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HEP Holly Energy Partners

Filed: 5 May 21, 3:18pm

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 March 31, 2021
OR
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)
 ______________________________________________________________________________________
Delaware20-0833098
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2828 N. Harwood, Suite 1300
Dallas
Texas75201
(Address of principal executive offices) (Zip code)
(214) 871-3555
(Registrant’s telephone number, including area code)
________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to 12(b) of the Securities Exchange Act of 1934:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Limited Partner UnitsHEPNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth” company in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filerNon-accelerated filerSmaller 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 April 30, 2021, was 105,440,201.


HOLLY ENERGY PARTNERS, L.P.
INDEX
 
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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical fact included in this Form 10-Q, including, but not limited to, statements regarding funding of capital expenditures and distributions, distributable cash flow coverage and leverage targets, and statements under “Results of Operations” and “Liquidity and Capital Resources” in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I are forward-looking statements. Forward-looking statements use words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “intend,” “should,” “would,” “could,” “believe,” “may,” and similar expressions and statements regarding our plans and objectives for future operations are intended to identify forward-looking statements. These statements are based on our beliefs and assumptions and those of our general partner using currently available information and expectations as of the date hereof, are not guarantees of future performance and involve certain risks and uncertainties. Although we and our general partner believe that such expectations reflected in such forward-looking statements are reasonable, neither we nor our general partner can give assurance that our expectations will prove to be correct. All statements concerning our expectations for future results of operations are based on forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. Certain factors could cause actual results to differ materially from results anticipated in the forward-looking statements. These factors include, but are not limited to:
the extraordinary market environment and effects of the COVID-19 pandemic, including a significant decline in demand for refined petroleum products in markets we serve;
risks and uncertainties with respect to the actual quantities of petroleum products and crude oil shipped on our pipelines and/or terminalled, stored or throughput in our terminals and refinery processing units;
the economic viability of HollyFrontier Corporation (“HFC”), our other customers and our joint ventures’ other customers, including any refusal or inability of our or our joint ventures’ customers or counterparties to perform their obligations under their contracts;
the demand for refined petroleum products in the markets we serve;
our ability to purchase and integrate future acquired operations;
our ability to complete previously announced or contemplated acquisitions;
the availability and cost of additional debt and equity financing;
the possibility of temporary or permanent reductions in production or shutdowns at refineries utilizing our pipelines, terminal facilities and refinery processing units, due to reasons such as infection in the workforce, in response to reductions in demand or lower gross margins due to the economic impact of the COVID-19 pandemic, and any potential asset impairments resulting from such actions;
the effects of current and future government regulations and policies, including the effects of current and future restrictions on various commercial and economic activities in response to the COVID-19 pandemic;
delay by government authorities in issuing permits necessary for our business or our capital projects;
our and our joint venture partners’ ability to complete and maintain operational efficiency in carrying out routine operations and capital construction projects;
the possibility of terrorist or cyberattacks and the consequences of any such attacks;
general economic conditions, including uncertainty regarding the timing, pace and extent of an economic recovery in the United States;
the impact of recent or proposed changes in the tax laws and regulations that affect master limited partnerships; and
other financial, operational and legal risks and uncertainties detailed from time to time in our Securities and Exchange Commission filings.

Cautionary statements identifying important factors that could cause actual results to differ materially from our expectations are set forth in this Form 10-Q, including, without limitation, the forward-looking statements that are referred to above. You should not put any undue reliance on any forward-looking statements. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the year ended
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December 31, 2020, and in this Quarterly Report on Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All forward-looking statements included in this Form 10-Q and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands, except unit data)
March 31,
2021
December 31, 2020
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (Cushing Connect VIEs: $17,967 and $18,259, respectively)
$19,753 $21,990 
Accounts receivable:
Trade17,451 14,543 
Affiliates45,467 47,972 
62,918 62,515 
Prepaid and other current assets9,502 9,487 
Total current assets92,173 93,992 
Properties and equipment, net (Cushing Connect VIEs: $65,741 and $47,801, respectively)
1,432,799 1,450,685 
Operating lease right-of-use assets, net2,912 2,979 
Net investment in leases206,124 166,316 
Intangible assets, net83,813 87,315 
Goodwill223,650 234,684 
Equity method investments (Cushing Connect VIEs: $38,964 and $39,456, respectively)
118,265 120,544 
Other assets10,790 11,050 
Total assets$2,170,526 $2,167,565 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable:
Trade (Cushing Connect VIEs: $16,063 and $14,076, respectively)
$30,169 $28,280 
Affiliates10,190 18,120 
40,359 46,400 
Accrued interest4,661 10,892 
Deferred revenue14,089 11,368 
Accrued property taxes5,250 3,992 
Current operating lease liabilities882 875 
Current finance lease liabilities3,668 3,713 
Other current liabilities2,989 2,505 
Total current liabilities71,898 79,745 
Long-term debt1,388,335 1,405,603 
Noncurrent operating lease liabilities2,404 2,476 
Noncurrent finance lease liabilities67,309 68,047 
Other long-term liabilities11,907 12,905 
Deferred revenue35,314 40,581 
Class B unit53,743 52,850 
Equity:
Partners’ equity:
Common unitholders (105,440 units issued and outstanding
    at March 31, 2021 and December 31, 2020)
405,976 379,292 
Noncontrolling interests133,640 126,066 
Total equity539,616 505,358 
Total liabilities and equity$2,170,526 $2,167,565 
See accompanying notes.

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HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per unit data)
Three Months Ended
March 31,
20212020
Revenues:
Affiliates$101,926 $101,428 
Third parties25,257 26,426 
127,183 127,854 
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)41,365 34,981 
Depreciation and amortization25,065 23,978 
General and administrative2,968 2,702 
Goodwill impairment11,034 
80,432 61,661 
Operating income46,751 66,193 
Other income (expense):
Equity in earnings of equity method investments1,763 1,714 
Interest expense(13,240)(17,767)
Interest income6,548 2,218 
Gain on sales-type leases24,650 
Loss on early extinguishment of debt(25,915)
Gain on sale of assets and other502 506 
20,223 (39,244)
Income before income taxes66,974 26,949 
State income tax expense(37)(37)
Net income66,937 26,912 
Allocation of net income attributable to noncontrolling interests(2,540)(2,051)
Net income attributable to the partners64,397 24,861 
Limited partners’ per unit interest in earnings—basic and diluted$0.61 $0.24 
Weighted average limited partners’ units outstanding105,440 105,440 


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

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HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Three Months Ended
March 31,
20212020
Cash flows from operating activities
Net income$66,937 $26,912 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization25,065 23,978 
(Gain) loss on sale of assets(262)(417)
Loss on early extinguishment of debt25,915 
Gain on sales-type leases(24,650)
Goodwill impairment11,034 
Amortization of deferred charges844 799 
Equity-based compensation expense683 506 
Equity in earnings of equity method investments, net of distributions(617)(1,164)
(Increase) decrease in operating assets:
Accounts receivable—trade506 3,093 
Accounts receivable—affiliates2,505 11,310 
Prepaid and other current assets463 126 
Increase (decrease) in operating liabilities:
Accounts payable—trade8,565 2,921 
Accounts payable—affiliates(7,930)(10,344)
Accrued interest(6,232)(8,511)
Deferred revenue4,013 (184)
Accrued property taxes1,258 1,908 
Other current liabilities484 760 
Other, net(524)339 
Net cash provided by operating activities82,142 77,947 
Cash flows from investing activities
Additions to properties and equipment(33,218)(18,942)
Investment in Cushing Connect JV Terminal(2,345)
Proceeds from sale of assets283 417 
Distributions in excess of equity in earnings of equity investments2,897 
Net cash used for investing activities(30,038)(20,870)
Cash flows from financing activities
Borrowings under credit agreement73,000 112,000 
Repayments of credit agreement borrowings(90,500)(67,000)
Redemption of senior notes(522,500)
Proceeds from issuance of debt500,000 
Contributions from general partner354 
Contributions from noncontrolling interests6,332 7,304 
Distributions to HEP unitholders(38,328)(68,519)
Distributions to noncontrolling interests(3,819)(3,000)
Payments on finance leases(958)(1,096)
Deferred financing costs(8,478)
Units withheld for tax withholding obligations(68)(147)
Net cash used by financing activities(54,341)(51,082)
Cash and cash equivalents
Increase (decrease) for the period(2,237)5,995 
Beginning of period21,990 13,287 
End of period$19,753 $19,282 
Supplemental disclosure of cash flow information:
Cash paid during the period for interest$18,674$25,168
See accompanying notes.
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HOLLY ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
 
Common
Units
Noncontrolling InterestsTotal Equity
 
Balance December 31, 2020$379,292 $126,066 $505,358 
Capital contribution - Cushing Connect— 9,746 9,746 
Distributions to HEP unitholders(38,328)— (38,328)
Distributions to noncontrolling interests— (3,819)(3,819)
Amortization of restricted and performance units683 — 683 
Class B unit accretion(893)— (893)
   Other(68)— (68)
Net income65,290 1,647 66,937 
Balance March 31, 2021$405,976 $133,640 $539,616 

Common
Units
Noncontrolling InterestsTotal Equity
 
Balance December 31, 2019$381,103 $106,655 $487,758 
Capital Contribution-Cushing Connect— 7,304 7,304 
Distributions to HEP unitholders(68,519)— (68,519)
Distributions to noncontrolling interests— (3,000)(3,000)
Equity-based compensation506 — 506 
Class B unit accretion(835)— (835)
Other208 — 208 
Net income25,696 1,216 26,912 
Balance March 31, 2020$338,159 $112,175 $450,334 

See accompanying notes.


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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 March 31, 2021, HollyFrontier Corporation (“HFC”) and its subsidiaries own a 57% limited partner interest and the non-economic general partner interest in HEP. We commenced operations on July 13, 2004, upon the completion of our initial public offering. In these consolidated financial statements, the words “we,” “our,” “ours” and “us” refer to HEP unless the context otherwise indicates.

We own and operate petroleum product and crude oil pipelines, terminal, tankage and loading rack facilities and refinery processing units that support refining and marketing operations of HFC and other refineries in the Mid-Continent, Southwest and Northwest regions of the United States. Additionally, we own a 75% interest in UNEV Pipeline, LLC (“UNEV”), a 50% interest in Osage Pipe Line Company, LLC (“Osage”), a 50% interest in Cheyenne Pipeline LLC, and a 50% interest in Cushing Connect Pipeline & Terminal LLC.

On June 1, 2020, HFC announced plans to permanently cease petroleum refining operations at its Cheyenne Refinery (the “Cheyenne Refinery”) and to convert certain assets at that refinery to renewable diesel production. HFC subsequently began winding down petroleum refining operations at the Cheyenne Refinery on August 3, 2020.

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

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 15.

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

The consolidated financial statements included herein have been prepared without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The interim financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of our results for the interim periods. Such adjustments are considered to be of a normal recurring nature. Although certain notes and other information required by U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020. Results of operations for interim periods are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2021.

Principles of Consolidation and Common Control Transactions
The consolidated financial statements include our accounts and those of subsidiaries and joint ventures that we control. All significant intercompany transactions and balances have been eliminated.

Most of our acquisitions from HFC occurred while we were a consolidated variable interest entity (“VIE”) of HFC. Therefore, as an entity under common control with HFC, we recorded these acquisitions on our balance sheets at HFC's historical basis instead of our purchase price or fair value.

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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 amortized. We test goodwill at the reporting unit level for impairment annually and between annual tests if events or changes in circumstances indicate the carrying amount may exceed fair value. Our goodwill impairment testing first entails a comparison of our reporting unit fair values relative to their respective carrying values, including goodwill. If carrying value exceeds the estimated fair value for a reporting unit, we measure goodwill impairment as the excess of the carrying amount of the reporting unit over the estimated fair value of the reporting unit.

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

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

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

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

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.
The majority of our long-term transportation contracts specify minimum volume requirements, whereby, we bill a customer for a minimum level of shipments in the event a customer ships below their contractual requirements. If there are no future performance obligations, we will recognize these deficiency payments in revenue.
In certain of these throughput agreements, a customer may later utilize such shortfall billings as credit towards future volume shipments in excess of its minimum levels within its respective contractual shortfall make-up period. Such amounts represent an obligation to perform future services, which may be initially deferred and later recognized as revenue based on estimated future shipping levels, including the likelihood of a customer’s ability to utilize such amounts prior to the end of the contractual shortfall make-up period. We recognize these deficiency payments in revenue when we do not expect we will be required to satisfy these performance obligations in the future based on the pattern of rights projected to be exercised by the customer. During the three months ended March 31, 2021 and 2020, we recognized $3.8 million and $7.5 million, respectively, of these
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deficiency payments in revenue, of which $0.5 million and $0.7 million, respectively, related to deficiency payments billed in prior periods.
We have other cost reimbursement provisions in our throughput / storage agreements providing that customers (including HFC) reimburse us for certain costs. Such reimbursements are recorded as revenue or deferred revenue depending on the nature of the cost. Deferred revenue is recognized over the remaining contractual term of the related throughput agreement.

Leases
We adopted 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

Credit Losses Measurement
In June 2016, ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” was issued requiring measurement of all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. We adopted this standard effective January 1, 2020, and adoption of the standard did not have a material impact on our financial condition, results of operations or cash flows.


Note 2:Investment in Joint Venture

On October 2, 2019, HEP Cushing LLC (“HEP Cushing”), a wholly-owned subsidiary of HEP, and Plains Marketing, L.P. (“PMLP”), a wholly-owned subsidiary of Plains All American Pipeline, L.P. (“Plains”), formed a 50/50 joint venture, Cushing Connect Pipeline & Terminal LLC (the “Cushing Connect Joint Venture”), for (i) the development and construction of a new 160,000 barrel per day common carrier crude oil pipeline (the “Cushing Connect Pipeline”) that will connect the Cushing, Oklahoma crude oil hub to the Tulsa, Oklahoma refining complex owned by a subsidiary of HFC and (ii) the ownership and operation of 1.5 million barrels of crude oil storage in Cushing, Oklahoma (the “Cushing Connect JV Terminal”). The Cushing Connect JV Terminal went in service during the second quarter of 2020, and the Cushing Connect Pipeline is expected to be placed in service 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
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total Cushing Connect Joint Venture investment will generally be shared equally among the partners, and HEP estimates its share of the cost of the Cushing Connect JV Terminal contributed by Plains and Cushing Connect Pipeline construction costs will be approximately $65 million to $70 million. However, we are solely responsible for any Cushing Connect Pipeline construction costs which exceed 10% of the budget.

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

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


Note 3:Revenues

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. See Note 1 for further discussion of revenue recognition.

Disaggregated revenues are as follows:
Three Months Ended
March 31,
20212020
(In thousands)
Pipelines$66,505 $70,472 
Terminals, tanks and loading racks38,182 37,498 
Refinery processing units22,496 19,884 
$127,183 $127,854 

Revenues on our consolidated statements of income were composed of the following lease and service revenues:
Three Months Ended
March 31,
20212020
(In thousands)
Lease revenues$87,944 $93,185 
Service revenues39,239 34,669 
$127,183 $127,854 
A contract liability exists when an entity is obligated to perform future services for a customer for which the entity has received consideration. Since HEP may be required to perform future services for these deficiency payments received, the deferred revenues on our balance sheets were considered contract liabilities. A contract asset exists when an entity has a right to
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consideration in exchange for goods or services transferred to a customer. Our consolidated balance sheets included the contract assets and liabilities in the table below:
March 31,
2021
December 31,
2020
 (In thousands)
Contract assets$6,425 $6,306 
Contract liabilities$(500)$(500)

The contract assets and liabilities include both lease and service components. During the three months ended March 31, 2021, we recognized $0.5 million of revenue that was previously included in contract liability as of December 31, 2020. During the three months ended March 31, 2021, we also recognized $0.1 million of revenue included in contract assets.

As of March 31, 2021, we expect to recognize $1.9 billion in revenue related to our unfulfilled performance obligations under the terms of our long-term throughput agreements and leases expiring in 2021 through 2036. These agreements generally provide for changes in the minimum revenue guarantees annually for increases or decreases in the Producer Price Index (“PPI”) or Federal Energy Regulatory Commission (“FERC”) index, with certain contracts having provisions that limit the level of the rate increases or decreases. We expect to recognize revenue for these unfulfilled performance obligations as shown in the table below (amounts shown in table include both service and lease revenues):
Years Ending December 31,(In millions)
Remainder of 2021$253 
2022310 
2023274 
2024236 
2025171 
2026156 
Thereafter479 
Total$1,879 
Payment terms under our contracts with customers are consistent with industry norms and are typically payable within 10 to 30 days of the date of invoice.


Note 4:Leases

We adopted ASC 842 effective January 1, 2019, and elected to adopt using the modified retrospective transition method and practical expedients, both of which are provided as options by the standard and further defined in Note 1. See Note 1 for further discussion of lease accounting.

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 24 years, some of which include options to extend the leases for up to 10 years.

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Finance Lease Obligations
We have finance lease obligations related to vehicle leases with initial terms of 33 to 48 months. The total cost of assets under finance leases was $6.1 million and $6.4 million as of March 31, 2021 and December 31, 2020, respectively, with accumulated depreciation of $3.1 million and $3.4 million as of March 31, 2021 and December 31, 2020, respectively. We include depreciation of finance leases in depreciation and amortization in our consolidated statements of income.

In addition, we have a finance lease obligation related to a pipeline lease with an initial term of 10 years with 1 remaining subsequent renewal option for an additional 10 years.

Supplemental balance sheet information related to leases was as follows (in thousands, except for lease term and discount rate):
March 31,
2021
December 31, 2020
Operating leases:
   Operating lease right-of-use assets, net$2,912 $2,979 
   Current operating lease liabilities882 875 
   Noncurrent operating lease liabilities2,404 2,476 
      Total operating lease liabilities$3,286 $3,351 
Finance leases:
   Properties and equipment$6,053 $6,410 
   Accumulated amortization(3,089)(3,390)
      Properties and equipment, net$2,964 $3,020 
   Current finance lease liabilities$3,668 $3,713 
   Noncurrent finance lease liabilities67,309 68,047 
      Total finance lease liabilities$70,977 $71,760 
Weighted average remaining lease term (in years)
   Operating leases5.75.9
   Finance leases15.715.9
Weighted average discount rate
   Operating leases4.9%4.8%
   Finance leases5.6%5.6%


Supplemental cash flow and other information related to leases were as follows:
Three Months Ended
March 31,
20212020
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows on operating leases$312 $282 
Operating cash flows on finance leases$1,058 $1,077 
Financing cash flows on finance leases$958 $1,096 
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Maturities of lease liabilities were as follows:
March 31, 2021
OperatingFinance
(In thousands)
2021$747 $5,537 
2022688 7,332 
2023607 7,375 
2024494 6,918 
2025426 6,456 
2026 and thereafter750 73,888 
   Total lease payments3,712 107,506 
Less: Imputed interest(426)(36,529)
   Total lease obligations3,286 70,977 
Less: Current lease liabilities(882)(3,668)
   Noncurrent lease liabilities$2,404 $67,309 

The components of lease expense were as follows:
Three Months Ended
March 31,
20212020
(In thousands)
Operating lease costs$298 $273 
Finance lease costs
   Amortization of assets212 242 
   Interest on lease liabilities1,006 1,037 
Variable lease cost66 49 
Total net lease cost$1,582 $1,601 

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

During the three months ended March 31, 2021, we entered into new agreements and modified other agreements with HFC related to our Cheyenne assets, Tulsa West lube racks, and various crude tanks. These agreements met the criteria of sales-type leases since the underlying assets are not expected to have an alternative use at the end of the lease terms to anyone other than HFC. Under sales-type lease accounting, at the commencement date, the lessor recognizes a net investment in the lease, based on the estimated fair value of the underlying leased assets at contract inception, and derecognizes the underlying assets with the difference recorded as selling profit or loss arising from the lease. Therefore, we recognized a gain on sales-type leases during the three months ended March 31, 2021 composed of the following:
(In thousands)
Net investment in leases$41,246 
Properties and equipment, net(23,155)
Deferred revenue6,559 
Gain on sales-type leases$24,650 

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

Lease income recognized was as follows:
Three Months Ended
March 31,
20212020
(In thousands)
Operating lease revenues$85,892 $91,388 
Direct financing lease interest income524 524 
Gain on sales-type leases24,650 
Sales-type lease interest income6,025 1,655 
Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable2,052 1,797 
For our sales-type leases, we included customer obligations related to minimum volume requirements in guaranteed minimum lease payments. Portions of our minimum guaranteed pipeline tariffs for assets subject to sales-type lease accounting are recorded as interest income with the remaining amounts recorded as a reduction in net investment in leases. We recognized any billings for throughput volumes in excess of minimum volume requirements as variable lease payments, and these variable lease payments were recorded in lease revenues.

Annual minimum undiscounted lease payments under our leases were as follows as of March 31, 2021:
OperatingFinanceSales-type
Years Ending December 31,(In thousands)
Remainder of 2021$212,736 $1,598 $20,900 
2022282,394 2,145 27,867 
2023251,943 2,162 23,961 
2024215,839 2,179 20,732 
2025152,925 2,196 17,305 
2026 and thereafter553,945 38,591 133,315 
Total lease receipt payments$1,669,782 $48,871 $244,080 
Less: Imputed interest(32,436)(189,424)
16,435 54,656 
Unguaranteed residual assets at end of leases139,121 
Net investment in leases$16,435 $193,777 

Net investments in leases recorded on our balance sheet were composed of the following:
March 31, 2021December 31, 2020
Sales-type LeasesDirect Financing LeasesSales-type LeasesDirect Financing Leases
(In thousands)(In thousands)
Lease receivables (1)
$122,514 $16,435 $88,922 $16,452 
Unguaranteed residual assets71,263 64,551 
Net investment in leases$193,777 $16,435 $153,473 $16,452 

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


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Note 5:Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are derived using inputs (assumptions that market participants would use in pricing an asset or liability) including assumptions about risk. GAAP categorizes inputs used in fair value measurements into three broad levels as follows:
(Level 1) Quoted prices in active markets for identical assets or liabilities.
(Level 2) Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, similar assets and liabilities in markets that are not active or can be corroborated by observable market data.
(Level 3) Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes valuation techniques that involve significant unobservable inputs.

Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and debt. The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. Debt consists of outstanding principal under our revolving credit agreement (which approximates fair value as interest rates are reset frequently at current interest rates) and our fixed interest rate senior notes.

The carrying amounts and estimated fair values of our senior notes were as follows:
 March 31, 2021December 31, 2020
Financial InstrumentFair Value Input LevelCarrying
Value
Fair ValueCarrying
Value
Fair Value
(In thousands)
Liabilities:
5% Senior NotesLevel 2492,335 504,960 492,103 506,540 

Level 2 Financial Instruments
Our senior notes are measured at fair value using Level 2 inputs. The fair value of the senior notes is based on market values provided by a third-party bank, which were derived using market quotes for similar type debt instruments. See Note 9 for additional information.

Non-Recurring Fair Value Measurements
For gains on sales-type leases recognized during three months ended March 31, 2021, the estimated fair value of the underlying leased assets at contract inception and the present value of the estimated unguaranteed residual asset at the end of the lease term are used in determining the net investment in leases and related gain on sales-type leases recorded. The asset valuation estimates include Level 3 inputs based on a replacement cost valuation method.

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


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Note 6:Properties and Equipment 

The carrying amounts of our properties and equipment were as follows:
March 31,
2021
December 31,
2020
 (In thousands)
Pipelines, terminals and tankage1
$1,554,870 $1,575,815 
Refinery assets348,882 348,882 
Land and right of way87,076 87,076 
Construction in progress79,762 58,467 
Other1
45,471 46,201 
2,116,061 2,116,441 
Less accumulated depreciation(683,262)(665,756)
$1,432,799 $1,450,685 

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

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


Note 7:Intangible Assets

Intangible assets include transportation agreements and customer relationships that represent a portion of the total purchase price of certain assets acquired from Delek in 2005, from HFC in 2008 prior to HEP becoming a consolidated VIE of HFC, from Plains in 2017, and from other minor acquisitions in 2018.

The carrying amounts of our intangible assets were as follows:
Useful LifeMarch 31,
2021
December 31,
2020
 (In thousands)
Delek transportation agreement30 years$59,933 $59,933 
HFC transportation agreement10-15 years75,131 75,131 
Customer relationships10 years69,683 69,683 
Other20 years50 50 
204,797 204,797 
Less accumulated amortization(120,984)(117,482)
$83,813 $87,315 

Amortization expense was $3.5 million for the three months ended March 31, 2021 and 2020, respectively. We estimate amortization expense to be $14.0 million for 2022, $9.9 million in 2023, and $9.1 million for 2024 through 2026.

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


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Note 8:Employees, Retirement and Incentive Plans

Direct support for our operations is provided by Holly Logistic Services, L.L.C. (“HLS”), an HFC subsidiary, which utilizes personnel employed by HFC who are dedicated to performing services for us. Their costs, including salaries, bonuses, payroll taxes, benefits and other direct costs, are charged to us monthly in accordance with an omnibus agreement that we have with HFC (the “Omnibus Agreement”). These employees participate in the retirement and benefit plans of HFC. Our share of retirement and benefit plan costs was $2.2 million for each of the three months ended March 31, 2021 and 2020.

Under HLS’s secondment agreement with HFC (the “Secondment Agreement”), certain employees of HFC are seconded to HLS to provide operational and maintenance services for certain of our processing, refining, pipeline and tankage assets, and HLS reimburses HFC for its prorated portion of the wages, benefits, and other costs related to these employees.
We have a Long-Term Incentive Plan for employees and non-employee directors who perform services for us. The Long-Term Incentive Plan consists of 4 components: restricted or phantom units, performance units, unit options and unit appreciation rights. Our accounting policy for the recognition of compensation expense for awards with pro-rata vesting (a significant proportion of our awards) is to expense the costs ratably over the vesting periods.

As of March 31, 2021, we had 2 types of incentive-based awards outstanding, which are described below. The compensation cost charged against income was $0.7 million and $0.5 million for the three months ended March 31, 2021 and 2020, respectively. We currently purchase units in the open market instead of issuing new units for settlement of all unit awards under our Long-Term Incentive Plan. As of March 31, 2021, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which 855,049 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.

A summary of phantom unit activity and changes during the three months ended March 31, 2021, is presented below:
Phantom UnitsUnitsWeighted Average Grant-Date Fair Value
Outstanding at January 1, 2021 (nonvested)295,992 $14.48 
Forfeited(870)16.17 
Outstanding at March 31, 2021 (nonvested)295,122 14.48 

NaN phantom units vested and transferred to recipients during the three months ended March 31, 2021 . As of March 31, 2021, $2.6 million of total unrecognized compensation expense related to unvested phantom unit grants is expected to be recognized over a weighted-average period of 1.5 years.

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

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

A summary of performance unit activity and changes for the three months ended March 31, 2021, is presented below:
Performance UnitsUnits
Outstanding at January 1, 2021 (nonvested)77,472 
Vesting and transfer of common units to recipients(10,881)
Outstanding at March 31, 2021 (nonvested)66,591 

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

During the three months ended March 31, 2021, we did not purchase any of our common units in the open market for the issuance and settlement of unit awards under our Long-Term Incentive Plan.


Note 9:Debt

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

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

We may prepay all loans at any time without penalty, except for tranche breakage costs. If an event of default exists under the Amended Credit Agreement, the lenders will be able to accelerate the maturity of all loans outstanding and exercise other rights and remedies. We were in compliance with the covenants under the Credit Agreement as of March 31, 2021.

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

The 5% Senior Notes are unsecured and impose certain restrictive covenants, including limitations on our ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. We were in compliance with the restrictive covenants for the 5% Senior Notes as of March 31, 2021. At any time when the 5% Senior Notes are rated investment grade by either Moody’s or Standard & Poor’s and no default or event of default exists, we will not be subject to many of the foregoing covenants. Additionally, we have certain redemption rights at varying premiums over face value under the 5% Senior Notes.
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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).

Long-term Debt
The carrying amounts of our long-term debt were as follows:
March 31,
2021
December 31,
2020
(In thousands)
Credit Agreement
Amount outstanding$896,000 $913,500 
5% Senior Notes
Principal500,000 500,000 
Unamortized premium and debt issuance costs(7,665)(7,897)
492,335 492,103 
Total long-term debt$1,388,335 $1,405,603 



Note 10:Related Party Transactions

We serve HFC’s refineries under long-term pipeline, terminal and tankage throughput agreements, and refinery processing unit tolling agreements expiring from 2021 to 2036, and revenues from these agreements accounted for 80% of our total revenues for the three months ended March 31, 2021. Under these agreements, HFC agrees to transport, store and process throughput volumes of refined product, crude oil and feedstocks on our pipelines, terminals, tankage, loading rack facilities and refinery processing units that result in minimum annual payments to us. These minimum annual payments or revenues are subject to annual rate adjustments on July 1st each year generally based on increases or decreases in PPI or the FERC index. As of March 31, 2021, these agreements with HFC require minimum annualized payments to us of $338 million.

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

Under certain provisions of the Omnibus Agreement, we pay HFC an annual administrative fee (currently $2.6 million) for the provision by HFC or its affiliates of various general and administrative services to us. This fee does not include the salaries of personnel employed by HFC who perform services for us on behalf of HLS or the cost of their employee benefits, which are charged to us separately by HFC. Also, we reimburse HFC and its affiliates for direct expenses they incur on our behalf.

Related party transactions with HFC were as follows:
Revenues received from HFC were $101.9 million and $101.4 million for the three months ended March 31, 2021 and 2020, respectively.
HFC charged us general and administrative services under the Omnibus Agreement of $0.7 million for both the three months ended March 31, 2021 and 2020.
We reimbursed HFC for costs of employees supporting our operations of $14.4 million and $14.1 million for the three months ended March 31, 2021 and 2020, respectively.
HFC reimbursed us $3.1 million for both the three months ended March 31, 2021 and 2020 for expense and capital projects..
We distributed $20.9 million and $37.6 million in the three months ended March 31, 2021 and 2020, respectively, to HFC as regular distributions on its common units.
Accounts receivable from HFC were $45.5 million and $48.0 million at March 31, 2021, and December 31, 2020, respectively.
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Accounts payable to HFC were $10.2 million and $18.1 million at March 31, 2021, and December 31, 2020, respectively.
Deferred revenue in the consolidated balance sheets included $0.4 million for both March 31, 2021 and December 31, 2020, relating to certain shortfall billings to HFC.
We received direct financing lease payments from HFC for use of our Artesia and Tulsa rail yards of $0.5 million for both of the three months ended March 31, 2021 and 2020.
We recorded a gain on sales-type leases with HFC of $24.7 million for the three months ended March 31, 2021, and we received sales-type lease payments of $6.2 million and $2.4 million from HFC that were not recorded in revenues for the three months ended March 31, 2021 and 2020, respectively.
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 use of certain HEP tank and rack assets in the Cheyenne Refinery to facilitate renewable diesel production with an annual lease payment of approximately $5 million, (2) a five-year contango service fee arrangement that will utilize HEP tank assets inside the Cheyenne Refinery where HFC will pay a base tariff to HEP for available crude oil storage and HFC and HEP will split any profits generated on crude oil contango opportunities and (3) a $10 million one-time cash payment from HFC to HEP for the termination of the existing minimum volume commitment.


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

As of March 31, 2021, HFC held 59,630,030 of our common units, constituting a 57% limited partner interest in us, and held the non-economic general partner interest.

Continuous Offering Program
We have a continuous offering program under which we may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200 million. As of March 31, 2021, HEP has issued 2,413,153 units under this program, providing $82.3 million in gross proceeds.

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

Cash Distributions
On April 22, 2021, we announced our cash distribution for the first quarter of 2021 of $0.35 per unit. The distribution is payable on all common units and will be paid May 13, 2021, to all unitholders of record on May 3, 2021.

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


Note 12: 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 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 percentage during the period, after consideration of any priority allocations of earnings. Our dilutive securities are immaterial for all periods presented.
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Net income per limited partner unit is computed as follows:
Three Months Ended
March 31,
20212020
(In thousands, except per unit data)
Net income attributable to the partners$64,397 $24,861 
Less: Participating securities’ share in earnings(225)
Net income attributable to common units64,172 24,861 
Weighted average limited partners' units outstanding105,440 105,440 
Limited partners' per unit interest in earnings - basic and diluted$0.61 $0.24 


Note 13:Environmental

We expensed $33 thousand and $0.2 million for the three months ended March 31, 2021 and 2020, respectively for environmental remediation obligations. The accrued environmental liability, net of expected recoveries from indemnifying parties, reflected in our consolidated balance sheets was $4.4 million and $4.5 million at March 31, 2021 and December 31, 2020, respectively, of which $2.3 million and $2.5 million, was classified as other long-term liabilities at March 31, 2021 and December 31, 2020. These accruals include remediation and monitoring costs expected to be incurred over an extended period of time.

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


Note 14: Contingencies

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


Note 15: Segment Information

Although financial information is reviewed by our chief operating decision makers from a variety of perspectives, they view the business in 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.
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Three Months Ended
March 31,
20212020
(In thousands)
Revenues:
Pipelines and terminals - affiliate$79,430 $81,544 
Pipelines and terminals - third-party25,257 26,426 
Refinery processing units - affiliate22,496 19,884 
Total segment revenues$127,183 $127,854 
Segment operating income:
Pipelines and terminals(1)
$41,484 $58,903 
Refinery processing units8,235 9,992 
Total segment operating income49,719 68,895 
Unallocated general and administrative expenses(2,968)(2,702)
Interest and financing costs, net(6,692)(15,549)
Loss on early extinguishment of debt(25,915)
Equity in earnings of equity method investments1,763 1,714 
Gain on sales-type leases24,650 
Gain (loss) on sale of assets and other502 506 
Income before income taxes$66,974 $26,949 
Capital Expenditures:
  Pipelines and terminals$33,218 $18,618 
  Refinery processing units324 
Total capital expenditures$33,218 $18,942 

March 31, 2021December 31, 2020
(In thousands)
Identifiable assets:
  Pipelines and terminals (2)
$1,739,414 $1,729,547 
  Refinery processing units300,363 305,090 
Other130,749 132,928 
Total identifiable assets$2,170,526 $2,167,565 

(1) Pipelines and terminals segment operating income includes goodwill impairment charge of $11.0 million for the three months ended March 31, 2021.
(2) Includes goodwill of $223.7 million as of March 31, 2021 and $234.7 million as of December 31, 2020.

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Note 16: Supplemental Guarantor/Non-Guarantor Financial Information

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

The following financial information presents condensed consolidating balance sheets, statements of 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.
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Condensed Consolidating Balance Sheet
March 31, 2021ParentGuarantor
Restricted Subsidiaries
Non-Guarantor Non-Restricted SubsidiariesEliminationsConsolidated
 (In thousands)
ASSETS
Current assets:
Cash and cash equivalents$2,125 $(838)$18,466 $$19,753 
Accounts receivable54,301 8,919 (302)62,918 
Prepaid and other current assets501 8,252 749 9,502 
Total current assets2,626 61,715 28,134 (302)92,173 
Properties and equipment, net1,054,969 377,830 1,432,799 
Operating lease right-of-use assets2,773 139 2,912 
Net investment in leases206,124 206,124 
Investment in subsidiaries
1,793,064 290,948 (2,084,012)
Intangible assets, net83,813 83,813 
Goodwill223,650 223,650 
Equity method investments79,301 38,964 118,265 
Other assets3,671 7,119 10,790 
Total assets$1,799,361 $2,010,412 $445,067 $(2,084,314)$2,170,526 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable$$22,978 $17,683 $(302)$40,359 
Accrued interest4,661 4,661 
Deferred revenue13,589 500 14,089 
Accrued property taxes3,488 1,762 5,250 
Current operating lease liabilities810 72 882 
Current finance lease liabilities3,668 3,668 
Other current liabilities129 2,848 12 2,989 
Total current liabilities4,790 47,381 20,029 (302)71,898 
Long-term debt1,388,335 1,388,335 
Noncurrent operating lease liabilities2,404 2,404 
Noncurrent finance lease liabilities67,309 67,309 
Other long-term liabilities260 11,197 450 11,907 
Deferred revenue35,314 35,314 
Class B unit53,743 53,743 
Equity - partners405,976 1,793,064 290,948 (2,084,012)405,976 
Equity - noncontrolling interests133,640 133,640 
Total liabilities and equity$1,799,361 $2,010,412 $445,067 $(2,084,314)$2,170,526 
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Condensed Consolidating Balance Sheet
December 31, 2020ParentGuarantor
Restricted Subsidiaries
Non-Guarantor Non-Restricted SubsidiariesEliminationsConsolidated
 (In thousands)
ASSETS
Current assets:
Cash and cash equivalents$1,627 $(987)$21,350 $$21,990 
Accounts receivable56,522 6,308 (315)62,515 
Prepaid and other current assets349 8,366 772 9,487 
Total current assets1,976 63,901 28,430 (315)93,992 
Properties and equipment, net1,087,184 363,501 1,450,685 
Operating lease right-of-use assets2,822 157 2,979 
Net investment in leases166,316 166,316 
Investment in subsidiaries1,789,808 286,883 (2,076,691)
Intangible assets, net87,315 87,315 
Goodwill234,684 234,684 
Equity method investments81,089 39,455 120,544 
Other assets4,268 6,782 11,050 
Total assets$1,796,052 $2,016,976 $431,543 $(2,077,006)$2,167,565 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable$$30,252 $16,463 $(315)$46,400 
Accrued interest10,892 10,892 
Deferred revenue10,868 500 11,368 
Accrued property taxes2,915 1,077 3,992 
Current operating lease liabilities804 71 875 
Current finance lease liabilities3,713 3,713 
Other current liabilities2,491 2,505 
Total current liabilities10,897 51,043 18,120 (315)79,745 
Long-term debt1,405,603 1,405,603 
Noncurrent operating lease liabilities2,476 2,476 
Noncurrent finance lease liabilities68,047 68,047 
Other long-term liabilities260 12,171 474 12,905 
Deferred revenue40,581 40,581 
Class B unit52,850 52,850 
Equity - partners379,292 1,789,808 286,883 (2,076,691)379,292 
Equity - noncontrolling interests126,066 126,066 
Total liabilities and equity$1,796,052 $2,016,976 $431,543 $(2,077,006)$2,167,565 



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Condensed Consolidating Statement of Income
Three Months Ended March 31, 2021ParentGuarantor Restricted
Subsidiaries
Non-Guarantor Non-restricted SubsidiariesEliminationsConsolidated
 (In thousands)
Revenues:
Affiliates$$95,701 $6,225 $$101,926 
Third parties19,051 6,206 25,257 
114,752 12,431 127,183 
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)37,799 3,566 41,365 
Depreciation and amortization20,836 4,229 25,065 
General and administrative1,178 1,790 2,968 
Goodwill impairment11,034 11,034 
1,178 71,459 7,795 80,432 
Operating income (loss)(1,178)43,293 4,636 46,751 
Other income (expense):
Equity in earnings of subsidiaries77,809 4,136 (81,945)
Equity in earnings of equity method investments0618 1,145 1,763 
Interest expense(12,234)(1,006)(13,240)
Interest income06,548 6,548 
Gain on sales-type lease24,650 24,650 
Other income501 502 
65,575 35,447 1,146 (81,945)20,223 
Income before income taxes64,397 78,740 5,782 (81,945)66,974 
State income tax expense(37)(37)
Net income64,397 78,703 5,782 (81,945)66,937 
Allocation of net income attributable to noncontrolling interests(893)(1,647)(2,540)
Net income attributable to the partners$64,397 $77,810 $4,135 $(81,945)$64,397 

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Condensed Consolidating Statement of Income
Three Months Ended March 31, 2020ParentGuarantor
Restricted Subsidiaries
Non-Guarantor Non-Restricted SubsidiariesEliminationsConsolidated
 (In thousands)
Revenues:
Affiliates$$94,755 $6,673 $$101,428 
Third parties19,155 7,271 26,426 
113,910 13,944 127,854 
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)31,131 3,850 34,981 
Depreciation and amortization019,753 4,225 23,978 
General and administrative1,099 1,603 2,702 
1,099 52,487 8,075 61,661 
Operating income (loss)(1,099)61,423 5,869 66,193 
Other income (expense):
Equity in earnings of subsidiaries68,535 4,295 (72,830)
Equity in earnings of equity method investments2,088 (374)1,714 
Interest expense(16,730)(1,037)(17,767)
Interest income2,218 2,218 
Loss on early extinguishment of debt(25,915)(25,915)
Gain on sale of assets and other70 420 16 506 
25,960 7,984 (358)(72,830)(39,244)
Income before income taxes24,861 69,407 5,511 (72,830)26,949 
State income tax expense(37)(37)
Net income24,861 69,370 5,511 (72,830)26,912 
Allocation of net income attributable to noncontrolling interests(835)(1,216)(2,051)
Net income attributable to the partners$24,861 $68,535 $4,295 $(72,830)$24,861 


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

This Item 2, including but not limited to the sections under “Results of Operations” and “Liquidity and Capital Resources,” contains forward-looking statements. See “Forward-Looking Statements” at the beginning of Part I of this Quarterly Report on Form 10-Q. In this document, the words “we,” “our,” “ours” and “us” refer to Holly Energy Partners, L.P. (“HEP”) and its consolidated subsidiaries or to HEP or an individual subsidiary and not to any other person.


OVERVIEW

HEP is a Delaware limited partnership. Through our subsidiaries and joint ventures, we own and/or operate petroleum product and crude oil pipelines, terminal, tankage and loading rack facilities and refinery processing units that support the refining and marketing operations of HollyFrontier Corporation (“HFC”) and other refineries in the Mid-Continent, Southwest and Northwest regions of the United States. HEP, through its subsidiaries and joint ventures, owns and/or operates petroleum product and crude pipelines, tankage and terminals in Texas, New Mexico, Washington, Idaho, Oklahoma, Utah, Nevada, Wyoming and Kansas as well as refinery processing units in Utah and Kansas. HFC owned 57% of our outstanding common units and the non-economic general partnership interest as of March 31, 2021.

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

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

Impact of COVID-19 on Our Business
Our business depends in large part on the demand for the various petroleum products we transport, terminal and store in the markets we serve. The impact of the COVID-19 pandemic on the global macroeconomy has created diminished demand, as well as lack of forward visibility, for refined products and crude oil transportation, and for the terminalling and storage services that we provide. Over the course of the last three quarters, demand for transportation fuels showed incremental improvement over the second quarter of 2020. We expect our customers will continue to adjust refinery production levels commensurate with market demand and ultimately expect demand to return to pre-COVID-19 levels.

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

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

The extent to which HEP’s future results are affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic, additional actions by businesses and governments in response to the pandemic and the speed and effectiveness of responses to combat the virus. However, we have long-term customer contracts with minimum volume commitments, which have expiration dates from 2021 to 2036. These minimum volume commitments accounted for approximately 71% and 76% of our total revenues in the three months ended March 31, 2021 and the twelve months ended December 31, 2020, respectively. We are currently not aware of any reasons that would prevent such customers from making the minimum payments required under the contracts or potentially making payments in excess of the minimum payments, other than with respect to the agreement reached with HFC with respect to HEP’s Cheyenne assets, which became effective on January 1, 2021 and is discussed below. In addition to these payments, we
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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. 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, 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 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 is expected to be placed in service 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 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, and HEP estimates its share of the cost of the Cushing Connect JV Terminal contributed by Plains and Cushing Connect Pipeline construction costs are approximately $65 million to $70 million. However, we are solely responsible for any Cushing Connect Pipeline construction costs which exceed 10% of the budget.

Agreements with HFC
We serve HFC's refineries under long-term pipeline, terminal, tankage and refinery processing unit throughput agreements expiring from 2021 to 2036. Under these agreements, HFC agrees to transport, store, and process throughput volumes of refined product, crude oil and feedstocks on our pipelines, terminal, tankage, loading rack facilities and refinery processing units that result in minimum annual payments to us. These minimum annual payments or revenues are subject to annual rate adjustments on July 1st each year based on the PPI or the FERC index. On December 17, 2020, FERC established a new price index for the five-year period commencing July 1, 2021 and ending June 30, 2026, in which common carriers charging indexed rates are permitted to adjust their indexed ceilings annually by Producer Price Index plus 0.78%. FERC has received requests for rehearing of its December 17, 2020 order, which remain pending in FERC Docket No. RM20-14-000. As of March 31, 2021, these agreements with HFC require minimum annualized payments to us of $338 million.

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

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

On June 1, 2020, HFC announced plans to permanently cease petroleum refining operations at its Cheyenne Refinery and to convert certain assets at that refinery to renewable diesel production. HFC subsequently began winding down petroleum refining operations at its Cheyenne Refinery on August 3, 2020.

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


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

The estimated fair 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 5 for further discussion of Level 3 inputs.

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

Under certain provisions of an omnibus agreement we have with HFC (the “Omnibus Agreement”), we pay HFC an annual administrative fee, currently $2.6 million, for the provision by HFC or its affiliates of various general and administrative services to us. This fee does not include the salaries of personnel employed by HFC who perform services for us on behalf of Holly Logistic Services, L.L.C. (“HLS”), or the cost of their employee benefits, which are separately charged to us by HFC. We also reimburse HFC and its affiliates for direct expenses they incur on our behalf.

Under HLS’s Secondment Agreement with HFC, certain employees of HFC are seconded to HLS to provide operational and maintenance services for certain of our processing, refining, pipeline and tankage assets, and HLS reimburses HFC for its prorated portion of the wages, benefits, and other costs of these employees for our benefit.

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

Furthermore, we plan to continue to pursue third-party logistic asset acquisitions that are accretive to our unitholders and increase the diversity of our revenues.
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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 months ended March 31, 2021 and 2020.
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 Three Months Ended March 31,Change from
 202120202020
 (In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates—refined product pipelines$18,606 $20,083 $(1,477)
Affiliates—intermediate pipelines7,506 7,474 32 
Affiliates—crude pipelines19,454 20,393 (939)
45,566 47,950 (2,384)
Third parties—refined product pipelines9,863 14,798 (4,935)
Third parties—crude pipelines11,076 7,724 3,352 
66,505 70,472 (3,967)
Terminals, tanks and loading racks:
Affiliates33,864 33,594 270 
Third parties4,318 3,904 414 
38,182 37,498 684 
Refinery processing units—Affiliates22,496 19,884 2,612 
Total revenues127,183 127,854 (671)
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)41,365 34,981 6,384 
Depreciation and amortization25,065 23,978 1,087 
General and administrative2,968 2,702 266 
Goodwill impairment11,034 — 11,034 
80,432 61,661 18,771 
Operating income46,751 66,193 (19,442)
Other income (expense):
Equity in earnings of equity method investments1,763 1,714 49 
Interest expense, including amortization(13,240)(17,767)4,527 
Interest income6,548 2,218 4,330 
Loss on early extinguishment of debt— (25,915)25,915 
Gain on sales-type leases24,650 — 24,650 
Gain on sale of assets and other502 506 (4)
20,223 (39,244)59,467 
Income before income taxes66,974 26,949 40,025 
State income tax expense(37)(37)— 
Net income66,937 26,912 40,025 
Allocation of net income attributable to noncontrolling interests(2,540)(2,051)(489)
Net income attributable to the partners64,397 24,861 39,536 
Limited partners’ earnings per unit—basic and diluted$0.61 $0.24 $0.37 
Weighted average limited partners’ units outstanding105,440 105,440 — 
EBITDA (1)
$96,191 $64,425 $31,766 
Adjusted EBITDA (1)
$87,936 $91,109 $(3,173)
Distributable cash flow (2)
$73,218 $70,708 $2,510 
Volumes (bpd)
Pipelines:
Affiliates—refined product pipelines119,590 129,966 (10,376)
Affiliates—intermediate pipelines115,225 142,112 (26,887)
Affiliates—crude pipelines250,647 305,031 (54,384)
485,462 577,109 (91,647)
Third parties—refined product pipelines44,428 49,637 (5,209)
Third parties—crude pipelines123,232 92,203 31,029 
653,122 718,949 (65,827)
Terminals and loading racks:
Affiliates323,286 429,730 (106,444)
Third parties45,753 45,945 (192)
369,039 475,675 (106,636)
Refinery processing units—Affiliates60,699 69,795 (9,096)
Total for pipelines and terminal and refinery processing unit assets (bpd)1,082,860 1,264,419 (181,559)
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(1)Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is calculated as net income attributable to the partners plus (i) interest expense, net of interest income, (ii) state income tax expense and (iii) depreciation and amortization. Adjusted EBITDA is calculated as EBITDA plus (i) loss on early extinguishment of debt, (ii) goodwill impairment and (iii) pipeline tariffs not included in revenues due to impacts from lease accounting for certain pipeline tariffs minus (iv) gain on sales-type leases, and (v) pipeline lease payments not included in operating costs and expenses. Portions of our minimum guaranteed pipeline tariffs for assets subject to sales-type lease accounting are recorded as interest income with the remaining amounts recorded as a reduction in net investment in leases. These pipeline tariffs were previously recorded as revenues prior to the renewal of the throughput agreements, which triggered sales-type lease accounting. Similarly, certain pipeline lease payments were previously recorded as operating costs and expenses, but the underlying lease was reclassified from an operating lease to a financing lease, and these payments are now recorded as interest expense and reductions in the lease liability. EBITDA and Adjusted EBITDA are not calculations based upon generally accepted accounting principles ("GAAP"). However, the amounts included in the EBITDA and Adjusted EBITDA calculations are derived from amounts included in our consolidated financial statements. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income attributable to Holly Energy Partners or operating income, as indications of our operating performance or as alternatives to operating cash flow as a measure of liquidity. EBITDA and Adjusted EBITDA are not necessarily comparable to similarly titled measures of other companies. EBITDA and Adjusted EBITDA are presented here because they are widely used financial indicators used by investors and analysts to measure performance. EBITDA and Adjusted EBITDA are also used by our management for internal analysis and as a basis for compliance with financial covenants. Set forth below are our calculations of EBITDA and Adjusted EBITDA.
 Three Months Ended
March 31,
 20212020
 (In thousands)
Net income attributable to the partners$64,397 $24,861 
Add (subtract):
Interest expense13,240 17,767 
Interest income(6,548)(2,218)
State income tax expense37 37 
Depreciation and amortization25,065 23,978 
EBITDA$96,191 $64,425 
Loss on early extinguishment of debt— 25,915 
Gain on sales-type leases(24,650)— 
Goodwill impairment11,034 — 
Pipeline tariffs not included in revenues6,967 2,375 
Lease payments not included in operating costs(1,606)(1,606)
Adjusted EBITDA$87,936 $91,109 

(2)Distributable cash flow is not a calculation based upon GAAP. However, the amounts included in the calculation are derived from amounts presented in our consolidated financial statements, with the general exceptions of maintenance capital expenditures. Distributable cash flow should not be considered in isolation or as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. Distributable cash flow is not necessarily comparable to similarly titled measures of other companies. Distributable cash flow is presented here because it is a widely accepted financial indicator used by investors to compare partnership performance. It is also used by management for internal analysis and for our performance units. We believe that this measure provides investors an enhanced perspective of the operating performance of our assets and the cash our business is generating. Set forth below is our calculation of distributable cash flow.
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 Three Months Ended
March 31,
 20212020
 (In thousands)
Net income attributable to the partners$64,397 $24,861 
Add (subtract):
Depreciation and amortization25,065 23,978 
Amortization of discount and deferred debt issuance costs844 799 
Loss on early extinguishment of debt— 25,915 
Customer billings greater than revenue recognized3,394 264 
Maintenance capital expenditures (3)
(1,372)(2,487)
Increase (decrease) in environmental liability(156)
Decrease in reimbursable deferred revenue(4,014)(2,800)
Gain on sales-type leases(24,650)— 
Goodwill impairment11,034 — 
Other(1,324)177 
Distributable cash flow$73,218 $70,708 

(3)Maintenance capital expenditures are capital expenditures made to replace partially or fully depreciated assets in order to maintain the existing operating capacity of our assets and to extend their useful lives. Maintenance capital expenditures include expenditures required to maintain equipment reliability, tankage and pipeline integrity, safety and to address environmental regulations.
March 31,
2021
December 31,
2020
(In thousands)
Balance Sheet Data
Cash and cash equivalents$19,753 $21,990 
Working capital$20,275 $14,247 
Total assets$2,170,526 $2,167,565 
Long-term debt$1,388,335 $1,405,603 
Partners’ equity$405,976 $379,292 


Results of Operations—Three Months Ended March 31, 2021 Compared with Three Months Ended March 31, 2020

Summary
Net income attributable to the partners for the first quarter was $64.4 million ($0.61 per basic and diluted limited partner unit) compared to $24.9 million ($0.24 per basic and diluted limited partner unit) for the first quarter of 2020. Results for the first quarter of 2021 reflect special items that collectively increased net income attributable to the partners by a total of $13.6 million. These items included a gain on sales-type leases of $24.7 million and a goodwill impairment charge of $11.0 million related to our Cheyenne assets. In addition, net income attributable to the partners for the first quarter of 2020 included a loss on early extinguishment of debt of $25.9 million. Excluding these items, net income attributable to the partners for both the first quarters of 2021 and 2020 was $50.8 million ($0.48 per basic and diluted limited partner unit).

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

Revenues from our refined product pipelines were $28.5 million, a decrease of $6.4 million compared to the first quarter of 2020. Shipments averaged 164.0 thousand barrels per day (“mbpd”) compared to 179.6 mbpd for the first quarter of 2020.
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The volume and revenue decreases were mainly due to lower volumes on pipelines servicing HFC's Navajo refinery, Delek's Big Spring refinery and our UNEV pipeline. Revenue also decreased due to a reclassification of certain pipeline income from revenue to interest income under sales-type lease accounting.

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

Revenues from our crude pipelines were $30.5 million, an increase of $2.4 million compared to the first quarter of 2020, and shipments averaged 373.9 mbpd compared to 397.2 mbpd for the first quarter of 2020. The revenue increase was mainly attributable to higher volumes on our crude pipeline systems in Wyoming and Utah. Those volume increases were more than offset by decreased volumes on our crude pipeline systems in New Mexico and Texas. Revenues did not decrease in proportion to the decrease in volumes mainly due to contractual minimum volume guarantees.

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

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

Operations Expense
Operations (exclusive of depreciation and amortization and goodwill impairment) expense was $41.4 million for the three months ended March 31, 2021, an increase of $6.4 million compared to the first quarter of 2020. The increase was mainly due to higher natural gas costs and maintenance expense project costs, partially offset by lower expenses for materials and supplies, chemicals and catalysts and property tax for the three months ended March 31, 2021.

Depreciation and Amortization
Depreciation and amortization for the three months ended March 31, 2021 increased by $1.1 million compared to the three months ended March 31, 2020. The increase was mainly due to the acceleration of depreciation on certain of our Cheyenne tanks.

General and Administrative
General and administrative costs for the three months ended March 31, 2021 increased by $0.3 million compared to the three months ended March 31, 2020, mainly due to higher legal expenses for the three months ended March 31, 2021.

Equity in Earnings of Equity Method Investments
Three Months Ended March 31,
Equity Method Investment20212020
(in thousands)
Osage Pipe Line Company, LLC$721 $1,014 
Cheyenne Pipeline LLC(104)1,075 
Cushing Terminal1,146 (375)
Total$1,763 $1,714 

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

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

State Income Tax
We recorded a state income tax expense of $37,000 for both the three months ended March 31, 2021 and 2020. All tax expense is solely attributable to the Texas margin tax.


LIQUIDITY AND CAPITAL RESOURCES

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

During the three months ended March 31, 2021, we received advances totaling $73.0 million and repaid $90.5 million, resulting in a net decrease of $17.5 million under the Credit Agreement and an outstanding balance of $896.0 million at March 31, 2021. As of March 31, 2021, we have no letters of credit outstanding under the Credit Agreement and the available capacity under the Credit Agreement was $504.0 million. Amounts repaid under the Credit Agreement may be reborrowed under the Amended Credit Agreement from time to time.
On February 4, 2020, we closed a private placement of $500 million in aggregate principal amount of 5% Senior Notes due in 2028. On February 5, 2020, we redeemed the existing $500 million 6% Senior Notes at a redemption cost of $522.5 million, at which time we recognized a $25.9 million early extinguishment loss consisting of a $22.5 million debt redemption premium and unamortized financing costs of $3.4 million. We funded the $522.5 million redemption with proceeds from the issuance of our 5% Senior Notes and borrowings under our Credit Agreement.
We have a continuous offering program under which we may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200 million. We did not issue any units under this program during the three months ended March 31, 2021. As of March 31, 2021, HEP has issued 2,413,153 units under this program, providing $82.3 million in gross proceeds.

Under our registration statement filed with the Securities and Exchange Commission (“SEC”) using a “shelf” registration process, we currently have the authority to raise up to $2.0 billion by offering securities, through one or more prospectus supplements that would describe, among other things, the specific amounts, prices and terms of any securities offered and how the proceeds would be used. Any proceeds from the sale of securities 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 cash balances, future internally generated funds and funds available under the Credit Agreement will provide sufficient resources to meet our working capital liquidity, capital expenditure and quarterly distribution needs for the foreseeable future.

In February 2021, we paid a regular quarterly cash distribution of $0.35 on all units in an aggregate amount of $37.0 million.
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Cash and cash equivalents decreased by $2.2 million during the three months ended March 31, 2021. The cash flows provided by operating activities of $82.1 million were less than the cash flows used for financing activities of $54.3 million and investing activities of $30.0 million. Working capital increased by $6.0 million to $20.3 million at March 31, 2021, from $14.2 million at December 31, 2020.

Cash Flows—Operating Activities
Cash flows from operating activities increased by $4.2 million from $77.9 million for the three months ended March 31, 2020, to $82.1 million for the three months ended March 31, 2021. The increase was mainly due to lower payments for interest expenses and operating expenses partially offset by lower cash receipts from customers during the three months ended March 31, 2021, as compared to the three months ended March 31, 2020.

Cash Flows—Investing Activities
Cash flows used for investing activities were $30.0 million for the three months ended March 31, 2021, compared to $20.9 million for the three months ended March 31, 2020, an increase of $9.2 million. During the three months ended March 31, 2021 and 2020, we invested $33.2 million and $18.9 million, respectively, in additions to properties and equipment. We received $2.9 million in excess of equity in earnings during the three months ended March 31, 2021.

Cash Flows—Financing Activities
Cash flows used for financing activities were $54.3 million for the three months ended March 31, 2021, compared to $51.1 million for the three months ended March 31, 2020, an increase of $3.3 million. During the three months ended March 31, 2021, we received $73.0 million and repaid $90.5 million in advances under the Credit Agreement. Additionally, we paid $38.3 million in regular quarterly cash distributions to our limited partners and $3.8 million to our noncontrolling interests. We received $6.3 million in contributions from noncontrolling interests during the three months ended March 31, 2021. During the three months ended March 31, 2020, we received $112.0 million and repaid $67.0 million in advances under the Credit Agreement. We paid $68.5 million in regular quarterly cash distributions to our limited partners, and distributed $3.0 million to our noncontrolling interests. We also received net proceeds of $491.5 million for issuance of our 5% Senior Notes and paid $522.5 million to retire our 6% Senior Notes.

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 capital forecast is comprised of approximately $14 million to $18 million for maintenance capital expenditures, $5 million to $8 million for refinery unit turnarounds and $30 million to $35 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.
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We expect that our currently planned sustaining and maintenance capital expenditures, as well as planned expenditures for acquisitions and capital development projects, will be funded with cash generated by operations.

Under the terms of the transaction to acquire HFC’s 75% interest in UNEV, we issued to HFC a Class B unit comprising a noncontrolling equity interest in a wholly-owned subsidiary subject to redemption to the extent that HFC is entitled to a 50% interest in our share of annual UNEV earnings before interest, income taxes, depreciation, and amortization above $30 million beginning July 1, 2015, and ending in June 2032, subject to certain limitations. However, to the extent earnings thresholds are not achieved, no redemption payments are required. No redemption payments have been required to date.

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

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

We may prepay all loans at any time without penalty, except for tranche breakage costs. If an event of default exists under the Amended Credit Agreement, the lenders will be able to accelerate the maturity of all loans outstanding and exercise other rights and remedies. We were in compliance with the covenants under the Credit Agreement as of March 31, 2021.

Senior Notes
As of March 31, 2021, we had $500 million in aggregate principal amount of 5% Senior Notes due in 2028.

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

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 March 31, 2021. At any time when the 5% Senior Notes are rated investment grade by either Moody’s or Standard & Poor’s and no default or event of default exists, we will not be subject to many of the foregoing covenants. Additionally, we have certain redemption rights at varying premiums over face value under the 5% Senior Notes.

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


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Long-term Debt
The carrying amounts of our long-term debt are as follows:
March 31,
2021
December 31,
2020
 (In thousands)
Credit Agreement$896,000 $913,500 
5% Senior Notes
Principal500,000 500,000 
Unamortized debt issuance costs(7,665)(7,897)
492,335 492,103 
Total long-term debt$1,388,335 $1,405,603 

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

Impact of Inflation
Inflation in the United States has been relatively moderate in recent years and did not have a material impact on our results of operations for the three months ended March 31, 2021 and 2020. PPI has increased an average of 0.9% annually over the past five calendar years, including a decrease of 1.3% in 2020 and an increase of 0.8% in 2019.

The substantial majority of our revenues are generated under long-term contracts that provide for increases or decreases in our rates and minimum revenue guarantees annually for increases or decreases in the PPI. Certain of these contracts have provisions that limit the level of annual PPI percentage rate increases or decreases. A significant and prolonged period of high inflation or a significant and prolonged period of negative inflation could adversely affect our cash flows and results of operations if costs increase at a rate greater than the fees we charge our shippers.

Environmental Matters
Our operation of pipelines, terminals, and associated facilities in connection with the transportation and storage of refined products and crude oil is subject to stringent and complex federal, state, and local laws and regulations governing the discharge of materials into the environment, or otherwise relating to the protection of the environment. As with the industry generally, compliance with existing and anticipated laws and regulations increases our overall cost of business, including our capital costs to construct, maintain, and upgrade equipment and facilities. While these laws and regulations affect our maintenance capital expenditures and net income, we believe that they do not affect our competitive position given that the operations of our competitors are similarly affected. However, these laws and regulations, and the interpretation or enforcement thereof, are subject to frequent change by regulatory authorities, and we are unable to predict the ongoing cost to us of complying with these laws and regulations or the future impact of these laws and regulations on our operations. Violation of environmental laws, regulations, and permits can result in the imposition of significant administrative, civil and criminal penalties, injunctions, and construction bans or delays. A major discharge of hydrocarbons or hazardous substances into the environment could, to the extent the event is not insured, subject us to substantial expense, including both the cost to comply with applicable laws and regulations and claims made by employees, neighboring landowners and other third parties for personal injury and property damage.

Under the Omnibus Agreement and certain transportation agreements and purchase agreements with HFC, HFC has agreed to indemnify us, subject to certain monetary and time limitations, for environmental noncompliance and remediation liabilities associated with certain assets transferred to us from HFC and occurring or existing prior to the date of such transfers.
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 March 31, 2021, we had an accrual of $4.4 million that related to environmental clean-up projects for which we have assumed liability or for which the indemnity
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provided for by HFC has expired or will expire. The remaining projects, including assessment and monitoring activities, are covered under the HFC environmental indemnification discussed above and represent liabilities of HFC.


CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2020. Certain critical accounting policies that materially affect the amounts recorded in our consolidated financial statements include revenue recognition, assessing the possible impairment of certain long-lived assets and goodwill, and assessing contingent liabilities for probable losses. There have been no changes to these policies in 2021. 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 March 31, 2021, we had an outstanding principal balance of $500 million on our 5% Senior Notes. A change in interest rates generally would affect the fair value of the 5% Senior Notes, but not our earnings or cash flows. At March 31, 2021, the fair value of our 5% Senior Notes was $505.0 million. We estimate a hypothetical 10% change in the yield-to-maturity applicable to the 5% Senior Notes at March 31, 2021 would result in a change of approximately $14.2 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 March 31, 2021, borrowings outstanding under the Credit Agreement were $896.0 million. A hypothetical 10% change in interest rates applicable to the Credit Agreement would not materially affect our cash flows.

Our operations are subject to normal hazards of operations, including but not limited to fire, explosion and weather-related perils. We maintain various insurance coverages, including property damage and business interruption insurance, subject to certain deductibles and insurance policy terms and conditions. We are not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable, or premium costs, in our judgment, do not justify such expenditures.

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


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Item 3.Quantitative and Qualitative Disclosures About Market Risk

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.

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


Item 4.Controls and Procedures

(a) Evaluation of disclosure controls and procedures
Our principal executive officer and principal financial officer have evaluated, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of March 31, 2021, at a reasonable level of assurance.

(b) Changes in internal control over financial reporting
During the three months ended March 31, 2021, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.


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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

There have been no material changes in our risk factors as previously disclosed in Part 1, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. In addition to the other information set forth in this quarterly report, you should consider carefully the information discussed in our 2020 Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our 2020 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.


Item 6.Exhibits

The Exhibit Index beginning on page 45 of this Quarterly Report on Form 10-Q lists the exhibits that are filed or furnished, as applicable, as part of this Quarterly Report on Form 10-Q.

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Exhibit Index
Exhibit
Number
Description
3.1
3.2
3.3
3.4
3.5
3.6
10.1
10.2


10.3
10.4Letter Agreement entered into on February 8, 2021, effective as of January 1, 2021, by and between HollyFrontier Refining & Marketing LLC and Holly Energy Partners – Operating, L.P.
10.5


10.6
10.7


10.8


10.9*
10.10+
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31.1*
31.2*
32.1**
32.2**
101++The following financial information from Holly Energy Partners, L.P.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 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.
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

*Filed herewith.
 **Furnished herewith.
+Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of regulation S-K. The registrant agrees to furnish supplementally a copy of the omitted schedules and exhibits to the SEC upon request.
++Filed electronically herewith.

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HOLLY ENERGY PARTNERS, L.P.
SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
HOLLY ENERGY PARTNERS, L.P.
(Registrant)
By: HEP LOGISTICS HOLDINGS, L.P.
its General Partner
By: HOLLY LOGISTIC SERVICES, L.L.C.
its General Partner
Date: May 5, 2021/s/    John Harrison
John Harrison
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: May 5, 2021/s/    Kenneth P. Norwood
Kenneth P. Norwood
Vice President and Controller
(Principal Accounting Officer)
 

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