##### 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 September 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
 For the transition period from  to .
 Commission File Number: 1-32225
 HOLLY ENERGY PARTNERS, L.P.
  Delaware
    
    20-0833098(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 (Address of principal executive offices)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
  o þ




---



##### 



PART I. FINANCIAL INFORMATION
    
    
    3FORWARD-LOOKING STATEMENTS
    
    
    3Item 1. Financial Statements (Unaudited, except December 31, 2009 Balance Sheet)
    
    
    4Consolidated Balance Sheets
    
    
    4Consolidated Statements of Income
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Consolidated Statement of Partners Equity
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    44Item 4. Controls and Procedures
    
    
    44PART II. OTHER INFORMATION
    
    
    45Item 1. Legal Proceedings
    
    
    45Item 6. Exhibits
    
    
    45SIGNATURES
    
    
    46Exhibit 12.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   - 2 -




---



##### Table of Contents



FORWARD-LOOKING STATEMENTS
  
    
    risks and uncertainties with respect to the actual quantities of petroleum products and
crude oil shipped on our pipelines and/or terminalled in our terminals;
 
    
    the economic viability of Holly Corporation, Alon USA, Inc. and our other customers;
 
    
    the demand for refined petroleum products in markets we serve;
 
    
    our ability to successfully purchase and integrate additional operations in the future;
 
    
    our ability to complete previously announced or contemplated acquisitions;
 
    
    the availability and cost of additional debt and equity financing;
 
    
    the possibility of reductions in production or shutdowns at refineries utilizing our
pipeline and terminal facilities;
 
    
    the effects of current and future government regulations and policies;
 
    
    our operational efficiency in carrying out routine operations and capital construction
projects;
 
    
    the possibility of terrorist attacks and the consequences of any such attacks;
 
    
    general economic conditions; and
 
    
    other financial, operations and legal risks and uncertainties detailed from time to time
in our Securities and Exchange Commission filings.
   - 3 -




---



##### Table of Contents



Item 1. Financial Statements
 Holly Energy Partners, L.P.
 
 Consolidated Balance Sheets
 September 30,2010
    
    
    December 31,(Unaudited)
    
    
    2009(In thousands, except unit data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    706
    
    
    $
    2,508Accounts receivable:Trade
    
    
    3,720
    
    
    
    4,693Affiliates
    
    
    17,599
    
    
    
    14,07421,319
    
    
    
    18,767Prepaid and other current assets
    
    
    1,121
    
    
    
    739Current assets of discontinued operations
    
    
    
    
    
    
    2,195Total current assets
    
    
    23,146
    
    
    
    24,209Properties and equipment, net
    
    
    424,806
    
    
    
    398,044Transportation agreements, net
    
    
    110,226
    
    
    
    115,436Goodwill
    
    
    49,109
    
    
    
    49,109Investment in SLC Pipeline
    
    
    25,513
    
    
    
    25,919Other assets
    
    
    1,784
    
    
    
    4,128Total assets
    
    $
    634,584
    
    
    $
    616,845LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable:Trade
    
    $
    2,978
    
    
    $
    3,860Affiliates
    
    
    2,808
    
    
    
    2,3515,786
    
    
    
    6,211Accrued interest
    
    
    1,532
    
    
    
    2,863Deferred revenue
    
    
    11,681
    
    
    
    8,402Accrued property taxes
    
    
    1,497
    
    
    
    1,072Other current liabilities
    
    
    1,042
    
    
    
    1,257Credit agreement borrowings
    
    
    157,000
    
    
    
    Total current liabilities
    
    
    178,538
    
    
    
    19,805Long-term debt
    
    
    332,564
    
    
    
    390,827Other long-term liabilities
    
    
    12,534
    
    
    
    12,349Partners equity:Common unitholders (22,078,509 units and
21,141,009 units issued and outstanding
at September 30, 2010 and December 31,
2009, respectively)
    
    
    266,957
    
    
    
    275,553Class B subordinated unitholders (937,500
units issued and outstanding at December
31, 2009)
    
    
    
    
    
    
    21,426General partner interest (2% interest)
    
    
    (144,184
    )
    
    
    (93,974
    )Accumulated other comprehensive loss
    
    
    (11,825
    )
    
    
    (9,141
    )Total partners equity
    
    
    110,948
    
    
    
    193,864Total liabilities and partners equity
    
    $
    634,584
    
    
    $
    616,845
   - 4 -




---



##### Table of Contents



Holly Energy Partners, L.P.
 
 Consolidated Statements of Income
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands, except per unit data)Revenues:Affiliates
    
    $
    37,312
    
    
    $
    28,359
    
    
    $
    107,988
    
    
    $
    71,746Third parties
    
    
    9,237
    
    
    
    12,446
    
    
    
    24,740
    
    
    
    36,39046,549
    
    
    
    40,805
    
    
    
    132,728
    
    
    
    108,136Operating costs and expenses:Operations
    
    
    13,632
    
    
    
    11,103
    
    
    
    40,187
    
    
    
    32,076Depreciation and amortization
    
    
    7,237
    
    
    
    6,580
    
    
    
    22,038
    
    
    
    19,209General and administrative
    
    
    1,508
    
    
    
    1,848
    
    
    
    5,984
    
    
    
    4,97922,377
    
    
    
    19,531
    
    
    
    68,209
    
    
    
    56,264Operating income
    
    
    24,172
    
    
    
    21,274
    
    
    
    64,519
    
    
    
    51,872Other income (expense):Equity in earnings of SLC Pipeline
    
    
    570
    
    
    
    711
    
    
    
    1,595
    
    
    
    1,309SLC Pipeline acquisition costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,500
    )Interest income
    
    
    1
    
    
    
    2
    
    
    
    6
    
    
    
    10Interest expense
    
    
    (8,417
    )
    
    
    (6,418
    )
    
    
    (25,510
    )
    
    
    (16,225
    )Other
    
    
    9
    
    
    
    
    
    
    
    2
    
    
    
    65(7,837
    )
    
    
    (5,705
    )
    
    
    (23,907
    )
    
    
    (17,341
    )Income from continuing operations before income taxes
    
    
    16,335
    
    
    
    15,569
    
    
    
    40,612
    
    
    
    34,531State income tax
    
    
    (76
    )
    
    
    (100
    )
    
    
    (216
    )
    
    
    (266
    )Income from continuing operations
    
    
    16,259
    
    
    
    15,469
    
    
    
    40,396
    
    
    
    34,265Income from discontinued operations, net of
noncontrolling interest of $269 and $1,191,
respectively
    
    
    
    
    
    
    1,070
    
    
    
    
    
    
    
    4,105Net income
    
    
    16,259
    
    
    
    16,539
    
    
    
    40,396
    
    
    
    38,370Less general partner interest in net income,
Including incentive distributions
    
    
    3,172
    
    
    
    2,022
    
    
    
    8,727
    
    
    
    5,163Limited partners interest in net income
    
    $
    13,087
    
    
    $
    14,517
    
    
    $
    31,669
    
    
    $
    33,207Limited partners per unit interest in
earnings  basic and diluted:Income from continuing operations
    
    $
    0.59
    
    
    $
    0.73
    
    
    $
    1.43
    
    
    $
    1.66Income from discontinued operations
    
    
    
    
    
    
    0.05
    
    
    
    
    
    
    
    0.23Net income
    
    $
    0.59
    
    
    $
    0.78
    
    
    $
    1.43
    
    
    $
    1.89Weighted average limited partners units outstanding
    
    
    22,079
    
    
    
    18,520
    
    
    
    22,079
    
    
    
    17,546
   - 5 -




---



##### Table of Contents



Holly Energy Partners, L.P.
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Nine Months EndedSeptember 30,2010
    
    
    2009 (1)(In thousands)Cash flows from operating activitiesNet income
    
    $
    40,396
    
    
    $
    38,370Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    22,038
    
    
    
    19,929Equity in earnings of SLC Pipeline, net of distributions
    
    
    406
    
    
    
    (1,309
    )Change in fair value  interest rate swaps
    
    
    1,464
    
    
    
    300Noncontrolling interest in earnings of Rio Grande Pipeline Company
    
    
    
    
    
    
    1,191Amortization of restricted and performance units
    
    
    1,770
    
    
    
    631(Increase) decrease in current assets:Accounts receivable  trade
    
    
    973
    
    
    
    117Accounts receivable  affiliates
    
    
    (3,525
    )
    
    
    (1,781
    )Prepaid and other current assets
    
    
    (382
    )
    
    
    (477
    )Current assets of discontinued operations
    
    
    2,195
    
    
    
    Increase (decrease) in current liabilities:Accounts payable  trade
    
    
    (882
    )
    
    
    (2,815
    )Accounts payable  affiliates
    
    
    457
    
    
    
    (237
    )Accrued interest
    
    
    (1,331
    )
    
    
    (1,929
    )Deferred revenue
    
    
    3,279
    
    
    
    (8,076
    )Accrued property taxes
    
    
    425
    
    
    
    341Other current liabilities
    
    
    (215
    )
    
    
    (137
    )Other, net
    
    
    (939
    )
    
    
    670Net cash provided by operating activities
    
    
    66,129
    
    
    
    44,788Cash flows from investing activitiesAdditions to properties and equipment
    
    
    (8,054
    )
    
    
    (27,478
    )Acquisition of assets from Holly Corporation
    
    
    (35,526
    )
    
    
    (46,000
    )Investment in SLC Pipeline
    
    
    
    
    
    
    (25,500
    )Net cash used for investing activities
    
    
    (43,580
    )
    
    
    (98,978
    )Cash flows from financing activitiesBorrowings under credit agreement
    
    
    52,000
    
    
    
    197,000Repayments of credit agreement borrowings
    
    
    (101,000
    )
    
    
    (152,000
    )Proceeds from issuance of senior notes
    
    
    147,540
    
    
    
    Proceeds from issuance of common units
    
    
    
    
    
    
    58,355Contribution from general partner
    
    
    
    
    
    
    1,191Distributions to HEP unitholders
    
    
    (62,648
    )
    
    
    (44,393
    )Distributions to noncontrolling interest
    
    
    
    
    
    
    (600
    )Purchase price in excess of transferred basis in assets acquired from Holly Corporation
    
    
    (57,474
    )
    
    
    (5,700
    )Purchase of units for restricted grants
    
    
    (2,276
    )
    
    
    (616
    )Deferred financing costs
    
    
    (493
    )
    
    
    Cost of issuing common units
    
    
    
    
    
    
    (266
    )Net cash provided by (used for) financing activities
    
    
    (24,351
    )
    
    
    52,971Cash and cash equivalentsIncrease (decrease) for the period
    
    
    (1,802
    )
    
    
    (1,219
    )Beginning of period
    
    
    2,508
    
    
    
    5,269End of period
    
    $
    706
    
    
    $
    4,050
 (1)
    
    Includes cash flows attributable to discontinued operations.   - 6 -




---



##### Table of Contents



Holly Energy Partners, L.P.
 
 Consolidated Statement of Partners Equity
 (Unaudited)
 AccumulatedClass B
    
    
    General
    
    
    OtherCommon
    
    
    Subordinated
    
    
    Partner
    
    
    ComprehensiveUnits
    
    
    Units
    
    
    Interest
    
    
    Loss
    
    
    Total(In thousands)Balance December 31, 2009
    
    $
    275,553
    
    
    $
    21,426
    
    
    $
    (93,974
    )
    
    $
    (9,141
    )
    
    $
    193,864Conversion of Class B subordinated units to common units
    
    
    20,588
    
    
    
    (20,588
    )
    
    
    
    
    
    
    
    
    
    
    Distributions to HEP unitholders
    
    
    (60,302
    )
    
    
    (1,519
    )
    
    
    (827
    )
    
    
    
    
    
    
    (62,648
    )Purchase price in excess of transferred basis in assets acquired from Holly Corporation
    
    
    
    
    
    
    
    
    
    
    (57,474
    )
    
    
    
    
    
    
    (57,474
    )Purchase of units for restricted grants
    
    
    (2,276
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,276
    )Amortization of restricted and performance units
    
    
    1,770
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,770Comprehensive income:Net income
    
    
    31,624
    
    
    
    681
    
    
    
    8,091
    
    
    
    
    
    
    
    40,396Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,684
    )
    
    
    (2,684
    )Comprehensive income
    
    
    31,624
    
    
    
    681
    
    
    
    8,091
    
    
    
    (2,684
    )
    
    
    37,712Balance September 30, 2010
    
    $
    266,957
    
    
    $
    
    
    
    $
    (144,184
    )
    
    $
    (11,825
    )
    
    $
    110,948
   - 7 -




---



##### Table of Contents



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




---



##### Table of Contents



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 -




---



##### Table of Contents



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 -




---



##### Table of Contents



Note 5: Properties and Equipment
 September 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Pipelines and terminals (1)
    
    $
    493,182
    
    
    $
    455,075Land and right of way
    
    
    25,257
    
    
    
    25,230Other
    
    
    13,926
    
    
    
    12,528Construction in progress
    
    
    14,417
    
    
    
    10,484546,782
    
    
    
    503,317Less accumulated depreciation
    
    
    121,976
    
    
    
    105,273$
    424,806
    
    
    $
    398,044
 (1)
    
    We periodically evaluate estimated useful lives of our properties and equipment. Effective
January 1, 2010, we revised the estimated useful lives of our terminal assets to 16 to 25
years. This change in estimated useful lives resulted in a $2.2 million reduction
in depreciation expense for the nine months ended September 30, 2010.  Note 6: Transportation Agreements
  
    
    The Alon pipelines and terminals agreement (the Alon PTA) represents a portion of the
total purchase price of the Alon assets acquired in 2005 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.
  September 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Alon transportation agreement
    
    $
    59,933
    
    
    $
    59,933Holly crude pipelines and tankage agreement
    
    
    74,231
    
    
    
    74,231134,164
    
    
    
    134,164Less accumulated amortization
    
    
    23,938
    
    
    
    18,728$
    110,226
    
    
    $
    115,436
    - 11 -




---



##### Table of Contents



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
    
    
    36,755
    
    
    
    43.13Vesting and transfer of full ownership to recipients
    
    
    (41,505
    )
    
    
    38.53Forfeited
    
    
    (1,226
    )
    
    
    34.28Outstanding at September 30, 2010 (nonvested)
    
    
    47,295
    
    
    $
    37.47
    
    
    
    0.9 year
    
    
    $
    2,424
    - 12 -




---



##### Table of Contents



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




---



##### Table of Contents



Senior Notes
     - 14 -




---



##### Table of Contents



September 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Credit Agreement
    
    $
    157,000
    
    
    $
    206,0006.25% Senior NotesPrincipal
    
    
    185,000
    
    
    
    185,000Unamortized discount
    
    
    (1,679
    )
    
    
    (1,964
    )Unamortized premium  dedesignated fair value hedge
    
    
    1,531
    
    
    
    1,791184,852
    
    
    
    184,8278.25% Senior NotesPrincipal
    
    
    150,000
    
    
    
    Unamortized discount
    
    
    (2,288
    )
    
    
    147,712
    
    
    
    Total debt
    
    
    489,564
    
    
    
    390,827Less credit agreement borrowings classified as current liabilities
    
    
    157,000
    
    
    
    Total long-term debt
    
    $
    332,564
    
    
    $
    390,827
 Interest Rate Risk Management
     Balance Sheet
    
    
    
    
    
    
    Location of Offsetting
    
    
    OffsettingInterest Rate Swap
    
    Location
    
    
    Fair Value
    
    
    Balance
    
    
    Amount(In thousands)LiabilityCash flow hedge  $155 million LIBOR based debt
    
    Other long-term liabilities
    
    $
    11,825
    
    
    Accumulated other comprehensive loss
    
    $
    11,825
   - 15 -




---



##### Table of Contents



Interest Expense and Other Debt Information
  September 30,
    
    
    September 30,2010
    
    
    2009(In thousands)Interest on outstanding debt:Credit Agreement, net of interest on interest rate swap
    
    $
    6,908
    
    
    $
    7,7456.25% Senior Notes, net of interest on interest rate swaps
    
    
    8,514
    
    
    
    8,3208.25% Senior Notes
    
    
    6,940
    
    
    
    Partial settlement of interest rate swap  cash flow hedge
    
    
    1,076
    
    
    
    Net fair value adjustments to interest rate swaps
    
    
    1,464
    
    
    
    300Net amortization of discount and deferred debt issuance costs
    
    
    710
    
    
    
    529Commitment fees
    
    
    286
    
    
    
    202Total interest incurred
    
    
    25,898
    
    
    
    17,096Less capitalized interest
    
    
    388
    
    
    
    871Net interest expense
    
    $
    25,510
    
    
    $
    16,225Cash paid for interest (1)
    
    $
    29,515
    
    
    $
    18,307
 (1)
    
    Net of cash received under our interest rate swap agreements of $1.9 million for the nine
months ended September 30, 2010 and $3.8 million for the nine months ended September 30, 2009. Note 9: Significant Customers
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Holly
    
    
    80
    %
    
    
    70
    %
    
    
    81
    %
    
    
    66
    %Alon
    
    
    15
    %
    
    
    26
    %
    
    
    14
    %
    
    
    29
    %
  - 16 -




---



##### Table of Contents



Note 10: Related Party Transactions
 Holly and Alon Agreements
  
    
    Holly PTA (pipelines and terminals throughput agreement expiring in 2019 that relates to
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
assets acquired from Holly in 2005 and 2009);
 
    
    Holly CPTA (crude pipelines and tankage throughput agreement expiring in 2023 that
relates to assets acquired from Holly in 2008);
 
    
    Holly PTTA (pipeline, tankage and loading rack throughput agreement expiring in 2024
that relates to the Tulsa east 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 facilities acquired from Holly in 2009);
 
    
    Holly NPA (natural gas pipeline throughput agreement expiring in 2024); and
 
    
    Holly ATA (asphalt loading rack throughput agreement expiring in 2025 that relates to
the Lovington facility acquired from Holly in March 2010).
      - 17 -




---



##### Table of Contents




    
    Revenues received from Holly were $37.3 million and $28.4 million for the three months
ended September 30, 2010 and 2009, respectively, and $108 million and $71.7 million for the
nine months ended September 30, 2010 and 2009, respectively.
 
    
    Holly charged general and administrative services under the Omnibus Agreement of $0.6
million for the three months ended September 30, 2010 and 2009 and $1.7 million for the nine
months ended September 30, 2010 and 2009.
 
    
    We reimbursed Holly for costs of employees supporting our operations of $4.8 million and
$4.2 million for the three months ended September 30, 2010 and 2009, respectively, and $13.6
million and $12.8 million for the nine months ended September 30, 2010 and 2009, respectively.
 
    
    We paid Holly a $2.5 million finders fee in connection the acquisition of our 25% joint
venture interest in the SLC Pipeline in the first quarter of 2009.
 
    
    We distributed $9.1 million and $7.6 million for the three months ended September 30, 2010
and 2009, respectively, to Holly as regular distributions on its common units, subordinated
units and general partner interest, including general partner incentive distributions. We
distributed $26.5 million and $21.6 million during the nine months ended September 30, 2010
and 2009, respectively.
 
    
    Accounts receivable from Holly were $17.6 million and $14.1 million at September 30, 2010
and December 31, 2009, respectively.
 
    
    Accounts payable to Holly were $2.8 million and $2.4 million at September 30, 2010 and
December 31, 2009, respectively.
 
    
    Revenues for the three and the nine months ended September 30, 2010 include $0.6 million
and $2.9 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 September 30, 2010 and December 31, 2009, includes $3.4 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 $3.4 million deferred at September 30, 2010.
 
    
    We acquired the Tulsa east and Lovington storage assets, Roadrunner and Beeson Pipelines,
Tulsa loading racks and a 16-inch intermediate pipeline from Holly in March 2010, December
2009, August 2009 and June 2009, respectively. See Note 3 for a description of these
transactions.
   
    
    Revenues received from Alon were $5.4 million and $8.8 million for the three months ended
September 30, 2010 and 2009, respectively, and $13.8 million and $25.8 million for the nine
months ended September 30, 2010 and 2009, respectively under the Alon PTA. Additionally,
revenues received under a pipeline capacity lease agreement with Alon were $1.7 million and
$1.6 million for the three months ended September 30, 2010 and 2009, respectively, and $4.9
million and $5 million for the nine months ended September 30, 2010 and 2009, respectively.
 
    
    Accounts receivable  trade include receivable balances from Alon of $3.6 million at
September 30, 2010 and $4 million at December 31, 2009.
  - 18 -




---



##### Table of Contents




    
    Revenues for the three and the nine months ended September 30, 2010 include $1.1 million
and $2.9 million, respectively, of shortfalls billed under the Alon PTA in 2010, as Alon did
not exceed its minimum revenue obligation in any of the subsequent four quarters. Deferred
revenue in the consolidated balance sheets at September 30, 2010 and December 31, 2009
includes $8.3 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 $8.3 million deferred at September 30, 2010.
 Note 11: Partners Equity
  Issuances of units
      Allocations of Net Income
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)General partner interest in net income
    
    $
    271
    
    
    $
    300
    
    
    $
    659
    
    
    $
    691General partner incentive distribution
    
    
    2,901
    
    
    
    1,722
    
    
    
    8,068
    
    
    
    4,472Total general partner interest in net income attributable to HEP
    
    $
    3,172
    
    
    $
    2,022
    
    
    $
    8,727
    
    
    $
    5,163
  - 19 -




---



##### Table of Contents



Cash Distributions
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands, except per unit data)General partner interest
    
    $
    436
    
    
    $
    336
    
    
    $
    1,280
    
    
    $
    947General partner incentive distribution
    
    
    2,901
    
    
    
    1,722
    
    
    
    8,068
    
    
    
    4,472Total general partner distribution
    
    
    3,337
    
    
    
    2,058
    
    
    
    9,348
    
    
    
    5,419Limited partner distribution
    
    
    18,435
    
    
    
    14,723
    
    
    
    54,566
    
    
    
    41,938Total regular quarterly cash distribution
    
    $
    21,772
    
    
    $
    16,781
    
    
    $
    63,914
    
    
    $
    47,357Cash distribution per unit applicable to limited partners
    
    $
    0.835
    
    
    $
    0.795
    
    
    $
    2.475
    
    
    $
    2.355
  Comprehensive Income (Loss)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Net income
    
    $
    16,259
    
    
    $
    16,808
    
    
    $
    40,396
    
    
    $
    39,561Other comprehensive income (loss):Change in fair value of cash flow hedge
    
    
    (703
    )
    
    
    (1,482
    )
    
    
    (3,760
    )
    
    
    2,786Reclassification adjustment to net income on
partial settlement of cash flow hedge
    
    
    
    
    
    
    
    
    
    
    1,076
    
    
    
    Other comprehensive income (loss)
    
    
    (703
    )
    
    
    (1,482
    )
    
    
    (2,684
    )
    
    
    2,786Comprehensive income
    
    
    15,556
    
    
    
    15,326
    
    
    
    37,712
    
    
    
    42,347Less noncontrolling interest in comprehensive income
    
    
    
    
    
    
    269
    
    
    
    
    
    
    
    1,191Comprehensive income attributable to HEP unitholders
    
    $
    15,556
    
    
    $
    15,057
    
    
    $
    37,712
    
    
    $
    41,156
  - 20 -




---



##### Table of Contents



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




---



##### Table of Contents



Condensed Consolidating Balance Sheet
 GuarantorSeptember 30, 2010
    
    Parent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    704
    
    
    $
    
    
    
    $
    706Accounts receivable
    
    
    
    
    
    
    21,319
    
    
    
    
    
    
    
    21,319Intercompany accounts receivable (payable)
    
    
    (73,158
    )
    
    
    73,158
    
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    368
    
    
    
    753
    
    
    
    
    
    
    
    1,121Total current assets
    
    
    (72,788
    )
    
    
    95,934
    
    
    
    
    
    
    
    23,146Properties and equipment, net
    
    
    
    
    
    
    424,806
    
    
    
    
    
    
    
    424,806Investment in subsidiaries
    
    
    517,300
    
    
    
    
    
    
    
    (517,300
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    110,226
    
    
    
    
    
    
    
    110,226Goodwill
    
    
    
    
    
    
    49,109
    
    
    
    
    
    
    
    49,109Investment in SLC Pipeline
    
    
    
    
    
    
    25,513
    
    
    
    
    
    
    
    25,513Other assets
    
    
    1,314
    
    
    
    470
    
    
    
    
    
    
    
    1,784Total assets
    
    $
    445,826
    
    
    $
    706,058
    
    
    $
    (517,300
    )
    
    $
    634,584LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    5,786
    
    
    $
    
    
    
    $
    5,786Accrued interest
    
    
    1,514
    
    
    
    18
    
    
    
    
    
    
    
    1,532Deferred revenue
    
    
    
    
    
    
    11,681
    
    
    
    
    
    
    
    11,681Accrued property taxes
    
    
    
    
    
    
    1,497
    
    
    
    
    
    
    
    1,497Other current liabilities
    
    
    800
    
    
    
    242
    
    
    
    
    
    
    
    1,042Credit agreement borrowings
    
    
    
    
    
    
    157,000
    
    
    
    
    
    
    
    157,000Total current liabilities
    
    
    2,314
    
    
    
    176,224
    
    
    
    
    
    
    
    178,538Long-term debt
    
    
    332,564
    
    
    
    
    
    
    
    
    
    
    
    332,564Other long-term liabilities
    
    
    
    
    
    
    12,534
    
    
    
    
    
    
    
    12,534Partners equity
    
    
    110,948
    
    
    
    517,300
    
    
    
    (517,300
    )
    
    
    110,948Total liabilities and partners equity
    
    $
    445,826
    
    
    $
    706,058
    
    
    $
    (517,300
    )
    
    $
    634,584
 Condensed Consolidating Balance Sheet
 GuarantorDecember 31, 2009
    
    Parent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    2,506
    
    
    $
    
    
    
    $
    2,508Accounts receivable
    
    
    
    
    
    
    18,767
    
    
    
    
    
    
    
    18,767Intercompany accounts receivable (payable)
    
    
    (76,855
    )
    
    
    76,855
    
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    261
    
    
    
    478
    
    
    
    
    
    
    
    739Current assets of discontinued operations
    
    
    
    
    
    
    2,195
    
    
    
    
    
    
    
    2,195Total current assets
    
    
    (76,592
    )
    
    
    100,801
    
    
    
    
    
    
    
    24,209Properties and equipment, net
    
    
    
    
    
    
    398,044
    
    
    
    
    
    
    
    398,044Investment in subsidiaries
    
    
    458,381
    
    
    
    
    
    
    
    (458,381
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    115,436
    
    
    
    
    
    
    
    115,436Goodwill
    
    
    
    
    
    
    49,109
    
    
    
    
    
    
    
    49,109Investment in SLC Pipeline
    
    
    
    
    
    
    25,919
    
    
    
    
    
    
    
    25,919Other assets
    
    
    3,267
    
    
    
    861
    
    
    
    
    
    
    
    4,128Total assets
    
    $
    385,056
    
    
    $
    690,170
    
    
    $
    (458,381
    )
    
    $
    616,845LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    6,211
    
    
    $
    
    
    
    $
    6,211Accrued interest
    
    
    2,849
    
    
    
    14
    
    
    
    
    
    
    
    2,863Deferred revenue
    
    
    
    
    
    
    8,402
    
    
    
    
    
    
    
    8,402Accrued property taxes
    
    
    
    
    
    
    1,072
    
    
    
    
    
    
    
    1,072Other current liabilities
    
    
    961
    
    
    
    296
    
    
    
    
    
    
    
    1,257Total current liabilities
    
    
    3,810
    
    
    
    15,995
    
    
    
    
    
    
    
    19,805Long-term debt
    
    
    184,827
    
    
    
    206,000
    
    
    
    
    
    
    
    390,827Other long-term liabilities
    
    
    2,555
    
    
    
    9,794
    
    
    
    
    
    
    
    12,349Partners equity
    
    
    193,864
    
    
    
    458,381
    
    
    
    (458,381
    )
    
    
    193,864Total liabilities and partners equity
    
    $
    385,056
    
    
    $
    690,170
    
    
    $
    (458,381
    )
    
    $
    616,845
  - 22 -




---



##### Table of Contents



Condensed Consolidating Statement of Income
 GuarantorThree months ended September 30, 2010
    
    Parent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    37,312
    
    
    $
    
    
    
    $
    37,312Third parties
    
    
    
    
    
    
    9,237
    
    
    
    
    
    
    
    9,237
    
    
    
    46,549
    
    
    
    
    
    
    
    46,549Operating costs and expenses:Operations
    
    
    
    
    
    
    13,632
    
    
    
    
    
    
    
    13,632Depreciation and amortization
    
    
    
    
    
    
    7,237
    
    
    
    
    
    
    
    7,237General and administrative
    
    
    888
    
    
    
    620
    
    
    
    
    
    
    
    1,508888
    
    
    
    21,489
    
    
    
    
    
    
    
    22,377Operating income (loss)
    
    
    (888
    )
    
    
    25,060
    
    
    
    
    
    
    
    24,172Equity in earnings of subsidiaries
    
    
    23,285
    
    
    
    
    
    
    
    (23,285
    )
    
    
    Equity in earnings of SLC Pipeline
    
    
    
    
    
    
    570
    
    
    
    
    
    
    
    570Interest income (expense)
    
    
    (6,138
    )
    
    
    (2,278
    )
    
    
    
    
    
    
    (8,416
    )Other
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    917,147
    
    
    
    (1,699
    )
    
    
    (23,285
    )
    
    
    (7,837
    )Income (loss)
before income
taxes
    
    
    16,259
    
    
    
    23,361
    
    
    
    (23,285
    )
    
    
    16,335State income tax
    
    
    
    
    
    
    (76
    )
    
    
    
    
    
    
    (76
    )Net income
    
    $
    16,259
    
    
    $
    23,285
    
    
    $
    (23,285
    )
    
    $
    16,259
 Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Three months ended September 30, 2009
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    28,359
    
    
    $
    
    
    
    $
    
    
    
    $
    28,359Third parties
    
    
    
    
    
    
    12,446
    
    
    
    
    
    
    
    
    
    
    
    12,446
    
    
    
    40,805
    
    
    
    
    
    
    
    
    
    
    
    40,805Operating costs and expenses:Operations
    
    
    
    
    
    
    11,103
    
    
    
    
    
    
    
    
    
    
    
    11,103Depreciation and amortization
    
    
    
    
    
    
    6,580
    
    
    
    
    
    
    
    
    
    
    
    6,580General and administrative
    
    
    1,210
    
    
    
    638
    
    
    
    
    
    
    
    
    
    
    
    1,8481,210
    
    
    
    18,321
    
    
    
    
    
    
    
    
    
    
    
    19,531Operating income (loss)
    
    
    (1,210
    )
    
    
    22,484
    
    
    
    
    
    
    
    
    
    
    
    21,274Equity in earnings of subsidiaries
    
    
    21,408
    
    
    
    628
    
    
    
    
    
    
    
    (22,036
    )
    
    
    Equity in earnings of SLC Pipeline
    
    
    
    
    
    
    711
    
    
    
    
    
    
    
    
    
    
    
    711Interest income (expense)
    
    
    (3,659
    )
    
    
    (2,757
    )
    
    
    
    
    
    
    
    
    
    
    (6,416
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,749
    
    
    
    (1,418
    )
    
    
    
    
    
    
    (22,036
    )
    
    
    (5,705
    )Income (loss)
from continuing
operations before
income taxes
    
    
    16,539
    
    
    
    21,066
    
    
    
    
    
    
    
    (22,036
    )
    
    
    15,569State income tax
    
    
    
    
    
    
    (100
    )
    
    
    
    
    
    
    
    
    
    
    (100
    )Income from continuing operations
    
    
    16,539
    
    
    
    20,966
    
    
    
    
    
    
    
    (22,036
    )
    
    
    15,469Income from discontinued operations
    
    
    
    
    
    
    442
    
    
    
    897
    
    
    
    (269
    )
    
    
    1,070Net income
    
    $
    16,539
    
    
    $
    21,408
    
    
    $
    897
    
    
    $
    (22,305
    )
    
    $
    16,539
  - 23 -




---



##### Table of Contents



Condensed Consolidating Statement of Income
 GuarantorNine months ended September 30, 2010
    
    Parent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    107,988
    
    
    $
    
    
    
    $
    107,988Third parties
    
    
    
    
    
    
    24,740
    
    
    
    
    
    
    
    24,740
    
    
    
    132,728
    
    
    
    
    
    
    
    132,728Operating costs and expenses:Operations
    
    
    
    
    
    
    40,187
    
    
    
    
    
    
    
    40,187Depreciation and amortization
    
    
    
    
    
    
    22,038
    
    
    
    
    
    
    
    22,038General and administrative
    
    
    3,970
    
    
    
    2,014
    
    
    
    
    
    
    
    5,9843,970
    
    
    
    64,239
    
    
    
    
    
    
    
    68,209Operating income (loss)
    
    
    (3,970
    )
    
    
    68,489
    
    
    
    
    
    
    
    64,519Equity in earnings of subsidiaries
    
    
    61,603
    
    
    
    
    
    
    
    (61,603
    )
    
    
    Equity in earnings of SLC Pipeline
    
    
    
    
    
    
    1,595
    
    
    
    
    
    
    
    1,595Interest income (expense)
    
    
    (17,237
    )
    
    
    (8,267
    )
    
    
    
    
    
    
    (25,504
    )Other
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    244,366
    
    
    
    (6,670
    )
    
    
    (61,603
    )
    
    
    (23,907
    )Income (loss)
before income
taxes
    
    
    40,396
    
    
    
    61,819
    
    
    
    (61,603
    )
    
    
    40,612State income tax
    
    
    
    
    
    
    (216
    )
    
    
    
    
    
    
    (216
    )Net income
    
    $
    40,396
    
    
    $
    61,603
    
    
    $
    (61,603
    )
    
    $
    40,396
 Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Nine months ended September 30, 2009
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    71,746
    
    
    $
    
    
    
    $
    
    
    
    $
    71,746Third parties
    
    
    
    
    
    
    36,390
    
    
    
    
    
    
    
    
    
    
    
    36,390
    
    
    
    108,136
    
    
    
    
    
    
    
    
    
    
    
    108,136Operating costs and expenses:Operations
    
    
    
    
    
    
    32,076
    
    
    
    
    
    
    
    
    
    
    
    32,076Depreciation and amortization
    
    
    
    
    
    
    19,209
    
    
    
    
    
    
    
    
    
    
    
    19,209General and administrative
    
    
    3,195
    
    
    
    1,784
    
    
    
    
    
    
    
    
    
    
    
    4,9793,195
    
    
    
    53,069
    
    
    
    
    
    
    
    
    
    
    
    56,264Operating income (loss)
    
    
    (3,195
    )
    
    
    55,067
    
    
    
    
    
    
    
    
    
    
    
    51,872Equity in earnings of subsidiaries
    
    
    50,026
    
    
    
    2,780
    
    
    
    
    
    
    
    (52,806
    )
    
    
    Equity in earnings of SLC Pipeline
    
    
    
    
    
    
    1,309
    
    
    
    
    
    
    
    
    
    
    
    1,309SLC Pipeline acquisition costs
    
    
    
    
    
    
    (2,500
    )
    
    
    
    
    
    
    
    
    
    
    (2,500
    )Interest income (expense)
    
    
    (8,461
    )
    
    
    (7,754
    )
    
    
    
    
    
    
    
    
    
    
    (16,215
    )Other
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    6541,565
    
    
    
    (6,100
    )
    
    
    
    
    
    
    (52,806
    )
    
    
    (17,341
    )Income (loss)
from continuing
operations before
income taxes
    
    
    38,370
    
    
    
    48,967
    
    
    
    
    
    
    
    (52,806
    )
    
    
    34,531State income tax
    
    
    
    
    
    
    (266
    )
    
    
    
    
    
    
    
    
    
    
    (266
    )Income from continuing operations
    
    
    38,370
    
    
    
    48,701
    
    
    
    
    
    
    
    (52,806
    )
    
    
    34,265Income from discontinued operations
    
    
    
    
    
    
    1,325
    
    
    
    3,971
    
    
    
    (1,191
    )
    
    
    4,105Net income
    
    $
    38,370
    
    
    $
    50,026
    
    
    $
    3,971
    
    
    $
    (53,997
    )
    
    $
    38,370
  - 24 -




---



##### Table of Contents



Condensed Consolidating Statement of
Cash Flows
 GuarantorNine months ended September 30, 2010
    
    Parent
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(In thousands)Cash flows from operating activities
    
    $
    (82,123
    )
    
    $
    148,252
    
    
    $
    
    
    
    $
    66,129Cash flows from investing activitiesAdditions to properties and equipment
    
    
    
    
    
    
    (8,054
    )
    
    
    
    
    
    
    (8,054
    )Acquisition of assets from Holly Corporation
    
    
    
    
    
    
    (35,526
    )
    
    
    
    
    
    
    (35,526
    )
    
    
    
    (43,580
    )
    
    
    
    
    
    
    (43,580
    )Cash flows from financing activitiesNet repayments under credit agreement
    
    
    
    
    
    
    (49,000
    )
    
    
    
    
    
    
    (49,000
    )Net proceeds from issuance of senior notes
    
    
    147,540
    
    
    
    
    
    
    
    
    
    
    
    147,540Distributions to HEP unitholders
    
    
    (62,648
    )
    
    
    
    
    
    
    
    
    
    
    (62,648
    )Purchase price in excess of transferred basis
in assets acquired from Holly
Corporation
    
    
    
    
    
    
    (57,474
    )
    
    
    
    
    
    
    (57,474
    )Purchase of units for restricted grants
    
    
    (2,276
    )
    
    
    
    
    
    
    
    
    
    
    (2,276
    )Deferred financing costs
    
    
    (493
    )
    
    
    
    
    
    
    
    
    
    
    (493
    )82,123
    
    
    
    (106,474
    )
    
    
    
    
    
    
    (24,351
    )Cash and cash equivalentsIncrease (decrease) for the period
    
    
    
    
    
    
    (1,802
    )
    
    
    
    
    
    
    (1,802
    )Beginning of period
    
    
    2
    
    
    
    2,506
    
    
    
    
    
    
    
    2,508End of period
    
    $
    2
    
    
    $
    704
    
    
    $
    
    
    
    $
    706
 Condensed Consolidating Statement of
Cash Flows
 Guarantor
    
    
    Non-Nine months ended September 30, 2009
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Cash flows from operating activities
    
    $
    (14,887
    )
    
    $
    56,819
    
    
    $
    4,256
    
    
    $
    (1,400
    )
    
    $
    44,788Cash flows from investing activitiesAdditions to properties and equipment
    
    
    
    
    
    
    (27,406
    )
    
    
    (72
    )
    
    
    
    
    
    
    (27,478
    )Acquisition of assets from Holly Corporation
    
    
    
    
    
    
    (46,000
    )
    
    
    
    
    
    
    
    
    
    
    (46,000
    )Investment in SLC Pipeline
    
    
    
    
    
    
    (25,500
    )
    
    
    
    
    
    
    
    
    
    
    (25,500
    )
    
    
    
    (98,906
    )
    
    
    (72
    )
    
    
    
    
    
    
    (98,978
    )Cash flows from financing activitiesNet borrowings under credit agreement
    
    
    
    
    
    
    45,000
    
    
    
    
    
    
    
    
    
    
    
    45,000Proceeds from issuance of common units
    
    
    58,355
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,355Contribution from general partner
    
    
    1,191
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,191Distributions to HEP unitholders
    
    
    (44,393
    )
    
    
    
    
    
    
    (2,000
    )
    
    
    2,000
    
    
    
    (44,393
    )Distributions to noncontrolling interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (600
    )
    
    
    (600
    )Purchase price in excess of transferred basis
in assets acquired from
Holly Corporation
    
    
    
    
    
    
    (5,700
    )
    
    
    
    
    
    
    
    
    
    
    (5,700
    )Purchase of units for restricted grants
    
    
    
    
    
    
    (616
    )
    
    
    
    
    
    
    
    
    
    
    (616
    )Cost of issuing common units
    
    
    (266
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (266
    )14,887
    
    
    
    38,684
    
    
    
    (2,000
    )
    
    
    1,400
    
    
    
    52,971Cash and cash equivalentsIncrease (decrease) for the period
    
    
    
    
    
    
    (3,403
    )
    
    
    2,184
    
    
    
    
    
    
    
    (1,219
    )Beginning of period
    
    
    2
    
    
    
    3,706
    
    
    
    1,561
    
    
    
    
    
    
    
    5,269End of period
    
    $
    2
    
    
    $
    303
    
    
    $
    3,745
    
    
    $
    
    
    
    $
    4,050
  - 25 -




---



##### Table of Contents



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




---



##### 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
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
assets acquired from Holly in 2005 and 2009);
 
    
    Holly CPTA (crude pipelines and tankage throughput agreement expiring in 2023 that
relates to assets acquired from Holly in 2008);
 
    
    Holly PTTA (pipeline, tankage and loading rack throughput agreement expiring in 2024
that relates to the Tulsa east 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 facilities acquired from Holly in 2009);
 
    
    Holly NPA (natural gas pipeline throughput agreement expiring in 2024); and
 
    
    Holly ATA (asphalt loading rack throughput agreement expiring in 2025 that relates to
the Lovington facility acquired from Holly in March 2010).
    - 27 -




---



##### 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 commitmentHolly NPA
    
    
    0.6
    
    
    
    2024
    
    
    Minimum revenue commitmentAlon PTA
    
    
    22.7
    
    
    
    2020
    
    
    Minimum volume commitmentAlon capacity lease
    
    
    6.4
    
    
    
    Various
    
    
    Capacity leaseTotal
    
    $
    162.1
    - 28 -




---



##### Table of Contents



RESULTS OF OPERATIONS (Unaudited)
 Income, Distributable Cash Flow and Volumes
  Three Months Ended
    
    
    ChangeSeptember 30,
    
    
    from2010
    
    
    2009
    
    
    2009(In thousands, except per unit data)RevenuesPipelines:Affiliates  refined product pipelines
    
    $
    12,340
    
    
    $
    12,267
    
    
    $
    73Affiliates  intermediate pipelines
    
    
    4,917
    
    
    
    5,370
    
    
    
    (453
    )Affiliates  crude pipelines
    
    
    9,775
    
    
    
    7,563
    
    
    
    2,21227,032
    
    
    
    25,200
    
    
    
    1,832Third parties  refined product pipelines
    
    
    7,277
    
    
    
    10,552
    
    
    
    (3,275
    )34,309
    
    
    
    35,752
    
    
    
    (1,443
    )Terminals and loading racks:Affiliates
    
    
    10,281
    
    
    
    3,159
    
    
    
    7,122Third parties
    
    
    1,959
    
    
    
    1,894
    
    
    
    6512,240
    
    
    
    5,053
    
    
    
    7,187Total revenues
    
    
    46,549
    
    
    
    40,805
    
    
    
    5,744Operating costs and expensesOperations
    
    
    13,632
    
    
    
    11,103
    
    
    
    2,529Depreciation and amortization
    
    
    7,237
    
    
    
    6,580
    
    
    
    657General and administrative
    
    
    1,508
    
    
    
    1,848
    
    
    
    (340
    )22,377
    
    
    
    19,531
    
    
    
    2,846Operating income
    
    
    24,172
    
    
    
    21,274
    
    
    
    2,898Equity in earnings of SLC Pipeline
    
    
    570
    
    
    
    711
    
    
    
    (141
    )Interest income
    
    
    1
    
    
    
    2
    
    
    
    (1
    )Interest expense, including amortization
    
    
    (8,417
    )
    
    
    (6,418
    )
    
    
    (1,999
    )Other
    
    
    9
    
    
    
    
    
    
    
    9(7,837
    )
    
    
    (5,705
    )
    
    
    (2,132
    )Income from continuing operations before income taxes
    
    
    16,335
    
    
    
    15,569
    
    
    
    766State income tax
    
    
    (76
    )
    
    
    (100
    )
    
    
    24Income from continuing operations
    
    
    16,259
    
    
    
    15,469
    
    
    
    790Income from discontinued operations, net of noncontrolling
interest of $269 (1)
    
    
    
    
    
    
    1,070
    
    
    
    (1,070
    )Net income
    
    
    16,259
    
    
    
    16,539
    
    
    
    (280
    )Less general partner interest in net income, including incentive
distributions (2)
    
    
    3,172
    
    
    
    2,022
    
    
    
    1,150Limited partners interest in net income
    
    $
    13,087
    
    
    $
    14,517
    
    
    $
    (1,430
    )Limited partners earnings per unit  basic and diluted(2)Income from continuing operations
    
    $
    0.59
    
    
    $
    0.73
    
    
    $
    (0.14
    )Income from discontinued operations
    
    
    
    
    
    
    0.05
    
    
    
    (0.05
    )Net income
    
    $
    0.59
    
    
    $
    0.78
    
    
    $
    (0.19
    )Weighted average limited partners units outstanding
    
    
    22,079
    
    
    
    18,520
    
    
    
    3,559EBITDA(3)
    
    $
    31,988
    
    
    $
    29,888
    
    
    $
    2,100Distributable cash flow(4)
    
    $
    23,969
    
    
    $
    20,678
    
    
    $
    3,291Volumes from continuing operations (bpd)(1)Pipelines:Affiliates  refined product pipelines
    
    
    93,194
    
    
    
    98,987
    
    
    
    (5,793
    )Affiliates  intermediate pipelines
    
    
    83,227
    
    
    
    88,053
    
    
    
    (4,826
    )Affiliates  crude pipelines
    
    
    143,617
    
    
    
    143,902
    
    
    
    (285
    )320,038
    
    
    
    330,942
    
    
    
    (10,904
    )Third parties  refined product pipelines
    
    
    41,967
    
    
    
    43,858
    
    
    
    (1,891
    )362,005
    
    
    
    374,800
    
    
    
    (12,795
    )Terminals and loading racks:Affiliates
    
    
    183,312
    
    
    
    122,413
    
    
    
    60,899Third parties
    
    
    43,633
    
    
    
    44,459
    
    
    
    (826
    )226,945
    
    
    
    166,872
    
    
    
    60,073Total for pipelines and terminal assets (bpd)
    
    
    588,950
    
    
    
    541,672
    
    
    
    47,278
  - 29 -




---



##### Table of Contents



Nine Months Ended
    
    
    ChangeSeptember 30,
    
    
    from2010
    
    
    2009
    
    
    2009(In thousands, except per unit data)RevenuesPipelines:Affiliates  refined product pipelines
    
    $
    35,887
    
    
    $
    31,186
    
    
    $
    4,701Affiliates  intermediate pipelines
    
    
    15,673
    
    
    
    11,438
    
    
    
    4,235Affiliates  crude pipelines
    
    
    28,907
    
    
    
    21,215
    
    
    
    7,69280,467
    
    
    
    63,839
    
    
    
    16,628Third parties  refined product pipelines
    
    
    19,136
    
    
    
    31,125
    
    
    
    (11,989
    )99,603
    
    
    
    94,964
    
    
    
    4,639Terminals and loading racks:Affiliates
    
    
    27,522
    
    
    
    7,907
    
    
    
    19,615Third parties
    
    
    5,603
    
    
    
    5,265
    
    
    
    33833,125
    
    
    
    13,172
    
    
    
    19,953Total revenues
    
    
    132,728
    
    
    
    108,136
    
    
    
    24,592Operating costs and expensesOperations
    
    
    40,187
    
    
    
    32,076
    
    
    
    8,111Depreciation and amortization
    
    
    22,038
    
    
    
    19,209
    
    
    
    2,829General and administrative
    
    
    5,984
    
    
    
    4,979
    
    
    
    1,00568,209
    
    
    
    56,264
    
    
    
    11,945Operating income
    
    
    64,519
    
    
    
    51,872
    
    
    
    12,647Equity in earnings of SLC Pipeline
    
    
    1,595
    
    
    
    1,309
    
    
    
    286SLC Pipeline acquisition costs
    
    
    
    
    
    
    (2,500
    )
    
    
    2,500Interest income
    
    
    6
    
    
    
    10
    
    
    
    (4
    )Interest expense, including amortization
    
    
    (25,510
    )
    
    
    (16,225
    )
    
    
    (9,285
    )Other
    
    
    2
    
    
    
    65
    
    
    
    (63
    )(23,907
    )
    
    
    (17,341
    )
    
    
    (6,566
    )Income from continuing operations before income taxes
    
    
    40,612
    
    
    
    34,531
    
    
    
    6,081State income tax
    
    
    (216
    )
    
    
    (266
    )
    
    
    50Income from continuing operations
    
    
    40,396
    
    
    
    34,265
    
    
    
    6,131Income from discontinued operations, net of noncontrolling
interest of $1,191 (1)
    
    
    
    
    
    
    4,105
    
    
    
    (4,105
    )Net income
    
    
    40,396
    
    
    
    38,370
    
    
    
    2,026Less general partner interest in net income, including incentive
distributions (2)
    
    
    8,727
    
    
    
    5,163
    
    
    
    3,564Limited partners interest in net income
    
    $
    31,669
    
    
    $
    33,207
    
    
    $
    (1,538
    )Limited partners earnings per unit  basic and diluted(2)Income from continuing operations
    
    $
    1.43
    
    
    $
    1.66
    
    
    $
    (0.23
    )Income from discontinued operations
    
    
    
    
    
    
    0.23
    
    
    
    (0.23
    )Net income
    
    $
    1.43
    
    
    $
    1.89
    
    
    $
    (0.46
    )Weighted average limited partners units outstanding
    
    
    22,079
    
    
    
    17,546
    
    
    
    4,533EBITDA(3)
    
    $
    88,154
    
    
    $
    74,831
    
    
    $
    13,323Distributable cash flow(4)
    
    $
    66,800
    
    
    $
    51,677
    
    
    $
    15,123Volumes from continuing operations (bpd)(1)Pipelines:Affiliates  refined product pipelines
    
    
    95,013
    
    
    
    85,489
    
    
    
    9,524Affiliates  intermediate pipelines
    
    
    82,844
    
    
    
    64,494
    
    
    
    18,350Affiliates  crude pipelines
    
    
    139,955
    
    
    
    136,315
    
    
    
    3,640317,812
    
    
    
    286,298
    
    
    
    31,514Third parties  refined product pipelines
    
    
    35,923
    
    
    
    45,647
    
    
    
    (9,724
    )353,735
    
    
    
    331,945
    
    
    
    21,790Terminals and loading racks:Affiliates
    
    
    177,946
    
    
    
    106,969
    
    
    
    70,977Third parties
    
    
    38,825
    
    
    
    42,873
    
    
    
    (4,048
    )216,771
    
    
    
    149,842
    
    
    
    66,929Total for pipelines and terminal assets (bpd)
    
    
    570,506
    
    
    
    481,787
    
    
    
    88,719
  - 30 -




---



##### Table of Contents



(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 also is used by our management for internal analysis and as a basis
for compliance with financial covenants.  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Income from continuing operations
    
    $
    16,259
    
    
    $
    15,469
    
    
    $
    40,396
    
    
    $
    34,265Add (subtract):Interest expense
    
    
    8,135
    
    
    
    5,314
    
    
    
    22,230
    
    
    
    15,396Amortization of discount and
deferred
debt issuance costs
    
    
    282
    
    
    
    176
    
    
    
    740
    
    
    
    529Increase in interest expense  change in
fair value of interest rate swaps and
swap settlement costs
    
    
    
    
    
    
    928
    
    
    
    2,540
    
    
    
    300Interest income
    
    
    (1
    )
    
    
    (2
    )
    
    
    (6
    )
    
    
    (10
    )State income tax
    
    
    76
    
    
    
    100
    
    
    
    216
    
    
    
    266Depreciation and amortization
    
    
    7,237
    
    
    
    6,580
    
    
    
    22,038
    
    
    
    19,209EBITDA from discontinued
operations
    
    
    
    
    
    
    1,323
    
    
    
    
    
    
    
    4,876EBITDA
    
    $
    31,988
    
    
    $
    29,888
    
    
    $
    88,154
    
    
    $
    74,831
 (4)
    
    Distributable cash flow is not a calculation based upon GAAP. However, the amounts
included in the calculation are derived from amounts separately presented in our
consolidated financial statements, with the exception of equity in excess cash flows over
earnings of SLC Pipeline, maintenance capital expenditures and distributable cash flow from
discontinued operations. Distributable cash flow should not be considered in isolation or
as an alternative to net income or operating income as an indication of our operating
performance or as an alternative to operating cash flow as a measure of liquidity.
Distributable cash flow is not necessarily comparable to similarly titled measures of other
companies. Distributable cash flow is presented here because it is a widely accepted
financial indicator used by investors to compare partnership performance. It also is used
by management for internal analysis and for our performance units. We believe that this
measure provides investors an enhanced perspective of the operating performance of our
assets and the cash our business is generating.  - 31 -




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Income from continuing operations
    
    $
    16,259
    
    
    $
    15,469
    
    
    $
    40,396
    
    
    $
    34,265Add (subtract):Depreciation and amortization
    
    
    7,237
    
    
    
    6,580
    
    
    
    22,038
    
    
    
    19,209Amortization of discount and
deferred debt issuance costs
    
    
    282
    
    
    
    176
    
    
    
    740
    
    
    
    529Increase in interest expense   change
in fair value of
interest rate
swaps and swap
settlement costs
    
    
    
    
    
    
    928
    
    
    
    2,540
    
    
    
    300Equity in excess cash flows
over
earnings of SLC Pipeline
    
    
    173
    
    
    
    167
    
    
    
    525
    
    
    
    387Increase (decrease) in
deferred revenue
    
    
    758
    
    
    
    (3,407
    )
    
    
    3,279
    
    
    
    (8,076
    )SLC Pipeline acquisition costs*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500Maintenance capital
expenditures**
    
    
    (740
    )
    
    
    (545
    )
    
    
    (2,718
    )
    
    
    (2,262
    )Distributable cash flow from
discontinued operations
    
    
    
    
    
    
    1,310
    
    
    
    
    
    
    
    4,825Distributable cash flow
    
    $
    23,969
    
    
    $
    20,678
    
    
    $
    66,800
    
    
    $
    51,677
 *
    
    We expensed the $2.5 million finders fee associated with our joint venture
agreement with Plains that closed in March 2009. These costs directly relate to our
interest in the new joint venture pipeline and are similar to expansion capital
expenditures; accordingly, we have added back these costs to arrive at distributable
cash flow.**
    
    Maintenance capital expenditures are capital expenditures made to replace
partially or fully depreciated assets in order to maintain the existing operating
capacity of our assets and to extend their useful lives. Maintenance capital
expenditures include expenditures required to maintain equipment reliability, tankage
and pipeline integrity, safety and to address environmental regulations. September 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Balance Sheet DataCash and cash equivalents
    
    $
    706
    
    
    $
    2,508Working capital (5)
    
    $
    (155,392
    )
    
    $
    4,404Total assets
    
    $
    634,584
    
    
    $
    616,845Long-term debt (6)
    
    $
    332,564
    
    
    $
    390,827Partners equity (7)
    
    $
    110,948
    
    
    $
    193,864
 (5)
    
    Our credit agreement expires in August 2011; therefore, working capital at September
30, 2010 reflects $157 million of credit agreement borrowings that are currently classified
as current liabilities. We intend to renew the credit agreement prior to expiration and to
continue to finance outstanding credit agreement borrowings. Upon renewal, outstanding
borrowings not designated for working capital purposes will be reclassified as long-term
debt. Excluding the $157 million credit agreement borrowings, working capital was $1.6
million at September 30, 2010.(6)
    
    Includes $206 million of credit agreement advances at December 31, 2009.(7)
    
    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 contributed and acquired from Holly while under common control of Holly had been
acquired from third parties, our
acquisition cost in excess of Hollys basis in the transferred assets of $217.9 million
would have been recorded in our financial statements as increases to our properties and
equipment and intangible assets instead of decreases to partners equity.  - 32 -




---



##### Table of Contents



Results of Operations  Three Months Ended September 30, 2010 Compared with Three Months Ended
September 30, 2009
 Summary
   Revenues
      Operations Expense
   - 33 -




---



##### Table of Contents



Depreciation and Amortization
  General and Administrative
  Equity in Earnings of SLC Pipeline
  Interest Expense
  State Income Tax
  Discontinued Operations
  Results of Operations  Nine Months ended September 30, 2010 Compared with Nine Months ended
September 30, 2009
 Summary
    - 34 -




---



##### Table of Contents



Revenues
      Operations Expense
  Depreciation and Amortization
   - 35 -




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



Cash Flows  Financing Activities
  Capital Requirements
      - 38 -




---



##### Table of Contents



Credit Agreement
      Senior Notes
    - 39 -




---



##### Table of Contents



September 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Credit Agreement
    
    $
    157,000
    
    
    $
    206,0006.25% Senior NotesPrincipal
    
    
    185,000
    
    
    
    185,000Unamortized discount
    
    
    (1,679
    )
    
    
    (1,964
    )Unamortized premium  dedesignated fair value hedge
    
    
    1,531
    
    
    
    1,791184,852
    
    
    
    184,8278.25% Senior NotesPrincipal
    
    
    150,000
    
    
    
    Unamortized discount
    
    
    (2,288
    )
    
    
    147,712
    
    
    
    Total debt
    
    
    489,564
    
    
    
    390,827Less credit agreement borrowings classified as
current liabilities
    
    
    157,000
    
    
    
    Total long-term debt
    
    $
    332,564
    
    
    $
    390,827
  Contractual Obligations
    Impact of Inflation
   Environmental Matters
   - 40 -




---



##### Table of Contents



CRITICAL ACCOUNTING POLICIES
    - 41 -




---



##### Table of Contents



RISK MANAGEMENT
     Balance Sheet
    
    
    
    
    
    
    Location of Offsetting
    
    
    OffsettingInterest Rate Swap
    
    Location
    
    
    Fair Value
    
    
    Balance
    
    
    Amount(In thousands)LiabilityCash flow hedge  $155 million LIBOR based debt
    
    Other long-term liabilities
    
    $
    11,825
    
    
    Accumulated other comprehensive loss
    
    $
    11,825
      - 42 -




---



##### Table of Contents



- 43 -




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risks
   
 Item 4. Controls and Procedures
 (a) Evaluation of disclosure controls and procedures
  (b) Changes in internal control over financial reporting
   - 44 -




---



##### Table of Contents



Item 1. Legal Proceedings
  
 Item 6. Exhibits
 10.1
    
    
    Tulsa Refinery Interconnects Term Sheet dated August 9, 2010 (incorporated by reference
to Exhibit 10.1 of Registrants Form 8-K Current Report dated August 11, 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.++
    
    Furnished herewith.  - 45 -




---



##### Table of Contents



SIGNATURES
  HOLLY ENERGY PARTNERS, L.P.
(Registrant)By:
    
    HEP LOGISTICS HOLDINGS, L.P.
its General PartnerBy:
    
    HOLLY LOGISTIC SERVICES, L.L.C.
its General PartnerDate: October 29, 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)
  - 46 -