##### 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, 2008
 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 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 (Address of principal executive offices)
 (Registrants telephone number, including area code)
 
   þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
  o þ




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##### 



PART I. FINANCIAL INFORMATION
    
    
    3FORWARD-LOOKING STATEMENTS
    
    
    3Item 1. Financial Statements (Unaudited, except December 31, 2007 Balance Sheet)
    
    
    4Consolidated Balance Sheets
    
    
    4Consolidated Statements of Income
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Consolidated Statement of Partners Equity (Deficit) and Comprehensive Income
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    42Item 4. Controls and Procedures
    
    
    42PART II. OTHER INFORMATION
    
    
    43Item 1. Legal Proceedings
    
    
    43Item 6. Exhibits
    
    
    43SIGNATURES
    
    
    44Computation 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 and
crude oil 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 and crude oil 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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##### Table of Contents



Item 1. Financial Statements
 Holly Energy Partners, L.P.
 
 Consolidated Balance Sheets
 June 30, 2008
    
    
    December 31,(Unaudited)
    
    
    2007(In thousands, except unit data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,371
    
    
    $
    10,321Accounts receivable:Trade
    
    
    7,331
    
    
    
    6,611Affiliates
    
    
    8,592
    
    
    
    5,70015,923
    
    
    
    12,311Prepaid and other current assets
    
    
    683
    
    
    
    546Total current assets
    
    
    22,977
    
    
    
    23,178Properties and equipment, net
    
    
    279,016
    
    
    
    158,600Transportation agreements, net
    
    
    123,674
    
    
    
    54,273Other assets
    
    
    6,263
    
    
    
    2,853Total assets
    
    $
    431,930
    
    
    $
    238,904LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,479
    
    
    $
    3,011Accounts payable  affiliates
    
    
    1,792
    
    
    
    6,021Accrued interest
    
    
    2,899
    
    
    
    2,996Deferred revenue
    
    
    10,481
    
    
    
    3,700Accrued property taxes
    
    
    841
    
    
    
    1,177Other current liabilities
    
    
    952
    
    
    
    827Short-term borrowings under credit agreement
    
    
    20,000
    
    
    
    Total current liabilities
    
    
    41,444
    
    
    
    17,732Commitments and contingencies
    
    
    
    
    
    
    Long-term debt
    
    
    354,113
    
    
    
    181,435Other long-term liabilities
    
    
    390
    
    
    
    1,181Minority interest
    
    
    10,509
    
    
    
    10,740Partners equity (deficit):Common unitholders (8,390,000 and 8,170,000 units issued and
outstanding at June 30, 2008 and December 31, 2007,
respectively)
    
    
    174,838
    
    
    
    172,807Subordinated unitholders (7,000,000 units issued and outstanding)
    
    
    (79,630
    )
    
    
    (73,725
    )Class B subordinated unitholders (937,500 units issued and
outstanding)
    
    
    22,181
    
    
    
    22,973General partner interest (2% interest)
    
    
    (94,363
    )
    
    
    (94,239
    )Accumulated other comprehensive income
    
    
    2,448
    
    
    
    Total partners equity
    
    
    25,474
    
    
    
    27,816Total liabilities and partners equity
    
    $
    431,930
    
    
    $
    238,904
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Holly Energy Partners, L.P.
 
 Consolidated Statements of Income
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except per unit data)Revenues:Affiliates
    
    $
    20,146
    
    
    $
    16,353
    
    
    $
    38,473
    
    
    $
    30,115Third parties
    
    
    6,629
    
    
    
    10,778
    
    
    
    15,578
    
    
    
    20,88826,775
    
    
    
    27,131
    
    
    
    54,051
    
    
    
    51,003Operating costs and expenses:Operations
    
    
    9,985
    
    
    
    8,189
    
    
    
    19,712
    
    
    
    15,922Depreciation and amortization
    
    
    6,062
    
    
    
    3,208
    
    
    
    10,375
    
    
    
    7,279General and administrative
    
    
    1,359
    
    
    
    1,284
    
    
    
    2,645
    
    
    
    2,55617,406
    
    
    
    12,681
    
    
    
    32,732
    
    
    
    25,757Operating income
    
    
    9,369
    
    
    
    14,450
    
    
    
    21,319
    
    
    
    25,246Other income (expense):Interest income
    
    
    28
    
    
    
    145
    
    
    
    121
    
    
    
    330Interest expense
    
    
    (5,233
    )
    
    
    (3,371
    )
    
    
    (9,040
    )
    
    
    (6,729
    )Gain on sale of assets
    
    
    
    
    
    
    1
    
    
    
    36
    
    
    
    298Minority interest in Rio Grande
Pipeline Company
    
    
    (264
    )
    
    
    (154
    )
    
    
    (670
    )
    
    
    (581
    )(5,469
    )
    
    
    (3,379
    )
    
    
    (9,553
    )
    
    
    (6,682
    )Income before income taxes
    
    
    3,900
    
    
    
    11,071
    
    
    
    11,766
    
    
    
    18,564State income tax
    
    
    (85
    )
    
    
    (65
    )
    
    
    (153
    )
    
    
    (124
    )Net income
    
    
    3,815
    
    
    
    11,006
    
    
    
    11,613
    
    
    
    18,440Less general partner interest in net income
    
    
    800
    
    
    
    726
    
    
    
    1,621
    
    
    
    1,306Limited partners interest in net income
    
    $
    3,015
    
    
    $
    10,280
    
    
    $
    9,992
    
    
    $
    17,134Net income per limited partner unit -
basic and diluted
    
    $
    0.18
    
    
    $
    0.64
    
    
    $
    0.61
    
    
    $
    1.06Weighted average limited partners units
outstanding
    
    
    16,328
    
    
    
    16,108
    
    
    
    16,254
    
    
    
    16,108
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Holly Energy Partners, L.P.
 
 Consolidated Statements of Cash Flows
(Unaudited)
 Six Months Ended June 30,2008
    
    
    2007(In thousands)Cash flows from operating activitiesNet income
    
    $
    11,613
    
    
    $
    18,440Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    10,375
    
    
    
    7,279Minority interest in Rio Grande Pipeline Company
    
    
    670
    
    
    
    581Amortization of restricted and performance units
    
    
    548
    
    
    
    763Gain on sale of assets
    
    
    (36
    )
    
    
    (298
    )(Increase) decrease in current assets:Accounts receivable
    
    
    (720
    )
    
    
    2,764Accounts receivable  affiliates
    
    
    (2,892
    )
    
    
    (373
    )Prepaid and other current assets
    
    
    (137
    )
    
    
    274Increase (decrease) in current liabilities:Accounts payable
    
    
    1,468
    
    
    
    (1,909
    )Accounts payable  affiliates
    
    
    (4,229
    )
    
    
    Accrued interest
    
    
    (97
    )
    
    
    (9
    )Deferred revenue
    
    
    6,781
    
    
    
    (991
    )Accrued property tax
    
    
    (427
    )
    
    
    (254
    )Other current liabilities
    
    
    216
    
    
    
    (377
    )Other, net
    
    
    288
    
    
    
    572Net cash provided by operating activities
    
    
    23,421
    
    
    
    26,462Cash flows from investing activitiesAdditions to properties and equipment
    
    
    (20,036
    )
    
    
    (1,933
    )Acquisition of crude pipelines and tankage assets
    
    
    (171,000
    )
    
    
    Proceeds from sale of assets
    
    
    36
    
    
    
    325Net cash used for investing activities
    
    
    (191,000
    )
    
    
    (1,608
    )Cash flows from financing activitiesBorrowings under credit agreement
    
    
    191,000
    
    
    
    Proceeds from issuance of common units
    
    
    104
    
    
    
    Distributions to partners
    
    
    (25,656
    )
    
    
    (23,382
    )Cash distributions to minority interest
    
    
    (900
    )
    
    
    (540
    )Cash contribution from general partner
    
    
    186
    
    
    
    Purchase of units for restricted grants
    
    
    (514
    )
    
    
    (908
    )Deferred financing costs
    
    
    (591
    )
    
    
    Other
    
    
    
    
    
    
    (16
    )Net cash provided by (used for) financing activities
    
    
    163,629
    
    
    
    (24,846
    )Cash and cash equivalentsDecrease for period
    
    
    (3,950
    )
    
    
    8Beginning of period
    
    
    10,321
    
    
    
    11,555End of period
    
    $
    6,371
    
    
    $
    11,563
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Holly Energy Partners, L.P.
 
 Consolidated Statement of Partners Equity (Deficit) and Comprehensive Income
(Unaudited)
 AccumulatedClass B
    
    
    General
    
    
    OtherCommon
    
    
    Subordinated
    
    
    Subordinated
    
    
    Partner
    
    
    ComprehensiveUnits
    
    
    Units
    
    
    Units
    
    
    Interest
    
    
    Income
    
    
    Total(In thousands)Balance December 31, 2007
    
    $
    172,807
    
    
    $
    (73,725
    )
    
    $
    22,973
    
    
    $
    (94,239
    )
    
    $
    
    
    
    $
    27,816Net income
    
    
    5,101
    
    
    
    4,313
    
    
    
    578
    
    
    
    1,621
    
    
    
    
    
    
    
    11,613Change in fair value of cash
flow hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,448
    
    
    
    2,448Comprehensive income
    
    
    5,101
    
    
    
    4,313
    
    
    
    578
    
    
    
    1,621
    
    
    
    2,448
    
    
    
    14,061Distributions to partners
    
    
    (12,137
    )
    
    
    (10,218
    )
    
    
    (1,370
    )
    
    
    (1,931
    )
    
    
    
    
    
    
    (25,656
    )Issuance of common units
    
    
    9,104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,104Cost of issuing common units
    
    
    (71
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71
    )Capital contribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    
    
    
    
    186Purchase of units for
restricted grants
    
    
    (514
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (514
    )Amortization of restricted
and
performance units
    
    
    548
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    548Balance June 30, 2008
    
    $
    174,838
    
    
    $
    (79,630
    )
    
    $
    22,181
    
    
    $
    (94,363
    )
    
    $
    2,448
    
    
    $
    25,474
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note 1: Description of Business and Presentation of Financial Statements
          - 8 -




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Recent Accounting Pronouncements
 Statement of Financial Accounting Standards (SFAS) No. 157 Fair Value Measurements
  EITF No. 07-04 Application of the Two-Class Method under FASB Statement No. 128, Earnings per
Share, to Master Limited Partnerships
 FASB Staff Position (FSP) No. EITF 03-6-1 Determining Whether Instruments Granted in Share-Based
Transactions Are Participating Securities
  Note 2: Acquisition
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Note 3: Properties and Equipment
 June 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Pipelines and terminals
    
    $
    305,833
    
    
    $
    196,800Land and right of way
    
    
    24,319
    
    
    
    22,825Other
    
    
    6,562
    
    
    
    5,706Construction in progress
    
    
    26,044
    
    
    
    9,103362,758
    
    
    
    234,434Less accumulated depreciation
    
    
    83,742
    
    
    
    75,834$
    279,016
    
    
    $
    158,600
  Note 4: Transportation Agreements
  
    
    The transportation agreement with Alon USA, Inc (Alon) represents a portion of the
total purchase price of assets purchased from Alon in 2005 that was allocated 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.
    
    The Holly crude pipelines and tankage agreement represents a portion of the total
purchase price of the Crude Pipelines and Tankage Assets that was allocated based on
managements preliminary estimate of its fair value. This asset is being amortized over 15
years ending 2023, the 15-year term of the Holly CPTA.
  June 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Alon transportation agreement
    
    $
    59,933
    
    
    $
    59,933Holly crude pipelines and
tankage agreement
    
    
    72,000
    
    
    
    131,933
    
    
    
    59,933Less accumulated amortization
    
    
    8,259
    
    
    
    5,660$
    123,674
    
    
    $
    54,273
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Note 5: Debt
 Credit Agreement
        Senior Notes Due 2015
  - 11 -




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June 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Credit Agreement
    
    $
    191,000
    
    
    $
    Senior NotesPrincipal
    
    
    185,000
    
    
    
    185,000Unamortized discount
    
    
    (2,534
    )
    
    
    (2,724
    )Fair value hedge  interest rate swap
    
    
    647
    
    
    
    (841
    )183,113
    
    
    
    181,435Total Debt
    
    
    374,113
    
    
    
    181,435Less short-term borrowing under credit agreement
    
    
    20,000
    
    
    
    Total long-term debt
    
    $
    354,113
    
    
    $
    181,435
 Interest Rate Risk Management
      - 12 -




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Fair Value
    
    Location of OffsettingInterest Rate Swaps
    
    Balance Sheet Location
    
    (In thousands)
    
    BalanceCash flow hedge -
$171 million LIBOR
based debt
    
    Other assets
    
    $2,448
    
    Accumulated othercomprehensive incomeFair value
hedge -
$60 million of
6.25% Senior Notes
    
    Other assets
    
    $   647
    
    Long-term debt
 Other Debt Information
 Six Months EndedJune 30,2008
    
    
    2007(In thousands)Interest on outstanding debt:Senior Notes, net of interest rate swap
    
    $
    5,353
    
    
    $
    5,874Credit Agreement, net of interest rate swap
    
    
    3,058
    
    
    
    Amortization of discount and deferred issuance costs
    
    
    480
    
    
    
    607Commitment fees
    
    
    149
    
    
    
    248Net interest expense
    
    $
    9,040
    
    
    $
    6,729Cash paid for interest(1)
    
    $
    6,200
    
    
    $
    6,259
 
 (1)
    
    Net of cash received under our interest rate swap agreement of $2.1 million and $1.9
million for the six months ended June 30, 2008 and 2007, respectively.  Note 6: Employees, Retirement and Benefit Plans
    - 13 -




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Restricted Units
   Weighted-Weighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicGrant-Date
    
    
    Contractual
    
    
    ValueRestricted Units
    
    Grants
    
    
    Fair Value
    
    
    Term
    
    
    ($000)Outstanding January 1, 2008 (not vested)
    
    
    44,711
    
    
    $
    44.77Granted
    
    
    18,902
    
    
    
    40.30Forfeited
    
    
    (303
    )
    
    
    44.62Vesting and transfer of full ownership to recipients
    
    
    (11,486
    )
    
    
    43.53Outstanding at June 30, 2008 (not vested)
    
    
    51,824
    
    
    $
    43.42
    
    
    
    1.1
    
    
    $
    2,021
  Performance Units
    PayablePerformance Units
    
    In UnitsOutstanding at January 1, 2008 (not vested)
    
    
    24,148Granted
    
    
    14,337Forfeited
    
    
    Vesting and transfer of full ownership to recipients
    
    
    (1,514
    )Outstanding at June 30, 2008 (not vested)
    
    
    36,971
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Note 7: Significant Customers
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Holly
    
    
    75
    %
    
    
    60
    %
    
    
    71
    %
    
    
    59
    %Alon
    
    
    12
    %
    
    
    29
    %
    
    
    16
    %
    
    
    28
    %BP
    
    
    8
    %
    
    
    7
    %
    
    
    9
    %
    
    
    10
    %
 Note 8: Related Party Transactions
 Holly
      - 15 -




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
    
    Pipeline, terminal and tankage revenues received from Holly were $20.1 million and $16.4
million for the three months ended June 30, 2008 and 2007, respectively, and $38.5 million and
$30.1 million for the six months ended June 30, 2008 and 2007, respectively. These amounts
include the revenues received under the Holly PTA, Holly IPA and Holly CPTA.
    
    Holly charged general and administrative services under the Omnibus Agreement of $0.6
million and $0.5 million for the three months ended June 30, 2008 and 2007, respectively, and
$1.1 million and $1.0 million for the six months ended June 30, 2008 and 2007, respectively.
    
    We reimbursed Holly for costs of employees supporting our operations of $3.5 million and
$2.3 million for the three months ended June 30, 2008 and 2007, respectively, and $6.1 million
and $4.6 million for the six months ended June 30, 2008 and 2007, respectively.
    
    Holly reimbursed us zero and $24,000 for certain costs paid on their behalf for the three
months ended June 30, 2008 and 2007, respectively, and zero and $98,000 for the six months
ended June 30, 2008 and 2007, respectively.
    
    We distributed $6.4 million and $5.6 million for the three months ended June 30, 2008 and
2007, respectively, to Holly as regular distributions on its subordinated units, common units
and general partner interest. We distributed $12.4 million and $11.1 million for the six
months ended June 30, 2008 and 2007, respectively.
    
    Our accounts receivable from Holly were $8.6 million and $5.7 million at June 30, 2008 and
December 31, 2007, respectively.
    
    Holly failed to meet its minimum volume commitment for each of the twelve quarters since
inception of the Holly IPA. We have charged Holly $5.7 million for these shortfalls to date,
$0.9 million and zero of which is included in affiliate accounts receivable at June 30, 2008
and December 31, 2007, respectively.
    
    For the three and six months ended June 30, 2008, our revenues from Holly included $0.2
million and $0.7 million, respectively, of shortfalls billed under the Holly IPA in 2007 as
Holly did not exceed its minimum volume commitment in any of the subsequent four quarters.
Deferred revenue in the consolidated balance sheets at June 30, 2008 and December 31, 2007,
includes $1.6 million and $1.1 million, respectively, relating to the Holly IPA. It is
possible that Holly may not exceed its
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minimum obligations under the Holly IPA to allow Holly
to receive credit for any of the $1.6 million deferred at June 30, 2008.
 BP
  
    
    BPs agreement to ship on the Rio Grande pipeline expired on March 31, 2008. Rio Grande is
currently serving multiple shippers on the pipeline. We recorded revenues from them of $2.2
million and $1.8 million for the three months ended June 30, 2008 and 2007, respectively, and
$4.9 million and $4.8 million for the six months ended June 30, 2008 and 2007, respectively.
    
    Rio Grande paid distributions to BP of $0.9 million and $0.5 million for the three and six
months ended June 30, 2008 and 2007, respectively.
    
    Included in our accounts receivable  trade at June 30, 2008 and December 31, 2007 were
$0.5 million and $1.5 million, respectively, which represented the receivable balance of Rio
Grande from BP.
 Alon
   
    
    We recognized $1.5 million and $6.2 million of revenues for pipeline transportation and
terminalling services under the Alon PTA and $1.8 million and $1.8 million under a pipeline
capacity lease for the three months ended June 30, 2008 and 2007, respectively. We recognized
$4.9 million and $10.7 million of revenues for pipeline transportation and terminal services
under the Alon PTA and $3.6 million and $3.5 million under a pipeline capacity lease for the
six months ended June 30, 2008 and 2007, respectively.
    
    We paid $0.7 million to Alon for distributions on our Class B subordinated units for the
three months ended June 30, 2008 and 2007, and $1.4 million and $1.3 million for the six
months ended June 30, 2008 and 2007, respectively.
    
    Included in our accounts receivable  trade at June 30, 2008 and December 31, 2007 were
$6.1 million and $3.5 million, respectively, which represented the receivable balance from
Alon.
    
    For the three and six months ended June 30, 2008, our revenues from Alon included $0.5
million and $1.3 million, respectively, of shortfalls billed under the Alon PTA in 2007 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, 2008 and December 31, 2007
includes $8.9 million and $2.6 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 $8.9 million deferred at June 30, 2008.
 - 17 -




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##### Table of Contents



Note 9: Partners Equity, Allocations and Cash Distributions
 Issuances of units
     Allocations of Net Income
  Cash Distributions
  - 18 -




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##### Table of Contents



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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except per unit data)General partner interest
    
    $
    260
    
    
    $
    227
    
    
    $
    512
    
    
    $
    449General partner incentive distribution
    
    
    738
    
    
    
    516
    
    
    
    1,417
    
    
    
    956Total general partner distribution
    
    
    998
    
    
    
    743
    
    
    
    1,929
    
    
    
    1,405Limited partner distribution
    
    
    12,035
    
    
    
    11,101
    
    
    
    23,727
    
    
    
    21,977Total regular quarterly cash distribution
    
    $
    13,033
    
    
    $
    11,844
    
    
    $
    25,656
    
    
    $
    23,382Cash distribution per unit applicable to
limited partners
    
    $
    0.735
    
    
    $
    0.69
    
    
    $
    1.460
    
    
    $
    1.365
  - 19 -




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##### Table of Contents



Note 10: Supplemental Guarantor/Non-Guarantor Financial Information
   - 20 -




---



##### Table of Contents



Condensed Consolidating Balance Sheet
 Guarantor
    
    
    Non-June 30, 2008
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    3,908
    
    
    $
    2,461
    
    
    $
    
    
    
    $
    6,371Accounts receivable
    
    
    
    
    
    
    15,386
    
    
    
    537
    
    
    
    
    
    
    
    15,923Intercompany accounts receivable (payable)
    
    
    (164,515
    )
    
    
    164,993
    
    
    
    (478
    )
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    6
    
    
    
    677
    
    
    
    
    
    
    
    
    
    
    
    683Total current assets
    
    
    (164,507
    )
    
    
    184,964
    
    
    
    2,520
    
    
    
    
    
    
    
    22,977Properties and equipment, net
    
    
    
    
    
    
    245,981
    
    
    
    33,035
    
    
    
    
    
    
    
    279,016Investment in subsidiaries
    
    
    374,416
    
    
    
    24,522
    
    
    
    
    
    
    
    (398,938
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    123,674
    
    
    
    
    
    
    
    
    
    
    
    123,674Other assets
    
    
    1,894
    
    
    
    4,369
    
    
    
    
    
    
    
    
    
    
    
    6,263Total assets
    
    $
    211,803
    
    
    $
    583,510
    
    
    $
    35,555
    
    
    $
    (398,938
    )
    
    $
    431,930LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    5,928
    
    
    $
    343
    
    
    $
    
    
    
    $
    6,271Accrued interest
    
    
    (2,782
    )
    
    
    5,681
    
    
    
    
    
    
    
    
    
    
    
    2,899Deferred revenue
    
    
    
    
    
    
    10,481
    
    
    
    
    
    
    
    
    
    
    
    10,481Accrued property taxes
    
    
    
    
    
    
    744
    
    
    
    97
    
    
    
    
    
    
    
    841Other current liabilities
    
    
    5,998
    
    
    
    (5,130
    )
    
    
    84
    
    
    
    
    
    
    
    952Short-term borrowings under
credit agreement
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    20,000Total current liabilities
    
    
    3,216
    
    
    
    37,704
    
    
    
    524
    
    
    
    
    
    
    
    41,444Long-term debt
    
    
    183,113
    
    
    
    171,000
    
    
    
    
    
    
    
    
    
    
    
    354,113Other long-term liabilities
    
    
    
    
    
    
    390
    
    
    
    
    
    
    
    
    
    
    
    390Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,509
    
    
    
    10,509Partners equity
    
    
    25,474
    
    
    
    374,416
    
    
    
    35,031
    
    
    
    (409,447
    )
    
    
    25,474Total liabilities and partners equity
    
    $
    211,803
    
    
    $
    583,510
    
    
    $
    35,555
    
    
    $
    (398,938
    )
    
    $
    431,930
 Condensed Consolidating Balance Sheet
 Guarantor
    
    
    Non-December 31, 2007
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    8,060
    
    
    $
    2,259
    
    
    $
    
    
    
    $
    10,321Accounts receivable
    
    
    
    
    
    
    10,820
    
    
    
    1,491
    
    
    
    
    
    
    
    12,311Intercompany accounts receivable (payable)
    
    
    (141,175
    )
    
    
    141,553
    
    
    
    (378
    )
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    183
    
    
    
    363
    
    
    
    
    
    
    
    
    
    
    
    546Total current assets
    
    
    (140,990
    )
    
    
    160,796
    
    
    
    3,372
    
    
    
    
    
    
    
    23,178Properties and equipment, net
    
    
    
    
    
    
    125,383
    
    
    
    33,217
    
    
    
    
    
    
    
    158,600Investment in subsidiaries
    
    
    353,235
    
    
    
    25,059
    
    
    
    
    
    
    
    (378,294
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    54,273
    
    
    
    
    
    
    
    
    
    
    
    54,273Other assets
    
    
    1,302
    
    
    
    1,551
    
    
    
    
    
    
    
    
    
    
    
    2,853Total assets
    
    $
    213,547
    
    
    $
    367,062
    
    
    $
    36,589
    
    
    $
    (378,294
    )
    
    $
    238,904LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    8,499
    
    
    $
    533
    
    
    $
    
    
    
    $
    9,032Accrued interest
    
    
    (2,932
    )
    
    
    5,928
    
    
    
    
    
    
    
    
    
    
    
    2,996Deferred revenue
    
    
    
    
    
    
    3,700
    
    
    
    
    
    
    
    
    
    
    
    3,700Accrued property taxes
    
    
    
    
    
    
    1,021
    
    
    
    156
    
    
    
    
    
    
    
    1,177Other current liabilities
    
    
    6,387
    
    
    
    (5,661
    )
    
    
    101
    
    
    
    
    
    
    
    827Total current liabilities
    
    
    3,455
    
    
    
    13,487
    
    
    
    790
    
    
    
    
    
    
    
    17,732Long-term debt
    
    
    181,435
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181,435Other long-term liabilities
    
    
    841
    
    
    
    340
    
    
    
    
    
    
    
    
    
    
    
    1,181Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,740
    
    
    
    10,740Partners equity
    
    
    27,816
    
    
    
    353,235
    
    
    
    35,799
    
    
    
    (389,034
    )
    
    
    27,816Total liabilities and partners equity
    
    $
    213,547
    
    
    $
    367,062
    
    
    $
    36,589
    
    
    $
    (378,294
    )
    
    $
    238,904
 - 21 -




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##### Table of Contents



Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Three months ended June 30, 2008
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    20,146
    
    
    $
    
    
    
    $
    
    
    
    $
    20,146Third parties
    
    
    
    
    
    
    4,782
    
    
    
    2,171
    
    
    
    (324
    )
    
    
    6,629
    
    
    
    24,928
    
    
    
    2,171
    
    
    
    (324
    )
    
    
    26,775Operating costs and expenses:Operations
    
    
    
    
    
    
    9,342
    
    
    
    967
    
    
    
    (324
    )
    
    
    9,985Depreciation and amortization
    
    
    
    
    
    
    5,736
    
    
    
    326
    
    
    
    
    
    
    
    6,062General and administrative
    
    
    760
    
    
    
    603
    
    
    
    (4
    )
    
    
    
    
    
    
    1,359760
    
    
    
    15,681
    
    
    
    1,289
    
    
    
    (324
    )
    
    
    17,406Operating income (loss)
    
    
    (760
    )
    
    
    9,247
    
    
    
    882
    
    
    
    
    
    
    
    9,369Equity in earnings of subsidiaries
    
    
    7,180
    
    
    
    615
    
    
    
    
    
    
    
    (7,795
    )
    
    
    Interest income (expense)
    
    
    (2,605
    )
    
    
    (2,613
    )
    
    
    13
    
    
    
    
    
    
    
    (5,205
    )Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (264
    )
    
    
    (264
    )4,575
    
    
    
    (1,998
    )
    
    
    13
    
    
    
    (8,059
    )
    
    
    (5,469
    )Income before income taxes
    
    
    3,815
    
    
    
    7,249
    
    
    
    895
    
    
    
    (8,059
    )
    
    
    3,900State income tax
    
    
    
    
    
    
    (69
    )
    
    
    (16
    )
    
    
    
    
    
    
    (85
    )Net income
    
    $
    3,815
    
    
    $
    7,180
    
    
    $
    879
    
    
    $
    (8,059
    )
    
    $
    3,815
 Condensed Consolidating Statement of Income
 Guarantor
    
    
    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
    
    
    
    
    
    
    7,552
    
    
    
    937
    
    
    
    (300
    )
    
    
    8,189Depreciation and amortization
    
    
    
    
    
    
    2,851
    
    
    
    357
    
    
    
    
    
    
    
    3,208General and administrative
    
    
    739
    
    
    
    530
    
    
    
    15
    
    
    
    
    
    
    
    1,284739
    
    
    
    10,933
    
    
    
    1,309
    
    
    
    (300
    )
    
    
    12,681Operating income (loss)
    
    
    (739
    )
    
    
    14,678
    
    
    
    511
    
    
    
    
    
    
    
    14,450Equity 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
    )11,745
    
    
    
    176
    
    
    
    30
    
    
    
    (15,330
    )
    
    
    (3,379
    )Income before income taxes
    
    
    11,006
    
    
    
    14,854
    
    
    
    541
    
    
    
    (15,330
    )
    
    
    11,071State income tax
    
    
    
    
    
    
    (49
    )
    
    
    (16
    )
    
    
    
    
    
    
    (65
    )Net income
    
    $
    11,006
    
    
    $
    14,805
    
    
    $
    525
    
    
    $
    (15,330
    )
    
    $
    11,006
 - 22 -




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##### Table of Contents



Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Six months ended June 30, 2008
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    38,473
    
    
    $
    
    
    
    $
    
    
    
    $
    38,473Third parties
    
    
    
    
    
    
    11,298
    
    
    
    4,921
    
    
    
    (641
    )
    
    
    15,578
    
    
    
    49,771
    
    
    
    4,921
    
    
    
    (641
    )
    
    
    54,051Operating costs and expenses:Operations
    
    
    
    
    
    
    18,315
    
    
    
    2,038
    
    
    
    (641
    )
    
    
    19,712Depreciation and amortization
    
    
    
    
    
    
    9,724
    
    
    
    651
    
    
    
    
    
    
    
    10,375General and administrative
    
    
    1,502
    
    
    
    1,146
    
    
    
    (3
    )
    
    
    
    
    
    
    2,6451,502
    
    
    
    29,185
    
    
    
    2,686
    
    
    
    (641
    )
    
    
    32,732Operating income (loss)
    
    
    (1,502
    )
    
    
    20,586
    
    
    
    2,235
    
    
    
    
    
    
    
    21,319Equity in earnings of subsidiaries
    
    
    18,734
    
    
    
    1,562
    
    
    
    
    
    
    
    (20,296
    )
    
    
    Interest income (expense)
    
    
    (5,619
    )
    
    
    (3,332
    )
    
    
    32
    
    
    
    
    
    
    
    (8,919
    )Gain on sale of assets
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    36Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (670
    )
    
    
    (670
    )13,115
    
    
    
    (1,734
    )
    
    
    32
    
    
    
    (20,966
    )
    
    
    (9,553
    )Income
before
income
taxes
    
    
    11,613
    
    
    
    18,852
    
    
    
    2,267
    
    
    
    (20,966
    )
    
    
    11,766State income tax
    
    
    
    
    
    
    (118
    )
    
    
    (35
    )
    
    
    
    
    
    
    (153
    )Net income
    
    $
    11,613
    
    
    $
    18,734
    
    
    $
    2,232
    
    
    $
    (20,966
    )
    
    $
    11,613
 Condensed Consolidating Statement of Income
 Guarantor
    
    
    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
    
    
    
    
    
    
    14,785
    
    
    
    1,730
    
    
    
    (593
    )
    
    
    15,922Depreciation and amortization
    
    
    
    
    
    
    6,074
    
    
    
    1,205
    
    
    
    
    
    
    
    7,279General and administrative
    
    
    1,505
    
    
    
    1,035
    
    
    
    16
    
    
    
    
    
    
    
    2,5561,505
    
    
    
    21,894
    
    
    
    2,951
    
    
    
    (593
    )
    
    
    25,757Operating income (loss)
    
    
    (1,505
    )
    
    
    24,856
    
    
    
    1,895
    
    
    
    
    
    
    
    25,246Equity 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
    )19,945
    
    
    
    1,321
    
    
    
    70
    
    
    
    (28,018
    )
    
    
    (6,682
    )Income
before
income
taxes
    
    
    18,440
    
    
    
    26,177
    
    
    
    1,965
    
    
    
    (28,018
    )
    
    
    18,564State income tax
    
    
    
    
    
    
    (93
    )
    
    
    (31
    )
    
    
    
    
    
    
    (124
    )Net income
    
    $
    18,440
    
    
    $
    26,084
    
    
    $
    1,934
    
    
    $
    (28,018
    )
    
    $
    18,440
 - 23 -




---



##### Table of Contents



Condensed Consolidating Statement of
Cash Flows
 Guarantor
    
    
    Non-Six months ended June 30, 2008
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Cash flows from operating activities
    
    $
    16,984
    
    
    $
    4,866
    
    
    $
    3,671
    
    
    $
    (2,100
    )
    
    $
    23,421Cash flows from investing activitiesAdditions to properties and equipment
    
    
    
    
    
    
    (19,567
    )
    
    
    (469
    )
    
    
    
    
    
    
    (20,036
    )Acquisition of
crude
pipelines and
tankage
assets
    
    
    
    
    
    
    (171,000
    )
    
    
    
    
    
    
    
    
    
    
    (171,000
    )Proceeds from sale of assets
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    (190,531
    )
    
    
    (469
    )
    
    
    
    
    
    
    (191,000
    )Cash flows from financing activitiesBorrowings under credit agreement
    
    
    9,000
    
    
    
    182,000
    
    
    
    
    
    
    
    
    
    
    
    191,000Proceeds from issuance of common units
    
    
    
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    104Distributions to partners
    
    
    (25,656
    )
    
    
    
    
    
    
    (3,000
    )
    
    
    3,000
    
    
    
    (25,656
    )Cash distribution to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (900
    )
    
    
    (900
    )Cash contribution from general
partner
    
    
    186
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186Purchase of units for restricted grants
    
    
    (514
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (514
    )Deferred financing costs
    
    
    
    
    
    
    (591
    )
    
    
    
    
    
    
    
    
    
    
    (591
    )(16,984
    )
    
    
    181,513
    
    
    
    (3,000
    )
    
    
    2,100
    
    
    
    163,629Cash and cash equivalentsIncrease (decrease) for the period
    
    
    
    
    
    
    (4,152
    )
    
    
    202
    
    
    
    
    
    
    
    (3,950
    )Beginning of period
    
    
    2
    
    
    
    8,060
    
    
    
    2,259
    
    
    
    
    
    
    
    10,321End of period
    
    $
    2
    
    
    $
    3,908
    
    
    $
    2,461
    
    
    $
    
    
    
    $
    6,371
 Condensed Consolidating Statement of
Cash Flows
 Guarantor
    
    
    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 distributions 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
 - 24 -




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##### Table of Contents



Note 11: Proposed Joint Ventures
   - 25 -




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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
    - 26 -




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- 27 -




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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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except per unit data)RevenuesPipelines:Affiliates  refined product pipelines
    
    $
    8,873
    
    
    $
    9,438
    
    
    $
    18,441
    
    
    $
    17,677Affiliates  intermediate pipelines
    
    
    2,456
    
    
    
    4,054
    
    
    
    6,049
    
    
    
    7,063Affiliates  crude pipelines
    
    
    6,553
    
    
    
    
    
    
    
    8,748
    
    
    
    17,882
    
    
    
    13,492
    
    
    
    33,238
    
    
    
    24,740Third parties- refined product pipelines
    
    
    5,681
    
    
    
    9,355
    
    
    
    13,516
    
    
    
    18,14523,563
    
    
    
    22,847
    
    
    
    46,754
    
    
    
    42,885Terminals and truck loading racks:Affiliates
    
    
    2,264
    
    
    
    2,861
    
    
    
    5,235
    
    
    
    5,403Third parties
    
    
    948
    
    
    
    1,423
    
    
    
    2,062
    
    
    
    2,7153,212
    
    
    
    4,284
    
    
    
    7,297
    
    
    
    8,118Total revenues
    
    
    26,775
    
    
    
    27,131
    
    
    
    54,051
    
    
    
    51,003Operating costs and expensesOperations
    
    
    9,985
    
    
    
    8,189
    
    
    
    19,712
    
    
    
    15,922Depreciation and amortization
    
    
    6,062
    
    
    
    3,208
    
    
    
    10,375
    
    
    
    7,279General and administrative
    
    
    1,359
    
    
    
    1,284
    
    
    
    2,645
    
    
    
    2,55617,406
    
    
    
    12,681
    
    
    
    32,732
    
    
    
    25,757Operating income
    
    
    9,369
    
    
    
    14,450
    
    
    
    21,319
    
    
    
    25,246Interest income
    
    
    28
    
    
    
    145
    
    
    
    121
    
    
    
    330Interest expense, including amortization
    
    
    (5,233
    )
    
    
    (3,371
    )
    
    
    (9,040
    )
    
    
    (6,729
    )Gain on sale of assets
    
    
    
    
    
    
    1
    
    
    
    36
    
    
    
    298Minority interest in Rio Grande
    
    
    (264
    )
    
    
    (154
    )
    
    
    (670
    )
    
    
    (581
    )Income before income taxes
    
    
    3,900
    
    
    
    11,071
    
    
    
    11,766
    
    
    
    18,564State income tax
    
    
    (85
    )
    
    
    (65
    )
    
    
    (153
    )
    
    
    (124
    )Net income
    
    
    3,815
    
    
    
    11,006
    
    
    
    11,613
    
    
    
    18,440Less general partner interest in net income,
including incentive distributions
(1)
    
    
    800
    
    
    
    726
    
    
    
    1,621
    
    
    
    1,306Limited partners interest in net income
    
    $
    3,015
    
    
    $
    10,280
    
    
    $
    9,992
    
    
    $
    17,134Net income per limited partner unit  basic
and diluted(1)
    
    $
    0.18
    
    
    $
    0.64
    
    
    $
    0.61
    
    
    $
    1.06Weighted average limited partners units
outstanding
    
    
    16,328
    
    
    
    16,108
    
    
    
    16,254
    
    
    
    16,108EBITDA(2)
    
    $
    15,167
    
    
    $
    17,505
    
    
    $
    31,060
    
    
    $
    32,242Distributable cash flow(3)
    
    $
    13,995
    
    
    $
    12,389
    
    
    $
    27,703
    
    
    $
    24,983Volumes (bpd)(4)Pipelines:Affiliates  refined product pipelines
    
    
    75,812
    
    
    
    82,571
    
    
    
    80,186
    
    
    
    77,494Affiliates  intermediate pipelines
    
    
    51,886
    
    
    
    68,437
    
    
    
    59,748
    
    
    
    63,980Affiliates  crude pipelines
    
    
    130,559
    
    
    
    
    
    
    
    88,979
    
    
    
    258,257
    
    
    
    151,008
    
    
    
    228,913
    
    
    
    141,474Third parties- refined product pipelines
    
    
    24,423
    
    
    
    64,487
    
    
    
    34,966
    
    
    
    64,835282,680
    
    
    
    215,495
    
    
    
    263,879
    
    
    
    206,309Terminals and truck loading racks:Affiliates
    
    
    93,328
    
    
    
    123,245
    
    
    
    110,381
    
    
    
    121,724Third parties
    
    
    31,178
    
    
    
    53,179
    
    
    
    34,210
    
    
    
    50,030124,506
    
    
    
    176,424
    
    
    
    144,591
    
    
    
    171,754Total for pipelines and terminal assets (bpd)
    
    
    407,186
    
    
    
    391,919
    
    
    
    408,470
    
    
    
    378,063
 - 28 -




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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 $0.7 million and $0.5 million were declared during the three months ended
June 30, 2008 and 2007, respectively, and $1.4 million and $1.0 million during the six
months ended June 30, 2008 and 2007, 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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Net income
    
    $
    3,815
    
    
    $
    11,006
    
    
    $
    11,613
    
    
    $
    18,440Add interest expense
    
    
    4,976
    
    
    
    3,067
    
    
    
    8,560
    
    
    
    6,122Add amortization of discount and
deferred debt issuance costs
    
    
    257
    
    
    
    304
    
    
    
    480
    
    
    
    607Subtract interest income
    
    
    (28
    )
    
    
    (145
    )
    
    
    (121
    )
    
    
    (330
    )Add state income tax
    
    
    85
    
    
    
    65
    
    
    
    153
    
    
    
    124Add depreciation and amortization
    
    
    6,062
    
    
    
    3,208
    
    
    
    10,375
    
    
    
    7,279EBITDA
    
    $
    15,167
    
    
    $
    17,505
    
    
    $
    31,060
    
    
    $
    32,242
 
 (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. - 29 -




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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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Net income
    
    $
    3,815
    
    
    $
    11,006
    
    
    $
    11,613
    
    
    $
    18,440Add depreciation and amortization
    
    
    6,062
    
    
    
    3,208
    
    
    
    10,375
    
    
    
    7,279Add amortization of discount and
deferred debt issuance costs
    
    
    257
    
    
    
    304
    
    
    
    480
    
    
    
    607Add (subtract) increase (decrease) in
deferred revenue
    
    
    4,930
    
    
    
    (1,896
    )
    
    
    6,781
    
    
    
    (990
    )Subtract maintenance capital
expenditures*
    
    
    (1,069
    )
    
    
    (233
    )
    
    
    (1,546
    )
    
    
    (353
    )Distributable cash flow
    
    $
    13,995
    
    
    $
    12,389
    
    
    $
    27,703
    
    
    $
    24,983
 
 *
    
    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. (4)
    
    The amounts reported for the six months ended June 30, 2008 include volumes transported
on the crude pipelines for the period from March 1, 2008 through June 30, 2008 only.
Volumes shipped during the months of March through June 2008 averaged 133.1 thousand
barrels per day (mbpd). For the six months ended June 30, 2008, crude pipeline volumes
are based on volumes for the months of March through June, averaged over the 182 days in
the first six months of 2008. Under the Holly CPTA, fees are based on volumes transported
on each pipeline component comprising the crude pipeline system (the crude oil gathering
pipelines and the crude oil trunk lines). Accordingly, volumes transported on the crude
pipelines represent the sum of volumes transported on both pipeline components. In cases
where volumes are transported over both components of the crude pipeline system, such
volumes are reflected twice in the total crude oil pipeline volumes.
 June 30,
    
    December 31,2008
    
    2007(In thousands)Balance Sheet DataCash and cash equivalents
    
    $
    6,371
    
    
    $
    10,321Working capital(5)
    
    $
    (18,467
    )
    
    $
    5,446Total assets
    
    $
    431,930
    
    
    $
    238,904Long-term debt
    
    $
    354,113
    
    
    $
    181,435Partners equity
    
    $
    25,474
    
    
    $
    27,816
 (5)
    
    Reflects $20.0 million of short-term borrowings that are classified as current
liabilities.
  - 30 -




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Results of Operations  Three Months Ended June 30, 2008 Compared with Three Months Ended June 30,
2007
 Summary
    Revenues
     - 31 -




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##### Table of Contents



Operating Costs
  Depreciation and Amortization
  General and Administrative
  Interest Expense
  Minority Interest in Earnings of Rio Grande
  State Income Tax
  - 32 -




---



##### Table of Contents



Results of Operations  Six Months Ended June 30, 2008 Compared with Six Months Ended June 30, 2007
 Summary
  Revenues
      Operating Costs
  - 33 -




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##### Table of Contents



Depreciation and Amortization
  General and Administrative
  Interest Expense
  Minority Interest in Earnings of Rio Grande
  State Income Tax
  LIQUIDITY AND CAPITAL RESOURCES
 Overview
    - 34 -




---



##### Table of Contents



Cash Flows  Operating Activities
   Cash Flows  Investing Activities
  Cash Flows  Financing Activities
  Capital Requirements
  - 35 -




---



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- 36 -




---



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Credit Agreement
        - 37 -




---



##### Table of Contents



Senior Notes Due 2015
   June 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Credit Agreement
    
    $
    191,000
    
    
    $
    Senior NotesPrincipal
    
    
    185,000
    
    
    
    185,000Unamortized discount
    
    
    (2,534
    )
    
    
    (2,724
    )Fair value hedge  interest rate swap
    
    
    647
    
    
    
    (841
    )183,113
    
    
    
    181,435Total Debt
    
    
    374,113
    
    
    
    181,435Less short-term borrowing under credit agreement
    
    
    20,000
    
    
    
    Total long-term debt
    
    $
    354,113
    
    
    $
    181,435
  Holly Crude Pipelines and Tankage Transaction
    Impact of Inflation
   - 38 -




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Environmental Matters
    CRITICAL ACCOUNTING POLICIES
   - 39 -




---



##### Table of Contents



Recent Accounting Pronouncements
 Statement of Financial Accounting Standards (SFAS) No. 157 Fair Value Measurements
  EITF No. 07-04 Application of the Two-Class Method under FASB Statement No. 128, Earnings per
Share, to Master Limited Partnerships
 FASB Staff Position (FSP) No. EITF 03-6-1 Determining Whether Instruments Granted in Share-Based
Transactions Are Participating Securities
 RISK MANAGEMENT
    - 40 -




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##### Table of Contents



Fair Value
    
    Location of OffsettingInterest Rate Swaps
    
    Balance Sheet Location
    
    (In thousands)
    
    BalanceCash flow hedge -
$171 million LIBOR
based debt
    
    Other assets
    
    $
    2,448
    
    
    Accumulated other
comprehensive incomeFair value hedge -
$60 million of
6.25% Senior Notes
    
    Other assets
    
    $
    647
    
    
    Long-term debt
      - 41 -




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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
  - 42 -




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##### Table of Contents



Item 1.
Legal proceedings
  
 Item 6.
Exhibits
 3.1
    
    Amendment No. 3 to First Amended and Restated Agreement of Limited Partnership of Holly
Energy Partners, L.P., dated April 11, 2008 (incorporated by reference to Exhibit 4.1 of
Registrants Current Report on Form 8-K filed April 15, 2008, File No. 1-32225).12.1*
    
    Computation of Ratio of Earnings to Fixed Charges.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.
 
 *
    
    Filed herewith+
    
    Constitutes management contracts or compensatory plans or arrangements. 
 - 43 -




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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 1, 2008
    
    
    
    /s/ Bruce R. ShawBruce R. Shaw
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)/s/ Scott C. SurplusScott C. SurplusVice President and Controller(Principal Accounting Officer)
 - 44 -