Debt

Credit Agreement

In March 2016, we amended our senior secured revolving credit facility (the “Credit Agreement”) expiring in November 2018, increasing the size of the Credit Agreement from $850 million to $1.2 billion. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. It is also available to fund letters of credit up to a $50 million sub-limit.

Our obligations under the Credit Agreement are collateralized by substantially all of our assets. Indebtedness under the Credit Agreement involves recourse to HEP Logistics Holdings, L.P. (“HEP Logistics”), our general partner, and is guaranteed by our material, wholly-owned subsidiaries. Any recourse to HEP Logistics would be limited to the extent of its assets, which other than its investment in us are not significant. We may prepay all loans at any time without penalty, except for payment of certain breakage and related costs.

Indebtedness under the Credit Agreement bears interest, at our option, at either (a) the reference rate as announced by the administrative agent plus an applicable margin (ranging from 0.750% to 1.75%) or (b) at a rate equal to LIBOR plus an applicable margin (ranging from 1.750% to 2.75%). In each case, the applicable margin is based upon the ratio of our funded debt (as defined in the Credit Agreement) to EBITDA (earnings before interest, taxes, depreciation and amortization, as defined in the Credit Agreement). The weighted-average interest rates on our Credit Agreement borrowings in effect at December 31, 2016 and 2015, were 2.978% and 2.655%, respectively. We incur a commitment fee on the unused portion of the Credit Agreement at an annual rate ranging from 0.30% to 0.50% based upon the ratio of our funded debt to EBITDA for the four most recently completed fiscal quarters.

The Credit Agreement imposes certain requirements on us with which we were in compliance as of December 31, 2016, including: a prohibition against distribution to unitholders if, before or after the distribution, a potential default or an event of default as defined in the agreement would occur; limitations on our ability to incur debt, make loans, acquire other companies, change the nature of our business, enter into a merger or consolidation, or sell assets; and covenants that require maintenance of a specified EBITDA to interest expense ratio, total debt to EBITDA ratio and senior debt to EBITDA ratio. If an event of default exists under the Credit Agreement, the lenders will be able to accelerate the maturity of the debt and exercise other rights and remedies. We were in compliance with the covenants as of December 31, 2016.

Senior Notes

As of December 31, 2016, we had $300 million in aggregate principal amount outstanding of 6.5% senior notes (the "6.5% Senior Notes") maturing March 2020.

On January 4, 2017, we redeemed the $300 million aggregate principal amount of 6.5% Senior Notes at a redemption cost of $316.4 million, at which time we recognized a $12.2 million early extinguishment loss. We funded the redemption with borrowings under our Credit Agreement.

On July 19, 2016, we closed a private placement of $400 million in aggregate principal amount of 6% senior unsecured notes due in 2024 (the “6% Senior Notes” and together with the 6.5% Senior Notes, the “Senior Notes”). We used the net proceeds to pay down indebtedness under our revolving credit agreement.

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 of December 31, 2016. At any time when the 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 Senior Notes.

In March 2014, we redeemed the $150 million aggregate principal amount of 8.25% Senior Notes maturing March 2018 at a redemption cost of $156.2 million, at which time we recognized a $7.7 million early extinguishment loss. We funded the redemption with borrowings under our Credit Agreement.

Indebtedness under the 6% Senior Notes and the 6.5% Senior Notes involves recourse to HEP Logistics, our general partner, and is guaranteed by our material, wholly-owned subsidiaries. However, any recourse to HEP Logistics would be limited to the extent of its assets, which other than its investment in us, are not significant.

Our purchase and contribution agreements with HFC with respect to the intermediate pipelines acquired in 2005 and the crude pipelines and tankage assets acquired in 2008, restrict us from selling these pipelines and terminals acquired from HFC. Under these agreements, we are restricted from prepaying borrowings and long-term debt to below $171 million prior to 2018, subject to certain limited exceptions.

Long-term Debt

The carrying amounts of our long-term debt are as follows:



	December 31, 2016			December 31, 2015
	(In thousands)
Credit Agreement
Amount outstanding	$	553,000		$	712,000

6% Senior Notes
Principal	400,000			—
Unamortized debt issuance costs	(6,607		)	—
	393,393			—
6.5% Senior Notes
Principal	300,000			300,000
Unamortized discount and debt issuance costs	(2,481		)	(3,248		)
	297,519			296,752

Total long-term debt	$	1,243,912		$	1,008,752

Maturities of our long-term debt are as follows:



Years Ending December 31,	(In thousands)
2017	$	—
2018	553,000
2019	—
2020	300,000
2021	—
Thereafter	400,000
Total	$	1,253,000

Interest Rate Risk Management

We use interest rate swaps (derivative instruments) to manage our exposure to interest rate risk.

As of December 31, 2016, we have two interest rate swaps with identical terms that hedge our exposure to the cash flow risk caused by the effects of LIBOR changes on $150 million of Credit Agreement advances. The swaps effectively convert $150 million of our LIBOR based debt to fixed rate debt having an interest rate of 0.74% plus an applicable margin of 2.25% as of December 31, 2016, which equaled an effective interest rate of 2.99%. Both of these swap contracts mature in July 2017.

We have designated these interest rate swaps as cash flow hedges. Based on our assessment of effectiveness using the change in variable cash flows method, we have determined that these interest rate swaps are effective in offsetting the variability in interest payments on $150 million of our variable rate debt resulting from changes in LIBOR. Under hedge accounting, we adjust our cash flow hedges on a quarterly basis to their fair values with the offsetting fair value adjustments to accumulated other comprehensive income (loss). Also on a quarterly basis, we measure hedge effectiveness by comparing the present value of the cumulative change in the expected future interest to be paid or received on the variable leg of our swaps against the expected future interest payments on $150 million of our variable rate debt. Any ineffectiveness is recorded directly to interest expense. As of December 31, 2016, we had no ineffectiveness on our cash flow hedges.

At December 31, 2016, we have accumulated other comprehensive income of $91,000 that relates to our current cash flow hedging instruments. Approximately $91,000 will be transferred from accumulated other comprehensive income into interest expense as interest is paid on the underlying swap agreements over the next twelve-month period, assuming interest rates remain unchanged.

Additional information on our interest rate swaps is as follows:



Derivative Instrument	Balance Sheet Location	Fair Value			Location of Offsetting Balance	Offsetting Amount
	(In thousands)
December 31, 2016
Interest rate swaps designated as cash flow hedging instrument:
Variable-to-fixed interest rate swap contract ($150 million of LIBOR based debt interest)	Other current assets	$	91		Accumulated other comprehensive loss	$	91
		$	91			$	91

December 31, 2015
Interest rate swaps designated as cash flow hedging instrument:
Variable-to-fixed interest rate swap contract ($150 million of LIBOR based debt interest)	Other long-term assets	$	304		Accumulated other comprehensive loss	$	304
Variable-to-fixed interest rate swap contract ($155 million of LIBOR based debt interest)	Other current liabilities	(114		)	Accumulated other comprehensive income	(114		)
		$	190			$	190

Interest Expense and Other Debt Information

Interest expense consists of the following components:



	Years Ended December 31,
	2016		2015		2014
	(In thousands)
Interest on outstanding debt:
Credit Agreement, net of interest on interest rate swaps	$	17,621	$	16,107	$	13,350
6% Senior Notes	10,811		—		—
6.5% Senior Notes	19,507		19,507		19,446
8.25% Senior Notes	—		—		2,544
Amortization of discount and deferred debt issuance costs	3,246		1,928		1,821
Commitment fees and other	2,069		638		450
Total interest incurred	53,254		38,180		37,611
Less capitalized interest	702		762		1,510
Net interest expense	$	52,552	$	37,418	$	36,101
Cash paid for interest	$	38,530	$	35,938	$	39,414

Capital Lease Obligations

Our capital lease obligations relate to vehicle leases with initial terms of 33 to 48 months. The total cost of assets under capital leases was $4.9 million and $3.0 million as of December 31, 2016 and 2015, respectively, with accumulated depreciation of $2.4 million and $1.1 million as of December 31, 2016 and 2015, respectively. We include depreciation of capital leases in depreciation and amortization in our consolidated statements of income.

At December 31, 2016, future minimum annual lease payments, including interest, for the capital leases are as follows:



Years Ending December 31,	(in thousands)
2017	$	1,340
2018	679
2019	431
2020	10
Total minimum lease payments	2,460
Less amount representing interest	(165		)
Capital lease obligations	$	2,295