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 ~~September~~June 30, ~~2021~~2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission File Number: 1-32225

_____________________________________________________________________________________

HOLLY ENERGY PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

______________________________________________________________________________________


Delaware						20-0833098
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)
2828 N. Harwood, Suite 1300
Dallas
Texas						75201
(Address of principal executive offices)						(Zip code)

(214) 871-3555

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging ~~growth” company~~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 ~~October 29, 2021,~~August 5, 2022, was ~~105,440,201.~~126,440,201.

Table of 19,

HOLLY ENERGY PARTNERS, L.P.

INDEX

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Table of 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,” “expect,” “project,” ~~“expect,~~“will,” “plan,” “goal,” “forecast,” “intend,” “should,” “would,” “could,” “believe,” “may,” and similar expressions and statements regarding our plans and objectives for future 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:

•HF Sinclair Corporation’s (“HF Sinclair”) and our ability to successfully integrate the Sinclair Oil Corporation (now known as Sinclair Oil LLC (“Sinclair Oil”)) and Sinclair Transportation Company LLC (“Sinclair Transportation”) businesses acquired from The Sinclair Companies (now known as REH Company), referred to herein as “Sinclair HoldCo”) with our existing operations and fully realize the expected synergies of the Sinclair Transactions (as defined herein) or on the expected timeline;

•the demand for and supply of crude oil and refined products, including uncertainty regarding the effects of the continuing COVID-19 pandemic on future demand ~~for refined petroleum products in markets we serve;~~

•(i) our ability to successfully close the Sinclair acquisition, which requires certain regulatory approvals (including clearance by antitrust authorities necessary to complete the Sinclair acquisition on the terms and timeline desired); (ii) disruption the Sinclair acquisition may cause to customers, vendors, business partners and our ongoing business; (iii) once closed, our ability to integrate the operations of Sinclair with our existing operations and fully realize the expected synergies of the Sinclair acquisition on the expected timeline; and (iv) the cost and potential for delay in closing as a result of litigation against us or HollyFrontier Corporation (“HFC”) challenging the Sinclair transactions;increasing societal expectations that companies address climate change;

•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 ~~HFC,~~HF Sinclair, 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, accidents, unexpected leaks or spills, unscheduled shutdowns, weather events, civil unrest, expropriation of assets, and other economic, diplomatic, legislative, or political events or developments, terrorism, cyberattacks, or other catastrophes or disruptions affecting our operations, terminal facilities, machinery, pipelines and other logistics assets, equipment, or information systems, or any of the foregoing of our suppliers, customers, or third-party service providers or lower gross margins due to the economic impact of the COVID-19 pandemic, inflation and labor costs, 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;~~pandemic and increases in interest rates;

•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;

- 3 -

Table of 19,

•the possibility of terrorist or cyberattacks and the consequences of any such attacks;

•uncertainty regarding the effects and duration of global hostilities and any associated military campaigns which may disrupt crude oil supplies and markets for refined products and create instability in the financial markets that could restrict our ability to raise capital;

•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

~~- 3 -~~

~~Table of~~ ~~19,~~

•other financial, operational and legal risks and uncertainties detailed from time to time in our Securities and Exchange Commission (the “SEC”) 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 risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the year ended December 31, ~~2020, our Quarterly Report on Form 10-Q for the quarter ended June 30,~~ 2021, and in this Quarterly Report on ~~Form 10-Q, and in connection with the discussion in this~~ 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.

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Table of 19,

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

HOLLY ENERGY PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
		(Unaudited)					(Unaudited)
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents (Cushing Connect VIEs: $7,472 and $18,259, respectively)		$	12,816	$	21,990
Cash and cash equivalents (Cushing Connect VIEs: $4,596 and $8,881, respectively)						Cash and cash equivalents (Cushing Connect VIEs: $4,596 and $8,881, respectively)	$	14,884	$	14,381
Accounts receivable:	Accounts receivable:					Accounts receivable:
Trade	Trade	12,121		14,543		Trade	13,583		12,745
Affiliates	Affiliates	41,507		47,972		Affiliates	58,969		56,154
		53,628		62,515			72,552		68,899
Prepaid and other current assets	Prepaid and other current assets	8,174		9,487		Prepaid and other current assets	11,969		11,033
Total current assets	Total current assets	74,618		93,992		Total current assets	99,405		94,313

Properties and equipment, net (Cushing Connect VIEs: $0 and $47,801, respectively)		1,335,042		1,450,685
Properties and equipment, net						Properties and equipment, net	1,426,492		1,329,028
Operating lease right-of-use assets, net	Operating lease right-of-use assets, net	2,501		2,979		Operating lease right-of-use assets, net	2,502		2,275
Net investment in leases (Cushing Connect VIEs: $95,598 and $0, respectively)		306,071		166,316
Net investment in leases (Cushing Connect VIEs: $100,866 and $100,042, respectively)						Net investment in leases (Cushing Connect VIEs: $100,866 and $100,042, respectively)	542,281		309,303
Intangible assets, net	Intangible assets, net	76,809		87,315		Intangible assets, net	66,304		73,307
Goodwill	Goodwill	223,650		234,684		Goodwill	314,418		223,650
Equity method investments (Cushing Connect VIEs: $37,691 and $39,456, respectively)		117,027		120,544
Equity method investments (Cushing Connect VIEs: $35,955 and $37,505, respectively)						Equity method investments (Cushing Connect VIEs: $35,955 and $37,505, respectively)	280,472		116,378
Deferred turnaround costs						Deferred turnaround costs	25,813		2,632
Other assets	Other assets	16,858		11,050		Other assets	17,351		14,981
Total assets	Total assets	$	2,152,576	$	2,167,565	Total assets	$	2,775,038	$	2,165,867

LIABILITIES AND EQUITY	LIABILITIES AND EQUITY					LIABILITIES AND EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable:	Accounts payable:					Accounts payable:
Trade (Cushing Connect VIEs: $10,083 and $14,076, respectively)		$	25,472	$	28,280
Trade (Cushing Connect VIEs: $3,427 and $8,285, respectively)						Trade (Cushing Connect VIEs: $3,427 and $8,285, respectively)	$	25,104	$	28,577
Affiliates	Affiliates	14,605		18,120		Affiliates	12,696		11,703
		40,077		46,400			37,800		40,280

Accrued interest	Accrued interest	4,604		10,892		Accrued interest	17,963		11,258
Deferred revenue	Deferred revenue	10,768		11,368		Deferred revenue	13,770		14,585
Accrued property taxes	Accrued property taxes	8,877		3,992		Accrued property taxes	7,145		4,542
Current operating lease liabilities	Current operating lease liabilities	706		875		Current operating lease liabilities	963		620
Current finance lease liabilities	Current finance lease liabilities	3,753		3,713		Current finance lease liabilities	3,857		3,786
Other current liabilities	Other current liabilities	2,687		2,505		Other current liabilities	2,648		1,781
Total current liabilities	Total current liabilities	71,472		79,745		Total current liabilities	84,146		76,852

Long-term debt	Long-term debt	1,333,309		1,405,603		Long-term debt	1,608,460		1,333,049
Noncurrent operating lease liabilities	Noncurrent operating lease liabilities	2,169		2,476		Noncurrent operating lease liabilities	2,006		2,030
Noncurrent finance lease liabilities	Noncurrent finance lease liabilities	65,565		68,047		Noncurrent finance lease liabilities	62,838		64,649
Other long-term liabilities	Other long-term liabilities	12,317		12,905		Other long-term liabilities	23,072		12,527
Deferred revenue	Deferred revenue	30,920		40,581		Deferred revenue	28,865		29,662

Class B unit	Class B unit	55,593		52,850		Class B unit	58,461		56,549

Equity:	Equity:					Equity:
Partners’ equity:	Partners’ equity:					Partners’ equity:
Common unitholders (105,440 units issued and outstanding at September 30, 2021 and December 31, 2020)		437,998		379,292
Common unitholders (126,440,201 and 105,440,201 units issued and outstanding at June 30, 2022 and December 31, 2021, respectively)						Common unitholders (126,440,201 and 105,440,201 units issued and outstanding at June 30, 2022 and December 31, 2021, respectively)	837,785		443,017
Noncontrolling interests	Noncontrolling interests	143,233		126,066		Noncontrolling interests	69,405		147,532
Total equity	Total equity	581,231		505,358		Total equity	907,190		590,549
Total liabilities and equity	Total liabilities and equity	$	2,152,576	$	2,167,565	Total liabilities and equity	$	2,775,038	$	2,165,867

See accompanying notes.

- 5 -

Table of 19,

HOLLY ENERGY PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per unit data)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Revenues:	Revenues:									Revenues:
Affiliates	Affiliates	$	97,124	$	100,992	$	298,192	$	297,983	Affiliates	$	110,537	$	99,142	$	202,791	$	201,068
Third parties	Third parties	25,460		26,739		77,810		72,409		Third parties	25,233		27,093		53,177		52,350
		122,584		127,731		376,002		370,392			135,770		126,235		255,968		253,418
Operating costs and expenses:	Operating costs and expenses:									Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	Operations (exclusive of depreciation and amortization)	42,793		40,003		126,226		109,721		Operations (exclusive of depreciation and amortization)	53,899		42,068		96,524		83,433
Depreciation and amortization	Depreciation and amortization	21,826		26,190		71,894		75,202		Depreciation and amortization	26,974		25,003		49,161		50,068
General and administrative	General and administrative	3,849		2,332		9,664		7,569		General and administrative	4,682		2,847		8,994		5,815
Goodwill impairment	Goodwill impairment	—		35,653		11,034		35,653		Goodwill impairment	—		—		—		11,034
		68,468		104,178		218,818		228,145			85,555		69,918		154,679		150,350
Operating income	Operating income	54,116		23,553		157,184		142,247		Operating income	50,215		56,317		101,289		103,068

Other income (expense):	Other income (expense):									Other income (expense):
Equity in earnings of equity method investments	Equity in earnings of equity method investments	3,689		1,316		8,875		5,186		Equity in earnings of equity method investments	5,447		3,423		9,073		5,186
Interest expense	Interest expense	(13,417)		(14,104)		(40,595)		(45,650)		Interest expense	(20,347)		(13,938)		(33,986)		(27,178)
Interest income	Interest income	6,835		2,803		19,997		7,834		Interest income	24,331		6,614		36,978		13,162
Gain on sales-type leases	Gain on sales-type leases	—		—		24,677		33,834		Gain on sales-type leases	—		27		—		24,677
Loss on early extinguishment of debt		—		—		—		(25,915)

Gain on sale of assets and other	Gain on sale of assets and other	77		7,465		5,994		8,439		Gain on sale of assets and other	45		5,415		146		5,917
		(2,816)		(2,520)		18,948		(16,272)			9,476		1,541		12,211		21,764
Income before income taxes	Income before income taxes	51,300		21,033		176,132		125,975		Income before income taxes	59,691		57,858		113,500		124,832
State income tax benefit (expense)		4		(34)		(60)		(110)
State income tax expense										State income tax expense	(14)		(27)		(45)		(64)
Net income	Net income	51,304		20,999		176,072		125,865		Net income	59,677		57,831		113,455		124,768
Allocation of net income attributable to noncontrolling interests	Allocation of net income attributable to noncontrolling interests	(2,144)		(3,186)		(6,770)		(6,721)		Allocation of net income attributable to noncontrolling interests	(2,885)		(2,086)		(7,104)		(4,626)
Net income attributable to the partners	Net income attributable to the partners	49,160		17,813		169,302		119,144		Net income attributable to the partners	56,792		55,745		106,351		120,142
Limited partners’ per unit interest in earnings—basic and diluted	Limited partners’ per unit interest in earnings—basic and diluted	$	0.46	$	0.17	$	1.60	$	1.13	Limited partners’ per unit interest in earnings—basic and diluted	$	0.45	$	0.53	$	0.90	$	1.14
Weighted average limited partners’ units outstanding	Weighted average limited partners’ units outstanding	105,440		105,440		105,440		105,440		Weighted average limited partners’ units outstanding	126,440		105,440		118,087		105,440

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

See accompanying notes.

- 6 -

Table of 19,

HOLLY ENERGY PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

Nine Months Ended
September 30,
2021 2020
Cash flows from operating activities
Net income $ 176,072 $ 125,865
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 71,894 75,202
Gain on sale of assets (5,567) (887)
Loss on early extinguishment of debt — 25,915
Gain on sales-type leases (24,677) (33,834)
Goodwill impairment 11,034 35,653
Amortization of deferred charges 2,992 2,479
Equity-based compensation expense 1,856 1,547
Equity in earnings of equity method investments, net of distributions — (238)
(Increase) decrease in operating assets:
Accounts receivable—trade 3,020 4,874
Accounts receivable—affiliates 6,465 3,212
Prepaid and other current assets 2,452 1,885
Increase (decrease) in operating liabilities:
Accounts payable—trade 3,202 (2,258)
Accounts payable—affiliates (3,515) (9,815)
Accrued interest (6,288) (8,515)
Deferred revenue (3,702) (3,675)
Accrued property taxes 4,885 5,173
Other current liabilities 183 544
Other, net 468 1,913
Net cash provided by operating activities 240,774 225,040
Cash flows from investing activities
Additions to properties and equipment (78,592) (38,642)
Investment in Cushing Connect JV Terminal — (2,438)
Proceeds from sale of assets 7,365 961
Distributions in excess of equity in earnings of equity investments 3,517 701
Net cash used for investing activities (67,710) (39,418)
Cash flows from financing activities
Borrowings under credit agreement 210,500 219,500
Repayments of credit agreement borrowings (283,500) (237,000)
Redemption of senior notes — (522,500)
Proceeds from issuance of debt — 500,000
Contributions from general partner — 611
Contributions from noncontrolling interests 21,285 15,382
Distributions to HEP unitholders (112,384) (137,437)
Distributions to noncontrolling interests (8,743) (7,845)
Payments on finance leases (2,666) (2,666)
Deferred financing costs (6,661) (8,714)
Units withheld for tax withholding obligations (69) (149)
Net cash used by financing activities (182,238) (180,818)
Cash and cash equivalents
Increase (decrease) for the period (9,174) 4,804
Beginning of period 21,990 13,287
End of period $ 12,816 $ 18,091
Supplemental disclosure of cash flow information
Cash paid during the period for interest $44,147 $51,375


	Six Months Ended June 30,
	2022		2021
Cash flows from operating activities
Net income	$	113,455	$	124,768
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	49,161		50,068
Gain on sale of assets	(25)		(5,586)

Gain on sales-type leases	—		(24,677)
Goodwill impairment	—		11,034
Amortization of deferred charges	1,803		2,229
Equity-based compensation expense	1,227		1,210
Equity in earnings of equity method investments, net of distributions	933		—
(Increase) decrease in operating assets:
Accounts receivable—trade	1,071		1,726
Accounts receivable—affiliates	(2,815)		1,649
Prepaid and other current assets	60		825
Increase (decrease) in operating liabilities:
Accounts payable—trade	1,355		3,068
Accounts payable—affiliates	993		(3,157)
Accrued interest	6,705		(23)
Deferred revenue	(1,612)		(2,176)
Accrued property taxes	1,630		1,065
Other current liabilities	77		438
Turnaround expenditures	(24,158)		(882)
Other, net	2,626		529
Net cash provided by operating activities	152,486		162,108

Cash flows from investing activities
Additions to properties and equipment	(23,246)		(59,375)
Acquisition of Sinclair Transportation	(321,366)		—

Proceeds from sale of assets	33		7,343
Distributions in excess of equity in earnings of equity investments	6,589		3,107
Net cash used for investing activities	(337,990)		(48,925)

Cash flows from financing activities
Borrowings under credit agreement	410,000		141,000
Repayments of credit agreement borrowings	(529,000)		(184,500)

Proceeds from issuance of debt	400,000		—

Contributions from noncontrolling interests	—		17,593
Distributions to HEP unitholders	(81,333)		(75,356)
Distributions to noncontrolling interests	(5,308)		(5,872)
Payments on finance leases	(1,776)		(1,747)
Deferred financing costs	(6,343)		(6,661)

Units withheld for tax withholding obligations	(65)		(69)
Other	(168)		—
Net cash provided (used) by financing activities	186,007		(115,612)

Cash and cash equivalents
Increase (decrease) for the period	503		(2,429)
Beginning of period	14,381		21,990
End of period	$	14,884	$	19,561

Supplemental disclosure of cash flow information
Cash paid during the period for interest	$25,814		$25,072

See accompanying notes.

- 7 -

Table of 19,

HOLLY ENERGY PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(In thousands)


		Common Units		Noncontrolling Interests		Total Equity			Common Units		Noncontrolling Interests		Total Equity

Balance December 31, 2020		$	379,292	$	126,066	$	505,358
Contributions from noncontrolling interest		—		9,746		9,746
Balance December 31, 2021								Balance December 31, 2021	$	443,017	$	147,532	$	590,549
Issuance of common units								Issuance of common units	349,020		—		349,020

Distributions to HEP unitholders	Distributions to HEP unitholders	(38,328)		—		(38,328)		Distributions to HEP unitholders	(36,997)		—		(36,997)
Distributions to noncontrolling interests	Distributions to noncontrolling interests	—		(3,819)		(3,819)		Distributions to noncontrolling interests	—		(877)		(877)
Acquisition of remaining UNEV interests								Acquisition of remaining UNEV interests	16,537		(78,187)		(61,650)

Equity-based compensation		683		—		683
Amortization of restricted and performance units								Amortization of restricted and performance units	620		—		620
Class B unit accretion	Class B unit accretion	(893)		—		(893)		Class B unit accretion	(956)		—		(956)
Other	Other	(68)		—		(68)		Other	(147)		—		(147)
Net income	Net income	65,290		1,647		66,937		Net income	50,515		3,263		53,778
Balance March 31, 2021		$	405,976	$	133,640	$	539,616
Contributions from noncontrolling interest		—		9,780		9,780
Balance March 31, 2022								Balance March 31, 2022	$	821,609	$	71,731	$	893,340

Distributions to HEP unitholders	Distributions to HEP unitholders	(37,028)		—		(37,028)		Distributions to HEP unitholders	(44,336)		—		(44,336)
Distributions to noncontrolling interest	Distributions to noncontrolling interest	—		(2,053)		(2,053)		Distributions to noncontrolling interest	—		(4,431)		(4,431)
Equity-based compensation		527		—		527
Acquisition of remaining UNEV interests								Acquisition of remaining UNEV interests	3,198		177		3,375
Amortization of restricted and performance units								Amortization of restricted and performance units	607		—		607
Class B unit accretion	Class B unit accretion	(894)		—		(894)		Class B unit accretion	(956)		—		(956)
Other	Other	(2)		—		(2)		Other	(86)		—		(86)
Net income	Net income	56,639		1,192		57,831		Net income	57,749		1,928		59,677
Balance June 30, 2021		$	425,218	$	142,559	$	567,777
Contributions from noncontrolling interest		—		2,358		2,358
Distributions to HEP unitholders		(37,028)		—		(37,028)
Distributions to noncontrolling interest		—		(2,871)		(2,871)
Equity-based compensation		646		—		646
Class B unit accretion		(956)		—		(956)
Other		1		—		1
Net income		50,117		1,187		51,304
Balance September 30, 2021		$	437,998	$	143,233	$	581,231
Balance June 30, 2022								Balance June 30, 2022	$	837,785	$	69,405	$	907,190

~~- 8 -~~

~~Table of~~ ~~19,~~


		Common Units		Noncontrolling Interests		Total Equity			Common Units		Noncontrolling Interests		Total Equity

Balance December 31, 2019		$	381,103	$	106,655	$	487,758
Contributions from noncontrolling interest		—		7,304		7,304
Balance December 31, 2020								Balance December 31, 2020	$	379,292	$	126,066	$	505,358
Capital Contribution - Cushing Connect								Capital Contribution - Cushing Connect	—		9,746		9,746

Distributions to HEP unitholders	Distributions to HEP unitholders	(68,519)		—		(68,519)		Distributions to HEP unitholders	(38,328)		—		(38,328)
Distributions to noncontrolling interests	Distributions to noncontrolling interests	—		(3,000)		(3,000)		Distributions to noncontrolling interests	—		(3,819)		(3,819)
Equity-based compensation		506		—		506
Amortization of restricted and performance units								Amortization of restricted and performance units	683		—		683
Class B unit accretion	Class B unit accretion	(835)		—		(835)		Class B unit accretion	(893)		—		(893)
Other	Other	208		—		208		Other	(68)		—		(68)
Net income	Net income	25,696		1,216		26,912		Net income	65,290		1,647		66,937
Balance March 31, 2020		$	338,159	$	112,175	$	450,334
Balance March 31, 2021								Balance March 31, 2021	$	405,976	$	133,640	$	539,616
Contributions from noncontrolling interest	Contributions from noncontrolling interest	—		5,959		5,959		Contributions from noncontrolling interest	—		9,780		9,780
Distributions to HEP unitholders	Distributions to HEP unitholders	(34,460)		—		(34,460)		Distributions to HEP unitholders	(37,028)		—		(37,028)
Distributions to noncontrolling interest	Distributions to noncontrolling interest	—		(1,000)		(1,000)		Distributions to noncontrolling interest	—		(2,053)		(2,053)
Equity-based compensation	Equity-based compensation	474		—		474		Equity-based compensation	527		—		527
Class B unit accretion	Class B unit accretion	(835)		—		(835)		Class B unit accretion	(894)		—		(894)
Other	Other	80		—		80		Other	(2)		—		(2)
Net income	Net income	77,305		649		77,954		Net income	56,639		1,192		57,831
Balance June 30, 2020		$	380,723	$	117,783	$	498,506
Contributions from noncontrolling interest		—		2,119		2,119
Distributions to HEP unitholders		(34,458)		—		(34,458)
Distributions to noncontrolling interest		—		(3,845)		(3,845)
Equity-based compensation		567		—		567
Class B unit accretion		(894)		—		(894)
Other		177		—		177
Net income		18,706		2,293		20,999
Balance September 30, 2020		$	364,821	$	118,350	$	483,171
Balance June 30, 2021								Balance June 30, 2021	$	425,218	$	142,559	$	567,777

See accompanying notes.

- 98 -

Table of 19,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1:Description of Business and Presentation of Financial Statements

Holly Energy Partners, L.P. (“HEP”), together with its consolidated subsidiaries, is a publicly held master limited partnership. ~~As of September 30, 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,~~On March 14, 2022 (the “Closing Date”), HollyFrontier Corporation (“HFC”) and HEP announced the ~~words “we,” “our,” “ours”~~establishment of HF Sinclair Corporation, a Delaware corporation (“HF Sinclair”), as the new parent holding company of HFC and ~~“us” refer~~HEP and their subsidiaries, and the completion of their respective acquisitions of Sinclair Oil Corporation (now known as Sinclair Oil LLC (“Sinclair Oil”)) and Sinclair Transportation Company LLC (“Sinclair Transportation”) from The Sinclair Companies (now known as REH Company and referred to ~~HEP unless~~herein as “Sinclair HoldCo”). On the ~~context otherwise indicates.~~Closing Date, pursuant to that certain Business Combination Agreement, dated as of August 2, 2021 (as amended on March 14, 2022, the “Business Combination Agreement”), by and among HFC, HF Sinclair (formerly known as Hippo Parent Corporation), Hippo Merger Sub, Inc., a wholly owned subsidiary of HF Sinclair (“Parent Merger Sub”), Sinclair HoldCo, and Hippo Holding LLC, a wholly owned subsidiary of Sinclair HoldCo (the “Target Company”), HF Sinclair completed its acquisition of the Target Company by effecting (a) a holding company merger in accordance with Section 251(g) of the Delaware General Corporation Law whereby HFC merged with and into Parent Merger Sub, with HFC surviving such merger as a direct wholly owned subsidiary of HF Sinclair (the “HFC Merger”), and (b) immediately following the HFC Merger, a contribution whereby Sinclair HoldCo contributed all of the equity interests of the Target Company to HF Sinclair in exchange for shares of HF Sinclair, resulting in the Target Company becoming a direct wholly owned subsidiary of HF Sinclair (together with the HFC Merger, the “HFC Transactions”).

WeAs of June 30, 2022, HF Sinclair and its subsidiaries owned a 47% limited partner interest and the non-economic general partner interest in HEP.

In connection with the closing of the HFC Transactions, HF Sinclair issued 60,230,036 shares of HF Sinclair common stock to Sinclair HoldCo, representing 27.0% of the pro forma equity of HF Sinclair with a value of approximately $2,149 million based on HFC’s fully diluted shares of common stock outstanding and closing stock price on March 11, 2022. References herein to HF Sinclair with respect to time periods prior to March 14, 2022 refer to HFC and its consolidated subsidiaries and do not include the Target Company, Sinclair Transportation or their respective consolidated subsidiaries. References herein to HF Sinclair with respect to time periods from and after March 14, 2022 refer to HF Sinclair and its consolidated subsidiaries, which includes the operations of the combined Sinclair HoldCo businesses.

Additionally, on the Closing Date, pursuant to that certain Contribution Agreement, dated August 2, 2021 (as amended on March 14, 2022, the “Contribution Agreement”) by and among Sinclair HoldCo, Sinclair Transportation and HEP, HEP acquired all of the outstanding equity interests of Sinclair Transportation from Sinclair HoldCo in exchange for 21 million newly issued common limited partner units of HEP (the “HEP Units”), representing 16.6% of the pro forma outstanding HEP Units with a value of approximately $349 million based on HEP’s fully diluted common limited partner units outstanding and closing unit price on March 11, 2022, and cash consideration equal to $321.4 million, inclusive of estimated working capital adjustments pursuant to the Contribution Agreement for an aggregate transaction value of $670.4 million (the “HEP Transaction” and together with the HFC Transactions, the “Sinclair Transactions”). Of the 21 million HEP Units, 5.29 million units are currently held in escrow to secure Sinclair HoldCo’s renewable identification numbers (“RINs”) credit obligations to HF Sinclair under Section 6.22 of the Business Combination Agreement. HF Sinclair, and not HEP, would be entitled to the HEP common units held in escrow in the event of Sinclair HoldCo’s breach of its RINs credit obligations under the Business Combination Agreement. The cash consideration was funded through a draw under HEP’s senior secured revolving credit facility. The HEP Transaction was conditioned on the closing of the HFC Transactions, which occurred immediately following the HEP Transaction.

Sinclair Transportation, which together with its subsidiaries, owns integrated crude and refined products pipelines and terminal assets, including approximately 1,200 miles of integrated crude and refined product pipeline supporting the Sinclair HoldCo refineries and other third party refineries, 8 product terminals and 2 crude terminals with approximately 4.5 million barrels of operated storage. In addition, HEP acquired Sinclair Transportation’s interests in three pipeline joint ventures for crude gathering and product offtake.

- 9 -

References herein to HEP with respect to time periods prior to March 14, 2022, include HEP and its consolidated subsidiaries and do not include Sinclair Transportation and its consolidated subsidiaries (collectively, the “Acquired Sinclair Businesses”). References herein to HEP with respect to time periods from and after March 14, 2022 include the operations of the Acquired Sinclair Businesses.

Through our subsidiaries and joint ventures, we own ~~and~~and/or operate petroleum product and crude oil pipelines, terminal, tankage and loading rack facilities and refinery processing units that support refining and marketing operations of ~~HFC~~HF Sinclair and other refineries in the Mid-Continent, Southwest and Northwest regions of the United States. Additionally, we own (a) a ~~75% interest in UNEV Pipeline, LLC (“UNEV”), a~~ 50% interest in Osage Pipe Line Company, LLC (“Osage”), (b) a 50% interest in Cheyenne Pipeline LLC, ~~and~~(c) a 50% interest in Cushing Connect Pipeline & Terminal ~~LLC.~~LLC, (d) a 25.06% interest in Saddle Butte Pipeline III, LLC and (e) a 49.995% interest in Pioneer Investments Corp. Following the HEP Transaction, we now own the remaining 25% interest in UNEV Pipeline, LLC and as a result, UNEV Pipeline, LLC is our wholly owned subsidiary.

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 the Cheyenne Refinery on August 3, 2020.

On February 8, 2021, HEP and HFC finalized and executed new agreements for HEP’s Cheyenne assets 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 (and now HF Sinclair’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 (and now HF Sinclair) will pay a base tariff to HEP for available crude oil storage and HFC (and now HF Sinclair) 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.

On April 1, 2021, we sold our 156-mile, 6-inch refined product pipeline that connected HFC’s Navajo Refinery to terminals in El Paso for gross proceeds of $7.0 million and recognized a gain on sale of $5.3 million.

We operate in 2 reportable segments, a Pipelines and Terminals segment and a Refinery Processing Unit segment. Disclosures around these segments are discussed in Note 16.

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~~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 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”).~~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, ~~2020.~~2021. 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, ~~2021.~~2022.

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.

~~- 10 -~~

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.

Goodwill and Long-lived Assets

Goodwill represents the excess of our cost of an acquired business over the fair value of the assets acquired, less liabilities assumed. Goodwill is not subject to amortization and is tested annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our goodwill

- 10 -

impairment testing first entails either a quantitative assessment or an optional qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine that based on the qualitative factors that it is more likely than not that the carrying amount of the reporting unit is greater than its fair value, a quantitative test is performed in which we estimate the fair value of the related reporting unit. If the carrying amount of a reporting unit exceeds its fair value, the goodwill of that reporting unit is impaired, and we measure goodwill impairment as the excess of the carrying amount of the reporting unit over the related fair value.

Indicators of Goodwill and Long-lived Asset Impairment

~~The~~During the first quarter of 2021, 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 6 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 performed our annual goodwill impairment testing qualitatively as of July 1, 2021, and determined it was not more likely than not that the carrying amount of each reporting unit was greater than its fair value. Therefore, a quantitative test was not necessary, and no additional impairment of goodwill was recorded.

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.

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 definition of 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 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.

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.

~~- 11 -~~

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

- 11 -

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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, we recognized ~~$12.3~~$10.4 million and ~~$13.8~~$8.8 million, respectively, of these deficiency payments in revenue, of which ~~$0.5~~$1.9 million and ~~$0.7~~$0.5 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)~~HF Sinclair) 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 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 below.

Lessee Accounting

At inception, we determine if an arrangement is or contains a lease. Right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our payment obligation under the leasing arrangement. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We use our estimated incremental borrowing rate (“IBR”) to determine the present value of lease payments as most of our leases do not contain an implicit rate. Our IBR represents the interest rate which we would pay to borrow, on a collateralized basis, an amount equal to the lease payments over a similar term in a similar economic environment. We use the implicit rate when readily determinable.

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.

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 residual value of the underlying assets when assessing the classification.

~~Accounting Pronouncements Adopted During the Periods Presented~~Deferred Turnaround Costs

~~Credit Losses Measurement~~

~~In June 2016, ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,~~Our refinery processing units require regular major maintenance and repairs which are commonly referred to as “turnarounds.” 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 adoptionThe required frequency of the ~~standard did not have a material impact on our financial condition, results of operations or cash flows.~~maintenance varies by unit, but generally is every four to five years. Turnaround costs are deferred and amortized over the period until the next scheduled turnaround.

~~- 12 -~~

Note 2:Sinclair Acquisition

HEP ~~Transactions~~Transaction

On ~~August 2, 2021, HEP, The Sinclair Companies (“Sinclair”) and Sinclair Transportation Company, a wholly owned subsidiary of Sinclair (“STC”), entered into a~~March 14, 2022, pursuant to the Contribution Agreement, ~~(the “Contribution Agreement”) pursuant to which~~ HEP ~~will acquire~~acquired all of the outstanding ~~shares~~equity interests of ~~STC~~Sinclair Transportation in exchange for 21 million newly issued HEP Units, representing 16.6% of the pro forma outstanding HEP Units with a value of approximately $349 million based on HEP’s fully diluted common limited partner units ~~of HEP~~outstanding and closing unit price on March 11, 2022, and cash consideration equal to ~~$325~~$321.4 million, ~~(the “HEP Transactions”).~~inclusive of estimated working capital adjustments pursuant to the Contribution Agreement for an aggregate transaction value of $670.4 million. On the same date ~~HFC, Sinclair~~ and ~~certain other parties entered into a~~immediately following the consummation of the HEP Transaction, pursuant to the Business Combination Agreement, ~~pursuant to which~~ Sinclair ~~will contribute~~HoldCo contributed all of the equity interests of ~~Hippo Holding LLC, which owns~~the Target Company to HF Sinclair ~~Oil Corporation, to a new HFC parent holding company that will be named “HF Sinclair Corporation”~~ in exchange for 60,230,036 shares of common stock in HF Sinclair, ~~Corporation (the “HFC Transactions”,~~representing 27.0% of the pro forma equity of HF Sinclair with a value of approximately

- 12 -

$2,149 million based on HF Sinclair’s fully diluted shares of common stock outstanding and ~~together with the HEP Transactions, the “Sinclair Transactions”).~~closing stock price on March 11, 2022.

The cash consideration for the HEP Transactions is subject to customary adjustments at closing for working capital of STC. The number of HEP common units to be issued to Sinclair at closing is subject to downward adjustment if, as a condition to obtaining antitrust clearance for the Sinclair Transactions, HEP agrees to divest a portion of its equity interest in UNEV Pipeline, LLC and the sales price for such interests does not exceed the threshold provided in the Contribution Agreement.

The Contribution Agreement contains customary representations, warranties and covenants of HEP, Sinclair, and STC. The HEP Transactions are expected to close in mid-2022, subject to the satisfaction or waiver of certain customary conditions, including, among others, the receipt of certain required regulatory consents and clearance, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act (the “HSR Act”), and the consummation of the HFC Transactions. On August ~~23,~~2, 2021, each of HollyFrontier and Sinclair filed its respective premerger notification and report regarding the Sinclair Transactions with the U.S. Department of Justice and the U.S. Federal Trade Commission (the “FTC”) under the HSR Act. On September 22, 2021, HFC and Sinclair each received a request for additional information and documentary material (“Second Request”) from the FTC in connection with the FTC’s review of the Sinclair Transactions. Issuance of the Second Request extends the waiting period under the HSR Act until 30 days after both HollyFrontier and Sinclair have substantially complied with the Second Request, unless the waiting period is terminated earlier by the FTC or the parties otherwise commit not to close the Sinclair Transactions for some additional period of time. HollyFrontier and Sinclair are cooperating with the FTC staff in its review.

The Contribution Agreement automatically terminates if the HFC Transactions are terminated, and contains other customary termination rights, including a termination right for each of HEP and Sinclair if, under certain circumstances, the closing does not occur by May 2, 2022 (the “Outside Date”), except that the Outside Date can be extended by either party by up to 2 90 day periods to obtain any required antitrust clearance.

Upon closing of the HEP Transactions, HEP’s existing senior management team will continue to operate HEP. Under the definitive agreements, Sinclair will be granted the right to nominate 1 director to the HEP board of directors at the closing. The Sinclair stockholders have also agreed to certain customary lock-up restrictions and registration rights for the HEP common units to be issued to the stockholders of Sinclair. HEP will continue to operate under the name Holly Energy Partners, L.P.

~~See Note 11 for a description of the Letter Agreement between HFC and HEP entered into~~ in connection with the Contribution ~~Agreement.~~Agreement, HEP, Holly Logistics Services, L.L.C., the ultimate general partner of HEP (“HLS”) and Navajo Pipeline Co., L.P., the sole member of HLS (the “Sole Member”), entered into a unitholders agreement (the “Unitholders Agreement”) by and among HEP, HLS, the Sole Member, Sinclair HoldCo and the stockholders of Sinclair HoldCo (each a “Unitholder” and collectively, the “Unitholders,” and along with Sinclair HoldCo and each of their permitted transferees, the “Sinclair Parties”), which became effective on the Closing Date.

Pursuant to the Unitholders Agreement, the Sinclair Parties have the right to nominate, and have nominated, 1 person to the board of directors of HLS until such time that (x) the Sinclair Parties beneficially own less than 10.5 million HEP Units or (y) the HEP Units beneficially owned by the Sinclair Parties constitute less than 5% of all outstanding HEP Units. The Unitholders Agreement also subjects 15.75 million of the HEP Units issued to the Sinclair Parties (the “Restricted Units”) to a “lock-up” period commencing on the Closing Date, during which the Sinclair Parties will be prohibited from selling the Restricted Units, except for certain permitted transfers. One-third of such Restricted Units will be released from such restrictions on the date that is six months after the closing, one-third of the Restricted Units will be released from such restrictions on the first anniversary of the Closing Date, and the remainder will be released from such restrictions on the date that is 15 months from the Closing Date.

Under the terms of the Contribution Agreement, HEP acquired Sinclair Transportation, which together with its subsidiaries, owned Sinclair HoldCo’s integrated crude and refined products pipelines and terminal assets, including approximately 1,200 miles of integrated crude and refined product pipelines supporting the Sinclair HoldCo refineries and other third-party refineries, 8 product terminals and 2 crude terminals with approximately 4.5 million barrels of operated storage. In addition, HEP acquired Sinclair Transportation’s interests in three pipeline joint ventures for crude gathering and product offtake including: Saddle Butte Pipeline III, LLC (25.06% non-operated interest); Pioneer Pipeline (49.995% non-operated interest); and UNEV Pipeline (the 25% non-operated interest not already owned by HEP, resulting in UNEV Pipeline, LLC becoming a wholly owned subsidiary of HEP).

The HEP Transaction was accounted for as a business combination using the acquisition method of accounting, with the assets acquired and liabilities assumed at their respective acquisition date fair values at the Closing Date, with the excess consideration recorded as goodwill. The preliminary purchase consideration allocation resulted in the recognition of $90.8 million in goodwill.

The following tables present the preliminary purchase consideration and preliminary purchase price allocation to the assets acquired and liabilities assumed on March 14, 2022:


Preliminary Purchase Consideration (in thousands except for per share amounts)
HEP common units issued	21,000
Closing price per unit of HEP common units(1)	$	16.62
Purchase consideration paid in HEP common units	349,020
Cash consideration paid by HEP	325,000
Estimated Adjusted Payments HEP(2)	(3,634)
Total cash consideration	321,366
Total purchase consideration	$	670,386

(1) Based on the HEP closing unit price on March 11, 2022.

(2) Net of cash acquired

- 13 -


	(In thousands)
Assets Acquired
Accounts receivable	$	1,910
Prepaid and other current assets	59
Properties and equipment	357,819
Operating lease right-of-use assets	105
Other assets	3,500
Goodwill	90,768
Equity method investments	229,891
Total assets acquired	$	684,052

Liabilities Assumed
Accounts payable	1,528
Accrued property taxes	973
Other current liabilities	789
Operating lease liabilities	33
Noncurrent operating lease liabilities	72
Other long-term liabilities	10,271
Total liabilities assumed	$	13,666
Net assets acquired	$	670,386

The fair value of properties, plants and equipment was based on the combination of the cost and market approaches. Key assumptions in the cost approach include determining the replacement cost by evaluating recently published data and adjusting replacement cost for physical deterioration, functional and economic obsolescence. We used the market approach to measure the value of certain assets through an analysis of recent sales or offerings of comparable properties.

The fair value of the equity method investments were based on a combination of valuation methods including discounted cash flows and the guideline public company method.

The fair values discussed above were based on significant inputs that are not observable in the market and, therefore, represent Level 3 measurements. See Note 6.

The fair values of all other current receivable and payables were equivalent to their carrying values due to their short-term nature.

These fair value estimates are preliminary and, therefore, the final fair values of assets acquired and liabilities assumed and the resulting effect on our financial position may change once all needed information has become available, the working capital true-up is complete, and we finalize our valuations.

Our consolidated financial and operating results reflect the Sinclair Transportation operations beginning March 14, 2022. Our results of operations for the three months ended June 30, 2022 included revenue, interest income from sales-type leases and net income of $10.5 million, $14.5 million and $19.2 million, respectively, and revenue, interest income from sales-type leases and net income of $12.1 million, $17.2 million and $21.8 million for the period from March 14, 2022 through June 30, 2022, respectively, related to these operations.

For the six months ended June 30, 2022, we incurred $1.7 million in incremental direct acquisition and integration costs that principally relate to legal, advisory and other professional fees and are presented as general and administrative expenses in our statements of operations.

- 14 -

The following unaudited pro forma combined condensed financial data for the six months ended June 30, 2022 and the three and six months ended June 30, 2021 was derived from our historical financial statements giving effect to the HEP Transaction as if it had occurred on January 1, 2021. The below information reflects pro forma adjustments based on available information and certain assumptions that we believe are reasonable, including the depreciation of Sinclair Transportation’s fair-valued properties, plants and equipment.

Additionally, pro forma earnings include certain non-recurring charges, the substantial majority of which consist of transaction costs related to financial advisors, legal advisors, financial advisory and professional accounting services.

The pro forma results of operations do not include any contract adjustments to tariffs made after closing, cost savings or other synergies that may result from the HEP Transaction. The pro forma combined condensed financial data has been included for comparative purposes only and is not necessarily indicative of the results that might have occurred had the HEP Transaction taken place on January 1, 2021 and is not intended to be a projection of future results.


	Three Months Ended June 30,		Six Months Ended June 30,
	2021		2022		2021
	(In thousands)
Sales and other revenues	$	143,279	$	270,730	$	286,469
Net income attributable to the partners	$	62,739	$	107,574	$	133,164

Contemporaneous with the closing of the Sinclair Transactions, HEP and HFC amended certain intercompany agreements, including the master throughput agreement, to include within the scope of such agreements certain of the assets acquired by HEP pursuant to the Contribution Agreement.

Note 3: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~~connected the Cushing, Oklahoma crude oil hub to the Tulsa, Oklahoma refining complex owned by a subsidiary of ~~HFC~~HF Sinclair 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 in service during the second quarter of 2020, and the Cushing Connect Pipeline was placed into service ~~at the end of~~during the 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 total Cushing Connect Joint Venture investment will generally be shared equally among the partners. However, we are solely responsible for any Cushing Connect Pipeline construction costs that exceed the budget by more than 10%. 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 ~~$70~~$73 million, ~~to $75 million.~~including approximately $5 million of Cushing Connect Pipeline construction costs exceeding the budget by more than 10% borne solely by HEP.

The Cushing Connect Joint Venture legal entities are variable interest entities ~~("VIEs"~~(“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 constructed and is ~~constructing and will operate~~operating 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

- 15 -

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. HEP’s maximum exposure to loss as a result of its involvement with the Cushing Connect JV Terminal legal entity is not expected to be material due to the long-term terminalling agreements in place to support its operations.

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 4:Revenues

Disaggregated revenues were as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
		(In thousands)				(In thousands)					(In thousands)				(In thousands)
Pipelines	Pipelines	$	67,354	$	68,292	$	202,180	$	197,718	Pipelines	$	68,319	$	68,322	$	133,099	$	134,827
Terminals, tanks and loading racks	Terminals, tanks and loading racks	33,317		39,036		108,386		112,814		Terminals, tanks and loading racks	44,558		36,887		81,573		75,069
Refinery processing units	Refinery processing units	21,913		20,403		65,436		59,860		Refinery processing units	22,893		21,026		41,296		43,522
		$	122,584	$	127,731	$	376,002	$	370,392		$	135,770	$	126,235	$	255,968	$	253,418

~~- 14 -~~

Revenues on our consolidated statements of income were composed of the following lease and service revenues:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
		(In thousands)				(In thousands)					(In thousands)				(In thousands)
Lease revenues	Lease revenues	$	84,074	$	90,077	$	258,877	$	269,931	Lease revenues	$	82,445	$	86,867	$	155,736	$	174,803
Service revenues	Service revenues	38,510		37,654		117,125		100,461		Service revenues	53,325		39,368		100,232		78,615
		$	122,584	$	127,731	$	376,002	$	370,392		$	135,770	$	126,235	$	255,968	$	253,418

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 consideration in exchange for goods or services transferred to a customer. Our consolidated balance sheets included the contract assets and liabilities in the table below:


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
		(In thousands)					(In thousands)
Contract assets	Contract assets	$	6,593	$	6,306	Contract assets	$	6,727	$	6,637
Contract liabilities	Contract liabilities	$	(482)	$	(500)	Contract liabilities	$	(2,247)	$	(4,185)

The contract assets and liabilities include both lease and service components. During the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021, we recognized $1.9 million and $0.5 million, respectively, of revenue that was previously included in contract liability as

- 16 -

of December 31, ~~2020.~~2021 and 2020, respectively. During the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021, we also recognized ~~$0.3~~$0.1 million and $0.2 million, respectively, of revenue included in contract assets.

As of ~~September~~June 30, ~~2021,~~2022, we expect to recognize ~~$1.7~~$1.6 billion in revenue related to our unfulfilled performance obligations under the terms of our long-term throughput agreements and leases expiring in ~~2022~~2023 through ~~2036.~~2037. 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,	Years Ending December 31,	(In millions)		Years Ending December 31,	(In millions)
Remainder of 2021		$	84
2022		312
Remainder of 2022				Remainder of 2022	$	182
2023	2023	276		2023	301
2024	2024	238		2024	266
2025	2025	172		2025	185
2026	2026	157		2026	170
2027				2027	137
Thereafter	Thereafter	483		Thereafter	407
Total	Total	$	1,722	Total	$	1,648

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.

~~- 15 -~~

Note 5:Leases

Lessee Accounting

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.

Our leases have remaining terms of less than 1 year to 23 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 ~~$6.0~~$6.2 million and ~~$6.4~~$6.0 million as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, with accumulated depreciation of ~~$3.4~~$4.0 million and $3.6 million as of ~~both September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021, 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 1 remaining subsequent renewal option for an additional 10 years.

- 17 -

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


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021

Operating leases:	Operating leases:					Operating leases:
Operating lease right-of-use assets, net	Operating lease right-of-use assets, net	$	2,501	$	2,979	Operating lease right-of-use assets, net	$	2,502	$	2,275

Current operating lease liabilities	Current operating lease liabilities	706		875		Current operating lease liabilities	963		620
Noncurrent operating lease liabilities	Noncurrent operating lease liabilities	2,169		2,476		Noncurrent operating lease liabilities	2,006		2,030
Total operating lease liabilities	Total operating lease liabilities	$	2,875	$	3,351	Total operating lease liabilities	$	2,969	$	2,650

Finance leases:	Finance leases:					Finance leases:
Properties and equipment	Properties and equipment	$	6,031	$	6,410	Properties and equipment	$	6,160	$	6,031
Accumulated amortization	Accumulated amortization	(3,437)		(3,390)		Accumulated amortization	(4,013)		(3,632)
Properties and equipment, net	Properties and equipment, net	$	2,594	$	3,020	Properties and equipment, net	$	2,147	$	2,399

Current finance lease liabilities	Current finance lease liabilities	$	3,753	$	3,713	Current finance lease liabilities	$	3,857	$	3,786
Noncurrent finance lease liabilities	Noncurrent finance lease liabilities	65,565		68,047		Noncurrent finance lease liabilities	62,838		64,649
Total finance lease liabilities	Total finance lease liabilities	$	69,318	$	71,760	Total finance lease liabilities	$	66,695	$	68,435

Weighted average remaining lease term (in years):	Weighted average remaining lease term (in years):					Weighted average remaining lease term (in years):
Operating leases	Operating leases	5.8		5.9		Operating leases	4.8		5.8
Finance leases	Finance leases	15.2		15.9		Finance leases	14.6		15.0

Weighted average discount rate:	Weighted average discount rate:					Weighted average discount rate:
Operating leases	Operating leases	4.8%		4.8%		Operating leases	4.5%		4.8%
Finance leases	Finance leases	5.6%		5.6%		Finance leases	5.6%		5.6%

~~- 16 -~~

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


		Nine Months Ended September 30,						Six Months Ended June 30,
		2021		2020				2022		2021
		(In thousands)				(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:	Cash paid for amounts included in the measurement of lease liabilities:						Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows on operating leases	Operating cash flows on operating leases	$	855	$	773		Operating cash flows on operating leases	$	518	$	576
Operating cash flows on finance leases	Operating cash flows on finance leases	$	3,110	$	3,241		Operating cash flows on finance leases	$	1,950	$	2,105
Financing cash flows on finance leases	Financing cash flows on finance leases	$	2,666	$	2,666		Financing cash flows on finance leases	$	1,776	$	1,747

- 18 -

Maturities of lease liabilities were as follows:


		September 30, 2021					June 30, 2022
		Operating		Finance			Operating		Finance
		(In thousands)					(In thousands)
2021		$	262	$	1,832
2022	2022	690		7,335		2022	$	504	$	3,672
2023	2023	603		7,374		2023	935		7,383
2024	2024	497		6,929		2024	524		6,938
2025	2025	429		6,470		2025	443		6,479
2026 and thereafter		787		73,888
2026						2026	289		6,432
2027 and thereafter						2027 and thereafter	501		67,463
Total lease payments	Total lease payments	3,268		103,828		Total lease payments	3,196		98,367
Less: Imputed interest	Less: Imputed interest	(393)		(34,510)		Less: Imputed interest	(227)		(31,672)
Total lease obligations	Total lease obligations	2,875		69,318		Total lease obligations	2,969		66,695
Less: Current lease liabilities	Less: Current lease liabilities	(706)		(3,753)		Less: Current lease liabilities	(963)		(3,857)
Noncurrent lease liabilities	Noncurrent lease liabilities	$	2,169	$	65,565	Noncurrent lease liabilities	$	2,006	$	62,838

The components of lease expense were as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
		(In thousands)									(In thousands)
Operating lease costs	Operating lease costs	$	260	$	242	$	807	$	745	Operating lease costs	$	242	$	249	$	504	$	547
Finance lease costs	Finance lease costs									Finance lease costs
Amortization of assets	Amortization of assets	195		251		607		766		Amortization of assets	189		200		381		412
Interest on lease liabilities	Interest on lease liabilities	983		1,032		2,983		3,108		Interest on lease liabilities	946		994		1,905		2,001
Variable lease cost	Variable lease cost	43		64		175		159		Variable lease cost	23		67		59		133
Total net lease cost	Total net lease cost	$	1,481	$	1,589	$	4,572	$	4,778	Total net lease cost	$	1,400	$	1,510	$	2,849	$	3,093

Lessor Accounting

As discussed in Note 1, the majority of our contracts with customers meet the definition of a lease.

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~~HF Sinclair generally has the option to purchase assets located within ~~HFC~~HF Sinclair refinery boundaries, including refinery tankage, truck racks and refinery processing units, at fair market value when the related agreements expire.

During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, we entered into new agreements, and amended other agreements, with HFC related to our newly acquired Sinclair Transportation assets. Certain of these agreements met the criteria of sales-type leases. 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. Because we recorded these assets at fair values under purchase price accounting, there was no gain or loss on these sales-type leases during the six months ended June 30, 2022. The balance sheet impacts were composed of the following:



	Six Months Ended June 30, 2022
	(In thousands)
Net investment in leases	$	235,620
Properties and equipment, net	(235,620)
Gain on sales-type leases	$	—

- 19 -

During the six months ended June 30, 2021, we entered into new agreements and modified other agreements with HF Sinclair related to our Cheyenne assets, Tulsa West lube racks, various crude tanks and new Navajo ~~tanks, and the agreements we previously entered into relating to the Cushing Connect Pipeline became effective.~~tanks. These agreements met the criteria of ~~sales-~~

~~- 17 -~~

~~type~~sales-type leases since the underlying assets are not expected to have an alternative use at the end of the lease terms to anyone other than ~~HFC.~~HF Sinclair. 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 ~~nine~~six months ended ~~September~~June 30, 2021 composed of the following:



	~~Nine~~Six Months Ended ~~September~~June 30, 2021
	(In thousands)

Net investment in leases	$	~~143,720~~47,795
Properties and equipment, net	~~(125,602)~~(29,677)
Deferred revenue	6,559
Gain on sales-type leases	$	24,677

During the nine months ended September 30, 2020, one of our throughput agreements with Delek US Holdings, Inc. (“Delek”) was partially renewed. A component of this agreement met the criteria of a sales-type lease since the underlying asset is not expected to have an alternative use at the end of the lease term to anyone other than Delek. Under sales-type lease accounting, at the commencement date, the lessor recognizes a net investment in the lease, based on the estimated fair value of the underlying leased assets at the commencement date of the lease, 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 nine months ended September 30, 2020 composed of the following:


	~~Nine Months Ended September 30, 2020~~
	~~(In thousands)~~
~~Net investment in lease~~	$	~~35,319~~
~~Properties and equipment, net~~	~~(1,485)~~

~~Gain on sales-type lease~~	$	~~33,834~~

These sales-type lease transactions, including the related gain, were non-cash transactions.

Lease income recognized was as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
		(In thousands)									(In thousands)
Operating lease revenues	Operating lease revenues	$	80,907	$	87,125	$	251,605	$	262,518	Operating lease revenues	$	76,538	$	84,426	$	146,891	$	170,698
Direct financing lease interest income	Direct financing lease interest income	521		525		1,568		1,572		Direct financing lease interest income	520		523		1,040		1,047
Gain on sales-type leases	Gain on sales-type leases	—		—		24,677		33,834		Gain on sales-type leases	—		27		—		24,677
Sales-type lease interest income	Sales-type lease interest income	6,313		2,278		18,429		6,218		Sales-type lease interest income	23,814		6,091		35,938		12,115
Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable	Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable	3,167		2,952		7,272		7,413		Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable	5,906		2,441		8,846		4,105

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.

- 1820 -

Annual minimum undiscounted lease payments under our leases were as follows as of ~~September~~June 30, ~~2021:~~2022:


		Operating		Finance		Sales-type			Operating		Finance		Sales-type
Years Ending December 31,	Years Ending December 31,	(In thousands)						Years Ending December 31,	(In thousands)
Remainder of 2021		$	71,001	$	544	$	10,525
2022		283,916		2,171		42,102
Remainder of 2022								Remainder of 2022	$	152,623	$	1,083	$	50,144
2023	2023	253,459		2,175		38,196		2023	272,169		2,175		96,383
2024	2024	217,355		2,192		34,967		2024	242,476		2,192		93,154
2025	2025	153,934		2,209		31,539		2025	166,290		2,209		89,727
2026 and thereafter		558,415		38,837		279,406
2026								2026	151,745		2,227		89,727
2027 and thereafter								2027 and thereafter	473,243		36,610		841,406
Total lease receipt payments	Total lease receipt payments	$	1,538,080	$	48,128	$	436,735	Total lease receipt payments	$	1,458,546	$	46,496	$	1,260,541
Less: Imputed interest	Less: Imputed interest			(31,734)		(367,089)		Less: Imputed interest			(30,173)		(1,131,594)
				16,394		69,646					16,323		128,947
Unguaranteed residual assets at end of leases	Unguaranteed residual assets at end of leases			—		224,779		Unguaranteed residual assets at end of leases			—		402,895
Net investment in leases	Net investment in leases			$	16,394	$	294,425	Net investment in leases			$	16,323	$	531,842

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


		September 30, 2021				December 31, 2020					June 30, 2022				December 31, 2021
		Sales-type Leases		Direct Financing Leases		Sales-type Leases		Direct Financing Leases			Sales-type Leases		Direct Financing Leases		Sales-type Leases		Direct Financing Leases
		(In thousands)				(In thousands)					(In thousands)				(In thousands)
Lease receivables (1)	Lease receivables (1)	$	211,053	$	16,394	$	88,922	$	16,452	Lease receivables (1)	$	426,582	$	16,323	$	207,768	$	16,371
Unguaranteed residual assets	Unguaranteed residual assets	83,372		—		64,551		—		Unguaranteed residual assets	105,260		—		90,097		—
Net investment in leases	Net investment in leases	$	294,425	$	16,394	$	153,473	$	16,452	Net investment in leases	$	531,842	$	16,323	$	297,865	$	16,371

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

Note 6: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.

- 1921 -

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

September 30, 2021

December 31, 2020

June 30, 2022

December 31, 2021

Financial Instrument

Fair Value Input Level

Carrying
Value

Fair Value

Carrying
Value

Fair Value

Financial Instrument

Fair Value Input Level

Carrying
Value

Fair Value

Carrying
Value

Fair Value

(In thousands)

Liabilities:

5% Senior Notes

Level 2

492,809

506,770

492,103

506,540

5% Senior Notes

Level 2

493,541

430,710

493,049

502,705

6.375% Senior Notes

Level 2

393,919

377,996

—

Total Liabilities

887,460

808,706

493,049

502,705

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 10 for additional information.

Non-Recurring Fair Value Measurements

The HEP Transaction was accounted for as a business combination using the acquisition method of accounting, with the assets acquired and liabilities assumed at their respective acquisition date fair values at the Closing Date. The fair value measurements were based on a combination of valuation methods including discounted cash flows, the guideline public company method, the market approach and obsolescence adjusted replacement costs, all of which are Level 3 inputs.

For ~~gains on~~the net investments in sales-type leases recognized during the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, 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.

~~At 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 7:Properties and Equipment

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

September 30,
2021 December 31,
2020
(In thousands)
Pipelines, terminals and tankage(1)
$ 1,545,545 $ 1,575,815
Refinery assets 348,882 348,882
Land and right of way 86,781 87,076
Construction in progress 14,878 58,467
Other(1)
43,876 46,201
2,039,962 2,116,441
Less accumulated depreciation (704,920) (665,756)
$ 1,335,042 $ 1,450,685

~~(1)Prior period balances have been reclassified to be comparative to current period.~~


	June 30, 2022		December 31, 2021
	(In thousands)
Pipelines, terminals and tankage	$	1,611,170	$	1,527,697
Refinery assets	352,274		348,882
Land and right of way	124,984		98,837
Construction in progress	31,864		26,446
Other	63,372		48,203
	2,183,664		2,050,065
Less accumulated depreciation	(757,172)		(721,037)
	$	1,426,492	$	1,329,028

Depreciation expense was ~~$60.9~~$40.8 million and ~~$64.3~~$42.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and includes depreciation of assets acquired under capital leases.

Note 8: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 US Holdings, Inc. (“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.

- 2022 -

The carrying amounts of our intangible assets were as follows:


		Useful Life	September 30, 2021		December 31, 2020			Useful Life	June 30, 2022		December 31, 2021
			(In thousands)						(In thousands)
Delek transportation agreement	Delek transportation agreement	30 years	$	59,933	$	59,933	Delek transportation agreement	30 years	$	59,933	$	59,933
HFC transportation agreement		10-15 years	75,131		75,131
HF Sinclair transportation agreement							HF Sinclair transportation agreement	10-15 years	75,131		75,131
Customer relationships	Customer relationships	10 years	69,683		69,683		Customer relationships	10 years	69,683		69,683
Other	Other	20 years	50		50		Other	20 years	50		50
			204,797		204,797				204,797		204,797
Less accumulated amortization	Less accumulated amortization		(127,988)		(117,482)		Less accumulated amortization		(138,493)		(131,490)
			$	76,809	$	87,315			$	66,304	$	73,307

Amortization expense was ~~$10.5~~$7.0 million for ~~both~~each of the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021. We estimate amortization expense to be ~~$14.0~~$9.9 million for ~~2022, $9.9 million in~~ 2023, and $9.1 million for 2024 through ~~2026.~~2027.

We have additional transportation agreements with ~~HFC~~subsidiaries of HF Sinclair resulting from historical transactions consisting of pipeline, terminal and tankage assets contributed to us or acquired from ~~HFC.~~subsidiaries of HF Sinclair. These transactions occurred while we were a consolidated variable interest entity of ~~HFC;~~HF Sinclair; therefore, our basis in these agreements is 0zero and does not reflect a step-up in basis to fair value.

Note 9:Employees, Retirement and Incentive Plans

Direct support for our operations is provided by ~~Holly Logistic Services, L.L.C. (“HLS”), an HFC subsidiary,~~HLS, which utilizes personnel employed by ~~HFC~~HF Sinclair 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~~HF Sinclair (the “Omnibus Agreement”). These employees participate in the retirement and benefit plans of ~~HFC.~~HF Sinclair. Our share of retirement and benefit plan costs was ~~$2.1~~$2.7 million and $1.9 million for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~$6.2~~$5.1 million and ~~$5.7~~$4.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

Under HLS’s secondment agreement with ~~HFC~~HF Sinclair (the “Secondment Agreement”), certain employees of ~~HFC~~HF Sinclair are seconded to HLS to provide operational and maintenance services for certain of our processing, refining, pipeline and tankage assets, and HLS reimburses ~~HFC~~HF Sinclair 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 5 components: restricted or phantom units, performance units, unit options, unit appreciation rights and cash awards. 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 ~~September~~June 30, ~~2021,~~2022, we had 2 types of ~~incentive-based~~unit-based awards outstanding, which are described below. The compensation cost charged against income was $0.6 million and $0.5 million for ~~both~~ the three months ended ~~September~~June 30, 2022 and 2021, respectively, and ~~2020, and $1.9 million and $1.5~~$1.2 million for both the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020, respectively.~~2021. 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 ~~September~~June 30, ~~2021,~~2022, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which ~~860,361~~819,513 were available to be granted, assuming no forfeitures of the unvested units and full achievement of goals for the unvested performance units.

Phantom Units

Under our Long-Term Incentive Plan, we grant phantom units to our non-employee directors and 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.

The fair value of each 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.

- 2123 -

A summary of phantom unit activity and changes during the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, is presented below:


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

Outstanding at January 1, 2022 (nonvested)					Outstanding at January 1, 2022 (nonvested)	203,263	$	14.85
Granted					Granted	4,313	17.40
Vesting and transfer of full ownership to recipients	Vesting and transfer of full ownership to recipients	(823)	16.24		Vesting and transfer of full ownership to recipients	(3,833)	15.54
Forfeited	Forfeited	(6,833)	15.54		Forfeited	(18,158)	14.60
Outstanding at September 30, 2021 (nonvested)		288,336	14.45
Outstanding at June 30, 2022 (nonvested)					Outstanding at June 30, 2022 (nonvested)	185,585	14.92

The grant date fair values of phantom units that were vested and transferred to recipients during the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021 ~~and 2020~~ were ~~$13~~$60 thousand and ~~$0.2 million,~~$2 thousand, respectively. The grant date fair values of phantom units that were granted during the six months ended June 30, 2022 were $75 thousand. No units were granted during the six months ended June 30, 2021. As of ~~September~~June 30, ~~2021, $1.4~~2022, $1.0 million of total unrecognized compensation expense related to unvested phantom unit grants is expected to be recognized over a weighted-average period of ~~1.2 years.~~1.0 year.

Performance Units

Under our Long-Term Incentive Plan, we grant performance units to selected officers who perform services for us. Performance units granted are payable in common units at the end of a three-year performance period based upon meeting certain criteria over the performance period. Under the terms of our performance unit grants, some awards are subject to the growth in our distributable cash flow per common unit over the performance period while other awards are subject to "financial performance" and "market performance." Financial performance is based on meeting certain earnings before interest, taxes, depreciation and amortization ("EBITDA") targets, while market performance is based on the relative standing of total unitholder return achieved by HEP compared to peer group companies. The number of units ultimately issued under these awards can range from 0% to 200%.

We did not grant any performance units during the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. 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 ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, is presented below:


Performance Units						Units
Outstanding at January 1, ~~2021~~2022 (nonvested)						~~77,472~~76,719

Vesting and transfer of common units to recipients						~~(10,881)~~(13,920)
Forfeited						(9,124)
Outstanding at ~~September~~June 30, ~~2021~~2022 (nonvested)						~~66,591~~53,675

The grant date fair value of performance units vested and transferred to recipients during both of the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 was $0.4 million. Based on the weighted-average fair value of performance units outstanding at ~~September~~June 30, ~~2021,~~2022, of ~~$1.2~~$0.9 million, there was ~~$0.4~~$0.5 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of ~~1.5~~1.3 years.

During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, 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.

- 2224 -

Note 10:Debt

Credit Agreement

In April 2021, we amended our senior secured revolving credit facility (the “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 Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments, working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit and continues to provide for an accordion feature that allows us to increase commitments under the Credit Agreement up to a maximum amount of $1.7 billion.

Our obligations under the Credit Agreement are collateralized by substantially all of our assets, and indebtedness under the Credit Agreement is guaranteed by our material, wholly owned subsidiaries. The Credit Agreement requires us to maintain compliance with certain financial covenants consisting of total leverage, senior secured leverage, and interest coverage. It also limits or restricts our ability to engage in certain activities. If, at any time prior to the maturity of the Credit Agreement, HEP obtains two investment grade credit ratings, the Credit Agreement will become unsecured and many of the covenants, limitations, and restrictions will be eliminated.

We may prepay all loans at any time without penalty, except for tranche breakage costs. If an event of default exists under the Credit Agreement, the lenders will be able to accelerate the maturity of all loans outstanding and exercise other rights and remedies. We were in compliance with the covenants under the Credit Agreement as of ~~September~~June 30, ~~2021.~~2022.

Senior Notes

On ~~February 4, 2020,~~April 8, 2022, we closed a private placement of $400 million in aggregate principal amount of 6.375% senior unsecured notes due in 2027 (the “6.375% Senior Notes”). The 6.375% Senior Notes were issued at par for net proceeds of approximately $393 million, after deducting the initial purchasers’ discounts and commissions and estimated offering expenses. The total net proceeds from the offering of the 6.375% Senior Notes were used to partially repay outstanding borrowings under the Credit Agreement, increasing our available liquidity.

As of June 30, 2022, we had $500 million in aggregate principal amount of 5% senior unsecured notes due in 2028 (the ~~"5%~~“5% Senior ~~Notes"). On February 5, 2020, we redeemed~~Notes,” and together with the ~~existing $500 million 6%~~6.375% 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.~~“Senior Notes”).

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 ~~September~~June 30, ~~2021.~~2022. 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).

- 25 -

Long-term Debt

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


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
		(In thousands)					(In thousands)
Credit Agreement	Credit Agreement					Credit Agreement
Amount outstanding	Amount outstanding	$	840,500	913,500		Amount outstanding	$	721,000	840,000

5% Senior Notes	5% Senior Notes					5% Senior Notes
Principal	Principal	500,000		500,000		Principal	500,000		500,000
Unamortized premium and debt issuance costs	Unamortized premium and debt issuance costs	(7,191)		(7,897)		Unamortized premium and debt issuance costs	(6,459)		(6,951)
		492,809		492,103			493,541		493,049

6.375% Senior Notes						6.375% Senior Notes
Principal						Principal	400,000		—
Unamortized premium and debt issuance costs						Unamortized premium and debt issuance costs	(6,081)		—
							393,919		—

Total long-term debt	Total long-term debt	$	1,333,309	$	1,405,603	Total long-term debt	$	1,608,460	$	1,333,049

~~- 23 -~~

Note 11:Related Party Transactions

We serve ~~HFC’s~~HF Sinclair’s refineries under long-term pipeline, terminal and tankage throughput agreements, and refinery processing unit tolling agreements expiring from ~~2022~~2023 to ~~2036,~~2037, and revenues from ~~HFC~~HF Sinclair accounted for 81% and 79% of our total revenues for ~~both~~ the three and ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022, respectively. Under these agreements, ~~HFC~~HF Sinclair 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 generally subject to annual rate adjustments on July 1st each year ~~generally~~ based on increases or decreases in PPI or the FERC index. As of ~~September 30, 2021,~~July 1, 2022, these agreements with ~~HFC~~HF Sinclair require minimum annualized payments to us of ~~$353~~$445.9 million.

If ~~HFC~~HF Sinclair fails to meet its minimum volume commitments under the agreements in any quarter, it will be required to pay us the amount of any shortfall in cash by the last day of the month following the end of the quarter. Under certain of 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~~HF Sinclair an annual administrative fee (currently ~~$2.6~~$5.0 million) for the provision by ~~HFC~~HF Sinclair or its affiliates of various general and administrative services to us. ~~This~~In connection with the HEP Transaction, we pay HF Sinclair a temporary monthly fee ~~does not include~~of $62,500 relating to transition services to be provided to HEP by HF Sinclair. Neither the annual administrative fee nor the temporary monthly fee includes the salaries of personnel employed by ~~HFC~~HF Sinclair who perform services for us on behalf of HLS or the cost of their employee benefits, which are charged to us separately by ~~HFC.~~HF Sinclair. Also, we reimburse ~~HFC~~HF Sinclair and its affiliates for direct expenses they incur on our behalf.

Related party transactions with ~~HFC~~HF Sinclair and its subsidiaries were as follows:

•Revenues received from ~~HFC~~HF Sinclair were ~~$97.1~~$110.5 million and ~~$101.0~~$99.1 million for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~$298.2~~$202.8 million and ~~$298.0~~$201.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

•~~HFC~~HF Sinclair charged us general and administrative services under the Omnibus Agreement of $1.3 million and $0.7 million for ~~both~~ the three months ended ~~September~~June 30, 2022 and 2021, ~~and 2020,~~respectively, and $2.0 million and $1.3 million for ~~both~~ the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021, ~~and 2020.~~respectively. In addition, HF Sinclair charged us $0.2 million for a prorated portion of the temporary administrative fee during the six months ended June 30, 2022.

•We reimbursed ~~HFC~~HF Sinclair for costs of employees supporting our operations of ~~$15.6~~$19.9 million and ~~$14.0~~$14.3 million for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~$44.2~~$36.1 million and ~~$41.3~~$28.7 million for the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021, ~~and 2020,~~ respectively.

- 26 -

•~~HFC~~HF Sinclair reimbursed us ~~$1.8~~$4.2 million and ~~$2.3~~$1.2 million for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020, respectively, and $6.1 million and $6.3 million for the nine months ended September 30,~~ 2021, ~~and 2020, respectively,~~ for expense and capital ~~projects.~~projects, respectively, and $8.6 million and $4.3 million for the six months ended June 30, 2022 and 2021, respectively.

•We distributed $20.9 million ~~and $18.4 million~~ in both the three months ended ~~September~~June 30, 2022 and 2021, and ~~2020, respectively, and $62.6~~$41.7 million and ~~$74.3 million~~ in both the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021, ~~and 2020, respectively,~~ to ~~HFC~~HF Sinclair as regular distributions on its common units.

•Accounts receivable from ~~HFC~~HF Sinclair were ~~$41.5~~$59.0 million and ~~$48.0~~$56.2 million at ~~September~~June 30, ~~2021,~~2022, and December 31, ~~2020,~~2021, respectively.

•Accounts payable to ~~HFC~~HF Sinclair were ~~$14.6~~$12.7 million and ~~$18.1~~$11.7 million at ~~September~~June 30, ~~2021,~~2022, and December 31, ~~2020,~~2021, respectively.

•Deferred revenue in the consolidated balance sheets included ~~$0.4 million for both September~~at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, includes $2.2 million and $4.1 million, respectively, relating to certain shortfall billings to ~~HFC.~~HF Sinclair.

•We received direct financing lease payments from ~~HFC~~HF Sinclair for use of our Artesia and Tulsa rail yards of $0.5 million for ~~both~~each of the three months ended ~~September~~June 30, 2022 and 2021 and ~~2020, respectively, and $1.6~~$1.0 million for both of the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~$1.5 million for the nine months ended September 30, 2020.~~2021.

•We recorded a gain on sales-type leases with ~~HFC~~HF Sinclair of $24.7 million for the ~~nine~~six months ended ~~September~~June 30, 2021, and we received sales-type lease payments of ~~$6.6~~$24.4 million and ~~$2.4~~$6.3 million from ~~HFC~~HF Sinclair for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~$19.1~~$37.0 million and ~~$7.1~~$12.5 million for the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021, ~~and 2020,~~ respectively.

~~- 24 -~~

•HEP and 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 (and now HF Sinclair’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 (and now HF Sinclair) will pay a base tariff to HEP for available crude oil storage and ~~HFC~~HF Sinclair and HEP will split any profits generated on crude oil contango opportunities and (3) a $10 million one-time cash payment from ~~HFC~~HF Sinclair to HEP for the termination of the existing minimum volume commitment.

~~On August 2, 2021, in connection~~Contemporaneous with the ~~Sinclair Transactions (described in Note 2 above), HEP and HFC entered into a Letter Agreement (“Letter Agreement”) pursuant to which, among other things, HEP and HFC agreed, upon the consummation~~closing of the Sinclair Transactions, ~~to enter into amendments to certain of the agreements by and among~~ HEP and HFC amended certain intercompany agreements, including the master throughput agreement, to include within the scope of such agreements certain of the assets ~~to be~~ acquired by HEP pursuant to the Contribution ~~Agreement (described in Note 2 above).~~

In addition, the Letter Agreement provides that if, as a condition to obtaining antitrust clearance for the Sinclair Transactions, HFC enters into a definitive agreement to divest its refinery in Davis County, Utah (the “Woods Cross Refinery”), then HEP would sell certain assets located at, or relating to, the Woods Cross Refinery to HFC in exchange for cash consideration equal to $232.5 million plus the certain accounts receivable of HEP in respect of such assets, with such sale to be effective immediately prior to the closing of the sale of the Woods Cross Refinery by HFC. The Letter Agreement also provides that HEP’s right to future revenues from HFC in respect of such Woods Cross Refinery assets will terminate at the closing of such sale.Agreement.

Note 12: Partners’ Equity, Income Allocations and Cash Distributions

As of ~~September~~June 30, ~~2021, HFC~~2022, HF Sinclair held 59,630,030 of our common units, constituting a ~~57%~~47% 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 ~~September~~June 30, ~~2021,~~2022, 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.

Cash Distributions

On ~~October~~July 21, ~~2021,~~2022, we announced our cash distribution for the ~~third~~second quarter of ~~2021~~2022 of ~~$0.35~~ $0.35 per unit. The distribution is payable on all common units and will be paid ~~November~~August 12, ~~2021,~~2022, to all unitholders of record on ~~November~~August 1, ~~2021.~~2022.

- 27 -

Our regular quarterly cash distribution to the limited partners will be ~~$37.0~~$44.3 million for the three months ended ~~September~~June 30, ~~2021~~2022 and was $37.0 million for the three months ended ~~September~~June 30, ~~2020.~~2021. For the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the regular quarterly distribution to the limited partners will be ~~$111.1~~$88.7 million and was ~~$105.9~~$74.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. Our distributions are declared subsequent to quarter end; therefore, these amounts do not reflect distributions paid during the respective period.

Note 13: Net Income Per Limited Partner Unit

Basic net income per unit applicable to the limited partners is calculated as net income attributable to the partners, adjusted for participating securities’ share in earnings, 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 phantom units and performance 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

~~- 25 -~~

percentage during the ~~period, after consideration of any priority allocations of earnings.~~period. Our dilutive securities are immaterial for all periods presented.

Net income per limited partner unit is computed as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
		(In thousands, except per unit data)									(In thousands, except per unit data)

Net income attributable to the partners	Net income attributable to the partners	$	49,160	$	17,813	$	169,302	$	119,144	Net income attributable to the partners	$	56,792	$	55,745	$	106,351	$	120,142
Less: Participating securities’ share in earnings	Less: Participating securities’ share in earnings	(165)		—		(579)		—		Less: Participating securities’ share in earnings	(107)		(190)		(222)		(411)
Net income attributable to common units	Net income attributable to common units	48,995		17,813		168,723		119,144		Net income attributable to common units	56,685		55,555		106,129		119,731
Weighted average limited partners' units outstanding	Weighted average limited partners' units outstanding	105,440		105,440		105,440		105,440		Weighted average limited partners' units outstanding	126,440		105,440		118,087		105,440
Limited partners' per unit interest in earnings - basic and diluted	Limited partners' per unit interest in earnings - basic and diluted	$	0.46	$	0.17	$	1.60	$	1.13	Limited partners' per unit interest in earnings - basic and diluted	$	0.45	$	0.53	$	0.90	$	1.14

Note 14:Environmental

We expensed ~~$0.7~~$0.2 million ~~and $1.3 million~~ for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively, for environmental remediation obligations and we expensed ~~$1.0~~$0.5 million ~~and $1.6 million~~ for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively. The accrued environmental liability, net of expected recoveries from indemnifying parties, reflected in our consolidated balance sheets was ~~$4.6~~$13.6 million and ~~$4.5~~$3.9 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, of which ~~$2.5~~$11.6 million and $2.4 million was classified as other long-term liabilities for ~~both periods.~~June 30, 2022 and December 31, 2021, respectively. These accruals include remediation and monitoring costs expected to be incurred over an extended period of time. Accrued environmental liabilities assumed in the Sinclair acquisition have preliminarily been fair valued at $10.0 million as of March 14, 2022. Estimated liabilities could increase in the future as the purchase price allocation for the Sinclair Transportation acquisition is finalized and when the results of ongoing investigations become known, are considered probable and can be reasonably estimated.

Under the Omnibus Agreement and certain transportation agreements and purchase agreements with ~~HFC, HFC~~HF Sinclair and/or its subsidiaries, HF Sinclair has agreed to indemnify us, subject to certain monetary and time limitations, for environmental noncompliance and remediation liabilities associated with certain assets transferred to us from ~~HFC~~HF Sinclair and its subsidiaries and occurring or existing prior to the date of such transfers. Our consolidated balance sheets included additional accrued environmental liabilities of ~~$0.4~~$0.2 million and ~~$0.5~~$0.3 million for ~~HFC~~HF Sinclair indemnified liabilities as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, and other assets included equal and offsetting balances representing amounts due from ~~HFC~~HF Sinclair related to indemnifications for environmental remediation liabilities.

Note 15: 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.

- 28 -

Note 16: Segment Information

Although financial information is reviewed by our chief operating decision makers from a variety of perspectives, they view the business in 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 segment.


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(In thousands)
Revenues:
Pipelines and terminals - affiliate	$	87,644	$	78,116	$	161,495	$	157,546
Pipelines and terminals - third-party	25,233		27,093		53,177		52,350
Refinery processing units - affiliate	22,893		21,026		41,296		43,522
Total segment revenues	$	135,770	$	126,235	$	255,968	$	253,418

Segment operating income:
Pipelines and terminals (1)	$	48,673	$	49,391	$	98,477	$	90,875
Refinery processing units	6,224		9,773		11,806		18,008
Total segment operating income	54,897		59,164		110,283		108,883
Unallocated general and administrative expenses	(4,682)		(2,847)		(8,994)		(5,815)
Interest expense	(20,347)		(13,938)		(33,986)		(27,178)
Interest income	24,331		6,614		36,978		13,162

Equity in earnings of equity method investments	5,447		3,423		9,073		5,186
Gain on sales-type leases	—		27		—		24,677
Gain (loss) on sale of assets and other	45		5,415		146		5,917
Income before income taxes	$	59,691	$	57,858	$	113,500	$	124,832

Capital Expenditures:
Pipelines and terminals	$	7,397	$	25,559	$	17,817	$	58,777
Refinery processing units	1,703		598		5,429		598
Total capital expenditures	$	9,100	$	26,157	$	23,246	$	59,375

- 2629 -

Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(In thousands)
Revenues:
Pipelines and terminals - affiliate $ 75,211 $ 80,589 $ 232,756 $ 238,123
Pipelines and terminals - third-party 25,460 26,739 77,810 72,409
Refinery processing units - affiliate 21,913 20,403 65,436 59,860
Total segment revenues $ 122,584 $ 127,731 $ 376,002 $ 370,392
Segment operating income:
Pipelines and terminals (1)
$ 48,268 $ 15,912 $ 139,143 $ 120,445
Refinery processing units 9,697 9,973 27,705 29,371
Total segment operating income 57,965 25,885 166,848 149,816
Unallocated general and administrative expenses (3,849) (2,332) (9,664) (7,569)
Interest and financing costs, net (6,582) (11,301) (20,598) (37,816)
Loss on early extinguishment of debt — — — (25,915)
Equity in earnings of equity method investments 3,689 1,316 8,875 5,186
Gain on sales-type leases — — 24,677 33,834
Gain (loss) on sale of assets and other 77 7,465 5,994 8,439
Income before income taxes $ 51,300 $ 21,033 $ 176,132 $ 125,975
Capital Expenditures:
Pipelines and terminals $ 19,049 $ 7,902 $ 77,826 $ 38,318
Refinery processing units 168 — 766 324
Total capital expenditures $ 19,217 $ 7,902 $ 78,592 $ 38,642


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
		(In thousands)					(In thousands)
Identifiable assets:	Identifiable assets:					Identifiable assets:
Pipelines and terminals (2)	Pipelines and terminals (2)	$	1,728,983	$	1,729,547	Pipelines and terminals (2)	$	2,157,472	$	1,737,388
Refinery processing units	Refinery processing units	291,838		305,090		Refinery processing units	312,931		294,452
Other	Other	131,755		132,928		Other	304,635		134,027
Total identifiable assets	Total identifiable assets	$	2,152,576	$	2,167,565	Total identifiable assets	$	2,775,038	$	2,165,867

(1) Pipelines and terminals segment operating income included goodwill impairment charges of $11.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021 and $35.7 million for both the three and nine months ended September 30, 2020.~~2021.

(2) Included goodwill of ~~$223.7~~$314.4 million as of ~~September~~June 30, ~~2021~~2022 and ~~$234.7~~$223.7 million as of December 31, ~~2020.~~2021.

- 2730 -

Note 17: 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 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.

As a result of the HEP Transaction, UNEV Pipeline, LLC became a 100% owned subsidiary, and it was subsequently added as a guarantor of the obligations of HEP under the Senior Notes during the second quarter of 2022. UNEV Pipeline, LLC financial information has been included in the Guarantor Subsidiaries financial information for all periods presented.

- 2831 -

Condensed Consolidating Balance Sheet


September 30, 2021		Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
June 30, 2022												June 30, 2022	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
		(In thousands)											(In thousands)
ASSETS	ASSETS											ASSETS
Current assets:	Current assets:											Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	350	$	(346)	$	12,812	$	—	$	12,816	Cash and cash equivalents	$	4,879	$	5,409	$	4,596	$	—	$	14,884
Accounts receivable	Accounts receivable	—		47,696		5,968		(36)		53,628		Accounts receivable	—		72,418		1,343		(1,209)		72,552
Prepaid and other current assets	Prepaid and other current assets	151		7,447		868		(292)		8,174		Prepaid and other current assets	322		11,647		329		(329)		11,969
Total current assets	Total current assets	501		54,797		19,648		(328)		74,618		Total current assets	5,201		89,474		6,268		(1,538)		99,405

Properties and equipment, net	Properties and equipment, net	—		1,030,270		304,772		—		1,335,042		Properties and equipment, net	—		1,426,492		—		—		1,426,492
Operating lease right-of-use assets	Operating lease right-of-use assets	—		2,397		104		—		2,501		Operating lease right-of-use assets	—		2,502		—		—		2,502
Net investment in leases	Net investment in leases	—		306,069		95,458		(95,456)		306,071		Net investment in leases	—		542,281		100,867		(100,867)		542,281
Investment in subsidiaries	Investment in subsidiaries	1,774,250		297,809		—		(2,072,059)		—		Investment in subsidiaries	2,461,802		69,405		—		(2,531,207)		—
Intangible assets, net	Intangible assets, net	—		76,809		—		—		76,809		Intangible assets, net	—		66,304		—		—		66,304
Goodwill	Goodwill	—		223,650		—		—		223,650		Goodwill	—		314,418		—		—		314,418
Equity method investments	Equity method investments	—		79,337		37,690		—		117,027		Equity method investments	—		244,517		35,955		—		280,472
Deferred turnaround costs												Deferred turnaround costs	—		25,813		—		—		25,813
Other assets	Other assets	8,643		8,215		—		—		16,858		Other assets	6,830		10,521		—		—		17,351
Total assets	Total assets	$	1,783,394	$	2,079,353	$	457,672	$	(2,167,843)	$	2,152,576	Total assets	$	2,473,833	$	2,791,727	$	143,090	$	(2,633,612)	$	2,775,038

LIABILITIES AND EQUITY	LIABILITIES AND EQUITY											LIABILITIES AND EQUITY
Current liabilities:	Current liabilities:											Current liabilities:
Accounts payable	Accounts payable	$	—	$	28,150	$	11,963	$	(36)	$	40,077	Accounts payable	$	—	$	35,448	$	3,561	$	(1,209)	$	37,800
Accrued interest	Accrued interest	4,604		—		—		—		4,604		Accrued interest	17,963		—		—		—		17,963
Deferred revenue	Deferred revenue	—		10,287		481		—		10,768		Deferred revenue	—		13,770		—		—		13,770
Accrued property taxes	Accrued property taxes	—		5,576		3,301		—		8,877		Accrued property taxes	—		7,145		—		—		7,145
Current operating lease liabilities	Current operating lease liabilities	—		632		74		—		706		Current operating lease liabilities	—		963		—		—		963
Current finance lease liabilities	Current finance lease liabilities	—		5,533		—		(1,780)		3,753		Current finance lease liabilities	—		5,862		—		(2,005)		3,857
Other current liabilities	Other current liabilities	—		2,302		385		—		2,687		Other current liabilities	79		1,850		719		—		2,648
Total current liabilities	Total current liabilities	4,604		52,480		16,204		(1,816)		71,472		Total current liabilities	18,042		65,038		4,280		(3,214)		84,146

Long-term debt	Long-term debt	1,333,309		—		—		—		1,333,309		Long-term debt	1,608,460		—		—		—		1,608,460
Noncurrent operating lease liabilities	Noncurrent operating lease liabilities	—		2,169		—		—		2,169		Noncurrent operating lease liabilities	—		2,006		—		—		2,006
Noncurrent finance lease liabilities	Noncurrent finance lease liabilities	—		152,310		—		(86,745)		65,565		Noncurrent finance lease liabilities	—		152,749		—		(89,911)		62,838
Other long-term liabilities	Other long-term liabilities	260		11,631		426		—		12,317		Other long-term liabilities	266		22,806		—		—		23,072
Deferred revenue	Deferred revenue	—		30,920		—		—		30,920		Deferred revenue	—		28,865		—		—		28,865
Class B unit	Class B unit	—		55,593		—		—		55,593		Class B unit	—		58,461		—		—		58,461
Equity - partners	Equity - partners	445,221		1,774,250		297,809		(2,079,282)		437,998		Equity - partners	847,065		2,461,802		69,405		(2,540,487)		837,785
Equity - noncontrolling interests	Equity - noncontrolling interests	—		—		143,233		—		143,233		Equity - noncontrolling interests	—		—		69,405		—		69,405
Total liabilities and equity	Total liabilities and equity	$	1,783,394	$	2,079,353	$	457,672	$	(2,167,843)	$	2,152,576	Total liabilities and equity	$	2,473,833	$	2,791,727	$	143,090	$	(2,633,612)	$	2,775,038

- 2932 -

Condensed Consolidating Balance Sheet


December 31, 2020		Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
December 31, 2021												December 31, 2021	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
		(In thousands)											(In thousands)
ASSETS	ASSETS											ASSETS
Current assets:	Current assets:											Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	1,627	$	(987)	$	21,350	$	—	$	21,990	Cash and cash equivalents	$	1,273	$	4,227	$	8,881	$	—	$	14,381
Accounts receivable	Accounts receivable	—		56,522		6,308		(315)		62,515		Accounts receivable	—		68,768		2,833		(2,702)		68,899
Prepaid and other current assets	Prepaid and other current assets	349		8,366		772		—		9,487		Prepaid and other current assets	353		10,680		304		(304)		11,033
Total current assets	Total current assets	1,976		63,901		28,430		(315)		93,992		Total current assets	1,626		83,675		12,018		(3,006)		94,313

Properties and equipment, net	Properties and equipment, net	—		1,087,184		363,501		—		1,450,685		Properties and equipment, net	—		1,329,028		—		—		1,329,028
Operating lease right-of-use assets	Operating lease right-of-use assets	—		2,822		157		—		2,979		Operating lease right-of-use assets	—		2,275		—		—		2,275
Net investment in leases	Net investment in leases	—		166,316		—		—		166,316		Net investment in leases	—		309,301		100,032		(100,030)		309,303
Investment in subsidiaries	Investment in subsidiaries	1,789,808		286,883		—		(2,076,691)		—		Investment in subsidiaries	1,785,024		70,437		—		(1,855,461)		—
Intangible assets, net	Intangible assets, net	—		87,315		—		—		87,315		Intangible assets, net	—		73,307		—		—		73,307
Goodwill	Goodwill	—		234,684		—		—		234,684		Goodwill	—		223,650		—		—		223,650
Equity method investments	Equity method investments	—		81,089		39,455		—		120,544		Equity method investments	—		78,873		37,505		—		116,378
Deferred turnaround costs												Deferred turnaround costs	—		2,632		—		—		2,632
Other assets	Other assets	4,268		6,782		—		—		11,050		Other assets	8,118		6,863		—		—		14,981
Total assets	Total assets	$	1,796,052	$	2,016,976	$	431,543	$	(2,077,006)	$	2,167,565	Total assets	$	1,794,768	$	2,180,041	$	149,555	$	(1,958,497)	$	2,165,867

LIABILITIES AND EQUITY	LIABILITIES AND EQUITY											LIABILITIES AND EQUITY
Current liabilities:	Current liabilities:											Current liabilities:
Accounts payable	Accounts payable	$	—	$	30,252	$	16,463	$	(315)	$	46,400	Accounts payable	$	—	$	34,566	$	8,416	$	(2,702)	$	40,280
Accrued interest	Accrued interest	10,892		—		—		—		10,892		Accrued interest	11,258		—		—		—		11,258
Deferred revenue	Deferred revenue	—		10,868		500		—		11,368		Deferred revenue	—		14,585		—		—		14,585
Accrued property taxes	Accrued property taxes	—		2,915		1,077		—		3,992		Accrued property taxes	—		4,542		—		—		4,542
Current operating lease liabilities	Current operating lease liabilities	—		804		71		—		875		Current operating lease liabilities	—		620		—		—		620
Current finance lease liabilities	Current finance lease liabilities	—		3,713		—		—		3,713		Current finance lease liabilities	—		5,566		—		(1,780)		3,786
Other current liabilities	Other current liabilities	5		2,491		9		—		2,505		Other current liabilities	3		1,513		265		—		1,781
Total current liabilities	Total current liabilities	10,897		51,043		18,120		(315)		79,745		Total current liabilities	11,261		61,392		8,681		(4,482)		76,852

Long-term debt	Long-term debt	1,405,603		—		—		—		1,405,603		Long-term debt	1,333,049		—		—		—		1,333,049
Noncurrent operating lease liabilities	Noncurrent operating lease liabilities	—		2,476		—		—		2,476		Noncurrent operating lease liabilities	—		2,030		—		—		2,030
Noncurrent finance lease liabilities	Noncurrent finance lease liabilities	—		68,047		—		—		68,047		Noncurrent finance lease liabilities	—		156,102		—		(91,453)		64,649
Other long-term liabilities	Other long-term liabilities	260		12,171		474		—		12,905		Other long-term liabilities	340		12,187		—		—		12,527
Deferred revenue	Deferred revenue	—		40,581		—		—		40,581		Deferred revenue	—		29,662		—		—		29,662
Class B unit	Class B unit	—		52,850		—		—		52,850		Class B unit	—		56,549		—		—		56,549
Equity - partners	Equity - partners	379,292		1,789,808		286,883		(2,076,691)		379,292		Equity - partners	450,118		1,785,024		70,437		(1,862,562)		443,017
Equity - noncontrolling interests	Equity - noncontrolling interests	—		—		126,066		—		126,066		Equity - noncontrolling interests	—		77,095		70,437		—		147,532
Total liabilities and equity	Total liabilities and equity	$	1,796,052	$	2,016,976	$	431,543	$	(2,077,006)	$	2,167,565	Total liabilities and equity	$	1,794,768	$	2,180,041	$	149,555	$	(1,958,497)	$	2,165,867

~~- 30 -~~

~~Condensed Consolidating Statement of Income~~

Three Months Ended September 30, 2021 Parent Guarantor Restricted
Subsidiaries Non-Guarantor Non-Restricted Subsidiaries Eliminations Consolidated
(In thousands)
Revenues:
Affiliates $ — $ 90,980 $ 6,144 $ — $ 97,124
Third parties — 20,024 5,436 — 25,460
— 111,004 11,580 — 122,584
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) — 38,676 4,117 — 42,793
Depreciation and amortization — 17,558 4,268 — 21,826
General and administrative 739 3,110 — — 3,849
739 59,344 8,385 — 68,468
Operating income (loss) (739) 51,660 3,195 — 54,116
Other income (expense):
Equity in earnings of subsidiaries 69,553 3,045 — (72,598) —
Equity in earnings of equity method investments — 2,743 946 — 3,689
Interest expense (12,431) (1,077) — 91 (13,417)
Interest income — 6,835 91 (91) 6,835
Gain on sales-type lease — 7,223 — (7,223) —
Gain on sale of assets and other — 76 1 — 77
57,122 18,845 1,038 (79,821) (2,816)
Income before income taxes 56,383 70,505 4,233 (79,821) 51,300
State income tax benefit — 4 — — 4
Net income 56,383 70,509 4,233 (79,821) 51,304
Allocation of net income attributable to noncontrolling interests — (956) (1,188) — (2,144)
Net income attributable to the partners $ 56,383 $ 69,553 $ 3,045 $ (79,821) $ 49,160

~~- 31 -~~

~~Condensed Consolidating Statement of Income~~

Three Months Ended September 30, 2020 Parent Guarantor
Restricted Subsidiaries Non-Guarantor Non-Restricted Subsidiaries Eliminations Consolidated
(In thousands)
Revenues:
Affiliates $ — $ 94,595 $ 6,397 $ — $ 100,992
Third parties — 21,550 5,189 — 26,739
— 116,145 11,586 — 127,731
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) — 36,065 3,938 — 40,003
Depreciation and amortization — 21,997 4,193 — 26,190
General and administrative 649 1,683 — — 2,332
Goodwill impairment — 35,653 — — 35,653
649 95,398 8,131 — 104,178
Operating income (loss) (649) 20,747 3,455 — 23,553
Other income (expense):
Equity in earnings of subsidiaries 31,461 6,589 — (38,050) —
Equity in earnings of equity method investments — 755 561 — 1,316
Interest expense (13,072) (1,032) — — (14,104)
Interest income — 2,787 16 — 2,803
Gain on sale of assets and other 73 2,542 4,850 — 7,465
18,462 11,641 5,427 (38,050) (2,520)
Income before income taxes 17,813 32,388 8,882 (38,050) 21,033
State income tax expense — (34) — — (34)
Net income 17,813 32,354 8,882 (38,050) 20,999
Allocation of net income attributable to noncontrolling interests — (893) (2,293) — (3,186)
Net income attributable to the partners $ 17,813 $ 31,461 $ 6,589 $ (38,050) $ 17,813

~~- 32 -~~

~~Condensed Consolidating Statement of Income~~

Nine Months Ended September 30, 2021 Parent Guarantor Restricted
Subsidiaries Non-Guarantor Non-Restricted Subsidiaries Eliminations Consolidated
(In thousands)
Revenues:
Affiliates $ — $ 279,592 $ 18,600 $ — $ 298,192
Third parties — 59,554 18,256 — 77,810
— 339,146 36,856 — 376,002
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) — 114,217 12,009 — 126,226
Depreciation and amortization — 59,045 12,849 — 71,894
General and administrative 2,824 6,840 — — 9,664
Goodwill impairment — 11,034 — — 11,034
2,824 191,136 24,858 — 218,818
Operating income (loss) (2,824) 148,010 11,998 — 157,184
Other income (expense):
Equity in earnings of subsidiaries 216,958 10,786 — (227,744) —
Equity in earnings of equity method investments — 6,154 2,721 — 8,875
Interest expense (37,609) (3,077) — 91 (40,595)
Interest income — 19,997 91 (91) 19,997
Gain on sales-type lease — 31,900 — (7,223) 24,677
Gain on sale of assets and other — 5,991 3 — 5,994
179,349 71,751 2,815 (234,967) 18,948
Income before income taxes 176,525 219,761 14,813 (234,967) 176,132
State income tax expense — (60) — — (60)
Net income 176,525 219,701 14,813 (234,967) 176,072
Allocation of net income attributable to noncontrolling interests — (2,743) (4,027) — (6,770)
Net income attributable to the partners $ 176,525 $ 216,958 $ 10,786 $ (234,967) $ 169,302

- 33 -

Condensed Consolidating Statement of Income

Nine Months Ended September 30, 2020 Parent Guarantor Restricted
Subsidiaries Non-Guarantor Non-Restricted Subsidiaries Eliminations Consolidated
(In thousands)
Revenues:
Affiliates $ — $ 278,767 $ 19,216 $ — $ 297,983
Third parties — 56,592 15,817 — 72,409
— 335,359 35,033 — 370,392
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) — 98,176 11,545 — 109,721
Depreciation and amortization — 62,489 12,713 — 75,202
General and administrative 2,528 5,041 — — 7,569
Goodwill impairment — 35,653 — — 35,653
2,528 201,359 24,258 — 228,145
Operating income (loss) (2,528) 134,000 10,775 — 142,247
Other income (expense):
Equity in earnings of subsidiaries 189,889 12,394 — (202,283) —
Equity in earnings of equity method investments — 4,292 894 — 5,186
Interest expense (42,542) (3,108) — — (45,650)
Interest income 26 7,792 16 — 7,834
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 214 3,358 4,867 — 8,439
121,672 58,562 5,777 (202,283) (16,272)
Income before income taxes 119,144 192,562 16,552 (202,283) 125,975
State income tax expense — (110) — — (110)
Net income 119,144 192,452 16,552 (202,283) 125,865
Allocation of net income attributable to noncontrolling interests — (2,563) (4,158) — (6,721)
Net income attributable to the partners $ 119,144 $ 189,889 $ 12,394 $ (202,283) $ 119,144


Three Months Ended June 30, 2022	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
Revenues:
Affiliates	$	—	$	110,537	$	—	$	—	$	110,537
Third parties	—		25,233		—		—		25,233
	—		135,770		—		—		135,770
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—		52,823		1,076		—		53,899
Depreciation and amortization	—		26,974		—		—		26,974
General and administrative	912		3,770		—		—		4,682

	912		83,567		1,076		—		85,555
Operating income (loss)	(912)		52,203		(1,076)		—		50,215

Other income (expense):
Equity in earnings of subsidiaries	77,104		1,927		—		(79,031)		—
Equity in earnings of equity method investments	—		4,641		806		—		5,447
Interest expense	(19,400)		(5,071)		—		4,124		(20,347)
Interest income	—		24,331		4,124		(4,124)		24,331

Gain on sale of assets and other	—		45		—		—		45
	57,704		25,873		4,930		(79,031)		9,476
Income before income taxes	56,792		78,076		3,854		(79,031)		59,691
State income tax expense	—		(14)		—		—		(14)
Net income	56,792		78,062		3,854		(79,031)		59,677
Allocation of net income attributable to noncontrolling interests	—		(958)		(1,927)		—		(2,885)

Net income attributable to the partners	$	56,792	$	77,104	$	1,927	$	(79,031)	$	56,792

- 34 -

Condensed Consolidating Statement of Income


Three Months Ended June 30, 2021	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
Revenues:
Affiliates	$	—	$	99,142	$	—	$	—	$	99,142
Third parties	—		27,093		—		—		27,093
	—		126,235		—		—		126,235
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—		41,411		657		—		42,068
Depreciation and amortization	—		25,003		—		—		25,003
General and administrative	907		1,940		—		—		2,847

	907		68,354		657		—		69,918
Operating income (loss)	(907)		57,881		(657)		—		56,317

Other income (expense):
Equity in earnings of subsidiaries	69,596		(14)		—		(69,582)		—
Equity in earnings of equity method investments	0		2,793		630		—		3,423
Interest expense	(12,944)		(994)		—		—		(13,938)
Interest income	0		6,614		—		—		6,614

Gain on sales-type lease	—		27		—		—		27
Gain on sale of assets and other	—		5,415		—		—		5,415
	56,652		13,841		630		(69,582)		1,541
Income before income taxes	55,745		71,722		(27)		(69,582)		57,858
State income tax expense	—		(27)		—		—		(27)
Net income	55,745		71,695		(27)		(69,582)		57,831
Allocation of net income attributable to noncontrolling interests	—		(2,099)		13		—		(2,086)


Net income attributable to the partners	$	55,745	$	69,596	$	(14)	$	(69,582)	$	55,745

- 35 -

Condensed Consolidating Statement of Income


Six Months Ended June 30, 2022	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-restricted Subsidiaries		Eliminations			Consolidated
	(In thousands)
Revenues:
Affiliates	$	—	$	202,791	$	—	$	—		$	202,791
Third parties	—		53,177		—		—			53,177
	—		255,968		—		—			255,968
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—		94,757		1,767		—			96,524
Depreciation and amortization	—		49,161		—		—			49,161
General and administrative	2,000		6,994		—		—			8,994
	2,000		150,912		1,767		—			154,679
Operating income (loss)	(2,000)		105,056		(1,767)		—		0	101,289

Other income (expense):
Equity in earnings of subsidiaries	140,431		4,098		—		(144,529)			—
Equity in earnings of equity method investments	—		7,361		1,712		—			9,073
Interest expense	(32,080)		(10,157)		—		8,251			(33,986)
Interest income	—		36,978		8,251		(8,251)			36,978

Gain on sale of assets and other	—		146		—		—			146
	108,351		38,426		9,963		(144,529)			12,211
Income before income taxes	106,351		143,482		8,196		(144,529)			113,500
State income tax expense	—		(45)		—		—			(45)
Net income	106,351		143,437		8,196		(144,529)			113,455
Allocation of net income attributable to noncontrolling interests	—		(3,006)		(4,098)		—			(7,104)

Net income attributable to the partners	$	106,351	$	140,431	$	4,098	$	(144,529)		$	106,351

- 36 -

Condensed Consolidating Statement of Income


Six Months Ended June 30, 2021	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
Revenues:
Affiliates	$	—	$	201,068	$	—	$	—	$	201,068
Third parties	—		52,350		—		—		52,350
	—		253,418		—		—		253,418
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—		82,434		999		—		83,433
Depreciation and amortization	—		50,068		—		—		50,068
General and administrative	2,085		3,730		—		—		5,815
Goodwill impairment	—		11,034		—		—		11,034
	2,085		147,266		999		—		150,350
Operating income (loss)	(2,085)		106,152		(999)		—		103,068

Other income (expense):
Equity in earnings of subsidiaries	147,405		388		—		(147,793)		—
Equity in earnings of equity method investments	—		3,411		1,775		—		5,186
Interest expense	(25,178)		(2,000)		—		—		(27,178)
Interest income	—		13,162		—		—		13,162
Gain on sales-type lease	—		24,677		—		—		24,677
Gain on sale of assets and other	—		5,917		—		—		5,917
	122,227		45,555		1,775		(147,793)		21,764
Income before income taxes	120,142		151,707		776		(147,793)		124,832
State income tax expense	—		(64)		—		—		(64)
Net income	120,142		151,643		776		(147,793)		124,768
Allocation of net income attributable to noncontrolling interests	—		(4,238)		(388)		—		(4,626)

Net income attributable to the partners	120,142		147,405		388		(147,793)		120,142

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Note 18: Osage Pipeline

On July 8, 2022, the Osage pipeline, which carries crude oil from Cushing, Oklahoma to El Dorado, Kansas, suffered a release of crude oil. The pipeline has resumed operations and recovery operations are ongoing. We expect to accrue amounts related to recovery and remediation in the third quarter of 2022, but cannot estimate those amounts at this time. We do not expect the accrual will have a material impact on our financial position.

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Table ofo

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. References herein to HF Sinclair Corporation (“HF Sinclair”) with respect to time periods prior to March 14, 2022 refer to HollyFrontier Corporation (“HFC”) and its consolidated subsidiaries and do not include Hippo Holding LLC, the parent company of Sinclair Oil LLC, Sinclair Transportation Company LLC or their respective consolidated subsidiaries (collectively, the “Acquired Sinclair Businesses”). References herein to HF Sinclair with respect to time periods from and after March 14, 2022 refer to HF Sinclair and its consolidated subsidiaries, which include the operations of the combined business operations of HFC and the Acquired Sinclair Businesses.

OVERVIEW

HEP, together with its consolidated subsidiaries, is a ~~Delaware~~publicly held master limited partnership. On March 14, 2022 (the “Closing Date”), HFC and HEP announced the establishment of HF Sinclair, as the new parent holding company of HFC and HEP and their subsidiaries, and the completion of their respective acquisitions of Sinclair Oil Corporation (now known as Sinclair Oil LLC (“Sinclair Oil”)) and Sinclair Transportation Company LLC (“Sinclair Transportation”) from REH Company (formerly known as The Sinclair Companies, referred to herein as “Sinclair HoldCo”). On the Closing Date, HF Sinclair completed its acquisition of Sinclair Oil by effecting (a) a holding company merger with HFC surviving such merger as a direct wholly owned subsidiary of HF Sinclair (the “HFC Merger”), and (b) immediately following the HFC Merger, a contribution whereby Sinclair HoldCo contributed all of the equity interests of Hippo Holding LLC, the parent company of Sinclair Oil (the “Target Company”), to HF Sinclair in exchange for shares of HF Sinclair, resulting in the Target Company becoming a direct wholly owned subsidiary of HF Sinclair (together with the HFC Merger, the “HFC Transactions”).

As of June 30, 2022, HF Sinclair and its subsidiaries owned a 47% limited partner interest and the non-economic general partner interest in HEP.

Additionally, on the Closing Date and immediately prior to consummation of the HFC Transactions, HEP acquired all of the outstanding equity interests of Sinclair Transportation from Sinclair HoldCo in exchange for 21 million newly issued common limited partner units of HEP (the “HEP Units”), representing 16.6% of the pro forma outstanding HEP Units with a value of approximately $349 million based on HEP’s fully diluted common limited partner units outstanding and closing unit price on March 11, 2022, and cash consideration equal to $321.4 million, inclusive of estimated working capital adjustments for an aggregate transaction value of $670.4 million (the “HEP Transaction” and together with the HFC Transactions, the “Sinclair Transactions”). The cash consideration was funded through a draw under HEP’s senior secured revolving credit facility. The HEP Transaction was conditioned on the closing of the HFC Transactions, which occurred immediately following the HEP Transaction.

Sinclair Transportation, together with its subsidiaries, owned Sinclair HoldCo’s integrated crude and refined products pipelines and terminal assets, including approximately 1,200 miles of integrated crude and refined product pipeline supporting the Sinclair HoldCo refineries and other third-party refineries, eight product terminals and two crude terminals with approximately 4.5 million barrels of operated storage. In addition, HEP acquired Sinclair Transportation’s interests in three pipeline joint ventures for crude gathering and product offtake including: Saddle Butte Pipeline III, LLC (25.06% non-operated interest); Pioneer Pipeline (49.995% non-operated interest); and UNEV Pipeline (the 25% non-operated interest not already owned by HEP, resulting in UNEV Pipeline, LLC becoming a wholly owned subsidiary of HEP).

See Notes 1 and 2 of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements” for additional information regarding the acquisitions.

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”)~~HF Sinclair and other refineries in the Mid-Continent, Southwest and Northwest regions of the United States. HEP, through its subsidiaries and joint ventures, owns and/or operates petroleum product and crude pipelines, tankage and terminals in ~~Texas,~~Colorado, Idaho, Iowa, Kansas, Missouri, Nevada, New Mexico, Oklahoma, Texas, Utah, Washington ~~Idaho, Oklahoma, Utah, Nevada,~~and 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 September 30, 2021.~~

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Table o

We generate revenues by charging tariffs for transporting petroleum products and crude oil through our pipelines, by charging fees for terminalling and storing refined products and other hydrocarbons, providing other services at our storage tanks and terminals and charging a tolling fee per barrel or thousand standard cubic feet of feedstock throughput in our refinery processing units. We do not take ownership of products that we transport, terminal, store or process, and therefore, we are not directly exposed to changes in commodity prices.

We believe the long-term global refined product demand and U.S. crude production should support high utilization rates for the refineries we serve, which in turn should support volumes in our product pipelines, crude gathering systems and terminals.

On August 2, 2021, HEP, The Sinclair Companies (“Sinclair”), and Sinclair Transportation Company, a wholly owned subsidiary of Sinclair (“STC”), entered into a Contribution Agreement (the “Contribution Agreement”) pursuant to which HEP will acquire all of the outstanding shares of STC in exchange for 21 million newly issued common units of HEP and cash consideration equal to $325 million (the “HEP Transactions”), subject to downward adjustment if, as a condition to obtaining antitrust clearance for the Sinclair Transactions (as defined below), HEP agrees to divest a portion of its equity interest in UNEV Pipeline, LLC and the sales price for such interests does not exceed the threshold provided in the Contribution Agreement.

The Sinclair Transactions are expected to close in mid-2022, subject to customary closing conditions and regulatory clearance, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act (the “HSR Act”). On August 23, 2021, each of HollyFrontier and Sinclair filed its respective premerger notification and report regarding the Sinclair Transactions with the U.S. Department of Justice and the U.S. Federal Trade Commission (the “FTC”) under the HSR Act. On September 22, 2021, HFC and Sinclair each received a request for additional information and documentary material (“Second Request”) from the FTC in connection with the FTC’s review of the Sinclair Transactions. Issuance of the Second Request extends the waiting period under the HSR Act until 30 days after both HollyFrontier and Sinclair have substantially complied with the Second Request, unless the waiting period is terminated earlier by the FTC or the parties otherwise commit not to close the Sinclair Transactions for some additional period of time. HollyFrontier and Sinclair are cooperating with the FTC staff in its review. In addition, the HEP Transactions are conditioned on the closing of the transactions contemplated by that certain Business Combination Agreement, dated as of August 2, 2021, by and among HollyFrontier, Sinclair and certain other parties, which will occur immediately following the HEP Transactions (the “HFC Transactions,” and together with the HEP Transactions, the “Sinclair Transactions”). See Note 2 of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements” for additional information.

~~Impact of COVID-19 on Our Business~~Market Developments

Our ~~business depends in large part on the demand~~results 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 created 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. Since the declines in demand at the beginning of the COVID-19 pandemic, we began to see improvement in demand for these products and services beginning late in the second quarter and first six months of ~~2020 that~~2022 were favorably impacted by continued ~~through the third quarter of 2021,~~strong global economic activity with ~~aggregate volumes approaching~~global demand for transportation fuels, lubricants and transportation and terminal services having returned to pre-pandemic levels. We expect our customers will continue to adjust refinery production

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~~Table of~~

levels commensurate with market ~~demand, and with the increasing availability of vaccines, we believe there is a path to a fulsome recovery in~~ demand.

With the increasing vaccination rates, most of our employees have returned to work at our locations, and we continue to follow Centers for Disease Control and local government guidance. We will continue to monitor developments in the COVID-19 pandemic and the dynamic environment it has created to properly address these policies going forward.

The extent to which HEP’s future results are affected by the COVID-19 pandemic or volatile regional and global economic conditions will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic, the effects of any new variant strains of the underlying virus, additional actions by businesses and governments in response to the pandemic and the speed and effectiveness of responses to combat the virus.control. However, we have long-term customer contracts with minimum volume commitments, which have expiration ~~date~~sdates from ~~2022~~2023 to ~~2036.~~2037. These minimum volume commitments accounted for ~~approximately 67%~~approximately 64% and ~~76%~~66% of our total revenues in the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~the twelve months ended December 31, 2020,~~June 30, 2021, respectively. We are currently not aware of any reasons that would prevent such customers from making the minimum payments required under the contracts or potentially making payments in excess of the minimum payments. In addition to these payments, we also expect to collect payments for services provided to uncommitted shippers. ~~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, 2020, in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, and in this Form 10-Q. 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., 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 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~~HF Sinclair 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 in service during the second quarter of 2020, and the Cushing Connect Pipeline was placed into service at the end of the 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 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 total Cushing Connect Joint Venture investment will generally be shared equally among HEP and Plains. However, we are solely responsible for any Cushing Connect Pipeline construction costs that exceed the budget by more than 10%. HEP estimates its share of the cost of the Cushing Connect JV Terminal contributed by Plains and Cushing Connect Pipeline construction costs are approximately ~~$70~~$73 million, ~~to $75 million.~~including approximately $5 million of Cushing Connect Pipeline construction costs exceeding the budget by more than 10% borne solely by HEP.

Agreements with ~~HFC~~HF Sinclair

We serve ~~HFC's~~HF Sinclair’s refineries under long-term pipeline, terminal, tankage and refinery processing unit throughput agreements expiring from ~~2022~~2023 to ~~2036.~~2037. Under these agreements, ~~HFC~~HF Sinclair agrees to transport, store, and process throughput volumes of refined product, crude oil and feedstocks on our pipelines, terminal, tankage, loading rack facilities and refinery processing units that result in minimum annual payments to us. These minimum annual payments or revenues are subject to annual rate adjustments on July 1st each year based on the PPI or the FERC index. On December 17, 2020, FERC established a new price index for the five-year period commencing July 1, 2021 and ending June 30, 2026, in which common carriers charging indexed rates ~~are~~were permitted to adjust their indexed ceilings annually by Producer Price Index plus 0.78%. FERC ~~has~~ received requests for rehearing of its December 17, 2020 order, ~~which remain pending in~~and on January 20, 2022, FERC ~~Docket No. RM20-14-000.~~revised the index level used to determine the annual changes to interstate oil pipeline rate ceilings to Producer Price Index minus 0.21%. The order required the recalculation of the July 1, 2021 index ceilings to be effective as of March 1, 2022. As of ~~September 30, 2021,~~July 1, 2022, these agreements with ~~HFC~~HF Sinclair require minimum annualized payments to us of ~~$353~~$446 million.

If ~~HFC~~HF Sinclair fails to meet its minimum volume commitments under the agreements in any quarter, it will be required to pay us the amount of any shortfall in cash by the last day of the month following the end of the quarter. Under certain of the agreements, a shortfall payment may be applied as a credit in the following four quarters after minimum obligations are met.

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

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Table ofo

On February 8, 2021, HEP and HFC finalized and executed new agreements for HEP's Cheyenne assets 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 (and now HF Sinclair’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 (and now HF Sinclair) will pay a base tariff to HEP for available crude oil storage and HFC (and now HF Sinclair) 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.

Under certain provisions of an omnibus agreement we have with ~~HFC~~HF Sinclair (the “Omnibus Agreement”), we pay ~~HFC~~HF Sinclair an annual administrative fee, currently ~~$2.6~~$5.0 million, for the provision by ~~HFC~~HF Sinclair or its affiliates of various general and administrative services to us. ~~This~~In connection with the HEP Transaction, we pay HF Sinclair a temporary monthly fee ~~does not include~~of $62,500 relating to transition services to be provided to HEP by HF Sinclair. Neither the annual administrative fee nor the temporary monthly fee includes the salaries of personnel employed by ~~HFC~~HF Sinclair who perform services for us on behalf of Holly Logistic Services, L.L.C. (“HLS”), or the cost of their employee benefits, which are separately charged to us by ~~HFC.~~HF Sinclair. We also reimburse ~~HFC~~HF Sinclair and its affiliates for direct expenses they incur on our behalf.

Under HLS’s Secondment Agreement with ~~HFC,~~HF Sinclair, certain employees of ~~HFC~~HF Sinclair are seconded to HLS to provide operational and maintenance services for certain of our processing, refining, pipeline and tankage assets, and HLS reimburses ~~HFC~~HF Sinclair 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 (and now HF Sinclair) 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”~~Market Developments” above, we also expect over the longer term to continue to work with ~~HFC~~HF Sinclair on logistic asset acquisitions in conjunction with ~~HFC’s~~HF Sinclair’s refinery acquisition strategies. See “Overview” above for a discussion of the Sinclair Transactions.

Furthermore, as demonstrated by our ~~pending~~recent transaction with Sinclair HoldCo, we plan to continue to pursue third-party logistic asset acquisitions that are accretive to our unitholders and increase the diversity of our revenues.

Indicators of Goodwill and Long-lived Asset Impairment

During the three months ended March 31, 2021, changes in our 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 values of our Cheyenne 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 6 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.

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RESULTS OF OPERATIONS (Unaudited)

Income, Distributable Cash Flow, Volumes and Balance Sheet Data

The following tables present income, distributable cash flow and volume information for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021.

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Table ofo


		Three Months Ended September 30,				Change from			Three Months Ended June 30,				Change from
		2021		2020		2020			2022		2021		2021
		(In thousands, except per unit data)							(In thousands, except per unit data)
Revenues:	Revenues:							Revenues:
Pipelines:	Pipelines:							Pipelines:
Affiliates—refined product pipelines	Affiliates—refined product pipelines	$	18,702	$	18,619	$	83	Affiliates—refined product pipelines	$	20,920	$	19,213	$	1,707
Affiliates—intermediate pipelines	Affiliates—intermediate pipelines	7,537		7,537		—		Affiliates—intermediate pipelines	7,521		7,521		—
Affiliates—crude pipelines	Affiliates—crude pipelines	19,536		20,218		(682)		Affiliates—crude pipelines	20,971		19,251		1,720
		45,775		46,374		(599)			49,412		45,985		3,427
Third parties—refined product pipelines	Third parties—refined product pipelines	8,799		9,812		(1,013)		Third parties—refined product pipelines	5,215		9,526		(4,311)
Third parties—crude pipelines	Third parties—crude pipelines	12,780		12,106		674		Third parties—crude pipelines	13,692		12,811		881
		67,354		68,292		(938)			68,319		68,322		(3)
Terminals, tanks and loading racks:	Terminals, tanks and loading racks:							Terminals, tanks and loading racks:
Affiliates	Affiliates	29,436		34,215		(4,779)		Affiliates	38,232		32,131		6,101
Third parties	Third parties	3,881		4,821		(940)		Third parties	6,326		4,756		1,570
		33,317		39,036		(5,719)			44,558		36,887		7,671

Refinery processing units—Affiliates	Refinery processing units—Affiliates	21,913		20,403		1,510		Refinery processing units—Affiliates	22,893		21,026		1,867

Total revenues	Total revenues	122,584		127,731		(5,147)		Total revenues	135,770		126,235		9,535
Operating costs and expenses:	Operating costs and expenses:							Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	Operations (exclusive of depreciation and amortization)	42,793		40,003		2,790		Operations (exclusive of depreciation and amortization)	53,899		42,068		11,831
Depreciation and amortization	Depreciation and amortization	21,826		26,190		(4,364)		Depreciation and amortization	26,974		25,003		1,971
General and administrative	General and administrative	3,849		2,332		1,517		General and administrative	4,682		2,847		1,835
Goodwill impairment		—		35,653		(35,653)

		68,468		104,178		(35,710)			85,555		69,918		15,637
Operating income	Operating income	54,116		23,553		30,563		Operating income	50,215		56,317		(6,102)
Other income (expense):	Other income (expense):							Other income (expense):
Equity in earnings of equity method investments	Equity in earnings of equity method investments	3,689		1,316		2,373		Equity in earnings of equity method investments	5,447		3,423		2,024
Interest expense, including amortization	Interest expense, including amortization	(13,417)		(14,104)		687		Interest expense, including amortization	(20,347)		(13,938)		(6,409)
Interest income	Interest income	6,835		2,803		4,032		Interest income	24,331		6,614		17,717

Gain on sales-type leases								Gain on sales-type leases	—		27		(27)
Gain on sale of assets and other	Gain on sale of assets and other	77		7,465		(7,388)		Gain on sale of assets and other	45		5,415		(5,370)
		(2,816)		(2,520)		(296)			9,476		1,541		7,935
Income before income taxes	Income before income taxes	51,300		21,033		30,267		Income before income taxes	59,691		57,858		1,833
State income tax benefit (expense)		4		(34)		38
State income tax expense								State income tax expense	(14)		(27)		13
Net income	Net income	51,304		20,999		30,305		Net income	59,677		57,831		1,846

Allocation of net income attributable to noncontrolling interests	Allocation of net income attributable to noncontrolling interests	(2,144)		(3,186)		1,042		Allocation of net income attributable to noncontrolling interests	(2,885)		(2,086)		(799)
Net income attributable to the partners	Net income attributable to the partners	49,160		17,813		31,347		Net income attributable to the partners	56,792		55,745		1,047

Limited partners’ earnings per unit—basic and diluted	Limited partners’ earnings per unit—basic and diluted	$	0.46	$	0.17	$	0.29	Limited partners’ earnings per unit—basic and diluted	$	0.45	$	0.53	$	(0.08)
Weighted average limited partners’ units outstanding	Weighted average limited partners’ units outstanding	105,440		105,440		—		Weighted average limited partners’ units outstanding	126,440		105,440		21,000
EBITDA (1)	EBITDA (1)	$	77,564	$	55,338	$	22,226	EBITDA (1)	$	79,796	$	88,099	$	(8,303)
Adjusted EBITDA (1)	Adjusted EBITDA (1)	$	83,270	$	86,435	$	(3,165)	Adjusted EBITDA (1)	$	104,244	$	88,261	$	15,983
Distributable cash flow (2)	Distributable cash flow (2)	$	66,810	$	76,894	$	(10,084)	Distributable cash flow (2)	$	78,458	$	66,680	$	11,778

Volumes (bpd)	Volumes (bpd)							Volumes (bpd)
Pipelines:	Pipelines:							Pipelines:
Affiliates—refined product pipelines	Affiliates—refined product pipelines	115,507		119,403		(3,896)		Affiliates—refined product pipelines	140,333		119,046		21,287
Affiliates—intermediate pipelines	Affiliates—intermediate pipelines	136,398		142,817		(6,419)		Affiliates—intermediate pipelines	124,588		143,762		(19,174)
Affiliates—crude pipelines	Affiliates—crude pipelines	271,717		270,840		877		Affiliates—crude pipelines	477,241		260,756		216,485
		523,622		533,060		(9,438)			742,162		523,564		218,598
Third parties—refined product pipelines	Third parties—refined product pipelines	46,834		60,203		(13,369)		Third parties—refined product pipelines	37,989		52,126		(14,137)
Third parties—crude pipelines	Third parties—crude pipelines	136,247		133,487		2,760		Third parties—crude pipelines	138,040		135,904		2,136
		706,703		726,750		(20,047)			918,191		711,594		206,597
Terminals and loading racks:	Terminals and loading racks:							Terminals and loading racks:
Affiliates	Affiliates	419,665		401,904		17,761		Affiliates	572,289		413,441		158,848
Third parties	Third parties	52,541		57,355		(4,814)		Third parties	36,748		53,257		(16,509)
		472,206		459,259		12,947			609,037		466,698		142,339
Refinery processing units—Affiliates	Refinery processing units—Affiliates	72,297		62,016		10,281		Refinery processing units—Affiliates	72,342		76,589		(4,247)
Total for pipelines and terminal and refinery processing unit assets (bpd)	Total for pipelines and terminal and refinery processing unit assets (bpd)	1,251,206		1,248,025		3,181		Total for pipelines and terminal and refinery processing unit assets (bpd)	1,599,570		1,254,881		344,689

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Table ofo


		Nine Months Ended September 30,				Change from			Six Months Ended June 30,				Change from
		2021		2020		2020			2022		2021		2021
		(In thousands, except per unit data)							(In thousands, except per unit data)
Revenues:	Revenues:							Revenues:
Pipelines:	Pipelines:							Pipelines:
Affiliates—refined product pipelines	Affiliates—refined product pipelines	$	56,520	$	55,004	$	1,516	Affiliates—refined product pipelines	$	37,780	$	37,819	$	(39)
Affiliates—intermediate pipelines	Affiliates—intermediate pipelines	22,564		22,486		78		Affiliates—intermediate pipelines	15,027		15,027		—
Affiliates—crude pipelines	Affiliates—crude pipelines	58,241		59,922		(1,681)		Affiliates—crude pipelines	39,248		38,705		543
		137,325		137,412		(87)			92,055		91,551		504
Third parties—refined product pipelines	Third parties—refined product pipelines	28,188		33,360		(5,172)		Third parties—refined product pipelines	14,475		19,389		(4,914)
Third parties—crude pipelines	Third parties—crude pipelines	36,667		26,946		9,721		Third parties—crude pipelines	26,569		23,887		2,682
		202,180		197,718		4,462			133,099		134,827		(1,728)
Terminals, tanks and loading racks:	Terminals, tanks and loading racks:							Terminals, tanks and loading racks:
Affiliates	Affiliates	95,431		100,711		(5,280)		Affiliates	69,440		65,995		3,445
Third parties	Third parties	12,955		12,103		852		Third parties	12,133		9,074		3,059
		108,386		112,814		(4,428)			81,573		75,069		6,504

Refinery processing units—Affiliates	Refinery processing units—Affiliates	65,436		59,860		5,576		Refinery processing units—Affiliates	41,296		43,522		(2,226)

Total revenues	Total revenues	376,002		370,392		5,610		Total revenues	255,968		253,418		2,550
Operating costs and expenses:	Operating costs and expenses:							Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	Operations (exclusive of depreciation and amortization)	126,226		109,721		16,505		Operations (exclusive of depreciation and amortization)	96,524		83,433		13,091
Depreciation and amortization	Depreciation and amortization	71,894		75,202		(3,308)		Depreciation and amortization	49,161		50,068		(907)
General and administrative	General and administrative	9,664		7,569		2,095		General and administrative	8,994		5,815		3,179
Goodwill impairment	Goodwill impairment	11,034		35,653		(24,619)		Goodwill impairment	—		11,034		(11,034)
		218,818		228,145		(9,327)			154,679		150,350		4,329
Operating income	Operating income	157,184		142,247		14,937		Operating income	101,289		103,068		(1,779)
Other income (expense):	Other income (expense):							Other income (expense):
Equity in earnings of equity method investments	Equity in earnings of equity method investments	8,875		5,186		3,689		Equity in earnings of equity method investments	9,073		5,186		3,887
Interest expense, including amortization	Interest expense, including amortization	(40,595)		(45,650)		5,055		Interest expense, including amortization	(33,986)		(27,178)		(6,808)
Interest income	Interest income	19,997		7,834		12,163		Interest income	36,978		13,162		23,816
Loss on early extinguishment of debt		—		(25,915)		25,915

Gain on sales-type leases	Gain on sales-type leases	24,677		33,834		(9,157)		Gain on sales-type leases	—		24,677		(24,677)
Gain on sale of assets and other	Gain on sale of assets and other	5,994		8,439		(2,445)		Gain on sale of assets and other	146		5,917		(5,771)
		18,948		(16,272)		35,220			12,211		21,764		(9,553)
Income before income taxes	Income before income taxes	176,132		125,975		50,157		Income before income taxes	113,500		124,832		(11,332)
State income tax expense	State income tax expense	(60)		(110)		50		State income tax expense	(45)		(64)		19
Net income	Net income	176,072		125,865		50,207		Net income	113,455		124,768		(11,313)

Allocation of net income attributable to noncontrolling interests	Allocation of net income attributable to noncontrolling interests	(6,770)		(6,721)		(49)		Allocation of net income attributable to noncontrolling interests	(7,104)		(4,626)		(2,478)
Net income attributable to the partners	Net income attributable to the partners	169,302		119,144		50,158		Net income attributable to the partners	106,351		120,142		(13,791)

Limited partners’ earnings per unit—basic and diluted	Limited partners’ earnings per unit—basic and diluted	$	1.60	$	1.13	$	0.47	Limited partners’ earnings per unit—basic and diluted	$	0.90	$	1.14	$	(0.24)
Weighted average limited partners’ units outstanding	Weighted average limited partners’ units outstanding	105,440		105,440		—		Weighted average limited partners’ units outstanding	118,087		105,440		12,647
EBITDA (1)	EBITDA (1)	$	261,854	$	232,272	$	29,582	EBITDA (1)	$	152,565	$	184,290	$	(31,725)
Adjusted EBITDA (1)	Adjusted EBITDA (1)	$	259,466	$	257,711	$	1,755	Adjusted EBITDA (1)	$	189,581	$	176,196	$	13,385
Distributable cash flow (2)	Distributable cash flow (2)	$	206,707	$	213,058	$	(6,351)	Distributable cash flow (2)	$	142,912	$	139,899	$	3,013

Volumes (bpd)	Volumes (bpd)							Volumes (bpd)
Pipelines:	Pipelines:							Pipelines:
Affiliates—refined product pipelines	Affiliates—refined product pipelines	118,033		116,641		1,392		Affiliates—refined product pipelines	123,863		119,316		4,547
Affiliates—intermediate pipelines	Affiliates—intermediate pipelines	131,873		137,816		(5,943)		Affiliates—intermediate pipelines	121,213		129,573		(8,360)
Affiliates—crude pipelines	Affiliates—crude pipelines	261,117		276,128		(15,011)		Affiliates—crude pipelines	436,865		255,730		181,135
		511,023		530,585		(19,562)			681,941		504,619		177,322
Third parties—refined product pipelines	Third parties—refined product pipelines	47,805		55,921		(8,116)		Third parties—refined product pipelines	43,479		48,298		(4,819)
Third parties—crude pipelines	Third parties—crude pipelines	131,842		103,955		27,887		Third parties—crude pipelines	134,602		129,603		4,999
		690,670		690,461		209			860,022		682,520		177,502
Terminals and loading racks:	Terminals and loading racks:							Terminals and loading racks:
Affiliates	Affiliates	386,400		401,245		(14,845)		Affiliates	509,509		368,612		140,897
Third parties	Third parties	50,542		49,753		789		Third parties	42,519		49,526		(7,007)
		436,942		450,998		(14,056)			552,028		418,138		133,890
Refinery processing units—Affiliates	Refinery processing units—Affiliates	69,904		60,573		9,331		Refinery processing units—Affiliates	68,804		68,688		116
Total for pipelines and terminal and refinery processing unit assets (bpd)	Total for pipelines and terminal and refinery processing unit assets (bpd)	1,197,516		1,202,032		(4,516)		Total for pipelines and terminal and refinery processing unit assets (bpd)	1,480,854		1,169,346		311,508

- 4044 -

Table ofo

(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,~~goodwill impairment, (ii) ~~goodwill impairment~~acquisition integration and regulatory costs and (iii) tariffs and fees not included in revenues due to impacts from lease accounting for certain tariffs and fees minus (iv) gain on sales-type leases, (v) gain on significant asset sales and (vi) pipeline lease payments not included in operating costs and expenses. Portions of our minimum guaranteed pipeline and terminal tariffs and fees 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 tariffs and fees 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~~HEP 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 September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
		(In thousands)									(In thousands)
Net income attributable to the partners	Net income attributable to the partners	$	49,160	$	17,813	$	169,302	$	119,144	Net income attributable to the partners	$	56,792	$	55,745	$	106,351	$	120,142
Add (subtract):	Add (subtract):									Add (subtract):
Interest expense	Interest expense	13,417		14,104		40,595		45,650		Interest expense	20,347		13,938		33,986		27,178
Interest income	Interest income	(6,835)		(2,803)		(19,997)		(7,834)		Interest income	(24,331)		(6,614)		(36,978)		(13,162)
State income tax (benefit) expense		(4)		34		60		110
State income tax expense										State income tax expense	14		27		45		64
Depreciation and amortization	Depreciation and amortization	21,826		26,190		71,894		75,202		Depreciation and amortization	26,974		25,003		49,161		50,068
EBITDA	EBITDA	$	77,564	$	55,338	$	261,854	$	232,272	EBITDA	$	79,796	$	88,099	$	152,565	$	184,290
Loss on early extinguishment of debt		—		—		—		25,915

Gain on sales-type leases	Gain on sales-type leases	—		—		(24,677)		(33,834)		Gain on sales-type leases	—		(27)		—		(24,677)
Gain on significant asset sales	Gain on significant asset sales	—		—		(5,263)		—		Gain on significant asset sales	—		(5,263)		—		(5,263)
Goodwill impairment	Goodwill impairment	—		35,653		11,034		35,653		Goodwill impairment	—		—		—		11,034
HEP's pro-rata share of gain on business interruption insurance settlement		—		(6,079)		—		(6,079)
Acquisition integration and regulatory costs										Acquisition integration and regulatory costs	886		—		1,722		—
Tariffs and fees not included in revenues	Tariffs and fees not included in revenues	7,312		3,129		21,337		8,603		Tariffs and fees not included in revenues	25,168		7,058		38,507		14,025
Lease payments not included in operating costs	Lease payments not included in operating costs	(1,606)		(1,606)		(4,819)		(4,819)		Lease payments not included in operating costs	(1,606)		(1,606)		(3,213)		(3,213)
Adjusted EBITDA	Adjusted EBITDA	$	83,270	$	86,435	$	259,466	$	257,711	Adjusted EBITDA	$	104,244	$	88,261	$	189,581	$	176,196

(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.

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Table ofo


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
		(In thousands)									(In thousands)
Net income attributable to the partners	Net income attributable to the partners	$	49,160	$	17,813	$	169,302	$	119,144	Net income attributable to the partners	$	56,792	$	55,745	$	106,351	$	120,142
Add (subtract):	Add (subtract):									Add (subtract):
Depreciation and amortization	Depreciation and amortization	21,826		26,190		71,894		75,202		Depreciation and amortization	26,974		25,003		49,161		50,068
Amortization of discount and deferred debt issuance costs	Amortization of discount and deferred debt issuance costs	763		838		2,992		2,479		Amortization of discount and deferred debt issuance costs	1,033		1,385		1,803		2,229
Loss on early extinguishment of debt		—		—		—		25,915
Customer billings greater than revenue recognized		(122)		(198)		(301)		(699)

Customer billings greater than net income recognized										Customer billings greater than net income recognized	125		(3,573)		621		(179)
Maintenance capital expenditures (3)	Maintenance capital expenditures (3)	(3,351)		(1,565)		(8,834)		(5,192)		Maintenance capital expenditures (3)	(4,963)		(4,111)		(10,583)		(5,482)
Increase in environmental liability	Increase in environmental liability	271		29		36		187		Increase in environmental liability	(124)		(78)		(244)		(234)
Decrease in reimbursable deferred revenue	Decrease in reimbursable deferred revenue	(2,991)		(3,257)		(10,507)		(9,062)		Decrease in reimbursable deferred revenue	(3,356)		(3,502)		(6,590)		(7,516)
Gain on sales-type leases	Gain on sales-type leases	—		—		(24,677)		(33,834)		Gain on sales-type leases	—		(27)		—		(24,677)
Gain on significant asset sales	Gain on significant asset sales	—		—		(5,263)		—		Gain on significant asset sales	—		(5,263)		—		(5,263)
Goodwill impairment	Goodwill impairment	—		35,653		11,034		35,653		Goodwill impairment	—		—		—		11,034
Other	Other	1,254		1,391		1,031		3,265		Other	1,977		1,101		2,393		(223)
Distributable cash flow	Distributable cash flow	$	66,810	$	76,894	$	206,707	$	213,058	Distributable cash flow	$	78,458	$	66,680	$	142,912	$	139,899

(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.


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
		(In thousands)					(In thousands)
Balance Sheet Data	Balance Sheet Data					Balance Sheet Data
Cash and cash equivalents	Cash and cash equivalents	$	12,816	$	21,990	Cash and cash equivalents	$	14,884	$	14,381
Working capital	Working capital	$	3,146	$	14,247	Working capital	$	15,259	$	17,461
Total assets	Total assets	$	2,152,576	$	2,167,565	Total assets	$	2,775,038	$	2,165,867
Long-term debt	Long-term debt	$	1,333,309	$	1,405,603	Long-term debt	$	1,608,460	$	1,333,049
Partners’ equity	Partners’ equity	$	437,998	$	379,292	Partners’ equity	$	837,785	$	443,017

Results of Operations—Three Months Ended ~~September~~June 30, ~~2021~~2022 Compared with Three Months Ended ~~September~~June 30, ~~2020~~2021

Summary

Net income attributable to the partners for the ~~third~~second quarter of ~~2021~~2022 was ~~$49.2~~$56.8 million ($~~0.46~~0.45 per basic and diluted limited partner unit) compared to ~~$17.8~~$55.7 million ($~~0.17~~0.53 per basic and diluted limited partner unit) for the ~~third~~second quarter of ~~2020. Net~~2021. Results for the second quarter of 2021 reflect a gain of $5.3 million related to the sale of a refined product pipeline. Excluding this gain, net income attributable to HEP for the ~~third~~second quarter of ~~2020 included a goodwill impairment charge of $35.7~~2021 was $50. million related to our Cheyenne reporting unit and a $6.1 million gain related to HEP's pro-rata share of a business interruption insurance claim settlement resulting from a loss at HollyFrontier's Woods Cross Refinery. Excluding these items, net income attributable to the partners for the third quarters of 2021 and 2020 were $49.2 million ($~~0.46~~0.48 per basic and diluted limited partner unit) ~~and $47.4 million ($0.45 per basic and diluted limited partner unit), respectively.~~. The increase in ~~earnings~~net income attributable to HEP was mainly due to ~~higher interest~~net income ~~associated with sales-type leases, higher equity in earnings~~ from ~~our joint ventures and lower depreciation expense~~Sinclair Transportation, which was acquired on March 14, 2022, partially offset by ~~lower revenues~~higher interest expense and higher operating costs and expenses.

Revenues

Revenues for the ~~third~~second quarter were ~~$122.6~~$135.8 million, ~~a decrease~~an increase of ~~$5.1~~$9.5 million compared to the ~~third~~second quarter of ~~2020.~~2021. The ~~decrease~~increase was mainly due to revenues on our recently acquired Sinclair Transportation assets and higher revenues on our UNEV pipeline, partially offset by lower ~~on-going~~ revenues on our Cheyenne assets as a result of the conversion of ~~the HollyFrontier~~

~~- 42 -~~

~~Table of~~

HF Sinclair's Cheyenne ~~Refinery~~refinery to renewable diesel production ~~reclassifications of certain tariffs~~ and ~~fees from revenue~~lower volumes on our product pipelines servicing HF Sinclair's Navajo refinery due to ~~interest income under sales-type lease accounting and a 3% decrease in overall crude and product pipeline volumes.~~lower throughput at the refinery.

Revenues from our refined product pipelines were ~~$27.5~~$26.1 million, a decrease of ~~$0.9~~$2.6 million compared to the ~~third~~second quarter of ~~2020.~~2021. Shipments averaged ~~162.3~~178.3 thousand barrels per day (“mbpd”) compared to ~~179.6~~171.2 mbpd for the ~~third~~second quarter of ~~2020.~~2021. The volume ~~and~~increase was mainly due to higher volumes on our recently acquired Sinclair Transportation product

- 46 -

Table o

pipelines, partially offset by lower volumes on pipelines servicing HF Sinclair's Navajo refinery. The revenue ~~decreases were~~decrease was mainly due to lower volumes on pipelines servicing ~~HollyFrontier's~~HF Sinclair's Navajo refinery and lower revenues from Delek US Holdings, Inc. (“Delek”) due to the expiration of a capacity lease, partially offset by revenues on our ~~pipelines servicing Delek's Big Spring refinery.~~recently acquired Sinclair Transportation product pipelines. Revenues did not increase in proportion to volumes due to our recognition of a portion of the Sinclair Transportation refined product pipeline tariffs as interest income under sales-type lease accounting.

Revenues from our intermediate pipelines were $7.5 million, consistent with the ~~third~~second quarter of ~~2020.~~2021. Shipments averaged ~~136.4~~124.6 mbpd for the ~~third~~second quarter of ~~2021~~2022 compared to ~~142.8~~143.8 mbpd for the ~~third~~second quarter of ~~2020.~~2021. The decrease in volumes was mainly due to lower throughputs on our intermediate pipelines servicing ~~HollyFrontier's~~HF Sinclair’s Navajo refinery while revenue remained constant ~~mainly~~ due to contractual minimum volume guarantees.

Revenues from our crude pipelines were ~~$32.3~~$34.7 million, ~~consistent with~~an increase of $2.6 million compared to the ~~third~~second quarter of ~~2020.~~2021. Shipments averaged ~~408.0~~615.3 mbpd compared to ~~404.3~~396.7 mbpd for the ~~third~~second quarter of ~~2020.~~2021. The ~~increased volume~~increase in volumes was mainly attributable to our Cushing Connect Pipeline, which went into service in September 2021, as well as volumes on our recently acquired Sinclair Transportation crude pipelines. The increase in revenues was mainly due to our recently acquired Sinclair Transportation crude pipelines. Revenues did not increase in proportion to volumes due to our recognition of most of the Cushing Connect Pipeline and Sinclair Transportation crude pipeline ~~systems in Wyoming and Utah.~~tariffs as interest income under sales-type lease accounting.

Revenues from terminal, tankage and loading rack fees were ~~$33.3~~$44.6 million, ~~a decrease~~an increase of ~~$5.7~~$7.7 million compared to the ~~third~~second quarter of ~~2020.~~2021. Refined products and crude oil terminalled in the facilities averaged ~~472.2~~609.0 mbpd compared to ~~459.3~~466.7 mbpd for the ~~third~~second quarter of ~~2020.~~2021. The increase in ~~volume~~volumes was ~~mainly the result of higher throughputs at HollyFrontier's El Dorado refinery. Revenues decreased~~ mainly due to ~~lower on-going~~our recently acquired Sinclair Transportation assets. Revenues increased mainly due to revenues on our recently acquired Sinclair Transportation assets and higher butane blending revenues. In addition, the second quarter of 2021 included the recognition of $3.4 million of the $10 million termination fee related to the termination of HF Sinclair's minimum volume commitment on our Cheyenne assets as a result of the conversion of the ~~HollyFrontier~~HF Sinclair Cheyenne ~~Refinery~~refinery to renewable diesel ~~production and reclassifications of certain tariffs and fees from revenue to interest income under sales-type lease accounting.~~production.

Revenues from refinery processing units were ~~$21.9~~$22.9 million, an increase of ~~$1.5~~$1.9 million compared to the ~~third~~second quarter of ~~2020,~~2021, and throughputs averaged 72.3 mbpd compared to ~~62.0~~76.6 mbpd for the ~~third~~second quarter of ~~2020.~~ T~~he increase~~2021. The decrease in volumes was mainly due to ~~increased~~decreased throughput ~~for both~~at our ~~Woods Cross and~~ El Dorado refinery processing units. Revenues increased mainly due to the higher natural gas cost recoveries in revenues. Revenues did not ~~increase~~decrease in proportion to the ~~increase~~decrease in volumes mainly due to contractual minimum volume guarantees.

Operations Expense

Operations (exclusive of depreciation and amortization and goodwill impairment) expense was ~~$42.8~~$53.9 million for the three months ended ~~September~~June 30, ~~2021,~~2022, an increase of ~~$2.8~~$11.8 million compared to the ~~third~~second quarter of ~~2020.~~2021. The increase was mainly due to operations expenses associated with our recently acquired Sinclair Transportation assets as well as higher employee costs, natural gas costs, maintenance costs and ~~employee~~materials and supplies costs, partially offset by lower rentals and leases for the three months ended ~~September~~June 30, ~~2021.~~2022.

Depreciation and Amortization

Depreciation and amortization for the three months ended ~~September~~June 30, ~~2021~~2022 ~~decreased~~increased by ~~$4.4~~$2.0 million compared to the three months ended ~~September~~June 30, ~~2020.~~2021. The ~~decrease~~increase was mainly due to ~~the acceleration of~~ depreciation on ~~certain~~our recently acquired Sinclair Transportation assets and amortization of ~~our Cheyenne tanks in 2020.~~the Woods Cross refinery processing units turnaround.

General and Administrative

General and administrative costs for the three months ended ~~September~~June 30, ~~2021~~2022 increased by ~~$1.5~~$1.8 million compared to the three months ended ~~September~~June 30, ~~2020,~~2021, mainly due to higher legal and professional expenses associated with ~~our Sinclair acquisition~~the HEP Transaction.

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Equity in Earnings of Equity Method Investments


		Three Months Ended September 30,					Three Months Ended June 30,
Equity Method Investment	Equity Method Investment	2021		2020		Equity Method Investment	2022		2021
		(in thousands)					(in thousands)
Osage Pipe Line Company, LLC	Osage Pipe Line Company, LLC	$	1,090	$	219	Osage Pipe Line Company, LLC	606		914
Cheyenne Pipeline LLC	Cheyenne Pipeline LLC	1,654		533		Cheyenne Pipeline LLC	1,586		1,879
Cushing Connect Terminal Holdings LLC	Cushing Connect Terminal Holdings LLC	945		564		Cushing Connect Terminal Holdings LLC	805		630
Pioneer Investments Corp.						Pioneer Investments Corp.	3,221		—
Saddle Butte Pipeline III, LLC						Saddle Butte Pipeline III, LLC	(771)		—
Total	Total	$	3,689	$	1,316	Total	$	5,447	$	3,423

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~~Table of~~

Equity in earnings of Osage Pipe Line Company, LLC ~~increased~~decreased for the three months ended ~~September~~June 30, ~~2021,~~2022, mainly due to higher ~~throughput volumes.~~maintenance costs. Equity in earnings of Cheyenne Pipeline LLC ~~increased~~decreased for the three months ended ~~September~~June 30, ~~2021,~~2022, mainly due to the recognition in revenue of prior contractual minimum commitment ~~billings.~~billings in the three months ended June 30, 2021. Equity in earnings of Cushing Connect Terminal Holdings LLC increased for the three months ended ~~September~~June 30, ~~2021,~~2022, mainly due to lower ~~operating expenses.~~property tax expense. Pioneer Investments Corp. and Saddle Butte Pipeline III, LLC were acquired during the first quarter of 2022 as part of the HEP Transaction.

Interest Expense, including Amortization

Interest expense for the three months ended ~~September~~June 30, ~~2021,~~2022, totaled ~~$13.4~~$20.3 million, ~~a decrease~~an increase of ~~$0.7~~$6.4 million compared to the three months ended ~~September~~June 30, ~~2020.~~2021. The ~~decrease~~increase was mainly due to ~~lower~~our April 2022 issuance of $400 million in aggregate principal amount of 6.375% senior unsecured notes maturing in April 2027 and higher average borrowings outstanding under our senior secured revolving credit facility ~~during~~related to the ~~third quarter~~funding of ~~2021.~~the cash portion of the Sinclair Transportation acquisition. In addition, market interest rates increased on our senior secured revolving credit facility. Our aggregate effective interest rates were ~~3.7%~~4.7% and ~~3.6%~~3.8% for the three months ended ~~September~~June 30, 2022 and 2021, respectively.

Interest Income

Interest income for the three months ended June 30, 2022, totaled $24.3 million, an increase of $17.7 million compared to the three months ended June 30, 2021. The increase was mainly due to higher sales-type lease interest income from our newly acquired Sinclair Transportation pipelines and ~~2020, respectively.~~terminals and our Cushing Connect Pipeline, which was placed into service at the end of the third quarter of 2021.

State Income Tax Expense

We recorded state income tax ~~benefit of $4,000 and a state income tax~~ expense of ~~$34,000~~$14,000 and $27,000 for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. All tax expense is solely attributable to the Texas margin tax.

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Table o

Results of Operations—~~Nine~~Six Months Ended ~~September~~June 30, ~~2021~~2022 Compared with ~~Nine~~Six Months Ended ~~September~~June 30, ~~2020~~2021

Summary

Net income attributable to the partners for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, was ~~$169.3~~$106.4 million ($~~1.60~~0.90 per basic and diluted limited partner unit) compared to ~~$119.1~~$120.1 million ($~~1.13~~1.14 per basic and diluted limited partner unit) for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. Results for the ~~nine~~six months ended ~~September~~June 30, 2021, ~~include~~reflect special items that collectively increased net income attributable to the partners by a total of~~$18.9 million~~. $19.0 million. These items ~~include~~included a gain on sales-type leases of $24.7 million, a gain on significant asset sales of $5.3 million and a goodwill impairment charge of $11.0 million. In addition, the net income attributable to the partners for the nine months ended September 30, 2020, included a gain on sales-type leases of $33.8 million, a loss on early extinguishment of debt of $25.9 million, a goodwill impairment charge of $35.7 million related to our Cheyenne reporting ~~unit and a $6.1 million gain related to HEP’s pro-rate share of a business interruption insurance claim resulting from a loss at HollyFrontier’s Woods Cross Refinery.~~unit. Excluding these items, net income attributable to the partners for the ~~nine~~six months ended ~~September~~June 30, 2021, ~~and 2020, were $150.4~~was $101.1 million ($~~1.43~~0.96 per basic and diluted limited partner unit) ~~and $140.8 million ($1.34 per basic and diluted limited partner unit), respectively.~~. The increase in earnings was mainly due to ~~higher volumes across our crude pipelines, higher interest~~net income ~~associated with sales-type leases and lower interest expense,~~from Sinclair Transportation, which was acquired on March 14, 2022, partially offset by higher interest expense and higher operating costs and expenses. In addition, the six months ended June 30, 2021 included the recognition of $9.9 million of the $10 million termination fee related to the termination of HF Sinclair's minimum volume commitment on our Cheyenne assets.

Revenues

Revenues for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, were ~~$376.0~~$256.0 million, an increase of ~~$5.6~~$2.6 million compared to the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~ 2021. The increase was mainly attributable to ~~increased volumes~~revenues on our ~~crude pipeline systems in Wyoming~~recently acquired Sinclair Transportation assets and ~~Utah,~~increased revenues from our UNEV assets, partially offset by lower revenues on our Cheyenne assets as a result of the conversion of HF Sinclair’s Cheyenne refinery to renewable diesel production and lower revenues on our product pipelines servicing HF Sinclair's Navajo refinery. The six months ended June 30, 2021 included the recognition of the $10 million termination fee related to the termination of ~~HollyFrontier's~~HF Sinclair's minimum volume commitment on our Cheyenne assets and higher revenues on our refinery processing units partially offset by lower on-going revenues on our Cheyenne assets and our pipelines servicing Delek's Big Spring refinery as well as reclassifications of certain tariffs and fees from revenue to interest income under sales-type lease accounting.assets.

Revenues from our refined product pipelines were ~~$84.7~~$52.3 million, a decrease of ~~$3.7~~$5.0 million compared to the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. Shipments averaged ~~165.8~~167.3 mbpd compared to ~~172.6~~167.6 mbpd for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The volume and revenue ~~decrease~~sdecreases were mainly due to lower volumes on pipelines servicing ~~Delek's Big Spring refinery.~~HF Sinclair's Navajo refinery, partially offset by volumes on our recently acquired Sinclair Transportation assets and higher volumes on our UNEV pipeline. We recognized a significant portion of the Sinclair Transportation refined product pipeline tariffs as interest income under sales-type lease accounting.

Revenues from our intermediate pipelines were ~~$22.6~~$15.0 million, ~~an increase of $0.1 million compared to~~consistent with the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. Shipments averaged ~~131.9~~121.2 mbpd compared to ~~137.8~~129.6 mbpd for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The decrease in volumes was mainly due to lower throughputs on our intermediate pipelines servicing ~~HollyFrontier's Tulsa~~HF Sinclair's Navajo refinery while revenue remained relatively constant ~~mainly~~ due to contractual minimum volume guarantees.

Revenues from our crude pipelines were ~~$94.9~~$65.8 million, an increase of ~~$8.0~~$3.2 million compared to the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. Shipments averaged ~~393.0~~571.5 mbpd compared to ~~380.1~~385.3 mbpd for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The increase~~s were~~ in volumes was mainly attributable to ~~increased~~our Cushing Connect Pipeline, which went into service in September 2021, as well as volumes on our recently acquired Sinclair Transportation crude ~~pipeline systems~~pipelines. The increase in revenues was mainly due to our recently acquired Sinclair Transportation crude pipelines and higher volumes revenues on our legacy crude pipelines in Wyoming and Utah. Revenues did not increase in proportion to volumes due to our recognition of most of the Cushing Connect Pipeline and Sinclair Transportation crude pipeline tariffs as interest income under sales-type lease accounting.

~~- 44 -~~

~~Table of~~

Revenues from terminal, tankage and loading rack fees were ~~$108.4~~$81.6 million, ~~a decrease~~an increase of ~~$4.4~~$6.5 million compared to the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. Refined products and crude oil terminalled in the facilities averaged ~~436.9~~552.0 mbpd compared to ~~451.0~~418.1 mbpd for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. Volumes ~~decreased~~increased mainly due to volumes on our recently acquired Sinclair Transportation assets and higher throughputs at HF Sinclair's Tulsa refinery. Revenues increased mainly due to revenues on our recently acquired Sinclair Transportation assets and higher butane blending revenues. In addition, the six months ended June 30, 2021 included the recognition of $9.9 million of the $10 million termination fee related to the termination of HF Sinclair's minimum volume commitment on our Cheyenne assets as a result of ~~lower throughputs at HollyFrontier's Tulsa~~the conversion of the HF Sinclair Cheyenne refinery ~~as well as the cessation of petroleum refinery operations at HollyFrontier's Cheyenne Refinery. Revenues decreased mainly as a result of reclassifications of certain tariffs and fees from revenue~~ to ~~interest income under sales-type lease accounting.~~renewable diesel production.

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Table o

Revenues from refinery processing units were ~~$65.4~~$41.3 million, ~~an increase~~a decrease of ~~$5.6~~$2.2 million compared to the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. Throughputs averaged ~~69.9~~68.8 mbpd compared to ~~60.6~~68.7 mbpd for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021 ~~The increase~~with increased throughputs at our El Dorado refinery processing units offset by lower throughputs at our Woods Cross refinery processing units, which were down for a scheduled turnaround in ~~volumes was~~March 2022. Revenues decreased mainly due to ~~increased~~the lower throughput ~~for both~~at our Woods Cross ~~and El Dorado~~refinery processing ~~units. Revenues increased mainly due to~~units, partially offset by higher ~~recovery of~~ natural gas ~~costs as well as higher throughputs.~~cost recoveries in revenues.

Operations Expense

Operations expense (exclusive of depreciation and amortization) for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, increased by ~~$16.5~~$13.1 million compared to the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The increase was mainly due to operations expenses associated with our recently acquired Sinclair Transportation assets as well as higher ~~maintenance,~~employee costs, natural gas costs, and ~~pipeline rental~~materials and supplies costs, partially offset by lower ~~materials~~rentals and ~~supplies and property taxes.~~leases.

Depreciation and Amortization

Depreciation and amortization for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, decreased by ~~$3.3~~$0.9 million compared to the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The decrease was mainly due to the acceleration of depreciation on certain of our Cheyenne tanks in ~~2020~~2021 as well as retirement of assets due to sales-type lease accounting.

General and Administrative

General and administrative costs for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, increased by ~~$2.1~~$3.2 million compared to the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 mainly due to higher legal and professional expenses incurred in the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022.

Equity in Earnings of Equity Method Investments


		Nine Months Ended September 30,					Six Months Ended June 30,
Equity Method Investment	Equity Method Investment	2021		2020		Equity Method Investment	2022		2021
		(in thousands)					(in thousands)
Osage Pipe Line Company, LLC	Osage Pipe Line Company, LLC	2,726		1,599		Osage Pipe Line Company, LLC	1,249		1,636
Cheyenne Pipeline LLC	Cheyenne Pipeline LLC	3,428		2,693		Cheyenne Pipeline LLC	3,360		1,774
Cushing Connect Terminal Holdings LLC	Cushing Connect Terminal Holdings LLC	2,721		894		Cushing Connect Terminal Holdings LLC	1,711		1,776
Pioneer Investments Corp.						Pioneer Investments Corp.	3,686		—
Saddle Butte Pipeline III, LLC						Saddle Butte Pipeline III, LLC	(933)		—
Total	Total	$	8,875	$	5,186	Total	$	9,073	$	5,186

Equity in earnings of Osage Pipe Line Company, LLC ~~increased~~decreased for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, mainly due to higher ~~throughput volumes.~~maintenance costs. Equity in earnings of Cheyenne Pipeline LLC increased for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, mainly due to the recognition in revenue of prior contractual minimum commitment billings. ~~Equity in earnings of Cushing Connect Terminal Holdings~~Pioneer Investments Corp. and Saddle Butte Pipeline III, LLC ~~increased for~~were acquired during the ~~nine months ended September 30, 2021 as the terminal started operations in the second~~first quarter of ~~2020.~~2022 as part of the HEP Transaction.

Interest Expense, including Amortization

Interest expense for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, totaled ~~$40.6~~$34.0 million, ~~a decrease~~an increase of ~~$5.1~~$6.8 million compared to the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The ~~decrease~~increase was mainly due to o~~lower~~ur April 2022 issuance of $400 million in aggregate principal amount of 6.375% senior unsecured notes maturing in April 2027 and higher average borrowings outstanding on under our senior secured revolving credit facility ~~and refinancing~~related to the funding of the cash portion of the Sinclair Transportation acquisition. In addition, market interest rates increased on our senior secured revolving credit facility. ~~our $500 million aggregate principal amount of 6.0% senior notes due 2024, with $500 million aggregate principal amount of 5.0% senior notes due 2028.~~Our aggregate effective interest rates were ~~3.7%~~4.2% and ~~3.8%~~3.6% for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

State Income Tax Expense

We recorded state income tax expense of ~~$60,000~~$45,000 and ~~$110,000~~$64,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. All tax expense is solely attributable to the Texas margin tax.

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Table ofo

LIQUIDITY AND CAPITAL RESOURCES

Overview

In April 2021, we amended our ~~senior secured revolving credit facility (the “Credit Agreement”)~~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 Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit and continues to provide for an accordion feature that allows us to increase commitments under the Credit Agreement up to a maximum amount of $1.7 billion.

During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, we received advances totaling ~~$210.5~~$410.0 million and repaid ~~$283.5~~$529.0 million under the Credit Agreement, resulting in a net decrease of ~~$73.0~~$119.0 million and an outstanding balance of ~~$840.5~~$721.0 million at ~~September~~June 30, ~~2021 under the Credit Agreement.~~2022. As of ~~September~~June 30, ~~2021,~~2022, we have no letters of credit outstanding under the Credit Agreement and the available capacity under the Credit Agreement was ~~$359.5~~$479.0 million. Amounts repaid under the Credit Agreement may be reborrowed from time to time.

As of June 30, 2022, we had $500 million in aggregate principal amount of 5% Senior Notes due in ~~2028. On February 5, 2020, we redeemed~~2028 (the “5% Senior Notes”, and together with the ~~existing $500 million 6%~~6.375 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.~~“Senior Notes”).

We have a continuous offering program under which we may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200 million. We did not issue any units under this program during the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. As of ~~September~~June 30, ~~2021,~~2022, 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 are expected to be used for general business purposes, which may include, among other things, funding acquisitions of assets or businesses, working capital, capital expenditures, investments in subsidiaries, the retirement of existing debt and/or the repurchase of common units or other securities.

We believe our current sources of liquidity, including cash balances, future internally generated funds, any future issuances of debt or equity securities and funds available under the Credit Agreement will provide sufficient resources to meet our working capital liquidity, capital expenditure and quarterly distribution needs for the foreseeable ~~future, including funding the cash portion of the HEP Transactions with Sinclair.~~future. Future securities issuances, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

~~We reduced our~~In the third quarter of 2022, HEP expects to hold the quarterly distribution toconstant at $0.35 per unit, ~~beginning~~or $1.40 on an annualized basis. We are on track to achieve our short-term leverage target of 3.5x by year-end. Consistent with ~~the distribution for the first quarter of 2020, representative of~~ our ~~new distribution strategy focused on funding all~~disciplined capital ~~expenditures and distributions within operating cash flow and improving distributable cash flow coverage~~allocation framework, we expect to ~~1.3x or greater with the goal of reducing leverage to 3.0-3.5x.~~increase unitholder returns in 2023.

In ~~August 2021,~~May 2022, we paid a regular quarterly cash distribution of $0.35 on all units in an aggregate amount of ~~$37.0~~$44.3 million.

Cash and cash equivalents in~~decreased~~creased by ~~$9.2~~$0.5 million during the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The cash flows provided by operating activities of ~~$240.8~~$152.5 million and financing activities of $186.0 million were ~~less~~more than the cash flows used for ~~financing activities of $182.2 million and~~ investing activities of ~~$67.7~~$338.0 million. Working capital decreased by ~~$11.1~~$2.2 million to ~~$3.1~~$15.3 million at ~~September~~June 30, ~~2021,~~2022, from ~~$14.2~~$17.5 million at December 31, ~~2020.~~2021.

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Table ofo

Cash Flows—Operating Activities

Cash flows from operating activities ~~incre~~decreased by ~~$15.7~~$9.6 million from ~~$225.0~~$162.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, to ~~$240.8~~$152.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The ~~increase~~decrease was mainly due to higher ~~cash receipts from customers and lower~~ payments for ~~interest~~turnaround expenses at our Woods Cross refinery processing units and higher payments for operating expenses, partially offset by higher ~~payments for operating costs and expenses~~cash receipts from customers during the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

Cash Flows—Investing Activities

Cash flows used for investing activities were ~~$67.7~~$338.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$39.4~~$48.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, an increase of ~~$28.3~~$289.1 million. During the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022, we paid the $321.4 million cash portion of the purchase price consideration for our acquisition of Sinclair Transportation. During the six months ended June 30, 2022 and ~~2020,~~2021, we invested ~~$78.6~~$23.2 million and ~~$38.6~~$59.4 million, respectively, in ~~additions~~addition to properties and equipment. ~~We received $3.5 million in excess of equity in earnings and $7.4 million in proceeds from the sale of assets during the nine months ended September 30, 2021.~~

Cash Flows—Financing Activities

Cash flows ~~used for~~provided by financing activities were ~~$182.2~~$186.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$180.8~~cash flows used by financing activities of $115.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, an increase of ~~$1.4~~$301.6 million. During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, we received ~~$210.5~~$410.0 million and repaid ~~$283.5~~$529.0 million in advances under the Credit ~~Agreement.~~Agreement, and we received net proceeds of $393.7 million related to the issuance of our 6.375% Senior Notes. Additionally, we paid ~~$112.4~~$81.3 million in regular quarterly cash distributions to our limited partners and ~~$8.7~~$5.3 million to our noncontrolling interests. ~~We received $21.3 million in contributions from noncontrolling interests during~~During the ~~nine~~six months ended ~~September~~June 30, ~~2021. During the nine months ended September 30, 2020,~~2021, we received ~~$219.5~~$141.0 million and repaid ~~$237.0~~$184.5 million in advances under the Credit Agreement. We paid ~~$137.4~~$75.4 million in regular quarterly cash distributions to our limited partners, and distributed ~~$7.8~~$5.9 million to our noncontrolling interests. ~~We also received net proceeds of $491.3 million for issuance of our 5% Senior Notes and paid $522.5 million to retire our 6% Senior Notes.~~ In addition, we received ~~$15.4~~$17.6 million in contributions from noncontrolling interests during the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

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. Our current ~~2021~~2022 capital forecast includes forecasted expenditures for our recently acquired Sinclair Transportation assets and is comprised of approximately ~~$15~~$20 million to ~~$20~~$30 million for maintenance capital expenditures, $2$25 million to $4$35 million for refinery unit turnarounds and ~~$40~~$5 million to ~~$45~~$10 million for expansion capital expenditures and ~~our share of Cushing Connect Joint Venture investments. We expect the majority of the 2021 expansion capital 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.

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 a subsidiary of HFC a Class B unit comprising a noncontrolling equity interest in a wholly owned subsidiary subject to redemption to the extent that HFC is entitled to a 50%

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interest in ~~our share~~75% of annual UNEV earnings before interest, income taxes, depreciation, and amortization above ~~$30~~

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$40 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

In April 2021, we amended our 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 Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit, and it continues to provide for an accordion feature that allows us to increase the commitments under the Credit Agreement up to a maximum amount of $1.7 billion.

Our obligations under the Credit Agreement are collateralized by substantially all of our assets, and indebtedness under the Credit Agreement is guaranteed by our material, wholly owned subsidiaries. The Credit Agreement requires us to maintain compliance with certain financial covenants consisting of total leverage, senior secured leverage, and interest coverage. It also limits or restricts our ability to engage in certain activities. If, at any time prior to the expiration of the Credit Agreement, HEP obtains two investment grade credit ratings, the Credit Agreement will become unsecured and many of the covenants, limitations and restrictions will be eliminated.

Senior Notes

As of ~~September~~June 30, ~~2021,~~2022, we had $500 million in aggregate principal amount of 5% Senior Notes due in 2028.

On ~~February 4, 2020,~~April 8, 2022, we closed a private placement of ~~$500~~$400 million in aggregate principal amount of 5%the 6.375% Senior Notes. The 6.375% Senior Notes ~~due in 2028. On February 5, 2020, we redeemed~~were issued at par for net proceeds of approximately $393 million, after deducting 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 premiuminitial purchasers’ discounts and ~~unamortized financing costs of $3.4 million. We funded the $522.5 million redemption with~~commissions and offering expenses. The total net proceeds from the ~~issuance~~offering of ~~our 5%~~the 6.375% Senior Notes ~~and~~were used to partially repay outstanding borrowings under the Credit Agreement, increasing our ~~Credit Agreement.~~available liquidity.

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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Long-term Debt

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


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
		(In thousands)					(In thousands)
Credit Agreement	Credit Agreement	$	840,500	913,500		Credit Agreement
Amount outstanding						Amount outstanding	721,000		840,000

5% Senior Notes	5% Senior Notes					5% Senior Notes
Principal	Principal	500,000		500,000		Principal	500,000		500,000
Unamortized debt issuance costs	Unamortized debt issuance costs	(7,191)		(7,897)		Unamortized debt issuance costs	(6,459)		(6,951)
		492,809		492,103			493,541		493,049

6.375% Senior Notes						6.375% Senior Notes
Principal						Principal	400,000		—
Unamortized debt issuance costs						Unamortized debt issuance costs	(6,081)		—
							393,919		—

Total long-term debt	Total long-term debt	$	1,333,309	$	1,405,603	Total long-term debt	$	1,608,460	$	1,333,049

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Contractual Obligations

There were no significant changes to our long-term contractual obligations during the quarter ended ~~September~~June 30, ~~2021.~~2022.

Impact of Inflation

Inflation in the United States did not have a material impact on our results of operations for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~ 2021. PPI has increased an average of ~~0.9%~~2.9% annually over the past five calendar years, including an increase of 8.9% in 2021 and a decrease of ~~1.4%~~1.3% in ~~2020 and an increase of 0.8% in 2019. PPI for the first nine months of 2021 increased by 7.6% over the first nine months of~~ 2020.

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, and the majority of our rates do not decrease when PPI is negative. 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.

Under the Omnibus Agreement and certain transportation agreements and purchase agreements with ~~HFC, HFC~~HF Sinclair, HF Sinclair has agreed to indemnify us, subject to certain monetary and time limitations, for environmental noncompliance and remediation liabilities associated with certain assets transferred to us from ~~HFC~~HF Sinclair and occurring or existing prior to the date of such transfers.

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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 ~~September~~June 30, ~~2021,~~2022, we had an accrual of ~~$4.6~~$13.6 million ~~that~~ related to environmental clean-up projects for which we have assumed liability, including accrued environmental liabilities assumed in the Sinclair Transportation acquisition that have preliminarily been fair valued at $10.0 million as of the acquisition date, or for which the indemnity provided for by ~~HFC~~HF Sinclair has expired or will expire. ~~The remaining~~There are environmental remediation projects in progress, including assessment and monitoring activities, that relate to certain assets acquired from HF Sinclair. Certain of these projects were underway prior to our purchase, are covered under the ~~HFC~~HF Sinclair environmental indemnification discussed above, and represent liabilities retained by HF Sinclair.

On July 8, 2022, the Osage pipeline, which carries crude oil from Cushing, Oklahoma to El Dorado, Kansas, suffered a release of ~~HFC.~~crude oil. The pipeline has resumed operations and recovery operations are ongoing. We expect to accrue amounts related to recovery and remediation in the third quarter of 2022, but cannot estimate those amounts at this time. We do not expect the accrual will have a material impact on our financial position.

CRITICAL ACCOUNTING ~~POLICIES~~ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted 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, ~~2020.~~2021. Certain critical

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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 ~~2021.~~2022. We consider these policies to be critical to understanding the judgments that are involved and the uncertainties that could impact our results of operations, financial condition and ~~cash flows.~~

~~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. 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 ~~September~~June 30, ~~2021,~~2022, we had an outstanding principal balance of ~~$500~~$900 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 ~~September~~June 30, ~~2021,~~2022, the fair value of our 5% Senior Notes was ~~$506.8~~$808.7 million. We estimate a hypothetical 10% change in the yield-to-maturity applicable to the 5% Senior Notes at ~~September~~June 30, ~~2021~~2022 would result in a change of approximately ~~$13.1~~$28.9 million in the fair value of the underlying 5% Senior Notes.

For the variable rate Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. At ~~September~~June 30, ~~2021,~~2022, borrowings outstanding under the Credit Agreement were ~~$840.5~~$721.0 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~~catastrophic losses, operational hazards ~~of operations,~~and unforeseen interruptions, including but not limited to fire, explosion, releases or spills, cyberattacks, weather-related perils, vandalism, power failures, mechanical failures and ~~weather-related perils.~~other events beyond our control. We maintain various insurance coverages, including general liability, property damage, business interruption and cyber insurance, subject to certain deductibles and insurance policy terms and conditions. We are not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable, or premium costs, in our judgment, do not justify such expenditures.

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

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices. See “Risk Management” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of market risk exposures that we have with respect to our long-term debt, which disclosure should be read in conjunction with the quantitative and qualitative disclosures about market risk contained in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020.~~2021.

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.

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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 ~~September~~June 30, ~~2021,~~2022, at a reasonable level of assurance.

(b) Changes in internal control over financial reporting

~~During~~We acquired Sinclair Transportation effective March 14, 2022, and have included the ~~three months ended September~~operating results and assets and liabilities of Sinclair Transportation in our consolidated financial statements as of June 30, ~~2021,~~2022 and for the 109 days then ended. Other than our internal controls for Sinclair Transportation, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.Legal Proceedings

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

Item 1A.Risk Factors

~~Except for the risk factors below, there~~There have been no material changes in our risk factors as previously disclosed in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020 and in Part II, “Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended June 30,~~ 2021. In addition to the other information set forth in this quarterly report, you should consider carefully the information discussed in our ~~2020~~2021 Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our ~~2020~~2021 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition or future results.

The pending HEP Transactions may not be consummated on a timely basis or at all. Failure to complete the acquisition within the expected timeframe or at all could adversely affect our common unit price and our future business and financial results.

On August 2, 2021, we entered into the Contribution Agreement with Sinclair and certain other parties thereto to acquire all of the issued and outstanding capital stock of STC. We expect the acquisition to close in mid-2022. The HEP Transactions are subject to closing conditions. If these conditions are not satisfied or waived, the acquisition will not be consummated. If the closing of the HEP Transactions is substantially delayed or does not occur at all, or if the terms of the acquisition are required to be modified substantially, we may not realize the anticipated benefits of the acquisition fully or at all, or they may take longer to realize than expected. The closing conditions include, among others, the absence of a law or order prohibiting the transactions contemplated by the business combination agreement and the termination or expiration of any waiting periods under the Hart-Scott Rodino Act, as amended (the “HSR Act”), with respect to the acquisition. On August 23, 2021, each of HollyFrontier and Sinclair filed its respective premerger notification and report regarding the Sinclair Transactions with the U.S. Department of Justice and the U.S. Federal Trade Commission (the “FTC”) under the HSR Act. On September 22, 2021, HFC and Sinclair each received a request for additional information and documentary material (“Second Request”) from the FTC in connection with the FTC’s review of the Sinclair Transactions. Issuance of the Second Request extends the waiting period under the HSR Act until 30 days after both HollyFrontier and Sinclair have substantially complied with the Second Request, unless the waiting period is terminated earlier by the FTC or the parties otherwise commit not to close the Sinclair Transactions for some additional period of time. HollyFrontier and Sinclair are cooperating with the FTC staff in its review. We have incurred and will continue to incur substantial transaction costs whether or not the acquisition is completed. Any failure to complete the HEP Transactions could have a material adverse effect on our common unit price, our competitiveness and reputation in the marketplace, and our future business and financial results, including our ability to execute on our strategy to return capital to our unitholders.

The HEP Transactions will require management to devote significant attention and resources to integrating the Sinclair business with our business. Potential difficulties that may be encountered in the integration process include, among others:

•the inability to successfully integrate the Sinclair business into the HEP business in a manner that permits us to achieve the revenue and cost savings that we announced as anticipated from the acquisition;

•~~complexities associated with managing the larger, integrated business;~~

•~~potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the acquisition;~~

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•~~integrating personnel from the two companies while maintaining focus on providing consistent, high-quality products and services;~~

•~~loss of key employees;~~

•~~integrating relationships with customers, vendors and business partners;~~

•performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the acquisition and integrating Sinclair’s operations into HEP; and

•~~the disruption of, or the loss of momentum in, each company’s ongoing business or inconsistencies in standards, controls, procedures and policies.~~

Delays or difficulties in the integration process could adversely affect our business, financial results, financial condition and common unit price. Even if we are able to integrate our business operations successfully, there can be no assurance that this integration will result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that we currently expect or have communicated from this integration or that these benefits will be achieved within the anticipated time frame.

~~Litigation relating to the Sinclair acquisition could result in substantial costs to HEP or an injunction preventing the completion of the Sinclair acquisition.~~

Securities class action lawsuits, derivative and related lawsuits are often brought against public companies that have entered into acquisition, merger or other business combination agreements. Even if such a lawsuit is without merit, defending against these claims can result in substantial costs and divert the time and resources of management. An adverse judgment could result in monetary damages, which could have a negative impact on HEP’s liquidity and financial condition.

Lawsuits that may be brought against us, have been or may be brought against HollyFrontier, and/or our or HollyFrontier’s directors could also seek, among other things, injunctive relief or other equitable relief, including a request to rescind parts of the acquisition agreement already implemented, issue additional disclosures and to otherwise enjoin the parties from consummating the Sinclair acquisition. HollyFrontier and the members of HollyFrontier’s board of directors were named as defendants in a lawsuit filed in Harris County, Texas, brought by an alleged HollyFrontier shareholder challenging the Sinclair acquisition and seeking, among other things, injunctive relief to enjoin and/or rescind the acquisition agreement and make additional or corrective disclosures. An additional lawsuit filed by an alleged HollyFrontier shareholder in the United States District Court for the Southern District of New York asserts claims under Section 14(a) of the Exchange Act and SEC Rule 14a-9 and claims under Section 20(a) of the Exchange Act against HollyFrontier and the members of HollyFrontier’s board of directors, and seeks, among other things, to enjoin and/or rescind the acquisition agreement and require defendants to amend the related proxy statement, and, if they do not, to recover damages. Additional lawsuits in connection with the Sinclair acquisition may be filed in the future in federal or state courts.

The outcome of these lawsuits or any other lawsuit that may be filed challenging the Sinclair acquisition is uncertain. One of the conditions to the closing of the Sinclair acquisition is that no injunction by any court or other tribunal of competent jurisdiction has been entered and continues to be in effect and no law has been adopted or is effective, in either case, that prohibits or makes illegal the closing of the Sinclair acquisition. Consequently, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Sinclair acquisition or delaying the shareholder vote, that injunction may delay or prevent the Sinclair acquisition from being completed within the expected timeframe or at all, which could result in substantial costs to us and may adversely affect our business, financial position, results of operations and cash flows. Relatedly, the defense or settlement of any lawsuit or claim that remains unresolved at the time the Sinclair acquisition is completed may adversely affect our business, financial condition, results of operations and cash flows and result in substantial costs to us.

Item 6.Exhibits

The Exhibit Index beginning on page 5458 of this Quarterly Report on Form 10-Q lists the exhibits that are filed or furnished, as applicable, as part of this Quarterly Report on Form 10-Q.

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Exhibit Index


Exhibit Number						Description

~~2.1†~~						Contribution Agreement, dated as of August 2, 2021, by and among Holly Energy Partners, L.P., The Sinclair Companies, and Sinclair Transportation Company (incorporated by reference to Exhibit 2.1 of Registrant’s Current Report on Form 8-K filed on August 3, 2021, File No. 1-32225).
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 HEP 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~~4.1						Second Amendment to Seventh Amended and Restated Master Throughput Agreement, entered into as of July 27, 2021, effective as of May 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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, File No. 1-32225).~~
~~10.2†~~						~~Unitholders Agreement,~~Indenture, dated ~~as of August 2, 2021,~~April 8, 2022, by and among Holly Energy Partners, L.P., Holly ~~Logistic Services, L.L.C.~~Energy Finance Corp., ~~Navajo Pipeline Co., L.P., The Sinclair Companies,~~each of the Guarantors party thereto and U.S. Bank Trust Company, National Association, relating to the ~~unitholders set forth on Schedule I thereto, as may be amended from time to time~~offering of the Notes (incorporated by reference to Exhibit ~~10.1~~4.1 of Registrant’s Current Report on Form 8-K filed ~~on August 3, 2021,~~April 8, 2022, File No. 1-32225).
~~10.3~~4.2						~~Letter Agreement,~~First Supplemental Indenture, dated ~~as of August 2, 2021, by and~~May 22, 2022, among ~~HollyFrontier Corporation~~UNEV Pipeline, LLC, Holly Energy Partners, L.P. and Holly Energy Finance Corp. and the other Guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee, related to Holly Energy Partners, L.P.’s 6.375% Senior Notes due 2027 (incorporated by reference to Exhibit ~~10.2~~4.9 of Registrant’s ~~Current Report~~Registration Statement on Form ~~8-K~~S-3 filed ~~on August 3, 2021,~~May 23, 2022, File No. ~~1-32225)~~333-265140).
~~10.4*+~~4.3						Second ~~Amendment to the~~Supplemental Indenture, dated as of May 22, 2022, among UNEV Pipeline, LLC, Holly Energy Partners, L.P. ~~Long-Term Incentive Plan, effective October 27, 2021.~~
~~10.5*+~~						~~Form of Performance Unit Agreement (Executive).~~
~~10.6*+~~						~~Form of Phantom Unit Agreement (Employee).~~
~~10.7*+~~						~~Form of Notice of Grant of Phantom Units (Employee).~~
~~10.8*+~~						~~Form of Phantom Unit Agreement (Non~~-~~Employee Director Award).~~
~~10.9*+~~						~~Form of Notice of Grant of Phantom Unit Agreement (Non~~-~~Employee Director Award).~~
~~10.10+~~						~~Consulting Agreement between~~and Holly ~~Logistics Services, L.L.C.~~Energy Finance Corp. and ~~Mark Cunningham, effective February 19, 2022~~the other Guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee, related to Holly Energy Partners, L.P.’s 5.000% Senior Notes due 2028 (incorporated by reference to Exhibit ~~10.1~~4.7 of Registrant’s ~~Current Report~~Registration Statement on Form ~~8-K~~S-3 filed ~~on October 29, 2021,~~May 23, 2022, File No. ~~I-32225)~~333-26514).
22.1*						Subsidiary Guarantors and Issuers of Guaranteed Securities and Affiliates whose Securities Collateralize Securities of the Registrant.
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 ~~September~~June 30, ~~2021~~2022 formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statement of Partners’ Equity, and (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).

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

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HOLLY ENERGY PARTNERS, L.P.

SIGNATURES

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


	HOLLY ENERGY PARTNERS, L.P.
	(Registrant)

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

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

~~Date: November 3, 2021~~August 8, 2022		/s/ John Harrison
		John Harrison
		Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)

~~Date: November 3, 2021~~August 8, 2022		/s/ Kenneth P. Norwood
		Kenneth P. Norwood
		Vice President and Controller (Principal Accounting Officer)

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	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	109

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3539

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5056

	Item 4.	Controls and Procedures	5156

PART II. OTHER INFORMATION			5257

	Item 1.	Legal Proceedings	5257

	Item 1A.	Risk Factors	5257

	Item 6.	Exhibits	5357

		Index to Exhibits	5458

		SIGNATURES	5659


Three Months Ended September 30, 2021	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
Revenues:
Affiliates	$	—	$	90,980	$	6,144	$	—	$	97,124
Third parties	—		20,024		5,436		—		25,460
	—		111,004		11,580		—		122,584
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—		38,676		4,117		—		42,793
Depreciation and amortization	—		17,558		4,268		—		21,826
General and administrative	739		3,110		—		—		3,849

	739		59,344		8,385		—		68,468
Operating income (loss)	(739)		51,660		3,195		—		54,116

Other income (expense):
Equity in earnings of subsidiaries	69,553		3,045		—		(72,598)		—
Equity in earnings of equity method investments	—		2,743		946		—		3,689
Interest expense	(12,431)		(1,077)		—		91		(13,417)
Interest income	—		6,835		91		(91)		6,835
Gain on sales-type lease	—		7,223		—		(7,223)		—
Gain on sale of assets and other	—		76		1		—		77
	57,122		18,845		1,038		(79,821)		(2,816)
Income before income taxes	56,383		70,505		4,233		(79,821)		51,300
State income tax benefit	—		4		—		—		4
Net income	56,383		70,509		4,233		(79,821)		51,304
Allocation of net income attributable to noncontrolling interests	—		(956)		(1,188)		—		(2,144)

Net income attributable to the partners	$	56,383	$	69,553	$	3,045	$	(79,821)	$	49,160


Three Months Ended September 30, 2020	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
Revenues:
Affiliates	$	—	$	94,595	$	6,397	$	—	$	100,992
Third parties	—		21,550		5,189		—		26,739
	—		116,145		11,586		—		127,731
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—		36,065		3,938		—		40,003
Depreciation and amortization	—		21,997		4,193		—		26,190
General and administrative	649		1,683		—		—		2,332
Goodwill impairment	—		35,653		—		—		35,653
	649		95,398		8,131		—		104,178
Operating income (loss)	(649)		20,747		3,455		—		23,553

Other income (expense):
Equity in earnings of subsidiaries	31,461		6,589		—		(38,050)		—
Equity in earnings of equity method investments	—		755		561		—		1,316
Interest expense	(13,072)		(1,032)		—		—		(14,104)
Interest income	—		2,787		16		—		2,803


Gain on sale of assets and other	73		2,542		4,850		—		7,465
	18,462		11,641		5,427		(38,050)		(2,520)
Income before income taxes	17,813		32,388		8,882		(38,050)		21,033
State income tax expense	—		(34)		—		—		(34)
Net income	17,813		32,354		8,882		(38,050)		20,999
Allocation of net income attributable to noncontrolling interests	—		(893)		(2,293)		—		(3,186)


Net income attributable to the partners	$	17,813	$	31,461	$	6,589	$	(38,050)	$	17,813


Nine Months Ended September 30, 2021	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
Revenues:
Affiliates	$	—	$	279,592	$	18,600	$	—	$	298,192
Third parties	—		59,554		18,256		—		77,810
	—		339,146		36,856		—		376,002
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—		114,217		12,009		—		126,226
Depreciation and amortization	—		59,045		12,849		—		71,894
General and administrative	2,824		6,840		—		—		9,664
Goodwill impairment	—		11,034		—		—		11,034
	2,824		191,136		24,858		—		218,818
Operating income (loss)	(2,824)		148,010		11,998		—		157,184

Other income (expense):
Equity in earnings of subsidiaries	216,958		10,786		—		(227,744)		—
Equity in earnings of equity method investments	—		6,154		2,721		—		8,875
Interest expense	(37,609)		(3,077)		—		91		(40,595)
Interest income	—		19,997		91		(91)		19,997

Gain on sales-type lease	—		31,900		—		(7,223)		24,677
Gain on sale of assets and other	—		5,991		3		—		5,994
	179,349		71,751		2,815		(234,967)		18,948
Income before income taxes	176,525		219,761		14,813		(234,967)		176,132
State income tax expense	—		(60)		—		—		(60)
Net income	176,525		219,701		14,813		(234,967)		176,072
Allocation of net income attributable to noncontrolling interests	—		(2,743)		(4,027)		—		(6,770)


Net income attributable to the partners	$	176,525	$	216,958	$	10,786	$	(234,967)	$	169,302


Nine Months Ended September 30, 2020	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
Revenues:
Affiliates	$	—	$	278,767	$	19,216	$	—	$	297,983
Third parties	—		56,592		15,817		—		72,409
	—		335,359		35,033		—		370,392
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—		98,176		11,545		—		109,721
Depreciation and amortization	—		62,489		12,713		—		75,202
General and administrative	2,528		5,041		—		—		7,569
Goodwill impairment	—		35,653		—		—		35,653
	2,528		201,359		24,258		—		228,145
Operating income (loss)	(2,528)		134,000		10,775		—		142,247

Other income (expense):
Equity in earnings of subsidiaries	189,889		12,394		—		(202,283)		—
Equity in earnings of equity method investments	—		4,292		894		—		5,186
Interest expense	(42,542)		(3,108)		—		—		(45,650)
Interest income	26		7,792		16		—		7,834
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	214		3,358		4,867		—		8,439
	121,672		58,562		5,777		(202,283)		(16,272)
Income before income taxes	119,144		192,562		16,552		(202,283)		125,975
State income tax expense	—		(110)		—		—		(110)
Net income	119,144		192,452		16,552		(202,283)		125,865
Allocation of net income attributable to noncontrolling interests	—		(2,563)		(4,158)		—		(6,721)

Net income attributable to the partners	$	119,144	$	189,889	$	12,394	$	(202,283)	$	119,144