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~~2020



☐	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,~~31, 2020, was 105,440,201.

Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.

INDEX

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~~statements regarding funding of capital expenditures and distributions, distributable cash flow coverage and leverage targets, and statements 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:

the extraordinary market environment and effects of the COVID-19 pandemic, including the continuation of a material decline in demand for refined petroleum products in markets we serve;

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;~~terminals and refinery processing units;

the economic viability of HollyFrontier Corporation (“HFC”), ~~Delek US Holdings, Inc. (“Delek”)~~our other customers and our joint ventures’ other ~~customers;~~customers, including any refusal or inability of our or our joint ventures’ customers or counterparties to perform their obligations under their contracts;

the demand for refined petroleum products in the 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 temporary or permanent reductions in production or shutdowns at refineries utilizing our ~~pipeline~~pipelines, terminal facilities and ~~terminal facilities;~~refinery processing units, due to reasons such as infection in the workforce, in response to reductions in demand or lower gross margins due to economic impact of the COVID-19 pandemic, and any potential asset impairments resulting from such actions;

the effects of current and future government regulations and ~~policies;~~policies, including the effects of current and future restrictions on various commercial and economic activities in response to the COVID-19 pandemic;

delay by government authorities in issuing permits necessary for our business or our capital projects;

our and our joint venture partners’ ability to complete and maintain 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;~~conditions, including uncertainty regarding the timing, pace and extent of an economic recovery in the United States;

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. You should not put any undue reliance on any forward-looking statements. 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~~2019, and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, and in this Quarterly

Table of Contentsril 19,

Report on Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations” and in “Risk Factors.~~Operations.” 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.

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		June 30, 2020		December 31, 2019
	(Unaudited)				(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	6,941	$	3,045
Cash and cash equivalents (Cushing Connect VIEs: $10,773 and $6,842, respectively)					$	18,913	$	13,287
Accounts receivable:
Trade	15,074		12,332
Trade (Cushing Connect VIEs: $2,170 and $79, respectively)					14,929		18,731
Affiliates	46,082		46,786		49,847		49,716
	61,156		59,118		64,776		68,447
Prepaid and other current assets	3,883		4,311		7,905		7,629
Total current assets	71,980		66,474		91,594		89,363

Properties and equipment, net	1,507,597		1,538,655
Properties and equipment, net (Cushing Connect VIEs: $25,832 and $2,916, respectively)					1,458,934		1,467,099
Operating lease right-of-use assets, net	76,551		—		3,377		3,255
Net investment in leases					168,153		134,886
Intangible assets, net	108,326		115,329		94,318		101,322
Goodwill	270,336		270,336		270,336		270,336
Equity method investments	83,015		83,840
Equity method investments (Cushing Connect VIEs: $39,815 and $37,084, respectively)					123,299		120,071
Other assets	30,038		27,906		11,772		12,900
Total assets	$	2,147,843	$	2,102,540	$	2,221,783	$	2,199,232

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable:
Trade	$	10,382	$	16,435
Trade (Cushing Connect VIEs: $6,421 and $2,082, respectively)					$	14,639	$	17,818
Affiliates	7,733		14,222		7,286		16,737
	18,115		30,657		21,925		34,555

Accrued interest	13,329		13,302		10,683		13,206
Deferred revenue	8,216		8,697		11,002		10,390
Accrued property taxes	5,437		1,779		5,526		3,799
Current operating lease liabilities	5,346		—		1,213		1,126
Current finance lease liabilities	857		936		3,293		3,224
Other current liabilities	2,525		2,526		2,975		2,305
Total current liabilities	53,825		57,897		56,617		68,605

Long-term debt	1,437,710		1,418,900		1,486,648		1,462,031
Noncurrent operating lease liabilities	71,550		—		2,530		2,482
Noncurrent finance lease liabilities					70,039		70,475
Other long-term liabilities	13,273		15,307		13,689		12,808
Deferred revenue	48,345		48,714		42,692		45,681

Class B unit	47,722		46,161		51,062		49,392

Equity:
Partners’ equity:
Common unitholders (105,440,201 units issued and outstanding at June 30, 2019 and December 31, 2018)	390,022		427,435
Common unitholders (105,440,201 units issued and outstanding at June 30, 2020 and December 31, 2019)					380,723		381,103
Noncontrolling interest	85,396		88,126		117,783		106,655
Total equity	475,418		515,561		498,506		487,758
Total liabilities and equity	$	2,147,843	$	2,102,540	$	2,221,783	$	2,199,232

See accompanying notes.

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,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
Revenues:
Affiliates	$	102,369		$	94,013		$	205,728		$	195,441		$	95,563		$	102,369		$	196,991		$	205,728
Third parties	28,382			24,747			59,520			52,203			19,244			28,382			45,670			59,520
	130,751			118,760			265,248			247,644			114,807			130,751			242,661			265,248
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	40,602			34,533			78,121			70,735			34,737			40,602			69,718			78,121
Depreciation and amortization	24,247			24,608			48,071			49,750			25,034			24,247			49,012			48,071
General and administrative	1,988			2,673			4,608			5,795			2,535			1,988			5,237			4,608
	66,837			61,814			130,800			126,280			62,306			66,837			123,967			130,800
Operating income	63,914			56,946			134,448			121,364			52,501			63,914			118,694			134,448

Other income (expense):
Equity in earnings of equity method investments	1,783			1,734			3,883			3,013			2,156			1,783			3,870			3,883
Interest expense	(19,230		)	(17,626		)	(38,252		)	(35,207		)	(13,779		)	(19,230		)	(31,546		)	(38,252		)
Interest income	551			526			1,079			1,041			2,813			551			5,031			1,079
Gain on sales-type leases													33,834			—			33,834			—
Loss on early extinguishment of debt													—			—			(25,915		)	—
Gain (loss) on sale of assets and other	111			(53		)	(199		)	33			468			111			974			(199		)
	(16,785		)	(15,419		)	(33,489		)	(31,120		)	25,492			(16,785		)	(13,752		)	(33,489		)
Income before income taxes	47,129			41,527			100,959			90,244			77,993			47,129			104,942			100,959
State income tax benefit (expense)	30			(28		)	(6		)	(110		)	(39		)	30			(76		)	(6		)
Net income	47,159			41,499			100,953			90,134			77,954			47,159			104,866			100,953
Allocation of net income attributable to noncontrolling interests	(1,469		)	(1,356		)	(4,081		)	(3,823		)	(1,484		)	(1,469		)	(3,535		)	(4,081		)
Net income attributable to the partners	45,690			40,143			96,872			86,311			76,470			45,690			101,331			96,872
Limited partners’ per unit interest in earnings—basic and diluted	$	0.43		$	0.38		$	0.92		$	0.82		$	0.73		$	0.43		$	0.96		$	0.92
Weighted average limited partners’ units outstanding	105,440			105,429			105,440			104,637			105,440			105,440			105,440			105,440

See accompanying notes.

Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Six Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2020			2019
Cash flows from operating activities
Net income	$	100,953		$	90,134		$	104,866		$	100,953
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	48,071			49,750			49,012			48,071
(Gain) loss on sale of assets	48			(183		)	(797		)	48
Loss on early extinguishment of debt							25,915			—
Gain on sales-type leases							(33,834		)	—
Amortization of deferred charges	1,535			1,516			1,641			1,535
Equity-based compensation expense	1,246			1,550			980			1,246
Equity in earnings of equity method investments, net of distributions	526			228			(1,298		)	526
(Increase) decrease in operating assets:
Accounts receivable—trade	(2,742		)	(698		)	3,803			(2,742		)
Accounts receivable—affiliates	704			14,836			(131		)	704
Prepaid and other current assets	426			(835		)	216			426
Increase (decrease) in operating liabilities:
Accounts payable—trade	420			(1,428		)	(4,959		)	420
Accounts payable—affiliates	(6,489		)	3,546			(9,452		)	(6,489		)
Accrued interest	27			(67		)	(2,523		)	27
Deferred revenue	339			3,700			(2,378		)	339
Accrued property taxes	3,658			888			1,727			3,658
Other current liabilities	—			(2,023		)	669			—
Other, net	(3,733		)	49			1,137			(3,733		)
Net cash provided by operating activities	144,989			160,963			134,594			144,989

Cash flows from investing activities
Additions to properties and equipment	(17,752		)	(24,739		)	(30,740		)	(17,752		)
Business and asset acquisitions	—			(6,831		)
Investment in Cushing Connect							(2,400		)	—
Proceeds from sale of assets	194			196			816			194
Distributions in excess of equity in earnings of equity investments	299			299			470			299
Net cash used for investing activities	(17,259		)	(31,075		)	(31,854		)	(17,259		)

Cash flows from financing activities
Borrowings under credit agreement	175,000			305,500			168,000			175,000
Repayments of credit agreement borrowings	(156,500		)	(417,500		)	(138,500		)	(156,500		)
Proceeds from issuance of common units	—			114,831
Redemption of senior notes							(522,500		)	—
Proceeds from issuance of debt							500,000			—
Contributions from general partner							435			—
Contributions from noncontrolling interest							13,263			—
Distributions to HEP unitholders	(136,207		)	(130,075		)	(102,979		)	(136,207		)
Distributions to noncontrolling interest	(5,250		)	(3,500		)	(4,000		)	(5,250		)
Payments on finance leases	(503		)	(704		)	(1,972		)	(503		)
Contributions from general partner	—			492
Deferred financing costs							(8,714		)	—
Purchase of units for incentive grants	(255		)	—			—			(255		)
Units withheld for tax withholding obligations	(119		)	(58		)	(147		)	(119		)
Other	—			6
Net cash used by financing activities	(123,834		)	(131,008		)	(97,114		)	(123,834		)

Cash and cash equivalents
Increase for the period	3,896			(1,120		)	5,626			3,896
Beginning of period	3,045			7,776			13,287			3,045
End of period	$	6,941		$	6,656		$	18,913		$	6,941

See accompanying notes.

Table of Contentsril 19,

HOLLY ENERGY PARTNERS, L.P.

CONSOLIDATED ~~STATEMENT~~STATEMENTS OF EQUITY

(Unaudited)

(In thousands)


	Common Units			Noncontrolling Interest			Total Equity			Common Units			Noncontrolling Interest			Total Equity

Balance December 31, 2018	$	427,435		$	88,126		$	515,561
Balance December 31, 2019										$	381,103		$	106,655		$	487,758
Capital contribution - Cushing Connect										—			7,304			7,304
Distributions to HEP unitholders	(67,975		)	—			(67,975		)	(68,519		)	—			(68,519		)
Distributions to noncontrolling interest	—			(3,000		)	(3,000		)	—			(3,000		)	(3,000		)
Amortization of restricted and performance units	661			—			661
Equity-based compensation										506			—			506
Class B unit accretion	(780		)	—			(780		)	(835		)	—			(835		)
Other	814			—			814			208			—			208
Net income	51,962			1,832			53,794			25,696			1,216			26,912
Balance March 31, 2019	412,117			86,958			499,075
Balance March 31, 2020										338,159			112,175			450,334
Capital Contribution - Cushing Connect										—			5,959			$	5,959
Distributions to HEP unitholders	(68,232		)	—			(68,232		)	(34,460		)	—			(34,460		)
Distributions to noncontrolling interest	—			(2,250		)	(2,250		)	—			(1,000		)	(1,000		)
Amortization of restricted and performance units	585			—			585
Equity-based compensation										474			—			474
Class B unit accretion	(781		)	—			(781		)	(835		)	—			(835		)
Other	(138		)	—			(138		)	80			—			80
Net income	46,471			688			47,159			77,305			649			77,954
Balance June 30, 2019	$	390,022		$	85,396		$	475,418
Balance June 30, 2020										$	380,723		$	117,783		$	498,506


	Common Units			Noncontrolling Interest			Total Equity			Common Units			Noncontrolling Interest			Total Equity

Balance December 31, 2017	$	393,959		$	91,106		$	485,065
Issuance of common units	114,376			—			114,376
Balance December 31, 2018										$	427,435		$	88,126		$	515,561
Distributions to HEP unitholders	(63,496		)	—			(63,496		)	(67,975		)	—			(67,975		)
Distributions to noncontrolling interest	—			(2,000		)	(2,000		)	—			(3,000		)	(3,000		)
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
Equity-based compensation										661			—			661
Class B unit accretion	(730		)	—			(730		)	(780		)	—			(780		)
Other	193			—			193			814			—			814
Net income	40,872			627			41,499			51,962			1,832			53,794
Balance June 30, 2018	$	468,397		$	89,971		$	558,368
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		)
Equity-based compensation										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

See accompanying notes.

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,~~2020, 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. This waiver of limited partner cash distributions will expire after the cash distribution for the second quarter of 2020, which will be made during the third quarter of 2020. 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 of HFC and other refineries in the Mid-Continent, Southwest and Northwest regions of the United ~~States and Delek US Holdings, Inc.’s (“Delek”) refinery in Big Spring, Texas.~~States. 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, and a 50% interest in Cushing Connect Pipeline & Terminal LLC.

On June 1, 2020, HFC announced plans to permanently cease petroleum refining operations at its Cheyenne Refinery and to convert certain assets at that refinery to renewable diesel production. HFC subsequently began winding down petroleum refining operations at its Cheyenne Refinery on August 3, 2020. As of June 30, 2020, our throughput agreement with HFC required minimum annualized payments to us of approximately $17.6 million related to our Cheyenne assets. During the third quarter of 2020, we expect to begin negotiations with HFC related to potential changes to our existing throughput agreement. The net book value of our Cheyenne assets as of June 30, 2020 was approximately $88.5 million, including $28.1 million of long-lived assets and $68.7 million of goodwill. Additionally, our annual goodwill impairment test is scheduled for the third quarter of 2020. Depending upon the outcome of negotiations related to our throughput agreement or other changes in anticipated commercial uses of our Cheyenne assets, such assets could be at risk of impairment in the future and such impairment charges could be material.

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.~~2019. 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.~~2020.

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.

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, and we elected to adopt using the ~~optional~~modified retrospective 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~~and the short-term lease recognition practical expedient, which allow an entity to not ~~reassess lease classification or initial indirect lease cost under~~recognize on the ~~new standard. In addition, we elected to exclude short-term~~balance sheet leases ~~which at inception have~~with a ~~lease~~ term of 12 months or ~~less, from the amounts recognized on our balance sheet.~~less. 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 23 and 34 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~~We adopted this standard is effective January 1, 2020, and ~~we are currently evaluating~~adoption of the standard did not have a material impact on our financial condition, results of ~~this standard.~~operations or cash flows.


Note 2:	Investment in Joint Venture

On October 2, 2019, HEP Cushing LLC (“HEP Cushing”), a wholly-owned subsidiary of HEP, and Plains Marketing, L.P. (“PMLP”), a wholly-owned subsidiary of Plains All American Pipeline, L.P. (“Plains”), formed a 50/50 joint venture, Cushing Connect Pipeline & Terminal LLC (the “Cushing Connect Joint Venture”), for (i) the development and construction of a new 160,000 barrel per day common carrier crude oil pipeline (the “Cushing Connect Pipeline”) that will connect the Cushing, Oklahoma crude oil hub to the Tulsa, Oklahoma refining complex owned by a subsidiary of HFC and (ii) the ownership and operation of 1.5 million barrels of crude oil storage in Cushing, Oklahoma (the “ Cushing Connect JV Terminal”). The Cushing Connect JV Terminal was fully in service beginning in April 2020. The Cushing Connect Pipeline is expected to be in service during the first quarter of 2021. Long-term commercial agreements have been entered into to support the Cushing Connect Joint Venture assets.

The Cushing Connect Joint Venture contracted with an affiliate of HEP to manage the construction and operation of the Cushing Connect Pipeline and with an affiliate of Plains to manage the operation of the Cushing Connect JV Terminal. The total Cushing Connect Joint Venture investment will be shared proportionately among the partners, and HEP estimates its share of the cost of the Cushing Connect JV Terminal contributed by Plains and Cushing Connect Pipeline construction costs will be approximately $65 million.

The Cushing Connect Joint Venture legal entities are variable interest entities ("VIEs") as defined under GAAP. A VIE is a legal entity if it has any one of the following characteristics: (i) the entity does not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support; (ii) the at risk equity holders, as a group, lack the characteristics of a controlling financial interest; or (iii) the entity is structured with non-substantive voting rights. The Cushing Connect Joint Venture legal entities do not have sufficient equity at risk to finance their activities without additional financial support. Since HEP is constructing and will operate the Cushing Connect Pipeline, HEP has more ability to direct the activities that most significantly impact the financial performance of the Cushing Connect Joint Venture and Cushing Connect Pipeline legal entities.

Therefore, HEP consolidates those legal entities. We do not have the ability to direct the activities that most significantly impact the Cushing Connect JV Terminal legal entity, and therefore, we account for our interest in the Cushing Connect JV Terminal legal entity using the equity method of accounting.


Note 3:	Revenues

Revenues are generally recognized as products are shipped through our pipelines and terminals, feedstocks are processed through our refinery processing units or other services are rendered. The majority of our contracts with customers meet the definition of a lease since (1) performance of the contracts is dependent on specified property, plant, or equipment and (2) it is remote that one or more parties other than the customer will take more than a minor amount of the output associated with the specified property, plant, or equipment. 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 six months ended June 30, ~~2019,~~2020, we recognized ~~$3.1~~$5.1 million and ~~$6.6~~$12.6 million ~~respectively,~~ of these deficiency payments in revenue, of which ~~none~~NaN and ~~$0.6~~$0.7 million, respectively, related to deficiency payments billed in prior periods. As of June 30, ~~2019,~~2020, deferred revenue reflected in our consolidated balance sheet related to shortfalls billed was ~~$0.8~~$0.5 million.

A contract liability exists when an entity is obligated to perform future services tofor 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			June 30, 2020			December 31, 2019
	(In thousands)						(In thousands)
Contract assets	$	5,283		$	1,818		$	6,064		$	5,675
Contract liabilities	$	(810	)	$	(1,821	)	$	(500	)	$	(650	)

The contract assets and liabilities include both lease and service components. We did not recognize any revenue during the three months ended June 30, 2020, that was previously included in contract liability as of December 31, 2019, and we recognized $0.7 million of revenue during the six months ended June 30, 2020, that was previously included in contract liability as of December 31, 2019. 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,~~2020, we also recognized ~~$0.3~~$0.2 million and ~~$3.5~~$0.4 million, respectively, of revenue included in contract assets at June 30, ~~2019.~~2020.

As of June 30, ~~2019,~~2020, we expect to recognize ~~$2.7~~$2.3 billion in revenue related to our unfulfilled performance obligations under the terms of our long-term throughput agreements and ~~operating~~ leases expiring in ~~2020~~2021 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)		(In millions)
Remainder of 2019	$	196
2020	368
Remainder of 2020			$	185
2021	356		362
2022	329		332
2023	293		295
2024			257
2025			188
Thereafter	1,121		650
Total	$	2,663	$	2,269

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,				Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
	(In thousands)								(In thousands)
Pipelines	$	72,263	$	65,539	$	147,363	$	137,708	$	58,954	$	72,263	$	129,426	$	147,363
Terminals, tanks and loading racks	39,089		34,386		76,667		72,567		36,280		39,089		73,778		76,667
Refinery processing units	19,399		18,835		41,218		37,369		19,573		19,399		39,457		41,218
	$	130,751	$	118,760	$	265,248	$	247,644	$	114,807	$	130,751	$	242,661	$	265,248

During the three and six months ended June 30, ~~2019,~~2020, lease revenues amounted to ~~$94.8~~$86.3 million and ~~$188.3~~$179.5 million, respectively, and service revenues amounted to ~~$36.0~~$28.5 million and ~~$77.0~~$63.2 million, respectively. Both of these revenues were recorded within affiliates and third parties revenues on our consolidated statement of income.


Note 3:4:	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~~noncurrent finance lease 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.

Our leases have remaining terms of less than 1 year to 2625 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~~$6.9 million and ~~$5.8~~$7.0 million as of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, with accumulated depreciation of ~~$4.8~~$3.4 million and ~~$4.3~~$4.5 million as of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. We include depreciation of finance leases in depreciation and amortization in our consolidated statements of income.

In addition, we have a finance lease obligation related to a pipeline lease with an initial term of 10 years with one remaining subsequent renewal option for an additional 10 years.

Supplemental balance sheet information related to leases was as follows (in thousands, except for lease term and discount rate):


	June 30, 2019			June 30, 2020			December 31, 2019

Operating leases:
Operating lease right-of-use assets, net	$	76,551		$	3,377		3,255

Current operating lease liabilities	5,346			1,213			1,126
Noncurrent operating lease liabilities	71,550			2,530			2,482
Total operating lease liabilities	$	76,896		$	3,743		3,608

Finance leases:
Properties and equipment	$	6,147		$	6,851		6,968
Accumulated amortization	(4,791		)	(3,358		)	(4,547	)
Properties and equipment, net	$	1,356		$	3,493		2,421

Current finance lease liabilities	$	857		$	3,293		3,224
Other long-term liabilities	667
Noncurrent finance lease liabilities				70,039			70,475
Total finance lease liabilities	$	1,524		$	73,332		73,699

Weighted average remaining lease term (in years)
Operating leases	17.4			6.1			6.5
Finance leases	1.1			16.3			17.0

Weighted average discount rate
Operating leases	5.6%			4.8%			5.0%
Finance leases	6.6%			5.6%			6.0%

Supplemental cash flow and other information related to leases were as follows:


			Six Months Ended June 30,
	Six Months Ended June 30, 2019		2020		2019
	(In thousands)		(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows on operating leases	$	3,589	$	518	$	3,589
Operating cash flows on finance leases	$	51	$	2,157	$	51
Financing cash flows on finance leases	$	503	$	1,972	$	503

Maturities of lease liabilities were as follows:


	June 30, 2019						June 30, 2020
	Operating			Finance			Operating			Finance
	(In thousands)						(In thousands)
2019	$	4,296		$	531
2020	7,865			691			$	491		$	3,865
2021	7,090			242			906			7,411
2022	6,737			91			627			7,285
2023	6,647			86			607			7,332
2024 and thereafter	87,700			—
2024							494			6,856
2025 and thereafter							1,179			80,313
Total lease payments	120,335			1,641			4,304			113,062
Less: Imputed interest	(43,439		)	(117		)	(561		)	(39,730		)
Total lease obligations	76,896			1,524			3,743			73,332
Less: Current obligations	(5,346		)	(857		)
Long-term lease obligations	$	71,550		$	667
Less: Current lease liabilities							(1,213		)	(3,293		)
Noncurrent lease liabilities							$	2,530		$	70,039

The components of lease expense were as follows:


					Three Months Ended June 30,				Six Months Ended June 30,
	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019		2020		2019		2020		2019
	(In thousands)				(In thousands)
Operating lease costs	$	1,798	$	3,568	$	230	$	1,798	$	503	$	3,568
Finance lease costs
Amortization of assets	254		498		273		254		515		498
Interest on lease liabilities	24		51		1,040		24		2,077		51
Variable lease cost	35		71		46		35		95		71
Total net lease cost	$	2,111	$	4,188	$	1,589	$	2,111	$	3,190	$	4,188

Lessor Accounting

As discussed in Note 2,3, the majority of our contracts with customers meet the definition of a lease. See Note 23 for further discussion of the impact of adoption of this standard on our activities as a lessor.

Customer contracts that contain leases are generally classified as either operating leases, direct finance leases or sales-type leases. We consider inputs such as the lease term, fair value of the underlying asset and residual value of the underlying assets when assessing the classification.

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.~~expire due to our risk management strategy for protecting the residual fair value of the underlying assets by performing ongoing maintenance during the lease term. 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.

One of our throughput agreements with Delek was renewed during the three months ending June 30, 2020. Certain components of this agreement met the criteria of sales-type leases since the underlying assets are not expected to have an alternative use at the end of the lease term to anyone other than Delek. Under sales-type lease accounting, at the commencement date, the lessor recognizes a net investment in the lease, based on the estimated fair value of the underlying leased assets at contract inception, and derecognizes the underlying assets with the difference recorded as selling profit or loss arising from the lease. Therefore, we recognized a gain on sales-type leases during the three months ending June 30, 2020 composed of the following:



	(In thousands)

Net investment in leases	$	35,319
Properties and equipment, net	(1,485		)
Gain on sales-type leases	$	33,834

This sales-type lease transaction, including the related gain, was a non-cash transaction.

Lease income recognized was as follows:


	Three Months Ended June 30, 2019				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
	(In thousands)								(In thousands)
Operating lease revenues	$	94,783	$	68,069	$	188,287	$	138,661	$	84,872	$	94,783	$	175,671	$	188,287

Direct financing lease interest income	$	509	$	501	$	1,019	$	1,004	524		509		1,048		1,019
Gain on sales-type leases									33,834		—		33,834		—
Sales-type lease interest income									2,286		—		3,940		—
Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable									1,474		—		3,822		—

~~As discussed~~For our sales-type leases, we included customer obligations related to minimum volume requirements in ~~Note 2, prior~~guaranteed minimum lease payments. Portions of our minimum guaranteed pipeline tariffs for assets subject to sales-type lease accounting are recorded as interest income with the ~~adoption~~remaining amounts recorded as a reduction in net investment in leases. We recognized any billings for throughput volumes in excess of ~~ASC 842, contract consideration was bifurcated between operating~~minimum volume requirements as variable lease payments, and ~~service~~these variable lease payments were recorded in lease revenues.

Annual minimum undiscounted lease payments under our leases were as follows as of June 30, ~~2019:~~2020:


	Operating		Finance			Operating		Finance		Sales-type
Years Ending December 31,	(In thousands)					(In thousands)
Remainder of 2019	$	166,904	$	1,049
2020	309,729		2,106
Remainder of 2020						$	155,376	$	1,060	$	6,198
2021	303,110		2,123			306,771		2,128		12,396
2022	301,707		2,139			304,315		2,145		12,396
2023	271,207		2,156			273,362		2,162		12,396
Thereafter	1,001,978		42,768
Less: Imputed Interest	—		(35,807		)
2024						235,280		2,179		12,396
2025 and thereafter						739,158		40,787		72,432
Total	$	2,354,635	$	16,534		$	2,014,262	$	50,461	$	128,214

~~Our consolidated~~Net investments in leases recorded on our balance sheet ~~included finance lease receivables~~were composed of ~~$16.5 million as of June 30, 2019.~~the following:



	June 30, 2020				December 31, 2019
	Sales-type Leases		Direct Financing Leases		Sales-type Leases		Direct Financing Leases
	(In thousands)				(In thousands)
Lease receivables⁽¹⁾	$	92,041	$	16,486	$	68,457	$	16,511
Unguaranteed residual assets	63,134		—		52,933		—
Net investment in leases	$	155,175	$	16,486	$	121,390	$	16,511


(1)	Current portion of lease receivables included in prepaid and other current assets on the balance sheet.


Note 4:5:	~~Financial Instruments~~Fair Value Measurements

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 fairFair value ~~due~~is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at 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.

measurement date. 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.

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.

The carrying amounts and estimated fair values of our senior notes were as follows:

June 30, 2019

December 31, 2018

June 30, 2020

December 31, 2019

Financial Instrument

Fair Value Input Level

Carrying

Value

Fair Value

Carrying

Value

Fair Value

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

—

496,531

522,045

5% Senior Notes

Level 2

491,648

477,835

—

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 89 for additional information.

Non-Recurring Fair Value Measurements

For gains on sales-type leases recognized during the second quarter of 2020, the estimated fair value of the underlying leased assets at contract inception and the present value of the estimated unguaranteed residual asset at the end of the lease term are used in determining the net investment in leases and related gain on sales-type leases recorded. The asset valuation estimates include Level 3 inputs based on a replacement cost valuation method.


Note 5:6:	Properties and Equipment

The carrying amounts of our properties and equipment are as follows:


	June 30, 2019		December 31, 2018		June 30, 2020		December 31, 2019
	(In thousands)				(In thousands)
Pipelines, terminals and tankage	$	1,572,949	$	1,571,338	$	1,610,916	$	1,602,231
Refinery assets	347,338		347,338		349,030		348,093
Land and right of way	86,095		86,298		87,076		86,190
Construction in progress	31,027		23,482		30,892		10,930
Other	40,603		41,250		9,829		14,110
	2,078,012		2,069,706		2,087,743		2,061,554
Less accumulated depreciation	570,415		531,051		628,809		594,455
	$	1,507,597	$	1,538,655	$	1,458,934	$	1,467,099

We capitalized $8$24 thousand and ~~$0.2 million~~$8 thousand during the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, in interest attributable to construction projects.

Depreciation expense was ~~$41.3~~$41.7 million and ~~$41.9~~$41.3 million for the six months ended June 30, ~~2019~~2020 and ~~2018~~2019, respectively, and includes depreciation of assets acquired under capital leases.


Note 6:7:	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		Useful Life	June 30, 2020		December 31, 2019
		(In thousands)					(In thousands)
Delek transportation agreement	30 years	$	59,933	$	59,933	30 years	$	59,933	$	59,933
HFC transportation agreement	10-15 years	75,131		75,131		10-15 years	75,131		75,131
Customer relationships	10 years	69,683		69,683		10 years	69,683		69,683
Other		50		50			50		50
		204,797		204,797			204,797		204,797
Less accumulated amortization		96,471		89,468			110,479		103,475
		$	108,326	$	115,329		$	94,318	$	101,322

Amortization expense was $7.0 million ~~and $7.5 million~~ for both of the six months ended June 30, ~~2019~~2020 and ~~2018, respectively.~~2019. We estimate amortization expense to be $14.0 million for each of the next ~~three~~two years, $9.9 million in 2023, and $9.1 million in ~~2024.~~2024 and 2025.

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~~variable interest entity of HFC; therefore, our basis in these agreements is zero and does not reflect a step-up in basis to fair value.


Note 7:8:	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~~$1.6 million and ~~$1.6~~$1.7 million for the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and $3.7 ~~million and $3.4~~ million for the six months ended June 30, ~~2019~~2020 and ~~2018, respectively.~~2019.

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~~4 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~~2020, we had ~~two~~2 types of incentive-based awards outstanding, which are described below. The compensation cost charged against income was ~~$0.6~~$0.5 million and ~~$0.7~~$0.6 million for the three months ended June 30, ~~2019~~2020 and ~~2018~~,2019, respectively, and ~~$1.2~~$1.0 million and ~~$1.5~~$1.2 million for the six months ended June 30, ~~2019~~2020 and ~~2018, respectively.~~2019. 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,~~2020, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which ~~1,235,221~~1,119,542 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,~~2020, is presented below:


Restricted and Phantom Units	Units		Weighted Average Grant-Date Fair Value		Units		Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2019 (nonvested)	138,016		$	31.35
Outstanding at January 1, 2020 (nonvested)					145,205		$	26.22
Vesting and transfer of full ownership to recipients					(4,397	)	30.29
Forfeited	(15,800	)	31.20		(5,890	)	25.33
Outstanding at June 30, 2019 (nonvested)	122,216		$	31.37
Outstanding at June 30, 2020 (nonvested)					134,918		$	26.13

The grant date fair values of phantom units that were vested and transferred to recipients during the six months ended June 30, 2020 were $0.1 million. No restricted or phantom units were vested and transferred to recipients during the six months ended June 30, 2019. As of June 30, ~~2019,~~2020, 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.

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~~2020, 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.~~2020. Although common units are not transferred to the recipients until the performance units vest, the recipients have distribution rights with respect to the ~~common~~target number of performance units subject to the award from the date of ~~grant.~~grant at the same rate as distributions paid on our common units.

A summary of performance unit activity and changes for the six months ended June 30, ~~2019,~~2020, is presented below:



Performance Units	Units
Outstanding at January 1, ~~2019~~2020 (nonvested)	~~51,748~~53,445
Vesting and transfer of common units to recipients	(~~10,113~~	)
~~Forfeited~~	~~(5,200~~11,634	)
Outstanding at June 30, ~~2019~~2020 (nonvested)	~~36,435~~41,811

The grant date fair value of performance units vested and transferred to recipients during the six months ended June 30, 2020 and 2019 ~~and 2018~~ was ~~$0.3~~$0.4 million and ~~$0.1~~$0.3 million, respectively. Based on the weighted-average fair value of performance units outstanding at June 30, ~~2019,~~2020, 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~~1.6 years.

During the six months ended June 30, ~~2019,~~2020, we ~~paid $0.3 million for the~~did not purchase any of our common units in the open market for the issuance and settlement of unit awards under our Long-Term Incentive Plan.


Note 8:9:	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.~~2020.

Senior Notes

~~We have~~As of December 31, 2019, we had $500 million in aggregate principal amount of 6% senior unsecured notes due in 2024 (the “"6% Senior Notes") outstanding. The 6% Senior ~~Notes”~~Notes were unsecured and imposed 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.

On February 4, 2020, we closed a private placement of $500 million in aggregate principal amount of 5% senior unsecured notes due in 2028 (the "5% Senior Notes"). On February 5, 2020, we redeemed the existing $500 million 6% Senior Notes at a redemption cost of $522.5 million, at which time we recognized a $25.9 million early extinguishment loss consisting of a $22.5 million debt redemption premium and unamortized financing costs of $3.4 million. We ~~used~~funded the $522.5 million redemption with net proceeds from the issuance of our ~~offerings of the 6%~~5% Senior Notes ~~to repay indebtedness~~and borrowings under our Credit Agreement.

into mergers. We were in compliance with the restrictive covenants for the 6%5% Senior Notes as of June 30, ~~2019.~~2020. At any time when the 6%5% Senior Notes are rated investment grade by ~~both~~either Moody’s ~~and~~or 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%5% Senior Notes.

Indebtedness under the 6%5% Senior Notes is guaranteed by all of our existing wholly-owned ~~subsidiaries.~~subsidiaries (other than Holly Energy Finance Corp. and certain immaterial 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 %



	June 30, 2020			December 31, 2019
	(In thousands)
Credit Agreement
Amount outstanding	995,000			$	965,500

6% Senior Notes
Principal	—			500,000
Unamortized premium and debt issuance costs	—			(3,469		)
	—			496,531

5% Senior Notes
Principal	500,000			—
Unamortized premium and debt issuance costs	(8,352		)	—
	491,648			—

Total long-term debt	$	1,486,648		$	1,462,031


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 2021 to 2036, and revenues from these agreements accounted for 83% and 81% of our total revenues for the three months and six months ended June 30, 2020, ~~to 2036.~~respectively. 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,~~July 1, 2020, these agreements with HFC require minimum annualized payments to us of ~~$349~~$351.1 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 $95.6 million and $102.4 ~~million and $94.0~~ million for the three months ended June 30, 2020 and 2019, respectively, and $197.0 million and $205.7 million for the six months ended June 30, 2020 and 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 $0.7 million and $0.6 million for ~~each of~~ the three months ended June 30, 2020 and 2019, and ~~2018, and~~ $1.3 ~~million and $1.2~~ million for the six months ended June 30, ~~2019~~2020 and ~~2018, respectively.~~2019.

We reimbursed HFC for costs of employees supporting our operations of $13.2 million for the three months ended June 30, 2020 and ~~$12.5~~2019, and $27.3 million and $26.8 million for the six months ended June 30, 2020 and 2019.

HFC reimbursed us $0.9 million and $3.6 million for the three months ended June 30, 2020 and 2019, respectively, for expense and ~~2018, respectively,~~capital projects, and ~~$26.8~~$4.0 million and ~~$25.2~~$5.8 million for the six months ended June 30, ~~2019~~2020 and ~~2018, respectively.~~2019.

~~HFC reimbursed us $3.6~~We distributed $18.4 million and ~~$2.9~~$37.5 million ~~for~~in the three months ended June 30, 2020 and 2019, respectively, and ~~2018, respectively, for expense and capital projects, and $5.8~~$56.0 million and ~~$4.2~~$74.8 million for the six months ended June 30, ~~2019~~2020 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~~$49.8 million and $~~46.8~~49.7 million at June 30, ~~2019~~2020, and December 31, ~~2018~~2019, respectively.


•	Accounts payable to HFC were ~~$7.7~~$7.3 million and $~~14.2~~16.7 million at June 30, ~~2019~~2020, and December 31, ~~2018~~2019, respectively.


•	Deferred revenue in the consolidated balance sheets at June 30, ~~2019~~2020 and December 31, ~~2018~~2019, included ~~$0.6~~$0.3 million and ~~$1.7~~$0.5 million, respectively, relating to certain shortfall billings to HFC.

We received ~~finance~~direct financing 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, 2020 and 2019, ~~and 2018,~~respectively, and $1.0 million for ~~each of~~both the six months ended June 30, 2020 and 2019 .

We received sales-type lease payments of $2.4 million from HFC that were not included in revenues for the three months ended June 30, 2020 and ~~2018.~~no payments for the same period in 2019, respectively, and $4.8 million for the six months ended June 30, 2020 and no payments for the same period in 2019.

On October 31, 2017, we closed on an equity restructuring transaction with HEP Logistics, a wholly-owned subsidiary of HFC and the general partner of HEP, pursuant to which the incentive distribution rights held by HEP Logistics were canceled, and HEP Logistics' 2% general partner interest in HEP was converted into a non-economic general partner interest in HEP. In consideration, we issued 37,250,000 of our common units to HEP Logistics. In addition, HEP Logistics agreed to waive $2.5 million of limited partner cash distributions for each of twelve consecutive quarters beginning with the first quarter the units issued as consideration were eligible to receive distributions. This waiver of limited partner cash distributions will expire after the cash distribution for the second quarter of 2020, which will be made during the third quarter of 2020.


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

As of June 30, ~~2019,~~2020, 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.

~~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,~~2020, 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,~~23, 2020, we announced our cash distribution for the second quarter of ~~2019~~2020 of ~~$0.6725~~$0.35 per unit. The distribution is payable on all common units and will be paid August 13, ~~2019,~~2020, to all unitholders of record on ~~July 29, 2019.~~August 3, 2020. 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 $34.5 million for the three months ended June 30, 2020 and was $68.5 million for the three months ended June 30, ~~2019 and was $67.1 million for the three months ended June 30, 2018.~~2019. For the six months ended June 30, ~~2019,~~2020, the regular quarterly distribution to the limited partners will be ~~$136.7~~$68.9 million and was ~~$133.7~~$136.7 million for the six months ended June 30, ~~2018.~~2019. 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~~

Note 12: Net Income Per Limited Partner Unit

~~Net~~Basic net income per unit applicable to the limited partners is ~~computed using~~calculated as net income attributable to the ~~two-class method, since we have more than one participating security (common~~partners divided by the weighted average limited partners’ units outstanding. Diluted net income per unit assumes, when dilutive, the issuance of the net incremental units from restricted units, phantom units and ~~restricted units).~~

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

~~For purposes of applying the two-class method, including the allocation of cash distributions in excess of earnings, net~~Net income per limited partner unit is computed as follows:

Three Months Ended
June 30, Six Months Ended
June 30,
2019 2018 2019 2018
(In thousands)
Net income attributable to the partners $ 45,690
$ 40,143
$ 96,872
$ 86,311
Limited partner’s distribution declared on common units (68,496 ) (67,091 ) (136,729 ) (133,670 )
Distributions in excess of net income attributable to the partners $ (22,806 ) $ (26,948 ) $ (39,857 ) $ (47,359 )


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,				Six Months Ended June 30,
	2019			2018			2019			2018			2020		2019		2020		2019
	(In thousands, except per unit data)												(In thousands, except per unit data)
Net income attributable to the partners:
Distributions declared	$	(68,496	)	$	(67,091	)	(136,729		)	(133,670		)
Distributions in excess of net income attributable to the partners	(22,806		)	(26,948		)	(39,857		)	(47,359		)
Net income attributable to the partners	$	45,690		$	40,143		$	96,872		$	86,311		$	76,470	$	45,690	$	101,331	$	96,872
Weighted average limited partners' units outstanding	105,440			105,429			105,440			104,637			105,440		105,440		105,440		105,440
Limited partners' per unit interest in earnings - basic and diluted	$	0.43		$	0.38		$	0.92		$	0.82		$	0.73	$	0.43	$	0.96	$	0.92


Note 13:	Environmental

We expensed $0.5 million and $0.7 million for the three and six months ended June 30, 2020, for environmental remediation obligations, and we expensed $0.1 million for the three and six months ended June 30, ~~2019, for environmental remediation obligations, and we expensed $0.3 million for the three and six months ended June 30, 2018.~~2019. The accrued environmental liability, net of expected recoveries from indemnifying parties, reflected in our consolidated balance sheets was $5.7 million and ~~$6.3~~$5.5 million at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, of which ~~$3.7~~$3.5 million ~~and $4.3 million, respectively, were~~was classified as other long-term ~~liabilities.~~liabilities for both periods. These accruals include remediation and monitoring costs expected to be incurred over an extended period of time.

Under the Omnibus Agreement and certain transportation agreements and purchase agreements with HFC, HFC has agreed to indemnify us, subject to certain monetary and time limitations, for environmental noncompliance and remediation liabilities associated with certain assets transferred to us from HFC and occurring or existing prior to the date of such transfers. ~~As of June 30, 2019 and December 31, 2018, our~~Our consolidated balance sheets included additional accrued environmental liabilities of $0.4 million and $0.5 million ~~million, respectively,~~ for HFC indemnified liabilities for the periods ending June 30, 2020and December 31, 2019, respectively, and other assets included equal and offsetting balances representing amounts due from HFC related to indemnifications for environmental remediation liabilities.


Note 14:	Contingencies

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


Note 15:	Segment Information

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

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

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


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
	(In thousands)												(In thousands)
Revenues:
Pipelines and terminals - affiliate	$	82,970		$	75,178		$	164,510		$	158,072		$	75,990		$	82,970		$	157,534		$	164,510
Pipelines and terminals - third-party	28,382			24,747			59,520			52,203			19,244			28,382			45,670			59,520
Refinery processing units - affiliate	19,399			18,835			41,218			37,369			19,573			19,399			39,457			41,218
Total segment revenues	$	130,751		$	118,760		$	265,248		$	247,644		$	114,807		$	130,751		$	242,661		$	265,248

Segment operating income:
Pipelines and terminals	$	57,936		$	51,004		$	121,168		$	111,217		$	45,630		$	57,936		$	104,533		$	121,168
Refinery processing units	7,966			8,615			17,888			15,942			9,406			7,966			19,398			17,888
Total segment operating income	65,902			59,619			139,056			127,159			55,036			65,902			123,931			139,056
Unallocated general and administrative expenses	(1,988		)	(2,673		)	(4,608		)	(5,795		)	(2,535		)	(1,988		)	(5,237		)	(4,608		)
Interest and financing costs, net	(18,679		)	(17,100		)	(37,173		)	(34,166		)	(10,966		)	(18,679		)	(26,515		)	(37,173		)
Equity in earnings of unconsolidated affiliates	1,783			1,734			3,883			3,013
Gain on sale of assets and other	111			(53		)	(199		)	33
Loss on early extinguishment of debt													—			—			(25,915		)	—
Equity in earnings of equity method investments													2,156			1,783			3,870			3,883
Gain on sales-type leases													33,834			—			33,834			—
Gain (loss) on sale of assets and other													468			111			974			(199		)
Income before income taxes	$	47,129		$	41,527		$	100,959		$	90,244		$	77,993		$	47,129		$	104,942		$	100,959

Capital Expenditures:
Pipelines and terminals	$	7,034		$	12,127		$	17,752		$	24,739		$	11,798		$	7,034		$	30,416		$	17,752
Refinery processing units													—			—			324			—
Total capital expenditures	$	7,034		$	12,127		$	17,752		$	24,739		$	11,798		$	7,034		$	30,740		$	17,752


	June 30, 2019		December 31, 2018		June 30, 2020		December 31, 2019
	(In thousands)				(In thousands)
Identifiable assets:
Pipelines and terminals⁽¹⁾	$	1,737,642	$	1,694,101	$	1,765,038	$	1,749,843
Refinery processing units	315,300		312,888		307,900		305,897
Other	94,901		95,551		148,845		143,492
Total identifiable assets	$	2,147,843	$	2,102,540	$	2,221,783	$	2,199,232

(1) Includes goodwill of $270.3 million as of June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.


Note 16:	Supplemental Guarantor/Non-Guarantor Financial Information

Obligations of HEP (“Parent”) under the 6%5% Senior Notes have been jointly and severally guaranteed by each of its direct and indirect 100% owned subsidiaries (“Guarantor Subsidiaries”). These guarantees are full and unconditional, subject to certain customary release provisions. These circumstances include (i) when a Guarantor Subsidiary is sold or sells all or substantially all of its assets, (ii) when a Guarantor Subsidiary is declared “unrestricted” for covenant purposes, (iii) when a Guarantor Subsidiary’s guarantee of other indebtedness is terminated or released and (iv) when the requirements for legal defeasance or covenant defeasance or to discharge the senior notes have been satisfied.

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

~~Condensed Consolidating Balance Sheet~~

June 30, 2019 Parent
Guarantor
Restricted Subsidiaries
Non-Guarantor Non-Restricted Subsidiaries Eliminations Consolidated
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 2
$ 1,703
$ 5,236
$ —
$ 6,941
Accounts receivable —
57,410
4,006
(260 ) 61,156
Prepaid and other current assets 318
3,173
392
—
3,883
Total current assets 320
62,286
9,634
(260 ) 71,980

Properties and equipment, net —
1,170,005
337,592
—
1,507,597
Operating leases right-of-use assets —
76,504
47
—
76,551
Investment in subsidiaries

1,833,110
256,187
—
(2,089,297 ) —
Intangible assets, net —
108,326
—
—
108,326
Goodwill —
270,336
—
—
270,336
Equity method investments —
83,015
—
—
83,015
Other assets 7,939
22,099
—
—
30,038
Total assets $ 1,841,369
$ 2,048,758
$ 347,273
$ (2,089,557 ) $ 2,147,843

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ —
$ 17,094
$ 1,281
$ (260 ) $ 18,115
Accrued interest 13,329
—
—
—
13,329
Deferred revenue —
7,406
810
—
8,216
Accrued property taxes —
2,280
3,157
—
5,437
Current maturities of operating leases —
5,299
47
—
5,346
Current maturities of finance leases —
857
—
—
857
Other current liabilities 48
2,473
4
—
2,525
Total current liabilities 13,377
35,409
5,299
(260 ) 53,825

Long-term debt 1,437,710
—
—
—
1,437,710
Noncurrent operating lease liabilities —
71,550
—
—
71,550
Other long-term liabilities 260
12,622
391
—
13,273
Deferred revenue —
48,345
—
—
48,345
Class B unit —
47,722
—
—
47,722
Equity - partners 390,022
1,833,110
256,187
(2,089,297 ) 390,022
Equity - noncontrolling interest —
—
85,396
—
85,396
Total liabilities and equity $ 1,841,369
$ 2,048,758
$ 347,273
$ (2,089,557 ) $ 2,147,843

Condensed Consolidating Balance Sheet


December 31, 2018	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations			Consolidated
June 30, 2020													Parent		Guarantor Restricted Subsidiaries			Non-Guarantor Non-Restricted Subsidiaries		Eliminations			Consolidated
	(In thousands)												(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	2	$	—	$	3,043	$	—		$	3,045		$	3,927	$	(766	)	$	15,752	$	—		$	18,913
Accounts receivable	—		53,376		5,994		(252		)	59,118			—		58,197			7,840		(1,261		)	64,776
Prepaid and other current assets	217		3,542		552		—			4,311			337		6,992			576					7,905
Total current assets	219		56,918		9,589		(252		)	66,474			4,264		64,423			24,168		(1,261		)	91,594

Properties and equipment, net	—		1,193,181		345,474		—			1,538,655			—		1,110,139			348,795		—			1,458,934
Operating lease right-of-use assets												0	—		3,185			192		—			3,377
Net investment in leases													—		168,153					—			168,153
Investment in subsidiaries	1,850,416		264,378		—		(2,114,794		)	—			1,868,595		282,348			—		(2,150,943		)	—
Intangible assets, net	—		115,329		—		—			115,329			—		94,318			—		—			94,318
Goodwill	—		270,336		—		—			270,336			—		270,336			—		—			270,336
Equity method investments	—		83,840		—		—			83,840			—		83,484			39,815		—			123,299
Other assets	9,291		18,615		—		—			27,906			5,497		6,275			—		—			11,772
Total assets	$	1,859,926	$	2,002,597	$	355,063	$	(2,115,046	)	$	2,102,540		$	1,878,356	$	2,082,661		$	412,970	$	(2,152,204	)	$	2,221,783

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	—	$	30,325	$	584	$	(252	)	$	30,657		$	—	$	14,343		$	8,843	$	(1,261	)	$	21,925
Accrued interest	13,302		—		—		��			13,302			10,683		—			—		—			10,683
Deferred revenue	—		8,065		632		—			8,697			—		10,502			500		—			11,002
Accrued property taxes	—		744		1,035		—			1,779			—		2,732			2,794		—			5,526
Current operating lease liabilities													—		1,145			68		—			1,213
Current finance lease liabilities													—		3,293			—		—			3,293
Other current liabilities	29		3,429		4		—			3,462			42		2,819			114		—			2,975
Total current liabilities	13,331		42,563		2,255		(252		)	57,897			10,725		34,834			12,319		(1,261		)	56,617

Long-term debt	1,418,900		—		—		—			1,418,900			1,486,648		—			—		—			1,486,648
Noncurrent operating lease liabilities													—		2,530			—		—			2,530
Noncurrent finance lease liabilities													—		70,039			—		—			70,039
Other long-term liabilities	260		14,743		304		—			15,307			260		12,909			520		—			13,689
Deferred revenue	—		48,714		—		—			48,714			—		42,692			—		—			42,692
Class B unit	—		46,161		—		—			46,161			—		51,062			—		—			51,062
Equity - partners	427,435		1,850,416		264,378		(2,114,794		)	427,435			380,723		1,868,595			282,348		(2,150,943		)	380,723
Equity - noncontrolling interest	—		—		88,126		—			88,126			—		—			117,783		—			117,783
Total liabilities and equity	$	1,859,926	$	2,002,597	$	355,063	$	(2,115,046	)	$	2,102,540		$	1,878,356	$	2,082,661		$	412,970	$	(2,152,204	)	$	2,221,783

Condensed Consolidating ~~Statement of Income~~Balance Sheet

Three Months Ended June 30, 2019 Parent
Guarantor Restricted
Subsidiaries
Non-Guarantor Non-restricted Subsidiaries Eliminations Consolidated
(In thousands)
Revenues:
Affiliates $ —
$ 96,221
$ 6,148
$ —
$ 102,369
Third parties —
23,700
4,682
—
28,382
—
119,921
10,830
—
130,751
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) —
36,701
3,901
—
40,602
Depreciation and amortization

20,027
4,220
—
24,247
General and administrative 745
1,243
—
—
1,988
745
57,971
8,121
—
66,837
Operating income (loss) (745 ) 61,950
2,709
—
63,914

Other income (expense):
Equity in earnings of subsidiaries 65,431
2,063
—
(67,494 ) —
Equity in earnings of equity method investments —
1,783
—
—
1,783
Interest expense (18,996 ) (234 ) —
—
(19,230 )
Interest income —
551
—
—
551
Gain on sale of assets and other —
69
42
—
111
46,435
4,232
42
(67,494 ) (16,785 )
Income before income taxes 45,690
66,182
2,751
(67,494 ) 47,129
State income tax benefit —
30
—
—
30
Net income 45,690
66,212
2,751
(67,494 ) 47,159
Allocation of net income attributable to noncontrolling interests —
(781 ) (688 ) —
(1,469 )
Net income attributable to the partners $ 45,690
$ 65,431
$ 2,063
$ (67,494 ) $ 45,690

~~Condensed Consolidating Statement of Income~~

Three Months Ended June 30, 2018 Parent
Guarantor
Restricted Subsidiaries
Non-Guarantor Non-Restricted Subsidiaries Eliminations Consolidated
(In thousands)
Revenues:
Affiliates $ —
$ 89,522
$ 4,491
$ —
$ 94,013
Third parties —
19,540
5,207
—
24,747
—
109,062
9,698
—
118,760
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) —
31,494
3,039
—
34,533
Depreciation and amortization —
20,431
4,177
—
24,608
General and administrative 761
1,912
—
—
2,673
761
53,837
7,216
—
61,814
Operating income (loss) (761 ) 55,225
2,482
—
56,946

Other income (expense):
Equity in earnings of subsidiaries 58,566
1,881
—
(60,447 ) —
Equity in earnings of equity method investments —
1,734
—
—
1,734
Interest expense (17,662 ) 36
—
—
(17,626 )
Interest income —
526
—
—
526
Gain (loss) on sale of assets and other —
(79 ) 26
—
(53 )
40,904
4,098
26
(60,447 ) (15,419 )
Income before income taxes 40,143
59,323
2,508
(60,447 ) 41,527
State income tax expense —
(28 ) —
—
(28 )
Net income 40,143
59,295
2,508
(60,447 ) 41,499
Allocation of net income attributable to noncontrolling interests —
(729 ) (627 ) —
(1,356 )
Net income attributable to the partners $ 40,143
$ 58,566
$ 1,881
$ (60,447 ) $ 40,143



December 31, 2019	Parent		Guarantor Restricted Subsidiaries			Non-Guarantor Non-Restricted Subsidiaries		Eliminations			Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	4,790	$	(709	)	$	9,206	$	—		$	13,287
Accounts receivable	—		60,229			8,549		(331		)	68,447
Prepaid and other current assets	282		6,710			637		—			7,629
Total current assets	5,072		66,230			18,392		(331		)	89,363

Properties and equipment, net	—		1,133,534			333,565		—			1,467,099
Operating lease right-of-use assets	—		3,243			12		—			3,255
Net investment in leases	—		134,886			—		—			134,886
Investment in subsidiaries	1,844,812		275,279			—		(2,120,091		)	—
Intangible assets, net	—		101,322			—		—			101,322
Goodwill	—		270,336			—		—			270,336
Equity method investments	—		82,987			37,084		—			120,071
Other assets	6,722		6,178			—		—			12,900
Total assets	$	1,856,606	$	2,073,995		$	389,053	$	(2,120,422	)	$	2,199,232

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	—	$	29,895		$	4,991	$	(331	)	$	34,555
Accrued interest	13,206		—			—		—			13,206
Deferred revenue	—		9,740			650		—			10,390
Accrued property taxes	—		2,737			1,062		—			3,799
Current operating lease liabilities	—		1,114			12		—			1,126
Current finance lease liabilities	—		3,224			—		—			3,224
Other current liabilities	6		2,293			6		—			2,305
Total current liabilities	13,212		49,003			6,721		(331		)	68,605

Long-term debt	1,462,031		—			—		—			1,462,031
Noncurrent operating lease liabilities	—		2,482			—		—			2,482
Noncurrent finance lease liabilities	—		70,475			—		—			70,475
Other long-term liabilities	260		12,150			398		—			12,808
Deferred revenue	—		45,681			—		—			45,681
Class B unit	—		49,392			—		—			49,392
Equity - partners	381,103		1,844,812			275,279		(2,120,091		)	381,103
Equity - noncontrolling interest	—		—			106,655		—			106,655
Total liabilities and equity	$	1,856,606	$	2,073,995		$	389,053	$	(2,120,422	)	$	2,199,232

Condensed Consolidating Statement of Comprehensive Income


Six Months Ended June 30, 2019	Parent			Guarantor Restricted Subsidiaries			Non-Guarantor Non-restricted Subsidiaries			Eliminations			Consolidated
Three Months Ended June 30, 2020																Parent			Guarantor Restricted Subsidiaries			Non-Guarantor Non-restricted Subsidiaries			Eliminations			Consolidated
	(In thousands)															(In thousands)
Revenues:
Affiliates	$	—		$	193,614		$	12,114		$	—		$	205,728		$	—		$	89,417		$	6,146		$	—		$	95,563
Third parties	—			45,765			13,755			—			59,520			—			15,887			3,357			—			19,244
	—			239,379			25,869			—			265,248			—			105,304			9,503			—			114,807
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—			70,778			7,343			—			78,121			—			30,980			3,757			—			34,737
Depreciation and amortization				39,563			8,508			—			48,071			—			20,739			4,295			—			25,034
General and administrative	1,821			2,787			—			—			4,608			780			1,755			—			—			2,535
	1,821			113,128			15,851			—			130,800			780			53,474			8,052			—			62,306
Operating income (loss)	(1,821		)	126,251			10,018			—			134,448			(780		)	51,830			1,451			—			52,501

Other income (expense):
Equity in earnings (loss) of subsidiaries	136,730			7,559			—			(144,289		)	—
Equity in earnings of subsidiaries																89,893			1,510			—			(91,403		)	—
Equity in earnings of equity method investments	—			3,883			—			—			3,883			—			1,449			707			—			2,156
Interest expense	(38,037		)	(215		)	—			—			(38,252		)	(12,740		)	(1,039		)	—			—			(13,779		)
Interest income	—			1,079			—			—			1,079			26			2,787			—			—			2,813
Gain (loss) on sale of assets and other	—			(260		)	61			—			(199		)
Gain on sales-type lease																—			33,834			—			—			33,834
Gain on sale of assets and other																71			396			1			—			468
	98,693			12,046			61			(144,289		)	(33,489		)	77,250			38,937			708			(91,403		)	25,492
Income (loss) before income taxes	96,872			138,297			10,079			(144,289		)	100,959
Income before income taxes																76,470			90,767			2,159			(91,403		)	77,993
State income tax expense	—			(6		)	—			—			(6		)	—			(39		)	—			—			(39		)
Net income (loss)	96,872			138,291			10,079			(144,289		)	100,953
Net income																76,470			90,728			2,159			(91,403		)	77,954
Allocation of net income attributable to noncontrolling interests	—			(1,561		)	(2,520		)	—			(4,081		)	—			(835		)	(649		)	—			(1,484		)
Net income attributable to the partners	$	96,872		$	136,730		$	7,559		$	(144,289	)	$	96,872		$	76,470		$	89,893		$	1,510		$	(91,403	)	$	76,470

Condensed Consolidating Statement of Comprehensive Income



Three Months Ended June 30, 2019	Parent			Guarantor Restricted Subsidiaries			Non-Guarantor Non-Restricted Subsidiaries			Eliminations			Consolidated
	(In thousands)
Revenues:
Affiliates	$	—		$	96,221		$	6,148		$	—		$	102,369
Third parties	—			23,700			4,682			—			28,382
	—			119,921			10,830			—			130,751
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—			36,701			3,901			—			40,602
Depreciation and amortization				20,027			4,220			—			24,247
General and administrative	745			1,243			—			—			1,988
	745			57,971			8,121			—			66,837
Operating income (loss)	(745		)	61,950			2,709			—			63,914

Other income (expense):
Equity in earnings of subsidiaries	65,431			2,063			—			(67,494		)	—
Equity in earnings of equity method investments	—			1,783			—			—			1,783
Interest expense	(18,996		)	(234		)	—			—			(19,230		)
Interest income	—			551			—			—			551
Gain (loss) on sale of assets and other	—			69			42			—			111
	46,435			4,232			42			(67,494		)	(16,785		)
Income before income taxes	45,690			66,182			2,751			(67,494		)	47,129
State income tax benefit	—			30			—			—			30
Net income	45,690			66,212			2,751			(67,494		)	47,159
Allocation of net income attributable to noncontrolling interests	—			(781		)	(688		)	—			(1,469		)
Net income attributable to the partners	$	45,690		$	65,431		$	2,063		$	(67,494	)	$	45,690

Condensed Consolidating Statement of Comprehensive Income


Six Months Ended June 30, 2018	Parent			Guarantor Restricted Subsidiaries			Non-Guarantor Non-Restricted Subsidiaries			Eliminations			Consolidated
Six Months Ended June 30, 2020																Parent			Guarantor Restricted Subsidiaries			Non-Guarantor Non-restricted Subsidiaries				Eliminations				Consolidated
	(In thousands)															(In thousands)
Revenues:
Affiliates	$	—		$	183,813		$	11,628		$	—		$	195,441		$	—		$	184,172		$	12,819			$	—			$	196,991
Third parties	—			39,518			12,685			—			52,203			—			35,042			10,628				—				45,670
	—			223,331			24,313			—			247,644			—			219,214			23,447				—				242,661
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—			64,158			6,577			—			70,735			—			62,111			7,607				—				69,718
Depreciation and amortization	—			41,432			8,318			—			49,750			—			40,492			8,520				—				49,012
General and administrative	2,041			3,754			—			—			5,795			1,879			3,358			—				—				5,237
	2,041			109,344			14,895			—			126,280			1,879			105,961			16,127				—				123,967
Operating income (loss)	(2,041		)	113,987			9,418			—			121,364			(1,879		)	113,253			7,320				—			—	118,694

Other income (expense):
Equity in earnings (loss) of subsidiaries	123,618			7,093			—			(130,711		)	—
Equity in earnings of subsidiaries																158,428			5,805			—				(164,233		)		—
Equity in earnings of equity method investments	—			3,013			—			—			3,013			—			3,537			333			—	—				3,870
Interest expense	(35,311		)	104			—			—			(35,207		)	(29,470		)	(2,076		)	—				—				(31,546		)
Interest income	—			1,041			—			—			1,041			26			5,005			—				—				5,031
Gain (loss) on sale of assets and other	45			(51		)	39			—			33
Loss on early extinguishment of debt																(25,915		)	—			—				—				(25,915		)
Gain on sales-type lease																—			33,834			—				—				33,834
Gain on sale of assets and other																141			816			17			—	—				974
	88,352			11,200			39			(130,711		)	(31,120		)	103,210			46,921			350				(164,233		)		(13,752		)
Income (loss) before income taxes	86,311			125,187			9,457			(130,711		)	90,244
Income before income taxes																101,331			160,174			7,670				(164,233		)		104,942
State income tax expense	—			(110		)	—			—			(110		)	—			(76		)	—				—				(76		)
Net income (loss)	86,311			125,077			9,457			(130,711		)	90,134
Net income																101,331			160,098			7,670				(164,233		)		104,866
Allocation of net income attributable to noncontrolling interests	—			(1,459		)	(2,364		)	—			(3,823		)	—			(1,670		)	(1,865		)		—				(3,535		)
Net income attributable to the partners	$	86,311		$	123,618		$	7,093		$	(130,711	)	$	86,311		$	101,331		$	158,428		$	5,805			$	(164,233	)		$	101,331

Condensed Consolidating Statement of Comprehensive Income



Six Months Ended June 30, 2019	Parent			Guarantor Restricted Subsidiaries			Non-Guarantor Non-restricted Subsidiaries				Eliminations			Consolidated
	(In thousands)
Revenues:
Affiliates	$	—		$	193,614		$	12,114			$	—		$	205,728
Third parties	—			45,765			13,755				—			59,520
	—			239,379			25,869				—			265,248
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—			70,778			7,343				—			78,121
Depreciation and amortization				39,563			8,508				—			48,071
General and administrative	1,821			2,787			—				—			4,608
	1,821			113,128			15,851				—			130,800
Operating income (loss)	(1,821		)	126,251			10,018				—			134,448

Other income (expense):
Equity in earnings of subsidiaries	136,730			7,559			—				(144,289		)	—
Equity in earnings of equity method investments	—			3,883			—			—	—			3,883
Interest expense	(38,037		)	(215		)	—				—			(38,252		)
Interest income	—			1,079			—			—	—			1,079
Gain on sale of assets and other	—			(260		)	61				—			(199		)
	98,693			12,046			61				(144,289		)	(33,489		)
Income before income taxes	96,872			138,297			10,079				(144,289		)	100,959
State income tax expense	—			(6		)	—				—			(6		)
Net income	96,872			138,291			10,079				(144,289		)	100,953
Allocation of net income attributable to noncontrolling interests	—			(1,561		)	(2,520		)		—			(4,081		)
Net income attributable to the partners	$	96,872		$	136,730		$	7,559			$	(144,289	)	$	96,872

Condensed Consolidating Statement of Cash Flows


Six Months Ended June 30, 2019	Parent			Guarantor Restricted Subsidiaries			Non-Guarantor Non-Restricted Subsidiaries			Eliminations			Consolidated
Six Months Ended June 30, 2020																Parent			Guarantor Restricted Subsidiaries			Non-Guarantor Non-Restricted Subsidiaries			Eliminations			Consolidated
	(In thousands)															(In thousands)
Cash flows from operating activities	$	(37,005	)	$	165,882		$	23,671		$	(7,559	)	$	144,989		$	(31,103	)	$	151,331		$	20,277		$	(5,911	)	$	134,594

Cash flows from investing activities
Additions to properties and equipment	—			(17,274		)	(478		)	—			(17,752		)	—			(8,883		)	(21,857		)	—			(30,740		)
Distributions from UNEV in excess of earnings	—			8,191			—			(8,191		)	—
Investment in Cushing Connect																—			(13,263		)	(2,400		)	13,263			(2,400		)
Proceeds from sale of assets	—			194			—			—			194			—			816			—			—			816
Distributions in excess of equity in earnings of equity investments	—			299			—			—			299			—			6,559			—			(6,089		)	470
	—			(8,590		)	(478		)	(8,191		)	(17,259		)	—			(14,771		)	(24,257		)	7,174			(31,854		)

Cash flows from financing activities
Net borrowings under credit agreement	18,500			—			—			—			18,500			29,500			—			—			—			29,500
Net intercompany financing activities	155,225			(155,225		)	—			—			—			134,645			(134,645		)	—			—			—
Redemption of senior notes																(522,500		)	—			—			—			(522,500		)
Proceeds from issuance of senior notes																500,000			—			—			—			500,000
Contribution from general partner																435			—			13,263			(13,263		)	435
Contribution from noncontrolling interest																—			—			13,263			—			13,263
Distributions to HEP unitholders	(136,207		)	—			—			—			(136,207		)	(102,979		)	—			—			—			(102,979		)
Distributions to noncontrolling interests	—			—			(21,000		)	15,750			(5,250		)	—			—			(16,000		)	12,000			(4,000		)
Units withheld for tax withholding obligations	(119		)	—			—			—			(119		)	(147		)	—			—			—			(147		)
Purchase units for incentive grants	(255		)	—			—			—			(255		)
Deferred financing costs																(8,714		)	—			—			—			(8,714		)
Payments on finance leases	(139		)	(364		)	—			—			(503		)	—			(1,972		)	—			—			(1,972		)
	37,005			(155,589		)	(21,000		)	15,750			(123,834		)	30,240			(136,617		)	10,526			(1,263		)	(97,114		)

Cash and cash equivalents
Increase (decrease) for the period	—			1,703			2,193			—			3,896			(863		)	(57		)	6,546			—			5,626
Beginning of period	2			—			3,043			—			3,045			4,790			(709		)	9,206			—			13,287
End of period	$	2		$	1,703		$	5,236		$	—		$	6,941		$	3,927		$	(766	)	$	15,752		$	—		$	18,913

Condensed Consolidating Statement of Cash Flows


Six Months Ended June 30, 2018	Parent			Guarantor Restricted Subsidiaries			Non-Guarantor Non-Restricted Subsidiaries			Eliminations			Consolidated
Six Months Ended June 30, 2019																Parent			Guarantor Restricted Subsidiaries			Non-Guarantor Non-Restricted Subsidiaries			Eliminations			Consolidated
	(In thousands)															(In thousands)
Cash flows from operating activities	$	(33,588	)	$	182,983		$	18,661		$	(7,093	)	$	160,963		$	(37,005	)	$	165,882		$	23,671		$	(7,559	)	$	144,989

Cash flows from investing activities
Additions to properties and equipment	—			(18,829		)	(5,910		)	—			(24,739		)	—			(17,274		)	(478		)	—			(17,752		)
Business and asset acquisitions	—			(6,831		)	—			—			(6,831		)
Distributions from UNEV in excess of earnings																—			8,191			—			(8,191		)	—
Proceeds from sale of assets	—			196			—			—			196			—			194			—			—			194
Distributions from UNEV in excess of earnings	—			3,407			—			(3,407		)	—
Distributions in excess of equity in earnings of equity investments	—			299			—			—			299			—			299			—			—			299
	—			(21,758		)	(5,910		)	(3,407		)	(31,075		)	—			(8,590		)	(478		)	(8,191		)	(17,259		)

Cash flows from financing activities
Net repayments under credit agreement	(112,000		)	—			—			—			(112,000		)
Net borrowings under credit agreement																18,500			—			—			—			18,500
Net intercompany financing activities	160,330			(160,330		)	—			—			—			155,225			(155,225		)	—			—			—
Proceeds from issuance of common units	114,899			(68		)	—			—			114,831
Distributions to HEP unitholders	(130,075		)	—			—			—			(130,075		)	(136,207		)	—			—			—			(136,207		)
Distributions to noncontrolling interests	—			—			(14,000		)	10,500			(3,500		)	—			—			(21,000		)	15,750			(5,250		)
Contributions from general partner	492			—			—			—			492
Units withheld for tax withholding obligations	(58		)	—			—			—			(58		)	(119		)	—			—			—			(119		)
Other	—			(698		)	—			—			(698		)
Purchase units for incentive grants																(255		)				—			—			(255		)
Payments on finance leases																(139		)	(364		)	—			—			(503		)
	33,588			(161,096		)	(14,000		)	10,500			(131,008		)	37,005			(155,589		)	(21,000		)	15,750			(123,834		)

Cash and cash equivalents
Increase (decrease) for the period	—			129			(1,249		)	—			(1,120		)
Increase for the period																—			1,703			2,193			—			3,896
Beginning of period	2			511			7,263			—			7,776			2			—			3,043			—			3,045
End of period	$	2		$	640		$	6,014		$	—		$	6,656		$	2		$	1,703		$	5,236		$	—		$	6,941

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Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 to Holly Energy Partners, L.P. (“HEP”) and its consolidated subsidiaries or to HEP or an individual subsidiary and not to any other person.

OVERVIEW

HEP is a Delaware limited partnership. WeThrough our subsidiaries and joint ventures, we own ~~and~~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 HollyFrontier Corporation (“HFC”) and other refineries in the Mid-Continent, Southwest and Northwest regions of the United ~~States and Delek US Holdings, Inc.’s (“Delek”) refinery in Big Spring, Texas.~~States. HEP, through its subsidiaries and joint ventures, owns and/or operates petroleum product and crude pipelines, tankage and terminals in Texas, New Mexico, Washington, Idaho, Oklahoma, Utah, Nevada, Wyoming and Kansas as well as refinery processing units in Utah and Kansas. HFC owned 57% of our outstanding common units and the non-economic general partnership interest, as of June 30, ~~2019.~~2020.

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 growth of 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.

Impact of COVID-19 on Our Business

Our business depends in large part on the demand for the various petroleum products we transport, terminal and store in the markets we serve. The impact of the COVID-19 pandemic on the global macroeconomy has created unprecedented destruction of demand, as well as lack of forward visibility, for refined products and crude oil transportation, and for the terminalling and storage services that we provide. Over the course of the second quarter, demand for transportation fuels stabilized, and we saw incremental improvement in our volumes late in the quarter. We expect our customers will continue to adjust refinery production levels commensurate with market demand and ultimately expect demand to return to pre-COVID-19 levels. HFC, our largest customer, has announced that for the third quarter of 2020 it expects to run between 340,000 and 370,000 barrels per day of crude oil based on expected market demand for transportation fuels.

In response to the COVID-19 pandemic, and with the health and safety of our employees as a top priority, we took several actions, including limiting onsite staff at all of our facilities to essential operational personnel only, implementing a work from home policy for certain employees and restricting travel unless approved by senior leadership. We will continue to monitor COVID-19 developments and the dynamic environment to properly address these policies going forward.

In light of current circumstances and our expectations for the future, HEP reduced its quarterly distribution to $0.35 per unit beginning with the distribution for the first quarter of 2020, representative of a new distribution strategy focused on funding all capital expenditures and distributions within cash flow, improving distributable cash flow coverage to 1.3x or greater and reducing leverage to 3.0-3.5x.

On March 27, 2020, the United States government passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), an approximately $2 trillion stimulus package that includes various provisions intended to provide relief to individuals and businesses in the form of tax changes, loans and grants, among others. At this time, we have not sought relief in the form of loans or grants from the CARES Act; however, we have benefited from certain tax deferrals in the CARES Act and may benefit from other tax provisions if we meet the requirements to do so.

The extent to which HEP’s future results are affected by COVID-19 will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic, additional actions by businesses and governments in response to the pandemic and the speed and effectiveness of responses to combat the virus. However, we have long-term customer contracts with minimum volume commitments, which have expiration dates from 2021 to 2036. These minimum volume commitments accounted for approximately 70% of our total revenues in 2019. We are currently not aware of any reasons that would prevent such customers

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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. There have been no material changes to customer payment terms due to the COVID-19 pandemic.

The COVID-19 pandemic, and the volatile regional and global economic conditions stemming from it, could also exacerbate the risk factors identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. The COVID-19 pandemic may also materially adversely affect our results in a manner that is either not currently known or that we do not currently consider to be a significant risk to our business.

Investment in Joint Venture

On October 2, 2019, HEP Cushing (“HEP Cushing”), a wholly-owned subsidiary of HEP, and Plains Marketing, L.P. (“PMLP”), a wholly-owned subsidiary of Plains All American Pipeline, L.P. (“Plains”), formed a 50/50 joint venture, Cushing Connect Pipeline & Terminal LLC (the “Cushing Connect Joint Venture”), for (i) the development and construction of a new 160,000 barrel per day common carrier crude oil pipeline (the “Cushing Connect Pipeline”) that will connect the Cushing, Oklahoma crude oil hub to the Tulsa, Oklahoma refining complex owned by a subsidiary of HFC and (ii) the ownership and operation of 1.5 million barrels of crude oil storage in Cushing, Oklahoma (the “Cushing Connect JV Terminal”). The Cushing Connect JV Terminal went into service during the second quarter of 2020, and the Cushing Connect Pipeline is expected to be in service during the first quarter of 2021. Long-term commercial agreements have been entered into to support the Cushing Connect Joint Venture assets.

The Cushing Connect Joint Venture will contract with an affiliate of HEP to manage the construction and operation of the Cushing Connect Pipeline and with an affiliate of Plains to manage the operation of the Cushing Connect JV Terminal. The total Cushing Connect Joint Venture investment will be shared proportionately among the partners, and HEP estimates its share of the cost of the Cushing Connect JV Terminal contributed by Plains and Cushing Connect Pipeline construction costs will be approximately $65 million.

Agreements with HFC ~~and Delek~~

We serve HFC’s refineries under long-term pipeline, terminal, tankage and refinery processing unit throughput agreements expiring from ~~2020~~2021 to 2036. Under these agreements, HFC agrees to transport, store and process throughput volumes of refined product, crude oil and feedstocks on our pipelines, terminal, tankage, and 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 Producer Price Index (“PPI”) or Federal Energy Regulatory Commission index. As of July 1, ~~2019,~~2020, these agreements with HFC require minimum annualized payments to us of ~~$349~~$351.1 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 the agreements, a shortfall payment may be applied as a credit in the following four quarters after minimum obligations are met.

We have a pipelines and terminals agreement with Delek expiring in 2020 under which Delek has agreed to transport on our pipelines and throughput through our terminals volumes of refined products that result in a minimum level of annual revenue that is also subject to annual tariff rate adjustments. We also have a capacity lease agreement under which we lease Delek space on our Orla to El Paso pipeline for the shipment of refined product. The terms for a portion of the capacity under this lease agreement expired in 2018 and were not renewed, and the remaining portions of the capacity expire in 2020 and 2022. As of June 30, 2019, these agreements with Delek require minimum annualized payments to us of $32 million.

A significant reduction in revenues under these agreements could have a material adverse effect on our results of operations.

On June 1, 2020, HFC announced plans to permanently cease petroleum refining operations at its Cheyenne Refinery and to convert certain assets at that refinery to renewable diesel production. HFC subsequently began winding down petroleum refining operations at its Cheyenne Refinery on August 3, 2020. As of June 30, 2020, our throughput agreement with HFC required minimum annualized payments to us of approximately $17.6 million related to our Cheyenne assets. During the third quarter of 2020, we expect to begin negotiations with HFC related to potential changes to our existing throughput agreement. The net book value of our Cheyenne related net assets as of June 30, 2020 was approximately $88.5 million, including $28.1 million of long-lived assets and $68.7 million of goodwill. Additionally, our annual goodwill impairment test is scheduled for the third quarter of 2020. Depending upon the outcome of negotiations related to our throughput agreement or other changes in anticipated commercial uses of our Cheyenne assets, such assets could be at risk of impairment in the future and such impairment charges could be material.

Under certain provisions of an omnibus agreement we have with HFC (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 Holly Logistic Services, L.L.C. (“HLS”), or the cost of their employee benefits, which are separately charged to us by HFC. We also reimburse HFC and its affiliates for direct expenses they incur on our behalf.

Under HLS’s Secondment Agreement with HFC, 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 of these employees for our benefit.

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We have a long-term strategic relationship with ~~HFC.~~HFC that has historically facilitated our growth. Our ~~current~~future growth ~~plan is~~plans include organic projects around our existing assets and select investments or acquisitions that enhance our service platform while creating accretion for our unitholders. While in the near term, any acquisitions would be subject to ~~continue~~economic conditions discussed in “Overview - Impact of COVID-19 on Our Business” above, we also expect over the longer term to ~~pursue purchases of logistic and other assets at HFC’s existing refining locations in New Mexico, Utah, Oklahoma, Kansas and Wyoming. We also expect~~continue to work with HFC on logistic asset acquisitions in conjunction with HFC’s refinery acquisition strategies.

Furthermore, we plan to continue to pursue third-party logistic asset acquisitions that are accretive to our unitholders and increase the diversity of our revenues.

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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 and the six months ended June 30, ~~2019~~2020 and ~~2018.~~2019.


	Three Months Ended June 30,						Change from			Three Months Ended June 30,						Change from
	2019			2018			2018			2020			2019			2019
	(In thousands, except per unit data)									(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates—refined product pipelines	$	20,759		$	18,744		$	2,015		$	16,302		$	20,759		$	(4,457	)
Affiliates—intermediate pipelines	7,297			7,255			42			7,475			7,297			178
Affiliates—crude pipelines	20,651			18,479			2,172			19,311			20,651			(1,340		)
	48,707			44,478			4,229			43,088			48,707			(5,619		)
Third parties—refined product pipelines	11,778			12,348			(570		)	8,750			11,778			(3,028		)
Third parties—crude pipelines	11,778			8,713			3,065			7,116			11,778			(4,662		)
	72,263			65,539			6,724			58,954			72,263			(13,309		)
Terminals, tanks and loading racks:
Affiliates	34,263			30,700			3,563			32,902			34,263			(1,361		)
Third parties	4,826			3,686			1,140			3,378			4,826			(1,448		)
	39,089			34,386			4,703			36,280			39,089			(2,809		)

Affiliates—refinery processing units	19,399			18,835			564			19,573			19,399			174

Total revenues	130,751			118,760			11,991			114,807			130,751			(15,944		)
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	40,602			34,533			6,069			34,737			40,602			(5,865		)
Depreciation and amortization	24,247			24,608			(361		)	25,034			24,247			787
General and administrative	1,988			2,673			(685		)	2,535			1,988			547
	66,837			61,814			5,023			62,306			66,837			(4,531		)
Operating income	63,914			56,946			6,968			52,501			63,914			(11,413		)
Other income (expense):
Equity in earnings of equity method investments	1,783			1,734			49			2,156			1,783			373
Interest expense, including amortization	(19,230		)	(17,626		)	(1,604		)	(13,779		)	(19,230		)	5,451
Interest income	551			526			25			2,813			551			2,262
Gain (loss) on sale of assets and other	111			(53		)	164
Gain on sales-type leases										33,834			—			33,834
Gain on sale of assets and other										468			111			357
	(16,785		)	(15,419		)	(1,366		)	25,492			(16,785		)	42,277
Income before income taxes	47,129			41,527			5,602			77,993			47,129			30,864
State income tax benefit (expense)	30			(28		)	58			(39		)	30			(69		)
Net income	47,159			41,499			5,660			77,954			47,159			30,795
Allocation of net income attributable to noncontrolling interests	(1,469		)	(1,356		)	(113		)	(1,484		)	(1,469		)	(15		)
Net income attributable to the partners	45,690			40,143			5,547			76,470			45,690			30,780
Limited partners’ earnings per unit—basic and diluted ⁽¹⁾	$	0.43		$	0.38		$	0.05
Limited partners’ earnings per unit—basic and diluted										$	0.73		$	0.43		$	0.30
Weighted average limited partners’ units outstanding	105,440			105,429			11			105,440			105,440			—
EBITDA ⁽²⁾	$	88,586		$	81,879		$	6,707
Distributable cash flow ⁽³⁾	$	67,486		$	65,180		$	2,306
EBITDA ⁽¹⁾										$	112,509		$	88,586		$	23,923
Adjusted EBITDA ⁽¹⁾										$	80,168		$	88,586		$	(8,418	)
Distributable cash flow ⁽²⁾										$	65,456		$	67,486		$	(2,030	)

Volumes (bpd)
Pipelines:
Affiliates—refined product pipelines	130,802			112,371			18,431			100,524			130,802			(30,278		)
Affiliates—intermediate pipelines	141,345			151,537			(10,192		)	128,464			141,345			(12,881		)
Affiliates—crude pipelines	370,351			322,850			47,501			252,570			370,351			(117,781		)
	642,498			586,758			55,740			481,558			642,498			(160,940		)
Third parties—refined product pipelines	66,963			73,196			(6,233		)	57,876			66,963			(9,087		)
Third parties—crude pipelines	140,555			115,011			25,544			85,851			140,555			(54,704		)
	850,016			774,965			75,051			625,285			850,016			(224,731		)
Terminals and loading racks:
Affiliates	431,509			446,089			(14,580		)	372,093			431,509			(59,416		)
Third parties	59,343			59,035			308			45,876			59,343			(13,467		)
	490,852			505,124			(14,272		)	417,969			490,852			(72,883		)

Affiliates—refinery processing units	77,728			71,117			6,611			49,891			77,728			(27,837		)

Total for pipelines and terminal and refinery processing unit assets (bpd)	1,418,596			1,351,206			67,390			1,093,145			1,418,596			(325,451		)

Table of Contentsril 19,


	Six Months Ended June 30,						Change from			Six Months Ended June 30,						Change from
	2019			2018			2018			2020			2019			2019
	(In thousands, except per unit data)									(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates—refined product pipelines	$	41,491		$	40,038		$	1,453		$	36,385		$	41,491		$	(5,106	)
Affiliates—intermediate pipelines	14,578			15,724			(1,146		)	14,949			14,578			371
Affiliates—crude pipelines	41,772			38,276			3,496			39,704			41,772			(2,068		)
	97,841			94,038			3,803			91,038			97,841			(6,803		)
Third parties—refined product pipelines	27,382			25,930			1,452			23,548			27,382			(3,834		)
Third parties—crude pipelines	22,140			17,740			4,400			14,840			22,140			(7,300		)
	147,363			137,708			9,655			129,426			147,363			(17,937		)
Terminals, tanks and loading racks:
Affiliates	66,669			64,034			2,635			66,496			66,669			(173		)
Third parties	9,998			8,533			1,465			7,282			9,998			(2,716		)
	76,667			72,567			4,100			73,778			76,667			(2,889		)

Affiliates—refinery processing units	41,218			37,369			3,849			39,457			41,218			(1,761		)

Total revenues	265,248			247,644			17,604			242,661			265,248			(22,587		)
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	78,121			70,735			7,386			69,718			78,121			(8,403		)
Depreciation and amortization	48,071			49,750			(1,679		)	49,012			48,071			941
General and administrative	4,608			5,795			(1,187		)	5,237			4,608			629
	130,800			126,280			4,520			123,967			130,800			(6,833		)
Operating income	134,448			121,364			13,084			118,694			134,448			(15,754		)
Other income (expense):
Equity in earnings of equity method investments	3,883			3,013			870			3,870			3,883			(13		)
Interest expense, including amortization	(38,252		)	(35,207		)	(3,045		)	(31,546		)	(38,252		)	6,706
Interest income	1,079			1,041			38			5,031			1,079			3,952
Loss on early extinguishment of debt										(25,915		)	—			(25,915		)
Gain on sales-type leases										33,834			—			33,834
Gain (loss) on sale of assets and other	(199		)	33			(232		)	974			(199		)	1,173
	(33,489		)	(31,120		)	(2,369		)	(13,752		)	(33,489		)	19,737
Income before income taxes	100,959			90,244			10,715			104,942			100,959			3,983
State income tax expense	(6		)	(110		)	104			(76		)	(6		)	(70		)
Net income	100,953			90,134			10,819			104,866			100,953			3,913
Allocation of net income attributable to noncontrolling interests	(4,081		)	(3,823		)	(258		)	(3,535		)	(4,081		)	546
Net income attributable to the partners	96,872			86,311			10,561			101,331			96,872			4,459
Limited partners’ earnings per unit—basic and diluted	$	0.92		$	0.82		$	0.10		$	0.96		$	0.92		$	0.04
Weighted average limited partners’ units outstanding	105,440			104,637			803			105,440			105,440			—
EBITDA ⁽¹⁾	$	182,122		$	170,337		$	11,785		$	176,934		$	182,122		$	(5,188	)
Adjusted EBITDA ⁽¹⁾										$	171,276		$	182,122		$	(10,846	)
Distributable cash flow ⁽²⁾	$	138,085		$	134,279		$	3,806		$	136,164		$	138,085		$	(1,921	)

Volumes (bpd)
Pipelines:
Affiliates—refined product pipelines	130,805			128,498			2,307			115,245			130,805			(15,560		)
Affiliates—intermediate pipelines	136,116			139,333			(3,217		)	135,288			136,116			(828		)
Affiliates—crude pipelines	385,490			341,922			43,568			278,801			385,490			(106,689		)
	652,411			609,753			42,658			529,334			652,411			(123,077		)
Third parties—refined product pipelines	73,975			72,720			1,255			53,756			73,975			(20,219		)
Third parties—crude pipelines	133,565			120,568			12,997			89,027			133,565			(44,538		)
	859,951			803,041			56,910			672,117			859,951			(187,834		)
Terminals and loading racks:
Affiliates	402,909			418,439			(15,530		)	400,911			402,909			(1,998		)
Third parties	64,028			60,684			3,344			45,910			64,028			(18,118		)
	466,937			479,123			(12,186		)	446,821			466,937			(20,116		)

Affiliates—refinery processing units	71,816			69,008			2,808			59,843			71,816			(11,973		)

Total for pipelines and terminal and refinery processing unit assets (bpd)	1,398,704			1,351,172			47,532			1,178,781			1,398,704			(219,923		)

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(1)

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is calculated as net income attributable to the partners plus (i) interest expense, net of interest income, (ii) state income tax expense and (iii) depreciation and amortization. Adjusted EBITDA is calculated as EBITDA plus (i) loss on early extinguishment of debt and (ii) pipeline tariffs not included in revenues due to impacts from lease accounting for certain pipeline tariffs minus (iii) gain on sales-type leases and (iv) pipeline lease payments not included in operating costs and expenses. Portions of our minimum guaranteed pipeline tariffs for assets subject to sales-type lease accounting are recorded as interest income with the remaining amounts recorded as a ~~calculation~~reduction in net investment in leases. These pipeline tariffs were previously recorded as revenues prior to the renewal of the throughput agreements, which triggered sales-type lease accounting. 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 recoded as interest expense and reductions in the lease liability. EBITDA and Adjusted EBITDA are not calculations based upon generally accepted accounting principles ~~(“GAAP”~~("GAAP"). However, the amounts included in the EBITDA ~~calculation~~and Adjusted EBITDA calculations are derived from amounts included in our consolidated financial statements. EBITDA and Adjusted EBITDA should not be considered as ~~an alternative~~alternatives to net income attributable to ~~the partners~~Holly Energy Partners or operating income, as ~~an indication~~indications of our operating performance or as ~~an alternative~~alternatives to operating cash flow as a measure of liquidity. EBITDA isand Adjusted EBITDA are not necessarily comparable to similarly titled measures of other companies. EBITDA isand Adjusted EBITDA are presented here because ~~it is a~~they are widely used financial ~~indicator~~indicators used by investors and analysts to measure performance. EBITDA isand Adjusted EBITDA are also used by our management for internal analysis and as a basis for compliance with financial covenants. Set forth below isare our ~~calculation~~calculations of EBITDA and Adjusted EBITDA.


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
	(In thousands)												(In thousands)
Net income attributable to the partners	$	45,690		$	40,143		$	96,872		$	86,311		$	76,470		$	45,690		$	101,331		$	96,872
Add (subtract):
Interest expense	18,461			16,867			36,717			33,691			13,779			19,230			31,546			38,252
Interest income	(551		)	(526		)	(1,079		)	(1,041		)	(2,813		)	(551		)	(5,031		)	(1,079		)
Amortization of discount and deferred debt issuance costs	769			759			1,535			1,516
State income tax (benefit) expense	(30		)	28			6			110			39			(30		)	76			6
Depreciation and amortization	24,247			24,608			48,071			49,750			25,034			24,247			49,012			48,071
EBITDA	$	88,586		$	81,879		$	182,122		$	170,337		$	112,509		$	88,586		$	176,934		$	182,122
Loss on early extinguishment of debt													—			—			25,915			—
Gain on sales-type leases													(33,834		)	—			(33,834		)	—
Pipeline tariffs not included in revenues													3,099			—			5,474			—
Lease payments not included in operating costs													(1,606		)	—			(3,213		)	—
Adjusted EBITDA													$	80,168		$	88,586		$	171,276		$	182,122

(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 exceptions 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.

Three Months Ended
June 30, Six Months Ended
June 30,
2019 2018 2019 2018
(In thousands)
Net income attributable to the partners $ 45,690
$ 40,143
$ 96,872
$ 86,311
Add (subtract):
Depreciation and amortization 24,247
24,608
48,071
49,750
Amortization of discount and deferred debt issuance costs 769
759
1,535
1,516
Revenue recognized (greater) less than customer billings (297 ) 1,819
(3,331 ) 138
Maintenance capital expenditures⁽³⁾
(625 ) (987 ) (1,360 ) (1,305 )
Decrease in environmental liability (277 ) (78 ) (555 ) (218 )
Decrease in reimbursable deferred revenue (2,061 ) (1,243 ) (3,640 ) (2,420 )
Other non-cash adjustments 40
159
493
507
Distributable cash flow $ 67,486
$ 65,180
$ 138,085
$ 134,279

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	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(In thousands)
Net income attributable to the partners	$	76,470		$	45,690		$	101,331		$	96,872
Add (subtract):
Depreciation and amortization	25,034			24,247			49,012			48,071
Amortization of discount and deferred debt issuance costs	842			769			1,641			1,535
Loss on early extinguishment of debt	—			—			25,915			—
Revenue recognized greater than customer billings	(44		)	(297		)	(501		)	(3,331		)
Maintenance capital expenditures⁽³⁾	(1,140		)	(625		)	(3,627		)	(1,360		)
Increase (decrease) in environmental liability	157			(277		)	158			(555		)
Decrease in reimbursable deferred revenue	(3,005		)	(2,061		)	(5,805		)	(3,640		)
Gain on sales-type leases	(33,834		)	—			(33,834		)	—
Other	976			40			1,874			493
Distributable cash flow	$	65,456		$	67,486		$	136,164		$	138,085


(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.


	June 30, 2019		December 31, 2018		June 30, 2020		December 31, 2019
	(In thousands)				(In thousands)
Balance Sheet Data
Cash and cash equivalents	$	6,941	$	3,045	$	18,913	$	13,287
Working capital	$	18,155	$	8,577	$	34,977	$	20,758
Total assets	$	2,147,843	$	2,102,540	$	2,221,783	$	2,199,232
Long-term debt	$	1,437,710	$	1,418,900	$	1,486,648	$	1,462,031
Partners’ equity ⁽⁴⁾	$	390,022	$	427,435	$	380,723	$	381,103

~~(4)~~

As a master limited partnership, we distribute our available cash, which historically has exceeded our net income attributable to the partners because depreciation and amortization expense represents a non-cash charge against income. The result is a decline in partners’ equity since our regular quarterly distributions have exceeded our quarterly net income attributable to the partners. Additionally, if the assets contributed and acquired from HFC while we were a consolidated variable interest entity of HFC had been acquired from third parties, our acquisition cost in excess of HFC’s basis in the transferred assets would have been recorded in our financial statements as increases to our properties and equipment and intangible assets at the time of acquisition instead of decreases to partners’ equity.

Results of Operations—Three Months Ended June 30, ~~2019~~2020 Compared with Three Months Ended June 30, ~~2018~~2019

Summary

Net income attributable to the partners for the second quarter was ~~$45.7~~$76.5 million ($~~0.43~~0.73 per basic and diluted limited partner unit) compared to ~~$40.1~~$45.7 million ($~~0.38~~0.43 per basic and diluted limited partner unit) for the second quarter of ~~2018.~~2019. The increase in earnings was primarily due to the recognition of a non-cash gain on sales-type leases resulting from the renewal of a third-party throughput agreement during the second quarter of 2020. A portion of the new throughput agreement met the definition of a sales-type lease, which resulted in a non-cash gain of $33.8 million million upon the initial recognition of the sales-type lease during the second quarter. Excluding this gain, net income attributable to HEP for the ~~partners~~quarter was $42.6 million ($0.40 per basic and diluted limited partner unit), a decrease of $3.1 million compared to the same period of 2019. The decrease in earnings was mainly due to ~~higher crude oil pipeline~~lower volumes ~~around~~due to demand destruction caused by the ~~Permian Basin and our crude pipeline systems in Wyoming and Utah as well as contractual tariff escalators. These gains were partially~~COVID-19 pandemic substantially offset by ~~higher~~lower operating ~~costs~~expenses and lower interest expense.

Revenues

Revenues for the second quarter were ~~$130.8~~$114.8 million, ~~an increase~~a decrease of ~~$12.0~~$15.9 million compared to the second quarter of ~~2018.~~2019. The ~~increase~~decrease was mainly attributable to ~~higher~~a 26% reduction in overall crude ~~oil~~and product pipeline volumes ~~around the Permian Basin~~predominantly in our Southwest and ~~our crude pipeline systems in Wyoming and Utah, which contributed to an increase in overall pipeline volumes of 10%, and contractual tariff escalators.~~Rockies regions.

Revenues from our refined product pipelines were ~~$32.5~~$25.1 million, ~~an increase~~a decrease of ~~$1.4~~$7.5 million compared to the second quarter of ~~2018, on shipments averaging 197.8~~2019. Shipments averaged 158.4 thousand barrels per day (“mbpd”) compared to ~~185.6~~197.8 mbpd for the second quarter of ~~2018.~~2019. The volume ~~increase was~~and revenue decreases were mainly due to lower volumes on pipelines servicing HFC's ~~Woods Cross~~Navajo refinery, ~~which had lower~~Delek's Big

Table of Contentsril 19,

Spring refinery and our UNEV pipeline as well as the recording of certain pipeline tariffs as interest income as the related throughput ~~during the second quarter of 2018 due~~contract renewals were determined to ~~operational issues at the refinery. The increase in revenues was mainly due to the higher throughput and contractual tariff escalators.~~be sales-type leases.

Revenues from our intermediate pipelines were ~~$7.3~~$7.5 million, ~~for both~~an increase of $0.2 million compared to the second ~~quarters~~quarter of ~~2019 and 2018, on shipments averaging~~2019. Shipments averaged 128.5 mbpd for the second quarter of 2020 compared to 141.3 mbpd for the second quarter of ~~2019 compared to 151.5 mbpd for the second quarter of 2018.~~2019. The decrease in volumes was mainly due to lower throughputs on our intermediate pipelines servicing HFC's ~~Tulsa~~Navajo refinery ~~due to flooding during the quarter. Revenue~~while revenue remained relatively constant mainly due to contractual minimum volume guarantees.

Revenues from our crude pipelines were ~~$32.4~~$26.4 million, ~~an increase~~a decrease of ~~$5.2~~$6.0 million compared to the second quarter of ~~2018, on~~2019, and shipments ~~averaging 510.9~~averaged 338.4 mbpd compared to ~~437.9~~510.9 mbpd for the second quarter of ~~2018.~~2019. The ~~increases~~decreases were mainly attributable to ~~increased~~decreased volumes on our crude pipeline systems in New Mexico and Texas and on our crude pipeline systems in Wyoming and ~~Utah as well as contractual tariff escalators.~~Utah.

Revenues from terminal, tankage and loading rack fees were ~~$39.1~~$36.3 million, ~~an increase~~a decrease of ~~$4.7~~$2.8 million compared to the second quarter of ~~2018.~~2019. Refined products and crude oil terminalled in the facilities averaged ~~490.9~~418.0 mbpd compared to ~~505.1~~490.9 mbpd for the second quarter of ~~2018.~~2019. The volume ~~decrease was~~and revenue decreases were mainly due to ~~lower~~demand destruction associated with COVID-19 across most of our facilities. Revenue did not decrease in proportion to the decrease in volumes ~~at HFC's Tulsa refinery, partially offset by volumes at our new Orla diesel rack and higher volumes at HFC's El Dorado refinery, the Spokane terminal, and the Woods Cross~~

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~~rack. The increase in revenue was~~ mainly due to ~~the higher volumes at HFC's El Dorado refinery and revenues from our Orla diesel rack, which began operations in the first quarter of 2019.~~contractual minimum volume guarantees.

Revenues from refinery processing units were ~~$19.4~~$19.6 million, an increase of ~~$0.6~~$0.2 million compared to the second quarter of ~~2018, on~~2019, and throughputs ~~averaging 77.7~~averaged 49.9 mbpd compared to ~~71.1~~77.7 mbpd for the second quarter of ~~2018.~~2019. The ~~increase~~decrease in ~~revenue~~volumes was mainly due to reduced throughput for both our Woods Cross and El Dorado processing units while revenue remained relatively constant mainly due to contractual ~~rate increases.~~minimum volume guarantees.

Operations Expense

Operations (exclusive of depreciation and amortization) expense was ~~$40.6~~$34.7 million for the three months ended June 30, ~~2019, an increase~~2020, a decrease of ~~$6.1~~$5.9 million compared to the second quarter of ~~2018.~~2019. The ~~increase~~decrease was mainly due to ~~higher employee compensation~~lower rental expenses, maintenance costs and ~~property taxes~~variable costs such as electricity and chemicals associated with lower volumes for the three months ended June 30, ~~2019.~~2020.

Depreciation and Amortization

Depreciation and amortization for the three months ended June 30, ~~2019, decreased~~2020 increased by ~~$0.4~~$0.8 million compared to the three months ended June 30, ~~2018.~~2019. The increase was mainly due to the acceleration of depreciation on certain of our Cheyenne tanks.

General and Administrative

General and administrative costs for the three months ended June 30, ~~2019, decreased~~2020 increased by ~~$0.7~~$0.5 million compared to the three months ended June 30, ~~2018,~~2019, mainly due to ~~lower employee compensation and~~higher legal ~~costs~~expenses for the three months ended June 30, ~~2019.~~2020.

Equity in Earnings of Equity Method Investments


	Three Months Ended June 30,				Three Months Ended June 30,
Equity Method Investment	2019		2018		2020		2019
	(in thousands)				(in thousands)
Osage Pipe Line Company, LLC	$	746	$	959	$	366	$	746
Cheyenne Pipeline LLC	1,037		775		1,085		1,037
Cushing Terminal					705		—
Total	$	1,783	$	1,734	$	2,156	$	1,783

Equity in earnings of ~~Cheyenne Pipeline~~Osage Pipe Line Company, LLC ~~increased~~decreased for the three months ended June 30, ~~2019,~~2020, mainly due to ~~higher crude~~lower throughput volumes.

Interest Expense

Interest expense for the three months ended June 30, ~~2019,~~2020, totaled ~~$19.2~~$13.8 million, ~~an increase~~a decrease of ~~$1.6~~$5.5 million compared to the three months ended June 30, ~~2018.~~2019. The ~~increase~~decrease was ~~primarily~~mainly due to ~~interest expense associated with higher average balances outstanding under the Credit Agreement (as defined below) and~~ market interest rate ~~increases~~decreases under ~~that facility.~~our senior secured revolving credit facility and refinancing our $500 million 6% Senior Notes with $500 million 5% Senior Notes. Our aggregate effective interest rates were ~~5.3%~~3.4% and ~~5.0%~~5.3% for the three months ended June 30, 2020 and 2019, ~~and 2018,~~ respectively.

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State Income Tax

We recorded a state income tax expense of $39,000 and a state income tax benefit of ~~$30,000~~ ~~and expense of $28,000~~$30,000 for the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. All tax expense is solely attributable to the Texas margin tax.

Results of Operations—Six Months Ended June 30, ~~2019~~2020 Compared with Six Months Ended June 30, ~~2018~~2019

Summary

Net income attributable to the partners for the six months ended June 30, ~~2019,~~2020 was $101.3 million ($0.96 per basic and diluted limited partner unit) compared to $96.9 million ~~compared~~($0.92 per basic and diluted limited partner unit) for the second quarter of 2019. The six months ended June 30, 2020 included a non-cash gain on sales-type leases of $33.8 million discussed above as well as a charge of $25.9 million related to ~~$86.3~~the early redemption of our previously outstanding $500 million aggregate principal amount of 6% senior notes, due in 2024. Excluding the gain on sales-type leases and the loss on early extinguishment of debt, net income attributable to the partners for the six months ended June 30, ~~2018.~~2020 was $93.4 million ($0.89 per basic and diluted limited partner unit), a decrease of $3.5 million compared to the same period of 2019. The ~~increase~~decrease in earnings was ~~primarily~~mainly due to ~~higher crude oil pipeline~~lower volumes ~~around~~due to demand destruction caused by the ~~Permian Basin and our crude pipeline systems in Wyoming and Utah, higher revenues on our refinery processing units and contractual tariff escalators. These gains were partially~~COVID-19 pandemic substantially offset by ~~higher~~lower operating ~~costs~~expenses and lower interest expense.

Revenues

Revenues for the six months ended June 30, ~~2019,~~2020, were ~~$265.2~~$242.7 million, ~~an increase~~a decrease of ~~$17.6~~$22.6 million compared to the six months ended June 30, ~~2018.~~2019. The ~~increase~~decrease was mainly attributable to ~~higher~~a 22% reduction in overall crude ~~oil~~and product pipeline volumes ~~around the Permian Basin~~predominantly in our Southwest and ~~our crude pipeline systems in Wyoming and Utah, higher revenues on our refinery processing units, and contractual tariff escalators.~~Rockies regions.

~~Table of Contentsril 19,~~

Revenues from our refined product pipelines were ~~$68.9~~$59.9 million, ~~an increase~~a decrease of ~~$2.9~~$8.9 million compared to the six months ended June 30, ~~2018, on shipments averaging 204.8~~2019. Shipments averaged 169.0 mbpd compared to ~~201.2~~204.8 mbpd for the six months ended June 30, ~~2018.~~2019. The volume and revenue ~~increases~~decreases were mainly due to ~~higher Delek volumes, higher~~lower volumes on pipelines servicing HFC's ~~Woods Cross~~Navajo refinery, ~~which had lower~~Delek's Big Spring refinery and our UNEV pipeline as well as the recording of certain pipeline tariffs as interest income as the related throughput ~~in 2018 due~~contract renewals were determined to ~~operational issues at the refinery beginning in the first quarter of 2018, and contractual tariff escalators.~~be sales-type leases.

Revenues from our intermediate pipelines were ~~$14.6~~$14.9 million, ~~a decrease~~an increase of ~~$1.1~~$0.4 million compared to the six months ended June 30, ~~2018, on shipments averaging 136.1~~2019. Shipments averaged 135.3 mbpd compared to ~~139.3~~136.1 mbpd for the six months ended June 30, ~~2018. The decrease in revenue was primarily attributable to a decrease in deferred revenue realized.~~2019.

Revenues from our crude pipelines were ~~$63.9~~$54.5 million, ~~an increase~~a decrease of ~~$7.9~~$9.4 million compared to the six months ended June 30, ~~2018, on shipments averaging 519.1~~2019. Shipments averaged 367.8 mbpd compared to ~~462.5~~519.1 mbpd for the six months ended June 30, ~~2018.~~2019. The ~~increases~~decreases were mainly attributable to ~~increased~~decreased volumes on our crude pipeline systems in New Mexico and Texas and on our crude pipeline systems in Wyoming and ~~Utah as well as contractual tariff escalators.~~Utah.

Revenues from terminal, tankage and loading rack fees were ~~$76.7~~$73.8 million, ~~an increase~~a decrease of ~~$4.1~~$2.9 million compared to the six months ended June 30, ~~2018.~~2019. Refined products and crude oil terminalled in the facilities averaged ~~466.9~~446.8 mbpd compared to ~~479.1~~466.9 mbpd for the six months ended June 30, ~~2018.~~2019. The volume ~~decrease was~~and revenue decreases were mainly due to ~~lower volumes at HFC's Tulsa refinery as a result~~demand destruction associated with the COVID-19 pandemic across most of the planned turnaround in the first quarter and flooding in the second quarter as well as lower volumes at HFC's El Dorado refinery due to operational issues in the first quarter, partially offset by volumes at our new Orla diesel rack and higher volumes at the Spokane terminal. The increase in revenue was mainly due to our Orla diesel rack, which began operations in the first quarter of 2019, and higher revenues at our Spokane and UNEV terminals.facilities.

Revenues from refinery processing units were ~~$41.2~~$39.5 million, ~~an increase~~a decrease of ~~$3.8~~$1.8 million compared to the six months ended June 30, ~~2018 on throughputs averaging 71.8~~2019. Throughputs averaged 59.8 mbpd compared to ~~69.0~~71.8 mbpd for the six months ended June 30, ~~2018.~~2019. The ~~increase~~decrease in ~~revenue~~volumes was mainly due to reduced throughput for both our Woods Cross and El Dorado processing units. Revenues were higher in the six months ended June 30, 2019 due to an adjustment in revenue recognition ~~and contractual rate increases.~~recorded during that period.

Operations Expense

Operations expense (exclusive of ~~depreciation~~depreciations and amortization) for the six months ended June 30, ~~2019, increased~~2020, decreased by ~~$7.4~~$8.4 million compared to the six months ended June 30, ~~2018.~~2019. The ~~increase~~decrease was mainly due to ~~higher employee compensation~~lower rental expenses, maintenance costs and ~~property taxes.~~variable costs such as electricity and chemicals associated with lower volumes.

Depreciation and Amortization

Depreciation and amortization for the six months ended June 30, ~~2019, decreased~~2020, increased by ~~$1.7~~$0.9 million compared to the six months ended June 30, ~~2018.~~2019. The ~~decrease~~increase was ~~primarily~~mainly due to ~~lower amortization~~the acceleration of ~~intangible assets and asset retirement obligations.~~depreciation on certain of our Cheyenne tanks.

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General and Administrative

General and administrative costs for the six months ended June 30, ~~2019, decreased $1.2~~2020, increased by $0.6 million compared to ~~the six months ended June 30, 2018, mainly due to lower employee compensation, legal and consulting costs incurred in the six months ended June 30, 2019.~~

~~Equity in Earnings of Equity Method Investments~~

Six Months Ended June 30,
Equity Method Investments 2019 2018
(in thousands)
Osage Pipe Line Company, LLC $ 1,251
$ 1,601
Cheyenne Pipeline LLC 2,632
1,412
Total $ 3,883
$ 3,013

~~Equity in earnings of Cheyenne Pipeline LLC increased for~~ the six months ended June 30, 2019 mainly due to higher ~~crude throughput volumes.~~legal expenses incurred in the six months ended June 30, 2020.

Equity in Earnings of Equity Method Investments

~~Table~~



	Six Months Ended June 30,
Equity Method Investment	2020		2019
	(in thousands)
Osage Pipe Line Company, LLC	1,380		1,251
Cheyenne Pipeline LLC	2,160		2,632
Cushing Terminal	330		—
Total	$	3,870	$	3,883

Equity in earnings of ~~Contentsril 19,~~

Cheyenne Pipeline LLC decreased for the six months ended June 30, 2020, mainly due to lower throughput volumes.

Interest Expense

Interest expense for the six months ended June 30, ~~2019,~~2020, totaled ~~$38.3~~$31.5 million, ~~an increase~~a decrease of ~~$3.0~~$6.7 million compared to the six months ended June 30, ~~2018.~~2019. The ~~increase is primarily~~decrease was mainly due to ~~higher average balances outstanding under our Credit Agreement, and~~ market interest rate ~~increases~~decreases under ~~that facility.~~our senior secured revolving credit facility and refinancing our $500 million 6% Senior Notes with $500 million 5% Senior Notes. Our aggregate effective interest rates were ~~5.3%~~4.0% and ~~5.0%~~5.3% for the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

State Income Tax

We recorded a state income tax expense of ~~$6,000~~$76,000 and ~~$110,000~~$6,000 for the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. All tax expense is solely attributable to the Texas margin tax.

LIQUIDITY AND CAPITAL RESOURCES

Overview

During the six months ended June 30, ~~2019,~~2020, we received advances totaling ~~$175.0~~$168.0 million and repaid ~~$156.5~~$138.5 million, resulting in a net increase of ~~$18.5~~$29.5 million under the Credit Agreement and an outstanding balance of ~~$941.5~~$995.0 million at June 30, ~~2019.~~2020. As of June 30, ~~2019,~~2020, we have no letters of credit outstanding under the Credit Agreement and the available capacity under the Credit Agreement was ~~$458.5~~$405.0 million. Amounts repaid under the Credit Agreement may be reborrowed from time to time.

~~If any particular lender under the Credit Agreement could not honor its commitment,~~On February 4, 2020, we believe the unused capacity that would be available from the remaining lenders would be sufficient to meet our borrowing needs. Additionally, we review publicly available information on the lenders in order to monitor their financial stability and assess their ongoing ability to honor their commitments under the Credit Agreement. We do not expect to experience any difficulty in the lenders’ ability to honor their respective commitments, and if it were to become necessary, we believe there would be alternative lenders or options available.

~~On January 25, 2018, we entered into a common unit purchase agreement in which certain purchasers agreed to purchase in~~closed a private placement ~~3,700,000 common units representing limited partnership interests,~~of $500 million in aggregate principal amount of 5% senior unsecured notes due in 2028 (the "5% Senior Notes"). On February 5, 2020, we redeemed the existing $500 million 6% Senior Notes at a ~~price~~redemption cost of ~~$29.73 per common unit. The private placement closed on February 6, 2018,~~$522.5 million, at which time we recognized a $25.9 million early extinguishment loss consisting of a $22.5 million debt redemption premium and ~~we received~~unamortized financing costs of $3.4 million. We funded the $522.5 million redemption with proceeds from the issuance of ~~approximately $110 million, which were used to repay indebtedness~~our 5% Senior Notes and borrowings under ~~the~~our Credit Agreement.

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 ~~six~~three months ended June 30, ~~2019. We intend to use the net proceeds for general partnership purposes, which may include funding working capital, repayment of debt, acquisitions and capital expenditures.~~2020. As of June 30, ~~2019,~~2020, HEP has issued 2,413,153 units under this program, providing $82.3 million in gross proceeds.

Under our registration statement filed with the Securities 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 would be used for general business purposes, which may include, among other

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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.

~~In March 2019, we repurchased 8,674 common units in the open market for the issuance and settlement of unit awards under our Long-Term Incentive Plan, for an aggregate purchase price of $0.3 million.~~

We believe our current cash balances, future internally generated funds 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.

In May ~~2019,~~2020, we paid a regular cash distribution of ~~$0.6700~~$0.35 on all units in an aggregate amount of ~~$68.2~~$34.5 million after deducting HEP Logistics' waiver of $2.5 million of limited partner cash distributions.

Cash and cash equivalents increased by ~~$3.9~~$5.6 million during the six months ended June 30, ~~2019~~2020. The cash flows provided by operating activities of ~~$145.0~~$134.6 million were more than the cash flows used for financing activities of ~~$123.8~~$97.1 million and investing

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activities of ~~$17.3~~$31.9 million. Working capital increased by ~~$9.6~~$14.2 million to ~~$18.2~~$35.0 million at June 30, ~~2019,~~2020, from ~~$8.6~~$20.8 million at December 31, ~~2018.~~2019.

Cash Flows—Operating Activities

Cash flows from operating activities decreased by ~~$16.0~~$10.4 million from ~~$161.0 million for the six months ended June 30, 2018, to~~ $145.0 million for the six months ended June 30, ~~2019.~~2019, to $134.6 million for the six months ended June 30, 2020. The decrease was mainly due to lower cash receipts from customers and higher payments for operating ~~and~~expenses, partially offset by lower payment for interest expenses during the six months ended June 30, ~~2019,~~2020, as compared to the six months ended June 30, ~~2018.~~2019.

Cash Flows—Investing Activities

Cash flows used for investing activities were $31.9 million for the six months ended June 30, 2020, compared to $17.3 million for the six months ended June 30, 2019, ~~compared to $31.1 million for the six months ended June 30, 2018, a decrease~~an increase of ~~$13.8~~$14.6 million. During the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, we invested ~~$17.8~~$30.7 million and ~~$24.7~~$17.8 million in additions to properties and equipment, respectively. During the six months ended June 30, ~~2018,~~2020, we ~~had cash payments of $6.8~~invested $2.4 million ~~for acquisitions.~~in our equity method investment in Cushing Connect JV Terminal. We ~~also~~ received ~~$0.3~~$0.5 million ~~for distributions~~ in excess of equity in earnings ~~of equity investments~~ during ~~both~~ the six months ended June 30, ~~2019~~2020 and ~~2018.~~$0.3 million during the six months ended June 30, 2019.

Cash Flows—Financing Activities

Cash flows used for financing activities were $97.1 million for the six months ended June 30, 2020, compared to $123.8 million for the six months ended June 30, 2019, ~~compared to $131.0 million for~~a decrease of $26.7 million. During the six months ended June 30, ~~2018, a decrease~~2020, we received $168.0 million and repaid $138.5 million in advances under the Credit Agreement. Additionally, we paid $103.0 million in regular quarterly cash distributions to our limited partners and $4.0 million to our noncontrolling interest. We received $13.3 million in contributions from noncontrolling interest during the six months ended June 30, 2020. We also received net proceeds of ~~$7.2 million.~~$491.3 million for issuance of our 5% Senior Notes and paid $522.5 million to retire our 6% Senior Notes. During the six months ended June 30, 2019, we received $175.0 million and repaid $156.5 million in advances under the Credit Agreement. ~~Additionally, we~~We paid $136.2 million in regular quarterly cash distributions to our limited partners, and distributed $5.3 million to our noncontrolling interest. During the six months ended June 30, 2018, we received $305.5 million and repaid $417.5 million in advances under the Credit Agreement. We paid $130.1 million in regular quarterly cash distributions to our limited partners, and distributed $3.5 million to our noncontrolling interest. We also received net proceeds of $114.8 million from the issuance of common units during the six months ended June 30, 2018.

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, whether through construction or acquisition. Expansion capital expenditures include expenditures to acquire assets, 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. The ~~2019~~2020 capital budget isas well as our current forecast are comprised of approximately ~~$10~~$8 million to $12 million for maintenance capital expenditures, ~~and approximately $20~~$4 million to ~~$25~~$6 million for refinery unit turnarounds and $45 million to $50 million for expansion capital ~~expenditures.~~expenditures and our share of Cushing Connect Joint Venture

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investments. We expect the majority of the 2020 expansion capital budget to be invested in ~~refined product pipeline expansions, crude system enhancements, new storage tanks and enhanced blending capabilities at~~ our ~~racks.~~share of Cushing Connect 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 acquisitions and capital development projects, will be funded with cash generated by operations, the sale of additional limited partner common units, the issuance of debt securities and advances under our Credit Agreement, or a combination thereof. With volatility and uncertainty at times in the credit and equity markets, there may be limits on our ability to issue new debt or equity financing. Additionally, due to pricing movements in the debt and equity markets, we may not be able to issue new debt and equity securities at acceptable pricing. Without additional capital beyond amounts available under the Credit Agreement, our ability to obtain funds for some of these capital projects may be limited.operations.

Under the terms of the transaction to acquire HFC’s 75% interest in UNEV, we issued to 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 our share of annual UNEV earnings before interest, income taxes, depreciation, and amortization above $30 million

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beginning July 1, 2015, and ending in June 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.

Credit Agreement

Our $1.4 billion Credit Agreement expires 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.

Senior Notes

~~We have~~As of December 31, 2019, we had $500 million in aggregate principal amount of 6% Senior Notes due in 2024 (the “ 6% Senior Notes”). ~~We used~~

On February 4, 2020, we closed a private placement of $500 million in aggregate principal amount of 5% senior unsecured notes due in 2028 (the "5% Senior Notes"). On February 5, 2020, we redeemed the ~~net proceeds from our offerings of the~~existing $500 million 6% Senior Notes ~~to repay indebtedness~~at a redemption cost of $522.5 million, at which time we recognized a $25.9 million early extinguishment loss consisting of a $22.5 million debt redemption premium and unamortized financing costs of $3.4 million. We funded the $522.5 million redemption with proceeds from the issuance of our 5% Senior Notes and borrowings under our Credit Agreement.

The 6%5% Senior Notes are unsecured and impose certain restrictive covenants, including limitations on our ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. We were in compliance with the restrictive covenants for the 6%5% Senior Notes as of June 30, ~~2019.~~2020. At any time when the 6%5% Senior Notes are rated investment grade by ~~both~~either Moody’s ~~and~~or 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%5% Senior Notes.

Indebtedness under the 6%5% Senior Notes is guaranteed by all of our existing wholly-owned ~~subsidiaries.~~subsidiaries (other than Holly Energy Finance Corp. and certain immaterial subsidiaries).

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Long-term Debt

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


	June 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
	(In thousands)						(In thousands)
Credit Agreement	$	941,500		$	923,000		995,000			$	965,500

6% Senior Notes
Principal	500,000			500,000			—			500,000
Unamortized debt issuance costs	(3,790		)	(4,100		)	—			(3,469		)
	496,210			495,900			—			496,531

5% Senior Notes
Principal							500,000			—
Unamortized debt issuance costs							(8,352		)	—
							491,648			—

Total long-term debt	$	1,437,710		$	1,418,900		$	1,486,648		$	1,462,031

Contractual Obligations

There were no significant changes to our long-term contractual obligations during this period.

Impact of Inflation

Inflation in the United States has been relatively moderate in recent years and did not have a material impact on our results of operations for the six months ended June 30, ~~2019~~2020 and ~~2018.~~2019. PPI has increased an average of ~~0.8%~~0.6% annually over the past five calendar years, including increases of 0.8% and 3.1% in 2019 and ~~3.2% in~~ 2018, ~~and 2017,~~ respectively.

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. Certain of these contracts have provisions

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that limit the level of annual PPI percentage rate increases or decreases. 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.

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.

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.

There are environmental remediation projects in progress that relate to certain assets acquired from HFC. Certain of these projects were underway prior to our purchase and represent liabilities retained by HFC. At June 30, ~~2019,~~2020, we had an accrual of $5.7 million

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that related to environmental clean-up projects for which we have assumed liability or for which the indemnity provided for by HFC has expired or will expire. The remaining projects, including assessment and monitoring activities, are covered under the HFC environmental indemnification discussed above and represent liabilities of HFC.

CRITICAL ACCOUNTING POLICIES

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 in the 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 may differ from these estimates under different assumptions or conditions. 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 ended December 31, ~~2018~~2019. 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. ~~With the exception of certain of our revenue recognition policies discussed in Note 2 of Notes to the Consolidated Financial Statements, there~~There have been no changes to these policies in ~~2019.~~2020. We consider these policies to be the most critical to understanding the judgments that are involved and the uncertainties that could impact our results of operations, financial condition and cash flows.

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Accounting Pronouncements Adopted During the Periods Presented

Goodwill Impairment Testing

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, and we elected to adopt using the modified retrospective 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 and the short-term lease recognition practical expedient, which allows an entity to not recognize on the balance sheet leases with a term of 12 months or less. 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 the standard did not have a material impact on our results of operations or cash flows. See Notes 23 and 34 of Notes to the Consolidated Financial Statements 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 of Notes to the Consolidated Financial Statements 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~~

~~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 iswas effective January 1, ~~2020, and we are currently evaluating~~2020. Adoption of the standard did not have a material impact on our financial condition, results of ~~this standard.~~operations or cash flows.

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.

At June 30, ~~2019~~2020, we had an outstanding principal balance of $500 million on our 6%5% Senior Notes. A change in interest rates generally would affect the fair value of the 6%5% Senior Notes, but not our earnings or cash flows. At June 30, ~~2019~~2020, the fair value of our 6%5% Senior Notes was ~~$517.4~~$477.8 million. We estimate a hypothetical 10% change in the yield-to-maturity applicable to the 6%5% Senior Notes at June 30, ~~2019~~2020, would result in a change of approximately ~~$12~~$17 million in the fair value of the underlying 6%5% Senior Notes.

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For the variable rate Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. At June 30, ~~2019~~2020, borrowings outstanding under the Credit Agreement were ~~$941.5~~$995.0 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 normal hazards of operations, including fire, explosion and weather-related perils. We maintain various insurance coverages, including business interruption insurance, subject to certain deductibles. 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.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices. See “Risk Management” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of market risk exposures that we have with respect to our long-term debt, which disclosure should be read in conjunction with the quantitative and qualitative disclosures about market risk contained in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018.~~2019.

Since we do not own products shipped on our pipelines or terminalled at our terminal facilities, we do not have direct market risks associated with commodity prices.


Item 4.	Controls and Procedures

(a) Evaluation of disclosure controls and procedures

Our principal executive officer and principal financial officer have evaluated, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of June 30, ~~2019~~2020, at a reasonable level of assurance.

(b) Changes in internal control over financial reporting

During the three months ended June 30, ~~2019,~~2020, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

In the ordinary course of business, we may become party to legal, regulatory or administrative proceedings or governmental investigations, including environmental and other matters. Damages or penalties may be sought from us in some matters and certain matters may require years to resolve. While the outcome and impact of these proceedings and investigations on us cannot be predicted with certainty, based on advice of counsel and information currently available to us, management believes that the resolution of these proceedings and investigations, through settlement or adverse judgment, will not, either individually or in the aggregate, have a materially adverse effect on our financial condition, results of operations or cash flows.

~~Environmental Matters~~

We are reporting the following proceedings to comply with SEC regulations which require us to disclose proceedings arising under federal, state or local provisions regulating the discharge of materials into the environment or protecting the environment if we reasonably believe that such proceedings may result in monetary sanctions of $100,000 or more. Our respective subsidiaries have or will develop corrective action plans regarding the subject of these proceedings that will be implemented in consultation with the respective federal and state agencies. It is not possible to predict the ultimate outcome of these proceedings, although none are currently expected to have a material effect on our financial condition, results of operations or cash flows.

~~Written Safety Compliance Program~~

Holly Energy Partners - Operating, L.P. (“HEP Operating”) received a Notice of Probable Violation (NOPV) dated June 20, 2018 from the Pipeline and Hazardous Materials Safety Administration (“PHMSA”). The NOPV follows a routine inspection of HEP's facilities and records and is not in response to an incident. In the NOPV, PHMSA alleges certain regulatory violations involving HEP Operating’s written safety compliance program for its pipelines, terminals and tanks. PHMSA has proposed a civil penalty and a compliance order that would require HEP Operating to take certain remedial actions. HEP Operating is currently working with PHMSA to resolve this matter.

~~Other~~

We are a party to various other legal and regulatory proceedings, which we believe, based on the advice of counsel, will not either individually or in the aggregate have a materially adverse impact on our financial condition, results of operations or cash flows.


Item 1A.	Risk Factors

~~Other than the risk factor set forth below, there~~There have been no material changes in our risk factors as previously disclosed in Part 1, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018.~~2019 and in Part II, “Item 1A Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. In addition to the other information set forth in this quarterly report, you should consider carefully the ~~factors~~information discussed in our ~~2018~~2019 Form 10-K and our first quarter 2020 Form 10-Q, which could materially affect our business, financial condition or future results. The risks described ~~below and~~ in our ~~2018~~2019 Form 10-K and our first quarter 2020 Form 10-Q are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition or future results.

The following risk factor, which was previously disclosed in Part 1, “Item 1A Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, is hereby amended and restated in its entirety as follows:

~~TAX RISKS TO COMMON UNITHOLDERS~~

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes or differing interpretations, possibly applied on a retroactive basis.

The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial changes and differing interpretations at any time. From time to time, members of Congress propose and consider similar substantive changes to the existing federal income tax laws that would affect publicly traded partnerships, including elimination of partnership tax treatment for publicly traded partnerships. For example, the

~~Table of Contentsril 19,~~

“Clean Energy for America Act”, which is similar to legislation that was commonly proposed during the Obama Administration, was introduced in the Senate on May 2, 2019. If enacted, this proposal would, among other things, repeal Section 7704(d)(1)(E) of the Code upon which we rely for our treatment as a partnership for federal income tax purposes.

In addition, the Treasury Department has issued, and in the future may issue, regulations interpreting those laws that affect publicly traded partnerships. There can be no assurance that there will not be further changes to U.S. federal income tax laws or the Treasury Department’s interpretation of the qualifying income rules in a manner that could impact our ability to qualify as a partnership in the future, which could negatively impact the value of an investment in our common units. Any modification to the federal income tax laws may be applied retroactively and could make it more difficult or impossible for us to meet the qualifying income requirement to be treated as a partnership for U.S. federal income tax purposes. You are urged to consult with your own tax advisor with respect to the status of regulatory or administrative developments and proposals and their potential effect on your investment in our common units.


Item 6.	Exhibits

The Exhibit Index on page 4749 of this Quarterly Report on Form 10-Q lists the exhibits that are filed or furnished, as applicable, as part of this Quarterly Report on Form 10-Q.

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Exhibit Index



Exhibit Number		Description

3.1		Second Amended and Restated Agreement of Limited Partnership of Holly Energy Partners, L.P. (incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed on November 1, 2017, File No. 1-32225).
3.2		First Amended and Restated Agreement of Limited Partnership of Holly Energy Partners - Operating Company, L.P. (incorporated by reference to Exhibit 3.2 of Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004, File No. 1-32225).
3.3		First Amended and Restated Agreement of Limited Partnership of HEP Logistics Holdings, L.P. (incorporated by reference to Exhibit 3.4 of Registrant’s Quarterly Report on Form 10-Q for its quarterly period ended June 30, 2004, File No. 1-32225).
3.4		First Amended and Restated Limited Liability Company Agreement of Holly Logistic Services, L.L.C. (incorporated by reference to Exhibit 3.5 of Registrant’s Quarterly Report on Form 10-Q for its quarterly period ended June 30, 2004, File No. 1-32225).
3.5		Amendment No. 1 to the First Amended and Restated Limited Liability Company Agreement of Holly Logistic Services, L.L.C., dated April 27, 2011 (incorporated by reference to Exhibit 3.1 of Registrant’s Form 8-K Current Report filed on May 3, 2011, File No. 1-32225).
3.6		First Amended and Restated Limited Liability Company Agreement of HEP Logistics GP, L.L.C. (incorporated by reference to Exhibit 3.6 of Registrant’s Quarterly Report on Form 10-Q for its quarterly period ended June 30, 2004, File No. 1-32225).
~~10.1~~10.1*		~~First~~ Second Amendment to Third Amended and Restated Crude Pipelines and Tankage Agreement dated ~~April 22, 2019,~~as of May 26, 2020, by and among HollyFrontier Navajo Refining LLC, HollyFrontier Woods Cross Refining LLC, HollyFrontier Refining & Marketing LLC, Holly Energy Partners - Operating, L.P., HEP Pipeline, L.L.C. and HEP Woods Cross, L.L.C. ~~(incorporated by reference to Exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for its quarterly period ended March 31, 2019, filed May 2, 2019, File No. 1-32225).~~
10.2*+		~~Form~~First Amendment to Fifth Amended and Restated Master Lease and Access Agreement dated as of August 4, 2020, effective as of January 23, 2020, by and among certain subsidiaries of Holly Energy Partners, L.P. ~~Indemnification Agreement to be entered into with officers~~ and ~~directors~~certain subsidiaries of ~~Holly Logistic Services, L.L.C. and its subsidiaries.~~HollyFrontier Corporation.
~~10.3~~		Fifth Amended and Restated Master Throughput Agreement, dated as of July 1, 2019, by and between HollyFrontier Refining & Marketing LLC and Holly Energy Partners - Operating, L.P. (incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K Current Report filed July 2, 2019, File No. 1-32225).
31.1*		Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.



101++		The following financial information from Holly Energy Partners, L.P.’s Quarterly Report on Form 10-Q for the quarter ended June 30, ~~2019,~~2020 formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statement of Partners’ Equity, and (vi) Notes to Consolidated Financial Statements. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).



*	Filed herewith.
**	Furnished herewith.
+	~~Constitutes management contracts or compensatory plans or arrangements.~~
++	Filed electronically herewith.

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HOLLY ENERGY PARTNERS, L.P.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	HOLLY ENERGY PARTNERS, L.P.
	(Registrant)

		By: HEP LOGISTICS HOLDINGS, L.P. its General Partner

		By: HOLLY LOGISTIC SERVICES, L.L.C. its General Partner

Date: August ~~1, 2019~~6, 2020		/s/ ~~Richard L. Voliva III~~John Harrison
		~~Richard L. Voliva III~~John Harrison
		~~Executive~~Senior Vice President, ~~and~~ Chief Financial Officer and Treasurer (Principal Financial Officer)

Date: August ~~1, 2019~~6, 2020		/s/ Kenneth P. Norwood
		Kenneth P. Norwood
		Vice President and Controller (Principal Accounting Officer)

- 4850 -



	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



Three Months Ended June 30, 2018	Parent			Guarantor Restricted Subsidiaries			Non-Guarantor Non-Restricted Subsidiaries			Eliminations			Consolidated
	(In thousands)
Revenues:
Affiliates	$	—		$	89,522		$	4,491		$	—		$	94,013
Third parties	—			19,540			5,207			—			24,747
	—			109,062			9,698			—			118,760
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—			31,494			3,039			—			34,533
Depreciation and amortization	—			20,431			4,177			—			24,608
General and administrative	761			1,912			—			—			2,673
	761			53,837			7,216			—			61,814
Operating income (loss)	(761		)	55,225			2,482			—			56,946

Other income (expense):
Equity in earnings of subsidiaries	58,566			1,881			—			(60,447		)	—
Equity in earnings of equity method investments	—			1,734			—			—			1,734
Interest expense	(17,662		)	36			—			—			(17,626		)
Interest income	—			526			—			—			526
Gain (loss) on sale of assets and other	—			(79		)	26			—			(53		)
	40,904			4,098			26			(60,447		)	(15,419		)
Income before income taxes	40,143			59,323			2,508			(60,447		)	41,527
State income tax expense	—			(28		)	—			—			(28		)
Net income	40,143			59,295			2,508			(60,447		)	41,499
Allocation of net income attributable to noncontrolling interests	—			(729		)	(627		)	—			(1,356		)
Net income attributable to the partners	$	40,143		$	58,566		$	1,881		$	(60,447	)	$	40,143