##### 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, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
 For the transition period from  to .
 Commission File Number: 1-32225
 HOLLY ENERGY PARTNERS, L.P.
  Delaware
    
    20-0833098(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 
 
   
   
   þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
  o þ




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##### 



PART I. FINANCIAL INFORMATION
    
    
    3FORWARD-LOOKING STATEMENTS
    
    
    3Item 1. Financial Statements (Unaudited, except December 31, 2005 Balance Sheet)
    
    
    4Consolidated Balance Sheets
    
    
    4Consolidated Statements of Income
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Consolidated Statement of Partners Equity (Deficit)
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    38Item 4. Controls and Procedures
    
    
    38PART II. OTHER INFORMATION
    
    
    39Item 1. Legal proceedings
    
    
    39Item 2. Unregistered sales of securities and use of proceeds
    
    
    39Item 6. Exhibits
    
    
    39SIGNATURES
    
    
    40Computation 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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PART I. FINANCIAL INFORMATION
 
 FORWARD-LOOKING STATEMENTS
  
    
    Risks and uncertainties with respect to the actual quantities of petroleum products
shipped on our pipelines and/or terminalled in our terminals;
    
    The economic viability of Holly Corporation, Alon USA, Inc. and our other customers;
    
    The demand for refined petroleum products in markets we serve;
    
    Our ability to successfully purchase and integrate any future acquired operations;
    
    The availability and cost of our financing;
    
    The possibility of reductions in production or shutdowns at refineries utilizing our
pipeline and terminal facilities;
    
    The effects of current and future government regulations and policies;
    
    Our operational efficiency in carrying out routine operations and capital construction projects;
    
    The possibility of terrorist attacks and the consequences of any such attacks;
    
    General economic conditions; and
    
    Other financial, operations and legal risks and uncertainties detailed from time to time
in our Securities and Exchange Commission filings.
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Item 1. Financial Statements
 Holly Energy Partners, L.P.
 
 Consolidated Balance Sheets
 June 30, 2006
    
    
    December 31,(Unaudited)
    
    
    2005(In thousands, except unit data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    16,414
    
    
    $
    20,583Accounts receivable:Trade
    
    
    3,835
    
    
    
    3,076Affiliates
    
    
    3,312
    
    
    
    3,6457,147
    
    
    
    6,721Prepaid and other current assets
    
    
    1,154
    
    
    
    1,401Total current assets
    
    
    24,715
    
    
    
    28,705Properties and equipment, net
    
    
    160,538
    
    
    
    162,298Transportation agreements, net
    
    
    58,862
    
    
    
    60,903Other assets
    
    
    2,659
    
    
    
    2,869Total assets
    
    $
    246,774
    
    
    $
    254,775LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,418
    
    
    $
    3,020Accrued interest
    
    
    2,924
    
    
    
    2,892Deferred revenue
    
    
    4,929
    
    
    
    1,013Other current liabilities
    
    
    2,125
    
    
    
    2,326Total current liabilities
    
    
    13,396
    
    
    
    9,251Commitments and contingencies
    
    
    
    
    
    
    Long-term debt
    
    
    178,435
    
    
    
    180,737Other long-term liabilities
    
    
    3,271
    
    
    
    974Minority interest
    
    
    10,826
    
    
    
    11,753Partners equity (deficit):Common unitholders (8,170,000 units issued and outstanding)
    
    
    179,024
    
    
    
    184,650Subordinated unitholder (7,000,000 units issued and outstanding)
    
    
    (67,966
    )
    
    
    (63,235
    )Class B subordinated unitholder (937,500 units issued and
outstanding)
    
    
    23,754
    
    
    
    24,388General partner (2% interest)
    
    
    (93,966
    )
    
    
    (93,743
    )Total partners equity
    
    
    40,846
    
    
    
    52,060Total liabilities and partners equity
    
    $
    246,774
    
    
    $
    254,775
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Holly Energy Partners, L.P.
 
 Consolidated Statements of Income
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per unit data)Revenues:Affiliates
    
    $
    10,584
    
    
    $
    9,941
    
    
    $
    23,066
    
    
    $
    19,371Third parties
    
    
    7,943
    
    
    
    9,580
    
    
    
    17,899
    
    
    
    16,66318,527
    
    
    
    19,521
    
    
    
    40,965
    
    
    
    36,034Operating costs and expenses:Operations
    
    
    7,429
    
    
    
    6,448
    
    
    
    14,538
    
    
    
    11,836Depreciation and amortization
    
    
    3,781
    
    
    
    3,849
    
    
    
    7,574
    
    
    
    6,212General and administrative
    
    
    1,289
    
    
    
    990
    
    
    
    2,513
    
    
    
    1,96712,499
    
    
    
    11,287
    
    
    
    24,625
    
    
    
    20,015Operating income
    
    
    6,028
    
    
    
    8,234
    
    
    
    16,340
    
    
    
    16,019Other income (expense):Interest income
    
    
    245
    
    
    
    145
    
    
    
    488
    
    
    
    233Interest expense
    
    
    (3,247
    )
    
    
    (2,365
    )
    
    
    (6,422
    )
    
    
    (3,483
    )(3,002
    )
    
    
    (2,220
    )
    
    
    (5,934
    )
    
    
    (3,250
    )Income before minority interest
    
    
    3,026
    
    
    
    6,014
    
    
    
    10,406
    
    
    
    12,769Minority interest in Rio Grande Pipeline
Company
    
    
    (28
    )
    
    
    27
    
    
    
    (273
    )
    
    
    (402
    )Net income
    
    
    2,998
    
    
    
    6,041
    
    
    
    10,133
    
    
    
    12,367Less general partner interest in net income
    
    
    319
    
    
    
    121
    
    
    
    646
    
    
    
    247Limited partners interest in net income
    
    $
    2,679
    
    
    $
    5,920
    
    
    $
    9,487
    
    
    $
    12,120Net income per limited partner unit 
Basic and diluted
    
    $
    0.17
    
    
    $
    0.40
    
    
    $
    0.59
    
    
    $
    0.83Weighted average limited partners units
outstanding
    
    
    16,108
    
    
    
    14,938
    
    
    
    16,108
    
    
    
    14,637
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Holly Energy Partners, L.P.
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Six Months Ended June 30,2006
    
    
    2005(In thousands)Cash flows from operating activitiesNet income
    
    $
    10,133
    
    
    $
    12,367Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    7,574
    
    
    
    6,212Minority interest in Rio Grande Pipeline Company
    
    
    273
    
    
    
    402Amortization of restricted and performance units
    
    
    409
    
    
    
    33(Increase) decrease in current assets:Accounts receivable  trade
    
    
    (759
    )
    
    
    (3,587
    )Accounts receivable  affiliates
    
    
    333
    
    
    
    (140
    )Prepaid and other current assets
    
    
    172
    
    
    
    (388
    )Increase (decrease) in current liabilities:Accounts payable
    
    
    398
    
    
    
    1,050Accrued interest
    
    
    32
    
    
    
    2,955Deferred revenue
    
    
    3,916
    
    
    
    Other current liabilities
    
    
    (200
    )
    
    
    125Other, net
    
    
    205
    
    
    
    223Net cash provided by operating activities
    
    
    22,486
    
    
    
    19,252Cash flows from investing activitiesAcquisition of pipeline and terminal assets
    
    
    
    
    
    
    (121,853
    )Additions to properties and equipment
    
    
    (3,699
    )
    
    
    (710
    )Other
    
    
    
    
    
    
    (211
    )Net cash used for investing activities
    
    
    (3,699
    )
    
    
    (122,774
    )Cash flows from financing activitiesProceeds from issuance of senior notes, net of discount
    
    
    
    
    
    
    181,238Net decrease in borrowings under revolving credit agreement
    
    
    
    
    
    
    (25,000
    )Distributions to partners
    
    
    (21,244
    )
    
    
    (15,526
    )Purchase of units for restricted grants
    
    
    (512
    )
    
    
    Cash contribution from general partner
    
    
    
    
    
    
    612Deferred debt issuance costs
    
    
    
    
    
    
    (967
    )Cash distributions to minority interest
    
    
    (1,200
    )
    
    
    (1,620
    )Other
    
    
    
    
    
    
    (9
    )Net cash provided by (used for) financing activities
    
    
    (22,956
    )
    
    
    138,728Cash and cash equivalentsIncrease/(decrease) for period
    
    
    (4,169
    )
    
    
    35,206Beginning of period
    
    
    20,583
    
    
    
    19,104End of period
    
    $
    16,414
    
    
    $
    54,310
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Holly Energy Partners, L.P.
 
 Consolidated Statement of Partners Equity (Deficit)
 (Unaudited)
 Class BCommon
    
    
    Subordinated
    
    
    Subordinated
    
    
    General PartnerUnits
    
    
    Units
    
    
    Units
    
    
    Interest
    
    
    Total(In thousands)Balance December 31, 2005
    
    $
    184,650
    
    
    $
    (63,235
    )
    
    $
    24,388
    
    
    $
    (93,743
    )
    
    $
    52,060Distributions
    
    
    (10,335
    )
    
    
    (8,854
    )
    
    
    (1,186
    )
    
    
    (869
    )
    
    
    (21,244
    )Purchase of units for
restricted grants
    
    
    (512
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (512
    )Amortization of
restricted and
performance units
    
    
    409
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    409Net income
    
    
    4,812
    
    
    
    4,123
    
    
    
    552
    
    
    
    646
    
    
    
    10,133Balance June 30, 2006
    
    $
    179,024
    
    
    $
    (67,966
    )
    
    $
    23,754
    
    
    $
    (93,966
    )
    
    $
    40,846
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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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Note 2: Acquisitions
 Alon Transaction
    Holly Intermediate Pipelines Transaction
   - 9 -




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Note 3: Properties and Equipment
 June 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Pipelines and terminals
    
    $
    186,458
    
    
    $
    184,464Land and right of way
    
    
    22,512
    
    
    
    22,163Other
    
    
    6,294
    
    
    
    5,728Construction in progress
    
    
    3,870
    
    
    
    2,792219,134
    
    
    
    215,147Less accumulated depreciation
    
    
    58,596
    
    
    
    52,849$
    160,538
    
    
    $
    162,298
  Note 4: Transportation Agreements
  
    
    Costs incurred by Rio Grande in constructing certain
pipeline and terminal facilities located in Mexico, which were
then contributed to an affiliate of Pemex, the national oil
company of Mexico. In exchange, Rio Grande received a 10-year
transportation agreement from BP plc expiring in 2007. This
asset is being amortized over the 10-year term of the
agreement.
    
    A portion of the total purchase price of the Alon assets
was allocated to the transportation agreement asset based on
the fair value appraisal provided by an independent firm.
This asset is being amortized over 30 years ending 2035, the
15-year initial term of the Alon PTA plus the expected 15-year
extension period.
 - 10 -




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June 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Rio Grande transportation agreement
    
    $
    20,836
    
    
    $
    20,836Alon transportation agreement
    
    
    59,933
    
    
    
    59,93380,769
    
    
    
    80,769Less accumulated amortization
    
    
    21,907
    
    
    
    19,866$
    58,862
    
    
    $
    60,903
 Note 5: Debt
 Credit Agreement
       - 11 -
    Table of Contents    Senior Notes Due 2015
      Interest Rate Risk Management
    - 12 -




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##### Table of Contents



Other Debt Information
 Six Months EndedJune 30,2006
    
    
    2005(In thousands)Interest on outstanding debt:Senior Notes, net of interest rate swap
    
    $
    5,690
    
    
    $
    2,825Credit Agreement
    
    
    
    
    
    
    164Amortization of discount and deferred issuance costs
    
    
    484
    
    
    
    308Commitment fees
    
    
    248
    
    
    
    186Net interest expense
    
    $
    6,422
    
    
    $
    3,483Cash paid for interest
    
    $
    7,781
    
    
    $
    937
  Note 6: Commitments and Contingencies
  Year EndingDecember 31,
    
    $000s2007
    
    $
    3,0412008
    
    
    6,0822009
    
    
    6,0822010
    
    
    6,082Thereafter
    
    
    39,529Total
    
    $
    60,816
 Note 7: Earnings per Unit
  Note 8: Employees, Retirement and Benefit Plans
   - 13 -




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Restricted Units
   Weighted-Weighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicGrant-Date
    
    
    Contractual
    
    
    ValueRestricted Units
    
    Grants
    
    
    Fair Value
    
    
    Term
    
    
    ($000)Outstanding January 1, 2006 (not vested)
    
    
    20,926
    
    
    $
    40.98Granted
    
    
    12,661
    
    
    $
    39.45Forfeited
    
    
    (200
    )
    
    $
    39.45Vesting and transfer of full ownership to recipients
    
    
    
    
    
    
    Outstanding at June 30, 2006 (not vested)
    
    
    33,387
    
    
    $
    40.40
    
    
    1.8 years
    
    $
    1,347
   Performance Units
  - 14 -




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Data Elements Used in AnalysisClosing price of HEP common units February 10, 2006
    
    $
    39.55Latest quarterly distribution per limited unit
    
    $
    0.64Risk-free rate
    
    
    4.86
    %
  StandardExpected Return on
    
    DeviationCompany
    
    Equity
    
    (Monthly)HEP
    
    
    14.0
    %
    
    
    7.6
    %Peer group
    
    9.8% to 11.0%
    
    3.8% to 4.9%
  Payable
    
    
    PayablePerformance Units
    
    In Cash
    
    
    In UnitsOutstanding at January 1, 2006 (not vested)
    
    
    1,515
    
    
    
    Conversion to unit payment
    
    
    (1,515
    )
    
    
    1,515Vesting and payment of units to recipients
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    12,501Forfeited
    
    
    
    
    
    
    Outstanding at June 30, 2006 (not vested)
    
    
    
    
    
    
    14,016
  - 15 -




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Note 9: Significant Customers
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Holly
    
    
    57
    %
    
    
    51
    %
    
    
    56
    %
    
    
    54
    %BP plc
    
    
    9
    %
    
    
    8
    %
    
    
    10
    %
    
    
    13
    %Alon
    
    
    30
    %
    
    
    37
    %
    
    
    30
    %
    
    
    29
    %
 Note 10: Related Party Transactions
 Holly
  
    
    Pipeline and terminal revenues received from Holly were
$10.6 million and $9.9 million for the three months ended June
30, 2006 and 2005, respectively, and $23.1 million and $19.4
million for the six months ended June 30, 2006 and 2005,
respectively. These amounts include the revenues received
under the Holly PTA and Holly IPA.
    
    Holly charged general and administrative services under
the Omnibus Agreement of $0.5 million in the three months
ended June 30, 2006 and 2005, and $1.0 million for the six
months ended June 30, 2006 and 2005.
    
    We reimbursed Holly for costs of employees supporting our
operations of $1.8 million and $1.6 million for the three
months ended June 30, 2006 and 2005, respectively, and $3.7
million and $3.0 million for the six months ended June 30,
2006 and 2005, respectively.
    
    Holly reimbursed $40,000 and $66,000 to us for certain
costs paid on their behalf in the three months ended June 30,
2006 and 2005, respectively. They reimbursed $96,000 and
$114,000 in the six months ended June 30, 2006 and 2005,
respectively.
    
    In the three months ended June 30, 2006 and 2005, we
distributed $5.0 million and $4.0 million, respectively, to
Holly as regular distributions on its subordinated units,
common units and general partner interest. We distributed
$9.8 million and $7.7 million to Holly in the six months ended
June 30, 2006 and 2005, respectively.
    
    Our net accounts receivable from Holly were $3.3 million
and $3.6 million at June 30, 2006 and December 31, 2005,
respectively.
    
    Deferred revenue includes $3.5 million and $1.0 million
of minimum revenue commitments under the Holly IPA and Holly
PTA at June 30, 2006 and December 31, 2005, respectively.
 BP plc
  - 16 -




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
    
    BP is the sole customer of Rio Grande, and we recorded
revenues from them of $1.6 million for the three months ended
June 30, 2006 and 2005, and $4.0 million and $4.6 million for
the six months ended June 30, 2006 and 2005, respectively.
    
    Rio Grande paid distributions to BP of $0.6 million for
the three months ended June 30, 2006 and 2005, and $1.2
million and $1.6 million for the six months ended June 30,
2006 and 2005, respectively.
    
    Included in our accounts receivable  trade at June 30,
2006 and December 31, 2005 were $0.2 million and $0.5 million,
respectively, which represented the receivable balance of Rio
Grande from BP.
 Alon
  
    
    We recognized $5.6 million and $7.1 million of revenues
for pipeline transportation and terminalling services under
the Alon PTA and under a pipeline capacity lease in the three
months ended June 30, 2006 and 2005, respectively. We
recognized $12.4 million and $9.4 million in the six months
ended June 30, 2006 and the period from February 28 to June
30, 2005, respectively.
    
    We paid $0.6 million and $0.5 million to Alon for
distributions on our Class B subordinated units in the three
months ended June 30, 2006 and 2005, respectively. We paid
$1.2 million and $0.5 million in the six months ended June 30,
2006 and the period from February 28 to June 30, 2005,
respectively.
    
    Our net accounts receivable from Alon were $3.4 million
at June 30, 2006 and $2.4 million at December 31, 2005.
    
    Deferred revenue includes $1.4 million of minimum
revenue commitments under the Alon PTA at June 30, 2006.
 Note 11: Partners Equity and Cash Distributions
 Issuances of units
  - 17 -




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Allocations of Net Income
  Cash Distributions
    - 18 -




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Marginal Percentage Interest inTotal Quarterly Distribution
    
    DistributionsTarget Amount
    
    Unitholders
    
    General PartnerMinimum Quarterly Distribution
    
    $
    0.50
    
    
    
    98
    %
    
    
    2
    %First Target Distribution
    
    Up to $0.55
    
    
    98
    %
    
    
    2
    %Second Target Distribution
    
    above $0.55 up to $0.625
    
    
    85
    %
    
    
    15
    %Third Target Distribution
    
    above $0.625 up to $0.75
    
    
    75
    %
    
    
    25
    %Thereafter
    
    Above $0.75
    
    
    50
    %
    
    
    50
    %
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per unit data)General partner interest
    
    $
    210
    
    
    $
    168
    
    
    $
    416
    
    
    $
    310General partner incentive distribution
    
    
    264
    
    
    
    
    
    
    
    453
    
    
    
    Total general partner distribution
    
    
    474
    
    
    
    168
    
    
    
    869
    
    
    
    310Limited partner distribution
    
    
    10,309
    
    
    
    8,215
    
    
    
    20,375
    
    
    
    15,216Total regular quarterly cash distribution
    
    $
    10,783
    
    
    $
    8,383
    
    
    $
    21,244
    
    
    $
    15,526Cash distribution per unit applicable to limited partners
    
    $
    0.64
    
    
    $
    0.55
    
    
    $
    1.265
    
    
    $
    1.05
  Note 12: Supplemental Guarantor/Non-Guarantor Financial Information
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Condensed Consolidating Balance Sheet
 Guarantor
    
    
    Non-June 30, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    14,897
    
    
    $
    1,515
    
    
    $
    
    
    
    $
    16,414Accounts receivable
    
    
    
    
    
    
    6,901
    
    
    
    246
    
    
    
    
    
    
    
    7,147Intercompany accounts receivable (payable)
    
    
    (49,418
    )
    
    
    49,827
    
    
    
    (409
    )
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    26
    
    
    
    1,128
    
    
    
    
    
    
    
    
    
    
    
    1,154Total current assets
    
    
    (49,390
    )
    
    
    72,753
    
    
    
    1,352
    
    
    
    
    
    
    
    24,715Properties and equipment, net
    
    
    
    
    
    
    126,810
    
    
    
    33,728
    
    
    
    
    
    
    
    160,538Investment in subsidiaries
    
    
    273,993
    
    
    
    25,260
    
    
    
    
    
    
    
    (299,253
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    57,270
    
    
    
    1,592
    
    
    
    
    
    
    
    58,862Other assets
    
    
    1,520
    
    
    
    1,139
    
    
    
    
    
    
    
    
    
    
    
    2,659Total assets
    
    $
    226,123
    
    
    $
    283,232
    
    
    $
    36,672
    
    
    $
    (299,253
    )
    
    $
    246,774LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    3,143
    
    
    $
    275
    
    
    $
    
    
    
    $
    3,418Accrued interest
    
    
    2,924
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,924Deferred revenue
    
    
    
    
    
    
    4,929
    
    
    
    
    
    
    
    
    
    
    
    4,929Other current liabilities
    
    
    647
    
    
    
    1,167
    
    
    
    311
    
    
    
    
    
    
    
    2,125Total current liabilities
    
    
    3,571
    
    
    
    9,239
    
    
    
    586
    
    
    
    
    
    
    
    13,396Long-term debt
    
    
    178,435
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    178,435Other long-term liabilities
    
    
    3,271
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,271Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,826
    
    
    
    10,826Partners equity
    
    
    40,846
    
    
    
    273,993
    
    
    
    36,086
    
    
    
    (310,079
    )
    
    
    40,846Total liabilities and partners equity
    
    $
    226,123
    
    
    $
    283,232
    
    
    $
    36,672
    
    
    $
    (299,253
    )
    
    $
    246,774
  Condensed Consolidating Balance Sheet
 Guarantor
    
    
    Non-December 31, 2005
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    17,770
    
    
    $
    2,811
    
    
    $
    
    
    
    $
    20,583Accounts receivable
    
    
    
    
    
    
    6,206
    
    
    
    515
    
    
    
    
    
    
    
    6,721Intercompany accounts receivable (payable)
    
    
    (21,182
    )
    
    
    21,458
    
    
    
    (276
    )
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    232
    
    
    
    1,169
    
    
    
    
    
    
    
    
    
    
    
    1,401Total current assets
    
    
    (20,948
    )
    
    
    46,603
    
    
    
    3,050
    
    
    
    
    
    
    
    28,705Properties and equipment, net
    
    
    
    
    
    
    128,077
    
    
    
    34,221
    
    
    
    
    
    
    
    162,298Investment in subsidiaries
    
    
    256,416
    
    
    
    27,423
    
    
    
    
    
    
    
    (283,839
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    58,269
    
    
    
    2,634
    
    
    
    
    
    
    
    60,903Other assets
    
    
    1,594
    
    
    
    1,275
    
    
    
    
    
    
    
    
    
    
    
    2,869Total assets
    
    $
    237,062
    
    
    $
    261,647
    
    
    $
    39,905
    
    
    $
    (283,839
    )
    
    $
    254,775LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    2,666
    
    
    $
    354
    
    
    $
    
    
    
    $
    3,020Accrued interest
    
    
    2,892
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,892Deferred revenue
    
    
    
    
    
    
    1,013
    
    
    
    
    
    
    
    
    
    
    
    1,013Other current liabilities
    
    
    594
    
    
    
    1,357
    
    
    
    375
    
    
    
    
    
    
    
    2,326Total current liabilities
    
    
    3,486
    
    
    
    5,036
    
    
    
    729
    
    
    
    
    
    
    
    9,251Long-term debt
    
    
    180,737
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180,737Other long-term liabilities
    
    
    779
    
    
    
    195
    
    
    
    
    
    
    
    
    
    
    
    974Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,753
    
    
    
    11,753Partners equity
    
    
    52,060
    
    
    
    256,416
    
    
    
    39,176
    
    
    
    (295,592
    )
    
    
    52,060Total liabilities and partners equity
    
    $
    237,062
    
    
    $
    261,647
    
    
    $
    39,905
    
    
    $
    (283,839
    )
    
    $
    254,775
 - 20 -




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##### Table of Contents



Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Three months ended June 30, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    10,584
    
    
    $
    
    
    
    $
    
    
    
    $
    10,584Third parties
    
    
    
    
    
    
    6,607
    
    
    
    1,637
    
    
    
    (301
    )
    
    
    7,943
    
    
    
    17,191
    
    
    
    1,637
    
    
    
    (301
    )
    
    
    18,527Operating costs and expenses:Operations
    
    
    
    
    
    
    7,006
    
    
    
    724
    
    
    
    (301
    )
    
    
    7,429Depreciation and amortization
    
    
    
    
    
    
    2,934
    
    
    
    847
    
    
    
    
    
    
    
    3,781General and administrative
    
    
    777
    
    
    
    510
    
    
    
    2
    
    
    
    
    
    
    
    1,289777
    
    
    
    10,450
    
    
    
    1,573
    
    
    
    (301
    )
    
    
    12,499Operating income (loss)
    
    
    (777
    )
    
    
    6,741
    
    
    
    64
    
    
    
    
    
    
    
    6,028Equity in earnings of subsidiaries
    
    
    6,788
    
    
    
    65
    
    
    
    
    
    
    
    (6,853
    )
    
    
    Interest income (expense)
    
    
    (3,013
    )
    
    
    (18
    )
    
    
    29
    
    
    
    
    
    
    
    (3,002
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    (28
    )Net income
    
    $
    2,998
    
    
    $
    6,788
    
    
    $
    93
    
    
    $
    (6,881
    )
    
    $
    2,998
  Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Three months ended June 30, 2005
    
    Parent
    
    
    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
    
    
    8,665
    
    
    
    (61
    )
    
    
    
    
    
    
    (8,604
    )
    
    
    Interest income (expense)
    
    
    (2,159
    )
    
    
    (79
    )
    
    
    18
    
    
    
    
    
    
    
    (2,220
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    27Net income
    
    $
    6,041
    
    
    $
    8,665
    
    
    $
    (88
    )
    
    $
    (8,577
    )
    
    $
    6,041
 - 21 -




---



##### Table of Contents



Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Six months ended June 30, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    23,066
    
    
    $
    
    
    
    $
    
    
    
    $
    23,066Third parties
    
    
    
    
    
    
    14,488
    
    
    
    4,006
    
    
    
    (595
    )
    
    
    17,899
    
    
    
    37,554
    
    
    
    4,006
    
    
    
    (595
    )
    
    
    40,965Operating costs and expenses:Operations
    
    
    
    
    
    
    13,676
    
    
    
    1,457
    
    
    
    (595
    )
    
    
    14,538Depreciation and amortization
    
    
    
    
    
    
    5,883
    
    
    
    1,691
    
    
    
    
    
    
    
    7,574General and administrative
    
    
    1,489
    
    
    
    1,021
    
    
    
    3
    
    
    
    
    
    
    
    2,5131,489
    
    
    
    20,580
    
    
    
    3,151
    
    
    
    (595
    )
    
    
    24,625Operating income (loss)
    
    
    (1,489
    )
    
    
    16,974
    
    
    
    855
    
    
    
    
    
    
    
    16,340Equity in earnings of subsidiaries
    
    
    17,577
    
    
    
    637
    
    
    
    
    
    
    
    (18,214
    )
    
    
    Interest income (expense)
    
    
    (5,955
    )
    
    
    (34
    )
    
    
    55
    
    
    
    
    
    
    
    (5,934
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (273
    )
    
    
    (273
    )Net income
    
    $
    10,133
    
    
    $
    17,577
    
    
    $
    910
    
    
    $
    (18,487
    )
    
    $
    10,133
  Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Six months ended June 30, 2005
    
    Parent
    
    
    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
    
    
    16,233
    
    
    
    940
    
    
    
    
    
    
    
    (17,173
    )
    
    
    Interest income (expense)
    
    
    (2,946
    )
    
    
    (322
    )
    
    
    18
    
    
    
    
    
    
    
    (3,250
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (402
    )
    
    
    (402
    )Net income
    
    $
    12,367
    
    
    $
    16,233
    
    
    $
    1,342
    
    
    $
    (17,575
    )
    
    $
    12,367
 - 22 -




---



##### Table of Contents



Condensed Consolidating Statement of Cash Flows
 Guarantor
    
    
    Non-Six months ended June 30, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Cash flows from operating activities
    
    $
    21,756
    
    
    $
    670
    
    
    $
    2,860
    
    
    $
    (2,800
    )
    
    $
    22,486Cash flows from investing activities  Additions
to properties and equipment
    
    
    
    
    
    
    (3,543
    )
    
    
    (156
    )
    
    
    
    
    
    
    (3,699
    )Cash flows from financing activitiesContributions from (distributions to) partners
    
    
    (21,244
    )
    
    
    
    
    
    
    (4,000
    )
    
    
    4,000
    
    
    
    (21,244
    )Cash distributions to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,200
    )
    
    
    (1,200
    )Other financing activities, net
    
    
    (512
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (512
    )(21,756
    )
    
    
    
    
    
    
    (4,000
    )
    
    
    2,800
    
    
    
    (22,956
    )Cash and cash equivalentsIncrease (decrease) for the year
    
    
    
    
    
    
    (2,873
    )
    
    
    (1,296
    )
    
    
    
    
    
    
    (4,169
    )Beginning of year
    
    
    2
    
    
    
    17,770
    
    
    
    2,811
    
    
    
    
    
    
    
    20,583End of year
    
    $
    2
    
    
    $
    14,897
    
    
    $
    1,515
    
    
    $
    
    
    
    $
    16,414
  Condensed Consolidating Statement of Cash Flows
 Guarantor
    
    
    Non-Six months ended June 30, 2005
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Cash flows from operating activities
    
    $
    (45,611
    )
    
    $
    65,245
    
    
    $
    3,398
    
    
    $
    (3,780
    )
    
    $
    19,252Cash flows from investing activitiesAcquisitions of pipeline and terminal assets
    
    
    (120,000
    )
    
    
    (1,853
    )
    
    
    
    
    
    
    
    
    
    
    (121,853
    )Additions to properties and equipment
    
    
    
    
    
    
    (710
    )
    
    
    
    
    
    
    
    
    
    
    (710
    )Investments in subsidiaries, net
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Other
    
    
    
    
    
    
    (211
    )
    
    
    
    
    
    
    
    
    
    
    (211
    )(120,001
    )
    
    
    (2,774
    )
    
    
    
    
    
    
    1
    
    
    
    (122,774
    )Cash flows from financing activitiesProceeds from issuance of senior notes, net
of discounts
    
    
    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
    )Cash distributions to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,620
    )
    
    
    (1,620
    )Other financing activities, net
    
    
    (712
    )
    
    
    (264
    )
    
    
    
    
    
    
    
    
    
    
    (976
    )165,612
    
    
    
    (25,263
    )
    
    
    (5,400
    )
    
    
    3,779
    
    
    
    138,728Cash and cash equivalentsIncrease (decrease) for the year
    
    
    
    
    
    
    37,208
    
    
    
    (2,002
    )
    
    
    
    
    
    
    35,206Beginning of year
    
    
    2
    
    
    
    15,143
    
    
    
    3,959
    
    
    
    
    
    
    
    19,104End of year
    
    $
    2
    
    
    $
    52,351
    
    
    $
    1,957
    
    
    $
    
    
    
    $
    54,310
 - 23 -




---



##### 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
   - 24 -




---



##### Table of Contents



RESULTS OF OPERATIONS (Unaudited)
 Income, Distributable Cash Flow and Volumes
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per unit data)RevenuesPipelines:Affiliates  refined product pipelines
    
    $
    6,374
    
    
    $
    7,121
    
    
    $
    13,697
    
    
    $
    14,189Affiliates  intermediate pipelines
    
    
    1,841
    
    
    
    
    
    
    
    4,314
    
    
    
    Third parties
    
    
    6,821
    
    
    
    8,226
    
    
    
    15,598
    
    
    
    14,49815,036
    
    
    
    15,347
    
    
    
    33,609
    
    
    
    28,687Terminals & truck loading racks:Affiliates
    
    
    2,369
    
    
    
    2,820
    
    
    
    5,055
    
    
    
    5,182Third parties
    
    
    1,122
    
    
    
    1,354
    
    
    
    2,301
    
    
    
    2,1653,491
    
    
    
    4,174
    
    
    
    7,356
    
    
    
    7,347Total revenues
    
    
    18,527
    
    
    
    19,521
    
    
    
    40,965
    
    
    
    36,034Operating costs and expensesOperations
    
    
    7,429
    
    
    
    6,448
    
    
    
    14,538
    
    
    
    11,836Depreciation and amortization
    
    
    3,781
    
    
    
    3,849
    
    
    
    7,574
    
    
    
    6,212General and administrative
    
    
    1,289
    
    
    
    990
    
    
    
    2,513
    
    
    
    1,96712,499
    
    
    
    11,287
    
    
    
    24,625
    
    
    
    20,015Operating income
    
    
    6,028
    
    
    
    8,234
    
    
    
    16,340
    
    
    
    16,019Interest income
    
    
    245
    
    
    
    145
    
    
    
    488
    
    
    
    233Interest expense, including amortization
    
    
    (3,247
    )
    
    
    (2,365
    )
    
    
    (6,422
    )
    
    
    (3,483
    )Minority interest in Rio Grande
    
    
    (28
    )
    
    
    27
    
    
    
    (273
    )
    
    
    (402
    )Net income
    
    
    2,998
    
    
    
    6,041
    
    
    
    10,133
    
    
    
    12,367Less general partner interest in net
income, including incentive distributions
(1)
    
    
    319
    
    
    
    121
    
    
    
    646
    
    
    
    247Limited partners interest in net income
    
    $
    2,679
    
    
    $
    5,920
    
    
    $
    9,487
    
    
    $
    12,120Net income per limited partner unit 
basic and diluted(1)
    
    $
    0.17
    
    
    $
    0.40
    
    
    $
    0.59
    
    
    $
    0.83Weighted average limited partners units
outstanding
    
    
    16,108
    
    
    
    14,938
    
    
    
    16,108
    
    
    
    14,637EBITDA(2)
    
    $
    9,781
    
    
    $
    12,110
    
    
    $
    23,641
    
    
    $
    21,829Distributable cash flow(3)
    
    $
    10,293
    
    
    $
    10,055
    
    
    $
    21,507
    
    
    $
    18,690
 - 25 -




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Volumes (bpd)(4)Pipelines:Affiliates  refined product pipelines
    
    
    55,793
    
    
    
    64,969
    
    
    
    61,151
    
    
    
    66,485Affiliates  intermediate pipelines
    
    
    44,955
    
    
    
    
    
    
    
    52,959
    
    
    
    Third parties
    
    
    52,134
    
    
    
    75,478
    
    
    
    64,666
    
    
    
    56,664152,882
    
    
    
    140,447
    
    
    
    178,776
    
    
    
    123,149Terminals & truck loading racks:Affiliates
    
    
    107,302
    
    
    
    128,827
    
    
    
    113,202
    
    
    
    122,778Third parties
    
    
    41,266
    
    
    
    50,380
    
    
    
    44,145
    
    
    
    39,152148,568
    
    
    
    179,207
    
    
    
    157,347
    
    
    
    161,930Total for pipelines and terminal assets (bpd)
    
    
    301,450
    
    
    
    319,654
    
    
    
    336,123
    
    
    
    285,079
 
 (1)
    
    Net income is allocated between limited partners and the general partner interest in
accordance with the provisions of the partnership agreement. Net income allocated to the
general partner includes any incentive distributions declared in the period. Incentive
distributions of $0.3 million and $0.5 million were declared during the three and six
months ended June 30, 2006, respectively. No incentive distributions were declared during
the six months ended June 30, 2005. The net income applicable to the limited partners is
divided by the weighted average limited partner units outstanding in computing the net
income per unit applicable to limited partners.(2)
    
    Earnings before interest, taxes, depreciation and amortization (EBITDA) is
calculated as net income plus (i) interest expense net of interest income and (ii)
depreciation and amortization. EBITDA is not a calculation based upon U.S. generally
accepted accounting principles (U.S. GAAP). However, the amounts included in the EBITDA
calculation are derived from amounts included in our consolidated financial statements.
EBITDA should not be considered as an alternative to net income or operating income, as an
indication of our operating performance or as an alternative to operating cash flow as a
measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures
of other companies. EBITDA is presented here because it is a widely used financial
indicator used by investors and analysts to measure performance. EBITDA is also used by
our management for internal analysis and as a basis for compliance with financial
covenants.Set forth below is our calculation of EBITDA. Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Net income
    
    $
    2,998
    
    
    $
    6,041
    
    
    $
    10,133
    
    
    $
    12,367Add interest expense
    
    
    3,005
    
    
    
    2,170
    
    
    
    5,938
    
    
    
    3,175Add amortization of discount and
deferred debt issuance costs
    
    
    242
    
    
    
    195
    
    
    
    484
    
    
    
    308Subtract interest income
    
    
    (245
    )
    
    
    (145
    )
    
    
    (488
    )
    
    
    (233
    )Add depreciation and amortization
    
    
    3,781
    
    
    
    3,849
    
    
    
    7,574
    
    
    
    6,212EBITDA
    
    $
    9,781
    
    
    $
    12,110
    
    
    $
    23,641
    
    
    $
    21,829
 
 (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 - 26 -




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##### Table of Contents



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.Set forth below is our calculation of distributable cash flow. Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Net income
    
    $
    2,998
    
    
    $
    6,041
    
    
    $
    10,133
    
    
    $
    12,367Add depreciation and amortization
    
    
    3,781
    
    
    
    3,849
    
    
    
    7,574
    
    
    
    6,212Add amortization of discount and
deferred debt issuance costs
    
    
    242
    
    
    
    195
    
    
    
    484
    
    
    
    308Add increase in deferred revenue
    
    
    3,432
    
    
    
    
    
    
    
    3,916
    
    
    
    Subtract maintenance capital
expenditures*
    
    
    (160
    )
    
    
    (30
    )
    
    
    (600
    )
    
    
    (197
    )Distributable cash flow
    
    $
    10,293
    
    
    $
    10,055
    
    
    $
    21,507
    
    
    $
    18,690
 
 *



    Maintenance capital expenditures are capital expenditures made to replace partially
or fully depreciated assets in order to maintain the existing operating capacity of
our assets and to extend their useful lives.(4)
    
    The amounts reported represent volumes from the initial assets contributed to HEP at
inception in July 2004 and additional volumes from the assets acquired from Alon starting
in March 2005 and the Intermediate Pipelines acquired from Holly starting in July 2005.
The amounts reported in the 2005 periods include volumes on the acquired assets from their
respective acquisition dates averaged over the full reported periods. Balance Sheet Data
 June 30,
    
    December 31,2006
    
    2005(In thousands)Cash and cash equivalents
    
    $
    16,414
    
    
    $
    20,583Working capital
    
    $
    11,319
    
    
    $
    19,454Total assets
    
    $
    246,774
    
    
    $
    254,775Long-term debt
    
    $
    178,435
    
    
    $
    180,737Partners equity
    
    $
    40,846
    
    
    $
    52,060
 - 27 -




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Results of Operations  Three Months Ended June 30, 2006 Compared with Three Months Ended June 30,
2005
 Summary
  Revenues
       - 28 -




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##### Table of Contents



Operations Expense
  Depreciation and Amortization
  General and Administrative
  Interest Expense
  Minority Interest in Earnings of Rio Grande
  Results of Operations  Six Months Ended June 30, 2006 Compared with Six Months Ended June 30, 2005
 Summary
  Revenues
  - 29 -




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Operations Expense
  Depreciation and Amortization
  General and Administrative
  Interest Expense
  - 30 -




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Minority Interest in Earnings of Rio Grande
  LIQUIDITY AND CAPITAL RESOURCES
 Overview
      Cash Flows  Operating Activities
  - 31 -




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




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Credit Agreement
         - 33 -




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Senior Notes Due 2015
    Alon Transaction
   Holly Intermediate Pipelines Transaction
   - 34 -




---



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Impact of Inflation
   Environmental Matters
      - 35 -




---



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CRITICAL ACCOUNTING POLICIES
   RISK MANAGEMENT
    - 36 -




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- 37 -




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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
  -38-




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##### Table of Contents



PART II. OTHER INFORMATION
 
 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
    
    
    Yet Be PurchasedTotal Number of
    
    
    
    
    
    
    as Part of Publicly
    
    
    Under a PubliclyUnits
    
    
    Average Price
    
    
    Announced Plan
    
    
    Announced PlanPeriod
    
    Purchased
    
    
    Paid Per Unit
    
    
    or Program
    
    
    or ProgramApril 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    May 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    June 2006
    
    
    12,461
    
    
    $
    41.05
    
    
    
    
    
    
    
    Total for April to June 2006
    
    
    12,461
    
    
    
    
    
    
    
    
 
 Item 6.
Exhibits
 12.1*
    
    Computation of Ratio of Earnings to Fixed Charges31.1*
    
    Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.32.2*
    
    Certification of Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith. -39-




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SIGNATURES
  HOLLY ENERGY PARTNERS, L.P.(Registrant)By: HEP LOGISTICS HOLDINGS, L.P.its General PartnerBy: HOLLY LOGISTIC SERVICES, L.L.C.its General PartnerDate: July 28, 2006
    
    /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-