##### 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 March 31, 2006
 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.)
 
 
   
   
   þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
  o þ




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
    
    
    3FORWARD-LOOKING STATEMENTS
    
    
    3Item 1. Financial Statements (Unaudited, except December 31, 2005 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
    
    
    35Item 4. Controls and Procedures
    
    
    35PART II. OTHER INFORMATION
    
    
    36Item 1. Legal proceedings
    
    
    36Item 6. Exhibits
    
    
    36SIGNATURES
    
    
    37Pipeline Lease AgreementAmendment to Pipeline Lease AgreementComputation 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
 -2-




---



##### 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 any future acquired operations;
    
    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.
  -3-




---



##### Table of Contents



Item 1. Financial Statements
 Holly Energy Partners, L.P.
 
 Consolidated Balance Sheets
 March 31, 2006
    
    
    December 31,(Unaudited)
    
    
    2005(In thousands, except unit data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,267
    
    
    $
    20,583Accounts receivable:Trade
    
    
    3,360
    
    
    
    3,076Affiliates
    
    
    3,559
    
    
    
    3,6456,919
    
    
    
    6,721Prepaid and other current assets
    
    
    1,498
    
    
    
    1,401Total current assets
    
    
    25,684
    
    
    
    28,705Properties and equipment, net
    
    
    160,417
    
    
    
    162,298Transportation agreements, net
    
    
    59,882
    
    
    
    60,903Other assets
    
    
    2,740
    
    
    
    2,869Total assets
    
    $
    248,723
    
    
    $
    254,775LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,539
    
    
    $
    3,020Accrued interest
    
    
    960
    
    
    
    2,892Deferred revenue
    
    
    1,497
    
    
    
    1,013Other current liabilities
    
    
    1,744
    
    
    
    2,326Total current liabilities
    
    
    6,740
    
    
    
    9,251Commitments and contingencies
    
    
    
    
    
    
    Long-term debt
    
    
    179,401
    
    
    
    180,737Other long-term liabilities
    
    
    2,307
    
    
    
    974Minority interest
    
    
    11,398
    
    
    
    11,753Partners equity (deficit):Common unitholders (8,170,000 units issued and outstanding)
    
    
    183,140
    
    
    
    184,650Subordinated unitholder (7,000,000 units issued and outstanding)
    
    
    (64,651
    )
    
    
    (63,235
    )Class B subordinated unitholder (937,500 units issued and
outstanding)
    
    
    24,198
    
    
    
    24,388General partner (2% interest)
    
    
    (93,810
    )
    
    
    (93,743
    )Total partners equity
    
    
    48,877
    
    
    
    52,060Total liabilities and partners equity
    
    $
    248,723
    
    
    $
    254,775
  -4-




---



##### Table of Contents



Holly Energy Partners, L.P.
 
 Consolidated Statements of Income
(Unaudited)
 Three Months Ended March 31,2006
    
    
    2005(In thousands, except per unit data)Revenues:Affiliates
    
    $
    12,482
    
    
    $
    9,430Third parties
    
    
    9,956
    
    
    
    7,08322,438
    
    
    
    16,513Operating costs and expenses:Operations
    
    
    7,109
    
    
    
    5,388Depreciation and amortization
    
    
    3,793
    
    
    
    2,363General and administrative
    
    
    1,224
    
    
    
    97712,126
    
    
    
    8,728Operating income
    
    
    10,312
    
    
    
    7,785Other income (expense):Interest income
    
    
    243
    
    
    
    88Interest expense
    
    
    (3,175
    )
    
    
    (1,118
    )(2,932
    )
    
    
    (1,030
    )Income before minority interest
    
    
    7,380
    
    
    
    6,755Minority interest in Rio Grande Pipeline Company
    
    
    (245
    )
    
    
    (429
    )Net income
    
    
    7,135
    
    
    
    6,326Less general partner interest in net income
    
    
    327
    
    
    
    126Limited partners interest in net income
    
    $
    6,808
    
    
    $
    6,200Net income per limited partner unit -
Basic and diluted
    
    $
    0.42
    
    
    $
    0.43Weighted average limited partners units
outstanding
    
    
    16,108
    
    
    
    14,333
  -5-




---



##### Table of Contents



Holly Energy Partners, L.P.
 
 Consolidated Statements of Cash Flows
(Unaudited)
 Three Months Ended March 31,2006
    
    
    2005(In thousands)Cash flows from operating activitiesNet income
    
    $
    7,135
    
    
    $
    6,326Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    3,793
    
    
    
    2,363Minority interest in Rio Grande Pipeline Company
    
    
    245
    
    
    
    429Amortization of restricted and performance units
    
    
    143
    
    
    
    14(Increase) decrease in current assets:Accounts receivable  trade
    
    
    (283
    )
    
    
    (1,599
    )Accounts receivable  affiliates
    
    
    86
    
    
    
    (538
    )Prepaid and other current assets
    
    
    (172
    )
    
    
    (567
    )Increase (decrease) in current liabilities:Accounts payable
    
    
    (481
    )
    
    
    (76
    )Accrued interest
    
    
    (1,932
    )
    
    
    706Other current liabilities
    
    
    (98
    )
    
    
    (379
    )Other, net
    
    
    126
    
    
    
    83Net cash provided by operating activities
    
    
    8,562
    
    
    
    6,762Cash flows from investing activitiesAcquisition of pipeline and terminal assets
    
    
    
    
    
    
    (121,280
    )Additions to properties and equipment
    
    
    (817
    )
    
    
    (446
    )Net cash used for investing activities
    
    
    (817
    )
    
    
    (121,726
    )Cash flows from financing activitiesProceeds from issuance of senior notes, net of discount
    
    
    
    
    
    
    147,375Net decrease in borrowings under revolving credit agreement
    
    
    
    
    
    
    (25,000
    )Distributions to partners
    
    
    (10,461
    )
    
    
    (7,143
    )Cash contribution from general partner
    
    
    
    
    
    
    612Deferred debt issuance costs
    
    
    
    
    
    
    (509
    )Cash distributions to minority interest
    
    
    (600
    )
    
    
    (1,050
    )Other
    
    
    
    
    
    
    (9
    )Net cash provided by (used for) financing activities
    
    
    (11,061
    )
    
    
    114,276Cash and cash equivalentsDecrease for period
    
    
    (3,316
    )
    
    
    (688
    )Beginning of period
    
    
    20,583
    
    
    
    19,104End of period
    
    $
    17,267
    
    
    $
    18,416
  -6-




---



##### Table of Contents



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, 2005
    
    $
    184,650
    
    
    $
    (63,235
    )
    
    $
    24,388
    
    
    $
    (93,743
    )
    
    $
    52,060Distributions
    
    
    (5,106
    )
    
    
    (4,375
    )
    
    
    (586
    )
    
    
    (394
    )
    
    
    (10,461
    )Amortization of
restricted and
performance units
    
    
    143
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    143Net income
    
    
    3,453
    
    
    
    2,959
    
    
    
    396
    
    
    
    327
    
    
    
    7,135Balance March 31, 2006
    
    $
    183,140
    
    
    $
    (64,651
    )
    
    $
    24,198
    
    
    $
    (93,810
    )
    
    $
    48,877
  -7-




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note 1: Description of Business and Presentation of Financial Statements
        Recent Accounting Pronouncement
  -8-




---



##### Table of Contents



Note 2: Acquisitions
 Alon Transaction
    -9-




---



##### Table of Contents



Holly Intermediate Pipelines Transaction
     Note 3: Properties and Equipment
 March 31,
    
    
    December 31,2006
    
    
    2005(In thousands)Pipelines and terminals
    
    $
    184,664
    
    
    $
    184,464Land and right of way
    
    
    22,163
    
    
    
    22,163Other
    
    
    5,764
    
    
    
    5,728Construction in progress
    
    
    3,517
    
    
    
    2,792216,108
    
    
    
    215,147Less accumulated depreciation
    
    
    55,691
    
    
    
    52,849$
    160,417
    
    
    $
    162,298
 -10-




---



##### Table of Contents



Note 4: 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 expiring in 2007. This
asset is being amortized over the 10-year term of the
agreement.
    
    A portion of the total purchase price of the Alon assets
was allocated to the transportation agreement asset based on
the fair value appraisal provided by an independent firm.
This asset is being amortized over 30 years ending 2035, the
15-year initial term of the Alon PTA plus the expected 15-year
extension period.
  March 31,
    
    
    December 31,2006
    
    
    2005(In thousands)Rio Grande transportation agreement
    
    $
    20,836
    
    
    $
    20,836Alon transportation agreement
    
    
    59,933
    
    
    
    59,93380,769
    
    
    
    80,769Less accumulated amortization
    
    
    20,887
    
    
    
    19,866$
    59,882
    
    
    $
    60,903
 Note 5: Debt
 Credit Agreement
     -11-




---



##### Table of Contents



Senior Notes Due 2015
      -12-




---



##### Table of Contents



Interest Rate Risk Management
    Other Debt Information
 Three Months EndedMarch 31,2006
    
    
    2005(In thousands)Interest on outstanding debt:Senior Notes, net of interest rate swap
    
    $
    2,810
    
    
    $
    757Credit Agreement
    
    
    
    
    
    
    164Amortization of discount and deferred issuance costs
    
    
    242
    
    
    
    120Commitment fees
    
    
    123
    
    
    
    77Net interest expense
    
    $
    3,175
    
    
    $
    1,118Cash paid for interest
    
    $
    6,740
    
    
    $
    215
  Note 6: Earnings per Unit
  Note 7: Employees, Retirement and Benefit Plans
  -13-




---



##### Table of Contents



Restricted Units
   Weighted-Weighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicGrant-Date
    
    
    Contractual
    
    
    ValueRestricted Units
    
    Grants
    
    
    Fair Value
    
    
    Term
    
    
    ($000)Outstanding January 1, 2006 (not vested)
    
    
    20,926
    
    
    
    40.98Granted
    
    
    12,661
    
    
    
    39.45Forfeited
    
    
    
    
    
    
    Vesting and transfer of full ownership to recipients
    
    
    
    
    
    
    Outstanding at March 31, 2006 (not vested)
    
    
    33,587
    
    
    $
    40.40
    
    
    2.1 years
    
    $
    1,434
  Performance Units
  -14-




---



##### Table of Contents



Data Elements Used in AnalysisClosing price of HEP common units February 10, 2006
    
    $
    39.55Latest quarterly distribution per limited unit
    
    $
    0.64Risk-free rate
    
    
    4.86
    %
  StandardExpected Return on
    
    DeviationCompany
    
    Equity
    
    (Monthly)HEP
    
    14.0%
    
    7.6%Peer group
    
    9.8% to 11.0%
    
    3.8% to 4.9%
  Payable
    
    PayablePerformance Units
    
    In Cash
    
    In UnitsOutstanding at January 1, 2006 (not vested)
    
    
    1,515
    
    
    
    Conversion to unit payment
    
    
    (1,515
    )
    
    
    1,515Vesting and payment of cash benefit to recipients
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    12,501Forfeited
    
    
    
    
    
    
    Outstanding at March 31, 2006 (not vested)
    
    
    
    
    
    
    14,016
  -15-




---



##### Table of Contents



Note 8: Significant Customers
  Three Months EndedMarch 31,2006
    
    2005Holly
    
    
    56
    %
    
    
    57
    %BP plc
    
    
    11
    %
    
    
    18
    %Alon
    
    
    31
    %
    
    
    21
    %
 Note 9: Related Party Transactions
 Holly
  
    
    Pipeline and terminal revenues received from Holly were $12.5 million and $9.4 million for the three months
ended March 31, 2006 and 2005, 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 in the three
months ended March 31, 2006 and 2005.
    
    We reimbursed Holly for costs of employees supporting our operations of $1.9 million and $1.4 million for the
three months ended March 31, 2006 and 2005, respectively.
    
    Holly reimbursed $56,000 and $48,000 to us for certain costs paid on their behalf in the three months ended
March 31, 2006 and 2005, respectively.
    
    In the three months ended March 31, 2006 and 2005, we distributed $4.8 million and $3.6 million, respectively,
to Holly as regular distributions on its subordinated units, common units and general partner interest.
    
    Our net accounts receivable from Holly were $3.6 million at March 31, 2006 and December 31, 2005.
    
    Deferred revenue includes $1.5 million and $1.0 million of shortfall commitments under the Holly IPA at
March 31, 2006 and December 31, 2005, respectively.
 BP plc
  
    
    BP is the sole customer of Rio Grande, and we recorded
revenues from them of $2.4 million and $3.0 million in the
three months ended March 31, 2006 and 2005, respectively.
    
    Rio Grande paid distributions to BP of $0.6 million and
$1.1 million in the three months ended March 31, 2006 and
2005, respectively.
    
    Included in our accounts receivable  trade at March 31,
2006 and December 31, 2005 were $0.4 million and $0.5 million,
respectively, which represented the receivable balance of Rio
Grande from BP.
 -16-




---



##### Table of Contents



Alon
  
    
    We recognized $6.9 million and $2.3 million of revenues
for pipeline transportation terminalling services under the
Alon PTA and under a pipeline capacity lease in the three
months ended March 31, 2006 and the period from February 28 to
March 31, 2005, respectively.
    
    We paid $0.6 million to Alon for distributions on our
Class B subordinated units in the three months ended March 31,
2006.
    
    Our net accounts receivable from Alon were $3.0 million
at March 31, 2006 and $2.4 million at December 31, 2005.
 Note 10: Partners Equity and Cash Distributions
 Issuances of units
     -17-




---



##### Table of Contents



Allocations of Net Income
  Cash Distributions
     -18-




---



##### 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 March 31,2006
    
    
    2005(In thousands, except per unit data)General partner interest
    
    $
    205
    
    
    $
    143General partner incentive distribution
    
    
    189
    
    
    
    Total general partner distribution
    
    
    394
    
    
    
    143Limited partner distribution
    
    
    10,067
    
    
    
    7,000Total regular quarterly cash distribution
    
    $
    10,461
    
    
    $
    7,143Cash distribution per unit applicable to limited partners
    
    $
    0.625
    
    
    $
    0.50
  Note 11: Supplemental Guarantor/Non-Guarantor Financial Information
   -19-




---



##### Table of Contents



Condensed Consolidating Balance Sheet
 Guarantor
    
    
    Non-March 31, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    15,029
    
    
    $
    2,236
    
    
    $
    
    
    
    $
    17,267Accounts receivable
    
    
    
    
    
    
    6,489
    
    
    
    430
    
    
    
    
    
    
    
    6,919Intercompany accounts receivable (payable)
    
    
    (37,014
    )
    
    
    37,198
    
    
    
    (184
    )
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    148
    
    
    
    1,350
    
    
    
    
    
    
    
    
    
    
    
    1,498Total current assets
    
    
    (36,864
    )
    
    
    60,066
    
    
    
    2,482
    
    
    
    
    
    
    
    25,684Properties and equipment, net
    
    
    
    
    
    
    126,485
    
    
    
    33,932
    
    
    
    
    
    
    
    160,417Investment in subsidiaries
    
    
    267,206
    
    
    
    26,595
    
    
    
    
    
    
    
    (293,801
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    57,769
    
    
    
    2,113
    
    
    
    
    
    
    
    59,882Other assets
    
    
    1,557
    
    
    
    1,183
    
    
    
    
    
    
    
    
    
    
    
    2,740Total assets
    
    $
    231,899
    
    
    $
    272,098
    
    
    $
    38,527
    
    
    $
    (293,801
    )
    
    $
    248,723LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    2,253
    
    
    $
    286
    
    
    $
    
    
    
    $
    2,539Accrued interest
    
    
    960
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960Deferred revenue
    
    
    
    
    
    
    1,497
    
    
    
    
    
    
    
    
    
    
    
    1,497Other current liabilities
    
    
    451
    
    
    
    1,045
    
    
    
    248
    
    
    
    
    
    
    
    1,744Total current liabilities
    
    
    1,411
    
    
    
    4,795
    
    
    
    534
    
    
    
    
    
    
    
    6,740Long-term debt
    
    
    179,401
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179,401Other long-term liabilities
    
    
    2,210
    
    
    
    97
    
    
    
    
    
    
    
    
    
    
    
    2,307Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,398
    
    
    
    11,398Partners equity
    
    
    48,877
    
    
    
    267,206
    
    
    
    37,993
    
    
    
    (305,199
    )
    
    
    48,877Total liabilities and partners equity
    
    $
    231,899
    
    
    $
    272,098
    
    
    $
    38,527
    
    
    $
    (293,801
    )
    
    $
    248,723
 
 Condensed Consolidating Balance Sheet
 Guarantor
    
    
    Non-December 31, 2005
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    17,770
    
    
    $
    2,811
    
    
    $
    
    
    
    $
    20,583Accounts receivable
    
    
    
    
    
    
    6,206
    
    
    
    515
    
    
    
    
    
    
    
    6,721Intercompany accounts receivable (payable)
    
    
    (21,182
    )
    
    
    21,458
    
    
    
    (276
    )
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    232
    
    
    
    1,169
    
    
    
    
    
    
    
    
    
    
    
    1,401Total current assets
    
    
    (20,948
    )
    
    
    46,603
    
    
    
    3,050
    
    
    
    
    
    
    
    28,705Properties and equipment, net
    
    
    
    
    
    
    128,077
    
    
    
    34,221
    
    
    
    
    
    
    
    162,298Investment in subsidiaries
    
    
    256,416
    
    
    
    27,423
    
    
    
    
    
    
    
    (283,839
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    58,269
    
    
    
    2,634
    
    
    
    
    
    
    
    60,903Other assets
    
    
    1,594
    
    
    
    1,275
    
    
    
    
    
    
    
    
    
    
    
    2,869Total assets
    
    $
    237,062
    
    
    $
    261,647
    
    
    $
    39,905
    
    
    $
    (283,839
    )
    
    $
    254,775LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    2,666
    
    
    $
    354
    
    
    $
    
    
    
    $
    3,020Accrued interest
    
    
    2,892
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,892Deferred revenue
    
    
    
    
    
    
    1,013
    
    
    
    
    
    
    
    
    
    
    
    1,013Other current liabilities
    
    
    594
    
    
    
    1,357
    
    
    
    375
    
    
    
    
    
    
    
    2,326Total current liabilities
    
    
    3,486
    
    
    
    5,036
    
    
    
    729
    
    
    
    
    
    
    
    9,251Long-term debt
    
    
    180,737
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180,737Other long-term liabilities
    
    
    779
    
    
    
    195
    
    
    
    
    
    
    
    
    
    
    
    974Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,753
    
    
    
    11,753Partners equity
    
    
    52,060
    
    
    
    256,416
    
    
    
    39,176
    
    
    
    (295,592
    )
    
    
    52,060Total liabilities and partners equity
    
    $
    237,062
    
    
    $
    261,647
    
    
    $
    39,905
    
    
    $
    (283,839
    )
    
    $
    254,775
 -20-




---



##### Table of Contents



Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Three months ended March 31, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    12,482
    
    
    $
    
    
    
    $
    
    
    
    $
    12,482Third parties
    
    
    
    
    
    
    7,881
    
    
    
    2,369
    
    
    
    (294
    )
    
    
    9,956
    
    
    
    20,363
    
    
    
    2,369
    
    
    
    (294
    )
    
    
    22,438Operating costs and expenses:Operations
    
    
    
    
    
    
    6,670
    
    
    
    733
    
    
    
    (294
    )
    
    
    7,109Depreciation and amortization
    
    
    
    
    
    
    2,949
    
    
    
    844
    
    
    
    
    
    
    
    3,793General and administrative
    
    
    712
    
    
    
    511
    
    
    
    1
    
    
    
    
    
    
    
    1,224712
    
    
    
    10,130
    
    
    
    1,578
    
    
    
    (294
    )
    
    
    12,126Operating income (loss)
    
    
    (712
    )
    
    
    10,233
    
    
    
    791
    
    
    
    
    
    
    
    10,312Equity in earnings of subsidiaries
    
    
    10,789
    
    
    
    572
    
    
    
    
    
    
    
    (11,361
    )
    
    
    Interest income (expense)
    
    
    (2,942
    )
    
    
    (16
    )
    
    
    26
    
    
    
    
    
    
    
    (2,932
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (245
    )
    
    
    (245
    )Net income
    
    $
    7,135
    
    
    $
    10,789
    
    
    $
    817
    
    
    $
    (11,606
    )
    
    $
    7,135
 
 Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Three months ended March 31, 2005
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    9,430
    
    
    $
    
    
    
    $
    
    
    
    $
    9,430Third parties
    
    
    
    
    
    
    4,101
    
    
    
    2,982
    
    
    
    
    
    
    
    7,083
    
    
    
    13,531
    
    
    
    2,982
    
    
    
    
    
    
    
    16,513Operating costs and expenses:Operations
    
    
    
    
    
    
    4,696
    
    
    
    692
    
    
    
    
    
    
    
    5,388Depreciation and amortization
    
    
    
    
    
    
    1,516
    
    
    
    847
    
    
    
    
    
    
    
    2,363General and administrative
    
    
    455
    
    
    
    509
    
    
    
    13
    
    
    
    
    
    
    
    977455
    
    
    
    6,721
    
    
    
    1,552
    
    
    
    
    
    
    
    8,728Operating income (loss)
    
    
    (455
    )
    
    
    6,810
    
    
    
    1,430
    
    
    
    
    
    
    
    7,785Equity in earnings of subsidiaries
    
    
    7,568
    
    
    
    1,001
    
    
    
    
    
    
    
    (8,569
    )
    
    
    Interest income (expense)
    
    
    (787
    )
    
    
    (243
    )
    
    
    
    
    
    
    
    
    
    
    (1,030
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (429
    )
    
    
    (429
    )Net income
    
    $
    6,326
    
    
    $
    7,568
    
    
    $
    1,430
    
    
    $
    (8,998
    )
    
    $
    6,326
 -21-




---



##### Table of Contents



Condensed Consolidating Statement of           Cash FlowsGuarantor
    
    
    Non-Three months ended March 31, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash flows from operating activities
    
    $
    10,461
    
    
    $
    (1,959
    )
    
    $
    1,460
    
    
    $
    (1,400
    )
    
    $
    8,562Cash flows from investing activities  additions to
properties and equipment
    
    
    
    
    
    
    (782
    )
    
    
    (35
    )
    
    
    
    
    
    
    (817
    )Cash flows from financing activitiesContributions from (distributions to) partners
    
    
    (10,461
    )
    
    
    
    
    
    
    (2,000
    )
    
    
    2,000
    
    
    
    (10,461
    )Cash distribution to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (600
    )
    
    
    (600
    )(10,461
    )
    
    
    
    
    
    
    (2,000
    )
    
    
    1,400
    
    
    
    (11,061
    )Cash and cash equivalentsIncrease (decrease) for the year
    
    
    
    
    
    
    (2,741
    )
    
    
    (575
    )
    
    
    
    
    
    
    (3,316
    )Beginning of year
    
    
    2
    
    
    
    17,770
    
    
    
    2,811
    
    
    
    
    
    
    
    20,583End of year
    
    $
    2
    
    
    $
    15,029
    
    
    $
    2,236
    
    
    $
    
    
    
    $
    17,267
 
 Condensed Consolidating Statement of           Cash FlowsGuarantor
    
    
    Non-Three months ended March 31, 2005
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash flows from operating activities
    
    $
    (20,446
    )
    
    $
    27,179
    
    
    $
    2,479
    
    
    $
    (2,450
    )
    
    $
    6,762Cash flows from investing activitiesAcquisitions of pipeline and terminal assets
    
    
    (120,000
    )
    
    
    (1,280
    )
    
    
    
    
    
    
    
    
    
    
    (121,280
    )Additions to properties and equipment
    
    
    
    
    
    
    (446
    )
    
    
    
    
    
    
    
    
    
    
    (446
    )Investments in subsidiaries, net
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (120,001
    )
    
    
    (1,726
    )
    
    
    
    
    
    
    1
    
    
    
    (121,726
    )Cash flows from financing activitiesProceeds from issuance of Senior Notes, net
of discounts
    
    
    147,375
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    147,375Contributions from (distributions to) partners
    
    
    (6,531
    )
    
    
    1
    
    
    
    (3,500
    )
    
    
    3,499
    
    
    
    (6,531
    )Borrowings (paydowns) of debt, net
    
    
    
    
    
    
    (25,000
    )
    
    
    
    
    
    
    
    
    
    
    (25,000
    )Cash distribution to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,050
    )
    
    
    (1,050
    )Other financing activities, net
    
    
    (397
    )
    
    
    (121
    )
    
    
    
    
    
    
    
    
    
    
    (518
    )140,447
    
    
    
    (25,120
    )
    
    
    (3,500
    )
    
    
    2,449
    
    
    
    114,276Cash and cash equivalentsIncrease (decrease) for the year
    
    
    
    
    
    
    333
    
    
    
    (1,021
    )
    
    
    
    
    
    
    (688
    )Beginning of year
    
    
    2
    
    
    
    15,143
    
    
    
    3,959
    
    
    
    
    
    
    
    19,104End of year
    
    $
    2
    
    
    $
    15,476
    
    
    $
    2,938
    
    
    $
    
    
    
    $
    18,416
 Note 12: Subsequent Events
  -22-




---



##### 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-




---



##### Table of Contents



RESULTS OF OPERATIONS (Unaudited)
 Income, Distributable Cash Flow and Volumes
  Three Months EndedMarch 31,2006
    
    
    2005(In thousands, except per unit data)RevenuesPipelines:Affiliates  refined product pipelines
    
    $
    7,323
    
    
    $
    7,068Affiliates  intermediate pipelines
    
    
    2,473
    
    
    
    Third parties
    
    
    8,777
    
    
    
    6,27218,573
    
    
    
    13,340Terminals & truck loading racks:Affiliates
    
    
    2,686
    
    
    
    2,362Third parties
    
    
    1,179
    
    
    
    8113,865
    
    
    
    3,173Total revenues
    
    
    22,438
    
    
    
    16,513Operating costs and expensesOperations
    
    
    7,109
    
    
    
    5,388Depreciation and amortization
    
    
    3,793
    
    
    
    2,363General and administrative
    
    
    1,224
    
    
    
    97712,126
    
    
    
    8,728Operating income
    
    
    10,312
    
    
    
    7,785Interest income
    
    
    243
    
    
    
    88Interest expense, including amortization
    
    
    (3,175
    )
    
    
    (1,118
    )Minority interest in Rio Grande
    
    
    (245
    )
    
    
    (429
    )Net income
    
    
    7,135
    
    
    
    6,326Less general partner interest in net income, including incentive distributions (1)
    
    
    327
    
    
    
    126Limited partners interest in net income
    
    $
    6,808
    
    
    $
    6,200Net income per limited partner unit  basic and diluted(1)
    
    $
    0.42
    
    
    $
    0.43Weighted average limited partners units outstanding
    
    
    16,108
    
    
    
    14,333EBITDA(2)
    
    $
    13,860
    
    
    $
    9,719Distributable cash flow(3)
    
    $
    11,214
    
    
    $
    8,635
 -24-




---



##### Table of Contents



Three Months EndedMarch 31,2006
    
    2005Volumes (bpd)(4)Pipelines:Affiliates  refined product pipelines
    
    
    66,570
    
    
    
    68,018Affiliates  intermediate pipelines
    
    
    61,052
    
    
    
    Third parties
    
    
    77,338
    
    
    
    37,640204,960
    
    
    
    105,658Terminals & truck loading racks:Affiliates
    
    
    119,168
    
    
    
    116,661Third parties
    
    
    47,056
    
    
    
    27,800166,224
    
    
    
    144,461Total for pipelines and terminal assets (bpd)
    
    
    371,184
    
    
    
    250,119
 
 (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 $0.2 million were declared during the quarter ended March 31, 2006. No
incentive distributions were declared during the quarter ended March 31, 2005. 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 EndedMarch 31,2006
    
    
    2005(In thousands)Net income
    
    $
    7,135
    
    
    $
    6,326Add interest expense
    
    
    2,933
    
    
    
    1,005Add amortization of discount and deferred debt issuance costs
    
    
    242
    
    
    
    113Subtract interest income
    
    
    (243
    )
    
    
    (88
    )Add depreciation and amortization
    
    
    3,793
    
    
    
    2,363EBITDA
    
    $
    13,860
    
    
    $
    9,719
 (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 -25-




---



##### Table of Contents



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.Set forth below is our calculation of distributable cash flow. Three Months EndedMarch 31,2006
    
    
    2005(In thousands)Net income
    
    $
    7,135
    
    
    $
    6,326Add depreciation and amortization
    
    
    3,793
    
    
    
    2,363Add amortization of discount and deferred debt issuance costs
    
    
    242
    
    
    
    113Add increase in deferred revenue
    
    
    484
    
    
    
    Subtract maintenance capital expenditures*
    
    
    (440
    )
    
    
    (167
    )Distributable cash flow
    
    $
    11,214
    
    
    $
    8,635
 *
    
    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 represent volumes from the initial assets contributed to HEP at
inception in July 2004 and additional volumes from the assets acquired from Alon starting
in March 2005 and the intermediate pipelines acquired from Holly starting in July 2005.
The amounts reported in the 2005 periods include volumes on the acquired assets from their
respective acquisition dates averaged over the full reported periods. Balance Sheet Data
 March 31,
    
    December 31,2006
    
    2005(Dollars in thousands)Cash and cash equivalents
    
    $
    17,267
    
    
    $
    20,583Working capital
    
    $
    18,944
    
    
    $
    19,454Total assets
    
    $
    248,723
    
    
    $
    254,775Long-term debt
    
    $
    179,401
    
    
    $
    180,737Partners equity
    
    $
    48,877
    
    
    $
    52,060
 Results of Operations  Three Months Ended March 31, 2006 Compared with Three Months Ended March 31, 2005
 Summary
  Revenues
  -26-




---



##### Table of Contents



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




---



##### Table of Contents



Minority Interest in Earnings of Rio Grande
  LIQUIDITY AND CAPITAL RESOURCES
 Overview
      Cash Flows  Operating Activities
  -28-




---



##### Table of Contents



Cash Flows  Investing Activities
  Cash Flows  Financing Activities
  Capital Requirements
    -29-




---



##### Table of Contents



Credit Agreement
         -30-




---



##### Table of Contents



Senior Notes Due 2015
    Alon Transaction
   Holly Intermediate Pipelines Transaction
  -31-




---



##### Table of Contents



Impact of Inflation
   Environmental Matters
     -32-




---



##### Table of Contents



CRITICAL ACCOUNTING POLICIES
   Recent Accounting Pronouncement
  -33-




---



##### Table of Contents



RISK MANAGEMENT
        -34-




---



##### 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
  -35-




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal proceedings
  
 Item 6. Exhibits
 10.1*
    
    Pipeline Lease Agreement, dated March 11, 1996, between Mid-America Pipeline
Company and Navajo Pipeline Company10.2*
    
    Amendment to Pipeline Lease Agreement, dated October 11, 2005, between
Mid-America Pipeline Company, LLC and Navajo Pipeline Co., L.P.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. -36-




---



##### 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: April 28, 2006
    
    /s/ P. Dean Ridenour

P. 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)
 -37-