HOLLY ENERGY PARTNERS, L.P. This Item 2, including but not limited to the sections under "Results of Operations" and "Liquidity and Capital Resources," contains forward-looking statements. See "Forward-Looking Statements" at the beginning of Part I of this Quarterly Report on Form 10-Q. In this document, the words "we," "our," "ours" and "us" refer toHolly Energy Partners, L.P. ("HEP") and its consolidated subsidiaries or to HEP or an individual subsidiary and not to any other person. References herein to HEP with respect to time periods prior toMarch 14, 2022 , include HEP and its consolidated subsidiaries and do not includeSinclair Transportation Company LLC ("Sinclair Transportation") and its consolidated subsidiaries (collectively, the "HEP Acquired Sinclair Businesses"). References herein to HEP with respect to time periods from and afterMarch 14, 2022 include the operations of the HEP Acquired Sinclair Businesses. References herein toHF Sinclair Corporation ("HF Sinclair") with respect to time periods prior toMarch 14, 2022 refer toHollyFrontier Corporation ("HFC") and its consolidated subsidiaries and do not includeHippo Holding LLC (now known asSinclair Holding LLC ), Sinclair Transportation or their respective consolidated subsidiaries (collectively, the "HFS Acquired Sinclair Businesses"). References herein toHF Sinclair with respect to time periods from and afterMarch 14, 2022 refer toHF Sinclair and its consolidated subsidiaries, which include the operations of the combined business operations of HFC and the HFS Acquired Sinclair Businesses.
OVERVIEW
HEP, together with its consolidated subsidiaries, is a publicly held master limited partnership. OnMarch 14, 2022 (the "Closing Date"), HFC and HEP announced the establishment ofHF Sinclair , as the new parent holding company of HFC and HEP and their subsidiaries, and the completion of their respective acquisitions ofSinclair Oil Corporation (now known asSinclair Oil LLC ("Sinclair Oil")) and Sinclair Transportation fromREH Company (formerly known asThe Sinclair Companies , and referred to herein as "REH Company "). On the Closing Date,HF Sinclair completed its acquisition of Sinclair Oil by effecting (a) a holding company merger with HFC surviving such merger as a direct wholly owned subsidiary ofHF Sinclair (the "HFC Merger"), and (b) immediately following the HFC Merger, a contribution wherebyREH Company contributed all of the equity interests ofHippo Holding LLC (now known asSinclair Holding LLC ), the parent company of Sinclair Oil (the "Target Company "), toHF Sinclair in exchange for shares ofHF Sinclair , resulting in theTarget Company becoming a direct wholly owned subsidiary ofHF Sinclair (together with the HFC Merger, the "HFC Transactions").
As of
Additionally, on the Closing Date and immediately prior to consummation of the HFC Transactions, HEP acquired all of the outstanding equity interests of Sinclair Transportation fromREH Company in exchange for 21 million newly issued common limited partner units of HEP (the "HEP Units"), representing 16.6% of the pro forma outstanding HEP Units with a value of approximately$349 million based on HEP's fully diluted common limited partner units outstanding and closing unit price onMarch 11, 2022 , and cash consideration equal to$329.0 million , inclusive of final working capital adjustments for an aggregate transaction value of$678.0 million (the "HEP Transaction" and together with the HFC Transactions, the "Sinclair Transactions"). The cash consideration was funded through a draw under HEP's senior secured revolving credit facility. The HEP Transaction was conditioned on the closing of the HFC Transactions, which occurred immediately following the HEP Transaction. Sinclair Transportation, together with its subsidiaries, ownedREH Company's integrated crude and refined products pipelines and terminal assets, including approximately 1,200 miles of integrated crude and refined product pipeline supporting theREH Company refineries and other third-party refineries, eight product terminals and two crude terminals with approximately 4.5 million barrels of operated storage. In addition, HEP acquired Sinclair Transportation's interests in three pipeline joint ventures for crude gathering and product offtake including:Saddle Butte Pipeline III, LLC (25.06% non-operated interest);Pioneer Investments Corp. (49.995% non-operated interest); andUNEV Pipeline, LLC ("UNEV") (the 25% non-operated interest not already owned by HEP, resulting in UNEV becoming a wholly owned subsidiary of HEP).
See Notes 1 and 2 of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information regarding the acquisitions.
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Through our subsidiaries and joint ventures, we own and/or operate petroleum
product and crude oil pipelines, terminal, tankage and loading rack facilities
and refinery processing units that support the refining and marketing operations
of HF Sinclair and other refineries in the Mid-Continent, Southwest and
Northwest regions of the United States . HEP, through its subsidiaries and joint
ventures, owns and/or operates petroleum product and crude pipelines, tankage
and terminals in Colorado , Idaho , Iowa , Kansas , Missouri , Nevada , New Mexico ,
Oklahoma , Texas , Utah , Washington and Wyoming as well as refinery processing
units in Utah and Kansas .
We generate revenues by charging tariffs for transporting petroleum products and
crude oil through our pipelines, by charging fees for terminalling and storing
refined products and other hydrocarbons, providing other services at our storage
tanks and terminals and charging a tolling fee per barrel or thousand standard
cubic feet of feedstock throughput in our refinery processing units. We do not
take ownership of products that we transport, terminal, store or process, and
therefore, we are not directly exposed to changes in commodity prices.
We believe the long-term global refined product demand and U.S. crude production
should support high utilization rates for the refineries we serve, which in turn
should support volumes in our product pipelines, crude gathering systems and
terminals.
HF Sinclair Proposal
On May 3, 2023 , we received a non-binding proposal from HF Sinclair to acquire
all of the outstanding common units ("Common Units") of HEP not beneficially
owned by HF Sinclair or its affiliates in exchange for shares of common stock,
par value $0.01 per share ("Common Stock") of HF Sinclair . Under the proposal,
HEP unitholders would receive newly issued shares of Common Stock at a fixed
exchange ratio of 0.3714 per each publicly held Common Unit, which was derived
using the 30-day volume weighted average prices for each security as of market
close on May 3, 2023 (the "Proposed HF Sinclair Transaction"). The proposal has
been made to the board of directors of our ultimate general partner (the
"Board"). It is anticipated that the Board will authorize the Conflicts
Committee of the Board (the "Conflicts Committee"), which is comprised of
independent members of the Board, to review, evaluate and negotiate the Proposed
HF Sinclair Transaction. The Proposed HF Sinclair Transaction is subject to the
negotiation and execution of a definitive agreement. There can be no assurance
that a definitive agreement will be executed or that any transaction will be
approved or consummated.
Market Developments
Our results for the three months ended March 31, 2023 were favorably impacted by
global demand for transportation fuels, lubricants and transportation and
terminal services having returned to pre-pandemic levels. We expect our
customers will continue to adjust refinery production levels commensurate with
market demand. The extent to which HEP's future results are affected by the
COVID-19 pandemic or volatile regional and global economic conditions will
depend on various factors and consequences beyond our control. However, we have
long-term customer contracts with minimum volume commitments, which have
expiration dates from 2024 to 2037. These minimum volume commitments accounted
for approximately 72% and 69% of our total tariffs and fees billed to customers
for the three months ended March 31, 2023 and March 31, 2022 , respectively. We
are currently not aware of any reasons that would prevent such customers from
making the minimum payments required under the contracts or potentially making
payments in excess of the minimum payments. In addition to these payments, we
also expect to collect payments for services provided to uncommitted shippers.
Agreements with HF Sinclair
We serve HF Sinclair's refineries under long-term pipeline, terminal, tankage
and refinery processing unit throughput agreements expiring from 2024 to 2037.
Under these agreements, HF Sinclair agrees to transport, store, and process
throughput volumes of refined product, crude oil and feedstocks on our
pipelines, terminal, tankage, loading rack facilities and refinery processing
units that result in minimum annual payments to us. These minimum annual
payments or revenues are subject to annual rate adjustments on July 1st each
year based on the PPI or the FERC index. On December 17, 2020 , FERC established
a new price index for the five-year period commencing July 1, 2021 and ending
June 30, 2026 , in which common carriers charging indexed rates were permitted to
adjust their indexed ceilings annually by Producer Price Index plus 0.78%. FERC
received requests for rehearing of its December 17, 2020 order, and on January
20, 2022 , FERC revised the index level used to determine the annual changes to
interstate oil pipeline rate ceilings to Producer Price Index minus 0.21%. The
order required the recalculation of the July 1, 2021 index ceilings to be
effective as of March 1, 2022 . As of March 31, 2023 , these agreements with HF
Sinclair require minimum annualized payments to us of $457 million .
If HF Sinclair fails to meet its minimum volume commitments under the agreements
in any quarter, it will be required to pay us the amount of any shortfall in
cash by the last day of the month following the end of the quarter. Under
certain of the agreements, a shortfall payment may be applied as a credit in the
following four quarters after minimum obligations are met.
A significant reduction in revenues under these agreements could have a material adverse effect on our results of operations.
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Under certain provisions of an omnibus agreement we have with HF Sinclair (the
"Omnibus Agreement"), we pay HF Sinclair an annual administrative fee, currently
$5.0 million , for the provision by HF Sinclair or its affiliates of various
general and administrative services to us. This fee does not include the
salaries of personnel employed by HF Sinclair who perform services for us on
behalf of Holly Logistic Services, L.L.C. ("HLS"), or the cost of their employee
benefits, which are separately charged to us by HF Sinclair . We also reimburse
HF Sinclair and its affiliates for direct expenses they incur on our behalf.
Under HLS's Secondment Agreement with
We have a long-term strategic relationship with HFC (and nowHF Sinclair ) that has historically facilitated our growth. Subject to the final negotiated terms of a definitive agreement withHF Sinclair on the Proposed HF Sinclair Transaction and the discretion of our Board, our future growth plans include organic projects around our existing assets and select investments or acquisitions that enhance our service platform while creating accretion for our unitholders. - 36 - -------------------------------------------------------------------------------- Table o RESULTS OF OPERATIONS (Unaudited)
Income, Distributable Cash Flow, Volumes and Balance Sheet Data
The following tables present income, distributable cash flow and volume
information for the three months ended
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Three Months Ended March 31, Change from
2023 2022 2022
(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates-refined product pipelines $
18,931
8,282 7,506 776
Affiliates-crude pipelines 24,667 18,277 6,390
51,880 42,643 9,237
Third parties-refined product pipelines 6,268 9,260 (2,992)
Third parties-crude pipelines 12,434 12,877 (443)
70,582 64,780 5,802
Terminals, tanks and loading racks:
Affiliates 38,473 31,208 7,265
Third parties 7,714 5,807 1,907
46,187 37,015 9,172
Refinery processing units-Affiliates 26,525 18,403 8,122
Total revenues 143,294 120,198 23,096
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) 52,142 42,625 9,517
Depreciation and amortization 24,663 22,187 2,476
General and administrative 4,635 4,312 323
81,440 69,124 12,316
Operating income 61,854 51,074 10,780
Other income (expense):
Equity in earnings of equity method investments 3,882 3,626 256
Interest expense, including amortization (25,978) (13,639) (12,339)
Interest income 20,400 12,647 7,753
Gain on sale of assets and other 173 101 72
(1,523) 2,735 (4,258)
Income before income taxes 60,331 53,809 6,522
State income tax expense (34) (31) (3)
Net income 60,297 53,778 6,519
Allocation of net income attributable to noncontrolling interests
(2,775) (4,219) 1,444
Net income attributable to the partners 57,522 49,559 7,963
Limited partners' earnings per unit-basic and diluted $
0.45
126,440 109,640 16,800
EBITDA (1) $ 87,797 $ 72,769 $ 15,028
Adjusted EBITDA (1) $
108,357
$
83,911
Volumes (bpd)
Pipelines:
Affiliates-refined product pipelines 143,002 107,210 35,792
Affiliates-intermediate pipelines 114,326 117,802 (3,476)
Affiliates-crude pipelines 473,712 396,040 77,672
731,040 621,052 109,988
Third parties-refined product pipelines 40,431 49,029 (8,598)
Third parties-crude pipelines 175,984 131,126 44,858
947,455 801,207 146,248
Terminals and loading racks:
Affiliates 686,845 446,032 240,813
Third parties 42,462 48,354 (5,892)
729,307 494,386 234,921
Refinery processing units-Affiliates 53,294 65,227 (11,933)
Total for pipelines and terminal and refinery processing unit
assets (bpd) 1,730,056 1,360,820 369,236
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(1)Earnings before interest, taxes, depreciation and amortization ("EBITDA") is
calculated as net income attributable to the partners plus or minus (i) interest
expense, (ii) interest income, (iii) state income tax expense and (iv)
depreciation and amortization. Adjusted EBITDA is calculated as EBITDA plus (i)
our share of Osage environmental remediation costs included in equity in
earnings of equity method investments, (ii) acquisition integration and
regulatory costs, (iii) tariffs and fees not included in revenues due to impacts
from lease accounting for certain tariffs and fees minus (iv) pipeline lease
payments not included in operating costs and expenses. Portions of our minimum
guaranteed tariffs for assets subject to sales-type lease accounting are
recorded as interest income with the remaining amounts recorded as a reduction
in net investment in leases. Similarly, certain pipeline lease payments were
previously recorded as operating costs and expenses, but the underlying lease
was reclassified from an operating lease to a financing lease, and these
payments are now recorded as interest expense and reductions in the lease
liability. EBITDA and Adjusted EBITDA are not calculations based upon generally
accepted accounting principles ("GAAP"). However, the amounts included in the
EBITDA and Adjusted EBITDA calculations are derived from amounts included in our
consolidated financial statements. EBITDA and Adjusted EBITDA should not be
considered as alternatives to net income attributable to the partners or
operating income, as indications of our operating performance or as alternatives
to operating cash flow as a measure of liquidity. EBITDA and Adjusted EBITDA are
not necessarily comparable to similarly titled measures of other companies.
EBITDA and Adjusted EBITDA are presented here because they are widely used
financial indicators used by investors and analysts to measure performance.
EBITDA and Adjusted EBITDA are also used by our management for internal analysis
and as a basis for compliance with financial covenants.
Three Months Ended
March 31,
2023 2022
(In thousands)
Net income attributable to the partners $ 57,522 $ 49,559
Add (subtract):
Interest expense 25,978 13,639
Interest income (20,400) (12,647)
State income tax expense 34 31
Depreciation and amortization 24,663 22,187
EBITDA$ 87,797 $
72,769
Share of Osage environmental remediation costs 870 - Acquisition integration and regulatory costs -
836
Tariffs and fees not included in revenues 21,296
13,339
Lease payments not included in operating costs (1,606) (1,606) Adjusted EBITDA
$ 108,357 $ 85,338 (2)Distributable cash flow is not a calculation based upon GAAP. However, the amounts included in the calculation are derived from amounts presented in our consolidated financial statements, with the general exception of maintenance capital expenditures. Distributable cash flow should not be considered in isolation or as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. Distributable cash flow is not necessarily comparable to similarly titled measures of other companies. Distributable cash flow is presented here because it is a widely accepted financial indicator used by investors to compare partnership performance. It is also used by management for internal analysis and for our performance units. We believe that this measure provides investors an enhanced perspective of the operating performance of our assets and the cash our business is generating. Set forth below is our calculation of distributable cash flow. - 39 -
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Three Months Ended
March 31,
2023 2022
(In thousands)
Net income attributable to the partners $ 57,522 $ 49,559
Add (subtract):
Depreciation and amortization 24,663 22,187
Amortization of discount and deferred debt issuance costs 1,071
770
Customer billings greater than net income recognized 4,873
497
Maintenance capital expenditures (3) (1,702)
(5,620)
Increase (decrease) in environmental liability (139)
(120)
Share ofOsage insurance coverage 500
-
Decrease in reimbursable deferred revenue (5,405) (3,234) Other 2,528 416 Distributable cash flow$ 83,911 $ 64,455 (3)Maintenance capital expenditures are capital expenditures made to replace partially or fully depreciated assets in order to maintain the existing operating capacity of our assets and to extend their useful lives. Maintenance capital expenditures include expenditures required to maintain equipment reliability, tankage and pipeline integrity, safety and to address environmental regulations. March 31, December 31, 2023 2022 (In thousands) Balance Sheet Data Cash and cash equivalents$ 7,105 $ 10,917 Working capital$ 29,139 $ 17,293 Total assets$ 2,733,100 $ 2,747,502 Long-term debt$ 1,540,385 $ 1,556,334 Partners' equity$ 870,694 $ 857,126
Results of Operations-Three Months Ended
Summary
Net income attributable to the partners for the first quarter of 2023 was$57.5 million ($0.45 per basic and diluted limited partner unit) compared to$49.6 million ($0.45 per basic and diluted limited partner unit) for the first quarter of 2022. The increase in net income was mainly due to net income from Sinclair Transportation, which was acquired onMarch 14, 2022 , as well as higher revenues from ourWoods Cross refinery processing units, partially offset by higher interest expense.
Revenues
Revenues for the first quarter were$143.3 million , an increase of$23.1 million compared to the first quarter of 2022. The increase was mainly due to revenues from the acquired Sinclair Transportation assets, higher revenues on ourWoods Cross refinery processing units, which were down for a scheduled turnaround inMarch 2022 , and rate increases that went into effect onJuly 1, 2022 , partially offset by lower revenues on our product pipelines servicingHF Sinclair's Navajo refinery . Revenues from our refined product pipelines were$25.2 million , a decrease of$0.9 million compared to the first quarter of 2022. Shipments averaged 183.4 thousand barrels per day ("mbpd") compared to 156.2 mbpd for the first quarter of 2022. The volume increase was mainly due to higher volumes on the acquired Sinclair Transportation product pipelines. The decrease in revenues was mainly due to lower volumes on our product pipelines servingHF Sinclair's Navajo refinery . Revenues were lower in proportion to volumes due to our recognition of a significant portion of the Sinclair Transportation refined product pipeline tariffs as interest income under sales-type lease accounting. Revenues from our intermediate pipelines were$8.3 million , an increase of$0.8 million compared to the first quarter of 2022. Shipments averaged 114.3 mbpd for the first quarter of 2023 compared to 117.8 mbpd for the first quarter of 2022. The increase in revenue was mainly due to rate increases that went into effect onJuly 1, 2022 . - 40 -
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Revenues from our crude pipelines were$37.1 million , an increase of$5.9 million compared to the first quarter of 2022. Shipments averaged 649.7 mbpd compared to 527.2 mbpd for the first quarter of 2022. The increase in volumes was mainly attributable to the acquired Sinclair Transportation crude pipelines and higher volumes on our crude pipeline systems inNew Mexico andTexas . The increase in revenues was mainly due to the acquired Sinclair Transportation crude pipelines, higher volumes on our crude pipeline systems inNew Mexico andTexas and rate increases that went into effect onJuly 1, 2022 . Revenues from terminal, tankage and loading rack fees were$46.2 million , an increase of$9.2 million compared to the first quarter of 2022. Refined products and crude oil terminalled in the facilities averaged 729.3 mbpd compared to 494.4 mbpd for the first quarter of 2022. The increase in volumes was mainly due to the acquired Sinclair Transportation assets. Revenues increased mainly due to revenues from the acquired Sinclair Transportation assets and rate increases that went into effect onJuly 1, 2022 . Revenues from refinery processing units were$26.5 million , an increase of$8.1 million compared to the first quarter of 2022, and throughputs averaged 53.3 mbpd compared to 65.2 mbpd for the first quarter of 2022. Revenues increased mainly due to higher revenues from ourWoods Cross refinery processing units, which were down for a scheduled turnaround inMarch 2022 , as well as rate increases that went into effect onJuly 1, 2022 . The decrease in volumes was due to maintenance at theEl Dorado refinery . Operations Expense Operations (exclusive of depreciation and amortization) expense was$52.1 million for the three months endedMarch 31, 2023 , an increase of$9.5 million compared to the first quarter of 2022. The increase was mainly due to operations expenses associated with the acquired Sinclair Transportation assets as well as higher employee costs and higher natural gas costs for the three months endedMarch 31, 2023 . Depreciation and Amortization Depreciation and amortization for the three months endedMarch 31, 2023 increased by$2.5 million compared to the three months endedMarch 31, 2022 . The increase was mainly due to depreciation on the acquired Sinclair Transportation assets and amortization of theWoods Cross refinery processing units turnaround. General and Administrative General and administrative costs for the three months endedMarch 31, 2023 increased by$0.3 million compared to the three months endedMarch 31, 2022 , mainly due to higher external audit expenses and higher administrative fees charged byHF Sinclair under the Omnibus Agreement, partially offset by lower acquisition integration and regulatory costs associated with the HEP Transaction.
Equity in Earnings of Equity Method Investments
Three Months Ended March 31,
Equity Method Investment 2023 2022
(in thousands)
Osage Pipe Line Company, LLC (939) 643
Cheyenne Pipeline LLC 1,374 1,774
Cushing Connect Terminal Holdings LLC 709 906
Pioneer Investments Corp. 3,202 465
Saddle Butte Pipeline III, LLC (464) (162)
Total $ 3,882 $ 3,626
Equity in earnings of Osage Pipe Line Company, LLC ("Osage") decreased for the
three months ended March 31, 2023 , mainly due to our 50% share of environmental
remediation and recovery expenses associated with the release of crude oil on
the Osage pipeline. Additional insurance recoveries will be recorded as they are
received. If the Osage insurance pays out in full, our share of the remaining
insurance coverage is expected to be $10.0 million . The pipeline resumed
operations in the third quarter of 2022 and remediation efforts are underway.
Pioneer Investments Corp. and Saddle Butte Pipeline III, LLC were acquired
during the first quarter of 2022 as part of the HEP Transaction.
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Interest Expense, including Amortization
Interest expense for the three months ended March 31, 2023 , was $26.0 million ,
an increase of $12.3 million compared to the three months ended March 31, 2022 .
The increase was mainly due to our April 2022 issuance of $400 million in
aggregate principal amount of 6.375% senior unsecured notes maturing in April
2027 , the proceeds of which were used to partially repay outstanding borrowings
under our senior secured credit facility following the funding of the cash
portion of the Sinclair Transportation acquisition. In addition, market interest
rates increased on our senior secured revolving credit facility. Our aggregate
effective interest rates were 6.4% and 3.5% for the three months ended March 31,
2023 and 2022, respectively.
Interest Income
Interest income for the three months ended March 31, 2023 , totaled $20.4
million , an increase of $7.8 million compared to the three months ended
March 31, 2022 . The increase was mainly due to higher sales-type lease interest
income from the acquired Sinclair Transportation pipelines and terminals.
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LIQUIDITY AND CAPITAL RESOURCES
Overview
We have a$1.2 billion senior secured revolving credit facility (the "Credit Agreement") that maturesJuly 2025 . The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a$50 million sub-limit and continues to provide for an accordion feature that allows us to increase commitments under the Credit Agreement up to a maximum amount of$1.7 billion . During the three months endedMarch 31, 2023 , we received advances totaling$42.0 million and repaid$58.5 million under the Credit Agreement, resulting in a net decrease of$16.5 million and an outstanding balance of$651.5 million atMarch 31, 2023 . As ofMarch 31, 2023 , we have no letters of credit outstanding under the Credit Agreement and the available capacity under the Credit Agreement was$548.5 million . Amounts repaid under the Credit Agreement may be reborrowed from time to time. OnApril 8, 2022 , we closed a private placement of$400 million in aggregate principal amount of 6.375% senior unsecured notes due in 2027 (the "6.375% Senior Notes"). The 6.375% Senior Notes were issued at par for net proceeds of approximately$393 million , after deducting the initial purchasers' discounts and commissions and estimated offering expenses. The total net proceeds from the offering of the 6.375% Senior Notes were used to partially repay outstanding borrowings under the Credit Agreement, increasing our available liquidity. As ofMarch 31, 2023 , we had$500 million in aggregate principal amount of 5% Senior Notes due in 2028 (the "5% Senior Notes", and together with the 6.375% Senior Notes, the "Senior Notes"). We have a continuous offering program under which we may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of$200 million . We did not issue any units under this program during the three months endedMarch 31, 2023 . As ofMarch 31, 2023 , HEP has issued 2,413,153 units under this program, providing$82.3 million in gross proceeds. Under our registration statement filed with theSecurities and Exchange Commission ("SEC") using a "shelf" registration process, we currently have the authority to raise up to$2.0 billion by offering securities, through one or more prospectus supplements that would describe, among other things, the specific amounts, prices and terms of any securities offered and how the proceeds would be used. Any proceeds from the sale of securities are expected to be used for general business purposes, which may include, among other things, funding acquisitions of assets or businesses, working capital, capital expenditures, investments in subsidiaries, the retirement of existing debt and/or the repurchase of common units or other securities. We believe our current sources of liquidity, including cash balances, future internally generated funds, any future issuances of debt or equity securities and funds available under the Credit Agreement will provide sufficient resources to meet our working capital liquidity, capital expenditure and quarterly distribution needs for the foreseeable future. Future securities issuances, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
In
OnApril 20, 2023 , we announced our cash distribution for the first quarter of 2023 of$0.35 per unit, or$1.40 on an annualized basis. Subject to the final negotiated terms of a definitive agreement withHF Sinclair on the Proposed HF Sinclair Transaction and the discretion of our Board, we expect our future cash distribution will continue as long as we remain a public company. Cash and cash equivalents decreased by$3.8 million during the three months endedMarch 31, 2023 . The cash flows used for investing activities of$9.3 million and financing activities of$64.4 million were more than the cash flows provided by operating activities of$69.8 million . Working capital increased by$11.8 million to$29.1 million atMarch 31, 2023 , from$17.3 million atDecember 31, 2022 . - 43 - -------------------------------------------------------------------------------- Table o Cash Flows-Operating Activities Cash flows from operating activities decreased by$2.0 million from$71.8 million for the three months endedMarch 31, 2022 , to$69.8 million for the three months endedMarch 31, 2023 . The decrease was mainly due to higher payments for operating expenses and interest expenses, partially offset by higher customer receipts and lower payments for turnaround expenditures during the three months endedMarch 31, 2023 , as compared to the three months endedMarch 31, 2022 . Cash Flows-Investing Activities Cash flows used for investing activities were$9.3 million for the three months endedMarch 31, 2023 , compared to$333.8 million for the three months endedMarch 31, 2022 , a decrease of$324.5 million . During the three months endedMarch 31, 2022 , we paid the$321.4 million cash portion of the purchase price consideration for our acquisition of Sinclair Transportation. During the three months endedMarch 31, 2023 and 2022, we invested$7.6 million and$14.1 million , respectively, in additions to properties and equipment. Cash Flows-Financing Activities Cash flows used by financing activities were$64.4 million for the three months endedMarch 31, 2023 , compared to cash flows provided by financing activities of$262.6 million for the three months endedMarch 31, 2022 , a decrease of$327.0 million . During the three months endedMarch 31, 2023 , we received$42.0 million and repaid$58.5 million in advances under the Credit Agreement. Additionally, we paid$44.3 million in regular quarterly cash distributions to our limited partners and$2.5 million to our noncontrolling interests. During the three months endedMarch 31, 2022 , we received$360.0 million and repaid$58.5 million in advances under the Credit Agreement. We paid$37.0 million in regular quarterly cash distributions to our limited partners, and distributed$0.9 million to our noncontrolling interests. Capital Requirements Our pipeline and terminalling operations are capital intensive, requiring investments to maintain, expand, upgrade or enhance existing operations and to meet environmental and operational regulations. Our capital requirements have consisted of, and are expected to continue to consist of, maintenance capital expenditures and expansion capital expenditures. "Maintenance capital expenditures" represent capital expenditures to replace partially or fully depreciated assets to maintain the operating capacity of existing assets. Maintenance capital expenditures include expenditures required to maintain equipment reliability, tankage and pipeline integrity, safety and to address environmental regulations. "Expansion capital expenditures" represent capital expenditures to expand the operating capacity of existing or new assets, but exclude acquisitions. Expansion capital expenditures include expenditures to grow our business and to expand existing facilities, such as projects that increase throughput capacity on our pipelines and in our terminals. Repair and maintenance expenses associated with existing assets that are minor in nature and do not extend the useful life of existing assets are charged to operating expenses as incurred. Each year the board of directors of HLS, our ultimate general partner, approves our annual capital budget, which specifies capital projects that our management is authorized to undertake. Additionally, at times when conditions warrant or as new opportunities arise, additional projects may be approved. The funds allocated for a particular capital project may be expended over a period in excess of a year, depending on the time required to complete the project. Therefore, our planned capital expenditures for a given year consist of expenditures approved for capital projects included in the current year's capital budget as well as, in certain cases, expenditures approved for capital projects in capital budgets for prior years. Our current 2023 capital forecast is comprised of approximately$25 million to$35 million for maintenance capital expenditures and$5 million to$10 million for expansion capital expenditures and our share of Joint Venture investments. In addition to our capital budget, we may spend funds periodically to perform capital upgrades or additions to our assets where a customer reimburses us for such costs. The upgrades or additions would generally benefit the customer over the remaining life of the related service agreements. We expect that our currently planned sustaining and maintenance capital expenditures, as well as expenditures for capital development projects, will be funded with cash generated by operations. We expect that, to the extent necessary, we can raise additional funds from time to time through equity or debt financings in the public and private capital markets. Under the terms of the transaction to acquire HFC's 75% interest in UNEV, we issued to a subsidiary of HFC a Class B unit comprising a noncontrolling equity interest in a wholly owned subsidiary subject to redemption to the extent that HFC is entitled to a 50% interest in 75% of annual UNEV earnings before interest, income taxes, depreciation, and amortization above$40 million beginningJuly 1, 2015 , and ending inJune 2032 , subject to certain limitations. However, to the extent earnings thresholds are not achieved, no redemption payments are required. No redemption payments have been required to date. - 44 - -------------------------------------------------------------------------------- Table o Credit Agreement We have a$1.2 billion Credit Agreement that matures inJuly 2025 . The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a$50 million sub-limit, and it continues to provide for an accordion feature that allows us to increase the commitments under the Credit Agreement up to a maximum amount of$1.7 billion . Our obligations under the Credit Agreement are collateralized by substantially all of our assets, and indebtedness under the Credit Agreement is guaranteed by our material, wholly owned subsidiaries. The Credit Agreement requires us to maintain compliance with certain financial covenants consisting of total leverage, senior secured leverage, and interest coverage. It also limits or restricts our ability to engage in certain activities. If, at any time prior to the expiration of the Credit Agreement, HEP obtains two investment grade credit ratings, the Credit Agreement will become unsecured and many of the covenants, limitations and restrictions will be eliminated. We may prepay all loans at any time without penalty, except for tranche breakage costs. If an event of default exists under the Credit Agreement, the lenders will be able to accelerate the maturity of all loans outstanding and exercise other rights and remedies. We were in compliance with the covenants under the Credit Agreement as ofMarch 31, 2023 . Senior Notes As ofMarch 31, 2023 , we had$500 million in aggregate principal amount of 5% Senior Notes due in 2028 (the "5% Senior Notes," and together with the 6.375% Senior Notes, the "Senior Notes"). OnApril 8, 2022 , we closed a private placement of$400 million in aggregate principal amount of the 6.375% Senior Notes. The 6.375% Senior Notes were issued at par for net proceeds of approximately$393 million , after deducting the initial purchasers' discounts and commissions and offering expenses. The total net proceeds from the offering of the 6.375% Senior Notes were used to partially repay outstanding borrowings under the Credit Agreement, increasing our available liquidity. The Senior Notes are unsecured and impose certain restrictive covenants, including limitations on our ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. We were in compliance with the restrictive covenants for the Senior Notes as ofMarch 31, 2023 . At any time when the Senior Notes are rated investment grade by either Moody's orStandard & Poor's and no default or event of default exists, we will not be subject to many of the foregoing covenants. Additionally, we have certain redemption rights at varying premiums over face value under the Senior Notes. Indebtedness under the Senior Notes is guaranteed by all of our existing wholly owned subsidiaries (other thanHolly Energy Finance Corp. and certain immaterial subsidiaries). - 45 - -------------------------------------------------------------------------------- Table o Long-term Debt The carrying amounts of our long-term debt are as follows: March 31, December 31, 2023 2022 (In thousands) Credit Agreement Amount outstanding$ 651,500 $ 668,000 5% Senior Notes Principal 500,000 500,000 Unamortized debt issuance costs (5,695) (5,953) 494,305 494,047 6.375% Senior Notes Principal 400,000 400,000 Unamortized debt issuance costs (5,420) (5,713) 394,580 394,287 Total long-term debt$ 1,540,385 $ 1,556,334
Contractual Obligations
There were no significant changes to our long-term contractual obligations
during the quarter ended
Impact of Inflation After being relatively moderate in recent years, PPI inthe United States increased significantly in 2023 and 2022. PPI has increased an average of 5% annually over the past five calendar years, including an increase of 13.5% in 2022 and 8.9% in 2021. The substantial majority of our revenues are generated under long-term contracts that provide for increases or decreases in our rates and minimum revenue guarantees annually for increases or decreases in the PPI. These annual rate adjustments generally occur onJuly 1st each year based on the PPI or theFERC index increase or decrease during the prior year. Certain of these contracts have provisions that limit the level of annual PPI percentage rate increases or decreases, and the majority of our rates do not decrease when PPI is negative. The substantial majority of our rates and minimum revenue guarantees used the 2021 PPI increase of 8.9% in theJuly 1, 2022 rate increase calculations. A significant and prolonged period of high inflation or a significant and prolonged period of negative inflation could adversely affect our cash flows and results of operations if costs increase at a rate greater than the fees we charge our shippers. However, the fees we charged our shippers increased at a rate greater than our inflationary cost increase for the year endedDecember 31, 2022 . Environmental Matters Our operation of pipelines, terminals, and associated facilities in connection with the transportation and storage of refined products and crude oil is subject to stringent and complex federal, state, and local laws and regulations governing the discharge of materials into the environment, or otherwise relating to the protection of the environment. As with the industry generally, compliance with existing and anticipated laws and regulations increases our overall cost of business, including our capital costs to construct, maintain, and upgrade equipment and facilities. While these laws and regulations affect our maintenance capital expenditures and net income, we believe that they do not affect our competitive position given that the operations of our competitors are similarly affected. However, these laws and regulations, and the interpretation or enforcement thereof, are subject to frequent change by regulatory authorities, and we are unable to predict the ongoing cost to us of complying with these laws and regulations or the future impact of these laws and regulations on our operations. Violation of environmental laws, regulations, and permits can result in the imposition of significant administrative, civil and criminal penalties, injunctions, and construction bans or delays. A major discharge of hydrocarbons or hazardous substances into the environment could, to the extent the event is not insured, subject us to substantial expense, including both the cost to comply with applicable laws and regulations and claims made by employees, neighboring landowners and other third parties for personal injury and property damage. - 46 -
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Contamination resulting from spills of refined products and crude oil is not unusual within the petroleum pipeline industry. Historic spills along our existing pipelines and terminals as a result of past operations have resulted in contamination of the environment, including soils and groundwater. Some environmental laws impose liability without regard to fault or the legality of the original act on certain classes of persons that contributed to the releases of hazardous substances or petroleum hydrocarbon substances into the environment. These persons include the owner or operator of the site or sites where the release occurred and companies that disposed of, or arranged for the disposal of, the hazardous substances found at the site. Such persons may be subject to strict, joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources, and for the costs of certain health studies. Site conditions, including soils and groundwater, are being evaluated at a few of our properties where operations may have resulted in releases of hydrocarbons and other wastes. There are environmental remediation projects in progress, including assessment and monitoring activities, that relate to certain assets acquired fromHF Sinclair . Under the Omnibus Agreement and certain transportation agreements and purchase agreements withHF Sinclair ,HF Sinclair has agreed to indemnify us, subject to certain monetary and time limitations, for environmental noncompliance and remediation liabilities associated with certain assets transferred to us fromHF Sinclair and occurring or existing prior to the date of such transfers.
We have an environmental agreement with Delek with respect to pre-closing environmental costs and liabilities relating to the pipelines and terminals acquired from Delek in 2005, under which Delek will indemnify us subject to certain monetary and time limitations.
AtMarch 31, 2023 , we had an accrual of$19.8 million related to environmental clean-up projects for which we have assumed liability, including accrued environmental liabilities assumed in the Sinclair Transportation acquisition that have been fair valued at$14.7 million as of the acquisition date, or for which the indemnity provided for byHF Sinclair has expired or will expire. OnJuly 8, 2022 , the Osage pipeline, which carries crude oil fromCushing, Oklahoma toEl Dorado, Kansas , suffered a release of crude oil. Our equity in earnings (loss) of equity method investments was reduced in the three months endedMarch 31, 2023 by$0.9 million for our 50% share of incurred and estimated environmental remediation and recovery expenses associated with the release. From the date of the release throughMarch 31, 2023 , our equity in earnings of equity method investments was reduced by$18.5 million for our 50% share of incurred and estimated environmental remediation and recovery expenses associated with the release, net of our share of insurance proceeds received to date of$3.0 million . Any additional insurance recoveries will be recorded as they are received. If theOsage insurance policy pays out in full, our share of the remaining insurance coverage is expected to be$10.0 million . The pipeline resumed operations in the third quarter of 2022 and remediation efforts are underway. It may be necessary forOsage to expend or accrue additional amounts for environmental remediation or other release-related expenses in future periods, but we cannot estimate those amounts at this time. Future costs and accruals could have a material impact on our results of operations and cash flows in the period recorded; however, we do not expect them to have a material impact on our financial position.
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results could materially differ from these estimates under different assumptions or conditions and have an impact on our financial position, results of operations and cash flows. Our significant accounting policies are described in "Item 7. Management's Discussion and Analysis of Financial Condition and Operations-Critical Accounting Policies" in our Annual Report on Form 10-K for the year endedDecember 31, 2022 . Certain critical accounting policies that materially affect the amounts recorded in our consolidated financial statements include revenue recognition, assessing the possible impairment of certain long-lived assets and goodwill, and assessing contingent liabilities for probable losses. There have been no changes to these policies in 2023. We consider these policies to be critical to understanding the judgments that are involved and the uncertainties that could impact our results of operations, financial condition and cash flows. - 47 -
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RISK MANAGEMENT
The market risk inherent in our debt positions is the potential change arising from increases or decreases in interest rates as discussed below.
AtMarch 31, 2023 , we had an outstanding principal balance of$900 million on our Senior Notes. A change in interest rates generally would affect the fair value of the Senior Notes, but not our earnings or cash flows. AtMarch 31, 2023 , the fair value of our Senior Notes was$866.9 million . We estimate a hypothetical 10% change in the yield-to-maturity applicable to the Senior Notes atMarch 31, 2023 would result in a change of approximately$22.3 million in the fair value of the underlying Senior Notes. For the variable rate Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. AtMarch 31, 2023 , borrowings outstanding under the Credit Agreement were$651.5 million . A hypothetical 10% change in interest rates applicable to the Credit Agreement would not materially affect our cash flows. Our operations are subject to catastrophic losses, operational hazards and unforeseen interruptions, including but not limited to fire, explosion, releases or spills, cyberattacks, weather-related perils, vandalism, power failures, mechanical failures and other events beyond our control. We maintain various insurance coverages, including general liability, property damage, business interruption and cyber insurance, subject to certain deductibles and insurance policy terms and conditions. We are not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable, or premium costs, in our judgment, do not justify such expenditures. We have a risk management oversight committee that is made up of members from our senior management. This committee monitors our risk environment and provides direction for activities to mitigate, to an acceptable level, identified risks that may adversely affect the achievement of our goals.
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