---

---

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

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

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

•	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 reductions in production or shutdowns at refineries utilizing our pipelines, terminal facilities and refinery processing units, whether due to infection in the workforce or in response to reductions in demand;

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

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

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

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

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

•	other financial, operational and legal risks and uncertainties detailed from time to time in our Securities and Exchange Commission filings.

---

Item 1.	Financial Statements

---

---

---

---

Note 1:	Description of Business and Presentation of Financial Statements

Holly Energy Partners, L.P. (“HEP”), together with its consolidated subsidiaries, is a publicly held master limited partnership. As of March 31, 2020, HollyFrontier Corporation (“HFC”) and its subsidiaries own a 57% limited partner interest and the non-economic general partner interest in HEP. We commenced operations on July 13, 2004, upon the completion of our initial public offering. In these consolidated financial statements, the words “we,” “our,” “ours” and “us” refer to HEP unless the context otherwise indicates.

On October 31, 2017, we closed on an equity restructuring transaction with HEP Logistics Holdings, L.P. (“HEP Logistics”), a wholly-owned subsidiary of HFC and the general partner of HEP, pursuant to which the incentive distribution rights ("IDRs") held by HEP Logistics were canceled, and HEP Logistics' 2% general partner interest in HEP was converted into a non-economic general partner interest in HEP. In consideration, we issued 37,250,000 of our common units to HEP Logistics. In addition, HEP Logistics agreed to waive $2.5 million of limited partner cash distributions for each of twelve consecutive quarters beginning with the first quarter the units issued as consideration were eligible to receive distributions. This waiver of limited partner cash distributions will expire after the cash distribution for the second quarter of 2020, which will be made during the third quarter of 2020. As a result of this transaction, no distributions were made on the general partner interest after October 31, 2017.

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

We operate in two reportable segments, a Pipelines and Terminals segment and a Refinery Processing Unit segment. Disclosures around these segments are discussed in Note 15.

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

The consolidated financial statements included herein have been prepared without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The interim financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of our results for the interim periods. Such adjustments are considered to be of a normal recurring nature. Although certain notes and other information required by U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019. Results of operations for interim periods are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2020.

Principles of Consolidation and Common Control Transactions

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

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

---

Accounting Pronouncements Adopted During the Periods Presented

Goodwill Impairment Testing

In January 2017, Accounting Standard Update (“ASU”) 2017-04, “Simplifying the Test for Goodwill Impairment,” was issued amending the testing for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under this standard, goodwill impairment is measured as the excess of the carrying amount of the reporting unit over the related fair value. We adopted this standard effective in the second quarter of 2019, and the adoption of this standard had no effect on our financial condition, results of operations or cash flows.

Leases

In February 2016, ASU No. 2016-02, “Leases” (“ASC 842”) was issued requiring leases to be measured and recognized as a lease liability, with a corresponding right-of-use asset on the balance sheet. We adopted this standard effective January 1, 2019, and we elected to adopt using the modified retrospective transition method, whereby comparative prior period financial information will not be restated and will continue to be reported under the lease accounting standard in effect during those periods. We also elected practical expedients provided by the new standard, including the package of practical expedients and the short-term lease recognition practical expedient, which allow an entity to not recognize on the balance sheet leases with a term of 12 months or less. Upon adoption of this standard, we recognized $78.4 million of lease liabilities and corresponding right-of-use assets on our consolidated balance sheet. Adoption of this standard did not have a material impact on our results of operations or cash flows. See Notes 3 and 4 for additional information on our lease policies.

Credit Losses Measurement

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

Note 2:	Investment in Joint Venture

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

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

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

---

Note 3:	Revenues

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

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

The majority of our long-term transportation contracts specify minimum volume requirements, whereby, we bill a customer for a minimum level of shipments in the event a customer ships below their contractual requirements. If there are no future performance obligations, we will recognize these deficiency payments in revenue.

In certain of these throughput agreements, a customer may later utilize such shortfall billings as credit towards future volume shipments in excess of its minimum levels within its respective contractual shortfall make-up period. Such amounts represent an obligation to perform future services, which may be initially deferred and later recognized as revenue based on estimated future shipping levels, including the likelihood of a customer’s ability to utilize such amounts prior to the end of the contractual shortfall make-up period. We recognize the service portion of these deficiency payments in revenue when we do not expect we will be required to satisfy these performance obligations in the future based on the pattern of rights exercised by the customer. During the three months ended March 31, 2020, we recognized $7.5 million of these deficiency payments in revenue, of which $0.7 million related to deficiency payments billed in prior periods. As of March 31, 2020, deferred revenue reflected in our consolidated balance sheet related to shortfalls billed was $0.3 million.

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

		March 31, 2020				December 31, 2019
		(In thousands)
Contract assets		$	5,870			$	5,675
Contract liabilities		$	(300	)		$	(650	)

The contract assets and liabilities include both lease and service components. We recognized $0.7 million of revenue, during the three months ended March 31, 2020, that was previously included in contract liability as of December 31, 2019, and we recognized $0.6 million of revenue during the three months ended March 31, 2019, that was previously included in contract liability as of December 31, 2018. During the three months ended March 31, 2020, we also recognized $0.2 million of revenue included in contract assets at March 31, 2020.

As of March 31, 2020, we expect to recognize $2.3 billion in revenue related to our unfulfilled performance obligations under the terms of our long-term throughput agreements and operating leases expiring in 2021 through 2036. These agreements generally provide for changes in the minimum revenue guarantees annually for increases or decreases in the Producer Price Index (“PPI”) or Federal Energy Regulatory Commission (“FERC”) index, with certain contracts having provisions that limit the level of the rate increases or decreases. We expect to recognize revenue for these unfulfilled performance obligations as shown in the table below (amounts shown in table include both service and lease revenues):

---

Years Ending December 31,		(In millions)
Remainder of 2020		$	277
2021		359
2022		331
2023		295
2024		257
2025		186
Thereafter		639
Total		$	2,344

Payment terms under our contracts with customers are consistent with industry norms and are typically payable within 10 to 30 days of the date of invoice.

Disaggregated revenues were as follows:

		Three Months Ended March 31,
		2020				2019
		(In thousands)
Pipelines		$	70,472			$	75,100
Terminals, tanks and loading racks		37,498				37,578
Refinery processing units		19,884				21,819
		$	127,854			$	134,497

During the three months ended March 31, 2020 and March 31, 2019, lease revenues amounted to $93.2 million and $94.3 million, respectively, and service revenues amounted to $34.7 million and $40.2 million, respectively. Both of these revenues were recorded within affiliates and third parties revenues on our consolidated statement of income.

Note 4:	Leases

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

Lessee Accounting

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

As a lessee, we lease land, buildings, pipelines, transportation and other equipment to support our operations. These leases can be categorized into operating and finance leases. Operating leases are recorded in operating lease right-of-use assets and current and noncurrent operating lease liabilities on our consolidated balance sheet. Finance leases are included in properties and equipment, current finance lease liabilities and noncurrent finance lease liabilities on our consolidated balance sheet.

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

Our leases have remaining terms of 1 to 25 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 $7.4 million and $7.0 million as of March 31, 2020 and December 31, 2019, respectively, with accumulated depreciation of $3.9 million and $4.5 million as of March 31, 2020 and December 31, 2019, respectively. We include depreciation of finance leases in depreciation and amortization in our consolidated statements of income.

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

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

		March 31, 2020				December 31, 2019
Operating leases:
Operating lease right-of-use assets, net		$	3,587			3,255
Current operating lease liabilities		1,235				1,126
Noncurrent operating lease liabilities		2,709				2,482
Total operating lease liabilities		$	3,944			3,608
Finance leases:
Properties and equipment		$	7,388			6,968
Accumulated amortization		(3,934		)		(4,547	)
Properties and equipment, net		$	3,454			2,421
Current finance lease liabilities		$	3,238			3,224
Noncurrent finance lease liabilities		70,640				70,475
Total finance lease liabilities		$	73,878			73,699
Weighted average remaining lease term (in years)
Operating leases		6.2				6.5
Finance leases		16.6				17.0
Weighted average discount rate
Operating leases		4.8%				5.0%
Finance leases		5.6%				6.0%

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

		Three Months Ended March 31,
		2020				2019
		(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows on operating leases		$	282			$	1,795
Operating cash flows on finance leases		$	1,077			$	27
Financing cash flows on finance leases		$	1,096			$	252

---

Maturities of lease liabilities were as follows:

		March 31, 2020
		Operating				Finance
		(In thousands)
2020		$	722			$	5,430
2021		963				7,333
2022		628				7,207
2023		544				7,254
2024		494				6,774
2025 and thereafter		1,184				80,313
Total lease payments		4,535				114,311
Less: Imputed interest		(591		)		(40,433		)
Total lease obligations		3,944				73,878
Less: Current obligations		(1,235		)		(3,238		)
Long-term lease obligations		$	2,709			$	70,640

The components of lease expense were as follows:

		Three Months Ended March 31, 2020				Three Months Ended March 31, 2019
		(In thousands)
Operating lease costs		$	273			1,770
Finance lease costs
Amortization of assets		242				244
Interest on lease liabilities		1,037				27
Variable lease cost		49				35
Total net lease cost		$	1,601			2,076

Lessor Accounting

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

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

Substantially all of the assets supporting contracts meeting the definition of a lease have long useful lives, and we believe these assets will continue to have value when the current agreements expire due to our risk management strategy for protecting the residual fair value of the underlying assets by performing ongoing maintenance during the lease term. HFC generally has the option to purchase assets located within HFC refinery boundaries, including refinery tankage, truck racks and refinery processing units, at fair market value when the related agreements expire.

Lease income recognized was as follows:

		Three Months Ended March 31, 2020				Three Months Ended March 31, 2019
		(In thousands)
Operating lease revenues		$	91,388			$	94,295
Direct financing lease interest income		$	524			$	509
Sales-type lease interest income		$	1,655			$	—
Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable		$	1,797			$	—

---

For our sales-type leases, we included customer obligations related to minimum volume requirements in guaranteed minimum lease payments. Portions of our minimum guaranteed pipeline tariffs for assets subject to sales-type lease accounting are recorded as interest income with the remaining amounts recorded as a reduction in net investment in leases. We recognized any billings for throughput volumes in excess of minimum volume requirements as variable lease payments, and these variable lease payments were recorded in lease revenues.

As discussed in Note 3, prior to the adoption of ASC 842, contract consideration was bifurcated between operating lease and service revenues.

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

		Operating				Finance				Sales-type
Years Ending December 31,		(In thousands)
Remainder of 2020		$	233,353			$	1,586			$	7,126
2021		305,811				2,128				9,501
2022		303,468				2,145				9,501
2023		272,784				2,162				9,501
2024		235,009				2,179				9,501
Thereafter		728,110				40,787				42,754
Total		$	2,078,535			$	50,987			$	87,884

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

		March 31, 2020								December 31, 2019
		Sales-type Leases				Direct Financing Leases				Sales-type Leases				Direct Financing Leases
		(In thousands)								(In thousands)
Lease receivables (1)		$	67,092			$	16,499			$	68,457			$	16,511
Unguaranteed residual assets		53,577				—				52,933				—
Net investment in leases		$	120,669			$	16,499			$	121,390			$	16,511

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

Note 5:	Fair Value Measurements

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

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

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

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

Financial Instruments

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

---

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

March 31, 2020

December 31, 2019

Financial Instrument

Fair Value Input Level

Carrying Value

Fair Value

Carrying Value

Fair Value

(In thousands)

Liabilities:

6% Senior Notes

Level 2

—

—

496,531

522,045

5% Senior Notes

Level 2

491,654

416,795

—

—

Level 2 Financial Instruments

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

Note 6:	Properties and Equipment

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

		March 31, 2020				December 31, 2019
		(In thousands)
Pipelines, terminals and tankage		$	1,602,189			$	1,602,231
Refinery assets		349,030				348,093
Land and right of way		87,076				86,190
Construction in progress		26,894				10,930
Other		14,501				14,110
		2,079,690				2,061,554
Less accumulated depreciation		613,901				594,455
		$	1,465,789			$	1,467,099

We capitalized $23.0 thousand and $46.0 thousand during the three months ended March 31, 2020 and 2019, respectively, in interest attributable to construction projects.

Note 7:	Intangible Assets

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

---

The carrying amounts of our intangible assets are as follows:

		Useful Life		March 31, 2020				December 31, 2019
				(In thousands)
Delek transportation agreement		30 years		$	59,933			$	59,933
HFC transportation agreement		10-15 years		75,131				75,131
Customer relationships		10 years		69,683				69,683
Other				50				50
				204,797				204,797
Less accumulated amortization				106,977				103,475
				$	97,820			$	101,322

Amortization expense was $3.5 million for both of the three months ended March 31, 2020 and 2019. We estimate amortization expense to be $14.0 million for each of the next two years, $9.9 million in 2023, and $9.1 million in 2024 and 2025.

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

Note 8:	Employees, Retirement and Incentive Plans

Direct support for our operations is provided by Holly Logistic Services, L.L.C. (“HLS”), an HFC subsidiary, which utilizes personnel employed by HFC who are dedicated to performing services for us. Their costs, including salaries, bonuses, payroll taxes, benefits and other direct costs, are charged to us monthly in accordance with an omnibus agreement that we have with HFC (the “Omnibus Agreement”). These employees participate in the retirement and benefit plans of HFC. Our share of retirement and benefit plan costs was $2.2 million and $1.9 million for the three months ended March 31, 2020 and 2019, respectively.

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

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

As of March 31, 2020, we had two types of incentive-based awards outstanding, which are described below. The compensation cost charged against income was $0.5 million and $0.7 million for the three months ended March 31, 2020 and 2019, respectively. We currently purchase units in the open market instead of issuing new units for settlement of all unit awards under our Long-Term Incentive Plan. As of March 31, 2020, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which 1,116,919 have not yet been granted, assuming no forfeitures of the unvested units and full achievement of goals for the unvested performance units.

Restricted and Phantom Units

Under our Long-Term Incentive Plan, we grant restricted units to non-employee directors and phantom units to selected employees who perform services for us, with most awards vesting over a period of one to three years. Although full ownership of the units does not transfer to the recipients until the units vest, the recipients have distribution rights on these units from the date of grant, and the recipients of the restricted units have voting rights on the restricted units from the date of grant.

The fair value of each restricted or phantom unit award is measured at the market price as of the date of grant and is amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award.

---

A summary of restricted and phantom unit activity and changes during the three months ended March 31, 2020, is presented below:

Restricted and Phantom Units		Units			Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2020 (nonvested)		145,205			$	26.22
Vesting and transfer of full ownership to recipients		(4,397	)		30.29
Forfeited		(3,267	)		24.44
Outstanding at March 31, 2020 (nonvested)		137,541			$	26.14

The grant date fair values of phantom units that were vested and transferred to recipients during the three months ended March 31, 2020 were $0.1 million. No restricted or phantom units were vested and transferred to recipients during the three months ended March 31, 2019. As of March 31, 2020, there was $1.9 million of total unrecognized compensation expense related to unvested restricted and phantom unit grants, which is expected to be recognized over a weighted-average period of 1.4 years.

Performance Units

Under our Long-Term Incentive Plan, we grant performance units to selected officers who perform services for us. Performance units granted are payable in common units at the end of a three-year performance period based upon meeting certain criteria over the performance period. Under the terms of our performance unit grants, some awards are subject to the growth in our distributable cash flow per common unit over the performance period while other awards are subject to "financial performance" and "market performance." Financial performance is based on meeting certain earnings before interest, taxes, depreciation and amortization ("EBITDA") targets, while market performance is based on the relative standing of total unitholder return achieved by HEP compared to peer group companies. The number of units ultimately issued under these awards can range from 50% to 150% or 0% to 200%. As of March 31, 2020, estimated unit payouts for outstanding nonvested performance unit awards ranged between 100% and 150% of the target number of performance units granted.

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

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

Performance Units		Units
Outstanding at January 1, 2020 (nonvested)		53,445
Vesting and transfer of common units to recipients		(11,634	)
Outstanding at March 31, 2020 (nonvested)		41,811

The grant date fair value of performance units vested and transferred to recipients during the three months ended March 31, 2020 and 2019 was $0.4 million and $0.3 million, respectively. Based on the weighted-average fair value of performance units outstanding at March 31, 2020, of $1.2 million, there was $0.5 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of 1.8 years.

During the three months ended March 31, 2020, we did not purchase any of our common units in the open market for the issuance and settlement of unit awards under our Long-Term Incentive Plan.

Note 9:	Debt

Credit Agreement

We have a $1.4 billion senior secured revolving credit facility (the “Credit Agreement”) expiring in July 2022. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit, and it contains an accordion feature giving us the ability to increase the size of the facility by up to $300 million with additional lender commitments.

---

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

We may prepay all loans at any time without penalty, except for tranche breakage costs.  If an event of default exists under the Credit Agreement, the lenders will be able to accelerate the maturity of all loans outstanding and exercise other rights and remedies.  We were in compliance with the covenants as of March 31, 2020.

Senior Notes

As of December 31, 2019, we had $500 million aggregate principal amount of 6% senior unsecured notes due in 2024 (the "6% Senior Notes") outstanding. The 6% Senior Notes were unsecured and imposed certain restrictive covenants, including limitations on our ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates and enter into mergers.

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

The 5% Senior Notes are unsecured and impose certain restrictive covenants, including limitations on our ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. We were in compliance with the restrictive covenants for the 5% Senior Notes as of March 31, 2020. At any time when the 5% Senior Notes are rated investment grade by either Moody’s or Standard & Poor’s and no default or event of default exists, we will not be subject to many of the foregoing covenants. Additionally, we have certain redemption rights at varying premiums over face value under the 5% Senior Notes.

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

Long-term Debt

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

		March 31, 2020			December 31, 2019
		(In thousands)
Credit Agreement
Amount outstanding		1,010,500			$	965,500
6% Senior Notes
Principal		—			500,000
Unamortized premium and debt issuance costs		—			(3,469		)
		—			496,531
5% Senior Notes
Principal		500,000			—
Unamortized premium and debt issuance costs		(8,346	)		—
		491,654			—
Total long-term debt		1,502,154			$	1,462,031

---

Interest Expense and Other Debt Information

Interest expense consists of the following components:

		Three Months Ended March 31,
		2020				2019
		(In thousands)
Interest on outstanding debt:
Credit Agreement		$	8,601			$	10,372
6% Senior Notes		2,833				7,500
5% Senior Notes		4,167				—
Amortization of discount and deferred debt issuance costs		799				766
Commitment fees		353				403
Interest on finance leases		1,037				27
Total interest incurred		17,790				19,068
Less capitalized interest		23				46
Net interest expense		$	17,767			$	19,022
Cash paid for interest		$	25,168			$	25,918

Note 10:	Related Party Transactions

We serve HFC’s refineries under long-term pipeline, terminal and tankage throughput agreements, and refinery processing unit tolling agreements expiring from 2021 to 2036, and revenues from these agreements accounted for 79% of our total revenues for the three months ended March 31, 2020. Under these agreements, HFC agrees to transport, store and process throughput volumes of refined product, crude oil and feedstocks on our pipelines, terminals, tankage, loading rack facilities and refinery processing units that result in minimum annual payments to us. These minimum annual payments or revenues are subject to annual rate adjustments on July 1st each year generally based on increases or decreases in PPI or the FERC index. As of March 31, 2020, these agreements with HFC require minimum annualized payments to us of $348.2 million.

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

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

Related party transactions with HFC are as follows:

•	Revenues received from HFC were $101.4 million and $103.4 million for the three months ended March 31, 2020 and 2019, respectively.

•	HFC charged us general and administrative services under the Omnibus Agreement of $0.7 million and $0.6 million for the three months ended March 31, 2020 and 2019, respectively.

•	We reimbursed HFC for costs of employees supporting our operations of $14.1 million and $13.6 million for the three months ended March 31, 2020 and 2019, respectively.

•	HFC reimbursed us $3.1 million and $2.1 million for the three months ended March 31, 2020 and 2019, respectively, for expense and capital projects.

•	We distributed $37.6 million and $37.3 million in the three months ended March 31, 2020 and 2019, respectively, to HFC as regular distributions on its common units.

•	Accounts receivable from HFC were $38.4 million and $49.7 million at March 31, 2020, and December 31, 2019, respectively.

•	Accounts payable to HFC were $6.4 million and $16.7 million at March 31, 2020, and December 31, 2019, respectively.

---

•	Deferred revenue in the consolidated balance sheets at March 31, 2020 and December 31, 2019, included $0.2 million and $0.5 million, respectively, relating to certain shortfall billings to HFC.

•	We received direct financing lease payments from HFC for use of our Artesia and Tulsa railyards of $0.5 million for the three months ended March 31, 2020 and 2019.

•	We received sales-type lease payments of $2.4 million from HFC that were not included in revenues for the three months ended March 31, 2020.

•

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

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

As of March 31, 2020, HFC held 59,630,030 of our common units, constituting a 57% limited partner interest in us, and held the non-economic general partner interest.

Continuous Offering Program

We have a continuous offering program under which we may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200 million. As of March 31, 2020, HEP has issued 2,413,153 units under this program, providing $82.3 million in gross proceeds.

 

Allocations of Net Income

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

Cash Distributions

On April 23, 2020, we announced our cash distribution for the first quarter of 2020 of $0.35 per unit. The distribution is payable on all common units and will be paid May 14, 2020, to all unitholders of record on May 4, 2020. However, HEP Logistics waived $2.5 million in limited partner cash distributions due to them as discussed in Note 1.

Our regular quarterly cash distribution to the limited partners will be $34.5 million for the three months ended March 31, 2020 and was $68.2 million for the three months ended March 31, 2019. Our distributions are declared subsequent to quarter end; therefore, these amounts do not reflect distributions paid during the respective period.

As a master limited partnership, we distribute our available cash, which historically has exceeded our net income attributable to HEP because depreciation and amortization expense represents a non-cash charge against income. The result is a decline in our partners’ equity since our regular quarterly distributions have exceeded our quarterly net income attributable to HEP. Additionally, if the asset contributions and acquisitions from HFC had occurred while we were not a consolidated VIE of HFC, our acquisition cost, in excess of HFC’s historical basis in the transferred assets, would have been recorded in our financial statements at the time of acquisition as increases to our properties and equipment and intangible assets instead of decreases to our partners’ equity.

Note 12:	Net Income Per Limited Partner Unit

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

  

---

Net income per limited partner unit is computed as follows:

		Three Months Ended March 31,
		2020				2019
		(In thousands, except per unit data)
Net income attributable to the partners		$	24,861			$	51,182
Weighted average limited partners' units outstanding		105,440				105,440
Limited partners' per unit interest in earnings - basic and diluted		$	0.24			$	0.49

Note 13:	Environmental

We expensed $0.2 million for the three months ended March 31, 2020, for environmental remediation obligations, and we incurred no expenses for the three months ended March 31, 2019. The accrued environmental liability, net of expected recoveries from indemnifying parties, reflected in our consolidated balance sheets was $5.5 million at both March 31, 2020 and December 31, 2019, of which $3.3 million and $3.5 million, respectively, were classified as other long-term liabilities. These accruals include remediation and monitoring costs expected to be incurred over an extended period of time.

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

Note 14:	Contingencies

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

Note 15:	Segment Information

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

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

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

---

		Three Months Ended March 31,
		2020				2019
		(In thousands)
Revenues:
Pipelines and terminals - affiliate		$	81,544			$	81,540
Pipelines and terminals - third-party		26,426				31,138
Refinery processing units - affiliate		19,884				21,819
Total segment revenues		$	127,854			$	134,497
Segment operating income:
Pipelines and terminals		$	58,903			$	63,232
Refinery processing units		9,992				9,922
Total segment operating income		68,895				73,154
Unallocated general and administrative expenses		(2,702		)		(2,620		)
Interest and financing costs, net		(15,549		)		(18,494		)
Loss on early extinguishment of debt		(25,915		)		—
Equity in earnings of equity method investments		1,714				2,100
Gain (loss) on sale of assets and other		506				(310		)
Income before income taxes		$	26,949			$	53,830
Capital Expenditures:
Pipelines and terminals		$	18,618			$	10,718
Refinery processing units		324				—
Total capital expenditures		$	18,942			$	10,718

		March 31, 2020				December 31, 2019
		(In thousands)
Identifiable assets:
Pipelines and terminals (1)		$	1,732,984			$	1,749,843
Refinery processing units		302,654				305,897
Other		152,646				143,492
Total identifiable assets		$	2,188,284			$	2,199,232

(1) Includes goodwill of $270.3 million as of March 31, 2020 and December 31, 2019.

Note 16:	Supplemental Guarantor/Non-Guarantor Financial Information

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

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

---

Condensed Consolidating Balance Sheet

March 31, 2020		Parent				Guarantor Restricted Subsidiaries				Non-Guarantor Non-Restricted Subsidiaries				Eliminations				Consolidated
		(In thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	1,722			$	(1,152	)		$	18,712			$	—			$	19,282
Accounts receivable		—				49,018				5,988				(962		)		54,044
Prepaid and other current assets		445				6,483				620								7,548
Total current assets		2,167				54,349				25,320				(962		)		80,874
Properties and equipment, net		—				1,123,996				341,793				—				1,465,789
Operating lease right-of-use assets	0	—				3,379				208				—				3,587
Net investment in leases		—				134,108				—				—				134,108
Investment in subsidiaries		1,837,112				277,876				—				(2,114,988		)		—
Intangible assets, net		—				97,820				—				—				97,820
Goodwill		—				270,336				—				—				270,336
Equity method investments		—				84,526				39,054				—				123,580
Other assets		6,110				6,080				—				—				12,190
Total assets		$	1,845,389			$	2,052,470			$	406,375			$	(2,115,950	)		$	2,188,284
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	—			$	13,363			$	13,541			$	(962	)		$	25,942
Accrued interest		4,695				—				—				—				4,695
Deferred revenue		—				10,510				300				—				10,810
Accrued property taxes		—				3,845				1,862				—				5,707
Current operating lease liabilities		—				1,167				68				—				1,235
Current finance lease liabilities		—				3,238				—				—				3,238
Other current liabilities		121				2,923				21				—				3,065
Total current liabilities		4,816				35,046				15,792				(962		)		54,692
Long-term debt		1,502,154				—				—				—				1,502,154
Noncurrent operating lease liabilities		—				2,709				—				—				2,709
Noncurrent finance lease liabilities		—				70,640				—				—				70,640
Other long-term liabilities		260				11,658				532				—				12,450
Deferred revenue		—				45,078				—				—				45,078
Class B unit		—				50,227				—				—				50,227
Equity - partners		338,159				1,837,112				277,876				(2,114,988		)		338,159
Equity - noncontrolling interest		—				—				112,175				—				112,175
Total liabilities and equity		$	1,845,389			$	2,052,470			$	406,375			$	(2,115,950	)		$	2,188,284

---

Condensed Consolidating Balance Sheet

December 31, 2019		Parent				Guarantor Restricted Subsidiaries				Non-Guarantor Non-Restricted Subsidiaries				Eliminations				Consolidated
		(In thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	4,790			$	(709	)		$	9,206			$	—			$	13,287
Accounts receivable		—				60,229				8,549				(331		)		68,447
Prepaid and other current assets		282				6,710				637				—				7,629
Total current assets		5,072				66,230				18,392				(331		)		89,363
Properties and equipment, net		—				1,133,534				333,565				—				1,467,099
Operating lease right-of-use assets		—				3,243				12				—				3,255
Net investment in leases		—				134,886				—				—				134,886
Investment in subsidiaries		1,844,812				275,279				—				(2,120,091		)		—
Intangible assets, net		—				101,322				—				—				101,322
Goodwill		—				270,336				—				—				270,336
Equity method investments		—				82,987				37,084				—				120,071
Other assets		6,722				6,178				—				—				12,900
Total assets		$	1,856,606			$	2,073,995			$	389,053			$	(2,120,422	)		$	2,199,232
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	—			$	29,895			$	4,991			$	(331	)		$	34,555
Accrued interest		13,206				—				—				—				13,206
Deferred revenue		—				9,740				650				—				10,390
Accrued property taxes		—				2,737				1,062				—				3,799
Current operating lease liabilities		—				1,114				12				—				1,126
Current finance lease liabilities		—				3,224				—				—				3,224
Other current liabilities		6				2,293				6				—				2,305
Total current liabilities		13,212				49,003				6,721				(331		)		68,605
Long-term debt		1,462,031				—				—				—				1,462,031
Noncurrent operating lease liabilities		—				2,482				—				—				2,482
Noncurrent finance lease liabilities		—				70,475				—				—				70,475
Other long-term liabilities		260				12,150				398				—				12,808
Deferred revenue		—				45,681				—				—				45,681
Class B unit		—				49,392				—				—				49,392
Equity - partners		381,103				1,844,812				275,279				(2,120,091		)		381,103
Equity - noncontrolling interest		—				—				106,655				—				106,655
Total liabilities and equity		$	1,856,606			$	2,073,995			$	389,053			$	(2,120,422	)		$	2,199,232

---

Condensed Consolidating Statement of Comprehensive Income

Three Months Ended March 31, 2020		Parent				Guarantor Restricted Subsidiaries				Non-Guarantor Non-restricted Subsidiaries				Eliminations				Consolidated
		(In thousands)
Revenues:
Affiliates		$	—			$	94,755			$	6,673			$	—			$	101,428
Third parties		—				19,155				7,271				—				26,426
		—				113,910				13,944				—				127,854
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)		—				31,131				3,850				—				34,981
Depreciation and amortization		—				19,753				4,225				—				23,978
General and administrative		1,099				1,603				—				—				2,702
		1,099				52,487				8,075				—				61,661
Operating income (loss)		(1,099		)		61,423				5,869				—				66,193
Other income (expense):
Equity in earnings of subsidiaries		68,535				4,295				—				(72,830		)		—
Equity in earnings of equity method investments		—				2,088				(374		)		—				1,714
Interest expense		(16,730		)		(1,037		)		—				—				(17,767		)
Interest income		—				2,218				—				—				2,218
Loss on early extinguishment of debt		(25,915		)		—				—				—				(25,915		)
Gain on sale of assets and other		70				420				16				—				506
		25,960				7,984				(358		)		(72,830		)		(39,244		)
Income before income taxes		24,861				69,407				5,511				(72,830		)		26,949
State income tax expense		—				(37		)		—				—				(37		)
Net income		24,861				69,370				5,511				(72,830		)		26,912
Allocation of net income attributable to noncontrolling interests		—				(835		)		(1,216		)		—				(2,051		)
Net income attributable to the partners		$	24,861			$	68,535			$	4,295			$	(72,830	)		$	24,861

---

Condensed Consolidating Statement of Comprehensive Income

Three Months Ended March 31, 2019		Parent				Guarantor Restricted Subsidiaries				Non-Guarantor Non-Restricted Subsidiaries				Eliminations				Consolidated
		(In thousands)
Revenues:
Affiliates		$	—			$	97,393			$	5,966			$	—			$	103,359
Third parties		—				22,065				9,073				—				31,138
		—				119,458				15,039				—				134,497
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)		—				34,077				3,442				—				37,519
Depreciation and amortization						19,536				4,288				—				23,824
General and administrative		1,076				1,544				—				—				2,620
		1,076				55,157				7,730				—				63,963
Operating income (loss)		(1,076		)		64,301				7,309				—				70,534
Other income (expense):
Equity in earnings of subsidiaries		71,299				5,496				—				(76,795		)		—
Equity in earnings of equity method investments		—				2,100				—				—				2,100
Interest expense		(19,041		)		19				—				—				(19,022		)
Interest income		—				528				—				—				528
Gain (loss) on sale of assets and other		—				(329		)		19				—				(310		)
		52,258				7,814				19				(76,795		)		(16,704		)
Income before income taxes		51,182				72,115				7,328				(76,795		)		53,830
State income tax expense		—				(36		)		—				—				(36		)
Net income		51,182				72,079				7,328				(76,795		)		53,794
Allocation of net income attributable to noncontrolling interests		—				(780		)		(1,832		)		—				(2,612		)
Net income attributable to the partners		$	51,182			$	71,299			$	5,496			$	(76,795	)		$	51,182

---

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2020		Parent				Guarantor Restricted Subsidiaries				Non-Guarantor Non-Restricted Subsidiaries				Eliminations				Consolidated
		(In thousands)
Cash flows from operating activities		$	(24,974	)		$	85,061			$	22,243			$	(4,383	)		$	77,947
Cash flows from investing activities
Additions to properties and equipment		—				(5,942		)		(13,000		)		—				(18,942		)
Investment in Cushing Connect		—				(7,304		)		(2,345		)		7,304				(2,345		)
Distributions from UNEV in excess of earnings		—				4,617				—				(4,617		)		—
Proceeds from sale of assets		—				417				—				—				417
		—				(8,212		)		(15,345		)		2,687				(20,870		)
Cash flows from financing activities
Net borrowings under credit agreement		45,000				—				—				—				45,000
Net intercompany financing activities		76,196				(76,196		)		—				—				—
Redemption of senior notes		(522,500		)		—				—				—				(522,500		)
Proceeds from issuance of senior notes		500,000				—				—				—				500,000
Contribution from general partner		354				—				7,304				(7,304		)		354
Contribution from noncontrolling interest		—				—				7,304				—				7,304
Distributions to HEP unitholders		(68,519		)		—				—				—				(68,519		)
Distributions to noncontrolling interests		—				—				(12,000		)		9,000				(3,000		)
Units withheld for tax withholding obligations		(147		)		—				—				—				(147		)
Deferred financing costs		(8,478		)		—				—				—				(8,478		)
Payments on finance leases		—				(1,096		)		—				—				(1,096		)
		21,906				(77,292		)		2,608				1,696				(51,082		)
Cash and cash equivalents
Increase (decrease) for the period		(3,068		)		(443		)		9,506				—				5,995
Beginning of period		4,790				(709		)		9,206				—				13,287
End of period		$	1,722			$	(1,152	)		$	18,712			$	—			$	19,282

---

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2019		Parent				Guarantor Restricted Subsidiaries				Non-Guarantor Non-Restricted Subsidiaries				Eliminations				Consolidated
		(In thousands)
Cash flows from operating activities		$	(26,584	)		$	91,226			$	12,009			$	(5,496	)		$	71,155
Cash flows from investing activities
Additions to properties and equipment		—				(10,564		)		(154		)		—				(10,718		)
Distributions from UNEV in excess of earnings		—				3,504				—				(3,504		)		—
Proceeds from sale of assets		—				9				—				—				9
Distributions in excess of equity in earnings of equity investments		—				395				—				—				395
		—				(6,656		)		(154		)		(3,504		)		(10,314		)
Cash flows from financing activities
Net repayments under credit agreement		19,000				—				—				—				19,000
Net intercompany financing activities		75,678				(75,678		)		—				—				—
Distributions to HEP unitholders		(67,975		)		—				—				—				(67,975		)
Distributions to noncontrolling interests		—				—				(12,000		)		9,000				(3,000		)
Units withheld for tax withholding obligations		(119		)		—				—				—				(119		)
Payments on finance leases		—				(252		)		—				—				(252		)
		26,584				(75,930		)		(12,000		)		9,000				(52,346		)
Cash and cash equivalents
Increase (decrease) for the period		—				8,640				(145		)		—				8,495
Beginning of period		2				—				3,043				—				3,045
End of period		$	2			$	8,640			$	2,898			$	—			$	11,540

---

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

---

---

---

---

(1)

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

(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.

---

(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.

(4)

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

---

---

---

---

---

---

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

---

Item 4.	Controls and Procedures

---

Item 1.	Legal Proceedings

Item 1A.	Risk Factors

•	changes in domestic demand for, and the marketability of, refined products, and in turn, for crude oil and its transportation, due to governmental regulations, including travel bans and restrictions, quarantines, shelter in place orders, and shutdowns;

•	the ability of HFC, our other customers or our joint ventures’ other customers to fulfill their respective contractual obligations or any material reduction in, or loss of, revenue from our customers or our joint ventures’ customers;

•	increased price volatility, including the prices our customers or our joint ventures’ customers pay for crude oil and other raw materials and receive for their refined and finished lubricant products;

•	the health of our workforce, including contractors and subcontractors, and their access to our facilities, which could result in a shutdown of our facilities if a significant portion of the workforce at a facility is impacted or if a significant portion of the workforce in our control room is impacted;

•	the ability or willingness of our or our joint ventures’ current vendors and suppliers to provide the equipment or parts for our or our joint ventures’ operations or otherwise fulfill their contractual obligations, potentially causing our delay or failure in construction projects or to deliver crude oil or refined products on a timely basis or at all;

•	increased potential for the occurrence of operational hazards, including terrorism, cyberattacks or domestic vandalism, as well as information system failures or communication network disruptions;

•	increasing cost and reduced availability of capital for additional liquidity, growth or capital expenditures;

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

•	increasing costs of operation in relation to the COVID-19 outbreak, which costs may not be fully recoverable or adequately covered by insurance; and

•	the impact of any economic downturn, recession or other disruption of the U.S. and global economies and financial and commodity markets.

---

Item 6.	Exhibits

---

---