##### 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, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
 For the transition period from  to .
 Commission File Number: 1-32225
 HOLLY ENERGY PARTNERS, L.P.
  Delaware
    
    20-0833098(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 
 (Address of principal executive offices)
  (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
 Yes o No þ




---



##### 



PART I. FINANCIAL INFORMATION
    
    
    3FORWARD-LOOKING STATEMENTS
    
    
    3Item 1. Financial Statements (Unaudited, except December 31, 2009 Balance Sheet)
    
    
    4Consolidated Balance Sheets
    
    
    4Consolidated Statements of Income
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Consolidated Statement of Partners Equity
    
    
    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
    
    
    44Item 4. Controls and Procedures
    
    
    44PART II. OTHER INFORMATION
    
    
    45Item 1. Legal Proceedings
    
    
    45Item 6. Exhibits
    
    
    45SIGNATURES
    
    
    46Exhibit 4.1Exhibit 4.2Exhibit 4.3Exhibit 4.4Exhibit 10.1Exhibit 10.2Exhibit 12.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   - 2 -




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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 in markets we serve;
 
    
    our ability to successfully purchase and integrate additional operations in the future;
 
    
    our ability to complete previously announced or contemplated acquisitions;
 
    
    the availability and cost of additional debt and equity financing;
 
    
    the possibility of reductions in production or shutdowns at refineries utilizing our
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 -




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##### Table of Contents



Item 1. Financial Statements
 Holly Energy Partners, L.P.
 
 Consolidated Balance Sheets
 June 30, 2010
    
    
    December 31,(Unaudited)
    
    
    2009(In thousands, except unit data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,806
    
    
    $
    2,508Accounts receivable:Trade
    
    
    6,389
    
    
    
    4,693Affiliates
    
    
    16,699
    
    
    
    14,07423,088
    
    
    
    18,767Prepaid and other current assets
    
    
    939
    
    
    
    739Current assets of discontinued operations
    
    
    
    
    
    
    2,195Total current assets
    
    
    26,833
    
    
    
    24,209Properties and equipment, net
    
    
    430,250
    
    
    
    398,044Transportation agreements, net
    
    
    111,963
    
    
    
    115,436Goodwill
    
    
    49,109
    
    
    
    49,109Investment in SLC Pipeline
    
    
    25,819
    
    
    
    25,919Other assets
    
    
    1,842
    
    
    
    4,128Total assets
    
    $
    645,816
    
    
    $
    616,845LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable:Trade
    
    $
    3,488
    
    
    $
    3,860Affiliates
    
    
    2,852
    
    
    
    2,3516,340
    
    
    
    6,211Accrued interest
    
    
    7,688
    
    
    
    2,863Deferred revenue
    
    
    10,923
    
    
    
    8,402Accrued property taxes
    
    
    990
    
    
    
    1,072Other current liabilities
    
    
    601
    
    
    
    1,257Total current liabilities
    
    
    26,542
    
    
    
    19,805Long-term debt
    
    
    487,479
    
    
    
    390,827Other long-term liabilities
    
    
    11,984
    
    
    
    12,349Partners equity:Common unitholders (22,078,509 units and
21,141,009 units issued and outstanding at
June 30, 2010 and December 31, 2009,
respectively)
    
    
    274,564
    
    
    
    275,553Class B subordinated unitholders (937,500
units issued and outstanding at
December 31, 2009)
    
    
    
    
    
    
    21,426General partner interest (2% interest)
    
    
    (143,631
    )
    
    
    (93,974
    )Accumulated other comprehensive loss
    
    
    (11,122
    )
    
    
    (9,141
    )Total partners equity
    
    
    119,811
    
    
    
    193,864Total liabilities and partners equity
    
    $
    645,816
    
    
    $
    616,845
   - 4 -




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Holly Energy Partners, L.P.
 
 Consolidated Statements of Income
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands, except per unit data)Revenues:Affiliates
    
    $
    37,079
    
    
    $
    25,064
    
    
    $
    70,676
    
    
    $
    43,387Third parties
    
    
    8,404
    
    
    
    12,935
    
    
    
    15,503
    
    
    
    23,94445,483
    
    
    
    37,999
    
    
    
    86,179
    
    
    
    67,331Operating costs and expenses:Operations
    
    
    13,495
    
    
    
    10,631
    
    
    
    26,555
    
    
    
    20,973Depreciation and amortization
    
    
    7,591
    
    
    
    6,613
    
    
    
    14,801
    
    
    
    12,629General and administrative
    
    
    1,913
    
    
    
    1,797
    
    
    
    4,476
    
    
    
    3,13122,999
    
    
    
    19,041
    
    
    
    45,832
    
    
    
    36,733Operating income
    
    
    22,484
    
    
    
    18,958
    
    
    
    40,347
    
    
    
    30,598Other income (expense):Equity in earnings of SLC Pipeline
    
    
    544
    
    
    
    423
    
    
    
    1,025
    
    
    
    598SLC Pipeline acquisition costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,500
    )Interest income
    
    
    2
    
    
    
    2
    
    
    
    5
    
    
    
    8Interest expense
    
    
    (9,549
    )
    
    
    (4,404
    )
    
    
    (17,093
    )
    
    
    (9,807
    )Other
    
    
    
    
    
    
    65
    
    
    
    (7
    )
    
    
    65(9,003
    )
    
    
    (3,914
    )
    
    
    (16,070
    )
    
    
    (11,636
    )Income from continuing operations before
income taxes
    
    
    13,481
    
    
    
    15,044
    
    
    
    24,277
    
    
    
    18,962State income tax
    
    
    (46
    )
    
    
    (93
    )
    
    
    (140
    )
    
    
    (166
    )Income from continuing operations
    
    
    13,435
    
    
    
    14,951
    
    
    
    24,137
    
    
    
    18,796Income from discontinued operations,
net of noncontrolling interest of
$427 and $922, respectively
    
    
    
    
    
    
    1,441
    
    
    
    
    
    
    
    3,035Net income
    
    
    13,435
    
    
    
    16,392
    
    
    
    24,137
    
    
    
    21,831Less general partner interest in net income,
Including incentive distributions
    
    
    2,909
    
    
    
    1,849
    
    
    
    5,555
    
    
    
    3,142Limited partners interest in net income
    
    $
    10,526
    
    
    $
    14,543
    
    
    $
    18,582
    
    
    $
    18,689Limited partners per unit interest in
earnings  basic and diluted:Income from continuing operations
    
    $
    0.48
    
    
    $
    0.74
    
    
    $
    0.84
    
    
    $
    0.92Income from discontinued operations
    
    
    
    
    
    
    0.08
    
    
    
    
    
    
    
    0.18Net income
    
    $
    0.48
    
    
    $
    0.82
    
    
    $
    0.84
    
    
    $
    1.10Weighted average limited partners units
outstanding
    
    
    22,079
    
    
    
    17,789
    
    
    
    22,079
    
    
    
    17,058
   - 5 -




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Holly Energy Partners, L.P.
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Six Months EndedJune 30,2010
    
    
    2009(1)(In thousands)Cash flows from operating activitiesNet income
    
    $
    24,137
    
    
    $
    21,831Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    14,801
    
    
    
    13,109Equity in earnings of SLC Pipeline, net of distributions
    
    
    100
    
    
    
    (598
    )Change in fair value  interest rate swaps
    
    
    1,464
    
    
    
    (628
    )Noncontrolling interest in earnings of Rio Grande Pipeline Company
    
    
    
    
    
    
    922Amortization of restricted and performance units
    
    
    1,339
    
    
    
    417(Increase) decrease in current assets:Accounts receivable  trade
    
    
    (1,696
    )
    
    
    278Accounts receivable  affiliates
    
    
    (2,625
    )
    
    
    719Prepaid and other current assets
    
    
    (200
    )
    
    
    (234
    )Current assets of discontinued operations
    
    
    2,195
    
    
    
    Increase (decrease) in current liabilities:Accounts payable  trade
    
    
    (372
    )
    
    
    1,258Accounts payable  affiliates
    
    
    501
    
    
    
    (156
    )Accrued interest
    
    
    4,825
    
    
    
    26Deferred revenue
    
    
    2,521
    
    
    
    (4,669
    )Accrued property taxes
    
    
    (82
    )
    
    
    (119
    )Other current liabilities
    
    
    (656
    )
    
    
    (447
    )Other, net
    
    
    (1,066
    )
    
    
    541Net cash provided by operating activities
    
    
    45,186
    
    
    
    32,250Cash flows from investing activitiesAdditions to properties and equipment
    
    
    (4,487
    )
    
    
    (21,826
    )Acquisition of assets from Holly Corporation
    
    
    (39,040
    )
    
    
    (34,200
    )Investment in SLC Pipeline
    
    
    
    
    
    
    (25,500
    )Net cash used for investing activities
    
    
    (43,527
    )
    
    
    (81,526
    )Cash flows from financing activitiesBorrowings under credit agreement
    
    
    39,000
    
    
    
    99,000Repayments of credit agreement borrowings
    
    
    (90,000
    )
    
    
    (81,000
    )Proceeds from issuance of senior notes
    
    
    147,540
    
    
    
    Proceeds from issuance of common units
    
    
    
    
    
    
    58,355Contribution from general partner
    
    
    
    
    
    
    1,191Distributions to HEP unitholders
    
    
    (41,312
    )
    
    
    (27,968
    )Distributions to noncontrolling interest
    
    
    
    
    
    
    (600
    )Purchase price in excess of transferred basis in assets acquired from
Holly Corporation
    
    
    (53,960
    )
    
    
    Purchase of units for restricted grants
    
    
    (2,276
    )
    
    
    (616
    )Deferred financing costs
    
    
    (353
    )
    
    
    Cost of issuing common units
    
    
    
    
    
    
    (160
    )Net cash provided by (used for) financing activities
    
    
    (1,361
    )
    
    
    48,202Cash and cash equivalentsIncrease (decrease) for the period
    
    
    298
    
    
    
    (1,074
    )Beginning of period
    
    
    2,508
    
    
    
    5,269End of period
    
    $
    2,806
    
    
    $
    4,195
 (1)
    
    Includes cash flows attributable to discontinued operations.   - 6 -




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Holly Energy Partners, L.P.
 
 Consolidated Statement of Partners Equity
 (Unaudited)
 AccumulatedClass B
    
    
    General
    
    
    OtherCommon
    
    
    Subordinated
    
    
    Partner
    
    
    ComprehensiveUnits
    
    
    Units
    
    
    Interest
    
    
    Loss
    
    
    Total(In thousands)Balance December 31, 2009
    
    $
    275,553
    
    
    $
    21,426
    
    
    $
    (93,974
    )
    
    $
    (9,141
    )
    
    $
    193,864Conversion of Class B subordinated units
to common units
    
    
    20,588
    
    
    
    (20,588
    )
    
    
    
    
    
    
    
    
    
    
    Distributions to partners
    
    
    (38,966
    )
    
    
    (1,519
    )
    
    
    (827
    )
    
    
    
    
    
    
    (41,312
    )Purchase price in excess of transferred
basis in assets acquired from
Holly Corporation
    
    
    
    
    
    
    
    
    
    
    (53,960
    )
    
    
    
    
    
    
    (53,960
    )Purchase of units for restricted grants
    
    
    (2,276
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,276
    )Amortization of restricted and
performance units
    
    
    1,339
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,339Comprehensive income:Net income
    
    
    18,326
    
    
    
    681
    
    
    
    5,130
    
    
    
    
    
    
    
    24,137Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,981
    )
    
    
    (1,981
    )Comprehensive income
    
    
    18,326
    
    
    
    681
    
    
    
    5,130
    
    
    
    (1,981
    )
    
    
    22,156Balance June 30, 2010
    
    $
    274,564
    
    
    $
    
    
    
    $
    (143,631
    )
    
    $
    (11,122
    )
    
    $
    119,811
   - 7 -




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Note 1: Description of Business and Presentation of Financial Statements
      Note 2: Discontinued Operations
     - 8 -




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Note 3: Acquisitions
 2010 Acquisitions
 Tulsa East / Lovington Storage Asset Transaction
     2009 Acquisitions
 Sinclair Logistics and Storage Assets Transaction
   Roadrunner / Beeson Pipelines Transaction
  Tulsa West Loading Racks Transaction
  Lovington-Artesia Pipeline Transaction
   - 9 -




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SLC Pipeline Joint Venture Interest
  Note 4: Financial Instruments
   Fair Value Measurements
  
    
    (Level 1) Quoted prices in active markets for identical assets or liabilities.
 
    
    (Level 2) Observable inputs other than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets, similar assets and liabilities
in markets that are not active or can be corroborated by observable market data.
 
    
    (Level 3) Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities. This includes
valuation techniques that involve significant unobservable inputs.
   - 10 -




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Note 5: Properties and Equipment
 June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Pipelines and terminals (1)
    
    $
    495,321
    
    
    $
    455,075Land and right of way
    
    
    25,247
    
    
    
    25,230Other
    
    
    13,411
    
    
    
    12,528Construction in progress
    
    
    12,775
    
    
    
    10,484546,754
    
    
    
    503,317Less accumulated depreciation
    
    
    116,504
    
    
    
    105,273$
    430,250
    
    
    $
    398,044
 (1)
    
    We periodically evaluate estimated useful lives of our
properties and equipment. Effective January 1, 2010, we have revised
the estimated useful lives of our terminal assets to 16 to 25
years. This change in estimated useful lives resulted in a
$1.5 million reduction in depreciation expense for the six months ended
June 30, 2010.  Note 6: Transportation Agreements
  
    
    The Alon pipelines and terminals agreement (the Alon PTA) represents a portion of the
total purchase price of the Alon assets that was allocated based on an estimated fair value
derived under an income approach. 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.
 
    
    The Holly crude pipelines and tankage agreement (the Holly CPTA) represents a portion
of the total purchase price of certain crude pipelines and tankage assets acquired from
Holly in 2008 that was allocated using a fair value based on the agreements expected
contribution to our future earnings under an income approach. This asset is being
amortized over 15 years ending 2023, the 15-year term of the Holly CPTA.
  June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Alon transportation agreement
    
    $
    59,933
    
    
    $
    59,933Holly crude pipelines and tankage agreement
    
    
    74,231
    
    
    
    74,231134,164
    
    
    
    134,164Less accumulated amortization
    
    
    22,201
    
    
    
    18,728$
    111,963
    
    
    $
    115,436
    - 11 -




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Note 7: Employees, Retirement and Incentive Plans
    Restricted Units
   Weighted-Weighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicGrant-Date
    
    
    Contractual
    
    
    ValueRestricted Units
    
    Grants
    
    
    Fair Value
    
    
    Term
    
    
    ($000)Outstanding at January 1, 2010 (nonvested)
    
    
    53,271
    
    
    $
    34.31Granted
    
    
    31,355
    
    
    
    42.59Vesting and transfer of full ownership to recipients
    
    
    (34,645
    )
    
    
    38.94Forfeited
    
    
    (1,226
    )
    
    
    34.28Outstanding at June 30, 2010 (nonvested)
    
    
    48,755
    
    
    $
    36.35
    
    
    0.9 year
    
    $
    2,136
   Performance Units
   - 12 -




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##### Table of Contents



PayablePerformance Units
    
    In UnitsOutstanding at January 1, 2010 (nonvested)
    
    
    54,771Vesting and transfer of common units to recipients
    
    
    (11,785
    )Granted
    
    
    16,965Forfeited
    
    
    (536
    )Outstanding at June 30, 2010 (nonvested)
    
    
    59,415
  Note 8: Debt
 Credit Agreement
      - 13 -




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Senior Notes
     June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Credit Agreement
    
    $
    155,000
    
    
    $
    206,0006.25% Senior NotesPrincipal
    
    
    185,000
    
    
    
    185,000Unamortized discount
    
    
    (1,774
    )
    
    
    (1,964
    )Unamortized premium  dedesignated fair value hedge
    
    
    1,617
    
    
    
    1,791184,843
    
    
    
    184,8278.25% Senior NotesPrincipal
    
    
    150,000
    
    
    
    Unamortized discount
    
    
    (2,364
    )
    
    
    147,636
    
    
    
    Total long-term debt
    
    $
    487,479
    
    
    $
    390,827
  - 14 -




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##### Table of Contents



Interest Rate Risk Management
      Balance Sheet
    
    
    
    
    
    
    Location of Offsetting
    
    
    OffsettingInterest Rate Swap
    
    Location
    
    
    Fair Value
    
    
    Balance
    
    
    Amount(In thousands)LiabilityCash flow hedge  $155 million LIBOR based debt
    
    Other long-term liabilities
    
    $
    11,122
    
    
    Accumulated other comprehensive loss
    
    $
    11,122
     - 15 -




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##### Table of Contents



Interest Expense and Other Debt Information
  June 30,
    
    
    June 30,2010
    
    
    2009(In thousands)Interest on outstanding debt:Credit Agreement, net of interest on interest rate swap
    
    $
    4,726
    
    
    $
    5,2606.25% Senior Notes, net of interest on interest rate swaps
    
    
    5,623
    
    
    
    5,3388.25% Senior Notes
    
    
    3,816
    
    
    
    Partial settlement of interest rate swap  cash flow hedge
    
    
    1,076
    
    
    
    Net fair value adjustments to interest rate swaps
    
    
    1,464
    
    
    
    (628
    )Net amortization of discount and deferred debt issuance costs
    
    
    458
    
    
    
    353Commitment fees
    
    
    177
    
    
    
    145Total interest incurred
    
    
    17,340
    
    
    
    10,468Less capitalized interest
    
    
    247
    
    
    
    661Net interest expense
    
    $
    17,093
    
    
    $
    9,807Cash paid for interest (1)
    
    $
    14,192
    
    
    $
    11,836
 (1)
    
    Net of cash received under our interest rate swap agreements of $1.9 million for
the six months ended June 30, 2010 and 2009. Note 9: Significant Customers
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Holly
    
    
    82
    %
    
    
    66
    %
    
    
    82
    %
    
    
    64
    %Alon
    
    
    14
    %
    
    
    29
    %
    
    
    14
    %
    
    
    30
    %
 Note 10: Related Party Transactions
 Holly and Alon Agreements
  
    
    Holly PTA (pipelines and terminals throughput agreement expiring in 2019 that relates to
the pipelines and terminal assets contributed to us by Holly upon our initial public
offering in 2004);
 
    
    Holly IPA (intermediate pipelines throughput agreement expiring in 2024 that relates to
the intermediate pipelines acquired from Holly in 2005 and 2009);
 
    
    Holly CPTA (crude pipelines and tankage throughput agreement expiring in 2023 that
relates to the crude pipelines and tankage assets acquired from Holly in 2008);
 
    
    Holly PTTA (pipeline, tankage and loading rack throughput agreement expiring in 2024
that relates to the Tulsa east storage tank and loading rack facilities acquired from
Sinclair in 2009 and from Holly in March 2010);
  - 16 -




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##### Table of Contents




    
    Holly RPA (pipeline throughput agreement expiring in 2024 that relates to the Roadrunner
Pipeline acquired from Holly in 2009);
 
    
    Holly ETA (equipment and throughput agreement expiring in 2024 that relates to the Tulsa
west loading rack facilities acquired from Holly in 2009); and
 
    
    Holly ATA (loading rack throughput agreement expiring in 2025 that relates to the
Lovington asphalt loading rack facility acquired from Holly in March 2010).
      
    
    Revenues received from Holly were $37.1 million and $25.1 million for the three months
ended June 30, 2010 and 2009, respectively, and $70.7 million and $43.4 million for the six
months ended June 30, 2010 and 2009, respectively.
 
    
    Holly charged general and administrative services under the Omnibus Agreement of $0.6
million for the three months ended June 30, 2010 and 2009 and $1.2 million for the six months
ended June 30, 2010 and 2009.
 
    
    We reimbursed Holly for costs of employees supporting our operations of $4.6 million and $4
million for the three months ended June 30, 2010 and 2009, respectively, and $8.8 million and
$8.6 million for the six months ended June 30, 2010 and 2009, respectively.
 
    
    We paid Holly a $2.5 million finders fee in connection the acquisition of our 25% joint
venture interest in the SLC Pipeline in the first quarter of 2009.
  - 17 -




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##### Table of Contents




    
    We distributed $8.8 million and $7.1 million for the three months ended June 30, 2010 and
2009, respectively, to Holly as regular distributions on its common units, subordinated units
and general partner interest, including general partner incentive distributions. We
distributed $17.4 million and $14 million during the six months ended June 30, 2010 and 2009,
respectively.
 
    
    Accounts receivable from Holly were $16.7 million and $14.1 million at June 30, 2010 and
December 31, 2009, respectively.
 
    
    Accounts payable to Holly were $2.9 million and $2.4 million at June 30, 2010 and December
31, 2009, respectively.
 
    
    Holly failed to meet its minimum volume commitment for each of the twenty quarters since
inception of the Holly IPA. Through June 30, 2010, we have charged Holly $12.4 million for
these shortfalls of which $0.7 million is included in affiliate accounts receivable at June
30, 2010 and December 31, 2009.
 
    
    Revenues for the three and the six months ended June 30, 2010 include $0.5 million and $2.3
million of shortfalls billed under the Holly IPA in 2009 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, 2010 and December 31, 2009, includes $3.2 million and
$3.6 million, respectively, relating to the Holly IPA. It is possible that Holly may not
exceed its minimum obligations under the Holly IPA to allow Holly to receive credit for any of
the $3.2 million deferred at June 30, 2010.
 
    
    We acquired the Tulsa east and Lovington storage assets, Roadrunner and Beeson Pipelines,
Tulsa loading racks and a 16-inch intermediate pipeline from Holly in March 2010, December
2009, August 2009 and June 2009, respectively. See Note 3 for a description of these
transactions.
   
    
    Revenues received from Alon were $4.6 million and $9.2 million for the three months ended
June 30, 2010 and 2009, respectively, and $8.5 million and $17 million for the six months
ended June 30, 2010 and 2009, respectively under the Alon PTA. Additionally, revenues
received under a pipeline capacity lease agreement with Alon were $1.6 million and $1.7
million for three months ended June 30, 2010 and 2009, respectively, and $3.2 million and $3.4
million for the six months ended June 30, 2010 and 2009, respectively.
 
    
    We distributed $0.7 million for the three months ended June 30, 2010 and 2009, and $1.5
million and $1.4 million for the six months ended June 30, 2010 and 2009, respectively, to
Alon for distributions on its units.
 
    
    Accounts receivable  trade include receivable balances from Alon of $4.5 million at June
30, 2010 and $4 million at December 31, 2009.
 
    
    Revenues for the three and the six months ended June 30, 2010 include $1.1 million and $1.8
million, respectively, of shortfalls billed under the Alon PTA in 2010, 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, 2010 and December 31, 2009 includes $7.8 million
and $4.8 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 $7.8 million deferred at June 30, 2010.
  - 18 -




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##### Table of Contents



Note 11: Partners Equity
  Issuances of units
      Allocations of Net Income
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands, except per unit data)General partner interest in net income
    
    $
    220
    
    
    $
    304
    
    
    $
    388
    
    
    $
    392General partner incentive distribution
    
    
    2,689
    
    
    
    1,545
    
    
    
    5,167
    
    
    
    2,750Total general partner interest in net
income attributable to HEP
    
    $
    2,909
    
    
    $
    1,849
    
    
    $
    5,555
    
    
    $
    3,142
 Cash Distributions
    - 19 -




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands, except per unit data)General partner interest
    
    $
    427
    
    
    $
    328
    
    
    $
    844
    
    
    $
    611General partner incentive distribution
    
    
    2,689
    
    
    
    1,545
    
    
    
    5,167
    
    
    
    2,750Total general partner distribution
    
    
    3,116
    
    
    
    1,873
    
    
    
    6,011
    
    
    
    3,361Limited partner distribution
    
    
    18,215
    
    
    
    14,552
    
    
    
    36,209
    
    
    
    27,214Total regular quarterly cash distribution
    
    $
    21,331
    
    
    $
    16,425
    
    
    $
    42,220
    
    
    $
    30,575Cash distribution per unit applicable to
limited partners
    
    $
    0.825
    
    
    $
    0.785
    
    
    $
    1.640
    
    
    $
    1.560
  Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Net income
    
    $
    13,435
    
    
    $
    16,819
    
    
    $
    24,137
    
    
    $
    22,753Other comprehensive income (loss):Change in fair value of cash flow hedge
    
    
    (1,696
    )
    
    
    4,417
    
    
    
    (3,057
    )
    
    
    4,267Reclassification adjustment to net income on partial
settlement of cash flow hedge
    
    
    1,076
    
    
    
    
    
    
    
    1,076
    
    
    
    Other comprehensive income (loss)
    
    
    (620
    )
    
    
    4,417
    
    
    
    (1,981
    )
    
    
    4,267Comprehensive income
    
    
    12,815
    
    
    
    21,236
    
    
    
    22,156
    
    
    
    27,020Less noncontrolling interest in comprehensive income
    
    
    
    
    
    
    (427
    )
    
    
    
    
    
    
    (922
    )Comprehensive income attributable to HEP unitholders
    
    $
    12,815
    
    
    $
    20,809
    
    
    $
    22,156
    
    
    $
    26,098
  - 20 -




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##### Table of Contents



Note 12: Supplemental Guarantor/Non-Guarantor Financial Information
     - 21 -




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##### Table of Contents



Condensed Consolidating Balance Sheet
 GuarantorJune 30, 2010
    
    Parent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    2,804
    
    
    $
    
    
    
    $
    2,806Accounts receivable
    
    
    
    
    
    
    23,088
    
    
    
    
    
    
    
    23,088Intercompany accounts receivable (payable)
    
    
    (35,489
    )
    
    
    35,489
    
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    62
    
    
    
    877
    
    
    
    
    
    
    
    939Total current assets
    
    
    (35,425
    )
    
    
    62,258
    
    
    
    
    
    
    
    26,833Properties and equipment, net
    
    
    
    
    
    
    430,250
    
    
    
    
    
    
    
    430,250Investment in subsidiaries
    
    
    494,717
    
    
    
    
    
    
    
    (494,717
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    111,963
    
    
    
    
    
    
    
    111,963Goodwill
    
    
    
    
    
    
    49,109
    
    
    
    
    
    
    
    49,109Investment in SLC Pipeline
    
    
    
    
    
    
    25,819
    
    
    
    
    
    
    
    25,819Other assets
    
    
    1,242
    
    
    
    600
    
    
    
    
    
    
    
    1,842Total assets
    
    $
    460,534
    
    
    $
    679,999
    
    
    $
    (494,717
    )
    
    $
    645,816LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    6,340
    
    
    $
    
    
    
    $
    6,340Accrued interest
    
    
    7,670
    
    
    
    18
    
    
    
    
    
    
    
    7,688Deferred revenue
    
    
    
    
    
    
    10,923
    
    
    
    
    
    
    
    10,923Accrued property taxes
    
    
    
    
    
    
    990
    
    
    
    
    
    
    
    990Other current liabilities
    
    
    574
    
    
    
    27
    
    
    
    
    
    
    
    601Total current liabilities
    
    
    8,244
    
    
    
    18,298
    
    
    
    
    
    
    
    26,542Long-term debt
    
    
    332,479
    
    
    
    155,000
    
    
    
    
    
    
    
    487,479Other long-term liabilities
    
    
    
    
    
    
    11,984
    
    
    
    
    
    
    
    11,984Partners equity
    
    
    119,811
    
    
    
    494,717
    
    
    
    (494,717
    )
    
    
    119,811Total liabilities and partners equity
    
    $
    460,534
    
    
    $
    679,999
    
    
    $
    (494,717
    )
    
    $
    645,816
 Condensed Consolidating Balance Sheet
 GuarantorDecember 31, 2009
    
    Parent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    2,506
    
    
    $
    
    
    
    $
    2,508Accounts receivable
    
    
    
    
    
    
    18,767
    
    
    
    
    
    
    
    18,767Intercompany accounts receivable (payable)
    
    
    (76,855
    )
    
    
    76,855
    
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    261
    
    
    
    478
    
    
    
    
    
    
    
    739Current assets of discontinued operations
    
    
    
    
    
    
    2,195
    
    
    
    
    
    
    
    2,195Total current assets
    
    
    (76,592
    )
    
    
    100,801
    
    
    
    
    
    
    
    24,209Properties and equipment, net
    
    
    
    
    
    
    398,044
    
    
    
    
    
    
    
    398,044Investment in subsidiaries
    
    
    458,381
    
    
    
    
    
    
    
    (458,381
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    115,436
    
    
    
    
    
    
    
    115,436Goodwill
    
    
    
    
    
    
    49,109
    
    
    
    
    
    
    
    49,109Investment in SLC Pipeline
    
    
    
    
    
    
    25,919
    
    
    
    
    
    
    
    25,919Other assets
    
    
    3,267
    
    
    
    861
    
    
    
    
    
    
    
    4,128Total assets
    
    $
    385,056
    
    
    $
    690,170
    
    
    $
    (458,381
    )
    
    $
    616,845LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    6,211
    
    
    $
    
    
    
    $
    6,211Accrued interest
    
    
    2,849
    
    
    
    14
    
    
    
    
    
    
    
    2,863Deferred revenue
    
    
    
    
    
    
    8,402
    
    
    
    
    
    
    
    8,402Accrued property taxes
    
    
    
    
    
    
    1,072
    
    
    
    
    
    
    
    1,072Other current liabilities
    
    
    961
    
    
    
    296
    
    
    
    
    
    
    
    1,257Total current liabilities
    
    
    3,810
    
    
    
    15,995
    
    
    
    
    
    
    
    19,805Long-term debt
    
    
    184,827
    
    
    
    206,000
    
    
    
    
    
    
    
    390,827Other long-term liabilities
    
    
    2,555
    
    
    
    9,794
    
    
    
    
    
    
    
    12,349Partners equity
    
    
    193,864
    
    
    
    458,381
    
    
    
    (458,381
    )
    
    
    193,864Total liabilities and partners equity
    
    $
    385,056
    
    
    $
    690,170
    
    
    $
    (458,381
    )
    
    $
    616,845
  - 22 -




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##### Table of Contents



Condensed Consolidating Statement of Income
 GuarantorThree months ended June 30, 2010
    
    Parent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    37,079
    
    
    $
    
    
    
    $
    37,079Third parties
    
    
    
    
    
    
    8,404
    
    
    
    
    
    
    
    8,404
    
    
    
    45,483
    
    
    
    
    
    
    
    45,483Operating costs and expenses:Operations
    
    
    
    
    
    
    13,495
    
    
    
    
    
    
    
    13,495Depreciation and amortization
    
    
    
    
    
    
    7,591
    
    
    
    
    
    
    
    7,591General and administrative
    
    
    1,281
    
    
    
    632
    
    
    
    
    
    
    
    1,9131,281
    
    
    
    21,718
    
    
    
    
    
    
    
    22,999Operating income (loss)
    
    
    (1,281
    )
    
    
    23,765
    
    
    
    
    
    
    
    22,484Equity in earnings of subsidiaries
    
    
    20,833
    
    
    
    
    
    
    
    (20,833
    )
    
    
    Equity in earnings of SLC Pipeline
    
    
    
    
    
    
    544
    
    
    
    
    
    
    
    544Interest income (expense)
    
    
    (6,117
    )
    
    
    (3,430
    )
    
    
    
    
    
    
    (9,547
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,716
    
    
    
    (2,886
    )
    
    
    (20,833
    )
    
    
    (9,003
    )Income (loss)
before income
taxes
    
    
    13,435
    
    
    
    20,879
    
    
    
    (20,833
    )
    
    
    13,481State income tax
    
    
    
    
    
    
    (46
    )
    
    
    
    
    
    
    (46
    )Net income
    
    $
    13,435
    
    
    $
    20,833
    
    
    $
    (20,833
    )
    
    $
    13,435
 Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Three months ended June 30, 2009
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    25,064
    
    
    $
    
    
    
    $
    
    
    
    $
    25,064Third parties
    
    
    
    
    
    
    12,935
    
    
    
    
    
    
    
    
    
    
    
    12,935
    
    
    
    37,999
    
    
    
    
    
    
    
    
    
    
    
    37,999Operating costs and expenses:Operations
    
    
    
    
    
    
    10,631
    
    
    
    
    
    
    
    
    
    
    
    10,631Depreciation and amortization
    
    
    
    
    
    
    6,613
    
    
    
    
    
    
    
    
    
    
    
    6,613General and administrative
    
    
    1,287
    
    
    
    510
    
    
    
    
    
    
    
    
    
    
    
    1,7971,287
    
    
    
    17,754
    
    
    
    
    
    
    
    
    
    
    
    19,041Operating income (loss)
    
    
    (1,287
    )
    
    
    20,245
    
    
    
    
    
    
    
    
    
    
    
    18,958Equity in earnings of subsidiaries
    
    
    19,554
    
    
    
    996
    
    
    
    
    
    
    
    (20,550
    )
    
    
    Equity in earnings of SLC Pipeline
    
    
    
    
    
    
    423
    
    
    
    
    
    
    
    
    
    
    
    423Interest income (expense)
    
    
    (1,875
    )
    
    
    (2,527
    )
    
    
    
    
    
    
    
    
    
    
    (4,402
    )Other
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    6517,679
    
    
    
    (1,043
    )
    
    
    
    
    
    
    (20,550
    )
    
    
    (3,914
    )Income (loss)
from continuing
operations before
income taxes
    
    
    16,392
    
    
    
    19,202
    
    
    
    
    
    
    
    (20,550
    )
    
    
    15,044State income tax
    
    
    
    
    
    
    (93
    )
    
    
    
    
    
    
    
    
    
    
    (93
    )Income from continuing operations
    
    
    16,392
    
    
    
    19,109
    
    
    
    
    
    
    
    (20,550
    )
    
    
    14,951Income from discontinued operations
    
    
    
    
    
    
    445
    
    
    
    1,423
    
    
    
    (427
    )
    
    
    1,441Net income
    
    $
    16,392
    
    
    $
    19,554
    
    
    $
    1,423
    
    
    $
    (20,977
    )
    
    $
    16,392
  - 23 -




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##### Table of Contents



Condensed Consolidating Statement of Income
 GuarantorSix months ended June 30, 2010
    
    Parent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    70,676
    
    
    $
    
    
    
    $
    70,676Third parties
    
    
    
    
    
    
    15,503
    
    
    
    
    
    
    
    15,503
    
    
    
    86,179
    
    
    
    
    
    
    
    86,179Operating costs and expenses:Operations
    
    
    
    
    
    
    26,555
    
    
    
    
    
    
    
    26,555Depreciation and amortization
    
    
    
    
    
    
    14,801
    
    
    
    
    
    
    
    14,801General and administrative
    
    
    3,082
    
    
    
    1,394
    
    
    
    
    
    
    
    4,4763,082
    
    
    
    42,750
    
    
    
    
    
    
    
    45,832Operating income (loss)
    
    
    (3,082
    )
    
    
    43,429
    
    
    
    
    
    
    
    40,347Equity in earnings of subsidiaries
    
    
    38,318
    
    
    
    
    
    
    
    (38,318
    )
    
    
    Equity in earnings of SLC Pipeline
    
    
    
    
    
    
    1,025
    
    
    
    
    
    
    
    1,025Interest income (expense)
    
    
    (11,099
    )
    
    
    (5,989
    )
    
    
    
    
    
    
    (17,088
    )Other
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )27,219
    
    
    
    (4,971
    )
    
    
    (38,318
    )
    
    
    (16,070
    )Income (loss)
before income
taxes
    
    
    24,137
    
    
    
    38,458
    
    
    
    (38,318
    )
    
    
    24,277State income tax
    
    
    
    
    
    
    (140
    )
    
    
    
    
    
    
    (140
    )Net income
    
    $
    24,137
    
    
    $
    38,318
    
    
    $
    (38,318
    )
    
    $
    24,137
 Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Six months ended June 30, 2009
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    43,387
    
    
    $
    
    
    
    $
    
    
    
    $
    43,387Third parties
    
    
    
    
    
    
    23,944
    
    
    
    
    
    
    
    
    
    
    
    23,944
    
    
    
    67,331
    
    
    
    
    
    
    
    
    
    
    
    67,331Operating costs and expenses:Operations
    
    
    
    
    
    
    20,973
    
    
    
    
    
    
    
    
    
    
    
    20,973Depreciation and amortization
    
    
    
    
    
    
    12,629
    
    
    
    
    
    
    
    
    
    
    
    12,629General and administrative
    
    
    1,985
    
    
    
    1,146
    
    
    
    
    
    
    
    
    
    
    
    3,1311,985
    
    
    
    34,748
    
    
    
    
    
    
    
    
    
    
    
    36,733Operating income (loss)
    
    
    (1,985
    )
    
    
    32,583
    
    
    
    
    
    
    
    
    
    
    
    30,598Equity in earnings of subsidiaries
    
    
    28,618
    
    
    
    2,152
    
    
    
    
    
    
    
    (30,770
    )
    
    
    Equity in earnings of SLC Pipeline
    
    
    
    
    
    
    598
    
    
    
    
    
    
    
    
    
    
    
    598SLC Pipeline acquisition costs
    
    
    
    
    
    
    (2,500
    )
    
    
    
    
    
    
    
    
    
    
    (2,500
    )Interest income (expense)
    
    
    (4,802
    )
    
    
    (4,997
    )
    
    
    
    
    
    
    
    
    
    
    (9,799
    )Other
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    6523,816
    
    
    
    (4,682
    )
    
    
    
    
    
    
    (30,770
    )
    
    
    (11,636
    )Income (loss)
from continuing
operations before
income taxes
    
    
    21,831
    
    
    
    27,901
    
    
    
    
    
    
    
    (30,770
    )
    
    
    18,962State income tax
    
    
    
    
    
    
    (166
    )
    
    
    
    
    
    
    
    
    
    
    (166
    )Income from continuing operations
    
    
    21,831
    
    
    
    27,735
    
    
    
    
    
    
    
    (30,770
    )
    
    
    18,796Income from discontinued operations
    
    
    
    
    
    
    883
    
    
    
    3,074
    
    
    
    (922
    )
    
    
    3,035Net income
    
    $
    21,831
    
    
    $
    28,618
    
    
    $
    3,074
    
    
    $
    (31,692
    )
    
    $
    21,831
  - 24 -




---



##### Table of Contents



Condensed Consolidating Statement of
Cash Flows
 GuarantorSix months ended June 30, 2010
    
    Parent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash flows from operating activities
    
    $
    (103,599
    )
    
    $
    148,785
    
    
    $
    
    
    
    $
    45,186Cash flows from investing activitiesAdditions to properties and equipment
    
    
    
    
    
    
    (4,487
    )
    
    
    
    
    
    
    (4,487
    )Acquisition of assets from Holly Corporation
    
    
    
    
    
    
    (39,040
    )
    
    
    
    
    
    
    (39,040
    )
    
    
    
    (43,527
    )
    
    
    
    
    
    
    (43,527
    )Cash flows from financing activitiesNet repayments under credit agreement
    
    
    
    
    
    
    (51,000
    )
    
    
    
    
    
    
    (51,000
    )Net proceeds from issuance of senior notes
    
    
    147,540
    
    
    
    
    
    
    
    
    
    
    
    147,540Purchase price in excess of transferred basis
in assets acquired from Holly Corporation
    
    
    
    
    
    
    (53,960
    )
    
    
    
    
    
    
    (53,960
    )Distributions to HEP unitholders
    
    
    (41,312
    )
    
    
    
    
    
    
    
    
    
    
    (41,312
    )Purchase of units for restricted grants
    
    
    (2,276
    )
    
    
    
    
    
    
    
    
    
    
    (2,276
    )Deferred financing costs
    
    
    (353
    )
    
    
    
    
    
    
    
    
    
    
    (353
    )103,599
    
    
    
    (104,960
    )
    
    
    
    
    
    
    (1,361
    )Cash and cash equivalentsIncrease (decrease) for the period
    
    
    
    
    
    
    298
    
    
    
    
    
    
    
    298Beginning of period
    
    
    2
    
    
    
    2,506
    
    
    
    
    
    
    
    2,508End of period
    
    $
    2
    
    
    $
    2,804
    
    
    $
    
    
    
    $
    2,806
 Condensed Consolidating Statement of
Cash Flows
 Guarantor
    
    
    Non-Six months ended June 30, 2009
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash flows from operating activities
    
    $
    (31,418
    )
    
    $
    61,676
    
    
    $
    3,392
    
    
    $
    (1,400
    )
    
    $
    32,250Cash flows from investing activitiesAdditions to properties and equipment
    
    
    
    
    
    
    (55,962
    )
    
    
    (64
    )
    
    
    
    
    
    
    (56,026
    )Investment in SLC Pipeline
    
    
    
    
    
    
    (25,500
    )
    
    
    
    
    
    
    
    
    
    
    (25,500
    )
    
    
    
    (81,462
    )
    
    
    (64
    )
    
    
    
    
    
    
    (81,526
    )Cash flows from financing activitiesNet borrowings under credit agreement
    
    
    
    
    
    
    18,000
    
    
    
    
    
    
    
    
    
    
    
    18,000Proceeds from issuance of common units
    
    
    58,355
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,355Capital contribution from general partner
    
    
    1,191
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,191Distributions to HEP unitholders
    
    
    (27,968
    )
    
    
    
    
    
    
    (2,000
    )
    
    
    2,000
    
    
    
    (27,968
    )Distributions to noncontrolling interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (600
    )
    
    
    (600
    )Cost of issuing common units
    
    
    (160
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (160
    )Purchase of units for restricted grants
    
    
    
    
    
    
    (616
    )
    
    
    
    
    
    
    
    
    
    
    (616
    )31,418
    
    
    
    17,384
    
    
    
    (2,000
    )
    
    
    1,400
    
    
    
    48,202Cash and cash equivalentsIncrease (decrease) for the period
    
    
    
    
    
    
    (2,402
    )
    
    
    1,328
    
    
    
    
    
    
    
    (1,074
    )Beginning of period
    
    
    2
    
    
    
    3,706
    
    
    
    1,561
    
    
    
    
    
    
    
    5,269End of period
    
    $
    2
    
    
    $
    1,304
    
    
    $
    2,889
    
    
    $
    
    
    
    $
    4,195
  - 25 -




---



##### Table of Contents



HOLLY ENERGY PARTNERS, L.P.
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
  OVERVIEW
   2010 Acquisitions
 Tulsa East / Lovington Storage Asset Transaction
  2009 Acquisitions
 Sinclair Logistics and Storage Assets Transaction
  Roadrunner / Beeson Pipelines Transaction
  Tulsa Loading Racks Transaction
   - 26 -




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##### Table of Contents



Lovington-Artesia Pipeline Transaction
  SLC Pipeline Joint Venture Interest
  Holly Capacity Expansion
  Rio Grande Pipeline Sale
  Agreements with Holly Corporation and Alon
  
    
    Holly PTA (pipelines and terminals throughput agreement expiring in 2019 that relates to
the pipelines and terminal assets contributed to us by Holly upon our initial public
offering in 2004);
 
    
    Holly IPA (intermediate pipelines throughput agreement expiring in 2024 that relates to
the intermediate pipelines acquired from Holly in 2005 and 2009);
 
    
    Holly CPTA (crude pipelines and tankage throughput agreement expiring in 2023 that
relates to the crude pipelines and tankage assets acquired from Holly in 2008);
 
    
    Holly PTTA (pipeline, tankage and loading rack throughput agreement expiring in 2024
that relates to the Tulsa east storage tank and loading rack facilities acquired from
Sinclair in 2009 and from Holly in March 2010);
 
    
    Holly RPA (pipeline throughput agreement expiring in 2024 that relates to the Roadrunner
Pipeline acquired from Holly in 2009);
 
    
    Holly ETA (equipment and throughput agreement expiring in 2024 that relates to the Tulsa
west loading rack facilities acquired from Holly in 2009); and
 
    
    Holly ATA (loading rack throughput agreement expiring in 2025 that relates to the
Lovington asphalt loading rack facility acquired from Holly in March 2010).
    - 27 -




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##### Table of Contents



Minimum AnnualizedCommitmentAgreement
    
    (In millions)
    
    
    Year of Maturity
    
    Contract TypeHolly PTA
    
    $
    43.7
    
    
    2019
    
    Minimum revenue commitmentHolly IPA
    
    
    20.7
    
    
    2024
    
    Minimum revenue commitmentHolly CPTA
    
    
    28.4
    
    
    2023
    
    Minimum revenue commitmentHolly PTTA
    
    
    27.2
    
    
    2024
    
    Minimum revenue commitmentHolly RPA
    
    
    9.2
    
    
    2024
    
    Minimum revenue commitmentHolly ETA
    
    
    2.7
    
    
    2024
    
    Minimum revenue commitmentHolly ATA
    
    
    0.5
    
    
    2025
    
    Minimum revenue commitmentAlon PTA
    
    
    22.7
    
    
    2020
    
    Minimum volume commitmentAlon capacity lease
    
    
    6.4
    
    
    Various
    
    Capacity leaseTotal
    
    $
    161.5
    - 28 -




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##### Table of Contents



RESULTS OF OPERATIONS (Unaudited)
 Income, Distributable Cash Flow and Volumes
  Three Months Ended
    
    
    ChangeJune 30,
    
    
    from2010
    
    
    2009
    
    
    2009(In thousands, except per unit data)RevenuesPipelines:Affiliates  refined product pipelines
    
    $
    12,067
    
    
    $
    11,366
    
    
    $
    701Affiliates  intermediate pipelines
    
    
    4,964
    
    
    
    4,302
    
    
    
    662Affiliates  crude pipelines
    
    
    9,728
    
    
    
    6,751
    
    
    
    2,97726,759
    
    
    
    22,419
    
    
    
    4,340Third parties  refined product pipelines
    
    
    6,455
    
    
    
    11,098
    
    
    
    (4,643
    )33,214
    
    
    
    33,517
    
    
    
    (303
    )Terminals and loading racks:Affiliates
    
    
    10,320
    
    
    
    2,645
    
    
    
    7,675Third parties
    
    
    1,949
    
    
    
    1,837
    
    
    
    11212,269
    
    
    
    4,482
    
    
    
    7,787Total revenues
    
    
    45,483
    
    
    
    37,999
    
    
    
    7,484Operating costs and expensesOperations
    
    
    13,495
    
    
    
    10,631
    
    
    
    2,864Depreciation and amortization
    
    
    7,591
    
    
    
    6,613
    
    
    
    978General and administrative
    
    
    1,913
    
    
    
    1,797
    
    
    
    11622,999
    
    
    
    19,041
    
    
    
    3,958Operating income
    
    
    22,484
    
    
    
    18,958
    
    
    
    3,526Equity in earnings of SLC Pipeline
    
    
    544
    
    
    
    423
    
    
    
    121Interest income
    
    
    2
    
    
    
    2
    
    
    
    Interest expense, including amortization
    
    
    (9,549
    )
    
    
    (4,404
    )
    
    
    (5,145
    )Other
    
    
    
    
    
    
    65
    
    
    
    (65
    )(9,003
    )
    
    
    (3,914
    )
    
    
    (5,089
    )Income from continuing operations before income taxes
    
    
    13,481
    
    
    
    15,044
    
    
    
    (1,563
    )State income tax
    
    
    (46
    )
    
    
    (93
    )
    
    
    47Income from continuing operations
    
    
    13,435
    
    
    
    14,951
    
    
    
    (1,516
    )Income from discontinued operations, net of noncontrolling
interest of $427 (1)
    
    
    
    
    
    
    1,441
    
    
    
    (1,441
    )Net income
    
    
    13,435
    
    
    
    16,392
    
    
    
    (2,957
    )Less general partner interest in net income, including incentive
distributions (2)
    
    
    2,909
    
    
    
    1,849
    
    
    
    1,060Limited partners interest in net income
    
    $
    10,526
    
    
    $
    14,543
    
    
    $
    (4,017
    )Limited partners earnings per unit  basic and diluted(2)Income from continuing operations
    
    $
    0.48
    
    
    $
    0.74
    
    
    $
    (0.26
    )Income from discontinued operations
    
    
    
    
    
    
    0.08
    
    
    
    (0.08
    )Net income
    
    $
    0.48
    
    
    $
    0.82
    
    
    $
    (0.34
    )Weighted average limited partners units outstanding
    
    
    22,079
    
    
    
    17,789
    
    
    
    4,290EBITDA(3)
    
    $
    30,619
    
    
    $
    27,759
    
    
    $
    2,860Distributable cash flow(4)
    
    $
    22,673
    
    
    $
    16,415
    
    
    $
    6,258Volumes from continuing operations (bpd)(1)Pipelines:Affiliates  refined product pipelines
    
    
    98,464
    
    
    
    94,738
    
    
    
    3,726Affiliates  intermediate pipelines
    
    
    86,140
    
    
    
    70,543
    
    
    
    15,597Affiliates  crude pipelines
    
    
    141,263
    
    
    
    142,598
    
    
    
    (1,335
    )325,867
    
    
    
    307,879
    
    
    
    17,988Third parties  refined product pipelines
    
    
    34,844
    
    
    
    43,854
    
    
    
    (9,010
    )360,711
    
    
    
    351,733
    
    
    
    8,978Terminals and loading racks:Affiliates
    
    
    186,515
    
    
    
    115,221
    
    
    
    71,294Third parties
    
    
    37,902
    
    
    
    40,742
    
    
    
    (2,840
    )224,417
    
    
    
    155,963
    
    
    
    68,454Total for pipelines and terminal assets (bpd)
    
    
    585,128
    
    
    
    507,696
    
    
    
    77,432
  - 29 -




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##### Table of Contents



Six Months Ended
    
    
    ChangeJune 30,
    
    
    from2010
    
    
    2009
    
    
    2009(In thousands, except per unit data)RevenuesPipelines:Affiliates  refined product pipelines
    
    $
    23,547
    
    
    $
    18,919
    
    
    $
    4,628Affiliates  intermediate pipelines
    
    
    10,756
    
    
    
    6,068
    
    
    
    4,688Affiliates  crude pipelines
    
    
    19,133
    
    
    
    13,652
    
    
    
    5,48153,436
    
    
    
    38,639
    
    
    
    14,797Third parties  refined product pipelines
    
    
    11,859
    
    
    
    20,573
    
    
    
    (8,714
    )65,295
    
    
    
    59,212
    
    
    
    6,083Terminals and loading racks:Affiliates
    
    
    17,240
    
    
    
    4,748
    
    
    
    12,492Third parties
    
    
    3,644
    
    
    
    3,371
    
    
    
    27320,884
    
    
    
    8,119
    
    
    
    12,765Total revenues
    
    
    86,179
    
    
    
    67,331
    
    
    
    18,848Operating costs and expensesOperations
    
    
    26,555
    
    
    
    20,973
    
    
    
    5,582Depreciation and amortization
    
    
    14,801
    
    
    
    12,629
    
    
    
    2,172General and administrative
    
    
    4,476
    
    
    
    3,131
    
    
    
    1,34545,832
    
    
    
    36,733
    
    
    
    9,099Operating income
    
    
    40,347
    
    
    
    30,598
    
    
    
    9,749Equity in earnings of SLC Pipeline
    
    
    1,025
    
    
    
    598
    
    
    
    427SLC Pipeline acquisition costs
    
    
    
    
    
    
    (2,500
    )
    
    
    2,500Interest income
    
    
    5
    
    
    
    8
    
    
    
    (3
    )Interest expense, including amortization
    
    
    (17,093
    )
    
    
    (9,807
    )
    
    
    (7,286
    )Other
    
    
    (7
    )
    
    
    65
    
    
    
    (72
    )(16,070
    )
    
    
    (11,636
    )
    
    
    (4,434
    )Income from continuing operations before income taxes
    
    
    24,277
    
    
    
    18,962
    
    
    
    5,315State income tax
    
    
    (140
    )
    
    
    (166
    )
    
    
    26Income from continuing operations
    
    
    24,137
    
    
    
    18,796
    
    
    
    5,341Income from discontinued operations, net of noncontrolling
interest of $922 (1)
    
    
    
    
    
    
    3,035
    
    
    
    (3,035
    )Net income
    
    
    24,137
    
    
    
    21,831
    
    
    
    2,306Less general partner interest in net income, including incentive
distributions (2)
    
    
    5,555
    
    
    
    3,142
    
    
    
    2,413Limited partners interest in net income
    
    $
    18,582
    
    
    $
    18,689
    
    
    $
    (107
    )Limited partners earnings per unit  basic and diluted(2)Income from continuing operations
    
    $
    0.84
    
    
    $
    0.92
    
    
    $
    (0.08
    )Income from discontinued operations
    
    
    
    
    
    
    0.18
    
    
    
    (0.18
    )Net income
    
    $
    0.84
    
    
    $
    1.10
    
    
    $
    (0.26
    )Weighted average limited partners units outstanding
    
    
    22,079
    
    
    
    17,058
    
    
    
    5,021EBITDA(3)
    
    $
    56,166
    
    
    $
    44,943
    
    
    $
    11,223Distributable cash flow(4)
    
    $
    42,831
    
    
    $
    30,999
    
    
    $
    11,832Volumes from continuing operations (bpd)(1)Pipelines:Affiliates  refined product pipelines
    
    
    95,937
    
    
    
    78,628
    
    
    
    17,309Affiliates  intermediate pipelines
    
    
    82,649
    
    
    
    52,520
    
    
    
    30,129Affiliates  crude pipelines
    
    
    138,094
    
    
    
    132,459
    
    
    
    5,635316,680
    
    
    
    263,607
    
    
    
    53,073Third parties  refined product pipelines
    
    
    32,850
    
    
    
    46,557
    
    
    
    (13,707
    )349,530
    
    
    
    310,164
    
    
    
    39,366Terminals and loading racks:Affiliates
    
    
    175,218
    
    
    
    99,118
    
    
    
    76,100Third parties
    
    
    36,381
    
    
    
    42,067
    
    
    
    (5,686
    )211,599
    
    
    
    141,185
    
    
    
    70,414Total for pipelines and terminal assets (bpd)
    
    
    561,129
    
    
    
    451,349
    
    
    
    109,780
 (1)
    
    On December 1, 2009, we sold our 70% interest in Rio Grande. Results of operations of
Rio Grande are presented in discontinued operations. Pipeline volume information excludes
volumes attributable to Rio Grande.  - 30 -




---



##### Table of Contents



(2)
    
    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 incentive distributions declared subsequent to quarter end. Net
income attributable to the limited partners is divided by the weighted average limited
partner units outstanding in computing the limited partners per unit interest in net
income.(3)
    
    EBITDA is calculated as net income plus (i) interest expense, net of interest income,
(ii) state income tax and (iii) depreciation and amortization. EBITDA is not a calculation
based upon GAAP. However, the amounts included in the EBITDA calculation are derived from
amounts included in our consolidated financial statements, with the exception of EBITDA
from discontinued operations. 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 also is 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 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Income from continuing operations
    
    $
    13,435
    
    
    $
    14,951
    
    
    $
    24,137
    
    
    $
    18,796Add (subtract):Interest expense
    
    
    8,209
    
    
    
    5,071
    
    
    
    14,095
    
    
    
    10,082Amortization of discount and
deferred
debt issuance costs
    
    
    264
    
    
    
    177
    
    
    
    458
    
    
    
    353Increase in interest expense  change in
fair value of interest rate swaps and
swap settlement costs
    
    
    1,076
    
    
    
    (844
    )
    
    
    2,540
    
    
    
    (628
    )Interest income
    
    
    (2
    )
    
    
    (2
    )
    
    
    (5
    )
    
    
    (8
    )State income tax
    
    
    46
    
    
    
    93
    
    
    
    140
    
    
    
    166Depreciation and amortization
    
    
    7,591
    
    
    
    6,613
    
    
    
    14,801
    
    
    
    12,629EBITDA from discontinued
operations
    
    
    
    
    
    
    1,700
    
    
    
    
    
    
    
    3,553EBITDA
    
    $
    30,619
    
    
    $
    27,759
    
    
    $
    56,166
    
    
    $
    44,943
 (4)
    
    Distributable cash flow is not a calculation based upon GAAP. However, the amounts
included in the calculation are derived from amounts separately presented in our
consolidated financial statements, with the exception of equity in excess cash flows over
earnings of SLC Pipeline, maintenance capital expenditures and distributable cash flow from
discontinued operations. Distributable cash flow should not be considered in isolation or
as an alternative to net income or operating income as an indication of our operating
performance or as an alternative to operating cash flow as a measure of liquidity.
Distributable cash flow is not necessarily comparable to similarly titled measures of other
companies. Distributable cash flow is presented here because it is a widely accepted
financial indicator used by investors to compare partnership performance. It also is used
by management for internal analysis and our performance units. We believe that this
measure provides investors an enhanced perspective of the operating performance of our
assets and the cash our business is generating.  - 31 -




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Set forth below is our calculation of distributable cash flow. Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Income from continuing operations
    
    $
    13,435
    
    
    $
    14,951
    
    
    $
    24,137
    
    
    $
    18,796Add (subtract):Depreciation and amortization
    
    
    7,591
    
    
    
    6,613
    
    
    
    14,801
    
    
    
    12,629Amortization of discount and
deferred debt issuance costs
    
    
    264
    
    
    
    177
    
    
    
    458
    
    
    
    353Increase in interest expense   change
in fair value of
interest rate
swaps and swap
settlement costs
    
    
    1,076
    
    
    
    (844
    )
    
    
    2,540
    
    
    
    (628
    )Equity in excess cash flows
over
earnings of SLC Pipeline
    
    
    174
    
    
    
    167
    
    
    
    352
    
    
    
    220Increase (decrease) in
deferred revenue
    
    
    1,414
    
    
    
    (5,031
    )
    
    
    2,521
    
    
    
    (4,669
    )SLC Pipeline acquisition costs*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500Maintenance capital
expenditures**
    
    
    (1,281
    )
    
    
    (1,299
    )
    
    
    (1,978
    )
    
    
    (1,717
    )Distributable cash flow from
discontinued operations
    
    
    
    
    
    
    1,681
    
    
    
    
    
    
    
    3,515Distributable cash flow
    
    $
    22,673
    
    
    $
    16,415
    
    
    $
    42,831
    
    
    $
    30,999
 *
    
    We expensed the $2.5 million finders fee associated with our joint venture
agreement with Plains that closed in March 2009. These costs directly relate to our
interest in the new joint venture pipeline and are similar to expansion capital
expenditures; accordingly, we have added back these costs to arrive at distributable
cash flow.**
    
    Maintenance capital expenditures are capital expenditures made to replace
partially or fully depreciated assets in order to maintain the existing operating
capacity of our assets and to extend their useful lives. Maintenance capital
expenditures include expenditures required to maintain equipment reliability, tankage
and pipeline integrity, safety and to address environmental regulations. June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Balance Sheet DataCash and cash equivalents
    
    $
    2,806
    
    
    $
    2,508Working capital
    
    $
    291
    
    
    $
    4,404Total assets
    
    $
    645,816
    
    
    $
    616,845Long-term debt (5)
    
    $
    487,479
    
    
    $
    390,827Partners equity (6)
    
    $
    119,811
    
    
    $
    193,864
 (5)
    
    Includes $155 million and $206 million of credit agreement advances at June 30, 2010
and December 31, 2009, respectively.(6)
    
    As a master limited partnership, we distribute our available cash, which historically
has exceeded our net income because depreciation and amortization expense represents a
non-cash charge against income. The result is a decline in partners equity since our
regular quarterly distributions have exceeded our quarterly net income. Additionally, if
the assets transferred to us upon our initial public offering in 2004, the intermediate
pipelines purchased from Holly in 2005, and the assets purchased from Holly in 2009 and
March 2010 had been acquired from third parties, our acquisition cost in excess of Hollys
basis in the transferred assets of $214.4 million would have been recorded in our financial
statements as increases to our properties and equipment and intangible assets instead of
decreases to partners equity.  - 32 -




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##### Table of Contents



Results of Operations  Three Months Ended June 30, 2010 Compared with Three Months Ended June 30,
2009
 Summary
   Revenues
      Operations Expense
  Depreciation and Amortization
   - 33 -




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##### Table of Contents



General and Administrative
  Equity in Earnings of SLC Pipeline
  Interest Expense
  State Income Tax
 $
 Discontinued Operations
  Results of Operations  Six Months Ended June 30, 2010 Compared with Six Months Ended June 30, 2009
 Summary
    - 34 -




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##### Table of Contents



Revenues
      Operations Expense
  Depreciation and Amortization
  General and Administrative
   - 35 -




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##### Table of Contents



Equity in Earnings of SLC Pipeline
  SLC Pipeline Acquisition Costs
  Interest Expense
  State Income Tax
  Discontinued Operations
  LIQUIDITY AND CAPITAL RESOURCES
 Overview
    - 36 -




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##### Table of Contents



Cash Flows  Operating Activities
   Cash Flows  Investing Activities
  Cash Flows  Financing Activities
   - 37 -




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##### Table of Contents



Capital Requirements
      Credit Agreement
   - 38 -




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##### Table of Contents



Senior Notes
    - 39 -




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##### Table of Contents



June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Credit Agreement
    
    $
    155,000
    
    
    $
    206,0006.25% Senior NotesPrincipal
    
    
    185,000
    
    
    
    185,000Unamortized discount
    
    
    (1,774
    )
    
    
    (1,964
    )Unamortized premium  dedesignated fair value hedge
    
    
    1,617
    
    
    
    1,791184,843
    
    
    
    184,8278.25% Senior NotesPrincipal
    
    
    150,000
    
    
    
    Unamortized discount
    
    
    (2,364
    )
    
    
    147,636
    
    
    
    Total long-term debt
    
    $
    487,479
    
    
    $
    390,827
  Contractual Obligations
    Impact of Inflation
   Environmental Matters
   - 40 -




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES
    - 41 -




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##### Table of Contents



RISK MANAGEMENT
     Balance Sheet
    
    
    
    
    
    Location of Offsetting
    
    OffsettingInterest Rate Swap
    
    Location
    
    Fair Value
    
    
    Balance
    
    Amount(In thousands)LiabilityCash flow hedge  $155 million LIBOR based debt
    
    Other long-term liabilities
    
    $
    11,122
    
    
    Accumulated other comprehensive loss
    
    $
    11,122
      - 42 -




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- 43 -




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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
   - 44 -




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##### Table of Contents



Item 1. Legal Proceedings
  
 Item 6. Exhibits
 4.1
    +
    
    Seventh Supplemental Indenture, dated as of April 14, 2010, among Holly Energy Storage-
Tulsa LLC, Holly Energy Storage-Lovington LLC, Holly Energy Partners, L.P., Holly Energy
Finance Corp., the other Guarantors, and U.S. Bank National Association.4.2
    +
    
    Eighth Supplemental Indenture, dated as of June 4, 2010, among HEP Operations LLC,
Holly Energy Partners, L.P., Holly Energy Finance Corp., the other Guarantors, and U.S.
Bank National Association.4.3
    +
    
    First Supplemental Indenture, dated as of April 14, 2010, among Holly Energy
Storage-Tulsa LLC, Holly Energy Storage-Lovington LLC, Holly Energy Partners, L.P., Holly
Energy Finance Corp., the other Guarantors, and U.S. Bank National Association.4.4
    +
    
    Second Supplemental Indenture, dated as of June 4, 2010, among HEP Operations LLC,
Holly Energy Partners, L.P., Holly Energy Finance Corp., the other Guarantors, and U.S.
Bank National Association.10.1
    +
    
    Amendment to First Amended and Restated Pipelines, Tankage and Loading Rack Throughput
Agreement (Tulsa East), dated as of June 11, 2010, by and between Holly Refining &
Marketing-Tulsa LLC, HEP Tulsa LLC and Holly Energy Storage-Tulsa LLC.10.2
    +*
    
    Form of Holly Logistic Services, L.L.C. Performance Unit Agreement.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.++
    
    Furnished herewith.*
    
    Constitutes management contracts or compensatory plans or arrangements.  - 45 -




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##### Table of Contents



SIGNATURES
  HOLLY ENERGY PARTNERS, L.P.(Registrant)By: HEP LOGISTICS HOLDINGS, L.P.its General PartnerBy: HOLLY LOGISTIC SERVICES, L.L.C.its General PartnerDate: July 30, 2010
    
    /s/ Bruce R. Shaw

Bruce R. ShawSenior Vice President andChief Financial Officer(Principal Financial Officer)/s/ Scott C. Surplus

Scott C. SurplusVice President and Controller(Principal Accounting Officer)
  - 46 -