HOLLY ENERGY PARTNERS LP - Quarter Report: 2023 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________________________________________________

FORM 10-Q

______________________________________________________________________________________

(Mark One)


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

For the quarterly period ended September 30, 2023


☐			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 October 31, 2023, was 126,440,201.

Table of 19,

HOLLY ENERGY PARTNERS, L.P.

INDEX




	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	10

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	38

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56

	Item 4.	Controls and Procedures	56

PART II. OTHER INFORMATION			57

	Item 1.	Legal Proceedings	57

	Item 1A.	Risk Factors	57

	Item 6.	Exhibits	59

		Index to Exhibits	60

		SIGNATURES	60

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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 and statements under “Results of Operations” and “Liquidity and Capital Resources” in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I are forward-looking statements. Forward-looking statements use words such as “anticipate,” “project,” “expect,” “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 or affect our unit price. These factors include, but are not limited to:

•the risk that the HF Sinclair Merger Transaction (as defined herein) is not consummated during the expected timeframe, or at all;

•failure to obtain the required approvals for the HF Sinclair Merger Transaction, including the ability to obtain the requisite approvals from HF Sinclair stockholders or our unitholders;

•the substantial transaction-related costs that may be incurred by HF Sinclair and us in connection with the HF Sinclair Merger Transaction;

•the possibility that financial projections by us may not prove to be reflective of actual future results;

•the focus of management time and attention on the HF Sinclair Merger Transaction and other disruptions arising from the HF Sinclair Merger Transaction, which may make it more difficult to maintain relationships with customers, employees or suppliers;

•legal proceedings that may be instituted against HF Sinclair or us in connection with the HF Sinclair Merger Transaction;

•the demand for and supply of crude oil and refined products, including the uncertainty regarding 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 operations and integrate the operations we have acquired or may acquire, including the acquired Sinclair Transportation Company LLC business;

•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 reductions in demand, accidents, unexpected leaks or spills, unscheduled shutdowns, infection in the workforce, weather events, global health 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 providers

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Table of 19,

or lower gross margins due to the economic impact of 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 increases in interest rates;

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

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

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

•uncertainty regarding the effects and duration of global hostilities, including the Israel-Gaza conflict, 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 economic slowdowns caused by a local or national recession or other adverse economic condition, such as periods of increased or prolonged inflation;

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

•the outcome of the Exchange Offers (as defined herein) and Consent Solicitations (as defined herein);

•the impact of the proposed amendments to the Credit Agreement (as defined herein); and

•other business, 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, 2022, in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023, 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)


	September 30, 2023		December 31, 2022
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (Cushing Connect VIEs: $1,900 and $2,147, respectively)	$	11,223	$	10,917
Accounts receivable:
Trade	17,460		16,344
Affiliates	83,137		63,459
	100,597		79,803
Prepaid and other current assets	10,026		12,397
Total current assets	121,846		103,117

Properties and equipment, net	1,362,829		1,388,888
Operating lease right-of-use assets, net	1,797		2,317
Net investment in leases (Cushing Connect VIEs: $101,855 and $101,871, respectively)	521,099		539,705
Intangible assets, net	51,681		59,300
Goodwill	342,762		342,762
Equity method investments (Cushing Connect VIEs: $32,753 and $34,746, respectively)	267,291		270,604
Deferred turnaround costs	21,279		24,154
Other assets	16,850		16,655
Total assets	$	2,707,434	$	2,747,502

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable:
Trade (Cushing Connect VIEs: $481 and $431, respectively)	$	28,122	$	26,753
Affiliates	18,561		15,756
	46,683		42,509

Accrued interest	17,512		17,992
Deferred revenue	21,066		12,087
Accrued property taxes	11,058		5,449
Current operating lease liabilities	793		968
Current finance lease liabilities	4,634		4,389
Other current liabilities	4,506		2,430
Total current liabilities	106,252		85,824

Long-term debt	1,468,505		1,556,334
Noncurrent operating lease liabilities	1,371		1,720
Noncurrent finance lease liabilities	60,474		62,513
Other long-term liabilities	28,571		29,111
Deferred revenue	16,878		24,613
Class B unit	61,034		60,507

Equity:
Partners’ equity:
Common unitholders (126,440,201 units issued and outstanding at both September 30, 2023 and December 31, 2022)	896,066		857,126
Noncontrolling interests	68,283		69,754
Total equity	964,349		926,880
Total liabilities and equity	$	2,707,434	$	2,747,502

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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenues:
Affiliates	$	129,287	$	122,868	$	356,087	$	325,659
Third parties	29,073		26,134		85,322		79,311
	158,360		149,002		441,409		404,970
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	58,422		60,470		163,706		156,994
Depreciation and amortization	24,362		25,236		74,922		74,397
General and administrative	7,947		3,751		18,094		12,745

	90,731		89,457		256,722		244,136
Operating income	67,629		59,545		184,687		160,834

Other income (expense):
Equity in earnings of equity method investments	3,581		(16,334)		11,008		(7,261)
Interest expense (including amortization)	(27,285)		(22,965)		(79,711)		(56,951)
Interest income	20,294		24,234		61,050		61,212


Gain on sale of assets and other	708		494		983		640
	(2,702)		(14,571)		(6,670)		(2,360)
Income before income taxes	64,927		44,974		178,017		158,474
State income tax expense	(16)		(38)		(18)		(83)
Net income	64,911		44,936		177,999		158,391
Allocation of net income attributable to noncontrolling interests	(1,886)		(2,985)		(7,223)		(10,089)
Net income attributable to the partners	63,025		41,951		170,776		148,302
Limited partners’ per unit interest in earnings—basic and diluted	$	0.50	$	0.33	$	1.35	$	1.22
Weighted average limited partners’ units outstanding	126,440		126,440		126,440		120,902

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

See accompanying notes.

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Table of 19,

HOLLY ENERGY PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities
Net income	$	177,999	$	158,391
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	74,922		74,397
Gain on sale of assets	(675)		(29)



Amortization of deferred charges	3,240		2,863
Equity-based compensation expense	1,092		1,493
Equity in earnings of equity method investments, net of distributions	6,073		22,084
(Increase) decrease in operating assets:
Accounts receivable—trade	(1,116)		(174)
Accounts receivable—affiliates	(19,678)		(16,643)
Prepaid and other current assets	2,635		2,264
Increase (decrease) in operating liabilities:
Accounts payable—trade	(516)		2,586
Accounts payable—affiliates	2,805		5,844
Accrued interest	(480)		6,664
Deferred revenue	1,244		(5,572)
Accrued property taxes	5,609		5,089
Other current liabilities	2,076		(20)
Turnaround expenditures	(618)		(24,728)
Other, net	3,911		3,988
Net cash provided by operating activities	258,523		238,497

Cash flows from investing activities
Additions to properties and equipment	(21,978)		(31,194)
Acquisition of Sinclair Transportation	—		(328,955)
Investment in Osage Pipe Line Company, LLC	(4,750)		(5,000)
Proceeds from sale of assets	1,417		37
Distributions in excess of equity in earnings of equity investments	1,993		4,724
Net cash used for investing activities	(23,318)		(360,388)

Cash flows from financing activities
Borrowings under credit agreement	60,000		460,000
Repayments of credit agreement borrowings	(149,500)		(594,000)

Proceeds from issuance of debt	—		400,000
Payments on Class B Unit	(2,569)		—


Distributions to HEP unitholders	(132,925)		(125,669)
Distributions to noncontrolling interests	(6,648)		(7,308)
Payments on finance leases	(3,261)		(2,700)
Deferred financing costs	—		(6,541)
Purchase of units for incentive grants	—		(334)
Units withheld for tax withholding obligations	(1)		(217)
Other	5		(170)
Net cash provided (used) by financing activities	(234,899)		123,061

Cash and cash equivalents
Increase for the period	306		1,170
Beginning of period	10,917		14,381
End of period	$	11,223	$	15,551

Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	76,294	$	47,941

See accompanying notes.

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Table of 19,

HOLLY ENERGY PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(In thousands)


	Common Units		Noncontrolling Interests		Total Equity

Balance December 31, 2022	$	857,126	$	69,754	$	926,880
Distributions to HEP unitholders	(44,308)		—		(44,308)
Distributions to noncontrolling interests	—		(2,549)		(2,549)

Amortization of restricted and performance units	354		—		354
Class B unit accretion	(1,024)		—		(1,024)

Net income	58,546		1,751		60,297
Balance March 31, 2023	$	870,694	$	68,956	$	939,650
Distributions to HEP unitholders	(44,309)		—		(44,309)
Distributions to noncontrolling interest	—		(1,861)		(1,861)
Amortization of restricted and performance units	367		—		367
Class B unit accretion	(1,024)		—		(1,024)

Net income	51,252		1,539		52,791
Balance June 30, 2023	$	876,980	$	68,634	$	945,614

Distributions to HEP unitholders	(44,308)		—		(44,308)
Distributions to noncontrolling interest	—		(2,238)		(2,238)

Amortization of restricted and performance units	371		—		371

Other	(2)		1		(1)
Net income	63,025		1,886		64,911
Balance September 30, 2023	$	896,066	$	68,283	$	964,349

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Table of 19,


	Common Units		Noncontrolling Interests		Total Equity

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

Distributions to HEP unitholders	(36,997)		—		(36,997)
Distributions to noncontrolling interests	—		(877)		(877)
Acquisition of remaining UNEV interests	16,537		(78,187)		(61,650)
Amortization of restricted and performance units	620		—		620
Class B unit accretion	(956)		—		(956)
Other	(147)		—		(147)
Net income	50,515		3,263		53,778
Balance March 31, 2022	$	821,609	$	71,731	$	893,340

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

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

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) and Sinclair Transportation Company LLC (“Sinclair Transportation”) from REH Company (formerly known as The Sinclair Companies, and referred to herein as “REH Company”). 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, Hippo Merger Sub, Inc., a wholly owned subsidiary of HF Sinclair (“Parent Merger Sub”), REH Company, and Hippo Holding LLC (now known as Sinclair Holding LLC), a wholly owned subsidiary of REH Company (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 REH Company 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 September 30, 2023, 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 REH Company, representing 27% 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 Target Company, Sinclair 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 REH Company, Sinclair Transportation and HEP, HEP acquired all of the outstanding equity interests of Sinclair Transportation from REH Company 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 $329.0 million, inclusive of final working capital adjustments pursuant to the Contribution Agreement for an aggregate transaction value of $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 were originally held in escrow to secure REH Company’s renewable identification numbers (“RINs”) credit obligations to HF Sinclair under Section 6.22 of the Business Combination Agreement. The HEP Units held in escrow were released to REH Company in April 2023 upon their satisfaction of the RINs credit obligations relating thereto. 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 integrated crude and refined products pipelines and terminal assets, including approximately 1,200 miles of integrated crude and refined product pipeline supporting the Target Company 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.

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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 (the “Cushing Connect Joint Venture”), (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 (“UNEV”) and as a result, UNEV is our wholly owned subsidiary.

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 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, 2022. 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, 2023.

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 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.

Our annual goodwill impairment testing for 2023 was performed on a quantitative basis during the third quarter of 2023, and we determined there was no impairment of goodwill attributable to our reporting units.

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

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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 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. The lease standard (see below) allows the election of a practical expedient whereby a lessor does not have to separate non-lease (service) components from lease components for operating leases under certain conditions. We have made this election for contracts with operating leases. 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. The practical expedient does not apply for sales-type leases. Therefore, we bifurcate the consideration received for those contracts between lease and service components. The service component is accounted for within the scope of ASC 606.

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

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

In certain of these throughput agreements, a customer may later utilize such shortfall billings as credit towards future volume shipments in excess of its minimum levels within its respective contractual shortfall make-up period. Such amounts represent an obligation to perform future services, which may be initially deferred and later recognized as revenue based on estimated future shipping levels, including the likelihood of a customer’s ability to utilize such amounts prior to the end of the contractual shortfall make-up period. We recognize these deficiency payments in revenue when we do not expect we will be required to satisfy these performance obligations in the future based on the pattern of rights projected to be exercised by the customer. During the nine months ended September 30, 2023 and 2022, we recognized $15.4 million and $14.0 million, respectively, of these deficiency payments in revenue, of which $3.9 million of the deficiency payments recognized during the nine months ended September 30, 2022, 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.

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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.

Class B Unit

UNEV earnings before interest, income taxes, depreciation, and amortization exceeded $40 million for the first time during the measurement period ending June 30, 2023 which required the Class B Unit to be reclassified from mezzanine equity to a long-term liability on the balance sheet as of June 30, 2023. A redemption payment of $2.6 million, calculated as described above, was paid in August 2023.

The Class B Unit liability will increase by a 7% factor compounded annually on the outstanding balance through its expiration date, and this increase is included in interest expense on our consolidated statements of income beginning July 1, 2023. Prior to classification of the Class B Unit as a liability, the 7% increase was included in allocation of net income attributable to noncontrolling interests on our consolidated statements of income.

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 $329.0 million, inclusive of final working capital adjustments pursuant to the Contribution Agreement for an aggregate transaction value of $678.0 million. On the same date and immediately following the consummation of the HEP Transaction, pursuant to the Business Combination Agreement, REH Company 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% of the pro forma equity of HF Sinclair with a value of approximately $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 Logistic 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, REH Company and the stockholders of REH Company (each a “Unitholder” and collectively, the “Unitholders,” and along with REH Company and each of their permitted transferees, the “REH Parties”), which became effective on the Closing Date.

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Pursuant to the Unitholders Agreement, the REH Parties have the right to nominate, and have nominated, one person to the board of directors of HLS until such time that (x) the REH Parties beneficially own less than 10.5 million HEP Units or (y) the HEP Units beneficially owned by the REH Parties constitute less than 5% of all outstanding HEP Units. The Unitholders Agreement also subjected 15.75 million of the HEP Units issued to the REH Parties (the “Restricted Units”) to a “lock-up” period commencing on the Closing Date, during which the REH Parties were prohibited from selling the Restricted Units, except for certain permitted transfers. One-third of such Restricted Units were released from such restrictions on the date that was six months after the Closing Date, one-third of the Restricted Units were released from such restrictions on the first anniversary of the Closing Date, and the remainder were released from such restrictions on June 14, 2023, the date that was 15 months from the Closing Date.

Under the terms of the Contribution Agreement, HEP acquired Sinclair Transportation, which together with its subsidiaries, owned REH Company’s integrated crude and refined products pipelines and terminal assets, including approximately 1,200 miles of integrated crude and refined product pipelines supporting the REH Company 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 Investments Corp. (49.995% non-operated interest); and UNEV (the 25% non-operated interest not already owned by HEP, resulting in UNEV 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 purchase price allocation resulted in the recognition of $119.1 million in goodwill.

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


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
Working capital adjustment payment by HEP(2)	3,955
Total cash consideration	328,955
Total purchase consideration	$	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	$	3,005
Prepaid and other current assets	59
Properties and equipment	340,682
Operating lease right-of-use assets	105
Other assets	3,500
Goodwill	119,112
Equity method investments	229,891
Total assets acquired	$	696,354

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	14,984
Total liabilities assumed	$	18,379
Net assets acquired	$	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.

We incurred $0.6 million and $0.4 million for the three months ended September 30, 2023 and 2022, respectively, and $2.1 million for both the nine months ended September 30, 2023 and 2022, 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 consolidated statements of income.

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.

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Note 3:Cushing Connect 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, 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 has contracted with an affiliate of HEP to manage the operation of the Cushing Connect Pipeline and with an affiliate of Plains to manage the operation of the Cushing Connect JV Terminal.

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

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

Note 4:Revenues

Disaggregated revenues were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands)				(In thousands)
Pipelines	$	85,042	$	77,147	$	226,642	$	210,246
Terminals, tanks and loading racks	48,324		44,432		140,342		126,005
Refinery processing units	24,994		27,423		74,425		68,719
	$	158,360	$	149,002	$	441,409	$	404,970

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

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands)				(In thousands)
Lease revenues	$	93,063	$	92,697	$	259,829	$	247,137
Service revenues	65,297		56,305		181,580		157,833
	$	158,360	$	149,002	$	441,409	$	404,970

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


	September 30, 2023		December 31, 2022
	(In thousands)
Contract assets	$	8,258	$	6,672
Contract liabilities	$	6,747	$	—

The contract assets and liabilities include both lease and service components. During the nine months ended September 30, 2022, we recognized $3.9 million of revenue that was previously included in contract liabilities as of December 31, 2021. During the nine months ended September 30, 2023 and 2022, we also recognized $2.1 million and $0.1 million, respectively, of revenue included in contract assets.

As of September 30, 2023, we expect to recognize $2.5 billion in revenue related to our unfulfilled performance obligations under the terms of our long-term throughput agreements and leases expiring in 2024 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,	(In millions)
Remainder of 2023	$	108
2024	407
2025	319
2026	302
2027	269
2028	268
Thereafter	827
Total	$	2,500

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.

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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 21 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 $8.2 million and $7.6 million as of September 30, 2023 and December 31, 2022, respectively, with accumulated depreciation of $4.1 million and $4.0 million as of September 30, 2023 and December 31, 2022, 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):


	September 30, 2023		December 31, 2022

Operating leases:
Operating lease right-of-use assets, net	$	1,797	$	2,317

Current operating lease liabilities	793		968
Noncurrent operating lease liabilities	1,371		1,720
Total operating lease liabilities	$	2,164	$	2,688

Finance leases:
Properties and equipment	$	8,158	$	7,649
Accumulated amortization	(4,088)		(3,979)
Properties and equipment, net	$	4,070	$	3,670

Current finance lease liabilities	$	4,634	$	4,389
Noncurrent finance lease liabilities	60,474		62,513
Total finance lease liabilities	$	65,108	$	66,902

Weighted average remaining lease term (in years):
Operating leases	4.3		4.6
Finance leases	13.1		13.9

Weighted average discount rate:
Operating leases	4.9%		4.6%
Finance leases	5.7%		5.7%

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


	Nine Months Ended September 30,
	2023		2022
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows on operating leases	$	813	$	766
Operating cash flows on finance leases	$	3,602	$	3,094
Financing cash flows on finance leases	$	3,261	$	2,700

Maturities of lease liabilities were as follows:


	September 30, 2023
	Operating		Finance
	(In thousands)
2023	$	294	$	2,079
2024	740		7,883
2025	513		7,423
2026	326		7,544
2027	205		6,822
2028 and thereafter	318		61,038
Total lease payments	2,396		92,789
Less: Imputed interest	(232)		(27,681)
Total lease obligations	2,164		65,108
Less: Current lease liabilities	(793)		(4,634)
Noncurrent lease liabilities	$	1,371	$	60,474

The components of lease expense were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands)
Operating lease costs	$	270	$	248	$	806	$	752
Finance lease costs
Amortization of assets	335		213		948		594
Interest on lease liabilities	942		938		2,840		2,843
Variable lease cost	350		206		768		265
Total net lease cost	$	1,897	$	1,605	$	5,362	$	4,454

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 which includes 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 nine months ended September 30, 2023, we amended agreements with HF Sinclair related to certain crude tank assets. The amended agreements were treated as lease modifications of previous agreements that met the criteria of sales-type

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leases. The modified agreements still met the criteria of sales-type leases; therefore, the residual net investment in lease is carried over to the new sales-type lease, and no gain or loss is recognized.

During the nine months ended September 30, 2022, we entered into new agreements and modified other agreements with HF Sinclair related to our 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 nine months ended September 30, 2022.

The balance sheet impacts were composed of the following:


	Nine Months Ended September 30, 2022
	(In thousands)

Net investment in leases	$	233,456
Properties and equipment, net	(233,456)

Gain on sales-type leases	$	—

These sales-type lease transactions were non-cash transactions.

Lease income recognized was as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands)
Operating lease revenues	$	84,594	$	84,684	$	242,746	$	230,279
Direct financing lease interest income	561		538		1,634		1,578

Sales-type lease interest income	19,729		23,695		59,403		59,633
Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable	8,469		8,013		17,083		16,859

For our sales-type leases, we bifurcate customer obligations between lease and service components. We included the lease portion of customer obligations related to minimum volume requirements in guaranteed minimum lease payments. The lease 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 the lease portion of 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.

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Annual minimum undiscounted lease payments under our leases were as follows as of September 30, 2023:


	Operating		Finance		Sales-type
Years Ending December 31,	(In thousands)
Remainder of 2023	$	78,965	$	598	$	21,372
2024	289,895		2,331		84,059
2025	210,177		2,279		82,060
2026	195,710		2,298		82,060
2027	162,207		2,316		82,060
2028 and thereafter	552,648		35,525		688,896
Total lease receipt payments	$	1,489,602	$	45,347	$	1,040,507
Less: Imputed interest			(29,181)		(919,460)
			16,166		121,047
Unguaranteed residual assets at end of leases			—		390,159
Net investment in leases			$	16,166	$	511,206

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


	September 30, 2023				December 31, 2022
	Sales-type Leases		Direct Financing Leases		Sales-type Leases		Direct Financing Leases
	(In thousands)				(In thousands)
Lease receivables (1)	$	376,826	$	16,166	$	418,989	$	16,264
Unguaranteed residual assets	134,380		—		110,466		—
Net investment in leases	$	511,206	$	16,166	$	529,455	$	16,264

(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.

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


		September 30, 2023				December 31, 2022
Financial Instrument	Fair Value Input Level	Carrying Value		Fair Value		Carrying Value		Fair Value
		(In thousands)
Liabilities:

5% Senior Notes	Level 2	$	494,830	$	461,515	$	494,047	$	458,090
6.375% Senior Notes	Level 2	395,175		392,740		394,287		394,568
Total Liabilities		$	890,005	$	854,255	$	888,334	$	852,658

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 nine months ended 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:


	September 30, 2023		December 31, 2022
	(In thousands)
Pipelines, terminals and tankage	$	1,602,638	$	1,567,359
Refinery assets	353,998		353,998
Land and right of way	171,472		171,327
Construction in progress	19,292		23,027
Other	72,060		69,098
	2,219,460		2,184,809
Less accumulated depreciation	(856,631)		(795,921)
	$	1,362,829	$	1,388,888

Depreciation expense was $63.2 million and $61.1 million for the nine months ended September 30, 2023 and 2022, 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.

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The carrying amounts of our intangible assets were as follows:


	Useful Life	September 30, 2023		December 31, 2022
		(In thousands)
Delek transportation agreement	30 years	$	59,933	$	59,933
HF Sinclair transportation agreement	10-15 years	900		75,131
Customer relationships	10 years	69,683		69,683
Other	20 years	50		50
		130,566		204,797
Less accumulated amortization		(78,885)		(145,497)
		$	51,681	$	59,300

Amortization expense was $7.6 million and $10.5 million for the nine months ended September 30, 2023 and 2022, respectively. We estimate amortization expense to be $9.1 million for 2024 through 2026, $7.9 million for 2027 and $2.0 million for 2028.

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 VIE 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 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 $2.9 million and $2.8 million for the three months ended September 30, 2023 and 2022, respectively, and $8.9 million and $7.9 million for the nine months ended September 30, 2023 and 2022, 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 five components: restricted or phantom units, performance units, unit options, unit appreciation rights and cash awards. Our accounting policy for the recognition of compensation expense for awards with pro-rata vesting (a significant proportion of our awards) is to expense the costs ratably over the vesting periods.

As of September 30, 2023, we had two types of unit-based awards outstanding, which are described below. The compensation cost charged against income was $0.4 million and $0.3 million for the three months ended September 30, 2023 and 2022, respectively, and $1.1 million and $1.5 million for the nine months ended September 30, 2023 and 2022, respectively. We have historically purchased units in the open market instead of issuing new units for settlement of all unit awards under our Long-Term Incentive Plan, although we may issue new units in the future. As of September 30, 2023, 2,500,000 units were authorized to be granted under our Long-Term Incentive Plan, of which 771,593 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.

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

A summary of phantom unit activity and changes during the nine months ended September 30, 2023, is presented below:


Phantom Units	Units	Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2023 (nonvested)	115,809	$	16.66
Granted	1,479	18.49
Vesting and transfer of full ownership to recipients	(330)	11.92
Forfeited	(1,084)	11.92
Outstanding at September 30, 2023 (nonvested)	115,874	16.74

The grant date fair values of phantom units that were vested and transferred to recipients during the nine months ended September 30, 2023 and 2022 was $4 thousand and $0.3 million, respectively. As of September 30, 2023, $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 0.7 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%.

Although common units are not transferred to the recipients until the performance units vest, the recipients have distribution rights with respect to the target number of performance units subject to the award from the date of grant at the same rate as distributions paid on our common units.

A summary of performance unit activity and changes for the nine months ended September 30, 2023, is presented below:


Performance Units						Units
Outstanding at January 1, 2023 (nonvested)						42,852
Granted						513


Outstanding at September 30, 2023 (nonvested)						43,365

The grant date fair value of performance units vested and transferred to recipients during the nine months ended September 30, 2022 was $0.6 million. Based on the weighted-average fair value of performance units outstanding at September 30, 2023 of $0.7 million, there was $0.3 million of total unrecognized compensation expense related to nonvested performance units, which is expected to be recognized over a weighted-average period of 0.9 years.

During the nine months ended September 30, 2023, we did not purchase any common units in the open market for the issuance and settlement of unit awards under our Long-Term Incentive Plan.

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Note 10:Debt

Credit Agreement

We have a $1.2 billion senior secured revolving credit facility (the “Credit Agreement”) that matures in July 2025. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments, working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit and continues to provide for an accordion feature that allows us to increase commitments under the Credit Agreement up to a maximum amount of $1.7 billion.

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

We may prepay all loans at any time without penalty, except for tranche breakage costs. If an event of default exists under the Credit Agreement, the lenders will be able to accelerate the maturity of all loans outstanding and exercise other rights and remedies. We were in compliance with the covenants under the Credit Agreement as of September 30, 2023.

As of September 30, 2023, borrowings outstanding under the Credit Agreement were $578.5 million. In connection with the consummation of the HF Sinclair Merger Transaction (as defined herein), we expect to amend the Credit Agreement to, among other things, (a) provide a guaranty from HF Sinclair and terminate all guaranties from subsidiaries of HEP, (b) amend the definition of “Investment Grade Rating” (as defined in the Credit Agreement) to reference the credit rating of HF Sinclair’s senior unsecured indebtedness, (c) eliminate the requirement to deliver separate audited and unaudited financial statements for HEP and its subsidiaries and only provide certain segment-level reporting for HEP with any compliance certificate delivered in accordance with the Credit Agreement and (d) amend certain covenants to eliminate certain restrictions on (i) amendments to intercompany contracts, (ii) transactions with HF Sinclair and its subsidiaries and (iii) investments in and contributions, dividends, transfers and distributions to HF Sinclair and its subsidiaries. There can be no assurance that the administrative agent and the lenders party thereto will agree to amend the Credit Agreement in a timely manner, or on acceptable terms, if at all.

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 September 30, 2023, 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 certain mergers, in each case subject to compliance with the terms of the indentures. 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:


	September 30, 2023		December 31, 2022
	(In thousands)
Credit Agreement
Amount outstanding	$	578,500	$	668,000

5% Senior Notes
Principal	500,000		500,000
Unamortized premium and debt issuance costs	(5,170)		(5,953)
	494,830		494,047

6.375% Senior Notes
Principal	400,000		400,000
Unamortized premium and debt issuance costs	(4,825)		(5,713)
	395,175		394,287

Total long-term debt	$	1,468,505	$	1,556,334

On October 30, 2023, we and HF Sinclair announced the commencement of private offers by HF Sinclair to all Eligible Holders (as defined in the Exchange Offer Memorandum) to exchange (the “Exchange Offers”) any and all outstanding 6.375% Senior Notes and 5% Senior Notes, for new notes to be issued by HF Sinclair, with registration rights, and cash, pursuant to the terms and subject to the conditions set forth in a confidential exchange offer memorandum and consent solicitation statement, dated October 30, 2023 (the “Exchange Offer Memorandum”). Concurrently with the Exchange Offers, HF Sinclair is soliciting consents (the “Consent Solicitations”) to adopt certain proposed amendments to the indentures governing the existing Senior Notes to, among other things, eliminate from each indenture, as it relates to each series of Senior Notes (i) substantially all of the restrictive covenants, (ii) certain of the events which may lead to an “Event of Default”, (iii) the SEC reporting covenant and (iv) the requirement of HEP to offer to purchase the Senior Notes upon a change of control. The Exchange Offers and Consent Solicitations are subject to the consummation of the HF Sinclair Merger Transaction. The Exchange Offers and Consent Solicitations are being made only pursuant to the terms and subject to conditions set forth in the Exchange Offer Memorandum.

The Exchange Offer Memorandum and other documents relating to the Exchange Offers and Consent Solicitations will be distributed only to Eligible Holders (as defined in the Exchange Offer Memorandum) of Senior Notes. The Exchange Offers and Consent Solicitations are not being made to holders of Senior Notes in any jurisdiction in which the making or acceptance thereof would not be in compliance with the securities, blue sky or other laws of such jurisdiction. The new notes to be issued by HF Sinclair have not been approved or disapproved by any regulatory authority, nor has any such authority passed upon the accuracy or adequacy of the Exchange Offer Memorandum. The complete terms and conditions of the Exchange Offers and Consent Solicitations are described in the Exchange Offer Memorandum.

Note 11:Related Party Transactions

We serve many of HF Sinclair’s refinery and renewable diesel facilities under long-term pipeline, terminal and tankage throughput agreements, and refinery processing unit tolling agreements expiring from 2024 to 2037, and revenues from these agreements accounted for approximately 82% and 81% of our total revenues for the three and nine months ended September 30, 2023, 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 September 30, 2023, these agreements with HF Sinclair require minimum annualized payments to us of $496.5 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.

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Under certain provisions of the Omnibus Agreement, we pay HF Sinclair an annual administrative fee (currently $5.7 million) for the provision by HF Sinclair or its affiliates of various general and administrative services to us. This fee does not include 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 $129.3 million and $122.9 million for the three months ended September 30, 2023 and 2022, respectively, and $356.1 million and $325.7 million for the nine months ended September 30, 2023 and 2022, respectively.

•HF Sinclair charged us general and administrative services under the Omnibus Agreement of $1.4 million and $1.3 million for the three months ended September 30, 2023 and 2022, respectively, and $3.9 million and $3.3 million for the nine months ended September 30, 2023 and 2022, respectively. In addition, HF Sinclair charged us $0.4 million for a prorated portion of the temporary administrative fee during the nine months ended September 30, 2022.

•We reimbursed HF Sinclair for costs of employees supporting our operations of $23.7 million and $21.0 million for the three months ended September 30, 2023 and 2022, respectively, and $64.6 million and $57.1 million for the nine months ended September 30, 2023 and 2022, respectively.

•HF Sinclair reimbursed us $2.5 million and $3.1 million for the three months ended September 30, 2023 and 2022, for expense and capital projects, respectively, and $6.9 million and $11.6 million for the nine months ended September 30, 2023 and 2022, respectively.

•We distributed $20.9 million in both the three months ended September 30, 2023 and 2022, and $62.6 million in both the nine months ended September 30, 2023 and 2022, to HF Sinclair as regular distributions on its common units.

•Accounts receivable from HF Sinclair were $83.1 million and $63.5 million at September 30, 2023, and December 31, 2022, respectively.

•Accounts payable to HF Sinclair were $18.6 million and $15.8 million at September 30, 2023, and December 31, 2022, respectively.

•Deferred revenue in the consolidated balance sheets as of September 30, 2023 includes $6.4 million 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 for the three months ended September 30, 2023 and 2022, and $1.7 million for the nine months ended September 30, 2023 and 2022.

•We received sales-type lease payments of $20.8 million and $24.3 million from HF Sinclair for the three months ended September 30, 2023 and 2022, respectively, and $62.4 million and $61.4 million for the nine months ended September 30, 2023 and 2022, respectively.

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

As of September 30, 2023, 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 September 30, 2023, HEP has issued 2,413,153 units under this program, providing $82.3 million in gross proceeds, but no units have been issued under this program during the periods presented.

Allocations of Net Income

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

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Cash Distributions

On October 19, 2023, we announced our cash distribution for the third quarter of 2023 of $0.35 per unit. The distribution is payable on all common units and will be paid November 10, 2023 to all unitholders of record on October 30, 2023.

Our regular quarterly cash distribution to the limited partners will be $44.3 million for the three months ended September 30, 2023 and was $44.3 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, the regular quarterly distribution to the limited partners will be $132.9 million and was $133.0 million for the nine months ended September 30, 2022. 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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands, except per unit data)



Net income attributable to the partners	$	63,025	$	41,951	$	170,776	$	148,302
Less: Participating securities’ share in earnings	(79)		(75)		(215)		(288)
Net income attributable to common units	62,946		41,876		170,561		148,014
Weighted average limited partners’ units outstanding	126,440		126,440		126,440		120,902
Limited partners’ per unit interest in earnings - basic and diluted	$	0.50	$	0.33	$	1.35	$	1.22

Note 14:Environmental

Environmental costs are charged to operating expenses if they relate to an existing condition caused by past operations and do not contribute to current or future revenue generation. We have ongoing investigations of environmental matters at various locations and routinely assess our recorded environmental obligations, if any, with respect to such matters. Liabilities are recorded when site restoration and environmental remediation, cleanup and other obligations are either known or considered probable and can be reasonably estimated. Such estimates are undiscounted and require judgment with respect to costs, time frame and extent of required remedial and cleanup activities and are subject to periodic adjustments based on currently available information.

We expensed $0.1 million for the three months ended September 30, 2023 and $49 thousand for the three months ended September 30, 2022, for environmental remediation obligations and we expensed $0.7 million and $0.3 million for the nine months ended September 30, 2023 and 2022, respectively. The accrued environmental liability, net of expected recoveries from indemnifying parties, reflected in our consolidated balance sheets was $18.3 million at September 30, 2023 and $19.5 million at December 31, 2022, of which $16.3 million and $17.5 million was classified as other long-term liabilities for September 30, 2023 and December 31, 2022, respectively. These accruals include remediation and monitoring costs expected to be incurred over an extended period of time.

- 28 -

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.

See Note 17 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 of equity method investments.

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.

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 two reportable operating segments: (1) pipelines and terminals, and (2) refinery processing units. These operating segments adhere to the accounting polices used for our consolidated financial statements. For a discussion of these accounting policies and a summary of our derivation of revenue, see Note 1.

Our pipelines and terminals segment includes our petroleum product and crude pipelines and terminal, tankage and loading rack facilities that support refining and marketing operations of HF Sinclair and other refineries in the Mid-Continent, Southwest and Northwest regions of the United States.

Our refinery processing unit segment consists of five refinery processing units at two of HF Sinclair’s refining facility locations.

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

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

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands)
Revenues:
Pipelines and terminals - affiliate	$	104,293	$	95,445	$	281,662	$	256,940
Pipelines and terminals - third-party	29,073		26,134		85,322		79,311
Refinery processing units - affiliate	24,994		27,423		74,425		68,719
Total segment revenues	$	158,360	$	149,002	$	441,409	$	404,970

Segment operating income:
Pipelines and terminals	$	63,158	$	51,621	$	167,953	$	150,098
Refinery processing units	12,418		11,675		34,828		23,481
Total segment operating income	75,576		63,296		202,781		173,579
Unallocated general and administrative expenses	(7,947)		(3,751)		(18,094)		(12,745)
Interest expense	(27,285)		(22,965)		(79,711)		(56,951)
Interest income	20,294		24,234		61,050		61,212

Equity in earnings of equity method investments	3,581		(16,334)		11,008		(7,261)

Gain on sale of assets and other	708		494		983		640
Income before income taxes	$	64,927	$	44,974	$	178,017	$	158,474

Capital Expenditures:
Pipelines and terminals	$	5,672	$	7,583	$	21,936	$	25,400
Refinery processing units	42		364		42		5,794
Total capital expenditures	$	5,714	$	7,947	$	21,978	$	31,194


	September 30, 2023		December 31, 2022
	(In thousands)
Identifiable assets:
Pipelines and terminals (1)	$	2,123,140	$	2,152,159
Refinery processing units	294,125		304,332
Other	290,169		291,011
Total identifiable assets	$	2,707,434	$	2,747,502

(1) Included goodwill of $342.8 million as of both September 30, 2023 and December 31, 2022.

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Note 17: 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 nine months ended September 30, 2023 by $5.5 million for our 50% share of incurred and estimated environmental remediation and recovery expenses and estimated fines and penalties associated with the release. From the date of the release through September 30, 2023, our equity in earnings of equity method investments was reduced by $23.1 million for our 50% share of incurred and estimated environmental remediation and recovery expenses and estimated fines and penalties associated with the release, net of our share of insurance proceeds received to date of $3.0 million. Any additional insurance recoveries will be recorded as they are received. If the Osage insurance policy pays out in full, our share of the remaining insurance coverage is expected to be $10.0 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 statements of income as a reduction in equity in earnings (loss) of equity method investments.

The Osage pipeline resumed operations in the third quarter of 2022 and remediation efforts are underway. It may be necessary for Osage to expend or accrue additional amounts for environmental remediation or other release-related expenses in future periods, but we cannot estimate those amounts at this time. Future 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 them to have a material impact on our financial position.

Note 18: HF Sinclair Merger Transaction

On August 15, 2023, HEP entered into an Agreement and Plan of Merger (the “Merger Agreement”) with HF Sinclair, the Sole Member, Holly Apple Holdings LLC, a Delaware limited liability company and a wholly owned subsidiary of the Sole Member (“Merger Sub”), HEP Logistics Holdings, L.P., a Delaware limited partnership and the general partner of HEP, and HLS, pursuant to which Merger Sub will merge with and into HEP, with HEP surviving as an indirect, wholly owned subsidiary of HF Sinclair (such merger, together with the other transactions contemplated by the Merger Agreement, being referred to herein as the “HF Sinclair Merger Transaction”).

Under the terms of the Merger Agreement, each outstanding common unit of HEP, other than the HEP common units already owned by HF Sinclair and its subsidiaries, will be converted into the right to receive 0.315 shares of HF Sinclair common stock and $4.00 in cash, without interest. Completion of the HF Sinclair Merger Transaction is subject to the approval of HF Sinclair stockholders and HEP unitholders and the satisfaction of certain customary closing conditions.

Note 19: 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 (“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 and statements of income 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 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 financial information has been included in the Guarantor Subsidiaries financial information for all periods presented.

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Condensed Consolidating Balance Sheet


September 30, 2023	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	10,641	$	(1,318)	$	1,900	$	—	$	11,223
Accounts receivable	—		100,557		1,408		(1,368)		100,597
Prepaid and other current assets	169		9,857		401		(401)		10,026
Total current assets	10,810		109,096		3,709		(1,769)		121,846

Properties and equipment, net	—		1,362,829		—		—		1,362,829
Operating lease right-of-use assets	—		1,797		—		—		1,797
Net investment in leases	—		521,099		101,908		(101,908)		521,099
Investment in subsidiaries	2,380,795		68,283		—		(2,449,078)		—
Intangible assets, net	—		51,681		—		—		51,681
Goodwill	—		342,762		—		—		342,762
Equity method investments	—		234,538		32,753		—		267,291
Deferred turnaround costs	—		21,279		—		—		21,279
Other assets	4,371		12,479		—		—		16,850
Total assets	$	2,395,976	$	2,725,843	$	138,370	$	(2,552,755)	$	2,707,434

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	—	$	47,530	$	521	$	(1,368)	$	46,683
Accrued interest	17,512		—		—		—		17,512
Deferred revenue	—		21,066		—		—		21,066
Accrued property taxes	—		11,058		—		—		11,058
Current operating lease liabilities	—		793		—		—		793
Current finance lease liabilities	—		7,080		—		(2,446)		4,634
Other current liabilities	862		2,361		1,283		—		4,506
Total current liabilities	18,374		89,888		1,804		(3,814)		106,252

Long-term debt	1,468,505		—		—		—		1,468,505
Noncurrent operating lease liabilities	—		1,371		—		—		1,371
Noncurrent finance lease liabilities	—		147,385		—		(86,911)		60,474
Other long-term liabilities	79		28,492		—		—		28,571
Deferred revenue	—		16,878		—		—		16,878
Class B Unit	—		61,034		—		—		61,034
Equity - partners	909,018		2,380,795		68,283		(2,462,030)		896,066
Equity - noncontrolling interests	—		—		68,283		—		68,283
Total liabilities and equity	$	2,395,976	$	2,725,843	$	138,370	$	(2,552,755)	$	2,707,434

- 32 -

Condensed Consolidating Balance Sheet


December 31, 2022	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	4,316	$	4,454	$	2,147	$	—	$	10,917
Accounts receivable	—		79,689		1,453		(1,339)		79,803
Prepaid and other current assets	256		12,141		356		(356)		12,397
Total current assets	4,572		96,284		3,956		(1,695)		103,117

Properties and equipment, net	—		1,388,888		—		—		1,388,888
Operating lease right-of-use assets	—		2,317		—		—		2,317
Net investment in leases	—		539,705		101,871		(101,871)		539,705
Investment in subsidiaries	2,432,767		69,754		—		(2,502,521)		—
Intangible assets, net	—		59,300		—		—		59,300
Goodwill	—		342,762		—		—		342,762
Equity method investments	—		235,858		34,746		—		270,604
Deferred turnaround costs	—		24,154		—		—		24,154
Other assets	5,865		10,790		—		—		16,655
Total assets	$	2,443,204	$	2,769,812	$	140,573	$	(2,606,087)	$	2,747,502

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	—	$	43,303	$	545	$	(1,339)	$	42,509
Accrued interest	17,992		—		—		—		17,992
Deferred revenue	—		12,087		—		—		12,087
Accrued property taxes	—		5,449		—		—		5,449
Current operating lease liabilities	—		968		—		—		968
Current finance lease liabilities	—		6,560		—		(2,171)		4,389
Other current liabilities	117		1,793		520		—		2,430
Total current liabilities	18,109		70,160		1,065		(3,510)		85,824

Long-term debt	1,556,334		—		—		—		1,556,334
Noncurrent operating lease liabilities	—		1,720		—		—		1,720
Noncurrent finance lease liabilities	—		150,935		—		(88,422)		62,513
Other long-term liabilities	—		29,111		—		—		29,111
Deferred revenue	—		24,613		—		—		24,613
Class B unit	—		60,507		—		—		60,507
Equity - partners	868,760		2,432,767		69,754		(2,514,155)		857,126
Equity - noncontrolling interests	—		—		69,754		—		69,754
Total liabilities and equity	$	2,443,203	$	2,769,813	$	140,573	$	(2,606,087)	$	2,747,502

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Condensed Consolidating Statement of Income


Three Months Ended September 30, 2023	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
Revenues:
Affiliates	$	—	$	129,168	$	119	$	—	$	129,287
Third parties	—		29,073		—		—		29,073
	—		158,241		119		—		158,360
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—		57,154		1,268		—		58,422
Depreciation and amortization	—		24,362		—		—		24,362
General and administrative	114		7,833		—		—		7,947

	114		89,349		1,268		—		90,731
Operating income (loss)	(114)		68,892		(1,149)		—		67,629

Other income (expense):
Equity in earnings of subsidiaries	88,429		1,886		—		(90,315)		—
Equity in earnings of equity method investments	—		2,772		809		—		3,581
Interest expense	(25,290)		(6,106)		—		4,111		(27,285)
Interest income	—		20,294		4,111		(4,111)		20,294

Gain on sale of assets and other	—		708		—		—		708
	63,139		19,554		4,920		(90,315)		(2,702)
Income before income taxes	63,025		88,446		3,771		(90,315)		64,927
State income tax expense	—		(16)		—		—		(16)
Net income	63,025		88,430		3,771		(90,315)		64,911
Allocation of net income attributable to noncontrolling interests	—				(1,886)		—		(1,886)

Net income attributable to the partners	$	63,025	$	88,430	$	1,885	$	(90,315)	$	63,025

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Condensed Consolidating Statement of Income


Nine Months Ended September 30, 2023	Parent		Guarantor Restricted Subsidiaries		Non-Guarantor Non-Restricted Subsidiaries		Eliminations		Consolidated
	(In thousands)
Revenues:
Affiliates	$	—	$	355,968	$	119	$	—	$	356,087
Third parties	—		85,322		—		—		85,322
	—		441,290		119		—		441,409
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	—		159,283		4,423		—		163,706
Depreciation and amortization	—		74,922		—		—		74,922
General and administrative	3,204		14,890		—		—		18,094

	3,204		249,095		4,423		—		256,722
Operating income (loss)	(3,204)		192,195		(4,304)		—		184,687

Other income (expense):
Equity in earnings of subsidiaries	249,798		5,177		—		(254,975)		—
Equity in earnings of equity method investments	—		8,696		2,312		—		11,008
Interest expense	(75,818)		(16,239)		—		12,346		(79,711)
Interest income	—		61,050		12,346		(12,346)		61,050

Gain on sale of assets and other	—		983		—		—		983
	173,980		59,667		14,658		(254,975)		(6,670)
Income before income taxes	170,776		251,862		10,354		(254,975)		178,017
State income tax expense	—		(18)		—		—		(18)
Net income	170,776		251,844		10,354		(254,975)		177,999
Allocation of net income attributable to noncontrolling interests	—		(2,046)		(5,177)		—		(7,223)
Net income attributable to the partners	$	170,776	$	249,798	$	5,177	$	(254,975)	$	170,776

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Condensed Consolidating Statement of Income


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

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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

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

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 (now known as Sinclair Holding LLC), Sinclair Transportation or their respective consolidated subsidiaries (collectively, the “HFS 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 HFS 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”)) and Sinclair Transportation from REH Company (formerly known as The Sinclair Companies, and referred to herein as “REH Company”). 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 REH Company 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 September 30, 2023, 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 REH Company 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 the HEP fully diluted common limited partner units outstanding and closing unit price on March 11, 2022, and cash consideration equal to $329.0 million, inclusive of final working capital adjustments for an aggregate transaction value of $678.0 million (the “HEP Transaction”). 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 REH Company’s integrated crude and refined products pipelines and terminal assets, including approximately 1,200 miles of integrated crude and refined product pipeline supporting the REH Company 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 Investments Corp. (49.995% non-operated interest); and UNEV Pipeline, LLC (“UNEV”) (the 25% non-operated interest not already owned by HEP, resulting in UNEV 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.

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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.

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.

HF Sinclair Merger Transaction

On August 15, 2023, HEP entered into an Agreement and Plan of Merger (the “Merger Agreement”) with HF Sinclair, Navajo Pipeline Co., L.P, a Delaware limited partnership and an indirect wholly owned subsidiary of HF Sinclair (the “Sole Member”), Holly Apple Holdings LLC, a Delaware limited liability company and a wholly owned subsidiary of the Sole Member (“Merger Sub”), HEP Logistics Holdings, L.P., a Delaware limited partnership and the general partner of HEP (“HLH”), and Holly Logistic Services, L.L.C., a Delaware limited liability company and the general partner of HLH (“HLS”), pursuant to which Merger Sub will merge with and into HEP, with HEP surviving as an indirect, wholly owned subsidiary of HF Sinclair (such merger, together with the other transactions contemplated by the Merger Agreement, being referred to herein as the “HF Sinclair Merger Transaction”).

Market Developments

Our results for the nine months ended September 30, 2023 were favorably impacted by 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 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 2024 to 2037. These minimum volume commitments accounted for approximately 73% and 70% of our total tariffs and fees billed to customers for the nine months ended September 30, 2023 and September 30, 2022, respectively. We are currently not aware of any reasons that would prevent such customers from making the minimum payments required under the contracts or potentially making payments in excess of the minimum payments. In addition to these payments, we also expect to collect payments for services provided to uncommitted shippers.

Agreements with HF Sinclair

We serve HF Sinclair’s refineries under long-term pipeline, terminal, tankage and refinery processing unit throughput agreements expiring from 2024 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 Producer Price Index (“PPI”) or the Federal Energy Regulatory Commission (“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 September 30, 2023, these agreements with HF Sinclair require minimum annualized payments to us of $496 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.

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

Under certain provisions of an omnibus agreement we have with HF Sinclair (the “Omnibus Agreement”), we pay HF Sinclair an annual administrative fee, currently $5.7 million, for the provision by HF Sinclair or its affiliates of various general and administrative services to us. This fee does not include 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 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. Subject to the Merger Agreement and the discretion of the board of directors of HLS, our ultimate general partner, 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.

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RESULTS OF OPERATIONS (Unaudited)

Income, Distributable Cash Flow, Volumes and Balance Sheet Data

The following tables present income, distributable cash flow and volume information for the three and nine months ended September 30, 2023 and 2022.

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	Three Months Ended September 30,				Change from
	2023		2022		2022
	(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates—refined product pipelines	$	25,972	$	24,731	$	1,241
Affiliates—intermediate pipelines	9,059		7,988		1,071
Affiliates—crude pipelines	25,540		23,169		2,371
	60,571		55,888		4,683
Third parties—refined product pipelines	8,640		6,694		1,946
Third parties—crude pipelines	15,831		14,565		1,266
	85,042		77,147		7,895
Terminals, tanks and loading racks:
Affiliates	43,722		39,557		4,165
Third parties	4,602		4,875		(273)
	48,324		44,432		3,892

Refinery processing units—Affiliates	24,994		27,423		(2,429)

Total revenues	158,360		149,002		9,358
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	58,422		60,470		(2,048)
Depreciation and amortization	24,362		25,236		(874)
General and administrative	7,947		3,751		4,196

	90,731		89,457		1,274
Operating income	67,629		59,545		8,084
Other income (expense):
Equity in earnings of equity method investments	3,581		(16,334)		19,915
Interest expense, including amortization	(27,285)		(22,965)		(4,320)
Interest income	20,294		24,234		(3,940)


Gain on sale of assets and other	708		494		214
	(2,702)		(14,571)		11,869
Income before income taxes	64,927		44,974		19,953
State income tax expense	(16)		(38)		22
Net income	64,911		44,936		19,975

Allocation of net income attributable to noncontrolling interests	(1,886)		(2,985)		1,099
Net income attributable to the partners	63,025		41,951		21,074


Limited partners’ earnings per unit—basic and diluted	$	0.50	$	0.33	$	0.17
Weighted average limited partners’ units outstanding	126,440		126,440		—
EBITDA (1)	$	94,394	$	65,956	$	28,438
Adjusted EBITDA (1)	$	118,514	$	110,092	$	8,422
Distributable cash flow (2)	$	78,465	$	78,731	$	(266)

Volumes (bpd)
Pipelines:
Affiliates—refined product pipelines	152,541		167,618		(15,077)
Affiliates—intermediate pipelines	107,019		137,049		(30,030)
Affiliates—crude pipelines	426,418		507,419		(81,001)
	685,978		812,086		(126,108)
Third parties—refined product pipelines	33,549		38,040		(4,491)
Third parties—crude pipelines	204,970		131,622		73,348
	924,497		981,748		(57,251)
Terminals and loading racks:
Affiliates	761,956		583,089		178,867
Third parties	40,440		37,782		2,658
	802,396		620,871		181,525
Refinery processing units—Affiliates	67,192		72,065		(4,873)
Total for pipelines and terminal and refinery processing unit assets (bpd)	1,794,085		1,674,684		119,401

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	Nine Months Ended September 30,				Change from
	2023		2022		2022
	(In thousands, except per unit data)
Revenues:
Pipelines:
Affiliates—refined product pipelines	$	64,092	$	62,511	$	1,581
Affiliates—intermediate pipelines	25,659		23,015		2,644
Affiliates—crude pipelines	70,872		62,417		8,455
	160,623		147,943		12,680
Third parties—refined product pipelines	24,288		21,169		3,119
Third parties—crude pipelines	41,731		41,134		597
	226,642		210,246		16,396
Terminals, tanks and loading racks:
Affiliates	121,039		108,997		12,042
Third parties	19,303		17,008		2,295
	140,342		126,005		14,337

Refinery processing units—Affiliates	74,425		68,719		5,706

Total revenues	441,409		404,970		36,439
Operating costs and expenses:
Operations (exclusive of depreciation and amortization)	163,706		156,994		6,712
Depreciation and amortization	74,922		74,397		525
General and administrative	18,094		12,745		5,349

	256,722		244,136		12,586
Operating income	184,687		160,834		23,853
Other income (expense):
Equity in earnings of equity method investments	11,008		(7,261)		18,269
Interest expense, including amortization	(79,711)		(56,951)		(22,760)
Interest income	61,050		61,212		(162)


Gain on sale of assets and other	983		640		343
	(6,670)		(2,360)		(4,310)
Income before income taxes	178,017		158,474		19,543
State income tax expense	(18)		(83)		65
Net income	177,999		158,391		19,608

Allocation of net income attributable to noncontrolling interests	(7,223)		(10,089)		2,866
Net income attributable to the partners	170,776		148,302		22,474


Limited partners’ earnings per unit—basic and diluted	$	1.35	$	1.22	$	0.13
Weighted average limited partners’ units outstanding	126,440		120,902		5,538
EBITDA (1)	$	264,377	$	218,521	$	45,856
Adjusted EBITDA (1)	$	330,591	$	299,673	$	30,918
Distributable cash flow (2)	$	235,648	$	221,643	$	14,005

Volumes (bpd)
Pipelines:
Affiliates—refined product pipelines	144,082		138,608		5,474
Affiliates—intermediate pipelines	108,579		126,550		(17,971)
Affiliates—crude pipelines	429,965		460,641		(30,676)
	682,626		725,799		(43,173)
Third parties—refined product pipelines	38,702		41,646		(2,944)
Third parties—crude pipelines	196,552		133,598		62,954
	917,880		901,043		16,837
Terminals and loading racks:
Affiliates	710,905		534,305		176,600
Third parties	44,263		40,923		3,340
	755,168		575,228		179,940
Refinery processing units—Affiliates	60,131		69,903		(9,772)
Total for pipelines and terminal and refinery processing unit assets (bpd)	1,733,179		1,546,174		187,005

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(1)Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is calculated as net income attributable to the partners plus or minus (i) interest expense, (ii) interest income, (iii) state income tax expense and (iv) depreciation and amortization. Adjusted EBITDA is calculated as EBITDA plus (i) our share of Osage environmental remediation costs included in equity in earnings of equity method investments, (ii) acquisition integration and regulatory costs, (iii) tariffs and fees not included in revenues due to impacts from lease accounting for certain tariffs and fees minus (iv) pipeline lease payments not included in operating costs and expenses. Portions of our minimum guaranteed 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. 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 the 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.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands)
Net income attributable to the partners	$	63,025	$	41,951	$	170,776	$	148,302
Add (subtract):
Interest expense	27,285		22,965		79,711		56,951
Interest income	(20,294)		(24,234)		(61,050)		(61,212)
State income tax expense	16		38		18		83
Depreciation and amortization	24,362		25,236		74,922		74,397
EBITDA	$	94,394	$	65,956	$	264,377	$	218,521




Share of Osage environmental remediation costs	69		20,297		1,289		20,297
Acquisition integration and regulatory costs	4,285		373		5,757		2,095
Tariffs and fees not included in revenues	21,372		25,072		63,987		63,579
Lease payments not included in operating costs	(1,606)		(1,606)		(4,819)		(4,819)
Adjusted EBITDA	$	118,514	$	110,092	$	330,591	$	299,673

(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 exception 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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands)
Net income attributable to the partners	$	63,025	$	41,951	$	170,776	$	148,302
Add (subtract):
Depreciation and amortization	24,362		25,236		74,922		74,397
Amortization of discount and deferred debt issuance costs	1,088		1,060		3,241		2,863

Customer billings greater than net income recognized	2,138		(587)		11,908		34
Maintenance capital expenditures (3)	(5,859)		(4,679)		(13,597)		(15,262)
Increase (decrease) in environmental liability	(1,550)		5,364		(2,553)		5,120
Share of Osage insurance coverage	—		12,500		500		12,500
Reimbursable deferred revenue	(3,620)		(3,538)		(12,534)		(10,127)



Other	(1,119)		1,424		2,985		3,816
Distributable cash flow	$	78,465	$	78,731	$	235,648	$	221,643

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


	September 30, 2023		December 31, 2022
	(In thousands)
Balance Sheet Data
Cash and cash equivalents	$	11,223	$	10,917
Working capital	$	15,594	$	17,293
Total assets	$	2,707,434	$	2,747,502
Long-term debt	$	1,468,505	$	1,556,334
Partners’ equity	$	896,066	$	857,126

Results of Operations—Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022

Summary

Net income attributable to the partners for the third quarter of 2023 was $63.0 million ($0.50 per basic and diluted limited partner unit) compared to $42.0 million ($0.33 per basic and diluted limited partner unit) for the third quarter of 2022. Results for the third quarters of 2023 and 2022 reflect reductions to our equity in earnings of equity method investments of $4.3 million and $20.3 million, respectively, for HEP’s 50% share of incurred and estimated environmental remediation and recovery expenses and estimated fines and penalties, net of insurance proceeds received, associated with a release of crude oil on the Osage Pipe Line Company, LLC (“Osage”) pipeline. Excluding these reductions, net income attributable to HEP for the third quarters of 2023 and 2022 was $67.3 million ($0.53 per basic and diluted limited partner unit) and $62.2 million ($0.49 per basic and diluted limited partner unit), respectively. The increase in net income attributable to HEP in the third quarter of 2023 was mainly due to higher revenues associated with tariff increases that went into effect on July 1, 2023, partially offset by higher interest expense and higher general and administrative expenses.

Revenues

Revenues for the third quarter of 2023 were $158.4 million, an increase of $9.4 million compared to the third quarter of 2022. The increase was mainly due to tariff increases that went into effect on July 1, 2023 as well as more customer billings recognized as revenue rather than interest income under sales-type lease accounting.

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Revenues from our refined product pipelines were $34.6 million, an increase of $3.2 million compared to the third quarter of 2022. Shipments averaged 186.1 thousand barrels per day (“mbpd”) compared to 205.7 mbpd for the third quarter of 2022. The volume decrease was mainly due to lower volumes on our product pipelines serving HF Sinclair’s Navajo refinery. The increase in revenues was mainly due to tariff increases that went into effect on July 1, 2023 as well as more customer billings recognized as revenue rather than interest income under sales-type lease accounting.

Revenues from our intermediate pipelines were $9.1 million, an increase of $1.1 million compared to the third quarter of 2022. Shipments averaged 107.0 mbpd for the third quarter of 2023 compared to 137.0 mbpd for the third quarter of 2022. The decrease in volumes was mainly due to lower throughputs on our intermediate pipelines servicing HF Sinclair’s Navajo and Tulsa refineries while revenues increased due to tariff increases on contractual minimum volume guarantees.

Revenues from our crude pipelines were $41.4 million, an increase of $3.6 million compared to the third quarter of 2022. Shipments averaged 631.4 mbpd compared to 639.0 mbpd for the third quarter of 2022. The decrease in volumes was mainly attributable to lower volumes on our New Mexico and Texas crude pipelines as well as our crude pipeline servicing HF Sinclair’s Tulsa refinery while revenues increased due to tariff increases that went into effect on July 1, 2023.

Revenues from terminal, tankage and loading rack fees were $48.3 million, an increase of $3.9 million compared to the third quarter of 2022. Refined products and crude oil terminalled in the facilities averaged 802.4 mbpd compared to 620.9 mbpd for the third quarter of 2022. The increase in volumes was mainly due to higher volumes on the Sinclair Transportation assets we acquired and certain crude tanks. Revenues increased mainly due to higher revenues from the increased volumes on the acquired Sinclair Transportation assets as well as rate increases that went into effect on July 1, 2023.

Revenues from refinery processing units were $25.0 million, a decrease of $2.4 million compared to the third quarter of 2022, and throughputs averaged 67.2 mbpd compared to 72.1 mbpd for the third quarter of 2022. The decrease in volumes was due to decreased throughput at our El Dorado and Woods Cross refinery processing units. Revenues decreased mainly due to lower natural gas cost recoveries partially offset by rate increases on contractual minimum volume guarantees.

Operations Expense

Operations (exclusive of depreciation and amortization) expense was $58.4 million for the three months ended September 30, 2023, a decrease of $2.0 million compared to the third quarter of 2022. The decrease was mainly due to lower natural gas costs, partially offset by increased employee costs.

Depreciation and Amortization

Depreciation and amortization for the three months ended September 30, 2023 decreased by $0.9 million compared to the three months ended September 30, 2022. The decrease was mainly due to lower amortization of certain intangible assets that were fully amortized during the first quarter of 2023.

General and Administrative

General and administrative costs for the three months ended September 30, 2023 increased by $4.2 million compared to the three months ended September 30, 2022, mainly due to higher professional service fees incurred in the three months ended September 30, 2023 associated with the HF Sinclair Merger Transaction.

Equity in Earnings of Equity Method Investments


	Three Months Ended September 30,
Equity Method Investment	2023		2022
	(in thousands)
Osage Pipe Line Company, LLC	$	(5,267)	$	(22,020)
Cheyenne Pipeline LLC	3,958		1,576
Cushing Connect Terminal Holdings LLC	809		782
Pioneer Investments Corp.	4,308		3,708
Saddle Butte Pipeline III, LLC	(227)		(380)
Total	$	3,581	$	(16,334)

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Equity in earnings of Osage increased for the three months ended September 30, 2023, mainly due to our 50% share of environmental remediation and recovery expenses and estimated fines and penalties, net of insurance recoveries, associated with the release of crude oil on the Osage pipeline, and expenses associated with pipeline inspections being lower for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Additional insurance recoveries will be recorded as they are received. If the Osage insurance pays out in full, our share of the remaining insurance coverage is expected to be $10.0 million. The Osage pipeline resumed operations in the third quarter of 2022 and remediation efforts are underway.

Interest Expense, including Amortization

Interest expense for the three months ended September 30, 2023 was $27.3 million, an increase of $4.3 million compared to the three months ended September 30, 2022. The increase was mainly due to higher market interest rates on our senior secured revolving credit facility. Our aggregate effective interest rates were 6.2% and 5.5% for the three months ended September 30, 2023 and 2022, respectively.

Interest Income

Interest income for the three months ended September 30, 2023, totaled $20.3 million, a decrease of $3.9 million compared to the three months ended September 30, 2022. The decrease was mainly due to more pipeline tariffs recognized as revenue rather than interest income under sales-type lease accounting.

Results of Operations—Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022

Summary

Net income attributable to the partners for the nine months ended September 30, 2023 was $170.8 million ($1.35 per basic and diluted limited partner unit) compared to $148.3 million ($1.22 per basic and diluted limited partner unit) for the nine months ended September 30, 2022. Results for the nine months ended September 30, 2023 and 2022 reflect reductions to our equity in earnings of equity method investments of $5.5 million and $20.3 million, respectively, for HEP’s 50% share of incurred and accrued environmental remediation and recovery expenses and estimated fines and penalties, net of insurance proceeds received, associated with a release of crude oil on the Osage pipeline. Excluding these reductions, net income attributable to HEP for the nine months ended September 30, 2023 and 2022 was $176.3 million ($1.39 per basic and diluted limited partner unit) and $168.6 million ($1.39 per basic and diluted limited partner unit), respectively. The increase in earnings was mainly due to net income from our Sinclair Transportation assets, which were acquired on March 14, 2022, tariff increases that went into effect on July 1, 2023, and higher revenues on our Woods Cross refinery processing units, partially offset by higher interest expense.

Revenues

Revenues for the nine months ended September 30, 2023 were $441.4 million, an increase of $36.4 million compared to the nine months ended September 30, 2022. The increase was mainly attributable to revenues from our Sinclair Transportation assets acquired on March 14, 2022, higher revenues on our Woods Cross refinery processing units, which were down for a scheduled turnaround in March 2022, and rate increases that went into effect on July 1, 2023, partially offset by lower revenues on our product pipelines servicing HF Sinclair's Navajo refinery.

Revenues from our refined product pipelines were $88.4 million, an increase of $4.7 million compared to the nine months ended September 30, 2022. Shipments averaged 182.8 mbpd compared to 180.3 mbpd for the nine months ended September 30, 2022. The volume and revenue increases were mainly due to volumes on the acquired Sinclair Transportation assets, partially offset by lower volumes on our product pipelines servicing HF Sinclair’s Navajo refinery due to lower throughput at the refinery.

Revenues from our intermediate pipelines were $25.7 million, an increase of $2.6 million compared to the nine months ended September 30, 2022. Shipments averaged 108.6 mbpd compared to 126.6 mbpd for the nine months ended September 30, 2022. The decrease in volumes was mainly due to lower throughputs on our intermediate pipelines servicing HF Sinclair’s Navajo refinery while revenues increased due to the acquired Sinclair Transportation intermediate pipelines as well as contractual minimum volume guarantees and rate increases that went into effect on July 1, 2023.

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Revenues from our crude pipelines were $112.6 million, an increase of $9.1 million compared to the nine months ended September 30, 2022. Shipments averaged 626.5 mbpd compared to 594.2 mbpd for the nine months ended September 30, 2022. The increase in volumes was mainly attributable to volumes on the acquired Sinclair Transportation crude pipelines. The increase in revenues was mainly due to the acquired Sinclair Transportation crude pipelines, higher revenues on our crude pipeline systems in New Mexico and Texas and rate increases that went into effect on July 1, 2023.

Revenues from terminal, tankage and loading rack fees were $140.3 million, an increase of $14.3 million compared to the nine months ended September 30, 2022. Refined products and crude oil terminalled in the facilities averaged 755.2 mbpd compared to 575.2 mbpd for the nine months ended September 30, 2022. Volumes increased mainly due to volumes on the acquired Sinclair Transportation assets and certain crude tanks. Revenues increased mainly due to revenues from the increased volumes on the acquired Sinclair Transportation assets, higher butane blending revenues, and rate increases that went into effect on July 1, 2023.

Revenues from refinery processing units were $74.4 million, an increase of $5.7 million compared to the nine months ended September 30, 2022. Throughputs averaged 60.1 mbpd compared to 69.9 mbpd for the nine months ended September 30, 2022. Revenues increased mainly due to higher revenues from our Woods Cross refinery processing units, which were down for a scheduled turnaround in March 2022, as well as rate increases. The decrease in volumes was primarily due to a turnaround at the El Dorado refinery.

Operations Expense

Operations expense (exclusive of depreciation and amortization) for the nine months ended September 30, 2023 increased by $6.7 million compared to the nine months ended September 30, 2022. The increase was mainly due to operating costs and expenses associated with the acquired Sinclair Transportation assets as well as higher employee costs, partially offset by lower natural gas costs.

Depreciation and Amortization

Depreciation and amortization for the nine months ended September 30, 2023 increased by $0.5 million compared to the nine months ended September 30, 2022. The increase was mainly due to depreciation on the acquired Sinclair Transportation assets and amortization of the Woods Cross refinery processing units turnaround, partially offset by lower amortization of certain intangible assets that were fully amortized during the first quarter of 2023.

General and Administrative

General and administrative costs for the nine months ended September 30, 2023 increased by $5.3 million compared to the nine months ended September 30, 2022 primarily due to higher legal and professional expenses incurred in the nine months ended September 30, 2023 associated with the HF Sinclair Merger Transaction.

Equity in Earnings of Equity Method Investments


	Nine Months Ended September 30,
Equity Method Investment	2023		2022
	(in thousands)
Osage Pipe Line Company, LLC	$	(7,576)	$	(20,771)
Cheyenne Pipeline LLC	6,733		4,936
Cushing Connect Terminal Holdings LLC	2,312		2,494
Pioneer Investments Corp.	10,510		7,393
Saddle Butte Pipeline III, LLC	(971)		(1,313)
Total	$	11,008	$	(7,261)

Equity in earnings of Osage increased for the nine months ended September 30, 2023, as our 50% share of environmental remediation and recovery expenses and estimated fines and penalties, net of insurance recoveries, associated with the release of crude oil on the Osage pipeline, and expenses associated with pipeline inspections was lower for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Additional insurance recoveries will be recorded as they are received. Our share of the remaining insurance coverage is $10.0 million. The pipeline resumed operations in the third quarter of 2022 and remediation efforts are underway.

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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 nine months ended September 30, 2023 totaled $79.7 million, an increase of $22.8 million compared to the nine months ended September 30, 2022. The increase was mainly due to higher interest rates on our long-term debt due to market interest rate increases on our senior secured revolving credit facility and our April 2022 issuance of $400 million in aggregate principal amount of 6.375% senior unsecured notes maturing in April 2027 (the “6.375% Senior Notes”), the proceeds of which were used to partially repay outstanding borrowings under our senior secured credit facility following the funding of the cash portion of the Sinclair Transportation acquisition. Our aggregate effective interest rates were 6.1% and 4.6% for the nine months ended September 30, 2023 and 2022, respectively.

Interest Income

Interest income for the nine months ended September 30, 2023 totaled $61.1 million, a decrease of $0.2 million compared to the nine months ended September 30, 2022. The decrease was mainly due to more pipeline tariffs recognized as revenue rather than interest income under sales-type lease accounting.

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LIQUIDITY AND CAPITAL RESOURCES

Overview

We have a $1.2 billion senior secured revolving credit facility (the “Credit Agreement”) that matures July 2025. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit and continues to provide for an accordion feature that allows us to increase commitments under the Credit Agreement up to a maximum amount of $1.7 billion.

During the nine months ended September 30, 2023, we received advances totaling $60.0 million and repaid $149.5 million under the Credit Agreement, resulting in a net decrease of $89.5 million and an outstanding balance of $578.5 million at September 30, 2023. As of September 30, 2023, we have no letters of credit outstanding under the Credit Agreement and the available capacity under the Credit Agreement was $621.5 million. Amounts repaid under the Credit Agreement may be reborrowed from time to time.

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 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 September 30, 2023, 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% 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 nine months ended September 30, 2023. As of September 30, 2023, 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 August 2023, we paid a regular quarterly cash distribution of $0.35 on all units in an aggregate amount of $44.3 million.

On October 19, 2023, we announced our cash distribution for the third quarter of 2023 of $0.35 per unit, or $1.40 on an annualized basis. Subject to the Merger Agreement and the discretion of the board of directors of HLS, our ultimate general partner, we expect our future cash distribution will continue as long as we remain a public company.

Cash and cash equivalents increased by $0.3 million during the nine months ended September 30, 2023. The cash flows used for investing activities of $23.3 million and financing activities of $234.9 million were less than the cash flows provided by operating activities of $258.5 million. Working capital decreased by $1.7 million to $15.6 million at September 30, 2023 from $17.3 million at December 31, 2022.

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Cash Flows—Operating Activities

Cash flows from operating activities increased by $20.0 million from $238.5 million for the nine months ended September 30, 2022, to $258.5 million for the nine months ended September 30, 2023. The increase was mainly due to higher customer receipts and lower payments for turnaround expenditures, partially offset by higher payments for operating expenses and interest expenses during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.

Cash Flows—Investing Activities

Cash flows used for investing activities were $23.3 million for the nine months ended September 30, 2023, compared to $360.4 million for the nine months ended September 30, 2022, a decrease of $337.1 million. During the nine months ended September 30, 2022, we paid the $329.0 million cash portion of the purchase price consideration for our acquisition of Sinclair Transportation. During the nine months ended September 30, 2023 and 2022, we invested $22.0 million and $31.2 million, respectively, in additions to properties and equipment.

Cash Flows—Financing Activities

Cash flows used by financing activities were $234.9 million for the nine months ended September 30, 2023, compared to cash flows provided by financing activities of $123.1 million for the nine months ended September 30, 2022, a decrease of $358.0 million. During the nine months ended September 30, 2023, we received $60.0 million and repaid $149.5 million in advances under the Credit Agreement. Additionally, we paid $132.9 million in regular quarterly cash distributions to our limited partners and $6.6 million to our noncontrolling interests. During the nine months ended September 30, 2022, we received $460.0 million and repaid $594.0 million in advances under the Credit Agreement, and we received net proceeds of $393.7 million related to the issuance of our 6.375% Senior Notes. We paid $125.7 million in regular quarterly cash distributions to our limited partners, and distributed $7.3 million to our noncontrolling interests.

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, but exclude acquisitions. Expansion capital expenditures include expenditures 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 2023 capital forecast is comprised of approximately $25 million to $30 million for maintenance capital expenditures and $5 million to $10 million for expansion capital expenditures and our share of 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 expenditures for capital development projects, will be funded with cash generated by operations. We expect that, to the extent necessary, we can raise additional funds from time to time through equity or debt financings in the public and private capital markets.

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Class B Unit Liability

Under the terms of the 2012 transaction pursuant to which HEP UNEV Holdings LLC (“HEP UNEV Holdings”) acquired HFC’s initial 75% interest in UNEV, HEP UNEV Holdings issued to a subsidiary of HFC a Class B unit comprised of a noncontrolling equity interest in a wholly owned subsidiary (the “Class B Unit”). Subject to certain limitations, the Class B Unit is subject to annual redemption payments to the extent that HFC is entitled to a 50% interest in 75% of annual UNEV earnings before interest, income taxes, depreciation, and amortization exceeding $40 million, beginning July 1, 2015 and ending in June 2032. However, if earnings thresholds are not achieved, no redemption payments are required. UNEV earnings before interest, income taxes, depreciation, and amortization exceeded $40 million for the first time during the measurement period ending June 30, 2023, which required the Class B Unit to be reclassified from mezzanine equity to a long-term liability on the balance sheet as of June 30, 2023. A redemption payment of $2.6 million, calculated as described above, was paid in August 2023.

Credit Agreement

We have a $1.2 billion Credit Agreement that matures in July 2025. The Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. The Credit Agreement is also available to fund letters of credit up to a $50 million sub-limit, and it continues to provide for an accordion feature that allows us to increase the commitments under the Credit Agreement up to a maximum amount of $1.7 billion.

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

In connection with the consummation of the HF Sinclair Merger Transaction, we expect to amend the Credit Agreement to, among other things, (a) provide a guaranty from HF Sinclair and terminate all guaranties from subsidiaries of HEP, (b) amend the definition of “Investment Grade Rating” (as defined in the Credit Agreement) to reference the credit rating of HF Sinclair’s senior unsecured indebtedness, (c) eliminate the requirement to deliver separate audited and unaudited financial statements for HEP and its subsidiaries and only provide certain segment-level reporting for HEP with any compliance certificate delivered in accordance with the Credit Agreement and (d) amend certain covenants to eliminate certain restrictions on (i) amendments to intercompany contracts, (ii) transactions with HF Sinclair and its subsidiaries and (iii) investments in and contributions, dividends, transfers and distributions to HF Sinclair and its subsidiaries. There can be no assurance that the administrative agent and the lenders party thereto will agree to amend the Credit Agreement in a timely manner, or on acceptable terms, if at all.

Senior Notes

As of September 30, 2023, we had $500 million in aggregate principal amount of the 5% Senior Notes.

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.

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 certain mergers, in each case subject to compliance with the terms of the indentures. We were in compliance with the restrictive covenants for the Senior Notes as of September 30, 2023. 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.

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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).

Long-term Debt

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


	September 30, 2023		December 31, 2022
	(In thousands)
Credit Agreement
Amount outstanding	$	578,500	$	668,000

5% Senior Notes
Principal	500,000		500,000
Unamortized debt issuance costs	(5,170)		(5,953)
	494,830		494,047

6.375% Senior Notes
Principal	400,000		400,000
Unamortized debt issuance costs	(4,825)		(5,713)
	395,175		394,287

Total long-term debt	$	1,468,505	$	1,556,334

Contractual Obligations

There were no significant changes to our long-term contractual obligations during the quarter ended September 30, 2023.

Impact of Inflation

After being relatively moderate in recent years, PPI in the United States increased significantly. PPI has increased an average of 5% annually over the past five calendar years, including an increase of 13.5% in 2022 and 8.9% in 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

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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, and the July 1, 2023 rate increase calculations used the 2022 PPI increase of 13.5%.

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, the fees we charged our shippers increased at a rate greater than our inflationary cost increase for the year ended December 31, 2022 and the nine months ended September 30, 2023.

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.

Contamination resulting from spills of refined products and crude oil is not unusual within the petroleum pipeline industry. Historic spills along our existing pipelines and terminals as a result of past operations have resulted in contamination of the environment, including soils and groundwater. Some environmental laws impose liability without regard to fault or the legality of the original act on certain classes of persons that contributed to the releases of hazardous substances or petroleum hydrocarbon substances into the environment. These persons include the owner or operator of the site or sites where the release occurred and companies that disposed of, or arranged for the disposal of, the hazardous substances found at the site. Such persons may be subject to strict, joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources, and for the costs of certain health studies. Site conditions, including soils and groundwater, are being evaluated at a few of our properties where operations may have resulted in releases of hydrocarbons and other wastes.

There are environmental remediation projects in progress, including assessment and monitoring activities, that relate to certain assets acquired from HF Sinclair. 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.

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 September 30, 2023, we had an accrual of $18.3 million related to environmental clean-up projects for which we have assumed liability or for which the indemnity provided for by HF Sinclair has expired or will expire.

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 nine months ended September 30, 2023 by $5.5 million for our 50% share of incurred and estimated environmental remediation and recovery expenses and estimated fines and penalties associated with the release. From the date of the release through September 30, 2023, our equity in earnings of equity method investments was reduced by $23.1 million for our 50% share of incurred and estimated environmental remediation and recovery expenses and estimated fines and penalties associated with the release, net of our

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share of insurance proceeds received of $3.0 million. Any additional insurance recoveries will be recorded as they are received. If the Osage insurance policy pays out in full, our share of the remaining insurance coverage is expected to be $10.0 million. The Osage pipeline resumed operations in the third quarter of 2022 and remediation efforts are underway. It may be necessary for Osage to expend or accrue additional amounts for environmental remediation or other release-related expenses in future periods, but we cannot estimate those amounts at this time. Future 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 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 could materially differ from these estimates under different assumptions or 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, 2022. 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 2023. 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 September 30, 2023, 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 September 30, 2023, the fair value of our Senior Notes was $854.3 million. We estimate a hypothetical 10% change in the yield-to-maturity applicable to the Senior Notes at September 30, 2023 would result in a change of approximately $21.3 million in the fair value of the underlying Senior Notes.

For the variable rate Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. At September 30, 2023, borrowings outstanding under the Credit Agreement were $578.5 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.

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

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices. See “Risk Management” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of market risk exposures that we have with respect to our long-term debt, which disclosure should be read in conjunction with the quantitative and qualitative disclosures about market risk contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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 September 30, 2023, at a reasonable level of assurance.

(b) Changes in internal control over financial reporting

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.

The environmental proceedings are reported to comply with SEC regulations which require us to disclose proceedings arising under provisions regulating the discharge of materials into the environment or protecting the environment when a governmental authority is party to the proceedings and such proceedings involve potential monetary sanctions that we reasonably believe could exceed $300,000.

Environmental Matters

Osage Pipeline

On July 8, 2022, the Osage Pipeline, which is owned by Osage Pipe Line Company, LLC (“Osage”), a joint venture between El Dorado Osage Company LLC, a subsidiary of HEP, and CHS McPherson Refinery Inc., experienced a release of crude oil at a location approximately 3.5 miles north northeast of Cushing, Oklahoma.

Osage and Holly Energy Partners – Operating, L.P. (“HEP Operating”), the operator of the Osage Pipeline, are working with federal, state, tribal, and local governmental agencies, as well as the affected landowners. Discussions with the United States Department of Transportation Pipeline and Hazardous Materials Safety Administration, United States Environmental Protection Agency (the “EPA”) and United States Department of Justice (the “DOJ”) regarding resolution of their potential claims relating to the incident are on-going. On September 13, 2023, Osage and HEP Operating received an offer for settlement from the EPA and DOJ. Osage and HEP Operating are currently in discussions with EPA and DOJ with respect to the offer. It is too early to predict the outcome of this matter.

Item 1A.Risk Factors

Except as described below, 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, 2022 (“2022 Form 10-K”) and in Part II, “Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023. In addition to the other information set forth in this quarterly report, you should consider carefully the information discussed in our 2022 Form 10-K and March 31, 2023 Form 10-Q, which could materially affect our business, financial condition or future results. The risks described in our 2022 Form 10-K and March 31, 2023 Form 10-Q are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition or future results.

The HF Sinclair Merger Transaction is subject to conditions, including some conditions that may not be satisfied on a timely basis, if at all. Failure to complete the HF Sinclair Merger Transaction, or significant delays in completing the HF Sinclair Merger Transaction, could negatively affect the trading prices of our common units.

The completion of the HF Sinclair Merger Transaction is not assured and is subject to certain risks, some of which are beyond our control, including the risk that certain conditions of the Merger Agreement are not satisfied or waived, which may prevent, delay or otherwise result in the HF Sinclair Merger Transaction not occurring. These conditions include, among other things, approval by our unitholders by the affirmative vote or consent of the holders of a majority of the outstanding HEP common units of the Merger Agreement, approval by a majority of the votes cast by HF Sinclair stockholders entitled to vote on such proposal of the issuance of shares of HF Sinclair common stock as part of the Merger Consideration (as defined herein) and the expiration or termination of any applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder (the “HSR Act”). The 30-day HSR Act waiting period

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expired on October 10, 2023, at 11:59 PM Eastern time. We and HF Sinclair cannot predict with certainty whether and when any of these conditions will be satisfied. Failure to complete, or significant delays in completing, the HF Sinclair Merger Transaction could negatively affect the trading prices of HF Sinclair common stock and our common units.

Because the exchange ratio under the Merger Agreement is fixed and because the market price of HF Sinclair common stock will fluctuate prior to the completion of the HF Sinclair Merger Transaction, our public unitholders cannot be sure of the market value of the HF Sinclair common stock they will receive as Merger Consideration relative to the value of our common units they exchange.

The market value of the consideration that our public unitholders will receive in the HF Sinclair Merger Transaction will depend, in part, on the trading price of HF Sinclair common stock at the closing of the HF Sinclair Merger Transaction. The exchange ratio that determines the number of shares of HF Sinclair common stock that our public unitholders will receive (in addition to $4.00 in cash, without interest) in the HF Sinclair Merger Transaction is fixed at 0.315 shares of HF Sinclair common stock for each HEP common unit (subject to adjustments in accordance with the terms of the Merger Agreement), which means that it will not change between now and the closing date, regardless of whether the market price of either HF Sinclair common stock or our common units changes. Stock or unit price changes may result from a variety of factors (many of which are beyond HF Sinclair’s and our control), including but not limited to:

•changes in our or HF Sinclair’s business, operations and prospects;

•changes in market assessments of our or HF Sinclair’s business, operations and prospects;

•changes in market assessments of the likelihood that the HF Sinclair Merger Transaction will be completed;

•interest rates, commodity prices, general market, industry and economic conditions and other factors generally affecting the price of HF Sinclair common stock or our common units; and

•federal, state and local legislation, governmental regulation and legal developments in the businesses in which we and HF Sinclair operate.

If the price of HF Sinclair common stock at the closing of the HF Sinclair Merger Transaction is less than the price of HF Sinclair common stock on the date that the Merger Agreement was executed, then the aggregate of the market value of the shares of HF Sinclair common stock to be issued and cash to be paid to our public unitholders in the HF Sinclair Merger Transaction pursuant to the Merger Agreement (the “Merger Consideration”) will be less than contemplated at the time the Merger Agreement was executed.

We and HF Sinclair will each be subject to business uncertainties while the HF Sinclair Merger Transaction is pending, which could adversely affect their respective businesses.

Uncertainty about the effect of the HF Sinclair Merger Transaction on the business relationships or commercial arrangements for the companies that do business with HF Sinclair and us may have an adverse effect on HF Sinclair and our respective businesses. These uncertainties may impair the ability of both HF Sinclair and us to attract, retain and motivate key personnel until the HF Sinclair Merger Transaction is completed and for a period of time thereafter, and could cause those that transact with HF Sinclair and us to seek to change their existing business relationships.

If the HF Sinclair Merger Transaction is approved by our unitholders, the date that our public unitholders will receive the Merger Consideration is dependent on the completion date of the HF Sinclair Merger Transaction, which is uncertain.

As described in the joint proxy statement/prospectus, completing the HF Sinclair Merger Transaction is subject to several conditions, not all of which are controllable by HF Sinclair or us. Accordingly, if the HF Sinclair Merger Transaction is approved by our unitholders, the date that our public unitholders will receive the Merger Consideration depends on the completion date of the Merger, which is uncertain and subject to several other closing conditions.

We may incur substantial transaction-related costs in connection with the HF Sinclair Merger Transaction.

We expect to incur substantial nonrecurring expenses in connection with completing the HF Sinclair Merger Transaction, including fees paid to legal, financial and accounting advisors, filing fees, proxy solicitation costs and printing costs. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. Pursuant to the Merger Agreement, all fees and expenses incurred in connection with the HF Sinclair Merger Transaction will be paid by the respective party incurring such fees and expenses except that expenses (other than the expenses of financial advisors or outside legal advisors) relating to the preparation, printing, filing and mailing of the joint proxy statement/prospectus and the related

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Schedule 13E-3 will be paid 50% by HF Sinclair and 50% by us and costs and fees of the exchange agent and all expenses associated with the exchange process will be paid by HF Sinclair.

We and HF Sinclair may in the future be targets of securities class action and derivative lawsuits, which could result in substantial costs and may delay or prevent the closing of the HF Sinclair Merger Transaction.

Securities class action lawsuits and derivative lawsuits are often brought against companies that have entered into merger agreements in an effort to enjoin the relevant merger or seek monetary relief. We and HF Sinclair may in the future be defendants in one or more lawsuits relating to or arising out of the Merger Agreement and the HF Sinclair Merger Transaction. We and HF Sinclair cannot predict the outcome of these lawsuits, or others, nor can either company predict the amount of time and expense that will be required to resolve such litigation. An unfavorable resolution of any such litigation surrounding the HF Sinclair Merger Transaction could delay or prevent its consummation. In addition, the costs of defending the litigation, even if resolved in HF Sinclair’s and our favor, could be substantial, and such litigation could divert management time and resources of HF Sinclair and HEP from pursuing the consummation of the HF Sinclair Merger Transaction and other potentially beneficial business opportunities.

Financial projections by HEP may not prove to be reflective of actual future results.

In connection with the HF Sinclair Merger Transaction, HLS’s management prepared and considered, among other things, internal financial forecasts for HEP. These forecasts speak only as of the date made and will not be updated. These financial projections were not provided with a view to public disclosure, are subject to significant economic, competitive, industry and other uncertainties and may not be achieved in full, at all or within projected timeframes. In addition, the failure of businesses to achieve projected results could have a material adverse effect on the share price of HF Sinclair common stock and on HF Sinclair’s financial position and ability to maintain or increase its dividends following the HF Sinclair Merger Transaction.

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

None.

Item 5. Other Information

None.

Item 6.Exhibits

The Exhibit Index beginning on page 60 of this Quarterly Report on Form 10-Q lists the exhibits that are filed or furnished, as applicable, as part of this Quarterly Report on Form 10-Q.

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Exhibit Index


Exhibit Number						Description

2.1						Agreement and Plan of Merger, dated August 15, 2023, by and among HF Sinclair Corporation, Navajo Pipeline Co., L.P., Holly Apple Holdings LLC, Holly Energy Partners, L.P., HEP Logistics Holdings, L.P. and Holly Logistic Services, L.L.C. (incorporated by reference to Exhibit 2.1 of Registrant’s Current Report on Form 8-K filed August 16, 2023, File No. 1-41325).
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 Current Report on Form 8-K 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).
22.1*						Subsidiary Guarantors and Issuers of Guaranteed Securities and Affiliates whose Securities Collateralize Securities of the Registrant.
31.1*						Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*						Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**						Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**						Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
101++						The following financial information from Holly Energy Partners, L.P.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 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.
++			Filed electronically herewith.

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HOLLY ENERGY PARTNERS, L.P.

SIGNATURES

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


	HOLLY ENERGY PARTNERS, L.P.
	(Registrant)

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

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

November 2, 2023		/s/ John Harrison
		John Harrison
		Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)

November 2, 2023		/s/ Kenneth P. Norwood
		Kenneth P. Norwood
		Vice President and Controller (Principal Accounting Officer)

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