Revenues

9 Months Ended

Sep. 30, 2019

Revenue from Contract with Customer [Abstract]

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 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 nine months ended September 30, 2019, we recognized $3.7 million and $10.4 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 September 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:



	September 30, 2019			December 31, 2018
	(In thousands)
Contract assets	$	5,479		$	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 September 30, 2019, that was previously included in contract liability as of December 31, 2018, and we recognized $0.6 million of revenue during the nine months ended September 30, 2019, that was previously included in contract liability as of December 31, 2018. During the three and the nine months ended September 30, 2018, we recognized $37 thousand and $2.6 million, respectively, that was previously included in contract liability as of January 1, 2018. During the three and the nine months ended September 30, 2019, we also recognized $0.2 million and $3.7 million, respectively, of revenue included in contract assets at September 30, 2019.

As of September 30, 2019, we expect to recognize $2.5 billion in revenue related to our unfulfilled performance obligations under the terms of our long-term throughput agreements and operating leases expiring in 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 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	$	96
2020	368
2021	358
2022	331
2023	295
Thereafter	1,082
Total	$	2,530

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 September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands)
Pipelines	$	73,163	$	69,735	$	220,526	$	207,443
Terminals, tanks and loading racks	42,454		36,469		119,121		109,036
Refinery processing units	20,278		19,580		61,496		56,949
	$	135,895	$	125,784	$	401,143	$	373,428

During the three and nine months ended September 30, 2019, lease revenues amounted to $97.5 million and $285.8 million, respectively, and service revenues amounted to $38.4 million and $115.3 million, respectively. Both of these revenues were recorded within affiliates and third parties revenues on our consolidated statement of income.