##### 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, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
 FOR
THE TRANSITION PERIOD FROM ______ TO ______.
 Commission File Number 1-32225
 HOLLY
ENERGY PARTNERS, L.P.
  Delaware
    
    20-0833098(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 (Address of principal executive offices)
 (Registrants telephone number, including area code)
 
  þ o
 o þ




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PART I. FINANCIAL INFORMATION
    
    
    3FORWARD-LOOKING STATEMENTS
    
    
    3Item 1. Financial Statements (Unaudited, except December 31, 2004 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
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    37Item 4. Controls and Procedures
    
    
    37PART II. OTHER INFORMATION
    
    
    38Item 1. Legal proceedings
    
    
    38Item 6. Exhibits
    
    
    38SIGNATURES
    
    
    40Waiver and AmendmentComputation of Ratio of Earnings to Fixed ChargesCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
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FORWARD-LOOKING STATEMENTS
  
    
    Risks and uncertainties with respect to the actual quantities of refined petroleum
products shipped on our pipelines and/or terminalled in our terminals;
    
    The future performance of the intermediate pipelines acquired from Holly Corporation in
July 2005 and of the pipelines and terminals acquired from Alon in February 2005;
    
    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 inefficiencies or shutdowns of refineries utilizing our pipeline and
terminal facilities;
    
    The effects of current and future government regulations and policies;
    
    Our operational efficiency in carrying out routine operations and capital construction projects;
    
    The possibility of terrorist attacks and the consequences of any such attacks;
    
    General economic conditions; and
    
    Other financial, operations and legal risks and uncertainties detailed from time to time
in our Securities and Exchange Commission filings.
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Item 1. Financial Statements
 Holly Energy Partners, L.P.
 
 Consolidated Balance Sheets
 June 30, 2005
    
    December 31,(Unaudited)
    
    2004(In thousands, except unit data)ASSETSCurrent assets:Cash and
cash equivalents
    
    $
    54,310
    
    
    $
    19,104Accounts
receivable:Trade
    
    
    4,325
    
    
    
    807Affiliates
    
    
    2,191
    
    
    
    2,0526,516
    
    
    
    2,859Prepaid and
other current assets
    
    
    737
    
    
    
    570Total
current assets
    
    
    61,563
    
    
    
    22,533Properties and equipment, net
    
    
    157,825
    
    
    
    74,626Transportation agreements, net
    
    
    62,707
    
    
    
    4,718Other assets
    
    
    4,489
    
    
    
    1,881Total
assets
    
    $
    286,584
    
    
    $
    103,758LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts
payable
    
    $
    2,766
    
    
    $
    1,716Accrued
interest
    
    
    3,006
    
    
    
    51Other
accrued liabilities
    
    
    1,771
    
    
    
    1,646Total
current liabilities
    
    
    7,543
    
    
    
    3,413Commitments and contingencies
    
    
    
    
    
    
    Long-term debt
    
    
    182,957
    
    
    
    25,000Other long-term liabilities
    
    
    390
    
    
    
    585Minority interest
    
    
    12,015
    
    
    
    13,232Partners equity (deficit):Common unitholders
(7,000,000 units issued and
outstanding as of June 30,
2005 and December 31, 2004)
    
    
    142,794
    
    
    
    144,318Subordinated unitholder
(7,000,000 units issued and
outstanding as of June 30,
2005 and December 31, 2004)
    
    
    (61,018
    )
    
    
    (59,470
    )Class B subordinated
unitholder (937,500 units
issued and outstanding as of
June 30, 2005)
    
    
    24,674
    
    
    
    General partner (2% interest)
    
    
    (22,771
    )
    
    
    (23,320
    )Total
partners equity
    
    
    83,679
    
    
    
    61,528Total
liabilities and partners equity
    
    $
    286,584
    
    
    $
    103,758
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Holly Energy Partners, L.P.
 
 Consolidated Statements of Income
(Unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(In thousands, except per unit data)Revenues:Affiliates
    
    $
    9,941
    
    
    $
    13,370
    
    
    $
    19,371
    
    
    $
    25,783Third parties
    
    
    9,580
    
    
    
    5,151
    
    
    
    16,663
    
    
    
    11,50919,521
    
    
    
    18,521
    
    
    
    36,034
    
    
    
    37,292Operating costs and expenses:Operations
    
    
    6,448
    
    
    
    6,208
    
    
    
    11,836
    
    
    
    12,660Depreciation and amortization
    
    
    3,849
    
    
    
    1,691
    
    
    
    6,212
    
    
    
    3,737General and administrative
    
    
    990
    
    
    
    
    
    
    
    1,967
    
    
    
    11,287
    
    
    
    7,899
    
    
    
    20,015
    
    
    
    16,397Operating income
    
    
    8,234
    
    
    
    10,622
    
    
    
    16,019
    
    
    
    20,895Other income (expense):Interest income
    
    
    145
    
    
    
    37
    
    
    
    233
    
    
    
    72Interest expense
    
    
    (2,365
    )
    
    
    
    
    
    
    (3,483
    )
    
    
    (2,220
    )
    
    
    37
    
    
    
    (3,250
    )
    
    
    72Income before minority interest
    
    
    6,014
    
    
    
    10,659
    
    
    
    12,769
    
    
    
    20,967Minority interest in Rio Grande Pipeline
Company
    
    
    27
    
    
    
    (307
    )
    
    
    (402
    )
    
    
    (995
    )Net income
    
    
    6,041
    
    
    
    10,352
    
    
    
    12,367
    
    
    
    19,972Less:Net income attributable to Predecessor
    
    
    
    
    
    
    10,352
    
    
    
    
    
    
    
    19,972General partner interest in net income
    
    
    121
    
    
    
    
    
    
    
    247
    
    
    
    Limited partners interest in net income
    
    $
    5,920
    
    
    $
    
    
    
    $
    12,120
    
    
    $
    Net
income per limited partner unit 
Basic and diluted
    
    $
    0.40
    
    
    $
    
    
    
    $
    0.83
    
    
    $
    Weighted average limited partners units
outstanding
    
    
    14,938
    
    
    
    
    
    
    
    14,637
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Holly Energy Partners, L.P.
 
 Consolidated Statements of Cash Flows
(Unaudited)
 Six Months Ended June 30,2005
    
    2004(In thousands)Cash flows from operating activitiesNet income
    
    $
    12,367
    
    
    $
    19,972Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    6,212
    
    
    
    3,737Minority interest in Rio Grande Pipeline Company
    
    
    402
    
    
    
    995Equity based compensation expense
    
    
    33
    
    
    
    (Increase) decrease in current assets:Accounts
receivable  trade
    
    
    (3,587
    )
    
    
    (95
    )Accounts
receivable  affiliates
    
    
    (140
    )
    
    
    (19,900
    )Prepaid and other current assets
    
    
    (388
    )
    
    
    (44
    )Increase (decrease) in current liabilities:Accounts payable
    
    
    1,050
    
    
    
    (1,810
    )Accounts
payable  affiliates
    
    
    
    
    
    
    (2,506
    )Accrued interest
    
    
    2,955
    
    
    
    Accrued liabilities
    
    
    125
    
    
    
    (113
    )Other, net
    
    
    223
    
    
    
    Net cash provided by operating activities
    
    
    19,252
    
    
    
    236Cash flows from investing activitiesAcquisition of pipeline and terminal assets
    
    
    (121,853
    )
    
    
    Additions to properties and equipment
    
    
    (710
    )
    
    
    (2,672
    )Cash distributions to minority interest
    
    
    (1,620
    )
    
    
    (2,250
    )Other
    
    
    (211
    )
    
    
    Net cash used for investing activities
    
    
    (124,394
    )
    
    
    (4,922
    )Cash flows from financing activitiesProceeds from issuance of senior notes, net of discount
    
    
    181,238
    
    
    
    Net decrease in borrowings under revolving credit agreement
    
    
    (25,000
    )
    
    
    Distributions to partners
    
    
    (15,526
    )
    
    
    Additional capital contribution from general partner
    
    
    612
    
    
    
    Deferred debt issuance costs
    
    
    (967
    )
    
    
    Other
    
    
    (9
    )
    
    
    Net cash provided by financing activities
    
    
    140,348
    
    
    
    Cash and cash equivalents
Increase (decrease) for period
    
    
    35,206
    
    
    
    (4,686
    )Beginning of period
    
    
    19,104
    
    
    
    6,694End of period
    
    $
    54,310
    
    
    $
    2,008
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Holly Energy Partners, L.P.
 
 Consolidated Statement of Partners Equity (Deficit)
(Unaudited)
 Class B
    
    GeneralCommon
    
    Subordinated
    
    Subordinated
    
    PartnerUnits
    
    Units
    
    Units
    
    Interest
    
    Total(In thousands)Balance December 31, 2004
    
    $
    144,318
    
    
    $
    (59,470
    )
    
    $
    
    
    
    $
    (23,320
    )
    
    $
    61,528Issuance of Class B
subordinated units
    
    
    
    
    
    
    
    
    
    
    24,674
    
    
    
    
    
    
    
    24,674Capital contribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    612
    
    
    
    612Distributions
    
    
    (7,350
    )
    
    
    (7,350
    )
    
    
    (516
    )
    
    
    (310
    )
    
    
    (15,526
    )Amortization of
restricted units
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Other
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )Net income
    
    
    5,802
    
    
    
    5,802
    
    
    
    516
    
    
    
    247
    
    
    
    12,367Balance June 30, 2005
    
    $
    142,794
    
    
    $
    (61,018
    )
    
    $
    24,674
    
    
    $
    (22,771
    )
    
    $
    83,679
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note 1: Organization, Basis of Presentation, and Principles of Consolidation
      Recent Accounting Pronouncements
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Note 2: Initial Public Offering of HEP
     Navajo Pipeline
    
    Contributed toCo., L.P.
    
    Holly Energy(Predecessor)
    
    Partners, L.P.
    
    NotJuly 12, 2004
    
    July 13, 2004
    
    Contributed(In thousands)Cash
    
    $
    2,268
    
    
    $
    2,268
    
    
    $
    Accounts
receivable  trade
    
    
    850
    
    
    
    800
    
    
    
    50Accounts
receivable  affiliates
    
    
    51,934
    
    
    
    
    
    
    
    51,934Prepaid and other current assets
    
    
    292
    
    
    
    173
    
    
    
    119Properties and equipment, net
    
    
    95,337
    
    
    
    76,605
    
    
    
    18,732Transportation agreement, net
    
    
    5,692
    
    
    
    5,692
    
    
    
    Total assets
    
    
    156,373
    
    
    
    85,538
    
    
    
    70,835Accounts
payable  trade
    
    
    1,452
    
    
    
    339
    
    
    
    1,113Accounts
payable  affiliates
    
    
    18,819
    
    
    
    
    
    
    
    18,819Accrued liabilities
    
    
    1,018
    
    
    
    534
    
    
    
    484Short-term debt
    
    
    30,082
    
    
    
    30,082
    
    
    
    Non-current liabilities
    
    
    1,775
    
    
    
    1,138
    
    
    
    637Minority interest
    
    
    13,263
    
    
    
    13,263
    
    
    
    Total liabilities
    
    
    66,409
    
    
    
    45,356
    
    
    
    21,053Net Assets
    
    $
    89,964
    
    
    $
    40,182
    
    
    $
    49,782
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Note 3: Acquisitions
 Alon Transaction
    - 10 -




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Holly Intermediate Pipelines Transaction
     - 11 -




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Note 4: Properties and Equipment
 June 30,
    
    December 31,2005
    
    2004(In thousands)Pipelines and terminals
    
    $
    181,064
    
    
    $
    104,095Land and right of way
    
    
    14,938
    
    
    
    4,865Other
    
    
    4,885
    
    
    
    4,436Construction in progress
    
    
    450
    
    
    
    201201,337
    
    
    
    113,597Less accumulated depreciation
    
    
    43,512
    
    
    
    38,971$
    157,825
    
    
    $
    74,626
  Note 5: Employees, Retirement and Benefit Plans
      Note 6: Debt
 Credit Agreement
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Senior Notes Due 2015
   - 13 -




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.
  Interest Rate Risk Management
    Other Debt Information
   Note 7: Commitments and Contingencies
  - 14 -




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Note 8: Significant Customers
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Holly
    
    
    51
    %
    
    
    72
    %
    
    
    54
    %
    
    
    69
    %Customer A
    
    
    8
    %
    
    
    14
    %
    
    
    13
    %
    
    
    17
    %Customer B
    
    
    37
    %
    
    
    9
    %
    
    
    29
    %
    
    
    9
    %
 Note 9: Related Party Transactions
     Note 10: Partners Equity and Cash Distributions
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Note 11: Supplemental Guarantor/Non-Guarantor Financial Information
   Unaudited Condensed Consolidating Balance Sheets
June 30, 2005
 Holly Energy
    
    Guarantor
    
    Non-Partners, L.P.
    
    Subsidiaries
    
    Guarantor
    
    Eliminations
    
    Consolidated(in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    52,351
    
    
    $
    1,957
    
    
    $
    
    
    
    $
    54,310Accounts
receivable  trade
    
    
    
    
    
    
    6,221
    
    
    
    295
    
    
    
    
    
    
    
    4,325Intercompany accounts receivable (payable)
    
    
    39,011
    
    
    
    (38,914
    )
    
    
    (97
    )
    
    
    
    
    
    
    2,191Inventories and other current assets
    
    
    23
    
    
    
    714
    
    
    
    
    
    
    
    
    
    
    
    737Total current assets
    
    
    39,036
    
    
    
    20,372
    
    
    
    2,155
    
    
    
    
    
    
    
    61,563Properties and equipment, net
    
    
    
    
    
    
    123,002
    
    
    
    34,823
    
    
    
    
    
    
    
    157,825Investment in subsidiaries
    
    
    228,460
    
    
    
    28,035
    
    
    
    
    
    
    
    (256,495
    )
    
    
    Other assets, net
    
    
    2,930
    
    
    
    60,591
    
    
    
    3,675
    
    
    
    
    
    
    
    67,196Total assets
    
    $
    270,426
    
    
    $
    232,000
    
    
    $
    40,653
    
    
    $
    (256,495
    )
    
    $
    286,584LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    307
    
    
    $
    2,178
    
    
    $
    281
    
    
    $
    
    
    
    $
    2,766Accrued interest
    
    
    3,006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,006Other accrued liabilities
    
    
    477
    
    
    
    972
    
    
    
    322
    
    
    
    
    
    
    
    1,771Total current liabilities
    
    
    3,790
    
    
    
    3,150
    
    
    
    603
    
    
    
    
    
    
    
    7,543Long-term debt
    
    
    182,957
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182,957Non-current liabilities
    
    
    
    
    
    
    390
    
    
    
    
    
    
    
    
    
    
    
    390Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,015
    
    
    
    12,015Partners equity
    
    
    83,679
    
    
    
    228,460
    
    
    
    40,050
    
    
    
    (268,510
    )
    
    
    83,679Total liabilities and partners equity
    
    $
    270,426
    
    
    $
    232,000
    
    
    $
    40,653
    
    
    $
    (256,495
    )
    
    $
    286,584
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Condensed Consolidating Balance Sheets
December 31, 2004
 Holly Energy
    
    Guarantor
    
    Non-Partners, L.P.
    
    Subsidiaries
    
    Guarantor
    
    Eliminations
    
    Consolidated(in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    15,143
    
    
    $
    3,959
    
    
    $
    
    
    
    $
    19,104Accounts
receivable  trade
    
    
    
    
    
    
    2,373
    
    
    
    486
    
    
    
    
    
    
    
    2,859Intercompany accounts receivable (payable)
    
    
    (5,658
    )
    
    
    5,658
    
    
    
    
    
    
    
    
    
    
    
    Inventories and other current assets
    
    
    180
    
    
    
    338
    
    
    
    52
    
    
    
    
    
    
    
    570Total current assets
    
    
    (5,476
    )
    
    
    23,512
    
    
    
    4,497
    
    
    
    
    
    
    
    22,533Properties and equipment, net
    
    
    
    
    
    
    39,097
    
    
    
    35,529
    
    
    
    
    
    
    
    74,626Investment in subsidiaries
    
    
    67,551
    
    
    
    30,876
    
    
    
    
    
    
    
    (98,427
    )
    
    
    Other assets, net
    
    
    
    
    
    
    1,881
    
    
    
    4,718
    
    
    
    
    
    
    
    6,599Total assets
    
    $
    62,075
    
    
    $
    95,366
    
    
    $
    44,744
    
    
    $
    (98,427
    )
    
    $
    103,758LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    1,467
    
    
    $
    249
    
    
    $
    
    
    
    $
    1,716Accrued liabilities
    
    
    547
    
    
    
    763
    
    
    
    387
    
    
    
    
    
    
    
    1,697Total current liabilities
    
    
    547
    
    
    
    2,230
    
    
    
    636
    
    
    
    
    
    
    
    3,413Long-term debt
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    25,000Non-current liabilities
    
    
    
    
    
    
    585
    
    
    
    
    
    
    
    
    
    
    
    585Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,232
    
    
    
    13,232Partners equity
    
    
    61,528
    
    
    
    67,551
    
    
    
    44,108
    
    
    
    (111,659
    )
    
    
    61,528Total liabilities and partners equity
    
    $
    62,075
    
    
    $
    95,366
    
    
    $
    44,744
    
    
    $
    (98,427
    )
    
    $
    103,758
 Unaudited Condensed Consolidating Statements of Income
Three Months Ended June 30, 2005
 Holly Energy
    
    Guarantor
    
    Non-Partners, L.P.
    
    Subsidiaries
    
    Guarantor
    
    Eliminations
    
    Consolidated(in thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    9,941
    
    
    $
    
    
    
    $
    
    
    
    $
    9,941Third parties
    
    
    
    
    
    
    8,213
    
    
    
    1,646
    
    
    
    (279
    )
    
    
    9,580
    
    
    
    18,154
    
    
    
    1,646
    
    
    
    (279
    )
    
    
    19,521Operating costs and expenses:Operations
    
    
    
    
    
    
    5,819
    
    
    
    908
    
    
    
    (279
    )
    
    
    6,448Depreciation and amortization
    
    
    
    
    
    
    3,007
    
    
    
    842
    
    
    
    
    
    
    
    3,849General and administrative
    
    
    465
    
    
    
    523
    
    
    
    2
    
    
    
    
    
    
    
    990465
    
    
    
    9,349
    
    
    
    1,752
    
    
    
    (279
    )
    
    
    11,287Operating income (loss)
    
    
    (465
    )
    
    
    8,805
    
    
    
    (106
    )
    
    
    
    
    
    
    8,234Equity in earnings of subsidiaries
    
    
    8,664
    
    
    
    (62
    )
    
    
    
    
    
    
    (8,602
    )
    
    
    Interest income (expense)
    
    
    (2,159
    )
    
    
    (79
    )
    
    
    18
    
    
    
    
    
    
    
    (2,220
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    27Net income (loss)
    
    $
    6,040
    
    
    $
    8,664
    
    
    $
    (88
    )
    
    $
    (8,575
    )
    
    $
    6,041
 - 17 -




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##### Table of Contents



Unaudited Condensed Consolidating Statements of Income
Three Months Ended June 30, 2004
 Holly Energy
    
    Guarantor
    
    Non-Partners, L.P.
    
    Subsidiaries
    
    Guarantor
    
    Eliminations
    
    Consolidated(in thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    13,370
    
    
    $
    
    
    
    $
    
    
    
    $
    13,370Third parties
    
    
    
    
    
    
    2,621
    
    
    
    2,530
    
    
    
    
    
    
    
    5,151
    
    
    
    15,991
    
    
    
    2,530
    
    
    
    
    
    
    
    18,521Operating costs and expenses:Operations
    
    
    
    
    
    
    5,543
    
    
    
    665
    
    
    
    
    
    
    
    6,208Depreciation and amortization
    
    
    
    
    
    
    845
    
    
    
    846
    
    
    
    
    
    
    
    1,691
    
    
    
    6,388
    
    
    
    1,511
    
    
    
    
    
    
    
    7,899Operating income
    
    
    
    
    
    
    9,603
    
    
    
    1,019
    
    
    
    
    
    
    
    10,622Equity in earnings of subsidiaries
    
    
    
    
    
    
    714
    
    
    
    
    
    
    
    (714
    )
    
    
    Interest income (expense)
    
    
    
    
    
    
    36
    
    
    
    1
    
    
    
    
    
    
    
    37Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (307
    )
    
    
    (307
    )Net income
    
    $
    
    
    
    $
    10,353
    
    
    $
    1,020
    
    
    $
    (1,021
    )
    
    $
    10,352
 Unaudited Condensed Consolidating Statements of Income
Six Months Ended June 30, 2005
 Holly Energy
    
    Guarantor
    
    Non-Partners, L.P.
    
    Subsidiaries
    
    Guarantor
    
    Eliminations
    
    Consolidated(in thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    19,371
    
    
    $
    
    
    
    $
    
    
    
    $
    19,371Third parties
    
    
    
    
    
    
    12,314
    
    
    
    4,628
    
    
    
    (279
    )
    
    
    16,663
    
    
    
    31,685
    
    
    
    4,628
    
    
    
    (279
    )
    
    
    36,034Operating costs and expenses:Operations
    
    
    
    
    
    
    10,515
    
    
    
    1,600
    
    
    
    (279
    )
    
    
    11,836Depreciation and amortization
    
    
    
    
    
    
    4,523
    
    
    
    1,689
    
    
    
    
    
    
    
    6,212General and administrative
    
    
    920
    
    
    
    1,032
    
    
    
    15
    
    
    
    
    
    
    
    1,967920
    
    
    
    16,070
    
    
    
    3,304
    
    
    
    (279
    )
    
    
    20,015Operating income (loss)
    
    
    (920
    )
    
    
    15,615
    
    
    
    1,324
    
    
    
    
    
    
    
    16,019Equity in earnings of subsidiaries
    
    
    16,232
    
    
    
    939
    
    
    
    
    
    
    
    (17,171
    )
    
    
    Interest income (expense)
    
    
    (2,946
    )
    
    
    (322
    )
    
    
    18
    
    
    
    
    
    
    
    (3,250
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (402
    )
    
    
    (402
    )Net income
    
    $
    12,366
    
    
    $
    16,232
    
    
    $
    1,342
    
    
    $
    (17,573
    )
    
    $
    12,367
 - 18 -




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##### Table of Contents



Unaudited Condensed Consolidating Statements of Income
Six Months Ended June 30, 2004
 Holly Energy
    
    Guarantor
    
    Non-Partners, L.P.
    
    Subsidiaries
    
    Guarantor
    
    Eliminations
    
    Consolidated(in thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    25,783
    
    
    $
    
    
    
    $
    
    
    
    $
    25,783Third parties
    
    
    
    
    
    
    5,202
    
    
    
    6,307
    
    
    
    
    
    
    
    11,509
    
    
    
    30,985
    
    
    
    6,307
    
    
    
    
    
    
    
    37,292Operating costs and expenses:Operations
    
    
    
    
    
    
    11,355
    
    
    
    1,305
    
    
    
    
    
    
    
    12,660Depreciation and amortization
    
    
    
    
    
    
    2,049
    
    
    
    1,688
    
    
    
    
    
    
    
    3,737
    
    
    
    13,404
    
    
    
    2,993
    
    
    
    
    
    
    
    16,397Operating income
    
    
    
    
    
    
    17,581
    
    
    
    3,314
    
    
    
    
    
    
    
    20,895Equity in earnings of subsidiaries
    
    
    
    
    
    
    2,321
    
    
    
    
    
    
    
    (2,321
    )
    
    
    Interest income (expense)
    
    
    
    
    
    
    71
    
    
    
    1
    
    
    
    
    
    
    
    72Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (995
    )
    
    
    (995
    )Net income
    
    $
    
    
    
    $
    19,973
    
    
    $
    3,315
    
    
    $
    (3,316
    )
    
    $
    19,972
 Unaudited Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2005
 Holly Energy
    
    Guarantor
    
    Non-Partners, L.P.
    
    Subsidiaries
    
    Guarantor
    
    Eliminations
    
    Consolidated(in thousands)Cash flows from operating activities
    
    $
    (45,611
    )
    
    $
    61,465
    
    
    $
    3,398
    
    
    $
    
    
    
    $
    19,252Cash flows used for investing activities:Acquisitions, net of cash acquired
    
    
    (120,000
    )
    
    
    (1,853
    )
    
    
    
    
    
    
    
    
    
    
    (121,853
    )Additions to properties and equipment
    
    
    
    
    
    
    (710
    )
    
    
    
    
    
    
    
    
    
    
    (710
    )Investments in subsidiaries, net
    
    
    (1
    )
    
    
    3,780
    
    
    
    
    
    
    
    (3,779
    )
    
    
    Cash distribution to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,620
    )
    
    
    (1,620
    )Other
    
    
    
    
    
    
    (211
    )
    
    
    
    
    
    
    
    
    
    
    (211
    )(120,001
    )
    
    
    1,006
    
    
    
    
    
    
    
    (5,399
    )
    
    
    (124,394
    )Cash flows from financing activities:Proceeds from issuance of senior
notes, net of discount
    
    
    181,238
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181,238Contributions from (distributions to)
partners
    
    
    (14,914
    )
    
    
    1
    
    
    
    (5,400
    )
    
    
    5,399
    
    
    
    (14,914
    )Borrowings (paydowns) of debt, net
    
    
    
    
    
    
    (25,000
    )
    
    
    
    
    
    
    
    
    
    
    (25,000
    )Other financing activities, net
    
    
    (712
    )
    
    
    (264
    )
    
    
    
    
    
    
    
    
    
    
    (976
    )165,612
    
    
    
    (25,263
    )
    
    
    (5,400
    )
    
    
    5,399
    
    
    
    140,348Cash and cash equivalentsIncrease (decrease) for the period
    
    
    
    
    
    
    37,208
    
    
    
    (2,002
    )
    
    
    
    
    
    
    35,206Beginning of period
    
    
    2
    
    
    
    15,143
    
    
    
    3,959
    
    
    
    
    
    
    
    19,104End of period
    
    $
    2
    
    
    $
    52,351
    
    
    $
    1,957
    
    
    $
    
    
    
    $
    54,310
 - 19 -




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##### Table of Contents



Unaudited Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2004
 Holly Energy
    
    Guarantor
    
    Non-Partners, L.P.
    
    Subsidiaries
    
    Guarantor
    
    Eliminations
    
    Consolidated(in thousands)Cash flows from operating activities
    
    $
    
    
    
    $
    (3,233
    )
    
    $
    3,469
    
    
    $
    
    
    
    $
    236Cash flows used for investing activities:Additions to properties and equipment
    
    
    
    
    
    
    (2,017
    )
    
    
    (655
    )
    
    
    
    
    
    
    (2,672
    )Investments in subsidiaries, net
    
    
    
    
    
    
    5,250
    
    
    
    
    
    
    
    (5,250
    )
    
    
    Cash distribution to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,250
    )
    
    
    (2,250
    )
    
    
    
    3,233
    
    
    
    (655
    )
    
    
    (7,500
    )
    
    
    (4,922
    )Cash flows
from financing activities 
contributions from (distributions to)
partners
    
    
    
    
    
    
    
    
    
    
    (7,500
    )
    
    
    7,500
    
    
    
    Cash and cash equivalentsDecrease for the period
    
    
    
    
    
    
    
    
    
    
    (4,686
    )
    
    
    
    
    
    
    (4,686
    )Beginning of period
    
    
    
    
    
    
    
    
    
    
    6,694
    
    
    
    
    
    
    
    6,694End of period
    
    $
    
    
    
    $
    
    
    
    $
    2,008
    
    
    $
    
    
    
    $
    2,008
 Note 12: Subsequent Events
    - 20 -




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##### Table of Contents



HOLLY ENERGY PARTNERS, L.P.
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  OVERVIEW
   Historical Results of Operations
    
    
    net proceeds from our initial public offering which closed on July 13, 2004 (see Liquidity and Capital
Resources below);
    
    the transfer of certain of our predecessors operations to HEP, which
 -
    includes our predecessors refined product pipeline and terminal assets and
short-term debt due to Holly (which was repaid upon the closing of our initial public
offering), and-
    excludes our predecessors crude oil systems, intermediate product pipelines,
accounts receivable from or payable to affiliates, and other miscellaneous assets and
liabilities;
 - 21 -




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##### Table of Contents




    
    the execution of the a 15-year pipelines and terminals
agreement with Holly (Holly PTA) and the recognition of
revenues derived therefrom for serving Hollys refineries in
New Mexico and Utah; and
    
    the execution of an omnibus agreement with Holly and
several of its subsidiaries (the Omnibus Agreement) and the
recognition of allocated general and administrative expenses
in addition to direct general and administrative expense
related to our operation as a publicly owned entity.
  Agreements with Holly Corporation
     - 22 -




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##### Table of Contents



Alon Transaction; Senior Note Offering
   Holly Intermediate Pipelines Transaction
   - 23 -




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##### Table of Contents



RESULTS OF OPERATIONS (Unaudited)
 Income, Distributable Cash Flow and Volumes
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(In thousands)RevenuesPipelines:Affiliates
    
    $
    7,121
    
    
    $
    7,115
    
    
    $
    14,189
    
    
    $
    14,099Third parties
    
    
    8,226
    
    
    
    4,137
    
    
    
    14,498
    
    
    
    9,52215,347
    
    
    
    11,252
    
    
    
    28,687
    
    
    
    23,621Terminals & truck loading racks:Affiliates
    
    
    2,820
    
    
    
    2,256
    
    
    
    5,182
    
    
    
    4,459Third parties
    
    
    1,354
    
    
    
    876
    
    
    
    2,165
    
    
    
    1,7194,174
    
    
    
    3,132
    
    
    
    7,347
    
    
    
    6,178Other
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    14Total for refined product pipeline and terminal assets
    
    
    19,521
    
    
    
    14,393
    
    
    
    36,034
    
    
    
    29,813Crude system and intermediate pipelines not contributed to HEP (1):Lovington crude oil pipelines
    
    
    
    
    
    
    1,667
    
    
    
    
    
    
    
    3,158Intermediate pipelines
    

    
    
    
    
    
    2,461
    
    
    
    
    
    
    
    4,321Total for crude system and intermediate pipeline assets
    
    
    
    
    
    
    4,128
    
    
    
    
    
    
    
    7,479Total revenues
    
    
    19,521
    
    
    
    18,521
    
    
    
    36,034
    
    
    
    37,292Operating costs and expensesCosts related to refined product pipeline and terminal assets:Operations
    
    
    6,448
    
    
    
    5,149
    
    
    
    11,836
    
    
    
    10,411Depreciation and amortization
    
    
    3,849
    
    
    
    1,496
    
    
    
    6,212
    
    
    
    3,330General and administrative
    
    
    990
    
    
    
    
    
    
    
    1,967
    
    
    
    11,287
    
    
    
    6,645
    
    
    
    20,015
    
    
    
    13,741Crude system and intermediate pipelines not contributed
to HEP (1):Operations
    
    
    
    
    
    
    1,059
    
    
    
    
    
    
    
    2,249Depreciation and amortization
    
    
    
    
    
    
    195
    
    
    
    
    
    
    
    407
    
    
    
    1,254
    
    
    
    
    
    
    
    2,656Total operating costs and expenses
    
    
    11,287
    
    
    
    7,899
    
    
    
    20,015
    
    
    
    16,397Operating income
    
    
    8,234
    
    
    
    10,622
    
    
    
    16,019
    
    
    
    20,895Interest income
    
    
    145
    
    
    
    37
    
    
    
    233
    
    
    
    72Interest expense, including amortization
    
    
    (2,365
    )
    
    
    
    
    
    
    (3,483
    )
    
    
    Minority interest in Rio Grande
    
    
    27
    
    
    
    (307
    )
    
    
    (402
    )
    
    
    (995
    )Net income
    
    
    6,041
    
    
    
    10,352
    
    
    
    12,367
    
    
    
    19,972Add interest expense
    
    
    2,170
    
    
    
    
    
    
    
    3,175
    
    
    
    Add amortization of discount and deferred debt issuance costs
    
    
    195
    
    
    
    
    
    
    
    308
    
    
    
    Subtract interest income
    
    
    (145
    )
    
    
    (37
    )
    
    
    (233
    )
    
    
    (72
    )Add depreciation and amortization
    
    
    3,849
    
    
    
    1,691
    
    
    
    6,212
    
    
    
    3,737EBITDA(2)
    
    
    12,110
    
    
    $
    12,006
    
    
    
    21,829
    
    
    $
    23,637Subtract interest expense
    
    
    (2,170
    )
    
    
    
    
    
    
    (3,175
    )Add interest income
    
    
    145
    
    
    
    
    
    
    
    233Subtract maintenance capital expenditures (3)
    
    
    (30
    )
    
    
    
    
    
    
    (197
    )Distributable cash flow(4)
    
    $
    10,055
    
    
    
    
    
    
    $
    18,690
 - 24 -




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Volumes (bpd)(5)Pipelines:Affiliates
    
    
    64,969
    
    
    
    65,081
    
    
    
    66,485
    
    
    
    65,197Third parties  Rio Grande
    
    
    12,962
    
    
    
    14,604
    
    
    
    15,416
    
    
    
    17,573Third parties  Other (5)
    
    
    46,355
    
    
    
    
    
    
    
    30,657
    
    
    
    Third parties  Other (volumes transported under
capacity lease agreement)
    
    
    15,701
    
    
    
    14,342
    
    
    
    10,360
    
    
    
    13,496139,987
    
    
    
    94,027
    
    
    
    122,918
    
    
    
    96,266Terminals & truck loading racks:Affiliates
    
    
    124,644
    
    
    
    115,118
    
    
    
    121,147
    
    
    
    115,350Third parties
    
    
    56,381
    
    
    
    27,282
    
    
    
    43,985
    
    
    
    26,540181,025
    
    
    
    142,400
    
    
    
    165,132
    
    
    
    141,890Total volumes for refined product pipeline and
terminal assets (bpd)
    
    
    321,012
    
    
    
    236,427
    
    
    
    288,050
    
    
    
    238,156
 
 (1)
    
    Revenue and expense items generated by the crude system and intermediate pipeline
assets that were not contributed to HEP. Historically, these items were included in the
income of NPL as predecessor, but are not included in the income of HEP beginning July 13,
2004.(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.(3)
    
    Maintenance capital expenditures are capital expenditures made to replace partially or
fully depreciated assets in order to maintain the existing operating capacity of our assets
and to extend their useful lives.(4)
    
    Distributable cash flow is not a calculation based upon U.S. GAAP. However, the
amounts included in the calculation are derived from amounts separately presented in our
consolidated financial statements, with the exception of maintenance capital expenditures.
Distributable cash flow should not be considered in isolation or as an alternative to net
income or operating income, as an indication of our operating performance or as an
alternative to operating cash flow as a measure of liquidity. Distributable cash flow is
not necessarily comparable to similarly titled measures of other companies. Distributable
cash flow is presented here because it is a widely accepted financial indicator used by
investors to compare partnership performance. We believe that this measure also provides
investors an enhanced perspective of the operating performance of our assets and the cash
our business is generating.(5)
    
    The amounts reported for the six months ended June 30, 2005 include volumes only for
March to June 2005 related to the assets acquired from Alon, averaged over the full 181
days in the six months. Refined product shipments by Alon on the newly acquired pipelines
in March to June 2005 averaged 45.5 thousand barrels per day (mbpd). Assuming the March
to June 2005 volumes on the assets acquired from Alon had been experienced for the entire
six months of 2005, pro forma total volumes for the six months would equal 137.7 mbpd
pipeline volumes, 175.6 mbpd terminal and truck loading rack volumes and 313.3 mbpd total
volumes. - 25 -




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Balance Sheet Data
 June 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Cash and cash equivalents
    
    $
    54,310
    
    
    $
    19,104Working capital
    
    $
    54,020
    
    
    $
    19,120Total assets
    
    $
    286,584
    
    
    $
    103,758Long-term debt
    
    $
    182,957
    
    
    $
    25,000Partners equity
    
    $
    83,679
    
    
    $
    61,528
 Results
of Operations  Three Months Ended June 30, 2005 Compared with Three Months Ended June 30,
2004
 Summary
  Revenues
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##### Table of Contents



Operating Costs
  Depreciation and Amortization
  General and Administrative
  Interest Expense
  Minority Interest in Earnings of Rio Grande
  Results
of Operations  Six Months Ended June 30, 2005 Compared with Six Months Ended June 30, 2004
 Summary
  Revenues
  - 27 -




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##### Table of Contents



Operating Costs
  Depreciation and Amortization
  General and Administrative
  Interest Expense
  Minority Interest in Earnings of Rio Grande
  - 28 -




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 Overview
     Cash Flows  Operating Activities
  Cash Flows  Investing Activities
  - 29 -




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##### Table of Contents



Cash Flows  Financing Activities
  Capital Requirements
   Credit Agreement
   - 30 -




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Senior Notes Due 2015
   - 31 -




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##### Table of Contents



.
  Alon Transaction
    Holly Intermediate Pipelines Transaction
  - 32 -




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##### Table of Contents



Contractual Obligations and Contingencies
  Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    Over 5Total
    
    1 Year
    
    2-3 Years
    
    4-5 Years
    
    Years(In thousands)Long-term debt  principal
    
    $
    185,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    185,000Long-term debt  interest
    
    
    115,657
    
    
    
    11,595
    
    
    
    23,125
    
    
    
    23,125
    
    
    
    57,812Pipeline operating lease
    
    
    11,246
    
    
    
    5,623
    
    
    
    5,623
    
    
    
    
    
    
    
    Other
    
    
    5,792
    
    
    
    2,575
    
    
    
    3,215
    
    
    
    2
    
    
    
    Total
    
    $
    317,695
    
    
    $
    19,793
    
    
    $
    31,963
    
    
    $
    23,127
    
    
    $
    242,812
 Impact of Inflation
  - 33 -




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##### Table of Contents



Environmental Matters
      CRITICAL ACCOUNTING POLICIES
  - 34 -




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##### Table of Contents



Recent Accounting Pronouncement
   ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
  RISK MANAGEMENT
    - 35 -




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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
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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal proceedings
  
 Item 6. Exhibits
 2.1
    
    Purchase and Sale Agreement, dated July 6, 2005 by and among Holly Corporation,
Navajo Pipeline Co., L.P., Navajo Refining Company, L.P., Holly Energy Partners, L.P.,
Holly Energy Partners  Operating, L.P. and HEP Pipeline, L.L.C. (incorporated by
reference to Exhibit 2.1 of Registrants Form 8-K Current Report dated July 6, 2005).3.1
    
    Amendment No 2. to the First Amended and Restated Agreement of Limited
Partnership of Holly Energy Partners, L.P., as amended, dated July 6, 2005
(incorporated by reference to Exhibit 3.1 of Registrants Form 8-K Current Report dated
July 6, 2005).4.1
    
    Registration Rights Agreement, dated June 28, 2005, among Holly Energy
Partners, L.P., Holly Energy Finance Corp. and the Initial Purchasers identified
therein (incorporated by reference to Exhibit 4.3 of Registrants Form 8-K Current
Report dated June 28, 2005).4.2
    
    Registration Rights Agreement, dated July 8, 2005, among Holly Energy Partners,
L.P., Fiduciary/Claymore MLP Opportunity Fund, Perry Partners, L.P., Structured Finance
Americas, LLC, Kayne Anderson MLP Investment Company and Kayne Anderson Energy Total
Return Fund, Inc. (incorporated by reference to Exhibit 4.1 of Registrants Form 8-K
Current Report dated July 6, 2005).10.1
    
    Pipelines Agreement, dated July 8, 2005, among Holly Energy Partners, L.P.,
Holly Energy Partners  Operating, L.P., Holly Corporation, HEP Pipeline, L.L.C.,
Navajo Refining Company, L.P., HEP Logistics Holdings, L.P., Holly Logistic Services,
L.L.C. and HEP Logistics GP, L.L.C. (incorporated by reference to Exhibit 10.1 of
Registrants Form 8-K Current Report dated July 6, 2005).10.2
    
    Mortgage and Deed of Trust, dated July 8, 2005, by HEP Pipeline, L.L.C. for the
benefit of Holly Corporation (incorporated by reference to Exhibit 10.2 of Registrants
Form 8-K Current Report dated July 6, 2005).10.3*
    
    Waiver and Amendment No. 3, dated June 17, 2005, among Holly Energy Partners,
L.P., Union Bank of California, N.A., as administrative agent, and certain other
lending institutions identified therein.10.4
    
    Consent and Amendment No. 4, dated July 8, 2005, among Holly Energy Partners,
L.P., Union Bank of California, N.A., as administrative agent, and certain other
lending institutions identified therein (incorporated by reference to Exhibit 10.3 of
Registrants Form 8-K Current Report dated July 6, 2005).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.
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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. - 39 -




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##### Table of Contents



SIGNATURES
  HOLLY ENERGY PARTNERS, L.P.(Registrant)By: HEP LOGISTICS HOLDINGS, L.P.its General PartnerBy: HOLLY LOGISTIC SERVICES, L.L.C.its General PartnerDate: August 4, 2005
    
    /s/ P. Dean RidenourP. Dean RidenourVice President and Chief Accounting Officerand Director(Principal Accounting Officer)/s/ Stephen J. McDonnellStephen J. McDonnellVice President and Chief FinancialOfficer(Principal Financial Officer)
 - 40 -