##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the quarterly period ended March 31, 2007
 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
  Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o  o þ




---



##### 



PART I. FINANCIAL INFORMATION
    
    
    3FORWARD-LOOKING STATEMENTS
    
    
    3Item 1. Financial Statements (Unaudited, except December 31, 2006 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
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    32Item 4. Controls and Procedures
    
    
    32PART II. OTHER INFORMATION
    
    
    33Item 1. Legal Proceedings
    
    
    33Item 2. Unregistered Sales of Securities and Use of Proceeds
    
    
    33Item 6. Exhibits
    
    
    33SIGNATURES
    
    
    34Computation of Ratio of Earnings to Fixed ChargesCertification of CEO under Section 302Certification of CFO under Section 302Certification of CEO under Section 906Certification of CFO under Section 906
  -2-




---



##### Table of Contents



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




---



##### Table of Contents



Item 1. Financial Statements
 Holly Energy Partners, L.P.
 
 Consolidated Balance Sheets
 March 31, 2007
    
    
    December 31,(Unaudited)
    
    
    2006(In thousands, except unit data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    11,100
    
    
    $
    11,555Accounts receivable:Trade
    
    
    5,571
    
    
    
    7,339Affiliates
    
    
    1,866
    
    
    
    3,5187,437
    
    
    
    10,857Prepaid and other current assets
    
    
    821
    
    
    
    1,212Total current assets
    
    
    19,358
    
    
    
    23,624Properties and equipment, net
    
    
    158,324
    
    
    
    160,484Transportation agreements, net
    
    
    55,801
    
    
    
    56,821Other assets
    
    
    2,470
    
    
    
    2,644Total assets
    
    $
    235,953
    
    
    $
    243,573LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,117
    
    
    $
    3,781Accrued interest
    
    
    988
    
    
    
    2,941Deferred revenue
    
    
    6,392
    
    
    
    5,486Accrued property taxes
    
    
    508
    
    
    
    868Other current liabilities
    
    
    730
    
    
    
    1,098Total current liabilities
    
    
    10,735
    
    
    
    14,174Commitments and contingencies
    
    
    
    
    
    
    Long-term debt
    
    
    181,048
    
    
    
    180,660Other long-term liabilities
    
    
    1,264
    
    
    
    1,550Minority interest
    
    
    11,390
    
    
    
    10,963Partners equity (deficit):Common unitholders (8,170,000 units issued and outstanding)
    
    
    174,197
    
    
    
    176,844Subordinated unitholders (7,000,000 units issued and outstanding)
    
    
    (71,769
    )
    
    
    (70,022
    )Class B subordinated unitholders (937,500 units issued and
outstanding)
    
    
    23,235
    
    
    
    23,469General partner interest (2% interest)
    
    
    (94,147
    )
    
    
    (94,065
    )Total partners equity
    
    
    31,516
    
    
    
    36,226Total liabilities and partners equity
    
    $
    235,953
    
    
    $
    243,573
  -4-




---



##### Table of Contents



Holly Energy Partners, L.P.
 
 Consolidated Statements of Income
 (Unaudited)
 Three Months Ended March 31,2007
    
    
    2006(In thousands, except per unit data)Revenues:Affiliates
    
    $
    13,790
    
    
    $
    12,482Third parties
    
    
    10,082
    
    
    
    9,95623,872
    
    
    
    22,438Operating costs and expenses:Operations
    
    
    7,777
    
    
    
    7,109Depreciation and amortization
    
    
    4,071
    
    
    
    3,793General and administrative
    
    
    1,287
    
    
    
    1,22413,135
    
    
    
    12,126Operating income
    
    
    10,737
    
    
    
    10,312Other income (expense):Interest income
    
    
    185
    
    
    
    243Interest expense
    
    
    (3,358
    )
    
    
    (3,175
    )Gain on sale of assets
    
    
    297
    
    
    
    (2,876
    )
    
    
    (2,932
    )Income before minority interest
    
    
    7,861
    
    
    
    7,380Minority interest in Rio Grande Pipeline Company
    
    
    (427
    )
    
    
    (245
    )Net income
    
    
    7,434
    
    
    
    7,135Less general partner interest in net income
    
    
    580
    
    
    
    327Limited partners interest in net income
    
    $
    6,854
    
    
    $
    6,808Net income per limited partner unit -
basic and diluted
    
    $
    0.43
    
    
    $
    0.42Weighted average limited partners units
outstanding
    
    
    16,108
    
    
    
    16,108
  -5-




---



##### Table of Contents



Holly Energy Partners, L.P.
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Three Months Ended March 31,2007
    
    
    2006(In thousands)Cash flows from operating activitiesNet income
    
    $
    7,434
    
    
    $
    7,135Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    4,071
    
    
    
    3,793Minority interest in Rio Grande Pipeline Company
    
    
    427
    
    
    
    245Amortization of restricted and performance units
    
    
    302
    
    
    
    143Gain on sale of assets
    
    
    (297
    )
    
    
    (Increase) decrease in current assets:Accounts receivable  trade
    
    
    1,768
    
    
    
    (283
    )Accounts receivable  affiliates
    
    
    1,652
    
    
    
    86Prepaid and other current assets
    
    
    391
    
    
    
    (172
    )Increase (decrease) in current liabilities:Accounts payable
    
    
    (1,664
    )
    
    
    (481
    )Accrued interest
    
    
    (1,953
    )
    
    
    (1,932
    )Deferred revenue
    
    
    906
    
    
    
    484Accrued property tax
    
    
    (360
    )
    
    
    (385
    )Other current liabilities
    
    
    (368
    )
    
    
    (197
    )Other, net
    
    
    284
    
    
    
    126Net cash provided by operating activities
    
    
    12,593
    
    
    
    8,562Cash flows from investing activitiesAdditions to properties and equipment
    
    
    (912
    )
    
    
    (817
    )Proceeds from sale of assets
    
    
    325
    
    
    
    Net cash used for investing activities
    
    
    (587
    )
    
    
    (817
    )Cash flows from financing activitiesDistributions to partners
    
    
    (11,538
    )
    
    
    (10,461
    )Purchase of units for restricted grants
    
    
    (908
    )
    
    
    Cash distributions to minority interest
    
    
    
    
    
    
    (600
    )Other
    
    
    (15
    )
    
    
    Net cash used for financing activities
    
    
    (12,461
    )
    
    
    (11,061
    )Cash and cash equivalentsDecrease for period
    
    
    (455
    )
    
    
    (3,316
    )Beginning of period
    
    
    11,555
    
    
    
    20,583End of period
    
    $
    11,100
    
    
    $
    17,267
  -6-




---



##### Table of Contents



Holly Energy Partners, L.P.
 
 Consolidated Statement of Partners Equity (Deficit)
 (Unaudited)
 Class BCommon
    
    
    Subordinated
    
    
    Subordinated
    
    
    General PartnerUnits
    
    
    Units
    
    
    Units
    
    
    Interest
    
    
    Total(In thousands)Balance December 31, 2006
    
    $
    176,844
    
    
    $
    (70,022
    )
    
    $
    23,469
    
    
    $
    (94,065
    )
    
    $
    36,226Distributions to partners
    
    
    (5,518
    )
    
    
    (4,725
    )
    
    
    (633
    )
    
    
    (662
    )
    
    
    (11,538
    )Purchase of units for
restricted grants
    
    
    (908
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (908
    )Amortization of
restricted and
performance units
    
    
    302
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    302Net income
    
    
    3,477
    
    
    
    2,978
    
    
    
    399
    
    
    
    580
    
    
    
    7,434Balance March 31, 2007
    
    $
    174,197
    
    
    $
    (71,769
    )
    
    $
    23,235
    
    
    $
    (94,147
    )
    
    $
    31,516
  -7-




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note 1: Description of Business and Presentation of Financial Statements
        Recent Accounting Pronouncements
 Interpretation No. 48 Accounting for Uncertainty in Income Taxes
  -8-




---



##### Table of Contents



Note 2: Properties and Equipment
 March 31,
    
    
    December 31,2007
    
    
    2006(In thousands)Pipelines and terminals
    
    $
    194,152
    
    
    $
    194,008Land and right of way
    
    
    22,458
    
    
    
    22,486Other
    
    
    6,947
    
    
    
    6,947Construction in progress
    
    
    2,451
    
    
    
    1,539226,008
    
    
    
    224,980Less accumulated depreciation
    
    
    67,684
    
    
    
    64,496$
    158,324
    
    
    $
    160,484
  Note 3: Transportation Agreements
  
    
    Costs incurred by Rio Grande in constructing certain
pipeline and terminal facilities located in Mexico, which were
then contributed to an affiliate of Pemex, the national oil
company of Mexico. In exchange, Rio Grande received a 10-year
transportation agreement from BP plc (BP) expiring in April
2007. This asset is being amortized over the 10-year term of
the agreement.
    
    A portion of the total purchase price of the Alon assets
was allocated to the transportation agreement asset based on
the fair value appraisal provided by an independent firm.
This asset is being amortized over 30 years ending 2035, the
15-year initial term of the Alon PTA plus the expected 15-year
extension period.
  March 31,
    
    
    December 31,2007
    
    
    2006(In thousands)Rio Grande transportation agreement
    
    $
    20,836
    
    
    $
    20,836Alon transportation agreement
    
    
    59,933
    
    
    
    59,93380,769
    
    
    
    80,769Less accumulated amortization
    
    
    24,968
    
    
    
    23,948$
    55,801
    
    
    $
    56,821
 Note 4: Debt
 Credit Agreement
  -9-




---



##### Table of Contents



Senior Notes Due 2015
   -10-




---



##### Table of Contents



Interest Rate Risk Management
    Other Debt Information
 Three Months EndedMarch 31,2007
    
    
    2006(In thousands)Interest on outstanding debt:Senior Notes, net of interest rate swap
    
    $
    2,932
    
    
    $
    2,810Credit Agreement
    
    
    
    
    
    
    Amortization of discount and deferred issuance costs
    
    
    303
    
    
    
    242Commitment fees
    
    
    123
    
    
    
    123Net interest expense
    
    $
    3,358
    
    
    $
    3,175Cash paid for interest(1)
    
    $
    5,135
    
    
    $
    4,865
 
 (1)
    
    Net of cash received under our interest rate swap agreement of $1.9 million in each of
the quarters ended March 31, 2007 and 2006.  Note 5: Employees, Retirement and Benefit Plans
    -11-




---



##### Table of Contents



Restricted Units
   Weighted-Weighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicGrant-Date
    
    
    Contractual
    
    
    ValueRestricted Units
    
    Grants
    
    
    Fair Value
    
    
    Term
    
    
    ($000)Outstanding January 1, 2007 (not vested)
    
    
    36,597
    
    
    
    40.21Granted
    
    
    19,687
    
    
    
    46.12Forfeited
    
    
    
    
    
    
    Vesting and transfer of full ownership to recipients
    
    
    (4,170
    )
    
    
    39.45Outstanding at March 31, 2007 (not vested)
    
    
    52,114
    
    
    $
    42.50
    
    
    1.4 years
    
    $
    2,429
  Performance Units
   -12-




---



##### Table of Contents



PayablePerformance Units
    
    In UnitsOutstanding at January 1, 2007 (not vested)
    
    
    14,015Vesting and payment of cash benefit to recipients
    
    
    Granted
    
    
    12,321Forfeited
    
    
    Outstanding at March 31, 2007 (not vested)
    
    
    26,336
  Note 6: Significant Customers
  Three Months EndedMarch 31,2007
    
    2006Holly
    
    
    58
    %
    
    
    56
    %Alon
    
    
    26
    %
    
    
    31
    %BP
    
    
    13
    %
    
    
    11
    %
 Note 7: Related Party Transactions
 Holly
     -13-




---



##### Table of Contents




    
    Pipeline and terminal revenues received from Holly were
$13.8 million and $12.5 million for the three months ended
March 31, 2007 and 2006, respectively. These amounts include
the revenues received under the Holly PTA and Holly IPA.
    
    Holly charged general and administrative services under
the Omnibus Agreement of $0.5 million for the three months
ended March 31, 2007 and 2006.
    
    We reimbursed Holly for costs of employees supporting our
operations of $2.3 million and $1.9 million for the three
months ended March 31, 2007 and 2006, respectively.
    
    Holly reimbursed $74,000 and $56,000 to us for certain
costs paid on their behalf for the three months ended March
31, 2007 and 2006, respectively.
    
    In the three months ended March 31, 2007 and 2006, we
distributed $5.4 million and $4.8 million, respectively, to
Holly as regular distributions on its subordinated units,
common units and general partner interest.
    
    Our net accounts receivable from Holly were $1.9 million
and $3.5 million at March 31, 2007 and December 31, 2006,
respectively.
    
    Holly has failed to meet its minimum revenue commitment
for each of the first seven quarters of the Holly IPA. We
have charged Holly $4.0 million for these shortfalls to date,
$0.6 million and $0.2 million of which are included in
affiliate accounts receivable at March 31, 2007 and December
31, 2006, respectively.We recognized $0.5 million of shortfalls billed under the Holly IPA in 2006 as additional
revenues in the first quarter of 2007, as Holly did not exceed its minimum revenue obligation in
any of the subsequent four quarters. Deferred revenue in the consolidated balance sheets at
March 31, 2007 and December 31, includes $2.5 million and $2.4 million, respectively, relating
to the Holly IPA. It is possible that Holly may not exceed its minimum obligations under the
Holly IPA to allow Holly to receive credit for any of the $2.5 million deferred at March 31,
2007.
 BP
  
    
    BP is the sole customer of Rio Grande. BPs agreement to ship on the Rio Grande pipeline expires in April
2007, and will continue year-to-year thereafter unless cancelled by either party prior to the beginning of the
previous contract year. We recorded revenues from them of $3.0 million and $2.4 million in the three months ended
March 31, 2007 and 2006, respectively.
    
    Rio Grande paid distributions to BP of $0.6 million in the three months ended March 31, 2006.
    
    Included in our accounts receivable  trade at March 31, 2007 and December 31, 2006 were $1.2 million and $2.1
million, respectively, which represented the receivable balance of Rio Grande from BP.
 Alon
  -14-




---



##### Table of Contents




    
    We recognized $4.4 million and $5.1 million of revenues
for pipeline transportation and terminalling services under
the Alon PTA and $1.8 million and $1.7 million under a
pipeline capacity lease for the three months ended March 31,
2007 and 2006, respectively. The capacity lease agreements
have remaining terms from less than a year up to three and
one-quarter years.
    
    We paid $0.6 million to Alon for distributions on our
Class B subordinated units for the three months ended March
31, 2007 and 2006.
    
    Included in our accounts receivable  trade at March 31,
2007 and December 31, 2006 were $4.5 million and $5.0 million,
respectively, which represented the receivable balance from
Alon.
    
    Deferred revenue includes $3.9 million and $3.1 million
of minimum revenue commitments under the Alon PTA at March 31,
2007 and December 31, 2006, respectively.
 Note 8: Partners Equity and Cash Distributions
 Issuances of units
    -15-




---



##### Table of Contents



Allocations of Net Income
  Cash Distributions
     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
    %
 -16-




---



##### Table of Contents



Three Months Ended March 31,2007
    
    
    2006(In thousands, except per unit data)General partner interest
    
    $
    222
    
    
    $
    205General partner incentive distribution
    
    
    440
    
    
    
    189Total general partner distribution
    
    
    662
    
    
    
    394Limited partner distribution
    
    
    10,876
    
    
    
    10,067Total regular quarterly cash distribution
    
    $
    11,538
    
    
    $
    10,461Cash distribution per unit applicable to limited partners
    
    $
    0.675
    
    
    $
    0.625
   Note 9: Supplemental Guarantor/Non-Guarantor Financial Information
   -17-




---



##### Table of Contents



Condensed Consolidating Balance SheetGuarantor
    
    
    Non-March 31, 2007
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    6,287
    
    
    $
    4,811
    
    
    $
    
    
    
    $
    11,100Accounts receivable
    
    
    
    
    
    
    6,277
    
    
    
    1,160
    
    
    
    
    
    
    
    7,437Intercompany accounts receivable (payable)
    
    
    (96,799
    )
    
    
    97,027
    
    
    
    (228
    )
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    105
    
    
    
    716
    
    
    
    
    
    
    
    
    
    
    
    821Total current assets
    
    
    (96,692
    )
    
    
    110,307
    
    
    
    5,743
    
    
    
    
    
    
    
    19,358Properties and equipment, net
    
    
    
    
    
    
    125,520
    
    
    
    32,804
    
    
    
    
    
    
    
    158,324Investment in subsidiaries
    
    
    310,137
    
    
    
    26,579
    
    
    
    
    
    
    
    (336,716
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    55,771
    
    
    
    30
    
    
    
    
    
    
    
    55,801Other assets
    
    
    1,415
    
    
    
    1,055
    
    
    
    
    
    
    
    
    
    
    
    2,470Total assets
    
    $
    214,860
    
    
    $
    319,232
    
    
    $
    38,577
    
    
    $
    (336,716
    )
    
    $
    235,953LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    1,761
    
    
    $
    356
    
    
    $
    
    
    
    $
    2,117Accrued interest
    
    
    988
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    988Deferred revenue
    
    
    
    
    
    
    6,392
    
    
    
    
    
    
    
    
    
    
    
    6,392Accrued property taxes
    
    
    
    
    
    
    464
    
    
    
    44
    
    
    
    
    
    
    
    508Other current liabilities
    
    
    365
    
    
    
    157
    
    
    
    208
    
    
    
    
    
    
    
    730Total current liabilities
    
    
    1,353
    
    
    
    8,774
    
    
    
    608
    
    
    
    
    
    
    
    10,735Long-term debt
    
    
    181,048
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181,048Other long-term liabilities
    
    
    943
    
    
    
    321
    
    
    
    
    
    
    
    
    
    
    
    1,264Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,390
    
    
    
    11,390Partners equity
    
    
    31,516
    
    
    
    310,137
    
    
    
    37,969
    
    
    
    (348,106
    )
    
    
    31,516Total liabilities and partners equity
    
    $
    214,860
    
    
    $
    319,232
    
    
    $
    38,577
    
    
    $
    (336,716
    )
    
    $
    235,953
 Condensed Consolidating Balance SheetGuarantor
    
    
    Non-December 31, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    9,819
    
    
    $
    1,734
    
    
    $
    
    
    
    $
    11,555Accounts receivable
    
    
    
    
    
    
    8,772
    
    
    
    2,085
    
    
    
    
    
    
    
    10,857Intercompany accounts receivable (payable)
    
    
    (78,952
    )
    
    
    79,144
    
    
    
    (192
    )
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    203
    
    
    
    1,009
    
    
    
    
    
    
    
    
    
    
    
    1,212Total current assets
    
    
    (78,747
    )
    
    
    98,744
    
    
    
    3,627
    
    
    
    
    
    
    
    23,624Properties and equipment, net
    
    
    
    
    
    
    127,357
    
    
    
    33,127
    
    
    
    
    
    
    
    160,484Investment in subsidiaries
    
    
    298,872
    
    
    
    25,581
    
    
    
    
    
    
    
    (324,453
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    56,271
    
    
    
    550
    
    
    
    
    
    
    
    56,821Other assets
    
    
    1,453
    
    
    
    1,191
    
    
    
    
    
    
    
    
    
    
    
    2,644Total assets
    
    $
    221,578
    
    
    $
    309,144
    
    
    $
    37,304
    
    
    $
    (324,453
    )
    
    $
    243,573LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    3,356
    
    
    $
    425
    
    
    $
    
    
    
    $
    3,781Accrued interest
    
    
    2,941
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,941Deferred revenue
    
    
    
    
    
    
    5,486
    
    
    
    
    
    
    
    
    
    
    
    5,486Accrued property taxes
    
    
    
    
    
    
    726
    
    
    
    142
    
    
    
    
    
    
    
    868Other current liabilities
    
    
    516
    
    
    
    389
    
    
    
    193
    
    
    
    
    
    
    
    1,098Total current liabilities
    
    
    3,457
    
    
    
    9,957
    
    
    
    760
    
    
    
    
    
    
    
    14,174Long-term debt
    
    
    180,660
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180,660Other long-term liabilities
    
    
    1,235
    
    
    
    315
    
    
    
    
    
    
    
    
    
    
    
    1,550Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,963
    
    
    
    10,963Partners equity
    
    
    36,226
    
    
    
    298,872
    
    
    
    36,544
    
    
    
    (335,416
    )
    
    
    36,226Total liabilities and partners equity
    
    $
    221,578
    
    
    $
    309,144
    
    
    $
    37,304
    
    
    $
    (324,453
    )
    
    $
    243,573
 -18-




---



##### Table of Contents



Condensed Consolidating Statement of IncomeGuarantor
    
    
    Non-Three months ended March 31, 2007
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    13,790
    
    
    $
    
    
    
    $
    
    
    
    $
    13,790Third parties
    
    
    
    
    
    
    7,349
    
    
    
    3,026
    
    
    
    (293
    )
    
    
    10,082
    
    
    
    21,139
    
    
    
    3,026
    
    
    
    (293
    )
    
    
    23,872Operating costs and expenses:Operations
    
    
    
    
    
    
    7,277
    
    
    
    793
    
    
    
    (293
    )
    
    
    7,777Depreciation and amortization
    
    
    
    
    
    
    3,223
    
    
    
    848
    
    
    
    
    
    
    
    4,071General and administrative
    
    
    766
    
    
    
    520
    
    
    
    1
    
    
    
    
    
    
    
    1,287766
    
    
    
    11,020
    
    
    
    1,642
    
    
    
    (293
    )
    
    
    13,135Operating income (loss)
    
    
    (766
    )
    
    
    10,119
    
    
    
    1,384
    
    
    
    
    
    
    
    10,737Equity in earnings of subsidiaries
    
    
    11,264
    
    
    
    997
    
    
    
    
    
    
    
    (12,261
    )
    
    
    Interest income (expense)
    
    
    (3,064
    )
    
    
    (149
    )
    
    
    40
    
    
    
    
    
    
    
    (3,173
    )Gain on sale of assets
    
    
    
    
    
    
    297
    
    
    
    
    
    
    
    
    
    
    
    297Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (427
    )
    
    
    (427
    )Net income
    
    $
    7,434
    
    
    $
    11,264
    
    
    $
    1,424
    
    
    $
    (12,688
    )
    
    $
    7,434
 Condensed Consolidating Statement of IncomeGuarantor
    
    
    Non-Three months ended March 31, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    12,482
    
    
    $
    
    
    
    $
    
    
    
    $
    12,482Third parties
    
    
    
    
    
    
    7,881
    
    
    
    2,369
    
    
    
    (294
    )
    
    
    9,956
    
    
    
    20,363
    
    
    
    2,369
    
    
    
    (294
    )
    
    
    22,438Operating costs and expenses:Operations
    
    
    
    
    
    
    6,670
    
    
    
    733
    
    
    
    (294
    )
    
    
    7,109Depreciation and amortization
    
    
    
    
    
    
    2,949
    
    
    
    844
    
    
    
    
    
    
    
    3,793General and administrative
    
    
    712
    
    
    
    511
    
    
    
    1
    
    
    
    
    
    
    
    1,224712
    
    
    
    10,130
    
    
    
    1,578
    
    
    
    (294
    )
    
    
    12,126Operating income (loss)
    
    
    (712
    )
    
    
    10,233
    
    
    
    791
    
    
    
    
    
    
    
    10,312Equity in earnings of subsidiaries
    
    
    10,789
    
    
    
    572
    
    
    
    
    
    
    
    (11,361
    )
    
    
    Interest income (expense)
    
    
    (2,942
    )
    
    
    (16
    )
    
    
    26
    
    
    
    
    
    
    
    (2,932
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (245
    )
    
    
    (245
    )Net income
    
    $
    7,135
    
    
    $
    10,789
    
    
    $
    817
    
    
    $
    (11,606
    )
    
    $
    7,135
 -19-




---



##### Table of Contents



Condensed Consolidating Statement of Cash FlowsGuarantor
    
    
    Non-Three months ended March 31, 2007
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash flows from operating activities
    
    $
    12,446
    
    
    $
    (2,934
    )
    
    $
    3,081
    
    
    $
    
    
    
    $
    12,593Cash flows from investing activitiesAdditions to properties and equipment
    
    
    
    
    
    
    (908
    )
    
    
    (4
    )
    
    
    
    
    
    
    (912
    )Proceeds from sale of assets
    
    
    
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    325
    
    
    
    (583
    )
    
    
    (4
    )
    
    
    
    
    
    
    (587
    )Cash flows from financing activitiesDistributions to partners
    
    
    (11,538
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,538
    )Purchase of units for restricted grants
    
    
    (908
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (908
    )Other
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    (15
    )(12,446
    )
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    (12,461
    )Cash and cash equivalentsIncrease (decrease) for the period
    
    
    
    
    
    
    (3,532
    )
    
    
    3,077
    
    
    
    
    
    
    
    (455
    )Beginning of period
    
    
    2
    
    
    
    9,819
    
    
    
    1,734
    
    
    
    
    
    
    
    11,555End of period
    
    $
    2
    
    
    $
    6,287
    
    
    $
    4,811
    
    
    $
    
    
    
    $
    11,100
 Condensed Consolidating Statement of Cash FlowsGuarantor
    
    
    Non-Three months ended March 31, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash flows from operating activities
    
    $
    10,461
    
    
    $
    (1,959
    )
    
    $
    1,460
    
    
    $
    (1,400
    )
    
    $
    8,562Cash flows from investing activities  additions to
properties and equipment
    
    
    
    
    
    
    (782
    )
    
    
    (35
    )
    
    
    
    
    
    
    (817
    )Cash flows from financing activitiesDistributions to partners
    
    
    (10,461
    )
    
    
    
    
    
    
    (2,000
    )
    
    
    2,000
    
    
    
    (10,461
    )Cash distribution to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (600
    )
    
    
    (600
    )(10,461
    )
    
    
    
    
    
    
    (2,000
    )
    
    
    1,400
    
    
    
    (11,061
    )Cash and cash equivalentsDecrease for the period
    
    
    
    
    
    
    (2,741
    )
    
    
    (575
    )
    
    
    
    
    
    
    (3,316
    )Beginning of period
    
    
    2
    
    
    
    17,770
    
    
    
    2,811
    
    
    
    
    
    
    
    20,583End of period
    
    $
    2
    
    
    $
    15,029
    
    
    $
    2,236
    
    
    $
    
    
    
    $
    17,267
 Note 10: Investment in Joint Venture
  -20-




---



##### 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
   -21-




---



##### Table of Contents



RESULTS OF OPERATIONS (Unaudited)
 Income, Distributable Cash Flow and Volumes
  Three Months EndedMarch 31,2007
    
    
    2006(In thousands, except per unit data)RevenuesPipelines:Affiliates  refined product pipelines
    
    $
    8,239
    
    
    $
    7,323Affiliates  intermediate pipelines
    
    
    3,009
    
    
    
    2,473Third parties
    
    
    8,790
    
    
    
    8,77720,038
    
    
    
    18,573Terminals and truck loading racks:Affiliates
    
    
    2,542
    
    
    
    2,686Third parties
    
    
    1,292
    
    
    
    1,1793,834
    
    
    
    3,865Total revenues
    
    
    23,872
    
    
    
    22,438Operating costs and expensesOperations
    
    
    7,777
    
    
    
    7,109Depreciation and amortization
    
    
    4,071
    
    
    
    3,793General and administrative
    
    
    1,287
    
    
    
    1,22413,135
    
    
    
    12,126Operating income
    
    
    10,737
    
    
    
    10,312Interest income
    
    
    185
    
    
    
    243Interest expense, including amortization
    
    
    (3,358
    )
    
    
    (3,175
    )Gain on sale of assets
    
    
    297
    
    
    
    Minority interest in Rio Grande
    
    
    (427
    )
    
    
    (245
    )Net income
    
    
    7,434
    
    
    
    7,135Less general partner interest in net income, including incentive distributions (1)
    
    
    580
    
    
    
    327Limited partners interest in net income
    
    $
    6,854
    
    
    $
    6,808Net income per limited partner unit  basic and diluted(1)
    
    $
    0.43
    
    
    $
    0.42Weighted average limited partners units outstanding
    
    
    16,108
    
    
    
    16,108EBITDA(2)
    
    $
    14,678
    
    
    $
    13,860Distributable cash flow(3)
    
    $
    12,594
    
    
    $
    11,214Volumes (bpd)Pipelines:Affiliates  refined product pipelines
    
    
    72,361
    
    
    
    66,570Affiliates  intermediate pipelines
    
    
    59,474
    
    
    
    61,052Third parties
    
    
    65,187
    
    
    
    77,338197,022
    
    
    
    204,960Terminals and truck loading racks:Affiliates
    
    
    120,186
    
    
    
    119,168Third parties
    
    
    46,846
    
    
    
    47,056167,032
    
    
    
    166,224Total for pipelines and terminal assets (bpd)
    
    
    364,054
    
    
    
    371,184
 -22-




---



##### 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 $0.4 million and $0.2 million were declared during the three months ended
March 31, 2007 and 2006, 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 and (ii) depreciation and
amortization. EBITDA is not a calculation based upon U.S. generally accepted accounting
principles (U.S. GAAP). However, the amounts included in the EBITDA calculation are
derived from amounts included in our consolidated financial statements. EBITDA should not
be considered as an alternative to net income or operating income, as an indication of our
operating performance or as an alternative to operating cash flow as a measure of
liquidity. EBITDA is not necessarily comparable to similarly titled measures of other
companies. EBITDA is presented here because it is a widely used financial indicator used
by investors and analysts to measure performance. EBITDA is also used by our management
for internal analysis and as a basis for compliance with financial covenants.Set forth below is our calculation of EBITDA. Three Months EndedMarch 31,2007
    
    
    2006(In thousands)Net income
    
    $
    7,434
    
    
    $
    7,135Add interest expense
    
    
    3,055
    
    
    
    2,933Add amortization of discount and deferred debt issuance costs
    
    
    303
    
    
    
    242Subtract interest income
    
    
    (185
    )
    
    
    (243
    )Add depreciation and amortization
    
    
    4,071
    
    
    
    3,793EBITDA
    
    $
    14,678
    
    
    $
    13,860
 (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.Set forth below is our calculation of distributable cash flow.
 Three Months EndedMarch 31,2007
    
    
    2006(In thousands)Net income
    
    $
    7,434
    
    
    $
    7,135Add depreciation and amortization
    
    
    4,071
    
    
    
    3,793Add amortization of discount and deferred debt issuance costs
    
    
    303
    
    
    
    242Add increase in deferred revenue
    
    
    906
    
    
    
    484Subtract maintenance capital expenditures*
    
    
    (120
    )
    
    
    (440
    )Distributable cash flow
    
    $
    12,594
    
    
    $
    11,214
 -23-




---



##### Table of Contents



*
    
    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.
 March 31,
    
    December 31,2007
    
    2006(In thousands)Balance Sheet DataCash and cash equivalents
    
    $
    11,100
    
    
    $
    11,555Working capital
    
    $
    8,623
    
    
    $
    9,450Total assets
    
    $
    235,953
    
    
    $
    243,573Long-term debt
    
    $
    181,048
    
    
    $
    180,660Partners equity
    
    $
    31,516
    
    
    $
    36,226
  Results of Operations  Three Months Ended March 31, 2007 Compared with Three Months Ended March
31, 2006
 Summary
  Revenues
    -24-




---



##### Table of Contents



Operating Costs
  Depreciation and Amortization
  General and Administrative
  Interest Expense
  Minority Interest in Earnings of Rio Grande
  LIQUIDITY AND CAPITAL RESOURCES
 Overview
  -25-




---



##### Table of Contents



Cash Flows  Operating Activities
   Cash Flows  Investing Activities
  Cash Flows  Financing Activities
  -26-




---



##### Table of Contents



Capital Requirements
      -27-




---



##### Table of Contents



Credit Agreement
       Senior Notes Due 2015
  -28-




---



##### Table of Contents



Impact of Inflation
   Environmental Matters
     -29-




---



##### Table of Contents



CRITICAL ACCOUNTING POLICIES
   Recent Accounting Pronouncements
 Interpretation No. 48 Accounting for Uncertainty in Income Taxes
  -30-




---



##### Table of Contents



RISK MANAGEMENT
        -31-




---



##### 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
  -32-




---



##### Table of Contents



Item 1. Legal proceedings
  
 Item 2. Unregistered Sales of Securities and Use of Proceeds
 (c) Common unit repurchases made in the quarter
  Maximum NumberTotal Number of
    
    of Units that MayUnits Purchased as
    
    Yet Be PurchasedPart of Publicly
    
    Under a PubliclyTotal Number of
    
    Average Price
    
    Announced Plan or
    
    Announced Plan orPeriod
    
    Units Purchased
    
    Paid Per Unit
    
    Program
    
    ProgramJanuary 2007
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    February 2007
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    March 2007
    
    
    19,687
    
    
    $
    47.17
    
    
    
    
    
    
    
    Total
    
    
    19,687
    
    
    $
    47.17
    
    
    
    
 
 Item 6. Exhibits
 12.1*
    
    Computation of Ratio of Earnings to Fixed Charges31.1*
    
    Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.32.2*
    
    Certification of Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith -33-




---



##### 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: May 4, 2007
    
    /s/ P. Dean Ridenour

P. Dean RidenourVice President and Chief Accounting Officerand Director(Principal Accounting Officer)/s/ Stephen J. McDonnell

Stephen J. McDonnellVice President and Chief Financial
Officer
(Principal Financial Officer)
 -34-