regulatory requirements.

We evaluate the performance of each segment based on its respective operating income. Certain general and administrative expenses and interest and financing costs are excluded from segment operating income as they are not directly attributable to a specific operating segment. Identifiable assets are those used by the segment, whereas other assets are principally equity method investments, cash, deposits and other assets that are not associated with a specific reportable operating segment.

- 20 -


 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
 
Revenues:
 
 
 
 
Pipelines and terminals - affiliate
 
$
82,894

 
$
69,645

Pipelines and terminals - third-party
 
27,456

 
16,609

Refinery processing units - affiliate
 
18,534

 
19,380

Total segment revenues
 
$
128,884

 
$
105,634

 
 
 
 
 
Segment operating income:
 
 
 
 
Pipelines and terminals
 
$
60,213

 
$
46,485

Refinery processing units
 
7,327

 
7,883

Total segment operating income
 
67,540

 
54,368

Unallocated general and administrative expenses
 
(3,122
)
 
(2,634
)
Interest and financing costs, net
 
(17,066
)
 
(25,662
)
Equity in earnings of unconsolidated affiliates
 
1,279

 
1,840

Gain on sale of assets and other
 
86

 
73

Income before income taxes
 
$
48,717

 
$
27,985

 
 
 
 
 
Capital Expenditures:
 
 
 
 
  Pipelines and terminals
 
$
12,612

 
$
8,129

  Refinery processing units
 

 
136

Total capital expenditures
 
$
12,612

 
$
8,265


 
 
March 31, 2018
 
December 31, 2017
 
 
(in thousands)
Identifiable assets:
 
 
 
 
  Pipelines and terminals (1)
 
$
1,711,880

 
$
1,728,074

  Refinery processing units
 
324,570

 
328,585

Other
 
98,339

 
97,455

Total identifiable assets
 
$
2,134,789

 
$
2,154,114

(1) Includes goodwill of $268.2 million and $266.7 million as of March 31, 2018 and December 31, 2017, respectively.



- 21 -


Note 16:
Supplemental Guarantor/Non-Guarantor Financial Information

Obligations of HEP (“Parent”) under the 6% Senior Notes have been jointly and severally guaranteed by each of its direct and indirect 100% owned subsidiaries (“Guarantor Subsidiaries”). These guarantees are full and unconditional, subject to certain customary release provisions. These circumstances include (i) when a Guarantor Subsidiary is sold or sells all or substantially all of its assets, (ii) when a Guarantor Subsidiary is declared “unrestricted” for covenant purposes, (iii) when a Guarantor Subsidiary’s guarantee of other indebtedness is terminated or released and (iv) when the requirements for legal defeasance or covenant defeasance or to discharge the senior notes have been satisfied.

The following financial information presents condensed consolidating balance sheets, statements of comprehensive income, and statements of cash flows of the Parent, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries. The information has been presented as if the Parent accounted for its ownership in the Guarantor Subsidiaries, and the Guarantor Restricted Subsidiaries accounted for the ownership of the Non-Guarantor Non-Restricted Subsidiaries, using the equity method of accounting.

Condensed Consolidating Balance Sheet
March 31, 2018
 
Parent
 
Guarantor
Restricted Subsidiaries
 
Non-Guarantor Non-Restricted Subsidiaries
 
Eliminations
 
Consolidated
 
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2

 
$
1,485

 
$
7,078

 
$

 
$
8,565

Accounts receivable
 

 
51,428

 
4,935

 
(198
)
 
56,165

Prepaid and other current assets
 
226

 
2,427

 
355

 

 
3,008

Total current assets
 
228

 
55,340

 
12,368

 
(198
)
 
67,738

 
 
 
 
 
 
 
 
 
 
 
Properties and equipment, net
 

 
1,204,672

 
356,382

 

 
1,561,054

Investment in subsidiaries

 
1,879,597

 
272,530

 

 
(2,152,127
)
 

Intangible assets, net
 

 
125,427

 

 

 
125,427

Goodwill
 

 
268,166

 

 

 
268,166

Equity method investments
 

 
84,678

 

 

 
84,678

Other assets
 
11,096

 
16,630

 

 

 
27,726

Total assets
 
$
1,890,921

 
$
2,027,443

 
$
368,750

 
$
(2,152,325
)
 
$
2,134,789

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$

 
$
20,691

 
$
3,461

 
$
(198
)
 
$
23,954

Accrued interest
 
6,079

 

 

 

 
6,079

Deferred revenue
 

 
8,497

 

 

 
8,497

Accrued property taxes
 

 
4,423

 
1,713

 

 
6,136

Other current liabilities
 
226

 
7,376

 

 

 
7,602

Total current liabilities
 
6,305

 
40,987

 
5,174

 
(198
)
 
52,268


 
 
 
 
 
 
 
 
 
 
Long-term debt
 
1,390,952

 

 

 

 
1,390,952

Other long-term liabilities
 
260

 
15,249

 
202

 

 
15,711

Deferred revenue
 

 
47,740

 

 

 
47,740

Class B unit
 

 
43,870

 

 

 
43,870

Equity - partners
 
493,404

 
1,879,597

 
272,530

 
(2,152,127
)
 
493,404

Equity - noncontrolling interest
 

 

 
90,844

 

 
90,844

Total liabilities and equity
 
$
1,890,921

 
$
2,027,443

 
$
368,750

 
$
(2,152,325
)
 
$
2,134,789



- 22 -



Condensed Consolidating Balance Sheet
December 31, 2017
 
Parent
 
Guarantor
Restricted Subsidiaries
 
Non-Guarantor Non-Restricted Subsidiaries
 
Eliminations
 
Consolidated
 
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2

 
$
511

 
$
7,263

 
$

 
$
7,776

Accounts receivable
 

 
59,448

 
5,038

 
(182
)
 
64,304

Prepaid and other current assets
 
13

 
2,016

 
282

 

 
2,311

Total current assets
 
15

 
61,975

 
12,583

 
(182
)
 
74,391

 
 
 
 
 
 
 
 
 
 
 
Properties and equipment, net
 

 
1,213,626

 
355,845

 

 
1,569,471

Investment in subsidiaries
 
1,902,285

 
273,319

 

 
(2,175,604
)
 

Intangible assets, net
 

 
129,463

 

 

 
129,463

Goodwill
 

 
266,716

 

 

 
266,716

Equity method investments
 

 
85,279

 

 

 
85,279

Other assets
 
11,753

 
17,041

 

 

 
28,794

Total assets
 
$
1,914,053

 
$
2,047,419

 
$
368,428

 
$
(2,175,786
)
 
$
2,154,114

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$

 
$
20,928

 
$
1,526

 
$
(182
)
 
$
22,272

Accrued interest
 
12,500

 
756

 

 

 
13,256

Deferred revenue
 

 
8,540

 
1,058

 

 
9,598

Accrued property taxes
 

 
3,431

 
1,221

 

 
4,652

Other current liabilities
 

 
5,707

 

 

 
5,707

Total current liabilities
 
12,500

 
39,362

 
3,805

 
(182
)
 
55,485

 
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
1,507,308

 

 

 

 
1,507,308

Other long-term liabilities
 
286

 
15,359

 
198

 

 
15,843

Deferred revenue
 

 
47,272

 

 

 
47,272

Class B unit
 

 
43,141

 

 

 
43,141

Equity - partners
 
393,959

 
1,902,285

 
273,319

 
(2,175,604
)
 
393,959

Equity - noncontrolling interest
 

 

 
91,106

 

 
91,106

Total liabilities and equity
 
$
1,914,053

 
$
2,047,419

 
$
368,428

 
$
(2,175,786
)
 
$
2,154,114





- 23 -



Condensed Consolidating Statement of Comprehensive Income
Three Months Ended March 31, 2018
 
Parent
 
Guarantor Restricted
Subsidiaries
 
Non-Guarantor Non-restricted Subsidiaries
 
Eliminations
 
Consolidated
 
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
Affiliates
 
$

 
$
94,291

 
$
7,137

 
$

 
$
101,428

Third parties
 

 
19,978

 
7,478

 

 
27,456

 
 

 
114,269

 
14,615

 

 
128,884

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
 
Operations (exclusive of depreciation and amortization)
 

 
32,664

 
3,538

 

 
36,202

Depreciation and amortization
 


 
21,001

 
4,141

 

 
25,142

General and administrative
 
1,280

 
1,842

 

 

 
3,122

 
 
1,280

 
55,507

 
7,679

 

 
64,466

Operating income (loss)
 
(1,280
)
 
58,762

 
6,936

 

 
64,418

 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
 
65,052

 
5,212

 

 
(70,264
)
 

Equity in earnings of equity method investments
 

 
1,279

 

 

 
1,279

Interest expense
 
(17,649
)
 
68

 

 

 
(17,581
)
Interest income
 

 
515

 

 

 
515

Gain on sale of assets and other
 
45

 
28

 
13

 

 
86

 
 
47,448

 
7,102

 
13

 
(70,264
)
 
(15,701
)
Income before income taxes
 
46,168

 
65,864

 
6,949

 
(70,264
)
 
48,717

State income tax expense
 

 
(82
)
 

 

 
(82
)
Net income
 
46,168

 
65,782

 
6,949

 
(70,264
)
 
48,635

Allocation of net income attributable to noncontrolling interests
 

 
(730
)
 
(1,737
)
 

 
(2,467
)
Net income attributable to the partners
 
46,168

 
65,052

 
5,212

 
(70,264
)
 
46,168

Other comprehensive income
 

 

 

 

 

Comprehensive income attributable to the partners
 
$
46,168

 
$
65,052

 
$
5,212

 
$
(70,264
)
 
$
46,168



- 24 -



Condensed Consolidating Statement of Comprehensive Income
Three Months Ended March 31, 2017
 
Parent
 
Guarantor
Restricted Subsidiaries
 
Non-Guarantor Non-Restricted Subsidiaries
 
Eliminations
 
Consolidated
 
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
Affiliates
 
$

 
$
80,776

 
$
8,249

 
$

 
$
89,025

Third parties
 

 
11,003

 
5,606