##### 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, 2008
 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
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ




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##### 



PART I. FINANCIAL INFORMATION
    
    
    3FORWARD-LOOKING STATEMENTS
    
    
    3Item 1. Financial Statements (Unaudited, except December 31, 2007 Balance Sheet)
    
    
    4Consolidated Balance Sheets
    
    
    4Consolidated Statements of Income
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Consolidated Statement of Partners Equity (Deficit)
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    26Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    43Item 4. Controls and Procedures
    
    
    43PART II. OTHER INFORMATION
    
    
    44Item 1. Legal Proceedings
    
    
    44Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    44Item 6. Exhibits
    
    
    44SIGNATURES
    
    
    45EX-10.1EX-12.1EX-31.1EX-31.2EX-32.1EX-32.2
  - 2 -




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##### Table of Contents



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




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##### Table of Contents



Item 1.
Financial Statements
 Holly Energy Partners, L.P.
 
 Consolidated Balance Sheets
 September 30,2008
    
    
    December 31,(Unaudited)
    
    
    2007(In thousands, except unit data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,118
    
    
    $
    10,321Accounts receivable:Trade
    
    
    7,503
    
    
    
    6,611Affiliates
    
    
    9,088
    
    
    
    5,70016,591
    
    
    
    12,311Prepaid and other current assets
    
    
    858
    
    
    
    546Total current assets
    
    
    19,567
    
    
    
    23,178Properties and equipment, net
    
    
    283,628
    
    
    
    158,600Transportation agreements, net
    
    
    121,975
    
    
    
    54,273Other assets
    
    
    4,916
    
    
    
    2,853Total assets
    
    $
    430,086
    
    
    $
    238,904LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,959
    
    
    $
    3,011Accounts payable  affiliates
    
    
    2,337
    
    
    
    6,021Accrued interest
    
    
    1,011
    
    
    
    2,996Deferred revenue
    
    
    14,338
    
    
    
    3,700Accrued property taxes
    
    
    1,377
    
    
    
    1,177Other current liabilities
    
    
    1,105
    
    
    
    827Short-term borrowings under credit agreement
    
    
    24,000
    
    
    
    Total current liabilities
    
    
    47,127
    
    
    
    17,732Commitments and contingencies
    
    
    
    
    
    
    Long-term debt
    
    
    354,522
    
    
    
    181,435Other long-term liabilities
    
    
    478
    
    
    
    1,181Minority interest
    
    
    10,374
    
    
    
    10,740Partners equity (deficit):Common unitholders (8,390,000 and 8,170,000 units issued and
outstanding at September 30, 2008 and December 31, 2007,
respectively)
    
    
    171,852
    
    
    
    172,807Subordinated unitholders (7,000,000 units issued and outstanding)
    
    
    (82,396
    )
    
    
    (73,725
    )Class B subordinated unitholders (937,500 units issued and
outstanding)
    
    
    21,812
    
    
    
    22,973General partner interest (2% interest)
    
    
    (94,508
    )
    
    
    (94,239
    )Accumulated other comprehensive income
    
    
    825
    
    
    
    Total partners equity
    
    
    17,585
    
    
    
    27,816Total liabilities and partners equity
    
    $
    430,086
    
    
    $
    238,904
 See accompanying notes. - 4 -




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##### Table of Contents



Holly Energy Partners, L.P.
 
 Consolidated Statements of Income
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except per unit data)Revenues:Affiliates
    
    $
    22,737
    
    
    $
    14,827
    
    
    $
    61,210
    
    
    $
    44,942Third parties
    
    
    6,774
    
    
    
    9,638
    
    
    
    22,352
    
    
    
    30,52629,511
    
    
    
    24,465
    
    
    
    83,562
    
    
    
    75,468Affiliates  other
    
    
    
    
    
    
    2,748
    
    
    
    
    
    
    
    2,74829,511
    
    
    
    27,213
    
    
    
    83,562
    
    
    
    78,216Operating costs and expenses:Operations
    
    
    11,033
    
    
    
    7,939
    
    
    
    30,745
    
    
    
    23,861Depreciation and amortization
    
    
    5,884
    
    
    
    3,594
    
    
    
    16,259
    
    
    
    10,873General and administrative
    
    
    1,596
    
    
    
    1,406
    
    
    
    4,241
    
    
    
    3,96218,513
    
    
    
    12,939
    
    
    
    51,245
    
    
    
    38,696Operating income
    
    
    10,998
    
    
    
    14,274
    
    
    
    32,317
    
    
    
    39,520Other income (expense):Interest income
    
    
    25
    
    
    
    101
    
    
    
    146
    
    
    
    431Interest expense
    
    
    (5,161
    )
    
    
    (3,383
    )
    
    
    (14,201
    )
    
    
    (10,112
    )Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    298Other income
    
    
    1,007
    
    
    
    
    
    
    
    1,007
    
    
    
    Minority interest in Rio Grande Pipeline
Company
    
    
    (164
    )
    
    
    (233
    )
    
    
    (834
    )
    
    
    (814
    )(4,293
    )
    
    
    (3,515
    )
    
    
    (13,846
    )
    
    
    (10,197
    )Income before income taxes
    
    
    6,705
    
    
    
    10,759
    
    
    
    18,471
    
    
    
    29,323State income tax
    
    
    (84
    )
    
    
    (69
    )
    
    
    (237
    )
    
    
    (193
    )Net income
    
    
    6,621
    
    
    
    10,690
    
    
    
    18,234
    
    
    
    29,130Less general partner interest in net income
    
    
    905
    
    
    
    794
    
    
    
    2,526
    
    
    
    2,100Limited partners interest in net income
    
    $
    5,716
    
    
    $
    9,896
    
    
    $
    15,708
    
    
    $
    27,030Net income per limited partner unit -
basic and diluted
    
    $
    0.35
    
    
    $
    0.61
    
    
    $
    0.96
    
    
    $
    1.68Weighted average limited partners units
outstanding
    
    
    16,328
    
    
    
    16,108
    
    
    
    16,279
    
    
    
    16,108
 See accompanying notes. - 5 -




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Holly Energy Partners, L.P.
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007(In thousands)Cash flows from operating activitiesNet income
    
    $
    18,234
    
    
    $
    29,130Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    16,259
    
    
    
    10,873Minority interest in Rio Grande Pipeline Company
    
    
    834
    
    
    
    814Amortization of restricted and performance units
    
    
    1,194
    
    
    
    1,087Gain on sale of assets
    
    
    (36
    )
    
    
    (298
    )(Increase) decrease in current assets:Accounts receivable
    
    
    (892
    )
    
    
    2,722Accounts receivable  affiliates
    
    
    (3,388
    )
    
    
    (2,670
    )Prepaid and other current assets
    
    
    (312
    )
    
    
    439Increase (decrease) in current liabilities:Accounts payable
    
    
    (52
    )
    
    
    (1,590
    )Accounts payable  affiliates
    
    
    (3,684
    )
    
    
    59Accrued interest
    
    
    (1,985
    )
    
    
    (1,977
    )Deferred revenue
    
    
    10,638
    
    
    
    (870
    )Accrued property tax
    
    
    200
    
    
    
    68Other current liabilities
    
    
    278
    
    
    
    (211
    )Other, net
    
    
    802
    
    
    
    551Net cash provided by operating activities
    
    
    38,090
    
    
    
    38,127Cash flows from investing activitiesAdditions to properties and equipment
    
    
    (29,024
    )
    
    
    (3,119
    )Acquisition of crude pipelines and tankage assets
    
    
    (171,000
    )
    
    
    Proceeds from sale of assets
    
    
    36
    
    
    
    325Net cash used for investing activities
    
    
    (199,988
    )
    
    
    (2,794
    )Cash flows from financing activitiesNet borrowings under credit agreement
    
    
    195,000
    
    
    
    Proceeds from issuance of common units
    
    
    104
    
    
    
    Distributions to partners
    
    
    (38,908
    )
    
    
    (35,565
    )Distributions to minority interest
    
    
    (1,200
    )
    
    
    (1,290
    )Contribution from general partner
    
    
    186
    
    
    
    Purchase of units for restricted grants
    
    
    (795
    )
    
    
    (1,082
    )Deferred financing costs
    
    
    (692
    )
    
    
    (225
    )Other
    
    
    
    
    
    
    (16
    )Net cash provided by (used for) financing activities
    
    
    153,695
    
    
    
    (38,178
    )Cash and cash equivalentsDecrease for period
    
    
    (8,203
    )
    
    
    (2,845
    )Beginning of period
    
    
    10,321
    
    
    
    11,555End of period
    
    $
    2,118
    
    
    $
    8,710
 See accompanying notes. - 6 -




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Holly Energy Partners, L.P.
 
 Consolidated Statement of Partners Equity (Deficit)
 (Unaudited)
 AccumulatedClass B
    
    
    General
    
    
    OtherCommon
    
    
    Subordinated
    
    
    Subordinated
    
    
    Partner
    
    
    ComprehensiveUnits
    
    
    Units
    
    
    Units
    
    
    Interest
    
    
    Income
    
    
    Total(In thousands)Balance December 31, 2007
    
    $
    172,807
    
    
    $
    (73,725
    )
    
    $
    22,973
    
    
    $
    (94,239
    )
    
    $
    
    
    
    $
    27,816Net income
    
    
    8,038
    
    
    
    6,764
    
    
    
    906
    
    
    
    2,526
    
    
    
    
    
    
    
    18,234Change in fair value of cash
flow hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    825
    
    
    
    825Comprehensive income
    
    
    8,038
    
    
    
    6,764
    
    
    
    906
    
    
    
    2,526
    
    
    
    825
    
    
    
    19,059Distributions to partners
    
    
    (18,425
    )
    
    
    (15,435
    )
    
    
    (2,067
    )
    
    
    (2,981
    )
    
    
    
    
    
    
    (38,908
    )Issuance of common units
    
    
    9,104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,104Cost of issuing common units
    
    
    (71
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71
    )Capital contribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    
    
    
    
    186Purchase of units for
restricted grants
    
    
    (795
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (795
    )Amortization of restricted
and
performance units
    
    
    1,194
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,194Balance September 30, 2008
    
    $
    171,852
    
    
    $
    (82,396
    )
    
    $
    21,812
    
    
    $
    (94,508
    )
    
    $
    825
    
    
    $
    17,585
 See accompanying notes. - 7 -




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##### Table of Contents



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




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Recent Accounting Pronouncements
 Statement of Financial Accounting Standards (SFAS) No. 157 Fair Value Measurements
  EITF No. 07-04 Application of the Two-Class Method under FASB Statement No. 128, Earnings per
Share, to Master Limited Partnerships
  FASB Staff Position (FSP) No. EITF 03-6-1 Determining Whether Instruments Granted in Share-Based
Transactions Are Participating Securities
  Note 2: Acquisition
   - 9 -




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Note 3: Properties and Equipment
 September 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Pipelines and terminals
    
    $
    306,700
    
    
    $
    196,800Land and right of way
    
    
    24,319
    
    
    
    22,825Other
    
    
    6,790
    
    
    
    5,706Construction in progress
    
    
    33,766
    
    
    
    9,103371,575
    
    
    
    234,434Less accumulated depreciation
    
    
    87,947
    
    
    
    75,834$
    283,628
    
    
    $
    158,600
  Note 4: Transportation Agreements
  
    
    The transportation agreement with Alon represents a portion of the total purchase price
of assets purchased from Alon in 2005 that was allocated based on an estimated fair value
derived under the income approach. This asset is being amortized over 30 years ending
2035, the 15-year initial term of the pipelines and terminals agreement with Alon plus the
expected 15-year extension period.
    
    The Holly crude pipelines and tankage agreement represents a portion of the total
purchase price of the Crude Pipelines and Tankage Assets that was allocated based on
managements preliminary estimate of its fair value. This asset is being amortized over 15
years ending 2023, the 15-year term of the Holly CPTA.
  September 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Alon transportation agreement
    
    $
    59,933
    
    
    $
    59,933Holly crude pipelines and tankage
agreement
    
    
    72,000
    
    
    
    131,933
    
    
    
    59,933Less accumulated amortization
    
    
    9,958
    
    
    
    5,660$
    121,975
    
    
    $
    54,273
 - 10 -




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Note 5: Debt
 Credit Agreement
        - 11 -




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Senior Notes Due 2015
    September 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Credit Agreement
    
    $
    195,000
    
    
    $
    Senior NotesPrincipal
    
    
    185,000
    
    
    
    185,000Unamortized discount
    
    
    (2,439
    )
    
    
    (2,724
    )Fair value hedge  interest rate swap
    
    
    961
    
    
    
    (841
    )183,522
    
    
    
    181,435Total Debt
    
    
    378,522
    
    
    
    181,435Less net short-term borrowing under credit agreement
    
    
    24,000
    
    
    
    Total long-term debt
    
    $
    354,522
    
    
    $
    181,435
 Interest Rate Risk Management
     - 12 -




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##### Table of Contents



Fair Value
    
    Location of OffsettingInterest Rate Swaps
    
    Balance Sheet Location
    
    (In thousands)
    
    BalanceCash flow hedge  $171 million LIBOR based debt
    
    Other assets
    
    $
    825
    
    
    Accumulated other comprehensive incomeFair value hedge  $60 million of 6.25% Senior Notes
    
    Other assets
    
    $
    961
    
    
    Long-term debt
 Interest Expense and Other Debt Information
  Nine Months EndedSeptember 30,2008
    
    
    2007(In thousands)Interest on outstanding debt:Senior Notes, net of interest rate swap
    
    $
    7,901
    
    
    $
    8,839Credit Agreement, net of interest rate swap
    
    
    5,320
    
    
    
    Amortization of discount and deferred issuance costs
    
    
    739
    
    
    
    917Commitment fees
    
    
    241
    
    
    
    356Net interest expense
    
    $
    14,201
    
    
    $
    10,112Cash paid for interest(1)
    
    $
    11,414
    
    
    $
    11,300
 
 (1)
    
    Net of cash received under our interest rate swap agreements of $3.8 million for the
nine months ended September 30, 2008 and 2007.  Note 6: Employees, Retirement and Benefit Plans
   - 13 -




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Restricted Units
   Weighted-Weighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicGrant-Date
    
    
    Contractual
    
    
    ValueRestricted Units
    
    Grants
    
    
    Fair Value
    
    
    Term
    
    
    ($000)Outstanding January 1, 2008 (not vested)
    
    
    44,711
    
    
    $
    44.77Granted
    
    
    27,088
    
    
    
    38.43Forfeited
    
    
    (303
    )
    
    
    44.62Vesting and transfer of full ownership to recipients
    
    
    (18,025
    )
    
    
    45.60Outstanding at September 30, 2008 (not vested)
    
    
    53,471
    
    
    $
    41.28
    
    
    1.0 year
    
    $
    1,606
  Performance Units
   - 14 -




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##### Table of Contents



PayablePerformance Units
    
    In UnitsOutstanding at January 1, 2008 (not vested)
    
    
    24,148Granted
    
    
    14,337Forfeited
    
    
    Vesting and payment of cash benefit to recipients
    
    
    (1,514
    )Outstanding at September 30, 2008 (not vested)
    
    
    36,971
  Note 7: Significant Customers
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Holly
    
    
    77
    %
    
    
    65
    %
    
    
    73
    %
    
    
    61
    %Alon
    
    
    13
    %
    
    
    25
    %
    
    
    15
    %
    
    
    27
    %BP
    
    
    6
    %
    
    
    7
    %
    
    
    8
    %
    
    
    9
    %
 Note 8: Related Party Transactions
 Holly and Alon
     - 15 -




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
    
    Pipeline, terminal and tankage revenues received from Holly were $22.7 million and $14.8
million for the three months ended September 30, 2008 and 2007, respectively, and $61.2
million and $44.9 million for the nine months ended September 30, 2008 and 2007, respectively.
These amounts include the revenues received under the Holly PTA, Holly IPA and Holly CPTA.
 
    
    Other revenues received from Holly were $2.7 million for the three and nine months ended
September 30, 2007 related to our sale of inventory of accumulated terminal overages of
refined product. These overages arose from net product gains at our terminals from the
beginning of 2005 through the third quarter of 2007. In the fourth quarter of 2007, we
amended our pipelines and terminals agreement with Holly to provide that, on a go-forward
basis, such terminal overages of refined product belong to Holly.
 
    
    Holly charged general and administrative services under the Omnibus Agreement of $0.6
million for each of the three months ended September 30, 2008 and 2007, and $1.6 million for
each of the nine months ended September 30, 2008 and 2007.
 
    
    We reimbursed Holly for costs of employees supporting our operations of $3.7 million and
$2.0 million for the three months ended September 30, 2008 and 2007, respectively, and $9.8
million and $6.6 million for the nine months ended September 30, 2008 and 2007, respectively.
 
    
    Holly reimbursed us zero and $80,000 for certain costs paid on their behalf for the three
months ended September 30, 2008 and 2007, respectively, and zero and $179,000 for the nine
months ended September 30, 2008 and 2007, respectively.
 
    
    We distributed $6.5 million and $5.8 million for the three months ended September 30, 2008
and 2007, respectively, to Holly as regular distributions on its subordinated units, common
units and general partner interest. We distributed $18.9 million and $16.9 million to Holly
for the nine months ended September 30, 2008 and 2007, respectively.
 - 16 -




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
    
    Our accounts receivable from Holly were $9.1 million and $5.7 million at September 30, 2008
and December 31, 2007, respectively.
 
    
    Holly has failed to meet its minimum volume commitment for each of the thirteen quarters
since inception of the Holly IPA. We have charged Holly $6.5 million for these shortfalls to
date, $0.8 million and zero million of which is included in affiliate accounts receivable at
September 30, 2008 and December 31, 2007, respectively.
 
    
    For the three and nine months ended September 30, 2008, our revenues from Holly included
$0.4 million and $1.2 million, respectively, of shortfalls billed under the Holly IPA in 2007
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, 2008 and December 31,
2007, includes $1.9 million and $1.1 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 $1.9 million deferred at September 30, 2008.
 BP
  
    
    BPs agreement to ship on the Rio Grande pipeline expired on March 31, 2008. Rio Grande is
currently serving multiple shippers on the pipeline. We recorded revenues from them of $1.7
million and $2.0 million for the three months ended September 30, 2008 and 2007, respectively,
and $6.6 million and $6.8 million for the nine months ended September 30, 2008 and 2007,
respectively.
 
    
    Rio Grande paid distributions to BP of $0.3 million and $0.8 million for the three months
ended September 30, 2008 and 2007, respectively, and $1.2 million and $1.3 million for the
nine months ended September 30, 2008 and 2007, respectively.
 
    
    Included in our accounts receivable  trade at September 30, 2008 and December 31, 2007
were $0.7 million and $1.5 million, respectively, which represented the receivable balance of
Rio Grande from BP.
 Alon
  
    
    We recognized $1.9 million and $5.0 million of revenues for pipeline transportation and
terminalling services under the Alon PTA and $1.8 million and $1.8 million under a pipeline
capacity lease for the three months ended September 30, 2008 and 2007, respectively. We
recognized $6.8 million and $15.8 million of revenues for pipeline transportation and
terminalling services under the Alon PTA and $5.3 million under pipeline
capacity leases for the nine months ended September 30, 2008 and 2007.
 
    
    We paid $0.7 million to Alon for distributions on our Class B subordinated units for each
of the three months ended September 30, 2008 and 2007 and $2.1 million and $1.9 million for
the nine months ended September 30, 2008 and 2007, respectively.
 
    
    Included in our accounts receivable  trade at September 30, 2008 and December 31, 2007
were $6.7 million and $3.5 million, respectively, which represented the receivable balance
from Alon.
 
    
    Our revenues from Alon for the three and nine months ended September 30, 2008 included $0.9
million and $2.2 million, respectively, of shortfalls billed under the Alon PTA in 2007 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, 2008 and December 31,
2007 includes $12.4 million and $2.6 million, respectively, relating to the Alon PTA. It is
possible that Alon may not exceed
 - 17 -




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##### Table of Contents



its minimum obligations under the Alon PTA to allow Alon to receive credit for any of the $12.4
million deferred at September 30, 2008.
 
    
    Other income of $1.0 million for the three and nine months ended September 30, 2008
represents a reimbursement from Alon for certain pipeline repair and maintenance costs that
were incurred and expensed over a two year period.
 Note 9: Partners Equity, Allocations and Cash Distributions
 Issuances of units
    Allocations of Net Income
  Cash Distributions
   - 18 -




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##### Table of Contents



Marginal Percentage Interest inTotal Quarterly Distribution
    
    DistributionsTarget Amount
    
    Unitholders
    
    General PartnerMinimum Quarterly Distribution
    
    $
    0.50
    
    
    
    98
    %
    
    
    2
    %First Target Distribution
    
    Up to $0.55
    
    
    98
    %
    
    
    2
    %Second Target Distribution
    
    above $0.55 up to $0.625
    
    
    85
    %
    
    
    15
    %Third Target distribution
    
    above $0.625 up to $0.75
    
    
    75
    %
    
    
    25
    %Thereafter
    
    Above $0.75
    
    
    50
    %
    
    
    50
    %
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except per unit data)General partner interest
    
    $
    264
    
    
    $
    232
    
    
    $
    776
    
    
    $
    681General partner incentive distribution
    
    
    788
    
    
    
    592
    
    
    
    2,205
    
    
    
    1,548Total general partner distribution
    
    
    1,052
    
    
    
    824
    
    
    
    2,981
    
    
    
    2,229Limited partner distribution
    
    
    12,200
    
    
    
    11,359
    
    
    
    35,927
    
    
    
    33,336Total regular quarterly cash distribution
    
    $
    13,252
    
    
    $
    12,183
    
    
    $
    38,908
    
    
    $
    35,565Cash distribution per unit applicable to
limited partners
    
    $
    0.745
    
    
    $
    0.705
    
    
    $
    2.205
    
    
    $
    2.070
   - 19 -




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##### Table of Contents



Note 10: Supplemental Guarantor/Non-Guarantor Financial Information
   - 20 -




---



##### Table of Contents



Condensed Consolidating Balance Sheet
 Guarantor
    
    
    Non-September 30, 2008
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    106
    
    
    $
    2,010
    
    
    $
    
    
    
    $
    2,118Accounts receivable
    
    
    
    
    
    
    15,931
    
    
    
    660
    
    
    
    
    
    
    
    16,591Intercompany accounts receivable (payable)
    
    
    (183,007
    )
    
    
    183,168
    
    
    
    (161
    )
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    261
    
    
    
    597
    
    
    
    
    
    
    
    
    
    
    
    858Total current assets
    
    
    (182,744
    )
    
    
    199,802
    
    
    
    2,509
    
    
    
    
    
    
    
    19,567Properties and equipment, net
    
    
    
    
    
    
    250,915
    
    
    
    32,713
    
    
    
    
    
    
    
    283,628Investment in subsidiaries
    
    
    382,982
    
    
    
    24,205
    
    
    
    
    
    
    
    (407,187
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    121,975
    
    
    
    
    
    
    
    
    
    
    
    121,975Other assets
    
    
    2,244
    
    
    
    2,672
    
    
    
    
    
    
    
    
    
    
    
    4,916Total assets
    
    $
    202,482
    
    
    $
    599,569
    
    
    $
    35,222
    
    
    $
    (407,187
    )
    
    $
    430,086LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    4,889
    
    
    $
    407
    
    
    $
    
    
    
    $
    5,296Accrued interest
    
    
    (835
    )
    
    
    1,846
    
    
    
    
    
    
    
    
    
    
    
    1,011Deferred revenue
    
    
    
    
    
    
    14,338
    
    
    
    
    
    
    
    
    
    
    
    14,338Accrued property taxes
    
    
    
    
    
    
    1,229
    
    
    
    148
    
    
    
    
    
    
    
    1,377Other current liabilities
    
    
    2,210
    
    
    
    (1,193
    )
    
    
    88
    
    
    
    
    
    
    
    1,105Short-term borrowings under credit agreement
    
    
    
    
    
    
    24,000
    
    
    
    
    
    
    
    
    
    
    
    24,000Total current liabilities
    
    
    1,375
    
    
    
    45,109
    
    
    
    643
    
    
    
    
    
    
    
    47,127Long-term debt
    
    
    183,522
    
    
    
    171,000
    
    
    
    
    
    
    
    
    
    
    
    354,522Other long-term liabilities
    
    
    
    
    
    
    478
    
    
    
    
    
    
    
    
    
    
    
    478Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,374
    
    
    
    10,374Partners equity
    
    
    17,585
    
    
    
    382,982
    
    
    
    34,579
    
    
    
    (417,561
    )
    
    
    17,585Total liabilities and partners equity
    
    $
    202,482
    
    
    $
    599,569
    
    
    $
    35,222
    
    
    $
    (407,187
    )
    
    $
    430,086
 Condensed Consolidating Balance Sheet
 Guarantor
    
    
    Non-December 31, 2007
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    8,060
    
    
    $
    2,259
    
    
    $
    
    
    
    $
    10,321Accounts receivable
    
    
    
    
    
    
    10,820
    
    
    
    1,491
    
    
    
    
    
    
    
    12,311Intercompany accounts receivable (payable)
    
    
    (141,175
    )
    
    
    141,553
    
    
    
    (378
    )
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    183
    
    
    
    363
    
    
    
    
    
    
    
    
    
    
    
    546Total current assets
    
    
    (140,990
    )
    
    
    160,796
    
    
    
    3,372
    
    
    
    
    
    
    
    23,178Properties and equipment, net
    
    
    
    
    
    
    125,383
    
    
    
    33,217
    
    
    
    
    
    
    
    158,600Investment in subsidiaries
    
    
    353,235
    
    
    
    25,059
    
    
    
    
    
    
    
    (378,294
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    54,273
    
    
    
    
    
    
    
    
    
    
    
    54,273Other assets
    
    
    1,302
    
    
    
    1,551
    
    
    
    
    
    
    
    
    
    
    
    2,853Total assets
    
    $
    213,547
    
    
    $
    367,062
    
    
    $
    36,589
    
    
    $
    (378,294
    )
    
    $
    238,904LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    8,499
    
    
    $
    533
    
    
    $
    
    
    
    $
    9,032Accrued interest
    
    
    (2,932
    )
    
    
    5,928
    
    
    
    
    
    
    
    
    
    
    
    2,996Deferred revenue
    
    
    
    
    
    
    3,700
    
    
    
    
    
    
    
    
    
    
    
    3,700Accrued property taxes
    
    
    
    
    
    
    1,021
    
    
    
    156
    
    
    
    
    
    
    
    1,177Other current liabilities
    
    
    6,387
    
    
    
    (5,661
    )
    
    
    101
    
    
    
    
    
    
    
    827Total current liabilities
    
    
    3,455
    
    
    
    13,487
    
    
    
    790
    
    
    
    
    
    
    
    17,732Long-term debt
    
    
    181,435
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181,435Other long-term liabilities
    
    
    841
    
    
    
    340
    
    
    
    
    
    
    
    
    
    
    
    1,181Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,740
    
    
    
    10,740Partners equity
    
    
    27,816
    
    
    
    353,235
    
    
    
    35,799
    
    
    
    (389,034
    )
    
    
    27,816Total liabilities and partners equity
    
    $
    213,547
    
    
    $
    367,062
    
    
    $
    36,589
    
    
    $
    (378,294
    )
    
    $
    238,904
 - 21 -




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##### Table of Contents



Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Three months ended September 30, 2008
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    22,737
    
    
    $
    
    
    
    $
    
    
    
    $
    22,737Third parties
    
    
    
    
    
    
    5,437
    
    
    
    1,663
    
    
    
    (326
    )
    
    
    6,774
    
    
    
    28,174
    
    
    
    1,663
    
    
    
    (326
    )
    
    
    29,511Operating costs and expenses:Operations
    
    
    
    
    
    
    10,593
    
    
    
    766
    
    
    
    (326
    )
    
    
    11,033Depreciation and amortization
    
    
    
    
    
    
    5,538
    
    
    
    346
    
    
    
    
    
    
    
    5,884General and administrative
    
    
    887
    
    
    
    710
    
    
    
    (1
    )
    
    
    
    
    
    
    1,596887
    
    
    
    16,841
    
    
    
    1,111
    
    
    
    (326
    )
    
    
    18,513Operating income (loss)
    
    
    (887
    )
    
    
    11,333
    
    
    
    552
    
    
    
    
    
    
    
    10,998Equity in earnings of subsidiaries
    
    
    10,189
    
    
    
    385
    
    
    
    
    
    
    
    (10,574
    )
    
    
    Interest income (expense)
    
    
    (2,681
    )
    
    
    (2,463
    )
    
    
    8
    
    
    
    
    
    
    
    (5,136
    )Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Income
    
    
    
    
    
    
    1,007
    
    
    
    
    
    
    
    
    
    
    
    1,007Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (164
    )
    
    
    (164
    )7,508
    
    
    
    (1,071
    )
    
    
    8
    
    
    
    (10,738
    )
    
    
    (4,293
    )Income (loss) before income taxes
    
    
    6,621
    
    
    
    10,262
    
    
    
    560
    
    
    
    (10,738
    )
    
    
    6,705State income tax
    
    
    
    
    
    
    (73
    )
    
    
    (11
    )
    
    
    
    
    
    
    (84
    )Net income
    
    $
    6,621
    
    
    $
    10,189
    
    
    $
    549
    
    
    $
    (10,738
    )
    
    $
    6,621
 Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Three months ended September 30, 2007
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    14,827
    
    
    $
    
    
    
    $
    
    
    
    $
    14,827Third parties
    
    
    
    
    
    
    7,976
    
    
    
    1,958
    
    
    
    (296
    )
    
    
    9,638
    
    
    
    22,803
    
    
    
    1,958
    
    
    
    (296
    )
    
    
    24,465Affiliates  other
    
    
    
    
    
    
    2,748
    
    
    
    
    
    
    
    
    
    
    
    2,748
    
    
    
    25,551
    
    
    
    1,958
    
    
    
    (296
    )
    
    
    27,213Operating costs and expenses:Operations
    
    
    
    
    
    
    7,514
    
    
    
    721
    
    
    
    (296
    )
    
    
    7,939Depreciation and amortization
    
    
    
    
    
    
    3,267
    
    
    
    327
    
    
    
    
    
    
    
    3,594General and administrative
    
    
    707
    
    
    
    586
    
    
    
    113
    
    
    
    
    
    
    
    1,406707
    
    
    
    11,367
    
    
    
    1,161
    
    
    
    (296
    )
    
    
    12,939Operating income (loss)
    
    
    (707
    )
    
    
    14,184
    
    
    
    797
    
    
    
    
    
    
    
    14,274Equity in earnings of subsidiaries
    
    
    14,495
    
    
    
    543
    
    
    
    
    
    
    
    (15,038
    )
    
    
    Interest income (expense)
    
    
    (3,098
    )
    
    
    (186
    )
    
    
    2
    
    
    
    
    
    
    
    (3,282
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (233
    )
    
    
    (233
    )11,397
    
    
    
    357
    
    
    
    2
    
    
    
    (15,271
    )
    
    
    (3,515
    )Income (loss) before income taxes
    
    
    10,690
    
    
    
    14,541
    
    
    
    799
    
    
    
    (15,271
    )
    
    
    10,759State income tax
    
    
    
    
    
    
    (46
    )
    
    
    (23
    )
    
    
    
    
    
    
    (69
    )Net income
    
    $
    10,690
    
    
    $
    14,495
    
    
    $
    776
    
    
    $
    (15,271
    )
    
    $
    10,690
 - 22 -




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##### Table of Contents



Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Nine months ended September 30, 2008
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    61,210
    
    
    $
    
    
    
    $
    
    
    
    $
    61,210Third parties
    
    
    
    
    
    
    16,735
    
    
    
    6,584
    
    
    
    (967
    )
    
    
    22,352
    
    
    
    77,945
    
    
    
    6,584
    
    
    
    (967
    )
    
    
    83,562Operating costs and expenses:Operations
    
    
    
    
    
    
    28,908
    
    
    
    2,804
    
    
    
    (967
    )
    
    
    30,745Depreciation and amortization
    
    
    
    
    
    
    15,262
    
    
    
    997
    
    
    
    
    
    
    
    16,259General and administrative
    
    
    2,389
    
    
    
    1,856
    
    
    
    (4
    )
    
    
    
    
    
    
    4,2412,389
    
    
    
    46,026
    
    
    
    3,797
    
    
    
    (967
    )
    
    
    51,245Operating income (loss)
    
    
    (2,389
    )
    
    
    31,919
    
    
    
    2,787
    
    
    
    
    
    
    
    32,317Equity in earnings of subsidiaries
    
    
    28,923
    
    
    
    1,947
    
    
    
    
    
    
    
    (30,870
    )
    
    
    Interest income (expense)
    
    
    (8,300
    )
    
    
    (5,795
    )
    
    
    40
    
    
    
    
    
    
    
    (14,055
    )Gain on sale of assets
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    36Other income
    
    
    
    
    
    
    1,007
    
    
    
    
    
    
    
    
    
    
    
    1,007Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (834
    )
    
    
    (834
    )20,623
    
    
    
    (2,805
    )
    
    
    40
    
    
    
    (31,704
    )
    
    
    (13,846
    )Income (loss) before income taxes
    
    
    18,234
    
    
    
    29,114
    
    
    
    2,827
    
    
    
    (31,704
    )
    
    
    18,471State income tax
    
    
    
    
    
    
    (191
    )
    
    
    (46
    )
    
    
    
    
    
    
    (237
    )Net income
    
    $
    18,234
    
    
    $
    28,923
    
    
    $
    2,781
    
    
    $
    (31,704
    )
    
    $
    18,234
 Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Nine months ended September 30, 2007
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    44,942
    
    
    $
    
    
    
    $
    
    
    
    $
    44,942Third parties
    
    
    
    
    
    
    24,611
    
    
    
    6,804
    
    
    
    (889
    )
    
    
    30,526
    
    
    
    69,553
    
    
    
    6,804
    
    
    
    (889
    )
    
    
    75,468Affiliates  other
    
    
    
    
    
    
    2,748
    
    
    
    
    
    
    
    
    
    
    
    2,748
    
    
    
    72,301
    
    
    
    6,804
    
    
    
    (889
    )
    
    
    78,216Operating costs and expenses:Operations
    
    
    
    
    
    
    22,300
    
    
    
    2,450
    
    
    
    (889
    )
    
    
    23,861Depreciation and amortization
    
    
    
    
    
    
    9,341
    
    
    
    1,532
    
    
    
    
    
    
    
    10,873General and administrative
    
    
    2,212
    
    
    
    1,621
    
    
    
    129
    
    
    
    
    
    
    
    3,9622,212
    
    
    
    33,262
    
    
    
    4,111
    
    
    
    (889
    )
    
    
    38,696Operating income (loss)
    
    
    (2,212
    )
    
    
    39,039
    
    
    
    2,693
    
    
    
    
    
    
    
    39,520Equity in earnings of subsidiaries
    
    
    40,579
    
    
    
    1,896
    
    
    
    
    
    
    
    (42,475
    )
    
    
    Interest income (expense)
    
    
    (9,237
    )
    
    
    (516
    )
    
    
    72
    
    
    
    
    
    
    
    (9,681
    )Gain on sale of assets
    
    
    
    
    
    
    298
    
    
    
    
    
    
    
    
    
    
    
    298Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (814
    )
    
    
    (814
    )31,342
    
    
    
    1,678
    
    
    
    72
    
    
    
    (43,289
    )
    
    
    (10,197
    )Income (loss) before income taxes
    
    
    29,130
    
    
    
    40,717
    
    
    
    2,765
    
    
    
    (43,289
    )
    
    
    29,323State income tax
    
    
    
    
    
    
    (138
    )
    
    
    (55
    )
    
    
    
    
    
    
    (193
    )Net income
    
    $
    29,130
    
    
    $
    40,579
    
    
    $
    2,710
    
    
    $
    (43,289
    )
    
    $
    29,130
 - 23 -




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##### Table of Contents



Condensed Consolidating Statement of Cash Flows
 Guarantor
    
    
    Non-Nine months ended September 30, 2008
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Cash flows from operating activities
    
    $
    (44,408
    )
    
    $
    81,053
    
    
    $
    4,245
    
    
    $
    (2,800
    )
    
    $
    38,090Cash flows from investing activitiesAdditions to properties and equipment
    
    
    
    
    
    
    (28,530
    )
    
    
    (494
    )
    
    
    
    
    
    
    (29,024
    )Acquisition of crude pipelines and
tankage assets
    
    
    
    
    
    
    (171,000
    )
    
    
    
    
    
    
    
    
    
    
    (171,000
    )Proceeds from sale of assets
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    (199,494
    )
    
    
    (494
    )
    
    
    
    
    
    
    (199,988
    )Cash flows from financing activitiesNet borrowings under credit agreement
    
    
    9,000
    
    
    
    186,000
    
    
    
    
    
    
    
    
    
    
    
    195,000Proceeds from issuance of common units
    
    
    
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    104Distributions to partners
    
    
    (38,908
    )
    
    
    
    
    
    
    (4,000
    )
    
    
    4,000
    
    
    
    (38,908
    )Distributions to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,200
    )
    
    
    (1,200
    )Contribution from general partner
    
    
    186
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186Purchase of units for restricted grants
    
    
    (795
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (795
    )Deferred financing costs
    
    
    
    
    
    
    (692
    )
    
    
    
    
    
    
    
    
    
    
    (692
    )(30,517
    )
    
    
    185,412
    
    
    
    (4,000
    )
    
    
    2,800
    
    
    
    153,695Cash and cash equivalentsIncrease (decrease) for the period
    
    
    (74,925
    )
    
    
    66,971
    
    
    
    (249
    )
    
    
    
    
    
    
    (8,203
    )Beginning of period
    
    
    2
    
    
    
    8,060
    
    
    
    2,259
    
    
    
    
    
    
    
    10,321End of period
    
    $
    (74,923
    )
    
    $
    75,031
    
    
    $
    2,010
    
    
    $
    
    
    
    $
    2,118
 Condensed Consolidating Statement of Cash Flows
 Guarantor
    
    
    Non-Nine months ended September 30, 2007
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Cash flows from operating activities
    
    $
    36,647
    
    
    $
    (1,179
    )
    
    $
    5,669
    
    
    $
    (3,010
    )
    
    $
    38,127Cash flows from investing activitiesAdditions to properties and equipment
    
    
    
    
    
    
    (2,580
    )
    
    
    (539
    )
    
    
    
    
    
    
    (3,119
    )Proceeds from sale of assets
    
    
    
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    325
    
    
    
    (2,255
    )
    
    
    (539
    )
    
    
    
    
    
    
    (2,794
    )Cash flows from financing activitiesDistributions to partners
    
    
    (35,565
    )
    
    
    
    
    
    
    (4,300
    )
    
    
    4,300
    
    
    
    (35,565
    )Distributions to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,290
    )
    
    
    (1,290
    )Purchase of units for restricted grants
    
    
    (1,082
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,082
    )Deferred financing costs
    
    
    
    
    
    
    (225
    )
    
    
    
    
    
    
    
    
    
    
    (225
    )Other
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    (16
    )(36,647
    )
    
    
    (241
    )
    
    
    (4,300
    )
    
    
    3,010
    
    
    
    (38,178
    )Cash and cash equivalentsIncrease (decrease) for the period
    
    
    
    
    
    
    (3,675
    )
    
    
    830
    
    
    
    
    
    
    
    (2,845
    )Beginning of period
    
    
    2
    
    
    
    9,819
    
    
    
    1,734
    
    
    
    
    
    
    
    11,555End of period
    
    $
    2
    
    
    $
    6,144
    
    
    $
    2,564
    
    
    $
    
    
    
    $
    8,710
 - 24 -




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##### Table of Contents



Note 11: Proposed Joint Ventures
    - 25 -




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##### Table of Contents



HOLLY ENERGY PARTNERS, L.P.
  Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
  OVERVIEW
     Agreements with Holly Corporation and Alon
     - 26 -




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##### Table of Contents



Minimum AnnualizedCommitment
    
    Year ofAgreement
    
    (In millions)
    
    Maturity
    
    
    Contract TypeHolly PTA
    
    $
    41.2
    
    
    
    2019
    
    
    Minimum revenue commitmentHolly IPA
    
    
    13.3
    
    
    
    2020
    
    
    Minimum revenue commitmentHolly CPTA
    
    
    26.7
    
    
    
    2022
    
    
    Minimum revenue commitmentAlon PTA
    
    
    22.0
    
    
    
    2020
    
    
    Minimum volume commitmentAlon capacity lease
    
    
    7.0
    
    
    Various
    
    Capacity leaseTotal
    
    $
    110.2
    - 27 -




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##### Table of Contents



RESULTS OF OPERATIONS (Unaudited)
 Income, Distributable Cash Flow and Volumes
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except per unit data)RevenuesPipelines:Affiliates  refined product pipelines
    
    $
    10,553
    
    
    $
    8,815
    
    
    $
    28,994
    
    
    $
    26,464Affiliates  intermediate pipelines
    
    
    2,953
    
    
    
    3,327
    
    
    
    9,002
    
    
    
    10,390Affiliates  crude pipelines
    
    
    6,776
    
    
    
    
    
    
    
    15,524
    
    
    
    20,282
    
    
    
    12,142
    
    
    
    53,520
    
    
    
    36,854Third parties- refined product pipelines
    
    
    5,773
    
    
    
    8,300
    
    
    
    19,289
    
    
    
    26,47326,055
    
    
    
    20,442
    
    
    
    72,809
    
    
    
    63,327Terminals and truck loading racks:Affiliates
    
    
    2,455
    
    
    
    2,685
    
    
    
    7,690
    
    
    
    8,088Third parties
    
    
    1,001
    
    
    
    1,338
    
    
    
    3,063
    
    
    
    4,0533,456
    
    
    
    4,023
    
    
    
    10,753
    
    
    
    12,141Other  affiliates
    
    
    
    
    
    
    2,748
    
    
    
    
    
    
    
    2,748Total revenues
    
    
    29,511
    
    
    
    27,213
    
    
    
    83,562
    
    
    
    78,216Operating costs and expensesOperations
    
    
    11,033
    
    
    
    7,939
    
    
    
    30,745
    
    
    
    23,861Depreciation and amortization
    
    
    5,884
    
    
    
    3,594
    
    
    
    16,259
    
    
    
    10,873General and administrative
    
    
    1,596
    
    
    
    1,406
    
    
    
    4,241
    
    
    
    3,96218,513
    
    
    
    12,939
    
    
    
    51,245
    
    
    
    38,696Operating income
    
    
    10,998
    
    
    
    14,274
    
    
    
    32,317
    
    
    
    39,520Interest income
    
    
    25
    
    
    
    101
    
    
    
    146
    
    
    
    431Interest expense, including amortization
    
    
    (5,161
    )
    
    
    (3,383
    )
    
    
    (14,201
    )
    
    
    (10,112
    )Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    298Other income
    
    
    1,007
    
    
    
    
    
    
    
    1,007
    
    
    
    Minority interest in Rio Grande
    
    
    (164
    )
    
    
    (233
    )
    
    
    (834
    )
    
    
    (814
    )Income before income taxes
    
    
    6,705
    
    
    
    10,759
    
    
    
    18,471
    
    
    
    29,323State income tax
    
    
    (84
    )
    
    
    (69
    )
    
    
    (237
    )
    
    
    (193
    )Net income
    
    
    6,621
    
    
    
    10,690
    
    
    
    18,234
    
    
    
    29,130Less general partner interest in net income,
including incentive distributions
(1)
    
    
    905
    
    
    
    794
    
    
    
    2,526
    
    
    
    2,100Limited partners interest in net income
    
    $
    5,716
    
    
    $
    9,896
    
    
    $
    15,708
    
    
    $
    27,030Net income per limited partner unit  basic
and diluted(1)
    
    $
    0.35
    
    
    $
    0.61
    
    
    $
    0.96
    
    
    $
    1.68Weighted average limited partners units
outstanding
    
    
    16,328
    
    
    
    16,108
    
    
    
    16,279
    
    
    
    16,108EBITDA(2)
    
    $
    17,725
    
    
    $
    17,635
    
    
    $
    48,785
    
    
    $
    49,877Distributable cash flow(3)
    
    $
    15,749
    
    
    $
    13,683
    
    
    $
    43,452
    
    
    $
    38,666Volumes (bpd)(4)Pipelines:Affiliates  refined product pipelines
    
    
    79,192
    
    
    
    71,987
    
    
    
    79,852
    
    
    
    75,638Affiliates  intermediate pipelines
    
    
    54,583
    
    
    
    62,072
    
    
    
    58,014
    
    
    
    63,337Affiliates  crude pipelines
    
    
    132,120
    
    
    
    
    
    
    
    103,465
    
    
    
    265,895
    
    
    
    134,059
    
    
    
    241,331
    
    
    
    138,975Third parties- refined product pipelines
    
    
    25,046
    
    
    
    59,024
    
    
    
    31,635
    
    
    
    62,877290,941
    
    
    
    193,083
    
    
    
    272,966
    
    
    
    201,852Terminals and truck loading racks:Affiliates
    
    
    102,128
    
    
    
    110,545
    
    
    
    107,611
    
    
    
    117,957Third parties
    
    
    27,845
    
    
    
    38,409
    
    
    
    32,073
    
    
    
    46,114129,973
    
    
    
    148,954
    
    
    
    139,684
    
    
    
    164,071Total for pipelines and terminal assets (bpd)
    
    
    420,914
    
    
    
    342,037
    
    
    
    412,650
    
    
    
    365,923
 - 28 -




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##### Table of Contents



(1)
    
    Net income is allocated between limited partners and the general partner interest in
accordance with the provisions of the partnership agreement. Net income allocated to the
general partner includes any incentive distributions declared in the period. Incentive
distributions of $0.8 million and $0.6 million were declared during the three months ended
September 30, 2008 and 2007, respectively, and $2.2 million and $1.5 million during the
nine months ended September 30, 2008 and 2007, respectively. The net income applicable to
the limited partners is divided by the weighted average limited partner units outstanding
in computing the net income per unit applicable to limited partners.(2)
    
    Earnings before interest, taxes, depreciation and amortization (EBITDA) is calculated
as net income plus (i) interest expense net of interest income, (ii) state income tax and
(iii) depreciation and amortization. EBITDA is not a calculation based upon U.S. generally
accepted accounting principles (U.S. GAAP). However, the amounts included in the EBITDA
calculation are derived from amounts included in our consolidated financial statements.
EBITDA should not be considered as an alternative to net income or operating income, as an
indication of our operating performance or as an alternative to operating cash flow as a
measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of
other companies. EBITDA is presented here because it is a widely used financial indicator
used by investors and analysts to measure performance. EBITDA is also used by our
management for internal analysis and as a basis for compliance with financial covenants.Set forth below is our calculation of EBITDA. Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Net income
    
    $
    6,621
    
    
    $
    10,690
    
    
    $
    18,234
    
    
    $
    29,130Add interest expense
    
    
    4,902
    
    
    
    3,091
    
    
    
    13,462
    
    
    
    9,213Add amortization of discount and
deferred debt issuance costs
    
    
    259
    
    
    
    292
    
    
    
    739
    
    
    
    899Subtract interest income
    
    
    (25
    )
    
    
    (101
    )
    
    
    (146
    )
    
    
    (431
    )Add state income tax
    
    
    84
    
    
    
    69
    
    
    
    237
    
    
    
    193Add depreciation and amortization
    
    
    5,884
    
    
    
    3,594
    
    
    
    16,259
    
    
    
    10,873EBITDA
    
    $
    17,725
    
    
    $
    17,635
    
    
    $
    48,785
    
    
    $
    49,877
 (3)
    
    Distributable cash flow is not a calculation based upon U.S. GAAP. However, the
amounts included in the calculation are derived from amounts separately presented in our
consolidated financial statements, with the exception of maintenance capital expenditures.
Distributable cash flow should not be considered in isolation or as an alternative to net
income or operating income, as an indication of our operating performance or as an
alternative to operating cash flow as a measure of liquidity. Distributable cash flow is
not necessarily comparable to similarly titled measures of other companies. Distributable
cash flow is presented here because it is a widely accepted financial indicator used by
investors to compare partnership performance. We believe that this measure provides
investors an enhanced perspective of the operating performance of our assets and the cash
our business is generating. - 29 -




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##### Table of Contents



Set forth below is our calculation of distributable cash flow. Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Net income
    
    $
    6,621
    
    
    $
    10,690
    
    
    $
    18,234
    
    
    $
    29,130Add depreciation and amortization
    
    
    5,884
    
    
    
    3,594
    
    
    
    16,259
    
    
    
    10,873Add amortization of discount and
deferred debt issuance costs
    
    
    259
    
    
    
    292
    
    
    
    739
    
    
    
    899Add (subtract) increase (decrease) in
deferred revenue
    
    
    3,857
    
    
    
    120
    
    
    
    10,638
    
    
    
    (870
    )Subtract maintenance capital
expenditures*
    
    
    (872
    )
    
    
    (1,013
    )
    
    
    (2,418
    )
    
    
    (1,366
    )Distributable cash flow
    
    $
    15,749
    
    
    $
    13,683
    
    
    $
    43,452
    
    
    $
    38,666
 *
    
    Maintenance capital expenditures are capital expenditures made to replace
partially or fully depreciated assets in order to maintain the existing operating
capacity of our assets and to extend their useful lives.(4)
    
    The amounts reported for the nine months ended September 30, 2008 include volumes
transported on the crude pipelines for the period from March 1, 2008 through September 30,
2008 only. Volumes shipped during the months of March through September 2008 averaged
132.5 thousand barrels per day (mbpd). For the nine months ended September 30, 2008,
crude pipeline volumes are based on volumes for the months of March through September,
averaged over the 274 days in the first nine months of 2008. Under the Holly CPTA, fees
are based on volumes transported on each pipeline component comprising the crude pipeline
system (the crude oil gathering pipelines and the crude oil trunk lines). Accordingly,
volumes transported on the crude pipelines represent the sum of volumes transported on both
pipeline components. In cases where volumes are transported over both components of the
crude pipeline system, such volumes are reflected twice in the total crude oil pipeline
volumes. September 30,
    
    December 31,2008
    
    2007(In thousands)Balance Sheet DataCash and cash equivalents
    
    $
    2,118
    
    
    $
    10,321Working capital(5)
    
    $
    (27,560
    )
    
    $
    5,446Total assets
    
    $
    430,086
    
    
    $
    238,904Long-term debt
    
    $
    354,522
    
    
    $
    181,435Partners equity
    
    $
    17,585
    
    
    $
    27,816
 (5)
    
    Reflects $24.0 million of short-term borrowings that were classified as current
liabilities at September 30, 2008.  Results of Operations  Three Months Ended September 30, 2008 Compared with Three Months Ended
September 30, 2007
 Summary
  - 30 -




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##### Table of Contents



Revenues
       - 31 -




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##### Table of Contents



Operating Costs
  Depreciation and Amortization
  General and Administrative
  Interest Expense
  Other Income
  Minority Interest in Earnings of Rio Grande
  State Income Tax
  Results of Operations  Nine Months Ended September 30, 2008 Compared with Nine Months Ended
September 30, 2007
 Summary
  - 32 -




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##### Table of Contents



Revenues
       Operating Costs
  Depreciation and Amortization
  General and Administrative
  - 33 -




---



##### Table of Contents



Interest Expense
  Other Income
  Minority Interest in Earnings of Rio Grande
  State Income Tax
  LIQUIDITY AND CAPITAL RESOURCES
 Overview
     - 34 -




---



##### Table of Contents



Cash Flows  Operating Activities
   Cash Flows  Investing Activities
  Cash Flows  Financing Activities
  - 35 -




---



##### Table of Contents



Capital Requirements
      - 36 -




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##### Table of Contents



Credit Agreement
      - 37 -




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##### Table of Contents



Senior Notes Due 2015
    September 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Credit Agreement
    
    $
    195,000
    
    
    $
    Senior NotesPrincipal
    
    
    185,000
    
    
    
    185,000Unamortized discount
    
    
    (2,439
    )
    
    
    (2,724
    )Fair value hedge  interest rate swap
    
    
    961
    
    
    
    (841
    )183,522
    
    
    
    181,435Total Debt
    
    
    378,522
    
    
    
    181,435Less short-term borrowing under credit agreement
    
    
    24,000
    
    
    
    Total long-term debt
    
    $
    354,522
    
    
    $
    181,435
  - 38 -




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##### Table of Contents



Holly Crude Pipelines and Tankage Transaction
    Impact of Inflation
   Environmental Matters
   - 39 -




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES
   Recent Accounting Pronouncements
 Statement of Financial Accounting Standards (SFAS) No. 157 Fair Value Measurements"
  EITF No. 07-04 Application of the Two-Class Method under FASB Statement No. 128, Earnings per
Share, to Master Limited Partnerships
  FASB Staff Position (FSP) No. EITF 03-6-1 Determining Whether Instruments Granted in Share-Based
Transactions Are Participating Securities
 - 40 -




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##### Table of Contents



RISK MANAGEMENT
        Fair Value
    
    Location of OffsettingInterest Rate Swaps
    
    Balance Sheet Location
    
    (In thousands)
    
    BalanceCash flow hedge - $171 million LIBOR based debt
    
    Other assets
    
    $825
    
    Accumulated other comprehensive incomeFair value hedge - $60 million of
6.25% Senior Notes
    
    Other assets
    
    $961
    
    Long-term debt
 - 41 -




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- 42 -




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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
  - 43 -




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##### Table of Contents



Item 1. Legal proceedings
  
 Item 2. Unregistered Sales of Securities and Use of Proceeds
 (c) Common unit repurchases made in the quarter
  Maximum NumberTotal Number of
    
    of Units that MayUnits Purchased as
    
    Yet Be PurchasedPart of Publicly
    
    Under a PubliclyTotal Number of
    
    Average Price
    
    Announced Plan or
    
    Announced Plan orPeriod
    
    Units Purchased
    
    Paid Per Unit
    
    Program
    
    ProgramJuly 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    August 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    September 2008
    
    
    8,186
    
    
    $
    34.34
    
    
    
    
    
    
    
    Total
    
    
    8,186
    
    
    $
    34.34
    
    
    
    
 
 Item 6. Exhibits
 10.1*
    
    Amendment No. 2 to Amended and Restated Credit Agreement, dated September 8, 2008,
between Holly Energy Partners  Operating, L.P., certain of its
subsidiaries acting as guarantors, Union Bank of California, N.A., as
administrative agent, issuing bank and sole lead arranger and certain other lenders.
 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 - 44 -




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SIGNATURES
  HOLLY ENERGY PARTNERS, L.P.(Registrant)By:
    
    HEP LOGISTICS HOLDINGS, L.P.its General PartnerBy:
    
    HOLLY LOGISTIC SERVICES, L.L.C.its General Partner
 Date: October 31, 2008
    /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) - 45 -