UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________________________________________________

FORM 10-Q

______________________________________________________________________________________

(Mark One)


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

For the quarterly period ended ~~June~~September 30, 2022


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

For the transition period from ____________ to _____________

Commission File Number: 1-32225

_____________________________________________________________________________________

HOLLY ENERGY PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

______________________________________________________________________________________


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

(214) 871-3555

(Registrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Limited Partner Units

HEP

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of the registrant’s outstanding common units at ~~August 5,~~November 4, 2022, was 126,440,201.

Table of 19,

HOLLY ENERGY PARTNERS, L.P.

INDEX

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Table of 19,

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical fact included in this Form 10-Q, including, but not limited to, statements regarding funding of capital expenditures and distributions, distributable cash flow coverage and leverage targets, and statements under “Results of Operations” and “Liquidity and Capital Resources” in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I are forward-looking statements. Forward-looking statements use words such as “anticipate,” ~~“expect,~~“project,” ~~“project,~~“expect,” “will,” “plan,” “goal,” “forecast,” “intend,” “strategy,” “should,” “would,” “could,” “believe,” “may,” and similar expressions and statements regarding our plans and objectives for future operations are intended to identify forward-looking statements. These statements are based on our beliefs and assumptions and those of our general partner using currently available information and expectations as of the date hereof, are not guarantees of future performance and involve certain risks and uncertainties. Although we and our general partner believe that such expectations reflected in such forward-looking statements are reasonable, neither we nor our general partner can give assurance that our expectations will prove to be correct. All statements concerning our expectations for future results of operations are based on forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. Certain factors could cause actual results to differ materially from results anticipated in the forward-looking statements. These factors include, but are not limited to:

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

•the demand for and supply of crude oil and refined products, including uncertainty regarding the effects of the continuing COVID-19 pandemic on future demand and increasing societal expectations that companies address climate change;

•risks and uncertainties with respect to the actual quantities of petroleum products and crude oil shipped on our pipelines and/or terminalled, stored or throughput in our terminals and refinery processing units;

•the economic viability of HF Sinclair, our other customers and our joint ventures’ other customers, including any refusal or inability of our or our joint ventures’ customers or counterparties to perform their obligations under their contracts;

•the demand for refined petroleum products in the markets we serve;

•our ability to purchase and integrate future acquired operations;

•our ability to complete previously announced or contemplated acquisitions;

•the availability and cost of additional debt and equity financing;

•the possibility of temporary or permanent reductions in production or shutdowns at refineries utilizing our pipelines, terminal facilities and refinery processing units, due to reasons such as infection in the workforce, in response to reductions in demand, accidents, unexpected leaks or spills, unscheduled shutdowns, weather events, civil unrest, expropriation of assets, and other economic, diplomatic, legislative, or political events or developments, terrorism, cyberattacks, or other catastrophes or disruptions affecting our operations, terminal facilities, machinery, pipelines and other logistics assets, equipment, or information systems, or any of the foregoing of our suppliers, customers, or third-party ~~service~~ providers or lower gross margins due to the economic impact of the COVID-19 pandemic, inflation and labor costs, and any potential asset impairments resulting from, or the failure to have adequate insurance coverage for or receive insurance recoveries 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 and increases in interest rates;

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

- 3 -

Table of 19,

•our and our joint venture partners’ ability to complete and maintain operational efficiency in carrying out routine operations and capital construction projects;

~~- 3 -~~

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

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

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

•general economic conditions, including uncertainty regarding the timing, pace and extent of an economic recovery in the United States;

•the impact of recent or proposed changes in the tax laws and regulations that affect master limited partnerships; and

•other financial, operational and legal risks and uncertainties detailed from time to time in our Securities and Exchange Commission (the “SEC”) filings.

Cautionary statements identifying important factors that could cause actual results to differ materially from our expectations are set forth in this Form 10-Q, including, without limitation, the forward-looking statements that are referred to above. You should not put any undue reliance on any forward-looking statements. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2021, 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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Table of 19,

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

HOLLY ENERGY PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
		(Unaudited)					(Unaudited)
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents (Cushing Connect VIEs: $4,596 and $8,881, respectively)		$	14,884	$	14,381
Cash and cash equivalents (Cushing Connect VIEs: $2,671 and $8,881, respectively)						Cash and cash equivalents (Cushing Connect VIEs: $2,671 and $8,881, respectively)	$	15,551	$	14,381
Accounts receivable:	Accounts receivable:					Accounts receivable:
Trade	Trade	13,583		12,745		Trade	14,828		12,745
Affiliates	Affiliates	58,969		56,154		Affiliates	72,796		56,154
		72,552		68,899			87,624		68,899
Prepaid and other current assets	Prepaid and other current assets	11,969		11,033		Prepaid and other current assets	9,818		11,033
Total current assets	Total current assets	99,405		94,313		Total current assets	112,993		94,313

Properties and equipment, net	Properties and equipment, net	1,426,492		1,329,028		Properties and equipment, net	1,417,198		1,329,028
Operating lease right-of-use assets, net	Operating lease right-of-use assets, net	2,502		2,275		Operating lease right-of-use assets, net	2,457		2,275
Net investment in leases (Cushing Connect VIEs: $100,866 and $100,042, respectively)		542,281		309,303
Net investment in leases (Cushing Connect VIEs: $101,485 and $100,042, respectively)						Net investment in leases (Cushing Connect VIEs: $101,485 and $100,042, respectively)	539,394		309,303
Intangible assets, net	Intangible assets, net	66,304		73,307		Intangible assets, net	62,802		73,307
Goodwill	Goodwill	314,418		223,650		Goodwill	322,007		223,650
Equity method investments (Cushing Connect VIEs: $35,955 and $37,505, respectively)		280,472		116,378
Equity method investments (Cushing Connect VIEs: $35,737 and $37,505, respectively)						Equity method investments (Cushing Connect VIEs: $35,737 and $37,505, respectively)	266,186		116,378
Deferred turnaround costs	Deferred turnaround costs	25,813		2,632		Deferred turnaround costs	25,092		2,632
Other assets	Other assets	17,351		14,981		Other assets	16,842		14,981
Total assets	Total assets	$	2,775,038	$	2,165,867	Total assets	$	2,764,971	$	2,165,867

LIABILITIES AND EQUITY	LIABILITIES AND EQUITY					LIABILITIES AND EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable:	Accounts payable:					Accounts payable:
Trade (Cushing Connect VIEs: $3,427 and $8,285, respectively)		$	25,104	$	28,577
Trade (Cushing Connect VIEs: $1,923 and $8,285, respectively)						Trade (Cushing Connect VIEs: $1,923 and $8,285, respectively)	$	26,735	$	28,577
Affiliates	Affiliates	12,696		11,703		Affiliates	17,546		11,703
		37,800		40,280			44,281		40,280

Accrued interest	Accrued interest	17,963		11,258		Accrued interest	17,922		11,258
Deferred revenue	Deferred revenue	13,770		14,585		Deferred revenue	11,923		14,585
Accrued property taxes	Accrued property taxes	7,145		4,542		Accrued property taxes	10,603		4,542
Current operating lease liabilities	Current operating lease liabilities	963		620		Current operating lease liabilities	966		620
Current finance lease liabilities	Current finance lease liabilities	3,857		3,786		Current finance lease liabilities	4,177		3,786
Other current liabilities	Other current liabilities	2,648		1,781		Other current liabilities	2,551		1,781
Total current liabilities	Total current liabilities	84,146		76,852		Total current liabilities	92,423		76,852

Long-term debt	Long-term debt	1,608,460		1,333,049		Long-term debt	1,593,797		1,333,049
Noncurrent operating lease liabilities	Noncurrent operating lease liabilities	2,006		2,030		Noncurrent operating lease liabilities	1,949		2,030
Noncurrent finance lease liabilities	Noncurrent finance lease liabilities	62,838		64,649		Noncurrent finance lease liabilities	62,790		64,649
Other long-term liabilities	Other long-term liabilities	23,072		12,527		Other long-term liabilities	23,230		12,527
Deferred revenue	Deferred revenue	28,865		29,662		Deferred revenue	26,752		29,662

Class B unit	Class B unit	58,461		56,549		Class B unit	59,484		56,549

Equity:	Equity:					Equity:
Partners’ equity:	Partners’ equity:					Partners’ equity:
Common unitholders (126,440,201 and 105,440,201 units issued and outstanding at June 30, 2022 and December 31, 2021, respectively)		837,785		443,017
Common unitholders (126,440,201 and 105,440,201 units issued and outstanding at September 30, 2022 and December 31, 2021, respectively)						Common unitholders (126,440,201 and 105,440,201 units issued and outstanding at September 30, 2022 and December 31, 2021, respectively)	835,178		443,017
Noncontrolling interests	Noncontrolling interests	69,405		147,532		Noncontrolling interests	69,368		147,532
Total equity	Total equity	907,190		590,549		Total equity	904,546		590,549
Total liabilities and equity	Total liabilities and equity	$	2,775,038	$	2,165,867	Total liabilities and equity	$	2,764,971	$	2,165,867

See accompanying notes.

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Table of 19,

HOLLY ENERGY PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per unit data)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
Revenues:	Revenues:									Revenues:
Affiliates	Affiliates	$	110,537	$	99,142	$	202,791	$	201,068	Affiliates	$	122,868	$	97,124	$	325,659	$	298,192
Third parties	Third parties	25,233		27,093		53,177		52,350		Third parties	26,134		25,460		79,311		77,810
		135,770		126,235		255,968		253,418			149,002		122,584		404,970		376,002
Operating costs and expenses:	Operating costs and expenses:									Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	Operations (exclusive of depreciation and amortization)	53,899		42,068		96,524		83,433		Operations (exclusive of depreciation and amortization)	60,470		42,793		156,994		126,226
Depreciation and amortization	Depreciation and amortization	26,974		25,003		49,161		50,068		Depreciation and amortization	25,236		21,826		74,397		71,894
General and administrative	General and administrative	4,682		2,847		8,994		5,815		General and administrative	3,751		3,849		12,745		9,664
Goodwill impairment	Goodwill impairment	—		—		—		11,034		Goodwill impairment	—		—		—		11,034
		85,555		69,918		154,679		150,350			89,457		68,468		244,136		218,818
Operating income	Operating income	50,215		56,317		101,289		103,068		Operating income	59,545		54,116		160,834		157,184

Other income (expense):	Other income (expense):									Other income (expense):
Equity in earnings of equity method investments		5,447		3,423		9,073		5,186
Equity in earnings (loss) of equity method investments										Equity in earnings (loss) of equity method investments	(16,334)		3,689		(7,261)		8,875
Interest expense	Interest expense	(20,347)		(13,938)		(33,986)		(27,178)		Interest expense	(22,965)		(13,417)		(56,951)		(40,595)
Interest income	Interest income	24,331		6,614		36,978		13,162		Interest income	24,234		6,835		61,212		19,997
Gain on sales-type leases	Gain on sales-type leases	—		27		—		24,677		Gain on sales-type leases	—		—		—		24,677

Gain on sale of assets and other	Gain on sale of assets and other	45		5,415		146		5,917		Gain on sale of assets and other	494		77		640		5,994
		9,476		1,541		12,211		21,764			(14,571)		(2,816)		(2,360)		18,948
Income before income taxes	Income before income taxes	59,691		57,858		113,500		124,832		Income before income taxes	44,974		51,300		158,474		176,132
State income tax expense		(14)		(27)		(45)		(64)
State income tax benefit (expense)										State income tax benefit (expense)	(38)		4		(83)		(60)
Net income	Net income	59,677		57,831		113,455		124,768		Net income	44,936		51,304		158,391		176,072
Allocation of net income attributable to noncontrolling interests	Allocation of net income attributable to noncontrolling interests	(2,885)		(2,086)		(7,104)		(4,626)		Allocation of net income attributable to noncontrolling interests	(2,985)		(2,144)		(10,089)		(6,770)
Net income attributable to the partners	Net income attributable to the partners	56,792		55,745		106,351		120,142		Net income attributable to the partners	41,951		49,160		148,302		169,302
Limited partners’ per unit interest in earnings—basic and diluted	Limited partners’ per unit interest in earnings—basic and diluted	$	0.45	$	0.53	$	0.90	$	1.14	Limited partners’ per unit interest in earnings—basic and diluted	$	0.33	$	0.46	$	1.22	$	1.60
Weighted average limited partners’ units outstanding	Weighted average limited partners’ units outstanding	126,440		105,440		118,087		105,440		Weighted average limited partners’ units outstanding	126,440		105,440		120,902		105,440

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

See accompanying notes.

- 6 -

Table of 19,

HOLLY ENERGY PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


		Six Months Ended June 30,					Nine Months Ended September 30,
		2022		2021			2022		2021
Cash flows from operating activities	Cash flows from operating activities					Cash flows from operating activities
Net income	Net income	$	113,455	$	124,768	Net income	$	158,391	$	176,072
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	49,161		50,068		Depreciation and amortization	74,397		71,894
Gain on sale of assets	Gain on sale of assets	(25)		(5,586)		Gain on sale of assets	(29)		(5,567)

Gain on sales-type leases	Gain on sales-type leases	—		(24,677)		Gain on sales-type leases	—		(24,677)
Goodwill impairment	Goodwill impairment	—		11,034		Goodwill impairment	—		11,034
Amortization of deferred charges	Amortization of deferred charges	1,803		2,229		Amortization of deferred charges	2,863		2,992
Equity-based compensation expense	Equity-based compensation expense	1,227		1,210		Equity-based compensation expense	1,493		1,856
Equity in earnings of equity method investments, net of distributions		933		—
Equity in losses of equity method investments						Equity in losses of equity method investments	22,084		—
(Increase) decrease in operating assets:	(Increase) decrease in operating assets:					(Increase) decrease in operating assets:
Accounts receivable—trade	Accounts receivable—trade	1,071		1,726		Accounts receivable—trade	(174)		3,020
Accounts receivable—affiliates	Accounts receivable—affiliates	(2,815)		1,649		Accounts receivable—affiliates	(16,643)		6,465
Prepaid and other current assets	Prepaid and other current assets	60		825		Prepaid and other current assets	2,264		2,452
Increase (decrease) in operating liabilities:	Increase (decrease) in operating liabilities:					Increase (decrease) in operating liabilities:
Accounts payable—trade	Accounts payable—trade	1,355		3,068		Accounts payable—trade	2,586		3,202
Accounts payable—affiliates	Accounts payable—affiliates	993		(3,157)		Accounts payable—affiliates	5,844		(3,515)
Accrued interest	Accrued interest	6,705		(23)		Accrued interest	6,664		(6,288)
Deferred revenue	Deferred revenue	(1,612)		(2,176)		Deferred revenue	(5,572)		(3,702)
Accrued property taxes	Accrued property taxes	1,630		1,065		Accrued property taxes	5,089		4,885
Other current liabilities	Other current liabilities	77		438		Other current liabilities	(20)		183
Turnaround expenditures	Turnaround expenditures	(24,158)		(882)		Turnaround expenditures	(24,728)		(1,251)
Other, net	Other, net	2,626		529		Other, net	3,988		1,719
Net cash provided by operating activities	Net cash provided by operating activities	152,486		162,108		Net cash provided by operating activities	238,497		240,774

Cash flows from investing activities	Cash flows from investing activities					Cash flows from investing activities
Additions to properties and equipment	Additions to properties and equipment	(23,246)		(59,375)		Additions to properties and equipment	(31,194)		(78,592)
Acquisition of Sinclair Transportation	Acquisition of Sinclair Transportation	(321,366)		—		Acquisition of Sinclair Transportation	(328,955)		—

Investment in Osage Pipe Line Company, LLC						Investment in Osage Pipe Line Company, LLC	(5,000)		—
Proceeds from sale of assets	Proceeds from sale of assets	33		7,343		Proceeds from sale of assets	37		7,365
Distributions in excess of equity in earnings of equity investments	Distributions in excess of equity in earnings of equity investments	6,589		3,107		Distributions in excess of equity in earnings of equity investments	4,724		3,517
Net cash used for investing activities	Net cash used for investing activities	(337,990)		(48,925)		Net cash used for investing activities	(360,388)		(67,710)

Cash flows from financing activities	Cash flows from financing activities					Cash flows from financing activities
Borrowings under credit agreement	Borrowings under credit agreement	410,000		141,000		Borrowings under credit agreement	460,000		210,500
Repayments of credit agreement borrowings	Repayments of credit agreement borrowings	(529,000)		(184,500)		Repayments of credit agreement borrowings	(594,000)		(283,500)

Proceeds from issuance of debt	Proceeds from issuance of debt	400,000		—		Proceeds from issuance of debt	400,000		—

Contributions from noncontrolling interests	Contributions from noncontrolling interests	—		17,593		Contributions from noncontrolling interests	—		21,285
Distributions to HEP unitholders	Distributions to HEP unitholders	(81,333)		(75,356)		Distributions to HEP unitholders	(125,669)		(112,384)
Distributions to noncontrolling interests	Distributions to noncontrolling interests	(5,308)		(5,872)		Distributions to noncontrolling interests	(7,308)		(8,743)
Payments on finance leases	Payments on finance leases	(1,776)		(1,747)		Payments on finance leases	(2,700)		(2,666)
Deferred financing costs	Deferred financing costs	(6,343)		(6,661)		Deferred financing costs	(6,541)		(6,661)

Purchase of units for incentive grants						Purchase of units for incentive grants	(334)		—
Units withheld for tax withholding obligations	Units withheld for tax withholding obligations	(65)		(69)		Units withheld for tax withholding obligations	(217)		(69)
Other	Other	(168)		—		Other	(170)		—
Net cash provided (used) by financing activities	Net cash provided (used) by financing activities	186,007		(115,612)		Net cash provided (used) by financing activities	123,061		(182,238)

Cash and cash equivalents	Cash and cash equivalents					Cash and cash equivalents
Increase (decrease) for the period	Increase (decrease) for the period	503		(2,429)		Increase (decrease) for the period	1,170		(9,174)
Beginning of period	Beginning of period	14,381		21,990		Beginning of period	14,381		21,990
End of period	End of period	$	14,884	$	19,561	End of period	$	15,551	$	12,816

Supplemental disclosure of cash flow information	Supplemental disclosure of cash flow information					Supplemental disclosure of cash flow information
Cash paid during the period for interest	Cash paid during the period for interest	$25,814		$25,072		Cash paid during the period for interest	$47,941		$44,147

See accompanying notes.

- 7 -

Table of 19,

HOLLY ENERGY PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(In thousands)


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

Balance December 31, 2021	Balance December 31, 2021	$	443,017	$	147,532	$	590,549	Balance December 31, 2021	$	443,017	$	147,532	$	590,549
Issuance of common units	Issuance of common units	349,020		—		349,020		Issuance of common units	349,020		—		349,020

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

Amortization of restricted and performance units	Amortization of restricted and performance units	620		—		620		Amortization of restricted and performance units	620		—		620
Class B unit accretion	Class B unit accretion	(956)		—		(956)		Class B unit accretion	(956)		—		(956)
Other	Other	(147)		—		(147)		Other	(147)		—		(147)
Net income	Net income	50,515		3,263		53,778		Net income	50,515		3,263		53,778
Balance March 31, 2022	Balance March 31, 2022	$	821,609	$	71,731	$	893,340	Balance March 31, 2022	$	821,609	$	71,731	$	893,340

Distributions to HEP unitholders	Distributions to HEP unitholders	(44,336)		—		(44,336)		Distributions to HEP unitholders	(44,336)		—		(44,336)
Distributions to noncontrolling interest	Distributions to noncontrolling interest	—		(4,431)		(4,431)		Distributions to noncontrolling interest	—		(4,431)		(4,431)
Acquisition of remaining UNEV interests	Acquisition of remaining UNEV interests	3,198		177		3,375		Acquisition of remaining UNEV interests	3,198		177		3,375
Amortization of restricted and performance units	Amortization of restricted and performance units	607		—		607		Amortization of restricted and performance units	607		—		607
Class B unit accretion	Class B unit accretion	(956)		—		(956)		Class B unit accretion	(956)		—		(956)
Other	Other	(86)		—		(86)		Other	(86)		—		(86)
Net income	Net income	57,749		1,928		59,677		Net income	57,749		1,928		59,677
Balance June 30, 2022	Balance June 30, 2022	$	837,785	$	69,405	$	907,190	Balance June 30, 2022	$	837,785	$	69,405	$	907,190

Distributions to HEP unitholders								Distributions to HEP unitholders	(44,336)		—		(44,336)
Distributions to noncontrolling interest								Distributions to noncontrolling interest	—		(2,000)		(2,000)
Purchase of units for incentive grants								Purchase of units for incentive grants	(334)		—		(334)
Amortization of restricted and performance units								Amortization of restricted and performance units	266		—		266
Class B unit accretion								Class B unit accretion	(1,023)		—		(1,023)
Other								Other	(153)		—		(153)
Net income								Net income	42,973		1,963		44,936
Balance September 30, 2022								Balance September 30, 2022	$	835,178	$	69,368	$	904,546

Common
Units Noncontrolling Interests Total Equity

Balance December 31, 2020 $ 379,292 $ 126,066 $ 505,358
Capital Contribution - Cushing Connect — 9,746 9,746
Distributions to HEP unitholders (38,328) — (38,328)
Distributions to noncontrolling interests — (3,819) (3,819)
Amortization of restricted and performance units 683 — 683
Class B unit accretion (893) — (893)
Other (68) — (68)
Net income 65,290 1,647 66,937
Balance March 31, 2021 $ 405,976 $ 133,640 $ 539,616
Contributions from noncontrolling interest — 9,780 9,780
Distributions to HEP unitholders (37,028) — (37,028)
Distributions to noncontrolling interest — (2,053) (2,053)
Equity-based compensation 527 — 527
Class B unit accretion (894) — (894)
Other (2) — (2)
Net income 56,639 1,192 57,831
Balance June 30, 2021 $ 425,218 $ 142,559 $ 567,777

- 8 -

Table of 19,


	Common Units		Noncontrolling Interests		Total Equity

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

Distributions to HEP unitholders	(38,328)		—		(38,328)
Distributions to noncontrolling interests	—		(3,819)		(3,819)
Amortization of restricted and performance units	683		—		683
Class B unit accretion	(893)		—		(893)
Other	(68)		—		(68)
Net income	65,290		1,647		66,937
Balance March 31, 2021	$	405,976	$	133,640	$	539,616
Contributions from noncontrolling interest	—		9,780		9,780
Distributions to HEP unitholders	(37,028)		—		(37,028)
Distributions to noncontrolling interest	—		(2,053)		(2,053)
Amortization of restricted and performance units	527		—		527
Class B unit accretion	(894)		—		(894)
Other	(2)		—		(2)
Net income	56,639		1,192		57,831
Balance June 30, 2021	$	425,218	$	142,559	$	567,777
Contributions from noncontrolling interest	—		2,358		2,358
Distributions to HEP unitholders	(37,028)		—		(37,028)
Distributions to noncontrolling interest	—		(2,871)		(2,871)
Amortization of restricted and performance units	646		—		646
Class B unit accretion	(956)		—		(956)
Other	1		—		1
Net income	50,117		1,187		51,304
Balance September 30, 2021	$	437,998	$	143,233	$	581,231

See accompanying notes.

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Table of 19,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1:Description of Business and Presentation of Financial Statements

Holly Energy Partners, L.P. (“HEP”), together with its consolidated subsidiaries, is a publicly held master limited partnership. We commenced operations on July 13, 2004, upon the completion of our initial public offering. On March 14, 2022 (the “Closing Date”), HollyFrontier Corporation (“HFC”) and HEP announced the establishment of HF Sinclair Corporation, a Delaware corporation (“HF Sinclair”), as the new parent holding company of HFC and HEP and their subsidiaries, and the completion of their respective acquisitions of Sinclair Oil Corporation (now known as Sinclair Oil LLC (“Sinclair Oil”)) and Sinclair Transportation Company LLC (“Sinclair Transportation”) from The Sinclair Companies (now known as REH Company and referred to herein as “Sinclair HoldCo”). On the Closing Date, pursuant to that certain Business Combination Agreement, dated as of August 2, 2021 (as amended on March 14, 2022, the “Business Combination Agreement”), by and among HFC, HF Sinclair (formerly known as Hippo Parent Corporation), Hippo Merger Sub, Inc., a wholly owned subsidiary of HF Sinclair (“Parent Merger Sub”), Sinclair HoldCo, and Hippo Holding LLC (now known as Sinclair Holding LLC), a wholly owned subsidiary of Sinclair HoldCo (the “Target Company”), HF Sinclair completed its acquisition of the Target Company by effecting (a) a holding company merger in accordance with Section 251(g) of the Delaware General Corporation Law whereby HFC merged with and into Parent Merger Sub, with HFC surviving such merger as a direct wholly owned subsidiary of HF Sinclair (the “HFC Merger”), and (b) immediately following the HFC Merger, a contribution whereby Sinclair HoldCo contributed all of the equity interests of the Target Company to HF Sinclair in exchange for shares of HF Sinclair, resulting in the Target Company becoming a direct wholly owned subsidiary of HF Sinclair (together with the HFC Merger, the “HFC Transactions”).

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

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

Additionally, on the Closing Date, pursuant to that certain Contribution Agreement, dated August 2, 2021 (as amended on March 14, 2022, the “Contribution Agreement”) by and among Sinclair HoldCo, Sinclair Transportation and HEP, HEP acquired all of the outstanding equity interests of Sinclair Transportation from Sinclair HoldCo in exchange for 21 million newly issued common limited partner units of HEP (the “HEP Units”), representing 16.6% of the pro forma outstanding HEP Units with a value of approximately $349 million based on HEP’s fully diluted common limited partner units outstanding and closing unit price on March 11, 2022, and cash consideration equal to ~~$321.4~~$329.0 million, inclusive of ~~estimated~~final working capital adjustments pursuant to the Contribution Agreement for an aggregate transaction value of ~~$670.4~~$678.0 million (the “HEP Transaction” and together with the HFC Transactions, the “Sinclair Transactions”). Of the 21 million HEP Units, 5.29 million units are currently held in escrow to secure Sinclair HoldCo’s renewable identification numbers (“RINs”) credit obligations to HF Sinclair under Section 6.22 of the Business Combination Agreement. HF Sinclair, and not HEP, would be entitled to the HEP common units held in escrow in the event of Sinclair HoldCo’s breach of its RINs credit obligations under the Business Combination Agreement. The cash consideration was funded through a draw under HEP’s senior secured revolving credit facility. The HEP Transaction was conditioned on the closing of the HFC Transactions, which occurred immediately following the HEP Transaction.

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

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

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

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

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

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

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

The consolidated financial statements included herein have been prepared without audit, pursuant to the rules and regulations of the 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, 2021. Results of operations for interim periods are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2022.

Principles of Consolidation and Common Control Transactions

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

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

Goodwill and Long-lived Assets

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

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

Indicators of Goodwill and Long-lived Asset Impairment

During the first quarter of 2021, changes in our agreements with HFC related to our Cheyenne assets resulted in an increase in the net book value of our Cheyenne reporting unit due to sales-type lease accounting, which led us to determine indicators of potential goodwill impairment for our Cheyenne reporting unit were present.

The estimated fair value of our Cheyenne reporting unit was derived using a combination of income and market approaches. The income approach reflects expected future cash flows based on anticipated gross margins, operating costs, and capital expenditures. The market approaches include both the guideline public company and guideline transaction methods. Both methods utilize pricing multiples derived from historical market transactions of other like-kind assets. These fair value measurements involve significant unobservable inputs (Level 3 inputs). See Note 6 for further discussion of Level 3 inputs.

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

We performed our annual goodwill impairment testing qualitatively as of July 1, ~~2021,~~2022, and determined it was not more likely than not that the carrying amount of each reporting unit was greater than its fair value. Therefore, a quantitative test was not necessary, and no additional impairment of goodwill was recorded.

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

Revenue Recognition

Revenues are generally recognized as products are shipped through our pipelines and terminals, feedstocks are processed through our refinery processing units or other services are rendered. The majority of our contracts with customers meet the definition of a lease since (1) performance of the contracts is dependent on specified property, plant, or equipment and (2) it is unlikely that one or more parties other than the customer will take more than a minor amount of the output associated with the specified property, plant, or equipment. Prior to the adoption of the new lease standard (see below), we bifurcated the consideration received between lease and service revenue. The new lease standard allows the election of a practical expedient whereby a lessor does not have to separate non-lease (service) components from lease components under certain conditions. The majority of our contracts meet these conditions, and we have made this election for those contracts. Under this practical expedient, we treat the combined components as a single performance obligation in accordance with Accounting Standards Codification (“ASC”) 606, which largely codified ASU 2014-09, if the non-lease (service) component is the dominant component. If the lease component is the dominant component, we treat the combined components as a lease in accordance with ASC 842, which largely codified ASU 2016-02.

Several of our contracts include incentive or reduced tariffs once a certain quarterly volume is met. Revenue from the variable element of these transactions is recognized based on the actual volumes shipped as it relates specifically to rendering the services during the applicable quarter.

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

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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 ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, we recognized ~~$10.4~~$14.0 million and ~~$8.8~~$12.3 million, respectively, of these deficiency payments in revenue, of which ~~$1.9~~$3.9 million and $0.5 million, respectively, related to deficiency payments billed in prior periods.

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

Leases

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

Lessee Accounting

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

Operating leases are recorded in operating lease right-of-use assets and current and noncurrent operating lease liabilities on our consolidated balance sheet. Finance leases are included in properties and equipment, current finance lease liabilities and noncurrent finance lease liabilities on our consolidated balance sheet.

When renewal options are defined in a lease, our lease term includes an option to extend the lease when it is reasonably certain we will exercise that option. Leases with a term of 12 months or less are not recorded on our balance sheet, and lease expense is accounted for on a straight-line basis. In addition, as a lessee, we separate non-lease components that are identifiable and exclude them from the determination of net present value of lease payment obligations.

Lessor Accounting

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

Deferred Turnaround Costs

Our refinery processing units require regular major maintenance and repairs which are commonly referred to as “turnarounds.” The required frequency of the maintenance varies by unit, but generally is every four to five years. Turnaround costs are deferred and amortized over the period until the next scheduled turnaround.

Note 2:Sinclair Acquisition

HEP Transaction

On March 14, 2022, pursuant to the Contribution Agreement, HEP acquired all of the outstanding equity interests of Sinclair Transportation in exchange for 21 million newly issued HEP Units, representing 16.6% of the pro forma outstanding HEP Units with a value of approximately $349 million based on HEP’s fully diluted common limited partner units outstanding and closing unit price on March 11, 2022, and cash consideration equal to ~~$321.4~~$329.0 million, inclusive of ~~estimated~~final working capital adjustments pursuant to the Contribution Agreement for an aggregate transaction value of ~~$670.4~~$678.0 million. On the same date and immediately following the consummation of the HEP Transaction, pursuant to the Business Combination Agreement, Sinclair HoldCo contributed all of the equity interests of the Target Company to HF Sinclair in exchange for 60,230,036 shares of common stock in HF Sinclair, representing 27.0% of the pro forma equity of HF Sinclair with a value of approximately

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$2,149 million based on HF Sinclair’s fully diluted shares of common stock outstanding and closing stock price on March 11, 2022.

On August 2, 2021, in connection with the Contribution Agreement, HEP, Holly Logistics Services, L.L.C., the ultimate general partner of HEP (“HLS”) and Navajo Pipeline Co., L.P., the sole member of HLS (the “Sole Member”), entered into a unitholders agreement (the “Unitholders Agreement”) by and among HEP, HLS, the Sole Member, Sinclair HoldCo and the stockholders of Sinclair HoldCo (each a “Unitholder” and collectively, the “Unitholders,” and along with Sinclair HoldCo and each of their permitted transferees, the “Sinclair Parties”), which became effective on the Closing Date.

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

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

The HEP Transaction was accounted for as a business combination using the acquisition method of accounting, with the assets acquired and liabilities assumed at their respective acquisition date fair values at the Closing Date, with the excess consideration recorded as goodwill. The preliminary purchase ~~consideration~~price allocation resulted in the recognition of ~~$90.8~~$98.4 million in goodwill.

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


~~Preliminary~~ Purchase Consideration (in thousands except for per share amounts)
HEP common units issued	21,000
Closing price per unit of HEP common units(1)	$	16.62
Purchase consideration paid in HEP common units	349,020
Cash consideration paid by HEP	325,000
~~Estimated Adjusted Payments~~Working capital adjustment payment by HEP(2)	~~(3,634)~~3,955
Total cash consideration	~~321,366~~328,955
Total purchase consideration	$	~~670,386~~677,975

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

(2) Net of cash acquired

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	(In thousands)
Assets Acquired
Accounts receivable	$	1,910
Prepaid and other current assets	59
Properties and equipment	357,819
Operating lease right-of-use assets	105
Other assets	3,500
Goodwill	~~90,768~~98,357
Equity method investments	229,891
Total assets acquired	$	~~684,052~~691,641

Liabilities Assumed
Accounts payable	1,528
Accrued property taxes	973
Other current liabilities	789
Operating lease liabilities	33
Noncurrent operating lease liabilities	72
Other long-term liabilities	10,271
Total liabilities assumed	$	13,666
Net assets acquired	$	~~670,386~~677,975

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

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

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

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

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

Our consolidated financial and operating results reflect the Sinclair Transportation operations beginning March 14, 2022. Our results of operations for the three months ended ~~June~~September 30, 2022 included revenue, interest income from sales-type leases and net income of ~~$10.5~~$11.6 million, ~~$14.5~~$14.4 million and ~~$19.2~~$19.3 million, respectively, and revenue, interest income from sales-type leases and net income of ~~$12.1~~$23.7 million, ~~$17.2~~$31.6 million and ~~$21.8~~$41.1 million for the period from March 14, 2022 through ~~June~~September 30, 2022, respectively, related to these operations.

For the ~~six~~nine months ended ~~June~~September 30, 2022, we incurred ~~$1.7~~$2.1 million in incremental direct acquisition and integration costs that principally relate to legal, advisory and other professional fees and are presented as general and administrative expenses in our statements of operations.

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

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

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


		Three Months Ended June 30,		Six Months Ended June 30,					Three Months Ended September 30,		Nine Months Ended September 30,
		2021		2022		2021			2021		2022		2021
		(In thousands)							(In thousands)
Sales and other revenues	Sales and other revenues	$	143,279	$	270,730	$	286,469	Sales and other revenues	$	141,500	$	419,732	$	427,969
Net income attributable to the partners	Net income attributable to the partners	$	62,739	$	107,574	$	133,164	Net income attributable to the partners	$	56,006	$	149,525	$	189,170

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

Note 3:Investment in Joint Venture

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

The Cushing Connect Joint Venture contracted with an affiliate of HEP to manage the construction and operation of the Cushing Connect Pipeline and with an affiliate of Plains to manage the operation of the Cushing Connect JV Terminal. The total Cushing Connect Joint Venture investment will generally be shared equally among the partners. However, we are solely responsible for any Cushing Connect Pipeline construction costs that exceed the budget by more than 10%. HEP estimates its share of the cost of the Cushing Connect JV Terminal contributed by Plains and Cushing Connect Pipeline construction costs are approximately $73 million, including approximately $5 million of Cushing Connect Pipeline construction costs exceeding the budget by more than 10% borne solely by HEP.

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

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entities. Therefore, HEP consolidates those legal entities. We do not have the ability to direct the activities that most significantly impact the Cushing Connect JV Terminal legal entity, and therefore, we account for our interest in the Cushing Connect JV Terminal legal entity using the equity method of accounting. HEP’s maximum exposure to loss as a result of its involvement with the Cushing Connect JV Terminal legal entity is not expected to be material due to the long-term terminalling agreements in place to support its operations.

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

Note 4:Revenues

Disaggregated revenues were as follows:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
		(In thousands)				(In thousands)					(In thousands)				(In thousands)
Pipelines	Pipelines	$	68,319	$	68,322	$	133,099	$	134,827	Pipelines	$	77,147	$	67,354	$	210,246	$	202,180
Terminals, tanks and loading racks	Terminals, tanks and loading racks	44,558		36,887		81,573		75,069		Terminals, tanks and loading racks	44,432		33,317		126,005		108,386
Refinery processing units	Refinery processing units	22,893		21,026		41,296		43,522		Refinery processing units	27,423		21,913		68,719		65,436
		$	135,770	$	126,235	$	255,968	$	253,418		$	149,002	$	122,584	$	404,970	$	376,002

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
		(In thousands)				(In thousands)					(In thousands)				(In thousands)
Lease revenues	Lease revenues	$	82,445	$	86,867	$	155,736	$	174,803	Lease revenues	$	92,697	$	84,074	$	247,137	$	258,877
Service revenues	Service revenues	53,325		39,368		100,232		78,615		Service revenues	56,305		38,510		157,833		117,125
		$	135,770	$	126,235	$	255,968	$	253,418		$	149,002	$	122,584	$	404,970	$	376,002

A contract liability exists when an entity is obligated to perform future services for a customer for which the entity has received consideration. Since HEP may be required to perform future services for these deficiency payments received, the deferred revenues on our balance sheets were considered contract liabilities. A contract asset exists when an entity has a right to consideration in exchange for goods or services transferred to a customer. Our consolidated balance sheets included the contract assets and liabilities in the table below:


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
		(In thousands)					(In thousands)
Contract assets	Contract assets	$	6,727	$	6,637	Contract assets	$	6,700	$	6,637
Contract liabilities	Contract liabilities	$	(2,247)	$	(4,185)	Contract liabilities	$	(256)	$	(4,185)

The contract assets and liabilities include both lease and service components. During the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, we recognized ~~$1.9~~$3.9 million and $0.5 million, respectively, of revenue that was previously included in contract ~~liability as~~

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

As of ~~June~~September 30, 2022, we expect to recognize $1.6 billion in revenue related to our unfulfilled performance obligations under the terms of our long-term throughput agreements and leases expiring in 2023 through 2037. These agreements generally provide for changes in the minimum revenue guarantees annually for increases or decreases in the Producer Price Index (“PPI”) or Federal Energy Regulatory Commission (“FERC”) index, with certain contracts having provisions that limit the level of the rate increases or decreases. We expect to recognize revenue for these unfulfilled performance obligations as shown in the table below (amounts shown in table include both service and lease revenues):


Years Ending December 31,	Years Ending December 31,	(In millions)		Years Ending December 31,	(In millions)
Remainder of 2022	Remainder of 2022	$	182	Remainder of 2022	$	90
2023	2023	301		2023	301
2024	2024	266		2024	266
2025	2025	185		2025	185
2026	2026	170		2026	170
2027	2027	137		2027	137
Thereafter	Thereafter	407		Thereafter	408
Total	Total	$	1,648	Total	$	1,557

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 5:Leases

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 2322 years, some of which include options to extend the leases for up to 10 years.

Finance Lease Obligations

We have finance lease obligations related to vehicle leases with initial terms of 33 to 48 months. The total cost of assets under finance leases was ~~$6.2~~$7.3 million and $6.0 million as of ~~June~~September 30, 2022 and December 31, 2021, respectively, with accumulated depreciation of ~~$4.0~~$4.2 million and $3.6 million as of ~~June~~September 30, 2022 and December 31, 2021, respectively. We include depreciation of finance leases in depreciation and amortization in our consolidated statements of income.

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

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


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

Operating leases:	Operating leases:					Operating leases:
Operating lease right-of-use assets, net	Operating lease right-of-use assets, net	$	2,502	$	2,275	Operating lease right-of-use assets, net	$	2,457	$	2,275

Current operating lease liabilities	Current operating lease liabilities	963		620		Current operating lease liabilities	966		620
Noncurrent operating lease liabilities	Noncurrent operating lease liabilities	2,006		2,030		Noncurrent operating lease liabilities	1,949		2,030
Total operating lease liabilities	Total operating lease liabilities	$	2,969	$	2,650	Total operating lease liabilities	$	2,915	$	2,650

Finance leases:	Finance leases:					Finance leases:
Properties and equipment	Properties and equipment	$	6,160	$	6,031	Properties and equipment	$	7,312	$	6,031
Accumulated amortization	Accumulated amortization	(4,013)		(3,632)		Accumulated amortization	(4,189)		(3,632)
Properties and equipment, net	Properties and equipment, net	$	2,147	$	2,399	Properties and equipment, net	$	3,123	$	2,399

Current finance lease liabilities	Current finance lease liabilities	$	3,857	$	3,786	Current finance lease liabilities	$	4,177	$	3,786
Noncurrent finance lease liabilities	Noncurrent finance lease liabilities	62,838		64,649		Noncurrent finance lease liabilities	62,790		64,649
Total finance lease liabilities	Total finance lease liabilities	$	66,695	$	68,435	Total finance lease liabilities	$	66,967	$	68,435

Weighted average remaining lease term (in years):	Weighted average remaining lease term (in years):					Weighted average remaining lease term (in years):
Operating leases	Operating leases	4.8		5.8		Operating leases	4.7		5.8
Finance leases	Finance leases	14.6		15.0		Finance leases	14.2		15.0

Weighted average discount rate:	Weighted average discount rate:					Weighted average discount rate:
Operating leases	Operating leases	4.5%		4.8%		Operating leases	4.6%		4.8%
Finance leases	Finance leases	5.6%		5.6%		Finance leases	5.6%		5.6%

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


		Six Months Ended June 30,						Nine Months Ended September 30,
		2022		2021				2022		2021
		(In thousands)				(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:	Cash paid for amounts included in the measurement of lease liabilities:						Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows on operating leases	Operating cash flows on operating leases	$	518	$	576		Operating cash flows on operating leases	$	766	$	855
Operating cash flows on finance leases	Operating cash flows on finance leases	$	1,950	$	2,105		Operating cash flows on finance leases	$	3,094	$	3,110
Financing cash flows on finance leases	Financing cash flows on finance leases	$	1,776	$	1,747		Financing cash flows on finance leases	$	2,700	$	2,666

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Maturities of lease liabilities were as follows:


		June 30, 2022					September 30, 2022
		Operating		Finance			Operating		Finance
		(In thousands)					(In thousands)
2022	2022	$	504	$	3,672	2022	$	280	$	1,925
2023	2023	935		7,383		2023	976		7,691
2024	2024	524		6,938		2024	565		7,247
2025	2025	443		6,479		2025	485		6,787
2026	2026	289		6,432		2026	330		6,823
2027 and thereafter	2027 and thereafter	501		67,463		2027 and thereafter	525		67,463
Total lease payments	Total lease payments	3,196		98,367		Total lease payments	3,161		97,936
Less: Imputed interest	Less: Imputed interest	(227)		(31,672)		Less: Imputed interest	(246)		(30,969)
Total lease obligations	Total lease obligations	2,969		66,695		Total lease obligations	2,915		66,967
Less: Current lease liabilities	Less: Current lease liabilities	(963)		(3,857)		Less: Current lease liabilities	(966)		(4,177)
Noncurrent lease liabilities	Noncurrent lease liabilities	$	2,006	$	62,838	Noncurrent lease liabilities	$	1,949	$	62,790

The components of lease expense were as follows:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
		(In thousands)									(In thousands)
Operating lease costs	Operating lease costs	$	242	$	249	$	504	$	547	Operating lease costs	$	248	$	260	$	752	$	807
Finance lease costs	Finance lease costs									Finance lease costs
Amortization of assets	Amortization of assets	189		200		381		412		Amortization of assets	213		195		594		607
Interest on lease liabilities	Interest on lease liabilities	946		994		1,905		2,001		Interest on lease liabilities	938		983		2,843		2,983
Variable lease cost	Variable lease cost	23		67		59		133		Variable lease cost	206		43		265		175
Total net lease cost	Total net lease cost	$	1,400	$	1,510	$	2,849	$	3,093	Total net lease cost	$	1,605	$	1,481	$	4,454	$	4,572

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

During the ~~six~~nine months ended ~~June~~September 30, 2022, we entered into new agreements, and amended other agreements, with HFC related to our newly acquired Sinclair Transportation assets. Certain of these agreements met the criteria of sales-type leases. Under sales-type lease accounting, at the commencement date, the lessor recognizes a net investment in the lease, based on the estimated fair value of the underlying leased assets at contract inception, and derecognizes the underlying assets with the difference recorded as selling profit or loss arising from the lease. Because we recorded these assets at fair values under purchase price accounting, there was no gain or loss on these sales-type leases during the ~~six~~nine months ended ~~June~~September 30, 2022. The balance sheet impacts were composed of the following:



	~~Six~~Nine Months Ended ~~June~~September 30, 2022
	(In thousands)
Net investment in leases	$	~~235,620~~233,456
Properties and equipment, net	~~(235,620)~~(233,456)
Gain on sales-type leases	$	—

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During the ~~six~~nine months ended ~~June~~September 30, 2021, we entered into new agreements and modified other agreements with HF Sinclair related to our Cheyenne assets, Tulsa West lube racks, various crude tanks and new Navajo tanks. 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 HF Sinclair. Under sales-type lease accounting, at the commencement date, the lessor recognizes a net investment in the lease, based on the estimated fair value of the underlying leased assets at contract inception, and derecognizes the underlying assets with the difference recorded as selling profit or loss arising from the lease. Therefore, we recognized a gain on sales-type leases during the ~~six~~nine months ended ~~June~~September 30, 2021 composed of the following:


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

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

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

Lease income recognized was as follows:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
		(In thousands)									(In thousands)
Operating lease revenues	Operating lease revenues	$	76,538	$	84,426	$	146,891	$	170,698	Operating lease revenues	$	84,684	$	80,907	$	230,279	$	251,605
Direct financing lease interest income	Direct financing lease interest income	520		523		1,040		1,047		Direct financing lease interest income	538		521		1,578		1,568
Gain on sales-type leases	Gain on sales-type leases	—		27		—		24,677		Gain on sales-type leases	—		—		—		24,677
Sales-type lease interest income	Sales-type lease interest income	23,814		6,091		35,938		12,115		Sales-type lease interest income	23,695		6,313		59,633		18,429
Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable	Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable	5,906		2,441		8,846		4,105		Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable	8,013		3,167		16,859		7,272

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.

- 2021 -

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


		Operating		Finance		Sales-type			Operating		Finance		Sales-type
Years Ending December 31,	Years Ending December 31,	(In thousands)						Years Ending December 31,	(In thousands)
Remainder of 2022	Remainder of 2022	$	152,623	$	1,083	$	50,144	Remainder of 2022	$	75,674	$	542	$	25,072
2023	2023	272,169		2,175		96,383		2023	272,169		2,175		96,383
2024	2024	242,476		2,192		93,154		2024	242,476		2,192		93,154
2025	2025	166,290		2,209		89,727		2025	166,290		2,209		89,727
2026	2026	151,745		2,227		89,727		2026	151,745		2,227		89,727
2027 and thereafter	2027 and thereafter	473,243		36,610		841,406		2027 and thereafter	473,243		36,610		841,406
Total lease receipt payments	Total lease receipt payments	$	1,458,546	$	46,496	$	1,260,541	Total lease receipt payments	$	1,381,597	$	45,955	$	1,235,469
Less: Imputed interest	Less: Imputed interest			(30,173)		(1,131,594)		Less: Imputed interest			(29,661)		(1,108,517)
				16,323		128,947					16,294		126,952
Unguaranteed residual assets at end of leases	Unguaranteed residual assets at end of leases			—		402,895		Unguaranteed residual assets at end of leases			—		402,092
Net investment in leases	Net investment in leases			$	16,323	$	531,842	Net investment in leases			$	16,294	$	529,044

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


		June 30, 2022				December 31, 2021					September 30, 2022				December 31, 2021
		Sales-type Leases		Direct Financing Leases		Sales-type Leases		Direct Financing Leases			Sales-type Leases		Direct Financing Leases		Sales-type Leases		Direct Financing Leases
		(In thousands)				(In thousands)					(In thousands)				(In thousands)
Lease receivables (1)	Lease receivables (1)	$	426,582	$	16,323	$	207,768	$	16,371	Lease receivables (1)	$	420,407	$	16,294	$	207,768	$	16,371
Unguaranteed residual assets	Unguaranteed residual assets	105,260		—		90,097		—		Unguaranteed residual assets	108,637		—		90,097		—
Net investment in leases	Net investment in leases	$	531,842	$	16,323	$	297,865	$	16,371	Net investment in leases	$	529,044	$	16,294	$	297,865	$	16,371

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

Note 6:Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are derived using inputs (assumptions that market participants would use in pricing an asset or liability) including assumptions about risk. GAAP categorizes inputs used in fair value measurements into three broad levels as follows:

•(Level 1) Quoted prices in active markets for identical assets or liabilities.

•(Level 2) Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, similar assets and liabilities in markets that are not active or can be corroborated by observable market data.

•(Level 3) Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes valuation techniques that involve significant unobservable inputs.

Financial Instruments

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

- 2122 -

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


			June 30, 2022		December 31, 2021				September 30, 2022				December 31, 2021
Financial Instrument	Financial Instrument	Fair Value Input Level	Carrying Value	Fair Value	Carrying Value	Fair Value	Financial Instrument	Fair Value Input Level	Carrying Value		Fair Value		Carrying Value		Fair Value
			(In thousands)						(In thousands)
Liabilities:	Liabilities:						Liabilities:

5% Senior Notes	5% Senior Notes	Level 2	493,541	430,710	493,049	502,705	5% Senior Notes	Level 2	$	493,793	$	441,120	$	493,049	$	502,705
6.375% Senior Notes	6.375% Senior Notes	Level 2	393,919	377,996	—	—	6.375% Senior Notes	Level 2	394,004		381,508		—		—
Total Liabilities	Total Liabilities		887,460	808,706	493,049	502,705	Total Liabilities		$	887,797	$	822,628	$	493,049	$	502,705

Level 2 Financial Instruments

Our senior notes are measured at fair value using Level 2 inputs. The fair value of the senior notes is based on market values provided by a third-party bank, which were derived using market quotes for similar type debt instruments. See Note 10 for additional information.

Non-Recurring Fair Value Measurements

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

For the net investments in sales-type leases recognized during the ~~six~~nine months ended ~~June~~September 30, 2022, the estimated fair value of the underlying leased assets at contract inception and the present value of the estimated unguaranteed residual asset at the end of the lease term are used in determining the net investment in leases recorded. The asset valuation estimates include Level 3 inputs based on a replacement cost valuation method.

Note 7:Properties and Equipment

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


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
		(In thousands)					(In thousands)
Pipelines, terminals and tankage	Pipelines, terminals and tankage	$	1,611,170	$	1,527,697	Pipelines, terminals and tankage	$	1,615,319	$	1,527,697
Refinery assets	Refinery assets	352,274		348,882		Refinery assets	353,504		348,882
Land and right of way	Land and right of way	124,984		98,837		Land and right of way	125,074		98,837
Construction in progress	Construction in progress	31,864		26,446		Construction in progress	30,203		26,446
Other	Other	63,372		48,203		Other	70,224		48,203
		2,183,664		2,050,065			2,194,324		2,050,065
Less accumulated depreciation	Less accumulated depreciation	(757,172)		(721,037)		Less accumulated depreciation	(777,126)		(721,037)
		$	1,426,492	$	1,329,028		$	1,417,198	$	1,329,028

Depreciation expense was ~~$40.8~~$61.1 million and ~~$42.7~~$60.9 million for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, respectively, and includes depreciation of assets acquired under capital leases.

Note 8:Intangible Assets

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

- 2223 -

The carrying amounts of our intangible assets were as follows:


		Useful Life	June 30, 2022		December 31, 2021			Useful Life	September 30, 2022		December 31, 2021
			(In thousands)						(In thousands)
Delek transportation agreement	Delek transportation agreement	30 years	$	59,933	$	59,933	Delek transportation agreement	30 years	$	59,933	$	59,933
HF Sinclair transportation agreement	HF Sinclair transportation agreement	10-15 years	75,131		75,131		HF Sinclair transportation agreement	10-15 years	75,131		75,131
Customer relationships	Customer relationships	10 years	69,683		69,683		Customer relationships	10 years	69,683		69,683
Other	Other	20 years	50		50		Other	20 years	50		50
			204,797		204,797				204,797		204,797
Less accumulated amortization	Less accumulated amortization		(138,493)		(131,490)		Less accumulated amortization		(141,995)		(131,490)
			$	66,304	$	73,307			$	62,802	$	73,307

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

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

Note 9:Employees, Retirement and Incentive Plans

Direct support for our operations is provided by HLS, which utilizes personnel employed by HF Sinclair who are dedicated to performing services for us. Their costs, including salaries, bonuses, payroll taxes, benefits and other direct costs, are charged to us monthly in accordance with an omnibus agreement ~~that~~ we have with HF Sinclair (the “Omnibus Agreement”). These employees participate in the retirement and benefit plans of HF Sinclair. Our share of retirement and benefit plan costs was ~~$2.7~~$2.8 million and ~~$1.9~~$2.1 million for the three months ended ~~June~~September 30, 2022 and 2021, respectively, and ~~$5.1~~$7.9 million and ~~$4.1~~$6.2 million for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, respectively.

Under HLS’s secondment agreement with HF Sinclair (the “Secondment Agreement”), certain employees of HF Sinclair are seconded to HLS to provide operational and maintenance services for certain of our processing, refining, pipeline and tankage assets, and HLS reimburses HF Sinclair for its prorated portion of the wages, benefits, and other costs related to these employees.

We have a Long-Term Incentive Plan for employees and non-employee directors who perform services for us. The Long-Term Incentive Plan consists of 5five components: restricted or phantom units, performance units, unit options, unit appreciation rights and cash awards. Our accounting policy for the recognition of compensation expense for awards with pro-rata vesting (a significant proportion of our awards) is to expense the costs ratably over the vesting periods.

As of ~~June~~September 30, 2022, we had 2two types of unit-based awards outstanding, which are described below. The compensation cost charged against income was ~~$0.6~~$0.3 million and ~~$0.5~~$0.6 million for the three months ended ~~June~~September 30, 2022 and 2021, respectively, and ~~$1.2~~$1.5 million and $1.9 million for ~~both~~ the ~~six~~nine months ended ~~June~~September 30, 2022 and ~~2021.~~2021, respectively. We currently purchase units in the open market instead of issuing new units for settlement of all unit awards under our Long-Term Incentive Plan. As of ~~June~~September 30, 2022, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which ~~819,513~~848,570 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.

- 24 -

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.

~~- 23 -~~

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


Phantom Units	Phantom Units	Units	Weighted Average Grant-Date Fair Value		Phantom Units	Units	Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2022 (nonvested)	Outstanding at January 1, 2022 (nonvested)	203,263	$	14.85	Outstanding at January 1, 2022 (nonvested)	203,263	$	14.85
Granted	Granted	4,313	17.40		Granted	19,269	18.15
Vesting and transfer of full ownership to recipients	Vesting and transfer of full ownership to recipients	(3,833)	15.54		Vesting and transfer of full ownership to recipients	(18,789)	17.78
Forfeited	Forfeited	(18,158)	14.60		Forfeited	(66,484)	13.27
Outstanding at June 30, 2022 (nonvested)		185,585	14.92
Outstanding at September 30, 2022 (nonvested)					Outstanding at September 30, 2022 (nonvested)	137,259	15.68

The grant date fair values of phantom units that were vested and transferred to recipients during the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 were ~~$60 thousand~~$0.3 million and $2$13 thousand, respectively. The grant date fair values of phantom units that were granted during the ~~six~~nine months ended ~~June~~September 30, 2022 were ~~$75 thousand.~~$0.4 million. No units were granted during the ~~six~~nine months ended ~~June~~September 30, 2021. As of ~~June~~September 30, 2022, ~~$1.0~~$0.5 million of total unrecognized compensation expense related to unvested phantom unit grants is expected to be recognized over a weighted-average period of ~~1.0 year.~~0.8 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%.

We did not grant any performance units during the ~~six~~nine months ended ~~June~~September 30, 2022. Although common units are not transferred to the recipients until the performance units vest, the recipients have distribution rights with respect to the target number of performance units subject to the award from the date of grant at the same rate as distributions paid on our common units.

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


Performance Units						Units
Outstanding at January 1, 2022 (nonvested)						76,719

Vesting and transfer of common units to recipients						~~(13,920)~~(24,809)
Forfeited						(9,124)
Outstanding at ~~June~~September 30, 2022 (nonvested)						~~53,675~~42,786

The grant date fair value of performance units vested and transferred to recipients during both the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 was $0.6 million and $0.4 ~~million.~~million, respectively. Based on the weighted-average fair value of performance units outstanding at ~~June~~September 30, 2022, of ~~$0.9~~$0.7 million, there was ~~$0.5~~$0.4 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of ~~1.3~~1.2 years.

During the ~~six~~nine months ended ~~June~~September 30, 2022, we ~~did not~~paid $0.3 million for the purchase ~~any~~ of our common units in the open market for the issuance and settlement of unit awards under our Long-Term Incentive Plan.

- 2425 -

Note 10:Debt

Credit Agreement

In April 2021, we amended our senior secured revolving credit facility (the “Credit Agreement”) decreasing the size of the facility from $1.4 billion to $1.2 billion and extending the maturity date to July 27, 2025. In August 2022, the Credit Agreement was amended to, among other things, provide an alternative reference rate for LIBOR. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments, working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit and continues to provide for an accordion feature that allows us to increase commitments under the Credit Agreement up to a maximum amount of $1.7 billion.

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

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

Senior Notes

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

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

The 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 Senior Notes as of ~~June~~September 30, 2022. At any time when the 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 Senior Notes.

Indebtedness under the 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 were as follows:


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
		(In thousands)					(In thousands)
Credit Agreement	Credit Agreement					Credit Agreement
Amount outstanding	Amount outstanding	$	721,000	840,000		Amount outstanding	$	706,000	840,000

5% Senior Notes	5% Senior Notes					5% Senior Notes
Principal	Principal	500,000		500,000		Principal	500,000		500,000
Unamortized premium and debt issuance costs	Unamortized premium and debt issuance costs	(6,459)		(6,951)		Unamortized premium and debt issuance costs	(6,207)		(6,951)
		493,541		493,049			493,793		493,049

6.375% Senior Notes	6.375% Senior Notes					6.375% Senior Notes
Principal	Principal	400,000		—		Principal	400,000		—
Unamortized premium and debt issuance costs	Unamortized premium and debt issuance costs	(6,081)		—		Unamortized premium and debt issuance costs	(5,996)		—
		393,919		—			394,004		—

Total long-term debt	Total long-term debt	$	1,608,460	$	1,333,049	Total long-term debt	$	1,593,797	$	1,333,049

Note 11:Related Party Transactions

We serve HF Sinclair’s refineries under long-term pipeline, terminal and tankage throughput agreements, and refinery processing unit tolling agreements expiring from 2023 to 2037, and revenues from HF Sinclair accounted for ~~81%~~82% and ~~79%~~80% of our total revenues for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively. Under these agreements, HF Sinclair agrees to transport, store and process throughput volumes of refined product, crude oil and feedstocks on our pipelines, terminals, tankage, loading rack facilities and refinery processing units that result in minimum annual payments to us. These minimum annual payments or revenues are generally subject to annual rate adjustments on July 1st each year based on increases or decreases in PPI or the FERC index. As of July 1, 2022, these agreements with HF Sinclair require minimum annualized payments to us of $445.9 million.

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

Under certain provisions of the Omnibus Agreement, we pay HF Sinclair an annual administrative fee (currently $5.0 million) for the provision by HF Sinclair or its affiliates of various general and administrative services to us. In connection with the HEP Transaction, we pay HF Sinclair a temporary monthly fee of $62,500 relating to transition services to be provided to HEP by HF Sinclair. Neither the annual administrative fee nor the temporary monthly fee includes the salaries of personnel employed by HF Sinclair who perform services for us on behalf of HLS or the cost of their employee benefits, which are charged to us separately by HF Sinclair. Also, we reimburse HF Sinclair and its affiliates for direct expenses they incur on our behalf.

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

•Revenues received from HF Sinclair were ~~$110.5~~$122.9 million and ~~$99.1~~$97.1 million for the three months ended ~~June~~September 30, 2022 and 2021, respectively, and ~~$202.8~~$325.7 million and ~~$201.1~~$298.2 million for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, respectively.

•HF Sinclair charged us general and administrative services under the Omnibus Agreement of $1.3 million and $0.7 million for the three months ended ~~June~~September 30, 2022 and 2021, respectively, and ~~$2.0~~$3.3 million and ~~$1.3~~$2.0 million for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, respectively. In addition, HF Sinclair charged us ~~$0.2~~$0.4 million for ~~a prorated portion of~~ the temporary administrative fee during the ~~six~~nine months ended ~~June~~September 30, 2022.

•We reimbursed HF Sinclair for costs of employees supporting our operations of ~~$19.9~~$21.0 million and ~~$14.3~~$15.6 million for the three months ended ~~June~~September 30, 2022 and 2021, respectively, and ~~$36.1~~$57.1 million and ~~$28.7~~$44.2 million for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, respectively.

- 2627 -

•HF Sinclair reimbursed us ~~$4.2~~$3.1 million and ~~$1.2~~$1.8 million for the three months ended ~~June~~September 30, 2022 and 2021, for expense and capital projects, respectively, and ~~$8.6~~$11.6 million and ~~$4.3~~$6.1 million for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, respectively.

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

•Accounts receivable from HF Sinclair were ~~$59.0~~$72.8 million and $56.2 million at ~~June~~September 30, 2022, and December 31, 2021, respectively.

•Accounts payable to HF Sinclair were ~~$12.7~~$17.5 million and $11.7 million at ~~June~~September 30, 2022, and December 31, 2021, respectively.

•Deferred revenue in the consolidated balance sheets included at ~~June~~September 30, 2022 and December 31, 2021, includes ~~$2.2~~$0.3 million and $4.1 million, respectively, relating to certain shortfall billings to HF Sinclair.

•We received direct financing lease payments from HF Sinclair for use of our Artesia and Tulsa rail yards of $0.6 million and $0.5 million for ~~each of~~ the three months ended ~~June~~September 30, 2022 and 2021, respectively and ~~$1.0~~$1.7 million and $1.6 million for ~~both of~~ the ~~six~~nine months ended ~~June~~September 30, 2022 and ~~2021.~~2021, respectively.

•We recorded a gain on sales-type leases with HF Sinclair of $24.7 million for the ~~six~~nine months ended ~~June~~September 30, 2021, and we received sales-type lease payments of ~~$24.4~~$24.3 million and ~~$6.3~~$6.6 million from HF Sinclair for the three months ended ~~June~~September 30, 2022 and 2021, respectively, and ~~$37.0~~$61.4 million and ~~$12.5~~$19.1 million for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, 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 2two five-year renewal option periods for HFC’s (and now HF Sinclair’s) use of certain HEP tank and rack assets in the Cheyenne Refinery to facilitate renewable diesel production with an annual lease payment of approximately $5 million, (2) a five-year contango service fee arrangement that will utilize HEP tank assets inside the Cheyenne Refinery where HFC (and now HF Sinclair) will pay a base tariff to HEP for available crude oil storage and HF Sinclair and HEP will split any profits generated on crude oil contango opportunities and (3) a $10 million one-time cash payment from HF Sinclair to HEP for the termination of the existing minimum volume commitment.

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

As of ~~June~~September 30, 2022, HF Sinclair held 59,630,030 of our common units, constituting a 47% limited partner interest in us, and held the non-economic general partner interest.

Continuous Offering Program

We have a continuous offering program under which we may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200 million. As of ~~June~~September 30, 2022, HEP has issued 2,413,153 units under this program, providing $82.3 million in gross proceeds.

Allocations of Net Income

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

Cash Distributions

On ~~July 21,~~October 20, 2022, we announced our cash distribution for the ~~second~~third quarter of 2022 of $0.35 per unit. The distribution is payable on all common units and will be paid ~~August 12,~~November 11, 2022, to all unitholders of record on ~~August 1,~~October 31, 2022.

- 2728 -

Our regular quarterly cash distribution to the limited partners will be $44.3 million for the three months ended ~~June~~September 30, 2022 and was $37.0 million for the three months ended ~~June~~September 30, 2021. For the ~~six~~nine months ended ~~June~~September 30, 2022, the regular quarterly distribution to the limited partners will be ~~$88.7~~$133.0 million and was ~~$74.1~~$111.1 million for the ~~six~~nine months ended ~~June~~September 30, 2021. Our distributions are declared subsequent to quarter end; therefore, these amounts do not reflect distributions paid during the respective period.

Note 13: Net Income Per Limited Partner Unit

Basic net income per unit applicable to the limited partners is calculated as net income attributable to the partners, adjusted for participating securities’ share in earnings, divided by the weighted average limited partners’ units outstanding. Diluted net income per unit assumes, when dilutive, the issuance of the net incremental units from phantom units and performance units. To the extent net income attributable to the partners exceeds or is less than cash distributions, this difference is allocated to the partners based on their weighted-average ownership percentage during the period. Our dilutive securities are immaterial for all periods presented.

Net income per limited partner unit is computed as follows:


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

Net income attributable to the partners	Net income attributable to the partners	$	56,792	$	55,745	$	106,351	$	120,142	Net income attributable to the partners	$	41,951	$	49,160	$	148,302	$	169,302
Less: Participating securities’ share in earnings	Less: Participating securities’ share in earnings	(107)		(190)		(222)		(411)		Less: Participating securities’ share in earnings	(75)		(165)		(288)		(579)
Net income attributable to common units	Net income attributable to common units	56,685		55,555		106,129		119,731		Net income attributable to common units	41,876		48,995		148,014		168,723
Weighted average limited partners' units outstanding	Weighted average limited partners' units outstanding	126,440		105,440		118,087		105,440		Weighted average limited partners' units outstanding	126,440		105,440		120,902		105,440
Limited partners' per unit interest in earnings - basic and diluted	Limited partners' per unit interest in earnings - basic and diluted	$	0.45	$	0.53	$	0.90	$	1.14	Limited partners' per unit interest in earnings - basic and diluted	$	0.33	$	0.46	$	1.22	$	1.60

Note 14:Environmental

We expensed ~~$0.2~~$49 thousand for the three months ended September 30, 2022 and $0.3 million for ~~both~~ the ~~three and six~~nine months ended ~~June~~September 30, 2022, ~~respectively,~~ for environmental remediation obligations and we expensed ~~$0.5~~$0.7 million and $1.3 million for ~~both~~ the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively. The accrued environmental liability, net of expected recoveries from indemnifying parties, reflected in our consolidated balance sheets was ~~$13.6~~$13.4 million and $3.9 million at ~~June~~September 30, 2022 and December 31, 2021, of which ~~$11.6~~$11.4 million and $2.4 million was classified as other long-term liabilities for ~~June~~September 30, 2022 and December 31, 2021, respectively. These accruals include remediation and monitoring costs expected to be incurred over an extended period of time. Accrued environmental liabilities assumed in the Sinclair acquisition have preliminarily been fair valued at ~~$10.0 million as of March 14, 2022.~~$10 million. Estimated liabilities could increase in the future as the purchase price allocation for the Sinclair Transportation acquisition is finalized and when the results of ongoing investigations become known, are considered probable and can be reasonably estimated.

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

See Note 18 for a discussion of our share of incurred and accrued environmental remediation and recovery expenses associated with the release of crude oil on the Osage pipeline reflected in our equity in earnings (loss) of equity method investments.

- 29 -

Note 15: Contingencies

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

~~- 28 -~~

Note 16: Segment Information

Although financial information is reviewed by our chief operating decision makers from a variety of perspectives, they view the business in 2two reportable operating segments: pipelines and terminals, and refinery processing units. These operating segments adhere to the accounting polices used for our consolidated financial statements.

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

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
		(In thousands)									(In thousands)
Revenues:	Revenues:									Revenues:
Pipelines and terminals - affiliate	Pipelines and terminals - affiliate	$	87,644	$	78,116	$	161,495	$	157,546	Pipelines and terminals - affiliate	$	95,445	$	75,211	$	256,940	$	232,756
Pipelines and terminals - third-party	Pipelines and terminals - third-party	25,233		27,093		53,177		52,350		Pipelines and terminals - third-party	26,134		25,460		79,311		77,810
Refinery processing units - affiliate	Refinery processing units - affiliate	22,893		21,026		41,296		43,522		Refinery processing units - affiliate	27,423		21,913		68,719		65,436
Total segment revenues	Total segment revenues	$	135,770	$	126,235	$	255,968	$	253,418	Total segment revenues	$	149,002	$	122,584	$	404,970	$	376,002

Segment operating income:	Segment operating income:									Segment operating income:
Pipelines and terminals (1)	Pipelines and terminals (1)	$	48,673	$	49,391	$	98,477	$	90,875	Pipelines and terminals (1)	$	51,621	$	48,268	$	150,098	$	139,143
Refinery processing units	Refinery processing units	6,224		9,773		11,806		18,008		Refinery processing units	11,675		9,697		23,481		27,705
Total segment operating income	Total segment operating income	54,897		59,164		110,283		108,883		Total segment operating income	63,296		57,965		173,579		166,848
Unallocated general and administrative expenses	Unallocated general and administrative expenses	(4,682)		(2,847)		(8,994)		(5,815)		Unallocated general and administrative expenses	(3,751)		(3,849)		(12,745)		(9,664)
Interest expense	Interest expense	(20,347)		(13,938)		(33,986)		(27,178)		Interest expense	(22,965)		(13,417)		(56,951)		(40,595)
Interest income	Interest income	24,331		6,614		36,978		13,162		Interest income	24,234		6,835		61,212		19,997

Equity in earnings of equity method investments	Equity in earnings of equity method investments	5,447		3,423		9,073		5,186		Equity in earnings of equity method investments	(16,334)		3,689		(7,261)		8,875
Gain on sales-type leases	Gain on sales-type leases	—		27		—		24,677		Gain on sales-type leases	—		—		—		24,677
Gain (loss) on sale of assets and other	Gain (loss) on sale of assets and other	45		5,415		146		5,917		Gain (loss) on sale of assets and other	494		77		640		5,994
Income before income taxes	Income before income taxes	$	59,691	$	57,858	$	113,500	$	124,832	Income before income taxes	$	44,974	$	51,300	$	158,474	$	176,132

Capital Expenditures:	Capital Expenditures:									Capital Expenditures:
Pipelines and terminals	Pipelines and terminals	$	7,397	$	25,559	$	17,817	$	58,777	Pipelines and terminals	$	7,583	$	19,049	$	25,400	$	77,826
Refinery processing units	Refinery processing units	1,703		598		5,429		598		Refinery processing units	364		168		5,794		766
Total capital expenditures	Total capital expenditures	$	9,100	$	26,157	$	23,246	$	59,375	Total capital expenditures	$	7,947	$	19,217	$	31,194	$	78,592

- 2930 -


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
		(In thousands)					(In thousands)
Identifiable assets:	Identifiable assets:					Identifiable assets:
Pipelines and terminals (2)	Pipelines and terminals (2)	$	2,157,472	$	1,737,388	Pipelines and terminals (2)	$	2,169,486	$	1,737,388
Refinery processing units	Refinery processing units	312,931		294,452		Refinery processing units	307,908		294,452
Other	Other	304,635		134,027		Other	287,577		134,027
Total identifiable assets	Total identifiable assets	$	2,775,038	$	2,165,867	Total identifiable assets	$	2,764,971	$	2,165,867

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

(2) Included goodwill of ~~$314.4~~$322.0 million as of ~~June~~September 30, 2022 and $223.7 million as of December 31, 2021.

- 3031 -

Note 17: Supplemental Guarantor/Non-Guarantor Financial Information

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

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

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

- 3132 -

Condensed Consolidating Balance Sheet


June 30, 2022		Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
September 30, 2022												September 30, 2022	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
		(In thousands)											(In thousands)
ASSETS	ASSETS											ASSETS
Current assets:	Current assets:											Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	4,879	$	5,409	$	4,596	$	—	$	14,884	Cash and cash equivalents	$	7,345	$	5,535	$	2,671	$	—	$	15,551
Accounts receivable	Accounts receivable	—		72,418		1,343		(1,209)		72,552		Accounts receivable			87,579		1,356		(1,311)		87,624
Prepaid and other current assets	Prepaid and other current assets	322		11,647		329		(329)		11,969		Prepaid and other current assets	155		9,663		342		(342)		9,818
Total current assets	Total current assets	5,201		89,474		6,268		(1,538)		99,405		Total current assets	7,500		102,777		4,369		(1,653)		112,993

Properties and equipment, net	Properties and equipment, net	—		1,426,492		—		—		1,426,492		Properties and equipment, net	—		1,417,198		—		—		1,417,198
Operating lease right-of-use assets	Operating lease right-of-use assets	—		2,502		—		—		2,502		Operating lease right-of-use assets	—		2,457		—		—		2,457
Net investment in leases	Net investment in leases	—		542,281		100,867		(100,867)		542,281		Net investment in leases	—		539,394		101,508		(101,508)		539,394
Investment in subsidiaries	Investment in subsidiaries	2,461,802		69,405		—		(2,531,207)		—		Investment in subsidiaries	2,443,931		69,368		—		(2,513,299)		—
Intangible assets, net	Intangible assets, net	—		66,304		—		—		66,304		Intangible assets, net	—		62,802		—		—		62,802
Goodwill	Goodwill	—		314,418		—		—		314,418		Goodwill	—		322,007		—		—		322,007
Equity method investments	Equity method investments	—		244,517		35,955		—		280,472		Equity method investments	—		230,448		35,738		—		266,186
Deferred turnaround costs	Deferred turnaround costs	—		25,813		—		—		25,813		Deferred turnaround costs	—		25,092		—		—		25,092
Other assets	Other assets	6,830		10,521		—		—		17,351		Other assets	6,304		10,538		—		—		16,842
Total assets	Total assets	$	2,473,833	$	2,791,727	$	143,090	$	(2,633,612)	$	2,775,038	Total assets	$	2,457,735	$	2,782,081	$	141,615	$	(2,616,460)	$	2,764,971

LIABILITIES AND EQUITY	LIABILITIES AND EQUITY											LIABILITIES AND EQUITY
Current liabilities:	Current liabilities:											Current liabilities:
Accounts payable	Accounts payable	$	—	$	35,448	$	3,561	$	(1,209)	$	37,800	Accounts payable	$	—	$	43,624	$	1,968	$	(1,311)	$	44,281
Accrued interest	Accrued interest	17,963		—		—		—		17,963		Accrued interest	17,922		—		—		—		17,922
Deferred revenue	Deferred revenue	—		13,770		—		—		13,770		Deferred revenue	—		11,923		—		—		11,923
Accrued property taxes	Accrued property taxes	—		7,145		—		—		7,145		Accrued property taxes	—		10,603		—		—		10,603
Current operating lease liabilities	Current operating lease liabilities	—		963		—		—		963		Current operating lease liabilities	—		966		—		—		966
Current finance lease liabilities	Current finance lease liabilities	—		5,862		—		(2,005)		3,857		Current finance lease liabilities	—		6,264		—		(2,087)		4,177
Other current liabilities	Other current liabilities	79		1,850		719		—		2,648		Other current liabilities	87		1,553		911		—		2,551
Total current liabilities	Total current liabilities	18,042		65,038		4,280		(3,214)		84,146		Total current liabilities	18,009		74,933		2,879		(3,398)		92,423

Long-term debt	Long-term debt	1,608,460		—		—		—		1,608,460		Long-term debt	1,593,797		—		—		—		1,593,797
Noncurrent operating lease liabilities	Noncurrent operating lease liabilities	—		2,006		—		—		2,006		Noncurrent operating lease liabilities	—		1,949		—		—		1,949
Noncurrent finance lease liabilities	Noncurrent finance lease liabilities	—		152,749		—		(89,911)		62,838		Noncurrent finance lease liabilities	—		152,147		—		(89,357)		62,790
Other long-term liabilities	Other long-term liabilities	266		22,806		—		—		23,072		Other long-term liabilities	345		22,885		—		—		23,230
Deferred revenue	Deferred revenue	—		28,865		—		—		28,865		Deferred revenue	—		26,752		—		—		26,752
Class B unit	Class B unit	—		58,461		—		—		58,461		Class B unit	—		59,484		—		—		59,484
Equity - partners	Equity - partners	847,065		2,461,802		69,405		(2,540,487)		837,785		Equity - partners	845,584		2,443,931		69,368		(2,523,705)		835,178
Equity - noncontrolling interests	Equity - noncontrolling interests	—		—		69,405		—		69,405		Equity - noncontrolling interests	—		—		69,368		—		69,368
Total liabilities and equity	Total liabilities and equity	$	2,473,833	$	2,791,727	$	143,090	$	(2,633,612)	$	2,775,038	Total liabilities and equity	$	2,457,735	$	2,782,081	$	141,615	$	(2,616,460)	$	2,764,971

- 3233 -

Condensed Consolidating Balance Sheet


December 31, 2021	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	1,273	$	4,227	$	8,881	$	—	$	14,381
Accounts receivable	—		68,768		2,833		(2,702)		68,899
Prepaid and other current assets	353		10,680		304		(304)		11,033
Total current assets	1,626		83,675		12,018		(3,006)		94,313

Properties and equipment, net	—		1,329,028		—		—		1,329,028
Operating lease right-of-use assets	—		2,275		—		—		2,275
Net investment in leases	—		309,301		100,032		(100,030)		309,303
Investment in subsidiaries	1,785,024		70,437		—		(1,855,461)		—
Intangible assets, net	—		73,307		—		—		73,307
Goodwill	—		223,650		—		—		223,650
Equity method investments	—		78,873		37,505		—		116,378
Deferred turnaround costs	—		2,632		—		—		2,632
Other assets	8,118		6,863		—		—		14,981
Total assets	$	1,794,768	$	2,180,041	$	149,555	$	(1,958,497)	$	2,165,867

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	—	$	34,566	$	8,416	$	(2,702)	$	40,280
Accrued interest	11,258		—		—		—		11,258
Deferred revenue	—		14,585		—		—		14,585
Accrued property taxes	—		4,542		—		—		4,542
Current operating lease liabilities	—		620		—		—		620
Current finance lease liabilities	—		5,566		—		(1,780)		3,786
Other current liabilities	3		1,513		265		—		1,781
Total current liabilities	11,261		61,392		8,681		(4,482)		76,852

Long-term debt	1,333,049		—		—		—		1,333,049
Noncurrent operating lease liabilities	—		2,030		—		—		2,030
Noncurrent finance lease liabilities	—		156,102		—		(91,453)		64,649
Other long-term liabilities	340		12,187		—		—		12,527
Deferred revenue	—		29,662		—		—		29,662
Class B unit	—		56,549		—		—		56,549
Equity - partners	450,118		1,785,024		70,437		(1,862,562)		443,017
Equity - noncontrolling interests	—		77,095		70,437		—		147,532
Total liabilities and equity	$	1,794,768	$	2,180,041	$	149,555	$	(1,958,497)	$	2,165,867

- ~~33 -~~

~~Condensed Consolidating Statement of Income~~

Three Months Ended June 30, 2022 Parent Guarantor Restricted
Subsidiaries Non-Guarantor Non-Restricted Subsidiaries Eliminations Consolidated
(In thousands)
Revenues:
Affiliates $ — $ 110,537 $ — $ — $ 110,537
Third parties — 25,233 — — 25,233
— 135,770 — — 135,770
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) — 52,823 1,076 — 53,899
Depreciation and amortization — 26,974 — — 26,974
General and administrative 912 3,770 — — 4,682
912 83,567 1,076 — 85,555
Operating income (loss) (912) 52,203 (1,076) — 50,215
Other income (expense):
Equity in earnings of subsidiaries 77,104 1,927 — (79,031) —
Equity in earnings of equity method investments — 4,641 806 — 5,447
Interest expense (19,400) (5,071) — 4,124 (20,347)
Interest income — 24,331 4,124 (4,124) 24,331
Gain on sale of assets and other — 45 — — 45
57,704 25,873 4,930 (79,031) 9,476
Income before income taxes 56,792 78,076 3,854 (79,031) 59,691
State income tax expense — (14) — — (14)
Net income 56,792 78,062 3,854 (79,031) 59,677
Allocation of net income attributable to noncontrolling interests — (958) (1,927) — (2,885)
Net income attributable to the partners $ 56,792 $ 77,104 $ 1,927 $ (79,031) $ 56,792

- 34 -

Condensed Consolidating Statement of Income

Three Months Ended June 30, 2021 Parent Guarantor
Restricted Subsidiaries Non-Guarantor Non-Restricted Subsidiaries Eliminations Consolidated
(In thousands)
Revenues:
Affiliates $ — $ 99,142 $ — $ — $ 99,142
Third parties — 27,093 — — 27,093
— 126,235 — — 126,235
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) — 41,411 657 — 42,068
Depreciation and amortization — 25,003 — — 25,003
General and administrative 907 1,940 — — 2,847
907 68,354 657 — 69,918
Operating income (loss) (907) 57,881 (657) — 56,317
Other income (expense):
Equity in earnings of subsidiaries 69,596 (14) — (69,582) —
Equity in earnings of equity method investments 0 2,793 630 — 3,423
Interest expense (12,944) (994) — — (13,938)
Interest income 0 6,614 — — 6,614
Gain on sales-type lease — 27 — — 27
Gain on sale of assets and other — 5,415 — — 5,415
56,652 13,841 630 (69,582) 1,541
Income before income taxes 55,745 71,722 (27) (69,582) 57,858
State income tax expense — (27) — — (27)
Net income 55,745 71,695 (27) (69,582) 57,831
Allocation of net income attributable to noncontrolling interests — (2,099) 13 — (2,086)
Net income attributable to the partners $ 55,745 $ 69,596 $ (14) $ (69,582) $ 55,745


Three Months Ended September 30, 2022	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
Revenues:
Affiliates	$	—	$	122,868	$	—	$	—	$	122,868
Third parties	—		26,134		—		—		26,134
	—		149,002		—		—		149,002
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—		59,493		977		—		60,470
Depreciation and amortization	—		25,236		—		—		25,236
General and administrative	703		3,048		—		—		3,751

	703		87,777		977		—		89,457
Operating income (loss)	(703)		61,225		(977)		—		59,545

Other income (expense):
Equity in earnings of subsidiaries	64,681		1,964		—		(66,645)		—
Equity in earnings of equity method investments	—		(17,117)		783		—		(16,334)
Interest expense	(22,027)		(5,060)		—		4,122		(22,965)
Interest income	—		24,234		4,122		(4,122)		24,234

Gain on sale of assets and other	—		494		—		—		494
	42,654		4,515		4,905		(66,645)		(14,571)
Income before income taxes	41,951		65,740		3,928		(66,645)		44,974
State income tax (expense)	—		(38)		—		—		(38)
Net income	41,951		65,702		3,928		(66,645)		44,936
Allocation of net income attributable to noncontrolling interests	—		(1,021)		(1,964)		—		(2,985)

Net income attributable to the partners	$	41,951	$	64,681	$	1,964	$	(66,645)	$	41,951

- 35 -

Condensed Consolidating Statement of Income

Six Months Ended June 30, 2022 Parent Guarantor Restricted
Subsidiaries Non-Guarantor Non-restricted Subsidiaries Eliminations Consolidated
(In thousands)
Revenues:
Affiliates $ — $ 202,791 $ — $ — $ 202,791
Third parties — 53,177 — — 53,177
— 255,968 — — 255,968
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) — 94,757 1,767 — 96,524
Depreciation and amortization — 49,161 — — 49,161
General and administrative 2,000 6,994 — — 8,994
2,000 150,912 1,767 — 154,679
Operating income (loss) (2,000) 105,056 (1,767) — 0 101,289
Other income (expense):
Equity in earnings of subsidiaries 140,431 4,098 — (144,529) —
Equity in earnings of equity method investments — 7,361 1,712 — 9,073
Interest expense (32,080) (10,157) — 8,251 (33,986)
Interest income — 36,978 8,251 (8,251) 36,978
Gain on sale of assets and other — 146 — — 146
108,351 38,426 9,963 (144,529) 12,211
Income before income taxes 106,351 143,482 8,196 (144,529) 113,500
State income tax expense — (45) — — (45)
Net income 106,351 143,437 8,196 (144,529) 113,455
Allocation of net income attributable to noncontrolling interests — (3,006) (4,098) — (7,104)
Net income attributable to the partners $ 106,351 $ 140,431 $ 4,098 $ (144,529) $ 106,351


Three Months Ended September 30, 2021	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
Revenues:
Affiliates	$	—	$	97,124	$	—	$	—	$	97,124
Third parties	—		25,460		—		—		25,460
	—		122,584		—		—		122,584
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—		42,276		517		—		42,793
Depreciation and amortization	—		21,826		—		—		21,826
General and administrative	739		3,110		—		—		3,849

	739		67,212		517		—		68,468
Operating income (loss)	(739)		55,372		(517)		—		54,116

Other income (expense):
Equity in earnings of subsidiaries	69,553		260		—		(69,813)		—
Equity in earnings of equity method investments	—		2,743		946		—		3,689
Interest expense	(12,431)		(1,077)		—		91		(13,417)
Interest income	—		6,835		91		(91)		6,835

Gain on sales-type lease	—		7,223		—		(7,223)		—
Gain on sale of assets and other	—		77		—		—		77
	57,122		16,061		1,037		(77,036)		(2,816)
Income before income taxes	56,383		71,433		520		(77,036)		51,300
State income tax benefit	—		4		—		—		4
Net income	56,383		71,437		520		(77,036)		51,304
Allocation of net income attributable to noncontrolling interests	—		(1,884)		(260)		—		(2,144)


Net income attributable to the partners	$	56,383	$	69,553	$	260	$	(77,036)	$	49,160

- 36 -

Condensed Consolidating Statement of Income


Nine Months Ended September 30, 2022	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
Revenues:
Affiliates	$	—	$	325,659	$	—	$	—	$	325,659
Third parties	—		79,311		—		—		79,311
	—		404,970		—		—		404,970
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—		154,250		2,744		—		156,994
Depreciation and amortization	—		74,397		—		—		74,397
General and administrative	2,703		10,042		—		—		12,745
	2,703		238,689		2,744		—		244,136
Operating income (loss)	(2,703)		166,281		(2,744)		—		160,834

Other income (expense):
Equity in earnings of subsidiaries	205,112		6,062		—		(211,174)		—
Equity in earnings of equity method investments	—		(9,756)		2,495		—		(7,261)
Interest expense	(54,107)		(15,217)		—		12,373		(56,951)
Interest income	—		61,212		12,373		(12,373)		61,212

Gain on sale of assets and other	—		640		—		—		640
	151,005		42,941		14,868		(211,174)		(2,360)
Income before income taxes	148,302		209,222		12,124		(211,174)		158,474
State income tax (expense)	—		(83)		—		—		(83)
Net income	148,302		209,139		12,124		(211,174)		158,391
Allocation of net income attributable to noncontrolling interests	—		(4,027)		(6,062)		—		(10,089)

Net income attributable to the partners	$	148,302	$	205,112	$	6,062	$	(211,174)	$	148,302

Six Months Ended June 30, 2021 Parent Guarantor Restricted
Subsidiaries Non-Guarantor Non-restricted Subsidiaries Eliminations Consolidated
(In thousands)
Revenues:
Affiliates $ — $ 201,068 $ — $ — $ 201,068
Third parties — 52,350 — — 52,350
— 253,418 — — 253,418
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) — 82,434 999 — 83,433
Depreciation and amortization — 50,068 — — 50,068
General and administrative 2,085 3,730 — — 5,815
Goodwill impairment — 11,034 — — 11,034
2,085 147,266 999 — 150,350
Operating income (loss) (2,085) 106,152 (999) — 103,068
Other income (expense):
Equity in earnings of subsidiaries 147,405 388 — (147,793) —
Equity in earnings of equity method investments — 3,411 1,775 — 5,186
Interest expense (25,178) (2,000) — — (27,178)
Interest income — 13,162 — — 13,162
Gain on sales-type lease — 24,677 — — 24,677
Gain on sale of assets and other — 5,917 — — 5,917
122,227 45,555 1,775 (147,793) 21,764
Income before income taxes 120,142 151,707 776 (147,793) 124,832
State income tax expense — (64) — — (64)
Net income 120,142 151,643 776 (147,793) 124,768
Allocation of net income attributable to noncontrolling interests — (4,238) (388) — (4,626)
Net income attributable to the partners 120,142 147,405 388 (147,793) 120,142

- 37 -

Condensed Consolidating Statement of Income


Nine Months Ended September 30, 2021	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
Revenues:
Affiliates	$	—	$	298,192	$	—	$	—	$	298,192
Third parties	—		77,810		—		—		77,810
	—		376,002		—		—		376,002
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—		124,710		1,516		—		126,226
Depreciation and amortization	—		71,894		—		—		71,894
General and administrative	2,824		6,840		—		—		9,664
Goodwill impairment	—		11,034		—		—		11,034
	2,824		214,478		1,516		—		218,818
Operating income (loss)	(2,824)		161,524		(1,516)		—		157,184

Other income (expense):
Equity in earnings of subsidiaries	216,958		648		—		(217,606)		—
Equity in earnings of equity method investments	—		6,154		2,721		—		8,875
Interest expense	(37,609)		(3,077)		—		91		(40,595)
Interest income	—		19,997		91		(91)		19,997
Gain on sales-type lease	—		31,900		—		(7,223)		24,677
Gain on sale of assets and other	—		5,994		—		—		5,994
	179,349		61,616		2,812		(224,829)		18,948
Income before income taxes	176,525		223,140		1,296		(224,829)		176,132
State income tax (expense)	—		(60)		—		—		(60)
Net income	176,525		223,080		1,296		(224,829)		176,072
Allocation of net income attributable to noncontrolling interests	—		(6,122)		(648)		—		(6,770)

Net income attributable to the partners	176,525		216,958		648		(224,829)		169,302

- 38 -

Note 18: Osage Pipeline

On July 8, 2022, the Osage pipeline, which is owned by Osage (see Note 1) and carries crude oil from Cushing, Oklahoma to El Dorado, Kansas, suffered a release of crude oil. Our equity in earnings of equity method investments was reduced in the three and nine months ended September 30, 2022 by $20.3 million for our 50% share of incurred and estimated environmental remediation and recovery expenses associated with the release, net of our share of insurance proceeds received to date of $0.5 million. Additional insurance recoveries will be recorded as they are received. Our share of the remaining insurance coverage is $12.5 million. As Osage is an equity method investment, its financial position and results are not consolidated into HEP financial statement line items. The financial impact of the Osage crude oil release is reflected on the consolidated balance sheets as a reduction in equity method investments and is reflected on the consolidated statement of income as a reduction in equity in earnings (loss) of equity method investments.

The pipeline ~~has~~ resumed operations ~~and recovery operations are ongoing. We expect to accrue amounts related to recovery and remediation~~ in the third quarter of 2022 and remediation efforts are underway. It may be necessary for Osage to accrue additional amounts for environmental remediation or other release-related expenses in future periods, but we cannot estimate those amounts at this time. WeFuture costs and accruals could have a material impact on our results of operations and cash flows in the period recorded; however, we do not expect ~~the accrual will~~them to have a material impact on our financial position.

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

OVERVIEW

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

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

Additionally, on the Closing Date and immediately prior to consummation of the HFC Transactions, HEP acquired all of the outstanding equity interests of Sinclair Transportation from Sinclair HoldCo in exchange for 21 million newly issued common limited partner units of HEP (the “HEP Units”), representing 16.6% of the pro forma outstanding HEP Units with a value of approximately $349 million based on HEP’s fully diluted common limited partner units outstanding and closing unit price on March 11, 2022, and cash consideration equal to ~~$321.4~~$329.0 million, inclusive of ~~estimated~~final working capital adjustments for an aggregate transaction value of ~~$670.4~~$678.0 million (the “HEP Transaction” and together with the HFC Transactions, the “Sinclair Transactions”). The cash consideration was funded through a draw under HEP’s senior secured revolving credit facility. The HEP Transaction was conditioned on the closing of the HFC Transactions, which occurred immediately following the HEP Transaction.

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

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

Through our subsidiaries and joint ventures, we own and/or operate petroleum product and crude oil pipelines, terminal, tankage and loading rack facilities and refinery processing units that support the refining and marketing operations of HF Sinclair and other refineries in the Mid-Continent, Southwest and Northwest regions of the United States. HEP, through its subsidiaries and joint ventures, owns and/or operates petroleum product and crude pipelines, tankage and terminals in Colorado, Idaho, Iowa, Kansas, Missouri, Nevada, New Mexico, Oklahoma, Texas, Utah, Washington and Wyoming as well as refinery processing units in Utah and Kansas.

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

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

Market Developments

Our results for the ~~second~~third quarter and ~~first six~~the nine months ofended September 30, 2022 were favorably impacted by ~~continued strong global economic activity with~~ global demand for transportation fuels, lubricants and transportation and terminal services having returned to pre-pandemic levels. We expect our customers will continue to adjust refinery production levels commensurate with market demand. The extent to which HEP’s future results are affected by the COVID-19 pandemic or volatile regional and global economic conditions will depend on various factors and consequences beyond our control. However, we have long-term customer contracts with minimum volume commitments, which have expiration dates from 2023 to 2037. These minimum volume commitments accounted for approximately ~~64% and 66%~~70% of our total ~~revenues in~~tariffs and fees billed to customers for both the ~~six~~nine months ended ~~June~~September 30, 2022 and ~~June~~September 30, ~~2021, respectively.~~2021. We are currently not aware of any reasons that would prevent such customers from making the minimum payments required under the contracts or potentially making payments in excess of the minimum payments. In addition to these payments, we also expect to collect payments for services provided to uncommitted shippers.

Investment in Joint Venture

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

The Cushing Connect Joint Venture has contracted with an affiliate of HEP to manage the construction and operation of the Cushing Connect Pipeline and with an affiliate of Plains to manage the operation of the Cushing Connect JV Terminal. The total Cushing Connect Joint Venture investment will generally be shared equally among HEP and Plains. However, we are solely responsible for any Cushing Connect Pipeline construction costs that exceed the budget by more than 10%. HEP estimates its share of the cost of the Cushing Connect JV Terminal contributed by Plains and Cushing Connect Pipeline construction costs are approximately $73 million, including approximately $5 million of Cushing Connect Pipeline construction costs exceeding the budget by more than 10% borne solely by HEP.

Agreements with HF Sinclair

We serve HF Sinclair’s refineries under long-term pipeline, terminal, tankage and refinery processing unit throughput agreements expiring from 2023 to 2037. Under these agreements, HF Sinclair agrees to transport, store, and process throughput volumes of refined product, crude oil and feedstocks on our pipelines, terminal, tankage, loading rack facilities and refinery processing units that result in minimum annual payments to us. These minimum annual payments or revenues are subject to annual rate adjustments on July 1st each year based on the PPI or the FERC index. On December 17, 2020, FERC established a new price index for the five-year period commencing July 1, 2021 and ending June 30, 2026, in which common carriers charging indexed rates were permitted to adjust their indexed ceilings annually by Producer Price Index plus 0.78%. FERC received requests for rehearing of its December 17, 2020 order, and on January 20, 2022, FERC revised the index level used to determine the annual changes to interstate oil pipeline rate ceilings to Producer Price Index minus 0.21%. The order required the recalculation of the July 1, 2021 index ceilings to be effective as of March 1, 2022. As of ~~July 1,~~September 30, 2022, these agreements with HF Sinclair require minimum annualized payments to us of $446 million.

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

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

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

Under certain provisions of an omnibus agreement we have with HF Sinclair (the “Omnibus Agreement”), we pay HF Sinclair an annual administrative fee, currently $5.0 million, for the provision by HF Sinclair or its affiliates of various general and administrative services to us. In connection with the HEP Transaction, we pay HF Sinclair a temporary monthly fee of $62,500 relating to transition services to be provided to HEP by HF Sinclair. Neither the annual administrative fee nor the temporary monthly fee includes the salaries of personnel employed by HF Sinclair who perform services for us on behalf of Holly Logistic Services, L.L.C. (“HLS”), or the cost of their employee benefits, which are separately charged to us by HF Sinclair. We also reimburse HF Sinclair and its affiliates for direct expenses they incur on our behalf.

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

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

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

Indicators of Goodwill and Long-lived Asset Impairment

During the three months ended March 31, 2021, changes in our agreements with HFC related to our Cheyenne assets resulted in an increase in the net book value of our Cheyenne reporting unit due to sales-type lease accounting, which led us to determine indicators of potential goodwill impairment for our Cheyenne reporting unit were present.

The estimated fair values of our Cheyenne reporting unit were derived using a combination of income and market approaches. The income approach reflects expected future cash flows based on anticipated gross margins, operating costs, and capital expenditures. The market approaches include both the guideline public company and guideline transaction methods. Both methods utilize pricing multiples derived from historical market transactions of other like-kind assets. These fair value measurements involve significant unobservable inputs (Level 3 inputs). See Note 6 for further discussion of Level 3 inputs.

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

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RESULTS OF OPERATIONS (Unaudited)

Income, Distributable Cash Flow, Volumes and Balance Sheet Data

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

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Three Months Ended June 30, Change from
2022 2021 2021
(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates—refined product pipelines $ 20,920 $ 19,213 $ 1,707
Affiliates—intermediate pipelines 7,521 7,521 —
Affiliates—crude pipelines 20,971 19,251 1,720
49,412 45,985 3,427
Third parties—refined product pipelines 5,215 9,526 (4,311)
Third parties—crude pipelines 13,692 12,811 881
68,319 68,322 (3)
Terminals, tanks and loading racks:
Affiliates 38,232 32,131 6,101
Third parties 6,326 4,756 1,570
44,558 36,887 7,671
Refinery processing units—Affiliates 22,893 21,026 1,867
Total revenues 135,770 126,235 9,535
Operating costs and expenses:
Operations (exclusive of depreciation and amortization) 53,899 42,068 11,831
Depreciation and amortization 26,974 25,003 1,971
General and administrative 4,682 2,847 1,835
85,555 69,918 15,637
Operating income 50,215 56,317 (6,102)
Other income (expense):
Equity in earnings of equity method investments 5,447 3,423 2,024
Interest expense, including amortization (20,347) (13,938) (6,409)
Interest income 24,331 6,614 17,717
Gain on sales-type leases — 27 (27)
Gain on sale of assets and other 45 5,415 (5,370)
9,476 1,541 7,935
Income before income taxes 59,691 57,858 1,833
State income tax expense (14) (27) 13
Net income 59,677 57,831 1,846
Allocation of net income attributable to noncontrolling interests (2,885) (2,086) (799)
Net income attributable to the partners 56,792 55,745 1,047
Limited partners’ earnings per unit—basic and diluted $ 0.45 $ 0.53 $ (0.08)
Weighted average limited partners’ units outstanding 126,440 105,440 21,000
EBITDA (1)
$ 79,796 $ 88,099 $ (8,303)
Adjusted EBITDA (1)
$ 104,244 $ 88,261 $ 15,983
Distributable cash flow (2)
$ 78,458 $ 66,680 $ 11,778
Volumes (bpd)
Pipelines:
Affiliates—refined product pipelines 140,333 119,046 21,287
Affiliates—intermediate pipelines 124,588 143,762 (19,174)
Affiliates—crude pipelines 477,241 260,756 216,485
742,162 523,564 218,598
Third parties—refined product pipelines 37,989 52,126 (14,137)
Third parties—crude pipelines 138,040 135,904 2,136
918,191 711,594 206,597
Terminals and loading racks:
Affiliates 572,289 413,441 158,848
Third parties 36,748 53,257 (16,509)
609,037 466,698 142,339
Refinery processing units—Affiliates 72,342 76,589 (4,247)
Total for pipelines and terminal and refinery processing unit assets (bpd) 1,599,570 1,254,881 344,689

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Table o


		Six Months Ended June 30,				Change from			Three Months Ended September 30,				Change from
		2022		2021		2021			2022		2021		2021
		(In thousands, except per unit data)							(In thousands, except per unit data)
Revenues:	Revenues:							Revenues:
Pipelines:	Pipelines:							Pipelines:
Affiliates—refined product pipelines	Affiliates—refined product pipelines	$	37,780	$	37,819	$	(39)	Affiliates—refined product pipelines	$	24,731	$	18,702	$	6,029
Affiliates—intermediate pipelines	Affiliates—intermediate pipelines	15,027		15,027		—		Affiliates—intermediate pipelines	7,988		7,537		451
Affiliates—crude pipelines	Affiliates—crude pipelines	39,248		38,705		543		Affiliates—crude pipelines	23,169		19,536		3,633
		92,055		91,551		504			55,888		45,775		10,113
Third parties—refined product pipelines	Third parties—refined product pipelines	14,475		19,389		(4,914)		Third parties—refined product pipelines	6,694		8,799		(2,105)
Third parties—crude pipelines	Third parties—crude pipelines	26,569		23,887		2,682		Third parties—crude pipelines	14,565		12,780		1,785
		133,099		134,827		(1,728)			77,147		67,354		9,793
Terminals, tanks and loading racks:	Terminals, tanks and loading racks:							Terminals, tanks and loading racks:
Affiliates	Affiliates	69,440		65,995		3,445		Affiliates	39,557		29,436		10,121
Third parties	Third parties	12,133		9,074		3,059		Third parties	4,875		3,881		994
		81,573		75,069		6,504			44,432		33,317		11,115

Refinery processing units—Affiliates	Refinery processing units—Affiliates	41,296		43,522		(2,226)		Refinery processing units—Affiliates	27,423		21,913		5,510

Total revenues	Total revenues	255,968		253,418		2,550		Total revenues	149,002		122,584		26,418
Operating costs and expenses:	Operating costs and expenses:							Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	Operations (exclusive of depreciation and amortization)	96,524		83,433		13,091		Operations (exclusive of depreciation and amortization)	60,470		42,793		17,677
Depreciation and amortization	Depreciation and amortization	49,161		50,068		(907)		Depreciation and amortization	25,236		21,826		3,410
General and administrative	General and administrative	8,994		5,815		3,179		General and administrative	3,751		3,849		(98)
Goodwill impairment		—		11,034		(11,034)

		154,679		150,350		4,329			89,457		68,468		20,989
Operating income	Operating income	101,289		103,068		(1,779)		Operating income	59,545		54,116		5,429
Other income (expense):	Other income (expense):							Other income (expense):
Equity in earnings of equity method investments	Equity in earnings of equity method investments	9,073		5,186		3,887		Equity in earnings of equity method investments	(16,334)		3,689		(20,023)
Interest expense, including amortization	Interest expense, including amortization	(33,986)		(27,178)		(6,808)		Interest expense, including amortization	(22,965)		(13,417)		(9,548)
Interest income	Interest income	36,978		13,162		23,816		Interest income	24,234		6,835		17,399

Gain on sales-type leases		—		24,677		(24,677)

Gain on sale of assets and other	Gain on sale of assets and other	146		5,917		(5,771)		Gain on sale of assets and other	494		77		417
		12,211		21,764		(9,553)			(14,571)		(2,816)		(11,755)
Income before income taxes	Income before income taxes	113,500		124,832		(11,332)		Income before income taxes	44,974		51,300		(6,326)
State income tax expense		(45)		(64)		19
State income tax benefit (expense)								State income tax benefit (expense)	(38)		4		(42)
Net income	Net income	113,455		124,768		(11,313)		Net income	44,936		51,304		(6,368)

Allocation of net income attributable to noncontrolling interests	Allocation of net income attributable to noncontrolling interests	(7,104)		(4,626)		(2,478)		Allocation of net income attributable to noncontrolling interests	(2,985)		(2,144)		(841)
Net income attributable to the partners	Net income attributable to the partners	106,351		120,142		(13,791)		Net income attributable to the partners	41,951		49,160		(7,209)

Limited partners’ earnings per unit—basic and diluted	Limited partners’ earnings per unit—basic and diluted	$	0.90	$	1.14	$	(0.24)	Limited partners’ earnings per unit—basic and diluted	$	0.33	$	0.46	$	(0.13)
Weighted average limited partners’ units outstanding	Weighted average limited partners’ units outstanding	118,087		105,440		12,647		Weighted average limited partners’ units outstanding	126,440		105,440		21,000
EBITDA (1)	EBITDA (1)	$	152,565	$	184,290	$	(31,725)	EBITDA (1)	$	65,956	$	77,564	$	(11,608)
Adjusted EBITDA (1)	Adjusted EBITDA (1)	$	189,581	$	176,196	$	13,385	Adjusted EBITDA (1)	$	110,092	$	83,270	$	26,822
Distributable cash flow (2)	Distributable cash flow (2)	$	142,912	$	139,899	$	3,013	Distributable cash flow (2)	$	78,731	$	66,810	$	11,921

Volumes (bpd)	Volumes (bpd)							Volumes (bpd)
Pipelines:	Pipelines:							Pipelines:
Affiliates—refined product pipelines	Affiliates—refined product pipelines	123,863		119,316		4,547		Affiliates—refined product pipelines	167,618		115,507		52,111
Affiliates—intermediate pipelines	Affiliates—intermediate pipelines	121,213		129,573		(8,360)		Affiliates—intermediate pipelines	137,049		136,398		651
Affiliates—crude pipelines	Affiliates—crude pipelines	436,865		255,730		181,135		Affiliates—crude pipelines	507,419		271,717		235,702
		681,941		504,619		177,322			812,086		523,622		288,464
Third parties—refined product pipelines	Third parties—refined product pipelines	43,479		48,298		(4,819)		Third parties—refined product pipelines	38,040		46,834		(8,794)
Third parties—crude pipelines	Third parties—crude pipelines	134,602		129,603		4,999		Third parties—crude pipelines	131,622		136,247		(4,625)
		860,022		682,520		177,502			981,748		706,703		275,045
Terminals and loading racks:	Terminals and loading racks:							Terminals and loading racks:
Affiliates	Affiliates	509,509		368,612		140,897		Affiliates	583,089		419,665		163,424
Third parties	Third parties	42,519		49,526		(7,007)		Third parties	37,782		52,541		(14,759)
		552,028		418,138		133,890			620,871		472,206		148,665
Refinery processing units—Affiliates	Refinery processing units—Affiliates	68,804		68,688		116		Refinery processing units—Affiliates	72,065		72,297		(232)
Total for pipelines and terminal and refinery processing unit assets (bpd)	Total for pipelines and terminal and refinery processing unit assets (bpd)	1,480,854		1,169,346		311,508		Total for pipelines and terminal and refinery processing unit assets (bpd)	1,674,684		1,251,206		423,478

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Table o


	Nine Months Ended September 30,				Change from
	2022		2021		2021
	(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates—refined product pipelines	$	62,511	$	56,520	$	5,991
Affiliates—intermediate pipelines	23,015		22,564		451
Affiliates—crude pipelines	62,417		58,241		4,176
	147,943		137,325		10,618
Third parties—refined product pipelines	21,169		28,188		(7,019)
Third parties—crude pipelines	41,134		36,667		4,467
	210,246		202,180		8,066
Terminals, tanks and loading racks:
Affiliates	108,997		95,431		13,566
Third parties	17,008		12,955		4,053
	126,005		108,386		17,619

Refinery processing units—Affiliates	68,719		65,436		3,283

Total revenues	404,970		376,002		28,968
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	156,994		126,226		30,768
Depreciation and amortization	74,397		71,894		2,503
General and administrative	12,745		9,664		3,081
Goodwill impairment	—		11,034		(11,034)
	244,136		218,818		25,318
Operating income	160,834		157,184		3,650
Other income (expense):
Equity in earnings of equity method investments	(7,261)		8,875		(16,136)
Interest expense, including amortization	(56,951)		(40,595)		(16,356)
Interest income	61,212		19,997		41,215

Gain on sales-type leases	—		24,677		(24,677)
Gain on sale of assets and other	640		5,994		(5,354)
	(2,360)		18,948		(21,308)
Income before income taxes	158,474		176,132		(17,658)
State income tax (expense)	(83)		(60)		(23)
Net income	158,391		176,072		(17,681)

Allocation of net income attributable to noncontrolling interests	(10,089)		(6,770)		(3,319)
Net income attributable to the partners	148,302		169,302		(21,000)


Limited partners’ earnings per unit—basic and diluted	$	1.22	$	1.60	$	(0.38)
Weighted average limited partners’ units outstanding	120,902		105,440		15,462
EBITDA (1)	$	218,521	$	261,854	$	(43,333)
Adjusted EBITDA (1)	$	299,673	$	259,466	$	40,207
Distributable cash flow (2)	$	221,643	$	206,707	$	14,936

Volumes (bpd)
Pipelines:
Affiliates—refined product pipelines	138,608		118,033		20,575
Affiliates—intermediate pipelines	126,550		131,873		(5,323)
Affiliates—crude pipelines	460,641		261,117		199,524
	725,799		511,023		214,776
Third parties—refined product pipelines	41,646		47,805		(6,159)
Third parties—crude pipelines	133,598		131,842		1,756
	901,043		690,670		210,373
Terminals and loading racks:
Affiliates	534,305		386,400		147,905
Third parties	40,923		50,542		(9,619)
	575,228		436,942		138,286
Refinery processing units—Affiliates	69,903		69,904		(1)
Total for pipelines and terminal and refinery processing unit assets (bpd)	1,546,174		1,197,516		348,658

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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) goodwill impairment, (ii) acquisition integration and regulatory costs, (iii) our share of Osage environmental expenses included in equity in earnings of equity method investments, and ~~(iii)~~(iv) tariffs and fees not included in revenues due to impacts from lease accounting for certain tariffs and fees minus ~~(iv)~~(v) gain on sales-type leases, ~~(v)~~(vi) gain on significant asset sales and ~~(vi)~~(vii) pipeline lease payments not included in operating costs and expenses. Portions of our minimum guaranteed pipeline and terminal tariffs and fees for assets subject to sales-type lease accounting are recorded as interest income with the remaining amounts recorded as a reduction in net investment in leases. ~~These tariffs and fees were previously recorded as revenues prior to the renewal of the throughput agreements, which triggered sales-type lease accounting.~~ Similarly, certain pipeline lease payments were previously recorded as operating costs and expenses, but the underlying lease was reclassified from an operating lease to a financing lease, and these payments are now recorded as interest expense and reductions in the lease liability. EBITDA and Adjusted EBITDA are not calculations based upon generally accepted accounting principles ("GAAP"). However, the amounts included in the EBITDA and Adjusted EBITDA calculations are derived from amounts included in our consolidated financial statements. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income attributable to HEP or operating income, as indications of our operating performance or as alternatives to operating cash flow as a measure of liquidity. EBITDA and Adjusted EBITDA are not necessarily comparable to similarly titled measures of other companies. EBITDA and Adjusted EBITDA are presented here because they are widely used financial indicators used by investors and analysts to measure performance. EBITDA and Adjusted EBITDA are also used by our management for internal analysis and as a basis for compliance with financial covenants. Set forth below are our calculations of EBITDA and Adjusted EBITDA.


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
		(In thousands)									(In thousands)
Net income attributable to the partners	Net income attributable to the partners	$	56,792	$	55,745	$	106,351	$	120,142	Net income attributable to the partners	$	41,951	$	49,160	$	148,302	$	169,302
Add (subtract):	Add (subtract):									Add (subtract):
Interest expense	Interest expense	20,347		13,938		33,986		27,178		Interest expense	22,965		13,417		56,951		40,595
Interest income	Interest income	(24,331)		(6,614)		(36,978)		(13,162)		Interest income	(24,234)		(6,835)		(61,212)		(19,997)
State income tax expense		14		27		45		64
State income tax expense (benefit)										State income tax expense (benefit)	38		(4)		83		60
Depreciation and amortization	Depreciation and amortization	26,974		25,003		49,161		50,068		Depreciation and amortization	25,236		21,826		74,397		71,894
EBITDA	EBITDA	$	79,796	$	88,099	$	152,565	$	184,290	EBITDA	$	65,956	$	77,564	$	218,521	$	261,854

Gain on sales-type leases	Gain on sales-type leases	—		(27)		—		(24,677)		Gain on sales-type leases	—		—		—		(24,677)
Gain on significant asset sales	Gain on significant asset sales	—		(5,263)		—		(5,263)		Gain on significant asset sales	—		—		—		(5,263)
Goodwill impairment	Goodwill impairment	—		—		—		11,034		Goodwill impairment	—		—		—		11,034
Share of Osage environmental remediation costs										Share of Osage environmental remediation costs	20,297		—		20,297		—
Acquisition integration and regulatory costs	Acquisition integration and regulatory costs	886		—		1,722		—		Acquisition integration and regulatory costs	373		—		2,095		—
Tariffs and fees not included in revenues	Tariffs and fees not included in revenues	25,168		7,058		38,507		14,025		Tariffs and fees not included in revenues	25,072		7,312		63,579		21,337
Lease payments not included in operating costs	Lease payments not included in operating costs	(1,606)		(1,606)		(3,213)		(3,213)		Lease payments not included in operating costs	(1,606)		(1,606)		(4,819)		(4,819)
Adjusted EBITDA	Adjusted EBITDA	$	104,244	$	88,261	$	189,581	$	176,196	Adjusted EBITDA	$	110,092	$	83,270	$	299,673	$	259,466

(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 June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
		(In thousands)									(In thousands)
Net income attributable to the partners	Net income attributable to the partners	$	56,792	$	55,745	$	106,351	$	120,142	Net income attributable to the partners	$	41,951	$	49,160	$	148,302	$	169,302
Add (subtract):	Add (subtract):									Add (subtract):
Depreciation and amortization	Depreciation and amortization	26,974		25,003		49,161		50,068		Depreciation and amortization	25,236		21,826		74,397		71,894
Amortization of discount and deferred debt issuance costs	Amortization of discount and deferred debt issuance costs	1,033		1,385		1,803		2,229		Amortization of discount and deferred debt issuance costs	1,060		763		2,863		2,992

Customer billings greater than net income recognized	Customer billings greater than net income recognized	125		(3,573)		621		(179)		Customer billings greater than net income recognized	(587)		(122)		34		(301)
Maintenance capital expenditures (3)	Maintenance capital expenditures (3)	(4,963)		(4,111)		(10,583)		(5,482)		Maintenance capital expenditures (3)	(4,679)		(3,351)		(15,262)		(8,834)
Increase in environmental liability	Increase in environmental liability	(124)		(78)		(244)		(234)		Increase in environmental liability	5,364		271		5,120		36
Share of remaining Osage insurance coverage										Share of remaining Osage insurance coverage	12,500		—		12,500		—
Decrease in reimbursable deferred revenue	Decrease in reimbursable deferred revenue	(3,356)		(3,502)		(6,590)		(7,516)		Decrease in reimbursable deferred revenue	(3,538)		(2,991)		(10,127)		(10,507)
Gain on sales-type leases	Gain on sales-type leases	—		(27)		—		(24,677)		Gain on sales-type leases	—		—		—		(24,677)
Gain on significant asset sales	Gain on significant asset sales	—		(5,263)		—		(5,263)		Gain on significant asset sales	—		—		—		(5,263)
Goodwill impairment	Goodwill impairment	—		—		—		11,034		Goodwill impairment	—		—		—		11,034
Other	Other	1,977		1,101		2,393		(223)		Other	1,424		1,254		3,816		1,031
Distributable cash flow	Distributable cash flow	$	78,458	$	66,680	$	142,912	$	139,899	Distributable cash flow	$	78,731	$	66,810	$	221,643	$	206,707

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


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
		(In thousands)					(In thousands)
Balance Sheet Data	Balance Sheet Data					Balance Sheet Data
Cash and cash equivalents	Cash and cash equivalents	$	14,884	$	14,381	Cash and cash equivalents	$	15,551	$	14,381
Working capital	Working capital	$	15,259	$	17,461	Working capital	$	20,570	$	17,461
Total assets	Total assets	$	2,775,038	$	2,165,867	Total assets	$	2,764,971	$	2,165,867
Long-term debt	Long-term debt	$	1,608,460	$	1,333,049	Long-term debt	$	1,593,797	$	1,333,049
Partners’ equity	Partners’ equity	$	837,785	$	443,017	Partners’ equity	$	835,178	$	443,017

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

Summary

Net income attributable to the partners for the ~~second~~third quarter of 2022 was ~~$56.8~~$42.0 million ($~~0.45~~0.33 per basic and diluted limited partner unit) compared to ~~$55.7~~$49.2 million ($~~0.53~~0.46 per basic and diluted limited partner unit) for the ~~second~~third quarter of 2021. Results for the ~~second~~third quarter of ~~2021~~2022 reflect the impact to our equity in earnings of equity method investments of HEP’s 50% share of incurred and estimated environmental remediation and recovery expenses, net of insurance proceeds received to date, associated with a ~~gain~~release of ~~$5.3 million related to~~crude oil on the ~~sale~~Osage pipeline of ~~a refined product pipeline.~~$20.3 million. Excluding this ~~gain,~~impact, net income attributable to ~~HEP~~the partners for the ~~second~~third quarter of ~~2021~~2022 was ~~$50.~~$62.2 million ($~~0.48~~0.49 per basic and diluted limited partner unit). The increase in net income attributable to ~~HEP~~the partners was mainly due to net income from Sinclair Transportation, which was acquired on March 14, 2022, partially offset by higher interest expense and higher operating costs and expenses.

Revenues

Revenues for the ~~second~~third quarter were ~~$135.8~~$149.0 million, an increase of ~~$9.5~~$26.4 million compared to the ~~second~~third quarter of 2021. The increase was mainly due to revenues on our recently acquired Sinclair Transportation assets, ~~and~~ higher revenues on our ~~UNEV pipeline, partially offset by lower revenues~~refinery processing units and rate increases that went into effect on our Cheyenne assets as a result of the conversion of HF Sinclair's Cheyenne refinery to renewable diesel production and lower volumes on our product pipelines servicing HF Sinclair's Navajo refinery due to lower throughput at the refinery.July 1, 2022.

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Revenues from our refined product pipelines were ~~$26.1~~$31.4 million, ~~a decrease~~an increase of ~~$2.6~~$3.9 million compared to the ~~second~~third quarter of 2021. Shipments averaged ~~178.3~~205.7 thousand barrels per day (“mbpd”) compared to ~~171.2~~162.3 mbpd for the ~~second~~third quarter of 2021. The revenue and volume ~~increase was~~increases were mainly due to higher volumes on our recently acquired Sinclair Transportation product

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pipelines, ~~partially offset by lower~~higher volumes on ~~pipelines servicing HF Sinclair's Navajo refinery. The revenue decrease was mainly due to lower volumes~~our UNEV pipeline and rate increases that went into effect on pipelines servicing HF Sinclair's Navajo refinery and lower revenues from Delek US Holdings, Inc. (“Delek”) due to the expiration of a capacity lease, partially offset by revenues on our recently acquired Sinclair Transportation product pipelines.July 1, 2022. Revenues did not increase in proportion to volumes due to our recognition of a significant portion of the Sinclair Transportation refined product pipeline tariffs as interest income under sales-type lease accounting.

Revenues from our intermediate pipelines were ~~$7.5~~$8.0 million, ~~consistent with~~an increase of $0.5 million compared to the ~~second~~third quarter of 2021. Shipments averaged ~~124.6~~137.0 mbpd for the ~~second~~third quarter of 2022 compared to ~~143.8~~136.4 mbpd for the ~~second~~third quarter of 2021. The ~~decrease~~increase in ~~volumes~~revenue was mainly due to ~~lower throughputs~~rate increases that went into effect on ~~our intermediate pipelines servicing HF Sinclair’s Navajo refinery while revenue remained constant due to contractual minimum volume guarantees.~~July 1, 2022.

Revenues from our crude pipelines were ~~$34.7~~$37.7 million, an increase of ~~$2.6~~$5.4 million compared to the ~~second~~third quarter of 2021. Shipments averaged ~~615.3~~639.0 mbpd compared to ~~396.7~~408.0 mbpd for the ~~second~~third quarter of 2021. The increase in volumes was mainly attributable to our Cushing Connect ~~Pipeline,~~pipeline, which went into service in September 2021, ~~as well as~~ volumes on our recently acquired Sinclair Transportation crude ~~pipelines.~~pipelines and higher volumes on our crude pipeline systems in New Mexico and Texas. The increase in revenues was mainly due to our recently acquired Sinclair Transportation crude ~~pipelines.~~pipelines, higher volumes on our crude pipeline systems in New Mexico and Texas and rate increases that went into effect on July 1, 2022. Revenues did not increase in proportion to volumes due to our recognition of most of the Cushing Connect ~~Pipeline~~pipeline tariffs and a significant portion of Sinclair Transportation crude pipeline tariffs as interest income under sales-type lease accounting.

Revenues from terminal, tankage and loading rack fees were ~~$44.6~~$44.4 million, an increase of ~~$7.7~~$11.1 million compared to the ~~second~~third quarter of 2021. Refined products and crude oil terminalled in the facilities averaged ~~609.0~~620.9 mbpd compared to ~~466.7~~472.2 mbpd for the ~~second~~third quarter of 2021. The increase in volumes was mainly due to our recently acquired Sinclair Transportation assets. Revenues increased mainly due to revenues on our recently acquired Sinclair Transportation assets and higher butane blending revenues. In addition, the second quarter of 2021 included the recognition of $3.4 million of the $10 million termination fee related to the termination of HF Sinclair's minimum volume commitmentrate increases that went into effect on ~~our Cheyenne assets as a result of the conversion of the HF Sinclair Cheyenne refinery to renewable diesel production.~~July 1, 2022.

Revenues from refinery processing units were ~~$22.9~~$27.4 million, an increase of ~~$1.9~~$5.5 million compared to the ~~second~~third quarter of 2021, and throughputs averaged ~~72.3~~72.1 mbpd compared to ~~76.6~~72.3 mbpd for the ~~second~~third quarter of 2021. ~~The decrease in volumes was mainly due to decreased throughput at our El Dorado refinery processing units.~~ Revenues increased mainly due to ~~the~~ higher natural gas cost recoveries in ~~revenues. Revenues did not decrease in proportion to the decrease in volumes mainly due to contractual minimum volume guarantees.~~revenues, higher throughput at our Woods Cross refinery processing units and rate increases that went into effect on July 1, 2022.

Operations Expense

Operations (exclusive of depreciation and amortization and goodwill impairment) expense was ~~$53.9~~$60.5 million for the three months ended ~~June~~September 30, 2022, an increase of ~~$11.8~~$17.7 million compared to the ~~second~~third quarter of 2021. The increase was mainly due to operations expenses associated with our recently acquired Sinclair Transportation assets as well as higher employee costs, natural gas costs, maintenance costs and materials and supplies costs, partially offset by lower rentals and leases for the three months ended ~~June~~September 30, 2022.

Depreciation and Amortization

Depreciation and amortization for the three months ended ~~June~~September 30, 2022 increased by ~~$2.0~~$3.4 million compared to the three months ended ~~June~~September 30, 2021. The increase was mainly due to depreciation on our recently acquired Sinclair Transportation assets and amortization of the Woods Cross refinery processing units turnaround.

General and Administrative

General and administrative costs for the three months ended ~~June~~September 30, 2022 ~~increased~~decreased by ~~$1.8~~$0.1 million compared to the three months ended ~~June~~September 30, 2021, mainly due to ~~higher~~lower legal and professional expenses associated with the HEP Transaction.

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Equity in Earnings of Equity Method Investments


		Three Months Ended June 30,					Three Months Ended September 30,
Equity Method Investment	Equity Method Investment	2022		2021		Equity Method Investment	2022		2021
		(in thousands)					(in thousands)
Osage Pipe Line Company, LLC	Osage Pipe Line Company, LLC	606		914		Osage Pipe Line Company, LLC	(22,020)		1,090
Cheyenne Pipeline LLC	Cheyenne Pipeline LLC	1,586		1,879		Cheyenne Pipeline LLC	1,576		1,654
Cushing Connect Terminal Holdings LLC	Cushing Connect Terminal Holdings LLC	805		630		Cushing Connect Terminal Holdings LLC	782		945
Pioneer Investments Corp.	Pioneer Investments Corp.	3,221		—		Pioneer Investments Corp.	3,708		—
Saddle Butte Pipeline III, LLC	Saddle Butte Pipeline III, LLC	(771)		—		Saddle Butte Pipeline III, LLC	(380)		—
Total	Total	$	5,447	$	3,423	Total	$	(16,334)	$	3,689

Equity in earnings of Osage Pipe Line Company, LLC (“Osage”) decreased for the three months ended ~~June~~September 30, 2022, mainly due to ~~higher mainten~~our 50% share of environmental remediation and recovery expenses, net of insurance recoveries to date, associated with the release of crude oil on the Osage pipeline. Additional insurance recoveries will be recorded as they are received. Our share of the remaining insurance coverage is ~~ance costs. Equity in earnings of Cheyenne Pipeline LLC decreased for the three months ended June 30, 2022, mainly due to the recognition in revenue of prior contractual minimum commitment billings~~$12.5 million. The pipeline resumed operations in the ~~three months ended June 30, 2021. Equity in earnings~~third quarter of ~~Cushing Connect Terminal Holdings LLC increased for the three months ended June 30,~~ 2022 ~~mainly due to lower property tax expense.~~ and remediation efforts are underway. Pioneer Investments Corp. and Saddle Butte Pipeline III, LLC were acquired during the first quarter of 2022 as part of the HEP Transaction.

Interest Expense, including Amortization

Interest expense for the three months ended ~~June~~September 30, 2022, totaled ~~$20.3~~$23.0 million, an increase of ~~$6.4~~$9.5 million compared to the three months ended ~~June~~September 30, 2021. The increase was mainly due to our April 2022 issuance of $400 million in aggregate principal amount of 6.375% senior unsecured notes maturing in April 2027 ~~and higher average borrowings outstanding under our senior secured revolving credit facility~~ related to the funding of the cash portion of the Sinclair Transportation acquisition. In addition, market interest rates increased on our senior secured revolving credit facility. Our aggregate effective interest rates were ~~4.7%~~5.5% and ~~3.8%~~3.7% for the three months ended ~~June~~September 30, 2022 and 2021, respectively.

Interest Income

Interest income for the three months ended ~~June~~September 30, 2022, totaled ~~$24.3~~$24.2 million, an increase of ~~$17.7~~$17.4 million compared to the three months ended ~~June~~September 30, 2021. The increase was mainly due to higher sales-type lease interest income from our ~~newly~~recently acquired Sinclair Transportation pipelines and terminals and our Cushing Connect Pipeline, which was placed into service at the end of the third quarter of 2021.

State Income Tax Expense

We recorded state income tax expense of ~~$14,000~~$38,000 and ~~$27,000~~a state income tax benefit of $4,000 for the three months ended ~~June~~September 30, 2022 and 2021, respectively. All tax expense is solely attributable to the Texas margin tax.

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

Summary

Net income attributable to the partners for the ~~six~~nine months ended ~~June~~September 30, 2022, was ~~$106.4~~$148.3 million ($~~0.90~~1.22 per basic and diluted limited partner unit) compared to ~~$120.1~~$169.3 million ($~~1.14~~1.60 per basic and diluted limited partner unit) for the ~~six~~nine months ended ~~June~~September 30, 2021. Results for the ~~six~~nine months ended ~~June~~September 30, 2022 reflect the impact to our equity in earnings (loss) of equity method investments of HEP’s 50% share of incurred and estimated environmental remediation and recovery expenses, net of insurance proceeds received to date, associated with a release of crude oil on the Osage pipeline of $20.3 million. In addition, results for the nine months ended September 30, 2021, reflect special items that collectively increased net income attributable to the partners by a total of ~~$19.0~~$18.9 million. These items included a gain on sales-type leases of $24.7 million, a gain on significant asset sales of $5.3 million and a goodwill impairment charge of $11.0 million related to our Cheyenne reporting unit. Excluding these items, net income attributable to the partners for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 ~~was $101.1~~were $168.6 million ($~~0.96~~1.39 per basic and diluted limited partner unit). and $150.4 million ($1.43 per basic and diluted limited partner unit), respectively. The increase in earnings was mainly due to net income from Sinclair Transportation, which was acquired on March 14, 2022, higher revenues on our UNEV pipeline and higher net income from our Cushing Connect Joint Venture as the Cushing Connect pipeline which went into service in September 2021; partially offset by higher interest expense and higher operating costs and expenses. In addition, the ~~six~~nine months ended ~~June~~September 30, 2021 included the recognition ~~of $9.9 million~~ of the $10 million termination fee related to the termination of HF Sinclair's minimum volume commitment on our Cheyenne assets.

Revenues

Revenues for the ~~six~~nine months ended ~~June~~September 30, 2022, were ~~$256.0~~$405.0 million, an increase of ~~$2.6~~$29.0 million compared to the ~~six~~nine months ended ~~June~~September 30, 2021. The increase was mainly attributable to revenues on our recently acquired Sinclair Transportation assets and increased revenues from our UNEV assets, partially offset by lower revenues on our Cheyenne assets as a result of the conversion of HF Sinclair’s Cheyenne refinery to renewable diesel production and lower revenues on our product pipelines servicing HF Sinclair's Navajo refinery. The ~~six~~nine months ended ~~June~~September 30, 2021 included the recognition of the $10 million termination fee related to the termination of HF Sinclair's minimum volume commitment on our Cheyenne assets.

Revenues from our refined product pipelines were ~~$52.3~~$83.7 million, a decrease of ~~$5.0~~$1.0 million compared to the ~~six~~nine months ended ~~June~~September 30, 2021. Shipments averaged ~~167.3~~180.3 mbpd compared to ~~167.6~~165.8 mbpd for the ~~six~~nine months ended ~~June~~September 30, 2021. The volume ~~and revenue decreases were~~increase was mainly due to ~~lower volumes on pipelines servicing HF Sinclair's Navajo refinery, partially offset by~~ volumes on our recently acquired Sinclair Transportation assets and higher volumes on our UNEV ~~pipeline.~~pipeline, partially offset by lower volumes on our product pipelines servicing HF Sinclair's Navajo refinery due to lower throughput at the refinery. We recognized a significant portion of the Sinclair Transportation refined product pipeline tariffs as interest income under sales-type lease accounting.

Revenues from our intermediate pipelines were ~~$15.0~~$23.0 million, ~~consistent with~~an increase of $0.5 million compared to the ~~six~~nine months ended ~~June~~September 30, 2021. Shipments averaged ~~121.2~~126.6 mbpd compared to ~~129.6~~131.9 mbpd for the ~~six~~nine months ended ~~June~~September 30, 2021. The decrease in volumes was mainly due to lower throughputs on our intermediate pipelines servicing HF Sinclair's Navajo refinery while revenue ~~remained relatively constant~~increased due to contractual minimum volume ~~guarantees.~~guarantees and rate increases that went into effect on July 1, 2022.

Revenues from our crude pipelines were ~~$65.8~~$103.6 million, an increase of ~~$3.2~~$8.6 million compared to the ~~six~~nine months ended ~~June~~September 30, 2021. Shipments averaged ~~571.5~~594.2 mbpd compared to ~~385.3~~393.0 mbpd for the ~~six~~nine months ended ~~June~~September 30, 2021. The increase in volumes was mainly attributable to our Cushing Connect ~~Pipeline,~~pipeline, which went into service in ~~September~~September 2021, ~~as well as~~ volumes on our recently acquired Sinclair Transportation crude ~~pipelines.~~pipelines and higher volumes on our crude pipeline systems in New Mexico and Texas. The increase in revenues was mainly due to our recently acquired Sinclair Transportation crude pipelines and higher volumes ~~revenues~~ on our ~~legacy~~ crude pipelines in ~~Wyoming~~New Mexico and ~~Utah.~~Texas. Revenues did not increase in proportion to volumes due to our recognition of most of the Cushing Connect ~~Pipeline~~pipeline tariffs and a significant portion of Sinclair Transportation crude pipeline tariffs as interest income under sales-type lease accounting.

Revenues from terminal, tankage and loading rack fees were ~~$81.6~~$126.0 million, an increase of ~~$6.5~~$17.6 million compared to the ~~six~~nine months ended ~~June~~September 30, 2021. Refined products and crude oil terminalled in the facilities averaged ~~552.0~~575.2 mbpd compared to ~~418.1~~436.9 mbpd for the ~~six~~nine months ended ~~June~~September 30, 2021. V~~olumes~~Volumes increased mainly due to volumes on our

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recently acquired Sinclair Transportation assets and higher throughputs at HF Sinclair's Tulsa refinery. Revenues increased mainly due to revenues on our recently acquired Sinclair Transportation assets, ~~and~~ higher butane blending ~~revenues.~~revenues, and higher revenues on our Tulsa assets. In addition, the ~~six~~nine months ended ~~June~~September 30, 2021 included the recognition ~~of $9.9 million~~ of the $10 million termination fee related to the termination of HF Sinclair's minimum volume commitment on our Cheyenne assets as a result of the conversion of the HF Sinclair Cheyenne refinery to renewable diesel production.

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Revenues from refinery processing units were ~~$41.3~~$68.7 million, ~~a decrease~~an increase of ~~$2.2~~$3.3 million compared to the ~~six~~nine months ended ~~June~~September 30, 2021. Throughputs averaged ~~68.8 mbpd compared to 68.7~~69.9 mbpd for both the ~~six~~nine months ended ~~June~~September 30, ~~2021~~ 2022 and 2021.~~with~~ Revenues increased throughputs at our El Dorado refinery processing units offset by lower throughputs at our Woods Cross refinery processing units, which were down for a scheduled turnaround in March 2022. Revenues decreased mainly due to ~~the lower throughput at our Woods Cross refinery processing units, partially offset by~~ higher natural gas cost recoveries in revenues as well as rate increases that went into effect on July 1, 2022.

Operations Expense

Operations expense (exclusive of depreciation and amortization) for the ~~six~~nine months ended ~~June~~September 30, 2022, increased by ~~$13.1~~$30.8 million compared to the ~~six~~nine months ended ~~June~~September 30, 2021. The increase was mainly due to operations expenses associated with our recently acquired Sinclair Transportation assets as well as higher employee costs, natural gas costs, maintenance costs and materials and supplies costs, partially offset by lower rentals and leases.In addition, the nine months ended September 30, 2021 included a goodwill impairment charge of $11.0 million related to our Cheyenne reporting unit.

Depreciation and Amortization

Depreciation and amortization for the ~~six~~nine months ended ~~June~~September 30, 2022, ~~decreased~~increased by ~~$0.9~~$2.5 million compared to the ~~six~~nine months ended ~~June~~September 30, 2021. The ~~decrease~~increase was mainly due to depreciation on our recently acquired Sinclair Transportation assets partially offset by the acceleration of depreciation on certain of our Cheyenne tanks in 2021 as well as retirement of assets due to sales-type lease accounting.

General and Administrative

General and administrative costs for the ~~six~~nine months ended ~~June~~September 30, 2022, increased by ~~$3.2~~$3.1 million compared to the ~~six~~nine months ended ~~June~~September 30, 2021 mainly due to higher legal and professional expenses incurred in the ~~six~~nine months ended ~~June~~September 30, 2022.

Equity in Earnings of Equity Method Investments


		Six Months Ended June 30,					Nine Months Ended September 30,
Equity Method Investment	Equity Method Investment	2022		2021		Equity Method Investment	2022		2021
		(in thousands)					(in thousands)
Osage Pipe Line Company, LLC	Osage Pipe Line Company, LLC	1,249		1,636		Osage Pipe Line Company, LLC	(20,771)		2,726
Cheyenne Pipeline LLC	Cheyenne Pipeline LLC	3,360		1,774		Cheyenne Pipeline LLC	4,936		3,428
Cushing Connect Terminal Holdings LLC	Cushing Connect Terminal Holdings LLC	1,711		1,776		Cushing Connect Terminal Holdings LLC	2,494		2,721
Pioneer Investments Corp.	Pioneer Investments Corp.	3,686		—		Pioneer Investments Corp.	7,393		—
Saddle Butte Pipeline III, LLC	Saddle Butte Pipeline III, LLC	(933)		—		Saddle Butte Pipeline III, LLC	(1,313)		—
Total	Total	$	9,073	$	5,186	Total	$	(7,261)	$	8,875

Equity in earnings of Osage Pipe Line Company, LLC decreased for the ~~six~~nine months ended ~~June~~September 30, 2022, mainly due to ~~higher maintenance costs.~~our 50% share of environmental remediation and recovery expenses, net of insurance recoveries to date, associated with the release of crude oil on the Osage pipeline. Additional insurance recoveries will be recorded as they are received. Our share of the remaining insurance coverage is $12.5 million. The pipeline resumed operations in the third quarter of 2022 and remediation efforts are underway. Equity in earnings of Cheyenne Pipeline LLC increased for the ~~six~~nine months ended ~~June~~September 30, 2022, mainly due to the recognition in revenue of prior contractual minimum commitment billings. Pioneer Investments Corp. and Saddle Butte Pipeline III, LLC were acquired during the first quarter of 2022 as part of the HEP Transaction.

Interest Expense, including Amortization

Interest expense for the ~~six~~nine months ended ~~June~~September 30, 2022, totaled ~~$34.0~~$57.0 million, an increase of ~~$6.8~~$16.4 million compared to the ~~six~~nine months ended ~~June~~September 30, 2021. The increase was mainly due to our April 2022 issuance of $400 million in aggregate principal amount of 6.375% senior unsecured notes maturing in April 2027 ~~and higher average borrowings outstanding under our senior secured revolving credit facility~~ related to the funding of the cash portion of the Sinclair Transportation acquisition. In addition, market interest rates increased on our senior secured revolving credit

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facility. Our aggregate effective interest rates were ~~4.2%~~4.6% and ~~3.6%~~3.7% for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, respectively.

Interest Income

Interest income for the nine months ended September 30, 2022, totaled $61.2 million, an increase of $41.2 million compared to the nine months ended September 30, 2021. The increase was mainly due to higher sales-type lease interest income from our recently acquired Sinclair Transportation pipelines and terminals and our Cushing Connect Pipeline, which was placed into service at the end of the third quarter of 2021.

State Income Tax Expense

We recorded state income tax expense of ~~$45,000~~$83,000 and ~~$64,000~~$60,000 for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, respectively. All tax expense is solely attributable to the Texas margin tax.

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LIQUIDITY AND CAPITAL RESOURCES

Overview

In April 2021, we amended our 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. In August 2022, the Credit Agreement was amended to, among other things, provide an alternative reference rate for LIBOR. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit and continues to provide for an accordion feature that allows us to increase commitments under the Credit Agreement up to a maximum amount of $1.7 billion.

During the ~~six~~nine months ended ~~June~~September 30, 2022, we received advances totaling ~~$410.0~~$460.0 million and repaid ~~$529.0~~$594.0 million under the Credit Agreement, resulting in a net decrease of ~~$119.0~~$134.0 million and an outstanding balance of ~~$721.0~~$706.0 million at ~~June~~September 30, 2022. As of ~~June~~September 30, 2022, we have no letters of credit outstanding under the Credit Agreement and the available capacity under the Credit Agreement was ~~$479.0~~$494.0 million. Amounts repaid under the Credit Agreement may be reborrowed from time to time.

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

We have a continuous offering program under which we may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200 million. We did not issue any units under this program during the ~~six~~nine months ended ~~June~~September 30, 2022. As of ~~June~~September 30, 2022, HEP has issued 2,413,153 units under this program, providing $82.3 million in gross proceeds.

Under our registration statement filed with the Securities and Exchange Commission (“SEC”) using a “shelf” registration process, we currently have the authority to raise up to $2.0 billion by offering securities, through one or more prospectus supplements that would describe, among other things, the specific amounts, prices and terms of any securities offered and how the proceeds would be used. Any proceeds from the sale of securities are expected to be used for general business purposes, which may include, among other things, funding acquisitions of assets or businesses, working capital, capital expenditures, investments in subsidiaries, the retirement of existing debt and/or the repurchase of common units or other securities.

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

In the third quarter of 2022, HEP expects to hold the quarterly distribution constant at $0.35 per unit, or $1.40 on an annualized basis. We are on track to achieve our short-term leverage target of 3.5x by year-end. Consistent with our disciplined capital allocation framework, we expect to increase unitholder returns in 2023.

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

On October 20, 2022, we announced our cash distribution for the third quarter of 2022 of $0.35 per unit, or $1.40 on an annualized basis. Looking forward, we remain committed to our capital allocation strategy and expect to reach our short-term leverage target of 3.5x in the first half of 2023.

Cash and cash equivalents increased by ~~$0.5~~$1.2 million during the ~~six~~nine months ended ~~June~~September 30, 2022. The cash flows provided by operating activities of ~~$152.5~~$238.5 million and financing activities of ~~$186.0~~$123.1 million were more than the cash flows used for investing activities of ~~$338.0~~$360.4 million. Working capital ~~decreased~~increased by ~~$2.2~~$3.1 million to ~~$15.3~~$20.6 million at ~~June~~September 30, 2022, from $17.5 million at December 31, 2021.

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Cash Flows—Operating Activities

Cash flows from operating activities decreased by ~~$9.6~~$2.3 million from ~~$162.1~~$240.8 million for the ~~six~~nine months ended ~~June~~September 30, 2021, to ~~$152.5~~$238.5 million for the ~~six~~nine months ended ~~June~~September 30, 2022. The decrease was mainly due to higher payments for turnaround expenses at our Woods Cross refinery processing units and higher payments for operating expenses, partially offset by higher cash receipts from customers during the ~~six~~nine months ended ~~June~~September 30, 2022, as compared to the ~~six~~nine months ended ~~June~~September 30, 2021.

Cash Flows—Investing Activities

Cash flows used for investing activities were ~~$338.0~~$360.4 million for the ~~six~~nine months ended ~~June~~September 30, 2022, compared to ~~$48.9~~$67.7 million for the ~~six~~nine months ended ~~June~~September 30, 2021, an increase of ~~$289.1~~$292.7 million. During the ~~six~~nine months ended ~~June~~September 30, 2022, we paid the ~~$321.4~~$329.0 million cash portion of the purchase price consideration for our acquisition of Sinclair Transportation. During the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, we invested ~~$23.2~~$31.2 million and ~~$59.4~~$78.6 million, respectively, in ~~addition~~additions to properties and equipment.

Cash Flows—Financing Activities

Cash flows provided by financing activities were ~~$186.0~~$123.1 million for the ~~six~~nine months ended ~~June~~September 30, 2022, compared to cash flows used by financing activities of ~~$115.6~~$182.2 million for the ~~six~~nine months ended ~~June~~September 30, 2021, an increase of ~~$301.6~~$305.3 million. During the ~~six~~nine months ended ~~June~~September 30, 2022, we received ~~$410.0~~$460.0 million and repaid ~~$529.0~~$594.0 million in advances under the Credit Agreement, and we received net proceeds of ~~$393.7~~$393.5 million related to the issuance of our 6.375% Senior Notes. Additionally, we paid ~~$81.3~~$125.7 million in regular quarterly cash distributions to our limited partners and ~~$5.3~~$7.3 million to our noncontrolling interests. During the ~~six~~nine months ended ~~June~~September 30, 2021, we received ~~$141.0~~$210.5 million and repaid ~~$184.5~~$283.5 million in advances under the Credit Agreement. We paid ~~$75.4~~$112.4 million in regular quarterly cash distributions to our limited partners, and distributed ~~$5.9~~$8.7 million to our noncontrolling interests. In addition, we received ~~$17.6~~$21.3 million in contributions from noncontrolling interests during the ~~six~~nine months ended ~~June~~September 30, 2021.

Capital Requirements

Our pipeline and terminalling operations are capital intensive, requiring investments to maintain, expand, upgrade or enhance existing operations and to meet environmental and operational regulations. Our capital requirements have consisted of, and are expected to continue to consist of, maintenance capital expenditures and expansion capital expenditures. “Maintenance capital expenditures” represent capital expenditures to replace partially or fully depreciated assets to maintain the operating capacity of existing assets. Maintenance capital expenditures include expenditures required to maintain equipment reliability, tankage and pipeline integrity, safety and to address environmental regulations. “Expansion capital expenditures” represent capital expenditures to expand the operating capacity of existing or new assets, whether through construction or acquisition. Expansion capital expenditures include expenditures to acquire assets, to grow our business and to expand existing facilities, such as projects that increase throughput capacity on our pipelines and in our terminals. Repair and maintenance expenses associated with existing assets that are minor in nature and do not extend the useful life of existing assets are charged to operating expenses as incurred.

Each year the board of directors of HLS, our ultimate general partner, approves our annual capital budget, which specifies capital projects that our management is authorized to undertake. Additionally, at times when conditions warrant or as new opportunities arise, additional projects may be approved. The funds allocated for a particular capital project may be expended over a period in excess of a year, depending on the time required to complete the project. Therefore, our planned capital expenditures for a given year consist of expenditures approved for capital projects included in the current year’s capital budget as well as, in certain cases, expenditures approved for capital projects in capital budgets for prior years. Our current 2022 capital forecast includes forecasted expenditures for our recently acquired Sinclair Transportation assets and is comprised of approximately $20 million to $30 million for maintenance capital expenditures, $25 million to ~~$35~~$30 million for refinery unit turnarounds and $5$10 million to ~~$10~~$15 million for expansion capital expenditures and our ~~share~~share of ~~Cushing Connect~~ Joint Venture investments. In addition to our capital budget, we may spend funds periodically to perform capital upgrades or additions to our assets where a customer reimburses us for such costs. The upgrades or additions would generally benefit the customer over the remaining life of the related service agreements.

We expect that our currently planned sustaining and maintenance capital expenditures, as well as planned expenditures for acquisitions and capital development projects, will be funded with cash generated by operations.

Under the terms of the transaction to acquire HFC’s 75% interest in UNEV, we issued to a subsidiary of HFC a Class B unit comprising a noncontrolling equity interest in a wholly owned subsidiary subject to redemption to the extent that HFC is

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entitled to a 50% interest in 75% of annual UNEV earnings before interest, income taxes, depreciation, and amortization above

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~~$40~~ $40 million beginning July 1, 2015, and ending in June 2032, subject to certain limitations. However, to the extent earnings thresholds are not achieved, no redemption payments are required. No redemption payments have been required to date.

Credit Agreement

In April 2021, we amended our Credit Agreement decreasing the commitments under the facility from $1.4 billion to $1.2 billion and extending the maturity date to July 27, 2025. In August 2022, the Credit Agreement was amended to, among other things, provide an alternative reference rate for LIBOR. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit, and it continues to provide for an accordion feature that allows us to increase the commitments under the Credit Agreement up to a maximum amount of $1.7 billion.

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

Senior Notes

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

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

Indebtedness under the 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:


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
		(In thousands)					(In thousands)
Credit Agreement	Credit Agreement					Credit Agreement
Amount outstanding	Amount outstanding	721,000		840,000		Amount outstanding	$	706,000	$	840,000

5% Senior Notes	5% Senior Notes					5% Senior Notes
Principal	Principal	500,000		500,000		Principal	500,000		500,000
Unamortized debt issuance costs	Unamortized debt issuance costs	(6,459)		(6,951)		Unamortized debt issuance costs	(6,207)		(6,951)
		493,541		493,049			493,793		493,049

6.375% Senior Notes	6.375% Senior Notes					6.375% Senior Notes
Principal	Principal	400,000		—		Principal	400,000		—
Unamortized debt issuance costs	Unamortized debt issuance costs	(6,081)		—		Unamortized debt issuance costs	(5,996)		—
		393,919		—			394,004		—

Total long-term debt	Total long-term debt	$	1,608,460	$	1,333,049	Total long-term debt	$	1,593,797	$	1,333,049

Contractual Obligations

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

Impact of Inflation

~~Inflation in the United States did not have a material impact on our results of operations for the six months ended June 30, 2022 and 2021.~~ PPI has increased an average of 2.9% annually over the past five calendar years, including an increase of 8.9% in 2021 and a decrease of 1.3% in 2020. PPI for the first nine months of 2022 increased by 14.7% over the first nine months of 2021.

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. These annual rate adjustments generally occur on July 1st each year based on the PPI or the FERC index increase or decrease during the prior year. Certain of these contracts have provisions that limit the level of annual PPI percentage rate increases or decreases, and the majority of our rates do not decrease when PPI is negative. The substantial majority of our rates and minimum revenue guarantees used the 2021 PPI increase of 8.9% in the July 1, 2022 rate increase calculations.

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. However, for the nine months ended September 30, 2022, the fees we charged our shippers increased at a rate greater than our inflationary cost increase.

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.

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

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We have an environmental agreement with Delek with respect to pre-closing environmental costs and liabilities relating to the pipelines and terminals acquired from Delek in 2005, under which Delek will indemnify us subject to certain monetary and time limitations.

At ~~June~~September 30, 2022, we had an accrual of ~~$13.6~~$13.4 million related to environmental clean-up projects for which we have assumed liability, including accrued environmental liabilities assumed in the Sinclair Transportation acquisition that have preliminarily been fair valued at ~~$10.0~~$10 million as of the acquisition date, or for which the indemnity provided for by HF Sinclair has expired or will expire. There are environmental remediation projects in progress, including assessment and monitoring activities, that relate to certain assets acquired from HF Sinclair. Certain of these projects were underway prior to our purchase, are covered under the HF Sinclair environmental indemnification discussed above, and represent liabilities retained by HF Sinclair.

On July 8, 2022, the Osage pipeline, which carries crude oil from Cushing, Oklahoma to El Dorado, Kansas, suffered a release of crude oil. Our equity in earnings (loss) of equity method investments was reduced in the three and nine months ended September 30, 2022 by $20.3 million for our 50% share of incurred and estimated environmental remediation and recovery expenses associated with the release, net of our share of insurance proceeds received to date of $0.5 million. Additional insurance recoveries will be recorded as they are received. Our share of the remaining insurance coverage is $12.5 million. The pipeline ~~has~~ resumed operations ~~and recovery operations are ongoing. We expect to accrue amounts related to recovery and remediation~~ in the third quarter of 2022 and remediation efforts are underway. It may be necessary for Osage to accrue additional amounts for environmental remediation or other release-related expenses in future periods, but we cannot estimate those amounts at this time. WeFuture costs and accruals could have a material impact on our results of operations and cash flows in the period recorded; however, we do not expect ~~the accrual will~~them to have a material impact on our financial position.

CRITICAL ACCOUNTING ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results ~~may~~could materially differ from these estimates under different assumptions or ~~conditions.~~conditions and have an impact on our financial position, results of operations and cash flows. 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, 2021. 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 2022. We consider these policies to be critical to understanding the judgments that are involved and the uncertainties that could impact our results of operations, financial condition and cash flows.

RISK MANAGEMENT

The market risk inherent in our debt positions is the potential change arising from increases or decreases in interest rates as discussed below.

At ~~June~~September 30, 2022, we had an outstanding principal balance of $900 million on our Senior Notes. A change in interest rates generally would affect the fair value of the Senior Notes, but not our earnings or cash flows. At ~~June~~September 30, 2022, the fair value of our Senior Notes was ~~$808.7~~$822.6 million. We estimate a hypothetical 10% change in the yield-to-maturity applicable to the Senior Notes at ~~June~~September 30, 2022 would result in a change of approximately ~~$28.9~~$27.2 million in the fair value of the underlying Senior Notes.

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For the variable rate Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. At ~~June~~September 30, 2022, borrowings outstanding under the Credit Agreement were ~~$721.0~~$706.0 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 catastrophic losses, operational hazards and unforeseen interruptions, including but not limited to fire, explosion, releases or spills, cyberattacks, weather-related perils, vandalism, power failures, mechanical failures and other events beyond our control. We maintain various insurance coverages, including general liability, property damage, business interruption and cyber insurance, subject to certain deductibles and insurance policy terms and conditions. We are not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable, or premium costs, in our judgment, do not justify such expenditures.

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

Item 3.Quantitative and Qualitative Disclosures About Market Risk

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

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

Item 4.Controls and Procedures

(a) Evaluation of disclosure controls and procedures

Our principal executive officer and principal financial officer have evaluated, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of ~~June~~September 30, 2022, at a reasonable level of assurance.

(b) Changes in internal control over financial reporting

We acquired Sinclair Transportation effective March 14, 2022, and have included the operating results and assets and liabilities of Sinclair Transportation in our consolidated financial statements as of ~~June~~September 30, 2022 and for the ~~109~~201 days then ended. Other than our internal controls for Sinclair Transportation, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.Legal Proceedings

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

Item 1A.Risk Factors

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

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

The following table discloses purchases of our common units made by us or on our behalf during the third quarter of 2022:


Period	Total Number of Units Purchased	Average Price Paid per Unit		Total Number of Units Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Units that May Yet Be Purchased Under the Plans or Programs
July 2022	—	$	—	—	—
August 2022	6,706	$	17.86	—	—
September 2022	20,806	$	17.64	—	—
Total for July to September 2022	27,512			—	—

The units reported represent (a) purchases of 18,497 common units in the open market for delivery to the recipients of our phantom unit and performance unit awards under our Long-Term Incentive Plan at the time of grant or settlement, as applicable; and (b) the delivery of 9,015 common units (which units were previously issued to certain officers and other employees pursuant to phantom unit awards at the time of grant or settlement, as applicable) by such officers and employees to provide funds for the payment of payroll and income taxes due at vesting in the case of officers and employees who did not elect to satisfy such taxes by other means.

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Item 6.Exhibits

The Exhibit Index beginning on page 5860 of this Quarterly Report on Form 10-Q lists the exhibits that are filed or furnished, as applicable, as part of this Quarterly Report on Form 10-Q.

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Exhibit Index


Exhibit Number						Description

3.1						Second Amended and Restated Agreement of Limited Partnership of Holly Energy Partners, L.P. (incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed on November 1, 2017, File No. 1-32225).
3.2						First Amended and Restated Agreement of Limited Partnership of HEP Operating Company, L.P. (incorporated by reference to Exhibit 3.2 of Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004, File No. 1-32225).
3.3						First Amended and Restated Agreement of Limited Partnership of HEP Logistics Holdings, L.P. (incorporated by reference to Exhibit 3.4 of Registrant’s Quarterly Report on Form 10-Q for its quarterly period ended June 30, 2004, File No. 1-32225).
3.4						First Amended and Restated Limited Liability Company Agreement of Holly Logistic Services, L.L.C. (incorporated by reference to Exhibit 3.5 of Registrant’s Quarterly Report on Form 10-Q for its quarterly period ended June 30, 2004, File No. 1-32225).
3.5						Amendment No. 1 to the First Amended and Restated Limited Liability Company Agreement of Holly Logistic Services, L.L.C., dated April 27, 2011 (incorporated by reference to Exhibit 3.1 of Registrant’s Form 8-K Current Report filed on May 3, 2011, File No. 1-32225).
3.6						First Amended and Restated Limited Liability Company Agreement of HEP Logistics GP, L.L.C. (incorporated by reference to Exhibit 3.6 of Registrant’s Quarterly Report on Form 10-Q for its quarterly period ended June 30, 2004, File No. 1-32225).
4.1						Indenture, dated April 8, 2022, by and among Holly Energy Partners, L.P., Holly Energy Finance Corp., each of the Guarantors party thereto and U.S. Bank Trust Company, National Association, relating to the offering of the Notes (incorporated by reference to Exhibit 4.1 of Registrant’s Current Report on Form 8-K filed April 8, 2022, File No. 1-32225).
4.2						First Supplemental Indenture, dated May 22, 2022, among UNEV Pipeline, LLC, Holly Energy Partners, L.P. and Holly Energy Finance Corp. and the other Guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee, related to Holly Energy Partners, L.P.’s 6.375% Senior Notes due 2027 (incorporated by reference to Exhibit 4.9 of Registrant’s Registration Statement on Form S-3 filed May 23, 2022, File No. 333-265140).
4.3						Second Supplemental Indenture, dated as of May 22, 2022, among UNEV Pipeline, LLC, Holly Energy Partners, L.P. and Holly Energy Finance Corp. and the other Guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee, related to Holly Energy Partners, L.P.’s 5.000% Senior Notes due 2028 (incorporated by reference to Exhibit 4.7 of Registrant’s Registration Statement on Form S-3 filed May 23, 2022, File No. 333-26514).
10.1*†						Amendment No. 2 to Third Amended and Restated Credit Agreement dated August 15, 2022, among Holly Energy Partners, L.P., as borrower, certain of its affiliates, as guarantors, Wells Fargo Bank, National Association, as administrative agent, an issuing bank and a lender, and certain other lenders party thereto.
10.2*+						Mutual Separation Agreement and Release of Claims by and among HF Sinclair Corporation, HollyFrontier Corporation, Holly Logistic Services, L.L.C., HollyFrontier Payroll Services, Inc., and Holly Energy Partners, L.P., on behalf of themselves and their respective parents, subsidiaries and affiliates and Richard Voliva, dated September 15, 2022.
10.3+						Holly Energy Partners, L.P. Severance Pay Plan and Summary Plan Description and Form of Participation Agreement (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on October 31, 2022, File No. 1-32225).
10.4*						First Amendment to Eighth Amended and Restated Master Throughput Agreement by and among HollyFrontier Refining & Marketing LLC, Sinclair Oil LLC and Holly Energy Partners – Operating, L.P., dated October 28, 2022.
22.1*						Subsidiary Guarantors and Issuers of Guaranteed Securities and Affiliates whose Securities Collateralize Securities of the ~~Registrant.~~Registrant .
31.1*						Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*						Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**						Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**						Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

- 61 -

Table o


101++						The following financial information from Holly Energy Partners, L.P.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statement of Partners’ Equity, and (v) Notes to Consolidated Financial Statements. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
104						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).


*			Filed herewith.
**			Furnished herewith.
+			Constitutes management contracts or compensatory plans or arrangements.
++			Filed electronically herewith.
†			Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant agrees to furnish supplementally a copy of the omitted schedules and exhibits to the SEC upon request.

~~- 58 -~~

~~Table o~~

HOLLY ENERGY PARTNERS, L.P.

SIGNATURES

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


	HOLLY ENERGY PARTNERS, L.P.
	(Registrant)

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

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

~~August 8,~~November 7, 2022		/s/ John Harrison
		John Harrison
		Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)

~~August 8,~~November 7, 2022		/s/ Kenneth P. Norwood
		Kenneth P. Norwood
		Vice President and Controller (Principal Accounting Officer)

- 5962 -




	FORWARD-LOOKING STATEMENTS		3

PART I. FINANCIAL INFORMATION			5

	Item 1.	Financial Statements (Unaudited)	5

		Consolidated Balance Sheets	5

		Consolidated Statements of Income	6

		Consolidated Statements of Cash Flows	7

		Consolidated Statements of Equity	8

		Notes to Consolidated Financial Statements	910

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3940

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5658

	Item 4.	Controls and Procedures	5658

PART II. OTHER INFORMATION			5759

	Item 1.	Legal Proceedings	5759

	Item 1A.	Risk Factors	5759

	Item 6.	Exhibits	5760

		Index to Exhibits	5861

		SIGNATURES	5962


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

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

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

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

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


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

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

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

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


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


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

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

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

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


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

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

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