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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ______________________________________________________________________________________
FORM 10-Q
 ______________________________________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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)
Securities registered pursuant to 12(b) of the Securities Exchange Act of 1934:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Limited Partner Units
 
HEP
 
New York Stock Exchange
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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes       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
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  
The number of the registrant’s outstanding common units at July 26, 2019, was 105,440,201.



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 (“HFC”), Delek US Holdings, Inc. (“Delek”) 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 or cyber attacks and the consequences of any such attacks;
general economic conditions;
the impact of recent or proposed 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, 2018, and in this Quarterly Report on Form 10-Q 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)
 
 
June 30, 2019
 
December 31, 2018
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
6,941

 
$
3,045

Accounts receivable:
 
 
 
 
Trade
 
15,074

 
12,332

Affiliates
 
46,082

 
46,786

 
 
61,156

 
59,118

Prepaid and other current assets
 
3,883

 
4,311

Total current assets
 
71,980

 
66,474

 
 
 
 
 
Properties and equipment, net
 
1,507,597

 
1,538,655

Operating lease right-of-use assets, net
 
76,551

 

Intangible assets, net
 
108,326

 
115,329

Goodwill
 
270,336

 
270,336

Equity method investments
 
83,015

 
83,840

Other assets
 
30,038

 
27,906

Total assets
 
$
2,147,843

 
$
2,102,540

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable:
 
 
 
 
Trade
 
$
10,382

 
$
16,435

Affiliates
 
7,733

 
14,222

 
 
18,115

 
30,657

 
 
 
 
 
Accrued interest
 
13,329

 
13,302

Deferred revenue
 
8,216

 
8,697

Accrued property taxes
 
5,437

 
1,779

Current operating lease liabilities
 
5,346

 

Current finance lease liabilities
 
857

 
936

Other current liabilities
 
2,525

 
2,526

Total current liabilities
 
53,825

 
57,897

 
 
 
 
 
Long-term debt
 
1,437,710

 
1,418,900

Noncurrent operating lease liabilities
 
71,550

 

Other long-term liabilities
 
13,273

 
15,307

Deferred revenue
 
48,345

 
48,714

 
 
 
 
 
Class B unit
 
47,722

 
46,161

 
 
 
 
 
Equity:
 
 
 
 
Partners’ equity:
 
 
 
 
Common unitholders (105,440,201 units issued and outstanding
    at June 30, 2019 and December 31, 2018)
 
390,022

 
427,435

Noncontrolling interest
 
85,396

 
88,126

Total equity
 
475,418

 
515,561

Total liabilities and equity
 
$
2,147,843

 
$
2,102,540



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
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
Affiliates
 
$
102,369

 
$
94,013

 
$
205,728

 
$
195,441

Third parties
 
28,382

 
24,747

 
59,520

 
52,203

 
 
130,751

 
118,760

 
265,248

 
247,644

Operating costs and expenses:
 
 
 
 
 
 
 
 
Operations (exclusive of depreciation and amortization)
 
40,602

 
34,533

 
78,121

 
70,735

Depreciation and amortization
 
24,247

 
24,608

 
48,071

 
49,750

General and administrative
 
1,988

 
2,673

 
4,608

 
5,795

 
 
66,837

 
61,814

 
130,800

 
126,280

Operating income
 
63,914

 
56,946

 
134,448

 
121,364

 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
Equity in earnings of equity method investments
 
1,783

 
1,734

 
3,883

 
3,013

Interest expense
 
(19,230
)
 
(17,626
)
 
(38,252
)
 
(35,207
)
Interest income
 
551

 
526

 
1,079

 
1,041

Gain (loss) on sale of assets and other
 
111

 
(53
)
 
(199
)
 
33

 
 
(16,785
)
 
(15,419
)
 
(33,489
)
 
(31,120
)
Income before income taxes
 
47,129

 
41,527

 
100,959

 
90,244

State income tax benefit (expense)
 
30

 
(28
)
 
(6
)
 
(110
)
Net income
 
47,159

 
41,499

 
100,953

 
90,134

Allocation of net income attributable to noncontrolling interests
 
(1,469
)
 
(1,356
)
 
(4,081
)
 
(3,823
)
Net income attributable to the partners
 
45,690

 
40,143

 
96,872

 
86,311

Limited partners’ per unit interest in earnings—basic and diluted
 
$
0.43

 
$
0.38

 
$
0.92

 
$
0.82

Weighted average limited partners’ units outstanding
 
105,440

 
105,429

 
105,440

 
104,637




See accompanying notes.


- 5 -

Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
 
Six Months Ended
June 30,
 
 
2019
 
2018
Cash flows from operating activities
 
 
 
 
Net income
 
$
100,953

 
$
90,134

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
48,071

 
49,750

(Gain) loss on sale of assets
 
48

 
(183
)
Amortization of deferred charges
 
1,535

 
1,516

Equity-based compensation expense
 
1,246

 
1,550

Equity in earnings of equity method investments, net of distributions
 
526

 
228

(Increase) decrease in operating assets:
 
 
 
 
Accounts receivable—trade
 
(2,742
)
 
(698
)
Accounts receivable—affiliates
 
704

 
14,836

Prepaid and other current assets
 
426

 
(835
)
Increase (decrease) in operating liabilities:
 
 
 
 
Accounts payable—trade
 
420

 
(1,428
)
Accounts payable—affiliates
 
(6,489
)
 
3,546

Accrued interest
 
27

 
(67
)
Deferred revenue
 
339

 
3,700

Accrued property taxes
 
3,658

 
888

Other current liabilities
 

 
(2,023
)
Other, net
 
(3,733
)
 
49

Net cash provided by operating activities
 
144,989

 
160,963

 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Additions to properties and equipment
 
(17,752
)
 
(24,739
)
Business and asset acquisitions
 

 
(6,831
)
Proceeds from sale of assets
 
194

 
196

Distributions in excess of equity in earnings of equity investments
 
299

 
299

Net cash used for investing activities
 
(17,259
)
 
(31,075
)
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
Borrowings under credit agreement
 
175,000

 
305,500

Repayments of credit agreement borrowings
 
(156,500
)
 
(417,500
)
Proceeds from issuance of common units
 

 
114,831

Distributions to HEP unitholders
 
(136,207
)
 
(130,075
)
Distributions to noncontrolling interest
 
(5,250
)
 
(3,500
)
Payments on finance leases
 
(503
)
 
(704
)
Contributions from general partner
 

 
492

Purchase of units for incentive grants
 
(255
)
 

Units withheld for tax withholding obligations
 
(119
)
 
(58
)
Other
 

 
6

Net cash used by financing activities
 
(123,834
)
 
(131,008
)
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
Increase for the period
 
3,896

 
(1,120
)
Beginning of period
 
3,045

 
7,776

End of period
 
$
6,941

 
$
6,656


See accompanying notes.

- 6 -

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, 2018
 
$
427,435

 
$
88,126

 
$
515,561

Distributions to HEP unitholders
 
(67,975
)
 

 
(67,975
)
Distributions to noncontrolling interest
 

 
(3,000
)
 
(3,000
)
Amortization of restricted and performance units
 
661

 

 
661

Class B unit accretion
 
(780
)
 

 
(780
)
   Other
 
814

 

 
814

Net income
 
51,962

 
1,832

 
53,794

Balance March 31, 2019
 
412,117

 
86,958

 
499,075

Distributions to HEP unitholders
 
(68,232
)
 

 
(68,232
)
Distributions to noncontrolling interest
 

 
(2,250
)
 
(2,250
)
Amortization of restricted and performance units
 
585

 

 
585

Class B unit accretion
 
(781
)
 

 
(781
)
   Other
 
(138
)
 

 
(138
)
Net income
 
46,471

 
688

 
47,159

Balance June 30, 2019
 
$
390,022

 
$
85,396

 
$
475,418


 
 
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

Issuance of common units
 
524

 

 
524

Distributions to HEP unitholders
 
(66,579
)
 

 
(66,579
)
Distributions to noncontrolling interest
 

 
(1,500
)
 
(1,500
)
Amortization of restricted and performance units
 
713

 

 
713

Class B unit accretion
 
(730
)
 

 
(730
)
Other
 
193

 

 
193

Net income
 
40,872

 
627

 
41,499

Balance June 30, 2018
 
$
468,397

 
$
89,971

 
$
558,368



See accompanying notes.



- 7 -

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 June 30, 2019, 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 Osage Pipe Line Company, LLC (“Osage”) and a 50% interest in 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, 2018. 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, 2019.

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.


- 8 -


Accounting Pronouncements Adopted During the Periods Presented

Goodwill Impairment Testing
In January 2017, Accounting Standard Update (“ASU”) 2017-04, “Simplifying the Test for Goodwill Impairment,” was issued amending the testing for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under this standard, goodwill impairment is measured as the excess of the carrying amount of the reporting unit over the related fair value. We adopted this standard effective in the second quarter of 2019, and the adoption of this standard had no effect on our financial condition, results of operations or cash flows.

Leases
In February 2016, ASU No. 2016-02, “Leases” (“ASC 842”) was issued requiring leases to be measured and recognized as a lease liability, with a corresponding right-of-use asset on the balance sheet. We adopted this standard effective January 1, 2019 using the optional transition method, whereby comparative prior period financial information will not be restated and will continue to be reported under the lease accounting standard in effect during those periods. We also elected practical expedients provided by the new standard, including the package of practical expedients whereby we did not reassess lease classification or initial indirect lease cost under the new standard. In addition, we elected to exclude short-term leases, which at inception have a lease term of 12 months or less, from the amounts recognized on our balance sheet. Upon adoption of this standard, we recognized $78.4 million of lease liabilities and corresponding right-of-use assets on our consolidated balance sheet. Adoption of this standard did not have a material impact on our results of operations or cash flows. See Notes 2 and 3 for additional information on our lease policies.

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 accounted for the new guidance using the modified retrospective implementation method, whereby a cumulative effect adjustment was 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 2 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

Credit Losses Measurement
In June 2016, ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” was issued requiring measurement of all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This standard is effective January 1, 2020, and we are currently evaluating the impact of this standard.

Note 2:
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. Prior to the adoption of the new lease standard (see Note 1), we bifurcated the consideration received between lease and service revenue. The new lease standard allows the election of a practical expedient whereby a lessor does not have to separate non-lease (service) components from lease components under certain conditions. The majority of our contracts meet

- 9 -


these conditions, and we have made this election for those contracts. Under this practical expedient, we treat the combined components as a single performance obligation in accordance with Accounting Standards Codification (“ASC”) 606, which largely codified ASU 2014-09, if the non-lease (service) component is the dominant component. If the lease component is the dominant component, we treat the combined components as a lease in accordance with ASC 842, which largely codified ASU 2016-02.
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 partners’ equity 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 thousands)
Deferred revenue
 
$
9,598

 
$
(1,320
)
 
$
8,278

Partners’ equity: Common unitholders
 
$
393,959

 
$
1,320

 
$
395,279


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.
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.
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 three and six months ended June 30, 2019, we recognized $3.1 million and $6.6 million, respectively, of these deficiency payments in revenue, of which none and $0.6 million, respectively, related to deficiency payments billed in prior periods. As of June 30, 2019, deferred revenue reflected in our consolidated balance sheet related to shortfalls billed was $0.8 million.
A contract liability exists when an entity is obligated to perform future services to a customer for which the entity has received consideration. Since HEP may be required to perform future services for these deficiency payments received, the deferred revenues on our balance sheets were considered contract liabilities. A contract asset exists when an entity has a right to consideration in exchange for goods or services transferred to a customer. Our consolidated balance sheets included the contract assets and liabilities in the table below:
 
 
June 30,
2019
 
December 31,
2018
 
 
(In thousands)
Contract assets
 
$
5,283

 
$
1,818

Contract liabilities
 
$
(810
)
 
$
(1,821
)


The contract assets and liabilities include both lease and service components. We did not recognize any revenue during the three months ended June 30, 2019, that was previously included in contract liability as of December 31, 2018, and we recognized $0.6 million of revenue during the six months ended June 30, 2019, that was previously included in contract liability as of December 31, 2018. During the three and the six months ended June 30, 2018, we recognized $0.4 million and $2.6 million, respectively, that was previously included in contract liability as of January 1, 2018. During the three and the six months ended June 30, 2019, we also recognized $0.3 million and $3.5 million, respectively, of revenue included in contract assets at June 30, 2019.
As of June 30, 2019, we expect to recognize $2.7 billion in revenue related to our unfulfilled performance obligations under the terms of our long-term throughput agreements and operating leases expiring in 2020 through 2036. These agreements generally 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

- 10 -


rate increases or decreases. We expect to recognize revenue for these unfulfilled performance obligations as shown in the table below (amounts shown in table include both service and lease revenues):
Years Ending December 31,
 
(In millions)
Remainder of 2019
 
$
196

2020
 
368

2021
 
356

2022
 
329

2023
 
293

Thereafter
 
1,121

Total
 
$
2,663


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 were as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(In thousands)
Pipelines
 
$
72,263

 
$
65,539

 
$
147,363

 
$
137,708

Terminals, tanks and loading racks
 
39,089

 
34,386

 
76,667

 
72,567

Refinery processing units
 
19,399

 
18,835

 
41,218

 
37,369

 
 
$
130,751

 
$
118,760

 
$
265,248

 
$
247,644


During the three and six months ended June 30, 2019, lease revenues amounted to $94.8 million and $188.3 million, respectively, and service revenues amounted to $36.0 million and $77.0 million, respectively. Both of these revenues were recorded within affiliates and third parties revenues on our consolidated statement of income.

Note 3:
Leases

We adopted ASC 842 effective January 1, 2019, and elected to adopt using the modified retrospective transition method and practical expedients, both of which are provided as options by the standard and further defined in Note 1.

Lessee Accounting
At inception, we determine if an arrangement is or contains a lease. Right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our payment obligation under the leasing arrangement. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We use our estimated incremental borrowing rate (“IBR”) to determine the present value of lease payments as most of our leases do not contain an implicit rate. Our IBR represents the interest rate which we would pay to borrow, on a collateralized basis, an amount equal to the lease payments over a similar term in a similar economic environment. We use the implicit rate when readily determinable.

As a lessee, we lease land, buildings, pipelines, transportation and other equipment to support our operations. These leases can be categorized into operating and finance leases. Operating leases are recorded in operating lease right-of-use assets and current and noncurrent operating lease liabilities on our consolidated balance sheet. Finance leases are included in properties and equipment, current finance lease liabilities and other long-term liabilities on our consolidated balance sheet.

When renewal options are defined in a lease, our lease term includes an option to extend the lease when it is reasonably certain we will exercise that option. Leases with a term of 12 months or less are not recorded on our balance sheet, and lease expense is accounted for on a straight-line basis. In addition, as a lessee, we separate non-lease components that are identifiable and exclude them from the determination of net present value of lease payment obligations.


- 11 -


Our leases have remaining terms of 1 to 26 years, some of which include options to extend the leases for up to 10 years.

Finance Lease Obligations
We have finance lease obligations related to vehicle leases with initial terms of 33 to 48 months. The total cost of assets under finance leases was $6.1 million and $5.8 million as of June 30, 2019 and December 31, 2018, respectively, with accumulated depreciation of $4.8 million and $4.3 million as of June 30, 2019 and December 31, 2018, respectively. We include depreciation of finance leases in depreciation and amortization in our consolidated statements of income.

Supplemental balance sheet information related to leases was as follows (in thousands, except for lease term and discount rate):
 
 
June 30, 2019
 
 
 
Operating leases:
 
 
   Operating lease right-of-use assets, net
 
$
76,551

 
 
 
   Current operating lease liabilities
 
5,346

   Noncurrent operating lease liabilities
 
71,550

      Total operating lease liabilities
 
$
76,896

 
 
 
Finance leases:
 
 
   Properties and equipment
 
$
6,147

   Accumulated amortization
 
(4,791
)
      Properties and equipment, net
 
$
1,356

 
 
 
   Current finance lease liabilities
 
$
857

   Other long-term liabilities
 
667

      Total finance lease liabilities
 
$
1,524

 
 
 
Weighted average remaining lease term (in years)
 
 
   Operating leases
 
17.4
   Finance leases
 
1.1
 
 
 
Weighted average discount rate
 
 
   Operating leases
 
5.6%
   Finance leases
 
6.6%



Supplemental cash flow and other information related to leases were as follows:
 
 
Six Months Ended
June 30, 2019
 
 
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows on operating leases
 
$
3,589

Operating cash flows on finance leases
 
$
51

Financing cash flows on finance leases
 
$
503




- 12 -



Maturities of lease liabilities were as follows:
 
 
June 30, 2019
 
 
Operating
 
Finance
 
 
(In thousands)
2019
 
$
4,296

 
$
531

2020
 
7,865

 
691

2021
 
7,090

 
242

2022
 
6,737

 
91

2023
 
6,647

 
86

2024 and thereafter
 
87,700

 

   Total lease payments
 
120,335

 
1,641

Less: Imputed interest
 
(43,439
)
 
(117
)
   Total lease obligations
 
76,896

 
1,524

Less: Current obligations
 
(5,346
)
 
(857
)
   Long-term lease obligations
 
$
71,550

 
$
667



The components of lease expense were as follows:
 
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
 
 
(In thousands)
Operating lease costs
 
$
1,798

 
$
3,568

Finance lease costs
 
 
 
 
   Amortization of assets
 
254

 
498

   Interest on lease liabilities
 
24

 
51

Variable lease cost
 
35

 
71

Total net lease cost
 
$
2,111

 
$
4,188


Lessor Accounting
As discussed in Note 2, the majority of our contracts with customers meet the definition of a lease. See Note 2 for further discussion of the impact of adoption of this standard on our activities as a lessor.

Substantially all of the assets supporting contracts meeting the definition of a lease have long useful lives, and we believe these assets will continue to have value when the current agreements expire. HFC generally has the option to purchase assets located within HFC refinery boundaries, including refinery tankage, truck racks and refinery processing units, at fair market value when the related agreements expire.

Lease income recognized was as follows:
 
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(In thousands)
Operating lease revenues
 
$
94,783

 
$
68,069

 
$
188,287

 
$
138,661

 
 
 
 
 
 
 
 
 
Direct financing lease interest income
 
$
509

 
$
501

 
$
1,019

 
$
1,004


As discussed in Note 2, prior to the adoption of ASC 842, contract consideration was bifurcated between operating lease and service revenues.

- 13 -


Annual minimum undiscounted lease payments under our leases were as follows as of June 30, 2019:
 
 
Operating
 
Finance
Years Ending December 31,
 
(In thousands)
Remainder of 2019
 
$
166,904

 
$
1,049

2020
 
309,729

 
2,106

2021
 
303,110

 
2,123

2022
 
301,707

 
2,139

2023
 
271,207

 
2,156

Thereafter
 
1,001,978

 
42,768

Less: Imputed Interest
 

 
(35,807
)
Total
 
$
2,354,635

 
$
16,534



Our consolidated balance sheet included finance lease receivables of $16.5 million as of June 30, 2019.


Note 4:
Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and debt. 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:
 
 
 
 
June 30, 2019
 
December 31, 2018
Financial Instrument
 
Fair Value Input Level
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
 
 
 
 
(In thousands)
Liabilities:
 
 
 
 
 
 
 
 
 
 
6% Senior Notes
 
Level 2
 
496,210

 
517,375

 
495,900

 
488,310



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.



- 14 -


Note 5:
Properties and Equipment 

The carrying amounts of our properties and equipment are as follows:
 
 
June 30,
2019
 
December 31,
2018
 
 
(In thousands)
Pipelines, terminals and tankage
 
$
1,572,949

 
$
1,571,338

Refinery assets
 
347,338

 
347,338

Land and right of way
 
86,095

 
86,298

Construction in progress
 
31,027

 
23,482

Other
 
40,603

 
41,250

 
 
2,078,012

 
2,069,706

Less accumulated depreciation
 
570,415

 
531,051

 
 
$
1,507,597

 
$
1,538,655



We capitalized $8 thousand and $0.2 million during the six months ended June 30, 2019 and 2018, respectively, in interest attributable to construction projects.

Depreciation expense was $41.3 million and $41.9 million for the six months ended June 30, 2019 and 2018, respectively, and includes depreciation of assets acquired under capital leases.


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, from Plains in 2017, and from other minor acquisitions in 2018.

The carrying amounts of our intangible assets are as follows:
 
 
Useful Life
 
June 30,
2019
 
December 31,
2018
 
 
 
 
(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
 
69,683

 
69,683

Other
 
 
 
50

 
50

 
 
 
 
204,797

 
204,797

Less accumulated amortization
 
 
 
96,471

 
89,468

 
 
 
 
$
108,326

 
$
115,329


Amortization expense was $7.0 million and $7.5 million for the six months ended June 30, 2019 and 2018, respectively. We estimate amortization expense to be $14.0 million for each of the next three years, $9.9 million in 2023, and $9.1 million in 2024.

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.



- 15 -


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 (the “Omnibus Agreement”). These employees participate in the retirement and benefit plans of HFC. Our share of retirement and benefit plan costs was $1.7 million and $1.6 million for the three months ended June 30, 2019 and 2018, respectively, and $3.7 million and $3.4 million for the six months ended June 30, 2019 and 2018, 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 June 30, 2019, we had two types of incentive-based awards outstanding, which are described below. The compensation cost charged against income was $0.6 million and $0.7 million for the three months ended June 30, 2019 and 2018, respectively, and $1.2 million and $1.5 million for the six months ended June 30, 2019 and 2018, 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 June 30, 2019, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which 1,235,221 have not yet been granted, assuming no forfeitures of the unvested units and full achievement of goals for the unvested performance units.

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 six months ended June 30, 2019, is presented below:
Restricted and Phantom Units
 
Units
 
Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2019 (nonvested)
 
138,016

 
$
31.35

Forfeited
 
(15,800
)
 
31.20

Outstanding at June 30, 2019 (nonvested)
 
122,216

 
$
31.37



No restricted units were vested and transferred to recipients during the six months ended June 30, 2019. As of June 30, 2019, there was $1.4 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 1.2 years.


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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 meeting certain criteria over the performance period. Under the terms of our performance unit grants, some awards are subject to the growth in our distributable cash flow per common unit over the performance period while other awards are subject to "financial performance" and "market performance." Financial performance is based on meeting certain earnings before interest, taxes, depreciation and amortization ("EBITDA") targets, while market performance is based on the relative standing of total unitholder return achieved by HEP compared to peer group companies. The number of units ultimately issued under these awards can range from 50% to 150% or 0% to 200%. As of June 30, 2019, estimated unit payouts for outstanding nonvested performance unit awards ranged between 100% and 150% of the target number of performance units granted.

We did not grant any performance units during the six months ended June 30, 2019. 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 six months ended June 30, 2019, is presented below:
Performance Units
 
Units
Outstanding at January 1, 2019 (nonvested)
 
51,748

Vesting and transfer of common units to recipients
 
(10,113
)
Forfeited
 
(5,200
)
Outstanding at June 30, 2019 (nonvested)
 
36,435



The grant date fair value of performance units vested and transferred to recipients during the six months ended June 30, 2019 and 2018 was $0.3 million and $0.1 million, respectively. Based on the weighted-average fair value of performance units outstanding at June 30, 2019, of $1.2 million, there was $0.4 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of 1.5 years.

During the six months ended June 30, 2019, we paid $0.3 million for the purchase of our common units in the open market for the issuance and settlement of unit awards under our Long-Term Incentive Plan.

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 June 30, 2019.

Senior Notes
We have $500 million in aggregate principal amount of 6% senior unsecured notes due in 2024 (the “ 6% Senior Notes”). We used the net proceeds from our offerings of the 6% Senior Notes to repay indebtedness under our Credit Agreement.

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

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into mergers. We were in compliance with the restrictive covenants for the 6% Senior Notes as of June 30, 2019. 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.

Long-term Debt
The carrying amounts of our long-term debt was as follows:
 
 
June 30,
2019
 
December 31,
2018
 
 
(In thousands)
Credit Agreement
 
 
 
 
Amount outstanding
 
$
941,500

 
$
923,000

 
 
 
 
 
6% Senior Notes
 
 
 
 
Principal
 
500,000

 
500,000

Unamortized premium and debt issuance costs
 
(3,790
)
 
(4,100
)
 
 
496,210

 
495,900

 
 
 
 
 
Total long-term debt
 
$
1,437,710

 
$
1,418,900



Interest Expense and Other Debt Information
Interest expense consists of the following components:
 
 
Six Months Ended June 30,
 
 
2019
 
2018
 
 
(In thousands)
Interest on outstanding debt:
 
 
 
 
Credit Agreement
 
$
20,840

 
$
17,850

6% Senior Notes
 
15,000

 
15,000

Amortization of discount and deferred debt issuance costs
 
1,535

 
1,516

Commitment fees and other
 
885

 
1,007

Total interest incurred
 
38,260

 
35,373

Less capitalized interest
 
8

 
166

Net interest expense
 
$
38,252

 
$
35,207

Cash paid for interest
 
$
36,698

 
$
33,935




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
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
HFC
 
78
%
 
79
%
 
78
%
 
79
%
Delek
 
6
%
 
7
%
 
6
%
 
6
%



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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 2020 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 June 30, 2019, these agreements with HFC require minimum annualized payments to us of $349 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 the Omnibus Agreement, we pay HFC an annual administrative fee (currently $2.6 million) for the provision by HFC or its affiliates of various general and administrative services to us. This fee does not include the salaries of personnel employed by HFC who perform services for us on behalf 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 $102.4 million and $94.0 million for the three months ended June 30, 2019 and 2018, respectively, and $205.7 million and $195.4 million for the six months ended June 30, 2019 and 2018, respectively.
HFC charged us general and administrative services under the Omnibus Agreement of $0.6 million for each of the three months ended June 30, 2019 and 2018, and $1.3 million and $1.2 million for the six months ended June 30, 2019 and 2018, respectively.
We reimbursed HFC for costs of employees supporting our operations of $13.2 million and $12.5 million for the three months ended June 30, 2019 and 2018, respectively, and $26.8 million and $25.2 million for the six months ended June 30, 2019 and 2018, respectively.
HFC reimbursed us $3.6 million and $2.9 million for the three months ended June 30, 2019 and 2018, respectively, for expense and capital projects, and $5.8 million and $4.2 million for the six months ended June 30, 2019 and 2018, respectively.
We distributed $37.5 million and $36.6 million in the three months ended June 30, 2019 and 2018, respectively, and $74.8 million and $72.8 million for the six months ended June 30, 2019 and 2018, respectively, to HFC as regular distributions on its common units.
Accounts receivable from HFC were $46.1 million and $46.8 million at June 30, 2019, and December 31, 2018, respectively.
Accounts payable to HFC were $7.7 million and $14.2 million at June 30, 2019, and December 31, 2018, respectively.
Deferred revenue in the consolidated balance sheets at June 30, 2019 and December 31, 2018, included $0.6 million and $1.7 million, respectively, relating to certain shortfall billings to HFC.
We received finance lease payments from HFC for use of our Artesia and Tulsa railyards of $0.5 million for each of the three months ended June 30, 2019 and 2018, and $1.0 million for each of the six months ended June 30, 2019 and 2018.


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

As of June 30, 2019, 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.

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

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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 six months ended June 30, 2019, HEP did not issue units under this program. As of June 30, 2019, HEP has issued 2,413,153 units under this program, providing $82.3 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 the Credit Agreement 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.

Cash Distributions
On July 18, 2019, we announced our cash distribution for the second quarter of 2019 of $0.6725 per unit. The distribution is payable on all common units and will be paid August 13, 2019, to all unitholders of record on July 29, 2019. However, HEP Logistics waived $2.5 million in limited partner cash distributions due to them as discussed in Note 1.

Our regular quarterly cash distribution to the limited partners will be $68.5 million for the three months ended June 30, 2019 and was $67.1 million for the three months ended June 30, 2018. For the six months ended June 30, 2019, the regular quarterly distribution to the limited partners will be $136.7 million and was $133.7 million for the six months ended June 30, 2018. Our distributions are declared subsequent to quarter end; therefore, these amounts do not reflect distributions paid during the respective period.

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 VIE 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