##### 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, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIESACT OF 1934
 For the transition period from  to .
 Commission File Number: 1-32225
 HOLLY
ENERGY PARTNERS, L.P.
  Delaware
    
    20-0833098(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 
 
   
   
   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, 2005 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
    
    
    25Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    40Item 4. Controls and Procedures
    
    
    40PART II. OTHER INFORMATION
    
    
    41Item 1. Legal Proceedings
    
    
    41Item 2. Unregistered Sales of Securities and Use of Proceeds
    
    
    41Item 6. Exhibits
    
    
    41SIGNATURES
    
    
    42Computation 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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PART I. FINANCIAL INFORMATION
 
 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, operational and legal risks and uncertainties detailed from time to
time in our Securities and Exchange Commission filings.
 
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##### Table of Contents



Item 1.
Financial Statements
 Holly Energy Partners, L.P.
 
 Consolidated Balance Sheets
 September 30,2006
    
    
    December 31,(Unaudited)
    
    
    2005(In thousands, except unit data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,408
    
    
    $
    20,583Accounts receivable:Trade
    
    
    4,659
    
    
    
    3,076Affiliates
    
    
    2,286
    
    
    
    3,6456,945
    
    
    
    6,721Prepaid and other current assets
    
    
    1,644
    
    
    
    1,401Total current assets
    
    
    20,997
    
    
    
    28,705Properties and equipment, net
    
    
    160,894
    
    
    
    162,298Transportation agreements, net
    
    
    57,842
    
    
    
    60,903Other assets
    
    
    2,768
    
    
    
    2,869Total assets
    
    $
    242,501
    
    
    $
    254,775LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,951
    
    
    $
    3,020Accrued interest
    
    
    970
    
    
    
    2,892Deferred revenue
    
    
    4,695
    
    
    
    1,013Accrued property taxes
    
    
    1,273
    
    
    
    1,013Other current liabilities
    
    
    1,567
    
    
    
    1,313Total current liabilities
    
    
    12,456
    
    
    
    9,251Commitments and contingencies
    
    
    
    
    
    
    Long-term debt
    
    
    180,466
    
    
    
    180,737Other long-term liabilities
    
    
    1,335
    
    
    
    974Minority interest
    
    
    10,638
    
    
    
    11,753Partners equity (deficit):Common unitholders (8,170,000 units issued and outstanding)
    
    
    177,472
    
    
    
    184,650Subordinated unitholder (7,000,000 units issued and outstanding)
    
    
    (69,396
    )
    
    
    (63,235
    )Class B subordinated unitholder (937,500 units issued and
outstanding)
    
    
    23,563
    
    
    
    24,388General partner (2% interest)
    
    
    (94,033
    )
    
    
    (93,743
    )Total partners equity
    
    
    37,606
    
    
    
    52,060Total liabilities and partners equity
    
    $
    242,501
    
    
    $
    254,775
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Holly Energy Partners, L.P.
 
 Consolidated Statements of Income
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per unit data)Revenues:Affiliates
    
    $
    14,272
    
    
    $
    12,507
    
    
    $
    37,338
    
    
    $
    31,878Third parties
    
    
    8,627
    
    
    
    9,010
    
    
    
    26,526
    
    
    
    25,67322,899
    
    
    
    21,517
    
    
    
    63,864
    
    
    
    57,551Operating costs and expenses:Operations
    
    
    7,082
    
    
    
    6,333
    
    
    
    21,620
    
    
    
    18,169Depreciation and amortization
    
    
    3,839
    
    
    
    3,924
    
    
    
    11,413
    
    
    
    10,136General and administrative
    
    
    1,177
    
    
    
    1,075
    
    
    
    3,690
    
    
    
    3,04212,098
    
    
    
    11,332
    
    
    
    36,723
    
    
    
    31,347Operating income
    
    
    10,801
    
    
    
    10,185
    
    
    
    27,141
    
    
    
    26,204Other income (expense):Interest income
    
    
    214
    
    
    
    201
    
    
    
    702
    
    
    
    434Interest expense
    
    
    (3,302
    )
    
    
    (3,038
    )
    
    
    (9,724
    )
    
    
    (6,521
    )(3,088
    )
    
    
    (2,837
    )
    
    
    (9,022
    )
    
    
    (6,087
    )Income before minority interest
    
    
    7,713
    
    
    
    7,348
    
    
    
    18,119
    
    
    
    20,117Minority interest in Rio Grande Pipeline
Company
    
    
    38
    
    
    
    (56
    )
    
    
    (235
    )
    
    
    (458
    )Net income
    
    
    7,751
    
    
    
    7,292
    
    
    
    17,884
    
    
    
    19,659Less general partner interest in net income
    
    
    488
    
    
    
    208
    
    
    
    1,134
    
    
    
    455Limited partners interest in net income
    
    $
    7,263
    
    
    $
    7,084
    
    
    $
    16,750
    
    
    $
    19,204Net income per limited partner unit -
Basic and diluted
    
    $
    0.45
    
    
    $
    0.44
    
    
    $
    1.04
    
    
    $
    1.27Weighted average limited partner units
outstanding
    
    
    16,108
    
    
    
    16,018
    
    
    
    16,108
    
    
    
    15,103
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Holly Energy Partners, L.P.
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Nine Months Ended September 30,2006
    
    
    2005(In thousands)Cash flows from operating activitiesNet income
    
    $
    17,884
    
    
    $
    19,659Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    11,413
    
    
    
    10,136Minority interest in Rio Grande Pipeline Company
    
    
    235
    
    
    
    458Amortization of restricted and performance units
    
    
    646
    
    
    
    144(Increase) decrease in current assets:Accounts receivable  trade
    
    
    (1,583
    )
    
    
    (2,624
    )Accounts receivable  affiliates
    
    
    1,359
    
    
    
    1,124Prepaid and other current assets
    
    
    (317
    )
    
    
    (986
    )Increase (decrease) in current liabilities:Accounts payable
    
    
    931
    
    
    
    691Accrued interest
    
    
    (1,922
    )
    
    
    860Deferred revenue
    
    
    3,682
    
    
    
    475Accrued property taxes
    
    
    260
    
    
    
    815Other current liabilities
    
    
    254
    
    
    
    (217
    )Other, net
    
    
    258
    
    
    
    203Net cash provided by operating activities
    
    
    33,100
    
    
    
    30,738Cash flows from investing activitiesAcquisition of pipeline and terminal assets
    
    
    
    
    
    
    (127,791
    )Additions to properties and equipment
    
    
    (6,941
    )
    
    
    (2,394
    )Net cash used for investing activities
    
    
    (6,941
    )
    
    
    (130,185
    )Cash flows from financing activitiesProceeds from issuance of senior notes, net of discount
    
    
    
    
    
    
    181,238Proceeds from issuance of common units, net of underwriter discount
    
    
    
    
    
    
    45,100Distributions to partners
    
    
    (32,350
    )
    
    
    (25,035
    )Excess purchase price over contributed basis of intermediate pipelines
    
    
    
    
    
    
    (71,850
    )Borrowings (payback) under revolving credit agreement
    
    
    
    
    
    
    (25,000
    )Purchase of units for restricted grants
    
    
    (634
    )
    
    
    (635
    )Cash contribution from general partner
    
    
    
    
    
    
    612Deferred debt issuance costs
    
    
    
    
    
    
    (1,208
    )Cash distributions to minority interest
    
    
    (1,350
    )
    
    
    (2,010
    )Costs of issuing common units
    
    
    
    
    
    
    (345
    )Net cash provided by (used for) financing activities
    
    
    (34,334
    )
    
    
    100,867Cash and cash equivalents
Increase/(decrease) for period
    
    
    (8,175
    )
    
    
    1,420Beginning of period
    
    
    20,583
    
    
    
    19,104End of period
    
    $
    12,408
    
    
    $
    20,524
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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, 2005
    
    $
    184,650
    
    
    $
    (63,235
    )
    
    $
    24,388
    
    
    $
    (93,743
    )
    
    $
    52,060Distributions
    
    
    (15,686
    )
    
    
    (13,440
    )
    
    
    (1,800
    )
    
    
    (1,424
    )
    
    
    (32,350
    )Purchase of units for
restricted grants
    
    
    (634
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (634
    )Amortization of restricted
and performance units
    
    
    646
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    646Net income
    
    
    8,496
    
    
    
    7,279
    
    
    
    975
    
    
    
    1,134
    
    
    
    17,884Balance September 30, 2006
    
    $
    177,472
    
    
    $
    (69,396
    )
    
    $
    23,563
    
    
    $
    (94,033
    )
    
    $
    37,606
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note 1: Description of Business and Presentation of Financial Statements
        - 8 -




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Note 2: Acquisitions
 Alon Transaction
    Holly Intermediate Pipelines Transaction
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Note 3: Properties and Equipment
 September 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Pipelines and terminals
    
    $
    187,738
    
    
    $
    184,464Land and right of way
    
    
    22,445
    
    
    
    22,163Other
    
    
    6,312
    
    
    
    5,728Construction in progress
    
    
    5,905
    
    
    
    2,792222,400
    
    
    
    215,147Less accumulated depreciation
    
    
    61,506
    
    
    
    52,849$
    160,894
    
    
    $
    162,298
  Note 4: 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 expiring in 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.
 - 10 -




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September 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Rio Grande transportation agreement
    
    $
    20,836
    
    
    $
    20,836Alon transportation agreement
    
    
    59,933
    
    
    
    59,93380,769
    
    
    
    80,769Less accumulated amortization
    
    
    22,927
    
    
    
    19,866$
    57,842
    
    
    $
    60,903
 Note 5: Debt
 Credit Agreement
        - 11 -




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Senior Notes Due 2015
      Interest Rate Risk Management
    - 12 -




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##### Table of Contents



Other Debt Information
 Nine Months EndedSeptember 30,2006
    
    
    2005(In thousands)Interest on outstanding debt:Senior Notes, net of interest rate swap
    
    $
    8,622
    
    
    $
    5,502Credit Agreement
    
    
    
    
    
    
    164Amortization of discount and deferred issuance costs
    
    
    726
    
    
    
    543Commitment fees
    
    
    376
    
    
    
    312Net interest expense
    
    $
    9,724
    
    
    $
    6,521Cash paid for interest
    
    $
    14,521
    
    
    $
    6,761
  Note 6: Commitments and Contingencies
  Year EndingDecember 31,
    
    $000s2007
    
    $
    3,0412008
    
    
    6,0822009
    
    
    6,0822010
    
    
    6,082Thereafter
    
    
    39,529Total
    
    $
    60,816
 Note 7: Earnings per Unit
  Note 8: 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, 2006 (not vested)
    
    
    20,926
    
    
    $
    40.98Granted
    
    
    15,871
    
    
    $
    39.19Forfeited
    
    
    (200
    )
    
    $
    40.08Vesting and transfer of full ownership to recipients
    
    
    
    
    
    
    Outstanding at September 30, 2006 (not vested)
    
    
    36,597
    
    
    $
    40.21
    
    
    1.5 years
    
    $
    1,382
   Performance Units
  - 14 -




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Data Elements Used in AnalysisClosing price of HEP common units February 10, 2006
    
    $
    39.55Latest quarterly distribution per limited unit
    
    $
    0.64Risk-free rate
    
    
    4.86
    %
  StandardExpected Return on
    
    DeviationCompany
    
    Equity
    
    (Monthly)HEP
    
    
    14.0
    %
    
    
    7.6
    %Peer group
    
    9.8% to 11.0%
    
    3.8% to 4.9%
  Payable
    
    
    PayablePerformance Units
    
    In Cash
    
    
    In UnitsOutstanding at January 1, 2006 (not vested)
    
    
    1,515
    
    
    
    Conversion to unit payment
    
    
    (1,515
    )
    
    
    1,515Vesting and payment of units to recipients
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    12,501Forfeited
    
    
    
    
    
    
    Outstanding at September 30, 2006 (not vested)
    
    
    
    
    
    
    14,016
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Note 9: Significant Customers
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Holly
    
    
    62
    %
    
    
    58
    %
    
    
    59
    %
    
    
    55
    %BP plc
    
    
    6
    %
    
    
    8
    %
    
    
    9
    %
    
    
    11
    %Alon
    
    
    29
    %
    
    
    31
    %
    
    
    30
    %
    
    
    30
    %
 Note 10: Related Party Transactions
 Holly
  
    
    Pipeline and terminal revenues received from Holly were
$14.3 million and $12.5 million for the three months ended
September 30, 2006 and 2005, respectively, and $37.3 million
and $31.9 million for the nine months ended September 30, 2006
and 2005, 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 in the three months
ended September 30, 2006 and 2005, and $1.5 million for the
nine months ended September 30, 2006 and 2005.
    
    We reimbursed Holly for costs of employees supporting our
operations of $2.0 million and $1.8 million for the three
months ended September 30, 2006 and 2005, respectively, and
$5.7 million and $4.8 million for the nine months ended
September 30, 2006 and 2005, respectively.
    
    Holly reimbursed $42,000 and $47,000 to us for certain
costs paid on their behalf in the three months ended September
30, 2006 and 2005, respectively. Holly reimbursed $138,000
and $161,000 in the nine months ended September 30, 2006 and
2005, respectively.
    
    In the three months ended September 30, 2006 and 2005, we
distributed $5.2 million and $4.3 million, respectively, to
Holly as regular distributions on its subordinated units,
common units and general partner interest. We distributed
$15.0 million and $12.0 million to Holly in the nine months
ended September 30, 2006 and 2005, respectively.
    
    Our net accounts receivable from Holly were $2.3 million
and $3.6 million at September 30, 2006 and December 31, 2005,
respectively.
    
    As described under Holly Intermediate Pipelines
Transaction in Note 2 above, under the Holly IPA, Holly
agreed to transport volumes of products on the Intermediate
Pipelines that will result in minimum funds to us of $11.8
million per year initially, adjusted annually for increases in
PPI. If Holly fails to meet its minimum revenue commitment in
any quarter, Holly is required to pay cash for the shortfall.
A shortfall payment may be applied as a credit in the
following four quarters after Hollys minimum obligation for
that quarter is met.Holly has failed to meet its minimum revenue commitment for each of the first five quarters of
the Holly IPA. We have charged Holly $3.2 million for these shortfalls to date, $0.6 million
and $0.5 million of which are included in affiliate accounts receivable at September 30, 2006
and December 31, 2005, respectively.
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BP plc
  
    
    BP is the sole customer of Rio Grande, and we recorded
revenues of $1.4 million and $1.7 million for the three months
ended September 30, 2006 and 2005, and $5.4 million and $6.3
million for the nine months ended September 30, 2006 and 2005,
respectively.
    
    Rio Grande paid distributions to BP of $0.2 million and
$0.4 million for the three months ended September 30, 2006 and
2005, and $1.4 million and $2.0 million for the nine months
ended September 30, 2006 and 2005, respectively.
    
    Included in our accounts receivable  trade at September
30, 2006 and December 31, 2005 were $0.3 million and $0.5
million, respectively, which represented the receivable
balance of Rio Grande from BP.
 Alon
  
    
    We recognized $6.6 million and $6.7 million of revenues
for pipeline transportation and terminalling services under
the Alon PTA and under a pipeline capacity lease in the three
months ended September 30, 2006 and 2005, respectively. We
recognized $19.0 million and $16.1 million in the nine months
ended September 30, 2006 and the period from February 28 to
September 30, 2005, respectively.
    
    We paid $0.6 million and $0.5 million to Alon for
distributions on our Class B subordinated units in the three
months ended September 30, 2006 and 2005, respectively. We
paid $1.8 million and $1.1 million in the nine months ended
September 30, 2006 and the period from February 28 to
September 30, 2005, respectively.
    
    Our net accounts receivable from Alon were $3.6 million
at September 30, 2006 and $2.4 million at December 31, 2005.
    
    Deferred revenue includes $2.0 million of minimum
revenue commitments under the Alon PTA at September 30, 2006.
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Note 11: Partners Equity and Cash Distributions
 Issuances of units
       - 18 -




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Allocations of Net Income
  Cash Distributions
      Marginal Percentage Interest inTotal Quarterly Distribution
    
    DistributionsTarget Amount Per Unit
    
    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
    %
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per unit data)General partner interest
    
    $
    215
    
    
    $
    189
    
    
    $
    631
    
    
    $
    499General partner incentive distribution
    
    
    340
    
    
    
    63
    
    
    
    793
    
    
    
    63Total general partner distribution
    
    
    555
    
    
    
    252
    
    
    
    1,424
    
    
    
    562Limited partner distribution
    
    
    10,550
    
    
    
    9,256
    
    
    
    30,926
    
    
    
    24,473Total regular quarterly cash distribution
    
    $
    11,105
    
    
    $
    9,508
    
    
    $
    32,350
    
    
    $
    25,035Cash distribution per unit applicable to limited partners
    
    $
    0.655
    
    
    $
    0.575
    
    
    $
    1.920
    
    
    $
    1.625
  Note 12: Supplemental Guarantor/Non-Guarantor Financial Information
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##### Table of Contents



Condensed Consolidating Balance Sheet
 Guarantor
    
    
    Non-September 30, 2006
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    10,979
    
    
    $
    1,427
    
    
    $
    
    
    
    $
    12,408Accounts receivable
    
    
    
    
    
    
    6,592
    
    
    
    353
    
    
    
    
    
    
    
    6,945Intercompany accounts receivable (payable)
    
    
    (66,150
    )
    
    
    66,348
    
    
    
    (198
    )
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    311
    
    
    
    1,333
    
    
    
    
    
    
    
    
    
    
    
    1,644Total current assets
    
    
    (65,837
    )
    
    
    85,252
    
    
    
    1,582
    
    
    
    
    
    
    
    20,997Properties and equipment, net
    
    
    
    
    
    
    127,442
    
    
    
    33,452
    
    
    
    
    
    
    
    160,894Investment in subsidiaries
    
    
    285,470
    
    
    
    24,823
    
    
    
    
    
    
    
    (310,293
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    56,771
    
    
    
    1,071
    
    
    
    
    
    
    
    57,842Other assets
    
    
    1,491
    
    
    
    1,277
    
    
    
    
    
    
    
    
    
    
    
    2,768Total assets
    
    $
    221,124
    
    
    $
    295,565
    
    
    $
    36,105
    
    
    $
    (310,293
    )
    
    $
    242,501LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    3,681
    
    
    $
    270
    
    
    $
    
    
    
    $
    3,951Accrued interest
    
    
    970
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    970Deferred revenue
    
    
    
    
    
    
    4,695
    
    
    
    
    
    
    
    
    
    
    
    4,695Accrued property taxes
    
    
    
    
    
    
    1,097
    
    
    
    176
    
    
    
    
    
    
    
    1,273Other current liabilities
    
    
    747
    
    
    
    622
    
    
    
    198
    
    
    
    
    
    
    
    1,567Total current liabilities
    
    
    1,717
    
    
    
    10,095
    
    
    
    644
    
    
    
    
    
    
    
    12,456Long-term debt
    
    
    180,466
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180,466Other long-term liabilities
    
    
    1,335
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,335Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,638
    
    
    
    10,638Partners equity
    
    
    37,606
    
    
    
    285,470
    
    
    
    35,461
    
    
    
    (320,931
    )
    
    
    37,606Total liabilities and partners equity
    
    $
    221,124
    
    
    $
    295,565
    
    
    $
    36,105
    
    
    $
    (310,293
    )
    
    $
    242,501
  Condensed Consolidating Balance Sheet
 Guarantor
    
    
    Non-December 31, 2005
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2
    
    
    $
    17,770
    
    
    $
    2,811
    
    
    $
    
    
    
    $
    20,583Accounts receivable
    
    
    
    
    
    
    6,206
    
    
    
    515
    
    
    
    
    
    
    
    6,721Intercompany accounts receivable (payable)
    
    
    (21,182
    )
    
    
    21,458
    
    
    
    (276
    )
    
    
    
    
    
    
    Prepaid and other current assets
    
    
    232
    
    
    
    1,169
    
    
    
    
    
    
    
    
    
    
    
    1,401Total current assets
    
    
    (20,948
    )
    
    
    46,603
    
    
    
    3,050
    
    
    
    
    
    
    
    28,705Properties and equipment, net
    
    
    
    
    
    
    128,077
    
    
    
    34,221
    
    
    
    
    
    
    
    162,298Investment in subsidiaries
    
    
    256,416
    
    
    
    27,423
    
    
    
    
    
    
    
    (283,839
    )
    
    
    Transportation agreements, net
    
    
    
    
    
    
    58,269
    
    
    
    2,634
    
    
    
    
    
    
    
    60,903Other assets
    
    
    1,594
    
    
    
    1,275
    
    
    
    
    
    
    
    
    
    
    
    2,869Total assets
    
    $
    237,062
    
    
    $
    261,647
    
    
    $
    39,905
    
    
    $
    (283,839
    )
    
    $
    254,775LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    2,666
    
    
    $
    354
    
    
    $
    
    
    
    $
    3,020Accrued interest
    
    
    2,892
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,892Deferred revenue
    
    
    
    
    
    
    1,013
    
    
    
    
    
    
    
    
    
    
    
    1,013Accrued property taxes
    
    
    
    
    
    
    837
    
    
    
    176
    
    
    
    
    
    
    
    1,013Other current liabilities
    
    
    594
    
    
    
    520
    
    
    
    199
    
    
    
    
    
    
    
    1,313Total current liabilities
    
    
    3,486
    
    
    
    5,036
    
    
    
    729
    
    
    
    
    
    
    
    9,251Long-term debt
    
    
    180,737
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180,737Other long-term liabilities
    
    
    779
    
    
    
    195
    
    
    
    
    
    
    
    
    
    
    
    974Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,753
    
    
    
    11,753Partners equity
    
    
    52,060
    
    
    
    256,416
    
    
    
    39,176
    
    
    
    (295,592
    )
    
    
    52,060Total liabilities and partners equity
    
    $
    237,062
    
    
    $
    261,647
    
    
    $
    39,905
    
    
    $
    (283,839
    )
    
    $
    254,775
 - 21 -




---



##### Table of Contents



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 (loss)
    
    $
    7,751
    
    
    $
    11,476
    
    
    $
    (125
    )
    
    $
    (11,351
    )
    
    $
    7,751
  Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Three months ended September 30, 2005
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    12,507
    
    
    $
    
    
    
    $
    
    
    
    $
    12,507Third parties
    
    
    
    
    
    
    7,627
    
    
    
    1,662
    
    
    
    (279
    )
    
    
    9,010
    
    
    
    20,134
    
    
    
    1,662
    
    
    
    (279
    )
    
    
    21,517Operating costs and expenses:Operations
    
    
    
    
    
    
    5,969
    
    
    
    643
    
    
    
    (279
    )
    
    
    6,333Depreciation and amortization
    
    
    
    
    
    
    3,080
    
    
    
    844
    
    
    
    
    
    
    
    3,924General and administrative
    
    
    557
    
    
    
    517
    
    
    
    1
    
    
    
    
    
    
    
    1,075557
    
    
    
    9,566
    
    
    
    1,488
    
    
    
    (279
    )
    
    
    11,332Operating income (loss)
    
    
    (557
    )
    
    
    10,568
    
    
    
    174
    
    
    
    
    
    
    
    10,185Equity in earnings of subsidiaries
    
    
    10,655
    
    
    
    130
    
    
    
    
    
    
    
    (10,785
    )
    
    
    Interest income (expense)
    
    
    (2,806
    )
    
    
    (43
    )
    
    
    12
    
    
    
    
    
    
    
    (2,837
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    (56
    )Net income
    
    $
    7,292
    
    
    $
    10,655
    
    
    $
    186
    
    
    $
    (10,841
    )
    
    $
    7,292
 - 22 -




---



##### Table of Contents



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
  Condensed Consolidating Statement of Income
 Guarantor
    
    
    Non-Nine months ended September 30, 2005
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Revenues:Affiliates
    
    $
    
    
    
    $
    31,878
    
    
    $
    
    
    
    $
    
    
    
    $
    31,878Third parties
    
    
    
    
    
    
    19,941
    
    
    
    6,290
    
    
    
    (558
    )
    
    
    25,673
    
    
    
    51,819
    
    
    
    6,290
    
    
    
    (558
    )
    
    
    57,551Operating costs and expenses:Operations
    
    
    
    
    
    
    16,484
    
    
    
    2,243
    
    
    
    (558
    )
    
    
    18,169Depreciation and amortization
    
    
    
    
    
    
    7,603
    
    
    
    2,533
    
    
    
    
    
    
    
    10,136General and administrative
    
    
    1,477
    
    
    
    1,549
    
    
    
    16
    
    
    
    
    
    
    
    3,0421,477
    
    
    
    25,636
    
    
    
    4,792
    
    
    
    (558
    )
    
    
    31,347Operating income (loss)
    
    
    (1,477
    )
    
    
    26,183
    
    
    
    1,498
    
    
    
    
    
    
    
    26,204Equity in earnings of subsidiaries
    
    
    26,888
    
    
    
    1,070
    
    
    
    
    
    
    
    (27,958
    )
    
    
    Interest income (expense)
    
    
    (5,752
    )
    
    
    (365
    )
    
    
    30
    
    
    
    
    
    
    
    (6,087
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (458
    )
    
    
    (458
    )Net income
    
    $
    19,659
    
    
    $
    26,888
    
    
    $
    1,528
    
    
    $
    (28,416
    )
    
    $
    19,659
 - 23 -




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##### Table of Contents



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 activitiesContributions from (distributions to) partners
    
    
    (32,350
    )
    
    
    
    
    
    
    (4,500
    )
    
    
    4,500
    
    
    
    (32,350
    )Cash distributions to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,350
    )
    
    
    (1,350
    )Purchase of units for restricted unit grants
    
    
    (634
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (634
    )(32,984
    )
    
    
    
    
    
    
    (4,500
    )
    
    
    3,150
    
    
    
    (34,334
    )Cash and cash equivalentsIncrease (decrease) 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
  Condensed Consolidating Statement of
Cash Flows
 Guarantor
    
    
    Non-Nine months ended September 30, 2005
    
    Parent
    
    
    Subsidiaries
    
    
    Guarantor
    
    
    Eliminations
    
    
    Consolidated(In thousands)Cash flows from operating activities
    
    $
    (2,444
    )
    
    $
    33,634
    
    
    $
    4,238
    
    
    $
    (4,690
    )
    
    $
    30,738Cash flows from investing activitiesAcquisitions of pipeline and terminal assets
    
    
    (125,801
    )
    
    
    (1,990
    )
    
    
    
    
    
    
    
    
    
    
    (127,791
    )Additions to properties and equipment
    
    
    
    
    
    
    (2,394
    )
    
    
    
    
    
    
    
    
    
    
    (2,394
    )Investments in subsidiaries
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (125,802
    )
    
    
    (4,384
    )
    
    
    
    
    
    
    1
    
    
    
    (130,185
    )Cash flows from financing activitiesProceeds from issuance of senior notes, net
of discounts
    
    
    181,238
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181,238Proceeds from issuance of common units, net
of underwriter discount
    
    
    45,100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,100Contributions from (distributions to) partners
    
    
    (24,423
    )
    
    
    1
    
    
    
    (6,700
    )
    
    
    6,699
    
    
    
    (24,423
    )Excess purchase price over contributed basis
of Intermediate Pipelines
    
    
    (71,850
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71,850
    )Borrowings (paydowns) of debt, net
    
    
    
    
    
    
    (25,000
    )
    
    
    
    
    
    
    
    
    
    
    (25,000
    )Cash distributions to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,010
    )
    
    
    (2,010
    )Other financing activities, net
    
    
    (1,819
    )
    
    
    (369
    )
    
    
    
    
    
    
    
    
    
    
    (2,188
    )128,246
    
    
    
    (25,368
    )
    
    
    (6,700
    )
    
    
    4,689
    
    
    
    100,867Cash and cash equivalentsIncrease (decrease) for the period
    
    
    
    
    
    
    3,882
    
    
    
    (2,462
    )
    
    
    
    
    
    
    1,420Beginning of period
    
    
    2
    
    
    
    15,143
    
    
    
    3,959
    
    
    
    
    
    
    
    19,104End of period
    
    $
    2
    
    
    $
    19,025
    
    
    $
    1,497
    
    
    $
    
    
    
    $
    20,524
 - 24 -




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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
   - 25 -




---



##### Table of Contents



RESULTS OF OPERATIONS (Unaudited)
 Income, Distributable Cash Flow and Volumes
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per unit data)RevenuesPipelines:Affiliates  refined product pipelines
    
    $
    8,707
    
    
    $
    7,659
    
    
    $
    22,404
    
    
    $
    21,848Affiliates  intermediate pipelines
    
    
    3,023
    
    
    
    2,224
    
    
    
    7,337
    
    
    
    2,224Third parties
    
    
    7,504
    
    
    
    7,873
    
    
    
    23,102
    
    
    
    22,37119,234
    
    
    
    17,756
    
    
    
    52,843
    
    
    
    46,443Terminals & truck loading racks:Affiliates
    
    
    2,542
    
    
    
    2,624
    
    
    
    7,597
    
    
    
    7,806Third parties
    
    
    1,123
    
    
    
    1,137
    
    
    
    3,424
    
    
    
    3,3023,665
    
    
    
    3,761
    
    
    
    11,021
    
    
    
    11,108Total revenues
    
    
    22,899
    
    
    
    21,517
    
    
    
    63,864
    
    
    
    57,551Operating costs and expensesOperations
    
    
    7,082
    
    
    
    6,333
    
    
    
    21,620
    
    
    
    18,169Depreciation and amortization
    
    
    3,839
    
    
    
    3,924
    
    
    
    11,413
    
    
    
    10,136General and administrative
    
    
    1,177
    
    
    
    1,075
    
    
    
    3,690
    
    
    
    3,04212,098
    
    
    
    11,332
    
    
    
    36,723
    
    
    
    31,347Operating income
    
    
    10,801
    
    
    
    10,185
    
    
    
    27,141
    
    
    
    26,204Interest income
    
    
    214
    
    
    
    201
    
    
    
    702
    
    
    
    434Interest expense, including amortization
    
    
    (3,302
    )
    
    
    (3,038
    )
    
    
    (9,724
    )
    
    
    (6,521
    )Minority interest in Rio Grande
    
    
    38
    
    
    
    (56
    )
    
    
    (235
    )
    
    
    (458
    )Net income
    
    
    7,751
    
    
    
    7,292
    
    
    
    17,884
    
    
    
    19,659Less general partner interest in net
income, including incentive distributions
(1)
    
    
    488
    
    
    
    208
    
    
    
    1,134
    
    
    
    455Limited partners interest in net income
    
    $
    7,263
    
    
    $
    7,084
    
    
    $
    16,750
    
    
    $
    19,204Net income per limited partner unit -
basic and diluted(1)
    
    $
    0.45
    
    
    $
    0.44
    
    
    $
    1.04
    
    
    $
    1.27Weighted average limited partners units
outstanding
    
    
    16,108
    
    
    
    16,018
    
    
    
    16,108
    
    
    
    15,103EBITDA(2)
    
    $
    14,678
    
    
    $
    14,053
    
    
    $
    38,319
    
    
    $
    35,882Distributable cash flow(3)
    
    $
    11,338
    
    
    $
    11,424
    
    
    $
    32,845
    
    
    $
    30,114
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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Volumes (bpd)(4)Pipelines:Affiliates  refined product pipelines
    
    
    73,525
    
    
    
    66,541
    
    
    
    65,321
    
    
    
    66,504Affiliates  intermediate pipelines
    
    
    58,711
    
    
    
    53,725
    
    
    
    54,898
    
    
    
    18,105Third parties
    
    
    58,744
    
    
    
    66,584
    
    
    
    62,671
    
    
    
    60,007190,980
    
    
    
    186,850
    
    
    
    182,890
    
    
    
    144,616Terminals & truck loading racks:Affiliates
    
    
    118,350
    
    
    
    121,835
    
    
    
    114,937
    
    
    
    122,460Third parties
    
    
    41,656
    
    
    
    44,369
    
    
    
    43,306
    
    
    
    40,911160,006
    
    
    
    166,204
    
    
    
    158,243
    
    
    
    163,371Total for pipelines and terminal assets (bpd)
    
    
    350,986
    
    
    
    353,054
    
    
    
    341,133
    
    
    
    307,987
 
 (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 $0.3 million and $0.8 million were declared during the three and nine
months ended September 30, 2006, respectively. Incentive distributions of $0.1 million
were declared during the three and nine months ended September 30, 2005. 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 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Net income
    
    $
    7,751
    
    
    $
    7,292
    
    
    $
    17,884
    
    
    $
    19,659Add interest expense
    
    
    3,060
    
    
    
    2,803
    
    
    
    8,998
    
    
    
    5,978Add amortization of discount and
deferred debt issuance costs
    
    
    242
    
    
    
    235
    
    
    
    726
    
    
    
    543Subtract interest income
    
    
    (214
    )
    
    
    (201
    )
    
    
    (702
    )
    
    
    (434
    )Add depreciation and amortization
    
    
    3,839
    
    
    
    3,924
    
    
    
    11,413
    
    
    
    10,136EBITDA
    
    $
    14,678
    
    
    $
    14,053
    
    
    $
    38,319
    
    
    $
    35,882
 (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
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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 Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Net income
    
    $
    7,751
    
    
    $
    7,292
    
    
    $
    17,884
    
    
    $
    19,659Add depreciation and amortization
    
    
    3,839
    
    
    
    3,924
    
    
    
    11,413
    
    
    
    10,136Add amortization of discount and
deferred debt issuance costs
    
    
    242
    
    
    
    235
    
    
    
    726
    
    
    
    543Increase (decrease) in deferred revenue
    
    
    (234
    )
    
    
    
    
    
    
    3,682
    
    
    
    Subtract maintenance capital
expenditures*
    
    
    (260
    )
    
    
    (27
    )
    
    
    (860
    )
    
    
    (224
    )Distributable cash flow
    
    $
    11,338
    
    
    $
    11,424
    
    
    $
    32,845
    
    
    $
    30,114
 *
    
    Maintenance capital expenditures are capital expenditures made to replace partially
or fully depreciated assets in order to maintain the existing operating capacity of our
assets and to extend their useful lives.
 (4)
    
    The amounts reported represent volumes from the initial assets contributed to HEP at
inception in July 2004 and additional volumes from the assets acquired from Alon starting
in March 2005 and the Intermediate Pipelines acquired from Holly starting in July 2005.
The amounts reported in the 2005 periods include volumes on the acquired assets from their
respective acquisition dates averaged over the full reported periods.
 Balance Sheet Data
 September 30,
    
    December 31,2006
    
    2005(In thousands)Cash and cash equivalents
    
    $
    12,408
    
    
    $
    20,583Working capital
    
    $
    8,541
    
    
    $
    19,454Total assets
    
    $
    242,501
    
    
    $
    254,775Long-term debt
    
    $
    180,466
    
    
    $
    180,737Partners equity
    
    $
    37,606
    
    
    $
    52,060
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Results of Operations  Three Months Ended September 30, 2006 Compared with Three Months Ended
September 30, 2005
 Summary
  Revenues
     Operations Expense
  - 29 -




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Depreciation and Amortization
  General and Administrative
  Interest Expense
  Minority Interest in Earnings of Rio Grande
  - 30 -




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##### Table of Contents



Results of Operations  Nine Months Ended September 30, 2006 Compared with Nine Months Ended
September 30, 2005
 Summary
  Revenues
     - 31 -




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Operations Expense
  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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Cash Flows  Operating Activities
   - 33 -




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Cash Flows  Investing Activities
  Cash Flows  Financing Activities
  Capital Requirements
   - 34 -




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Credit Agreement
        - 35 -




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Senior Notes Due 2015
    Alon Transaction
   Holly Intermediate Pipelines Transaction
  - 36 -




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Impact of Inflation
   Environmental Matters
    - 37 -




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CRITICAL ACCOUNTING POLICIES
   - 38 -




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RISK MANAGEMENT
        - 39 -




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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
  - 40 -




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Securities and Use of Proceeds
 (c) Common unit repurchases made in the quarter
  Total Number of
    
    Maximum NumberUnits
    
    of Units that MayTotal
    
    
    
    
    
    Purchased as
    
    Yet Be PurchasedNumber of
    
    
    
    
    
    Part of Publicly
    
    Under a PubliclyUnits
    
    Average Price
    
    Announced
    
    Announced Plan orPeriod
    
    Purchased
    
    Paid Per Unit
    
    Plan or Program
    
    ProgramJuly 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    August 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    September 2006
    
    
    3,210
    
    
    $
    38.14
    
    
    
    
    
    
    
    Total for July to September 2006
    
    
    3,210
    
    
    
    
    
    
    
    
 
 Item 6. Exhibits
 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. - 41 -




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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, 2006
    
    /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)
 - 42 -