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, 2020~~March 31, 2021



☐			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~~) (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 31, 2020,~~April 30, 2021, was 105,440,201.

Table of ~~Contentsril~~ 19,

HOLLY ENERGY PARTNERS, L.P.

INDEX

- 2 -

Table of ~~Contentsril~~ 19,

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical fact included in this Form 10-Q, including, but not limited to, 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.~~operations are intended to identify forward-looking statements. 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~~significant 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 and refinery processing units;

•the economic viability of HollyFrontier Corporation (“HFC”), our other customers and our joint ventures’ other 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 pipelines, terminal facilities and refinery processing units, due to reasons such as infection in the workforce, in response to reductions in demand or lower gross margins due to the 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, 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~~cyberattacks and the consequences of any such attacks;

•general economic 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

- 3 -

Table of 19,

December ~~31, 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.” 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.

- 4 -

Table of ~~Contentsril~~ 19,

PART I. FINANCIAL INFORMATION


~~Item 1.~~	~~Financial Statements~~

Item 1.Financial Statements

HOLLY ENERGY PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)

June 30, 2020 December 31, 2019
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (Cushing Connect VIEs: $10,773 and $6,842, respectively)
$ 18,913
$ 13,287
Accounts receivable:
Trade (Cushing Connect VIEs: $2,170 and $79, respectively)
14,929
18,731
Affiliates 49,847
49,716
64,776
68,447
Prepaid and other current assets 7,905
7,629
Total current assets 91,594
89,363

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 3,377
3,255
Net investment in leases 168,153
134,886
Intangible assets, net 94,318
101,322
Goodwill 270,336
270,336
Equity method investments (Cushing Connect VIEs: $39,815 and $37,084, respectively)
123,299
120,071
Other assets 11,772
12,900
Total assets $ 2,221,783
$ 2,199,232

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable:
Trade (Cushing Connect VIEs: $6,421 and $2,082, respectively)
$ 14,639
$ 17,818
Affiliates 7,286
16,737
21,925
34,555

Accrued interest 10,683
13,206
Deferred revenue 11,002
10,390
Accrued property taxes 5,526
3,799
Current operating lease liabilities 1,213
1,126
Current finance lease liabilities 3,293
3,224
Other current liabilities 2,975
2,305
Total current liabilities 56,617
68,605

Long-term debt 1,486,648
1,462,031
Noncurrent operating lease liabilities 2,530
2,482
Noncurrent finance lease liabilities 70,039
70,475
Other long-term liabilities 13,689
12,808
Deferred revenue 42,692
45,681

Class B unit 51,062
49,392

Equity:
Partners’ equity:
Common unitholders (105,440,201 units issued and outstanding
at June 30, 2020 and December 31, 2019)
380,723
381,103
Noncontrolling interest 117,783
106,655
Total equity 498,506
487,758
Total liabilities and equity $ 2,221,783
$ 2,199,232


	March 31, 2021		December 31, 2020
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (Cushing Connect VIEs: $17,967 and $18,259, respectively)	$	19,753	$	21,990
Accounts receivable:
Trade	17,451		14,543
Affiliates	45,467		47,972
	62,918		62,515
Prepaid and other current assets	9,502		9,487
Total current assets	92,173		93,992

Properties and equipment, net (Cushing Connect VIEs: $65,741 and $47,801, respectively)	1,432,799		1,450,685
Operating lease right-of-use assets, net	2,912		2,979
Net investment in leases	206,124		166,316
Intangible assets, net	83,813		87,315
Goodwill	223,650		234,684
Equity method investments (Cushing Connect VIEs: $38,964 and $39,456, respectively)	118,265		120,544
Other assets	10,790		11,050
Total assets	$	2,170,526	$	2,167,565

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable:
Trade (Cushing Connect VIEs: $16,063 and $14,076, respectively)	$	30,169	$	28,280
Affiliates	10,190		18,120
	40,359		46,400

Accrued interest	4,661		10,892
Deferred revenue	14,089		11,368
Accrued property taxes	5,250		3,992
Current operating lease liabilities	882		875
Current finance lease liabilities	3,668		3,713
Other current liabilities	2,989		2,505
Total current liabilities	71,898		79,745

Long-term debt	1,388,335		1,405,603
Noncurrent operating lease liabilities	2,404		2,476
Noncurrent finance lease liabilities	67,309		68,047
Other long-term liabilities	11,907		12,905
Deferred revenue	35,314		40,581

Class B unit	53,743		52,850

Equity:
Partners’ equity:
Common unitholders (105,440 units issued and outstanding at March 31, 2021 and December 31, 2020)	405,976		379,292
Noncontrolling interests	133,640		126,066
Total equity	539,616		505,358
Total liabilities and equity	$	2,170,526	$	2,167,565

See accompanying notes.

- 5 -

Table of ~~Contentsril~~ 19,

HOLLY ENERGY PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per unit data)


	Three Months Ended March 31,
	2021		2020
Revenues:
Affiliates	$	101,926	$	101,428
Third parties	25,257		26,426
	127,183		127,854
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	41,365		34,981
Depreciation and amortization	25,065		23,978
General and administrative	2,968		2,702
Goodwill impairment	11,034		0
	80,432		61,661
Operating income	46,751		66,193

Other income (expense):
Equity in earnings of equity method investments	1,763		1,714
Interest expense	(13,240)		(17,767)
Interest income	6,548		2,218
Gain on sales-type leases	24,650		0
Loss on early extinguishment of debt	0		(25,915)
Gain on sale of assets and other	502		506
	20,223		(39,244)
Income before income taxes	66,974		26,949
State income tax expense	(37)		(37)
Net income	66,937		26,912
Allocation of net income attributable to noncontrolling interests	(2,540)		(2,051)
Net income attributable to the partners	64,397		24,861
Limited partners’ per unit interest in earnings—basic and diluted	$	0.61	$	0.24
Weighted average limited partners’ units outstanding	105,440		105,440

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

Other income (expense):
Equity in earnings of equity method investments 2,156
1,783
3,870
3,883
Interest expense (13,779 ) (19,230 ) (31,546 ) (38,252 )
Interest income 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 468
111
974
(199 )
25,492
(16,785 ) (13,752 ) (33,489 )
Income before income taxes 77,993
47,129
104,942
100,959
State income tax benefit (expense) (39 ) 30
(76 ) (6 )
Net income 77,954
47,159
104,866
100,953
Allocation of net income attributable to noncontrolling interests (1,484 ) (1,469 ) (3,535 ) (4,081 )
Net income attributable to the partners 76,470
45,690
101,331
96,872
Limited partners’ per unit interest in earnings—basic and diluted $ 0.73
$ 0.43
$ 0.96
$ 0.92
Weighted average limited partners’ units outstanding 105,440
105,440
105,440
105,440

Net income and comprehensive income are the same in all periods presented.

See accompanying notes.

- 6 -

Table of ~~Contentsril~~ 19,

HOLLY ENERGY PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

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

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

Cash flows from financing activities
Borrowings under credit agreement 168,000
175,000
Repayments of credit agreement borrowings (138,500 ) (156,500 )
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 (102,979 ) (136,207 )
Distributions to noncontrolling interest (4,000 ) (5,250 )
Payments on finance leases (1,972 ) (503 )
Deferred financing costs (8,714 ) —
Purchase of units for incentive grants —
(255 )
Units withheld for tax withholding obligations (147 ) (119 )
Net cash used by financing activities (97,114 ) (123,834 )

Cash and cash equivalents
Increase for the period 5,626
3,896
Beginning of period 13,287
3,045
End of period $ 18,913
$ 6,941


	Three Months Ended March 31,
	2021		2020
Cash flows from operating activities
Net income	$	66,937	$	26,912
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	25,065		23,978
(Gain) loss on sale of assets	(262)		(417)
Loss on early extinguishment of debt	0		25,915
Gain on sales-type leases	(24,650)		0
Goodwill impairment	11,034		0
Amortization of deferred charges	844		799
Equity-based compensation expense	683		506
Equity in earnings of equity method investments, net of distributions	(617)		(1,164)
(Increase) decrease in operating assets:
Accounts receivable—trade	506		3,093
Accounts receivable—affiliates	2,505		11,310
Prepaid and other current assets	463		126
Increase (decrease) in operating liabilities:
Accounts payable—trade	8,565		2,921
Accounts payable—affiliates	(7,930)		(10,344)
Accrued interest	(6,232)		(8,511)
Deferred revenue	4,013		(184)
Accrued property taxes	1,258		1,908
Other current liabilities	484		760
Other, net	(524)		339
Net cash provided by operating activities	82,142		77,947

Cash flows from investing activities
Additions to properties and equipment	(33,218)		(18,942)
Investment in Cushing Connect JV Terminal	0		(2,345)
Proceeds from sale of assets	283		417
Distributions in excess of equity in earnings of equity investments	2,897		0
Net cash used for investing activities	(30,038)		(20,870)

Cash flows from financing activities
Borrowings under credit agreement	73,000		112,000
Repayments of credit agreement borrowings	(90,500)		(67,000)
Redemption of senior notes	0		(522,500)
Proceeds from issuance of debt	0		500,000
Contributions from general partner	0		354
Contributions from noncontrolling interests	6,332		7,304
Distributions to HEP unitholders	(38,328)		(68,519)
Distributions to noncontrolling interests	(3,819)		(3,000)
Payments on finance leases	(958)		(1,096)
Deferred financing costs	0		(8,478)

Units withheld for tax withholding obligations	(68)		(147)
Net cash used by financing activities	(54,341)		(51,082)

Cash and cash equivalents
Increase (decrease) for the period	(2,237)		5,995
Beginning of period	21,990		13,287
End of period	$	19,753	$	19,282

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$18,674		$25,168

See accompanying notes.

- 7 -

Table of ~~Contentsril~~ 19,

HOLLY ENERGY PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(In thousands)


	Common Units		Noncontrolling Interests		Total Equity

Balance December 31, 2020	$	379,292	$	126,066	$	505,358
Capital contribution - Cushing Connect	—		9,746		9,746

Distributions to HEP unitholders	(38,328)		—		(38,328)
Distributions to noncontrolling interests	—		(3,819)		(3,819)

Amortization of restricted and performance units	683		—		683
Class B unit accretion	(893)		—		(893)
Other	(68)		—		(68)
Net income	65,290		1,647		66,937
Balance March 31, 2021	$	405,976	$	133,640	$	539,616

Common
Units
Noncontrolling Interest Total Equity

Balance December 31, 2019 $ 381,103
$ 106,655
$ 487,758
Capital contribution - Cushing Connect

—
7,304
7,304
Distributions to HEP unitholders (68,519 ) —
(68,519 )
Distributions to noncontrolling interest —
(3,000 ) (3,000 )
Equity-based compensation 506
—
506
Class B unit accretion (835 ) —
(835 )
Other 208
—
208
Net income 25,696
1,216
26,912
Balance March 31, 2020 338,159
112,175
450,334
Capital Contribution - Cushing Connect —
5,959
$ 5,959
Distributions to HEP unitholders (34,460 ) —
(34,460 )
Distributions to noncontrolling interest —
(1,000 ) (1,000 )
Equity-based compensation 474
—
474
Class B unit accretion (835 ) —
(835 )
Other 80
—
80
Net income 77,305
649
77,954
Balance June 30, 2020 $ 380,723
$ 117,783
$ 498,506

Common
Units
Noncontrolling Interest Total Equity

Balance December 31, 2018 $ 427,435
$ 88,126
$ 515,561
Distributions to HEP unitholders (67,975 ) —
(67,975 )
Distributions to noncontrolling interest —
(3,000 ) (3,000 )
Equity-based compensation 661
—
661
Class B unit accretion (780 ) —
(780 )
Other 814
—
814
Net income 51,962
1,832
53,794
Balance March 31, 2019 412,117
86,958
499,075
Distributions to HEP unitholders (68,232 ) —
(68,232 )
Distributions to noncontrolling interest —
(2,250 ) (2,250 )
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


	Common Units		Noncontrolling Interests		Total Equity

Balance December 31, 2019	$	381,103	$	106,655	$	487,758
Capital Contribution-Cushing Connect	—		7,304		7,304
Distributions to HEP unitholders	(68,519)		—		(68,519)
Distributions to noncontrolling interests	—		(3,000)		(3,000)
Equity-based compensation	506		—		506
Class B unit accretion	(835)		—		(835)
Other	208		—		208
Net income	25,696		1,216		26,912
Balance March 31, 2020	$	338,159	$	112,175	$	450,334

See accompanying notes.

- 8 -

Table of ~~Contentsril~~ 19,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


~~Note 1:~~	~~Description of Business and Presentation of Financial Statements~~

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, 2020,~~March 31, 2021, 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.

We own and operate petroleum product and crude oil pipelines, terminal, tankage and loading rack facilities and refinery processing units that support refining and marketing operations of HFC and other refineries in the Mid-Continent, Southwest and Northwest regions of the United States. Additionally, we own a 75% interest in UNEV Pipeline, LLC (“UNEV”), a 50% interest in Osage Pipe Line Company, LLC (“Osage”), 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 (the “Cheyenne Refinery”) and to convert certain assets at that refinery to renewable diesel production. HFC subsequently began winding down petroleum refining operations at ~~its~~the Cheyenne Refinery on August 3, 2020. As

HEP and HFC finalized and executed new agreements for HEP’s Cheyenne assets on February 8, 2021, with the following terms, in each case effective January 1, 2021: (1) a ten-year lease with 2 five-year renewal option periods for HFC’s use of ~~June 30, 2020, our throughput agreement~~certain HEP tank and rack assets in the Cheyenne Refinery to facilitate renewable diesel production with ~~HFC required minimum annualized payments to us~~an annual lease payment of approximately ~~$17.6~~$5 million, ~~related~~(2) a five-year contango service fee arrangement that will utilize HEP tank assets inside the Cheyenne Refinery where HFC will pay a base tariff to ~~our Cheyenne assets. During the third quarter of 2020, we expect~~HEP for available crude oil storage and HFC and HEP will split any profits generated on crude oil contango opportunities and (3) a $10 million one-time cash payment from HFC 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 scheduledHEP for the ~~third quarter~~termination 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.existing minimum volume commitment.

We operate in ~~two~~2 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, ~~2019.~~2020. 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, ~~2020.~~2021.

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~~

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Goodwill ~~Impairment Testing~~and Long-Lived Assets

~~In January 2017, Accounting Standard Update (“ASU”) 2017-04, “Simplifying~~Goodwill represents the ~~Test for Goodwill Impairment,” was issued amending~~excess of our cost of an acquired business over 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 athe assets acquired, less liabilities assumed. Goodwill is not amortized. We test goodwill at the reporting ~~unit’s goodwill with~~unit level for impairment annually and between annual tests if events or changes in circumstances indicate the carrying amount ~~of that goodwill. Under this standard,~~may exceed fair value. Our goodwill impairment ~~is measured~~testing first entails a comparison of our reporting unit fair values relative to their respective carrying values, including goodwill. If carrying value exceeds the estimated fair value for a reporting unit, we measure goodwill impairment as the excess of the carrying amount of the reporting unit over the estimated fair value of the reporting unit.

Indicators of goodwill and long-lived asset impairment

The changes in our new agreements with HFC related to our Cheyenne assets resulted in an increase in the net book value of our Cheyenne reporting unit due to sales-type lease accounting, which led us to determine indicators of potential goodwill impairment for our Cheyenne reporting unit were present.

The estimated fair value of our Cheyenne reporting unit was derived using a combination of income and market approaches. The income approach reflects expected future cash flows based on anticipated gross margins, operating costs, and capital expenditures. The market approaches include both the guideline public company and guideline transaction methods. Both methods utilize pricing multiples derived from historical market transactions of other like-kind assets. These fair value measurements involve significant unobservable inputs (Level 3 inputs). See Note 5 for further discussion of Level 3 inputs.

Our interim impairment testing of our Cheyenne reporting unit goodwill identified an impairment charge of $11.0 million, which was recorded in the three months ended March 31, 2021.

We evaluate long-lived assets, including finite-lived intangible assets, for potential impairment by identifying whether indicators of impairment exist and, if so, assessing whether the long-lived assets are recoverable from estimated future undiscounted cash flows. The actual amount of impairment loss, if any, to be recorded is equal to the amount by which a long-lived asset’s carrying value exceeds its fair value. ~~We adopted this standard effective in~~

Revenue Recognition

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 ~~second quarter~~definition of ~~2019,~~a lease since (1) performance of the contracts is dependent on specified property, plant, or equipment and (2) it is unlikely 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 below), 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 ~~standard had no effect on our financial condition, results of operations or cash flows.~~

~~Leases~~

~~In February 2016,~~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 ~~No. 2016-02, “Leases” (“ASC 842”) was issued requiring leases to be measured and recognized~~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 ~~liability,~~in accordance with ASC 842, which largely codified ASU 2016-02.

Several of our contracts include incentive or reduced tariffs once a ~~corresponding right-of-use asset~~certain quarterly volume is met. Revenue from the variable element of these transactions is recognized based on the ~~balance sheet.~~ 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 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 projected to be exercised by the customer. During the three months ended March 31, 2021 and 2020, we recognized $3.8 million and $7.5 million, respectively, of these

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deficiency payments in revenue, of which $0.5 million and $0.7 million, respectively, related to deficiency payments billed in prior periods.

We have other cost reimbursement provisions in our throughput / storage agreements providing that customers (including HFC) reimburse us for certain costs. Such reimbursements are recorded as revenue or deferred revenue depending on the nature of the cost. Deferred revenue is recognized over the remaining contractual term of the related throughput agreement.

Leases

We adopted ~~this standard~~ASC 842 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~~practical expedients, both of which are provided as options by the standard and further defined below.

Lessee Accounting - At inception, we determine if an arrangement is or contains a lease. Right-of-use assets represent our right to ~~be reported~~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 ~~accounting standard in effect during those periods. We also elected practical expedients provided by~~liabilities are recognized at the ~~new standard, including the package of practical expedients and the short-term lease recognition practical expedient, which allow an entity to not recognize~~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.

Operating leases are recorded in operating lease right-of-use assets and current and noncurrent operating lease liabilities on our consolidated balance ~~sheet~~sheet. Finance leases are included in properties and equipment, current finance lease liabilities and 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. Upon adoption~~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 ~~this standard, we recognized $78.4 million~~net present value of lease ~~liabilities~~payment obligations.

Lessor Accounting - 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 ~~corresponding right-of-use~~residual value of the underlying 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 3 and 4 for additional information on our lease policies.when assessing the classification.

Accounting Pronouncements Adopted During the Periods Presented

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. We adopted this standard effective January 1, 2020, and adoption of the standard did not have a material impact on our financial condition, results of operations or cash flows.


~~Note 2:~~	~~Investment in Joint Venture~~

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~~“Cushing Connect JV Terminal”). The Cushing Connect JV Terminal ~~was fully~~went in service ~~beginning in April 2020. The~~during the second quarter of 2020, and the Cushing Connect Pipeline is expected to be placed in service during the ~~first~~third 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

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total Cushing Connect Joint Venture investment will generally be shared ~~proportionately~~equally 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 to $70 million. However, we are solely responsible for any Cushing Connect Pipeline construction costs which exceed 10% of the budget.

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.

With the exception of the assets of HEP Cushing, creditors of the Cushing Connect Joint Venture legal entities have no recourse to our assets. Any recourse to HEP Cushing would be limited to the extent of HEP Cushing's assets, which other than its investment in Cushing Connect Joint Venture, are not significant. Furthermore, our creditors have no recourse to the assets of the Cushing Connect Joint Venture legal entities.


~~Note 3:~~	~~Revenues~~

Note 3:Revenues

Disaggregated revenues are as follows:


	Three Months Ended March 31,
	2021		2020
	(In thousands)
Pipelines	$	66,505	$	70,472
Terminals, tanks and loading racks	38,182		37,498
Refinery processing units	22,496		19,884
	$	127,183	$	127,854

Revenues on our ~~contracts with customers meet the definition~~consolidated statements of ~~a lease since (1) performance~~income were composed 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 betweenfollowing 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.revenues:

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.

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, 2020, we recognized $5.1 million and $12.6 million of these deficiency payments in revenue, of which NaN and $0.7 million, respectively, related to deficiency payments billed in prior periods. As of June 30, 2020, deferred revenue reflected in our consolidated balance sheet related to shortfalls billed was $0.5 million.


	Three Months Ended March 31,
	2021		2020
	(In thousands)
Lease revenues	$	87,944	$	93,185
Service revenues	39,239		34,669
	$	127,183	$	127,854

A contract liability exists when an entity is obligated to perform future services for 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

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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:


	March 31, 2021		December 31, 2020
	(In thousands)
Contract assets	$	6,425	$	6,306
Contract liabilities	$	(500)	$	(500)

June 30,
2020 December 31,
2019
(In thousands)
Contract assets $ 6,064
$ 5,675
Contract liabilities $ (500 ) $ (650 )

The contract assets and liabilities include both lease and service components. ~~We did not recognize any revenue during~~During the three months ended ~~June 30, 2020,~~March 31, 2021, we recognized $0.5 million of revenue 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 during2020. During the three months ended ~~June 30, 2019, that was previously included in contract liability as of December~~March 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, 2020,2021, we also recognized ~~$0.2~~$0.1 million ~~and $0.4 million, respectively,~~ of revenue included in contract ~~assets at June 30, 2020.~~assets.

As of ~~June 30, 2020,~~March 31, 2021, we expect to recognize ~~$2.3~~$1.9 billion in revenue related to our unfulfilled performance obligations under the terms of our long-term throughput agreements and leases expiring in 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)
Remainder of 2020 $ 185
2021 362
2022 332
2023 295
2024 257
2025 188
Thereafter 650
Total $ 2,269


Years Ending December 31,	(In millions)
Remainder of 2021	$	253
2022	310
2023	274
2024	236
2025	171
2026	156
Thereafter	479
Total	$	1,879

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,
2020 2019 2020 2019
(In thousands)
Pipelines $ 58,954
$ 72,263
$ 129,426
$ 147,363
Terminals, tanks and loading racks 36,280
39,089
73,778
76,667
Refinery processing units 19,573
19,399
39,457
41,218
$ 114,807
$ 130,751
$ 242,661
$ 265,248

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

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. See Note 1 for further discussion of lease 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 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 2524 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 ~~$6.9~~$6.1 million and ~~$7.0~~$6.4 million as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, with accumulated depreciation of ~~$3.4~~$3.1 million and ~~$4.5~~$3.4 million as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, 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~~1 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):


	March 31, 2021		December 31, 2020

Operating leases:
Operating lease right-of-use assets, net	$	2,912	$	2,979

Current operating lease liabilities	882		875
Noncurrent operating lease liabilities	2,404		2,476
Total operating lease liabilities	$	3,286	$	3,351

Finance leases:
Properties and equipment	$	6,053	$	6,410
Accumulated amortization	(3,089)		(3,390)
Properties and equipment, net	$	2,964	$	3,020

Current finance lease liabilities	$	3,668	$	3,713
Noncurrent finance lease liabilities	67,309		68,047
Total finance lease liabilities	$	70,977	$	71,760

Weighted average remaining lease term (in years)
Operating leases	5.7		5.9
Finance leases	15.7		15.9

Weighted average discount rate
Operating leases	4.9%		4.8%
Finance leases	5.6%		5.6%

June 30, 2020 December 31, 2019

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

   Current operating lease liabilities 1,213
1,126
   Noncurrent operating lease liabilities 2,530
2,482
      Total operating lease liabilities $ 3,743
3,608

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

   Current finance lease liabilities $ 3,293
3,224
   Noncurrent finance lease liabilities 70,039
70,475
      Total finance lease liabilities $ 73,332
73,699

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

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

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


	Three Months Ended March 31,
	2021		2020
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows on operating leases	$	312	$	282
Operating cash flows on finance leases	$	1,058	$	1,077
Financing cash flows on finance leases	$	958	$	1,096

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

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Maturities of lease liabilities were as follows:


								March 31, 2021
	June 30, 2020							Operating		Finance
	Operating			Finance				(In thousands)
	(In thousands)
2020	$	491		$	3,865
2021	906			7,411			2021	$	747	$	5,537
2022	627			7,285			2022	688		7,332
2023	607			7,332			2023	607		7,375
2024	494			6,856			2024	494		6,918
2025 and thereafter	1,179			80,313
2025							2025	426		6,456
2026 and thereafter							2026 and thereafter	750		73,888
Total lease payments	4,304			113,062			Total lease payments	3,712		107,506
Less: Imputed interest	(561		)	(39,730		)	Less: Imputed interest	(426)		(36,529)
Total lease obligations	3,743			73,332			Total lease obligations	3,286		70,977
Less: Current lease liabilities	(1,213		)	(3,293		)	Less: Current lease liabilities	(882)		(3,668)
Noncurrent lease liabilities	$	2,530		$	70,039		Noncurrent lease liabilities	$	2,404	$	67,309

The components of lease expense were as follows:


	Three Months Ended March 31,
	2021		2020
	(In thousands)
Operating lease costs	$	298	$	273
Finance lease costs
Amortization of assets	212		242
Interest on lease liabilities	1,006		1,037
Variable lease cost	66		49
Total net lease cost	$	1,582	$	1,601

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

As discussed in Note 3,1, the majority of our contracts with customers meet the definition of a lease. ~~See Note 3 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 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~~During the three months ~~ending June 30, 2020. Certain components of this agreement~~ended March 31, 2021, we entered into new agreements and modified other agreements with HFC related to our Cheyenne assets, Tulsa West lube racks, and various crude tanks. These agreements 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~~terms to anyone other than ~~Delek.~~HFC. 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~~ended March 31, 2021 composed of the following:



	(In thousands)

Net investment in leases	$	41,246
Properties and equipment, net	(23,155)
Deferred revenue	6,559
Gain on sales-type leases	$	24,650

(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, Six Months Ended
June 30,
2020 2019 2020 2019
(In thousands)
Operating lease revenues $ 84,872
$ 94,783
$ 175,671
$ 188,287
Direct financing lease interest income 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
—


	Three Months Ended March 31,
	2021		2020
	(In thousands)
Operating lease revenues	$	85,892	$	91,388
Direct financing lease interest income	524		524
Gain on sales-type leases	24,650		0
Sales-type lease interest income	6,025		1,655
Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable	2,052		1,797

For our sales-type leases, we included customer obligations related to minimum volume requirements in 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 remaining amounts recorded as a reduction in net investment in leases. We recognized any billings for throughput volumes in excess of minimum volume requirements as variable lease payments, and these variable lease payments were recorded in lease revenues.

Annual minimum undiscounted lease payments under our leases were as follows as of ~~June 30, 2020:~~March 31, 2021:


	Operating		Finance		Sales-type
Years Ending December 31,	(In thousands)
Remainder of 2021	$	212,736	$	1,598	$	20,900
2022	282,394		2,145		27,867
2023	251,943		2,162		23,961
2024	215,839		2,179		20,732
2025	152,925		2,196		17,305
2026 and thereafter	553,945		38,591		133,315
Total lease receipt payments	$	1,669,782	$	48,871	$	244,080
Less: Imputed interest			(32,436)		(189,424)
			16,435		54,656
Unguaranteed residual assets at end of leases			0		139,121
Net investment in leases			$	16,435	$	193,777

Operating Finance Sales-type
Years Ending December 31, (In thousands)
Remainder of 2020 $ 155,376
$ 1,060
$ 6,198
2021 306,771
2,128
12,396
2022 304,315
2,145
12,396
2023 273,362
2,162
12,396
2024 235,280
2,179
12,396
2025 and thereafter 739,158
40,787
72,432
Total $ 2,014,262
$ 50,461
$ 128,214

Net investments in leases recorded on our balance sheet were composed of the following:


	March 31, 2021				December 31, 2020
	Sales-type Leases		Direct Financing Leases		Sales-type Leases		Direct Financing Leases
	(In thousands)				(In thousands)
Lease receivables (1)	$	122,514	$	16,435	$	88,922	$	16,452
Unguaranteed residual assets	71,263		0		64,551		0
Net investment in leases	$	193,777	$	16,435	$	153,473	$	16,452

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

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 5:~~	~~Fair Value Measurements~~

Note 5:Fair Value Measurements

Fair value 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 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:

March 31, 2021

December 31, 2020

Financial Instrument

Fair Value Input Level

Carrying
Value

Fair Value

Carrying
Value

Fair Value

(In thousands)

Liabilities:

5% Senior Notes

Level 2

492,335

504,960

492,103

506,540

June 30, 2020 December 31, 2019
Financial Instrument Fair Value Input Level
Carrying
Value
Fair Value
Carrying
Value
Fair Value
(In thousands)
Liabilities:
6% Senior Notes 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 9 for additional information.

Non-Recurring Fair Value Measurements

For gains on sales-type leases recognized during ~~the second quarter of 2020,~~three months ended March 31, 2021, 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.

During the three months ended March 31, 2021, we recognized goodwill impairment based on fair value measurements utilized during our goodwill testing (see Note 1). The fair value measurements were based on a combination of valuation methods including discounted cash flows, the guideline public company and guideline transaction methods and obsolescence adjusted replacement costs, all of which are Level 3 inputs.

Note 6:Properties and Equipment

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


	March 31, 2021		December 31, 2020
	(In thousands)
Pipelines, terminals and tankage1	$	1,554,870	$	1,575,815
Refinery assets	348,882		348,882
Land and right of way	87,076		87,076
Construction in progress	79,762		58,467
Other1	45,471		46,201
	2,116,061		2,116,441
Less accumulated depreciation	(683,262)		(665,756)
	$	1,432,799	$	1,450,685

June 30,
2020 December 31,
2019
(In thousands)
Pipelines, terminals and tankage $ 1,610,916
$ 1,602,231
Refinery assets 349,030
348,093
Land and right of way 87,076
86,190
Construction in progress 30,892
10,930
Other 9,829
14,110
2,087,743
2,061,554
Less accumulated depreciation 628,809
594,455
$ 1,458,934
$ 1,467,099

~~We capitalized $24 thousand and $8 thousand during the six months ended June 30, 2020 and 2019, respectively, in interest attributable~~(1)Prior period balances have been reclassified to ~~construction projects.~~

be comparative to current period.

Depreciation expense was ~~$41.7~~$21.4 million and ~~$41.3~~$20.3 million for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019~~, respectively, and includes depreciation of assets acquired under capital leases.

Note 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~~were as follows:


	Useful Life	March 31, 2021		December 31, 2020
		(In thousands)
Delek transportation agreement	30 years	$	59,933	$	59,933
HFC transportation agreement	10-15 years	75,131		75,131
Customer relationships	10 years	69,683		69,683
Other	20 years	50		50
		204,797		204,797
Less accumulated amortization		(120,984)		(117,482)
		$	83,813	$	87,315

Useful Life June 30,
2020 December 31,
2019
(In thousands)
Delek transportation agreement 30 years $ 59,933
$ 59,933
HFC transportation agreement 10-15 years 75,131
75,131
Customer relationships 10 years 69,683
69,683
Other 50
50
204,797
204,797
Less accumulated amortization 110,479
103,475
$ 94,318
$ 101,322

Amortization expense was ~~$7.0~~$3.5 million for ~~both of~~ the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019.~~respectively. We estimate amortization expense to be $14.0 million for ~~each of the next two years,~~2022, $9.9 million in 2023, and $9.1 million infor 2024 ~~and 2025.~~through 2026.

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 variable interest entity of HFC; therefore, our basis in these agreements is ~~zero~~0 and does not reflect a step-up in basis to fair value.

Note 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 ~~$1.6~~$2.2 million ~~and $1.7 million~~ for each of the three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019, respectively, and $3.7 million for the six months ended June 30, 2020 and 2019.~~2020.

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 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, 2020~~,March 31, 2021, we had 2 types of incentive-based awards outstanding, which are described below. The compensation cost charged against income was ~~$0.5~~$0.7 million and ~~$0.6~~$0.5 million for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $1.0 million and $1.2 million for the six months ended June 30, 2020 and 2019.~~respectively. We currently purchase units in the open market instead of issuing new units for settlement of all unit awards under our Long-Term Incentive Plan. As of ~~June 30, 2020,~~March 31, 2021, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which ~~1,119,542 have not yet been~~855,049 were available to be 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~~phantom units to our 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. 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~~three months ended ~~June 30, 2020,~~March 31, 2021, is presented below:


Phantom Units	Units	Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2021 (nonvested)	295,992	$	14.48


Forfeited	(870)	16.17
Outstanding at March 31, 2021 (nonvested)	295,122	14.48

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

~~The grant date fair values of~~NaN phantom units ~~that were~~ vested and transferred to recipients during the ~~six~~three 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.~~March 31, 2021 . As of ~~June 30, 2020, there was $1.4~~March 31, 2021, $2.6 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~~1.5 years.

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, 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~~three months ended ~~June 30, 2020.~~March 31, 2021. Although common units are not transferred to the recipients until the performance units vest, the recipients have distribution rights with respect to the target number of performance units subject to the award from the date of grant at the same rate as distributions paid on our common units.

A summary of performance unit activity and changes for the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, is presented below:



Performance Units	Units
Outstanding at January 1, ~~2020~~2021 (nonvested)	~~53,445~~77,472

Vesting and transfer of common units to recipients	~~(11,634~~(10,881)	)

Outstanding at ~~June 30, 2020~~March 31, 2021 (nonvested)	~~41,811~~66,591

The grant date fair value of performance units vested and transferred to recipients during both of the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ was $0.4 million ~~and $0.3 million, respectively.~~. Based on the weighted-average fair value of performance units outstanding at ~~June 30, 2020,~~March 31, 2021, of $1.2 million, there was ~~$0.4~~$0.7 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of ~~1.6~~2.0 years.

During the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, we 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.

~~We have~~At March 31, 2021, we had a $1.4 billion senior secured revolving credit facility (the “Credit Agreement”) ~~expiring~~maturing in July 2022. On April 30, 2021, the Credit Agreement was amended (the “Amended Credit Agreement”), decreasing the size of the facility from $1.4 billion to $1.2 billion and extending the maturity date to July 27, 2025. The Amended Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments, ~~and~~ working capital and for general partnership purposes. The Amended Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit and ~~it contains~~continues to provide for an accordion feature ~~giving~~that allows us ~~the ability~~ to increase commitments under the ~~size of the facility by~~Amended Credit Agreement up to ~~$300 million with additional lender commitments.~~a maximum amount of $1.7 billion.

Our obligations under the Amended Credit Agreement are collateralized by substantially all of our assets, and indebtedness under the Amended Credit Agreement is guaranteed by our material, wholly-owned subsidiaries. The Amended 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~~maturity of the Amended Credit Agreement, HEP obtains two investment grade credit ratings, the Amended 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 Amended Credit Agreement, the lenders will be able to accelerate the maturity of all loans outstanding and exercise other rights and remedies. We were in compliance with the covenants under the Credit Agreement as of ~~June 30, 2020.~~March 31, 2021.

As of December 31, 2019, we had $500 million aggregate principal amount of 6% senior unsecured notes due in 2024 (the "6% Senior Notes") outstanding. The 6% Senior 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 funded the $522.5 million redemption with net proceeds from the issuance of our 5% Senior Notes and borrowings under our Credit Agreement.

The 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 5% Senior Notes as of ~~June 30, 2020.~~March 31, 2021. At any time when the 5% Senior Notes are rated investment grade by either Moody’s 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 5% Senior Notes.

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

The carrying amounts of our long-term debt ~~was~~were as follows:

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%~~80% of our total revenues for the three months ~~and six months~~ ended ~~June 30, 2020, respectively.~~March 31, 2021. 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 ~~July 1, 2020,~~March 31, 2021, these agreements with HFC require minimum annualized payments to us of ~~$351.1~~$338 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~~)$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~~were as follows:

•Revenues received from HFC were ~~$95.6~~$101.9 million and ~~$102.4~~$101.4 million for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $197.0 million and $205.7 million for the six months ended June 30, 2020 and 2019,~~ respectively.

•HFC charged us general and administrative services under the Omnibus Agreement of $0.7 million ~~and $0.6 million~~ for both the three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019, and $1.3 million for the six months ended June 30, 2020 and 2019.~~2020.

•We reimbursed HFC for costs of employees supporting our operations of ~~$13.2~~$14.4 million and $14.1 million for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, and $27.3 million and $26.8 million for the six months ended June 30, 2020 and 2019.~~respectively.

•HFC reimbursed us ~~$0.9~~$3.1 million ~~and $3.6 million~~ for both the three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019, respectively,~~ for expense and capital ~~projects, and $4.0~~projects..

•We distributed $20.9 million and ~~$5.8 million for the six months ended June 30, 2020 and 2019.~~

~~Accounts receivable from HFC were $49.8~~

•Accounts receivable from HFC were $45.5 million and $48.0 million at March 31, 2021, and December 31, 2020, respectively.

- 21 -

•Accounts payable to HFC were $10.2 million and $18.1 million at March 31, 2021, and December 31, 2020, respectively.

•Deferred revenue in the consolidated balance sheets included $0.4 million for both March 31, 2021 and December 31, 2020, relating to certain shortfall billings to HFC.

•~~$49.7 million~~ at ~~June 30, 2020, and~~ ~~December 31, 2019, respectively.~~

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

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

•We recorded a gain on sales-type leases with HFC of $24.7 million for the three months ended ~~June 30, 2020~~March 31, 2021, and ~~2019, respectively, and $1.0 million for both the six months ended June 30, 2020 and 2019 .~~

•HEP and ~~no payments~~HFC reached an agreement to terminate the existing minimum volume commitments for HEP’s Cheyenne assets and enter into new agreements, which were finalized and executed on February 8, 2021, with the following terms, in each case effective January 1, 2021: (1) a ten-year lease with 2 five-year renewal option periods for HFC’s use of certain HEP tank and rack assets in the Cheyenne Refinery to facilitate renewable diesel production with an annual lease payment of approximately $5 million, (2) a five-year contango service fee arrangement that will utilize HEP tank assets inside the Cheyenne Refinery where HFC will pay a base tariff to HEP for available crude oil storage and HFC and HEP will split any profits generated on crude oil contango opportunities and (3) a $10 million one-time cash payment from HFC to HEP for the ~~same period in 2019, respectively, and $4.8 million for~~termination of the ~~six months ended June 30, 2020 and no payments for the same period in 2019.~~existing minimum volume commitment.

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, 2020,~~March 31, 2021, 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.

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. As of ~~June 30, 2020,~~March 31, 2021, HEP has issued 2,413,153 units under this program, providing $82.3 million in gross proceeds.

Allocations of Net Income

Net income attributable to HEP is allocated to the partners based on their weighted-average ownership percentage during the period.

On ~~July 23, 2020~~,April 22, 2021, we announced our cash distribution for the ~~second~~first quarter of ~~2020~~2021 of $0.35 per unit. The distribution is payable on all common units and will be paid ~~August~~May 13, ~~2020~~,2021, to all unitholders of record on ~~August~~May 3, ~~2020. However, HEP Logistics waived $2.5 million in limited partner cash distributions due to them as discussed in Note 1.~~2021.

Our regular quarterly cash distribution to the limited partners will be $37.0 million for the three months ended March 31, 2021 and was $34.5 million for the three months ended June 30, 2020 and was $68.5 million for the three months ended June 30, 2019. For the six months ended June 30, 2020, the regular quarterly distribution to the limited partners will be $68.9 million and was $136.7 million for the six months ended June 30, 2019.March 31, 2020. Our distributions are declared subsequent to quarter end; therefore, these amounts do not reflect distributions paid during the respective period.

Basic net income per unit applicable to the limited partners is calculated as net income attributable to the 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 performance ~~units.To~~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 are immaterial for all periods presented.

Net income per limited partner unit is computed as follows:


	Three Months Ended March 31,
	2021		2020
	(In thousands, except per unit data)



Net income attributable to the partners	$	64,397	$	24,861
Less: Participating securities’ share in earnings	(225)		0
Net income attributable to common units	64,172		24,861
Weighted average limited partners' units outstanding	105,440		105,440
Limited partners' per unit interest in earnings - basic and diluted	$	0.61	$	0.24

Three Months Ended
June 30, Six Months Ended
June 30,
2020 2019 2020 2019
(In thousands, except per unit data)
Net income attributable to the partners $ 76,470
$ 45,690
$ 101,331
$ 96,872
Weighted average limited partners' units outstanding 105,440
105,440
105,440
105,440
Limited partners' per unit interest in earnings - basic and diluted $ 0.73
$ 0.43
$ 0.96
$ 0.92

Note 13:Environmental

We expensed ~~$0.5 million~~$33 thousand and ~~$0.7~~$0.2 million for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, respectively for environmental remediation ~~obligations, and we expensed $0.1 million for the three and six months ended June 30, 2019.~~obligations. The accrued environmental liability, net of expected recoveries from indemnifying parties, reflected in our consolidated balance sheets was ~~$5.7~~$4.4 million and ~~$5.5~~$4.5 million at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, of which ~~$3.5~~$2.3 million and $2.5 million, was classified as other long-term liabilities ~~for both periods.~~at March 31, 2021 and December 31, 2020. 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. Our consolidated balance sheets included additional accrued environmental liabilities of ~~$0.4 million and~~ $0.5 million for HFC indemnified liabilities ~~for the periods ending June 30, 2020~~as of both March 31, 2021 and December 31, ~~2019, respectively,~~2020, 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~~2 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.

Pipelines and terminals(1)


	March 31, 2021		December 31, 2020
	(In thousands)
Identifiable assets:
Pipelines and terminals (2)	$	1,739,414	$	1,729,547
Refinery processing units	300,363		305,090
Other	130,749		132,928
Total identifiable assets	$	2,170,526	$	2,167,565

June 30, 2020 December 31, 2019
(In thousands)
Identifiable assets:
Pipelines and terminals⁽¹⁾
$ 1,765,038
$ 1,749,843
Refinery processing units 307,900
305,897
Other 148,845
143,492
Total identifiable assets $ 2,221,783
$ 2,199,232

(1) Pipelines and terminals segment operating income includes goodwill impairment charge of $11.0 million for the three months ended March 31, 2021.

~~(1)~~(2) Includes goodwill of ~~$270.3~~$223.7 million as of March 31, 2021 and $234.7 million as of ~~June 30, 2020 and~~ December 31, ~~2019.~~2020.

Note 16: Supplemental Guarantor/Non-Guarantor Financial Information

Obligations of HEP (“Parent”) under the 5% Senior Notes have been jointly and severally guaranteed by each of its direct and indirect 100% owned subsidiaries, other than Holly Energy Finance Corp. and certain immaterial 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


March 31, 2021	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	2,125	$	(838)	$	18,466	$	0	$	19,753
Accounts receivable	0		54,301		8,919		(302)		62,918
Prepaid and other current assets	501		8,252		749		0		9,502
Total current assets	2,626		61,715		28,134		(302)		92,173

Properties and equipment, net	0		1,054,969		377,830		0		1,432,799
Operating lease right-of-use assets	0		2,773		139		0		2,912
Net investment in leases	0		206,124		0		0		206,124
Investment in subsidiaries	1,793,064		290,948		0		(2,084,012)		0
Intangible assets, net	0		83,813		0		0		83,813
Goodwill	0		223,650		0		0		223,650
Equity method investments	0		79,301		38,964		0		118,265
Other assets	3,671		7,119		0		0		10,790
Total assets	$	1,799,361	$	2,010,412	$	445,067	$	(2,084,314)	$	2,170,526

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	0	$	22,978	$	17,683	$	(302)	$	40,359
Accrued interest	4,661		0		0		0		4,661
Deferred revenue	0		13,589		500		0		14,089
Accrued property taxes	0		3,488		1,762		0		5,250
Current operating lease liabilities	0		810		72		0		882
Current finance lease liabilities	0		3,668		0		0		3,668
Other current liabilities	129		2,848		12		0		2,989
Total current liabilities	4,790		47,381		20,029		(302)		71,898

Long-term debt	1,388,335		0		0		0		1,388,335
Noncurrent operating lease liabilities	0		2,404		0		0		2,404
Noncurrent finance lease liabilities	0		67,309		0		0		67,309
Other long-term liabilities	260		11,197		450		0		11,907
Deferred revenue	0		35,314		0		0		35,314
Class B unit	0		53,743		0		0		53,743
Equity - partners	405,976		1,793,064		290,948		(2,084,012)		405,976
Equity - noncontrolling interests	0		0		133,640		0		133,640
Total liabilities and equity	$	1,799,361	$	2,010,412	$	445,067	$	(2,084,314)	$	2,170,526

June 30, 2020 Parent
Guarantor
Restricted Subsidiaries
Non-Guarantor Non-Restricted Subsidiaries Eliminations Consolidated
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 3,927
$ (766 ) $ 15,752
$ —
$ 18,913
Accounts receivable —
58,197
7,840
(1,261 ) 64,776
Prepaid and other current assets 337
6,992
576

7,905
Total current assets 4,264
64,423
24,168
(1,261 ) 91,594

Properties and equipment, net —
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

1,868,595
282,348
—
(2,150,943 ) —
Intangible assets, net —
94,318
—
—
94,318
Goodwill —
270,336
—
—
270,336
Equity method investments —
83,484
39,815
—
123,299
Other assets 5,497
6,275
—
—
11,772
Total assets $ 1,878,356
$ 2,082,661
$ 412,970
$ (2,152,204 ) $ 2,221,783

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ —
$ 14,343
$ 8,843
$ (1,261 ) $ 21,925
Accrued interest 10,683
—
—
—
10,683
Deferred revenue —
10,502
500
—
11,002
Accrued property taxes —
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 42
2,819
114
—
2,975
Total current liabilities 10,725
34,834
12,319
(1,261 ) 56,617

Long-term debt 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
12,909
520
—
13,689
Deferred revenue —
42,692
—
—
42,692
Class B unit —
51,062
—
—
51,062
Equity - partners 380,723
1,868,595
282,348
(2,150,943 ) 380,723
Equity - noncontrolling interest —
—
117,783
—
117,783
Total liabilities and equity $ 1,878,356
$ 2,082,661
$ 412,970
$ (2,152,204 ) $ 2,221,783

Condensed Consolidating Balance Sheet


December 31, 2020	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	1,627	$	(987)	$	21,350	$	0	$	21,990
Accounts receivable	0		56,522		6,308		(315)		62,515
Prepaid and other current assets	349		8,366		772		0		9,487
Total current assets	1,976		63,901		28,430		(315)		93,992

Properties and equipment, net	0		1,087,184		363,501		0		1,450,685
Operating lease right-of-use assets	0		2,822		157		0		2,979
Net investment in leases	0		166,316		0		0		166,316
Investment in subsidiaries	1,789,808		286,883		0		(2,076,691)		0
Intangible assets, net	0		87,315		0		0		87,315
Goodwill	0		234,684		0		0		234,684
Equity method investments	0		81,089		39,455		0		120,544
Other assets	4,268		6,782		0		0		11,050
Total assets	$	1,796,052	$	2,016,976	$	431,543	$	(2,077,006)	$	2,167,565

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	0	$	30,252	$	16,463	$	(315)	$	46,400
Accrued interest	10,892		0		0		0		10,892
Deferred revenue	0		10,868		500		0		11,368
Accrued property taxes	0		2,915		1,077		0		3,992
Current operating lease liabilities	0		804		71		0		875
Current finance lease liabilities	0		3,713		0		0		3,713
Other current liabilities	5		2,491		9		0		2,505
Total current liabilities	10,897		51,043		18,120		(315)		79,745

Long-term debt	1,405,603		0		0		0		1,405,603
Noncurrent operating lease liabilities	0		2,476		0		0		2,476
Noncurrent finance lease liabilities	0		68,047		0		0		68,047
Other long-term liabilities	260		12,171		474		0		12,905
Deferred revenue	0		40,581		0		0		40,581
Class B unit	0		52,850		0		0		52,850
Equity - partners	379,292		1,789,808		286,883		(2,076,691)		379,292
Equity - noncontrolling interests	0		0		126,066		0		126,066
Total liabilities and equity	$	1,796,052	$	2,016,976	$	431,543	$	(2,077,006)	$	2,167,565

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


Three Months Ended March 31, 2021	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
Revenues:
Affiliates	$	0	$	95,701	$	6,225	$	0	$	101,926
Third parties	0		19,051		6,206		0		25,257
	0		114,752		12,431		0		127,183
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	0		37,799		3,566		0		41,365
Depreciation and amortization	0		20,836		4,229		0		25,065
General and administrative	1,178		1,790		0		0		2,968
Goodwill impairment	0		11,034		0		0		11,034
	1,178		71,459		7,795		0		80,432
Operating income (loss)	(1,178)		43,293		4,636		0		46,751

Other income (expense):
Equity in earnings of subsidiaries	77,809		4,136		0		(81,945)		0
Equity in earnings of equity method investments	0		618		1,145		0		1,763
Interest expense	(12,234)		(1,006)		0		0		(13,240)
Interest income	0		6,548		0		0		6,548
Gain on sales-type lease	0		24,650		0		0		24,650
Other income	0		501		1		0		502
	65,575		35,447		1,146		(81,945)		20,223
Income before income taxes	64,397		78,740		5,782		(81,945)		66,974
State income tax expense	0		(37)		0		0		(37)
Net income	64,397		78,703		5,782		(81,945)		66,937
Allocation of net income attributable to noncontrolling interests	0		(893)		(1,647)		0		(2,540)

Net income attributable to the partners	$	64,397	$	77,810	$	4,135	$	(81,945)	$	64,397

Three Months Ended June 30, 2020 Parent
Guarantor Restricted
Subsidiaries
Non-Guarantor Non-restricted Subsidiaries Eliminations Consolidated
(In thousands)
Revenues:
Affiliates $ —
$ 89,417
$ 6,146
$ —
$ 95,563
Third parties —
15,887
3,357
—
19,244
—
105,304
9,503
—
114,807
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) —
30,980
3,757
—
34,737
Depreciation and amortization —
20,739
4,295
—
25,034
General and administrative 780
1,755
—
—
2,535
780
53,474
8,052
—
62,306
Operating income (loss) (780 ) 51,830
1,451
—
52,501

Other income (expense):
Equity in earnings of subsidiaries 89,893
1,510
—
(91,403 ) —
Equity in earnings of equity method investments —
1,449
707
—
2,156
Interest expense (12,740 ) (1,039 ) —
—
(13,779 )
Interest income 26
2,787
—
—
2,813
Gain on sales-type lease —
33,834
—
—
33,834
Gain on sale of assets and other 71
396
1
—
468
77,250
38,937
708
(91,403 ) 25,492
Income before income taxes 76,470
90,767
2,159
(91,403 ) 77,993
State income tax expense —
(39 ) —
—
(39 )
Net income 76,470
90,728
2,159
(91,403 ) 77,954
Allocation of net income attributable to noncontrolling interests —
(835 ) (649 ) —
(1,484 )
Net income attributable to the partners $ 76,470
$ 89,893
$ 1,510
$ (91,403 ) $ 76,470

~~Condensed Consolidating Statement of Comprehensive Income~~

Restricted Subsidiaries

~~Condensed Consolidating Statement of Comprehensive Income~~

Guarantor Restricted

Condensed Consolidating Statement of ~~Comprehensive~~ Income


Three Months Ended March 31, 2020	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
Revenues:
Affiliates	$	0	$	94,755	$	6,673	$	0	$	101,428
Third parties	0		19,155		7,271		0		26,426
	0		113,910		13,944		0		127,854
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	0		31,131		3,850		0		34,981
Depreciation and amortization	0		19,753		4,225		0		23,978
General and administrative	1,099		1,603		0		0		2,702
	1,099		52,487		8,075		0		61,661
Operating income (loss)	(1,099)		61,423		5,869		0		66,193

Other income (expense):
Equity in earnings of subsidiaries	68,535		4,295		0		(72,830)		0
Equity in earnings of equity method investments	0		2,088		(374)		0		1,714
Interest expense	(16,730)		(1,037)		0		0		(17,767)
Interest income	0		2,218		0		0		2,218
Loss on early extinguishment of debt	(25,915)		0		0		0		(25,915)

Gain on sale of assets and other	70		420		16		0		506
	25,960		7,984		(358)		(72,830)		(39,244)
Income before income taxes	24,861		69,407		5,511		(72,830)		26,949
State income tax expense	0		(37)		0		0		(37)
Net income	24,861		69,370		5,511		(72,830)		26,912
Allocation of net income attributable to noncontrolling interests	0		(835)		(1,216)		0		(2,051)


Net income attributable to the partners	$	24,861	$	68,535	$	4,295	$	(72,830)	$	24,861

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~~

Restricted Subsidiaries

~~Condensed Consolidating Statement of Cash Flows~~

Six Months Ended June 30, 2019 Parent
Guarantor
Restricted Subsidiaries
Non-Guarantor Non-Restricted Subsidiaries Eliminations Consolidated
(In thousands)
Cash flows from operating activities $ (37,005 ) $ 165,882
$ 23,671
$ (7,559 ) $ 144,989

Cash flows from investing activities
Additions to properties and equipment —
(17,274 ) (478 ) —
(17,752 )
Distributions from UNEV in excess of earnings —
8,191
—
(8,191 ) —
Proceeds from sale of assets —
194
—
—
194
Distributions in excess of equity in earnings of equity investments —
299
—
—
299
—
(8,590 ) (478 ) (8,191 ) (17,259 )

Cash flows from financing activities
Net borrowings under credit agreement 18,500
—
—
—
18,500
Net intercompany financing activities 155,225
(155,225 ) —
—
—
Distributions to HEP unitholders (136,207 ) —
—
—
(136,207 )
Distributions to noncontrolling interests —
—
(21,000 ) 15,750
(5,250 )
Units withheld for tax withholding obligations (119 ) —
—
—
(119 )
Purchase units for incentive grants (255 )

—
—
(255 )
Payments on finance leases (139 ) (364 ) —
—
(503 )
37,005
(155,589 ) (21,000 ) 15,750
(123,834 )

Cash and cash equivalents
Increase for the period —
1,703
2,193
—
3,896
Beginning of period 2
—
3,043
—
3,045
End of period $ 2
$ 1,703
$ 5,236
$ —
$ 6,941

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.

HEP is a Delaware limited partnership. Through our subsidiaries and joint ventures, we own and/or operate petroleum product and crude oil pipelines, terminal, tankage and loading rack facilities and refinery processing units that support the refining and marketing operations of HollyFrontier Corporation (“HFC”) and other refineries in the Mid-Continent, Southwest and Northwest regions of the United States. HEP, through its subsidiaries and joint ventures, owns and/or operates petroleum product and crude pipelines, tankage and terminals in 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, 2020.~~March 31, 2021.

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~~diminished 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,~~last three quarters, demand for transportation fuels ~~stabilized, and we saw~~showed incremental improvement ~~in our volumes late in~~over the ~~quarter.~~second quarter of 2020. 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~~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 operating cash flow and improving distributable cash flow coverage to 1.3x or greater ~~and~~with the goal of 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 the COVID-19 pandemic 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~~dates from 2021 to 2036. These minimum volume commitments accounted for approximately ~~70%~~71% and 76% of our total revenues in ~~2019.~~the three months ended March 31, 2021 and the twelve months ended December 31, 2020, respectively. We are currently not aware of any reasons that would prevent such customers

from making the minimum payments required under the contracts or potentially making payments in excess of the minimum ~~payments.~~ payments, other than with respect to the agreement reached with HFC with respect to HEP’s Cheyenne assets, which became effective on January 1, 2021 and is discussed below. 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 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, construction, ownership and ~~construction~~operation 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~~in service during the second quarter of 2020, and the Cushing Connect Pipeline is expected to be placed in service during the ~~first~~third 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~~has 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~~Terminal.The total Cushing Connect Joint Venture investment will generally be shared ~~proportionately~~equally among ~~the partners,~~HEP and Plains, 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~~are approximately $65 million to $70 million. However, we are solely responsible for any Cushing Connect Pipeline construction costs which exceed 10% of the budget.

We serve ~~HFC’s~~HFC's refineries under long-term pipeline, terminal, tankage and refinery processing unit throughput agreements expiring from 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 PPI or the FERC index. On December 17, 2020, FERC established a new price index for the five-year period commencing July 1, 2021 and ending June 30, 2026, in which common carriers charging indexed rates are permitted to adjust their indexed ceilings annually by Producer Price Index ~~(“PPI”) or Federal Energy Regulatory Commission index.~~plus 0.78%. FERC has received requests for rehearing of its December 17, 2020 order, which remain pending in FERC Docket No. RM20-14-000. As of ~~July 1, 2020,~~March 31, 2021, these agreements with HFC require minimum annualized payments to us of ~~$351.1~~$338 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.

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

HEP and HFC finalized and executed new agreements for HEP's Cheyenne assets on February 8, 2021, with the following terms, in each case effective January 1, 2021: (1) a ten-year lease with two five-year renewal option periods for HFC’s use of ~~June 30, 2020, our throughput agreement~~certain HEP tank and rack assets in the Cheyenne Refinery to facilitate renewable diesel production with ~~HFC required minimum annualized payments to us~~an annual lease payment of approximately ~~$17.6~~$5 million, (2) a five-year contango service fee arrangement that will utilize HEP tank assets inside the Cheyenne Refinery where HFC will pay a base tariff to HEP for available crude oil storage and HFC and HEP will split any profits generated on crude oil contango opportunities and (3) a $10 million one-time cash payment from HFC to HEP for the termination of the existing minimum volume commitment.

Indicators of goodwill and long-lived asset impairment

The changes in our new agreements with HFC related to our Cheyenne ~~assets. During~~assets resulted in an increase in 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~~reporting unit due to sales-type lease accounting, which led us to determine indicators 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~~potential 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~~Cheyenne reporting unit were present.

The estimated fair values of our Cheyenne ~~assets, such assets could be at risk~~reporting unit were derived using a combination of income and market approaches. The income approach reflects expected future cash flows based on anticipated gross margins, operating costs, and capital expenditures. The market approaches include both the guideline public company and guideline transaction methods. Both methods utilize pricing multiples derived from historical market transactions of other like-kind assets. These fair value measurements involve significant unobservable inputs (Level 3 inputs). See Note 5 for further discussion of Level 3 inputs.

Our interim impairment testing of our Cheyenne reporting unit goodwill identified an impairment charge of $11.0 million, which was recorded in the ~~future and such impairment charges could be material.~~three months ended March 31, 2021.

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.

We have a long-term strategic relationship with HFC that has historically facilitated our growth. Our future growth plans include organic projects around our existing assets and select investments or acquisitions that enhance our service platform while creating accretion for our unitholders. While in the near term, any acquisitions would be subject to economic conditions discussed in “Overview - Impact of COVID-19 on Our Business” above, we also expect over the longer term to 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.

Income, Distributable Cash Flow, Volumes and Balance Sheet Data

The following tables present income, distributable cash flow and volume information for the three months ended March 31, 2021 and 2020.


	Three Months Ended March 31,				Change from
	2021		2020		2020
	(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates—refined product pipelines	$	18,606	$	20,083	$	(1,477)
Affiliates—intermediate pipelines	7,506		7,474		32
Affiliates—crude pipelines	19,454		20,393		(939)
	45,566		47,950		(2,384)
Third parties—refined product pipelines	9,863		14,798		(4,935)
Third parties—crude pipelines	11,076		7,724		3,352
	66,505		70,472		(3,967)
Terminals, tanks and loading racks:
Affiliates	33,864		33,594		270
Third parties	4,318		3,904		414
	38,182		37,498		684

Refinery processing units—Affiliates	22,496		19,884		2,612

Total revenues	127,183		127,854		(671)
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	41,365		34,981		6,384
Depreciation and amortization	25,065		23,978		1,087
General and administrative	2,968		2,702		266
Goodwill impairment	11,034		—		11,034
	80,432		61,661		18,771
Operating income	46,751		66,193		(19,442)
Other income (expense):
Equity in earnings of equity method investments	1,763		1,714		49
Interest expense, including amortization	(13,240)		(17,767)		4,527
Interest income	6,548		2,218		4,330
Loss on early extinguishment of debt	—		(25,915)		25,915
Gain on sales-type leases	24,650		—		24,650
Gain on sale of assets and other	502		506		(4)
	20,223		(39,244)		59,467
Income before income taxes	66,974		26,949		40,025
State income tax expense	(37)		(37)		—
Net income	66,937		26,912		40,025

Allocation of net income attributable to noncontrolling interests	(2,540)		(2,051)		(489)
Net income attributable to the partners	64,397		24,861		39,536


Limited partners’ earnings per unit—basic and diluted	$	0.61	$	0.24	$	0.37
Weighted average limited partners’ units outstanding	105,440		105,440		—
EBITDA (1)	$	96,191	$	64,425	$	31,766
Adjusted EBITDA (1)	$	87,936	$	91,109	$	(3,173)
Distributable cash flow (2)	$	73,218	$	70,708	$	2,510

Volumes (bpd)
Pipelines:
Affiliates—refined product pipelines	119,590		129,966		(10,376)
Affiliates—intermediate pipelines	115,225		142,112		(26,887)
Affiliates—crude pipelines	250,647		305,031		(54,384)
	485,462		577,109		(91,647)
Third parties—refined product pipelines	44,428		49,637		(5,209)
Third parties—crude pipelines	123,232		92,203		31,029
	653,122		718,949		(65,827)
Terminals and loading racks:
Affiliates	323,286		429,730		(106,444)
Third parties	45,753		45,945		(192)
	369,039		475,675		(106,636)
Refinery processing units—Affiliates	60,699		69,795		(9,096)
Total for pipelines and terminal and refinery processing unit assets (bpd)	1,082,860		1,264,419		(181,559)

(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, (ii) goodwill impairment and (iii) pipeline tariffs not included in revenues due to impacts from lease accounting for certain pipeline tariffs minus (iv) gain on sales-type leases, and (v) 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 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 recorded as interest expense and reductions in the lease liability. EBITDA and Adjusted EBITDA are not calculations based upon generally accepted accounting principles ("GAAP"). However, the amounts included in the EBITDA and Adjusted EBITDA calculations are derived from amounts included in our consolidated financial statements. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income attributable to Holly Energy Partners or operating income, as indications of our operating performance or as alternatives to operating cash flow as a measure of liquidity. EBITDA and Adjusted EBITDA are not necessarily comparable to similarly titled measures of other companies. EBITDA and Adjusted EBITDA are presented here because they are widely used financial indicators used by investors and analysts to measure performance. EBITDA and Adjusted EBITDA are also used by our management for internal analysis and as a basis for compliance with financial covenants. Set forth below are our calculations of EBITDA and Adjusted EBITDA.


	Three Months Ended March 31,
	2021		2020
	(In thousands)
Net income attributable to the partners	$	64,397	$	24,861
Add (subtract):
Interest expense	13,240		17,767
Interest income	(6,548)		(2,218)
State income tax expense	37		37
Depreciation and amortization	25,065		23,978
EBITDA	$	96,191	$	64,425
Loss on early extinguishment of debt	—		25,915
Gain on sales-type leases	(24,650)		—
Goodwill impairment	11,034		—

Pipeline tariffs not included in revenues	6,967		2,375
Lease payments not included in operating costs	(1,606)		(1,606)
Adjusted EBITDA	$	87,936	$	91,109

(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 ~~six months ended June 30, 2020 and 2019.~~cash our business is generating. Set forth below is our calculation of distributable cash flow.

- 35 -

Three Months Ended June 30, Change from
2020 2019 2019
(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates—refined product pipelines $ 16,302
$ 20,759
$ (4,457 )
Affiliates—intermediate pipelines 7,475
7,297
178
Affiliates—crude pipelines 19,311
20,651
(1,340 )
43,088
48,707
(5,619 )
Third parties—refined product pipelines 8,750
11,778
(3,028 )
Third parties—crude pipelines 7,116
11,778
(4,662 )
58,954
72,263
(13,309 )
Terminals, tanks and loading racks:
Affiliates 32,902
34,263
(1,361 )
Third parties 3,378
4,826
(1,448 )
36,280
39,089
(2,809 )

Affiliates—refinery processing units 19,573
19,399
174

Total revenues 114,807
130,751
(15,944 )
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) 34,737
40,602
(5,865 )
Depreciation and amortization 25,034
24,247
787
General and administrative 2,535
1,988
547
62,306
66,837
(4,531 )
Operating income 52,501
63,914
(11,413 )
Other income (expense):
Equity in earnings of equity method investments 2,156
1,783
373
Interest expense, including amortization (13,779 ) (19,230 ) 5,451
Interest income 2,813
551
2,262
Gain on sales-type leases 33,834
—
33,834
Gain on sale of assets and other 468
111
357
25,492
(16,785 ) 42,277
Income before income taxes 77,993
47,129
30,864
State income tax benefit (expense) (39 ) 30
(69 )
Net income 77,954
47,159
30,795
Allocation of net income attributable to noncontrolling interests (1,484 ) (1,469 ) (15 )
Net income attributable to the partners 76,470
45,690
30,780
Limited partners’ earnings per unit—basic and diluted $ 0.73
$ 0.43
$ 0.30
Weighted average limited partners’ units outstanding 105,440
105,440
—
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 100,524
130,802
(30,278 )
Affiliates—intermediate pipelines 128,464
141,345
(12,881 )
Affiliates—crude pipelines 252,570
370,351
(117,781 )
481,558
642,498
(160,940 )
Third parties—refined product pipelines 57,876
66,963
(9,087 )
Third parties—crude pipelines 85,851
140,555
(54,704 )
625,285
850,016
(224,731 )
Terminals and loading racks:
Affiliates 372,093
431,509
(59,416 )
Third parties 45,876
59,343
(13,467 )
417,969
490,852
(72,883 )

Affiliates—refinery processing units 49,891
77,728
(27,837 )

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

Table of ~~Contentsril 19,~~

Six Months Ended June 30, Change from
2020 2019 2019
(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates—refined product pipelines $ 36,385
$ 41,491
$ (5,106 )
Affiliates—intermediate pipelines 14,949
14,578
371
Affiliates—crude pipelines 39,704
41,772
(2,068 )
91,038
97,841
(6,803 )
Third parties—refined product pipelines 23,548
27,382
(3,834 )
Third parties—crude pipelines 14,840
22,140
(7,300 )
129,426
147,363
(17,937 )
Terminals, tanks and loading racks:
Affiliates 66,496
66,669
(173 )
Third parties 7,282
9,998
(2,716 )
73,778
76,667
(2,889 )

Affiliates—refinery processing units 39,457
41,218
(1,761 )

Total revenues 242,661
265,248
(22,587 )
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) 69,718
78,121
(8,403 )
Depreciation and amortization 49,012
48,071
941
General and administrative 5,237
4,608
629
123,967
130,800
(6,833 )
Operating income 118,694
134,448
(15,754 )
Other income (expense):
Equity in earnings of equity method investments 3,870
3,883
(13 )
Interest expense, including amortization (31,546 ) (38,252 ) 6,706
Interest income 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 974
(199 ) 1,173
(13,752 ) (33,489 ) 19,737
Income before income taxes 104,942
100,959
3,983
State income tax expense (76 ) (6 ) (70 )
Net income 104,866
100,953
3,913
Allocation of net income attributable to noncontrolling interests (3,535 ) (4,081 ) 546
Net income attributable to the partners 101,331
96,872
4,459
Limited partners’ earnings per unit—basic and diluted $ 0.96
$ 0.92
$ 0.04
Weighted average limited partners’ units outstanding 105,440
105,440
—
EBITDA ⁽¹⁾
$ 176,934
$ 182,122
$ (5,188 )
Adjusted EBITDA ⁽¹⁾
$ 171,276
$ 182,122
$ (10,846 )
Distributable cash flow ⁽²⁾
$ 136,164
$ 138,085
$ (1,921 )

Volumes (bpd)
Pipelines:
Affiliates—refined product pipelines 115,245
130,805
(15,560 )
Affiliates—intermediate pipelines 135,288
136,116
(828 )
Affiliates—crude pipelines 278,801
385,490
(106,689 )
529,334
652,411
(123,077 )
Third parties—refined product pipelines 53,756
73,975
(20,219 )
Third parties—crude pipelines 89,027
133,565
(44,538 )
672,117
859,951
(187,834 )
Terminals and loading racks:
Affiliates 400,911
402,909
(1,998 )
Third parties 45,910
64,028
(18,118 )
446,821
466,937
(20,116 )

Affiliates—refinery processing units 59,843
71,816
(11,973 )

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

~~Table of Contentsril 19,~~

~~(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 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"). However, the amounts included in the EBITDA and Adjusted EBITDA calculations are derived from amounts included in our consolidated financial statements. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income attributable to Holly Energy Partners or operating income, as indications of our operating performance or as alternatives to operating cash flow as a measure of liquidity. EBITDA and Adjusted EBITDA are not necessarily comparable to similarly titled measures of other companies. EBITDA and Adjusted EBITDA are presented here because they are widely used financial indicators used by investors and analysts to measure performance. EBITDA and Adjusted EBITDA are also used by our management for internal analysis and as a basis for compliance with financial covenants. Set forth below are our calculations of EBITDA and Adjusted EBITDA.

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):
Interest expense 13,779
19,230
31,546
38,252
Interest income (2,813 ) (551 ) (5,031 ) (1,079 )
State income tax (benefit) expense 39
(30 ) 76
6
Depreciation and amortization 25,034
24,247
49,012
48,071
EBITDA $ 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.

~~Table of Contentsril 19,~~

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,
2020 December 31,
2019
(In thousands)
Balance Sheet Data
Cash and cash equivalents $ 18,913
$ 13,287
Working capital $ 34,977
$ 20,758
Total assets $ 2,221,783
$ 2,199,232
Long-term debt $ 1,486,648
$ 1,462,031
Partners’ equity $ 380,723
$ 381,103


	Three Months Ended March 31,
	2021		2020
	(In thousands)
Net income attributable to the partners	$	64,397	$	24,861
Add (subtract):
Depreciation and amortization	25,065		23,978
Amortization of discount and deferred debt issuance costs	844		799
Loss on early extinguishment of debt	—		25,915
Customer billings greater than revenue recognized	3,394		264
Maintenance capital expenditures (3)	(1,372)		(2,487)
Increase (decrease) in environmental liability	(156)		1
Decrease in reimbursable deferred revenue	(4,014)		(2,800)
Gain on sales-type leases	(24,650)		—
Goodwill impairment	11,034		—
Other	(1,324)		177
Distributable cash flow	$	73,218	$	70,708

(3)Maintenance capital expenditures are capital expenditures made to replace partially or fully depreciated assets in order to maintain the existing operating capacity of our assets and to extend their useful lives. Maintenance capital expenditures include expenditures required to maintain equipment reliability, tankage and pipeline integrity, safety and to address environmental regulations.


	March 31, 2021		December 31, 2020
	(In thousands)
Balance Sheet Data
Cash and cash equivalents	$	19,753	$	21,990
Working capital	$	20,275	$	14,247
Total assets	$	2,170,526	$	2,167,565
Long-term debt	$	1,388,335	$	1,405,603
Partners’ equity	$	405,976	$	379,292

Results of Operations—Three Months Ended ~~June 30, 2020~~March 31, 2021 Compared with Three Months Ended ~~June 30, 2019~~March 31, 2020

Summary

Net income attributable to the partners for the ~~second~~first quarter was ~~$76.5~~$64.4 million ($~~0.73~~0.61 per basic and diluted limited partner unit) compared to ~~$45.7~~$24.9 million ($~~0.43~~0.24 per basic and diluted limited partner unit) for the ~~second~~first quarter of ~~2019. The increase in earnings was primarily due~~2020. Results for the first quarter of 2021 reflect special items that collectively increased net income attributable to the ~~recognition~~partners by a total of $13.6 million. These items included a ~~non-cash~~ gain on sales-type leases ~~resulting from the renewal~~ of $24.7 million and a ~~third-party throughput agreement during the second quarter~~goodwill impairment charge 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~~$11.0 million ~~million upon the initial recognition of the sales-type lease during the second quarter. Excluding this gain,~~related to our Cheyenne assets. In addition, net income attributable to ~~HEP~~the partners for the first quarter of 2020 included a loss on early extinguishment of debt of $25.9 million. Excluding these items, net income attributable to the partners for both the first quarters of 2021 and 2020 was ~~$42.6~~$50.8 million ($~~0.40~~0.48 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 lower volumes due to demand destruction caused by the COVID-19 pandemic substantially offset by lower operating expenses and lower interest expense..

Revenues

Revenues for the ~~second~~first quarter were ~~$114.8~~$127.2 million, a decrease of ~~$15.9~~$0.7 million compared to the ~~second~~first quarter of ~~2019.~~2020. The decrease was mainly attributable to a ~~26%~~9% reduction in overall crude and product pipeline volumes. Revenues did not decrease in proportion to the decrease in volumes ~~predominantly~~mainly due to contractual minimum volume guarantees as well as the recognition in revenue of $6.5 million of the $10 million termination fee related to the termination of HFC's existing minimum volume commitment on our ~~Southwest and Rockies regions.~~Cheyenne assets.

Revenues from our refined product pipelines were ~~$25.1~~$28.5 million, a decrease of ~~$7.5~~$6.4 million compared to the ~~second~~first quarter of ~~2019.~~2020. Shipments averaged ~~158.4~~164.0 thousand barrels per day (“mbpd”) compared to ~~197.8~~179.6 mbpd for the ~~second~~first quarter of ~~2019.~~ 2020.

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Table of

The volume and revenue decreases were mainly due to lower volumes on pipelines servicing HFC's Navajo refinery, Delek's Big

~~Table of Contentsril 19,~~

Spring refinery and our UNEV ~~pipeline as well as the recording~~pipeline. Revenue also decreased due to a reclassification of certain pipeline ~~tariffs as~~income from revenue to interest income ~~as the related throughput contract renewals were determined to be~~under sales-type ~~leases.~~lease accounting.

Revenues from our intermediate pipelines were $7.5 million, ~~an increase of $0.2 million compared to~~consistent with the ~~second~~first quarter of ~~2019.~~2020. Shipments averaged ~~128.5~~115.2 mbpd for the ~~second~~first quarter of ~~2020~~2021 compared to ~~141.3~~142.1 mbpd for the ~~second~~first quarter of ~~2019.~~2020. The decrease in volumes was mainly due to lower throughputs on our intermediate pipelines servicing HFC's Navajo refinery while revenue remained relatively constant mainly due to contractual minimum volume guarantees.

Revenues from our crude pipelines were ~~$26.4~~$30.5 million, ~~a decrease~~an increase of ~~$6.0~~$2.4 million compared to the ~~second~~first quarter of ~~2019,~~2020, and shipments averaged ~~338.4~~373.9 mbpd compared to ~~510.9~~397.2 mbpd for the ~~second~~first quarter of ~~2019.~~2020. The ~~decreases were~~revenue increase was mainly attributable to higher volumes on our crude pipeline systems in Wyoming and Utah. Those volume increases were more than offset by decreased volumes on our crude pipeline systems in New Mexico and ~~Texas and on our crude pipeline systems in Wyoming and Utah.~~

Texas. Revenues ~~from~~ ~~terminal, tankage and loading rack~~ fees were $36.3 million, a decrease of $2.8 million compared to the second quarter of 2019. Refined products and crude oil terminalled in the facilities averaged 418.0 mbpd compared to 490.9 mbpd for the second quarter of 2019. The volume and revenue decreases were mainly due to demand destruction associated with COVID-19 across most of our facilities. Revenue did not decrease in proportion to the decrease in volumes mainly due to contractual minimum volume guarantees.

Revenues from terminal, tankage and loading rack fees were $38.2 million, an increase of $0.7 million compared to the first quarter of 2020. Refined products and crude oil terminalled in the facilities averaged 369.0 mbpd compared to 475.7 mbpd for the first quarter of 2020. The volume decrease was mainly the result of lower throughputs at HFC's Tulsa refinery as well as the cessation of petroleum refinery operations at HFC's Cheyenne refinery. Revenues did not decrease in proportion to the decrease in volumes mainly due to the recognition of $6.5 million of the $10 million termination fee related to the termination of HFC's existing minimum volume commitment on our Cheyenne assets and contractual minimum volume guarantees partially offset by lower on-going revenues on our Cheyenne assets as a result of the conversion of the HFC Cheyenne refinery to renewable diesel production.

Revenues from refinery processing units were ~~$19.6~~$22.5 million, an increase of ~~$0.2~~$2.6 million compared to the ~~second~~first quarter of ~~2019,~~2020, and throughputs averaged ~~49.9~~60.7 mbpd compared to ~~77.7~~69.8 mbpd for the ~~second~~first quarter of ~~2019.~~2020. The decrease in volumes was mainly due to reduced throughput for both our Woods Cross and El Dorado processing units largely as a result of extreme weather while revenue ~~remained relatively constant mainly~~increased due to ~~contractual minimum volume guarantees.~~higher recovery of natural gas costs.

Operations Expense

Operations (exclusive of depreciation and ~~amortization)~~amortization and goodwill impairment) expense was ~~$34.7~~$41.4 million for the three months ended ~~June 30, 2020, a decrease~~March 31, 2021, an increase of ~~$5.9~~$6.4 million compared to the ~~second~~first quarter of ~~2019.~~2020. The ~~decrease~~increase was mainly due to ~~lower rental expenses, maintenance~~higher natural gas costs and ~~variable~~maintenance expense project costs, ~~such as electricity~~partially offset by lower expenses for materials and supplies, chemicals ~~associated with lower volumes~~and catalysts and property tax for the three months ended ~~June 30, 2020.~~March 31, 2021.

Depreciation and Amortization

Depreciation and amortization for the three months ended ~~June 30, 2020~~March 31, 2021 increased by ~~$0.8~~$1.1 million compared to the three months ended ~~June 30, 2019.~~March 31, 2020. 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, 2020~~March 31, 2021 increased by ~~$0.5~~$0.3 million compared to the three months ended ~~June 30, 2019,~~March 31, 2020, mainly due to higher legal expenses for the three months ended ~~June 30, 2020.~~March 31, 2021.

Equity in Earnings of Equity Method Investments


	Three Months Ended March 31,
Equity Method Investment	2021		2020
	(in thousands)
Osage Pipe Line Company, LLC	$	721	$	1,014
Cheyenne Pipeline LLC	(104)		1,075
Cushing Terminal	1,146		(375)
Total	$	1,763	$	1,714

- 37 -

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

Table of

Equity in earnings of Osage Pipe Line Company, LLC and Cheyenne Pipeline LLC decreased for the three months ended ~~June 30, 2020,~~March 31, 2021, mainly due to lower throughput volumes. Equity in earnings of Cushing Terminal increased for the three months ended March 31, 2021 as the terminal started operations in the second quarter of 2020.

Interest Expense

Interest expense for the three months ended ~~June 30, 2020,~~March 31, 2021, totaled ~~$13.8~~$13.2 million, a decrease of ~~$5.5~~$4.5 million compared to the three months ended ~~June 30, 2019.~~March 31, 2020. The decrease was mainly due to market interest rate decreases under our senior secured revolving credit facility and refinancing our $500 million aggregate principal amount of 6% Senior Notes due 2024 (“6% Senior Notes”) with $500 million aggregate principal amount of 5% Senior ~~Notes.~~Notes due 2028 (“5% Senior Notes”). Our aggregate effective interest rates were ~~3.4%~~3.5% and ~~5.3%~~4.5% for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively.

~~Table of Contents~~
~~ril 19,~~

State Income Tax

We recorded a state income tax expense of ~~$39,000 and a state income tax benefit of $30,000~~$37,000 for both the three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019, respectively.~~2020. All tax expense is solely attributable to the Texas margin tax.

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

~~Summary~~

Net income attributable to the partners for the six months ended June 30, 2020 was $101.3 million ($0.96 per basic and diluted limited partner unit) compared to $96.9 million ($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 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, 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 decrease in earnings was mainly due to lower volumes due to demand destruction caused by the COVID-19 pandemic substantially offset by lower operating expenses and lower interest expense.

~~Revenues~~

Revenues for the six months ended June 30, 2020, were $242.7 million, a decrease of $22.6 million compared to the six months ended June 30, 2019. The decrease was mainly attributable to a 22% reduction in overall crude and product pipeline volumes predominantly in our Southwest and Rockies regions.

Revenues from our refined product pipelines were $59.9 million, a decrease of $8.9 million compared to the six months ended June 30, 2019. Shipments averaged 169.0 mbpd compared to 204.8 mbpd for the six months ended June 30, 2019. The volume and revenue decreases were mainly due to lower volumes on pipelines servicing HFC's Navajo refinery, 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 contract renewals were determined to be sales-type leases.

Revenues from our intermediate pipelines were $14.9 million, an increase of $0.4 million compared to the six months ended June 30, 2019. Shipments averaged 135.3 mbpd compared to 136.1 mbpd for the six months ended June 30, 2019.

Revenues from our crude pipelines were $54.5 million, a decrease of $9.4 million compared to the six months ended June 30, 2019. Shipments averaged 367.8 mbpd compared to 519.1 mbpd for the six months ended June 30, 2019. The decreases were mainly attributable to decreased volumes on our crude pipeline systems in New Mexico and Texas and on our crude pipeline systems in Wyoming and Utah.

Revenues from terminal, tankage and loading rack fees were $73.8 million, a decrease of $2.9 million compared to the six months ended June 30, 2019. Refined products and crude oil terminalled in the facilities averaged 446.8 mbpd compared to 466.9 mbpd for the six months ended June 30, 2019. The volume and revenue decreases were mainly due to demand destruction associated with the COVID-19 pandemic across most of our facilities.

Revenues from refinery processing units were $39.5 million, a decrease of $1.8 million compared to the six months ended June 30, 2019. Throughputs averaged 59.8 mbpd compared to 71.8 mbpd for the six months ended June 30, 2019. The decrease in 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 recorded during that period.

~~Operations Expense~~

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

~~Depreciation and Amortization~~

Depreciation and amortization for the six months ended June 30, 2020, increased by $0.9 million compared to the six months ended June 30, 2019. The increase was mainly due to the acceleration of depreciation on certain of our Cheyenne tanks.

~~Table of Contentsril 19,~~

~~General and Administrative~~

General and administrative costs for the six months ended June 30, 2020, increased by $0.6 million compared to the six months ended June 30, 2019 mainly due to higher legal expenses incurred in the six months ended June 30, 2020.

~~Equity in Earnings of Equity Method Investments~~

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 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, 2020, totaled $31.5 million, a decrease of $6.7 million compared to the six months ended June 30, 2019. The decrease was mainly due to market interest rate decreases under 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 4.0% and 5.3% for the six months ended June 30, 2020 and 2019, respectively.

~~State Income Tax~~

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

LIQUIDITY AND CAPITAL RESOURCES

Overview

~~We have~~As of March 31, 2021, we had a $1.4 billion senior secured revolving credit facility (the “Credit Agreement”) ~~expiring~~maturing in July 2022. On April 30, 2021, the Credit Agreement was amended, (the “Amended Credit Agreement”), decreasing the size of the facility from $1.4 billion to $1.2 billion and extending the maturity date to July 27, 2025. The Amended Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Amended Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit and ~~it contains~~continues to provide for an accordion feature ~~giving~~that allows us ~~the ability~~ to increase commitments under the ~~size of the facility by~~Amended Credit Agreement up to ~~$300 million with additional lender commitments.~~

a maximum amount of $1.7 billion.

During the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, we received advances totaling ~~$168.0~~$73.0 million and repaid ~~$138.5~~$90.5 million, resulting in a net ~~increase~~decrease of ~~$29.5~~$17.5 million under the Credit Agreement and an outstanding balance of ~~$995.0~~$896.0 million at ~~June 30, 2020.~~March 31, 2021. As of ~~June 30, 2020,~~March 31, 2021, we have no letters of credit outstanding under the Credit Agreement and the available capacity under the Credit Agreement was ~~$405.0~~$504.0 million. Amounts repaid under the Credit Agreement may be reborrowed under the Amended Credit Agreement from time to time.

On February 4, 2020, we closed a private placement of $500 million in aggregate principal amount of 5% ~~senior unsecured notes~~Senior Notes due in ~~2028 (the "5% Senior Notes").~~2028. 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 funded the $522.5 million redemption with proceeds from the issuance of our 5% Senior Notes and borrowings under 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 three months ended ~~June 30, 2020.~~March 31, 2021. As of ~~June 30, 2020,~~March 31, 2021, 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~~are expected to be used for general business purposes, which may include, among other

~~Table of Contentsril 19,~~

things, funding acquisitions of assets or businesses, working capital, capital expenditures, investments in subsidiaries, the retirement of existing debt and/or the repurchase of common units or other securities.

We believe our current 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 2020,~~February 2021, we paid a regular quarterly cash distribution of $0.35 on all units in an aggregate amount of ~~$34.5 million after deducting HEP Logistics' waiver~~$37.0 million.

- 38 -

Table of ~~$2.5 million of limited partner cash distributions.~~

Cash and cash equivalents ~~increased~~decreased by ~~$5.6~~$2.2 million during the ~~six~~three months ended ~~June 30, 2020~~.March 31, 2021. The cash flows provided by operating activities of ~~$134.6~~$82.1 million were ~~more~~less than the cash flows used for financing activities of ~~$97.1~~$54.3 million and investing activities of ~~$31.9~~$30.0 million. Working capital increased by ~~$14.2~~$6.0 million to ~~$35.0~~$20.3 million at ~~June 30, 2020,~~March 31, 2021, from ~~$20.8~~$14.2 million at December 31, ~~2019.~~2020.

Cash Flows—Operating Activities

Cash flows from operating activities ~~decreased~~ increased by ~~$10.4~~$4.2 million from ~~$145.0~~$77.9 million for the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, to ~~$134.6~~$82.1 million for the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021. The ~~decrease~~ increase was mainly due to lower ~~cash receipts from customers and higher~~ payments for interest expenses and operating expenses partially offset by lower ~~payment for interest expenses~~cash receipts from customers during the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, as compared to the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020.

Cash Flows—Investing Activities

Cash flows used for investing activities were ~~$31.9~~$30.0 million for the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, compared to ~~$17.3~~$20.9 million for the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, an increase of ~~$14.6~~$9.2 million. During the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ we invested ~~$30.7~~$33.2 million and ~~$17.8~~$18.9 million, respectively, in additions to properties and ~~equipment, respectively. During the six months ended June 30, 2020, we invested $2.4 million in our equity method investment in Cushing Connect JV Terminal.~~equipment. We received ~~$0.5~~$2.9 million in excess of equity in earnings during the ~~six~~three months ended ~~June 30, 2020 and $0.3 million during the six months ended June 30, 2019.~~March 31, 2021.

Cash Flows—Financing Activities

Cash flows used for financing activities were ~~$97.1~~$54.3 million for the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, compared to ~~$123.8~~$51.1 million for the ~~six~~three months ended ~~June 30, 2019, a decrease~~March 31, 2020, an increase of ~~$26.7~~$3.3 million. During the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, we received ~~$168.0~~$73.0 million and repaid ~~$138.5~~$90.5 million in advances under the Credit Agreement. Additionally, we paid ~~$103.0~~$38.3 million in regular quarterly cash distributions to our limited partners and ~~$4.0~~$3.8 million to our noncontrolling ~~interest.~~interests. We received ~~$13.3~~$6.3 million in contributions from noncontrolling ~~interest~~interests during the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021. During the three months ended March 31, 2020, we received $112.0 million and repaid $67.0 million in advances under the Credit Agreement. We paid $68.5 million in regular quarterly cash distributions to our limited partners, and distributed $3.0 million to our noncontrolling interests. We also received net proceeds of ~~$491.3~~$491.5 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. We paid $136.2 million in regular quarterly cash distributions to our limited partners, and distributed $5.3 million to our noncontrolling interest.

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 2020~~Our current 2021 capital ~~budget as well as our current~~ forecast ~~are~~is comprised of approximately $8$14 million to ~~$12~~$18 million for maintenance capital expenditures, $4$5 million to $6$8 million for refinery unit turnarounds and ~~$45~~$30 million to ~~$50~~$35 million for expansion capital expenditures and our share of Cushing Connect Joint Venture

~~Table of Contentsril 19,~~

investments. We expect the majority of the ~~2020~~2021 expansion capital ~~budget~~ to be invested in our 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.

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Table of

We expect that our currently planned sustaining and maintenance capital expenditures, as well as planned expenditures for acquisitions and capital development projects, will be funded with cash generated by 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 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~~On March 31, 2021, we had a $1.4 billion Credit Agreement ~~expires~~maturing in July 2022. On April 30, 2021, the Credit Agreement was amended (the “Amended Credit Agreement”), decreasing the commitments under the facility from $1.4 billion to $1.2 billion and extending the maturity date to July 27, 2025. The amended Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Amended Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit, and it ~~contains~~continues to provide for an accordion feature ~~giving~~that allows us ~~the ability~~ to increase the ~~size of~~commitments under the ~~facility by~~Amended Credit Agreement up to ~~$300 million with additional lender commitments.~~a maximum amount of $1.7 billion.

Our obligations under the Amended Credit Agreement are collateralized by substantially all of our assets, and indebtedness under the Amended Credit Agreement is guaranteed by our material, wholly-owned subsidiaries. The Amended 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 Amended Credit Agreement, HEP obtains two investment grade credit ratings, the Amended 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 Amended 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 ~~all~~the covenants under the Credit Agreement as of ~~June 30, 2020.~~March 31, 2021.

Senior Notes

As of ~~December~~March 31, ~~2019,~~2021, we had $500 million in aggregate principal amount of 6%5% Senior Notes due in ~~2024 (the “ 6% Senior Notes”).~~2028.

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

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Table of ~~Contentsril 19,~~

Long-term Debt

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


	June 30, 2020			December 31, 2019				March 31, 2021		December 31, 2020
	(In thousands)							(In thousands)
Credit Agreement	995,000			$	965,500		Credit Agreement	$	896,000	$	913,500

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

5% Senior Notes							5% Senior Notes
Principal	500,000			—			Principal	500,000		500,000
Unamortized debt issuance costs	(8,352		)	—			Unamortized debt issuance costs	(7,665)		(7,897)
	491,648			—				492,335		492,103

Total long-term debt	$	1,486,648		$	1,462,031		Total long-term debt	$	1,388,335	$	1,405,603

Contractual Obligations

There were no significant changes to our long-term contractual obligations during ~~this period.~~the quarter ended March 31, 2021.

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~~three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~ 2020. PPI has increased an average of ~~0.6%~~0.9% annually over the past five calendar years, including ~~increases~~a decrease of 1.3% in 2020 and an increase of 0.8% ~~and 3.1%~~ in ~~2019 and 2018, respectively.~~2019.

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 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, 2020,~~March 31, 2021, we had an accrual of ~~$5.7~~$4.4 million

~~Table of Contentsril 19,~~

that related to environmental clean-up projects for which we have assumed liability or for which the indemnity

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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, ~~2019~~.2020. Certain critical accounting policies that materially affect the amounts recorded in our consolidated financial statements include revenue recognition, assessing the possible impairment of certain long-lived assets and goodwill, and assessing contingent liabilities for probable losses. There have been no changes to these policies in ~~2020.~~2021. 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.

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 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 3 and 4 of Notes to the Consolidated Financial Statements for additional information on our lease policies.

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 was effective January 1, 2020. Adoption of the standard did not have a material impact on our financial condition, results of 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, 2020~~,March 31, 2021, we had an outstanding principal balance of $500 million on our 5% Senior Notes. A change in interest rates generally would affect the fair value of the 5% Senior Notes, but not our earnings or cash flows. At ~~June 30, 2020~~,March 31, 2021, the fair value of our 5% Senior Notes was ~~$477.8~~$505.0 million. We estimate a hypothetical 10% change in the yield-to-maturity applicable to the 5% Senior Notes at ~~June 30, 2020~~March 31, 2021 would result in a change of approximately ~~$17~~$14.2 million in the fair value of the underlying 5% Senior Notes.

~~Table of Contentsril 19,~~

For the variable rate Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. At ~~June 30, 2020~~,March 31, 2021, borrowings outstanding under the Credit Agreement were ~~$995.0~~$896.0 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 but not limited to fire, explosion and weather-related perils. We maintain various insurance coverages, including property damage and business interruption insurance, subject to certain ~~deductibles.~~deductibles and insurance policy terms and conditions. We are not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable, or premium costs, in our judgment, do not justify such expenditures.

We have a risk management oversight committee that is made up of members from our senior management. This committee monitors our risk environment and provides direction for activities to mitigate, to an acceptable level, identified risks that may adversely affect the achievement of our goals.

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~~Item 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~

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, ~~2019.~~2020.

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~~

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, 2020~~,March 31, 2021, at a reasonable level of assurance.

(b) Changes in internal control over financial reporting

During the three months ended ~~June 30, 2020,~~March 31, 2021, 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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Table of ~~Contentsril 19,~~

PART II. OTHER INFORMATION


~~Item 1.~~	~~Legal Proceedings~~

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.


~~Item 1A.~~	~~Risk Factors~~

Item 1A.Risk Factors

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, ~~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 information discussed in our ~~2019~~2020 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 in our ~~2019~~2020 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.


~~Item 6.~~	~~Exhibits~~

Item 6.Exhibits

The Exhibit Index beginning on page 4945 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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Table of ~~Contentsril 19,~~

Exhibit Index


Exhibit Number		Description

~~Exhibit~~ ~~Number~~ 3.1		~~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		~~Second~~Third Amendment to Third Amended and Restated Crude Pipelines and Tankage Agreement ~~dated~~entered into as of ~~May 26, 2020,~~February 8, 2021, effective as of January 1, 2021, 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 10.8 of Registrant’s Current Report on Form 8-K dated February 11, 2021, File No. 1-32225).
10.2*10.2		~~First Amendment~~Twenty-First Amended and Restated Omnibus Agreement, entered into as of February 8, 2021, effective as of January 1, 2021, by and between HollyFrontier Corporation, Holly Energy Partners, L.P. and certain of their respective subsidiaries (incorporated by reference to ~~Fifth~~Exhibit 10.5 of Registrant’s Current Report on Form 8-K dated February 11, 2021, File No. 1-32225).
10.3		Seventh Amended and Restated Master Throughput Agreement, entered into as of February 8, 2021, effective as of January 1, 2021, by and between HollyFrontier Refining & Marketing LLC and Holly Energy Partners - Operating, L.P. (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K dated February 11, 2021, File No. 1-32225).
10.4		Letter Agreement entered into on February 8, 2021, effective as of January 1, 2021, by and between HollyFrontier Refining & Marketing LLC and Holly Energy Partners – Operating, L.P.
10.5		Fourth Amended and Restated Services and Secondment Agreement, entered into as of February 8, 2021, effective as of January 1, 2021, by and among Holly Logistic Services, L.L.C., certain subsidiaries of Holly Energy Partners, L.P. and certain subsidiaries of HollyFrontier Corporation (incorporated by reference to Exhibit 10.7 of Registrant’s Current Report on Form 8-K dated February 11, 2021, File No. 1-32225).
10.6		Sixth Amended and Restated Master Lease and Access Agreement, ~~dated~~entered into as of ~~August 4, 2020,~~February 8, 2021, effective as of January ~~23, 2020,~~1, 2021, by and among certain subsidiaries of Holly Energy Partners, L.P. and certain subsidiaries of HollyFrontier ~~Corporation.~~Corporation (incorporated by reference to Exhibit 10.6 of Registrant’s Current Report on Form 8-K dated February 11, 2021, File No. 1-32225).
31.1*10.7		Services Agreement, entered into as of February 8, 2021, effective as of January 1, 2021, by and between HollyFrontier Refining & Marketing LLC and Holly Energy Partners – Operating, L.P. (incorporated by reference to Exhibit 10.3 of Registrant's Current Report on Form 8-K filed February 11, 2021, File No. 1-32225).
10.8		Asset Lease Agreement, entered into as of February 8, 2021, effective as of January 1, 2021, by and between Cheyenne Logistics LLC and Cheyenne Renewable Diesel Company LLC (incorporated by reference to Exhibit 10.4 of Registrant's Current Report on Form 8-K filed February 11, 2021, File No. 1-32225).
10.9*		First Amendment to Seventh Amended and Restated Master Throughput Agreement, entered into as of April 30, 2021, effective as of April 1, 2021 by and between HollyFrontier Refining & Marketing LLC and Holly Energy Partners - Operating, L.P.
10.10+		Amendment No. 1 to Third Amended and Restated Credit Agreement dated April 30, 2021, among Holly Energy Partners, L.P., as borrower, certain of its affiliates, as guarantors, Wells Fargo Bank, National Association, as administrative agent, an issuing bank and a lender, and certain other lenders party thereto (incorporated by reference to Exhibit 10.1 of Registrant ’s Current Repo rt on Form 8-K filed on May 3, 2021, File No.1-32225).

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Table of


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, 2020~~March 31, 2021 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)~~(iv) Consolidated Statement of Partners’ Equity, and ~~(vi)~~(v) 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.
+		Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of regulation S-K. The registrant agrees to furnish supplementally a copy of the omitted schedules and exhibits to the SEC upon request.
++		Filed electronically herewith.

*		~~Filed herewith.~~
**	~~Furnished herewith.~~
++	~~Filed electronically herewith.~~

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Table of ~~Contentsril 19,~~

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)

			~~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 6, 2020~~May 5, 2021				/s/ John Harrison
				John Harrison
				Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)

Date: ~~August 6, 2020~~May 5, 2021				/s/ Kenneth P. Norwood
				Kenneth P. Norwood
				Vice President and Controller (Principal Accounting Officer)

- 5047 -





	FORWARD-LOOKING STATEMENTS			3

PART I. FINANCIAL INFORMATION					5

		Item 1.	Financial Statements (Unaudited)		5

			Consolidated Balance Sheets		5

			Consolidated Statements of Income		6

			Consolidated Statements of Cash Flows		7

			Consolidated Statements of Equity		8

			Notes to Consolidated Financial Statements		9

		Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		3330

		Item 3.	Quantitative and Qualitative Disclosures About Market Risk		4743

		Item 4.	Controls and Procedures		4743

PART II. OTHER INFORMATION					4844

		Item 1.	Legal Proceedings		4844

		Item 1A.	Risk Factors		4844

		Item 6.	Exhibits		4844

			Index to Exhibits		4945

			SIGNATURES		5047



	June 30, 2020		December 31, 2019
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (Cushing Connect VIEs: $10,773 and $6,842, respectively)	$	18,913	$	13,287
Accounts receivable:
Trade (Cushing Connect VIEs: $2,170 and $79, respectively)	14,929		18,731
Affiliates	49,847		49,716
	64,776		68,447
Prepaid and other current assets	7,905		7,629
Total current assets	91,594		89,363

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	3,377		3,255
Net investment in leases	168,153		134,886
Intangible assets, net	94,318		101,322
Goodwill	270,336		270,336
Equity method investments (Cushing Connect VIEs: $39,815 and $37,084, respectively)	123,299		120,071
Other assets	11,772		12,900
Total assets	$	2,221,783	$	2,199,232

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable:
Trade (Cushing Connect VIEs: $6,421 and $2,082, respectively)	$	14,639	$	17,818
Affiliates	7,286		16,737
	21,925		34,555

Accrued interest	10,683		13,206
Deferred revenue	11,002		10,390
Accrued property taxes	5,526		3,799
Current operating lease liabilities	1,213		1,126
Current finance lease liabilities	3,293		3,224
Other current liabilities	2,975		2,305
Total current liabilities	56,617		68,605

Long-term debt	1,486,648		1,462,031
Noncurrent operating lease liabilities	2,530		2,482
Noncurrent finance lease liabilities	70,039		70,475
Other long-term liabilities	13,689		12,808
Deferred revenue	42,692		45,681

Class B unit	51,062		49,392

Equity:
Partners’ equity:
Common unitholders (105,440,201 units issued and outstanding at June 30, 2020 and December 31, 2019)	380,723		381,103
Noncontrolling interest	117,783		106,655
Total equity	498,506		487,758
Total liabilities and equity	$	2,221,783	$	2,199,232



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

Other income (expense):
Equity in earnings of equity method investments	2,156			1,783			3,870			3,883
Interest expense	(13,779		)	(19,230		)	(31,546		)	(38,252		)
Interest income	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	468			111			974			(199		)
	25,492			(16,785		)	(13,752		)	(33,489		)
Income before income taxes	77,993			47,129			104,942			100,959
State income tax benefit (expense)	(39		)	30			(76		)	(6		)
Net income	77,954			47,159			104,866			100,953
Allocation of net income attributable to noncontrolling interests	(1,484		)	(1,469		)	(3,535		)	(4,081		)
Net income attributable to the partners	76,470			45,690			101,331			96,872
Limited partners’ per unit interest in earnings—basic and diluted	$	0.73		$	0.43		$	0.96		$	0.92
Weighted average limited partners’ units outstanding	105,440			105,440			105,440			105,440



Years Ending December 31,	(In millions)
Remainder of 2020	$	185
2021	362
2022	332
2023	295
2024	257
2025	188
Thereafter	650
Total	$	2,269



	(In thousands)

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



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


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


~~Note 16:~~	~~Supplemental Guarantor/Non-Guarantor Financial Information~~



Three Months Ended June 30, 2020	Parent			Guarantor Restricted Subsidiaries			Non-Guarantor Non-restricted Subsidiaries			Eliminations			Consolidated
	(In thousands)
Revenues:
Affiliates	$	—		$	89,417		$	6,146		$	—		$	95,563
Third parties	—			15,887			3,357			—			19,244
	—			105,304			9,503			—			114,807
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—			30,980			3,757			—			34,737
Depreciation and amortization	—			20,739			4,295			—			25,034
General and administrative	780			1,755			—			—			2,535
	780			53,474			8,052			—			62,306
Operating income (loss)	(780		)	51,830			1,451			—			52,501

Other income (expense):
Equity in earnings of subsidiaries	89,893			1,510			—			(91,403		)	—
Equity in earnings of equity method investments	—			1,449			707			—			2,156
Interest expense	(12,740		)	(1,039		)	—			—			(13,779		)
Interest income	26			2,787			—			—			2,813
Gain on sales-type lease	—			33,834			—			—			33,834
Gain on sale of assets and other	71			396			1			—			468
	77,250			38,937			708			(91,403		)	25,492
Income before income taxes	76,470			90,767			2,159			(91,403		)	77,993
State income tax expense	—			(39		)	—			—			(39		)
Net income	76,470			90,728			2,159			(91,403		)	77,954
Allocation of net income attributable to noncontrolling interests	—			(835		)	(649		)	—			(1,484		)
Net income attributable to the partners	$	76,470		$	89,893		$	1,510		$	(91,403	)	$	76,470



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



Six Months Ended June 30, 2020	Parent			Guarantor Restricted Subsidiaries			Non-Guarantor Non-restricted Subsidiaries				Eliminations				Consolidated
	(In thousands)
Revenues:
Affiliates	$	—		$	184,172		$	12,819			$	—			$	196,991
Third parties	—			35,042			10,628				—				45,670
	—			219,214			23,447				—				242,661
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—			62,111			7,607				—				69,718
Depreciation and amortization	—			40,492			8,520				—				49,012
General and administrative	1,879			3,358			—				—				5,237
	1,879			105,961			16,127				—				123,967
Operating income (loss)	(1,879		)	113,253			7,320				—			—	118,694

Other income (expense):
Equity in earnings of subsidiaries	158,428			5,805			—				(164,233		)		—
Equity in earnings of equity method investments	—			3,537			333			—	—				3,870
Interest expense	(29,470		)	(2,076		)	—				—				(31,546		)
Interest income	26			5,005			—				—				5,031
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
	103,210			46,921			350				(164,233		)		(13,752		)
Income before income taxes	101,331			160,174			7,670				(164,233		)		104,942
State income tax expense	—			(76		)	—				—				(76		)
Net income	101,331			160,098			7,670				(164,233		)		104,866
Allocation of net income attributable to noncontrolling interests	—			(1,670		)	(1,865		)		—				(3,535		)
Net income attributable to the partners	$	101,331		$	158,428		$	5,805			$	(164,233	)		$	101,331



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


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



	Three Months Ended June 30,						Change from
	2020			2019			2019
	(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates—refined product pipelines	$	16,302		$	20,759		$	(4,457	)
Affiliates—intermediate pipelines	7,475			7,297			178
Affiliates—crude pipelines	19,311			20,651			(1,340		)
	43,088			48,707			(5,619		)
Third parties—refined product pipelines	8,750			11,778			(3,028		)
Third parties—crude pipelines	7,116			11,778			(4,662		)
	58,954			72,263			(13,309		)
Terminals, tanks and loading racks:
Affiliates	32,902			34,263			(1,361		)
Third parties	3,378			4,826			(1,448		)
	36,280			39,089			(2,809		)

Affiliates—refinery processing units	19,573			19,399			174

Total revenues	114,807			130,751			(15,944		)
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	34,737			40,602			(5,865		)
Depreciation and amortization	25,034			24,247			787
General and administrative	2,535			1,988			547
	62,306			66,837			(4,531		)
Operating income	52,501			63,914			(11,413		)
Other income (expense):
Equity in earnings of equity method investments	2,156			1,783			373
Interest expense, including amortization	(13,779		)	(19,230		)	5,451
Interest income	2,813			551			2,262
Gain on sales-type leases	33,834			—			33,834
Gain on sale of assets and other	468			111			357
	25,492			(16,785		)	42,277
Income before income taxes	77,993			47,129			30,864
State income tax benefit (expense)	(39		)	30			(69		)
Net income	77,954			47,159			30,795
Allocation of net income attributable to noncontrolling interests	(1,484		)	(1,469		)	(15		)
Net income attributable to the partners	76,470			45,690			30,780
Limited partners’ earnings per unit—basic and diluted	$	0.73		$	0.43		$	0.30
Weighted average limited partners’ units outstanding	105,440			105,440			—
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	100,524			130,802			(30,278		)
Affiliates—intermediate pipelines	128,464			141,345			(12,881		)
Affiliates—crude pipelines	252,570			370,351			(117,781		)
	481,558			642,498			(160,940		)
Third parties—refined product pipelines	57,876			66,963			(9,087		)
Third parties—crude pipelines	85,851			140,555			(54,704		)
	625,285			850,016			(224,731		)
Terminals and loading racks:
Affiliates	372,093			431,509			(59,416		)
Third parties	45,876			59,343			(13,467		)
	417,969			490,852			(72,883		)

Affiliates—refinery processing units	49,891			77,728			(27,837		)

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



	Six Months Ended June 30,						Change from
	2020			2019			2019
	(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates—refined product pipelines	$	36,385		$	41,491		$	(5,106	)
Affiliates—intermediate pipelines	14,949			14,578			371
Affiliates—crude pipelines	39,704			41,772			(2,068		)
	91,038			97,841			(6,803		)
Third parties—refined product pipelines	23,548			27,382			(3,834		)
Third parties—crude pipelines	14,840			22,140			(7,300		)
	129,426			147,363			(17,937		)
Terminals, tanks and loading racks:
Affiliates	66,496			66,669			(173		)
Third parties	7,282			9,998			(2,716		)
	73,778			76,667			(2,889		)

Affiliates—refinery processing units	39,457			41,218			(1,761		)

Total revenues	242,661			265,248			(22,587		)
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	69,718			78,121			(8,403		)
Depreciation and amortization	49,012			48,071			941
General and administrative	5,237			4,608			629
	123,967			130,800			(6,833		)
Operating income	118,694			134,448			(15,754		)
Other income (expense):
Equity in earnings of equity method investments	3,870			3,883			(13		)
Interest expense, including amortization	(31,546		)	(38,252		)	6,706
Interest income	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	974			(199		)	1,173
	(13,752		)	(33,489		)	19,737
Income before income taxes	104,942			100,959			3,983
State income tax expense	(76		)	(6		)	(70		)
Net income	104,866			100,953			3,913
Allocation of net income attributable to noncontrolling interests	(3,535		)	(4,081		)	546
Net income attributable to the partners	101,331			96,872			4,459
Limited partners’ earnings per unit—basic and diluted	$	0.96		$	0.92		$	0.04
Weighted average limited partners’ units outstanding	105,440			105,440			—
EBITDA ⁽¹⁾	$	176,934		$	182,122		$	(5,188	)
Adjusted EBITDA ⁽¹⁾	$	171,276		$	182,122		$	(10,846	)
Distributable cash flow ⁽²⁾	$	136,164		$	138,085		$	(1,921	)

Volumes (bpd)
Pipelines:
Affiliates—refined product pipelines	115,245			130,805			(15,560		)
Affiliates—intermediate pipelines	135,288			136,116			(828		)
Affiliates—crude pipelines	278,801			385,490			(106,689		)
	529,334			652,411			(123,077		)
Third parties—refined product pipelines	53,756			73,975			(20,219		)
Third parties—crude pipelines	89,027			133,565			(44,538		)
	672,117			859,951			(187,834		)
Terminals and loading racks:
Affiliates	400,911			402,909			(1,998		)
Third parties	45,910			64,028			(18,118		)
	446,821			466,937			(20,116		)

Affiliates—refinery processing units	59,843			71,816			(11,973		)

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