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




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##### 



PART I. FINANCIAL INFORMATION
    
    
    3FORWARD-LOOKING STATEMENTS
    
    
    3Item 1. Financial Statements (Unaudited, except December 31, 2009 Balance Sheet)
    
    
    4Consolidated Balance Sheets
    
    
    4Consolidated Statements of Income
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Consolidated Statement of Partners Equity
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    39Item 4. Controls and Procedures
    
    
    39PART II. OTHER INFORMATION
    
    
    40Item 1. Legal Proceedings
    
    
    40Item 6. Exhibits
    
    
    40SIGNATURES
    
    
    41Exhibit 12.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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FORWARD-LOOKING STATEMENTS
  
    
    risks and uncertainties with respect to the actual quantities of petroleum products and
crude oil shipped on our pipelines and/or terminalled in our terminals;
 
    
    the economic viability of Holly Corporation, Alon USA, Inc. and our other customers;
 
    
    the demand for refined petroleum products in markets we serve;
 
    
    our ability to successfully purchase and integrate additional operations in the future;
 
    
    our ability to complete previously announced or contemplated acquisitions;
 
    
    the availability and cost of additional debt and equity financing;
 
    
    the possibility of reductions in production or shutdowns at refineries utilizing our
pipeline and terminal facilities;
 
    
    the effects of current and future government regulations and policies;
 
    
    our operational efficiency in carrying out routine operations and capital construction
projects;
 
    
    the possibility of terrorist attacks and the consequences of any such attacks;
 
    
    general economic conditions; and
 
    
    other financial, operations and legal risks and uncertainties detailed from time to time
in our Securities and Exchange Commission filings.
   - 3 -




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##### Table of Contents



Item 1. Financial Statements
 Holly Energy Partners, L.P.
 
 Consolidated Balance Sheets
 March 31, 2010
    
    
    December 31,(Unaudited)
    
    
    2009(In thousands, except unit data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    16,609
    
    
    $
    2,508Accounts receivable:Trade
    
    
    4,301
    
    
    
    4,693Affiliates
    
    
    16,155
    
    
    
    14,07420,456
    
    
    
    18,767Prepaid and other current assets
    
    
    514
    
    
    
    739Current assets of discontinued operations
    
    
    
    
    
    
    2,195Total current assets
    
    
    37,579
    
    
    
    24,209Properties and equipment, net
    
    
    432,057
    
    
    
    398,044Transportation agreements, net
    
    
    113,699
    
    
    
    115,436Goodwill
    
    
    49,109
    
    
    
    49,109Investment in SLC Pipeline
    
    
    26,400
    
    
    
    25,919Other assets
    
    
    1,845
    
    
    
    4,128Total assets
    
    $
    660,689
    
    
    $
    616,845LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable:Trade
    
    $
    3,361
    
    
    $
    3,860Affiliates
    
    
    2,855
    
    
    
    2,3516,216
    
    
    
    6,211Accrued interest
    
    
    1,706
    
    
    
    2,863Deferred revenue
    
    
    9,510
    
    
    
    8,402Accrued property taxes
    
    
    858
    
    
    
    1,072Other current liabilities
    
    
    1,148
    
    
    
    1,257Total current
liabilities
    
    
    19,438
    
    
    
    19,805Long-term debt
    
    
    503,393
    
    
    
    390,827Other long-term liabilities
    
    
    11,366
    
    
    
    12,349Partners equity:Common unitholders (21,141,009 units issued and outstanding)
    
    
    262,941
    
    
    
    275,553Class B subordinated unitholders (937,500 units issued and
outstanding)
    
    
    21,022
    
    
    
    21,426General partner interest (2% interest)
    
    
    (146,969
    )
    
    
    (93,974
    )Accumulated other comprehensive loss
    
    
    (10,502
    )
    
    
    (9,141
    )Total partners equity
    
    
    126,492
    
    
    
    193,864Total liabilities and
partners equity
    
    $
    660,689
    
    
    $
    616,845
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Holly Energy Partners, L.P.
 
 Consolidated Statements of Income
 (Unaudited)
 Three Months EndedMarch  31,2010
    
    
    2009(In thousands, except per unit data)Revenues:Affiliates
    
    $
    33,597
    
    
    $
    18,323Third parties
    
    
    7,099
    
    
    
    11,00940,696
    
    
    
    29,332Operating costs and expenses:Operations
    
    
    13,060
    
    
    
    10,342Depreciation and amortization
    
    
    7,210
    
    
    
    6,016General and administrative
    
    
    2,563
    
    
    
    1,33422,833
    
    
    
    17,692Operating
income
    
    
    17,863
    
    
    
    11,640Other income (expense):Equity in earnings of SLC Pipeline
    
    
    481
    
    
    
    175Interest income
    
    
    3
    
    
    
    6Interest expense
    
    
    (7,544
    )
    
    
    (5,403
    )Other expense
    
    
    (7
    )
    
    
    SLC Pipeline acquisition costs
    
    
    
    
    
    
    (2,500
    )(7,067
    )
    
    
    (7,722
    )Income from continuing operations before income taxes
    
    
    10,796
    
    
    
    3,918State income tax
    
    
    (94
    )
    
    
    (73
    )Income from continuing operations
    
    
    10,702
    
    
    
    3,845Income from discontinued operations, net of
noncontrolling interest of $495
    
    
    
    
    
    
    1,594Net income
    
    
    10,702
    
    
    
    5,439Less general partner interest in net income,
including incentive distributions
    
    
    2,646
    
    
    
    1,293Limited partners interest in net income
    
    $
    8,056
    
    
    $
    4,146Limited partners per unit interest in earnings 
basic and diluted:Income from continuing operations
    
    $
    0.36
    
    
    $
    0.16Income from discontinued operations
    
    
    
    
    
    
    0.09Net income
    
    $
    0.36
    
    
    $
    0.25Weighted average limited partners units outstanding
    
    
    22,079
    
    
    
    16,328
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Holly Energy Partners, L.P.
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Three Months EndedMarch 31,2010
    
    
    2009 (1)(In thousands)Cash flows from operating activitiesNet income
    
    $
    10,702
    
    
    $
    5,439Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    7,210
    
    
    
    6,256SLC Pipeline earnings in excess of distributions
    
    
    (481
    )
    
    
    (175
    )Change in fair value  interest rate swaps
    
    
    1,464
    
    
    
    216Noncontrolling interest in earnings of Rio Grande Pipeline Company
    
    
    
    
    
    
    495Amortization of restricted and performance units
    
    
    966
    
    
    
    (52
    )(Increase) decrease in current assets:Accounts receivable  trade
    
    
    392
    
    
    
    923Accounts receivable  affiliates
    
    
    (2,081
    )
    
    
    (2,336
    )Prepaid and other current assets
    
    
    225
    
    
    
    242Current assets of discontinued operations
    
    
    2,195
    
    
    
    Increase (decrease) in current liabilities:Accounts payable  trade
    
    
    (499
    )
    
    
    (124
    )Accounts payable  affiliates
    
    
    504
    
    
    
    940Accrued interest
    
    
    (1,157
    )
    
    
    (1,923
    )Deferred revenue
    
    
    1,108
    
    
    
    362Accrued property taxes
    
    
    (214
    )
    
    
    (335
    )Other current liabilities
    
    
    (109
    )
    
    
    (540
    )Other, net
    
    
    (1,502
    )
    
    
    168Net cash provided by operating activities
    
    
    18,723
    
    
    
    9,556Cash flows from investing activitiesAdditions to properties and equipment
    
    
    (1,911
    )
    
    
    (10,570
    )Acquisition of assets from Holly Corporation
    
    
    (37,234
    )
    
    
    Investment in SLC Pipeline
    
    
    
    
    
    
    (25,500
    )Net cash used for investing activities
    
    
    (39,145
    )
    
    
    (36,070
    )Cash flows from financing activitiesBorrowings under credit agreement
    
    
    33,000
    
    
    
    53,000Repayments under credit agreement
    
    
    (68,000
    )
    
    
    (13,000
    )Proceeds from issuance of senior notes
    
    
    147,540
    
    
    
    Distributions to HEP unitholders
    
    
    (20,506
    )
    
    
    (13,818
    )Purchase price in excess of transferred basis in assets acquired from Holly
Corporation
    
    
    (55,766
    )
    
    
    Purchase of units for restricted grants
    
    
    (1,745
    )
    
    
    (616
    )Net cash provided by financing activities
    
    
    34,523
    
    
    
    25,566Cash and cash equivalentsIncrease (decrease) for the period
    
    
    14,101
    
    
    
    (948
    )Beginning of period
    
    
    2,508
    
    
    
    5,269End of period
    
    $
    16,609
    
    
    $
    4,321
 (1)
    
    Includes cash flows attributable to discontinued operations.   - 6 -




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Holly Energy Partners, L.P.
 
 Consolidated Statement of Partners Equity
 (Unaudited)
 AccumulatedClass B
    
    
    General
    
    
    OtherCommon
    
    
    Subordinated
    
    
    Partner
    
    
    ComprehensiveUnits
    
    
    Units
    
    
    Interest
    
    
    Loss
    
    
    Total(In thousands)Balance December 31, 2009
    
    $
    275,553
    
    
    $
    21,426
    
    
    $
    (93,974
    )
    
    $
    (9,141
    )
    
    $
    193,864Distributions to partners
    
    
    (19,751
    )
    
    
    (755
    )
    
    
    
    
    
    
    
    
    
    
    (20,506
    )Purchase price in excess of transferred
basis in assets acquired from Holly
Corporation
    
    
    
    
    
    
    
    
    
    
    (55,428
    )
    
    
    
    
    
    
    (55,428
    )Purchase of units for restricted grants
    
    
    (1,745
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,745
    )Amortization of restricted and
performance units
    
    
    966
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    966Comprehensive income:Net income
    
    
    7,918
    
    
    
    351
    
    
    
    2,433
    
    
    
    
    
    
    
    10,702Change in fair value of cash flow hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,361
    )
    
    
    (1,361
    )Comprehensive income
    
    
    7,918
    
    
    
    351
    
    
    
    2,433
    
    
    
    (1,361
    )
    
    
    9,341Balance March 31, 2010
    
    $
    262,941
    
    
    $
    21,022
    
    
    $
    (146,969
    )
    
    $
    (10,502
    )
    
    $
    126,492
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Note 1: Description of Business and Presentation of Financial Statements
      Note 2: Discontinued Operations
     - 8 -




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




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




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Note 5: Properties and Equipment
 March 31,
    
    
    December 31,2010
    
    
    2009(In thousands)Pipelines and terminals (1)
    
    $
    492,931
    
    
    $
    455,075Land and right of way
    
    
    25,247
    
    
    
    25,230Other
    
    
    13,071
    
    
    
    12,528Construction in progress
    
    
    11,496
    
    
    
    10,484542,745
    
    
    
    503,317Less accumulated depreciation
    
    
    110,688
    
    
    
    105,273$
    432,057
    
    
    $
    398,044
 (1)
    
    We periodically evaluate estimated useful lives of our properties and equipment. Effective
January 1, 2010, we have revised the estimated useful lives of our terminal assets to 16 to 25
years. This change in estimated useful lives resulted in a $0.7 million reduction
in depreciation expense for the three months ended March 31, 2010.  Note 6: Transportation Agreements
  
    
    The Alon pipelines and terminals agreement (the Alon PTA) represents a portion of the
total purchase price of the Alon assets that was allocated based on an estimated fair value
derived under an income approach. This asset is being amortized over 30 years ending 2035,
the 15-year initial term of the Alon PTA plus the expected 15-year extension period.
 
    
    The Holly crude pipelines and tankage agreement (the Holly CPTA) represents a portion
of the total purchase price of certain crude pipelines and tankage assets acquired from
Holly in 2008 that was allocated using a fair value based on the agreements expected
contribution to our future earnings under an income approach. This asset is being
amortized over 15 years ending 2023, the 15-year term of the Holly CPTA.
  March 31,
    
    
    December 31,2010
    
    
    2009(In thousands)Alon transportation agreement
    
    $
    59,933
    
    
    $
    59,933Holly crude pipelines and tankage agreement
    
    
    74,231
    
    
    
    74,231134,164
    
    
    
    134,164Less accumulated amortization
    
    
    20,465
    
    
    
    18,728$
    113,699
    
    
    $
    115,436
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Note 7: Employees, Retirement and Incentive Plans
    Restricted Units
   Weighted-Weighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicGrant-Date
    
    
    Contractual
    
    
    ValueRestricted Units
    
    Grants
    
    
    Fair Value
    
    
    Term
    
    
    ($000)Outstanding at January 1, 2010 (nonvested)
    
    
    53,271
    
    
    $
    34.31Granted
    
    
    31,355
    
    
    
    42.59Vesting and transfer of full ownership to recipients
    
    
    (34,645
    )
    
    
    38.94Outstanding at March 31, 2010 (nonvested)
    
    
    49,981
    
    
    $
    36.30
    
    
    
    1 year
    
    
    $
    2,124
    - 12 -




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##### Table of Contents



Performance Units
    PayablePerformance Units
    
    In UnitsOutstanding at January 1, 2010 (nonvested)
    
    
    54,771Vesting and transfer of common units to recipients
    
    
    (11,785
    )Granted
    
    
    16,965Outstanding at March 31, 2010 (nonvested)
    
    
    59,951
  Note 8: Debt
 Credit Agreement
     - 13 -




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Senior Notes
     - 14 -




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March 31,
    
    
    December 31,2010
    
    
    2009(In thousands)Credit Agreement
    
    $
    171,000
    
    
    $
    206,0006.25% Senior NotesPrincipal
    
    
    185,000
    
    
    
    185,000Unamortized discount
    
    
    (1,868
    )
    
    
    (1,964
    )Unamortized
premium  dedesignated fair value hedge
    
    
    1,704
    
    
    
    1,791184,836
    
    
    
    184,8278.25% Senior NotesPrincipal
    
    
    150,000
    
    
    
    Unamortized discount
    
    
    (2,443
    )
    
    
    147,557
    
    
    
    Total long-term debt
    
    $
    503,393
    
    
    $
    390,827
 Interest Rate Risk Management
     Balance Sheet
    
    
    
    
    
    Location of Offsetting
    
    OffsettingInterest Rate Swap
    
    Location
    
    Fair Value
    
    
    Balance
    
    Amount(In thousands)LiabilityCash flow hedge  $171 million LIBOR based debt
    
    Other long-term liabilities
    
    $
    (10,502
    )
    
    Accumulated other comprehensive loss
    
    $
    10,502
    - 15 -




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Interest Expense and Other Debt Information
  March 31,
    
    
    March 31,2010
    
    
    2009(In thousands)Interest on outstanding debt:Credit Agreement, net of interest on interest rate swap
    
    $
    2,472
    
    
    $
    2,5706.25% Senior Notes, net of interest on interest rate swaps
    
    
    2,732
    
    
    
    2,6658.25% Senior Notes
    
    
    722
    
    
    
    Net fair value adjustments to interest rate swaps
    
    
    1,464
    
    
    
    216Net amortization of discount and deferred debt issuance costs
    
    
    194
    
    
    
    176Commitment fees
    
    
    77
    
    
    
    65Total interest incurred
    
    
    7,661
    
    
    
    5,692Less capitalized interest
    
    
    117
    
    
    
    289Net interest expense
    
    $
    7,544
    
    
    $
    5,403Cash paid for interest (1)
    
    $
    10,587
    
    
    $
    8,501
 (1)
    
    Net of cash received under our interest rate swap agreements of $1.9 million for the three months ended March 31, 2010 and 2009. Note 9: Significant Customers
   Three Months EndedMarch 31,2010
    
    
    2009Holly
    
    
    83
    %
    
    
    63
    %Alon
    
    
    13
    %
    
    
    32
    %
 Note 10: Related Party Transactions
 Holly and Alon Agreements
  
    
    Holly PTA (pipelines and terminals throughput agreement expiring in 2019 that relates to
the pipelines and terminal assets contributed to us by Holly upon our initial public
offering in 2004);
 
    
    Holly IPA (intermediate pipelines throughput agreement expiring in 2024 that relates to
the intermediate pipelines acquired from Holly in 2005 and 2009);
 
    
    Holly CPTA (crude pipelines and tankage throughput agreement expiring in 2023 that
relates to the crude pipelines and tankage assets acquired from Holly in 2008);
  - 16 -




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
    
    Holly PTTA (pipeline, tankage and loading rack throughput agreement expiring in 2024
that relates to the Tulsa east storage tank and loading rack facilities acquired from
Sinclair in 2009 and from Holly in March 2010);
 
    
    Holly RPA (pipeline throughput agreement expiring in 2024 that relates to the Roadrunner
Pipeline acquired from Holly in 2009);
 
    
    Holly ETA (equipment and throughput agreement expiring in 2024 that relates to the Tulsa
west loading rack facilities acquired from Holly in 2009); and
 
    
    Holly ATA (loading rack throughput agreement expiring in 2025 that relates to the
Lovington asphalt loading rack facility acquired from Holly in March 2010).
      
    
    Pipeline, terminal and tankage revenues received from Holly were $33.6 million and $18.3
million for the three months ended March 31, 2010 and 2009, respectively. These amounts
include revenues received under our long-term transportation and throughput agreements with
Holly.
 
    
    Holly charged general and administrative services under the Omnibus Agreement of $0.6
million for the three months ended March 31, 2010 and 2009.
 
    
    We reimbursed Holly for costs of employees supporting our operations of $4.2 million and
$4.7 million for the three months ended March 31, 2010 and 2009, respectively.
 
    
    We paid Holly a $2.5 million finders fee in connection the acquisition of our 25% joint
venture interest in the SLC Pipeline in the first quarter of 2009.
  - 17 -




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
    
    We distributed $8.5 million and $6.9 million for the three months ended March 31, 2010 and
2009, respectively, to Holly as regular distributions on its common units, subordinated units
and general partner interest, including general partner incentive distributions.
 
    
    Our accounts receivable from Holly was $16.2 million and $14.1 million at March 31, 2010
and December 31, 2009, respectively.
 
    
    Our accounts payable to Holly were $2.9 million and $2.4 million at March 31, 2010 and
December 31, 2009, respectively.
 
    
    Holly failed to meet its minimum volume commitment for each of the nineteen quarters since
inception of the Holly IPA. Through March 31, 2010, we have charged Holly $11.7 million for
these shortfalls of which $1.1 million and $0.7 million is included in affiliate accounts
receivable at March 31, 2010 and December 31, 2009, respectively.
 
    
    Our revenues for the three months ended March 31, 2010 include $1.8 million of shortfalls
billed under the Holly IPA in 2009 as Holly did not exceed its minimum volume commitment in
any of the subsequent four quarters. Deferred revenue in the consolidated balance sheets at
March 31, 2010 and December 31, 2009, includes $3 million and $3.6 million, respectively,
relating to the Holly IPA. It is possible that Holly may not exceed its minimum obligations
under the Holly IPA to allow Holly to receive credit for any of the $3 million deferred at
March 31, 2010.
 
    
    We acquired the Tulsa east and Lovington storage assets, Roadrunner and Beeson Pipelines,
Tulsa loading racks and a 16-inch intermediate pipeline from Holly in March 2010, December
2009, August 2009 and June 2009, respectively. See Note 3 for a description of these
transactions.
   
    
    Pipeline and terminal revenues received from Alon were $4.1 million and $7.7 million for
the three months ended March 31, 2010 and 2009, respectively, under the Alon PTA.
Additionally, pipeline revenues received under a pipeline capacity lease agreement with Alon
were $1.3 million and $1.7 million for three months ended March 31, 2010 and 2009,
respectively.
 
    
    We distributed $0.8 million and $0.7 million for the three months ended March 31, 2010 and
2009, respectively, to Alon for distributions on its Class B subordinated units.
 
    
    Our accounts receivable  trade include receivable balances from Alon of $4 million at
March 31, 2010 and December 31, 2009.
 
    
    Our revenues for the three months ended March 31, 2010 include $0.7 million of shortfalls
billed under the Alon PTA in 2009, 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, 2010 and December 31, 2009 includes $6.6 million and $4.8 million, respectively,
relating to the Alon PTA. It is possible that Alon may not exceed its minimum obligations
under the Alon PTA to allow Alon to receive credit for any of the $6.6 million deferred at
March 31, 2010.
 Note 11: Partners Equity, Income Allocations, Cash Distributions and Comprehensive Income
    - 18 -




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##### Table of Contents



Issuances of units
      Allocations of Net Income
   Three Months EndedMarch 31,2010
    
    
    2009(In thousands)General partner interest in net income
    
    $
    169
    
    
    $
    88General partner incentive distribution
    
    
    2,477
    
    
    
    1,205Total general partner interest in net income
    
    $
    2,646
    
    
    $
    1,293
 Cash Distributions
    - 19 -




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##### Table of Contents



Three Months EndedMarch 31,2010
    
    
    2009(In thousands, except per unit data)General partner regular distribution
    
    $
    418
    
    
    $
    283General partner incentive distribution
    
    
    2,477
    
    
    
    1,205Total general partner distribution
    
    
    2,895
    
    
    
    1,488Limited partner distribution
    
    
    17,994
    
    
    
    12,654Total regular quarterly cash distribution
    
    $
    20,889
    
    
    $
    14,142Cash distribution per unit applicable to limited partners
    
    $
    0.815
    
    
    $
    0.775
  Comprehensive Income
  Three Months EndedMarch 31,2010
    
    
    2009(In thousands)Net income
    
    $
    10,702
    
    
    $
    5,934Other comprehensive loss:Change in fair value of cash flow hedge
    
    
    (1,361
    )
    
    
    (150
    )Comprehensive income
    
    
    9,341
    
    
    
    5,784Less noncontrolling interest in comprehensive income
    
    
    
    
    
    
    (495
    )Comprehensive income attributable to HEP unitholders
    
    $
    9,341
    
    
    $
    5,289
 Note 12: Supplemental Guarantor/Non-Guarantor Financial Information
    - 20 -




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##### Table of Contents



Condensed Consolidating Balance Sheet
 GuarantorMarch 31, 2010
    
    Parent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    16,607
    
    
    $
    
    
    
    $
    16,609Accounts receivable
    
    
    
    
    
    
    20,456
    
    
    
    
    
    
    
    20,456Intercompany accounts receivable (payable)
    
    
    (14,523
    )
    
    
    14,523
    
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    227
    
    
    
    287
    
    
    
    
    
    
    
    514Total current assets
    
    
    (14,294
    )
    
    
    51,873
    
    
    
    
    
    
    
    37,579Properties and equipment, net
    
    
    
    
    
    
    432,057
    
    
    
    
    
    
    
    432,057Investment in subsidiaries
    
    
    474,504
    
    
    
    
    
    
    
    (474,504
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    113,699
    
    
    
    
    
    
    
    113,699Goodwill
    
    
    
    
    
    
    49,109
    
    
    
    
    
    
    
    49,109Investment in SLC Pipeline
    
    
    
    
    
    
    26,400
    
    
    
    
    
    
    
    26,400Other assets
    
    
    1,115
    
    
    
    730
    
    
    
    
    
    
    
    1,845Total assets
    
    $
    461,325
    
    
    $
    673,868
    
    
    $
    (474,504
    )
    
    $
    660,689LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    6,216
    
    
    $
    
    
    
    $
    6,216Accrued interest
    
    
    1,685
    
    
    
    21
    
    
    
    
    
    
    
    1,706Deferred revenue
    
    
    
    
    
    
    9,510
    
    
    
    
    
    
    
    9,510Accrued property taxes
    
    
    
    
    
    
    858
    
    
    
    
    
    
    
    858Other current liabilities
    
    
    755
    
    
    
    393
    
    
    
    
    
    
    
    1,148Total current liabilities
    
    
    2,440
    
    
    
    16,998
    
    
    
    
    
    
    
    19,438Long-term debt
    
    
    332,393
    
    
    
    171,000
    
    
    
    
    
    
    
    503,393Other long-term liabilities
    
    
    
    
    
    
    11,366
    
    
    
    
    
    
    
    11,366Partners equity
    
    
    126,492
    
    
    
    474,504
    
    
    
    (474,504
    )
    
    
    126,492Total liabilities and partners equity
    
    $
    461,325
    
    
    $
    673,868
    
    
    $
    (474,504
    )
    
    $
    660,689
 Condensed Consolidating Balance Sheet
 GuarantorDecember 31, 2009
    
    Parent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    2,506
    
    
    $
    
    
    
    $
    2,508Accounts receivable
    
    
    
    
    
    
    18,767
    
    
    
    
    
    
    
    18,767Intercompany accounts receivable (payable)
    
    
    (76,855
    )
    
    
    76,855
    
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    261
    
    
    
    478
    
    
    
    
    
    
    
    739Current assets of discontinued operations
    
    
    
    
    
    
    2,195
    
    
    
    
    
    
    
    2,195Total current assets
    
    
    (76,592
    )
    
    
    100,801
    
    
    
    
    
    
    
    24,209Properties and equipment, net
    
    
    
    
    
    
    398,044
    
    
    
    
    
    
    
    398,044Investment in subsidiaries
    
    
    458,381
    
    
    
    
    
    
    
    (458,381
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    115,436
    
    
    
    
    
    
    
    115,436Goodwill
    
    
    
    
    
    
    49,109
    
    
    
    
    
    
    
    49,109Investment in SLC Pipeline
    
    
    
    
    
    
    25,919
    
    
    
    
    
    
    
    25,919Other assets
    
    
    3,267
    
    
    
    861
    
    
    
    
    
    
    
    4,128Total assets
    
    $
    385,056
    
    
    $
    690,170
    
    
    $
    (458,381
    )
    
    $
    616,845LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    6,211
    
    
    $
    
    
    
    $
    6,211Accrued interest
    
    
    2,849
    
    
    
    14
    
    
    
    
    
    
    
    2,863Deferred revenue
    
    
    
    
    
    
    8,402
    
    
    
    
    
    
    
    8,402Accrued property taxes
    
    
    
    
    
    
    1,072
    
    
    
    
    
    
    
    1,072Other current liabilities
    
    
    961
    
    
    
    296
    
    
    
    
    
    
    
    1,257Total current liabilities
    
    
    3,810
    
    
    
    15,995
    
    
    
    
    
    
    
    19,805Long-term debt
    
    
    184,827
    
    
    
    206,000
    
    
    
    
    
    
    
    390,827Other long-term liabilities
    
    
    2,555
    
    
    
    9,794
    
    
    
    
    
    
    
    12,349Partners equity
    
    
    193,864
    
    
    
    458,381
    
    
    
    (458,381
    )
    
    
    193,864Total liabilities and partners equity
    
    $
    385,056
    
    
    $
    690,170
    
    
    $
    (458,381
    )
    
    $
    616,845
  - 21 -




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##### Table of Contents



Condensed Consolidating Statement of Income
 GuarantorThree months ended March 31, 2010
    
    Parent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    33,597
    
    
    $
    
    
    
    $
    33,597Third parties
    
    
    
    
    
    
    7,099
    
    
    
    
    
    
    
    7,099
    
    
    
    40,696
    
    
    
    
    
    
    
    40,696Operating costs and expenses:Operations
    
    
    
    
    
    
    13,060
    
    
    
    
    
    
    
    13,060Depreciation and amortization
    
    
    
    
    
    
    7,210
    
    
    
    
    
    
    
    7,210General and administrative
    
    
    1,801
    
    
    
    762
    
    
    
    
    
    
    
    2,5631,801
    
    
    
    21,032
    
    
    
    
    
    
    
    22,833Operating income (loss)
    
    
    (1,801
    )
    
    
    19,664
    
    
    
    
    
    
    
    17,863Equity in earnings of subsidiaries
    
    
    17,485
    
    
    
    
    
    
    
    (17,485
    )
    
    
    Equity in earnings of SLC Pipeline
    
    
    
    
    
    
    481
    
    
    
    
    
    
    
    481Interest income (expense)
    
    
    (4,982
    )
    
    
    (2,559
    )
    
    
    
    
    
    
    (7,541
    )Other
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )12,503
    
    
    
    (2,085
    )
    
    
    (17,485
    )
    
    
    (7,067
    )Income (loss) before
income taxes
    
    
    10,702
    
    
    
    17,579
    
    
    
    (17,485
    )
    
    
    10,796State income tax
    
    
    
    
    
    
    (94
    )
    
    
    
    
    
    
    (94
    )Net income
    
    $
    10,702
    
    
    $
    17,485
    
    
    $
    (17,485
    )
    
    $
    10,702
 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
    
    
    
    
    
    
    11,009
    
    
    
    
    
    
    
    
    
    
    
    11,009
    
    
    
    29,332
    
    
    
    
    
    
    
    
    
    
    
    29,332Operating costs and expenses:Operations
    
    
    
    
    
    
    10,342
    
    
    
    
    
    
    
    
    
    
    
    10,342Depreciation and amortization
    
    
    
    
    
    
    6,016
    
    
    
    
    
    
    
    
    
    
    
    6,016General and administrative
    
    
    698
    
    
    
    636
    
    
    
    
    
    
    
    
    
    
    
    1,334698
    
    
    
    16,994
    
    
    
    
    
    
    
    
    
    
    
    17,692Operating income (loss)
    
    
    (698
    )
    
    
    12,338
    
    
    
    
    
    
    
    
    
    
    
    11,640Equity in earnings of subsidiaries
    
    
    9,064
    
    
    
    1,156
    
    
    
    
    
    
    
    (10,220
    )
    
    
    Equity in earnings of SLC Pipeline
    
    
    
    
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    175Interest income (expense)
    
    
    (2,927
    )
    
    
    (2,470
    )
    
    
    
    
    
    
    
    
    
    
    (5,397
    )SLC Pipeline acquisition costs
    
    
    
    
    
    
    (2,500
    )
    
    
    
    
    
    
    
    
    
    
    (2,500
    )6,137
    
    
    
    (3,639
    )
    
    
    
    
    
    
    (10,220
    )
    
    
    (7,722
    )Income
(loss) from continuing operations
before income taxes
    
    
    5,439
    
    
    
    8,699
    
    
    
    
    
    
    
    (10,220
    )
    
    
    3,918State income tax
    
    
    
    
    
    
    (73
    )
    
    
    
    
    
    
    
    
    
    
    (73
    )Income from continuing operations
    
    
    5,439
    
    
    
    8,626
    
    
    
    
    
    
    
    (10,220
    )
    
    
    3,845Income from discontinued operations
    
    
    
    
    
    
    438
    
    
    
    1,651
    
    
    
    (495
    )
    
    
    1,594Net income
    
    $
    5,439
    
    
    $
    9,064
    
    
    $
    1,651
    
    
    $
    (10,715
    )
    
    $
    5,439
  - 22 -




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##### Table of Contents



Condensed Consolidating Statement of Cash Flows
 GuarantorThree months ended March 31, 2010
    
    Parent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash flows from operating activities
    
    $
    (69,523
    )
    
    $
    88,246
    
    
    $
    
    
    
    $
    18,723Cash flows from investing activitiesAdditions to properties and equipment
    
    
    
    
    
    
    (1,911
    )
    
    
    
    
    
    
    (1,911
    )Acquisition of assets from Holly Corporation
    
    
    
    
    
    
    (37,234
    )
    
    
    
    
    
    
    (37,234
    )
    
    
    
    (39,145
    )
    
    
    
    
    
    
    (39,145
    )Cash flows from financing activitiesNet repayments under credit agreement
    
    
    
    
    
    
    (35,000
    )
    
    
    
    
    
    
    (35,000
    )Net proceeds from issuance of senior notes
    
    
    147,540
    
    
    
    
    
    
    
    
    
    
    
    147,540Purchase price in excess of transferred
basis in assets acquired from Holly
Corporation
    
    
    (55,766
    )
    
    
    
    
    
    
    
    
    
    
    (55,766
    )Distributions to HEP unitholders
    
    
    (20,506
    )
    
    
    
    
    
    
    
    
    
    
    (20,506
    )Purchase of units for restricted grants
    
    
    (1,745
    )
    
    
    
    
    
    
    
    
    
    
    (1,745
    )69,523
    
    
    
    (35,000
    )
    
    
    
    
    
    
    34,523Cash and cash equivalentsIncrease (decrease) for the period
    
    
    
    
    
    
    14,101
    
    
    
    
    
    
    
    14,101Beginning of period
    
    
    2
    
    
    
    2,506
    
    
    
    
    
    
    
    2,508End of period
    
    $
    2
    
    
    $
    16,607
    
    
    $
    
    
    
    $
    16,609
 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 activitiesAdditions to properties and equipment
    
    
    
    
    
    
    (10,518
    )
    
    
    (52
    )
    
    
    
    
    
    
    (10,570
    )Investment in SLC Pipeline
    
    
    
    
    
    
    (25,500
    )
    
    
    
    
    
    
    
    
    
    
    (25,500
    )
    
    
    
    (36,018
    )
    
    
    (52
    )
    
    
    
    
    
    
    (36,070
    )Cash flows from financing activitiesNet borrowings under credit agreement
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Distributions to HEP unitholders
    
    
    (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
  - 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
   2010 Acquisitions
 Tulsa East / Lovington Storage Asset Transaction
  2009 Acquisitions
 Sinclair Logistics and Storage Assets Transaction
  Roadrunner / Beeson Pipelines Transaction
  Tulsa Loading Racks Transaction
   - 24 -




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##### Table of Contents



Lovington-Artesia Pipeline Transaction
  SLC Pipeline Joint Venture Interest
  Holly Capacity Expansion
  Rio Grande Pipeline Sale
  Agreements with Holly Corporation and Alon
  
    
    Holly PTA (pipelines and terminals throughput agreement expiring in 2019 that relates to
the pipelines and terminal assets contributed to us by Holly upon our initial public
offering in 2004);
 
    
    Holly IPA (intermediate pipelines throughput agreement expiring in 2024 that relates to
the intermediate pipelines acquired from Holly in 2005 and 2009);
 
    
    Holly CPTA (crude pipelines and tankage throughput agreement expiring in 2023 that
relates to the crude pipelines and tankage assets acquired from Holly in 2008);
 
    
    Holly PTTA (pipeline, tankage and loading rack throughput agreement expiring in 2024
that relates to the Tulsa east storage tank and loading rack facilities acquired from
Sinclair in 2009 and from Holly in March 2010);
 
    
    Holly RPA (pipeline throughput agreement expiring in 2024 that relates to the Roadrunner
Pipeline acquired from Holly in 2009);
 
    
    Holly ETA (equipment and throughput agreement expiring in 2024 that relates to the Tulsa
west loading rack facilities acquired from Holly in 2009); and
 
    
    Holly ATA (loading rack throughput agreement expiring in 2025 that relates to the
Lovington asphalt loading rack facility acquired from Holly in March 2010).
    - 25 -




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##### Table of Contents



Minimum AnnualizedCommitmentAgreement
    
    (In millions)
    
    
    Year of Maturity
    
    Contract TypeHolly PTA
    
    $
    43.7
    
    
    2019
    
    Minimum revenue commitmentHolly IPA
    
    
    20.7
    
    
    2024
    
    Minimum revenue commitmentHolly CPTA
    
    
    28.4
    
    
    2023
    
    Minimum revenue commitmentHolly PTTA
    
    
    27.2
    
    
    2024
    
    Minimum revenue commitmentHolly RPA
    
    
    9.2
    
    
    2024
    
    Minimum revenue commitmentHolly ETA
    
    
    2.7
    
    
    2024
    
    Minimum revenue commitmentHolly ATA
    
    
    0.5
    
    
    2025
    
    Minimum revenue commitmentAlon PTA
    
    
    22.7
    
    
    2020
    
    Minimum volume commitmentAlon capacity lease
    
    
    6.4
    
    
    Various
    
    Capacity leaseTotal
    
    $
    161.5
    - 26 -




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##### Table of Contents



RESULTS OF OPERATIONS (Unaudited)
 Income, Distributable Cash Flow and Volumes
  Three Months Ended
    
    
    ChangeMarch 31,
    
    
    from2010
    
    
    2009
    
    
    2009(In thousands, except per unit data)RevenuesPipelines:Affiliates  refined product pipelines
    
    $
    11,480
    
    
    $
    7,553
    
    
    $
    3,927Affiliates  intermediate pipelines
    
    
    5,792
    
    
    
    1,766
    
    
    
    4,026Affiliates  crude pipelines
    
    
    9,405
    
    
    
    6,901
    
    
    
    2,50426,677
    
    
    
    16,220
    
    
    
    10,457Third parties  refined product pipelines
    
    
    5,404
    
    
    
    9,475
    
    
    
    (4,071
    )32,081
    
    
    
    25,695
    
    
    
    6,386Terminals and loading racks:Affiliates
    
    
    6,920
    
    
    
    2,103
    
    
    
    4,817Third parties
    
    
    1,695
    
    
    
    1,534
    
    
    
    1618,615
    
    
    
    3,637
    
    
    
    4,978Total revenues
    
    
    40,696
    
    
    
    29,332
    
    
    
    11,364Operating costs and expensesOperations
    
    
    13,060
    
    
    
    10,342
    
    
    
    2,718Depreciation and amortization
    
    
    7,210
    
    
    
    6,016
    
    
    
    1,194General and administrative
    
    
    2,563
    
    
    
    1,334
    
    
    
    1,22922,833
    
    
    
    17,692
    
    
    
    5,141Operating income
    
    
    17,863
    
    
    
    11,640
    
    
    
    6,223Equity in earnings of SLC Pipeline
    
    
    481
    
    
    
    175
    
    
    
    306Interest income
    
    
    3
    
    
    
    6
    
    
    
    (3
    )Interest expense, including amortization
    
    
    (7,544
    )
    
    
    (5,403
    )
    
    
    (2,141
    )Other expense
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )SLC Pipeline acquisition costs
    
    
    
    
    
    
    (2,500
    )
    
    
    2,500(7,067
    )
    
    
    (7,722
    )
    
    
    655Income from continuing operations before income taxes
    
    
    10,796
    
    
    
    3,918
    
    
    
    6,878State income tax
    
    
    (94
    )
    
    
    (73
    )
    
    
    (21
    )Income from continuing operations
    
    
    10,702
    
    
    
    3,845
    
    
    
    6,857Income from discontinued operations, net of noncontrolling interest
of $495 (1)
    
    
    
    
    
    
    1,594
    
    
    
    (1,594
    )Net income
    
    
    10,702
    
    
    
    5,439
    
    
    
    5,263Less general partner interest in net income, including incentive
distributions (2)
    
    
    2,646
    
    
    
    1,293
    
    
    
    1,353Limited partners interest in net income
    
    $
    8,056
    
    
    $
    4,146
    
    
    $
    3,910Limited partners earnings per unit  basic and diluted(2)Income from continuing operations
    
    $
    0.36
    
    
    $
    0.16
    
    
    $
    0.20Income from discontinued operations
    
    
    
    
    
    
    0.09
    
    
    
    (0.09
    )Net income
    
    $
    0.36
    
    
    $
    0.25
    
    
    $
    0.11Weighted average limited partners units outstanding
    
    
    22,079
    
    
    
    16,328
    
    
    
    5,751EBITDA(3)
    
    $
    25,547
    
    
    $
    17,184
    
    
    $
    8,363Distributable cash flow(4)
    
    $
    20,159
    
    
    $
    14,584
    
    
    $
    5,575
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##### Table of Contents



Three Months Ended
    
    
    ChangeMarch 31,
    
    
    from2010
    
    
    2009
    
    
    2009Volumes from continuing operations (bpd)(1)Pipelines:Affiliates  refined product pipelines
    
    
    93,382
    
    
    
    62,338
    
    
    
    31,044Affiliates  intermediate pipelines
    
    
    79,118
    
    
    
    34,296
    
    
    
    44,822Affiliates  crude pipelines
    
    
    134,889
    
    
    
    122,207
    
    
    
    12,682307,389
    
    
    
    218,841
    
    
    
    88,548Third parties  refined product pipelines
    
    
    30,835
    
    
    
    49,289
    
    
    
    (18,454
    )338,224
    
    
    
    268,130
    
    
    
    70,094Terminals and loading racks:Affiliates
    
    
    163,796
    
    
    
    82,836
    
    
    
    80,960Third parties
    
    
    34,843
    
    
    
    43,406
    
    
    
    (8,563
    )198,639
    
    
    
    126,242
    
    
    
    72,397Total for pipelines and terminal assets (bpd)
    
    
    536,863
    
    
    
    394,372
    
    
    
    142,491
 (1)
    
    On December 1, 2009, we sold our 70% interest in Rio Grande. Results of operations of
Rio Grande are presented in discontinued operations. Pipeline volume information excludes
volumes attributable to Rio Grande.(2)
    
    Net income is allocated between limited partners and the general partner interest in
accordance with the provisions of the partnership agreement. Net income allocated to the
general partner includes incentive distributions declared subsequent to quarter end. Net
income attributable to the limited partners is divided by the weighted average limited
partner units outstanding in computing the limited partners per unit interest in net
income.(3)
    
    EBITDA is calculated as net income plus (i) interest expense, net of interest income,
(ii) state income tax and (iii) depreciation and amortization. EBITDA is not a calculation
based upon GAAP. However, the amounts included in the EBITDA calculation are derived from
amounts included in our consolidated financial statements, with the exception of EBITDA
from discontinued operations. EBITDA should not be considered as an alternative to net
income or operating income, as an indication of our operating performance or as an
alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily
comparable to similarly titled measures of other companies. EBITDA is presented here
because it is a widely used financial indicator used by investors and analysts to measure
performance. EBITDA 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 31,2010
    
    
    2009(In thousands)Income from continuing operations
    
    $
    10,702
    
    
    $
    3,845Add (subtract):Interest expense
    
    
    5,886
    
    
    
    5,011Amortization of discount and deferred debt issuance costs
    
    
    194
    
    
    
    176Increase in interest expense  change in fair value of interest rate swaps
    
    
    1,464
    
    
    
    216Interest income
    
    
    (3
    )
    
    
    (6
    )State income tax
    
    
    94
    
    
    
    73Depreciation and amortization
    
    
    7,210
    
    
    
    6,016EBITDA from discontinued operations
    
    
    
    
    
    
    1,853EBITDA
    
    $
    25,547
    
    
    $
    17,184
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##### Table of Contents



(4)
    
    Distributable cash flow is not a calculation based upon GAAP. However, the amounts
included in the calculation are derived from amounts separately presented in our
consolidated financial statements, with the exception of equity in excess cash flows over
earnings of SLC Pipeline, maintenance capital expenditures and distributable cash flow from
discontinued operations. Distributable cash flow should not be considered in isolation or
as an alternative to net income or operating income as an indication of our operating
performance or as an alternative to operating cash flow as a measure of liquidity.
Distributable cash flow is not necessarily comparable to similarly titled measures of other
companies. Distributable cash flow is presented here because it is a widely accepted
financial indicator used by investors to compare partnership performance. We believe that
this measure provides investors an enhanced perspective of the operating performance of our
assets and the cash our business is generating.Set forth below is our calculation of distributable cash flow. Three Months EndedMarch 31,2010
    
    
    2009(In thousands)Income from continuing operations
    
    $
    10,702
    
    
    $
    3,845Add (subtract):Depreciation and amortization
    
    
    7,210
    
    
    
    6,016Amortization of discount and deferred debt issuance costs
    
    
    194
    
    
    
    176Increase in interest expense  change in fair value of interest rate swaps
    
    
    1,464
    
    
    
    216Equity in excess cash flows over earnings of SLC Pipeline
    
    
    178
    
    
    
    53Increase in deferred revenue
    
    
    1,108
    
    
    
    362SLC Pipeline acquisition costs*
    
    
    
    
    
    
    2,500Maintenance capital expenditures**
    
    
    (697
    )
    
    
    (418
    )Distributable cash flow from discontinued operations
    
    
    
    
    
    
    1,834Distributable cash flow
    
    $
    20,159
    
    
    $
    14,584
 *
    
    We expensed the $2.5 million finders fee 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. Maintenance capital
expenditures include expenditures required to maintain equipment reliability, tankage
and pipeline integrity, safety and to address environmental regulations. March 31,
    
    
    December 31,2010
    
    
    2009(In thousands)Balance Sheet DataCash and cash equivalents
    
    $
    16,609
    
    
    $
    2,508Working capital
    
    $
    18,141
    
    
    $
    4,404Total assets
    
    $
    660,689
    
    
    $
    616,845Long-term debt (5)
    
    $
    503,393
    
    
    $
    390,827Partners equity (6)
    
    $
    126,492
    
    
    $
    193,864
 (5)
    
    Includes $171 million and $206 million of credit agreement advances at March 31, 2010
and December 31, 2009, respectively.(6)
    
    As a master limited partnership, we distribute our available cash, which historically
has exceeded our net income because depreciation and amortization expense represents a
non-cash charge against income. The result is a decline in partners equity since our
regular quarterly distributions have exceeded our quarterly net income. Additionally, if
the assets transferred to us upon our initial public offering in 2004, the intermediate
pipelines purchased from Holly in 2005, and the assets purchased from Holly in 2009 and
March 2010 had been acquired from third parties, our acquisition cost in excess of Hollys
basis in the transferred assets of $216.2 million would have been recorded as increases to
our properties and equipment and intangible assets instead of decreases to partners
equity.  - 29 -




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##### Table of Contents



Results of Operations  Three Months Ended March 31, 2010 Compared with Three Months Ended
March 31, 2009
 Summary
   Revenues
       - 30 -




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##### Table of Contents



Operations Expense
  Depreciation and Amortization
  General and Administrative
  Equity in Earnings of SLC Pipeline
  SLC Pipeline Acquisition Costs
  Interest Expense
  State Income Tax
  Discontinued Operations
   - 31 -




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 Overview
        Cash Flows  Operating Activities
    - 32 -




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##### Table of Contents



Cash Flows  Investing Activities
  Cash Flows  Financing Activities
  Capital Requirements
     - 33 -




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##### Table of Contents



Credit Agreement
      Senior Notes
   - 34 -




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##### Table of Contents



March 31,
    
    
    December 31,2010
    
    
    2009(In thousands)Credit Agreement
    
    $
    171,000
    
    
    $
    206,0006.25% Senior NotesPrincipal
    
    
    185,000
    
    
    
    185,000Unamortized discount
    
    
    (1,868
    )
    
    
    (1,964
    )Unamortized premium  dedesignated fair value hedge
    
    
    1,704
    
    
    
    1,791184,836
    
    
    
    184,8278.25% Senior NotesPrincipal
    
    
    150,000
    
    
    
    Unamortized discount
    
    
    (2,443
    )
    
    
    147,557
    
    
    
    Total long-term debt
    
    $
    503,393
    
    
    $
    390,827
  Contractual Obligations
    Impact of Inflation
   Environmental Matters
   - 35 -




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES
    - 36 -




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##### Table of Contents



RISK MANAGEMENT
     Balance Sheet
    
    
    
    
    
    Location of Offsetting
    
    OffsettingInterest Rate Swap
    
    Location
    
    Fair Value
    
    
    Balance
    
    Amount(In thousands)LiabilityCash flow hedge 
$171 million LIBOR based debt
    
    Other long-term liabilities
    
    $
    (10,502
    )
    
    Accumulated other comprehensive loss
    
    $
    10,502
       - 37 -




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##### Table of Contents



- 38 -




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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
   - 39 -




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##### Table of Contents



Item 1. Legal Proceedings
  
 Item 6. Exhibits
 4.1
    
    
    Indenture dated March 10, 2010, among Holly Energy Partners, L.P., Holly Energy Finance
Corp. and each of the guarantors party thereto and U.S. Bank National Association
(incorporated by reference to Exhibit 4.1 of Registrants Form 8-K Current Report dated
March 11, 2010, File No. 1-32225).10.1
    
    
    LLC Interest Purchase Agreement, dated as of March 31, 2010, by and among Holly
Corporation, Holly Refining & Marketing-Tulsa, LLC, Lea Refining Company, HEP Tulsa LLC and
HEP Refining, L.L.C. (incorporated by reference to Exhibit 10.1 of Registrants Form 8-K
Current Report dated April 6, 2010, File No. 1-32225).10.2
    
    
    First Amended and Restated Pipelines, Tankage and Loading Rack Throughput Agreement
(Tulsa East), dated as of March 31, 2010, by and between Holly Refining & Marketing-Tulsa,
LLC, HEP Tulsa LLC and Holly Energy Storage-Tulsa LLC (incorporated by reference to Exhibit
10.2 of Registrants Form 8-K Current Report dated April 6, 2010, File No. 1-32225).10.3
    
    
    Loading Rack Throughput Agreement (Lovington), dated as of March 31, 2010, by and
between Navajo Refining Company, L.L.C. and Holly Energy Storage-Lovington LLC
(incorporated by reference to Exhibit 10.3 of Registrants Form 8-K Current Report dated
April 6, 2010, File No. 1-32225).10.4
    
    
    Fourth Amended and Restated Omnibus Agreement, dated as of March 31, 2010, by and among
Holly Corporation, Holly Energy Partners, L.P. and certain of their respective subsidiaries
(incorporated by reference to Exhibit 10.4 of Registrants Form 8-K Current Report dated
April 6, 2010, File No. 1-32225).10.5
    
    
    First Amended and Restated Lease and Access Agreement (East Tulsa), dated as of March
31, 2010, by and between Holly Refining & Marketing-Tulsa, LLC, HEP Tulsa LLC and Holly
Energy Storage-Tulsa LLC (incorporated by reference to Exhibit 10.5 of Registrants Form
8-K Current Report dated April 6, 2010, File No. 1-32225).10.6
    
    
    First Amendment to Pipeline Systems Operating Agreement, dated as of March 31, 2010, by
and among Navajo Refining Company, L.L.C., Lea Refining Company, Woods Cross Refining
Company, L.L.C., Holly Refining & Marketing-Tulsa, LLC and Holly Energy Partners-Operating,
L.P. (incorporated by reference to Exhibit 10.6 of Registrants Form 8-K Current Report
dated April 6, 2010, File No. 1-32225).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  - 40 -




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##### Table of Contents



SIGNATURES
  HOLLY ENERGY PARTNERS, L.P.
(Registrant)
By: HEP LOGISTICS HOLDINGS, L.P. 
its General Partner
By: HOLLY LOGISTIC SERVICES, L.L.C.
its General PartnerDate: April 30, 2010
    /s/ Bruce R. ShawBruce R. ShawSenior Vice President and
Chief Financial Officer
(Principal Financial Officer)/s/ Scott C. SurplusScott C. SurplusVice President and Controller
(Principal Accounting Officer)  - 41 -