##### 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, 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
  o þ o
  o þ




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##### 



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
    
    
    24Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    39Item 4. Controls and Procedures
    
    
    39PART II. OTHER INFORMATION
    
    
    40Item 1. Legal Proceedings
    
    
    40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 6. Exhibits
    
    
    40SIGNATURES
    
    
    41Computation of Ratio of Earnings to Fixed ChargesCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
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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 additional operations in the future;
    
    Our ability to complete previously announced pending or contemplated acquisitions;
    
    The availability and cost of our financing;
    
    The possibility of reductions in production or shutdowns at refineries utilizing our
pipeline and terminal facilities;
    
    The effects of current and future government regulations and policies;
    
    Our operational efficiency in carrying out routine operations and capital construction
projects;
    
    The possibility of terrorist attacks and the consequences of any such attacks;
    
    General economic conditions; and
    
    Other financial, operations and legal risks and uncertainties detailed from time to time
in our Securities and Exchange Commission filings.
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Item 1.
Financial Statements
 Holly Energy Partners, L.P.
 
 Consolidated Balance Sheets
 September 30,2007
    
    
    December 31,(Unaudited)
    
    
    2006(In thousands, except unit data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,710
    
    
    $
    11,555Accounts receivable:Trade
    
    
    4,617
    
    
    
    7,339Affiliates
    
    
    6,129
    
    
    
    3,51810,746
    
    
    
    10,857Prepaid and other current assets
    
    
    773
    
    
    
    1,212Total current assets
    
    
    20,229
    
    
    
    23,624Properties and equipment, net
    
    
    154,770
    
    
    
    160,484Transportation agreements, net
    
    
    54,773
    
    
    
    56,821Other assets
    
    
    2,619
    
    
    
    2,644Total assets
    
    $
    232,391
    
    
    $
    243,573LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,191
    
    
    $
    3,781Accrued interest
    
    
    964
    
    
    
    2,941Deferred revenue
    
    
    4,616
    
    
    
    5,486Accrued property taxes
    
    
    936
    
    
    
    868Other current liabilities
    
    
    887
    
    
    
    1,098Total current liabilities
    
    
    9,594
    
    
    
    14,174Commitments and contingencies
    
    
    
    
    
    
    Long-term debt
    
    
    181,347
    
    
    
    180,660Other long-term liabilities
    
    
    1,168
    
    
    
    1,550Minority interest
    
    
    10,486
    
    
    
    10,963Partners equity (deficit):Common unitholders (8,170,000 units
issued and outstanding)
    
    
    173,654
    
    
    
    176,844Subordinated unitholders (7,000,000 units
issued and outstanding)
    
    
    (72,765
    )
    
    
    (70,022
    )Class B subordinated unitholders (937,500
units issued and outstanding)
    
    
    23,101
    
    
    
    23,469General partner interest (2% interest)
    
    
    (94,194
    )
    
    
    (94,065
    )Total partners equity
    
    
    29,796
    
    
    
    36,226Total liabilities and partners equity
    
    $
    232,391
    
    
    $
    243,573
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Holly Energy Partners, L.P.
 
 Consolidated Statements of Income
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except per unit data)Revenues:Affiliates
    
    $
    14,827
    
    
    $
    14,272
    
    
    $
    44,942
    
    
    $
    37,338Third parties
    
    
    9,638
    
    
    
    8,627
    
    
    
    30,526
    
    
    
    26,52624,465
    
    
    
    22,899
    
    
    
    75,468
    
    
    
    63,864Affiliates - other
    
    
    2,748
    
    
    
    
    
    
    
    2,748
    
    
    
    27,213
    
    
    
    22,899
    
    
    
    78,216
    
    
    
    63,864Operating costs and expenses:Operations
    
    
    7,985
    
    
    
    7,082
    
    
    
    24,025
    
    
    
    21,620Depreciation and amortization
    
    
    3,594
    
    
    
    3,839
    
    
    
    10,873
    
    
    
    11,413General and administrative
    
    
    1,429
    
    
    
    1,177
    
    
    
    3,991
    
    
    
    3,69013,008
    
    
    
    12,098
    
    
    
    38,889
    
    
    
    36,723Operating income
    
    
    14,205
    
    
    
    10,801
    
    
    
    39,327
    
    
    
    27,141Other income (expense):Interest income
    
    
    101
    
    
    
    214
    
    
    
    431
    
    
    
    702Interest expense
    
    
    (3,383
    )
    
    
    (3,302
    )
    
    
    (10,112
    )
    
    
    (9,724
    )Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    298
    
    
    
    (3,282
    )
    
    
    (3,088
    )
    
    
    (9,383
    )
    
    
    (9,022
    )Income before minority interest
    
    
    10,923
    
    
    
    7,713
    
    
    
    29,944
    
    
    
    18,119Minority interest in Rio Grande Pipeline
Company
    
    
    (233
    )
    
    
    38
    
    
    
    (814
    )
    
    
    (235
    )Net income
    
    
    10,690
    
    
    
    7,751
    
    
    
    29,130
    
    
    
    17,884Less general partner interest in net income
    
    
    794
    
    
    
    488
    
    
    
    2,100
    
    
    
    1,134Limited partners interest in net income
    
    $
    9,896
    
    
    $
    7,263
    
    
    $
    27,030
    
    
    $
    16,750Net income per limited partner unit -
basic and diluted
    
    $
    0.61
    
    
    $
    0.45
    
    
    $
    1.68
    
    
    $
    1.04Weighted average limited partners units
outstanding
    
    
    16,108
    
    
    
    16,108
    
    
    
    16,108
    
    
    
    16,108
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Holly Energy Partners, L.P.
 
 Consolidated Statements of Cash Flows
(Unaudited)
 Nine Months Ended September 30,2007
    
    
    2006(In thousands)Cash flows from operating activitiesNet income
    
    $
    29,130
    
    
    $
    17,884Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    10,873
    
    
    
    11,413Minority interest in Rio Grande Pipeline Company
    
    
    814
    
    
    
    235Amortization of restricted and performance units
    
    
    1,087
    
    
    
    646Gain on sale of assets
    
    
    (298
    )
    
    
    (Increase) decrease in current assets:Accounts receivable  trade
    
    
    2,722
    
    
    
    (1,583
    )Accounts receivable  affiliates
    
    
    (2,611
    )
    
    
    1,359Prepaid and other current assets
    
    
    439
    
    
    
    (317
    )Increase (decrease) in current liabilities:Accounts payable
    
    
    (1,590
    )
    
    
    931Accrued interest
    
    
    (1,977
    )
    
    
    (1,922
    )Deferred revenue
    
    
    (870
    )
    
    
    3,682Accrued property tax
    
    
    68
    
    
    
    260Other current liabilities
    
    
    (211
    )
    
    
    254Other, net
    
    
    551
    
    
    
    258Net cash provided by operating activities
    
    
    38,127
    
    
    
    33,100Cash flows from investing activitiesAdditions to properties and equipment
    
    
    (3,119
    )
    
    
    (6,941
    )Proceeds from sale of assets
    
    
    325
    
    
    
    Net cash used for investing activities
    
    
    (2,794
    )
    
    
    (6,941
    )Cash flows from financing activitiesDistributions to partners
    
    
    (35,565
    )
    
    
    (32,350
    )Purchase of units for restricted grants
    
    
    (1,082
    )
    
    
    (634
    )Cash distributions to minority interest
    
    
    (1,290
    )
    
    
    (1,350
    )Deferred financing costs
    
    
    (225
    )
    
    
    Other
    
    
    (16
    )
    
    
    Net cash used for financing activities
    
    
    (38,178
    )
    
    
    (34,334
    )Cash and cash equivalentsDecrease for period
    
    
    (2,845
    )
    
    
    (8,175
    )Beginning of period
    
    
    11,555
    
    
    
    20,583End of period
    
    $
    8,710
    
    
    $
    12,408
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Holly Energy Partners, L.P.
 
 Consolidated Statement of Partners Equity (Deficit)
(Unaudited)
 Class BCommon
    
    
    Subordinated
    
    
    Subordinated
    
    
    General PartnerUnits
    
    
    Units
    
    
    Units
    
    
    Interest
    
    
    Total(In thousands)Balance December 31, 2006
    
    $
    176,844
    
    
    $
    (70,022
    )
    
    $
    23,469
    
    
    $
    (94,065
    )
    
    $
    36,226Distributions to partners
    
    
    (16,905
    )
    
    
    (14,490
    )
    
    
    (1,941
    )
    
    
    (2,229
    )
    
    
    (35,565
    )Purchase of units for
restricted
grants
    
    
    (1,082
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,082
    )Amortization of
restricted and
performance units
    
    
    1,087
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,087Net income
    
    
    13,710
    
    
    
    11,747
    
    
    
    1,573
    
    
    
    2,100
    
    
    
    29,130Balance September 30, 2007
    
    $
    173,654
    
    
    $
    (72,765
    )
    
    $
    23,101
    
    
    $
    (94,194
    )
    
    $
    29,796
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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
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Note 2: Properties and Equipment
 September 30,
    
    
    December 31,2007
    
    
    2006(In thousands)Pipelines and terminals
    
    $
    196,452
    
    
    $
    195,688Land and right of way
    
    
    22,825
    
    
    
    22,486Other
    
    
    5,315
    
    
    
    5,267Construction in progress
    
    
    3,910
    
    
    
    1,539228,502
    
    
    
    224,980Less accumulated depreciation
    
    
    73,732
    
    
    
    64,496$
    154,770
    
    
    $
    160,484
  Note 3: Transportation Agreements
  
    
    The Rio Grande transportation agreement represents 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). The initial 10-year term of this agreement expired in April 2007 and
was extended for an additional year. This agreement will continue on a year-to-year basis
unless cancelled by either party prior to the end of the previous contract year. The
carrying amount of this asset was fully amortized and retired in April 2007.
    
    The Alon transportation agreement represents a portion of the total purchase price of the Alon assets 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.
  September 30,
    
    
    December 31,2007
    
    
    2006(In thousands)Rio Grande transportation agreement
    
    $
    
    
    
    $
    20,836Alon transportation agreement
    
    
    59,933
    
    
    
    59,93359,933
    
    
    
    80,769Less accumulated amortization
    
    
    5,160
    
    
    
    23,948$
    54,773
    
    
    $
    56,821
 Note 4: Debt
 Credit Agreement
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Senior Notes Due 2015
   - 10 -




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Interest Rate Risk Management
    Other Debt Information
 Nine Months EndedSeptember 30,2007
    
    
    2006(In thousands)Interest on outstanding debt:Senior Notes, net of interest rate swap
    
    $
    8,839
    
    
    $
    8,622Amortization of discount and deferred issuance costs
    
    
    917
    
    
    
    726Commitment fees
    
    
    356
    
    
    
    376Net interest expense
    
    $
    10,112
    
    
    $
    9,724Cash paid for interest(1)
    
    $
    11,300
    
    
    $
    10,792
 
 (1)
    
    Net of cash received under our interest rate swap agreement of $3.8 million for the
nine months ended September 30, 2007 and 2006.  Note 5: Employees, Retirement and Benefit Plans
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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
    
    
    23,523
    
    
    
    47.10Forfeited
    
    
    (1,555
    )
    
    
    44.32Vesting and transfer of full ownership to recipients
    
    
    (13,869
    )
    
    
    36.90Outstanding at September 30, 2007 (not vested)
    
    
    44,696
    
    
    $
    44.77
    
    
    0.9 years
    
    $
    2,058
  Performance Units
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PayablePerformance Units
    
    In UnitsOutstanding at January 1, 2007 (not vested)
    
    
    14,015Vesting and payment of cash benefit to recipients
    
    
    Granted
    
    
    12,321Forfeited
    
    
    (2,188
    )Outstanding at September 30, 2007 (not vested)
    
    
    24,148
  Note 6: Significant Customers
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Holly
    
    
    65
    %
    
    
    62
    %
    
    
    61
    %
    
    
    59
    %Alon
    
    
    25
    %
    
    
    29
    %
    
    
    27
    %
    
    
    30
    %BP
    
    
    7
    %
    
    
    6
    %
    
    
    9
    %
    
    
    9
    %
 Note 7: Related Party Transactions
 Holly
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
    
    Pipeline and terminal revenues received from Holly were $14.8 million and $14.3 million for
the three months ended September 30, 2007 and 2006, respectively, and $44.9 million and $37.3
million for the nine months ended September 30, 2007 and 2006, respectively. These amounts
include the revenues received under the Holly PTA and Holly IPA.
    
    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. We are currently negotiating an
amendment to our pipelines and terminals agreement with Holly that provides that such terminal
overages of refined product shall belong to Holly in the future.
    
    Holly charged general and administrative services under the Omnibus Agreement of $0.6
million and $0.5 million for the three months ended September 30, 2007 and 2006, respectively,
and $1.6 million and $1.5 million for the nine months ended September 30, 2007 and 2006,
respectively.
    
    We reimbursed Holly for costs of employees supporting our operations of $2.0 million for
the three months ended September 30, 2007 and 2006, and $6.6 million and $5.7 million for the
nine months ended September 30, 2007 and 2006, respectively.
    
    Holly reimbursed us $80,000 and $42,000 for certain costs paid on their behalf for the
three months ended September 30, 2007 and 2006, respectively, and $179,000 and $138,000 for
the nine months ended September 30, 2007 and 2006, respectively.
    
    In the three months ended September 30, 2007 and 2006, we distributed $5.8 million and $5.2
million, respectively, to Holly as regular distributions on its subordinated units, common
units and general partner interest. We distributed $16.9 million and $15.0 million to Holly
in the nine months ended September 30, 2007 and 2006, respectively.
    
    Our net accounts receivable from Holly were $6.1 million and $3.5 million at September 30,
2007 and December 31, 2006, respectively.
    
    Holly has failed to meet its minimum volume commitment for each of the first nine quarters
of the Holly IPA. We have charged Holly $4.5 million for these shortfalls to date, $0.3
million and $0.2 million of which is included in affiliate accounts receivable at September
30, 2007 and December 31, 2006, respectively.
    
    For the three and nine months ended September 30, 2007, our revenues from Holly included
$0.6 million and $2.2 million, respectively, of shortfalls billed under the Holly IPA in 2006
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, 2007 and December 31,
2006, includes $1.3 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 $1.3 million deferred at September 30, 2007.
 BP
  
    
    BP is the sole customer of Rio Grande. BPs agreement to ship on the Rio Grande pipeline
expired in April 2007 and was extended for an additional year. This agreement will continue on
a year-to-year
 - 14 -




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basis unless cancelled by either party prior to the end of the previous
contract year. We recorded revenues from them of $2.0 million and $1.4 million for the three
months ended September 30, 2007 and 2006, respectively, and $6.8 million and $5.4 million for
the nine months ended September 30, 2007 and 2006, respectively.
    
    Rio Grande paid distributions to BP of $0.8 million and $0.2 million for the three months
ended September 30, 2007 and 2006, respectively, and $1.3 million and $1.4 million for the
nine months ended September 30, 2007 and 2006, respectively.
    
    Included in our accounts receivable  trade at September 30, 2007 and December 31, 2006
were $0.8 million and $2.1 million, respectively, which represented the receivable balance of
Rio Grande from BP.
 Alon
   
    
    We recognized $5.0 million and $4.8 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, 2007 and 2006, respectively. We
recognized $15.8 million and $13.8 million of revenues for pipeline transportation and
terminalling services under the Alon PTA and $5.3 million and $5.2 million under pipeline
capacity leases for the nine months ended September 30, 2007 and
2006, respectively. The pipeline lease agreement with Alon was
amended effective August 31, 2007 to extend two capacity leases for
10 years to August 31, 2018 and July 31, 2020, respectively, to reduce
the total leased capacity from 20,000 to 17,500 barrels per day
(bpd) effective September 1, 2008, and to allow Alon an
option, effective from September 1, 2008, to increase the leased
capacity by 2,500 bpd for a term of 10 years.
    
    We paid $0.7 million and $0.6 million to Alon for distributions on our Class B subordinated
units for the three months ended September 30, 2007 and 2006, respectively, and $1.9 million
and $1.8 million for the nine months ended September 30, 2007 and 2006, respectively.
    
    Included in our accounts receivable  trade at September 30, 2007 and December 31, 2006
were $3.7 million and $5.0 million, respectively, which represented the receivable balance
from Alon.
    
    For the three and nine months ended September 30, 2007, our revenues from Alon included
$0.6 million of shortfalls billed under the Alon PTA in 2006 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, 2007 and December 31, 2006 includes $3.3 million
and $3.1 million, respectively, relating to the Alon PTA. It is possible that Alon may not
exceed its minimum obligations under the Alon PTA to allow Alon to receive credit for any of
the $3.3 million deferred at September 30, 2007.
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Note 8: Partners Equity and Cash Distributions
 Issuances of units
    Allocations of Net Income
  Cash Distributions
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Marginal Percentage Interest inTotal Quarterly Distribution
    
    DistributionsTarget Amount
    
    Unitholders
    
    General PartnerMinimum Quarterly Distribution
    
    $
    0.50
    
    
    
    98
    %
    
    
    2
    %First Target Distribution
    
    Up to $0.55
    
    
    98
    %
    
    
    2
    %Second Target Distribution
    
    above $0.55 up to $0.625
    
    
    85
    %
    
    
    15
    %Third Target distribution
    
    above $0.625 up to $0.75
    
    
    75
    %
    
    
    25
    %Thereafter
    
    Above $0.75
    
    
    50
    %
    
    
    50
    %
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except per unit data)General partner interest
    
    $
    232
    
    
    $
    215
    
    
    $
    681
    
    
    $
    631General partner incentive distribution
    
    
    592
    
    
    
    340
    
    
    
    1,548
    
    
    
    793Total general partner distribution
    
    
    824
    
    
    
    555
    
    
    
    2,229
    
    
    
    1,424Limited partner distribution
    
    
    11,359
    
    
    
    10,550
    
    
    
    33,336
    
    
    
    30,926Total regular quarterly cash distribution
    
    $
    12,183
    
    
    $
    11,105
    
    
    $
    35,565
    
    
    $
    32,350Cash distribution per unit applicable to
limited partners
    
    $
    0.705
    
    
    $
    0.655
    
    
    $
    2.070
    
    
    $
    1.920
   - 17 -




---



##### Table of Contents



Note 9: Supplemental Guarantor/Non-Guarantor Financial Information
   - 18 -




---



##### Table of Contents



Condensed Consolidating Balance Sheet
 Guarantor
    
    
    Non-September 30, 2007
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    6,144
    
    
    $
    2,564
    
    
    $
    
    
    
    $
    8,710Accounts receivable
    
    
    
    
    
    
    9,962
    
    
    
    784
    
    
    
    
    
    
    
    10,746Intercompany accounts receivable (payable)
    
    
    (127,480
    )
    
    
    127,847
    
    
    
    (367
    )
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    271
    
    
    
    502
    
    
    
    
    
    
    
    
    
    
    
    773Total current assets
    
    
    (127,207
    )
    
    
    144,455
    
    
    
    2,981
    
    
    
    
    
    
    
    20,229Properties and equipment, net
    
    
    
    
    
    
    122,085
    
    
    
    32,685
    
    
    
    
    
    
    
    154,770Investment in subsidiaries
    
    
    339,451
    
    
    
    24,469
    
    
    
    
    
    
    
    (363,920
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    54,773
    
    
    
    
    
    
    
    
    
    
    
    54,773Other assets
    
    
    1,340
    
    
    
    1,279
    
    
    
    
    
    
    
    
    
    
    
    2,619Total assets
    
    $
    213,584
    
    
    $
    347,061
    
    
    $
    35,666
    
    
    $
    (363,920
    )
    
    $
    232,391LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    1,692
    
    
    $
    499
    
    
    $
    
    
    
    $
    2,191Accrued interest
    
    
    957
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    964Deferred revenue
    
    
    
    
    
    
    4,616
    
    
    
    
    
    
    
    
    
    
    
    4,616Accrued property taxes
    
    
    
    
    
    
    805
    
    
    
    131
    
    
    
    
    
    
    
    936Other current liabilities
    
    
    650
    
    
    
    156
    
    
    
    81
    
    
    
    
    
    
    
    887Total current liabilities
    
    
    1,607
    
    
    
    7,276
    
    
    
    711
    
    
    
    
    
    
    
    9,594Long-term debt
    
    
    181,347
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181,347Other long-term liabilities
    
    
    834
    
    
    
    334
    
    
    
    
    
    
    
    
    
    
    
    1,168Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,486
    
    
    
    10,486Partners equity
    
    
    29,796
    
    
    
    339,451
    
    
    
    34,955
    
    
    
    (374,406
    )
    
    
    29,796Total liabilities and partners equity
    
    $
    213,584
    
    
    $
    347,061
    
    
    $
    35,666
    
    
    $
    (363,920
    )
    
    $
    232,391
 Condensed Consolidating Balance Sheet
 Guarantor
    
    
    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
 - 19 -




---



##### Table of Contents



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
    
    
    
    
    
    
    7,560
    
    
    
    721
    
    
    
    (296
    )
    
    
    7,985Depreciation and amortization
    
    
    
    
    
    
    3,267
    
    
    
    327
    
    
    
    
    
    
    
    3,594General and administrative
    
    
    707
    
    
    
    586
    
    
    
    136
    
    
    
    
    
    
    
    1,429707
    
    
    
    11,413
    
    
    
    1,184
    
    
    
    (296
    )
    
    
    13,008Operating income (loss)
    
    
    (707
    )
    
    
    14,138
    
    
    
    774
    
    
    
    
    
    
    
    14,205Equity in earnings of subsidiaries
    
    
    14,495
    
    
    
    543
    
    
    
    
    
    
    
    (15,038
    )
    
    
    Interest income (expense)
    
    
    (3,098
    )
    
    
    (186
    )
    
    
    2
    
    
    
    
    
    
    
    (3,282
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (233
    )
    
    
    (233
    )Net income
    
    $
    10,690
    
    
    $
    14,495
    
    
    $
    776
    
    
    $
    (15,271
    )
    
    $
    10,690
 Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Three months ended September 30, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    14,272
    
    
    $
    
    
    
    $
    
    
    
    $
    14,272Third parties
    
    
    
    
    
    
    7,526
    
    
    
    1,403
    
    
    
    (302
    )
    
    
    8,627
    
    
    
    21,798
    
    
    
    1,403
    
    
    
    (302
    )
    
    
    22,899Operating costs and expenses:Operations
    
    
    
    
    
    
    6,697
    
    
    
    687
    
    
    
    (302
    )
    
    
    7,082Depreciation and amortization
    
    
    
    
    
    
    2,981
    
    
    
    858
    
    
    
    
    
    
    
    3,839General and administrative
    
    
    660
    
    
    
    516
    
    
    
    1
    
    
    
    
    
    
    
    1,177660
    
    
    
    10,194
    
    
    
    1,546
    
    
    
    (302
    )
    
    
    12,098Operating income (loss)
    
    
    (660
    )
    
    
    11,604
    
    
    
    (143
    )
    
    
    
    
    
    
    10,801Equity in earnings of subsidiaries
    
    
    11,476
    
    
    
    (87
    )
    
    
    
    
    
    
    (11,389
    )
    
    
    Interest income (expense)
    
    
    (3,065
    )
    
    
    (41
    )
    
    
    18
    
    
    
    
    
    
    
    (3,088
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    38Net income
    
    $
    7,751
    
    
    $
    11,476
    
    
    $
    (125
    )
    
    $
    (11,351
    )
    
    $
    7,751
 - 20 -




---



##### Table of Contents



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
    
    
    
    
    
    
    22,438
    
    
    
    2,476
    
    
    
    (889
    )
    
    
    24,025Depreciation and amortization
    
    
    
    
    
    
    9,341
    
    
    
    1,532
    
    
    
    
    
    
    
    10,873General and administrative
    
    
    2,212
    
    
    
    1,621
    
    
    
    158
    
    
    
    
    
    
    
    3,9912,212
    
    
    
    33,400
    
    
    
    4,166
    
    
    
    (889
    )
    
    
    38,889Operating income (loss)
    
    
    (2,212
    )
    
    
    38,901
    
    
    
    2,638
    
    
    
    
    
    
    
    39,327Equity 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
    )Net income
    
    $
    29,130
    
    
    $
    40,579
    
    
    $
    2,710
    
    
    $
    (43,289
    )
    
    $
    29,130
 Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Nine months ended September 30, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    37,338
    
    
    $
    
    
    
    $
    
    
    
    $
    37,338Third parties
    
    
    
    
    
    
    22,014
    
    
    
    5,409
    
    
    
    (897
    )
    
    
    26,526
    
    
    
    59,352
    
    
    
    5,409
    
    
    
    (897
    )
    
    
    63,864Operating costs and expenses:Operations
    
    
    
    
    
    
    20,373
    
    
    
    2,144
    
    
    
    (897
    )
    
    
    21,620Depreciation and amortization
    
    
    
    
    
    
    8,864
    
    
    
    2,549
    
    
    
    
    
    
    
    11,413General and administrative
    
    
    2,149
    
    
    
    1,537
    
    
    
    4
    
    
    
    
    
    
    
    3,6902,149
    
    
    
    30,774
    
    
    
    4,697
    
    
    
    (897
    )
    
    
    36,723Operating income (loss)
    
    
    (2,149
    )
    
    
    28,578
    
    
    
    712
    
    
    
    
    
    
    
    27,141Equity in earnings of subsidiaries
    
    
    29,053
    
    
    
    550
    
    
    
    
    
    
    
    (29,603
    )
    
    
    Interest income (expense)
    
    
    (9,020
    )
    
    
    (75
    )
    
    
    73
    
    
    
    
    
    
    
    (9,022
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (235
    )
    
    
    (235
    )Net income
    
    $
    17,884
    
    
    $
    29,053
    
    
    $
    785
    
    
    $
    (29,838
    )
    
    $
    17,884
 - 21 -




---



##### Table of Contents



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
    
    $
    36,872
    
    
    $
    (1,404
    )
    
    $
    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
    )Cash distribution 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
    )(36,872
    )
    
    
    (16
    )
    
    
    (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
 Condensed Consolidating Statement of Cash Flows
 Guarantor
    
    
    Non-Nine months ended September 30, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash flows from operating activities
    
    $
    32,984
    
    
    $
    (67
    )
    
    $
    3,333
    
    
    $
    (3,150
    )
    
    $
    33,100Cash flows from investing activities  additions to
properties and equipment
    
    
    
    
    
    
    (6,724
    )
    
    
    (217
    )
    
    
    
    
    
    
    (6,941
    )Cash flows from financing activitiesDistributions to partners
    
    
    (32,350
    )
    
    
    
    
    
    
    (4,500
    )
    
    
    4,500
    
    
    
    (32,350
    )Cash distribution to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,350
    )
    
    
    (1,350
    )Purchase of units for restricted grants
    
    
    (634
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (634
    )(32,984
    )
    
    
    
    
    
    
    (4,500
    )
    
    
    3,150
    
    
    
    (34,334
    )Cash and cash equivalentsDecrease for the period
    
    
    
    
    
    
    (6,791
    )
    
    
    (1,384
    )
    
    
    
    
    
    
    (8,175
    )Beginning of period
    
    
    2
    
    
    
    17,770
    
    
    
    2,811
    
    
    
    
    
    
    
    20,583End of period
    
    $
    2
    
    
    $
    10,979
    
    
    $
    1,427
    
    
    $
    
    
    
    $
    12,408
 Note 10: Proposed Joint Ventures
   - 22 -




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##### Table of Contents



Note 11: Subsequent Events
  - 23 -




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##### Table of Contents



HOLLY ENERGY PARTNERS, L.P.
 
 Item 2.
Managements Discussion and Analysis of Financial Condition and Results of
Operations
  OVERVIEW
    Agreements with Holly Corporation
   - 24 -




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##### Table of Contents



RESULTS OF OPERATIONS (Unaudited)
 Income, Distributable Cash Flow and Volumes
  Three Months EndedSeptember 30,
    
    
    Change from2007
    
    
    2006
    
    
    2006(In thousands, except per unit data)RevenuesPipelines:Affiliates  refined product pipelines
    
    $
    8,815
    
    
    $
    8,707
    
    
    $
    108Third parties  refined product pipelines
    
    
    8,300
    
    
    
    7,504
    
    
    
    79617,115
    
    
    
    16,211
    
    
    
    904Affiliates  intermediate pipelines
    
    
    3,327
    
    
    
    3,023
    
    
    
    30420,442
    
    
    
    19,234
    
    
    
    1,208Terminals and truck loading racks:Affiliates
    
    
    2,685
    
    
    
    2,542
    
    
    
    143Third parties
    
    
    1,338
    
    
    
    1,123
    
    
    
    2154,023
    
    
    
    3,665
    
    
    
    358Other - affiliates
    
    
    2,748
    
    
    
    
    
    
    
    2,748Total revenues
    
    
    27,213
    
    
    
    22,899
    
    
    
    4,314Operating costs and expensesOperations
    
    
    7,985
    
    
    
    7,082
    
    
    
    903Depreciation and amortization
    
    
    3,594
    
    
    
    3,839
    
    
    
    (245
    )General and administrative
    
    
    1,429
    
    
    
    1,177
    
    
    
    25213,008
    
    
    
    12,098
    
    
    
    910Operating income
    
    
    14,205
    
    
    
    10,801
    
    
    
    3,404Interest income
    
    
    101
    
    
    
    214
    
    
    
    (113
    )Interest expense, including amortization
    
    
    (3,383
    )
    
    
    (3,302
    )
    
    
    (81
    )Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    Minority interest in Rio Grande
    
    
    (233
    )
    
    
    38
    
    
    
    (271
    )Net income
    
    
    10,690
    
    
    
    7,751
    
    
    
    2,939Less general partner interest in net income, including incentive
distributions (1)
    
    
    794
    
    
    
    488
    
    
    
    306Limited partners interest in net income
    
    $
    9,896
    
    
    $
    7,263
    
    
    $
    2,633Net
income per limited partner unit - basic and diluted(1)
    
    $
    0.61
    
    
    $
    0.45
    
    
    $
    0.16Weighted average limited partners units outstanding
    
    
    16,108
    
    
    
    16,108
    
    
    
    EBITDA(2)
    
    $
    17,566
    
    
    $
    14,678
    
    
    $
    2,888Distributable cash flow(3)
    
    $
    13,683
    
    
    $
    11,338
    
    
    $
    2,345Volumes (bpd)(4)Pipelines:Affiliates  refined product pipelines
    
    
    71,987
    
    
    
    73,525
    
    
    
    (1,538
    )Third parties  refined product pipelines
    
    
    59,024
    
    
    
    58,744
    
    
    
    280131,011
    
    
    
    132,269
    
    
    
    (1,258
    )Affiliates  intermediate pipelines
    
    
    62,072
    
    
    
    58,711
    
    
    
    3,361193,083
    
    
    
    190,980
    
    
    
    2,103Terminals and truck loading racks:Affiliates
    
    
    110,545
    
    
    
    118,350
    
    
    
    (7,805
    )Third parties
    
    
    38,409
    
    
    
    41,656
    
    
    
    (3,247
    )148,954
    
    
    
    160,006
    
    
    
    (11,052
    )Total for pipelines and terminal assets (bpd)
    
    
    342,037
    
    
    
    350,986
    
    
    
    (8,949
    )
 - 25 -




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##### Table of Contents



Nine Months EndedSeptember 30,
    
    
    Change from2007
    
    
    2006
    
    
    2006(In thousands, except per unit data)RevenuesPipelines:Affiliates  refined product pipelines
    
    $
    26,464
    
    
    $
    22,404
    
    
    $
    4,060Third parties  refined product pipelines
    
    
    26,473
    
    
    
    23,102
    
    
    
    3,37152,937
    
    
    
    45,506
    
    
    
    7,431Affiliates  intermediate pipelines
    
    
    10,390
    
    
    
    7,337
    
    
    
    3,05363,327
    
    
    
    52,843
    
    
    
    10,484Terminals and truck loading racks:Affiliates
    
    
    8,088
    
    
    
    7,597
    
    
    
    491Third parties
    
    
    4,053
    
    
    
    3,424
    
    
    
    62912,141
    
    
    
    11,021
    
    
    
    1,120Other - affiliates
    
    
    2,748
    
    
    
    
    
    
    
    2,748Total revenues
    
    
    78,216
    
    
    
    63,864
    
    
    
    14,352Operating costs and expensesOperations
    
    
    24,025
    
    
    
    21,620
    
    
    
    2,405Depreciation and amortization
    
    
    10,873
    
    
    
    11,413
    
    
    
    (540
    )General and administrative
    
    
    3,991
    
    
    
    3,690
    
    
    
    30138,889
    
    
    
    36,723
    
    
    
    2,166Operating income
    
    
    39,327
    
    
    
    27,141
    
    
    
    12,186Interest income
    
    
    431
    
    
    
    702
    
    
    
    (271
    )Interest expense, including amortization
    
    
    (10,112
    )
    
    
    (9,724
    )
    
    
    (388
    )Gain on sale of assets
    
    
    298
    
    
    
    
    
    
    
    298Minority interest in Rio Grande
    
    
    (814
    )
    
    
    (235
    )
    
    
    (579
    )Net income
    
    
    29,130
    
    
    
    17,884
    
    
    
    11,246Less general partner interest in net income, including incentive
distributions (1)
    
    
    2,100
    
    
    
    1,134
    
    
    
    966Limited partners interest in net income
    
    $
    27,030
    
    
    $
    16,750
    
    
    $
    10,280Net
income per limited partner unit - basic and diluted(1)
    
    $
    1.68
    
    
    $
    1.04
    
    
    $
    0.64Weighted average limited partners units outstanding
    
    
    16,108
    
    
    
    16,108
    
    
    
    EBITDA(2)
    
    $
    49,684
    
    
    $
    38,319
    
    
    $
    11,365Distributable cash flow(3)
    
    $
    38,666
    
    
    $
    32,845
    
    
    $
    5,821Volumes (bpd)Pipelines:Affiliates  refined product pipelines
    
    
    75,638
    
    
    
    65,321
    
    
    
    10,317Third parties  refined product pipelines
    
    
    62,877
    
    
    
    62,671
    
    
    
    206138,515
    
    
    
    127,992
    
    
    
    10,523Affiliates  intermediate pipelines
    
    
    63,337
    
    
    
    54,898
    
    
    
    8,439201,852
    
    
    
    182,890
    
    
    
    18,962Terminals and truck loading racks:Affiliates
    
    
    117,957
    
    
    
    114,937
    
    
    
    3,020Third parties
    
    
    46,114
    
    
    
    43,306
    
    
    
    2,808164,071
    
    
    
    158,243
    
    
    
    5,828Total for pipelines and terminal assets (bpd)
    
    
    365,923
    
    
    
    341,133
    
    
    
    24,790
 - 26 -




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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 $0.6 million and $0.3 million were declared during the three months ended
September 30, 2007 and 2006, respectively, and $1.5 million and $0.8 million during the
nine months ended September 30, 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 Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)Net income
    
    $
    10,690
    
    
    $
    7,751
    
    
    $
    29,130
    
    
    $
    17,884Add interest expense
    
    
    3,091
    
    
    
    3,060
    
    
    
    9,213
    
    
    
    8,998Add amortization of discount and
deferred debt issuance costs
    
    
    292
    
    
    
    242
    
    
    
    899
    
    
    
    726Subtract interest income
    
    
    (101
    )
    
    
    (214
    )
    
    
    (431
    )
    
    
    (702
    )Add depreciation and amortization
    
    
    3,594
    
    
    
    3,839
    
    
    
    10,873
    
    
    
    11,413EBITDA
    
    $
    17,566
    
    
    $
    14,678
    
    
    $
    49,684
    
    
    $
    38,319
 
 (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. - 27 -




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)Net income
    
    $
    10,690
    
    
    $
    7,751
    
    
    $
    29,130
    
    
    $
    17,884Add depreciation
and amortization
    
    
    3,594
    
    
    
    3,839
    
    
    
    10,873
    
    
    
    11,413Add amortization of discount and
deferred debt issuance costs
    
    
    292
    
    
    
    242
    
    
    
    899
    
    
    
    726Add (subtract) increase
(decrease) in deferred revenue
    
    
    120
    
    
    
    (234
    )
    
    
    (870
    )
    
    
    3,682Subtract
maintenance capital
expenditures*
    
    
    (1,013
    )
    
    
    (260
    )
    
    
    (1,366
    )
    
    
    (860
    )Distributable cash flow
    
    $
    13,683
    
    
    $
    11,338
    
    
    $
    38,666
    
    
    $
    32,845
 
 *
    
    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. September 30,
    
    December 31,2007
    
    2006Balance Sheet Data
    
    (In thousands)Cash and cash equivalents
    
    $
    8,710
    
    
    $
    11,555Working capital
    
    $
    10,635
    
    
    $
    9,450Total assets
    
    $
    232,391
    
    
    $
    243,573Long-term debt
    
    $
    181,347
    
    
    $
    180,660Partners equity
    
    $
    29,796
    
    
    $
    36,226
  Results of Operations  Three Months Ended September 30, 2007 Compared with Three Months Ended
September 30, 2006
 Summary
  Revenues
  - 28 -




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Operating Costs
  Depreciation and Amortization
  - 29 -




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General and Administrative
  Interest Expense
  Minority Interest in Earnings of Rio Grande
  Results of Operations  Nine Months Ended September 30, 2007 Compared with Nine Months Ended
September 30, 2006
 Summary
  Revenues
   - 30 -




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Operating Costs
  - 31 -




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Depreciation and Amortization
  General and Administrative
  Interest Expense
  Minority Interest in Earnings of Rio Grande
  LIQUIDITY AND CAPITAL RESOURCES
 Overview
    - 32 -




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##### Table of Contents



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




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- 34 -




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Credit Agreement
       Senior Notes Due 2015
  - 35 -




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##### Table of Contents



Impact of Inflation
   Environmental Matters
      - 36 -




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CRITICAL ACCOUNTING POLICIES
   Recent Accounting Pronouncements
 Interpretation No. 48 Accounting for Uncertainty in Income Taxes
 - 37 -




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RISK MANAGEMENT
        - 38 -




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##### Table of Contents



Item 3.
Quantitative and Qualitative Disclosures About Market Risks
   
 Item 4.
Controls and Procedures
 (a) Evaluation of disclosure controls and procedures
  (b) Changes in internal control over financial reporting
  - 39 -




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##### Table of Contents



Item 1.
Legal proceedings
  
 Item 2. Unregistered Sales of Securities and Use of Proceeds
 (c) Common unit repurchases made in the quarter
  Maximum Number ofTotal Number 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 2007
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    August 2007
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    September 2007
    
    
    3,836
    
    
    $
    45.29
    
    
    
    
    
    
    
    Total
    
    
    3,836
    
    
    $
    45.29
    
    
    
    
 
 Item 6.
Exhibits
 10.1
    
    Amendment and Supplement to Pipeline Lease Agreement, dated February 21, 1997, between
American Petrofina Pipeline Company (predecessor in interest to Alon USA, L.P.) and Navajo
Pipeline Company (predecessor in interest to HEP Pipeline Assets, L.P.) (incorporated by
reference to Exhibit 10.1 of Registrants Form 8-K Current Report dated October 16, 2007).10.2
    
    Amendment to Pipelines and Terminals Agreement, dated July 13, 2004, by and among Holly
Corporation, Navajo Refining Company, L.P., Holly Refining and Marketing Company, Holly
Energy Partners  Operating, L.P., HEP Logistics Holdings, L.P., Holly Logistic Services,
L.L.C. and HEP Logistics GP, L.L.C. (incorporated by reference to Exhibit 10.1 of
Registrants Form 8-K Current Report dated October 19, 2007).10.3
    
    Amended and Restated Credit Agreement, dated August 27, 2007, between Holly Energy
Partners  Operating, L.P., Union Bank of California, N.A., Bank of America, N.A., Guaranty
Bank, and certain other lenders (incorporated by reference to Exhibit 10.1 of Registrants
Form 8-K Current Report dated October 31, 2007).12.1*
    
    Computation of Ratio of Earnings to Fixed Charges.31.1*
    
    Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.32.2*
    
    Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith - 40 -




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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: November 2, 2007
    
    /s/ P. Dean RidenourP. Dean RidenourVice President and Chief Accounting Officer
and Director(Principal Accounting Officer)/s/ Stephen J. McDonnellStephen J. McDonnellVice President and Chief Financial
Officer(Principal Financial Officer)
 - 41 -