##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2009
 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)
 
  þ o
 o o
   Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



PART I. FINANCIAL INFORMATION
    
    
    3FORWARD-LOOKING STATEMENTS
    
    
    3Item 1. Financial Statements (Unaudited, except December 31, 2008 Balance Sheet)
    
    
    4Consolidated Balance Sheets
    
    
    4Consolidated Statements of Income
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Consolidated Statement of Equity
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    40Item 4. Controls and Procedures
    
    
    40PART II. OTHER INFORMATION
    
    
    41Item 1. Legal Proceedings
    
    
    41Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 6. Exhibits
    
    
    41SIGNATURES
    
    
    42EX-12.1EX-31.1EX-31.2EX-32.1EX-32.2
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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 pending 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.
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##### Table of Contents



Item 1. Financial Statements
 Holly Energy Partners, L.P.
 
 Consolidated Balance Sheets
 March 31, 2009
    
    
    December 31,(Unaudited)
    
    
    2008(In thousands, except unit data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,321
    
    
    $
    5,269Accounts receivable:Trade
    
    
    4,159
    
    
    
    5,082Affiliates
    
    
    11,731
    
    
    
    9,39515,890
    
    
    
    14,477Prepaid and other current assets
    
    
    351
    
    
    
    593Total current assets
    
    
    20,562
    
    
    
    20,339Properties and equipment, net
    
    
    296,343
    
    
    
    290,284Transportation agreements, net
    
    
    120,646
    
    
    
    122,383Investment in SLC Pipeline
    
    
    25,675
    
    
    
    Other assets
    
    
    6,319
    
    
    
    6,682Total assets
    
    $
    469,545
    
    
    $
    439,688LIABILITIES AND EQUITYCurrent liabilities:Accounts payable
    
    $
    5,692
    
    
    $
    5,816Accounts payable  affiliates
    
    
    3,142
    
    
    
    2,202Accrued interest
    
    
    922
    
    
    
    2,845Deferred revenue
    
    
    16,020
    
    
    
    15,658Accrued property taxes
    
    
    810
    
    
    
    1,145Other current liabilities
    
    
    965
    
    
    
    1,505Short-term borrowings under credit agreement
    
    
    
    
    
    
    29,000Total current liabilities
    
    
    27,551
    
    
    
    58,171Commitments and contingencies
    
    
    
    
    
    
    Long-term debt
    
    
    424,802
    
    
    
    355,793Other long-term liabilities
    
    
    17,774
    
    
    
    17,604Equity:Holly Energy Partners, L.P. partners equity (deficit):Common unitholders (8,390,000 units issued and outstanding
at March 31, 2009 and December 31, 2008)
    
    
    164,248
    
    
    
    169,126Subordinated unitholders (7,000,000 units issued and
outstanding at March 31, 2009 and December 31, 2008)
    
    
    (88,568
    )
    
    
    (85,059
    )Class B subordinated unitholders (937,500 units issued and
outstanding at March 31, 2009 and December 31, 2008)
    
    
    20,984
    
    
    
    21,455General partner interest (2% interest)
    
    
    (94,842
    )
    
    
    (94,653
    )Accumulated other comprehensive loss
    
    
    (13,117
    )
    
    
    (12,967
    )Total Holly Energy Partners, L.P. partners deficit
    
    
    (11,295
    )
    
    
    (2,098
    )Noncontrolling interest
    
    
    10,713
    
    
    
    10,218Total equity (deficit)
    
    
    (582
    )
    
    
    8,120Total liabilities and equity
    
    $
    469,545
    
    
    $
    439,688
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Holly Energy Partners, L.P.
 
 Consolidated Statements of Income
(Unaudited)
 Three Months EndedMarch 31,2009
    
    
    2008(In thousands, except per unit data)Revenues:Affiliates
    
    $
    18,323
    
    
    $
    18,327Third parties
    
    
    13,801
    
    
    
    8,94932,124
    
    
    
    27,276Operating costs and expenses:Operations
    
    
    10,796
    
    
    
    9,727Depreciation and amortization
    
    
    6,256
    
    
    
    4,313General and administrative
    
    
    1,324
    
    
    
    1,28618,376
    
    
    
    15,326Operating income
    
    
    13,748
    
    
    
    11,950Other income (expense):Equity in earnings of SLC Pipeline
    
    
    175
    
    
    
    SLC Pipeline acquisition costs
    
    
    (2,500
    )
    
    
    Interest income
    
    
    6
    
    
    
    93Interest expense
    
    
    (5,403
    )
    
    
    (3,807
    )Gain on sale of assets
    
    
    
    
    
    
    36(7,722
    )
    
    
    (3,678
    )Income before income taxes
    
    
    6,026
    
    
    
    8,272State income tax
    
    
    (92
    )
    
    
    (68
    )Net income
    
    
    5,934
    
    
    
    8,204Less noncontrolling interest in net income
    
    
    495
    
    
    
    406Net income attributable to Holly Energy Partners, L.P.
    
    
    5,439
    
    
    
    7,798Less general partner interest in net income attributable to
Holly Energy Partners, L.P.
    
    
    1,293
    
    
    
    880Limited partners interest in net income attributable to
Holly Energy Partners, L.P.
    
    $
    4,146
    
    
    $
    6,918Limited partners per unit interest in net income
attributable to Holly Energy Partners, L.P.  basic and
diluted
    
    $
    0.25
    
    
    $
    0.43Weighted average limited partners units outstanding
    
    
    16,328
    
    
    
    16,181
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Holly Energy Partners, L.P.
 
 Consolidated Statements of Cash Flows
(Unaudited)
 Three Months EndedMarch 31,2009
    
    
    2008(In thousands)Cash flows from operating activitiesNet income
    
    $
    5,934
    
    
    $
    8,204Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    6,256
    
    
    
    4,313Equity in earnings of SLC Pipeline
    
    
    (175
    )
    
    
    Change in fair value  interest rate swaps
    
    
    216
    
    
    
    Amortization of restricted and performance units
    
    
    (52
    )
    
    
    94Gain on sale of assets
    
    
    
    
    
    
    (36
    )(Increase) decrease in current assets:Accounts receivable
    
    
    923
    
    
    
    1,427Accounts receivable  affiliates
    
    
    (2,336
    )
    
    
    (2,073
    )Prepaid and other current assets
    
    
    242
    
    
    
    204Increase (decrease) in current liabilities:Accounts payable
    
    
    (124
    )
    
    
    1,762Accounts payable  affiliates
    
    
    940
    
    
    
    (953
    )Accrued interest
    
    
    (1,923
    )
    
    
    (1,969
    )Deferred revenue
    
    
    362
    
    
    
    1,851Accrued property taxes
    
    
    (335
    )
    
    
    (551
    )Other current liabilities
    
    
    (540
    )
    
    
    (177
    )Other, net
    
    
    168
    
    
    
    308Net cash provided by operating activities
    
    
    9,556
    
    
    
    12,404Cash flows from investing activitiesAdditions to properties and equipment
    
    
    (10,570
    )
    
    
    (11,086
    )Investment in SLC Pipeline
    
    
    (25,500
    )
    
    
    Acquisition of crude pipelines and tankage assets
    
    
    
    
    
    
    (171,000
    )Proceeds from sale of assets
    
    
    
    
    
    
    36Net cash used for investing activities
    
    
    (36,070
    )
    
    
    (182,050
    )Cash flows from financing activitiesNet borrowings under credit agreement
    
    
    40,000
    
    
    
    181,000Distributions to HEP partners
    
    
    (13,818
    )
    
    
    (12,623
    )Purchase of units for restricted grants
    
    
    (616
    )
    
    
    (514
    )Proceeds from issuance of common units
    
    
    
    
    
    
    104Contribution from general partner
    
    
    
    
    
    
    186Deferred financing costs
    
    
    
    
    
    
    (591
    )Net cash provided by financing activities
    
    
    25,566
    
    
    
    167,562Cash and cash equivalentsDecrease for period
    
    
    (948
    )
    
    
    (2,084
    )Beginning of period
    
    
    5,269
    
    
    
    10,321End of period
    
    $
    4,321
    
    
    $
    8,237
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Holly Energy Partners, L.P.
 
 Consolidated Statement of Equity
(Unaudited)
 Holly Energy Partners, L.P. Partners' Equity (Deficit):AccumulatedClass B
    
    
    General
    
    
    Other
    
    
    Non-Common
    
    
    Subordinated
    
    
    Subordinated
    
    
    Partner
    
    
    Comprehensive
    
    
    ControllingUnits
    
    
    Units
    
    
    Units
    
    
    Interest
    
    
    Loss
    
    
    Interest
    
    
    Total(In thousands)Balance December 31, 2008
    
    $
    169,126
    
    
    $
    (85,059
    )
    
    $
    21,455
    
    
    $
    (94,653
    )
    
    $
    (12,967
    )
    
    $
    10,218
    
    
    $
    8,120Distributions
    
    
    (6,421
    )
    
    
    (5,354
    )
    
    
    (718
    )
    
    
    (1,325
    )
    
    
    
    
    
    
    
    
    
    
    (13,818
    )Purchase of units for
restricted grants
    
    
    (616
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (616
    )Amortization of
restricted and
performance units
    
    
    (52
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52
    )Comprehensive income:Net income
    
    
    2,211
    
    
    
    1,845
    
    
    
    247
    
    
    
    1,136
    
    
    
    
    
    
    
    495
    
    
    
    5,934Change in fair value
of cash flow hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (150
    )
    
    
    
    
    
    
    (150
    )Comprehensive income
    
    
    2,211
    
    
    
    1,845
    
    
    
    247
    
    
    
    1,136
    
    
    
    (150
    )
    
    
    495
    
    
    
    5,784Balance March 31, 2009
    
    $
    164,248
    
    
    $
    (88,568
    )
    
    $
    20,984
    
    
    $
    (94,842
    )
    
    $
    (13,117
    )
    
    $
    10,713
    
    
    $
    (582
    )
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note 1: Description of Business and Presentation of Financial Statements
          - 8 -




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Recent Accounting Pronouncements
 Statement of Financial Accounting Standard (SFAS) No. 160 Noncontrolling Interests in
Consolidated Financial Statements  an Amendment of Accounting Research Bulletin (ARB) No. 51
  SFAS 141(R) Business Combinations
  SFAS No. 161 Disclosures about Derivative Instruments and Hedging Activities, an Amendment of SFAS
No. 133
  EITF No. 07-04 Application of the Two-Class Method under FASB Statement No. 128, Earnings per
Share, to Master Limited Partnerships
  FASB Staff Position (FSP) No. EITF 03-6-1 Determining Whether Instruments Granted in Share-Based
Transactions Are Participating Securities
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Note 2: Holly Crude Pipelines and Tankage Transaction
   Note 3: Properties and Equipment
 March 31,
    
    
    December 31,2009
    
    
    2008(In thousands)Pipelines and terminals
    
    $
    309,326
    
    
    $
    308,056Land and right of way
    
    
    24,991
    
    
    
    24,991Other
    
    
    11,660
    
    
    
    11,498Construction in progress
    
    
    48,889
    
    
    
    38,589394,866
    
    
    
    383,134Less accumulated depreciation
    
    
    98,523
    
    
    
    92,850$
    296,343
    
    
    $
    290,284
  Note 4: Transportation Agreements
  
    
    The Alon transportation 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 represents a portion of the total
purchase price of the Crude Pipelines and Tankage Assets 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.
 - 10 -




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March 31,
    
    
    December 31,2009
    
    
    2008(In thousands)Alon transportation agreement
    
    $
    59,933
    
    
    $
    59,933Holly crude pipelines and tankage agreement
    
    
    74,231
    
    
    
    74,231134,164
    
    
    
    134,164Less accumulated amortization
    
    
    13,518
    
    
    
    11,781$
    120,646
    
    
    $
    122,383
  Note 5: Employees, Retirement and Benefit Plans
    Restricted Units
  - 11 -




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Weighted-Weighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicGrant-Date
    
    
    Contractual
    
    
    ValueRestricted Units
    
    Grants
    
    

Fair
Value
    
    
    Term
    
    
    ($000)Outstanding January
1, 2009 (not
vested)
    
    
    53,505
    
    
    $
    41.28Granted
    
    
    26,562
    
    
    
    23.30Forfeited
    
    
    (2,152
    )
    
    
    42.53Vesting and
transfer of full
ownership to
recipients
    
    
    (23,318
    )
    
    
    37.70Outstanding at
March 31, 2009 (not
vested)
    
    
    54,597
    
    
    $
    34.01
    
    
    1.2 years
    
    $
    1,268
   Performance Units
    PayablePerformance Units
    
    In UnitsOutstanding at January 1, 2009 (not vested)
    
    
    36,971Granted
    
    
    28,113Forfeited
    
    
    Vesting and transfer of common units to recipients
    
    
    (10,313
    )Outstanding at March 31, 2009 (not vested)
    
    
    54,771
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Note 6: Debt
 Credit Agreement
       Senior Notes Due 2015
  - 13 -




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##### Table of Contents



March 31,
    
    
    December 31,2009
    
    
    2008(In thousands)Credit Agreement
    
    $
    240,000
    
    
    $
    200,000Senior NotesPrincipal
    
    
    185,000
    
    
    
    185,000Unamortized discount
    
    
    (2,249
    )
    
    
    (2,344
    )Unamortized premium  de-designated fair value hedge
    
    
    2,051
    
    
    
    2,137184,802
    
    
    
    184,793Total debt
    
    
    424,802
    
    
    
    384,793Less net short-term borrowings under credit agreement (1)
    
    
    
    
    
    
    29,000Total long-term debt (1)
    
    $
    424,802
    
    
    $
    355,793
 
 (1)
    
    We are currently classifying all borrowings under the Credit Agreement as long-term. At December 31, 2008, we reclassified certain of our Credit Agreement borrowings as short-term. Interest Rate Risk Management
      - 14 -




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Balance Sheet
    
    
    
    
    
    Location of Offsetting
    
    OffsettingInterest Rate Swaps
    
    Location
    
    Fair Value
    
    
    Balance
    
    Amount(In thousands)AssetFixed-to-variable interest rate swap
    
    Other assets
    
    $
    3,762
    
    
    Long-term debt
    
    $
    (2,051
    )- $60 million of 6.25% Senior Notes
    
    
    
    
    
    
    
    HEP partners deficit
    
    
    (1,942
    )(1)Interest expense
    
    
    231
    (2)$
    3,762
    
    
    
    
    $
    (3,762
    )LiabilityCash flow hedge  $171 million 
LIBOR based debt
    
    Other long-term liabilities
    
    $
    (13,117
    )
    
    Accumulated other comprehensive loss
    
    $
    13,117Variable-to-fixed interest rate swap
    
    Other long-term
    
    
    
    
    
    HEP partners' deficit
    
    
    4,166
    (1)- $60 million
    
    liabilities
    
    
    (4,064
    )
    
    Interest expense
    
    
    (102
    )$
    (17,181
    )
    
    
    
    $
    17,181
 
 (1)
    
    Represents prior year charges to interest expense.(2)
    
    Net of amortization of premium attributable to de-designated hedge. Interest Expense and Other Debt Information
  Three Months EndedMarch 31,2009
    
    
    2008(In thousands)Interest on outstanding debt:Senior Notes, net of interest rate swaps
    
    $
    2,881
    
    
    $
    2,710Credit Agreement, net of interest rate swap
    
    
    2,570
    
    
    
    984Net amortization of discount and deferred debt issuance costs
    
    
    176
    
    
    
    223Commitment fees
    
    
    65
    
    
    
    71Total interest incurred
    
    
    5,692
    
    
    
    3,988Less capitalized interest
    
    
    289
    
    
    
    181Net interest expense
    
    $
    5,403
    
    
    $
    3,807Cash paid for interest(1)
    
    $
    8,501
    
    
    $
    5,013
 
 (1)
    
    Net of cash received under our interest rate swap agreements of $1.9 million for each
of the three months ended March 31, 2009 and 2008.  - 15 -




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Note 7: Significant Customers
  Three Months EndedMarch 31,2009
    
    2008Holly
    
    
    57
    %
    
    
    67
    %Alon
    
    
    29
    %
    
    
    19
    %BP
    
    
    5
    %
    
    
    10
    %
 Note 8: Related Party Transactions
 Holly and Alon Agreements
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
    
    Pipeline, terminal and tankage revenues received from Holly were $18.3 million for each of
the three months ended March 31, 2009 and 2008. These amounts include the revenues received
under the Holly PTA, Holly IPA and Holly CPTA.
 
    
    Holly charged general and administrative services under the Omnibus Agreement of $0.6
million and $0.5 million for the three months ended March 31, 2009 and 2008, respectively.
 
    
    We reimbursed Holly for costs of employees supporting our operations of $4.7 million and
$2.6 million for the three months ended March 31, 2009 and 2008, respectively.
 
    
    During the three months ended March 31, 2009, we paid Holly a $2.5 million finders fee in
consideration for their assistance in obtaining our joint venture interest in the SLC
Pipeline.
 
    
    We distributed $6.9 million and $6.1 million during the three months ended March 31, 2009
and 2008, respectively, to Holly as regular distributions on its subordinated units, common
units and general partner interest.
 
    
    Our accounts receivable from Holly was $11.7 million and $9.4 million at March 31, 2009 and
December 31, 2008, respectively.
 
    
    Holly has failed to meet its minimum volume commitment for each of the fifteen quarters
since inception of the Holly IPA. Through March 31, 2009, we have charged Holly $8.7 million
for these shortfalls to date, $1.8 million and $0.5 million of which is included in affiliate
accounts receivable at March 31, 2009 and December 31, 2008, respectively.
 
    
    Our revenues for the three months ended March 31, 2009 include $0.2 million of shortfalls
billed under the Holly IPA in 2008 as Holly did not exceed its minimum volume commitment in
any of the subsequent four quarters. Deferred revenue in the consolidated balance sheets at
March 31, 2009 and December 31, 2008, includes $3.9 million and $2.4 million, respectively,
relating to the Holly IPA. It is possible that Holly may not exceed its minimum obligations
under the Holly IPA to allow Holly to receive credit for any of the $3.9 million deferred at
March 31, 2009.
  
    
    Pipeline and terminal revenues received from Alon were $7.7 million and $3.4 million for
the three months ended March 31, 2009 and 2008, respectively, under the Alon PTA.
Additionally, pipeline revenues received under a pipeline capacity lease agreement with Alon
were $1.7 million and $1.8 million for the three months ended March 31, 2009 and 2008,
respectively.
 
    
    We distributed $0.7 million during each of the three months ended March 31, 2009 and 2008
to Alon for distributions on its Class B subordinated units.
 
    
    Included in our accounts receivable  trade were $3.3 million and $2.5 million at March
31, 2009 and December 31, 2008, respectively, which represented receivable balances from Alon.
 
    
    Our revenues for the three months ended March 31, 2009 include $2.9 million of shortfalls
billed under the Alon PTA in 2008 as Alon did not exceed its minimum revenue obligation in any
of the subsequent four quarters. Deferred revenue in the consolidated balance sheets at March
31, 2009 and December 31, 2008 includes $11.1 million and $13.3 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 $11.1 million deferred at
March 31, 2009.
 BP
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##### Table of Contents




    
    BP is one of multiple shippers on the Rio Grande pipeline. We recorded revenues from BP of
$1.7 million and $2.7 million for the three months ended March 31, 2009 and 2008,
respectively.
 
    
    Included in our accounts receivable  trade at March 31, 2009 and December 31, 2008 were
$0.5 million and $1.1 million, respectively, which represented the receivable balance of Rio
Grande from BP.
 Note 9: HEP Partners Equity, Income Allocations, Cash Distributions and Comprehensive Income
 Issuances of units
   Allocations of Net Income
  Cash Distributions
    - 18 -




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##### Table of Contents



Three Months EndedMarch 31,2009
    
    
    2008(In thousands, except per unit data)General partner interest
    
    $
    283
    
    
    $
    260General partner incentive distribution
    
    
    1,205
    
    
    
    738Total general partner distribution
    
    
    1,488
    
    
    
    998Limited partner distribution
    
    
    12,654
    
    
    
    12,035Total regular quarterly cash distribution
    
    $
    14,142
    
    
    $
    13,033Cash distribution per unit applicable to limited partners
    
    $
    0.775
    
    
    $
    0.735
   Comprehensive Income
  Three Months EndedMarch 31,2009
    
    
    2008(In thousands)Net income
    
    $
    5,934
    
    
    $
    8,204Other comprehensive loss:Change in fair value of cash flow hedge
    
    
    (150
    )
    
    
    (4,349
    )Comprehensive income
    
    
    5,784
    
    
    
    3,855Less noncontrolling interest in comprehensive income
    
    
    (495
    )
    
    
    (406
    )Comprehensive income attributable to HEP unitholders
    
    $
    5,289
    
    
    $
    3,449
 Note 10: SLC Pipeline Joint Venture
    - 19 -




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##### Table of Contents



Note 11: Supplemental Guarantor/Non-Guarantor Financial Information
   - 20 -




---



##### Table of Contents



Condensed Consolidating Balance Sheet
 Guarantor
    
    
    Non-March 31, 2009
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    1,105
    
    
    $
    3,214
    
    
    $
    
    
    
    $
    4,321Accounts receivable
    
    
    
    
    
    
    15,104
    
    
    
    786
    
    
    
    
    
    
    
    15,890Intercompany accounts receivable (payable)
    
    
    (213,794
    )
    
    
    213,980
    
    
    
    (186
    )
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    91
    
    
    
    260
    
    
    
    
    
    
    
    
    
    
    
    351Total current assets
    
    
    (213,701
    )
    
    
    230,449
    
    
    
    3,814
    
    
    
    
    
    
    
    20,562Properties and equipment, net
    
    
    
    
    
    
    264,234
    
    
    
    32,109
    
    
    
    
    
    
    
    296,343Investment in subsidiaries
    
    
    385,831
    
    
    
    24,998
    
    
    
    
    
    
    
    (410,829
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    120,646
    
    
    
    
    
    
    
    
    
    
    
    120,646Investment in SLC Pipeline
    
    
    
    
    
    
    25,675
    
    
    
    
    
    
    
    
    
    
    
    25,675Other assets
    
    
    5,067
    
    
    
    1,252
    
    
    
    
    
    
    
    
    
    
    
    6,319Total assets
    
    $
    177,197
    
    
    $
    667,254
    
    
    $
    35,923
    
    
    $
    (410,829
    )
    
    $
    469,545LIABILITIES AND EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    8,764
    
    
    $
    70
    
    
    $
    
    
    
    $
    8,834Accrued interest
    
    
    (888
    )
    
    
    1,810
    
    
    
    
    
    
    
    
    
    
    
    922Deferred revenue
    
    
    
    
    
    
    16,020
    
    
    
    
    
    
    
    
    
    
    
    16,020Accrued property taxes
    
    
    
    
    
    
    763
    
    
    
    47
    
    
    
    
    
    
    
    810Other current liabilities
    
    
    2,078
    
    
    
    (1,208
    )
    
    
    95
    
    
    
    
    
    
    
    965Total current liabilities
    
    
    1,190
    
    
    
    26,149
    
    
    
    212
    
    
    
    
    
    
    
    27,551Long-term debt
    
    
    184,802
    
    
    
    240,000
    
    
    
    
    
    
    
    
    
    
    
    424,802Other long-term liabilities
    
    
    
    
    
    
    17,774
    
    
    
    
    
    
    
    
    
    
    
    17,774Equity
    
    
    (8,795
    )
    
    
    383,331
    
    
    
    35,711
    
    
    
    (410,829
    )
    
    
    (582
    )Total liabilities and equity
    
    $
    177,197
    
    
    $
    667,254
    
    
    $
    35,923
    
    
    $
    (410,829
    )
    
    $
    469,545
 Condensed Consolidating Balance Sheet
 Guarantor
    
    
    Non-December 31, 2008
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    3,706
    
    
    $
    1,561
    
    
    $
    
    
    
    $
    5,269Accounts receivable
    
    
    
    
    
    
    13,332
    
    
    
    1,145
    
    
    
    
    
    
    
    14,477Intercompany accounts receivable (payable)
    
    
    (197,828
    )
    
    
    197,979
    
    
    
    (151
    )
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    176
    
    
    
    417
    
    
    
    
    
    
    
    
    
    
    
    593Total current assets
    
    
    (197,650
    )
    
    
    215,434
    
    
    
    2,555
    
    
    
    
    
    
    
    20,339Properties and equipment, net
    
    
    
    
    
    
    257,886
    
    
    
    32,398
    
    
    
    
    
    
    
    290,284Investment in subsidiaries
    
    
    378,481
    
    
    
    23,842
    
    
    
    
    
    
    
    (402,323
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    122,383
    
    
    
    
    
    
    
    
    
    
    
    122,383Other assets
    
    
    5,300
    
    
    
    1,382
    
    
    
    
    
    
    
    
    
    
    
    6,682Total assets
    
    $
    186,131
    
    
    $
    620,927
    
    
    $
    34,953
    
    
    $
    (402,323
    )
    
    $
    439,688LIABILITIES AND EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    7,357
    
    
    $
    661
    
    
    $
    
    
    
    $
    8,018Accrued interest
    
    
    (27,778
    )
    
    
    30,623
    
    
    
    
    
    
    
    
    
    
    
    2,845Deferred revenue
    
    
    
    
    
    
    15,658
    
    
    
    
    
    
    
    
    
    
    
    15,658Accrued property taxes
    
    
    
    
    
    
    1,015
    
    
    
    130
    
    
    
    
    
    
    
    1,145Other current liabilities
    
    
    31,214
    
    
    
    (29,811
    )
    
    
    102
    
    
    
    
    
    
    
    1,505Short-term borrowings under credit agreement
    
    
    
    
    
    
    29,000
    
    
    
    
    
    
    
    
    
    
    
    29,000Total current liabilities
    
    
    3,436
    
    
    
    53,842
    
    
    
    893
    
    
    
    
    
    
    
    58,171Long-term debt
    
    
    184,793
    
    
    
    171,000
    
    
    
    
    
    
    
    
    
    
    
    355,793Other long-term liabilities
    
    
    
    
    
    
    17,604
    
    
    
    
    
    
    
    
    
    
    
    17,604Equity
    
    
    (2,098
    )
    
    
    378,481
    
    
    
    34,060
    
    
    
    (402,323
    )
    
    
    8,120Total liabilities and equity
    
    $
    186,131
    
    
    $
    620,927
    
    
    $
    34,953
    
    
    $
    (402,323
    )
    
    $
    439,688
 - 21 -




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##### Table of Contents



Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Three months ended March 31, 2009
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    18,323
    
    
    $
    
    
    
    $
    
    
    
    $
    18,323Third parties
    
    
    
    
    
    
    11,353
    
    
    
    2,792
    
    
    
    (344
    )
    
    
    13,801
    
    
    
    29,676
    
    
    
    2,792
    
    
    
    (344
    )
    
    
    32,124Operating costs and expenses:Operations
    
    
    
    
    
    
    10,349
    
    
    
    791
    
    
    
    (344
    )
    
    
    10,796Depreciation and amortization
    
    
    
    
    
    
    5,916
    
    
    
    340
    
    
    
    
    
    
    
    6,256General and administrative
    
    
    698
    
    
    
    636
    
    
    
    (10
    )
    
    
    
    
    
    
    1,324698
    
    
    
    16,901
    
    
    
    1,121
    
    
    
    (344
    )
    
    
    18,376Operating income (loss)
    
    
    (698
    )
    
    
    12,775
    
    
    
    1,671
    
    
    
    
    
    
    
    13,748Other income (expense):Equity in earnings of subsidiaries
    
    
    11,564
    
    
    
    1,156
    
    
    
    
    
    
    
    (12,720
    )
    
    
    Equity in earnings of SLC Pipeline
    
    
    
    
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    175SLC Pipeline acquisition costs
    
    
    
    
    
    
    (2,500
    )
    
    
    
    
    
    
    
    
    
    
    (2,500
    )Interest income (expense)
    
    
    (2,927
    )
    
    
    (2,470
    )
    
    
    
    
    
    
    
    
    
    
    (5,397
    )8,637
    
    
    
    (3,639
    )
    
    
    
    
    
    
    (12,720
    )
    
    
    (7,722
    )Income (loss) before income taxes
    
    
    7,939
    
    
    
    9,136
    
    
    
    1,671
    
    
    
    (12,720
    )
    
    
    6,026State income tax
    
    
    
    
    
    
    (72
    )
    
    
    (20
    )
    
    
    
    
    
    
    (92
    )Net income
    
    
    7,939
    
    
    
    9,064
    
    
    
    1,651
    
    
    
    (12,720
    )
    
    
    5,934Less noncontrolling interest in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    495
    
    
    
    495Net income attributable to HEP partners
    
    $
    7,939
    
    
    $
    9,064
    
    
    $
    1,651
    
    
    $
    (13,215
    )
    
    $
    5,439
 Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Three months ended March 31, 2008
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    18,327
    
    
    $
    
    
    
    $
    
    
    
    $
    18,327Third parties
    
    
    
    
    
    
    6,516
    
    
    
    2,750
    
    
    
    (317
    )
    
    
    8,949
    
    
    
    24,843
    
    
    
    2,750
    
    
    
    (317
    )
    
    
    27,276Operating costs and expenses:Operations
    
    
    
    
    
    
    8,973
    
    
    
    1,071
    
    
    
    (317
    )
    
    
    9,727Depreciation and amortization
    
    
    
    
    
    
    3,988
    
    
    
    325
    
    
    
    
    
    
    
    4,313General and administrative
    
    
    742
    
    
    
    543
    
    
    
    1
    
    
    
    
    
    
    
    1,286742
    
    
    
    13,504
    
    
    
    1,397
    
    
    
    (317
    )
    
    
    15,326Operating income (loss)
    
    
    (742
    )
    
    
    11,339
    
    
    
    1,353
    
    
    
    
    
    
    
    11,950Other income (expense):Equity in earnings of subsidiaries
    
    
    11,554
    
    
    
    947
    
    
    
    
    
    
    
    (12,501
    )
    
    
    Interest income (expense)
    
    
    (3,014
    )
    
    
    (719
    )
    
    
    19
    
    
    
    
    
    
    
    (3,714
    )Gain on sale of assets
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    368,540
    
    
    
    264
    
    
    
    19
    
    
    
    (12,501
    )
    
    
    (3,678
    )Income (loss) before income taxes
    
    
    7,798
    
    
    
    11,603
    
    
    
    1,372
    
    
    
    (12,501
    )
    
    
    8,272State income tax
    
    
    
    
    
    
    (49
    )
    
    
    (19
    )
    
    
    
    
    
    
    (68
    )Net income
    
    
    7,798
    
    
    
    11,554
    
    
    
    1,353
    
    
    
    (12,501
    )
    
    
    8,204Less noncontrolling interest in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    406
    
    
    
    406Net income attributable to HEP partners
    
    $
    7,798
    
    
    $
    11,554
    
    
    $
    1,353
    
    
    $
    (12,907
    )
    
    $
    7,798
 - 22 -




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##### Table of Contents



Condensed Consolidating Statement of Cash Flows
 Guarantor
    
    
    Non-Three months ended March 31, 2009
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash flows from operating activities
    
    $
    13,818
    
    
    $
    (5,966
    )
    
    $
    1,704
    
    
    $
    
    
    
    $
    9,556Cash flows from investing activitiesInvestment in SLC Pipeline
    
    
    
    
    
    
    (25,500
    )
    
    
    
    
    
    
    
    
    
    
    (25,500
    )Additions to properties and equipment
    
    
    
    
    
    
    (10,518
    )
    
    
    (52
    )
    
    
    
    
    
    
    (10,570
    )
    
    
    
    (36,018
    )
    
    
    (52
    )
    
    
    
    
    
    
    (36,070
    )Cash flows from financing activitiesBorrowings under credit agreement
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Distributions to partners
    
    
    (13,818
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,818
    )Purchase of units for restricted grants
    
    
    
    
    
    
    (616
    )
    
    
    
    
    
    
    
    
    
    
    (616
    )(13,818
    )
    
    
    39,384
    
    
    
    
    
    
    
    
    
    
    
    25,566Cash and cash equivalentsIncrease (decrease) for the period
    
    
    
    
    
    
    (2,600
    )
    
    
    1,652
    
    
    
    
    
    
    
    (948
    )Beginning of period
    
    
    2
    
    
    
    3,706
    
    
    
    1,561
    
    
    
    
    
    
    
    5,269End of period
    
    $
    2
    
    
    $
    1,106
    
    
    $
    3,213
    
    
    $
    
    
    
    $
    4,321
 Condensed Consolidating Statement of Cash Flows
 Guarantor
    
    
    Non-Three months ended March 31, 2008
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash flows from operating activities
    
    $
    3,908
    
    
    $
    6,154
    
    
    $
    2,342
    
    
    $
    
    
    
    $
    12,404Cash flows from investing activitiesAdditions to properties and equipment
    
    
    
    
    
    
    (11,041
    )
    
    
    (45
    )
    
    
    
    
    
    
    (11,086
    )Acquisition of crude pipelines and
tankage assets
    
    
    
    
    
    
    (171,000
    )
    
    
    
    
    
    
    
    
    
    
    (171,000
    )Proceeds from sale of assets
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    (182,005
    )
    
    
    (45
    )
    
    
    
    
    
    
    (182,050
    )Cash flows from financing activitiesBorrowings under credit agreement
    
    
    
    
    
    
    181,000
    
    
    
    
    
    
    
    
    
    
    
    181,000Proceeds from issuance of common units
    
    
    
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    104Distributions to partners
    
    
    (12,437
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,437
    )Purchase of units for restricted grants
    
    
    (514
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (514
    )Deferred financing costs
    
    
    
    
    
    
    (591
    )
    
    
    
    
    
    
    
    
    
    
    (591
    )(12,951
    )
    
    
    180,513
    
    
    
    
    
    
    
    
    
    
    
    167,562Cash and cash equivalentsIncrease (decrease) for the period
    
    
    (9,043
    )
    
    
    4,662
    
    
    
    2,297
    
    
    
    
    
    
    
    (2,084
    )Beginning of period
    
    
    2
    
    
    
    8,060
    
    
    
    2,259
    
    
    
    
    
    
    
    10,321End of period
    
    $
    (9,041
    )
    
    $
    12,722
    
    
    $
    4,556
    
    
    $
    
    
    
    $
    8,237
 - 23 -




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##### Table of Contents



HOLLY ENERGY PARTNERS, L.P.
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  OVERVIEW
       Agreements with Holly Corporation and Alon
   - 24 -




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##### Table of Contents



Minimum AnnualizedCommitmentAgreement
    
    (In millions)
    
    
    Year of Maturity
    
    Contract TypeHolly PTA
    
    $
    41.2
    
    
    2019
    
    Minimum revenue commitmentHolly IPA
    
    
    13.3
    
    
    2020
    
    Minimum revenue commitmentHolly CPTA
    
    
    26.8
    
    
    2022
    
    Minimum revenue commitmentAlon PTA
    
    
    21.7
    
    
    2020
    
    Minimum volume commitmentAlon capacity lease
    
    
    6.8
    
    
    Various
    
    Capacity leaseTotal
    
    $
    109.8
   - 25 -




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##### Table of Contents



RESULTS OF OPERATIONS (Unaudited)
 Income, Distributable Cash Flow and Volumes
 Three Months EndedMarch 31,
    
    
    Change from2009
    
    
    2008
    
    
    2008(In thousands, except per unit data)RevenuesPipelines:Affiliates  refined product pipelines
    
    $
    7,553
    
    
    $
    9,568
    
    
    $
    (2,015
    )Affiliates  intermediate pipelines
    
    
    1,766
    
    
    
    3,593
    
    
    
    (1,827
    )Affiliates  crude pipelines
    
    
    6,901
    
    
    
    2,195
    
    
    
    4,70616,220
    
    
    
    15,356
    
    
    
    864Third parties  refined product pipelines
    
    
    12,267
    
    
    
    7,835
    
    
    
    4,43228,487
    
    
    
    23,191
    
    
    
    5,296Terminals, refinery tankage and truck loading racks:Affiliates
    
    
    2,103
    
    
    
    2,971
    
    
    
    (868
    )Third parties
    
    
    1,534
    
    
    
    1,114
    
    
    
    4203,637
    
    
    
    4,085
    
    
    
    (448
    )Total revenues
    
    
    32,124
    
    
    
    27,276
    
    
    
    4,848Operating costs and expenses:Operations
    
    
    10,796
    
    
    
    9,727
    
    
    
    1,069Depreciation and amortization
    
    
    6,256
    
    
    
    4,313
    
    
    
    1,943General and administrative
    
    
    1,324
    
    
    
    1,286
    
    
    
    3818,376
    
    
    
    15,326
    
    
    
    3,050Operating income
    
    
    13,748
    
    
    
    11,950
    
    
    
    1,798Other income (expense):Equity in earnings of SLC Pipeline
    
    
    175
    
    
    
    
    
    
    
    175SLC Pipeline acquisition costs
    
    
    (2,500
    )
    
    
    
    
    
    
    (2,500
    )Interest income
    
    
    6
    
    
    
    93
    
    
    
    (87
    )Interest expense, including amortization
    
    
    (5,403
    )
    
    
    (3,807
    )
    
    
    (1,596
    )Gain on sale of assets
    
    
    
    
    
    
    36
    
    
    
    (36
    )(7,722
    )
    
    
    (3,678
    )
    
    
    (4,044
    )Income before income taxes
    
    
    6,026
    
    
    
    8,272
    
    
    
    (2,246
    )State income tax
    
    
    (92
    )
    
    
    (68
    )
    
    
    (24
    )Net income(8)
    
    
    5,934
    
    
    
    8,204
    
    
    
    (2,270
    )Less noncontrolling interest in net income(8)
    
    
    495
    
    
    
    406
    
    
    
    89Net income attributable to HEP(8)
    
    
    5,439
    
    
    
    7,798
    
    
    
    (2,359
    )Less general partner interest in net income attributable to
HEP, including incentive distributions (1)
    
    
    1,293
    
    
    
    880
    
    
    
    413Limited partners interest in net income attributable to HEP
    
    $
    4,146
    
    
    $
    6,918
    
    
    $
    (2,772
    )Limited partners per unit interest in net income
attributable to HEP  basic and diluted(1)(9)
    
    $
    0.25
    
    
    $
    0.43
    
    
    $
    (0.18
    )Weighted average limited partners units outstanding
    
    
    16,328
    
    
    
    16,181
    
    
    
    147EBITDA(2)
    
    $
    17,184
    
    
    $
    15,893
    
    
    $
    1,291Distributable cash flow(3)
    
    $
    14,356
    
    
    $
    13,708
    
    
    $
    648Volumes  barrels per day (bpd)(4)Pipelines:Affiliates  refined product pipelines
    
    
    62,338
    
    
    
    84,560
    
    
    
    (22,222
    )Affiliates  intermediate pipelines
    
    
    34,296
    
    
    
    67,611
    
    
    
    (33,315
    )Affiliates  crude pipelines
    
    
    122,207
    
    
    
    47,398
    
    
    
    74,809218,841
    
    
    
    199,569
    
    
    
    19,272Third parties  refined product pipelines
    
    
    66,298
    
    
    
    45,510
    
    
    
    20,788285,139
    
    
    
    245,079
    
    
    
    40,060Terminals and truck loading racks:Affiliates
    
    
    82,836
    
    
    
    127,436
    
    
    
    (44,600
    )Third parties
    
    
    43,406
    
    
    
    37,242
    
    
    
    6,164126,242
    
    
    
    164,678
    
    
    
    (38,436
    )Total for pipelines and terminal assets (bpd)
    
    
    411,381
    
    
    
    409,757
    
    
    
    1,624
 - 26 -




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##### Table of Contents



(1)
    
    Net income attributable to HEP is allocated between limited partners and the general
partner interest in accordance with the provisions of the partnership agreement. HEP net
income allocated to the general partner includes incentive distributions declared
subsequent to quarter end. General partner incentive distributions for the three months
ended March 31, 2009 and 2008 were $1.2 million and $0.7 million, respectively. HEP 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 HEP net
income.(2)
    
    Earnings before interest, taxes, depreciation and amortization (EBITDA) is calculated
as net income attributable to HEP plus (i) interest expense net of interest income, (ii)
state income tax and (iii) depreciation and amortization. EBITDA is not a calculation
based upon U.S. generally accepted accounting principles (U.S. GAAP). However, the
amounts included in the EBITDA calculation are derived from amounts included in our
consolidated financial statements. EBITDA should not be considered as an alternative to
net income or operating income, as an indication of our operating performance or as an
alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily
comparable to similarly titled measures of other companies. EBITDA is presented here
because it is a widely used financial indicator used by investors and analysts to measure
performance. EBITDA is also used by our management for internal analysis and as a basis
for compliance with financial covenants.Set forth below is our calculation of EBITDA. Three Months EndedMarch 31,2009
    
    
    2008(In thousands)Net income attributable to HEP
    
    $
    5,439
    
    
    $
    7,798Add interest expense
    
    
    5,227
    
    
    
    3,584Add amortization of discount and deferred debt issuance costs
    
    
    176
    
    
    
    223Subtract interest income
    
    
    (6
    )
    
    
    (93
    )Add state income tax
    
    
    92
    
    
    
    68Add depreciation and amortization
    
    
    6,256
    
    
    
    4,313EBITDA
    
    $
    17,184
    
    
    $
    15,893
 
 (3)
    
    Distributable cash flow is not a calculation based upon U.S. GAAP. However, the
amounts included in the calculation are derived from amounts separately presented in our
consolidated financial statements, with the exception of maintenance capital expenditures.
Distributable cash flow should not be considered in isolation or as an alternative to net
income or operating income, as an indication of our operating performance or as an
alternative to operating cash flow as a measure of liquidity. Distributable cash flow is
not necessarily comparable to similarly titled measures of other companies. Distributable
cash flow is presented here because it is a widely accepted financial indicator used by
investors to compare partnership performance. We believe that this measure provides
investors an enhanced perspective of the operating performance of our assets and the cash
our business is generating. - 27 -




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##### Table of Contents



Set forth below is our calculation of distributable cash flow. Three Months EndedMarch 31,2009
    
    
    2008(In thousands)Net income attributable to HEP
    
    $
    5,439
    
    
    $
    7,798Add depreciation and amortization
    
    
    6,256
    
    
    
    4,313Add amortization of discount and deferred debt issuance costs
    
    
    176
    
    
    
    223Add increase in interest expense  change in fair value of interest rate swaps
    
    
    216
    
    
    
    Subtract equity in earnings of SLC Pipeline
    
    
    (175
    )
    
    
    Add increase in deferred revenue
    
    
    362
    
    
    
    1,851Add SLC Pipeline acquisition costs*
    
    
    2,500
    
    
    
    Subtract maintenance capital expenditures**
    
    
    (418
    )
    
    
    (477
    )Distributable cash flow
    
    $
    14,356
    
    
    $
    13,708
 
 *
    
    Under new accounting guidance, Statement of Financial accounting Standards
(SFAS) No. 141(R) effective January 1, 2009, we were required to expense rather than
capitalize certain acquisition costs of $2.5 million associated with our joint venture
agreement with Plains that closed in March 2009. As these costs directly relate to our
interest in the new joint venture pipeline and are similar to expansion capital
expenditures, 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.(4)
    
    The amounts reported for the three months ended March 31, 2008 include volumes
transported on the crude pipelines for the period from March 1, 2008 through March 31, 2008
only. Volumes shipped during March 2008 averaged 139.1 thousand barrels per day (mbpd).
For the three months ended March 31, 2008, crude pipeline volumes are based on March
volumes, averaged over the 91 days in the first quarter of 2008. Under the Holly CPTA,
fees are based on volumes transported on each pipeline component comprising the crude
pipeline system (the crude oil gathering pipelines and the crude oil trunk lines).
Accordingly, volumes transported on the crude pipelines represent the sum of volumes
transported on both pipeline components. In cases where volumes are transported over both
components of the crude pipeline system, such volumes are reflected twice in the total
crude oil pipeline volumes. March 31,
    
    December 31,2009
    
    2008Balance Sheet Data
    
    (In thousands)Cash and cash equivalents
    
    $
    4,321
    
    
    $
    5,269Working capital(5)
    
    $
    (6,989
    )
    
    $
    (37,832
    )Total assets(6)
    
    $
    469,545
    
    
    $
    439,688Long-term debt(7)
    
    $
    424,802
    
    
    $
    355,793Total equity (deficit)(6)(8)
    
    $
    (582
    )
    
    $
    8,120
 
 (5)
    
    Reflects $29.0 million of credit agreement advances that were classified as short-term
borrowings at December 31, 2008.(6)
    
    As a master limited partnership, we distribute our available cash, which historically
has exceeded net income because depreciation and amortization expense represents a non-cash
charge against income. The result is a decline in 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 and the intermediate pipelines
purchased from Holly in 2005 had been acquired from third parties, our acquisition cost in
excess of Hollys basis in the transferred assets of $157.3 million would have been
recorded as increases to our properties and equipment and intangible assets instead of
reductions to equity.(7)
    
    Includes $69.0 million of credit agreement advances that were classified long-term debt
at March 31, 2009. - 28 -




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##### Table of Contents



(8)
    
    During the first quarter of 2009, we adopted SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements  an amendment of ARB No. 51. As a result, net income
attributable to the non-controlling interest in our Rio Grande subsidiary is now presented
as an adjustment to net income to arrive at Net income attributable to Holly Energy
Partners, L.P. in our Consolidated Statements of Income. Prior to our adoption of this
standard, this amount was presented as Minority interest in Rio Grande, a non-operating
expense item before Income before income taxes. Additionally, equity attributable to
noncontrolling interests in our Rio Grande subsidiary is now presented as a separate
component of total equity in our Consolidated Financial Statements. We have adopted this
standard on a retroactive basis. While this presentation differs from previous GAAP
requirements, this standard did not affect our net income and equity attributable to HEP
partners.(9)
    
    During the quarter, we also adopted Emerging Issues Task Force (EITF) No. 07-4,
Application of the Two-Class Method under SFAS No. 128 to Master Limited Partnerships,
which prescribes the application of the two-class method in computing earnings per unit to
reflect a master limited partnerships contractual obligation to make distributions to the
general partner, limited partners and incentive distribution rights holder. We adopted
this standard effective January 1, 2009. As a result, our quarterly earnings allocations
to the general partner now include incentive distributions that were declared subsequent to
quarter end. Prior to our adoption of this standard, our general partner earnings
allocations included incentive distributions that were declared during each quarter. We
have adopted this standard on a retroactive basis. Although this standard resulted in a
decrease in our limited partners interest in net income attributable to HEP for the first
quarter of 2008, it did not affect last years first quarter earnings of $0.43 per limited
partner unit. Results of Operations  Three Months Ended March 31, 2009 Compared with Three Months Ended March
31, 2008
 Summary
  Revenues
  - 29 -




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##### Table of Contents



Operating Costs
  Depreciation and Amortization
  General and Administrative
  Equity in earnings of SLC Pipeline
  SLC Pipeline Acquisition Costs
  - 30 -




---



##### Table of Contents



Interest Expense
  State Income Tax
  LIQUIDITY AND CAPITAL RESOURCES
 Overview
       - 31 -




---



##### Table of Contents



Cash Flows  Operating Activities
   Cash Flows  Investing Activities
  Cash Flows  Financing Activities
  Capital Requirements
   - 32 -




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- 33 -




---



##### Table of Contents



Credit Agreement
       Senior Notes Due 2015
  - 34 -




---



##### Table of Contents



March 31,
    
    
    December 31,2009
    
    
    2008(In thousands)Credit Agreement
    
    $
    240,000
    
    
    $
    200,000Senior NotesPrincipal
    
    
    185,000
    
    
    
    185,000Unamortized discount
    
    
    (2,249
    )
    
    
    (2,344
    )Unamortized premium  de-designated fair value hedge
    
    
    2,051
    
    
    
    2,137184,802
    
    
    
    184,793Total Debt
    
    
    424,802
    
    
    
    384,793Less net short-term borrowings under credit agreement (1)
    
    
    
    
    
    
    29,000Total long-term debt (1)
    
    $
    424,802
    
    
    $
    355,793
 
 (1)
    
    We are currently classifying all borrowings under the Credit Agreement as long-term.  At December 31, 2008, we classified certain of our Credit Agreement borrowings as short-term.  Contractual Obligations
   Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    OverContractual Obligations
    
    Total
    
    
    1 Year
    
    
    2-3 Years
    
    
    4-5 Years
    
    
    5 Years(In thousands)Long-term debt  principal(1)
    
    $
    425,000
    
    
    $
    
    
    
    $
    240,000
    
    
    $
    
    
    
    $
    185,000Long-term debt  interest(2)
    
    
    82,194
    
    
    
    16,867
    
    
    
    30,639
    
    
    
    23,125
    
    
    
    11,563Pipeline operating and right of way leases
    
    
    53,138
    
    
    
    6,569
    
    
    
    12,709
    
    
    
    12,645
    
    
    
    21,215Other agreements
    
    
    19,887
    
    
    
    2,721
    
    
    
    5,091
    
    
    
    4,600
    
    
    
    7,475Total
    
    $
    580,219
    
    
    $
    26,157
    
    
    $
    288,439
    
    
    $
    40,370
    
    
    $
    225,253
 
 (1)
    
    Long-term debt consists of the $185.0 million principal balance on the Senior Notes
and $240.0 million of outstanding principal under the Credit Agreement that has been
classified as long-term debt.(2)
    
    Interest payments consist of interest on outstanding principal under the 6.25% Senior
Notes and Credit Agreement. Interest on the Credit Agreement debt is based on a March 31,
2009 effective interest rate of 2.21%. Impact of Inflation
  - 35 -




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##### Table of Contents



Environmental Matters
     CRITICAL ACCOUNTING POLICIES
   - 36 -




---



##### Table of Contents



Recent Accounting Pronouncements
 SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements  an Amendment of
Accounting Research Bulletin (ARB) No. 51
  SFAS 141(R) Business Combinations
  SFAS No. 161 Disclosures about Derivative Instruments and Hedging Activities, an Amendment of SFAS
No. 133
  EITF No. 07-04 Application of the Two-Class Method under FASB Statement No. 128, Earnings per
Share, to Master Limited Partnerships
  FASB Staff Position (FSP) No. EITF 03-6-1 Determining Whether Instruments Granted in Share-Based
Transactions Are Participating Securities
  - 37 -




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##### Table of Contents



RISK MANAGEMENT
         - 38 -




---



##### Table of Contents



Balance Sheet
    
    
    
    
    
    Location of Offsetting
    
    OffsettingInterest Rate Swaps
    
    Location
    
    Fair Value
    
    
    Balance
    
    Amount(In thousands)AssetFixed-to-variable interest rate swap
    
    Other assets
    
    
    
    
    
    Long-term debt
    
    $
    (2,051
    )- $60 million of 6.25% Senior Notes
    
    
    
    $
    3,762
    
    
    HEP partners deficit
    
    
    (1,942
    )(1)Interest expense
    
    
    231
    (2)$
    3,762
    
    
    
    
    $
    (3,762
    )LiabilityCash flow hedge  $171 million LIBOR based debt
    
    Other long-term liabilities
    
    $
    (13,117
    )
    
    Accumulated other comprehensive loss
    
    $
    13,117Variable-to-fixed interest rate swap
    
    Other long-term
    
    
    
    
    
    HEP partners deficit
    
    
    4,166
    (1)- $60 million
    
    liabilities
    
    
    (4,064
    )
    
    Interest expense
    
    
    (102
    )$
    (17,181
    )
    
    
    
    $
    17,181
 
 (1)
    
    Represents prior year charges to interest expense.(2)
    
    Net of amortization of premium attributable to de-designated hedge.      - 39 -




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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
  - 40 -




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##### Table of Contents



Item 1. Legal proceedings
  
 Item 2. Unregistered Sales of Securities and Use of Proceeds
 (c) Common unit repurchases made in the quarter
  Maximum NumberTotal Number of
    
    of Units that MayUnits Purchased as
    
    Yet Be PurchasedPart of Publicly
    
    Under a PubliclyTotal Number of
    
    Average Price
    
    Announced Plan or
    
    Announced Plan orPeriod
    
    Units Purchased
    
    Paid Per Unit
    
    Program
    
    ProgramJanuary 2009
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    February 2009
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    March 2009
    
    
    26,431
    
    
    $
    23.31
    
    
    
    
    
    
    
    Total
    
    
    26,431
    
    
    $
    23.31
    
    
    
    
 
 Item 6. Exhibits
 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 - 41 -




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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: April 29, 2009
    
    
    
    /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)
 - 42 -