##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the quarterly period ended June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
 For the transition period from  to .
 Commission File Number: 1-32225
 HOLLY ENERGY PARTNERS, L.P.
  Delaware
    
    20-0833098(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 (Address of principal executive offices)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
  o þ




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##### 



PART I. FINANCIAL INFORMATION
    
    
    3FORWARD-LOOKING STATEMENTS
    
    
    3Item 1. Financial Statements (Unaudited, except December 31, 2006 Balance Sheet)
    
    
    4Consolidated Balance Sheets
    
    
    4Consolidated Statements of Income
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Consolidated Statement of Partners Equity (Deficit)
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    36Item 4. Controls and Procedures
    
    
    36PART II. OTHER INFORMATION
    
    
    37Item 1. Legal Proceedings
    
    
    37Item 6. Exhibits
    
    
    37SIGNATURES
    
    
    38Computation of Ratio of Earnings to Fixed ChargesCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
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##### Table of Contents



FORWARD-LOOKING STATEMENTS
  
    
    Risks and uncertainties with respect to the actual quantities of petroleum products
shipped on our pipelines and/or terminalled in our terminals;
    
    The economic viability of Holly Corporation, Alon USA, Inc. and our other customers;
    
    The demand for refined petroleum products in markets we serve;
    
    Our ability to successfully purchase and integrate additional operations in the future;
    
    Our ability to complete previously announced pending or contemplated acquisitions;
    
    The availability and cost of our financing;
    
    The possibility of reductions in production or shutdowns at refineries utilizing our
pipeline and terminal facilities;
    
    The effects of current and future government regulations and policies;
    
    Our operational efficiency in carrying out routine operations and capital construction projects;
    
    The possibility of terrorist attacks and the consequences of any such attacks;
    
    General economic conditions; and
    
    Other financial, operations and legal risks and uncertainties detailed from time to time
in our Securities and Exchange Commission filings.
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Item 1. Financial Statements
 Holly Energy Partners, L.P.
 
 Consolidated Balance Sheets
 June 30, 2007
    
    
    December 31,(Unaudited)
    
    
    2006(In thousands, except unit data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    11,563
    
    
    $
    11,555Accounts receivable:Trade
    
    
    4,575
    
    
    
    7,339Affiliates
    
    
    3,891
    
    
    
    3,5188,466
    
    
    
    10,857Prepaid and other current assets
    
    
    938
    
    
    
    1,212Total current assets
    
    
    20,967
    
    
    
    23,624Properties and equipment, net
    
    
    156,671
    
    
    
    160,484Transportation agreements, net
    
    
    55,272
    
    
    
    56,821Other assets
    
    
    2,279
    
    
    
    2,644Total assets
    
    $
    235,189
    
    
    $
    243,573LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,872
    
    
    $
    3,781Accrued interest
    
    
    2,932
    
    
    
    2,941Deferred revenue
    
    
    4,495
    
    
    
    5,486Accrued property taxes
    
    
    614
    
    
    
    868Other current liabilities
    
    
    721
    
    
    
    1,098Total current liabilities
    
    
    10,634
    
    
    
    14,174Commitments and contingencies
    
    
    
    
    
    
    Long-term debt
    
    
    181,443
    
    
    
    180,660Other long-term liabilities
    
    
    970
    
    
    
    1,550Minority interest
    
    
    11,003
    
    
    
    10,963Partners equity (deficit):Common unitholders (8,170,000 units issued and outstanding)
    
    
    174,248
    
    
    
    176,844Subordinated unitholders (7,000,000 units issued and outstanding)
    
    
    (72,131
    )
    
    
    (70,022
    )Class B subordinated unitholders (937,500 units issued and
outstanding)
    
    
    23,186
    
    
    
    23,469General partner interest (2% interest)
    
    
    (94,164
    )
    
    
    (94,065
    )Total partners equity
    
    
    31,139
    
    
    
    36,226Total liabilities and partners equity
    
    $
    235,189
    
    
    $
    243,573
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Holly Energy Partners, L.P.
 
 Consolidated Statements of Income
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except per unit data)Revenues:Affiliates
    
    $
    16,353
    
    
    $
    10,584
    
    
    $
    30,115
    
    
    $
    23,066Third parties
    
    
    10,778
    
    
    
    7,943
    
    
    
    20,888
    
    
    
    17,89927,131
    
    
    
    18,527
    
    
    
    51,003
    
    
    
    40,965Operating costs and expenses:Operations
    
    
    8,263
    
    
    
    7,429
    
    
    
    16,040
    
    
    
    14,538Depreciation and amortization
    
    
    3,208
    
    
    
    3,781
    
    
    
    7,279
    
    
    
    7,574General and administrative
    
    
    1,275
    
    
    
    1,289
    
    
    
    2,562
    
    
    
    2,51312,746
    
    
    
    12,499
    
    
    
    25,881
    
    
    
    24,625Operating income
    
    
    14,385
    
    
    
    6,028
    
    
    
    25,122
    
    
    
    16,340Other income (expense):Interest income
    
    
    145
    
    
    
    245
    
    
    
    330
    
    
    
    488Interest expense
    
    
    (3,371
    )
    
    
    (3,247
    )
    
    
    (6,729
    )
    
    
    (6,422
    )Gain on sale of assets
    
    
    1
    
    
    
    
    
    
    
    298
    
    
    
    (3,225
    )
    
    
    (3,002
    )
    
    
    (6,101
    )
    
    
    (5,934
    )Income before minority interest
    
    
    11,160
    
    
    
    3,026
    
    
    
    19,021
    
    
    
    10,406Minority interest in Rio Grande Pipeline Company
    
    
    (154
    )
    
    
    (28
    )
    
    
    (581
    )
    
    
    (273
    )Net income
    
    
    11,006
    
    
    
    2,998
    
    
    
    18,440
    
    
    
    10,133Less general partner interest in net income
    
    
    726
    
    
    
    319
    
    
    
    1,306
    
    
    
    646Limited partners interest in net income
    
    $
    10,280
    
    
    $
    2,679
    
    
    $
    17,134
    
    
    $
    9,487Net income per limited partner unit -
basic and diluted
    
    $
    0.64
    
    
    $
    0.17
    
    
    $
    1.06
    
    
    $
    0.59Weighted average limited partners units
outstanding
    
    
    16,108
    
    
    
    16,108
    
    
    
    16,108
    
    
    
    16,108
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Holly Energy Partners, L.P.
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Six Months Ended June 30,2007
    
    
    2006(In thousands)Cash flows from operating activitiesNet income
    
    $
    18,440
    
    
    $
    10,133Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    7,279
    
    
    
    7,574Minority interest in Rio Grande Pipeline Company
    
    
    581
    
    
    
    273Amortization of restricted and performance units
    
    
    763
    
    
    
    409Gain on sale of assets
    
    
    (298
    )
    
    
    (Increase) decrease in current assets:Accounts receivable  trade
    
    
    2,764
    
    
    
    (759
    )Accounts receivable  affiliates
    
    
    (373
    )
    
    
    333Prepaid and other current assets
    
    
    274
    
    
    
    172Increase (decrease) in current liabilities:Accounts payable
    
    
    (1,909
    )
    
    
    398Accrued interest
    
    
    (9
    )
    
    
    32Deferred revenue
    
    
    (991
    )
    
    
    3,916Accrued property tax
    
    
    (254
    )
    
    
    (188
    )Other current liabilities
    
    
    (377
    )
    
    
    (12
    )Other, net
    
    
    572
    
    
    
    205Net cash provided by operating activities
    
    
    26,462
    
    
    
    22,486Cash flows from investing activitiesAdditions to properties and equipment
    
    
    (1,933
    )
    
    
    (3,699
    )Proceeds from sale of assets
    
    
    325
    
    
    
    Net cash used for investing activities
    
    
    (1,608
    )
    
    
    (3,699
    )Cash flows from financing activitiesDistributions to partners
    
    
    (23,382
    )
    
    
    (21,244
    )Purchase of units for restricted grants
    
    
    (908
    )
    
    
    (512
    )Cash distributions to minority interest
    
    
    (540
    )
    
    
    (1,200
    )Other
    
    
    (16
    )
    
    
    Net cash used for financing activities
    
    
    (24,846
    )
    
    
    (22,956
    )Cash and cash equivalentsIncrease (decrease) for period
    
    
    8
    
    
    
    (4,169
    )Beginning of period
    
    
    11,555
    
    
    
    20,583End of period
    
    $
    11,563
    
    
    $
    16,414
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Holly Energy Partners, L.P.
 
 Consolidated Statement of Partners Equity (Deficit)
 (Unaudited)
 Class BCommon
    
    
    Subordinated
    
    
    Subordinated
    
    
    General PartnerUnits
    
    
    Units
    
    
    Units
    
    
    Interest
    
    
    Total(In thousands)Balance December 31, 2006
    
    $
    176,844
    
    
    $
    (70,022
    )
    
    $
    23,469
    
    
    $
    (94,065
    )
    
    $
    36,226Distributions to partners
    
    
    (11,142
    )
    
    
    (9,555
    )
    
    
    (1,280
    )
    
    
    (1,405
    )
    
    
    (23,382
    )Purchase of units for
restricted grants
    
    
    (908
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (908
    )Amortization of
restricted and
performance units
    
    
    763
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    763Net income
    
    
    8,691
    
    
    
    7,446
    
    
    
    997
    
    
    
    1,306
    
    
    
    18,440Balance June 30, 2007
    
    $
    174,248
    
    
    $
    (72,131
    )
    
    $
    23,186
    
    
    $
    (94,164
    )
    
    $
    31,139
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note 1: Description of Business and Presentation of Financial Statements
        Recent Accounting Pronouncements
 Interpretation No. 48 Accounting for Uncertainty in Income Taxes
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Note 2: Properties and Equipment
 June 30,
    
    
    December 31,2007
    
    
    2006(In thousands)Pipelines and terminals
    
    $
    196,308
    
    
    $
    195,688Land and right of way
    
    
    22,825
    
    
    
    22,486Other
    
    
    5,294
    
    
    
    5,267Construction in progress
    
    
    2,745
    
    
    
    1,539227,172
    
    
    
    224,980Less accumulated depreciation
    
    
    70,501
    
    
    
    64,496$
    156,671
    
    
    $
    160,484
  Note 3: Transportation Agreements
  
    
    Costs incurred by Rio Grande in constructing certain pipeline and terminal facilities
located in Mexico, which were then contributed to an affiliate of Pemex, the national oil
company of Mexico. In exchange, Rio Grande received a 10-year transportation agreement
from BP plc (BP). The initial 10-year term of this agreement expired in April 2007 and
was extended for an additional year. This agreement will continue on a year-to-year basis
unless cancelled by either party prior to the end of the previous contract year. The
carrying amount of this asset was fully amortized and retired as of June 30, 2007.
    
    A portion of the total purchase price of the Alon assets was allocated to the
transportation agreement asset based on an estimated fair value derived under the income
approach. This asset is being amortized over 30 years ending 2035, the 15-year initial
term of the pipelines and terminals agreement with Alon plus the expected 15-year extension
period.
  June 30,
    
    
    December 31,2007
    
    
    2006(In thousands)Rio Grande transportation agreement
    
    $
    
    
    
    $
    20,836Alon transportation agreement
    
    
    59,933
    
    
    
    59,93359,933
    
    
    
    80,769Less accumulated amortization
    
    
    4,661
    
    
    
    23,948$
    55,272
    
    
    $
    56,821
 Note 4: Debt
 Credit Agreement
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Senior Notes Due 2015
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Interest Rate Risk Management
    Other Debt Information
 Six Months EndedJune 30,2007
    
    
    2006(In thousands)Interest on outstanding debt:Senior Notes, net of interest rate swap
    
    $
    5,874
    
    
    $
    5,690Amortization of discount and deferred issuance costs
    
    
    607
    
    
    
    484Commitment fees
    
    
    248
    
    
    
    248Net interest expense
    
    $
    6,729
    
    
    $
    6,422Cash paid for interest(1)
    
    $
    6,259
    
    
    $
    5,906
 
 (1)
    
    Net of cash received under our interest rate swap agreement of $1.9 million for the
six months ended June 30, 2007 and 2006.  Note 5: Employees, Retirement and Benefit Plans
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Restricted Units
   Weighted-Weighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicGrant-Date
    
    
    Contractual
    
    
    ValueRestricted Units
    
    Grants
    
    
    Fair Value
    
    
    Term
    
    
    ($000)Outstanding January 1, 2007 (not vested)
    
    
    36,597
    
    
    
    40.21Granted
    
    
    19,687
    
    
    
    46.12Forfeited
    
    
    (1,555
    )
    
    
    45.94Vesting and transfer of full ownership to recipients
    
    
    (4,170
    )
    
    
    39.45Outstanding at June 30, 2007 (not vested)
    
    
    50,559
    
    
    $
    42.02
    
    
    1.1 years
    
    $
    2,573
  Performance Units
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PayablePerformance Units
    
    In UnitsOutstanding at January 1, 2007 (not vested)
    
    
    14,015Vesting and payment of cash benefit to recipients
    
    
    Granted
    
    
    12,321Forfeited
    
    
    (2,188
    )Outstanding at June 30, 2007 (not vested)
    
    
    24,148
  Note 6: Significant Customers
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Holly
    
    
    60
    %
    
    
    57
    %
    
    
    59
    %
    
    
    56
    %Alon
    
    
    29
    %
    
    
    30
    %
    
    
    28
    %
    
    
    30
    %BP
    
    
    7
    %
    
    
    9
    %
    
    
    10
    %
    
    
    10
    %
 Note 7: Related Party Transactions
 Holly
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
    
    Pipeline and terminal revenues received from Holly were
$16.4 million and $10.6 million for the three months ended
June 30, 2007 and 2006, respectively, and $30.1 million and
$23.1 million for the six months ended June 30, 2007 and 2006,
respectively. These amounts include the revenues received
under the Holly PTA and Holly IPA.
    
    Holly charged general and administrative services under
the Omnibus Agreement of $0.5 million for the three months
ended June 30, 2007 and 2006 and $1.0 million for the six
months ended June 30, 2007 and 2006.
    
    We reimbursed Holly for costs of employees supporting our
operations of $2.3 million and $1.8 million for the three
months ended June 30, 2007 and 2006, respectively, and $4.6 million and $3.7 million for the six months ended June 30,
2007 and 2006, respectively.
    
    Holly reimbursed us $24,000 and $40,000 for certain costs
paid on their behalf for the three months ended June 30, 2007
and 2006, respectively, and $98,000 and $96,000 for the six
months ended June 30, 2007 and 2006, respectively.
    
    In the three months ended June 30, 2007 and 2006, we
distributed $5.6 million and $5.0 million, respectively, to
Holly as regular distributions on its subordinated units,
common units and general partner interest. We distributed
$11.1 million and $9.8 million to Holly in the six months
ended June 30, 2007 and 2006, respectively.
    
    Our net accounts receivable from Holly were $3.9 million
and $3.5 million at June 30, 2007 and December 31, 2006,
respectively.
    
    Holly has failed to meet its minimum revenue commitment
for each of the first eight quarters of the Holly IPA. We
have charged Holly $4.1 million for these shortfalls to date,
$0.2 million of which is included in affiliate accounts
receivable at June 30, 2007 and December 31, 2006.
    
    For the three and six months
ended June 30, 2007, our revenues from Holly included $1.1
million and $1.6 million, respectively, of shortfalls billed under the Holly IPA in 2006 as
Holly did not exceed its minimum revenue obligation in any of the subsequent four quarters.
Deferred revenue in the consolidated balance sheets at June 30, 2007 and December 31, 2006,
includes $1.5 million and $2.4 million, respectively, relating to the Holly IPA. It is possible
that Holly may not exceed its minimum obligations under the Holly IPA to allow Holly to receive
credit for any of the $1.5 million deferred at June 30, 2007.
 BP
  
    
    BP is the sole customer of Rio Grande. BPs agreement to
ship on the Rio Grande pipeline expired in April 2007 and was
extended for an additional year. This agreement will continue
on a year-to-year basis unless cancelled by either party prior
to the end of the previous contract year. We recorded
revenues from them of $1.8 million and $1.6 million for the
three months ended June 30, 2007 and 2006, respectively, and
$4.8 million and $4.0 million for the six months ended June
30, 2007 and 2006, respectively.
    
    Rio Grande paid distributions to BP of $0.5 million and
$0.6 million for the three months ended June 30, 2007 and
2006, respectively, and $0.5 million and $1.2 million for the
six months ended June 30, 2007 and 2006, respectively.
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
    
    Included in our accounts receivable  trade at June 30,
2007 and December 31, 2006 were $0.4 million and $2.1 million,
respectively, which represented the receivable balance of Rio
Grande from BP.
 Alon
   
    
    We recognized $6.2 million and $5.6 million of revenues
for pipeline transportation and terminalling services under
the Alon PTA and $1.8 million and $1.7 million under a
pipeline capacity lease for the three months ended June 30,
2007 and 2006, respectively. We recognized $10.7 million and
$12.4 million of revenues for pipeline transportation and
terminalling services under the Alon PTA and $3.5 million and
$3.4 million under a pipeline capacity lease for the six
months ended June 30, 2007 and 2006, respectively. The
capacity lease agreements have remaining terms from less than
a year up to three years.
    
    We paid $0.7 million and $0.6 million to Alon for
distributions on our Class B subordinated units for the three
months ended June 30, 2007 and 2006, respectively, and $1.3
million and $1.2 million for the six months ended June 30,
2007 and 2006, respectively.
    
    Included in our accounts receivable  trade at June 30, 2007
and December 31, 2006 were $4.4 million and $5.0 million,
respectively, which represented the receivable balance from
Alon.
    
    For the three and six months
ended June 30, 2007, our revenues from Alon included
$1.5 million of shortfalls
billed under the Alon PTA in 2006 as Alon did not exceed its
minimum revenue obligation in any of the subsequent four
quarters. Deferred revenue in the consolidated balance sheets
at June 30, 2007 and December 31, 2006 includes $3.0 million
and $3.1 million, respectively, relating to the Alon PTA. It
is possible that Alon may not exceed its minimum obligations
under the Alon PTA to allow Alon to receive credit for any of
the $3.0 million deferred at June 30, 2007.
 Note 8: Partners Equity and Cash Distributions
 Issuances of units
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Allocations of Net Income
  Cash Distributions
    - 16 -




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Marginal Percentage Interest inTotal Quarterly Distribution
    
    DistributionsTarget Amount
    
    Unitholders
    
    General PartnerMinimum Quarterly Distribution
    
    $0.50
    
    
    98
    %
    
    
    2
    %First Target Distribution
    
    Up to $0.55
    
    
    98
    %
    
    
    2
    %Second Target Distribution
    
    above $0.55 up to $0.625
    
    
    85
    %
    
    
    15
    %Third Target distribution
    
    above $0.625 up to $0.75
    
    
    75
    %
    
    
    25
    %Thereafter
    
    Above $0.75
    
    
    50
    %
    
    
    50
    %
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except per unit data)General partner interest
    
    $
    227
    
    
    $
    210
    
    
    $
    449
    
    
    $
    416General partner incentive distribution
    
    
    516
    
    
    
    264
    
    
    
    956
    
    
    
    453Total general partner distribution
    
    
    743
    
    
    
    474
    
    
    
    1,405
    
    
    
    869Limited partner distribution
    
    
    11,101
    
    
    
    10,309
    
    
    
    21,977
    
    
    
    20,375Total regular quarterly cash distribution
    
    $
    11,844
    
    
    $
    10,783
    
    
    $
    23,382
    
    
    $
    21,244Cash distribution per unit applicable to
limited partners
    
    $
    0.69
    
    
    $
    0.64
    
    
    $
    1.365
    
    
    $
    1.265
   Note 9: Supplemental Guarantor/Non-Guarantor Financial Information
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Condensed Consolidating Balance SheetGuarantor
    
    
    Non-June 30, 2007
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    7,099
    
    
    $
    4,462
    
    
    $
    
    
    
    $
    11,563Accounts receivable
    
    
    
    
    
    
    8,054
    
    
    
    412
    
    
    
    
    
    
    
    8,466Intercompany accounts receivable (payable)
    
    
    (109,671
    )
    
    
    109,878
    
    
    
    (207
    )
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    6
    
    
    
    932
    
    
    
    
    
    
    
    
    
    
    
    938Total current assets
    
    
    (109,663
    )
    
    
    125,963
    
    
    
    4,667
    
    
    
    
    
    
    
    20,967Properties and equipment, net
    
    
    
    
    
    
    124,098
    
    
    
    32,573
    
    
    
    
    
    
    
    156,671Investment in subsidiaries
    
    
    324,956
    
    
    
    25,675
    
    
    
    
    
    
    
    (350,631
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    55,272
    
    
    
    
    
    
    
    
    
    
    
    55,272Other assets
    
    
    1,378
    
    
    
    901
    
    
    
    
    
    
    
    
    
    
    
    2,279Total assets
    
    $
    216,671
    
    
    $
    331,909
    
    
    $
    37,240
    
    
    $
    (350,631
    )
    
    $
    235,189LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    1,480
    
    
    $
    392
    
    
    $
    
    
    
    $
    1,872Accrued interest
    
    
    2,930
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2,932Deferred revenue
    
    
    
    
    
    
    4,495
    
    
    
    
    
    
    
    
    
    
    
    4,495Accrued property taxes
    
    
    
    
    
    
    527
    
    
    
    87
    
    
    
    
    
    
    
    614Other current liabilities
    
    
    516
    
    
    
    122
    
    
    
    83
    
    
    
    
    
    
    
    721Total current liabilities
    
    
    3,446
    
    
    
    6,626
    
    
    
    562
    
    
    
    
    
    
    
    10,634Long-term debt
    
    
    181,443
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181,443Other long-term liabilities
    
    
    643
    
    
    
    327
    
    
    
    
    
    
    
    
    
    
    
    970Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,003
    
    
    
    11,003Partners equity
    
    
    31,139
    
    
    
    324,956
    
    
    
    36,678
    
    
    
    (361,634
    )
    
    
    31,139Total liabilities and partners equity
    
    $
    216,671
    
    
    $
    331,909
    
    
    $
    37,240
    
    
    $
    (350,631
    )
    
    $
    235,189
 Condensed Consolidating Balance SheetGuarantor
    
    
    Non-December 31, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    9,819
    
    
    $
    1,734
    
    
    $
    
    
    
    $
    11,555Accounts receivable
    
    
    
    
    
    
    8,772
    
    
    
    2,085
    
    
    
    
    
    
    
    10,857Intercompany accounts receivable (payable)
    
    
    (78,952
    )
    
    
    79,144
    
    
    
    (192
    )
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    203
    
    
    
    1,009
    
    
    
    
    
    
    
    
    
    
    
    1,212Total current assets
    
    
    (78,747
    )
    
    
    98,744
    
    
    
    3,627
    
    
    
    
    
    
    
    23,624Properties and equipment, net
    
    
    
    
    
    
    127,357
    
    
    
    33,127
    
    
    
    
    
    
    
    160,484Investment in subsidiaries
    
    
    298,872
    
    
    
    25,581
    
    
    
    
    
    
    
    (324,453
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    56,271
    
    
    
    550
    
    
    
    
    
    
    
    56,821Other assets
    
    
    1,453
    
    
    
    1,191
    
    
    
    
    
    
    
    
    
    
    
    2,644Total assets
    
    $
    221,578
    
    
    $
    309,144
    
    
    $
    37,304
    
    
    $
    (324,453
    )
    
    $
    243,573LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    3,356
    
    
    $
    425
    
    
    $
    
    
    
    $
    3,781Accrued interest
    
    
    2,941
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,941Deferred revenue
    
    
    
    
    
    
    5,486
    
    
    
    
    
    
    
    
    
    
    
    5,486Accrued property taxes
    
    
    
    
    
    
    726
    
    
    
    142
    
    
    
    
    
    
    
    868Other current liabilities
    
    
    516
    
    
    
    389
    
    
    
    193
    
    
    
    
    
    
    
    1,098Total current liabilities
    
    
    3,457
    
    
    
    9,957
    
    
    
    760
    
    
    
    
    
    
    
    14,174Long-term debt
    
    
    180,660
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180,660Other long-term liabilities
    
    
    1,235
    
    
    
    315
    
    
    
    
    
    
    
    
    
    
    
    1,550Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,963
    
    
    
    10,963Partners equity
    
    
    36,226
    
    
    
    298,872
    
    
    
    36,544
    
    
    
    (335,416
    )
    
    
    36,226Total liabilities and partners equity
    
    $
    221,578
    
    
    $
    309,144
    
    
    $
    37,304
    
    
    $
    (324,453
    )
    
    $
    243,573
 - 18 -




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##### Table of Contents



Condensed Consolidating Statement of IncomeGuarantor
    
    
    Non-Three months ended June 30, 2007
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    16,353
    
    
    $
    
    
    
    $
    
    
    
    $
    16,353Third parties
    
    
    
    
    
    
    9,258
    
    
    
    1,820
    
    
    
    (300
    )
    
    
    10,778
    
    
    
    25,611
    
    
    
    1,820
    
    
    
    (300
    )
    
    
    27,131Operating costs and expenses:Operations
    
    
    
    
    
    
    7,601
    
    
    
    962
    
    
    
    (300
    )
    
    
    8,263Depreciation and amortization
    
    
    
    
    
    
    2,851
    
    
    
    357
    
    
    
    
    
    
    
    3,208General and administrative
    
    
    739
    
    
    
    515
    
    
    
    21
    
    
    
    
    
    
    
    1,275739
    
    
    
    10,967
    
    
    
    1,340
    
    
    
    (300
    )
    
    
    12,746Operating income (loss)
    
    
    (739
    )
    
    
    14,644
    
    
    
    480
    
    
    
    
    
    
    
    14,385Equity in earnings of subsidiaries
    
    
    14,820
    
    
    
    356
    
    
    
    
    
    
    
    (15,176
    )
    
    
    Interest income (expense)
    
    
    (3,075
    )
    
    
    (181
    )
    
    
    30
    
    
    
    
    
    
    
    (3,226
    )Gain on sale of assets
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (154
    )
    
    
    (154
    )Net income
    
    $
    11,006
    
    
    $
    14,820
    
    
    $
    510
    
    
    $
    (15,330
    )
    
    $
    11,006
 Condensed Consolidating Statement of IncomeGuarantor
    
    
    Non-Three months ended June 30, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    10,584
    
    
    $
    
    
    
    $
    
    
    
    $
    10,584Third parties
    
    
    
    
    
    
    6,607
    
    
    
    1,637
    
    
    
    (301
    )
    
    
    7,943
    
    
    
    17,191
    
    
    
    1,637
    
    
    
    (301
    )
    
    
    18,527Operating costs and expenses:Operations
    
    
    
    
    
    
    7,006
    
    
    
    724
    
    
    
    (301
    )
    
    
    7,429Depreciation and amortization
    
    
    
    
    
    
    2,934
    
    
    
    847
    
    
    
    
    
    
    
    3,781General and administrative
    
    
    777
    
    
    
    510
    
    
    
    2
    
    
    
    
    
    
    
    1,289777
    
    
    
    10,450
    
    
    
    1,573
    
    
    
    (301
    )
    
    
    12,499Operating income (loss)
    
    
    (777
    )
    
    
    6,741
    
    
    
    64
    
    
    
    
    
    
    
    6,028Equity in earnings of subsidiaries
    
    
    6,788
    
    
    
    65
    
    
    
    
    
    
    
    (6,853
    )
    
    
    Interest income (expense)
    
    
    (3,013
    )
    
    
    (18
    )
    
    
    29
    
    
    
    
    
    
    
    (3,002
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    (28
    )Net income
    
    $
    2,998
    
    
    $
    6,788
    
    
    $
    93
    
    
    $
    (6,881
    )
    
    $
    2,998
 - 19 -




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##### Table of Contents



Condensed Consolidating Statement of IncomeGuarantor
    
    
    Non-Six months ended June 30, 2007
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    30,115
    
    
    $
    
    
    
    $
    
    
    
    $
    30,115Third parties
    
    
    
    
    
    
    16,635
    
    
    
    4,846
    
    
    
    (593
    )
    
    
    20,888
    
    
    
    46,750
    
    
    
    4,846
    
    
    
    (593
    )
    
    
    51,003Operating costs and expenses:Operations
    
    
    
    
    
    
    14,878
    
    
    
    1,755
    
    
    
    (593
    )
    
    
    16,040Depreciation and amortization
    
    
    
    
    
    
    6,074
    
    
    
    1,205
    
    
    
    
    
    
    
    7,279General and administrative
    
    
    1,505
    
    
    
    1,035
    
    
    
    22
    
    
    
    
    
    
    
    2,5621,505
    
    
    
    21,987
    
    
    
    2,982
    
    
    
    (593
    )
    
    
    25,881Operating income (loss)
    
    
    (1,505
    )
    
    
    24,763
    
    
    
    1,864
    
    
    
    
    
    
    
    25,122Equity in earnings of subsidiaries
    
    
    26,084
    
    
    
    1,353
    
    
    
    
    
    
    
    (27,437
    )
    
    
    Interest income (expense)
    
    
    (6,139
    )
    
    
    (330
    )
    
    
    70
    
    
    
    
    
    
    
    (6,399
    )Gain on sale of assets
    
    
    
    
    
    
    298
    
    
    
    
    
    
    
    
    
    
    
    298Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (581
    )
    
    
    (581
    )Net income
    
    $
    18,440
    
    
    $
    26,084
    
    
    $
    1,934
    
    
    $
    (28,018
    )
    
    $
    18,440
 Condensed Consolidating Statement of IncomeGuarantor
    
    
    Non-Six months ended June 30, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    23,066
    
    
    $
    
    
    
    $
    
    
    
    $
    23,066Third parties
    
    
    
    
    
    
    14,488
    
    
    
    4,006
    
    
    
    (595
    )
    
    
    17,899
    
    
    
    37,554
    
    
    
    4,006
    
    
    
    (595
    )
    
    
    40,965Operating costs and expenses:Operations
    
    
    
    
    
    
    13,676
    
    
    
    1,457
    
    
    
    (595
    )
    
    
    14,538Depreciation and amortization
    
    
    
    
    
    
    5,883
    
    
    
    1,691
    
    
    
    
    
    
    
    7,574General and administrative
    
    
    1,489
    
    
    
    1,021
    
    
    
    3
    
    
    
    
    
    
    
    2,5131,489
    
    
    
    20,580
    
    
    
    3,151
    
    
    
    (595
    )
    
    
    24,625Operating income (loss)
    
    
    (1,489
    )
    
    
    16,974
    
    
    
    855
    
    
    
    
    
    
    
    16,340Equity in earnings of subsidiaries
    
    
    17,577
    
    
    
    637
    
    
    
    
    
    
    
    (18,214
    )
    
    
    Interest income (expense)
    
    
    (5,955
    )
    
    
    (34
    )
    
    
    55
    
    
    
    
    
    
    
    (5,934
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (273
    )
    
    
    (273
    )Net income
    
    $
    10,133
    
    
    $
    17,577
    
    
    $
    910
    
    
    $
    (18,487
    )
    
    $
    10,133
 - 20 -




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##### Table of Contents



Condensed Consolidating Statement of Cash FlowsGuarantor
    
    
    Non-Six months ended June 30, 2007
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash flows from operating activities
    
    $
    24,290
    
    
    $
    (1,196
    )
    
    $
    4,628
    
    
    $
    (1,260
    )
    
    $
    26,462Cash flows from investing activitiesAdditions to properties and equipment
    
    
    
    
    
    
    (1,833
    )
    
    
    (100
    )
    
    
    
    
    
    
    (1,933
    )Proceeds from sale of assets
    
    
    
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    325
    
    
    
    (1,508
    )
    
    
    (100
    )
    
    
    
    
    
    
    (1,608
    )Cash flows from financing activitiesDistributions to partners
    
    
    (23,382
    )
    
    
    
    
    
    
    (1,800
    )
    
    
    1,800
    
    
    
    (23,382
    )Cash distribution to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (540
    )
    
    
    (540
    )Purchase of units for restricted grants
    
    
    (908
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (908
    )Other
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    (16
    )(24,290
    )
    
    
    (16
    )
    
    
    (1,800
    )
    
    
    1,260
    
    
    
    (24,846
    )Cash and cash equivalentsIncrease (decrease) for the period
    
    
    
    
    
    
    (2,720
    )
    
    
    2,728
    
    
    
    
    
    
    
    8Beginning of period
    
    
    2
    
    
    
    9,819
    
    
    
    1,734
    
    
    
    
    
    
    
    11,555End of period
    
    $
    2
    
    
    $
    7,099
    
    
    $
    4,462
    
    
    $
    
    
    
    $
    11,563
 Condensed
Consolidating Statement of Cash FlowsGuarantor
    
    
    Non-Six months ended June 30, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash flows from operating activities
    
    $
    21,756
    
    
    $
    670
    
    
    $
    2,860
    
    
    $
    (2,800
    )
    
    $
    22,486Cash flows from investing activities  additions to
properties and equipment
    
    
    
    
    
    
    (3,543
    )
    
    
    (156
    )
    
    
    
    
    
    
    (3,699
    )Cash flows from financing activitiesDistributions to partners
    
    
    (21,244
    )
    
    
    
    
    
    
    (4,000
    )
    
    
    4,000
    
    
    
    (21,244
    )Cash distribution to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,200
    )
    
    
    (1,200
    )Purchase of
units for restricted grants
    
    
    (512
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (512
    )(21,756
    )
    
    
    
    
    
    
    (4,000
    )
    
    
    2,800
    
    
    
    (22,956
    )Cash and cash equivalentsDecrease for the period
    
    
    
    
    
    
    (2,873
    )
    
    
    (1,296
    )
    
    
    
    
    
    
    (4,169
    )Beginning of period
    
    
    2
    
    
    
    17,770
    
    
    
    2,811
    
    
    
    
    
    
    
    20,583End of period
    
    $
    2
    
    
    $
    14,897
    
    
    $
    1,515
    
    
    $
    
    
    
    $
    16,414
 Note 10: Proposed Joint Ventures
   - 21 -




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##### Table of Contents



- 22 -




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##### Table of Contents



HOLLY ENERGY PARTNERS, L.P.
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  OVERVIEW
    Agreements with Holly Corporation
   - 23 -




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##### Table of Contents



RESULTS OF OPERATIONS (Unaudited)
 Income, Distributable Cash Flow and Volumes
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except per unit data)RevenuesPipelines:Affiliates  refined product pipelines
    
    $
    9,438
    
    
    $
    6,374
    
    
    $
    17,677
    
    
    $
    13,697Affiliates  intermediate pipelines
    
    
    4,054
    
    
    
    1,841
    
    
    
    7,063
    
    
    
    4,314Third parties
    
    
    9,355
    
    
    
    6,821
    
    
    
    18,145
    
    
    
    15,59822,847
    
    
    
    15,036
    
    
    
    42,885
    
    
    
    33,609Terminals and truck loading racks:Affiliates
    
    
    2,861
    
    
    
    2,369
    
    
    
    5,403
    
    
    
    5,055Third parties
    
    
    1,423
    
    
    
    1,122
    
    
    
    2,715
    
    
    
    2,3014,284
    
    
    
    3,491
    
    
    
    8,118
    
    
    
    7,356Total revenues
    
    
    27,131
    
    
    
    18,527
    
    
    
    51,003
    
    
    
    40,965Operating costs and expensesOperations
    
    
    8,263
    
    
    
    7,429
    
    
    
    16,040
    
    
    
    14,538Depreciation and amortization
    
    
    3,208
    
    
    
    3,781
    
    
    
    7,279
    
    
    
    7,574General and administrative
    
    
    1,275
    
    
    
    1,289
    
    
    
    2,562
    
    
    
    2,51312,746
    
    
    
    12,499
    
    
    
    25,881
    
    
    
    24,625Operating income
    
    
    14,385
    
    
    
    6,028
    
    
    
    25,122
    
    
    
    16,340Interest income
    
    
    145
    
    
    
    245
    
    
    
    330
    
    
    
    488Interest expense, including amortization
    
    
    (3,371
    )
    
    
    (3,247
    )
    
    
    (6,729
    )
    
    
    (6,422
    )Gain on sale of assets
    
    
    1
    
    
    
    
    
    
    
    298
    
    
    
    Minority interest in Rio Grande
    
    
    (154
    )
    
    
    (28
    )
    
    
    (581
    )
    
    
    (273
    )Net income
    
    
    11,006
    
    
    
    2,998
    
    
    
    18,440
    
    
    
    10,133Less general partner interest in net
income, including incentive distributions
(1)
    
    
    726
    
    
    
    319
    
    
    
    1,306
    
    
    
    646Limited partners interest in net income
    
    $
    10,280
    
    
    $
    2,679
    
    
    $
    17,134
    
    
    $
    9,487Net income per limited partner unit -
basic and diluted(1)
    
    $
    0.64
    
    
    $
    0.17
    
    
    $
    1.06
    
    
    $
    0.59Weighted average limited partners units
outstanding
    
    
    16,108
    
    
    
    16,108
    
    
    
    16,108
    
    
    
    16,108EBITDA(2)
    
    $
    17,440
    
    
    $
    9,781
    
    
    $
    32,118
    
    
    $
    23,641Distributable cash flow(3)
    
    $
    12,389
    
    
    $
    10,293
    
    
    $
    24,983
    
    
    $
    21,507Volumes (bpd)Pipelines:Affiliates  refined product pipelines
    
    
    82,571
    
    
    
    55,793
    
    
    
    77,494
    
    
    
    61,151Affiliates  intermediate pipelines
    
    
    68,437
    
    
    
    44,955
    
    
    
    63,980
    
    
    
    52,959Third parties
    
    
    64,487
    
    
    
    52,134
    
    
    
    64,835
    
    
    
    64,666215,495
    
    
    
    152,882
    
    
    
    206,309
    
    
    
    178,776Terminals and truck loading racks:Affiliates
    
    
    123,245
    
    
    
    107,302
    
    
    
    121,724
    
    
    
    113,202Third parties
    
    
    53,179
    
    
    
    41,266
    
    
    
    50,030
    
    
    
    44,145176,424
    
    
    
    148,568
    
    
    
    171,754
    
    
    
    157,347Total for pipelines and terminal assets (bpd)
    
    
    391,919
    
    
    
    301,450
    
    
    
    378,063
    
    
    
    336,123
 - 24 -




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##### Table of Contents



(1)
    
    Net income is allocated between limited partners and the general partner interest in
accordance with the provisions of the partnership agreement. Net income allocated to the
general partner includes any incentive distributions declared in the period. Incentive
distributions of $0.5 million and $0.3 million were declared during the three months ended
June 30, 2007 and 2006, respectively, and $1.0 million and $0.5 million during the six
months ended June 30, 2007 and 2006, respectively. The net income applicable to the
limited partners is divided by the weighted average limited partner units outstanding in
computing the net income per unit applicable to limited partners.(2)
    
    Earnings before interest, taxes, depreciation and amortization (EBITDA) is calculated
as net income plus (i) interest expense net of interest income and (ii) depreciation and
amortization. EBITDA is not a calculation based upon U.S. generally accepted accounting
principles (U.S. GAAP). However, the amounts included in the EBITDA calculation are
derived from amounts included in our consolidated financial statements. EBITDA should not
be considered 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. EBITDA is not necessarily comparable to similarly titled measures of other
companies. EBITDA is presented here because it is a widely used financial indicator used
by investors and analysts to measure performance. EBITDA is also used by our management
for internal analysis and as a basis for compliance with financial covenants.Set forth below is our calculation of EBITDA. Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)Net income
    
    $
    11,006
    
    
    $
    2,998
    
    
    $
    18,440
    
    
    $
    10,133Add interest expense
    
    
    3,067
    
    
    
    3,005
    
    
    
    6,122
    
    
    
    5,938Add amortization of discount and
deferred debt issuance costs
    
    
    304
    
    
    
    242
    
    
    
    607
    
    
    
    484Subtract interest income
    
    
    (145
    )
    
    
    (245
    )
    
    
    (330
    )
    
    
    (488
    )Add depreciation and
amortization
    
    
    3,208
    
    
    
    3,781
    
    
    
    7,279
    
    
    
    7,574EBITDA
    
    $
    17,440
    
    
    $
    9,781
    
    
    $
    32,118
    
    
    $
    23,641
 (3)
    
    Distributable cash flow is not a calculation based upon U.S. GAAP. However, the
amounts included in the calculation are derived from amounts separately presented in our
consolidated financial statements, with the 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. We believe that this measure provides
investors an enhanced perspective of the operating performance of our assets and the cash
our business is generating. - 25 -




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##### Table of Contents



Set forth below is our calculation of distributable cash flow. Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)Net income
    
    $
    11,006
    
    
    $
    2,998
    
    
    $
    18,440
    
    
    $
    10,133Add
depreciation and
amortization
    
    
    3,208
    
    
    
    3,781
    
    
    
    7,279
    
    
    
    7,574Add amortization of discount and
deferred debt issuance costs
    
    
    304
    
    
    
    242
    
    
    
    607
    
    
    
    484Add
(subtract) increase
(decrease) in
deferred revenue
    
    
    (1,896
    )
    
    
    3,432
    
    
    
    (990
    )
    
    
    3,916Subtract
maintenance capital
expenditures*
    
    
    (233
    )
    
    
    (160
    )
    
    
    (353
    )
    
    
    (600
    )Distributable cash flow
    
    $
    12,389
    
    
    $
    10,293
    
    
    $
    24,983
    
    
    $
    21,507
  *
    
    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. June 30,
    
    December 31,2007
    
    2006(In thousands)Balance Sheet DataCash and cash equivalents
    
    $
    11,563
    
    
    $
    11,555Working capital
    
    $
    10,333
    
    
    $
    9,450Total assets
    
    $
    235,189
    
    
    $
    243,573Long-term debt
    
    $
    181,443
    
    
    $
    180,660Partners equity
    
    $
    31,139
    
    
    $
    36,226
  Results of Operations  Three Months Ended June 30, 2007 Compared with Three Months Ended June 30,
2006
 Summary
  Revenues
  - 26 -




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##### Table of Contents



Operating Costs
  Depreciation and Amortization
  General and Administrative
  Interest Expense
  - 27 -




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##### Table of Contents



Minority Interest in Earnings of Rio Grande
  Results of Operations  Six Months Ended June 30, 2007 Compared with Six Months Ended June 30, 2006
 Summary
  Revenues
     - 28 -




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##### Table of Contents



Operating Costs
  Depreciation and Amortization
  General and Administrative
  Interest Expense
  Minority Interest in Earnings of Rio Grande
  LIQUIDITY AND CAPITAL RESOURCES
 Overview
  - 29 -




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##### Table of Contents



Cash Flows  Operating Activities
   Cash Flows  Investing Activities
  Cash Flows  Financing Activities
  - 30 -




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##### Table of Contents



Capital Requirements
      - 31 -




---



##### Table of Contents



8-inch 12-inch
   Credit Agreement
       - 32 -




---



##### Table of Contents



Senior Notes Due 2015
   Impact of Inflation
   Environmental Matters
    - 33 -




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES
   Recent Accounting Pronouncements
 Interpretation No. 48 Accounting for Uncertainty in Income Taxes
 - 34 -




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##### Table of Contents



RISK MANAGEMENT
        - 35 -




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risks
   
 Item 4. Controls and Procedures
 (a) Evaluation of disclosure controls and procedures
  (b) Changes in internal control over financial reporting
  - 36 -




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##### Table of Contents



Item 1. Legal proceedings
  
 Item 6. Exhibits
 12.1*
    
    Computation of Ratio of Earnings to Fixed Charges31.1*
    
    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.
 
 *
    
    Filed herewith - 37 -




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##### Table of Contents



SIGNATURES
  HOLLY ENERGY PARTNERS, L.P.(Registrant)By: HEP LOGISTICS HOLDINGS, L.P. 
its General PartnerBy: HOLLY LOGISTIC SERVICES, L.L.C. 
its General PartnerDate: August 3, 2007
    
    /s/ P. Dean RidenourP. Dean RidenourVice President and Chief Accounting Officer 
and Director(Principal Accounting Officer)/s/ Stephen J. McDonnellStephen J. McDonnellVice President and Chief Financial
Officer(Principal Financial Officer)
 - 38 -